                                                KREIT MECHANICAL ASSOCIATES, INC., PETITIONER
                                                   v. COMMISSIONER OF INTERNAL REVENUE,
                                                                RESPONDENT
                                                        Docket No. 14692–09L.                   Filed October 3, 2011.

                                                  P filed a petition for review pursuant to sec. 6330, I.R.C.,
                                               in response to R’s determination to proceed with collection
                                               actions. P sought a collection alternative and submitted an
                                               offer-in-compromise. R rejected the offer, concluding that the
                                               entire amount due was collectible after R found that a 75-per-
                                               cent discount of P’s accounts receivable was inappropriate in
                                               valuing P’s assets and the offer-in-compromise. Held: R’s
                                               determination is sustained.

                                                                                                                                     123




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                                      124                137 UNITED STATES TAX COURT REPORTS                                        (123)


                                           Cruz Saavedra, for petitioner.
                                           Nicole C. Lloyd, for respondent.
                                        WHERRY, Judge: This case is before the Court on a petition
                                      for review of a Notice of Determination Concerning Collection
                                      Action(s) Under Section 6320 and/or 6330 (notice of deter-
                                      mination). 1 Petitioner seeks review of respondent’s deter-
                                      mination to proceed with a proposed levy.
                                        The collection action stems from unpaid employment taxes
                                      reported on Form 941, Employer’s Quarterly Federal Tax
                                      Return, penalties under section 6656, and additions to tax
                                      under section 6651(a)(2) with respect to the third quarter of
                                      2005 and all four quarters of 2006. The issue for decision is
                                      whether respondent’s settlement officer abused her discretion
                                      in rejecting petitioner’s offer-in-compromise and determining
                                      the proposed collection action was appropriate.
                                                                          FINDINGS OF FACT

                                         Some of the facts have been stipulated. The stipulations,
                                      with accompanying exhibits, are incorporated herein by this
                                      reference. At the time the petition was filed, petitioner had
                                      its principal business address in Los Angeles, California.
                                      During the periods at issue Ephraim Kreitenberg (Mr.
                                      Kreitenberg) was the president and coowner of petitioner.
                                      Shaindee Kreitenberg (Mrs. Kreitenberg) was vice president
                                      and coowner of petitioner. Petitioner is in the commercial
                                      plumbing business and operates as a subcontractor.
                                         On February 18, 2007, petitioner filed delinquent Forms
                                      941 for the quarters ending September 30, 2005, and March
                                      31, June 20, September 30, and December 31, 2006. Taxes,
                                      penalties, additions to tax, and interest were assessed on
                                      May 28, 2007.
                                         On May 29, 2007, petitioner was issued a Final Notice,
                                      Notice of Intent to Levy and Notice of Your Right to a
                                      Hearing (levy notice). The levy notice stated that respondent
                                      intended to levy to collect petitioner’s unpaid liabilities,
                                      including employment taxes, penalties, and interest, totaling
                                      $717,818.23 and that petitioner was entitled to a hearing
                                      with respondent’s Office of Appeals. On June 26, 2007, peti-
                                      tioner submitted a timely request for a collection due process
                                        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.




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                                      (123)       KREIT MECH. ASSOCIATES, INC. v. COMMISSIONER                                      125


                                      (CDP) hearing and stated that it proposed to make an offer-
                                      in-compromise as an alternative to the levy.
                                         On July 18, 2007, the Appeals settlement officer assigned
                                      to the case, Alicia A. Flores (Officer Flores), mailed petitioner
                                      a notice that the Appeals Office had received petitioner’s CDP
                                      hearing request and scheduled a telephone conference. On
                                      September 4, 2007, petitioner submitted a completed Form
                                      656, Offer in Compromise, based on doubt as to collectibility.
                                      Petitioner offered $369,192.27 2 payable under a deferred
                                      periodic payment arrangement of $3,073.60 per month for
                                      120 months.
                                         Attached to the offer-in-compromise petitioner included a
                                      completed Form 433–B, Collection Information Statement for
                                      Businesses. As required on the Form 433–B, petitioner listed
                                      accounts receivable of: $35,664, $604,364, $259,580, and
                                      $165,800. Petitioner then listed the total accounts receivable
                                      as $250,000, not $1,065,408 (the value of adding together the
                                      listed accounts receivable). In the attached ‘‘Explanation of
                                      determination of value of accounts receivable’’, petitioner
                                      explained how it arrived at $250,000 and listed the reasons
                                      it felt the face value of the accounts receivable should not be
                                      taken into account. Petitioner stated that
                                      Billings to the general contractor by the taxpayer (subcontractor) are based
                                      on industry values and standards. They are subject to approval by the
                                      project manager, the general contractor and the owner of the project. They
                                      also involve ‘‘joint check’’ payments to suppliers where applicable.[3]

                                        For these reasons petitioner believed that the accounts
                                      receivable should be discounted by approximately 75 percent.
                                      Petitioner submitted the relevant applications for payments
                                      related to the accounts receivable listed in the offer-in-com-
                                      promise. All of the applications for payments include certain

                                        2 Petitioner calculated the amount offered of $369,192.27 as the amount required to fully pay

                                      the trust fund portion (i.e., the amount withheld from employee paychecks); however, when we
                                      add the proposed installment payments we get $368,832.20. As petitioner offered the
                                      $369,192.27, we shall use that number. We note that because petitioner was required to match
                                      this amount, the offer-in-compromise will not make the United States whole. We also note that
                                      Mr. and Ms. Kreitenberg were potentially personally liable for the trust fund amount under sec.
                                      6672.
                                        3 At trial Mr. Kreitenberg explained that a joint check was a check written to more than one

                                      person. In their case the general contractor would write it to both petitioner and their supplier
                                      in order to ensure that the supplier would get paid by petitioner.




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                                      126                137 UNITED STATES TAX COURT REPORTS                                        (123)


                                      adjustments to the bill for ‘‘change orders’’ and ‘‘retention’’
                                      percentages. 4
                                         On September 19, 2007, respondent’s Appeals Office sent
                                      petitioner a letter stating that the Appeals Office had
                                      received the offer-in-compromise and that the offer met the
                                      standards for processing. At trial Officer Flores testified that
                                      she reviewed all of the information petitioner submitted in
                                      the offer-in-compromise package and that she was aware of
                                      the reasons petitioner stated for discounting the accounts
                                      receivable.
                                         On May 28, 2008, petitioner’s counsel sent Officer Flores
                                      a facsimile (fax) regarding prior telephone conversations. It
                                      referenced conversations in which Officer Flores had stated
                                      that the offer-in-compromise package could not be processed
                                      unless petitioner was brought current on its deferred pay-
                                      ments under the agreement and remedied the compliance
                                      problems for its Forms 941 for the quarters ended March 30
                                      and June 30, 2007. The fax stated that petitioner would
                                      resolve those issues by June 9, 2008. On June 9, 2008, peti-
                                      tioner’s counsel sent Officer Flores a fax stating that pay-
                                      ments to his trust account of $3,076.60 and $1,540.01 had
                                      been made in order to bring the deferred payments current
                                      and pay the tax reported on Forms 941 for 2007. With his
                                      receipt of these checks he indicated his trust fund account
                                      now had sufficient funds to bring the deferred payments for
                                      October 2007 through May 19, 2008, current ($24,612.80)
                                      and pay the 2007 Form 941 tax due of $1,540.01. The funds
                                      were then tendered to respondent from the trust fund
                                      account on June 11, 2008.
                                         On July 29, 2008, Officer Flores requested additional
                                      information from petitioner in order to consider the offer-in-
                                      compromise. Officer Flores inter alia requested: Bank state-
                                      ments for the corporate payroll and general account, Forms
                                      1099, description of all machinery and equipment and inven-
                                      tory, depreciation schedules, explanations of cash with-
                                      drawals, current accounts receivable, notes evidencing any
                                      loans from shareholders or family members, and a current
                                      copy of the profit and loss statement. She also requested per-
                                        4 The common meaning of ‘‘change order’’ in construction is the process in which work is added

                                      to or deleted from the original scope of the contract. ‘‘Retention’’ commonly refers to the amount
                                      held back from the requested payment under the contract to ensure that the contractor or sub-
                                      contractor completes the work; this amount is then paid after the retention period passes.




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                                      (123)           KREIT MECH. ASSOCIATES, INC. v. COMMISSIONER                                     127


                                      sonal information from Mr. and Mrs. Kreitenberg, including:
                                      Forms W–2, Wage and Tax Statement, for 2007, a list of
                                      investments, and their personal bank statements. In this
                                      letter, Officer Flores also asked petitioner to
                                      Identify if any of the receivables from the current list have been pledged
                                      as collateral on a loan or sold at a discount. Provide an aging report to
                                      show how much each vendor is owed, and how much of the balance for
                                      each vendor is overdue. Explain in a separate report the amount of the
                                      receivables which are obligated to the suppliers. Do not discount the
                                      amounts for purposes of the offer.

                                         On August 21, 2008, petitioner responded to almost all of
                                      Officer Flores’ requests. In the cover page to the packet, peti-
                                      tioner stated that ‘‘No receivables are pledges [sic] as collat-
                                      eral. No loans except from shareholders or other family mem-
                                      bers.’’
                                         On February 2, 2009, Officer Flores sent petitioner a letter
                                      requesting updated information because ‘‘The information
                                      has become outdated due to significant delays which were
                                      not caused by the taxpayers. [sic]’’. At trial Officer Flores
                                      acknowledged that she ‘‘had a really high inventory that
                                      really kept * * * [her] from working this, this case a lot
                                      sooner.’’
                                         On February 23, 2009, petitioner submitted a package of
                                      additional information to Officer Flores. The package
                                      included representations regarding its accounts receivable,
                                      stating that it was owed $467,000 for the UCLA Life Sciences
                                      Replacement Building and $291,457 for the LAPD Police
                                      Headquarters Facility. Petitioner included its profit and loss
                                      statement for 2008. All of petitioner’s profit and loss state-
                                      ments can be summarized as follows: 5
                                                                                      2006                2007                2008
                                               Operating income                   $3,346,102            $2,770,370       $7,656,198
                                               Expenses                           (3,547,660)           (3,180,016)      (7,243,454)
                                               Other income or loss                    2,522                   154             (526)
                                                 Net income                         (199,036)             (409,492)         412,218

                                        On April 1, 2009, Officer Flores sent petitioner a letter
                                      rejecting the offer-in-compromise for a variety of reasons. In
                                      the letter, Officer Flores explained that ‘‘Although you did
                                      not provide all of the records I requested (explained below),
                                           5 The   values in all tables have been rounded to the nearest whole number.




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                                      128                137 UNITED STATES TAX COURT REPORTS                                        (123)


                                      there is sufficient information given to support the rejecting
                                      of the offer * * * because * * * an amount larger than the
                                      offer appears to be collectible.’’ She further explained that
                                      The Profit & Loss Statement showed that the net income for the twelve
                                      months ending in 2008 was $412,218.04. I also determined that the
                                      expenses reported for Charitable Donations in the amount of $14,914.00
                                      and Meals & Entertainment in the amount of $1,518.37 are not allowable.
                                      The credit available from corporate credit cards is $2,605. The total value
                                      of the Accounts Receivables is $758,457 for [sic] which you stated have not
                                      been sold or pledged as collateral.

                                         She went on to explain that there were additional facts
                                      supporting the rejection of the offer-in-compromise. First,
                                      petitioner did not provide its bank statements for the general
                                      account, and Officer Flores believed that there was an
                                      impermissible commingling of the personal expenses of Mr.
                                      and Mrs. Kreitenberg. Second, petitioner never provided a
                                      valuation of the business. Third, Officer Flores noted the
                                      great increases in petitioner’s gross receipts. Fourth, peti-
                                      tioner did not provide Forms W–2 for Mr. and Mrs.
                                      Kreitenberg separate from their tax returns, and they did not
                                      provide adequate personal banking information for Officer
                                      Flores to determine their disposable income.
                                         Officer Flores’ April 1 letter also offered an installment
                                      agreement in which the total liability would be paid off in
                                      $21,500 monthly payments for approximately 60 months. It
                                      asked petitioner to contact Officer Flores by April 10, 2009,
                                      and concluded that if petitioner did not contact the office by
                                      that date, the case would be promptly closed.
                                         On April 10, 2009, after Officer Flores had not heard from
                                      petitioner, she called petitioner’s counsel and left a voicemail
                                      message asking whether petitioner wanted to negotiate the
                                      installment agreement. On April 23, 2009, petitioner’s
                                      counsel left Officer Flores a voicemail message stating that
                                      he had understood that if petitioner did not respond to
                                      Officer Flores’ letter, she would close the case and issue a
                                      notice of determination. He stated that he would like Officer
                                      Flores to close the case and issue the notice of determination
                                      because he would like to pursue the issue of collectibility in
                                      this Court.
                                         On May 22, 2009, Appeals Team Manager Paula Mills
                                      mailed petitioner a Notice of Determination Concerning




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                                      (123)       KREIT MECH. ASSOCIATES, INC. v. COMMISSIONER                                            129


                                      Collection Action(s) Under Section 6320 and/or 6330. The
                                      letter explained that
                                      It has been determined that we are unable to accept your offer at this time
                                      because the tax is held to be legally due and an amount larger than the
                                      offer appears to be collectible. Furthermore, you did not remain in full
                                      compliance during the time the offer was under consideration. We do not
                                      have authority to accept an offer in these circumstances.
                                      Because you are not interested in other alternatives such as an install-
                                      ment agreement, the proposed levy action is appropriate. Based on the
                                      case circumstances the proposed levy balances the need for efficient collec-
                                      tion of taxes with the legitimate concern that the collection action be no
                                      more intrusive than necessary.

                                        Petitioner timely filed a petition with this Court on June
                                      16, 2009, for review of the Appeals Office’s actions and the
                                      determination. Petitioner stated that ‘‘petitioner disagrees
                                      with the IRS Notice of Determination on the grounds that the
                                      IRS abused its discretion in determining that the taxpayer
                                      could full pay the liability in question.’’
                                        The following table shows the taxes, penalties, additions to
                                      tax, and interest assessed as of March 2, 2010.
                                                                                     Federal
                                                                          Late         tax      Failure
                                           Quarter          Tax          filing      deposit     to pay
                                            ended         assessed      penalty      penalty    addition     Interest   Payments       Balance

                                      Sept. 30, 2005      $81,920      $18,432      $12,243       $7,782     $12,700      $61,682      $71,396
                                      Mar. 31, 2006       109,895       24,726       16,484        7,143      11,864          ---      170,112
                                      June 30, 2006       141,553       31,849       21,233        7,078      11,824          ---      213,537
                                      Sept. 30, 2006      126,316       22,737       18,947        4,421       6,986          ---      179,408
                                      Dec. 31, 2006       106,045        2,090        5,179          979       1,697       61,459       54,531
                                        Total             565,729       99,834       74,086       27,403      45,071      123,141      688,984

                                         On April 28, 2010, respondent filed a motion for summary
                                      judgment, and on April 30, 2010, this Court ordered peti-
                                      tioner to file a response to the motion by May 14, 2010. On
                                      May 14, 2010, petitioner submitted an expert witness report
                                      under Rule 143(g). On May 17, 2010, petitioner filed a
                                      response to the motion which had been timely mailed on May
                                      14, 2010. On May 18, 2010, petitioner filed its supplement to
                                      opposition to respondent’s motion for summary judgment. On
                                      June 7, 2010, respondent filed a motion in limine to exclude
                                      the testimony and report of Adlai Climan, petitioner’s prof-
                                      fered expert. At trial this Court denied both of respondent’s
                                      motions. The trial was held on June 16, 2010, in Los
                                      Angeles, California.




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                                      130                137 UNITED STATES TAX COURT REPORTS                                        (123)


                                                                                  OPINION

                                      I. Evidentiary Issues
                                           A. Administrative Record Rule
                                         Respondent argues that the administrative record rule, by
                                      which the Court’s review is limited solely to the administra-
                                      tive record, applies in this case. Petitioner and respondent
                                      agree that because the underlying liability is not at issue,
                                      the Court’s review of the administrative determination
                                      regarding the collection action is limited to abuse of discre-
                                      tion. See Sego v. Commissioner, 114 T.C. 604, 610
                                      (2000); Goza v. Commissioner, 114 T.C. 176, 181–182 (2000).
                                      Respondent essentially argues that the Court may look only
                                      at the administrative record that was available to the settle-
                                      ment officer when she made the administrative determina-
                                      tion.
                                         This Court held in Robinette v. Commissioner, 123 T.C. 85,
                                      101 (2004), revd. 439 F.3d 455 (8th Cir. 2006), that we are
                                      not limited to the administrative record in reviewing CDP
                                      determinations. However, under the Golsen rule, we follow
                                      the law of the Court of Appeals for the Ninth Circuit, to
                                      which this case, absent a stipulation to the contrary, is
                                      appealable. See Golsen v. Commissioner, 54 T.C. 742, 757
                                      (1970), affd. 445 F.2d 985 (10th Cir. 1971). That Court of
                                      Appeals has limited the review of the administrative deter-
                                      mination to the administrative record. See Keller v. Commis-
                                      sioner, 568 F.3d 710, 718 (9th Cir. 2009) (‘‘our review is con-
                                      fined to the record at the time the Commissioner’s decision
                                      was rendered’’), affg. T.C. Memo. 2006–166 and affg. and
                                      vacating decisions in related cases. Therefore, the adminis-
                                      trative record rule applies.
                                           B. Adlai Climan’s Report and Testimony
                                        Petitioner has offered a report and the testimony of an
                                      expert witness to establish the factual circumstances that it
                                      believes should be considered to value its assets. Respondent
                                      objects to the admittance of the report and testimony of Adlai
                                      Climan (Mr. Climan) on the grounds that it is outside the
                                      administrative record and that the report does not qualify as
                                      an expert witness report that may be admitted under rule
                                      702 of the Federal Rules of Evidence and Rule 143.




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                                         However, as respondent readily acknowledges, there is an
                                      exception to the administrative record rule in the Ninth Cir-
                                      cuit by which ‘‘The extra-record inquiry is limited to deter-
                                      mining whether the agency has considered all relevant fac-
                                      tors and has explained its decision.’’ Friends of the Payette v.
                                      Horseshoe Bend Hydroelectric Co., 988 F.2d 989, 997 (9th
                                      Cir. 1993). Mr. Climan’s report purports to address the ques-
                                      tions that should have been asked in determining the actual
                                      value of petitioner’s assets. The Court of Appeals for the
                                      Ninth Circuit has explained that
                                      A satisfactory explanation of agency action is essential for adequate
                                      judicial review, because the focus of judicial review is not on the wisdom
                                      of the agency’s decision, but on whether the process employed by the
                                      agency to reach its decision took into consideration all the relevant factors.
                                      [Asarco, Inc., v. EPA, 616 F.2d 1153, 1159 (9th Cir. 1980).]

                                      Assuming arguendo that Mr. Climan’s report and testimony
                                      fit within the exception, respondent further objects to the
                                      report and testimony on the basis of rule 702 of the Federal
                                      Rules of Evidence and Rule 143.
                                         An expert’s opinion is admissible if it will assist the trier
                                      of fact to understand the evidence or to determine a fact in
                                      issue. Fed. R. Evid. 702. We evaluate expert opinions in the
                                      light of each expert’s demonstrated qualifications and all
                                      other evidence in the record. See Parker v. Commissioner, 86
                                      T.C. 547, 561 (1986). We are not bound by an expert’s
                                      opinion and may accept or reject an expert opinion in full or
                                      in part in the exercise of sound judgment. See Helvering v.
                                      Natl. Grocery Co., 304 U.S. 282, 295 (1938); Parker v.
                                      Commissioner, supra at 561–562.
                                         However, an expert’s opinion is not admissible if it con-
                                      tains improper conclusions as to issues of law and not fact.
                                      Snap-Drape, Inc. v. Commissioner, 105 T.C. 16, 20 (1995),
                                      affd. 98 F.3d 194 (5th Cir. 1996). Although Mr. Climan’s
                                      report concludes with an improper conclusion of law, i.e.,
                                      that because the settlement officer did not review the factors
                                      he believed probative, she must have abused her discretion,
                                      a conclusion we shall disregard, the prior sections of the
                                      report simply discuss factors that Mr. Climan or another
                                      settlement officer would and should have used to make a
                                      determination had he been the officer on the case. We do not




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                                      132                137 UNITED STATES TAX COURT REPORTS                                        (123)


                                      find those factors to be an improper conclusion as to an issue
                                      of law.
                                         Mr. Climan has a bachelor of arts degree from Queens Col-
                                      lege and a master’s in business administration from Cali-
                                      fornia State University at Northridge. He worked for the
                                      Internal Revenue Service from 1974 through 2008, first as a
                                      revenue officer and then from 1987 through 2008 as a settle-
                                      ment officer. In his report, Mr. Climan states that he was an
                                      instructor for numerous training classes for both revenue
                                      officers and settlement officers which covered valuation of
                                      assets for offers-in-compromise.
                                         In Mr. Climan’s opinion, when valuing petitioner’s
                                      accounts receivable the following questions should have been
                                      asked:
                                      Was the A/R figure shown the amount due to be paid at the completion
                                      of the contracted-for work, or was it an amount due to be paid to the tax-
                                      payer for work already completed?
                                      If it was for to-be-completed work, what were the terms of the payments
                                      to be made * * * ?
                                      If these were progress payments, what costs did the taxpayer need to incur
                                      to complete each portion of the project in order to receive each successive
                                      progress payment?
                                      What has been the historic percentage of similar receivables as received
                                      by the taxpayer (e.g. less retention and/or charge-back costs)?

                                        His report also opines on other factors that he believed the
                                      settlement officer should have taken into account when
                                      evaluating petitioner’s offer-in-compromise and ability to
                                      make payments. Because the report is helpful to the Court
                                      in understanding respondent’s administrative procedures and
                                      options and assists the Court in comprehending the evidence,
                                      we overrule respondent’s objection to the admission of Mr.
                                      Climan’s report and testimony.
                                      II. Review for Abuse of Discretion
                                        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 an unpaid tax liability only if the Commissioner
                                      has given written notice to the taxpayer 30 days before the




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                                      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 levy is begun.
                                         If an administrative hearing is requested in a lien or levy
                                      case, the hearing is to be conducted by the Appeals Office.
                                      Secs. 6320(b)(1), 6330(b)(1). At the hearing, the Appeals
                                      officer conducting it must verify that the requirements of any
                                      applicable law or administrative procedure have been met.
                                      Secs. 6320(c), 6330(c)(1). The taxpayer may raise any rel-
                                      evant issue with regard to the Commissioner’s intended
                                      collection activities, including spousal defenses, challenges to
                                      the appropriateness of the proposed levy, and alternative
                                      means of collection. Sec. 6330(c)(2)(A); see also Sego v.
                                      Commissioner, 114 T.C. at 609; Goza v. Commissioner, 114
                                      T.C. at 181–182. Taxpayers are expected to provide all rel-
                                      evant information requested by Appeals, including financial
                                      statements, for its consideration of the facts and issues
                                      involved in the hearing. Secs. 301.6320–1(e)(1), 301.6330–
                                      1(e)(1), Proced. & Admin. Regs.
                                         Among the issues that may be raised at Appeals and are
                                      reviewed for abuse of discretion are ‘‘offers of collection alter-
                                      natives’’ such as offers-in-compromise. Sec. 6330(c)(2)(A)(iii).
                                      The Court reviews the Appeals officer’s rejection of an offer-
                                      in-compromise to decide whether the rejection was arbitrary,
                                      capricious, or without sound basis in fact or law and there-
                                      fore an abuse of discretion. Murphy v. Commissioner, 125
                                      T.C. 301, 320 (2005), affd. 469 F.3d 27 (1st Cir. 2006);
                                      Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
                                         Section 7122(a) authorizes the Commissioner to com-
                                      promise 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(a)(1), (c)(1),
                                      Proced. & Admin. Regs.
                                         The grounds for compromise of a tax liability are doubt as
                                      to liability, doubt as to collectibility, and promotion of effec-
                                      tive tax administration. Sec. 301.7122–1(b), Proced. &
                                      Admin. Regs. Petitioners 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




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                                      134                137 UNITED STATES TAX COURT REPORTS                                        (123)


                                      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 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 binding duty to negotiate
                                      with a taxpayer before rejecting the taxpayer’s offer-in-com-
                                      promise. Keller v. Commissioner, 568 F.3d at 719; Fargo v.
                                      Commissioner, 447 F.3d 706, 713 (9th Cir. 2006), affg. T.C.
                                      Memo. 2004–13.
                                         Petitioner argues that ‘‘The Appeals Officer rejected * * *
                                      [petitioner’s] proposed OIC because it determined that, based
                                      on the value of the accounts receivable, whether subject to
                                      collection or included as an income stream item, was ade-
                                      quate to full [sic] pay the outstanding tax liabilities.’’ Peti-
                                      tioner essentially believes that the only reason the offer-in-
                                      compromise was rejected was that the settlement officer
                                      misvalued petitioner’s accounts receivable. According to peti-
                                      tioner, the settlement officer should have valued the accounts
                                      receivable at only 25 percent of their face value.
                                         When petitioner submitted updated information to Officer
                                      Flores on February 23, 2009, it listed a total of $758,457 of
                                      accounts receivable. 6 Although petitioner did not include its
                                      applications for payment in those accounts receivable, it
                                      stated that the $467,000 for the UCLA Life Sciences Replace-
                                      ment Building was billed on January 25, 2009, and was due
                                      on March 5, 2009. It also stated that the $291,457 for the
                                      LAPD Police Headquarter Facility was billed on January 25,
                                      2009, and was due on March 5, 2009.
                                         Petitioner’s prior submissions to Officer Flores included the
                                      applications for payment of accounts receivable, and each
                                      application showed the original contract amount, an adjust-
                                      ment to that amount for ‘‘Change Orders’’, amount of work
                                      completed to date, less an amount withheld for ‘‘Retention’’,
                                      before arriving at the billed amount. 7 Therefore according to
                                        6 We note that 25 percent of $758,457 is $189,614.25. By petitioner’s own discount, it could

                                      not, using its valuation methodology, make the $369,192.27 offer-in-compromise using only ac-
                                      counts receivable collections.
                                        7 Petitioner’s expert report states that the accounts receivable should be discounted by ‘‘reten-




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                                      (123)       KREIT MECH. ASSOCIATES, INC. v. COMMISSIONER                                      135


                                      petitioner’s own application for payment the amount billed
                                      has already been decreased for change orders and retention.
                                      Petitioner did not include the applications for payment of its
                                      most recent accounts receivable. Consequently, it was not an
                                      abuse of discretion for Officer Flores to believe that the
                                      amount petitioner stated was the amount billed and that it
                                      already accounted for the change orders and retention.
                                        Officer Flores took into account all of petitioner’s financial
                                      information in making her determination, not just the value
                                      of the accounts receivable. We do not find it an abuse of
                                      discretion for Officer Flores to have considered petitioner’s
                                      2008 net income of $412,218.04 and to have noted ‘‘the size-
                                      able increases in Gross Receipts and almost double its pay-
                                      roll, the business has prospered’’, to conclude that more than
                                      the $369,192.27 offer-in-compromise appeared to be collect-
                                      ible.
                                        Finally, it was not an abuse of discretion for Officer Flores
                                      to close the case after she had not heard from petitioner
                                      regarding her April 1, 2009, letter rejecting petitioner’s offer-
                                      in-compromise and offering her own installment agreement.
                                        The Court has considered all of petitioner’s contentions,
                                      arguments, requests, and statements. To the extent not dis-
                                      cussed herein, the Court concludes that they are meritless,
                                      moot, or irrelevant.
                                        To reflect the foregoing,
                                                                           Decision will be entered for respondent.

                                                                               f




                                      tion and/or charge-back costs’’. However, as petitioner’s own statements show, under its billing
                                      methodology the accounts receivable had already been discounted for those exact factors. The
                                      question then for the settlement officer was whether the amount of discount was appropriate
                                      or excessive. She found it to be excessive when combined with the 75-percent discount. While
                                      this Court on a de novo basis might have valued the collectible portion of the $758,457 some-
                                      what more conservatively than did the settlement officer, we cannot say her valuation was un-
                                      reasonably outside the pale of actual value, and hence it was not arbitrary, capricious, or with-
                                      out sound basis in fact or law. See Woodral v. Commissioner, 112 T.C. 19, 23 (1999). Hence it
                                      was not an abuse of discretion. Petitioner had also mentioned in its prior submissions that some
                                      of the accounts receivable would include amounts written as joint checks to suppliers; however,
                                      petitioner never submitted any documentation that its most current accounts receivable of
                                      $758,457 were subject to joint checks.




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