Opinion
13022-17L
08-17-2023
LECIEL L. LOWERY, JR. & CHARLENE A. LOWERY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER AND DECISION
Joseph W. Nega Judge
This collection due process (CDP) case is presently calendared for an in-person trial at the session of the Court scheduled to commence on Monday, September 18, 2023, in Baltimore, Maryland. On July 19, 2023, respondent filed a Motion for Summary Judgment (respondent's motion). By Order issued July 20, 2023, the Court directed petitioners to respond to respondent's motion on or before August 11, 2023. On August 11, 2023, petitioners filed an Opposition to Motion for Summary Judgment (petitioners' opposition), an Affidavit of Leciel L. Lowery in Support of Opposition to Motion for Summary Judgment, and an Affidavit of Charlene A. Lowery in Support of Opposition to Motion for Summary Judgment.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure.
I. Background
Petitioners filed joint tax returns for 2006 through 2014 (the years at issue) on which they self-reported tax owed but did not pay the liability. In October 2015 respondent issued to petitioners a Notice of Intent to Levy and Notice of Your Right to Hearing (levy notice) for tax years 2006 through 2013 and a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRS 6320 (NFTL). In December 2015 respondent issued to petitioners a second levy notice and a second NFTL for tax year 2014. Petitioners timely requested CDP hearings in response to each levy notice and NFTL. Petitioners' CDP case was assigned to an appeals officer, who corresponded with petitioners about a potential collection alternative and, after failing to reach an agreement with petitioners, ultimately issued a notice of determination sustaining the collection actions on May 12, 2017. Petitioners then filed a Petition with this Court, disputing the notice of determination. As of February 26, 2018 (the date of the most recent account transcripts stipulated to by the parties), petitioners owed a total amount of $639,109.21 for the years at issue, including applicable additions to tax and interest. After a trial and briefing by the parties, the Court issued a memorandum findings of fact and opinion, concluding that the record was insufficient for the Court to determine whether the appeals officer had abused her discretion. See Lowery v. Commissioner, T.C. Memo. 2019-151, at *17-18. By Order issued January 2, 2020, the Court remanded the case back to Appeals. In doing so, the Court directed Appeals to take the following actions in the supplemental CDP proceedings:
(1) explain why funds not received by petitioners because of mandatory [payroll] deductions were treated as available to pay petitioners' back tax;
(2) review records previously made available by petitioners and consider whether or to what extent those records substantiate the amounts of petitioners' reported unreimbursed expenses, and, to the extent respondent concludes that petitioners had unreimbursed employee expenses, why funds so expended should be considered available to petitioners to pay their back tax;
(3) consider whether Arizona law affects petitioner wife's power as trustee to sell property held by her family trust; and
(4) determine whether special circumstances, such as age, restrict the full or partial liquidation of petitioner husband's retirement account to pay petitioners' back tax.Id.
On remand, a new Appeals Officer (AO), Joseph D. Teti, was initially assigned to petitioners' case. AO Teti received from petitioners' counsel a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, with updated financials for petitioners. The Form 433-A reported that petitioners had $4,805 in monthly net income after expenses; the monthly income amount was based on a six-year average of petitioners' annual income, extrapolated out to monthly amounts. At the time of the CDP proceedings, petitioners' primary income source was from Mr. Lowery's work as a pilot for cargo vessels navigating the Chesapeake Bay. The Form 433-A also reported petitioners' available equity in a number of assets, including bank accounts ($142,354), a home ($366,500), three personal vehicles ($39,259), and a 401(k) retirement account ($302,400).
AO Teti reviewed the provided Form 433-A and, after applying the applicable national and local standards, reduced petitioners' allowable food, clothing and misc. expense amount from $3,208 to $1,446 and reduced petitioners' allowable housing and utilities expense amount from $5,365 to $2,108. Those adjustments resulted in a total allowable monthly expense amount of $15,486 and thus a minimum monthly payment amount of $9,840. AO Teti also considered petitioners' available net equity in considering their ability to pay. In doing so, AO Teti (1) did not include the trust value because petitioners could fully pay their tax liability without considering it and (2) exempted the full amount of the retirement account because petitioners would need its balance to cover expenses after retirement. Based on his calculations, AO Teti concluded petitioners could afford a plan of $9,500 per month for 72 months with a lump sum payment of $122,354.
On March 4, 2020, AO Teti called petitioners' counsel to inform petitioners of the calculated payment options and that the case would soon be reassigned to a new appeals officer. Petitioner's counsel requested an upward deviation from the standards for housing and utilities expenses, which AO Teti had previously indicated would be disallowed; AO Teti informed him that petitioners would need to submit proof that additional expenses were essential for health, welfare, or production of income. Petitioners' counsel also requested an offer in compromise or partial pay installment agreement (PPIA); AO Teti informed him that neither option could be considered, as petitioners' net equity in their assets indicated that full payment of the liability could be made prior to the collection statute expiration date (CSED).
A new appeals officer, AO Cynthia Covey, was then assigned to handle petitioners' case. As of March 11, 2020, petitioners owed a total amount of $707,556.79 for the years at issue. AO Covey advised petitioners' counsel that she would accept the installment agreement already proposed by AO Teti: a lump sum payment of $122,354 and monthly payments of $9,500. Due to the onset of the COVID-19 pandemic, AO Covey informed petitioners' counsel that payments would not be required under the agreement until late July 2020. Petitioners did not agree to the proposed installment agreement. In May and June 2020, petitioners' counsel sent a pair of letters to AO Covey that represented that Mr. Lowery's income from his piloting work had fallen due to the COVID-19 pandemic, from $45,879.47 in February 2020 to $40,282 in March 2020 and $31,800 in April 2020. On November 2, 2020, after consulting with respondent's counsel, AO Covey issued several supplemental notices of determinations to petitioners.
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 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.
B. Standard of Review
Section 6330(d)(1) grants this Court jurisdiction to review the AO's determination in connection with a CDP hearing. When a case is remanded to Appeals and supplemental determinations are issued, we review the determination as supplemented. See Kelby v. Commissioner, 130 T.C. 79, 86-87 (2008). 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, 180-81 (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 609-10. Where the validity of the underlying tax liability is not properly at issue, the Court will review the AO's 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). In reviewing the rejection of a collection alternative for abuse of discretion, we do not substitute our judgment for that of the appeals officer nor decide independently the amount we believe would be acceptable. See Thompson v. Commissioner, 140 T.C. 173, 179 (2013); Murphy, 125 T.C. at 320.
C. Underlying Liability
A taxpayer may challenge the existence or amount of underlying tax liability in a CDP proceeding only "if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability." § 6330(c)(2)(B). If the underlying liability was self-reported by a taxpayer on a return and summarily assessed by respondent, a taxpayer may still challenge that liability's existence or amount so long as they did not otherwise have an opportunity to dispute the liability. See Montgomery v. Commissioner, 122 T.C. 1, 8-9 (2004). However, to preserve such a challenge, a taxpayer must actually raise the issue of the underlying liability during the CDP proceeding. See Giamelli v. Commissioner, 129 T.C. 107, 112-16 (2007); Treas. Reg. § 301.6330-1(f)(2) Q&A-F3.
Petitioners did not raise their underlying liability as an issue in the CDP proceeding. As the Court previously concluded, petitioners' "underlying tax liability is not in dispute" in this case, and we thus review the supplemental determinations only for abuse of discretion. See Lowery, T.C. Memo. 2019-151, at *7.
D. Abuse of Discretion
1. Issues Raised-Consideration of Remand Issues
As noted above, the Court directed Appeals to consider four particular issues in the supplemental CDP proceeding. Ultimately, AO Covey conceded each of these issues in petitioners' favor. First, AO Covey accepted petitioners' reported monthly income and did not seek to include Mr. Lowery's mandatory payroll deductions. Second, AO Covey accepted all of petitioners' reported monthly business expenses. Third, AO Covey did not include the trust income in the ability to pay calculation and did not require petitioners to liquidate the trust in order to qualify for an installment agreement. Fourth, AO Covey did not include Mr. Lowery's retirement account balance in the ability to pay calculation and did not require petitioners to liquidate the account in order to qualify for an installment agreement.
In their response, petitioners suggest that AO Covey's conclusion that they could fully pay their liability meant that she had improperly included the trust and retirement account values in her calculations. Petitioners point to stray references made by AO Covey in the case activity notes as to petitioners having roughly "$800k" available in net equity. However, the supplemental notices of determination clarify this point: in them, AO Covey expressly states that neither the trust, the net equity in petitioners' home, nor the retirement account were included in the ability to pay calculation. We conclude that Appeals fully complied with the Court's memorandum findings of fact and opinion and related order by addressing and conceding each of these issues in petitioners' favor.
2. Issues Raised-Rejection of Proposed Installment Agreement
Section 6159(a) authorizes the Commissioner to enter into written agreements allowing taxpayers to pay tax in installment payments if he deems that the "agreement will facilitate full or partial collection of such liability." The decision to accept or reject an installment agreement lies within the Commissioner's discretion. Thompson, 140 T.C. at 179. In determining whether an installment agreement is appropriate, AOs review a taxpayer's monthly income, expenses, and net equity in assets, in order to determine whether the taxpayer can make a full payment of the liability within the applicable period of limitations on collection activity. See, e.g., Siebert v. Commissioner, T.C. Memo. 2021-34, at *29 (explaining installment agreement guidelines). If the taxpayer cannot fully pay the liability, the AO proceeds to calculate the taxpayer's reasonable collection potential (RCP). This Court has repeatedly held that AOs are entitled to rely on the guidelines published in the Internal Revenue Manual (IRM) in evaluating a taxpayer's ability to pay. See, e.g., Speltz v. Commissioner, 124 T.C. 165, 179 (2005), aff'd, 454 F.3d 782 (8th Cir. 2006). The IRM provides that a taxpayer may be eligible for a PPIA if they are unable to fully pay their tax liability within the period of limitations on collection activity. See IRM 5.14.2.2(1) (Apr. 26, 2019).
In opposing summary judgment, petitioners contend that AO Covey's rejection of their $4,800 PPIA offer rested on several errors. First, petitioners argue that the downward adjustment to their monthly housing and utilities expense amount was in error. Petitioners contend that their home repair and maintenance expenses were necessary and that AO Covey "seem[ed] to dismiss these issues out of hand without any meaningful analysis." Second, petitioners argue that AO Covey should have accounted for the decline in Mr. Lowery's monthly income from the onset of the COVID-19 pandemic.
a. Home Repairs & Maintenance Expenses
The IRM provides that "necessary maintenance and repair" expenses are includible in the monthly housing and utilities expense amount. See IRM 5.15.1.10.1(1) (Nov. 22, 2021). A necessary expense is one that is "necessary to provide for a taxpayer's and his or her family's health and welfare and/or production of income." IRM 5.15.1.8(1) (July 24, 2019). To support an upward deviation from the applicable local standards, a taxpayer thus "must provide documentation to substantiate those expenses are necessary." IRM 5.15.1.10.1(3) (Nov. 22, 2021); see, e.g., Flynn v. Commissioner, T.C. Memo. 2022-5, at *8 ("The taxpayer bears the burden of providing sufficient information to justify a deviation from local standards.").
As a starting point, AO Covey followed the IRM guidelines in allowing petitioners' claimed housing and utilities expense amount only up to the local standard limit for Baltimore County. Accordingly, petitioners bore the burden of providing sufficient documentation as to justify an upward deviation. Petitioners claimed that expenses corresponding to the following repairs should be included in their monthly expense total: (1) repairing water damage to interior drywall and tile; (2) replacing a window and installing new siding to improve energy efficiency; and (3) removing part of a driveway's blacktop. But petitioners offered little in the way of documentation or reasoning as to why these expenses were necessary for petitioners' health, welfare, or production of income. The sole piece of documentation provided to AO Covey was an email estimate from a contractor, quoting a price to "[t]ake out and haul away approximately [illegible] Sq. Ft. of old blacktop" from the driveway of petitioners' residence. We fail to see how any of petitioners' claimed home repair and maintenance expenses were necessary to their health and welfare and/or production of income.
More to the point, petitioners provided no documentation that any of their claimed expenses had been actually paid or would be paid in the near future. IRM 5.15.1.8(5) (Nov. 22, 2021) and 5.15.1.2(15) (July 24, 2019) (instructing IRS personnel to seek substantiation for any "[f]uture expenses"). Neither the IRM nor common sense justify allowing petitioners an upward deviation from the local standards for discretionary expenses that they may or may not incur in the future. See, e.g., McDonough v. Commissioner, T.C. Memo. 2006-234, 92 T.C.M. (CCH) 386, 389 (finding no abuse of discretion in settlement officer's determination not to allow unsubstantiated "speculative future medical costs" as expenses in calculation of ability to pay). We conclude that AO Covey did not abuse her discretion in applying the local standards to petitioners' monthly housing and utilities expense amount and thus rejecting their offered installment agreement amount as insufficient.
b. Pandemic-Related Income Reduction
Under the right circumstances, an AO's failure to account for a taxpayer's income reduction may constitute an abuse of discretion. See, e.g., Whittaker v. Commissioner, T.C. Memo. 2023-59, at *12-13 (considering this issue in the context of the COVID-19 pandemic). However, we are satisfied that AO Covey did not abuse her discretion on the facts of this case. For one, we note that petitioners' reported monthly income was already based on an average of their prior six years of annual income, extrapolated out to a monthly basis. That averaging, which resulted in a monthly amount of $37,307.32, thus already represented a substantial reduction from petitioners' actual monthly income in 2019 and the first two months of 2020. Having already afforded petitioners considerable leeway in allowing an average monthly income amount lower than their actual income, we conclude that AO Covey was within her discretion not to allow a further reduction based only on the much smaller and (potentially nonrepresentative) sample size of March and April 2020. See IRM 5.15.1.15 (Oct. 2, 2012) ("The income and expense information provided must reflect a sufficient time frame to accurately determine the monthly average that could be expected for the entire year . . . extraordinary events that can lead to excessive increases or decreases in income or expenses at a particular time [must be considered].").
In each year of the sample size, Mr. Lowery's income from his work increased, starting at $384,963 in 2014 (i.e., $32,080.25 per month) and ending at $488,527 in 2019 (i.e., $40,710.58 per month).
Further, even assuming arguendo that AO Covey erred in not allowing a lower monthly income amount due to COVID-19, that error would have been harmless in the context of this case. See Romano-Murphy v. Commissioner, 152 T.C. 278, 310 (2019) (describing harmless error rule as applicable if an agency's mistake was not prejudicial and would "not affect the outcome"). In a May 2020 letter to AO Covey, petitioners' counsel represented that Mr. Lowery's monthly income had substantially fallen, from $45,879.47 in February 2020 to $40,282 in March 2020 and $31,800 in April 2020. However, even accepting that $31,800 amount would not have changed the fact that a discrepancy existed between petitioners' ability to pay and their offered installment agreement amount. See, e.g., Estate of Washington v. Commissioner, T.C. Memo. 2022-4, at *27 (characterizing calculation error by Appeals as harmless when correct amount would still not have justified acceptance of taxpayer's offered collection alternative); Ragsdale v. Commissioner, T.C. Memo. 2019-33, at *32-33. We conclude that AO Covey did not abuse her discretion in not considering a lower amount for petitioners' monthly income due to the pandemic.
Petitioners' reported monthly income from Mr. Lowery's work was $37,307.32, while their actual April 2020 income from that work was apparently $31,800. A roughly $5,500 reduction in monthly income could not have bridged the gap between AO Covey's determined minimum monthly payment of $9,500 with a $122,354 lump sum payment and petitioners' offer of $4,800 per month.
3. Verification & Balancing Obligations
We finish with the issues of verification and balancing, which we generally may review regardless of whether raised by the taxpayer in the CDP proceeding. See Hoyle v. Commissioner, 131 T.C. 197, 202-03 (2008), supplemented by 136 T.C. 463 (2011). Sections 6330(c)(1) and (3) require that the AO: (1) properly verify that the requirements of applicable law or administrative procedure have been met and (2) consider 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. On the record before us, we are satisfied that AO Covey verified that petitioners' liability was properly assessed and that other relevant legal requirements were met. Finally, we conclude that AO Covey's determination to sustain the collection actions appropriately balanced the statutorily-prescribed interests, given petitioners' ability to pay.
III. Conclusion
Finding no abuse of discretion, we will grant respondent's motion. We have considered all the other arguments of the parties and, to the extent not discussed above, find those arguments to be irrelevant, moot, or without merit.
Accordingly, it is
ORDERED that respondent's Motion for Summary Judgment, filed July 19, 2023, is granted. It is further
ORDERED AND DECIDED that the Notice of Determination Concerning Collection Actions Under Sections 6320 or 6330 of the Internal Revenue Code, dated May 12, 2017, as supplemented, upon which this case is based, is sustained, and respondent may proceed with the collection actions as determined for tax years 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, and 2014.