                         T.C. Memo. 2004-163



                       UNITED STATES TAX COURT



         MARK FOWLER AND JOYLYN SOUTER-FOWLER, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6650-02L.                Filed July 13, 2004.



     Mark Fowler and Joylyn Souter-Fowler, pro sese.

     Guy H. Glaser, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     GERBER, Chief Judge:    Respondent, on February 21, 2002, sent

Mark Fowler (petitioner) a Notice of Determination Concerning

Collection Action(s) Under Section 63201 and/or 6330, in which

respondent sustained the filing of a Federal tax lien for


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code.
                               - 2 -

petitioner’s 1990-92 tax liabilities.   In that same notice

respondent also rejected petitioner’s offer in compromise.     On

that same date respondent sent Mark Fowler and Joylyn Souter-

Fowler (petitioners) a second Notice of Determination Concerning

Collection Action(s) Under Section 6320 and/or 6330.   In this

notice respondent sustained the filing of a Federal tax lien with

respect to petitioners’ 1994-96 tax liabilities, and respondent

again rejected petitioners’ offer in compromise.

     Prior to these determinations, petitioners sought and were

offered an Appeals hearing, but they did not attend due to

personal reasons.   One month after the scheduled hearing date,

the Appeals officer issued the above determinations sustaining

the filing of the Federal tax liens and rejecting petitioners’

offers in compromise.   With respect to both determinations,

petitioners appealed to this Court.

     The issue for consideration is whether respondent abused his

discretion by rejecting petitioners’ offers in compromise and by

sustaining the filing of the Federal tax liens.
                                - 3 -

                          FINDINGS OF FACT2

     Petitioners resided in Garden Grove, California, when the

petition in this case was filed.

Separate Liabilities

     Petitioner filed his 1990 Federal income tax return late on

September 6, 1991.    On July 21, 1993, respondent mailed a

statutory notice of deficiency to petitioner for his 1990 taxable

year.    Petitioner did not petition this Court to dispute the

deficiency.    On December 20, 1993, respondent assessed the $399

income tax deficiency and a $98.74 late-filing penalty under

section 6651(a)(1).    In addition, $104.40 of interest was

assessed.    Petitioner does not contest the 1990 tax liability.

     Petitioner timely filed his 1991 Federal income tax return

that contained several mathematical errors.     Respondent corrected

the mathematical errors in accord with section 6213(b)(1), and

assessments were made to correct the errors.     Respondent

subsequently selected petitioner’s 1991 return for an audit

examination.    On April 5, 1994, respondent mailed petitioner a

statutory notice of deficiency for his 1991 taxable year

determining a $545 income tax deficiency.     Petitioner did not

petition this Court with respect to the 1991 notice of




     2
       The parties’ stipulation of facts is incorporated by this
reference.
                                 - 4 -

deficiency.   On September 5, 1994, respondent assessed the $545

deficiency and $103.37 of accrued interest.

     Petitioner filed his 1992 Federal income tax return late on

July 28, 1993.   Respondent selected petitioner’s 1992 return for

an audit examination.   On January 11, 1995, respondent mailed

petitioner a statutory notice of deficiency for his 1992 taxable

year determining a $1,193 income tax deficiency and a $189

penalty for late filing under section 6651(a)(1).   On July 17,

1995, respondent assessed the deficiency, the late-filing

penalty, and accrued interest in the amount of $265.92.    On the

same day, the late-filing penalty was abated leaving an unpaid

balance of $1,458.92 for 1992.

Joint Liabilities

     Petitioners were married in 1993.   Under cover of a letter

dated September 15, 1997, petitioners submitted their untimely

1994, 1995, and 1996 joint Federal income tax returns.    These

returns were filed by respondent on September 29, 1997.

Petitioners reported tax due for 1994, 1995, and 1996 on their

returns in the amounts of $402.04, $402.03, and $1,480.66,

respectively.

     On October 27, 1997, respondent assessed the 1994 income tax

liability, a late-filing penalty in the amount of $100, a failure

to pay tax penalty in the amount of $62.32, and accrued interest

in the amount of $128.35, for a total assessment of $692.71.      On
                               - 5 -

that same date, respondent assessed the 1995 income tax

liability, a late-filing penalty in the amount of $100, a failure

to pay tax penalty in the amount of $38.19, and accrued interest

in the amount of $73.03, for a total assessment of $613.25.      On

November 17, 1997, respondent assessed the 1996 income tax

liability, a late-filing penalty in the amount of $333.15, a

failure to pay tax penalty in the amount of $59.23, and accrued

interest in the amount of $99.21, for a total assessment of

$1,972.25.

Events Leading to the Issuance of the Notice of Determination

     On December 21, 1999, respondent mailed two separate Notices

of Intent to Levy and Notice of Your Right to a Hearing to

petitioners.   The notices reflected petitioners’ unpaid Federal

income tax liabilities for 1990 through 1992 and 1994 through

1996.   On January 26, 2000, petitioners informed respondent of

their desire to submit an offer in compromise to resolve all of

their individual and joint liabilities.   In response, respondent

mailed petitioners a package of materials for the submission of

offers in compromise for their outstanding individual and joint

liabilities.

     On April 19, 2000, respondent received petitioners’ offer to

compromise the 1994 through 1996 joint liabilities for $1,150.

On that same date respondent received petitioner’s offer to

compromise the 1990 through 1992 liabilities for $360.    Both
                                - 6 -

offers in compromise were submitted on Form 656, Offer in

Compromise.   Petitioners’ offer was to make monthly payments to

satisfy the liabilities.   Petitioners planned to pay a portion of

the offer amount from their expected tax refund for 1999.

     On May 19, 2000, respondent’s revenue officer advised

petitioners that their offers in compromise could not be

processed until petitioners’ 1999 Federal income tax return was

filed.   Under respondent’s procedures, offers are not processed

while taxpayers are not in compliance with the internal revenue

laws.

     Petitioners had already filed for an extension of time to

file for 1999 because they were awaiting information from third

parties to complete the return.   On June 15, 2000, respondent

filed two Notices of Federal Tax Lien (NFTL) at the county

recorder’s office in Orange County, California, with respect to

the individual and joint tax liabilities.   Respondent sent

petitioners the filed NFTLs and Notices of Right to a Collection

Due Process Hearing.   On July 14, 2000, petitioners submitted

Form 12153, Request for a Collection Due Process Hearing

(administrative hearing), contesting the NFTLs filed by

respondent and noting the pending offers in compromise.

     Sometime in 2001, petitioners’ claims were assigned to

respondent’s Appeals officer.   On June 20, 2001, the Appeals

officer and petitioners had a telephone conversation discussing
                                - 7 -

petitioners’ desire to compromise all of the liabilities.     The

Appeals officer requested more information from petitioners,

which they timely provided with a copy of their filed 1999

Federal income tax return.   At some time in the process,

petitioners submitted an amended offer in compromise for $2,400,

to be paid in $100-monthly installments.   Under those terms, the

$2,400-offer could be paid in full in 2 years.

     On October 16, 2001, respondent’s Appeals officer sent

petitioners a letter informing them that he had reviewed the

offers in compromise.   The Appeals officer determined that the

minimum offer to compromise both the individual and joint

liabilities should be a total of $2,400.   The Appeals officer

used petitioners’ estimate of their primary vehicle3 to calculate

a quick sale value of $2,400, which was determined to be the

minimum acceptable offer.    The Appeals officer then attempted to

determine whether petitioners would be able to meet the monthly

installment offer obligation.   In calculating petitioners’

financial capability, the Appeals officer used petitioners’

submitted monthly gross income figure of $4,608, but did not use

petitioners’ submitted $3,989 monthly expense figure.   Instead of

using the $3,989 expense figure provided by petitioners, the

Appeals officer used $4,644, an estimated amount based on


     3
       Petitioners estimated the value of their primary vehicle
to be $3,000. Respondent used this figure to calculate the
$2,400 quick sale value.
                                 - 8 -

national statistical averages.    Using $4,644 resulted in

petitioners’ estimated monthly expenses exceeding their monthly

income by $36 and rendering petitioners ineligible due to their

projected inability to make the $100-monthly payments.

     The Appeals officer rejected petitioners’ offers in

compromise.   Petitioners requested an in person hearing, but a

hearing was not held due to petitioners’ unavailability.      On

February 21, 2002, respondent issued two separate notices of

determination for the individual and joint liabilities sustaining

the filing of the notices of Federal tax liens and rejecting

petitioners’ offers in compromise.       Petitioners timely appealed

to this Court for review of respondent’s determinations.

                              OPINION

     Petitioners contend that the Appeals officer abused his

discretion by rejecting their offers in compromise and by

sustaining the filing of the Federal tax liens.

     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).   Hearings under section 6320 are conducted in accordance

with the procedural requirements set forth in section 6330.        Sec.

6320(c).

     When an Appeals officer issues a determination regarding a

disputed collection action, section 6330(d) allows a taxpayer to
                                 - 9 -

seek judicial review with the Tax Court or a District Court.

Where the validity of the underlying tax liability is properly at

issue, the Court will review the matter on a de novo basis.       Sego

v. Commissioner, 114 T.C. 604, 610 (2000).    However, when the

validity of the underlying tax is not at issue, the Court will

review the Commissioner’s administrative determination for an

abuse of discretion.    Id.   Petitioners do not dispute the

validity of the underlying tax.    Accordingly, our review is for

an abuse of discretion.

     We do not conduct an independent review of what would be

acceptable offers in compromise.    We review only whether the

Appeals officer’s refusal to accept the offers in compromise was

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

See Woodral v. Commissioner, 112 T.C. 19, 23 (1999).     The Court

considers whether the Commissioner abused his discretion in

rejecting a taxpayer’s position with respect to any relevant

issues, including challenges to the appropriateness of the

collections action, and offers of collection alternatives.      See

sec. 6330(c)(2)(A).    This case involves collection alternatives.

     Section 7122(a) authorizes the Secretary to compromise any

civil case arising under the internal revenue laws.    There are

three standards that the Secretary may use to compromise a

liability.   The first standard is doubt as to liability, the

second being doubt as to ability to collect, and the third being
                               - 10 -

promotion of effective tax administration.    Sec. 301.7122-1T(b),

Temporary Proced. & Admin. Regs., 64 Fed. Reg. 39024 (July 21,

1999); see sec. 7122(c)(1).    The record reflects that

petitioners’ offers are with respect to doubt as to

collectibility.4

     Section 7122(c) provides the standards for evaluation of

such offers.   Under section 7122(c)(2):

          (A) * * * the Secretary shall develop and publish
     schedules of national and local allowances designed to
     provide that taxpayers entering into a compromise have
     an adequate means to provide for basic living expenses.

          (B) Use of schedules.-–The guidelines shall
     provide that officers and employees of the Internal
     Revenue Service shall determine, on the basis of the
     facts and circumstances of each taxpayer, whether the
     use of the schedules published under subparagraph (A)
     is appropriate and shall not use the schedules to the
     extent such use would result in the taxpayer not having
     adequate means to provide for basic living expenses.
     [Emphasis added.]

The Appeals officer chose to use the national averages and that

use resulted in petitioners’ being categorized as not having

adequate means to provide for basic living expenses.

     The national average statistics are published by the

Internal Revenue Service, but use of the statistics by Appeals

officers is not mandatory.    The Appeals officer exercised

discretion in ignoring petitioners’ submitted expense amount and,


     4
       Doubt as to collectibility exists in any case where the
taxpayer’s assets and income are less than the full amount of the
assessed liability. Sec. 301.7122-1T(b)(3), Temporary Proced. &
Admin. Regs., 64 Fed. Reg. 39024 (July 21, 1999).
                               - 11 -

instead, used the national statistical amount as an estimate of

petitioners’ expenses.    The use of the national averages for

petitioners’ expenses resulted in petitioners’ monthly expenses

exceeding their monthly income by $36.    Therefore, by using the

average expense figure, petitioners’ income was $136 short of

producing the $100 per month needed to compromise their tax

liabilities for $2,400.    We note that, percentagewise, the

shortfall is less than 3 percent of petitioners’ gross income.

The Appeals officer chose to use the national statistical

averages rather than the expense figures provided by petitioners.

If the Appeals officer had used petitioners’ submitted expense

figure of $3,989, petitioners would have had $619 monthly and

would have been financially capable of satisfying the $100

installments.

     The Appeals officer is allowed to use the national schedules

when considering the facts and circumstances of this case.

However, if use of the schedules results in petitioners’ not

having adequate means to provide for basic living expenses, as

here when the Appeals officer determined a negative $36 amount

for basic living expenses, an installment offer may not be

appropriate.    See sec. 7122(c)(2)(B).

     Under the regulations for doubt as to collectibility cases:

          A determination of doubt as to collectibility will
     include a determination of ability to pay. In
     determining ability to pay, the Secretary will permit
     taxpayers to retain sufficient funds to pay basic
                              - 12 -

     living expenses. The determination of the amount of
     such basic living expenses will be founded upon an
     evaluation of the individual facts and circumstances
     presented by the taxpayer’s case. To guide this
     determination, guidelines published by the Secretary on
     national and local living expense standards will be
     taken into account. [Sec. 301.7122-1T(b)(3)(ii),
     Temporary Proced. & Admin. Regs., 64 Fed. Reg. 39024
     (July 21, 1999).]

     The regulation provides that the guidelines are to be taken

into account.   When the Appeals officer reviewed petitioners’

offers, he decided to use the guidelines because he thought

petitioners’ actual figures were too low.   In that regard, there

is no specific explanation why the Appeals officer believed that

petitioners’ monthly expenses of $3,989 was too low or why the

guideline figure of $4,644 was more accurate.   The use of the

guideline expense figure resulted in a $136 shortfall in

petitioners’ capability to meet the $100-monthly installment to

satisfy the $2,400 compromise.   If petitioners’ submitted monthly

expenses of $3,989 had been used, there would have been a $619

surplus of income over expenses that would have enabled

petitioners to meet the $100-monthly installment to satisfy the

compromise.

     In essence, the Appeals officer decided that petitioners

could not live less expensively than the national average

(guidelines).   We find it curious that the Appeals officer relied

on petitioners’ figures for their vehicle and for their income,

but chose not to use petitioners’ figures for their monthly
                               - 13 -

expenses.   Petitioners made an estimate of $3,000 for the value

of their primary car and the Appeals officer used this figure to

calculate the quick sale value of $2,400.    Based on this premise,

the Appeals officer determined that an offer of $2,400 would be

an appropriate amount to settle the outstanding liabilities due

for 1990-92 and 1994-96.    The Appeals officer requested a lump-

sum payment through the sale of petitioners’ primary vehicle.

Petitioners rejected this approach as this was their primary

vehicle and to sell it would have caused great financial harm.

     Petitioners submitted an amended offer in compromise for

$2,400, to be paid in $100 monthly installments.    Under those

terms, the $2,400 compromise could be paid in full in 2 years.

That offer was rejected due to the Appeals officer’s

determination that petitioners were financially unable to make

the payments.   We note that petitioners had cooperated with all

requests from the Internal Revenue Service in an attempt to

resolve this matter.

     Appeals officers, in the consideration of an offer in

compromise should verify that the requirements of applicable law

and administrative procedures have been met, and “whether any

proposed collection action balances the need for the efficient

collection of taxes with the legitimate concern of the person

that any collection action be no more intrusive than necessary.”

See sec. 6330(c)(3)(C).    The verification of applicable law and
                               - 14 -

administrative procedure was met in this case.    However, it is

questionable as to whether the proposed collection action

balanced the need for efficient collection of taxes with the

concern of petitioners that any collection action be no more

intrusive than necessary.

     Payment plans are one possible option for an offer in

compromise.    According to the instructions that accompany the

Form 656, there are three possible payment plans under the short-

term deferred payment offer.    One plan requires full payment of

the realizable value of assets within 90 days from the date the

Internal Revenue Service accepts the offer, and payment, within 2

years of acceptance of the amount that they could collect over 60

months.    A second plan permits a cash payment for a portion of

the realizable value of petitioners’ assets within 90 days of the

offer being accepted, and the balance of the realizable value

plus the remainder of the amount that could have been collected

over 60 months within 2 years.    The third plan permits monthly

payments of the entire offer amount over a period not to exceed 2

years from the date of acceptance by the Internal Revenue

Service.    Petitioners offered $100 per month for 2 years or 24

months, which equals the $2,400-compromise amount.5


     5
       Although not relevant to the facts of this case, there is
also a deferred payment offer that provides for a plan similar to
the short-term deferred plan (the third plan described above).
The deferred payment plan allows the entire offer amount to be
                                                   (continued...)
                              - 15 -

     Under the various payment options, respondent would be able

to file Federal tax liens to protect his interests until such

time as the liability is satisfied.    Accordingly, respondent’s

interest would be protected through the liens while respondent

received monthly payments.   The result of the Appeals officer’s

financial analysis, however, was to deny petitioners’ offers in

compromise.   To use the national guidelines rather than actual

figures in this instance was arbitrary, capricious, and without a

sound basis in fact.   Petitioners have stated that they are still

willing to compromise their tax liabilities for $2,400, but

through monthly payments rather than a lump-sum payment.6

     Therefore, based on the facts and circumstances of this

case, we hold that respondent abused his discretion in denying

petitioners’ offer to compromise their tax liabilities for




     5
      (...continued)
made in monthly payments over the life of the collection statute.
The deferred plan could result in a longer payment period than 24
months.
     6
       Petitioners and respondent agreed on the amount of the
compromise. The only disagreement here is the method of payment.
Based on the financial information submitted by petitioners, a
payment plan is a reasonable option.
                              - 16 -

$2,400.   We further hold that respondent did not abuse his

discretion in sustaining the filing of the Notices of Federal Tax

Liens.7

                                    An appropriate decision will

                               be entered.




     7
       Petitioners have made no argument of merit from which an
abuse of discretion could be found with respect to respondent’s
determination that the filing of the Notices of Federal Tax Liens
was appropriate.
