Dailey v. Comm'r

T.C. Memo. 2008-148

UNITED STATES TAX COURT

VINCENT F. AND ELIZABETH R. DAILEY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10693-06L. Filed June 9, 2008.

Vincent F. Dailey and Elizabeth R. Dailey, pro sese.

Karen A. Rennie and Michelle L. Maniscalco, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge: This case arises from a petition and an

amended petition filed in response to a notice of determination

concerning collection action(s) under section 63201 and/or 6330

(notice of determination).

1
All section references are to the Internal Revenue Code in
effect at all relevant times.
 - 2 -

We must decide whether we should sustain the determinations

in the notice of determination with respect to petitioners’

taxable years 2002 and 2003.2 On the record before us, we are

unable to decide whether we should sustain those determinations.

Accordingly, we shall remand this case to respondent’s Appeals

Office for clarification and for further consideration.

FINDINGS OF FACT

Some of the facts in this case have been stipulated by the

parties and are so found.3

Petitioners’ address shown in the petition in this case was

in New York.

Petitioners have one daughter and two sons. During 1997,

petitioners’ daughter was 16 years old, one of petitioners’ two

sons (petitioners’ older son) was 14 years old, and the second of

petitioners’ two sons (petitioners’ younger son) was 7 years old.

During at least certain of the years 1997 through 2006, petition-

ers’ daughter and/or petitioners’ older son suffered from certain

serious health problems.

2
The notice of determination pertained to petitioners’
taxable years 1999, 2002, and 2003. Respondent concedes that
respondent abused respondent’s discretion in making the determi-
nations in the notice of determination with respect to petition-
ers’ taxable year 1999.
3
In view of respondent’s concession with respect to peti-
tioners’ taxable year 1999, we do not find facts relating to that
year except where needed for clarity.
 - 3 -

On a date not disclosed by the record before 1999, peti-

tioner Vincent F. Dailey (Mr. Dailey) resigned from his position

as a stockbroker.

During 2002 and 2003, Mr. Dailey was unemployable and/or

underemployed. During those years, Mr. Dailey made substantial

withdrawals from his individual retirement account (Mr. Dailey’s

IRA) in order to pay certain living expenses and medical bills

for himself and his family.

On April 21, 2004, petitioners filed a Federal income tax

(tax) return (return) for their taxable year 2002 (2002 return)

which showed total tax of $109,261. When petitioners filed their

2002 return, they owed $34,361 of the total tax shown in that

return, which they did not pay at that time.

On May 31, 2004, respondent assessed the total tax shown in

the 2002 return, additions to tax under sections 6651(a)(1) and

(2) and 6654 of $7,731.22, $2,405.27, and $2,237, respectively,

and interest as provided by law of $2,020.61 for petitioners’

taxable year 2002. (We shall refer to any unpaid assessed

amounts with respect to petitioners’ taxable year 2002, as well

as interest as provided by law accrued after May 31, 2004, as

petitioners’ unpaid 2002 liability.)

On April 15, 2004, petitioners filed a return for their

taxable year 2003 (2003 return) which showed total tax of

$86,953. When petitioners filed their 2003 return, they owed
 - 4 -

$61,895 of the total tax shown in that return, which they did not

pay at that time.

On June 7, 2004, respondent assessed the total tax shown in

the 2003 return, additions to tax under sections 6651(a)(2) and

6654 of $618.95 and $1,525, respectively, and interest as pro-

vided by law of $449.74 for petitioners’ taxable year 2003. (We

shall refer to any unpaid assessed amounts with respect to

petitioners’ taxable year 2003, as well as interest as provided

by law accrued after June 7, 2004, as petitioners’ unpaid 2003

liability.)

On July 31, 2004, petitioners submitted to respondent’s

collection function an offer (petitioners’ July 31, 2004 offer-

in-compromise) to compromise, inter alia, petitioners’ unpaid

2002 liability and petitioners’ unpaid 2003 liability. On a date

in 2004 not disclosed by the record, the collection function

rejected that offer-in-compromise.

On a date in 2004 not disclosed by the record, petitioners

appealed to respondent’s Appeals Office (Appeals Office) the

rejection by respondent’s collection function of petitioners’

July 31, 2004 offer-in-compromise. On a date in 2004 not dis-

closed by the record, Mr. Dailey met with a settlement officer

with the Appeals Office to discuss petitioners’ appeal.

By letter dated February 18, 2005, the Appeals Office

informed petitioners that it was sustaining the rejection by
 - 5 -

respondent’s collection function of petitioners’ July 31, 2004

offer-in-compromise. That letter stated in pertinent part:

This refers to your offer of $18,000.00, submitted July
31, 2004 to compromise your liability for the tax
period(s) ending 12/1999, 12/2002 and 12/2003.

We are sorry, but your circumstances do not qualify for
acceptance under the Effective Tax Administration
option and we are sustaining the rejection of your
offer.

To qualify under ETA [effective tax administration],
the collection of the full liability would create an
economic hardship for the taxpayer and family or be
detrimental to voluntary compliance. This is only
applicable if you have received incorrect advice from
the Service.

Economic hardship can exist when: a) a taxpayer has a
serious illness that renders him/her incapable of
earning a living and it is reasonably foreseeable that
taxpayer’s financial resources will be exhausted pro-
viding for care and support during the course of the
illness; or, b) liquidation of assets to pay outstand-
ing liabilities would render the taxpayer unable to
meet basic living expenses; or c) the taxpayer is
unable to borrow against equity in those assets and
seizure/sale of the assets would have sufficient ad-
verse consequences such that enforced collection is
unlikely.

You do not qualify under item a. Liquidation of assets
would not leave you unable to meet basic living ex-
penses after the entire liability was paid. That
leaves item c. At this time, you are probably unable
to borrow against any assets. However, you have not
been notified that seizure is the next action to take
place so we cannot assume that this action is being
contemplated. When these conditions do not exist, we
do not have the authority to accept the offer under the
Effective Tax Administration option.

We must therefore ask you to pay your account in full
as soon as possible. * * *
 - 6 -

On or about October 13, 2005, respondent filed a notice of

Federal tax lien with respect to, inter alia, petitioners’

taxable years 2002 and 2003. On October 20, 2005, respondent

issued to petitioners a notice of Federal tax lien filing and

your right to a hearing (notice of tax lien) with respect to,

inter alia, petitioners’ taxable years 2002 and 2003.

On November 16, 2005, petitioners timely submitted to

respondent Form 12153, Request for a Collection Due Process

Hearing (petitioners’ Form 12153), with respect to the notice of

tax lien. In that form, petitioners indicated their disagreement

with the notice of tax lien4 and requested a hearing with the

Appeals Office. In petitioners’ Form 12153, petitioners gave the

following explanation for their disagreement: “Economic Hard-

ship, Effective Tax Admin”. An attachment to petitioners’ Form

12153 stated in pertinent part:

I am in debt and am not able to afford appropriate
representation.

I believe my circumstances qualify as special and
exceptional.

I do not believe Effective Tax Administration would be
adversely affected by granting me equitable and eco-
nomic hardship considerations.

4
In petitioners’ Form 12153, petitioners also indicated
their disagreement with a “Notice of Levy/Seizure”. The record
does not establish that respondent issued any such notice to
petitioners.
 - 7 -

I believe I have been compliant for over 30 years with
all prior tax responsibilities prior to these IRA
related incidents.

I request Taxpayer assistance and an advocate to assist
me in resolving the current tax problems and lien
hearings; to properly identify and explain my reasons
for disagreement the Internal Revenue Service.

I want to amicably resolve my obligations to the De-
partment of Treasury without adverse consequences to my
family or myself. [Reproduced literally.]

By letter dated January 4, 2006, the Appeals Office acknowl-

edged receipt of petitioners’ Form 12153.

On February 24, 2006, a settlement officer with the Appeals

Office who was assigned petitioners’ Form 12153 (settlement

officer) made the following pertinent entries in her “Case

Activity Records”:

Form 12153 received 11/18/2005. The CDP request was
timely. * * * This S.O. has had no prior involvement
with this matter in Collection or Appeals. The taxpay-
ers maintain that they are suffering an economic hard-
ship and believe they qualify for effective tax admin-
istration. The latter refers to an offer basis but no
offer was included in the case file. The taxpayers
state that the liabilities arose from IRA related
transactions. Review of transcripts reveal an offer
was received on 08/19/2004 and rejected on 02/18/2005.
Review of ACDS [Appeals Centralized Database System]
closed cases reveal that the rejection was appealed and
S.O. C. Berger sustained the rejection. Checked ICS
[Integrated Collection System] history but there was
nothing. It appears COIC [Centralized Offer in Compro-
mise] worked the offer. The taxpayers’ total income in
2004 was $1,132 from partnership or s-corp income.
However, in 2003, the total income was $273,166 and in
 - 8 -

2002 it was $322,824.[5] Each year reveals large medi-
cal and dental expenses. * * * [Reproduced literally.]

The settlement officer sent petitioners a letter dated

February 24, 2006 (February 24, 2006 letter). That letter stated

in pertinent part:

Appeals received your request for a Collection Due
Process (CDP) Hearing. I have scheduled a telephone
conference call for you on March 22, 2006 at 10:30 AM.
This call will be your CDP hearing.

* * * * * * *

If this time is not convenient for you, or you would
prefer your CDP hearing to be held by face-to-face
conference at the Appeals office closest to your cur-
rent residence * * * or by correspondence, please let
me know within fourteen (14) days from the date of this
letter.

Your CDP hearing request regarding the filing of a
Notice of Federal Tax Lien on the following tax periods
was timely: Form 1040, for tax periods * * * December
31, 2002 and December 31, 2003. During your hearing
and until any appeals become final, the legal collec-
tion period is suspended on these tax and periods.
However, levy action may continue if the Collection
division determines it is appropriate, and this hearing
relates only to the filing of a notice of tax lien.

During the hearing, I must consider:

• Whether the IRS met all the requirements of any
applicable law or administrative procedure

• Any relevant issues you wish to discuss. These
can include:

1. Collection alternatives to levy such as
full payment of the liability, install-

5
Although not altogether clear from the record, we believe
that petitioners’ income for 2002 and 2003 consisted of certain
withdrawals from Mr. Dailey’s IRA.
 - 9 -

ment agreement, offer in compromise or
temporary delay of collection action.
Although they may not be considered an
“alternative” to a notice of lien fil-
ing, these collection options may also
be discussed at a lien hearing.

2. Challenges to the appropriateness of
collection action. If this is a lien
hearing, you may ask us to determine if
the notice of lien filing was appropri-
ate and if you qualify for a lien with-
drawal or other lien options, such as
subordination.

3. Spousal defenses, when applicable.

• We may also consider whether you owe the amount due,
but only if you have not otherwise had an opportunity
to dispute it with Appeals or did not receive a statu-
tory notice of deficiency.

• We will balance the IRS’ need for efficient tax
collection and your legitimate concern that the
collection action be no more intrusive than neces-
sary.

* * * * * * *

For me to consider alternative collection methods such
as an installment agreement or offer in compromise, you
must provide any items listed below. In addition, you
must have filed all federal tax returns due.

• A completed Collection Information Statement (Form
433-A for individuals * * *)

• Signed tax return(s) for the following tax peri-
ods. Our records indicate they have not been
filed:
Type of Tax: 1040
Period or Periods: 2005

Please send me the items above within 14 days from the
date of this letter. I cannot consider collection
alternatives in your hearing without the information
requested above. I am enclosing the applicable forms
and a return envelope for your convenience.
 - 10 -

In petitioners’ Form 12153, petitioners placed the settle-

ment officer on notice that they were seeking an offer-in-compro-

mise based on effective tax administration. Nonetheless, the

settlement officer did not ask petitioners in her February 24,

2006 letter to submit to her Form 656, Offer in Compromise (Form

656), and petitioners did not submit that form to her.

On March 13, 2006, the settlement officer made the following

entries in her “Case Activity Records”:

Spoke with Mr. TP. He needs additional time. He will
not receive his K-1 until 03/20/2006. Agreed to re-
schedule tel conf for 04/05/2006 @ 10:30 AM. Add info
to be submitted before this date. [Reproduced liter-
ally.]

On March 30, 2006, the settlement officer received from Mr.

Dailey a letter dated March 28, 2006 (March 28, 2006 letter). In

that letter, Mr. Dailey indicated that petitioners’ daughter had

been suffering from certain serious health problems and that he

and his spouse, petitioner Elizabeth R. Dailey (Ms. Dailey), had

been “under a severe strain”. As requested by the settlement

officer in her February 24, 2006 letter, Mr. Dailey enclosed with

his March 28, 2006 letter (1) completed Form 433-A that was

signed by petitioners and dated March 26, 2006 (petitioners’ Form

433-A) and (2) a copy of Form 1040, U.S. Individual Income Tax

Return, for petitioners’ taxable year 2005 that was signed by

petitioners and dated March 18, 2006 (petitioners’ 2005 return)
 - 11 -

and various documents in support of certain entries in that

return.

Form 433-A contained several sections identified as sections

1 through 9.6 In response to certain questions in section 1 of

petitioners’ Form 433-A, petitioners indicated that Mr. Dailey

was born on December 14, 1950, and that Ms. Dailey was born on

November 14, 1955.

In section 1 of petitioners’ Form 433-A, petitioners pro-

vided the responses indicated to the following questions:

6. List the dependents you can claim on your tax
return: * * *

First Name Relationship Age Does this person
live with you?

* * * SON 16 9 No : Yes

* * * SON 23 9 No : Yes

6
Secs. 1 through 9 of Form 433-A requested the following
types of information:

Section Type of Information Requested
1 Personal
2 Business
3 Employment
4 Other income
5 Banking, investing, cash,
credit, and life insurance
6 Financial condition
7 Assets and liabilities
8 Accounts/notes receivable
9 Monthly income and expense
analysis
 - 12 -

In response to a question in section 2 of petitioners’ Form

433-A, petitioners indicated that they were not self-employed and

did not operate a business.

In section 3 of petitioners’ Form 433-A, petitioners pro-

vided the responses indicated to the following questions:

8. Your Employer 9. Spouse’s Employer
McFadden Farrel * * * Greenburg Central #7 S Dst
* * *

8a. How long with 9a. How long with this
this employer? 2 mos employer? 2 mos

8b. Occupation BROKER 9b. Occupation Counsellor

In section 4 of petitioners’ Form 433-A, petitioners pro-

vided the response indicated to the following question:

10. Do you receive income from sources other than your
own business or your employer? (Check all that
apply.)

9 Pension 9 Social Security : Other (specify,
i.e. child support, alimony, rental) see
attached

The attachment to question 10 in section 4 of petitioners’ Form

433-A (question 10 attachment) was a statement of Mr. Dailey that

indicated:

I received a check from Executive House for the sale of
the property and used it to repay past due credit card
bills, bank overdrafts, insurance payments and other
living expenses. See attached letter from them.

The property referred to in the question 10 attachment was a

limited partnership interest that Mr. Dailey had in Executive
 - 13 -

House Associates and that was purchased from him between January

20 and March 28, 2006, for an amount not disclosed by the record.

In response to certain questions in section 5 of petition-

ers’ Form 433-A, petitioners indicated (1) that they maintained a

checking account that had a balance of zero, (2) that they had no

investments, (3) that they had two credit cards with total

available credit of $185, and (4) that they had life insurance

with a cash value of $995.

In section 6 of petitioners’ Form 433-A, petitioners pro-

vided the responses indicated to the following questions:

17a. Are there any garnishments against your wages?
: No 9 Yes

* * * * * * *

17b. Are there any judgments against you? 9 No : Yes
SEE ATTACHED
If yes, who is Date creditor Amount of debt
the creditor? NY obtained $56,867.00
STATE DEPT TAX judgment
& FINANCE 3/28/05

17c. Are you a party in a lawsuit? : No 9 Yes

* * * * * * *

17d. Did you ever file bankruptcy? : No 9 Yes

* * * * * * *

17e. In the past 10 years did you transfer any assets
out of your name for less than their actual
value? : No 9 Yes

* * * * * * *

17f. Do you anticipate any increase in household
income in the next two years? 9 No : Yes
 - 14 -

If yes, why will the income increase? Both have
Tentative Jobs * * *

How much will it increase? * * * See attached

17g. Are you a beneficiary of a trust or an estate?
: No 9 Yes

* * * * * * *

17h. Are you a participant in a profit sharing plan?
: No 9 Yes

The attachment to question 17b in section 6 of petitioners’

Form 433-A was a copy of a warrant dated March 30, 2005, that was

issued by the New York State Department of Taxation and Finance.

That warrant indicated that the total amount due from petitioners

to the Commissioner of the New York State Department of Taxation

and Finance with respect to their taxable years 2002 and 2003 was

$53,648.40 and that interest would continue to accrue on that

amount at a rate of 6 percent.

The attachment to question 17f in section 6 of petitioners’

Form 433-A was a statement of Mr. Dailey that indicated:

My wife recently completed Masters Education in Coun-
selling. She is in a temporary position currently
being paid $40/day through May. * * * We are hopeful
that she will receive a permanent position but there
can be no guarantees. That would amount to before tax
and union dues $41,846. (Currently she is not paid
when school is on vacation * * *) Myself, I have
recently been forced to change employers as a result of
financial difficulties of my former employer Seaboard
Securities. My compensation is based solely on commis-
sion, I have been working at McFadden Farrell & Smith
for 2 months and total earned compensation totals after
deductions amounts to only $1,175.
 - 15 -

I am hopeful that I will be able to develop a
stable stream of income but to date I have not reached
any of my personal goals and thus am reluctant to guess
on short term income. The firm itself is weighing
whether to remain open given it ever rising expenses.
[Reproduced literally.]

In response to certain questions in section 7 of petition-

ers’ Form 433-A, petitioners indicated that they owned the

following three automobiles: (1) A 1988 “BMW 320i” that had a

current value of $800, (2) a 1990 Lexus “LS 400" that had a

current value of $1,000, and (3) a 1998 “Volks Passat” that had a

current value of $800.

In response to certain questions in section 7 of petition-

ers’ Form 433-A, petitioners indicated (1) that they owned their

residence, (2) that they had purchased their residence in March

1983 for $535,000, (3) that the current value of their residence

was between $1,400,000 and $1,600,000,7 and (4) that there was a

loan balance of $153,700 with respect to their residence.8 In

response to the question in section 7 of petitioners’ Form 433-A

that requested the name of the lender or lien holder, petitioners

7
In the stipulation of facts, the parties stipulated that
the fair market value of petitioners’ residence on the date on
which the parties executed that stipulation was more than
$1,400,000.
8
Although petitioners indicated in sec. 7 of petitioners’
Form 433-A that they had a loan balance of $153,700 with respect
to their residence, as discussed below, that loan balance per-
tained to certain loans from various family members of Mr. Dailey
and did not pertain to petitioners’ residence.
 - 16 -

referred to an attachment. That attachment was a statement of

Mr. Dailey that indicated in pertinent part:

I currently owe various family members $153,700.00:

Mother 83 years old 37,200
Sister 57 [years old] * * * 24,500
Brother 53 [years old] * * * 84,300
Brother 45 [years old] * * * 7,700.

These members have been funding on a weekly and
monthly basis all of our Living Expenses as well medi-
cal bills beginning in January of 2004, as I have
exhausted all my financial assets and could not find
employment.

They have been under a strain to do this and have
‘limited’ funds with which to further aid us. My
children * * * were therefore forced to take out per-
sonal loans and obtain financial aid on their own in
order to attend college. [Reproduced literally.]

In response to certain questions in section 7 of petition-

ers’ Form 433-A, petitioners indicated that they owned personal

assets consisting of furniture and personal effects that had a

current value of $35,000 and jewelry that had a current value of

$5,000.

In section 9 of petitioners’ Form 433-A, petitioners listed

various income and expense items. With respect to the income

items listed in that section, petitioners indicated that they had

total monthly income of $4,587 consisting of Mr. Dailey’s wages

of $1,100 and Ms. Dailey’s wages of $3,487. With respect to the

expense items listed in section 9 of petitioners’ Form 433-A,

petitioners showed monthly living expenses totaling $7,601 that

consisted of $1,740 for “Food, Clothing, and Misc.”, $3,235 for
 - 17 -

“Housing and Utilities”, $1,153 for “Transportation”, $1,080 for

“Health Care”, and $393 for “Life insurance”.

In petitioners’ 2005 return that Mr. Dailey enclosed with

his March 28, 2006 letter, petitioners claimed petitioners’

younger son as a dependent. In that return, petitioners reported

total income of $7,277 consisting of (1) Mr. Dailey’s wages of

$2,000,9 (2) taxable interest of $5, (3) a distribution of $3,374

from an IRA, and (4) partnership income of $1,898 with respect to

Mr. Dailey’s limited partnership interest in Executive House

Associates. In petitioners’ 2005 return, petitioners claimed

total itemized deductions from Schedule A--Itemized Deductions of

$40,504 and showed taxable income of zero and total tax of zero.

On March 30, 2006, the settlement officer made the following

pertinent entries in her “Case Activity Records”:

Mr. Taxpayer came into the office with his Form 433-A.
It was an unscheduled visit. He stated that he really
wants a face to face conference. * * * Reviewed CIS
[Collection Information Statement] information. The
taxpayers appear to be good candidates for CNC [Cur-
rently Not Collectible]. They are currently earning
very little but have a house with plenty of equity. It
is unlikely that on their income they can get a second
mortgage. However, this equity makes them poor candi-
dates for an offer. Called Mr. Taxpayer. Addressed
conference room issue. Rescheduled face to face for
04/19/2006 @ 10:30 AM. Discussed CNC and IA [Install-

9
Petitioners attached to petitioners’ 2005 return Form W-2,
Wage and Tax Statement, which showed that during 2005 Mr. Dailey
received wages of $2,006.39 from Seaboard Securities, Inc. The
record does not explain why petitioners reported only $2,000 of
those wages in petitioners’ 2005 return.
 - 18 -

ment Agreements]. He had some questions but could not
ask them at work. Call ended. Plan: Face to face
conference with taxpayer on 04/19/2006 at 10:30 AM.
[Reproduced literally.]

On or about April 19, 2006, the settlement officer met

(April 19, 2006 meeting) with Mr. Dailey and discussed petition-

ers’ Form 433-A and petitioners’ financial status as of that

date. On April 19, 2006, the settlement officer made the follow-

ing entries in her “Case Activity Records” with respect to the

April 19, 2006 meeting:

Mr. Taxpayer came into Appeals for a face to face
conference. Reviewed CIS information. Confirmed his
current financial status. He and his wife cannot
afford to pay at the moment. However, he is not a good
candidate for an offer because he owns a house with
equity but does not have circumstances that would
currently fit ETA criteria. Explained the NFTL filing
is going to be sustained and explained why. Explained
CNC and stressed interest will continue to accrue.
Discussed options such as reverse mortgage (too young)
and selling of his primary residence (he still has a
minor in school). CNC is best alternative at the
moment. Told him the Service may request updated
financials in the future. [Reproduced literally.]

On May 1, 2006, respondent issued to petitioners a notice of

determination with respect to, inter alia, petitioners’ taxable

years 2002 and 2003.10 That notice indicated in pertinent part:

The filing of the Notice of Federal Tax Lien is sus-
tained by Appeals. However, the balances are to be
declared currently not collectible, understanding
interest will continue to accrue until full payment or
until the collection statutes expire.

10
See supra note 2.
 - 19 -

The notice of determination included an attachment that stated in

pertinent part:

Summary and Recommendation

You submitted a Request for a Collection Due Process
(CDP) Hearing Form 12153 following the receipt of
Letter 3172, Notice of Federal Tax Lien and Your Right
to a Hearing under Internal Revenue Code (IRC) Section
6320. Automated Collection (ACS) issued the notice
dated 10/20/2005, allowing you until 11/21/2005 to
submit a request for a hearing with Appeals. ACS
received Form 12153 on 11/18/2005. The CDP request
was, therefore, timely as it was made within the
timeframe outlined in Letter 3172.

[The settlement officer] * * * received Collection
Information Statement Form 433-A from Mr. Dailey on
03/30/2006 and met with him on 04/19/2006. [The set-
tlement officer] * * * determined the Notice of Federal
Tax Lien was filed in accordance with established
procedures. Therefore, the filing of the Notice of
Federal Tax Lien is sustained by Appeals.

The negotiation of alternatives to enforced collection
resulted in the determination that you cannot currently
afford to pay the debts. Therefore, the balances are
to be declared currently not collectible, understanding
interest will continue to accrue until full payment is
received or until the collection statutes expire.

Brief Background

You filed your 1999 and 2003 1040 returns timely. Your
2002 1040 return was received by the Internal Revenue
Service (Service) on 04/21/2004. * * * No adjustments
were completed on your 2002 and 2003 1040 returns but
you did not have sufficient withholding or pay esti-
mated taxes to cover the tax due and you did not remit
full payment with the returns.

Discussion and Analysis

IRC Section 6320 gives a taxpayer the right to a Col-
lection Due Process (CDP) hearing with Appeals in
response to the filing of a Notice of Federal Tax Lien
(NFTL). The Service is required to inform a taxpayer
 - 20 -

of a lien not more than 5 business days after the date
of the filing of Notice of Lien. A taxpayer must file
the hearing request within a 30 calendar day period
that begins the day after the conclusion of the 5-day
notification period. A taxpayer who timely requests a
hearing has the right to protest an Appeals determina-
tion in Tax Court or United States District Court,
depending on the type of tax issue. In certain in-
stances, a taxpayer may return to Appeals after the
case has been closed under the “retained jurisdiction”
clause in the statute.

A taxpayer may raise any relevant issues related to the
unpaid tax including the appropriateness of collection
actions, collection alternatives, and spousal defenses
as well as to challenge the existence or amount of the
tax if (s)he did not receive a Notice of Deficiency for
that liability or did not have the opportunity to
dispute the tax liability previously.

Appeals is required to:

• Verify that the requirements of any applicable law
or administrative procedures have been met;

• Consider issues raised by the taxpayer;

• Efficiently collection taxes while avoiding unnec-
essarily intrusive collection actions.

Law and Procedure

With the best information available, the requirements
of various applicable law or administrative procedures
have been met. Based on transcripts of your accounts,
the following was confirmed:

• Assessment was made on the above considered peri-
ods per IRC Section 6201 and notice and demand for
payment was mailed within 60 days of the assess-
ment as required by IRC Section 6303;

• The filing of the Notice of Federal Tax Lien was
not requested until at least 31 days after the
issuance of an Urgent Notice (CP 504);
 - 21 -

• There was a balance due when the NFTL was filed
and Notice of Your Right to a Hearing was issued
per IRC Sections 6322 and 6331(a);

• Letter 3172 was sent by certified mail to your
last known address no later than 5 business days
after the NFTL was mailed for recordation per IRC
Section 6320(a);

• The filing of the NFTL was approved by an employee
with sufficient delegated authority;

• Collection action was suspended upon receipt of
the timely CDP request;

• The Settlement Officer had no prior involvement
with this matter in Compliance or Appeals.

Issues Raised by the Taxpayer

You stated on Form 12153 that you were experiencing an
economic hardship. You also mentioned Effective Tax
Administration (ETA), which is a type of the offer in
compromise. [The settlement officer] * * * agreed that
you are currently suffering an economic hardship. As
such, she determined that declaring the balances cur-
rently not collectible would be the best alternative to
enforcement at the moment. She also addressed offer in
compromise possibilities although you did not submit
offer Form 656. She explained that because there is
sufficient equity in your primary residence to full pay
the debts, you are not a good candidate for an offer
based on doubt as to collectibility. Because you are
currently underemployed, you do not have the ability to
secure the equity to pay the debts.

Economic hardship as it pertains to an ETA offer in
compromise means that you have the equity in assets to
full pay the debts but have extraordinary circumstances
that would warrant acceptance of less than full pay-
ment. Some factors considered include advanced age,
the health of dependents, special education needs of
said dependents, medical catastrophe, or natural disas-
ter. These factors do not pertain to your current
financial condition. Therefore, you are not a good
candidate for an ETA offer.
 - 22 -

You did not raise liability issues. No other collec-
tion issues were raised.

Intrusiveness versus Efficiency

Because the NFTL was filed properly, its filing is
sustained. Because you cannot afford to secure equity
in your home to pay the debts and because you cannot
afford to make monthly payments at this time, the
balances are to be declared currently not collectible.
[Reproduced literally.]

On June 5, 2006, petitioners filed a petition commencing

this case. On July 27, 2006, petitioners filed an amended

petition. In the amended petition, petitioners alleged in

pertinent part:

I wish to appeal decision to lien home, as it will
cause my family economic hardship. As a person, seek-
ing financial officer placement, it would almost cer-
tainly hinder me getting a job.

I also wish to appeal 2/05 decisions not to accept
my OIC under ETA. I wish for the court to find a way
to give us a fresh start without us having to sell our
home. We believe the facts & exceptional circumstances
of our case justify such a finding based on some of the
following economic hardship, exceptional & special
circumstances, equity, fairness, adverse consequences,
similar granting’s, inability to manage affairs, over-
all past compliance, reasonable collection potential
vs. an acceptable OIC amount.

OPINION

Where, as is the case here, the validity of the underlying

tax liability for each of the taxable years 2002 and 2003 is not

properly placed at issue, the Court will review the determination

of the Commissioner of Internal Revenue for abuse of discre-
 - 23 -

tion.11 See Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza

v. Commissioner, 114 T.C. 176, 181-182 (2000).

As we understand it, it is petitioners’ position that they

qualify for an offer-in-compromise based on effective tax admin-

istration and that the Appeals Office abused the Appeals Office’s

discretion in making the determinations in the notice of determi-

nation.12

Section 7122(a) authorizes the Secretary of the Treasury

(Secretary) to compromise, inter alia, any civil case arising

under the internal revenue laws. Section 7122(c) authorizes the

Secretary to prescribe guidelines for the officers and the

11
It does not appear that petitioners are disputing the
existence or the respective amounts of petitioners’ unpaid 2002
liability and petitioners’ unpaid 2003 liability. In fact,
petitioners acknowledge the existence of an unpaid tax liability
of a substantial amount with respect to each of their taxable
years 2002 and 2003. Assuming arguendo that petitioners were
disputing the respective amounts of petitioners’ unpaid 2002
liability and petitioners’ unpaid 2003 liability and that they
had challenged the respective amounts of those unpaid liabilities
at the Appeals Office hearing with respect to petitioners’ Form
12153, a fact which is not established by the record, petitioners
have presented no evidence as to why the respective amounts of
petitioners’ unpaid 2002 liability and petitioners’ unpaid 2003
liability are incorrect. Nor have petitioners presented any
evidence to establish the respective correct amounts of petition-
ers’ unpaid 2002 liability and petitioners’ unpaid 2003 liabil-
ity.
12
Our discussion of the determinations in the notice of
determination pertains to the determinations with respect to
petitioners’ taxable years 2002 and 2003, and not 1999. That is
because respondent concedes that respondent abused respondent’s
discretion in making the determinations in that notice with
respect to petitioners’ taxable year 1999. See supra note 2.
 - 24 -

employees of the Internal Revenue Service to determine whether an

offer-in-compromise is adequate and should be accepted to resolve

a dispute. The regulations promulgated under section 7122

indicate that the promotion of effective tax administration is a

ground for the compromise of a liability (effective tax adminis-

tration offer-in-compromise).13 Sec. 301.7122-1(b)(3), Proced. &

Admin. Regs.

Section 301.7122-1(b)(3)(i), Proced. & Admin. Regs., pro-

vides:

(3) Promote effective tax administration.--(i) A
compromise may be entered into to promote effective tax
administration when the Secretary determines that,
although collection in full could be achieved, collec-
tion of the full liability would cause the taxpayer
economic hardship within the meaning of § 301.6343-
1.[14]

Section 301.6343-1(b)(4)(i), Proced. & Admin. Regs., pro-

vides:

13
The regulations promulgated under sec. 7122 further indi-
cate that doubt as to liability and doubt as to collectibility
are grounds for the compromise of a liability. Sec. 301.7122-
1(b)(1) and (2), Proced. & Admin. Regs. Petitioners are not
claiming that they qualify for an offer-in-compromise on either
of those grounds.
14
Sec. 301.7122-1(b)(3)(iii), Proced. & Admin. Regs., pro-
vides that “No compromise to promote effective tax administration
may be entered into if compromise of the liability would under-
mine compliance by taxpayers with the tax laws.” Respondent does
not argue that an effective tax administration offer-in-compro-
mise with respect to petitioners’ unpaid 2002 liability and
petitioners’ unpaid 2003 liability would undermine compliance by
taxpayers with the tax laws.
 - 25 -

(4) Economic hardship.–-(i) General rule.–-The
levy is creating an economic hardship due to the finan-
cial condition of an individual taxpayer. This condi-
tion applies if satisfaction of the levy in whole or in
part will cause an individual taxpayer to be unable to
pay his or her reasonable basic living expenses. The
determination of a reasonable amount for basic living
expenses will be made by the director and will vary
according to the unique circumstances of the individual
taxpayer. Unique circumstances, however, do not in-
clude the maintenance of an affluent or luxurious
standard of living.

Section 301.6343-1(b)(4)(ii), Proced. & Admin. Regs.,

provides that, for purposes of determining the taxpayer’s reason-

able amount of living expenses, any information that is provided

by the taxpayer is to be considered, including the following:

(A) The taxpayer’s age, employment status and
history, ability to earn, number of dependents, and
status as a dependent of someone else;

(B) The amount reasonably necessary for food,
clothing, housing * * *, medical expenses * * *, trans-
portation, current tax payments * * *, alimony, child
support, or other court-ordered payments, and expenses
necessary to the taxpayer’s production of income * * *;

(C) The cost of living in the geographic area in
which the taxpayer resides;

(D) The amount of property exempt from levy which
is available to pay the taxpayer’s expenses;

(E) Any extraordinary circumstances such as spe-
cial education expenses, a medical catastrophe, or
natural disaster; and

(F) Any other factor that the taxpayer claims
bears on economic hardship and brings to the attention
of the director.
 - 26 -

Factors that support a determination that collection would

cause economic hardship include, but are not limited to, the

following:

(A) Taxpayer is incapable of earning a living
because of a long term illness, medical condition, or
disability, and it is reasonably foreseeable that
taxpayer’s financial resources will be exhausted pro-
viding for care and support during the course of the
condition;

(B) Although taxpayer has certain monthly income,
that income is exhausted each month in providing for
the care of dependents with no other means of support;
and

(C) Although taxpayer has certain assets, the
taxpayer is unable to borrow against the equity in
those assets and liquidation of those assets to pay
outstanding tax liabilities would render the taxpayer
unable to meet basic living expenses.

Sec. 301.7122-1(c)(3)(i), Proced. & Admin. Regs.

Respondent has prescribed procedures in the Internal Revenue

Manual (IRM) that are consistent with section 7122 and the

regulations thereunder in order to determine whether an effective

tax administration offer-in-compromise based on economic hardship

should be considered and accepted. Consistent with section

301.7122-1(b)(3)(i), Proced. & Admin. Regs., part 5.8.11.2.1(1)

of the IRM (Sept. 1, 2005) provides that an effective tax admin-

istration offer-in-compromise based on economic hardship may be

considered “When a taxpayers [sic] liability can be collected in

full but collection would create an economic hardship”.
 - 27 -

Also consistent with section 301.7122-1(b)(3)(i), Proced. &

Admin. Regs., part 5.8.11.2.1(2) of the IRM (Sept. 1, 2005)

defines the term “economic hardship” as it applies to an effec-

tive tax administration offer-in-compromise in pertinent part as

follows:

The definition of economic hardship as it applies to
Effective Tax Administration (ETA) offers is derived
from Treasury Regulations § 301.6343-1. Economic
hardship occurs when a taxpayer is unable to pay rea-
sonable basic living expenses. * * *

In determining whether a taxpayer qualifies for an effective

tax administration offer-in-compromise based on economic hard-

ship, part 5.8.11.2.1(3) of the IRM (Sept. 1, 2005), which is

consistent with section 301.6343-1(b)(4)(i) and (ii), Proced. &

Admin. Regs., provides that the taxpayer’s financial information

and special circumstances must be examined. That part of the IRM

further provides that “Financial analysis includes reviewing

basic living expenses as well as other considerations.” IRM pt.

5.8.11.2.1(3) (Sept. 1, 2005).

In reviewing a taxpayer’s basic living expenses, part

5.8.11.2.1(4) of the IRM (Sept. 1, 2005), which is consistent

with section 301.6343-1(b)(4)(ii)(B), Proced. & Admin. Regs.,

provides in pertinent part:

Basic living expenses are those expenses that provide
for health and welfare and production of income of
the taxpayer and the taxpayers [sic] family. * * *
 - 28 -

Part 5.8.11.2.1(5) of the IRM (Sept. 1, 2005) provides that,

in addition to a taxpayer’s basic living expenses, other factors

that are to be considered that impact the taxpayer’s financial

condition include, but are not limited to, the following:15

• The taxpayers [sic] age and employment status,

• Number, age, and health of the taxpayers [sic]
dependents,

• Cost of living in the area the taxpayer resides, and

• Any extraordinary circumstances such as special
education expenses, a medical catastrophe, or
natural disaster.

Part 5.8.11.2.1(11) of the IRM (Sept. 1, 2005) provides that

The existence of economic hardship criteria does not
dictate that an offer must be accepted. An acceptable
offer amount must still be determined based on a full
financial analysis and negotiation with the taxpayer.
When hardship criteria are identified but the taxpayer
does not offer an acceptable amount, the offer should
not be recommended for acceptance.

According to part 5.8.11.2.1(10) of the IRM (Sept. 1, 2005),

an acceptable offer amount is determined by analyzing
the financial information, supporting documentation,
and the hardship that would be created if certain
assets, or a portion of certain assets, were used to
pay the liability.

Consistent with section 301.7122-1(b)(3)(i), Proced. &

Admin. Regs., part 5.8.11.2(5) of the IRM (Sept. 1, 2005) pro-

15
The factors listed in pt. 5.8.11.2.1(5) of the IRM (Sept.
1, 2005) are some, but not all, of the factors listed in sec.
301.6343-1(b)(4)(ii), Proced. & Admin. Regs. That part of the
IRM provides that “Other factors may be considered in making an
economic hardship determination.” IRM pt. 5.8.11.2.1(5) (Sept.
1, 2005).
 - 29 -

vides that, before an effective tax administration offer-in-

compromise may be considered, the following three factors must

exist:

a. A liability has been or will be assessed against
taxpayer(s) before acceptance of the offer.

b. The net equity in assets plus future income or
reasonable collection potential (RCP) must be
greater than the amount owed.

c. Exceptional circumstances exist, such as the
collection of the tax would create an economic
hardship * * *.

In the notice of determination, the Appeals Office deter-

mined (1) that respondent assessed a liability with respect to

each of petitioners’ taxable years 2002 and 2003 and (2) that the

net equity in petitioners’ residence was greater than the total

amount of petitioners’ unpaid 2002 liability and petitioners’

unpaid 2003 liability. Thus, the Appeals Office implicitly

determined in that notice that the first two requirements set

forth in part 5.8.11.2(5) of the IRM (Sept. 1, 2005) for consid-

ering an effective tax administration offer-in-compromise were

met with respect to those unpaid liabilities.

In the notice of determination, the Appeals Office agreed

with the position of petitioners in petitioners’ Form 12153 and

determined that they were “suffering an economic hardship”.16 By

16
In determining in the notice of determination that peti-
tioners were suffering an economic hardship, the Appeals Office
determined in that notice that they were underemployed and that
(continued...)
 - 30 -

determining in the notice of determination that petitioners were

suffering an economic hardship, the Appeals Office implicitly

acknowledged (1) that they were unable to pay their reasonable

basic living expenses, see sec. 301.6343-1(b)(4)(i), Proced. &

Admin. Regs.; IRM pt. 5.8.11.2.1(2) (Sept. 1, 2005), and (2) that

the payment of petitioners’ unpaid 2002 liability and petition-

ers’ unpaid 2003 liability would cause petitioners an even

greater economic hardship than they were already experiencing.

Since the Appeals Office determined in the notice of deter-

mination that petitioners were suffering an economic hardship, it

appears that the Appeals Office should have determined that the

third requirement set forth in part 5.8.11.2(5) of the IRM (Sept.

1, 2005) for considering an effective tax administration offer-

in-compromise was met with respect to petitioners’ unpaid 2002

liability and petitioners’ unpaid 2003 liability, i.e., “Excep-

tional circumstances exist, such as the collection of the tax

would create an economic hardship”. However, the Appeals Office

did not make that determination. Instead, the Appeals Office

determined in the notice of determination that petitioners were

16
(...continued)
they did “not have the ability to secure the equity [in their
primary residence] to pay the debts.” In addition, in the
settlement officer’s “Case Activity Records”, the settlement
officer indicated (1) that petitioners were “earning very lit-
tle”, (2) that it was unlikely that they would be able to obtain
a “second mortgage” with respect to their residence, and (3) that
they were unable to sell their residence because they had a minor
living with them who was in school.
 - 31 -

not a “good candidate” for an effective tax administration offer-

in-compromise17 and that “declaring the balances currently not

collectible would be the best alternative to enforcement at the

moment.”18

The record is unclear as to why the Appeals Office deter-

mined in the notice of determination that petitioners were not a

good candidate for an effective tax administration offer-in-

compromise.19 The only explanation in the notice of determina-

tion for that determination is:

Economic hardship as it pertains to an ETA offer in
compromise means that you have the equity in assets to
full pay the debts but have extraordinary circumstances
that would warrant acceptance of less than full pay-
ment. Some factors considered include advanced age,

17
In petitioners’ Form 12153, petitioners placed the settle-
ment officer on notice that they were seeking an effective tax
administration offer-in-compromise. Nonetheless, the settlement
officer did not ask petitioners in her February 24, 2006 letter
to submit to her Form 656, Offer in Compromise, and petitioners
did not submit that form to her. The record does not establish
that at any time after the settlement officer sent petitioners
that letter she asked them to submit to her Form 656.
18
A balance may be declared currently not collectible when,
inter alia, “collection of the liability would create an undue
hardship for taxpayers by leaving them unable to meet necessary
living expenses”. IRM pt. 5.16.1.1(2) (Sept. 19, 2005).
19
The Appeals Office did not determine in the notice of
determination that petitioners did not offer an acceptable amount
to compromise petitioners’ unpaid 2002 liability and petitioners’
unpaid 2003 liability on the basis of effective tax administra-
tion. See IRM pt. 5.8.11.2.1(11) (Sept. 1, 2005). Instead, it
appears that the Appeals Office determined that petitioners were
not a good candidate for an effective tax administration offer-
in-compromise regardless of what might constitute such an accept-
able amount. See supra note 17.
 - 32 -

the health of dependents, special education needs of
said dependents, medical catastrophe, or natural disas-
ter. These factors do not pertain to your current
financial condition. * * *

In determining in the notice of determination that petition-

ers were not a good candidate for an effective tax administration

offer-in-compromise, the Appeals Office appears to have consid-

ered at least the following factors: “advanced age, the health

of dependents, special education needs of said dependents,

medical catastrophe, or natural disaster.” According to the

Appeals Office, those factors did not “pertain to * * * [peti-

tioners’] current financial condition.” Even if the Appeals

Office were correct that the factors listed in the notice of

determination and quoted above did not “pertain to * * * [peti-

tioners’] current financial condition”, the record is unclear as

to whether the Appeals Office considered any other factors or

circumstances that might impact petitioners’ financial condition,

which it was permitted to do, see IRM pt. 5.8.11.2.1(5) (Sept. 1,

2005). For example, the record is unclear as to whether the

Appeals Office considered (1) the ability of Ms. Dailey and Mr.

Dailey, who at the time they submitted petitioners’ Form 433-A

were 50 years old and 55 years old, respectively, to earn suffi-

cient income to pay petitioners’ unpaid 2002 liability and

petitioners’ unpaid 2003 liability as well as their reasonable

basic living expenses; (2) the impact that a tax lien on peti-

tioners’ residence might have on Mr. Dailey’s ability to obtain a
 - 33 -

position as a stockbroker or a real estate agent20 or a similar

position and to earn an amount of income that, when added to the

amount of income from Ms. Dailey’s position, was sufficient to

pay those unpaid liabilities as well as those expenses; (3) the

impact that petitioners’ payment of the medical bills attribut-

able to the serious health problems of petitioners’ daughter and

petitioners’ older son might have on petitioners’ financial

condition, even though those children may not qualify as peti-

tioners’ dependents for tax purposes; and (4) the impact that the

serious health problems of petitioners’ daughter and petitioners’

older son might have on petitioners’ ability to earn sufficient

income to pay petitioners’ unpaid 2002 liability and petitioners’

unpaid 2003 liability as well as their reasonable basic living

expenses.21

On the record before us, we are unable to decide whether we

should sustain the determinations in the notice of determination

with respect to petitioners’ taxable years 2002 and 2003.

20
In petitioners’ brief, petitioners contend that Mr. Dailey
was working as a real estate agent. In respondent’s brief,
respondent acknowledges that Mr. Dailey began working as a “real
estate broker” after he resigned from his position as a stockbro-
ker.
21
If in determining in the notice of determination that
petitioners were not a good candidate for an effective tax
administration offer-in-compromise the Appeals Office had consid-
ered other factors or circumstances, such as those that we
describe above, the record does not establish the other factors
or circumstances that it considered and its evaluation of them.
 - 34 -

Accordingly, we shall remand this case to respondent’s Appeals

Office for clarification and for further consideration.

To reflect the foregoing,

An appropriate order will be

issued.