T.C. Memo. 2012-238
UNITED STATES TAX COURT
WAYNE CLARKE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11538-11L. Filed August 16, 2012.
Beverly L. Winstead, for petitioner.
Michael A. Raiken, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: The petition in this case was filed in response to a notice of
determination concerning collection action sustaining a final notice of intent to levy
with respect to income tax, additions to tax, and interest for 2008 and 2009. The
issues for decision are:
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[*2] (1) whether the settlement officer (SO) assigned to this case abused his
discretion by not adequately considering petitioner’s installment agreement request.
We hold the SO did not abuse his discretion; and
(2) whether the SO abused his discretion in using national standards to
determine petitioner’s reasonable collection potential rather than using petitioner’s
actual expenses. We hold the SO did not abuse his discretion.
FINDINGS OF FACT
At the time the petition was filed, petitioner resided in Maryland.
During 2007, 2008, and 2009 petitioner was self-employed as a consultant
and operated his consulting activities through a limited liability company called
Clarke & Associates, LLC. Clarke & Associates was wholly owned by petitioner
and was treated as a disregarded entity during those years.
On October 20, 2008, petitioner filed his 2007 Federal income tax return
reporting $498,5761 of taxable income and self-assessed tax of $176,586.
Respondent assessed the tax reported on the return on November 24, 2008.
Petitioner made a payment of $5,000 with the 2007 tax return but made no
estimated tax payments or other advance payment of his income tax liability.
1
All dollar amounts are rounded to the nearest dollar.
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[*3] Since filing the 2007 tax return, petitioner has made $42,444 in additional
payments toward the 2007 tax liability.
On October 22, 2009, petitioner filed his 2008 tax return reporting $234,168
of taxable income and self-assessed tax of $81,428. Respondent assessed the tax
reported on the return on November 16, 2009. Petitioner made no estimated tax
payments or other advance payments of his 2008 tax liability, made no payments
with his return, and has made no payments toward the liability since the return was
filed.
On April 15, 2010, petitioner filed his 2009 return reporting $165,795 of
taxable income and self-assessed tax of $49,505. Respondent assessed the tax
reported on the return on May 13, 2010. Petitioner made no estimated tax payments
or other advance payments of his 2009 tax liability, made no payments with his
return, and has made no payments toward the liability since the return was filed.
In addition to liability for the previously described unpaid tax (as well certain
additions to tax2 and interest), petitioner also had a $49 unpaid liability remaining
from his 2005 tax as of January 4, 2011.
2
Additions to tax assessed were the estimated tax addition and the failure to
pay tax addition for both 2008 and 2009. It is not clear which additions to tax, if
any, were assessed for 2007.
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[*4] On September 18, 2009, petitioner purchased a home for $950,000. In order
to help pay for the home, petitioner obtained a mortgage for $741,757. To make the
downpayment, petitioner withdrew approximately $183,000 from his brokerage
account. The home has at least 4,000 square feet of interior finished living space, is
on a lot of approximately two acres in a gated “golf course community”, and has
four bedrooms and five bathrooms. Petitioner lived there with his son and no one
else. Before purchasing the home, petitioner stayed in a rental.3
Petitioner’s work as a consultant involved convincing residential and
commercial real estate developers and executives to develop land in Prince Georges
County, Maryland, the county in which he lived. Petitioner set up an office in one
of the rooms in his home where he would meet potential and existing business
clients. Before buying the home petitioner did not have his own office and would
often meet clients in restaurants or hotel lobbies.
The parties stipulated that “On November 13, 2009, petitioner requested an
installment agreement for the payment of his tax liabilities for 2005, 2007, 2008,
and 2009.” This stipulation appears to be incorrect in part, given that petitioner
3
Petitioner simply testified that he “was renting”. He did not describe the
place he was renting.
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[*5] did not file his 2009 tax return until April 15, 2010. However, the 2008 Form
4340, Certificate of Assessments, Payments, and Other Specified Matters, submitted
into evidence does show a “PENDING INSTALLMENT AGREEMENT” on
November 13, 2009, as well as on November 17, 2009. The 2008 Form 4340
reflects no payments made as a result of an installment agreement, and an entry for
April 21, 2010, states: “REVERSES PENDING INSTALLMENT
AGREEMENT”. The parties did not expand upon the facts regarding this requested
installment agreement.
On August 18, 2010, petitioner submitted a Form 433-A, Collection
Information Statement for Wage Earners and Self-Employed Individuals. This Form
433-A stated that petitioner’s total monthly income was $14,773 and his total
monthly living expenses were $14,026. The monthly living expenses included
$6,105 for housing and utilities.
On November 5, 2010, respondent mailed to petitioner a Final Notice,
Notice of Intent to Levy and Notice of Your Right to a Hearing (notice of intent to
levy), for petitioner’s 2008 and 2009 taxable years. On November 10, 2010,
petitioner timely submitted a request for a collection due process (CDP) or
equivalent hearing. In his CDP hearing request petitioner asked for an installment
agreement (but not an offer-in-compromise (OIC)) and stated that his reasonable
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[*6] expenses exceeded his income. Petitioner did not dispute the underlying
liabilities in his CDP hearing request.
There is no evidence, and petitioner has not claimed, that he followed through
on his request for an installment agreement. Instead, on January 11, 2011, petitioner
submitted a $50,000 OIC on Form 656, Offer in Compromise, for his 2005, 2007,
2008, and 2009 tax liabilities. On the Form 656 petitioner stated that the reason for
the OIC was doubt as to collectibility, that he would borrow money from friends
and family to pay the offered amount, and that he would pay the $50,000 in monthly
installments of $600 over the course of 84 months.4 When petitioner submitted the
OIC his remaining tax liabilities were over $350,000 for years 2005, 2007, 2008,
and 2009 combined.
On January 31, 2011, respondent received a second Form 433-A from
petitioner. This Form 433-A stated that petitioner had a total monthly income of
$13,744 and total monthly living expenses of $21,428. However, petitioner’s
math regarding the living expenses appears to be incorrect, as the sum of the
individual expenses is only $17,703. As with the first Form 433-A, one of the
4
It appears petitioner believed this “deferred periodic payment” OIC was the
same as an installment agreement. This would explain why petitioner asked for an
installment agreement (and not an OIC) in his CDP hearing request, only to then
submit an OIC (but not a proposed installment agreement).
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[*7] expenses listed is $6,105 for housing and utilities. The Form 433-A also listed
a monthly expense of $3,725 resulting from an installment agreement with the State
of Maryland regarding State tax petitioner owed for 2007. While that installment
agreement had recently ended when the Form 433-A was submitted, petitioner was
in the process of negotiating another installment agreement with the State of
Maryland regarding $36,000 in unpaid 2008 and 2009 State taxes. Finally, the
Form 433-A states that petitioner had equity of $60,000 in his home, $10,000 in one
of his two automobiles, and $2,500 in his furniture. Petitioner had no significant
liquid assets when the Form 433-A was submitted.
The SO assigned to petitioner’s case reviewed the proposed OIC but found
that petitioner’s reasonable collection potential was $369,000. As a result, on
February 28, 2011, the SO mailed petitioner a letter informing him that the OIC
would not be accepted. The letter also scheduled a CDP hearing for March 31,
2011.
In determining petitioner’s reasonable collection potential, the SO
determined that petitioner’s allowable monthly expenses were only $8,743.
However, just as petitioner had, the SO incorrectly added the various expenses;
and respondent now admits the allowable monthly expenses should have totaled
$8,953. The two most significant adjustments were to amounts petitioner had
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[*8] listed for the State tax installment agreement and for housing and utilities
expenses. The SO did not allow any amounts for the State tax installment
agreement, apparently because petitioner did have an installment agreement at the
time the second Form 433-A was submitted. The SO also found petitioner’s
allowable housing and utilities expenses were only $1,646 by using respondent’s
local housing and utilities standard for petitioner’s area.
On March 31, 2011, the SO and petitioner’s representative held a telephone
conference wherein they discussed petitioner’s reasonable collection potential and
the SO’s rejection of the OIC. The SO stated that an installment agreement under
which petitioner would make monthly payments of $3,500 to $4,000 might be
acceptable even though the requested OIC was not. However, the representative
stated that she did not want to enter into an installment agreement on behalf of
petitioner at that time. The representative agreed that the underlying liabilities were
not in dispute and that petitioner’s rights had not been violated.
On April 12, 2011, the SO issued a notice of determination sustaining the
notice of intent to levy. Petitioner timely filed a petition contesting respondent’s
determination.
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[*9] OPINION
I. CDP Hearings in General and Standard of Review
Before proceeding with a levy, the Commissioner must issue a final notice of
intent to levy and notify the taxpayer of the right to a hearing. Sec. 6330(a), (b)(1).5
During the hearing a taxpayer may raise any relevant issue, including challenges to
the appropriateness of the collection action and possible collection alternatives.
Sec. 6330(c)(2)(A). Following the hearing, the Appeals Office must make a
determination whether the lien filing was appropriate and is required to consider:
(1) whether the Secretary has met the requirements of applicable law and
administrative procedure; (2) the relevant issues raised by the taxpayer; and (3)
whether the proposed collection action appropriately balances the need for efficient
collection of taxes with the taxpayer’s concerns that the collection action be no
more intrusive than necessary. Sec. 6330(c)(3). The SO considered each of these
prongs in this case and found they should not prevent the collection action from
proceeding.
Petitioner agrees that the Secretary has met the requirements of applicable
law and administrative procedure and is not challenging the underlying liabilities.
5
Unless otherwise indicated, all section references are to the Internal Revenue
Code in effect at all relevant times.
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[*10] However, petitioner claims that the SO otherwise erred in rejecting
petitioner’s proposed collection alternatives. Where a taxpayer’s underlying tax
liability is not in dispute, the Court reviews the Commissioner’s determination for
abuse of discretion. See Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v.
Commissioner, 114 T.C. 176, 182 (2000). To establish an abuse of discretion, the
taxpayer must prove that the decision of the Commissioner was arbitrary,
capricious, or without sound basis in fact or in law. Giamelli v. Commissioner, 129
T.C. 107, 111 (2007) (citing Sego v. Commissioner, 114 T.C. at 610, and Woodral
v. Commissioner, 112 T.C. 19, 23 (1999)); Tinnerman v. Commissioner, T.C.
Memo. 2010-150, aff’d, 448 Fed. Appx. 73 (D.C. Cir. 2012). In reviewing for
abuse of discretion, we generally consider only the arguments, issues, and other
matters that were raised at the hearing or otherwise brought to the attention of the
Appeals Office. Giamelli v. Commissioner, 129 T.C. at 115; Tinnerman v.
Commissioner, T.C. Memo. 2010-150.
II. Whether the SO Abused His Discretion by Not Adequately Considering
Petitioner’s Installment Agreement Request
In his pretrial memo, petitioner states that he “initially proposed a collection
alternative of an installment agreement” but that “Respondent did not consider his
installment agreement request”. Petitioner claims that respondent’s failure to do
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[*11] so amounted to an abuse of discretion. Petitioner did not raise this argument
in his posttrial brief, but we will briefly address it.
Although the parties stipulated that petitioner requested an installment
agreement for the payment of his tax liabilities on November 13, 2009, no payments
were made as the result of any installment agreement. The 2008 Form 4340 states
that the pending installment agreement was reversed on April 21, 2010, and no other
evidence regarding this proposed installment agreement was presented. We find
petitioner failed to prove abuse of discretion regarding such an installment
agreement.
On his November 10, 2010, CDP request, petitioner asked for an installment
agreement (but not an OIC) and stated that his reasonable expenses exceeded his
income. However, there is no evidence that petitioner actually submitted a
proposed installment agreement after this date. Rather, it appears petitioner meant
to request an OIC, but confused an installment agreement with the $600 per month
deferred periodic payment OIC he later proposed on Form 656. At the CDP
hearing the SO stated that an installment agreement under which petitioner would
make monthly payments of $3,500 to $4,000 might be acceptable; however,
petitioner’s representative stated she did not wish to enter into an installment
agreement on behalf of petitioner at that time. No other evidence regarding any
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[*12] other proposed installment agreement was produced. Given these facts, we
find petitioner failed to prove abuse of discretion regarding this potential installment
agreement.
III. Whether the SO Abused His Discretion in Using National and Local
Standards To Determine Petitioner’s Collection Potential Rather Than Using
Petitioner’s Actual Expenses
Section 7122(a) authorizes the Secretary to compromise any civil case arising
under the internal revenue laws. Generally speaking, there are “prescribe[d]
guidelines for officers and employees of the Internal Revenue Service to determine
whether an offer-in-compromise is adequate and should be accepted to resolve a
dispute.” Sec. 7122(d)(1). In prescribing guidelines there are “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(d)(2)(A). In every case Internal Revenue Service officers and employees must
determine “whether the use of the schedules * * * is appropriate and shall not use
the schedules to the extent such use would result in the taxpayer not having
adequate means to provide for basic living expenses.” Sec. 7122(d)(2)(B).
The Commissioner will generally compromise a liability on the basis of
doubt as to collectibility only if the liability exceeds the taxpayer’s reasonable
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[*13] collection potential. Murphy v. Commissioner, 125 T.C. 301, 308-310
(2005), aff’d, 469 F.3d 27 (1st Cir. 2006). As we have previously stated--
A taxpayer’s reasonable collection potential is determined, in part,
using published guidelines for certain national and local allowances for
basic living expenses, and essentially treating income and assets in
excess of those needed for basic living expenses as available to satisfy
Federal income tax liabilities. The foregoing formulaic approach is
disregarded, however, upon 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. For purposes of the formulaic
approach, allowable basic living expenses include reasonable “expenses that are
necessary to provide for a taxpayer’s and his or her family’s health and welfare
and/or production of income.” Internal Revenue Manual, pt. 5.15.1.7(1) (Oct. 2,
2009).
Petitioner claims that he “purchased his primary residence to help promote
confidence among businesses that Prince George’s County is still a booming
community” and that he used his home “office to meet prospective clients and the
location of his office allowed him to produce income”. Petitioner further claims
that without the home office “he would be forced to rent outside space which
would not be a viable option considering the unpredictable nature of his income”.
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[*14] Petitioner thus argues that he has a special circumstance which should excuse
him from the local standard housing and utilities allowance and, alternatively, that
he should be allowed his claimed housing and utilities expenses because his home
“is necessary for the production of his income”.6 We disagree.
As stated supra p. 10, in reviewing for abuse of discretion, we generally
consider only the arguments, issues, and other matters that were raised at the
hearing or otherwise brought to the attention of the Appeals Office. Giamelli v.
Commissioner, 129 T.C. at 115; Tinnerman v. Commissioner, T.C. Memo.
2010-150. While respondent was generally aware of petitioner’s business,7 there
was no evidence presented that petitioner made the Appeals Office aware of the
fact that one of the rooms in his home was used as an office for Clarke &
Associates. Indeed, each Form 433-A petitioner submitted listed an address for
Clarke & Associates that was different from his personal address listed. There
was no evidence presented that petitioner informed respondent’s Appeals Office
or the SO that his housing expenses may have helped him (through Clarke &
6
Petitioner has not argued that the SO abused his discretion in making other
adjustments to petitioner’s stated monthly expenses.
7
An Integrated Collection System history transcript for petitioner showing
respondent’s revenue officer’s collection actions against petitioner stated: “Tp is a
zoning consultant, helps deal with governments when a store wants to open a store.”
The transcript also stated that “tp’s business is Clark and Associates LLC”.
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[*15] Associates) to produce income. Because petitioner failed to prove this
information was provided to the SO, we find that he failed to prove the SO abused
his discretion in using the local standard housing and utilities allowances instead of
petitioner’s stated housing and utilities expenses.
Even if petitioner had informed the SO of the facts regarding his business
and home office, we would still rule that the SO did not abuse his discretion, as we
find that petitioner’s home was not a necessary expense for production of his
income and that no special circumstance exists which would allow him to deduct
his stated housing and utilities expenses. Apart from vague testimony, petitioner
offered no evidence that owning the home helped Clarke & Associates generate
business. We also compare the size of the house as a whole (4,000 square feet on
two acres of land with four bedrooms and five bathrooms) with the size of the
areas used for business. Petitioner testified he used one room as an office8 but that
he also “spread things out in the--off the kitchen. Sometimes we bring folks in,
and they sit in the living room and downstairs”. Considering the cost of the house
(nearly four times the local standard housing and utilities allowance) and the
vague and unproven benefits to his business, we find that petitioner was not
8
Petitioner estimated the size of the room at 256 square feet but admitted he
was not great at estimating square footage.
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[*16] entitled to his claimed housing and utilities expenses of $6,105 a month and
that the SO did not abuse his discretion in not allowing him this claimed monthly
expense.
IV. Conclusion
We hold that the SO did not abuse his discretion in rejecting petitioner’s
proposed OIC and sustaining the proposed collection action regarding petitioner’s
2008 and 2009 tax liabilities.9 We therefore sustain the determination of the SO.
To reflect the foregoing,
Decision will be entered
for respondent.
9
Although petitioner’s proposed OIC was for tax liabilities for 2005, 2007,
2008, and 2009, the notice of intent to levy related only to the 2008 and 2009 tax
liabilities. This opinion does not apply to collection of the 2005 and 2007 liabilities.