T.C. Memo. 2008-259
UNITED STATES TAX COURT
LEROY WRIGHT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1429-06L. Filed November 18, 2008.
Frederick J. O’Laughlin, for petitioner.
G. Chad Barton, for respondent.
MEMORANDUM OPINION
MARVEL, Judge: Pursuant to section 6330(d),1 petitioner
seeks review of respondent’s determination to proceed with the
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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collection of petitioner’s 1993, 1994, 1995, 1996, 1999, and 2000
Federal income tax liabilities.
Background
The parties submitted this case fully stipulated under Rule
122. We incorporate the stipulated facts into our findings by
this reference. Petitioner resided in Oklahoma when he filed his
petition.
Petitioner failed to file timely Federal income tax returns
for 1993, 1994, and 1995. After respondent prepared substitutes
for returns under section 6020(b) for the above years, petitioner
filed Federal income tax returns for those years but failed to
pay all of the tax reported on the returns. Respondent assessed
the income tax reported on the returns as well as additions to
tax and interest.
Petitioner filed Federal income tax returns for 1996, 1999,
and 2000 but failed to pay all of the tax reported on the
returns. Respondent assessed the income tax reported on the
returns as well as additions to tax and interest.
On June 22, 2005, respondent issued petitioner a Final
Notice of Intent to Levy and Notice of Your Right to a Hearing
for 1993, 1994, 1995, 1996, 1999, and 2000. Petitioner timely
submitted a Form 12153, Request for a Collection Due Process
Hearing. In a note attached to his Form 12153, petitioner stated
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that he disagreed with the proposed levy because it would cause
him great hardship and he could not pay.
On September 13, 2005, Settlement Officer Debra Alcorte (Ms.
Alcorte) mailed petitioner a letter scheduling a telephone
hearing for October 13, 2005. Ms. Alcorte requested that
petitioner provide the following items: (1) A completed Form
433-A, Collection Information Statement for Wage Earners and
Self-Employed Individuals, or Form 433-B, Collection Information
Statement for Businesses; (2) copies of bank statements for the
past 3 months; (3) copies of wage statements for the last three
pay periods; (4) copies of a mortgage statement or rental
agreement; and (5) copies of life and health insurance policies,
if applicable. On October 20, 2005, petitioner submitted Form
433-A on which he indicated that he was a single, self-employed
individual operating “Wright Way Const” and that he had income
and living expenses as follows:
Income Living expenses
Gross Actual
Source monthly Expense items monthly
Net income Food, clothing, misc. $300
from business $1,405 Housing and utilities 600
Total 1,405 Transportation 200
Health care 500
Taxes (income and FICA) 155
Court ordered payments 200
Total 1,955
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Petitioner attached to the Form 433-A copies of 10 checks
drawn on the account of TLJ Wrightway, L.L.C.,2 payable to
petitioner:
Date Amount
1
7/1/05 $1,500
7/15/05 1,080
7/29/05 1,387
8/5/05 1,958
8/12/05 850
8/19/05 1,033
8/23/05 500
8/26/05 500
9/2/05 958
9/9/05 400
Total 10,166
1
Amounts are rounded to the nearest dollar.
Petitioner also provided copies of statements of accounts held at
Tinker Federal Credit Union (TFCU) for July and September 20053
showing deposits totaling $800 and $2,326.52,4 respectively, and
statements for a checking account held at Republic Bank & Trust
for August and September 2005 showing no activity. Petitioner
indicated on Form 433-A that he owned two automobiles valued at
2
The record indicates that TLJ Wrightway, L.L.C., is the
business petitioner operates and to which he referred as “Wright
Way Const” on Form 433-A.
3
The TFCU statements show that the owner of the account is
Carla J. Gathright. Petitioner provided a voided check drawn on
the same account and bearing his name, and he listed the account
as his account on Form 433-A.
4
The September 2005 amount includes two deposits of $150
made by transfer from Carla Gathright.
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$1,0005 and $500, real estate valued at $40,000 subject to a loan
balance of $27,000, furniture/personal effects valued at $750,
horses valued at $1,250, and tools used in business valued at
$1,500 subject to a loan balance of $1,000.
On October 20, 2005, Ms. Alcorte held a telephone hearing
during which petitioner’s representative, Frederick J. O’Laughlin
(Mr. O’Laughlin), indicated that petitioner was seeking an offer-
in-compromise of $2,000.6 Ms. Alcorte advised Mr. O’Laughlin
that she had not seen the Form 433-A before the hearing and would
need to conduct research to evaluate the offer. After reviewing
petitioner’s Form 433-A, Ms. Alcorte made four adjustments to the
income and expenses reported on the form. She increased
petitioner’s net monthly income from business to $3,700. Ms.
Alcorte calculated the net monthly income from business by
totaling the amounts on copies of 10 checks attached to the Form
433-A and dividing the total by 2.75.7 She also increased
5
Petitioner indicated on the Form 433-A that the automobile
valued at $1,000 was subject to a loan, but he did not indicate
the loan balance.
6
At Mr. O’Laughlin’s request, the telephone hearing
originally scheduled for Oct. 13, 2005, was rescheduled for
Oct. 20, 2005.
7
In a June 28, 2006, letter Ms. Alcorte explained that she
recalculated petitioner’s income as $3,700 on the basis of bank
statements. However, handwritten notes next to the copies of the
checks suggest she relied on the checks rather than the bank
statements. It also appears Ms. Alcorte used 2.75 because the
checks are dated between July 1 and Sept. 9, 2005, and this time
(continued...)
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petitioner’s monthly housing and utilities expenses to $649, the
maximum allowed under the national standards, and she increased
petitioner’s transportation expense to $300 in accordance with
the applicable standards. Finally, Ms. Alcorte decreased
petitioner’s health care expense to $200.8 Ms. Alcorte
subtracted the adjusted monthly living expenses from the adjusted
monthly gross income and determined that petitioner had excess
monthly income of $1,596.9 On October 28, 2005, Ms. Alcorte also
conducted an online search to determine petitioner’s assets and
found 13 addresses listed for petitioner and several vehicles
registered in the State of Mississippi under the name “Lee Henry
Wright”.
7
(...continued)
period is not a full 3 months.
8
In the letter dated June 28, 2006, Ms. Alcorte explained
that she decreased petitioner’s health care expense to $200 to
allow the average. The record does not show how Ms. Alcorte
calculated the average.
9
The following table shows Ms. Alcorte’s calculations:
Income Living expenses
Gross Actual
Source monthly Expense items monthly
Net income Food, clothing, misc. $649
from business $3,700 Housing and utilities 600
Total 3,700 Transportation 300
Health care 200
Taxes (income and FICA) 155
Court ordered payments 200
Total 2,104
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On December 14, 2005, respondent sent petitioner a Notice of
Determination Concerning Collection Action(s) Under Section 6320
and/or 6330 for 1993, 1994, 1995, 1996, 1999, and 2000 sustaining
the proposed levy. On January 19, 2006, petitioner petitioned
this Court challenging respondent’s determination.
On May 16, 2006, the parties filed a joint motion to remand.
We granted the joint motion and remanded this case to
respondent’s Appeals Office.
On June 8, 2006, Ms. Alcorte sent Mr. O’Laughlin a letter
scheduling a telephone hearing for June 28, 2006. Ms. Alcorte
asked petitioner for information regarding his horses and proof
that petitioner did not own certain real and personal property.
In response Mr. O’Laughlin explained that the only real estate
petitioner owned was the property reported on the Form 433-A.
Mr. O’Laughlin also stated that the total value of the horses was
$1,250, and in March 2006 petitioner had sold a mule “for $70
with a value of $50.” Mr. O’Laughlin also provided an affidavit
in which petitioner swore that he at no time owned any of the
vehicles registered in Mississippi to “Lee Henry Wright”.
On June 28, 2006, Ms. Alcorte held a telephone hearing with
Mr. O’Laughlin (the second hearing). During the second hearing
Mr. O’Laughlin asked Ms. Alcorte to consider an offer-in-
compromise of $2,000. Ms. Alcorte informed Mr. O’Laughlin that
the offer was not feasible because on the basis of her analysis
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of petitioner’s assets and future income the minimum offer was
$82,908. Ms. Alcorte suggested that petitioner enter into a
partial payment installment agreement.
On or about June 28, 2006,10 Mr. O’Laughlin faxed Ms.
Alcorte Form 656, Offer in Compromise, in which petitioner sought
to compromise his tax liability for $2,000 based on doubt as to
collectibility.11 On the Form 656, petitioner asserted that he
could not afford to pay the full amount of his tax liabilities.
On June 28, 2006, Ms. Alcorte faxed Mr. O’Laughlin a letter
explaining that petitioner’s offer-in-compromise was unacceptable
as the minimum offer amount was $82,908 and suggesting a partial
payment installment agreement of $1,596 per month. Ms. Alcorte
also explained that she determined petitioner’s excess monthly
income of $1,596 on the basis of her adjustments to petitioner’s
Form 433-A, that petitioner’s income potential for the following
48 months was $76,608,12 and that petitioner’s net realizable
equity in assets was $6,300. Ms. Alcorte determined petitioner’s
net realizable equity in his assets by adding the amounts
attributable to real estate ($5,000) and animals ($1,300) he
10
Although the parties stipulated that petitioner’s counsel
sent the offer-in-compromise by fax on June 28, 2006, the fax
appears to have been sent on June 27, 2006.
11
Petitioner submitted the June 2006 offer-in-compromise
with respect to 1993, 1994, 1995, 1996, 1999, and 2000.
12
Ms. Alcorte arrived at petitioner’s future income by
multiplying petitioner’s excess monthly income by 48.
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owned. Ms. Alcorte determined petitioner’s equity in his real
estate by taking 80 percent of the value of the real estate
listed on his Form 433-A and subtracting the loan balance
reported on the Form 433-A. She determined the equity in the
animals by adding the value of two horses ($750 and $500) and the
value of a mule ($50).13
On July 5 and 6, 2006, Ms. Alcorte held telephone
conferences with Mr. O’Laughlin during which they discussed the
offer-in-compromise and the partial payment installment
agreement. Mr. O’Laughlin informed her that petitioner did not
wish to enter into a partial payment installment agreement
because petitioner “would get a better deal by filing for
bankruptcy.”
On July 17, 2006, respondent issued petitioner a
Supplemental Notice of Determination Concerning Collection
Action(s) Under Section 6320 and/or 6330 (supplemental notice).
In the supplemental notice, the Appeals Office determined that
respondent met all administrative and procedural requirements,
that the offer-in-compromise was too low, that no viable
alternatives to the levy were established, and that the levy was
not considered an overly intrusive action.
13
In calculating net realizable equity in assets Ms. Alcorte
added the value of the mule although petitioner had sold the mule
in March 2006.
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The parties have stipulated Ms. Alcorte’s sworn declaration
dated August 21, 2006, with attachments (declaration). In the
declaration Ms. Alcorte stated that she made her determination to
proceed with the levy after reviewing (1) the correspondence
between respondent and petitioner or Mr. O’Laughlin, (2)
documents petitioner sent to Ms. Alcorte, (3) results of the
research she conducted on October 28, 2005, such as the State of
Mississippi Motor Vehicles Report, property assessment record,
and a printout of online search results, and (4) TXMODA14
transcripts of petitioner’s account for 1993, 1994, 1995, 1996,
1999, and 2000 (transcripts). From the transcripts, Ms. Alcorte
determined that respondent followed administrative procedures
before the issuance of the supplemental notice. Ms. Alcorte
attached to the declaration all documents she reviewed.
Discussion
Section 6330(a) provides that no levy may be made on any
property or right to property of any person unless the Secretary
has notified such person in writing of the right to a hearing
before the levy is made. If the person requests a hearing, a
hearing shall be held before an impartial officer or employee of
14
A TXMODA transcript contains current account information
from the Commissioner’s master file. TXMODA is a command that
the Commissioner’s employee enters into the Commissioner’s
integrated data retrieval system (IDRS) to obtain a transcript.
Crow v. Commissioner, T.C. Memo. 2002-149 n.6. In essence, IDRS
is the interface between the Commissioner’s employees and the
Commissioner’s various computer systems. Id.
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the Internal Revenue Service Office of Appeals. Sec. 6330(b)(1),
(3). At the hearing, a taxpayer may raise any relevant issue,
including appropriate spousal defenses, challenges to the
appropriateness of the collection action, and collection
alternatives. Sec. 6330(c)(2)(A). A taxpayer may contest the
existence or amount of the underlying tax liability at the
hearing if the taxpayer did not receive a notice of deficiency
for the tax liability or did not otherwise have an opportunity to
dispute the tax liability. Sec. 6330(c)(2)(B); see also Sego v.
Commissioner, 114 T.C. 604, 609 (2000).
Following a hearing, the Appeals Office must make a
determination whether the proposed levy action may proceed. The
Appeals Office is required to take into consideration: (1)
Verification presented by the Secretary that the requirements of
applicable law and administrative procedure have been met, (2)
relevant issues raised by the taxpayer, and (3) whether the
proposed levy action appropriately balances the need for
efficient collection of taxes with a taxpayer’s concerns
regarding the intrusiveness of the proposed levy action. Sec.
6330(c)(3).
Section 6330(d)(1) grants this Court jurisdiction to review
the determination made by the Appeals Office in connection with
the section 6330 hearing. Where the underlying tax liability is
not in dispute, the Court will review the determination of the
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Appeals Office for abuse of discretion. Lunsford v.
Commissioner, 117 T.C. 183, 185 (2001); Sego v. Commissioner,
supra at 610; Goza v. Commissioner, 114 T.C. 176, 182 (2000). An
abuse of discretion occurs if the Appeals Office exercises its
discretion “arbitrarily, capriciously, or without sound basis in
fact or law.” Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
Petitioner does not dispute the underlying tax liability for
any of the years in question.15 Accordingly, we shall review
respondent’s determination for abuse of discretion.
Petitioner argues that respondent erred in the determination
to sustain the levy because Ms. Alcorte incorrectly calculated
petitioner’s gross monthly income. Petitioner asks that we again
remand his case to respondent’s Appeals Office to redetermine
petitioner’s excess monthly income for an offer-in-compromise or
installment agreement.
Section 7122(a) authorizes the Secretary to compromise any
civil or criminal case arising under the internal revenue laws.
Section 7122(c) provides that the Secretary shall prescribe
guidelines for evaluation of whether an offer-in-compromise
should be accepted. Regulations under section 7122 set forth
three grounds for compromise of a taxpayer’s liability. One of
those grounds is doubt as to collectibility. A compromise based
15
Although the record does not indicate whether petitioner
received a notice of deficiency, he does not challenge the
underlying liability.
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on doubt as to collectibility may be accepted “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.
In a section 6330 proceeding, we do not normally conduct an
independent review of whether an offer-in-compromise is
acceptable. Rather, our review is generally limited to
determining whether the hearing officer’s or Appeals officer’s
rejection of the offer-in-compromise submitted by the taxpayer
was arbitrary, capricious, or without sound basis in fact or law.
Murphy v. Commissioner, 125 T.C. 301, 320 (2005), affd. 469 F.3d
27 (1st Cir. 2006). We have found no abuse of discretion where
the hearing officer followed the Commissioner’s guidelines in
rejecting the taxpayer’s collection alternative. See, e.g.,
McClanahan v. Commissioner, T.C. Memo. 2008-161; Lemann v.
Commissioner, T.C. Memo. 2006-37; Schulman v. Commissioner, T.C.
Memo. 2002-129.
The Internal Revenue Manual (IRM) contains procedures for
the submission and evaluation of offers-in-compromise under
section 7122. Under the IRM, absent special circumstances, an
offer-in-compromise based on doubt as to collectibility is
acceptable if it reflects the taxpayer’s reasonable collection
potential. 1 Administration, IRM (CCH), pt. 5.8.1.1.3(3), at
16,253-16,254 (Sept. 1, 2005). The IRM provides that a
taxpayer’s reasonable collection potential consists of, inter
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alia, the taxpayer’s net realizable equity in his assets and his
future income potential. Id. pt. 5.8.4.4.1, at 16,307 (Sept. 1,
2005). The IRM defines the net realizable equity in assets as
quick sale value, which is usually calculated at 80 percent of
the fair market value, less amounts owed to secured lien holders
with priority over the Federal tax lien. Id. pt. 5.8.5.3.1(1),
(3), at 16,337 (Sept. 1, 2005). The IRM defines the future
income potential with respect to a cash offer as expected future
income minus necessary living expenses multiplied by 48 months.16
16
The Financial Analysis Handbook of the IRM (the Handbook),
2 Administration, IRM (CCH), pt. 5.15 (May 1, 2004), as in effect
when petitioner submitted his Form 433-A and the offer-in-
compromise, provides that net income from self-employment
consisted of the amount the taxpayer earned after allowing for
ordinary and necessary business expenses. 2 Administration, IRM
(CCH), pt. 5.15.1.11(2)(c) (May 1, 2004). The Handbook and part
5.8.5 of the IRM contain instructions for analyzing a taxpayer’s
financial condition to determine reasonable collection potential.
1 Administration, IRM (CCH), pt. 5.8.5.1(1) at 16,333 (Sept. 1,
2005); 2 Administration, IRM (CCH), pt. 5.15.1.1(1) (May 1,
2004). Both part 5.8.5 of the IRM and the Handbook instruct the
reviewing officer to verify the taxpayer’s collection information
statement. 1 Administration, IRM (CCH), pt. 5.8.5.2(1) at 16,333
(Sept. 1, 2005); 2 Administration, IRM (CCH), pt. 5.15.1.3(3)
(May 1, 2004). Such verification includes “reviewing information
available from internal sources and requesting that the taxpayer
provide additional information or documents that are necessary to
determine reasonable collection potential”. 1 Administration,
IRM (CCH), pt. 5.8.5.2(1) at 16,333 (Sept. 1, 2005); 2
Administration, IRM (CCH), pt. 5.15.1.3(3) (May 1, 2004).
The Handbook provides that the reviewing officer should
verify as much of the collection information statement as
possible through internal sources, including, inter alia, (1)
RTVUE, which is a record of line items from Federal income tax
returns and accompanying schedules, Whittington v. Commissioner,
T.C. Memo. 1999-279 n.3, or the last filed return, (2) state
motor vehicles records, and (3) real estate records. 2
(continued...)
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Id. pt. 5.8.4.4.1, at 16,307 (Sept. 1, 2005); see also id. pt.
5.8.5.5, at 16,339-7 (Sept. 1, 2005).
Ms. Alcorte calculated petitioner’s net realizable equity in
assets as $6,300. The record indicates she determined this
amount by first calculating the quick sale value of the real
estate as $32,000 and then subtracting the loan balance of
$27,000. She based the calculations on the market value and loan
balance information petitioner provided on the Form 433-A. Ms.
Alcorte also added the value of petitioner’s animals of $1,300.
Ms. Alcorte also determined that petitioner’s gross monthly
income was $3,700 and net monthly income was $1,596. Ms. Alcorte
based her calculations of petitioner’s income on copies of the 10
checks drawn on the account of TLJ Wrightway, L.L.C., payable to
petitioner.
16
(...continued)
Administration, IRM (CCH), pt. 5.15.1.5(1), (4) (May 1, 2004).
The Handbook also provides that the reviewing officer should use
RTVUE or the taxpayer’s last filed return, including Schedule C,
Profit or Loss From Business, to compare the reported income to
income declared on the collection information statement. 2
Administration, IRM (CCH), pt. 5.15.1.5(4) (May 1, 2004). The
IRM provides that when internal sources are unavailable or
indicate a discrepancy, the officer should request the taxpayer
to provide reasonable information to support the collection
information financial statement. 2 Administration, IRM (CCH),
pt. 5.15.1.5(2) (May 1, 2004). With respect to external sources
for self-employed taxpayers, the IRM requires the reviewing
officer to request certain documents, such as proof of income for
the prior 3 months, and to compare average earnings to the Form
433-A income. 1 Administration, IRM (CCH), pt. 5.8.5.2.2.(6), at
16,335 (Sept. 1, 2005).
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Although we have some concern that Ms. Alcorte’s analysis of
petitioner’s future income was incomplete and her determination
of petitioner’s future income potential was flawed, we do not
need to reach this issue in deciding whether her determination to
sustain the proposed levy was an abuse of discretion. Petitioner
submitted an offer-in-compromise of $2,000. The offer-in-
compromise was $3,000 less than net realizable equity in real
estate and $4,250 less than net realizable equity in real estate
and horses he owned when he submitted the offer-in-compromise.
We conclude that the offer-in-compromise was less than net
realizable equity in petitioner’s assets, and this fact alone
justified Ms. Alcorte’s rejection of the offer-in-compromise.
Ms. Alcorte also discussed her concerns about petitioner’s
offer-in-compromise with petitioner’s counsel and gave petitioner
a chance to respond before she made her determination to proceed
with the proposed collection action. For example, the stipulated
record indicates that during the first hearing on October 20,
2005, Mr. O’Laughlin told Ms. Alcorte that on the Form 433-A
petitioner overstated the value of real estate due to necessary
repairs. However, petitioner never documented the need for
repairs, and he did not submit a revised Form 433-A. Petitioner
also did not dispute Ms. Alcorte’s calculation of petitioner’s
net realizable equity in his assets based on the information
petitioner had submitted. After Ms. Alcorte suggested a partial
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payment installment agreement during the second hearing,
petitioner did not propose a revised collection alternative.
Instead, Mr. O’Laughlin conveyed to Ms. Alcorte petitioner’s
decision not to enter into a partial payment installment
agreement as petitioner “would get a better deal by filing for
bankruptcy.” Petitioner’s failure to submit a revised offer-in-
compromise or any other reasonable collection alternative
supports respondent’s determination that the only viable
alternative is the proposed levy.
On the basis of the record presented, we conclude that Ms.
Alcorte did not abuse her discretion when she rejected
petitioner’s offer-in-compromise because the offer did not
satisfy the requirements for a proper offer-in-compromise based
on doubt as to collectibility. We have considered the remaining
arguments made by the parties and to the extent not discussed
above, conclude those arguments are irrelevant, moot, or without
merit. We conclude it is neither necessary nor productive to
remand the case to respondent. We sustain respondent’s
determination to proceed with collection of petitioner’s 1993,
1994, 1995, 1996, 1999, and 2000 Federal income tax liabilities.
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To reflect the foregoing,
Decision will be entered
for respondent.