                    T.C. Memo. 2009-86



                  UNITED STATES TAX COURT



DAVID HARRIS SHER AND CATHERINE GAIL NEMSER, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



 Docket No. 27548-07L.            Filed April 28, 2009.



      In April 1999 Ps requested an extension of time to
 file their 1998 Federal income tax return and
 separately submitted a $70,000 estimated tax payment.
 Although Ps’ 1998 return includes signature dates in
 July 1999, R did not receive the return until 2004. R
 assessed the tax reflected on the return, along with
 additions to tax and interest, in 2004.

      In October 2000 Ps filed their 1999 return and
 paid their 1999 taxes in full. In November 2000, R
 refunded the $70,000 estimated tax payment that R
 received in April 1999 and had credited to Ps’ account
 for 1999.

      After receiving a notice of deficiency for 2000,
 Ps filed a 2000 return. R processed this return and
 assessed tax, additions to tax, and interest in
 December 2002. Ps later conceded that they omitted
 income from their 2000 return and agreed to an
 additional assessment.
                              - 2 -

          Ps submitted an offer-in-compromise (OIC) seeking
     relief based upon doubt as to collectibility and doubt
     as to liability, and R rejected it. R’s Appeals Office
     sustained the rejection and rejected a second OIC,
     affirming that Ps’ reasonable collection potential
     exceeded the amounts offered and concluding that Ps’
     liability was properly determined and assessed.

          R filed a Federal tax lien and notified Ps. Ps
     requested a CDP hearing, seeking relief from interest
     and penalties. R’s settlement officer sustained the
     filing of the Federal tax lien.

          Held: R’s determination is sustained, and Ps are
     not entitled to any abatement of interest.



     David Harris Sher and Catherine Gail Nemser, pro sese.

     Frederick C. Mutter, for respondent.



                       MEMORANDUM OPINION


     PANUTHOS, Chief Special Trial Judge:   This case is before

the Court on petitioners’ request for judicial review of an

Internal Revenue Service (IRS) determination to sustain a Federal

tax lien filing.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code, as amended.

                           Background

     Some of the facts have been stipulated, and we so find.

Petitioners resided in New York when they filed the petition.

Petitioners were married at all relevant times, and they filed

joint Federal income tax returns for each year in issue.
                                - 3 -

     On April 15, 1999, the IRS received petitioners’ request for

an extension of time to file their Federal income tax return for

taxable year 1998.   On April 22, 1999, the IRS received a $70,000

estimated tax payment from petitioners.   Petitioners mailed the

estimated tax payment separately from the extension request and

did not direct the IRS to apply the $70,000 to any particular tax

year.   The IRS applied the estimated tax payment toward

petitioners’ account for taxable year 1999.

     The record includes petitioners’ 1998 Form 1040, U.S.

Individual Income Tax Return.   Petitioners’ return preparer dated

this return July 6, 1999, and petitioners dated their signatures

July 10, 1999.   The return reports total tax due of $86,417,

withholding credits of $5,803, estimated tax payments of $70,000,

and a balance due of $10,614.   IRS records reflect petitioners’

1998 extension request and the 1998 withholding credit on April

15, 1999.   However, IRS records further reflect that the IRS

received and processed petitioners’ 1998 return on February 26,

2004.   The IRS assessed tax, additions to tax, and interest as

follows:

     Total tax for 1998                       $86,417.00
     Failure to file addition to tax           18,138.15
     Failure to pay addition to tax            20,153.50
     Interest                                  40,111.38

     Petitioners filed their 1999 Federal income tax return, with

an extension, on October 12, 2000, and included full payment of
                              - 4 -

their 1999 liability with the return.     On November 20, 2000, the

IRS refunded $70,000 to petitioners as an overpayment for 1999.

     With the $70,000 income tax refund, the IRS included a

statement explaining that the sum of petitioners’ 1999

withholding tax credits and the payment submitted with the 1999

return exactly equaled their 1999 tax liability.    The statement

listed a $70,000 estimated tax payment made on April 22, 1999,

and credited toward taxable year 1999.1

     On receipt of the $70,000 income tax refund check in

November 2000, petitioners called the IRS to ask whether there

had been some mistake and whether they should cash the check.

Apparently because the IRS computer system did not have any

record of a liability for 1998 (because the IRS had not yet

received or processed a return from petitioners for 1998), an IRS

employee told petitioners that the IRS did not have any record of

petitioners’ having any outstanding liability, that petitioners

had overpaid their 1999 taxes, and that the refund was valid.

Petitioners did not inform the IRS at any time before cashing the

refund check that they wanted the IRS to apply that $70,000

payment to their account for 1998 rather than 1999.

     The IRS issued petitioners a notice of deficiency for

taxable year 2000, after which petitioners filed a Form 1040 for


     1
       Petitioners’ only estimated tax payment in 1999 was the
$70,000 payment the Internal Revenue Service (IRS) received April
22, 1999, and credited toward petitioners’ account for 1999.
                                - 5 -

2000.   The IRS received this late-filed return on August 3, 2002,

processed it, and assessed the following on December 9, 2002:

     Total tax for 2000                        $22,768.00
     Failure to file addition to tax             3,561.30
     Failure to pay addition to tax              1,187.10
     Interest                                    1,268.93

     On December 31, 2002, the IRS informed petitioners that

their late-filed 2000 return failed to include certain income.

Petitioners ultimately agreed with the IRS that they

underreported their income for 2000, and they agreed to the

assessment of additional tax, additions to tax, and interest.

The IRS assessed the following on December 8, 2003:

     Additional   tax assessed for 2000              $20,006.00
     Additional   failure to file addition to tax      8,767.25
     Additional   failure to pay addition to tax         838.40
     Additional   interest                             4,524.74


     Petitioners submitted a Form 656, Offer in Compromise (OIC),

dated January 10, 2004, in response to the IRS’s determination of

unreported income on petitioners’ 2000 tax return.    This OIC does

not state which liabilities petitioners sought to compromise, but

petitioners offered $17,000 and claimed as grounds for compromise

both doubt as to collectibility (DATC) and doubt as to liability

(DATL).   It appears from the record that the IRS informed

petitioners that this OIC could not be processed because the IRS

did not have any record of petitioners’ filing a tax return for

1998.   Petitioners then submitted a 1998 Form 1040, which the IRS

processed on February 26, 2004.
                               - 6 -

     Petitioners submitted another OIC in March 2004, again

offering to pay $17,000 and claiming both DATC and DATL, but this

time listing tax years 1998 and 2000.   They explained in a letter

to the IRS that it had erroneously applied the $70,000 estimated

tax payment they made in April 1999 to taxable year 1999 and

erroneously refunded that amount to petitioners in November 2000.

Petitioners also explained that they had a large net operating

loss (NOL) that they proposed carrying back to offset their 1998

liability.

     On January 3, 2005, the OIC reviewer informed petitioners

that if there was an error with the application or refund of the

estimated tax payment, petitioners might avoided some penalties

and interest if they had taken action to inform the IRS of the

error when it occurred rather than accepting the refund and

cashing the check.   The OIC reviewer advised petitioners that the

IRS could not agree to petitioners’ proposal to reduce their NOL

by the amount of the refunded estimated tax payment.   He also

informed petitioners that they were not entitled to relief under

either DATC or DATL and that formal notification of the rejection

of their offer would follow.

     On March 1, 2005, the IRS rejected petitioners’ OIC.   The

OIC rejection letter recited that an analysis of petitioners’

ability to pay dictated rejecting the $17,000 offer because

petitioners’ reasonable collection potential (RCP) was
                               - 7 -

$161,708.07.   The letter also explained that petitioners did not

present any information indicating that the amount of tax

assessed for 1998 or 2000 was incorrect; rather, petitioners

claimed they were not liable for interest and penalties which

accrued on the $70,000 portion of their 1998 tax liability that

they intended to pay.   The letter further stated that “Your

failure to return this refund contributed to the accrual of

penalties and interest.”   The IRS considered both collectibility

and liability in rejecting petitioners’ OIC.

     Petitioners timely appealed the rejection of their OIC,

challenging the DATC and the DATL conclusions.   They complained

of two IRS errors:   Refunding the $70,000 estimated tax payment;

and telling petitioners they had no tax liability.   Petitioners

also complained that the IRS notified them about the taxes due

for 1998 nearly 5 years after they made the estimated tax payment

in April 1999.   Petitioners sought relief from interest and

additions to tax due to the passage of time and due to the errors

they ascribe to the IRS.   Petitioners also argued that the IRS

collectibility calculations did not properly account for the

legitimate expenses of living in New York.

     In November 2005, apparently as part of the appeal of the

rejection of their $17,000 OIC, petitioners offered $28,000 to

settle their liabilities for 1998 and 2000, again asserting DATC

and DATL.   Petitioners made arguments similar to those in their
                                 - 8 -

OIC appeal, and they did not assert that they filed their 1998

tax return before February 2004.

     On February 9, 2006, the IRS Appeals Office determined that

the tax liability was legally due and that petitioners’ RCP was

$139,277.   Appeals noted that the 1998 return was filed February

26, 2004, well after petitioners fully paid their 1999 taxes and

received the refund and also well after an IRS employee informed

petitioners in 2000 that IRS records indicated that petitioners

did not have any outstanding liability.   Appeals sustained the

rejection of the earlier OIC and rejected the new OIC.

     On April 24, 2007, the IRS mailed a Notice of Federal Tax

Lien Filing and Your Right to a Hearing Under IRC 6320 (filing

notice) to petitioners.   The IRS prepared the tax lien on April

13, 2007, and mailed a notice of Federal tax lien (NFTL) to New

York County on April 18, 2007.    The filing notice states that the

lien was filed on April 17, 2007.2

     Petitioners filed a Form 12153, Request for a Collection Due

Process or Equivalent Hearing, on May 8, 2007, challenging the

lien filing for their liabilities for 1998 and 2000.3    On that

form, petitioners indicated that they sought an OIC as a


     2
       New York County recorded the notice of Federal tax lien on
May 14, 2007.
     3
       The notice of Federal tax lien listed liabilities of
$143,164.03 for 1998, $51,740.72 for 2000, and $956.07 for 2003.
Petitioners did not challenge the lien filing for 2003 in their
collection hearing request.
                                - 9 -

collection alternative and withdrawal of the lien because:     “1)

Notification by IRS was late.   2) Amount assessed is wrong.   3)

We dispute liability for interest and penalties.”

     In an attachment to their collection hearing request,

petitioners asserted that the IRS failed to notify them within 5

days of filing the lien, and they challenged the underlying tax

liability reflected in the filing notice for 1998 and 2000.

Petitioners’ challenge to the underlying liability for 1998

involved the estimated tax payment that the IRS refunded, the

interest and additions to tax on that amount, and the fact that

the IRS did not demand payment of their liability for 1998 until

2004.   Petitioners’ challenge to the liability for 2000 concerned

the application of their subsequent year tax refunds.   They

complain that the IRS applied some of those refunds to 1998 and

some to 2000.   They also asserted that Appeals finally rejected

their OIC on February 9, 2006, but that, as a result of delays in

transferring the file from Appeals to Collections, the IRS did

not send a new tax due bill until March 12, 2007; that they were

told that interest and additions to tax would not accrue during

the OIC process; and that they are not liable for all of the

assessed and accrued interest and additions to tax.

     The settlement officer (SO) assigned to petitioners’

collection hearing instructed petitioners to submit certain

information required for her to consider collection
                              - 10 -

alternative(s).   The SO informed petitioners that she could not

consider challenges to the underlying tax liability for either

1998 or 2000 because petitioners received a notice of deficiency

and/or had prior opportunities to dispute their liability.    She

scheduled a telephone conference with petitioners for October 30,

2007.

     Petitioners did not submit any of the information the SO

requested, and petitioners informed the SO during the collection

hearing that they wished to pursue their case in court.

Following the hearing, the IRS issued a Notice of Determination

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

(notice of determination), dated November 2, 2007.   The SO

recited in the notice of determination that petitioners did not

provide a statement detailing any collection alternative sought

and also did not submit the financial information required for

her to consider collection alternatives.   The SO explained that

she verified that the applicable legal and administrative

procedures were followed in the issuance of the Federal tax lien;

that she considered the issues petitioners raised in their

hearing request and during the conference, and that petitioners’

arguments did not support the IRS’s withdrawing the lien; that

she could not consider challenges to the underlying tax liability

because petitioners had prior opportunities to dispute the

liability at issue; and that she balanced the need for efficient
                               - 11 -

collection with petitioners’ concerns that collection be no more

intrusive than necessary.    The IRS sustained the filing of the

NFTL.

     In their petition, petitioners assert:

     I request a hearing to establish important facts and to
     require the IRS to remove interest and penalties from its
     collection action for the tax year 1998. During the hearing
     I intend to bring evidence of the following problems with
     the IRS collection action. 1) That the IRS in filing for a
     federal tax lien failed to obey proper procedure by not
     notifying me in writing 5 business days after the filing of
     a lien. 2) That the IRS has not provided an accurate
     accounting of liability. 3) That the IRS applied penalties
     and interest charges in a capricious fashion and that it
     cannot account for the numbers. 4) That interest and
     penalties should not have been applied at all considering
     that late payment of 1998 tax bill was due entirely to IRS
     error. 4) That the IRS has on a number of occasions
     misrepresented material facts to us that harmed our
     situation and led to greater liability. (A detailed
     explanation can be found on attached request for due process
     hearing).

     Petitioners alleged at trial that they filed their 1998

return in 1999.    This was the first time this allegation had been

made.    Petitioners also asserted that the IRS failed to timely

notify them of the lien filing, and they sought to challenge the

interest and penalty determinations.4   Petitioners acknowledge

their principal tax liabilities but assert that only reducing the

additions to tax and interest can correct the IRS’s errors.




     4
       As noted, the IRS assessed taxes, interest, and additions
to tax for failure to file and failure to pay. It has not
assessed any penalties for either 1998 or 2000.
                                - 12 -

     The issue for decision is whether respondent abused his

discretion in upholding the filing of the NFTL and denying

petitioners’ request for an abatement of interest.

                              Discussion

     On the record before us, we find that, although petitioners’

1998 return bears signature dates in 1999, petitioners did not

file the 1998 return until 2004.

I.   Review of Collection Determination

     Pursuant to sections 6320(c) and 6330(d)(1), we have

jurisdiction to review the IRS’s determination that the NFTL was

properly filed.

     In reviewing the Commissioner’s decision to sustain

collection actions, where tax liability is properly at issue, the

Court reviews the Commissioner’s determination of tax liability

de novo.   Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v.

Commissioner, 114 T.C. 176, 181-182 (2000).   The Court reviews

determinations regarding proposed collection actions for abuse of

discretion.   Sego v. Commissioner, supra at 610; Goza v.

Commissioner, supra at 182.    An abuse of discretion occurs when

the exercise of discretion is without sound basis in fact or law.

Murphy v. Commissioner, 125 T.C. 301, 308 (2005), affd. 469 F.3d

27 (1st Cir. 2006).

     At the collection hearing, a taxpayer may raise any relevant

issues relating to the unpaid tax or lien filing, including
                               - 13 -

spousal defenses, challenges to the appropriateness of the

collection actions, and offers of collection alternatives.     In

addition, he may challenge the existence or amount of the

underlying tax liability, but only if he did not receive a notice

of deficiency or otherwise have an opportunity to dispute such

liability.    Sec. 6330(c)(2)(B).

      In making a determination following a collection hearing,

the IRS must consider:   (1) Whether the requirements of any

applicable law or administrative procedure have been met, (2) any

relevant issues the taxpayer raised, and (3) whether the proposed

collection action balances the need for efficient collection with

legitimate concerns that the collection action be no more

intrusive than necessary.    Sec. 6330(c)(3).

II.   Procedural Error

      At trial petitioners challenged the timing of the filing

notice, arguing that the IRS failed to notify them within 5 days

of the date the IRS filed the tax lien as required by section

6320(a)(2).

      Although the IRS prepared the tax lien on April 13, 2007,

the filing notice states that the IRS filed the tax lien on April

17, 2007.    The IRS mailed the NFTL to New York County on April

18, 2007.    The IRS then mailed the filing notice to petitioners

on April 24, 2007, which is within 5 business days of both April
                                  - 14 -

17 and April 18.       The IRS properly notified petitioners of the

lien filing.5

III. Challenges to the Underlying Tax Liabilities

       Petitioners submitted an OIC challenging both collectibility

and liability.       The IRS concluded that petitioners could pay more

than the amount of their offer and that the liability, including

additions to tax and interest, had been properly assessed on the

basis of petitioners’ late-filed tax returns.       The IRS rejected

petitioners’ OIC.       Petitioners appealed that rejection.   The

Appeals Office reconsidered the challenges and entertained a new

OIC.       During the appeal the Appeals officer confirmed that the

IRS properly assessed the liabilities and that petitioners’ RCP

exceeded their offer amounts.       Appeals concluded that

petitioners’ offers were not acceptable.

       Section 6330(c)(2)(B) allows a taxpayer to challenge an

underlying tax liability in a collection hearing only if he did

not receive any notice of deficiency for the liability and he did

not otherwise have an opportunity to dispute the underlying tax



       5
       We have made findings as to the relevant dates of the (1)
mailing of the NFTL to New York County, (2) mailing of the lien
filing notice to petitioners, (3) hearing date request by
petitioners, and (4) recordation by New York County. Petitioners
did not argue, nor do we conclude, that petitioners were
adversely affected by the timing of the recording of the notice
of lien since they requested and received administrative review.
Further, they filed a timely petition in response to a notice of
determination and had a full opportunity for judicial review.
See Golub v. Commissioner, T.C. Memo. 2008-122.
                                - 15 -

liability.     We have previously held that where a taxpayer

received a notice of deficiency and did not file a timely

petition, an OIC-DATL made during the later collection hearing

was a challenge to the underlying tax liability.     Thus,

respondent properly refused to consider the underlying tax

liability.     Sec. 6330(c)(2)(B); Baltic v. Commissioner, 129 T.C.

178, 183 (2007).

     For tax year 1998 petitioners did not receive a notice of

deficiency.6    For tax year 2000 petitioners received a notice of

deficiency but did not file a petition with this Court.      For

each tax year petitioners challenged the tax liability with their

OIC-DATL submissions before the collection proceeding.

     It would appear that an OIC-DATL is an opportunity to

dispute the underlying tax liability and that the SO did not

abuse her discretion by not considering this challenge.      Sec.

6330(c)(2)(B); see Baltic v. Commissioner, supra; Lewis v.

Commissioner, 128 T.C. 48 (2007); Sego v. Commissioner, supra at

609-611; Goza v. Commissioner, supra at 180-181, 183-184.

         Even if petitioners could dispute the tax liability as

discussed further below (see discussion on interest abatement),

petitioners’ failure to designate the period to which the $70,000



     6
       The IRS is not required to issue a notice of deficiency
when the assessment is of taxes determined by the IRS or the
taxpayer and based on returns filed by the taxpayer. Montgomery
v. Commissioner, 122 T.C. 1, 8 (2004); see also sec. 6201(a)(1).
                              - 16 -

payment should be applied would result in a denial of

petitioners’ claim for relief.7

IV.   Interest Abatement

      In the attachment to the collection hearing request, which

petitioners also attached to their petition, petitioners seek

relief from interest and additions to tax.8   As discussed,

section 6330(c)(2)(B) appears to foreclose the challenge to the

underlying tax liability, including the additions to tax.9


      7
       Finally, as to petitioners’ complaint that the IRS applied
some of their subsequent year overpayments to offset the 1998
liability when petitioners would have preferred to offset the
2000 liability, sec. 6402(a) allows the IRS to credit any
overpayment to any liability owed by a taxpayer. Petitioners
will not be heard to challenge the IRS’s choice of which
liability to offset. See Kalb v. United States, 505 F.2d 506,
509 (2d Cir. 1974).
      8
       Petitioners assert that the additions to tax and interest
for 1998 should be reduced on account of the erroneous refund of
their $70,000 estimated tax payment. We have found that
petitioners filed their 1998 return in 2004. Respondent assessed
and petitioners have not specifically challenged the failure to
file addition to tax.

     The failure to pay addition to tax accrues at 0.5 percent
per month, to a maximum of 25 percent, from the date prescribed
for payment of such tax. Sec. 6651(a)(2). The maximum failure
to pay addition to tax, therefore, accrues in 50 months.
Petitioners’ 1998 tax payment was due Apr. 15, 1999. More than
50 months have clearly elapsed since Apr. 15, 1999, even
excluding the 19 months during which the IRS held petitioners’
$70,000 estimated tax payment. Respondent has properly assessed
the maximum failure to pay addition to tax.
      9
       As to the additions to tax, even if petitioners could so
challenge, they have not shown reasonable cause or good faith for
their failure to timely file or pay their taxes for 1998 or 2000.
Thus, they are liable for these additions to tax. See sec.
                                                   (continued...)
                               - 17 -

However, we will consider whether the IRS abused its discretion

in refusing to abate any of the interest on petitioners’ 1998 or

2000 liability.   We note that because Congress did not intend the

interest abatement statute to be used routinely, we grant

abatement only “‘where failure to abate interest would be widely

perceived as grossly unfair.’”    Lee v. Commissioner, 113 T.C.

145, 149 (1999) (quoting H. Rept. 99-426, at 844 (1985), 1986-3

C.B. (Vol. 2) 1, 844, and S. Rept. 99-313, at 208 (1986), 1986-3

C.B. (Vol. 3) 1, 208).

     A taxpayer may be entitled to an abatement of interest when

an unreasonable error or delay in an IRS employee’s performing a

ministerial or managerial act causes an error or delay in payment

of tax.   See sec. 6404(e).   Transferring a case between IRS

offices after a request for transfer has been approved and

misplacing a taxpayer’s file are managerial acts; unreasonable

errors or delays in either may be grounds for abatement of

interest.   See Palihnich v. Commissioner, T.C. Memo. 2003-297;

sec. 301.6404-2(c), Examples (1), (6), Proced. & Admin. Regs.

     To qualify for abatement, the taxpayer must show:    (1) An

error or delay by the IRS in performing a ministerial or

managerial act; (2) a correlation between a specific period of

delay in payment and an error or delay by the IRS; and (3) that



     9
      (...continued)
6651(a)(1) and (2).
                                - 18 -

the taxpayer would have paid the tax liability earlier but for

the IRS’s error.     Braun v. Commissioner, T.C. Memo. 2005-221.

     Petitioners identified the period between the final

rejection of their OIC, on February 9, 2006, and the issuance of

a new tax due bill, on March 12, 2007, as a period of

unreasonable delay.10    However, they have not provided any link

between any delay in producing a new tax due bill and their delay

in payment.   Petitioners were well aware of the principal amounts

due for 1998 and 2000, and they knew the amounts of interest and

additions to tax which were due before their filing OICs.     Even

though their attempts to compromise their liabilities had failed,

they did not pay any of these amounts while waiting for a new

bill from the IRS.    Petitioners have not demonstrated that they

would have paid their tax liability for 1998 and 2000 earlier but

for the IRS’s delay in preparing a tax due bill.    See id.

     It would not be unfair to hold petitioners liable for the

interest on their tax liability.    Petitioners are not entitled to

abatement of interest.




     10
       To the extent that petitioners might seek abatement of
interest during the 19 months the IRS had petitioner’s $70,000
estimated tax payment, such abatement is foreclosed by sec.
6404(e)(1) and (2). Petitioners made their estimated tax payment
late and did not challenge the refund in 2000 as erroneous on the
grounds that they intended the IRS to apply the estimated tax
payment to a different year. Finally, their self-serving
testimony is the only evidence they offered of any intent to
apply the $70,000 payment toward tax year 1998.
                                - 19 -

V.   Conclusion

     The notice of determination indicates that the SO considered

relevant issues petitioners raised, whether the IRS met the

requirements of applicable law and administrative procedure, and

whether the proposed collection action balances collection

efficiency and intrusiveness.    Petitioners did not raise any

spousal defenses or pursue any collection alternatives during the

collection hearing.   The SO properly determined that petitioners

were not entitled to challenge the existence or amount of the

underlying tax liability.

     The SO satisfied the requirements of sections 6320 and 6330,

and we conclude that respondent’s decision sustaining the filing

of the NFTL was neither erroneous nor an abuse of discretion.

     In reaching our holdings, we have considered all the

parties’ contentions, and to the extent not addressed herein, we

conclude that they are irrelevant, moot, or without merit.

     To reflect the foregoing,


                                          Decision will be entered

                                     for respondent.
