                         T.C. Memo. 2008-117



                       UNITED STATES TAX COURT



 WILLIAM G. SCHWARTZ AND JACQUELINE R. SCHWARTZ, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12530-06L.            Filed April 28, 2008.



     Gregory M. McCauley, for petitioners.

     Kathleen K. Raup, for respondent.



                         MEMORANDUM OPINION



     JACOBS, Judge:1   The petition in this case was filed in

response to a Notice of Determination Concerning Collection

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



     1
      This case was submitted to Judge James S. Halpern on Nov.
26, 2007. The Chief Judge reassigned this case to Judge Julian
I. Jacobs on Mar. 14, 2008.
                                          - 2 -

determination).2            The issue for decision is whether respondent

abused his discretion in rejecting as inadequate petitioners’

offer-in-compromise to satisfy their unpaid income taxes for tax

years 1996, 1997, 1998, 2000, and 2001.

                                       Background

       This case was submitted fully stipulated pursuant to Rule

122.       The stipulation of facts and the attached exhibits are

incorporated herein by this reference.                Petitioners resided in

Pennsylvania at the time they filed their petition.

       Petitioners filed income tax returns for the years at issue

as follows:

                                                                             Self Em-
               Date Return                         Adjusted        Income     ployment
               Due (After              Date        Gross Income    Tax per     Tax per
Year           Extensions)         Return Filed    per Return      Return       Return

1996           Oct.   15,   1997   Jan. 7, 1999        N/A        $136,155      N/A
1997           Oct.   15,   1998   Aug. 6, 1999     $185,713        63,354    $ 5,610
1998           Oct.   15,   1999   Oct. 28, 1999     117,963        32,906     11,831
2000           Aug.   15,   2001   Aug. 7, 2001       55,953        15,193     12,124
2001           Oct.   15,   2002   Oct. 17, 2002     104,836        26,569     13,525


Respondent assessed the tax shown on each return.                     As of November

10, 2003, the date respondent issued a Letter 1058, Final Notice

of Intent to Levy and Notice of Your Right to a Hearing (final

notice of intent to levy), for tax years 1996 through 2001, the

unpaid balance of petitioners’ tax liabilities (after taking into




       2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
                               - 3 -

account withholding credits, payments, additions to tax, and

interest) totaled $287,523.10.3

     The final notice of intent to levy was followed on November

17, 2003, by a Notice of Federal Tax Lien with respect to

petitioners’ outstanding tax liabilities for 1996 through 2001

and a Letter 3172, Notice of Federal Tax Lien Filing and Your

Right to a Hearing Under IRC 6320 (notice of tax lien filing),

for tax years 1996 through 2001.   In response to respondent’s

final notice of intent to levy and notice of tax lien filing,

petitioners, in December of 2003, requested hearings under

sections 6320 and 6330.   Petitioners’ hearing under section 6320

was held in conjunction with their hearing under section 6330 and

was conducted by correspondence and telephone conversations with

a succession of four officers in respondent’s Office of Appeals.

     At their hearing petitioners sought to compromise their tax

liability.   In the course of exploring this collection

alternative, the parties disagreed as to the amount of

petitioners’ reasonable collection potential, which in turn

largely depends upon the net amount petitioners could realize




     3
      This amount includes $4,629.93 owed for tax year 1999.
Petitioners paid some of the taxes due after respondent issued
the final notice of intent to levy. As a consequence, no tax is
owed and respondent does not seek to collect any amount with
respect to 1999.
                               - 4 -

from their equity in their home, their main asset.4   This

disagreement forms the basis of petitioners’ claim that

respondent placed a value on petitioners’ home greater than that

which could be realized and thus abused his discretion in

rejecting petitioners’ offer-in-compromise.

     The Internal Revenue Service (IRS) refused to process

petitioners’ first ($29,124) offer-in-compromise, claiming that

as of the date of the offer-in-compromise (June 2004) petitioners

were not current with regard to tax deposits for their business

employees.   After clarifying that they did not have business

employees for the period in question, in September 2004

petitioners resubmitted their $29,124 offer-in-compromise, which

was accepted for processing.   Before respondent took action on

that offer-in-compromise other than to request additional

information, petitioners submitted an amended offer-in-compromise

for $7,452 on November 17, 2004, followed by a second amended

offer-in-compromise for $65,525 on November 26, 2004.   Respondent

accepted petitioners’ $65,525 offer-in-compromise for processing.



     4
      As discussed infra, the reasonable collection potential
with respect to the tax debt of a taxpayer is defined as the
amount that can be collected from all available means and is
generally calculated using: (1) The values of assets, (2) future
income, (3) amounts collectible from third parties, and (4)
assets and/or income that are available to the taxpayer but
beyond the reach of the Government (e.g., assets to which a lien
will not attach because they are outside the country). 1
Administration, Internal Revenue Manual (CCH), pt. 5.8.4.4.1, at
16,307.
                                - 5 -

     In support of their $65,525 offer-in-compromise, petitioners

submitted a written appraisal for their home, dated March 10,

2003, which represented that the home had a “quick sale”, “as is”

value of $400,000.

     In evaluating the $65,525 offer-in-compromise, respondent’s

Appeals officer requested an opinion as to the offer’s legal

sufficiency from respondent’s Office of Chief Counsel.   In March

2005 respondent’s Office of Chief Counsel responded that the

$65,525 offer-in-compromise was legally insufficient because,

among other things, (1) the appraisal of petitioners’ home was by

then more than 2 years old, and (2) because the appraisal was

based on comparable sales made on or before the summer of 2002,

the appraisal did not accurately reflect the value of the

property at the time the $65,525 offer-in-compromise was

submitted.

     Petitioners claimed that they had little or no equity in

their home because it was encumbered by two mortgages, one of

which was held by a savings bank in the approximate amount of

$280,000.    Respondent’s Office of Chief Counsel did not contest

the bona fides of that mortgage but did question the bona fides

of a $125,000 “open end mortgage” held by William G. Schwartz’s

father which was recorded shortly before the filing of

respondent’s notice of tax lien.
                                - 6 -

     Upon receiving the response from respondent’s Office of

Chief Counsel, respondent’s Appeals officer requested additional

information from petitioners, including a new appraisal of their

home.   Accordingly, on August 3, 2005, petitioners provided an

appraisal as of November 1, 2004, which was prepared by the same

appraiser who had prepared the first appraisal.     It showed an “as

is” value for the home of $400,000.     On October 11, 2005,

petitioners submitted yet another appraisal as of October 5,

2005.   That appraisal was prepared by a different appraiser and

showed an “as is” value of $430,000.     On October 21, 2005,

petitioners provided respondent’s Appeals officer with an

inspection report, dated July 19, 2005.

     Respondent’s Appeals officer independently investigated the

value of petitioners’ home and identified a number of problems

with petitioners’ appraisals.   For example, the Appeals officer

discovered that three smaller properties in the same area were

for sale for $500,000 to $650,000, but were not reflected in

petitioners’ appraisals.   Additionally, a November 2004 sale of a

smaller property in the same area for $780,000 was omitted.

Furthermore, it appeared that property values in the area had

increased by more than 70 percent in recent years, whereas

petitioners’ most recent appraisal reflected a much smaller

increase, even though it appeared that petitioners had made major
                               - 7 -

improvements on their property.   The Appeals officer’s report

detailed the weaknesses of petitioners’ appraisals.5

     On November 3, 2005, respondent’s Appeals officer advised

petitioners that she could recommend acceptance of an amended

offer-in-compromise for $129,361.   The Appeals officer wrote:

“Once you have returned the amended Offer form, I will forward

the case to our Chief Counsel office for concurrence.”

Petitioners duly signed and submitted an amended offer-in-

compromise.6   Thereafter, the Appeals officer requested an

opinion from respondent’s Office of Chief Counsel as to the legal

sufficiency of petitioners’ $129,361 offer.

     On March 26, 2006, respondent’s Office of Chief Counsel

responded to the Appeals officer that it was unable to determine

whether petitioners’ $129,361 offer-in-compromise was legally

sufficient because the reasonable collection potential of

petitioners’ home had not been adequately determined.    The

Appeals officer was advised to request assistance from




     5
      The Appeals Officer’s report identified other items
requiring adjustment that are no longer at issue. For example,
the Appeals officer adjusted the amount petitioners claimed as
equity in their pension plans. In addition, the Appeals officer
disregarded the “open end mortgage” held by William G. Schwartz’s
father, but made a $54,000 allowance for amounts from the father
that had been used to pay a portion of petitioners’ tax
liabilities.
     6
      At that time petitioners’ tax liability approximated
$315,930.
                                 - 8 -

respondent’s Engineering Group.7    The Appeals officer then

forwarded all three of petitioners’ appraisals to respondent’s

Engineering Group to ascertain whether the valuations were

reasonable.   On May 1, 2006, a member of respondent’s Engineering

Group, holding an MAI designation,8 informed the Appeals officer

by letter that the current market value of petitioners’ home

might be 30 to 40 percent greater than that stated in

petitioners’ appraisals.   Before reaching this conclusion, the

Engineering Group member had reviewed additional sales in the

subject market area.

     Respondent’s Office of Appeals rejected petitioners’

$129,361 offer-in-compromise as inadequate and notified

petitioners of this rejection on June 6, 2006.     On the same date,

respondent issued a notice of determination sustaining both the

proposed levy and the filing of a Federal tax lien for the tax

years in issue.

     Petitioners timely filed their petition seeking our review

of respondent’s determination.     Petitioners contend that:   (1)



     7
      Respondent’s Engineering Group consists of experts who
provide technical advice for field investigations.
     8
      MAI is a designation awarded to qualifying members of the
Appraisal Institute (the body that resulted from the merger of
the American Institute of Real Estate Appraisers and the Society
of Real Estate Appraisers). Within the real estate appraisal
community MAI is viewed as the highest regarded appraisal
designation. See Estate of Auker v. Commissioner, T.C. Memo.
1998-185.
                                 - 9 -

Respondent rejected their $65,525 and $129,351 offers-in-

compromise “out of hand, without basis or reason” and (2) because

petitioners submitted a certified appraisal supporting their

valuation, respondent’s Engineering Group likewise should have

prepared a certified appraisal supporting its conclusions.

Petitioners further claim that respondent should have continued

to negotiate an acceptable offer-in-compromise, and respondent’s

failure to do so constituted an abuse of discretion.

                               Discussion

        Section 6321 imposes a lien in favor of the United States

on all property and property rights of a person who is liable

for, and fails to pay, taxes after demand for payment has been

made.    The lien arises when assessment is made and continues

until the assessed liability is paid or becomes unenforceable by

lapse of time.    Sec. 6322.   For the lien to be valid against

certain third parties, the Secretary must file a notice of

Federal tax lien, and within 5 business days thereafter the

Secretary must provide written notice to the taxpayer.       Secs.

6320(a), 6323(a).    The taxpayer may then request an

administrative hearing before an Appeals officer.     Sec.

6320(b)(1).

     Section 6331(a) authorizes the Secretary to levy upon

property and property rights of a taxpayer liable for taxes who

fails to pay those taxes within 10 days after notice and demand
                                - 10 -

for payment.   Section 6331(d) provides that the levy authorized

in section 6331(a) may be made with respect to any unpaid tax

only after the Secretary has notified the person in writing of

his intention to make the levy at least 30 days before any levy

action is begun.   Section 6330 elaborates on section 6331 and

provides that upon a timely request a taxpayer is entitled to a

collection hearing before respondent’s Office of Appeals.      Sec.

6330(a)(3)(B) and (b)(1).    A request for a collection hearing

must be made within the 30-day period commencing on the day after

the date of the section 6330 notice.     Sec. 6330(a)(3)(B),(2);

sec. 301.6330-1(b)(1), Proced. & Admin. Regs.

     If a hearing under section 6320 or 6330 is requested, the

hearing is to be conducted by respondent’s Office of Appeals,

and, at the hearing, the Appeals officer conducting it must

verify that the requirements of any applicable law or

administrative procedure have been met.     Secs. 6320(b)(1), (c),

6330(b)(1),(c)(1).   To the extent practicable, a hearing under

section 6320 is to be held in conjunction with a hearing under

section 6330, and the conduct of the hearing is to be in

accordance with the relevant provisions of section 6330.     Sec.

6320(b)(4),(c).    The taxpayer may raise at the hearing any

relevant issue relating to the unpaid tax or the proposed levy.

Secs. 6320(c), 6330(c)(2)(A).
                               - 11 -

     At the conclusion of the hearing, the Appeals officer must

determine whether and how to proceed with collection and take

into account:   (i) The relevant issues raised by the taxpayer,

(ii) challenges to the underlying tax liability by the taxpayer,

where permitted, and (iii) whether any proposed collection action

balances the need for the efficient collection of taxes with the

legitimate concern of the taxpayer that the collection action be

no more intrusive than necessary.   Secs. 6320(c), 6330(c)(3).

     Section 7122(a) permits the Secretary to compromise any

civil case arising under the internal revenue laws.    Section

7122(c) requires the Secretary to prescribe guidelines for

officers and employees of the IRS to determine whether an offer-

in-compromise is adequate and should be accepted to resolve a

dispute.   Sec. 7122(a),(c)(1).   Section 7122(b) provides that if

the Secretary makes a compromise exceeding $50,000, an opinion of

the General Counsel for the Department of the Treasury or his

delegate shall be placed on file in the office of the Secretary.

Sec. 301.7122-1(e)(6), Proced. & Admin. Regs.

     The contemplated guidelines and schedules pertaining to

evaluating offers-in-compromise on the basis of collectibility

have been published in the regulations interpreting section 7122.

See sec. 301.7122-1(c)(2), Proced. & Admin. Regs.; 1

Administration, Internal Revenue Manual (CCH), pt. 5.8.4.4, at

16,306.    Under this administrative guidance, the Secretary will
                               - 12 -

generally compromise a liability on the basis of doubt as to

collectibility only if the liability exceeds the taxpayer’s

reasonable collection potential.    Cf. Murphy v. Commissioner, 125

T.C. 301, 308-310 (2005), affd. 469 F.3d 27 (1st Cir. 2006).

Furthermore, an offer to compromise based on doubt as to

collectibility will be acceptable only if the offer reflects the

taxpayer’s reasonable collection potential; i.e., that amount,

less than the full liability, that the IRS could collect through

means such as administrative and judicial collection remedies.

Id. at 309; Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517,

517.    The Secretary has no duty to negotiate with a taxpayer

before rejecting the taxpayer’s offer-in-compromise.    Fargo v.

Commissioner, 447 F.3d 706, 713 (9th Cir. 2006), affg. T.C. Memo.

2004-13; Catlow v. Commissioner, T.C. Memo. 2007-47.

       A taxpayer’s reasonable collection potential is determined,

in part, using the published guidelines for certain national and

local allowances for basic living expenses and essentially

treating income and assets in excess of those needed for basic

living expenses as available to satisfy Federal income tax

liabilities.    See 2 Administration, Internal Revenue Manual

(CCH), exh. 5.15.1-3, at 17,668, exh. 5.15.1-8, at 17,686, exh.

5.15.1-9, at 17,742.

       The aforementioned formulaic approach is disregarded,

however, upon a showing by the taxpayer of special circumstances
                               - 13 -

that may cause an offer to be accepted notwithstanding that it is

for less than the taxpayer’s reasonable collection potential,

e.g., the taxpayer is incapable of earning a living because of a

long-term illness, and it is reasonably foreseeable that the

taxpayer’s financial resources will be exhausted providing for

care and support during the course of the condition.    Sec.

301.7122-1(b)(3), (c)(3), Proced. & Admin. Regs.; 1

Administration, Internal Revenue Manual (CCH), pt. 5.8.11.2.1, at

16,375, sec. 5.8.11.2.2, at 16,377.     Petitioners do not allege,

and it does not appear, that any such special circumstances are

present.

     Where, as here, the underlying tax liability is not at

issue, we review respondent’s determination for abuse of

discretion.9    Sego v. Commissioner, 114 T.C. 604, 610 (2000).

This standard does not require us to decide what we think would

be an acceptable offer-in-compromise.     Murphy v. Commissioner,

supra at 320.    Rather, our review is to determine whether

respondent’s rejection of petitioners’ offer-in-compromise was



     9
      Secs. 301.6320-1(f)(2), A-F5, and 301.6330-1(f)(2), A-F5,
Proced. & Admin Regs., provide that in seeking Tax Court review
of a notice of determination, the taxpayer can ask the Court to
consider only an issue that was raised in the taxpayer’s sec.
6320 and/or 6330 hearing. See Giamelli v. Commissioner, 129 T.C.
107, 113 (2007); Magana v. Commissioner, 118 T.C. 488, 493
(2002). Petitioners raised various issues pertaining to their
underlying tax liabilities in their requests for a hearing under
secs. 6320 and 6330 but did not pursue those claims at the
hearing, or at any time thereafter.
                              - 14 -

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

Id.

      Petitioners do not suggest, and it does not appear from this

record, that respondent failed to follow his own procedures in

evaluating petitioners’ offers-in-compromise or that those

procedures were defective.   Petitioners claim that respondent

summarily refused to accept the values shown in the appraisals

they submitted and consequently miscalculated their reasonable

collection potential.   That miscalculation, according to

petitioners, led respondent to reject both their $65,525 offer-

in-compromise, evaluated by respondent’s Office of Chief Counsel

in March of 2005, and their $129,361 offer-in-compromise,

evaluated by respondent’s Engineering Group in May of 2006, and

constituted an abuse of discretion.

      Respondent’s Office of Chief Counsel identified a number of

defects in petitioners’ $65,525 offer-in-compromise, such as the

outdated appraisals submitted in support of the claimed value of

petitioners’ home, the validity of an encumbrance placed on the

mortgage by a member of petitioners’ family, and the consequent

value of petitioners’ equity in the home.   The Appeals officer

also identified several problems with the more recent appraisals

that petitioners then submitted.

      Admittedly, the reviewing member of respondent’s Engineering

Group expressed her opinion concerning the value of petitioners’
                                - 15 -

home in a letter to the Appeals officer, as opposed to a formal

appraisal report.    However, we do not believe that such an

appraisal report was required.

     The Engineering Group member reviewing petitioners’

appraisals held an MAI designation.      Her letter to the Appeals

officer makes clear that she reached her conclusion after

reviewing petitioners’ appraisals10 and by conducting her own

investigation with respect to other property sales in the subject

market area.

     The record shows that from the time petitioners submitted

their first offer-in-compromise, a substantial divergence of

opinion existed as to the value of petitioners’ home.      Respondent

alerted petitioners to the fact that their appraisals were

problematic, beginning with the first appraisal dated March 10,

2003.     The bases of respondent’s objections to the appraisals

were explained.

     Upon a review of the record, we cannot say that respondent’s

objections to petitioners’ appraisals were arbitrary, capricious,

unreasonable, or without sound basis in fact or law.      Nor can we

agree with petitioners that respondent’s Engineering Group and/or

Office of Appeals summarily rejected “out of hand” petitioners’



     10
      It is not clear from this record whether petitioners’
appraisers held MAI designations. An MAI designation does not
appear after their names on their appraisals, although
petitioners refer to their “certified MIA appraisals” on brief.
                              - 16 -

valuation.   Moreover, contrary to petitioners’ assertion,

respondent was under no obligation “to negotiate a new offer-in-

compromise figure” once respondent determined that petitioners’

$129,361 offer-in-compromise was inadequate.

     We hold that respondent did not abuse his discretion in

rejecting petitioners’ offer-in-compromise as inadequate.

Consequently, we sustain respondent’s determination that the

proposed levy and filing of a Federal tax lien were appropriate.

     To reflect the foregoing,


                                      Decision will be entered

                                 for respondent.
