                              T.C. Memo. 2013-247



                         UNITED STATES TAX COURT



 JOHN T. O’DONNELL AND ELLEN J. NORRIS O’DONNELL, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 22230-08L.                      Filed October 29, 2013.



      Donald G. Koch, Jacob Zelmanovitz, John P. Fazzio, and Jacob Delmano,

for petitioners.

      Justin L. Campolieta, Frederick C. Mutter, Mimi M. Wong, and Rose E.

Gole, for respondent.



                           MEMORANDUM OPINION


      COHEN, Judge: This case was commenced under section 6330 in response

to a notice of determination concerning collection action that sustained a levy with
                                         -2-

[*2] respect to petitioners’ unpaid Federal income tax liabilities for 2000, 2001,

2003, 2004, 2005, and 2006. The issue for decision is whether the Appeals

settlement officer abused his discretion in refusing petitioners’ suggested

installment agreement. Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect at all relevant times, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

                                      Background

      All of the facts have been stipulated, and the stipulated facts are

incorporated as our findings by this reference. Petitioners resided in New York at

the time they filed their petition.

      On or about April 22, 2005, a Final Notice--Notice of Intent to Levy and

Notice of Your Right to a Hearing (April 2005 notice of levy) relating to the

collection of petitioners’ outstanding income tax liabilities for 1997, 1998, 1999,

and 2002 was sent to petitioners. Petitioners did not request a section 6330

hearing in response to this notice.

      On or about April 23, 2007, petitioners’ representative, Ronny Buni, mailed

to the Internal Revenue Service (IRS) a letter transmitting a Form 433-A,

Collection Information Statement for Wage Earners and Self-Employed

Individuals, dated April 23, 2007, as well as copies of petitioners’ Forms W-2,
                                        -3-

[*3] Wage and Tax Statement, for the taxable year 2006. In the letter, Buni

proposed, as a collection alternative, for the IRS to consider an installment

agreement with a monthly payment starting at $2,500 and increasing to $3,000

monthly for the subsequent year and eventually to $3,500 for the second

subsequent year.

       On or about August 8, 2007, a Final Notice--Notice of Intent to Levy and

Notice of Your Right to a Hearing (August 2007 notice of levy) was sent to

petitioners. The August 2007 notice of levy related to the collection of

petitioners’ outstanding income tax liabilities for 1997, 1998, 1999, 2000, 2001,

2002, 2003, 2004, 2005, and 2006.

      On or about August 21, 2007, petitioners submitted to the IRS a Form

12153, Request for a Collection Due Process or Equivalent Hearing. Although

petitioners listed the taxable years 1997 through 2006 on their August 21, 2007,

Form 12153, they had forfeited their right to administrative review by the Office

of Appeals with respect to 1997, 1998, 1999, and 2002 because they did not

request a hearing in response to the April 2005 notice of levy.

      For 2000, 2001, 2003, 2004, 2005, and 2006, petitioners’ outstanding

liabilities consisted only of the assessed balance of tax shown as due but unpaid on
                                         -4-

[*4] joint income tax returns filed by petitioners plus statutory additions to tax and

statutory interest accruals.

      On or about December 18, 2007, Settlement Officer Michael Smith sent to

petitioners a letter for the purpose, among other things, of scheduling a telephone

hearing and requesting that petitioners provide the following information: (1) an

updated Form 433-A; (2) each of petitioners’ final pay statements for 2007; (3)

petitioners’ most recent checking account statements; and (4) a copy of the

yearend account statements for petitioners’ Treasury bond, section 401(k)

retirement, CREF money market, and CREF stock accounts.

       On or about February 6, 2008, petitioners’ representative Buni sent two

packages to the settlement officer. The first package was a fax transmitting an

updated Form 433-A dated February 6, 2008, and signed by Buni. The second

was a package of documents containing additional financial information. On or

about February 8, 2008, a telephone conference was held between Buni and the

settlement officer, during which the parties discussed a potential installment

agreement involving an upfront lump-sum payment out of current assets.

      On or about April 2, 2008, the settlement officer contacted the law firm

representing petitioner and spoke with Donald Koch of that firm. Koch informed

the settlement officer that Buni was no longer with the firm but that Koch would
                                        -5-

[*5] be representing petitioners on behalf of the firm. The settlement officer

continued discussions with Koch concerning a potential installment agreement

proposal by petitioners and the possibility of a potential upfront lump-sum

payment by petitioners.

      On or about April 29, 2008, the settlement officer and Koch discussed by

telephone a potential installment agreement. The settlement officer inquired as to

whether petitioners’ investment accounts, listed as assets on line 13 of the Form

433-A, could be liquidated to provide for an upfront lump-sum payment as a start

to a possible five-year installment agreement. Koch indicated that he had not yet

discussed the investment accounts with petitioners but that he would discuss a

possible liquidation of those accounts and get back to the settlement officer within

7 to 10 days.

      On or about May 27, 2008, the settlement officer and Koch had a telephone

conversation, during which the settlement officer requested that petitioners make a

proposal for a collection alternative. Koch indicated that he still needed to speak

with petitioners. However, he further indicated that petitioners had significant

outstanding liabilities to other creditors, including New York State and credit card

companies, and that emptying the investment accounts and paying only the IRS

might not be a feasible course of action, because the other creditors could
                                           -6-

[*6] commence collection efforts with respect to income and assets needed to pay

the IRS.

      On or about June 11, 2008, the settlement officer and Koch had a telephone

conversation and discussed a number of matters regarding petitioners’ liabilities.

Koch pointed out that there were two errors on the February 6, 2008, Form 433-A.

First, the statement incorrectly listed petitioners’ CREF and section 401(k)

retirement accounts as assets. Koch indicated that these inclusions were improper

because petitioners were unable to access those funds. In response, the settlement

officer requested that petitioners substantiate that the retirement funds were

unavailable, and, if so, then they would not be taken into consideration in

determining petitioners’ ability to pay.

      Second, Koch indicated that petitioners’ other investment accounts had

previously been liquidated to pay petitioners’ 2007 Federal income tax liability

and should not have been listed as current assets on the statement. In response, the

settlement officer noted that the funds held in the liquidated accounts exceeded

petitioners’ total 2007 Federal income tax liability and asked that petitioners

provide an accounting of how the additional funds were spent. Koch agreed to

provide this information, as well as updated financial statements, also requested by

Settlement Officer Smith, including a revised Form 433-A.
                                        -7-

[*7] During the June 11, 2008, conference, Koch proposed an installment

agreement commencing with a monthly payment of between $1,500 and $1,800

that would increase after a year to between $3,000 and $4,000 a month. In

response, the settlement officer indicated that, according to his calculations and

given petitioners’ current net monthly income, petitioners could afford a larger

monthly installment payment. The settlement officer also expressed his concern

that a number of petitioners’ claimed living expenses exceeded the national and

local standard allowances. Without an agreement that would pay the liability in

full within five years, many of these conditional living expenses would not

be allowed in determining petitioners’ ability to pay.

      On or about July 23, 2008, Koch faxed to the settlement officer a package of

documents including a letter from Koch, supporting financial documentation, and

an updated Form 433-A dated July 22, 2008, signed by petitioners. The cover

letter from Koch explained that petitioners’ nonretirement investment account was

closed on September 12, 2007, after withdrawal of $41,807.67, and the funds were

transferred into an account held by petitioners’ 28-year-old son. Of the total

amount, $21,747.50 was returned to petitioners and used to pay New York State

and Federal 2007 income tax liabilities and the balance remained in petitioners’

son’s account and was used to pay his tuition, tuition loans, credit card debt, and
                                       -8-

[*8] living expenses. The July 22 Form 433-A reflected gross monthly income of

$40,034; cash on hand of $8,982; investments of $110,860; and a vehicle valued at

$2,575. That statement reported monthly expenses of $42,195, including the

following:

                Food, clothing, and misc         $1,728
                Housing and utilities             7,426
                Vehicle operating costs           1,163
                Public transportation               358
                Out-of-pocket health care         1,377
                Court ordered payments              780
                Tuition/fees                        904
                Legal fees                        3,900
                Taxes                            17,726
                Credit card payments              6,833
                                                 42,195

      Included with the documents petitioners submitted to the settlement officer

on June 23, 2008, was a copy of a billing statement from counsel to petitioners

that described services as:

      Reviewed form 433A and bankruptcy analysis spreadsheets in
      preparation for meeting with clients. Prepared outline. Meeting with
      Dr. and Mrs. O’Donnell - reviewed all calculations and explained that
      bankruptcy is the only total solution to the problem but they need to
      wait before filing. We will try to reach a settlement at the CDP
      hearing to tide them over for one year or some portion thereof, and
      then file an Offer in Compromise based on a bankruptcy which
      should hold off IRS collection for another year or more.
                                        -9-

[*9] On or about August 4, 2008, Koch faxed another letter to the settlement

officer, stating, among other things:

      I have included the minimum amount needed to pay monthly credit
      card charges as an allowable expense. If Dr. O’Donnell fails to meet
      his duties to these creditors, the debt will quickly become a judgment
      and the creditors will levy his earnings. Not only will such an
      outcome force him to default on any installment arrangement that we
      agree to, but it is likely to force him into bankruptcy. Exercise of his
      right to bankruptcy relief will be costly to the IRS since more than
      half of his tax debt is dischargeable now and nearly another 40% will
      become dischargeable within a year following conclusion of the CDP
      hearing.

The settlement officer responded on August 5, 2008, in a voicemail message that

he memorialized in his notes as follows:

      It was clear from the information that you sent me, that Dr. O’Donnell’s
      intent is to delay collection as much as he can until all the liability is
      dischargeable in bankruptcy; its his intent to pay his credit card bills and
      New York State Taxes in preference to payment of the federal taxes. There
      is information that you sent me that he has been making large cash
      withdrawals from his own Morgan Stanley Account and putting it into the
      checking account of his stepson Jeremy Norris. You know which all of this
      is the intent to defeat collection. I asked you a few weeks ago whether he
      was sincere in wanting to take care of his taxes. The information that you
      sent me convinced me that he’s not sincere, that he’s just attempting to not
      pay. So I have sustained the levy; its my opinion that the collection office
      should levy as much as possible prior to the taxpayer filing bankruptcy
      which is his intent and especially so in consideration the fact that he’s
      transferring assets, ok.
                                      - 10 -

[*10] On or about August 5, 2008, the settlement officer spoke with Koch and

communicated his determination to sustain the proposed collection action.

      The settlement officer reviewed the information petitioners submitted and

determined the amounts of petitioners’ allowable expenses. He disallowed

completely the expenses for “Tuition/Fees” and “Credit Card Payments”; applied

standard allowances for “Food, Clothing, and Misc”, “Housing and Utilities”,

“Vehicle Operating Costs”, and “Public Transportation” expenses; and allowed

entirely--without verification--the expenses claimed for “Out-of-Pocket Health

Care”, “Court Ordered Payments”, “Taxes”, and “Legal Fees”.

      The settlement officer determined petitioners’ total allowable expenses to be

$31,247, as follows:

               Food, clothing, and misc         $1,370
               Housing and utilities             5,451
               Vehicle operating costs             480
               Public transportation               163
               Out-of-pocket health care         1,377
               Court ordered payments              780
               Tuition/fees                          0
               Legal fees                        3,900
               Taxes                            17,726
               Credit card payments                  0
                                                31,247

      On August 6, 2008, the settlement officer issued the Notice of

Determination Concerning Collection Action(s) Under Section 6320 and/or 6330
                                       - 11 -

[*11] sustaining respondent’s proposed use of a levy to collect petitioners’

outstanding income tax liabilities for 2000, 2001, 2003, 2004, 2005, and 2006.

The notice explained:

      We determine that the collection office may levy as proposed to
      collect these taxes. The taxpayer’s payment proposal is not viable
      because it does not offer in payment any of the taxpayer’s investment
      assets which the taxpayer acknowledged he could obtain. The
      taxpayer did not provide complete financial information in regard to
      substantial withdrawals [from] his Morgan Stanley account. The
      information provided establishes that he recently moved some of the
      funds in these accounts to a checking account owned by his step son.
      In addition, the proposal initially offers just $1500 monthly from
      current income which exceeds $40,000 per month. The proposed
      payment amount is not consistent with the taxpayer’s ability to pay
      when the government’s allowable expense standards are employed.
      Information provided establishes the taxpayer’s intent to simply “hold
      off IRS collection” until a bankruptcy can be filed.

                 *       *        *       *          *    *      *

      The taxpayer’s returns for the years 2000 through 2003 were filed at
      the end of 2004. The 2004 and 2005 returns were filed in February
      2007. The 2006 return was the first return in ten years to have been
      filed timely. All these returns reflected a substantial underpayment of
      the tax on the return.

      John O’Donnell is a physician at St. Clare’s Hospital in New Jersey.
      He is also self-employed as a psychiatric consultant. Ellen O’Donnell
      is a nurse working at St. Luke’s Hospital in Manhattan. These
      assessments are all the result of returns the taxpayers filed without
      full payment of the liability. The taxpayer’s 2006 income was
      $417,038 or $34,753 per month on average. The taxpayer’s 2007
      income grew to $49,672 or $41,472 per month on average.

                  *       *       *      *       *       *      *
                                  - 12 -

[*12] Subsequent information provided by your attorney establishes
that this payment proposal was not intended to be a means to pay your
full liability over the long term. Notes of your April 4th meeting with
Mr. Koch establish that the $1500 per month installment payment
proposal was intended to “hold off IRS collection” for “one year or a
portion thereof” pending a bankruptcy filing.

Aside from your current income, you have not fully disclosed the
availability of liquid assets to pay these liabilities. Your liquid assets
as shown on your 2007 financial statement include $159,222 in
investments and $35,931 in the bank.

Appeals’ discussions with Mr. Buni and Mr. Koch addressed the
availability of your investment accounts and pension funds. Your
representative reported on June 11th that these funds in Morgan
Stanley investment accounts and in TIAA-CREF accounts had been
used to pay your current taxes or were not available to you. The
statement that the investment funds were no longer available was
never substantiated. The information provided to Appeals indicates
you had transferred approximately $42,000 last fall from your own
Morgan Stanley accounts to the checking account held by your
stepson, Jeremy Norris. While there is insufficient information to
conclude this was constructively fraudulent, it certainly qualifies as a
suspicious transaction that merits further consideration by the
collection office. The transfer of liquid funds to a relative was never
disclosed in any conversations with Appeals.

On June 23rd, we learned that you told your representative you were
able to access your TIAA-CREF accounts. This was never disclosed
at the time to Appeals in any of our discussions. In his notes of May
27th, your attorney wrote that he believes you should use the
investment accounts to pay NYS Taxation, a junior creditor, and
credit cards debts and non-dischargeable taxes in anticipation of a
future bankruptcy filing. At no time did your representative make a
payment proposal that would include any of your liquid funds on
hand. He wrote on June 6th that he would “try to avoid” paying a
lump sum payment from the funds you have available.
                                         - 13 -

      [*13] A full accounting of the withdrawals and availability of your
      investment accounts and retirement funds was never provided to
      Appeals. It was requested more than once during the course of this
      hearing.

      We determine that the collection office may levy as proposed to
      collect these assessments as you have not offered a payment proposal
      that is commensurate with your ability to pay from current income.
      You have not offered to pay anything from the liquid funds you have
      access to. You have never made a payment since the date of
      assessment of any of these liabilities. It is our conclusion that it is
      unlikely that you will pay these liabilities voluntarily to the best of
      your ability if levy action is not taken. Your intent to delay collection
      until such time as you could have these liabilities discharged in
      bankruptcy underscores the need for levy action. You raised no other
      issues in this due process hearing.

      Petitioners are not challenging the existence or the amount of their

underlying liability for tax, additions to tax, and interest for 2000, 2001, 2003,

2004, 2005, or 2006. Nor do petitioners challenge that the Office of Appeals

properly verified that the requirements of any applicable law or administrative

procedure had been met.

      The petition in this case was filed September 9, 2008. The case was called

for trial on June 15, 2009, and the parties filed a stipulation of facts and exhibits

and moved for submission of the case under Rule 122. The motion was granted,

and the Court ordered simultaneous briefs, with opening briefs due August 14,

2009. Respondent’s brief was timely filed, but on August 14, 2009, petitioners
                                        - 14 -

[*14] filed a petition in bankruptcy; they did not file a brief. An automatic stay

under 11 U.S.C. sec. 362(a) (2006) was in effect until May 25, 2011. At the

request of the parties, a discretionary stay was thereafter entered because of the

pendency of an adversary proceeding commenced September 23, 2009, in the

bankruptcy court. Because the bankruptcy case was still pending without

discernible activity four years after this case was submitted, the Court ordered

petitioners to file an answering brief so that this case could be resolved. In that

brief petitioners argue that the notice of determination was an abuse of discretion

because the settlement officer made inappropriate adjustments to their allowed

monthly expenses. Petitioners also contend that the settlement officer

misinterpreted the legal bills petitioners provided that showed a discussion of

bankruptcy strategy between petitioners and their counsel.

                                     Discussion

      Section 6330 provides for notice and opportunity for a hearing, before the

IRS may levy upon the property of any person. Under section 6330(c)(3), the

determination to proceed with a collection action “shall take into consideration

* * * 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.”
                                        - 15 -

[*15] Petitioners do not challenge their underlying self-reported liabilities or that

the settlement officer followed verification procedures required under section

6330(c). They recognize that our review in these circumstances is for abuse of

discretion. Abuse of discretion may be found if action is arbitrary, capricious, or

without sound basis in fact or law. Giamelli v. Commissioner, 129 T.C. 107, 111

(2007); Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

      Section 6159(a) authorizes installment agreements with taxpayers to

facilitate collection of the taxpayers’ liabilities, and these agreements are within

the discretion of the IRS. See sec. 301.6159-1(a), Proced. & Admin. Regs. In

reviewing for abuse of discretion, we do not recalculate a taxpayer’s ability to pay

and substitute our judgment for that of the settlement officer. See Aldridge v.

Commissioner, T.C. Memo. 2009-276, slip op. at 16; see also Murphy v.

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

Commissioner, 124 T.C. 165, 179-180 (2005), aff’d, 454 F.3d 782 (8th Cir. 2006);

Hult v. Commissioner, T.C. Memo. 2007-302.

      Petitioners in their brief suggest interpretations of the billing records

containing discussion of bankruptcy strategy different from those drawn by the

settlement officer in his notes. They contend that bankruptcy was intended only as

an option, not as something intended to be done after time had passed to make
                                        - 16 -

[*16] more of their liabilities subject to discharge. This argument is apparently

intended to counteract a question from the settlement officer concerning their

sincerity about paying their Federal tax liabilities. There is no evidence in the

record supporting petitioners’ explanation, and the settlement officer’s

interpretations are not unreasonable. (His interpretation was validated by what

subsequently occurred in this case.) In any event, the notice of determination does

not rely on a subjective reaction to the billing records.

      Although petitioners dispute the settlement officer’s calculation of their

allowable monthly expenses, they acknowledge:

      The settlement officer ultimately based his decision to reject
      petitioners’ proposed installment agreement on his contention that
      petitioners’ present ability to pay “far exceeded what they offered to
      pay.” * * * Whereas the settlement officer calculated that petitioners
      could afford to pay “at least $9,948” per month towards their
      outstanding liability, the actual amount that petitioners could afford
      was at most $6,737.

The amount they offered, however, was only $1,500 to $1,800 per month,

increasing to between $3,000 and $4,000 after a year.

      Petitioners contend, in effect, that the settlement officer was required

to engage in unlimited exchanges to verify the information that petitioners

provided, even after alleged errors in that information had been corrected

multiple times over months of negotiations. In view of the stipulated
                                         - 17 -

[*17] history of those negotiations, we cannot conclude that the settlement

officer acted arbitrarily. Because his determination was reasonably based

on the information petitioners provided, we cannot conclude that it was

without foundation in fact or law. In reviewing the determination, we do

not recalculate petitioners’ ability to pay in installments, but the record

confirms that their ability significantly exceeded their offer. The settlement

officer did not abuse his discretion in sustaining the levy.

      We have considered the arguments of petitioners for a contrary result. They

are either irrelevant to our conclusion or without merit.

      To reflect the foregoing,



                                                        Decision will be entered

                                                  for respondent.
