                         T.C. Memo. 2007-325



                       UNITED STATES TAX COURT



                   CARL KLEIN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket Nos. 7162-06L, 7163-06L.     Filed October 30, 2007.



    Robert E. McKenzie and Kathleen M. Lach, for petitioner.

    Gregory J. Stull and Gorica B. Djuraskovic, for respondent.



                         MEMORANDUM OPINION


     JACOBS, Judge:1   The petitions in these consolidated cases

were each filed in response to a Notice of Determination

Concerning Collection Action(s) Under Section 6320 and/or 6330




     1
      These cases were assigned to Judge Julian I. Jacobs for
disposition by order of the Chief Judge on August 20, 2007.
                                    - 2 -

(notice of determination).2       Pursuant to section 6330(d),

petitioner seeks our review of respondent’s determination

upholding the proposed use of a levy to collect petitioner’s

income tax liabilities for tax years 1997, 1998, 1999, and 2000.

The issue for decision is whether respondent’s proposed levy

actions may proceed.

                                 Background

       These consolidated cases were submitted fully stipulated

pursuant to Rule 122.       The case at docket No. 7163-06L pertains

to tax years 1997 and 1998.       The case at docket No. 7162-06L

pertains to tax years 1999 and 2000.          The stipulations of fact

and the attached exhibits are incorporated herein by this

reference.    At the time he filed the petitions, petitioner

resided in Chicago, Illinois.

       Petitioner, who was born in 1946, is an attorney who

practiced law with various Chicago law firms at different times

during the years at issue.       Petitioner filed income tax returns

for the years at issue as follows:

                                                                      Self-Em-
             Date Return                    Adjusted       Income    ployment
             Due (After         Date        Gross Income   Tax per    Tax per
Year         Extensions)    Return Filed    per Return     Return      Return

1997        Oct. 15, 1998   July 25, 2001   $163,286       $25,692    $15,431
1998        Oct. 15, 1999   Aug. 15, 2001    213,864        40,918     16,684



       2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                                     - 3 -
1999         Aug. 15, 2000   Apr. 15, 2003      102,994       47,963      19,208
2000         Aug. 15, 2001   Aug. 28, 2002      151,475       28,949      17,792


       Respondent assessed the tax for each year and demanded

payment for the unpaid balances.3            When petitioner failed to pay

the balances, respondent determined that enforced collection

action would be required.        On November 12, 2003, respondent

mailed petitioner a Letter 1058, Final Notice of Intent to Levy

and Notice of Your Right to a Hearing for 1997 and 1998, and a

separate such notice for 1999 and 2000.4            According to

respondent’s notices of levy, petitioner’s total unpaid tax

liability, including additions to tax and interest, exceeded

$200,000.5    In response to each notice of levy, petitioner, by

means of a Form 12153, Request For a Collection Due Process

Hearing, timely requested a hearing under section 6330.                In his

requests for a hearing, petitioner claimed:               (1) He was entitled

to abatement of the “penalties”6 assessed against him because he


       3
      Respondent assessed $1,337 of additional tax for 1997 in
May of 2003 and $1,927 of additional tax for 2000 in December of
2003. By the time he filed the petitions, petitioner had paid
approximately $30,700 of his tax liability for the 4 years in
issue.
       4
      On or about Nov. 14, 2003, a Federal tax lien was obtained
on petitioner’s property with respect to all tax years at issue.
Petitioner does not contest the propriety of the tax lien filing.
       5
      The income tax assessments include additions to tax under
sec. 6651(a)(1) and (2) for all tax years at issue and under sec.
6654 for 1997, 1998, and 1999.
       6
        References to penalties in various places in the record
                                                      (continued...)
                               - 4 -

had reasonable cause for his failure to pay the taxes; (2) the

Internal Revenue Service (IRS) should have accepted his offer-in-

compromise based on doubt as to collectibility because of the

possibility of discharge of his taxes in the event he filed for

bankruptcy; and (3) alternatively, in the event his offer-in-

compromise was not accepted, the IRS should have allowed him to

pay his tax liability in installments.

     Petitioner’s section 6330 hearing was conducted by means of

a face-to-face meeting, correspondence, and telephone

conversations with a settlement officer in respondent’s Appeals

Office (the settlement officer).   On November 2, 2004, the IRS

received petitioner’s offer to compromise his total tax liability

for 1997, 1998, 1999, 2000, and 2001 for $70,000.7   On December 8,

2005, following petitioner’s submission of additional information

in response to requests by respondent, the settlement officer

advised petitioner that petitioner was ineligible for an offer-

in-compromise because petitioner had the ability to fully pay his

income tax liability over 48 months.   On December 22, 2005, the

settlement officer wrote a letter to petitioner explaining, among

other things:   (1) That petitioner had not as yet provided any


     6
      (...continued)
actually are to additions to tax under sec. 6651(a)(1) and (2)
and sec. 6654. References in this opinion to additions to tax
relate to one or more, as appropriate. Petitioner does not seek
abatement of interest.
     7
      Tax year 2001 is not at issue herein.
                                - 5 -

verification of reasonable cause for abatement of additions to

tax and that respondent would assume that there was none unless

such was provided within the next 15 days; (2) that consideration

of petitioner’s bankruptcy assertion must be made in the light of

the new bankruptcy laws which take “a harder look at future

income than the old law did”.   The settlement officer noted that

“You have significant income potential, as you have displayed

through past performance, and I do not think that you would avoid

paying all the taxes if you file [for bankruptcy]”; and (3) that

if petitioner wished to enter into an installment agreement, he

should, through his representatives, contact respondent within 15

days.

     Petitioner responded to the settlement officer’s December

22, 2005, letter by reiterating his position that respondent had

not given adequate consideration to his potential bankruptcy

because respondent had not considered that his future earnings

were uncertain because petitioner was aging and was at that time

practicing law without associates and without a formal office or

support staff.   In addition, petitioner contested the settlement

officer’s calculation of petitioner’s realizable collection

potential, claiming that increased allowances should have been

made for petitioner’s basic living expenses.   Petitioner did not

attempt to enter into an installment agreement and did not

respond to the invitation to submit verification of reasonable
                                - 6 -

cause for abatement of the additions to tax.    The settlement

officer ultimately recommended rejection of petitioner’s offer-

in-compromise, and on March 15, 2006, respondent’s Appeals Office

issued notices of determination sustaining the levy actions for

the tax years in issue.

     Petitioner timely filed his petitions, in which he seeks

review of respondent’s determinations.     Petitioner contends that

respondent acted impermissibly:    (1) In denying petitioner’s

requests for abatement of additions to tax, (2) in rejecting

petitioner’s offer-in-compromise, and (3) in sustaining the

proposed levy actions.

                              Discussion

     The parties are not at odds regarding the technical

provisions of section 6330.    Further, petitioner does not claim

that respondent failed to satisfy any of the mechanical or

procedural obligations contemplated by that statute.    Nor does

petitioner contest the propriety of the assessments of tax as a

procedural matter.    Consequently, we immediately turn our

attention to petitioner’s complaints and begin with his first

contention that respondent acted impermissibly in denying

petitioner’s requests for abatement of additions to tax due to

reasonable cause.    We construe petitioner’s position in this

regard to be that he should not be held liable for the additions

to tax.
                                 - 7 -

     Section 6330(c)(2)(B) provides that a person may challenge

“the existence or amount of the underlying tax liability for any

tax period if the person did not receive any statutory notice of

deficiency for such tax liability or did not otherwise have an

opportunity to dispute such tax liability.”    Petitioner did not

receive a notice of deficiency for 1998 or for 1999 or otherwise

have an opportunity to dispute those additions.    Therefore,

petitioner is entitled to challenge the existence or amount of

the tax liabilities with respect to those returns, which he did

in his section 6330 hearing.     See Montgomery v. Commissioner, 122

T.C. 1 (2004).   We review de novo respondent’s determinations

with respect to 1998 and 1999.    See Davis v. Commissioner, 115

T.C. 35, 39 (2000); Goza v. Commissioner, 114 T.C. 176, 181

(2000).

     The record is not entirely clear as to whether petitioner

received a statutory notice of deficiency for 1997 or for 2000,

and if he did, the extent to which additions to tax were

determined therein.   Assuming they are subject to review, and

regardless of which standard we use to review respondent’s

determinations (de novo or for an abuse of discretion), we find

no basis on which to relieve petitioner from liability for any of

the additions to tax.

    The Commissioner bears the burden of production regarding the

additions to tax.   Sec. 7491(c); Higbee v. Commissioner, 116 T.C.
                               - 8 -

438 (2001).   In order to meet this burden, the Commissioner must

produce sufficient evidence indicating that it is appropriate to

impose an addition to tax.   Higbee v. Commissioner, supra at 446.

Once the Commissioner has met this burden, the taxpayer must come

forward with evidence sufficient to persuade the Court that the

Commissioner’s determination is incorrect or an exception

applies.   Id. at 447.

     As relevant here, in general, section 6651(a)(1) provides

for an addition to tax that can amount to 25 percent of the tax

(net amount) required to be shown on the return if the return is

filed more than 4 months after the due date of the return,

including extensions.8   See sec. 6651(b).   Section 6651(a)(2), in

general, provides for an addition to tax that can amount to 25

percent of the unpaid portion of the tax shown on a return if the

unpaid portion remains unpaid for more than 49 months after the

tax is due to be paid.   A taxpayer can be absolved of liability

from the aforementioned additions to tax if the taxpayer

demonstrates that the failure to file, or the failure to pay, as

appropriate, is due to reasonable cause and not due to willful

neglect.   Sec. 6651(a); Higbee v. Commissioner, supra.

     Reasonable cause for the failure to file a return may be

shown where the taxpayer has made a satisfactory showing that he



     8
      Where the sec. 6651(a)(2) addition also applies, the sec.
6651(a)(2) addition is reduced as provided in sec. 6651(c)(1).
                               - 9 -

exercised ordinary business care and prudence but nevertheless

was unable to file the return within the prescribed time.

Reasonable cause for the failure to pay the tax may be shown

where the taxpayer has made a satisfactory showing that he

exercised ordinary business care and prudence in providing for

payment of his tax liability and was nevertheless either unable

to pay the tax or would suffer an undue hardship if he paid on

the due date.   Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

     Petitioner does not dispute that he filed his returns late

and that the taxes shown on the returns remained unpaid as

reflected in respondent’s records.     Petitioner contends that his

failure to file returns timely and timely pay taxes was due to

personal circumstances during the years at issue and that these

circumstances constituted reasonable cause for purposes of

section 6651(a).   Specifically, petitioner claims that his


     marriage was ending, the firms he was associated with were
     collapsing around him, or not following through on promised
     remuneration, and he was in the midst of a significantly
     over-budget rehabilitation project on a dream home that
     almost immediately upon completion he was forced to sell due
     to the divorce. This occurred all while trying to assure
     his family’s needs were met.


     The record shows that petitioner requested extensions of

time to file in each of the tax years at issue.    Thus, there is
                              - 10 -

no doubt but that petitioner knew of his obligation to file

returns and knew the dates on which they were due.   Moreover, he

knew that he had an unpaid tax liability.

     In spite of the personal adversity he encountered,

petitioner succeeded in generating substantial income for the

years at issue and apparently chose to spend this income to

maintain an elevated lifestyle and to “assure his family needs

were met”9 as opposed to paying his taxes.   Petitioner is an

attorney and obviously knew he had an obligation to obey the tax

laws, including the obligation to file timely returns and pay the

taxes when due.   The obstacles petitioner describes simply do not

rise to a level amounting to reasonable cause.   After reviewing

the record and applying the de novo standard of review for all

years at issue, we hold that petitioner is liable for the

additions to tax under section 6651(a)(1) and (2) for all of the

years at issue.

     Section 6654(a) imposes an addition to tax for failure to

pay estimated income tax where prepayments of such tax, either

through withholding or by making estimated quarterly tax payments



     9
      In response to a question on Form 433-A, Collection
Information Statement for Wage Earners and Self-Employed
Individuals, requesting a list of “the dependents you can claim
on your tax return”, petitioner listed his son aged 24 and his
daughter aged 22, neither of whom lived with him. Petitioner
signed and dated the Form 433-A on Oct. 25, 2004. In
petitioner’s 2003 tax return, dated Oct. 14, 2004, neither child
(or anyone else) had been claimed as a dependent.
                              - 11 -

during the course of the year, do not equal the percentage of

total liability required under the statute.   The amount required

to be paid through each such estimated quarterly payment is 25

percent of the required annual payment.   Sec. 6654(d)(1)(A).   The

required annual payment is, in turn, the lesser of 90 percent of

the tax shown on the return for that taxable year or 100 percent

of the tax shown on the return for the preceding taxable year (or

a greater percent for individuals with adjusted gross income

exceeding $150,000).   Sec. 6654(d)(1)(B) and (C).   There is no

broadly applicable reasonable cause exception to the section 6654

addition to tax.

     The record shows that petitioner did not make sufficient

estimated tax payments for 1997, 1998, or 1999, the years for

which respondent seeks to impose the section 6654 addition.     None

of the statutory exceptions to imposition of the addition

applies.   We conclude that respondent has met his burden of

production under section 7491(c) regarding petitioner’s liability

for the additions to tax under section 6654 and that petitioner

is liable for those additions.10




     10
      The parties stipulated that “petitioner filed an income
tax return for 1996, reporting tax liability in the amount of
$29,980.” In addition, for 1996, petitioner reported self-
employment tax of $15,430.
                              - 12 -

     Petitioner’s second contention is that respondent abused his

discretion in rejecting petitioner’s offer-in-compromise on the

basis of doubt as to its collectibility.

     Section 7122(a) authorizes the Secretary to compromise any

civil case arising under the internal revenue laws and requires

him to prescribe guidelines for officers and employees of the

IRS to determine whether an offer-in-compromise is adequate and

should be accepted to resolve a dispute.   Sec. 7122(a), (c)(1).

     The contemplated guidelines and schedules pertaining to

evaluating offers-in-compromise on the basis of collectibility

have been published in the regulations interpreting section 7122.

See sec. 301.7122-1(c)(2), Proced. & Admin. Regs.; 1

Administration, Internal Revenue Manual (CCH), sec. 5.8.4.4 at

16,306.   Under this administrative guidance, the Secretary will

generally compromise a liability on the basis of doubt as to

collectibility only if the liability exceeds the taxpayer’s

reasonable collection potential.   Cf. Murphy v. Commissioner, 125

T.C. 301, 308-310 (2005), affd. 469 F.3d 27 (1st Cir. 2006).    A

taxpayer’s reasonable collection potential is determined, in

part, using the published guidelines for certain national and

local allowances for basic living expenses and essentially

treating income and assets in excess of those needed for basic

living expenses as available to satisfy Federal income tax

liabilities.   See 2 Administration, Internal Revenue Manual
                              - 13 -

(CCH), exh. 5.15.1-3 at 17,668, exh. 5.15.1-8 at 17,686, exh.

5.15.1-9 at 17,742.   Application of the standard allowances for

housing and utility expenses (rather than the taxpayer’s actual

expenses) is not an abuse of discretion where use of the standard

allowances does not result in the taxpayer’s not having adequate

means to provide for basic living expenses.    See McDonough v.

Commissioner, T.C. Memo. 2006-234.

     The foregoing formulaic approach is disregarded, however,

upon a showing by the taxpayer of special circumstances that may

cause an offer to be accepted notwithstanding that it is for less

than the taxpayer’s reasonable collection potential (e.g., the

taxpayer is incapable of earning a living because of a long-term

illness, and it is reasonably foreseeable that the taxpayer’s

financial resources will be exhausted providing for care and

support during the course of the condition).   Sec. 301.7122-

1(b)(3), (c)(3), Proced. & Admin. Regs.; 1 Administration,

Internal Revenue Manual (CCH), sec. 5.8.11.2.1 at 16,375, sec.

5.8.11.2.2 at 16,377.   Petitioner does not allege, and it does

not appear, that any such special circumstances are present.

     According to petitioner, respondent did not properly apply

the published guidelines because he failed to make an allowance

for petitioner’s basic living expenses which were greater than

that indicated in the published guidelines.    Petitioner contends

that a greater amount should have been allowed to reflect the
                              - 14 -

cost of his living in the downtown Chicago area because of his

need to entertain clients in his home.   Further, petitioner

claims that respondent failed to evaluate petitioner’s option to

file for bankruptcy and the potential discharge of some of the

taxes that respondent seeks to collect by levy.

     Respondent, in applying the published guidelines, allowed

petitioner $2,474 per month for basic living expenses, which

petitioner agrees was substantially the same as the amount

provided for under the published guidelines.11    When subtracted

from the $22,000 gross monthly income that petitioner disclosed

in his offer-in-compromise, and in the light of respondent’s

records which showed that petitioner had $302,400 in wages and

$13,400 in nonemployee compensation for tax year 2004,12

respondent concluded that petitioner would be able to pay his by-

then $252,462 tax liability in full over 48 months.

     We agree with respondent that petitioner had sufficient

income to meet his basic living expenses as well as to pay his

tax liability in full.   Petitioner basically wants the Government


     11
      Respondent allowed $194 per month for transportation; it
appears that the published guidelines allow $329, or a similar
amount, for ownership of one car in Chicago. Petitioner contends
that he should be allowed “the actual expense for his car loan
($870 per month)” instead.
     12
      The record shows that respondent did not consider the
value of dissipated assets in evaluating petitioner’s offer-in-
compromise, although respondent was concerned that such
consideration might have been warranted. See 1 Administration,
Internal Revenue Manual (CCH), sec. 5.8.5.4. at 16,339-6.
                                - 15 -

to permit him to use his current and expected future earnings to

maintain a lifestyle more lavish than the standard for the

Chicago area (petitioner’s living expenses are more than twice

those of the average national and local standards) plus $4,000

per month for “business expenses” without having to fully satisfy

his past due tax obligations.    The record does not disclose any

special circumstances that warrant acceptance of petitioner’s

offer-in-compromise ($70,000 to extinguish a tax liability over

$200,000).

     As for the impact that petitioner’s bankruptcy might have

had on respondent’s considerations, respondent contends that he

applied the provisions of the Internal Revenue Manual, which

advises:

     When a taxpayer threatens bankruptcy, the impact of
     bankruptcy on the Service’s ability to collect must be
     considered. If the Offer Investigator believes, based upon
     factual information, that the taxpayer is seriously
     considering filing bankruptcy, the employee should discuss
     the benefits of filing an administrative offer instead. [1
     Administration, Internal Revenue Manual (CCH), sec.
     5.8.10.2.2(1), at 16,367.]

     The record shows that respondent considered the possibility

that petitioner might file a petition in bankruptcy.

Respondent’s correspondence to petitioner is specific in

explaining that petitioner had the ability to pay his total tax

liability in full and “in light of the recently passed bankruptcy

law which takes more into consideration an individual’s income

production”, respondent did not believe that petitioner would be
                              - 16 -

able to avoid paying the total tax liability by filing for

bankruptcy.   In other words, respondent believed that the impact

of petitioner’s filing for bankruptcy on respondent’s ability to

collect petitioner’s unpaid tax would be minimal.    We are not

prepared to find that respondent’s rejection of petitioner’s

offer-in-compromise was arbitrary, capricious, or without sound

basis in fact or law.

     On the basis of this record, we conclude that petitioner is

liable for the additions to tax as determined by respondent for

all years at issue and that respondent did not abuse his

discretion in rejecting petitioner’s offer-in-compromise.

Respondent’s determination that the Federal tax levies were

appropriate in these cases is sustained.

     To reflect the foregoing,


                                      Decisions will be entered

                                 for respondent.
