                  T.C. Summary Opinion 2005-164



                      UNITED STATES TAX COURT



                 JOSEPH A. LOFTUS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2137-04S.              Filed November 9, 2005.


     Joseph A. Loftus, pro se.

     Wanda M. Cohen, for respondent.



     DEAN, Special Trial 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 of 1986, as amended.    The decision to be entered is

not reviewable by any other court, and this opinion should not be

cited as authority.
                               - 2 -

     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 sections 6320(c) and 6330(d),

petitioner seeks review of respondent’s filing of a notice of

Federal tax lien for his tax liabilities for 1996 and 1997.1     The

issue for decision is whether respondent abused his discretion by

filing the notice of Federal tax lien for petitioner’s 1996 and

1997 tax liabilities.

                            Background

     The stipulated facts and the exhibits received into evidence

are incorporated herein by reference.     At the time the petition

in this case was filed, petitioner resided in Houston, Texas.

The Underlying Liability

     Petitioner received premature distributions from his IRA and

section 401 accounts in 1996 and 1997, respectively, rendering

himself liable for the 10-percent additional tax on early

distributions under section 72(t).     Petitioner’s 1996 and 1997

Federal income tax returns, filed pursuant to extensions,

reported the distributions as income.     Petitioner, however,

failed to pay the additional tax on early distributions due for

both years.

     Respondent assessed the unpaid amounts and issued to

petitioner a notice and demand for payment.


     1
      Although respondent’s notice of determination also
references 2000, for which the notice of Federal tax lien
indicates a then-current liability of $43.03, the year was not
listed in the petition or addressed at trial.
                               - 3 -

The Bankruptcy Proceeding

     In February of 1998, petitioner filed a petition for relief

under chapter 7 of the United States Bankruptcy Code, 11 U.S.C.

sections 101-1330 (2000), and received a discharge of

dischargeable debts on June 9, 1998.

     Respondent’s Insolvency Section prepared and filed with the

bankruptcy court an original and an amended proof of claim, as an

unsecured priority claimant, on behalf of the Internal Revenue

Service (IRS).

     During the bankruptcy case, the chapter 7 trustee applied to

the court for authority to pay State sales taxes incurred by the

estate, postpetition, as administrative expenses.   No party filed

an objection to the trustee’s application.2

     The trustee filed a notice of final report, and a final

report before distribution on February 16, 2001, showing that

after payments for the secured claim and for administrative

expenses, there would be nothing remaining in the estate for

distribution for unsecured priority claims and general unsecured

claims.   No objection to the final report before distributions

was filed by any party.   Therefore, respondent did not receive

any distribution from the bankruptcy estate for the prepetition

unsecured priority claim.




     2
       As it was later determined that the estate had no
liability for State sales taxes, they were not included in the
trustee’s final report of distribution.
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The Section 6320/6330 Administrative Process

     After respondent mailed him a Letter 3172, Notice of Federal

Tax Lien Filing and Your Right To a Hearing Under IRC 6320,

petitioner timely submitted a Form 12153, Request For a

Collection Due Process Hearing, referencing 1996 and 1997.     In a

document attached to the Form 12153, petitioner stated that he

did not disagree with the asserted liability for the 10-percent

additional tax on early distributions.   Petitioner strongly

objected, however, to what he perceived as the unjustified

failure of the IRS to file a motion to compel payment of its

claim before final distribution of the bankruptcy estate.

Petitioner asked that the IRS “completely abandon its claim”.

     Petitioner received a telephonic hearing with the Office of

Appeals in Houston, Texas.   The office issued a notice of

determination finding the filing of the notice of the Federal tax

lien to be an appropriate collection action.

     After the petition was filed with the Court for review of

respondent’s determination, respondent obtained from the Court a

remand of the case for further consideration of the bankruptcy

issue.   Petitioner, on remand, met face to face with an Appeals

conferee.   The conferee issued a supplement to the original

notice of determination that again sustained as appropriate the

filing of the notice of Federal tax lien.
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                            Discussion

Procedure Under Sections 6320 and 6330

     Section 6320 entitles a taxpayer to notice of his right to

request a hearing with the IRS Office of Appeals after a notice

of lien is filed by the Commissioner in furtherance of the

collection of unpaid Federal taxes.    The taxpayer requesting the

hearing may raise any relevant issue with regard to the

Commissioner’s intended collection activities, including spousal

defenses, challenges to the appropriateness of the Commissioner’s

intended collection action, and alternative means of collection.

Secs. 6320(b) and (c); 6330(c); see Sego v. Commissioner, 114

T.C. 604, 609 (2000); Goza v. Commissioner, 114 T.C. 176, 180

(2000).

     The taxpayer may raise challenges “to the existence or

amount of the underlying tax liability”, however, only if he “did

not receive any statutory notice of deficiency for such tax

liability or did not otherwise have an opportunity to dispute

such tax liability.”   Sec. 6330(c)(2)(B).

     Where the validity of the tax liability is not properly part

of the appeal, the taxpayer may challenge the determination of

the Appeals officer for abuse of discretion.     Sego v.
Commissioner, supra at 609-610; Goza v. Commissioner, supra at

181-182.

     As the Court understands his argument, petitioner does not

challenge the existence or amount of the underlying tax

liability.   The parties in fact so stipulate.   For reasons to be
                               - 6 -

explained, petitioner argues that the IRS should be limited to

collecting half of the amount of the liability for which the

notice of lien was filed for 1996 and 1997.    In addition, he

objects to the failure to pay addition to tax and the interest

that accrued on the assessments after his bankruptcy action.     The

Court will treat petitioner’s arguments as challenges to the

collection action.

     Challenges to Collection Action

     Questions about the appropriateness of the collection action

include whether it is proper for the Commissioner to proceed with

the collection action as determined in the notice of

determination, and whether the type and/or method of collection

chosen by the Commissioner is appropriate.    See, e.g., Swanson v.

Commissioner, 121 T.C. 111, 119 (2003) (challenge to

appropriateness of collection reviewed for abuse of discretion).

     In order for a taxpayer to prevail under the abuse of

discretion standard, it is not enough for the Court to conclude

that the Court would not have authorized collection; the Court

must conclude that, in authorizing collection, the Appeals

officer has exercised discretion arbitrarily, capriciously, or

without sound basis in fact.   Estate of Jung v. Commissioner, 101
T.C. 412, 449 (1993); accord Mailman v. Commissioner, 91 T.C.

1079, 1084 (1988).   It has been held that discretion can be

abused by neglecting a significant relevant factor, by giving

weight to an irrelevant factor, or by considering only the proper
                               - 7 -

factors but nevertheless making a clear error in judging their

weight.   Henry v. INS, 74 F.3d 1, 4 (1st Cir. 1996).

     Petitioner’s arguments are based upon his perception of how

respondent’s Insolvency Section handled his tax liabilities in

the bankruptcy proceeding.   Petitioner voiced several complaints

during his testimony, including the “indifference” to his plight

exhibited by respondent’s Insolvency Section.

     The main bone of contention, however, is his belief that the

chapter 7 trustee would have paid 50 percent of petitioner’s

outstanding tax liabilities, the unsecured priority claim, if

only respondent had filed a motion to compel payment before the

final distribution.   Petitioner testified that the trustee told

him that he would not oppose, and would in fact recommend, the

partial payment.   Petitioner further testified that he relayed

the trustee’s “offer” to the Insolvency Section and was informed

that under their guidelines, motions to compel would not be filed

in cases involving less than $50,000 of tax liability.

     Petitioner asserts that the failure of the Insolvency

Section to file a motion to compel was an abuse of discretion.

Neither the trustee in petitioner’s bankruptcy proceeding nor any

employee of the Insolvency Section was called as a witness in

this case.

     Court Review of the Determination

     The Court reviews the actions of the Appeals officer who

conducted the hearing and issued the notice of determination in

this case.   Section 6330 does not contemplate that the Court
                                   - 8 -

directly review prior actions of IRS employees.    See sec. 6330(c)

and (d) (“determination” is made by Appeals officer; court

reviews determination).    The Court may indirectly review the

prior actions of IRS employees in that the determination by the

Appeals officer must take into consideration whether the

requirements of any applicable law or administrative procedure

have been met.   Secs. 6320(c), 6330(c)(1).

     Certain types of debt are nondischargeable under a chapter 7

bankruptcy proceeding.    11 U.S.C. sec. 523(a) (2000).    Section

523(a)(1)(A) of the United States Bankruptcy Code automatically

excepted petitioner’s income tax liabilities from discharge

because they were a tax of the kind specified in 11 U.S.C.

section 507(a)(8).3   See Swanson v. Commissioner, supra at 128.

Petitioner understands and agrees with this legal principle.

Petitioner has stated that he also understands and agrees that

there was no legal or administrative requirement that respondent

file a motion to compel the chapter 7 trustee to pay a portion of

     3
      11 U.S.C. sec. 507(a)(8)(2000) provides in part:

     (a) The following expenses and claims have priority in
     the following order:

     *       *        *        *           *   *       *

     (8) Eighth, allowed unsecured claims of governmental units,
     only to the extent that such claims are for –-

     (A)   a tax on or measured by income or gross receipts --

     (i) for a taxable year ending on or before the date of the
     filing of the petition for which a return, if required, is
     last due, including extensions, after three years before the
     date of the filing of the petition * * *
                                 - 9 -

his tax liabilities from the bankruptcy estate.     Even though

respondent was not required to file the motion to compel,

petitioner believes respondent’s Insolvency Section “should” have

exercised discretion to do so.     Petitioner argues that by not

filing the motion, it enabled the trustee to request and receive

“the maximum amount of compensation allowed by law”.     Petitioner

believes that the maximum is “not generally granted” and that the

“trustee compensation is not an administrative cost of the

estate.”

     Administrative expenses include taxes incurred by the estate

(other than taxes listed in 11 U.S.C. section 507(a)(8)), such as

the postpetition State sales taxes in this case the proposed

payment of which petitioner believes respondent’s Insolvency

Section should have objected to.    11 U.S.C. sec. 503(b)(1)(B)

(2000).    Also, petitioner’s belief concerning the classification

of the trustee’s compensation expense is incorrect.

     Compensation and reimbursement of actual and necessary

expenses of the trustee are administrative expenses of the

bankruptcy estate.   11 U.S.C. secs. 503(c)(2), 330 (2000).    The

determination of whether the amount of compensation requested is

reasonable requires consideration of a number of factors.     11

U.S.C. sec. 330(a)(3)(A).   The fee requested by the trustee is

subject to reduction upon motion by the court itself, the United

States trustee, or “any party in interest.”    11 U.S.C. sec. 330.

Neither the bankruptcy court nor any party in interest moved to

reduce the trustee’s fee in petitioner’s bankruptcy proceeding.
                              - 10 -

     Petitioner’s belief that the maximum amount of trustee

compensation allowed by law is not generally granted is based

upon his reading of a report that he says listed the average fees

for all bankruptcies by size for the years 1994 through 2000.

The report was not introduced into evidence.

     Petitioner, who was represented by counsel during the

bankruptcy proceeding, appears to be under the impression that

the IRS was also required to represent his best interests in the

bankruptcy proceeding.   The failure of respondent vigorously to

do so was an “abuse of discretion”, according to petitioner,

requiring the withdrawal of the notice of lien and the reduction,

by half, of his tax liability, and the abatement of interest and

the additions to tax.

     Without deciding the issue, the Court accepts as accurate

petitioner’s testimony that the Insolvency Section operates under

certain tolerance levels, governed by the amount of tax owed, in

requesting its lawyers to file motions to compel in bankruptcy

cases.   Petitioner has failed however, to describe how that

policy relates to an abuse of discretion by the Appeals officer

in this case.

     To reach the conclusion advocated by petitioner would

require the Court at the outset to find that the Appeals

officer’s determination that the requirements of applicable law

or administrative procedure had been met was an abuse of

discretion.   Yet by petitioner’s own admission, and the Court’s

determination, there is no law or administrative procedure that
                               - 11 -

requires the IRS to do what he says “should” have been done.     The

mere failure to take discretionary action is the exercise of

discretion, not the abuse of discretion.

     The Court finds that the Appeals officer did not neglect a

significant relevant factor, give weight to an irrelevant factor,

or consider only the proper factors but nevertheless make a clear

error in judging their weight.    Respondent has not exercised

discretion arbitrarily, capriciously, or without sound basis in

fact.

Abatement of Interest and Additions to Tax

     Interest

     For tax years beginning before July 31, 1996, the

Commissioner may abate interest assessed on any deficiency or

payment of tax to the extent that any error or delay in payment

of the tax is attributable to erroneous or dilatory performance

of a ministerial act by an officer or employee of the

Commissioner and the taxpayer caused no significant aspect of the

delay.   Sec. 6404(e)(1).   A ministerial act is a procedural or

mechanical act that does not involve the exercise of judgment or
discretion by the Commissioner.    Sec. 301.6404-2T(b)(1),

Temporary Proced. & Admin. Regs., 52 Fed. Reg. 30163 (Aug. 13,

1987).

     The delay of which petitioner complains is respondent’s

focus “on actions of the trustee and the Federal Bankruptcy Court

as opposed to my contentions”.    Insofar as the year 1996 is
                                - 12 -

concerned, the Court finds the acts complained of to be other

than ministerial.

     In 1996, Congress amended section 6404(e) to permit

abatement of interest that accrues as a result of an

“unreasonable” error or delay in performing a ministerial or

“managerial” act.   Sec. 6404(e)(1)(A) and (B); Taxpayer Bill of

Rights 2 (TBOR 2), Pub. L. 104-168, sec. 301(a) (1996).       The 1996

amendment applies to deficiencies or payments for tax years

beginning after July 30, 1996.    TBOR 2 sec. 301(c).   The

amendment applies to petitioner’s 1997 tax year.

     A decision concerning the application of Federal or State

law is not a managerial act.    Sec. 301.6404-2(b)(1), Proced. &

Admin. Regs.   Petitioner has failed to show, with respect to

1997, that the acts complained of were unreasonable errors or

delays in performing a ministerial or managerial act.

     Additions to Tax

     The Court is not sure of the basis for petitioner’s

objection to the additions to tax for failure to pay timely under

section 6651(a)(2).     The parties have stipulated that petitioner

does not object to the underlying tax liability.    The assessed

tax liability includes any additions to tax.    Sec. 6201(a); sec.

301.6201-1(a), Proced. & Admin. Regs.

     Further, section 6330(c)(2)(B) provides that the taxpayer

may challenge the underlying tax liability at the Appeals Office

unless he received a statutory notice of deficiency for the

liability or otherwise had an opportunity to dispute the
                                - 13 -

liability.     Even if the Appeals Office considers a challenge to

the underlying tax liability where one of the two above

situations obtains, the Court may not review the determination on

the issue because it was not properly part of the hearing.

Sabath v. Commissioner, T.C. Memo. 2005-222; sec. 301.6330-

1(e)(3), Q&A-E11, Proced. & Admin. Regs.; see also Behling v.

Commissioner, 118 T.C. 572, 578-579 (2002).

       The Court has held that when the IRS submits in a Federal

bankruptcy proceeding a proof of claim for unpaid taxes, the

taxpayer has an opportunity to dispute his tax liability within

the meaning of section 6330(c)(2)(B).     See Kendricks v.

Commissioner, 124 T.C. 69, 77 (2005); Sabath v. Commissioner,

supra.     Petitioner is therefore precluded from challenging his

liability for the additions to tax under section 6651(a)(2) in

this case.

       In any event, petitioner, having admitted that the taxes

were not timely paid, testified that he chose to pay other

creditors instead of paying his tax liabilities.     He provided no

documentary evidence on the issue, and his testimony fell short

of carrying his burden to show that there is reasonable cause for

his failure to pay timely.     See Higbee v. Commissioner, 116 T.C.
438, 446 (2001); sec. 301.6651-1(c), Proced. & Admin. Regs.

       Petitioner may also be asking for an abatement of the

addition to tax.     Section 6404(f) allows for the abatement of an

addition to tax attributable to erroneous written advice by the

IRS.     Petitioner has not argued or proved that he received any
                             - 14 -

written advice on which he relied and to which he can attribute

his failure to pay timely his tax liabilities for 1996 and 1997.

                           Conclusion

     The Court has considered all of petitioner’s contentions,

arguments, and requests, and to the extent they were not

discussed, the Court concludes that they are moot, irrelevant, or

without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.


                                        Decision will be entered

                                  for respondent.
