TAX COURT OPINION

Case: Wayne & Carol Lu
Docket Number: 26795-11L
Judge: Kroupa
Opinion Type: bench
Filed: 07/11/2012
Pages: 12

UNITED STATES TAX COURT WASHINGTON, D.C. 20217 WAYNE LU AND CAROL LU, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ORDE R Docket No. 26795-11L Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioners and to respondent a copy of the pages of the transcript of proceedings of this case before Judge Diane L. Kroupa in Honolulu, Hawaii on June 18, 2012, containing her oral findings of fact and opinion rendered at the trial session at which this case was calendared. In accordance with the oral findings of fact and opinion, an appropriate decision will be entered for respondent. (Signed) Diane L. Kroupa Judge Date: Washington, DC July 11, 2012 s(cid:0)523EDJUL 1 3 2012 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 Bench Opinion by Judge Diane L. Kroupa June 18, 2012 Lu v. Commissioner Docket No. 26795-11L THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. These oral findings of fact and opinion shall not be relied upon as precedent in any other case. This bench opinion is made pursuant to the authority granted by § 7459(b) and Rule 152. All section references are to the Internal Revenue Code as amended and in effect for 2003, and all rule references are to the Tax Court Rules of Practice and Procedure. This is a collection review case involving the proposed levy to collect Petitioners' unpaid federal income tax liabilities for 2003. Howard Chang appeared on Petitioners' behalf. Jonathan Ono appeared on behalf of Respondent. Findings of Fact. Certain facts have been stipulated. The stipulation of facts the parties filed, with accompanying exhibits, is incorporated by this reference. The facts are so found. Petitioners resided in Hawaii at the time Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 they filed the collection review petition. Petitioners filed an amended joint federal income tax return for 2003, but failed to pay the entire tax shown on the return. Respondent assessed the unpaid tax liability and issued Petitioners a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (levy notice) for 2003. Petitioners timely requested a hearing. In their request, Petitioners indicated they wanted to enter into an offer in compromise (OIC) with Respondent. Thereafter, Petitioners sent Respondent Form 433-A, Collection Information Statements for Wage Earners and Self-Employed Individuals.. Petitioners asserted monthly expenses that included costs for credit cards, education, life insurance, withholding taxes and health insurance. Petitioners made a "short-term periodic payment offer" on Form 656, Offer in Compromise, and paid the first installment. They made no further payments. Respondent referred the matter to the Centralized Offer in Compromise (COIC) Unit for consideration. Respondent's Appeals Office informed Petitioners that COIC would review the OIC and that COIC may contact Petitioners. COIC sent three letters to Petitioners during 2011. Two of the three letters Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 were sent to Petitioners' address. Petitioners' address on the other letter contained a minor typographical error. None of the letters were returned to Respondent. COIC indicated in its first letter that Petitioners had incorrectly combined their joint individual liabilities with Petitioner husband's trust fund liabilities in the OIC. They were later told they needed to submit separate OICs, pay the application fee and 20 percent payment required for Respondent to consider the OIC for combined liabilities. COIC again requested Petitioners submit separate OICs and the applicable fees in its second letter. Respondent also noted that Petitioners had not continued installment payments and warned that the OIC would be rejected if the payments were not made. COIC concluded in the third letter that Petitioners had withdrawn the OIC because Petitioners discontinued their installment payments. COIC returned the matter to Respondent's Appeals Office, and it was assigned to a settlement officer for a final determination. The settlement officer contacted Petitioners by letter. Petitioners' counsel asserted in response Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that Petitioners had not received any letters from COIC. The settlement officer held a telephonic hearing with Petitioners' counsel in July 2011. The settlement officer again detailed that Petitioners were required to continue their installment payments and provide separate OICs along with additional documentation. Petitioners submitted separate OICs for their joint liabilities for 1997, 1998, 2003 and 2004 and for Petitioner husband's trust fund liabilities. Petitioners offered to pay $18,000 of the joint liabilities and $12,000 for the trust fund liabilities. The settlement officer reviewed Petitioners' Form 433-A in light of the financial information they provided and the guidelines published in the Internal Revenue Manual (IRM) for evaluating the OICs. Based on this review, the settlement officer adjusted Petitioners' monthly income and expenses. The settlement officer determined that Petitioners' monthly income exceeded their expenses. The settlement officer rejected the OICs for their unpaid tax liabilities based on the analysis of the financial information and supporting documentation Petitioners provided. The settlement officer then Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 7 informed Petitioners' counsel that an installment plan would be considered if Petitioners desired. Petitioners did not contact the settlement officer. Subsequently, the settlement officer issued the determination that rejected the OICs because OL% Petitioners had disposable income to satisfy the tax liabilities. Petitioners filed a petition with this Court challenging the settlement officer's determination. Opinion. We are asked to decide whether the settlement officer abused her discretion in determining the proposed levy action was appropriate to collect Petitioners' unpaid tax liabilities for 2003. We begin with the standard of review. Where, as is the case here, the validity of the underlying tax liability is not properly placed at issue, the Court will review Respondent's determination for abuse of discretion. Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). We must decide whether Respondent exercised his discretion arbitrarily, capriciously or without sound basis in fact or law. See ew v. DLK Commissioner, 112 T.C. 19, 23 (1999); Fargo v. Commissioner, T.C. Memo 2004-13. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 In making this determination, we do not conduct an independent review of what would be an acceptable collection alternative, nor do we substitute our judgment for that of the settlement officer. See Murphy v. Commissioner, 125 T.C. 301, 320 (2005). Based upon our examination of the entire record before us, we find that Respondent did not abuse his discretion in determining that the collection action should proceed with respect to Petitioners' unpaid liabilities for 2003. We briefly describe collection procedures by levy. No levy may be made on any person's property unless the Secretary has notified such person in writing of their right to a hearing before the levy is made. Sec. 6330(a). The person may request a hearing with the IRS Appeals Office and raise any relevant issues, including collection alternatives, at the hearing. Sec. 6330 (c) (2) (A). After the hearing, the settlement officer is required to make a determination that addresses issues the taxpayer raised, verifies that all requirements of applicable law and administrative procedures have been met and 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 Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 9 necessary. Sec. 6330(c) (3) (C). The settlement officer considered the collection alternative Petitioners raised for resolving the unpaid tax liabilities. Section 7122(a) authorizes a compromise of a taxpayer's federal tax liability. An OIC may be accepted where there is doubt as to liability or collectibility or where it would promote effective tax administration. Sec. 301.7122-1(b), Proced. & Admin. Regs. Petitioners assigned numerous errors to Respondent's rejection of the OICs. First, Petitioners argue that the settlement officer was prejudiced when the Petitioners were deemed to have withdrawn the OIC. We disagree. A short-term periodic payment offer requires the taxpayer continue to make installments while the collection determination is pending, and nonpayment during this time may be treated as a withdrawal of such offer in compromise. Sec. 7122(c) (1) (B) (ii). Petitioners failed to make the monthly payments as required for a short-term OIC. Petitioners subsequently made separate OICs. One OIC was for their individual liabilities and one was for the trust fund liabilities. Petitioners were told to file these partial OICs, pay the applicable processing Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 fee5and pay the 20 percent downpayment for each OIC. DL The settlement officer Petitioners to submit additional information to consider their separate OICs 10 on Forms 656. Second, Petitioners argue that Respondent incorrectly determined Petitioners' monthly income and expenses. We disagree. The Commissioner verified the taxpayers' income and assets according to his policies and procedures. Sec. 7122(d); Rev. Proc. 2003-71, 2003-2 C.B. 517. Verification of the source of unexplained bank deposits or statements from the source of gifts may be required to correctly determine the taxpayer's current income. I.R.M. Sec. 5.8.5.18(6). Petitioners' bank statements reflected that Petitioners had a series of bank deposits in the months before submitting the OICs. Respondent concluded that Petitioners did not adequately substantiate their assertion that the deposits were gifts or loans. Finally, Petitioners argue that Respondent incorrectly excluded expenses for health and life insurance, credit cards, taxes and education. Expenses that are necessary for the health and welfare of the taxpayer or the taxpayer's family or are Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 11 necessary for the production of income are allowed. Rev. Proc. 2003-71, 2003-2 C.B. 517; See I.R.M. Sec. 5.15.1.7(1). Petitioners did not substantiate that the expenses were necessities under this test. We have reviewed the entire record and cannot find that the settlement officer's determination rejecting Petitioners' OIC was an abuse Vlae.nd«m of discretion. See Van Maa.endrerr v. Commissioner, T.C. Memo 2003-346; Crisan v. Commissioner, T.C. Memo 2003-318; Willis v. Commissioner, T.C. Memo 2003-302. We find that the settlement officer fully considered Petitioners' Forms 433-A and all other necessary documents for determining whether Petitioners were eligible for OICs with respect to their unpaid tax liabilities for 2003. Even if we might have reached a different conclusion on the reasonableness of some of Petitioners' income or expenses, we cannot say that there was an abuse of discretion by the settlement officer. We remind the parties that the Court does not substitute its judgment for that of the settlement officer in deciding whether there was any abuse of discretion. The record reflects that the settlement officer properly balanced the need for efficient Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 12 collection of taxes with Petitioners' legitimate concern that any collection be no more intrusive than necessary. Petitioners have not raised any challenges to the appropriateness of collection and did not assert any spousal defense. See Sec. 6330 (c) (2). Accordingly, these issues are now deemed conceded. Rule 331(b) (4). In addition, Petitioners did not submit an alternative installment plan despite the settlement officer's request to do so. We are sympathetic to Petitioners' financial situation and the havoc that arises when people are unemployed. We also understand that the economic downturn has substantially affected many Americans. Nevertheless, we must treat all taxpayers equally. Petitioners have failed to demonstrate circumstances establishing that the settlement officer abused her discretion in sustaining the proposed levy action. We therefore conclude that the settlement officer did not abuse her discretion in upholding Respondent's proposed levy action to collect from Petitioners outstanding tax liabilities for 2003. Based upon our examination of the entire record before us, we find that Respondent did not abuse his discretion in determining that the collection action should proceed with respect to Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 13 Petitioners' unpaid liabilities for 2003. To reflect the foregoing, decision will be entered for Respondent and an appropriate order will be issued sustaining the determinations set forth in the determination notice dated October 27, 2011, upon which this case is based, regarding the unpaid liabilities for 2003. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 10:55 a.m. the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888