T.C. Memo. 2007-325
UNITED STATES TAX COURT
CARL KLEIN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 7162-06L, 7163-06L. Filed October 30, 2007.
Robert E. McKenzie and Kathleen M. Lach, for petitioner.
Gregory J. Stull and Gorica B. Djuraskovic, for respondent.
MEMORANDUM OPINION
JACOBS, Judge:1 The petitions in these consolidated cases
were each filed in response to a Notice of Determination
Concerning Collection Action(s) Under Section 6320 and/or 6330
1
These cases were assigned to Judge Julian I. Jacobs for
disposition by order of the Chief Judge on August 20, 2007.
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(notice of determination).2 Pursuant to section 6330(d),
petitioner seeks our review of respondent’s determination
upholding the proposed use of a levy to collect petitioner’s
income tax liabilities for tax years 1997, 1998, 1999, and 2000.
The issue for decision is whether respondent’s proposed levy
actions may proceed.
Background
These consolidated cases were submitted fully stipulated
pursuant to Rule 122. The case at docket No. 7163-06L pertains
to tax years 1997 and 1998. The case at docket No. 7162-06L
pertains to tax years 1999 and 2000. The stipulations of fact
and the attached exhibits are incorporated herein by this
reference. At the time he filed the petitions, petitioner
resided in Chicago, Illinois.
Petitioner, who was born in 1946, is an attorney who
practiced law with various Chicago law firms at different times
during the years at issue. Petitioner filed income tax returns
for the years at issue as follows:
Self-Em-
Date Return Adjusted Income ployment
Due (After Date Gross Income Tax per Tax per
Year Extensions) Return Filed per Return Return Return
1997 Oct. 15, 1998 July 25, 2001 $163,286 $25,692 $15,431
1998 Oct. 15, 1999 Aug. 15, 2001 213,864 40,918 16,684
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
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1999 Aug. 15, 2000 Apr. 15, 2003 102,994 47,963 19,208
2000 Aug. 15, 2001 Aug. 28, 2002 151,475 28,949 17,792
Respondent assessed the tax for each year and demanded
payment for the unpaid balances.3 When petitioner failed to pay
the balances, respondent determined that enforced collection
action would be required. On November 12, 2003, respondent
mailed petitioner a Letter 1058, Final Notice of Intent to Levy
and Notice of Your Right to a Hearing for 1997 and 1998, and a
separate such notice for 1999 and 2000.4 According to
respondent’s notices of levy, petitioner’s total unpaid tax
liability, including additions to tax and interest, exceeded
$200,000.5 In response to each notice of levy, petitioner, by
means of a Form 12153, Request For a Collection Due Process
Hearing, timely requested a hearing under section 6330. In his
requests for a hearing, petitioner claimed: (1) He was entitled
to abatement of the “penalties”6 assessed against him because he
3
Respondent assessed $1,337 of additional tax for 1997 in
May of 2003 and $1,927 of additional tax for 2000 in December of
2003. By the time he filed the petitions, petitioner had paid
approximately $30,700 of his tax liability for the 4 years in
issue.
4
On or about Nov. 14, 2003, a Federal tax lien was obtained
on petitioner’s property with respect to all tax years at issue.
Petitioner does not contest the propriety of the tax lien filing.
5
The income tax assessments include additions to tax under
sec. 6651(a)(1) and (2) for all tax years at issue and under sec.
6654 for 1997, 1998, and 1999.
6
References to penalties in various places in the record
(continued...)
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had reasonable cause for his failure to pay the taxes; (2) the
Internal Revenue Service (IRS) should have accepted his offer-in-
compromise based on doubt as to collectibility because of the
possibility of discharge of his taxes in the event he filed for
bankruptcy; and (3) alternatively, in the event his offer-in-
compromise was not accepted, the IRS should have allowed him to
pay his tax liability in installments.
Petitioner’s section 6330 hearing was conducted by means of
a face-to-face meeting, correspondence, and telephone
conversations with a settlement officer in respondent’s Appeals
Office (the settlement officer). On November 2, 2004, the IRS
received petitioner’s offer to compromise his total tax liability
for 1997, 1998, 1999, 2000, and 2001 for $70,000.7 On December 8,
2005, following petitioner’s submission of additional information
in response to requests by respondent, the settlement officer
advised petitioner that petitioner was ineligible for an offer-
in-compromise because petitioner had the ability to fully pay his
income tax liability over 48 months. On December 22, 2005, the
settlement officer wrote a letter to petitioner explaining, among
other things: (1) That petitioner had not as yet provided any
6
(...continued)
actually are to additions to tax under sec. 6651(a)(1) and (2)
and sec. 6654. References in this opinion to additions to tax
relate to one or more, as appropriate. Petitioner does not seek
abatement of interest.
7
Tax year 2001 is not at issue herein.
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verification of reasonable cause for abatement of additions to
tax and that respondent would assume that there was none unless
such was provided within the next 15 days; (2) that consideration
of petitioner’s bankruptcy assertion must be made in the light of
the new bankruptcy laws which take “a harder look at future
income than the old law did”. The settlement officer noted that
“You have significant income potential, as you have displayed
through past performance, and I do not think that you would avoid
paying all the taxes if you file [for bankruptcy]”; and (3) that
if petitioner wished to enter into an installment agreement, he
should, through his representatives, contact respondent within 15
days.
Petitioner responded to the settlement officer’s December
22, 2005, letter by reiterating his position that respondent had
not given adequate consideration to his potential bankruptcy
because respondent had not considered that his future earnings
were uncertain because petitioner was aging and was at that time
practicing law without associates and without a formal office or
support staff. In addition, petitioner contested the settlement
officer’s calculation of petitioner’s realizable collection
potential, claiming that increased allowances should have been
made for petitioner’s basic living expenses. Petitioner did not
attempt to enter into an installment agreement and did not
respond to the invitation to submit verification of reasonable
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cause for abatement of the additions to tax. The settlement
officer ultimately recommended rejection of petitioner’s offer-
in-compromise, and on March 15, 2006, respondent’s Appeals Office
issued notices of determination sustaining the levy actions for
the tax years in issue.
Petitioner timely filed his petitions, in which he seeks
review of respondent’s determinations. Petitioner contends that
respondent acted impermissibly: (1) In denying petitioner’s
requests for abatement of additions to tax, (2) in rejecting
petitioner’s offer-in-compromise, and (3) in sustaining the
proposed levy actions.
Discussion
The parties are not at odds regarding the technical
provisions of section 6330. Further, petitioner does not claim
that respondent failed to satisfy any of the mechanical or
procedural obligations contemplated by that statute. Nor does
petitioner contest the propriety of the assessments of tax as a
procedural matter. Consequently, we immediately turn our
attention to petitioner’s complaints and begin with his first
contention that respondent acted impermissibly in denying
petitioner’s requests for abatement of additions to tax due to
reasonable cause. We construe petitioner’s position in this
regard to be that he should not be held liable for the additions
to tax.
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Section 6330(c)(2)(B) provides that a person may challenge
“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.” Petitioner did not
receive a notice of deficiency for 1998 or for 1999 or otherwise
have an opportunity to dispute those additions. Therefore,
petitioner is entitled to challenge the existence or amount of
the tax liabilities with respect to those returns, which he did
in his section 6330 hearing. See Montgomery v. Commissioner, 122
T.C. 1 (2004). We review de novo respondent’s determinations
with respect to 1998 and 1999. See Davis v. Commissioner, 115
T.C. 35, 39 (2000); Goza v. Commissioner, 114 T.C. 176, 181
(2000).
The record is not entirely clear as to whether petitioner
received a statutory notice of deficiency for 1997 or for 2000,
and if he did, the extent to which additions to tax were
determined therein. Assuming they are subject to review, and
regardless of which standard we use to review respondent’s
determinations (de novo or for an abuse of discretion), we find
no basis on which to relieve petitioner from liability for any of
the additions to tax.
The Commissioner bears the burden of production regarding the
additions to tax. Sec. 7491(c); Higbee v. Commissioner, 116 T.C.
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438 (2001). In order to meet this burden, the Commissioner must
produce sufficient evidence indicating that it is appropriate to
impose an addition to tax. Higbee v. Commissioner, supra at 446.
Once the Commissioner has met this burden, the taxpayer must come
forward with evidence sufficient to persuade the Court that the
Commissioner’s determination is incorrect or an exception
applies. Id. at 447.
As relevant here, in general, section 6651(a)(1) provides
for an addition to tax that can amount to 25 percent of the tax
(net amount) required to be shown on the return if the return is
filed more than 4 months after the due date of the return,
including extensions.8 See sec. 6651(b). Section 6651(a)(2), in
general, provides for an addition to tax that can amount to 25
percent of the unpaid portion of the tax shown on a return if the
unpaid portion remains unpaid for more than 49 months after the
tax is due to be paid. A taxpayer can be absolved of liability
from the aforementioned additions to tax if the taxpayer
demonstrates that the failure to file, or the failure to pay, as
appropriate, is due to reasonable cause and not due to willful
neglect. Sec. 6651(a); Higbee v. Commissioner, supra.
Reasonable cause for the failure to file a return may be
shown where the taxpayer has made a satisfactory showing that he
8
Where the sec. 6651(a)(2) addition also applies, the sec.
6651(a)(2) addition is reduced as provided in sec. 6651(c)(1).
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exercised ordinary business care and prudence but nevertheless
was unable to file the return within the prescribed time.
Reasonable cause for the failure to pay the tax may be shown
where the taxpayer has made a satisfactory showing that he
exercised ordinary business care and prudence in providing for
payment of his tax liability and was nevertheless either unable
to pay the tax or would suffer an undue hardship if he paid on
the due date. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
Petitioner does not dispute that he filed his returns late
and that the taxes shown on the returns remained unpaid as
reflected in respondent’s records. Petitioner contends that his
failure to file returns timely and timely pay taxes was due to
personal circumstances during the years at issue and that these
circumstances constituted reasonable cause for purposes of
section 6651(a). Specifically, petitioner claims that his
marriage was ending, the firms he was associated with were
collapsing around him, or not following through on promised
remuneration, and he was in the midst of a significantly
over-budget rehabilitation project on a dream home that
almost immediately upon completion he was forced to sell due
to the divorce. This occurred all while trying to assure
his family’s needs were met.
The record shows that petitioner requested extensions of
time to file in each of the tax years at issue. Thus, there is
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no doubt but that petitioner knew of his obligation to file
returns and knew the dates on which they were due. Moreover, he
knew that he had an unpaid tax liability.
In spite of the personal adversity he encountered,
petitioner succeeded in generating substantial income for the
years at issue and apparently chose to spend this income to
maintain an elevated lifestyle and to “assure his family needs
were met”9 as opposed to paying his taxes. Petitioner is an
attorney and obviously knew he had an obligation to obey the tax
laws, including the obligation to file timely returns and pay the
taxes when due. The obstacles petitioner describes simply do not
rise to a level amounting to reasonable cause. After reviewing
the record and applying the de novo standard of review for all
years at issue, we hold that petitioner is liable for the
additions to tax under section 6651(a)(1) and (2) for all of the
years at issue.
Section 6654(a) imposes an addition to tax for failure to
pay estimated income tax where prepayments of such tax, either
through withholding or by making estimated quarterly tax payments
9
In response to a question on Form 433-A, Collection
Information Statement for Wage Earners and Self-Employed
Individuals, requesting a list of “the dependents you can claim
on your tax return”, petitioner listed his son aged 24 and his
daughter aged 22, neither of whom lived with him. Petitioner
signed and dated the Form 433-A on Oct. 25, 2004. In
petitioner’s 2003 tax return, dated Oct. 14, 2004, neither child
(or anyone else) had been claimed as a dependent.
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during the course of the year, do not equal the percentage of
total liability required under the statute. The amount required
to be paid through each such estimated quarterly payment is 25
percent of the required annual payment. Sec. 6654(d)(1)(A). The
required annual payment is, in turn, the lesser of 90 percent of
the tax shown on the return for that taxable year or 100 percent
of the tax shown on the return for the preceding taxable year (or
a greater percent for individuals with adjusted gross income
exceeding $150,000). Sec. 6654(d)(1)(B) and (C). There is no
broadly applicable reasonable cause exception to the section 6654
addition to tax.
The record shows that petitioner did not make sufficient
estimated tax payments for 1997, 1998, or 1999, the years for
which respondent seeks to impose the section 6654 addition. None
of the statutory exceptions to imposition of the addition
applies. We conclude that respondent has met his burden of
production under section 7491(c) regarding petitioner’s liability
for the additions to tax under section 6654 and that petitioner
is liable for those additions.10
10
The parties stipulated that “petitioner filed an income
tax return for 1996, reporting tax liability in the amount of
$29,980.” In addition, for 1996, petitioner reported self-
employment tax of $15,430.
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Petitioner’s second contention is that respondent abused his
discretion in rejecting petitioner’s offer-in-compromise on the
basis of doubt as to its collectibility.
Section 7122(a) authorizes the Secretary to compromise any
civil case arising under the internal revenue laws and requires
him to prescribe guidelines for officers and employees of the
IRS to determine whether an offer-in-compromise is adequate and
should be accepted to resolve a dispute. Sec. 7122(a), (c)(1).
The contemplated guidelines and schedules pertaining to
evaluating offers-in-compromise on the basis of collectibility
have been published in the regulations interpreting section 7122.
See sec. 301.7122-1(c)(2), Proced. & Admin. Regs.; 1
Administration, Internal Revenue Manual (CCH), sec. 5.8.4.4 at
16,306. Under this administrative guidance, the Secretary will
generally compromise a liability on the basis of doubt as to
collectibility only if the liability exceeds the taxpayer’s
reasonable collection potential. Cf. Murphy v. Commissioner, 125
T.C. 301, 308-310 (2005), affd. 469 F.3d 27 (1st Cir. 2006). A
taxpayer’s reasonable collection potential is determined, in
part, using the published guidelines for certain national and
local allowances for basic living expenses and essentially
treating income and assets in excess of those needed for basic
living expenses as available to satisfy Federal income tax
liabilities. See 2 Administration, Internal Revenue Manual
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(CCH), exh. 5.15.1-3 at 17,668, exh. 5.15.1-8 at 17,686, exh.
5.15.1-9 at 17,742. Application of the standard allowances for
housing and utility expenses (rather than the taxpayer’s actual
expenses) is not an abuse of discretion where use of the standard
allowances does not result in the taxpayer’s not having adequate
means to provide for basic living expenses. See McDonough v.
Commissioner, T.C. Memo. 2006-234.
The foregoing formulaic approach is disregarded, however,
upon a showing by the taxpayer of special circumstances that may
cause an offer to be accepted notwithstanding that it is for less
than the taxpayer’s reasonable collection potential (e.g., the
taxpayer is incapable of earning a living because of a long-term
illness, and it is reasonably foreseeable that the taxpayer’s
financial resources will be exhausted providing for care and
support during the course of the condition). Sec. 301.7122-
1(b)(3), (c)(3), Proced. & Admin. Regs.; 1 Administration,
Internal Revenue Manual (CCH), sec. 5.8.11.2.1 at 16,375, sec.
5.8.11.2.2 at 16,377. Petitioner does not allege, and it does
not appear, that any such special circumstances are present.
According to petitioner, respondent did not properly apply
the published guidelines because he failed to make an allowance
for petitioner’s basic living expenses which were greater than
that indicated in the published guidelines. Petitioner contends
that a greater amount should have been allowed to reflect the
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cost of his living in the downtown Chicago area because of his
need to entertain clients in his home. Further, petitioner
claims that respondent failed to evaluate petitioner’s option to
file for bankruptcy and the potential discharge of some of the
taxes that respondent seeks to collect by levy.
Respondent, in applying the published guidelines, allowed
petitioner $2,474 per month for basic living expenses, which
petitioner agrees was substantially the same as the amount
provided for under the published guidelines.11 When subtracted
from the $22,000 gross monthly income that petitioner disclosed
in his offer-in-compromise, and in the light of respondent’s
records which showed that petitioner had $302,400 in wages and
$13,400 in nonemployee compensation for tax year 2004,12
respondent concluded that petitioner would be able to pay his by-
then $252,462 tax liability in full over 48 months.
We agree with respondent that petitioner had sufficient
income to meet his basic living expenses as well as to pay his
tax liability in full. Petitioner basically wants the Government
11
Respondent allowed $194 per month for transportation; it
appears that the published guidelines allow $329, or a similar
amount, for ownership of one car in Chicago. Petitioner contends
that he should be allowed “the actual expense for his car loan
($870 per month)” instead.
12
The record shows that respondent did not consider the
value of dissipated assets in evaluating petitioner’s offer-in-
compromise, although respondent was concerned that such
consideration might have been warranted. See 1 Administration,
Internal Revenue Manual (CCH), sec. 5.8.5.4. at 16,339-6.
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to permit him to use his current and expected future earnings to
maintain a lifestyle more lavish than the standard for the
Chicago area (petitioner’s living expenses are more than twice
those of the average national and local standards) plus $4,000
per month for “business expenses” without having to fully satisfy
his past due tax obligations. The record does not disclose any
special circumstances that warrant acceptance of petitioner’s
offer-in-compromise ($70,000 to extinguish a tax liability over
$200,000).
As for the impact that petitioner’s bankruptcy might have
had on respondent’s considerations, respondent contends that he
applied the provisions of the Internal Revenue Manual, which
advises:
When a taxpayer threatens bankruptcy, the impact of
bankruptcy on the Service’s ability to collect must be
considered. If the Offer Investigator believes, based upon
factual information, that the taxpayer is seriously
considering filing bankruptcy, the employee should discuss
the benefits of filing an administrative offer instead. [1
Administration, Internal Revenue Manual (CCH), sec.
5.8.10.2.2(1), at 16,367.]
The record shows that respondent considered the possibility
that petitioner might file a petition in bankruptcy.
Respondent’s correspondence to petitioner is specific in
explaining that petitioner had the ability to pay his total tax
liability in full and “in light of the recently passed bankruptcy
law which takes more into consideration an individual’s income
production”, respondent did not believe that petitioner would be
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able to avoid paying the total tax liability by filing for
bankruptcy. In other words, respondent believed that the impact
of petitioner’s filing for bankruptcy on respondent’s ability to
collect petitioner’s unpaid tax would be minimal. We are not
prepared to find that respondent’s rejection of petitioner’s
offer-in-compromise was arbitrary, capricious, or without sound
basis in fact or law.
On the basis of this record, we conclude that petitioner is
liable for the additions to tax as determined by respondent for
all years at issue and that respondent did not abuse his
discretion in rejecting petitioner’s offer-in-compromise.
Respondent’s determination that the Federal tax levies were
appropriate in these cases is sustained.
To reflect the foregoing,
Decisions will be entered
for respondent.