T.C. Memo. 2004-163
UNITED STATES TAX COURT
MARK FOWLER AND JOYLYN SOUTER-FOWLER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6650-02L. Filed July 13, 2004.
Mark Fowler and Joylyn Souter-Fowler, pro sese.
Guy H. Glaser, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Chief Judge: Respondent, on February 21, 2002, sent
Mark Fowler (petitioner) a Notice of Determination Concerning
Collection Action(s) Under Section 63201 and/or 6330, in which
respondent sustained the filing of a Federal tax lien for
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code.
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petitioner’s 1990-92 tax liabilities. In that same notice
respondent also rejected petitioner’s offer in compromise. On
that same date respondent sent Mark Fowler and Joylyn Souter-
Fowler (petitioners) a second Notice of Determination Concerning
Collection Action(s) Under Section 6320 and/or 6330. In this
notice respondent sustained the filing of a Federal tax lien with
respect to petitioners’ 1994-96 tax liabilities, and respondent
again rejected petitioners’ offer in compromise.
Prior to these determinations, petitioners sought and were
offered an Appeals hearing, but they did not attend due to
personal reasons. One month after the scheduled hearing date,
the Appeals officer issued the above determinations sustaining
the filing of the Federal tax liens and rejecting petitioners’
offers in compromise. With respect to both determinations,
petitioners appealed to this Court.
The issue for consideration is whether respondent abused his
discretion by rejecting petitioners’ offers in compromise and by
sustaining the filing of the Federal tax liens.
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FINDINGS OF FACT2
Petitioners resided in Garden Grove, California, when the
petition in this case was filed.
Separate Liabilities
Petitioner filed his 1990 Federal income tax return late on
September 6, 1991. On July 21, 1993, respondent mailed a
statutory notice of deficiency to petitioner for his 1990 taxable
year. Petitioner did not petition this Court to dispute the
deficiency. On December 20, 1993, respondent assessed the $399
income tax deficiency and a $98.74 late-filing penalty under
section 6651(a)(1). In addition, $104.40 of interest was
assessed. Petitioner does not contest the 1990 tax liability.
Petitioner timely filed his 1991 Federal income tax return
that contained several mathematical errors. Respondent corrected
the mathematical errors in accord with section 6213(b)(1), and
assessments were made to correct the errors. Respondent
subsequently selected petitioner’s 1991 return for an audit
examination. On April 5, 1994, respondent mailed petitioner a
statutory notice of deficiency for his 1991 taxable year
determining a $545 income tax deficiency. Petitioner did not
petition this Court with respect to the 1991 notice of
2
The parties’ stipulation of facts is incorporated by this
reference.
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deficiency. On September 5, 1994, respondent assessed the $545
deficiency and $103.37 of accrued interest.
Petitioner filed his 1992 Federal income tax return late on
July 28, 1993. Respondent selected petitioner’s 1992 return for
an audit examination. On January 11, 1995, respondent mailed
petitioner a statutory notice of deficiency for his 1992 taxable
year determining a $1,193 income tax deficiency and a $189
penalty for late filing under section 6651(a)(1). On July 17,
1995, respondent assessed the deficiency, the late-filing
penalty, and accrued interest in the amount of $265.92. On the
same day, the late-filing penalty was abated leaving an unpaid
balance of $1,458.92 for 1992.
Joint Liabilities
Petitioners were married in 1993. Under cover of a letter
dated September 15, 1997, petitioners submitted their untimely
1994, 1995, and 1996 joint Federal income tax returns. These
returns were filed by respondent on September 29, 1997.
Petitioners reported tax due for 1994, 1995, and 1996 on their
returns in the amounts of $402.04, $402.03, and $1,480.66,
respectively.
On October 27, 1997, respondent assessed the 1994 income tax
liability, a late-filing penalty in the amount of $100, a failure
to pay tax penalty in the amount of $62.32, and accrued interest
in the amount of $128.35, for a total assessment of $692.71. On
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that same date, respondent assessed the 1995 income tax
liability, a late-filing penalty in the amount of $100, a failure
to pay tax penalty in the amount of $38.19, and accrued interest
in the amount of $73.03, for a total assessment of $613.25. On
November 17, 1997, respondent assessed the 1996 income tax
liability, a late-filing penalty in the amount of $333.15, a
failure to pay tax penalty in the amount of $59.23, and accrued
interest in the amount of $99.21, for a total assessment of
$1,972.25.
Events Leading to the Issuance of the Notice of Determination
On December 21, 1999, respondent mailed two separate Notices
of Intent to Levy and Notice of Your Right to a Hearing to
petitioners. The notices reflected petitioners’ unpaid Federal
income tax liabilities for 1990 through 1992 and 1994 through
1996. On January 26, 2000, petitioners informed respondent of
their desire to submit an offer in compromise to resolve all of
their individual and joint liabilities. In response, respondent
mailed petitioners a package of materials for the submission of
offers in compromise for their outstanding individual and joint
liabilities.
On April 19, 2000, respondent received petitioners’ offer to
compromise the 1994 through 1996 joint liabilities for $1,150.
On that same date respondent received petitioner’s offer to
compromise the 1990 through 1992 liabilities for $360. Both
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offers in compromise were submitted on Form 656, Offer in
Compromise. Petitioners’ offer was to make monthly payments to
satisfy the liabilities. Petitioners planned to pay a portion of
the offer amount from their expected tax refund for 1999.
On May 19, 2000, respondent’s revenue officer advised
petitioners that their offers in compromise could not be
processed until petitioners’ 1999 Federal income tax return was
filed. Under respondent’s procedures, offers are not processed
while taxpayers are not in compliance with the internal revenue
laws.
Petitioners had already filed for an extension of time to
file for 1999 because they were awaiting information from third
parties to complete the return. On June 15, 2000, respondent
filed two Notices of Federal Tax Lien (NFTL) at the county
recorder’s office in Orange County, California, with respect to
the individual and joint tax liabilities. Respondent sent
petitioners the filed NFTLs and Notices of Right to a Collection
Due Process Hearing. On July 14, 2000, petitioners submitted
Form 12153, Request for a Collection Due Process Hearing
(administrative hearing), contesting the NFTLs filed by
respondent and noting the pending offers in compromise.
Sometime in 2001, petitioners’ claims were assigned to
respondent’s Appeals officer. On June 20, 2001, the Appeals
officer and petitioners had a telephone conversation discussing
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petitioners’ desire to compromise all of the liabilities. The
Appeals officer requested more information from petitioners,
which they timely provided with a copy of their filed 1999
Federal income tax return. At some time in the process,
petitioners submitted an amended offer in compromise for $2,400,
to be paid in $100-monthly installments. Under those terms, the
$2,400-offer could be paid in full in 2 years.
On October 16, 2001, respondent’s Appeals officer sent
petitioners a letter informing them that he had reviewed the
offers in compromise. The Appeals officer determined that the
minimum offer to compromise both the individual and joint
liabilities should be a total of $2,400. The Appeals officer
used petitioners’ estimate of their primary vehicle3 to calculate
a quick sale value of $2,400, which was determined to be the
minimum acceptable offer. The Appeals officer then attempted to
determine whether petitioners would be able to meet the monthly
installment offer obligation. In calculating petitioners’
financial capability, the Appeals officer used petitioners’
submitted monthly gross income figure of $4,608, but did not use
petitioners’ submitted $3,989 monthly expense figure. Instead of
using the $3,989 expense figure provided by petitioners, the
Appeals officer used $4,644, an estimated amount based on
3
Petitioners estimated the value of their primary vehicle
to be $3,000. Respondent used this figure to calculate the
$2,400 quick sale value.
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national statistical averages. Using $4,644 resulted in
petitioners’ estimated monthly expenses exceeding their monthly
income by $36 and rendering petitioners ineligible due to their
projected inability to make the $100-monthly payments.
The Appeals officer rejected petitioners’ offers in
compromise. Petitioners requested an in person hearing, but a
hearing was not held due to petitioners’ unavailability. On
February 21, 2002, respondent issued two separate notices of
determination for the individual and joint liabilities sustaining
the filing of the notices of Federal tax liens and rejecting
petitioners’ offers in compromise. Petitioners timely appealed
to this Court for review of respondent’s determinations.
OPINION
Petitioners contend that the Appeals officer abused his
discretion by rejecting their offers in compromise and by
sustaining the filing of the Federal tax liens.
Section 6320 provides that a taxpayer shall be notified in
writing by the Secretary of the filing of a Federal tax lien and
provided with an opportunity for an administrative hearing. Sec.
6320(b). Hearings under section 6320 are conducted in accordance
with the procedural requirements set forth in section 6330. Sec.
6320(c).
When an Appeals officer issues a determination regarding a
disputed collection action, section 6330(d) allows a taxpayer to
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seek judicial review with the Tax Court or a District Court.
Where the validity of the underlying tax liability is properly at
issue, the Court will review the matter on a de novo basis. Sego
v. Commissioner, 114 T.C. 604, 610 (2000). However, when the
validity of the underlying tax is not at issue, the Court will
review the Commissioner’s administrative determination for an
abuse of discretion. Id. Petitioners do not dispute the
validity of the underlying tax. Accordingly, our review is for
an abuse of discretion.
We do not conduct an independent review of what would be
acceptable offers in compromise. We review only whether the
Appeals officer’s refusal to accept the offers in compromise was
arbitrary, capricious, or without sound basis in fact or law.
See Woodral v. Commissioner, 112 T.C. 19, 23 (1999). The Court
considers whether the Commissioner abused his discretion in
rejecting a taxpayer’s position with respect to any relevant
issues, including challenges to the appropriateness of the
collections action, and offers of collection alternatives. See
sec. 6330(c)(2)(A). This case involves collection alternatives.
Section 7122(a) authorizes the Secretary to compromise any
civil case arising under the internal revenue laws. There are
three standards that the Secretary may use to compromise a
liability. The first standard is doubt as to liability, the
second being doubt as to ability to collect, and the third being
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promotion of effective tax administration. Sec. 301.7122-1T(b),
Temporary Proced. & Admin. Regs., 64 Fed. Reg. 39024 (July 21,
1999); see sec. 7122(c)(1). The record reflects that
petitioners’ offers are with respect to doubt as to
collectibility.4
Section 7122(c) provides the standards for evaluation of
such offers. Under section 7122(c)(2):
(A) * * * the Secretary shall develop and publish
schedules of national and local allowances designed to
provide that taxpayers entering into a compromise have
an adequate means to provide for basic living expenses.
(B) Use of schedules.-–The guidelines shall
provide that officers and employees of the Internal
Revenue Service shall determine, on the basis of the
facts and circumstances of each taxpayer, whether the
use of the schedules published under subparagraph (A)
is appropriate and shall not use the schedules to the
extent such use would result in the taxpayer not having
adequate means to provide for basic living expenses.
[Emphasis added.]
The Appeals officer chose to use the national averages and that
use resulted in petitioners’ being categorized as not having
adequate means to provide for basic living expenses.
The national average statistics are published by the
Internal Revenue Service, but use of the statistics by Appeals
officers is not mandatory. The Appeals officer exercised
discretion in ignoring petitioners’ submitted expense amount and,
4
Doubt as to collectibility exists in any case where the
taxpayer’s assets and income are less than the full amount of the
assessed liability. Sec. 301.7122-1T(b)(3), Temporary Proced. &
Admin. Regs., 64 Fed. Reg. 39024 (July 21, 1999).
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instead, used the national statistical amount as an estimate of
petitioners’ expenses. The use of the national averages for
petitioners’ expenses resulted in petitioners’ monthly expenses
exceeding their monthly income by $36. Therefore, by using the
average expense figure, petitioners’ income was $136 short of
producing the $100 per month needed to compromise their tax
liabilities for $2,400. We note that, percentagewise, the
shortfall is less than 3 percent of petitioners’ gross income.
The Appeals officer chose to use the national statistical
averages rather than the expense figures provided by petitioners.
If the Appeals officer had used petitioners’ submitted expense
figure of $3,989, petitioners would have had $619 monthly and
would have been financially capable of satisfying the $100
installments.
The Appeals officer is allowed to use the national schedules
when considering the facts and circumstances of this case.
However, if use of the schedules results in petitioners’ not
having adequate means to provide for basic living expenses, as
here when the Appeals officer determined a negative $36 amount
for basic living expenses, an installment offer may not be
appropriate. See sec. 7122(c)(2)(B).
Under the regulations for doubt as to collectibility cases:
A determination of doubt as to collectibility will
include a determination of ability to pay. In
determining ability to pay, the Secretary will permit
taxpayers to retain sufficient funds to pay basic
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living expenses. The determination of the amount of
such basic living expenses will be founded upon an
evaluation of the individual facts and circumstances
presented by the taxpayer’s case. To guide this
determination, guidelines published by the Secretary on
national and local living expense standards will be
taken into account. [Sec. 301.7122-1T(b)(3)(ii),
Temporary Proced. & Admin. Regs., 64 Fed. Reg. 39024
(July 21, 1999).]
The regulation provides that the guidelines are to be taken
into account. When the Appeals officer reviewed petitioners’
offers, he decided to use the guidelines because he thought
petitioners’ actual figures were too low. In that regard, there
is no specific explanation why the Appeals officer believed that
petitioners’ monthly expenses of $3,989 was too low or why the
guideline figure of $4,644 was more accurate. The use of the
guideline expense figure resulted in a $136 shortfall in
petitioners’ capability to meet the $100-monthly installment to
satisfy the $2,400 compromise. If petitioners’ submitted monthly
expenses of $3,989 had been used, there would have been a $619
surplus of income over expenses that would have enabled
petitioners to meet the $100-monthly installment to satisfy the
compromise.
In essence, the Appeals officer decided that petitioners
could not live less expensively than the national average
(guidelines). We find it curious that the Appeals officer relied
on petitioners’ figures for their vehicle and for their income,
but chose not to use petitioners’ figures for their monthly
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expenses. Petitioners made an estimate of $3,000 for the value
of their primary car and the Appeals officer used this figure to
calculate the quick sale value of $2,400. Based on this premise,
the Appeals officer determined that an offer of $2,400 would be
an appropriate amount to settle the outstanding liabilities due
for 1990-92 and 1994-96. The Appeals officer requested a lump-
sum payment through the sale of petitioners’ primary vehicle.
Petitioners rejected this approach as this was their primary
vehicle and to sell it would have caused great financial harm.
Petitioners submitted an amended offer in compromise for
$2,400, to be paid in $100 monthly installments. Under those
terms, the $2,400 compromise could be paid in full in 2 years.
That offer was rejected due to the Appeals officer’s
determination that petitioners were financially unable to make
the payments. We note that petitioners had cooperated with all
requests from the Internal Revenue Service in an attempt to
resolve this matter.
Appeals officers, in the consideration of an offer in
compromise should verify that the requirements of applicable law
and administrative procedures have been met, and “whether any
proposed collection action balances the need for the efficient
collection of taxes with the legitimate concern of the person
that any collection action be no more intrusive than necessary.”
See sec. 6330(c)(3)(C). The verification of applicable law and
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administrative procedure was met in this case. However, it is
questionable as to whether the proposed collection action
balanced the need for efficient collection of taxes with the
concern of petitioners that any collection action be no more
intrusive than necessary.
Payment plans are one possible option for an offer in
compromise. According to the instructions that accompany the
Form 656, there are three possible payment plans under the short-
term deferred payment offer. One plan requires full payment of
the realizable value of assets within 90 days from the date the
Internal Revenue Service accepts the offer, and payment, within 2
years of acceptance of the amount that they could collect over 60
months. A second plan permits a cash payment for a portion of
the realizable value of petitioners’ assets within 90 days of the
offer being accepted, and the balance of the realizable value
plus the remainder of the amount that could have been collected
over 60 months within 2 years. The third plan permits monthly
payments of the entire offer amount over a period not to exceed 2
years from the date of acceptance by the Internal Revenue
Service. Petitioners offered $100 per month for 2 years or 24
months, which equals the $2,400-compromise amount.5
5
Although not relevant to the facts of this case, there is
also a deferred payment offer that provides for a plan similar to
the short-term deferred plan (the third plan described above).
The deferred payment plan allows the entire offer amount to be
(continued...)
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Under the various payment options, respondent would be able
to file Federal tax liens to protect his interests until such
time as the liability is satisfied. Accordingly, respondent’s
interest would be protected through the liens while respondent
received monthly payments. The result of the Appeals officer’s
financial analysis, however, was to deny petitioners’ offers in
compromise. To use the national guidelines rather than actual
figures in this instance was arbitrary, capricious, and without a
sound basis in fact. Petitioners have stated that they are still
willing to compromise their tax liabilities for $2,400, but
through monthly payments rather than a lump-sum payment.6
Therefore, based on the facts and circumstances of this
case, we hold that respondent abused his discretion in denying
petitioners’ offer to compromise their tax liabilities for
5
(...continued)
made in monthly payments over the life of the collection statute.
The deferred plan could result in a longer payment period than 24
months.
6
Petitioners and respondent agreed on the amount of the
compromise. The only disagreement here is the method of payment.
Based on the financial information submitted by petitioners, a
payment plan is a reasonable option.
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$2,400. We further hold that respondent did not abuse his
discretion in sustaining the filing of the Notices of Federal Tax
Liens.7
An appropriate decision will
be entered.
7
Petitioners have made no argument of merit from which an
abuse of discretion could be found with respect to respondent’s
determination that the filing of the Notices of Federal Tax Liens
was appropriate.