                        T.C. Memo. 2009-45



                      UNITED STATES TAX COURT



               GREGORY H. HAUBRICH, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 26422-06L.             Filed February 24, 2009.



     Frederick J. O’Laughlin, for petitioner.

     William F. Castor, for respondent.



                        MEMORANDUM OPINION


     MARVEL, Judge:   Pursuant to section 6330(d),1 petitioner

seeks review of respondent’s determination to proceed with the

collection of petitioner’s 2002 Federal income tax liability.


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

The issues for decision are:       (1) Whether respondent abused his

discretion in issuing a Final Notice of Intent to Levy and Notice

of Your Right to a Hearing for 2002 (final notice) while

petitioner’s bankruptcy case was pending, and (2) whether

respondent abused his discretion in rejecting petitioner’s

installment agreement offer.

                                Background

       The parties submitted this case fully stipulated under Rule

122.       We incorporate the stipulated facts into our findings by

this reference.       Petitioner resided in Oklahoma when his petition

was filed.

I.     Petitioner’s Bankruptcy Proceedings

       On June 12, 2002, petitioner and his former wife, Betty A.

Haubrich (Ms. Haubrich), filed a bankruptcy petition under

chapter 7 of the Bankruptcy Code with the U.S. Bankruptcy Court

for the Western District of Oklahoma (bankruptcy court).2      On

January 28, 2003, the bankruptcy trustee filed an adversary

complaint to compel petitioner to turn over bankruptcy estate

property; the bankruptcy trustee also objected to petitioner’s

discharge.       On June 27, 2003, the bankruptcy court issued an

Order Approving Compromise of Controversy, pursuant to which

petitioner was to pay $22,000 to the bankruptcy trustee in


       2
      On Jan. 8, 2003, the bankruptcy court discharged Ms.
Haubrich from all dischargeable debts.
                                - 3 -

settlement of the adversary proceeding.    However, petitioner paid

only $1,700 of the compromise amount.3    On February 24, 2004, the

bankruptcy court entered a $20,300 judgment against petitioner,

which was nondischargeable.

      Petitioner was neither granted nor denied a discharge in the

bankruptcy case.   On August 6, 2005, the bankruptcy case was

closed.

II.   Petitioner’s Tax Collection Proceeding

      Petitioner filed his 2002 Form 1040, U.S. Individual Income

Tax Return, but failed to pay $6,578 of the $6,879 tax liability

reported on the return.   On January 28, 2005, respondent issued

petitioner the final notice.4   On February 25, 2005, respondent

received petitioner’s timely Form 12153, Request for a Collection

Due Process Hearing.   In an attachment to his Form 12153

petitioner stated that he disagreed with the proposed levy

because it would cause him extreme hardship and also because

respondent issued the final notice after petitioner had filed a

bankruptcy petition.



      3
      The parties stipulated that the bankruptcy court found that
petitioner had paid $3,700 to the trustee. However, the
bankruptcy court’s judgment stated that petitioner had paid
$1,700.
      4
      The record contains only the first page of the final
notice, which does not state to which year the final notice
relates.
                                - 4 -

     On August 30, 2006, Settlement Officer Minnie L. Banks (Ms.

Banks) mailed petitioner a letter scheduling a telephone hearing

for October 12, 2006.5   Ms. Banks requested that petitioner

provide a completed Form 433-A, Collection Information Statement

for Wage Earners and Self-Employed Individuals, Form 433-B,

Collection Information Statement for Businesses, and supporting

documents.    Ms. Banks also stated that petitioner must have filed

all required Federal tax returns to be eligible for alternative

collection methods, such as an installment agreement or offer-in-

compromise.   On September 19, 2006, Ms. Banks sent petitioner a

letter rescheduling the telephone conference to October 31, 2006,

pursuant to a request of petitioner’s representative, Frederick

J. O’Laughlin (Mr. O’Laughlin).6

     On October 31, 2006, Mr. O’Laughlin submitted petitioner’s

Form 433-A, Form 433-B, and supporting documents, which showed

that petitioner was an attorney and sole owner of the Haubrich

Law Firm, P.C.   Mr. O’Laughlin also submitted to Ms. Banks



     5
      Although the final notice related to 2002 only, on his Form
12153 petitioner requested a hearing with respect to “200 [sic],
2002, and 2003”. The header of the Aug. 30, 2006, letter from
Ms. Banks to petitioner mistakenly stated: “Tax Period(s) Ended:
12/2001 12/2003”. However, in the letter Ms. Banks stated that
petitioner’s hearing request was timely only with respect to
2002.
     6
      Mr. O’Laughlin again requested to reschedule the hearing,
but Ms. Banks denied the request.
                               - 5 -

petitioner’s offer to enter into an installment agreement to pay

his unpaid tax liability.

     Ms. Banks reviewed the Form 433-A and Form 433-B petitioner

submitted and determined that petitioner had received income from

his corporation as distributions rather than wages and,

consequently, had incorrectly reported the payments on his

Federal income tax returns.   Ms. Banks also concluded that

petitioner’s corporation was not making Federal tax deposits and

had not filed required Forms 941, Employer’s Quarterly Federal

Tax Return, Forms 940, Employer’s Annual Federal Unemployment

(FUTA) Tax Return, and Forms 1120S, U.S. Income Tax Return for an

S Corporation.7

     On October 31, 2006, Ms. Banks held a telephone hearing with

Mr. O’Laughlin.   Ms. Banks stated that the installment agreement

offer faxed earlier that day could not be considered because

petitioner was not in compliance.   Ms. Banks then temporarily

transferred the call to the Appeals team manager who explained

that an installment agreement could not be considered because

petitioner reported income from his law practice as distributions

rather than wages.

     7
      According to Ms. Banks’s case activity record, which is
part of the record, Ms. Banks also reviewed respondent’s
transcripts of petitioner’s account. In the case activity record
Ms. Banks stated that petitioner was “not in compliance with
estimated tax payment.” However, the case activity record does
not state for which years petitioner was not in compliance with
the estimated tax payment requirement.
                                - 6 -

     During the October 31, 2006, hearing Mr. O’Laughlin argued

that the final notice was invalid as it was issued during

petitioner’s bankruptcy proceeding.     Ms. Banks explained that

respondent’s records showed that petitioner filed a bankruptcy

petition in June 2002 and the bankruptcy case was closed in April

2004.    Mr. O’Laughlin stated that the case closing date was

incorrect.    On November 13, 2006, Mr. O’Laughlin sent to Ms.

Banks a copy of the final decree in petitioner’s bankruptcy case

establishing that the bankruptcy case was closed on August 6,

2005.8

     On November 17, 2006, respondent issued petitioner a Notice

of Determination Concerning Collection Action(s) Under Section

6320 and/or 6330 (notice of determination) with respect to 2002

sustaining the proposed levy action.     The notice of determination

stated that Ms. Banks verified that all applicable laws and

procedures were met, considered all issues raised, and balanced


     8
      During the hearing Mr. O’Laughlin also argued that
petitioner’s Form 12153 was timely for 2001, 2002, and 2003. Ms.
Banks explained that the final notice was issued by respondent’s
Oklahoma City office, and it was for 2002 only. On Mar. 14,
2005, respondent’s Philadelphia office issued petitioner a Final
Notice of Intent to Levy and Notice of Your Right to a Hearing
for 2001 and 2003. Consequently, petitioner’s Form 12153 was
premature with respect to 2001 and 2003 because he submitted it
on Feb. 25, 2005. On May 30, 2006, Mr. O’Laughlin submitted to
respondent’s Philadelphia office a copy of the same Form 12153.
During the hearing Ms. Banks explained that the second submission
of the Form 12153 was not a timely request for a hearing with
respect to 2001 and 2003 because respondent did not receive it
within the 30-day deadline.
                               - 7 -

the efficiency and intrusiveness of the proposed collection

action.   In the notice of determination respondent’s Appeals

Office determined that the proposed levy was appropriate and the

installment agreement could not be considered because “the

taxpayer is not [in] compliance according to the law.”     With

respect to issues petitioner raised, the attachment to the notice

of determination stated that petitioner had offered a collection

alternative in the form of an installment agreement.     The

attachment also stated that the Appeals team manager had

explained to Mr. O’Laughlin during the October 31, 2006, hearing

that petitioner’s installment agreement

     was not a viable option because the income Mr.
     Haubbrich [sic] receives from his Corporation was
     incorrectly reported on Mr. Haubrich’s 1040 tax
     returns. The income received by Mr. Haubrich was
     reported as distributions whereas it should have been
     reported as wages because Mr. Haubrich is the sole
     owner and employee of the Corporation. * * *

The attachment to the notice of determination also described Ms.

Banks and Mr. O’Laughlin’s conversation regarding the correct

date when the bankruptcy case was closed.

                            Discussion

I.   Section 6330

     Section 6330(a) provides that no levy may be made on any

property or right to property of any person unless the Secretary

has notified such person in writing of the right to a hearing

before the levy is made.   If the person requests a hearing, a
                                - 8 -

hearing shall be held before an impartial officer or employee of

the Internal Revenue Service Office of Appeals.      Sec. 6330(b)(1),

(3).    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.    Sec. 6330(c)(2)(A).    A taxpayer may contest the

existence or amount of the underlying tax liability at the

hearing if the taxpayer did not receive a notice of deficiency

for the tax liability or did not otherwise have an earlier

opportunity to dispute the tax liability.      Sec. 6330(c)(2)(B);

see also Sego v. Commissioner, 114 T.C. 604, 609 (2000).

       Following a hearing, the Appeals Office must determine

whether the proposed levy action may proceed.      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 levy

action appropriately balances the need for efficient collection

of taxes with a taxpayer’s concerns regarding the intrusiveness

of the proposed levy action.    Sec. 6330(c)(3).

       Section 6330(d)(1) grants this Court jurisdiction to review

the determination made by the Appeals Office in connection with

the section 6330 hearing.    Where the underlying tax liability is

not in dispute, the Court will review the determination of the
                                 - 9 -

Appeals Office for abuse of discretion.      Lunsford v.

Commissioner, 117 T.C. 183, 185 (2001); Sego v. Commissioner,

supra at 610; Goza v. Commissioner, 114 T.C. 176, 182 (2000).     An

abuse of discretion occurs if the Appeals Office exercises its

discretion “arbitrarily, capriciously, or without sound basis in

fact or law.”     Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

      Petitioner does not dispute the underlying tax liability for

2002.   Accordingly, we review respondent’s determination for

abuse of discretion.    See Lunsford v. Commissioner, supra at 185.

II.   Petitioner’s Automatic Stay Argument

      Petitioner contends that respondent abused his discretion in

upholding the levy because the notice of determination was based

on an invalid final notice.    He asserts that the final notice was

invalid because respondent issued it on January 28, 2005, which

was after June 12, 2002, the date petitioner had filed his

bankruptcy petition, and before August 6, 2005, the date

petitioner’s bankruptcy case was closed.      Accordingly, petitioner

argues, respondent issued the final notice in violation of the

automatic stay.

      Title 11 U.S.C. sec. 362(a)(1) (2006) provides that after a

bankruptcy petition is filed all entities are stayed from

commencing or continuing “a judicial, administrative, or other

action or proceeding against the debtor that was or could have

been commenced before the commencement of the case under this
                               - 10 -

title, or to recover a claim against the debtor that arose before

the commencement of the case under this title”.    Title 11 U.S.C.

sec. 362(a)(6) (2006) provides that a bankruptcy petition also

operates as a stay of “any act to collect, assess, or recover a

claim against the debtor that arose before the commencement of

the case under this title”.    Title 11 U.S.C. sec. 362(b)(9)

(2006) provides that the following actions are not violations of

an automatic stay:    “(A) an audit by a governmental unit to

determine tax liability; (B) the issuance to the debtor by a

governmental unit of a notice of tax deficiency; (C) a demand for

tax returns; or (D) the making of an assessment for any tax”.

     We have previously held that a final notice of intent to

levy after a taxpayer has failed to pay his taxes constitutes a

commencement of an administrative action against a taxpayer

within the meaning of 11 U.S.C. sec. 362(a)(1).    See Smith v.

Commissioner, 124 T.C. 36, 43 (2005); Beverly v. Commissioner,

T.C. Memo. 2005-41.    However, an administrative action against a

taxpayer is not affected by the automatic stay if such action

pertains to a claim arising after a bankruptcy petition is filed.

See Parker v. Commissioner, T.C. Memo. 2006-43.    For this purpose

Federal income tax liability arises no sooner than the end of the

taxable year.   See id.; Dixon v. United States ex. rel. IRS, 210

Bankr. 610, 614 (Bankr. W.D. Okla. 1997), affd. 218 Bankr. 150

(Bankr. 10th Cir. 1998).    Therefore, the Government’s claim to
                              - 11 -

petitioner’s 2002 Federal income tax liability arose no earlier

than December 31, 2002, which is after June 12, 2002, the date on

which petitioner filed his bankruptcy petition.     Because the

claim to the tax liability arose after petitioner filed his

bankruptcy petition, it is a postpetition claim, and the final

notice was not subject to the automatic stay provisions of the

Bankruptcy Code.   See Parker v. Commissioner, T.C. Memo. 2006-

117; Parker v. Commissioner, T.C. Memo. 2006-43.     Accordingly,

respondent did not abuse his discretion in issuing the final

notice while petitioner’s bankruptcy case was pending.

III. Rejection of the Installment Agreement Offer

     Petitioner contends that respondent abused his discretion by

rejecting petitioner’s request for an installment agreement on

the ground that “another taxpayer distributed money to

petitioner”.   Petitioner also contends that respondent abused his

discretion by using another taxpayer’s filing noncompliance as a

ground for rejecting petitioner’s installment agreement.     For the

reasons described below, we will remand this case to respondent’s

Appeals Office for reconsideration of petitioner’s installment

agreement proposal.

     Section 6159(a) authorizes the Secretary “to enter into

written agreements with any taxpayer under which such taxpayer is

allowed to make payment on any tax in installment payments if the

Secretary determines that such agreement will facilitate full or
                               - 12 -

partial collection of such liability.”    Accepting or rejecting an

installment agreement proposed by a taxpayer is within the

discretion of the Commissioner.    See sec. 301.6159-1(b)(1)(i),

Proced. & Admin. Regs.    We review the Commissioner’s rejections

of installment agreement proposals for abuse of discretion.        See

Orum v. Commissioner, 123 T.C. 1, 12-13 (2004), affd. 412 F.3d

819 (7th Cir. 2005); Schulman v. Commissioner, T.C. Memo. 2002-

129.

       Respondent’s Appeals Office stated in the notice of

determination that Ms. Banks was unable to consider petitioner’s

installment agreement because petitioner was “not [in] compliance

according to the law.”    The attachment to the notice of

determination explains that petitioner’s noncompliance consisted

of incorrect reporting of income from his law practice.      The

record does not suggest that petitioner failed to report income

from his professional corporation; rather, Ms. Banks rejected the

installment agreement proposal because she determined that “The

income received by Mr. Haubrich was reported as distributions

whereas it should have been reported as wages because Mr.

Haubrich is the sole owner and employee of the Corporation.”

       Part 5 of the Internal Revenue Manual (IRM) contains

guidelines and instructions for Internal Revenue Service

employees with respect to collection process.    IRM pt. 5.1.11.6.7

provides that the Employment Tax Program is responsible for
                              - 13 -

determining when income of corporate officers should be reported

as wages.9   1 Administration, IRM (CCH), pt. 5.1.11.6.7(1), at

15,300 (May 27, 1999).   The IRM instructs reviewing officers to

refer a case to the Employment Tax Program “when it is determined

during an investigation that a taxpayer may be treating employees

as independent contractors or officers may be taking draws,

loans, dividends, professional or administrative fees, etc., to

avoid reporting taxable wage.”     Id. pt. 5.1.11.6.7(2).   Although

it appears that Ms. Banks, the reviewing officer, should have

referred the case to the appropriate Employment Tax Program for a

determination of whether petitioner’s professional corporation

and/or petitioner were properly classifying and reporting income

distributed by the professional corporation to petitioner, Ms.

Banks did not make the referral.    Instead she concluded that

petitioner10 was not in compliance, and as a result, she refused

to consider petitioner’s request for an installment agreement.

     Ms. Banks’s concern about the behavior of petitioner and his

professional corporation is understandable given the emphasis



     9
      The Employment Tax Program responsibilities involve, inter
alia, determining the appropriateness of income tax on wages of
employees, employer tax and employee Social Security tax, and tax
for unemployment insurance. See 1 Administration, IRM (CCH), pt.
5.1.11.6.7(1), at 15,300 (May 27, 1999).
     10
      An entry in Ms. Banks’s activity record states that Ms.
Banks also determined that petitioner’s corporation was not in
compliance with the requirements to file Forms 941, 940, and
1120S and was not making Federal tax deposits.
                               - 14 -

that the IRM places on present and future compliance in

evaluating collection alternatives.     However, it appears that Ms.

Banks attributed the alleged noncompliance of a separate but

related professional corporation to petitioner in a manner that

may be contrary to the provisions of the IRM.    In general the IRM

instructs the reviewing officer to consider the taxpayer’s

compliance with all filing requirements before granting an

installment agreement.   See, e.g., IRM pt. 5.14.1.5.1(1) (“Filing

and paying compliance must be considered prior to determining

that the best manner of paying delinquent taxes is through an

installment agreement.”), 5.14.1.2(9)(E) (the taxpayer must file

current tax returns and pay current deposits), 5.14.1.3(4)(D)

(the taxpayer must be in compliance with filing requirements),

5.14.1.5.1(4) (the taxpayer must be in compliance with all filing

requirements before an installment agreement can be approved)

(July 12, 2005).   However, the IRM draws a distinction between

noncompliance by the taxpayer seeking a collection alternative

and noncompliance by a related taxpayer.    For example, IRM pt.

5.14.4.3 (July 12, 2005) addresses the issue of noncompliance by

a related entity and the impact of that noncompliance on a

request for an installment agreement made by the taxpayer and the

related entity.    It provides that “If the person or entity that

is missing the returns does not file the required returns, a

recommendation for rejection can be given * * * regarding only
                               - 15 -

the person or entity that is not in compliance, and the taxpayer

that is in compliance may be granted an installment agreement (if

appropriate).”   IRM pt. 5.14.4.3(1) (July 12, 2005).

     The Appeals Office did not determine that petitioner failed

to file a required return or that he failed to report the

distributions he received from his professional corporation

during 2002 and later years.   The Appeals Office also did not

determine that petitioner reported the distributions he received

in a manner that was inconsistent with the way the professional

corporation classified and paid the distributions.   We fail to

see how petitioner was not in compliance with a filing obligation

when he filed his 2002 return and reported the distributions he

received in a manner consistent with the classification and

payment of the distributions by the professional corporation.11

The noncompliance that the notice of determination identified was

the alleged noncompliance of a related taxpayer.   The IRM appears



     11
      In her case activity record Ms. Banks states that
petitioner “is not in compliance with estimated tax payment.”
However, the notice of determination contains no finding with
respect to whether petitioner has a current obligation to make
estimated tax payments or that he was failing to comply with that
obligation. If petitioner is continuing to receive distributions
from his professional corporation that are not being treated as
wages, petitioner may well have an obligation to make estimated
tax payments, and a failure to do so is grounds for refusing to
consider collection alternatives. See Schwartz v. Commissioner,
T.C. Memo. 2007-155 (upholding the Commissioner’s determination
to proceed with the proposed collection action when the Appeals
Office determined that the taxpayer was not in compliance with
the estimated tax payment requirement).
                              - 16 -

to require that the alleged noncompliance be referred to the

Employment Tax Program for investigation, but Ms. Banks

apparently did not do so.   Instead she summarily concluded that

petitioner had failed to report his income from his professional

corporation as wages and that this failure was sufficient to

reject his collection alternative.     Absent some explanation as to

why the Appeals Office was entitled to consider the alleged

noncompliance of a related taxpayer as the noncompliance of

petitioner, we cannot conclude on this record that the Appeals

Office did not abuse its discretion in refusing to consider

petitioner’s proffered installment agreement and in concluding

that collection action could proceed.

     Accordingly, we shall remand this case to respondent’s

Appeals Office to consider whether petitioner is in compliance

within the meaning of relevant IRM provisions and, if so, whether

petitioner’s request for an installment agreement is appropriate.

     We have considered the remaining arguments made by the

parties, and to the extent not discussed above, we conclude those

arguments are irrelevant, moot, or without merit.

     To reflect the foregoing,


                                      An appropriate order will

                                 be issued.
