                         T.C. Memo. 2009-264



                       UNITED STATES TAX COURT



                ERNEST ROMERO, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24327-07L.                Filed November 19, 2009.



     Ernest Romero, Jr., pro se.

     Cindy Park, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


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

seeks review of respondent’s determination to proceed with

collection of his unpaid 2002, 2003, and 2004 income tax

liabilities.   The issue for decision is whether respondent abused


     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code.
                                - 2 -

his discretion by sustaining the filing of the notice of Federal

tax lien against petitioner.   We find respondent did not abuse

his discretion.

                          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.   Petitioner resided in

California at the time he filed the petition.

Background

     Petitioner requested and received extensions to file his

2002 and 2003 income tax returns; these returns were due August

15, 2003 and 2004, respectively.   His 2004 return was due April

15, 2005.    Petitioner filed his 2002, 2003, and 2004 income tax

returns on or about April 10, April 3, and March 27, 2006,

respectively.

     On August 2, 2006, respondent mailed to petitioner a Notice

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

6320 (notice of Federal tax lien) regarding tax years 2002, 2003,

and 2004.    The notice of Federal tax lien stated petitioner owed

liabilities as follows:

     Type of Tax           Tax Period           Amount Owed

      Form 1040            12/31/2002            $5,354.27
      Form 1040            12/31/2003             4,855.34
      Form 1040            12/31/2004             1,724.22
                               - 3 -

On August 31, 2006, petitioner timely submitted Form 12153,

Request for a Collection Due Process Hearing (request), regarding

2002, 2003, and 2004 to respondent.

Petitioner’s Offer-in-Compromise Proposal

     In the request petitioner stated the lien would impair his

efforts to procure employment and would damage his credit.      He

further stated he had previously suggested and again was

suggesting the following offer-in-compromise (OIC):    if the

penalties and interest were waived, he would be able to borrow

the money from his father and pay the taxes in full.

     Settlement Officer Vic Morel (Officer Morel) was the Appeals

settlement officer assigned to petitioner.   Petitioner requested

a face-to-face collection due process hearing (CDP hearing).

     Before the CDP hearing, Officer Morel requested that

petitioner submit a completed Form 433-A, Collection Information

Statement for Wage Earners and Self-Employed Individuals, along

with backup documentation and information.   Petitioner submitted

the requested information, and Officer Morel used it to calculate

petitioner’s tentative reasonable collection potential (RCP) to

be $49,926 (future income value (FIV) of $45,168 plus net equity

in assets of $4,758).   At the time petitioner’s entire tax

liability (including years not at issue in the notice of Federal
                               - 4 -

tax lien) was approximately $29,000.2   Officer Morel determined

that petitioner’s RCP precluded him from having an OIC accepted

because he could pay the entire tax liability and the sole basis

on which petitioner sought an OIC was doubt as to collectibility.

     Officer Morel sent petitioner a letter scheduling the face-

to-face CDP hearing and asking petitioner for additional

information.   He asked petitioner to explain or describe special

circumstances which might affect his ability to pay and to

provide the following additional information for his use in

recalculating petitioner’s RCP:   Income information; bank

statements; leases on his rental property; and information on his

transportation expenses, health care expenses, and legal

expenses.   Petitioner sent Officer Morel most of the information

requested and included reports from a psychiatrist and a

psychologist to support his claim of special circumstances.

     Using this information, Officer Morel decreased petitioner’s

FIV, which reduced petitioner’s RCP from $49,926 to $49,110 (FIV

of $44,352 plus asset/equity table value of $4,758).   However,

Officer Morel determined on the basis of the reports of the

psychiatrist and the psychologist that petitioner did not meet

the criteria for special circumstances.   The psychiatrist’s


     2
        The record is unclear for which tax periods in addition
to 2002, 2003, and 2004 petitioner owed tax liabilities.
However, tax liabilities for 1993, 1994, 1995, 1999, and 2000
were in uncollectible status.
                               - 5 -

report stated petitioner would be able to return to work by

November 30, 2006, and as of that date, he would be considered

fully recovered.   The psychologist’s report gave petitioner a

guardedly optimistic prognosis and reported that petitioner

ceased psychotherapeutic sessions on October 19, 2006.

Face-to-Face CDP Hearing

     Officer Morel conducted the face-to-face CDP hearing on July

12, 2007, at the IRS Appeals Office in Los Angeles.     As of July

9, 2007, petitioner’s total outstanding tax liability for all

periods was approximately $29,000.

     Petitioner orally proposed an OIC of $10,000.     Officer Morel

explained to petitioner that he did not qualify for an OIC

because his RCP exceeded the liability owed, and Officer Morel

provided petitioner with copies of the income/expense table,

asset/equity table, and the RCP calculation.

     Petitioner said he would pay the tax in full if penalties

and interest were abated.   Officer Morel explained that, absent

reasonable cause or administrative delay, the penalties and

interest could not be compromised.     Officer Morel suggested an

installment agreement, and petitioner stated he was not

interested.

     Petitioner did not dispute Officer Morel’s finding that he

did not meet the criteria for special circumstances.
                                - 6 -

Post-CDP Hearing

     Petitioner contacted Officer Morel after the CDP hearing and

questioned the FIV Officer Morel determined and used in

calculating petitioner’s RCP.   Petitioner sent a letter to

Officer Morel stating that his monthly income was lower than the

figure Officer Morel used and that he expected his disability

benefits to terminate in 2 months.      Petitioner stated that after

his disability benefits terminated, his monthly expenses would

exceed his monthly income and he did not understand why he would

not qualify for an OIC.

     Subsequently, Officer Morel talked with petitioner over the

phone and decreased petitioner’s FIV, which decreased

petitioner’s RCP.   Initially, in calculating petitioner’s FIV

Officer Morel included income from three sources:     Employment

with Venturi Staffing Partners, unemployment benefits, and

disability benefits.   Petitioner informed Officer Morel that he

had worked for Venturi Staffing for only 2 days, and Officer

Morel decreased petitioner’s FIV by removing this as a source of

income.   Petitioner also informed Officer Morel that he received

unemployment benefits biweekly instead of weekly; Officer Morel

adjusted petitioner’s FIV to reflect this change in timing.

Finally, petitioner informed Officer Morel that he expected his

unemployment benefits to terminate in 2 months, but Officer Morel

did not adjust petitioner’s FIV because it was a future event.
                               - 7 -

These adjustments resulted in a net decrease in petitioner’s FIV

from $44,352 to $34,414, which decreased petitioner’s RCP from

$49,110 to $39,414.

     Even with these adjustments, petitioner’s RCP still exceeded

the tax liability, and Officer Morel determined acceptance of

petitioner’s $10,000 OIC was precluded by statute and

regulations.   Officer Morel informed petitioner of this and

suggested an installment agreement.    Petitioner rejected the

installment agreement.

Notice of Determination

     On October 2, 2007, Officer Morel issued a Notice of

Determination Concerning Collection Action(s) Under Section 6320

and/or 6330 (notice of determination).    The notice of

determination sustained the filing of the lien, stated that

petitioner had suggested a $10,000 OIC to satisfy his $29,000

liability and this OIC could not be accepted because it was less

than petitioner’s RCP of $39,414, and verified that the

requirements of applicable laws had been met, that the issues

raised had been considered, and that the proposed collection

action balanced the need for efficient collection of taxes with

the legitimate concerns that such action be no more intrusive

than necessary.   See sec. 6330(c)(3).

     Petitioner timely petitioned this Court for review of the

notice of determination sustaining the lien for 2002, 2003, and
                               - 8 -

2004.   Petitioner asserts Officer Morel made his determination

with erroneous information and failed to recalculate his RCP once

correct information was brought to his attention.    Respondent

asserts petitioner did not submit an OIC for consideration and

Officer Morel properly determined petitioner’s ineligibility for

an OIC.

                              OPINION

I.   Jurisdiction and Standard of Review

      Section 6320(a)(1) 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(a) and (b) 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 in a manner 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

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).   Where the validity of the underlying tax

liability is not at issue, we review the Commissioner’s
                                - 9 -

determination for abuse of discretion.     Sego v. Commissioner,

supra at 610.

       Petitioner does not dispute the underlying tax liability;

rather, petitioner disputes respondent’s rejection of his alleged

OIC.    Accordingly, we review this determination for abuse of

discretion.

       Under an abuse of discretion standard, “we do not interfere

unless the Commissioner’s determination is arbitrary, capricious,

clearly unlawful, or without sound basis in fact or law.”     Ewing

v. Commissioner, 122 T.C. 32, 39 (2004), vacated 439 F.3d 1009

(9th Cir. 2006); see also Woodral v. Commissioner, 112 T.C. 19,

23 (1999).

II.    Offer-in-Compromise

       Section 7122(a) authorizes the Commissioner to compromise a

taxpayer’s outstanding liabilities.     The regulations and

procedures under section 7122 provide the exclusive method of

effecting a binding nonjudicial compromise.     Laurins v.

Commissioner, 889 F.2d 910, 912 (9th Cir. 1989), affg. Norman v.

Commissioner, T.C. Memo. 1987-265; Shumaker v. Commissioner, 648

F.2d 1198, 1199-1200 (9th Cir. 1981) (citing Botany Worsted Mills

v. United States, 278 U.S. 282, 288-289 (1929)), affg. in part,

revg. in part and remanding per curiam on other grounds T.C.

Memo. 1979-71.
                              - 10 -

     Section 301.7122-1(d)(1), Proced. & Admin. Regs., provides:

     An offer to compromise a tax liability pursuant to section
     7122 must be submitted according to the procedures, and in
     the form and manner, prescribed by the Secretary. An offer
     to compromise a tax liability must be made in writing, must
     be signed by the taxpayer under penalty of perjury, and must
     contain all of the information prescribed or requested by
     the Secretary. * * *

See Nash v. Commissioner, T.C. Memo. 2008-250; Harbaugh v.

Commissioner, T.C. Memo. 2003-316; see also Wagner v.

Commissioner, T.C. Memo. 1990-443 (“compromise agreements under

section 7122 are required to be in writing”); Prakash v.

Commissioner, T.C. Memo. 1990-106 (same); Foulds v. Commissioner,

T.C. Memo. 1989-29 (same).

     An OIC must be submitted on a special form prescribed by the

Secretary.   Riederich v. Commissioner, 985 F.2d 574 (9th Cir.

1993), affg. without published opinion T.C. Memo. 1991-164;

Laurins v. Commissioner, supra at 912.   Section 601.203(b),

Statement of Procedural Rules, identifies Form 656, Offer in

Compromise, as the form required for an OIC:

     Offers in compromise are required to be submitted on
     Form 656, properly executed, and accompanied by a
     financial statement on Form 433 (if based on inability
     to pay). Form 656 is used in all cases regardless of
     whether the amount of the offer is tendered in full at
     the time the offer is filed or the amount of the offer
     is to be paid by deferred payment or payments. * * *

See also Godwin v. Commissioner, T.C. Memo. 2003-289 (“Taxpayers

who wish to propose an offer in compromise must submit a Form

656, Offer in Compromise”), affd. 132 Fed. Appx. 785 (11th Cir.
                               - 11 -

2005); Ringgold v. Commissioner, T.C. Memo. 2003-199 (“settlement

of tax liabilities for less than the amount owed requires the

completion of Form 656”).

       Petitioner did not submit a Form 656 or any other writing

made under penalty of perjury to compromise his tax liabilities.

Petitioner proposed in writing an offer to pay the full amount of

the tax in exchange for respondent’s waiving penalties and

interest.    Later, petitioner orally proposed a $10,000 OIC.

Petitioner was cooperative in submitting requested documentation

to respondent, and using this documentation, respondent was able

to calculate petitioner’s RCP.    Using the information petitioner

provided, respondent repeatedly advised him that he would not

qualify for an OIC based on his RCP.     Without the submission of a

formal OIC, we cannot determine whether respondent abused his

discretion in sustaining the filing of the lien.     See O’Neil v.

Commissioner, T.C. Memo. 2009-183.      However, assuming petitioner

made a formal OIC in either of the amounts he proposed, we would

sustain respondent’s calculation of petitioner’s RCP and find

there was no abuse of discretion.

III.    Calculation of RCP

       Petitioner asserts Officer Morel should have lowered his RCP

to reflect the anticipated termination of petitioner’s disability

benefits.
                              - 12 -

     A compromise based on “doubt as to collectibility” (which

petitioner seeks) may be accepted “where the taxpayer’s assets

and income are less than the full amount of the liability.”    Sec.

301.7122-1(b)(2), Proced. & Admin. Regs.   With respect to offers-

in-compromise on this basis, we observed in Murphy v.

Commissioner, 125 T.C. 301, 309 (2005), affd. 469 F.3d 27 (1st

Cir. 2006):

     Generally, under * * * [the Commissioner’s]
     administrative pronouncements, an offer to compromise
     based on doubt as to collectibility will be acceptable
     only if the offer reflects the reasonable collection
     potential of the case (i.e., that amount, less than the
     full liability, that the IRS could collect through
     means such as administrative and judicial collection
     remedies). Rev. Proc. 2003-71, sec. 4.02(2), 2003-2,
     C.B. 517. * * *

See also Internal Revenue Manual (IRM), pt. 5.8.1.1.3(3) (Sept.

1, 2005) (“Absent special circumstances, a Doubt as to

Collectibility (DATC) offer amount must equal or exceed a

taxpayers [sic] reasonable collection potential (RCP) in order to

be considered for acceptance.”).

     The taxpayer’s RCP includes realizable equity in assets

owned by the taxpayer as well as amounts collectible from the

taxpayer’s future income after allowing for payment of necessary

living expenses.   Id. pt. 5.8.4.4.1.   Generally, where an Appeals

employee has followed the Commissioner’s guidelines to ascertain

a taxpayer’s RCP and rejected the taxpayer’s collection

alternative on that basis, we have found no abuse of discretion.
                              - 13 -

Lemann v. Commissioner, T.C. Memo. 2006-37; see also Schulman v.

Commissioner, T.C. Memo. 2002-129.

     Petitioner asserts Officer Morel abused his discretion in

calculating petitioner’s RCP because Officer Morel did not reduce

petitioner’s FIV after being informed that petitioner’s

disability benefits were expected to terminate in 2 months.

     The IRM defines future income as an estimate of a taxpayer’s

ability to pay based on an analysis of gross income, less

necessary living expenses, for a specific number of months into

the future.   IRM pt. 5.8.5.5(1) (Sept. 1, 2005).    The IRM

instructs the settlement officer to consider the taxpayer’s

general overall situation including such facts as age, health,

marital status, number and age of dependents, level of education

or occupational training, and work experience.      Id. pt.

5.8.5.5(3).   The IRM further states that some situations may

warrant placing a different value on future income than current

or past income indicates and lists, inter alia, two situations

relevant here:   Where income will increase or decrease or current

necessary expenses will increase or decrease, and where a

taxpayer is temporarily unemployed or underemployed.      Id. pt.

5.8.5.5(5).

     Where income or current necessary expenses will increase or

decrease, the IRM instructs the settlement officer to adjust the
                                  - 14 -

amount or number of payments to what is expected during the

appropriate number of months.       Id.

       Where the taxpayer is temporarily unemployed or

underemployed, the IRM instructs the settlement officer to use

the level of income expected if the taxpayer were fully employed

if the potential for employment is apparent.       Id.   It further

states that each case should be judged on its own merit,

including consideration of special circumstances or relating to

effective tax administration issues.       Id.

       We are satisfied Officer Morel judged petitioner’s case on

the unique circumstances of petitioner’s individual situation and

did not abuse his discretion in determining petitioner’s FIV and

RCP.       Officer Morel repeatedly worked with petitioner in

petitioner’s attempts to become eligible for an OIC.       After a

tentative RCP determination revealed petitioner was ineligible

for an OIC, Officer Morel asked petitioner to explain special

circumstances3 and provide additional information which could

       3
        In some cases the Secretary will accept an offer of less
than the reasonable collection potential of the case if there are
special circumstances. Rev. Proc. 2003-71, sec. 4.02(2), 2003-2
C.B. 517, 517. Special circumstances are: (1) Circumstances
demonstrating that the taxpayer would suffer economic hardship if
the IRS were to collect from him an amount equal to the
reasonable collection potential of the case or (2) if no
demonstration of such suffering can be made, circumstances
justifying acceptance of an amount less than reasonable
collection potential of the case based on public policy or equity
considerations. IRM pt. 5.8.4.3 (Sept. 1, 2005) (effective tax
administration and doubt as to collectibility with special
                                                   (continued...)
                              - 15 -

affect his eligibility for an OIC.     After the additional

information revealed that petitioner did not meet the criteria

for special circumstances and was still ineligible for an OIC,

Officer Morel continued to communicate with petitioner about his

calculations.   After discussing the matter with petitioner,

Officer Morel made adjustments to petitioner’s FIV to reflect the

loss of a source of income (Venturi Staffing) and a difference in

the timing of benefits (biweekly), but he did not make an

adjustment to reflect the anticipated termination of petitioner’s

disability benefits.

     We are satisfied Officer Morel made appropriate adjustments

to petitioner’s FIV.   Although pursuant to the IRM Officer Morel

could have decreased petitioner’s FIV to reflect the anticipated

termination of disability benefits, he is equally justified in

not decreasing petitioner’s FIV.   Petitioner was unemployed and

receiving unemployment and disability benefits when he began

discussing the possibility of an OIC.     Upon receiving two mental

health reports suggesting that petitioner was able to return to

work immediately and was no longer disabled, Officer Morel


     3
      (...continued)
circumstances). To demonstrate that compelling public policy or
equity considerations justify a compromise, the taxpayer must be
able to demonstrate that, because of exceptional circumstances,
collection of the full liability would undermine public
confidence that the tax laws are being administered in a fair and
equitable manner. Sec. 301.7122-1(b)(3)(ii), Proced. & Admin.
Regs.
                              - 16 -

decided not to decrease petitioner’s FIV to reflect the

anticipated termination of disability benefits.    Where a taxpayer

is presently unemployed, the settlement officer is instructed to

look to the level of income expected if the taxpayer were fully

employed if the potential for employment is apparent.    Although

at one time petitioner was unable to work because of his

disability, this was no longer the case.    Petitioner was not

disabled and was able to work.    Although petitioner anticipated

losing a source of income, the unique circumstances of

petitioner’s situation suggested that petitioner was losing this

source of income about the same time as he was gaining the

ability to return to work.   Accordingly, we are satisfied that

Officer Morel followed the IRM in determining petitioner’s FIV

and calculating petitioner’s RCP and did not abuse his

discretion.

     To reflect the foregoing,


                                      Decision will be entered

                                 for respondent.
