                              T.C. Memo. 2019-121



                         UNITED STATES TAX COURT



                  MICHAEL D. BROWN, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 18104-17L.                        Filed September 16, 2019.



      Steven R. Mather and Lydia B. Turanchik, for petitioner.

      Kevin W. Coy, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      KERRIGAN, Judge: This collection due process (CDP) case was

commenced in response to two Notices of Determination Concerning Collection

Action(s) Under Section 6320 and/or 6330 dated August 11, 2017, upholding two

notice of Federal tax lien (NFTL) filings regarding petitioner’s unpaid tax
                                           -2-

[*2] liabilities for 2007 and 2014 (years in issue). The issue for our consideration

is whether respondent’s determinations to sustain the collection actions were

proper.

      Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect at all relevant times. We round all monetary amounts to

the nearest dollar.

                                 FINDINGS OF FACT

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

facts and attached exhibits are incorporated herein by this reference.1 Petitioner

resided in California when he timely filed his petition.

      On January 8, 2009, petitioner filed his 2007 Form 1040, U.S. Individual

Income Tax Return. On December 29, 2014, after an examination of petitioner’s

2007 Form 1040, the parties reached a settlement for petitioner’s outstanding tax

liability for that year. Respondent assessed petitioner’s unpaid 2007 tax liability

on February 16, 2015.2

      On April 2, 2015, respondent filed an NFTL against petitioner’s personal

residence for $35,268, and on April 14, 2015, sent petitioner a notice informing


      1
          These facts are relevant portions of the administrative record.
      2
          Petitioner’s ex-wife was granted innocent spouse relief for 2007.
                                           -3-

[*3] him of the NFTL filing and his right to a CDP hearing. On May 13, 2015,

petitioner’s counsel timely requested a CDP hearing on Form 12153, Request for a

Collection Due Process or Equivalent Hearing. On Form 12153 petitioner’s

counsel indicated that petitioner wanted to submit an offer-in-compromise (OIC)

as a collection alternative and did not raise the underlying tax liability for 2007.

      Petitioner’s outstanding tax liability for 2014 is based on his income tax

liability reported on his 2014 Form 1040. Respondent assessed petitioner’s 2014

tax liability on January 4, 2016.3 On March 2, 2016, respondent filed an NFTL

against petitioner’s property for $48,457 and on March 15, 2016, sent petitioner a

notice informing him of the NFTL filing and his right to a CDP hearing. On April

7, 2016, petitioner’s counsel timely requested a CDP hearing on Form 12153.

Petitioner’s counsel indicated petitioner wanted to submit a collection alternative

and checked the boxes for “Installment Agreement”, “Offer in Compromise”, and

“I Cannot Pay Balance”. The hearing request stated that the “lien filing was

premature” and that the “liability is excessive due to failure to abate penalties”.4




      3
          Petitioner’s 2014 filing status was “married filing separately”.
      4
       At petitioner’s CDP hearing petitioner’s counsel conceded these issues and
raised only the OIC as a collection alternative.
                                         -4-

[*4] In addition to the outstanding tax liabilities for the years in issue petitioner

has outstanding tax liabilities for tax years 2001, 2002, 2004, 2005, 2006, 2009,

2010, and 2011. Petitioner’s total outstanding tax liabilities exceed $50 million.

      On April 28, 2016, this Court sustained respondent’s filing of the NFTLs

and the jeopardy levy actions for tax years 2001, 2002, 2004, 2005, and 2006.

Brown v. Commissioner, T.C. Memo. 2016-82, aff’d, 697 F. App’x 1 (D.C. Cir.

2017). A portion of petitioner’s 2009 liability arose from a Tax Equity and Fiscal

Responsibility Act (TEFRA) audit of Zelly, LLC (Zelly), a limited liability

company (LLC) in which he owns an interest. On July 7, 2014, petitioner filed a

petition with this Court for a readjustment of partnership items relating to Zelly.

See Zelly, LLC v. Commissioner, T.C. Dkt. No. 15609-14. The parties entered

into a joint stipulation of settled issues on February 6, 2017. The Court entered a

decision on January 23, 2018.

      On January 22, 2016, petitioner’s CDP case for the 2007 tax liability was

assigned to a settlement officer. On June 8, 2016, petitioner’s CDP case for the

2014 tax liability was assigned to the same settlement officer.

      As part of her review the settlement officer searched the Internal Revenue

Service (IRS) Partnership Investor Control File system, which showed that

petitioner had open TEFRA audits for tax years 2002, 2005, and 2009. The
                                        -5-

[*5] settlement officer spoke with a TEFRA specialist to confirm there were open

TEFRA audits.

      On September 8, 2016, the settlement officer mailed petitioner a letter for

tax year 2007 and a letter for tax year 2014 scheduling his CDP hearing. She also

requested that he submit a completed Form 433-A, Collection Information

Statement for Wage Earners and Self-Employed Individuals, with supporting

documentation; a Form 656, Offer in Compromise, with the OIC application fee

and required payment; a list of all cases pending at any level with the IRS; and a

description of why petitioner believed the NFTLs were wrongly filed.

      On October 24, 2016, petitioner’s counsel provided the settlement officer

with information relating to other pending tax issues, including tax years and

issues before this Court, open TEFRA audits, and pending assessments. In

addition to the 2009 TEFRA case for Zelly petitioner’s counsel indicated that

there were three other open TEFRA audits for 2009 relating to other entities in

which petitioner held interests.

      The settlement officer conducted petitioner’s CDP hearing for the years in

issue on October 26, 2016. Petitioner did not provide the settlement officer with

Form 656 or supporting financial documentation before the CDP hearing. During

the CDP hearing the settlement officer informed petitioner’s counsel that
                                         -6-

[*6] petitioner had the right to submit an OIC as a collection alternative but that it

would likely be returned because of the open TEFRA cases.

      In a letter to petitioner dated October 31, 2016, the settlement officer gave

petitioner until November 16, 2016, to submit his OIC and accompanying

payments. The letter explained that if the settlement officer did not receive the

documents she would make a determination in his case on the basis of information

available in the IRS’ system. She also requested that petitioner provide completed

Forms 433-B, Collection Information Statement for Businesses, for five different

business entities; substantiation, if any, of those entities’ financial information

showing whether they were out of business; estimated tax payments for the first

three quarters of 2016; and the contact information of the IRS employees handling

the pending TEFRA cases and other tax matters currently under examination.

      On November 16, 2016, petitioner submitted Form 656 offering to settle his

total outstanding tax liabilities for all delinquent tax years in a lump-sum payment

of $400,000. Petitioner submitted his OIC on the basis of doubt as to

collectibility. With his OIC petitioner included a Tax Increase Prevention and

Reconciliation5 (TIPRA) payment of $80,000 (20% of the total OIC), the OIC

      5
      The Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. No.
109-222, sec. 509(a), 120 Stat. at 362, enacted new sec. 7122(c), effective for
                                                                       (continued...)
                                       -7-

[*7] application fee of $186, and his estimated tax payments for 2016. Petitioner

did not request that his $80,000 TIPRA payment be applied against a specific

year’s tax liability. On his Form 656 petitioner acknowledged that his $80,000

TIPRA payment was a nonrefundable payment of tax.

      On November 18, 2016, the settlement officer forwarded petitioner’s OIC to

the Centralized Offer in Compromise Unit in Holtsville, New York (Holtsville

COIC Unit), for consideration. After reviewing all of the documentation, the

Holtsville COIC Unit determined that petitioner’s OIC was a processable offer.

The Holtsville COIC Unit applied petitioner’s OIC application fee of $186 and his

$80,000 TIPRA payment against his total outstanding tax liabilities.

      On January 10, 2017, the settlement officer sent petitioner’s OIC to the

Long Beach, California, Centralized Offer in Compromise Group (Long Beach

Group). The Long Beach Group investigated whether to accept, reject, or return

petitioner’s offer. The offer specialist with the Long Beach Group found that there

was an open Abusive Tax Avoidance Transaction (ATAT) investigation. The




      5
        (...continued)
OICs submitted on or after July 16, 2006. Sec. 7122(c)(1)(A)(i) requires that the
submission of any lump-sum OIC “be accompanied by the payment of 20 percent
of the amount of such offer.” See also Notice 2006-68, 2006-2 C.B. 105.
                                          -8-

[*8] offer specialist contacted the revenue officer conducting the investigation to

determine its status.

      Since October 27, 2011, the assigned revenue officer had been investigating

petitioner’s ability to pay, focusing on identifying and attempting to collect

petitioner’s assets held through trusts, LLCs, and offshore accounts. Petitioner

responded to the assigned revenue officer’s requests for information dated

November 7, 2012, and January 25, May 3, and September 7, 2017. At the time of

trial of this case the investigation was still ongoing.

      The offer specialist concluded that the OIC needed to be returned pending

the completion of the revenue officer’s ATAT investigation. On April 6, 2017, the

offer specialist in the Long Beach Group returned petitioner’s OIC, noting that

there was an open ATAT investigation that could potentially affect the outstanding

tax liabilities petitioner sought to compromise. Upon returning the OIC the offer

specialist closed petitioner’s case.

      The settlement officer reviewed the Long Beach Group’s decision to return

petitioner’s OIC and determined that the decision was consistent with IRS policy.

On April 17, 2017, the settlement officer spoke with petitioner’s counsel about the

reasons the OIC was returned. She told petitioner’s counsel that the Collection

Division (Collection) properly returned the OIC on the basis of stated IRS policy.
                                        -9-

[*9] The settlement officer also told petitioner’s counsel that the pending TEFRA

audits were still open.

      Petitioner’s counsel told the settlement officer that he did not agree with the

OIC’s being returned. He also informed the settlement officer that, on April 11,

2017, he had spoken with the offer specialist in the Long Beach Group and the

acting general manager at Collection. Petitioner’s counsel requested additional

time to contact Collection to try to have the OIC reopened. The settlement officer

gave petitioner’s counsel until April 27, 2017, to contact Collection.

      On April 27, 2017, the settlement officer again spoke to petitioner’s counsel

and reminded him that the OIC could be withdrawn. Petitioner’s counsel told the

settlement officer that petitioner did not want to withdraw his OIC and preferred

instead to receive a notice of determination.

      The settlement officer verified that the assessments for the years in issue

were proper. On August 11, 2017, the settlement officer issued a notice of

determination for each of the tax years in issue sustaining the NFTL filing. Each

of the notices of determination states that Collection returned petitioner’s OIC on

April 6, 2017, “because there were other investigations pending at the Collection’s

level that might affect your delinquent tax account sought to be compromised” and

that the Appeals Office “concurs that the basis determined by Collection to return
                                        - 10 -

[*10] your Offer in Compromise was appropriate”. The notices of determination

also state: “In addition to the other investigations pending at the Collection’s

level, you have several pending TEFRA * * * partnership issues related to you and

these issues will need to be resolved before Appeals can consider an Offer in

Compromise for you”.

      In both notices of determination the settlement officer verified that all

requirements of applicable law and administrative procedure had been met. The

settlement officer also determined that the NFTL filings were appropriate

collection actions that balanced the need for the efficient collection of unpaid

taxes with the legitimate concern that such actions be no more intrusive than

necessary.

                                     OPINION

I.    Standard of Review

      The Secretary is required to provide a taxpayer with written notice of the

filing of an NFTL against the taxpayer’s property or rights to property. Sec.

6320(a)(1). The notice must also inform the taxpayer of his or her right to a CDP

hearing before an impartial officer or employee of the Appeals Office. Sec.

6320(a)(3), (b). At the CDP hearing the taxpayer may raise any relevant issue

relating to the unpaid tax or the NFTL, including spousal defenses, challenges to
                                        - 11 -

[*11] the appropriateness of the collection action, and offers of collection

alternatives. Secs. 6320(b)(4), 6330(c)(2)(A). The taxpayer may challenge the

existence or the amount of the underlying tax liability for any period only if he or

she did not receive a notice of deficiency or did not otherwise have an opportunity

to dispute the liability. Sec. 6330(c)(2)(B); Sego v. Commissioner, 114 T.C. 604,

609 (2000).

      Following the hearing the settlement officer must determine whether

proceeding with the proposed collection action is appropriate. In making that

determination the settlement officer is required to take into consideration:

(1) whether the requirements of any applicable law or administrative procedure

have been met, (2) any relevant issues raised by the taxpayer, and (3) whether the

proposed collection action balances the need for the efficient collection of taxes

with the legitimate concern of the taxpayer that the collection action be no more

intrusive than necessary. Secs. 6320(c), 6330(c); see also Lunsford v.

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

      The Court considers an underlying liability on review only if the taxpayer

properly raised the issue during the CDP hearing. Sec. 301.6330-1(f)(2), Q&A-

F3, Proced. & Admin. Regs.; see also Giamelli v. Commissioner, 129 T.C. 107,
                                        - 12 -

[*12] 115 (2007). Petitioner did not raise the underlying liabilities for the years in

issue during his CDP hearing.

      Where the validity of the underlying tax liability is not at issue, we review

the settlement officer’s administrative determinations regarding nonliability issues

for abuse of discretion. Sego v. Commissioner, 114 T.C. at 610. Abuse of

discretion exists when a determination is arbitrary, capricious, or without sound

basis in fact or law. See Murphy v. Commissioner, 125 T.C. 301, 320 (2005),

aff’d, 469 F.3d 27 (1st Cir. 2006). The Court does not conduct an independent

review and substitute its judgment for that of the settlement officer. Id. If the

settlement officer follows all statutory and administrative guidelines and provides

a reasoned, balanced decision, the Court will not reweigh the equities. Link v.

Commissioner, T.C. Memo. 2013-53, at *12.

      This Court may review the settlement officer’s verification under section

6330(c)(1) without regard to whether the taxpayer raised it at the CDP hearing.

Secs. 6320(c), 6330(c)(1), (3)(A); see also Hoyle v. Commissioner, 131 T.C. 197,

202-203 (2008), supplemented by 136 T.C. 463 (2011). A settlement officer is

required to base the notice of determination, in part, on the verification obtained

under section 6330(c)(1) by ensuring that all legal requirements have been

followed. Hoyle v. Commissioner, 131 T.C. at 201-202; see also sec. 6320(c).
                                        - 13 -

[*13] The section 6330(c)(1) verification is required for every determination.

Hoyle v. Commissioner, 131 T.C. at 202-203.

II.   Scope of Review

      Absent a stipulation to the contrary, an appeal in this case would normally

lie with the U.S. Court of Appeals for the Ninth Circuit. Sec. 7482(b)(1)(G)(i).

Under Ninth Circuit precedent the scope of our review is generally limited to the

administrative record. See Keller v. Commissioner, 568 F.3d 710, 718 (9th Cir.

2009) (adopting Robinette v. Commissioner, 439 F.3d 455, 459-460 (8th Cir.

2006), rev’g 123 T.C. 85 (2004)), aff’g in part as to this issue T.C. Memo. 2006-

166, and aff’g in part, vacating in part decisions in related cases. Section

301.6330-1(f)(2), Q&A-F4, Proced. & Admin. Regs., defines the administrative

record as Appeals’ case file, including “any * * * documents or materials relied

upon by the Appeals officer * * * in making the determination under section

6330(c)(3)”.

      At trial petitioner offered, as Exhibit 3-P, his counsel’s handwritten notes

summarizing two telephone conversations he had on April 11, 2017, with the

Collection offer specialist and acting general manager following the return of

petitioner’s OIC by the Long Beach Group. Petitioner contends that these notes

should be considered part of the administrative record because the conversation
                                         - 14 -

[*14] explained the Long Beach Group’s reasons for returning petitioner’s OIC

and was not documented in the offer specialist’s or acting general manager’s case

history notes. We do not agree.

       Regardless of whether Exhibit 3-P meets the business record exception for

hearsay in rule 803 of the Federal Rules of Evidence, the information contained in

Exhibit 3-P was not part of the administrative record before the settlement officer

at the time she rendered her determination. Accordingly, we will not look beyond

the administrative record in resolving this case. See, e.g., Coastal Luxury Mgmt.,

Inc. v. Commissioner, T.C. Memo. 2019-43, at *7-*8. Exhibit 3-P is not part of

the administrative record and is outside the scope of our review. See Keller v.

Commissioner, 568 F.3d at 718.

III.   Abuse of Discretion

       A.    Return of the OIC

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

criminal case arising under the internal revenue laws. Regulations implementing

section 7122 set forth three grounds for the compromise of a liability: (1) doubt as

to liability, (2) doubt as to collectibility, and (3) promotion of effective tax

administration. Sec. 301.7122-1(b), Proced. & Admin. Regs. Doubt as to

collectibility exists where the taxpayer’s assets and income are less than the full
                                        - 15 -

[*15] amount of the liability. Id. subpara. (2). The offer must include all unpaid

tax liabilities and periods for which the taxpayer is liable. Murphy v.

Commissioner, 125 T.C. at 309; see also Internal Revenue Manual (IRM) pt.

5.8.1.7(1) (Jan. 1, 2016).

      Pursuant to the authority granted in section 7122(d), the Secretary has

developed guidelines and procedures to evaluate the adequacy of an OIC,

including regulations, the IRM, and other publications used by the IRS. See also

Rev. Proc. 2003-71, sec. 2.02, 2003-2 C.B. 517, 517. The IRM informs a

settlement officer that the Centralized Offer in Compromise (COIC) unit

determines whether an OIC is processable. IRM pt. 8.22.7.10.1.1(1) (Sept. 23,

2014). The Holtsville COIC Unit determined that petitioner’s OIC was

processable.

      Petitioner argues that respondent violated the mandate of section 6330(c)(3)

by agreeing with the offer specialist’s decision to return the OIC and by basing her

determination, in part, on the open 2009 TEFRA assessment for Zelly. When an

OIC is processable, Collection investigates the offer and can either accept it,

provide a recommendation to reject it, or determine whether the offer should be

returned to the taxpayer. IRM pt. 8.22.7.10.1.1(2). If a taxpayer is the subject of

an open ATAT investigation, consideration of the OIC cannot proceed until the
                                        - 16 -

[*16] investigation is complete. IRM pt. 5.8.4.17(2) (May 10, 2013). A

taxpayer’s offer is closed and the 24-month statutory period of automatic

acceptance prescribed in section 7122(f) ends when the COIC unit returns a

taxpayer’s OIC. IRM pt. 8.23.3.1.1.1(6) (Oct. 15, 2014).

      Petitioner contends that the settlement officer, in making her determination,

violated the statutory mandate because she erroneously deferred to the revenue

officer conducting the ATAT investigation. We do not agree. The Long Beach

Group investigated petitioner’s OIC and determined that it should be returned due

to an open ATAT investigation. The Long Beach Group’s decision also

considered the total outstanding assessed tax liability owed and the ATAT revenue

officer’s attempts to identify petitioner’s assets and collect his unpaid tax

liabilities. The settlement officer independently verified that the actions taken by

the Long Beach Group were proper according to IRS guidance.

      Petitioner further argues that the settlement officer abused her discretion in

sustaining the NFTLs on the grounds of open TEFRA audits. He contends that the

Long Beach Group did not consider the open TEFRA audits in the OIC

investigation. He argues that the settlement officer could take into consideration

only what the Long Beach Group considered.
                                        - 17 -

[*17] In OIC investigations IRS employees, including Appeals Office settlement

officers, are directed to check for pending assessments, including TEFRA

proceedings. IRM pts. 5.8.4.17(1), 8.23.3.9.4(1)(a) (Oct. 15, 2014). If there is an

open TEFRA audit, a settlement officer is directed to attempt to secure a

withdrawal of the OIC. Id. pt. 8.23.3.9.4(1)(a). An OIC may be returned if there is

at least one open TEFRA case. Id. pt. 5.8.4.17(2).

      Alternatively, petitioner argues that the settlement officer abused her

discretion because he contends that there were no open TEFRA audits when the

settlement officer rendered her decision. Under IRS policy an OIC cannot be

accepted until all TEFRA issues have been resolved. See id. pt. 8.23.3.9.4.

Petitioner contends that the parties in the 2009 Zelly proceeding had filed a

stipulation of settled issues on February 6, 2017. Petitioner submitted his OIC, in

part, to compromise his tax liability for 2009. This Court did not enter a decision

in Zelly until after the settlement officer issued the notices of determination. The

IRS could not assess the 2009 liability for Zelly until after this Court entered its

decision. Therefore, the settlement officer properly determined that petitioner’s

OIC should be returned because of the outstanding assessment of the Zelly

TEFRA proceeding.
                                        - 18 -

[*18] Sections 6320(c) and 6330(c)(3)(C) require a settlement officer to consider

whether the proposed collection action balances the need for the efficient

collection of taxes with the taxpayer’s legitimate concern that the collection action

be no more intrusive than necessary. The settlement officer followed the

procedures set forth in the IRM. She properly verified that petitioner was the

subject of an open and ongoing ATAT investigation and that there was at least one

open TEFRA case pertaining to him. Before issuing the notices of determination

the settlement officer also verified that the assessments for the years in issue were

proper and that petitioner received all required notices pertaining to the NFTL

filings.

       We find that the settlement officer did not abuse her discretion in sustaining

the NFTL filings due to the OIC being returned to petitioner.

       B.    20% OIC TIPRA Payment

       Section 7122(c)(1)(A)(i) requires that the submission of any lump-sum OIC

be accompanied by a payment of 20% of the offer amount. Any OIC paid in five

or fewer payments is considered a lump-sum OIC. Sec. 7122(c)(1)(A)(ii). The

legislative history of section 7122(c) refers to the 20% payment as a “partial

payment” or “down payment” of the taxpayer’s liability. H.R. Conf. Rept. No.

109-455, at 234 (2006), 2006 U.S.C.C.A.N. 234, 420-421. The 20% payment of
                                        - 19 -

[*19] the offer amount is treated as a payment of tax rather than a refundable

deposit under section 7809(b) or section 301.7122-1(h), Proced. & Admin. Regs.

See Notice 2006-68, sec. 1.02, 2006-2 C.B. 105, 105.

      Under section 7122(c)(2)(A) the taxpayer may specify how he or she wants

their TIPRA payment applied by making the request in writing when he or she

submits the OIC. Notice 2006-68, sec. 1.04, 2006-2 C.B. at 105. If no such

specification is made, the IRS will apply the TIPRA payment in the best interest of

the Government. Id.

      On November 16, 2016, petitioner submitted an OIC of $400,000 on the

basis of doubt as to collectibility. As required by section 7122(c)(1), petitioner

included a payment of $80,000 (20% of the OIC) with the submission of his OIC.

At the bottom of Form 656 petitioner acknowledged that his TIPRA payment was

nonrefundable and would not be returned to him if his OIC was withdrawn,

rejected, or returned.

      Petitioner contends that it was an abuse of discretion for respondent to

return his OIC and not refund the 20% “deposit” he paid with his submission. The

20% payment submitted with a lump-sum OIC is nonrefundable. Notice 2006-68,

sec. 1.02; see also Isley v. Commissioner, 141 T.C. 349, 372 (2013). Petitioner

acknowledged this when he submitted his OIC and 20% TIPRA payment. We
                                        - 20 -

[*20] conclude that it was not an abuse of discretion for the settlement officer to

retain petitioner’s 20% TIPRA payment.

IV.   Deemed Acceptance of the OIC

      Petitioner contends that respondent did not formally reject his OIC, and

therefore, it is deemed accepted by operation of law under the provisions of

section 7122(f), which provides that an OIC is deemed accepted if it is not rejected

before 24 months after it is submitted. Petitioner submitted his OIC on November

16, 2016. The Long Beach Group correctly returned petitioner’s OIC on April 6,

2017, at which point his OIC was considered closed. See IRM pt. 8.23.3.1.1.1(6)

(stating that the 24-month acceptance period provided in section 7122(f) ends

when an OIC is rejected or returned). Accordingly, petitioner’s OIC is not deemed

accepted by operation of law under the provision of section 7122(f).

V.    Conclusion

      We conclude the settlement officer did not abuse her discretion. We have

considered all other arguments made and facts presented in reaching our decision,

and to the extent not discussed above, we conclude that they are moot, irrelevant,

or without merit.
                                  - 21 -

[*21] To reflect the foregoing,


                                           Decision will be entered for

                                  respondent.
