                          T.C. Memo. 2009-292



                       UNITED STATES TAX COURT



                   GLENN LITWAK, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21122-07L.                Filed December 21, 2009.



     Robert T. Leonard, for petitioner.

     Laura L. Buckley, Karen Nicholson Sommers, and Jeffrey A.

Schlei, for respondent.



                          MEMORANDUM OPINION


     VASQUEZ, Judge:    Pursuant to section 6330(d),1 petitioner

seeks review of respondent’s determination to proceed with



     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                - 2 -

collection of his unpaid 2000, 2001, and 2002 Federal income tax

liabilities.   The issue for decision is whether respondent abused

his discretion in sustaining his proposed levy.

                            Background

     The parties submitted this case fully stipulated pursuant to

Rule 122.   The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    Petitioner resided in

California at the time he filed his petition.

     Petitioner is an attorney and real estate broker.    He

operates two S corporations:    Glenn Litwak, A Professional

Corporation, and GTL Realty, Inc.    Both corporations pay him

wages reported on Forms W-2, Wage and Tax Statement.    He also

receives net business income, which he reports on Schedules K-1,

Shareholder’s Share of Income, Credits, Deductions, etc., from

both S corporations.

     Petitioner filed Federal income tax returns for 2000, 2001,

and 2002 but failed to pay the tax shown on the returns as due.

Respondent filed notices of Federal tax lien (Federal tax liens)

for tax years 2000, 2001, 2002, 2004, and 2005.

     On May 5, 2006, respondent mailed a Final Notice–-Notice of

Intent to Levy and Notice of Your Right to a Hearing, for 2000,

2001, and 2002 to petitioner.
                                - 3 -

     On June 6, 2006, respondent received petitioner’s timely

filed Form 12153, Request for a Collection Due Process Hearing,

for 2000, 2001, and 2002.

Offer-in-Compromise

     On December 11, 2006, respondent received petitioner’s Form

656, Offer in Compromise (OIC), as to tax liabilities for 1997,

1998, 2000, 2001, 2002, 2004, and 2005.    Petitioner attached to

the OIC a Form 433-A, Collection Information Statement for Wage

Earners and Self-Employed Individuals; a Form 433-B, Collection

Information Statement for Businesses, for Glenn Litwak, A

Professional Corporation; and a Form 433-B for GTL Realty, Inc.

Petitioner offered to settle the following outstanding Federal

income tax liabilities (including interest computed to November

2006) for $15,000 based on doubt as to collectibility:

                Tax             Year      Liability

             Form 1040          1997      $69,433.27
             Form 1040          1998       32,671.89
             Form 1040          2000       48,884.13
             Form 1040          2001       67,150.10
             Form 1040          2002       33,851.78
             Form 1040          2004       19,172.22
             Form 1040          2005       18,812.85
               Total                      289,976.24

Petitioner’s counsel asserted that petitioner was unable to make

monthly payments and that petitioner’s net realizable equity in

assets was $5,250.    Petitioner would be able to borrow $15,000

from family members and friends, and, accordingly, offered to
                                - 4 -

compromise all his outstanding Federal income tax liabilities for

this amount.

     Petitioner submitted a letter with his OIC which discussed

the potential dischargeability of his Federal income tax

liabilities in bankruptcy.    The letter stated:   “The taxpayer

desires to reach an agreement through the Offer in Compromise

Program and avoid bankruptcy.    However, bankruptcy is a viable

option and consideration of an offer should be a calculated

business decision.”   Petitioner’s counsel asserted that

petitioner’s Federal income tax liabilities for 1997, 1998, 2000,

2001, 2002, 2004, and 2005 were currently dischargeable or would

soon be dischargeable in bankruptcy.

Settlement Officer’s Review

     On April 16, 2007, Settlement Officer Nathan August (Mr.

August) reviewed petitioner’s OIC and the attached information.

Mr. August determined that petitioner’s 2004 and 2005 Federal

income tax liabilities would not be discharged in bankruptcy.      He

determined petitioner had a current ability to pay $1,390 per

month, on the basis of the difference between petitioner’s

reported $12,440 monthly income and monthly expenses of $11,050.

He noted that petitioner had an unencumbered BMW car with a

current value of $10,000.

     On April 17, 2007, Mr. August sent a letter to petitioner

scheduling a meeting for July 16, 2007, and requesting additional
                                - 5 -

documentation.   Petitioner provided the documents, and Mr. August

reviewed the information therein.   He analyzed the bank

statements, Forms W-2, and Schedules K-1 petitioner provided and

determined that the income figures that petitioner reported on

his Form 433-A were accurate.   Thus, Mr. August determined that

petitioner received $12,440 per month in gross wages, net

business income, and interest income.   Using the Internal Revenue

Service’s National Standard Allowable Expense Table, Mr. August

determined that petitioner’s total allowable monthly expenses

were $7,767 and concluded that petitioner had the ability to pay

$4,673 per month towards his delinquent tax liabilities.    Mr.

August also determined that petitioner’s net realizable equity in

assets was $8,400.   Accordingly, Mr. August calculated that

petitioner’s net realizable equity in assets of $8,400 plus his

future income value of $224,304 ($4,673 times 48 months) produced

a reasonable collection potential of $232,704.

Section 6330 Hearing

     On August 2, 2007, Mr. August held a section 6330 hearing

with petitioner and petitioner’s counsel.   During the section

6330 hearing petitioner conceded net realizable equity in assets

of $8,400.2   Petitioner’s counsel stated that petitioner could

increase his OIC to $23,000.    Petitioner’s counsel asserted that


     2
        Petitioner later argued that the $8,400 of assets would
be exempt from the bankruptcy estate in his hypothetical ch. 7
bankruptcy.
                               - 6 -

petitioner had offered more than his reasonable collection

potential because his outstanding Federal income tax liabilities

for all years except for 2005 would be discharged in bankruptcy.

Petitioner’s counsel informed Mr. August that petitioner intended

to file for bankruptcy in October 2008 to discharge his Federal

income tax liabilities and credit card debt.

     Mr. August told petitioner that he did not believe a

bankruptcy court would discharge petitioner’s Federal income tax

liabilities because petitioner was not insolvent.    Further, he

had determined that petitioner had an ability to pay $4,673 per

month towards his outstanding Federal income tax liabilities.

     Petitioner’s counsel stated that petitioner was not able to

pay $4,673 per month and expected his income to decrease because

he had lost a major client.   Mr. August told petitioner’s counsel

that the claim that petitioner’s income would decrease was

speculative and lacked supporting documentation.    He further

determined that petitioner’s bank account deposit records

covering the last 12 months documented high income for petitioner

and his two S corporations.

     On August 20, 2007, respondent mailed to petitioner a Notice

of Determination Concerning Collection Action(s) Under Section

6320 and/or 6330.   Respondent rejected petitioner’s OIC of

$15,000 and sustained the proposed levy because the OIC did not

represent petitioner’s reasonable collection potential.
                                 - 7 -

                                OPINION

I.   Jurisdiction and Standard of Review

      Section 6330(a) provides that the Secretary shall furnish a

taxpayer with written notice of his right to a hearing before any

property is levied upon.    Section 6330 further provides that the

taxpayer may request administrative review of the matter (in the

form of a hearing) within a 30-day period.    Sec. 6330(a) and (b).

      Pursuant to section 6330(c)(2)(A), a taxpayer may raise at

the section 6330 hearing any relevant issue with regard to the

Commissioner’s collection activities, including spousal defenses,

challenges to the appropriateness of the Commissioner’s intended

collection action, and alternative means of collection.     Sego v.

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

T.C. 176, 180 (2000).

      Petitioner does not dispute his underlying Federal income

tax liabilities for 2000, 2001, or 2002 or the validity of the

Federal tax liens respondent filed for 2000, 2001, 2002, 2004, or

2005.     Rather, petitioner disputes respondent’s rejection of his

OICs.3    Where the validity of the underlying tax liability is not

at issue, we review the Commissioner’s determination for abuse of

discretion.     Sego v. Commissioner, supra at 610.




      3
        Petitioner did not formally submit an OIC of $23,000.
However, respondent has conceded that petitioner made an OIC of
$23,000.
                               - 8 -

      Under an abuse of discretion standard, a taxpayer must prove

that the Commissioner exercised his discretion arbitrarily,

capriciously, or without sound basis in fact or law.     Woodral v.

Commissioner, 112 T.C. 19, 23 (1999).

II.   Offer-in-Compromise

      Section 7122(a) authorizes the Commissioner to compromise a

taxpayer’s outstanding liabilities.     The regulations and

procedures under section 7122 provide the exclusive method of

effecting a binding nonjudicial compromise.     Laurins v.

Commissioner, 889 F.2d 910, 912 (9th Cir. 1989), affg. Norman v.

Commissioner, T.C. Memo. 1987-265; Shumaker v. Commissioner, 648

F.2d 1198, 1199-1200 (9th Cir. 1981) (citing Botany Worsted Mills

v. United States, 278 U.S. 282, 288-289 (1929)), affg. in part,

revg. in part and remanding per curiam on other grounds T.C.

Memo. 1979-71.

      A compromise based on “doubt as to collectibility” may be

accepted “where the taxpayer’s assets and income are less than

the full amount of the liability.”     Sec. 301.7122-1(b)(2),

Proced. & Admin. Regs.   With respect to OICs on this basis, we

stated in Murphy v. Commissioner, 125 T.C. 301, 309 (2005), affd.

469 F.3d 27 (1st Cir. 2006):

      Generally, under * * * [the Commissioner’s]
      administrative pronouncements, an offer to compromise
      based on doubt as to collectibility will be acceptable
      only if the offer reflects the reasonable collection
      potential of the case (i.e., that amount, less than the
      full liability, that the IRS could collect through
                               - 9 -

     means such as administrative and judicial collection
     remedies). Rev. Proc. 2003-71, sec. 4.02(2), 2003-2
     C.B. 517. * * *

See also Internal Revenue Manual (IRM), pt. 5.8.1.1.3(3) (Sept.

1, 2005) (“Absent special circumstances, a Doubt as to

Collectibility (DATC) offer amount must equal or exceed a

taxpayers [sic] reasonable collection potential (RCP) in order to

be considered for acceptance.”).

Reasonable Collection Potential

     The taxpayer’s RCP includes realizable equity in assets

owned by the taxpayer as well as amounts collectible from the

taxpayer’s future income after allowing for payment of necessary

living expenses.   Id. pt. 5.8.4.4.1.   Generally, where an IRS

Appeals employee has followed the Commissioner’s guidelines to

ascertain a taxpayer’s RCP and rejected the taxpayer’s collection

alternative on that basis, we have found no abuse of discretion.

Lemann v. Commissioner, T.C. Memo. 2006-37; see also Schulman v.

Commissioner, T.C. Memo. 2002-129.

     Petitioner made OICs of $15,000 and $23,000 to settle his

outstanding Federal income tax liabilities for 1997, 1998, 2000,

2001, 2002, 2004, and 2005.   In a letter submitted with his

$15,000 OIC, petitioner threatened to file for bankruptcy.

Petitioner again threatened to file for bankruptcy at the August

2, 2007, section 6330 hearing and stated he would file for

bankruptcy in October 2008 (nearly 15 months in the future).
                              - 10 -

Petitioner argues respondent abused his discretion by not

accepting either of petitioner’s OICs.

     Mr. August determined that petitioner’s RCP was $232,704.

Petitioner did not assign any error to Mr. August’s determination

of petitioner’s $232,704 RCP in his petition.   Rule 331(b)(4).

Consequently, petitioner’s $15,000 and $23,000 OICs failed to

exceed his RCP.   However, once petitioner threatened to file for

bankruptcy, Mr. August took into account the potential impact of

bankruptcy on petitioner’s RCP when making his determination to

reject petitioner’s OICs and sustain the proposed levy.

     When a taxpayer threatens bankruptcy, the impact of

bankruptcy on the Internal Revenue Service’s (IRS) ability to

collect must be considered.   “Offers in Compromise Before

Bankruptcy”, IRM pt. 5.8.10.2.2(1) (Sept. 1, 2005).   While IRS

officers are evaluating the acceptability of an OIC when the

threat of bankruptcy is a consideration, the IRM instructs them

to determine the RCP of the taxpayer.    Id. pt. 5.8.10.2.2(4).

The IRM further states that analysis of the collectibility if

bankruptcy were filed, along with a financial analysis and a

determination of liabilities that would be fully discharged,

should result in the information necessary to make an informed

decision regarding the offer and to attempt negotiation with the

taxpayer.   Id. pt. 5.8.10.2.2(5).
                              - 11 -

     Respondent’s determination regarding whether petitioner’s

unpaid Federal income tax liabilities could be collected by levy

if petitioner were to file for bankruptcy required an

interpretation of bankruptcy law.    If respondent’s determination

was based on erroneous views of the law and petitioner’s unpaid

Federal income tax liabilities could not be collected by levy,

then we must reject respondent’s view and find that there was an

abuse of discretion.   See Iannone v. Commissioner, 122 T.C. 287,

291 (2004) (citing Swanson v. Commissioner, 121 T.C. 111, 119

(2003), and Ramsdell v. Commissioner, T.C. Memo. 2003-317).

     It is undisputed that petitioner’s 2005 Federal income tax

liability of approximately $18,812.85 (as of November 2006) would

not be discharged in a bankruptcy filed in October 2008.   It is

also undisputed that petitioner’s 1997, 1998, 2000, 2001, and

2002 Federal income tax liabilities would be discharged in such a

bankruptcy.   Respondent disputes petitioner’s contention that

petitioner’s 2004 Federal income tax liability of approximately

$19,172.22 (as of November 2006) would be discharged in such a

bankruptcy.   We need not decide whether the 2004 Federal income

tax liability would be discharged.

     Assuming arguendo that petitioner’s Federal income tax

liabilities for all years except 2005 would be discharged in
                               - 12 -

bankruptcy, $18,812.854 would be collectible in personam from

petitioner.    See Iannone v. Commissioner, supra at 293 (citing

Johnson v. Home State Bank, 501 U.S. 78, 84 (1991)).    This

exceeds the $15,000 OIC petitioner made, and accordingly,

respondent did not abuse his discretion when he refused to accept

petitioner’s $15,000 OIC.

     Next, petitioner made an OIC of $23,000.    Both parties agree

that petitioner had net realizable equity in assets of $8,400.

Petitioner asserts that these assets would be exempt from the

bankruptcy estate.

     Assuming arguendo that petitioner’s assertion is true and

the assets composing petitioner’s net realizable equity in assets

of $8,400 would be exempt from the bankruptcy estate, these

assets would remain encumbered by the valid Federal tax liens.

See Iannone v. Commissioner, supra at 293.    Respondent’s Federal

tax liens for 2000, 2001, 2002, 2004, and 2005 have been

stipulated and are not at issue.    As we stated in Iannone,

Federal tax liens are not extinguished by personal discharge in

bankruptcy.    Any existing Federal tax liens remain in effect and

attach to assets owned before the date of filing the bankruptcy

petition.    Iannone v. Commissioner, supra at 293 (citing 11

U.S.C. section 522(c)(2)(B) (2000) and Connor v. United States,

27 F.3d 365, 366 (9th Cir. 1994) (“A preexisting lien on


     4
         Petitioner owed $18,812.85 in November 2006.
                               - 13 -

property, however, remains enforceable against that property even

after an individual’s personal liability has been discharged.”)).

     Even if petitioner’s Federal income tax liabilities were

discharged in personam for all years except 2005 ($18,812.85) and

all of petitioner’s assets ($8,400) were exempt from the

bankruptcy estate, the sum of the amounts collectible from

petitioner in personam and in rem would exceed petitioner’s OIC

of $23,000.    Respondent would be able to collect the 2005 Federal

income tax liability of approximately $18,812.85 from petitioner

in personam.   Additionally, respondent would be able to collect

$8,400 from petitioner in rem using assets exempt from

petitioner’s estate because the Federal tax liens for 2000, 2001,

2002, 2004, and 2005 precede petitioner’s hypothetical October

2008 bankruptcy filing and those liens attached to the exempt

assets.   Accordingly, respondent did not abuse his discretion

when he refused to accept petitioner’s $23,000 OIC.

     In reaching our holdings, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.

     To reflect the foregoing,

                                           Decision will be entered

                                      for respondent.
