                   T.C. Summary Opinion 2006-179



                      UNITED STATES TAX COURT



              GARY AND CYNTHIA STEIN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23179-04S.               Filed November 2, 2006.



     Gary and Cynthia Stein, pro sese.

     Carolyn E. Moran, for respondent.



     GOLDBERG, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 in effect when the petition was

filed.1   The decision to be entered is not reviewable by any

other court, and this opinion should not be cited as authority.

This case arises from a petition for judicial review filed in


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

response to a Notice of Determination Concerning Collection

Action(s) Under Section 6320 and/or 6330 issued for unpaid

Federal income tax liabilities for taxable years 1994 and 2002.2

     The sole issue for decision is whether respondent abused his

discretion in sustaining a Notice of Federal Tax Lien.   For the

following reasons, we hold that there was no abuse of discretion

in this case.

                             Background

     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.

     Petitioners resided in Egg Harbor City, New Jersey, on the

date the petition was filed.

Prior Assessments and Offer-in-Compromise

     Respondent assessed a Federal income tax liability of

$28,222.27 against petitioners for taxable year 1993 on August 7,

1995.    Respondent also assessed a Federal income tax liability of

$19,934.61 against petitioners for taxable year 1994 on July 31,

1995.    The total amount assessed for petitioners’ 1993 and 1994

Federal income tax liabilities was $48,156.88.

     Petitioners made an Offer-in-Compromise (OIC) for the

Federal income tax liabilities assessed for the 1993 and 1994



     2
      Petitioners’ liability for the taxable year 2002 has been
satisfied and is no longer in issue.
                                - 3 -

taxable years.    The OIC provided that petitioners would pay

$32,000 to satisfy these liabilities, with $27,000 to be

initially deposited upon respondent’s acceptance of the OIC, and

$5,000 to be paid 6 months after respondent’s notice of

acceptance.    As part of the OIC, petitioners were to “comply with

all provisions of the Internal Revenue Code relating to the

filing [of] returns and paying [of] required taxes for five (5)

years from the date IRS accepts the offer.”    Petitioners signed

the OIC on January 30, 1997.

      Respondent accepted petitioners’ OIC by return letter dated

March 28, 1997.    In his acceptance letter, respondent provided

that “the conditions of the offer require [petitioners] to file

and pay all required taxes for five years from the date shown in

the upper right corner of this letter.”    To avoid default on the

OIC, petitioners were required to timely file and pay their taxes

through March 28, 2002.

      Over the next 5 years, petitioners either did not timely

file, and/or did not timely pay, and/or failed to report all of

their income on their Federal tax returns.

1.   Taxable Year 1997

      Petitioners failed to report all of their income on their

1997 Federal income tax return.    Respondent issued a notice of

deficiency for taxable year 1997, which petitioners subsequently

defaulted.    As a result of the default, respondent assessed an
                                 - 4 -

additional tax of $5,642.    The assessment included an accuracy-

related penalty pursuant to section 6662, a failure to pay

addition to tax pursuant to section 6651(a)(2), and interest for

taxable year 1997.

2.   Taxable Year 1998

      For the taxable year 1998, petitioners timely filed their

Federal income tax return but failed to report all of their

income and pay their full tax liability by the filing due date.

Respondent issued a notice of deficiency for taxable year 1998,

which petitioners subsequently defaulted.    As a result of the

default, respondent assessed an additional tax of $12,208.

Petitioners were also assessed a dishonored check penalty, an

accuracy-related penalty pursuant to section 6662, a failure to

pay addition to tax pursuant to section 6651(a)(2), and interest.

Petitioners’ 1998 tax liability was ultimately paid on June 12,

2003.

3.   Taxable Year 1999

      For the taxable year 1999, petitioners failed to timely pay

their tax liability.     Petitioners were assessed a deficiency, an

addition to tax pursuant to section 6651(a)(2), and interest for

the taxable year 1999.    Petitioners’ 1999 tax liability was

ultimately paid on June 26, 2000.
                                 - 5 -

4.   Taxable Year 2000

      For the taxable year 2000, petitioners failed to pay their

tax liability by the filing due date.    Petitioners were liable

for a failure to pay addition to tax pursuant to section

6651(a)(2), a failure to pay estimated tax addition to tax

pursuant to section 6654(a), and interest for the taxable year

2000.   Petitioners’ 2000 tax liability was ultimately paid on May

14, 2004.

5.   Taxable Year 2001

      For the taxable year 2001, petitioners failed to timely file

and pay their estimated tax liability.    Accordingly, petitioners

were assessed an addition to tax pursuant to section 6651(a)(1),

a failure to pay addition to tax pursuant to section 6651(a)(2),

a failure to pay estimated addition to tax pursuant to section

6654(a), two dishonored check penalties, and interest.

      In summary, petitioners did not comply with the provisions

of the Internal Revenue Code pertaining to the filing of returns

and paying of Federal income taxes for 1997, 1998, 1999, 2000,

and 2001 as required by the OIC.

Change of Residential Address

      Petitioners moved from Lynwood, New Jersey, to Egg Harbor

City, New Jersey, in May 2000.    Petitioners’ address was changed

in respondent’s records to Egg Harbor City, New Jersey, sometime

in the first week of April 2001.
                               - 6 -

Collection Actions

     Although petitioners paid $27,000 when respondent accepted

the OIC, petitioners did not make any further payment under the

terms of the OIC; namely the $5,000 payment due on September 27,

1997.   The record indicates that the $27,000 paid was applied to

amount of the OIC total attributable to taxable year 1993.     This

application resulted in the settlement of the 1993 taxable year.

However, because petitioners did not remit the remainder of the

OIC amount, a liability for taxable year 1994 remained.

     On October 6, 1997, respondent sent petitioners a letter

that applied interest on the unpaid portion of their income tax

liability stemming from taxable year 1994.   On May 4, 1998,

respondent assessed a deficiency of $12,525.27 for taxable year

1994.

     As previously discussed, petitioners did not timely file,

timely pay, and/or fully report their income for taxable years

1997, 1998, 1999, 2000, and 2001.   Although respondent’s

Collections personnel were in contact with petitioners regarding

their outstanding liabilities for these years, the personnel did

not revisit the unpaid portion of the 1994 assessment until early

2001.

     On May 1, 2001, and August 31, 2002, respectively,

respondent sent petitioners letters warning them that if they did

not become compliant with the unpaid liability for taxable year
                                 - 7 -

1994, the original amount of their income tax liability for 1994-

-$19,934.61--would be reinstated.    On February 7, 2003,

respondent sent petitioners a letter of default for the taxable

year 1994.

     Respondent filed a Notice of Federal Tax Lien on April 29,

2004, showing $12,525.27 owed for taxable year 1994, and $332.94

owed for taxable year 2002.

     Petitioners requested a Collection Due Process (CDP) Hearing

on May 11, 2004.    The CDP Hearing occurred in Baltimore,

Maryland, on October 12, 2004.    At the Hearing, petitioner

husband requested that the terms of the original OIC be

reinstated.   He did not recommend or propose an alternative

collection means.    Respondent determined that issuance of a

Notice of Federal Tax Lien would be justified, since petitioners

defaulted on the OIC when they failed to timely file and pay

their Federal income taxes for 1997, 1998, 1999, 2000, and 2001.

     On November 5, 2004, respondent issued petitioners a Notice

of Determination Concerning Collection Action(s) pursuant to

section 6320 and/or 6330, in which respondent determined the

Notice of Federal Tax Lien for taxable years 1994 and 2002 to be

proper and determined that collection of the tax liabilities for

those years should proceed.
                                - 8 -

     Petitioners filed a Petition for Redetermination of a

Deficiency3 requesting the elimination of penalties and interest

for their 1994 tax liability, and concurrent restoration of the

terms of the defaulted OIC.    The trial occurred on November 1,

2005.

                              Discussion

     Before a Federal tax lien is filed with regard to any

property or right to property, taxpayers are entitled to notice

and opportunity for a hearing before an impartial officer of the

respondent’s Office of Appeals.    Secs. 6320(a) and (b),

6330(b)(3).    If the taxpayers request a hearing, they may raise

in that hearing any relevant issue relating to the unpaid tax or

the proposed lien, including challenges to the appropriateness of

the collection action and “offers of collection alternatives,

which may include the posting of a bond, the substitution of

other assets, an installment agreement, or an offer-in-

compromise”.   Secs. 6320(c), 6330(c)(2)(A).   A determination is

then made which takes into consideration those issues, the

verification that the requirements of applicable law and

administrative procedures have been met, and “whether any

proposed collection action balances the need for the efficient

collection of taxes with the legitimate concern of the person


     3
      On the petition, petitioners should have placed an “X” in
the box entitled Petition for Lien or Levy Action (Collection
Action), as this is not a deficiency case.
                                - 9 -

that any collection action be no more intrusive than necessary”.

Sec. 6330(c)(3)(C).   At the CDP hearing, petitioners did not

argue that any portion of their outstanding tax liability for

1994 is uncollectible.   Because petitioners do not dispute the

underlying tax liability, we review respondent’s determination

for an abuse of discretion.   Sec. 6330(d); Goza v. Commissioner,

114 T.C. 176, 181-182 (2000).    An abuse of discretion occurs when

the Commissioner takes action that is arbitrary or capricious,

lacks a sound basis in law, or is not justifiable in light of the

facts and circumstances.   Mailman v. Commissioner, 91 T.C. 1079,

1084 (1988).

     Petitioners argue that respondent’s actions amounted to an

abuse of discretion because petitioners were not notified of

their default, and respondent’s Appeals officer unreasonably

denied petitioners’ request at the CDP hearing that the terms of

the underlying OIC be reinstated.   For the reasons stated below,

we find that there was no abuse of discretion in this case.

Notice of Default

     Petitioners assert that respondent did not provide them with

notice of default before a Notice of Federal Tax Lien was issued.

The OIC Case history shows that when petitioners failed to pay

the $5,000 due on September 27, 1997, the Commissioner’s

collections personnel contacted petitioners by letter dated

October 6, 1997, whereby the Commissioner applied interest of
                              - 10 -

$168.02 to the unpaid liability stemming from taxable year 1994.

The OIC Case history shows that while respondent’s collections

personnel did not contact petitioners about petitioners’ unpaid

liability for taxable year 1994 until early 2001, the collections

personnel were in contact with petitioners between 1997 and 2001

regarding their unpaid tax liabilities stemming from taxable

years 1997, 1998, and 1999.

     Regarding the outstanding assessment for 1994, respondent

attempted to contact petitioners by telephone no less than 10

separate times between 2001 and 2004.   Respondent also sent

petitioners three letters; in two of these letters, he warned

petitioners of default, and in the third, he notified petitioners

of default.

     The OIC Case history Listing is replete with notations that

respondent’s Collections employees and managers reviewed

petitioners’ record for taxable year 1994 for payments, received

approval to proceed with collections, and attempted contact with

petitioners when no payments were received.   Accordingly, we

conclude that the review undertaken by respondent’s employees in

this case was as thorough and complete as possible given

petitioners’ noncompliance with the 5-year timely filing and

paying requirement imposed by the OIC, and the inability of

respondent’s employees to contact petitioners.
                                - 11 -

     With respect to the issue of notice before filing of the

Federal Tax Lien, the Internal Revenue Manual, sec. 5.12.1.3,

provides that reasonable efforts be made to contact the taxpayer

before filing.     However, there are no specific requirements

provided in the Manual, or under the law, that the Commissioner

must send a warning default letter when the taxpayers have not

complied with the terms of an underlying OIC.

     In this case, respondent sent petitioners two letters

warning them of default on the OIC for the taxable year 1994.

Petitioners testified that they had not received either of the

two default warning letters sent by respondent on May 1, 2001,

and August 31, 2002, or the letter of default dated February 7,

2003.     All three letters were sent to petitioners’ address in Egg

Harbor City, New Jersey, and petitioners moved to the Egg Harbor

City, New Jersey, address in May 2000.     Petitioners testified

that the first time they became aware that they had defaulted on

the OIC was when respondent issued them a Notice of Federal Tax

Lien on April 29, 2004.

        When questioned by the Court, petitioners admitted that

there were “warnings” that they had defaulted on the OIC.     We

find that based on the OIC Case history, the “warnings” received

by petitioners included both the aforementioned letters and phone

conversations.     Moreover, we find that petitioners not only had

warning and notice of their default through three letters and
                                - 12 -

phone conversations, but that they were aware from the date they

signed the OIC that any noncompliance on their part with the 5-

year timely filing and payment requirement would immediately

result in default of the OIC.

Collection Due Process Hearing

     The only argument set forth in the petition was that “all

legal and procedural requirements [with respect to the CDP

hearing] were not met.”   Section 6320 requires that the

Commissioner give notice to taxpayers in writing within 5 days

after the filing of the Notice of Federal Tax Lien of the

taxpayers’ right to request a hearing with Appeals if the request

is made during the 30 days following the end of the 5-day

notification period.   In this case, respondent sent petitioners

the Notice of Federal Tax Lien together with the Notice of

Petitioners’ Right to Request a Hearing on May 4, 2004.

Petitioners requested a hearing on May 20, 2004.    Accordingly, we

find that all procedural requirements with respect to the notice

of the lien and the CDP hearing were timely met.

     At the CDP hearing, petitioner husband requested relief from

paying the outstanding amount due for taxable year 1994 under the

original OIC.   Petitioner husband presented no other collection

alternatives to this request.    Petitioner husband’s singular

argument at the CDP hearing was that he had not received notice

of default, and that he had no notice until receiving the Notice
                               - 13 -

of Federal Tax Lien that he was in danger of default.   As

previously stated, we find that petitioners were in receipt of

written and verbal notice of their default.   Moreover, we find

that petitioners were aware that their repeated noncompliance

with the 5-year timely filing requirement placed them in default

on the underlying OIC.

     We therefore cannot conclude that respondent acted in an

arbitrary or capricious manner based on the facts of this case.

Petitioners were well aware of their duty to timely file and pay

their taxes for the 5 years following respondent’s acceptance of

the underlying OIC.   Petitioners not only failed to timely file

their 1997 Federal tax return; they failed to timely file in each

and every one of the 5 years of the OIC compliance period.

Moreover, respondent attempted on 10 occasions over 3 years to

contact petitioners at their Egg Harbor residence to craft a

resolution to petitioners’ outstanding liability stemming from

taxable year 1994.    In these years, respondent attempted to work

with petitioners, despite their repeated failures to timely file.

Petitioner husband, by his own admission, testified that

petitioners did not respond to these attempts because they

“lacked the money to pay.”    Petitioners then begged this Court to

consider that they are “desperate” because they cannot afford to

pay the amount now sought by respondent with respect to 1994.
                             - 14 -

     We find that respondent made repeated efforts to work with

petitioners after they had defaulted on the underlying OIC.     We

further find that although petitioners were aware that their

failure to timely file just once in the 5-year compliance period

would result in default, and that they were aware through phone

calls and correspondence from respondent about the default, they

chose to disregard the results of their noncompliance until the

time of the CDP hearing.

     We therefore hold that respondent’s determination sustaining

the Notice of Federal Tax Lien was not an abuse of discretion and

that respondent may proceed with collection by Federal Tax Lien

of petitioners’ liability stemming from taxable year 1994.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                          Decision will be entered

                                      for respondent.
