                       123 T.C. No. 15



                UNITED STATES TAX COURT



     BRADLEY M. AND MONICA PIXLEY, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 7093-02L.           Filed September 15, 2004.



     H is an ordained Baptist minister. In this
proceeding to collect Ps’ unpaid 1992 and 1993 tax
liabilities by levy, Ps submitted to R’s Appeals Office
an offer in compromise, claiming a “tithe to church” as
part of their necessary living expenses. In evaluating
Ps’ ability to pay their outstanding tax liabilities,
the Appeals officer declined to take these alleged
tithing expenses into account.

     Held: Under relevant provisions of the Internal
Revenue Manual, tithes that a minister is required to
pay as a condition of employment are allowable in
determining ability to pay outstanding tax liabilities.
Held, further, because Ps failed to substantiate that H
was employed as a Baptist minister after R initiated
the collection proceedings, the Appeals officer did not
abuse his discretion by declining to take into account
Ps’ alleged tithing expenses. Held, further, the
disallowance of Ps’ alleged tithing expenses for this
                                - 2 -

     purpose did not violate H’s First Amendment rights to
     free exercise of religion.



     Tommy E. Swate, for petitioners.

     Daniel N. Price, for respondent.



                               OPINION

     THORNTON, Judge:   Pursuant to section 6330(d), petitioners

filed a petition for review of an Appeals Office determination

sustaining a proposed levy.1   The primary issue for decision is

whether, in evaluating petitioners’ offer in compromise, the

Appeals officer should have considered petitioners’ alleged

tithing expenses in determining whether they had the ability to

pay their outstanding tax liabilities.2   We must also decide

whether respondent’s disallowance of tithing expenses for this

purpose violates Mr. Pixley’s First Amendment right to free

exercise of religion.

                            Background

     The parties submitted this case fully stipulated pursuant to

Rule 122.   We incorporate herein the stipulated facts.   When


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and Rule references are to
the Tax Court Rules of Practice and Procedure.
     2
       A “tithe” is “a tenth part of something paid as a
voluntary contribution or as a tax especially for the support of
a religious establishment”. Merriam Webster’s Collegiate
Dictionary 1238 (10th ed. 1997).
                              - 3 -

petitioners filed their petition, they resided in Newhall,

California.

     Mr. Pixley is a licensed and ordained Baptist minister.

From September 1995 through June 2001, he served as pastor of

Grace Community Bible Church, in Tomball, Texas.3   Thereafter,

petitioners moved to California, and Mr. Pixley was employed as

an echocardiographer at Children’s Hospital in Los Angeles.

     Respondent mailed to petitioners a Letter 1058, Final

Notice-Notice of Intent to Levy and Notice of Your Right to a

Hearing (notice of intent to levy), dated October 5, 2000,

proposing a levy with respect to petitioners’ unpaid tax

liabilities totaling $19,366.69 for 1992 and $39,851.27 for 1993.

In response to this notice, petitioners submitted a timely Form

12153, Request for a Collection Due Process Hearing, dated

October 18, 2000, raising an offer in compromise as an

alternative to levy.

     Shortly after requesting their Appeals hearing, petitioners

submitted to respondent a Form 656, Offer in Compromise (offer in

compromise), signed October 22, 2000.   Petitioners also submitted

a Form 433-A, Collection Information Statement for Individuals,

listing a $520 “tithe to church” as a monthly necessary living

expense.



     3
       Until early 2001, Mr. Pixley was also employed by
Cardiology Associates of Houston, Texas.
                                 - 4 -

     In the Appeals hearing, the Appeals officer requested, on

numerous occasions, that petitioners submit evidence that the

claimed tithe was a condition of Mr. Pixley’s employment.

Petitioners failed to respond to these requests.    The Appeals

Office issued to petitioners a “Notice of Determination

Concerning Collection Action(s) Under Section 6320 and/or 6330”,

dated March 14, 2002.   In the notice of determination, the

Appeals Office rejected petitioners’ offer in compromise and

concluded that petitioners had the ability to fully pay their

1992 and 1993 tax liabilities.    The notice of determination

stated that petitioners failed to establish that tithes were a

condition of Mr. Pixley’s employment and that, for purposes of

evaluating petitioners’ offer in compromise, tithing expenses

were disallowed in determining petitioners’ ability to pay.

      After the notice of determination was issued, the Appeals

officer reconsidered petitioners’ offer in compromise and gave

them additional opportunities to submit evidence that the claimed

tithe was a condition of Mr. Pixley’s employment.    Petitioners

failed to submit this information, and the Appeals officer

ultimately sustained his rejection of petitioners’ offer.

                            Discussion

     In this case, we are called upon to address for the first

time, in the context of an offer in compromise, the treatment of
                                 - 5 -

a minister’s tithing expenses for purposes of determining ability

to pay outstanding tax liabilities.

I.    Petitioners’ Contentions

      Petitioners claim that tithing expenses are incurred as a

condition of Mr. Pixley’s employment as a Baptist minister and

should be taken into account in determining petitioners’ ability

to pay their taxes.     Petitioners argue that the Appeals officer’s

disallowance of the tithing expenses for this purpose violates

Mr. Pixley’s First Amendment right to free exercise of religion.

II.   Standard of Review

      Because petitioners’ underlying tax liability was not

properly at issue in the Appeals Office hearing, we review the

Appeals Office determination for abuse of discretion.    See Keene

v. Commissioner, 121 T.C. 8, 17-18 (2003); Lunsford v.

Commissioner, 117 T.C. 183, 185 (2001).

III. Offers in Compromise

      A.   In General

      Section 7122(a) authorizes the Commissioner to compromise a

taxpayer’s outstanding tax liabilities.     Dutton v. Commissioner,

122 T.C. 133, 137 (2004).    Section 7122(c)(1) provides that “The

Secretary shall prescribe guidelines for officers and employees

of the Internal Revenue Service to determine whether an offer in

compromise is adequate and should be accepted to resolve a

dispute.”
                                  - 6 -

     The regulations state three different grounds for

compromising tax liabilities:     (1) Doubt as to liability; (2)

doubt as to collectibility; and (3) promotion of effective tax

administration.   Sec. 301.7122-1T(b), Temporary Proced. & Admin.

Regs., 64 Fed. Reg. 39024 (July 21, 1999).4    The parties’

arguments focus exclusively on the ground of doubt as to

collectibility.   Doubt as to collectibility arises if the

taxpayer’s assets and income are less than the full amount of the

assessed liability.   Id.   In determining whether there is doubt

as to collectibility, the Commissioner must determine the

taxpayer’s “ability to pay” the outstanding tax liabilities that

are to be compromised.   Sec. 301.7122-1T(b)(3)(ii), Temporary

Proced. & Admin. Regs., supra.

     B.   Determining a Taxpayer’s Ability To Pay

     In determining a taxpayer’s ability to pay outstanding tax

liabilities, the Commissioner takes into account the funds the

taxpayer needs to pay basic living expenses.     Id.   The taxpayer’s

basic living expenses are determined by evaluating the taxpayer’s

facts and circumstances.    Id.

     In evaluating a taxpayer’s ability to pay, the Commissioner

considers two types of allowable expenses:     (1) necessary

expenses, and (2) conditional expenses.     Internal Revenue Manual


     4
       Final regulations under sec. 7122 were promulgated
effective for offers in compromise pending on or submitted on or
after July 18, 2002. Sec. 301.7122-1(k), Proced. & Admin. Regs.
                               - 7 -

(IRM), secs. 5.15.1.3 and 5.15.1.3.1(1) (Mar. 31, 2000).5     For

this purpose, a necessary expense is one that is used for a

taxpayer’s (and his family’s) health and welfare or production of

income.   IRM sec. 5.15.1.3.2(1) (Mar. 31, 2000).    The expense

must be reasonable taking into account family size, geographic

location, and any unique individual circumstances.     IRM sec.

5.15.1.2.3(1) and (2) (Mar. 31, 2000).     Expenses that do not

qualify as necessary may nevertheless be allowable in certain

limited circumstances as so-called conditional expenses.      IRM

sec. 5.8.5.4.2 (Nov. 30, 2001).

     For purposes of determining a taxpayer’s ability to pay,

charitable contributions are necessary expenses if they provide

for a taxpayer’s (or his family’s) health and welfare or are a

condition of the taxpayer’s employment.     IRM sec. 5.15.1.3.2.3(3)

and exh. 5.15.1-2 (Mar. 31, 2000).     The IRM specifically

addresses tithes to religious organizations, as follows:

     1.    Question. If, as a condition of employment, a
           minister is to tithe, a business executive is
           required to contribute to a charity * * *, will
           these expenses be allowed?

           Answer. Yes. The only thing to consider is
           whether the amount being contributed equals the


     5
       On May 5, 2004, we ordered the parties to file additional
supplemental stipulations of fact, including stipulations as to
the portions of the Internal Revenue Manual (IRM), as in effect
for the relevant time periods, that the parties discussed on
brief. The parties made appropriate stipulations and included as
exhibits copies of the relevant portions of the IRM. All
references to the IRM are to these stipulated exhibits.
                               - 8 -

           amount actually required and does not include a
           voluntary portion. [IRM, Exhibit 5.15.1-3
           (Mar. 31, 2000).]

      On brief, respondent contends that petitioners’ alleged

tithing expenses should be disallowed pursuant to IRM section

5.8.5.4.2(9) (Nov. 30, 2001), which states that “Charitable

contributions are not allowed.”   This IRM subsection, however,

relates expressly to conditional expenses, not necessary

expenses, and does not purport to override the provisions of IRM

Exhibit 5.15.1-3 (Mar. 31, 2000) as set out above.

IV.   Whether the Appeals Officer Abused His Discretion

      In the Appeals hearing, petitioners were given the

opportunity to substantiate that Mr. Pixley was employed as a

Baptist minister.   They failed to do so.   In fact, there is no

evidence that Mr. Pixley was employed as a minister when the

notice of determination was issued to petitioners in March 2002

or that he has been employed as a minister at any time since.6

Consequently, even if we were to assume arguendo, as petitioners

assert, that “The Southern Baptist Convention has a doctrine that




      6
       On brief, petitioners allege that after Mr. Pixley left
Grace Community Church in June 2001, petitioners moved to
California so that Mr. Pixley could prepare to attend a seminary,
that he continued his ministry in an unpaid position as a Baptist
minister, and that he continued to tithe to keep this position.
There is no evidence in the record, however, to substantiate
these allegations, and there is no indication that petitioners
presented any such evidence to the Appeals officer. Even if we
were to assume arguendo that these allegations are true, they do
not establish that tithes were paid as a condition of employment.
                               - 9 -

its members should tithe ten percent of their income to the

church”, we are unpersuaded that tithing was a requirement of

Mr. Pixley’s employment.

     We hold that the Appeals officer did not abuse his

discretion in disallowing petitioners’ claimed tithing expenses.

V.   Petitioners’ First Amendment Challenge

     The First Amendment of the United States Constitution

provides that “Congress shall make no law respecting an

establishment of religion, or prohibiting the free exercise

thereof”.

     Petitioners contend that respondent’s disallowance of Mr.

Pixley’s tithing expenses for purposes of evaluating their offer

in compromise violates the Free Exercise Clause of the First

Amendment.   The gist of petitioners’ argument, as we understand

it, is that by declining to make allowance for tithing expenses

in evaluating petitioners’ ability to pay their taxes, respondent

is effectively reducing the funds that petitioners have available

to support their religion and diverting those funds to the U.S.

Treasury.

     It may well be true that paying their taxes will leave

petitioners less funds to support their religion.   But this is a

burden, common to all taxpayers, on their pocketbooks, rather

than a recognizable burden on the free exercise of their

religious beliefs.   Constitutional protection of fundamental
                              - 10 -

freedoms “does not confer an entitlement to such funds as may be

necessary to realize all the advantages of that freedom.”     Harris

v. McRae, 448 U.S. 297, 318 (1980); see Regan v. Taxation With

Representation of Wash., 461 U.S. 540, 550 (1983).

     In any event, even if petitioners could demonstrate a

recognizable burden on the free exercise of their religious

beliefs, the burden would be justified by the Government’s

compelling interest in collecting taxes and administering a

uniform, mandatory, and sound tax system.   See, e.g., Hernandez

v. Commissioner, 490 U.S. 680, 699-700 (1989) (quoting United

States v. Lee, 455 U.S. 252, 260 (1982), stating that the

Government has a “‘broad public interest in maintaining a sound

tax system,’ free of ‘myriad exceptions flowing from a wide

variety of religious beliefs’”); United States v. Lee, supra at

260 (“Because the broad public interest in maintaining a sound

tax system is of such a high order, religious belief in conflict

with the payment of taxes affords no basis for resisting the

tax.”); Miller v. Commissioner, 114 T.C. 511, 517 (2000); Adams

v. Commissioner, 110 T.C. 137, 139 (1998), affd. 170 F.3d 173 (3d

Cir. 1999).   This compelling Government interest underpins the

Commissioner’s authority to compromise tax liabilities under

section 7122 and to prescribe guidelines for officers and

employees of the Internal Revenue Service to determine whether an
                              - 11 -

offer in compromise is adequate and should be accepted to resolve

a tax dispute, see sec. 7122(c)(1).7

      We hold that the Appeals officer’s disallowance of tithing

expenses in evaluating petitioners’ ability to pay their taxes

did not violate Mr. Pixley’s First Amendment rights to free

exercise of religion.

VI.   Conclusion

      We sustain respondent’s determination in the notice of

determination that, for purposes of petitioners’ offer in

compromise, Mr. Pixley’s tithing expenses are not allowable in

determining petitioners’ ability to pay their outstanding tax

liabilities.   Petitioners raise no additional arguments against

respondent’s proposed collection action.    Consequently, we

sustain respondent’s determination to proceed with collection of

petitioners’ tax liabilities by levy.


                                               Decision will be

                                           entered for respondent.


      7
       The Commissioner states that the objectives of the offer
in compromise program are to: (1) Effect collection of what can
reasonably be collected at the earliest possible time and at the
least cost to the Government; (2) achieve a resolution that is in
the best interest of both the individual taxpayer and the
Government; (3) provide the taxpayer a fresh start toward future
voluntary compliance with all filing and payment requirements;
and (4) secure collection of revenue that may not be collected
through any other means. IRM sec. 5.8.1.1.4(1) (Feb. 4, 2000).
These objectives are in furtherance of the Government’s greater
interest in collecting taxes and maintaining a uniform,
mandatory, and sound tax system.
