T.C. M em o . 2 0 1 7 -3 3

UNITED STATES TAX COURT
ELIAS OLSON AND ROSALINDA OLSON, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 1 8 63 -1 4 L. Fi l edFeb ru ary 1 3 , 2 0 1 7
.
El i as Ol s on an d Ro s al i n da Ol s o n , p ro s es e. Ch ri st o p h er J . Ri ch m o n d , fo r res p o nd en t .

M EM ORANDUM OPINION FOLEY, Ju d g e: Th e i s s u es fo r d eci s i o n are wh et h er p et i t i o n ers m ay
ex cl u d e fro m

i nco m e Cal i fo rn i a St at e Teach ers ’ Ret i rem en tSy st em (Cal STRS) p aym en t s t o Ro sal in da Ol s o n an dwh et h er res p o n den tab u sedh i s d i s cret i o n i n
s u s t ai n i n g n o t ices o f Fed eral t ax l i en(NFTLs ) rel at i n g t o p et it i on ers ’ u np ai dt ax- 2
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[* 2 ] l i ab i l i t i es . Th e p art i es s ub m i tt edth i s cas e fu ll y s t i p u l at edp u rs u an tt o Ru l e 1 2 2
. 1 Back gro u n d In 1 9 7 2 M rs . Ol s on b eg ant each i n g el em en t ary s ch o o l i n Cal ifo rn i a. Ono r
aro u n dAu g u s t2 4 , 2 0 0 0 , s h e i nju redh er el b o w m ov i n g cl as s ro o m fu rn i ture. Fro m Au g u s t2 6 , 2 0 0 0 , u n ti l h er 6 0 th b i rt hd ay i n 2 0 0 9 , M rs . Ol so n recei v edd is ab i l i ty p aym en t s fro m

Cal STRS rel at i n g t o a s erv ice-co n n ect edd is ab i l i ty . 2 Wh en M rs . Ol s o n reach edth e n o rm al ret i rem en t ag e o f 6 0 , s ee Cal . Edu c. Co d e s ec. 2 2 1 4 8 (W es t2 00 2 ), h er d i s ab i li ty p aym en ts were t erm i n at ed , an ds h o rt l y th ereaft er s h e b eg anrecei v i n g s erv i ce ret i rem en tb en efi t s , s ee i d . s ec. 2 4 2 1 3 (a). M rs . Ol so n ’ s
s erv i ce ret i rem en tp aym en ts were m ad e p u rs uan tt o Cal . Edu c. Co d e s ec. 2 4 2 0 2 (W es t2 00 2 ) an dwere cal cu lat edb y referen ce t o h er ag e an dy ears o f s erv i ce. Th e Ol s o ns rep o rt edo n thei r Fo rm s 1 0 4 0 , U.S. In d i v i du al In co m e Tax Retu rn , rel at i n g t o 2 0 0 9, 2 0 1 0 , an d2 0 1 1 th atth e s erv i ce ret i rem en tp aym en t s were t ax ab l e. Th ey

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de i n effect atal l rel ev an tt i m es , an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re.

2 M rs . Ol s o n recei v ed d i s ab il i ty p aym en t s p u rs u an t t o Di s ab i l i ty Co v erag e A, wh i ch i s av ai l ab l e t o em p l o y ees wh o b ecam e Cal STRS m em b ers b efo re Oct o b er 1 6 , 1 9 9 2 , an dd i dn ot el ectCo v erag e B b efo re Ap ri l 1 9 9 3 . Al l o th er Cal STRS m em

b ers m ay recei v e b en efi t s p u rs u an tt o Di s ab il i ty Co v erag e B.- 3
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[* 3 ] rep o rt edb al an ces du e rel at i n g t o 2 0 0 9, 2 0 1 0 , an d2 0 1 1 b u t d idn o trem i t p aym en t wi th res p ectt o tho s e y ears . OnSep t em

b er 4 , 2 01 2 , res p o nd en ti s s u edp et i t i o n ers a No t i ce o f Fed eral Tax Li en Fi l i n g an d Yo u r Ri gh tt o a Heari n g Un d er IRC 6 3 2 0 rel at in g t o 2 0 0 9 an d 2 0 1 0 , an do n Feb ru ary

7 , 2 0 1 3 , h e i s s u edp et i ti o n ers a No t i ce o f Fed eral Tax Li en Fi l i n g an dYo u r Ri g h tt o a Heari n g Un d er IRC 6 3 2 0 rel at i n g t o 2 0 1 1 . Th e Ol s o n s t i m el y fi l eda Fo rm

1 2 15 3 , Requ es tfo r a Co ll ect i o n Du e Pro ces s o r Equi v al en t Heari n g . Atth e Au g u s t1 , 2 0 1 3 , co l l ect i o n du e p ro ces s (CDP) h eari n g th e Ol s o n s
co n ten d ed th at th e Cal STRS s erv i ce ret i rem en tp aym en ts are ex em p t fro m t ax an d req u es t eda Fo rm

6 56 , Offer i n Co m

p ro m is e (OIC). Pet i t i o n ers ’ OIC was recei v ed
o n Decem

b er 1 0 , 2 0 1 3 . Res p o n d en t , o n M arch 1 7 , 2 0 1 4, ad v i s ed the Ol s o n s th at th ei r OIC wo u l db e reject edb ecau s e t h ey h ad co nt i n uedt o accru e u np ai d Fed eral i n co m e t ax l i ab i l i t i es . Th e Ol s o n s s ub s equ en t l y wi th drew t h ei r OIC an do n o r ab o utAp ri l 2 5 , 2 0 1 4 , s ub m i t t eda p ro po s edi ns t al l m en tag reem en t i n wh i ch th ey
o ffered t o p ay $ 9 5 ,0 0 0 . Res po n d en t reject edth e p ro p o sal b ecau s e i td i dn o t i n cl u d e al l o f t he Ol so n s ’ Fed eral t ax l i ab i l i t i es an do n Au gu s t 1 3 , 2 0 1 4 , i s s u edth e Ol s o ns a n ot i ce o f d et erm i n at i o n up h o l d i n g th e NFTLs
. OnSep t em ber 1 5 , 2 0 1 4 , th e Ol s o ns , wh i le res i d i n g i n Cal i fo rn i a, t i m el y fi l edth ei r p et i t i o n wi th th e Co u rt .- 4
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[* 4 ] Di s cu s s i on W e rev iew p et i ti o ners ’ u n d erl y i n g t ax l i ab i l i t i es d e n o v o b ecau s e t h ey d i d
n o trecei v e a n o t i ce o f d efi ci en cy o r o th erwi s e h av e an o p p o rtu n i ty t o d i s p u t e t h ei r t ax l i ab i l i t i es . 3 See s ec. 6 3 30 (c)(2 )(B); M on t g o m ery v . Co m m i s s i on er, 1 2 2 T.C. 1 , 8 -9 (2 0 0 4 ). Sect i o n 10 4 (a)(1 ) an dth e reg u l at i o n s th ereu n d er p ro v i d e t h at ret i rem en tp aym en t s are ex cl u d ab l e fro m g ro s s i n co m e i f t h ey

are recei v ed p u rs u an t t o a wo rkm en ’ s co m p en s at i o n acto r a s t atu t e i n th e n atu re o f a
wo rkm en ’ s co m

p en s at i o n act . See Seward s v . Co m m i s s i o n er, 1 3 8 T.C. 3 2 0 , 3 2 2 (2 0 1 2), aff’ d , 7 8 5 F.3 d1 3 3 1 (9 th Ci r. 2 0 15 ); s ec. 1 .1 0 4 -1 (b ), In co m e Tax Reg s . Sect i o n 1 0 4 d o es n o tap p l y , h owev er, t o th e ex t en tth atp aym en ts are d et erm i n ed b y referen ce t o th e em

p l o y ee’ s ag e o r l en g th o f s erv i ce o r t h e em pl o y ee’ s p ri o r
co n tri b u t i o n s, ev en i f t h e em p l o y ee’ s ret i rem en ti s o ccas i o ned b y o ccup at i o n al i n jury . See Seward s v . Co m m i s s i on er, 1 3 8 T.C. at3 2 3 ; s ec. 1 .1 0 4 -1 (b ), In co m e Tax Reg s . Pu rs u an tt o Cal . Edu c. Co d e s ec. 2 4 20 2 , M rs . Ol s o n ’ s s erv i ce ret i rem en tp aym en t s were d et erm i n edb y referen ce t o h er ag e an dl en g th o f
s erv i ce. Acco rd in g l y , h er s erv i ce ret i rem en tp aym en t s were n o tex cl u d ab le fro m

3 Wh ena t ax p ay er’ s u n derl y i n g t ax l i ab i l i ty i s p ro p erl y ati s s u e, t h e Co u rt rev i ews th e u n d erl y i n g t ax l i ab i l i ty d e n o v o an dal l o th er ad m i n i s trat i v e d et erm i n at i o n s fo r ab u s e o f d i scret i o n . See LG Ken dri ck , LLC v . Co m m i s s i o n er, 1 4 6 T.C. 1 7 , 2 6 (2 0 1 6 ).- 5
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[* 5 ] i n co m e. See s ec. 1 04 (a)(1 ); Seward s v . Co m m i s si o n er, 1 3 8 T.C. at3 22 ; s ec. 1 .1 04 -1 (b ), In co m e Tax Reg s . Pet i t i o ners fu rt h er co n t en dth atres p o n d en tab u s edh i s d i s cret i o n b y n o t accep t i n g ei th er th ei r OIC o r t h ei r p ro p o s edi n st al lm en tag reem en t . Th e Ap p eal s
o ffi cer rev i ewedth e i n fo rm at i o n p et i t i o n ers s ub m i t t ed , ev al u at edthei r
co n ten t i o n s , an dv eri fi edth atth e req u i rem en t s o f ap p l i cab l e l aw an d ad m i n is trat i v e p ro cedu re h adb een m et . See s ec. 6 3 3 0 (c). Aft er rev i ewi n g p et i t i o n ers ’ h i st o ry

o f fai l i n g t o p ay

t ax l i ab i l i t i es , res p o n d en treas o n ab l y d et erm i n edth atth e NFTLs were t h e m o s teffi ci en t m ean s o f co l lect i n g p et i t i o n ers ’
u np ai dt ax . See i d . Ins h o rt , res p o n den t’ s d et erm i n at i o n t o s u s t ai n t h e NFTLs was
n o tarb i traryo r cap ri ci o u s. See Go za v . Co m m i s s io n er, 1 1 4 T.C. 1 76 , 1 82 (2 0 0 0 ); W o o dral v . Co m

m i s s i o n er, 1 1 2 T.C. 1 9 , 2 3 (1 9 99 ). Co n ten ti o ns we h av e n o t ad dres sedare i rrel ev an t , m o o t , o r m eri t l es s . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t ered fo r res p o n den t .