TAX COURT OPINION

Case: David F. & Ronda Ching Day
Docket Number: 11559-09L
Judge: Colvin
Opinion Type: bench
Filed: 07/27/2010
Pages: 17

UNITED STATES TAX COUR T WASHINGTON , DC 2021 7 DAVID F . AND RONDA CHING DAY , Petitioners , V . Docket No . 11559-09L COMMISSIONER OF INTERNAL REVENUE Respondent O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge David Gustafson at Honolulu, Hawaii, on June 22, 2010, containing his oral findings of fact and opinion rendered at the conclusion of the trial . In accordance with the oral findings of fact and opinion, decision will be entered for respondent . (Signed) David Gustafson Judg e Dated : Washington, .D .C . July 27, 2010 SERVED Jul 28 2010 2 1 Bench Opinion by Judge David Gustafson - June 22, 201 0 2 DAVID F . & RONDA CHING DAY Docket No : 011559-09L 3 THE COURT : The Court has decided t o 4 render oral Findings of Fact and Opinion in this case, 5 and the following represents the Court's oral Findings 6 of Fact and Opinion . The oral Findings of Fact an d 7 Opinion shall not be relied on as precedent in any 8 other case . 9 This Bench opinion is made pursuant to 10 the authority granted by section 7459(b) in th e 11 Internal Revenue Code of 1986, as amended, and Rule 12 152 of the Tax Court Rules of Practice and Procedure . 13 By a "Notice of Determination" dated 14 April 16, 2009 (Ex . 7-J), the IRS gave notice t o 15 Petitioners David F . Day and Ronda Ching Day that the 16 IRS's Office of Appeals had sustained th e 17 determination to file a notice of Federal tax lien, in 18 order to collect income tax that they owed . We will 19 affirm that determination . 20 Trial of this case was conducted on June 21 21, 2010, in Honolulu, Hawaii . The parties ' 22 "Stipulation of Facts", with Exhibits 1-J through 11 23 -R was admitted into evidence, and Mr . Day gave his 24 testimony and offered additional exhibits that were 25 admitted into evidence . Heritage Reporting Corporation (202) 628-4888 3 1 Findings of Fact . 2 The liabilities at issue . This suit 3 involves the IRS's attempt to collect income tax from 4 Mr . and Mrs . Day for four years -- 2001, 2002, 2005, 5 and 2006 . The IRS examined the Days' tax returns for 6 2001 and 2002, and the parties entered into a n 7 agreement for the assessment of additional tax . For 8 2005 and 2006, the Days filed original and amende d 9 returns reporting tax liabilities that the IRS 10 assessed . 11 The Days' Offer in Compromise . As of 12 November 2007 those liabilities were still not fully 13 paid, and the unpaid balances totaled approximately 14 $60,000 (Ex . 5-J) . The . Days submitted to the IRS a 15 Form 656 "Offer in Compromise" ("OIC", Ex . 8-R), based 16 on doubt as to collectability . Their OIC proposed to 17 pay a total of $10,000 by means of 24 monthly payments 18 of $416 .66, the first of, which was submitted with the 19 offer . Paragraph (m) in section V of the Form 65 6 20 that they signed and submitted states : 21 The IRS generally files a notice of 22 Federal Tax Lien to protect the Government' s 23 interest on offers with deferred payments . Also, 24 the IRS may file a notice of Federal Tax Lien . 25 during the offer investigation . This tax lien wil l Heritage Reporting Corporation .(202) 628-4888 4 1 be released when the payment terms of the offer 2 agreement have been satisfied . 3 In support of their Form 656 the Days 4 submitted a Form 433-A " :Collection Informatio n 5 Statement" on which they reported their financia l 6 situation . On line 20a they reported their ownership 7 of their home, for which they stated a current value 8 of $800,000 (which Mr . Day contends was an error) and 9 a mortgage loan balance of $400,000, thus indicatin g 10 that they owned equity of $400,000 in their house . 11 Because $400,000 in equity greatly exceeded the 12 $60,000 in liabilities, the IRS Appeals offic e 13 personnel considering the Days' OIC advised them of a 14 preliminary determination "that you have sufficient 15 future income value and equity in assets to allow for 16 full payment of your debt . I am unable to recommend 17 an offer in these circumstances ." (Ex . 9-R .) After 18 further communications, the Days withdrew in writing 19 their OIC on April 10, 2008 . 20 The notice of lien and the CDP process . 21 Three weeks earlier, on March 18, 2008, the IRS sent 22 to the Days a Letter 3172 "Notice of Federal Tax Lien 23 Filing and Your Right to a Hearing Under IRC 6320", 24 advising them that a notice of Federal tax lien had 25 been filed that day . On April 23, 2008, the Day s Heritage Reporting Corporation (202) 628-4888 1 timely submitted a Form 12153 "Request For a 2 Collection Due Process or Equivalent Hearing" . The 3 Days' request asserted two "Bases for Relief" -- 4 first, that the lien filing was "premature" and shoul d 5 not have been made until the Days had been given an 6 opportunity to refinance their house to obtain funds 7 to pay the taxes ; and second, that the Days were 8 suffering "economic hardship" because of drastically 9 reduced income . After the IRS Office of Appeal s 10 received his request, a Settlement Officer ("SO") 11 telephoned Mr . Day, who requested a face-to-face 12 hearing with Appeals . The SO responded that a 13 face-to-face hearing was not possible (because there 14 was no Settlement Officer in Hawaii), and the CD P 15 hearing was thereafter conducted by telephone . and 16 correspondence . 17 The Days' principal request in thei r 18 dealings with Appeals in the CDP process was that the 19 lien be "lifted" (Ex . 6-J) so that they could qualify 20 for a loan with which to pay the IRS . (Exs . 6-J , 21 10-R .) The SO explained that economic hardship was not 22 a basis for withdrawing a notice of Federal Tax Lien 23 and that if Mr . Day wanted to propose anothe r 24 Offer-in-Compromise in the CDP context, he shoul d 25 submit an OIC on Form 656 and a financial statement o n Heritage Reporting Corporation (202) 628-4888 1 Form 433 . (Ex . 10-R .) The SO explained that it is 2 possible for a lien to be withdrawn in order t o 3 facilitate a refinancing in which the tax debt is paid 4 off . On September 25, 2008, Mr . Day sent Appeals a 5 letter (Ex . 11-R) offering to send another copy of 6 "the original OIC application" and transmitting to 7 Appeals the same Form 433-A he had submitted i n 8 support of his OIC, which stated the house's current 9 value as $800,000 and its mortgage balance a s 10 $400,000, again suggesting equity of $400,000 . He had 11 stated to the SO over the telephone, however, that the 12 "property values . . .have decreased" (Ex . 10-R) . 13 On February 5, .2009, the SO sent the Days 14 a letter (Ex . 11-R) requesting that they attempt t o 15 get an equity loan without prior withdrawal of th e 16 lien . She directed that they attempt a loan from two 17 financial organizations, and that if the prospective 18 lenders denied the loans on the grounds that the lien 19 was pending, then Appeals would consider withdrawing 20 the Notice of Federal Tax Lien . The letter directed 21 that these attempts be .documented by February 26 , 22 2009 . Mr . Day spoke with the Credit Union throug h 23 which he had an equity line of credit, to see whether 24 he could borrow through it, but he was told he coul d 25 not . He never reported this attempt to Appeals . Heritage Reporting Corporation (202) 628-4888 1 did not respond by the February 26 deadline, but in 2 early March he sent two faxes to the SO stating his 3 desire to confer about "further information to b e 4 submitted" . Mr . Day and the SO then spoke on March 5 16, 2009 . He said that he preferred not to make a n OIC but to have the lien released so that he could 7 obtain a loan to pay off the IRS . The SO explained 8 again that he would need to document loan attempts 9 that were impeded by the lien the .same thing she 10 had requested be provided by February 26, 18 day s 11 earlier . She also noted that the Form 433-A showed an 12 ability to pay in,full, and that if the value of his 13 house had changed, he could file a new OIC or perhaps 14 qualify for an installment agreement . (Ex . 10-R .) She 15 agreed to let him submit the documentation as late as 16 March 23 (one week later), but denied his request to 17 be given until April 5 because of an out-of-tow n 18 business trip he had to take . (12-P .) The S O 19 asked him if he could try to go to a .20 lender before he leaves town this weekend to call 21 me on 3/23 at 1 :15 PSDST to let me know the status 22 and then I will . let him know about any furthe r 23 extensions since he has already surpassed the 24 previous deadline . 25 (Ex . 10-R .) When Mr . Day did not produc e Heritage Reporting Corporation (202) 628-4888 8 1 the documentation by March 23, the SO telephoned hi m 2 and left a message that if she "did not hear back from 3 him today I will issue determination letter" . Mr . Day 4 did not call her back, and on April 1 she called hi m 5 again and left a message asking him "to let me know if 6 he has done any investigating into whether the NFT L 7 would prevent him from being able to secure a loan" . 8 (Ex . l0-R . ) 9 However, Mr . Day considered the process of 10 applying for loans without prior removal of the lien 11 to be "a huge, impossible exercise in futility . I 12 simply gave up at this point ." (Ex . 16-P . ) 13 On April 16, 2009, Appeals issued a notice 14 of determination (Ex . 7-J) sustaining the filing o f 15 the notice of lien . It advised the Days of their 16 right to appeal the determination to the Tax Court, 17 and they timely filed their petition in this Court on 18 May 13, 2009 . At that time they resided in Hawaii . 19 (Stip . 1 .) . 20 Opinion . 21 I . "Collection Due Process" review . 22 When a taxpayer fails to pay any Federal 23 income tax liability after demand, section 632 1 24 imposes a lien in favor of the United States on all . 25 the property of the delinquent taxpayer, and section Heritage Reporting Corporation (202) 628-4888 9 1 6323 authorizes the IRS to file notice of that lien . 2 However, within 5 business days after filing a notice 3 of tax lien, the IRS must provide written notice o f 4 that filing to the taxpayer . Sec . 6320(a) . After 5 receiving such a notice, the taxpayer may, within 30 6 days, request an administrative hearing before th e 7 Office of Appeals . Sec . 6320(a) (3) (B) and (b) (1) . 8 Administrative review is carried out by way of a 9 hearing before the office of Appeals pursuant t o 10 section 6320(b) and (c) (which references sectio n 11 6330(b) and (c)) ; and, if the taxpayer is dissatisfied 12 with the outcome there, he can appeal tha t 13 determination to the Tax Court within 30 days under 14 sections 6320(c) and 6330(d) . 15 In the case of a notice of lien, section 16 6320(c) provides that the procedures for the 17 agency-level CDP hearing before the office of Appeals 18 are set forth in section 6330(c) : 19 First, the IRS Appeals officer must 20 "obtain verification from the Secretary that the 21 requirements of any applicable law or administrative 22 procedure have been met ." Sec . 6330(c)(1) . The 23 notice of determination sets forth the IRS' s 24 compliance with these requirements ; and the Days made 25 no challenge as to verification in their petition o r Heritage Reporting Corporation (202) 628-4888 1 0 1 at trial . 2 Second, the taxpayer may "raise at th e 3 hearing any relevant issue relating to the unpaid tax 4 or the proposed [collection action], including " 5 challenges to the appropriateness of the collection 6 action and offers of collection alternatives . Sec . 7 6330(c)(1)(A) . The Days' contentions pertain to that 8 second set of issues, which we will discuss below . 9 Under certain conditions the taxpayer may 10 challenge the existence and amount of the underlying 11 tax liability, sec 6330(c)(2)(B), but the Days made no 12 such challenge in the CDP proceedings, in thei r 13 petition, or at trial, so the existence and amount of 14 the liabilities are not at issue . 15 Finally, the appeals officer mus t 16 determine "whether any proposed collection action 17 balances the need for the efficient collection o f 18 taxes with the legitimate concern of the person that 19 any collection action be no more intrusive tha n 20 necessary" . The notice of determination undertook 21 such a balancing, and found that "retaining the NFTL 22 balances the need for efficient collection with your 23 concern that any collection action be no mor e 24 intrusive than necessary" . Some of the Days ' 25 contentions could be cast in terms of "balancing" or Heritage Reporting Corporation (202) 628-4888 1 1 1 "intrusiveness" ; but they have made no distinc t 2 contentions in . this regard, and we consider their 3 contentions instead as challenges to th e 4 appropriateness of the collection action under section 5 6330 (c) (2) (A ) 6 Thus, we have no occasion here to address 7 verification, challenges to underlying liability, o r 8 intrusiveness, and we address now the appropriateness 9 of the collection action . 10 II . Application of CDP principles to this 11 case . 12 Where the underlying liability is not at 13 issue, we review the appeals officer's determinations 14 regarding the collection action for an abuse o f 15 discretion . Goza v . Commissioner, 114 T .C . 176 16 (2000) . Accordingly, we review the IRS' s 17 determination in this case for abuse of discretion ; 18 that is, whether the determination was arbitrary, 19 capricious, or without sound basis in fact or law . 20 See Murphy v . Commissioner, 125 T .C . 301, 320 (2005), 21 affd . 469 F .3d 27 (1st Cir . 2006) ; Sego v . 22 Commissioner, 114 T .C . 604, 610 (2000) . We do no t 23 substitute our own judgment for the appeals officer's 24 and attempt to decide how, in our opinion, she might 25 best have handled the Days' situation . Rather, we Heritage Reporting Corporation (202) 628-4888 1 2 1 decide whether the appeals officer abused he r 2 discretion in making the determination she made . The 3 Days' pretrial memorandum lists five issues, one o f 4 which is general ("Whether Petitioners are entitled to 5 any relief . . ."), and the other four of which (numbered 6 2 through 5) we address here, along with an additional 7 contention not stated explicitly in their list o f 8 issues . 9 A . Denial of OIC . 10 The Days contend that " it was an abuse of 11 discretion for the OIC Reviewing officer to den y 12 petitioners an OIC based on an erroneous real property 13 valuation ." The contention fails because in thi s 14 proceeding we review not, the OIC Reviewing Officer's 15 action but the subsequent and distinct action of the 16 CDP hearing officer . The Days submitted no OIC t o 17 Appeals during their CDP. proceeding, although Appeals 18 informed them that they were free to do so . It was 19 not an abuse of discretion for an appeals officer to 20 fail to consider a collection alternative when th e 21 taxpayer had proposed none . Kendricks v . 22 Commissioner , 124 T .C . 69, 79 (2005) . 23 Moreover, the Days withdrew their OIC and 24 therefore cannot complain that it was not accepted . 25 In addition, the Office of Appeals cannot be faulte d Heritage Reporting Corporation (202) 628-4888 1 3 1 for accepting the Days' representations about the 2 value of their property . Once the Days had asserted 3 an $800,000 value, it was clearly incumbent upon them 4 to substantiate (not merely to assert) a lower value . 5 B . "Premature" lien . 6 The Days contend that "it was an abuse of 7 discretion for the OIC Reviewing Officer to file a 8 NFTL, having accepted OIC payments, without givin g 9 petitioners an opportunity first to resolve the matter 10 without the imposition of the lien ." The contention 11 must fail to the extent it is directed to the OI C 12 Reviewing Officer, for the reasons noted above . It 13 must also fail, even when considered with respect to 14 the CDP hearing officer's sustaining the lien filing, 15 for several reasons . First, the IRS was entitled to 16 file a notice of lien without regard to the Days ' 17 making an OIC, and without allowing the passage of 18 time . When the Days' tax liability arose, the lien 19 existed as a matter of law ; and when they failed to 20 pay the tax after notice and demand, the statut e 21 entitled the IRS to file the notice of lien . Second, 22 the OIC the Days submitted explicitly acknowledged 23 that the IRS was entitled to file a notice of lien 24 while considering the OIC . See Baltic v . 25 Commissioner, 129 T .C . 178, 180 n .4 (2007) (affirmin g Heritage Reporting Corporation (202) 628-4888 14 1 the IRS's sustaining a lien notice while it considered 2 the taxpayer's OIC, and stating that sectio n 3 6331(k)(1) "generally blocks the IRS from collecting 4 taxes by levy (though not by lien) while an OIC i s 5 pending") ; Schropp v . Commissioner, T .C . Memo . 6 2010-71, slip op . at 22-23 . 7 C . Lien "based on an erroneous real 8 property valuation" . 9 The Days contend that "it was an abuse of 10 discretion for the OIC Reviewing Officer to file a 11 NFTL, having accepted OIC payments, based on a n 12 erroneous real property valuation ." Again, we review 13 here only the action of the CDP hearing officer i n 14 sustaining the filing of a notice of lien . In tha t 15 context, as in the OIC consideration context, the only 16 written statement of value that the Days gave t o 17 Appeals was the $800,000 value stated on the Form 18 433-A, which the Days submitted to Appeals for a 19 second time without revision . No later than March 16, 20 2009, the SO noted that if the value of the Days ' 21 house had changed, they could submit a new OIC -- 22 which would have involved submitting an up-to-dat e 23 financial statement on Form 433-A, with a statement of 24 the value of the property -- but the Days made no such 25 submission . The Office of Appeals did not abuse it s Heritage Reporting Corporation (202) 628-4888 1 5 1 discretion by requiring written documentation of the 2 value of the house, rather than accepting Mr . Day's 3 telephonic comment about its value . 4 D . Unreasonable requirement of loan 5 attempts . 6 The Days contend in their pre-trial 7 memorandum that Appeals abused its discretion b y 8 declining to consider releasing the lien until after 9 the Days could document two loan attempts denie d 10 because of the lien, which the Days considered a 11 "futile exercise", and by giving Mr . Day only until 12 March 23, 2009, to document his attempts . In fact, 13 the SO had already extended an original February 26 14 due date, and she required only that by the new March 15 23 date Mr . Day would "go to a lender" and "let me 16 know the status ." Appeals is entitled to se t 17 deadlines of this sort . See Shanley v . Commissioner, 18 T .C . Memo . 2009-17 . Mr . Day did not explain why he 19 did not inform the SO of his failed attempt to get a 20 loan frog-the credit union . The explanation seems to 21 be, as he wrote on May 7, 2009, "I simply gave up ." 22 (Ex . 16-P .) Appeals had good reason to wonder whether 23 the Days were now simply stringing Appeals along, and 24 Mr . Day's failure to make any response to the messages 25 gave them reason to conclude that the Days ha d Heritage Reporting Corporation (202) 628-4888 16 1 effectively bailed out of the CDP process . Appeal s 2 did not abuse its discretion by imposing deadlines for 3 the Days to show their attempts at getting a loan . 4 E . Abatement of interest and penalties . 5 The Days contend that they are entitled to 6 an abatement of interest and penalties on the 7 liabilities at issue for the 18-month period December 8 15, 2005, through June 28, 2007, because IRS personnel 9 supposedly told them to delay paying . However , 10 Mr . Day admits that they did not make this contention 11 at any point during the agency-level CDP hearing (from 12 April 2008 to April 2009), nor in their petition i n 13 this Tax Court CDP case, nor at any time prior to the 14 week before trial . We can review here only the 15 determinations of the office of Appeals, and any issue 16 or argument that the Days failed to make befor e 17 Appeals is not properly before us . We cannot conclud e 18 that Appeals abused its discretion by failing t 19 address issues that the Days never raised, or failin g 20 . to consider information that was never put before it . 21 Moreover, we have jurisdiction under section 6404(h) 22 to review a failure by the IRS to abate interest only 23 after a determination by the IRS denying the 24 abatement . Since the Days never requested an 25 abatement from the IRS, there is no determination fo r Heritage Reporting Corporation (202) 628-4888 1 7 1 us to review . 2 An appropriate order will be issued, 3 affirming the IRS's determination to sustain the 4 filing of a notice of Federal Tax Lien . 5 This concludes the Court ' s Oral Findings 6 of Fact and Opinion in this case . 7 (Whereupon , at 5 :16 p .m ., the bench opinion in 8 the above - entitled matter was concluded . ) 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 17 18 19 2 0 2 1 2 2 2 3 24 25 Heritage Reporting Corporation (202) 628-4888