TAX COURT OPINION

Case: Aaron L. & Pamela J. Sadler
Docket Number: 11189-11L
Judge: Gustafson
Opinion Type: bench
Filed: 12/14/2012
Pages: 27

UNITED STATES TAX COURT WASHINGTON, DC 20217 AARON L. & PAMELA J. SADLER, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent CLC 11189-11 L. ) ) ) ) ) Docket No. ) ) ) ) O R D E R Pursuant to the opinion of the Court as set forth in the pages of the transcript of the proceedings before Judge David Gustafson in Denver, Colorado, on November 28, 2012, containing his oral findings of fact and opinion, it is 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 Gustafson at Washington, D.C., containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, an appropriate order remanding the case to the IRS's Office of Appeals will be issued. (Signed) David Gustafson Judge Dated. Washington, D.C. December 14, 2012 SERVED Dec 14 2012 Capital Reporting Company 3 1 2 3 4 5 6 Bench Opinion by Judge David Gustafson November 28, 2012 Aaron L. and Pamela J. Sadler Docket No. 11189-11L THE COURT: The Court has decided to render the following as its oral Findings of Fact and 7 Opinion in this case, which shall not be relied on as 8 9 10 11 12 13 14 precedent in any other case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code, and Rule 152 of the Tax Court Rules of Practice and Procedure. This "collection due process" ("CDP") case is an appeal by petitioners Aaron and Pamela Sadler, pursuant to 26 U.S.C. section 6330 (d), asking this 15 Court to review the IRS's determination to sustain a 16 17 18 proposed levy to collect petitioners' unpaid income tax, penalties, and additions to tax for the two years 1999 and 2000. Trial was held in Denver, 19 Colorado, on November 26 and 27, 2012. Mr. Sadler 20 21 22 23 24 25 represented the petitioners, and Melinda K. Fisher represented respondent. The Sadlers attempt to challenge their underlying liability for the taxes, penalties, and additions to tax for both years, and they allege that the IRS's Office of Appeals erred by declining to consider that challenge, by failing to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 verify that their tax had been validly assessed, and by failing to consider collection alternatives to its proposed levy. The IRS defends Appeals' handling of the Sadlers' case, except it admits that Appeals erred to the extent it failed to allow the Sadlers to challenge their liability for the addition to tax under section 6651(a) (3) for failure to pay the tax after notice and demand. We accept the IRS's concession, and we also find that Appeals erred by failing adequately to verify the validity of the assessments for purposes of section 6330 (c) (1). We 12 will therefore remand the case to Appeals for 13 14 15 16 17 18 19 20 21 22 23 24 25 appropriate consideration of those particular issues; but we otherwise find no abuse of discretion in Appeals' handling of the case. FINDINGS OF FACT The parties' stipulation of facts is incorporated herein by this reference (except that petitioners do not in fact stipulate to paragraphs 6 and 15). At the time they filed their petition in this Court, the Sadlers resided in Texas. (Stip. 1.) We further find the following facts: IRS examination of the Sadlers' returns Mr. Sadler owns and runs a construction business. The Sadlers filed their 1999 Federal income 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 tax return in April 2000 and filed their 2000 return in May 2001. (Stip. 4-5.) The IRS examined the returns, and the principal adjustments that they proposed related to Mr. Sadler's construction business; those adjustments were for cost of goods sold ("COGS") in both years and gross receipts in 1999. The Sadlers did not receive a statutory notice of deficiency for those years pursuant to section 6212, but for both years the IRS assessed against them additional tax, accuracy-related penalties, and interest in June 2003. The tax assessment alone for 1999 was $395,060 and for 2000 was $594,165. (Ex. 26- R.) Failed attempt at audit reconsideration With the help of an enrolled agent, the Sadlers requested audit reconsideration, perhaps as early as October 2003. It appears that IRS collection personnel had either filed or proposed to file a notice of federal tax lien (which is not before us in this levy-only case), and the Sadlers requested review of the lien by the Office of Appeals. Whether prompted in part by the request for audit reconsideration or prompted solely by the request for review of the lien, Appeals recommended in February 2004 that the Sadlers receive audit reconsideration. 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 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 (Ex. 28-P.) When months passed and no such reconsideration had taken place, the Sadlers' representative inquired and learned that their exam file had been lost. She was advised that the only way she could prompt reconsideration of the Sadlers' liability was to make an Offer in Compromise ("OIC") based on doubt as to liability ("DATL"). She therefore submitted such an OIC in April 2005. (Stip. 8, Ex. 21-R.) For 15 months, nothing more happened. When the representative inquired, she learned that their OIC had been lost, and she was asked to send a copy of the OIC, which she did. When another year went by with still no action, and the IRS had once again lost the Sadlers' file (Ex. 27-P), their representative invoked the assistance of the National Taxpayer Advocate (NTA). 18 Audit reconsideration 19 20 21 22 23 24 25 The NTA was able to get the matter assigned to a Revenue Agent in May 2007. (Ex. 30-P.) In December 2007 the Revenue Agent eventually determined that COGS for 1999 should be adjusted as the Sadlers contended, but did not adjust gross receipts for 1999 nor COGS for 2000. (Ex. 26-R.) For tax year 1999, tax was abated in April 2008 in the amount of $463,487 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 (Ex. 20-R); but this still left a substantial tax liability assessed and unpaid, and in addition the Sadlers reasonably believed that the 1999 penalty had not been adjusted and abated commensurate with the tax abatement that the IRS had admitted was appropriate. The OIC was rejected (apparently in 7 March 2008). 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 The Sadlers contend that they never received audit reconsideration, but we find that, to the extent this assertion is relevant, it is not correct. The Revenue Agent did reconsider their case, did make some of the adjustments that they argued for, and did effectuate a substantial abatement of tax. It may be that the Sadlers received an inadequate reconsideration, or that the reconsideration did not correct all the errors inherent in the prior assessment; but it is clear that audit reconsideration took place. Review by IRS Appeals In April 2008, about a month after the OIC had been rejected, the Sadlers requested that Appeals review the OIC rejection and the related audit issues. Appeals did review the matter. The Appeals 24 Officer assigned was Richard Gullion, who testified 25 at trial. In 2009 he prepared a "Summary and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 Recommendation" memorandum (Ex. 26-R) that described the history of the case, the issues for which the Sadlers wanted reconsideration, the agent's rationale, and the reasons that Mr. Gullion believed no further adjustment was appropriate. His superior accepted his recommendation and signed a letter to the Sadlers (Ex. 21-R)dated March 17, 2009, which sustained the rejection of the OIC. It is true, as the Sadlers point out, that Appeals' letter uses language--"an amount larger than the offer appears to be collectible"--that appears to be form language composed to address an OIC based not on DATL (as the Sadlers' was) but on doubt as to collectability ("DATC") . Nonetheless, it is clear that Appeals did consider the Sadlers' liability for 1999 and 2000. On May 7, 2009, the IRS sent letters (Ex. 29-P) to both of the Sadlers, informing them that the agency had again lost unspecified information of theirs and apologizing for the loss. CDP request By June 2010 the Sadlers' 1999 and 2000 liabilities, with penalties, additions to tax, and interest, totaled over $1.3 million. (The IRS admits that their liabilities include additions to tax under 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 9 1 2 3 section 6651(a) (3) for failure to pay after notice and demand.) When the Sadlers did not pay that amount, the IRS served on them a "Final Notice / 4 Notice of Intent to Levy and Notice of Your Right to 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 a Hearing" dated June 23, 2010. (Ex. 1-R.) (Mr. Sadler testified that he believed that the IRS also sent him a notice of Federal tax lien. However, his testimony was vague; neither a June 2010 notice of lien nor any document referring to such a notice is in our record; and it appears that, after the passage of time, Mr. Sadler may be mis- remembering an earlier notice of lien that gave rise to Appeals' February 2004 recommendation that the Sadlers receive audit reconsideration. In any event, there is no evidence that any CDP hearing was requested with respect to any notice of lien, nor that Appeals issued any determination with respect to such a notice; and we have no jurisdiction in this case to take any action with respect to any lien. 20 Offiler v. Commissioner, 114 T.C. 492, 498 (2000) 21 22 23 24 25 (jurisdiction under section 6330 (d) "is dependent on the issuance of a valid notice of determination and a timely petition for review"); see also Parker v. Commissioner, 117 T.C. 63, 66 (2001) (liens and levies are separate collection actions for purposes 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 of sections 6320 and 6330).) Rather, in response to the final notice of proposed levy, the Sadlers' representative prepared and timely filed with the IRS a "Request for 5 Collection Due Process or Equivalent Hearing" (Form 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 12153) dated July 22, 2010 (Ex. 2-R). On line 5 on the second page, only the levy box was checked (not the lien box), and no boxes were checked in line 7 requesting lien-related remedies. Instead, boxes were checked indicating that the Sadlers wanted an "Installment Agreement" ("IA") or an OIC. An attachment to the Form 12153 requested that they be placed in uncollectible status, that they have an OIC based on doubt as to collectability ("DATC") or effective tax administration ("ETA"), or an IA. On the Sadlers' Form 12153 the box for "Innocent Spouse Relief" was not checked, and no Form 8857 ("Request for Innocent Spouse Relief") was attached. CDP hearing In response to the Sadlers' CDP request proposing these collection alternatives, Appeals scheduled and then rescheduled a CDP hearing, in each instance sending a letter that requested financial information from the Sadlers on Form 433-A. (Exs. 12- 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 R, 19-R.) However, at no point in the CDP process did the Sadlers provide financial information on Form 433-A or otherwise. At no point did they submit or even propose an OIC (other than based on DATL) or an IA. Rather, the Sadlers were chiefly interested in obtaining reconsideration of the audit issues that Appeals had previously considered. For reasons we cannot tell and that they cannot recall, neither they nor their representative attended the rescheduled face-to-face hearing that they had requested. In a telephone conversation with Appeals on February 10, 2010 (see Ex. 16-R), Mr. Sadler pressed their need for reconsideration of their audit issues; he offered to provide information about those issues; and he brought up again the idea of an OIC based on DATL. When the Settlement Officer assigned to their case resisted their challenge to the 1999 and 2000 liabilities (i.e., by saying she could not consider an OIC based on DATL, or that she would not consider their additional evidence on the audit issues), Mr. Sadler evidently interpreted this as stubbornness on the part of the Settlement Officer, and as evidence of unwillingness to give the Sadlers a real hearing. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Moreover, Mr. Sadler testified that he intentionally 25 refrained from submitting financial information on 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 Form 433-A because he believed that the IRS would use it only to identify assets to seize and not to evaluate collection alternatives. The Sadlers did not offer during the CDP hearing any evidence or argument on the subject of innocent spouse relief for Mrs. Sadler under section 6015. The Settlement Officer's "Case Activity Record Print" (Ex. 16-R) indicates that, during the February 2010 telephone conversation, Mr. Sadler supposedly "did confirmed [sic] receipt of the SNOD"- -i.e., the statutory notice of deficiency--and Appeals' eventual notice of determination repeated this supposed admission (see Ex. 25-R at 3). However, we find that Mr. Sadler did not knowingly make such an admission. He testified--and we believe--that he did not receive a notice of deficiency and that he did not say that he did. The settlement officer did not testify, cf. Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946) (negative inference), aff'd, 162 F.2d 513 (10th Cir. 1947), leaving us unable to explain whether the discrepancy between Mr. Sadler's testimony (and our finding) and the statement in the Settlement Officer's record is attributable to her faulty memory of the event, or 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 13 1 2 3 4 5 6 7 8 9 her use of inapplicable boilerplate language in preparing her notes, or her use of unclear language in attempting to raise the question with him. (We doubt that most taxpayers understand the terms "statutory notice of deficiency", "SNOD", "notice of deficiency", "deficiency notice", or "stat notice" or that they know the difference between such a document and any other very different document from the IRS that states an amount due.) We find that the Appeals 10 Officer did not intelligibly ask Mr. Sadler whether 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 he received a notice of deficiency and that he therefore made no admission that he had received one. The CDP hearing record includes a year 2000 transcript (Ex. 20-R) that shows an entry for "Additional tax assessed by examination" with code 300 (which counsel, not a witness, explained means an assessment that would necessarily have been based on a notice of deficiency). However, the 2000 transcript does not include a separate entry explicitly showing the issuance of a notice of deficiency. The CDP hearing does not contain a 1999 transcript, as far as we can tell (Exhibits 11-R and 18-R are inscrutable to us, and no witness explained them); and neither the CDP hearing record nor our trial record includes for 1999 any "Certificate of Assessments and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 2 3 4 5 6 7 Payments" or equivalent English- language transcript that is intelligible to us. Moreover, the CDP hearing record does not include (and respondent has never obtained or produced) a copy of the statutory notice of deficiency for the Sadlers' 1999 and 2000 tax liabilities alleged to have been issued in 2003, nor a record of mailing of a notice of deficiency. 8 Notice of determination and petition 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 On April 13, 2011, Appeals sent to the Sadlers a "Notice of Determination" (Ex. 25-R) that upheld the proposed levy. An attachment to the notice states that transcripts had been reviewed and that "[T]he administrative records indicate * * * [that t]here was a valid tax assessment." In response to the notice of determination, the Sadlers timely filed their petition with this Court on May 13, 2011. Paragraph 1 of the petition states, "Petitioners deny that the tax assessment is valid", and the petition states various complaints about the IRS's handling of their 1999 and 2000 tax years. The petition does not request or mention innocent spouse relief under section 6015. In a pretrial telephone conference and when the case was called for trial, Mr. Sadler orally 25 moved that the petitioners be granted leave to amend 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 their petition to state a claim for innocent spouse relief for Mrs. Sadler, and the IRS objected. Also before trial, on November 9, 2012, the IRS moved in limine to preclude petitioners' offering evidence to challenge their underlying liability, and the Sadlers objected. I. Collection Due Process principles OPINION If a taxpayer fails to pay any Federal income tax liability after notice and demand, section 6331(a) authorizes the IRS to collect the tax by levy on the taxpayer's property. However, Congress has added to chapter 64 of the Code certain provisions (in subchapter C, part I, and in subchapter D, part I) as "Due Process for Collections", and those provisions must be complied with before the IRS can proceed with a levy: The IRS must first issue a final notice of intent to levy and notify the taxpayer of the right to an administrative hearing before the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Office of Appeals. Sec. 6330 (a) and (b) (1). 21 At the CDP hearing, the appeals officer 22 must make a determination whether the proposed 23 24 25 collection action may proceed. The appeals officer is required to take into consideration several things: First, the Appeals Officer must verify that 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 the requirements of any applicable law and administrative procedure have been met by IRS personnel (see sec. 6330 (c) (3) (A)). The requirement in dispute here is the valid assessment of the Sadlers' liabilities for 1999 and 2000. We discuss below the Sadlers' contention that Appeals failed to verify the IRS's compliance with this requirement. Second, the Appeals Officer must consider any collection alternatives proposed by the taxpayer (see sec. 6330 (c) (3) (B), citing sec. 6330 (c) (2)). And third, the Appeals Officer must determine "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" (see sec. 6330 (c) (3)), an issue the Sadlers have not distinctly raised. Pursuant to section 6330(c) (2) (B) a taxpayer may challenge the underlying tax liability in a CDP hearing, but only if he "did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability." The Sadlers contend that they did not receive a statutory notice of deficiency (and we so find) and that they had no other prior 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 17 opportunity to challenge the liabilities the IRS asserted for 1999 and 2000 (which we discuss below). If, after the CDP hearing, the Office of Appeals then issues a notice of determination to proceed with the proposed levy, the taxpayer may appeal that determination to this Court within 30 days, as the Sadlers have done, and we now "have jurisdiction with respect to such matter." Sec. 6330 (d) (1). II. Burden of proof and standard of review As petitioners, the Sadlers bear the burden of proof. See Rule 142(a) (1). The Sadlers make no contention that the burden has shifted for any reason, and we see no basis in the record for such a contention. Where the validity of the underlying tax liability is properly at issue in the appeal of a collection determination, the Tax Court reviews de novo the determination of the underlying tax liability. Sego v. Commissioner, 114 T.C. 604, 610 (2000). Insofar as issues other than the validity of the underlying tax liability are presented, the Court reviews the administrative determination for an abuse of discretion. Id. III. Verification 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 In a CDP hearing, Appeals must verify that 18 the requirements of any applicable law and administrative procedure have been met by IRS personnel (see sec. 6330 (c) (3) (A)). A valid assessment is one of those requirements, and in a case like this one the validity of the assessment depends on the issuance of a notice of deficiency. See IRM pt. 8.22.2.2.4.7 (Dec. 14, 2010). In view of the mandatory nature of the verification requirement, "this Court will review the Appeals officer's verification under section 6330(c) (1) without regard to whether the taxpayer raised it at the Appeals hearing", Hoyle v. Commissioner, 131 T.C. 197, 202 (2008), as long as the taxpayers have adequately raised the issue in their appeal, as the Sadlers have done. Where the taxpayer in a lien or levy case before this Court contends that the appeals officer failed to obtain the requisite verification under section 6330(c) (1), the taxpayer has the burden of going forward with a prima facie case and the burden of proof on that contention. See Medical Practice Solutions v. Commissioner, T.C. Memo. 2009-14, slip op. at 16-17. The Sadlers have met that burden: First, the notice of determination 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 1 misstates the verification requirement and is thereby 19 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 equivocal on verification of a valid assessment. It states, "There is no evidence that the requirements of applicable law or administrative procedures were not met and the actions taken were not appropriate under the circumstances." (Ex. 25-R, emphasis added.) This language in the notice of determination reads almost as if it were the taxpayer's burden in the CDP hearing to come forward with evidence of agency non- compliance with the law. Rather, it is Appeals' obligation to obtain information to affirmatively verify compliance with law, an obligation that is not satisfied by noting an absence of evidence negating compliance. Second, Appeals failed to ask the taxpayers if they received a statutory notice of deficiency. Respondent argues that the Settlement Officer verified the validity of the assessment (including the issuance of a notice of deficiency) by consulting the transcript; and it is true that Appeals may use transcripts for verification, see Nestor v. Commissioner, 118 T.C. 162, 166-167 (2002). However, the 2000 transcript included, at most (if we accept the information given by counsel), an implication that a statutory notice of deficiency had been 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 20 1 2 3 4 5 issued. The Internal Revenue Manual states that the Settlement Officer should "[a]sk the taxpayer if he or she received the SNOD" (we have found that she did not so ask) and that, in the absence of the taxpayer's admission of receipt, the Settlement 6 Officer "must review (or attempt to review) the 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 underlying pre-assessment documents that show that the notice was issued and was sent to the taxpayer's last known address. This means in addition to transcripts, you should review or attempt to review the following documents, if possible: A. a copy of the SNOD and B. the certified mailing list for the SNOD to verify whether the SNOD was properly mailed to the taxpayer's last known address." IRM pt. 8.22.2.2.4.7.1(4) (emphasis added). But, third, Appeals failed to attempt to review those pre- assessment documents. Fourth, our record includes no transcript for 1999. As we noted in Medical Practice, slip op. at 18, "the absence of transcripts in the stipulated documents from the hearing record * * * leaves us unable to review his verification." When the IRS 23 moves for summary judgment in a CDP case, its 24 25 attorneys are instructed to attach to the motion a Form 4340 transcript, see Chief Counsel Notice CC- 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 21 1 2 3 4 5 6 2009-010 (Feb. 13, 2009), which is generally intelligible and can be consulted in the absence of an explaining witness, see Barnes v. Commissioner, T.C. Memo. 2010-30; and at trial, it would seem appropriate to follow the same instruction, especially when the IRS has decided not to call any 7 witness. But in any event, we lack such information 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 for 1999. Thus, we find there was inadequate verification of the issuance of a statutory notice of deficiency, and we will remand the case to Appeals so that this verification can be accomplished. Of course, if Appeals cannot verify that a proper notice of deficiency was issued to the Sadlers for 1999 and 2000, then the assessment at issue would be found invalid and collection could not proceed, which remains to be seen. III. Challenge to underlying liability Section 6330(c) (2) (B) provides that a taxpayer may challenge the underlying tax liability in a CDP hearing only if he "did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability." A. Addition to tax under section 6651(a) (3) 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 22 1 Respondent admits that the Sadlers were 2 wrongly denied the opportunity to challenge their 3 4 liability for the addition to tax under section 6651(a) (3). That section provides that the addition 5 will not be owing if "it is shown that such failure 6 7 8 9 10 11 12 13 is due to reasonable cause and not due to willful neglect", a defense that the taxpayer makes by "showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship * * * if he paid on the due date". 26 C.F.R. sec. 301.6651- 1(c) (1). Given the size of the tax debt (over $1.3 14 million) and Mr. Sadler's general testimony about his 15 16 17 18 19 20 21 22 23 24 25 family's modest means (a $200,000 house, older cars, no investments, and $3,000 in the bank) we cannot say that a remand on this point would be futile. We will therefore remand the case to Appeals so that this issue can be considered. B. Taxes and penalties Respondent contends that the Sadlers are precluded from challenging the underlying liability for the taxes and penalties both because they received a statutory notice of deficiency and because they had a prior opportunity to challenge liability 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 when they requested Appeals to review the rejection of their OIC based on DATL in late 2008 and early 2009. We have found that the Sadlers did not in fact receive a notice of deficiency, but Appeals' review of the OIC rejection was indeed a "prior opportunity". This conclusion may not be intuitive. Section 6330 (c) (2) (B) precludes a liability challenge only if the taxpayer "did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability". A reader of English might conclude that the "opportunity" is presented by the statute as parallel to a statutory notice of deficiency (especially given the word "otherwise") and that therefore the "opportunity" must be equivalent to the opportunity that one has after receiving a statutory notice--i.e., an opportunity that includes the 19 availability of judicial review of Appeals' 20 21 22 23 24 25 determination. Since there was no opportunity for judicial review of Appeals consideration of the OIC in 2008 and 2009, and no opportunity for the Sadlers to ask a Court to review the IRS's COGS and gross receipts adjustments, one might contend that they did not really have an "opportunity to dispute such tax 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 24 liability". However, the authorities that govern our decision-making hold otherwise. "[I]f Congress had intended to preclude only those taxpayers who previously enjoyed the opportunity for judicial review of the underlying liability from raising the underlying liability again in a collection review proceeding, the statute would have been drafted to clearly so provide. The fact that Congress chose not to use such explicit language leads us to believe that Congress also intended to preclude taxpayers who were previously afforded a conference with the Appeals Office from raising the underlying liabilities again in a collection review hearing and before this Court." Lewis v. Commissioner, 128 T.C. 48, 61 (2007). The Sadlers were therefore precluded from challenging, in their CDP hearing and in our review of it, their underlying liability for the taxes and penalties that Appeals previously considered. We therefore granted the IRS's motion in limine during trial. We stress that in so holding we are not by any means affirming Appeals' March 2009 determination upholding the audit. Our only role in this case is to assure that Appeals considered the matter in 2009, 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 25 not to review its conclusions. Those conclusions seem problematic to us, but since section 6330 (c) (2) (B) called for us to preclude the introduction of evidence on the liability issues, we are not in a position to decide those issues. If the Sadlers are later accorded review of these issues (by the IRS, in a refund suit, in bankruptcy, or otherwise), our holding here would certainly not estop them from disputing the issues. IV. Innocent spouse relief Relief under section 6015 from joint liability (so called "innocent spouse" relief) can be an issue in a CDP hearing. See sec. 6330 (c) (2) (A) (i) ("spousal defenses"). However, the Sadlers did not raise that issue in their CDP request or at any time in their CDP hearing. Appeals therefore had no occasion to rule for or against any such claim, and we can hardly characterize as an abuse of discretion their failure to address an issue that the Sadlers never raised. "[W]e do not have authority to consider section 6330 (c) (2) issues that were not raised before the Appeals Office." Giamelli v. Commissioner, 129 T.C. 107, 115 (2007). V. Collection alternatives The Sadlers fault Appeals for failing to 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 26 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 consider alternatives to a levy, such as an IA, an OIC, or allowing them to obtain funds by refinancing their house. However, Mr. Sadler admits that he never actually made any specific proposal for a collection alternative, and that he declined to give Appeals the financial information about the Sadlers that Appeals would have needed to evaluate their eligibility for any of those alternatives. It is not an abuse of discretion for Appeals to fail to consider a collection alternative that is never proposed, see Kendricks v. Commissioner, 124 T.C. 69, 79 (2005); and it is not an abuse of discretion to decline to accept an alternative when a taxpayer fails to provide financial information to support the alternative, see Huntress v. Commissioner, T.C. Memo. 2009-161. Therefore, we hold that Appeals did not abuse its discretion by failing to consider and agree to a collection alternative. We note that our holding does not preclude the Sadlers from offering, nor the IRS from accepting, a collection alternative in the future. 22 Outside the context of a CDP hearing (and apart from 23 24 any prospect of judicial review), the Sadlers can propose an IA or an OIC. An OIC based on DATL may 25 meet a cold reception in Appeals, but an OIC based on 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 27 1 2 3 4 5 6 DATC or ETA may get a better hearing. No such OIC is before us, so we cannot know whether, as it seems, an OIC based on ETA would receive consideration in view of the multiple, documented delays by the agency and its losses of the Sadlers' file and OIC. We do not mean to unduly criticize the agency. It receives 7 billions of returns and information returns every 8 9 10 11 12 13 14 15 16 17 18 year and must somehow be able to retrieve them in short order. It is required to transfer responsibility for cases from one function to another; and in such circumstances, matters (and papers) inevitably fall between the cracks. However, it appears that the Sadlers have received more than their share of these mishaps; and if that is so, it would certainly be appropriate for the agency to take that fact into account in its further work with the Sadlers--but such considerations are currently outside our jurisdiction, which concerns only the 19 matters properly subject to the CDP proceedings. 20 21 22 23 24 An order will be issued that (1) grants the IRS's motion in limine to preclude petitioners' offering evidence to challenge their underlying liability, (2) denies the Sadler's motion to amend the petition to claim "innocent spouse" relief for 25 Mrs. Sadler under section 6015, and (3) remands this 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 28 case to the IRS's Office of Appeals for only (a) verification of the IRS's issuance of a notice of deficiency to the Sadlers for 1999 and 2000 and (b) consideration of the Sadlers' contention that the section 6651(a) (3) addition to tax should be abated on account of reasonable cause. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 10:49 a.m., the bench opinion in 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 2 4 25 866.488.DEPO www.CapitalReportingCompany.com