T.C. Memo. 2007-8
UNITED STATES TAX COURT
WILL K. NG, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3883-05L. Filed January 16, 2007.
John Gigounas, for petitioner.
Andrew R. Moore, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Pursuant to section 6330(d),1 petitioner
seeks review of respondent’s determination regarding collection
of his 1993, 1994, and 1995 income tax liabilities. The issue
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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for decision is whether respondent’s determination to proceed
with collection was an abuse of discretion.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.2
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time he filed his
petition, petitioner lived in San Francisco, California. As of
February 29, 2000, petitioner owed income taxes and additions to
tax for 1993, 1994, and 1995 of $113,417.14, $24,228.67, and
$18,789.03, respectively. On January 18, 2000, petitioner filed
a Form 656, Offer in Compromise (OIC), with respondent. On his
OIC, petitioner proposed to settle his 1993, 1994, and 1995 tax
liabilities with a cash payment of $83,779. Petitioner submitted
his OIC on the grounds of doubt as to collectibility. The OIC
stated (in relevant part):
Item 8 - By submitting this offer, I/we understand and
agree to the following conditions:
* * * * * * *
(d) I/we will comply with all provisions of the
Internal Revenue Code relating to filing my/our
returns and paying my/our required taxes for 5
years or until the offered amount is paid in full,
whichever is longer.
2
The parties initially stipulated that petitioner’s 1993
tax liability was satisfied by the payment petitioner submitted
with his offer-in-compromise. In their briefs, the parties agree
that this is incorrect. Pursuant to Rule 91(e), we do not treat
that portion of the stipulation as a conclusive admission by
either party.
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* * * * * * *
(j) I/we understand that I/we remain responsible for
the full amount of the tax liability, unless and
until the IRS accepts the offer in writing and
I/we have met all the terms and conditions of the
offer. The IRS will not remove the original
amount of the tax liability from its records until
I/we have met all the terms of the offer.
* * * * * * *
(o) If I/we fail to meet any of the terms and
conditions of the offer and the offer defaults,
then the IRS may:
• immediately file suit to collect the entire
unpaid balance of the offer
• immediately file suit to collect an amount
equal to the original amount of the tax
liability as liquidating damages, minus any
payment already received under the terms of
this offer
• disregard the amount of the offer and apply all
amounts already paid under the offer against
the original amount of the tax liability
• file suit or levy to collect the original
amount of the tax liability, without further
notice of any kind.
Respondent accepted petitioner’s OIC by a letter dated
February 25, 2000. That letter stated, in relevant part:
“Please note that the conditions of the offer require you to file
and pay all required taxes for five tax years or the period of
time payments are being made on the offer, whichever is longer.”
The letter also reiterated the language above from Item 8,
paragraph (o) of the OIC.
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Petitioner timely paid the offer amount of $83,779.
Petitioner also timely filed returns and paid the tax owed for
2001, 2003, and 2004. The dispute in this case focuses on
petitioner’s failure to timely pay his 2002 tax.
After respondent granted petitioner’s timely requests for
extensions, petitioner timely filed his 2002 Form 1040, U.S.
Individual Income Tax Return, on October 15, 2003. That return
showed a tax liability of $86,496, payments of $9,849, and a
remaining liability of $77,540.3 With his 2002 return,
petitioner submitted a $15,000 payment and a Form 9465,
Installment Agreement Request. On the Installment Agreement
Request, petitioner proposed to make payments of $20,000 on the
28th of each month.
Respondent neither accepted nor rejected petitioner’s
Installment Agreement Request. At trial, respondent did not
contest petitioner’s assertion that respondent never acted on the
Installment Agreement Request. Moreover, it is not clear from
the record whether any employee of respondent ever considered
petitioner’s Installment Agreement Request.
On November 14, 2003, respondent sent petitioner a letter
stating that, as part of his OIC, petitioner agreed to timely
file returns and pay his income taxes for 5 years following the
3
The figure of $77,540 includes an estimated tax penalty
of $893.
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date respondent accepted the offer. The letter warned petitioner
that he needed to pay his remaining 2002 tax liability of
$71,984.36 within 30 days “to prevent termination of * * * [his]
Offer In Compromise.” The letter stated that if petitioner did
not comply, respondent would terminate the OIC and would
reinstate the original amount of the compromised liability,
reduced for the payment petitioner had already made.
That letter apparently never reached petitioner and was
returned to respondent by the Postal Service. Respondent sent a
nearly identical letter containing the same warnings to
petitioner at his new address on December 10, 2003. By that
time, because of the accrual of interest and penalties,
petitioner’s 2002 liability had increased to $72,683.54.
Petitioner does not contend that he did not receive the December
10 letter. Petitioner did not pay his 2002 tax liability within
30 days of the December 10 letter or otherwise reply to the
letter.
Petitioner received a letter from respondent dated February
11, 2004. In that letter, respondent declared petitioner in
default of the OIC and stated that “arrangements to compromise
the liability are terminated.”
Respondent applied petitioner’s payment on the OIC to his
previously compromised liabilities. This left balances owing for
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1993, 1994, and 1995 of $29,347.57, $33,763.22 and $30,195.96,
respectively.
On March 24, 2004, petitioner made payments totaling $20,000
toward his 2002 tax liability.
In a letter dated July 7, 2004, respondent sent petitioner a
Final Notice--Notice of Intent to Levy and Notice of Your Right
to a Hearing (notice of intent to levy) for the outstanding 1994,
1995, and 2002 liabilities. The notice of intent to levy showed
a total of $121,218.36 in unpaid taxes, interest, and penalties.
On July 14, 2004, petitioner paid respondent a total of
$56,731.05, satisfying his 2002 tax liability.
On July 15, 2004, respondent sent petitioner a Notice of
Federal Tax Lien Filing and Your Right to a Hearing Under IRC
6320 (NFTL). On August 11, 2004, petitioner filed a Form 12153,
Request for a Collection Due Process Hearing, with regard to the
NFTL.
Appeals Officer Lawrence Dorr was assigned to petitioner’s
case. Petitioner’s hearing consisted of an in-person meeting
with Officer Dorr on January 19, 2005, and subsequent
correspondence. During the hearing, petitioner raised the
argument that although he had violated the literal terms of the
OIC by failing to timely pay his 2002 income tax liability, his
breach was not “material” and that respondent therefore should
not have declared him in default on the OIC. Officer Dorr did
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not have petitioner’s Installment Agreement Request from
October 15, 2003, and Officer Dorr did not consider the
Installment Agreement Request in reaching his determination
regarding petitioner’s outstanding tax liabilities. On February
23, 2005, respondent issued to petitioner two Notices of
Determination Concerning Collection Action(s) Under Section 6320
and/or 6330 (notices of determination) regarding petitioner’s
outstanding 1993, 1994, 1995, and 2002 tax liabilities.4 In the
notices of determination, respondent sustained the filing of the
lien. In the Attachment to Determination Letter mailed with the
notices of determination, respondent noted petitioner’s argument
that he had been improperly declared in default on the OIC and
concluded that petitioner had been properly declared in default.
On February 28, 2005, petitioner timely petitioned this
Court for review of respondent’s determinations under section
6320 and/or 6330.
OPINION
I. Standard of Review
In the context of a section 6320 or 6330 hearing, a
challenge to the Commissioner’s determination that a taxpayer was
properly deemed in default on an OIC is not a dispute of the
underlying tax liability. See Robinette v. Commissioner, 123
T.C. 85, 93-94 (2004), revd. on other grounds 439 F.3d 455 (8th
4
Petitioner’s 2002 tax year is not at issue in this case.
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Cir. 2006). Petitioner has not raised any other issue that
amounts to a challenge of the underlying tax liability.
Where the validity of the underlying tax liability is not
properly in dispute, we review the Commissioner’s determination
for an abuse of discretion. Sego v. Commissioner, 114 T.C. 604,
610 (2000); Goza v. Commissioner, 114 T.C. 176, 181 (2000).
Accordingly, we review respondent’s determination to proceed with
collection of petitioner’s 1993, 1994, and 1995 tax liabilities
for an abuse of discretion. An abuse of discretion has occurred
if the “Commissioner exercised * * * [his] discretion
arbitrarily, capriciously, or without sound basis in fact or
law.” Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
II. Analysis Applied to Offers-in-Compromise
“An accepted offer in compromise is properly analyzed as a
contract between the parties.” Dutton v. Commissioner, 122 T.C.
133, 138 (2004). When reviewing whether the Commissioner abused
his discretion in declaring a taxpayer in default on an OIC, our
analysis is governed by “general principles of contract law.”
Id.
III. Parties’ Arguments
The parties have focused their disputes in this case on two
contentious--and familiar--issues. Petitioner urges that, when
analyzing whether respondent abused his discretion by finding
that petitioner defaulted on his OIC, we apply the “material
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breach” analysis as applied in the majority opinion of this
Court’s decision in Robinette v. Commissioner, supra at 109-112.
Applying that analysis, petitioner argues that late payment of
his 2002 taxes was not material, and that respondent therefore
abused his discretion by finding that petitioner defaulted on his
OIC. Petitioner also urges that the Court consider his
Installment Agreement Request and his testimony at trial, neither
of which is part of the administrative record that respondent
considered at the section 6330 hearing. Petitioner argues that,
under this Court’s decision in Robinette, the evidence is within
the scope of this Court’s review of a determination under section
6320 and/or 6330 for an abuse of discretion. On the basis of his
testimony, respondent’s internal procedures, and the Installment
Agreement Request, petitioner urges that we should treat his
Installment Agreement Request as having been granted. Had the
Installment Agreement Request been granted, petitioner argues,
late payment of his 2002 taxes would not have been a material
breach of the OIC.
As to the contractual issue, respondent argues that we
should apply the “doctrine of express conditions” analysis
applied by the U.S. Court of Appeals for the Eighth Circuit in
reversing this Court’s decision. Robinette v. Commissioner, 439
F.3d at 462-463. Respondent also argues that, even under a
“material breach” analysis, respondent did not abuse his
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discretion by declaring petitioner in default on his OIC because
petitioner’s late payment of his 2002 taxes was a material
breach. Finally, relying on the Court of Appeals’ opinion in
Robinette, respondent argues that we may not consider evidence
beyond the administrative record when reviewing a determination
under section 6320 and/or 6330 for an abuse of discretion.
IV. Analysis
A. Applicable Contract Law
1. Material Breach Analysis
Under the “material breach” analysis applied by the Tax
Court in Robinette, “‘If the plaintiff’s breach is material and
sufficiently serious, the defendant’s obligation to perform may
be discharged. * * * Not so, however, if the plaintiff’s breach
is comparatively minor.’” Robinette v. Commissioner, 123 T.C. at
108 (quoting TXO Prod. Corp. v. Page Farms, Inc., 698 S.W.2d 791,
793 (Ark. 1985)).
The Court went on to point out:
“In determining whether a failure to render or to
offer performance is material, the following
circumstances are significant:
(a) the extent to which the injured party
will be deprived of the benefit which he
reasonably expected;
(b) the extent to which the injured party can
be adequately compensated for the part of that
benefit of which he will be deprived;
(c) the extent to which the party failing to
perform or to offer to perform will suffer
forfeiture;
(d) the likelihood that the party failing to
perform or to offer to perform will cure his
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failure, taking account of all the circumstances
including any reasonable assurances; [and]
(e) the extent to which the behavior of the
party failing to perform or to offer to perform
comports with standards of good faith and fair
dealing.” [Id. at 109, quoting 2 Restatement,
Contracts 2d, sec. 241 (1981).]
Although the above circumstances may by themselves indicate the
materiality or nonmateriality of a breach, the standard of
materiality is necessarily somewhat imprecise and flexible, and
should be applied in light of the facts of each case in such a
way as to further the purpose of securing for each party his
expectation of an exchange of performances. 2 Restatement, supra
sec. 241 cmt. a.
2. Doctrine of Express Conditions
Under the “doctrine of express conditions” analysis endorsed
by the Court of Appeals in Robinette, an express condition of a
contract is subject to a requirement of strict performance.
Robinette v. Commissioner, 439 F.3d at 462 (citing 13 Williston
on Contracts, sec. 38:6 (4th ed. 2000)). When an express
condition fails to occur, the performance subject to that
condition does not become due unless the nonoccurrence of the
condition is excused. 2 Restatement, supra sec. 225(1). Under
that doctrine, a failure to meet express conditions may be
excused if they are immaterial to the exchange and if their
enforcement would result in a disproportionate forfeiture.
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Robinette v. Commissioner, 439 F.3d at 463 (citing 2 Restatement,
supra sec. 229).
Under this analysis, the performance conditioned upon strict
compliance with the terms of the OIC is the Commissioner’s
discharge of the full amount of the tax liability compromised.
3. Application
Considering all the relevant facts and circumstances,
petitioner’s significantly late payment of a substantial tax
liability amounts to both a failure of an express condition of
the OIC and a material breach of the OIC. Therefore, we need not
decide which doctrine applies.
By the plain terms of the OIC, respondent was not obligated
to discharge petitioner’s unpaid 1993, 1994, and 1995 tax
liabilities until petitioner “[complied] with all provisions of
the Internal Revenue Code relating to filing [his] returns and
paying [his] required taxes for 5 years or until the offered
amount is paid in full, whichever is longer.” The Internal
Revenue Code required that petitioner pay his outstanding 2002
income tax liability of $77,540 by April 15, 2003. See secs.
6151(a), 6072(a). He failed to do so. Petitioner failed to pay
the bulk of his 2002 tax liability for well over a year after it
was due, eventually satisfying his tax debt with his final
payment of $56,731.05 on July 14, 2004. Moreover, despite
petitioner’s failure to pay his 2002 taxes, respondent’s letters
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of November 14 and December 10, 2003, warned petitioner of the
potential for default and gave him an additional opportunity to
pay his taxes without defaulting on the OIC. Petitioner again
failed to pay his 2002 tax liability.
Under the circumstances, petitioner’s failure to satisfy his
2002 tax liability amounted to a “material breach” of the OIC.
By withholding a sizable sum of money from respondent for a
substantial period, petitioner deprived respondent of a material
financial benefit under the OIC. Also, at the time respondent
declared petitioner in default on February 11, 2004, it appeared
unlikely that petitioner would cure his failure. By that time,
petitioner had failed to comply with the terms not only of the
OIC but also of respondent’s letter of December 10, 2003 (again
requesting payment of petitioner’s 2002 taxes), thereby declining
an opportunity to “cure” his failure.
By failing to satisfy his 2002 tax liability for over a
year, petitioner committed a material breach of the terms of the
OIC. Nor is there any applicable “excuse of a condition”. As
explained supra, an express condition of a contract may be
excused if a contracting party can show that (1) compliance with
the condition would result in a disproportionate forfeiture or
penalty, and (2) the condition was not a material part of the
bargain. See 2 Restatement, supra sec. 229. The record before
us does not indicate that strict compliance would have resulted
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in a disproportionate forfeiture or penalty to petitioner.
Moreover, for the reasons discussed supra, we find that the
condition that petitioner timely pay his 2002 taxes was a
material part of the OIC.
B. Scope of Review
Consideration of petitioner’s testimony or the Installment
Agreement Request would not alter any of the conclusions above.
At the time petitioner filed his Installment Agreement Request,
the Commissioner’s internal procedures provided that the
Commissioner could grant installment agreement requests from a
taxpayer in petitioner’s situation without declaring the taxpayer
in default. Internal Revenue Manual sec. 5.19.7.3.17.3
(effective October 1, 2001). While it may have been within
respondent’s discretion to overlook petitioner’s noncompliance
with the OIC and grant petitioner’s Installment Agreement
Request, we have long held that the Commissioner’s internal
procedures do not have the effect of law and that noncompliance
with those procedures does not render an action of the
Commissioner invalid. Vallone v. Commissioner, 88 T.C. 794, 807-
808 (1987).
Petitioner also argues that because he was never notified
that his Installment Agreement Request was denied, we should
treat the request as having been granted. We disagree. We note
that petitioner failed to comply with the terms of his proposed
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Installment Agreement by not making the monthly payments he had
offered. Such noncompliance hardly inspires the Court to find
that petitioner’s late payment of his 2002 taxes did not form
adequate grounds upon which to find him in default of his OIC.
Indeed, consideration of petitioner’s testimony would only
bolster the conclusions that his breach was material and that
there was no “excuse of conditions” because reinstatement of his
original tax liability would not work a disproportionate
forfeiture upon him. At trial, petitioner admitted that the
terms of the OIC were explained to him by his tax advisers when
he entered into the compromise. Petitioner also admitted that he
realized a capital gain of $416,895 upon the sale of his home in
December 2002. Even after purchasing a new home and remodeling
it, petitioner admitted he had slightly over $100,000 in cash
with which to satisfy his 2002 tax liability. Under such
circumstances, petitioner’s late payment of his 2002 taxes seems
to be exactly the sort of “evasion of the spirit of the bargain,
lack of diligence and slacking off, [and/or] willful rendering of
imperfect performance” that typifies a failure of good faith
performance and therefore indicates a material breach. See 2
Restatement, supra sec. 205 cmt. d. Accordingly, we need not
decide herein whether we may consider evidence beyond the
administrative record.
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We conclude that respondent did not abuse his discretion in
proceeding with collection of petitioner’s unpaid 1993, 1994, and
1995 taxes.
To reflect the foregoing,
Decision will be entered
for respondent.