                               T.C. Memo. 2012-39



                        UNITED STATES TAX COURT



                    MARK A. LEAGO, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13070-08L.                      Filed February 9, 2012.



      Mark A. Leago, pro se.

      Susan Kathy Greene, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      THORNTON, Judge: Pursuant to section 6330(d) petitioner appeals

respondent’s determination and supplemental determination to proceed by levy to
                                         -2-

collect petitioner’s unpaid employment taxes, including Federal Insurance

Contributions Act taxes, with respect to Forms 941, Employer’s Quarterly Federal

Tax Return, for the taxable quarters ending March 31, June 30, September 30, and

December 31, 1995, and December 31, 1996 (employment taxes); and to collect by

levy petitioner’s unpaid tax liabilities with respect to Form 940, Employer’s Annual

Federal Unemployment (FUTA) Tax Return, for taxable year 1996.1

                                FINDINGS OF FACT

      The parties have stipulated some facts, which we incorporate by this

reference. Petitioner resided in Texas when he filed his petition.

      From 1993 to 1996 petitioner owned and operated, as a sole proprietorship, a

video rental business with several employees. He failed to file Forms 941 for the

taxable quarters ending March 31, June 30, September 30, December 31, 1995, and

December 31, 1996, and failed to file Form 940 for taxable year 1996.

      On August 12, 1998, respondent sent petitioner Letters 950, proposing

deficiencies totaling $21,621 for the unpaid employment and FUTA taxes and

additions to tax for failure to timely file and failure to make deposits of taxes. On

August 9, 1999, respondent assessed these liabilities plus statutory interest.


      1
       All section references are to the Internal Revenue Code in effect at all
relevant times. All monetary amounts are rounded to the nearest dollar.
                                          -3-

       On February 7, 2007, respondent sent petitioner Letter 1058, Final Notice--

Notice of Intent to Levy and Notice of Your Right to a Hearing, with respect to the

assessed liabilities. On March 2, 2007, respondent received from petitioner a timely

Form 12153, Request for a Collection Due Process or Equivalent Hearing. On the

Form 12153 petitioner indicated, among other things, that he disagreed with the

assessment and that he had health problems and financial hardship. In a letter

attached to the Form 12153, petitioner indicated that he had lost his business

records for the periods at issue but believed he had already paid the taxes. The

letter stated:

       I am also experiencing physical and financial hardship. I was
       diagnosed last year with an acoustic neuroma brain tumor, this is a life
       threatening illness. I experienced severe symptoms, including
       headaches, vertigo, loss of balance, tinnitus, cloudy thinking, memory
       loss, depression and others. For several months, I could barely get out
       of bed and rarely able to leave the apartment, and when I did it was
       with much difficulty. Recently I have begun to feel better on many
       days, some symptoms remain, and some days they all come back and
       leave me unable to get out of bed. This condition does not allow me to
       be gainfully employed full time. However, I can sometimes still work
       on real estate investments. I will not be as effective if I were not sick,
       but hopeful that I will soon be able to get a brain operation to solve my
       health problems.

       I am requesting the IRS to delay the Levy and Collection process until,
       that it can be fairly determined how much taxes, if any, that I do indeed
       owe to the IRS and until my health is restored, so that I can be self-
       reliant and fulfill any financial obligations that I may have.
                                          -4-

      On May 29, 2007, respondent’s settlement officer held a telephone collection

due process (CDP) hearing with petitioner. Although petitioner initially questioned

his underlying liability, after discussing the issue with the settlement officer, he

stated that he no longer disputed it. Petitioner requested that his accounts for the

unpaid taxes in question be closed as currently not collectible because of financial

hardship and health problems. According to the settlement officer’s log, petitioner

stated that he was diagnosed with a brain tumor in June 2006. The log states: “He

needs surgery but does not have the funds for the sugery [sic]. He has no assets,

lives in an apt and a friend gives him the funds to meet his necessary living

expenses. * * * If he had the money he would have the surgery done, that was his

first priority.” The settlement officer requested that petitioner submit various

information, including a current doctor’s statement, a Form 433-A, Collection

Information Statement for Wage Earners and Self-Employed Individuals, and the

last six months of his bank statements.

      In response to this request, on June 12, 2007, the settlement officer received

from petitioner letters from two doctors and a hospital. One of the letters, dated

July 28, 2006, from Dr. Todd W. Trask in the Department of Neurosurgery at

Methodist Neurological Institute, indicated that petitioner had an acoustic neuroma

that caused him severe vertigo and hearing loss. The letter stated: “It is
                                         -5-

absolutely necessary for this tumour to be treated. Our recommendation is for

microsurgical excision * * * to be done as soon as possible.”

      Another letter, dated August 2, 2006, from Dr. Jeffrey T. Vrabec at the

Baylor College of Medicine indicated that petitioner was a patient under his care

who recently had been diagnosed with an acoustic neuroma and that a sigmoid

craniotomy was recommended to remove the tumor. This letter indicated that both

Dr. Vrabec and Dr. Trask would perform the surgery and that the total

hospitalization would average four to five days, with 24-48 hours in the neuro

intensive care unit. The letter indicated that petitioner was without insurance and

was asking for financial aid for the surgery.

      Petitioner also submitted a letter dated February 9, 2007, from The Methodist

Hospital, Houston, Texas, stating that his request for charity care had been declined

because his income exceeded eligibility criteria.

      On June 12, 2007, the settlement officer also received from petitioner, as

requested, a Form 433-A and bank statements. The Form 433-A indicated that

petitioner had zero monthly income. The bank statements indicated that between

November 2006 and May 2007 there had been monthly deposits into his checking
                                         -6-

account totaling $13,800.2 Petitioner also submitted unsigned and unfiled Forms

1040, U.S. Individual Income Tax Return, for taxable years 2004 and 2005, which

listed petitioner’s occupation as “real estate”. These returns indicated that during

2004 petitioner had sold certain property, generating installment sale income of

$41,000 in 2004 and $125,618 in 2005.

       On July 18, 2007, the settlement officer and petitioner spoke by telephone

and discussed his financial information and medical condition. The settlement

officer’s log states in part: “Medical-Need current statements from doctors. He

[petitioner] had a heated argument with the SO [settlement officer] stating he did not

want to go back to the doctor as he could not afford the surgery requested.

Informed him that I needed a current prognosis especially since he has had income

for the last three tax years.”

       On May 1, 2008, respondent issued to petitioner a Notice of Determination

Concerning Collection Action(s) Under Section 6320 and/or 6330, sustaining the

proposed levy. The determination was based in part on petitioner’s failure to file

Federal income tax returns and make payments for the taxable years 2004, 2005,

and 2006.


       2
        Petitioner advised the settlement officer that these deposits represented sums
that a friend lent him each month so that he could pay living expenses.
                                          -7-

       Petitioner filed a petition with this Court, challenging this determination. On

June 25, 2009, when the case was called for trial, petitioner appeared and

represented that he was in ill health, needed a $100,000 operation to remove his

acoustic neuroma, had no health insurance, and was broke. Respondent’s counsel

indicated that after the notice of determination had been issued, petitioner had filed

his delinquent income tax returns but that the Internal Revenue Service (IRS) had

not yet reviewed them to determine whether his account should be placed in

currently not collectible status. The Court remanded the case to respondent’s

Appeals Office for further consideration of whether petitioner qualified for any

collection alternative or whether the tax liabilities at issue were currently not

collectible.

       On June 29, 2009, petitioner telephoned the settlement officer, who advised

him to start preparing a new Form 433-A. A supplemental CDP hearing was

scheduled for September 22, 2009. On August 20, 2009, the settlement officer

received from petitioner a Form 433-A and a copy of his unfiled 2008 income tax

return. The Form 433-A, dated June 25, 2009, showed that petitioner had zero

monthly income and estimated monthly living expenses of $5,848, which included

$400 for health insurance but no amount for out-of-pocket health care costs, which

were indicated by a question mark. After submitting this Form 433-A, petitioner
                                          -8-

started working as an independent contractor, collecting lead for a green energy

company. On August 25, 2009, petitioner submitted an amended Form 433-A

showing total monthly income of $3,010 and total monthly expenses of $3,787,

including no amount for health insurance costs or out-of-pocket health care costs.

      On September 22, 2009, the settlement officer spoke with petitioner by

telephone. She advised him that he was ineligible for currently not collectible status

because, according to her analysis, he had sufficient income to make payments

toward his delinquent taxes. She offered petitioner a part-pay installment agreement

that would require him to pay $200 per month toward his tax liabilities.3 According

to the settlement officer’s log, this offer was intended “to enable him [petitioner] to

get his health issues resolved. Once this issue is resolved the taxpayer may be in a

position to renegotiate the agreement.”

      According to her log, in determining that petitioner could afford to pay $200

per month toward his tax liabilities, the settlement officer excluded any expenses for

health care because “expenses that he [petitioner] was not paying for currently could

not be allowed.” But she did allow petitioner $190 per month for health insurance

“due to his medical condition”. According to the settlement officer’s log, petitioner


      3
       Under a part-pay installment agreement, petitioner’s total tax liability would
not be paid off before the expiration of the period of limitations for collection.
                                        -9-

pleaded with her to “show leniency given his health situation and his brain tumor”.

When the settlement officer asked him whether he had been back to the doctor,

petitioner responded by asking “if the mechanic informed him he had a transmission

problem would he go back to the mechanic if he did not have the funds for the

repairs”. Petitioner declined the proposed part-pay installment agreement.

      On September 23, 2009, the settlement officer sent petitioner a letter,

enclosing a blank Form 656, Offer In Compromise, and her revised income and

expense analysis. The letter indicates that the calculations are based on national and

local standards and states: “I cannot allow expenses that you are not currently

paying.” The letter informed petitioner that he had not made estimated tax

payments for 2009.

      On November 2, 2009, petitioner submitted two money orders totaling $1,205

to be applied as estimated tax payments for 2009, a money order for $150 for the

offer-in-compromise application fee, and a money order for $480 as an initial

payment of his offer.

      On November 4, 2009, the IRS received from petitioner a Form 656 offering

to compromise the employment taxes that are at issue in this case as well as his

unpaid Federal income taxes for tax years 2004 through 2008 (a total liability of
                                        - 10 -

$94,433) for a cash payment of $2,400 to be paid in five installments.4 Petitioner

requested an offer-in-compromise based on doubt as to collectibility. Attached to

the Form 656 was a statement for consideration of special circumstances. This

statement indicated that in May 2006 petitioner had awakened with a noticeable

hearing loss in his right ear and after various consultations with his doctors was

diagnosed with an acoustic neuroma brain tumor. He indicated that his symptoms

included “double vision, severe vertigo, cloudy thinking, tinnitus, depression, lack

of energy, and a great deal of fear.” He stated that these symptoms greatly reduced

his income-earning potential. He indicated that the operation he needed was

estimated to cost $100,000 and that he had no health insurance, no assets, and no

savings. Attached to the Form 656 was a one-page typed list titled “Medical

Surgery Expenses”, listing expenses of $106,824 for his brain surgery but including

no supporting documentation.

      Along with the offer-in-compromise petitioner submitted an updated Form

433-A, which listed his total monthly income as $4,000 and his total monthly living

expenses as $7,683, including monthly out-of-pocket health care expenses


      4
       The offer-in-compromise identified the source of his proposed cash
payments as an advance from the company for which he worked as an independent
contractor: “THIS WOULD BE A LOAN THAT I WOULD WORK OFF IN THE
FUTURE. AT SOME POINT I NEED TO FOCUS ON RESOLVING MY
HEALTH PROBLEMS.”
                                         - 11 -

of $3,100, representing his estimate of future expenses for brain surgery. He also

submitted a bank statement indicating that as of October 16, 2009, his checking

account was overdrawn by $344.

      On November 12, 2009, the settlement officer met with petitioner to discuss

his offer-in-compromise. She presented him with a letter requesting that he provide,

within a week, specified documentation, including verification of the $3,100 per

month he had claimed as out-of-pocket health care costs. According to the

settlement officer’s log, petitioner advised the settlement officer that the claimed

$3,100 per month of health care costs represented “payments [that] were for future

expenses he would need to incur for surgery.” The settlement officer responded that

she “could not allow for future expenses that he may incur.” According to the log,

petitioner left the interviewing room stating: “You would rather I pay my taxes than

have surgery.”

      In a letter to the settlement officer dated November 16, 2009, petitioner again

stated: “My estimation for medical payments and out of pocket health care cost are

a way of getting the cost of my necessary surgery in the record.”

      On November 18, 2009, petitioner met with the settlement officer and

provided some of the requested information but no additional documentation for his

estimated health care costs.
                                        - 12 -

      In a letter to petitioner dated November 19, 2009, the settlement officer

advised him that the minimum amount for an acceptable offer-in-compromise was

$13,152. Workpapers attached to this letter indicate that this number represented

48 times petitioner’s monthly disposable income, which the settlement officer

determined to be $274, representing the difference between his $4,000 monthly

income and allowable monthly living expenses of $3,762.5 In calculating

petitioner’s monthly living expenses the settlement officer allowed him $60 for out-

of-pocket medical expenses and $200 for health care insurance, “based on the

special medical circumstances claimed by the tax payer.” The letter indicates that

the settlement officer had disallowed petitioner’s $3,100 claimed monthly allowance

to allow him to save for future brain surgery because “the Settlement Officer was

unable to understand how Mr. Leago could save an amount he did not have.”

      In a phone call with the settlement officer on December 11, 2009, petitioner

disagreed with her determinations.




      5
        In this letter the settlement officer found that petitioner’s only known asset
was his car, with an equity value of $3,118. In calculating the minimum amount for
an acceptable offer from petitioner, the settlement officer excluded the equity value
of the car “primarily due to the taxpayer’s health condition, and to assist the
taxpayer to reach a resolution for the taxes owed.”
                                        - 13 -

      On January 15, 2010, respondent’s Appeals Office sent petitioner a

Supplemental Notice of Collection Concerning Collection Action(s) Under Section

6320 and/or 6330 with attachment, sustaining the proposed levy because a

collection alternative could not be reached. In the section captioned “SUMMARY

AND RECOMMENDATION”, the supplemental determination states:

      the settlement officer has arrived at the conclusion that the taxpayer has
      determined that the only acceptable resolution to the personal and
      business taxes owed by him is for the Government to accept an Offer
      in Compromise for an amount which is far less than his ability to pay.
      The taxpayer has concluded that the Internal Revenue Service should
      forgo collection of the delinquent taxes, to enable him to save sufficient
      funds for his surgery. In spite of repeated requests he has failed to
      provide any current information regarding his health.

The supplemental determination explains the rejection of any collection alternative

as follows:

      Collection Alternatives Offered by Taxpayer

      All the collection alternatives submitted by the taxpayer were
      considered. All collection alternatives proposed by the taxpayer were
      discussed with him. It was explained to him that he was not eligible
      for the collection alternative of Currently Not Collectible. He
      requested an Installment Agreement but declined to enter into an
      agreement for the amount of $200.00 per month proposed by the
      settlement officer. He did not want to increase the amount of his offer
      to the amount to $13,152.00, which the settlement officer determined
      to be his Reasonable Collection Potential.
                                        - 14 -

      In concluding that the proposed levy balanced the need for efficient collection

with petitioner’s concern that the collection action be no more intrusive than

necessary, the supplemental notice of determination stated: “Mr. Leago’s offer to

compromise his liability for the sum of $2,400.00 did not adequately reflect his

RCP.”

      The supplemental notice of determination indicates that the calculation of

petitioner’s reasonable collection potential (RCP) included a $60 allowance for out-

of-pocket health care expenses and a $200 allowance for health insurance “based on

the special medical circumstances claimed by the tax payer.” With regard to these

items, the supplemental notice of determination states:

      The standard amount was allowed. The taxpayer failed [to] provide any
      information of medicines (prescription or over the counter) he was taking on
      a regular or irregular basis. His bank statements and his credit card
      statements did not indicate that payments were being made for prescription
      medicine or over the counter medicine.

      Mr. Leago claims medical expenses for $3,100. He states this would
      allow him to save for future surgery he may require. As this amount far
      exceeds his income, the Settlement Officer was unable to understand
      how Mr. Leago could save an amount he did not have.

The supplemental notice of determination does not expressly indicate that the

adverse determination was based on any noncompliance by petitioner with his
                                        - 15 -

Federal tax obligations but contains some seemingly contradictory statements in

this regard.6

       On October 25, 2010, a trial was held in Houston, Texas. Petitioner testified

that his financial circumstances had further deteriorated since the settlement

officer’s supplemental determination; he indicated a willingness to submit updated

information. On November 10, 2010, respondent filed a status report requesting

that, because of petitioner’s alleged change in circumstances, the Court continue this

case to allow time for him to submit a request for a collection alternative and

updated supporting documentation, so that respondent’s counsel might forward it to

the appropriate collections office for a determination. By order dated November 22,

2010, the Court gave petitioner until December 22, 2010, to submit to respondent’s

counsel a new request for a collection alternative and updated financial information

with supporting documentation. According to the parties’ status reports, petitioner

did not submit his new offer-in-compromise until July 2011. Petitioner asserted that

the delay was attributable to his being homeless,


       6
        In the section captioned “BRIEF BACKGROUND”, the supplemental notice
of determination states, consistent with the facts found above: “For 2009, Mr.
Leago has made estimated tax payments of $1,205.” Inconsistently, the body of the
supplemental notice of determination states: “Review of the computer records
indicated that the taxpayer was not in compliance and had not made any estimated
tax payments for 2009.”
                                        - 16 -

with no way to receive mail and no resources. Petitioner’s new offer-in-

compromise was transferred to respondent’s centralized offer-in-compromise unit

for consideration.

      In a status report filed December 7, 2011, respondent indicated that petitioner

had failed to furnish requested information needed to make a decision about his new

offer-in-compromise. In a status report filed January 13, 2012, petitioner indicated

that he was still homeless, sharing a room with 150 people at the Salvation Army,

that all his assets had been confiscated, and that respondent’s transferring his case

to personnel in Nashville, Tennessee, who lacked familiarity with his case had

impeded its resolution.

                                      OPINION

      After a previous remand to respondent’s Appeals Office, a trial, and posttrial

attempts to resolve this case administratively, it remains unresolved. Although

petitioner apparently has a new offer-in-compromise pending before respondent’s

Collection Division, it appears to have stalled. Accordingly, the focus of our review

is the position that respondent’s Appeals Office took in its supplemental notice of

determination rejecting petitioner’s earlier offer-in-compromise. See Kelby v.

Commissioner, 130 T.C. 79, 86 (2008) (stating that when this Court remands a case

to the IRS Appeals Office, “the further hearing is a supplement to the taxpayer’s
                                        - 17 -

original section 6330 hearing, [and] not a new hearing” and that we review the

position taken in the last supplemental determination rather than in any prior

notices).

      Because petitioner has not challenged his underlying tax liabilities in this

proceeding, we review the supplemental notice of determination for abuse of

discretion, asking whether it was arbitrary, capricious, or without sound basis in fact

or law. See, e.g., Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469

F.3d 27 (1st Cir. 2006); Sego v. Commissioner, 114 T.C. 604, 610 (2000).

      Section 7122(a) and (d)(1) authorizes the Secretary to compromise a

taxpayer’s outstanding tax liability and requires him to prescribe guidelines for IRS

officers and employees to determine whether an offer-in-compromise is adequate

and should be accepted to resolve a dispute. Petitioner seeks an offer-in-

compromise based on doubt as to collectibility. Such an offer may be accepted

“where the taxpayer’s assets and income are less than the full amount of the

liability.” Sec. 301.7122-1(b)(2), Proced. & Admin. Regs. Section 301.7122-

1(c)(2)(i), Proced. & Admin. Regs., provides:

      A determination of doubt as to collectibility will include a
      determination of ability to pay. In determining ability to pay, the
      Secretary will permit taxpayers to retain sufficient funds to pay basic
      living expenses. The determination of the amount of such basic living
      expenses will be founded upon an evaluation of the individual
                                        - 18 -

      facts and circumstances presented by the taxpayer’s case. To guide this
      determination, guidelines published by the Secretary on national and local
      living expense standards will be taken into account.

      As a general rule, an acceptable offer-in-compromise based on doubt as to

collectibility must be for an amount that equals or exceeds the taxpayer’s RCP; i.e.,

the amount the IRS could collect through other means such as administrative and

judicial collection remedies. Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517,

517; see Internal Revenue Manual (IRM) pt. 5.8.1.1.3 (Sept. 23, 2008). In

determining a taxpayer’s RCP, the IRS is to take into account the taxpayer’s

reasonable basic living expenses. Rev. Proc. 2003-71, sec. 4.02(2). Basic living

expenses are those that provide for the taxpayer’s (and the taxpayer’s family’s)

health, welfare, and production of income. IRM pt. 5.8.11.2.1(4) (Sept. 23, 2008).

National and local standard expense amounts provide guidelines in determining

allowable amounts of basic living expenses, but a deviation is appropriate if the

standard amount is inadequate to provide for a specific taxpayer’s basic living

expenses. Id.

      In some cases, the IRS may accept an offer of less than the RCP if there are

“special circumstances”. Rev. Proc. 2003-71, sec. 4.02(2). For this purpose,

special circumstances are: (1) circumstances demonstrating that the taxpayer would

suffer economic hardship if the IRS were to collect from him an amount
                                         - 19 -

equal to the RCP; and (2) compelling public policy or equity considerations that

provide sufficient basis for compromise. See Murphy v. Commissioner, 125 T.C. at

309; McClanahan v. Commissioner, T.C. Memo. 2008-161; IRM pt. 5.8.4.3(4)

(Sept. 23, 2008) (stating that the factors establishing special circumstances for doubt

as to collectibility are the same as those considered under effective tax

administration (ETA)); IRM pt. 5.8.11.2(2)(B) (Sept. 23, 2008).7 For this purpose,

factors to be considered include extraordinary circumstances such as medical

catastrophe and history of unemployment. IRM pt. 5.8.11.2.1(5) (Sept. 23, 2008).

Factors indicating economic hardship include, but are not limited to, the taxpayer’s

long-term illness, medical condition, or disability that render a taxpayer incapable of

earning a living, where it is “reasonably foreseeable that taxpayer’s financial

resources will be exhausted providing for care and support during the

course of the condition”. Sec. 301.7122-1(c)(3)(A), Proced. & Admin. Regs.; IRM

pt. 5.8.11.2.1(6)(1) (Sept. 23, 2008).

      7
       An offer-in-compromise based on ETA may be acceptable even though the
taxpayer’s RCP is greater than the liability owed if collection of the full liability
would cause the taxpayer economic hardship or if public policy or equity
considerations provide a sufficient basis for compromising the liability. Rev. Proc.
2003-71, sec. 4.02(3), 2003-2 C.B. 517, 517. According to the IRM as in effect
when petitioner submitted his offer-in-compromise, an ETA offer-in-compromise
can be considered only when the IRS has determined that the taxpayer does not
qualify for consideration under doubt as to collectibility or doubt as to liability.
IRM pt. 5.8.11.1(5) (Sept. 23, 2008).
                                         - 20 -

      The IRM as in effect when petitioner submitted his offer-in-compromise also

directs that consideration should be given to “the taxpayer’s overall general

situation including such facts as age, health, marital status, number and age of

dependents, level of education or occupational training, and work experience.”

IRM pt. 5.8.5.6(2) (Sept. 23, 2008). More specifically, the IRM states: “Some

situations may warrant placing a different value on future income than current or

past income indicates”. Id. pt. 5.8.5.6(5). By way of illustration, the IRM states

that if “A taxpayer is elderly, in poor health, or both and the ability to continue

working is questionable”, then the offer-in-compromise examiner should “Adjust the

amount or number of payments to the expected earnings during the appropriate

number of months. Consider special circumstance situations when making any

adjustments.” Id.

      The settlement officer rejected petitioner’s offer-in-compromise on the

ground that it did not adequately reflect his ability to pay. A key issue dividing

petitioner and the settlement officer was what allowance, if any, should be made for

his brain surgery. It appears that the settlement officer’s rejection of petitioner’s

offer-in-compromise was based largely on her finding that he had incurred no

significant out-of-pocket costs for his alleged health condition and her conclusion

that “expenses he [petitioner] was not paying for currently could not be
                                        - 21 -

allowed”. The settlement officer reiterated this idea in her September 23, 2009,

letter to petitioner, which states: “I cannot allow expenses that you are not currently

paying.” And in her November 19, 2009, letter, once again rejecting petitioner’s

request for a monthly allowance to save up for his future brain surgery, the

settlement officer stated that she “was unable to understand how Mr. Leago could

save an amount he did not have.” This idea reappears in the supplemental notice of

determination, which gives as the reason for disallowing any allowance for future

surgery expenses: “the Settlement Officer was unable to understand how Mr. Leago

could save an amount he did not have.” Essentially, the settlement officer seemed

to believe that because petitioner could not afford surgery and had not yet incurred

any out-of-pocket costs for it, no allowance could be made for it.

      The settlement officer’s approach is difficult to square with the applicable

administrative guidelines just discussed. Under those guidelines the settlement

officer should have determined whether there were “special circumstances”, as

petitioner claimed, that warranted the IRS’ accepting an offer-in-compromise for an

amount less than his RCP. It is not apparent from the administrative record that the

settlement officer did so. Her determination appears to be based entirely on her

assessment of petitioner’s ability to pay. The supplemental notice of
                                         - 22 -

determination cites parts of the IRM defining offer-in-compromise and requiring that

an offer-in-compromise generally reflect the taxpayer’s RCP but does not mention

administrative guidelines that permit an offer-in-compromise for less than RCP if

there are special circumstances such as long-term medical conditions and resulting

economic hardship.

      Granted, petitioner shares blame for failing to provide updated medical

information, as the settlement officer requested, to better substantiate his cost

estimate for his brain surgery.8 Petitioner’s view, as we understand it, was that

there was no point in his incurring additional, uninsured medical expenses to

confirm his need for brain surgery that he presently could not afford.

      The settlement officer did not abuse her discretion in requesting that

petitioner provide updated medical information. But even without this updated

information, it appears that the settlement officer did not dispute several key factors

that petitioner relied upon as special circumstances warranting relief--namely, that

he has been diagnosed with a brain tumor, that his doctors have urged that the tumor

should be surgically removed, that he has no significant assets and

      8
        From the doctors’ letters that petitioner originally provided the settlement
officer, however, it would seem self-evident that the recommended surgery--
involving two neurosurgeons and a hospital stay of four to five days, with 24 to 48
hours in neuro intensive care--would cost much more than the $60 per month that
the settlement officer allowed as an out-of-pocket medical expense.
                                          - 23 -

no health insurance and has been denied charity care, and that he continues to have

health problems that have limited his ability to earn. In fact, the settlement officer’s

log indicates that in calculating petitioner’s ability to pay, she took his health

condition into account (at least to a very limited extent) by, for instance, allowing

him a $200 monthly allowance for health insurance (even though he had none) “due

to his medical condition” and by excluding the equity value of his only asset, his car,

“primarily due [to] the taxpayer’s health condition”.

      Ultimately, the reasons given in the supplemental notice of determination for

rejecting petitioner’s proposed offer-in-compromise are inadequate for us to

determine whether the settlement officer abused her discretion in evaluating, or

failing to evaluate, in the light of all relevant considerations, whether he had

established special circumstances that might have warranted acceptance of an offer-

in-compromise for an amount less than his RCP. With some reluctance we shall

once again remand this case to respondent’s Appeals Office for further

consideration and clarification. Cf. Hoyle v. Commissioner, 131 T.C. 197, 204-205

(2008) (remanding collection case to clarify the basis for the Appeals officer’s

determination); Fairlamb v. Commissioner, T.C. Memo. 2010-22 (remanding

collection case for clarification of the reasons for rejecting an offer-in-compromise,

where the stated reasons were found to be inadequate); Oman v.
                                         - 24 -

Commissioner, T.C. Memo. 2006-231 (same). Upon remand the Appeals Office

shall consider any new collection alternative that petitioner may wish to propose,

including any new offer-in-compromise that he has submitted to respondent’s

Collection Division, and shall also consider his alleged changed circumstances. See

Churchill v. Commissioner, T.C. Memo. 2011-182 (remanding a collection case to

respondent’s Appeals Office for consideration of the taxpayer’s changed

circumstances). Petitioner is strongly urged to provide the Appeals Office updated

financial and medical information as may be requested; failure to do so may weigh

heavily against favorable consideration of a collection alternative.

      To reflect the foregoing,


                                                            An appropriate order

                                                     will be issued.
