                          T.C. Memo. 2004-229



                        UNITED STATES TAX COURT



              MITCHELL F. SKRIZOWSKI, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9652-02L.               Filed October 7, 2004.


     Aline H. Lotter, for petitioner.

     Carina J. Campobasso, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:     Pursuant to section 6330(d),1 petitioner

seeks review of respondent’s determination to leave the notices

of liens for petitioner’s 1986, 1987, 1988, 1989, and 1992 tax

liabilities in place.


     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                - 2 -

                          FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    At the time he filed the

petition, petitioner resided in Manchester, New Hampshire.

Petitioner’s Activities Before 1990

     During and prior to 1989, petitioner was in the business of

buying, selling, and renting real estate.    In 1989, the number of

vacancies in petitioner’s real estate increased.    Petitioner sold

his home and exhausted all of his cash, but was unable to pay the

mortgages on the real estate he owned.    The real estate was

foreclosed upon.    Around this time, petitioner and his wife

separated.

Respondent’s Assessments and Attempt To Collect Taxes

     Around 1990, petitioner received a letter from the Internal

Revenue Service (IRS) that stated he owed $250,000 in taxes for

1987.    Around September 1991, Revenue Officer Boyd Chivers was

assigned to collect taxes from petitioner and Lafayette Oil Co.2

Mr. Chivers’s concerns were that petitioner was not filing

returns and was not declaring money that he earned.     At that



     2
        Petitioner purchased Lafayette Oil Co. for $50,000, and,
in 1989, sold it to Robert Hicks. Mr. Hicks paid petitioner
$25,000 and promised to pay petitioner $5,000 per month for 5
years. Mr. Hicks never made any of the $5,000 payments.
Respondent’s collection actions concerning taxes owed by
Lafayette Oil Co. are not in issue in this proceeding.
                                - 3 -

time, petitioner was not filing tax returns because he was no

longer earning any money.

     Mr. Chivers told petitioner that he had to file a 1989

income tax return.    Petitioner advised Mr. Chivers that he had no

books or records, and he did not recall how much money he earned

in 1989.   Mr. Chivers instructed petitioner to estimate on the

high side and report an amount large enough to cover the amount

petitioner had earned.   Mr. Chivers informed petitioner that he

could go to jail if he did not file a return for 1989.

     Petitioner prepared an income tax return for 1989 (1989

return).   The only entries on the 1989 return were:   Petitioner

listed two of his children as dependents; line 7, Wages,

salaries, tips, etc., has $1 million written in and scribbled

out; line 12, Business income, lists $5 million; line 31,

adjusted gross income, lists $5 million; page 2 is blank except

for petitioner’s signature, the date is listed as “9/19/91”, and

petitioner’s occupation is listed as unemployed; and the Schedule

C, Profit or Loss From Business, lists $5 million of gross

receipts or sales, no cost of goods sold, and no expenses.

Petitioner listed $5 million in income on the 1989 return because

he was drunk, he was intimidated by Mr. Chivers, and he did not

want to go to jail.
                               - 4 -

     Petitioner gave Mr. Chivers the 1989 return.    It was obvious

to Mr. Chivers that petitioner did not earn the amount of money

reported on the 1989 return and that he was drunk.

     On April 7, 1992, respondent assessed income tax, penalties,

and interest with respect to petitioner’s 1986, 1987, and 1988

tax years.   Petitioner had the opportunity to petition the Tax

Court for 1986, 1987, and 1988, but he chose not to because he

lacked the money to contest the proposed deficiencies.

     On May 11, 1992, based upon the 1989 return filed on October

4, 1991, respondent assessed $1,398,726 in income tax, a

$349,681.50 penalty, and $397,559.58 in interest with respect to

petitioner’s 1989 tax year.

     On September 4, 1992, respondent filed notices of Federal

tax liens regarding petitioner’s 1986, 1987, 1988, and 1989 tax

years (1992 liens).   Although the IRS tried to collect these

taxes from petitioner, Mr. Chivers concluded that petitioner had

no assets, placed petitioner’s case in uncollectable status, and

closed the case.

     On September 20, 1993, based upon a return filed by

petitioner for 1992 listing $1,799.18 in adjusted gross income,

respondent assessed $75.89 in income tax, a $2.27 penalty, and

$2.33 in interest with respect to petitioner’s 1992 tax year.
                                - 5 -

Petitioner’s Activities During the Mid-1990s

     In the mid-1990s, petitioner obtained employment renovating

buildings.    Old friends unable to sell their properties offered

those properties to petitioner.    The properties were placed into

one of three trusts (three trusts):     Pangia Trust, Joshua

Irrevocable Trust, or Good Apple Trust.     The trustees were a

friend of petitioner’s family and/or one of petitioner’s

children.    The beneficiaries were petitioner’s three children.

Petitioner’s Disability and Deteriorating Health

     Petitioner has been ruled permanently and totally disabled.

He collects approximately $1,400 per month of disability income

from Social Security.

     In 1999, petitioner was diagnosed with hepatitis C.       He has

been hospitalized for jaundice, and he has cirrhosis of the

liver.   Petitioner’s prognosis was that he had approximately a 75

percent chance of developing cancer within 5 years.     Petitioner

wanted to resolve his problems with the IRS while he was still

somewhat healthy.

Petitioner’s Submission of an Offer-In-Compromise

     On or about March 16, 2000, petitioner submitted an offer-

in-compromise (OIC) seeking to compromise his 1986, 1987, 1988,

1989, and 1992 Federal income tax liabilities for $5,000.

Petitioner submitted the OIC on the grounds of doubt as to

collectability.    Offer Specialist John Mahalaris was assigned to

investigate the OIC.
                                 - 6 -

     On January 10, 2001, Mr. Mahalaris spoke with Elizabeth

Lorsbach, an attorney at the law firm of Lotter and Bailin, P.C.

She advised him that petitioner was drunk when he submitted the

1989 return, that Mr. Chivers told petitioner that he had to file

a return for 1989 before Mr. Chivers could do anything to help

him, that petitioner did not receive $5 million, and that

petitioner was destitute.

     On January 24, 2001, Mr. Mahalaris was advised by Mr.

Chivers that petitioner’s case was put in uncollectable status.

Mr. Chivers told Mr. Mahalaris that he (Mr. Chivers) did not

believe that the $5 million listed on the 1989 return was real in

the first place.

         On April 17, 2001, Mr. Mahalaris filed four notices of

Federal tax lien identifying the three trusts and Pangia Asset

Management Corp. as petitioner’s nominees3 (nominee liens).       The

nominee liens covered the income tax years 1986, 1987, 1988,

1989, and 1992.4    The total unpaid balance listed on the nominee

liens was $6,143,276.23, of which $4,341,486.84 was attributable

to 1989.     That same day, respondent sent petitioner a notice

pursuant to section 6320 advising him of the filing of the

     3
        We use the term “nominee” throughout the opinion for
convenience only. We make no findings regarding whether the
three trusts or the corporation were nominees of petitioner.
     4
        One of the nominee liens mistakenly refers to 1996
instead of 1986.
                               - 7 -

nominee liens and his right to a hearing (hearing notice).    At

the time he received the hearing notice, petitioner was receiving

chemotherapy treatments.

     On May 9, 2001, Mr. Mahalaris rejected petitioner’s OIC.

Section 6330 Hearing and Determination

     On May 17, 2001, petitioner timely filed a Form 12153,

Request for a Collection Due Process Hearing, regarding his

1986,5 1987, 1988, 1989, and 1992 tax years (hearing request).

In the hearing request, petitioner:    Disputed the nominee status

of the trusts and corporation; noted that the IRS had placed

petitioner in uncollectable status; disputed the amount

respondent claimed petitioner owed because he lacked an

opportunity to dispute the amount earlier; and noted that the $5

million figure listed on the 1989 return was not correct.      On

July 20, 2001, petitioner’s case was assigned to Settlement

Officer Michael G. Blais.   On January 14, 2002, Mr. Blais made

the following entry into his case activity record:

“Notwithstanding nominee issues there still appears to be a

reasonable collection potential figure far below the full

balance”.



     5
        The hearing request lists “12/31/96” as one of the tax
periods in issue; however, this appears to be either a
typographical error that respondent treated as referring to 1986
or based upon respondent’s error contained in the nominee liens.
                               - 8 -

     On January 29, 2002, Mr. Blais conducted a section 6330

hearing (hearing) with petitioner’s representatives--Ms. Lotter

and Scott O’Connell.   Mr. Blais never spoke to petitioner.     At

the hearing, Mr. Blais considered the 1989 return.   On its face,

the 1989 return appeared unusual to Mr. Blais.    Mr. Blais advised

petitioner’s representatives that he could not adjust or abate a

tax without evidence as to the amount of petitioner’s true income

for 1989.   Petitioner’s representatives advised Mr. Blais that

petitioner had no books or records for 1989 and also disagreed

with the nominee liens.

     The focus of the hearing, however, was whether petitioner’s

case could be settled through an OIC; i.e., petitioner proposed

an OIC as a collection alternative.    Petitioner suggested a

compromise consisting of a percentage of the equity of the

properties held in the three trusts.    Mr. O’Connell stated that

he could provide Mr. Blais with information that would help Mr.

Blais determine a settlement figure (via an OIC).    Petitioner was

willing and prepared to present any documents Mr. Blais needed.

     On January 29, 2002, Mr. Blais made the following entry into

his case activity record:   “best case scenario on nominee leaves

about 77K collectible * * * Ms. Lotter to determine if t/p can

raise add’l funds for OIC in projected settlement range with

hazards figured in”.
                               - 9 -

     On March 29, 2002, Mr. O’Connell provided documents to Mr.

Blais.   Mr. Blais concluded that an OIC was possible, but

additional investigation was necessary and needed to be done at a

“lower level”.   Mr. Blais did not feel comfortable determining a

settlement figure.   That same day, Mr. Blais wrote petitioner’s

attorneys:

     I can state with reasonable certainty that sufficient
     resources do not appear to exist to liquidate the full
     amount of the delinquent tax liability. Although, an
     Offer in Compromise appears to be a likely method of
     resolving the dispute; the information submitted so far
     is not adequate to quantify an amount or a range of
     amounts that appear acceptable. In order to fully
     exhaust this method of resolution I propose to return
     the Offer in Compromise portion of my case to the
     Compliance function so they can fully develop and
     quantify an equity/asset position. If an agreement
     cannot be reached at that level the Offer may receive
     additional consideration from Appeals.

The letter concluded:   “The complex nature and numerous

transactions regarding the Offer in Compromise warrant additional

investigative work by the Compliance function prior to a

resolution acceptable by both parties.”   Mr. Blais sent the OIC

to the “OIC group” for additional investigation.

     On April 10, 2002, Mr. Blais prepared an Appeals case

memorandum.   In the Appeals case memorandum, Mr. Blais wrote:

“There is no evidence that the taxpayer had 5 million dollars to

purchase trust property and finance the business dealings” and

that bankruptcy proceedings “did not uncover any assets or cash

that might have been available to start the type of entities now
                              - 10 -

uncovered.”   The Appeals case memorandum concluded:    “Hazards to

the governments’ [sic] position appear to exist and there appears

to be some grounds for settlement * * *   Any percentage based

settlement is clearly beyond the reach of the taxpayer based on

the total balance of tax due and his relative inability to pay.”

     On May 9, 2002, respondent issued a Notice of Determination

Concerning Collection Action(s) Under Section 6320 and/or 6330 to

petitioner regarding his 1986, 1987, 1988, 1989, and 1992 tax

years (notice of determination).   In the notice of determination,

respondent determined that the liens filed on or about April 9,

2001,6 were appropriate and “will remain in full force and effect

until satisfied or unenforceable by law.”

     In discussing the OIC as a collection alternative, the

attachment to the notice of determination (the attachment) noted:

“While it appears clear that the taxpayer does not have the

ability to liquidate the full amount of $7,000,000 a reasonable

amount could not be calculated” and “additional investigation is

required to determine an acceptable offer amount.”     The

attachment further noted that the OIC was returned to the

compliance function for additional research and calculation.     The

attachment also stated that petitioner disputed the $5 million

figure listed on the 1989 return, respondent had previously coded



     6
        It is unclear why the date was listed as Apr. 9, 2001,
instead of Apr. 17, 2001.
                               - 11 -

petitioner’s account “currently not collectible”, and petitioner

disputed that the trusts and corporation are the nominees of

petitioner.

     On September 25, 2002, respondent mailed petitioner’s OIC

back to him.   The OIC is stamped in the upper left hand corner

“RETURNED”.    A letter from Philip W. Sullivan, OIC Group Manager,

explained the reason the IRS was “returning” petitioner’s OIC:

     The offer in compromise can not [sic] be considered
     since the taxpayer has petitioned the Tax Court for
     review of the liabilities that are subject of the offer
     in compromise. The collection potential analysis that
     must be performed in evaluating the taxpayer’s offer
     may change based on the outcome of the Tax Court case.

Petitioner’s transcripts of account for 1986, 1987, 1988, 1989,

and 1992 list the OIC as “rejected” on this same date.

                               OPINION

I.   Sections 6320 and 6330--General Legal Principles

     Section 6320 provides that the Secretary shall furnish the

person described in section 6321 with written notice (i.e., the

hearing notice) of the filing of a notice of lien under section

6323.   Section 6320 further provides that the taxpayer may

request administrative review of the matter (in the form of a

hearing) within a 30-day period.   The hearing generally shall be

conducted consistent with the procedures set forth in section

6330(c), (d), and (e).   Sec. 6320(c).

     Pursuant to section 6330(c)(2)(A), a taxpayer may raise at

the section 6330 hearing any relevant issue with regard to the
                                 - 12 -

Commissioner’s collection activities, including spousal defenses,

challenges to the appropriateness of the Commissioner’s intended

collection action, and alternative means of collection.         Sego v.

Commissioner, 114 T.C. 604, 609 (2000); Goza v. Commissioner, 114

T.C. 176, 180 (2000).      If a taxpayer received a statutory notice

of deficiency for the years in issue or otherwise had the

opportunity to dispute the underlying tax liability, the taxpayer

is precluded from challenging the existence or amount of the

underlying tax liability.     Sec. 6330(c)(2)(B); Sego v.

Commissioner, supra at 610-611; Goza v. Commissioner, supra at

182-183.

      When the Commissioner issues a determination regarding a

disputed collection action, section 6330(d) permits a taxpayer to

seek judicial review with the Tax Court or a U.S. District Court,

as is appropriate.   If the underlying tax liability is properly

at issue, we review that issue de novo.      Sego v. Commissioner,

supra at 610; Goza v. Commissioner, supra at 181.      If the

validity of the underlying tax liability is not at issue, we

review the Commissioner’s determination for an abuse of

discretion.   Sego v. Commissioner, supra at 610.

II.   Standard of Review

      A.   Petitioner’s 1986, 1987, 1988, and 1992 Tax Years

      Petitioner had the opportunity to petition the Court for

1986, 1987, and 1988; however, he chose not to.     Accordingly,
                               - 13 -

petitioner cannot contest the underlying liabilities for 1986,

1987, and 1988.    Sec. 6330(c)(2)(B); Sego v. Commissioner, supra;

Goza v. Commissioner, supra at 182-183.    Additionally, petitioner

did not question his underlying liability for 1992.    Accordingly,

we shall review respondent’s determinations for 1986, 1987, 1988,

and 1992 for an abuse of discretion.

     B.     Petitioner’s 1989 Tax Year

     Petitioner did not receive a statutory notice of deficiency

for 1989.    Respondent assessed petitioner’s 1989 tax based on the

1989 return.    Petitioner raised the issue of his underlying

liability for 1989 in his hearing request and at the hearing.

     Respondent argues that the underlying tax liability for 1989

is not at issue as petitioner did not raise it in the petition.

We conclude that the language of the petition is broad enough to

raise the issue of petitioner’s underlying liability for 1989.

In the petition, petitioner stated that he listed $5 million on

the 1989 return under duress and that $5 million did not

accurately reflect his income for 1989.    Furthermore, even if it

was not raised in the petition, the issue was tried by consent.7



     7
        When issues not raised by the pleadings are tried by
implied consent of the parties, the issues shall be treated as if
they had been raised in the pleadings. Rule 41(b). Parties
satisfy Rule 41(b) when they introduce the issue at trial and
acquiesce in the introduction of evidence on that issue without
objection. LeFever v. Commissioner, 103 T.C. 525, 538-539
(1994), affd. 100 F.3d 778 (10th Cir. 1996); see also Hardin v.
Manitowoc-Forsythe Corp., 691 F.2d 449, 456 (10th Cir. 1982).
                                 - 14 -

Rule 41(b).     Accordingly, petitioner’s underlying liability for

1989 is properly before the Court, and we review that issue de

novo.8     See Sego v. Commissioner, supra; Goza v. Commissioner,

supra.     We shall review the remainder of respondent’s

determination for 1989 for an abuse of discretion.     Sego v.

Commissioner, supra.

III. Underlying Tax Liability

      The evidence establishes that petitioner did not receive $5

million in business income in 1989.

IV.   Abuse of Discretion

      A.     Evidentiary Issue

      Respondent argues that we should be limited to the

administrative record in deciding whether the settlement

officer abused his discretion.     At trial, respondent objected to

the introduction of evidence offered by petitioner to prove an

abuse of discretion where that evidence was not provided to the

settlement officer.     The Court noted respondent’s objection but

allowed testimony to proceed.     On brief, however, respondent

stated that the Court should consider the testimony of the




      8
        We note that at the time he filed the petition and as of
the date of trial, we had not ruled whether in sec. 6330 cases
taxpayers could challenge the existence or amount of a tax
liability reported on their original return (as is the case
herein). In Montgomery v. Commissioner, 122 T.C. 1 (2004), we
held that in sec. 6330 cases taxpayers can dispute tax
liabilities reported on their original return.
                               - 15 -

settlement officer even though it is not part of the

administrative record.

       In Robinette v. Commissioner, 123 T.C. 85 (2004), we held

that when reviewing the Commissioner’s determination pursuant to

section 6330 the evidence we may consider is not limited to the

administrative record.    For the reasons stated in Robinette,

respondent’s objection is overruled.     Id.

       B.   The Controversy Before The Court

       Petitioner claims that the settlement officer’s sustaining

the nominee liens was an abuse of discretion.    Petitioner argues

that we should also review respondent’s return/rejection of the

OIC.    Petitioner claims that the OIC was a collection alternative

that was raised and considered during the hearing.    Petitioner

argues that respondent abused his discretion in his determination

to “reject” the OIC by proceeding with collection while

“reconsideration” of the OIC was pending.

       Respondent contends that the only issue before us is the

sustaining of the nominee liens, and petitioner lacks standing to

challenge respondent’s determination on this issue.    Respondent

claims that the settlement officer was assigned two separate

requests for Appeals consideration:     (1) The section 6330 hearing

(regarding the nominee liens), and (2) the appeal of respondent’s

rejection of the OIC.    Respondent asserts that the settlement

officer’s decision to return the OIC to Compliance for additional
                              - 16 -

research was separate and apart from the hearing and the Court

does not have jurisdiction over this action.   Respondent argues

that although Compliance subsequently returned the OIC to

petitioner, petitioner cannot contest the return of the OIC by

Compliance because the Court does not have jurisdiction to review

Compliance’s “determination” to return the OIC.   Respondent

alternatively9 contends that the issue before the Court is

whether the settlement officer abused his discretion in returning

the OIC to Compliance.

     As discussed below, we conclude that we can review

respondent’s determination regarding the OIC; i.e., to leave the

nominee liens in place, and essentially reject the OIC, while the

OIC was supposed to be investigated further.

     C.   Petitioner Raised the OIC as a Collection Alternative

     Respondent admits that at the hearing petitioner proposed

consideration of the OIC, and petitioner submitted additional

information to support the OIC.   Mr. Blais, the settlement

officer who conducted the hearing, testified that the focus of

the hearing was whether petitioner’s case could be settled

through an OIC.

     We conclude that pursuant to section 6330(c)(2)(A)(iii)

petitioner raised the OIC as a collection alternative at the



     9
        Although respondent did not do so, we characterize this
as an alternative argument.
                               - 17 -

hearing.    Accordingly, we conclude that respondent’s

determination included consideration of this issue.10     Sec.

6330(c)(3)(B) (the determination shall take into consideration

the issues raised under section 6330(c)(2)--which includes offers

of collection alternatives including OICs).     Accordingly, we

shall review whether respondent’s determination regarding the OIC

was arbitrary, capricious, or without sound basis in fact and

law.    Fowler v. Commissioner, T.C. Memo. 2004-163; see Woodral v.

Commissioner, 112 T.C. 19, 23 (1999).

       D.   Did Respondent Abuse His Discretion Regarding the OIC?

            1.   The OIC Was Not Fully Investigated

       Petitioner claims that the OIC was not fully investigated

before it was essentially rejected.     We agree.   Mr. Blais

admitted that the OIC needed further investigation before a

decision on the OIC could be made because of its complexity and

the lack of sufficient information to evaluate the OIC.      Mr.

Blais, in fact, returned the OIC for further investigation.

Respondent, however, determined to leave the nominee liens in

place before the further investigation of the OIC was completed.




       10
        If respondent’s determination did not include
consideration of this issue, respondent would have abused his
discretion by failing to follow the express provisions of sec.
6330 which require respondent to consider all issues raised at
the hearing, including collection alternatives such as OICs, in
making his determination.
                                 - 18 -

            2.   Respondent Did Not Base His Determination on
                 Petitioner’s Ability To Pay

     Petitioner is disabled and has a limited life expectancy.

Respondent determined to leave the nominee liens in place when

Mr. Blais indicated that in a best case scenario resolution of

petitioner’s case for a figure of more than $80,000 was

unreasonable.    Respondent made this determination regarding the

nominee liens even though Mr. Blais specifically noted--before

and after the hearing--that settlement for less than $80,000 was

the best option.

     Respondent’s determination was not based on a financial

analysis of petitioner’s income, assets, and allowable expenses

and his ability to pay.    See Schulman v. Commissioner, T.C. Memo.

2002-129.   Respondent did not give due consideration to

collection alternatives.      See id.

            3.   Conclusion

     For the reasons stated supra, we conclude that the

determination to leave the nominee liens in place for the years

in issue was an abuse of discretion.11    In reaching all of our


     11
        As we hold that respondent abused his discretion in
determining that the OIC was not an acceptable collection
alternative, we need not reach the issue of whether petitioner
has standing to challenge the filing of the nominee liens. We
note that the decision of the District Court in Skrizowski v.
Commissioner, 292 F. Supp.2d 277 (D.N.H. 2003), regarding the
nominee liens and the responsible person penalty, is not a final
decision (it is currently on appeal to the U.S. Court of Appeals
for the First Circuit). See Johnston v. Commissioner, 119 T.C.
                                                   (continued...)
                             - 19 -

holdings herein, we have considered all arguments made by the

parties, and to the extent not mentioned above, we find them to

be irrelevant or without merit.

     To reflect the foregoing,



                                        Decision will be entered

                                   for petitioner.




     11
      (...continued)
27 (2002); Toney v. Commissioner, T.C. Memo. 2003-333; Strong v.
Commissioner, T.C. Memo. 2001-103. Additionally, unlike in the
case at bar, petitioner did not raise the issue of the
OIC/collection alternatives in the complaint in the District
Court case. Skrizowski v. Commissioner, supra at 279, 281 (“The
sole remedy sought in the complaint in this action is an order to
release these liens on real estate of third parties.”).
Furthermore, respondent does not contend that petitioner lacks
standing regarding the OIC/collection alternative issue.
