T.C. Summary Opinion 2009-158
UNITED STATES TAX COURT
JOHN DELGADO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16334-08S. Filed October 14, 2009.
Samuel L. Milledge, for petitioner.
David E. Whitcomb, for respondent.
LARO, Judge: This case was heard pursuant to the provisions
of section 7463 of the Internal Revenue Code in effect when the
petition was filed.1 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.
1
Section references are to the applicable versions of the
Internal Revenue Code.
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Petitioner petitioned the Court under section 6330(d) to
review the determination of the Internal Revenue Service Office
of Appeals (Appeals) sustaining a proposed levy related to
petitioner’s assessed Federal income tax liability for 2004.
Petitioner asserts that Appeals improperly rejected his original
and amended offers-in-compromise. The original offers stated
that petitioner would pay $265 to compromise his Federal tax
liabilities for 1998 through 2004. Petitioner later submitted
the amended offers to compromise tax liabilities for the above
years and for 2006 as well. The liabilities underlying the
amended offers aggregated $107,426.90 as of June 2, 2008.
We decide whether Appeals abused its discretion in rejecting
petitioner’s offers. We hold it did not.
Background
I. Preliminaries
The parties filed with the Court a stipulation of facts and
accompanying exhibits. The stipulated facts are found
accordingly. Petitioner resided in Texas when his petition was
filed.
II. Petitioner’s 2004 Federal Income Tax Return
On or about May 16, 2005, petitioner filed his 2004 Federal
income tax return. On July 14 and September 8, 2006, petitioner
submitted offers-in-compromise for 1998 through 2000 and for 2001
through 2004. On November 13, 2006, respondent returned the
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offers to petitioner on procedural grounds. Petitioner filed an
amended return for 2004 on or about November 20, 2006. On the
basis of this return, respondent assessed against petitioner an
additional liability of $9,756 with respect to petitioner’s 2004
Federal income tax. Immediately afterwards, petitioner’s unpaid
tax and interest for 2004 totaled approximately $9,500.
III. Hearing
On December 1, 2006, respondent sent to petitioner a Letter
1058, Final Notice of Intent to Levy and Notice of Your Right to
Hearing, with respect to his 2004 income tax liability. Five
days later, petitioner requested a hearing as to that letter. An
Appeals settlement officer, David C. Green (Green), scheduled the
hearing for February 14, 2007, as a telephone conference.
Petitioner later failed to be available for that conference.
IV. Offer-in-Compromise
A. Submission of Offers-in-Compromise
On or about March 22, 2007, petitioner filed a Form 433-A,
Collection Information Statement for Wage Earners and Self-
Employed Individuals (collection information statement), and two
Forms 656, Offer in Compromise, with respect to his 1998 through
2000 liabilities and his 2001 through 2004 liabilities. The Form
433-A reported that petitioner had no disposable income and
listed his total income as $4,464, his total expenses as $4,895,
and his net equity in assets as zero. The combined offers
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proposed one $115 payment and three $50 payments for total
payments of $265.
B. Information Requested To Process the Offers
On July 2 and December 17, 2007, Green sent petitioner a
request for additional information with respect to processing the
offers. The requested information included proof of payment of a
loan and of all expenses from April 1 to June 30, 2007, and an
explanation of why he reported that one of his requested assets,
unimproved land, had a fair market value (FMV) of $5,000 (without
consideration of any encumbrance on the land).2
C. Rejection of the Offers
On January 28, 2008, Green sent petitioner a letter
scheduling a face-to-face hearing for February 14, 2008.
Petitioner attended that hearing, and he and Green discussed
certain issues, including petitioner’s request for an offer-in-
compromise as a collection alternative. On March 13, 2008,
petitioner sent Green a letter with the additional information
that he requested. On April 10, 2008, Green sent a letter to
petitioner explaining that Appeals was rejecting the offers and
stating the reasons for the rejection.
2
Petitioner reported that the current value (defined on Form
433-A as “the amount you could sell the asset for today”) of the
unimproved land was $5,000. Petitioner asserted this amount by
discounting his valuation of the unimproved land, $6,250, by 20
percent.
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On April 14, 2008, petitioner submitted amended offers-in-
compromise as to the same years as before, plus 2006. On May 2,
2008, Green sent a letter to petitioner explaining that Appeals
was likewise rejecting those amended offers and stating the
reasons for the rejection.
On May 29, 2008, Appeals sent to petitioner a Notice of
Determination Concerning Collection Action(s) Under Section 6320
and/or 6330 (notice) with respect to his 2004 income tax
liability. The notice stated that Appeals was sustaining
respondent’s proposed levy for 2004.
Discussion
I. Abuse of Discretion
A. Standard
We decide whether Appeals abused its discretion in rejecting
petitioner’s offers-in-compromise and sustaining respondent’s
proposed levy for 2004. Where an underlying tax liability is not
at issue in a collection due process case, we review the Appeals
determination under an abuse of discretion standard. Sego v.
Commissioner, 114 T.C. 604, 610 (2000).
B. Burden of Proof
Taxpayers such as petitioner generally bear the burden of
proving that Appeals abused its discretion. Phillips v.
Commissioner, 114 T.C. 115 (2000), affd. 272 F.3d 1172 (9th Cir.
2001). We will reject the determination of Appeals under such a
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standard only if the determination is arbitrary, capricious, or
without sound basis in fact or in law. Murphy v. Commissioner,
125 T.C. 301, 308, 320 (2005), affd. 469 F.3d 27 (1st Cir. 2006).
II. Offer-in-Compromise
Section 6330(c)(2)(A)(iii) allows a taxpayer to offer to
compromise Federal tax liabilities as a collection alternative to
a proposed levy. Section 7122(c) and (d) authorizes the
Commissioner to prescribe guidelines to determine when a
taxpayer’s offer-in-compromise should be accepted. In
determining whether to accept an offer-in-compromise, Appeals
generally must compare the taxpayer’s offer with a defined
reasonable collection potential. Appeals may accept the offer
when it is unlikely that the tax liability can be collected in
full and the amount offered reflects the reasonable collection
potential.
III. Reasonable Collection Potential
A. Petitioner’s Objection to the Evaluation of His Offers
In the petition, petitioner mainly objected to Appeals’
calculation of future income and its valuation of properties, the
two primary components of reasonable collection potential. A
taxpayer’s future income for short-term periodic payment offers
(the type of offer in this case) equals the taxpayer’s expected
future income minus necessary living expenses multiplied by 48
months (net disposable income). 1 Administration, Internal
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Revenue Manual (IRM) (CCH), pt. 5.8.4.4.1, at 16,335 (Sept. 23,
2008).
B. Calculation of Necessary Living Expenses
The parties agree with Appeals’ calculation of petitioner’s
expected future income. They disagree, however, with the
calculation of his necessary living expenses. Petitioner asserts
that Appeals wrongly used petitioner’s income for 2005 and his
expenses for 2007. We disagree. The income used by Appeals was
provided to it by petitioner on the Form 433-A, and the expenses
reflect petitioner’s most recent necessary living expenses after
Appeals took into account as to each expense item the lesser of
the local standard or the amount actually paid. See 2
Administration, IRM (CCH) pt. 5.15.1.7(4), at 17,692 (May 9,
2008). In sum, Appeals adequately determined that petitioner’s
future income amounts to $18,192, a monthly net disposable income
of $379 ($4,464 in monthly gross income less $4,085 in monthly
expenses) over 48 months.
C. Valuation of Assets
Petitioner reported that his assets included the unimproved
land and a homestead which he valued at $6,250 and $104,000,
respectively. Appeals determined that these values were $55,000
and $111,500, respectively. Petitioner argues that Appeals
should have used 80 percent of the FMV of the unimproved land in
calculating the value of his equity in that land. The reasonable
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collection potential includes the taxpayer’s net realizable
equity in assets that is defined as “quick sale value (QSV) less
amounts owed to secured lien holders with priority over the
federal tax lien.” 1 Administration, IRM (CCH) pt. 5.8.5.4.1(1),
at 16,357 (Sept. 23, 2008).
Appeals calculated the aggregate QSV of the unimproved land
and the homestead by adding 90 percent of the FMV of the
unimproved land to 80 percent of the FMV of the homestead.
Appeals noted that the 90-percent value was appropriate as to the
unimproved land because it was investment property. 1
Administration, IRM (CCH) pt. 5.8.5.4.1(3), at 16,357 (Sept. 23,
2008) (stating that although generally QSV is calculated at 80
percent of the FMV, a higher or lower percentage may be
appropriate, depending on the type of asset and current market
conditions).3
Petitioner contests respondent’s reliance on IRM pt.
5.8.5.4.1 because, petitioner argues, the part became effective 4
months after the rejection of petitioner’s offers. The same
guideline, however, appeared in the predecessor provision which
was effective when Appeals valued the land. We also disagree
with petitioner’s claim that other land that sold for $27,500 is
3
Even if the 80-percent value was the appropriate gauge of
the unimproved land, the value of the assets would be more than
$27,000 in excess of petitioner’s $265 offers. Thus, this would
not materially change the determination that petitioner’s offers
were insufficient.
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the best indicator of the FMV of his unimproved land. That sale
was subsequent to the valuation date and was a foreclosure.
IV. Conclusion
Appeals complied with the applicable provisions in the
Internal Revenue Manual in evaluating the reasonable collection
potential and in properly rejecting petitioner’s offers of $265
to compromise $107,426.90 of his tax liabilities. Petitioner had
sufficient assets and expected future income that totaled
significantly more than he offered to compromise those
liabilities. Thus, we hold that Appeals did not abuse its
discretion in rejecting the $265 offers-in-compromise and in
sustaining respondent’s proposed levy for 2004.
In so holding, we are not in position to determine the
amount of any compromise that petitioner could or should be
required to pay, or that respondent is required to accept. The
only issue before us is whether Appeals abused its discretion in
refusing petitioner’s $265 offers-in-compromise. See Hansen v.
Commissioner, T.C. Memo. 2007-56, affd. in part and vacated in
part on another issue sub nom. Keller v. Commissioner, 568 F.3d
710 (9th Cir. 2009).
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We have considered all of petitioner’s arguments for a
contrary holding and have found those arguments not discussed
herein to be without merit. Accordingly,
Decision will be entered
for respondent.