Opinion
21639-21L
04-22-2022
JOSEPH J. JENKINS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER AND DECISION
Joseph W. Nega Judge
This collection due process (CDP) case is currently calendared for an in-person trial for the session of the Court scheduled to commence May 2, 2022, in San Diego, California. On February 22, 2022, respondent filed a Motion for Summary Judgment (respondent's motion) and an accompanying Declaration of John P. Brewer in Support of Motion for Summary Judgment. On March 28, 2022, petitioner filed a Response to Motion for Summary Judgment, in which he represented that he does not object to the granting of respondent's motion.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
I. Background
The following facts are drawn from the parties' pleadings and motion papers, including the attached declaration and exhibits. See Rule 121.
On February 27, 2020, respondent issued to petitioner a final notice of intent to levy, informing petitioner of his intention to levy with respect to tax year 2018. The final notice of intent to levy indicated that as of that date, petitioner owed a total balance of $177,216.91 for tax year 2018. On March 16, 2020, petitioner timely submitted to the Internal Revenue Service (IRS) Independent Office of Appeals (Appeals) a CDP request with respect to tax year 2018. In his CDP request, petitioner requested a collection alternative and checked boxes corresponding to "Installment Agreement" and "I Cannot Pay Balance." Settlement Officer Patricia Williams (SO Williams) of Appeals was assigned to conduct petitioner's CDP hearing.
On December 17, 2020, SO Williams issued to petitioner an initial contact letter, scheduling a telephonic conference for February 2, 2021. In the letter, SO Williams requested a number of documents in advance of the conference, including a completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals (Form 433-A), a completed Form 433-B, proof of payment for 2020 estimated taxes, and proof of deposit of federal employment taxes. On December 31, 2020, petitioner's representative responded via fax and requested that the conference be rescheduled to February 8, 2021; SO Williams agreed and confirmed the rescheduled conference date.
In advance of the conference, petitioner's representative provided to SO Williams (1) a completed Form 433-A; (2) completed Forms 433-B for two entities, Northlawn Property LLC (Northlawn) and Chelton Property LLC (Chelton); and (3) copies of bank statements for petitioner's personal account and the business accounts for the two entities. Petitioner's Form 433-A disclosed monthly income of $2,692 from Social Security and $250 of monthly distributions, and monthly living expenses of $3,686. The Form 433-A further disclosed that petitioner's membership interests in the Chelton and Northlawn LLCs had a current equity value of $1,048,939 and $365,000, respectively. Petitioner's two Forms 433-B disclosed that petitioner was the sole member of both entities. The Chelton Form 433-B stated that its assets were primarily comprised of an oceanfront, five-unit rental property in Mexico, with equity value of $955,000, and a note receivable with $93,939 due. The Northlawn Form 433-B stated that its sole asset was a promissory note from a sale of real property to Locofortis, Inc. (an entity apparently controlled by petitioner's brother, Jimmie Jenkins), with a value of $365,000.
In later correspondence, petitioner indicated that this disclosed monthly distribution was what he considered the monthly value of one of the apartment units in the Mexico rental property, which he, as sole member of Chelton, provided to himself rent-free as manager of the property.
In later correspondence, petitioner indicated that he valued the rental property by subtracting the mortgage on the property ($145,000) from the property's original purchase price of $1,100,000, which he disclosed that he purchased in early 2019.
SO Williams referred petitioner's case for further investigation, and Revenue Officer Michael J. Sandoval (RO Sandoval) was assigned to the case. On April 3, 2021, petitioner's representative provided RO Sandoval with additional information, including responses to specific questions, updated bank statements, and a summary of the mortgage on the property held by Chelton. In correspondence sent to RO Sandoval, petitioner addressed the issue of liquidating the rental property in Mexico but did not address the possibility of transferring his membership interest in Chelton for consideration or of borrowing against the rental property. Petitioner recited a litany of obstacles related to selling the property, including that (1) the property was purchased on an installment contract in which title was not yet vested in Chelton; (2) the market was not currently favorable for a sale due to the COVID-19 pandemic; and (3) the property had maintenance issues. Petitioner also addressed the issue of selling his two debt instruments to pay off the tax liability. Petitioner stated that the Northlawn note (valued at $365,000) was a second mortgage on a property in Colorado and described a number of potential risk factors that might deter a potential purchaser of the note, including (1) the property was in poor condition; and (2) the holder of the first mortgage had recently died with the mortgage coming due in 2022. Petitioner stated that the Chelton note is personally guaranteed but unsecured and thus would be difficult to sell.
Petitioner produced a copy of the purported installment contract, dated February 27, 2019, between Chelton and Locofortis, Inc. The contract was signed on behalf of Locofortis by petitioner's brother, Jimmie J. Jenkins.
After reviewing the provided information and petitioner's answers to his questions, RO Sandoval concluded that he was unable to verify petitioner's monthly income from his business ventures or the value of petitioner's assets. RO Sandoval also identified that Forms 1065, U.S. Returns of Partnership Income, had not been filed for Chelton for tax years 2017, 2019, and 2020, or for Northlawn for tax years 2016 through 2020. RO Sandoval memorialized his conclusions in a memorandum to SO Williams, dated April 16, 2021. On April 19, 2021, SO Williams faxed to petitioner's representative a copy of RO Sandoval's memorandum. On May 18, 2021, petitioner's representative sent a fax to SO Williams addressing the issues raised by RO Sandoval's memorandum.
On July 28, 2021, SO Williams performed her own compliance check and agreed with RO Sandoval's conclusions. In her case activity notes, SO Williams confirmed, inter alia, that (1) the various Forms 1065 remained unfiled; (2) petitioner did not meet the criteria for Currently Not Collectible (CNC) status due to the significant value in his assets; and (3) petitioner's ability to pay could not be determined because of the lack of verifying documents from petitioner.
On August 24, 2021, respondent issued to petitioner a Notice of Determination Concerning Collection Action Under Section 6320 and/or 6330 with respect to tax year 2018, sustaining respondent's levy action. In the notice of determination, SO Williams stated, inter alia, that she could not consider CNC status or an installment agreement, because petitioner's documentation established that he had equity in assets available to pay toward the outstanding tax liability and that his ability to pay could not be verified. On September 7, 2021, petitioner timely filed a Petition with this Court. In the Petition, petitioner alleged that respondent erred in not granting a monthly installment agreement as a collection alternative and in determining that a levy would not be overly intrusive. Petitioner also alleged that he "does not have sufficient liquid assets to full pay his 2018 liability."
II. Discussion
A. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C 678, 681 (1998). The Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we construe factual materials and draw inferences from them in the light most favorable to the nonmoving party. Sundstrand Corp., 98 T.C. at 520. However, the nonmoving party may not rest upon mere allegations or denials of his pleadings but, rather, must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d); see Sundstrand Corp., 98 T.C. at 520.
B. Standard of Review
Section 6330(d)(1) grants this Court jurisdiction to review the SO's determination in connection with a CDP hearing. Section 6330(c)(2) prescribes the matters that a taxpayer may raise at a CDP hearing, including spousal defenses, challenges to the appropriateness of the collection action, and collection alternatives. The existence or amount of the underlying tax liability may be contested at a CDP hearing only if the taxpayer did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the tax liability. See § 6330(c)(2)(B); Sego v. Commissioner, 114 T.C. 604, 609 (2000); Goza v. Commissioner, 114 T.C. 176, 180- 181 (2000).
If the validity of the underlying tax liability is properly at issue, the Court will review the taxpayer's liability de novo. See Sego, 114 T.C. at 609-610. Where the validity of the underlying tax liability is not properly at issue, the Court will review the SO's administrative determination for abuse of discretion. Id. at 610. Abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law. Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd, 469 F.3d 27 (1st Cir. 2006).
Petitioner's underlying liability is not at issue in this proceeding. We thus review respondent's determination only for abuse of discretion.
C. Rejection of Proposed Collection Alternatives
We must determine whether SO Williams's rejection of petitioner's proposed collection alternatives was an abuse of her discretion. Section 6330(c)(3) requires that the SO consider (1) the verification that the requirements of applicable law and administrative procedure have been met; (2) issues raised by the taxpayer; and (3) whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection be no more intrusive than necessary. Thompson v. Commissioner, 140 T.C. 173, 178-179 (2013).
In reviewing the determination, we do not substitute our judgment for that of the SO or make an independent determination of what would be an acceptable collection alternative. Id. at 179. If the SO "followed all statutory and administrative guidelines and provided a reasoned, balanced decision," we "will not reweigh the equities." Id.
With those principles in mind, we turn to the merits of SO Williams's determination to reject the two collection alternatives raised by petitioner. That determination rested upon two subsidiary conclusions: (1) that petitioner had significant value in his assets and thus was not eligible for CNC status; and (2) that due to that significant asset value petitioner did not establish he lacked ability to pay and thus was not eligible for an installment agreement. Respondent also argues in favor of a third rationale: that petitioner was out of compliance with his current filing obligations by failing to make estimated tax payments and failing to file Forms 1065 for Chelton and Northlawn.
We start with that third possible rationale: the issue of petitioner's filing compliance. In respondent's motion, respondent concedes that this rationale was not expressed in the notice of determination but directs our attention toward SO Williams's case activity notes and her correspondence with petitioner's representative, both of which discussed the issue. When a taxpayer is out of compliance with their current filing and payment obligations, we have previously held that this factor alone may be sufficient to justify an SO's determination to reject a collection alternative. See, e.g., Northside Carting, Inc. v. Commissioner, T.C. Memo. 2020-18, at *17; Cmty. Law Firm, Inc. v. Commissioner, T.C. Memo. 2018-198, at *8; Boulware v. Commissioner, T.C. Memo. 2014-80, at *21, aff'd, 816 F.3d 133 (D.C. Cir. 2016).
However, the fact that the filing compliance rationale was not expressed in the notice of determination precludes our review of it. When reviewing an agency determination, we must judge its validity "solely by the grounds invoked by the agency." Sec. & Exch. Comm'n v. Chenery Corp. (Chenery II), 332 U.S. 194, 196 (1947); see Sec. & Exch. Comm'n v. Chenery Corp. (Chenery I), 318 U.S. 80, 87-88 (1943). In a CDP case, we thus can uphold a determination only on grounds actually relied upon in the notice of determination. See, e.g., Dickes v. Commissioner, T.C. Memo. 2013-210, at *12-*13. Respondent's offered rationale is a post-hoc explanation, which may well have been contemplated during agency deliberations but was not expressed in a final agency determination. See, e.g., Antioco v. Commissioner, T.C. Memo. 2013-35, at *28; Jones v. Commissioner, T.C. Memo. 2012-274, at *22- *23. Accordingly, we do not review the filing compliance issue.
1. Denial of CNC Status
Turning to the actual grounds expressed in the notice of determination, we start with whether it was an abuse of discretion for SO Williams to conclude that petitioner was ineligible for CNC status, due to the significant equity value of his assets. Placing a taxpayer's account in CNC status "has the effect of suspending all collection action against that taxpayer." Margolis-Sellers v. Commissioner, T.C. Memo. 2019-165, at *44. To be entitled to CNC status, a taxpayer must show that they have "no apparent ability to make payments on the outstanding tax liability." Norberg v. Commissioner, T.C. Memo. 2022-30, at *5 (quoting Foley v. Commissioner, T.C. Memo. 2007-242, 2007 WL 2403732, at *2); see IRM pt. 5.16.1.2.9 ("An account should not be reported as CNC if the taxpayer has income or equity in assets * * *.").
We have thus previously upheld Appeals' determinations to deny CNC status where taxpayers had substantial equity in assets. See, e.g., Clues v. Commissioner, T.C. Memo. 2015-209, at *26; Riggs v. Commissioner, T.C. Memo. 2015-98, at *13; Fangonilo v. Commissioner, T.C. Memo. 2008-75, 2008 WL 852023, at *4.
We will likewise uphold SO William's determination to deny CNC status to petitioner. Consistent with this Court's past decisions and the Commissioner's administrative procedures, petitioner's equity in his assets (upwards of $1 million) far exceeded his tax liability and thus made him ineligible for CNC status. Accordingly, SO Williams did not abuse her discretion in denying petitioner CNC status.
2. Denial of Installment Agreement
Finally, we turn to whether SO Williams abused her discretion in denying petitioner's proposal of an installment agreement, due to his significant asset value. In his Petition, petitioner alleged that he "does not have sufficient liquid assets to full pay his 2018 liability." Even construing that factual allegation in petitioner's favor, we conclude that SO Williams's determination to reject the proposal of an installment agreement was not an abuse of discretion.
It is unclear whether petitioner still contends that this factual allegation is correct, given that he has indicated that he does not object to the granting of respondent's motion.
Section 6159 provides the Commissioner with the delegated authority to enter into installment payment agreements with a taxpayer where he determines that "such agreement will facilitate full or partial collection of such liability." The Commissioner generally has discretion "to accept or reject any proposed installment agreement." Treas. Reg. § 301.6159-1(c); see Rebuck v. Commissioner, T.C. Memo. 2016-3, at *15. In considering whether a taxpayer is eligible for an installment agreement, "an SO does not abuse her discretion by following guidelines set forth in the IRM." Dodson v. Commissioner, T.C. Memo. 2020-106, at *11. Generally, a taxpayer's ability to pay for purposes of an installment agreement is calculated by comparing monthly income to allowable monthly expenses. See, e.g., Friedman v. Commissioner, T.C. Memo. 2013-44, at *9. However, if a taxpayer has "equity in assets that could be used to fully or substantially satisfy" the liability, the Commissioner's internal guidance instructs that an SO should generally "explore the possibility of liquidating or borrowing against those assets" unless it would create a hardship for the taxpayer. IRM pt. 5.14.1.4(5).
In his correspondence with SO Williams and RO Sandoval, petitioner offered several reasons why he was unable to liquidate his assets to pay off the tax liability but did not support his explanation with evidence. Petitioner also did not address whether he would be able to borrow against the substantial equity in the real property in Mexico. We do not consider petitioner's arguments sufficient to establish that borrowing against or liquidating assets would constitute a hardship for him, as opposed to being merely inconvenient or occurring for less than optimal market value.
We have routinely held that a settlement officer does not abuse their discretion in rejecting an installment agreement because a taxpayer refuses to borrow against or liquidate assets to satisfy their tax liabilities. See, e.g., Strashny v. Commissioner, T.C. Memo. 2020-82, at *7-*8; Boulware, T.C. Memo. 2014-80, at *24; Bibby v. Commissioner, T.C. Memo. 2013-281, at *9-*10. We will likewise uphold SO Williams's determination here and conclude that it was not an abuse of discretion to reject petitioner's proposal of an installment agreement.
3. Verification & Balancing Obligations
Finally, we briefly address whether SO Williams satisfied her statutory obligations (1) to verify that the requirements of applicable law and administrative procedure were met and (2) to consider whether the proposed levy balanced the need for the efficient collection of taxes with the concern that collection be no more intrusive than necessary. We are satisfied that she did so.
In both her case activity notes and in the notice of determination, SO Williams documented that she verified: (1) that assessment was properly made for tax year 2018; (2) that notice and demand was mailed to petitioner's last known address; (3) that a balance was due and owing when the notice of intent to levy was issued; and (4) that SO Williams had no prior involvement with respect to tax year 2018. Similarly, in the notice of determination, SO Williams indicated that she had conducted a balancing analysis and concluded that the proposed levy was appropriate given the petitioner's available equity in his assets to pay toward the tax liability. Accordingly, we find that SO Williams complied with section 6330(c)(1) and (3).
III. Conclusion
We conclude that no material facts remain in dispute and that respondent is entitled to judgment as a matter of law. See Rule 121(b). Accordingly, we will grant respondent's motion.
Upon due consideration and for cause, it is
ORDERED that respondent's Motion for Summary Judgment, filed February 22, 2022, is granted. It is further
ORDERED that Notice of Determination Concerning Collection Action Under Section 6320 and/or 6330, dated August 24, 2021, upon which this case is based, is sustained, and respondent may proceed with the collection actions as determined in the Notice of Determination for the tax year 2018.