TAX COURT OPINION

Case: John K. Kilbourne
Docket Number: 23328-14L
Judge: Marvel
Opinion Type: bench
Filed: 10/23/2015
Pages: 13

RS UNITED STATES TAX COURT WASHINGTON, DC 20217 JOHN K. KILBOURNE, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) Docket No. 23328-14 L ) ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioner and to respondent a copy of the pages of the transcript of the proceedings of the above case before Judge L. Paige Marvel at Seattle, Washington, on October 2, 2015, containing the Court's oral findings of fact and opinion. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) L. Paige Marvel Judge Dated: Washington, D.C. October 23, 2015 SERVED Oct 26 2015 Capital Reporting Company 3 1 Bench Opinion by Judge L. Paige Marvel 2 October 2, 2015 3 4 5 6 7 8 9 10 11 12 13 14 15 16 l'! 18 19 John K. Kilbourne v. Commissioner Docket No. 23328-14L 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. The 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 Section 7459(b) of the Internal Revenue Code of 1986 as amended and Rule 152 of the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, subsequent section references made in this bench opinion are to the Internal Revenue Code of 1986 as amended in effect for the relevant period, and Rule references are to the Tax Court Rules of Practice and Procedure. Scott A. Schumacher, John A. Clynch, Jr., and 20 Melinda E. Iwen appeared on behalf of petitioner. 21 22 23 24 25 Lisa M. Oshiro appeared on behalf of respondent. Petitioner petitioned this Court pursuant to Section 6330(d)(1) to review an adverse determination by the Internal Revenue Service (IRS) Appeals Office (Appeals Office) upholding å proposed cyc A to 866.488.DEPO www.CapitalReportingCompany.com 0\ I Capital Reporting Company 4 collect unpaid Federal income tax liabilities for the 2008 and 2010 taxable years. The issue we must decide is whether respondent's Appeals Office abused its discretion in upholding the proposed levy and in rejecting the proposed offer-in-compromise. BACKGROUND The parties submitted this case fully stipulated to Rule 122. We find facts in accordance with the stipulations of fact, which we incorporate in this opinion by this reference. Petitioner resided in the State of Washington when he petitioned this Court. In 1994, petitioner and his spouse founded a design company. They invested $400,000 to improve a 10,000-square-foot facility and at one time employed up to 25 people. In 2005, petitioner hired a controller to manage the company's finances. In 2007, petitioner's spouse began suffering from health problems, and petitioner had to rely more heavily on the company's controller. Due to a variety of issues, some involving petitioner's controller, the business ceased operations in 2009. In 2010, petitioner started a new design company, Level Design, which he ran from his home. In 2011, foreclosure proceedings began on 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com , Capital Reporting Company 5 1 petitioner's house and were completed in 2012. 2 Petitioner and his spouse subsequently moved into the 3 4 5 6 7 8 9 basement of a friend's house and operated the business from there. They continue to live in the basement and operate the business. During 2011-2013, petitioner reported that he had net business income h6M7-(o of ©5, 125, $13,559, and $93,981, respectively. On June 20, 2013, respondent sent petitioner a Letter 1058, Final Notice of Intent to Levy and 10 Notice of Your Right to a Hearing with respect to his 11 12 13 14 15 16 17 18 19 20 21 22 2008 and 2010 unpaid Federal income tax liabilities (liabilities at issue). Petitioner timely filed, on June 24, 2013, a Form 12153, Request for a Collection Due Process or Equivalent Hearing and requested an offer-in-compromise. On September 30, 2013, petitioner submitted a Form 656, Offer-in-Compromise, which would settle petitioner's liabilities at issue and other outstanding tax liabilities not at issue, totaling $154,347.39 as of July 31, 2014, for $10 on the basis of doubt as to c (September 30 offer). Settlement Officer Charles Duff (Settlement Officer 23 Duff) reviewed the September 30 offer, calculated 24 25 that petitioner could fully pay his outstanding tax liabilities through an installment agreement, and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 determined that petitioner was not eligible for an offer-in-compromise. Petitioner's case was subsequently transferred to Settlement Officer Kimberly Lewis (Settlement Officer Lewis) to conduct a Section 6330 conference on August 5, 2014. Be fax dated August 5, 2014, petitioner increased his September 30 offer to $14,064 (August 5 offer) because his business income had increased. 9 Petitioner calculated the August 5 offer amount by 10 multiplying the net difference after subtracting his 11 total personal monthly expenses from his gross 12 monthly income by 12. Petitioner calculated his 13 14 gross monthly business income by averaging his business income over a three-year period, 2011-2013. 15 Petitioner contended that averaging his income over a 16 17 18 19 three-year period to determine his monthly income was appropriate because of his past business troubles and the cyclical nature of the housing market. Settlement Officer Lewis disagreed with 20 petitioner's calculation of his net monthly income 21 22 and recalculated it in order to determine petitioner's ability to pay. She rejected 23 petitioner's use of a three-year average to calculate 24 25 his monthly income and instead used a number derived by adding petitioner's 2013 self-employment income 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 from his business and income earned by petitioner's spouse. Settlement Officer Lewis used petitioner's 2013 self-employment income because 2013 was the most recently completed taxable year available to her at the time. After allowing for expenses, Settlement 6 Officer Lewis calculated that petitioner could pay 7 8 $5,375 per month, and she determined that an installment agreement requiring monthly payments 9 would enable petitioner to fully pay his liabilities 10 within the applicable period of limitations for 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 collection. During the Section 6330 conference, petitioner's representative requested that petitioner's income be averaged over a 3-year period, 2011 through 2013, because his income had fluctuated substantially over that time period. Settlement Officer Lewis explained that averaging petitioner's income was not appropriate because petitioner could fully pay his tax liabilities under an installment agreement, and she could not consider an offer-in-compromise if petitioner could fully pay his liabilities with an installment agreement. Settlement Officer Lewis stated that economic downturn is not a special circumstance that justified accepting an offer-in- compromise under these circumstances. She did agree 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 though that a lower monthly payment was appropriate and proposed an installment agreement that required petitioner to pay $2,560 per month for 71 months. Petitioner's representative requested an installment agreement with lower monthly payments and a longer payment period, but Settlement Officer Lewis did not accept the offer because the proposed installment agreement would not generate sufficient funds to fully pay all of petitioner's liabilities before the period of limitations for collection expired with respect to some of those liabilities. 12 Petitioner declined the proposed installment 13 14 15 16 17 18 19 20 21 22 23 24 25 agreement of $2,560 per month. The Appeals Office issued a notice of determination dated August 27, 2014, sustaining the proposed levy. DISCUSSION Section 6331(a) provides that if any person liable to pay any tax neglects or refuses to pay the tax within ten days after notice and demand, the Commissioner may collect the tax by levying upon the person's property or rights to property. Section 6330(a) (1), however, provides that the Commissioner may not levy unless he has first informed the taxpayer in writing of his right to a hearing. If 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 the taxpayer timely requests a hearing, the hearing 2 must be held before an impartial officer or employee 3 4 5 6 7 8 9 10 11 12 13 14 15 of the Appeals Office. Sec. 6330(b)(1), (3). During the Section 6330 hearing, the taxpayer may raise any relevant issue, including appropriate spousal defenses, challenges to the appropriateness of the collection action, and collection alternatives. Sec. 6330(c)(2) (A). The taxpayer may also dispute the existence or amount of the underlying tax liability, but only if he did not receive a notice of deficiency or did not have a prior opportunity to dispute the liability. Sec. 6330(c)(2) (B); Sego v. Commissioner, 114 T.C. 604, 609 (2000). Following the Section 6330 hearing, the Appeals 16 Office must determine whether the proposed levy may 17 18 19 20 21 22 23 24 25 proceed. The Appeals Office is required to take into consider.ation: (1) verification presented by the Secretary that the requirements of applicable law and administrative procedure have been met; (2) relevant issues raised by the taxpayer; and (3) whether the proposed collection action appropriately balances the need for efficient collection of taxes with the taxpayer's concerns regarding the intrusiveness of the proposed collection action. Sec. 6330(c)(3). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 This Court has jurisdiction to review the Appeals Office's determination. Sec. 6330(d)(1). 3 When, like in this case, the underlying liability is 4 5 6 7 8 not in issue, we review the determination for abuse of discretion. Sego v. Commissioner, 114 T.C. at 610. We will not conclude that a determination is an abuse of discretion unless it is arbitrary, capricious, or without sound basis in fact or law. 9 Woodral v. Commissioner, 112 T.C. 19, 23 (1999). 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Section 7122(a) authorizes the IRS to compromise any civil or criminal case arising under the Code. Section 7122(d)(1) requires the Secretary to prescribe guidelines to determine whether an offer- in-compromise should be accepted. The Secretary is authorized to accept an offer-in-compromise: (1) to promote effective tax administration; (2) when doubt as to liability exists; or (3) when doubt as to collectability exists. Sec. 301.7122-1(a) and (b), Proced. & Admin. Regs. Doubt as to collectability exists when a taxpayer's net assets and income are less than the tax liabilities that the taxpayer owes. Id. Para. (b)(2). A determination of doubt as to collectability must include a calculation of the taxpayer's ability to pay. See Internal Revenue 25 Manual (IRM) pt. 5.8.5.2(1) (Sept. 30, 2013). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 The taxpayer is not eligible for an offer-in- compromise if he can fully pay the tax liabilities 3 within the collection period. See IRM pt. 4 5 6 7 8 5.8.5.2(3). A taxpayer has the ability to pay if the taxpayer can fully pay the tax liabilities through an installment agreement. Id. . 5.8.5.2(2). In order to determine if a taxpayer has the ability to pay under an installment agreement, the IRS Appeals 9 Office determines the taxpayer's monthly gross income 10 11 12 13 14 15 and subtracts allowable monthly living expenses. Id. 5.8.5.20(1) (Sept. 30, 2013)-. The Appeals Office calculates a taxpayer's self-employment income for installment agreement purposes as the amount earned after paying ordinary and necessary business çk. expenses. Id. PA 5.15.1.11(2)(c)(Oct. 2, 2012). 16 When evaluating a taxpayer's self-employment income, 17 18 19 20 21 22 23 24 25 the IRM states that "the income and expense information provided must reflect a sufficient time frame to accurately determine the monthly average that could be expected for the entire year." Id. The only issue that petitioner raised in his petition is that the Appeals Office should not have relied solely on his 2013 self-employment income to determine whether petitioner had the ability to pay his tax liabilities through an installment agreement. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 Petitioner asserts that the 2013 taxable year was an 2 3 4 5 6 7 8 insufficient time frame to accurately determine his income and that his income should have been averaged over the 2011-2013 time period. Respondent contends that petitioner's 2013 income was a reliable indicator of his income and that the Appeals Office was not required to average petitioner's income. The Appeals Office was not required to average 9 petitioner's income over a three-year period in 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 determining whether petitioner could fully pay his tax liabilities through an installment agreement. The IRM requires only that the Appeals Office consider a "sufficient time frame to determine the monthly average that could be expected for the entire year" when evaluating whether a taxpayer has the ability to pay through an installment agreement. Id. In this case, the Appeals Office calculated petitioner's ability to pay using income information from the then most recent complete taxable year, 2013. The record does not support a finding that petitioner's 2013 income was an insufficient or inadequate base for determining petitioner's monthly income. Even if Settlement Officer Lewis had discretion under the Internal Revenue Manual to average a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 5 taxpayer's income over a defined period of time, her decision in this case not to do so and to rely instead on petitioner's self-employment income for 2013 was not an abuse of discretion. Petitioner's previous business ceased operations in 2009. 6 Petitioner declared bankruptcy in 2010. During 2011 7 8 9 10 11 12 13 14 15 16 and 2012, petitioner's home was in a foreclosure proceeding. Petitioner's taxable year 2013 was the first year since 2009 that petitioner had suffered no personal or business financial catastrophes and the income earned by petitioner during 2013 was the most reliable or at least a reasonable indicator of petitioner's income potential that was available to Settlement Officer Lewis when she made her calculation. Petitioner has not demonstrated that Settlement 17 Officer Lewis abused her discretion in determining 18 19 20 21 22 23 24 that petitioner could fully pay his outstanding liabilities with an installment agreement or that the Appeals Office abused its discretion in determining that petitioner's offer-in-compromise should be rejected. The administrative record establishes that the Appeals Office took all of the steps required by Section 6330(c), the settlement officer addressed 25 petitioner's relevant issue regarding his income, and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 the settlement officer properly concluded that the IRS could proceed with collection. On the record before us, we find no abuse of discretion by the Appeals Office in sustaining the determination to proceed with collection. To reflect the foregoing, decision will be entered for respondent. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 9:49 a.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com