Michael J. Kehoe and Karen D. Kehoe v. Commissioner

T.C. Memo. 2013-63

UNITED STATES TAX COURT

MICHAEL J. KEHOE AND KAREN D. KEHOE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1230-09L. Filed February 28, 2013.

Michael J. Kehoe and Karen D. Kehoe, pro se.

Bryan Sladek, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PARIS, Judge: This case is before the Court on a petition for review of a

Notice of Determination Concerning Collection Action(s) Under Section 6320
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[*2] and/or 6330 (notice of determination). See sec. 6330(d).1 Petitioners seek

judicial review of respondent’s determination to sustain a notice of Federal tax lien

(NFTL). This collection action concerns petitioners’ outstanding Federal income

tax liability for taxable year 2005. The sole issue for decision is whether

respondent’s determination to sustain the filing of the lien constituted an abuse of

discretion.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of

facts and the exhibits received in evidence are incorporated herein by this reference.

Petitioners resided in Michigan when this petition was filed.

Petitioners timely filed their Federal income tax return for tax year 2005

showing tax due of $35,495. Petitioners made a partial payment of $2,000 along

with Federal withholding of $2,544 but were unable to pay the balance.2 On

November 6, 2006, respondent assessed the remaining tax due from

1
Unless otherwise indicated, all section references are to the Internal Revenue
Code in effect at all relevant times.
2
During the year at issue petitioners incurred significant expenses in
connection with an ongoing family crisis. Petitioners self-reported the correct
amount of tax for each year but simply could not afford to pay the tax in a timely
manner. It is clear from the record that it was not petitioners’ intention to avoid tax
during the year at issue, but rather that they overspent their available income by
giving their family obligations priority over their tax obligations.
 -3-

[*3] petitioners for tax year 2005. On July 9, 2007, petitioners submitted another

payment of $6,000 toward their outstanding balance for tax year 2005. On October

26, 2007, respondent sent to petitioners a Notice of Federal Tax Lien Filing and

Your Right to a Hearing Under IRC 6320 (lien notice) concerning petitioners’ 2005

tax liability.3 The lien notice informed petitioners that respondent had filed a notice

of lien on their property and that they could request a collection due process (CDP)

hearing to contest the lien filing as well as offer collection alternatives. Petitioners

sent respondent a timely CDP hearing request on December 12, 2007, in which they

did not contest their underlying liability but instead argued that they should have had

an opportunity to discuss collection alternatives before the filing of the lien.

Petitioners then requested an opportunity to negotiate a collection alternative for the

balance due that would operate without the burden of a tax lien.

In the wake of the NFTL filing, petitioners encountered numerous financial

hardships. Petitioners’ existing $41,000 line of credit with American Express was

canceled. In addition, petitioners’ limit on an existing line of credit with Bank of

3
At that time the lien notice reflected a remaining balance due of $28,657.19
for tax year 2005.
 -4-

[*4] America was reduced by $10,000 and petitioners’ interest rates for various

credit cards rose to untenable levels.

On March 6, 2008, petitioner Michael Kehoe had a telephone CDP hearing

with Settlement Officer Alois Hoog (SO Hoog). SO Hoog advised Mr. Kehoe that

all legal requirements had been met and that the lien was properly filed. Mr. Kehoe

detailed various hardships that the lien had caused him and his wife since its filing,

including: (1) that it caused them to lose $51,000 worth of existing credit that they

were going to use to help resolve the balance owed; (2) that it caused the issuing

banks to substantially reduce spending limits and increase interest rates on their

various credit cards; (3) that it caused a precipitous drop in each of their credit

ratings; and (4) that it had an overall negative impact on their financial stability and

ability to pay the balance owed.

SO Hoog discussed various options available to petitioners, including an

effective tax administration (ETA) offer-in-compromise and an installment

agreement. Mr. Kehoe believed that he and his wife might qualify for an ETA

offer-in-compromise, and SO Hoog agreed to review the financial information
 -5-

[*5] petitioners provided. During that time petitioners continued to make periodic

payments toward their outstanding liability when they could afford to do so.4

Petitioners filed an ETA offer-in-compromise for $5,000 but soon after

amended the offer to $30,000. After analyzing petitioners’ financial information,

SO Hoog concluded that petitioners were not eligible for an ETA offer-in-

compromise because they had sufficient income and assets to pay the liability in full.

SO Hoog then communicated to petitioners that while he could not accept the offer-

in-compromise they had submitted, he would accept an installment agreement that

provided for payments of $300 per month until February 2011, at which time Mr.

Kehoe would pay the remaining balance from his IRA.5 SO Hoog further informed

petitioners that he would not withdraw the NFTL for tax year 2005 and that,

pursuant to the proposed installment agreement, a second NFTL would be filed for

tax year 2006.6

4
The transcripts show that petitioners made two payments in May 2008 for
$150 and $1,000. In addition, a $1,200 credit on petitioners’ account from their
2007 return was applied to the 2005 balance.
5
In February 2011 Mr. Kehoe would reach the age of 59-1/2, rendering him
eligible to make withdrawals from his IRA without penalty under sec. 72(t).
6
Petitioners also had self-reported Federal income tax due for tax year 2006.
Petitioners have timely filed their Federal income tax returns and paid the amounts
due for all subsequent tax years through the date of trial.
 -6-

[*6] In a letter dated November 14, 2008, petitioners voiced their concerns with

the proposed installment agreement. Petitioners indicated that they would be willing

to enter into the proposed installment agreement but only if the NFTL for tax year

2005 was withdrawn and no NFTL was filed for tax year 2006. Petitioners

indicated that they believed that SO Hoog should withdraw the NFTL for tax year

2005 pursuant to section 6323(j)(1)(B) because petitioners were entering into an

installment agreement that would satisfy the outstanding liability. Petitioners went

on to reiterate many of the hardships that the filing of the NFTL had caused them

and plead for an efficient resolution. Petitioners stated that they were addressing

these concerns in writing because by signing the installment agreement, as written,

they would be agreeing to the NFTLs for both 2005 and 2006 and they wanted to

memorialize their objections to doing so.

On November 25, 2008, Mr. Kehoe called SO Hoog and advised him that

petitioners had decided to withdraw their outstanding offer-in-compromise and

sign the installment agreement, but they wanted a notice of determination issued so

that they could reserve the right to dispute his decision not to withdraw the lien.

SO Hoog mailed to petitioners a copy of the installment agreement for them to

sign.
 -7-

[*7] On December 1, 2008, SO Hoog received the installment agreement signed

by both petitioners, as well as a withdrawal of the outstanding offer-in-compromise.

However, where a box on the installment agreement had been marked to indicate

that a subsequent lien would be filed for tax year 2006, petitioners had applied

opaque white correction fluid to the check mark in an apparent attempt to modify

the agreement. As a result of this modification, SO Hoog rejected the installment

agreement and sustained the NFTL for tax year 2005. On December 15, 2008, the

Office of Appeals issued to petitioners a notice of determination. Petitioners timely

filed a petition with this Court.

OPINION

Under section 6321, if a person liable to pay any tax neglects or refuses to

pay the same after demand, the amount shall be a lien in favor of the United States

upon all property, whether real or personal, belonging to such person. Under

section 6323, the Commissioner may file a notice of the lien that arises under

section 6321. The purpose of such a filing is to protect the Government’s interest in

a taxpayer’s property against the claims of other creditors. Hughes v.

Commissioner, T.C. Memo. 2011-294; Berkery v. Commissioner, T.C. Memo.

2011-57. Once filed in accordance with the requirements of section 6323(f), an

NFTL validates the Government’s lien against a subsequent purchaser, holder of a
 -8-

[*8] security interest, mechanic’s lienor, or judgment lien creditor. See sec.

6323(a); Stein v. Commissioner, T.C. Memo. 2004-124; Lindsay v. Commissioner,

T.C. Memo. 2001-285, aff’d, 56 Fed. Appx. 800 (9th Cir. 2003).

I. Standard of Review

Where the validity of the underlying tax liability is properly at issue, the

Court will review the matter de novo. Davis v. Commissioner, 115 T.C. 35, 39

(2000). Where the underlying tax liability is not properly at issue, the Court will

review the Commissioner’s administrative determination for abuse of discretion.

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

176, 181-182 (2000). An abuse of discretion is any action that is arbitrary,

capricious, or without sound basis in law or fact. Woodral v. Commissioner, 112

T.C. 19, 23 (1999).

Petitioners do not challenge their underlying liability for tax year 2005. The

only issue petitioners raise is whether respondent abused his discretion in sustaining

the NFTL. Accordingly, the underlying liability is not properly at issue in this case

and the applicable standard of review is abuse of discretion.

II. Abuse of Discretion Standard

If the Commissioner chooses to file an NFTL, section 6320 requires him to

give the taxpayer notice of that filing and notice of the right to an administrative
 -9-

[*9] hearing before an impartial officer of the IRS Appeals Office. Sec. 6320(a) and

(b). At the hearing, the taxpayer may raise appropriate spousal defenses, challenge

the appropriateness of the collection action, and offer collection alternatives. Secs.

6320(c), 6330(c)(2)(A). In addition to considering the above-stated issues raised by

the taxpayer, the Appeals officer must verify that the requirements of applicable law

and administrative procedure have been met and consider whether any proposed

collection action balances the need for efficient collection of taxes with the

legitimate concern of the taxpayer that any collection action should be no more

intrusive than necessary. Sec. 6330(c)(3).

A. Withdrawal of the Lien

Petitioners contend that respondent abused his discretion in failing to

withdraw the NFTL for tax year 2005. Under section 6323(j), the Commissioner

has the discretion to withdraw an NFTL if: (1) the filing was premature or not in

accordance with administrative procedures; (2) the taxpayer enters into an

installment agreement to pay the tax, unless the agreement requires that the lien

remain filed; (3) the withdrawal of the lien would facilitate the collection of the tax;

or (4) the withdrawal of the lien would be in the best interest of the taxpayer, as

determined by the National Taxpayer Advocate, and of the United States. See also

sec. 301.6323(j)-1(a), Proced. & Admin. Regs.
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[*10] In Hughes v. Commissioner, T.C. Memo. 2011-294, this Court sustained a

filed NFTL where the taxpayer alleged that the filing should have been withdrawn

because it impaired his credit. In that opinion the Court stated that the impairment

of credit by itself does not impair the taxpayer’s ability to satisfy his tax liability.

Id. Additionally, the Court noted that the taxpayer’s long history of noncompliance

supported the notion that the filed NFTL was necessary to protect the Government’s

interest in the taxpayer’s property.

In a similar case, this Court again sustained a filed NFTL where the taxpayer

alleged that the filing had impaired his ability to pay because he could not obtain a

loan to satisfy the liability. Berkery v. Commissioner, T.C. Memo. 2011-57. The

Court stated that the taxpayer had not established that the NFTL filing had impaired

his ability to pay the liability because he had not presented any evidence that he had

been rejected for a loan as a result of the NFTL. The Court noted that the taxpayer

had almost two years before the filing of the NFTL, during which he made no effort

to pay any of his outstanding tax liability, and that his payment history “casts doubt

on the good faith of his efforts to pay.” Id.

The Court in both instances noted that lien withdrawal is permissive.

Although section 6323(j)(1) allows the Commissioner to withdraw an NFTL for any

of the reasons stated above, it does not require him to do so. The regulations
 - 11 -

[*11] make the Commissioner’s discretion explicit: “If the Commissioner

determines conditions for withdrawal are present, the Commissioner may (but is not

required to) authorize the withdrawal.” Sec. 301.6323(j)-1(c), Proced. & Admin.

Regs.

Petitioners argue that the filing of the NFTL impaired their ability to pay the

outstanding liability. Specifically, the financial impact of the NFTL left them in a

position where they could no longer make the monthly installment payments or

borrow funds to pay the liability in full.

Petitioners are unlike the taxpayers in Berkery and Hughes. Before 2005,

petitioners had never failed to pay their Federal income tax. Even for the year at

issue, petitioners correctly self-reported their income and timely filed their Federal

income tax return. They did not pay their liability in full because they had expended

their available funds in dealing with an ongoing family crisis. Despite being in a

tight financial position, petitioners still made efforts to pay down their liability

whenever possible.

During the CDP process petitioners attempted to resolve the liability by

negotiating a settlement agreement. Petitioners were eager to come to an agreement

and resolve the debt in an efficient way. Petitioners and SO Hoog were in

agreement as to the substance of an acceptable installment agreement for tax
 - 12 -

[*12] years 2005 and 2006. The only point of contention was whether the NFTL for

2005 should be sustained and a new NFTL for 2006 be filed in conjunction with the

execution of the installment agreement.

The Court notes that petitioners were certainly financially disadvantaged by

the filing of the NFTL. Additionally the Court notes that petitioners have no history

of noncompliance and appear to have dealt with SO Hoog in good faith. However,

it is clear that regardless of the presence of circumstances adequate to allow

withdrawal of the NFTL, withdrawal is left in the discretion of the settlement

officer. Accordingly, it was not an abuse of discretion for SO Hoog to refuse to

withdraw the NFTL.

B. Section 6330(c)(3)

While section 6323(j) and its accompanying regulations are clear that

withdrawal of a filed NFTL is left to the Commissioner’s discretion, sections

6320(c) and 6330(c)(3) together direct the settlement officer to review collection

alternatives under the overarching standard of “whether any proposed collection

action balances the need for the efficient collection of taxes with the legitimate

concern of the * * * [taxpayer] that any collection action be no more intrusive than

necessary.” Adair v. Commissioner, T.C. Memo. 2011-75.
 - 13 -

[*13] Petitioners contend that the filing of the NFTL was more intrusive than

necessary to ensure efficient collection of the taxes owed. Petitioners argue that the

filing of the NFTL imposed serious hardship upon them by causing them to lose

large lines of credit, causing the issuers of their various credit cards to decrease their

spending limits and increase the interest rates on their existing accounts, seriously

impairing their credit ratings and therefore their ability to procure new credit, and

having an overall disastrous effect on their financial stability.

Respondent contends that withdrawing the NFTL would have impaired the

Government’s ability to collect the balance due by leaving it vulnerable to losing its

protected interest in petitioners’ assets. Respondent further argues that SO Hoog

determined that such protection was necessary until the liability was paid in full

through monthly installments and that this determination was not an abuse of

discretion.

The Court again notes that petitioners were doubtlessly subjected to serious

financial hardship as a result of the filing of the NFTL. However, the Court

cannot say that SO Hoog’s determination to sustain the NFTL was arbitrary,

capricious, or without sound basis in fact or law. Accordingly, respondent did not

abuse his discretion.
 - 14 -

[*14] III. Possibility of Remand

Absent limiting statutes, courts generally have the “inherent authority to issue

such orders as they deem necessary and prudent to achieve the ‘orderly and

expeditious disposition of cases’”. Williams v. Commissioner, 92 T.C. 920, 932

(1989) (quoting Link v. Wabash R.R. Co., 370 U.S. 626, 630-631 (1962)) (citing

Roadway Express, Inc. v. Piper, 447 U.S. 752, 764-765 (1980)). In Friday v.

Commissioner, 124 T.C. 220, 221-222 (2005), the Court noted that it can remand a

case to an agency if the agency retains jurisdiction over the case, such as the

Appeals Office does in a CDP determination. See sec. 6330(d)(2); sec. 301.6330-

1(h)(1), Proced. & Admin. Regs.

The Court may certainly remand in CDP cases when an Appeals officer has

abused his discretion in some way. See Med. Practice Solutions, LLC v.

Commissioner, T.C. Memo. 2009-214. The Court may also remand where, for

example, the Appeals officer did not develop the record enough for the Court to

properly review it. See Hoyle v. Commissioner, 131 T.C. 197, 204-205 (2008).

Remand may be a response to an error the Court has found that it wants the

Appeals Office to remedy. However, the Court has also remanded where the law

changed between the CDP hearing and the Tax Court trial if that may have affected

a taxpayer’s presentation of his case. See Harrell v. Commissioner, T.C.
 - 15 -

[*15] Memo. 2003-271. The Court has also suggested that it may remand when the

Appeals Office did not abuse its discretion and there was no change in law, so long

as the remand would be “helpful”. Wells v. Commissioner, T.C. Memo. 2003-234

n.6, aff’d, 108 Fed. Appx. 440 (9th Cir. 2004); see also Ashlock v. Commissioner,

T.C. Memo. 2008-58 (noting taxpayer declined remand to consider changed

financial circumstances). Phrased differently, the Court “return[s] a case to Appeals

if * * * [it] consider[s] a rehearing ‘necessary or productive’”. Martin v.

Commissioner, T.C. Memo. 2003-288 (quoting Lunsford v. Commissioner, 117

T.C. 183, 189 (2001)), aff’d, 436 F.3d 1216 (10th Cir. 2006).

In Churchill v. Commissioner, T.C. Memo. 2011-182, the Court used the

preceding analysis to reach the holding that it has authority to remand a CDP case

for consideration of changed circumstances when remand would be helpful,

necessary, or productive. In Churchill the taxpayer was married at the time of the

CDP hearing, and his joint income with his spouse was considered in rejecting an

offer-in-compromise. By the time of trial, the taxpayer and his spouse were

divorced. The Court chose to remand the case because this change in

circumstances could affect the outcome of the Commissioner’s offer-in-compromise

analysis.
 - 16 -

[*16] Since petitioners’ CDP hearing, Mr. Kehoe has become eligible to make

withdrawals from his IRA without the threat of penalty. While this change of

circumstances certainly has an effect on petitioners’ liquidity, it does not reflect a

change that would have potentially affected respondent’s decision to proceed with

the filing of the NFTL. Consequently, the facts presented do not show a material

change in circumstances such that remand would be appropriate.7

To reflect the foregoing,

An appropriate decision

will be entered.

7
The Court notes that while remand is not appropriate in this instance,
petitioners may still pursue collection alternatives with the IRS. Sec. 6330(b)(2)
would preclude petitioners’ seeking judicial review of any subsequent administrative
determination; however, petitioners are still free to attempt to negotiate a new
collection alternative on the basis of changed circumstances.