                                  T.C. Memo. 2019-67



                            UNITED STATES TAX COURT



                 MARIA SHENORAH MCCREE, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 10129-14L.                            Filed June 6, 2019.



      Maria Shenorah McCree, pro se.

      Moenika N. Coleman, Linda L. Wong, Michael S. Navarro, and Cindy L.

Wofford, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


      VASQUEZ, Judge: In this collection due process (CDP) case, petitioner

seeks review, pursuant to section 6330(d)(1),1 of the determination by the Internal


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                           (continued...)
                                         -2-

[*2] Revenue Service (IRS or respondent) to proceed by levy with collection of

her unpaid Federal income tax liability for 2010.

      After a trial on the merits, the issues for decision are whether: (1) the

distribution that petitioner received from her retirement account is includable in

her gross income for 2010, (2) petitioner is liable for the 10% additional tax for

the retirement distribution imposed by section 72(t), and (3) respondent abused his

discretion by sustaining the proposed levy to collect petitioner’s unpaid income

tax liability for 2010.

                               FINDINGS OF FACT

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

the stipulation of facts and the attached exhibits by this reference. Petitioner

resided in Texas when she timely filed her petition.

I.    Petitioner’s Retirement Distribution

      In 2010 petitioner terminated her employment with the Department of

Family and Protective Services to become a full-time student at the University of

Phoenix. In November of that same year petitioner requested a withdrawal from a

retirement account she had with the Employees Retirement System of Texas

      1
      (...continued)
Revenue Code in effect at all relevant times, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                         -3-

[*3] (ERS). Petitioner’s ERS retirement plan was a qualified defined benefit plan

under section 401(a). Petitioner received a distribution of $20,056 from her ERS

account. After Federal income tax of $4,011 was withheld from her ERS

distribution, petitioner received a check for $16,045, which she deposited in her

savings account at Bank of America. Petitioner was 42 years old when she

received this distribution. Petitioner used the proceeds from her ERS distribution

to cover some of her tuition and living expenses.

II.   Petitioner’s Form 1040 and Letter 4464C

      Petitioner timely filed her 2010 Form 1040, U.S. Individual Income Tax

Return. She reported her ERS distribution of $20,056 as a rollover, reporting zero

taxable amount, but she failed to deposit the distribution in a qualified account.

Petitioner claimed a refund of $8,380.

      On February 17, 2011, the IRS Integrity & Verification Operation (IVO)

issued a Letter 4464C, Questionable Refund 3rd Party Notification, to petitioner.2

The IVO’s Letter 4464C informed petitioner that her 2010 refund was being held

pending the IVO’s review. On March 28, 2011, petitioner received the $8,380

refund she had claimed on her 2010 tax return.

      2
       The IVO verifies withholdings to protect taxpayers against claims for
fraudulent inflated refunds. See Internal Revenue Manual pt. 9.5.3.2.5 (Feb. 9,
2005) (questionable refund program).
                                        -4-

[*4] On August 6, 2012, respondent issued to petitioner a statutory notice of

deficiency determining a deficiency in her 2010 Federal income tax of $5,637 and

an accuracy-related penalty under section 6662(a) of $1,127. Respondent

determined that petitioner’s $20,056 distribution was unreported taxable income.

Respondent also determined that petitioner was liable for a 10% additional tax of

$2,006 pursuant to section 72(t). Petitioner did not receive the notice of

deficiency and, therefore, did not timely petition the Court in response to the

notice of deficiency.3

III.   Offer-in-Compromise, CDP Hearing, and Remand

       Respondent assessed the deficiency and accuracy-related penalty and sent

petitioner a notice of balance due. In response petitioner submitted to respondent

a Form 656-L, Offer in Compromise (Doubt as to Liability), dated March 20,

2013, for her 2010 tax liability. Petitioner challenged the correctness of the tax

liability by attaching qualifying tuition payment documentation to Form 656-L.


       3
        Petitioner filed a petition 253 days after the notice of deficiency was mailed
to her. Even though petitioner checked the box to dispute a notice of deficiency,
she attached to the petition letters disputing other IRS notices and letters. That
petition was dismissed for lack of jurisdiction because the Court has no authority
to extend the period provided by law for filing a petition “whatever the equities of
a particular case may be and regardless of the cause for its not being filed within
the required period.” Axe v. Commissioner, 58 T.C. 256, 259 (1972); see also sec.
6213(a); Estate of Cerrito v. Commissioner, 73 T.C. 896 (1980).
                                        -5-

[*5] Petitioner’s offer-in-compromise (OIC) was sent to the IRS Appeals Office

(Appeals) for consideration by an Appeals officer.

      While Appeals Officer (AO) Christopher Roy was considering petitioner’s

OIC, respondent issued to petitioner a Letter 1058, Final Notice of Intent to Levy

and Notice of Your Right to a Hearing, dated July 31, 2013, for 2010 (levy

notice). Upon receipt of the levy notice, petitioner timely submitted Form 12153,

Request for a Collection Due Process or Equivalent Hearing, and checked the box

for “Proposed Levy or Actual Levy”. On Form 12153 petitioner did not select a

collection alternative but stated that “[t]he intent to levy my property should be

withdrawn. At the time the tax was due I was a full time student.” Petitioner’s

CDP hearing was assigned to Appeals Settlement Officer (SO) Diana Muniz.

      On January 31, 2014, SO Muniz issued to petitioner a letter scheduling a

telephone CDP hearing for February 25, 2014. In the letter SO Muniz erroneously

informed petitioner that she would be unable to dispute the underlying liability at

the CDP hearing because she had had a prior opportunity and that AO Roy was

considering her OIC in a separate Appeals setting.

      On February 25, 2014, SO Muniz called petitioner for the CDP hearing. SO

Muniz informed petitioner that on the basis of the documents she provided to

support her OIC, AO Roy partially abated her income tax liability by $1,008 and
                                         -6-

[*6] abated the accuracy-related penalty in full. SO Muniz again erroneously

informed petitioner that she would be unable to contest the 2010 tax liability.

Petitioner then stated that she did not owe the tax and wanted to review AO Roy’s

determination on her OIC before discussing her case further.

       SO Muniz sent petitioner a letter, dated February 28, 2014, with AO Roy’s

OIC determination attached. The letter scheduled a followup telephone call for

March 5, 2014. During that call petitioner again challenged the correctness of the

tax liability and stated that she did not owe the tax and “wanted her day in Court”.

SO Muniz then stopped the CDP hearing and closed petitioner’s case and, on

March 26, 2014, issued a Notice of Determination Concerning Collection

Action(s) Under Section(s) 6320 and/or 6330 (notice of determination), sustaining

the proposed collection action for petitioner’s remaining 2010 Federal income tax

liability.

IV.    Proceedings Before the Court

       Petitioner filed a petition to the Court for review of the notice of

determination. Petitioner asserted that she was given a refund after the IRS

reviewed the distribution from her retirement account. She further asserted that

releasing the refund was “due to negligence on the IRS” and because the IRS was

negligent she “should not have to pay for an IRS employee mistake.”
                                         -7-

[*7] On September 22, 2015, respondent filed a motion to remand to allow

petitioner an opportunity to raise any legitimate arguments regarding her 2010

underlying liability. In the motion respondent indicated that SO Muniz wrongly

believed that petitioner could not challenge her underlying liability at the CDP

hearing because she had had a prior opportunity to do so. On September 29, 2015,

the Court granted respondent’s motion to remand and ordered that petitioner be

provided a supplemental CDP hearing.

      A.     Supplemental CDP Hearing

      Petitioner’s case was assigned to AO Mayngor Lam and SO William Taylor,

neither of whom had previously played any substantive role in petitioner’s case.

On October 28, 2015, AO Lam sent petitioner a letter scheduling a telephone

supplemental CDP hearing to discuss additional facts and information regarding

her underlying liability pursuant to the Court’s order.

      The supplemental CDP hearing was held on November 9, 2015. Petitioner

did not offer any additional documents or information challenging the underlying

liability at the hearing. Instead, petitioner asserted that the IRS misallocated funds

by issuing her a refund. AO Lam informed petitioner that a determination of her

underlying liability would be made on the basis of review of the information she

had previously provided with her OIC and her CDP hearing request. AO Lam
                                        -8-

[*8] then transferred the case to SO Taylor, who verified that the requirements of

applicable law and admistrative procedure were met in petitioner’s case. He

further verified that a proper assessment of petitioner’s tax liability was made and

that a notice and demand for payment was timely mailed to petitioner’s last known

address.

      On December 21, 2015, SO Taylor issued to petitioner a letter scheduling a

followup supplemental CDP hearing for January 13, 2016, to discuss collection

alternatives to the proposed levy. In the letter SO Taylor informed petitioner that

she qualified for an installment agreement and that he would process the necessary

paperwork if she agreed to the proposed monthly payment. SO Taylor also stated

that if petitioner did not agree to the proposed amount, she would need to

complete a Form 433-A, Collection Information Statement for Wage Earners and

Self-Employed Individuals, before they could discuss other options.

      Petitioner did not respond to SO Taylor’s letter or provide him with a Form

433-A or financial documents. SO Taylor called petitioner for the scheduled

supplemental CDP hearing on January 13, 2016, and left her a voicemail message

informing her that if she did not want a collection alternative then her case would

be closed. Petitioner did not return SO Taylor’s call or send him any other

correspondence. On February 10, 2016, SO Taylor issued to petitioner a
                                          -9-

[*9] Supplemental Notice of Determination Concerning Collection Action(s)

Under Section 6320 and/or 6330 sustaining the proposed levy for 2010

(supplemental notice of determination).

      B.     Respondent’s Summary Judgment Motion

      After issuing the supplemental notice of determination, respondent filed a

motion for summary judgment. The Court held a hearing on respondent’s motion

on May 23, 2016. The issues respondent raised for summary judgment were

whether: (1) petitioner challenged the existence or amount of her 2010 income tax

liability in her CDP hearing, (2) the petition raises valid claims for relief,

(3) respondent is precluded from determining a deficiency after issuing a refund,

and (4) SO Taylor abused his discretion when he sustained the proposed levy

action.

      The Court denied respondent’s motion for summary judgment on the issues

regarding petitioner’s underlying liability. The Court held that petitioner properly

challenged her underlying liability during her initial CDP hearing and in her

petition. McCree v. Commissioner, T.C. Memo. 2017-145, at *14-*16. However,

the Court granted respondent partial summary judgment holding that respondent is

not precluded from determining a deficiency after issuing a refund. Id. at *19.

The Court stated that “[t]he practice of issuing refunds before examining a return
                                        - 10 -

[*10] does not estop the IRS from later determining a deficiency on the return at

issue and seeking to recover the funds previously allowed as a refund.” Id. The

Court further determined that contrary to petitioner’s assertion, Letter 4464C is

not an audit letter, and thus, petitioner was not subject to two audits. Id. at *16-

*19.

       The Court did not make a determination regarding whether SO Taylor

abused his discretion when he sustained the proposed levy. Because the Court

determined that petitioner’s underlying liability should be reviewed de novo at a

future trial setting, the Court stated that a review of SO Taylor’s administrative

determination was premature. Id. at *20.

       C.    Trial

       The Court held a trial on this case in Dallas, Texas. At trial petitioner raised

the same arguments she asserted in response to respondent’s motion. Specifically,

petitioner contended that the IRS sent her a fraudulent refund, and because the IRS

failed to verify that she was entitled to that refund, she should not be held liable

for her 2010 tax deficiency. At the end of the trial the Court ordered that each

party file an original brief by April 23, 2018. Both parties complied with this

order and filed their briefs.
                                         - 11 -

[*11]                                  OPINION

I.      Jurisdiction

        Section 6331(a) authorizes the Secretary4 to levy upon property and

property rights of a taxpayer who fails to pay a tax within 10 days after notice and

demand. Before the Secretary may levy upon the taxpayer’s property, the

Secretary must first notify the taxpayer of the Secretary’s intent to levy. Sec.

6331(d)(1). The Secretary must also notify the taxpayer of his right to a CDP

hearing. Sec. 6330(a)(1).

        If the taxpayer requests a CDP hearing, the hearing is conducted by

Appeals. Sec. 6330(b)(1). At the hearing the taxpayer may raise any relevant

issue relating to the unpaid tax or the proposed collection action. Sec.

6330(c)(2)(A). Once the SO makes a determination, the taxpayer may appeal to

this Court for review. Sec. 6330(d)(1).

II.     Petitioner’s Underlying Tax Liability

        Where the validity of the underlying tax liability is at issue, we review the

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

Commissioner, 114 T.C. 176, 181-182 (2000). A taxpayer may challenge the


        4
       The term “Secretary” means the Secretary of the Treasury or his delegate.
Sec. 7701(a)(11)(B).
                                        - 12 -

[*12] underlying tax liability during a CDP hearing if he did not receive a

statutory notice of deficiency for the liability or did not otherwise have the

opportunity to dispute the liability. Sec. 6330(c)(2)(B); see also Montgomery v.

Commissioner, 122 T.C. 1, 9-10 (2004). The Court will consider an underlying

tax liability on review only if the taxpayer properly raised the issue during the

CDP hearing. Giamelli v. Commissioner, 129 T.C. 107, 115 (2007); see also sec.

301.6330-1(f)(2), Q&A-F3, Proced. & Admin. Regs.

      Petitioner did not receive a notice of deficiency. McCree v. Commissioner,

at *4. In our prior opinion this Court held that petitioner properly contested her

underlying liability during her initial CDP hearing by attaching to her CDP

hearing request and to her petition documents that supported reducing her

underlying tax liability. Id. at *14, *16. Although the Court was not able to

decide the merits of petitioner’s underlying liability on summary judgment, the

Court determined that petitioner should be allowed to contest it in a future trial

setting. Id. at *15. Consequently, because petitioner properly raised her

underlying liability in her petition and during her initial CDP hearing, we will now

review this issue de novo. See Giamelli v. Commissioner, 129 T.C. at 111; Sego

v. Commissioner, 114 T.C. at 610; Goza v. Commissioner, 114 T.C. at 181-182.
                                        - 13 -

[*13] A.     Taxability of Petitioner’s Retirement Distribution

      Generally, the Commissioner’s determination of a deficiency is presumed

correct, and the taxpayer bears the burden of proving that it is incorrect. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The U.S. Court of Appeals

for the Fifth Circuit, to which an appeal would presumably lie absent a stipulation

to the contrary, see sec. 7482(b)(1)(A), has held that for the presumption of

correctness to attach in an unreported income case, the Commissioner must

establish “some factual foundation” for the assessment, see Portillo v.

Commissioner, 932 F.2d 1128, 1133 (5th Cir. 1991), aff’g in part, rev’g in part

T.C. Memo. 1990-68; Carson v. United States, 560 F.2d 693, 696 (5th Cir. 1977).

Petitioner concedes that she received her ERS distribution in 2010. Consequently,

the presumption of correctness attaches to respondent’s notice of deficiency, and

petitioner bears the burden of proving that the determination is incorrect.

      Section 402(a) provides that “any amount actually distributed to any

distributee by any employees’ trust described in section 401(a) which is exempt

from tax under section 501(a) shall be taxable to the distributee, in the taxable year

of the distributee in which distributed, under section 72 (relating to annuities).”

The facts establish that petitioner actually received a distribution of $20,056 from

a qualified defined benefit plan under section 401(a). Because distributions from
                                         - 14 -

[*14] qualified plans are generally treated as annuities and subject to tax to the

extent provided in section 72, see Wright v. Commissioner, T.C. Memo. 2005-5,

this sum is taxable to petitioner unless some exclusion applies.

        Section 402(c)(1) provides a “rollover” exception to this general rule. It

excludes from gross income any portion of a distribution that is transferred to an

“eligible retirement plan” as defined in section 402(c)(8)(B). Section 402(c)(3)(A)

provides the general rule that the rollover exclusion is not available for “any

transfer of a distribution made after the 60th day following the day on which the

distributee received the property distributed.” Thus, to qualify for the rollover

exclusion, petitioner must show that she transferred some portion of the

distribution she received, within 60 days of receipt, to another eligible retirement

plan.

        Petitioner has not presented evidence showing that she transferred any

portion of her ERS distribution to another eligible retirement plan within 60 days

of receipt. To the contrary, petitioner admitted in her petition and at trial that she

deposited her ERS distribution in her savings account in Bank of America, a

nonqualified account. Because petitioner did not roll over any of the proceeds

from her ERS distribution into a qualified plan within 60 days of receipt, the
                                        - 15 -

[*15] “rollover” exception does not apply. Therefore, respondent properly

included the ERS distribution in petitioner’s gross income.5

      B.     Additional Tax on Early Distribution

      We now address whether petitioner is liable for the 10% additional tax on

the retirement distribution imposed by section 72(t).

      Section 72(t)(1) imposes a 10% additional tax on the taxable amount of an

early distribution from a qualified retirement plan, which includes plans described

in section 401(a), such as a trust exempt from tax under section 501(a). A

distribution is early if made to an employee who has not attained age 59-1/2. Sec.

72(t)(2)(A)(i). Among other exceptions not relevant here, a taxpayer may be able

to reduce the amount of an early distribution that is subject to the 10% additional

tax by the amount of a taxpayer’s qualified higher education expenses paid in the

year of the early distribution.6 Sec. 72(t)(2)(E).


      5
        It appears that petitioner was the recipient of a windfall during the initial
CDP hearing. For reasons not clear from the record, AO Roy reduced the taxable
amount of the distribution to $16,056 in calculating his adjustment to petitioner’s
tax liability. We will treat this reduction as a concession by respondent.
      6
        As stated supra, petitioner’s ERS plan was a qualified defined benefit plan
under sec. 401(a). The sec. 72(t)(2)(E) exception applies only to distributions
from an “individual retirement plan”. Respondent does not contend that
petitioner’s higher education expenses are ineligible for the sec. 72(t)(2)(E)
exception on account of this distinction. Cf. Uscinski v. Commissioner, T.C.
                                                                        (continued...)
                                         - 16 -

[*16] In general, “qualified higher education expenses” means qualified higher

education expenses (as defined in section 529(e)(3)) for education furnished to the

taxpayer, the taxpayer’s spouse, or any child of the taxpayer or the taxpayer’s

spouse, at an eligible educational institution. Sec. 72(t)(7). These include tuition,

fees, books, supplies, and equipment. Sec. 529(e)(3)(A)(i). In the case of an

individual who is an eligible student (as defined in section 25A(b)(3)) for any

academic period, the term also includes reasonable costs for the period (as

determined under the qualified tuition program) for room and board while

attending an eligible educational institution. Sec. 529(e)(3)(B)(i). In general, the

term “eligible student” means, with respect to any academic period, a student who

is enrolled at least half time in a degree or certificate program at an eligible

institution of higher education. See secs. 529(e)(3)(B)(i), 25A(b)(3); Higher

Education Amendments of 1986, Pub. L. No. 99-498, sec. 407(a), 100 Stat. at

1479-1480 (codified at 20 U.S.C. sec. 1091(a)(1) (2006)).

      Petitioner, who does not dispute that her ERS plan was a qualified

retirement plan, was 42 years old at the time of the distribution. Because

petitioner had not attained age 59-1/2, she received an early distribution from a

      6
        (...continued)
Memo. 2005-124 (holding that sec. 72(t)(2)(E) did not apply to a distribution from
a sec. 401(k) account). We accordingly deem the issue conceded.
                                       - 17 -

[*17] qualified retirement plan under section 72(t)(1), and a 10% additional tax is

imposed on the taxable portion of such distribution unless an exception applies.

      When petitioner filed her OIC, she attached documents that showed she paid

higher education expenses in the same year as her early distribution. These

documents showed that petitioner was a full-time student at the University of

Phoenix in 2010. According to petitioner’s tuition statement, the University of

Phoenix received payments of $11,727 for petitioner’s tuition and expenses. This

statement also showed that petitioner received scholarships and grants of $7,421.

On the basis of this information, respondent has conceded that petitioner paid

qualified higher education expenses of $4,306 ($11,727 ! $7,421) and that the

10% additional tax does not apply to this portion of petitioner’s ERS distribution.

      At trial petitioner did not offer any evidence that the remaining $15,750

($20,056 minus the portion allocated to higher education expenses of $4,306) of

her ERS distribution qualifies for any other exception to the additional tax

imposed on early distributions. Therefore, petitioner is subject to the 10%

additional tax on $15,750 of the early distribution she received from her ERS

retirement account.7

      7
      During petitioner’s OIC proceedings, AO Roy incorrectly determined that
the amount of petitioner’s qualified higher education expenses was $4,000 for
                                                                     (continued...)
                                       - 18 -

[*18] III.   Respondent’s Administrative Determinations

      We now turn to respondent’s determination to proceed with collection,

which we review under an abuse of discretion standard. See Sego v.

Commissioner, 114 T.C. at 610; Goza v. Commissioner, 114 T.C. at 182. The

taxpayer bears the burden of proving that the SO exercised his discretion

“arbitrarily, capriciously, or without sound basis in fact or law.” Woodral v.

Commissioner, 112 T.C. 19, 23 (1999); see Rule 142(a). The Court does not

conduct an independent review and substitute its judgment for that of the SO.

Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir.

2006). If the SO follows all statutory and administrative guidelines and provides a

reasoned, balanced decision, the Court will not reweigh the equities. Link v.

Commissioner, T.C. Memo. 2013-53, at *12.

      In deciding whether the SO abused his discretion in sustaining the proposed

levy, we review the record to determine whether the SO: (1) properly verified that

the requirements of applicable law or administrative procedure had been met,

(2) considered any relevant issues petitioner raised, and (3) considered “whether


      7
        (...continued)
reasons not clear in the record. Given respondent’s concession that petitioner’s
qualified educational expenses for 2010 were $4,306, a Rule 155 computation will
be necessary.
                                        - 19 -

[*19] any proposed collection action balances the need for the efficient collection

of taxes with the legitimate concern of * * * [petitioner] that any collection action

be no more intrusive than necessary.” See sec. 6330(c)(3). Our review of the

record confirms that SO Taylor properly discharged all of these duties.

      Petitioner has not advanced any evidence that SO Taylor abused his

discretion in sustaining the proposed levy action against petitioner for her 2010

income tax liability. Petitioner’s briefs and trial testimony did not identify any

defects in SO Taylor’s verification process. At trial petitioner argued that she

should not be required to pay her 2010 income tax liability because respondent

should have verified that she did not roll over the proceeds from her ERS

distribution when respondent’s IVO reviewed her 2010 tax return. She further

alleged that respondent misallocated funds by issuing a refund to her before

determining a deficiency for the 2010 tax year. This Court has already rejected

petitioner’s arguments by holding that (1) the IVO’s review and verification of

petitioner’s 2010 tax return does not constitute an audit or examination and

(2) respondent is not precluded from determining a deficiency after issuing a

refund. McCree v. Commissioner, at *18-*20.

      It is clear from our review of the record that SO Taylor verified that the

requirements of any applicable law and administrative procedure were followed
                                       - 20 -

[*20] and that in sustaining the proposed levy against petitioner, SO Taylor

properly balanced “the need for the efficient collection of taxes with the legitimate

concern of * * * [petitioner] that any collection action be no more intrusive than

necessary.” See sec. 6330(c)(3).

      We therefore hold that petitioner has not satisfied her burden of showing

that SO Taylor abused his discretion in sustaining the proposed levy, and we will

sustain respondent’s determination to proceed with collection against petitioner.

      To reflect the foregoing,


                                                Decision will be entered under

                                       Rule 155.
