                           T.C. Summary Opinion 2012-76



                          UNITED STATES TAX COURT



         JAMES A. ADAMS AND FRANCES A. ADAMS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13398-10S L.                        Filed July 31, 2012.



      James A. Adams and Frances A. Adams, pro sese.

      David Baudilio Mora, for respondent.



                               SUMMARY OPINION


      DEAN, Special Trial Judge: This case was heard pursuant to the provisions

of section 7463 of the Internal Revenue Code in effect when the petition was filed.

Pursuant to section 7463(b), the decision to be entered is not reviewable by any

other court, and this opinion shall not be treated as precedent for any other case.
                                          -2-

Unless otherwise indicated, subsequent section references are to the Internal

Revenue Code in effect at all relevant times, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

      Respondent issued petitioners a Notice of Determination Concerning

Collection Action(s) Under Section 6320 and/or 6330 (notice) that sustained a

proposed levy action for 2004. The issues for decision are whether: (1) the

settlement officer (SO) abused her discretion when she denied petitioners’ request

for abatement of interest; (2) petitioners are liable for a section 6651(a)(3) addition

to tax, including a section 6651(d)(1) rate increase for failure to pay tax in certain

cases; and (3) the SO abused her discretion when she sustained the proposed levy

action.

                                      Background

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

facts as supplemented and the attached exhibits are incorporated herein by

reference.1 Petitioners resided in Texas when they filed their petition.


      1
       Petitioners objected to Exhibits 1-J, 3-J, 4-J, 11-R, 12-R, and 13-R on the
grounds of relevancy. Their objection to Exhibits 1-J, 3-J, 4-J, 12-R, and 13-R is
overruled because the Court finds these exhibits are relevant to the case at hand.
Fed. R. Evid. 401 defines “Relevant evidence” as “evidence having any tendency to
make the existence of any fact that is of consequence to the determination of the
action more probable or less probable than it would be without the evidence.”
                                                                         (continued...)
                                          -3-

      Petitioners filed a joint Federal income tax return for 2004. Their return was

chosen for examination, and upon the conclusion of the examination a notice of

deficiency was issued to them. Petitioners filed a petition with this Court in docket

No. 25888-07S to dispute the proposed deficiency (docket No. 25888-07S).

Petitioners signed a stipulated decision document (decision) for docket No. 25888-

07S on August 12, 2008, and the Court entered it on August 21, 2008. The decision

ordered and decided that there was a deficiency in Federal income tax of $16,478

and that there was no section 6662(a) penalty due from petitioners for 2004. The

decision also states: “It is further stipulated that interest will be assessed as

provided by law on the deficiency due from petitioners.” Respondent assessed the

deficiency and interest on November 10, 2008.

      Petitioners filed a joint Federal income tax return dated April 5, 2008, for

2007, reporting an overpayment of $4,746. “Apply to 2004 tax” is handwritten on



      1
        (...continued)
Petitioners’ objection to Exhibit 11-R is moot because that exhibit was not used in
reaching the Court’s decision.

       Respondent objected to Exhibits 24-P through 76-P attached to the
supplemental stipulation of facts on the grounds of relevancy. His objection to
Exhibits 42-P, 57-P, 69-P through 74-P, and 76-P is overruled because the Court
finds these exhibits relevant to the case at hand. Respondent’s objection to Exhibits
24-P through 41-P, 43-P through 56-P, 58-P through 68-P, and 75-P is moot
because those exhibits were not used in reaching the Court’s decision.
                                         -4-

line 76, Amount you owe. Respondent applied petitioners’ 2007 overpayment to

their estimated tax for 2008. On their 2008 joint Federal income tax return

petitioners instructed respondent to apply their 2008 overpayment to their 2004 tax

liability. Respondent applied petitioners’ 2008 overpayment of $8,649--which

included their 2007 overpayment--to their 2004 tax liability.

      Respondent mailed petitioner wife a CP 503 Notice dated February 23, 2009,

reporting an amount due of $21,608.56 for 2004. The heading at the top of the CP

503 Notice states: “IMPORTANT Immediate action is required.”

      Respondent mailed petitioner husband and petitioner wife each a CP 504

Notice dated September 14, 2009, reporting an amount due of $13,872.59 for 2004.

The heading at the top of the CP 504 Notice states: “Urgent!! We intend to levy on

certain assets. Please respond NOW.”

      Respondent mailed petitioner husband and petitioner wife each a Final

Notice of Intent to Levy and Notice of Your Right to a Hearing dated November 23,

2009, for 2004. Ten days after that notice respondent began adding to petitioners’

tax the section 6651(a)(3) addition to tax at the increased rate provided under

section 6651(d). Petitioners mailed respondent a Form 12153, Request for a

Collection Due Process or Equivalent Hearing, dated November 30, 2009, for
                                          -5-

2004.2 The Form 12153 bears a “received” stamp date of December 8, 2009, by

respondent’s Fresno, California, office.3 Petitioners’ stated reason for the collection

due process (CDP) hearing was: “We are not in agreement with charges for

penalty[4] & interest. We have agreed to amount of tax. Interest and penalty due to

delays, inconsistanicies, & inappropriate advise by IRS [sic].”5

      Petitioners requested a face-to-face CDP hearing by letter dated January 26,

2010. Their case was transferred from the Fresno, California, office to the Houston,

Texas, Appeals Office. Petitioners had a face-to-face CDP hearing with the SO on

May 11, 2010. Petitioners’ only arguments at the CDP hearing were that they

should not have to pay the addition to tax and interest associated with their 2004 tax

liability because they received incorrect advice from respondent and because the

      2
       Petitioners had mailed respondent three other requests for a collection due
process hearing dated January 5, April 5, and September 15, 2009. Respondent
mailed petitioners a letter for each of those requests that states that the request was
untimely because no final notice of intent to levy had been mailed to petitioners.
      3
       The Form 12153 bears the date “12-7-09” under the title “IRS Received
Date” on the bottom of the second page with the heading “IRS Use Only”.
      4
       The “penalty” of which petitioners speak is actually an addition to tax. The
Court will refer to it as such throughout.
      5
        Petitioners also reference docket No. 26842-09S on their Form 12153. They
petitioned the Court to dispute the same issues that the Court must decide now. The
case at docket No. 26842-09S was dismissed for lack of jurisdiction on February
25, 2010, because petitioners had not been issued a notice of determination for
2004.
                                         -6-

process had taken too long. They did not provide the SO with any financial

documents during the CDP hearing, nor did they provide any collection

alternatives.6

       Respondent issued petitioners the notice dated June 3, 2010, which sustained

the proposed levy action for 2004.

                                      Discussion

       Section 6330 generally provides that the Commissioner cannot proceed with

collection by way of a levy until the taxpayer has been given notice and the

opportunity for an administrative review of the matter (in the form of an Appeals

Office hearing) and that, if dissatisfied, the person may obtain judicial review of the

administrative determination. See Davis v. Commissioner, 115 T.C. 35, 37 (2000);

Goza v. Commissioner, 114 T.C. 176, 179 (2000). At the hearing the Appeals

officer shall obtain verification that the requirements of any applicable law or

administrative procedure have been met. Sec. 6330(c)(1).

       The taxpayer requesting the hearing may raise any relevant issue with regard

to the Commissioner’s intended collection activities, including spousal defenses,

challenges to the appropriateness of the collection action, and offers of collection


       6
        Before their CDP hearing petitioners requested to be put on an installment
plan. Respondent denied their request because they would not agree to an
installment plan that included additions to tax and interest.
                                          -7-

alternatives. Sec. 6330(c)(2)(A); Sego v. Commissioner, 114 T.C. 604, 609 (2000);

Goza v. Commissioner, 114 T.C. at 180. The taxpayer may also raise challenges

“to the existence or amount of the underlying tax liability”, however, only if he or

she “did not receive any statutory notice of deficiency for such tax liability or did

not otherwise have an opportunity to dispute such tax liability.” Sec. 6330(c)(2)(B).

Petitioners cannot challenge their underlying tax liability because they received a

statutory notice of deficiency and because this Court entered a stipulated decision in

docket No. 25888-07S pertaining to their underlying liability. See id.; Katz v.

Commissioner, 115 T.C. 329, 339 (2000).

      Where the validity of the tax liability is not properly part of the appeal, the

taxpayer may nevertheless challenge the determination of the Appeals officer to

proceed with collection as an abuse of discretion. Sego v. Commissioner, 114 T.C.

at 609-610; Goza v. Commissioner, 114 T.C. at 181-182.

      The Court has jurisdiction under section 6404(h) to hear a request for

abatement of interest in a CDP case. Katz v. Commissioner, 115 T.C. at 340; see

also Gray v. Commissioner, 138 T.C. __ (Mar. 28, 2012).
                                         -8-

I.    Whether the SO Abused Her Discretion When She Denied Petitioners’
      Request for Abatement of Interest

      Petitioners presented two arguments to support their position that the interest

that has accrued since the decision was entered against them should be abated.

First, they argue that respondent provided erroneous advice, and second they argue

that respondent’s delay in applying their 2007 overpayment to their 2004 liability

allowed more interest and additions to tax to accrue.

      A.     Petitioners’ Erroneous Advice Argument

      Under section 6404(e)(1) the Commissioner may abate the assessment of

interest on any deficiency to the extent that any error or delay in payment is

attributable to an officer or employee of the Internal Revenue Service’s (IRS) being

erroneous or dilatory in performing a managerial or ministerial act.

      A managerial act is an administrative act that occurs during the processing of

a taxpayer’s case involving the temporary or permanent loss of records or the

exercise of judgment or discretion relating to management of personnel. Sec.

301.6404-2(b)(1), Proced. & Admin. Regs. A ministerial act is a procedural or

mechanical act that does not involve the exercise of judgment or discretion by the

Commissioner. Sec. 301.6404-2(b)(2), Proced. & Admin. Regs. A managerial or

ministerial act, however, does not include “[a] decision concerning the proper
                                         -9-

application of federal tax law (or other federal or state law)”. Sec. 301.6404-2(b),

Proced. & Admin. Regs.

      Petitioners argue that the interest on their 2004 tax liability should be abated

because an IRS employee orally advised them to have more tax withheld than they

owed each year and then request to have the overpayment applied to their 2004 tax

liability, which petitioners did. The oral advice petitioners claimed to have received

does not constitute a ministerial or managerial act and therefore does not entitle

petitioners to abatement of interest. See sec. 301.6404-2, Proced. & Admin. Regs.;

see also Chakoian v. Commissioner, T.C. Memo. 2009-151.

      B.     Petitioners’ Delay Argument

      Petitioners’ delay argument centers around their 2007 overpayment of Federal

income tax. They argue that respondent’s delay in applying the overpayment

increased the amount of interest that accrued on their underlying tax liability.

      The Commissioner’s right to “set off” or to credit an overpayment of one tax

year to another derives from section 6402(a), which permits him to set off any

existing tax liabilities against any tax overpayments due the taxpayer. Section

6402(a) provides:
                                         - 10 -

      In the case of any overpayment, the Secretary, within the applicable
      period of limitations, may credit the amount of such overpayment,
      including any interest allowed thereon, against any liability in respect
      of an internal revenue tax on the part of the person who made the
      overpayment and shall, subject to subsections (c), (d), (e), and (f)
      refund any balance to such person.

      Effectively, section 6402(a) provides that a party is entitled to a tax refund

only of the overpayment amount that exceeds any outstanding tax liabilities.

Campbell v. United States (In re Davis), 889 F.2d 658, 661 (5th Cir. 1989);

Kabbaby v. Richardson, 520 F.2d 334 (5th Cir. 1975); United States v. Rochelle,

363 F.2d 225, 232-233 (5th Cir. 1966).

      When a taxpayer makes a voluntary payment to the Commissioner, he or she

has a right to direct the application of that payment to whatever type of liability he

or she chooses. Wood v. United States, 808 F.2d 411, 416 (5th Cir. 1987);

Muntwyler v. United States, 703 F.2d 1030, 1032 (7th Cir. 1983); O’Dell v. United

States, 326 F.2d 451, 456 (10th Cir. 1964). Under the voluntary payment rule,

when a taxpayer who has outstanding tax liabilities voluntarily makes a payment,

the Commissioner usually will honor the taxpayer’s request as to how to apply that

payment. United States v. Ryan (In re Ryan), 64 F.3d 1516, 1522 (11th Cir. 1995).
                                         - 11 -

The regulations promulgated under section 6402(a), however, demonstrate that the

Commissioner does not apply the voluntary payment rule to overpayments.

      The regulations do provide that a taxpayer can instruct the Commissioner to

credit his or her overpayment against the estimated tax for the taxable year

immediately succeeding the taxable year for which such overpayment was claimed.

Sec. 301.6402-3(a)(5), Proced. & Admin. Regs. The regulations, however, mirror

the statute and authorize the Commissioner to override that election and apply the

overpayment against “any outstanding liability for any tax”. Sec. 301.6402-

3(a)(6)(i), Proced. & Admin. Regs.; see N. States Power Co. v. United States, 73

F.3d 764, 767 (8th Cir. 1996) (quoting Ryan, 64 F.3d at 1523 (“‘[Section 6402],

plainly gives the IRS the discretion to apply overpayments to any tax liability.’”));

Pettibone Corp. v. United States, 34 F.3d 536, 538 (7th Cir. 1994) (section 6402(a)

“leaves to the Commissioner’s discretion whether to apply overpayments to

delinquencies or to refund them to the taxpayer”); Kalb v. United States, 505 F.2d

506, 509 (2d Cir. 1974) (rejecting the argument that because tax overpayment was

voluntary, the Commissioner was bound to comply with the taxpayer’s direction

about how to apply that payment; section 6402(a) “clearly gives the IRS discretion

to apply a refund to ‘any liability’ of the taxpayer”).
                                         - 12 -

      Respondent applied petitioners’ 2007 overpayment to their 2008 estimated

tax. Petitioners argue that if respondent had followed their directions to apply the

2007 overpayment to their 2004 tax liability they would not owe as much interest.

      Petitioners’ right to designate payments does not extend to overpayments.

See sec. 301.6402-3(a)(5), Proced. & Admin. Regs. Even if petitioners were

allowed to direct the application of their 2007 overpayment to their 2004 tax

liability, at the time they requested the application, April 5, 2008, their 2004 tax

liability had not been assessed because the decision in docket No. 25888-07S was

not yet final.7 See secs. 6213(a), 7481(b).

      At the time petitioners requested the application of their 2007 overpayment to

their 2004 liability, respondent’s only options were to issue them a refund or credit

the overpayment to their 2008 estimated tax. See sec. 301.6402-3(a)(5), Proced. &

Admin. Regs. Respondent’s application of petitioners’ 2007 overpayment to their

2008 estimated tax was, therefore, proper.8

      7
        The Court notes that the decision in docket No. 25888-07S was final on
November 19, 2008, 90 days after the decision was entered on August 21, 2008.
See sec. 7481(b). Respondent assessed petitioners’ 2004 tax liability on November
10, 2008. Petitioners did not begin a proceeding to enjoin the early assessment of
their tax liability, and no collection actions were begun before the Court’s decision
became final.
      8
          Respondent did apply petitioners’ 2008 overpayment--which included their
                                                                       (continued...)
                                        - 13 -

      Additionally, the mere passage of time does not establish error or delay in

performing a ministerial act. See Cosgriff v. Commissioner, T.C. Memo. 2000-241

(citing Lee v. Commissioner, 113 T.C. 145, 150 (1999)). The fact that respondent

did not earlier apply petitioners’ 2007 overpayment to their 2004 tax liability does

not suggest that he committed a ministerial or managerial error.

      Petitioners have not proved that a ministerial or managerial error within the

meaning of section 6404(e) occurred that would require the abatement of interest.

Therefore, the SO did not abuse her discretion when she did not abate the interest

that accrued after the decision was entered in docket No. 25888-07S.

II.   Petitioners’ Liability for the Section 6651(a)(3) Addition to Tax and Section
      6651(d) Increase

      The addition to tax that petitioners are not in agreement with is a section

6651(a)(3) addition to tax and the increase of that addition to tax provided under

section 6651(d).

      A section 6651(a)(3) addition to tax will be imposed on a taxpayer who fails

to pay any amount in respect of any tax required to be shown on an income tax

return, which is not so shown, within 21 calendar days from the date of notice and



      8
       (...continued)
2007 overpayment--to their 2004 tax liability after the 2004 tax liability was
assessed.
                                         - 14 -

demand therefor. The section 6651(a)(3) addition to tax is not subject to

deficiency procedures applicable to tax. See Burke v. Commissioner, T.C. Memo.

2009-282.

      The Commissioner cannot collect the failure-to-pay addition to tax until after

notice and demand for payment. Sec. 6651(a)(3). Notice and demand for payment

cannot be made until after assessment, sec. 6303, and an assessment of a tax

deficiency cannot be made until the decision of the Tax Court is final, sec. 6213(a).

Consequently, a section 6651(a)(3) addition to tax cannot be a part of a deficiency

proceeding.

      As pertinent here, the increase in the rate of accrual of the addition to tax is

not applicable until the day 10 days after the date on which notice is given under

section 6331(d). Sec. 6651(d)(1).

      Because petitioners have not otherwise had an opportunity to challenge the

section 6651(a)(3) addition to tax, the Court will review this issue de novo. See

sec. 6330(c)(2)(B); see also Burke v. Commissioner, T.C. Memo. 2009-282.

      A taxpayer may avoid an addition to tax by proving reasonable cause for the

failure to pay the tax. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. A failure to

pay will be considered due to reasonable cause to the extent a taxpayer can show he
                                         - 15 -

or she exercised ordinary business care and prudence in paying his or her tax

liability and was nevertheless unable to pay the tax. Id.

      Petitioners’ arguments for reasonable cause are the same as their arguments

for abatement of interest--respondent’s delay and erroneous advice.

      As the Court discussed supra, petitioners have shown no delay by the IRS.

Petitioners’ overpayments were properly credited first to estimated tax for 2008 and

then to their 2004 tax liability once it was assessed.

      Petitioners allegedly received oral advice from an IRS employee concerning

withholding extra tax to pay their tax liability. The only evidence of the oral advice

they received from an IRS employee is petitioner husband’s testimony. The Court

does not have to accept petitioner husband’s uncorroborated, self-serving testimony

as the truth. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Additionally,

the Court notes that petitioners’ claim of reliance on advice given to them by the

IRS is undermined to the extent that the advice was oral. See Henry v. United

States, 870 F.2d 634, 637 (Fed. Cir. 1989) (citing Heckler v. Cmty. Health Servs. of

Crawford Cnty., Inc., 467 U.S. 51, 65 (1984), Schweiker v. Hansen, 450 U.S. 785,

788 (1981), and City of Alexandria v. United States, 737 F.2d 1022, 1027-1028

(Fed. Cir. 1984)).
                                          - 16 -

       Petitioners provided no credible evidence to prove that they had reasonable

cause such that they should not be liable for the section 6651(a)(3) addition to tax or

that the section 6651(d) increase in rate should not apply. Therefore, petitioners are

liable for the addition to tax and the increased rate.

III.   Whether the SO Abused Her Discretion When She Sustained the Proposed
       Levy Action

       A taxpayer is expected to provide all relevant information requested by

Appeals for its consideration of the facts and issues involved in the hearing,

including financial statements. Sec. 301.6330-1(e)(1), Proced. & Admin. Regs.

       Petitioners did not propose any collection alternatives at the CDP hearing.

They also failed to provide the SO with any of the documents she requested,

including financial statements. The Court finds that the SO did not abuse her

discretion when she sustained the proposed levy action.

       We have considered all of petitioners’ arguments, and, to the extent not

addressed herein, we conclude that they are moot, irrelevant, or without merit.

       To reflect the foregoing,


                                                         Decision will be entered

                                                   for respondent.
