T.C. Memo. 2007-294
UNITED STATES TAX COURT
MICHAEL D. CORNWELL AND HILARY J. IKER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15013-06L. Filed September 27, 2007.
Michael D. Cornwell and Hilary J. Iker, pro se.
Michael W. Tan, for respondent.
MEMORANDUM OPINION
COHEN, Judge: This proceeding was commenced in response to
three Notices of Determination Concerning Collection Action(s).
The issue for decision is whether the settlement officer abused
his discretion in determining the amount of an acceptable offer-
in-compromise (OIC) by including prior overtime earnings in the
calculation of reasonable collection potential (RCP). Unless
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otherwise indicated, all section references are to the Internal
Revenue Code, as amended.
Background
All of the facts have been stipulated, and the stipulated
facts are incorporated as our findings by this reference.
Petitioners resided in California at the time that their petition
was filed. Petitioner Michael D. Cornwell (petitioner) is and
for many years has been employed as a legal assistant at a law
firm.
For tax years 1994 through 1996, petitioner filed
Forms 1040, U.S. Individual Income Tax Return, but failed to pay
the amounts shown as tax due on those returns. For 1997 through
2002, petitioners filed joint Federal income tax returns but did
not pay the balances due on those returns.
On October 20, 2003, the Internal Revenue Service (IRS) sent
to petitioner a Notice of Federal Tax Lien Filing and Your Right
to a Hearing Under IRC 6320, advising petitioner that a Notice of
Federal Tax Lien had been filed with respect to his unpaid
liabilities for 1994, 1995, and 1996. (The parties’ stipulation
of facts and respondent’s brief erroneously set forth the date as
October 20, 2004.)
On October 24, 2003, the IRS sent to petitioners a Notice of
Federal Tax Lien Filing and Your Right to a Hearing Under IRC
6320, advising petitioners that a Notice of Federal Tax Lien had
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been filed with respect to their joint unpaid liabilities for
1997 through 2002.
On November 24, 2003, the IRS received from petitioners a
Form 12153, Request for Collection Due Process Hearing, signed by
petitioners and dated November 19, 2003, with respect to the
notices sent October 20 and October 24, 2003.
On July 2, 2004, the IRS sent to petitioner a Final Notice
of Intent to Levy and Notice of Your Right to a Hearing, advising
petitioner that respondent intended to levy to collect unpaid
liabilities for 2002. On July 29, 2004, petitioners filed a
Form 12153 with respect to the July 2, 2004, notice. The
July 29, 2004, request for hearing included the following
paragraph:
This hearing request may be moot as IRS advises Final
Notice of Levy was mistakenly issued. See attached
Letter 3212 dated 7/15/04.
HOWEVER, out of caution, we are submitting the hearing
request. The basis of the hearing request is that the
Final Notice was incorrectly issued as an Offer In
Compromise concerning this tax period is and has been
pending. A pending OIC prohibits issuance of a levy.
A July 15, 2004, letter to petitioner from the IRS stated:
We’re sorry that we made a mistake in recently
sending you a Notice of Intent to Levy and Notice of
Your Right to a Hearing, dated July 2, 2004. The
letter advised you that we would take collection action
if you did not pay the amount of tax you owe or ask for
a Collection Due Process (CDP) Hearing within 30 days.
Because we do not intend to take levy or seizure action
against you at this time, we are rescinding the Notice
of Intent to Levy.
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By law, you are entitled to only one CDP Hearing
under Internal Revenue Code Section 6330 for the unpaid
taxes listed in our Notice of Intent to Levy. This
letter preserves your right to a future CDP hearing
should that become necessary. You don’t need to do
anything further regarding this request. * * *
* * * * * * *
The law entitles you to a CDP Hearing, but the hearing
would take place after the levy or seizure.
The IRS later advised petitioners that the July 15, 2004, letter
rescinding the notice of levy was issued in error.
On May 6, 2005, petitioners and respondent’s Settlement
Officer, Patrick S. Lin (Lin), had a face-to-face meeting to
discuss petitioners’ hearing requests. During the meeting,
petitioners expressed their intent to submit an OIC to settle
their respective tax liabilities for 1994 through 2002.
After the face-to-face meeting, on July 27, 2005,
petitioners filed two separate OICs. The first offered to
compromise petitioner’s individual 1994 through 1996 tax
liabilities for $4,000. The second offered to compromise
petitioners’ joint 1997 through 2002 tax liabilities for $16,000.
Subsequently, petitioners filed amended OICs and increased the
amounts of the offers to: (1) $6,250 for petitioner’s separate
tax liabilities for 1989, 1993, 1994, 1995, and 1996 and
(2) $18,500 for petitioners’ 1997 through 2002 joint tax
liabilities (for a total offer of $24,750).
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On April 21, 2006, Lin sent to petitioners a letter
summarizing his work on petitioners’ income and expense table for
the purpose of calculating the RCP. At that time, based on the
information received from petitioners, the RCP was calculated to
be $81,456. Lin further informed petitioners that, unless he
received an amended OIC offering at least that amount, the OIC
would be rejected.
On May 4, 2006, petitioners sent to Lin a letter stating the
grounds for their objection to the inclusion of overtime pay in
calculating their future income for the purposes of determining
the RCP. The letter stated, in bold print, that “My firm has a
written policy that overtime is not permitted unless expressly
authorized in advance by a supervisor.” Petitioner enclosed a
copy of an Office Handbook issued May 2004 that supported
petitioner’s assertion. Petitioners asserted that, pursuant to
an enclosed economics publication, it is incorrect for
petitioner’s overtime pay to be included in their future income
calculations, because overtime may not continue in the future.
Further, petitioners provided more information related to
petitioner wife’s employment status and her student debt loan.
On May 19, 2006, Lin sent to petitioners a letter responding
to their objection to the inclusion of overtime pay in future
income. The letter stated that Lin appreciated petitioner’s
arguments in objecting to the inclusion of overtime pay in future
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income, but he noted that 1 Administration, Internal Revenue
Manual (CCH), section 5.5.5.5, at 16,339-7, provides a guideline
to compute future income. The cited section provides for
adjustments when income is expected to increase or decrease.
After considering that overtime pay would result in variable
income, Lin decided to average petitioner’s most recent 5 years
of income to calculate future income. The calculations are set
forth below:
Period Adjusted Gross Income
2001 $98,315.00
2002 100,392.00
2003 100,203.00
2004 100,297.00
2005 107,024.00
Total 506,231.00
Average (annual) 101,246.20
Average (monthly) 8,437.18
Lin further explained that, based on this revised figure for
future income, the RCP was now $56,976. The letter reminded
petitioners that Lin would be rejecting their OICs if they did
not amend their offer to at least pay the RCP.
In a letter dated May 30, 2006, petitioner mailed the
declaration of Dr. Joyce Pickersgill, a forensic economist, to
support petitioners’ position that overtime pay should be
excluded entirely when calculating future income for the purpose
of computing the RCP. Petitioner again referred to “a recent
change in the overtime pay policy of my employer.”
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After reviewing the correspondence, Lin made a determination
to permit the collection action to proceed. On June 26, 2006, he
sent three separate Appeals Case Memorandums, delineating the
facts and reasons underlying his decision, for managerial
approval. As of that time, petitioners owed approximately
$84,000 for the years in issue.
After managerial approval, the Appeals Case Memorandums were
incorporated into three separate notices of determination:
(1) Notice of determination for levy for 2002 taxes dated July 7,
2006; (2) notice of determination for lien for 1997 through 2002
taxes dated July 14, 2006; and (3) notice of determination for
lien for 1994 through 1996 taxes dated July 14, 2006.
After Lin’s June 26, 2006, Appeals Case Memorandums and
prior to the issuance of the notices of determination, petitioner
sent two faxes to Lin. Each fax attached a copy of an email
dated July 5, 2006, referring to overtime at the law firm where
petitioner was employed. The email stated:
After assessing the current work load in the firm, it
has been determined that no overtime is necessary at
this time for support staff.
If something changes in your work load which would
require a necessity for overtime, you will need to have
approval from your supervisor in advance.
Discussion
Petitioners invoke our jurisdiction under section 6330(d) to
review the three notices of determination described above. (The
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petition erroneously alleged that both petitioners appealed all
three notices, but only petitioner husband is the recipient of
the October 20, 2003, notice of lien and the July 2, 2004, notice
of levy and of the determinations relating to those notices.)
Their challenge to the notices is that the settlement officer
abused his discretion in requiring an increased OIC of their
outstanding liabilities.
Petitioners contend, among other things, that the notices of
determination sustaining two liens and a levy were an abuse of
discretion because the settlement officer failed to consider
evidence of “changed circumstances” presented by petitioners
before the notices of determination were issued and “in choosing
to not further investigate this change of circumstance caused by
a new overtime policy change”. Respondent contends that the
faxes sent in July 2006 merely reiterated the employer’s policy
in effect in 2004 and that the settlement officer considered that
policy in adjusting the amount of an acceptable OIC based on
averaging petitioner’s earnings for the prior 5 years of his
employment.
The review applicable in cases such as this one was stated
in Murphy v. Commissioner, 125 T.C. 301, 320 (2005), affd. 469
F.3d 27 (1st Cir. 2006), as follows:
We do not conduct an independent review of what
would be an acceptable offer in compromise. Fowler v.
Commissioner, T.C. Memo. 2004-163. The extent of our
review is to determine whether the Appeals officer’s
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decision to reject the offer in compromise actually
submitted by the taxpayer was arbitrary, capricious, or
without sound basis in fact or law. Skrizowski v.
Commissioner, T.C. Memo. 2004-229; Fowler v.
Commissioner, supra; see Woodral v. Commissioner, 112
T.C. 19, 23 (1999).
The proposals presented to Settlement Officer Lin were for less
than $25,000 against total liabilities approximating $84,000 as
of June 2006. Petitioners’ proposals were rejected by the
settlement officer, who calculated an acceptable offer by
reference to petitioner’s actual earning history, in accordance
with the Internal Revenue Manual. Petitioners then suggested
that overtime pay that had been consistently earned by petitioner
should be excluded from the calculation altogether. That
suggestion does not appear to be reasonable, because petitioner
continued to receive overtime pay notwithstanding his employer’s
policy. Petitioners never offered any evidence that petitioner’s
actual earnings were declining as a result of the 2004 or
allegedly “new” in 2006 overtime policy.
Petitioners argue that the settlement officer should have
conducted a further investigation before sending the notices of
determination. Respondent points out that the negotiations over
petitioners’ long delinquent tax liabilities had gone on for
years and that reasonable deadlines had been set and had passed
when the notices of determination were sent. See Murphy v.
Commissioner, supra at 322-323.
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Respondent declined an opportunity at the time for trial to
cross-examine petitioner or representatives of his employer about
the effect of the allegedly new policy, apparently because
respondent maintains the position that nothing may be considered
outside of the administrative record made before the settlement
officer. Petitioners did not attempt to introduce any evidence
concerning the actual effect of the allegedly new policy, which
had purportedly been in effect 10 months as of the time set for
trial in May 2007 and presumably would have been reflected in
petitioner’s 2006 or current compensation. Thus we need not
decide whether to reconsider our position as to evidence first
presented at trial. See Murphy v. Commissioner, supra at 311-
312; Robinette v. Commissioner, 123 T.C. 85, 94-101 (2004), revd.
439 F.3d 455 (8th Cir. 2006).
Because petitioners’ proposed OIC was not supported by
evidence of petitioner’s actual current or future earning
potential, we cannot conclude that the settlement officer’s
rejection of their offer was arbitrary, capricious, or without
sound basis in fact or law. The settlement officer’s computation
of what would be acceptable reflected actual earnings that have
not been shown to be unreliable as an indicator of future
earnings, because the claim that the employer’s policy would
reduce petitioner’s earnings is merely speculation. Petitioners
failed to show that the allegedly new overtime policy had an
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effect on petitioner’s actual earnings and constituted a change
of circumstances. Thus they have not shown that the settlement
officer’s further investigation would have made a difference. We
cannot conclude that sustaining the liens and the proposed levy
was an abuse of discretion.
We have considered the other arguments of the parties. They
are moot, irrelevant, or lacking in merit.
Decision will be entered
for respondent.