                         T.C. Summary Opinion 2012-26



                        UNITED STATES TAX COURT



                     REZA FATEHI, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 12143-10SL.                      Filed March 22, 2012.



      Reza Fatehi, pro se.

      Tabitha A. Green, for respondent.



                             SUMMARY OPINION


      WELLS, 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
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to section 7463(b),1 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. We must

decide whether respondent’s Appeals Office abused its discretion when it upheld a

notice of Federal tax lien (NFTL) with respect to petitioner’s 2004, 2005, and 2006

tax years (years in issue).

                                     Background

      Some of the facts and certain exhibits have been stipulated. The parties’

stipulations of facts are incorporated in this opinion by reference and are found

accordingly. At the time he filed his petition, petitioner was a resident of Georgia.

      Petitioner is a self-employed electrician. Petitioner timely filed his tax returns

for the years in issue, and he paid in full the amounts shown on his returns.

However, the Internal Revenue Service (IRS) selected his returns for examination

and during 2008 assessed additional taxes of $9,382, $10,707, and $4,281 with

respect to his 2004, 2005, and 2006 tax years, respectively. With respect to all of

the years in issue, the Forms 4340, Certificate of Assessments, Payments, and Other

Specified Matters, respondent submitted include the entry “ADDITIONAL



      1
       Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended, and Rule references are to the Tax Court Rules of
Practice and Procedure.
                                          -3-
TAX ASSESSED BY EXAMINATION AGREED AUDIT DEFICIENCY PRIOR TO 30 OR

60 DAY LETTER”.

      During June 2009, petitioner prepared and submitted Form 433-A, Collection

Information Statement for Wage Earners and Self-Employed Individuals. On his

Form 433-A he indicated that he had very little cash on hand or in bank accounts

and that he had little property of any value. However, he indicated that he had

available credit of $22,000, which reflected the credit limit on his credit card. He

indicated that his current monthly income was $1,931 and that his current monthly

expenses totaled $2,523. Also during June 2009, petitioner submitted Form 656,

Offer in Compromise, proposing to pay $1,000 in five installments. He indicated

that he would borrow those funds from others.

      On October 15, 2009, an IRS offer-in-compromise specialist mailed a letter to

petitioner indicating that the IRS had determined that he had the ability to pay his

tax liabilities in full. The letter indicated that the IRS offer-in-compromise specialist

had made that determination on the basis of petitioner’s past income and his “net

equity in assets”. The “net equity in assets” referred to in the letter is actually

petitioner’s credit limit on his credit card, not any equity in assets he owned. The

letter also indicated that the IRS had determined that petitioner’s average monthly
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income was $3,500, more than the $1,931 he had reported on his Form 433-A. That

determination was apparently made on the basis of petitioner’s income during

past years. However, during trial on April 4, 2011, petitioner testified that business

is bad and that his income is not as high as it used to be. On or about November 5,

2009, petitioner sent a letter to the IRS offer-in-compromise specialist disputing

the contention that he was earning an average of $3,500 per month.

      On December 18, 2009, respondent filed an NFTL with respect to each of the

years in issue. On December 22, 2009, respondent sent petitioner, via certified

mail, a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC

6320. Petitioner timely submitted a Form 12153, Request for a Collection Due

Process or Equivalent Hearing. On the Form 12153 petitioner checked the boxes

indicating that he wanted respondent to consider an installment agreement or an

offer-in-compromise.

      On March 8, 2010, Settlement Officer Y.B. Crear mailed petitioner a letter

scheduling a telephone conference for March 25, 2010. The letter requested that

petitioner provide Ms. Crear with a completed Form 433-A within 14 days.

Petitioner had already completed a Form 433-A, which he had submitted to the IRS

offer-in-compromise specialist during June 2009, so he apparently failed to submit a
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new Form 433-A before March 25, 2010. Petitioner and Ms. Crear held the

scheduled telephone conference on March 25, 2010 (Appeals hearing).

      During the Appeals hearing petitioner stated that he wanted respondent to

consider a collection alternative and referred to the earlier rejection of his offer-in-

compromise by the IRS offer-in-compromise specialist. Ms. Crear requested that

petitioner update the Form 433-A that he had submitted during June 2009 to reflect

information from his 2009 tax return. She also requested that he submit a Form

12256, Withdrawal of Request for Collection Due Process or Equivalent Hearing.

Petitioner told Ms. Crear that he would not be able to submit an updated Form 433-

A until after he submitted his 2009 tax return on April 15, 2010. Ms. Crear did not

indicate a deadline by which petitioner had to submit the requested forms, and

during the Appeals hearing she agreed that he could wait to submit his updated

Form 433-A until after he had filed his 2009 tax return on April 15, 2010.

      Petitioner cannot recall whether he raised the issue of his underlying liabilities

during the Appeals hearing, but the case activity report Ms. Crear submitted (case

activity report) does not indicate that the underlying liabilities were raised.

       After receiving the Form 12256 via fax on March 26, 2010, petitioner was

apparently confused about the implications of signing it and therefore hesitated to do
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so. For that reason and because Ms. Crear had agreed that he could wait until after

he filed his 2009 tax return to file the updated Form 433-A, he did not immediately

submit either the Form 12256 or an updated Form 433-A. On April 16, 2010, a

little more than two weeks after sending petitioner the Form 12256 and without

attempting to contact him again, Ms. Crear determined that it was appropriate to

sustain the NFTL; and according to the case activity report, she decided at that time

to issue the Notice of Determination Concerning Collection Action(s) Under Section

6320 and/or 6330 (notice of determination). On April 27, 2010, the IRS sent

petitioner, via certified mail, the notice of determination.

      The notice of determination erroneously states that petitioner’s “liabilities

stem from self assessed returns filed with a balance due”. That error is also present

in the case activity report. The parties now appear to agree that the liabilities

actually stem from additional assessments following respondent’s examination of

petitioner’s returns.

      After receiving the notice of determination, petitioner submitted to Ms. Crear

an updated Form 433-A on May 19, 2010. On May 27, 2010, petitioner timely filed

his petition with this Court.

      On April 4, 2011, the instant case was recalled for trial from the calendar of

the Court at Atlanta, Georgia. Petitioner testified at trial. After considering his
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testimony and the other evidence in the record, we ordered respondent to consider

petitioner’s offer-in-compromise. On October 4, 2011, respondent submitted a

status report indicating that petitioner had submitted a new offer-in-compromise and

that respondent’s Centralized Offer-in-Compromise Unit had rejected petitioner’s

offer. On October 20, 2011, the Court ordered the parties to supplement the record

with the subsequent proceedings regarding the rejection of petitioner’s offer-in-

compromise. From those supplements to the record, we construct the following

narrative.

      Following the trial petitioner again submitted to respondent the Form 433-A

that he had attempted to submit to Ms. Crear on May 19, 2010. On that Form

433-A he indicated that his monthly income is only $984 and that his monthly

expenses exceed his monthly income. He indicated that he had almost no savings

and little personal property of any value. He attached documentation of his monthly

expenses to his Form 433-A. Petitioner also attached a copy of his 2010 tax return,

on which he reported business income of $7,100 and an adjusted gross income of

$2,129. With his Form 433-A, petitioner submitted a new Form 656 on which he

proposed to settle his tax liabilities by paying a total of $625 in one initial payment

of $125 and five installments of $100 each; he indicated that he would make those

payments with assistance from others.
                                         -8-

      On or about July 7, 2011, Offer Specialist Joe Kennedy sent petitioner a letter

asking for additional documentation of his business income and assets, among other

items. On or about July 28, 2011, petitioner replied to Mr. Kennedy’s letter and

supplied additional documentation. Petitioner and Mr. Kennedy spoke on the phone

on or about August 2, 2011, and Mr. Kennedy sent him a letter on or about August

3, 2011, asking him to let Mr. Kennedy know by August 10, 2011, whether he

would amend his offer-in-compromise to pay $125 per month for 24 months (instead

of $625 over five months). It is unclear whether petitioner responded to Mr.

Kennedy’s letter.

      On August 23, 2011, Mr. Kennedy sent an email to respondent’s counsel

alerting her to his decision to reject petitioner’s offer-in-compromise. In that email

Mr. Kennedy explained that he was rejecting petitioner’s offer-in-compromise

because he had determined that petitioner was able to “generate an income” greater

than the amount indicated on his returns or on his Form 433-A. Mr. Kennedy noted

that petitioner is college educated and in good health and his business as an

electrician used to generate more income than it does now. Mr. Kennedy wrote:

      The Revenue Agent that conducted the audit that created the assessments on
      all three of the years that are outstanding clearly recalled the circumstances
      surrounding his investigation. He is fully confident that Mr. Fatehi is being
                                            -9-

      paid for his services in the form of cash and not reporting such on his Form
      1040’s [sic]. The Revenue Agent said that the taxpayer is sending this same
      money overseas to his family.

Mr. Kennedy gave no indication regarding how the revenue agent came to be

confident that petitioner is currently not reporting some of his income, but Mr.

Kennedy apparently reached his determination to reject petitioner’s offer-in-

compromise on the basis of the revenue agent’s apparent confidence.

      On or about September 27, 2011, respondent mailed petitioner a letter

notifying him that respondent had rejected his offer-in-compromise. The letter

offered only a one-sentence explanation: “We have determined that acceptance of

your offer would not be in the best interest of the government.” Unsurprisingly,

petitioner did not find that explanation helpful, and he sent Mr. Kennedy a letter on

or about October 26, 2011, asking for additional explanation and disputing Mr.

Kennedy’s determination. On or about November 2, 2011, respondent mailed

petitioner a letter informing him that respondent had received his request to appeal

the determination to reject his offer-in-compromise and that it was being forwarded

to the Appeals Office. On December 2, 2011, respondent’s counsel faxed petitioner

the email she received from Mr. Kennedy explaining his reasons for rejecting

petitioner’s offer-in-compromise.
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                                      Discussion

      Section 6320(a)(1) requires the Commissioner to give a taxpayer written

notice of the filing of a notice of Federal tax lien upon that taxpayer’s property. The

notice of filing must inform the taxpayer of the right to request a hearing in the

Commissioner’s Appeals Office. Sec. 6320(a)(3)(B), (b)(1). Section 6330(c), (d),

and (e) governs the conduct of a hearing requested under section 6320. Sec.

6320(c). At the hearing the taxpayer may raise any relevant issues including

appropriate spousal defenses, challenges to the appropriateness of collection

actions, and collection alternatives. Sec. 6330(c)(2)(A). The taxpayer may

challenge the underlying tax liability at the hearing only if the taxpayer did not

receive a statutory notice of deficiency or otherwise have an opportunity to dispute

the tax liability. Sec. 6330(c)(2)(B). In addition to considering issues raised by the

taxpayer under section 6330(c)(2), the Appeals Office must also verify that the

requirements of any applicable law or administrative procedure have been met. Sec.

6330(c)(1), (3).

      Where the validity of the underlying tax liability is properly in issue, the

Court will review the matter de novo. Sego v. Commissioner, 114 T.C. 604, 610

(2000); Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). However, where

the validity of the underlying tax is not properly in issue, the Court will review the
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Commissioner’s determination for abuse of discretion. Sego v. Commissioner, 114

T.C. at 610; Goza v. Commissioner, 114 T.C. at 181-182.

      The Form 4340 respondent submitted indicates that petitioner agreed to the

assessments of the additional taxes determined by the IRS examination. The Form

4340 is “‘generally regarded as being sufficient proof, in the absence of evidence to

the contrary, of the adequacy and propriety of notices and assessments that have

been made.’” Orum v. Commissioner, 123 T.C. 1, 9 (2004) (quoting Gentry v.

United States, 962 F.2d 555, 557 (6th Cir.1992)), aff’d, 412 F.3d 819 (7th Cir.

2005). At trial petitioner indicated that he did not agree with the underlying

liabilities and would like to contest them. However, petitioner did not present any

evidence that would give us any doubt that he agreed to the assessments of

additional deficiencies. Because petitioner agreed to those assessments, he gave up

his right to challenge the deficiencies and is not entitled to raise his underlying

liabilities before the Appeals Office or this Court. See Aguirre v. Commissioner,

117 T.C. 324, 327 (2001); Deese v. Commissioner, T.C. Memo. 2007-362.

Accordingly, we review the Appeals Office’s determination for abuse of discretion.

      At trial respondent’s counsel contended that the issue of the rejection of

petitioner’s offer-in-compromise was not raised during the Appeals hearing.
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However, that contention is contrary to the record. Petitioner testified that he

discussed the rejection of his offer-in-compromise during the Appeals hearing.

Additionally, petitioner checked the box on Form 12153, indicating that he wished

to discuss an offer-in-compromise. Accordingly, we reject respondent’s argument

that petitioner did not raise the rejection of his offer-in-compromise at the hearing.

      In reviewing the Appeals Office’s determination for abuse of discretion, we

review the underlying reasoning to decide whether it was arbitrary, capricious, or

without sound basis in fact or law. See Murphy v. Commissioner, 125 T.C. 301,

320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006). As noted above, during the Appeals

hearing Ms. Crear indicated to petitioner that he would be permitted the time to file

his 2009 tax return on April 15, 2010, and that he would thereafter have time to

update his Form 433-A with the numbers from his return. Not only was petitioner’s

request for that additional time reasonable, but Ms. Crear assented to it.

Nevertheless, on April 16, 2010, and without contacting petitioner again, Ms. Crear

chose to issue the notice of determination on the basis that she had not yet received

the requested documentation from petitioner. Her timing contradicted

representations she made to petitioner, and the record contains nothing that would

explain her failure to contact him before issuing the notice of determination. Ms.

Crear never evaluated the merits of petitioner’s offer-in-compromise. Because we
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considered Ms. Crear’s failure to wait for the information requested from petitioner

before proceeding with her determination arbitrary and capricious, we ordered a

remand of this case to respondent’s Appeals Office to consider petitioner’s offer-in-

compromise.

      After examination of respondent’s supplement to the record, it appears that

the sole basis for respondent’s determination to reject petitioner’s offer-in-

compromise is an unnamed revenue agent’s bald assertion that petitioner is being

paid in cash and not reporting his income. Petitioner disputes the statement of the

revenue agent, and he contends that the additional liabilities stemming from the IRS

examination of his returns for the years in issue were made on the basis of

adjustments to his deductions, not on the basis of unreported income. Additionally,

petitioner notes that respondent has provided no evidence supporting the revenue

agent’s statement.

      It is unclear from the record on what grounds the revenue agent reached his

conclusion that petitioner has unreported income, and it is unclear what, if

anything, the revenue agent provided to Mr. Kennedy that led Mr. Kennedy to rely

on the revenue agent’s assertion. Moreover, it appears that the revenue agent has

had no contact with petitioner for at least four years, leading us to question how he

can be so confident of petitioner’s recent failure to report his income. Suffice it to
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say that we do not consider Mr. Kennedy’s reliance on the revenue agent’s bald

assertion to constitute a sound basis in fact. Accordingly, we conclude that the

Appeals Office abused its discretion when it rejected petitioner’s offer-in-

compromise in reliance on the revenue agent’s assertion.

      Additionally, we question Ms. Crear’s insufficient review of petitioner’s case.

It was apparently so cursory that she misidentified the source of his liabilities,

stating that they stemmed from self-assessments on his returns instead of from an

examination. Because Ms. Crear made such a basic error, we question how

thoroughly she reviewed petitioner’s case. We also are troubled by the

determination of the IRS offer-in-compromise specialist, when he initially reviewed

petitioner’s offer-in-compromise, to consider petitioner’s credit card limit as “equity

in assets”.

      On the basis of the foregoing, we hold that it was an abuse of discretion for

respondent’s Appeals Office to reject petitioner’s offer-in-compromise.

Consequently, we will remand this case to the Appeals Office to clarify the record

as to what respondent’s employees relied on to determine that petitioner currently

has cash income that he is not reporting. On remand, we expect the Appeals

Office to articulate the facts on which they based their determination to reject

petitioner’s offer-in-compromise. If the Appeals Office fails to do so or if we
                                         - 15 -

deem the facts articulated not to constitute a sound basis in fact, we will be inclined

to rule in favor of petitioner and order the NFTL withdrawn.

      In reaching these holdings, we have considered all of the parties’ arguments,

and, to the extent not addressed herein, we conclude that they are moot, irrelevant,

or without merit.

      To reflect the foregoing,


                                             An appropriate order will be issued.
