                  T.C. Summary Opinion 2007-123



                      UNITED STATES TAX COURT



    RICHARD ALLAN AND CORINNE LUCILLE BALSER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19611-05S.            Filed July 19, 2007.


     John S. Kutscher, for petitioners.

     Catherine L. Campbell, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code of 1986 as amended (Code).   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.
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     The petition was filed in response to a Notice of

Determination Concerning Collection Action(s) Under Section 6330

(notice of determination).   Pursuant to section 6330(d),

petitioners seek review of respondent’s notice of intent to levy

relating to their tax liabilities for 1992, 1993, and 1996.1

                             Background

     The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference.    At the time the

petition was filed, petitioners resided in Lynnwood, Washington.

     Petitioners jointly filed for 1992, 1993, and 1996 Forms

1040, U.S. Individual Income Tax Return.   Because petitioners

self-assessed their taxes for all years in issue, no statutory

notice of deficiency was issued.

     During the years at issue, petitioner Richard Balser (Mr.

Balser) and petitioner Corinne Balser (Mrs. Balser) were the sole

owners of Homewood Development, Inc. (HDI).    HDI was in the

business of developing residential projects.



     1
      Petitioners also sought the review of a Notice of
Determination Concerning Collection Action(s) Under Section 6330
issued to Mr. Balser regarding a civil penalty under sec. 6672
for the third quarter of 1996. The Court’s jurisdiction to
review the Commissioner’s determination regarding a collection
matter is limited to cases where the underlying tax liability is
of the type over which the Court normally has jurisdiction. See
Moore v. Commissioner, 114 T.C. 171, 175 (2000). By order dated
Jan. 25, 2006, the Court granted respondent’s motion to dismiss
for lack of jurisdiction to the extent that petitioners seek a
review of the collection activity regarding the sec. 6672
penalty.
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The Bankruptcy Proceedings

     In June of 1995, three involuntary bankruptcy proceedings

under chapter 7 of the Bankruptcy Code, 11 U.S.C. sections 101-

1330 (2000), were commenced against Mr. Balser, Mrs. Balser, and

HDI, respectively, in the U.S. Bankruptcy Court for the Western

District of Washington (bankruptcy court).   Subsequently, the

bankruptcy court substantively consolidated the involuntary

bankruptcy proceedings and converted them into proceedings under

chapter 11 of the Bankruptcy Code (consolidated bankruptcy

cases).   Mr. Balser was the president of HDI at the time the

consolidated bankruptcy cases were filed.

     Respondent filed with the bankruptcy court proofs of claim

and amended proofs of claim against petitioners for unpaid income

taxes for 1992 and 1993.   Respondent also requested payment for

administrative expenses relating to postpetition income taxes,

including 1996.

     On May 12, 1999, HDI filed an objection to “tax

liabilities”.   Petitioners did not file any other objections to

respondent’s claims or requests for payment of administrative

expenses.   No order disallowing respondent’s claims was entered

in the consolidated bankruptcy cases.

     On June 18, 1999, the bankruptcy court confirmed the

Debtors’ Joint Plan of Reorganization (plan).   Respondent
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subsequently notified petitioners that they were in default of

the prepetition taxes under the terms of the confirmed plan.

The Section 6330 Administrative Process

     On March 1, 2003, respondent sent two Letters 1058, Final

Notice of Intent to Levy and Notice of Your Right to a Hearing,

one to each of petitioners, regarding their tax liabilities for

1992, 1993, and 1996.   According to the notice of determination,

as of August 15, 2005, petitioners’ unpaid liabilities, including

statutory additions, were $22,858.53, $8,595.61, and $366.25 for

1992, 1993, and 1996, respectively.

     Petitioners timely submitted a Form 12153, Request for a

Collection Due Process Hearing, for 1992 through 2002, along with

a letter explaining why they did not agree with the proposed

levy.

     Petitioners’ case was assigned to Appeals officer Celia

Cleveland (AO Cleveland), and petitioners were afforded a

collection hearing via several telephone calls.   At the hearing,

petitioners did not dispute the amount of underlying tax

liabilities self-assessed on the returns.   Petitioners instead

contended that their tax liabilities should have been paid in

full by the funds that were available in the estate of the

consolidated bankruptcy cases.

     Petitioners did not submit to respondent an offer-in-

compromise or any other collection alternatives during the
                               - 5 -

Appeals hearing.   AO Cleveland reviewed petitioners’

administrative file and transcripts for the years in issue, and

she verified that the requirements of all applicable laws and

administrative procedures had been met.

     On September 13, 2005, the Appeals Office issued to

petitioners a notice of determination for 1992, 1993, and 1996

sustaining as appropriate respondent’s proposed levy action.    The

Appeals Office further determined that the levy action should

proceed because petitioners had not made any arrangements to pay

the taxes.

     On October 20, 2005, petitioners filed with the Court a

petition for lien or levy action.

                            Discussion

Procedure Under Section 6330

     Section 6331 authorizes the Secretary to levy upon property

and property rights of a taxpayer liable for taxes who fails to

pay those taxes within 10 days after notice and demand for

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

section 6331(a) may be made with respect to any “unpaid tax” only

after the Secretary has notified the person in writing of his

intention to make the levy and of the taxpayer’s right to a

section 6330 hearing at least 30 days before any levy action is

begun.
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     If a section 6330 hearing is requested, the hearing is to be

conducted by the Appeals Office of the Internal Revenue Service

(IRS), and at the hearing, the Appeals officer conducting it must

verify that the requirements of any applicable law or

administrative procedures have been met.    Sec. 6330(b)(1),

(c)(1).   The person 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 Commissioner’s intended collection action,

and alternative means of collection.    Sec. 6330(c); see Sego v.

Commissioner, 114 T.C. 604, 609 (2000); Goza v. Commissioner, 114

T.C. 176, 180 (2000).

     In making a determination, the Appeals officer is required

to take into consideration issues properly raised, the

verification that the requirements of applicable law and

administrative procedures have been met, and whether any proposed

collection action balances the need for efficient collection of

taxes with the legitimate concern of the person that any

collection action be no more intrusive than necessary.     Sec.

6330(c)(3).   Within 30 days after the Appeals Office issues a

notice of determination, the person may appeal the determination

to the Tax Court, if the Court has jurisdiction over the

underlying tax liability.    Sec. 6330(d)(1)(A).   The Court has

jurisdiction in this case.
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Standard of Review

     Where the underlying tax liability is properly at issue, the

Court reviews the determination de novo.    See Goza v.

Commissioner, supra at 181-182.    Where the underlying tax

liability is not properly at issue, the Court reviews the

determination for abuse of discretion.     Id.

     Section 6330(c)(2)(B) provides that the existence or the

amount of the underlying tax liability can be contested at an

Appeals Office hearing if the person did not receive a statutory

notice of deficiency or did not otherwise have an earlier

opportunity to dispute such tax liability.       Sego v. Commissioner,

supra at 609; Goza v. Commissioner, supra at 180-181.

     Because petitioners self-assessed their taxes for all years

at issue, respondent did not issue to petitioners a statutory

notice of deficiency.    See sec. 6201(a)(1).

     Respondent contends that the appropriate standard of review

for the years at issue is the abuse of discretion standard and

not review de novo.     Respondent argues that although a deficiency

notice was not issued, petitioners had a prior opportunity to

dispute those tax liabilities before the bankruptcy court.

     The Court agrees with respondent.    In Kendricks v.

Commissioner, 124 T.C. 69, 77 (2005), the Court held that when

the IRS submits a proof of claim in a taxpayer’s bankruptcy

action, the taxpayer has an opportunity to dispute the liability
                               - 8 -

within the meaning of section 6330(c)(2)(B).   Respondent

submitted proofs of claim and amended proofs of claims in the

consolidated bankruptcy cases for unpaid Federal taxes for 1992,

1993, and 1996.   Petitioners were therefore precluded from

challenging the amounts of the underlying liabilities for the

years in issue both at the Appeals Office hearing and in this

case.

     Petitioners, however, claim that they are not seeking to

dispute the amounts of the underlying tax for 1992 and 1993.

Petitioners contend that they are seeking only an abatement of

interest and relief from the penalties for the years in issue.

But unless otherwise specified under the Code, both interest and

penalties are treated as “tax”.   See secs. 6601(e)(1), 6665(a).

Since petitioners are precluded from raising these issues, the

Court need not address them.

Challenges to Collection Action

     Since the validity of the underlying tax liabilities for the

years at issue was not properly part of the appeal, the Court

will review the notice of determination for abuse of discretion.

See Goza v. Commissioner, supra at 181-182.

     Questions about the appropriateness of the collection action

include whether it is proper for the Commissioner to proceed with

the collection action as determined in the notice of

determination and whether the type and/or method of collection
                                - 9 -

chosen by the Commissioner is appropriate.    See, e.g., Swanson v.

Commissioner, 121 T.C. 111, 119 (2003) (challenge to

appropriateness of collection reviewed for abuse of discretion).

     In order for a taxpayer to prevail under the abuse of

discretion standard, it is not enough for the Court to conclude

that the Court would not have authorized collection; the Court

must conclude that, in authorizing collection, the Appeals

officer has exercised discretion arbitrarily, capriciously, or

without sound basis in fact.    Estate of Jung v. Commissioner, 101

T.C. 412, 449 (1993); accord Mailman v. Commissioner, 91 T.C.

1079, 1084 (1988).   An abuse of discretion occurs when a decision

is based upon an erroneous legal standard or on a clearly

erroneous finding of fact.     Smith v. Marsh, 194 F.3d 1045, 1049

(9th Cir. 1999).

     In response to their request for an Appeals hearing,

petitioners were afforded a conference with AO Cleveland via

several telephone calls.   Petitioners contended during the

conference that the collection was inappropriate because all

outstanding taxes were paid in accordance with the confirmed plan

in the consolidated bankruptcy case.

     In support of their argument, petitioners presented as

evidence a statement of account dated September 21, 1999, in

which the IRS determined that petitioners had an overpayment of
                                - 10 -

tax for 1997 (1997 overpayment).2    The statement indicates that

$11,270.34 is the “amount to be refunded to you if you owe no

other taxes or other debts we are required to collect.”

Petitioners subsequently received a refund check from the Federal

Government which they claim is evidence that all outstanding

Federal taxes are fully paid.

     Respondent disagrees, contending that petitioners’ tax

liabilities for 1992, 1993, and 1996 remain outstanding.

Respondent argues that a refund check was sent to petitioners

despite their having outstanding tax liabilities because a lack

of mutuality precluded the IRS’s offsetting the 1997 overpayment

against the taxes owed.

     Generally, section 6402(a) provides that the IRS has the

right to offset an overpayment against any outstanding tax

liabilities of the taxpayer.    This right to offset is preserved

in a bankruptcy proceeding by 11 U.S.C. section 553 (2000),

Setoff, which provides in relevant part:

     (a) Except as otherwise provided in this section * * *,
     this title does not affect any right of a creditor to
     offset a mutual debt owing by such creditor to the
     debtor that arose before the commencement of the case
     under this title against a claim of such creditor
     against the debtor that arose before the commencement
     of the case, * * *.

     Respondent’s right to offset is subject to the mutuality

requirement under 11 U.S.C. section 553.    See, e.g., Aetna Cas. &


     2
      Taxable year 1997 is not at issue in this case.
                               - 11 -

Sur. Co. v. LTV Steel Co. (In re Chateaugay Corp.), 94 F.3d 772,

781-782 (2d Cir. 1996); United States v. Jones, 230 Bankr. 875,

878 (M.D. Ala. 1999).    Mutuality means that the creditor and the

debtor must be mutually indebted in order to exercise the right

of offset.    11 U.S.C. sec. 553; see In re O.P.M. Leasing Servs.,

Inc., 68 Bankr. 979, 985-986 (Bankr. S.D.N.Y. 1987).    “The

mutuality requirement is satisfied if the debts at issue are

‘owing between the same parties, in the same right or capacity,

and ... [are] of the same kind and quality.’”     In re O.P.M.

Leasing Servs., Inc., supra at 986 (quoting In re Braniff

Airways, Inc., 42 Bankr. 443, 449 (Bankr. N.D. Tex. 1984)).

Accordingly, obligations owing between a creditor and a

prepetition debtor may not be offset against obligations owing

between that same creditor and the debtor’s estate since the

requisite mutuality of obligations is absent.     Id.

       The 1997 overpayment is a postpetition debt that the IRS

owed to petitioners’ bankruptcy estate.    The tax liabilities for

1992 and 1993 are prepetition debts that petitioners owed to the

IRS.    Therefore, respondent is correct that the IRS lacked the

requisite mutuality to offset the refund for 1997 against the

1992 and 1993 taxes of petitioners.     The tax liability for 1996,

however, is a postpetition debt.    Respondent could have exercised

his right to offset but chose not to do so.     Therefore,
                              - 12 -

petitioners’ receipt of the refund check is insufficient to show

that their outstanding tax liabilities are paid in full.

     Respondent presented as evidence certified copies of Forms

4340, Certificate of Assessments, Payments and Other Specified

Matters, with respect to 1992, 1993, and 1996 to show that

petitioners’ tax liabilities were properly assessed and that the

amounts remained outstanding as of September 29, 2003.    A Form

4340 satisfies the verification requirements of section

6330(c)(1).   See Burke v. Commissioner, 124 T.C. 189, 195-196

(2005).   Petitioners have not alleged any irregularity in the

assessment procedure that would raise a question about the

validity of the assessment or the information contained in the

Forms 4340.

     Petitioners did not submit an offer-in-compromise or offer a

collection alternative to the Appeals Office.    At trial,

petitioners’ counsel requested that petitioners be allowed an

opportunity to enter into an installment agreement.    Respondent

asserts that AO Cleveland raised the possibility of an

installment agreement during the conference.    Petitioners,

however, apparently declined to entertain collection alternatives

because they wanted respondent to issue a notice of determination

to allow them to come before the Court.

     The Court does not find that a remand is necessary or would

be productive.   See Lunsford v. Commissioner, 117 T.C. 183, 188-
                               - 13 -

189 (2001); Martin v. Commissioner, T.C. Memo. 2003-288.

Respondent, however, has expressed a willingness to discuss an

installment agreement with petitioners pursuant to proper

procedures.    Under section 6330(d)(2), the IRS retains

jurisdiction of the collection action after the determination is

made, and a taxpayer may “request an installment agreement * * *

at any time before, during, or after the Notice of Intent to Levy

hearing.”    H. Conf. Rept. 105-599, at 266 (1998), 1998-3 C.B.

747, 1020.

     The Court has considered the remaining arguments raised in

petitioners’ pretrial memorandum and finds that they are

unconvincing.

     Accordingly, the Court holds that the Appeals Office did not

abuse its discretion in determining that respondent’s proposed

levy should be sustained.

     To reflect the foregoing,

                                          Decision will be entered

                                     for respondent.
