                               T.C. Memo. 2019-53



                         UNITED STATES TAX COURT



                    JEVON KEARSE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 14080-14L.                         Filed May 20, 2019.



      Vivian D. Hoard, Scot A. Burton, and Robert B. Gardner III, for petitioner.

      Ashley Y. Smith, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      ASHFORD, Judge: Petitioner commenced this collection due process

(CDP) case pursuant to sections 6320(c) and 6330(d)(1)1 in response to a


      1
      Unless otherwise indicated, all 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. Some monetary amounts are rounded to
                                                                       (continued...)
                                         -2-

[*2] determination by the Internal Revenue Service (IRS) Office of Appeals

(Appeals) to uphold the filing of a notice of Federal tax lien (NFTL) relating to

petitioner’s unpaid Federal income tax liability for the 2010 taxable year. The

issue for consideration is whether Appeals’ determination to sustain the NFTL was

proper.

                               FINDINGS OF FACT

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

facts, the supplemental stipulation of facts, and the attached exhibits are

incorporated herein by this reference. Petitioner resided in Florida when his

petition was filed with the Court.

      Petitioner is a retired professional athlete, having played in the National

Football League from 1999 to 2010. His unpaid Federal income tax liability for

2010 stems in pertinent part from the IRS’ determination that a $1,359,000

deduction for a “business bad debt expense” he claimed on his Form 1040, U.S.

Individual Income Tax Return, for 2010 should be disallowed.2 A notice of

deficiency dated May 11, 2012, that was addressed to petitioner at his last known


      1
       (...continued)
the nearest dollar.
      2
        Petitioner now asserts (as he did during the CDP process) that he did not
suffer a business bad debt loss but rather a theft loss (of $1,679,500).
                                        -3-

[*3] address reflects that determination. Petitioner disputes proper mailing and

receipt of this notice of deficiency. The parties stipulated that respondent cannot

produce a United States Postal Service (USPS) Form 3877 to show proof of

mailing of the notice of deficiency or otherwise establish that it was delivered to

petitioner.

      On November 5, 2012, the IRS assessed against petitioner the unpaid

balance of his 2010 Federal income tax liability which, as of that date, totaled

$432,015. On December 4, 2012, the IRS filed an NFTL in the appropriate place

and sent petitioner that same day a Letter 3172, Notice of Federal Tax Lien Filing

and Your Right to a Hearing Under IRC 6320, advising him that an NFTL had

been filed and of his right to request a hearing to appeal the collection action and

to discuss payment options.

      In response to the Letter 3172, petitioner timely submitted Form 12153,

Request for a Collection Due Process or Equivalent Hearing (CDP hearing

request), along with Form 656-L, Offer in Compromise (Doubt as to Liability).

As reflected in the Form 656-L petitioner offered to pay $1, and in a document

attached to this form he explained the circumstances of his offer, including

asserting the lack of proper mailing and receipt of the May 11, 2012, notice of
                                       -4-

[*4] deficiency. On his CDP hearing request petitioner requested that a CDP

hearing be held with his authorized representative.

      On May 6, 2014, after the Appeals officer assigned to petitioner’s CDP

hearing request conducted a CDP hearing with petitioner’s authorized

representative in which he was allowed to raise petitioner’s underlying tax

liability, Appeals sent petitioner a Notice of Determination Concerning Collection

Action(s) Under Section 6320 and/or 6330 sustaining the NFTL with respect to

petitioner’s outstanding 2010 income tax liability (notice of determination). A

summary detailing the matters considered by Appeals and its conclusions was

attached to the notice of determination and included the following explanations:

                        DISCUSSION AND ANALYSIS

      a.    Verification of legal and procedural requirements:

      Appeals has obtained verification from the IRS office collecting the
      tax that the requirements of any applicable law, regulation or
      administrative procedure with respect to the proposed levy or NFTL
      filing have been met. Computer records indicate that the notice and
      demand, notice of intent to levy and/or notice of federal tax lien
      filing, and notice of a right to a Collection Due Process hearing were
      issued.

      Assessment was properly made per IRC § 6201 for each tax and
      period listed on the CDP notice.
                                       -5-

[*5] The notice and demand for payment letter was mailed to the
     taxpayer’s last known address, within 60 days of the assessment, as
     required by IRC § 6303.

      There was a balance due when the CDP levy notice was issued or
      when the NFTL filing was requested.
      *          *          *         *          *          *               *

      Collection followed all legal and procedural requirements and the
      actions taken or proposed were appropriate under the circumstances.

      b.    Issues raised by the taxpayer

      Collection Alternatives Offered by Taxpayer
      You filed a Doubt as to Liability OIC. You were offered a reduction
      to tax as a concession of 33% but would not agree to concede and the
      OIC/DATL was rejected and returned to the Settlement Officer for
      further review of any other alternatives to collection. No other
      alternative was requested.

      Challenges to the Existence of [sic] Amount of Liability
      You disputed your liability stating that the amount due was the result
      of theft. However, you offered no proof or further evidence that the
      use of funds as loans was actually a theft. The loss did not qualify as
      a Ponzi-scheme. You did not provide substantiation that the liability
      was due to a bad debt deduction and failed to substantiate the debt as
      claimed on your Schedule C for 12/2010. You were offered a
      concession of 33% to settle the OIC/DATL. You did not agree to the
      concession offered by Appeals. Your OIC is rejected.

      You raised no other issues.

      c.    Balancing of need for efficient collection with taxpayer
      concern that the collection action be no more intrusive than
      necessary.
                                        -6-

[*6] The filing of a Notice of Federal Tax Lien is sustained. The
     requirements of applicable law or administrative procedures have
     been met and the action taken were appropriate under the
     circumstances. The Settlement Officer had no prior involvement with
     the liabilities under review.

      A viable collection alternative could not be determined as you did not
      furnish any financial information and delinquent returns requested.
      You refused to agree to the OIC concession offered to you that would
      reduce your liability and therefore, the liability for 12/2010 remains
      unchanged. Your OIC was rejected. As a result you have failed to
      show that the issuance of the Notice is overly intrusive or that a better
      collection alternative is available; and therefore, the filing of the
      Notice balances the efficient collection of the taxes with a concern
      that the collection action be no more intrusive than necessary.

      Petitioner timely filed a petition with this Court for review of the notice of

determination, disputing the notice of determination on the following grounds:

(1) Appeals erred in asserting that it properly mailed the May 11, 2012, notice of

deficiency; (2) Appeals erred in asserting that petitioner received a copy of the

notice of deficiency; and (3) Appeals erred in its discussion, analysis, and

conclusions with respect to the facts and law related to petitioner’s underlying tax

liability. In his answer respondent denied each of these alleged errors.

                                     OPINION

      Under section 6321, if any person liable to pay any tax neglects or refuses to

do so after notice and demand, the amount, including any interest, addition to tax,

or assessable penalty, shall be a lien in favor of the United States upon all property
                                        -7-

[*7] and rights to property, whether real or personal, belonging to such person.

The lien is perfected when the assessment is made. Szekely v. Commissioner,

T.C. Memo. 2013-227, at *7 (and cases cited thereat). However, the IRS’ filing of

an NFTL in the appropriate place ensures priority of the Federal tax lien over

positions of most competing creditors. See sec. 6323. Section 6320(a) requires

the Secretary (i.e., the IRS) to provide the person with written notice of and an

opportunity for an administrative hearing to review the propriety of the filing of

the NFTL.

      If an administrative hearing is requested in a lien case, the hearing is to be

conducted by Appeals. Sec. 6320(b)(1). At the hearing the Appeals officer

conducting it must obtain verification that the requirements of applicable law and

administrative procedure have been met. Secs. 6320(c), 6330(c)(1). The taxpayer

may raise at the hearing any relevant issue relating to the unpaid tax or the

collection action, including spousal defenses, challenges to the appropriateness of

the collection action, and collection alternatives. Secs. 6320(c), 6330(c)(2)(A).

      Following the hearing the Appeals officer must determine among other

things whether to sustain the filing of the NFTL. In reaching the determination the

Appeals officer must take into consideration: (1) whether the requirements of

applicable law and administrative procedure have been met, (2) all relevant issues
                                         -8-

[*8] raised by the taxpayer including offers of collection alternatives, such as an

offer-in-compromise, and (3) whether any collection action balances the need for

the efficient collection of taxes with the legitimate concern of the taxpayer that

collection be no more intrusive than necessary. Secs. 6320(c), 6330(c)(3); see also

Lunsford v. Commissioner, 117 T.C. 183, 184 (2001).

      Sections 6320(c) and 6330(d)(1) grant this Court jurisdiction to review the

determination made by Appeals in a lien case. If the taxpayer files a timely

petition for such judicial review, the applicable standard of review depends on

whether the underlying tax liability is at issue. Where the taxpayer’s underlying

liability is properly at issue, the Court reviews the liability determination de novo.

Hoyle v. Commissioner, 131 T.C. 197, 199 (2008), supplemented by 136 T.C. 463

(2011); Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner,

114 T.C. 176, 181-182 (2000). The Court reviews administrative determinations

made by Appeals regarding nonliability issues for abuse of discretion. Hoyle v.

Commissioner, 131 T.C. at 200; Sego v. Commissioner, 114 T.C. at 610; Goza v.

Commissioner, 114 T.C. at 182. An abuse of discretion occurs if Appeals

exercises its discretion “arbitrarily, capriciously, or without sound basis in fact or

law.” Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
                                         -9-

[*9] A taxpayer may challenge his underlying tax liability during a CDP hearing

(and thereafter in this Court) if he did not receive a notice of deficiency with

respect to the liability or did not otherwise have an earlier opportunity to dispute

the liability. See secs. 6320(c), 6330(c)(2)(B); sec. 301.6320-1(e)(3), Q&A-E2,

Proced. & Admin. Regs.; see also Kuykendall v. Commissioner, 129 T.C. 77, 80

(2007); Sego v. Commissioner, 114 T.C. at 609; Shere v. Commissioner, T.C.

Memo. 2008-8, slip op. at 10. Although the parties have stipulated as to

petitioner’s nonreceipt of the May 11, 2012, notice of deficiency and that therefore

he may challenge his underlying tax liability in this proceeding, for the reasons

explained below it is unnecessary for us to review his underlying tax liability de

novo.

        As indicated supra p. 7, the Appeals officer conducting the hearing in a lien

case must verify that the IRS has complied with the requirements of applicable law

and administrative procedure, and this verification is required, among other things,

to be a part of every Appeals determination. Secs. 6320(c), 6330(c)(1), (3)(A); see

also Hoyle v. Commissioner, 131 T.C. at 201-202. The verification must be

obtained before Appeals issues the notice of determination. Sec. 301.6320-

1(e)(1), Proced. & Admin. Regs. In cases where an assessment of tax is based on
                                        - 10 -

[*10] a defaulted3 notice of deficiency, the Appeals officer must verify, among

other things, that the notice of deficiency was duly mailed to the taxpayer before

the assessment of tax pursuant to section 6213(a). Hoyle v. Commissioner, 131

T.C. at 203; see also Internal Revenue Manual (IRM) pt. 8.22.5.4.2.1.1(1) (Nov. 8,

2013) (advising Appeals officers that for assessments requiring the issuance of a

notice of deficiency, the validity of the assessment is confirmed by verifying that

the notice of deficiency was “properly issued”, i.e., by certified or registered mail

to the taxpayer’s last known address and before the assessment of the deficiency).

      In Hoyle v. Commissioner, 131 T.C. at 200-204, we considered whether

Appeals met this verification requirement where the taxpayer raised in that judicial

proceeding (but not during the CDP process) the issue of whether the IRS had in

fact mailed him a notice of deficiency before assessing the tax at issue. We held

that because verification is mandatory, we will review the propriety of that

verification regardless of whether the taxpayer challenging the collection action

raises this issue at the CDP hearing. Id. at 202-203. The record in Hoyle


      3
       According to IRS guidance, “[i]f the taxpayer does not petition the Tax
Court or agree to the deficiency within 105 (165 if either the taxpayer is outside
the United States when the notice is mailed or the notice is mailed to an address
outside the United States) days, the case [i.e., the notice of deficiency] is
considered to be defaulted”. Internal Revenue Manual pt. 4.8.9.26(2) (July 9,
2013).
                                         - 11 -

[*11] contained two copies of a notice of deficiency that the Commissioner

asserted were properly mailed. Id. at 203. Appeals’ notice of determination

issued to the taxpayer “summarily concluded that ‘all statutory, regulatory, and

administrative procedures have been followed”’ and noted that the taxpayer’s file

“contained a copy of a notice of deficiency ‘properly sent”’ to him; it did not,

however, indicate what documents were relied upon to verify that the notice of

deficiency was properly mailed. Id. The administrative record lacked, for

example, a properly completed USPS Form 3877, which this Court and other

Federal courts have held raises a presumption of official regularity in the IRS’

favor and is sufficient, absent evidence to the contrary, to establish that a notice of

deficiency has been properly mailed. Id. (and cases cited thereat). Thus in Hoyle,

on the basis of the record before us at that time, we concluded that it was unclear

what the Appeals officer relied on to verify that the assessment of the taxpayer’s

liability had been preceded by a duly mailed notice of deficiency, and we declined

to review the taxpayer’s underlying tax liability, remanding the case to Appeals to

clarify the record as to the basis for the Appeals officer’s verification that all

requirements of applicable law and administrative procedure had been met, i.e.,

that the notice of deficiency had been properly sent to the taxpayer. Id. at 204-

205.
                                        - 12 -

[*12] The case before us now is strikingly similar to Hoyle. In his petition

petitioner alleges that Appeals erred in asserting that it properly mailed the May

11, 2012, notice of deficiency to him, calling into question (albeit somewhat

inartfully) the propriety of Appeals’ verification that the IRS complied with

applicable law and administrative procedure, i.e., whether the May 11, 2012,

notice of deficiency was properly mailed to him before assessment of his 2010

income tax liability. In his answer respondent asserted a general denial of this

allegation.

      Similarly to the record in Hoyle, the record here contains a copy of (1) the

May 11, 2012, notice of deficiency and (2) the notice of determination, which

summarily concludes that “the requirements of any applicable law, regulation or

administrative procedure with respect to the * * * NFTL filing have been met” and

that “[a]ssessment was properly made per IRC § 6201”. Similarly to the notice of

determination in Hoyle, the notice of determination here does not indicate what

documents were relied upon to verify that the May 11, 2012, notice of deficiency

was properly mailed. Additionally, the record before us does not contain a USPS

Form 3877 or equivalent IRS certified mailing list (CML) bearing a USPS date

stamp or the initials of a postal employee. Indeed, the parties stipulated that

respondent cannot produce that form (or list).
                                       - 13 -

[*13] After the trial of this case we ordered respondent to file a response

addressing in pertinent part whether the Appeals officer properly verified that the

May 11, 2012, notice of deficiency was mailed to petitioner.4 In his response

respondent contends that the Appeals officer made the proper verification

“pursuant to I.R.C. § 6330(c)(1) & Internal Revenue Manual Provision

8.22.5.4.2.1.1.” Attached to the response is, among other documents, the

declaration of the Appeals officer and the Appeals officer’s case activity record.

In her declaration the Appeals officer avers that although she was unable to secure

the USPS Form 3877 to show proof of mailing of the May 11, 2012, notice of

deficiency to petitioner, she examined the IRS’ Integrated Data Retrieval System

(IDRS) “in order to verify the validity of the assessment against Mr. Kearse from

the May 11 notice”, and more specifically, that the May 11, 2012, notice of

deficiency was issued to him. In her case activity record she states that she “did

not request the statutory notice of deficiency”. According to respondent, because

the IRM permits Appeals officers to examine IDRS to verify the validity of an

assessment from a notice of deficiency, the Appeals officer’s examination of IDRS




      4
       We also ordered respondent to address whether the resulting assessment
against petitioner for 2010 is invalid.
                                          - 14 -

[*14] here demonstrates that she properly verified that the May 11, 2012, notice of

deficiency was mailed to petitioner in accordance with section 6330(c).

      Respondent is correct that IRS guidance does advise Appeals officers that

they may “rely” on IDRS to verify the validity of an assessment from a notice of

deficiency. See IRM pt. 8.22.5.4.2.1.1(2) (Nov. 8, 2013). But that is the

“general[]” rule. Id. Where a taxpayer alleges that the notice of deficiency was

not properly mailed to him, he has “alleged an irregularity”, id. pt.

8.22.5.4.2.1.1(5), thereby requiring Appeals officers, according to further IRS

guidance, to do more than “rely solely” on IDRS; they must review: (1) a copy of

the notice of deficiency and (2) the USPS Form 3877 or equivalent IRS certified

mail list bearing a USPS date stamp or the initials of a postal employee, id. pt.

8.22.5.4.2.1.1(6). Despite the fact that during the CDP process petitioner alleged

such an irregularity, the Appeals officer here acknowledges that she did not secure

(and accordingly review) either of these documents before the notice of

determination was issued to petitioner.

      Incredibly, respondent has now produced a USPS Form 3877 dated May 11,

2012, intended to evidence the mailing of the May 11, 2012, notice of deficiency

to petitioner via USPS certified mail, which he also attaches to his response. He

states in a footnote in the response that “during the case’s pendency, respondent
                                        - 15 -

[*15] updated its systems for locating CMLs, thus, allowing them to be easily

located.” However, respondent has already stipulated that he cannot produce a

USPS Form 3877 regarding the May 11, 2012, notice of deficiency to petitioner.

We treat a stipulation “as a conclusive admission by the parties, and the Court will

not permit a party to change or contradict a stipulation, except in extraordinary

circumstances.” Shackelford v. Commissioner, T.C. Memo. 1995-484, slip op. at

15; see also Rule 91(e). We also note that respondent has not “asked to be

relieved [from the binding effect] of this stipulation, and we will therefore hold

him to it.” See Winter v. Commissioner, T.C. Memo. 2010-287, slip op. at 28.

      On the basis of the record before us, it is clear that the Appeals officer failed

to properly perform the verification mandated by section 6330(c), i.e., to properly

verify that the assessment of petitioner’s unpaid 2010 income tax liability was

preceded by a duly mailed notice of deficiency. This failure constitutes an abuse

of discretion. Consequently, we conclude that Appeals abused its discretion in

sustaining the NFTL with respect to petitioner’s 2010 income tax liability.5




      5
        Because of our conclusion, in addition to its being unnecessary to review
petitioner’s underlying tax liability de novo, it is unnecessary for us to consider
whether Appeals’ decision to reject his offer-in-compromise constituted an abuse
of discretion.
                                       - 16 -

[*16] We have considered all of the arguments made by the parties and, to the

extent they are not addressed herein, we find them to be moot, irrelevant, or

without merit.

      To reflect the foregoing,


                                                An appropriate order and decision

                                      will be entered for petitioner.
