                        T.C. Memo. 2005-238



                      UNITED STATES TAX COURT



            JAMES WILSON RICHMOND, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7438-04L.            Filed October 12, 2005.


     James Wilson Richmond, Jr., pro se.

     Innessa Glazman Molot, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge:   This case arises from a petition for

judicial review pursuant to section 63301 of respondent’s

determination to proceed with collection by levy with respect to

petitioner’s income tax liability for 2000.     The issue we must


     1
      Section references are to the Internal Revenue Code in
effect at relevant times.
                                - 2 -

decide is whether respondent’s determination constituted an abuse

of discretion.

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the exhibits submitted therewith are

incorporated herein by this reference.

     At the time the petition was filed, petitioner resided in

Silver Spring, Maryland.

     Petitioner, a self-employed attorney during the relevant

years, filed income tax returns for 1999 and 2000 on August 21,

2001.    He properly filed a Form 1040, U.S. Individual Income Tax

Return, for 1999 (the 1999 return) but improperly filed a Form

1040A,2 Individual Income Tax Return, for 2000 (the 2000 return).

The income petitioner reported on both the 1999 and 2000 returns

consisted of business income as reflected on Schedules C, Profit

or Loss from Business, attached to the returns.   Because the 2000

return did not have a line for reporting Schedule C income,

petitioner improperly reported that income as wages, salaries,

tips, etc.

     On the 1999 return, petitioner reported total tax of $3,223,

total payments of $6,000, and an overpayment of $2,777.   On the



     2
      The instructions to the 2000 Form 1040A direct individuals
with business income to file a Form 1040 rather than a Form
1040A.
                               - 3 -

return, petitioner directed that the overpayment be applied to

his 2000 estimated tax.

     On the 2000 return, petitioner reported gross receipts of

$64,957.98, total expenses of $21,400.36, and net profit of

$43,557.62.   He also reported a $400 IRA distribution as income

and claimed an IRA deduction of $1,000.   He reported adjusted

gross income of $42,957.62.   He claimed the standard deduction of

$4,400, deducted $2,800 for one exemption, and reported taxable

income of $35,757.62 ($42,957.62 - $4,400 - $2,800).   Petitioner

reported tax of $6,605 without regard to his self-employment tax.

     Petitioner made numerous mistakes in calculating his 1999

and 2000 tax liabilities.   In computing his self-employment tax

for 2000, petitioner correctly reported his net earnings from

self-employment to be $40,225; i.e., 92.35 percent of his

Schedule C net profit ($43,558 x 0.9235).   However, petitioner

erroneously calculated his self-employment tax to be $1,665, as

follows:
                                - 4 -

  Line                   Item                         Amount

   1        Net farm profit from Schedule F             --
   2        Net profit from Schedule C              $43,557.62
   3        Combine lines 1 and 2                    43,557.62
   4a       Multiply line 3 by 0.9235                40,225.00
   4b       Optional method amount                      --
   4c       Combine lines 4a and 4b                  40,225.00
   5b       Church employee income                       --
   6        Net earning from self-employment
            (combine lines 4c and 5b)                40,225.00
   7        Maximum amount of combined wages
            and self-employment earnings subject
            to social security tax for 2000          76,200.00
   8a       Total social security wages and tips       --
   8b       Unreported tips                            --
   8c       Add lines 8a and 8b                      43,557.00
   9        Subtract line 8c from line 7               --
   10       Multiply the smaller of line 6 or
                                                       1
            line 9 by 0.124                             498.79
   11       Multiply line 6 by 0.029                  1,166.53
   12       Self-employment tax
            (add lines 10 and 11)                     1,665.31
            1
             This number is incorrect; the product of $40,225
       (line 6 amount) and 0.124 is $4,987.90.

       Petitioner erroneously reported total tax of $7,437.65,

which he computed by adding $832.65 (approximately 50 percent of

the $1,665.31 self-employment tax he computed) to the $6,605 tax

on his taxable income.

       Without regard to the 1999 overpayment, petitioner made

three estimated tax payments ($1,331.50, $5,233, and $1,374.37)

totaling $7,938.87 for 2000.    He claimed total 2000 estimated tax

payments of $10,705.87 that included the estimated tax payments
                                - 5 -

plus the amount applied from the 1999 return.3   On the 2000

return, he claimed an overpayment of $3,268.22 and directed that

it be applied to his 2001 estimated tax.

     Although petitioner reported payments totaling $6,000 for

1999, in fact he made payments totaling $6,600 and had an

overpayment of $3,377 ($3,223 - $6,600) in 1999.    Respondent did

not apply that overpayment to petitioner’s 2000 estimated tax as

petitioner directed on the 1999 return.    Instead, respondent

credited, as of April 15, 2000, the $3,377 overpayment from 1999

to petitioner’s unpaid tax for 1994.4

     With respect to 2000, respondent assessed a total tax of

$11,091.22, rather than the $7,437.65 petitioner reported on the

2000 return.   The tax assessed was calculated on $40,350 of

adjusted gross income, $33,150 of taxable income, and $5,214 of

self-employment tax.   Respondent attributed the increase in the

tax assessed over that reported on petitioner’s return to

mathematical errors on the 2000 return.    As a result of

respondent’s adjustments, respondent determined that petitioner

underreported his income tax by $3,653.57 ($11,091.22 -

$7,437.65).    Because respondent credited petitioner’s overpayment

     3
      We note the tax payments so claimed correctly total
$10,715.87 ($7,938.87 + $2,777).
     4
      The transcript of petitioner’s 1999 account shows that
petitioner’s 1999 overpayment was credited to his 1994 liability
during the 40th week of 2001. The Court takes judicial notice
that the 40th week of 2001 was the first week in October 2001.
                               - 6 -

from 1999 to taxes petitioner owed for 1994 and applied only

petitioner’s three estimated tax payments for 2000 totaling

$7,938.87 to petitioner’s 2000 tax liability, respondent

determined that petitioner underpaid his taxes for 2000 by

$3,152.35 ($11,091.22 - $7,938.87).    Respondent also assessed a

penalty for underpayment of estimated tax and interest.

     The transcript of petitioner’s 2000 taxes shows that on

November 5 and 12, 2001, respondent sent petitioner notices of

balance due for his 2000 taxes.    On July 30, 2002, petitioner

filed a petition for bankruptcy under 11 U.S.C chapter 7 seeking

discharge of his tax liabilities for 1992-95.    On November 13,

2002, the bankruptcy court granted petitioner a discharge of

those taxes.

     On October 14, 2003, respondent issued a Final Notice of

Intent to Levy and Notice of Right to a Hearing with respect to

petitioner’s 2000 tax liability.    Petitioner filed a timely

request for a hearing.

     On March 24, 2004, Appeals Officer Jacquelyn Sansbury met

with petitioner.   Appeals Officer Sansbury had no prior

involvement with regard to petitioner’s tax liabilities.    At the

meeting, petitioner asserted the proposed collection of the 2000

taxes was improper because the Internal Revenue Service (IRS)

ignored his direction to apply the 1999 overpayment to his 2000

estimated taxes.
                               - 7 -

                              OPINION

A.   Section 6330

     Section 6330 entitles a taxpayer to notice and an

opportunity for a hearing before the IRS can begin the process of

tax collection by lien and/or levy.     Upon request, a taxpayer is

entitled to a fair hearing before an impartial officer from the

IRS Office of Appeals.   Sec. 6330(b)(1), (3).    At the hearing,

the Appeals officer is required to verify that the requirements

of any applicable law or administrative procedure have been met

and to consider any relevant issue the taxpayer raises relating

to the unpaid tax or the proposed levy.     Sec. 6330(c)(1) and

(2)(A).

     A taxpayer may generally raise any relevant issue relating

to his/her unpaid tax liability or the proposed levy during the

hearing.   Relevant issues include an appropriate spousal defense,

challenges to the appropriateness of the collection action, and

offers of collection alternatives.     Sec. 6330(c)(2)(A).   The

taxpayer may challenge the existence or amount of the underlying

tax liability if he/she did not receive a statutory notice of

deficiency for the tax liability or did not have an opportunity

to dispute it.   Sec. 6330(c)(2)(B).

     Following the hearing, the Appeals officer must determine

whether the collection action is to proceed, taking into account

the verification the Appeals officer has made, the issues raised
                               - 8 -

by the taxpayer at the hearing, and “whether any proposed

collection action balances the need for the efficient collection

of taxes with the legitimate concern of the * * * [taxpayer] that

any collection action be no more intrusive than necessary.”      Sec.

6330(c)(3).

     If the Commissioner issues a determination letter to the

taxpayer following an administrative hearing, the taxpayer may

file a petition for judicial review of the administrative

determination.   Sec. 6330(d)(1); Davis v. Commissioner, 115 T.C.

35, 37 (2000); Goza v. Commissioner, 114 T.C. 176, 179 (2000).

     We have jurisdiction over this matter because petitioner

filed a timely petition for review in response to respondent’s

valid notice of determination to proceed with collection.    See

sec. 6330(d)(1); Lunsford v. Commissioner, 117 T.C. 159 (2001);

Sarrell v. Commissioner, 117 T.C. 122 (2001); Sego v.

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

114 T.C. 492, 498 (2000); Hochschild v. Commissioner, T.C. Memo.

2002-195.   In a proceeding commenced under section 6330(d), the

Court applies a de novo standard to determine a taxpayer’s

underlying tax liability, when and if it is at issue, and an

abuse of discretion standard to review certain other

administrative determinations of the Commissioner.     Sego v.

Commissioner, supra at 610.
                                 - 9 -

     The crux of petitioner’s complaint is that had respondent

applied petitioner’s 1999 overpayment as an estimated tax payment

toward his 2000 tax liability, petitioner’s 2000 tax liability

would have been paid.     Thus, petitioner challenges his underlying

tax liability for the year at issue.     See Landry v. Commissioner,

116 T.C. 60, 62 (2001).

     Respondent did not issue, and petitioner did not receive, a

statutory notice of deficiency for 2000.    Petitioner’s 2000 taxes

were not discharged in his bankruptcy proceeding, and he did not

otherwise have an opportunity to argue that his 1999 overpayment

should be applied to his 2000 tax liability.    Consequently,

petitioner may challenge that liability, and we have jurisdiction

to consider it.   We also have jurisdiction to consider

petitioner’s tax liabilities for 1999 and 1994, years that were

not the subject of the notice of determination, insofar as they

are relevant to computing petitioner’s 2000 tax liability.      See

Freije v. Commissioner, 125 T.C. 14 (2005).

B.   Verification That Requirements of Applicable Law and
     Administrative Procedure Have Been Met

      Section 6330 requires the Appeals officer to verify that

the requirements of any applicable law or administrative

procedure have been met.    Consequently, the Appeals officer must

verify that the underlying tax was properly assessed.

     Section 6201 authorizes the Secretary to assess all taxes

reported by the taxpayer on his/her return.    Generally, the
                              - 10 -

Secretary may not assess tax greater than that reported on the

return without issuing a statutory notice of deficiency.5    An

exception to the general rule permits the Secretary to assess an

additional amount resulting from a mathematical or clerical error

appearing on the return.   Sec. 6213(b).   Additionally, if a tax

return or claim for refund of income taxes under subtitle A of

the Internal Revenue Code contains an overstatement of the amount

paid as estimated income tax, the Secretary may assess the

overstated amount “in the same manner as in the case of a

mathematical or clerical error appearing upon the return”.    Sec.

6201(a)(3); see Schlosser v. Commissioner, 94 T.C. 816, 824-825

(1990), affd. without published opinion 2 F.3d 404 (11th Cir.

1993).

     1.   Mathematical and Clerical Errors

     The term “mathematical or clerical error” is defined to

include an error in addition, subtraction, multiplication, or

division; incorrect use of any table that is apparent from the

return; inconsistent entries on the return; omission of

information required to substantiate an entry; and an entry on a




     5
      Sec. 6211(a) provides in pertinent part that in the case of
income taxes imposed by subtit. A the term “deficiency” means the
amount by which the tax imposed by subtit. A exceeds the amount
of tax shown by the taxpayer on his/her return. Sec. 1401, which
imposes the tax on self-employment income, is a part of subtit.
A of the Internal Revenue Code.
                                - 11 -

return of a deduction or credit in an amount that exceeds a

statutory limit.   Sec. 6213(g)(2).

     On his 2000 return, petitioner reported a total tax

liability of $7,437.65--$6,605 tax on taxable income of

$35,757.62 plus $832.65 (approximately 50 percent of the

$1,665.31 self-employment tax he computed).    Respondent assessed

a total tax of $11,091.22, rather than the $7,437.65 petitioner

reported on the return.   Respondent determined that the

deficiency was attributed to a mathematical error and did not

issue a notice of deficiency.    The statutory notice of balance

due explaining the changes in the amount of tax assessed is not

in the record.

     The transcript of petitioner’s 2000 taxes reflects that

respondent assessed petitioner’s taxes on the basis of $40,350 of

adjusted gross income, $33,150 of taxable income, and $5,214 of

self-employment tax.   On the basis of those numbers, we conclude

that respondent assessed income tax of $5,877 ($11,091 - $5,214)

on $33,150 of taxable income, consistent with the tax table for

2000.   As a result of respondent’s adjustments, respondent

determined that petitioner underreported his income tax by

$3,653.57 ($11,091.22 - $7,437.65).

     There is no notice of deficiency to explain how respondent

computed petitioner’s 2000 tax liability.    At the trial of this

case and on brief, respondent explained the correction of
                                 - 12 -

mathematical errors (using petitioner’s method of computing the

self-employment tax) as follows:

  1    Net farm profit   from Schedule F                  --
  2    Net profit from   Schedule C                   $43,557.62
  3    Combine lines 1   and 2                         43,557.62
  4a   Multiply line 3   by 0.9235                     40,225.00
  4b                                                      --
  4c   Combine lines 4a and 4b                         40,225.00
  5b                                                      --
  6  Net earning from self-employment                  40,225.00
     (combine lines 4c and 5b)
  7 Maximum amount of combined wages and
      self-employment earnings subject to
      social security tax for 2000                     76,200.00
  8a Total social security wages and tips                 --
  8b Unreported tips                                      --
  8c Add lines 8a and 8b                               43,557.00
  9 Subtract line 8c from line 7                       32,643.00
 10 Multiply the smaller of line 6 or
      line 9 by 0.124                                   4,047.73
 11 Multiply line 6 by 0.029                            1,166.53
 12 Self-employment tax. Add lines 10 and 11.           5,214.26

       In computing petitioner’s self-employment tax, respondent

erroneously subtracted $43,558 (petitioner’s Schedule C net

profit which petitioner reported on line 7 of Form 1040A as

wages, salaries, and tips) from $76,200 (the maximum amount of

combined wages and self-employment earning subject to Social

Security tax for 2000).      Petitioner had no employment income

other than Schedule C income.

       Petitioner had a net profit of $43,558 in 2000 as reflected

on Schedule C attached to his 2000 return.      Thus, for purposes of

computing his self-employment tax, petitioner had net earnings

from self-employment of $40,225; i.e., 92.35 percent of his

Schedule C net profit ($43,558 x 0.9235).      Petitioner’s correct
                               - 13 -

self-employment tax was $6,154; i.e., 15.3 percent of his net

earnings from self-employment ($40,225 x 0.153), rather than

$1,665 as he reported on the 2000 return.

     Petitioner’s correct tax liability for 2000 is $11,891,

computed as follows:

     Business income (Schedule C)               $43,558
     Total IRA distributions                        400
      Total income                               43,958

     IRA deduction                   $1,000
     One-half self-employment tax     3,077
                                                  4,077
     Adjusted gross income                       39,881

     Standard deduction                 4,400
     Exemption                          2,800
                                                  7,200
     Taxable income                              32,681

     Tax on taxable income                                $5,737
     Self-employment tax                                   6,154
       Total tax                                          11,891

     Petitioner understated his 2000 tax liability by $4,453

($11,891 - $7,438).    That understatement is attributable to

mathematical and clerical errors, and respondent was not required

to issue a notice of deficiency.    Respondent did not assess tax

greater than the amount properly computed on the income

petitioner reported on his return or greater than that

attributable to petitioner’s mathematical and clerical errors.

To the contrary, respondent made an error in the calculation of

petitioner’s self-employment tax and consequently assessed

petitioner $800 less than he actually owed.     Therefore,
                              - 14 -

respondent was not required to issue a notice of deficiency, and

the taxes were properly assessed.

     Petitioner filed his 1999 return on August 21, 2001.   The 3-

year period for assessing additional tax for petitioner for 1999

has expired.   See sec. 6501(a).   Hence, respondent may collect

only the amount previously assessed.

     2.   Overstatement of Estimated Taxes

     A deficiency for a given year is the correct amount of tax

less the amount shown as tax on the tax return.    Sec. 6211(a);

Laing v. United States, 423 U.S. 161, 173 (1976).    Both the

correct amount of tax and the amount shown on the return are

computed without regard to credits for estimated tax payments.

Secs. 31, 6211(a) and (b)(1); sec. 301.6211-1(b), Proced. &

Admin. Regs.   An assessment by the Commissioner of tax greater

than that reported on the return attributable to a taxpayer’s

overstatement of estimated tax payments is not a deficiency

within the meaning of section 6211.    See Hutchinson v. United

States, 677 F.2d 1322, 1326 (9th Cir. 1982); Judge v.

Commissioner, 88 T.C. 1175, 1183 (1987); Bregin v. Commissioner,

74 T.C. 1097 (1980); Keefe v. Commissioner, 15 T.C. 947, 955

(1950).

     If a tax return or claim for refund of income taxes under

subtitle A of the Internal Revenue Code contains an overstatement

of the amount paid as estimated income tax, the overstated amount
                               - 15 -

“may be assessed by the Secretary in the same manner as in the

case of a mathematical or clerical error appearing upon the

return”.    Sec. 6201(a)(3); see Schlosser v. Commissioner, 94

T.C. at 824-825.    Consequently, respondent was not required to

issue a notice of deficiency for the underpayment of tax

attributable to any overstatement of petitioner’s estimated tax

payments.

     3.     The Right of Setoff Under Section 6402(a)

     When a taxpayer makes voluntary payments to the IRS, he/she

has a right to direct the application of those payments to

whatever liability he chooses.     Wood v. United States, 808 F.2d

411, 416 (5th Cir. 1987); Muntwyler v. United States, 703 F.2d

1030, 1032 (7th Cir. 1983); O’Dell v. United States, 326 F.2d

451, 456 (10th Cir. 1964).    Under the voluntary payment rule,

when a taxpayer who has outstanding tax liabilities voluntarily

makes a payment, the IRS usually will honor a taxpayer’s request

as to how to apply that payment.     United States v. Ryan, 64 F.3d

1516, 1522 (11th Cir. 1995).    However, section 6402(a) and the

regulations promulgated thereunder demonstrate that a taxpayer’s

right to designate his/her voluntary payments does not extend to

an overpayment reported on a return.

     Section 6402(a) allows the IRS to credit an “overpayment,

including any interest allowed thereon, against any liability in

respect of an internal revenue tax on the part of the person who
                              - 16 -

made the overpayment” and, subject to certain limitations, refund

any balance to the person.   In lieu of a refund, a taxpayer can

instruct the IRS to credit his overpayment against the estimated

tax for the taxable year immediately succeeding the year of the

overpayment.   Sec. 301.6402-3(a)(5), Proced. & Admin. Regs.    It

is well settled that the IRS need only refund, or apply to the

taxpayer’s estimated tax, that portion of the overpayment that

exceeds the taxpayer’s “outstanding liability for any tax”.    Sec.

301.6402-3(a)(6)(i), Proced. & Admin. Regs.; see N. States Power

Co. v. United States, 73 F.3d 764, 767 (8th Cir. 1996) (quoting

United States v. Ryan, supra at 1523 (“[Section 6402], ‘plainly

gives the IRS the discretion to apply overpayments to any tax

liability’”)); Pettibone Corp. v. United States, 34 F.3d 536, 538

(7th Cir. 1994) (section 6402(a) “leaves to the Commissioner’s

discretion whether to apply overpayments to delinquencies or to

refund them to the taxpayer”); Kalb v. United States, 505 F.2d

506, 509 (2d Cir. 1974) (rejecting the argument that because the

tax overpayment was voluntary, the IRS was bound to comply with

the taxpayer’s direction about how to apply that payment; section

6402(a) “clearly gives the IRS discretion to apply a refund to

‘any liability’ of the taxpayer”).

     Respondent’s application of petitioner’s 2000 overpayment to

petitioner’s 1994 tax liability falls within respondent’s
                              - 17 -

authority to credit overpayments to any liability for any tax

year and, therefore, was proper.

     4.   Violation of Automatic Bankruptcy Stay

     Petitioner asserts that the bankruptcy court discharged his

1994 tax liability when it granted petitioner a discharge on

November 13, 2002, and that respondent’s application of the

$3,377 from petitioner’s 1999 account to his 1994 tax liability

violated the automatic stay imposed under 11 U.S.C. sec. 362.

We have jurisdiction in this levy proceeding to determine whether

petitioner’s unpaid liabilities were discharged in bankruptcy.

See Washington v. Commissioner, 120 T.C. 114 (2003).

     The Certificates of Official Record for petitioner’s 1994

and 1999 tax years reflect that the $3,377 overpayment from

petitioner’s 1999 account was applied to petitioner’s outstanding

1994 tax liability in October 2001.    Petitioner did not file his

bankruptcy petition until July 30, 2002.    Thus, there could not

have been a violation of the automatic bankruptcy stay before the

filing of a bankruptcy petition.   We conclude, therefore, that

respondent’s application of the funds from petitioner’s 1999

overpayment was permitted.   Moreover, since the funds were

applied to petitioner’s 1994 tax liability before petitioner

filed for bankruptcy, petitioner was no longer liable for that

portion of the 1994 liability when he filed for bankruptcy.

Consequently, any of petitioner’s 1994 tax liability discharged
                               - 18 -

by the bankruptcy court did not include amounts paid before his

filing his petition with the bankruptcy court.

     Aside from challenging his underlying tax liability,

petitioner did not raise any relevant issue relating to the

proposed levy.   He offered no collection alternatives.   On the

basis of the foregoing we conclude that there was no abuse of

discretion by respondent’s Appeals officer.   All the requirements

of section 6330 have been satisfied, and respondent may proceed

with the proposed levy to collect the tax liability assessed

against petitioner for 2000.

     To reflect the foregoing,


                                         Decision will be entered

                                    for respondent.
