T.C. Memo. 2013-63
UNITED STATES TAX COURT
MICHAEL J. KEHOE AND KAREN D. KEHOE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1230-09L. Filed February 28, 2013.
Michael J. Kehoe and Karen D. Kehoe, pro se.
Bryan Sladek, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARIS, Judge: This case is before the Court on a petition for review of a
Notice of Determination Concerning Collection Action(s) Under Section 6320 -2-
[*2] and/or 6330 (notice of determination). See sec. 6330(d).1 Petitioners seek
judicial review of respondent’s determination to sustain a notice of Federal tax lien
(NFTL). This collection action concerns petitioners’ outstanding Federal income
tax liability for taxable year 2005. The sole issue for decision is whether
respondent’s determination to sustain the filing of the lien constituted an abuse of
discretion.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of
facts and the exhibits received in evidence are incorporated herein by this reference.
Petitioners resided in Michigan when this petition was filed.
Petitioners timely filed their Federal income tax return for tax year 2005
showing tax due of $35,495. Petitioners made a partial payment of $2,000 along
with Federal withholding of $2,544 but were unable to pay the balance.2 On
November 6, 2006, respondent assessed the remaining tax due from
1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect at all relevant times. 2 During the year at issue petitioners incurred significant expenses in connection with an ongoing family crisis. Petitioners self-reported the correct amount of tax for each year but simply could not afford to pay the tax in a timely manner. It is clear from the record that it was not petitioners’ intention to avoid tax during the year at issue, but rather that they overspent their available income by giving their family obligations priority over their tax obligations. -3-
[*3] petitioners for tax year 2005. On July 9, 2007, petitioners submitted another
payment of $6,000 toward their outstanding balance for tax year 2005. On October
26, 2007, respondent sent to petitioners a Notice of Federal Tax Lien Filing and
Your Right to a Hearing Under IRC 6320 (lien notice) concerning petitioners’ 2005
tax liability.3 The lien notice informed petitioners that respondent had filed a notice
of lien on their property and that they could request a collection due process (CDP)
hearing to contest the lien filing as well as offer collection alternatives. Petitioners
sent respondent a timely CDP hearing request on December 12, 2007, in which they
did not contest their underlying liability but instead argued that they should have had
an opportunity to discuss collection alternatives before the filing of the lien.
Petitioners then requested an opportunity to negotiate a collection alternative for the
balance due that would operate without the burden of a tax lien.
In the wake of the NFTL filing, petitioners encountered numerous financial
hardships. Petitioners’ existing $41,000 line of credit with American Express was
canceled. In addition, petitioners’ limit on an existing line of credit with Bank of
3 At that time the lien notice reflected a remaining balance due of $28,657.19 for tax year 2005. -4-
[*4] America was reduced by $10,000 and petitioners’ interest rates for various
credit cards rose to untenable levels.
On March 6, 2008, petitioner Michael Kehoe had a telephone CDP hearing
with Settlement Officer Alois Hoog (SO Hoog). SO Hoog advised Mr. Kehoe that
all legal requirements had been met and that the lien was properly filed. Mr. Kehoe
detailed various hardships that the lien had caused him and his wife since its filing,
including: (1) that it caused them to lose $51,000 worth of existing credit that they
were going to use to help resolve the balance owed; (2) that it caused the issuing
banks to substantially reduce spending limits and increase interest rates on their
various credit cards; (3) that it caused a precipitous drop in each of their credit
ratings; and (4) that it had an overall negative impact on their financial stability and
ability to pay the balance owed.
SO Hoog discussed various options available to petitioners, including an
effective tax administration (ETA) offer-in-compromise and an installment
agreement. Mr. Kehoe believed that he and his wife might qualify for an ETA
offer-in-compromise, and SO Hoog agreed to review the financial information -5-
[*5] petitioners provided. During that time petitioners continued to make periodic
payments toward their outstanding liability when they could afford to do so.4
Petitioners filed an ETA offer-in-compromise for $5,000 but soon after
amended the offer to $30,000. After analyzing petitioners’ financial information,
SO Hoog concluded that petitioners were not eligible for an ETA offer-in-
compromise because they had sufficient income and assets to pay the liability in full.
SO Hoog then communicated to petitioners that while he could not accept the offer-
in-compromise they had submitted, he would accept an installment agreement that
provided for payments of $300 per month until February 2011, at which time Mr.
Kehoe would pay the remaining balance from his IRA.5 SO Hoog further informed
petitioners that he would not withdraw the NFTL for tax year 2005 and that,
pursuant to the proposed installment agreement, a second NFTL would be filed for
tax year 2006.6
4 The transcripts show that petitioners made two payments in May 2008 for $150 and $1,000. In addition, a $1,200 credit on petitioners’ account from their 2007 return was applied to the 2005 balance. 5 In February 2011 Mr. Kehoe would reach the age of 59-1/2, rendering him eligible to make withdrawals from his IRA without penalty under sec. 72(t). 6 Petitioners also had self-reported Federal income tax due for tax year 2006. Petitioners have timely filed their Federal income tax returns and paid the amounts due for all subsequent tax years through the date of trial. -6-
[*6] In a letter dated November 14, 2008, petitioners voiced their concerns with
the proposed installment agreement. Petitioners indicated that they would be willing
to enter into the proposed installment agreement but only if the NFTL for tax year
2005 was withdrawn and no NFTL was filed for tax year 2006. Petitioners
indicated that they believed that SO Hoog should withdraw the NFTL for tax year
2005 pursuant to section 6323(j)(1)(B) because petitioners were entering into an
installment agreement that would satisfy the outstanding liability. Petitioners went
on to reiterate many of the hardships that the filing of the NFTL had caused them
and plead for an efficient resolution. Petitioners stated that they were addressing
these concerns in writing because by signing the installment agreement, as written,
they would be agreeing to the NFTLs for both 2005 and 2006 and they wanted to
memorialize their objections to doing so.
On November 25, 2008, Mr. Kehoe called SO Hoog and advised him that
petitioners had decided to withdraw their outstanding offer-in-compromise and
sign the installment agreement, but they wanted a notice of determination issued so
that they could reserve the right to dispute his decision not to withdraw the lien.
SO Hoog mailed to petitioners a copy of the installment agreement for them to
sign. -7-
[*7] On December 1, 2008, SO Hoog received the installment agreement signed
by both petitioners, as well as a withdrawal of the outstanding offer-in-compromise.
However, where a box on the installment agreement had been marked to indicate
that a subsequent lien would be filed for tax year 2006, petitioners had applied
opaque white correction fluid to the check mark in an apparent attempt to modify
the agreement. As a result of this modification, SO Hoog rejected the installment
agreement and sustained the NFTL for tax year 2005. On December 15, 2008, the
Office of Appeals issued to petitioners a notice of determination. Petitioners timely
filed a petition with this Court.
OPINION
Under section 6321, if a person liable to pay any tax neglects or refuses to
pay the same after demand, the amount shall be a lien in favor of the United States
upon all property, whether real or personal, belonging to such person. Under
section 6323, the Commissioner may file a notice of the lien that arises under
section 6321. The purpose of such a filing is to protect the Government’s interest in
a taxpayer’s property against the claims of other creditors. Hughes v.
Commissioner, T.C. Memo. 2011-294; Berkery v. Commissioner, T.C. Memo.
2011-57. Once filed in accordance with the requirements of section 6323(f), an
NFTL validates the Government’s lien against a subsequent purchaser, holder of a -8-
[*8] security interest, mechanic’s lienor, or judgment lien creditor. See sec.
6323(a); Stein v. Commissioner, T.C. Memo. 2004-124; Lindsay v. Commissioner,
T.C. Memo. 2001-285, aff’d, 56 Fed. Appx. 800 (9th Cir. 2003).
I. Standard of Review
Where the validity of the underlying tax liability is properly at issue, the
Court will review the matter de novo. Davis v. Commissioner, 115 T.C. 35, 39
(2000). Where the underlying tax liability is not properly at issue, the Court will
review the Commissioner’s administrative determination for abuse of discretion.
Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C.
176, 181-182 (2000). An abuse of discretion is any action that is arbitrary,
capricious, or without sound basis in law or fact. Woodral v. Commissioner, 112
T.C. 19, 23 (1999).
Petitioners do not challenge their underlying liability for tax year 2005. The
only issue petitioners raise is whether respondent abused his discretion in sustaining
the NFTL. Accordingly, the underlying liability is not properly at issue in this case
and the applicable standard of review is abuse of discretion.
II. Abuse of Discretion Standard
If the Commissioner chooses to file an NFTL, section 6320 requires him to
give the taxpayer notice of that filing and notice of the right to an administrative -9-
[*9] hearing before an impartial officer of the IRS Appeals Office. Sec. 6320(a) and
(b). At the hearing, the taxpayer may raise appropriate spousal defenses, challenge
the appropriateness of the collection action, and offer collection alternatives. Secs.
6320(c), 6330(c)(2)(A). In addition to considering the above-stated issues raised by
the taxpayer, the Appeals officer must verify that the requirements of applicable law
and administrative procedure have been met and consider whether any proposed
collection action balances the need for efficient collection of taxes with the
legitimate concern of the taxpayer that any collection action should be no more
intrusive than necessary. Sec. 6330(c)(3).
A. Withdrawal of the Lien
Petitioners contend that respondent abused his discretion in failing to
withdraw the NFTL for tax year 2005. Under section 6323(j), the Commissioner
has the discretion to withdraw an NFTL if: (1) the filing was premature or not in
accordance with administrative procedures; (2) the taxpayer enters into an
installment agreement to pay the tax, unless the agreement requires that the lien
remain filed; (3) the withdrawal of the lien would facilitate the collection of the tax;
or (4) the withdrawal of the lien would be in the best interest of the taxpayer, as
determined by the National Taxpayer Advocate, and of the United States. See also
sec. 301.6323(j)-1(a), Proced. & Admin. Regs. - 10 -
[*10] In Hughes v. Commissioner, T.C. Memo. 2011-294, this Court sustained a
filed NFTL where the taxpayer alleged that the filing should have been withdrawn
because it impaired his credit. In that opinion the Court stated that the impairment
of credit by itself does not impair the taxpayer’s ability to satisfy his tax liability.
Id. Additionally, the Court noted that the taxpayer’s long history of noncompliance
supported the notion that the filed NFTL was necessary to protect the Government’s
interest in the taxpayer’s property.
In a similar case, this Court again sustained a filed NFTL where the taxpayer
alleged that the filing had impaired his ability to pay because he could not obtain a
loan to satisfy the liability. Berkery v. Commissioner, T.C. Memo. 2011-57. The
Court stated that the taxpayer had not established that the NFTL filing had impaired
his ability to pay the liability because he had not presented any evidence that he had
been rejected for a loan as a result of the NFTL. The Court noted that the taxpayer
had almost two years before the filing of the NFTL, during which he made no effort
to pay any of his outstanding tax liability, and that his payment history “casts doubt
on the good faith of his efforts to pay.” Id.
The Court in both instances noted that lien withdrawal is permissive.
Although section 6323(j)(1) allows the Commissioner to withdraw an NFTL for any
of the reasons stated above, it does not require him to do so. The regulations - 11 -
[*11] make the Commissioner’s discretion explicit: “If the Commissioner
determines conditions for withdrawal are present, the Commissioner may (but is not
required to) authorize the withdrawal.” Sec. 301.6323(j)-1(c), Proced. & Admin.
Regs.
Petitioners argue that the filing of the NFTL impaired their ability to pay the
outstanding liability. Specifically, the financial impact of the NFTL left them in a
position where they could no longer make the monthly installment payments or
borrow funds to pay the liability in full.
Petitioners are unlike the taxpayers in Berkery and Hughes. Before 2005,
petitioners had never failed to pay their Federal income tax. Even for the year at
issue, petitioners correctly self-reported their income and timely filed their Federal
income tax return. They did not pay their liability in full because they had expended
their available funds in dealing with an ongoing family crisis. Despite being in a
tight financial position, petitioners still made efforts to pay down their liability
whenever possible.
During the CDP process petitioners attempted to resolve the liability by
negotiating a settlement agreement. Petitioners were eager to come to an agreement
and resolve the debt in an efficient way. Petitioners and SO Hoog were in
agreement as to the substance of an acceptable installment agreement for tax - 12 -
[*12] years 2005 and 2006. The only point of contention was whether the NFTL for
2005 should be sustained and a new NFTL for 2006 be filed in conjunction with the
execution of the installment agreement.
The Court notes that petitioners were certainly financially disadvantaged by
the filing of the NFTL. Additionally the Court notes that petitioners have no history
of noncompliance and appear to have dealt with SO Hoog in good faith. However,
it is clear that regardless of the presence of circumstances adequate to allow
withdrawal of the NFTL, withdrawal is left in the discretion of the settlement
officer. Accordingly, it was not an abuse of discretion for SO Hoog to refuse to
withdraw the NFTL.
B. Section 6330(c)(3)
While section 6323(j) and its accompanying regulations are clear that
withdrawal of a filed NFTL is left to the Commissioner’s discretion, sections
6320(c) and 6330(c)(3) together direct the settlement officer to review collection
alternatives under the overarching standard of “whether any proposed collection
action balances the need for the efficient collection of taxes with the legitimate
concern of the * * * [taxpayer] that any collection action be no more intrusive than
necessary.” Adair v. Commissioner, T.C. Memo. 2011-75. - 13 -
[*13] Petitioners contend that the filing of the NFTL was more intrusive than
necessary to ensure efficient collection of the taxes owed. Petitioners argue that the
filing of the NFTL imposed serious hardship upon them by causing them to lose
large lines of credit, causing the issuers of their various credit cards to decrease their
spending limits and increase the interest rates on their existing accounts, seriously
impairing their credit ratings and therefore their ability to procure new credit, and
having an overall disastrous effect on their financial stability.
Respondent contends that withdrawing the NFTL would have impaired the
Government’s ability to collect the balance due by leaving it vulnerable to losing its
protected interest in petitioners’ assets. Respondent further argues that SO Hoog
determined that such protection was necessary until the liability was paid in full
through monthly installments and that this determination was not an abuse of
The Court again notes that petitioners were doubtlessly subjected to serious
financial hardship as a result of the filing of the NFTL. However, the Court
cannot say that SO Hoog’s determination to sustain the NFTL was arbitrary,
capricious, or without sound basis in fact or law. Accordingly, respondent did not
abuse his discretion. - 14 -
[*14] III. Possibility of Remand
Absent limiting statutes, courts generally have the “inherent authority to issue
such orders as they deem necessary and prudent to achieve the ‘orderly and
expeditious disposition of cases’”. Williams v. Commissioner, 92 T.C. 920, 932
(1989) (quoting Link v. Wabash R.R. Co., 370 U.S. 626, 630-631 (1962)) (citing
Roadway Express, Inc. v. Piper, 447 U.S. 752, 764-765 (1980)). In Friday v.
Commissioner, 124 T.C. 220, 221-222 (2005), the Court noted that it can remand a
case to an agency if the agency retains jurisdiction over the case, such as the
Appeals Office does in a CDP determination. See sec. 6330(d)(2); sec. 301.6330-
1(h)(1), Proced. & Admin. Regs.
The Court may certainly remand in CDP cases when an Appeals officer has
abused his discretion in some way. See Med. Practice Solutions, LLC v.
Commissioner, T.C. Memo. 2009-214. The Court may also remand where, for
example, the Appeals officer did not develop the record enough for the Court to
properly review it. See Hoyle v. Commissioner, 131 T.C. 197, 204-205 (2008).
Remand may be a response to an error the Court has found that it wants the
Appeals Office to remedy. However, the Court has also remanded where the law
changed between the CDP hearing and the Tax Court trial if that may have affected
a taxpayer’s presentation of his case. See Harrell v. Commissioner, T.C. - 15 -
[*15] Memo. 2003-271. The Court has also suggested that it may remand when the
Appeals Office did not abuse its discretion and there was no change in law, so long
as the remand would be “helpful”. Wells v. Commissioner, T.C. Memo. 2003-234
n.6, aff’d, 108 Fed. Appx. 440 (9th Cir. 2004); see also Ashlock v. Commissioner,
T.C. Memo. 2008-58 (noting taxpayer declined remand to consider changed
financial circumstances). Phrased differently, the Court “return[s] a case to Appeals
if * * * [it] consider[s] a rehearing ‘necessary or productive’”. Martin v.
Commissioner, T.C. Memo. 2003-288 (quoting Lunsford v. Commissioner, 117
T.C. 183, 189 (2001)), aff’d, 436 F.3d 1216 (10th Cir. 2006).
In Churchill v. Commissioner, T.C. Memo. 2011-182, the Court used the
preceding analysis to reach the holding that it has authority to remand a CDP case
for consideration of changed circumstances when remand would be helpful,
necessary, or productive. In Churchill the taxpayer was married at the time of the
CDP hearing, and his joint income with his spouse was considered in rejecting an
offer-in-compromise. By the time of trial, the taxpayer and his spouse were
divorced. The Court chose to remand the case because this change in
circumstances could affect the outcome of the Commissioner’s offer-in-compromise
analysis. - 16 -
[*16] Since petitioners’ CDP hearing, Mr. Kehoe has become eligible to make
withdrawals from his IRA without the threat of penalty. While this change of
circumstances certainly has an effect on petitioners’ liquidity, it does not reflect a
change that would have potentially affected respondent’s decision to proceed with
the filing of the NFTL. Consequently, the facts presented do not show a material
change in circumstances such that remand would be appropriate.7
To reflect the foregoing,
An appropriate decision
will be entered.
7 The Court notes that while remand is not appropriate in this instance, petitioners may still pursue collection alternatives with the IRS. Sec. 6330(b)(2) would preclude petitioners’ seeking judicial review of any subsequent administrative determination; however, petitioners are still free to attempt to negotiate a new collection alternative on the basis of changed circumstances.