Offer in Compromise rejected for Cora Taylor. The question of whether the IRS abused its discretion when it rejected her first two OICs was irrelevant, because those offers were replaced by her third OIC. The IRS's refused to consider the taxpayer's offer of an installment agreement to avoid a tax lien, because she failed to provide requested information regarding the liquidation of her assets, and never formally applied for an installment agreement. The IRS also refused to consider the third OIC when it decided to proceed with a tax levy, because the taxpayer had not fully paid her estimated taxes for another tax year, and she had sufficient assets to pay her liabilities without financial hardship. The IRS properly applied the regulations and the Internal Revenue Manual, and its actions were not arbitrary or capricious.

Cora Taylor v. Commissioner.

Dkt. Nos. 12424-05L ; 147654-07L , TC Memo. 2009-27, February 5, 2009.






Penalties, civil: Failure to pay tax: Reasonable cause. --
A taxpayer was liable for the penalty for failing to timely pay her taxes absent evidence that she had reasonable cause. She offered no evidence for her claim that she was unable to pay because of a bad investment, and her evidence regarding her ill health related to other tax years.


MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: In these consolidated cases petitioner, pursuant to sections 6320 1 and 6330, seeks a review of two notices of determination in which respondent determined that collection actions could proceed with respect to petitioner's unpaid Federal income tax liabilities. In docket No. 12424-05L (the lien case), petitioner alleges that respondent abused his discretion in determining that the filing of a notice of Federal tax lien (NFTL) regarding petitioner's unpaid income tax liabilities for 1998, 2000, and 2001 (unpaid tax liabilities) was appropriate. In docket No. 14765-07L (the levy case), petitioner alleges that respondent abused his discretion in determining that collection of petitioner's unpaid tax liabilities for 1998 and 2000 could proceed by levy. In both cases petitioner contends that respondent erred (1) by not accepting petitioner's offer-in-compromise (OIC) on grounds of effective tax administration, (2) by denying petitioner's request for the abatement of section 6651(a)(2) additions to tax assessed with respect to 1998, 2000, and 2001, and (3) by determining that the collection action was appropriate.


FINDINGS OF FACT

Petitioner is a well-known musical and recording artist who performs under the name of Koko Taylor. Petitioner, who is 80 years old, resides in Illinois. Petitioner is married and filed her Federal income tax returns for 1998, 2000, and 2001 using a filing status of married filing separately.



Petitioner's Professional Career and Medical Condition
Petitioner is a professional blues singer who is sometimes called "Queen of the Blues". Her performing career spans five decades.

Petitioner was born into a poor family on a farm in Tennessee and was orphaned at an early age. She received only a few years of formal schooling. In her early twenties petitioner moved to Chicago, where she worked cleaning houses.

Petitioner started her singing career by singing blues in Chicago night clubs. Her big break came in 1962 when an arranger and composer named Willie Dixon discovered her. He helped petitioner get a recording contract and produce several singles, including the hit "Wang Dang Doodle", and two albums.

Petitioner went on to become a very successful blues singer. During her career she released 12 albums, one completed sometime around 2007. Petitioner has received two Grammy Awards and has been nominated for eight. She has also received 24 W.C. Handy Awards, among many other awards, and in 2004 she was a recipient of the National Heritage Fellowship of the National Endowment for the Arts.

In December 2001 petitioner had her first heart attack. After the heart attack, she was hospitalized for approximately 9 days. During the hospitalization stents were inserted into her arteries. Petitioner began to perform again in February 2002.

In October 2003 petitioner suffered a second heart attack. She underwent coronary bypass surgery. Following the surgery, petitioner developed abdominal bleeding, resulting in additional surgery. After the second heart attack she did not perform again until spring of 2004. Petitioner also suffers from high blood pressure and diabetes and must take insulin three times daily.



Petitioner's Unpaid Tax Liabilities for 1998, 2000, and 2001
Petitioner timely filed her 1998 Form 1040, U.S. Individual Income Tax Return (1998 return), on or about October 14, 1999, pursuant to extensions. Petitioner reported an income tax liability of $136,382, no estimated tax payments, and a section 6654(a) addition to tax of $4,914. Petitioner also claimed a credit for tax withheld of $1,486, and she remitted a $60,000 payment with the 1998 return.

On December 6, 1999, respondent assessed an income tax liability of $136,382, as reported on the 1998 return. Respondent also assessed a section 6651(a)(2) addition to tax of $4,796 for failure to pay timely the tax shown on the 1998 return and a section 6654(a) addition to tax of $4,914. Respondent applied the credit for the $1,486 of tax withheld and the $60,000 payment petitioner remitted with her 1998 return against the assessed amount. From February 23, 2000, through June 21, 2002, petitioner made installment payments of approximately $1,550 per month on her 1998 unpaid tax liability.

On or around October 15, 2001, petitioner filed a timely 2000 Form 1040 (2000 return), pursuant to extensions. On the 2000 return, petitioner reported an income tax liability of $143,097 and no estimated tax payments, and she claimed a credit for tax withheld of $1,723. She did not send any payment with the 2000 return.

On November 26, 2001, respondent assessed the income tax reported on petitioner's 2000 return, a section 6651(a)(2) addition to tax of $5,655, a section 6654(a) addition to tax of $7,032, and interest. Respondent credited the tax withheld against the assessed amounts.

At some point before February 2002, respondent selected petitioner's 1998 return for examination. The parties resolved the examination by agreement. On or about February 18, 2002, respondent assessed a $15,880 income tax deficiency for 1998 in accordance with Form 4549, Income Tax Examination Changes, dated November 26, 2001, which petitioner signed, and interest.

On or about February 25, 2002, petitioner filed a Form 1040X, Amended U.S. Individual Income Tax Return, for 2000, claiming an overpayment of $19,293 resulting from a passive loss carryover from 1998. On August 19, 2002, respondent credited the overpayment to petitioner's unpaid 2000 tax liability.

On or about August 16, 2002, petitioner filed a timely 2001 Form 1040 (2001 return), pursuant to extensions. Petitioner reported income tax due of $88,591 and no estimated tax payments, and she claimed a credit for tax withheld of $1,610. Petitioner did not send any payment with the 2001 return.

On September 23, 2002, respondent assessed the tax liability reported on petitioner's 2001 return. Respondent also assessed a section 6651(a)(2) addition to tax of $2,609, a section 6654(a) addition to tax of $3,435, and interest. Respondent credited the tax withheld against the assessed amounts.



Petitioner's Compliance History After 2001
For 2002, 2003, and 2004 petitioner timely filed her Federal income tax returns and paid all taxes due for those years. However, with respect to 2005, petitioner did not timely pay her entire tax liability either through estimated tax payments or at the time she filed her return. On November 6, 2006, petitioner submitted an $8,515 payment for application to her 2005 tax liability, but the check was returned for insufficient funds. For 2006 petitioner made no estimated tax payments.



Petitioner's Performances and Income During 2002-06
During 2002-06, despite her health problems, petitioner continued to perform at events in the United States and abroad. In 2003, 2004, and 2005 petitioner performed at 54, 21, and 27 events, respectively. From January 15 through September 3, 2006, petitioner performed at 18 shows, and she was still performing in 2007.

Petitioner reported on her Federal income tax returns gross receipts from performances and adjusted gross income as follows:



Gross
receipts Adjusted
from
performances gross
Year 1 income

2002 $415,875 $308,411

2003 488,750 268,369

2004 233,250 161,759

2005 326,800 166,365

1Petitioner's gross receipts from
performances reflect the income from
her performances as reported on a
statement attached to her returns.
Petitioner's gross receipts or sales
reported on her 2002 and 2004 Schedules
C, Profit or Loss From Business, are
higher amounts than her gross receipts
from performances in those years.





Respondent's Collection Actions in the Lien Case
On December 13, 2002, respondent sent an NFTL with respect to petitioner's unpaid tax liabilities for 1998, 2000, and 2001 to the Office of Recorder of Deeds, Cook County, Illinois. On December 18, 2002, respondent mailed a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 to petitioner by certified mail. On January 9, 2003, petitioner, through her counsel, submitted to respondent a timely Form 12153, Request for a Collection Due Process Hearing, with respect to the NFTL. In the request, petitioner contended that (1) the filing of the NFTL adversely affects her credit rating, business activities, and ability to secure financing; (2) she is entitled to an abatement of the addition to tax for failure to pay because she has reasonable cause for not paying her taxes; (3) she is entitled to an OIC based on inability to pay, doubt as to liability, and effective tax administration; and (4) if she is not granted an OIC, she is entitled to an installment agreement.

On or about January 21, 2003, petitioner submitted to respondent a $150,000 OIC dated November 18, 2002 2 (OIC I), seeking to settle her unpaid tax liabilities on the ground of effective tax administration. Respondent returned OIC I to petitioner for clarification of certain information.

Respondent referred petitioner's request for a section 6320 hearing regarding the NFTL filing to the Appeals Office in Chicago, Illinois. Petitioner's case was assigned to Settlement Officer Paul Lewis (Settlement Officer Lewis).

On March 26, 2003, petitioner's counsel sent to Settlement Officer Lewis a letter and copy of OIC I that had previously been submitted to respondent and returned to petitioner. On July 28, 2003, Settlement Officer Lewis approved OIC I for consideration, and on or about August 19, 2003, OIC I was referred to respondent's OIC group for investigation.

On or about September 15, 2003, an OIC specialist requested additional information from petitioner regarding OIC I. Specifically, the OIC specialist requested a copy of petitioner's 2002 tax return and proof that petitioner made 2003 estimated tax payments. The OIC specialist determined that petitioner had paid only $20,000 towards her 2003 estimated tax liability and that she owed an additional $54,250. Petitioner's counsel responded to the OIC specialist's inquiry, explaining that petitioner had received an extension for filing her 2002 return and that a copy would be forwarded when completed. She also explained that petitioner had made another payment of $25,000 towards her 2003 estimated tax liability but that petitioner anticipated her 2003 earnings would be significantly reduced because of her health condition. On or around November 20, 2003, petitioner submitted a copy of her 2002 return to Settlement Officer Lewis.

In March 2004 the OIC specialist returned OIC I to Settlement Officer Lewis with a recommendation that OIC I be rejected. 3 The OIC specialist calculated petitioner's reasonable collection potential and determined that petitioner's income was sufficient to satisfy her unpaid tax liabilities within a reasonable time without causing undue hardship. The OIC specialist also explained that petitioner's medical condition was not extraordinary for a person her age and did not appear to affect her income.

On or about April 7, 2004, Settlement Officer Lewis sent petitioner's counsel a letter enclosing copies of an Income Expense Table (IET) and an Asset Equity Table (AET) prepared by the OIC specialist. The letter stated that the IET and AET showed that petitioner had the ability to resolve her liabilities without an OIC, that her age was considered, and that petitioner's counsel could discuss the calculations or an installment agreement for petitioner. On July 1 and 22, 2004, petitioner's counsel wrote to Settlement Officer Lewis regarding the "other expenses" and royalties listed in OIC I, explaining that the "other expenses" included attorney's and accountant's fees and that petitioner's royalties in 2003 were approximately $22,000.

During the OIC negotiations petitioner proposed to increase the amount offered in OIC I to $200,000 with a future income collateral agreement (OIC II). Settlement Officer Lewis sent a letter dated August 9, 2004, to petitioner's counsel acknowledging petitioner's proposal and requesting additional verification of the "other expenses" claimed in OIC I. He also informed petitioner's counsel that petitioner's medical documentation did not describe a significant health problem for someone of petitioner's age. In response, petitioner's counsel sent copies of invoices regarding legal fees petitioner paid for her representation and a copy of a letter from petitioner's physician dated October 11, 2004, regarding petitioner's medical condition. Petitioner also submitted a copy of her 2003 Form 1040 (2003 return).

Petitioner's counsel continued to communicate with Settlement Officer Lewis regarding an OIC. In response to requests by Settlement Officer Lewis, petitioner's counsel provided documentation of petitioner's performance schedule and additional information from petitioner's physician. Petitioner's counsel also sent Settlement Officer Lewis a copy of petitioner's 2004 Form 1040.

In 2005 respondent began an examination of petitioner's 2003 return (2003 examination). By letter dated May 27, 2005, Settlement Officer Lewis informed petitioner that her OIC could not be considered because of the pending 2003 examination and that she could resubmit an OIC through the normal processing procedures after the audit was resolved.

On June 7, 2005, respondent's Appeals Office mailed petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330, sustaining respondent's filing of the NFTL. The attachment to the notice of determination explained that petitioner raised the following issues in the hearing: (1) The NFTL would adversely affect her credit rating and hinder her business activities, (2) petitioner is entitled to an abatement of penalties, (3) petitioner requests an OIC, and (4) petitioner requests an installment agreement. The attachment stated that petitioner presented no evidence that the NFTL would hinder her business activities or that she had reasonable cause for the abatement of penalties. The attachment also stated that petitioner was advised that she could resubmit her OIC after the audit was resolved and that she was not eligible for an installment agreement because her tax liabilities could be satisfied by liquidating her assets.

Petitioner filed a timely petition under section 6320 contesting respondent's determination in the lien case.

On October 12, 2005, respondent notified petitioner by letter of no changes to petitioner's 2003 return. On September 13, 2006, a trial was held in the lien case.



Respondent's Collection Actions in the Levy Case
On or about August 6, 2002, respondent sent petitioner a Final Notice of Intent to Levy and Notice of Your Right to a Hearing with respect to petitioner's unpaid 1998 and 2000 tax liabilities. Petitioner, through an authorized representative, submitted a timely Form 12153 contesting the proposed levy.

Respondent assigned petitioner's levy case to Settlement Officer Mary McHugh (Settlement Officer McHugh). On or about November 16, 2006, Settlement Officer McHugh sent petitioner and her counsel a letter acknowledging receipt of petitioner's request for a hearing and explaining the hearing process. The letter stated:

Appeals cannot approve an installment agreement or accept an offer-in-compromise unless all required estimated tax payments for the current year's income tax liability have been made. If you wish to pursue one of these alternatives during the * * * [collection due process] hearing process, you must arrange for the payment of any required estimated tax payments. Delinquent estimated tax payments can be included in an installment agreement. However, the estimated tax payments must be paid in full before an offer-in-compromise can be accepted. Our records indicate that you have not made estimated tax payments for the following period(s): 2006.

Settlement Officer McHugh requested that petitioner submit a completed Collection Information Statement (Form 433-A for individuals and/or Form 433-B for businesses) with verification and required attachments and proof of estimated tax payments for 2006. Settlement Officer McHugh scheduled a hearing for January 9, 2007.

On or about December 21, 2006, petitioner's counsel submitted to respondent a Form 656, Offer in Compromise, that was marked "AMENDED" (OIC III) for consideration in connection with the hearing. OIC III included a cash offer of $125,000 and a collateral agreement to pay a percentage of annual net income that exceeded $125,000. Petitioner attached to the Form 656 an explanation of her circumstances that was almost identical to the one attached to OIC I submitted in the lien case. Petitioner also submitted a Form 2261, Collateral Agreement, and Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. On the Form 433-A, petitioner reported the following monthly income and expenses:



Income Living expenses

Gross Gross
Source monthly Expense items monthly

Food, clothing,
Wages $1,259 misc. $1,500

Housing and
Net income utilities 1,400

from
business 11,813 Transportation 500

Health care
Pension/Social (estimate) 500

Taxes (income and
Security 1,500 FICA) 5,000

Other Life insurance 400

Other secured
Royalties 140 debt

Total 14,712 (credit cards) 600

Other expenses 1 3,000

Total 2 12,400

1Other expenses include average legal and accounting
fees of $2,000 and an estimate of other household expenses
of $1,000.

2The total amount of living expenses should be shown as
$12,900.


Petitioner also gave Settlement Officer McHugh a copy of an appraisal prepared by Rick Hiton & Associates, dated March 1, 2000, valuing petitioner's personal residence at $215,000 and additional documentation of her assets, liabilities, income, and expenses, including various Explanation of Benefits forms from Blue Cross/Blue Shield of Illinois, a Medicare Summary Notice, a copy of a matter ledger card from the law firm representing petitioner, and several months of bank account statements for each of petitioner's bank accounts.

After reviewing the documentation petitioner submitted and petitioner's financial status, Settlement Officer McHugh prepared a draft IET and AET to determine petitioner's reasonable collection potential. Settlement Officer McHugh determined that petitioner had $6,094 of monthly disposable income available to satisfy her tax liabilities and $306,242 of equity in assets. The draft IET and AET showed the following:



IET

Income Claimed Appeals

Gross wages $1,259 $1,259

Royalties 140 140

Social Security 1,500 1,500

Income from business 11,813 11,813

Total 14,712 14,712

Expenses

National Standard $1,500 $916

Housing & utilities 1,400 1,375

Housing & utilities 1,000 -0-

Transportation --

operating costs 500 327

Taxes (on income) 5,000 5,000

Health care expenses 500 500

Life insurance 400 -0-

Other expenses:

Credit cards 600 -0-

Legal/accounting 2,000 500

Total 12,900 8,618

Monthly disposable
income 1,812 6,094




AET

Fair Percentage Collect
Asset market QS
description value RED 1 Value 1 Equity 1

Checking
acct. $549 -- -- $549

Savings
acct. 14,672 -- -- 14,672

Life
insurance
value 3,651 -- -- 3,651

Real
estate
(Residence) 302,523 20 $242,018 242,018

Household
goods 15,000 20 12,000 4,280

Vehicle 1 7,000 20 5,600 5,600

Vehicle 2 11,000 20 8,800 8,800

Vehicle 3 7,000 20 5,600 5,600

Hummer 2 26,340 20 21,072 21,072

1We understand these captions to mean quick sale reduction
percentage, quick sale value, and realizable equity,
respectively.

2Petitioner did not disclose the Hummer on her Form 433-A.
Settlement Officer McHugh determined that a 2006 Hummer H3 SUV 4
Door Wagon Sport Utility was registered under petitioner's name.
Settlement Officer McHugh used the Kelly Blue Book to determine
the value of the vehicle in "good" condition and included its
value in the AET.


On January 9, 2007, a hearing was held in the levy case. Settlement Officer McHugh and petitioner's counsel discussed whether one of petitioner's counsel had orally withdrawn petitioner from the section 6330 hearing process in the levy case. The parties agreed that because there was no written withdrawal, petitioner was entitled to a hearing in the levy case. They also discussed whether OIC III was a new OIC or an amended OIC. Petitioner's counsel suggested that OIC III be treated as an amended OIC because only one OIC should be in process. Settlement Officer McHugh agreed but stated that she would consult counsel. 4

Settlement Officer McHugh next explained that she calculated petitioner's reasonable collection potential using 3 years of income and that it was greater than petitioner's tax liabilities. 5 Settlement Officer McHugh told petitioner's counsel that petitioner was not a candidate for an effective tax administration OIC because petitioner did not have any hardship. Settlement Officer McHugh explained that petitioner was able to meet her normal living expenses using her Social Security income and income from her music ventures. When petitioner's counsel asked about the collateral agreement, Settlement Officer McHugh responded that an OIC is generally considered without regard to a collateral agreement. She explained that a collateral agreement is used when there is a strong likelihood that a taxpayer's income will increase in the future and that that was not the case with petitioner.

Settlement Officer McHugh also informed petitioner's counsel that petitioner was not in current compliance with her tax payment obligations because the check for petitioner's 2005 tax liability had been returned and petitioner had not made any of her required 2006 estimated tax payments. Settlement Officer McHugh requested that petitioner make those payments by January 19, 2007. 6

On January 9, 2007, the same day as the hearing, Settlement Officer McHugh faxed petitioner's counsel a copy of her draft IET and AET. By letter dated January 19, 2007, petitioner objected to several of Settlement Officer McHugh's findings in the IET and AET. With respect to the IET, petitioner made the following objections: (1) Her income from business should not be included in her future income; (2) her actual expenses, and not the amounts permitted under National and Local Standards, should be allowed; 7 (3) the expense for life insurance should be allowed because the value of the policy was included in the AET; and (4) legal and accounting fees incurred should be allowed. With respect to the AET, petitioner objected to the value used for her residence and the inclusion of the Hummer. Petitioner requested additional time to obtain an appraisal of her residence. Petitioner also noted that she could borrow only approximately $100,000 against the residence and that anything above that amount was irrelevant as to whether an effective tax administration OIC should be accepted.

Petitioner enclosed with the January 19, 2007, letter an $8,515 check for her 2005 tax liability and an $8,000 check for her 2006 estimated tax liability. Each payment, however, was insufficient to fully satisfy the liability. Settlement Officer McHugh notified petitioner's counsel by telephone that the payments were insufficient, 8 and she gave petitioner until February 15, 2007, to pay the remaining tax liabilities.

On or around February 15, 2007, petitioner paid another $441 to satisfy the remaining 2005 tax liability. However, petitioner did not make another payment towards her 2006 estimated tax liability. In a letter to respondent, petitioner's counsel indicated that petitioner's income had declined in 2006, that petitioner did not yet have an income projection, and that petitioner intended to satisfy her 2006 tax liability by April 15, 2007. Petitioner's counsel attached to the letter an appraisal dated February 14, 2007, from an Internet Web site that valued petitioner's residence at $279,132.

On February 22, 2007, another hearing was held. Settlement Officer McHugh began by explaining that petitioner was not in current compliance with her 2006 estimated tax obligations. She also explained that even if petitioner were in current compliance, OIC III would not be acceptable on the grounds of effective tax administration because petitioner's circumstances did not present any hardship.

The parties also discussed the possibility of an installment agreement. Settlement Officer McHugh explained that in order for petitioner to qualify for an installment agreement she should make a significant downpayment based on her home equity and that a reverse mortgage was a possibility. She also explained that petitioner's monthly disposable income of approximately $6,000, as calculated by Settlement Officer McHugh, would be the amount of her monthly installment payment. Petitioner's counsel indicated that petitioner would not agree on any of the issues, and Settlement Officer McHugh informed petitioner's counsel that a notice of determination would be issued.

On June 1, 2007, respondent's Appeals Office mailed to petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 sustaining respondent's determination to proceed with collection by levy. The attachment to the notice of determination addressed petitioner's objections to the AET and IET calculated by Settlement Officer McHugh. It explained that the value of petitioner's residence was based on a 2000 appraisal applying a 5-percent annual increase in value as suggested by petitioner's counsel. It also explained that an Internet appraisal dated February 14, 2007, did not consider items such as the pool and other property characteristics. The attachment stated that petitioner did not provide the requested verification that she did not use her funds to purchase the Hummer. The attachment explained that Settlement Officer McHugh reduced the expense items in the IET to match the amounts allowed by National and Local Standards. It also noted that the housing and utilities expense should consist of only real estate taxes and utilities and that the amount petitioner claimed was unrealistic. The attachment stated that on the basis of statements of petitioner's legal and accounting fees incurred, petitioner's monthly fees incurred should equal $500 and not $2,000 as petitioner claimed. The attachment also stated that petitioner was not entitled to an abatement of penalties for failure to pay. It explained that petitioner's investment in a local club and her heart attack were not reasonable cause for her failure to pay her taxes.

On June 28, 2007, petitioner timely filed a petition contesting respondent's levy determination. The parties filed a joint motion to assign the levy case to the same Judge who had conducted the trial in the lien case and a joint motion to submit the levy case to the Court fully stipulated under Rule 122. At the request of the parties the Court, by order dated February 4, 2008, consolidated the two cases for briefing and opinion and set a briefing schedule. Both parties filed opening briefs, and petitioner filed an answering brief.


OPINION




I. Section 6320 and 6330 Hearings
Section 6321 imposes a lien on all property and property rights of a taxpayer liable for taxes where a demand for the payment of the taxes has been made and the taxpayer fails to pay. Section 6320(a) requires the Secretary to send written notice to the taxpayer of the filing of a notice of lien and of the taxpayer's right to an administrative hearing on the matter. Section 6331(a) provides that if any taxpayer liable to pay any tax neglects or refuses to pay such tax within 10 days after notice and demand for payment, then the Secretary is authorized to collect such tax by levy upon the taxpayer's property. Section 6330(a) requires the Secretary to send written notice to the taxpayer of the taxpayer's right to request a section 6330 hearing before a levy is made.

If the person makes a timely request for a hearing under section 6320 (dealing with liens) or section 6330 (dealing with levies), a hearing shall be held by the Internal Revenue Service Office of Appeals. Secs. 6320(a)(3)(B), (b)(1), and (c), 6330(b)(1). Administrative hearings under sections 6320 and 6330 must be conducted in accordance with section 6330(c). Secs. 6320(c), 6330(c).

At the hearing, a taxpayer may raise any relevant issue, including appropriate spousal defenses, challenges to the appropriateness of the collection action, and collection alternatives, such as an OIC or an installment agreement. Sec. 6330(c)(2)(A). Additionally, the taxpayer may contest the validity of the underlying tax liability, but only if the taxpayer did not receive a notice of deficiency or otherwise have an opportunity to dispute the tax liability. Sec. 6330(c)(2)(B). The phrase "underlying tax liability" includes the tax deficiency, any penalties and additions to tax, and statutory interest. Katz v. Commissioner, 115 T.C. 329, 339 (2000).

Following a hearing, the Appeals Office must issue a notice of determination regarding the validity of the filed Federal tax lien or the appropriateness of the proposed levy action. In making a determination, the Appeals Office must take into consideration: (1) The verification presented by the Secretary that the requirements of applicable law and administrative procedures have been met; (2) the relevant issues raised by the taxpayer; and (3) whether the proposed collection action appropriately balances the need for efficient collection of taxes with a taxpayer's concerns regarding the intrusiveness of the proposed collection action. Sec. 6330(c)(3). If the taxpayer disagrees with the Appeals Office's determination, the taxpayer may seek judicial review by appealing to this Court. Sec. 6330(d). Where the underlying tax liability is properly at issue, the Court reviews any determination regarding the underlying tax liability de novo. Sego v. Commissioner, 114 T.C. 604, 610 (2000). Where the underlying tax liability is not properly at issue, the court will review the administrative determination of the Appeals Office for abuse of discretion. Lunsford v. Commissioner, 117 T.C. 183, 185 (2001); Sego v. Commissioner, supra; Goza v. Commissioner, 114 T.C. 176, 182 (2000). In reviewing for an abuse of discretion, we do not conduct an independent review of whether an OIC submitted by a taxpayer was acceptable or substitute our judgment for that of the Appeals Office. Rather, we must uphold the Appeals Office's determination unless it is arbitrary, capricious, or without sound basis in fact or law. See, e.g., Murphy v. Commissioner, 125 T.C. 301, 320 (2005), affd. 469 F.3d 27 (1st Cir. 2006); Hansen v. Commissioner, T.C. Memo. 2007-56; Catlow v. Commissioner, T.C. Memo. 2007-47.

Section 7122(a) authorizes the Secretary to compromise any civil case arising under the internal revenue laws. Section 7122(c)(1) 9 authorizes the Secretary to prescribe guidelines for officers and employees of the IRS to determine whether an OIC is adequate and should be accepted. The regulations under section 7122 provide that effective tax administration is one ground for the compromise of a tax liability. 10 Sec. 301.7122-1(b)(3), Proced. & Admin. Regs. In order to compromise a tax liability to promote effective tax administration, the Secretary must determine that collection in full could be achieved but that collection in full would cause the taxpayer economic hardship. 11 Sec. 301.7122-1(b)(3)(i), Proced. & Admin. Regs.

Economic hardship exists if satisfaction of the levy in whole or in part would render a taxpayer unable to pay reasonable basic living expenses. Secs. 301.7122-1(b)(3), 301.6343-1(b)(4)(i), Proced. & Admin. Regs. The determination of a reasonable amount for basic living expenses must be made and will vary according to the unique circumstances of the taxpayer. Sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living. Id.

Factors supporting a determination that collection would cause economic hardship include, among others: (1) The taxpayer is incapable of earning a living because of a long-term illness, medical condition, or disability, and it is reasonably foreseeable that the taxpayer's financial resources will be exhausted providing care and support during the course of the condition; and (2) although the taxpayer has certain assets, the taxpayer cannot borrow against the equity in those assets, and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses. Sec. 301.7122-1(c)(3)(i), Proced. & Admin. Regs.

A. Settlement Officer Lewis's Determination in the Lien Case

Petitioner argues that Settlement Officer Lewis abused his discretion in the lien case by returning the OIC 12 because of the pending 2003 examination and thereby prematurely ending the negotiations. Petitioner contends that her counsel told Settlement Officer Lewis that the issue in the 2003 examination was minor and would be resolved quickly. Settlement Officer Lewis denies receiving this information. Nevertheless, Settlement Officer Lewis informed petitioner by letter that she could resubmit an OIC after the 2003 examination was resolved and that a notice of determination would be issued.

Although Settlement Officer Lewis may have abused his discretion by concluding that OIC I or II could not be considered because of the pending 2003 examination, as petitioner contends, we need not decide the issue. After the notice of determination was issued in the lien case and a trial was held to review the determination, petitioner submitted OIC III, marked "AMENDED", to respondent in the levy case. Petitioner attached to OIC III an Explanation of Circumstances almost identical to the one submitted with OIC I in the lien case. During the levy hearing, respondent and petitioner's counsel agreed that OIC III would be treated as an amended OIC. Because the parties treated OIC III as amending OIC I and OIC II, we conclude that OIC III superseded OIC I and OIC II. A remand to the Appeals Office for a redetermination regarding OIC I or II would be neither necessary nor productive.

Petitioner further argues that Settlement Officer Lewis abused his discretion by not giving petitioner time to discuss other collection alternatives such as an installment agreement. We disagree. Several months before the notice of determination was issued, Settlement Officer Lewis sent petitioner's counsel a letter explaining that petitioner could not enter into an installment agreement with respondent until petitioner addressed whether the liquidation of some of her assets was appropriate, as required by Internal Revenue Manual (IRM) pt. 5.14.1.5(6) (Sept. 30, 2004). According to the IRM part cited by Settlement Officer Lewis, a taxpayer does not qualify for an installment agreement if the taxpayer's tax liabilities could be fully or partially satisfied by liquidating assets, unless factors such as advanced age, ill health, or other special circumstances are determined to prevent the liquidation of the assets. Id.

The record does not establish that petitioner ever provided Settlement Officer Lewis any information regarding the liquidation of her assets or whether her circumstances prevented the liquidation of her assets. Moreover, petitioner never submitted a Form 433-D, Installment Agreement, or any other document requesting an installment agreement in the lien case. Because petitioner failed to provide the information necessary for Settlement Officer Lewis to consider an installment agreement, as requested, we cannot conclude that Settlement Officer Lewis's decision to close the lien case without considering whether petitioner qualified for an installment agreement was an abuse of discretion. Accordingly, we sustain respondent's determination that the NFTL filing was an appropriate enforcement action with respect to petitioner's unpaid tax liabilities. See Kindred v. Commissioner, 454 F.3d 688, 695-698 (7th Cir. 2006); Orum v. Commissioner, 412 F.3d 819 (7th Cir. 2005), affg. 123 T.C. 1 (2004).

B. Settlement Officer McHugh's Determination in the Levy Case

Petitioner argues that Settlement Officer McHugh abused her discretion by rejecting petitioner's OIC in that she failed to balance petitioner's legitimate needs with the necessity of efficient collection. Petitioner also contends that Settlement Officer McHugh abused her discretion in failing to consider the facts of the case, such as the amount of the OIC, petitioner's health, and her limited resources.

In the attachment to the notice of determination, two reasons were cited for Settlement Officer McHugh's rejection of OIC III: (1) Petitioner was not in current compliance with her 2006 estimated tax liability, and (2) petitioner was not entitled to an effective tax administration OIC because she had the ability to satisfy her unpaid tax liabilities without creating any hardship. The attachment also stated that a collateral agreement is appropriate only when it is likely that the taxpayer will have an increase in future income and that petitioner has not shown that such an increase in income is likely. 13

The IRM, which contains procedures for evaluating OICs, provides that the Commissioner must return an OIC if the taxpayer has not made sufficient estimated tax payments. IRM pt. 5.8.7.2.2.1(1) (Sept. 1, 2005). Before returning an offer for noncompliance, the Appeals Office is instructed by the IRM to determine whether the taxpayer is required to make estimated tax payments, to calculate the amount of estimated tax payments that should have been made, and to contact the taxpayer to explain the noncompliance and request payment. IRM pt. 5.8.7.2.2.1(2) (Sept. 1, 2005). The Appeals officer should give the taxpayer a reasonable deadline for responding, with a warning that the OIC will be returned if payment is not received by the deadline. Id.

Settlement Officer McHugh made at least three requests that petitioner pay her 2006 estimated tax liability and explained that she could not consider OIC III until petitioner complied. Settlement Officer McHugh requested the payment during the January 9, 2007, hearing and gave petitioner until January 19, 2007, to comply. Petitioner submitted an $8,000 payment towards her 2006 estimated tax liability. After Settlement Officer McHugh notified petitioner that the payment was insufficient to satisfy her 2006 estimated tax liability, Settlement Officer McHugh gave petitioner until February 15, 2007, to pay the remaining amount. Petitioner did not submit another payment toward her 2006 estimated tax liability.

Settlement Officer McHugh followed the procedures in the IRM for handling an OIC when the taxpayer is not in current compliance with her estimated tax obligations. She gave petitioner several chances to comply with her required estimated tax payments, but petitioner failed to do so. Consequently, we cannot conclude that Settlement Officer McHugh abused her discretion in rejecting OIC III on the grounds that petitioner was not in current compliance with her 2006 estimated tax liability. See Orum v. Commissioner, supra at 821.

Settlement Officer McHugh also concluded that petitioner did not qualify for an effective tax administration OIC on the grounds of economic hardship. Settlement Officer McHugh determined that petitioner had the ability to satisfy her unpaid tax liabilities without creating economic hardship.

When a taxpayer has sufficient disposable income to satisfy her tax liabilities, an effective tax administration OIC may be appropriate if satisfaction of those liabilities would cause the taxpayer economic hardship. 14 Sec. 301.7122-1(b)(3)(i), Proced. & Admin. Regs.; see also IRM pt. 5.8.11.2.1(1) (Sept. 1, 2005). The IRM requires that a taxpayer's financial information and special circumstances be examined to determine whether the taxpayer qualifies for an effective tax administration offer on the basis of economic hardship. IRM pt. 5.8.11.2.1(3) (Sept. 1, 2005).

The regulations and the IRM provide that economic hardship exists only if satisfaction of the taxpayer's tax liabilities would leave the taxpayer unable to pay reasonable basic living expenses. Secs. 301.7122-(b)(3), 301.6343-1(b)(4)(i), Proced. & Admin. Regs.; IRM pt. 5.8.11.2.1(2) (Sept. 1, 2005). The IRM states that basic living expenses are those expenses that provide for health, welfare, and production of income of the taxpayer and the taxpayer's family. IRM pt. 5.8.11.2.1(4) (Sept. 1, 2005). It further states that some basic living expenses are limited to the National Standards while other expenses are limited to Local Standards, and deviation from those standards is permissible only if the taxpayer can justify the expenses that exceed those limits. IRM pt. 5.8.11.2.1(4) (Sept. 1, 2005). In addition to the basic living expenses, the IRM lists several other factors to consider: (1) The taxpayer's age and employment status; (2) the number, age, and health of taxpayer's dependents; (3) the cost of living in the area where the taxpayer resides; and (4) any extraordinary circumstances, including a medical catastrophe. IRM pt. 5.8.11.2.1(5) (Sept. 1, 2005).

Settlement Officer McHugh followed the regulations and IRM procedures for determining whether petitioner qualified for an effective tax administration OIC based on economic hardship. Settlement Officer McHugh calculated petitioner's reasonable collection potential using the information petitioner provided on the Form 433-A and elsewhere and determined that petitioner had approximately $6,000 of disposable monthly income that could be used to satisfy her unpaid tax liabilities. 15

In making her determination, Settlement Officer McHugh made several adjustments to petitioner's claimed monthly living expenses. First, she decreased the National Standards amount to $916. Second, she decreased the housing and utilities expense petitioner claimed to $1,375. She determined that according to the Cook County treasurer's office, petitioner's real estate taxes for 2006 were approximately $534 per month and that the remaining amount of petitioner's claimed housing and utilities expense was too high for the utilities. 16 Third, she decreased petitioner's transportation expenses to $327. Fourth, she disallowed petitioner's expense for life insurance because she determined that it was excessive and that petitioner had no minor children to consider. Fifth, she disallowed the $600 of credit card expenses petitioner claimed. Sixth, she decreased petitioner's monthly legal/accounting expense to $500. She based her determination regarding these expenses on petitioner's current balance as reflected on the statements petitioner submitted and on the payments already made.

Settlement Officer McHugh also made adjustments to the assets petitioner reported on the Form 433-A. She determined that petitioner's residence had a value of $302,523 using an appraisal petitioner submitted and using a 5-percent annual appreciation value as petitioner suggested on the Form 433-A. Settlement Officer McHugh also included the Hummer vehicle in petitioner's assets after Settlement Officer McHugh's research revealed that the Hummer was registered in petitioner's name. Although petitioner claimed the vehicle belonged to her granddaughter, petitioner never provided any verification that the Hummer was not purchased with her funds, as requested by Settlement Officer McHugh.

Settlement Officer McHugh gave petitioner the opportunity to object to her adjustments. However, petitioner's objections to the adjustments for monthly living expenses consisted of unsubstantiated statements regarding her actual expenses and assertions that her expenses should be allowed. Because petitioner did not provide substantiation of her actual expenses that would have permitted Settlement Officer McHugh to deviate from the National or Local Standards or to increase the expenses, we cannot conclude that Settlement Officer McHugh abused her discretion in making the adjustments to petitioner's monthly living expenses. We also cannot conclude that Settlement Officer McHugh abused her discretion in adjusting the value of petitioner's residence and including the Hummer in petitioner's assets.

Aside from petitioner's financial status, Settlement Officer McHugh also considered that petitioner was still performing 17 and earning income and that her health condition was not uncommon for someone her age. Settlement Officer McHugh did not abuse her discretion by determining that petitioner's age and health were not such extraordinary circumstances that petitioner would have suffered economic hardship if she were required to pay her outstanding tax liabilities.

Settlement Officer McHugh followed the procedures outlined in the regulations and the IRM for evaluating effective tax administration offers based on economic hardship. We cannot conclude on the record in the levy case that Settlement Officer McHugh's findings were arbitrary, capricious, or without sound basis in law or fact. Consequently, we conclude that Settlement Officer McHugh did not abuse her discretion in rejecting OIC III on the grounds that petitioner did not qualify for an effective tax administration OIC on the ground of economic hardship. We therefore conclude that respondent's determination to proceed by levy with the collection of petitioner's 1998 and 2000 unpaid tax liabilities was not an abuse of discretion.



II. Section 6651(a)(2) Additions to Tax
Petitioner argues that respondent erred in the lien and levy case by denying petitioner's request for an abatement of penalties for reasonable cause. 18 References to penalties in the record are to the addition to tax under section 6651(a)(2) for petitioner's failure to pay her 1998, 2000, and 2001 tax liabilities by their respective due dates. We understand petitioner's argument to mean that she should not be held liable for the section 6651(a)(2) addition to tax because she had reasonable cause for not timely paying her tax liabilities.

Section 6330(c)(2)(B) provides that a taxpayer may raise at the hearing challenges to the existence or amount of the underlying tax liability if the taxpayer did not receive a notice of deficiency for such tax liability and did not otherwise have an opportunity to dispute the tax liability. A taxpayer's underlying tax liability includes the addition to tax under section 6651(a)(2). See Katz v. Commissioner, 115 T.C. at 339. Petitioner raised the issue of her liability for the section 6651(a)(2) additions to tax in both the lien and levy hearings. We review de novo respondent's determination that petitioner is liable for the addition to tax under section 6651(a)(2). See Goza v. Commissioner, 114 T.C. at 181.

Section 6651(a)(2) imposes an addition to tax for failure to pay the amount of tax shown on the taxpayer's Federal income tax return on or before the payment due date, unless such failure is due to reasonable cause and not due to willful neglect. A failure to pay will be considered due to reasonable cause if the taxpayer makes a satisfactory showing that she exercised ordinary business care and prudence in providing for payment of her tax liability but nevertheless either was unable to pay the tax or would suffer undue hardship if she paid on the due date. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

Section 7491(c) imposes on the Commissioner the burden of production with respect to additions to tax. In order to meet his burden of production, the Commissioner must come forward with sufficient evidence that it is appropriate to impose the relevant addition to tax or penalty. Higbee v. Commissioner, 116 T.C. 438, 446 (2001). However, the Commissioner is not required to introduce evidence regarding reasonable cause, substantial authority, or similar defenses. Id. Once the Commissioner meets his initial burden of production, the taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect. Id. at 447.

Petitioner does not dispute that she failed to timely pay her 1998, 2000, and 2001 tax liabilities and therefore respondent satisfied the initial burden of production with respect to the section 6651(a)(2) additions to tax. Petitioner argues however that she should not be held liable for the section 6651(a)(2) additions to tax because she had reasonable cause for not timely paying her tax liabilities.

Petitioner argues that two factors contributed to her inability to pay her tax liabilities timely and that those factors establish that her failure to pay was due to reasonable cause. First, petitioner claims that a bad investment in an unsuccessful club led to her failure to pay her tax. However, petitioner introduced no evidence regarding her investment in the club or how the club's failure affected her ability to pay her taxes. Because of the lack of evidence regarding petitioner's investment in the club, we cannot conclude that the investment constituted reasonable cause for her failure to pay her 1998, 2000, and 2001 tax liabilities by their respective due dates. Second, petitioner cites her poor health as reasonable cause. Petitioner introduced in evidence a letter from her physician, who has treated petitioner since 2002, describing her medical condition during 2003 and 2004. Because the letter did not address petitioner's medical condition at the time her 1998, 2000, and 2001 taxes were due, we find it unconvincing. In addition, although petitioner's first heart attack occurred in December 2001 and left her hospitalized for over a week, she was performing again in February 2002, before her 2001 taxes were due. Petitioner did not establish that her medical bills were such that she did not have the funds to pay her tax liabilities. Petitioner presented no other evidence that her medical condition rendered her unable to pay her 1998, 2000, and 2001 taxes or that she would have suffered undue hardship if she had paid them. Although we recognize that petitioner had to deal with serious health problems in 2001 and 2003, we cannot conclude on the record in these consolidated cases that her medical problems were the reason she failed to pay her 1998, 2000, and 2001 tax liabilities or that her health problems constituted reasonable cause for not timely paying her tax liabilities.

On review of the record, we cannot conclude that petitioner exercised ordinary business care and prudence with respect to her 1998, 2000, and 2001 tax liabilities. Because petitioner has not established that her failure to timely pay her taxes was due to reasonable cause, we sustain respondent's determination not to abate the section 6651(a)(2) additions to tax. 19



III. Conclusion
Both petitioner and respondent repeatedly commented on petitioner's stature as a beloved and well-known professional singer as support for their respective positions in these consolidated cases. 20 We disagree with both parties insofar as they contend that a taxpayer's celebrity status is somehow relevant to what this Court must do in deciding whether the Commissioner's collection action may proceed. Every taxpayer, no matter how famous or notorious, has a legal obligation to honestly report and pay his or her income tax liability each year and is entitled to fair enforcement of Federal tax laws. A taxpayer like petitioner whose business income is generated by performances must carefully comply with estimated tax requirements. The record establishes that petitioner had outstanding tax liabilities for 1998, 2000, and 2001 because she did not make required estimated tax payments when due and that respondent did not abuse his discretion in determining that the filing of an NFTL was appropriate and that respondent may proceed to collect petitioner's outstanding tax liabilities by levy. Respondent gave petitioner ample opportunity to rectify her failure to pay estimated tax when due and considered petitioner's collection alternatives in accordance with applicable administrative and legal requirements.

To reflect the foregoing,

Decisions will be entered for respondent.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar.

2 The parties incorrectly stipulated that the OIC was dated Nov. 12, 2002.

3 In the recommendation report, the OIC specialist noted that petitioner was in current compliance with all estimated tax obligations.

4 On a later telephone conference call among respondent's counsel, the Appeals Office, and petitioner's counsel, it was decided that OIC III would be treated as an amended OIC.

5 As of Sept. 5, 2006, petitioner's tax liabilities for 1998, 2000, and 2001 totaled $296,666.

6 During the hearing, Settlement Officer McHugh and petitioner's counsel also discussed the Hummer vehicle and petitioner's daughter's income, both of which were not included on petitioner's Form 433-A. Settlement Officer McHugh explained that because petitioner's daughter lives with petitioner, the daughter's income should increase the monthly payment amounts.

7 National Standards include living expenses for clothing, food, housekeeping supplies, personal care products, and miscellaneous. Local Standards include living expenses for housing and utilities and for transportation.

8 Settlement Officer McHugh also notified one of petitioner's counsel by telephone that her research indicated that the Hummer was registered in petitioner's name. After petitioner's counsel suggested that petitioner's granddaughter drives the Hummer, Settlement Officer McHugh requested verification that petitioner's funds were not used to purchase it. However, petitioner never provided the requested verification. They also discussed the value of petitioner's residence, and petitioner's counsel stated that she did not dispute Settlement Officer McHugh's valuation.

9 In the Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. 109-222, sec. 509, 120 Stat. 362 (2006), Congress redesignated sec. 7122(c) as sec. 7122(d) effective for OICs submitted on and after July 16, 2006.

10 The other grounds for the compromise of a tax liability are doubt as to liability and doubt as to collectibility. Sec. 301.7122-1(b)(1) and (2), Proced. & Admin. Regs.

11 A taxpayer and the IRS may not enter into a compromise of a tax liability to promote effective tax administration if compromise of the liability would undermine the taxpayers' compliance with the tax laws. Sec. 301.7122-1(b)(3)(iii), Proced. & Admin. Regs.

12 Petitioner orally amended OIC I to include a $200,000 cash payment and collateral agreement (OIC II). Although Settlement Officer Lewis recognized the amendment in a letter to petitioner, the notice of determination is unclear as to whether it was issued with respect to OIC I or II. In any event, this distinction does not affect our decision.

13 The IRM states that securing a collateral agreement should be the exception and not the rule and that a collateral agreement should not be used to accept an offer amount less than the taxpayer's financial condition indicates. IRM pt. 5.8.6.3(1) and (2) (Sept. 1, 2005). It further provides that a future income collateral agreement is appropriate only when a substantial increase in the taxpayer's future income is expected. IRM pt. 5.8.6.3.1(1) (Sept. 1, 2005). Settlement Officer McHugh did not abuse her discretion in determining that the future income collateral agreement petitioner offered did not affect her evaluation of OIC III. Moreover, petitioner never introduced any evidence that a substantial increase in her future income was likely.

14 A compromise to promote effective tax administration may also be appropriate where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability and where, because of exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered fairly and equitably. Sec. 301.7122-1(b)(3)(ii), Proced. & Admin. Regs.; see also Speltz v. Commissioner, 124 T.C. 165 (2005), affd. 454 F.3d 782 (8th Cir. 2006). Petitioner did not argue that her OIC should be accepted on these grounds, nor did she identify any compelling public policy or equity consideration that would provide a sufficient basis for compromising the liability.

15 There is a calculation error in the IET attached to the notice of determination. The IET shows that petitioner's monthly disposable income is $8,618 as determined by the Appeals Office and $12,400 as claimed by petitioner. The IET should show that the Appeals Office determined that petitioner's monthly disposable income was $6,094 and that petitioner claimed monthly disposable income of $1,812. The draft IET that Settlement Officer McHugh sent petitioner's counsel reflected the correct monthly disposable income amounts. Petitioner does not argue and we do not find that this error was material to Settlement Officer McHugh's determination to reject OIC III.

16 Petitioner did not have a mortgage on her residence.

17 Settlement Officer McHugh reviewed an article from the Chicago Tribune Sunday Magazine dated Jan. 7, 2007, stating that petitioner "still belts out her songs on stage regularly and just finished work on her 12th album."

18 At trial respondent asserted that petitioner was precluded from presenting evidence regarding reasonable cause for the sec. 6651(a)(2) additions to tax in the lien case because petitioner had an earlier opportunity to dispute her liability for the additions to tax. See sec. 6330(c)(2)(B). Specifically, respondent contended that petitioner received a notice of intent to levy but that petitioner orally withdrew her challenge to the proposed levy before the hearing process was completed. However, petitioner's counsel and Settlement Officer McHugh agreed during the levy hearing that petitioner did not withdraw from the levy case, and we so find.

19 Because we conclude that petitioner has not established reasonable cause for her failure to timely pay her tax liabilities, we need not decide whether her failure was due to willful neglect.

20 Petitioner's consolidated cases before this Court were publicized in a June 2, 2008, Forbes magazine Internet article entitled "Singing Tax Blues".

Fact finding. --Compromises: Fact finding

The IRS's determination to reject a married couple's offer-in-compromise (OIC) and proceed with collection of tax liabilities was not an abuse of discretion. The couple's OIC was rejected because they failed to provide additional requested information needed to evaluate the offer. Further, the couple had been given several opportunities and extensions of time to file their completed OIC. Moreover, they were not current with their estimated taxes.

W.J. DiCindio, CA-3, 2008-1 USTC ¶50,196; aff'g. in part and vac'g and rem'g in part, per curiam, 93 TCM 1060, Dec. 56,884(M), TC Memo. 2007-77.

When computing amounts due to the IRS under a collateral agreement, married taxpayers could not deduct amounts paid in prior years under the agreement. Although the collateral agreement on Form 2261 referred to the wrong line of the couple's offer in compromise on Form 656 when it set out how the payments should be computed, the reference was only a clerical error. Since the reference did not create an ambiguity in the agreement under state (Georgia) law, the agreement was enforced according to its plain terms. Thus, only same-year payments made under the offer in compromise, not prior-year payments made under the collateral agreement, were deductible in determining the couple's annual income.

A.I. Begner, CA-11, 2005-2 USTC ¶50,510.

The issue as to whether or not a settlement agreement was reached, what the terms of such agreement were, and whether the terms were followed was remanded to the District Court since the matter was factual and should first be decided by the District Court.

Six Seam Co., CA-6, 75-2 USTC ¶9765, 524 F2d 347.

Conviction of evasion of taxes for four tax years was affirmed on appeal. The taxpayer argued that the government had improperly granted the chief witness in the trial civil immunity with respect to a tax liability of more than $700,000. However, authorization is provided to the Secretary of the Treasury, or his delegate, or to the Attorney General, if the matter is before the Department of Justice, to compromise any civil or criminal case. Thus, the compromise was not unlawful. Other claims, such as prejudicial publicity, failure to suppress evidence, etc., were overruled.

E.J. Barrett, CA-7, 75-1 USTC ¶9340, 505 F2d 1091. Cert. denied, 421 US 964.

The District Court properly denied taxpayer's suit seeking an injunction against the collection of an income tax assessment. The IRS did not waive any right to a further assessment by agreeing to a settlement and the IRS agent had no authority to compromise taxpayer's tax liability. The taxpayer also had an adequate remedy at law by paying the assessment and suing in the district court for a refund.

C.J. Reimer, CA-5, 71-1 USTC ¶9355, 441 F2d 1129.

A compromise agreement related only to renegotiation matters then pending in the Tax Court and did not include a settlement of an excess profits tax assessment.

H.J. Brubaker, CA-7, 65-1 USTC ¶9274, 342 F2d 655.

The government's receipt of a taxpayer's check and application of funds to a liability under investigation do not comprise a compromise which can be a bar to a later criminal prosecution.

R.G. Jonson, CA-9, 60-2 USTC ¶9680, 281 F2d 884.

Petitioner's contention that a compromise had been entered into was not supported by the evidence where the copy of the supposed compromise offer showed on its face that the form had not been printed until after the date on which the agreement allegedly had been executed.

Hanby, CA-4, 67 F2d 125.

A voluntary disclosure (see ¶41,318.04 and ¶41,318.37) is not a compromise.

Lustig, CA-2, 47-2 USTC ¶9325, 163 F2d 85. Cert. denied, 332 US 775.

Taxpayers who claimed that they had entered into a settlement agreement with the government, but failed to establish the existence of a valid settlement agreement, were not entitled to a refund.

J.P. Devin, DC Wyo., 2006-1 USTC ¶50,264, 423 FSupp2d 1232.

An Appeals officer did not abuse her discretion by denying a taxpayer's offer in compromise, despite the taxpayer's assertion that a change in circumstances had detrimentally affected his financial position and ability to earn future wages. In addition, although there were questions regarding whether the taxpayer could obtain the proceeds of a loan, the IRS's treatment of the loan as an asset was within its discretion and did not constitute an error in judgment.

Alliance Services, Inc., DC Ga., 2005-1 USTC ¶50,248, 363 FSupp2d 1367.

The IRS properly rejected a delinquent accountant's offer in compromise because he had not questioned his tax liability, and collection of the full liability would not cause him economic hardship. Although the taxpayer was unemployed, that appeared to be a temporary situation. Moreover, he had adequate income and assets to pay the liability, his spouse was employed, and he received financial assistance from his adult children who lived at home. Further, no compelling public policy or equity considerations compelled acceptance of the offer.

W.N. Ramos, DC N.Y., 2005-1 USTC ¶50,160.

The IRS did not abuse its discretion when it rejected an individual's offer in compromise. There was evidence that the individual had additional assets that he should have taken into consideration when he made his offer based on the uncollectibility of the tax due.

B.R. Splawn, DC Tenn., 2004-2 USTC ¶50,392.

Taxpayers failed to show they were denied a fair hearing on their appeal of the IRS's determination to levy their property. The IRS did not abuse its discretion by issuing notices of levy following the taxpayers' failure to submit requested documents in support of an offer in compromise by the designated deadline. As a result of the taxpayers' failure to provide the requested information, the IRS officer was faced with incomplete offers-in-compromise and therefore was unable to consider the offers as an alternative to the levy.

Allglass Systems, Inc., DC Pa., 2004-2 USTC ¶50,387, 330 FSupp2d 540.

The terms of taxpayers' Form 2261, Future Income Collateral Agreement, executed as a condition of IRS acceptance of their Form 656, Offer in Compromise, did not permit the deduction of collateral agreement payments when calculating the amount due on the compromise agreement. The agreement required the taxpayers to pay specified percentages of excess income if their income exceeded a stated level of annual income. The taxpayers attempted to deduct from annual income collateral payments relating to prior year tax obligations. However, the clear unambiguous language of the agreement limits deductions to payments for the year in which the annual income is being computed.

A.I. Begner, DC Ga., 2004-1 USTC ¶50,269.

A small payment made by married taxpayers to the IRS did not constitute a compromise for the entire amount of their delinquent tax liabilities that would entitle them to the release of federal tax liens on real property. The parties had no written offer of compromise, and there was no written acceptance by the IRS of such an offer. The record established that the payment related to a tax year for which no liens had been recorded or asserted. Moreover, the IRS did not file a certificate of release relating to the existing tax liens. Finally, the taxpayers failed to prove that the IRS agent who allegedly entered into a compromise with them was authorized to bind the IRS to such an agreement.

R.S. Mungan, BC-DC Tenn., 2003-1 USTC ¶50,146, 292 BR 613.

An appeals officer did not abuse his discretion when he did not accept a taxpayer's offer-in-compromise and instituted collection proceedings for past-due payroll taxes. The taxpayer had a long history of noncompliance with payroll tax laws. In addition, it was not meeting current payroll tax obligations at the time of the appeals hearing. Similarly, the officer's decision not to give the taxpayer a full quarter to demonstrate an ability to comply was not an abuse of discretion.

AJP Management, DC Calif., 2001-1 USTC ¶50,184.

Similarly.

TTK Management, DC Calif., 2001-1 USTC ¶50,185.

A tax shelter investor's action seeking an award of damages against the IRS in connection with its refusal to accept his offers in compromise regarding his tax liability was dismissed because he failed to plead any facts demonstrating a violation upon which relief could be granted. The taxpayer argued that the IRS's Office of Taxpayer Assistance improperly referred his complaints to the Problem Resolution Office, that the IRS failed to negotiate the offers in compromise in good faith, and that the IRS improperly attempted to seize his assets. However, he did not plead any facts from which a trier of fact could infer either a violation of Code Sec. 7811, which governs the issuance of Taxpayer Assistance Orders, or of Code Sec. 7122, which governs offers in compromise.

J.B. Evseroff, DC N.Y., 2000-2 USTC ¶50,807. Aff'd, CA-2 (unpublished opinion), 2001-2 USTC ¶50,486.

An individual failed to prove that he entered into a contract with the IRS to release a federal tax lien on his real property. Since an IRS agent lacked statutory authority to release the lien prior to the taxpayer's discharge in bankruptcy, he could not accept the taxpayer's offer to release the lien for payment and, thus, there was no mutual assent to a settlement agreement. Moreover, even if a contract had been formed, the existence of a material misrepresentation on the part of the taxpayer would have made the contract voidable.

G.J. Buesing, FedCl, 2000-2 USTC ¶50,724.

The Court of Federal Claims properly dismissed married taxpayers' claim that the IRS had wrongfully retained refunds due them as a result of overpayments for several tax years. Although the taxpayers had submitted an offer in compromise for the years at issue, the submission of an offer did not automatically stay the collection of the taxpayers' tax liability. Further, although the IRS may stay the collection of tax while an offer is pending, it was not required to, and could enforce the collection of the liability.

J.R. Smith, FedCl, 2000-1 USTC ¶50,386. Aff'd, per curiam, CA-FC (unpublished opinion), 2001-1 USTC ¶50,177.

Individual taxpayers' motion to dismiss their action against the IRS was without merit. They had not complied with statutes, regulations and procedures governing compromises, which prescribe the exclusive method for settling claims with the IRS. Further, they were not seeking to enforce an agreement to compromise their tax liability but, rather, to extinguish it.

D.W. Pack, DC Calif., 97-2 USTC ¶50,969.

The IRS could assess additional income tax and interest because it had not entered into a settlement agreement with a married couple for the years in question. Code Sec. 7121 and Code Sec. 7122 exclusively govern the settlement of disputed tax liabilities, and no agreement was entered into under those provisions. Letters from the IRS purported to be a settlement offer applied to a different tax year and were not signed by an official authorized to enter into settlement agreements. Further, the taxpayers' filing of amended returns for the disputed years containing changes based on the alleged settlement terms was not evidence of a settlement agreement; the taxpayer cited no authority for such a rule and the use of amended returns as a means of settlement would be contrary to the explicit settlement procedures set out in the Code.

N. Segel, DC Fla., 97-1 USTC ¶50,404.

A debtor's tax liabilities were dischargeable in bankruptcy because 240 days had passed between the date of the IRS assessment of the liabilities and the date of the debtor's bankruptcy petition. Although the debtor made an offer in compromise that tolled the 240-day period, an IRS letter to the debtor constituted a formal rejection, which terminated the pendency of the offer, thus allowing in excess of 240 days to pass between the assessment date and the petition date. The letter stated that the debtor's appeal of the initial rejection of his offer was terminated and that the debtor would have to submit a new offer. Finally, an earlier letter sent by the debtor's representative did not terminate the offer because it indicated that the debtor wanted the offer to be accepted.

C.L. Hobbs, BC-DC Iowa, 97-1 USTC ¶50,127.

IRS admissions, given in response to a corporate taxpayer's request, did not unilaterally settle factual issues in a case after administrative proceedings were completed and the case was referred to the Department of Justice. Therefore, counsel for the government could take a position contrary to that of the IRS concerning volumes and fair market values of the taxpayer's timber that suffered hurricane damage.

International Paper Co., FedCl, 96-2 USTC ¶50,686.

Cross motions regarding the validity of a consent order concerning the release of property wrongfully seized by the IRS from a nominee agent in satisfaction of a bankrupt corporation's tax liability were resolved by the court. Portions of the consent order relating to the individual tax liabilities of the bankrupt corporation's owner were unenforceable because the parties only agreed that the owner would pay an amount in consideration of his offer-in-compromise, not that the government would be bound by the offer.

Barmat, Inc., DC Ga., 95-1 USTC ¶50,089.

A federal tax lien filed against a bankrupt debtor with respect to which the debtor made a partial payment was not released because the lien did not become unenforceable, the debt was not paid in full, and no offer in compromise was accepted by the IRS. There was no evidence that an offer in compromise was submitted or that an agreement between the debtor and the IRS to accept a lesser amount was reached. A request for release of the lien that was sent with the partial payment did not establish that an offer in compromise was submitted and accepted by the IRS. Thus, the bankruptcy estate, to the extent it had funds, was liable for the unsatisfied amount.

Robert Turner Optical, Inc., BC-DC Ala., 94-2 USTC ¶50,555.

On a taxpayer's objections to the magistrate's recommendation (92-1 USTC ¶50,178), the court adopted the earlier finding that Form 656 was binding on the taxpayer. The evidence did not support the contention that Form 656 was superseded by subsequent oral or written agreements.

G.H. Keating, DC Neb., 92-2 USTC ¶50,413.

Since an offer in compromise was valid and binding, the taxpayers could not escape its conclusive bar to their refund suit. The original offer, which was made on Form 656, was later revised and then amended by letter. The letter offered additional consideration for the acceptance of the offer in compromise and did not otherwise supersede the Form 656.

G.H. Keating, DC Neb., 92-1 USTC ¶50,178, 794 FSupp 888.

Since an offer in compromise was valid and binding, the taxpayers could not escape its conclusive bar to their refund suit. The original offer, which was made on Form 656, was later amended by letter. The amendment letter constituted a collateral agreement, which simply offered additional consideration for the acceptance of the offer in compromise. The validity of the offer in compromise on two documents was recognized by both parties and had to be recognized by the court. Furthermore, the taxpayers submitted no evidence of fraud or mutual mistake in entering the compromise agreement, and it appeared that they would have no grounds to make such an allegation.

T. Waller, DC Calif., 91-1 USTC ¶50,288, 767 FSupp 1042.

A settlement report signed by the taxpayer and a representative of the IRS was found to contain provisions settling all issues between the parties and, at the time the report was signed, complete settlement was the clear understanding of the parties. Taxpayer could not later contend that a refund and credits were still due from the IRS.

I.A. Edens, DC S.C., 82-2 USTC ¶9692.

The taxpayer was found liable for the amount of taxes determined in a conference between him and an IRS officer. The taxpayer's contention that there was an agreement reached in that conference which reduced the amount owed was rejected since there was insufficient evidence to find that an agreement had been reached. Further, the IRS officer was not authorized to accept such an agreement even if one had been made.

H.T. Teti, DC Conn., 75-2 USTC ¶9709.

No compromise agreement was found to have been made.

E.O. Piper, DC Ill., 62-1 USTC ¶9194, 202 FSupp 657.

A.F. Pereira, 35 TCM 290, Dec. 33,698(M), TC Memo. 1976-66.

M.E. Roberts, DC Tex., 77-2 USTC ¶9702, 436 FSupp 553.

A collector was not estopped from the collection of income and excess profits taxes legally due but not yet assessed by a compromise agreement, which, although ambiguously worded, both parties intended to relate only to the government's claim for tax upon liquors alleged to have been diverted to beverage use.

Guckenheimer & Bros. Co., DC Pa., 40-1 USTC ¶9271.

The IRS did not abuse its discretion when it rejected an individual's offer in compromise that was based on effective tax administration and doubts as to collectibility. The ability to pay the entire deficiency is a precondition to an offer based on effective tax administration, but it was undisputed that the taxpayer could not pay the full amount of his liability. The taxpayer's offer based on collectibility was also unacceptable because it was substantially less than the IRS calculated he could pay, and he failed to demonstrate any special circumstances that justified his lower offer. The IRS did not improperly refuse to negotiate with the taxpayer, especially since he failed to present a counter-offer after his original offer was rejected. Thus, the IRS rejection of the offer in compromise was not arbitrary, capricious or without sound basis in fact or law.

E.F. Murphy, 125 TC 301, Dec. 56,232.

An IRS Appeals officer's determination to reject married taxpayers' offer-in-compromise did not consider certain relevant factors and, therefore, was remanded to Appeals for further consideration. The record was unclear as to why the Appeals officer found that the taxpayers were not good candidates and why the offer in compromise was denied.

V.F. Dailey, 95 TCM 1582, Dec. 57,461(M), TC Memo. 2008-148.

The IRS Appeals office abused its discretion when it rejected a married couple's offer-in-compromise because of the couple's alleged nominee interest in trust property. The record failed to establish that the Appeals officer even considered whether the taxpayers had an attachable interest in the trust property under state (Maine) law. Therefore, the IRS's motion for summary judgment was denied and the case remanded to the IRS Appeals office to determine whether the IRS may assert an interest in the trust property taking into account both state and federal law.

A. Dalton, Jr., 96 TCM 3, Dec. 57,484(M), TC Memo. 2008-165.

The IRS's determination to proceed with a proposed levy action against a married couple who failed to file a timely return and pay the taxes due was not an abuse of discretion. The copy of the return presented by the taxpayers bore a date after the due date of the return and the taxpayers could not show that the return was filed before the IRS's notification that the return was not received. They also failed to prove that they had paid the tax shown on the return. In addition, the IRS did not abuse its discretion in denying the taxpayers' offers in satisfaction of their tax liability. The taxpayers never submitted an offer-in-compromise as required by applicable guidelines and their informal offers were of unacceptable amounts.

W.R. Kohler, 95 TCM 1493, Dec. 57,434(M), TC Memo. 2008-127.

The IRS did not abuse its discretion in rejecting an offer-in-compromise (OIC) from a businessman who filed tax returns but failed to pay the taxes due over a period in excess of ten years. The OIC, submitted based on doubt as to collectibility, was returned as not processable because the businessman was noncompliant as to his current year return.

R.M. Scharringhausen, 95 TCM 1109, Dec. 57,329(M), TC Memo. 2008-26.

The IRS did not abuse its discretion by rejecting an attorney's offer-in-compromise when there were outstanding excise and income liabilities, nor by determining the attorney's reasonable collection potential (RCP) to be the full amount of his liabilities. Moreover, the IRS properly calculated the future income component of his RCP by using the attorney's average wage income over 3 years since the Internal Revenue Manual recommends averaging over 3 years for similar circumstances and averaging over more years would still have yielded more than the amount he offered. Finally, the IRS effectively balanced the need for efficient tax collection against the concern that collection be no more intrusive than necessary.

H.M. Lloyd, 95 TCM 1061, Dec. 57,316(M), TC Memo. 2008-15.

The IRS Appeals Office did not abuse its discretion by rejecting a married couple's offer-in-compromise where the taxpayers had underreported their income for several tax years due to claimed losses and credits from Hoyt partnership tax shelter investments. The taxpayers argued that their offer should have been accepted because of their age, health and anticipated postretirement earnings. However, the court found that the taxpayers failed to show that payment of more than they offered would render them unable to meet their basis living expenses in retirement.

R. Bergevin, 95 TCM 1031, Dec. 57,307(M) , TC Memo. 2008-6.

The IRS did not abuse its discretion in rejecting a taxpayer's offer-in-compromise of his outstanding tax liabilities. In evaluating his reasonable collection potential, the taxpayer argued that the IRS failed to make an allowance for his basis living expenses greater than provided in published guidance and that the IRS failed to take into consideration his option to file for bankruptcy and potentially discharge some of the tax liabilities. However, the taxpayer had not disclosed any special circumstances that would warrant allowing him a standard of living more lavish that the standard for the area where he lived. The evidence also indicated that the IRS did consider the possibility that the taxpayer might file for bankruptcy; however, in light of the changes to the bankruptcy law, the IRS believed that the taxpayer would not be able to avoid paying the total tax liability by filing for bankruptcy.

C. Klein, 94 TCM 423, Dec. 57,156(M), TC Memo. 2007-325.

The IRS did not abuse its discretion in rejecting an individual's offer in compromise. He had previously made an offer in compromise for one of the years at issue that had been accepted, but he promptly defaulted. His latest offer in compromise was rejected because it did not reflect his ability to pay. Although the individual argued that the IRS erroneously took into account various assets, the existence of other sources of funds supported the findings of the IRS settlement officer.

N.D. Newton, 94 TCM 255, Dec. 57,086(M), TC Memo. 2007-264.

An IRS Appeals officer did not abuse her discretion by determining that an individual could pay her outstanding tax liabilities and sustaining a tax lien. Although the taxpayer made an offer-in-compromise on hardship grounds, the information she submitted on Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, indicated that she had liquid assets in excess the amount of her unpaid tax liabilities for the years at issue.

M.H. Salmassi, 94 TCM 248, Dec. 57,083(M), TC Memo. 2007-261.

The IRS Appeals Office did not abuse its discretion in rejecting a married couple's offer-in-compromise where the taxpayers had underreported their income for several tax years due to claimed losses and credits from Hoyt partnership tax shelter investments. The IRS Appeals officer considered all of the evidence submitted, and reasonably applied the guidelines for evaluating an offer-in-compromise. The offer was unacceptable because, among other reasons, the taxpayers were not forthcoming in establishing their financial status, acceptance of the offer would undermine compliance with the tax laws by taxpayers in general, and the taxpayers had the financial wherewithal to pay more than the offered amount. The officer adequately considered the taxpayers' unique facts and circumstances, and the taxpayers did not show that requiring them to pay more than the offer amount would result in an economic hardship. Public policy did not demand that the taxpayers' offer be accepted because they were victims of fraud, and acceptance of the offer would not enhance voluntary compliance by other taxpayers.

M. Smith, 93 TCM 1047, Dec. 56,880(M), TC Memo. 2007-73.

Refusal to accept a married couple's offer-in-compromise was not an abuse of discretion. The taxpayers did not demonstrate either that they would suffer economic hardship from the proposed collection method or that public policy and equity reasons weighed in favor of accepting their offer. The case was not a "longstanding" case in which forgiveness of penalties and interest was appropriate, and there was no evidence that the IRS Appeals officer failed to give adequate consideration to the taxpayers' unique facts and circumstances. Public policy did not demand acceptance of the offer because the taxpayers were victims of a shelter promoter's fraud. Acceptance of the compromise would reduce the risks involved in investing in tax shelters, undermining voluntary compliance with the tax laws.

G. Hansen, 93 TCM 983, Dec. 56,861(M), TC Memo. 2007-56.

Rejection of a taxpayer's offer in compromise was not an abuse of discretion where the financial information provided by the taxpayer conflicted with the implications of the terms of the taxpayer's marital settlement and separation agreement. The information provided did not explain the inconsistencies with regard to the ownership of various assets; thus, it was not sufficient to permit a reasonable analysis of the taxpayer's offer.

J.J. Kerr, 93 TCM 932, Dec. 56,846(M), TC Memo. 2007-43.

The IRS's rejection of an offer-in-compromise from investors in a cattle-breeding tax shelter was not arbitrary, capricious or without sound basis in fact or law, and the IRS was allowed to proceed with its collection action. The IRS did not abuse its discretion in rejecting the offer despite the taxpayer's claim of special circumstances or economic hardship. The IRS was not required to address every aspect of the taxpayers' special circumstances in the notice of determination and its calculation of the taxpayers' reasonable collection potential far exceeded the taxpayers' offer. In addition, the IRS was not required to accept the taxpayer's offer based on considerations of public policy or equity. The longstanding nature of the taxpayers' case did not require acceptance of the offer-in-compromise, the IRS could rely on an example in the Internal Revenue Manual that was similar although not identical to the taxpayers' case, and the IRS did not have to consider all of the taxpayers' equitable facts, including their claim that they were victims of fraud. Finally, the taxpayers' other arguments regarding compromise of penalties and interest, the IRS's alleged failure to provide the court with sufficient information, the IRS's deadline for submission of information, the husband's pending innocent spouse claim and the IRS's alleged failure to balance the need for efficient tax collection of taxes with the concern that collection be no more intrusive than necessary were rejected.

C. Andrews Est., 93 TCM 891, Dec. 56,831(M), TC Memo. 2007-30.

An IRS Appeals officer did not abuse her discretion by rejecting a married couple's offer-in-compromise based on doubt as to collectibility with special circumstances and effective tax administration. The guidelines for acceptance based on doubt as to collectibility with special circumstances were not met because the taxpayers were able to pay far more than the amount that they offered. Further, the Appeals officer properly concluded that acceptance of the offer-in-compromise would not promote effective tax administration. Acceptance of the offer would undermine compliance with the tax laws by encouraging more taxpayers to participate in tax shelters. The couple failed to identify compelling public policy or equity concerns to show that acceptance of their offer-in-compromise was appropriate. Therefore, the IRS was permitted to proceed with the proposed collection action.

B.E. Johnson, 93 TCM 885, Dec. 56,830(M), TC Memo. 2007-29.

The IRS's rejection of an offer-in-compromise from investors in a cattle-breeding tax shelter was not arbitrary, capricious or without sound basis in fact or law, and the IRS was allowed to proceed with its collection action. The IRS did not abuse its discretion in rejecting the offer despite the taxpayer's claim of exceptional circumstances. In addition, the IRS was not required to accept the taxpayer's offer based on considerations of public policy or equity. The longstanding nature of the taxpayers' case did not require acceptance of the offer, the IRS could rely on an example in the Internal Revenue Manual that was similar although not identical to the taxpayers' case, and the IRS did not have to consider the taxpayers' claim that they were victims of fraud. Finally, the taxpayers' other arguments regarding compromise of penalties and interest, the IRS's alleged failure to provide the court with sufficient information, the IRS's refusal to delay the Code Sec. 6330 hearing, the wife's pending innocent spouse claim, and the IRS's alleged failure to balance the need for efficient tax collection with the concern that collection be no more intrusive than necessary were rejected.

G. Freeman, 93 TCM 879, Dec. 56,829(M), TC Memo. 2007-28.

An IRS Appeals officer did not abuse her discretion by rejecting a married couple's offer-in-compromise based on doubt as to collectibility with special circumstances and effective tax administration. The guidelines for acceptance based on doubt as to collectibility with special circumstances were not met because the taxpayers were able to pay far more than the amount that they offered. Further, the Appeals officer properly concluded that acceptance of the offer-in-compromise would not promote effective tax administration. Acceptance of the offer would undermine compliance with the tax laws by encouraging more taxpayers to participate in tax shelters. The couple failed to identify compelling public policy or equity concerns to show that acceptance of their offer-in-compromise was appropriate. Therefore, the IRS was permitted to proceed with the proposed collection action.

F. Hubbart, 93 TCM 870, Dec. 56,827(M), TC Memo. 2007-26.

The IRS's rejection of an offer-in-compromise from investors in a cattle-breeding tax shelter was not arbitrary, capricious or without sound basis in fact or law, and the IRS was allowed to proceed with its collection action. The IRS did not abuse its discretion in rejecting the offer despite the taxpayers' claim of special circumstances or economic hardship. The IRS was not required to address every aspect of the taxpayers' special circumstances in the notice of determination and its calculation of the taxpayers' reasonable collection potential far exceeded the taxpayers' offer. In addition, the IRS was not required to accept the taxpayers' offer based on considerations of public policy or equity. The longstanding nature of the taxpayers' case did not require acceptance of the offer, the IRS could rely on an example in the Internal Revenue Manual that was similar although not identical to the taxpayers' case, and the IRS did not have to consider the taxpayers' claim that they were victims of fraud. Finally, the taxpayers' other arguments regarding compromise of penalties and interest, the IRS's alleged failure to provide the court with sufficient information, the IRS's refusal to delay the Code Sec. 6330 hearing, and the IRS's alleged failure to balance the need for efficient tax collection with the concern that collection be no more intrusive than necessary were rejected.

R. Carter, 93 TCM 861, Dec. 56,826(M), TC Memo. 2007-25.

The IRS did not abuse its discretion in rejecting an individual's offer-in-compromise (OIC) for a liability that arose from his claimed losses and credits from his involvement in a Hoyt partnership. Accepting the offer would not have promoted effective tax administration because reducing the risk of participating in tax shelters would encourage more taxpayers to run those risks, thus undermining, not enhancing, compliance with the tax laws.

D.O. Abelein, 93 TCM 857, Dec. 56,825(M), TC Memo. 2007-24.

An IRS Appeals officer did not abuse her discretion in rejecting a taxpayer's offer-in-compromise. The liability arose from claimed losses and credits arising from the taxpayer's involvement in a Hoyt partnership. The taxpayer did not show that the determination by the IRS was arbitrary or capricious, or without sound basis in fact or law; therefore, the IRS was permitted to proceed with the proposed collection action.

D. Ertz, 93 TCM 696, Dec. 56,816(M), TC Memo. 2007-15.

An IRS Appeals officer did not abuse her discretion in rejecting a taxpayer's offer-in-compromise. The Appeals officer correctly concluded that acceptance of the offer-in-compromise would not promote effective tax administration. Further, she did not abuse her discretion in determining that the taxpayer's real property had a value in excess of the amount indicated by the taxpayer, which was based on an outdated appraisal, and she correctly determined that the reasonable collection potential was greater than the taxpayer's offer amount.

G.W. McDonough, 92 TCM 386, Dec. 56,665(M), TC Memo. 2006-234.

The IRS's decision to reject an individual's offer in compromise and proceed with collection of his federal tax liabilities was remanded for further consideration and clarification. Although the IRS's analysis of the offer indicated that the taxpayer's reasonable collection potential was zero, the IRS concluded that acceptance of the offer would not be in the best interest of the government under Internal Revenue Manual (IRM) sec. 5.8.7.6(5) because of the taxpayer's egregious history of noncompliance and the likelihood that he would be unable to remain in compliance during the offer term. However, the IRS's application of IRM sec. 5.8.7.6(5) was inconsistent with IRS policy statement P-5-100, on which the IRM relies. Policy statement P-5-100 describes "best interest of the government" only in terms of the potentially collectible amount and does not mention past non-compliance as a criterion for rejection of an offer. Because the reasoning behind the rejection of the offer was unclear, the Tax Court could not determine whether the IRS's decision to reject the offer and proceed with collection was an abuse of discretion.

R.W. Oman, 92 TCM 372, Dec. 56,662(M), TC Memo. 2006-231.

An IRS Appeals officer did not abuse his discretion in rejecting married taxpayers' offer-in-compromise. The Appeals officer correctly concluded that the taxpayers had withdrawn their arguments in favor of a compromise based on doubt as to collectibility with special circumstances and effective tax administration based upon the taxpayers' correspondence. Although the Appeals officer made errors in his calculation of collection potential, he nevertheless correctly determined that the reasonable collection potential was greater than the taxpayers' offer amount. The taxpayers' arguments that the Appeals officer (1) failed to provide sufficient information for review, (2) abused his discretion by refusing to consider an offer-in-compromise for unassessed years, and (3) failed to consider less intrusive collection alternatives were properly rejected.

W.H. Lindley, 92 TCM 363, Dec. 56,659(M), TC Memo. 2006-229.

An Appeals officer acted within her discretion by waiting to schedule a hearing until after a married couple's appeal to the Court of Appeals was resolved because once the IRS has referred a case to the Department of Justice for defense or prosecution, only the Attorney General or his delegate has the authority to compromise it.

H.D. Summers, 92 TCM 345, Dec. 56,647(M), TC Memo. 2006-219.

The IRS properly rejected the offer-in-compromise based on doubt as to collectibility with special circumstances because the taxpayers had assets adequate to pay more than their offer and failed to prove the existence of any special circumstances. The IRS also properly rejected the offer-in-compromise made on grounds of public policy and equitable consideration. The taxpayer's argument that penalties and interest are required to be forgiven in longstanding cases was rejected. The taxpayer's argument that the IRS improperly relied upon a similar example in the Internal Revenue Manual was also rejected. Also, the fact that the taxpayer may have been defrauded by Hoyt was not persuasive as many other investors in these partnerships had been deemed liable for the interest and penalties despite supposed fraud. All of the taxpayer's arguments that the IRS abused its discretion were also rejected.

D. Ertz, 92 TCM 296, Dec. 56,630(M), TC Memo. 2006-204.

IRS representatives did not accept or intend to accept the offer of a husband and wife to settle their tax deficiency case. The IRS appeals officer to whom the offer letter was sent did not make a written or oral response, and did not accept the offer. The IRS's counsel in the case did not accept the offer, where the offer was not made to him, he was unaware of its specifics, and the appeals officer conducted the negotiations. Although it was disputed whether the IRS's counsel had told taxpayers' counsel that a settlement had been reached, IRS counsel's statement was, at best, his understanding of the intent or actions of the appeals officer or her office.

R.R. Smith, 92 TCM 219, Dec. 56,611(M), TC Memo. 2006-187.

The IRS did not abuse its discretion in rejecting an offer-in-compromise and sustaining a proposed levy action against a taxpayer who was a partner in a cattle breeding partnership through which he claimed deductions for farming losses and carried back related net operating losses that gave rise to refunds. The Tax Court rejected the taxpayer's argument that the longstanding nature of the case required the IRS to accept his offer-in-compromise for the same reasons that the Court of Appeals for the Ninth Circuit considered and rejected that argument in C.G. Fargo, CA-9, 2006-1 USTC 50,326, 447 F3d 706. Further, IRS's reliance on an example in the Internal Revenue Manual was not arbitrary or capricious. Also, the mere fact that certain "equitable facts" present in the case did not persuade the IRS did not mean that they were not considered. Finally, the IRS did not fail to balance the need for efficient collection of taxes with the concern that the collection action not be more intrusive than necessary. The IRS did seek to collect the taxpayer's outstanding tax liability through less intrusive means --an installment agreement. But the taxpayer rejected it.

M. Keller, 92 TCM 114, Dec. 56,587(M), TC Memo. 2006-166.

An IRS Appeals officer did not abuse her discretion in rejecting a $32,000 offer-in-compromise from a husband and wife who had more than $400,000 in unpaid tax liabilities, including interest and penalties, resulting from participation in discredited tax shelter partnerships organized and operated by A.J. Hoyt. The guidelines for acceptance due to collectibility with special circumstances were not met because the amount offered was inadequate relative to the $140,000 in assets admittedly owned by the taxpayers. All special circumstances presented by the taxpayers regarding their financial situation had been reviewed by the Appeals officer and failed to establishment economic hardship. The guidelines for acceptance based on effective tax administration were not satisfied because acceptance would actually tend to encourage taxpayers to risk participation in tax shelters and, thereby, reduce effective tax administration. Furthermore, acceptance based on effective tax administration requires that a taxpayer's equity in assets plus future income equal or exceed the amount to be compromised and this condition was not met. The IRS was, therefore, entitled to move forward with its proposed levy.

R. Barnes, 92 TCM 31, Dec. 56,570(M), TC Memo. 2006-150.

An IRS Appeals officer did not abuse his discretion in rejecting both offers in compromise submitted by married taxpayers. Both offers were substantially less than the amount collectible determined by an IRS officer using published guidelines. Since the taxpayers failed to demonstrate any special circumstances, the determination to levy for the full tax liability was proper.

A.A. Lemann III, 91 TCM 846, Dec. 56,443(M), TC Memo. 2006-37.

The IRS did not abuse its discretion in determining to proceed with collection of an individual's unpaid tax liability. The IRS's failure to consider the taxpayer's offer to compromise his tax liability for a nominal amount was not an abuse of discretion. The taxpayer submitted the offer in compromise after the scheduled CDP hearing and final notice was issued. Accordingly, the IRS could not have considered the offer at the CDP hearing.

M.H. Hajiyani,, 90 TCM 153, Dec. 56,121(M), TC Memo. 2005-198.

An IRS settlement officer did not abuse her discretion in rejecting a married couple's offer in compromise. The officer rejected the offer after determining that the taxpayers had sufficient income and assets to satisfy the liability in full. The officer complied with the requirements of Code Sec. 6330 and did not abuse her discretion under Code Sec. 7122.

D.A. Singer, 90 TCM 67, Dec. 56,098(M), TC Memo. 2005-175.

An Appeals officer's determination that the IRS could proceed with a levy against an individual taxpayer was not an abuse of discretion. The taxpayer's claim that she had requested, but was not granted, a face-to-face interview was not persuasive. Moreover, the taxpayer had been given 30 days to revise her offer in compromise, and her case was not closed for six weeks after that time period had lapsed, but even with the additional time, the taxpayer did not revise her offer or provide the additional information that had been requested.

M.J. Chandler, 89 TCM 1113, Dec. 56,011(M), TC Memo. 2005-99.

The IRS did not act arbitrarily, capriciously or without sound basis in fact or law when it rejected a delinquent taxpayer's offer in compromise (OIC). Thus, its determination to proceed with the collection action against him was sustained. The record reflected that throughout the administrative process, the taxpayer was given multiple and repeated opportunities to submit sufficient information to support his offer in compromise. Because such information was not provided in a timely manner, the IRS's decision to the reject the OIC was sustained.

S. Roman, 87 TCM 835, Dec. 55,522(M), TC Memo. 2004-20.

The IRS did not act arbitrarily, capriciously, or without sound basis in fact or law when it rejected a delinquent taxpayer's offer in compromise. Thus, its determination to proceed with the collection action against her was sustained. The IRS considered the taxpayer's circumstances in light of the prescribed guidelines for accepting offers. It reasonably concluded that the evidence failed to establish either the requisite economic hardship or other exceptional factors demonstrating that compromise of the liability would not undermine voluntary compliance with the tax laws.

D.M. Chandler, 87 TCM 804, Dec. 55,508(M), TC Memo. 2004-7.

An IRS Appeals officer's rejection of an individual's Form 656, Offer in Compromise, was not an abuse of discretion. The Tax Court noted the possibility that an IRS revenue officer's financial analysis of the taxpayer, based on information that the taxpayer provided, was flawed. However, the Tax Court declined to conclude that the information the taxpayer provided was reasonable or that consideration of his amended offer in compromise would have changed the Appeals officer's determination. The determination also indicated that a levy was necessary to induce payment, which was reasonable based on the taxpayer's long history of delinquency. Consequently, neither rejection of the taxpayer's initial offer nor his amended offer constituted an abuse of discretion.

R.G. Van Vlaenderen, 86 TCM 736, Dec. 55,382(M), TC Memo. 2003-346.

The IRS did not act arbitrarily, capriciously, or without sound basis in fact or law when it rejected a delinquent couple's offer in compromise. Thus, its determination to proceed with the collection action against them was sustained. The IRS considered the taxpayers' circumstances in light of the prescribed guidelines for accepting offers. It reasonably concluded that the evidence failed to establish either the requisite economic hardship or other exceptional factors demonstrating that compromise of the liability would not undermine voluntary compliance with the tax laws.

J.J. Crisan, 86 TCM 601, Dec. 55,350(M), TC Memo. 2003-318.

The IRS did not act arbitrarily, capriciously, or without sound basis in fact or law when it rejected a delinquent taxpayer's offer in compromise. Thus, its determination to proceed with the collection action against him was sustained. The taxpayer failed to submit a properly completed Form 656, Offer in Compromise, and the required financial information for the consideration of his request.

C.R. Neugebauer, 86 TCM 467, Dec. 55,323(M), TC Memo. 2003-292.

The IRS did not act arbitrarily, capriciously, or without sound basis in fact or law when it rejected a delinquent taxpayer's offer in compromise. Thus, its determination to proceed with the collection action against her was sustained. The IRS considered the taxpayer's circumstances in light of the prescribed guidelines for accepting offers. Further, it reasonably concluded that the evidence failed to establish either the requisite economic hardship or other exceptional factors demonstrating that compromise of the liability would not undermine voluntary compliance with the tax laws.

A.H. O'Brien, 86 TCM 461, Dec. 55,321(M), TC Memo. 2003-290.

An IRS Appeals officer did not abuse his discretion in presenting a proposed offer in compromise and refusing an offer in compromise proposed by married taxpayers during a Collection Due Process hearing. The IRS's proposal for the collection of the taxpayers' delinquent taxes, which spanned 14 years, was computed according to the guidelines provided in the IRS manual, taking into consideration the husband's age and poor health.

R.M. Galvin, 86 TCM 353, Dec. 55,289(M), TC Memo. 2003-263.

An IRS Appeals officer did not abuse her discretion in denying a taxpayer's offer in compromise relating to her underlying tax liability for several tax years. The offer in compromise was considered in detail and it was appropriately concluded that it did not fairly represent the taxpayer's ability to pay her tax debt. Moreover, contrary to the taxpayer's assertion, the IRS's failure to send her a written rejection of her in compromise for one tax year did not deprive her of any administrative appeal rights.

D. Moorhous, 85 TCM 1538, Dec. 55,198(M), TC Memo. 2003-183.

The IRS's refusal to consider an individual's offer in compromise because she had not filed all required tax returns was not an abuse of discretion. The taxpayer's testimony and copies of some of her returns were not as persuasive in showing that she had filed returns for the thirteen tax years at issue as the IRS's certificate of official record and the testimony of agents in showing that her tax returns had not been filed. The IRS required all of the financial information supporting her offer in compromise in order to evaluate its acceptability. Thus, it was a reasonable exercise of discretion for the IRS to deny the taxpayer's offer in compromise.

S.S. Rodriguez, 85 TCM 1414, Dec. 55,168(M), TC Memo. 2003-153.

An IRS Appeals officer did not abuse her discretion in denying a taxpayer's offer in compromise relating to his underlying tax liability for several tax years. The taxpayer's history of noncompliance, the late filing of his income tax return for one tax year, and the delinquency on his estimated tax payments for a subsequent tax year established his failure to be in current compliance with his federal income tax liabilities and supported the Appeals officer's determination disapproving of the offer in compromise. The taxpayer's argument that the Appeals officer failed to have her proposed rejection of the offer in compromise reviewed by an "independent reviewer" was not supported by the record.

C. Londono, 85 TCM 1121, Dec. 55,107(M), TC Memo. 2003-99.

An IRS Appeals Office agent did not abuse his discretion in denying a taxpayer's second offer in compromise relating to his underlying tax liability for six tax years. Contrary to the taxpayer's assertion, the offer in compromise was considered in detail and it was appropriately concluded that it did not fairly represent the taxpayer's ability to pay his tax debt.

A.C. Schenkel, 85 TCM 839, Dec. 55,043(M), TC Memo. 2003-37.

A dentist who attempted to repay a loan from a profit-sharing plan via a prohibited transaction several years later, and who actually repaid the loan with interest in a subsequent tax year as part of a settlement with the IRS, was allowed a deduction for the investment interest payment in that subsequent year. The IRS was bound by the settlement and, thus, could not claim that the taxpayer had repaid the loan early through the prohibited transaction.

F.E. Hickman, 74 TCM 1346, Dec. 52,390(M), TC Memo. 1997-545.

Negotiations between individuals and the IRS regarding alleged deficiencies arising out of tax-shelter investments and occurring before the docketing of any cases in the Tax Court were not compromises that were formally submitted using the appropriate documents. Therefore, the negotiations did not bind the IRS. In one instance, the evidence failed to establish acceptance of the IRS offer; in another, it showed that the IRS offer had been rejected; and, in a third, it demonstrated that no offer had ever been made.

R.W. Rohn, 67 TCM 3030, Dec. 49,876(M), TC Memo. 1994-244.

The parties to a settlement agreement did not intend for the agreed-upon increases in the taxpayers' income to be mitigated by additional claims of tax deductions and benefits, such as income averaging, an increased general sales tax deduction, the deduction for a married couple when both work, and the offset of the corporate taxpayer's additional taxable income with a net operating loss. None of the additional items were mentioned in the settlement or raised prior to settlement, and what the taxpayers mistakenly failed to insert into the terms of the agreement could not thereafter be included.

Yoo Han & Co., 62 TCM 83, Dec. 47,455(M), TC Memo. 1991-308.

A couple's payment for release of a tax lien that resulted from unpaid 1983 taxes did not constitute a settlement of their entire 1983 tax liability and did not preclude the IRS from subsequently determining a deficiency for unpaid self-employment taxes for the same year. Although the IRS had issued a certificate of lien release, the evidence was insufficient to establish that the IRS, either orally or in writing, had agreed to compromise the taxpayers' entire tax liability in exchange for payment to release the lien.

R. Foulds, 56 TCM 1112, Dec. 45,433(M), TC Memo. 1989-29.

An agreed-upon settlement agreement based upon a specific dollar amount and not upon concessions of any underlying legal or factual issues was enforced by the court under principles of contract law. The taxpayer made a unilateral mistake of fact in thinking that such amounts could be further reduced by net operating loss carrybacks where the Commissioner was not aware of the existence of such carrybacks and the issue was not raised by the taxpayer.

V.F. Himmelwright, 55 TCM 403, Dec. 44,644(M), TC Memo. 1988-114.

The taxpayer was required to recognize the entire long-term capital gain it realized upon the 1969 sale of property it had originally acquired through its acquisition and liquidation of another corporation. It was not shown that the Commissioner had agreed in a 1964 audit to eliminate any capital gain derived from the future sale of the property in question.

Baker Industries, Inc., 37 TCM 1842, Dec. 35,504(M), TC Memo. 1978-440.

Chief Counsel advised that the IRS could not accept an offer in compromise submitted by one of the general partners of a defunct partnership to compromise the partner's individual derivative share of the employment tax obligations of the partnership. The employment tax obligations represented a single liability assessed against the partnership. The partnership liability was the only liability subject to compromise and any compromise of the liability had to involve a thorough analysis of the partnership assets and the assets of the other general partners.

CCA Letter Ruling 200127009, March 30, 2001.

The IRS's rejection of an offer in compromise wherein the non-liable spouse refused to provide all financial information needed to evaluate the taxpayer's percentage of shared expenses was a permissible exercise of its discretion. The mere fact that the non-liable spouse provided a sworn statement that all of the taxpayer's income was contributed toward their living expenses was insufficient to preclude the IRS's rejection of the taxpayer's offer. Although IRS procedures do not clearly show that rejection is permissible under the given circumstances, each offer in compromise may be evaluated on its merits. Therefore, the IRS was entitled to conclude that the offer was not in its best interest and reject it.

CCA Letter Ruling 200129010, March 26, 2001.

Chief Counsel concluded that an individual who erroneously believed that she was not entitled to innocent spouse relief because she filed a joint return and subsequently entered into an offer in compromise with the IRS was not entitled to set aside the compromise. The government was not mistaken in law or fact regarding the taxpayer's liability for those tax years. Likewise, the taxpayer was not mistaken regarding facts surrounding her case. However, she failed to affirmatively raise the issue of innocent spouse relief prior to the government's acceptance of the offer. Because the taxpayer's mistake was unilateral, based upon her misunderstanding of the law, there were no grounds to set aside the offer in compromise.

Technical Advice Memorandum 200120009, February 6, 2001.

An IRS Appeals officer properly applied standard allowances to determine a taxpayer's living expenses in rejecting his offer in compromise based on doubt as to collectability. The taxpayer's reasonable collection potential was much greater than his offer in compromise and also much greater than his total tax liability. The taxpayer's contention that actual living expenses, rather than standard allowances, should be used in determining reasonable collection potential was rejected. Nothing on the record showed that the Appeals officer's determination was arbitrary or unreasonable.

L. Fernandez, Dec. 57,531(M), TC Memo. 2008-210.

An IRS Appeals officer did not abuse his discretion in issuing a final determination to levy when the taxpayer failed to provide the necessary financial information to properly consider his offer in compromise. Further, the 10-year statute of limitations for collection had not expired since his offer in compromise waived the running of the statute of limitations until the offer was rejected.

J.G. Nash, Dec. 57,578(M), TC Memo. 2008-250.

An IRS settlement officer's determination to reject a taxpayer's offer-in-compromise was not an abuse of discretion. The offer did not satisfy the requirements for a proper offer-in-compromise based on doubt as to collectability because it did not reflect his reasonable collection potential. Although the Settlement Officer's determination of the taxpayer's future income potential may have been flawed, it was clear that the amount offered was less than the taxpayer's net realizable equity in his assets.

L. Wright, Dec. 57,588(M), TC Memo. 2008-259.

An IRS Appeals officer's decision to reject a married taxpayers' offer-in-compromise and proceed with collection of their unpaid tax liabilities was not an abuse of discretion. The taxpayers' offer was less than three cents on the dollar, which was far less than their reasonable collection potential (RCP). The Appeals officer's decision to add back depreciation into their income for purposes of calculating RCP was reasonable, especially as he valued their depreciable assets at their fair market value for purposes of determining RCP. In addition, the taxpayers failed to identify these assets as business assets on their Form 433-B, Collection Information Statement for Businesses. Moreover, the IRS gave the taxpayers ample opportunity to alter their offer so that it would have a greater chance of being accepted.

J.T. Atchison, Dec. 57,709(M), TC Memo. 2009-8.