Michael Rosendale & Tamara D. Rosendale v. Commissioner , 2018 T.C. Memo. 99 ( 2018 )

T.C. Memo. 2018-99UNITED STATES TAX COURT
MICHAEL ROSENDALE AND TAMARA D. ROSENDALE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7710-17L. Filed July 2, 2018.
Glen E. Frost, Kaitlyn A. Loughner, and Robert B. Hamilton, for petitioners.
Elizabeth C. Mourges and Nancy M. Gilmore, for respondent.
MEMORANDUM OPINION
LAUBER, Judge: In this collection due process (CDP) case, petitioners
seek review pursuant to section 6330(d)(1)1 of the determinations by the Internal
1
All statutory references are to the Internal Revenue Code in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure. We round all monetary amounts to the nearest dollar.
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[*2] Revenue Service (IRS or respondent) to uphold three notices of intent to levy.
The IRS served the levy notices to assist in collecting from petitioners unpaid in-
come tax liabilities for tax years 2008, 2009, and 2012-2015, as well as unpaid
trust fund recovery penalties (TFRPs) that it had assessed against petitioner hus-
band for eight calendar quarters during 2008-2010. Respondent has moved for
summary judgment under Rule 121, contending that there are no disputed issues of
material fact and that his determination to sustain the proposed collection actions
was proper as a matter of law. We agree and accordingly will grant the motion.
Background
The following facts are based on the parties’ pleadings and motion papers,
including the attached affidavits and exhibits. See Rule 121(b). Petitioners resid-
ed in Maryland when they filed their petition.
Petitioners filed delinquent income tax returns for 2008, 2009, and 2012-
2014 and a timely income tax return for 2015. They did not pay the tax shown as
due on any of these returns. On March 17, 2016, in an effort to collect these un-
paid liabilities, the IRS sent petitioners a Letter 1058, Final Notice of Intent to
Levy and Notice of Your Right to a Hearing, for 2008, 2009, and 2012-2014. On
July 8, 2016, the IRS sent petitioners a separate Letter 1058 for 2015. Petitioners’
aggregate unpaid income tax liabilities for these years exceed $200,000.
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[*3] Petitioner husband was the sole owner of 2188 Properties LLC, d.b.a.
Rosendale Realty (Realty), a Maryland business that encountered financial diffi-
culties. It became delinquent in its employment tax liabilities for the eight calen-
dar quarters in question. The IRS assessed TFRPs against petitioner husband un-
der section 6672, having determined that he was a “responsible person” required
to collect, account for, and pay over the withheld employment taxes. On March
17, 2016, the IRS sent petitioner husband a Letter 1058 in an effort to collect these
unpaid TFRPs, the aggregate amount of which exceeds $25,000.
Petitioners timely requested CDP hearings. In each request, they checked
the boxes “Installment Agreement,” “Offer in Compromise,” and “I Cannot Pay
Balance.” In letters attached to two of their hearing requests, they also requested
penalty abatement. They did not indicate an intention to challenge their under-
lying liability for any year or quarter in question.
After receiving petitioners’ case a settlement officer (SO) from the IRS Ap-
peals Office confirmed that the tax liabilities and penalties had been properly as-
sessed and that all other requirements of applicable law and administrative proced-
ure had been met. The SO scheduled a telephone CDP hearing and informed peti-
tioners that, in order for her to consider a collection alternative, they needed to
supply a completed Form 433-A, Collection Information Statement for Wage
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[*4] Earners and Self-Employed Individuals, and proof that they were current on
all estimated tax payments.
Before the hearing petitioners submitted a Form 433-A, which showed
monthly income of $24,121 and monthly expenses of $24,208. Petitioners also
submitted copies of amended returns for 2014 and 2015 and evidence that they
had made estimated tax payments of $19,150 for 2016.
The CDP hearing was held on September 27, 2016. Petitioners’ counsel re-
quested that their accounts be placed into currently not collectible (CNC) status.
The SO asked for additional information about certain expenses petitioners had
reported on the Form 433-A, including monthly payments of $1,000 toward an
outstanding balance on an American Express credit card and monthly payments on
a $127,107 loan encumbering four vacant lots owned by Realty. The SO investi-
gated the status of the 2014 and 2015 amended returns and determined that the
IRS had not processed them.
Petitioners subsequently provided some of the requested information, ex-
plaining that the American Express balance reflected various Realty-related ex-
penses that petitioners had charged to their credit card. With regard to the loan
payments, the SO determined that the outstanding balance on the loan encumber-
ing the vacant lots exceeded the lots’ fair market value. She concluded that
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[*5] neither the American Express payments nor the loan repayments were
necessary living expenses for purposes of determining petitioners’ entitlement to a
collection alternative. She proposed that petitioners sell the vacant lots to free up
funds to pay their tax liabilities, but they declined to do this.
Petitioners submitted additional information regarding their housing and ve-
hicle costs. They explained that their current rent was artificially low because they
were residing with relatives; they contended that they should instead be allowed
the local standard amount for housing, which was higher. They contended that the
SO had miscalculated their vehicle expense by not allowing depreciation in addi-
tion to vehicle operating costs. The SO rejected both arguments, determining that
petitioners should be allowed only their actual housing expenses and that depreci-
ation was not allowable because it was not an out-of-pocket cost.
After reviewing all of this information, the SO determined that petitioners’
monthly income would exceed their allowable monthly expenses by $14,591 once
certain State tax liabilities were paid off. She accordingly determined that peti-
tioners were not eligible for CNC status. As an alternative, she proposed a partial
pay installment agreement (PPIA) under which petitioners would pay $1,929 per
month for the first three months of 2017 (enabling them to discharge a portion of
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[*6] their Maryland tax liabilities) and $14,591 per month for the ensuing 111
months.2 On December 14, 2016, the SO mailed this proposal to petitioners and
instructed them, if they accepted the proposal, to sign the enclosed Form 433-D,
Installment Agreement, and return it to her within 14 days.
On December 28, 2016, petitioners’ counsel informed the SO that they
would not be accepting the proposed PPIA. Petitioners did not make a counter-
offer in that letter or subsequently. After receiving no further communication
from petitioners or their counsel during the next nine weeks, the SO closed the
case and, on March 6, 2017, issued petitioners notices of determination sustaining
the proposed levies. On April 6, 2017, petitioners timely petitioned this Court for
review. In August 2017 respondent filed a motion for summary judgment, which
petitioners timely opposed.
On April 18, 2018, the Court issued an order directing respondent to file a
response addressing the application of section 6751(b)(1) to the TFRPs in question
in light of this Court’s Opinion in Graev v. Commissioner, 149 T.C. __ (Dec. 20,
2017), supplementing and overruling in part 147 T.C. 460 (2016). Respondent
filed a response attaching a declaration from the SO and a Form 4183, Recommen-
2
The SO’s PPIA proposal covered the tax liabilities in question here--i.e.,
petitioners’ income tax liabilities for 2008, 2009, and 2012-2015 and petitioner
husband’s TFRP liabilities--as well as certain liabilities for non-CDP years.
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[*7] dation re: Trust Fund Recovery Penalty Assessment. This form shows that
the initial determination of the TFRPs by Revenue Officer (RO) Reynolds was ap-
proved in writing by Group Manager Doherty, who signed the form before as-
sessment.
Discussion
I. Summary Judgment Standard and Standard of Review
The purpose of summary judgment is to expedite litigation and avoid costly,
time-consuming, and unnecessary 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). In deciding whether to grant summary judg-
ment, we construe factual materials and inferences drawn from them in the light
most favorable to the nonmoving party. Sundstrand Corp., 98 T.C. at 520. How-
ever, the nonmoving party may not rest upon mere allegations or denials of his
pleadings but instead must set forth specific facts showing that there is a genuine
dispute for trial. Rule 121(d); see Sundstrand Corp., 98 T.C. at 520. We find that
no material facts are in dispute and that this case may appropriately be adjudicated
summarily.
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[*8] Where a taxpayer’s underlying tax liability is properly at issue, we review
the IRS’ determination de novo. Goza v. Commissioner, 114 T.C. 176, 181-182
(2000). Where (as here) the taxpayers’ underlying liabilities are not properly be-
fore us,3 we review the IRS determination for abuse of discretion only. See id. at
181. 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).
II. Analysis
In deciding whether the SO abused her discretion in sustaining the proposed
levies, we review the record to determine whether she: (1) properly verified that
the requirements of applicable law or administrative procedure had been met;
(2) considered any relevant issues petitioners raised; and (3) considered “whether
any proposed collection action balances the need for the efficient collection of
3
Petitioners have not challenged their underlying income tax liabilities, all
of which were self-reported. In letters attached to their CDP hearing requests they
requested abatement of the TFRPs. But they did not submit to the SO the forms
required for abatement consideration. Nor did they challenge, in their petition to
this Court, petitioner husband’s liability for the TFRPs. They are thus precluded
from challenging those liabilities here. See Rule 331(b)(4) (“Any issue not raised
in the assignments of error shall be deemed to be conceded.”); Thompson v. Com-
missioner, 140 T.C. 173, 178 (2013) (“A taxpayer is precluded from disputing the
underlying liability if it was not properly raised in the CDP hearing.”); sec.
301.6330-1(f)(2), Q&A-F3, Proced. & Admin. Regs.
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[*9] taxes with the legitimate concern of * * * [petitioners] that any collection
action be no more intrusive than necessary.” See sec. 6330(c)(3).
A taxpayer may raise at a CDP hearing relevant issues relating to the collec-
tion action and is entitled to make offers of collection alternatives. See sec.
6330(c)(2) and (3). In their submissions to the SO petitioners sought two forms of
collection alternative: CNC status and an installment agreement (IA).
To be entitled to have his account placed into CNC status, the taxpayer must
demonstrate that, on the basis of his assets, equity, income, and expenses, he has
no apparent ability to make payments on the outstanding tax liability. See Foley v.
Commissioner, T.C. Memo. 2007-242, 94 T.C.M. (CCH) 210, 212; Internal Reve-
nue Manual (IRM) pt. 5.16.1.1 (Aug. 25, 2014). A taxpayer’s ability to make pay-
ments is determined by calculating the excess of income over necessary living ex-
penses. IRM pt. 5.16.1.2 (Jan. 1, 2016). In reviewing for abuse of discretion, the
Court does not substitute its judgment for that of the SO or recalculate a taxpayer’s
ability to pay. See O’Donnell v. Commissioner, T.C. Memo. 2013-247, 106
T.C.M. (CCH) 477, 481.
The SO denied petitioners’ request to have their accounts placed into CNC
status, concluding that their monthly income exceeded their allowable monthly
expenses by as much as $14,519. Although petitioners challenge the SO’s treat-
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[*10] ment of various expense items, we find that she did not abuse her discretion
in making any of these determinations:
• Petitioners first contend that the SO improperly considered their original
2015 return, rather than their amended 2015 return, in performing her financial
analysis. Petitioners filed their amended 2015 return in September 2016; at the
time the SO issued the notice of determination, the IRS had not processed the
amended return. We find that the SO did not abuse her discretion by considering
petitioners’ original 2015 return, which was their most recently filed and pro-
cessed return at that time. See Lloyd v. Commissioner, T.C. Memo. 2017-60, 113
T.C.M. (CCH) 1287, 1289.
• Petitioners contend that the SO should have treated their monthly Ameri-
can Express payments of $1,000 as allowable living expenses. The SO explained
to petitioners that if the expenses they were charging to the American Express card
were allowable living expenses, those expenses would be allowed separately, and
they could not be given credit for the same expenses twice. Petitioners did not
submit any documentation to show that they were using the credit card to pay ne-
cessary living expenses other than those which the SO had already allowed. By
making these payments, petitioners admitted that they had monthly disposable
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[*11] income of at least $1,000. This shows, without more, that they were not
entitled to CNC status.
• Petitioners contend that the SO should have treated depreciation on their
vehicles as allowable living expenses. But SOs are directed to consider only cash
expenses in their financial analysis. See IRM pt. 5.15.1.17(2) (Oct. 2, 2012). De-
preciation is not a cash expense; the SO therefore did not abuse her discretion by
disregarding depreciation. The SO properly allowed vehicle operating expenses of
$450 per month, the applicable local standard amount. See id. pt. 5.15.1.9(1)(b).
• Petitioners contend that the SO should have allowed them the standard
local housing expense of $2,349 per month, as opposed to the $1,500 per month
they were actually paying. The SO did not abuse her discretion in allowing the
lesser of petitioners’ actual expenses and the standard housing allowance. See id.pt. 5.15.1.9. Petitioners’ contention that they might eventually move to new ac-
commodations requiring higher rent is speculation that any taxpayer could ad-
vance. The SO did not abuse her discretion by basing her determination on what
petitioners’ rent actually was, not on what it might be in the future.
• Petitioners contend that the SO erred in not allowing as expenses the full
amount of their required estimated tax payments. On their Form 433-A, petition-
ers reported that their current year tax expense was $7,583. The SO allowed them
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[*12] a current year tax expense of $9,465, or $1,882 more than they had
requested.
• Petitioners contend that the SO should have treated as allowable living
expenses their payments on the $127,107 loan secured by the four vacant lots. In
determining a taxpayer’s ability to pay, the SO must ascertain whether assets are
essential for the production of income. IRM pt. 5.15.1.22 (Oct. 2, 2012). If an
asset is necessary for the production of income, an SO may “adjust the income or
expense calculation * * * to account for the loss of income stream if the asset were
either liquidated or used as collateral to secure a loan.” Ibid. When there is no
equity in the assets, no adjustment to income or expenses is necessary. Ibid.Because they were vacant, the four lots secured by the loan were producing
no income. Employing the customary “quick sale” methodology, see IRM pt.
5.15.1.20 (Oct. 2, 2012), the SO determined that petitioners had no equity in the
vacant lots. For both reasons, the loan payments were not essential for the pro-
duction of income. The SO therefore did not abuse her discretion in declining to
treat these payments as necessary living expenses.4
4
Petitioners also contend that the SO did not give them a sufficient allow-
ance for their unpaid State income tax liabilities. For 2013 and prior years, peti-
tioners had an amnesty agreement with the State of Maryland that reduced the
aggregate taxes they were required to pay. The SO allowed as expenses the full
(continued...)
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[*13] Finally, petitioners contend that the SO erred in handling their request for an
IA. After determining that petitioners did not qualify for CNC status, the SO pro-
posed a PPIA under which petitioners would pay $1,929 per month for the first
three months of 2017 and $14,591 per month for the balance of the agreement’s
term. Petitioners rejected this offer. Before closing the case, the SO waited more
than two months to see whether petitioners would make a counter proposal, but
they never did.
Even if petitioners had made a counter proposal, they were not in full com-
pliance with their ongoing tax obligations for 2016. Although they submitted
proof of payment of $19,150 toward their 2016 estimated tax liability, there re-
mained a balance due at the time of the CDP hearing. Petitioners did not make
any subsequent payments toward their 2016 tax liability.
Taxpayers must be current on all ongoing tax obligations at the time the
proposed IA is to go into effect. See IRM pt. 5.14.1.4.2(18) (Sept. 19, 2014). It is
not an abuse of discretion for an Appeals Officer to reject a collection alternative
4
(...continued)
amount of petitioners’ Maryland State tax liabilities as thus reduced. See IRM pt.
5.15.1.10(4)(b) (Nov. 17, 2014). Petitioners also had unpaid Maryland State tax
liabilities for 2014 and 2015, which the SO did not allow as expenses. But even if
she had allowed them, petitioners would still not have qualified for CNC status
because their monthly income vastly exceeded their allowable monthly expenses.
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[*14] where the taxpayers are not in compliance with their ongoing tax
obligations, as petitioners were not for 2016. See Cox v. Commissioner, 126 T.C.
237, 258 (2006), rev’d on other grounds, 514 F.3d 1119 (10th Cir. 2008); Hull v.
Commissioner, T.C. Memo. 2015-86, 109 T.C.M. (CCH) 1438, 1441.
Section 6330(c)(1) and (3)(A) required the SO to verify that all applicable
legal and administrative requirements had been met. One requirement is that im-
posed by section 6751(b)(1), which provides: “No penalty under this title shall be
assessed unless the initial determination of such assessment is personally approved
(in writing) by the immediate supervisor of the individual making such determina-
tion or such higher level official as the Secretary may designate.”
In Blackburn v. Commissioner, 150 T.C. __ (Apr. 5, 2018), the IRS argued
that section 6751(b) does not apply to TFRPs at all. We found no need to decide
that question because the record included a Form 4183 reflecting supervisory ap-
proval of the TFRPs in question. We determined that the Form 4183 was suffic-
ient to enable the SO to verify that the requirements of section 6751(b)(1) had
been met with respect to the TFRPs, assuming the IRS had to meet those require-
ments in the first place.
Here, respondent submitted a declaration that attached a Form 4183 show-
ing that the TFRPs assessed against petitioner husband had been approved in
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[*15] writing, before assessment, by Group Manager Doherty, the immediate
supervisor of RO Reynolds. In Blackburn, we held that an actual signature is not
required; the form need only show that the TFRPs were approved by the RO’s
supervisor. Accordingly, we find that there is a sufficient record of prior approval
of the TFRPs and that the SO properly verified that all other requirements of
applicable law and administrative procedure were followed as required by section
6330(c)(1).
Our review of the record establishes that the SO properly discharged all of
her responsibilities under section 6330(c)(3). She correctly determined that peti-
tioners were a very long way from establishing entitlement to CNC status. They
rejected her conditional offer of a PPIA, and they did not propose another collec-
tion alternative. In any event, they failed to establish compliance with their on-
going tax obligations. Finding no abuse of discretion in any respect, we will sus-
tain the proposed collection actions.
To reflect the foregoing,
An appropriate order and decision
will be entered.