                              T.C. Memo. 2019-116



                        UNITED STATES TAX COURT



          JASON STEWART AND KRISTY STEWART, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 15734-18L.                        Filed September 10, 2019.



      Eric William Johnson, for petitioners.

      Paul A. George, for respondent.



                          MEMORANDUM OPINION


      KERRIGAN, Judge: The petition in this case was filed in response to two

Notices of Determination Concerning Collection Action(s) Under Section 6320

and/or 6330 (notices of determination) dated July 19, 2018, that were issued to

each petitioner by the Internal Revenue Service (IRS or respondent) Office of

Appeals. The notices of determination sustained the filing of a notice of Federal
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[*2] tax lien (NFTL) and a proposed levy regarding petitioners’ unpaid income tax

liabilities for 2015 and 2016 (years in issue).1 The NFTL pertains to year 2015,

and the proposed levy pertains to years 2015 and 2016.

      The issue for consideration is whether the IRS settlement officer improperly

engaged in an ex parte communication with the IRS revenue officer during

petitioners’ collection due process (CDP) proceeding, committing an abuse of

discretion. Unless otherwise indicated, all section references are to the Internal

Revenue Code, as amended, in effect at all relevant times, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

                                    Background

      This case was fully stipulated pursuant to Rule 122. The stipulated facts are

incorporated in our findings by this reference. Petitioners resided in Minnesota

when they timely filed their petition.

      Petitioners reported adjusted income of $664,234 and $448,154 for 2015

and 2016, respectively. For 2015 they made no estimated tax payments and no

payment when their income tax return was filed. For 2016 they made one

estimated tax payment and no payment when their return was filed.

      1
        The parties agree that the notices of determination contain typographical
errors that incorrectly state that the NFTL pertains to years 2015 and 2016 and the
proposed levy pertains only to year 2015.
                                        -3-

[*3] On May 23, 2017, respondent issued to petitioners a notice of NFTL filing

for 2015. On June 20, 2017, petitioners timely filed a CDP hearing request on

which they checked the boxes for installment agreement and not being able to pay

the balance. On July 28, 2017, Revenue Officer J. Wagner (RO Wagner) visited

petitioners’ representative, E. Johnson, who also represents petitioners before this

Court, as a part of his initial collection investigation. Following the meeting RO

Wagner entered notes in the Information Collection System (ICS) history, which is

a part of the administrative file kept by respondent.

      RO Wagner’s notes state that Mr. Johnson was “uncooperative” and

“unwilling to provide financial information” on petitioners’ behalf. RO Wagner’s

notes also state that Mr. Johnson concluded the visit by informing him “we’re

done” and that Mr. Johnson directed RO Wagner out of his office.

      Also on July 28, 2017, RO Wagner sent Mr. Johnson a followup letter

containing statements consistent with RO Wagner’s ICS history notes of the

meeting from earlier that day. This letter stated: “You refused to provide any

collection information and stated it would be provided directly to the office

appeals. You then brusquely directed me to leave your office.”

      Respondent issued to each petitioner a Notice of Intent to Levy and Your

Right to a Hearing for the years in issue dated July 28, 2017. On or around July
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[*4] 31, 2017, petitioners timely filed a second CDP hearing request. Petitioners’

CDP hearing requests were assigned to Settlement Officer G. Wert (SO Wert) in

the IRS Appeals Office. On December 19, 2017, SO Wert conducted petitioners’

CDP hearing with Mr. Johnson. Mr. Johnson and SO Wert discussed collection

alternatives, lien withdrawal and discharge, and the possibility of placing

petitioners in currently noncollectible (CNC) status.

      On January 18, 2018, SO Wert and Mr. Johnson discussed the requirements

for CNC status based on hardship. SO Wert requested from Mr. Johnson the

financial information from petitioners needed for IRS Collections to investigate

and verify that financial information before CNC status could be granted. Mr.

Johnson provided the requested financial information, a Collection Information

Statement (CIS), to SO Wert. Mr. Johnson requested that petitioners be placed in

CNC status for six months, as they were pursuing potential litigation, had

fluctuating income, and could not currently pay their back taxes.

      On March 1, 2018, the CIS was sent to RO Wagner. On April 2, 2018, RO

Wagner completed his investigation of petitioners’ CIS, and those results were

shared with Mr. Johnson and petitioners. RO Wagner determined that petitioners

could make monthly installment payments and were ineligible for CNC status.
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[*5] Petitioners were given until May 3, 2018, to respond to or rebut RO

Wagner’s analysis. On May 3, 2018, Mr. Johnson communicated to SO Wert that

he wanted petitioners to be placed in CNC status and that they could not make

monthly installment payments. He requested that the Appeals Office proceed with

a notice of determination.

      SO Wert relied on the information and documents in respondent’s

administrative file regarding petitioners to make his determinations. The ICS

history, containing RO Wagner’s comments regarding his visit with Mr. Johnson

on July 28, 2017, was a part of this administrative file.

      SO Wert concluded that all legal and procedural requirements had been met

and the collection actions taken or proposed were appropriate under the

circumstances. On July 19, 2018, respondent issued to petitioners the notices of

determination sustaining the NFTL and the proposed levy for the years in issue.

Petitioners’ petition raises the issue that SO Wert abused his discretion by not

allowing petitioners temporary CNC status.2 Their amended petition raises the

issue of an ex parte communication between RO Wagner and SO Wert.




      2
      Petitioners are not contesting the determination that they were not entitled
to CNC status.
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[*6]                                 Discussion

       The Federal Government obtains a tax lien against the property and rights to

property, whether real or personal, of a taxpayer with an outstanding tax liability

whenever a demand for payment has been made and the taxpayer neglects or

refuses to pay. Sec. 6321; Iannone v. Commissioner, 122 T.C. 287, 293 (2004).

Section 6320(a)(1) requires the Secretary to provide written notice to a taxpayer

when the Secretary has filed an NFTL against the taxpayer’s property and property

rights. See also sec. 6323. The Secretary must also notify the taxpayer of his or

her right to a CDP hearing. Sec. 6320(a)(3).

       Section 6331(a) authorizes the Secretary to levy upon the property and

property rights of a taxpayer who fails to pay a tax within 10 days after notice and

demand. Before the Secretary may levy upon the taxpayer’s property the Secretary

must notify the taxpayer of the Secretary’s intention to levy. Sec. 6331(d)(1). The

Secretary must also notify the taxpayer of his or her right to a CDP hearing. Sec.

6330(a)(1).

       If the taxpayer requests a CDP hearing, the hearing is conducted by the

Appeals Office. Secs. 6320(b)(1), 6330(b)(1). At the hearing the taxpayer may

raise any relevant issue relating to the unpaid tax or the proposed collection action.

Secs. 6320(c), 6330(c)(2)(A). The taxpayer may challenge the existence or the
                                         -7-

[*7] amount of the underlying tax liability for any period only if he or she did not

receive a notice of deficiency or did not otherwise have an opportunity to dispute

the liability. Sec. 6330(c)(2)(B); Sego v. Commissioner, 114 T.C. 604, 609

(2000).

      Petitioners did not challenge the underlying liabilities in this case.

Consequently, we review the settlement officer’s determination for abuse of

discretion. Goza v. Commissioner, 114 T.C. 176, 182 (2000). In determining

whether an abuse of discretion exists, we consider whether the determination was

arbitrary, capricious, or without sound basis in fact or law. See Murphy v.

Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006).

      Following the hearing the settlement officer must determine whether

proceeding with the proposed collection action is appropriate. In making that

determination the settlement officer is required to take into consideration:

(1) whether the requirements of any applicable law or administrative procedure

have been met, (2) any relevant issues raised by the taxpayer, and (3) whether the

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); see also Lunsford v. Commissioner, 117
                                        -8-

[*8] T.C. 183, 184 (2001). Once the settlement officer makes a determination, the

taxpayer may appeal it to this Court. Secs. 6320(c), 6330(d)(1).

      Petitioners contend that the ICS history transmitted to SO Wert as part of

the administrative file was an ex parte communication. They contend that they

were not aware that RO Wagner’s “gratuitous characterization” of petitioner’s

counsel was part of the administrative record. Petitioners request that their case be

remanded to the Appeals Office and assigned to a different settlement officer who

has not been exposed to the alleged ex parte communication. Respondent

contends that the alleged ex parte communication was a permissible transmittal of

petitioners’ administrative file between the revenue officer and the settlement

officer during the CDP process.

      In the IRS Restructuring and Reform Act of 1998, Pub. L. No. 105-206, sec.

1001(a)(4), 112 Stat. at 689, Congress directed the Commissioner to ensure that

the Appeals Office is independent and to develop a plan to prohibit ex parte

communications between settlement officers and other IRS employees so that the

independence of the Appeals Office would not be compromised. In response the

Commissioner issued Rev. Proc. 2000-43, 2000-2 C.B. 404, amplified, modified,

and superseded by Rev. Proc. 2012-18, 2012-10 I.R.B. 455. Rev. Proc. 2012-18,

sec. 2.01(1), 2012-10 I.R.B. at 456, defines ex parte communication as “a
                                        -9-

[*9] communication that takes place between any Appeals employee * * * and

employees of other IRS functions, without the taxpayer * * * [or her]

representative being given an opportunity to participate in the communication.”

The term “communication” includes oral and written communications. Id.

      Generally, the administrative file transmitted to the Appeals Office by the

revenue officer is not considered to be an ex parte communication. See id. sec.

2.03(4), 2012-10 I.R.B. at 459. Rev. Proc. 2012-18, sec. 2.03(4)(d), 2012-10

I.R.B. at 460, further states:

      The originating function, however, shall refrain from placing in the
      administrative file any notes, memoranda, or other documents that
      normally would not be included in the administrative file in the
      ordinary course of developing the case if the reason for including this
      material in the administrative file is to attempt to influence Appeals’
      decision-making process. For example, the originating function
      should not include gratuitous comments in the case history, a memo
      to the file, or a transmittal document * * * if the substance of the
      comments would be prohibited if they were communicated to Appeals
      separate and apart from the administrative file. In contrast, it is
      permissible to contemporaneously include statements or documents
      that are pertinent to the originating function’s consideration of the
      case in the administrative file even if the substance of those
      comments, statements, or documents would be prohibited if they were
      communicated to Appeals separate and apart from the administrative
      file.

      RO Wagner’s notes in the ICS history in petitioners’ administrative file

were made pursuant to his duties as a revenue officer, as directed by the Internal
                                       - 10 -

[*10] Revenue Manual (IRM). See IRM 5.1.10.3(9) (Feb. 26, 2016) (directing the

revenue officer to document the case history). RO Wagner recorded the notes in

the ICS history the same day that he spoke with petitioners’ representative.

      We have previously held that there was an abuse of discretion when

Appeals’ independence was compromised by prohibited ex parte communications.

See, e.g., Drake v. Commissioner, 125 T.C. 201, 210 (2005), supplemented by

T.C. Memo. 2006-151; Indus. Inv’rs v. Commissioner, T.C. Memo. 2007-93;

Moore v. Commissioner, T.C. Memo. 2006-171. These cases were remanded to

the Appeals Office after improper ex parte communications occurred concerning

the merits of the case or the character of the taxpayer. See Drake v.

Commissioner, 125 T.C. at 210; Indus. Inv’rs v. Commissioner, slip op. at 11;

Moore v. Commissioner, slip op. at 10-11.

      The communications in those cases were materially different from the

communications at issue here. Petitioners’ administrative file, which included RO

Wagner’s notes, was transmitted and reviewed by SO Wert. However, RO

Wagner’s notes did not address the substance of the issues or suggest any

positions to be taken in petitioners’ CDP proceedings.

      Ex parte communications are allowed when the communications involve

matters that are ministerial, administrative, or procedural and do not address the
                                          - 11 -

[*11] substance of the issues or positions taken in the case. See Rev. Proc.

2012-18, sec. 2.02(6), 2012-10 I.R.B. at 458. RO Wagner’s notes in petitioners’

administrative file were procedural. While RO Wagner did make comments

regarding Mr. Johnson’s generally “uncooperative” nature, these comments were

made contemporaneously as a part of his job function as a revenue officer. See id.

sec. 2.03(4)(d), 2012-10 I.R.B. at 460.

      We find that the communication in respondent’s administrative file

regarding petitioners was not a prohibited ex parte communication. Accordingly,

we conclude there was no abuse of discretion and SO Wert appropriately sustained

the NFTL and the proposed levy for the years in issue.

      Any contention we have not addressed is irrelevant, moot, or meritless.

      To reflect the foregoing,


                                                   Decision will be entered for

                                          respondent.
