Sullivan v. Comm'r

T.C. Memo. 2009-4
UNITED STATES TAX COURT
EDWARD AND MARY E. SULLIVAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15124-06L. Filed January 5, 2009.
Ps had unpaid liabilities of income tax for six
years (some joint, and some the liability of P-H only),
for which R sent notices of liens and proposed levies
under secs. 6320(a) and 6330(a), I.R.C. Pursuant to
secs. 6320(b) and 6330(b), Ps requested a collection
review hearing, and in that hearing submitted several
Forms 656, Offers in Compromise (OIC) (with which they
submitted financial information), proposing compromise
of liabilities estimated at $210,405, consisting of the
six years of income tax liabilities, plus other
liabilities whose collection is outside this Court’s
jurisdiction to review. Ps informally proposed their
last offer--$54,000--in writing but not on Form 656,
offered to submit Form 656, and disclosed their equity
of $464,653 in a house they owned as tenants by the
entirety. R’s appeals officer rejected the OICs and
the informal proposal, and issued notices of
determination to proceed with collection. Ps filed
their petition, and R moved for summary judgment.
Held: The Court’s jurisdiction to review
collection as to Ps’ liability for six years of income
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tax enables the Court to review the exercise of
discretion by R’s appeals officer in rejecting OICs
that included both those liabilities and other
liabilities whose collection the Court does not have
jurisdiction to review.
Held, further, the $54,000 written proposal that
was not submitted on Form 656, although not a formal
OIC for purposes of sec. 7122, I.R.C., was preceded by
formal OICs, was accompanied by the information
required with an OIC, and did constitute a “collection
alternative” (under sec. 6330(c)(2)(A)(iii), I.R.C.)
that was properly raised at the hearing and is subject
to our review.
Held, further, it was not an abuse of discretion
for R’s appeals officer to consider the value of Ps’
entirety property as contributing to their reasonable
collection potential.
Held, further, it was not an abuse of discretion
for R’s appeals officer to reject Ps’ $54,000 proposal,
because she reasonably determined that there was no
basis for compromise on (i) doubt as to liability,
because Ps do not challenge liability; (ii) doubt as to
collectibility, because Ps’ reasonable collection
potential was substantially greater than their OICs,
including their $54,000 proposal, and greater than
their liabilities; or (iii) promotion of effective tax
administration, because Ps failed to show any special
circumstances which would demonstrate that collection
of the full liability would undermine public confidence
that tax laws are being administered fairly.
Joseph A. Ryan, for petitioners.
Kristina L. Rico, for respondent.
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MEMORANDUM OPINION
GUSTAFSON, Judge: The petition in this case is an appeal,
pursuant to section 6330(d)(1),1 of three Notices of
Determination Concerning Collection Action(s) under Section 6320
and/or 6330, which were issued by the Internal Revenue Service
(IRS) to petitioners Edward and Mary E. Sullivan in connection
with Mr. Sullivan’s unpaid income taxes for tax years 1993 and
1995 and Mr. and Mrs. Sullivan’s joint unpaid income taxes for
tax years 1996, 1997, 2000, and 2001. The issue for decision is
whether the IRS abused its discretion in rejecting the offers-in-
compromise (OICs) that the Sullivans submitted to satisfy those
liabilities (and others)2 or whether instead the IRS may proceed
to collect those liabilities.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code (26 U.S.C.), and all Rule references
are to the Tax Court Rules of Practice and Procedure.
2
The Sullivans’ several OICs which the Court must consider
here, and which are discussed in more detail below, proposed to
satisfy not only the liabilities whose collection is within our
jurisdiction but also additional liabilities--i.e., Mr. and Mrs.
Sullivan’s joint income tax liabilities for several other tax
years (for which it is not alleged that the IRS ever issued any
notice under section 6320(a) or 6330(a)) and for Mr. Sullivan’s
liability for the trust fund penalties. For reasons explained
below, this Court does not have jurisdiction to review the IRS’s
proposed collection of those other liabilities, but they are
relevant to the issues that are within the Court’s jurisdiction.
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Background
This case was submitted fully stipulated pursuant to Rule
122, reflecting the parties’ agreement that the relevant facts
could be presented without a trial. The stipulation of facts and
the attached exhibits are incorporated herein by this reference.
Mr. and Mrs. Sullivan resided in Pennsylvania at the time they
filed their petition.
Tax Years 1993 and 1995
Mr. Sullivan filed income tax returns for 1993 and 1995.
The IRS conducted an examination of those returns and sent him a
statutory notice of deficiency for 1993 and 1995. Because
Mr. Sullivan did not petition this Court with respect to the
deficiency notice, the IRS assessed the 1993 and 1995 income tax
deficiencies, along with additions to tax and interest, in
June 1997 and in March 1998. Subsequently, in May 2005, the IRS
sent to Mr. Sullivan a Final Notice--Notice of Intent to Levy and
Notice of Your Right to a Hearing, pursuant to sections
6330(a)(1) and 6331(d)(1), advising him of the IRS’s intent to
levy upon his property, and also sent to him a Notice of Federal
Tax Lien Filing and Your Right to a Hearing, pursuant to
section 6320(a)(1), advising him that the IRS had filed a notice
of tax lien against him. Both notices reflected the income tax
liabilities for 1993 and 1995; however, the notice of lien also
reflected other liabilities the collection of which is, for
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reasons explained below, not within our jurisdiction here--i.e.,
Mr. Sullivan’s liability in calendar quarters in 1998 and 1999
for so-called “trust fund penalties” under section 6672, with
respect to the operation of Paoli Local Restaurant.
Tax Years 1996, 1997, 2000, and 2001
Mr. and Mrs. Sullivan filed joint income tax returns for the
four years 1996, 1997, 2000, and 2001. For the first two of
those years--1996 and 1997--the IRS conducted an examination of
the returns and sent the Sullivans a statutory notice of
deficiency. Because the Sullivans did not petition this Court
with respect to the deficiency notice, the IRS assessed in
April 1999 the income tax deficiencies it had determined for 1996
and 1997, along with additions to tax and interest.
For the later years 2000 and 2001, the IRS assessed in
October 2001 and April 2002 the income tax liabilities that the
Sullivans had self-reported on their tax returns, but which they
had not fully paid when they filed those returns.
Subsequently, in May 2005, the IRS sent to each of Mr. and
Mrs. Sullivan separately a Notice of Federal Tax Lien Filing and
Your Right to a Hearing, pursuant to section 6320(a)(1), advising
each of them that the IRS had filed a notice of tax lien against
them for all four years (1996, 1997, 2000, and 2001), and sent to
each of them separately a Final Notice--Notice of Intent to Levy
and Notice of Your Right to a Hearing, pursuant to sections
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6330(a)(1) and 6331(d)(1), advising each of them of the IRS’s
intent to levy upon their property for 2000 and 2001 only. (The
record does not show why no notice of levy was sent for 1996 or
1997.)
The six collection notices that the Sullivans received from
the IRS can be summarized thus:
Type of
Recipient Liability
Notice
Levy Mr. Sullivan Income tax: 1993, 1995
Lien Mr. Sullivan Income tax: 1993, 1995;
Sec. 6672 penalty: 1998, 1999
Levy Mr. Sullivan Income tax: 2000, 2001
Lien Mr. Sullivan Income tax: 1996, 1997, 2000,
2001
Levy Mrs. Sullivan Income tax: 2000, 2001
Lien Mrs. Sullivan Income tax: 1996, 1997, 2000,
2001
Agency Hearing
In response to these six notices, the Sullivans’
representative submitted to the IRS on May 27, 2005, four
Forms 12153, Request for a Collection Due Process Hearing--two
for Mr. Sullivan, one for Mrs. Sullivan, and one for the
Sullivans jointly.3 In the aggregate, the requests pertained to
3
The Sullivans’ Forms 12153 included references to supposed
notices of levy for 1996 and 1997 income tax and for the trust
fund penalties, even though the record here does not include
evidence of any such notices. The district court’s decision in
(continued...)
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all of the liabilities that had been reflected on the IRS’s six
collection notices--i.e., the liability of Mr. Sullivan for 1993
and 1995 income tax and for the trust fund penalty from quarters
in 1998 and 1999, and the liability of both Mr. and Mrs. Sullivan
for income tax for 1996, 1997, 2000, and 2001.
With their requests for a hearing, the Sullivans submitted
financial information about themselves (on Form 433-A, Collection
Information Statement for Wage Earners and Self-Employed
Individuals) and on Mr. Sullivan’s bankrupt business (on
Form 433-B, Collection Information Statement for Businesses).
The forms disclosed bank accounts with modest balances; a
retirement account worth $11,530; a house worth $350,000 subject
to a mortgage of $78,520; credit card debt of $9,938; car loans
totaling $16,118; and no other debt.
On the Forms 12153 requesting a hearing, the Sullivans did
not challenge the underlying tax liabilities; rather, the forms
stated only their desire for an OIC. Even before requesting the
hearing, the Sullivans had proposed such a compromise:
More than a month earlier, on April 14, 2005, the Sullivans
had jointly submitted a Form 656, Offer in Compromise, pursuant
3
(...continued)
Mr. Sullivan’s case involving the trust fund penalties does refer
to collection by levy, so it appears that a notice of levy must
have been issued as to the trust fund penalties. Sullivan v.
United States, 100 AFTR 2d 2007-6204, at 2007-6207 (E.D. Pa.
2007). This discrepancy does not affect the outcome here.
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to section 7122, proposing compromise on the basis of effective
tax administration (ETA). The OIC proposed that the IRS accept
payment of $34,017 from the Sullivans to satisfy Mr. Sullivan’s
liability for trust fund penalties and Mr. and Mrs. Sullivan’s
income tax liabilities for 1993, 1995, 1996, 1997, and 2000.4 To
justify the compromise on ETA grounds, a letter accompanying the
Form 656 argued that the offer should be accepted because the
Sullivans had tried to resolve their dispute with the IRS in a
“timely and equitable manner” and because their tax troubles were
largely a result of unfortunate circumstances outside of their
control, such as Mr. Sullivan’s inconsistent employment and the
bankruptcy of their family business.
On May 7, 2005 (again, before the Sullivans’ Forms 12153
requesting a hearing were submitted to the IRS), the IRS’s
Centralized OIC Unit in Holtsville, New York, sent the Sullivans
a letter indicating, among other things, that each of them would
need to submit a separate OIC on Form 656.
In response, on May 27, 2005--the same day the Sullivans
submitted their Forms 12153 requesting a collection review
4
It is unclear whether the April 2005 OIC excludes the year
2001 deliberately or in error. However, the later OICs do
explicitly include 2001. Similarly, although the parties have
stipulated that the April 2005 OIC included “employment * * * tax
liabilities” (by which they presumably mean the trust fund
penalty), the Form 656 does not say so in the appropriate line
under “Item 5”. However, the trust fund penalty liabilities are
explicitly included in Mr. Sullivan’s May 2005 OIC.
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hearing--Mr. Sullivan submitted an OIC on the basis of doubt as
to liability (DATL) and doubt as to collectibility (DATC),
proposing that the IRS accept payment of $31,629 to satisfy his
individual trust fund penalties and his income tax liabilities
for eight years. Those eight years consisted of his two non-
joint tax years that had been the subject of the IRS’s prior
notices (1993 and 1995), the four joint years that had been the
subject of the IRS’s prior notices (1996, 1997, 2000, and 2001),
and two additional years, newly brought into consideration--2003
and 2004. On the same day, Mrs. Sullivan submitted an OIC on the
basis of DATL and DATC, proposing that the IRS accept payment of
$10,000 to satisfy her income tax liabilities for six years: the
four joint years that had been the subject of the IRS’s prior
notices (1996, 1997, 2000, and 2001), and the two additional
years--2003 and 2004.
To justify their individual OICs on grounds of DATL and
DATC, Mr. and Mrs. Sullivan each cited the same reasons that had
previously been argued in favor of their prior, joint OIC, and
additional reasons stated in a letter dated May 23, 2005. In
that letter, the Sullivans argued that there was doubt as to
liability because (i) Mr. Sullivan’s trust fund penalties were
allegedly discharged in the bankruptcy of Paoli Local Restaurant
(a contention later rejected in separate litigation, as explained
below) and (ii) the IRS had allegedly failed to apply several
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credits to their unpaid income taxes. They argued that there was
doubt as to collectibility because “the only substantive asset
[they] possess is [their] personal residence”.
In that letter of May 23, 2005, the Sullivans valued their
house at $375,0005 and stated their mortgage balance (along with
necessary “[c]ommissions”, “repairs”, and “taxes” incidental to a
sale) amounted to $125,000; and they conceded that the resulting
equity in their home (apparently $250,000) was sufficient to
fully satisfy their liabilities to respondent (i.e., $210,405),
with almost $40,000 left over. However, they argued that forcing
them to sell their house “would be neither fair nor equitable”,
because it would leave them “with $40,000, no home, poor credit,
no pension/retirement funds to speak of, and limited earning
ability at age 55.” Their representative’s letter of May 27,
2005, added that their house “is owned jointly under a tenancy by
the entireties thereby creating serious questions regarding
collectability [sic] of any taxes purportedly owed by
Mr. Sullivan individually”, but did not elaborate on those
“questions.”
The so-called “collection due process” (CDP) hearing was
held as a telephone conference on November 28, 2005, between
5
This $375,000 value was somewhat greater than the $350,000
value reported on their Form 433-A. And, as is stated below, it
is substantially less than the value at which this residence was
appraised less than a year later: $538,000.
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respondent’s hearing officer, Darryl Lee, and the Sullivans’
representative; and subsequently, numerous telephone calls and
correspondence were exchanged between the hearing officer and the
Sullivans’ representative.
Petitioners’ Latest Proposal
The total of Mr. Sullivan’s May 2005 offer ($31,629) and
Mrs. Sullivan’s May 2005 offer ($10,000) had been $41,629. In
February 2006 the hearing officer apparently suggested that he
would recommend that his superiors approve an agreement if the
Sullivans would increase their offer to $54,000; so on March 8,
2006, their representative sent respondent a letter stating--
that Mr. and Mrs. Sullivan agree to your recommended
lump sum settlement payment of $54,000. The Sullivans’
approval is conditioned upon the following:
(1) the settlement would extinguish any and all
alleged tax liabilities (including any and all
interest and penalties) which the Sullivans may
individually or jointly have for tax years
1993-2004, and
(2) the settlement would extinguish any and all alleged
trust fund tax responsibilities that Mr. Sullivan may
have arising from the operation of the Paoli Local
Restaurant.
Please advise as to whether we will need to modify
and resubmit the Offers in Compromise separately
submitted by Mr. and Mrs. Sullivan. Once we have been
advised that your recommendation has been approved, the
Sullivans will proceed with finalizing in obtaining the
home equity loan. * * *
By its literal terms, this March 2006 proposal included
Mr. and Mrs. Sullivan’s income tax liabilities for the twelve
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years 1993 through 2004 and Mr. Sullivan’s trust fund penalty
liabilities. Those twelve years of income tax included four tax
years (1994, 1998, 1999, and 2002) that had not been the subject
of the Sullivans’ previous offers, and included six years (the
same four, plus 2003 and 2004) for which the IRS had not issued
any notice of the filing of a lien nor any notice of intent to
levy. If the IRS had accepted the March 2006 proposal, the
resulting agreement would have “extinguish[ed]” not only the
liabilities whose collection is properly at issue in this case
(i.e., income tax for the six years 1993, 1995-1997, and 2000-
2001) but also income tax liabilities for six additional years
(1994, 1998-1999, and 2002-2004) plus the trust fund penalties.
The record before us does not permit a precise calculation
of the liabilities that would have been “extinguish[ed]” by the
March 2006 offer. However, according to the Sullivans’ counsel’s
letter of May 23, 2005, “the amounts claimed to be due to the
IRS” totaled $210,405 at that time, and we will assume that
number.6
6
This amount apparently includes additions to tax and
interest but does not include any income tax for the years 1994,
1998, 1999, or 2002. Counsel’s letter of May 2005 appears to
reflect an expectation that the crediting of a $105,775 payment
that the IRS had allegedly received from the Bankruptcy Court in
2001 (apparently in relation to the employment taxes underlying
the trust fund liabilities) would reduce that $210,405 total
(which included trust fund liabilities of $115,625). However, as
was noted above, in 2007, the district court upheld respondent’s
determination “that the payment to the I.R.S., agreed on in the
(continued...)
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In April 2006 the Sullivans’ counsel and the hearing officer
discussed (but did not resolve) how the OICs should be revised to
allocate the $54,000 amount among the various liabilities
involved in the OIC. However, no revised Forms 656 reflecting
the $54,000 proposal were ever solicited by the IRS or submitted
by the Sullivans; and the Sullivans’ counsel’s letter made it
clear that the hearing officer’s recommendation of the $54,000
was contingent upon his receiving, inter alia, an appraisal of
the Sullivans’ house and information about their mortgage on that
house.
On May 12, 2006, the Sullivans’ counsel sent the IRS a
letter transmitting information that had been requested by the
hearing officer and that was intended to persuade the IRS that it
should accept the Sullivans’ $54,000 proposal. That information
included the Sullivans’ 2005 joint income tax return showing
gross income of $53,384, and bank statements showing account
balances of $1,981.43 and $1,320.11. The most significant
information pertained to their residence, held jointly by them as
tenants by the entirety.7 They sent the IRS an appraisal of
6
(...continued)
Stipulated Order, applied to taxes owed by Paoli Restaurant,
Inc., and did not apply to the unpaid employment taxes owed by
Plaintiff individually.” Sullivan v. United States, 100 AFTR 2d
2007-6204, at 2007-6207.
7
Under Pennsylvania law, a tenancy by the entirety is a
joint estate held by a husband and wife that is protected from
(continued...)
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their residence, reporting its value to be $538,000. This
appraised value was $163,000 greater than the estimated value of
$375,000 that the Sullivans had provided a year earlier. The
information sent to the hearing officer also included a mortgage
statement reflecting a balance due of $73,346.78. That
information provided in May 2006 thus showed that their equity in
the house amounted to $464,653.22--an amount more than double the
amount of their own estimate of their total tax liability (i.e.,
$210,405).
7
(...continued)
certain types of involuntary transfers:
A tenancy by the entirety is an estate which exists
whenever property is held jointly by a husband and a
wife by virtue of title which they acquired after
marriage.
A tenancy by the entirety is an estate "per tout et non
per my"; that is, each spouse is seised of the whole of
the property and not of any share, divisible part or
interest thereof. The concept arises from the
common-law theory that marriage creates a unified
holding of property whereby neither spouse maintains an
individual interest in entireties property, but rather,
both spouses share possession and all rights and
enjoyment arising therefrom.
* * * * * * *
An estate by the entirety differs from a joint tenancy
in that the right of survivorship cannot be defeated by
a conveyance by one of the spouses, nor by an
involuntary transfer of the interest of one of the
spouses.
“Tenancy by Entirety in General”, 26 Pennsylvania Law
Encyclopedia sec. 42 (2007)(fn. refs. omitted).
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The Appeals Officer’s Determination, and the Commencement of
This Suit
On July 7, 2006, after having received the May 2006 letter
and exhibits that showed the Sullivans to have net assets
substantially greater than their total tax liability, the IRS
appeals officer8 rejected all three of the OICs that the
Sullivans had submitted on Form 656. Each of the three
Forms 5402-c, Appeals Transmittal and Case Memo, reflecting that
decision for each OIC had an attached “Appeals Case Memorandum”,
evidently prepared by the hearing officer, that included
identical language: “As the total of equity in assets exceeds
the liability, there is no basis for an offer in compromise.”
In making that judgment, the hearing officer had discounted the
Sullivans’ equity of $464,653 by approximately 25 percent to
8
The hearing had been conducted by Mr. Lee, whom we refer to
here as the “hearing officer”. His recommendations to reject the
OICs and to issue determinations to proceed with collection were
approved and issued by Ms. Laura Weening, the Appeals Team
Manager, whom we refer to as the “appeals officer”. Petitioners’
briefs as quoted here use the pronouns “he” and “his” to refer to
the appeals officer who exercised discretion to make the
determinations at issue here, and we do not correct those
pronouns. The distinction between the hearing officer and the
appeals officer is not material here. Section 6330(b)(1)
provides that the hearing “shall be held by the Internal Revenue
Service Office of Appeals” (emphasis added); section 6330(b)(3)
provides that the hearing may be “conducted by an officer or
employee” of the Office of Appeals (emphasis added); and
section 6330(c)(3) provides that the determination is made “by an
appeals officer” (emphasis added); and the statute does not
require that the “appeals officer” making the determination must
be the same person as the “officer or employee” conducting the
hearing.
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$357,400, for reasons not explained in the record. The memoranda
attached to the Forms 5402-c further show that the Sullivans’
joint OIC of $34,017 was rejected because the Sullivans had not
demonstrated that a special circumstance existed to support a
compromise of the liability, and that the Sullivans’ individual
OICs were rejected because no special circumstances existed,
there was no doubt as to liability, and there was therefore no
basis for accepting an OIC. The Office of Appeals did not
solicit any amended Form 656 reflecting the Sullivans’ $54,000
proposal, and it thereby implicitly rejected that proposal.
On July 7, 2006, the IRS issued three Notices of
Determination Concerning Collection Action(s) under Section 6320
and/or 6330: one such notice to Mr. Sullivan, determining to
uphold its liens and proceed with a levy to collect income tax
for 1993 and 1995; a second notice to Mr. and Mrs. Sullivan
jointly, determining to proceed with a levy to collect income tax
for 2000 and 2001; and a third notice to Mr. and Mrs. Sullivan
jointly, upholding the filing of a tax lien as to income tax for
1996, 1997, 2000, and 2001. In response, Mr. and Mrs. Sullivan
timely filed a petition with this Court.
Resolution of the Trust Fund Penalties in District Court
The Sullivans’ original petition in this Court sought the
Court’s collection review as to both the six years of income tax
and the trust fund penalties; but by our order of November 24,
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2006, we granted respondent’s motion to dismiss the petition in
part, for lack of jurisdiction, to the extent that, inter alia,
it sought review of the IRS’s collection of the trust fund
penalties. Mr. Sullivan then filed suit in federal district
court to obtain that court’s review, under section 6330(d), of
the IRS’s proposed collection of the trust fund penalties. The
district court held that Mr. Sullivan was liable for the
penalties, that his liability was not discharged in bankruptcy,
“that Plaintiff had sufficient equity to pay the taxes and that
imposing a levy was the ‘most efficient method of collection
remaining.’” Sullivan v. United States, 100 AFTR 2d 2007-6204,
at 2007-6207 (E.D. Pa. 2007).
The Sullivans were subsequently granted leave to file an
amended petition in this Court, and the amended petition requests
this Court’s review as to only the six years of income taxes and
asks this Court to find that the appeals officer abused her
discretion in rejecting the Sullivans’ $54,000 proposal. Shortly
thereafter, the parties submitted a stipulation of facts pursuant
to Rule 122, which provides that “Petitioners’ [sic] are not
challenging the underlying liability in this Tax Court
Proceedings [sic]”, and “Petitioners’ [sic] are challenging that
the settlement officer abused his discretion by not accepting
petitioners’ offer-in-compromise in the amount of $54,000".
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Discussion
I. The Tax Court Has Jurisdiction Under Section 6330 To Review
the IRS’s Proposed Collection of Petitioners’ Income Tax
Liabilities for Six Years.
The facts of this case present a logical puzzle as to this
Court’s jurisdiction, because of the mixed nature of the
Sullivans’ OICs.
A. Petitioners’ Offers-in-Compromise Included Other Income
Tax Liabilities and Trust Fund Penalty Liabilities, the
Collection of Which Is Outside This Court’s
Jurisdiction To Review.
The IRS sent to the Sullivans various notices of its filing
of liens, and of its intent to levy, with respect to
Mr. Sullivan’s individual unpaid income taxes for two years (1993
and 1995) and Mr. and Mrs. Sullivans’ joint unpaid income taxes
for another four years (1996, 1997, 2000, and 2001); and this
Court has jurisdiction to review that proposed collection of
income taxes. However, one of the lien notices also included
Mr. Sullivan’s liability for trust fund penalties; and as a
further complication, the Sullivans’ OICs--the IRS’s rejection of
which must now be reviewed for abuse of discretion--offered to
pay a given amount to satisfy not only the income tax liabilities
for those six years, but also (i) the Sullivans’ income tax
liabilities for several other tax years for which they had
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received no collection notices or determinations from the IRS,
and (ii) Mr. Sullivan’s liability for trust fund penalties.9
The appeals officer rejected the OICs and determined to
proceed with collection. The appeals officer’s determinations
were issued before October 16, 2006, at a time when this Court
had no jurisdiction to review the IRS’s proposed collection as to
the trust fund penalties. See Moore v. Commissioner, 114 T.C.
171 (2000). Furthermore, this Court has jurisdiction to review
the collection activities of the Commissioner only with respect
to tax liabilities for which a valid notice of determination was
issued. Sec. 6330(d)(1). Here, valid notices of determination
were issued as to collection of only six years of the Sullivans’
income tax liabilities, and we have no jurisdiction to review the
IRS’s collection activity as to their income tax liabilities for
other tax years. Consequently, respondent moved to dismiss the
petition in part, insofar as it pertained to those liabilities
whose collection is outside this Court’s jurisdiction to review,
9
First, in April 2005 the Sullivans filed their joint OIC,
offering to pay $34,017 to satisfy income tax liabilities and
trust fund penalties. Second, in May 2005 Mr. Sullivan made
another OIC and offered to pay $31,629 to satisfy his income tax
liabilities and trust fund penalties. (Mrs. Sullivan
simultaneously made an OIC, offering to pay $10,000 to satisfy
income tax liabilities only.) Third, in March 2006 the Sullivans
jointly made an informal written proposal to pay $54,000 to
satisfy all of their income tax liabilities for twelve years, and
Mr. Sullivan’s trust fund penalties.
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and this Court granted that motion by its order of November 24,
2006.
B. This Court Has Jurisdiction To Review the IRS’s
Proposed Collection of the Income Tax Liabilities for
Six Years and, in So Doing, To Consider Facts Relating
to the Other Liabilities That Were Included in
Petitioners’ OICs.
The record is thus clear that this Court now retains
jurisdiction to review respondent’s proposed collection of income
tax for only six of the years--Mr. Sullivan’s liability for
income tax for 1993 and 1995, and the Sullivans’ joint liability
for income tax for 1996, 1997, 2000, and 2001. The Court must
now determine whether the appeals officer abused her discretion
in determining to proceed with collection of those liabilities
notwithstanding the Sullivans’ OICs, which she determined to
reject. However, the Sullivans’ OICs proposed compromises of
both the liabilities whose collection is properly before us and
the extra-jurisdictional liabilities. The Sullivans’ OICs
proposed to compromise both sets of liabilities in one agreement;
and the appeals officer made a determination (which either was or
was not an abuse of her discretion) to reject each OIC and
proceed with collection. This prompts the question whether and
how this Court can evaluate that decision without addressing
matters outside its jurisdiction.
One answer, which is not tenable, would be that the Court
should simply ignore the existence of the extra-jurisdictional
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liabilities and should evaluate the OICs (and the appeals
officer’s rejection of the OICs) as if those liabilities did not
exist. Under that approach, the Court would simply consider
whether the amount that the Sullivans had offered should have
been accepted in satisfaction of the six years of income tax only
(without regard to the OIC’s effect on the extra-jurisdictional
liabilities). We decline to follow this approach for two
reasons: First, this Court would be reviewing a hypothetical
decision that was never made by the appeals officer, instead of
reviewing her actual decision. And second, ignoring an extra-
jurisdictional liability that an OIC would have required the IRS
to compromise could materially alter the reasonableness of the
OIC. An offer to pay $54,000 to satisfy income tax liabilities
totaling less than $100,000 is very different from an offer to
pay $54,000 to satisfy income tax liabilities and trust fund
penalties totaling more than $210,000. Ignoring some of the
liabilities in the OIC could radically distort this Court’s
review.
A second answer, which is also not tenable, is that when
taxpayers have offered a hybrid or mixed OIC that includes extra-
jurisdictional liabilities, this Court is required to dismiss the
petition altogether. However, this Court has not taken that
- 22 -
approach,10 and for good reason: The Court has jurisdiction to
review proposed collection of petitioners’ income tax liabilities
for which a valid notice of determination was issued; and the
matter that it lacks jurisdiction to review is collection of the
other liabilities. This Court is disabled from halting the IRS’s
collection of these other liabilities, but it is not disabled
from knowing about them. In determining whether the rejection of
the OICs and the collection of the six years of income tax is
appropriate, this Court is authorized (as the appeals officer was
required) to consider “any relevant issue relating to * * * the
proposed levy”. Sec. 6330(c)(2)(A), (d).
In reviewing the appropriateness of a collection action, the
Court must inevitably consider facts in addition to the tax
liabilities whose collection is at issue. For example, although
this Court has no jurisdiction to adjudicate the Sullivans’
liability for their mortgage, it can and must consider the
mortgage as a fact in determining the quantum of their equity
interest in their residence. Similarly, although this Court has
no jurisdiction to adjudicate Mr. Sullivan’s liability for the
10
See, e.g., Orum v. Commissioner, 123 T.C. 1 (2004)
(reviewing an OIC that covers income tax liabilities for tax
years that are both within and outside of this Court’s
jurisdiction), affd. 412 F.3d 819 (7th Cir. 2005); Milnes v.
Commissioner, T.C. Memo. 2003-62 (reviewing the Commissioner’s
determination to proceed with the collection of income tax
liabilities and dismissing the case as to the Commissioner’s
determination to collect extra-jurisdictional liabilities).
- 23 -
trust fund penalties, nor to halt respondent’s collection of
those penalties, the Court nonetheless can and must consider the
trust fund penalties (and their inclusion in the OIC) as a fact
in determining the reasonableness of the offer.
We therefore proceed to evaluate the appeals officer’s
exercise of discretion in rejecting the OICs, taking into account
all the liabilities that were proposed to be compromised, even
though we do not have jurisdiction to review the collection of
all those liabilities.
II. The Appeals Officer Did Not Abuse Her Discretion in
Rejecting Petitioners’ OICs and Determining To Proceed With
Collection.
A. The Internal Revenue Code Provides the IRS’s Collection
Procedures, the Agency Hearing to Which a Taxpayer Is
Entitled, and the Court Review to Which the Agency
Determination Is Subject.
If a taxpayer fails to pay any Federal income tax liability
after notice and demand, chapter 64 of the Internal Revenue Code
provides two means by which the IRS can collect the tax: First,
section 6321 imposes a lien in favor of the United States on all
the property of the delinquent taxpayer, and section 6323(f)
authorizes the IRS to file notice of that lien. Second,
section 6331(a) authorizes the IRS to collect the tax by levy on
the taxpayer’s property.
However, Congress has added to chapter 64 of the Code
certain provisions (in subchapter C, part I, and in subchapter D,
part I) as “Due Process for Collections”, and those provisions
- 24 -
must be complied with after the IRS files a tax lien, and before
the IRS can proceed with a levy: Within five business days after
filing a notice of tax lien, the IRS must provide written notice
of that filing to the taxpayer. Sec. 6320(a). After receiving
such a notice, the taxpayer may request an administrative hearing
before the Office of Appeals.11 Sec. 6320(b)(1). Similarly,
before proceeding with a levy, the IRS must issue a final notice
of intent to levy and notify the taxpayer of the right to an
administrative hearing before the Office of Appeals. Sec.
6330(a) and (b)(1).
At that CDP hearing, the taxpayer may generally raise
relevant issues relating to the unpaid tax or the proposed levy,
including offers of collection alternatives. Such collection
alternatives may include, among other things, an installment
agreement or offer in compromise. Sec. 6330(c)(2)(A). The
appeals officer must make a determination whether or not the lien
should be released and/or whether the proposed levy action may
proceed. The appeals officer is required to take into
consideration: (1) “verification from the Secretary that the
requirements of any applicable law and administrative procedure
have been met” (see sec. 6330(c)(3)(A), citing sec. 6330(c)(1));
11
To the extent practicable, a CDP hearing concerning a lien
(under sec. 6320) is to be held in conjunction with a CDP hearing
concerning a levy (under sec. 6330), and the conduct of the lien
hearing is to be in accordance with the relevant provisions of
section 6330. See sec. 6320(b)(4), (c).
- 25 -
(2) relevant issues raised by the taxpayer (see sec.
6330(c)(3)(B), citing sec. 6330(c)(2)12); and (3) “whether any
proposed collection action balances the need for the efficient
collection of taxes with the legitimate concern of the person
that any collection action be no more intrusive than necessary”
(see sec. 6330(c)(3)). If the Office of Appeals then issues a
notice of determination to uphold the lien and/or to proceed with
the proposed levy, the taxpayer may appeal the determination to
this Court within 30 days (see secs. 6320(c), 6330(d)(1)), as the
Sullivans have done.
B. In Their CDP Hearing, the Sullivans Offered To Pay
$54,000 To Extinguish Liabilities of No Less Than
$210,405.
The Sullivans’ sole remaining contention here, stated in
the parties’ stipulation, is “that the settlement officer abused
his discretion by not accepting the Sullivans’ offer-in-
12
Under section 6330(c)(2), a taxpayer may raise collection
issues under subsection (c)(2)(A) and may, under certain
circumstances, challenge the underlying tax liability under
subsection (c)(2)(B). Where the underlying tax liability is
properly at issue in a section 6330 hearing, the Court will
review the matter de novo. Davis v. Commissioner, 115 T.C. 35, 39
(2000). However, where the underlying liability is not at issue,
we review the appeals officer’s determinations regarding the
collection action for an abuse of discretion. Goza v.
Commissioner, 114 T.C. 176 (2000). The Sullivans have not
challenged their underlying liability. Accordingly, we review
the IRS’s determinations for abuse of discretion; that is,
whether the determinations were arbitrary, capricious, or without
sound basis in fact or law. See Murphy v. Commissioner, 125 T.C.
301, 320 (2005), affd. 469 F.3d 27 (1st Cir. 2006); Sego v.
Commissioner, 114 T.C. 604, 610 (2000).
- 26 -
compromise in the amount of $54,000.”13 As is noted above, one
of the issues that a taxpayer may raise in a collection hearing
is “offers of collection alternatives, which may include * * * an
offer-in-compromise.” Sec. 6330(c)(2)(A)(iii).
The regulations require OICs to be submitted on “forms
prescribed by the Internal Revenue Service”, sec. 301.7122-
1(d)(1), Proced. & Admin. Regs. (26 C.F.R.). The prescribed form
for an OIC is Form 656, but the Sullivans’ latest proposal of
$54,000 was not stated on a Form 656. However, they had
previously submitted three OICs on Form 656; they had submitted
financial information on Form 433-A and otherwise; they made
their revised proposal in writing; and they expressly offered to
submit a revised Form 656.14 The $54,000 proposal originated as
a recommendation from the hearing officer, so there is no
13
Since the Sullivans’ sole remaining contention here
relates to their proposal to pay $54,000, and since the amount of
that proposal was greater than the amounts offered in their prior
OICs (i.e., $34,017 and $41,629), we need not address separately
whether the appeals officer abused her discretion in rejecting
the prior OICs for lesser amounts.
14
The facts of this case are thus plainly different from
those of Godwin v. Commissioner, T.C. Memo 2003-289, 86 TCM (CCH)
451, 457 (2003), affd. 132 Fed. Appx. 785 (11th Cir. 2005). In
that case, the taxpayers “did not submit a Form 656 or otherwise
describe their income, assets, and other financial information
* * *. Instead petitioners attempted to settle their entire
liability for $100,000 without providing any facts to support
their claimed inability to pay the full tax liability”. But see
infra note 21.
- 27 -
suggestion that the IRS failed to consider the proposal because
of its informality.
Rather, it was understood by both parties that the Sullivans
were offering $54,000 to extinguish liabilities estimated to be
$210,405. Consequently, the $54,000 proposal--although not a
formal OIC for purposes of section 7122--did constitute a
“collection alternative” that was properly raised at the CDP
hearing under section 6330(c)(2)(A)(iii) and is subject to our
review.
C. The Appeals Officer Did Not Abuse Her Discretion in
Rejecting Petitioners’ $54,000 Proposal, Since She
Reasonably Concluded That They Had Assets (Chiefly
Their Home Equity of $464,653.22) That Were Sufficient
(Even If Discounted to $357,400) To Pay Their Estimated
Liability of $210,405.
Where, as here, the underlying tax liability is not at
issue, we review the Commissioner’s determination for abuse of
discretion. Sego v. Commissioner, 114 T.C. 604, 610 (2000).
This standard does not require us to decide what we think would
be an acceptable OIC. Murphy v. Commissioner, 125 T.C. 301,
308-310 (2005), affd. 469 F.3d 27 (1st Cir. 2006). Rather, our
review is to determine whether the appeals officer’s rejection of
the Sullivans’ OIC was arbitrary, capricious, or without sound
basis in fact or law. See id.
The grounds for compromise of a tax liability are (i) doubt
as to liability (DATL), (ii) doubt as to collectibility (DATC),
and (iii) promotion of effective tax administration (ETA). Sec.
- 28 -
301.7122-1(b), Proced. & Admin. Regs. Mr. and Mrs. Sullivan made
their original joint OIC on grounds of ETA and their later
individual OICs on grounds of DATL and DATC. Since the Sullivans
thus raised all three grounds for compromise in their prior OICs
submitted on Form 656, we consider all three grounds in
evaluating their $54,000 proposal.
1. Doubt as to Liability Is Not an Issue.
Whether the appeals officer abused her discretion in
determining that there is no DATL is not an issue here.
Asserting doubt as to liability is equivalent to challenging the
underlying liability under section 6330(c)(2)(B),15 and the
Sullivans have stipulated that they are not challenging
underlying liability in this case.
15
See Baltic v. Commissioner, 129 T.C. 178, 183 (2007);
Yesse v. Commissioner, T.C. Memo. 2008-157 (“a challenge to the
amount of the tax liability made in the form of an offer-in-
compromise based on DATL by a taxpayer who has received a notice
of deficiency is a challenge to the underlying liability
precluded by section 6330(c)(2)(B)”). For most of the
liabilities included within the Sullivans’ OICs, such a challenge
would be legally precluded here. As to the trust fund penalties,
Mr. Sullivan was held liable in Sullivan v. United States, supra.
As to the income taxes for 1993, 1995, 1996, and 1997, the
Sullivans received statutory notices of deficiency and chose not
to petition this Court; they therefore are barred by section
6330(c)(2)(B) from contesting that liability.
- 29 -
2. The Appeals Officer Reasonably Ruled Out Doubt as
to Collectibility, as a Basis for an OIC.
a. Doubt as to Collectibility Is Determined By
Reference to Published Standards.
The appeals officer did not abuse her discretion in
determining that there was no doubt as to collectibility. The
guidelines for evaluating OICs on the basis of DATC are published
in the regulations interpreting section 7122. See sec.
301.7122-1(c)(2), Proced. & Admin. Regs.; see also 1
Administration, Internal Revenue Manual (IRM), pt. 5.8.4.4, at
16,306. Under this administrative guidance, the Secretary will
generally compromise a liability on the basis of DATC only if the
liability exceeds the taxpayer’s reasonable collection potential.
See Murphy v. Commissioner, supra at 308-310; Schwartz v.
Commissioner, T.C. Memo. 2008-117. Furthermore, an OIC based on
DATC will be acceptable only if the offer reflects the taxpayer’s
reasonable collection potential, i.e., that amount, less than the
full liability, that the IRS could collect through means such as
administrative and judicial collection remedies. Murphy v.
Commissioner, supra at 309; Rev. Proc. 2003-71, sec. 4.02(2),
2003-2 C.B. 517, 517. A taxpayer’s reasonable collection
potential is determined, in part, using the 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
- 30 -
Federal income tax liabilities. See 2 Administration, IRM, exh.
5.15.1-3, at 17,668, exh. 5.15.1-8, at 17,686, exh. 5.15.1-9, at
17,742.
b. The Amount of Petitioners’ Equity in Their
Residence Removed Doubt as to Collectibility.
In this instance it is simple to determine that the
Sullivans’ collection potential exceeded their liability. Their
reasonable collection potential, absent special circumstances,
was equal to no less than their equity in their house. Even the
Sullivans’ original lowball estimate of their house’s value,
given in the May 2005 letter accompanying their individual OICs,
showed that their equity exceeded their total tax liability by
almost $40,000. The appraisal they later submitted in May 2006
showed that their equity interest in their house was in fact
$464,653.22--an amount that was more than double the $210,405 of
tax liabilities they tried to settle, and that was more than
eight times the amount of their latest proposal of $54,000.16
Even if one were to assume (as the Sullivans assert) that neither
of them would ever generate income in excess of their living
expenses, their reasonable collection potential, which includes
both income and assets, was still substantially greater than
their total tax liability or their $54,000 offer.
16
The hearing officer’s unexplained 25 percent discount of
that equity yielded an amount--$357,400--that still greatly
exceeded the total liability, and was more than six times their
$54,000 proposal.
- 31 -
c. This Analysis Is Not Changed By the Argument
That Petitioners Owned Their Home as Tenants
By the Entirety.
The Sullivans argue for the possibility that, under
Pennsylvania law, none of the value of their house would be
available to satisfy Mr. Sullivan’s liabilities, because they
owned the property as tenants by the entirety.17 This
possibility, the Sullivans argue, raises doubt as to
collectibility despite the hundreds of thousands of dollars of
equity in their house. This argument does not survive analysis.
The IRS filed a notice of lien and, in deciding whether to
compromise the Sullivans’ liability, took into account their
equity in their home. The IRS could force a sale of the house
upon the severance of the entirety property (e.g., upon the
divorce of Mr. and Mrs. Sullivan). See “Tenancy by Entirety in
General”, 26 Pennsylvania Law Encyclopedia sec. 42 (2007).
17
The Sullivans’ argument on this issue has evolved. As
previously noted supra p. 10, their only contention at the agency
hearing was that the entirety ownership raised “serious” but
unstated “questions”. In this litigation, an early version of
the argument, in a brief filed July 25, 2007, was that under
Pennsylvania law, only 50 percent of the value of their house is
available to reduce the tax liability of Mr. Sullivan, who has
substantially greater tax liabilities than Mrs. Sullivan.
However, if the appeals officer had anticipated this argument,
his evaluation of the OICs could have considered only 50 percent
of the $464,653 of equity in the Sullivans’ house (i.e., only
$232,326) but still determined that the reasonable collection
potential was higher than any of their OICs--and higher than the
liability. If the appeals officer had considered only 50 percent
of the discounted equity of $375,400 (i.e., only $187,700), the
reasonable collection potential was still more than three times
the offer of $54,000.
- 32 -
Furthermore, the IRS, through its Federal tax lien, could
restrict the Sullivans’ ability to extract equity from their
home. Thus, even short of forcing an immediate sale,18 the IRS
could reasonably expect the Sullivans to consider the value of an
unencumbered title to their home in determining the ultimate
value of settling their tax liabilities.
Generally, when the tax liability at issue is owed by only
one spouse (as is true for most but not all of the liabilities
here) and real estate is held in tenancy by the entirety, it is
the IRS’s policy to consider 50 percent of that real estate’s net
realizable equity in calculating a taxpayer’s reasonable
collection potential. IRS Notice 2003-60, 2003-2 C.B. 643;
1 Administration, IRM, pt. 5.8.5.3.11, at 16,339-5. Furthermore,
the Court of Appeals for the Third Circuit (to which an appeal in
18
The IRS did not threaten an immediate forced sale of their
house; and had it done so, not the Tax Court but the district
court would have had jurisdiction to approve that levy, under
section 6334(e); so we do not reach the question whether the IRS
could have done so. However, we note that the Sullivans had
unpaid joint tax liabilities, and they have suggested no reason
that the IRS did not have the right to levy on the jointly held
property to collect the joint liability. See Napotnik v.
Equibank, 679 F.2d 316, 320 (3d Cir. 1982) (“in Pennsylvania
entirety property may be reached by creditors to satisfy the
joint debts of husband and wife”); United States v. Eglinton,
71A AFTR 2d 93-3689, 90-1 USTC par. 50,322 (E.D. Pa. 1990)
(applying Napotnik to federal tax debts). Whether such a levy to
collect the joint liability would thereafter permit the
collection of a spouse’s separate federal tax liability from his
share of the remaining proceeds is a further question we need not
reach. But see Fitzgerald v. Fitzgerald, 13 Pa. D. & C.3d 278
(Pa. Ct. Com. Pl. 1979) (after mortgage foreclosure, remaining
proceeds retained their entirety character until severance).
- 33 -
this case would lie) endorsed the IRS’s receipt and retention of
50 percent of the proceeds of sale of entirety property in the
context of dividing the proceeds under Pennsylvania law. See
Popky v. United States, 419 F.3d 242, 244-245 (3d Cir. 2005).
Where the tenants are jointly liable, there is of course even
more reason to consider the property in calculating the tenants’
collection potential. In this instance, 50 percent of the
Sullivans’ equity in their house would have satisfied the entire
estimated liability, joint and separate.
The Sullivans argue, however, that their case is
distinguishable from Popky because they have no intention or plan
to sell their house. Furthermore, they argue that under
Pennsylvania law the IRS may never be able to levy on and sell
their house, because of its status as entirety property.19
19
We do not need to definitively resolve this legal question
to decide this case, since for present purposes it is enough that
the appeals officer made a reasonable judgment of the Sullivans’
collection potential. However, we observe that existing
precedent does not appear to favor the Sullivans’ argument that
entirety property in Pennsylvania is exempt from levy and forced
sale by the IRS--even in the case of an attempt to collect only
non-joint liabilities of one of the tenants. In United States v.
Craft, 535 U.S. 274 (2002), the Supreme Court held that a federal
tax lien under section 6321 can attach to entirety property. To
date, the Supreme Court has yet to extend Craft’s holding to
levies or forced sales under section 6331. However, Craft’s
holding has been extended to levies and forced sales by the IRS,
in its IRS Notice 2003-60, 2003-2 C.B. 643, and by the Sixth
Circuit, in Hatchett v. United States, 330 F.3d 875, 882 (6th
Cir. 2003). Furthermore, in Popky v. United States, 326 F. Supp.
2d 594, 604-605 (E.D. Pa. 2004), affd. 419 F.3d 242 (3d Cir.
2005), the district court followed Hatchett, and its opinion was
(continued...)
- 34 -
However, under Sego v. Commissioner, 114 T.C. 610, we review
respondent’s determination for abuse of discretion, and we
decline to hold that the appeals officer abused her discretion in
her estimate of the Sullivans’ reasonable collection potential.
Absent a showing of special circumstances (discussed below), the
Sullivans’ $54,000 proposal was inadequate under the regulations,
when compared even to 50 percent of the value of the entirety
property. See Popky v. United States, supra; Murphy v.
Commissioner, 125 T.C. 309; Rev. Proc. 2003-71, sec. 4.02(2),
2003-2 C.B. 517, 517.
Upon a showing of special circumstances by the taxpayer, the
formulaic approach described above is modified, and an OIC may be
accepted even if it is for less than the taxpayer’s reasonable
collection potential, e.g., where a long-term illness prevents
the taxpayer from earning a living, and it is reasonably
foreseeable that the taxpayer’s financial resources will be
exhausted providing for care and support during the course of the
condition. Sec. 301.7122-1(b)(3), (c)(3), Proced. & Admin.
Regs.; see also 1 Administration, IRM, pt. 5.8.11.2.1, at 16,375,
pt. 5.8.11.2.2, at 16,377. No such circumstances have been shown
19
(...continued)
affirmed by the Court of Appeals for the Third Circuit without
discussion or criticism on this point. The district court held
that entirety property (in that case, the proceeds of a sale) was
subject to levy under section 6331, provided that the procedural
requirements of the statute are followed and the property is not
otherwise exempt under section 6334. Id.
- 35 -
here. The Sullivans have not shown that payment of more than the
amount that they offered in settlement of their liabilities would
have rendered them unable to meet basic living expenses. Their
projections of future income and expenses are speculative and
unpersuasive. The Sullivans’ situation is not comparable to the
examples given in the regulations. The appeals officer
thoroughly considered and addressed their arguments.
3. The Appeals Officer Reasonably Ruled Out Promotion
of Effective Tax Administration, as a Basis for
an OIC.
The appeals officer did not abuse her discretion in
determining that the Sullivans failed to show that their final
offer of $54,000 promotes effective tax administration. Under
the regulations,20 a liability may be compromised in order to
promote ETA if there are compelling public policy or equity
considerations identified by the taxpayer. Compromise is
justified where, because of exceptional circumstances, collection
of the full liability would undermine public confidence that tax
laws are being administered fairly. Sec. 301.7122-1(b)(3)(ii),
Proced. & Admin. Regs. Some examples of a compromise that is
allowed for purposes of public policy and equity are: (i) a
taxpayer who was hospitalized regularly for a number of years and
was unable, at that time, to manage his financial affairs, and
(ii) a taxpayer who learns at audit that he was given erroneous
20
See also 1 Administration, IRM, pt. 5.8, at 16251.
- 36 -
advice and, as a result of actions taken in reliance on it, is
facing additional taxes, penalties, and additions to tax. Sec.
301.7122-1(c)(3)(iv), Proced. & Admin. Regs.
The Sullivans have not shown that requiring them to pay more
than $54,000 would undermine public confidence that tax laws are
being administered fairly. In fact, the opposite may more likely
be true: If the IRS had accepted the Sullivans’ proposal that
they pay no more than a fourth of their total tax liability--and
an eighth of their reasonable collection potential--simply
because they had endured a number of unfortunate circumstances,
such as intermittent unemployment and the bankruptcy of their
family business, then taxpayers in similar situations who lose a
job or a business, but dutifully pay their taxes nonetheless,
might lose confidence in a system that charges some but exempts
others when they fail to comply. The Sullivans’ situation is not
comparable to the examples given in the regulations. The appeals
officer considered and addressed their arguments.
In sum, the appeals officer reviewed and considered the
information that the Sullivans submitted. On the basis of the
Sullivans’ facts and circumstances as they had been presented to
her, the appeals officer determined that none of the Sullivans’
OICs, nor their final offer of $54,000, met the applicable
guidelines for acceptance of an OIC with respect to DATL, DATC,
- 37 -
or promotion of ETA. We find no abuse of discretion in that
determination.
4. The Notices of Determination Adequately Address
the Issues.
The Sullivans take exception to the fact that the notices of
determination do not specifically acknowledge that they are in
their fifties, have modest income, and hold few assets aside from
their house. The Sullivans speculate from this fact that the
appeals officer did not adequately take into account their
special circumstances. However, their assertions and speculation
are without merit. The Office of Appeals has no obligation to
specifically list in the notice of determination every single
fact that it considered in arriving at the determination. See
Johnson v. Commissioner, T.C. Memo. 2007-29; Barnes v.
Commissioner, T.C. Memo. 2006-150. Nor do we find that the
appeals officer inadequately considered the information actually
given to her by the Sullivans. In fact, their own calculations
of their net assets and total tax liability support the appeals
officer’s conclusion that their total equity in assets exceeded
their liability.
The Sullivans also take exception to the fact that their
$54,000 proposal was not specifically discussed in the notices of
determination, nor was it formally rejected by respondent on a
Form 5402-c. However, these objections are without merit.
Again, the Office of Appeals has no obligation to list every
- 38 -
single fact that it considered in arriving at its determination.
See Johnson v. Commissioner, supra; Barnes v. Commissioner,
supra. Furthermore, the IRS cannot be required to issue a formal
rejection on Form 5402-c where there has been no formal offer on
Form 656.21 The Sullivans’ informal proposal of a payment of
$54,000 was adequately addressed when the Office of Appeals
determined that the Sullivans’ equity in their house (discounted
to $357,400) exceeded their estimated liability of $210,405,
rendering the proposal unacceptable.
We hold that the appeals officer did not abuse her
discretion in rejecting as inadequate the Sullivans’ OICs,
including their $54,000 informal proposal. Consequently, we
sustain the IRS’s determination that the proposed levies and the
filing of a notice of Federal tax lien were appropriate.
21
For OICs submitted after July 15, 2006, an implicit
obligation to reject a formal OIC is reflected in a new
subsection 7122(f), which provides: “Any offer-in-compromise
submitted under this section shall be deemed to be accepted by
the Secretary if such offer is not rejected by the Secretary”
within 24 months. (Emphasis added.) This obligation to reject a
formal OIC under section 7122(f) is effective only as to OICs
submitted on and after the date which is sixty days after the
date of enactment, May 17, 2006 (see Tax Increase Prevention and
Reconciliation Act of 2005, Pub. L. 109-222, 120 Stat. 345), and
thus could not be applicable to the Sullivan’s informal offer
made on March 8, 2006. Furthermore, this obligation exists only
as to an OIC “submitted under this section”, and the IRS is
entitled to insist on compliance with its regulation requiring
that offers under section 7122 be submitted on “forms prescribed
by the Internal Revenue Service”, sec. 301.7122-1(d)(1), Proced.
& Admin. Regs. (As is explained supra pp. 25-27 in part II.B,
the Sullivans’ informal offer, though not a formal OIC, was a
“collection alternative” under section 6330(c)(2)(A)(iii).)
- 39 -
To reflect the foregoing,
Decision will be entered for
respondent.