                        T.C. Memo. 2006-231



                      UNITED STATES TAX COURT



                  RONALD W. OMAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1910-05L.                Filed October 30, 2006.

          P filed a petition for judicial review pursuant to
     sec. 6320, I.R.C., in response to a determination by R
     that lien action was appropriate.

          Held: The case is remanded for further
     consideration by the Internal Revenue Service Office of
     Appeals.


     Ronald W. Oman, pro se.

     Robert W. Dillard and Michael D. Zima, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:   This case is before the Court on a petition

for judicial review of a Notice of Determination Concerning
                                   - 2 -

Collection Action(s) Under Section 6320 (Lien) of the Internal

Revenue Code.1      The issue for decision is whether respondent may

proceed with collection, in the form of a filed tax lien, of

petitioner’s Federal income tax liabilities for the 1990, 1993,

1994, 2000, and 2001 taxable years.

                             FINDINGS OF FACT

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

The stipulations of the parties, with accompanying exhibits, are

incorporated herein by this reference.       At the time this petition

was filed, petitioner resided in Altamonte Springs, Florida.

     Petitioner failed to file a Federal income tax return for

1990.       Petitioner filed untimely for the 1993, 1994, 1996, and

1997 taxable years and did not remit payment of the balances due.

Petitioner filed timely for 1999, 2000, and 2001, but again did

not remit sufficient payment.

     The vast majority of petitioner’s tax liabilities arose in

1993 and 1994 when petitioner was president of Public Telephone

Corporation and earned over $100,000 in salary each year.       In

1995, Public Telephone Corporation was seized by the Federal

Trade Commission and put into receivership.       Thereafter,

petitioner held a series of seasonal and odd jobs and relied on

friends and family for housing, food, and other bare necessities.



        1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) of 1986, as amended.
                               - 3 -

Petitioner also struggled with alcohol, drugs, and depression,

for which he entered rehabilitation in the fall of 2003.

     As of 2004, petitioner’s outstanding tax liabilities for the

years 1990, 1993, 1994, 1996, 1997, 1999, 2000, and 2001 totaled

$169,145.97.   On February 9, 2004, respondent received from

petitioner a Form 656, Offer in Compromise, offering to pay

$1,000 based on doubt as to collectibility.   Petitioner also

provided a Form 433-A, Collection Information Statement for Wage

Earners and Self-Employed Individuals, indicating that he was

unemployed, lived with friends, received money from his parents

“from time to time” and had no assets.

     Respondent thereafter evaluated petitioner’s offer,

preparing, inter alia, a “Full Pay Worksheet” dated February 17,

2004, and income/expense and asset/equity tables dated July 16,

2004.   The worksheet indicated that petitioner’s total ability to

pay was zero and stated that “Initial Analysis indicates a Low-

Income Taxpayer that can’t pay with assets at this time”.   The

income/expense table reflected that petitioner had monthly income

and allowed expenses of $653 and $1,012, respectively, for a $359

monthly negative cashflow, and that “the amount that could be

paid” was zero.   The asset/equity table showed that petitioner

had a “total minimum value” of zero.

     Nevertheless, respondent rejected petitioner’s $1,000 offer-

in-compromise because petitioner had “an egregious history of
                               - 4 -

past non-compliance”, and respondent’s “analysis of * * *

[petitioner’s] current finances reveals that it will be highly

unlikely * * * [petitioner] will be able to remain in compliance

during the offer terms.”   Therefore, respondent concluded “it

would not be in the best interest of the government”.     In the

“REJECTION NARRATIVE” prepared in connection with the letter

informing petitioner of the rejection, dated August 10, 2004,

respondent noted that petitioner’s “reasonable collection

potential” was zero.

     Shortly before rejecting the offer-in-compromise,

respondent, on July 22, 2004, filed a Notice of Federal Tax Lien

in Seminole County, Florida, with respect to petitioner’s 1990,

1993, 1994, 1996, 1997, 1999, 2000, and 2001, income tax

liabilities.   Respondent then, on July 23, 2004, issued to

petitioner a corresponding Notice of Federal Tax Lien Filing and

Your Right to a Hearing Under IRC 6320 for the taxable years

1990, 1993, 1994, 2000, and 2001.2     In response, petitioner


     2
      Taxable years 1996, 1997, and 1999, were not covered by
this notice because respondent had previously issued, on October
25, 2000, a Notice of Federal Tax Lien Filing and Your Right to a
Hearing under IRC 6320 for these years and petitioner had not
timely requested a hearing in response to that notice.
Respondent had also previously issued, on January 25, 1999, a
Final Notice of Intent to Levy and Notice of your Right to a
Hearing for taxable years 1993 and 1994, and petitioner had also
not timely requested a hearing in response to that notice.
Because petitioner’s requests for a hearing on the proposed levy
for 1993 and 1994, and the filed lien as to 1996, 1997, and 1999,
were filed late, petitioner was afforded an equivalent
                                                   (continued...)
                               - 5 -

submitted a Form 12153, Request for a Collection Due Process

Hearing, which was received by respondent on August 11, 2004.

Petitioner stated his disagreement with the lien as follows:

“I’M GOING THROUGH OFFER AND COMPROMISE AS WE SPEAK”.

     Respondent’s Appeals Office conducted a collection hearing

by telephone with petitioner on December 14, 2004.   During that

interview, petitioner continued to press for acceptance of his

offer-in-compromise.   Thereafter, on January 3, 2005, respondent

issued the above-mentioned notice of determination for the 1990,

1993, 1994, 2000, and 2001 taxable years, sustaining the filing

of the notice of lien in July of 2004.3   An attachment to the

notice addressed the issues raised by the taxpayer and stated, as

relevant here:   “The rejection of your offer in compromise has

been sustained by Appeals based on IRM 5.8.7.6(5), that due to

your egregious history of non-compliance it is in the best




     2
      (...continued)
administrative hearing for these collection actions. Equivalent
administrative hearings are not appealable to this Court. See
secs. 6320(b)(2), 6330(b)(2); Inv. Research Associates, Inc. v.
Commissioner, 126 T.C. 183, 189-191 (2006); Orum v. Commissioner,
123 T.C. 1, 8-11 (2004), affd. 412 F.3d 819 (7th Cir. 2005).
     3
      Respondent had earlier issued to petitioner a Decision
Letter Concerning Equivalent Hearing Under Section 6330 (Levy) of
the Internal Revenue Code sustaining levy action as to taxable
years 1993 and 1994, and a Decision Letter Concerning Equivalent
Hearing Under Section 6320 (Lien) of the Internal Revenue Code
sustaining the filing of a Federal tax lien with respect to
taxable years 1996, 1997, and 1999. See supra note 2.
                                  - 6 -

interest of the government not to accept your offer in

compromise.”

                                 OPINION

I.     Collection Action

       A.   General Rules

       If a taxpayer liable to pay taxes fails to do so after

demand for payment, the tax liability becomes a lien in favor of

the United States against all of the taxpayer’s real and personal

property and rights to such property.        Sec. 6321.   The lien

arises at the time the assessment is made and continues until the

liability is satisfied or becomes unenforceable by reason of

lapse of time.     Sec. 6322.   The Secretary is obliged to notify

the taxpayer that a notice of a Federal tax lien has been filed

within 5 business days of filing and of the administrative

appeals available to the taxpayer.        Sec. 6320(a).   Upon timely

request a taxpayer is entitled to a hearing before the Internal

Revenue Service Office of Appeals regarding the propriety of the

filing of the lien.     This hearing is conducted in accordance with

the procedural requirements of section 6330.        Sec. 6320(b) and

(c).

       The taxpayer is entitled to appeal the determination of the

Appeals Office, made on or before October 16, 2006, to the Tax

Court or a U.S. District Court, depending on the type of tax at
                                  - 7 -

issue.     Sec. 6330(d).4   Where the validity of the underlying tax

liability is properly at issue, the Court will review the matter

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

Commissioner, 114 T.C. 176, 181-182 (2000).      The Court reviews

any other administrative determination for an abuse of

discretion.     Sego v. Commissioner, supra at 610; Goza v.

Commissioner, supra at 182.      An abuse of discretion has occurred

if the “Commissioner exercised * * * [his] discretion

arbitrarily, capriciously, or without sound basis in fact or

law.”    Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

Petitioner does not dispute the existence or amounts of the

underlying tax liabilities.      Accordingly, the Court’s standard of

review is abuse of discretion.

     B.     Review for Abuse of Discretion

     Among the issues that may be raised at the Appeals Office

and are reviewed for an abuse of discretion are “challenges to

the appropriateness of collection” and “offers of collection

alternatives” such as an offer-in-compromise.      Sec.

6330(c)(2)(A).     The Court does not conduct an independent review

of what would be an acceptable offer-in-compromise; rather it

gives due deference to the Commissioner’s discretion.       Murphy v.

Commissioner, 125 T.C. 301, 320 (2005); Woodral v. Commissioner,


     4
      Determinations made after Oct. 16, 2006, are appealable
only to the Tax Court. See Pension Protection Act of 2006, Pub.
L. 109-280, sec. 855, 120 Stat. 1019.
                                 - 8 -

supra at 23.    The Court reviews the Appeals officer’s rejection

of an offer-in-compromise to decide whether the rejection was

arbitrary, capricious, or without sound basis in fact or law.

Murphy v. Commissioner, supra at 320; Woodral v. Commissioner,

supra at 23.

     Section 7122(a) authorizes the Secretary to compromise any

civil case arising under the internal revenue laws.     In general,

the decision to accept or reject an offer, as well as the terms

and conditions agreed to, are left to the discretion of the

Secretary.     Sec. 301.7122-1(c)(1), Proced. & Admin. Regs.

However, regulations promulgated under section 7122 provide that

“No offer to compromise may be rejected solely on the basis of

the amount of the offer without evaluating that offer under the

provisions” of the regulations “and the Secretary’s policies and

procedures regarding the compromise of cases.”     Sec. 301.7122-

1(f)(3), Proced. & Admin. Regs.

     The grounds for compromise of a tax liability are doubt as

to liability, doubt as to collectibility, and promotion of

effective tax administration.     Sec. 301.7122-1(b), Proced. &

Admin. Regs.     Petitioner based his offer-in-compromise on doubt

as to collectibility, which “exists in any case where the

taxpayer’s assets and income are less than the full amount of the

liability.”     Sec. 301.7122-1(b)(2), Proced. & Admin. Regs.   In

determining the taxpayer’s ability to pay, the individual facts
                               - 9 -

and circumstances of the taxpayer’s case are considered and the

taxpayer is permitted “to retain sufficient funds to pay basic

living expenses.”   Sec. 301.7122-1(c)(2), Proced. & Admin. Regs.

     The Internal Revenue Manual (IRM) contains guidelines for

rejection of offers-in-compromise.     IRM sec. 5.8.7.6(5) (Nov. 15,

2004), which respondent relied on in rejecting petitioner’s

offer, states:

     An offer rejection may also be based on a determination
     that acceptance of the specific offer at hand is not in
     the "best interest of the government", per policy
     statement P-5-100. Rejections under this provision
     should not be routine and should be fully supported by
     the facts outlined in the rejection narrative. Offers
     rejected under this section require the review and
     approval of the second level manager; that is,
     Territory Manager for the field or Department Manager
     for COIC [Centralized Offers in Compromise]. Examples
     of situations that may warrant rejection as not being
     in the "best interest of the government" include:

     Recent compliance satisfies offer processability
     criteria, however the taxpayer has an egregious history
     of past non-compliance and our analysis of his current
     finances reveals that it will be highly unlikely the
     taxpayer will be able to remain in compliance during
     the offer terms.

Policy statement P-5-100 (Jan. 30, 1992), on which the IRM

relies, states:

     The Service will accept an offer in compromise when it
     is unlikely that the tax liability can be collected in
     full and the amount offered reasonably reflects
     collection potential. An offer in compromise is a
     legitimate alternative to declaring a case currently
     not collectible or to a protracted installment
     agreement. The goal is to achieve collection of what
     is potentially collectible at the earliest possible
     time and at the least cost to the Government.
                               - 10 -

     In cases where any offer in compromise appears to be a
     viable solution to a tax delinquency, the Service
     employee assigned the case will discuss the compromise
     alternative with the taxpayer and, when necessary,
     assist in preparing the required forms. The taxpayer
     will be responsible for initiating the first specific
     proposal for compromise.

     The success of the offer in compromise program will be
     assured only if the taxpayers make adequate compromise
     proposals consistent with their ability to pay and the
     Service makes prompt and reasonable decisions.
     Taxpayers are expected to provide reasonable
     documentation to verify their ability to pay. The
     ultimate goal is a compromise which is in the best
     interest of both the taxpayer and the Service.
     Acceptance of an adequate offer will also result in
     creating for the taxpayer an expectation of a fresh
     start toward compliance with all future filing and
     payment requirements. [Emphasis added.]

     IRM sec. 5.8.7.6(5) and policy statement P-5-100, as applied

in this case, appear to be inconsistent regarding the “best

interest of the government”.   IRM sec. 5.8.7.6(5) pertains to

rejecting offers if they are “not in the ‘best interest of the

government’, per policy statement P-5-100", while policy

statement P-5-100 describes the dollar amount of offers which are

in the “best interest” of the government and encourages such

compromises.   The “goal” of the offer-in-compromise program,

according to policy statement P-5-100, is to collect what is

potentially collectible as early as possible, and the “ultimate

goal” is to find a compromise that is in the “best interest of

both the taxpayer and the Service.”     Policy statement P-5-100

does not mention “egregious past non-compliance”.     It instead
                              - 11 -

mentions “creating for the taxpayer an expectation of a fresh

start toward future compliance”.

     According to policy statement P-5-100, it appears the “best

interest of the government” is a compromise that is also in the

best interest of the taxpayer and which collects the potentially

collectible amount, or more, at the earliest possible time.    In

the instant case, respondent determined that petitioner’s

reasonable collection potential was zero.   Pursuant to policy

statement P-5-100, it appears that acceptance of petitioner’s

$1,000 offer is in respondent’s best interest as it is also in

petitioner’s best interest and permits respondent to collect more

than respondent determined was potentially collectible otherwise.

It would also afford petitioner “a fresh start toward future

compliance”.

     The Internal Revenue Manual does contain a provision that

allows for rejection of offers that exceed the reasonable

collection potential.   IRM sec. 5.8.7.6.1 (Nov. 15, 2004)

states:

          (1) Policy statement P-5-89 establishes that
     offers may be rejected on the basis of public policy if
     acceptance might in any way be detrimental to the
     interests of fair tax administration, even though it is
     shown conclusively that the amount offered is greater
     than could be collected by any other means, if no
     Effective Tax Administration (ETA) issues exist.

     Note: This section should not be confused with IRM
     5.8.11.2.2 under Effective Tax Administration (ETA)
     offers.
                              - 12 -

          (2) A decision to reject an offer for public
     policy reason(s) should be based on the fact that
     public reaction to the acceptance of the offer could be
     so negative as to diminish future voluntary compliance
     by the general public. Decisions to reject offers for
     this reason should be rare.

     Example: Below are some examples of situations that may
     warrant rejection based on a public policy decision.

     The taxpayer has openly encouraged others to refuse to
     comply with the tax laws.

     Suspicion that the financial benefits of a criminal
     activity are concealed or the criminal activity is
     continuing.

          (3) An offer will not be rejected for public
     policy grounds solely because:

          (a) It would generate considerable public
     interest, some of it critical.

          (b) A taxpayer was criminally prosecuted for tax
     or non-tax violation.

          (4) The rejection narrative should discuss the
     specific public policy issues.

          (5) Rejections of this type require the approval
     of the SB/SE Compliance Area Director in the field or
     SB/SE Compliance Services Field Director for COIC.
     [Emphasis omitted.]

Policy statement P-5-89 does not specifically reference

“egregious past non-compliance”, but appears to provide that in

some cases it may be a legitimate basis for rejecting an offer

that exceeds the reasonable collection potential.   However, IRM

sec. 5.8.7.6.1 provides that respondent should discuss and

document the specific public policy issues relevant to the case

in the rejection narrative.   Respondent did not reference either
                               - 13 -

IRM sec. 5.8.7.6.1 or policy statement P-5-89 in the rejection

narrative.   Rather, respondent referenced IRM sec. 5.8.7.6(5) as

the reason for rejecting petitioner’s offer.

     Offers-in-compromise contain default provisions.   IRM sec.

5.19.7.3.20.5(1) (Feb. 1, 2004) provides that “Taxpayers must

agree to the future compliance provisions when offers are

accepted.    The taxpayer must timely file all tax returns and pay

all taxes due during the compliance period.    The compliance

period is five years from the acceptance date or until the offer

amount is paid in full, whichever is longer.”    It further

provides “Failure to adhere to the compliance terms could result

in the default of the OIC and reinstatement of compromised

liabilities.”   IRM sec. 5.19.7.3.20.5(4) (Feb. 1, 2004).     Form

656 Item 8(n) elaborates by providing that if the taxpayer

     fail[s] to meet any of the terms and conditions of the
     offer and the offer defaults, then the IRS may:

     -immediately file suit to collect the entire unpaid
     balance of the offer

     -immediately file suit to collect an amount equal to
     the original amount of the tax liability as liquidating
     damages, minus any payment already received under the
     terms of this offer

     -disregard the amount of the offer and apply all
     amounts already paid under the offer against the
     original amount of the tax liability

     -file suit or levy to collect the original amount of
     the tax liability, without further notice of any kind.
                              - 14 -

      Respondent argues that doubt as to future compliance is a

sufficient reason to reject an offer-in-compromise.    Respondent

contends that although the default provision of an offer-in-

compromise affords respondent some protection, it is not enough.

Respondent notes, citing Robinette v. Commissioner, 123 T.C. 85

(2004), revd. 439 F.3d 455 (8th Cir. 2006), that where taxpayers

violate the future compliance condition, courts have not always

found violations to be material and do not always allow

respondent to terminate an offer.    The Court is not convinced by

respondent’s speculative argument.     Courts have found offers-in-

compromise materially breached and have allowed termination of

the offer in appropriate cases where taxpayers fail to make

payments agreed to in the offer-in-compromise, fail to pay off

the amount compromised, or fail to pay taxes owed during the 5-

year period after the offer has been accepted.    E.g., United

States v. Feinberg, 372 F.2d 352, 357-358 (3d Cir. 1965); United

States v. Lane, 303 F.2d 1, 4 (5th Cir. 1962); Roberts v. United

States, 225 F. Supp. 2d 1138, 1148 (E.D. Mo. 2001); United States

v. Wilson, 182 F. Supp. 567, 571 (D.N.J. 1960).

II.   Conclusion

      Taking into account the inconsistency of IRM sec. 5.8.7.6(5)

and policy statement P-5-100, the “best interest of the

government” reasoning behind respondent’s rejection of

petitioner’s offer is unclear.   Absent clarification, the Court
                             - 15 -

cannot conclude whether it was an abuse of discretion for

respondent to proceed with collection for the reasons and on the

authority set forth in the determination letter.   The Court will

remand the case to respondent’s Appeals Office for further

consideration and clarification.

     To reflect the foregoing,


                                        An appropriate order will

                                   be issued.
