                               T.C. Memo. 2012-274



                         UNITED STATES TAX COURT



          A. DEEWAYNE JONES AND SHIRLEY JONES, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 312-10L.                           Filed September 26, 2012.



      A. DeeWayne Jones and Shirley Jones, pro sese.

      Nathan C. Johnston, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


      MARVEL, Judge: Pursuant to sections 6320 and 6330(d),1 petitioners seek

review of respondent’s determination to sustain the filing of a notice of Federal tax


      1
       Unless otherwise indicated, all section references are to the Internal Revenue
Code for the relevant period, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                          -2-

[*2] lien (NFTL) with respect to their unpaid Federal income tax liabilities for 2002-

05. The issue for decision is whether respondent’s determination was an abuse of

discretion.

                                FINDINGS OF FACT

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

facts and facts drawn from stipulated exhibits are incorporated herein by this

reference. Petitioners resided in California when they filed their petition.

      At the time of respondent’s determination A. DeeWayne Jones (Dr. Jones)

was a 74-year-old semiretired dentist, and his wife, Shirley Jones, was a 74-year-old

retired secretary.

      Petitioners’ tax troubles began in 2007 when respondent examined

petitioners’ 2002-05 tax returns. As a result of the examinations petitioners agreed

to adjustments to the income tax liabilities shown on their 2002-05 tax returns, and

respondent assessed the resulting deficiencies. As of September 28, 2009,

petitioners had balances outstanding of $16,259, $17,171, $8,059, and $9,976 for

the 2002, 2003, 2004, and 2005 tax years, respectively, totaling $51,465.

      On January 27, 2009, respondent mailed to petitioners a Notice of Federal

Tax Lien Filing and Your Right to a Hearing Under IRC 6320 for the 2002-05 tax

years. Petitioners timely submitted a Form 12153, Request for a Collection Due
                                          -3-

[*3] Process or Equivalent Hearing (section 6320 hearing request), seeking

withdrawal of the NFTL and acceptance of an offer-in-compromise (OIC) as a

collection alternative. Respondent received petitioners’ section 6320 hearing

request on February 7, 2009.2 On February 23, 2009, respondent levied on

petitioners’ Bank of America checking accounts, collecting $923.62.3 Respondent

later posted this amount as a payment to petitioners’ 2002 tax year account.

      On or around February 25, 2009, petitioners submitted a Form 656, Offer in

Compromise, dated February 24, 2009. At the same time, petitioners submitted a

Form 433-A, Collection Information Statement for Wage Earners and Self-

Employed Individuals (first Form 433-A), in support of their OIC. Petitioners’


      2
        The parties stipulated that respondent received petitioners’ section 6320
hearing request on February 25, 2009. However, this stipulation is contradicted by
a stipulated exhibit titled “Collection Due Process Case History Record”, which
states that respondent received petitioners’ section 6320 hearing request on
February 7, 2009. We disregard the stipulation as inconsistent with the stipulated
exhibit in the record. See Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181,
195 (1989).
      3
        At some point before levying on petitioners’ bank accounts, respondent
apparently issued a notice of intent to levy under sec. 6330. Upon receiving that
notice, petitioners timely requested a sec. 6330 hearing, on a Form 12153 dated
February 21, 2008, proposing an installment agreement as a collection alternative
for tax years 2002-05. Sometime before December 1, 2008, petitioners’ authorized
representative withdrew petitioners’ sec. 6330 hearing request for tax years 2002-
03. There is nothing in the record before us as to the status of petitioners’ sec. 6330
hearing request for tax years 2004-05.
                                           -4-

[*4] OIC was $5,500, with a $1,100 downpayment and the remainder due within

three months. Petitioners’ first Form 433-A listed only one property as real estate

they owned. The address petitioners provided for that property was 722 East Main

Street, Santa Paula, California (Santa Paula property).

      Respondent subsequently mailed to petitioners two letters, both dated April

14, 2009. The first was from the Appeals Office in Fresno, California,

acknowledging receipt of petitioners’ section 6320 hearing request. The second

was from Offer Specialist P. Pfeiffer, writing from an office in Glendale, California.

      In his letter Offer Specialist Pfeiffer requested, among other items, (1) an

updated Form 433-A and a completed Form 433-B, Collection Information

Statement for Businesses, with proof of payment of all expenses listed on the Form

433-B; (2) a copy of petitioners’ 2008 Federal income tax return; (3) copies of all

books and records relating to petitioners’ 2008 tax year; (4) a list of all real property

owned by petitioners within the last five years; (5) copies of residential rental

agreements, including proof of payment for three months; (6) completed

personal questionnaires; (7) an explanation of how petitioners meet their monthly

expenses; and (8) written explanations with respect to several items flagged by

respondent. The written explanations requested included the following: (1) an
                                          -5-

[*5] explanation of what had happened to various properties that respondent had on

record as belonging to petitioners, or the inclusion of the properties on petitioners’

updated Form 433-A; and (2) an explanation of petitioners’ affiliation with “Canyon

Crest Ranch Partners - Moorpark” (Canyon Crest). In particular, respondent

inquired about the following properties: 652 Zurich Drive, Lake Arrowhead,

California (Lake Arrowhead property), and 1035 and 1055 Marine View Drive,

Moorpark, California (Moorpark properties).

      Through their authorized representative, Robert D. Heinrich, C.P.A.,

petitioners timely responded to respondent’s information request. In a letter dated

April 22, 2009, and addressed to Offer Specialist Pfeiffer, Mr. Heinrich stated,

among other things, (1) that Dr. Jones works for the county prison system and has

no assets for his business; (2) that petitioners meet their expenses by borrowing

from their children and by using credit cards; (3) that petitioners own two

properties, the Santa Paula property and the Lake Arrowhead property; (4) that

petitioners omitted the Lake Arrowhead property from their first Form 433-A

because “the property was upside down” and in severe disrepair, with needed

repairs totaling almost $75,000; (5) that the Moorpark properties are owned by

Canyon Crest; and (6) that petitioners own 67% of Canyon Crest. Mr. Heinrich

also enclosed, among other documents, (1) an updated Form 433-A and a
                                         -6-

[*6] completed Form 433-B for petitioners; (2) petitioners’ 2008 joint Federal

income tax return; (3) a copy of Dr. Jones’ 2008 Form 1099-MISC, Miscellaneous

Income; (4) copies of a check register supporting expenses petitioners reported on

Dr. Jones’ Schedule C, Profit or Loss From Business, for 2008; (5) a copy of a

residential rental agreement for a residence at 12317 Willow Hill Drive, Moorpark,

California (Moorpark residence); (6) copies of recent rent checks to the landlord of

the Moorpark residence (paid by Jodi Jones Proud, petitioners’ daughter); (7)

completed questionnaires for petitioners; (8) copies of an insurance cancellation

notice for the Lake Arrowhead property; and (9) copies of a bid to reroof the home

on the Lake Arrowhead property and of an estimate of the cost to repair severe

water damage and leakage to the Lake Arrowhead property.

      On their updated Form 433-A, petitioners reported, under penalty of perjury,

that they had monthly gross income of $6,626 and monthly living expenses of

$7,079. Petitioners also reported the following assets: (1) two Bank of America

checking accounts with balances of $1,250 and $300, respectively;4 (2) a 1997

Ford Explorer with a current value of $1,000; (3) a 2002 Ford Explorer with a

current value of $2,500; (4) the Santa Paula property with a current value of


      4
       Petitioners erroneously calculated their total checking account balances to be
$5,550.
                                         -7-

[*7] $450,000 and a loan balance of $460,000; (5) the Lake Arrowhead property

with a current value of $155,000 and a loan balance of $155,468; and (6) furniture

and personal effects with a current value of $3,400.

      On the completed questionnaires that petitioners submitted to respondent, Dr.

Jones stated that his health was fair, that he was currently employed as a dentist for

the Ventura County Sheriff’s Department, and that he planned on retiring within five

years; and Mrs. Jones stated that her health was poor and that she was retired. As

requested, petitioners described the serious, chronic medical conditions that led

them to describe their health as fair and poor, respectively.

      In late June or early July respondent informed petitioners that their OIC

would be handled by Appeals because they filed their OIC after filing their section

6320 hearing request. In a letter dated July 10, 2009, respondent notified petitioners

and Mr. Heinrich that petitioners’ “[OIC] had been accepted as processable and will

be worked in Appeals.”

      In a letter dated September 29, 2009, Settlement Officer Lisanti notified

petitioners and Mr. Heinrich of a scheduled conference call for October 20, 2009,

with respect to petitioners’ section 6320 hearing request.

      Petitioners and Mr. Heinrich did not call into the October 20, 2009,

conference call, and in a letter to petitioners and Mr. Heinrich dated that same day,
                                         -8-

[*8] Settlement Officer Lisanti noted petitioners’ failure to call and advised

petitioners that they had until November 3, 2009, to submit materials for

consideration in the section 6320 hearing.

      On November 5, 2009, Mr. Heinrich left a voicemail for Settlement Officer

Lisanti, requesting a return phone call. Settlement Officer Lisanti then left a

message on Mr. Heinrich’s voicemail, requesting a call back by the close of

business that day. Hearing nothing, Settlement Officer Lisanti left a message on Mr.

Heinrich’s voicemail on November 6, 2009, noting that several deadlines had

passed and informing him that he would have to confer with her soon. Settlement

Officer Lisanti further informed Mr. Heinrich that she would not be

recommending the OIC because petitioners had sufficient income and assets

to pay their full account. Settlement Officer Lisanti then gave Mr. Heinrich a

deadline of November 14, 2009, to contact her regarding any installment

agreement that petitioners might be interested in pursuing and stated that otherwise

the case would be closed and a notice of determination would be issued, sustaining

the filing of the NFTL. On November 10, 2009, Settlement Officer Lisanti left

another voicemail for Mr. Heinrich, asking him to return her phone call by

November 13, 2009, and also inquiring whether petitioners were interested in

alternatives to an OIC. Also on November 10, 2009, Settlement Officer Lisanti
                                         -9-

[*9] faxed a copy of her reasonable collection potential analysis (worksheet) to Mr.

Heinrich. This was the first time that Settlement Officer Lisanti provided to

petitioners any information regarding the details of her analysis.

      Settlement Officer Lisanti’s worksheet showed that petitioners had gross

monthly income of $8,941, monthly expenses of $4,917, and net monthly income of

$4,024.5 Accordingly, the worksheet showed that the present value of


      5
        Specifically, Settlement Officer Lisanti made the following adjustments to
petitioners’ claimed income and expenses:

                  Gross monthly income                     Taxpayers    Appeals

    Interest--dividends                                         -0-       $331
    Net business income                                       $4,600     4,600
    Pension/SSA (taxpayer)                                     1,351     2,334
    Pension/SSA (spouse)                                         675       -0-
    Other                                                       -0-      1,676
     Total income                                              6,626     8,941

                     Monthly expenses

    Allowable national standard expense--2 people               $550      $961
    Local housing and utilities (Los Angeles)                  3,473     2,236
    Local transportation:
     Ownership costs--vehicle 1                                  700       -0-
     Operating costs--vehicle 1                                 -0-         100
     Operating costs--vehicle 2                                 -0-         261
    Other allowable expenses:
     Health insurance premiums                                 1,058       656
     Life insurance                                              798       200
     Taxes (income & FICA)                                       500       503
                                                                        (continued...)
                                         - 10 -

[*10] petitioners’ future income and expenses was $193,152. Additionally, the

worksheet showed that petitioners had net realizable equity in assets of $193,239.

In calculating petitioners’ net realizable equity in assets, Settlement Officer Lisanti

included $5,550 for petitioners’ Bank of America checking accounts, $800 for

petitioners’ 1997 Ford Explorer, $2,000 for petitioners’ 2002 Ford Explorer,

$164,932 for the Lake Arrowhead property, and $19,957 for the total amount of

petitioners’ 2007 and 2008 charitable contributions as dissipated assets.6

      On November 12, 2009, Mr. Heinrich left a voicemail for Settlement Officer

Lisanti in which he stated that he disagreed with the value that Settlement Officer

Lisanti attributed to the Lake Arrowhead property and with her adjustments to

petitioners’ allowable living expenses on the worksheet. Mr. Heinrich also




      5
       (...continued)
       Total expenses                                           7,079        4,917

       Net monthly income                                       (453)        4,024

      6
       Dr. Jones offered into evidence a document dated November 11, 2009, that
Mr. Heinrich claimed he had faxed to Settlement Officer Lisanti, detailing his
disagreements with the adjustments on Settlement Officer Lisanti’s worksheet. We
did not admit the document into evidence because Dr. Jones lacked personal
knowledge that the document had been faxed to Settlement Officer Lisanti, see Fed.
R. Evid. 802; Rule 143, and Mr. Heinrich was unavailable to authenticate the
document as having been faxed to Settlement Officer Lisanti.
                                         - 11 -

[*11] indicated that he would supply further documentation by a date that is unclear

from the record, but possibly as late as November 20, 2009.7

      On November 19, 2009, Settlement Officer Lisanti left a voicemail for Mr.

Heinrich, informing him that she would be closing the case and reminding him that

petitioners had the right to seek judicial review of the determination. On December

3, 2009, Settlement Officer Lisanti terminated the section 6320 hearing.

      On December 9, 2009, respondent mailed to petitioners the notice of

determination, sustaining the filing of the NFTL. The Appeals Office attached a

statement prepared by Settlement Officer Lisanti and a copy of her worksheet. In

the statement Settlement Officer Lisanti stated that Dr. Jones is “in apparent good

health” and that Mrs. Jones has “no known health problems.” In explaining why

the Appeals Office rejected petitioners’ OIC, Settlement Officer Lisanti explained

that a taxpayer’s reasonable collection potential is calculated by adding the

taxpayer’s net realizable equity in assets to the present value of the taxpayer’s

future income and expenses. Settlement Officer Lisanti then stated that


      7
       The parties stipulated, and a document in evidence titled “Case Activity
Record Print” shows, that Mr. Heinrich promised to provide the supporting
documentation to Settlement Officer Lisanti by the end of the next day, November
13, 2009. However, in a statement attached to the Notice of Determination
Concerning Collection Action(s) under Section 6320 and/or 6330 (notice of
determination), Settlement Officer Lisanti stated that Mr. Heinrich agreed to provide
the supporting documentation via fax by November 20, 2009.
                                         - 12 -

[*12] petitioners’ net realizable equity in assets was $193,239 and that “[n]o further

analysis is required to determine that an OIC based on * * * [doubt as to

collectibility] is not an acceptable resolution to the taxpayers’ account.” Settlement

Officer Lisanti stated that she determined the value of petitioners’ Lake Arrowhead

property by using Zillow.com. 8 Settlement Officer Lisanti also noted that

petitioners’ net realizable equity in assets, as determined by petitioners’ own

financial statements, was $9,050, nearly twice the amount petitioners offered.

According to Settlement Officer Lisanti, this indicated that the offer was

“unacceptable on its face”.

      As an additional consideration, Settlement Officer Lisanti noted that

petitioners had reported $3,968 of interest income on their 2008 Federal income

tax return from accounts that petitioners did not include on the financial

statements they provided.9 According to Settlement Officer Lisanti, this indicated

that “there may be additional * * * assets that should be part of the * * *

[reasonable collection potential] calculation that are not included on my


      8
      The “Zestimate” for the Lake Arrowhead property was $355,500, and the
“Value Range” was $245,295-$369,720.
      9
       On their 2008 Schedule B, Interest and Ordinary Dividends, petitioners
reported interest income from three accounts: $49 from a Community West Bank
account; $670 from a Washington Mutual account; and $3,249 from a JP Morgan
Chase Bank account.
                                         - 13 -

[*13] worksheet.” In fact, respondent conceded at trial that Settlement Officer

Lisanti was aware that these accounts contained insurance proceeds from a fire that

destroyed petitioners’ home on the Moorpark properties in 2006. Finally,

Settlement Officer Lisanti stated that there were no special circumstances that

would warrant consideration on any other basis.

      Upon receiving the notice of determination, petitioners timely filed their

petition with this Court, contesting respondent’s determination to sustain the filing

of the NFTL.

                                       OPINION

I.    Section 6320 Hearings

      Section 6321 imposes a lien on all property and property rights of a

taxpayer liable for taxes where a demand for the payment of the taxes has been

made and the taxpayer fails to pay. The Internal Revenue Service (IRS) is

authorized to file an NFTL with respect to taxpayers that have outstanding tax

liabilities and fail to pay after notice and demand. Sec. 6323. Section 6320(a)

requires the Secretary10 to send written notice to the taxpayer of the filing of an

NFTL and of the taxpayer’s right to an administrative hearing on the matter. The



      10
        The term “Secretary” means the Secretary of the Treasury or his delegate.
Sec. 7701(a)(11)(B).
                                         - 14 -

[*14] conduct and scope of section 6320 hearings are governed by section 6330(c),

(d) (other than paragraph (2)(B)), and (e). Sec. 6320(c). At the hearing, a taxpayer

may raise any relevant issue, including appropriate spousal defenses, challenges to

the appropriateness of the collection action, and collection alternatives, such as an

OIC or an installment agreement. Sec. 6330(c)(2)(A).

      Following the hearing, the Appeals Office must issue a notice of

determination regarding the validity of the filed NFTL. The Appeals Office is

required to take into consideration: (1) verification presented by the Secretary that

the requirements of applicable law and administrative procedure have been met, (2)

relevant issues raised by the taxpayer, and (3) whether the proposed collection

action appropriately balances the need for efficient collection of taxes with a

taxpayer’s concerns regarding the intrusiveness of the proposed collection action.

Sec. 6330(c)(3); Wadleigh v. Commissioner, 134 T.C. 280, 287-288 (2010).

      We have jurisdiction to review the Appeals Office’s determination. Sec.

6330(d)(1); see Murphy v. Commissioner, 125 T.C. 301, 308 (2005), aff’d, 469

F.3d 27 (1st Cir. 2006). Where the underlying tax liability is properly at issue, we

review any determination regarding the underlying tax liability de novo. Sego v.

Commissioner, 114 T.C. 604, 610 (2000). Where, as here, the underlying tax

liability is not properly at issue, we review the administrative determination of the
                                        - 15 -

[*15] Appeals Office for abuse of discretion. Lunsford v. Commissioner, 117 T.C.

183, 185 (2001); Sego v. Commissioner, 114 T.C. at 610; Goza v. Commissioner,

114 T.C. 176, 182 (2000). In reviewing for abuse of discretion, we do not conduct

an independent review of whether an OIC submitted by a taxpayer was acceptable

or substitute our judgment for that of the Appeals Office. Rather, we must uphold

the Appeals Office’s determination unless it is arbitrary, capricious, or without

sound basis in fact or law. See, e.g., Murphy v. Commissioner, 125 T.C. at 320;

Taylor v. Commissioner, T.C. Memo. 2009-27, 97 T.C.M. (CCH) 1109, 1116

(2009); see also Fargo v. Commissioner, 447 F.3d 706, 709 (9th Cir. 2006)

(“Abuse of discretion occurs when a decision is based ‘on an erroneous view of the

law or a clearly erroneous assessment of the facts.’” (quoting United States v.

Morales, 108 F.3d 1031, 1035 (9th Cir. 1997))), aff’g T.C. Memo. 2004-13.

However, we can uphold the Appeals Office’s determination only on grounds

actually relied upon by the Appeals officer in the notice of determination. See

Salahuddin v. Commissioner, T.C. Memo. 2012-141, slip op. at 16 (citing SEC v.

Chenery Corp., 318 U.S. 80, 93-95 (1943)); Rosenbloom v. Commissioner, T.C.

Memo. 2011-140, 101 T.C.M. (CCH) 1669, 1674 n.17 (2011); see also Safe Air

For Everyone v. EPA, 488 F.3d 1088, 1091 (9th Cir. 2007); Carpenter Family
                                         - 16 -

[*16] Invs., LLC v. Commissioner, 136 T.C. 373, 380 (2011) (citing SEC v.

Chenery Corp., 332 U.S. 194, 196 (1947)).

II.   Parties’ Arguments

      A.      Petitioners’ Arguments

      Petitioners contend that respondent abused his discretion in determining to

sustain the filing of the NFTL for several reasons:

      First, petitioners contend that it was their impression that Settlement Officer

Lisanti only denied their OIC because she determined that they had sufficient equity

in the Lake Arrowhead property to satisfy their tax liabilities. In that regard,

petitioners contend that Settlement Officer Lisanti erred by using Zillow.com to

value the property and by ignoring the documented disrepair of the property and the

copies of bids to repair the property that they submitted.

      Second, petitioners contend that Settlement Officer Lisanti failed to consider

their advanced age, their poor health, Dr. Jones’ stated intention to retire, and the

trauma relating to the 2006 fire that destroyed their home on the Moorpark

properties.

      Third, petitioners contend that Settlement Officer Lisanti erroneously

included checking account balances of $5,550 in their net realizable equity in assets.
                                           - 17 -

[*17] Fourth, petitioners contend that Settlement Officer Lisanti erroneously

included the amount of their 2007-08 charitable contributions in calculating their net

realizable equity in assets.

         Fifth, petitioners contend that Settlement Officer Lisanti made several

erroneous adjustments to the present value of their future income and expenses on

her worksheet.

         Finally, petitioners assert that their financial condition has worsened

considerably since respondent issued the notice of determination and that Dr. Jones

would like to retire immediately and continues working only because of his severe

debts.

         B.    Respondent’s Arguments

         Respondent contends that Settlement Officer Lisanti did not abuse her

discretion in determining that petitioners’ reasonable collection potential was

sufficient to pay their tax liability in full. As an initial matter, respondent contends

that petitioners were afforded ample opportunity to submit materials supporting their

OIC and to participate in a conference with Settlement Officer Lisanti but failed to

do so.

         With respect to petitioners’ net realizable equity in assets, respondent

contends that Settlement Officer Lisanti properly relied on the Zillow.com
                                          - 18 -

[*18] estimate of value for the Lake Arrowhead property, rounded up to the nearest

thousand to $356,000, reduced by 10% for a quick sale value (QSV) of $320,400,

and reduced further by the outstanding mortgage balance on the property of

$155,468, leaving equity of $164,932. Moreover, respondent contends that even if

the estimate of $74,240 for the allegedly required repairs on the property is

deducted dollar for dollar, petitioners would still have $90,692 of equity in the

property, which is more than sufficient to satisfy their outstanding tax liabilities.

Respondent also contends that petitioners have $5,550 deposited in checking

accounts, a Ford Explorer worth $1,000, and a Ford Explorer worth $2,500, the

values of the vehicles being discounted to QSVs of $800 and $2,000, respectively.

With respect to the 2007-08 charitable contributions, respondent contends that

settlement officers are instructed to consider including dissipated assets in the

reasonable collection potential calculation. See Internal Revenue Manual (IRM) pt.

5.8.5.5 (Sept. 23, 2008).

      With respect to petitioners’ future income and expenses, respondent

contends that Settlement Officer Lisanti properly determined that the present value

of their future income and expenses was $193,152. According to respondent, part

of this amount is attributable to Settlement Officer Lisanti’s determination that

petitioners understated their monthly income, and part of this amount is
                                        - 19 -

[*19] attributable to Settlement Officer Lisanti’s disallowance of certain of

petitioners’ claimed expenses. Moreover, respondent contends that, even accepting

all of petitioners’ claimed expenses, the present value of petitioners’ future income

and expenses would still be $69,504.

       Finally, respondent contends that Settlement Officer Lisanti did not abuse her

discretion by failing to take into account the loss of petitioners’ home in the 2006

fire and petitioners’ continued expense in making payments on that property

because petitioners failed to disclose the property and the payments on their Form

433-A.

III.   Petitioners’ Section 6320 Hearing

       A.    Offers-in-Compromise

       Section 7122(a) authorizes the Secretary to compromise any civil or criminal

case arising under the internal revenue laws before its referral to the Department of

Justice. Section 7122(d) authorizes the Secretary to prescribe guidelines for officers

and employees of the IRS to determine whether an OIC is adequate and should be

accepted. Accordingly, we generally uphold the rejection of an OIC when the

Appeals Office has followed the IRM. See, e.g., Churchill v. Commissioner, T.C.

Memo. 2011-182, 102 T.C.M. (CCH) 116, 117 (2011);
                                         - 20 -

[*20] Atchison v. Commissioner, T.C. Memo. 2009-8, 97 T.C.M. (CCH) 1034,

1036 (2009).

       The regulations under section 7122 provide that an OIC is appropriate where

there is doubt as to collectibility. Sec. 301.7122-1(b)(2), Proced. & Admin. Regs.

“Doubt as to collectibility exists in any case where the taxpayer’s assets and income

are less than the full amount of the liability.” Id. “A determination of doubt as to

collectibility will include a determination of ability to pay. In determining ability to

pay, the Secretary will permit taxpayers to retain sufficient funds to pay basic living

expenses.” Sec. 301.7122-1(c)(2)(i), Proced. & Admin. Regs.; see also sec.

7122(d)(2)(A) and (B). Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517, 517,

states that

       [d]oubt as to collectibility exists in any case where the taxpayer’s
       assets and income cannot satisfy the full amount of the liability.

              An offer to compromise based on doubt as to collectibility
       generally will be considered acceptable if it is unlikely that the tax can
       be collected in full and the offer reasonably reflects the amount the
       Service could collect through other means, including administrative and
       judicial collection remedies. * * * This amount is the reasonable
       collection potential of a case. In determining the reasonable collection
       potential of a case, the Service will take into account the taxpayer’s
       reasonable basic living expenses. In some cases, the Service may
       accept an offer of less than the total reasonable collection potential of a
       case if there are special circumstances.
                                         - 21 -

[*21] Pursuant to the IRM, “[i]n determining the taxpayer’s future ability to pay, full

consideration must be given to the taxpayer’s overall general situation including

such factors as age, health, marital status, number and age of dependents, education

or occupational training and work experience.” IRM pt. 5.8.4.4 (Sept. 23, 2008).

      B.     Petitioners’ Reasonable Collection Potential

      Although Settlement Officer Lisanti attached a copy of her worksheet to the

notice of determination, she also stated in the attached statement that because

petitioners’ net realizable equity in assets was $193,239, “[n]o further analysis is

required”. Settlement Officer Lisanti further stated that the OIC was “unacceptable

on its face” because petitioners’ net realizable equity in assets would have been

$9,050 according to the financial statements that petitioners submitted with their

OIC. Settlement Officer Lisanti then explained some of her reasoning in

determining petitioners’ net realizable equity in assets, but she did not explain any

of her reasoning regarding the adjustments she made to petitioners’ income and

expenses. From this we conclude that Settlement Officer Lisanti did not rely on her

adjustments to petitioners’ income and expenses in determining that petitioners’

reasonable collection potential was greater than their OIC.
                                         - 22 -

[*22] Respondent goes to great length to explain the adjustments on Settlement

Officer Lisanti’s income and expense worksheet and contends that any abuse of

discretion with respect to the net realizable equity in assets calculation was harmless

because of the adjustments to petitioners’ future income and expenses. But “our

role under section 6330(d) is to review actions that the IRS took, not actions that it

could have taken.” Salahuddin v. Commissioner, slip op. at 16 (citing Chenery, 318

U.S. at 93-95); see also Rosenbloom v. Commissioner, 101 T.C.M. (CCH) at 1674

n.17.

        In Chenery, 318 U.S. at 93-94, the Supreme Court explained that

        [the agency’s] action must be measured by what the * * * [agency] did,
        not by what it might have done. * * * The * * * [agency’s] action
        cannot be upheld merely because findings might have been made and
        considerations disclosed which would justify its order as an appropriate
        safeguard for the interests protected by the Act. There must be such a
        responsible finding. * * *

See also Safe Air For Everyone, 488 F.3d at 1091 (“[O]ur review of an

administrative agency’s decision begins and ends with the reasoning that the agency

relied upon in making that decision”.). We have found that Settlement Officer

Lisanti did not rely on her adjustments to petitioners’ income and expenses and that

she failed to explain any of her reasoning regarding those adjustments.

Accordingly, we decline to consider respondent’s post hoc explanations of the
                                         - 23 -

[*23] adjustments on Settlement Officer Lisanti’s income and expense worksheet as

a valid basis for sustaining respondent’s determination.

      Additionally, the notice of determination does not disclose that Settlement

Officer Lisanti gave any consideration to the impact petitioners’ advanced age and

asserted poor health might have on petitioners’ ability to pay, as required by IRM

pt. 5.8.4.4. In fact, the statement attached to the notice of determination appears to

confirm that Settlement Officer Lisanti gave no consideration to petitioners’ age or

claims of poor health. There is no documentation in the administrative record

showing that Settlement Officer Lisanti ever asked for documentation of or disputed

petitioners’ asserted poor health, and respondent has offered no explanation for

Settlement Officer Lisanti’s statement that Dr. Jones is “in apparent good health”

and that Mrs. Jones has “no known health problems.” Although the Appeals

Office does not have to list “every single fact that it considered in arriving at * * *

[its] determination”, Barnes v. Commissioner, T.C. Memo. 2006-150, 92

T.C.M. (CCH) 31, 35 (2006), aff’d in part, vacated in part sub nom. Keller v.

Commissioner, 568 F.3d 710 (9th Cir. 2009), it cannot misstate or fail to

address significant and obviously relevant facts.11 Because we cannot


      11
        Significantly, most of petitioners’ income is Schedule C income from Dr.
Jones’ dental practice. Accordingly, Dr. Jones’ advanced age and asserted health
                                                                       (continued...)
                                         - 24 -

[*24] ascertain from the administrative record how Settlement Officer Lisanti

arrived at her conclusion that petitioners were in good health in the face of

information supplied by petitioners during the section 6320 hearing that they were

not, we cannot evaluate whether Settlement Officer Lisanti abused her discretion in

rejecting petitioners’ OIC.

      C.     Petitioners’ Net Realizable Equity in Assets

      Pursuant to the IRM, a taxpayer’s ability to pay for OIC purposes is

determined in part by calculating the net realizable equity in the taxpayer’s assets.

IRM pt. 5.8.5.4.1(1) (Sept. 23, 2008). “Net realizable equity is defined as * * *

(QSV) less amounts owed to secured lien holders with priority over the federal tax

lien.” Id. “QSV is defined as an estimate of the price a seller could get for the

asset in a situation where financial pressures motivate the owner to sell in a short

period of time, usually 90 calendar days or less.” Id. pt. 5.8.5.4.1(2). “Normally,

QSV is calculated at 80% of * * * [fair market value (FMV)]. A higher or lower




      11
        (...continued)
problems clearly have the potential to significantly affect petitioners’ future income.
By contrast, in cases such as Johnson v. Commissioner, T.C. Memo. 2007-29, 93
T.C.M. (CCH) 885, 889 (2007), aff’d in part, vacated in part sub nom. Keller v.
Commissioner, 568 F.3d 710 (9th Cir. 2009), the failure to address the taxpayers’
age and health was deemed insignificant because the taxpayers relied principally on
income that was not contingent upon employment.
                                         - 25 -

[*25] percentage may be applied in determining QSV when appropriate, depending

on the type of asset and current market conditions.” Id. pt. 5.8.5.4.1(3).

        Petitioners contend that Settlement Officer Lisanti erred in her determination

of the FMV of the Lake Arrowhead property, in her calculation of petitioners’

checking account balances, and in her inclusion of the total amount of petitioners’

2007-08 charitable contributions, as dissipated assets, in her calculation of

petitioners’ net realizable equity in assets. We address each of these contentions in

turn.

              1.     Lake Arrowhead Property Valuation

                     a.    Evidentiary Issues

        Before we decide whether Settlement Officer Lisanti erred in determining

that petitioners had realizable equity of $164,932 in the Lake Arrowhead property,

we must first resolve an evidentiary dispute regarding two documents that

petitioners sought to introduce into evidence to support their contention that they

had no equity in the Lake Arrowhead property. The first of these documents is a

letter from a loan officer at Mountain West Financial, Inc., dated September 7,

2010, and the second is an appraisal of the Lake Arrowhead property dated

September 17, 2010. Respondent objected to the introduction of these documents

because both postdate the administrative record and are thus irrelevant in
                                         - 26 -

[*26] determining whether Settlement Officer Lisanti abused her discretion in

sustaining the filing of the NFTL.

      Respondent contends, and we agree, that the U.S. Court of Appeals for the

Ninth Circuit, to which an appeal in this case would lie absent a stipulation to the

contrary, see sec. 7482(b)(1)(A), has adopted the administrative record rule in

section 6320 cases where the underlying liability is not at issue, see Keller, 568 F.3d

at 718; Jordan v. Commissioner, 134 T.C. 1, 9 (2010); see also Robinette v.

Commissioner, 439 F.3d 455 (8th Cir. 2006), rev’g 123 T.C. 85 (2004).

Accordingly, under Golsen v. Commissioner, 54 T.C. 742 (1970), aff’d, 445 F.2d

985 (10th Cir. 1971), we must sustain respondent’s objections.

                    b.     Respondent’s Valuation of the Lake Arrowhead Property

      The IRM in effect during 2009 provided the following methods for

determining the FMV of real estate for OIC purposes: a recent purchase price or an

existing contract to sell; recent appraisals; a real estate tax assessment; a market

comparable; and a homeowner’s insurance replacement cost.12 IRM pt.

5.8.5.4.11(2) (Sept. 23, 2008).




      12
         The current version of the Internal Revenue Manual (IRM) provides that
internal sources, such as Accurint, can also be used to determine the FMV of real
property. IRM pt. 5.8.5.12 (Oct. 22, 2010).
                                        - 27 -

[*27] In their Form 433-A petitioners stated under penalty of perjury that the Lake

Arrowhead property had a current value of $155,000. However, in the statement

attached to the notice of determination, Settlement Officer Lisanti determined, on

the basis of a valuation obtained using Zillow.com, that the Lake Arrowhead

property had a fair market value of $356,000, apparently rounded up to the nearest

thousand. In so doing, Settlement Officer Lisanti used the “Zestimate” provided by

Zillow.com, which was near the higher end of the “Value Range” of $245,295 to

$369,720 that accompanied that estimate. Settlement Officer Lisanti then reduced

that amount by 10% for a QSV of $320,400, but she did not explain why she used a

10% reduction as opposed to the standard 20% reduction used to calculate QSV.

Settlement Officer Lisanti then subtracted the outstanding mortgage balance on the

property of $155,468, for net realizable equity of $164,932.

      Settlement Officer Lisanti never asked petitioners to provide an appraisal or

to otherwise substantiate the value they placed on the Lake Arrowhead property.

Moreover, petitioners submitted several documents on or around April 22, 2009,

to substantiate their assertion that the Lake Arrowhead property required

significant repairs, but Settlement Officer Lisanti never considered those

documents. Only after Settlement Officer Lisanti faxed Mr. Heinrich a copy of her
                                          - 28 -

[*28] worksheet on November 10, 2009, were petitioners or Mr. Heinrich aware

that Settlement Officer Lisanti disputed their position that they had no equity in the

Lake Arrowhead property. On November 12, 2009, Mr. Heinrich purportedly

promised Settlement Officer Lisanti additional documents supporting petitioners’

valuation of the Lake Arrowhead property by as late as November 20, 2009. Yet on

November 19, 2009, Settlement Officer Lisanti left a voicemail for Mr. Heinrich,

informing him that she would be closing the case. It is also unclear what new

documents Settlement Officer Lisanti expected Mr. Heinrich to provide on such

short notice.

      In this context, Settlement Officer Lisanti’s reliance on the “Zestimate”

provided by Zillow.com to determine the FMV of the Lake Arrowhead property,

despite petitioners’ sworn statement that the Lake Arrowhead property had a

significantly lower value, without additional investigation, was clearly erroneous.

Zillow.com itself states that its “Zestimate” “is not an appraisal. It is a starting

point in determining a home’s value.”13 What is a Zestimate?, Zillow.com,

http://www.zillow.com/wikipages/What-is-a-Zestimate/ (last visited June 18,



      13
        We note that respondent’s counsel also objected to the appraisal that
petitioners were trying to introduce into evidence on the grounds that the appraisal
specifically stated that “This appraisal report is intended for use by the owner and
subject for personal reasons only. This report is not intended for any other use.”
                                         - 29 -

[*29] 2012). Moreover, Settlement Officer Lisanti did not consider the “Value

Range” provided in the Zillow.com report. Significantly, had Settlement Officer

Lisanti considered that range and the documented disrepair of the Lake Arrowhead

property, she might have agreed with petitioners’ position that they had no equity in

the Lake Arrowhead property.14 At a minimum, Settlement Officer Lisanti should

have provided petitioners a meaningful opportunity to substantiate their position.

      Settlement Officer Lisanti first notified petitioners that she disagreed with

their valuation of the Lake Arrowhead property on November 10, 2009, when she

faxed Mr. Heinrich her worksheet. On November 19, 2009, she left a voicemail for

Mr. Heinrich, informing him that she would be closing the case. We do not think

that this constituted a meaningful opportunity for petitioners to substantiate their

position.

      Because we find that Settlement Officer Lisanti erred by failing to consider

the documented disrepair of the property and by failing to provide petitioners a




      14
        For example, if Settlement Officer Lisanti had assumed that the FMV of the
Lake Arrowhead property, without factoring in the required repairs, was $245,295,
which is at the low end of the Zillow.com “Value Range”, the QSV of the property,
as calculated by Settlement Officer Lisanti, would have been $220,766. After
subtracting the $74,240 in work estimates that petitioners provided, the QSV would
be $146,526, which is less than the outstanding mortgage balance on the property of
$155,468.
                                         - 30 -

[*30] meaningful opportunity to substantiate their position, we need not decide at

this time whether Zillow.com, or similar Web sites, are appropriate tools for

determining the FMV of real property in the context of section 6320 hearings or

otherwise. Cf. In re Darosa, 442 B.R. 173, 177 (Bankr. D. Mass. 2010) (suggesting

that Zillow.com’s “Zestimates” are unreliable and can be manipulated by users).

             2.       Checking Account Balances

      In calculating petitioners’ net realizable equity in assets, Settlement Officer

Lisanti included $5,550 for amounts in petitioners’ checking accounts. However,

petitioners listed two checking accounts on their Form 433-A, one with a balance of

$1,250 and the other with a balance of $300. Settlement Officer Lisanti should have

realized that petitioners made a typographical error in entering the total as $5,550,

rather than $1,550.

             3.       2007 and 2008 Charitable Contributions as Dissipated Assets

      Dissipation of assets is “[t]he use of an asset for an illegal or inequitable

purpose”. Black’s Law Dictionary 541 (9th ed. 2009) (defining “dissipation”).

Pursuant to IRM pt. 5.8.5.5(1), an asset is dissipated if it has “been sold, gifted,

transferred, or spent on non-priority items or debts and are no longer available to

pay the tax liability.” Dissipated assets could be included in a taxpayer’s
                                         - 31 -

[*31] reasonable collection potential either because the tax collector is

understandably concerned that the assets may only appear to have dissipated, see

Tucker v. Commissioner, T.C. Memo. 2011-67, 101 T.C.M. (CCH) 1307, 1314

(2011), aff’d, 676 F.3d 1129 (D.C. Cir. 2012), or “to deter delinquent taxpayers

from wasting money that they owe and should pay as taxes”, id. Accordingly, for a

dissipated asset to be added to a taxpayer’s reasonable collection potential, an asset

that should otherwise have been available to satisfy the taxpayer’s tax liability must

be identified as having been dissipated. See IRM pt. 5.8.5.5(1).

      The IRM has specific guidelines for how dissipated assets should be treated

in the context of an OIC: (1) It must be determined that assets were dissipated and

are no longer available to pay the tax liability. Id. (2) The investigation should

determine whether the dissipated assets should be included in the taxpayer’s

reasonable collection potential. Id. pt. 5.8.5.5(2). (3) Inclusion of dissipated assets

in the reasonable collection potential calculation should be documented in the

administrative record. Id. pt. 5.8.5.5(3). (4) The determination that assets were

dissipated should consider: the timing of such dissipation in relation to when the

taxpayer submitted the offer and to when the liability arose; how the assets were

transferred; whether the taxpayer realized funds from the transfer and how the

funds were used; the value of the transferred assets; and the taxpayer’s interest
                                         - 32 -

[*32] in those assets. Id. (5) Where the taxpayer can show that dissipated assets

were spent on necessary living expenses, the dissipated assets should not be

included in the taxpayer’s reasonable collection potential. Id. pt. 5.8.5.5(4).

      In her worksheet Settlement Officer Lisanti added $19,957 to petitioners’ net

realizable equity in assets on account of petitioners’ 2007 and 2008 charitable

contributions.15 The stated reason for this inclusion was that these contributions

constituted dissipated assets. However, Settlement Officer Lisanti did not explain

her reasoning for characterizing charitable contributions as dissipated assets, nor did

she describe her analysis in the notice of determination or in any part of the

administrative record. Without such an explanation, we cannot properly review

Settlement Officer Lisanti’s conclusion and evaluate its impact on the Appeals

Office’s determination. See Safe Air For Everyone, 488 F.3d at 1091; Salahuddin

v. Commissioner, slip op. at 16; Rosenbloom v. Commissioner, 101 T.C.M. (CCH)

at 1674 n.17.




      15
        Petitioners claimed charitable contribution deductions of $17,487 and
$2,470 for 2007 and 2008, respectively. We infer that Settlement Officer Lisanti
based her conclusion that assets were dissipated solely on the fact that petitioners
claimed charitable contribution deductions for 2007 and 2008.
                                          - 33 -

[*33] D.     Petitioners’ Failure To Disclose the Washington Mutual Account

      The Appeals Office can deny a taxpayer’s OIC based on doubt as to

collectibility if it reasonably determines that the taxpayer failed to disclose assets.

See Schropp v. Commissioner, T.C. Memo. 2010-71, 99 T.C.M. (CCH) 1298, 1304

(2010), aff’d, 405 Fed. Appx. 800 (4th Cir. 2010).

      In the statement attached to the notice of determination, Settlement Officer

Lisanti stated that petitioners had reported $3,968 of interest income from accounts

that petitioners did not include on the financial statements they provided. According

to Settlement Officer Lisanti, this indicated that “there may be additional * * *

assets that should be part of the * * * [reasonable collection potential] calculation

that are not included on my worksheet.”

      At trial, however, respondent conceded that Settlement Officer Lisanti knew

that these accounts contained insurance proceeds from the fire that destroyed

petitioners’ home on the Moorpark properties in 2006. Despite her knowledge of

the fire and the insurance proceeds, Settlement Officer Lisanti never requested

documents relating to these accounts, and there is no indication in the record that

she was concerned about these accounts before issuing the notice of

determination. We infer that Settlement Officer Lisanti was either satisfied that

these funds should not be included in petitioners’ net realizable equity in assets or
                                         - 34 -

[*34] knew that the funds in the accounts had been depleted. This is consistent with

petitioners’ testimony at trial that they could not spend the insurance proceeds

without approval from the banks and that the funds were all used to pay various

necessary expenses. Considering that Settlement Officer Lisanti knew about the

source of the funds in the accounts, we also question her assertion that she did not

know whether any funds remained in the accounts. In any event, Settlement Officer

Lisanti’s knowledge of the fire that destroyed petitioners’ home and of the source of

the funds in the accounts and her apparent failure to inquire further about the

existence and use of the insurance proceeds render her conclusion that the accounts

were undisclosed unreasonable.

IV.   Propriety of Remand

      We may under certain circumstances remand a case to the Commissioner’s

Appeals Office while retaining jurisdiction. See Lunsford v. Commissioner, 117

T.C. at 189. The resulting section 6320 hearing on remand provides the parties with

an opportunity to complete the initial section 6320 hearing while preserving the

taxpayer’s right to receive judicial review of the ultimate administrative

determination. Drake v. Commissioner, T.C. Memo. 2006-151, 92 T.C.M. (CCH)

37, 44 (2006), aff’d, 511 F.3d 65 (1st Cir. 2007). It is well settled that we may

remand in section 6320 cases where the Appeals Office has abused its discretion
                                        - 35 -

[*35] in some way. See, e.g., Churchill v. Commissioner, 102 T.C.M. (CCH) at

118; Med. Practice Solutions, LLC v. Commissioner, T.C. Memo. 2009-214, 98

T.C.M. (CCH) 242, 247 (2009). Because the administrative record does not

adequately disclose the analysis of the Appeals Office in determining that the OIC

was not acceptable and that the filing of the NFTL should be sustained and because

petitioners were not afforded a meaningful opportunity to substantiate their position

with respect to the valuation of the Lake Arrowhead property, remand is appropriate

in this case.16

V.     Conclusion

       We have considered the parties’ remaining arguments and, to the extent not

discussed above, conclude that those arguments are irrelevant, moot, or without

merit. For the reasons identified above, we will remand this case to the Appeals

Office for further proceedings consistent with this opinion.

       To reflect the foregoing,


                                                 An appropriate order will be issued.




       16
        Upon remand the Appeals Office shall 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. See
Leago v. Commissioner, T.C. Memo. 2012-39, slip op. at 24.
