                  T.C. Summary Opinion 2006-75



                     UNITED STATES TAX COURT



                    AL SAMPSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4170-05S.              Filed May 8, 2006.



     Al Sampson, pro se.

     Catherine G. Chang, for respondent.



     PANUTHOS, Chief Special Trial Judge:   This case was heard

pursuant to the provisions of sections 6330(d) and 7463 of the

Internal Revenue Code in effect when 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, all subsequent section references are to the Internal

Revenue Code in effect at relevant times.
                               - 2 -

     This proceeding arises from a petition for judicial review

filed in response to a Notice of Determination Concerning

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

determination) sent to petitioner on February 19, 2005.    Pursuant

to sections 6320(c) and 6330(d), petitioner seeks review of

respondent’s determination sustaining the filing of a notice of

Federal tax lien against petitioner.     The issue for decision is

whether respondent abused his discretion in rejecting an offer-

in-compromise (OIC) that petitioner submitted for the taxable

year 2002.

                            Background

     Some of the facts have been stipulated, and they are so

found.   The record consists of the stipulation of facts and

supplemental stipulation of facts with attached exhibits, an

additional exhibit admitted during trial, and the testimony of

petitioner.   At the time of filing the petition, petitioner

resided in San Francisco, California.

     Petitioner was 43 years old at the time of trial.    He has

been sporadically employed throughout his adulthood.     Social

Security records covering the taxable years 1978 through 2003

indicate petitioner’s annual wage income has never exceeded

$19,432.   The records also indicate petitioner earned no wage
                                   - 3 -

income from 1998 through 2003.1      For the past several years,

petitioner has been a student at City College of San Francisco

(City College).       At the time of trial, petitioner was a senior at

City College but was unsure when he would graduate.      Petitioner

indicated that City College had recently reduced its offering of

courses due to budget constraints, which has delayed his

graduation.       Petitioner has maintained himself during this time

by using student loan proceeds and by minimizing his living

expenses.

       In the taxable year 2002, petitioner won a car from Centra

Marketing & Communications, LLC (Centra) as part of an Internet

sales promotion.       Petitioner sold the car shortly after receiving

it, although it is not clear what he did with the proceeds.

Centra issued a Form 1099-MISC, Miscellaneous Income, to

petitioner reflecting $38,540 of gross income attributable to the

car.       Petitioner reported that amount on his 2002 Federal income

tax return, as well as $146 of interest income, but made no

payments toward his tax liability.

       Respondent made assessments against petitioner for the

taxable year 2002 totaling $5,942.01 for income tax and related

penalties and interest.      In July 2004, respondent filed a notice

of Federal tax lien and sent petitioner a Notice of Federal Tax


       1
       The record does not indicate whether petitioner had other
sources of income during these years, other than a small amount
of interest income that he received in the taxable year 2002.
                                - 4 -

Lien Filing and Your Right to a Hearing Under IRC 6320.

Petitioner timely submitted a Form 12153, Request for a

Collection Due Process Hearing.    He also submitted an OIC, in

which he made a cash offer of $2,000 to compromise his 2002 tax

liability.2   The OIC was based on doubt as to collectibility.

     Petitioner’s OIC was assigned to an Appeals officer.    As

part of his evaluation of the OIC, the Appeals officer calculated

the monthly income that petitioner could pay toward his 2002 tax

liability.    The Appeals officer used petitioner’s 2002 gross

income of $38,686 as a baseline and then projected that amount

over a 48-month period.    After subtracting allowable expenses,

the Appeals officer calculated that petitioner could pay $932 a

month toward his 2002 tax liability, which would allow him to pay

the liability in full in less than a year.

     Petitioner and the Appeals officer participated in an

administrative hearing in January 2005.    Prior to the hearing,

the Appeals officer was unaware that petitioner’s 2002 gross

income was attributable almost entirely to the car he had

received from Centra.    After learning of this fact, the Appeals

officer requested and received additional information from

petitioner.




     2
       Petitioner intended to use his student loan proceeds to
pay the $2,000.
                               - 5 -

On January 19, 2005, the Appeals officer sent petitioner a letter

stating in part:

     Part of the process of evaluating an offer from a
     person who is unemployed is to consider what that
     person would earn if they were working. Usually that
     is done by looking at previous income history. In your
     case, that is problematical because of your history,
     but it seems clear that were you to find employment you
     would be able to pay the tax liability for 2002. The
     fact that you have chosen to go to school rather than
     work is not really relevant.

     On February 19, 2005, respondent issued petitioner a notice

of determination sustaining the filing of the notice of Federal

tax lien.   The notice of determination states that the Appeals

officer verified that the requirements of law and administrative

procedure had been met and that petitioner’s OIC was rejected

because petitioner could fully pay his 2002 tax liability.

                            Discussion

     Section 6321 imposes a lien in favor of the United States on

all property and rights to property of a person when a demand for

the payment of the person’s liability for taxes has been made and

the person fails to pay those taxes.     Such a lien arises when an

assessment is made.   Sec. 6322.   Section 6323(a) requires the

Secretary to file notice of Federal tax lien if such lien is to

be valid against any purchaser, holder of a security interest,

mechanic’s lienor, or judgment lien creditor.     Lindsay v.

Commissioner, T.C. Memo. 2001-285, affd. 56 Fed. Appx. 800 (9th

Cir. 2003).
                                 - 6 -

     Section 6320 provides that a taxpayer shall be notified in

writing by the Secretary of the filing of a Federal tax lien and

provided with an opportunity for an administrative hearing.      Sec.

6320(b).    An administrative hearing under section 6320 is

conducted in accordance with the procedural requirements of

section 6330.    Sec. 6320(c).   At the administrative hearing, a

taxpayer is entitled to raise any relevant issue relating to the

unpaid tax, including a spousal defense or collection

alternatives such as an OIC or an installment agreement.      Sec.

6330(b) and (c)(2); sec. 301.6320-1(e)(1), Proced. & Admin. Regs.

     A taxpayer also may challenge the existence or amount of the

underlying tax liability, including a liability reported on the

taxpayer’s original return, if the taxpayer “did not receive any

statutory notice of deficiency for such tax liability or did not

otherwise have an opportunity to dispute such tax liability.”

Sec. 6330(c)(2)(B); see also Urbano v. Commissioner, 122 T.C.

384, 389-390 (2004); Montgomery v. Commissioner, 122 T.C. 1, 9-10

(2004).    Section 6330(d) provides for judicial review of the

administrative determination in the Tax Court or a Federal

District Court, as may be appropriate.     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
                               - 7 -

of discretion.   Goza v. Commissioner, 114 T.C. 176, 181-182

(2000).   Whether an abuse of discretion has occurred depends upon

whether the exercise of discretion is without sound basis in fact

or law.   See Freije v. Commissioner, 125 T.C. 14, 23 (2005);

Ansley-Sheppard-Burgess Co. v. Commissioner, 104 T.C. 367, 371

(1995).

     Petitioner does not seek to challenge his underlying tax

liability.   He challenges only the rejection of his OIC.    We

therefore review for abuse of discretion.

     Section 7122(a) authorizes the Secretary to compromise any

civil case arising under the internal revenue laws.    The

Commissioner will generally compromise a liability on the basis

of doubt as to collectibility only if the liability exceeds the

taxpayer’s reasonable collection potential.   Lemann v.

Commissioner, T.C. Memo. 2006-37.   A taxpayer’s reasonable

collection potential is calculated by determining and adding

together the taxpayer’s net equity and his future income.     See

id.; sec. 301.7122-1(b)(2), Proced. & Admin. Regs.    Respondent

concedes that petitioner had no equity available to satisfy his

2002 tax liability.   Respondent argues, however, that petitioner

had sufficient future income to pay his tax liability in full.3




     3
       The parties do not dispute the amount of petitioner’s
allowable living expenses.
                                - 8 -

      Section 7122(c) provides that the Secretary shall prescribe

guidelines for IRS personnel to determine whether an OIC is

adequate and should be accepted.    These guidelines have been

published and include certain provisions of the Internal Revenue

Manual (IRM).   See Lemann v. Commissioner, supra; Spurgin v.

Commissioner, T.C. Memo. 2001-290.      IRM sec. 5.8.5.5 (Nov. 15,

2004) provides guidelines for calculating a taxpayer’s future

income.   “Future income is defined as an estimate of the

taxpayer’s ability to pay based on an analysis of gross income,

less necessary living expenses, for a specific number of months

into the future.”    IRM sec. 5.8.5.5(1) (Nov. 15, 2004).      For cash

offers, income and expenses are estimated for a 48-month period.

Id.   The calculation of future income should take into account

“the taxpayer’s overall general situation including such facts as

age, health, marital status, number and age of dependents,

highest education or occupational training and work experience.”

IRM sec. 5.8.5.5(3) (Nov. 15, 2004).     The IRM provides that “Some

situations may warrant placing a different value on future income

than current or past income indicates”.     IRM sec. 5.8.5.5(5)

(Nov. 15, 2004).    For example, if income or necessary expenses

will increase or decrease, then the amount or number of expected

payments should be adjusted accordingly.      Id.   If a taxpayer is

“temporarily unemployed or underemployed”, then income should be

calculated as if the taxpayer were fully employed.       Id.   If a
                                - 9 -

taxpayer has a “sporadic employment history or fluctuating

income”, then earnings over several prior years should be

averaged.    Id.

     As the Appeals officer acknowledged, estimating petitioner’s

future income is “problematical”.    Petitioner intends to graduate

and find work, but it is uncertain when he will graduate, what

type of employment he will find, or how much he will earn.    While

the IRM addresses situations where the taxpayer is “temporarily”

out of work, petitioner has not been employed for several years.

Petitioner has a history of sporadic employment and thus is a

candidate for income averaging.    See IRM sec. 5.8.5.5(5) (Nov.

15, 2004).    Because of his limited earnings, however,

petitioner’s average income over the several years prior to 2002

is close to zero.

     Despite the unusual circumstances of petitioner’s case, the

IRM provides the following guidance:

     In some instances, a future income collateral agreement
     may be used in lieu of including the estimated value of
     future income in reasonable collection potential (RCP).
     When investigating an offer where current or past
     income does not provide an ability to accurately
     estimate future income, the use of a future income
     collateral agreement may provide a better means of
     calculating an acceptable offer amount. * * *

     Example: A taxpayer is currently in medical school and
     it is anticipated that upon graduation income should
     increase dramatically.

IRM sec. 5.8.5.5(6) (Nov. 15, 2004).
                              - 10 -

     Assuming petitioner secures employment after graduation, he

likely will earn significantly more income than he has over the

past several years.   For the reasons stated above, however, it is

difficult to estimate the amount of his future income or when he

will receive such income.   The facts of petitioner’s case

therefore appear to fit squarely within IRM sec. 5.8.5.5(6).

Nevertheless, there is no indication that the Appeals officer

considered using a future income collateral agreement.   Instead,

the Appeals officer determined that because petitioner’s status

as a student was “not really relevant”, petitioner’s future

income included the wages he could have earned, but chose to

forgo, in order to pursue his studies (forgone earnings).     The

Appeals officer also determined that petitioner’s forgone

earnings were sufficient to pay his 2002 tax liability in full.

     It is true petitioner could have increased his income had he

discontinued his education and found work; however, we can find

nothing in the IRM suggesting that a student’s forgone earnings

are a component of future income.   In fact, the example in IRM

sec. 5.8.5.5(6) indicates a taxpayer can qualify for an OIC

despite choosing to pursue education rather than employment.     The

example does not include forgone earnings as part of the

taxpayer’s reasonable collection potential.

     Even if petitioner’s future income did include forgone

earnings, the difficulty of calculating the amount of such
                               - 11 -

earnings is evident.   Petitioner’s forgone earnings presumably

depend on the type of employment he could obtain, which in turn

depends on factors such as his work experience, job skills, and

the strength of the labor market.   There is no indication the

Appeals officer considered these factors or attempted to

calculate petitioner’s forgone earnings.4   Rather, it appears the

Appeals officer assumed that petitioner would earn sufficient

income, after allowable expenses, to pay his tax liability in

full.    Petitioner’s history of intermittent employment and modest

wage income raises doubts about the validity of this assumption.

Furthermore, it is unclear whether the Appeals officer considered

that petitioner might have increased expenses if he discontinued

his studies, such as student loan repayments.

     We conclude the Appeals officer abused his discretion in

rejecting petitioner’s OIC on the ground that petitioner had

sufficient future income to pay his 2002 tax liability in full.

We therefore shall remand this matter to the Appeals Office for

reconsideration of petitioner’s OIC.




     4
       As mentioned supra, the Appeals officer prepared an income
projection based on petitioner’s 2002 gross income of $38,686.
After petitioner explained that he had received a car as part of
a sales promotion, however, it appears the Appeals officer
acknowledged the income projection was inaccurate. There is no
indication the Appeals officer prepared a revised income
projection.
                            - 12 -

    Reviewed and adopted as the report of the Small Tax Case

Division.

    To reflect the foregoing,


                                     An appropriate order will

                                be issued.
