T.C. Mem o. 2 01 5- 10 7

UNITED STAT ES TAX COURT
QUALITY SOFTWARE SYSTEMS INC., Pe ti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 14 00 8- 11 L. Fi le d J un e 1 1, 2 01 5.
P p et it io ne d fo r rev ie w of ade te rm in at io n b y th e In te rn al Rev enue Serv ic e App eal s Off ic e uph ol di ng R's fil in g o f a n ot ic e o f Fed eral tax li en(NFTL) an d re jecti ng P's p ro po se d c ol le ct io n al te rn at iv e. P's alt ern at iv e wou ldha ve rei ns ta te d a n o ffer -in
co m pr om is e ag reem en t tha t was term in at edon acco un t o f P's bre ach of th e co nd it io n re qu iri ng P, forfiv e y ears , to fil e al l re tu rn s t im el y an d t o p ay

all tax es ti m el y . Held : P b reac he d the ag reem en t, an d R was wi th in hi s ri gh ts to te rm in at e it , to rei ns ta te unpa idtax , andto m ov e to co ll ectth e unp ai d ta x b y fil in g the NFTL. Held , furth er, rem an de d t o Ap pe al s Off ic e to ex pl ai n i ts ba si s fo r reject in g P 's c ol le ct io n a lt ern at iv e.- 2 -

[* 2] Hen ry

F. Fur st , forpe ti ti on er. Mar co Fran co , forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION HALPERN, Ju dg e: Thi s ca se is be fo re the Co urt t o re vi ew a d et erm in at io n (d et erm in at io n) m ad e b y

th e In te rn al Rev enue Serv ic e (IR S) Ap pe al s Off ic e (Ap pe al s) th at(1) res po nd en t h adpro pe rly andap pr op ria te ly file d ano ti ce o f Fed eral tax li en(NFTL) to co ll ectpe ti ti on er's unpa idem pl oym en t t ax li ab il ity

an d (2 ) App eal s wo ul d n ot , as aco ll ect io n a lt ern at iv e, rei ns ta te anag reem en t (ag reem en t) a ccep ti ng pe ti ti on er's off er-i n- co m pr om is e (OIC) . The t erm s o f th e ag reem en t wer e th atres po nd en t wo ul d a ccep t a p art ia l p aym en t o f pe ti ti on er's
em pl oym en t t ax li ab il ity

if, am on g o th er thi ng s, p et it io ne r co m pl ie d fo r fi ve y ears with a ll pro vi si on s o f th e In te rn al Rev enue Co de (Co de ) rel at in g t o fi li ng it s returns an d p ay in g i ts requi redtax es . Res po nd en t h adtermin at edth e ag reem en t
an d re in st at edth e unp ai d t ax li ab il ity on acco un t o f pe ti ti on er's bre ach of t ha t
co nd it io n. Pe ti ti on er as si gn s erro r to th e d et erm in at io n o n the gro un ds th at App eal s ab us edit s d is cret io n i n re fu si ng to rei ns ta te th e ag reem en t an d n ot withd rawi ng th e NFTL.- 3 -

[* 3] Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o the Co de of 1 98 6,
as am en de d. Al l d ol lar am ou nt s h av e b eenrou nd edto th e n eare stdo ll ar. W e
rev ie w th e d et erm in at io n p ur su an t t o s ect io ns 63 20 (c) and63 30 (d )(1 ). FINDINGS OF FACT The pa rti es ha ve st ip ul at edcert ai n fa ct s an d the au th en ti ci ty of cert ai n do cu m en ts . The fac ts st ip ul at edare s o fo un d, an d the do cu m en ts st ip ul at edare
acce pt edas aut he nt ic . Whe n p et it io ne r fi le d the pe ti ti on , it s p rin ci pa l p la ce o f bu si ne ss was i n New J ers ey . OIC an d Ag reem en t On Fe brua ry

23 , 20 05 , res po nd en t ac cep te d p et it io ne r's off er t o p ay $3 60 ,00 0 i n c om

pr om is e o f it s s ub st an ti al ly great er u np ai d e m pl oym en t t ax li ab il ity for cert ai n t ax ab le pe rio ds th aten de d i n 2 00 0 a nd20 02 . Peti ti on er h ad
m ad e th e OIC o n the ba si s o f do ub t as to co ll ect ib il ity ; i .e., th atitdi d n otha ve
su ffi ci en t as se ts an d i nc om e to pa y th e fu ll am ou ntitowed . The ag reem en t
res ul ti ng fro m

res po nd en t's acce pt an ce o f th e OIC p ro vi de s, am on g o th er thi ng s, th atpe ti ti on er wi ll co m

pl y with a ll pro vi si on s o f th e Co de rel at in g t o fi li ng it s returns an d p ay in g i ts requi redtax es forfiv e ta x years f ro m th e d at e o f th e ag reem en t. Inth e ev en t o f pe ti ti on er's de fau lt , th e ag reem en t p ro vi de s tha t- 4 -

[* 4] res po nd en t ca n re in st at e th e unp ai d a m ountof t ax an d c ol le ctitalo ng with in te res t. Pet it io ne r's Co m

pl ianc e His to ry Res po nd en t m ai nt ai ns anorg an iz at io n, the Cen tra li zedOIC Uni t (C OIC Uni t), t o m on it orco m

pl ianc e with a ccep te d OIC s. As anem pl oyer, pet it io ne r was ob li ga te d t o fi le qu art erl y em pl oym en t t ax returns on Fo rm 94 1, Em pl oyer's Qua rte rly Fede ral Tax R eturn, an d t o m ak e p eri od ic de po si ts of e m pl oym en t t ax es . Fro m Ju ly 200 6 thr ou gh Marc h 2 00 9, p et it io ne r br each edth e ag reem en t o n s ev eral
oc cas io ns by notti m el y

fil in g F orm

94 1 o r by no t t im el y

m ak in g i ts requi redtax de po si ts . Res po nd en t's reco rd s i nd ic at e th at , onfou r oc cas io ns , inres po ns e to pe ti ti on er's bre ach of t he ag reem en t, the COIC Un itsen t t o p et it io ne r wha t
res po nd en t ch arac te riz es as a"p ot en ti al de fau ltlet te r" an d tha t, o n Au gu st12 , 20 09 , th e uni t s en t t o p et it io ne r wha t re sp on de ntch arac te riz es as a"d efau lt le tt er"
. On Sep te m

be r 3, 2 00 9, re sp on de ntterm in at edth e ag reem en t. 1 The term "d efau lt " i s d efi ne d i n re le vantpa rt a s: "The om is si on or f ai lu re 1 to pe rfo rm

a le ga l o r co nt ractua l dut y ". Bl ack 's Law Di ct io na ry 48 0 (9 th ed
. 20 09 ). W ith re sp ectto OICs , th e IRS us es th e te rm intwo di ffer en t ways: (1 ) as m od ifi edby the ad

jecti ve "p ot en ti al ", to si gn ify tha t a t ax pa y er i s n otin co m pl ianc e wit h h is ob li ga ti on s u nd er an acce pt edOIC b utth atth e IRS is no t read y to term in at e th e ag reem en t, s ee, e.g ., Int ern al Rev enue Man ua l (I RM) pt . 5.8 .9.3 (1 )(b ) (J an . 1, 2 01 5) , and(2) to si gn ify the term in at io n o f th e ag reem en t, se e, e.g ., id . pt . 5.8 .9-4 (Sep t. 2 3, 2 00 8) (Defau ltLett er). We will us e th e te rm (co nt in ue d...)- 5 -

[* 5] The fol lo win g t ab le su m m ari zes th atact iv ity . Date Activity 7/31/2006 Petitioner does not timely file F orm 941 for qua

rter e nded 6/30/2006. 10/25/2006 COI C sends potential defa ult letter ref

ere ncingfailure to file return. 12/15/2006 Petitioner files retur n. 9/30/2007 Ba lance due on ac count of $265 pe nalty for latedeposits. 12/20/2007 COI C sends potential defa ult letter ref

ere ncingfailure to pay penalty
. 12/27/2007 Petitioner makes pay ment.

__________________________________________________________________ 1/30/2009 Petitioner does not timely file F orm 941 for qua

rter e nded 12/31/2008. 3/31/2009 COI C sends potential defa ult letter ref

ere ncingfailure to file return. 4/9/2009 Petitioner files retur n. 4/30/2009 Petitioner does not timely file F orm 941 for qua

rter e nded 3/31/2009. 6/25/2009 Respondent claims the COI C Unit sent potential default letter

ref ere ncingfailure to file retur n. Petitioner claims it did not rec eive the le tter. 7/19/2010 Petitioner files retur n. 8/12/2009 Respondent claims the COI C Unit sent default letter, sta ting that petitioner had f

ailed to file a

For m 941 for the qua

rter ended 3/31/2009 and ha d failed to pa y a $344 pena lty occa sioned by

a late e mploy

ment tax deposit s for the qua rter ended 12/31/2008. Petitioner cla ims itdid not rece ive the letter. 9/3/2009 Respondent terminate s the agree ment. (...co nt inue d) 1 "b reac h" to m eana fai lu re t o c om pl y with the term s o f anacce pt edOIC an d the te rm "t erm in at e" t o re fer t o a n IR S d eci si on to tak e adve rs e act io n, s uc h a s t o rei ns tate th e o rig in al tax ob li ga ti on , onacco un t o f a b reac h. Se e Tro utv. Co m m is si on er, 1 31 T.C. 23 9, 2 58 n.1 (20 08 ) (Ma rv el , J., co nc urrin g)
.- 6 -

[* 6] Rei ns ta te m en t o f Liab il ity an d the NFTL On Se pt em

be r 28 , 20 09 , onacco un t o f ha vi ng term in at edth e ag reem en t,
res po nd en t re in st at edth e unp ai d a m ou ntof p et it io ne r's em pl oym en t t ax li ab il ity fo r 20 00 , whi chres ul te d i n arei ns ta te d a ss es sm en t o f $1 38 ,74 5 o f pr ev io us ly
as se ss edtax an d the ass es sm en t o f $7 0,1 88 of s ta tu to ry in te res t, fo r to ta l
as se ss m en ts of $ 20 8,9 33 . As of th e p et it io n fi li ng da te , res po nd en t h adno t m ad e a de te rm in at io n wi th res pe ctto th e am ou nt s o f pe ti ti on er's unpa idem pl oym en t t ax li ab il it ie s fo r th e ta xabl e p eri od s en de d i n 2 00 2, wh ic h wer e al so co ve redun de r th e ag reem en t. On M ay 27 , 20 10 , res po nd en t fi le d a n NFTL an d i ss ue d t o p et it io ne r a Not ic e o f Fed eral Tax Li enFil in g a ndYou r Ri gh t t o aHeari ng Und er IR C 6 32 0 (n ot ic e), wit h re sp ectto pe ti ti on er's unpa idem pl oym en t t ax li ab il it ie s fo r th e qu art ers en de d Dec em

be r 31 , 20 00 ($2 08 ,93 3) , andDecem be r 31 , 20 08 ($3 44 ). Rec ti fic at io n Pet it io ne r fi le d the m is si ng Fo rm 94 1 fo r th e qua rte r en de d M arch 31 , 20 09 , on Ju ly 19, 2 01 0, an d p ai d the $3 44 pe na lty onAug us t 2 6, 2 01 0. Co ll ect io n Du e Pro ces s Hea rin g On J un e 4 , 20 10 , inres po ns e to th e n ot ic e, pe ti ti on er fi le d aFo rm 12 15 3, Reque stfor

a Co ll ect io n Du e Pro ces s o r Equ iv al en t Hea rin g, re fere nc in g the- 7 -

[* 7] qu art er en de d Dec em be r 31 , 20 00 , andst at in g a s the ba si s fo r th e h eari ng reque stres po nd en t's fil in g o f th e NFTL. In res po ns e to th e que st io n o n the form
as ki ng why pe ti ti on er d is ag reedwith the fil in g o f th e NFTL, pet it io ne r refe ren ced a le tt er i t s ai d was att ach edto th e fo rm . Howev er, n o l et te r acc om pani edth e fo rm th atres po nd en t re cei ve d. Pe ti ti on er's reque stwas u lt im at el y ass ig ne d t o Set tl em en t Offi cer J es se D. Voy se stto co nduc t the he ari ng . On No ve m

be r 8, 2 01 0, M r. Voyses t h el d aface -to -fac e h eari ng with Mi ch ael G. Falk , pet it io ne r's rep res en ta ti ve . The o nl y is su es th ey

di sc us se d wer e (1 ) whe th er the ag reem en t s ho ul d b e rei ns ta te d a nd(2) whet he r pe ti ti on er re cei ve d th e n ot ic es of p ot en ti al de fau lt . Mr. Fal k a rg ue d tha t p et it io ne r's bre ach es of t he ag reem en t caus in g re sp on de ntto term in at e it(i.e ., fail in g t o fi le on e qua rte rly return andto pay

a $3 44 pe na lty ) were d e m in im is an d tha t i t wo ul d b e anab us e o f App eal s' d is cret io n n otto rei ns ta te it . On Nov em be r 8, 2 01 0, M r. Voyses t
reco rd edth e fo ll owi ng inhi s ca se act iv ity reco rd
. Helda face to face co nf

eren ce wi th th e TP's [ta xp ay er's ] POA [in di vi du al ha vi ng th e ta xp ay er's po wer o f at to rn ey ]. Ess en ti al ly, al th ou gh I ag ree t ha t a r ei ns ta te m en t o f th e TP's off er i s a vi ab le res ol ut io n, t ech ni cal ly, al l p ro pe r pr oc edur es were fo ll owe d i n de fau lt in g the off

er. I ag reedto runth is pa stCOIC t o d et erm in e if th ere are an y rei ns ta te m en t o pt io ns .- 8 -

[* 8] On No ve m

be r 12 , 20 10 , aft er a d is cu ss io n wi th so m eo ne inth e COIC Un it , Mr. Vo y se streco rd ed : "[ S]inc e th e TP cl earl y de fau lt edth ere i s n o p ro cedur al ba si s fo r rei ns ta te m en t." On M arch 29 , 20 11 , he m ad e anen try in t he cas e act iv ity reco rdth at
su m m ari zes hi s thi nk in g. Rev ie wedCOIC ca se hi st ory whi chcle arl y

in di cat es th atth e TP's OIC was pro pe rly defaul te d a s the pro pe r no ti fic at io n (P ot en ti al Defau ltLett er, Let te r 29 09 C) was m ai le d t o the TP on12 /1 8/ 07
. Howev er, the re ap pe ars to be un res ol ve d i ss ue s re ga rd in g wh ethe r or no t the TP's POA was pro po erl y [si c] no ti fie d. The TP's o ffer

was a ccep te d o n 1 1/ 29 /0 4 [s ic 2/ 23 /2 00 5]. The TP's of fer was de fau lt edon 8/ 12 /0 9 b as edon no n- co m pl ianc e wit h the fiv e y ear rul e. Duri ng th e la sty ear o f co m pl ianc e m on it or in g the TP in cu rredanFTD [Fed eral tax de po si t] pen al ty (5/1 8/ 09 ) in th e am ou nt of $3 43 .81 whi chwas fu ll y sat is fie d o n 8 /2 6/ 10 . In ad di ti on , Form 94 1 fo r th e 1 stqu art er o f 20 09 was n otfil edina ti m el y m an ne r. The ta x re tu rnwas due by 4/1 5/ 09 . The return was fil edon 7/ 21 /1 0. Al l FTD's wer e ti m el y

m ad e an d n o p en al ti es were i nc urred
. At thi s p oi ntaltho ug h the TP has tec hn ic al ly defau lt edI ne edto co ns id er the ha zard s o f li ti ga ti on si nc e th e TP's CDP [co ll ect io n due pr oc es s] reque stwas fi le d i n ati m el y m an ne r. My

co nc ernis whethe r orno t the US Tax C ou rt m ay fin d tha t an ab us e o f di sc ret io n h as oc cu rredby notrei ns ta ti ng th e TP's off er s in ce the act io ns whi ch cau se d· th e d efau ltwere d e-m in im us [si c] andwere re ct ifi ed
. Ess en ti al ly, wou lditbe fai r to rei ns ta te th e TP's off er? In thi s in st an ce I b el ie ve itwou ldbe
. Mr. Vo y se stso ug htfurth er g ui da nc e fro m anApp eal s an al y st . On Apr il 25 , 20 11 , he r eco rd edth athe ha d re cei ve d ares po ns e fro m th e an al y st , who advi se d- 9 -

[* 9] "tha t re in st at em en t o f th e TP's off er s ho ul d b e d en ie d a s the re was a ge nu in e de fau ltof t he TP's o ffer ." He th enreco rd edhi s co nc lu si on : "Th eref or e, [c]om pl ianc e m us t b e su st ai ne d." He lat er ad vi se d M r. Fal k o f hi s d eci si on to de ny rein st at em en t o f th e ag reem en t an d tha t Ap pe al s wo ul d i ss ue a ne ga ti ve de te rm in at io n. On M ay 12 , 20 11 , by a Not ic e o f Det erm in at io n C on cern in g C ol le ct io n Acti on (s ) Und er Se ct io n 6 32 0 a nd/o r 63 30 (no ti ce o f de te rm in at io n) , App eal s Team Man ag er Darry l Lee pro vi de d p et it io ne r with the fol lo win g " Su m m ary of Dete rm in at io n" : Bas edon th e av ai labl e fac ts , th e ap pl ic ab le laws an d a dm in is tra ti ve pr oc edur es were fo ll owe d a ndth e fi li ng of t he Not ic e o f Fed eral Tax Lien was p ro pe r an d app ro pr ia te . You r reque stforth e rei ns ta te m en t o f y ou r of fer i n c om

pr om is e h as be ende ni ed . It was de te rm in edth aty oudi d n otco m pl y with the co m pl ianc e te rm s an d p ro vi si on s o f Fo rm 65 6, Offe r in Co m

pr om is e. Enc lo se d wi thth e n ot ic e o f de te rm in at io n was anatt ach m en t ap pa ren tl y writ te n b y

Mr. Vo y se st , whi chde sc rib es th e g ro un ds forth e d et erm in at io n. It be gi ns with M r. Voyses t's reco m m en da ti on s, wh ic h re pe atve rb at im Mr. Lee's
su m m ary of th e d et erm in at io n. Itst at es th at , by th e h eari ng reque st , pet it io ne r reque st edth e rei ns tate m en t o f th e ag reem en t as a co ll ect io n a lt ern at iv e. It s ta te s th atpe ti ti on er d idno t d is pu te it s l iabi li ty for the tax an d ra is edno furth er i ss ue s.- 10 -

[* 10 ] Und er the he ad in g " Bal an ci ng of n eedforeffi ci en t co ll ect io n wi th tax pa y er
co nc ernth atth e co ll ect io n a ct io n b e n o m or e in tru si ve th anne ces sary .", itst at es th e fo ll owi ng . The li enact io n b al an cedth e n eedforth e eff ic ie ntco ll ect io n o f ta xe s an d i s n o m or e in tru si ve th anne ces sa ry . Bas edon a rev ie w of the cas e act iv ity reco rd s an d c as e tr an sc rip ts th e li enact io n was ne ces sa ry inord er t o p ro te ctth e g ov ern m en t's in te res t. Pet it io n Pet it io ne r ti m el y

fil edth e p et it io n o n Jun e 1 3, 2 01 1. Pe ti ti on er as si gn edas
erro r th atth e IRS fai le d t o p ro pe rly exer ci se it s d is cret io n t o p erm itanOIC to be rei ns tate d. Insupp ort o f it s as si gn m en t o f erro r, pe ti ti on er av ers , am on g o th er th in gs , th atth e IRS di d n otpro ve th atpe ti ti on er re cei ve d a ll ap pr op ria te no ti ces
co nc ern in g the de fau ltan d tha t re in st at em en t o f $2 89 ,93 3 o f ta x i s a p en al ty di sp ro po rti on al to th e h arm to th e IRS of o ne m is se d re tu rnan d the lat e p aym en t of a sm al l t ax pe na lty . Res po nd en t d en ie d b ot h p et it io ne r's ass ig nm en t an d i ts 2 de sc rib edav erm en ts .

It i s n otcle ar wh ere t he am ou ntof $ 28 9,9 33 co m es fro m . W e are 2 rev ie win g o nl y

th e d et erm in at io n re late d t o p et it io ne r's unpa id20 00 Fo rm 94 1 li ab il ity , ass es sm en ts of wh ic h (i nc lu di ng in te res t) t he pa rti es have st ip ul at edto ta l $2 08 ,93 3.- 11 -

[* 11 ] O PINION I. In tro du ct io n Sect io n 6 32 1 i m

po se s a l ie n fo r unpa idFed eral tax es . Sect io n 6 32 3 pr ov id es th atth e li enim

po se d b y sec ti on 63 21 is no t v al idag ai ns t ce rta inpe rs on s
un ti l n ot ic e o f th e li en(th e NFTL) is fil edinacco rd an ce wi th rul es pro vi de d. Sect io n 6 32 0( a) p ro vi de s tha t, af te r th e Co m

m is si on er h as fil edth e NFTL, th e Co m m is si on er m

us t n ot ify the tax pa y er o f th e fac t o f th e fi li ng an d, am on g o th er th in gs , hi s ri gh t t o re qu es t a h eari ng . If th e ta xp ay er re qu es ts a he ari ng , th e he ari ng is to be co nduc te d b y App eal s, an d the App eal s o ffi cer c on du ct in g the he ari ng m

us t v eri fy th atth e requi rem en ts of a ny app li cab le law o r adm in is tra ti ve pr oc edur e h av e b eenm et . Secs . 63 20 (b ) an d (c ), 63 30 (c)( 1) . The t ax pa y er reque st in g the he ari ng m ay rai se "an y

rel ev an t i ss ue " rel at in g t o the unpa idtax or th e Co m m is si on er's co ll ect io n a ct io n, i nc lu di ng "ch al le ng es to th e ap pr op ria te ne ss of co ll ect io n a ct io ns " an d " of fers of c ol le ct io n a lt ern at iv es ", in cl ud in g " anofferin -co m pr om is e." Se c. 63 30 (c)( 2) (A)(i i) a nd(ii i). Fo ll owi ng th e h eari ng , th e App eal s o ffi cer m us t d et erm in e whe th er the
co ll ect io n a ct io n i s t o p ro ceed , tak in g i nt o a cco un t the ve rif ic at io n the App eal s of fic er h as m ad e, th e is su es rai se d b y th e ta xp ay er atth e h eari ng , andwhet he r th e
co ll ect io n a ct io n " ba lanc es th e n eedforth e eff ic ie ntco ll ect io n o f ta xe s wi th th e- 12 -

[* 12 ] le gi ti m at e co nc ernof t he * * * [t ax pa y er] th atan y co ll ect io n a ct io n b e n o
m or e in tru si ve th anne ces sary ." Sec . 63 30 (c)( 3) . Sect io n 6 33 0( d) (1 ) sp eci fie s tha t we ha ve juri sd ic ti on to rev ie w su chde te rm in at io ns . Whe re the tax pay er's
un de rlyin g t ax li ab il ity

is no t atis su e, whi chitis no t h ere, we re vi ew su ch de te rm in at io ns forab us e o f di sc ret io n. E.g., Is le y v. Co m m is si on er, 1 41 T.C. 34 9, 36 1 (2 01 3) . An ab us e o f di sc ret io n o ccurs if the App eal s o ffi cer e xe rci se s h is di sc ret io n a rb itrari ly, cap ric io us ly, orwitho utso un d b as is infactor l aw. See i d. II. Part ie s' Arg um en ts A. Pet it io ne r's Argu m en ts Pet it io ne r arg ue s tha t M r. Voyses t h addi sc ret io n t o re in st at e th e ag reem en t
an d, b y no t d oi ng so , he abu se d tha t d is cret io n. Itarg ue s M r. Voyses t erredin de te rm in in g tha t m ai nt ai ni ng th e NFTL bal an cedth e n eedforeffi ci en t co ll ect io n of tax es an d p et it io ne r's leg it im at e co nc ernth atan y co ll ect io n a ct io n b e n o m or e in tru si ve th anne ces sa ry . It al so arg ue s tha t re sp on de nt 's fa il ur e to sen d ano ti ce o f po te nt ia l d efau ltsupp orts rei ns ta te m en t o f th e ag reem en t. Fi na ll y , itarg ue s tha t it s l at e p aym en t o f a $ 34 4 p en al ty doe s n otco ns ti tu te gro un ds forterm in at in g the ag reem en t.- 13 -

[* 13 ] B. Res po nd en t's Argu m en ts Res po nd en t ar gu es th atApp eal s d idno t ab us e it s d is cret io n b y no t rei ns tati ng th e ag reem en t. He ci te s 1 3 Wil li st on on Co nt ract s, s ec. 3 9: 32 (4t h e d. 20 00 ), fo r th e p ro po si ti on th at , "[o ]nce a co nt ractis bre ach ed , th e in jure d p arty

can ch oo se to eit he r co nt in ue th e co nt ractor t erm in at e th e co nt ract ." He co nc ed es , as he m us t, tha t g en eral ly, th e in

jure d p arty

canbri ng a te rm in at edco nt ractba ckin to effe ct : "I n the co nt ex t o f anOIC", h e st at es , "th is m ean s tha t re sp on de ntha s the le ga l ri gh t t o * * * bri ng a te rm in at edOIC b ackin to effe ctaft er i t [s ic ] pr ev io us ly de ci de d t o t erm in at e it ." He ad ds : "Ho wev er, d es pi te th e fac t tha t re sp on de ntha s a le ga l ri gh t t o re in st at e a t erm in at edOIC, res po nd en t h as no ob li ga ti on or
ex pe ct at io n t o e xe rci se th is rig ht ." "[T]he d eci si on to rei ns ta te anOIC th atwas te rm in at eddu e to a ta xp ay er's bre ach ", h e co nt in ue s, " res ts so le ly w ithi n
res po nd en t's di sc ret io n." He st at es : "[ B]oth re sp on de ntan d i ts App eal s Off ic e ha ve co ns is te nt ly m ai nt ai ne d apo li cy th atth ey wil l n otrei ns tate anOIC th atwas pr op erl y de fau lt edaft er a t ax pa y er b reac he d i ts term s an d c on di ti on s." (Em ph as is ad de d.) Parti cu lariz in g h is arg um en t t o the fact s o f th is cas e, res po nd en t s ta te s:

The App eal s Off

ic e's de ci si on de cl in in g t o re in st at e th e OIC was no t u ne xp ect ed , as i t was co ns is te ntwith the App eal s Off ic e's reg ul arl y pra ct ic edpo li cy

reg ard in g t erm in at edoff ers . The Ap pe al s Offi ce d idno t d ev ia te fro m it s p ol ic y inany way , no r di d Ap pe al s- 14 -

[* 14 ] tre atth e p et it io ne r in th is cas e d iff eren tl y th anth ey wou ldha ve tre at edan y

othe r si mil arl y

si tu at edtax pa y er. App aren tl y

us in g the adve rb "fai rly" to m eanev en ha nd ed ly, res po nd en t co nc lu de s hi s ar gu m en t thu s: "Pet it io ne r do es no t al le ge th atApp eal s treat editun fai rly. * * * Whil e p et it io ne r m ay be un happ y

with the fin al ou tc om e o f th is cas e, th ere
was no ab us e o f di sc ret io n." He arg ue s tha t M r. Voyses t p ro pe rly bal an cedth e n eedforeffi ci en t
co ll ect io n wi th pe ti ti on er's leg it im at e co nc ernth atco ll ect io n b e n o m or e in tru si ve th anne ces sa ry

be cau se , othe r th anrei ns ta ti ng th e ag reem en t, p et it io ne r of fere d n o
co ll ect io n a lt ern at iv e. He arg ue s tha t p et it io ne r's all eg at io n tha t i t d idno t re cei ve all th e n ot ic es is "i m m at eri al ", s in ce the ag reem en t s pe ci fic al ly stat es th atres po nd en t co ul d te rm in at e th e ag reem en t upo n b reac h wi th ou t fu rth er n ot ic e o f an y ki nd . He arg ue s tha t " [a]t m os t" , th e IRM st at es th atth e COIC u ni t s ho ul d " m ak e an at te m pt " t o s ecu re co m

pl ianc e b y

sen di ng warn in g n ot ic es be fo re t erm in at in g a n OIC ag reem en t b utth atth e IRM do es no t re qu ire su chno ti ces to be sen t, an d,
m or eo ve r, pe ti ti on er ca nn otrel y on th e IRM
. Fi na ll y , he a rg ue s tha t p et it io ne r br each edth e ag reem en t n o fe wer tha n fi ve ti m es , all of wh ic h c ou ldbe gro un ds to term in at e th e ag reem en t. Res po nd en t- 15 -

[* 15 ] te rm in at edth e ag reem en t b ecau se of ( 1) pe ti ti on er's fai lu re t o fi le ti m el y it s Fo rm 94 1 fo r th e fi rs t qua rte r of 20 09 , and(2) pe ti ti on er's fai lu re t o m ak e a t im el y Fed eral tax de po si t fo r th e fo urth qu art er o f 20 08 , whi chres ul te d i n the ass es sm en t of th e $ 34 4 p en al ty. Whi le res po nd en t b el ie ve s the lat te r fai lu re al so co ns ti tu te s a br each of t he ag reem en t, re sp on de ntarg ue s the form er fa il ur e was cle arl y a br each
su ffi ci en t t o t erm in at e th e ag reem en t o n i ts own . III. Dis cu ss io n A. In tro du ct io n Pet it io ne r as si gn edas e rro r on ly tha t Ap pe al s fa il edpro pe rly to e xe rci se it s di sc ret io n i n n otpe rm itti ng th e ag reem en t t o b e rei ns ta te d. Itis , ho wev er, cl ear fro m it s av erm en ts insupp ort o f th e as si gn m en t an d fr om it s ar gu m en ts on bri ef th atitals o c ha ll en ge s the ap pr op ria te ne ss of r es po nd en t's NFTL fil in g a ndMr. Voyses t's de te rm in at io n t o m ai nt ai n the NFTL. W e wil l d eal fir stwith 3 pe ti ti on er's ch al le ng e to th e ap pr op ria te ne ss of t he NFTL fil in g. We will th en
co ns id er Mr . Voy se st 's e xe rci se of d is cret io n. Fo r th e rea so ns st at edin fra, we

Gen eral ly, we wil l re fer t o Ap pe al s as th e act or m ak in g the de te rm in at io n. 3 Whe n we wi sh to di sc us s M r. Voyses t's pe rs on al in vo lv em en t, we wi ll refe r to hi m by nam e. It i s cl ear t o u s tha t the de te rm in at io n e m bo di edhi s co ns id erat io ns an d reco m m en da ti on s.- 16 -

[* 16 ] ne edno t n ow d eal with p et it io ne r's ch al le ng e o f App eal s' d et erm in at io n t o
m ai nt ai n the NFTL. B. App ro pr ia te ne ss of R es po nd en t's Fil in g the NFTL On Se pt em

be r 3, 2 00 9, re sp on de ntterm in at edth e ag reem en t, an d, o n Sep te m be r 28 , 20 09 , he r ei ns ta te d p et it io ne r's unpa id20 00 em pl oym en t t ax li ab il ity . He rein st at edth e p rev io us ass es sm en t o f ta x a ndass es se d i nt eres t, fo r to ta l as se ss m en ts of $ 20 8,9 33 . By May 27, 2 01 0, p et it io ne r ha d n otpa idth atsu m , no r ha d i t p ai d $ 34 4 o wedforth e la stqu art er o f 20 08 , and , onth atda te , res po nd en t to okact io n t o c ol le ctbo th am ou nt s b y fil in g an NFTL. Pet it io ne r ch al le ng es th e ap pr op ria te ne ss of r es po nd en t's fil in g the NFTL, at le as t t o the ex te ntof t he $2 08 ,93 3, o n the gro un ds th atres po nd en t h adun lawfu ll y term in at edth e ag reem en t. Hadhe no t t erm in at edth e ag reem en t, p et it io ne r arg ue s, the re wo ul d h av e b eenno act io nabl e as se ss m en ts to ta li ng $2 08 ,93 3, an d, wi th ou t tho se act io nabl e
as se ss m en ts , no li enno ti ce fo r $2 08 ,93 3 wo ul d h av e b eenfil ed . There fo re, i t
co nc lu de s, the NFTL, at le as t t o the ex te ntof $ 20 8,9 33 , was an in ap pr op ria te
co ll ect io n a ct io n. The pa rti es ha ve st ip ul at ed , andwe ha ve fou nd , th atres po nd en t t erm in at ed th e ag reem en t as a res ul t o f pe ti ti on er's fai lu res (1) to fil e th e Fo rm 94 1 fo r th e qu art er en de d M arch 31 , 20 09 , and(2) to pa y a $3 44 pe na lty

fora la te em

pl oym en t- 17 -

[* 17 ] ta x d ep os itforth e qua rte r en de d Dec em be r 31 , 20 08 . The ag reem en t sp eci fic al ly pro vi de s tha t, fo r fi ve y ears fol lo win g the da te of t he ag reem en t, Feb ru ary 23 , 20 05 , pet it io ne r wou ldco m pl y with a ll pro vi si on s o f th e Co de rel at in g t o fi li ng it s re turn s an d p ay in g i ts requi redtax es . The ag reem en t fu rth er pr ov id es th at , up on pe ti ti on er's bre ach of i ts term s, re sp on de ntco ul d re in st at e th e
unpa idam ou ntof t ax an d c ol le ctit . In Tro utv. Co m m is si on er, 1 31 T.C. 23 9, 2 54 (2 00 8) , we hel d tha t the ti m el y -fi li ng -an d- pa y in g re qu ire m en ts of a n OIC si m il ar t o th e o ne he re i n que st io n wer e ex pr es s co nd it io ns of t he res ul ti ng ag reem en t wi th th e IRS , requi rin g s tri ctco m pl ianc e to av oi d b reac h a ndterm in at io n o f th e ag reem en t. Pet it io ne r can no t ar gu e th atitdi d n otbre achth e ag reem en t b y fai li ng ti m el y to fil e th e Fo rm

94 1 fo r th e qua rte r en de d M arch 31 , 20 09 . It arg ue s tha t i ts fai lu re t o p ay

th e $ 34 4 p en al ty didno t b reac h the ag reem en t b ecau se th e ag reem en t requi rediton ly to p ay

all requi redtax es an d d idno t al so requi re i t t o p ay all requi redpe na lt ie s. Re sp on de ntpo in ts ou t tha t the $3 44 pe na lty was a ss es se d o nl y be cau se pe ti ti on er d idno t t im el y m ak e a Fed eral tax de po si t, wh ic h i t was requi red to do un de r th e ap pl ic ab le pro vi si on s o f th e Co de rel at in g t o p ay in g i ts tax es . See
se c. 66 56 (a) (p ro vi di ng th atth e p en al ty for fai lu re t o m ak e Fed eral tax de po si ts is ap pl ie d a ga in sttax pa y ers who fai l t o m ak e a d ep os itof t ax as r equi redun de r th e Co de or b y

reg ul at io ns of t he Secr et ary). Pet it io ne r br each edth e ag reem en t b ot h- 18 -

[* 18 ] by fail in g t im el y

to fil e a requi redreturn a ndby fail in g t im el y to m ak e a Fed eral tax de po si t. Res po nd en t was withi n h is rig ht s u nd er the ag reem en t t o te rm in at e th e ag reem en t an d t o re in st at e th e unp ai d t ax , alo ng with a ss es si ng in te res t. Res po nd en t was als o wi th in hi s ri gh ts to actto pro te ctth e Gov ern m en t's in te res t b y

fil in g a n NFTL. See s ec. 6 32 3( a). W e se e n o e rro r in res po nd en t's act io n i n tha t re ga rd
. C. Mr. Vo y se st 's Ex erci se of Di sc ret io n The pa rti es ha ve joi ne d i ss ue as t o wh ethe r App eal s fa il edpro pe rly to
ex erci se it s d is cret io n b y

no t p erm it ti ng th e ag reem en t t o b e rei ns ta te d. Th e n ot ic e of de te rm in at io n s ta te s o nl y : "Yo urreque stforrei ns tate m en t o f y ou r of fer i n
co m pr om is e h as be ende ni ed . It was de te rm in edth aty oudi d n otco m pl y with the
co m pl ianc e te rm s an d p ro vi si on s o f Fo rm 65 6, Offe r in Co m

pr om is e." Th e Voyses t at ta ch m en t t o the no ti ce o ffer s n o fu rth er ex pl an at io n. Mr . Voy se st 's c as e act iv ity reco rd , part o f th e adm in is tra ti ve fil e, in di cat es hi s s y m pa th y forrei ns ta ti ng th e ag reem en t. OnNov em be r 8, 2 01 0, h e rec or de d: "I ag ree t ha t a r ei ns ta te m en t of th e TP's off

er i s a v iabl e res ol ut io n" . Sho rtl y th erea fte r, on th e b as is of a di sc us si on with s om eo ne inth e COIC Un it , he r eco rd edhi s co nc lu si onth at , be cau se th e ag reem en t h adbe enterm in at ed , th ere was no pro cedur al ba si s fo r rei ns tate m en t. OnMarc h 2 9, 2 01 1, h e co ns id eredth e g ro un ds on whi chth e- 19 -

[* 19 ] ag reem en t h adbe enterm in at ed : Itha d b eenterm in at eddu rin g the las t year of pe ti ti on er's fiv e-year co m pl ianc e te rm

be cau se pe ti ti on er h adbe enass es se d a Fed eral tax de po si t p en al ty of $3 44 , whi chitha d p ai d, an d i t h adno t t im el y fil ed Fo rm 94 1, fo r on e quarte r, whi chitha d s ub se qu en tl y fil ed . He reco rd edhi s
co nc ern s tha t tho se bre ach es of t he ag reem en t wer e d e m in im is an d h adbe en rect ifi ed . He worri edth at , for th os e rea so ns , th e Tax Co urt wo ul d fi ndth at App eal s h adab us edit s d is cret io n i n n otrei ns ta ti ng th e ag reem en t. He co nc lu de d hi s M arch 29 en try with a rh et or ic al qu es ti on (whi chhe an swe red ): " Ess en ti al ly,
wou lditbe fai r to rei ns ta te th e TP's off er? In thi s i ns tanc e I b el ie ve itwou ldbe ." On fu rth er co ns ul ta ti on with a n Ap pe al s co ll eag ue , he c on cl ud edth atrei ns ta ti ng th e ag reem en t was no t an op ti on si nc e th e ag reem en t h adpro pe rly beenterm in at ed
. The de te rm in at io n fo ll owe d. A tax pa y er m ay , ina se ct io n 6 33 0 h eari ng , rai se a co ll ect io n a lt ern at iv e, an d
co ll ect io n a lt ern at iv es in cl ud e o ffer s- in -co m pr om is e. Sec. 6 33 0( c)(2 )(A)(i ii ). On br ie f, res po nd en t co nc ed es th atApp eal s fa cedno leg al im pe di m en t t o re in st at in g th e ag reem en t; to do so , he s tate s, " res ts so le ly w ithi n re sp on de nt 's d is cret io n" . As
a m atte r of

po li cy , ho wev er, res po nd en t ar gu es , nei th er h e n or App eal s wi ll rei ns tate anOIC ag reem en t tha t was term in at edbe cau se of atax pa y er's bre ach of th e ag reem en t's term s an d c on di ti on s. We thus co nc lu de th at , pra ct ic al ly spe ak in g,- 20 -

[* 20 ] Mr. Vo y se stha d n o d is cret io n t o re in st at e th e ag reem en t. No twi th st an di ng hi s ap pa ren t co nc lu si on th atth e equi ti es weig he d i n fa vo r of rei ns ta te m en t, h e de te rm in edth atth e o nl y

reco m m en da ti on th athe co ul d m ak e was th atApp eal s rejectpe ti ti on er's co ll ect io n a lt ern at iv e o f rei ns ta ti ng th e ag reem en t. Whi le th ere m ay

be go odreas on forApp eal s' b lank etreject io n o f th e rei ns tate m en t o f OIC ag reem en ts incas es of b reac h, we ca nn ottel l tha t fr om th e
reco rdor f

ro m res po nd en t's arg um en t. Itis no t ev encle ar s uc h apo li cy ex is ts de sp it e Mr. Vo y se st 's d et erm in at io n a ndres po nd en t's co nt en ti on s o n b rie f. Cf. Trou t v . Comm is si on er, 1 31 T.C. at 2 55 ("Th e App eal s o ffi cer und ers to od* * * th athe ha d the di sc ret io n t o e xc us e th e b reac h o f th e expr es s co nd it io n a nd rei ns tate th e OIC. He ch os e n otto ."). If s uc h apo li cy

do es ex is t, i t i s n otread il y ap paren t wh atreas on s o r pr in ci pl es jus ti fy

th e la ckof a n e xc ep ti on to rei ns ta te m en t i n a ll cir cu m st an ces of br each , esp eci al ly giv enth e in di vi du al iz edan al y si s af fo rd edth e in it ia l t erm in at io n de ci si on s o f br each edOIC ag reem en ts . See, e.g ., IRM p t. 5 .8.9 .3 (J an . 1, 2 01 5) (p ro cedur es forha nd li ng bre ach edbu t n oty etterm in at edOIC ag reem en ts , referred to as " Po te nt ia l Def

au ltCas es "); supr a p p. 4 -5 (pe ti ti on er b reac he d s ev eral ti m es y etres po nd en t d idno t t erm in at e th e ag reem en t). An d i f th ere a re n o re as on s o r pr in ci pl es jus ti fy in g the po li cy , we po in t o utth aton e d efi ni ti on of " arb itrary" is ,- 21 -

[* 21 ] "d et erm in edby chan ce, wh im , or i m pu ls e, an d n otby neces si ty, reas on , or pr in ci pl e". Th e Am eri canHeri ta ge Dict io na ry of t he Eng li sh Lang ua ge 91 (5t h e d. 20 11 ). By

ha vi ng di sc ret io n t o re in st at e OIC ag reem en ts , bu t ch oo si ng ne ve r to
ex erci se th atdi sc ret io n, wi th ou t p ro vi di ng an y so rt o f jus ti fic at io n, Ap pe al s m ay be ab us in g i ts di sc ret io n. Inth is in st an ce, Ap pe al s h as ex cu se d i ts el f fro m st at in g fact s an d re as on s tha t re sp on d t o the ev id en ce an d a rg um en ts of p et it io ne r an d h as de pr iv edus of t he op po rtu ni ty for tho ug ht fu l ju di ci al rev ie w. Cf. Est at e o f Ro sk i v. Co m m is si on er, 1 28 T.C. 11 3, 1 28 -1 31 (20 07 ) ("B y ad op ti ng a br ig ht -li ne rul e in
ev ery cas e, th e Co m

m is si on er h as sh irk edhi s ad m in is tra ti ve du ty to s ta te fin di ng s of factan d re as on s t o s up po rt h is de ci si on s tha t ar e su ffi ci en t t o re fle cta
co ns id eredres po ns e to th e ev id en ce an d c on te nt io ns of t he lo si ng pa rty andto al lo w forth ou gh tfu l ju di ci al rev ie w."); see als o Harbo rli te Co rp . v. In te rs ta te Co m m erce Co m

m 'n, 6 13 F.2d10 88 , 10 92 (D.C. Cir . 19 79 ) (o n wh ic h we r el ie d i n Est at e o f Ro sk i). App eal s re ta in s juris di ct io n o ve r th is cas e, se e se c. 63 30 (d )(2 ), an d we wi ll
rem an d i t s o tha t, i f App eal s, o n fu rth er co ns id erat io n, d et erm in es no t t o re in st at e th e ag reem en t, i t can i nc lu de init s d et erm in at io n aful l ex pl an at io n o f it s re as on s, whe th er tho se reas on s ar e p art ic ul ar t o the fact s o f th is cas e o r whe th er tho se
reas on s amoun t t o apo li cy no t t o re in st at e OIC ag reem en ts th atha ve be en- 22 -

[* 22 ] te rm in at edwitho utreg ardto th e fac ts of aparti cu lar cas e. Our re m an d wi ll al so gi ve th e p art ie s the op po rtu ni ty to co ns id er wh ethe r Mr. Vo y se st 's c omm un ic ati on s wi th th e COIC Un itco ns ti tu te d p ro hi bi te d e x p art e co m m un ic at io ns be twee n App eal s an d o th er IR S em pl oyees. Se e Rev . Pro c. 20 00 -4 3, s ec. 3 , Q&A-6 , 20 00 -2 C.B. 4 04 , 40 6, am

pl ifi ed , m od ifi ed , andsupe rs ed edby Rev. Pro c. 20 12 -1 8, s ec. 2.0 3( 10 )(a) , 20 12 -1 0 I.R .B. 45 5, 4 60
. D. Rem ai ni ng Iss ue s W e n eedno t ad dr es s an y un ad dr es se d i ss ue s u nt il th is cas e returns to us fo ll owi ng rem an d. IV. Co nc lu si on To re fle ctth e fo reg oi ng , An ap pr op ria te ord er wi ll be is su ed
.