                  T.C. Summary Opinion 2004-147



                     UNITED STATES TAX COURT



WILLIAM C. EBERHARDT, JR. AND SUSAN A. EBERHARDT, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1918-03S.              Filed October 21, 2004.



     William C. Eberhardt, Jr. and Susan A. Eberhardt, pro sese.

     Kevin W. Coy, for respondent.



     DEAN, Special Trial Judge:   This case was heard pursuant to

the provisions of sections 6330(d) and 7463 of the Internal

Revenue Code in effect at the time that the petition was filed.

Unless otherwise indicated, subsequent section references are to

the Internal Revenue Code in effect at all relevant times, and

all Rule references are to the Tax Court Rules of Practice and
                               - 2 -

Procedure.   The decision to be entered is not reviewable by any

other court, and this opinion should not be cited as authority.

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

of Determination Concerning Collection Action(s) Under Section

6320 and/or 6330.   Pursuant to section 6330(d), petitioners seek

review of respondent's determination to proceed with collection

of their tax liability of $40,094.22 for 1995.   At trial,

petitioners also challenged the amount of interest that has

accrued on their tax liability.   The issues for decision are

whether:   (1) The Appeals officer abused her discretion in

rejecting petitioners' Offer in Compromise (OIC) and sustaining a

proposed levy to collect petitioners' unpaid income tax

liability; and (2) the Appeals officer should have abated

interest assessed with respect to petitioners' liability for the

1995 tax year.

     The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference.   Petitioners

resided in Riverside, California, at the time the petition was

filed.

                            Background

A. Examination of Petitioners' Individual Income Tax Return for
1995

     On April 15, 1996, petitioners filed a joint Form 1040, U.S.

Individual Income Tax Return, for 1995.   On September 23, 1997,

respondent notified petitioners that their 1995 return had been
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selected for examination.   On November 5, 1997, respondent mailed

to petitioners a letter containing a report of proposed

adjustments.   In that report, respondent determined that

petitioners were liable for the 10-percent additional tax for

making a premature withdrawal from their retirement plan.    On

December 2, 1997, petitioners sent respondent a letter detailing

petitioner William C. Eberhardt, Jr.'s (Mr. Eberhardt) disability

and relying on that condition as authorization to withdraw

retirement funds without penalty.

     On December 9, 1997, respondent notified petitioners that

additional issues had been identified for audit with regard to

petitioners' 1995 tax year.   The letter contained a Form 4564,

Information Document Request (IDR), which solicited documentation

pertaining to petitioners' medical expenses, casualty or theft

loss, and income and expense items on petitioners' Schedule C,

Profit or Loss From Business, as well as additional information

pertaining to Mr. Eberhardt's disability.

     On January 22, 1998, petitioners sent respondent a letter

containing additional documentation regarding the issue of Mr.

Eberhardt's disability.   Also enclosed was a copy of a letter

dated May 6, 1996, in which petitioners were notified that the

examination of their 1993 return showed that no change was

necessary in the tax reported in that return.   Petitioners did
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not submit any documents pertaining to Mr. Eberhardt's medical

expenses or any of the other documents requested in the IDR.

     On March 10, 1998, respondent sent petitioners a second IDR

regarding petitioners' medical expenses, casualty or theft loss,

and Schedule C income and expenses.    On May 2, 1998, petitioners

submitted to respondent documentation pertaining to their claimed

casualty or theft loss, which was related to petitioners' pension

plan.   They did not submit any medical expense or Schedule C

documentation.

     On May 24, 1998, petitioners sent respondent a copy of their

1993 Federal income tax return and a copy of a letter respondent

sent to petitioners resolving an audit of their 1993 tax year.

After reviewing petitioners' 1993 return, respondent's examiner

narrowed the scope of the audit of petitioners' 1995 return to

their medical expenses and the pension-related casualty or theft

loss.

     On May 27, 1998, respondent mailed to petitioners a report

proposing adjustments to petitioners' medical expense deductions

and the pension-related casualty or theft loss.   Petitioners had

invested in a self-directed IRA with First Pension Corporation

(First Pension).   In April 1994, First Pension filed for

bankruptcy, and the accounts of their investment trustee, Summit

Trust Company, were frozen.   At the time of the bankruptcy

filing, petitioners' account contained a 5-acre parcel of land
                                 - 5 -

that petitioners allege decreased in value while their account

was frozen.

     On August 10, 1998, petitioners submitted to respondent

additional documents they had prepared pertaining to the casualty

or theft loss issue.   Respondent reviewed the documentation and

on October 26, 1998, notified petitioners that respondent's

determination had not changed.    Respondent also provided

petitioners with copies of cases supporting respondent's decision

to disallow petitioners' casualty or theft loss.

     On November 25, 1998, respondent sent petitioners an updated

report proposing adjustments to petitioners' medical expense and

casualty or theft loss deductions as well as an additional case

supporting respondent's decision regarding the casualty or theft

loss issue.   Respondent also sent petitioners a separate letter

soliciting an extension of the period of limitations within which

to audit petitioners' 1995 return.       On December 14, 1998,

petitioners signed a Form 872, Consent to Extend Time to Assess

Tax, extending to June 30, 2000, the period within which

respondent could assess the tax due for petitioners' 1995 tax

year.

     Respondent sent petitioners a revised audit report dated

January 6, 1999, disallowing petitioners' medical expenses for

lack of substantiation and also disallowing their casualty or

theft loss.   On January 11, 1999, respondent closed out the audit
                                - 6 -

of petitioners' 1995 return as unagreed and forwarded the case to

the Appeals Office.

B.   Review of Petitioners' Return by the Appeals Office

      Petitioners' case file was received in Appeals on or about

January 27, 1999, and Appeals Officer Marilyn Radford (Ms.

Radford) was assigned to handle the case.    Petitioners agreed to

hold their initial meeting with Ms. Radford on March 19, 1999.

On March 18, 1999, petitioners sent her information setting forth

their position on the audit.    Ms. Radford asked for a

postponement of the initial meeting so she could review the

information.

      Ms. Radford held telephone conferences with petitioners on

March 24, 1999, and March 26, 1999.     Petitioners complained that

the IRS handled their audit unprofessionally and caused

unnecessary delays.   Petitioners also blamed the IRS for allowing

a qualified plan to "defraud" its investors and for the resulting

loss in the value of their IRA.    Petitioners did not discuss the

medical expense issue at all.

      Ms. Radford prepared an Appeals Case Memorandum on April 22,

1999, in which she recommended disallowing petitioners' medical

expenses for lack of substantiation.    Petitioners provided only a

typed list of expenses incurred, not actual receipts or

statements as requested in the IDRs.    Ms. Radford also

recommended disallowing petitioners' claimed casualty or theft
                               - 7 -

loss because petitioners still owned the property.    On May 7,

1999, respondent issued a notice of deficiency disallowing the

deductions and determining a deficiency of $30,771.

C.   Petitioners' Tax Court Case

      On August 9, 1999, petitioners filed a petition with this

Court seeking a redetermination of the 1995 tax deficiency

determined by respondent.   Prior to trial, respondent conceded

the issue pertaining to petitioners' medical expenses on Schedule

A.   At trial, the Court entered a decision for respondent

sustaining the disallowance of the casualty or theft loss.

Eberhardt v. Commissioner, T.C. Summary Opinion 2000-163.

Petitioners filed a Motion for Reconsideration which was denied.

Subsequently, respondent assessed the tax deficiency and

interest.

D.   Respondent's Collection Efforts

      On April 15, 2001, respondent withheld petitioners' 2000

Federal income tax refund of $754.22 and applied it to their

outstanding 1995 tax liability.    Between April 23, 2001, and July

2, 2001, respondent mailed to petitioners three separate notices

of balance due with respect to the unpaid liability.    On December

3, 2001, respondent withheld petitioners' midyear 2000 refund of

$600 and applied it to petitioners' outstanding 1995 tax

liability.
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      On February 7, 2002, respondent issued a Final Notice,

Notice of Intent to Levy and Notice of Your Right to a Hearing

(Notice of Intent to Levy), with respect to petitioners' taxable

year 1995.   On February 27, 2002, in response to the Notice of

Intent to Levy, respondent received petitioners' Form 12153,

Request for a Collection Due Process Hearing (hearing).

E.   Petitioners' Section 6330 Hearing

      Appeals Officer Wendy Clinger (Ms. Clinger) was assigned to

handle petitioners' hearing.    Petitioners met with her for their

hearing on November 21, 2002.

      During the hearing, petitioners disputed their underlying

tax liability.   Ms. Clinger advised them that they had already

had an opportunity to challenge the liability when they had a

trial before the Tax Court and could not do so again in the

hearing.   Ms. Clinger explained that petitioners could discuss

the collection alternatives available to petitioners to satisfy

their tax liability.

      At the hearing, petitioners submitted an OIC offering $1,000

to satisfy their outstanding 1995 tax liability which totaled

over $49,000, including accumulated interest.   The $1,000 would

be paid within 90 days of written acceptance of their OIC.

Petitioners requested that their OIC be accepted in the interests

of effective tax administration, or doubt as to collectibility.
                               - 9 -

     In support of their grounds for effective tax

administration, petitioners revisited the facts and circumstances

of their prior Tax Court proceeding.   Petitioners claimed that

they cannot pay the tax in full because they have a substantial

amount of short-term debt, the expenses of deferred maintenance

on their home, and the need to fund their retirement savings over

a limited number of years.

     As to doubt as to collectibility, petitioners pointed to the

Form 433-A, Collection Information Statement for Wage Earners and

Self-Employed Individuals, they submitted to Ms. Clinger.   On

their Form 433-A, petitioners indicated that they owned their

home located in Riverside, California, which they valued at

$350,000 with mortgages of $331,290.   Petitioners also have

retirement accounts valued at $24,815.65 and bank accounts valued

at $606.75.   Petitioners indicated that their monthly income is

$10,834 and their monthly expenses are $12,571.   Monthly expenses

of $4,473 are attributable to petitioners' debts.

     Ms. Clinger's analysis of petitioners' monthly income over

allowable expenses revealed the following:
                                 - 10 -

                                                Allowable
 Income                  Expense Type         Expense Amount

$10,834               National standard1          $1,235
                      Housing & utilities          1,223
                      Transportation               1,070
                      Health care                    382
                      Taxes                        1,546

                         Total                     5,456

Ms. Clinger concluded that petitioners had the ability to pay

$5,378 per month–-the net difference between petitioners' monthly

income and monthly allowable expenses--toward their outstanding

1995 tax liability.   Petitioners declined Ms. Clinger's offer of

an installment agreement.   Petitioners also requested an

abatement of interest on the deficiency because they feel the

audit of their 1995 tax year was prolonged due to mistakes of the

IRS employees who performed the audit.

     Upon consideration of petitioners' submitted documentation,

Ms. Clinger prepared a Form 1271-c, Rejection or Withdrawal

Memorandum, recommending that petitioners' OIC be rejected.    Ms.

Clinger concluded that, given petitioners' available asset equity

and monthly disposable income, petitioners have the ability to

pay the liability in full via an installment agreement.     She also

noted that petitioners did not demonstrate any special

circumstances or grounds for an exception for effective tax


     1
      National standard expenses are for clothing and clothing
services, food, housekeeping supplies, personal care products and
services. See Schulman v. Commissioner, T.C. Memo. 2002-129 n.6.
                               - 11 -

administration.   On December 12, 2002, Ms. Clinger notified

petitioners that respondent was rejecting their OIC.

     On January 9, 2003, Ms. Clinger sent petitioners a Notice of

Determination Concerning Collection Action Under Section 6330

sustaining respondent's proposed levy as the appropriate means of

collecting petitioners' unpaid liability for the 1995 tax year.

She also sent petitioners another copy of the letter rejecting

their OIC.    Additionally, Ms. Clinger sent petitioners a Notice

of Full Disallowance--Final Determination denying petitioners'

request for an abatement of interest on their 1995 deficiency

assessment.

                             Discussion

     Section 6330(c) prescribes the matters that a person may

raise at an Appeals Office hearing.     Section 6330(c)(2)(A)

provides that a person may raise collection issues such as

spousal defenses, the appropriateness of the Commissioner's

intended collection action, and possible alternative means of

collection.    See Sego v. Commissioner, 114 T.C. 604, 609 (2000);

Goza v. Commissioner, 114 T.C. 176, 180 (2000).     In addition,

section 6330(c)(2)(B) establishes the circumstances under which a

person may challenge the existence or amount of his or her

underlying tax liability.    Section 6330(c)(2)(B) provides:
                                 - 12 -

           (2)   Issues at Hearing.--

           *      *      *        *       *      *      *

                (B) Underlying Liability.--The person may
           also raise at the hearing challenges to the
           existence or amount of the underlying tax
           liability for any tax period 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.

     A taxpayer, however, is precluded from relitigating issues

raised and considered in any previous Appeals hearing or any

other administrative or judicial proceeding in which the taxpayer

meaningfully participated.    Sec. 6330(c)(4); Katz v.

Commissioner, 115 T.C. 329, 339 (2000).

     Petitioners not only received a notice of deficiency for tax

year 1995, they also litigated the matter before this Court.

Therefore, they are precluded from challenging the existence or

amount of their 1995 tax liability in a subsequent section 6330

hearing.   Sec. 6330(c)(2)(B).

     Where, as is the case here, the validity of the underlying

tax liability is not properly placed at issue, the Court will

review the administrative determination of the Appeals Office for

abuse of discretion.    Sego v. Commissioner, supra at 610; Goza v.

Commissioner, supra at 181-183.       The Court reviews only whether

the Appeals officer's refusal to accept petitioners' OIC was

arbitrary, capricious, or without sound basis in fact or law.

See Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
                              - 13 -

A.   Petitioners' Offer in Compromise

      Section 7122(a) authorizes a compromise of a taxpayer's

Federal tax liability.   An OIC may be accepted where there is

doubt as to liability or collectibility, or where it would

promote effective tax administration.   Sec. 301.7122-1(b),

Proced. & Admin. Regs.

      Doubt as to liability does not exist where the liability

has been established by a final court decision or judgment

concerning the existence or amount of the liability.     Sec.

301.7122-1(b)(1), Proced. & Admin. Regs.   Doubt as to

collectibility exists in any case 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.

      After reviewing petitioners' financial situation, Ms.

Clinger determined that their financial situation enabled them to

pay the entire tax liability within a reasonable time.

Petitioners' financial information indicated that both

petitioners had gainful employment and that their monthly income

exceeded their necessary living expenses, thereby allowing the

full payment of their liability.

     If there is no doubt as to liability or collectibility, a

compromise may be entered into to promote effective tax

administration when collection of the full liability will create

economic hardship within the meaning of section 301.6343-1,
                              - 14 -

Proced. & Admin. Regs.   Sec. 301.7122-1(b)(3)(i), Proced. &

Admin. Regs.   Economic hardship is defined as the inability of

the taxpayer to pay his or her reasonable living expenses.     Sec.

301.6343-1(b)(4), Proced. & Admin. Regs.

      Factors supporting a determination that collection would

cause economic hardship within the meaning of section 301.7122-

1(b)(3)(i), Proced. & Admin. Regs., include, but are not limited

to:

           (A) Taxpayer is incapable of earning a living because
      of a long term illness, medical condition, or disability,
      and it is reasonably foreseeable that taxpayer's financial
      resources will be exhausted providing care and support
      during the course of the condition;

           (B) Although taxpayer has certain monthly income, that
      income is exhausted each month in providing for the care of
      dependents with no other means of support; and

           (C) Although taxpayer has certain assets, the taxpayer
      is unable to borrow against the equity in those assets and
      liquidation of those assets to pay outstanding tax
      liabilities * * *.

Sec. 301.7122-1(c)(3)(i)(A), (B) and (C), Proced. & Admin. Regs.

      Petitioners claim they cannot pay the tax in full because

they have a substantial amount of short-term debt, the expenses

of deferred maintenance on their home, and the need to fund their

retirement savings over a limited number of years.   These

circumstances fall short of qualifying as economic hardship

within the meaning of section 301.6343-1(b)(4), Proced. & Admin.

Regs.
                              - 15 -

     When there are no grounds for compromise under the

provisions pertaining to doubt as to liability, doubt as to

collectibility, or effective tax administration due to economic

hardship, the IRS may compromise a liability to promote effective

tax administration where compelling public policy or equity

considerations identified by the taxpayer provide a sufficient

basis for compromising the liability.     Sec. 301.7122-1(b)(3)(ii),

Proced. & Admin. Regs.   Compromise will be justified only where,

due to exceptional circumstances, collection of the full

liability would undermine public confidence that the laws are

being administered in a fair and equitable manner.     A taxpayer

proposing such a compromise will be expected to demonstrate

circumstances that justify compromise even though a similarly

situated taxpayer may have paid his liability in full.     Id.

     Petitioners have failed to demonstrate that there are any

circumstances showing that collection of their full liability

would undermine public confidence that the tax laws are being

administered fairly and equitably.     Petitioners have not shown

evidence sufficient to warrant consideration of an OIC based on

effective tax administration grounds.

     Having reviewed the entire record, including the financial

information presented to Ms. Clinger, the Court cannot find that

the determination rejecting petitioners' OIC was an abuse of

discretion.   See Van Vlaenderen v. Commissioner, T.C. Memo.
                                - 16 -

2003-346; Crisan v. Commissioner, T.C. Memo. 2003-318; Willis v.

Commissioner, T.C. Memo. 2003-302.       Accordingly, collection by

levy of petitioners' unpaid 1995 tax liability reflected in the

Notice of Determination may proceed.

B.   Abatement of Interest

      If, as part of a section 6330 hearing, a taxpayer makes a

request for abatement of interest, the Court has jurisdiction

over the request for abatement of interest that is the subject of

the Commissioner's collection activities.       Katz v. Commissioner,

115 T.C. at 340-341.

      This Court may order an abatement of interest only if there

is an abuse of discretion by the Commissioner in failing to abate

interest.   See sec. 6404(i) (formerly sec. 6404(g)).      In order to

demonstrate an abuse of discretion, a taxpayer must prove that

the Commissioner exercised his discretion arbitrarily,

capriciously, or without sound basis in fact or law.      See Rule

142(a); Lee v. Commissioner, 113 T.C. 145, 149 (1999); Woodral v.

Commissioner, 112 T.C. at 23.
                                  - 17 -

       Under preamendment section 6404(e),2 the Commissioner "may

abate the assessment of interest on any payment of tax to the

extent that any error or delay in payment is attributable to an

officer or employee of the IRS being erroneous or dilatory in

performing a ministerial act."       Lee v. Commissioner, supra at

148.       A ministerial act does not include a "decision concerning

the proper application of federal tax law (or other federal or

state law)".       Sec. 301.6404-2(b)(2), Proced. & Admin. Regs.

       An error or delay by the Commissioner can be taken into

account only if:       (1) It occurs after the Commissioner has

contacted the taxpayer in writing with respect to the deficiency,

and (2) no significant aspect of the error or delay is

attributable to the taxpayer.       See sec. 6404(e)(1); Krugman v.

Commissioner, 112 T.C. 230, 239 (1999); Hawksley v. Commissioner,

T.C. Memo. 2000-354.      Section 6404(e)(1) "does not therefore

permit the abatement of interest for the period of time between

the date the taxpayer files a return and the date the IRS

commences an audit, regardless of the length of that time



       2
      Sec. 6404(e) was amended under sec. 301 of the Taxpayer
Bill of Rights 2, Pub. L. 104-168, 110 Stat. 1457 (1996), to
permit the Secretary to abate interest with respect to an
"unreasonable" error or delay resulting from "managerial" and
ministerial acts. This amendment, however, applies to interest
accruing with respect to deficiencies or payments of tax for
years beginning after July 30, 1996; therefore, the amendment is
inapplicable to the case at bar. See Woodral v. Commissioner,
112 T.C. 19, 25 n.8 (1999).
                               - 18 -

period."   H. Rept. 99-426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1,

844; S. Rept. 99-313, at 208 (1986), 1986-3 C.B. (Vol. 3) 1, 208.

     Petitioners request abatement partly because respondent did

not notify them that their return had been selected for

examination until September 23, 1997.    They argue that such a

length of time constitutes a ministerial error by respondent and

warrants an abatement of interest.

     For purposes of section 6404(e), an error or delay cannot be

considered for the period before September 23, 1997, because that

is the date on which respondent first contacted petitioners in

writing regarding the deficiency for 1995.    See sec. 6404(e);

Krugman v. Commissioner, supra at 239; Nerad v. Commissioner,

T.C. Memo. 1999-376.

     Petitioners also assert that the audit was unreasonably

lengthy because several different IRS employees participated in

the audit.   There is no evidence in the record that any of the

employees assigned to petitioners' audit mishandled any portion

of the audit.   There were no significant delays by respondent

replying to contacts or correspondence from petitioners.    The

greatest delays came in petitioners' responses to respondent's

document requests.

     Respondent's decisions on how to proceed during the audit

necessarily required the exercise of judgment and thus cannot be

ministerial acts.    Additionally, the mere passage of time does
                              - 19 -

not establish error or delay by the Commissioner in performing a

ministerial act.   Lee v. Commissioner, supra at 150.   The Court,

therefore, concludes that the passage of 19 months during the

audit of petitioners' 1995 tax year is not attributable to error

or delay in performing a ministerial act.

     Reviewed and adopted as the report of the Small Tax Case

Division.


                                    Decision will be entered

                               for respondent.
