T.C. Memo. 2008-210

UNITED STATES TAX COURT

LUCIANO FERNANDEZ, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15538-07L. Filed September 3, 2008.

Luciano Fernandez, pro se.

Vivian N. Rodriguez, for respondent.

MEMORANDUM OPINION

COHEN, Judge: This action was commenced in response to a

Notice of Determination Concerning Collection Action(s) Under

Section 6320 (Lien) of the Internal Revenue Code (notice of

determination) with respect to petitioner’s Federal income tax

liabilities for 2000, 2003, and 2004 and unpaid trust fund

recovery penalties under section 6672 for periods ended June 30,
- 2 -

2000, September 30, 2000, December 31, 2000, March 31, 2001,

September 30, 2001, December 31, 2001, and March 31, 2002. The

issue for decision is whether the Appeals officer abused his

discretion in rejecting petitioner’s offer-in-compromise and

sustaining the lien actions. 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.

Background

This case was submitted fully stipulated under Rule 122. 

The stipulated facts are incorporated as our findings by this

reference. Petitioner resided in Florida at the time that he

filed his petition.

Federal income tax liabilities arose because petitioner

failed to pay in full the tax reported on his returns for 2000,

2003, and 2004. Petitioner also failed to pay trust fund

recovery penalties under section 6672 for periods ended June 30,

2000, September 30, 2000, December 31, 2000, March 31, 2001,

September 30, 2001, December 31, 2001, and March 31, 2002.

On July 12, 2006, the Internal Revenue Service (IRS) sent a

Notice of Federal Tax Lien Filing and Your Right to a Hearing

Under IRC 6320 (notice of Federal tax lien) to petitioner with

respect to his 2003 and 2004 Federal income tax liabilities and

all the trust fund recovery penalties at issue. On the same

date, the IRS sent a separate notice of Federal tax lien to
- 3 -

petitioner and his spouse with respect to their 2000 Federal

income tax liability. The total amount of petitioner’s

outstanding tax liabilities and penalties, reflected by both

notices, was $47,228.02 at that time.

Petitioner responded to the notices of Federal tax lien by

submitting a timely request for an administrative hearing

(section 6330 hearing). In his request petitioner explained that

he had “tried to do a payment plan” but that the IRS would not

accept it because his account was labeled “uncollectable”. After

receiving the request, the Appeals Office contacted petitioner

about the section 6330 hearing and, in order to consider

alternative collection methods, requested and received certain

financial information on Form 433-A, Collection Information

Statement for Wage Earners and Self-Employed Individuals, and

Form 433-B, Collection Information Statement for Businesses.

On February 23, 2007, the Appeals officer conducted a

section 6330 hearing with petitioner by telephone. The

underlying tax liabilities were not raised. Petitioner wanted to

pursue a collection alternative by employing a deferred offer-incompromise of $5,000. The Appeals officer advised petitioner of

additional financial information that would need to be submitted

along with Form 656, Offer in Compromise. Having reviewed

petitioner’s living expenses, the Appeals officer cautioned that

some of these expenses could be calculated, for offer-in-
- 4 -

compromise purposes, at allowance amounts less than what

petitioner claimed.

On March 8, 2007, the Appeals Office received petitioner and

his spouse’s offer-in-compromise and all other requested

information. Their offer proposed a compromise of $4,272 as full

satisfaction of their liabilities and penalties to be paid over a

2-year period in monthly payments of $178. On their Form 656

petitioner and his spouse did not check any of the provided boxes

stating the legal grounds on which the compromise was based. 

Because no grounds had been selected, the Appeals Office

processed their offer-in-compromise under “Doubt as to

Collectibility”.

On June 25, 2007, the Appeals Office sent to petitioner the

notice of determination upon which this case is based. In the

notice of determination, the Appeals officer determined the

reasonable collection potential to be $205,220, on the basis of

the information petitioner provided. The Appeals officer

explained to petitioner how the reasonable collection potential

was calculated, including how the amounts of some of his living

expenses were based upon current national and local allowance

schedules instead of petitioner’s provided figures. With respect

to petitioner’s monthly housing and utilities expense, the

Appeals officer allowed $1,450, on the basis of the local
- 5 -

standard amount for South Florida of $1,291, which was markedly

less than petitioner’s claimed amount of $3,678.

Because the reasonable collection potential was

significantly greater than petitioner’s offer-in-compromise (and

significantly greater than the total tax liabilities and

penalties), the Appeals officer did not recommend acceptance of

the offer. The notice of determination concluded that the

Federal tax lien filings were proper in that they conformed with

IRS procedures and were no more intrusive than necessary for the

efficient collection of taxes.

Discussion

Neither the amount of petitioner’s liability nor the

procedural facts in this case are in dispute. Petitioner

contends that the use of the local standard allowance for his

housing and utilities monthly expense caused an unrealistic

result in determining his reasonable collection potential. 

Ultimately, petitioner argues that it was an abuse of discretion

for the Appeals officer to reject his offer-in-compromise and

sustain the lien.

We have jurisdiction to review the Appeals Office

determination in a section 6330 hearing. Secs. 6320(c),

6330(d)(1); see Ginsberg v. Commissioner, 130 T.C. __, __ (2008)

(slip. op. at 6-7) (explaining that the Court’s jurisdiction

includes review of all appeals of collection determinations made
- 6 -

after October 16, 2006, including when trust fund recovery

penalties are part of the underlying tax liabilities); GreeneThapedi v. Commissioner, 126 T.C. 1, 6 (2006). Review is for

abuse of discretion. Murphy v. Commissioner, 125 T.C. 301, 320

(2005), affd. 469 F.3d 27 (1st Cir. 2006); Speltz v.

Commissioner, 124 T.C. 165, 170-171 (2005), affd. 454 F.3d 782

(8th Cir. 2006); Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

Section 7122(a) authorizes compromise of a taxpayer’s

Federal income tax liability. “The decision to entertain, accept

or reject an offer in compromise is squarely within the

discretion of the appeals officer and the IRS in general.” 

Kindred v. Commissioner, 454 F.3d 688, 696 (7th Cir. 2006). 

Generally, where the Appeals officer has followed the IRS

guidelines to ascertain a taxpayer’s reasonable collection

potential and rejected the taxpayer’s collection alternative on

that basis, we have found no abuse of discretion. See McClanahan

v. Commissioner, T.C. Memo. 2008-161; Lemann v. Commissioner,

T.C. Memo. 2006-37; Schulman v. Commissioner, T.C. Memo. 2002-

129.

Regulations adopted pursuant to section 7122 set forth three

grounds for the compromise of a liability: (1) Doubt as to

liability, (2) doubt as to collectibility, or (3) promotion of

effective tax administration. Sec. 301.7122-1(b), Proced. &

Admin. Regs. On a Form 656, the taxpayer selects the legal
- 7 -

grounds he or she proposes for compromise. Petitioner did not

select the grounds for compromise on his Form 656. The Appeals

Office processed his offer-in-compromise on the grounds of doubt

as to collectibility.

Doubt as to collectibility exists where a taxpayer’s assets

and income are less than the full amount of the liability. Sec.

301.7122-1(b)(2), Proced. & Admin. Regs. A taxpayer’s assets

(the net realizable equity in his assets) and income (the present

value of a taxpayer’s future ability to pay toward the tax debt

as determined by his monthly income minus necessary living

expenses) are the two primary components that make up reasonable

collection potential (the amount, which is less than the full

liability, that the IRS could collect through means such as

administrative and judicial collection remedies). See Murphy v.

Commissioner, supra at 309; Bergevin v. Commissioner, T.C. Memo.

2008-6. Generally a doubt-as-to-collectibility offer amount must

equal or exceed the taxpayer’s reasonable collection potential in

order to be considered for acceptance. 1 Administration,

Internal Revenue Manual (CCH), pt. 5.8.1.1.3(3), at 16,253-16,254

(Sept. 1, 2005); see also Rev. Proc. 2003-71, sec. 4.02(2), 2003-

2 C.B. 517, 517 (stating that an offer will be considered

acceptable if it reflects the taxpayer’s reasonable collection

potential).
- 8 -

The Appeals officer determined petitioner’s reasonable

collection potential to be $205,220. If this determination is

reasonable, then petitioner’s reasonable collection potential is

substantially higher than petitioner’s offer of $4,272, and it

was proper for the Appeals officer to find the offer

unacceptable. Similarly, because the reasonable collection

potential is substantially higher than petitioner’s total tax

liability of approximately $45,000, doubt as to collectibility

would not exist. Therefore, petitioner’s arguments hinge on

whether the Appeals officer’s determination of petitioner’s

reasonable collection potential is actually reasonable. See

Murphy v. Commissioner, supra at 321.

Petitioner contests the use of standard allowances provided

by IRS guidelines in determining his total monthly living

expenses. Petitioner argues that if his actual housing and

utilities expense was used, his reasonable collection potential

would be more in line with economic reality. Section 7122(d)

authorizes the IRS to prescribe guidelines as follows:

SEC. 7122(d). Standards for Evaluation of Offers.--

(1) In general.–-The Secretary shall prescribe

guidelines for officers and employees of the Internal

Revenue Service to determine whether an offer-incompromise is adequate and should be accepted to

resolve a dispute.

(2) Allowances for basic living expenses.--

(A) In general.–-In prescribing guidelines

under paragraph (1), the Secretary shall develop
- 9 -

and publish schedules of national and local

allowances designed to provide that taxpayers

entering into a compromise have an adequate means

to provide for basic living expenses.

(B) Use of schedules.–-The guidelines shall

provide that officers and employees of the

Internal Revenue Service shall determine, on the

basis of the facts and circumstances of each

taxpayer, whether the use of the schedules

published under subparagraph (A) is appropriate

and shall not use the schedules to the extent such

use would result in the taxpayer not having

adequate means to provide for basic living

expenses.

Regulations for doubt as to collectibility cases further

provide:

A determination of doubt as to collectibility will

include a determination of ability to pay. * * * To

guide this determination [of the amount of the

taxpayer’s basic living expenses], guidelines published

by the Secretary on national and local living expense

standards will be taken into account. [Sec. 301.7122-

1(c)(2)(i), Proced. & Admin. Regs.]

Use of the IRS’s published national and local allowances as

guidelines for basic living expenses is an appropriate method to

determine a taxpayer’s monthly expenses. See Speltz v.

Commissioner, supra at 179; McDonough v. Commissioner, T.C. Memo.

2006-234 (finding no abuse of discretion where the Appeals

officer used the standard allowance instead of the taxpayer’s

actual housing and utilities expense); Hawkins v. Commissioner,

T.C. Memo. 2005-88. The Appeals officer considered and adjusted

the financial information petitioner submitted and determined

that $1,450 was sufficient to provide petitioner with the basic
- 10 -

monthly living expense of housing and utilities. The Appeals

officer properly applied the provisions of the Code, the

regulations, and the Internal Revenue Manual.

Petitioner contends that the housing and utilities allowance

of $1,450 would make it “almost impossible to own a family size

house” in South Florida. However, nothing in the record of this

case shows that the Appeals officer’s determination was arbitrary

or unreasonable. We therefore conclude that there was no abuse

of discretion in rejecting petitioner’s offer and in sustaining

the liens.

Decision will be entered for

respondent.