                  T.C. Summary Opinion 2007-187



                     UNITED STATES TAX COURT



                   WAYNE SMITH, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16263-05S.              Filed November 1, 2007.



     Frank M. Schuler and Tara Jensen, for petitioner.

     Vicki L. Miller, for respondent.



     GOLDBERG, Special Trial Judge:     This matter was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petition was filed.

Pursuant to section 7463(b), the decision to be entered is not

reviewable by any other court, and this opinion shall not be

treated as precedent for any other case.     Unless otherwise

indicated, all Rule references are to the Tax Court Rules of
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Practice and Procedure, and all section references are to the

Internal Revenue Code, as amended.

     This matter is before us under Rule 121 on the parties’

cross-motions for summary judgment.

     Respondent issued a notice of determination concerning

collection action(s) under section 6320 and/or 6330 sustaining a

levy on petitioner’s property to collect unpaid taxes for taxable

years 2000, 2001, and 2002.    The underlying issue for decision in

this matter is whether respondent’s Appeals Office abused its

discretion by rejecting offers-in-compromise made on petitioner’s

behalf, thus sustaining respondent’s proposed levy action against

petitioner’s Individual Retirement Account (IRA).

                              Background

     For purposes of addressing the parties’ cross-motions for

summary judgment, the record in this matter consists of the

pleadings, the parties’ cross-motions for summary judgment, and

the relevant documents attached thereto.   The underlying facts in

this case are not in dispute.

     In order to collect unpaid Federal income taxes and related

additions to tax and interest for 2000, 2001, and 2002 respondent

seeks to levy on petitioner’s IRA for the taxes owed as follows:

$1,636.51 for 2000; $27,368.92 for 2001; and $5,800.83 for 2002.
                                - 3 -

Filing of Federal Income Tax Returns

     Petitioner delinquently filed his Federal income tax return

for taxable year 2000 on October 22, 2002.    On his 2000 return,

he reported tax in the amount of $13,825, less withholding

credits of $12,502.    He did not remit the $1,323 owed when he

filed his return.    Petitioner later made three payments, totaling

$557, towards the amount owed for 2000.

     Petitioner delinquently filed his Federal income tax return

for taxable year 2001 on January 28, 2003.    On his 2001 return,

he reported tax in the amount of $22,511, less withholding

credits of $5,099.    He did not remit the $17,412 owed when he

filed his return.

     Petitioner delinquently filed his 2002 Federal income tax

return on May 1, 2003.    On his 2002 return, he reported tax in

the amount of $6,227, less withholding credits of $1,700.      He did

not remit the $4,672 owed when he filed his return.

Request for Collections Due Process Hearing

     On August 7, 2004, respondent mailed to petitioner a Final

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

Under Section 6330/6331, which stated that respondent intended to

levy on petitioner’s IRA account in 30 days.    In response,

petitioner timely filed a request for a collection due process

(CDP) hearing with respondent’s Appeals Office.    Petitioner’s

request for a hearing indicated his disagreement with
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respondent’s Notice of Intent to Levy on the grounds that the

“collection by levy is inappropriate as [I] intend to submit an

offer in compromise to resolve the tax liability soon.”

Offer-In-Compromise

     As contemplated in his request for a hearing, an offer-in-

compromise (OIC) was submitted on petitioner’s behalf by the

Kansas City Tax Clinic on September 30, 2004.   Petitioner offered

to pay a total of $9,407.60 in 24 monthly payments of $391.98, to

compromise his outstanding total tax liabilities, including any

interest, penalties, and additions to tax with respect to the

taxable years at issue.

     A document entitled “Explanation of Special Circumstances”

(Explanation) was attached to petitioner’s OIC.   In this

Explanation, petitioner stated that when he was retired from AT&T

in 1998 as the result of a corporate downsizing, his pension

account with Bank of America had a value of approximately

$400,000.   At some time after his separation from AT&T,

petitioner bifurcated this pension account, placing about one-

half of its total value into a new, separate retirement account,

also with Bank of America.   The Explanation also stated that a

combination of his taking several distributions from both of his

Bank of America accounts, along with poor market factors, had

resulted in a total depletion of one of the two Bank of America

accounts.
                               - 5 -

     The record reflects that at the time of his separation from

AT&T, petitioner started receiving a series of substantially

equal periodic payments, pursuant to section 72(t)(4), from one

of the two Bank of America accounts in the form of a monthly

distribution in the amount of $1,931.    Petitioner was still

receiving this monthly amount at the time the present motions

were heard by the Court.

     Petitioner’s financial statements, which are included as

part of the record, contain the following information regarding

petitioner’s IRA accounts:



     Year      Amount Held in IRA       Amount Issued to Petitioner
                  (Form 5498)                  (Form 1099-R)

     1998           $805,349                      $428,899
     1999            538,390                        83,373
     2000            383,631                        61,178
     2001            222,290                        80,077
     2002            159,406                        38,606
     2003            145,155                        23,177



     With respect to the establishment and value of petitioner’s

bifurcated accounts, and the amounts withdrawn on each, the

record contains only one bank statement from the Bank of America

accounts, dated January 1-31, 2001.    This statement contains the

following information:
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     Account Number       Portfolio Detail        Total Value

       * * * 1315         Mutual funds            $289,802.65
       * * * 1323         Cash/mutual funds         86,848.52


     The Kansas City Tax Clinic, in letters to respondent dated

May 5, 2005, and May 10, 2005, explained that petitioner’s

withdrawals from the Bank of America accounts were due to his

inability to work as a result of general downsizing in the

telecommunications market, his considerable personal expenses,

and his gambling addiction.   The May 5, 2005, letter contained a

Bank of America statement dated February 27 through March 28,

2001, showing that in the course of 1 month, petitioner withdrew

nearly $4,000 from ATMs which the Kansas City Tax Clinic

describes as either “at the Woodlands racetrack,” or “the Argosy

Casino.”

     Petitioner attached to his OIC Form 433-A, Collection

Information Statement for Wage Earners and Self-Employed

Individuals, on which he listed the following as his monthly

income and expenses:
                                              1
           Pension/Social Security             $1,931.50
           Food, clothing and misc.              (513.00)
           Housing and utilities                 (549.84)
           Transportation                        (280.00)
           Health care                           (183.24)
           Taxes                                 (253.16)
                 Income after expenses            152.26


     1We note that petitioner did not receive Social Security
payments, and will not be eligible to receive such payments until
the year 2010. The $1,931.50 is solely the amount of the monthly
distribution from the IRA.
                               - 7 -

     During the taxable years in issue through the time that the

present motions were heard, petitioner resided with his mother in

her home.   The record contains a letter dated August 24, 2004,

and signed “Linora Smith” which states: “Wayne Smith has paid

$300 a month rent in cash for approximately the past three-and-

one-half years.”

     With respect to the substantiation of the above expenses,

the record contains voided photocopies of personal money orders

drafted on an account held with Central Communications Credit

Union dated January through March of 2005.   The “Pay to the Order

of” line on each of these money orders has been filled in by

hand, and neither the amounts reflected in these orders nor their

payees correspond exactly to the expenses listed above.

      Finally, and with respect to additional, “special”

circumstances, the Explanation attached to the original OIC

states that petitioner, at 56 years old, “is unable to find any

worthwhile work”, and that he previously underwent “two

angioplasty procedures.”

Collections Due Process Hearing

     A CDP hearing occurred between petitioner’s representative

and the Internal Revenue Service (IRS) on May 11, 2005.    At that

hearing, petitioner’s representative restated the OIC in the

amount of $9,407.60, and also proposed a second, alternative OIC,

whereby the IRS could levy on petitioner’s then-existing accounts

to collect the full payment for the periods covered by the
                               - 8 -

hearing, provided that the IRS would both waive all penalties1

associated with the account withdrawal, and compromise any

liability stemming from petitioner’s 2005 taxable year on the

amounts withdrawn on the account for $1.00.   The Appeals Office

rejected both the original OIC and the newly proposed OIC on the

grounds that they were unacceptable and not viable collection

alternatives.   The Appeals Office also stated that the proposed

levy would not deplete petitioner’s remaining IRA account, and

that petitioner had neither alleged nor proven that he was

disabled or unable to work.

     On July 27, 2005, respondent mailed to petitioner a Notice

of Determination Concerning Collection Action(s) Under Section

6320 and/or 6330 in which respondent’s Appeals Office sustained

respondent’s proposed levy action.

     The petition alleges that respondent’s Appeals Office abused

its discretion in denying petitioner’s OIC because it did not

appreciate the effect that the recapture penalty under section

72(t)(4)(A) would have on petitioner as a result of a levy on

petitioner’s Bank of America account.   The petition also lists as

grounds for relief that the proposed levy is more intrusive than

necessary, and that petitioner has shown special hardship

circumstances which demand a settlement of a lesser amount than

that of the full assessment.




     1
      Namely, the recapture penalty under sec. 72(t)(4)(A).
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                            Discussion

      Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.    Fla. Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).    Summary judgment may be

granted where there is no genuine issue of any material fact and

a decision may be rendered as a matter of law.   Rule 121(a) and

(b); see Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520

(1992), affd. 17 F.3d 965 (7th Cir. 1994).

     The moving party bears the burden of proving that there is

no genuine issue of material fact, and factual inferences will be

read in a manner most favorable to the party opposing summary

judgment.   Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985).     A

party opposing a motion for summary judgment “may not rest upon

the mere allegations or denials of such party’s pleading,” but

the objecting party’s response “must set forth specific facts

showing that there is a genuine issue for trial.”   Rule 121(d);

Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

     The petition was filed pursuant to section 6330(d), which

provides for Tax Court review of the Commissioner’s

administrative determinations to proceed with the collection of

tax liabilities via levies on property.   Where the validity of

the underlying tax liability is at issue, the Court will review

that matter de novo.   Davis v. Commissioner, 115 T.C. 35, 39

(2000).   Where, as here, the underlying liability is not at

issue, the Court will review the determinations made by
                               - 10 -

respondent’s Appeals Office with respect to the proposed

collections action under the abuse of discretion standard.     Goza

v. Commissioner, 114 T.C. 176 (2000).     Under this standard, the

Court shall consider whether the actions of the Appeals Office in

rejecting petitioner’s OIC and thus, sustaining respondent’s

proposed collections action, were arbitrary, capricious, or

without sound basis in law.   See Sego v. Commissioner, 114 T.C.

604, 610 (2000); Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

     Petitioner argues that respondent’s Appeals Office abused

its discretion in rejecting both proposed OICs because it did not

consider that a levy upon petitioner’s remaining IRA, a periodic

payments account structured under section 72(t)(4), would trigger

the recapture tax in such a manner that petitioner would be

essentially left with little or no assets to live on until the

time that he would be eligible to receive Social Security.

Moreover, petitioner argues that respondent’s Appeals Office

ignored evidence that he was unable to work, and that his offers

were reasonable in the light of his considerable and necessary

monthly expenses.

     Generally, amounts distributed from an IRA are includable in

gross income as provided in section 72.    Sec. 408(d)(1).   Section

72(t)(1) further provides:    “If any taxpayer receives any amount

from a qualified retirement plan * * * the taxpayer’s tax under

this chapter for the taxable year in which such amount is

received shall be increased by an amount equal to 10 percent of
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the portion of such amount which is includable in gross income.”

     Section 72(t)(2) further provides:

     Paragraph [72(t)(1) shall not apply to any of the following

distributions:

          (A) * * * Distributions which are--

                      (iv) part of a series of substantially equal
                 periodic payments * * * or

                 *      *      *      *      *      *      *
                      (vii) made on account of a levy under section
                 6331 on the qualified retirement plan.

     Section 72(t)(4) provides:

          (A) In general. If–-
                    (i) paragraph (1) does not apply to a
               distribution by reason of paragraph (2)(A)(iv),
               and
                    (ii) the series of payments under such
               paragraph are subsequently modified (other than by
               reason of death or disability)-

                           (I) before the close of the 5-year
                      period beginning with the date of the first
                      payment and after the employee attains age
                      59-1/2, or
                           (II) before the employee attains age 59-
                           1/2,

          the taxpayer’s tax for the 1st taxable year in which
          such modification occurs shall be increased by an
          amount, determined under regulation, equal to the tax
          which (but for paragraph (2)(A)(iv)) would have been
          imposed, plus interest for the deferral period.


     Petitioner’s argument is premised on his belief that section

72(t)(4)(A), which applies the aforementioned recapture tax when

a taxpayer modifies an existing series of substantially equal

payments, supersedes the exception to the 10-percent additional

tax provided in section 72(t)(2)(A)(vii), in cases where the
                                - 12 -

distribution from a qualified plan is made as a result of a levy

action under section 6331.   As we cannot point to authoritative

case law, we accordingly begin our analysis with the relevant

legislative history and intent behind the enactment of clause

(vii) of section 72(t)(2)(A).

     Section 72(t)(2)(A)(vii) was enacted as an amendment to

section 72(t) as part of the IRS Restructuring and Reform Act of

1998, Pub. L. 105-206, 112 Stat. 685.    As reasoning for the

addition of clause (vii), the Senate report states:

     the imposition of the 10-percent early withdrawal tax on
     amounts distributed from employer-sponsored retirement plans
     or IRAs on account of an IRS levy may impose significant
     hardships on taxpayers. Accordingly, the Committee believes
     such distributions should be exempt from the 10-percent
     early withdrawal tax. [S. Rept. 105-174, at 83 (1998),
     1998-3 C.B. 537, 619.]


     Notably, in further explanation of clause (vii), the Senate

report emphasizes that the exception provided in clause (vii)

shall only apply if “the plan or IRA is levied; it does not

apply, for example, if the taxpayer withdrawals funds to pay

taxes in the absence of a levy, [or] in order to release a levy

on other interests.”   Id.

     Therefore, the distinction that gives section

72(t)(2)(A)(vii) precedence over the recapture tax clause in

section 72(t)(4)(A) is the concept of voluntariness; namely, that

clause (vii) is intended to apply where the action that caused a

distribution to be made did not originate with the taxpayer

and/or did not occur at the discretion or direction of the
                             - 13 -

taxpayer.

     This concept of voluntariness is also echoed in Arnold v.

Commissioner, 111 T.C. 250 (1998), concerning the recapture tax

provision under section 74(t)(4), and United States v. Novak, 476

F.3d 1041 (9th Cir. 2007), addressing section 72(t)(2)(A)(vii).

In Arnold, the taxpayer elected to receive a series of

substantially equal payments from an IRA pursuant to section

72(t)(4)(A) when he retired from his own company at age 55.    Four

years later, when he sold the business for less profit than he

anticipated, he received an additional distribution from his

account to compensate him for his loss of anticipated revenue.

This Court held that petitioner’s receipt of an additional

distribution did not fall within one of the exceptions provided

in section 72(t)(2)(A) and was an impermissible modification to

the prior series of substantially equal periodic payments, thus

triggering the recapture tax under section 72(t)(4).     Arnold v.

Commissioner, supra at 255-256.

     In Novak, the Court of Appeals for the Ninth Circuit

examined whether the IRS possessed the power to levy upon an

ERISA account to compensate the victims of the defendant’s

crimes,2 and where the defendant’s right to access the account


     2
       Notably, in Murillo v. Commissioner, T.C. Memo. 1998-13
(1998), affd. without published opinion 166 F.3d 1201 (2d Cir.
1998), the Court held that a taxpayer’s forfeit of his retirement
plan as part of his criminal plea would also not trigger
application of the 10-percent additional tax under sec. 72(t)(1).
                              - 14 -

without incurring a penalty for Federal income tax purposes had

not yet commenced.   As to the latter consideration, the Court of

Appeals held:

     under the “steps into the taxpayer’s shoes” principle,
     see Nat’l Bank of Commerce, 472 U.S. 713, 725, a tax levy
     can demand (1) that a retirement plan directly pay to the
     IRS any post-retirement payments that otherwise would
     have automatically gone to the taxpayer; and (2) if the
     plan allows the participant to demand payment before
     retirement or at a different rate--including immediate
     payment of the entire present value of benefits--the full
     amount that the participant could presently demand.
     Retirement plan distributions to satisfy [such] a tax
     levy are not subject to the ten-percent penalty tax.

          Other circuits have held that the IRS has the authority
     to demand annuity and retirement funds when the
     beneficiary has the contractual right immediately to
     withdraw the money sought. See Kane v. Capital Guardian
     Trust Co., 145 F.3d 1218, 1223 (10th Cir. 1998)
     (“[Taxpayer’s] right to liquidate his IRA and withdraw the
     funds therefrom (even if subject to some interest penalty)
     undoubtedly constituted a ‘right to property’ subject to the
     IRS’ administrative levy power under [26 U.S.C. sec.
     6331(a).] Upon [the plan’s] receipt of the notice of levy,
     the IRS stepped into [the taxpayer’s] shoes and acquired all
     his rights in the IRA, including his right to liquidate the
     mutual fund shares in his IRA and withdraw the cash
     proceeds.”

United States v. Novak, 476 F.3d 1041, 1062 (9th Cir. 2007).

     Accordingly, for purposes of determining whether the

recapture provision under section 72(t)(4)(A) applies in the

light of a levy action commenced under section 6330, if the levy

on the property occurs as the result of the IRS’s “stepping into

the shoes of the taxpayer,” then that action should be treated as

nonvoluntary on the part of the taxpayer and accordingly, not

subject to either the 10-percent additional tax under section

72(t) or the recapture tax pursuant to section 72(t)(4)(A).    If,
                              - 15 -

however, the taxpayer has a right to access the funds, and does

so in an effort to alleviate his tax liability, or does so in a

manner (such as in Arnold v. Commissioner, supra) that modifies

the series of substantially equal payments under section

72(t)(4)(A) for his personal gain, then that voluntary action

should trigger the recapture penalty under section 74(t)(4)(A).

     Based on the foregoing, we reject petitioner’s argument that

the recapture penalty under section 72(t)(4)(A) supersedes the

levy exception provision under section 72(t)(2)(A)(vii).   In

doing so, we conclude that respondent’s Appeals Office did not

act in an arbitrary or capricious manner in disregarding

petitioner’s position that a levy upon his IRA account would

result in not only a significant withdrawal from his account, but

an unduly and overly intrusive depletion of most of the account

as a result of the application of the recapture tax.

     As to petitioner’s argument that respondent’s Appeals Office

did not consider petitioner’s position that the proposed levy is

unfair in the light of his inability to work and medical

conditions, we are unpersuaded that any issue of fact exists.

Petitioner presented no evidence at the time of the hearing that

he was unable to work.   He merely stated that due to a tight job

market in the telecommunications industry he was unable to find

“worthwhile” work.   Although petitioner did include mention in

his Explanation (attached to the original OIC) that he had

undergone “two angioplasty procedures”, he offered no additional
                                - 16 -

evidence to show how these procedures, or the effects therefrom,

had rendered him medically unable to work.   Accordingly, we hold

that respondent’s Appeals Office did not act in an arbitrary or

capricious manner in sustaining the proposed levy action as there

was no evidence presented whereby the Appeals Office could

determine that the levy was unduly burdensome given petitioner’s

medical status.

     With respect to petitioner’s argument that respondent’s

Appeals Office failed to appreciate fully petitioner’s monthly

expenses in the light of the monthly amount he was receiving from

his IRA, we are again unpersuaded by the lack of evidence

produced by petitioner in support of this claim.   First,

petitioner only provided a scant, 3-month record vis-a-vis

photocopies of money orders, all of which appear to be notated to

correspond to the expenses as listed on his OIC Form 433-A in

anticipation of trial, none of which correspond in amount to the

amounts listed on Form 433-A.    Second, we are unconvinced by the

letter purportedly written by petitioner’s mother that he had

been renting space in her home for the past 3 years and paying

her $300 per month in rent.   Petitioner produced no receipts or

bank records to corroborate this claim.   Moreover, while we are

convinced that petitioner did, in fact, live with his mother, we

are not persuaded that he was required to spend more than one-

half of his monthly income on rent, food, and clothing.

Accordingly, we hold that respondent’s Appeals Office did not act
                              - 17 -

in an arbitrary or capricious manner in rejecting petitioner’s

OICs, which were largely premised on his position that he could

not afford to make a larger payment.

     Finally, we note that the IRS Manual on Notice in Levy Cases

provides that in deciding whether to levy on a retirement

account, the Commissioner’s Appeals Office should determine

“whether the taxpayer’s conduct has been flagrant [, with] * * *

some examples of flagrant conduct [being] * * * Taxpayers who

have placed other assets beyond the reach of the government [by]

* * * dissipating them.”   Administration, Internal Revenue Manual

(CCH), Notice to Levy, sec. 5.11.6.2(5) at 16,719.   In this case,

the Kansas City Tax Clinic candidly shared with respondent the

details of petitioner’s gambling addiction.   We are convinced,

based on this evidence, and our examination of both petitioner’s

financial statements and the rapidly declining IRA balances as

previously detailed in this report, that a large portion of the

$660,194 withdrawn from petitioner’s IRA accounts between 1998

and 2003 went to fund his gambling addiction.

     We are further convinced by our examination of the Bank of

America statements that detail petitioner’s account balances as

of January 2001, that at the time that petitioner would have been

required to pay his Federal income tax owing for all of the years

in issue he could have done so, but elected not to for the

benefit of his proclivity for racetracks and casinos.   Finally,

we are convinced, in the light of the above IRS Manual guidance,
                             - 18 -

and the unfortunate, yet convincing, facts presented with respect

to petitioner’s gambling habit, that respondent’s Appeals officer

did not act in an arbitrary or capricious manner in rejecting

either of petitioner’s OICs and, in doing so, sustaining the

proposed levy action.

     Accordingly, without any evidence to create a question of

fact whether respondent’s Appeals Office abused its discretion,

respondent’s motion for summary judgment will be granted, and

petitioner’s cross-motion for summary judgment will be denied.



                                          An appropriate order and

                                      decision will be entered.
