                  T.C. Summary Opinion 2005-25



                     UNITED STATES TAX COURT



         DAVID RAY AND LINDA LEE HARRIS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6711-03S.             Filed March 3, 2005.


     David Ray and Linda Lee Harris, pro sese.

     Albert B. Kerkhove, for respondent.



     GOLDBERG, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code.

     The petition in this case was filed in response to a Notice

of Determination Concerning Collection Action(s) Under Section
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6320 and/or 6330 (the notice).    Petitioners seek review of the

determination to proceed with collection of their tax liabilities

for 1994, 1995, 1996, 1997, and 1999.     The issue for decision is

whether respondent may proceed with collection action as

determined in the notice.

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

The stipulation of facts and the attached exhibits thereto are

incorporated herein by this reference.    Petitioners resided in

Des Moines, Iowa, on the date the petition was filed in this

case.   Petitioners appeared before the Court; however, only David

Ray Harris (petitioner) testified.

                             Background

     Between 1987 and 1990, petitioners started experiencing

financial difficulties.    During this time, petitioners put their

house in La Porte City, Iowa, up for sale.    However, after the

house did not sell as petitioners had expected, their mortgage on

the house was foreclosed.    Petitioners explained their situation

to the Veterans’ Administration, which had guaranteed the

mortgage on the house.    The Veterans’ Administration forgave

petitioners’ indebtedness on the mortgage in the amount of

$27,500.   The Veterans’ Administration also informed petitioners

that such forgiveness of debt can be considered income under the

Internal Revenue Code.    Therefore, petitioners reported that

income on their 1990 Federal income tax return.
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      Petitioners’ 1990 Federal income tax return reported tax of

$7,462, withholding credits of $1,068, and a balance due of

$6,394.   Petitioners made a subsequent payment of $1,936 which

reduced their balance due to $4,458.    On May 4, 1992, respondent

assessed the tax reported by petitioners on their 1990 return,

along with penalties and interest.     However, petitioners failed

to pay the amount due.

     Petitioners’ 1991 Federal income tax return reported tax of

$1,905, withholding credits of $436, an earned income credit of

$203, and a balance due of $1,266.     On June 1, 1992, respondent

assessed the tax reported by petitioners on their 1991 return,

along with interest.   However, petitioners failed to pay the

amount due.

     Petitioners’ 1992 Federal income tax return reported tax of

$2,137, withholding credits of $705, and a balance due of $1,432.

On June 7, 1993, respondent assessed the tax reported by

petitioners in their 1992 return, along with penalties and

interest.   However, petitioners failed to pay the amount due.

     During 1993, petitioners and respondent agreed to an

installment agreement with regard to taxable years 1990, 1991,

and 1992.   This agreement required petitioners to make monthly

installment payments in an attempt to pay off their tax

liabilities from 1990, 1991, and 1992.    In 1993, petitioners made

two subsequent payments of $100 under the installment agreement.
                                - 4 -

     Petitioners’ 1993 Federal income tax return reported tax of

$1,781, withholding credits of $1,030, and a balance due of $751.

On July 25, 1994, respondent assessed the tax reported by

petitioners in their 1993 return, along with penalties and

interest.    However, petitioners failed to pay the amount due.

     Petitioners timely filed their joint Federal income tax

returns for the years 1994, 1995, 1996, 1997, and 1999 with the

Internal Revenue Service Center in Kansas City, Missouri.

     Petitioners’ 1994 Federal income tax return reported tax of

$4,184, withholding credits of $87, and a balance due of $4,097.

On June 5, 1995, respondent assessed the tax reported by

petitioners in their 1994 return, along with penalties and

interest.    Also on June 5, 1995, notice and demand for payment of

the 1994 income tax liability was sent to petitioners.    However,

petitioners failed to pay the amount due.

     In 1995, petitioners again agreed to an installment

agreement with respondent in regard to taxable years 1990, 1991,

1992, 1993, and 1994.    This agreement required petitioners to

make monthly installment payments of $200 in an attempt to pay

off their tax liabilities from 1990, 1991, 1992, 1993, and 1994.

Throughout 1996, 1997, and 1998, petitioners made several

payments of $200 in accordance with the 1995 installment

agreement.    One payment recorded on petitioners’ transcript of

account for taxable year 1990 shows a payment of $3,200 made on
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September 17, 1997.1   However, these payments stopped in 1998

when petitioners again ran into severe financial difficulty.

     Petitioners’ 1995 Federal income tax return reported tax of

$4,494, withholding credits of $805, and a balance due of $3,689.

On June 3, 1996, respondent assessed the tax reported by

petitioners in their 1995 return, along with penalties and

interest.   Also on June 3, 1996, notice and demand for payment of

the 1995 income tax liability was sent to petitioners.   However,

petitioners failed to pay the amount due.

     Petitioners’ 1996 Federal income tax return reported tax of

$5,370, withholding credits of $2,242, and a balance due of

$3,128.   On May 26, 1997, respondent assessed the tax reported by

petitioners in their 1996 return, along with penalties and

interest.   Also on May 26, 1997, notice and demand for payment of

the 1996 income tax liability was sent to petitioners.   However,

petitioners failed to pay the amount due.

     Petitioners’ 1997 Federal income tax return reported tax of

$3,448, withholding credits of $1,081, and a balance due of

$2,367.   On September 7, 1998, respondent assessed the tax

reported by petitioners in their 1997 return, along with



     1
      Petitioners claim that this $3,200 payment was made to pay
off their 1996 tax liability. However, petitioner did not
present any evidence that the payment was earmarked for the 1996
tax liability. In fact, petitioners have not made any attempt to
get a copy of the check or any other evidence that would
substantiate their claim.
                                - 6 -

penalties and interest.   Also on September 7, 1998, notice and

demand for payment of the 1997 income tax liability was sent to

petitioners.   However, petitioners failed to pay the amount due.

     Petitioners’ 1999 Federal income tax return reported tax of

$951, withholding credits of $746, and a balance due of $205.     On

May 22, 2000, respondent assessed the tax reported by petitioners

in their 1999 return, along with penalties and interest.   Also on

May 22, 2000, notice and demand for payment of the 1999 income

tax liability was sent to petitioners.   However, petitioners

failed to pay the amount due.

     In 1999, petitioners filed Form 1040X, Amended U.S.

Individual Income Tax Return, for taxable year 1990 in which they

claimed their tax liability should be reduced.   Respondent

accepted the Form 1040X as filed.   In other words, respondent

agreed with petitioners that their tax liability for 1990 should

be reduced to the amount reported on the Form 1040X, $3,814.     As

a result, no controversy exists as to the amount of petitioners’

1990 income tax liability.

     Respondent’s acceptance of the Form 1040X changed the

application of payments petitioners had previously made on their

tax liabilities.   Because assessment of petitioners’ excess 1990

tax liability, related penalties, and interest was abated,

petitioners’ prior payments on the original 1990 tax liability,

penalties, and interest were credited to petitioners’ other tax
                                 - 7 -

liabilities.   The transfer of these previous payments satisfied

petitioners’ tax liabilities for 1991, 1992, and 1993.

Therefore, the only remaining liabilities outstanding and at

issue in this case are for 1994, 1995, 1996, 1997, and 1999.

     On November 11, 2000, a Final Notice--Notice of Intent to

Levy and Notice of Your Right to a Hearing was issued to

petitioners with respect to their unpaid 1994, 1995, 1996, 1997,

and 1999 income tax liabilities.    On December 8, 2000,

petitioners timely filed a Form 12153, Request for a Collection

Due Process Hearing.   In their request for a hearing, petitioners

questioned whether payments they previously made had been

properly applied against their 1994, 1995, 1996, 1997, and 1999

income tax liabilities.

     On March 4, 2001, the Internal Revenue Service in Kansas

City, Missouri, sent a letter to petitioners advising that their

request for a collection due process hearing (CDP hearing) had

been received and that they would be contacted.    By letter dated

April 13, 2001, petitioners were sent account summaries for their

1994, 1995, 1996, 1997, and 1999 income tax accounts.

     Petitioners’ hearing request was assigned to an Appeals

officer.   In a letter dated December 6, 2001, the Appeals officer

advised petitioners that he had scheduled a hearing for December

28, 2001, in Des Moines, Iowa.
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     By letter dated December 27, 2001, petitioners advised the

Appeals officer that they disputed that they had been given

credit for all of the payments which they had made toward their

1990 income tax liability.   On December 28, 2001, the Appeals

officer held a CDP hearing with petitioners.   Additionally, on

December 28, 2001, the Appeals officer provided petitioners with

a spreadsheet showing where all of their payments toward their

1990 tax liability had been applied.

     On or about February 8, 2002, petitioners filed a Form 656,

Offer in Compromise (OIC), based upon doubt as to liability.     In

their OIC, petitioners again contended that they were not

properly credited for the payments they had made and that they

owed less than the amounts shown by the Internal Revenue Service.

By letter dated March 25, 2002, the Internal Revenue Service in

Milwaukee, Wisconsin, acknowledged that petitioners’ OIC had been

received.

     Petitioners were advised in a letter dated October 15, 2002,

that their OIC had been transferred to the Appeals officer who

held their CDP hearing.   The Appeals officer subsequently sent

petitioners a letter advising that he had received their doubt as

to liability OIC.   On the basis of the determination that

petitioners had been credited for all payments, the Appeals

officer advised petitioners that he was rejecting their OIC.     The
                                 - 9 -

Appeals officer then requested that petitioners call him to

discuss payment options.

     On December 2, 2002, the Appeals officer received a letter

from petitioners again disputing their liabilities.     On December

4, 2002, the Appeals officer formally rejected petitioners’ OIC

on the basis that petitioners had been properly credited for

their payments.     By letter dated January 31, 2003, the Appeals

officer advised petitioners that their OIC had been rejected

because the tax was legally due.     The Appeals officer determined

that since the tax was correct and since petitioners had failed

to propose any collection alternatives, respondent’s proposed

levy action was appropriate.

     On January 31, 2003, respondent mailed the notice.

Petitioners timely filed a Petition for Lien or Levy Action Under

Code Section 6320(c) or 6330(d) challenging respondent’s

determination.

                              Discussion

I.   Section 6330

     Section 6331(a) provides that if any person liable to pay

any tax neglects or refuses to pay such tax within 10 days after

notice and demand for payment, the Secretary is authorized to

collect such tax by levy upon property belonging to such person.

Pursuant to section 6331(d), the Secretary is required to give

the taxpayer notice of his intent to levy and within that notice
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must describe the administrative review available to the

taxpayer, before proceeding with the levy.    See also sec.

6330(a).

     Section 6330 generally provides that the Commissioner cannot

proceed with collection by levy until the person has been given

notice and opportunity for an administrative review of the matter

(in the form of an Appeals Office hearing) and, if dissatisfied,

with judicial review of the administrative determination.     See

Davis v. Commissioner, 115 T.C. 35, 37 (2000); Goza v.

Commissioner, 114 T.C. 176, 179-180 (2000).

     Section 6330(b) describes the administrative review process,

providing that a taxpayer can request an Appeals hearing with

regard to a levy notice.   At the Appeals hearing, the taxpayer

may raise certain matters set forth in section 6330(c)(2), which

provides, in pertinent part:

          SEC. 6330(c). Matters Considered at Hearing.–-In the
     case of any hearing conducted under this section--

                *    *     *   *      *   *    *

           (2) Issues at hearing.--

                (A) In general.–-The person may raise at the
           hearing any relevant issue relating to the unpaid tax
           or the proposed levy, including--

                     (i) appropriate spousal defenses;

                     (ii) challenges to the appropriateness of
                collection actions; and

                     (iii) offers of collection alternatives,
                which may include the posting of a bond, the
                                 - 11 -

                substitution of other assets, an installment
                agreement, or an offer-in-compromise.

                (B) Underlying liability.–-The person may also
           raise at the hearing challenges to 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.

      Pursuant to section 6330(d)(1), within 30 days of the

issuance of the notice of determination, the taxpayer may appeal

that determination to this Court if we would normally have

jurisdiction over the underlying tax liability.      Moore v.

Commissioner, 114 T.C. 171, 175 (2000).

II.   Standard of Review

      A central question in the present case is the standard of

review to be applied.      Although section 6330 does not prescribe

the standard of review that the Court is to apply in reviewing

the Commissioner’s administrative determinations, we have stated

that where the validity of the underlying tax liability is

properly at issue, the Court will review the matter de novo.

Where the validity of the underlying tax liability is not

properly at issue, however, the Court will review the

Commissioner’s administrative determination for abuse of

discretion.   Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza

v. Commissioner, supra at 181-182.

      Generally, under section 6330(c)(2)(B), issues that are

reviewed de novo include those such as a redetermination of the
                              - 12 -

tax on which the Commissioner based the assessment, provided that

the taxpayer did not have an opportunity to seek a

redetermination before assessment.     See, e.g., Landry v.

Commissioner, 116 T.C. 60, 62 (2001) (“Because the validity of

the underlying tax liability, i.e., the amount unpaid after

application of credits to which petitioner is entitled, is

properly at issue, we review respondent’s determination de

novo.”).   Whether the Commissioner’s assessment was made within

the limitation period also constitutes a challenge to the

underlying tax liability.   Hoffman v. Commissioner, 119 T.C. 140,

145 (2002).

     Under an abuse of discretion standard, “we do not interfere

unless the Commissioner’s determination is arbitrary, capricious,

clearly unlawful, or without sound basis in fact or law.”      Ewing

v. Commissioner, 122 T.C. 32, 39 (2004); see also Woodral v.

Commissioner, 112 T.C. 19, 23 (1999).    Review for abuse of

discretion includes “any relevant issue relating to the unpaid

tax or the proposed levy”, including “challenges to the

appropriateness of collection actions” and “offers of collection

alternatives” such as offers in compromise.    Sec. 6330(c)(2)(A).

Questions about the appropriateness of the collection action

include whether it is proper for the Commissioner to proceed with

the collection action as determined in the notice of

determination, and whether the type and/or method of collection
                              - 13 -

chosen by the Commissioner is appropriate.   See, e.g., Swanson v.

Commissioner, 121 T.C. 111, 119 (2003) (challenge to

appropriateness of collection reviewed for abuse of discretion).

     Petitioners framed their dispute with respondent as a

dispute as to liability.2   However, the stipulated facts,

exhibits, and petitioner’s testimony at trial indicate that this

is a case where petitioners dispute the application of

transferred payments and the assessment of statutory interest and

penalties.

     Because of the ambiguity of petitioners’ argument, we will

consider the argument as both a dispute as to the underlying

liability and as a challenge to the appropriateness of

respondent’s collection actions.

     A.   Underlying Liability

     Considering petitioners’ argument as a dispute as to the

underlying tax liability, we review petitioners’ liability de

novo.

     Petitioners do not in any of their papers or pleadings

include any specific calculations of disputed transferred

payments or disputed assessments of statutory interest and


     2
      Petitioners argue first that their previous payments and
abated liabilities were not correctly applied to their subsequent
taxable years’ liabilities. Petitioners argue second that their
payment of $3,200 made in 1997 was earmarked for payment for
their 1996 taxable year liability. Finally, petitioners argue
that the penalties and interest assessed as to their unpaid
liabilities are incorrect and “exorbitantly high.”
                              - 14 -

penalties.   Petitioners simply set forth unsubstantiated

arguments in support of their claim that the misapplication of

transferred payments has distorted the assessment of statutory

interest, penalties, and their subsequent tax year liabilities.

     However, respondent has submitted into evidence account

summaries for petitioners’ 1991, 1992, 1993, 1994, 1995, 1996,

1997, 1998, and 1999 income tax accounts.   Respondent has also

submitted into evidence an Internal Revenue Service spreadsheet

that establishes the application of transferred payments among

petitioners’ accounts.

     Upon the basis of the record, we find that respondent

correctly determined that all of the unpaid tax liabilities,

including interest and penalties, are correct.

     B.   Collection Action

     Considering petitioners’ argument as a challenge to the

application of payments in a collection action or as a challenge

to the rejection of petitioners’ OIC, we review this issue under

an abuse of discretion standard.   See Sego v. Commissioner, supra

at 610; Goza v. Commissioner, 114 T.C. at 181-182; see also,

e.g., Swanson v. Commissioner, supra.

     As stated previously, under an abuse of discretion standard,

we do not “interfere unless the Commissioner’s determination is

arbitrary, capricious, clearly unlawful, or without sound basis

in fact or law.”   Ewing v. Commissioner, supra at 39.
                                 - 15 -

     Petitioners have not introduced any evidence as to specific

mistakes or irregularities in respondent’s assessment procedure

or determination process.     Petitioners introduced no evidence at

trial to show that respondent’s determination was “arbitrary,

capricious, clearly unlawful or without sound basis in fact or

law.”     Id.   Therefore, we conclude that respondent did not abuse

his discretion, and we sustain respondent’s determination.

        Reviewed and adopted as the report of the Small Tax Case

Division.


                                       Decision will be entered

                                  for respondent.
