T.C. Memo. 2019-129
UNITED STATES TAX COURT
COLEMAN MOORE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7390-16L. Filed September 30, 2019.
Carlos S. Lopez, for petitioner.
Adam B. Landy, Nancy M. Gilmore, and Thomas R. Mackinson, for
respondent.
MEMORANDUM OPINION
GOEKE, Judge: Petitioner challenges respondent’s attempt to collect by
levy unpaid trust fund recovery penalties (TFRP) for which petitioner is a
responsible officer. These matters turn on whether the settlement officer assigned -2-
[*2] to petitioner’s hearing under section 63301 abused his discretion by sustaining
the proposed levy. We find that the settlement officer abused his discretion and
will remand this case. We have jurisdiction under section 6330.
Background
When the petition was filed, petitioner resided in California. In 2003 and
2004 petitioner was the president and the chief executive officer of H.L. Heggstad,
Inc. (Heggstad). Heggstad failed to fully pay the employment taxes due and
owing on Form 941, Employer’s Quarterly Federal Tax Return, for the periods
ending March 31 and December 31, 2003, and March 31 and June 30, 2004 (tax
periods at issue). During his investigation of Heggstad’s unpaid employment and
trust fund taxes, respondent determined that petitioner had signatory authority over
Heggstad’s bank accounts and was a responsible officer for the nonpayment of its
employment tax liabilities.
Respondent made two assessments against petitioner for the TFRP: (1) a
jeopardy assessment on October 7, 2004, for each tax period at issue and (2) a
nonjeopardy assessment on June 5, 2006, for only the tax period ending June 30,
2004. The revenue officer made the initial determinations of the TFRP, and the
1 Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) as amended and in effect at all relevant times. -3-
[*3] determinations were timely approved in writing by the revenue officer’s
supervisors.
I. Submission of OIC
On August 7, 2008, respondent received Form 656, Offer In Compromise
(OIC), from petitioner seeking to compromise the TFRP liabilities for Heggstad
and another entity, Intex Form, Inc. (Intex), on the basis of doubt as to
collectibility for five tax periods: the tax periods ending December 31, 2002,
March 31, 2003, and March 31 and June 30, 2004, for Heggstad, and the tax
periods ending March 31 and September 30, 2003, and March 31 and June 30,
2004, for Intex. Petitioner offered to compromise the outstanding liability as a
responsible person for both companies for $49,962.29. He did not contest the
validity or the amounts of the underlying liabilities. The Form 656 was prepared
and signed by Eugene Neri, an enrolled agent, and the form designated Mr. Neri’s
employer’s firm as petitioner’s representative.
On March 4, 2010, respondent received an amended Form 656 (amended
OIC) from petitioner signed and dated February 18, 2010, that removed the
liabilities for Intex, revised the offer amount to $45,000, and included only the
four tax periods at issue for Heggstad. -4-
[*4] In signing the original and amended Forms 656 petitioner affirmed that he
had read, understood, and agreed to the requirement in section V, subsection (d) of
the Form that he comply with all provisions of the Code relating to filing Form
1040, U.S. Individual Income Tax Return, and pay his required income tax for five
years or until the offer amount is paid in full, whichever period was longer. He
also affirmed that if he failed to meet any of the terms and conditions of the OIC,
he would also be in default on the offer, and respondent could seek collection of
the liabilities.
On April 27, 2010, the Internal Revenue Service’s (IRS) Sacramento,
California, Appeals Office accepted petitioner’s amended OIC. Respondent’s
April 27, 2010, acceptance letter stated: “Please note that the conditions of the
offer require you to file and pay all required taxes for five years or until the
offered amount is paid in full, whichever is longer.” By letter dated December 15,
2011, respondent notified petitioner that he had met the payment provisions of his
OIC, and respondent began processing lien releases related to the tax periods at
issue. In this letter respondent reminded petitioner of the five-year compliance
requirement and that noncompliance could result in the OIC’s termination and
reinstatement of the original liabilities. The letter indicates that respondent sent it
to petitioner’s representative, who the parties identify as Mr. Neri. -5-
[*5] II. Income Tax Issues for 2010 Through 2012
On January 24, 2012, petitioner filed a joint income tax return for 2010 with
his former spouse after its April 18, 2011, due date. He had not requested an
extension for filing. Petitioner and his former spouse claimed the married filing
jointly status. On their 2010 joint return petitioner and his former spouse reported
total tax due of $1,881, withholding and credits of $1,405, and a balance due of
$476. Petitioner did not pay the $476 balance due for 2010 by the April 18, 2011,
filing deadline, but on January 24, 2012, he remitted a payment of $476 with the
late-filed 2010 joint return. Respondent assessed a late filing penalty of $135, a
late payment penalty of $23.80, and interest of $15.46 for 2010. Petitioner
remitted an additional payment of $174.26 on April 6, 2012, to pay the penalties
and interest.
Petitioner timely filed a 2011 joint return under extension on October 11,
2012. Petitioner and his former spouse claimed the married filing jointly status.
On their 2011 joint return petitioner and his former spouse reported total tax due
of $3,211, withholding and credits of $2,249, and a balance due of $962. On
October 17, 2012, petitioner remitted a payment of $962. He attached Form
1040-V, Payment Voucher, to his payment that listed his address as “PO Box
3473, Sacramneto [sic], CA 95829” (P.O. Box 3473 address). The payment was -6-
[*6] made with a check from El Dorado Savings Bank with a preprinted address
for petitioner of “8880 Elder Creek Rd., Sacramento, CA 95828-1805” (Elder
Creek address). Respondent assessed a late payment penalty of $28.86 and
interest of $15.81 for 2011. Petitioner remitted an additional payment of $50.74
on June 21, 2017, to pay the penalty and interest.
Petitioner timely filed a 2012 joint return on October 14, 2013, under
extension. Petitioner and his former spouse claimed the married filing jointly
status. On their 2012 joint return petitioner and his former spouse reported total
tax due of $7,804, withholding and credits of $4,485, and a balance due of $3,319.
On October 17, 2013, petitioner remitted a payment of $3,319. Respondent
assessed a late payment penalty of $99.57 and assessed interest of $50.98 for
2012. Petitioner remitted an additional payment of $150.55 on August 4, 2014, to
pay the penalty and interest. Respondent assessed an additional amount of interest
of $3.25, which petitioner paid on June 22, 2017.
The 2010 through 2012 returns were filed electronically and were prepared
by a friend of petitioner who was an accountant. The 2010 through 2012 returns
listed petitioner’s address as the P.O. Box 3473 address. Petitioner did not have a
post office box in Sacramento. Petitioner received electronic notifications when -7-
[*7] the returns were filed and hard copies of the returns after their electronic
filing, which he did not review.
Respondent issued to petitioner a notice of proposed changes, Notice CP
2000, dated December 3, 2012, notifying him of income unreported on his 2010
joint return. Notice CP 2000 was sent to petitioner’s last known address, the P.O.
Box 3473 address. For 2010 petitioner and his former spouse failed to report
unemployment compensation received of $8,550. Petitioner does not dispute the
omission of the unemployment compensation. He did not respond to Notice CP
2000 by the January 2, 2013, deadline, and on May 13, 2013, respondent issued to
petitioner and his former spouse a notice of deficiency, by certified mail, to the
P.O. Box 3473 address for the tax liability and a late payment penalty. Neither
petitioner nor his former spouse responded to the notice of deficiency by the
90-day deadline of August 12, 2013, as petitioner did not receive it. Respondent
made a default assessment on September 30, 2013, of $1,380 of income tax, an
addition to tax under section 6651(a)(1) of $236, and interest of $88 for a total
amount due of $1,704.
On January 10, 2014, the IRS Brookhaven Appeals Office (Brookhaven)
sent a letter to petitioner at the P.O. Box 3473 address, notifying him that his OIC
was terminated (termination letter) and that respondent was reinstating the TFRP -8-
[*8] liabilities less payments made by petitioner because he did not timely pay his
income tax liabilities for 2010, 2011, and 2012. A copy of the termination letter
was sent to Mr. Neri as petitioner’s representative. The termination letter also
stated that petitioner did not contact respondent or pay the balance due by the
January 2, 2014, deadline. The administrative record does not contain a written
communication addressed to petitioner informing him of a default in the OIC,
requesting that he contact respondent, or setting a January 2, 2014, deadline to
respond or pay the amounts due.
On July 29, 2014, respondent sent a Letter 3172, Notice of Federal Tax Lien
Filing and Your Right to a Hearing Under IRC 6320, to petitioner notifying him of
a tax lien filing for unpaid income tax for 2010 and 2012. The lien notice was sent
to petitioner’s Elder Creek address, which petitioner provided to respondent upon
filing his 2013 Form 1040 on April 15, 2014, and processed by respondent on May
19, 2014. In response to this notice petitioner promptly paid the amount shown as
due, $1,893.40, by check dated August 1, 2014, and received by respondent on
August 4, 2014. Respondent applied $1,742.85 of the August 1, 2014, payment
against petitioner’s 2010 income tax liability and $150.55 against his 2012 income
tax liability. By letter dated August 5, 2014, respondent’s revenue officer notified
petitioner that the August 1, 2014, payment did not pay the entire amount due and -9-
[*9] a balance of $212.35 remained. Petitioner remitted a check dated September
2, 2014, for the amount due, and respondent received this payment on September
4, 2014. Nevertheless, respondent sent petitioner a letter dated October 31, 2014,
notifying him that respondent was revoking the release of the Federal tax liens for
the TFRP liabilities for the tax periods at issue because of petitioner’s failure to
comply with the terms of the OIC.
Respondent issued to petitioner a Letter 1058, Final Notice of Intent to Levy
and Notice of Your Right to a Hearing, dated December 3, 2015. The levy notice
stated that petitioner owed $751,495.92 through January 3, 2016, for the TFRP
under section 6672 for the tax periods at issue. On December 23, 2015, petitioner
timely filed Form 12153, Request for a Collection Due Process or Equivalent
Hearing. In the request petitioner asserted:
(a) he did not receive Notice CP 2000 in 2012, the notice of deficiency in
2013, or the termination letter in 2014;
(b) he fully complied with the terms and conditions of the accepted OIC,
and he did not materially breach the OIC under California law;
(c) his representative did not receive the July 2014 lien notice for the unpaid
Federal income tax liabilities; and - 10 -
[*10] (d) respondent should reinstate the previously accepted OIC and abate the
reinstated TFRP assessments.
Before the collection due process (CDP) hearing, the settlement officer
assigned to petitioner’s case determined that petitioner breached the terms and
conditions of the OIC by (1) filing his 2010 joint return and paying the balance
due late; (2) paying his 2011 income tax liability late and having a balance due at
the time of the CDP hearing; and (3) paying his 2012 income tax liability late. On
February 11, 2016, the settlement officer held a CDP hearing by telephone with
petitioner’s then representative, Spencer Malysiak. During the CDP hearing Mr.
Malysiak argued that Brookhaven should not have terminated the OIC because
petitioner’s noncompliance was not a material breach of the OIC. At the
conclusion of the telephone conference Mr. Malysiak requested additional time to
submit a second OIC and the supporting financial information. The settlement
officer refused this request. He determined that the financial statement that
petitioner had provided was incomplete and that petitioner provided no new
information for him to consider. He determined that Internal Revenue Manual
(IRM) pt. 8.22.7.10.11(4) (Sept. 23, 2014) precluded respondent from reinstating
petitioner’s previously terminated OIC. That part of the IRM states: - 11 -
[*11] The taxpayer may contend that the termination was improper because the default was insignificant or not a “material breach.” The only relevant question is whether there was a default of an express condition. Whether the taxpayer “materially breached” the OIC or “substantially complied” with the OIC is irrelevant.
The settlement officer concluded the CDP hearing by sustaining the
proposed levy and issued a notice of determination.
III. Remand of CDP Hearing
On August 29, 2017, respondent filed a motion to remand the case to the
Appeals Office for a supplemental CDP hearing for the purpose of considering a
new OIC as a collection alternative. In his motion respondent asserted that the
settlement officer did not provide petitioner with Form 656 or set a deadline for
him to submit a new OIC and the required financial information statements and
supporting documents. The Court held a hearing on September 18, 2017, to
consider respondent’s motion to remand and petitioner’s counsel’s motion to
withdraw filed on August 3, 2017. Mr. Malysiak sought to withdraw as
petitioner’s counsel because petitioner was receiving conflicting advice from
another attorney. The Court granted both motions over petitioner’s objections. As
a result of his counsel’s withdrawal, petitioner was unrepresented at the hearing to
oppose the motion to remand. At the hearing petitioner argued that his terminated
OIC should be reinstated. - 12 -
[*12] On October 19, 2017, Appeals received a letter from petitioner’s new
representative, Michael S. Cash, requesting a CDP hearing. On October 26, 2017,
the settlement officer mailed to petitioner, with a copy to Mr. Cash, a Letter 4837,
Appeals Received Your Request for a Collection Due Process Hearing, informing
him that Appeals had received his request for a supplemental CDP hearing and
scheduling a telephone conference for November 15, 2017. Before the
supplemental CDP hearing, the settlement officer requested a new Form 656, the
required financial statement, associated financial records, the application fee, and
an initial offer payment. In response by a faxed letter dated October 31, 2017, Mr.
Cash questioned why the supplemental CDP hearing was not assigned to a new
settlement officer. On November 1, 2017, the settlement officer notified Mr. Cash
that the IRM states that remanded CDP cases are assigned to the prior settlement
officer, and there is no requirement that a supplemental CDP hearing be assigned
to a new settlement officer. Petitioner did not present any testimony, other
evidence, or circumstances that required the supplemental CDP hearing to be
conducted by someone else.
Mr. Cash faxed the settlement officer a letter, dated November 13, 2017,
and received on November 14, 2017, requesting the November 15, 2017,
supplemental CDP hearing be rescheduled and arguing the terminated OIC should - 13 -
[*13] be reinstated. Mr. Cash argued that petitioner was not given an opportunity
to cure the noncompliance before the OIC’s termination. He argued that
Brookhaven’s termination of the OIC without providing an opportunity to cure the
default was an abuse of discretion. He also argued that petitioner did not receive
the termination letter or Notice CP 2000 and was entitled to actual notice and
receipt of the Notice CP 2000 and the termination letter. Mr. Cash objected to
respondent’s use of the P.O. Box 3473 address for the notices and letters. He also
stated that petitioner was not prepared to submit a new OIC at that time.
In response the settlement officer left a voice message for Mr. Cash on
November 14, 2017, to discuss the faxed letter. He stated that Mr. Cash’s request
to reschedule the CDP hearing was denied because the request was not timely. On
November 15, 2017, the settlement officer called Mr. Cash for the telephone
supplemental CDP hearing. During the supplemental CDP hearing petitioner did
not submit a new Form 656. Mr. Cash indicated that petitioner was not prepared
to submit a new OIC at that time. Instead Mr. Cash sought reinstatement of the
terminated OIC as a first course of action. The settlement officer understood that
the main purpose of the remand was for petitioner to submit a new OIC. The
settlement officer stated that respondent terminated the OIC because petitioner had
incurred unpaid income tax liabilities within the five-year compliance period. - 14 -
[*14] The settlement officer concluded the hearing by stating that it was his
determination that Brookhaven followed all proper procedures in notifying
petitioner of his noncompliance before terminating the OIC. Mr. Cash indicated
that petitioner could file a new OIC, and the settlement officer advised that
petitioner do so through IRS Compliance. In both the original and supplemental
CDP hearings the settlement officer determined that the proposed levy balanced
the need for the efficient collection of tax with petitioner’s concern that the
collection action be no more intrusive than necessary.
On December 12, 2017, respondent mailed a supplemental notice of
determination to petitioner for the tax periods at issue, reaffirming the
determination that the issuance of the levy notice was valid and appropriate and
that petitioner was not entitled to a collection alternative because he did not
submit a new Form 656 as requested by the settlement officer. In the original and
supplemental notices of determination, the settlement officer determined that
petitioner could not challenge the termination of his OIC because the termination
was upheld by Appeals, which provided its decision in the January 10, 2014,
termination letter. At trial petitioner did not present any testimony or other
evidence to address or explore the possibility of any collection alternatives other
than reinstatement of the terminated OIC. - 15 -
[*15] Discussion
When the underlying tax liability is properly at issue in a CDP case, the
Court decides the issue of liability de novo. Sego v. Commissioner, 114 T.C. 604,
610 (2000). A taxpayer is precluded from disputing the underlying tax liability in
a CDP judicial review proceeding if the taxpayer failed to properly raise the merits
of the underlying tax liability as an issue during the CDP hearing. Giamelli v.
Commissioner, 129 T.C. 107, 115 (2007).
Petitioner did not raise the underlying TFRP liabilities for the tax periods at
issue during the original or supplemental CDP hearing. In the letter dated
February 9, 2016, Mr. Malysiak stated to the settlement officer that petitioner
“understands that he cannot dispute the original assessment made against him for
the civil penalties”. He did not challenge the underlying tax liabilities during the
original or supplemental CDP hearing. He sought reinstatement of his terminated
OIC as a collection alternative during the hearings. Accordingly, he cannot now
dispute the underlying TFRP liabilities.
Decisions regarding collection alternatives do not go to underlying liability
and are, therefore, reviewed for abuse of discretion. Giamelli v. Commissioner,
129 T.C. at 111; Goza v. Commissioner, 114 T.C. 176, 182 (2000). Appeal of this
case would lie with the Court of Appeals for the Ninth Circuit, which has held that - 16 -
[*16] our review in abuse of discretion cases is limited to the administrative
record. Kreit Mech. Assocs., Inc. v. Commissioner, 137 T.C. 123, 130 (2011)
(citing Keller v. Commissioner, 568 F.3d 710, 718 (9th Cir. 2009), aff’g in part
T.C. Memo. 2006-116 and aff’g in part, rev’g in part decisions in related cases).
Under the abuse of discretion standard, the Court determines whether the IRS
settlement officer exercised his discretion arbitrarily, capriciously, or without
sound basis in fact or law. Thompson v. Commissioner, 140 T.C. 173, 179 (2013)
(citing Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27
(1st Cir. 2006)).
To make that determination, the Court considers whether the settlement
officer’s decision “was grounded on an error of law or rested on a clearly
erroneous finding of fact, or whether he applied the correct law to fact findings
that weren’t clearly erroneous but ruled in an irrational manner.” Bennett v.
Commissioner, T.C. Memo. 2008-251, slip op. at 6-7; see also Indus. Inv’rs v.
Commissioner, T.C. Memo. 2007-93, slip op. at 7 (citing United States v.
Sherburne, 249 F.3d 1121, 1125-1126 (9th Cir. 2001)). Where the settlement
officer followed all statutory and administrative procedures and gave a reasoned
decision, the Court cannot reverse simply because we might have weighed the
equities differently. Fifty Below Sales & Mktg., Inc. v. United States, 497 F.3d - 17 -
[*17] 828, 830 (8th Cir. 2007); Thompson v. Commissioner, 140 T.C. at 179. In
determining whether the settlement officer abused his discretion, the Court
considers whether he: (i) properly verified that the requirements of any applicable
law or administrative procedure had been met, (ii) considered any relevant issues
raised by the taxpayer, and (iii) determined 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.” Sec. 6330(c)(3); see sec. 301.6330-1(e), Proced. & Admin. Regs.
This Court has stated that it is not an abuse of discretion for the Appeals
Office to determine that a taxpayer is ineligible for a collection alternative if the
taxpayer does not provide the requested financial information. Tucker v.
Commissioner, T.C. Memo. 2014-103, at *27; Huntress v. Commissioner, T.C.
Memo. 2009-161, slip op. at 12; see also sec. 301.6330-1(e)(1), Proced. & Admin.
Regs. (“Taxpayers will be expected to provide all relevant information requested
by Appeals, including financial statements, for its consideration of the facts and
issues involved in the hearing.”). A CDP hearing officer may refuse to consider a
taxpayer’s eligibility for a collection alternative if the taxpayer does not provide
the requested documentation. See, e.g., Kindred v. Commissioner, 454 F.3d 688,
696-697 (7th Cir. 2006); Kendricks v. Commissioner, 124 T.C. 69, 79 (2005) - 18 -
[*18] (holding that it is not abuse of discretion to decline to consider a collection
alternative that the taxpayer did not propose). Moreover, the taxpayer is expected
to meet reasonable deadlines set by the Appeals Office to submit requested
information, and it is not an abuse of discretion to issue a determination if the
taxpayer fails to submit the requested items within the reasonable time given.
Pough v. Commissioner, 135 T.C. 344, 351 (2010).
On January 26, 2016, the settlement officer conducted an initial analysis of
the case, which included reviewing the case file, petitioner’s CDP request, and
respondent’s Integrated Data Retrieval System. He verified that the assessments
were made for the tax periods at issue and that a balance due remained. He
determined that the revenue officer timely obtained supervisory written approval.
He also determined that the notice and demand for payment was sent to petitioner
at his last known address. Finally, he determined that all legal and procedural
guidelines regarding the TFRP assessments were followed. In the supplemental
CDP hearing he provided petitioner with an opportunity to submit a new OIC,
which petitioner chose not to do. Instead, petitioner argued that the Appeals
Office failed to adhere to its administrative procedures when it terminated the
OIC. - 19 -
[*19] The crux of this case involves the settlement officer’s refusal to consider the
reinstatement of the terminated OIC. The Appeals Office terminated the OIC for
noncompliance during the five-year compliance period. It is clear that petitioner
and his wife filed a late return for 2010 and failed to timely pay their tax liabilities
for 2010 and 2012, which left petitioner subject to a potential default on his OIC
for noncompliance. Any noncompliance, even one that is immaterial, is sufficient
to terminate an OIC. In this regard our caselaw is very supportive of respondent’s
position. See Trout v. Commissioner, 131 T.C. 239 (2008). As noted in Trout v.
Commissioner, 131 T.C. at 253, and relevant in this case, the Commissioner could
not have used any “plainer language [on Form 656] to explain the terms and
conditions of the OIC or to express his intent.” There was no difference of
opinion regarding the OIC’s terms and conditions between petitioner and the
Appeals Office when the OIC was accepted on April 27, 2010. Petitioner testified
that he understood that the terms of the OIC required him to timely file his income
tax returns and timely pay his income tax for five years after the OIC’s acceptance.
He also admitted that he breached the terms and conditions of his OIC.
The fact that petitioner breached the terms and conditions of the OIC is not
determinative, however. We must consider whether the settlement officer abused
his discretion when he refused to reconsider the OIC’s termination. Brookhaven - 20 -
[*20] terminated the OIC for noncompliance. Petitioner argues that Brookhaven
did not follow the administrative procedures for terminating an OIC for
noncompliance, that the settlement officer did not properly verify that Brookhaven
followed those procedures, and that such a failure is an abuse of discretion. For
these reasons, he argues that his terminated OIC should be reinstated.
Specifically, petitioner argues that Brookhaven did not issue a potential default
letter to him or his representative that provided an opportunity to cure the
noncompliance before Brookhaven terminated the OIC.2 Respondent argues that
the settlement officer did not abuse his discretion when he concluded that
Brookhaven properly terminated the OIC and, thus, petitioner could not contest
the termination or seek reinstatement of the OIC during the original and
supplemental CDP hearings.
Under the terms of Form 656, termination for a taxpayer’s noncompliance is
authorized but not automatic. Form 656 states that the IRS may terminate the
OIC. See IRM pt. 8.20.5.30.2(2) (Nov. 5, 2013) (IRS has right to terminate). The
Commissioner must exercise his right to terminate an OIC in accordance with the
2 For simplicity, we refer to a letter informing a taxpayer of a default and providing an opportunity to cure as a potential default letter and a letter informing the taxpayer terminating the OIC for a default that was not cured as a termination letter. - 21 -
[*21] administrative procedures applicable to a potential default on an OIC. The
IRM sets out procedures for terminating an OIC for noncompliance in Part 5,
Collecting Process, and Part 8, Appeals. Part 5 reiterates the Commissioner’s
discretionary, but not automatic, termination of an OIC for noncompliance. Under
IRM part 5, upon a default, a “default letter” is sent. IRM pt. 5.8.9.3 (Apr. 15,
2011). The IRS “will make an attempt to secure compliance” and “[i]f the
taxpayer fails to comply with any requests for delinquent returns or payments, the
* * * [IRS] will default the offer.” Id. The IRS will terminate the OIC and
reinstate the liability “[a]fter all appropriate letters have been sent”. Id. The IRM
notes that compliance often occurs after the taxpayer receives a default letter and
the taxpayer should be given a grace period of at least 60 days to comply before
the OIC is terminated. IRM pt. 5.19.7.3.20(4) (Jan. 8, 2014).
Respondent argues that IRM part 5 does not apply to a settlement officer in
a CDP hearing; instead he argues that we should consider the procedures in IRM
part 8. He argues that IRM part 5 applies to offer examiners, offer specialists, tax
examiners in the Monitoring Offer in Compromise unit, and other employees
assigned to the OIC program when a taxpayer breaches an OIC. He argues that
neither the settlement officer nor Brookhaven was responsible for investigating an
OIC or processing and monitoring closed OICs. Respondent argues that IRM - 22 -
[*22] part 8 grants the IRS the right to terminate an OIC if a taxpayer fails to meet
any of the terms of the OIC. He quotes IRM pt. 8.22.7.10.8(1) (Aug. 9. 2017):3
“When the IRS determines an OIC is in default, it sends the taxpayer a default
letter to cure the noncompliance items. If the taxpayer does not cure the default,
the OIC is terminated. A taxpayer does not have a right to appeal the termination
of an OIC.”
In his brief respondent acknowledges that under the IRM the Appeals Office
was required to send petitioner a potential default letter and to give him an
opportunity to cure before terminating the OIC. The provisions of the IRM
respondent cites mandate the issuance of a potential default letter that provides an
opportunity to cure separate from the IRM part 5 procedural requirements.4 Thus,
the parties’ dispute over whether we should look to part 5 or part 8 is immaterial.
The settlement officer was required to verify that Brookhaven sent a potential
default letter.
3 Both parties cite the current edition of the IRM. 4 Internal Revenue Manual (IRM) pt. 5.19.7.2.19.4 was subsequently revised on August 25, 2017, stating that the IRS must send a potential default letter providing an opportunity to cure the default; and if the taxpayer does not respond to the potential default letter, a formal “default letter” is then sent, referred to in this case as a termination letter. IRM pt. 5.19.7.2.19.4(8) and (9). The termination comes “[a]fter all appropriate letters have been sent”. IRM pt. 5.8.9.4(3) (Jan. 12, 2017). - 23 -
[*23] Respondent argues that Brookhaven’s decision to terminate the OIC was not
part of the CDP process. Yet the levy action at issue followed Brookhaven’s
decision to terminate the OIC. The purpose of the CDP hearing is to give the
taxpayer an opportunity for an independent review to ensure that the levy action is
warranted and appropriate. The settlement officer determined that petitioner
breached the OIC’s terms and the OIC was subject to termination; however, that
was not the end of his required inquiry. The settlement officer was required to
verify that all administrative procedures with respect to the levy action had been
satisfied. Termination of the OIC was a necessary step before the levy action
could be initiated.
During the CDP hearing the taxpayer may raise “any relevant issue relating
to unpaid tax or proposed levy” including the appropriateness of collection
actions, and the hearing officer is required to consider those issues. Sec.
6330(c)(2)(A)(ii). Section 6330(c)(4)(A) prohibits a taxpayer from raising an
issue during the CDP hearing if (1) the issue was raised and considered at a
previous section 6320 hearing or in any other previous administrative or judicial
proceeding and (2) the taxpayer participated meaningfully in such a hearing or
proceeding. Section 6330(c)(4) would not preclude petitioner from raising the - 24 -
[*24] OIC’s termination in the original and supplemental CDP hearings because
he did not meaningfully participate in Brookhaven’s decision to terminate the
OIC.
Respondent argues that the potential default letter was sent and that
petitioner was given an opportunity to cure before Brookhaven terminated the
OIC; however, the administrative record does not support that argument.
Respondent argues that the settlement officer “inferred that (1) a OIC default letter
was sent in December 2013 with a response deadline of January 2, 2014.” We are
not satisfied with this inference. The administrative record does not establish that
Brookhaven sent petitioner or his representative a potential default letter.
Respondent argues that the settlement officer did not abuse his discretion in
determining that Brookhaven had sent a potential default letter to petitioner.
There is no document in the administrative record that references an opportunity to
cure or that sets a January 2, 2014, deadline except for the termination letter. The
administrative record does not support a finding that Brookhaven followed the
administrative procedures before terminating the OIC. Conversely, the Appeals
officer in Trout did consider whether he should reinstate the terminated OIC as a
collection alternative but determined that the taxpayer had already been given
sufficient opportunity to cure the default before the OIC’s termination as the - 25 -
[*25] Commissioner had made several efforts to bring the taxpayer into
compliance.5 See also West v. Commissioner, T.C. Memo. 2008-30, slip op. at 5
(upon noncompliance, the IRS sent letters warning the taxpayers that they were
potentially in default on their OICs and giving them opportunities to cure the
noncompliance before terminating the OICs); Ng v. Commissioner, T.C. Memo.
2007-8, slip op. at 4-5 (same).
Respondent alternatively argues that Notice CP 2000, the notice of
deficiency, and the termination letter satisfy the administrative procedures for
terminating an OIC. We disagree. Respondent properly notified petitioner of the
2010 income tax deficiency that resulted in the OIC’s termination. However,
neither Notice CP 2000 nor the notice of deficiency warns that the 2010 income
tax deficiency would result in the OIC’s termination. Neither notice informs
petitioner of an opportunity to cure the default or sets a January 2, 2014, deadline
to cure the default. Neither notice was sufficient under the administrative
procedures for a potential default letter. A potential default letter provides an
5 In Trout v. Commissioner, 131 T.C. 239 (2008), the IRS sent the taxpayer multiple letters informing him of a potential default on the OIC, gave him 30 days to cure the noncompliance, and threatened to terminate the OIC if he did not respond to the letters. Approximately seven months later, the IRS sent a letter informing the taxpayer the OIC was terminated on the basis of his noncompliance and failure to cure. Thereafter, the IRS sent a notice of intent to levy. - 26 -
[*26] opportunity to cure. Neither Notice CP 2000 nor the notice of deficiency
mentioned such an opportunity or the OIC. Moreover, both relate only to 2010,
but the termination letter states there was noncompliance and an opportunity to
cure for 2010, 2011, and 2012 with a January 2, 2014, deadline.
During the original and supplemental CDP hearings the settlement officer
was required to verify that the administrative procedures with respect to the
proposed levy had been satisfied. He did not verify that the administrative
procedures for terminating the OIC were followed as he did not properly verify
that a potential default letter was sent before the termination letter.
In the notices of determination the settlement officer cited IRM pt.
8.22.7.10.11(4) (Sept. 23, 2014) as the basis for not reinstating the terminated
OIC. That provision relates to a taxpayer’s argument that the breach of an OIC
was immaterial and should not result in a termination. Further, IRM pt.
8.22.7.10.11(3) states: “Appeals will not reinstate an OIC where there was a
default and the OIC was properly terminated.” It is possible that the OIC was not
properly terminated in accordance with the administrative procedures irrespective
of the materiality of the breach.
Respondent further argues that a taxpayer generally cannot appeal the
termination of an OIC and that a terminated OIC can be reinstated only in rare - 27 -
[*27] cases when the taxpayer properly shows that the termination was in error
because of circumstances beyond his control. “In rare situations, a defaulted offer
may be reopened based upon a taxpayer’s exceptional circumstance.” IRM pt.
5.19.7.2.20.4(2) (Oct. 30, 2018). “A situation may arise where an offer in
compromise is defaulted and we later discover that the termination was an IRS
error.” Id. at (1).
At trial petitioner argued that he did not receive Notice CP 2000, the notice
of deficiency, or the termination letter because he was living in his employer’s
warehouse and the letter was improperly addressed to P.O. Box 3473. For the
dates of these notices, petitioner’s last known address was the P.O. Box 3473
address. He did not submit Form 8822, Change of Address, to respondent.
Although petitioner never had a post office box in Sacramento, the P.O. Box 3473
address was on his joint returns, which he failed to review. Furthermore, the
termination letter was sent to Mr. Neri, petitioner’s then representative. Petitioner
argues that a check, dated October 17, 2012, with the Elder Creek address that he
submitted to pay his 2011 income tax was sufficient to notify respondent of a
change of address. However, Form 1040-V submitted with the check listed his
address as the P.O. Box 3473 address. The address on this check is hardly clear
and concise notification to respondent of petitioner’s change of address. - 28 -
[*28] It is clear that the OIC was not terminated because of circumstances beyond
petitioner’s control. His default was his own doing. He failed to carefully manage
his income tax liabilities and filing obligations for five years after being granted a
favorable OIC that was conditioned on his tax compliance. He also failed to
notify respondent of a change to his mailing address. However, these failures on
petitioner’s part do not excuse respondent’s failure to follow his own
administrative procedures for terminating an OIC. The administrative record does
not contain a potential default letter providing an opportunity to cure the
noncompliance. If respondent did send a potential default letter to petitioner’s last
known address, it is unlikely petitioner would have received it. However, the
administrative record does not establish that respondent sent a potential default
letter to petitioner’s last known address. Nor does it establish that he sent a
potential default letter to petitioner’s representative, Mr. Neri. The termination
letter was sent to Mr. Neri and so was the December 15, 2011, letter notifying
petitioner that he had satisfied the payment terms of the OIC and that respondent
was releasing the liens against petitioner. - 29 -
[*29] We have no way of knowing what respondent may have proposed for
petitioner to cure the noncompliance if he indeed sent a potential default letter.6
What we do know is that petitioner cured the noncompliance promptly once he
discovered that he owed additional amounts. Notably, respondent did not revoke
the release of the liens for the years at issue associated with the terminated OIC
until after petitioner had already paid the income tax liabilities due, and he did not
issue the notice of intent to levy at issue in the original and supplemental CDP
hearings until over one year after petitioner had paid the tax.
In conclusion, we find that the settlement officer did not properly verify that
Brookhaven followed the administrative procedures for terminating the OIC. We
hold that the determination to sustain the proposed levy without doing so was an
abuse of discretion. During the original and supplemental CDP hearings petitioner
requested reinstatement of the terminated OIC as a collection alternative, and the
settlement officer did not consider that request. Accordingly, we will remand this
case. On remand the settlement officer should consider whether the OIC was
properly terminated and, if not, whether the terminated OIC should be reinstated
6 Payment of the tax owed appears to be an acceptable cure to avoid an OIC’s termination. The termination letter stated that petitioner did not contact respondent or pay the balance due by the January 2, 2014, deadline. - 30 -
[*30] as a collection alternative. Given the circumstances described, we would
suggest a new settlement officer be assigned to this case.
In reaching our holding, we have considered all arguments made, and, to the
extent not mentioned above, we conclude they are moot, irrelevant, or without
merit.
To reflect the foregoing,
An appropriate order will be issued.