T.C. Summary Opinion 2004-147
UNITED STATES TAX COURT
WILLIAM C. EBERHARDT, JR. AND SUSAN A. EBERHARDT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1918-03S. Filed October 21, 2004.
William C. Eberhardt, Jr. and Susan A. Eberhardt, pro sese.
Kevin W. Coy, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of sections 6330(d) and 7463 of the Internal
Revenue Code in effect at the time that the petition was filed.
Unless otherwise indicated, subsequent section references are to
the Internal Revenue Code in effect at all relevant times, and
all Rule references are to the Tax Court Rules of Practice and
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Procedure. The decision to be entered is not reviewable by any
other court, and this opinion should not be cited as authority.
The petition in this case was filed in response to a Notice
of Determination Concerning Collection Action(s) Under Section
6320 and/or 6330. Pursuant to section 6330(d), petitioners seek
review of respondent's determination to proceed with collection
of their tax liability of $40,094.22 for 1995. At trial,
petitioners also challenged the amount of interest that has
accrued on their tax liability. The issues for decision are
whether: (1) The Appeals officer abused her discretion in
rejecting petitioners' Offer in Compromise (OIC) and sustaining a
proposed levy to collect petitioners' unpaid income tax
liability; and (2) the Appeals officer should have abated
interest assessed with respect to petitioners' liability for the
1995 tax year.
The stipulation of facts and the exhibits received into
evidence are incorporated herein by reference. Petitioners
resided in Riverside, California, at the time the petition was
filed.
Background
A. Examination of Petitioners' Individual Income Tax Return for
1995
On April 15, 1996, petitioners filed a joint Form 1040, U.S.
Individual Income Tax Return, for 1995. On September 23, 1997,
respondent notified petitioners that their 1995 return had been
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selected for examination. On November 5, 1997, respondent mailed
to petitioners a letter containing a report of proposed
adjustments. In that report, respondent determined that
petitioners were liable for the 10-percent additional tax for
making a premature withdrawal from their retirement plan. On
December 2, 1997, petitioners sent respondent a letter detailing
petitioner William C. Eberhardt, Jr.'s (Mr. Eberhardt) disability
and relying on that condition as authorization to withdraw
retirement funds without penalty.
On December 9, 1997, respondent notified petitioners that
additional issues had been identified for audit with regard to
petitioners' 1995 tax year. The letter contained a Form 4564,
Information Document Request (IDR), which solicited documentation
pertaining to petitioners' medical expenses, casualty or theft
loss, and income and expense items on petitioners' Schedule C,
Profit or Loss From Business, as well as additional information
pertaining to Mr. Eberhardt's disability.
On January 22, 1998, petitioners sent respondent a letter
containing additional documentation regarding the issue of Mr.
Eberhardt's disability. Also enclosed was a copy of a letter
dated May 6, 1996, in which petitioners were notified that the
examination of their 1993 return showed that no change was
necessary in the tax reported in that return. Petitioners did
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not submit any documents pertaining to Mr. Eberhardt's medical
expenses or any of the other documents requested in the IDR.
On March 10, 1998, respondent sent petitioners a second IDR
regarding petitioners' medical expenses, casualty or theft loss,
and Schedule C income and expenses. On May 2, 1998, petitioners
submitted to respondent documentation pertaining to their claimed
casualty or theft loss, which was related to petitioners' pension
plan. They did not submit any medical expense or Schedule C
documentation.
On May 24, 1998, petitioners sent respondent a copy of their
1993 Federal income tax return and a copy of a letter respondent
sent to petitioners resolving an audit of their 1993 tax year.
After reviewing petitioners' 1993 return, respondent's examiner
narrowed the scope of the audit of petitioners' 1995 return to
their medical expenses and the pension-related casualty or theft
loss.
On May 27, 1998, respondent mailed to petitioners a report
proposing adjustments to petitioners' medical expense deductions
and the pension-related casualty or theft loss. Petitioners had
invested in a self-directed IRA with First Pension Corporation
(First Pension). In April 1994, First Pension filed for
bankruptcy, and the accounts of their investment trustee, Summit
Trust Company, were frozen. At the time of the bankruptcy
filing, petitioners' account contained a 5-acre parcel of land
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that petitioners allege decreased in value while their account
was frozen.
On August 10, 1998, petitioners submitted to respondent
additional documents they had prepared pertaining to the casualty
or theft loss issue. Respondent reviewed the documentation and
on October 26, 1998, notified petitioners that respondent's
determination had not changed. Respondent also provided
petitioners with copies of cases supporting respondent's decision
to disallow petitioners' casualty or theft loss.
On November 25, 1998, respondent sent petitioners an updated
report proposing adjustments to petitioners' medical expense and
casualty or theft loss deductions as well as an additional case
supporting respondent's decision regarding the casualty or theft
loss issue. Respondent also sent petitioners a separate letter
soliciting an extension of the period of limitations within which
to audit petitioners' 1995 return. On December 14, 1998,
petitioners signed a Form 872, Consent to Extend Time to Assess
Tax, extending to June 30, 2000, the period within which
respondent could assess the tax due for petitioners' 1995 tax
year.
Respondent sent petitioners a revised audit report dated
January 6, 1999, disallowing petitioners' medical expenses for
lack of substantiation and also disallowing their casualty or
theft loss. On January 11, 1999, respondent closed out the audit
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of petitioners' 1995 return as unagreed and forwarded the case to
the Appeals Office.
B. Review of Petitioners' Return by the Appeals Office
Petitioners' case file was received in Appeals on or about
January 27, 1999, and Appeals Officer Marilyn Radford (Ms.
Radford) was assigned to handle the case. Petitioners agreed to
hold their initial meeting with Ms. Radford on March 19, 1999.
On March 18, 1999, petitioners sent her information setting forth
their position on the audit. Ms. Radford asked for a
postponement of the initial meeting so she could review the
information.
Ms. Radford held telephone conferences with petitioners on
March 24, 1999, and March 26, 1999. Petitioners complained that
the IRS handled their audit unprofessionally and caused
unnecessary delays. Petitioners also blamed the IRS for allowing
a qualified plan to "defraud" its investors and for the resulting
loss in the value of their IRA. Petitioners did not discuss the
medical expense issue at all.
Ms. Radford prepared an Appeals Case Memorandum on April 22,
1999, in which she recommended disallowing petitioners' medical
expenses for lack of substantiation. Petitioners provided only a
typed list of expenses incurred, not actual receipts or
statements as requested in the IDRs. Ms. Radford also
recommended disallowing petitioners' claimed casualty or theft
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loss because petitioners still owned the property. On May 7,
1999, respondent issued a notice of deficiency disallowing the
deductions and determining a deficiency of $30,771.
C. Petitioners' Tax Court Case
On August 9, 1999, petitioners filed a petition with this
Court seeking a redetermination of the 1995 tax deficiency
determined by respondent. Prior to trial, respondent conceded
the issue pertaining to petitioners' medical expenses on Schedule
A. At trial, the Court entered a decision for respondent
sustaining the disallowance of the casualty or theft loss.
Eberhardt v. Commissioner, T.C. Summary Opinion 2000-163.
Petitioners filed a Motion for Reconsideration which was denied.
Subsequently, respondent assessed the tax deficiency and
interest.
D. Respondent's Collection Efforts
On April 15, 2001, respondent withheld petitioners' 2000
Federal income tax refund of $754.22 and applied it to their
outstanding 1995 tax liability. Between April 23, 2001, and July
2, 2001, respondent mailed to petitioners three separate notices
of balance due with respect to the unpaid liability. On December
3, 2001, respondent withheld petitioners' midyear 2000 refund of
$600 and applied it to petitioners' outstanding 1995 tax
liability.
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On February 7, 2002, respondent issued a Final Notice,
Notice of Intent to Levy and Notice of Your Right to a Hearing
(Notice of Intent to Levy), with respect to petitioners' taxable
year 1995. On February 27, 2002, in response to the Notice of
Intent to Levy, respondent received petitioners' Form 12153,
Request for a Collection Due Process Hearing (hearing).
E. Petitioners' Section 6330 Hearing
Appeals Officer Wendy Clinger (Ms. Clinger) was assigned to
handle petitioners' hearing. Petitioners met with her for their
hearing on November 21, 2002.
During the hearing, petitioners disputed their underlying
tax liability. Ms. Clinger advised them that they had already
had an opportunity to challenge the liability when they had a
trial before the Tax Court and could not do so again in the
hearing. Ms. Clinger explained that petitioners could discuss
the collection alternatives available to petitioners to satisfy
their tax liability.
At the hearing, petitioners submitted an OIC offering $1,000
to satisfy their outstanding 1995 tax liability which totaled
over $49,000, including accumulated interest. The $1,000 would
be paid within 90 days of written acceptance of their OIC.
Petitioners requested that their OIC be accepted in the interests
of effective tax administration, or doubt as to collectibility.
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In support of their grounds for effective tax
administration, petitioners revisited the facts and circumstances
of their prior Tax Court proceeding. Petitioners claimed that
they cannot pay the tax in full because they have a substantial
amount of short-term debt, the expenses of deferred maintenance
on their home, and the need to fund their retirement savings over
a limited number of years.
As to doubt as to collectibility, petitioners pointed to the
Form 433-A, Collection Information Statement for Wage Earners and
Self-Employed Individuals, they submitted to Ms. Clinger. On
their Form 433-A, petitioners indicated that they owned their
home located in Riverside, California, which they valued at
$350,000 with mortgages of $331,290. Petitioners also have
retirement accounts valued at $24,815.65 and bank accounts valued
at $606.75. Petitioners indicated that their monthly income is
$10,834 and their monthly expenses are $12,571. Monthly expenses
of $4,473 are attributable to petitioners' debts.
Ms. Clinger's analysis of petitioners' monthly income over
allowable expenses revealed the following:
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Allowable
Income Expense Type Expense Amount
$10,834 National standard1 $1,235
Housing & utilities 1,223
Transportation 1,070
Health care 382
Taxes 1,546
Total 5,456
Ms. Clinger concluded that petitioners had the ability to pay
$5,378 per month–-the net difference between petitioners' monthly
income and monthly allowable expenses--toward their outstanding
1995 tax liability. Petitioners declined Ms. Clinger's offer of
an installment agreement. Petitioners also requested an
abatement of interest on the deficiency because they feel the
audit of their 1995 tax year was prolonged due to mistakes of the
IRS employees who performed the audit.
Upon consideration of petitioners' submitted documentation,
Ms. Clinger prepared a Form 1271-c, Rejection or Withdrawal
Memorandum, recommending that petitioners' OIC be rejected. Ms.
Clinger concluded that, given petitioners' available asset equity
and monthly disposable income, petitioners have the ability to
pay the liability in full via an installment agreement. She also
noted that petitioners did not demonstrate any special
circumstances or grounds for an exception for effective tax
1
National standard expenses are for clothing and clothing
services, food, housekeeping supplies, personal care products and
services. See Schulman v. Commissioner, T.C. Memo. 2002-129 n.6.
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administration. On December 12, 2002, Ms. Clinger notified
petitioners that respondent was rejecting their OIC.
On January 9, 2003, Ms. Clinger sent petitioners a Notice of
Determination Concerning Collection Action Under Section 6330
sustaining respondent's proposed levy as the appropriate means of
collecting petitioners' unpaid liability for the 1995 tax year.
She also sent petitioners another copy of the letter rejecting
their OIC. Additionally, Ms. Clinger sent petitioners a Notice
of Full Disallowance--Final Determination denying petitioners'
request for an abatement of interest on their 1995 deficiency
assessment.
Discussion
Section 6330(c) prescribes the matters that a person may
raise at an Appeals Office hearing. Section 6330(c)(2)(A)
provides that a person may raise collection issues such as
spousal defenses, the appropriateness of the Commissioner's
intended collection action, and possible alternative means of
collection. See Sego v. Commissioner, 114 T.C. 604, 609 (2000);
Goza v. Commissioner, 114 T.C. 176, 180 (2000). In addition,
section 6330(c)(2)(B) establishes the circumstances under which a
person may challenge the existence or amount of his or her
underlying tax liability. Section 6330(c)(2)(B) provides:
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(2) Issues at Hearing.--
* * * * * * *
(B) Underlying Liability.--The person may
also raise at the hearing challenges to the
existence or amount of the underlying tax
liability for any tax period if the person did not
receive any statutory notice of deficiency for
such tax liability or did not otherwise have an
opportunity to dispute such tax liability.
A taxpayer, however, is precluded from relitigating issues
raised and considered in any previous Appeals hearing or any
other administrative or judicial proceeding in which the taxpayer
meaningfully participated. Sec. 6330(c)(4); Katz v.
Commissioner, 115 T.C. 329, 339 (2000).
Petitioners not only received a notice of deficiency for tax
year 1995, they also litigated the matter before this Court.
Therefore, they are precluded from challenging the existence or
amount of their 1995 tax liability in a subsequent section 6330
hearing. Sec. 6330(c)(2)(B).
Where, as is the case here, the validity of the underlying
tax liability is not properly placed at issue, the Court will
review the administrative determination of the Appeals Office for
abuse of discretion. Sego v. Commissioner, supra at 610; Goza v.
Commissioner, supra at 181-183. The Court reviews only whether
the Appeals officer's refusal to accept petitioners' OIC was
arbitrary, capricious, or without sound basis in fact or law.
See Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
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A. Petitioners' Offer in Compromise
Section 7122(a) authorizes a compromise of a taxpayer's
Federal tax liability. An OIC may be accepted where there is
doubt as to liability or collectibility, or where it would
promote effective tax administration. Sec. 301.7122-1(b),
Proced. & Admin. Regs.
Doubt as to liability does not exist where the liability
has been established by a final court decision or judgment
concerning the existence or amount of the liability. Sec.
301.7122-1(b)(1), Proced. & Admin. Regs. Doubt as to
collectibility exists in any case where the taxpayer's assets and
income are less than the full amount of the liability. Sec.
301.7122-1(b)(2), Proced. & Admin. Regs.
After reviewing petitioners' financial situation, Ms.
Clinger determined that their financial situation enabled them to
pay the entire tax liability within a reasonable time.
Petitioners' financial information indicated that both
petitioners had gainful employment and that their monthly income
exceeded their necessary living expenses, thereby allowing the
full payment of their liability.
If there is no doubt as to liability or collectibility, a
compromise may be entered into to promote effective tax
administration when collection of the full liability will create
economic hardship within the meaning of section 301.6343-1,
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Proced. & Admin. Regs. Sec. 301.7122-1(b)(3)(i), Proced. &
Admin. Regs. Economic hardship is defined as the inability of
the taxpayer to pay his or her reasonable living expenses. Sec.
301.6343-1(b)(4), Proced. & Admin. Regs.
Factors supporting a determination that collection would
cause economic hardship within the meaning of section 301.7122-
1(b)(3)(i), Proced. & Admin. Regs., include, but are not limited
to:
(A) Taxpayer is incapable of earning a living because
of a long term illness, medical condition, or disability,
and it is reasonably foreseeable that taxpayer's financial
resources will be exhausted providing care and support
during the course of the condition;
(B) Although taxpayer has certain monthly income, that
income is exhausted each month in providing for the care of
dependents with no other means of support; and
(C) Although taxpayer has certain assets, the taxpayer
is unable to borrow against the equity in those assets and
liquidation of those assets to pay outstanding tax
liabilities * * *.
Sec. 301.7122-1(c)(3)(i)(A), (B) and (C), Proced. & Admin. Regs.
Petitioners claim they cannot pay the tax in full because
they have a substantial amount of short-term debt, the expenses
of deferred maintenance on their home, and the need to fund their
retirement savings over a limited number of years. These
circumstances fall short of qualifying as economic hardship
within the meaning of section 301.6343-1(b)(4), Proced. & Admin.
Regs.
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When there are no grounds for compromise under the
provisions pertaining to doubt as to liability, doubt as to
collectibility, or effective tax administration due to economic
hardship, the IRS may compromise a liability to promote effective
tax administration where compelling public policy or equity
considerations identified by the taxpayer provide a sufficient
basis for compromising the liability. Sec. 301.7122-1(b)(3)(ii),
Proced. & Admin. Regs. Compromise will be justified only where,
due to exceptional circumstances, collection of the full
liability would undermine public confidence that the laws are
being administered in a fair and equitable manner. A taxpayer
proposing such a compromise will be expected to demonstrate
circumstances that justify compromise even though a similarly
situated taxpayer may have paid his liability in full. Id.
Petitioners have failed to demonstrate that there are any
circumstances showing that collection of their full liability
would undermine public confidence that the tax laws are being
administered fairly and equitably. Petitioners have not shown
evidence sufficient to warrant consideration of an OIC based on
effective tax administration grounds.
Having reviewed the entire record, including the financial
information presented to Ms. Clinger, the Court cannot find that
the determination rejecting petitioners' OIC was an abuse of
discretion. See Van Vlaenderen v. Commissioner, T.C. Memo.
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2003-346; Crisan v. Commissioner, T.C. Memo. 2003-318; Willis v.
Commissioner, T.C. Memo. 2003-302. Accordingly, collection by
levy of petitioners' unpaid 1995 tax liability reflected in the
Notice of Determination may proceed.
B. Abatement of Interest
If, as part of a section 6330 hearing, a taxpayer makes a
request for abatement of interest, the Court has jurisdiction
over the request for abatement of interest that is the subject of
the Commissioner's collection activities. Katz v. Commissioner,
115 T.C. at 340-341.
This Court may order an abatement of interest only if there
is an abuse of discretion by the Commissioner in failing to abate
interest. See sec. 6404(i) (formerly sec. 6404(g)). In order to
demonstrate an abuse of discretion, a taxpayer must prove that
the Commissioner exercised his discretion arbitrarily,
capriciously, or without sound basis in fact or law. See Rule
142(a); Lee v. Commissioner, 113 T.C. 145, 149 (1999); Woodral v.
Commissioner, 112 T.C. at 23.
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Under preamendment section 6404(e),2 the Commissioner "may
abate the assessment of interest on any payment of tax to the
extent that any error or delay in payment is attributable to an
officer or employee of the IRS being erroneous or dilatory in
performing a ministerial act." Lee v. Commissioner, supra at
148. A ministerial act does not include a "decision concerning
the proper application of federal tax law (or other federal or
state law)". Sec. 301.6404-2(b)(2), Proced. & Admin. Regs.
An error or delay by the Commissioner can be taken into
account only if: (1) It occurs after the Commissioner has
contacted the taxpayer in writing with respect to the deficiency,
and (2) no significant aspect of the error or delay is
attributable to the taxpayer. See sec. 6404(e)(1); Krugman v.
Commissioner, 112 T.C. 230, 239 (1999); Hawksley v. Commissioner,
T.C. Memo. 2000-354. Section 6404(e)(1) "does not therefore
permit the abatement of interest for the period of time between
the date the taxpayer files a return and the date the IRS
commences an audit, regardless of the length of that time
2
Sec. 6404(e) was amended under sec. 301 of the Taxpayer
Bill of Rights 2, Pub. L. 104-168, 110 Stat. 1457 (1996), to
permit the Secretary to abate interest with respect to an
"unreasonable" error or delay resulting from "managerial" and
ministerial acts. This amendment, however, applies to interest
accruing with respect to deficiencies or payments of tax for
years beginning after July 30, 1996; therefore, the amendment is
inapplicable to the case at bar. See Woodral v. Commissioner,
112 T.C. 19, 25 n.8 (1999).
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period." H. Rept. 99-426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1,
844; S. Rept. 99-313, at 208 (1986), 1986-3 C.B. (Vol. 3) 1, 208.
Petitioners request abatement partly because respondent did
not notify them that their return had been selected for
examination until September 23, 1997. They argue that such a
length of time constitutes a ministerial error by respondent and
warrants an abatement of interest.
For purposes of section 6404(e), an error or delay cannot be
considered for the period before September 23, 1997, because that
is the date on which respondent first contacted petitioners in
writing regarding the deficiency for 1995. See sec. 6404(e);
Krugman v. Commissioner, supra at 239; Nerad v. Commissioner,
T.C. Memo. 1999-376.
Petitioners also assert that the audit was unreasonably
lengthy because several different IRS employees participated in
the audit. There is no evidence in the record that any of the
employees assigned to petitioners' audit mishandled any portion
of the audit. There were no significant delays by respondent
replying to contacts or correspondence from petitioners. The
greatest delays came in petitioners' responses to respondent's
document requests.
Respondent's decisions on how to proceed during the audit
necessarily required the exercise of judgment and thus cannot be
ministerial acts. Additionally, the mere passage of time does
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not establish error or delay by the Commissioner in performing a
ministerial act. Lee v. Commissioner, supra at 150. The Court,
therefore, concludes that the passage of 19 months during the
audit of petitioners' 1995 tax year is not attributable to error
or delay in performing a ministerial act.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.