                              T.C. Memo. 2019-151



                        UNITED STATES TAX COURT



   LECIEL L. LOWERY, JR., AND CHARLENE A. LOWERY, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13022-17L.                        Filed November 18, 2019.



      Stephen P. Kauffman and Terry L. Goddard, Jr., for petitioners

      Nancy M. Gilmore and David A. Indek, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      COLVIN, Judge: The issue for decision is whether respondent’s

determination to sustain two proposed levies and the filing of two notices of

Federal tax lien was an abuse of discretion. Because the record before us contains
                                        -2-

[*2] insufficient information to decide this issue, we will remand the case to the

Internal Revenue Service (IRS) Appeals Office for further proceedings.

                               FINDINGS OF FACT

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

husband and wife and resided in Maryland when they timely filed the petition.

A.    Procedural Background

      As of February 7, 2018, petitioners had not paid, and they now concede they

are liable for, the following amounts of Federal income tax, penalties, and interest:

$58,9491 for 2006, $100,997 for 2007, $45,128 for 2008, $64,092 for 2009,

$61,668 for 2010, $65,305 for 2011, $91,225 for 2012, $80,009 for 2013, and

$71,727 for 2014. On October 20, 2015, respondent issued a Final Notice of

Intent to Levy and Notice of Your Right to a Hearing (levy notice) to petitioners

for tax years 2006-13 (first levy notice). On October 29, 2015, respondent issued

a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under 6320 (lien

notice) to petitioners for tax years 2008-13 (first lien notice). On December 2,

2015, respondent issued a levy notice to petitioners for tax year 2014 (second levy

notice). On December 15, 2015, respondent issued a lien notice to petitioners for

      1
       Monetary amounts are rounded to the nearest dollar. Unless otherwise
indicated section references are to the Internal Revenue Code in effect at all
relevant times.
                                         -3-

[*3] tax year 2014 (second lien notice). Petitioners timely submitted Form 12153,

Request for a Collection Due Process or Equivalent Hearing, for each levy and

lien notice (CDP hearing requests).

      Petitioners requested the CDP hearings to obtain consideration of either an

installment agreement or an offer-in-compromise. The IRS Appeals officer (AO)

assigned to petitioners’ case calculated what the Commissioner refers to as

petitioners’ reasonable collection potential (RCP)2 using Form 14561, Income and

Expense/Asset Equity Calculation Table. On May 12, 2017, the AO issued to

petitioners a notice of determination sustaining the collection actions for the first

and second lien notices and the first levy notice and a decision letter sustaining the

collection actions for the second levy notice.3

B.    Petitioner Husband’s Employment

      1.     Petitioner Husband’s Duties

      Petitioner husband is employed as a ship pilot (pilot) on the Chesapeake

Bay. Pilots’ duties include boarding foreign vessels entering Maryland waters and


      2
        RCP is calculated on the basis of a taxpayer’s net realizable equity and
future income for the next 12 to 24 months (after allowing for necessary living
expenses). Internal Revenue Manual (IRM) pt. 5.8.4.3.1 (Apr. 30, 2015).
      3
      A decision letter was sent rather than a notice of determination because the
AO had determined that the CDP hearing request for the second levy notice was
untimely. Respondent now concedes that the request was timely.
                                        -4-

[*4] assuming navigational control. A pilot is taken to a ship via a smaller vessel

and climbs a ladder to board the ship regardless of the weather. Petitioner

husband’s 60th birthday was in 2018. Because of the physical demands of his job,

petitioner husband likely will retire from work as a pilot by 2026.

      2.       Mandatory Deductions From Petitioner Husband’s Income

      As a pilot, petitioner husband is required to be a member of the Association

of Maryland Pilots (Association), which is a partnership. Each month the

Association distributes to petitioner husband an amount equal to his share of the

fees received by the Association less several mandatory deductions. Mandatory

deductions comprise health insurance premiums ($1,887), life insurance premiums

($27), supplemental profit-sharing plan and section 401(k) retirement

contributions ($1,000), capital contributions ($500), and political action

committee (PAC) fund contributions ($75). The Association also deducts from

petitioner husband’s monthly distribution $542 for a money purchase plan loan

repayment (not further explained in the record) and $557 withheld for Virginia

State taxes.

      The AO reduced the amount that petitioners could reasonably be expected

to pay each month by $1,887 for petitioner husband’s monthly health insurance

premiums and $27 for his monthly life insurance premiums. The AO did not
                                        -5-

[*5] reduce the amount petitioners could reasonably be expected to pay by the

amounts of the other mandatory deductions, which total $1,575, or by the

reductions for the money purchase plan loan repayment ($542) and Virginia State

taxes ($557), and she did not explain why she treated money not distributed to

petitioners as if it were available to pay their unpaid Federal income tax.

      3.     Unreimbursed Business Expenses

      Petitioner husband claims that he incurs expenses totaling $5,206 per

month4 in the performance of his duties as a pilot, specifically, expenses for local

travel, overnight travel, specialized gear, accounting and tax services, and

maintaining a home office. The AO approved $2,533 for transportation expenses,5

which is less than one-half of petitioner husband’s claimed business expenses.

The Association does not reimburse its pilots for any of their business expenses or

provide them with an office.




      4
        Petitioners assert that the total amount of petitioner husband’s monthly
unreimbursed expenses was $5,801. The record does not show how they reached
that total.
      5
      That amount is included in the AO’s allowance for petitioners’ monthly
household and court-ordered expenses ($7,189).
                                         -6-

[*6] During the CDP hearing stage petitioners offered to provide some of their

credit card records as substantiation for these expenses. The AO did not review

these records.

C.      Petitioner Husband’s Retirement Account and Petitioner Wife’s Pension

        Petitioner husband has a retirement account with Charles Schwab that was

valued at $232,838 as of October 31, 2015. As of September 2015 petitioner wife

received $433 per month from an AT&T pension plan. Her 69th birthday was in

2018.

D.      Petitioner Wife’s Family Trust

        Petitioner wife is the trustee of the Donald Couch Trust, which her father

established in 2006 for the benefit of petitioner wife and her two siblings. The

only asset in the trust is a house in Arizona. The final mortgage payment was due

in October 2018. As of July 2018 the home was rented but did not generate any

net income.

E.      Communications Between Petitioners and the Revenue Officer

        In a letter dated March 7, 2016, written in response to Form 9297, Summary

of Contact, and a phone call from a revenue officer (RO) to whom this case was

assigned before its assignment to the AO, petitioners said that they wanted to

refinance their home and to use the loan to make a lump-sum payment to the IRS.
                                         -7-

[*7] Petitioners also proposed that they make an additional lump-sum payment,

likely from petitioner husband’s retirement account, followed by monthly

payments of $2,300. However, the record suggests that petitioners were unable to

obtain a home equity loan. In a letter to the AO dated August 22, 2016, petitioners

said they could “only afford to commit to a monthly payment of $2,400,”

suggesting they were withdrawing their proposal to refinance their home and to

use part of petitioner husband’s retirement account to pay their back tax.

                                     OPINION

      After concessions by the parties,6 the issue for decision is whether it was an

abuse of discretion for respondent to require, as a condition of accepting an

installment agreement, that petitioners pay either (1) $13,997 per month or

(2) $6,341 per month for 72 months if petitioners first pay to respondent the entire

amount of petitioner husband’s retirement account and petitioner wife’s proceeds

from the sale of the house held by the trust.

A.    Standard and Scope of Review

      Where, as here, underlying tax liability is not in dispute, we review the

Commissioner’s determination for an abuse of discretion. Goza v. Commissioner,

      6
       The parties agree that the amount of petitioners’ monthly household and
court-ordered expenses is $7,189 and the amount for monthly tax payments
(income, FICA, and Maryland State) is $8,900.
                                         -8-

[*8] 114 T.C. 176, 182 (2000). An abuse of discretion occurs if the AO exercises

his or her discretion “arbitrar[il]y, capricious[ly], or without sound basis in fact or

law.” Giamelli v. Commissioner, 129 T.C. 107, 111 (2007). If the AO follows all

statutory and administrative guidelines and provides a reasoned, balanced

decision, we will not reweigh the equities. Thompson v. Commissioner, 140 T.C.

173, 179 (2013).

       In a CDP case, if we decide that a further hearing would be helpful,

necessary, or productive, then we may remand the case to the IRS Appeals Office.

Kelby v. Commissioner, 130 T.C. 79, 86 n.4 (2008); Lunsford v. Commissioner,

117 T.C. 183, 189 (2001).

       Petitioners and respondent dispute the scope of our review. Respondent

contends that our scope of review is limited to the administrative record. See

Robinette v. Commissioner, 439 F.3d 455 (8th Cir. 2006), rev’g 123 T.C. 85

(2004). However, we need not decide that issue because the scope of review does

not affect the result.

B.     Proposed Installment Agreements

       The Commissioner and a taxpayer may enter into an installment agreement

under which the taxpayer agrees to pay unpaid tax liabilities over a period of time.

Sec. 301.6159-1(a), Proced. & Admin. Regs. The Commissioner has 10 years
                                           -9-

[*9] from the date of assessment to collect unpaid taxes. Sec. 6502(a)(1).

However, the Commissioner and a taxpayer may agree to extend the 10-year

period in connection with an installment agreement. Sec. 6502(a)(2). The Internal

Revenue Manual (IRM) instructs IRS officers to “[b]e aware of the * * * [10-year

collection period] when granting installment agreements.” IRM pt. 5.14.2.2(2)

(Jan. 1, 2016). The IRM also states that if taxpayers cannot fully pay their unpaid

tax within the 10-year period, the Commissioner may adopt a partial payment

installment agreement. IRM pt. 5.14.2.1 (Mar. 11, 2011).

      Petitioners proposed that they pay $6,064 per month, and respondent

proposed that petitioners pay $13,997 per month.7 Alternatively, respondent

proposed that petitioners pay $6,341 per month for 72 months if they first pay to

respondent (1) all of the funds in petitioner husband’s retirement account (about

$232,838 as of 2015) and (2) all of petitioner wife’s proceeds from the sale of the

house held by the trust (about $50,000). Respondent determined that if petitioners

accepted either of those two options, petitioners would fully pay their unpaid tax

within the 10-year collection period. See sec. 6502(a)(1). However, an

installment agreement need not necessarily achieve full payment of a tax within

the collection period. See secs. 6502(a)(2), 6159(a); IRM pt. 5.14.2.1.

      7
          These amounts are taken from the parties’ posttrial briefs.
                                       - 10 -

[*10] C.    Petitioners’ Reasonable Collection Potential

      1.    Mandatory Deductions

      Respondent allowed two of petitioner husband’s mandatory deductions

($1,8878 for health insurance premiums and $27 for life insurance) in calculating

petitioners’ RCP. Petitioner husband’s other mandatory deductions reduced his

net income by $1,575 each month (supplemental profit-sharing plan and section

401(k) contribution of $1,000; capital contributions of $500; and PAC fund

contribution of $75). In addition the partnership reduced his monthly distribution

by $542 for the money purchase plan loan repayment and by $557 for Virginia

State tax withholding. Respondent did not reduce petitioners’ RCP on the basis of

those amounts.

      The IRM states that “the amount of disposable income * * * available to

apply to the tax liability” is “gross income less all allowable expenses”. IRM

pt. 5.15.1.2(1) (Nov. 17, 2014). Allowable expenses include necessary expenses,

which are expenses that are necessary to provide for the taxpayers’ health, welfare,

and/or production of income. See IRM pt. 5.15.1.7 (Oct. 2, 2012); IRM


      8
       In a letter dated December 20, 2016, petitioners assert that the health
insurance premiums were going to increase to $2,284 and state that they would
send substantiation of this change when it occurred. The record does not show
whether the increase occurred.
                                         - 11 -

[*11] pt. 5.15.1.10(3) (Nov. 17, 2014). Necessary expenses include “[i]nvoluntary

[d]eductions”, which are necessary “if * * * [the expense] is a requirement of the

job.” IRM pt. 5.15.1.10(3).

      The AO did not treat amounts required to be withheld from petitioner

husband’s distribution as reducing the amount of income available to petitioners

because those expenses “were not allowed as expenses per the IRM.” The AO did

not cite an IRM provision to support that position or explain how her

determination relates to the IRM text quoted above. On remand, the Appeals

Office will have an opportunity to articulate the basis on which it determined that

amounts subtracted from petitioner husband’s distribution should be treated as

available to pay petitioners’ unpaid tax liabilities.

      2.     Unreimbursed Expenses

      Petitioners contend that petitioner husband spends $5,206 each month for

unreimbursed job expenses comprising $2,030 for local travel (in addition to the

$2,533 approved by the AO), $1,033 for overnight travel, $503 for specialized

gear, $640 for professional accounting and tax services, and $1,000 per month to

maintain a home office. When the AO initially reviewed petitioners’ file around

July 11, 2016, she concluded that petitioner husband’s unreimbursed business

expenses were “average expenses” and “appeared to be * * * normal household
                                      - 12 -

[*12] expenses.” During the CDP hearing on December 22, 2016, petitioners

stated how the expenses related to petitioner husband’s job. The record does not

show how the AO determined that petitioner husband’s unreimbursed business

expenses in excess of the amount respondent allowed as transportation expenses

(assuming petitioner husband had business expenses in the amounts he reported)

were average and normal household expenses.

      Respondent contends that petitioners did not substantiate any of their

reported unreimbursed expenses and that there is no evidence showing that

petitioners were willing to deliver this information to the AO. We disagree. In a

letter dated December 20, 2016, petitioners told the AO:

      We also have several pages of 2016 American Express Charge Card
      statements that substantiate and support other asserted
      non-reimbursed business expenses. There are over 25 pages of these
      documents. Please advise if you would like * * * [us] to forward
      those documents to you and how you would like * * * [us] to forward
      them to you.

During the meeting on December 22, 2016, petitioners offered to provide

documents substantiating the unreimbursed expenses. During a meeting on

January 11, 2017, the AO asked petitioners to provide the amounts of petitioner

husband’s business expenses for 2011-15 reported on petitioners’ Forms 1040,
                                        - 13 -

[*13] U.S. Individual Income Tax Return. The AO did not ask petitioners to

provide the credit card statements.

      Respondent contends that the AO did not consider the credit card statements

because the statements covered only a six-month period in 2016 and that the AO

was using a five-year average to determine income. Without reviewing the offered

records the AO determined that petitioners’ reported unreimbursed expenses were

not allowable beyond the $2,533 amount the AO allowed for transportation

expenses. On remand the Appeals Office will presumably review petitioners’

credit card statements, determine whether or to what extent to reduce the RCP

based on petitioner husband’s reported unreimbursed expenses, and provide

reasons for that determination.

      3.     Sale of the House Held by the Donald Couch Trust

      The only asset held by the Donald Couch Trust is a house in Arizona. The

AO determined that before she could accept an installment agreement in which

petitioners would pay $6,341 per month, petitioner wife must sell the house held

by the trust and pay her share of the proceeds to respondent.

      The trust instrument states that petitioner wife, as trustee, has discretionary

powers to sell all real property held in the trust and distribute the proceeds to the

beneficiaries without “permission from anyone or any organization, including any
                                        - 14 -

[*14] remainder beneficiary.”9 Respondent contends that the trust instrument

authorizes petitioner wife to sell the Arizona home and distribute one-third of the

proceeds to herself. The record does not show whether the AO considered

Arizona law concerning the trust instrument when determining that the house must

be sold as one of the conditions of respondent’s agreement to accept a monthly

installment payment of $6,341.

      Arizona trust law provides both default and mandatory rules for trusts.

Ariz. Rev. Stat. Ann. sec. 14-10105 (2009).10 Mandatory rules apply regardless of

the trust instrument. The mandatory rules, in pertinent part, state that a trustee has

a duty to act in good faith and that the trust and its terms must be “for the benefit

of its beneficiaries.” Id. subsec. (B)(2) and (3). Arizona law also provides that

“[n]otwithstanding the breadth of discretion granted to a trustee in the terms of the

trust, * * * the trustee shall exercise a discretionary power in good faith as to only




      9
       A remainder beneficiary is “a person entitled to receive principal when an
income interest ends.” Ariz. Rev. Stat. Ann. sec. 14-7401(11) (2009). The trust
instrument does not define remainder beneficiaries.
      10
       Arizona adopted a new trust code, which became effective on January 1,
2009. The new code “applies to all trusts created before, on or after January 1,
2009.” Arizona Trust Code, sec. 18(a)(1), 2008 Ariz. Sess. Laws 1119, 1179.
Consequently, we have cited the text from the new trust code, even though the
Donald Couch Trust was established in 2006.
                                        - 15 -

[*15] beneficiaries of the trust and creditors of the trust”.11 Id. sec. 14-10814(A)

(2009). On remand the Appeals Office should consider whether or under what

circumstances, under Arizona law, petitioner wife may sell the house to pay

petitioners’ unpaid Federal income tax.

      4.     Liquidation of Petitioner Husband’s Retirement Account

      Petitioner husband’s retirement account with Charles Schwab was valued at

$232,838 as of October 31, 2015. On February 5, 2016, the RO completed the

Form 9297. The IRS uses Form 9297 to request information from a taxpayer to

“calculate/verify the * * * [taxpayer’s] ability to pay the tax delinquencies.” In

that form, under “[i]nformation/[d]ocuments required”, the RO wrote:

“[L]iquidate Charles Schwab investment account and use [the] proceeds to make

full/partial payment towards the outstanding tax liabilities.”

      IRM pt. 5.14.1.4(5) (Sept. 19, 2014),12 states that “[i]f Taxpayers have

equity in assets that could be used to fully or substantially satisfy balance due

accounts, [the Commissioner’s personnel should] explore the possibility of


      11
        Creditors cannot compel a trustee to distribute trust assets, with an
exception for court orders requiring that child support or maintenance be paid
from the trust. See Ariz. Rev. Stat. Ann. secs. 14-10814(A), 14-10504(B) (2009).
Whether respondent is considered a creditor of the trust is undetermined.
      12
         Respondent cites IRM pt. 5.14.1.5(5) but apparently intended to cite IRM
pt. 5.14.1.4(5) (Sept. 19, 2014).
                                         - 16 -

[*16] liquidating or borrowing against those assets, unless * * * factors such as

advanced age, ill-health, or other special circumstances are determined to prevent

the liquidation of the assets”. (Emphasis added.) During their discussions with

the AO petitioners argued that because petitioner husband was nearing retirement

his retirement account should not be required to be liquidated in its entirety to pay

petitioners’ tax obligations.

      Respondent contends that during the CDP hearing stage petitioners did not

provide information about the timing of petitioner husband’s retirement. We

disagree. In a letter dated March 7, 2016, petitioners said that petitioner husband’s

job “is extremely difficult and extremely dangerous * * * [and that] there is a very

real danger and potential for serious injury each day * * * [he] goes to work” and

that he would likely retire by 2026. Respondent further argues that even if

petitioner husband is nearing retirement age as a pilot, “eight years [from the date

of trial] is a long enough period in which to make alternative arrangements for

retirement income.” We are unsure on what basis respondent concluded that eight

years is long enough for petitioners to accumulate retirement savings in addition to

fulfilling their other financial obligations.

      The AO determined that as a condition to an agreement by respondent to

accept monthly payments of $6,341 (rather than $13,997) petitioner husband’s
                                       - 17 -

[*17] retirement account must be liquidated. On remand the Appeals Office

should consider whether or to what extent, in light of petitioner husband’s

employment and age, liquidation of his retirement account should be required as a

condition of accepting an installment payment agreement.

D.    Conclusion

      On the basis of this record we are unable to conclude whether it was an

abuse of discretion for respondent to require, as a condition of accepting an

installment payment agreement, that petitioners pay either (1) $13,997 per month

or (2) $6,341 per month for 72 months if petitioners first pay to respondent the

entire amount of petitioner husband’s retirement account and petitioner wife’s

proceeds from the sale of the house held by the trust. We may remand when the

AO did not develop a record sufficient for judicial review, see Hoyle v.

Commissioner, 131 T.C. 197, 204-205 (2008), supplemented by 136 T.C. 463

(2011); Churchill v. Commissioner, T.C. Memo. 2011-182, and ask the Appeals

Office to clarify the record, see Gurule v. Commissioner, T.C. Memo. 2015-61,

at *20. We will remand the case to the Appeals Office to give it an occasion to:

      (1) explain why funds not received by petitioners because of mandatory

deductions were treated as available to pay petitioners’ back tax;
                                        - 18 -

[*18] (2) review records previously made available by petitioners and consider

whether or to what extent those records substantiate the amounts of petitioners’

reported unreimbursed expenses, and, to the extent respondent concludes that

petitioners had unreimbursed employee expenses, why funds so expended should

be considered available to petitioners to pay their back tax;

      (3) consider whether Arizona law affects petitioner wife’s power as trustee

to sell property held by her family trust; and

      (4) determine whether special circumstances, such as age, restrict the full or

partial liquidation of petitioner husband’s retirement account to pay petitioners’

back tax.

      Upon remand we expect that the Appeals Office will consider any additional

information or evidence that petitioners may wish to submit, any new collection

alternative that petitioners may wish to propose, and any asserted change in

circumstances.

      To reflect the foregoing,


                                                 An appropriate order will be issued.
