                        T.C. Memo. 2006-171



                      UNITED STATES TAX COURT



                  J. JEAN MOORE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11634-05L.             Filed August 17, 2006.



     Timothy W. Tuttle and D. Anthony Gaston, for petitioner.

     Karen Nicholson Sommers, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     SWIFT, Judge:   Petitioner seeks review of respondent’s

notice of determination sustaining a notice of Federal tax lien

filing relating to petitioner’s outstanding 1997 through 2002

individual Federal income taxes.   The issue for decision is

whether respondent’s Appeals Office conducted prohibited ex parte

communications, and if so what remedy is appropriate.
                              - 2 -
     Unless otherwise indicated, all section references are to

the Internal Revenue Code as amended, and all Rule references are

to the Tax Court Rules of Practice and Procedure.


                        FINDINGS OF FACT

     This case was submitted under Rule 122, but other than

establishing the residence of petitioner in San Diego,

California, the stipulation of the parties relates only to

exhibits.

     During the 1990s and until at least the end of 2003,

petitioner solely owned and operated, through a limited liability

company (LLC), an eldercare business in California and in

Oregon.1

     In addition to the income petitioner received relating to

the eldercare business, petitioner received rental income

relating to residential and commercial real property that

petitioner owned in California and in Oregon.

     In 2001, after an audit and a criminal tax investigation by

respondent relating to petitioner’s individual Federal income

taxes for 1992 through 1995, petitioner was charged with and was

convicted on several counts of tax evasion.   As a condition of


     1
        References in our findings of fact to ownership, and to
transfers, of real property and of other assets are not intended
to constitute ultimate findings of fact as to the true legal and
equitable ownership of the real property and other assets
involved in this case.
                               - 3 -
her probation, petitioner was ordered to pay $250,000 toward her

outstanding 1992 through 1995 Federal income taxes, penalties,

and interest.

     On her 1997 through 2001 individual Federal income tax

returns, which she late filed on November 7, 2002, and on her

timely filed 2002 individual Federal income tax return,

petitioner reported a cumulative total tax liability of

approximately $1 million.   Petitioner made no payments to

respondent with her filed tax returns, nor had petitioner made

any payments via withholding or estimates.

     Respondent did not audit and did not otherwise dispute

petitioner’s 1997 through 2002 Federal income taxes as reported

by petitioner on her tax returns.2

     For 2003 and 2004, petitioner apparently has timely filed

her individual Federal income tax returns, and for purposes of

this collection action respondent has not questioned the tax

liabilities and tax payments reported thereon.

     On September 23, 2003, respondent filed a Federal tax lien

against petitioner relating to petitioner’s assessed and unpaid

1997 through 2002 cumulative total tax liability of approximately

$1 million, and on September 26, 2003, respondent mailed to

     2
        Information relating to petitioner’s 1996 individual
Federal income tax return is not in the record.
                               - 4 -
petitioner a notice of tax lien filing with regard to the tax

lien that respondent had filed.

     On October 24, 2003, petitioner timely requested a section

6320 collection due process (CDP) hearing with respondent’s

Appeals Office for the purpose of securing the release of

respondent’s filed tax lien against petitioner.

     On January 1, 2004, petitioner organized a corporation and

transferred her eldercare business to the new corporation.

     Ownership of the new corporation was placed 51 percent in

the name of petitioner and 49 percent in the name of petitioner’s

son and daughter-in-law.   At some point, petitioner transferred

some of the real property she owned to her daughter.

      On March 11, 2004, during the CDP hearing, petitioner

submitted to respondent an offer-in-compromise (OIC).   In her

OIC, petitioner offered to make a payment of $258,000 in full

settlement and compromise of her cumulative total then accrued

and outstanding approximate $1.8 million in Federal income taxes,

additions to tax, and interest for 1992 through 1995 and for 1997

through 2002.
                                - 5 -
     With the filing of her OIC, petitioner did not make any

payment to respondent, but petitioner did offer to pay the

$258,000 within 90 days of respondent’s acceptance of her OIC.3

Petitioner planned to sell assets in order to obtain the

$258,000.

     On April 15, 2004, petitioner paid respondent the final

$79,166 she owed relating to her criminal conviction, and

petitioner asked that the $79,166 be credited toward the $258,000

she would owe under the pending OIC.

     In connection with the Appeals Office’s consideration of

petitioner’s OIC, a number of communications about petitioner

occurred among respondent’s Appeals officer, an offer specialist

assigned to work on petitioner’s OIC, and two of respondent’s

revenue officers, one of whom worked in California and one of

whom worked in Oregon.   Before petitioner’s CDP hearing with

respondent’s Appeals officer, both of these revenue officers had

been involved in attempting to collect petitioner’s outstanding

taxes for the years in issue.   The communications between

respondent’s Appeals officer and the offer specialist, on the one

hand, and respondent’s two revenue officers, on the other,

     3
        By Mar. 11, 2004, petitioner had paid respondent $170,834
due as a result of the criminal conviction relating to her 1992
through 1995 Federal income taxes, which amount is separate from
the $258,000 petitioner offered to pay respondent under the
offer-in-compromise.
                               - 6 -
occurred in person, over the telephone, and via e-mail and

without petitioner’s participation.

     Among other communications, the revenue officers in

California and Oregon communicated to the Appeals officer concern

about assets that petitioner may have transferred to a nominee.

     Also, the revenue officer in Oregon suggested to the Appeals

officer and to the offer specialist that they should “probe and

inquire if there were any links or money stream to * * *

[petitioner]” relating to a home in Oregon.

     On May 27, 2004, the offer specialist recommended that the

Appeals Office reject petitioner’s OIC, explaining that

petitioner had paid insufficient individual estimated taxes and

that the eldercare business had paid insufficient payroll taxes.

The offer specialist also explained that petitioner’s OIC should

be rejected because the outstanding taxes petitioner owed related

to what the offer specialist described as “nominee, transferee,

fraud issues –- case is filled with them as it is the basis of

the assessments.”

     On May 26, 2005, the Appeals Office issued a notice of

determination (notice) sustaining the tax lien filed against

petitioner.   Attached to the notice was the Appeals officer’s

general statement that petitioner’s OIC was not in the best

interest of the Government because of, among other things,
                                - 7 -
alleged nominee transfers of petitioner’s real property and

assets.

     Petitioner timely petitioned the Tax Court for review of the

notice.

                               OPINION

     When underlying taxes are not in dispute, as in the instant

case, we review respondent’s adverse CDP determinations for abuse

of discretion.    Speltz v. Commissioner, 454 F.3d 782, 784-785

(8th Cir. 2006), affg. 124 T.C. 165 (2005); Sego v. Commissioner,

114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176,

181-182 (2000).   Respondent will be regarded as abusing his

discretion when he acts without a sound basis in fact or law.

Freije v. Commissioner, 125 T.C. 14, 23 (2005); Woodral v.

Commissioner, 112 T.C. 19, 23 (1999).

     In prior years, and with a great deal of effectiveness and

propriety, respondent’s Appeals officers generally were allowed

to communicate with respondent’s revenue agents and officers

concerning a taxpayer’s outstanding taxes.

     In 1998, however, after a series of hearings relating to

respondent’s collection practices,4 Congress enacted and the

     4
        For news reporting on the 1997 and 1998 congressional
hearings on tax collection reform, see Taxes at the Top, The
Newshour with Jim Lehrer (PBS television broadcast Jun. 4, 2004)
(transcript available at http://www.pbs.org/newshour/bb/business
/jan-june04/tax_6-04.html).
                                   - 8 -
President signed into law the Internal Revenue Service

Restructuring and Reform Act of 1998, Pub. L. 105-206, 112 Stat.

685 (RRA 1998).5

     In RRA 1998, Congress provided, among other things, in new

section 6320 that respondent’s Appeals officers conducting CDP

hearings are to be impartial and are not to have had prior

involvement in a taxpayer’s outstanding taxes for the years

involved in a CDP hearing.       See sec. 6320(b)(3).   The language of

section 6320(b)(3) provides as follows:


          SEC. 6320(b).   Right to Fair Hearing.--

              *     *        *       *     *     *      *

               (3) Impartial officer.--The hearing
          under this subsection shall be conducted by
          an officer or employee who has had no prior
          involvement with respect to the unpaid tax
          specified in subsection (a)(3)(A) before the
          first hearing under this section or section
          6330. A taxpayer may waive the requirement
          of this paragraph.


     In RRA 1998 sec. 1001(a)(4), 112 Stat. 689, Congress also

directed that respondent’s Appeals officers should exercise

independent judgment, and Congress prohibited respondent’s

Appeals officers from engaging in ex parte communications with

other employees of respondent that would appear to compromise the

     5
        See generally 144 Cong. Rec. 14688-14689, 14694-14717,
14719-14722, 14726-14727, 14730-14733, 14735-14737, 14739, 14789-
14795 (1998).
                               - 9 -
Appeals officers’ judgment.   The relevant language of RRA 1998

sec. 1001(a) provides as follows:


          (a) In General.--The Commissioner of Internal
     Revenue shall develop and implement a plan to
     reorganize the Internal Revenue Service. The plan
     shall--

              *     *     *      *     *     *     *

          (4) ensure an independent appeals function within
     the Internal Revenue Service, including the prohibition
     in the plan of ex parte communications between appeals
     officers and other Internal Revenue Service employees
     to the extent that such communications appear to
     compromise the independence of the appeals officers.


     Under authority of the above flush language of RRA 1998 sec.

1001(a), respondent promulgated Rev. Proc. 2000-43, 2000-2 C.B.

404, effective for administrative CDP appeals initiated after

October 23, 2000.   Id., sec. 4, 2000-2 C.B. at 409.   Therein ex

parte communications are defined as written or oral

communications that occur between Appeals officers and other

employees of respondent without the taxpayer, or his or her

representative, being able to participate in the communications.

Id., sec. 3, Q&A-1 and 2, 2000-2 C.B. at 405.

     Rev. Proc. 2000-43, sec. 3, Q&A-5, 2000-2 C.B. at 405-406,

makes it clear that ex parte communications about substantive

matters, such as a taxpayer’s credibility and the accuracy and

importance of alleged facts, are to be treated as improper ex
                               - 10 -
parte communications and are prohibited under RRA 1998 sec.

1001(a)(4).

     Rev. Proc. 2000-43, supra, specifies that respondent’s

Appeals officers should not communicate with respondent’s revenue

agents and officers if the communications would, or would appear

to, compromise the independent judgment of the Appeals Office.

Id. sec. 3, Q&A-29, 2000-2 C.B. at 409.

     An exception is provided to the prohibited ex parte

communications rule of Rev. Proc. 2000-43, supra, for

communications that relate only to administrative, ministerial,

or minor procedural matters.   Communications between an Appeals

officer and a revenue officer about the location of missing file

documents are listed as an example of ex parte communications

that would be allowed.   Id. sec. 3, Q&A-5.

     In Drake v. Commissioner, 125 T.C. 201, 210 (2005), we

remanded a CDP case to respondent’s Appeals Office because of

documents that were regarded by the Court as ex parte and

prohibited.

     Herein, the Appeals officer and the offer specialist should

have carefully restricted the communications they had with the

revenue officers relating to the collection of petitioner’s taxes

to mere administrative, ministerial, or minor procedural matters.

     The suggestions by the California and Oregon revenue

officers to the Appeals officer and to the offer specialist to
                                - 11 -
consider a nominee theory and to look at petitioner’s “money

stream” were substantive in nature and clearly constituted

prohibited ex parte communications that were per se prejudicial

to petitioner.

     Respondent argues that grounds independent of the ex parte

communications would support the Appeals Office’s adverse

determination (namely, petitioner’s conviction for tax evasion

and noncompliance by petitioner’s eldercare business with certain

Federal employment tax laws).    These alleged grounds do not

overcome or render moot the prohibited ex parte communication

rules, as respondent appears to argue.

     Respondent also argues that because petitioner eventually

learned from the Appeals officer the content of the ex parte

communications, petitioner was not kept in the dark with regard

thereto and was not harmed.   Nothing, however, in either RRA 1998

or Rev. Proc. 2000-43, supra, allows respondent’s Appeals officer

to avoid the rule against prohibited ex parte communications by

later informing the taxpayer about the communications.

     Respondent characterizes the ex parte communications as

“routine factual investigation.”    We disagree.   Although the ex

parte communications may have been in good faith and intended to

assist in the development of relevant facts, they were ex parte

and substantive, and they were covered by the prohibition

discussed above.
                              - 12 -
     Respondent points out that Rev. Proc. 2000-43, sec. 3,

Q&A-10, 2000-2 C.B. at 406, allows Appeals officers to pass on to

respondent’s other employees new information received by an

Appeals officer.   Q&A-10, however, addresses new information

“presented by the taxpayer,” not new information obtained by

the Appeals Officer via ex parte communications from other of

respondent’s employees.   Respondent misreads Q&A-10.

     We recognize that under section 7122(a) respondent is given

broad discretion to consider and to reject offers-in-compromise,

and we defer to respondent’s discretion when it is properly

exercised.   Mailman v. Commissioner, 91 T.C. 1079, 1082 (1988).

However, the communications before us clearly constituted

prohibited ex parte communications.

     We turn to the appropriate remedy.

     In Robert v. United States, 364 F.3d 988 (8th Cir. 2004),

affg. 91 AFTR 2d 2003-602, 2003-1 USTC par. 50,212 (E.D. Mo.

2003), the District Court and the Court of Appeals for the Eighth

Circuit refused to quash administrative third-party summonses

that were issued based on information respondent obtained through

prohibited ex parte communications.    The Court of Appeals for the

Eighth Circuit explained that it affirmed the District Court’s

order enforcing summonses because “The Supreme Court has stated

that courts should be slow to erect barriers to enforcement of

[respondent’s] summonses where the summonses are being used to
                               - 13 -
further [respondent’s] mission of effectively investigating

taxpayer liabilities”, id. at 996 (quoting United States v. Euge,

444 U.S. 707,711 (1980)), and because Congress did not provide in

RRA 1998 a specific remedy for prohibited ex parte

communications.

     Under Rev. Proc. 2000-43, sec. 3, Q&A-28 and 29, 2000-2 C.B.

at 409, the availability of administrative and personnel remedies

for violations of ex parte communications is acknowledged.

Herein, in light of the prohibited ex parte communications that

occurred, respondent’s Appeals Office should have addressed the

prejudice caused by these communications by providing some

administrative remedy, such as reassignment to a new Appeals

officer.    Respondent’s failure to do so constituted a failure on

the part of respondent to give petitioner an impartial hearing

and constituted an abuse of respondent’s discretion.

     On the facts before us in this case, remand of this case to

respondent’s Appeals Office is appropriate.   By remand, we allow

respondent to cure the defect that occurred in petitioner’s CDP

hearing in accordance with respondent’s existing administrative

procedures.

     We acknowledge that where ex parte communications have

occurred but where the taxpayer is making frivolous underlying

arguments, it may not be appropriate to grant any relief to the

taxpayer.   For example, in Sapp v. Commissioner, T.C. Memo. 2006-
                               - 14 -
104, ex parte communications allegedly occurred in which the

taxpayer was referred to disparagingly as a tax protester.

Because the taxpayer relied solely on underlying frivolous

arguments, we refused to remand the case to the Appeals Office,

and we entered a decision for respondent.

     Although petitioner was convicted of tax fraud for earlier

years, there is no indication that petitioner herein relies on

frivolous arguments.

     For the reasons stated, we shall remand this case to

respondent’s Appeals Office.     Respondent’s Appeals Office is to

identify and apply an appropriate administrative remedy to avoid

prejudice attaching to petitioner as a result of the prohibited

ex parte communications that occurred.    If respondent determines

that the appropriate remedy to offer petitioner is a new CDP

hearing with respondent’s Appeals Office, all references to the

prohibited ex parte communications that occurred herein are to be

deleted from respondent’s administrative file, including any copy

of this opinion that itself would inform a new Appeals officer of

the prohibited ex parte communications.

     To reflect the foregoing,

                                      An appropriate order will

                                 be issued.
