                         T.C. Memo. 2007-8



                       UNITED STATES TAX COURT



                    WILL K. NG, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3883-05L.               Filed January 16, 2007.



     John Gigounas, for petitioner.

     Andrew R. Moore, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


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

seeks review of respondent’s determination regarding collection

of his 1993, 1994, and 1995 income tax liabilities.    The issue



     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 -

for decision is whether respondent’s determination to proceed

with collection was an abuse of discretion.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.2

The stipulation of facts and the attached exhibits are

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

petition, petitioner lived in San Francisco, California.      As of

February 29, 2000, petitioner owed income taxes and additions to

tax for 1993, 1994, and 1995 of $113,417.14, $24,228.67, and

$18,789.03, respectively.     On January 18, 2000, petitioner filed

a Form 656, Offer in Compromise (OIC), with respondent.      On his

OIC, petitioner proposed to settle his 1993, 1994, and 1995 tax

liabilities with a cash payment of $83,779.    Petitioner submitted

his OIC on the grounds of doubt as to collectibility.      The OIC

stated (in relevant part):

     Item 8 - By submitting this offer, I/we understand and
     agree to the following conditions:

            *      *      *       *      *      *      *

     (d)   I/we will comply with all provisions of the
           Internal Revenue Code relating to filing my/our
           returns and paying my/our required taxes for 5
           years or until the offered amount is paid in full,
           whichever is longer.


     2
        The parties initially stipulated that petitioner’s 1993
tax liability was satisfied by the payment petitioner submitted
with his offer-in-compromise. In their briefs, the parties agree
that this is incorrect. Pursuant to Rule 91(e), we do not treat
that portion of the stipulation as a conclusive admission by
either party.
                                      - 3 -


               *        *        *      *      *      *      *

     (j)   I/we understand that I/we remain responsible for
           the full amount of the tax liability, unless and
           until the IRS accepts the offer in writing and
           I/we have met all the terms and conditions of the
           offer. The IRS will not remove the original
           amount of the tax liability from its records until
           I/we have met all the terms of the offer.

               *        *        *      *      *      *      *

     (o)   If I/we fail to meet any of the terms and
           conditions of the offer and the offer defaults,
           then the IRS may:

           •       immediately file suit to collect the entire
                   unpaid balance of the offer

           •       immediately file suit to collect an amount
                   equal to the original amount of the tax
                   liability as liquidating damages, minus any
                   payment already received under the terms of
                   this offer

           •       disregard the amount of the offer and apply all
                   amounts already paid under the offer against
                   the original amount of the tax liability

           •       file suit or levy to collect the original
                   amount of the tax liability, without further
                   notice of any kind.

     Respondent accepted petitioner’s OIC by a letter dated

February 25, 2000.          That letter stated, in relevant part:

“Please note that the conditions of the offer require you to file

and pay all required taxes for five tax years or the period of

time payments are being made on the offer, whichever is longer.”

The letter also reiterated the language above from Item 8,

paragraph (o) of the OIC.
                                 - 4 -

     Petitioner timely paid the offer amount of $83,779.

Petitioner also timely filed returns and paid the tax owed for

2001, 2003, and 2004.   The dispute in this case focuses on

petitioner’s failure to timely pay his 2002 tax.

     After respondent granted petitioner’s timely requests for

extensions, petitioner timely filed his 2002 Form 1040, U.S.

Individual Income Tax Return, on October 15, 2003.     That return

showed a tax liability of $86,496, payments of $9,849, and a

remaining liability of $77,540.3    With his 2002 return,

petitioner submitted a $15,000 payment and a Form 9465,

Installment Agreement Request.     On the Installment Agreement

Request, petitioner proposed to make payments of $20,000 on the

28th of each month.

     Respondent neither accepted nor rejected petitioner’s

Installment Agreement Request.     At trial, respondent did not

contest petitioner’s assertion that respondent never acted on the

Installment Agreement Request.     Moreover, it is not clear from

the record whether any employee of respondent ever considered

petitioner’s Installment Agreement Request.

     On November 14, 2003, respondent sent petitioner a letter

stating that, as part of his OIC, petitioner agreed to timely

file returns and pay his income taxes for 5 years following the



     3
        The figure of $77,540 includes an estimated tax penalty
of $893.
                                 - 5 -

date respondent accepted the offer.      The letter warned petitioner

that he needed to pay his remaining 2002 tax liability of

$71,984.36 within 30 days “to prevent termination of * * * [his]

Offer In Compromise.”    The letter stated that if petitioner did

not comply, respondent would terminate the OIC and would

reinstate the original amount of the compromised liability,

reduced for the payment petitioner had already made.

     That letter apparently never reached petitioner and was

returned to respondent by the Postal Service.     Respondent sent a

nearly identical letter containing the same warnings to

petitioner at his new address on December 10, 2003.     By that

time, because of the accrual of interest and penalties,

petitioner’s 2002 liability had increased to $72,683.54.

Petitioner does not contend that he did not receive the December

10 letter.    Petitioner did not pay his 2002 tax liability within

30 days of the December 10 letter or otherwise reply to the

letter.

     Petitioner received a letter from respondent dated February

11, 2004.    In that letter, respondent declared petitioner in

default of the OIC and stated that “arrangements to compromise

the liability are terminated.”

     Respondent applied petitioner’s payment on the OIC to his

previously compromised liabilities.      This left balances owing for
                                 - 6 -

1993, 1994, and 1995 of $29,347.57, $33,763.22 and $30,195.96,

respectively.

     On March 24, 2004, petitioner made payments totaling $20,000

toward his 2002 tax liability.

     In a letter dated July 7, 2004, respondent sent petitioner a

Final Notice--Notice of Intent to Levy and Notice of Your Right

to a Hearing (notice of intent to levy) for the outstanding 1994,

1995, and 2002 liabilities.   The notice of intent to levy showed

a total of $121,218.36 in unpaid taxes, interest, and penalties.

     On July 14, 2004, petitioner paid respondent a total of

$56,731.05, satisfying his 2002 tax liability.

     On July 15, 2004, respondent sent petitioner a Notice of

Federal Tax Lien Filing and Your Right to a Hearing Under IRC

6320 (NFTL).    On August 11, 2004, petitioner filed a Form 12153,

Request for a Collection Due Process Hearing, with regard to the

NFTL.

     Appeals Officer Lawrence Dorr was assigned to petitioner’s

case.   Petitioner’s hearing consisted of an in-person meeting

with Officer Dorr on January 19, 2005, and subsequent

correspondence.   During the hearing, petitioner raised the

argument that although he had violated the literal terms of the

OIC by failing to timely pay his 2002 income tax liability, his

breach was not “material” and that respondent therefore should

not have declared him in default on the OIC.   Officer Dorr did
                                 - 7 -

not have petitioner’s Installment Agreement Request from

October 15, 2003, and Officer Dorr did not consider the

Installment Agreement Request in reaching his determination

regarding petitioner’s outstanding tax liabilities.    On February

23, 2005, respondent issued to petitioner two Notices of

Determination Concerning Collection Action(s) Under Section 6320

and/or 6330 (notices of determination) regarding petitioner’s

outstanding 1993, 1994, 1995, and 2002 tax liabilities.4    In the

notices of determination, respondent sustained the filing of the

lien.     In the Attachment to Determination Letter mailed with the

notices of determination, respondent noted petitioner’s argument

that he had been improperly declared in default on the OIC and

concluded that petitioner had been properly declared in default.

      On February 28, 2005, petitioner timely petitioned this

Court for review of respondent’s determinations under section

6320 and/or 6330.

                                OPINION

I.   Standard of Review

      In the context of a section 6320 or 6330 hearing, a

challenge to the Commissioner’s determination that a taxpayer was

properly deemed in default on an OIC is not a dispute of the

underlying tax liability.    See Robinette v. Commissioner, 123

T.C. 85, 93-94 (2004), revd. on other grounds 439 F.3d 455 (8th


      4
          Petitioner’s 2002 tax year is not at issue in this case.
                                 - 8 -

Cir. 2006).     Petitioner has not raised any other issue that

amounts to a challenge of the underlying tax liability.

        Where the validity of the underlying tax liability is not

properly in dispute, we review the Commissioner’s determination

for an abuse of discretion.     Sego v. Commissioner, 114 T.C. 604,

610 (2000); Goza v. Commissioner, 114 T.C. 176, 181 (2000).

Accordingly, we review respondent’s determination to proceed with

collection of petitioner’s 1993, 1994, and 1995 tax liabilities

for an abuse of discretion.     An abuse of discretion has occurred

if the “Commissioner exercised * * * [his] discretion

arbitrarily, capriciously, or without sound basis in fact or

law.”     Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

II.     Analysis Applied to Offers-in-Compromise

        “An accepted offer in compromise is properly analyzed as a

contract between the parties.”     Dutton v. Commissioner, 122 T.C.

133, 138 (2004).     When reviewing whether the Commissioner abused

his discretion in declaring a taxpayer in default on an OIC, our

analysis is governed by “general principles of contract law.”

Id.

III.     Parties’ Arguments

        The parties have focused their disputes in this case on two

contentious--and familiar--issues.       Petitioner urges that, when

analyzing whether respondent abused his discretion by finding

that petitioner defaulted on his OIC, we apply the “material
                                - 9 -

breach” analysis as applied in the majority opinion of this

Court’s decision in Robinette v. Commissioner, supra at 109-112.

Applying that analysis, petitioner argues that late payment of

his 2002 taxes was not material, and that respondent therefore

abused his discretion by finding that petitioner defaulted on his

OIC.    Petitioner also urges that the Court consider his

Installment Agreement Request and his testimony at trial, neither

of which is part of the administrative record that respondent

considered at the section 6330 hearing.    Petitioner argues that,

under this Court’s decision in Robinette, the evidence is within

the scope of this Court’s review of a determination under section

6320 and/or 6330 for an abuse of discretion.    On the basis of his

testimony, respondent’s internal procedures, and the Installment

Agreement Request, petitioner urges that we should treat his

Installment Agreement Request as having been granted.    Had the

Installment Agreement Request been granted, petitioner argues,

late payment of his 2002 taxes would not have been a material

breach of the OIC.

       As to the contractual issue, respondent argues that we

should apply the “doctrine of express conditions” analysis

applied by the U.S. Court of Appeals for the Eighth Circuit in

reversing this Court’s decision.    Robinette v. Commissioner, 439

F.3d at 462-463.    Respondent also argues that, even under a

“material breach” analysis, respondent did not abuse his
                                 - 10 -

discretion by declaring petitioner in default on his OIC because

petitioner’s late payment of his 2002 taxes was a material

breach.    Finally, relying on the Court of Appeals’ opinion in

Robinette, respondent argues that we may not consider evidence

beyond the administrative record when reviewing a determination

under section 6320 and/or 6330 for an abuse of discretion.

IV.   Analysis

      A.   Applicable Contract Law

           1.    Material Breach Analysis

      Under the “material breach” analysis applied by the Tax

Court in Robinette, “‘If the plaintiff’s breach is material and

sufficiently serious, the defendant’s obligation to perform may

be discharged. * * *     Not so, however, if the plaintiff’s breach

is comparatively minor.’”      Robinette v. Commissioner, 123 T.C. at

108 (quoting TXO Prod. Corp. v. Page Farms, Inc., 698 S.W.2d 791,

793 (Ark. 1985)).

      The Court went on to point out:

           “In determining whether a failure to render or   to
      offer performance is material, the following
      circumstances are significant:
                (a) the extent to which the injured party
           will be deprived of the benefit which he
           reasonably expected;
                (b) the extent to which the injured party   can
           be adequately compensated for the part of that
           benefit of which he will be deprived;
                (c) the extent to which the party failing   to
           perform or to offer to perform will suffer
           forfeiture;
                (d) the likelihood that the party failing   to
           perform or to offer to perform will cure his
                              - 11 -

          failure, taking account of all the circumstances
          including any reasonable assurances; [and]
               (e) the extent to which the behavior of the
          party failing to perform or to offer to perform
          comports with standards of good faith and fair
          dealing.” [Id. at 109, quoting 2 Restatement,
          Contracts 2d, sec. 241 (1981).]

Although the above circumstances may by themselves indicate the

materiality or nonmateriality of a breach, the standard of

materiality is necessarily somewhat imprecise and flexible, and

should be applied in light of the facts of each case in such a

way as to further the purpose of securing for each party his

expectation of an exchange of performances.     2 Restatement, supra

sec. 241 cmt. a.

          2.   Doctrine of Express Conditions

     Under the “doctrine of express conditions” analysis endorsed

by the Court of Appeals in Robinette, an express condition of a

contract is subject to a requirement of strict performance.

Robinette v. Commissioner, 439 F.3d at 462 (citing 13 Williston

on Contracts, sec. 38:6 (4th ed. 2000)).   When an express

condition fails to occur, the performance subject to that

condition does not become due unless the nonoccurrence of the

condition is excused.   2 Restatement, supra sec. 225(1).    Under

that doctrine, a failure to meet express conditions may be

excused if they are immaterial to the exchange and if their

enforcement would result in a disproportionate forfeiture.
                              - 12 -

Robinette v. Commissioner, 439 F.3d at 463 (citing 2 Restatement,

supra sec. 229).

     Under this analysis, the performance conditioned upon strict

compliance with the terms of the OIC is the Commissioner’s

discharge of the full amount of the tax liability compromised.

          3.   Application

     Considering all the relevant facts and circumstances,

petitioner’s significantly late payment of a substantial tax

liability amounts to both a failure of an express condition of

the OIC and a material breach of the OIC.   Therefore, we need not

decide which doctrine applies.

     By the plain terms of the OIC, respondent was not obligated

to discharge petitioner’s unpaid 1993, 1994, and 1995 tax

liabilities until petitioner “[complied] with all provisions of

the Internal Revenue Code relating to filing [his] returns and

paying [his] required taxes for 5 years or until the offered

amount is paid in full, whichever is longer.”   The Internal

Revenue Code required that petitioner pay his outstanding 2002

income tax liability of $77,540 by April 15, 2003.   See secs.

6151(a), 6072(a).   He failed to do so.   Petitioner failed to pay

the bulk of his 2002 tax liability for well over a year after it

was due, eventually satisfying his tax debt with his final

payment of $56,731.05 on July 14, 2004.   Moreover, despite

petitioner’s failure to pay his 2002 taxes, respondent’s letters
                               - 13 -

of November 14 and December 10, 2003, warned petitioner of the

potential for default and gave him an additional opportunity to

pay his taxes without defaulting on the OIC.     Petitioner again

failed to pay his 2002 tax liability.

       Under the circumstances, petitioner’s failure to satisfy his

2002 tax liability amounted to a “material breach” of the OIC.

By withholding a sizable sum of money from respondent for a

substantial period, petitioner deprived respondent of a material

financial benefit under the OIC.    Also, at the time respondent

declared petitioner in default on February 11, 2004, it appeared

unlikely that petitioner would cure his failure.     By that time,

petitioner had failed to comply with the terms not only of the

OIC but also of respondent’s letter of December 10, 2003 (again

requesting payment of petitioner’s 2002 taxes), thereby declining

an opportunity to “cure” his failure.

       By failing to satisfy his 2002 tax liability for over a

year, petitioner committed a material breach of the terms of the

OIC.    Nor is there any applicable “excuse of a condition”.     As

explained supra, an express condition of a contract may be

excused if a contracting party can show that (1) compliance with

the condition would result in a disproportionate forfeiture or

penalty, and (2) the condition was not a material part of the

bargain.    See 2 Restatement, supra sec. 229.   The record before

us does not indicate that strict compliance would have resulted
                               - 14 -

in a disproportionate forfeiture or penalty to petitioner.

Moreover, for the reasons discussed supra, we find that the

condition that petitioner timely pay his 2002 taxes was a

material part of the OIC.

     B.   Scope of Review

     Consideration of petitioner’s testimony or the Installment

Agreement Request would not alter any of the conclusions above.

At the time petitioner filed his Installment Agreement Request,

the Commissioner’s internal procedures provided that the

Commissioner could grant installment agreement requests from a

taxpayer in petitioner’s situation without declaring the taxpayer

in default.   Internal Revenue Manual sec. 5.19.7.3.17.3

(effective October 1, 2001).   While it may have been within

respondent’s discretion to overlook petitioner’s noncompliance

with the OIC and grant petitioner’s Installment Agreement

Request, we have long held that the Commissioner’s internal

procedures do not have the effect of law and that noncompliance

with those procedures does not render an action of the

Commissioner invalid.   Vallone v. Commissioner, 88 T.C. 794, 807-

808 (1987).

     Petitioner also argues that because he was never notified

that his Installment Agreement Request was denied, we should

treat the request as having been granted.   We disagree.   We note

that petitioner failed to comply with the terms of his proposed
                              - 15 -

Installment Agreement by not making the monthly payments he had

offered.   Such noncompliance hardly inspires the Court to find

that petitioner’s late payment of his 2002 taxes did not form

adequate grounds upon which to find him in default of his OIC.

     Indeed, consideration of petitioner’s testimony would only

bolster the conclusions that his breach was material and that

there was no “excuse of conditions” because reinstatement of his

original tax liability would not work a disproportionate

forfeiture upon him.   At trial, petitioner admitted that the

terms of the OIC were explained to him by his tax advisers when

he entered into the compromise.   Petitioner also admitted that he

realized a capital gain of $416,895 upon the sale of his home in

December 2002.   Even after purchasing a new home and remodeling

it, petitioner admitted he had slightly over $100,000 in cash

with which to satisfy his 2002 tax liability.   Under such

circumstances, petitioner’s late payment of his 2002 taxes seems

to be exactly the sort of “evasion of the spirit of the bargain,

lack of diligence and slacking off, [and/or] willful rendering of

imperfect performance” that typifies a failure of good faith

performance and therefore indicates a material breach.   See 2

Restatement, supra sec. 205 cmt. d.    Accordingly, we need not

decide herein whether we may consider evidence beyond the

administrative record.
                             - 16 -

     We conclude that respondent did not abuse his discretion in

proceeding with collection of petitioner’s unpaid 1993, 1994, and

1995 taxes.

     To reflect the foregoing,

                                        Decision will be entered

                                   for respondent.
