Opinion
5060-19L
01-27-2022
PATRICIA JINDRA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER AND DECISION
Joseph W. Nega, Judge
This collection due process (CDP) case is before the Court on respondent's Motion for Summary Judgment, filed February 28, 2020 (respondent's motion) and accompanying Declaration of Settlement Officer Mary B. Smith In Support of Motion for Summary Judgment.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26, U.S.C., in effect for the years in issue, all regulation references are to Code of Federal Regulations, Title 26 (Treas. Reg.), in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar.
By Order dated April 14, 2020, the Court directed petitioner to file a response to respondent's motion. On August 14, 2020, petitioner filed a Response to Motion for Summary Judgment (petitioner's response). By Order dated August 19, 2020, the Court directed respondent to file a reply to petitioner's response on or before September 18, 2020. On September 18, 2020, respondent filed a Reply to Response to Motion for Summary Judgment.
Background
The following facts are drawn from the parties' pleadings and motion papers, including the attached declarations and exhibits. See Rule 121.
On January 4, 2016, petitioner was assessed a trust fund recovery penalty (TFRP) pursuant to section 6673(a)(1) in the amount of $9,071 for the tax period ending March 31, 2014. On March 20, 2017, the Commissioner issued to petitioner a Notice of Intent to Levy and Notice of Your Right to Hearing with respect to the TFRP assessed for that period. On April 19, 2017, petitioner timely submitted a Form 12153, Request for a Collection Due Process or Equivalent Hearing, to the IRS Office of Appeals, requesting a CDP hearing and consideration of an Offer in Compromise (OIC) as a collection alternative. As of June 21, 2017, petitioner's outstanding tax liability, with interest computed through July 3, 2017, totaled $58,954.
On July 1, 2019, Congress renamed the IRS Office of Appeals the IRS Independent Office of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, sec. 1001(a), 133 Stat. at 983 (2019). The events in this case largely predate that change, so we use the name in effect at the times relevant to this case, i.e., the Office of Appeals.
Settlement Officer Mary B. Smith (SO Smith) was assigned to petitioner's CDP case. On July 27, 2017, SO Smith sent to petitioner a letter, stating that she had received petitioner's CDP request and scheduling a telephonic hearing for August 29, 2017. SO Smith also requested that petitioner provide a signed Form 1040 for tax year 2016 and a completed Form 656 with all required documentation for consideration of an OIC.
Neither petitioner nor her representative called in to the scheduled telephonic hearing on August 29, 2017. However, on that same day, SO Smith received a responsive letter (dated August 25, 2017) from petitioner's representative, Mr. E. Thomas Ryder, that attached thereto a completed Form 656 and Form 433-A (OIC), along with supporting financial documentation. On the Form 656, petitioner made a lump sum cash offer of $1,000 as a compromise for not only petitioner's TFRP liability for the period ending March 31, 2014, but also (1) petitioner's joint federal income tax liability with her husband for tax year 2009; (2) petitioner's TFRP liabilities for various other periods; and (3) petitioner's joint individual shared responsibility payment liabilities for tax years 2014 and 2015. On the Form 433-A (OIC), petitioner and her husband listed several assets, including a primary residence in Spring Grove, Illinois with a fair market value of $270,000.00 and a loan balance of $219,000.00. After application of an 80% multiplier to the fair market value, the Form 433-A (OIC) listed total equity in assets in the amount of $0.00.
SO Smith forwarded petitioner's submission to the Centralized Offer in Compromise (COIC) Unit for processing, which assigned petitioner's submission to Revenue Officer Melissa McConnell (RO McConnell), an offer specialist, for further review. After some back and forth communications between RO McConnell and petitioner's representative, RO McConnell calculated that petitioner's ability to pay exceeded her tax liability and thus made the preliminary recommendation that petitioner's OIC be rejected. On August 9, 2018, the COIC Unit issued a letter to petitioner informing her of the preliminary decision to reject her offer based on her ability to pay the liability in full within the time provided by law.
On August 15, 2018, SO Smith received petitioner's case back from RO McConnell. In her case activity report, SO Smith noted that she issued a letter to petitioner, with copy to petitioner's representative, on August 15, 2018, scheduling a telephonic hearing with petitioner for September 17, 2018. On August 21, 2018, petitioner's representative sent a letter SO Smith disagreeing with what petitioner's representative characterized as the determination of petitioner's reasonable collection potential (RCP). In the letter, petitioner's representative argued for application in the RCP calculation of a different county's higher standard for housing expenses due to the extreme proximity ("less than one mile as the crow flies") between petitioner's residence in McHenry County and the neighboring Lake County, which had a higher housing standard. Petitioner's representative requested (1) a "hybrid deviation" standard of $2,450 (roughly 98% of Lake County's higher $2,501 standard) to account for proximity to Lake County; and (2) a second deviation upward to account for the remaining $383 of actual expenses, pursuant to pt. 5.15.1.9 of the Internal Revenue Manual (IRM). Petitioner's representative also argued that SO Smith should have calculated petitioner's future net income using a twelve-month multiplier, instead of using the length of the remaining period of limitations for collection (known as the Collection Statute Expiration Date or CSED). Petitioner's representative's argument was based on his calculation that petitioner owed approximately $63,000 in tax liability, which would exceed her ability to pay of $60,649 as calculated by RO McConnell.
Petitioner alleges that neither she nor her representative received such a letter informing them of the scheduled telephone call.
The IRM has been updated since petitioner's correspondence, and we construe petitioner to likely be referencing the section now found at IRM pt. 5.15.1.10.1, which instructs IRS personnel to allow actual expenses above the local housing standard only if "disallowance will cause the taxpayer economic hardship."
In her review of petitioner's submission and the preliminary rejection recommendation, SO Smith confirmed the mathematical calculations made by RO McConnell. SO Smith determined that petitioner had future monthly net income of $498 and net equity in her primary residence of $15,331, an adjustment which resulted from revaluing petitioner's primary residence upwards to $310,944. SO Smith also examined petitioner's two primary arguments, as expressed in her representative's letter of August 15. SO Smith rejected petitioner's attempt to deviate from the applicable local housing expense standard and determined that the IRM example cited was not factually applicable. Next, SO Smith examined petitioner's attempt to apply a 12-month multiplier to petitioner's net income rather than the remaining length of the period before the CSED. SO Smith noted that petitioner's differing calculation of the tax liability included daily compounded interest and penalties, which she concluded were not includible in the aggregate balance of the tax liability. SO Smith's final calculations showed a tax liability of $58,953 and an RCP of $60,649. SO Smith thus determined that petitioner's future net income was appropriately multiplied by the remaining CSED because of her ability to pay the liability in full.
Neither petitioner nor petitioner's representative called into the scheduled CDP hearing conference on September 17, 2018. On September 17, 2018, SO Smith noted in her case activity report that she subsequently issued a last chance letter to petitioner, with copy to petitioner's representative, giving petitioner until October 1, 2018 to respond. On February 6, 2019, the Commissioner issued a Notice of Determination Concerning Collection Actions Under Sections 6320 or 6330 (Notice of Determination), sustaining the levy action. On March 8, 2019, petitioner timely filed a petition with this Court. See § 7502(a)(1).
Petitioner also alleges that neither she nor her representative received this letter.
Discussion
I. 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 therefrom 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.
II. 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 to reject an OIC 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). In reviewing the rejection of an OIC for abuse of discretion, we do not substitute our judgment for that of the settlement officer nor decide independently the amount we believe would be an acceptable OIC. See Thompson v. Commissioner, 140 T.C. 173, 179 (2013); Murphy, 125 T.C. at 130.
Here, petitioner's underlying liability is not at issue, and we thus review respondent's determination for abuse of discretion.
III. The Determination to Reject Petitioner's Offer in Compromise
Section 7122(a) provides the Commissioner with delegated authority to compromise any civil or criminal tax liability. Generally, the "decision to entertain, accept or reject an offer in compromise is squarely within the discretion of the appeals officer and the [Commissioner]." Kindred v. Commissioner, 454 F.3d 688, 696 (7th Cir. 2006); see § 301.7122-1(c)(1), Admin & Proced. Regs. There are three grounds for an OIC: (1) doubt as to liability (DATL), (2) doubt as to collectibility (DATC), and (3) the promotion of effective tax administration (ETA). See Speltz v. Commissioner, 124 T.C. 165, 172 (2005), aff'd, 454 F.3d 782 (8th Cir. 2006); see also § 301.7122-1(b)(1)-(3), Admin & Proced. Regs. Petitioner sought to qualify her offer as a DATC OIC and has not alleged that she was entitled to an ETA OIC.
The regulations direct the Commissioner to make an initial determination of a taxpayer's ability to pay as part of its determination to accept or reject a DATC OIC. See § 301.7122-1(c)(2)(i), Admin & Proced. Regs. Generally, the Commissioner will only accept a DATC OIC if the taxpayer's liability exceeds her ability to pay. See Murphy, 125 T.C. at 309; Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517. If the taxpayer's liability exceeds her ability to pay, then the Commissioner will calculate an appropriate offer amount, based on the taxpayer's reasonable collection potential (RCP), a figure comprised of the sum of future net income and net equity in assets. Murphy, 125 T.C. at 309. As part of both the ability to pay and RCP calculations, the Commissioner is guided by national and local expense standards. See § 7122(d)(2)(A). The standards provide a maximum allowance for a taxpayer's monthly expenses, and the Commissioner will generally only allow expenses that do not exceed the applicable standards. Section 7122(d)(2)(B) provides that the Commissioner must determine, based on the facts and circumstances of each taxpayer, "whether the use of the schedules * * * is appropriate."
This Court has generally sustained the Commissioner's reliance on the national and local standards in determining a taxpayer's allowed expenses for purposes of evaluating an OIC. See, e.g., Perrin v. Commissioner, T.C. Memo. 2012-22, 2012 WL 162701, at *3 ("The use of local and national standards is expressly authorized by Congress and does not constitute an abuse of discretion even if it forces a taxpayer such as petitioner to change his lifestyle."). The taxpayer bears the burden of submitting information to the settlement officer that justifies a departure from the standards. See, e.g., Dean v. Commissioner, T.C. Memo. 2009-269, 2009 WL 4161785, at *7. Finally, it is well settled "that the IRM does not have the force of law, is not binding on the Commissioner, and does not confer any rights on the taxpayer." Barnes v. Commissioner, 130 T.C. 248, 255-256 (2008) (citing Carlson v. United States, 126 F.3d 915, 922 (7th Cir. 1997)).
Petitioner argues that respondent abused his discretion by declining to allow a deviation upwards from the applicable local housing expense standard for McHenry County. As support, petitioner cites an example in IRM pt. 5.8.5.22.1(3), which sets out a scenario where a taxpayer has $2,250 in monthly housing expenses, an applicable local standard of $1,800, and a primary residence with a FMV approximately equal to its mortgage balance. The example specifies two conditions for upward deviation: (1) the taxpayer must be "unable to restructure their mortgage payment" and (2) the equity in the property must be "insufficient to pay the costs of selling their current home, related moving expenses, and purchasing or renting a new home that would allow for monthly payments within the national standard." IRM pt. 5.8.5.22.1(3). Under that set of facts and with those conditions satisfied, the IRM instructs that "the taxpayer may be allowed a housing amount that exceeds the standard." Id.
The example in the IRM contemplates a narrow factual scenario of economic distress, where the taxpayer has little or no equity in their primary residence, pays substantial monthly mortgage payments, and is unable to reduce their cost of living through refinancing or moving to a new residence. Petitioner's situation was not so closely analogous to the IRM example that we will second-guess SO Smith's determination not to extend it. SO Smith was well within the bounds of her discretion not to apply the relief in the example to petitioner's distinct set of facts, and her determination to rely on the local McHenry County housing standard instead was reasonable. See Speltz, 124 T.C. at 179 (concluding that differences between the parties as to the calculation of their ability to pay "are not material and do not preclude resolution of th[e] case on summary judgment").
Next, petitioner argues that SO Smith improperly calculated petitioner's RCP over the length of the remaining CSED. When processing a DATC OIC, IRS personnel are directed to first make an "initial calculation to determine if the taxpayer can full pay through installment agreement guidelines, which includes equity in assets and the taxpayer's ability to make payments over the remaining CSED." IRM pt. 5.8.5.2(2) (emphasis added); see id. at 5.8.4.3(3) ("Offers should not be accepted where the tax can be paid in full as a lump sum or can be paid under current installment agreement (IA) guidelines * * *".). The IRM directs that this calculation "should be made on the liability(s) (assessed and unassessed) due at the time the offer was submitted." Id. at 5.8.5.2(1) (emphasis added). If the taxpayer does not have the ability to fully pay the liability per this calculation, only then does the IRM instruct IRS personnel to calculate a taxpayer's RCP for an offer amount, which is comprised of net realizable equity in assets plus net future income, calculated over a 12 or 24 month period for a lump sum offer. See IRM pt. 5.8.4.3.1(1).
Here, the Commissioner's records establish that petitioner's total tax liability was $58,953.89 on June 21, 2017, roughly two months before the OIC was submitted on August 29, 2017. SO Smith calculated that petitioner had the ability to pay $60,649 over the remaining length of the CSED. Accordingly, petitioner's ability to fully pay the liability over the remaining CSED meant that she was simply not eligible for a DATC OIC, and SO Smith's determination to reject her OIC was not an abuse of discretion. See, e.g., Gillette v. Commissioner, 801 Fed.Appx. 398, 402-403 (7th Cir. 2020) (finding no abuse of discretion in settlement's officer determination to reject DATC OIC when taxpayers had sufficient net equity in real estate for full payment), aff'g, T.C. Memo. 2018-195; see also § 301.7122-1(b)(2), Admin & Proced. Regs.
While the record does not establish the exact amount of petitioner's total tax liability on August 29, 2017 (the date the OIC was submitted), interest would have accrued on petitioner's liability of $58,954 between July 3 and August 29, 2017 at a rate of 4%. See Rev. Rul. 2017-13, 2017-26 I.R.B. 1264; see also § 6621(a)(2). In the absence of any evidence to the contrary, we find that petitioner's ability to pay, as calculated by SO Smith, exceeded her total tax liability on the date the OIC was submitted.
That leads us to petitioner's final, procedural argument. Petitioner states that she was willing to discuss the case further and to amend her offer upwards but never received the opportunity to do so, because, she alleges, she did not receive either the August 15, 2018 letter (which scheduled a call) or the September 17, 2018 letter (which set a 14-day deadline to provide information) from SO Smith. Petitioner argues that this constituted an abuse of discretion by SO Smith. We disagree with petitioner for two reasons.
First, petitioner's unsupported allegation that she failed to receive the two letters is insufficient to create a material fact issue that would defeat summary judgment. Rule 121(d) generally requires that a party opposing summary judgment "set forth specific facts showing that there is a genuine dispute for trial." Petitioner has failed to elaborate on her bare allegation in the petition that she did not receive either letter, nor has she produced an affidavit or declaration supporting the allegation and establishing a genuine dispute with respondent's supported allegations. See, e.g., Rosenberg v. Commissioner, T.C. Memo. 2019-52, at *17 (petitioner's unsupported allegation that he did not receive mail or phone calls from the Commissioner did not constitute a fact issue). Consequently, petitioner has failed to carry her burden under Rule 121(d) of establishing the existence of a fact issue.
Second, even if petitioner had established a fact issue, we are not convinced that the alleged non-receipt would be sufficiently material as to whether SO Smith's determination was an abuse of discretion. SO Smith was under no duty to negotiate with petitioner over the offer. See, e.g., Brombach v. Commissioner, T.C. Memo. 2012-265, at *28 ("The opportunity to amend an offer is not a taxpayer's right but is within the Commissioner's discretion, and the Commissioner has no binding duty to negotiate with a taxpayer before rejecting his offer."). After seeking to contact petitioner twice via mail in order to provide an additional opportunity to respond to the preliminary rejection, SO Smith waited roughly two additional months before closing the case, with no contact from petitioner or her representative. Cf. McAvey v. Commissioner, T.C. Memo. 2018-142, at *18 (no abuse of discretion where settlement officer issued notice of determination after setting deadline and twice attempting to contact petitioner's representative); Scholz v. Commissioner, T.C. Memo. 2015-2, at *8 ("When an SO gives a taxpayer an adequate period of time in which to respond, it is not an abuse of discretion for the SO to move ahead after encountering radio silence from the taxpayer."); Shanley v. Commissioner, T.C. Memo. 2009-17, 2009 WL 195929, at *5-7 (no abuse of discretion where appeals officer closed case after taxpayer failed to timely respond to a 14-day deadline). SO Smith was under no obligation to wait indefinitely for petitioner, and the issuance of the notice of determination after failing to hear from petitioner or her representative was not an abuse of discretion. See Pough v. Commissioner, 135 T.C. 344, 351 (2010).
We thus conclude that SO Smith did not abuse her discretion in rejecting petitioner's OIC. In reaching our decision, we have considered all arguments made, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.
Upon due consideration and for cause. It is
ORDERED that respondent's Motion for Summary Judgment, filed February 28, 2020, is granted. It is further
ORDERED AND DECIDED that the Notice of Determination Concerning Collection Actions Under Sections 6320 or 6330, dated February 6, 2019, 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 period ending March 30, 2014.