                                T.C. Memo. 2016-70



                         UNITED STATES TAX COURT



                   DAVID W. STRONG, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 1358-14L.                          Filed April 19, 2016.



      Martin J. Martelle, for petitioner.

      Nhi T. Luu and Catherine J. Caballero, for respondent.



                           MEMORANDUM OPINION


      NEGA, Judge: Pursuant to section 6330(d)(1),1 petitioner seeks review of

respondent’s determination to proceed with collection by levy of unpaid trust fund



      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code as amended and in effect at all relevant times, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                                        -2-

[*2] recovery penalties (TFRPs) assessed against him. The sole issue before the

Court is whether the Internal Revenue Service (IRS) Appeals Office abused its

discretion when evaluating petitioner’s offer-in-compromise (OIC) for doubt as to

collectibility.

                                    Background

       All of the facts have been stipulated and are so found. The stipulation of

facts and the attached exhibits are incorporated herein by this reference. The

parties have agreed to submit the case for decision without trial under Rule 122.

Petitioner resided in Idaho when the petition was filed.

       Petitioner operates a window and gutter installation business. Petitioner

initially operated the business as Boise Gutter, Inc., a C corporation. He later

formed Strong Siding & Window LLC, a single-member disregarded limited

liability company that operated under the assumed business name Boise Gutter.

Boise Gutter uses a cash basis accounting method.

       On May 1, 2012, respondent issued a Letter 1058, Final Notice of Intent to

Levy and Notice of Your Right to a Hearing Under I.R.C. 6330, with respect to

petitioner’s unpaid TFRPs for taxable periods ending: December 31, 2006; March

31, 2007; December 31, 2009; and December 31, 2010. In response to this notice

petitioner timely submitted Form 12153, Request for a Collection Due Process or
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[*3] Equivalent Hearing. The Form 12153 permitted petitioner to indicate the

nature of his CDP hearing request by checking boxes selectively. Petitioner

checked “I Cannot Pay Balance” on his Form 12153.

      Along with his Form 12153 petitioner submitted a completed Form 433-B,

Collection Information Statement for Businesses. Petitioner’s Form 433-B

reported Boise Gutter’s monthly income as $47,8122 and monthly expenses as

$44,894. Thereafter, petitioner submitted a completed Form 433-A, Collection

Information Statement for Wage Earners and Self-Employed Individuals.

Petitioner’s Form 433-A reported gross monthly business income of $63,697 and

monthly business expenses of $61,715. Form 433-A also reported business assets

of: (1) $15,663 in a U.S. Bank checking account and a D.L. Evans Bank savings

account and (2) $7,200 used for the production of income.

      On October 12, 2012, respondent received Form 656, Offer in Compromise

(OIC), from petitioner, which proposed a lump-sum offer of $11,500 based upon

doubt as to collectibility. The OIC sought to compromise: (1) an Individual

Master File (IMF) balance owing totaling $67,462, which included the TFRPs for

taxable periods ending December 31, 2006, March 31, 2007, December 31, 2009,

and December 31, 2010, and (2) a Business Master File (BMF) balance owing

      2
          All monetary amounts are rounded to the nearest dollar.
                                         -4-

[*4] totaling $105,952. Petitioner did not indicate on Form 656 any exceptional

circumstances in his case such that acceptance of his OIC would promote effective

tax administration. Petitioner attached a letter to the Form 656 stating that Boise

Gutter operates on a cash basis and that although his business bank account

balances were high, Boise Gutter had offsetting payables for normal business

expenses.

      On November 30, 2012, petitioner submitted two amended OICs, which did

not amend the total amount of his original offer, $11,500, but rather allocated that

amount between petitioner’s IMF tax liabilities and his BMF tax liabilities. The

amended offers did not indicate any exceptional circumstances such that

acceptance of his OIC would promote effective tax administration.

      Acting through letters, faxes, and telephone calls, a settlement officer (SO)

at the IRS Appeals Office requested and petitioner provided additional

information, substantiation, and explanations of the representations set forth on

petitioner’s OICs and Form 433-A and Form 433-B. Specifically, petitioner,

through his representative, provided: (1) Boise Gutter’s profit and loss (P&L)

statements for January through September 2012 and January through July 2013;

(2) Boise Gutter’s distribution reports for 2012 and 2013, which showed

distributions that petitioner received from his business; (3) petitioner’s business
                                       -5-

[*5] bank statements at U.S. Bank for May, June, and July 2012; (4) petitioner’s

business bank statements at D.L. Evans Bank for April, May, and June 2012; (5)

petitioner’s 2011 and 2012 Federal income tax returns; and (6) Boise Gutter’s

accounts payable and accounts receivable reports as of September 30, 2012. Boise

Gutter’s accounts payable report showed that of its total payables of $53,080,

$30,746 was owed to Dennis B. Strong and Shirley J. Strong.

      On November 23, 2013, the SO reviewed petitioner’s documents and noted

that the U.S. Bank account had an average ending balance over a three-month

period from May through July 2012 of $14,655. The SO concluded that according

to petitioner’s business bank account statements, Boise Gutter had funds to make

monthly payments, maintain deposits, and pay business expenses. The SO

determined that she would not include the funds in petitioner’s business bank

accounts in determining petitioner’s reasonable collection potential (RCP) because

petitioner needed the funds to continue to produce income and pay his business

expenses. The SO included $33,952 of Boise Gutter’s accounts receivable that

was less than 90 days past due and that was reported on its accounts receivable

report dated September 30, 2012, in determining petitioner’s RCP. The SO

calculated petitioner’s RCP as $38,839. The SO summarized her findings in a

letter to petitioner dated November 25, 2013.
                                        -6-

[*6] On December 11, 2013, petitioner’s representative faxed a letter to the SO

in response to her analysis. Petitioner’s representative explained that the SO

should not consider Boise Gutter’s accounts receivable as business assets for

purposes of calculating petitioner’s RCP because Boise Gutter needed the

accounts receivable to continue to operate. The letter referred the SO to

previously submitted accounts payable and accounts receivable reports dated

September 30, 2012, that showed that Boise Gutter’s accounts payable exceeded

its accounts receivable by $18,734. The letter also argued, per the Internal

Revenue Manual (IRM) pt. 5.8.5.14 (Oct. 22, 2010), that accounts receivable may

be treated as future income when it is determined that liquidation of a receivable

would be detrimental to the continued operation of an otherwise profitable

business. Finally, the letter requested that petitioner’s case be reviewed by a

supervisor before the SO made a determination.

      That same day, the SO noted in her case activity record that she had

reviewed petitioner’s representative’s position that Boise Gutter’s accounts

receivable should not be considered business assets because they were necessary

to operate Boise Gutter.

      On December 17, 2013, the SO and her manager reviewed all the documents

that petitioner provided and agreed that Boise Gutter’s accounts receivable were
                                        -7-

[*7] business assets that should be included in petitioner’s RCP. Specifically, they

noted that petitioner’s 2013 P&L statement was inconsistent with petitioner’s

2013 distribution report. The SO also determined that the 2013 distribution report

was not necessary to her analysis because the financial documents petitioner

provided for that year were incomplete and she could complete her analysis using

the 2012 documents provided.

      Petitioner did not make another amended OIC in response to the SO’s

analysis. On December 23, 2013, respondent issued a Notice of Determination

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

Revenue Code (notice of determination).

      In the notice the SO evaluated petitioner’s OIC based upon doubt as to

collectibility and outlined her calculation of petitioner’s RCP. The SO also

provided a detailed history of petitioner’s CDP case. Specifically, in determining

that petitioner’s RCP should include Boise Gutter’s accounts receivable that were

less than 90 days old, the SO considered relevant IRM sections, including IRM pt.

5.8.5.14, cited by petitioner’s representative. The SO also noted discrepancies

between Boise Gutter’s 2012 distribution report and its 2012 P&L statement for

January through September. Specifically, Boise Gutter’s 2012 distribution report

listed $41,319 in distributions to petitioner for the year (for a $3,443 monthly
                                       -8-

[*8] average) while Boise Gutter’s 2012 P&L statement through September 2012

claimed $2,982 in net average business income and a $233 “draw” from payroll

for this period. The SO noted that although there were major discrepancies

between Boise Gutter’s 2013 P&L statement for January through July and its 2013

distribution report, the 2013 P&L statement was still considered.

      In her recap and analysis in the notice of determination the SO noted that an

average monthly balance of $14,855 in petitioner’s U.S. Bank account, allowing

for unexpected expenses, was sufficient to operate petitioner’s business. She also

noted: “The account receivable is money owed and yet the business continues to

operate and maintain high monthly balance based on the bank statements

provided.” The SO concluded that according to all the documentation submitted

and considered, the RCP of $38,839 was reasonable. Most of the SO’s calculation

of petitioner’s RCP came from 50% of the fair market value of petitioner’s U.S.

Bank checking account less encumbrances of -$4,253, and Boise Gutter’s accounts

receivable of -$33,952. The Notice of Determination sustained the proposed levy

action and rejected petitioner’s OIC of $11,500 because it did not equal or exceed

petitioner’s RCP.
                                         -9-

                                     Discussion

[*9] Petitioner asserts that the SO improperly rejected his OIC. We review for

abuse of discretion the SO’s determination to reject petitioner’s OIC. See Sego v.

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

182 (2000). We do not conduct an independent review of what would be an

acceptable OIC or substitute our judgment for that of the Appeals Office. See

McClanahan v. Commissioner, T.C. Memo. 2008-161. Rather, an SO’s decision

to reject an OIC will not be disturbed unless it is arbitrary, capricious, or without

sound basis in fact or law. See, e.g., Murphy v. Commissioner, 125 T.C. 301, 320

(2005), aff’d, 469 F.3d 27 (1st Cir. 2006); Hansen v. Commissioner, T.C. Memo.

2007-56, aff’d in part, vacated in part sub nom. Keller v. Commissioner, 568 F.3d

710 (9th Cir. 2009). Generally, we have found no abuse of discretion where the

Appeals Office has followed the Commissioner’s guidelines to ascertain a

taxpayer’s RCP and has rejected a taxpayer’s collection alternative on that basis.

Litwak v. Commissioner, T.C. Memo. 2009-292, aff’d, 473 F. App’x 709 (9th Cir.

2012); Romero v. Commissioner, T.C. Memo. 2009-264; McClanahan v.

Commissioner, T.C. Memo. 2008-161; Lemann v. Commissioner, T.C. Memo.

2006-37.
                                         - 10 -

[*10] At the CDP hearing the taxpayer may raise any relevant issue with regard to

the collection activities, including alternative means of collection such as an OIC.

Sec. 6330(c)(2)(A); see also Sego v. Commissioner, 114 T.C. at 609. Taxpayers

are expected to provide all relevant information requested by the SO, including

financial statements, for consideration of the facts and issues involved in the

hearing. Sec. 301.6330-1(e)(1), Proced. & Admin. Regs.

      Section 7122(a) authorizes the Secretary to compromise a taxpayer’s

income tax liability. In general, the decision to accept or reject an offer as well as

the terms and conditions agreed to are left to the discretion of the Commissioner.

Sec. 301.7122-1(a)(1), (c)(1), Proced. & Admin. Regs. The grounds for the

compromise of a tax liability are doubt as to liability, doubt as to collectibility, and

the promotion of effective tax administration. Id. para. (b). Petitioner bases his

OIC on doubt as to collectibility, which “exists in any case where the taxpayer’s

assets and income are less than the full amount of the liability.” Id. subpara. (2).

      The Commissioner will generally compromise a liability on the basis of

doubt as to collectibility only if the liability exceeds the taxpayer’s RCP, “i.e., that

amount, less than the full liability, that the IRS could collect through means such

as administrative and judicial collection remedies”. Murphy v. Commissioner,
                                       - 11 -

[*11] 125 T.C. at 309; Salazar v. Commissioner, T.C. Memo. 2008-38, aff’d, 338

F. App’x 75 (2d Cir. 2009).

      Petitioner argues that the SO abused her discretion by treating his accounts

receivable less than 90 days past due as business assets that were includible in the

determination of his RCP. Petitioner states that the notice of determination cited

only deposit account balances from peak business months as the sole facts and

evidence for the determination. Petitioner also states that the SO’s analysis failed

to set forth any explanation for disregarding documents that petitioner submitted

showing that: (1) petitioner’s accounts payable significantly offset any accounts

receivable and (2) bank account balances which reflected funds set aside from

busier summer months would be necessary to cover the cost of petitioner’s

business during slower winter months. Finally, petitioner argues that the SO did

not indicate that she reviewed these documents as part of her analysis.

Specifically, petitioner contends that the SO neglected to incorporate income and

expense figures from his tax returns in her analysis to calculate his average income

for purposes of RCP.

      Respondent argues that the SO properly reviewed petitioner’s business bank

account statements and concluded that Boise Gutter had funds in these accounts to

pay its business expenses. Respondent argues that the SO subsequently followed
                                        - 12 -

[*12] the guidelines in the IRM, including IRM pt. 5.8.5.14, and properly valued

Boise Gutter’s accounts receivable less than 90 days past due in full for purposes

of calculating petitioner’s RCP and acted within her discretion to reject

petitioner’s OIC, which he put forth on the sole ground of doubt as to

collectibility. Furthermore, respondent argues that petitioner is attempting to raise

a new issue on brief--specifically, that the SO abused her discretion in not

addressing petitioner’s special circumstances or economic hardship in the notice

of determination.

      As a preliminary matter, we find that petitioner did not raise a new issue on

brief. Petitioner did not need to indicate on his Form 656 any exceptional

circumstances in his case such that acceptance of his OIC would promote effective

tax administration for the Court to review his argument. Petitioner does not argue

any exceptional circumstances; rather, he argues the SO abused her discretion

when she failed to consider all the facts and evidence presented and decided to

treat Boise Gutter’s accounts receivable as business assets. This issue is properly

reviewable by the Court.

      On the basis of the record, petitioner’s argument does not pass muster. The

record clearly shows the SO took into account all relevant documents submitted.

The SO’s case activity record shows that on December 11, 2013, she reviewed
                                        - 13 -

[*13] petitioner’s representative’s contention that Boise Gutter’s accounts

receivable should not be considered business assets and that she consulted with

her manager soon thereafter. Still, petitioner complains that the SO considered

business account balances from only peak business months in determining that the

accounts could adequately satisfy petitioner’s expenses. However, petitioner

provided the SO with bank statements from only these peak business months; he

did not provide material evidence to substantiate his claim that the high business

account balances were necessary to cover the cost of his business during slower

winter months. Although petitioner provided the SO with his tax returns to show

income and expenses from Boise Gutter, a tax return is merely a statement of a

taxpayer’s claim; it does not establish the truth of the matters set forth therein. See

Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979); Roberts v. Commissioner,

62 T.C. 834, 837 (1974).

      Many of the documents petitioner submitted, such as Boise Gutter’s

distribution reports and P&L statements, were inconsistent with one another.

Furthermore, Boise Gutter’s accounts payable, which petitioner contends offset its

accounts receivable for 2012, showed that most of the payables were apparently

owed to petitioner’s relatives as opposed to third-party vendors. Petitioner simply

did not provide the SO with adequate evidence to show that the liquidation of
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[*14] Boise Gutter’s accounts receivable would be detrimental to its survival. See

IRM pt. 5.8.5.14. These facts and the fact that petitioner had an RCP more than

three times his proposed OIC show that the SO did not abuse her discretion in

rejecting the OIC. See, e.g., Moore v. Commissioner, T.C. Memo. 2013-278. We

therefore sustain the SO’s determination. In reaching our holding, we have

considered all arguments made, and, to the extent not mentioned above, we

conclude they are moot, irrelevant, or without merit.

      To reflect the foregoing,


                                                Decision will be entered

                                      for respondent.
