                               T.C. Memo. 2013-35



                         UNITED STATES TAX COURT



                    JURATE ANTIOCO, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 29182-09L.                         Filed February 4, 2013.


      Steven L. Walker, for petitioner.

      Lesley A. Hale and Thomas R. Mackinson, for respondent.



                           MEMORANDUM OPINION


      HOLMES, Judge: Jurate Antioco is a 71-year-old woman living with her 96-

year-old mother in an apartment building that Ms. Antioco owns. She owed the

Commissioner over $170,000 in tax, but because she had put most of her wealth

into the apartment building, she didn’t pay it. When the Commissioner told Ms.

Antioco that he intended to seize the building, she proposed instead that she pay
                                          -2-

[*2] something each month while searching for a lender who would let her use her

considerable equity in the building to refinance it and let her and her mother stay.

The Appeals officer rejected her proposal, and Ms. Antioco appealed.

      The Commissioner conceded before trial that the Appeals officer abused her

discretion by not asking Ms. Antioco to submit revised financial information, and we

remanded for a supplemental hearing. On remand a different Appeals officer never

asked for or looked at the financial information we had told him to, but quickly

concluded that Ms. Antioco had committed fraud--actual or constructive--and placed

a lien on the building and went back to suggesting the IRS seize and sell it.

      The Commissioner now agrees that Ms. Antioco didn’t commit fraud, but

argues that rejection of the installment agreement was still appropriate because she

could fully pay her tax liability. Ms. Antioco again disputes the determination, and

urges us to finally shoot down the series of moving targets that the Commissioner

keeps placing between her and a reasonable collection alternative to the forced sale

of her livelihood and residence.
                                         -3-

[*3]                                 Background

I.     Origins of Case

       Ms. Antioco was married to Peter Antioco for 27 years. During their marriage

they lived in Martha’s Vineyard, where they owned and operated a bed and breakfast

that was also their home. In 2006 the Antiocos divorced and sold the B&B for

almost $2 million. Part of the money paid off their marital debts, but Ms. Antioco

received around $165,000 in sale proceeds at the end of 2006, and another $881,000

in early 2007 when she was unable to conduct a section 1031 like-kind exchange

within the required time.1

       After the divorce and almost a year of living in temporary housing, Ms.

Antioco eventually settled in California. With her share of the sale proceeds and a

$950,000 bank loan she bought a small apartment building in San Francisco for

$1.9 million in March 2007. Ms. Antioco moved into the building and still lives in




       1
        Section 1031 says that a taxpayer doesn’t have to recognize gain or loss on
the exchange of property held for productive use in a trade or business or for
investment if she exchanges the property solely for property of “like kind” that she
also holds for productive use in a trade or business or for investment. To qualify,
she must complete the exchange within 180 days of transferring the exchanged
property. See sec. 1031(a)(3); sec. 1.1031(k)-1(b), Income Tax Regs. (Unless we
say otherwise, all section references are to the Internal Revenue Code in effect at all
relevant times.)
                                         -4-

[*4] one of its five units, while her 96-year-old mother lives in another. She rents out

the remaining three as a source of income.

       Though Ms. Antioco knew she had received money from the bed and

breakfast’s sale, she didn’t think she owed any tax on the sale because the B&B had

been her primary residence. Not until April 2008--more than a year after she bought

the apartment building--did she learn from her accountant that she owed thousands of

dollars in tax.

       Ms. Antioco filed her 2006 and 2007 tax returns in August 2008, and reported

the gain from the sale using the installment-sale method. She reported tax liabilities

for the two years totaling about $170,000--resulting mostly from her capital gain

from the bed and breakfast’s sale. But she didn’t submit payments with her returns--

after all, she had put almost all her money into the apartment building--and so the

Commissioner assessed the tax, along with interest, penalties, and additions to tax.

II.    Initial Hearing

       In April 2009 the Commissioner sent Ms. Antioco a notice of intent to levy,

which told her that the IRS was about to seize her property to pay the 2006 and

2007 tax. Ms. Antioco, realizing her only significant asset was the apartment

building that she and her mother lived in, asked for a collection due process (CDP)
                                         -5-

[*5] hearing and proposed an installment agreement of $1,000 per month until she

could get a loan to pay her tax bill in full. She explained that she wanted an

installment agreement because she was the primary caretaker for her elderly mother,

who had recently experienced health problems, and that the proposed levy on the

property would cause them both “economic hardship.” She began making $1,000

monthly payments toward her tax bill.

      Ms. Antioco also began contacting potential lenders for a loan. She quickly

learned that though she had significant equity in the building, refinancing wouldn’t be

easy because the loan agreements with her current lender gave it the right to

foreclose on the apartment building if another lien was placed on the property

without the lender’s consent. Her current lender informed her it was unwilling to

consent to a second mortgage on the property because doing so would result in an

unacceptable debt-service coverage ratio.2 It also told her it wasn’t willing to

refinance her existing loan to allow her to tap into some of the building’s equity

because her income was too low.

      In July 2009 an Appeals officer sent Ms. Antioco a letter to set up a

telephone CDP hearing for September 2009 and to ask for financial information.


      2
        Debt-service coverage ratio is a ratio to measure a property’s amount of
available cash remaining after servicing the loan payments.
                                         -6-

[*6] Ms. Antioco responded with a Form 433-A, Collection Information Statement

for Wage Earners and Self-Employed Individuals, along with her substantiating

documents and her most recent tax return. Around that same time Ms. Antioco and

her mother found a new lender--Luther Burbank Savings--that was willing to

refinance her existing loan on the apartment building at a reduced interest rate, but

still would not allow Ms. Antioco to pull cash out of the property.

      The CDP hearing went forward as scheduled several days later. At the

hearing, the Appeals officer told Ms. Antioco that before she could consider an

installment agreement, Ms. Antioco would have to try to borrow against the equity in

her apartment building. Ms. Antioco explained the difficulties she had had trying to

do just this, but mentioned that she had recently received a loan-commitment letter

from Luther Burbank Savings. The Appeals officer asked Ms. Antioco to submit

proof of her attempts to refinance before she made her determination.

      Several weeks later, Ms. Antioco sent in that proof. Included with the

documents was a copy of the Luther Burbank Savings loan-commitment letter that

listed Ms. Antioco and her mother as borrowers and approved the refinancing. The

commitment letter noted that one condition of the refinancing was: “Title to

correct vesting through escrow and provide a certified copy of the Grant Deed.”
                                         -7-

[*7] This meant that Ms. Antioco had to add her mother’s name to the deed, which

she did by granting her a joint-tenancy interest in the property. The loan closed by

the end of September 2009.

      After not hearing from the Appeals officer for several months, Ms. Antioco

received a notice of determination sustaining the proposed levy in November 2009.

The notice stated that Ms. Antioco had shown she was unable to borrow against the

equity in the apartment building, but that Appeals couldn’t consider an installment

agreement because of the Appeals Officer’s inability to verify Ms. Antioco’s

monthly business income without a revised Form 433-A. The notice concluded that

the proposed levy balanced the need for efficient collection, but didn’t address Ms.

Antioco’s economic-hardship argument.

      Ms. Antioco appealed the determination and argued that the Appeals officer

never asked her to submit a revised Form 433-A. She also reiterated that she and her

mother would experience “great economic hardship” if she couldn’t get an

installment agreement. Before trial the Commissioner moved to remand the case on

the ground that the Appeals officer had abused her discretion by not asking Ms.

Antioco to submit a revised Form 433-A and additional documentation relating to her

monthly business income. We granted the motion and remanded the case to

Appeals.
                                         -8-

[*8] III.    Supplemental Hearing

       On remand the Appeals officer assigned to the case was Alan Owyang. The

day he received the case, Mr. Owyang called Ms. Antioco to schedule a face-to-face

hearing and asked her to confirm numerous details about her case. Ms. Antioco told

him that she would call him back later that day when she had her documents relating

to the case and could better answer his questions. Mr. Owyang didn’t wait--he

called Ms. Antioco several more times that day and at one point told her she was

being uncooperative and that she didn’t have to go through with the case. He also

told her to “put your money where your mouth is” and that he had been a witness in

Tax Court. Ms. Antioco felt so threatened by Mr. Owyang’s calls that she stopped

answering and hired an attorney to help her.

       Mr. Owyang followed up his calls with a letter several days later. In it he

stated that he had preliminarily determined Ms. Antioco’s decision to add her mother

to the title had “essentially rendered [her] insolvent and devoid of any equity in

assets,” and that Ms. Antioco could pay her liabilities but “simply chose not to do

so.” The letter also asked Ms. Antioco to submit various documents, including

documentation relating to the sale of the bed and breakfast, the Luther Burbank

Savings loan, and the grant deed to her mother, but not--curiously in light of the

terms of our remand--a revised Form 433-A.
                                          -9-

[*9] Ms. Antioco’s attorney submitted a package of documents, along with a

renewed request for an installment agreement, and scheduled another telephone CDP

hearing with Mr. Owyang for the beginning of April 2011. He explained that Ms.

Antioco feared that her mother would not be able to survive the apartment building’s

sale and move to another location because of her declining health. He again asked

for a short-term installment agreement until she could get financing or her mother

passed away.

       At the hearing Mr. Owyang told Ms. Antioco’s attorney that he could not

consider an installment agreement because Ms. Antioco could fully pay her liabilies

but had transferred all her equity in the apartment building to her mother by adding

her to the deed. He also refused to consider Ms. Antioco’s “hardship” argument and

noted in the case activity record that “[t]he issue[] of * * * her 95-year old mother

(to explain why she cannot sell) [is a] diversionary argument[] that I will not

consider.”

      Because he believed the government’s interest in the building was in

jeopardy, Mr. Owyang contacted the IRS Compliance Division to file a manual lien

against the apartment building before he issued a supplemental notice of

determination. There were problems filing the lien, and several months later Mr.

Owyang emailed the revenue officer responsible for the lien filing to check on its
                                         - 10 -

[*10] status. He told the revenue officer that he wanted a lien filed “because the

federal government was completely unprotected as it relates to a valuable piece of

real property belonging to the taxpayer and then removed, by the taxpayer, from the

government’s reach in response to a CDP levy notice.”

      In May 2011 Mr. Owyang issued a supplemental notice of determination

sustaining the proposed levy. The notice concluded that Appeals could not consider

her proposed installment agreement because there was over $900,000 in equity in Ms.

Antioco’s apartment building and she had fraudulently transferred it to her mother. It

went into great detail explaining the numerous factors that Mr. Owyang believed

showed Ms. Antioco had committed fraud, including that she concealed the transfer

from the government, became insolvent as a result of the transfer, and was left

without any “equity in assets” to pay the federal government. It also suggested that

Ms. Antioco could’ve gotten a loan from a financial institution to pay off her

liabilities. And it concluded that Ms. Antioco was a “non-compliant”and “won’t pay

taxpayer” who refused to provide numerous requested documents and was “using her

95 year old mother as an emotional diversion.”

IV.   Motion for Summary Judgment

      The case came back to us, and the Commissioner moved for summary

judgment on the ground that Mr. Owyang did not abuse his discretion when he
                                         - 11 -

[*11] rejected Ms. Antioco’s proposed installment agreement. The Commissioner

admitted during a hearing on the motion that Mr. Owyang didn’t perform the

insolvency analysis necessary to find constructive fraud and that Mr. Owyang’s

analysis of actual fraud was flawed. He also conceded that Mr. Owyang didn’t

consider Ms. Antioco’s hardship argument and that a number of Mr. Owyang’s

conclusions were not supported by the administrative record. But he argued that we

should find no abuse of discretion because Ms. Antioco can fully pay her 2006 and

2007 liabilities. We denied the motion because there was a genuine dispute as to

what should be in the administrative record,3 and the case proceeded to trial.

                                      Discussion

I.    General Principles of Collection Due Process

      Once the Commissioner assesses a tax, he can collect any unpaid portion of it

by filing liens against, and levying on, a taxpayer’s property. See secs. 6321,




       3
          Ms. Antioco was and still is a resident of California, so her case would
 ordinarily be appealable to the Ninth Circuit. That court requires us to follow the
 “record rule,” which means we must look at the same things that the Commissioner
 looked at (i.e., the “administrative record”) to decide whether Mr. Owyang abused
 his discretion in upholding the proposed levy. See Keller v. Commissioner, 568
 F.3d 710, 718 (9th Cir. 2009), aff’g in part as to this issue T.C. Memo. 2006-166.
                                          - 12 -

[*12] 6331(a). But first he has to notify the taxpayer whose property he wants to

take.4 See sec. 6330(a)(1). He does this by sending the taxpayer a standard form

(such as Notice of Federal Tax Lien or Notice of Intent to Levy). See secs.

301.6320-1(a)(1), 301.6330-1(b)(3), Proced. & Admin. Regs.

      The Code gives taxpayers who receive one of these notices the right to a

hearing before the Commissioner can use a lien or levy to collect the unpaid taxes.

See secs. 6320(a)(3)(B), 6330(a)(3)(B). But the taxpayer must ask for a CDP hearing

within 30 days. See id. If the taxpayer does, then an IRS employee--called an

Appeals officer--holds the hearing with the taxpayer. See secs. 6320(b)(1),

6330(b)(1).

      A taxpayer can raise at the hearing any relevant issue relating to the unpaid

tax or proposed collection action, including challenges to the appropriateness of

collection and offers of collection alternatives. See sec. 6330(c)(2)(A). One

possible collection alternative--and the one at issue in this case--is an installment

agreement, which allows a taxpayer to pay her tax debt over time if the IRS

determines it will facilitate collection of the tax. See secs. 6159(a),

6330(c)(2)(A)(iii).


       4
        There are exceptions to this general rule that don’t apply here. See sec.
6330(f).
                                         - 13 -

[*13] At the end of the hearing the Appeals officer issues a notice of determination

on whether the proposed collection action is appropriate. See secs. 301.6320-1(b)(2),

Q&A-B3, 301.6330-1(e)(3), Q&A-E8, Proced. & Admin. Regs. The Appeals

officer’s determination must consider the issues the taxpayer raised and whether the

proposed action balances the need for efficient collection of taxes with the legitimate

concern that collection be no more intrusive than necessary. Sec. 6330(c)(3)(B) and

(C). If the taxpayer disagrees with the determination, she has 30 days to appeal. Sec.

6330(d)(1).

      In cases where the taxpayer’s underlying liability isn’t in question, we review

the Appeals officer’s actions for abuse of discretion.5 Sego v. Commissioner, 114

T.C. 604, 609-10 (2000). Under this standard, we determine whether the

Commissioner’s rejection of the taxpayer’s proposed collective alternative was

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

Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006);


       5
        A taxpayer may only challenge her underlying liability at a CDP hearing if
she didn’t receive a notice of deficiency or didn’t otherwise have an opportunity to
dispute the liability. Sec. 6330(c)(2)(B). The Commissioner’s computation of the
gain from the sale of the B&B was almost certainly too high--Ms. Antioco probably
could’ve divvied up the gain and excluded the portion of the B&B that she and her
ex used as their principal residence. See sec. 1.121-1(e), Income Tax Regs. But
Ms. Antioco did not dispute the amount of her tax bill at either of her CDP hearings,
so we can’t review the amount of that liability now.
                                           - 14 -

[*14] Woodral v. Commissioner, 112 T.C. 19, 23 (1999). This means, according to

the Ninth Circuit, that we look to see if the Commissioner’s decision was based on an

error of law or rested on a clearly erroneous finding of fact, or whether he ruled

irrationally. See Fargo v. Commissioner, 447 F.3d 706, 709 (9th Cir. 2006), aff’g

T.C. Memo. 2004-13; United States v. Sherburne, 249 F.3d 1121, 1125-26 (9th Cir.

2001).

         The Ninth Circuit also tells us to follow the record rule, which limits our review

of the Commissioner’s determination to the administrative record at the time he made

his decision. Keller v. Commissioner, 568 F.3d 710, 718 (9th Cir. 2009), aff’g in part

as to this issue T.C. Memo. 2006-166. This rule has a few narrow exceptions: We

can supplement the administrative record with evidence outside the record

         •     if necessary to determine whether the agency has considered all relevant
               factors and explained its decision;

         •     if the agency has relied on documents not in the record;

         •     when necessary to explain technical terms or complex subject matter; or

         •     when there is a showing of agency bad faith.

Tri-Valley CAREs v. DOE, 671 F.3d 1113, 1130 (9th Cir. 2012); Lands Council v.

Powell, 395 F.3d 1019, 1030 (9th Cir. 2005). But these exceptions apply only to
                                        - 15 -

[*15] information available at the time of the decision--we can’t use postdecision

information as a reason to sustain or attack the agency’s decision. Tri-Valley

CAREs, 671 F.3d at 1130-31.

        The Commissioner conceded during the hearing on his summary-judgment

motion that a number of Mr. Owyang’s determinations could not be explained by the

administrative record. And it became apparent that the administrative record the

Commissioner had compiled for the motion was incomplete. We ordered trial for the

limited purpose of supplementing the record with information that should have been

included that wasn’t and that was necessary to explain the Commissioner’s decision.

See Friends of the Payette v. Horseshoe Bend Hydroelectric Co., 988 F.2d 989, 997

(9th Cir. 1993); Kreit Mech. Assocs., Inc. v. Commissioner, 137 T.C. 123,131

(2011).

        Before trial the Commissioner’s lawyers tracked down a number of documents

that should’ve been in the administrative record--like Mr. Owyang’s case activity

record and the account transcripts. They also attempted to supplement the

Commissioner’s determination and remedy its errors with Mr. Owyang’s testimony

about the findings he made in the supplemental notice of determination. This raised

even more questions about Mr. Owyang’s reasoning and the findings that he had

made.
                                          - 16 -

[*16] II.    The Chenery Problem

       A.    Reasons for Determination to Proceed With Levy

             1.     Fraud

       One reason Mr. Owyang sustained the proposed levy is that he determined Ms.

Antioco had fraudulently transferred her apartment building to her mother. This

transfer, he said, rendered her insolvent and left her without equity in the building. At

trial he backpedaled and stated that he meant to say “less solvent,” although he

admitted that he hadn’t performed any insolvency analysis at all.

       Under California law,6 constructive fraud occurs when a person transfers

property without receiving reasonably equivalent value in exchange, and the

transferor (1) either (a) engaged in a transaction for which the transferor’s

remaining assets are unreasonably small in relation to the transaction or (b) intended

to incur (or reasonably believed that she would incur) debts beyond her ability to

pay), Cal. Civ. Code. sec. 3439.04(a)(2) (West 1997 & Supp. 2013), or (2) is either

       6
        We look to state law to determine whether there was a fraudulent transfer.
See Dalton v. Commissioner, 135 T.C. 393, 407, 411 (2010), rev’d on other
grounds, 682 F.3d 149 (1st Cir. 2012); Hudgins v. Commissioner, T.C. Memo.
2012-260, at *27-*28. Mr. Owyang did not specifically mention California
fraudulent-transfer law in his supplemental notice of determination. He instead used
general principles of state and federal fraudulent-transfer law to make his
determination, but because California fraudulent-transfer law matches up with
Federal and other states’ fraudulent-transfer law, we find neither error nor a lack of
reasonableness in his reasoning on this specific issue.
                                          - 17 -

[*17] insolvent or becomes insolvent from the transfer, Cal Civ. Code sec. 3439.05

(West 1997). Mr. Owyang’s determination that Ms. Antioco committed fraud is just

plain wrong--wrong as a matter of law, because he didn’t know what constructive

fraud meant, and clearly erroneous as a matter of fact because he did not determine

whether Ms. Antioco had actually committed constructive fraud under any of those

tests.

         But Mr. Owyang also determined that a number of facts pointed to actual fraud.

These included Ms. Antioco’s transfer of the property for inadequate consideration,

her supposed concealment of the transfer from the government, and her alleged

removal of the building from the government’s reach. He also noted that “[b]ecause

of the taxpayer’s prior non-compliant behavior, it is with absolute certainty that the

sale and transfer was done to defeat the administration and collection of the

petitioner’s federal income tax arrears for 2006 and 2007.” At trial Mr. Owyang

explained that he thought Ms. Antioco intended to place the property out of the

government’s reach because he couldn’t figure out why a financial institution would

request that her 95-year-old mother be added to the deed. Yet he also admitted that

he saw the prior Appeals officer’s notes about the Luther Burbank Savings

refinancing in the case activity record and that the administrative files he received

contained documents related to the refinancing.
                                         - 18 -

[*18] Actual fraud occurs when a person transfers property “[w]ith actual intent to

hinder, delay, or defraud any creditor.” Cal. Civ. Code sec. 3439.04(a)(1). There

was no actual fraud here. Mr. Owyang simply, and clearly, erred. The administrative

record shows that Ms. Antioco disclosed her efforts to refinance her existing loan

with Luther Burbank Savings to the first Appeals officer and also disclosed the

conditions she had to satisfy to do so. She provided documentation during her

hearings that supported her explanation of why she made her mom a joint tenant in

the apartment building. She explained why she pursued refinancing--a lower interest

rate--even though the bank wouldn’t let her take cash out of her equity. Mr.

Owyang’s determination that she concealed the transfer from the government was

therefore arbitrary.

      Mr. Owyang also unreasonably determined that Ms. Antioco’s addition of her

mother’s name on the deed put the property beyond the government’s reach. Once

the Commissioner assesses a tax, a federal tax lien automatically attaches to all

property belonging to the taxpayer. Sec. 6321. The mere attachment of that lien

gives the government a fully-protected claim that is superior to all--except some

full-value purchasers, secured creditors, or judgment-lien creditors of the taxpayer.

See sec. 6323(a); Bank of Nev. v. United States, 251 F.2d 820, 826 (9th Cir. 1957).

Ms. Antioco’s mother did not pay anything for her interest, and the tax lien arose
                                          - 19 -

[*19] well before the transfer occurred. This was, again, a pure mistake of law that

made Mr. Owyang’s determination an abuse of discretion. Because the record in this

case undermines Mr. Owyang’s determinations pointing to actual fraud, we cannot

sustain his ultimate finding of fraud on that ground either. See Dalton v.

Commissioner, 682 F.3d 149, 155 (1st Cir. 2012) (“[A] court should set aside

determinations reached by the IRS during the CDP process only if they are

unreasonable in light of the record compiled before the agency”), rev’g 135 T.C. 393

(2010).

             2.     Ability to Obtain Loan

      The supplemental notice of determination also found that the levy should

proceed because Ms. Antioco didn’t show that she made an effort to obtain a loan

from a financial institution to pay off her liabilities. The Internal Revenue Manual

(IRM) pt. 5.15.1.26(3) (May 9, 2008) states that “[t]he equity in real estate should be

pursued as a means to full pay or reduce the tax liability.” It also instructs Appeals

officers to ask the taxpayer to secure a loan and that the taxpayer’s “[r]efusal to pro-

actively seek a loan will be considered refusal to pay.” Id.

      The record contains a number of documents supporting Ms. Antioco’s

contention that she was unable to obtain a loan that would allow her to tap into some

of the apartment building’s equity. Ms. Antioco gave the first Appeals officer
                                         - 20 -

[*20] a letter from her former lender stating that it would not consent to another loan

on the property and that it was unwilling to refinance or offer her another loan, along

with her loan documents with that lender. She also submitted her loan request and

email communications about her request with another lender. And she gave the first

Appeals officer a copy of the Luther Burbank Savings commitment letter to refinance

her existing loan, and later gave a copy of the grant deed and her loan agreement with

Luther Burbank Savings to Mr. Owyang.

      Based on the documents given to her, the first Appeals officer concluded that

Ms. Antioco had verified her inability to get a loan to pay her tax liabilities. And Mr.

Owyang seemed to at first agree with this conclusion: He wrote in a letter to Ms.

Antioco notifying her of her remanded CDP case, “although you corroborated to the

federal government that you were unable to get a loan, the federal government will

ask you to full pay your income tax arrears * * * by selling your real property on

Washington street.” Yet Mr. Owyang later concluded in the supplemental notice of

determination that,

      I am not aware of any normal business practice whereas a financial
      institution denies a request for an equity loan (second Deed of Trust)
      and, concurrently, offers to subrogate an existing first Deed of Trust,
      especially since (should we believe the petitioner), by the petitioner’s
      own claim, she was not, singly, qualified for any such substitution with
      Luther Burbank Savings. And how did Luther Burbank Savings even
                                        - 21 -

       [*21] remotely knew [sic] that adding the petitioner’s 95 year old
       mother to the refinancing would cinch the deal?

      Then at trial Mr. Owyang conceded that the letter from Ms. Antioco’s former

lender--which he said he reviewed--was sufficient to show it wasn’t willing to allow

more debt on the property. He also expressed unfamiliarity with the term “debt

coverage service ratio” and admitted that he had never worked as a bank loan officer

or been in the business of refinancing commercial property. In light of the record, Mr.

Owyang’s determination that Ms. Antioco didn’t show that she was unable to obtain a

loan is clearly erroneous.

             3.     Noncompliance

      Mr. Owyang also concluded that Ms. Antioco is a “won’t pay taxpayer” and

that her “non-compliant behavior” was a reason to reject her proposed installment

agreement. This was because Mr. Owyang determined that Ms. Antioco deliberately

ignored her 2006 tax liability--that she failed to make any estimated tax payments

though she had the cash to do so--and instead bought the San Francisco apartment

building with the proceeds she received from the B&B’s sale.

      There is nothing in the record to support any of these conclusions either. The

record in fact shows just the opposite: Ms. Antioco didn’t even find out she owed

any tax for 2006 and 2007 until her accountant told her in April 2008. And she
                                         - 22 -

[*22] wasn’t required to make any estimated tax payments for 2006 (she had not been

penalized for failure to pay estimated tax) because she didn’t owe any tax for 2005.

See sec. 6654(e)(2). During her CDP hearings Ms. Antioco submitted the documents

the IRS asked for, and she began paying her 2006 liability even before her first CDP

hearing. By the time of trial, Ms. Antioco had reduced her 2006 liability by over

$88,000 through payments she made and the application of credits resulting from

available net-operating-loss carrybacks. Mr. Owyang’s determination that Ms.

Antioco was not in compliance was clearly erroneous.

      B.     Alternative Reason to Uphold Determination: Enough Equity to Fully
             Pay

      The supplemental notice of determination concluded that the Appeals officer

could not grant an installment agreement because “there is approximately

$921,740.73 in equity in the petitioner’s property and because of the petitioner’s

transfer of her primary asset, in fraud of a tax debt” and “non-compliant behavior.”

But elsewhere in the notice Mr. Owyang determined that the transfer rendered Ms.

Antioco insolvent and without any equity in the property or any means of paying the

federal government. And while the notice devoted pages to analyzing Ms. Antioco’s

supposedly fraudulent transfer to her mother, nowhere did it explain how Mr.

Owyang had determined the value of Ms. Antioco’s equity in the building or
                                          - 23 -

[*23] that the fair market value of the property was still $1.9 million (what Ms.

Antioco paid for it in 2007).7

      Yet at trial Mr. Owyang testified that the primary basis for his determination to

sustain the levy was not Ms. Antioco’s supposed fraudulent transfer and

noncompliance, but that she had enough equity in her apartment building to fully pay

her tax liability. The Commissioner now argues, based on this testimony, that the

fraudulent transfer and insolvency assertions contained in the notice are harmless

error because Mr. Owyang has now stated that he couldn’t accept Ms. Antioco’s

proposed installment agreement because of the amount of equity in the building.

Since we have found Mr. Owyang’s other grounds for sustaining the proposed levy to

be an abuse of discretion, the question now becomes: Can we uphold his

determination to proceed with the levy on this new ground?

      Ms. Antioco points out that the Commissioner’s argument that she had enough

equity to fully pay her tax bill was not one the Appeals officer relied on in the

supplemental notice of determination. She says that this is the very type of

impermissible post hoc rationalization that the Chenery doctrine prohibits.


       7
         An appraisal Ms. Antioco submitted to the first Appeals officer and that is
part of the administrative record valued the apartment building at $1.34 million.
This was because the building’s foundation was brick and was considered to be
“legally non-conforming.”
                                         - 24 -

[*24] See SEC v. Chenery Corp., 332 U.S. 194 (1947) (Chenery II); SEC v. Chenery

Corp., 318 U.S. 80 (1943) (Chenery I).

      The Commissioner agrees that the Chenery doctrine applies to this case. But

he points to Mr. Owyang’s testimony and the supplemental notice’s mentioning that

Ms. Antioco “has the ability to full pay” as supporting his argument that her ability to

fully pay was the primary reason Appeals rejected the proposed installment

agreement.

      The Chenery doctrine is an administrative-law principle that says “a

reviewing court, in dealing with a determination or judgment which an

administrative agency alone is authorized to make, must judge the propriety of such

action solely by the grounds invoked by the agency.” Chenery II, 332 U.S. at 196

(describing its holding in Chenery I). The Supreme Court not too long ago

announced that “we are not inclined to carve out an approach to administrative

review good for tax law only” and noted “the importance of maintaining a uniform

approach to judicial review of administrative action.” Mayo Found. for Med. Educ.

& Research v. United States, 562 U.S. ___, ___, 131 S. Ct. 704, 713 (2011) (citation

and internal quotation marks omitted). This dictates that we follow the Chenery

doctrine in CDP cases, as we have already done in a couple other recent cases. See
                                         - 25 -

[*25] Jones v. Commissioner, T.C. Memo. 2012-274, at *22-*23; Salahuddin v.

Commissioner, T.C. Memo. 2012-141, 2012 WL 1758628, at *7.

      Applying Chenery in the CDP context means that we can’t uphold a notice of

determination on grounds other than those actually relied upon by the Appeals officer.

See Chenery I, 318 U.S. at 87-88; Spiva v. Astrue, 628 F.3d 346, 353 (7th Cir. 2010)

(agency has the responsibility to articulate its reasoning); Salahuddin, 2012 WL

1758628, at *7 (stating that “our role under section 6330(d) is to review actions that

the IRS took, not the actions that it could have taken”). Those grounds must be

clearly set forth so that we do not have to guess about why an Appeals officer

decided what he did. See Chenery II, 332 U.S. at 195. We cannot uphold his

determination simply because findings might have been made and considerations

might be disclosed which might justify his ultimate conclusion. Chenery I, 318 U.S.

at 93-94.

      We cannot say that Ms. Antioco’s having enough equity in her apartment

building to fully pay her liability was a ground that Mr. Owyang actually relied on

in making his determination. Mr. Owyang determined in his own mind on the day

he received the case that Ms. Antioco had fraudulently transferred her apartment

building to her mother and that the transfer rendered her insolvent and without

equity in the property to pay her tax bills. His conclusions changed very little
                                          - 26 -

[*26] throughout the rest of the time the case was before him, and he repeated them at

the end in the supplemental notice of determination. The supplemental notice was so

riddled with factual errors and contradictory statements that it’s hard to say whether

Mr. Owyang determined Ms. Antioco “has the ability to full pay” because of the

equity in her property. And nowhere in it did Mr. Owyang explain how he calculated

the amount of equity. We therefore reject the Commissioner’s attempt at trial to

make the necessary findings and arguments to justify that determination, and we

refuse to rely on Ms. Antioco’s supposed ability to fully pay to sustain the

supplemental notice. Mr. Owyang’s determination to proceed with the proposed levy

in the supplemental notice of determination was an abuse of discretion.

      C.     Failure to Consider Issues Raised

             1.     Special Circumstances

      Even if Mr. Owyang had relied on the equity ground, he never considered Ms.

Antioco’s argument about her mother’s advanced age and failing health that she

raised at both CDP hearings. Section 6159 authorizes the Commissioner to enter

into an installment agreement where it will “facilitate full or partial collection.” See

sec. 6159(a); sec. 301.6159-1(a), Proced. & Admin. Regs. The Internal Revenue

Manual states that a taxpayer does not qualify for installment agreements if the

taxpayer’s account can be fully or partially satisfied by liquidating assets, unless
                                          - 27 -

[*27] “factors such as advanced age, ill-health, or other special circumstances are

determined to prevent the liquidation of the assets.” IRM pt. 5.14.1.4(6) (Sept. 26,

2008).

         Ms. Antioco repeatedly brought up in her CDP hearings that she was the

caretaker for her now 96-year-old mother, who suffers from congestive heart failure

and wears a pacemaker, and noted that her mother lives in one of the apartments

connected to hers. She indicated she was concerned that her mother would not be

able to survive the sale of the building and subsequent move because of her health

and advanced age. Ms. Antioco, a senior citizen herself, was also worried that she

and her mother would have difficulty finding somewhere else to live. These were

precisely the reasons Ms. Antioco listed as grounds for entering into a short-term

installment agreement until she could either obtain a loan or sell the building after her

mother passed away. And after Mr. Owyang had manual liens placed on the

property, she noted that the government’s interest would be fully protected during this

temporary reprieve from the levy.

         But Mr. Owyang failed to meaningfully consider this argument during Ms.

Antioco’s supplemental CDP hearing. And he didn’t make any findings anywhere

in the administrative record about Ms. Antioco’s special circumstances, other than

that Ms. Antioco was “using her 95 year old mother as an emotional diversion.” On
                                        - 28 -

[*28] brief the Commissioner again supplied the reasoning for not accepting Ms.

Antioco’s installment agreement despite these circumstances: Ms. Antioco and her

mother don’t share the same household--they live in separate apartments in the same

building. And Ms. Antioco hasn’t provided evidence that she had “specially

modified” her mother’s apartment, “as might be required if she had a specific

handicap” (as opposed to simply being a nonagenarian with congestive heart failure)

or that her mother cannot be safely moved to a different residence. We again refuse

to accept the Commissioner’s post hoc justification for rejecting Ms. Antioco’s

special-circumstances argument. We find instead that it was an abuse of discretion

for Mr. Owyang not to consider Ms. Antioco’s argument--as required under section

6330(c)(3)(B)--that special circumstances warranted accepting her proposed

collection alternative. See Blosser v. Commissioner, T.C. Memo. 2007-323, 2007

WL 3145516, at *4.

            2.     Economic Hardship

      Section 6343(a)(1)(D) tells the Commissioner to release a levy upon all, or

part of, a taxpayer’s property if he determines that a levy would cause economic

hardship to a taxpayer. A regulation tells us that a levy causes “economic hardship”

when it would cause the taxpayer to be unable to pay her reasonable basic living

expenses. Sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs. A taxpayer
                                          - 29 -

[*29] can’t just say this; she has to submit complete and current financial information

to the Commissioner. See Picchiottino v. Commissioner, T.C. Memo. 2004-231,

2004 WL 2284376, at *5-*6. In a CDP hearing, if a taxpayer does provide financial

information that shows the proposed levy would create economic hardship for her, the

Appeals officer cannot go forward with the levy and has to consider an alternative.

See Vinatieri v. Commissioner, 133 T.C. 392, 401 (2009).

      Ms. Antioco used the words “hardship” and “economic hardship” in numerous

letters that she sent to the Appeals officer in her first hearing to describe what would

happen if the IRS levied on her apartment building. Her lawyer again raised this

argument at her supplemental hearing. This should have made it clear to the Appeals

officers that they needed to consider her argument. Yet the administrative record

reflects that Mr. Owyang didn’t even make any determination about economic

hardship, and the words “hardship” and “economic hardship” do not even appear in

the supplemental notice of determination. Mr. Owyang didn’t even ask for a revised

Form 433-A--the reason we remanded in the first place--which would have allowed

him to determine Ms. Antioco’s income from renting the other apartments in her

building and if levying on the property would cause her hardship.
                                         - 30 -

[*30] Mr. Owyang testified at trial that the reason he didn’t consider economic

hardship in making his determination is that Ms. Antioco never raised the issue. But

he also testified that he had read the communications from Ms. Antioco’s first CDP

hearing and he admitted that Ms. Antioco’s attorney had mentioned hardship as well.

His testimony on this point is simply not believable.

      The Commissioner argues on brief that Ms. Antioco’s apartment building

should not be protected as her principal residence8 because of the amount of equity

and the lack of special improvements. He also argues that Ms. Antioco’s alleged

economic hardship can be remedied by selling the building and using the

approximately $700,000 in net proceeds9 to pay her and her mother’s reasonable

basic living expenses. He admits that selling the property would deprive Ms.


       8
        Ms. Antioco also argued in her renewed request for an installment
agreement that section 6334 exempts her apartment building from levy because it
serves as her principal residence. See sec. 6334(a)(13)(B)(i), (e)(1). Mr. Owyang
correctly determined that section 6334(e) allows a levy on a principal residence
once a District Court judge or magistrate approves the levy in writing. See sec.
6334(e)(1)(A). This means that even if we were to uphold the proposed levy, the
IRS would still have to obtain approval from a District Court before levying on Ms.
Antioco’s building. That court’s review may overlap with our own. See Foley v.
Commissioner, T.C. Memo. 2007-242, 2007 WL 2403732, at *3 n.2.
       9
        The Commissioner never explained how he reached this number, but we
assume he calculated it based on a fair market value of $1.9 million (what Ms.
Antioco paid for the property in 2007), and not some more recent post-crash
appraisal.
                                        - 31 -

[*31] Antioco of the income she currently receives from renting out the other units but

states that she would receive enough money from the sale to pay living expenses or

invest in a new venture.

       These arguments are also nowhere to be found in the administrative record.

The fact is that Mr. Owyang failed to consider Ms. Antioco’s economic-hardship

argument or to ask for the relevant financial information to determine whether levying

on the property would cause her hardship. His failure to do so was an abuse of

discretion.

III.   Remedy

       We have found that Mr. Owyang abused his discretion in sustaining the

proposed levy and that we cannot uphold the supplemental notice of determination on

any of the stated grounds. Ms. Antioco asks that we decide she is entitled to an

installment agreement instead of remanding to Appeals for yet another CDP hearing.

We hesitate to hold that we ourselves can independently review whether a proposed

collection alternative is acceptable. See Murphy, 125 T.C. at 320. In any event, Mr.

Owyang never asked for a revised Form 433-A, so we couldn’t even begin to evaluate

whether Ms. Antioco’s $1,000 per month installment-agreement -with-expectation-of-

refinancing-and-protection-by-lien alternative was appropriate.
                                       - 32 -

[*32] We will therefore again remand the case to Appeals to consider Ms. Antioco’s

proposed installment agreement, her financial information, and whether special

circumstances or economic hardship exists.


                                             An appropriate order will be issued.
