T.C. Summary Opinion 2006-75
UNITED STATES TAX COURT
AL SAMPSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4170-05S. Filed May 8, 2006.
Al Sampson, pro se.
Catherine G. Chang, for respondent.
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of sections 6330(d) and 7463 of the
Internal Revenue Code in effect when the petition was filed. The
decision to be entered is not reviewable by any other court, and
this opinion should not be cited as authority. Unless otherwise
indicated, all subsequent section references are to the Internal
Revenue Code in effect at relevant times.
- 2 -
This proceeding arises from a petition for judicial review
filed in response to a Notice of Determination Concerning
Collection Action(s) Under Section 6320 and/or 6330 (notice of
determination) sent to petitioner on February 19, 2005. Pursuant
to sections 6320(c) and 6330(d), petitioner seeks review of
respondent’s determination sustaining the filing of a notice of
Federal tax lien against petitioner. The issue for decision is
whether respondent abused his discretion in rejecting an offer-
in-compromise (OIC) that petitioner submitted for the taxable
year 2002.
Background
Some of the facts have been stipulated, and they are so
found. The record consists of the stipulation of facts and
supplemental stipulation of facts with attached exhibits, an
additional exhibit admitted during trial, and the testimony of
petitioner. At the time of filing the petition, petitioner
resided in San Francisco, California.
Petitioner was 43 years old at the time of trial. He has
been sporadically employed throughout his adulthood. Social
Security records covering the taxable years 1978 through 2003
indicate petitioner’s annual wage income has never exceeded
$19,432. The records also indicate petitioner earned no wage
- 3 -
income from 1998 through 2003.1 For the past several years,
petitioner has been a student at City College of San Francisco
(City College). At the time of trial, petitioner was a senior at
City College but was unsure when he would graduate. Petitioner
indicated that City College had recently reduced its offering of
courses due to budget constraints, which has delayed his
graduation. Petitioner has maintained himself during this time
by using student loan proceeds and by minimizing his living
expenses.
In the taxable year 2002, petitioner won a car from Centra
Marketing & Communications, LLC (Centra) as part of an Internet
sales promotion. Petitioner sold the car shortly after receiving
it, although it is not clear what he did with the proceeds.
Centra issued a Form 1099-MISC, Miscellaneous Income, to
petitioner reflecting $38,540 of gross income attributable to the
car. Petitioner reported that amount on his 2002 Federal income
tax return, as well as $146 of interest income, but made no
payments toward his tax liability.
Respondent made assessments against petitioner for the
taxable year 2002 totaling $5,942.01 for income tax and related
penalties and interest. In July 2004, respondent filed a notice
of Federal tax lien and sent petitioner a Notice of Federal Tax
1
The record does not indicate whether petitioner had other
sources of income during these years, other than a small amount
of interest income that he received in the taxable year 2002.
- 4 -
Lien Filing and Your Right to a Hearing Under IRC 6320.
Petitioner timely submitted a Form 12153, Request for a
Collection Due Process Hearing. He also submitted an OIC, in
which he made a cash offer of $2,000 to compromise his 2002 tax
liability.2 The OIC was based on doubt as to collectibility.
Petitioner’s OIC was assigned to an Appeals officer. As
part of his evaluation of the OIC, the Appeals officer calculated
the monthly income that petitioner could pay toward his 2002 tax
liability. The Appeals officer used petitioner’s 2002 gross
income of $38,686 as a baseline and then projected that amount
over a 48-month period. After subtracting allowable expenses,
the Appeals officer calculated that petitioner could pay $932 a
month toward his 2002 tax liability, which would allow him to pay
the liability in full in less than a year.
Petitioner and the Appeals officer participated in an
administrative hearing in January 2005. Prior to the hearing,
the Appeals officer was unaware that petitioner’s 2002 gross
income was attributable almost entirely to the car he had
received from Centra. After learning of this fact, the Appeals
officer requested and received additional information from
petitioner.
2
Petitioner intended to use his student loan proceeds to
pay the $2,000.
- 5 -
On January 19, 2005, the Appeals officer sent petitioner a letter
stating in part:
Part of the process of evaluating an offer from a
person who is unemployed is to consider what that
person would earn if they were working. Usually that
is done by looking at previous income history. In your
case, that is problematical because of your history,
but it seems clear that were you to find employment you
would be able to pay the tax liability for 2002. The
fact that you have chosen to go to school rather than
work is not really relevant.
On February 19, 2005, respondent issued petitioner a notice
of determination sustaining the filing of the notice of Federal
tax lien. The notice of determination states that the Appeals
officer verified that the requirements of law and administrative
procedure had been met and that petitioner’s OIC was rejected
because petitioner could fully pay his 2002 tax liability.
Discussion
Section 6321 imposes a lien in favor of the United States on
all property and rights to property of a person when a demand for
the payment of the person’s liability for taxes has been made and
the person fails to pay those taxes. Such a lien arises when an
assessment is made. Sec. 6322. Section 6323(a) requires the
Secretary to file notice of Federal tax lien if such lien is to
be valid against any purchaser, holder of a security interest,
mechanic’s lienor, or judgment lien creditor. Lindsay v.
Commissioner, T.C. Memo. 2001-285, affd. 56 Fed. Appx. 800 (9th
Cir. 2003).
- 6 -
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). An administrative hearing under section 6320 is
conducted in accordance with the procedural requirements of
section 6330. Sec. 6320(c). At the administrative hearing, a
taxpayer is entitled to raise any relevant issue relating to the
unpaid tax, including a spousal defense or collection
alternatives such as an OIC or an installment agreement. Sec.
6330(b) and (c)(2); sec. 301.6320-1(e)(1), Proced. & Admin. Regs.
A taxpayer also may challenge the existence or amount of the
underlying tax liability, including a liability reported on the
taxpayer’s original return, if the taxpayer “did not receive any
statutory notice of deficiency for such tax liability or did not
otherwise have an opportunity to dispute such tax liability.”
Sec. 6330(c)(2)(B); see also Urbano v. Commissioner, 122 T.C.
384, 389-390 (2004); Montgomery v. Commissioner, 122 T.C. 1, 9-10
(2004). Section 6330(d) provides for judicial review of the
administrative determination in the Tax Court or a Federal
District Court, as may be appropriate. Where the validity of the
underlying tax liability is properly at issue, the Court will
review the matter de novo. Where the validity of the underlying
tax liability is not properly at issue, however, the Court will
review the Commissioner’s administrative determination for abuse
- 7 -
of discretion. Goza v. Commissioner, 114 T.C. 176, 181-182
(2000). Whether an abuse of discretion has occurred depends upon
whether the exercise of discretion is without sound basis in fact
or law. See Freije v. Commissioner, 125 T.C. 14, 23 (2005);
Ansley-Sheppard-Burgess Co. v. Commissioner, 104 T.C. 367, 371
(1995).
Petitioner does not seek to challenge his underlying tax
liability. He challenges only the rejection of his OIC. We
therefore review for abuse of discretion.
Section 7122(a) authorizes the Secretary to compromise any
civil case arising under the internal revenue laws. The
Commissioner will generally compromise a liability on the basis
of doubt as to collectibility only if the liability exceeds the
taxpayer’s reasonable collection potential. Lemann v.
Commissioner, T.C. Memo. 2006-37. A taxpayer’s reasonable
collection potential is calculated by determining and adding
together the taxpayer’s net equity and his future income. See
id.; sec. 301.7122-1(b)(2), Proced. & Admin. Regs. Respondent
concedes that petitioner had no equity available to satisfy his
2002 tax liability. Respondent argues, however, that petitioner
had sufficient future income to pay his tax liability in full.3
3
The parties do not dispute the amount of petitioner’s
allowable living expenses.
- 8 -
Section 7122(c) provides that the Secretary shall prescribe
guidelines for IRS personnel to determine whether an OIC is
adequate and should be accepted. These guidelines have been
published and include certain provisions of the Internal Revenue
Manual (IRM). See Lemann v. Commissioner, supra; Spurgin v.
Commissioner, T.C. Memo. 2001-290. IRM sec. 5.8.5.5 (Nov. 15,
2004) provides guidelines for calculating a taxpayer’s future
income. “Future income is defined as an estimate of the
taxpayer’s ability to pay based on an analysis of gross income,
less necessary living expenses, for a specific number of months
into the future.” IRM sec. 5.8.5.5(1) (Nov. 15, 2004). For cash
offers, income and expenses are estimated for a 48-month period.
Id. The calculation of future income should take into account
“the taxpayer’s overall general situation including such facts as
age, health, marital status, number and age of dependents,
highest education or occupational training and work experience.”
IRM sec. 5.8.5.5(3) (Nov. 15, 2004). The IRM provides that “Some
situations may warrant placing a different value on future income
than current or past income indicates”. IRM sec. 5.8.5.5(5)
(Nov. 15, 2004). For example, if income or necessary expenses
will increase or decrease, then the amount or number of expected
payments should be adjusted accordingly. Id. If a taxpayer is
“temporarily unemployed or underemployed”, then income should be
calculated as if the taxpayer were fully employed. Id. If a
- 9 -
taxpayer has a “sporadic employment history or fluctuating
income”, then earnings over several prior years should be
averaged. Id.
As the Appeals officer acknowledged, estimating petitioner’s
future income is “problematical”. Petitioner intends to graduate
and find work, but it is uncertain when he will graduate, what
type of employment he will find, or how much he will earn. While
the IRM addresses situations where the taxpayer is “temporarily”
out of work, petitioner has not been employed for several years.
Petitioner has a history of sporadic employment and thus is a
candidate for income averaging. See IRM sec. 5.8.5.5(5) (Nov.
15, 2004). Because of his limited earnings, however,
petitioner’s average income over the several years prior to 2002
is close to zero.
Despite the unusual circumstances of petitioner’s case, the
IRM provides the following guidance:
In some instances, a future income collateral agreement
may be used in lieu of including the estimated value of
future income in reasonable collection potential (RCP).
When investigating an offer where current or past
income does not provide an ability to accurately
estimate future income, the use of a future income
collateral agreement may provide a better means of
calculating an acceptable offer amount. * * *
Example: A taxpayer is currently in medical school and
it is anticipated that upon graduation income should
increase dramatically.
IRM sec. 5.8.5.5(6) (Nov. 15, 2004).
- 10 -
Assuming petitioner secures employment after graduation, he
likely will earn significantly more income than he has over the
past several years. For the reasons stated above, however, it is
difficult to estimate the amount of his future income or when he
will receive such income. The facts of petitioner’s case
therefore appear to fit squarely within IRM sec. 5.8.5.5(6).
Nevertheless, there is no indication that the Appeals officer
considered using a future income collateral agreement. Instead,
the Appeals officer determined that because petitioner’s status
as a student was “not really relevant”, petitioner’s future
income included the wages he could have earned, but chose to
forgo, in order to pursue his studies (forgone earnings). The
Appeals officer also determined that petitioner’s forgone
earnings were sufficient to pay his 2002 tax liability in full.
It is true petitioner could have increased his income had he
discontinued his education and found work; however, we can find
nothing in the IRM suggesting that a student’s forgone earnings
are a component of future income. In fact, the example in IRM
sec. 5.8.5.5(6) indicates a taxpayer can qualify for an OIC
despite choosing to pursue education rather than employment. The
example does not include forgone earnings as part of the
taxpayer’s reasonable collection potential.
Even if petitioner’s future income did include forgone
earnings, the difficulty of calculating the amount of such
- 11 -
earnings is evident. Petitioner’s forgone earnings presumably
depend on the type of employment he could obtain, which in turn
depends on factors such as his work experience, job skills, and
the strength of the labor market. There is no indication the
Appeals officer considered these factors or attempted to
calculate petitioner’s forgone earnings.4 Rather, it appears the
Appeals officer assumed that petitioner would earn sufficient
income, after allowable expenses, to pay his tax liability in
full. Petitioner’s history of intermittent employment and modest
wage income raises doubts about the validity of this assumption.
Furthermore, it is unclear whether the Appeals officer considered
that petitioner might have increased expenses if he discontinued
his studies, such as student loan repayments.
We conclude the Appeals officer abused his discretion in
rejecting petitioner’s OIC on the ground that petitioner had
sufficient future income to pay his 2002 tax liability in full.
We therefore shall remand this matter to the Appeals Office for
reconsideration of petitioner’s OIC.
4
As mentioned supra, the Appeals officer prepared an income
projection based on petitioner’s 2002 gross income of $38,686.
After petitioner explained that he had received a car as part of
a sales promotion, however, it appears the Appeals officer
acknowledged the income projection was inaccurate. There is no
indication the Appeals officer prepared a revised income
projection.
- 12 -
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
An appropriate order will
be issued.