                               T.C. Memo. 2012-131



                         UNITED STATES TAX COURT



   FARID FARHOUMAND AND SONYA S. FARHOUMAND, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 12540-08L.                          Filed May 8, 2012.



      Arthur H. Boelter, for petitioners.

      Melissa L. Hilty, for respondent.



                           MEMORANDUM OPINION


      MARVEL, Judge: Pursuant to section 6330(d), petitioners seek review of

respondent’s determination to proceed with the collection of their 2000 Federal
                                         -2-

income tax liability.1 This matter was submitted fully stipulated under Rule 122 on

January 31, 2011. Subsequently, on January 19, 2012, respondent filed a motion to

dismiss for lack of jurisdiction which remains before the Court and which, if

granted, could eliminate the need for any further ruling on the merits pursuant to the

Rule 122 submission. The issues for decision are: (1) whether the Court has

jurisdiction to consider petitioners’ challenge to the section 6654(a) addition to tax

for failure to pay estimated tax for 2000 (section 6654(a) addition to tax); (2)

whether petitioners are entitled to a waiver of the section 6654(a) addition to tax for

2000; and (3) whether respondent abused his discretion when he sustained the

proposed levy.

                                     Background

      As noted above, the parties submitted this case fully stipulated under Rule

122. We incorporate the stipulated facts herein by this reference. Petitioners

resided in Indiana when they filed their petition.

      Farid Farhoumand is a stockbroker and investment consultant. His wife,

Sonya S. Farhoumand, does not work outside the home.



      1
       Unless otherwise indicated, section references are to the Internal Revenue
Code (Code) for the relevant period, and Rule references are to the Tax Court Rules
of Practice and Procedure.
                                        -3-

      At various times throughout 2000 Mr. Farhoumand purchased and sold

stocks. His stock transactions generated a net loss of approximately $3 million.

When Mr. Farhoumand met with a tax adviser to have petitioners’ 2000 return

prepared, he discovered that they could deduct only $3,000 of the capital losses

against ordinary income because of the limitations on claiming capital losses. See

sec. 1211(b).

      On November 2, 2001, petitioners filed their joint Form 1040, U.S. Individual

Income Tax Return, for 2000, reporting income of $1,487,577 and tax due of

$589,211. Petitioners’ total estimated income tax for 2000 was $502,604, to be

paid in quarterly installments of $125,651 each on April 15, June 15, and September

15, 2000, and January 15, 2001. Petitioners failed to make any of those payments.

      The Form 4340, Certificate of Assessments, Payments and Other Specified

Matters, for petitioners’ tax account for 2000 shows the following assessments and

payments or credits, as of December 4, 2006:
                                        -4-

   Date                 Explanation                Assessments     Payments/Credits

 11/2/01      Prompt assessment                    $559,026.00            ---
 11/2/01      Sec. 6651(a)(1) addition to tax       125,780.85            ---
 11/2/01      Sec. 6654(a) addition to tax           30,066.88            ---
 11/2/01      Interest                               28,393.83            ---
 4/15/03      Overpaid credit applied                   ---            $35,877.55
 10/17/03     Overpaid credit applied                   ---             75,027.00
 12/22/03     Overpaid credit applied                   ---             34,860.42
 6/22/06      Payment                                    ---           559,815.00
 10/19/06     Overpayment applied                       ---              5,474.23
 2006         Sec. 6651(a)(1) addition to tax
               abated                              (125,780.85)            ---
 12/4/06      Sec. 6651(a)(2) addition to tax        93,567.49             ---
  Total                                             711,054.20         711,054.20

      Although petitioners’ tax account appears fully paid as of December 4, 2006,

we infer from the record that respondent’s assessment of the addition to tax under

section 6651(a)(2) for failure to pay the amount shown as tax on the return (section

6651(a)(2) addition to tax) for 2000 was only a partial assessment of the section

6651(a)(2) addition to tax due from petitioners. On June 18, 2007, respondent

assessed an additional section 6651(a)(2) addition to tax for 2000 of $44,574.52.

Respondent did not send petitioners a notice of deficiency.

      On August 22, 2007, petitioners mailed respondent a letter requesting that

respondent waive the section 6654(a) addition to tax of $30,036 (plus interest)

under section 6654(e)(3). In the attached memorandum petitioners explained that

they had failed to pay the required installments of estimated tax because the losses
                                         -5-

from Mr. Farhoumand’s stock trades were attributable to “one of the most

extraordinary collapses in the history of the stock market”, that the losses continued

throughout the year, and that they believed that because of these losses they could

not possibly owe any income tax for 2000. Petitioners also explained that they had

no money to pay installments of estimated tax.

      On September 3, 2007, respondent mailed to petitioners a Letter 1058, Final

Notice of Intent to Levy and Notice of Your Right to a Hearing, for 2000 (final

notice). The final notice showed that respondent had assessed the section

6651(a)(2) addition to tax of $44,574.52 and interest and that the total amount due

was $195,719.13.2 Petitioners timely submitted a Form 12153, Request for a

Collection Due Process or Equivalent Hearing. In their request petitioners

acknowledged that they owed income taxes for 2000 but explained that they had

requested a waiver of the section 6654(a) addition to tax, which, if accepted, would

have reduced the tax due to approximately $150,000. They also requested

additional time to borrow money to pay their overdue taxes.




      2
       The final notice shows the assessed balance of $44,574.52, accrued interest
of $164,284.90, and a credit with respect to the sec. 6651(a)(2) addition to tax of
$13,140.29, for the total amount of $195,719.13. We infer from the record that as
of March 26, 2009, the date of the Form 4340, additional interest of $164,284.90
had accrued but had not yet been assessed.
                                         -6-

      On January 9, 2008, Settlement Officer Joyce A. Daniels mailed petitioners a

letter scheduling a telephone hearing for January 31, 2008. She requested that

petitioners provide a completed Form 433-A, Collection Information Statement for

Wage Earners and Self-Employed Individuals, or Form 433-B, Collection

Information Statement for Businesses. Petitioners’ attorney, Arthur H. Boelter, who

resides and practices in Seattle, Washington, requested that the case be transferred

to the Appeals Office in Seattle for a face-to-face hearing, which he wanted to

attend on their behalf.

      Having determined that a face-to-face hearing could take place only at the

Appeals Office closest to petitioners’ place of residence, the Internal Revenue

Service (IRS) transferred the case file to Indiana. On March 5, 2008, Settlement

Officer Mark L. Grzesiowski mailed petitioners a letter scheduling a telephone

hearing for April 2, 2008, which was subsequently rescheduled to April 9, 2008.

Settlement Officer Grzesiowski requested that petitioners provide a completed

Form 433-A or Form 433-B and proof of estimated tax payments for 2007. On

March 11 and 19, 2008, Mr. Boelter faxed letters to Settlement Officer

Grzesiowski reiterating the request for a face-to-face hearing in Seattle.

Petitioners did not submit the requested financial information before the hearing,

explaining to Settlement Officer Grzesiowski that they were prepared to pay the
                                          -7-

remaining liability once the IRS waived the section 6654(a) addition to tax. On

March 24, 2008, Settlement Officer Grzesiowski informed Mr. Boelter that a face-

to-face hearing could be held only at an Appeals Office in Indiana, where petitioners

resided.

        On April 9, 2008, a telephone conference was held between Mr. Boelter and

Settlement Officer Grzesiowski. During the hearing Mr. Boelter raised only the

issue of the waiver of the section 6654(a) addition to tax.

        On April 29, 2008, respondent sent petitioners a Notice of Determination

Concerning Collection Action(s) Under Section 6320 and/or 6330 for 2000. In the

notice of determination the Appeals Office determined that petitioners did not

qualify for the waiver of the section 6654(a) addition to tax and that it was

appropriate to collect the unpaid tax liability by levy.

        Petitioners timely petitioned this Court. Petitioners then filed a motion for

partial summary judgment, which we denied. After the Court held a conference call

with the parties, respondent filed a motion to dismiss for lack of jurisdiction. See

infra pp. 10-11.

        At any relevant time petitioners had not attained age 62 or become disabled.

Petitioners paid an addition to tax of $12,058 for failing to pay estimated tax for

1999.
                                          -8-

                                      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

hearing shall be held before an impartial officer or employee of the IRS Appeals

Office. 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 Secretary3 that the requirements of

applicable law and administrative procedure have been met, (2) relevant issues


      3
       The term “Secretary” means the Secretary of the Treasury or his delegate.
Sec. 7701(a)(11)(B).
                                          -9-

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

validity of the underlying tax liability is properly at issue, the Court will review the

matter on a de novo basis. Sego v. Commissioner, 114 T.C. at 610; Goza v.

Commissioner, 114 T.C. 176, 181-182 (2000). Where the underlying tax liability is

not in dispute, the Court will review the determination of the Appeals Office for

abuse of discretion. Sego v. Commissioner, 114 T.C. at 610; Goza v.

Commissioner, 114 T.C. at 182. 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).

      Before reviewing the notice of determination, we shall consider respondent’s

motion.4




      4
       The parties addressed the issue described herein upon the Court’s invitation
to do so.
                                        - 10 -

II.   Respondent’s Motion To Dismiss for Lack of Jurisdiction

      A.     The Parties’ Arguments

      In his motion to dismiss respondent contends that this Court lacks

jurisdiction to review the notice of determination with respect to the section

6654(a) addition to tax because he issued the final notice only with respect to the

section 6651(a)(2) addition to tax. In respondent’s view, because the only liability

that he can collect and with respect to which he issued the final notice was the

section 6651(a)(2) addition to tax, the only relevant issue in the section 6330

proceeding and in this Court is the collection of the section 6651(a)(2) addition to

tax. Respondent believes that for this reason the waiver of the section 6654(a)

addition to tax was not validly raised during the section 6330 hearing and

therefore the Court has no jurisdiction to consider any issues regarding the waiver.

Respondent also contends that (1) as of the date of the final notice, petitioners had

paid the section 6654(a) addition to tax and owed no taxes for 2000, rendering any

potential collection of the section 6654(a) addition to tax moot, and (2) under

Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), the Court has no jurisdiction

to consider the section 6654(a) addition to tax on the ground of mootness.
                                          - 11 -

Respondent requests the Court to uphold the notice of determination and allow

respondent to proceed with the levy.5

      Petitioners contend that the entire liability for the taxable year is the subject

of the collection proceeding rather than what the final notice shows. They also

contend that it is irrelevant that a component of the total liability for the taxable year

has been paid because a waiver of the section 6654(a) addition to tax is a method of

paying the liability shown in the final notice. Petitioners distinguish Greene-Thapedi

on the ground that a portion of the liability for the tax year remains unpaid.

      B.     Analysis

      The Tax Court is a court of limited jurisdiction, and we may exercise

jurisdiction only to the extent expressly authorized by Congress. See sec. 7442;

Greene-Thapedi v. Commissioner, 126 T.C. at 6. Our jurisdiction under section

6330(d)(1) depends upon the issuance of a valid notice of determination and the

filing of a timely petition for review. See Orum v. Commissioner, 123 T.C. 1, 8

(2004), aff’d, 412 F.3d 819 (7th Cir. 2005); Sarrell v. Commissioner, 117 T.C. 122,

125 (2001). Respondent issued a notice of determination, and petitioners timely



      5
       Respondent’s request to uphold the notice of determination is inconsistent
with his motion to dismiss for lack of jurisdiction. We construe respondent’s
request to uphold the notice of determination as an alternative position.
                                         - 12 -

filed a petition. Accordingly, we have jurisdiction to review the notice of

determination.

      Under Greene-Thapedi, we may dismiss a case when the proposed levy for

the taxpayer’s tax liability is moot. In Greene-Thapedi v. Commissioner, 126 T.C.

at 7, the proposed levy was moot because the Commissioner acknowledged that

there was no unpaid liability for the determination year upon which a levy could be

based and that he was no longer pursuing the levy. Respondent contends that this

case is similar to Greene-Thapedi because petitioners paid the section 6654(a)

addition to tax and respondent is not pursuing collection of that liability. We

disagree. The proposed levy is not moot because respondent assessed the section

6651(a)(2) addition to tax, issued a final notice and a notice of determination (which

addressed the section 6654(a) addition to tax waiver), and intends to proceed with

the levy. Petitioners are raising an issue which, if we address it, could result in a

determination that the levy may not proceed. Because the collection of the tax

liability for 2000 remains unresolved, we shall not dismiss the case as moot.

      Although respondent styled his motion a motion to dismiss for lack of

jurisdiction, the core of his position is that (1) we may not consider a challenge to

the section 6654(a) addition to tax because it is not the liability that respondent
                                          - 13 -

assessed and is attempting to collect by levy, and (2) petitioners raise no argument

that we may properly consider. We disagree for several reasons.

      First, petitioners raise an issue that is relevant to the unpaid tax and the

proposed levy. Section 6330(c)(2) allows the taxpayer to raise any relevant issue

relating to the unpaid tax or the proposed levy during the section 6330 hearing.6 In

Freije v. Commissioner, 125 T.C. 14, 26 (2005), we stated that Congress intended a

broad construction of what issues a taxpayer was entitled to raise in a section 6330

hearing. Petitioners’ argument that they are not liable for an addition to tax that

respondent had assessed and they had paid, even if different from the one shown in

the final notice, is a relevant issue because it affects the amount of tax that

respondent is entitled to collect for the determination year. Cf. id. at 26-27.

      Second, we view petitioners’ request for a waiver of the section 6654(a)

addition to tax as a challenge to the underlying tax liability, which we may review

de novo because they did not receive a notice of deficiency for 2000. See Sego v.

Commissioner, 114 T.C. at 610. Although section 6330 and regulations thereunder




      6
       Sec. 6330(c)(2) provides several examples of such relevant issues, such as
appropriate spousal defenses, challenges to the appropriateness of the collection
actions, offers of collection alternatives, and, under certain circumstances,
challenges to the existence or amount of the underlying liability.
                                         - 14 -

do not define the phrase “underlying tax liability”, in Montgomery v. Commissioner,

122 T.C. 1, 7 (2004), we interpreted it “as a reference to the amounts that the

Commissioner assessed for a particular tax period.”7 Because the “underlying tax

liability” refers to any amounts assessed for the relevant tax period, the liability not

shown in the final notice is a component of the underlying tax liability and can be

properly challenged in a section 6330 proceeding. Id. Accordingly, we conclude

that petitioners may raise an argument regarding the liability not shown in the final

notice. As follows from the foregoing, we shall deny respondent’s motion to

dismiss for lack of jurisdiction.

III.   Review of the Notice of Determination

       We now address petitioners’ argument that they are not liable for the section

6654(a) addition to tax. The parties agree that petitioners did not receive a notice of

deficiency for 2000. Accordingly, we review respondent’s determination de novo.

See Sego v. Commissioner, 114 T.C. at 610.



       7
        Although in Montgomery v. Commissioner, 122 T.C. 1 (2004), the precise
issue was different from the issue in this case, the facts relevant to the issue at hand
are similar. In Montgomery, the taxpayers not only challenged the $222,315.34
amount specified in the final notice, but they also contended that they had overpaid
their taxes by $519,087. See id. at 11 n.1 (Wells, J., concurring). Accordingly,
both in Montgomery and in the case at hand, the challenged liability concerns an
amount not specified in the final notice.
                                         - 15 -

      Generally, section 7491(c) provides that the Commissioner bears the burden

of production in any court proceeding with respect to the liability of any individual

for any penalty, addition to tax, or additional amount. To satisfy the burden of

production, the Commissioner must produce evidence that imposing the relevant

penalty or addition to tax is appropriate. See Swain v. Commissioner, 118 T.C.

358, 363 (2002). Respondent introduced evidence establishing that petitioners were

required to pay estimated tax but failed to do so.8 This satisfies respondent’s burden

of production under section 7491(c). Accordingly, petitioners bear the burden of

introducing evidence establishing that the imposition of the addition to tax is not

appropriate. See Higbee v. Commissioner, 116 T.C. 438, 447 (2001).

      Section 6654(a) imposes an addition to tax for underpayment of a required

installment of estimated tax. Each required installment of estimated tax is equal to

25% of the “required annual payment”, which in turn is equal to the lesser of (1)

90% of the tax shown on the taxpayer’s return for that year (or, if no return is filed,

90%of his or her tax for such year), or (2) if the taxpayer filed a return for the

immediately preceding taxable year, 100% of the tax shown on that return. Sec.

6654(d)(1)(A) and (B). The addition to tax is imposed regardless of whether


      8
         The parties stipulated that petitioners had an $855,353 Federal income tax
liability for 1999.
                                         - 16 -

there was reasonable cause for the underpayment. Sec. 1.6654-1(a)(1), Income Tax

Regs. The addition to tax under section 6654(a) may be waived if “the Secretary

determines that by reason of casualty, disaster, or other unusual circumstances the

imposition of such addition to tax would be against equity and good conscience.”

Sec. 6654(e)(3)(A).

      Petitioners contend that they qualify for a waiver under section 6654(e)(3).9

They claim that they had negative cashflow every quarter and had no money to pay

estimated tax. They claim that “the bursting of the Dot-Com bubble in 2000”,

which was one of the “most momentous” collapses in stock market history, qualifies

as an unusual circumstance within the meaning of section 6654(e)(3). Petitioners

state that although they had taxable income, “[o]n a profit and loss basis * * * [their]

losses exceeded their income by $2,000,000.” Because they had continuous losses,

they assumed that they had no income and would not owe any income tax for 2000.

However, during the return preparation process petitioners found out that they were

permitted to deduct only $3,000 of their capital loss.10


      9
       The parties stipulated that petitioners do not qualify for any of the other
exceptions to the estimated tax addition to tax under sec. 6654(e).
      10
        Sec. 1211(b) provides that losses from sales or exchanges of capital assets
are allowed only to the extent of the gains from such sales or exchanges, plus the
lower of $3,000 or the excess of such losses over the gains.
                                        - 17 -

      Petitioners also contend that the imposition of the addition to tax would be

against equity and good conscience. Although petitioners recognize that section

6654(a) contains no reasonable cause exception, they contend that several cases

acknowledge that an honest mistake as to tax liability qualifies as reasonable cause

for the section 6651(a)(1) addition to tax and the section 6662(a) penalty, and

therefore the imposition of the section 6654(a) addition to tax would be against

equity and good conscience.

      We disagree. Even if petitioners did not know about the limitations on

deductibility of capital losses under section 1211(b), as of the time when each

payment of estimated tax was due they did not know whether they would have

income or a loss for the full year. They had no way of predicting whether they

would be able to recoup their losses by yearend, and Mr. Farhoumand continued his

investment activity, presumably with the hope of a market turnaround.

      We also reject petitioners’ argument that they had no money to pay estimated

tax because they used money to pay for stock losses. Petitioners did not pay for

stock losses, as they claim. They incurred losses upon selling shares they owned.

Yet they continued to purchase other stocks, instead of using the sale proceeds to
                                        - 18 -

pay estimated tax.11 In addition, petitioners’ estimate that they owe no tax for the

taxable year is irrelevant because the Code does not provide for the reasonable

cause defense for the section 6654(a) addition to tax, see, e.g., Wolfgram v.

Commissioner, T.C. Memo. 2010-69, nor would the imposition of the section

6654(a) addition to tax be against equity and good conscience under the

circumstances of this case. Lastly, we disagree that the stock market volatility is an

unusual circumstance. Accordingly, we conclude that petitioners do not qualify for

a waiver under section 6654(e)(3).

      During the hearing petitioners did not offer collection alternatives, and in this

proceeding they have not pursued any argument or presented any evidence that

would allow us to conclude that the determination to sustain the levy was arbitrary,

capricious, without foundation in fact or law, or otherwise an abuse of discretion.

The Appeals Office verified that all requirements of applicable law or administrative

      11
         Petitioners’ select stock purchases show that they had sufficient funds to
continue to buy stocks. On April 10, 2000, the week that petitioners’ first
installment of estimated tax of $125,651 was due, they purchased several blocs of
shares of Cisco Systems, Inc., and shares of Rydex Series Trust. The cost of one
bloc of shares of Cisco Systems, Inc., was $367,574 (later sold at a loss for
$261,517). On June 5, 2000, around the time when the second installment of
$125,651 was due, petitioners purchased two blocks of stock of Profunds Ultraotc
Invs. for $298,752 and $479,880 (sold later in 2000 for $333,598 and $472,253,
respectively). On September 29, 2000, around the time the third installment of
$125,651 was due, petitioners bought stock of Rambus, Inc., for $399,818 (later
sold at a loss for $265,254).
                                         - 19 -

procedure were met. The Appeals Office concluded that the levy balanced the need

for efficient collection of taxes with petitioners’ concerns that the collection action

be no more intrusive than necessary. Accordingly, we conclude that respondent did

not abuse his discretion in sustaining the levy.

      We have considered all of the arguments raised by either party, and to the

extent not discussed above, we find them to be irrelevant, moot, or without merit.

      To reflect the foregoing,


                                                  An appropriate order denying

                                         respondent’s motion to dismiss for lack of

                                         jurisdiction will be issued, and decision will

                                         be entered for respondent.
