Bradley M. and Monica Pixley v. Commissioner ( 2004 )

123 T.C. No. 15UNITED STATES TAX COURT
BRADLEY M. AND MONICA PIXLEY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7093-02L. Filed September 15, 2004.
H is an ordained Baptist minister. In this
proceeding to collect Ps’ unpaid 1992 and 1993 tax
liabilities by levy, Ps submitted to R’s Appeals Office
an offer in compromise, claiming a “tithe to church” as
part of their necessary living expenses. In evaluating
Ps’ ability to pay their outstanding tax liabilities,
the Appeals officer declined to take these alleged
tithing expenses into account.
Held: Under relevant provisions of the Internal
Revenue Manual, tithes that a minister is required to
pay as a condition of employment are allowable in
determining ability to pay outstanding tax liabilities.
Held, further, because Ps failed to substantiate that H
was employed as a Baptist minister after R initiated
the collection proceedings, the Appeals officer did not
abuse his discretion by declining to take into account
Ps’ alleged tithing expenses. Held, further, the
disallowance of Ps’ alleged tithing expenses for this
- 2 -
purpose did not violate H’s First Amendment rights to
free exercise of religion.
Tommy E. Swate, for petitioners.
Daniel N. Price, for respondent.
OPINION
THORNTON, Judge: Pursuant to section 6330(d), petitioners
filed a petition for review of an Appeals Office determination
sustaining a proposed levy.1 The primary issue for decision is
whether, in evaluating petitioners’ offer in compromise, the
Appeals officer should have considered petitioners’ alleged
tithing expenses in determining whether they had the ability to
pay their outstanding tax liabilities.2 We must also decide
whether respondent’s disallowance of tithing expenses for this
purpose violates Mr. Pixley’s First Amendment right to free
exercise of religion.
Background
The parties submitted this case fully stipulated pursuant to
Rule 122. We incorporate herein the stipulated facts. When
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and Rule references are to
the Tax Court Rules of Practice and Procedure.
2
A “tithe” is “a tenth part of something paid as a
voluntary contribution or as a tax especially for the support of
a religious establishment”. Merriam Webster’s Collegiate
Dictionary 1238 (10th ed. 1997).
- 3 -
petitioners filed their petition, they resided in Newhall,
California.
Mr. Pixley is a licensed and ordained Baptist minister.
From September 1995 through June 2001, he served as pastor of
Grace Community Bible Church, in Tomball, Texas.3 Thereafter,
petitioners moved to California, and Mr. Pixley was employed as
an echocardiographer at Children’s Hospital in Los Angeles.
Respondent mailed to petitioners a Letter 1058, Final
Notice-Notice of Intent to Levy and Notice of Your Right to a
Hearing (notice of intent to levy), dated October 5, 2000,
proposing a levy with respect to petitioners’ unpaid tax
liabilities totaling $19,366.69 for 1992 and $39,851.27 for 1993.
In response to this notice, petitioners submitted a timely Form
12153, Request for a Collection Due Process Hearing, dated
October 18, 2000, raising an offer in compromise as an
alternative to levy.
Shortly after requesting their Appeals hearing, petitioners
submitted to respondent a Form 656, Offer in Compromise (offer in
compromise), signed October 22, 2000. Petitioners also submitted
a Form 433-A, Collection Information Statement for Individuals,
listing a $520 “tithe to church” as a monthly necessary living
expense.
3
Until early 2001, Mr. Pixley was also employed by
Cardiology Associates of Houston, Texas.
- 4 -
In the Appeals hearing, the Appeals officer requested, on
numerous occasions, that petitioners submit evidence that the
claimed tithe was a condition of Mr. Pixley’s employment.
Petitioners failed to respond to these requests. The Appeals
Office issued to petitioners a “Notice of Determination
Concerning Collection Action(s) Under Section 6320 and/or 6330”,
dated March 14, 2002. In the notice of determination, the
Appeals Office rejected petitioners’ offer in compromise and
concluded that petitioners had the ability to fully pay their
1992 and 1993 tax liabilities. The notice of determination
stated that petitioners failed to establish that tithes were a
condition of Mr. Pixley’s employment and that, for purposes of
evaluating petitioners’ offer in compromise, tithing expenses
were disallowed in determining petitioners’ ability to pay.
After the notice of determination was issued, the Appeals
officer reconsidered petitioners’ offer in compromise and gave
them additional opportunities to submit evidence that the claimed
tithe was a condition of Mr. Pixley’s employment. Petitioners
failed to submit this information, and the Appeals officer
ultimately sustained his rejection of petitioners’ offer.
Discussion
In this case, we are called upon to address for the first
time, in the context of an offer in compromise, the treatment of
- 5 -
a minister’s tithing expenses for purposes of determining ability
to pay outstanding tax liabilities.
I. Petitioners’ Contentions
Petitioners claim that tithing expenses are incurred as a
condition of Mr. Pixley’s employment as a Baptist minister and
should be taken into account in determining petitioners’ ability
to pay their taxes. Petitioners argue that the Appeals officer’s
disallowance of the tithing expenses for this purpose violates
Mr. Pixley’s First Amendment right to free exercise of religion.
II. Standard of Review
Because petitioners’ underlying tax liability was not
properly at issue in the Appeals Office hearing, we review the
Appeals Office determination for abuse of discretion. See Keene
v. Commissioner, 121 T.C. 8, 17-18 (2003); Lunsford v.
Commissioner, 117 T.C. 183, 185 (2001).
III. Offers in Compromise
A. In General
Section 7122(a) authorizes the Commissioner to compromise a
taxpayer’s outstanding tax liabilities. Dutton v. Commissioner,
122 T.C. 133, 137 (2004). Section 7122(c)(1) provides that “The
Secretary shall prescribe 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.”
- 6 -
The regulations state three different grounds for
compromising tax liabilities: (1) Doubt as to liability; (2)
doubt as to collectibility; and (3) promotion of effective tax
administration. Sec. 301.7122-1T(b), Temporary Proced. & Admin.
Regs., 64 Fed. Reg. 39024 (July 21, 1999).4 The parties’
arguments focus exclusively on the ground of doubt as to
collectibility. Doubt as to collectibility arises if the
taxpayer’s assets and income are less than the full amount of the
assessed liability. Id. In determining whether there is doubt
as to collectibility, the Commissioner must determine the
taxpayer’s “ability to pay” the outstanding tax liabilities that
are to be compromised. Sec. 301.7122-1T(b)(3)(ii), Temporary
Proced. & Admin. Regs., supra.
B. Determining a Taxpayer’s Ability To Pay
In determining a taxpayer’s ability to pay outstanding tax
liabilities, the Commissioner takes into account the funds the
taxpayer needs to pay basic living expenses. Id. The taxpayer’s
basic living expenses are determined by evaluating the taxpayer’s
facts and circumstances. Id.
In evaluating a taxpayer’s ability to pay, the Commissioner
considers two types of allowable expenses: (1) necessary
expenses, and (2) conditional expenses. Internal Revenue Manual
4
Final regulations under sec. 7122 were promulgated
effective for offers in compromise pending on or submitted on or
after July 18, 2002. Sec. 301.7122-1(k), Proced. & Admin. Regs.
- 7 -
(IRM), secs. 5.15.1.3 and 5.15.1.3.1(1) (Mar. 31, 2000).5 For
this purpose, a necessary expense is one that is used for a
taxpayer’s (and his family’s) health and welfare or production of
income. IRM sec. 5.15.1.3.2(1) (Mar. 31, 2000). The expense
must be reasonable taking into account family size, geographic
location, and any unique individual circumstances. IRM sec.
5.15.1.2.3(1) and (2) (Mar. 31, 2000). Expenses that do not
qualify as necessary may nevertheless be allowable in certain
limited circumstances as so-called conditional expenses. IRM
sec. 5.8.5.4.2 (Nov. 30, 2001).
For purposes of determining a taxpayer’s ability to pay,
charitable contributions are necessary expenses if they provide
for a taxpayer’s (or his family’s) health and welfare or are a
condition of the taxpayer’s employment. IRM sec. 5.15.1.3.2.3(3)
and exh. 5.15.1-2 (Mar. 31, 2000). The IRM specifically
addresses tithes to religious organizations, as follows:
1. Question. If, as a condition of employment, a
minister is to tithe, a business executive is
required to contribute to a charity * * *, will
these expenses be allowed?
Answer. Yes. The only thing to consider is
whether the amount being contributed equals the
5
On May 5, 2004, we ordered the parties to file additional
supplemental stipulations of fact, including stipulations as to
the portions of the Internal Revenue Manual (IRM), as in effect
for the relevant time periods, that the parties discussed on
brief. The parties made appropriate stipulations and included as
exhibits copies of the relevant portions of the IRM. All
references to the IRM are to these stipulated exhibits.
- 8 -
amount actually required and does not include a
voluntary portion. [IRM, Exhibit 5.15.1-3
(Mar. 31, 2000).]
On brief, respondent contends that petitioners’ alleged
tithing expenses should be disallowed pursuant to IRM section
5.8.5.4.2(9) (Nov. 30, 2001), which states that “Charitable
contributions are not allowed.” This IRM subsection, however,
relates expressly to conditional expenses, not necessary
expenses, and does not purport to override the provisions of IRM
Exhibit 5.15.1-3 (Mar. 31, 2000) as set out above.
IV. Whether the Appeals Officer Abused His Discretion
In the Appeals hearing, petitioners were given the
opportunity to substantiate that Mr. Pixley was employed as a
Baptist minister. They failed to do so. In fact, there is no
evidence that Mr. Pixley was employed as a minister when the
notice of determination was issued to petitioners in March 2002
or that he has been employed as a minister at any time since.6
Consequently, even if we were to assume arguendo, as petitioners
assert, that “The Southern Baptist Convention has a doctrine that
6
On brief, petitioners allege that after Mr. Pixley left
Grace Community Church in June 2001, petitioners moved to
California so that Mr. Pixley could prepare to attend a seminary,
that he continued his ministry in an unpaid position as a Baptist
minister, and that he continued to tithe to keep this position.
There is no evidence in the record, however, to substantiate
these allegations, and there is no indication that petitioners
presented any such evidence to the Appeals officer. Even if we
were to assume arguendo that these allegations are true, they do
not establish that tithes were paid as a condition of employment.
- 9 -
its members should tithe ten percent of their income to the
church”, we are unpersuaded that tithing was a requirement of
Mr. Pixley’s employment.
We hold that the Appeals officer did not abuse his
discretion in disallowing petitioners’ claimed tithing expenses.
V. Petitioners’ First Amendment Challenge
The First Amendment of the United States Constitution
provides that “Congress shall make no law respecting an
establishment of religion, or prohibiting the free exercise
thereof”.
Petitioners contend that respondent’s disallowance of Mr.
Pixley’s tithing expenses for purposes of evaluating their offer
in compromise violates the Free Exercise Clause of the First
Amendment. The gist of petitioners’ argument, as we understand
it, is that by declining to make allowance for tithing expenses
in evaluating petitioners’ ability to pay their taxes, respondent
is effectively reducing the funds that petitioners have available
to support their religion and diverting those funds to the U.S.
Treasury.
It may well be true that paying their taxes will leave
petitioners less funds to support their religion. But this is a
burden, common to all taxpayers, on their pocketbooks, rather
than a recognizable burden on the free exercise of their
religious beliefs. Constitutional protection of fundamental
- 10 -
freedoms “does not confer an entitlement to such funds as may be
necessary to realize all the advantages of that freedom.” Harris
v. McRae, 448 U.S. 297, 318 (1980); see Regan v. Taxation With
Representation of Wash., 461 U.S. 540, 550 (1983).
In any event, even if petitioners could demonstrate a
recognizable burden on the free exercise of their religious
beliefs, the burden would be justified by the Government’s
compelling interest in collecting taxes and administering a
uniform, mandatory, and sound tax system. See, e.g., Hernandez
v. Commissioner, 490 U.S. 680, 699-700 (1989) (quoting United
States v. Lee, 455 U.S. 252, 260 (1982), stating that the
Government has a “‘broad public interest in maintaining a sound
tax system,’ free of ‘myriad exceptions flowing from a wide
variety of religious beliefs’”); United States v. Lee, supra at
260 (“Because the broad public interest in maintaining a sound
tax system is of such a high order, religious belief in conflict
with the payment of taxes affords no basis for resisting the
tax.”); Miller v. Commissioner, 114 T.C. 511, 517 (2000); Adams
v. Commissioner, 110 T.C. 137, 139 (1998), affd. 170 F.3d 173 (3d
Cir. 1999). This compelling Government interest underpins the
Commissioner’s authority to compromise tax liabilities under
section 7122 and to prescribe guidelines for officers and
employees of the Internal Revenue Service to determine whether an
- 11 -
offer in compromise is adequate and should be accepted to resolve
a tax dispute, see sec. 7122(c)(1).7
We hold that the Appeals officer’s disallowance of tithing
expenses in evaluating petitioners’ ability to pay their taxes
did not violate Mr. Pixley’s First Amendment rights to free
exercise of religion.
VI. Conclusion
We sustain respondent’s determination in the notice of
determination that, for purposes of petitioners’ offer in
compromise, Mr. Pixley’s tithing expenses are not allowable in
determining petitioners’ ability to pay their outstanding tax
liabilities. Petitioners raise no additional arguments against
respondent’s proposed collection action. Consequently, we
sustain respondent’s determination to proceed with collection of
petitioners’ tax liabilities by levy.
Decision will be
entered for respondent.
7
The Commissioner states that the objectives of the offer
in compromise program are to: (1) Effect collection of what can
reasonably be collected at the earliest possible time and at the
least cost to the Government; (2) achieve a resolution that is in
the best interest of both the individual taxpayer and the
Government; (3) provide the taxpayer a fresh start toward future
voluntary compliance with all filing and payment requirements;
and (4) secure collection of revenue that may not be collected
through any other means. IRM sec. 5.8.1.1.4(1) (Feb. 4, 2000).
These objectives are in furtherance of the Government’s greater
interest in collecting taxes and maintaining a uniform,
mandatory, and sound tax system.