                                 T.C. Memo. 2013-232



                           UNITED STATES TAX COURT



                 J & S AUTO PAINTING, INC., Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 23029-11L.                        Filed October 21, 2013.



      Mark Frederick Werblood, for petitioner.

      James G. Hartford, for respondent.



                             MEMORANDUM OPINION


      DAWSON, Judge: This case is before the Court on a petition for review of

a Notice of Determination Concerning Collection Action(s) Under Section 6320

and or 6330,1 dated August 26, 2011, to proceed with the levy on petitioner’s


      1
          Unless otherwise indicated, all subsequent section references are to the
                                                                         (continued...)
                                         -2-

[*2] property to collect petitioner’s unpaid Federal employment tax liabilities

(notice of determination). The issues for decision are: (1) whether the settlement

officer abused her discretion by rejecting petitioner’s proposal to pay $400 per

month under an installment agreement as a collection alternative; and (2) whether

the settlement officer abused her discretion by not holding a face-to-face

collection due process hearing (CDP hearing) with petitioner.

                                     Background

      This case was submitted fully stipulated under Rule 122, and the stipulated

facts are so found. We incorporate by reference the parties’ stipulation of facts

and accompanying exhibits.

      Petitioner is a family-owned corporation operating an automobile painting

franchise. At the time the petition was filed, petitioner’s principal place of

business was in Falls Church, Virginia. At all relevant times, petitioner was

required to make biweekly deposits of Federal employment taxes.




      1
       (...continued)
Internal Revenue Code as amended and in effect at all relevant times. All Rule
references are to the Tax Court Rules of Practice and Procedure.
                                        -3-

[*3] Petitioner filed its Forms 941, Employer’s Quarterly Federal Tax Return,

reporting the following employment taxes owed for the quarters and years at issue:

      Form           Quarter ending           Reported employment tax owed

       941               3/31/08                        $16,237.94
       941               6/30/08                         17,085.52
       941               9/30/08                         16,825.96
       941              12/31/08                         13,040.36
       941               3/31/09                         14,101.08
       941               6/30/09                         12,636.26
       941               9/30/09                         14,726.00

On January 4, 2010, respondent assessed the employment tax liabilities petitioner

reported on its Forms 941, late payment additions to tax, failure to deposit

penalties, and interest for each of the taxable quarters at issue. On February 8,

2010, respondent assessed additional Federal tax deposit penalties as follows:

               Quarter ending          Additional penalties

                   3/31/08                    $811.90
                   6/30/08                     854.27
                   9/30/08                     841.30
                  12/31/08                     652.02
                   3/31/09                     705.05
                   6/30/09                     631.81
                   9/30/09                     736.30

      Respondent sent petitioner a Final Notice of Intent to Levy and Notice of

Your Right to a Hearing (final notice) on July 26, 2010, reflecting petitioner’s
                                         -4-

[*4] unpaid employment tax liabilities, including assessed penalties and interest,

as follows:2

               Taxable periods           Total liability

               Mar. 31, 2008             $27,420.51
               June 30, 2008              28,259.89
               Sept. 30, 2008             27,270.52
               Dec. 31, 2008              20,689.96
               Mar. 31, 2009              21,947.64
               June 30, 2009              18,716.02
               Sept. 30, 2009             19,348.44
                Total                    163,652.98

      On August 25, 2010, petitioner timely filed a Form 12153, Request for a

Collection Due Process or Equivalent Hearing, requesting a CDP hearing and

consideration of a collection alternative.

      By letter dated December 11, 2010, respondent acknowledged receipt of

petitioner’s CDP hearing request. On January 18, 2011, respondent informed

petitioner that its CDP hearing request had been assigned to Settlement Officer

E.J. Frazier (SO Frazier) in the Internal Revenue Service’s (IRS) Memphis,

Tennessee, Appeals Office. SO Frazier had not had any prior involvement with

petitioner either in Appeals or in any other IRS function for the employment tax


      2
      When the final notice was issued on July 26, 2010, petitioner had unpaid
employment taxes for each of the taxable quarters at issue and no bankruptcy
proceeding was pending.
                                         -5-

[*5] and tax years at issue. On March 1, 2011, SO Frazier sent petitioner a letter,

stating: (1) she had received petitioner’s Form 12153, (2) she had scheduled a

telephone hearing for March 29, 2011, and (3) petitioner had to be in compliance

with its Federal tax filing obligations in order to qualify for a collection

alternative. As of March 1, 2011, petitioner had not filed Forms 941 for tax

quarters ended September 30 and December 30, 2010, or a Form 940, Employer’s

Annual Federal Unemployment (FUTA) Tax Return, for the taxable year ended

December 31, 2010. SO Frazier requested that petitioner submit the following by

March 15, 2011: (1) the delinquent Forms 941 and 940, (2) a Form 433-B,

Collection Information Statement for Businesses, with the required supporting

documentation, and (3) a Form 656, Offer in Compromise, with a $150

nonrefundable application fee.

      By facsimile (fax) dated March 15, 2011, petitioner’s counsel requested a

face-to-face CDP hearing and requested that the scheduled March 29, 2011,

hearing be postponed to a later date because he was ordered to be in Court the

same day. On March 25, 2011, petitioner’s counsel faxed to SO Frazier the

following documents: (1) petitioner’s Forms 941 for the quarters ended June 30,

September 30, and December 31, 2010, (2) petitioner’s Form 1120, U.S.

Corporation Income Tax Return, for the tax year ending December 31, 2009, (3) a
                                       -6-

[*6] completed Form 433-B,3 and (4) some of petitioner’s records for its Wachovia

business checking account and its Capital One general ledger and loan accounts.

      The Wachovia records included only the first pages of the statements--page

1 of the 12-page December 2010 statement, page 1 of the 14-page January 2011

statement, and page 1 of the 15-page February 2011 statement. The Wachovia

records show the following account summaries for those periods:

                           Dec. 2010         Jan. 2011       Feb. 2011

 Opening balance         $4,991.66          $2,755.26       $16,917.62
 Deposits and credits    41,255.64          50,311.06         38,663.21
 Checks                 (40,143.43)        (31,390.86)       (38,959.00)
 Automated checks            -0-                (46.99)           -0-
 Other withdrawals/fees (3,348.61)           (4,710.85)        (2,976.61)
 Closing balance          2,755.26          16,917.62         13,645.22

The Wachovia records showed only the account summaries, a few of the deposits

and credits, and none of the checks or other withdrawals or fees for the account for

those periods.




      3
        Although the parties have stipulated that “on July 11, 2011, petitioner
submitted a Form 433-B and supporting documents to Ms. Munson” and that “on
August 1, 2011, petitioner’s counsel faxed a Form 433-B”, these documents are
not in the record before us. We base our analysis only on the record before this
Court. There is no indication that the figures in the “other” Forms 433-B are
different from those in the Form 433-B in the record.
                                         -7-

[*7] The Capital One general ledger account records are the complete statements

for December 2010, January 2011, and February 2011 and show the following

account summaries:

                            Dec. 2010          Jan. 2011      Feb. 2011

 Opening balance           ($2,088.20)      ($2,040.18)           $78.68
 Deposits and credits        4,387.87         7,357.78         48,027.42
 Checks and debits          (4,339.85)       (5,288.96)       (48,034.21)
 Service charge                 -0-              -0-               -0-
 Ending balance             (2,040.18)           28.64             71.87

      The Capital One February 2011 statement shows, inter alia, customer

deposits of $15,500 and $20,000, respectively, made on February 10 and 15 and

two withdrawals each for $15,500 made on February 14 (designated as “ACH

Withdrawal CHASE EPAY * * * MURTAGH, COLM”) and 16 (designated

“Customer withdrawal”).

      Petitioner stated claimed monthly income of $51,188 and monthly expenses

of $52,461.45 on the Form 433-B but stated on the form that the “Business has

steadily increased sales over the past 3 years” and that it expected its income to

increase by more than $70,000.

      On March 29, 2011, respondent transferred petitioner’s CDP hearing to the

Richmond, Virginia, Appeals Office and assigned the matter to Settlement Officer

Ahn Munson (SO Munson), who had had no prior involvement with petitioner in
                                         -8-

[*8] Appeals or any other IRS function for the employment taxes or tax years

involved in this case.

      SO Munson reviewed the case file and determined that petitioner was not

current with its required Federal employment tax deposits. In an April 26, 2011,

telephone call, SO Munson informed petitioner’s counsel that for that reason,

petitioner did not qualify for a face-to-face CDP hearing.4 Petitioner’s counsel

stated that petitioner had reduced its labor force and was in the process of

obtaining a loan to fund an offer-in-compromise. SO Munson requested that

petitioner provide by May 2, 2011, proof that it had filed Form 941 for the taxable

quarter ended March 31, 2011, and proof of payment of the required Federal

employment tax deposits. SO Munson stated that she would sustain the levy if

petitioner did not comply. Petitioner’s counsel agreed to provide the requested

information but as of May 9, 2011, had not done so.

      On May 16, 2011, petitioner’s counsel provided SO Munson with (1) proof

that petitioner had filed for an extension of time for filing the 2010 Form 1120, (2)

a copy of the Form 941 for the taxable quarter ended March 31, 2011, and (3)

proof that petitioner paid the taxes shown on the March 31, 2011, Form 941 on

      4
        The parties stipulated that as of April 26, 2011, petitioner did not qualify
for a face-to-face CDP hearing because it was not current with its Federal
employment tax deposits.
                                        -9-

[*9] May 2, 2011. He also left SO Munson a voice mail message stating that he

had to travel out of town for a family emergency but that he believed petitioner to

be in full compliance.

      SO Munson agreed to schedule a CDP hearing in the IRS’ Richmond,

Virginia, Appeals Office for June 29, 2011, provided petitioner submitted at the

hearing proof of full compliance with filing and payment requirements.

      On June 24, 2011, petitioner’s counsel called and informed SO Munson that

he would be unable to attend the June 29, 2011, CDP hearing. His father had

passed away that morning, and he had to go to Florida to coordinate funeral

arrangements and then travel to New York for his father’s burial. SO Munson, in

response, offered petitioner’s counsel a telephone hearing as an alternative, but

petitioner’s counsel stated that he preferred a face-to-face hearing. SO Munson

agreed to reschedule the face-to-face hearing to July 13, 2011, but informed

petitioner’s counsel that, having given petitioner many extensions and

opportunities to comply and become current with its tax obligations, if it did not

provide proof of compliance and submit a collection alternative by July 11, 2011,

she would sustain the levy.

      On July 11, 2011, SO Munson called petitioner’s counsel and left a voice

mail message informing him that her office was in the process of moving and that
                                          - 10 -

[*10] she had to reschedule the July 13, 2011, face-to-face hearing to August 2,

2011. SO Munson provided petitioner’s counsel with the new Appeals Office

address.

       On August 2, 2011, SO Munson called petitioner’s counsel and left him a

voice mail message, informing him that the August 2, 2011, face-to-face hearing

would be canceled because petitioner had not provided the promised collection

alternative. The same day, petitioner’s counsel returned the call, informing SO

Munson that he would be submitting the requested Form 433-D, Installment

Agreement, and an updated collection information statement. SO Munson granted

petitioner’s counsel a further extension until August 5, 2011, to do so. SO

Munson reminded petitioner’s counsel that if he did not comply, she would sustain

the levy.

       On August 5, 2011, petitioner’s counsel faxed a Form 433-D dated August

1, 2011, to SO Munson, offering to pay installments of $400 per month. By letter

dated August 5, 2011, SO Munson acknowledged receipt of the offer but informed

petitioner it would not be accepted because petitioner’s bank statements and Form

433-B showed that petitioner could pay more than $400 monthly. She further

stated that, in order for petitioner’s tax liability to be fully satisfied within the

statutory collection period, petitioner would need to make monthly payments of
                                        - 11 -

[*11] about $5,000. She advised petitioner’s counsel to submit a completed Form

433-D to her by August 15, 2011, if petitioner wanted to offer a new collection

alternative. SO Munson informed petitioner’s counsel that she would close the

case and sustain the levy if she did not receive the updated Form 433-D by August

15, 2011. As of August 19, 2011, petitioner had not submitted an updated Form

433-D or other collection alternative to SO Munson, and SO Munson closed the

file. On August 26, 2011, respondent issued the notice of determination,

sustaining the levy.5 The notice stated:

      The Appeals Office rejected this proposed * * * [installment
      agreement] since the taxpayer’s financial records indicate the
      taxpayer has ability to pay much more than the proposed amount.
      Appeals advised the representative and the taxpayer to increase the
      payment to at least $5,000 per month before it is considered as an
      acceptable collection alternative. So far the taxpayer has not
      responded to the Appeals Office; therefore, the proposed levy action
      is fully sustained.

                                     Discussion

      Section 6331(a) authorizes the Commissioner to levy upon property and

rights to property of a taxpayer who is liable for taxes and who fails to pay those

      5
        As of February 14, 2013, petitioner had not made any payment of Federal
employment taxes and penalties assessed or interest accrued for the taxable
quarters and years at issue. As of February 15, 2013, petitioner had not filed its
Form 941 for the taxable quarter ended September 30, 2012, and was not current
with its Federal employment tax deposits for the taxable quarter ended December
31, 2012.
                                        - 12 -

[*12] taxes within 10 days after notice and demand for payment is made. Section

6331(d) provides that the levy authorized in section 6331(a) may be made only if

the Commissioner has given notice to the taxpayer no less than 30 days before the

day of the levy.

      Section 6330(a) grants the taxpayer the right to request a prelevy CDP

hearing to be conducted by the IRS Appeals Office. Sec. 6330(a)(3)(B), (b)(1);

see Davis v. Commissioner, 115 T.C. 35, 37 (2000); Goza v. Commissioner, 114

T.C. 176, 179 (2000). The Appeals Office must verify that the requirements of

any applicable law or administrative procedure have been met and consider the

issues raised by the taxpayer and whether any proposed collection action balances

the need for the efficient collection of taxes with the legitimate concern that any

collection action be no more intrusive than necessary. Sec. 6330(c)(3); Lunsford

v. Commissioner, 117 T.C. 183, 184 (2001).

      Pursuant to section 6330(d)(1), this Court may review a determination to

sustain a proposed levy made by the Appeals Office. See Rules 330-334. Where

the underlying tax liability is properly in dispute, we review the determination de

novo. Goza v. Commissioner, 114 T.C. at 181-182. Petitioner does not challenge

either the amounts or the validity of the outstanding employment tax liabilities,

additions to tax, penalties, and/or interest for the taxable quarters at issue. Where,
                                         - 13 -

[*13] as in this case, the underlying tax liability is not at issue, we review the

Commissioner’s determination for abuse of discretion. Id. at 182; see also Hoyle

v. Commissioner, 131 T.C. 197, 200 (2008); Sego v. Commissioner, 114 T.C.

604, 610 (2000). An abuse of discretion occurs if the Appeals Office exercises its

discretion “arbitrarily, capriciously, or without sound basis in fact or law.”

Woodral v. Commissioner, 112 T.C. 19, 23 (1999); see Giamelli v. Commissioner,

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

      Petitioner asserts that SO Munson abused her discretion by rejecting

petitioner’s offer to pay the unpaid employment taxes in monthly installments of

$400 and not holding a CDP hearing with petitioner. This Court does not

independently review whether a collection alternative is acceptable but rather

focuses on whether the settlement officer’s rejection of the offer was arbitrary,

capricious, or without sound basis in fact or law. Murphy v. Commissioner, 125

T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006). The taxpayer bears the

burden of proving abuse of discretion. Rules 122(b), 142(a); see also Titsworth v.

Commissioner, T.C. Memo. 2012-12, 2012 WL 86670, at *6 (holding that the

taxpayer bears the burden even in cases submitted fully stipulated).
                                         - 14 -

[*14] Rejection of Installment Agreement

      Section 6159 authorizes the Commissioner to enter into written agreements

allowing taxpayers to pay tax in installment payments if he deems that the

“agreement will facilitate full or partial collection of such liability.” The

Commissioner in general has the discretion to accept or reject any proposed

installment agreement. See sec. 301.6159-1(c)(1)(i), Proced. & Admin. Regs.

This Court has generally held that there is no abuse of discretion when the

settlement officer relies on guidelines published in the Internal Revenue Manual

(IRM) to evaluate a proposed installment agreement. See, e.g., Orum v.

Commissioner, 123 T.C. 1, 13 (2004), aff’d, 412 F.3d 819 (7th Cir. 2005);

Aldridge v. Commissioner, T.C. Memo. 2009-276; Etkin v. Commissioner, T.C.

Memo. 2005-245. The IRM guidelines state that the procedures for processing an

installment agreement for a business are applicable only if taxpayers can pay

operating expenses as well as current and delinquent taxes and are current with

their filing and deposit requirements. See IRM pts. 5.14.7.2 (Aug. 5, 2010),

5.14.7.4 (Mar. 11, 2011).

      SO Munson rejected petitioner’s offer to pay $400 monthly installments

because petitioner’s bank statements and Form 433-B showed that petitioner could

pay monthly installments much greater than $400. SO Munson determined that
                                       - 15 -

[*15] petitioner would need to pay monthly installments of approximately $5,000.

The Capital One February 2011 statement shows, inter alia, customer deposits of

$15,500 and $20,000, respectively, made on February 10 and 15 and two

withdrawals each for $15,500 made on February 14 (designated as “ACH

Withdrawal CHASE EPAY * * * MURTAGH, COLM”) and 16 (designated

“Customer withdrawal”). Therefore, it was not unreasonable or arbitrary for SO

Munson to conclude that petitioner could pay much more that the $400 monthly

payments offered. Additionally, although on the Form 433-B petitioner claimed

monthly income of $51,188 and monthly expenses of $52,461.45, it did not

reconcile the claimed net loss with the deposits on its bank records. Moreover,

petitioner stated on the Form 433-B that sales had steadily increased over the

previous three years and that it expected its income to increase by more than

$70,000. Finally, SO Munson advised petitioner’s counsel to submit a new

completed Form 433-D to her by August 15, 2011, if petitioner wanted to offer a

new collection alternative. Petitioner did not do so.

      Petitioner contends that SO Munson did not provide any further explanation

to the August 5, 2011, letter. We note, however, that petitioner did not attempt to

contact SO Munson or follow up in any way. Accordingly, after receiving no

response from petitioner, SO Munson closed the file and issued a notice of
                                        - 16 -

[*16] determination sustaining the proposed levy. SO Munson’s rejection of

petitioner’s installment agreement offer was not arbitrary or capricious.

Face-to-Face Hearing

      Petitioner argues that it was not afforded a face-to-face hearing and that, in

fact, a CDP hearing never occurred. We disagree.

      A section 6330 CDP or other prelevy hearing is not a formal adjudication,

and a face-to-face hearing is not required under section 6330. Katz v.

Commissioner, 115 T.C. 329, 337-338 (2000) (finding a combination of telephone

calls and one or more written communications between a taxpayer and a settlement

officer is sufficient to constitute a hearing); Radeke v. Commissioner, T.C. Memo.

2012-319, at *9 (“An informal telephone conference which gives the taxpayer the

opportunity to discuss the merits of her case, settlement alternatives, and other

issues related to the proposed levy is a proper CDP hearing.”); Jackson v.

Commissioner, T.C. Memo. 2010-180, 2010 WL 3119253, at *2 (and cases cited

therein); Williamson v. Commissioner, T.C. Memo. 2009-188; see sec. 301.6330-

1(d)(2), Q&A-D6, Proced. & Admin. Regs.

      SO Munson and petitioner’s counsel communicated through letters, faxes,

and telephone conversations. These communications constituted a proper CDP

hearing. Petitioner argues that it was unaware that the telephone conversations its
                                        - 17 -

[*17] counsel had with SO Munson constituted a CDP hearing. This argument

lacks merit because SO Munson repeatedly cautioned petitioner’s counsel that

there would not be a face-to-face hearing if certain forms, returns, or records were

not provided or if petitioner did not bring its required filings and deposits into

compliance. The clear implication was that, if a “face-to-face” hearing was not

allowed, the telephone conversations and other communications constituted the

hearing. Thus, SO Munson did not abuse her discretion by denying petitioner a

face-to-face hearing.

      We conclude that petitioner would have needed to offer to pay more than

$400 per month to satisfy its outstanding tax liabilities. At no time did petitioner

express an indication (or made any revised offer) to do so. In addition, petitioner

has failed to establish current compliance and is thus not eligible for a collection

alternative.

                                     Conclusion

      SO Munson verified that all requirements of applicable law and

administrative procedure had been met and considered the relevant issues

petitioner raised. Therefore, on the record presented, we hold that SO Munson did

not abuse her discretion by sustaining the proposed levy action to collect

petitioner’s outstanding employment tax liabilities for 2008 and 2009, and we
                                      - 18 -

[*18] sustain respondent’s determination to proceed with the proposed levy. We

also hold that SO Munson did not abuse her discretion by not holding a face-to-

face CDP hearing with petitioner.

      To reflect the foregoing,


                                                     Decision will be entered for

                                               respondent.
