*Of the District of Rhode Island, sitting by designation.

United States Court of Appeals

For the First Circuit

No. 06-1109

EDWARD F. MURPHY,

Petitioner, Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent, Appellee.

APPEAL FROM THE UNITED STATES TAX COURT

[Hon. James S. Halpern, Judge]

Before

 Selya and Howard, Circuit Judges,

and Smith, District Judge. *

Timothy J. Burke for appellant.

Rachel I. Wollitzer, Attorney, Tax Division, Department of

Justice, with whom Eileen J. O'Connor, Assistant Attorney General

and Jonathan S. Cohen, Attorney, Tax Division, Department of

Justice, were on brief, for appellee.

November 20, 2006
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HOWARD, Circuit Judge. Edward F. Murphy owed federal

income taxes in excess of $250,000 for 1992-2001. He offered to

settle this liability by paying $10,000. The Internal Revenue

Service (IRS) rejected Murphy's offer, concluding that he could

afford a larger settlement payment. Murphy appealed to the United

States Tax Court, which upheld the IRS's ruling. Murphy now

appeals the Tax Court's decision. We affirm.

I.

In April 2002, the IRS issued Murphy a notice of intent

to levy on his property to collect on his outstanding income tax

liability. Murphy then exercised his right to request a collection

due-process hearing (CDP hearing) before the IRS executed the levy.

See 26 U.S.C. § 6330. In July 2002, the IRS assigned Murphy's case

to an appeals officer.

On October 3, 2002, the appeals officer met with Murphy's

attorney to begin the hearing. At this meeting, counsel informed

the officer that Murphy did not contest his tax liability but

rather would make an "offer-in-compromise" of $10,000 to settle his

liability through 2001. Murphy's offer was based on his claimed

inability to pay the full amount owed due to special circumstances.

In response to a request for information about Murphy's

special circumstances, counsel told the officer that Murphy was ill

but refused to disclose the nature of the illness. The officer set

an October 31, 2002 deadline for Murphy to submit certain
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outstanding documents necessary for considering his offer,

including his 2001 tax return. Murphy missed this deadline and

several subsequent extensions before finally filing the 2001 tax

return on January 8, 2003.

On January 22, 2003, the appeals officer informed counsel

that she required additional information from Murphy by February 5,

2003, including verification that Murphy had tendered his estimated

tax payment for 2002. Murphy missed this deadline by a week. 

A month later, the appeals officer notified counsel that

Murphy's offer-in-compromise was insufficient because she

calculated that he could make a larger settlement payment in light

of his current income and expenses. The letter included a summary

of the officer's calculations, and set an April 9, 2003 deadline

for Murphy to increase his offer. Counsel subsequently told the

officer that Murphy could not make a larger payment and that the

calculation was erroneous. The officer granted Murphy ten days to

offer a counter-proposal or to demonstrate any error in the

calculation. Murphy did not respond by the deadline. A week after

the deadline, counsel telephoned the officer to report that Murphy

had been hospitalized but again declined to disclose the nature of

Murphy's illness. Counsel promised to provide Murphy's counterproposal by May 9, 2003, but he did not do so.

After Murphy missed the May 9th deadline, the appeals

officer determined that Murphy's offer-in-compromise could not be
The court did admit testimony from the appeals officer 1

explaining the meaning of certain notes and symbols that appeared

in the record.

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accepted because it was not commensurate with his ability to pay

and because he had missed filing deadlines on multiple occasions.

The IRS adopted the appeals officer's recommendation and sent

Murphy a letter stating that the agency would proceed to levy on

his property.

Murphy appealed this ruling to the Tax Court. The court

held an evidentiary hearing during which Murphy unsuccessfully

sought to introduce testimony from himself and the appeals officer.

In a thorough opinion, the Tax Court ruled that (1) most of the

testimony that Murphy sought to offer during the evidentiary

hearing was irrelevant, (2) the appeals officer reasonably 1

terminated Murphy's hearing without providing further extensions

after Murphy missed several filing deadlines, and (3) the IRS did

not abuse its discretion in determining that Murphy's offer-incompromise was insufficient.

II.

On appeal, Murphy raises three arguments. First, he

claims that the Tax Court abused its discretion in excluding his

testimony and the testimony of the appeals officer. Second, he

argues that the court erred in determining that the IRS acted

reasonably in ending the CDP hearing without providing him with

further extensions to submit additional information. Finally, he
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contends that the court erred in concluding that the IRS acted

within its discretion in rejecting his offer-in-compromise.

Before addressing these arguments, we provide a brief

summary of the CDP hearing process and the taxpayer's right to

appeal. In 1998, Congress established the CDP hearing process to

temper "any harshness caused by allowing the IRS to levy on

property without any provision for advance hearing." Olsen v.

United States, 414 F.3d 144, 150 (1st Cir. 2005). The hearing is

informal: no face-to-face meetings are necessary and there is no

requirement that the proceedings be transcribed or recorded. See

Living Care Alternatives of Utica, Inc. v. United States, 411 F.3d

621, 624 (6th Cir. 2005). During the hearing, a taxpayer may raise

"any relevant issue relating to the unpaid tax or the proposed

levy, including . . . offers of collection alternatives, which may

include an offer-in-compromise." 26 U.S.C. § 6330(c)(2)(A). 

To proceed with a levy after a CDP hearing, the IRS must

verify that it has met all the requirements to move forward with a

levy, reject the taxpayer's defenses and proposed collection

alternatives, and determine that the "proposed collection action

balances the need for efficient collection of taxes with the

legitimate concern of the person that any collection be no more

intrusive than necessary." Id. § 6330(c)(3). An aggrieved
Prior to the enactment of Pub. L. No. 109-281, appeals from 2

CDP hearings were heard in federal district court if the Tax Court

did not have jurisdiction over the underlying tax liability.

See 26 U.S.C. § 6330(d)(1)(B) (repealed by Pub. L. No. 109-281, §

855(a) (2006)).

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taxpayer may appeal to the Tax Court. Id. § 6330(d)(1) (as amended

by Pub. L. No. 109-281, § 855(a)).2

A. Extra-Record Evidence 

During the evidentiary hearing before the Tax Court,

Murphy testified about the circumstances that made him unable to

offer a larger settlement payment, and the appeals officer

testified concerning the process that she employed to evaluate

Murphy's offer-in-compromise. The IRS objected to the introduction

of this testimony on the basis that the Tax Court should not

consider evidence that was not part of the administrative record of

the CDP hearing. The court rejected this argument but still

excluded the evidence as irrelevant. The IRS urges us to affirm

this ruling on an alternative ground: Tax Court review should be

limited to the administrative record.

We recently considered this issue in the context of a

taxpayer appeal to the district court from the denial of an offerin-compromise made during a CDP hearing. See Olsen, 414 F.3d at

154-57; see also supra n.2. We recognized that the Supreme Court

has "consistently stated that review of administrative decisions is

'ordinarily limited to consideration of the decision of the agency

. . . and of the evidence on which it was based.'" 415 F.3d at 155
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(quoting United States v. Carlo Bianchi & Co., 373 U.S. 709, 714-15

(1963)). We further observed that this rule applies to judicial

review of informal agency adjudications. Id. We therefore held

that, subject to limited exceptions, the district court could not

consider evidence outside of the administrative record in ruling on

a taxpayer's CDP hearing appeal. Id. We did not decide, however,

whether the same rule should apply where the taxpayer appeals to

the Tax Court. Id. at 154 n.9.

We now conclude that, for the reasons articulated in

Olsen, the administrative record rule also applies to a taxpayer's

CDP hearing appeal to the Tax Court. See Robinette v. Comm'r, 439

F.3d 455, 461 (8th Cir. 2006) (citing Olsen in support of applying

the administrative record rule to CDP hearing appeals in the Tax

Court). Our decision to apply the administrative record rule in

the context of district court appeals was premised on basic

administrative law principles. Olsen, 414 F.3d at 155. The

reasons supporting application of the administrative record rule in

district court CDP hearing appeals have equal force where the

appeal takes place in the Tax Court. The Tax Court, like the

district court, is charged with determining whether the IRS's

rulings during a CDP hearing were within its discretion. Thus,

judicial review normally should be limited to the information that

was before the IRS when making the challenged rulings. See

Robinette, 439 F.3d at 461. 
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As mentioned above, there are limited exceptions to the

administrative record rule. A reviewing court may accept evidence

outside the administrative record where there "is a strong showing

of bad faith or improper behavior" by agency decisionmakers, Town

of Norfolk v. U.S. Army Corps of Eng'rs, 968 F.2d 1438, 1459 (1st

Cir. 1992) (internal citation omitted), or where there is a

"failure to explain administrative action [so] as to frustrate

effective judicial review," Camp v. Pitts, 411 U.S. 138, 142-43

(1973) (per curiam).

Neither exception applies here. The appeals officer's

testimony may have been admissible if the existing administrative

record had been inadequate to permit effective judicial review,

but the record in this case was clearly sufficient. It included a

log of the appeals officer's actions in considering Murphy's offer,

contemporaneous notes that the officer made during the hearing,

copies of correspondence with Murphy's counsel, and a memorandum

outlining the officer's basis for decision. See Robinette, 439

F.3d at 461-62 (concluding that a similarly constituted

administrative record was adequate to permit adequate judicial

review of a CDP hearing appeal). Murphy's testimony, providing

evidence about his financial and health situation that was not

presented to the IRS, does not fall within either exception.

Accordingly, Murphy's extra-record evidence was properly excluded.
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B. Conduct of the Hearing 

Murphy contends that the IRS abused its discretion in the

conduct of his CDP hearing. He argues that the appeals officer

acted "with a clear predisposition toward an inflexible and

expeditious determination of . . . the matter" by declining to

grant him additional extensions to file more information. 

The relevant regulations do not provide a time period

within which a CDP hearing must be concluded. Rather, they

instruct the IRS to complete the hearing "as expeditiously as

possible under the circumstances." 26 C.F.R. § 301.6330-1(e)(3).

Thus, there is no requirement that an appeals officer "wait a

certain amount of time before rendering [a] determination as to a

proposed levy." Clawson v. Comm'r, 87 T.C.M. (CCH) 1251, 2004 WL

870523, at *7 (U.S. Tax Ct. Apr. 23, 2004). The reasonableness of

the appeals officer's decision to terminate a CDP hearing must be

determined in light of the entire context of the proceeding. See

Morlino v. Comm'r, 90 T.C.M. (CCH) 168, 2005 WL 2978531 at *6

(U.S. Tax Ct. Aug. 24, 2005).

 Murphy's CDP hearing had been ongoing for eight months

before the appeals officer concluded it. During that time, Murphy

missed numerous deadlines despite repeated extensions. To the

extent that his failure to meet filing deadlines was caused by

illness, he was less than forthcoming with the IRS, as he refused

to disclose even the nature of the illness until after the hearing
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had ended. 

It is apparent that the appeals officer did not conclude

the hearing because of an unyielding determination to end the

matter quickly, but rather because she reasonably believed that

there was little hope that Murphy would timely provide the required

information. Were we to find an abuse of discretion on this

record, we would transform CDP hearings from a shield against

invasive government conduct into a taxpayer's tool to delay the

timely collection of delinquent tax liabilities by seeking endless

extensions. We will not do so. See, e.g., Carlson v. United

States, 394 F. Supp. 2d 321, 329-30 (D. Mass. 2005) (declining to

find abuse of discretion where appeals officer declined further

extensions after taxpayer missed several deadlines); Manjourides v.

Comm'r, 90 T.C.M. (CCH) 396, 2005 WL 2591930, at *3 (U.S. Tax Ct.

Oct. 13, 2005) (concluding that there was no abuse of discretion in

terminating CDP hearing where taxpayer failed to meet filing

deadline).

C. Rejection of the Offer-in-Compromise 

Finally, we turn to the IRS's rejection of Murphy's

$10,000 offer-in-compromise. We review the Tax Court's decision de

novo. See Fargo v. Comm'r, 447 F.3d 706, 709 (9th Cir. 2006). But

our review of the underlying IRS decision is deferential. We will

only disturb the rejection of Murphy's offer-in-compromise if it

represents "a clear abuse of discretion in the sense of clear
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taxpayer abuse and unfairness by the IRS." Olsen, 414 F.3d at 150

(internal citation omitted).

The IRS may compromise a taxpayer's liability where it

has a "[d]oubt as to collectability" of the debt. 26 C.F.R. §

301.7122-1(b)(2). A doubt as to collectability exists "in any case

where the taxpayer's assets and income are less than the full

amount of the liability." Id.

Once a doubt as to collectability is established, the

"decision to accept or reject an offer to compromise . . . is left

to the discretion of the [IRS]." Id. § 301.7122(c)(1). In

exercising this discretion, the IRS must consider all the facts and

circumstances of the taxpayer's case, including whether they

warrant acceptance of an amount that might not otherwise be

acceptable under the IRS's policies and procedures. Id. There is

no dispute that Murphy established a doubt as to collectability

and therefore was eligible to compromise his debt. The only

question is whether the IRS abused its discretion in declining to

accept Murphy's proposed compromise.

The IRS may reject an offer-in-compromise because the

taxpayer's ability to pay exceeds the compromise proposal. See

Fargo, 447 F.3d at 709-10. Under IRS procedures, the agency will

not accept a compromise that is less than the reasonable collection

value of the case, absent a showing of special circumstances. See

Rev. Proc. 2003-71(2). The IRS considers the reasonable collection
Murphy has not presented a developed argument that the IRS 3

abused its discretion by declining to accept his offer-incompromise because of special circumstances. See United States v.

Zannino, 895 F.2d 1, 17 (1st Cir. 1990).

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value of a case to be the funds available after the taxpayer meets

basic living expenses. Id. Murphy argues that the IRS's

determination that the reasonable collection value of his case

exceeded $10,000 was unreasonable.

Based on information provided by Murphy, the appeals

officer calculated that, after expenses, Murphy had a monthly

surplus of $1,128. The officer multiplied this figure by 60 months

(a reasonable period until Murphy could expect to retire) for a

total of $67,680 in available income. The officer then added

realizable equity to conclude that Murphy could offer to pay

$82,164 to settle his tax liability.

Murphy has never mounted a serious challenge to these

calculations. After complaining to the appeals officer that her

proposed compromise figure was too high, Murphy never offered an

explanation for why the officer's calculations were unreasonable.

Even now, Murphy offers only a conclusory allegation that the

appeals officer's calculation was "preposterous." On this record,

the IRS did not abuse its discretion in rejecting Murphy's offerin-compromise.3

Affirmed.