                  T.C. Summary Opinion 2010-170



                     UNITED STATES TAX COURT



            MARLENE & RAYFIELD MURPHY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7787-09S.                Filed December 6, 2010.



     Marlene and Rayfield Murphy, pro sese.

     Barton Thomas and Swati Desai (student), for respondent.



    COHEN, Judge:   This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.   Pursuant to section 7463(b), the

decision to be entered is not reviewable by any other court, and

this opinion shall not be treated as precedent for any other

case.
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     This case was commenced in response to a notice of

determination concerning collection action.   The issues for

decision are whether the Internal Revenue Service (IRS) Appeals

Office abused its discretion by sustaining (1) the rejection of

an offer-in-compromise (OIC) and (2) the filing of a Federal tax

lien with respect to petitioners’ unpaid Federal income taxes for

2003 and 2004.   All section references are to the Internal

Revenue Code.

                             Background

     Some of the facts have been stipulated, and the stipulated

facts are incorporated by this reference.   Petitioners resided in

Illinois at the time their petition was filed.

     Petitioners filed joint Federal income tax returns for 2003

and 2004.   The IRS examined these tax returns and determined

deficiencies.    Petitioners consented to the determined income tax

deficiencies, interest, and failure to pay additions to tax by

executing Forms 870, Waiver of Restrictions on Assessment and

Collection of Deficiency in Tax and Acceptance of Overassessment.

Subsequently, these amounts were assessed in December 2007.

     On December 13, 2007, petitioners submitted a Form 656,

Offer in Compromise, based on doubt as to collectibility and

offered to pay $5,000 for the then-outstanding 2003 and 2004 tax

liabilities of $27,755.26.    Petitioners attached a completed Form

433-A, Collection Information Statement for Wage Earners and
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Self-Employed Individuals, and indicated that petitioner Marlene

Murphy (petitioner) owned and operated a business school out of

the home and that petitioner Rayfield Murphy worked for a

delivery service.

     The IRS acknowledged receipt of the OIC and informed

petitioners that while the IRS was investigating the offer, a

notice of Federal tax lien would be filed to protect the

Government’s interests.    The offer specialist determined that

petitioners owned assets with equity including vehicles,

petitioner’s individual retirement account, and real property

where petitioner’s father lives part time.    Petitioner informed

the offer specialist that she had applied for a home equity loan

but did not qualify because of an outstanding judgment stemming

from a business that Rayfield Murphy had owned and operated from

2003 until October 2007.

     On June 24, 2008, the IRS sent petitioners a notice of

Federal tax lien filing with respect to 2003 and 2004.     The

recorded lien reported outstanding amounts owed of $7,752.03 and

$20,003.23 for 2003 and 2004, respectively.

     On July 2, 2008, petitioners responded to the lien filing by

submitting a completed Form 12153, Request for a Collection Due

Process or Equivalent Hearing.    On the Form 12153, petitioners

requested the collection alternative of an OIC and withdrawal of

the lien.
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     The settlement officer assigned to petitioners’ collection

due process (CDP) proceeding informed them that she would include

the determination from the Appeals Office’s review of their

previously submitted OIC in her notice of determination.    On

November 12, 2008, the settlement officer conducted a telephone

conference with petitioner regarding the tax lien filing.

Petitioner requested that the lien filing be withdrawn because it

was negatively affecting petitioners’ credit rating, was

preventing petitioner from earning income from her business

school because she was having difficulty securing liability

insurance and a surety bond, and was preventing petitioners from

securing a home equity loan to pay the outstanding tax

liabilities.   Petitioner also requested abatement of interest and

additions to tax for failure to pay, claiming reasonable cause.

     The Appeals officer reviewing petitioners’ OIC noted that

petitioner’s business school was not generating a profit and

determined that petitioners’ income was minimal and not

sufficient to meet necessary living expenses.   During the review

the Appeals officer reduced petitioners’ calculated equity in

assets to $36,360.   However, by letter dated December 30, 2008,

the Appeals Office informed petitioners that it would not

recommend acceptance of their offer because their equity in

assets exceeded the amount owed.
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     On February 24, 2009, the Appeals Office sent separate and

identical notices of determination to petitioners informing them

that the Appeals Office had sustained the rejection of the OIC

and the filing of the notice of Federal tax lien.

                             Discussion

     Section 6321 imposes a lien in favor of the United States on

all property and property rights of a taxpayer liable for taxes

after a demand for the payment of the taxes has been made and the

taxpayer fails to pay.    The lien arises when the assessment is

made.   See sec. 6322.   The IRS files a notice of Federal tax lien

to preserve priority and put other creditors on notice.    See sec.

6323.   Section 6320(a) requires the Secretary to send written

notice to the taxpayer of the filing of a notice of lien and of

the taxpayer’s right to an administrative hearing on the matter.

     The hearing generally shall be conducted consistent with

procedures set forth in section 6330(c), (d), (e), and (g).    See

sec. 6320(c).   Under section 6330(c)(2)(A) a taxpayer may raise

any relevant issue at a CDP hearing, including challenges to “the

appropriateness of collection actions”, and may make “offers of

collection alternatives, which may include the posting of a bond,

the substitution of other assets, an installment agreement, or an

offer-in-compromise.”    The taxpayer may also challenge the

existence and amount of the underlying tax liability if no notice

of deficiency was received or the taxpayer did not otherwise have
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an opportunity to dispute such tax liability.   Sec.

6330(c)(2)(B).   This Court has interpreted “underlying tax

liability” in section 6330 to include any amounts owed by the

taxpayer pursuant to the tax laws, including additions to tax and

statutory interest.   Katz v. Commissioner, 115 T.C. 329, 339

(2000).

     The Appeals officer must consider the relevant issues,

verify the requirements of applicable law and administrative

procedures have been met, and consider “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).

     For purposes of section 6330(c)(2)(B), a taxpayer who has

waived the right to challenge the proposed assessments by signing

a Form 870 consenting to the immediate assessment and collection

of tax liabilities is deemed to have had the opportunity to

dispute the underlying tax liability and is precluded by such

waiver from challenging the underlying tax liability in the CDP

hearing or before this Court.   See Aguirre v. Commissioner, 117

T.C. 324, 327 (2001); Lance v. Commissioner, T.C. Memo. 2009-129

     Petitioners executed Forms 870 for 2003 and 2004 with

respect to the income tax deficiencies, additions to tax, and

interest.   Therefore, they may not contest the underlying
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liabilities and must establish that the issuance of the notices

of determination sustaining the rejection of an OIC and lien

filing was an abuse of discretion.     See Sego v. Commissioner, 114

T.C. 604, 609-610 (2000).   An abuse of discretion is shown only

if the action of the Appeals officer was arbitrary, capricious,

or without sound basis in fact or law.    See Giamelli v.

Commissioner, 129 T.C. 107, 111 (2007).

     Section 7122(a) authorizes compromise of a taxpayer’s

outstanding Federal income tax liabilities.    Section 7122(d)

provides that the Secretary shall prescribe guidelines for

evaluation of whether an OIC should be accepted.    The regulations

set forth three grounds for the compromise of a liability:    (1)

Doubt as to liability; (2) doubt as to collectibility; or (3)

promotion of effective tax administration.    Sec. 301.7122-1(b),

Proced. & Admin. Regs.   Doubt as to liability is not at issue in

this case.

     For purposes of evaluating an OIC, doubt as to

collectibility exists “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.   An OIC based on doubt as to

collectibility “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
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* * * This amount is the reasonable collection potential of a

case.”   Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517, 517.

     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.   Generally, under the Commissioner’s administrative

guidelines, an offer to compromise based on doubt as to

collectibility will be acceptable only if it reflects the

reasonable collection potential (RCP).    See Internal Revenue

Manual (IRM), pt. 5.8.1.1.3(3) (Sept. 1, 2005); see also Rev.

Proc. 2003-71, sec. 4.02(2).    Where the Appeals officer has

followed the IRS guidelines to ascertain a taxpayer’s RCP and has

rejected the taxpayer’s collection alternative on that basis, we

generally have found no abuse of discretion.    See Dean v.

Commissioner, T.C. Memo. 2009-269; McClanahan v. Commissioner,

T.C. Memo. 2008-161.   Petitioner supplied information and

explanations to the Appeals Office that resulted in the

determination of an RCP that was greater than the amount of the

outstanding liabilities.   The record reflects that the Appeals

Office followed IRS guidelines to determine petitioners’ RCP and

the determined RCP exceeds petitioners’ offer.

     A compromise may be entered into to promote effective tax

administration when the Secretary determines that, although

collection in full could be achieved, collection of the full
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liability would cause the taxpayer economic hardship within the

meaning of section 301.6343-1, Proced. & Admin. Regs.    See sec.

301.7122-1(b)(3), Proced. & Admin. Regs.    In some cases, the

Commissioner will accept an offer of less than the RCP if there

are “special circumstances.”    Rev. Proc. 2003-71, sec. 4.02(2).

Special circumstances are:    (1) Circumstances demonstrating that

the taxpayer would suffer economic hardship if the IRS were to

collect an amount equal to the RCP; or (2) circumstances

justifying acceptance of an amount less than the RCP of the case

based on public policy or equity considerations.    See IRM pt.

5.8.4.3(4) (Sept. 1, 2005).    Economic hardship is present when

the taxpayer is unable to pay reasonable basic living expenses.

Sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs.    However, in

accordance with the Commissioner’s guidelines, an OIC based on

doubt as to collectibility with special circumstances or to

promote effective tax administration should not be accepted, even

when economic hardship or considerations of public policy or

equity circumstances are identified, if the taxpayer does not

offer an acceptable amount.    See IRM pt. 5.8.11.2.1(11),

5.8.11.2.2(12) (Sept. 1, 2005).

     We do not substitute our own judgment for that of the

Appeals Office or prescribe the amount we believe would be an

acceptable OIC but instead correct only abuses of discretion.

See Schropp v. Commissioner, T.C. Memo. 2010-71; see also Murphy
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v. Commissioner, 125 T.C. 301, 320 (2005), affd. 469 F.3d 27 (1st

Cir. 2006).

     Petitioners do not allege that the Appeals Office failed to

consider any information with respect to their OIC or that any of

the factual findings were incorrect but assert that the Appeals

Office did not consider their inability to use the equity in

their assets to pay the outstanding tax liabilities.

     Although the Appeals Office recognized that petitioners’

income over the 3-year period before the CDP hearing had been

minimal and not sufficient to meet necessary living expenses, the

Appeals officer determined that the requested OIC of $5,000 was

not an acceptable amount and should be rejected because

petitioners had equity in assets that exceeded the outstanding

liabilities.    See IRM pt. 5.8.11.2.1(11).

     The Government is entitled to preserve its priority

regarding petitioners’ assets, given their value and the

uncertainty regarding their disposition.      The Appeals officer

considered petitioners’ proposed OIC and confirmed the rejection

of that OIC on the basis of a proper application of the IRM

guidelines.    Thus, it was not an abuse of discretion for the

Appeals Office to confirm the rejection of the OIC with respect

to petitioners’ unpaid income tax liabilities for 2003 and 2004.

     Petitioners contend that respondent should have advised them

of the option to request placing their outstanding tax
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liabilities in currently not collectible status.   A taxpayer may

request that an outstanding Federal income tax liability be

designated currently not collectible where, on the basis of the

taxpayer’s assets, equity, income, and expenses, the taxpayer has

no apparent ability to make payments on the outstanding tax

liability.   See Foley v. Commissioner, T.C. Memo. 2007-242.

IRS procedures indicate that currently not collectible status is

a collection alternative to a levy action, and there is no levy

in this case; thus petitioners’ assertion is meritless.    See IRM

pt. 1.2.14.1.14 (Nov. 19, 1980) (Policy Statement 5-71).

     Petitioner asserted that the filing of the Federal tax lien

was preventing petitioners from obtaining a home equity loan.

However, petitioner informed the Appeals Office that a home

equity loan had been denied because of an outstanding judgment

related to the business that her husband had owned and operated.

     After verifying that the requirements of applicable law and

administrative procedure had been met, the Appeals Office

concluded that the filing of the notice of Federal tax lien

balanced the need for efficient collection of taxes with

petitioners’ concern that the collection be no more intrusive

than necessary.   Respondent used the available methods under the

Internal Revenue Code for protecting the United States’ claims

against subsequent creditors by filing the Federal tax lien, and

the record shows that the decision of the Appeals Office to
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sustain the filing of the Federal tax lien was not arbitrary,

capricious, or without sound basis in fact or law.

     We have considered all arguments made, and to the extent not

mentioned or addressed, we conclude that they are without merit

or irrelevant.   To reflect the foregoing,


                                         Decision will be entered

                                    for respondent.
