Seminole Nursing Home, Inc. v. Comm'r

T.C. Memo. 2017-102

UNITED STATES TAX COURT

SEMINOLE NURSING HOME, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 24577-14L. Filed June 5, 2017.

David J. Looby, for petitioner.

Ann Louise Darnold, for respondent.

MEMORANDUM OPINION

PARIS, Judge: In this collection due process (CDP) case, petitioner seeks

review pursuant to section 6330(d)(1)1 of the determination by the Internal

1
Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986, as amended and in effect at all relevant times, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
 -2-

[*2] Revenue Service (IRS or respondent) to uphold a notice of intent to levy as

set forth in a Notice of Determination Concerning Collection Action(s) Under

Section 6320 and/or 6330 (notice of determination), dated September 17, 2014, for

petitioner’s taxable period ending December 31, 2013.

Petitioner and respondent have each filed a motion for summary judgment

under Rule 121. The issue for decision is whether IRS Settlement Officer Alcorte

(SO Alcorte) abused her discretion in rejecting petitioner’s proposed installment

agreement and sustaining the proposed collection action. For the reasons

explained infra, the Court will deny petitioner’s motion for summary judgment,

grant in part respondent’s motion for summary judgment, and remand the

remainder of this case to the IRS Appeals Office for the limited purpose of

reconsidering the balancing test under section 6330(c)(3)(C).

Background

The following facts are based on the parties’ pleadings and motion papers,

including the attached exhibits and affidavits.2 See Rule 121(b). Petitioner

2
Each party requests that certain of the other’s affidavits and exhibits be
stricken from the record because they were not part of the original administrative
record. Although there exists conflicting authority as to whether the Court’s
review in CDP cases is limited to the administrative record, neither the U.S. Court
of Appeals for the Tenth Circuit nor the U.S. Court of Appeals for the D.C. Circuit
has specifically ruled on the issue. The Court denies both requests.
 -3-

[*3] operates a nursing home facility in a rural community of fewer than 8,000

residents. Its principal place of business was in Oklahoma at the time the petition

was filed.

The case at issue relates to petitioner’s outstanding tax liability from Form

941, Employer’s Quarterly Federal Tax Return, for the period ending December

31, 2013. For that period, petitioner timely filed its Form 941 but failed to pay its

reported tax liability of $61,916.19 for that quarter. On April 14, 2014,

respondent assessed the tax reported and began collection efforts.

On April 24, 2014, respondent issued to petitioner a Letter 1058, Final

Notice--Notice of Intent to Levy and Notice of Your Right to a Hearing. In

response petitioner timely submitted a Form 12153, Request for a Collection Due

Process or Equivalent Hearing (CDP hearing request), seeking to enter into a

$6,000-per-month installment agreement for its unpaid employment tax liability.

The CDP hearing request stated that if respondent were permitted to levy,

petitioner’s difficulty with Medicare and Medicaid collections would render it

unable to pay either its employment tax balance or its current taxes. Petitioner’s

CDP hearing request, however, did not dispute the underlying employment tax

liability; petitioner checked the collection alternative boxes for “Installment

Agreement” and “I Cannot Pay Balance”.
 -4-

[*4] Respondent mailed petitioner a letter dated June 6, 2014, acknowledging

receipt of petitioner’s CDP hearing request, and SO Alcorte subsequently mailed

petitioner a letter scheduling a CDP hearing for August 26, 2014. SO Alcorte’s

letter advised petitioner that it did not qualify for consideration of an installment

agreement because it was not in compliance with its employment tax deposit

requirements for the taxable period ending June 30, 2014. The letter further

advised petitioner that to qualify for a collection alternative it had to provide to SO

Alcorte the following items no later than August 12, 2014: (1) a completed Form

433-B, Collection Information Statement for Businesses, and (2) evidence that it

had made the required Federal employment tax deposits for the current taxable

period. SO Alcorte informed petitioner that respondent could not consider

collection alternatives without the information requested.

Petitioner did not submit the requested Form 433-B until August 25, 2014,

one day before the scheduled CDP hearing, asserting that the proposed levy would

result in “economic hardship” and, therefore, “this situation * * * mandate[s] the

release of the proposed levy”. The Form 433-B was signed by petitioner’s

president, Sam Jewell, and listed among petitioner’s assets accounts receivable

from Private Pay, Medicaid Oklahoma, Medicare, and Insurance CoPay--with a

combined balance of $313,112.98 for the period April 30 through June 30,
 -5-

[*5] 2014.3 The Form 433-B also listed petitioner’s monthly income of

$202,807.01 and monthly expenses of $188,152.24. However, SO Alcorte’s notes

indicated that petitioner’s monthly expenses were $288,152, resulting in a net

negative monthly income. This appears to be her mathematical error in reading

the numbers on the Form 433-B. The actual monthly expenses total $188,152.24,

for a net monthly income of $14,654.77.

In preparation for the CDP hearing SO Alcorte noted in her case activity

report that petitioner did not appear to qualify for an installment agreement

because its assets were sufficient to pay the outstanding liability in full. She also

noted that petitioner offered no explanation regarding how it would make its

proposed monthly installment agreement payments of $6,000 while she mistakenly

believed its net monthly income was negative.

On August 6, 2014, the parties held the scheduled CDP hearing.

Petitioner’s representative did not contest petitioner’s underlying tax liability but

instead reiterated that it would suffer economic hardship if the proposed collection

action were sustained. SO Alcorte explained that she would not consider

petitioner’s economic hardship argument because the economic hardship

3
The record reflects that $273,252.38 of petitioner’s total accounts
receivable was owed by the Federal and State Government agencies referenced
above.
 -6-

[*6] exception under section 6343(a)(1)(D) is not available to corporations. She

noted that because (1) petitioner’s accounts receivable were sufficient to pay its

outstanding liability in full, (2) petitioner was not in compliance with its Federal

employment tax deposit obligations, and (3) the economic hardship exception was

unavailable to corporations, she would be sustaining the proposed collection

action and closing the case.

SO Alcorte verified that the assessment was properly made and that all other

requirements of applicable law and administrative procedure had been met. She

thereupon closed the case and, on September 17, 2014, issued to petitioner a

notice of determination sustaining the notice of intent to levy with respect to the

Form 941 tax period ending December 31, 2013.

Discussion

I. Summary Judgment and Standard of Review

The purpose of summary judgment is to expedite litigation and avoid

unnecessary and time-consuming trials. Fla. Peach Corp. v. Commissioner, 90

T.C. 678, 681 (1988). The Court may grant summary judgment when there is no

genuine dispute as to any material fact and a decision may be rendered as a matter

of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992),

aff’d, 17 F.3d 965 (7th Cir. 1994). If a moving party properly makes and supports
 -7-

[*7] a motion for summary judgment, “an adverse party may not rest upon the

mere allegations or denials of such party’s pleading” but must set forth specific

facts, by affidavit or otherwise, showing that there is a genuine dispute for trial.

Rule 121(d).

Upon due consideration of the parties’ motions, supporting declarations,

and responses thereto, the Court concludes that there are no material facts in

dispute and that judgment may be rendered as a matter of law.

Where the validity of the underlying tax liability is properly at issue in a

collection case, the Court will review the matter on a de novo basis. Sego v.

Commissioner, 114 T.C. 604, 610 (2000). Where, as here, there is no dispute

concerning the underlying tax liability, the Court reviews the Commissioner’s

administrative determination to proceed with collection for abuse of discretion.4

Id. Abuse of discretion exists when a determination is arbitrary, capricious, or

without sound basis in fact or law. See Murphy v. Commissioner, 125 T.C. 301,

320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006).

4
Regardless of whether petitioner could have contested its underlying
liability at the CDP hearing, this Court may consider a challenge to such a liability
only if the taxpayer properly raised it before the SO, Giamelli v. Commissioner,
129 T.C. 107, 115 (2007), and again in its petition to this Court, see Rule
331(b)(4) (“Any issue not raised in the assignments of error shall be deemed to be
conceded.”). Petitioner did not raise this issue with SO Alcorte or in its petition.
The Court accordingly deems it conceded.
 -8-

[*8] II. Collection Due Process

In deciding whether the SO abused her discretion in sustaining the proposed

collection action, the Court considers whether she: (1) properly verified that the

requirements of any applicable law or administrative procedure have been met;

(2) considered any relevant issues petitioner raised; and (3) determined whether

“any proposed collection action balances the need for the efficient collection of

taxes with the legitimate concern of * * * [petitioner] that any collection action be

no more intrusive than necessary.” See sec. 6330(c)(3).

Review of the record reveals that SO Alcorte conducted a review of

petitioner’s account, determined that the taxes had been properly assessed, and

verified that other requirements of applicable law and administrative procedure

were followed.

Petitioner’s primary contention is that section 301.6343-1(b)(4)(i), Proced.

& Admin. Regs. (defining economic hardship only with respect to individual

taxpayers), is invalid and that SO Alcorte abused her discretion in failing to

consider its request for relief under the economic hardship provision of section

6343(a)(1)(D). This contention is incorrect. This Court recently released its

Opinion in Lindsay Manor Nursing Home, Inc. v. Commissioner (Lindsay Manor

I), 148 T.C. __ (Mar. 23, 2017), finding that section 301.6343-1(b)(4)(i), Proced.
 -9-

[*9] & Admin. Regs., is valid and that the economic hardship relief provided by

section 6343(a)(1)(D) is available only to individual taxpayers. And in a

companion Memorandum Opinion, Lindsay Manor Nursing Home, Inc. v.

Commissioner, T.C. Memo. 2017-50, the Court concluded that the SO did not

abuse her discretion in failing to consider a request for economic hardship relief

made by a corporate taxpayer. SO Alcorte did not abuse her discretion in

declining this request either.

Petitioner argues alternatively that SO Alcorte abused her discretion in

rejecting its installment agreement request and in failing to adequately consider its

“economic hardship” in the balancing analysis required by section 6330(c)(3).5

Finally, petitioner suggests that SO Alcorte was not impartial as required by

section 6330(b)(3).

A. Petitioner’s Installment Agreement Request

In its discretion, the IRS may enter into an installment agreement if it

determines that doing so will facilitate full or partial collection of a tax liability.

5
In Lindsay Manor I, this Court found that sec. 301.6343-1(b)(4)(i), Proced.
& Admin. Regs., is valid; accordingly, the economic hardship exception is
available only to individuals. To the extent that petitioner’s other arguments
attempt to rehash this issue, they are summarily disregarded. The Court will,
however, address petitioner’s economic position with respect to SO Alcorte’s sec.
6330(c)(3)(C) balancing analysis.
 - 10 -

[*10] See sec. 6159(a). The IRS also has discretion to reject a proposed

installment agreement (subject to certain restrictions not applicable here). See

Thompson v. Commissioner, 140 T.C. 173, 179 (2013); sec. 301.6159-1(a),

(c)(1)(i), Proced. & Admin. Regs. Consequently, in reviewing this determination,

the Court does not substitute its judgment for that of Appeals and decide whether

in its opinion petitioner’s installment agreement should have been accepted. See

Woodral v. Commissioner, 112 T.C. 19, 23 (1999); Keller v. Commissioner, T.C.

Memo. 2006-166, aff’d in part, 568 F.3d 710 (9th Cir. 2009). Instead, the Court

reviews this determination for abuse of discretion.

Petitioner argues that it was an abuse of discretion for SO Alcorte to reject

its proposed installment agreement. Although the record demonstrates that SO

Alcorte’s rejection of petitioner’s installment agreement was proper for either of

her two reasons--(1) the value of petitioner’s assets exceeded the underlying

liability and (2) petitioner was not in compliance with its Federal employment tax

deposit obligations6--her review of the Form 433-B reflects a substantial

6
The Court finds disingenuous petitioner’s argument that SO Alcorte’s notes
in her case activity report constituted a predetermination. The notes indicate SO
Alcorte’s preparation for petitioner’s CDP hearing and reflect a thorough review
of the late-submitted Form 433-B and its attachments. This is not an abuse of
discretion.
 - 11 -

[*11] mathematical error indicating monthly expenses of $288,152.24 versus the

listed amounts which actually total $188,152.24.

1. Petitioner’s Assets

SO Alcorte rejected petitioner’s proposed installment agreement after

determining that it could fully or partially satisfy its tax liability--$61,916.19--by

liquidating or borrowing against its assets--$313,112.98 in accounts receivable

alone. See Internal Revenue Manual (IRM) pt. 5.14.1.4(5) and (6) (June 1, 2010)

(“Taxpayers do not qualify for installment agreements if balance due accounts can

be fully or partially satisfied by liquidating assets[.]”); see also Boulware v.

Commissioner, T.C. Memo. 2014-80 (finding that the SO’s reliance on this IRM

provision was not an abuse of discretion), aff’d, 816 F.3d 133 (D.C. Cir. 2016).

And other than its argument for economic hardship relief, petitioner does

not suggest that any exception to the general rule applies. The record does not

reflect an abuse of discretion by SO Alcorte in rejecting this offer.

2. Compliance With Federal Tax Obligations

In rejecting petitioner’s proposed installment agreement, SO Alcorte also

noted that petitioner was not in compliance with its current Federal employment

tax deposit obligations. Established IRS policy requires taxpayers to be in

compliance with current filing and estimated tax payment requirements to be
 - 12 -

[*12] eligible for collection alternatives. See Reed v. Commissioner, 141 T.C.

248, 256-257 (2013). Generally, current compliance with tax laws is a

prerequisite to being eligible for collection alternatives. See Cox v.

Commissioner, 126 T.C. 237, 257 (2006), rev’d on other grounds, 514 F.3d 1119

(10th Cir. 2008). And despite petitioner’s contention, SO Alcorte was well within

her discretion to require compliance with current tax obligations. See Giamelli v.

Commissioner, 129 T.C. 107, 111-112 (2007); cf. Christopher Cross, Inc. v.

United States, 461 F.3d 610, 613 (5th Cir. 2006) (finding no abuse of discretion

when settlement officer rejected collection alternative because taxpayer was not in

compliance with its tax payment obligations); Reed v. Commissioner, 141 T.C. at

257 (same).

Petitioner argues that SO Alcorte abused her discretion because--even

though it was not in compliance--she failed to consider that its inability to remain

current with its Federal tax deposits was a result of its nonreceipt of Medicare and

Medicaid funding from the Federal and State Governments. To support its

argument, petitioner cites Alessio Azzari, Inc. v. Commissioner, 136 T.C. 178

(2011).

In Alessio Azzari, Inc., a lender stopped lending money to the taxpayer after

the Commissioner’s settlement officer erroneously determined that the
 - 13 -

[*13] Commissioner did not need to subordinate his lien on the taxpayer’s

accounts to the lender’s lien on the same accounts. Id. at 181-183. As a result, the

taxpayer was unable to stay current with its employment tax deposits after being in

compliance for six consecutive quarters. Id. at 183. The Commissioner denied the

taxpayer’s installment agreement request because the taxpayer was no longer in

compliance. Id. at 183-184. The Court held that it was an abuse of discretion for

the Commissioner to deny the taxpayer’s request for an installment agreement on

the basis of the taxpayer’s failure to stay current on its tax deposits because the

SO’s erroneous interpretation of law led to the lender’s decision to stop lending

money to the taxpayer, which led to the taxpayer’s not being in compliance. Id. at

194.

Unlike the taxpayer in Alessio Azzari, Inc., petitioner was indisputably not

in compliance when it requested an installment agreement. And because section

301.6343-1(b)(4)(i), Proced. & Admin. Regs., is valid, SO Alcorte’s interpretation

was not erroneous. See Lindsay Manor I. SO Alcorte did not abuse her discretion

in rejecting petitioner’s installment agreement request on the grounds that

petitioner was not in compliance.

Although SO Alcorte made a substantial mathematical error in determining

petitioner’s available net income, the Court finds that with respect to her decision
 - 14 -

[*14] to reject petitioner’s installment agreement request, her error was harmless

because that request could have been properly rejected for either of the two

reasons discussed. Had SO Alcorte properly noted petitioner’s excess monthly

income of $14,654.77, she could have properly rejected its proposed monthly

installment payments of only $6,000. See Boulware v. Commissioner, T.C.

Memo. 2014-80 (finding no abuse of discretion in rejecting proposed installment

agreement when taxpayer’s ability to pay was twice the amount of the proposed

payments), aff’d, 816 F.3d 133 (D.C. Cir. 2016).

B. SO Alcorte’s Balancing Analysis

Petitioner next argues that SO Alcorte either did not conduct the required

statutory balancing test or did not explain her reason for concluding that its

requirements were met. Petitioner suggests that it “proposed a viable collection

alternative that it could afford to pay on a monthly basis while staying current on

its federal tax deposit payments that was less intrusive than enforced levy action”.

It is well established that rejecting a collection alternative because of

noncompliance with estimated tax payment requirements does not violate the

proper balancing requirement. See, e.g., Orum v. Commissioner, 123 T.C. 1

(2004), aff’d, 412 F.3d 819 (7th Cir. 2005); Friedman v. Commissioner, T.C.

Memo. 2015-196; Schwartz v. Commissioner, T.C. Memo. 2007-155. In
 - 15 -

[*15] preparation for the CDP hearing, SO Alcorte discovered that petitioner was

not in compliance with its current employment tax deposit obligations for the

taxable period ending June 30, 2014, and that it did not provide proof of making

its required September 30, 2014, deposit. Accordingly, SO Alcorte’s rejection of

petitioner’s installment agreement request for this reason is not an abuse of

discretion. But noncompliance is not the only factor involved in the balancing

requirement.

This Court found in Lindsay Manor I that the section 6330(c)(3)(C)

balancing test properly takes into account a taxpayer’s specific economic realities

and the consequences of a proposed collection action. At the time petitioner

requested this installment agreement, it had adequate net monthly income for

monthly payments of $6,000. Petitioner’s Form 433-B showed that its monthly

income exceeded its monthly expenses for a net monthly income of $14,654.77.

SO Alcorte, however, made a substantial mathematical error, reflected both in her

case activity report and on the Form 433-B. This factual error, while harmless to

SO Alcorte’s denial of petitioner’s installment agreement request, was consistently

repeated. Cf. Sulphur Manor, Inc. v. Commissioner, T.C. Memo. 2017-95, at *11

n.7 (finding harmless a poorly worded sentence in the SO’s case activity report

where the SO’s notes elsewhere reflected proper calculation).
 - 16 -

[*16] In certain circumstances a mathematical error can be harmless. Id. And in

others excess income works in favor of the Government for purposes of this

balancing test. See id. at *11 n.7, *14. Either could be true here. But because SO

Alcorte repeated her error and because there is nothing in the record reflecting a

correction of that error, the Court finds that the balancing test under section

6330(c)(3)(C) could have been affected.

C. SO Alcorte’s Impartiality

Next, petitioner argues that SO Alcorte’s review of the documents it

provided before the CDP hearing violates its section 6330(b)(3) right to a CDP

hearing by an Appeals officer who had no prior involvement with respect to the

unpaid tax.

Section 6330(b)(3) requires a CDP hearing to be “conducted by an officer or

employee who has had no prior involvement with respect to the unpaid tax * * *

before the first hearing”. Prior involvement exists only when (1) the taxpayer, the

tax, and the tax period at issue in the CDP hearing also were at issue in the prior

non-CDP matter and (2) the Appeals officer or employee actually participated in

the prior matter. Sec. 301.6330-1(d)(2), Q&A-D4, Proced. & Admin. Regs.

Petitioner does not argue that SO Alcorte had prior involvement in an

earlier, non-CDP matter; rather, it argues that, because she had reviewed
 - 17 -

[*17] petitioner’s documents before the CDP hearing, SO Alcorte was not

impartial. Petitioner is incorrect. The regulations clearly state that prior

involvement means that an Appeals officer actually participated in an earlier, non-

CDP matter. Id. Because petitioner does not assert that SO Alcorte participated in

a prior non-CDP matter, its argument must fail.

SO Alcorte verified that she had not had any prior involvement with respect

to the specific tax period at issue. Because SO Alcorte did not participate in a

prior non-CDP matter concerning the same tax, taxpayer, and tax period at issue,

she was an eligible Appeals officer to conduct the CDP hearing. Accordingly, the

undisputed material facts establish that SO Alcorte did not abuse her discretion by

reviewing the information petitioner had provided before its CDP hearing.

III. Conclusion

Finally, petitioner argues that the Court should remand this case for

additional consideration. The Court remands a CDP case to the IRS Appeals

Office when the Court determines that a further hearing would be “helpful”,

“necessary”, or “productive”. Kelby v. Commissioner, 130 T.C. 79, 86 n.4 (2008);

Lunsford v. Commissioner, 117 T.C. 183, 189 (2001); Churchill v. Commissioner,

T.C. Memo. 2011-182. “[T]he further hearing is a supplement to the taxpayer’s

original * * * hearing, not a new hearing.” Kelby v. Commissioner, 130 T.C. at
 - 18 -

[*18] 86. The purpose of a remand is not to afford a “do over” for a taxpayer

whose missteps during the CDP process resulted in its collection alternative’s

being rejected. See Kakeh v. Commissioner, T.C. Memo. 2015-103, at *13. But

because SO Alcorte mistakenly construed petitioner’s financial condition and

because there is no record of her correcting that substantial mathematical error,

remand is appropriate for SO Alcorte to reconsider her balancing analysis in the

light of the corrected facts and circumstances.

The Court will accordingly deny petitioner’s motion for summary judgment,

grant in part respondent’s motion for summary judgment, and remand the

remainder of this case to the IRS Appeals Office for reconsideration of the

balancing test under section 6330(c)(3)(C) in relation to petitioner’s corrected

financial condition.

To reflect the foregoing,

An appropriate order will be issued.