                                T.C. Memo. 2016-16



                         UNITED STATES TAX COURT



     MICHAEL G. MORRIS AND MONICA CLAY-MORRIS, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 14268-14L.                          Filed February 4, 2016.



      Michael G. Morris and Monica Clay-Morris, pro sese.

      Thomas Alan Friday and Horace Crump, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      NEGA, Judge: The Internal Revenue Service (IRS) Appeals Office sent

petitioners a Notice of Determination Concerning Collection Action(s) Under

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

Federal tax lien (NFTLs) and notices of intent to levy filed to collect petitioners’

unpaid self-reported tax liabilities for 2008-11. In the notice of determination,
                                        -2-

[*2] respondent sustained the NFTLs for tax years 2008-10 and 2011,

respectively, and the proposed levy actions for tax years 2009-10 and 2011,

respectively.1 Pursuant to section 6330(d)(1),2 petitioners seek review of

respondent’s determination to sustain the filing of the NFTLs and the proposed

levy actions.

                               FINDINGS OF FACT

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

and the accompanying exhibits are incorporated herein by this reference.

Petitioners resided in Mississippi when their petition was filed.

      Petitioner husband (Dr. Morris) is a physician who specializes in obstetrics

and gynecology. In 2006 the Morrises moved from Pennsylvania to central

Mississippi in order for Dr. Morris to pursue a practice opportunity with an

obstetrics and gynecology physicians group in the area. After encountering

difficulties with the physicians group, Dr. Morris sought employment from a local

hospital, Central Mississippi Medical Center (CMMC). Dr. Morris and the


      1
        As explained below, respondent abated in full petitioners’ 2008 tax liability
and additions to tax. As a result, respondent no longer seeks to collect petitioners’
tax liability and additions to tax for this year.
      2
       All section references are to the Internal Revenue Code in effect at all
relevant times. All Rule references are to the Tax Court Rules of Practice and
Procedure.
                                         -3-

[*3] hospital negotiated a physicians recruitment contract whereby the hospital

would help cover startup costs if he maintained a new practice in the area for three

years. Dr. Morris opened his practice in 2006 and received payments from the

hospital in 2006 and 2007 in accordance with the physicians recruitment contract.

In 2008 and 2009 he received Forms 1099-MISC, Miscellaneous Income, from

CMMC to report the disbursement of these funds.

      Petitioners self-reported their tax liabilities for tax years 2008-11 and failed

to pay the liabilities for these years. Their tax returns for tax years 2009-11, the

years at issue, were filed after their respective due dates, taking into account

extensions of time to file.3

      At trial petitioners testified that they were confused over how to report

income from the physicians recruitment contract. They testified that they

originally reported income from the contract on their tax returns for tax years 2006

and 2007, the years they received the funds from CMMC, rather than on their

returns for tax years 2008 and 2009, the years in which they received Forms 1099-

      3
      Petitioners’ 2009 tax return was filed on September 5, 2011. Taking into
account an extension of time to file, that return was due on or before October 15,
2010. Petitioners’ 2010 tax return was filed on December 26, 2011. Taking into
account an extension of time to file, that return was due on or before October 15,
2011. Petitioners’ 2011 tax return was filed November 26, 2012. Taking into
account an extension of time to file, that return was due on or before October 15,
2012.
                                         -4-

[*4] MISC. They testified that this confusion caused them to seek out advice from

different tax return preparers and amend their tax returns multiple times. In one

instance, petitioners testified that they explained to their return preparer the terms

of the physicians recruitment contract but did not provide the return preparer with

a copy of the contract. The contract is not in the record. Dr. Morris also testified

that he suffered financial difficulties in 2008 because of disagreements with his

billing company that caused him to draw down his retirement funds in that year.

      On January 26, 2012, respondent received a claim for credit from petitioners

for overpayment of their 2006 tax liability. Later that year, respondent disallowed

their claim because it was filed more than three years after petitioners filed their

2006 tax return and more than two years after they paid their outstanding liability

for 2006.

Appeals Process for 2008-10 Liabilities

      On May 9, 2012, respondent issued a Notice of Intent to Levy and Notice of

Your Right to a Hearing Under I.R.C. 6330 (notice of intent to levy) to petitioners

with respect to their tax liabilities for 2008-10. On May 22, 2012, respondent

issued a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under

I.R.C. 6320 (notice of lien filing) for this same period.
                                         -5-

[*5] Petitioners timely submitted a Form 12153, Request for a Collection Due

Process or Equivalent Hearing, in response to these notices. On the form

petitioners requested collection alternatives--specifically, an installment agreement

and an offer-in-compromise, and requested that their account be placed in

uncollectible status. Petitioners also attached a letter to the form in which they

contended that the proposed levy was premature because the amounts owed were

still at issue. Specifically, they stated that they had filed amendments to their tax

returns that would significantly decrease the amounts owed. They also stated that

the IRS was reviewing their overpayment of tax for a previous year and that the

overpayment would help to substantially reduce their tax liabilities and put them

in a position to either pay past due tax or make installment payments.

      On July 17, 2012, respondent’s settlement officer (SO) sent petitioners a

letter offering them the opportunity to schedule a face-to-face collection due

process (CDP) hearing by August 6, 2012, if they submitted: (1) a completed

Form 433-A, Collection Information Statement for Wage Earners and Self-

Employed Individuals, with supporting documentation; (2) amended returns for

review and consideration; and (3) proof of estimated tax payments. Petitioners

submitted Form 433-A and thereafter requested to reschedule their face-to-face
                                        -6-

[*6] hearing to August 28, 2012. Soon after, petitioners requested to reschedule

their hearing to September 4, 2012.

        On August 5, 2012, petitioners submitted Form 12277, Application for

Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. On the form

petitioners stated that: (1) the NFTL was filed prematurely or not in accordance

with IRS procedures; (2) withdrawal would facilitate collection of the tax; and (3)

petitioners, or the Taxpayer Advocate acting on behalf of petitioners, believed

withdrawal to be in the best interest of the taxpayer and the Government.

        On September 4, 2012, a face-to-face hearing was held. During the hearing

the SO reviewed petitioners’ Form 433-A and requested supporting documentation

in order to make a determination of petitioners’ ability to pay. Petitioners also

challenged their underlying liabilities during the hearing and questioned how the

hearing could take place when their amended returns were still being processed by

the Appeals Office. On September 11, 2012, petitioners’ CDP hearing was

suspended pending the outcome of their challenge to their 2008 and 2009 tax

liabilities.

        On November 26, 2012, petitioners filed amended returns for 2008 and

2009.
                                        -7-

[*7] Appeals Process for 2011 Liability

      On December 7, 2012, respondent issued a notice of intent to levy to

petitioners with respect to their 2011 tax liability. On December 20, 2012,

respondent issued a notice of lien filing for this same period.

      Petitioners timely submitted a request for a CDP hearing for this period and

requested collection alternatives--specifically, an installment agreement or an

offer-in-compromise, and alternatively requested their account be placed in

uncollectible status. They also requested lien subordination, discharge, and

withdrawal.

      On February 7, 2013, the SO sent petitioners a letter offering them the

opportunity to schedule a telephone hearing for February 26, 2013, and requested

they submit a completed Form 433-A with supporting documentation and proof of

estimated tax payments in order to pursue an installment agreement or an offer-in-

compromise. The letter also noted that petitioners’ tax years 2008-09 had open

liability issues that were being reviewed by an Appeals officer.

      A telephone conference was held on February 26, 2013. During the

conference the SO requested an updated Form 433-A with supporting

documentation so that the SO could consider a collection alternative. Petitioners

subsequently provided some of the requested documentation to the SO.
                                        -8-

[*8] Subsequent Correspondence Between Petitioners, the Appeals Office, and
     the SO

      Petitioners and the SO negotiated a proposed installment agreement

throughout 2013. Petitioners did not propose a written offer-in-compromise. On

June 5, 2013, an Appeals officer issued a decision regarding petitioners’ challenge

to their 2008 and 2009 tax liabilities, and their case was taken out of suspense

status to continue the CDP hearing process. Respondent subsequently accepted

petitioners’ amended 2009 tax return.

      On August 13, 2013, Dr. Morris requested the Appeals Office to send Form

433-D, Installment Agreement, and Form 12257, Summary Notice of

Determination, Waiver of Right to Judicial Review of a Collection Due Process

Determination, and Waiver of Suspension of Levy Action. Dr. Morris wanted to

review these forms for resolution of the case.

      On August 27, 2013, the Appeals Office received notification that

petitioners had filed for bankruptcy with the U.S. Bankruptcy Court for the

Southern District of Mississippi under 11 U.S.C. chapter 7, No. 13-02540-ee.

Petitioners’ case was suspended pending the bankruptcy case outcome. They were

discharged from bankruptcy on December 26, 2013, and as a result of the
                                         -9-

[*9] bankruptcy proceeding respondent abated in full their 2008 tax liability and

additions to tax.

      On April 15, 2014, the SO mailed a letter to petitioners stating that their

CDP hearing had been resumed on account of the bankruptcy discharge and that

they still had outstanding tax liabilities subject to the hearing. In the letter the SO

set the final deadline for petitioners to submit requested documentation for

April 29, 2014. The final deadline was subsequently extended to May 5, 2014.

On May 6, 2014, petitioners provided respondent with documents regarding issues

previously raised and considered during the CDP hearing.

Notice of Determination and Petition to Tax Court

      On May 21, 2014, the Appeals Office issued the notice of determination

sustaining the NFTLs for tax years 2008-10 and 2011, respectively, and the

proposed levy actions for tax years 2009-10 and 2011, respectively. The notice of

determination stated that the NFTLs were appropriate at the time they were filed

and that a collection alternative could not be granted because petitioners would

not agree to the proposed installment agreement. Petitioners timely filed a petition

with this Court.

      Petitioners claim the SO did not take into account the discharge of their

2008 tax liability and overpayment of 2006 tax to calculate monthly payments for
                                         - 10 -

[*10] an installment agreement. They also claim that he refused to negotiate a

new installment agreement and provide a new tax balance showing that the 2008

tax liability was discharged and that their tax liability for 2006 had been overpaid.

      In their petition, petitioners argue that the notice of determination is

erroneous and constitutes an abuse of discretion by respondent because: (1)

petitioners are entitled to first-time penalty abatement; (2) the lien was filed

prematurely; (3) the NFTL caused undue hardship; (4) petitioners are entitled to

abatement of penalties and interest on account of reasonable cause and IRS delay;

(5) petitioners are entitled to a credit for overpayment of 2006 tax; (6) the SO

reviewing their case engaged in abusive practices; (7) the installment agreement

that the SO proposed was not the least intrusive method of collection and would

have created greater hardship; (8) the penalty assessments against petitioners were

in violation of an Internal Revenue Manual (IRM) provision that requires a

manager to approve penalty assessments; and (9) the levy was not the least

intrusive method of collection.

                                      OPINION

I.    Administrative Hearings Under Section 6330

      Section 6301 empowers the Commissioner to collect the taxes imposed by

the internal revenue laws. To further that objective, Congress has provided that
                                        - 11 -

[*11] the Commissioner may effect the collection of taxes by, among other

methods, liens and levies. Pursuant to section 6321, the Federal Government

obtains a lien against “all property and rights to property, whether real or

personal” of any person liable for Federal taxes upon demand for payment and

failure to pay. See Iannone v. Commissioner, 122 T.C. 287, 293 (2004). The lien

arises automatically on the date of assessment and persists until the tax liability is

satisfied or becomes unenforceable by reason of lapse of time. Sec. 6322; Iannone

v. Commissioner, 122 T.C. at 293. Section 6331(a) authorizes the Commissioner

to levy upon all property or property rights of any taxpayer liable for any tax who

neglects or refuses to pay that liability within 10 days after notice and demand for

payment.

      When the Commissioner pursues collection by lien or levy, he must notify

the affected taxpayer in writing of his or her right to a CDP hearing with an

impartial Appeals officer. See secs. 6320(a) and (b) (relating to liens), 6330(a)

and (b) (relating to levies). Where a hearing is requested, whether in response to

an NFTL filing or a proposed levy, the presiding Appeals officer must satisfy the

standards set forth in section 6330. See secs. 6320(c), 6330(c).

      Specifically, as part of the CDP hearing, the Appeals officer must take into

consideration: (1) verification that the requirements of applicable law and
                                        - 12 -

[*12] administrative procedure have been met; (2) relevant issues raised by the

taxpayer concerning the collection action; and (3) whether the proposed collection

action balances the need for the efficient collection of tax with the taxpayer’s

legitimate concern that the collection action be no more intrusive than necessary.

Sec. 6330(c)(3). Relevant issues may include appropriate spousal defenses,

challenges to the appropriateness of the collection action, and potential collection

alternatives such as an installment agreement or an offer-in-compromise. Sec.

6330(c)(2)(A).

II.   Judicial Review

      A determination made by the Appeals Office under section 6330 to sustain a

proposed levy may be reviewed by this Court. Sec. 6330(d)(1); see Rules 330-

334. In general, upon review of a notice of determination sustaining a collection

action the Court will limit its review to those issues properly raised during the

administrative hearing. Giamelli v. Commissioner, 129 T.C. 107, 114-115 (2007);

Magana v. Commissioner, 118 T.C. 488, 493 (2002). Where the validity of the

underlying liability is properly at issue during the hearing, we review that issue de

novo. Sego v. Commissioner, 114 T.C. 604, 610 (2000). We review other

administrative determinations of the Appeals Office for abuse of discretion. Id.
                                         - 13 -

[*13] Section 6330(c)(2)(B) permits challenges to the validity of the underlying

liability in collection proceedings only where the taxpayer did not receive a notice

of deficiency or otherwise have an opportunity to challenge the liability. The

parties agree that petitioners had no prior opportunity before their CDP hearings to

dispute their underlying liabilities and that they are entitled to challenge the

liabilities in this proceeding. See Callahan v. Commissioner, 130 T.C. 44, 50

(2008).

      Petitioners’ underlying liabilities consist of outstanding tax liabilities and

additions to tax. Petitioners challenge their outstanding tax liabilities for tax years

2008-09 and the additions to tax for tax years 2008-11. The parties agree that the

tax liability and the addition to tax for 2008 have been discharged in bankruptcy

and are no longer at issue. The parties also agree that petitioners’ tax liability for

2009 is no longer at issue. The only underlying liabilities at issue are additions to

tax assessed by respondent for failure to timely pay tax for tax years 2009-11.

Accordingly, we review these liabilities de novo. See Sego v. Commissioner, 114

T.C. at 610. Petitioners bear the burden of proof to show error in respondent’s

determinations as to their underlying liabilities, but respondent bears the burden of

production with respect to the additions to tax assessed against petitioners. See

sec. 7491(c); Rule 142(a).
                                         - 14 -

[*14] III.   Petitioners’ Section 6651(a)(2) Additions to Tax for 2009-11

      Respondent assessed section 6651(a)(2) additions to tax for failure to timely

pay tax for tax years 2009-11. Section 6651(a)(2) provides for an addition to tax

when a taxpayer fails to timely pay the tax shown on a return unless the taxpayer

proves that the failure was due to reasonable cause and not due to willful neglect.

Reasonable cause for purposes of section 6651(a)(2) depends upon whether the

taxpayer, notwithstanding the exercise of ordinary business care and prudence,

was in fact unable to pay or would suffer undue hardship if payment were made.

See Ruggeri v. Commissioner, T.C. Memo. 2008-300.

      Respondent submitted sufficient evidence to show that petitioners paid their

tax liabilities untimely for the years at issue and so met his burden of production

under section 7491(c). Petitioners argue they exercised ordinary business care and

prudence but nevertheless suffered undue hardship in attempting to timely pay

their tax liabilities. To support their claim, petitioners rely on provisions in the

IRM that specify situations where reasonable cause may be found. Specifically,

petitioners cite the IRM to contend that notwithstanding the fact they exercised

ordinary business care and prudence they: (1) made a mistake in filing their tax

returns and were unable to comply within the prescribed time; (2) were ignorant of

the law with respect to a specific type of income reported on their return;
                                        - 15 -

[*15] (3) followed advice provided by a tax professional; and (4) followed oral

advice from the IRS. See IRM pt. 20.1.1.3 (Aug. 20, 1998).

       Petitioners have failed to show that they exercised ordinary business care

and prudence. The regulations state that taxpayers will be considered to have

exercised ordinary business care and prudence if they made reasonable efforts to

conserve sufficient assets in marketable form to satisfy their tax liability and

nevertheless were unable to pay all or a portion of the tax when it became due.

See sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Petitioners failed to produce

evidence to show other than their unpersuasive testimony that they tried to timely

satisfy their tax liabilities.

       Although we do not doubt that petitioners suffered financial difficulties

during the years at issue, we cannot determine on the basis of the record whether

they made reasonable efforts to satisfy their tax liabilities notwithstanding these

difficulties. Petitioners may have amended their 2006-09 tax returns multiple

times in an attempt to correct mistakes reporting funds received as part of Dr.

Morris’ physicians recruitment contract, but these attempts occurred after the

payments for these years were due. Similarly, their bankruptcy filing occurred

almost a year after the last of their payments for 2009-11, the years at issue, were

due. From the record, we cannot determine whether petitioners made an effort to
                                         - 16 -

[*16] conserve assets in 2009-11 before submitting untimely returns. Therefore,

petitioners did not meet their burden of proof to show they exercised ordinary

business care and prudence but nevertheless suffered undue hardship in attempting

to timely pay their tax liabilities for 2009-11. Respondent’s determination is

sustained with respect to this issue.

IV.   Other Issues Reviewed for Abuse of Discretion

      In reviewing a settlement officer’s determination to sustain liens and levies

for abuse of discretion, we will reject the determination only if it is arbitrary,

capricious, or without sound basis in fact or law. See Rule 142; Murphy v.

Commissioner, 125 T.C. 301, 308 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006). We

do not substitute our judgment for that of the settlement officer, and we do not

decide independently whether we believe the lien notices or proposed levy actions

should be withdrawn. See Murphy v. Commissioner, 125 T.C. at 320. Instead, we

consider whether, in the course of making the determination, the SO (1) verified

that the requirements of applicable law and administrative procedure have been

met,4 (2) considered any relevant issue raised by the taxpayer that relates to the

      4
        In Dinino v. Commissioner, T.C. Memo. 2009-284, we indicated that we
need not consider the verification requirement unless the taxpayer adequately
raised it in the petition. Although petitioners did not explicitly challenge the
verification requirement in their petition, we believe their argument that the lien
                                                                         (continued...)
                                        - 17 -

[*17] unpaid tax or the proposed lien and levy actions, and (3) determined whether

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

taxes with the legitimate concern of the person that any collection action be no

more intrusive than necessary. Sec. 6330(c)(1)-(3).

      Petitioners raised several issues during their CDP hearing, including

collection alternatives, lien withdrawal, lien discharge, lien subordination,

challenges to the appropriateness of the collection action, and challenges to their

underlying liabilities. Petitioners also requested penalty abatement, including

first-time penalty abatement, based on reasonable cause for ignorance of the law

and following the advice of a tax return preparer.

      Petitioners chiefly contend that the NFTLs and the proposed levy actions

hamper their ability to pay their tax liabilities and prevent Dr. Morris from

pursuing employment. The record indicates that the SO considered lien relief

measures and discussed steps for petitioners to take to apply for such relief.

Petitioners did not follow the SO’s advice, did not provide additional

documentation for the SO to consider with respect to their ability to pay, and did




      4
        (...continued)
was filed prematurely and in violation of the IRM is sufficient to properly raise the
verification requirement.
                                         - 18 -

[*18] not establish the appropriateness of a withdrawal of the NFTL or a

subordination of the lien or a discharge of the property subject to the lien.

      When a Federal tax lien is in place, the IRS is permitted to withdraw the

notice of Federal tax lien under four situations, including where “the withdrawal

of such notice will facilitate the collection of the tax liability” or “the withdrawal

of such notice would be in the best interests of the taxpayer * * * and the United

States.” Sec. 6323(j). The IRS may also subordinate a tax lien on specific

property by issuing a certificate of subordination. Sec. 6325(d). Somewhat

similarly, the IRS may also issue a certificate of discharge of any part of a

property subject to a Federal tax lien without full payment being required. Sec.

6325(b)(1)-(3).

      All three of these lien relief measures, as expressed in statutes and

regulations, are permissive, and the IRS is generally not required to withdraw,

subordinate, or discharge even if the conditions of a measure are fully met. See,

e.g., Taggart v. Commissioner, T.C. Memo. 2013-113, at *16-*17 (“Section

6323(j) uses discretionary, not mandatory, language, and respondent is not

required to withdraw the lien even for one of the reasons stated in section

6323(j)”); sec. 301.6325-1(b)(1), Proced. & Admin. Regs. (providing that an

appropriate official may, in his or her discretion, issue a certificate of discharge of
                                         - 19 -

[*19] any part of a subject property under certain circumstances); sec. 301.6325-

1(d)(1), Proced. & Admin. Regs. (providing that an appropriate official may, in his

or her discretion, issue a certificate of subordination of a lien under certain

circumstances). Accordingly, we cannot conclude that the settlement officer

abused his discretion with regard to these permissive lien relief measures,

especially in the light of petitioners’ failure to provide relevant information during

the CDP hearings.

      In their petition and at trial petitioners provided other contentions for

finding that the notice of determination was erroneous and constitutes an abuse of

discretion by respondent. Many of these arguments hinge on the process by which

the lien notices were filed. Rather than address each argument separately, we note

that petitioners have failed to carry their burden with respect to these issues. For

example, petitioners’ request for first-time penalty abatement generally requires

not having penalty reversals in the preceding three years and having reasonable

cause for failure to pay tax. See IRM pt. 20.1.1.3.6.1 (Aug. 5, 2014). In the notice

of determination, respondent states that petitioners’ account transcript for 2007

contained penalty reversals and petitioners did not show reasonable cause for their

failure to pay. Although there are limited exceptions to the general rule for
                                       - 20 -

[*20] first-time penalty abatement, petitioners did not provide sufficient evidence

to dispute respondent’s determination with respect to this issue.

      For some of their contentions--such as their claim that the assessments were

in violation of an IRM provision that requires a manager to approve penalty

assessments--petitioners provided no evidence to show that this was the case.

Even if respondent failed to comply with the provisions of the IRM, those

provisions are simply intraagency operating procedures; they are not judicially

enforceable against the agency. First Ala. Bank, N.A. v. United States, 981 F.2d

1226, 1230 n.5 (11th Cir. 1993); see also Valen Mfg. Co. v. United States, 90 F.3d

1190, 1194 (6th Cir. 1996); United States v. Horne, 714 F.2d 206, 207 (1st Cir.

1983). The procedures in the IRM do not confer rights on taxpayers. Horne, 714

F.2d at 207; United States v. Mapp, 561 F.2d 685, 690 (7th Cir. 1977). In any

event, we conclude the rules were not violated.

      Finally, petitioners assert that they have an overpayment available from tax

year 2006 that should be applied against their liabilities for 2009-11. Contrary to

their assertions, their alleged overpayment represents a mere claim of an

overpayment that was subsequently denied by the IRS. This Court lacks

jurisdiction to adjudicate such an overpayment claim in this collection proceeding.
                                        - 21 -

[*21] See Weber v. Commissioner, 138 T.C. 348, 371-372 (2012); Greene-

Thapedi v. Commissioner, 126 T.C. 1, 13 (2006).

      On the basis of the record, we find that the SO verified that the requirements

of applicable law and administrative procedure were followed and that in

sustaining the filing of the NFTLs and proposed levy actions the SO properly

balanced “the need for the efficient collection of taxes with the legitimate concern

of * * * [petitioners] that any collection action be no more intrusive than

necessary.” See sec. 6330(c)(3). For these reasons, respondent did not err in

sustaining the filing of the NFTLs and the proposed levy actions.

      We have considered the other arguments of the parties, and they are not

material to our conclusions.

      To reflect the foregoing,


                                                 Decision will be entered

                                       for respondent.
