                        T.C. Memo. 2005-206



                      UNITED STATES TAX COURT



         RICHARD T. AND CATHERINE L. LITES, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19906-03L.             Filed August 30, 2005.



     Robert E. McKenzie and Kathleen M. Lach, for petitioners.

     Thomas D. Yang, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION

     THORNTON, Judge:   Pursuant to section 6330(d), petitioners

seek review of an Appeals Office determination sustaining a

proposed levy.1




     1
       Unless otherwise indicated, section references are to the
Internal Revenue Code, as amended.
                                - 2 -

                          FINDINGS OF FACT

       The parties have stipulated some facts, which we incorporate

herein by this reference.    When they petitioned the Court,

petitioners resided in Homewood, Illinois.

Background

       Petitioner husband (hereinafter, Richard) is the primary

wage earner for petitioners’ family of four.    Petitioner wife

(hereinafter, Catherine) has had very limited work experience.

At the time of trial, petitioners’ children were 15 and 18 years

old.

        Until 1997, Richard worked as a municipal bonds salesman at

various investment banking firms in Chicago, Illinois.    According

to his testimony, he was a “very, very good salesman” and in the

early 1990s made “tremendous amounts of money”.    At some point,

due to changes in the financial services industry, his income

began to fall.    In 1997, at age 53, Richard went into business

with a friend providing management, consulting, and training

services.    Before making this job change, he had been earning

about $120,000 a year.    By 1998, his earnings had dropped to

$54,173.

       In January 1999, Richard had quintuple bypass surgery.    He

was unable to return to work until July 1999; he worked only

about 10 weeks that year, earning $49,067.    He did not return to

work full time until May 2001, when he took a job with a trust
                                 - 3 -

company.   He was terminated from that position in April 2002; he

did not secure full-time employment again until October 2002,

making about $9,500 per month.     As of the time of trial, Richard

was earning about $10,000 per month; i.e., about the same as

before his 1997 job change.

     After his 1997 job change, Richard began liquidating his

Individual Retirement Account (IRA).     Between 1998 and 2000, he

took out $382,577 in early distributions.2    He used these IRA

distributions partly to cover living expenses and partly for

things such as making payments of about $700 per month on a

recreational boat.3    In 1999, petitioners refinanced their

residence and used the $37,500 proceeds principally to pay off

credit card debts.

1999 and 2000 Federal Tax Returns

     Petitioners’ 1999 Federal income tax return was due, after

extensions, on October 15, 2000; petitioners filed it on

October 24, 2000.     Petitioners’ 2000 Federal income tax return

was due, after extensions, on October 15, 2001; petitioners filed

it on November 14, 2001.



     2
       Richard withdrew $198,107 from his IRA in 1998, $107,735
in 1999, and $76,735 in 2000. He elected to have Federal income
taxes withheld (in the amounts of $48,207 and $8,300,
respectively) from the 1998 and 1999 withdrawals but not from the
2000 withdrawal.
     3
       Richard testified that he had continued making payments on
the boat until some 3 months before the trial in this case.
                                  - 4 -

     Petitioners’ 1999 and 2000 returns reported amounts due but

included no remittances.   Petitioners made no estimated tax

payments with respect to their 1999 and 2000 tax years.

     Respondent assessed the amounts reported on petitioners’

returns plus statutory additions to tax as follows:

                                     Additions to Tax
                                Sec.          Sec.          Sec.
     Year       Tax          6651(a)(1)    6651(a)(2)       6654

     1999     $38,074            $858             $763       $814
     2000      28,776           1,036            1,036      1,204

Petitioners’ Default on 1999 Installment Agreement

     On December 5, 2000, petitioners entered into an installment

agreement to pay their 1999 income tax liability.        Throughout

2001 they made sporadic payments totaling $3,394 before

defaulting.

Proposed Collection Action

     On October 24, 2002, respondent issued petitioners a Final

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

(the Final Notice) with respect to their income tax liabilities

for 1999 and 2000.

     The Final Notice showed that petitioners owed the following

tax liabilities:

                   Amount due             Statutory
     Year          on return              additions        Total

     1999          $19,214.29             $5,077.31      $24,291.60
     2000           26,947.19              2,707.37       29,654.56
                                - 5 -

In response, petitioners timely filed a Form 12153, Request for

Collection Due Process Hearing.   Petitioners requested abatement

of the statutory additions on the basis of reasonable cause and

further requested an offer-in-compromise or, in the alternative,

an installment agreement.

Appeals Officer’s Conclusions

     During the Appeals process, the parties conducted a hearing

through written correspondence and telephone conversations.      As

requested, petitioners submitted a completed Form 433-A,

Collection Information Statement for Wage Earners and Self-

Employed Individuals.   On the Form 433-A, petitioners listed

their assets and included an analysis showing total gross monthly

income of $10,499 (including $500 wages for Catherine) and total

monthly living expenses of $9,611.      On the basis of this

analysis, petitioners initially requested an installment

agreement whereby they would pay $750 per month.      The Appeals

officer rejected this offer.    By letter to petitioners’ counsel

dated August 25, 2003, the Appeals officer stated that on the

basis of the financial information petitioners had submitted, she

had determined that petitioners had “excess monthly income” of

$2,732 per month.   The letter also stated that the Appeals

officer had determined that petitioners would need to pay $2,700

per month if they wished to enter into an installment agreement.

The letter further stated:   “This amount would allow the
                               - 6 -

liabilities to be paid in full prior to the time Mr. Lites would

be expected to retire and there would be no requirement that the

collection statute expiration date (CSED) be extended.”

     Petitioners increased their installment agreement offer to

$1,000 per month.   The Appeals officer also rejected this offer.

In a letter to petitioners’ counsel dated September 5, 2003, the

Appeals officer stated:

          Regarding your request for an installment
     agreement of $1,000/mo., I do not feel the amount
     requested is adequate. Based on Mr. Lites’ age, health
     concerns and the likelihood that he could retire prior
     to full payment, I do not feel that it would be in the
     best interest of the taxpayer or the Government to
     accept this amount. If Mr. Lites were to retire at 65,
     it is extremely unlikely that Mrs. Lites would be able
     to maintain this agreement based on what appears to be
     limited work experience. In addition, the taxpayers
     would be required to extend the collection statute
     expiration date (CSED) to at least the year 2014. It
     is my opinion that the granting of an installment
     agreement in the amount requested would place an undue
     burden on both of the taxpayers when the liabilities
     can be paid in full by 2007 if the taxpayers were to
     enter into an agreement in the amount indicated in my
     letter of August 25, 2003. Based on this discussion I
     will be unable to honor your request for the agreement
     in the amount of $1,000/mo.

          If the taxpayers do not wish to accept an
     installment agreement for $2,700/mo. please advise me
     no later than September 12, 2003.

     In her September 5, 2003, letter, the Appeals officer agreed

to abate the section 6651(a)(1) addition to tax for failure to

timely file for 1999.   The Appeals officer declined to consider

petitioners’ request to abate the section 6651(a)(1) addition to

tax for 2000 on the ground that petitioners had “presented no
                               - 7 -

information explaining why the 2000 return was not filed timely”.

In her letter, the Appeals officer stated that she would be

unable to recommend abating the section 6651(a)(2) addition to

tax for failure to pay for either 1999 or 2000 for several

reasons:   (1) Because petitioners had presented no evidence to

support their claim that Richard’s heart surgery had diminished

his mental ability to function at his business; (2) because

petitioners had failed to submit evidence that the funds taken

from their savings were used for living expenses; and (3) because

petitioners had not shown ordinary care and prudence with respect

to the requirement to make estimated tax payments.

     Shortly after receiving this letter, petitioners proposed an

installment agreement of $1,200 per month.    Apparently, the

Appeals officer rejected this counteroffer.

     The Appeals Office issued a Notice of Determination

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

(the Notice of Determination), dated October 29, 2003, sustaining

the proposed levy and denying petitioners’ request for an

installment agreement.4   The Notice of Determination refers to


     4
       The Notice of Determination Concerning Collection
Action(s) Under Section 6320 and/or 6330 (Notice of
Determination) states as its “Summary of Determination” simply
that “Based on all information available, the proposed collection
enforcement action is appropriate in this case.” An attachment
to the Notice of Determination, however, states that the Appeals
officer had recommended abating the sec. 6651(a)(1) addition to
tax for failure to timely file for 1999. Respondent’s proposed
                                                    (continued...)
                              - 8 -

and adopts the Appeals officer’s reasons for rejecting

petitioners’ initial installment agreement proposal of $750 per

month and subsequent proposal of $1,000 per month.5   The Notice

of Determination states in part:

     The Appeals Officer reviewed previous and subsequent
     information submitted by the representative and
     determined that at a minimum you have excess available
     income of $2,732/mo.

               *    *    *    *    *    *    *

     The Appeals Officer sent your representative a letter
     dated August 25, 2003 advising that consideration was
     given to your age and health issues and it was


     4
      (...continued)
findings of fact Number 18 states in part: “The Notice of
Determination recommended abatement of the failure to timely file
penalty with respect to petitioners’ 1999 income tax liability”.
The transcripts of petitioners’ account, as included in the
record, do not appear to reflect any abatement of the sec.
6651(a)(1) addition to tax for 1999. We treat respondent’s
proposed finding of fact as a concession that the sec. 6651(a)(1)
addition to tax for 1999 should be abated, if it has not been
already.
     5
       The Notice of Determination does not specifically address
petitioner’s counteroffer of an installment agreement of $1,200
per month or the reasons why it was rejected. The Notice of
Determination does address, however, what was apparently a later-
in-time proposal that is not otherwise alluded to in the record:

     Your representative contacted the Appeals Officer by
     telephone on September 11, 2003 and stated that you
     were willing to increase the monthly amount to $1,300
     or $1,400/mo. The Appeals Officer advised that it
     would not be in the best interest of the Government to
     accept this amount because you have not demonstrated
     that you are attempting to avoid balance due returns by
     increasing your withholding. However, since the
     Appeals Officer had not required that the withholding
     be increased, the installment agreement would only be
     granted in the amount of $2,700/mo. * * *
                               - 9 -

     determined that an installment agreement would be
     granted in the amount of $2,700/mo. because this amount
     was available monthly. In addition, payment of this
     monthly amount would ensure that the liabilities would
     be paid in full prior to the expected retirement date
     of Mr. Lites and there would be no requirement for
     extension of the collection statute expiration date
     (CSED). This determination was also contingent upon
     whether there was no balance due on the 2002 return
     that is due to be filed by October 15, 2003.

                              OPINION

     If a person fails to pay any Federal income tax liability

within 10 days of notice and demand, the Secretary is authorized

to collect the tax by levy on the person’s property.      Sec.

6331(a).   First, however, the person must be notified of the

right to an administrative hearing.     Sec. 6330(a).   If one is

requested, the administrative hearing is before the Appeals

Office of the Internal Revenue Service.     Sec. 6330(b)(1).     At the

hearing, the person may generally raise “any relevant issue

relating to the unpaid tax or the proposed levy”; the person may

also challenge the “existence or amount of the underlying tax

liability” if the person received no statutory notice of

deficiency or otherwise had no opportunity to dispute the tax

liability.   Sec. 6330(c)(2)(A) and (B).    In addition, the person

may raise at the hearing offers of collection alternatives, which

may include, among other things, an installment agreement or

offer in compromise.   Sec. 6330(c)(2)(A)(iii).

     In making a determination, the Appeals officer is required

to take into consideration issues properly raised, the
                               - 10 -

verification that the requirements of applicable law and

administrative procedures have been met, and whether any proposed

collection action balances the need for the efficient collection

of taxes with the legitimate concern of the person that any

collection action be no more intrusive than necessary.     Sec.

6330(c)(3).   Within 30 days after the Appeals Office issues a

notice of determination, the person may appeal the determination

to the Tax Court, if we have jurisdiction over the underlying tax

liability, sec. 6330(d)(1), as we do in the instant case.      For

purposes of these provisions, “underlying tax liability” includes

additions to tax.    Katz v. Commissioner, 115 T.C. 329, 339

(2000).

De Novo Review of Additions to Tax

     In this proceeding, petitioners seek abatement of the

section 6651(a)(1) additions to tax for late filing and of the

section 6651(a)(2) additions to tax for failure to pay.6

Petitioners were issued no notice of deficiency and have

otherwise had no opportunity to dispute the underlying tax

liability.    Accordingly, petitioners may challenge the additions

to tax.   See sec. 6330(c)(2)(B); Downing v. Commissioner, 118

T.C. 22 (2002).   Respondent has conceded that the section


     6
       At trial and on brief, petitioners have made no argument
and presented no evidence concerning the sec. 6654 additions to
tax for failure to pay estimated income tax. We consider
petitioners to have conceded the sec. 6654 additions to tax. See
Rybak v. Commissioner, 91 T.C. 524, 566 (1988).
                               - 11 -

6651(a)(1) addition to tax for late filing should be abated for

petitioner’s 1999 tax year.   We review de novo whether

petitioners are liable for the remaining additions to tax under

section 6651.   See Downing v. Commissioner, supra at 29.

     Section 6651(a)(1) Addition to Tax for Late Filing for 2000

     Section 6651(a)(1) imposes an addition to tax for failure to

file a return by the prescribed date (taking into account any

extension of time for filing), unless it is shown that the

failure is due to reasonable cause and not due to willful

neglect.   A showing of reasonable cause requires petitioners to

demonstrate they exercised “ordinary business care and prudence”

but were nevertheless unable to file the return within the

prescribed time.   Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

For illness to constitute reasonable cause for failure to file,

petitioners must show that the surgery so incapacitated Richard

that they could not file their 2000 return on time.

     Petitioners contend that Richard’s cardiac surgery in

January 1999 and consequent employment hiatus constitute

reasonable cause for petitioners’ failure to timely file their

2000 return.    Petitioners do not assert, and the record does not

indicate, that Richard’s illness would have prevented Catherine

from tending to petitioners’ filing obligations.   Moreover,

petitioners’ 2000 tax return was due (after extensions) on

October 15, 2001--about 2 years and 9 months after Richard’s
                              - 12 -

cardiac surgery and well after he had returned to work full time.

Moreover, petitioners’ 1998 tax return, which was due October 15,

1999 (only about 9 months after Richard’s cardiac surgery), was

timely filed on October 8, 1999.   We are not persuaded that

Richard’s health problems prevented petitioners from filing their

2000 tax return on time.7   See, e.g., Ramirez v. Commissioner,

T.C. Memo. 2005-179.

     We conclude that petitioners are liable for the section

6651(a)(1) addition to tax for failure to timely file their

Federal income tax return for tax year 2000.

     Section 6651(a)(2) Addition to Tax for Failure To Pay

     Section 6651(a)(2) imposes an addition to tax for failure to

pay the amount of taxes shown on a return on or before the date

prescribed (taking into account any extension of time for

filing), unless it is shown that the failure is due to reasonable

cause and not due to willful neglect.   A taxpayer has reasonable

cause for failure to timely pay a tax if:

     the taxpayer has made a satisfactory showing that he
     exercised ordinary business care and prudence in
     providing for payment of his tax liability and was
     nevertheless either unable to pay the tax or would
     suffer an undue hardship * * * if he paid on the due
     date. * * * Thus, for example, a taxpayer who incurs
     lavish or extravagant living expenses in an amount such


     7
       We further note that petitioners’ Forms 2688, Application
for Additional Extension of Time to File U.S. Individual Income
Tax Return, did not assert Richard’s illness or purported
resultant financial distress as a reason requiring an additional
extension for 1999 or 2000.
                              - 13 -

     that the remainder of his assets and anticipated income
     will be insufficient to pay his tax, has not exercised
     ordinary business care and prudence in providing for
     the payment of his tax liability. * * * A taxpayer will
     be considered to have exercised ordinary business care
     and prudence if he made reasonable efforts to conserve
     sufficient assets in marketable form to satisfy his tax
     liability and nevertheless was unable to pay all or a
     portion of the tax when it became due. [Sec. 301.6651-
     1(c)(1), Proced. & Admin. Regs.]

     Petitioners contend that Richard was unable to return to his

former level of productivity after his surgery, thus limiting his

ability to work and earn income.   Richard, however, did return to

employment in July 1999 and earned $49,067 in wages–-almost as

much as he had earned in the year before his surgery.    When asked

on direct examination why petitioners had not paid their 1999 and

2000 taxes, Richard did not mention his illness.    Instead, he

spoke at length about changes in the financial services industry

that had made it a “long, steady climb” for him to regain his

former income-earning potential.

      From 1998 through 2000, Richard withdrew about $385,000

from his IRA; in 1999, petitioners refinanced their residential

mortgage, taking out $37,500 in proceeds.    Petitioners have not

shown that they attempted to conserve these or other assets to

meet their tax obligations or that they curtailed unnecessary

expenses.   To the contrary, as Richard conceded at trial:    “I

pretty much did not curtail things. * * * I also used some

dollars for some frivolous things”.    For example, Richard
                              - 14 -

testified that he continued, until some 3 months before trial, to

make payments of about $700 per month on a recreational boat.

     We conclude that petitioners are liable for the section

6651(a)(2) additions to tax for failure to pay the amounts shown

on their Federal income tax returns for 1999 and 2000.

Installment Agreement

     On brief, petitioners argue that the Appeals officer abused

her discretion in rejecting their installment agreement

proposals.   They requested an installment agreement whereby they

would pay $1,200 per month in full discharge of their tax

liabilities.8   We review this matter for abuse of discretion.

See Orum v. Commissioner, 123 T.C. 1, 12-13 (2004), affd. 412

F.3d 819 (7th Cir. 2005).   An abuse of discretion occurs when

respondent takes action that is arbitrary or capricious, lacks

sound basis in law, or is not justifiable in light of the facts

and circumstances.   Mailman v. Commissioner, 91 T.C. 1079, 1084

(1988).

     Pursuant to section 6159(a), as in effect during the period

covering the administrative proceedings in this case, the



     8
       In their request for an administrative hearing,
petitioners requested an offer in compromise based on doubt as to
collectability, and, in the alternative, an installment
agreement. In the administrative hearing, however, petitioners
pursued only an installment agreement. Consequently, the Appeals
officer did not consider petitioners’ eligibility for an offer in
compromise. In this Court proceeding, petitioners have not
argued that they should be entitled to an offer in compromise.
                              - 15 -

Secretary was authorized to enter into installment agreements

with any taxpayer “to satisfy liability for payment of any tax in

installment payments if the Secretary determines that such

agreement will facilitate collection of such liability.”   The

applicable regulations contemplated that an installment agreement

would require the taxpayer to make scheduled periodic payments

until the tax liability is fully paid.9   Sec. 301.6159-1(a),

Proced. & Admin. Regs.   Respondent generally has the discretion




     9
       In the American Jobs Creation Act of 2004 (AJCA 2004),
Pub. L. 108-357, sec. 843(a)(1), 118 Stat. 1418, 1600, Congress
amended sec. 6159 to authorize the Secretary to enter into
installment agreements “under which such taxpayer is allowed to
make payment on any tax in installment payments if the Secretary
determines that such agreement will facilitate full or partial
collection of such liability.” The amendment is effective for
installment agreements entered into on or after Oct. 22, 2004.
AJCA 2004 sec. 843(c). The legislative history describes the
reason for this amendment as follows:

     The Committee believes that clarifying that the IRS is
     authorized to enter into installment agreements with
     taxpayers that do not provide for full payment of the
     taxpayer’s liability over the life of the agreement
     will improve effective tax administration.

          The Committee recognizes that some taxpayers are
     unable or unwilling to enter into a realistic offer-in-
     compromise. The Committee believes that these
     taxpayers should be encouraged to make partial payments
     toward resolving their tax liability, and that
     providing for partial payment installment agreements
     will help facilitate this. [H. Rept. 108-548, at 307
     (2004).]
                               - 16 -

to accept or reject an installment agreement proposed by a

taxpayer.10   Sec. 301.6159-1(b)(1)(i), Proced. & Admin. Regs.

     Eligibility for an installment agreement is based on the

taxpayer’s current financial condition.     Internal Revenue Manual

(I.R.M.) sec. 5.14.1.4(1) (effective July 1, 2002).     In

requesting an installment agreement, a taxpayer must provide

specific information, including a proposed monthly payment or

other periodic payment amount.    I.R.M. sec. 5.14.1.3(4)

(effective July 1, 2002).    The amount of the taxpayer’s payment

depends on his or her ability to pay.     I.R.M. sec. 5.14.1.4.3(1)

(effective July 1, 2002).    For an installment agreement to be

approved, a taxpayer must be in compliance with all filing

requirements.   I.R.M. sec. 5.14.1.4.1(5) (effective July 1,

2002).

     At the time of the administrative process in this case, the

Internal Revenue Service generally limited the length of

installment agreements to the 10-year statutory collection period

as provided in section 6502(a)(2)(A), “except in instances when a

reasonable extension of the statutory period for collection will

allow an agreement to be accepted.”     I.R.M. sec. 5.14.2.1(2)

(effective Mar. 30, 2002).    Extensions were limited to no more



     10
       As an exception to this general rule, sec. 6159 requires
the Commissioner to enter into installment agreements in certain
circumstances (generally involving tax liabilities of less than
$10,000) not presented by the instant case. See sec. 6159(c).
                              - 17 -

than 5 years, plus up to 1 year to account for changes in the

agreement (such as payment skips, interest rate changes, etc.).

I.R.M. sec. 5.14.2.1(6) (effective Mar. 30, 2002).11

     Petitioners initially requested an installment agreement

that would require them to pay $750 per month, having submitted a

Form 433-A that indicated they had $888 excess monthly income

after taking into account monthly living expenses.     After the

Appeals officer rejected this proposal, petitioners counter-

offered, first proposing to pay $1,000 per month and then

proposing to pay $1,200 per month.     The Notice of Determination

addresses--and rejects--petitioners’ proposals to pay $750 per

month and $1,000 per month but does not expressly address

petitioners’ proposal to pay $1,200 per month.12


     11
       Current Internal Revenue Service policy is to extend the
collection statute expiration date only in conjunction with
partial payment installment agreements and only in certain
situations. I.R.M. sec. 5.14.2.1 (effective July 12, 2005).
     12
       As previously noted, the Notice of Determination refers
to an apparently last-in-time proposal by petitioners to pay
$1,300 to $1,400 per month. The Notice of Determination
indicates that the $1,300 to $1,400 per month offer was rejected
because petitioners had failed to show that they were currently
making adequate withholdings. At the same time, however, the
Notice of Determination acknowledges that “the Appeals Officer
had not required that the withholding be increased” and concludes
that an installment agreement would be granted only in the amount
of $2,700 per month. Such reasoning strikes us as a nonsequitur:
It is not apparent why petitioners’ failure to increase their tax
withholding should doom their offer when that had not been made a
precondition for an installment agreement, or indeed why it
should be a precondition for petitioners’ offer but not for the
Appeals Office’s counteroffer.
                                                   (continued...)
                              - 18 -

     The Notice of Determination adopts the Appeals officer’s

finding that petitioners had excess monthly income of $2,732.

The record does not reveal the basis for this finding.    We need

not linger long over this matter, however, for on brief

respondent concedes that petitioners’ monthly income and expenses

were identical to the amounts listed on their Form 433-A.13

Effectively, then, respondent has conceded that petitioners’

excess monthly income was $888, rather than $2,732 as found by

the Appeals officer.   Respondent argues that the Notice of

Determination should be sustained, however, because petitioners’

installment agreement offers exceeded what petitioners could

afford.   Respondent states on brief: “petitioners’ overall

financial situation indicated that they would be unable to comply

with their proposed installment agreement until their liabilities

are paid in full.”

     We are confused and perplexed by respondent’s position.    In

the first instance, by respondent’s admission, petitioners had



     12
      (...continued)
     Neither party has addressed this aspect of the Notice of
Determination. In this proceeding, petitioners seek a $1,200 per
month installment agreement; they have not complained about, and
respondent has not sought to defend, the Appeals Office
determination regarding any $1,300 to $1,400 per month proposal.
Consequently, we give this matter no further consideration.
     13
       Citing petitioners’ Form 433-A, respondent proposes as a
finding of fact: “As of May 28, 2003, petitioners [sic] then
current monthly wage income was $10,499.00 and their then current
total monthly living expenses was [sic] $9,611.00.”
                                - 19 -

available excess monthly income of $888, which would have more

than covered their offer of $750 per month.    Moreover, the

Internal Revenue Manual does not appear to contemplate rejecting

an installment agreement merely because the taxpayer has offered

more than the Commissioner believes the taxpayer can afford.14

Finally, and most fundamentally, respondent’s position on brief

conflicts directly with the rationale articulated in the Notice

of Determination.    The Appeals Office rejected petitioners’

installment agreement proposals largely on the basis that

petitioners could afford to pay much more than they had offered.

Now, apparently, respondent seeks to defend this action on the

opposite ground that petitioners could not afford to pay as much

as they had offered.    Respondent cannot have it both ways.

     The finding that petitioners could afford to pay $2,732 per

month appears central to the decision in the Notice of

Determination to reject petitioners’ installment agreement



     14
          I.R.M. sec. 5.14.1.4(9) (effective July 1, 2002) states:

            If an analysis of the taxpayer’s financial
            condition shows taxpayers cannot pay:

            • but they insist on installment agreements;
            • amounts proposed will fully pay the bal
              [sic] due account(s) within the collection
              statute (and waiver period if appropriate);
            • but the possibility remains that payments
              cannot be made;

            then prepare a backup Form 53 along with the
            installment agreement in case of eventual default
            and termination. * * *
                              - 20 -

proposals.   For instance, having found that petitioners have

excess monthly income of $2,732 per month, the Appeals officer

concluded that petitioners’ offers to pay $750 per month and

$1,000 per month (and ostensibly their offer to pay $1,200 per

month, although the Appeals officer’s reasons for rejecting this

offer are not explicitly documented in the record) would not be

in the best interests of either petitioners or the Government,

reasoning that, in light of Richard’s age and health and other

factors, petitioners and the Government both would be better off

if the liabilities were paid off sooner rather than later.    If,

however, as respondent now asserts, petitioners could not afford

to pay the lesser amounts that they had offered, then it would

not appear to serve either petitioners’ or the Government’s

interests to require petitioners to pay the much higher amount of

$2,700 per month, as the Appeals Office insisted.15


     15
       In addition, the Appeals officer indicated that
petitioners’ payment proposals would require extending the
collection statute expiration date to at least the year 2014,
whereas if petitioners accepted the Appeals officer’s offer of a
$2,700 per month installment agreement, the tax liabilities could
be paid in full by 2007. The record does not reflect the basis
for the Appeals officer’s conclusion that accepting petitioners’
installment proposals would require extending the collection
statute expiration date to 2014, or to what extent this
conclusion was meant to apply to petitioners’ offer to pay $1,200
per month (which is not expressly addressed in the Appeals
officer’s letters or in the Notice of Determination). Simple
math shows that petitioners’ proposal to pay $1,200 per month
would result in total payments of $72,000 over 5 years.
Considering that petitioners’ unpaid tax liabilities for 1999 and
2000 (after taking into account respondent’s concession of the
sec. 6651(a)(1) addition to tax for 1999, but without taking into
                                                   (continued...)
                              - 21 -

     As support for the Appeals Office decision to reject

petitioners’ installment agreement proposals, respondent points

to petitioners’ default on a prior installment agreement.

Granted, such a circumstance might appropriately be considered by

the Appeals Office as a ground for rejecting an installment

agreement proposal.   See, e.g., Orum v. Commissioner, 123 T.C. 1

(2004).   In the instant case, however, the Appeals Office

apparently did not regard petitioners’ prior default as a reason

to deny them a new installment agreement.   To the contrary, it

offered petitioners a new installment agreement (of $2,700 per

month), notwithstanding their prior default.   A consideration

that played no part in the Appeals Office determination--and in

fact is controverted by it--cannot provide the basis for

sustaining that determination.16


     15
      (...continued)
account interest accruals) totaled $53,088, it is not apparent
that petitioners’ $1,200 per month proposal would require
extending the 10-year collection statute expiration date at all,
much less to 2014.
     16
       For similar reasons, we do not find persuasive
respondent’s argument on brief that the Appeals officer’s
rejection of petitioners’ installment agreement should be
sustained on the ground that petitioners “continued to live
beyond their means as petitioners failed to curb their credit
card debt.” We find no indication in the record that such a
consideration played any part in the Appeals officer’s
determinations, and we are not persuaded that respondent’s
apparent afterthought in this regard suffices to sustain the
Notice of Determination. In reaching this conclusion, we do not
mean to suggest that respondent is invariably confined strictly
to the four corners of the Notice of Determination or to the
evidence compiled during the administrative proceeding. Cf.
                                                   (continued...)
                              - 22 -

Conclusion

     The Notice of Determination rejected petitioners’

installment agreement proposals (without expressly referring to

petitioners’ $1,200 per month proposal) largely on the basis of a

finding that petitioners had excess income of $2,732.    Respondent

has effectively conceded that this finding was erroneous and

thereby inadvertently convinced us that, insofar as it relates to

petitioners’ proposed installment agreements, the Notice of

Determination was not justifiable in light of the facts and

circumstances.   Accordingly, we hold that it was an abuse of

discretion to issue the Notice of Determination in these

circumstances.

     In their petition, petitioners request as relief that they

“be granted an installment agreement in an amount they will

reasonably be able to afford.”   On brief, petitioners request

that “a proposed payment plan of $1,200 per month be accepted to

fully address the tax liability.”   We have no basis, however, for

evaluating the amount petitioners can now reasonably afford or

for deciding whether an installment payment plan of $1,200 per

month--or of any other particular amount--is an appropriate

collection alternative in light of petitioners’ current financial

condition and circumstances, whatever those might be.

Accordingly, we believe that it is “necessary and productive” to


     16
      (...continued)
Robinette v. Commissioner, 123 T.C. 85 (2004).
                               - 23 -

remand this case to the Commissioner, whom the law authorizes to

make installment agreements.     Lunsford v. Commissioner, 117 T.C.

183, 189 (2001); see Harrell v. Commissioner, T.C. Memo. 2003-271

(concluding that the issuance of a notice of determination was an

abuse of discretion and remanding the matter to the Commissioner

for the sole purpose of allowing the taxpayer to pursue

collection alternatives), motion for reconsideration denied T.C.

Memo. 2003-312.

     We shall remand this matter to the Commissioner for the sole

purpose of reconsidering petitioners’ $1,200 per month

installment agreement proposal or such other collection

alternatives as petitioners might now wish to offer.    In

evaluating any such collection alternatives, the Commissioner

should consider petitioners’ current financial circumstances,

petitioners’ current paying and filing compliance, and any other

relevant factors.   The Commissioner should also take into

account, to the extent relevant, applicable amendments to section

6159(a), which authorize partial payment installment agreements.

Petitioners may not further challenge the imposition of the

section 6651(a)(1) and (2) additions to tax or raise any new or

additional issues beyond offering collection alternatives.

     To reflect the foregoing,


                                          An appropriate order

                                     will be issued.
