                    T.C. Summary Opinion 2007-52



                      UNITED STATES TAX COURT



              BRAD DANIEL CLARKE, SR., Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 5494-06S.                Filed March 29, 2007.



    Brad Daniel Clarke, Sr., pro se.

    Susan K. Greene, for respondent.



     JACOBS, Judge:   This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.    Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code as

amended.   Pursuant to section 7463(b), the decision to be entered
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is not reviewable by any other court, and this opinion shall not

be treated as precedent for any other case.

     The petition in this case was filed in response to a Notice

of Determination Concerning Collection Action(s) Under Section

6320 and/or 6330 (notice of determination).    Pursuant to section

6330(d), petitioner seeks review of respondent’s proposed levy

action with respect to his income tax liability for tax year

1999.   The issue for decision is whether respondent’s

determination to proceed with the proposed levy action for tax

year 1999 was an abuse of discretion.

                            Background

     At the time petitioner filed the petition, he resided in

Houston, Texas.   Petitioner filed a Federal income tax return for

the tax year 1999 which showed tax of $4,587, a withholding

credit of $1,922, and a balance due of $2,665.    Respondent

assessed the tax shown on petitioner’s 1999 return, plus

additions to tax and interest.    Thereafter, respondent audited

petitioner’s 1999 return, determined a deficiency of $1,170, and

issued a notice of deficiency.    Petitioner filed a petition with

this Court with respect to the 1999 tax year, but the case for

that year was never tried because the parties agreed to a

stipulated decision, which was entered on February 28, 2003.    In

the decision document, the parties stipulated that there was a

deficiency of $1,170 for 1999.    The parties further stipulated
                               - 3 -

that interest would be assessed as provided by law.    Petitioner

and respondent both signed and dated the stipulated decision.

     On June 13, 2005, respondent sent petitioner a notice of

intent to levy, advising petitioner that respondent intended to

proceed with collection by levy with regard to petitioner’s

unpaid income tax liability for the tax year 1999.    Respondent

advised petitioner that petitioner could request a hearing with

respondent’s Office of Appeals.

     Petitioner requested a collection due process hearing for

the tax year 1999, which was held by telephone on November 7,

2005.   In his request for the hearing, petitioner indicated that

he did not agree with the proposed levy action because of

“financial hardship, low wages, divorce, bankruptcy, child

support and multiple lawsuits.”   During the hearing, petitioner

and the Appeals officer explored collection alternatives.

Petitioner stated that he would be willing to pay $50 per month

until the 1999 tax obligation was paid.   Petitioner explained

that he was earning $10 per hour as a hotel purchasing clerk,

that he rented his housing, and that he had very few assets.     At

the conclusion of the telephone conversation, the Appeals officer

provided petitioner with Form 433-D, Installment Agreement.    In

addition to showing the $2,242.31 petitioner owed for 1999, the

proposed installment agreement the Appeals officer prepared

included the tax year 2004 because respondent’s records showed
                                - 4 -

that petitioner owed approximately $222 for the tax year 2004.

The proposed installment agreement provided that petitioner would

pay $50 each month beginning January 21, 2006.

     Petitioner did not believe that he owed the amount indicated

for 2004.    On the contrary, he believed that he was entitled to a

refund, and therefore he refused to sign the installment

agreement.   Petitioner explained his reluctance to sign the

proposed installment agreement in a voice mail message to

respondent’s Appeals officer on January 17, 2006.   Petitioner

reiterated his position in a telephone conversation with the same

Appeals officer on January 19, 2006, and again in a letter to the

same Appeals Officer dated January 20, 2006, and received by the

Appeals officer on February 3, 2006.    In the January 20 letter,

petitioner wrote that he was, however, “happily cooperating with

the IRS by making voluntary payments until this 2004 tax issue

can be resolved.”   Respondent’s records show that petitioner made

five payments of $50 each between January and April of 2006.1

     On February 10, 2006, respondent’s Appeals officer sustained

the proposed levy action.   The Appeals officer’s notes indicate

that in communicating to petitioner his intention to sustain the

proposed levy action, the Appeals officer advised petitioner that

he did not have jurisdiction over tax year 2004 and that




     1
      Petitioner had also made a $50 payment in July of 2005.
                                - 5 -

petitioner could seek assistance with regard to the 2004 tax year

from the “TAO’s Office”.2

     On March 16, 2006, petitioner filed a petition for lien or

levy action and for redetermination of a deficiency with this

Court.    Because respondent applied petitioner’s tax refund from

the year 2005 to his outstanding tax liabilities from 2004 as

well as from 1999, according to respondent petitioner no longer

has an unpaid tax liability for the year 2004 and owes

approximately $282.03 for the 1999 tax year.

     Petitioner contends that respondent abused his discretion in

refusing to enter into a settlement agreement with him unless the

agreement included the 2004 tax year as well as the 1999 tax

year.    Further, petitioner contends that he was owed a refund for

the tax year 2004, rather than owing additional tax as respondent

determined.    This claim, according to petitioner, was never

properly evaluated by respondent’s Appeals officer.

Consequently, petitioner contends that respondent acted

improperly in applying a refund due petitioner for the tax year

2005 to 2004, for which year, claims petitioner, he did not owe

any tax.    Had respondent applied the 2005 refund entirely to

amounts owed for 1999, claims petitioner, the liability for 1999

would have been completely paid.



     2
      We assume that this refers to the Taxpayer Assistance
Office.
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                               Discussion

     Section 6331(a) authorizes the Secretary to levy upon

property and property rights of a taxpayer liable for taxes who

fails to pay those taxes within 10 days after notice and demand

for payment.   Section 6331(d) provides that the levy authorized

in section 6331(a) may be made with respect to any “unpaid tax”

only after the Secretary has notified the person in writing of

his intention to make the levy and of the taxpayer’s right to a

section 6330 hearing at least 30 days before any levy action is

begun.

     If a section 6330 hearing is requested, the hearing is to be

conducted by the Commissioner’s Office of Appeals, and, at the

hearing, the Appeals officer conducting it must verify that the

requirements of any applicable law or administrative procedure

have been met.    Sec. 6330(b)(1), (c)(1).   The taxpayer is

entitled to one hearing with respect to “the taxable period to

which the unpaid tax specified in * * * [the levy notice]

relates.”   Sec. 6330(b)(2).    The taxpayer may raise at the

hearing “any relevant issue relating to the unpaid tax or the

proposed levy”.    Sec. 6330(c)(2)(A).

     At the conclusion of the hearing, the Appeals officer must

determine whether and how to proceed with collection and shall

take into account (i) the verification that the requirements of

any applicable law or administrative procedure have been met,
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(ii) the relevant issues raised by the taxpayer, (iii) challenges

to the underlying tax liability by the taxpayer, where permitted,

and (iv) whether any proposed collection action balances the need

for the efficient collection of taxes with the legitimate concern

of the taxpayer that the collection action be no more intrusive

than necessary.   Sec. 6330(c)(3).

     We have jurisdiction to review the Appeals officer´s

determination where we have jurisdiction over the type of tax

involved in the case.   Sec. 6330(d)(1)(a).   Generally, we may

consider only those issues that the taxpayer raised during the

section 6330 hearing or otherwise brought to the attention of the

Appeals Office.   Magana v. Commissioner, 118 T.C. 488, 493

(2002).   We also have jurisdiction to consider the taxpayer’s tax

liabilities for years that were not the subject of the notice of

determination insofar as they are relevant to computing

the taxpayer’s tax liability for years that are the subject of

the notice of determination.    Freije v. Commissioner, 125 T.C.

14, 27 (2005).

     Where the underlying tax liability is at issue, we review

the determination de novo.     Sego v. Commissioner, 114 T.C. 604,

610 (2000).   Where the underlying tax liability is not at issue,

we review the determination for abuse of discretion.     Id.

     An abuse of discretion is defined as any action that is

unreasonable, arbitrary or capricious, clearly unlawful, or
                               - 8 -

lacking sound basis in law, taking into account all the facts

and circumstances. See, e.g., Thor Power Tool Co. v.

Commissioner, 439 U.S. 522, 532-533 (1979).

     Petitioner’s underlying tax liability for 1999 is not at

issue because petitioner received a notice of deficiency for that

year and agreed, in a stipulated decision entered by the Court,

that he owed, in addition to the self-assessed amount of $4,587

($1,922 of which had already been paid through withholding

credits), tax of $1,170, together with interest.3   See sec.

6330(c)(2)(B).   Therefore, we review respondent’s determination

for abuse of discretion.

     Petitioner’s first claim is that respondent abused his

discretion by refusing to enter into an installment agreement

with petitioner for 1999, the tax year in issue, unless the 2004

year were also included.   Petitioner did not believe that he owed



     3
      Also, an addition to tax arises upon the taxpayer’s failure
to pay income tax when it is due. Respondent seeks to collect
this addition to tax because petitioner did not timely pay the
1999 tax liability as he had agreed. See sec. 6651(a)(2) and
(3). It appears that respondent assessed this addition to tax in
November of 2000 and again in May of 2006. Petitioner did not
raise the issue of his liability for the addition to tax during
his sec. 6330 hearing or otherwise bring it to the attention of
the Appeals Office. Therefore, we do not consider it even though
petitioner raised this issue in his petition. See sec. 301.6330-
1(f)(2), A-F5, Proced. & Admin. Regs. If the issue were properly
before us, and if, as appears to be the case, petitioner did not
receive a notice of deficiency with respect to the addition to
tax or otherwise have an opportunity to dispute it, our review
would be de novo. Sego v. Commissioner, 114 T.C. 604, 609
(2000).
                                - 9 -

any tax for 2004; on the contrary, he believed that he was

entitled to a refund.   Therefore, he refused to agree to

respondent’s proposed installment agreement, which included in

its terms both 1999 and 2004.

     Respondent contends that he was merely following his own

policies as set forth in the Internal Revenue Manual (IRM).

Specifically, IRM sec. 5.14.1.5.1 requires the Commissioner to

ensure that all “balance due modules” are included in installment

agreements.   A “balance due module”, according to respondent,

included tax year 2004 because respondent’s records indicated, at

the time the possibility of an installment agreement was

discussed, that petitioner had an outstanding balance of tax due

for 2004.

     Section 6159 authorizes the Commissioner to enter into

installment agreements with taxpayers to satisfy their tax

liabilities if the Commissioner determines that such agreements

will facilitate the collection of the liabilities.   The IRM,

together with sections 301.6159-1, 301.6320-1, and 301.6330-1,

Proced. & Admin. Regs., establishes Internal Revenue Service

(IRS) procedures for determining whether an installment agreement

will facilitate collection of the liability.   This Court has

previously upheld the Commissioner’s determinations that were

based partly on the provisions of the IRM.   See, e.g., Orum v.
                                - 10 -

Commissioner, 123 T.C. 1, 13 (2004), affd. 412 F.3d 819 (7th Cir.

2005); McCorkle v. Commissioner, T.C. Memo. 2003-34; Schulman v.

Commissioner, T.C. Memo. 2002-129.

     Respondent’s position with respect to the installment

agreement is in accord with pertinent provisions of the IRM.    See

IRM sec. 5.14.1.5.1.   We are not prepared to find that

respondent, in following his own procedures, made a decision that

is arbitrary or capricious, clearly unlawful, or lacking sound

basis in law.

     Respondent’s proposed installment agreement contemplated

monthly payments of $50.   Petitioner had already indicated that

he was willing to do this and did in fact make the contemplated

payments even in the absence of an installment agreement.

Consequently, we cannot say that the installment agreement would

have facilitated the collection of the liability or that

respondent’s refusal to enter into such an agreement would have

impeded the collection of the liability.

     We reach a different conclusion with respect to the manner

in which respondent evaluated petitioner’s contentions with

respect to the 2004 tax year.    Respondent applied petitioner’s

refund from 2005 to petitioner’s 2004 tax.

     Section 6402 allows the IRS to credit an “overpayment,

including any interest allowed thereon, against any liability in

respect of an internal revenue tax on the part of the person who
                                - 11 -

made the overpayment” and, subject to certain limitations, to

refund any balance to the person.    In lieu of a refund, a

taxpayer can instruct the IRS to credit his overpayment against

the estimated tax for the taxable year immediately succeeding the

year of the overpayment.    Sec. 301.6402-3(a)(5), Proced. & Admin.

Regs.

     It is well settled that the IRS need only refund, or apply

to the taxpayer’s estimated tax, that portion of the overpayment

that exceeds the taxpayer’s “outstanding liability for any tax”.

Sec. 301.6402-3(a)(6)(i), Proced. & Admin. Regs.; see N. States

Power Co. v. United States, 73 F.3d 764, 767 (8th Cir. 1996)

(quoting United States v. Ryan, 64 F.3d 1516, 1523 (11th Cir.

1995) (“[Section 6402], ‘plainly gives the IRS the discretion to

apply overpayments to any tax liability’”)); Kalb v. United

States, 505 F.2d 506, 509 (2d Cir. 1974) (rejecting the argument

that because the tax overpayment was voluntary, the IRS was bound

to comply with the taxpayer’s direction about how to apply that

payment; section 6402(a) “clearly gives the IRS discretion to

apply a refund to ‘any liability’ of the taxpayer”).

        The difficulty in this case is that it was never established

that petitioner owed any tax for 2004.    Petitioner repeatedly

brought to respondent’s attention that he did not believe that he

owed tax for 2004.     On the contrary, petitioner believed that he

was entitled to a refund of $243.20, and thus it was
                               - 12 -

inappropriate for respondent to apply any refund credits from

2005 to the 2004 tax year.   Respondent’s records4 show that

petitioner filed a 2004 return reporting a tax of $3,119, which

was assessed, and that petitioner was entitled to withholding

credits of $3,362.20.    This difference in withholding credits

over the tax owed is $243.20, exactly the amount petitioner

claims as a refund.    However, respondent’s records show that

respondent assessed an additional $450 in tax for 2004.    There is

no explanation in respondent’s records as to why this occurred

and whether this assessment was preceded by a notice of

deficiency.    Petitioner explained to the Appeals officer that

respondent had disallowed a claimed deduction for 2004 and that

petitioner had supplied additional information in support of that

deduction.    The only answer that petitioner was ever able to

obtain from respondent was that the 2004 tax year could not be

considered, as it was not the subject of a levy action, and that

respondent’s Appeals officer did not have jurisdiction over

matters relating to 2004.

     We find that respondent did not take into account the

relevant issues petitioner raised as required by section

6330(c)(3).    Indeed, respondent explicitly declined to take into



     4
      Respondent’s records consist of data stored in a computer.
Respondent’s records pertaining to petitioner’s 2004 tax
liability were printed on Sept. 13, 2005, well before
respondent’s Appeals officer upheld the levy on Feb. 10, 2006.
                                  - 13 -

account petitioner’s claims pertaining to the 2004 tax year, even

though petitioner’s arguments were clearly relevant in evaluating

the permissibility of the levy action in relation to the 1999

tax.

        We hold that respondent’s application of petitioner’s tax

refund amount from 2005 to the year 2004, in the absence of

respondent’s establishing that there was any tax liability for

2004, even though petitioner repeatedly asserted, and his 2004

return showed, that there was no such liability, was an error of

law.5       The Appeals officer’s verification that the requirements

of applicable law had been met was incorrect.       Accordingly, levy

to collect the 1999 assessment may not proceed.       We shall remand

the determination for 1999 to respondent’s Office of Appeals for

reconsideration of petitioner’s claim that he owed no taxes for

2004 and thus the amount of the refund due him for tax year 2005

should have been applied entirely to tax year 1999.




        5
      As explained supra note 3, we do not review respondent’s
imposition of an addition to tax under sec. 6651(a)(2) and (3)
for failure to pay income tax when it is due. In the light of
our holding that respondent erred as a matter of law in pursuing
the levy action, the standard of review that we would employ in
evaluating the issue of petitioner’s liability for the addition
to tax makes no difference. See Kendricks v. Commissioner, 124
T.C. 69, 75 (2005). On remand, respondent should determine
whether he should have applied petitioner’s entire 2005 refund to
tax year 1999 and whether doing so would have reduced or
extinguished the 1999 liability and the corresponding addition to
tax which was assessed in 2006.
                        - 14 -

To reflect the foregoing,

                             An appropriate order

                             will be issued.
