                       T.C. Memo. 2005-88



                     UNITED STATES TAX COURT



                 KENNETH HAWKINS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1468-03L.             Filed April 19, 2005.



     Kenneth Hawkins, pro se.

     Vivian N. Rodriguez, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GERBER, Chief Judge:   On January 2, 2003, respondent sent

petitioner a Notice of Determination Concerning Collection

Action(s) Under Section 63201 and/or 6330 (notice of


     1
       Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code in effect for the
years at issue.
                                - 2 -

determination), in which respondent sustained the filing of a

Federal tax lien for petitioner’s 1993, 1995, and 1996 tax

liabilities.   Petitioner had previously made two offers-in-

compromise regarding these tax liabilities.     Respondent rejected

the first offer and returned the second.

     The issue for consideration is whether respondent abused his

discretion by sustaining the filing of the Federal tax lien.

                           FINDINGS OF FACT2

     Petitioner resided in Pompano Beach, Florida, when the

petition in this case was filed.     He was self-employed for

taxable years 1993, 1995, and 1996 (collectively, the subject

years), operating a business known as “Professional

Investigations and Consulting Inc.”.     Petitioner filed untimely

tax returns for all subject years, with unpaid tax liabilities

for 1995 and 1996 and a small refund for 1993.     At all relevant

times, petitioner had an unpaid Federal income tax liability

outstanding for each of the subject years, much of which arose

out of self-assessment.3    Petitioner was not married and did not

file joint returns for the taxable years under consideration.




     2
       The parties’ stipulation of facts is incorporated by this
reference.
     3
       All of the 1995 and 1996 liabilities arose from unpaid tax
shown on petitioner’s self-assessed tax returns, while an audit
for the 1993 taxable year resulted in a deficiency determination
for that taxable year.
                                - 3 -

Petitioner did not petition this Court to redetermine any of the

tax liabilities, and the underlying tax liabilities are not in

dispute.

     Petitioner married during 1997, and on February 10, 1997, he

and his wife purchased a residence as tenants by the entireties.

Petitioner contributed $50,000, or one-half of the downpayment.

     Between October 25, 1994, and December 2, 1997, respondent

assessed tax and additions to tax against petitioner for 1993,

1995, and 1996, based on audit examinations and amounts shown as

due on income tax returns.    On December 3, 1997, petitioner sent

respondent a Form 656, Offer-in-Compromise (first offer), based

on doubt as to collectibility for the subject years, offering to

settle the total outstanding tax liabilities for $16,209.   At

that time, petitioner’s outstanding and unpaid tax liability was

$26,266.06.   Petitioner on Form 433-A, Collection Information

Statement for Individuals, claimed that he had a 50-percent

interest in his home and monthly net business income and living

expenses of $1,400 and $1,648, respectively.   On February 13,

2001, respondent sent petitioner a notice rejecting petitioner’s

first offer, stating that the amount owed was legally due and

appeared to be collectible.

     On September 5, 2001, petitioner submitted a second offer-

in-compromise (second offer) for the subject years, this time for

$2,200.    In the second offer, petitioner’s only reference to his
                                - 4 -

wife’s physical condition was the statement:    “my wife is

unemployable.   She is on Social Security Disability and earns no

income.”   At that time, petitioner’s total outstanding tax

liability had increased to $38,165.32.     Petitioner claimed on the

Form 433-A that he had a 25-percent interest in his home and

monthly net business income and living expenses of $2,550 and

$3,384, respectively.4   On Form 433-A, petitioner explained his

home ownership as follows:    “As I borrowed my contribution toward

the purchase of the home, and as a result of the fact that my

wife’s assets were the basis for the ability to obtain the

mortgage in the first place, my interest in the house is 25%

while hers is 75%.”   On June 17, 2002, respondent returned the

offer, stating that petitioner did not have any changed

circumstances and that the offer was not materially different

from the prior offer.


     4
       The total living expenses for both offers were calculated
by petitioner as follows:

            Expense              First Offer      Second Offer

   National standard1               $448               -0-
   Housing/utilities               1,000             $2,042
   Transportation                   ---                 800
   Health insurance premium          200                340
   Taxes                            ---                 100
   Life insurance                   ---                 102
     Total                         1,648              3,384
     1
      Includes clothing and clothing services, food,
housekeeping supplies, personal care products and services, and
miscellaneous.
                               - 5 -

     For the first offer, respondent accepted petitioner’s

claimed amount of monthly business net income but determined

petitioner’s allowable living expenses to be $433 on the basis of

the national standard expenses table amount.   For the second

offer, respondent determined petitioner’s net monthly business

income to be $3,108, on the basis of petitioner’s claimed revenue

and expenses after disallowing some expenses that were double-

counted as both business and personal expenses.   To estimate

petitioner’s living expenses, respondent first computed

petitioner’s and his wife’s shares of monthly income, on the

basis of the recomputed $3,108 income and petitioner’s wife’s

$1,638 of Social Security and interest income reported for her

2000 taxable year.   On the basis of this information, respondent

determined that petitioner generated 65 percent of the income and

petitioner’s wife generated 35 percent of the income.

     Respondent then applied this percentage to recompute

petitioner’s expenses on the basis of petitioner’s own

calculations or amounts indicated for local or national

standards.   Respondent allowed the full amount of the claimed

life insurance expense but prorated petitioner’s claimed health

insurance premium and taxes by 65 percent.   Also, respondent

allowed the full Broward County local standard amount for

transportation but allowed only a 65-percent prorated amount of

the local standard for housing and of the national standard

expense.
                                - 6 -

     Respondent also determined, for both offers, petitioner’s

equity in assets, on the basis of petitioner’s submitted

information, statements from third parties, and a review of

public records. Respondent determined the value of petitioner’s

home to be $342,096 for the first offer, on the basis of a

valuation by the Broward County Property Appraiser.        For the

second offer, respondent determined the value of petitioner’s

home had increased to at least $610,000, because a similar home

with a tax assessment lower than petitioner’s home had sold for

that much in the same development.      The combination of

petitioner’s equity and earnings multiple resulted in a

determination that petitioner’s reasonable collection potential

(RCP) exceeded both the amount of the offer and the outstanding

tax liability for both offers.5


     5
         The calculations can be summarized as follows:

                                   First Offer         Second Offer

  Equity in home1                           $20,688             $41,746
  IRA                                         2,000               1,809
  Cash on hand                                                    5,738
  Net value of assets                        22,688              49,293
  Monthly income                  $1,400              $3,108
  Less: Expenses                    (433)             (2,423)
  Disposable income                  967                 685
  Multiple                         x 48                 x 48
  Value of income                            46,416              32,880
  Reasonable collection                      69,104              82,173

  Tax liability                              26,266              38,165
  OIC                                        16,209               2,200
     1
       Value based on 50 percent ownership for first offer and 25
percent ownership for second offer.
                                 - 7 -

     On June 24, 2002, respondent filed a notice of Federal tax

lien on petitioner’s property.    On June 28, 2002, respondent sent

petitioner a Notice of Federal Tax Lien and Your Right to a

Hearing.    On July 3, 2002, petitioner filed a Form 12153, Request

for a Collection Due Process Hearing.    Petitioner attended the

October 24, 2002, hearing but did not present any collection

alternatives or make any additional offer and refused to consider

any collection alternatives that did not entail removal of the

tax lien.   On January 2, 2003, respondent sent petitioner a

notice of determination in which the filing of the Federal tax

lien was sustained.

                              OPINION6

     Petitioner made two offers in this case to settle his

Federal income tax liability.    Respondent accepted neither offer,

then placed a Federal tax lien on petitioner’s property.     We




     6
       Petitioner served untimely discovery requests upon
respondent. In addition, petitioner attempted to offer
documentary evidence with his posttrial brief. Petitioner argues
that he has been prejudiced by not being able to gather or submit
evidence necessary to adequately present his case. Petitioner
did not timely move the Court to compel discovery. See Rule
104(b). More importantly, petitioner has provided no evidence
that respondent failed to comply with petitioner’s requests or
misled petitioner in any way. Finally, we will not treat
documents attached to briefs as evidence. Rule 143(b); Clifton-
Bligh v. Commissioner, T.C. Memo. 2003-44. We note that, even if
the documents offered by petitioner were admissible, they would
not change the outcome of this case.
                                 - 8 -

decide whether respondent abused his discretion in filing the

lien.    That question depends on whether respondent’s failure to

accept petitioner’s offers was an abuse of discretion.    Nearly 4

years separated the first and second offer, and the second offer

was substantially less than the first.    Because the making of the

second offer was so long after the first and the second offer

preceded the filing of the lien, we need to consider only whether

respondent abused his discretion in rejecting the second offer.7

        Section 6320 provides that a taxpayer shall be notified in

writing by the Secretary of the filing of a Federal tax lien and

provided with an opportunity for an administrative hearing.     Sec.

6320(b).     Hearings under section 6320 are conducted in accordance

with the procedural requirements set forth in section 6330.     Sec.

6320(c).

        When an Appeals officer issues a determination regarding a

disputed collection action, a taxpayer may seek judicial review

with the Tax Court or a District Court, as appropriate.    Sec.

6330(d); see Davis v. Commissioner, 115 T.C. 35, 37 (2000); Goza

v. Commissioner, 114 T.C. 176, 179 (2000).    Where the validity of

the underlying tax liability is properly at issue, the Court will

review the matter de novo.     Sego v. Commissioner, 114 T.C. 604,

610 (2000).    However, when the validity of the underlying tax is


     7
       We consider the first offer only to the extent helpful to
determine whether respondent abused his discretion in rejecting
the second offer.
                               - 9 -

not at issue, the Court will review the Commissioner’s

administrative determination for an abuse of discretion.     Id.;

Goza v. Commissioner, supra at 181-182.    Petitioner does not

dispute the validity of the underlying tax.    Accordingly, our

review is for an abuse of discretion.

     We do not conduct an independent review of what would be

acceptable offers-in-compromise.    We review only whether the

Appeals officer’s rejection of the offer-in-compromise was

arbitrary, capricious, or without sound basis in fact or law.

Woodral v. Commissioner, 112 T.C. 19, 23 (1999).    The Court

considers whether the Commissioner abused his discretion in

rejecting a taxpayer’s position with respect to any relevant

issues, including offers of collection alternatives, which

include an offer-in-compromise.    See sec. 6330(c)(2)(A).

     Section 7122(a) authorizes the Secretary to compromise any

civil case arising under the internal revenue laws.    The three

standards that the Secretary may use to compromise a liability

are doubt as to liability, doubt as to collectibility, and the

promotion of effective tax administration.    Sec. 7122(c)(1); sec.

301.7122-1T(b), Temporary Proced. & Admin. Regs., 64 Fed. Reg.

39024 (July 19, 1999).8   Petitioner bases both offers on doubt as


     8
       Sec. 7122(c) is effective only for offers-in-compromise
submitted after July 22, 1998. Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3462,
112 Stat. 764. Sec. 301.7122-1T(b), Temporary Proced. & Admin.
Regs., 64 Fed. Reg. 39024 (July 19, 1999), is effective for
offers submitted after July 19, 1999, but sec. 301.7122-1,
                              - 10 -

to collectibility.

     Section 7122(c) provides the standards for evaluation of

such offers.   Under section 7122(c)(2):

        (A) * * * the Secretary shall develop and publish
     schedules of national and local allowances designed to
     provide that taxpayers entering into a compromise have
     an adequate means to provide for basic living expenses.

        (B) Use of schedules.-–The guidelines shall
     provide that officers and employees of the Internal
     Revenue Service shall determine, on the basis of the
     facts and circumstances of each taxpayer, whether the
     use of the schedules published under subparagraph (A)
     is appropriate and shall not use the schedules to the
     extent such use would result in the taxpayer not having
     adequate means to provide for basic living expenses.

Under the regulations for doubt as to collectibility cases:

     A determination of doubt as to collectibility will
     include a determination of ability to pay. * * * To
     guide this determination [of the amount of the
     taxpayer’s basic living expenses], guidelines published
     by the Secretary on national and local living expense
     standards will be taken into account. [Sec. 301.7122-
     1T(b)(3)(ii), Temporary Proced. & Admin. Regs., supra.]
     Thus, use of the national and local average statistics

published by the Internal Revenue Service is an appropriate

method to determine a taxpayer’s monthly expenses.   By using

national and local averages for some of petitioner’s expenses



Proced. & Admin. Regs., applies to offers pending on or submitted
on or after July 18, 2002. We do not need to address the
applicability of the statute and the regulations to the first
offer because we focus on the second offer. The second offer was
made on Sept. 5, 2001, and returned on June 17, 2002, after the
effective date of the statutory change and the temporary
regulation but before the effective date of the new regulation.
The statute and the temporary regulation are therefore effective
for the second offer. See Galvin v. Commissioner, T.C. Memo.
2003-263, for a discussion of the addition of sec. 7122(c).
                               - 11 -

rather than petitioner’s submitted expenses, the Appeals officer

characterized petitioner as able to provide for basic living

expenses.   Thus, the Appeals officer did not violate statutory

limits by using the tables.    See sec. 7122(c)(2)(B).   In

addition, petitioner has not shown that his submitted expenses

were more appropriate than the national or local averages.

Respondent’s proration of some of petitioner’s expenses was

appropriate because even though petitioner claims to incur all of

the household expenses because of his wife’s disability and lack

of income, information returns show that his wife still generates

passive income.    While that income should not be considered in

determining petitioner’s collection potential, it should be

considered in determining petitioner’s responsibility for shared

living expenses.   1 Administration, Internal Revenue Manual

(CCH), sec. 5.8.5.5.3, at 16,342.     Accordingly, respondent’s use

of the national and local averages combined with a prorated

expense allowance was a reasonable way to estimate petitioner’s

expenses.

     The denial of petitioner’s offers was based on objective

computations of petitioner’s disposable income and assets,

computed separately for each offer.     The revenue officer even

considered the alleged decrease, to 25 percent, in petitioner’s

equity ownership in the home between the first and the second
                                - 12 -

offer.9   Respondent refused the second offer after applying the

national and local averages to estimate petitioner’s expenses

because the RCP exceeded the full amount of the tax liability and

was certainly much more than petitioner’s offer.        In fact,

petitioner’s second offer falls short of a reasonable offer even

if his own calculation of expenses is used.        The equity in

petitioner’s home alone exceeds both the offer and the full

amount of the tax liability, even at 25-percent ownership.         Even

if we recalculated petitioner’s RCP in a manner most favorable to

petitioner, using a negative multiple of petitioner’s cashflows

with which he could offset equity in his other assets,10 the RCP

would far exceed petitioner’s $2,200 offer and cover most of the

outstanding $38,165.32 tax liability.11    Thus, petitioner’s

     9
       Calculation of 50-percent or only 25-percent home
ownership also shows that respondent in no way considered
petitioner’s wife’s assets in determining petitioner’s reasonable
collection potential, despite petitioner’s allegations to the
contrary.
     10
        The regulations and the internal revenue manual are both
silent on how to apply a negative future income. See sec.
301.7122-1T(c), Temporary Proced. & Admin. Regs., supra; 1
Administration, Internal Revenue Manual (CCH), sec. 5.8.5.5, at
16,339.
     11
       The collection potential based on negative income is
shown in the following calculation:

                                           Second Offer

          Equity in home                            $41,746
          IRA                                         1,809
          Cash on hand                                5,738
          Net value of assets                        49,293
          Monthly income                  $3,108
                                - 13 -

second offer was inadequate.

     Petitioner argues that respondent’s haste in filing the

notices of lien shows that respondent was predisposed to reject

petitioner’s second offer.    Respondent, however, filed the

Federal tax lien 1 week after petitioner’s second offer was

returned, and we are not persuaded that in doing so respondent

failed to properly consider petitioner’s second offer or abused

his discretion in any other manner.

     Amongst petitioner’s numerous arguments only one has any

potential for success--his allegation that he was suffering from

economic hardship when he submitted the second offer.           Petitioner

relies on the internal revenue manual to support his position

that even if he has the ability to pay the liability, an offer-

in-compromise may be accepted if he suffers from economic

hardship.    See 1 Administration, Internal Revenue Manual (CCH),

sec. 5.8.11.2.1, at 16,385-5.       Factors related to economic

hardship may include:    (1) Long-term illness, medical condition,

or disability may render the taxpayer incapable of earning a

living, (2) the taxpayer may have a set monthly income and no

other means of support, and the income is exhausted each month


            Less: Expenses                 (3,384)
            Disposable income                (276)
            Multiple                         x 48
            Value of income                          (13,248)
            Reasonable collection                     36,045
                               - 14 -

caring for dependents, and (3) the taxpayer may be unable to

borrow against the equity in assets so that enforced collection

is unlikely.   Id.   Petitioner alleges that the first and third

factors are relevant to his situation.

     Petitioner alleges that his wife’s permanent disability

makes the first factor relevant.   The only evidence petitioner

offered concerning his wife’s disability was:   (1) His statement

in the second offer that his wife was unemployable, was on Social

Security disability, and earned no income; and (2) his own

general testimony that his wife became disabled in 1999.     When he

made his offer petitioner did not state the nature of her

disability, present any evidence of its financial effect, or even

allege that it caused economic hardship.   The only monthly

expense submitted in the second offer that could have related to

his wife’s disability was health insurance of $340, representing

only 10 percent of the claimed expenses.   The lack of any

evidence or specificity to support petitioner’s allegation left

respondent without an adequate basis for making any findings

concerning the financial impact of the alleged disability.    There

is no indication that the revenue officer summarily refused to

consider any changed circumstances of petitioner.   Rather,

petitioner did not provide sufficient proof of the nature and

extent of his alleged hardship.

     Furthermore, when economic hardship is a factor in a doubt-
                              - 15 -

as-to-collectibility situation, the unique circumstances of the

taxpayer to be considered in determining the taxpayer’s

reasonable basic living expenses do not include the maintenance

of an affluent or luxurious standard of living.   Sec. 301.7122-

1T(b)(4)(i), Temporary Proced. & Admin. Regs, 64 Fed. Reg. 39024

(July 21, 1999); sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs.

Substantial equity in a home worth at least $610,000 would weigh

against a finding that petitioner was suffering economic hardship

when he made the second offer.

     Moreover, petitioner’s allegations with regard to his home

ownership show that petitioner’s assertions are unreliable.

Petitioner admitted on cross-examination that he made a 50-

percent, $50,000 initial contribution to the downpayment.    In

addition, he stated in his first offer he had a 50-percent

interest in his home before his wife’s disability.   He then

alleged in his second offer that his home equity had dropped to

25 percent after the disability, even though he alleged that his

wife’s condition necessitated his making all the mortgage

payments.   Even though respondent accepts this decreased

ownership for purposes of the second offer, petitioner’s attempts

to show a reduction in equity are superficial at best.

Irrespective of petitioner’s actual equity position, his

inconsistent, self-serving explanations show that his allegations

regarding his economic well-being and alleged hardship are
                                 - 16 -

unreliable.

     Next, petitioner argues that the third factor of economic

hardship, the inability-to-borrow factor, is relevant to his

situation.    See supra p. 14.   Citing 1 Administration, Internal

Revenue Manual (CCH), sec. 5.8.11.2.1, at 16,385-5, petitioner

alleges that the existence of the Federal tax lien makes it

impossible to borrow against his home because “in today’s

financial market credit scoring is everything.”    The only

evidence that petitioner offers is Washington Mutual’s general

policy:

     Federal tax liens do not subordinate to any other
     liens.

             If the transaction is a refinance and the
             applicant has entered into a repayment agreement,
             the lien (which is also evidenced in the title
             report) must be paid in full at closing.

     At the section 6320 hearing, the Appeals officer stated

that respondent would be willing to sign a certificate of

subordination to subordinate the lien to a new lender.     Financing

could be available in this situation.     Most importantly,

petitioner has not shown that the lien affected his ability to

borrow, or that he has attempted to borrow only to be thwarted by

the existence of the lien.     Therefore, it appears that petitioner

had sufficient equity in his home against which he could borrow.

     In sum, without more specific evidence of petitioner’s

wife’s condition, respondent could not make any findings as to
                               - 17 -

his economic hardship.    Moreover, even if respondent used all the

expenses petitioner submitted with the claim, petitioner’s second

offer was still unreasonably low.    Accordingly, respondent did

not abuse his discretion by rejecting petitioner’s second offer.

     Under section 6320, the Appeals officer must consider

collection alternatives as well as whether any proposed

collection action balances the need for efficient collection of

taxes with the legitimate concern that collection be no more

intrusive than necessary.    Secs. 6320(c), 6330(c)(2)(A)(iii),

(3)(C).   Even considering the circumstances in a light most

favorable to petitioner, petitioner had the ability to pay over

$36,000 yet offered only $2,200 to compromise the outstanding

$38,165.32 tax liability.    Petitioner suggested no reasonable

collection alternatives and would not even entertain any

collection alternative that did not involve the removal of the

Federal tax lien.   In light of petitioner’s inflexible stance,

respondent’s collection activity was no more intrusive than

necessary.   The Appeals officer thus complied with the

requirements of sections 6320(c) and 6330(c) when he conducted

the hearing and made a determination to keep in place the lien

on petitioner’s assets.

     Petitioner has the ability to pay his undisputed tax

liability.   Most of the liabilities that respondent is attempting

to collect were due with the self-assessed returns petitioner
                             - 18 -

filed nearly a decade ago.

     We have considered all of the contentions and arguments of

the parties that are not discussed herein, and we find them to be

without merit, irrelevant, or moot.    We hold that respondent did

not abuse his discretion and correctly determined to proceed with

collection.

     To reflect the foregoing,

                                      A decision will be entered for

                                 respondent.
