                               T.C. Memo. 2013-121



                         UNITED STATES TAX COURT



                     DANNY LANE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 16602-10L.                          Filed May 6, 2013.



      Richard L. Pyper, for petitioner.

      Marshall R. Jones, for respondent.



                           MEMORANDUM OPINION


      CHIECHI, Judge: This case is before us on respondent’s motion for

summary judgment (respondent’s motion).1 We shall deny respondent’s motion



      1
        Petitioner filed a response to respondent’s motion, and respondent filed a
reply to petitioner’s response.
                                        -2-

[*2] and remand this case to respondent’s Appeals Office (Appeals Office).2

                                    Background

      The record establishes and/or the parties do not dispute the following.

      Petitioner resided in Alabama at the time he filed the petition.

      At all relevant times, petitioner was engaged in the business of commercial

real estate construction. He conducted that business as a sole proprietorship under

the name D & L Construction.

      Petitioner filed late (1) Form 940-EZ, Employer’s Annual Federal

Unemployment (FUTA) Tax Return (Form 940-EZ), for each of his taxable years

2003 and 2005 and (2) Form 941, Employer’s Quarterly Federal Tax Return (Form

941), for each of the 20 consecutive quarters that began on January 1, 2003, and

that ended on December 31, 2007. Petitioner also paid late the respective Federal

taxes (taxes in question) that he owed for those respective taxable periods.3


      2
       All section references are to the Internal Revenue Code in effect at all
relevant times. All Rule references are to the Tax Court Rules of Practice and
Procedure.
      3
       Petitioner paid the taxes in question (1) on March 27, 2008, for his taxable
year 2003 and for the eight consecutive quarters that began on January 1, 2003,
and that ended on December 31, 2004; (2) on April 29, 2008, for his taxable year
2005 and for the seven consecutive quarters that began on January 1, 2005, and
that ended on September 30, 2006; (3) on July 28, 2008, for the quarter that began
on October 1, 2006, and that ended on December 31, 2006; and (4) at a time not
                                                                      (continued...)
                                        -3-

[*3] However, he has not paid any additions to, and/or any penalties on, the taxes

in question or interest as provided by law. (We shall refer to any such additions

and/or any such penalties and interest as provided by law as petitioner’s unpaid

liabilities at issue.)

       On July 1, 2008, respondent issued to petitioner two separate notices of

Federal tax lien filing and your right to a hearing under IRC 6320 (notices of tax

lien). One of those notices pertained to petitioner’s 15 consecutive quarterly

periods that began on January 1, 2003, and that ended on September 30, 2006, for

which he filed Forms 941. The second of those notices pertained to

(1) petitioner’s annual periods 2003 and 2005, for which he filed Forms 940-EZ,

and (2) petitioner’s five consecutive quarterly periods that began on October 1,

2006, and that ended on December 31, 2007, for which he filed Forms 941.

       Richard L. Pyper (Mr. Pyper), petitioner’s authorized representative, timely

submitted to respondent petitioner’s Form 12153, Request for a Collection Due

Process or Equivalent Hearing (petitioner’s Form 12153), and requested a hearing

with the Appeals Office. In that form, Mr. Pyper indicated that petitioner


       3
        (...continued)
established by the record after July 28, 2008, and before February 24, 2009, for the
four consecutive quarters that began on January 1, 2007, and that ended on
December 31, 2007.
                                         -4-

[*4] disagreed with the notices of tax lien and indicated that petitioner intended to

propose an offer-in-compromise as a collection alternative.

      On February 24, 2009, Mr. Pyper attended a face-to-face hearing (hearing)

with respondent’s settlement officer who was assigned petitioner’s Form 12153

(settlement officer). At that hearing, Mr. Pyper submitted to the settlement officer

Form 656, Offer in Compromise (Form 656). In that form, petitioner proposed to

settle petitioner’s unpaid liabilities at issue by paying a total of $100,000, with

$20,000 to be paid at the time he submitted his offer and the remaining $80,000 to

be paid in five monthly installments of $16,000 (petitioner’s offer-in-

compromise). Petitioner indicated in Form 656 that he was proposing an offer-in-

compromise because of “Doubt as to Collectibility--‘I have insufficient assets and

income to pay the full amount.’” According to petitioner,

      Market conditions were responsible for my failure to pay the
      employment taxes on time. However, I have since made all required
      payroll tax payments and the only outstanding obligation owed by me
      is for penalties and interest applicable to the unpaid taxes. Due to
      continuing deterioration in the current construction market, it is
      doubtful that I will be in any position for the next several years to
      make payments in excess of what I have proposed here. FYI: This is
      the worst economy I have seen in 40 years; I have not shown a profit
      since 2000 and am just keeping my business open to keep my
      reputation intact in case there is a recovery.
                                           -5-

[*5] At the hearing with the settlement officer, Mr. Pyper provided her

petitioner’s Form 433-B, Collection Information Statement for Businesses

(petitioner’s first Form 433-B). In that form, petitioner showed, inter alia, gross

business income and business expenses of $87,063 and $82,665.94, respectively,

for the period that began on November 30, 2008, and that ended on December 31,

2008. In petitioner’s first Form 433-B, petitioner also showed the following

business assets and his equity therein:4

                     Asset                                   Equity
          Business bank accounts                          $12,685.24
          Accounts/notes receivable                        87,063.00
          Vehicles                                           9,390.00
          Business equipment                              115,334.45

      On February 16, 2010, the settlement officer sent a written preliminary

assessment of petitioner’s offer-in-compromise to Mr. Pyper. That preliminary

assessment included the following so-called Asset/Equity Table and so-called

Income/Expense Table:




      4
        Except for petitioner’s business bank accounts, the record does not
establish the respective dates as of which petitioner showed his equity in the
various assets that he held.
                                             -6-

                                    [*6] Asset/Equity Table
                      Fair Market                   Quick Sale
          Item           Value          % Reduced     Value      Encumbrances       Equity

            *         *             *           *         *        *            *
Checking account          $17,812          0%         $17,812                       $17,812

            *         *             *           *         *        *            *
Vehicle 1-2002              1,800         20%           1,440                         1,440
 Chev
Vehicle 2 - 2003            2,160         20%           1,728                         1,728
 Ford
Vehicle 3 - 2004            2,480         47%           1,314                         1,314
 Ford
Equipment/tools           115,334         20%          92,268                        92,268

            *         *             *           *         *        *            *
Accounts receivable        87,063                      87,063                        87,063
Vehicle 4 - 2004            2,950         20%           2,360                         2,360
 Ford
 Totals                   229,599                     203,985          ---          203,985
                                                     -7-

                                     [*7] Income/Expense Table

           *           *              *               *           *         *            *
           Total Income                                    Necessary Business Expenses
        Source              Gross                    Expense              Claimed            Allowed
19. Gross receipts         $87,063        27. Materials purchased        $41,836.47      $41,836.47
19a. Returns &                            28. Inventory purchased
      Allowance
      ***
19b. Cost of Goods                        29. Gross wages &               11,347.00          11,347.00
      Sold * * *                               salaries
20. Gross rental                          30. Rent                           400.00            400.00
     income
21. Interest                              31. Supplies                       246.05            246.05
22. Dividends                             32. Utilities/telephone            723.69            723.69
23. Other income                          33. Vehicle gasoline/oil          2,961.05          2,961.05
     (specify below)
                                          34. Repairs/maintenance         11,837.05          11,837.05
                                          35. Insurance                     3,181.09          3,181.09
                                          36. Current taxes                 1,060.91          1,060.91
                                          37. Other expenses * * *          9,072.63

           *           *              *               *           *         *            *
26. Total income           $87,063        39. Total expenses                $82,666      $73,593.37
                NET DIFFERENCE (Line 26 minus line 39) * * *                             $13,469.63

           *           *              *               *           *         *            *
Monthly net difference is $13,469.63 x 48 months (cash offer) equals $646,542.
                                         -8-

[*8] On March 4, 2010, Mr. Pyper sent a letter (March 4, 2010 letter) to the

settlement officer by facsimile (fax) in which he responded to her preliminary

assessment of petitioner’s offer-in-compromise. That letter stated in pertinent

part:

              Item # 1. Form 433-A, Line 37, Accounts Receivable. You
        have treated these amounts as contributing to your analysis of the
        Asset Equity Table (“AET”) pertaining to the taxpayer, but your
        analysis is flawed.

              Response # 1:

                    Under Alabama law a subcontractor has a so called
              “mechanics lien” on all services and materials that are
              committed to a particular job. In the instant case, these
              Accounts Receivable are already earmarked for payment to Mr.
              Lane’s various subcontractors before they are submitted to his
              customers. In reality his share of the proceeds historically runs
              about 10%. Due to Mr. Lane’s tax problems, the customer
              normally issues a check in payment on account in the names of
              Mr. Lane and his subcontractor(s), so that he must remit the
              proportional share to the subcontractor in order to maintain his
              credibility with his customers. When you take the accounts
              receivable off your calculation of the AET, the remaining
              balance (±$116,000) approximates the amount the taxpayer has
              offered to pay per his OIC [offer-in-compromise].

         *          *           *          *          *           *          *

               Item # 4. Liquidation of Equipment. Your analysis
        presupposes that Mr. Lane could liquidate most of his operating
        assets to meet his liabilities without incurring serious damage to his
        ability to remain in business.
                                         -9-

[*9]          Response # 4.

                     If the taxpayer had to immediately liquidate his
              equipment to meet his obligations to the Internal Revenue
              Service this would place an unreasonable burden on him
              because it would essentially mean he would have to go out of
              business. Without this equipment he could not secure
              additional, meaningful work and would have to lay off
              employees and resort to government support himself. The
              equipment is essential to staying in business. I don’t believe
              the current political and economic objectives of the U.S.
              Government is to force small businessmen, like the taxpayer, to
              go out of business and add more workers to the unemployment
              roles.

        On March 9, 2010, the settlement officer sent a letter (March 9, 2010 letter)

to Mr. Pyper in response to his March 4, 2010 letter. That letter stated in pertinent

part:

        I am in receipt of your letter that was faxed to Appeals on
        03/04/2010.

        Accounts and notes receivable are considered assets. The value of
        the accounts and notes receivable are determined by what is
        collectible from the borrower, what can be levied upon and what is
        secured and if so by what assets. Per the information reviewed, the
        accounts and notes receivable reported on the Form 433-B can be
        collected per the services rendered by D & L Construction. The
        amount owed to D & L Construction can be levied upon for payment
        of the taxes owed. The accounts and notes receivable will not be
        disregarded for the computation of an acceptable offer.

         *          *           *          *          *           *          *
                                   - 10 -

[*10] D & L Construction is a sole proprietor[ship]. Therefore, I have
      enclosed Form 433-A, Collection Information Statement for
      completion since Mr. Lane is the sole owner of this business. The
      taxes can also be collected from his personal assets as well as the
      business assets. Please complete and return the Form 433-A to me
      with the applicable attachments no later than 3/26/2010.

      Inventory, machinery and equipment are assets of the business.
      Therefore, their values are included in the computation of an offer. It
      is noted that an exemption of $4,120 will be deducted from the total
      of equity shown in the equipment and tools on the AET [Asset/Equity
      Table].

      On March 26, 2010, Mr. Pyper sent a letter (March 26, 2010 letter) to the

settlement officer by fax in response to her March 9, 2010 letter. That letter stated

in pertinent part:

             This letter is intended as a proportional response to your recent
      comment regarding the right to consider the gross amount of accounts
      receivable the taxpayer described on the Form 433-B that was
      submitted in conjunction with his OIC [offer-in-compromise] a year
      ago. I thought the response #1 in my letter dated March 4, 2010, was
      sufficient to apprise you of your misapprehension as contained in the
      analysis of the Asset Equity Table (“AET”), but apparently I did not
      do a credible job of explaining the unique relationship that exists
      among general contractors and subcontractors (“the subs”) under
      Alabama law. Therefore, please consider the following:

                    A. Specifically, the amount reported on Form 433-B did
             not reflect the fact that 90% of the amount reported was not
             owed to Mr. Lane but was owed to the various subcontractors
             hired my [sic] Mr. Lane to provide certain services and
             materials for the project awarded to Mr. Lane. In that context
             he was merely acting as their agent in securing a payment and
             could not apply the funds for any other purpose because the
                                        - 11 -

             [*11] subs possessed a mechanics lien which automatically
             attached itself to the funds the moment they were remitted to
             Mr. Lane in satisfaction of the account receivable. To be
             absolutely correct the amount shown as an account receivable
             on the From [sic] 433-B should have been $8,706.30 instead of
             the $87,063 that was reported. Mr. Lane thought the Internal
             Revenue Service would recognize this fact when it was
             originally reported, but there have been other instances when
             the I.R.S. has failed to recognize a lien authorized under
             Alabama law. * * * This is the routine way in which
             subcontractor obligations and vendor debts are handled and
             conforms to industry standards.

      On March 30, 2010, the settlement officer sent a letter to Mr. Pyper by fax

in response to his March 26, 2010 letter. That letter stated in pertinent part:

      Per review of the information recently received, an updated Form
      433-B, Collection Information Statement for Businesses can be
      submitted by 04/07/2010.

      Per review of the [petitioner’s first] Form 433-B, the amount of
      $87,063 is the total of the accounts receivable. Per page 6 of the
      [petitioner’s first] Form 433-B, the amount of $87,063 on line 25 is
      the total of the accounts receivable reported as monthly income. The
      total of expenses claimed was deducted from that amount. The
      expenses would have included any subcontractors, employees, etc
      that were owed. This amount deleted from the Asset and Equity table
      leaves a balance of $112,802.

       *           *           *          *           *           *          *

      Also, Mr. Lane is a sole proprietor (owns 100% of his business), but
      we did not include any of his personal assets on the Asset and Equity
      table. The tax can be collected from his personal and business assets.
      I need a copy of the mortgage coupon, etc (which shows the value
                                        - 12 -

      [*12] and the balance due on his personal residence). This information
      may be submitted with the updated Form 433-B by 04/07/2010.

      On April 6, 2010, Mr. Pyper submitted to the settlement officer an updated

Form 433-B (petitioner’s second Form 433-B). In that form, petitioner showed,

inter alia, gross business income and business expenses of $26,560 and

$24,929.43, respectively, for the period that began on February 28, 2010, and that

ended on March 31, 2010. In petitioner’s second Form 433-B, petitioner also

showed the following business assets5 and his equity therein:6

                     Asset                                   Equity
          Business bank accounts                            $4,958.00
          Accounts/notes receivable                         26,560.00
          Real property                                     25,000.00
          Vehicles                                            9,390.00
          Business equipment                               115,334.45




      5
       One of the assets that petitioner listed in petitioner’s second Form 433-B
was his residence on which there were certain mortgage loans. It was at the
request of the settlement officer that petitioner showed as an asset in that form his
residence and his equity therein even though that residence was not a business
asset of petitioner.
      6
        Except for petitioner’s business bank accounts, the record does not
establish the respective dates as of which petitioner showed his equity in the
various assets that he held.
                                        - 13 -

[*13] On May 21, 2010, the settlement officer sent a letter (May 21, 2010 letter)

to Mr. Pyper. That later stated in pertinent part:

      The information received did not change the Reasonable Collection
      Potential on Mr. Lane’s case.

        *            *         *          *          *           *            *

      The offer in the amount of $100,000 is rejected. The taxes may be
      paid by way of an installment agreement of approximately $6000 a
      month and by borrowing on assets of the business and individually to
      reduce the balance to include in an installment agreement.

      You may notify me no later than 06/07/2010 if you wish to consider
      the above as a collection alternative on your case. Otherwise, your
      case will be closed and a determination letter will be issued.

      On June 8, 2010, Mr. Pyper sent a letter (June 8, 2010 letter) to the

settlement officer by fax in response to her May 21, 2010 letter. That letter stated

in pertinent part:

             This is in response to your letter dated May 21, 2010. There is
      some uncertainty regarding the proposal of $6,000 per month. If this
      is not a modification of the taxpayer’s OIC, what is the time period
      for making such monthly payments?

             A monthly payment of $6,000, if made with current cash flow,
      would obviously be “after tax” which equates to a gross earnings of
      close to $10,000 per month “before tax”. What information has been
      submitted to you suggesting the taxpayer has this kind of cash flow
      available for such a string of indeterminate payments during this time
      of extreme economic hardship for most businesses involved in the
      construction industry? Please advise.
                                          - 14 -

[*14]         Since it appears on its face this is not a modification of * * *
        Mr. Lane’s OIC, unless we are mistaken, the taxpayer must
        respectfully decline the proposal and will await the receipt of your
        determination.

        On June 9, 2010, the settlement officer sent a letter to Mr. Pyper in response

to his June 8, 2010 letter. That letter stated in pertinent part:

        Per your letter received via fax on today, a review of the bank
        statements received indicate that an installment payment in the
        amount of $6000 could be made on the tax liabilities.

        The offer in the amount of $100,000 is rejected. You will receive my
        determination in writing and have the opportunity for judicial review
        if desired.

        On June 23, 2010, respondent issued to petitioner two separate notices of

determination concerning collection action(s) under section 6320 and/or 6330

(notices of determination). One of those notices pertained to petitioner’s annual

periods 2003 and 2005, for which he filed Forms 940-EZ. The second of those

notices pertained to petitioner’s 20 consecutive quarterly periods that began on

January 1, 2003, and that ended on December 31, 2007, for which he filed Forms

941. Each of those notices stated in pertinent part:

        Summary of Determination
        The filing of the Notice of Federal Tax Lien is appropriate, given the
        facts and circumstances of your case. The requirements of applicable
        law and administrative procedures have been met and the action taken
        was appropriate under the circumstances.
                                       - 15 -

[*15] We could not accept your collection alternative of an offer-in-
      compromise because the Service can reasonably expect to collect an
      amount larger than you offered.

      Since were unable to accept your offer and you did not propose
      another viable collection alternative, retaining the Notice of Federal
      Tax Lien balances the need for the efficient collection of the taxes
      with your concern that any collection action be more intrusive than
      necessary.

      Each of the notices of determination included an attachment that stated in

pertinent part:

                  SUMMARY AND RECOMMENDATION

      You filed a request for a Collection Due Process (CDP) hearing under
      Internal Revenue Code § 6320 following receipt of Letter 3172,
      Notice of Federal Tax Lien Filing and Your Right to a Hearing. Your
      Form 12153, requesting a CDP hearing was timely received on
      07/31/2008 within the 30-day period for requesting a hearing.

      The filing of the Notice of Federal Tax Lien is appropriate, given the
      facts and circumstance of your case as discussed below.

                            BRIEF BACKGROUND

      The taxes due are a result of insufficient federal tax deposits being
      made when they were due. The notices of the taxes being due were
      sent to you at your last known address of record.

      You stated on the Form 12153 that you will submit an offer-in-
      compromise as a collection alternative. You submitted an offer and it
      was investigated. It was determined that the amount you offer was
      less than your reasonable collection potential. Therefore, we could
      not accept your offer. You were informed that you may consider an
      installment agreement as a collection alternative. You disagreed with
                                - 16 -

[*16] the amount proposed as an installment agreement and you did
not propose an amount that could be accepted per the amount of taxes
owed on your account, therefore, no alterative to collection was
granted on your case.

Agreements are based on your ability to fully pay the taxes within the
statutory period for collection which is 10 years from the date of
assessment of the tax.

You were offered a face-to-face, telephonic or correspondence
conference by letter dated 1/29/2009. Your representative requested
and received a face-to-face conference.

                  DISCUSSION AND ANALYSIS

a. Verification of legal and procedural requirements:

Appeals has obtained verification from the IRS office collecting the
tax that the requirements of any applicable law, regulation or
administrative procedure with respect to the proposed levy or NFTL
filing have been met. Computer records indicate that the notice and
demand, notice of intent to levy and/or notice of federal tax lien
filing, and notice of a right to a Collection Due Process hearing were
issued.

Assessment was properly made per IRC § 6201 for each tax and
period listed on the CDP notice.

The notice and demand for payment letter was mailed to your last
known address, within 60 days of the assessment, as required by IRC
§ 6303.

There was a balance due when the CDP levy notice was issued or
when the NFTL filing was requested.
                                      - 17 -

[*17] Letter 3172 was sent by certified mail to the your last known address
      per records of the Automated Lien System, no later than 5 business
      days after the NFTL was recorded (IRC § 6320(a)).

      There is no pending bankruptcy case, nor did you have a pending
      bankruptcy case at the time the CDP notice was sent.

      Prior involvement:
      I had no prior involvement with respect to the specific tax periods
      either in Appeals or Compliance.

      Collection statute verification:
      The collection statute has been suspended; the collection period
      allowed by statute to collect these taxes has been suspended by the
      appropriate computer codes for the tax periods at issue.

      Collection followed all legal and procedural requirements and the
      actions taken or proposed were appropriate under the circumstances.

                          Issues raised by the taxpayer

      Collection Alternatives Offered by Taxpayer
      You requested the collection alternative of an offer-in-compromise.
      We considered your request but determined that the offer was not a
      viable collection alternative on your case.

      You offered to pay $100,000 as a lump sum cash offer. You
      submitted $20,000 with the offer (20%) and upon written acceptance
      of the offer the balance ($80,000) would be paid in 5 installments of
      $16,000.

      An offer-in-compromise reasonable collection potential is base on
      your equity in assets and ability to make future payments on the taxes
      due.
                                           - 18 -

[*18] A review of the financial information and documentation you
      provided, your reasonable collection potential was calculated to be
      $278,117.96 as shown below;

                                      Asset/Equity table
                     Fair Market                    Quick Sale
           Item         Value         % Reduced       Value        Encumbrances       Equity

             *      *             *            *            *        *            *
 Checking Account       $17,812           0%          17,812                           17,812

             *      *             *            *            *        *            *
 Vehicle 1-2002          $1,800          20%               1,440                        1,440
  Chev
 Vehicle 2- 2003         $2,160          20%               1,728                        1,728
  Ford
 Vehicle 3- 2004         $2,480          47%               1,314                        1,314
  Ford
 Equipment/Tools     $115,334            20%          92,268             4,120         88,148

             *      *             *            *            *        *            *
 Accounts               $87,063                       87,063                           87,063
  Receivable
 Vehicle 4- 2004         $2,950          20%               2,360                        2,360
  ford
  Totals             $229,599                        203,985             4,120        199,865

      The above information does not include the assets that belong to you
      individually because you did not provide this information. The
      information is based on what you reported on the [petitioner’s first]
      Form 433-B and the documentation attached to verify the values and
      encumbrances on the assets. Your equity in assets was calculated to
      be $199,865.
                                                  - 19 -

[*19] The Income/Expense table below is also based on the revised
      [petitioner’s second] Form 433-B, Collection Information for
      Businesses, dated and signed by you on 03/31/2010.

                  Income/Expense Table (IET) For Corporations & Partnerships

            *           *             *              *            *         *            *
            Income Total                                   Necessary Business Expenses
         Source              Gross                                        Claimed            Allowed
 19. Gross Receipts          26,560       27. Materials Purchased         $1,518.37          $1,518.37
 19a. Returns &                           28. Inventory Purchased
      Allowance
      ***
 19b. Cost of Goods                       29. Gross Wages &               11.224.00          11,224.00
       Sold * * *                              Salaries
 20. Gross Rental                         30. Rent                           500.00            500.00
      Income
 21. Interest                             31. Supplies
 22. Dividends                            32. Utilities/telephone            674.67            674.67
 23. Other income                         33. Vehicle Gasoline/Oil          2850.96           2850.96
      (specify below)
                                          34. Repairs/Maintenance           2933.38           2933.28
                                          35. Insurance                     1983.27           1983.27
                                          36. Current Taxes                 3244.88           3244.88
                                          37. Other Expenses * * *

            *           *             *              *            *         *            *
 26. Total Income           $26,560       39. Total Expenses             $24,929.43      $24,929.43
                 NET DIFFERENCE (Line 26 minus line 39) * * *                                $1630.57

            *           *             *              *            *         *            *
 The amount of $1630.57 x 48 months (cash offer) = $78,252.96
                                        - 20 -

[*20] The total of equity in assets plus future potential income is a total of
      $278,117.96 which is more than the $100,000 offered.

      As stated earlier, you were requested to submit Form 433-A,
      Collection Information Statement for Wage Earners and Self-
      Employed Individuals per letter dated 03/09/2010. The Form 433-A
      was not received. The Form 433-A is required when evaluating a sole
      proprietor for any collection alternative. Therefore, the above
      computations do not include any assets or additional income you have
      personally.

      Since we could not accept your offer in the amount of $100,000 the
      filing of the Notice of Federal Tax Lien is appropriate, given the facts
      and circumstance of your case.

      Challenges to the Existence of Amount of Liability
      You did not dispute your liabilities.

      You raised no other issues:

        Balancing of need for efficient collection with taxpayer concern
        that the collection action be no more intrusive than necessary.

      I balance the competing interests in finding the lien appropriate.
      Given your failure to propose a viable collection alternative that
      could be accepted at this time, retaining the filed lien balances the
      need for the efficient collection of the taxes with your concern that
      any collection action be no more intrusive than necessary.
      [Reproduced literally.]

                                     Discussion

      We may grant summary judgment where there is no genuine dispute as to

any material fact and a decision may be rendered as a matter of law. Rule 121(b);
                                        - 21 -

[*21] Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d

965 (7th Cir. 1994).

      Where, as is the case here, the validity of the underlying tax liability is not

properly placed at issue, we review the determination of the Commissioner of

Internal Revenue for abuse of discretion. See Sego v. Commissioner, 114 T.C.

604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 182 (2000).

      Section 7122(a) authorizes the Secretary of the Treasury (Secretary) to

compromise, inter alia, any civil case arising under the internal revenue laws.

Section 7122(d)(1) requires the Secretary to prescribe guidelines for officers and

employees of the Internal Revenue Service to determine whether an offer-in-

compromise is adequate and should be accepted to resolve a dispute. Section

301.7122-1(b)(2), Proced. & Admin. Regs., provides that doubt as to collectibility

is a ground for the compromise of a liability.7 Section 301.7122-1(b)(2), Proced.

& Admin. Regs., provides that “Doubt as to collectibility exists in any case where

the taxpayer’s assets and income are less than the full amount of the liability.”




      7
        Sec. 301.7122-1(b)(1) and (3), Proced. & Admin. Regs., also provides that
doubt as to liability and the promotion of effective tax administration are grounds
for the compromise of a liability. Petitioner does not claim that he qualifies for an
offer-in-compromise on either of those two grounds.
                                         - 22 -

[*22] Respondent has prescribed procedures that are consistent with section 7122

and the regulations thereunder in order to determine whether an offer-in-

compromise based on doubt as to collectibility should be considered and accepted.

Consistent with section 301.7122-1(b)(2), Proced. & Admin. Regs., section 4.02

of Revenue Procedure 2003-71, 2003-2 C.B. at 517, provides that an offer-in-

compromise based on doubt as to collectibility “generally will be considered

acceptable if it is unlikely that the tax can be collected in full and the offer

reasonably reflects the amount the Service could collect through other means,

including administrative and judicial collection remedies.” An offer-in-

compromise based on doubt as to collectibility usually must equal or exceed a

taxpayer’s reasonable collection potential in order to be accepted. Internal

Revenue Manual (IRM) pt. 5.8.1.1.3(3) (Sept. 23, 2008).8

      As pertinent here, part 5.8.4.4.1 of the IRM (Sept. 23, 2008) provided that a

taxpayer’s reasonable collection potential is the sum of (1) the taxpayer’s net

realizable equity in assets (net realizable equity) and (2) the amount collectible

from the taxpayer’s expected future income after allowing for payment of

      8
        Unless otherwise indicated, all IRM references are to the version of the
IRM that was in effect on the date of petitioner’s hearing. Although there were
changes made to the IRM that went into effect after that hearing and before
respondent issued the notices of determination to petitioner, none of those changes
is applicable here except for one change (discussed below).
                                        - 23 -

[*23] necessary living expenses (expected future income). The term “net

realizable equity” was defined for purposes of part 5.8.4.4.1 of the IRM (Sept. 23,

2008) to mean “quick sale value * * * less amounts owed to secured lien holders

with priority over the federal tax lien.” Id. pt. 5.8.5.4.1(1) (Sept. 23, 2008). The

term “quick sale value” used in the definition of “net realizable equity” was

defined to mean “an estimate of the price a seller could get for the asset in a

situation where financial pressures motivate the owner to sell in a short period of

time”, usually 80-percent of the fair market value of the asset. Id. pt. 5.8.5.4.1(2)

and (3).

      “Generally, the amount to be collected from future income is calculated by

taking the projected gross monthly income, less allowable expenses, and

multiplying the difference by the number of months remaining on the statutory

period for collection.” Id. pt. 5.8.5.6.6(1) (Sept. 23, 2008). Part 5.8.5.6.1(1) of the

IRM (Sept. 23, 2008) provided that “allowable expenses” consist of, inter alia,

“necessary expenses”, as defined in part 5.15.1.7 of the IRM (May 9, 2008). The

term “necessary expense” was defined for purposes of part 5.8.5.6.1(1) of the IRM

(Sept. 23, 2008) to mean an expense that is “necessary to provide for a taxpayer’s

and his or her family’s health and welfare and/or production of income.” Id. pt.

5.15.1.7(1). Part 5.15.1.7 of the IRM (May 9, 2008) provided in pertinent part:
                                         - 24 -

[*24] (2) There are three types of necessary expenses:

      •       National Standards

      •       Local Standards

      •       Other Expenses

      (3) National Standards: These establish standards for Food, Clothing
      and Other Items, and Out-of-Pocket Health Care Expenses.

          *        *            *          *          *          *           *

      (4) Local Standards: These establish standards for two necessary
      expenses: housing and utilities and transportation. * * *

          *        *            *          *          *          *           *

      (6) Other - Other expenses may be allowed if they meet the necessary
      expense test.

National standards and local standards serve as guidelines to provide accuracy and

consistency in determining a taxpayer’s basic living expenses (discussed below).

IRM pt. 5.8.5.6.2(1) (Sept. 23, 2008).

      An offer-in-compromise based on doubt as to collectibility that is less than a

taxpayer’s reasonable collection potential may be accepted where special

circumstances exist that warrant acceptance of less than the taxpayer’s reasonable

collection potential. Id. pt. 5.8.1.1.3(3) (Sept. 23, 2008). As pertinent here, such

special circumstances exist where requiring the taxpayer to pay the full amount of
                                       - 25 -

[*25] the taxpayer’s reasonable collection potential would cause the taxpayer

economic hardship within the meaning of section 301.6343-1, Proced. & Admin.

Regs. See IRM pt. 5.8.4.3(4) (Sept. 23, 2008), 5.8.11.2.1 (Sept. 23, 2008).

Section 301.6343-1(b)(4), Proced. & Admin. Regs., provides in pertinent part:

      (4) Economic hardship.--(i) General rule.--The levy is creating an
      economic hardship due to the financial condition of an individual
      taxpayer. This condition applies if satisfaction of the levy in whole or
      in part will cause an individual taxpayer to be unable to pay his or her
      reasonable basic living expenses. The determination of a reasonable
      amount for basic living expenses will be made by the director and
      will vary according to the unique circumstances of the individual
      taxpayer. Unique circumstances, however, do not include the
      maintenance of an affluent or luxurious standard of living.

            (ii) Information from taxpayer.--In determining a reasonable
      amount for basic living expenses the director will consider any
      information provided by the taxpayer including–

                   (A) The taxpayer’s age, employment status and history,
            ability to earn, number of dependents, and status as a dependent
            of someone else;

                   (B) The amount reasonably necessary for food, clothing,
            housing (including utilities, home-owner insurance, home-
            owner dues, and the like), medical expenses (including health
            insurance), transportation, current tax payments (including
            federal, state, and local), alimony, child support, or other court-
            ordered payments, and expenses necessary to the taxpayer’s
            production of income (such as dues for a trade union or
            professional organization, or child care payments which allow
            the taxpayer to be gainfully employed);
                                        - 26 -

[*26]              (C) The cost of living in the geographic area in which the
              taxpayer resides;

                    (D) The amount of property exempt from levy which is
              available to pay the taxpayer’s expenses;

                    (E) Any extraordinary circumstances such as special
              education expenses, a medical catastrophe, or natural disaster;
              and

                   (F) Any other factor that the taxpayer claims bears on
              economic hardship and brings to the attention of the director.

        In the notices of determination, the Appeals Office determined that

petitioner’s reasonable collection potential was $278,117.96, i.e., the sum of

(1) net realizable equity of $199,865, which the settlement officer calculated on

the basis of the assets and the equity therein that petitioner showed in petitioner’s

first Form 433-B, and (2) expected future income of $78,252.96, which the

settlement officer calculated on the basis of the gross business income and

business expenses that petitioner showed in petitioner’s second Form 433-B.9 It is

        9
        It is noteworthy that the financial information that petitioner showed in
petitioner’s first Form 433-B differed significantly from the financial information
that he showed in petitioner’s second Form 433-B. Nevertheless, in her May 21,
2010 letter, the settlement officer stated that the financial information that
petitioner showed in petitioner’s second Form 433-B did not change his
reasonable collection potential from that which she calculated on the basis of the
financial information that petitioner showed in petitioner’s first Form 433-B. It is
not clear why the settlement officer made that statement.

                                                                        (continued...)
                                        - 27 -

[*27] not clear why the Appeals Office determined the amount of petitioner’s

reasonable collection potential in part on the basis of financial information that

petitioner showed in petitioner’s first Form 433-B and in part on the basis of

financial information that he showed in petitioner’s second Form 433-B.

      As discussed above, the Appeals Office used the assets and the equity

therein that petitioner showed in petitioner’s first Form 433-B, which he submitted

to the settlement officer on February 24, 2009, to determine the amount of

petitioner’s net realizable equity. It is not clear why. Part 5.8.5.3.2(1) of the IRM

(Sept. 23, 2008) appears to have required the Appeals Office to determine the

amount of petitioner’s net realizable equity by using the assets and the equity

therein that petitioner showed in petitioner’s second Form 433-B, which he

submitted to the settlement officer on April 6, 2010.10


      9
        (...continued)
       The settlement officer calculated petitioner’s reasonable collection potential
to be approximately $846,407 on the basis of the financial information that
petitioner showed in petitioner’s first Form 433-B. Using the same assumptions
that the settlement officer made in calculating petitioner’s reasonable collection
potential on the basis of the financial information that petitioner showed in
petitioner’s first Form 433-B, it appears that petitioner’s reasonable collection
potential would have been approximately $251,757 on the basis of the financial
information that petitioner showed in petitioner’s second Form 433-B.
      10
        Part 5.8.5.3.2 of the IRM (Sept. 23, 2008) provided in pertinent part: “If
during the processing of the offer, the financial information becomes older than 12
months, contact should be made with the taxpayer to update the information.”
                                        - 28 -

[*28] In addition, the Appeals Office determined that petitioner had $87,063 in net

realizable equity in his accounts receivable. In his March 4, 2010 letter and his

March 26, 2010 letter, Mr. Pyper claimed that the amount of petitioner’s net

realizable equity in his accounts receivable was approximately 10-percent of the

total amount of those accounts receivable. That is because, according to Mr.

Pyper, each of the subcontractors that petitioner hired to work on the construction

projects to which petitioner’s accounts receivable are attributable held a

mechanic’s lien on each of those accounts receivable in an amount that was equal

to approximately 90-percent of the total of any such accounts receivable

attributable to each such contractor. The record does not establish that the

settlement officer investigated (1) whether any of the subcontractors that petitioner

hired to work on the construction projects to which petitioner’s accounts

receivable are attributable held a mechanic’s lien on a portion of petitioner’s

accounts receivable and (2) the significance of any such mechanic’s liens on the

valuation of petitioner’s net realizable equity in his accounts receivable.

      In petitioner’s second Form 433-B, petitioner showed, inter alia, that he had

gross business income and business expenses of $26,560 and $24,929.43,

respectively, for the one-month period that began on February 28, 2010, and that

ended on March 31, 2010. The Appeals Office used only those respective
                                         - 29 -

[*29] amounts of gross business income and business expenses that petitioner

showed for the one-month period that began on February 28, 2010, and that ended

on March 31, 2010, to determine the amount of petitioner’s expected future

income. It is not clear why. Part 5.8.5.3.2(7) of the IRM (Sept. 23, 2008) appears

to have required the Appeals Office to use petitioner’s gross business income and

business expenses for the most recent three months to determine the amount of

petitioner’s expected future income.11

      In addition, the Appeals Office did not take into account any personal

income or any personal expenses of petitioner in determining the amount of

petitioner’s expected future income.12 That is because petitioner did not submit

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

Employed Individuals (Form 433-A), which would have included that




      11
         Part 5.8.5.3.2(7) of the IRM (Sept. 23, 2008) provided in pertinent part
that a settlement officer assigned to investigate an offer-in-compromise should
request from self-employed individuals “proof of gross income * * * for the prior
three months” and should “Compare average earnings to the amounts declared on
the CIS [i.e., Form 433-B, Collection Information Statement for Businesses].”
      12
        There are references in the record to certain mortgage loans on petitioner’s
residence. However, the Appeals Office did not factor petitioner’s obligation to
make payments with respect to those loans into its calculation of petitioner’s
expected future income. Nor did the Appeals Office factor the value of
petitioner’s residence into its calculation of petitioner’s net realizable equity.
                                        - 30 -

[*30] information.13 It is not clear how the Appeals Office could have calculated

an accurate amount of petitioner’s expected future income without taking into

account any personal income or any personal expenses of petitioner.

      In the notices of determination, the Appeals Office stated that its calculation

of petitioner’s reasonable collection potential, inter alia, did “not include any

assets * * * [petitioner] ha[s] personally.” Because the Appeals Office calculated

petitioner’s net realizable equity on the basis of the assets and the equity therein




      13
         Because petitioner failed to submit Form 433-A after he was directed to do
so by the settlement officer in her March 9, 2010 letter, he is not before us with so-
called clean hands. If the Appeals Office had rejected petitioner’s offer-in-
compromise on the ground that petitioner failed to provide the settlement officer
with certain requested financial information, respondent could have argued here
that that was an adequate ground for the Appeals Office to have rejected
petitioner’s offer-in-compromise. See, e.g., Sullivan v. Commissioner, T.C.
Memo. 2012-337; Wright v. Commissioner, T.C. Memo. 2012-24; Huntress v.
Commissioner, T.C. Memo. 2009-161. The Appeals Office did not reject
petitioner’s offer-in-compromise on that ground, however. As a result, in
determining whether to sustain or reject the Appeals Office’s determinations, we
must consider the ground(s) upon which it relied in making those determinations
in the notices of determination. See Jones v. Commissioner, T.C. Memo. 2012-
274.
                                        - 31 -

[*31] that petitioner showed in petitioner’s first Form 433-B,14 that statement is

correct.15 It is not clear how the Appeals Office could have calculated an accurate

amount of petitioner’s net realizable equity without taking into account the

amounts of certain mortgage loans on petitioner’s residence.16

      Finally, we believe that in both Form 656 and Mr. Pyper’s March 4, 2010

letter to the settlement officer petitioner and Mr. Pyper raised issues regarding the

economic hardship17 that petitioner would suffer if the Appeals Office were to

reject his offer-in-compromise.18 Form 656 stated in pertinent part: “This is the

      14
        Although the Appeals Office calculated petitioner’s net realizable equity
on the basis of the assets and the equity therein that petitioner showed in
petitioner’s first Form 433-B, that office calculated petitioner’s expected future
income on the basis of the gross business income and business expenses that
petitioner showed in petitioner’s second Form 433-B.
      15
           See supra notes 5 and 12.
      16
           See supra notes 5 and 12.
      17
         As discussed above, economic hardship exists when a taxpayer is unable
to pay his or her reasonable basic living expenses. See sec. 301.6343-1(b)(4)(i),
Proced. & Admin. Regs. Such basic living expenses include expenses necessary,
inter alia, for the production of income. See sec. 301.6343-1(b)(4)(ii)(B), Proced.
& Admin. Regs.
      18
        Even if petitioner and Mr. Pyper had not raised the issue of economic
hardship in both Form 656 and Mr. Pyper’s March 4, 2010 letter, part 5.8.4.2(1) of
the IRM (June 1, 2010), which became effective after petitioner’s hearing and
before respondent issued the notices of determination to petitioner on June 23,
2010, provided in pertinent part that the Appeals Office should consider the issue
                                                                       (continued...)
                                        - 32 -

[*32] worst economy I have seen in 40 years; I have not shown a profit since 2000

and am just keeping my business open to keep my reputation intact in case there is

a recovery.” Mr. Pyper’s March 4, 2010 letter to the settlement officer stated in

pertinent part:

      If the taxpayer had to immediately liquidate his equipment to meet his
      obligations to the Internal Revenue Service this could place an
      unreasonable burden on him because it would essentially mean he
      would have to go out of business. Without this equipment he could
      not secure additional, meaningful work and would have to lay off
      employees and resort to government support himself.[19]

The record does not establish that the Appeals Office considered any issues

regarding whether petitioner would suffer economic hardship in determining to

reject petitioner’s offer-in-compromise.

      On the record before us, we are unable to decide whether we should sustain

the determinations in the notices of determination. Accordingly, we shall deny

respondent’s motion and remand this case to the Appeals Office for clarification

and for further consideration.


      18
        (...continued)
of economic hardship, whether identified by the taxpayer or not, when
investigating any offer-in-compromise.
      19
         Part 5.8.11.2.1(6) of the IRM (Sept. 23, 2008) provides in pertinent part
that a finding of economic hardship may be appropriate where “The taxpayer has
assets * * * and liquidation to pay the outstanding tax liabilitie(s) would render the
taxpayer unable to meet his basic living expenses.”
                                  - 33 -

[*33] To reflect the foregoing,


                                           An appropriate order will be issued.
