                        T.C. Memo. 2003-302



                      UNITED STATES TAX COURT



         DONALD G. AND CLAUDIA A. WILLIS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6456-02L.             Filed November 3, 2003



     Mark H. Westlake, for petitioners.

     Caroline Krivacka, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     SWIFT, Judge:   This case arises from a petition for judicial

review timely filed in response to a notice of determination

concerning collection action under section 6330.1   The notice of



     1
        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.
                               - 2 -

determination relates to petitioners’ Federal income tax

liabilities for 1992, 1993, 1994, 1995, 1996, and 1997.

Petitioners’ liability for the underlying taxes, interest, and

penalties is not disputed.   The issue for decision is whether

respondent’s rejection of petitioners’ three proposed

alternatives to collection constitutes an abuse of discretion.


                         FINDINGS OF FACT

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

     At the time of filing the petition, petitioners resided in

Lebanon, Tennessee.   Petitioner Donald G. Willis2 operates a

locksmith business as a sole proprietorship.   Petitioner

subcontracts much of the locksmith work.    In addition, petitioner

derives income from a part-time ministry.   Petitioner Claudia A.

Willis is not employed outside the home.

     On January 30, 2001, respondent sent to petitioners a final

notice of intent to levy with respect to petitioners’ outstanding

Federal income taxes, interest, and penalties for 1992 through

1997 (cumulative liability).   On March 1, 2001, respondent

received petitioners’ timely request for a collection due process

hearing.

     After submitting to respondent for consideration certain

personal financial information relating to petitioners, on May 9,


     2
        Hereinafter, unless otherwise indicated, references to
petitioner in the singular are to petitioner Donald G. Willis.
                                - 3 -

2001, petitioners’ counsel met with a settlement officer from

respondent’s Appeals Office.    Petitioners’ counsel requested that

respondent allow petitioners to partially satisfy their

cumulative liability by means of an installment agreement.

     The settlement officer correctly advised petitioners’

counsel that, under respondent’s policy, an installment agreement

would be acceptable only if the payments thereunder would satisfy

in full the total amount of the cumulative liability within the

applicable periods of limitation, plus any allowable extensions.

Petitioners did not offer to make payments to respondent in an

amount sufficient, within the applicable periods of limitation

plus allowable extensions, to fully satisfy the cumulative

liability, which, at that time, totaled approximately $125,000.

As a result, respondent rejected petitioners’ proposed

installment agreement.

     On July 17, 2001, petitioner personally met with the

settlement officer.   At that meeting, petitioner requested that

respondent designate the cumulative liability as currently not

collectible (i.e., as uncollectible), and the settlement officer

considered the revisions petitioner submitted to his financial

information.   After considering the revisions, the settlement

officer concluded that petitioners had disposable monthly income

of $348 and that petitioners could afford to make payment to

respondent of $180 per month.   As a result, the settlement
                               - 4 -

officer advised petitioners that the cumulative liability could

not be classified as currently not collectible.     The settlement

officer then suggested to petitioner that petitioners submit an

offer in compromise in the amount of $180 per month for 116

months.   Under this suggested offer in compromise, respondent

would consider compromising the cumulative liability for a total

payment by petitioners of $20,880.

     On or about September 5, 2001, petitioners submitted on the

appropriate form the above offer in compromise as proposed by

respondent’s settlement officer.   On September 18, 2001, the

settlement officer wrote to petitioners indicating that

verification of the financial information petitioners had

submitted was required before petitioners’ offer in compromise

could be reviewed and approved.

     During the settlement officer’s verification of petitioners’

financial information, certain real estate was identified which

had not been previously disclosed to respondent.3    Petitioners’

mobile home in which they resided was located on the real estate.

In 1996, the real estate had been purchased in petitioners’

names, using a cashier’s check in the amount of $8,750 as part of

a $9,000 downpayment toward the $35,000 total purchase price.        In

1998, nominal title to this real estate was transferred by


     3
        The information that petitioners had submitted up until
that time indicated that petitioners paid rent for the “land” on
which the mobile home in which they resided was located.
                               - 5 -

petitioners to petitioner’s mother.    Although the warranty deed

recording this title transfer reflects consideration of $10,000,

petitioner’s mother made no such payment to petitioners.     Since

1999, the mobile home located on this real estate has been

petitioners’ primary residence.

     Petitioners advised the settlement officer that the real

estate belonged to petitioner’s mother.   Petitioners indicated

that petitioner’s mother had provided the funds for the 1996

cashier’s check used to purchase the real estate.   Petitioners

submitted to respondent’s settlement officer copies of checks and

a bank statement in support of this contention.   The bank

statement reflects a payment by petitioner’s mother of $8,750 on

August 26, 1996.   The bank statement, however, also reflects a

deposit of $10,532.33 into the same bank account on that same

date.

     From the time of purchase in 1996 through the time of the

collection due process hearing, petitioners paid the property

taxes and mortgage payments relating to the real estate.     No

rental agreement between petitioners and petitioner’s mother was

provided, and none appears to exist.   On her Federal income tax

returns, petitioner’s mother did not include rental income or

deduct mortgage interest relating to this real estate.

Petitioner’s mother was not called as a witness in this case.
                               - 6 -

     Also, information obtained by the settlement officer

indicated that, just prior to the above 1996 purchase of the real

estate, petitioners sold a house in Nashville, Tennessee.

Petitioners did not provide to the settlement officer requested

information regarding the disposition of the proceeds from the

sale of the Nashville house.

     Based on valid and unresolved concerns regarding ownership

of the real estate on which petitioners’ mobile home residence

was located, the settlement officer rejected petitioners’ offer

in compromise of $180 per month and calculated a minimum

acceptable offer in compromise from petitioners of $529 per month

for 116 months, until a total of $61,364 would be paid.    In

preparing computations of this new minimum amount for an

acceptable offer in compromise from petitioners, the settlement

officer used a fair market value for the real estate of $82,300,

based upon a 2001 local property tax appraisal.   The settlement

officer calculated petitioners’ net realizable equity in the real

estate at $39,840.

     Petitioners disputed the settlement officer’s decision to

consider the equity in the real estate in evaluating their offer

in compromise.   Petitioners, however, did not submit to

respondent’s settlement officer information sufficient to resolve

the settlement officer’s question regarding ownership of the real

estate.
                               - 7 -

     On January 17, 2002, the settlement officer prepared an

Appeals Case Memorandum sustaining the proposed levy action.     On

February 19, 2002, respondent issued to petitioners a notice of

determination concluding that petitioners’ offer in compromise

was unacceptable and denying petitioners’ request to suspend

collection action.


                              OPINION

     Because the underlying tax liability is not in dispute, we

review the settlement officer’s actions under an abuse of

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

(2000).   An abuse of discretion occurs when respondent takes

action that is arbitrary or capricious, lacks sound basis in law,

or is not justifiable in light of the facts and circumstances.

Mailman v. Commissioner, 91 T.C. 1079, 1084 (1988).

     Petitioners contend that the settlement officer abused his

discretion in refusing to designate petitioners’ cumulative

liability as currently not collectible.     Petitioners also contend

that the settlement officer abused his discretion in refusing to

accept the proposed payments of $180 per month under either an

installment agreement or an offer in compromise.

     Generally, Appeals officers are to consider alternatives to

collection offered by taxpayers in the course of collection due

process proceedings.   Sec. 6330(c).    As indicated, petitioners
                                - 8 -

proposed three alternatives to collection.    We address each

seriatim.


Currently Not Collectible

     Generally, currently not collectible (CNC) status may be

available when a taxpayer has no ability to make payments.

2 Administration, Internal Revenue Manual (CCH), sec. 5.16.1.1,

at 17,803 (2000).    A taxpayer’s ability to make payments is

determined by calculating the excess of income over necessary

living expenses.    2 Administration, Internal Revenue Manual

(CCH), sec. 5.16.1.2.1, at 17,804 (2000).    CNC status may be

available based on “hardship” if the levy action would prevent

the taxpayer from meeting necessary living expenses.

     Petitioners submitted to the settlement officer certain

personal financial information in support of their request for

CNC status for the cumulative liability.    The settlement officer

concluded that petitioners had the ability to make monthly

payments and that CNC status was not appropriate.    Petitioners do

not challenge the settlement officer’s conclusion as to their

ability to make some payments toward their cumulative liability;

indeed, petitioners’ proposed offer in compromise, involving

payments of $180 per month, would belie any such claim.

     Petitioners clearly had some ability to make payments toward

the cumulative liability.    As a result, petitioners were not

eligible to have the cumulative liability classified as CNC.     We
                               - 9 -

find no abuse of discretion in the settlement officer’s decision

that petitioners were not eligible for CNC status.


Installment Agreement

     Section 6159 authorizes respondent to consider installment

agreements when a taxpayer lacks the current ability to satisfy

the full amount of taxes.   At the time of the collection due

process hearing in this case, respondent maintained a policy of

accepting installment agreements only with terms that would

result in full payment of all Federal income tax liabilities

within the applicable collection periods of limitation.   Internal

Revenue Manual, sec. 5.14.1.1 (effective Oct. 18, 1999 to

Mar. 30, 2002).   A 5-year extension of the periods of limitation

is permissible when making this determination.   Internal Revenue

Manual, sec. 5.14.1.7 (effective Oct. 18, 1999 to Mar. 30, 2002).

     In light of the amount of petitioners’ cumulative liability,

an acceptable installment agreement would have required payments

of approximately $1,500 per month for the 116 months in the

collection periods of limitation.   Even with a 5-year extension,

payments of more than $1,100 per month would have been required.

Petitioners do not dispute their inability to make payments in

that amount.

     After the notice of determination was issued in this case,

respondent changed its policy related to installment agreements.

Under respondent’s new policy, respondent may allow taxpayers to
                              - 10 -

enter into installment agreements to pay specific tax periods in

full and to have other tax periods designated as CNC.

2 Administration, Internal Revenue Manual (CCH), sec. 5.14.2.2,

at 17,529 (effective Mar. 30, 2002).   Respondent’s new policy,

however, still requires that taxpayers borrow upon or liquidate

current assets.   2 Administration, Internal Revenue Manual (CCH),

sec. 5.14.2.2(1), at 17,529 (effective Mar. 30, 2002).    At trial,

petitioners’ counsel argued that this case was not about abuse of

discretion by an individual settlement officer, but rather about

an “institutional abuse of discretion” in the application of the

policy that respondent used when considering petitioners’

proposed installment agreement.   Petitioners claim respondent

should have treated the cumulative liability as consisting of

separate liabilities for each year and should have classified

some years as CNC while allowing petitioners an installment

agreement for the liabilities for other years.

     The settlement officer properly applied the policies

applicable when considering petitioners’ request for an

installment agreement, and we find no abuse of discretion in his

action.   Further, particularly in light of the unresolved

question relating to ownership of the real estate, petitioners

have failed to establish that they would qualify for treatment

under respondent’s new policy.    We find no abuse of discretion in
                              - 11 -

respondent’s use in this case of the prior policy for installment

agreements.


Offer in Compromise

     Section 7122 provides authority for an offer in compromise

as an alternative to collection action.    An offer in compromise

reduces a taxpayer’s overall liability.    An offer in compromise

may be granted for reasons such as doubt as to the actual tax

liability, doubt as to collectibility, or for other purposes

relating to effective tax administration.   Sec. 7122.

     As indicated, petitioners do not dispute the amount of the

cumulative liability.   The proposed offer in compromise was

considered on the grounds of doubt as to collectibility.    In

general, an offer in compromise based on doubt as to

collectibility may be accepted where there are substantial

questions concerning whether the tax liability will be collected

in full and where the offered amount reflects realistic

collection potential.   2 Administration, Internal Revenue Manual

(CCH), sec. 5.8.1.1.3, at 16,253 (2001).

     After reviewing the initial financial information provided

by petitioners, the settlement officer suggested that

petitioners’ proposed offer in compromise of $180 a month for 116

months, for a total of $20,880, appeared acceptable.     However, as

explained above, the settlement officer’s verification of

petitioners’ financial information uncovered a significant
                               - 12 -

question regarding ownership of real estate in which an equity

interest of nearly $40,000 appeared to exist.   As a result, the

settlement officer concluded that petitioners’ offer in

compromise was not acceptable.

      Although petitioners continue to assert that the real

estate belongs to petitioner’s mother, petitioners failed to

provide to respondent’s settlement officer certain requested

information in support of this assertion.   For example,

petitioners failed to provide information relating to the

proceeds of the Nashville house that petitioners sold,

information that is particularly significant because of the

$10,532.33 deposit into petitioner’s mother’s bank account on the

same day that the cashier’s check used for part of the

downpayment on the real estate was purchased.   Moreover, the

information petitioners provided to the settlement officer showed

that the real estate was originally titled in petitioners’ names,

that petitioners transferred title for no consideration, that

petitioners lived there, and that petitioners paid the property

taxes and mortgage payments.

     Generally, when challenging a levy action, taxpayers bear

the responsibility of providing relevant information.

Rule 142(a).   The information petitioners provided to the

settlement officer was insufficient to resolve the question

regarding ownership of the real estate.   We find no abuse of
                               - 13 -

discretion in the settlement officer’s determination.    Other

arguments made by petitioners that are not specifically addressed

have been considered and rejected.

     Based on the foregoing,


                                          A decision will be

                                     entered for respondent.
