349

RONALD ISLEY, PETITIONER v. COMMISSIONER OF

INTERNAL REVENUE, RESPONDENT

Docket No. 5616–11L. Filed November 6, 2013. 

P was a founding member of the popular Isley Brothers 

singing group, which for many years generated substantial 

income from personal appearances and record sales. P failed 

to pay Federal income tax on much of that income. The 

Commissioner sought to collect unpaid tax for all but five 

years within the 1971–95 period by filing proofs of claim in 

two bankruptcy proceedings (bankruptcies I & II), which 

resulted in his collection of substantial amounts from P. The 

United States also obtained P’s criminal conviction for tax 

evasion and willful failure to file with respect to 1997–2002 

(conviction years), which resulted in his being sentenced, on 

Sept. 1, 2009, to 37 months in prison followed by a three-year 

probationary period during which P was required to discharge 

his liabilities for the conviction years and his tax filing and 

payment obligations for the probation years. After bankruptcy 

II, P instituted an unsuccessful suit for the refund of amounts 

that the Commissioner collected in that bankruptcy proceeding that P alleged should have been offset by payments 

emanating from bankruptcy I. R issued to P two notices of 

Federal tax lien (NFTLs) and two notices of levy that together 

covered P’s assessed liabilities for the conviction years plus 

2003, 2004, and 2006. P requested a collection due process 

(CDP) hearing, which resulted in his offer and the Appeals 

officer’s preliminary acceptance of an offer-in-compromise 

(OIC). The Appeals officer referred the OIC to C, an attorney 

in R’s Office of Chief Counsel, for review. C recommended the 

OIC be rejected because the conviction years (which were covVerDate Mar 15 2010 08:54 Feb 03, 2015 Jkt 000000 PO 00000 Frm 00001 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\ISLEY JAMIE
350 141 UNITED STATES TAX COURT REPORTS (349) 

ered by the OIC), had been referred to the Department of Justice (DOJ) for prosecution so that R was prohibited by I.R.C. 

sec. 7122(a) from unilaterally compromising P’s liabilities for 

those years, and also because the Appeals officer had overlooked (1) potential sources for the collection of more than P 

had offered and (2) P’s noncompliance with the terms of the 

OIC. Following C’s advice, Appeals rejected the OIC and sustained the NFTL filings and the levy notices. P seeks to have 

the OIC reinstated on the ground that (1) I.R.C. sec. 7122(a) 

did not prohibit Appeals from entering into an OIC pursuant 

to I.R.C. sec. 6330(c)(2) and (3); (2) C’s involvement effectively 

made him the ‘‘de facto’’ Appeals officer, and, because of his 

earlier involvement in bankruptcy II, his involvement in P’s 

CDP hearing violated the ‘‘impartial officer’’ requirement of 

I.R.C. sec. 6330(b)(3); and (3) as the ‘‘de facto’’ Appeals officer, 

his improper ex parte communications with non-Appeals IRS 

personnel require that we disregard his rejection of the OIC 

and ratify Appeals’ initial acceptance of it. P also renews the 

argument, made in his unsuccessful refund suit, that the 

assessed liabilities are overstated because the Commissioner 

did not properly credit to P’s account payments made to the 

Commissioner at the conclusion of bankruptcy I (offset issue). 

Lastly, P argues that, should we uphold Appeals’ rejection of 

his OIC, we must order a refund of the 20% partial payment 

that he made pursuant to I.R.C. sec. 7122(c) because P was 

induced to submit the OIC under false pretenses. 

1. Held: I.R.C. sec. 7122(a) barred Appeals’ unilateral 

acceptance of P’s OIC. 

2. Held, further, C’s advice was properly requested and furnished to the Appeals officer pursuant to I.R.C. sec. 7122(b). 

Thus, his involvement did not cause him to become the ‘‘de 

facto’’ Appeals officer and, therefore, could not and did not 

result in (1) a violation of the ‘‘impartial officer’’ requirement 

of I.R.C. sec. 6330(b)(3), or (2) improper ex parte communications between Appeals and non-Appeals IRS personnel. 

3. Held, further, because (1) bankruptcy II gave P a prior 

opportunity to raise the offset issue, and (2) P’s position with 

respect to that issue was rejected in his unsuccessful refund 

suit, I.R.C. sec. 6330(c)(2)(B) and (4)(A) alternatively barred 

him from raising that issue during his CDP hearing. 

4. Held, further, P was not invited to submit his OIC under 

false pretenses. Therefore, pursuant to the normal rules providing for the nonrefundability of the 20% partial payment 

required by I.R.C. sec. 7122(c) (which P does not dispute), P 

is not entitled to a refund of that payment. 

5. Held, further, Appeals’ determination not to withdraw the 

NFTLs is sustained. 

6. Held, further, Appeals’ determination to sustain the 

notices of levy and proceed with collection by levy of the 

(349) ISLEY v. COMMISSIONER 351

1 Unless otherwise indicated, all section references are to the Internal 

Revenue Code of 1986, as amended and in effect at all relevant times. Dollar amounts have been rounded to the nearest dollar. 

2The Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. 

No. 109–222, sec. 509(a), 120 Stat. at 362, enacted new sec. 7122(c), effective for OICs submitted on or after July 16, 2006. Sec. 7122(c)(1)(A)(i) requires that the submission of any lump-sum OIC ‘‘be accompanied by the 

payment of 20 percent of the amount of such offer.’’ 

assessed liabilities is rejected and the case is remanded to 

Appeals to explore the possibility of a new OIC or installment 

agreement, not to be finalized until approved by DOJ pursuant to I.R.C. sec. 7122(a). 

Steven Ray Mather, for petitioner. 

Cassidy B. Collins, Katherine Holmes Ankeny, and Carolyn 

A. Schenck, for respondent. 

HALPERN, Judge: This case is before the Court to review 

determinations made by the Internal Revenue Service (IRS) 

Appeals Office (Appeals) in four notices issued to petitioner 

after a collection due process (CDP) hearing conducted pursuant to sections 6320(b) and (c) and 6330(b) and (c). 1

Together, those determinations sustained (1) respondent’s 

right to proceed to collect by levy petitioner’s assessed liabilities for 1997 through 2003 and (2) the filing of notices of 

Federal tax lien (NFTLs) with respect to those years plus 

2004 and 2006. In response thereto, petitioner, pursuant to 

section 6330(d)(1), timely filed a petition with this Court in 

which he assigns error on the grounds that respondent 

should have (1) determined that the assessed liabilities for 

the years in issue were overstated and (2) accepted petitioner’s offer-in-compromise (OIC) as a collection alternative. 

Petitioner also alleges that (1) if we determine that Appeals 

did not err in rejecting his OIC, we should order the return 

to petitioner of his 20% partial payment made pursuant to 

section 7122(c)(1)(A)(i) (section 7122(c) payment), 2 and (2) we 

have jurisdiction to adjudicate his challenge to the underlying liabilities based upon respondent’s alleged failure to 

properly credit against those liabilities amounts paid to 

respondent in prior years that should have been credited to 

his delinquent account. 

352 141 UNITED STATES TAX COURT REPORTS (349) 

FINDINGS OF FACT 

Some facts are stipulated and are so found. The stipulation 

of facts, with accompanying exhibits, is incorporated herein 

by this reference. 

Petitioner resided in St. Louis, Missouri, when he filed his 

petition. 

Petitioner’s Musical Career 

Petitioner’s musical career generated considerable income. 

His failure to pay Federal income tax with respect to much 

of it led to his perhaps even more considerable problems with 

the law. 

Petitioner was the third of six brothers, three of whom 

(petitioner and his two older brothers, O’Kelly and Rudolph) 

moved to New York as teenagers and launched what became 

a successful recording and concert career as the Isley 

Brothers. Years later, the group also included two younger 

brothers, Ernie and Marvin. Their musical genres included 

rhythm and blues, doo-wop, funk, and contemporary R&B. 

Various versions of the group had top 40 singles and/or top 

20 albums during a period stretching from 1962 to 2006, 

which ultimately led to various accolades including the 

induction of petitioner and four of his brothers into the Rock 

and Roll Hall of Fame. Late in his career, petitioner focused 

on solo work, and as late as 2011 he was still performing 

with his younger brother Ernie. 

The New Jersey Bankruptcy 

On August 23, 1984, petitioner and his two older brothers, 

O’Kelly and Rudolph, each filed for bankruptcy protection in 

a proceeding under chapter 11 of the Bankruptcy Code, with 

the U.S. Bankruptcy Court for the District of New Jersey, 

subsequently converted to a chapter 7 bankruptcy proceeding 

(New Jersey bankruptcy). Upon motion by the trustee, the 

three bankruptcy estates were consolidated. Thereafter, the 

bankruptcy court issued an order determining the extent, 

validity, and priority of respondent’s claims against the three 

brothers. Respondent’s approved claims against petitioner 

were for tax years 1971–76, 1978, and 1980–83. The trustee 

satisfied all of respondent’s prepetition claims against the 

consolidated bankruptcy estate, and ordered that, because 

(349) ISLEY v. COMMISSIONER 353

3For both 1976 and 1978, respondent sought post-(New Jersey) petition 

interest not covered by the consent order terminating the New Jersey 

bankruptcy. 

respondent also had postpetition claims against the consolidated estate, any funds left in the estate after discharge of 

the prepetition claims would also be paid to respondent. 

Respondent applied almost all of those postpetition liability 

payments in discharge of O’Kelly’s outstanding liabilities, 

with little or nothing applied to the outstanding liabilities of 

petitioner and Rudolph. 

The California Bankruptcy 

On April 2, 1997, petitioner filed a voluntary petition for 

bankruptcy protection in a proceeding under chapter 11 of 

the Bankruptcy Code (also subsequently converted to a 

chapter 7 bankruptcy proceeding) with the U.S. Bankruptcy 

Court for the Central District of California (California bankruptcy). Respondent filed proofs of claim in the California 

bankruptcy for tax years 1976, 1978, 3 1985, 1986, 1988, 

1989, and 1991–95. The bankruptcy court approved a settlement agreement whereby a number of petitioner’s ‘‘songwriter interests’’ (then belonging to the bankruptcy estate) 

were sold, and, on June 23, 2000, $2 million was paid to 

respondent (June 23, 2000, payment) and applied to petitioner’s outstanding liabilities to respondent for all of the 

foregoing years except 1992. During the bankruptcy proceeding, neither petitioner nor the trustee objected to 

respondent’s proofs of claim (satisfied by the June 23, 2000, 

payment) on the basis that respondent had misapplied (to 

O’Kelly’s account) payments received from the New Jersey 

bankruptcy trustee. 

Petitioner’s Suit For Refund 

On June 19, 2002, petitioner filed a claim with respondent 

for refund of the June 23, 2000, payment, and, on March 1, 

2005, he filed a suit for refund of that payment in the U.S. 

District Court for the Central District of California. In his 

refund suit, petitioner alleged that, pursuant to the June 23, 

2000, payment, respondent ‘‘illegally and unlawfully collected 

the full balance of tax, penalty and interest determined by 

[respondent] for the [p]eriods in [i]ssue.’’ The Government 

354 141 UNITED STATES TAX COURT REPORTS (349) 

moved to dismiss the complaint and/or for summary judgment, in part, on the ground that petitioner’s claims (1) were 

barred by the doctrine of res judicata because the New 

Jersey and California bankruptcies finally determined the 

amounts owed to respondent and (2) were untimely. The 

Government also argued that petitioner could not challenge 

respondent’s application of payments from the New Jersey 

bankruptcy ‘‘because * * * [the IRS] was entitled to apply 

the payments as it saw fit.’’ In granting the Government’s 

motion for summary judgment, the court first stated that 

petitioner was barred by the doctrine of res judicata from 

challenging his liabilities to respondent for 1976 and 1978 as 

determined in the New Jersey bankruptcy. The court further 

stated that petitioner’s challenge to respondent’s claims in 

the California bankruptcy was barred by that same doctrine 

because (1) during the California bankruptcy, ‘‘neither the 

Chapter 7 trustee nor * * * [petitioner] objected to the IRS’ 

claims that were satisfied by the June 23, 2000 payment’’, (2) 

‘‘[p]roofs of claim to which no objection is filed are ‘deemed 

allowed’ ’’, and (3) ‘‘ ‘deemed allowed’ claims are themselves 

entitled to res judicata effect’’. The court also determined 

that petitioner lacked standing to assert the refund claim 

because both the assets sold and the amounts received 

therefor, which funded the June 23, 2000, payment, were 

assets of the bankruptcy estate. Therefore, the court concluded that ‘‘the bankruptcy estate, and not * * * [petitioner], made the alleged overpayment’’ and was the party 

with standing to pursue the refund claim. 

The Court of Appeals for the Ninth Circuit affirmed the 

District Court’s decision and, in particular, that court’s determination that the California bankruptcy estate, not petitioner, had standing to pursue the refund. Isley v. United 

States, 272 Fed. Appx. 640 (9th Cir. 2008). The Court of 

Appeals further determined that (1) petitioner’s claim ‘‘also 

fails to state a basis for refund’’ because the IRS has ‘‘the 

right to apply payments in the manner it chooses’’ and (2) 

even if petitioner has standing to pursue the refund, his 

claim would be barred by res judicata because the bankruptcy court’s allowance of the Government’s claim ‘‘necessarily decided the legality of the tax claim at issue in this 

appeal’’. Id. at 641–642. 

(349) ISLEY v. COMMISSIONER 355

Criminal Proceedings Against Petitioner 

Petitioner was indicted, tried, and convicted in the District 

Court for the Central District of California on five counts of 

tax evasion and one count of willful failure to file a tax 

return covering tax years 1997–2002 (conviction years). Following the guilty verdict, the court, on September 1, 2006, 

issued a judgment and probation commitment order (JPC 

order) sentencing petitioner to 37 months’ imprisonment and, 

upon release from imprisonment, placing petitioner on 

‘‘supervised release for a term of three years’’ (three-year 

probationary period). The JPC order set forth a number of 

terms and conditions with respect to the three-year probationary period, including the following: 

2. The defendant shall truthfully and timely file and pay taxes owed for 

the years of conviction; and shall truthfully and timely file and pay taxes 

during the period of community supervision. Further, the defendant 

shall show proof to the Probation Officer of compliance with this order; 

* * * * * * * 

10. The Defendant shall pay all taxes when due, and, if necessary, sell 

assets to satisfy his tax obligations. 

The JPC order also provided for the adjustment of petitioner’s restitution obligation as follows: 

The defendant shall notify the Court through the Probation Office, and 

notify the United States Attorney of any material change in the defendant’s economic circumstances that might affect the defendant’s ability to 

pay a fine or restitution, as required by 18 U.S.C. § 3664(k). The Court 

may also accept such notification from the government or the victim, and 

may, on its own motion or that of a party or the victim, adjust the 

manner of payment of a fine or restitution—pursuant to 18 U.S.C. 

§ 3664(k). 

On February 11, 2008, the Court of Appeals for the Ninth 

Circuit affirmed the District Court’s 37-month sentence. 

Respondent’s Notices of Lien and Levy 

Between December 12, 2006, and August 31, 2007, 

respondent issued to petitioner two NFTLs and two notices 

of intent to levy (each including a notice of petitioner’s right 

to a hearing) covering the assessed liabilities for the years in 

356 141 UNITED STATES TAX COURT REPORTS (349) 

4 As noted supra, the levy notices covered 1997–2003, and the NFTLs 

covered 1997–2004 and 2006. 5Petitioner did not specifically request a face-to-face hearing in his response to the NFTL covering 2002–04. Nevertheless, Mr. August treated 

the face-to-face hearing with petitioner’s counsel as covering that NFTL as 

well as the other NFTL and the two levy notices. 

issue. Together, the notices covered the conviction years 

(1997–2002), plus 2003, 2004, and 2006. 4

The CDP Hearing 

In 2007, while in prison, petitioner timely filed Forms 

12153, Request for a Collection Due Process or Equivalent 

Hearing, with respect to all of the tax years covered by the 

NFTLs and levy notices. In each of his hearing requests, 

petitioner alleged one or more of the following: (1) the 

assessed liability is excessive, (2) the penalties should be 

abated for reasonable cause, (3) prior payments were applied 

to the wrong periods, and (4) the liability for one of the years 

(2006) was paid. In each hearing request, in the section 

denominated ‘‘Collection Alternative’’, petitioner checked the 

boxes for ‘‘Installment Agreement’’ and ‘‘Offer in Compromise’’. Petitioner requested and received (via his counsel, 

Mr. Mather) a ‘‘face-to-face’’ hearing, which was conducted by 

Settlement Officer Nathan August (Appeals officer or Mr. 

August) on April 27, 2009, with additional meetings between 

June 4, 2009, and February 3, 2011. 5 During one or more of 

those meetings, petitioner’s counsel renewed petitioner’s 

argument (rejected by the California Federal courts in 

connection with petitioner’s refund suit) that respondent had 

improperly applied the payments emanating from the New 

Jersey consolidated bankruptcy by not crediting petitioner’s 

account for a portion thereof (offset issue). 

As part of the CDP hearing, Mr. August verified that the 

liabilities listed in the lien and levy notices were validly 

assessed and that all legal and administrative procedure 

requirements were met. At the conclusion of Mr. August’s 

consideration of the case, petitioner’s total assessed liabilities, including tax, interest, and penalties, exceeded $9 million, which included penalty assessments under section 

6651(f) for fraudulent failure to file totaling $1,811,983. The 

section 6651(f) penalty assessments were not part of petiVerDate Mar 15 2010 08:54 Feb 03, 2015 Jkt 000000 PO 00000 Frm 00008 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\ISLEY JAMIE
(349) ISLEY v. COMMISSIONER 357

6The amended OIC did not cover 2004. 

tioner’s CDP hearing because respondent had not yet issued 

CDP notices with respect to those assessments. 

The face-to-face meetings, telephone conversations, and 

correspondence between Mr. August and petitioner’s counsel 

eventually resulted in petitioner’s July 31, 2009, submission 

of a Form 656, Offer in Compromise, in the sum of $1 million, which covered all of the CDP hearing years plus 2007, 

accompanied by a $200,000 (20%) section 7122(c) payment. 

On September 29, 2009, after further review of petitioner’s 

existing and potential postincarceration financial circumstances, Mr. August told petitioner’s counsel to submit 

an amended OIC for $1,047,216 and an additional section 

7122(c) payment so that the total section 7122(c) payment 

would equal 20% of the new OIC amount. On October 30, 

2009, Mr. August received the amended OIC for $1,047,216 

and checks totaling $9,444 representing the additional section 7122(c) payment. 6 In submitting the original and 

amended OICs, petitioner undertook to ‘‘comply with all 

provisions of the Internal Revenue Code relating to filing 

* * * [his] returns and paying * * * [his] required taxes for 

5 years or until the offered amount is paid in full, whichever 

is longer.’’ 

On November 4, 2009, Mr. August recommended acceptance of the amended OIC in conjunction with a Future 

Income Collateral Agreement (FICA) of five years’ duration, 

from 2010 through 2014. The FICA called for payments equal 

to percentages of petitioner’s annual income for those years 

in excess of $750,000, which increased as petitioner’s income 

(in excess of $750,000) increased. On November 5, 2009, the 

Appeals team manager preliminarily approved both the OIC 

and the FICA. 

On November 13, 2009, Mr. August submitted the OIC and 

the FICA to IRS Chief Counsel Attorney Ronald Chun for a 

legal sufficiency determination. 

Mr. Chun was no stranger to petitioner’s Federal income 

tax difficulties. He had been one of four IRS attorneys who, 

at one time or another, were assigned to work on respondent’s proofs of claim filed in connection with the California 

bankruptcy. Much of his involvement in that bankruptcy proceeding stemmed from a March 25, 2002, letter from petiVerDate Mar 15 2010 08:54 Feb 03, 2015 Jkt 000000 PO 00000 Frm 00009 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\ISLEY JAMIE
358 141 UNITED STATES TAX COURT REPORTS (349) 

tioner’s counsel, Mr. Mather, to him in which Mr. Mather 

challenged respondent’s amended proof of claim in two 

respects: (1) he raised the offset issue, alleging that payments related to respondent’s ‘‘secured [priorities] claim’’ had 

been misapplied, most prominently, by applying the entire 

payment from the New Jersey bankruptcy to O’Kelly Isley’s 

account rather than to the accounts of all three Isley 

brothers involved in the bankruptcy, one-third each, and (2) 

he alleged that respondent’s ‘‘unsecured priority claim’’, 

which was based upon a bank deposits analysis, was ‘‘grossly 

and demonstrably inflated.’’ Mr. Chun’s involvement appears 

to have been confined to working with Mr. Mather in order 

to resolve the second issue, which was ultimately resolved to 

their mutual satisfaction in March 2003 by respondent’s 

agreement to file amended proofs of claim based upon (mutually agreed-to) deficiency computations for tax years 1992–94 

in sharply reduced amounts as compared with respondent’s 

previously filed unsecured priority claim. 

Mr. Chun furnished his recommendation to Mr. August in 

a memorandum dated January 10, 2011. He recommended 

rejection of petitioner’s OIC (and, by implication, the FICA) 

on the ground that the IRS ‘‘lacks settlement authority to 

compromise the liabilities under * * * Section 7122(a).’’ In 

reaching that conclusion, Mr. Chun relied on section 7122(a), 

the regulations thereunder, and provisions of the Internal 

Revenue Manual. He also pointed to what he considered 

impermissible inconsistencies between the JPC order and the 

OIC. 

Alternatively, Mr. Chun determined that petitioner’s OIC 

should be rejected ‘‘because the Realizable Collection Potential exceeds the proposed offer amount of $1,047,216, * * * 

[petitioner] provided incomplete or inaccurate information to 

the Settlement Officer, and * * * [petitioner] is not in 

compliance with his filing obligations.’’ Mr. Chun’s finding of 

noncompliance was based upon his finding that petitioner 

had not timely filed his 2009 return. In connection with his 

alternative determination that petitioner’s offer was insufficient in the light of the realizable collection potential, Mr. 

Chun found that petitioner had understated the values of his 

assets and omitted potential sources of future income. He 

suggested that petitioner provide additional information to 

Mr. August, including an amended Form 433–A, Collection 

(349) ISLEY v. COMMISSIONER 359

Information Statement for Wage Earners and Self-Employed 

Individuals, and an amended Form 433–B, Collection 

Information Statement for Businesses. 

Mr. Chun secured the assistance of the revenue officer 

assigned to petitioner’s case in obtaining an appraisal of petitioner’s residence and spoke to the appraiser. He also mailed 

a copy of his recommendation to Mr. August to the revenue 

officer and to a special agent. 

On the basis of both Mr. Chun’s factual findings and his 

legal conclusion that section 7122(a) precluded the acceptance of petitioner’s amended OIC, and upon his own finding 

confirming that petitioner had failed to comply with the 

terms of the OIC by not filing his 2009 return and, also, by 

underpaying his 2010 estimated taxes, Mr. August rejected 

the amended OIC and recommended sustaining the proposed 

levies and the NFTL filings. He also rejected petitioner’s 

argument that respondent misapplied the payments he 

received from the Isley brothers’ New Jersey bankruptcy 

estate by not applying a pro rata share to petitioner’s liabilities (the offset issue) on the ground that ‘‘the IRS had the 

authority to apply the payment as it chose.’’ A copy of his 

‘‘Summary and Recommendation’’ was attached to each of the 

four notices of determination issued to petitioner sustaining 

the levy notices and NFTLs and rejecting petitioner’s 

amended OIC. 

OPINION 

I. Introduction 

The parties have raised a number of issues for us to consider in deciding whether to sustain the challenged notices of 

determination: (1) whether section 7122(a) barred the 

Appeals officer’s acceptance of petitioner’s amended OIC 

(preemption issue); (2) whether Mr. Chun, in recommending 

rejection of the amended OIC, attained the status of the de 

facto Appeals or settlement officer in this case so that his 

prior involvement in the California bankruptcy resulted in a 

violation of the section 6330(b)(3) requirement that a CDP 

hearing be ‘‘conducted by an officer or employee who has had 

no prior involvement with respect to the unpaid tax’’ (impartiality issue); (3) whether Mr. Chun’s communications with 

the revenue officer assigned to petitioner’s case and with an 

360 141 UNITED STATES TAX COURT REPORTS (349) 

IRS special agent constituted improper ex parte communications requiring that we disregard Mr. Chun’s determination 

to reject the OIC and ratify Mr. August’s determination to 

accept it (ex parte communication issue); (4) whether we 

should exercise jurisdiction to decide the offset issue and, if 

so, whether we should resolve it in petitioner’s favor; and (5) 

should we sustain the Appeals officer’s rejection of the 

amended offer-in-compromise, whether we should order 

respondent to return to petitioner the section 7122(c) payment (section 7122(c) payment issue). Superimposed over 

issues (1) through (4) is the overall question of whether the 

Appeals officer, Mr. August, abused his discretion in 

rejecting the amended OIC and sustaining the NFTLs and 

the collection, by levy, of petitioner’s outstanding assessed 

liabilities for the tax years at issue. We will separately consider each of the foregoing issues. 

II. Sections 6320, 6330, and 6331 

Section 6331(a) authorizes the Secretary to levy against 

property and property rights when a taxpayer liable for taxes 

fails to pay those taxes within 10 days after notice and 

demand for payment. Section 6331(d) requires the Secretary 

to send to the taxpayer written notice of the Secretary’s 

intent to levy, and section 6330(a) requires the Secretary to 

send the taxpayer written notice of his right to a hearing 

before Appeals at least 30 days before any levy begins. A taxpayer receiving an NFTL has hearing rights similar to the 

hearing rights accorded to a taxpayer receiving a notice of 

intent to levy. See sec. 6320(c). At the hearing, the taxpayer 

may raise any relevant issue including collection alternatives, which may include an OIC. After the hearing, an 

Appeals officer must determine whether and how to proceed 

with collection, taking into account, among other things, 

collection alternatives the taxpayer proposed and whether 

any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the 

taxpayer that the collection action be no more intrusive than 

necessary. See sec. 6330(c)(3). The taxpayer may contest the 

underlying tax liability at the hearing if he or she did not 

receive any statutory notice of deficiency for the liability or 

did not otherwise have an opportunity to dispute it. Sec. 

(349) ISLEY v. COMMISSIONER 361

6330(c)(2)(B). Where the underlying tax liability is properly 

at issue, we review the Appeals officer’s determination de 

novo. E.g., Goza v. Commissioner, 114 T.C. 176, 181–182 

(2000). Where the underlying tax liability is not properly at 

issue, we review the determination for abuse of discretion. 

Id. at 182. In reviewing for abuse of discretion, we must 

uphold the Appeals officer’s determination unless it is 

arbitrary, capricious, or without sound basis in fact or law. 

See Woodral v. Commissioner, 112 T.C. 19, 23 (1999). 

III. The Preemption Issue 

A. Section 7122(a) and the Pertinent Regulations 

Section 7122(a) provides: ‘‘The Secretary may compromise 

any civil or criminal case arising under the internal revenue 

laws prior to reference to the Department of Justice for 

prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the 

Department of Justice for prosecution or defense.’’ 

Section 301.7122–1(d)(2), Proced. & Admin. Regs., states in 

pertinent part: ‘‘The IRS may not accept for processing any 

offer to compromise a liability following reference of a case 

involving such liability to the Department of Justice for 

prosecution or defense.’’ 

B. The Parties’ Arguments 

On the basis of the foregoing provisions, respondent argues 

that Appeals was without authority to accept (or, indeed, 

even to process) petitioner’s amended OIC because it sought 

to compromise tax liabilities for the conviction years, which 

had been referred to the Department of Justice (DOJ) for 

prosecution. Respondent attempts to harmonize section 

7122(a) and section 6330(c)(2)(A), which permits a taxpayer 

to ‘‘raise at * * * [a CDP] hearing any relevant issue relating 

to the unpaid tax or the proposed levy, including * * * 

(iii) offers of collection alternatives, which may include 

* * * an offer-in-compromise’’ (emphasis added), by arguing 

that, in the light of section 7122(a), the propriety of an OIC 

in this case is not a ‘‘relevant issue’’. Respondent also argues 

that, because the Appeals officer’s consideration of collection 

alternatives ‘‘may include’’ an OIC, there was ‘‘Congressional 

362 141 UNITED STATES TAX COURT REPORTS (349) 

7 As noted in the text, sec. 6330(c)(2)(A)(iii) permits the taxpayer to make 

‘‘offers of collection alternatives, which may include * * * an offer-in-comprise.’’ Sec. 6330(c)(3)(B) requires the Appeals officer to ‘‘take into consideration * * * issues raised * * * [at the hearing]’’. 

recognition that not every collection alternative will be * * * 

available in every hearing.’’ 

Petitioner argues that, pursuant to section 6330(c)(2)(A), 

he had an absolute right to submit an OIC and that, pursuant to section 6330(c)(3)(B), respondent was required to take 

petitioner’s OIC into consideration. 7 Petitioner argues that 

section 7122(a) prohibits respondent to compromise only tax 

liabilities that are subject to ‘‘pending’’ criminal prosecutions 

and that, because the criminal case against petitioner was 

complete with his sentencing on September 6, 2006, more 

than eight months before petitioner’s liabilities for all but 

one of the years at issue herein were assessed, section 

7122(a) is inapplicable to this case. Petitioner also argues 

that respondent’s position is unjustified because ‘‘acceptance 

of petitioner’s offer in compromise in fact has no effect whatsoever on petitioner’s sentence and probation.’’ Petitioner 

posits that his ‘‘compliance with the terms of the Judgment 

and Probation Commitment Order * * * is a matter that lies 

within the exclusive jurisdiction of the federal district court, 

the Department of Justice and the United States Probation 

Office.’’ Lastly, petitioner notes that neither the prosecutor in 

the criminal case nor petitioner’s probation officer actually 

objected to the acceptance of petitioner’s OIC. 

C. Analysis 

1. Introduction 

Both parties attempt to resolve the potential conflict 

between sections 6330(c) and 7122(a). Respondent argues 

that, after the taxpayer’s nonpayment of tax has been 

referred to DOJ for prosecution or defense, consideration of 

the taxpayer’s OIC is no longer a ‘‘relevant issue’’ at a CDP 

hearing. Petitioner argues that only where a criminal 

prosecution against the taxpayer is still pending (i.e., where 

the outcome is still in doubt) is the Appeals officer at a CDP 

hearing prohibited from considering the taxpayer’s OIC. The 

parties’ efforts to harmonize the two provisions are consistent 

with the Supreme Court’s admonition that ‘‘when two statVerDate Mar 15 2010 08:54 Feb 03, 2015 Jkt 000000 PO 00000 Frm 00014 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\ISLEY JAMIE
(349) ISLEY v. COMMISSIONER 363

8Pursuant to Fed. R. App. P. 32.1(a) (applicable to and adopted by all 

Federal Courts of Appeals), ‘‘[a] court may not prohibit or restrict the citation of federal judicial opinions * * * that have been: (i) designated as ‘unpublished,’ ‘not for publication,’ ‘non-precedential,’ ‘not-precedent,’ or the 

like; and (ii) issued on or after January 1, 2007.’’ That rule is applicable 

to the opinion of the Court of Appeals for the Third Circuit in United 

States v. Jackson, 511 Fed. Appx. 200 (3d Cir. 2013). The advisory committee notes accompanying the promulgation of Fed. R. App. P. 32.1 make 

clear, however, that the rule ‘‘says nothing about what effect a court must 

give to one of its unpublished opinions’’. The local appellate rules adopted 

by the Court of Appeals for the Third Circuit on November 20, 2008, do 

not specifically address the precedential value of its unpublished opinions. 

The Court of Appeals for the Ninth Circuit does not generally treat its 

post-January 1, 2007, unpublished opinions as precedent. See 9th Cir. R. 

36–3. Barring written stipulation to the contrary, the venue for appeal of 

Continued 

utes are capable of co-existence, it is the duty of the courts, 

absent a clearly expressed congressional intention to the contrary, to regard each as effective.’’ Morton v. Mancari, 417 

U.S. 535, 551 (1974); see also BLAK Invs. v. Commissioner, 

133 T.C. 431, 439–440 (2009) (‘‘The various sections of the 

Code should be construed so that one section will explain and 

support and not defeat or destroy another section.’’). We do 

not subscribe to either party’s rationale for reconciling the 

two provisions, however; and although we agree with 

respondent that, once a case has been referred to DOJ for 

prosecution or defense, section 7122(a) trumps section 

6330(c), we conclude that the former provision does not prohibit the Appeals officer in a CDP hearing from at least negotiating the terms of a potential OIC with a taxpayer after 

referral of his or her case to DOJ for prosecution. It only prevents Appeals from unilaterally approving the OIC. 

2. Impact of Section 7122(a) 

The Courts of Appeals for both the Third Circuit and the 

Ninth Circuit have held, albeit in unpublished opinions, that, 

pursuant to section 7122(a), from the moment a taxpayer’s 

case is referred to DOJ for prosecution (or defense), the 

Commissioner loses his authority to compromise the taxpayer’s tax liabilities unless authorized by DOJ. See United 

States v. Jackson, 511 Fed. Appx. 200, 203 (3d Cir. 2013); 

Faust v. United States, 28 F.3d 105, 1994 WL 327584, at *2, 

74 A.F.T.R.2d 94–5194, at 94–5196 (9th Cir. 1994). 8 In JackVerDate Mar 15 2010 08:54 Feb 03, 2015 Jkt 000000 PO 00000 Frm 00015 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\ISLEY JAMIE
364 141 UNITED STATES TAX COURT REPORTS (349) 

this case would be the Court of Appeals for the Eighth Circuit. See sec. 

7482(b). We are not so much concerned with the application of the principles of stare decisis to the two cases as we are with the persuasiveness 

of their reasoning. 9 Although the record does not indicate the exact dates of petitioner’s incarceration, it appears that he entered prison on or shortly after December 

1, 2006, and was released at the end of December 2009 or in early 2010. 

Therefore, the three-year probationary period could not have terminated 

until December 2012, at the earliest, with the result that it was necessarily in effect during Mr. August’s consideration of petitioner’s OIC, in 

2010 and 2011, and when respondent issued the notices of determination 

on February 10 and 11, 2012. 

son, which was decided after the enactment of section 6330 

in 1998, the court further stated that ‘‘the DOJ retains 

authority to compromise even if a judgment has been 

obtained and the case has been returned to the IRS for 

collection.’’ Jackson, 511 Fed. Appx. at 203; accord Chief 

Counsel Notice CC–2011–020 (Sept. 15, 2011). 

As respondent notes: ‘‘The language of section 7122(a) is 

clear on its face * * * [and] there is no evidence, statutory 

or otherwise, that Congress intended for sections 6320 and 

6330 to supersede section 7122(a).’’ As respondent also notes, 

to treat section 6330(c) as carving out an exception to the 

application of section 7122(a) would be to violate an established rule of statutory construction that amendments by 

implication are not to be favored. See Estate of Morgens v. 

Commissioner, 133 T.C. 402, 421 (2009) (citing United States 

v. Welden, 377 U.S. 95, 103 n.12 (1964)), aff ’d, 678 F.3d 769 

(9th Cir. 2012). 

Moreover, it makes perfect sense from a policy standpoint 

that DOJ’s primacy in compromising tax liabilities that have 

been referred to the Attorney General for prosecution should 

continue until the terms of the court’s judgment (or of any 

settlement authorized by the Attorney General or his delegate) have been satisfied. In this case, any compromise by 

respondent of petitioner’s liabilities would have violated the 

express terms of the JPC order, which requires that, during 

the three-year probationary period, petitioner make full payment of ‘‘taxes owed for the years of conviction’’. 9

It is also clear that there is nothing in section 7122(a) that 

would have prevented petitioner, either on his own or in 

conjunction with Mr. August acting on behalf of respondent, 

from asking the District Court and/or the Attorney General 

(349) ISLEY v. COMMISSIONER 365

10Sec. 7122(a) appears to explicitly grant that right to the Attorney General or his delegate where the case has been referred to DOJ for prosecution or defense. 

or his delegate to modify the full payment requirement contained in the JPC order, which, by its terms, provides that 

the court, upon notification by the defendant (i.e., petitioner), 

the Government, or the victim (respondent, in either case), or 

on its own motion ‘‘may * * * adjust the manner of payment 

of * * * restitution’’. Although that provision, arguably, does 

no more than permit the payment terms in the JPC order to 

be revised, we do not doubt the Attorney General’s or the 

District Court’s right to settle or compromise (as well as 

extend the time for payment of) a defendant’s restitution 

obligation. 10 See Creel v. Commissioner, 419 F.3d 1135, 

1140–1142 (11th Cir. 2005). In Creel, the Court of Appeals 

for the Eleventh Circuit affirmed our decision rejecting an 

Appeals officer’s determination, after a CDP hearing, to sustain a proposed levy where a restitution order, arising out of 

the taxpayer’s prior criminal case, that required the taxpayer 

to pay the IRS ‘‘$83,830 plus any applicable penalties and 

interest’’ was deemed, by the U.S. Attorney’s Office, to have 

been satisfied after the taxpayer’s payment of $83,830. The 

Commissioner had sought approval of a levy to collect the 

unpaid penalties and interest. On the basis of what we had 

found, the Court of Appeals found that the U.S. Attorney’s 

Office 

believed that the receipt of petitioner’s civil taxes (exclusive of penalties 

and interest) in the amount of $83,830 was the most that it could 

recover from petitioner and agreed with him following his sentencing 

that his timely payment of that amount would serve to settle his civil 

tax liability of $83,830 plus related penalties and interest. * * * Thus, 

although not compelled to do so, the government discharged Creel’s civil 

tax liabilities as part of the criminal case. [Id. at 1141.] 

Thus, we do not consider section 7122(a) to be an absolute 

bar to an Appeals officer’s consideration, pursuant to section 

6330(c), of an offer to compromise a taxpayer’s assessed 

liabilities, after referral of those liabilities to DOJ for 

prosecution. It does, however, require prior approval by the 

Attorney General or his delegate of the proposed compromise, 

which, in this case, was not sought by either petitioner or the 

Appeals officer. 

366 141 UNITED STATES TAX COURT REPORTS (349) 

As noted supra, section 301.7122–1(d)(2), Proced. & Admin. 

Regs., provides: ‘‘The IRS may not accept for processing any 

offer to compromise a liability following reference of a case 

involving such liability to the Department of Justice for 

prosecution or defense.’’ (Emphasis added.) The emphasized 

language makes clear that the Attorney General’s exclusive 

right of compromise applies only to liabilities that have been 

referred to DOJ for prosecution or defense, in this case, petitioner’s assessed liabilities for the conviction years. But the 

notices of levy cover 2003 in addition to the conviction years, 

and the NFTLs cover 2003, 2004, and 2006. Therefore, section 7122(a) did not negate Mr. August’s authority, pursuant 

to section 6330(c), to compromise petitioner’s assessed liabilities for 2003, 2004, and 2006. Nonetheless, because both 

petitioner’s OIC and his amended OIC would have compromised his unpaid liabilities for the conviction years as 

well for the subsequent years, section 7122(a) barred Mr. 

August from unilaterally accepting either. 

D. Conclusion 

Section 7122(a) barred Appeals from unilaterally accepting 

petitioner’s amended OIC. On the basis of that limitation and 

upon Mr. August’s finding of petitioner’s noncompliance with 

the tax filing and payment requirements of the OIC, Appeals 

did not abuse its discretion by rejecting that OIC. 

IV. Mr. Chun’s Involvement: The Impartiality and Ex Parte 

Communication Issues 

A. Introduction 

Because section 7122(a) barred Appeals from unilaterally 

accepting petitioner’s amended OIC as a matter of law, Mr. 

Chun’s involvement in Mr. August’s determination to reject 

that OIC, whether or not proper, is of no consequence. Therefore, both the impartiality and ex parte communication 

issues are technically moot. Nonetheless, assuming there 

were a need to decide those issues herein, we would resolve 

both in respondent’s favor. 

(349) ISLEY v. COMMISSIONER 367

B. Analysis and Conclusion 

1. Mr. Chun’s Involvement Did Not Result in a Violation of 

the Section 6330(b)(3) Impartial Officer Requirement. 

Section 7122(b) provides, in pertinent part, that, in the 

case of a decision to compromise a taxpayer’s liability in 

excess of $50,000, ‘‘there shall be placed on file in the office 

of the Secretary the opinion of the [Treasury’s] General 

Counsel * * * or his delegate, with his reasons therefor’’. See 

also section 301.7122–1(e)(6), Proced. & Admin. Regs., providing that, where an OIC involving a liability in excess of 

$50,000 is accepted, ‘‘there will be placed on file the opinion 

of the Chief Counsel for the IRS with respect to such compromise, along with the reasons therefor.’’ 

Because Mr. August initially recommended acceptance of 

and the Appeals team manager preliminarily approved the 

amended OIC, it was incumbent upon them to obtain the 

Chief Counsel opinion required by section 7122(b) and the 

regulations thereunder, and they acted appropriately in 

referring the matter to Chief Counsel for that purpose. Mr. 

Chun, as a member of respondent’s Office of Chief Counsel, 

was assigned to handle that referral, and he recommended 

rejection of the amended OIC in that capacity. Mr. Chun’s 

involvement did not cause him to become, as petitioner 

argues, the de facto Appeals officer in the case. As a result, 

the section 6330(b)(3) requirement that petitioner’s CDP 

hearing ‘‘be conducted by an officer or employee who has had 

no prior involvement with respect to * * * [petitioner’s] 

unpaid tax’’ does not apply to Mr. Chun, and his prior 

involvement in the California bankruptcy, which, in any 

event, concerned petitioner’s unpaid taxes for different tax 

years, could not have resulted in a violation of that requirement. 

2. Mr. Chun Was Not Subject to the Rule Prohibiting Ex 

Parte Communications. 

The Internal Revenue Service Restructuring and Reform 

Act of 1998, Pub. L. No. 105–206, sec. 1001(a)(4), 112 Stat. 

at 689, requires that the mandated plan to reorganize the 

IRS ‘‘ensure an independent appeals function within the 

Internal Revenue Service, including the prohibition * * * of 

368 141 UNITED STATES TAX COURT REPORTS (349) 

11See Kovacevich v. Commissioner, T.C. Memo. 2009–160, 2009 WL 

1916351, at *5–*6, for a discussion of the caselaw involving the classification, under sec. 6330(c)(2), of challenges to the proper crediting of taxpayer 

payments to the Commissioner. 

ex parte communications between appeals officers and other 

Internal Revenue Service employees to the extent that such 

communications appear to compromise the independence of 

the appeals officers.’’ 

Rev. Proc. 2000–43, sec. 3, Q&A–1, 2000–2 C.B. 404, 405, 

makes clear that the prohibition against ex parte communications extends to communications between ‘‘Appeals and 

another Service function’’. Because, as discussed supra, Mr. 

Chun was not an Appeals employee, his communications 

with the revenue officer and the special agent did not constitute prohibited ex parte communications. 

V. The Offset Issue 

A. Introduction 

On February 27, 2012, we denied petitioner’s motion to 

raise the offset issue (which had been raised at his CDP 

hearing) by amending his petition in order to add an allegation challenging ‘‘the amount of the liability based on 

Respondent’s unlawful application [to petitioner’s brother 

O’Kelly’s account] of payments [made in connection with the 

New Jersey bankruptcy] in prior years’’. During the trial, 

petitioner renewed that motion. We sustained respondent’s 

objection to that motion but ruled that petitioner was still 

free ‘‘to ask leave to amend the petition, to assign error to 

* * * [Mr. August’s] failure to credit the payments * * * 

[but] without recourse to * * * facts [beyond the administrative record]’’. 

B. Analysis 

Regardless of whether the offset issue presents a challenge 

to petitioner’s ‘‘underlying liability’’ within the meaning of 

section 6330(c)(2)(B) (subject to de novo review) as petitioner 

argues, or constitutes a ‘‘relevant issue relating to the [allegedly] unpaid tax’’ within the meaning of section 6330(c)(2)(A) 

(subject to review for abuse of discretion) as respondent 

argues, petitioner is barred from raising the issue. 11

(349) ISLEY v. COMMISSIONER 369

12See Freije v. Commissioner, 125 T.C. 14, 26 (2005) (‘‘[A] ‘relevant issue 

relating to the unpaid tax * * *’ surely includes a claim * * * that the 

‘unpaid tax’ has in fact been satisfied by a remittance that the Commissioner improperly applied elsewhere.’’). 

1. Underlying Liability Analysis 

Pursuant to section 6330(c)(2)(B), a taxpayer may challenge his underlying liability at a CDP hearing if the taxpayer ‘‘did not receive * * * [a] statutory notice of deficiency 

for * * * [the] liability or did not otherwise have an opportunity to dispute such * * * liability.’’ Here, the District 

Court for the Central District of California, in denying petitioner’s refund claim based upon the Commissioner’s 

misapplication of funds paid into the New Jersey bankruptcy 

proceeding, specifically found that the Isleys (including petitioner) were in a position to, but did not, object to respondent’s proofs of claim in the California bankruptcy, which 

claims necessarily included amounts that, in petitioner’s 

view, would not have been due but for respondent’s allegedly 

improper application of the New Jersey bankruptcy funds. 

The court held that, as a result of that failure to object, 

respondent’s claims were ‘‘deemed allowed’’, entitling them to 

res judicata effect. It is sufficient for us to decline to consider 

the offset issue on the ground that the California bankruptcy 

afforded to petitioner a prior opportunity to dispute his liabilities. See Kendricks v. Commissioner, 124 T.C. 69, 77 (2005) 

(‘‘[W]hen the * * * [bankruptcy] provides the taxpayer the 

opportunity to object to the IRS’s proof of claim for an unpaid 

Federal tax liability, the taxpayer is afforded an opportunity 

to dispute the liability, as contemplated by Congress in section 6330(c)(2)(B).’’). 

2. Unpaid Tax Analysis 

If we assume, however, that the offset issue does not 

involve a challenge to petitioner’s underlying liabilities but, 

instead, constitutes a ‘‘relevant issue relating to the unpaid 

tax’’ within the meaning of section 6330(c)(2)(A), 12 we agree 

with respondent that our consideration of the issue is barred 

by section 6330(c)(4)(A). That provision states, in pertinent 

part, that ‘‘[a]n issue may not be raised at the hearing if 

* * * the issue was raised and considered * * * [in a] previous administrative or judicial proceeding; and * * * the 

370 141 UNITED STATES TAX COURT REPORTS (349) 

person seeking to raise the issue participated meaningfully 

in such hearing or proceeding’’. 

As noted supra, petitioner raised the offset issue in his 

refund suit before the District Court for the Central District 

of California, which rejected petitioner’s claim of offset on the 

grounds that (1) it was barred by the doctrine of res judicata 

and (2) petitioner lacked standing to sue for the refund, the 

liabilities at issue having been discharged by proceeds from 

the sale of assets belonging to the bankruptcy estate. The 

Court of Appeals for the Ninth Circuit affirmed on both 

grounds and on the further ground that the IRS ‘‘ ‘enjoys the 

right to apply payment in the manner it chooses.’ ’’ Isley v. 

United States, 272 Fed. Appx. 640 (9th Cir. 2008) (quoting 

United States v. Plummer (In re Plummer), 174 B.R. 284, 286 

(Bankr. C.D. Cal. 1992)). 

Petitioner argues that the holding at both the trial and 

appellate court levels was that petitioner lacked standing to 

sue for a refund (i.e., that his suit was procedurally deficient), a position implying that those courts’ alternative 

bases for denying relief were dicta. Petitioner concludes that 

‘‘in none of these prior proceedings was * * * [he] allowed to 

reach a determination on the merits * * * [so that he has] 

had no opportunity in those proceedings to dispute the 

liability.’’ We disagree. Each of the courts’ alternative bases 

for the denial of petitioner’s refund claims was sufficient, by 

itself, to sustain that result. Where there are multiple bases 

for the result in a case, they constitute alternative holdings. 

See Superior Trading, LLC v. Commissioner, T.C. Memo. 

2012–110, 2012 WL 1319748, at *2 (‘‘These are all alternative holdings, each by itself sufficient to sustain respondent’s adjustments.’’), aff ’d, 728 F.3d 676 (7th Cir. 2013). 

Moreover, it is a long-established principle of law that each 

alternative rationale for the result in a case has precedential 

value. See, e.g., Massachusetts v. United States, 333 U.S. 611, 

623 (1948) (‘‘[A]s we were asked to do and rightly could do 

* * * we decided both issues, and the judgment rested as 

much upon the one determination as the other. In such a 

case the adjudication is effective for both.’’); Richmond Screw 

Anchor Co. v. United States, 275 U.S. 331, 340 (1928) (‘‘It 

does not make a reason given for a conclusion in a case 

obiter dictum, because it is only one of two reasons for the 

same conclusion.’’). Thus, it is clear that, during the refund 

(349) ISLEY v. COMMISSIONER 371

13 In his opening brief, petitioner seeks credit (offset), not only for the 

allegedly misapplied payments made to the Commissioner in connection 

with the New Jersey bankruptcy, but also for some $900,000 ‘‘in fees paid 

to the [California] bankruptcy trustee, the trustee’s attorney, the trustee’s 

accountant and the debtor’s attorney.’’ Petitioner argues that those expenditures were ‘‘needlessly wasted’’ because proper application of a portion of 

the New Jersey bankruptcy payments to his account would have eliminated the need for the California bankruptcy proceeding, and the $900,000 

‘‘would have been available to pay the tax liabilities’’ that were satisfied 

by the June 23, 2000, payment. We agree with respondent that petitioner’s 

failure to make this novel argument during his CDP hearing bars him 

from making it here. See sec. 301.6330–1(f)(2), Q&A–F3, Proced. & Admin. 

Regs. (‘‘In seeking Tax Court review of a Notice of Determination, the taxpayer can only ask the court to consider an issue * * * that was properly 

raised in the taxpayer’s CDP hearing.’’); see also Giamelli v. Commissioner, 

129 T.C. 107, 112–115 (2007). 

litigation in the District Court for the Central District of 

California and the Court of Appeals for the Ninth Circuit, 

the offset issue ‘‘was raised and considered’’ and that petitioner ‘‘participated meaningfully’’ in that litigation as 

required by section 6330(c)(4)(A). 

Nor is the application of section 6330(c)(4)(A) as a bar to 

petitioner’s raising the offset issue herein compromised by 

the fact that that issue was improperly addressed during 

petitioner’s CDP hearing. See sec. 301.6330–1(e)(3), Q&A– 

E11, Proced. & Admin. Regs. (‘‘Any determination * * * 

made by the Appeals officer with respect to * * * a precluded issue shall not be treated as part of the Notice of 

Determination * * * and will not be subject to any judicial 

review * * * it is not reviewable by the Tax Court because 

the precluded issue is not properly part of the CDP 

hearing.’’); see also Swanson v. Commissioner, 121 T.C. 111, 

118 (2003); Behling v. Commissioner, 118 T.C. 572, 579 

(2002). 

C. Conclusion 

Section 6330(c)(2)(B) and (4)(A) alternatively preclude petitioner from raising the offset issue herein. 13

372 141 UNITED STATES TAX COURT REPORTS (349) 

VI. The Section 7122(c) Payment Issue 

A. Analysis 

As noted supra note 2, section 7122(c)(1)(A)(i) requires that 

the submission of any lump-sum OIC ‘‘be accompanied by the 

payment of 20 percent of the amount of such offer.’’ H.R. 

Conf. Rept. No. 109–455 (2006), 2006 U.S.C.C.A.N. 234, is 

the report of the committee of conference to accompany H.R. 

4297, 109th Cong. (2006), which, when enacted as the Tax 

Increase Prevention and Reconciliation Act of 2005, Pub. L. 

No. 109–122, sec. 509(a), 120 Stat. at 362, added the new 

section 7122(c). The report’s explanation of the new provision 

refers to the 20% payment as a ‘‘partial payment’’ or ‘‘down 

payment’’ of the taxpayer’s liability. H.R. Conf. Rept. No. 

109–455, at 234, 2006 U.S.C.C.A.N. at 420–421. Notice 2006– 

68, sec. 1.02, 2006–2 C.B. 105, states: ‘‘The Service will treat 

the required 20-percent payment as a payment of tax, rather 

than a refundable deposit under section 7809(b) or Treas. 

Reg. § 301.7122–1(h).’’ Moreover, the amended OIC that petitioner submitted to respondent contained the following representation and acknowledgment by petitioner: ‘‘I * * * voluntarily submit all tax payments made on this offer, 

including the mandatory payments of tax required under section 7122(c). These tax payments are not refundable even if 

I * * * withdraw the offer prior to acceptance or the IRS 

returns or rejects the offer.’’ 

Thus, it is clear that, in the normal circumstances of a taxpayer’s submission of an OIC to the IRS, the section 7122(c) 

payment constitutes a nonrefundable, partial payment of the 

taxpayer’s liability, and petitioner does not argue to the contrary. Petitioner does argue, however, that his amended OIC 

was neither submitted nor rejected under normal circumstances, and that he is entitled, therefore, to a refund of 

his section 7122(c) payment. 

Petitioner notes that Mr. August assured his counsel that 

his OIC ‘‘would be based on collectibility.’’ He argues that, 

because his amended OIC was rejected on grounds (e.g., section 7122(a)) other than doubt as to collectibility, Mr. 

August’s assurance to the contrary constituted, under principles of contract law, a ‘‘false representation and inducement 

[that] voids the terms of the offer in compromise and makes 

(349) ISLEY v. COMMISSIONER 373

the deposited funds refundable.’’ Respondent argues that we 

lack jurisdiction to order a refund of the section 7122(c) payment, and that ‘‘the proper means of requesting [a] return of 

the funds is to file * * * [a] claim for refund and, if necessary, a refund suit in federal court.’’ In the alternative, he 

argues that, because there is no evidence that Mr. August 

was aware of either the JPC order or the section 7122(a) bar 

to his acceptance of an OIC when he agreed to make collectibility the sole determining factor in connection with his 

consideration thereof, he did not ‘‘fraudulently misrepresent 

material facts to petitioner in order to induce him to submit 

the * * * [section 7122(c)] payment.’’ 

We need not address respondent’s first alternative ground 

since we agree with his second; i.e., there is no evidence of 

false representations or fraudulent inducement. Moreover, 

petitioner overlooks the fact that among Mr. August’s 

grounds for ultimately rejecting the amended OIC was his 

finding, based upon Mr. Chun’s memorandum, that petitioner had understated the value of his assets and the 

amount of his anticipated future income, which, in his view, 

raised ‘‘multiple collectibility issues’’. Also, Mr. August made 

a finding that petitioner had violated the terms of the OIC 

by failing to remain in compliance with his tax filing and 

payment obligations (i.e., he failed to timely file his 2009 

return or pay sufficient estimated taxes for 2009 and 2010), 

a finding that petitioner’s counsel admitted to Mr. August 

was correct. 

B. Conclusion 

In the light of Mr. August’s good-faith processing of the 

amended OIC, the presence of issues regarding collectibility, 

and petitioner’s noncompliance with his ongoing tax obligations, we find that Appeals did not abuse its discretion in 

retaining the section 7122(c) payment in conjunction with its 

rejection of the amended OIC. 

VII. Conclusion 

We conclude that Mr. August and his Appeals team manager did not abuse Appeals’ discretion in rejecting petitioner’s OIC and retaining his section 7122(c) payment. Still 

unresolved, however, is the question of whether it was an 

374 141 UNITED STATES TAX COURT REPORTS (349) 

abuse of discretion for Appeals to refuse to withdraw the 

NFTLs and to sustain the levies. 

A. The NFTLs 

Pursuant to section 6323(j)(1), the Commissioner is authorized to withdraw an NFTL if (A) the notice is premature or 

otherwise violates administrative procedures, (B) the taxpayer has entered into an installment payment agreement to 

satisfy the liability for which the lien was imposed, (C) the 

withdrawal will facilitate collection of the liability, or (D) the 

withdrawal would be ‘‘in the best interests of the taxpayer 

* * * and the United States.’’ There is no evidence in the 

record, nor any claim by petitioner, that any of those conditions has been satisfied. Moreover, Mr. August’s ‘‘Case 

Activity Record’’ states that petitioner’s counsel told him he 

did not care about the liens and that the IRS is entitled to 

its liens. It was not an abuse of discretion for Appeals to sustain the NFTLs. 

B. The Levies 

Pursuant to section 6330(c)(3)(C), the determination by the 

Appeals officer conducting the CDP hearing must ‘‘take into 

consideration * * * whether any proposed collection action 

balances the need for the efficient collection of taxes with the 

legitimate concern of the person that any collection action be 

no more intrusive than necessary.’’ (Emphasis added.) 

While Mr. Chun may have been correct in concluding that 

the OIC of $1,047,216 was below the realizable collection 

potential from petitioner and, therefore, insufficient, he suggested, in his January 10, 2011, memorandum to Mr. August, 

that Mr. August ‘‘obtain more updated information’’; that 

Appeals reiterate its ‘‘requests for accounting information 

and accounting statements covering the last five years’’; and 

that ‘‘Appeals or the revenue officer obtain the assistance of 

an IRS engineer to value Isley Brothers LLC.’’ Mr. Chun’s 

suggestions that Mr. August obtain additional information 

regarding petitioner’s assets and future income potential, and 

his repeated references to potential sources of both that petitioner had failed to include in the financial statements 

(Forms 433A and B) that he submitted to Mr. August in 

connection with his OICs, indicate his view (which appears 

(349) ISLEY v. COMMISSIONER 375

reasonable) that further negotiations with petitioner might 

have proven fruitful and that petitioner had (or would have) 

the financial wherewithal to submit another OIC in a larger 

amount or, perhaps, enter into an installment agreement 

with respondent to pay his assessed liabilities over time. 

Either alternative would have needed the prior approval of 

DOJ, pursuant to section 7122(a), but, as noted supra, either 

or both petitioner and Appeals could have solicited such prior 

approval. Also, if petitioner is correct that neither the prosecutor in the criminal case nor petitioner’s probation officer 

actually objected to the acceptance of petitioner’s OIC, such 

approval likely would have been forthcoming. 

Moreover, it would appear that petitioner’s 2009 and 2010 

compliance shortcomings were not intentional and were 

readily curable. Mr. August’s case activity report indicates 

that the failure to file petitioner’s 2009 return was due to a 

mixup between his advisers as to who had that responsibility, and that the estimated tax payment shortfall was due 

to the fact that estimated tax payments had been based 

inadvertently upon petitioner’s ‘‘touring income’’ but not his 

‘‘royalty income’’. 

Under the circumstances, a referral to DOJ being required, 

we conclude that Appeals acted prematurely in sustaining 

the levies. Moreover, such an action might very well have 

been ‘‘more intrusive than necessary’’. Therefore, we will 

remand the case to Appeals for further consideration and 

instruct Appeals to reexamine petitioner’s financial position, 

and if, in Appeals’ view, it warrants petitioner’s submission 

of another OIC or of an installment agreement (and petitionVerDate Mar 15 2010 08:54 Feb 03, 2015 Jkt 000000 PO 00000 Frm 00027 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\ISLEY JAMIE
376 141 UNITED STATES TAX COURT REPORTS (349) 

14The three-year probationary period appears to have expired at or 

shortly after the end of 2012. If petitioner has fully complied with its 

terms, which include the obligation to discharge his liabilities for both the 

conviction years and the three-year probationary period, or if those liabilities have been discharged by means of a settlement between petitioner 

and DOJ, there will be nothing more to collect for those years, making the 

issues of compromise and the continued application of sec. 7122(a) to the 

conviction years moot. Not having been so notified by the parties, we suspect that that is not the case and that there are still uncollected assessed 

liabilities. If that is true, DOJ’s prior approval of any compromise with respect to the conviction years still will be necessary. 

er is amenable thereto), to seek approval thereof from DOJ 

before entering into or processing either. 14

f 

An appropriate order will be issued.