                    T.C. Memo. 2011-24



                  UNITED STATES TAX COURT



ESTATE OF JOSEPH L. MANGIARDI, DECEASED, JOSEPH L. MANGIARDI
   DECLARATION OF TRUST DATED FEBRUARY 13, 1998, MAUREEN G.
 MANGIARDI, CO-TRUSTEE AND STATUTORY EXECUTOR, Petitioner v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



  Docket No. 3958-08L.               Filed January 27, 2011.



       P filed a petition for judicial review pursuant to sec.
  6330(d)(1), I.R.C., in response to R’s determination that
  levy action was appropriate.

       Held: R’s determination to maintain the levy to
  protect the Government’s interest does not constitute
  an abuse of discretion. R’s determination to proceed
  with collection action is sustained.



  W. Morgan Speer, for petitioner.

  John T. Lortie, for respondent.
                                   - 2 -

                            MEMORANDUM OPINION


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

for judicial review of a Notice of Determination Concerning

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

determination).1      The Estate of Joseph Mangiardi, Deceased,

Joseph L. Mangiardi Declaration of Trust Dated February 13, 1998,

Maureen G. Mangiardi, Co-Trustee and Statutory Executor

(petitioner), seeks judicial review of respondent’s determination

to proceed with a proposed levy with respect to petitioner’s

estate tax liability.       The sole issue for decision is whether

respondent’s determination to proceed with a proposed levy for

collection of unpaid estate tax liability constitutes an abuse of

discretion.

                                Background

       This case was submitted fully stipulated pursuant to Rule

122.       The parties’ stipulation of facts, with accompanying

exhibits, is incorporated herein by this reference.       The estate’s

legal residence was Florida at the time the petition was filed.

The cotrustee of the previously referenced trust (trust) and

statutory executor of the estate, Ms. Maureen G. Mangiardi,

resided in the State of New York at the time the petition was



       1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                                 - 3 -

filed.    Dr. Joseph L. Mangiardi (decedent), who established the

trust, which was revocable during his lifetime, was a resident of

the State of Florida when he died on April 5, 2000.

     On July 5, 2001, petitioner filed a Form 706, United States

Estate (and Generation-Skipping Transfer) Tax Return, showing an

unpaid estate tax liability of $2,621,810.    The Form 706 stated

that the value of the gross estate was $8,050,042 but that most

of decedent’s assets were not subject to distribution thorough

probate.    The nonprobate assets of decedent’s estate included the

trust, valued at $4,577,360 as of the alternate valuation date,

and individual retirement accounts (IRAs) decedent held totaling

$3,433,007.    The IRAs ultimately passed by contract under

applicable State law to decedent’s nine children (the

beneficiaries).

     Petitioner filed an amended Form 706 on December 28, 2001.

The Form 706 was selected for examination; however, no additional

assessment was made.    Instead, an abatement of tax of $143,152

was made on December 22, 2003.

     Pursuant to section 6161, petitioner requested a total of

six extensions to pay the estate tax liability, all of which

respondent granted.    Petitioner’s final Form 4768, Application

for Extension of Time To File a Return and/or Pay U.S. Estate

(and Generation-Skipping Transfer) Taxes, was submitted in June

2004.    The attachment to the Form 4768 requested an additional 12
                               - 4 -

months until July 5, 2005, “to pay estate taxes under the

hardship provisions of Treasury Regulations 20.6161-1(a)(2) or in

the alternative, request is made under the reasonable cause

provisions of Treasury Regulations 20.6161-1(a)(1).”   Petitioner

claimed that “the assets in the gross estate which must be

liquidated to pay the estate tax can only be sold at a sacrifice

price or in a depressed market, if the tax is to be paid on the

above referenced extended due date.”   The unliquidated value of

the trust account as of May 31, 2004, was approximately

$542,713.60.   Hence, “the liquidation of the securities in this

account at this time” would have resulted in a substantial loss

to the estate and the beneficiaries.   The attachment to the Form

4768 provided a detailed description of the events that led to

the devaluation of the assets in the trust account.

     On September 20, 2004, respondent approved petitioner’s

request for additional time to pay the estate tax liability, but

only until December 5, 2004, and advised petitioner that no

further extensions to pay the estate tax would be granted beyond

that date.   Respondent’s letter warned:

    The extension to pay is only being allowed until 12/5/2004
    because, if the liability is not paid in full by that date,
    the IRS will begin making transferee assessments against the
    heirs of the estate that received assets and have not paid
    to the IRS their portion of the estate tax and interest
    owed. We can not provide any additional time because we
    must ensure that the transferee assessments are made prior
    to the assessment expiration date to make those assessments.
                                - 5 -

     The estate tax liability remained unpaid after the extended

deadline of December 5, 2004.   On July 13, 2006, respondent sent

to petitioner a Final Notice of Intent to Levy and Notice of Your

Right to a Hearing (levy notice), for the unpaid estate tax

liability.   Petitioner timely submitted Form 12153, Request for a

Collection Due Process Hearing (CDP hearing request), in response

to the levy notice.

     Internal Revenue Service Office of Appeals (Appeals)

Settlement Officer David C. Varnerin (Mr. Varnerin), conducted

the CDP hearing through a series of conferences and/or

communications with petitioner commencing on October 11, 2007.

At the CDP hearing petitioner claimed that respondent was

precluded from collecting the estate tax liability from the IRA

beneficiaries because the time for making a transferee assessment

under section 6901 had expired.   Accordingly, petitioner

requested that the estate tax liability be resolved through an

offer-in-compromise in which petitioner would offer a reduced

amount based on doubt as to collectibility of the remaining

assets in the trust.

     Mr. Varnerin sought legal advice from respondent’s counsel

as to whether the unpaid estate tax liability could be collected.

Counsel responded via memo dated December 5, 2007 (counsel’s

memo), stating that the estate tax liability could be collected

either from the executor/personal representative under 31 U.S.C.
                               - 6 -

section 3713 or from the beneficiaries by enforcing the estate

tax lien under section 6324(a)(2) without a prior assessment

against the transferees under section 6901.

      On January 11, 2008, respondent sustained the proposed levy

action and issued to petitioner a notice of determination.    In

issuing the notice of determination, Mr. Varnerin relied on

counsel’s memo but made a clerical error by stating that an

assessment could be made against transferee/beneficiaries under

section 6901.   Mr. Varnerin intended that the notice of

determination state that a lawsuit could be brought against the

transferee/beneficiaries under section 6324(a)(2).   On February

14, 2008, petitioner filed a petition in this Court to review

respondent’s intended collection action.

                            Discussion

I.   Section 6161 Extension of Time To Pay Estate Tax Liability

     The Commissioner may, pursuant to section 6161(a)(2), for

reasonable cause upon request of the executor extend the time for

payment of the tax shown on the estate tax return, for a

reasonable period not in excess of 10 years.   The extension may

be granted in up to 12-month chunks if “an examination of all the

facts and circumstances discloses that such request is based upon

reasonable cause.”   Sec. 20.6161-1(a)(1), Estate Tax Regs.   Under

the regulations prescribed by the Commissioner, if “the district

director finds that payment on the due date * * * would impose
                               - 7 -

undue hardship upon the estate,” he may extend the payment due

date as detailed in the applicable regulations.2   Sec. 20.6161-

1(a)(2)(i), Estate Tax Regs.   “[U]ndue hardship” involves more

than mere inconvenience.   A taxpayer claiming undue hardship must

show that the estate would sustain a very substantial and severe

financial loss if forced to pay a tax on the due date; i.e., that

“The assets in the gross estate which must be liquidated to pay

the estate tax can only be sold at a sacrifice price or in a

depressed market if the tax is to be paid when otherwise due.”

Sec. 20.6161-1(a)(2)(ii), Example (2), Estate Tax Regs.

     A Federal agency is bound to follow its own regulations.

Twp. of S. Fayette v. Allegheny Cnty. Hous. Auth., 27 F. Supp. 2d

582, 595 (W.D. Pa. 1998) (citing United States v. Nixon, 418 U.S.

683, 695-696 (1974)), affd. without published opinion 185 F.3d

863 (3d Cir. 1999).   “An agency of the government must

scrupulously observe rules, regulations, or procedures which it

has established.   When it fails to do so, its action cannot stand




     2
      While Congress amended sec. 6161(a)(2) in the Tax Reform
Act of 1976, Pub. L. 94-455, sec. 2004(c), 90 Stat. 1867, to
substitute the words “reasonable cause” for “undue hardship”, the
regulations have never been updated to reflect this change.
Nevertheless, we refer to them here because the legislative
history indicates clearly that reasonable cause is intended to be
a less restrictive standard than undue hardship. Thus, one who
would satisfy the latter should also satisfy the former test.
Staff of Joint Comm. on Taxation, General Explanation of the Tax
Reform Act of 1976, at 555-558 (J. Comm. Print 1976), 1976-3 C.B.
(Vol. 2) 1, 555-558.
                                 - 8 -

and courts will strike it down.”    United States v. Heffner, 420

F.2d 809, 811 (4th Cir. 1969).

     Respondent claimed he could not grant petitioner any

additional time to pay the estate tax liability beyond December 5,

2004, because he needed to make transferee assessments against the

heirs of the estate, i.e., the beneficiaries, before the section

6901 assessment expiration date.    However, respondent has never

made such assessments and now asserts that a transferee assessment

under section 6901 is not required before personal liability can

be imposed under section 6324(a)(2).

     If respondent’s assertion is correct, then respondent did not

properly apply his own regulations under section 6161.   Those

regulations regarding undue hardship and reasonable cause should

have been fully considered in September 2004 before denying

petitioner’s request for a 12-month extension to pay the estate

tax liability and announcing that no further extensions would be

granted without regard to any facts which might exist in the

future.   However, the record indicates that respondent made no

such consideration.   Instead, he did not fully allow the requested

extension and prematurely denied any additional requests by

petitioner under section 6161 for an extension to pay the estate

tax liability.

     On the inconsistent and poorly developed record before us, we

are unable to decide whether respondent abused his discretion in
                                 - 9 -

denying petitioner’s request for an extension of time to pay the

estate tax liability.3    However, given that the maximum allowable

extension of time under section 6161(a)(2) (10 years) expired on

January 5, 2011, remanding the case to Appeals for further

consideration of this issue would prove unproductive, as the issue

is now moot.

II.   Levy Action

      Section 6331(a) authorizes the Commissioner to levy upon

property or property rights of a taxpayer liable for taxes who

fails to pay those taxes within 10 days after a notice and demand

for payment is made.     Section 6331(d) provides that the levy

authorized in section 6331(a) may be made with respect to unpaid

tax liability only if the Commissioner has given written notice to

the taxpayer 30 days before the levy.     Section 6330(a) requires

the Commissioner to send a written notice to the taxpayer of the

amount of the unpaid tax and of the taxpayer’s right to a section

6330 hearing at least 30 days before the first levy is made.

      If an administrative hearing is requested in a levy case, the

hearing is to be conducted by Appeals.     Sec. 6330(b)(1).   At the

hearing the Appeals officer conducting it must verify that the



      3
      The Court also previously denied respondent’s May 15, 2008,
motion for summary judgment, which was predicated on essentially
the same facts as those in the stipulation which accompanied the
Rule 122 motion. In denying that motion, Judge Thornton noted
that there were material factual questions still unresolved and
thus summary judgment was inappropriate at that time.
                               - 10 -

requirements of any applicable law or administrative procedure

have been met.   Sec. 6330(c)(1).

     A taxpayer may raise any relevant issue relating to the

unpaid tax or the proposed levy, including a spousal defense or

collection alternatives such as an offer-in-compromise or an

installment agreement.   Sec. 6330(c)(2); sec. 301.6330-1(e)(1),

Proced. & Admin. Regs.   Following the hearing, the Appeals officer

must determine, among other things, whether the proposed

collection action should proceed.   In making the determination the

Appeals officer shall take into consideration:   (1) Whether the

requirements of all applicable laws and administrative procedures

have been satisfied; (2) any relevant issues raised by the

taxpayer during the section 6330 hearing; and (3) whether the

proposed collection action balances the need for efficient

collection of taxes with the taxpayer’s legitimate concern that

any collection action be no more intrusive than necessary.   Sec.

6330(c)(3).

     This Court has jurisdiction to review the Appeals officer’s

determination.   Sec. 6330(d)(1).   Where the taxpayer’s underlying

liability was not properly at issue in the hearing, we review the

determination for abuse of discretion.    Sego v. Commissioner, 114

T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 181-182

(2000).   An Appeals officer’s determination is not an abuse of

discretion unless the determination is arbitrary, capricious, or
                               - 11 -

without sound basis in law or fact.     Giamelli v. Commissioner, 129

T.C. 107, 111 (2007); Freije v. Commissioner, 125 T.C. 14, 23

(2005).

     Petitioner claims that respondent applied the law erroneously

in sustaining the collection action and improperly determined that

a section 6901 assessment was not required before instituting

collection action against the beneficiaries under section

6324(a)(2).   Petitioner further argues that respondent abused his

discretion by “refusing to consider any compromise” and denying

petitioner’s offer-in-compromise based on doubt as to

collectibilty.

     Respondent argues that Mr. Varnerin did not abuse his

discretion by upholding the proposed collection action against

petitioner because respondent can collect the full estate tax

liability from the beneficiaries pursuant to section 6324(a)(2)

without a prior assessment against them under section 6901.

Respondent claims that any erroneous application of law was

harmless error and that Mr. Varnerin verified that respondent

followed all relevant legal and administrative procedures

regarding the collection of the estate tax liability before making

his determination to sustain the levy.

     A.   Section 6901 Assessment

     Both petitioner’s and respondent’s arguments turn on whether

a section 6901 assessment is required before the initiation of
                               - 12 -

collection action under section 6324(a)(2).   Few courts have

considered this issue directly; however, the Courts of Appeals for

the Third Circuit and the Tenth Circuit have held that respondent

may collect estate tax from a transferee pursuant to section

6324(a)(2) without a prior assessment against the transferee under

section 6901.   United States v. Geniviva, 16 F.3d 522, 525 (3d

Cir. 1994); United States v. Russell, 461 F.2d 605, 607 (10th Cir.

1972).

     This Court has found those cases to be persuasive and well

reasoned.   Ripley v. Commissioner, 102 T.C. 654, 659 (1994).   In

its holding in United States v. Geniviva, supra at 525, the Court

of Appeals for the Third Circuit noted “a certain sorrow that what

seems inherently unfair is also quite in accordance with the law”.

We also sympathize with the beneficiaries of decedent’s estate in

that years later they find themselves at risk of forfeiting their

inheritance without prior notice, especially after respondent had

ample opportunity to make assessments against them.   Nevertheless,

as discussed above it has previously been determined that a

section 6901 assessment is not required before initiation of

collection action under section 6324(a)(2).

     B.   Respondent’s Denial of Petitioner’s Offer-in-Compromise

     Among the issues that may be raised at Appeals and are

reviewed for abuse of discretion are “offers of collection

alternatives” such as offers-in-compromise.   Sec.

6330(c)(2)(A)(iii).   The Court reviews the Appeals officer’s
                               - 13 -

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

rejection was arbitrary, capricious, or without sound basis in

fact or law and therefore an abuse of discretion.     Murphy v.

Commissioner, 125 T.C. 301, 320 (2005), affd. 469 F.3d 27 (1st

Cir. 2006); Woodral v. Commissioner, 122 T.C. 19, 23 (1999).

     Section 7122(a) authorizes the Commissioner 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

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

However, regulations promulgated under section 7122 provide:      “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 law, regulations, and the Commissioner’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 the 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.

     The Commissioner will generally compromise a liability on the

basis of doubt as to collectibility only if the liability exceeds
                               - 14 -

the taxpayer’s reasonable collection potential; “i.e., that

amount, less than the full liability, that the IRS could collect

through means such as administrative and judicial collection

remedies”.   Murphy v. Commissioner, supra at 309-310.   The

Commissioner has no duty to negotiate with a taxpayer before

rejecting the taxpayer’s offer-in-compromise.   Fargo v.

Commissioner, 447 F.3d 706, 713 (9th Cir. 2006), affg. T.C. Memo.

2004-13; Catlow v. Commissioner, T.C. Memo. 2007-47, affd. in part

and vacated in part sub nom. Keller v. Commissioner, 568 F.3d 710

(9th Cir. 2009).

     Petitioner argues that the reasonable collection potential

should not include any amount which respondent could collect from

the beneficiaries through an action in equity under section

6324(a)(2) because the statute of limitations for making a

transferee assessment under section 6901 has expired.    However,

this Court determined supra that respondent is not required to

make a section 6901 assessment before initiating collection action

under section 6324(a)(2).   Therefore, any amount of the unpaid

estate tax liability that respondent could collect from the

beneficiaries should be included in petitioner’s reasonable

collection potential; i.e., the amount of the IRA distributions.

     Petitioner offered the remaining assets in the estate

(approximately $700,000) as an offer-in-compromise; however,

respondent determined petitioner’s reasonable collection potential

to be at least $3 million given that the beneficiaries received
                                - 15 -

$3,433,007 in IRA distributions.    Because petitioner did not offer

an acceptable amount, respondent did not abuse his discretion in

rejecting petitioner’s offer-in-compromise.

       C. Harmless Error

       If infected by an error of law, the determination of the

Appeals officer may be set aside.    Swanson v. Commissioner, 121

T.C. 111, 119 (2003); Perkins v. Commissioner, T.C. Memo. 2008-

103.    However, if the error is harmless and causes no prejudice or

does not affect the ultimate determination in the case, the Court

should not find an abuse of discretion.    See, e.g., Perkins v.

Commissioner, 129 T.C. 58 (2007); Boyd v. Commissioner, 322 F.

Supp. 2d 1229 (D.N.M. 2004), affd. 121 Fed. Appx. 348 (10th Cir.

2005).

       None of respondent’s questionable actions, as of the present

time, prejudice petitioner or affect respondent’s conclusion that

a lawsuit can be brought against the beneficiaries under section

6324(a)(2) to collect the unpaid estate tax liability.

       The facts do not establish a currently existing abuse of

discretion on respondent’s part.    The Court will therefore sustain

respondent’s proposed collection actions.

       The Court has considered all of petitioner’s contentions,

arguments, requests, and statements.     To the extent not discussed

herein, the Court concludes that they are meritless, moot, or

irrelevant.
                            - 16 -

To reflect the foregoing,


                                     Decision will be entered

                                for respondent.
