Russ v. Comm'r

T.C. Summary Opinion 2008-21

UNITED STATES TAX COURT

LAWRENCE JAY RUSS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4899-06S. Filed February 28, 2008.

Lawrence Jay Russ, pro se.

Linette B. Angelastro, for respondent.

PANUTHOS, Chief Special Trial Judge: This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petition was filed.

Pursuant to section 7463(b), the decision to be entered is not

reviewable by any other court, and this opinion shall not be

treated as precedent for any other case. Unless otherwise
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indicated, subsequent section references are to the Internal

Revenue Code, and all Rule references are to the Tax Court Rules

of Practice and Procedure.

Petitioner filed the petition in this case in response to a

Notice of Determination Concerning Collection Action(s) Under

Section 6320 and/or 6330. The only issue before the Court is

whether respondent abused his discretion in sustaining the

decision to file a Federal tax lien with respect to petitioner’s

income tax liabilities for the taxable years 1998, 1999, 2000,

2001, and 2002 (years in issue).1

Background

Petitioner resided in California when he filed the petition

in this case. The parties did not file a stipulation of facts.

Petitioner filed delinquent Federal income tax returns for

the years in issue. Each return reported tax owed, but payment

was not included with the returns. Respondent selected

petitioner’s 1999 Federal income tax return for examination and

determined a deficiency for that year. Respondent issued a

notice of deficiency, and petitioner timely petitioned this Court

1
Respondent moved for summary judgment pursuant to Rule
121. Having called this case for trial and taken petitioner’s
testimony, we will deny respondent’s motion for summary judgment
and decide this case on the merits. Petitioner also made several
oral motions at trial. For reasons discussed infra pp. 18-19, we
will deny petitioner’s motions.
 - 3 -

for redetermination. Petitioner and respondent executed a

stipulated decision which was entered by the Court.2

Respondent assessed a deficiency for 1999 in accordance with

the stipulated decision. In addition, respondent assessed unpaid

taxes for 1998, 2000, 2001, and 2002 based on the balance due

returns petitioner filed for those years, as well as interest and

additions to tax for late filing.

Petitioner submitted an offer-in-compromise (OIC) with

respect to his tax liabilities for the years in issue.

Petitioner offered $5,320, paid over 24 months, to settle an

aggregate liability that exceeded $32,000 for the 5 tax years

(not including interest and additions to tax). Respondent

considered the OIC, determined that petitioner could pay the

entire liability over time, and rejected the OIC. Petitioner

requested an administrative review of the rejection of his OIC.

Respondent filed a notice of Federal tax lien for the years

in issue in Ventura County, California, on March 17, 2005. The

notice listed petitioner’s unpaid balance as:

2
Docket No. 2721-02, stipulated decision entered Jan. 9,
2003.
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Table 1: Unpaid Taxes by Year

Tax Year Tax Due

1998 $6,577.17
1999 11,003.93
2000 5,752.52
2001 6,053.45
2002 3,260.58
Total 32,647.65

In response to the notice of Federal tax lien Filing and

Your Right to a Hearing Under IRC 6320 sent to him on March 24,

2005, petitioner timely submitted a Form 12153, Request for a

Collection Due Process Hearing.

On September 15, 2005, after consulting with petitioner,

respondent consolidated the two appeals (the appeal of the

rejection of the OIC and the appeal of the Federal tax lien

filing) with one Appeals Officer (AO). The AO scheduled a

hearing with petitioner for October 5, 2005.

Before the hearing, the AO analyzed petitioner’s financial

situation and determined what expenses were allowable under

Internal Revenue Manual (IRM) guidelines. Petitioner’s central

complaint with the rejection of his OIC was the exclusion of his

monthly credit card payments from the expenses allowed in

computing his income available to pay his outstanding tax

liabilities.

At the face-to-face conference between petitioner and the AO

on October 5, 2005, petitioner sought approval of his OIC and did

not challenge the underlying tax liabilities. The AO explained
 - 5 -

that the IRS could not accept the OIC because: (1) Petitioner’s

OIC computation reduced his income available to pay taxes by his

credit card payments, and (2) petitioner had the ability to pay

the full liability over time. The AO offered an installment

agreement as a collection alternative, with monthly payments

designed to pay the entire liability. The proposed installment

amount was $800 per month for 2006 and $1,210 per month beginning

in January, 2007. Petitioner rejected the installment agreement,

asserting that he could not afford the proposed monthly payments.

On October 7, 2005, the AO wrote petitioner a letter

explaining his determination and enclosed an installment

agreement form. The AO determined petitioner’s income history as

follows:

Table 2: Income Earned by Year

Tax Year Income

2000 $88,804
2001 80,004
2002 68,985
2003 77,635
2004 87,637

Petitioner, the OIC examiner, and the AO analyzed

petitioner’s income, expenses, and ability to pay his taxes as

follows:
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Table 3: Analysis of Ability To Pay Tax Liabilities

Petitioner OIC AO

Monthly income $6,334 $6,324 $7,303
Necessary living expenses
National expense 1,037 953 953
Local housing & utilities 1,500 1,500 1,500
Local transportation1 833 353 553
Other allowable expenses
Health care 76 114 114
Taxes 2,088 2,085 2,522
Other - non-priority debt 1,112 -0- -0-
Total expenses 6,646 5,005 5,642
Income available to
pay taxes -0- 1,319 1,661
Realizable equity in assets -0- 4,152 4,152
Reasonable collection
potential2 -0- 83,292 103,812
1
The record does not explain the discrepancy between the
local transportation allowances used by the OIC examiner and
the AO.
2
Reasonable collection potential is calculated by
multiplying petitioner’s monthly income available to pay
taxes by 60 months and adding the realizable equity in
petitioner’s assets to the product.

On February 3, 2006, respondent issued a Notice of

Determination Concerning Collection Action(s) Under Section 6320

and/or 6330. Petitioner filed a timely petition for lien or levy

action (collection action) with this Court.

The Court calendared this case for trial at the trial

session of the Court commencing October 3, 2006, in Los Angeles,

California. Respondent filed a motion for summary judgment on

September 5, 2006. When the case was called from the calendar,

the parties advised the Court that they had reached a basis of

settlement and expected to submit settlement documents within 90
 - 7 -

days. The parties indicated that petitioner was prepared to

concede the case and to enter an installment agreement with

respondent. The Court granted respondent’s oral motion to

withdraw the motion for summary judgment and ordered the parties

to submit a status report or decision documents within 90 days.

After the Court allowed additional time to submit the

decision documents, the parties indicated that they had not been

able to execute a settlement agreement. The Court again set the

case for trial commencing June 18, 2007. Respondent filed

another motion for summary judgment on June 4, 2007.

When this matter was called for trial, petitioner made

several oral motions, including: (1) Motion for dismissal of tax

penalties; (2) motion for reduction of taxes due; (3) motion to

accept original offer-in-compromise; and (4) motion to dismiss

taxes and penalties for tax years 2001 and 2002. The Court took

petitioner’s oral motions and respondent’s motion for summary

judgment, filed June 4, 2007, under advisement, and the case was

deemed submitted.

Discussion

The parties dispute whether petitioner’s minimum monthly

payments on his credit card debt represent an allowable expense

against income available to pay taxes in consideration of an

offer-in-compromise. Petitioner argues that not allowing such

expenses amounts to discrimination against taxpayers with
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unsecured debts. Respondent asserts that the Federal tax lien

has priority over these debts and that credit card payments are

not necessary expenses properly allowable under IRM guidelines.

Finally, respondent contends that: (1) Petitioner’s future

income available to pay taxes (monthly gross income less

necessary expenses, not including the credit card payments) is

sufficient to pay his tax liability in full before the end of the

statutory period for collections; (2) because petitioner can

fully pay the tax liability, he is not eligible for an offer-in-

compromise; and (3) it was not an abuse of discretion for the AO

to confirm the rejection of the OIC, to propose an installment

agreement as the available collection alternative, and to sustain

the collection action.

Section 6321 imposes a lien in favor of the United States on

all property and rights to property of a taxpayer when the

Secretary demands payment of the taxpayer’s tax liability and the

taxpayer fails to pay those taxes. Such a lien arises when an

assessment is made. Sec. 6322. Section 6323(a) requires the

Secretary to file a notice of Federal tax lien if the 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).
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Section 6320 provides that a taxpayer shall be notified in

writing by the Secretary of the filing of a notice of Federal tax

lien and provided with an opportunity for an administrative

hearing. If timely requested, the Office of Appeals conducts an

administrative hearing under section 6320 in accordance with the

procedural requirements of section 6330.3 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 offer-in-compromise

or an installment agreement. Sec. 6330(c)(2); sec. 301.6330-

1(e)(1), Proced. & Admin. Regs. A taxpayer also may challenge

the existence or amount of the underlying tax liability,

3
Sec. 6330(b)(3) ensures a measure of impartiality by
requiring that, unless the taxpayer waives the requirement, the
sec. 6330 hearing be conducted by an AO who has had no prior
involvement with the unpaid tax at issue in the hearing. Murphy
v. Commissioner, 125 T.C. 301, 324-325 (2005), affd. 469 F.3d 27
(1st Cir. 2006). Respondent filed the notice of Federal tax lien
on Mar. 17, 2005, and assigned the administrative appeal of the
OIC to an AO on Mar. 18, 2005. Respondent sent petitioner a
Notice of Federal Tax Lien Filing and Your Right to a Hearing
Under IRC 6320 dated Mar. 24, 2005. Respondent initially
assigned petitioner’s request for a sec. 6320 hearing, submitted
Apr. 28, 2005, to a different AO. On Sept. 15, 2005, the OIC AO
consulted with petitioner, took responsibility for both the OIC
appeal and the sec. 6320 hearing, and scheduled a face-to-face
hearing for Oct. 5, 2005. Sec. 6330(c)(2)(A)(III) requires the
AO to consider collection alternatives raised by the taxpayer,
which, in this case, include the reconsideration of the rejected
OIC. Petitioner has not claimed that the AO’s assignment to both
the OIC appeal and the sec. 6320 hearing violated sec.
6330(b)(3). In any event, we conclude that it did not, because
the OIC appeal and the sec. 6320 hearing were conducted
simultaneously by an AO with no prior involvement with the unpaid
taxes at issue.
 - 10 -

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).

At the conclusion of the hearing, the AO must determine

whether and how to proceed with collection. The AO must

consider: (1) The Secretary’s verification that the requirements

of applicable law or administrative procedure have been met; (2)

issues raised by the taxpayer at the hearing, including

challenges to the appropriateness of the collection action and

any collection alternatives proposed by the taxpayer; and (3)

whether any proposed collection action balances the need for the

efficient collection of taxes with the legitimate concern of the

taxpayer that the collection action be no more intrusive than

necessary. See sec. 6330(c)(3).

This Court has jurisdiction under section 6330 to review the

Commissioner’s administrative determinations. Sec. 6330(d); see

Iannone v. Commissioner, 122 T.C. 287, 290 (2004). Where the

underlying tax liability is properly at issue, we review the

determination de novo. Goza v. Commissioner, 114 T.C. 176, 181-

182 (2000). Where the underlying tax liability is not at issue,

we review the determination for abuse of discretion. Id. at 182.
 - 11 -

Petitioner received a notice of deficiency for the tax year

1999 and thus may not dispute the underlying deficiency for that

year.4 For the remaining tax years, petitioner had the

opportunity at the section 6320 hearing to challenge the

underlying tax liabilities but did not. “This statutory

preclusion is triggered by the opportunity to contest the

underlying liability, even if the opportunity is not pursued.”

Bell v. Commissioner, 126 T.C. 356, 358 (2006); Goza v.

Commissioner, supra at 182-183. Accordingly, we review

respondent’s determination for abuse of discretion.

Section 6159 authorizes the Secretary to enter into a

written installment agreement with a taxpayer if such an

agreement will facilitate the full or partial collection of the

tax liability. Section 7122(a) permits the Secretary to

compromise tax liabilities. Section 7122(c) requires the

Secretary to prescribe guidelines for evaluating offers in

compromise and to “develop and publish schedules of national and

local allowances designed to provide that taxpayers entering into

a compromise have an adequate means to provide for basic living

expenses.” Sec. 7122(c)(1) and (2)(A).

4
Furthermore, petitioner already petitioned this Court for
redetermination of the deficiency for 1999. As mentioned supra
p. 3, that case resulted in a stipulated decision, and respondent
assessed the deficiency stipulated in that decision.
 - 12 -

Regulations implementing section 7122 set forth three

grounds for the compromise of a tax liability: (1) Doubt as to

liability, (2) doubt as to collectibility, and (3) to promote

effective tax administration. Sec. 301.7122-1(b), Proced. &

Admin. Regs. Doubt as to liability is not an issue in this case.

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. Where

the reasonable collection potential of a case exceeds the

taxpayer’s liability, doubt as to collectibility is not a ground

for compromise.

However, if collection of the full liability would cause the

taxpayer economic hardship within the meaning of section

301.6343-1, Proced. & Admin. Regs., the Secretary may enter into

a compromise on the ground of effective tax administration. Sec.

301.7122-1(b)(3), Proced. & Admin. Regs.; see also Murphy v.

Commissioner, 125 T.C. 301, 310 (2005), affd. 469 F.3d 27 (1st

Cir. 2006). Economic hardship is present when the taxpayer is

unable to pay reasonable basic living expenses. Sec. 301.6343-

1(b)(4), Proced. & Admin. Regs.

The Secretary has promulgated collection guidelines in IRM

pt. 5.15. “Allowable expenses include those expenses that meet

the necessary expense test.” IRM pt. 5.15.1.7(1) (2004).

“Necessary expenses” are defined as those necessary to provide
 - 13 -

for the production of income and/or for the health and welfare of

the taxpayer and his family. Id. The sum of the necessary

expenses establishes the minimum amount the taxpayer needs to

live. Id.

A taxpayer’s reasonable collection potential is determined,

in part, using published guidelines for certain national and

local allowances for basic living expenses. Income and assets in

excess of those needed for basic living expenses are considered

available to satisfy Federal income tax liabilities. This strict

formulaic approach is disregarded, however, on a showing by the

taxpayer of special circumstances including, but not limited to,

advanced age, poor health, history of unemployment, disability,

dependents with special needs, or medical catastrophe, that may

cause an offer to be accepted notwithstanding that it is for less

than the taxpayer’s reasonable collection potential. Lemann v.

Commissioner, T.C. Memo. 2006-37.

Petitioner asserted generally that the published expense

schedules do not adequately reflect the cost of living in greater

Los Angeles. The Court does not doubt that living in southern

California is expensive. However, the scheme of national and

local expense standards employed by the Commissioner reasonably

attempts to consider regional and local costs. Local standards,

for example, cover two necessary expenses: Housing and
 - 14 -

transportation.5 Housing standards are established for each

county within a State. Transportation standards include not only

ownership costs based on nationwide figures for loan or lease

payments but also operating costs determined by census region and

metropolitan area. IRM pt. 5.15.1.7(4) (2004). A taxpayer

seeking a deviation from the expense standards must substantiate

that he has necessary expenses exceeding the standards and that

those expenses are reasonable. IRM pt. 5.8.5.5.1.2 (2005).

Petitioner failed to document or otherwise substantiate that he

has such reasonable and necessary expenses in excess of the

standards. We hold that his generalized assertion is

insufficient to require a deviation.6

5
National standards combine five necessary expenses: Four
from the Bureau of Labor Statistics Consumer Expenditure Survey,
namely food, housekeeping supplies, apparel and services, and
personal care products and services; and a discretionary amount,
categorized as miscellaneous, established by the Internal Revenue
Service. IRM pt. 5.15.1.7(3) (2004).
6
Petitioner explains that his unemployment was the major
cause of his unpaid taxes. However, the Court notes that the
only period of unemployment reflected in the record occurred
between approximately August 2001 and April 2002; yet most of
petitioner’s tax liability, more than 70 percent, results from
unpaid taxes for tax years 1998, 1999, and 2000. See Table 1,
supra p. 4. Petitioner has also not indicated that he
anticipates future unemployment. Petitioner is an engineer
working in the high-tech industry, as opposed to a seasonal
worker subject to regular lay-offs, for example. On the record
before the Court, we conclude that petitioner has not
demonstrated a history of unemployment sufficient to require a
deviation from the reasonable collection potential formula.
 - 15 -

In contrast to necessary expenses, “conditional expenses”

are those expenditures that do not meet the necessary expense

test. IRM pt. 5.15.1.7(6) (2004). In general, the IRS expects a

taxpayer to pay toward his liability the difference between his

gross income and his necessary, allowable expenses. The

Secretary instructs that installment agreements will be based on

a taxpayer’s maximum ability to pay; “i.e., how quickly a

taxpayer can fully pay the tax liability.” IRM pt. 5.15.1.2(6)

(2004).

However, the “Five Year Rule” of IRM pt. 5.15.1.2(5) (2004),

provides that excessive necessary and conditional expenses may be

allowed if the expenses are reasonable and the tax liability,

including projected accruals, will be fully paid within 5 years.

Necessary expenses above the national and local standards are

“excessive necessary” expenses. This flexibility is limited,

however, to cases where the taxpayer will fully pay his liability

within 5 years.7

7
Given that the 60-month reasonable collection potentials
calculated by the OIC examiner and by the AO both substantially
exceed petitioner’s aggregate tax liability, it appears that a 5-
year installment plan may permit petitioner to make some payments
toward his credit card debt. Excluding interest and penalties,
the monthly installment amount required to pay the aggregate
liability reflected on the notice of Federal tax lien filing in
full over 5 years is $475. The installment agreement mailed to
petitioner after the face-to-face hearing specified an initial
monthly installment payment of $800. Both amounts are
substantially smaller than petitioner’s income available to pay
taxes as determined by the OIC examiner ($1,319) and the AO
(continued...)
 - 16 -

IRM pt. 5.8 provides guidelines for offers in compromise.

In evaluating an OIC, the IRS estimates the taxpayer’s reasonable

collection potential (RCP). The RCP is calculated by

determining, then adding together: (1) The taxpayer’s “net

realizable equity”; i.e., quick sale value less amounts owed to

secured lien holders with priority over Federal tax liens; and

(2) the taxpayer’s “future income”; i.e., the amount collectible

from his expected future gross income after allowing for

necessary living expenses. IRM secs. 5.8.5.3.1, 5.8.5.5 (2005).

“Generally, the amount to be collected from future income is

calculated by taking the projected gross monthly income less

allowable expenses and multiplying the difference times the

number of months remaining on the statutory period for

collection.” IRM pt. 5.8.5.5.5.1 (2005).

In a compromise, the Government will not collect the full

amount of the tax. As a result, the conditional expenses rules

for an OIC differ from the rules for installment agreements. IRM

pt. 5.8.5.5.3.1 (2005). With respect to conditional expenses,

such as credit card payments, “although the payment may be

allowed in an installment agreement where the tax will be paid in

full, it [the conditional expense] will not be allowed for

computation of an acceptable offer amount because the Federal

7
(...continued)
($1,661). See Table 3, supra p. 6.
 - 17 -

government has priority rights to the funds.”8 IRM pt.

5.8.5.5.3.8 (2004).

The AO followed published guidelines in computing

petitioner’s future income and determined that petitioner’s RCP

exceeded $100,000.

Petitioner complains that the AO inappropriately increased

petitioner’s monthly income based on a year-end bonus that was

not guaranteed. The record does not disclose the precise reason

the AO determined that petitioner and the OIC examiner had

understated petitioner’s 2004 income. However, even the original

OIC examiner determined that petitioner’s RCP was more than

$80,000. Both RCPs are substantially greater than petitioner’s

tax liability and both demonstrate that respondent determined

that petitioner can pay his liability in full.

8
If a taxpayer justifies and substantiates that expenses
for unsecured debts like credit card minimum payments are
necessary for either the production of income or for the health
and welfare of the taxpayer and his family, those expenses are
allowable. Lemann v. Commissioner, T.C. Memo. 2006-37 n.13.
Petitioner testified vaguely: (1) That some of his credit card
debt resulted from the purchase of household items and living
expenses; (2) that he did not remember what he purchased; and (3)
that he used a credit card when he did not have sufficient
cashflow, whether employed or unemployed. He did not remember
whether he bought food with his credit cards. He may have
charged dinners but not necessarily groceries. Petitioner does
not specifically allege that his credit card debt resulted from
necessary expenditures for the production of income or for his
family’s health and welfare. Accordingly, we conclude that this
unsecured debt is not allowable as an expense in an offer-in-
compromise. See id.
 - 18 -

The record indicates that the AO determined that the

requirements of applicable law and administrative procedure were

satisfied. The AO considered petitioner’s proposed OIC and

confirmed the rejection of that OIC on the basis of a proper

application of the IRM guidelines. Finally, the AO determined

that the lien balanced the need for efficient collection against

the taxpayer’s concern that the collection action be no more

intrusive than necessary. We conclude that respondent has not

abused his discretion.

Petitioner’s Motions

At trial the Court explained to petitioner that its

jurisdiction in collection appeals cases is strictly limited by

statute and that the Court can only review whether respondent

abused his discretion. Petitioner asked the Court for various

forms of relief, including dismissal of tax penalties, reduction

of taxes due, acceptance of his original OIC, and dismissal of

taxes and penalties for certain years.

The Tax Court is a court of limited jurisdiction, and we may

exercise our jurisdiction only to the extent provided by

Congress. See sec. 7442; see also GAF Corp. & Subs. v.

Commissioner, 114 T.C. 519, 521 (2000). Following a hearing

under section 6320, section 6330(d)(1) permits the taxpayer to

appeal the Commissioner’s determination to the Tax Court.

Iannone v. Commissioner, 122 T.C. at 290. However, as previously
 - 19 -

indicated, where, as here, the underlying tax liability is not at

issue, the Tax Court’s review is limited to determining whether

the Commissioner abused his discretion when issuing the notice of

determination. See Goza v. Commissioner, 114 T.C. at 181-182.

The Court is not authorized to provide the relief petitioner

requests. As a result, the Court will deny petitioner’s motions.

An appropriate order and

decision will be entered.