United States Tax Court

United States Tax Court

T.C. Memo. 2024-80

ESTATE OF RALPH W. BAUMGARDNER, JR., DECEASED,

PATRICIA L. BAUMGARDNER, PERSONAL REPRESENTATIVE,

AND PATRICIA L. BAUMGARDNER,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket No. 11343-19L.

Filed August 22, 2024.

__________

Jay S. Block, for petitioners.

David A. Indek, Bradley C. Plovan, Jim Liang, Nancy M. Gilmore, and

Victoria E. Cveck, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARSHALL, Judge: This is a collection due process (CDP) case

brought pursuant to section 6330(d), 1 in which petitioners ask this Court

to review the determination by the Internal Revenue Service (IRS)

Independent Office of Appeals (IRS Appeals) 2 to sustain a Notice CP90,

Intent to Seize Your Assets and Notice of Your Right to a Hearing (Levy

Notice), related to an income tax liability for tax year 2013 (tax year at

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the

Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and

Rule references are to the Tax Court Rules of Practice and Procedure. All monetary

amounts are rounded to the nearest dollar.

2 Before July 1, 2019, the IRS Independent Office of Appeals was known as the

IRS Office of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, § 1001, 133 Stat.

981, 983 (2019).

Served 08/22/24

2

[*2] issue). 3 Petitioners argue that IRS Appeals abused its discretion in

denying Ralph W. Baumgardner, Jr., and Patricia L. Baumgardner’s

offer-in-compromise (OIC). Petitioners also contend that the settlement

officer (SO) erred in calculating the Baumgardners’ reasonable

collection potential (RCP) by (i) determining that they were not entitled

to increased health care expenses, (ii) determining that they were not

entitled to additional transportation expenses, (iii) not reducing the

quick sale values (QSV) of their non-income-producing properties for

selling costs in the revised RCP, (iv) disallowing replacement housing

and utilities expenses of $2,059 if their primary residence were sold,

(v) disallowing future repair and maintenance expenses for their

income-producing property in calculating the revised RCP, and

(vi) including the net equity of Mr. Baumgardner’s whole life insurance

policy in the revised RCP. Respondent counters that IRS Appeals did

not abuse its discretion in sustaining the proposed levy because (i) the

Baumgardners were not entitled to increased health care expenses

because they were speculative future medical costs, (ii) they were not

entitled to prospective transportation ownership costs in the evaluation

of their OIC because such ownership costs are excluded where they

owned the vehicles and did not have any loan payments, (iii) consistent

with Internal Revenue Manual (IRM) guidance, the SO properly

included the QSV unreduced by selling costs of the non-incomeproducing properties in the revised RCP, (iv) any prospective repair

expenses should not be used to reduce the RCP because the incomeproducing property was excluded from the revised RCP and such

expenses are speculative, and (v) the net equity of Mr. Baumgardner’s

whole life insurance policy was properly included in the revised RCP

because such insurance is not considered a necessary expense and

because the SO determined that the equity of the insurance policy was

not being used for past or current expenses and therefore would not

create a hardship if liquidated.

The case was called for trial on February 13, 2023, at the Court’s

Baltimore, Maryland, trial session. The Court heard the parties’

opening statements. The parties did not offer any testimony. The facts

stated below are based on the parties’ First Stipulation of Facts, which

was admitted into evidence. In the First Stipulation of Facts the parties

3 On April 19, 2024, petitioners filed a Motion to Amend Order, asking the

Court to set aside our August 24, 2021 Order “that so much of this case as it relates to

tax year 2012 is dismissed for lack of jurisdiction.” For the reasons stated in the

Court’s August 24, 2021 Order, petitioners’ Motion will be denied. See, e.g., Gallagher

v. Commissioner, T.C. Memo. 2018-77, at *9–10.

3

[*3] stipulated facts of the CDP hearing and the documents generated

during that hearing to produce the administrative record. For the

reasons stated below, we hold that IRS Appeals did not abuse its

discretion in rejecting the Baumgardners’ OIC and in sustaining the

Levy Notice.

FINDINGS OF FACT

The Baumgardners resided in Maryland when they filed the

Petition. Mr. Baumgardner died on September 26, 2022. Mrs.

Baumgardner was appointed as the personal representative of the

Estate of Ralph W. Baumgardner, and on February 7, 2023, this Court

granted her Motion to Substitute Parties and Change Caption.

I.

The Baumgardners’ Income Tax Liability

On October 16, 2016, the Baumgardners filed late their Form

1040, U.S. Individual Income Tax Return, for the 2012 tax year. They

filed a married filing joint return and claimed their adult son, Ralph

Baumgardner III (Ralph III), as a dependent. 4 On their 2012 Form 1040

income tax return, they reported total tax due of $59,988 and claimed a

tax credit of $36. Because they failed to timely file the 2012 Form 1040

income tax return and timely pay the amount shown on the return,

respondent determined additions to tax, pursuant to sections 6651(a)(1)

and (2) and 6654, of $13,489, $13,489, and $9,062, respectively. As of

June 1, 2020, a balance due of $114,504 remained for the 2012 tax year.

The Baumgardners also filed late their Form 1040 income tax

return for the 2013 tax year on October 16, 2016. They filed a married

filing joint return and claimed their son, Ralph III, as a dependent. On

their 2013 Form 1040 income tax return, they reported total tax due of

$3,266 and claimed a tax credit of $1,000. Since they failed to timely file

the 2013 Form 1040 income tax return and timely pay the tax amount

shown on the return, respondent determined additions to tax, pursuant

to sections 6651(a)(1) and (2) and 6654, of $510, $349, and $41,

4 The Baumgardners’ OIC submission included a copy of a February 13, 2015

Social Security Administration (SSA) letter denying Ralph III’s claim for

Supplemental Security Income benefits. The SSA letter references psychological and

medical reports that were prepared by medical professionals who evaluated Ralph III

and that Ralph III attached to his benefits claim. The Baumgardners informed IRS

Appeals that Ralph III was unable to work because of his health challenges and that

they provided more than half of his support.

4

[*4] respectively. As of June 28, 2021, a balance due of $4,251 remained

for the tax year at issue.

II.

Collection Activity

The Baumgardners did not pay the liabilities for the 2012 tax year

or the tax year at issue, and respondent began collection activities. On

May 1, 2017, respondent sent the Levy Notice, stating that they owed

$3,497 in an unpaid federal income tax liability for the tax year at issue

and that they had 30 days from the date of the letter to pay the amount

due in full or request a CDP hearing.

III.

CDP Hearing Request

The Baumgardners timely submitted Form 12153, Request for a

Collection Due Process or Equivalent Hearing, for the tax year at issue,

with a signature date of May 25, 2017. Respondent received it on May

30, 2017. Form 12153 directs the taxpayer to check the most

appropriate box for the reason the taxpayer disagrees with the filing of

a notice of federal tax lien filing or a proposed levy. The form provides

four options: (i) collection alternative, (ii) installment agreement,

(iii) OIC, or (iv) “I cannot pay balance.” The Baumgardners did not check

a box indicating a basis for their disagreement with the proposed

collection action. However, they circled “collection alternative” and

cross-referenced and made the following statement on line 8 of the Form

12153: “We are currently compiling the information necessary in

preparing a complete and accurate 433A & 433B. Said forms will allow

us to determine whether an installment agreement or offer in

compromise is the collection alternative.”

IV.

The Baumgardners’ OIC

On July 11, 2017, the Baumgardners submitted an OIC based on

effective tax administration (ETA) that consisted of (i) a Form 656, Offer

in Compromise, (ii) a Form 433–A, Collection Information Statement for

Wage Earners and Self-Employed Individuals, with supporting

documentation, and (iii) a three-page narrative explaining what they

asserted were their special circumstances that they believed qualified

them for an OIC based on ETA. In their Form 656, they offered to settle

their outstanding income tax liability of $103,241 for the 2012, 2013,

and 2014 tax years for a lump-sum cash payment of $1,825 (offer

amount).

They proposed to pay the offer amount in separate

installments: $915 one month after respondent’s acceptance and $910

two months later. In the attachment, they explained that their monthly

5

[*5] ordinary and necessary expenses exceeded their monthly income,

they have significant debt, and that, even if the assets that were

excluded from their OIC were liquidated to full pay their 2013 income

tax liability, they would suffer economic hardship because they would

be unable to meet their basic living expenses for the remainder of their

joint life expectancy of not less than 15 years.

In the Form 433–A they submitted as part of their OIC, the

Baumgardners detailed their monthly income and expenses, as well as

their assets and liabilities for purposes of calculating their RCP. They

reported that they had a total monthly income of $3,097 consisting of

$1,840 in Social Security income and $1,257 in net rental income. They

further reported that they had total monthly living expenses of $4,292.

They also reported personal assets of $357,985, consisting of several

bank accounts, an individual retirement account (IRA), two life

insurance policies, three automobiles, and three real estate properties.

Each of the three real estate properties was in Westminster, Maryland.

One of these properties (114 E.) was used in part as their personal

residence, and in part as a rental property. The other two were

exclusively rental properties (116 E. and 137). While 116 E. was an

income-producing asset, 114 E. and 137 were not. Neither 114 E. nor

137 was sold or had a sale pending when the Baumgardners’ OIC was

under consideration.

By letter dated August 7, 2017, respondent notified the

Baumgardners that he had received their OIC. On August 31, 2017, IRS

Appeals SO D. Bartholomew notified them by letter that IRS Appeals

had received their OIC and that respondent was suspending their

request for a CDP hearing during the pendency and review of their OIC.

The OIC was initially reviewed by respondent’s Offer Examiner P. Goetz

(OE Goetz).

OE Goetz reviewed the Baumgardners’ financial information and

prepared an OIC Financial Analysis Report (OIC Report). In the OIC

Report OE Goetz determined that they had total assets, and therefore

an RCP, of $354,241. OE Goetz recommended rejecting their offer

amount because she determined that they had an RCP of $354,241 and

the ability to fully pay their tax liability based on equity in assets. On

April 6, 2018, OE Goetz notified the Baumgardners and their counsel by

letter that respondent had made a preliminary decision to reject their

OIC because they had the ability to fully pay their federal tax liability

6

[*6] within the collection period expiration date. 5 OE Goetz’s letter also

stated that their special circumstances did not constitute a hardship

that warranted acceptance of their OIC. Because they had requested a

CDP hearing, OE Goetz’s preliminary determination was forwarded to

IRS Appeals for consideration and final determination.

V.

CDP Hearing

The Baumgardners’ CDP hearing was initially assigned to SO

Bartholomew.

On February 22, 2019, their counsel and SO

Bartholomew held a telephone conference and discussed their assets,

including the three real estate properties. Their counsel explained to

SO Bartholomew that expenses exceeded income for two of the

properties, 114 E. and 137, and that the rental income from the incomeproducing property, 116 E., was used to pay their basic living expenses.

SO Bartholomew stated that she would consider their counsel’s

arguments as to the inclusion of the properties in the table of assets and

available equity in those assets for purposes of evaluating their OIC.

On March 11, 2019, the case was transferred to SO D. Connolly.

On March 27, 2019, SO Connolly held a telephone conference with the

Baumgardners’ counsel and discussed the properties and their other

assets, including Mrs. Baumgardner’s IRA. On March 27 and April 5,

2019, their counsel and SO Connolly exchanged correspondence, and he

sent SO Connolly additional documentation regarding the real estate

properties in support of their OIC based on ETA. This correspondence,

along with the narrative that was attached to the Baumgardners’ Form

656, focused on excluding assets from the RCP including the real estate

properties, automobiles, Mrs. Baumgardner’s IRA, and the surrender

value of a whole life insurance policy on Ralph III. On April 5, 2019, SO

Connolly called their counsel and explained that even if the rental

properties were excluded from their assets for purposes of the RCP

calculation, they would still have sufficient assets to fully pay their tax

liability and would not be considered for an OIC based on ETA. On

April 5, 2019, the SO received a letter from their counsel that included

a table of their assets. The assets listed on the table included Mrs.

Baumgardner’s IRA, the surrender value of a whole life insurance policy

on Ralph III’s life, the surrender value of a separate whole life insurance

policy on Mr. Baumgardner’s life, a bank account, the three real estate

5 We note that OE Goetz and the Baumgardners engaged in several

communications before OE Goetz’s April 6, 2018 preliminary decision to reject their

OIC wherein they provided her with additional documentation to support the income,

expenses, and assets that they listed on their Form 433–A.

7

[*7] properties, and their vehicles. The total value of these assets was

$291,854. However, their counsel reiterated his position that none of

these assets should be considered of value for inclusion in the RCP

except for the surrender value of the whole life insurance policy on Ralph

III’s life. During the CDP hearing, their counsel also reiterated that if

the assets that were excluded from their OIC were liquidated to fully

pay their 2013 income tax liability, they would suffer economic hardship

because they would be unable to meet their basic living expenses for the

remainder of their respective life expectancies.

On May 28, 2019, SO Connolly issued the Baumgardners the

Notice of Determination Concerning Collection Actions under IRC

Sections 6320 or 6330 of the Internal Revenue Code (Notice). The

attachment to the Notice provided additional background on the

Baumgardners and their medical conditions. 6 It stated that Mr.

Baumgardner was forced to retire because of medical disability and Mrs.

Baumgardner was unable to work because of physical injury. More

specifically, it stated that Mr. Baumgardner was “forced to retire due to

imbalance due to spinal issues, morbid obesity and diabetes.” It also

stated that Mrs. Baumgardner incurred injuries in 2016 for a “fractured

knee, shoulder, [p]elvic collapse, bursitis, arthritis, and a herniated

disc.” Mrs. Baumgardner applied for SSA disability benefits, but the

SSA denied her claim, stating that she should be healed and able to

return to work by June 2017.

The Baumgardners’ adult dependent son was living with them,

and they were providing more than half of his living expenses. An IRS

Appeals technical advisor reviewed their Form 433–A and agreed to

remove the equity from two of their real estate properties from the RCP

because the sale of the first would increase their housing expense while

also eliminating some rental income and the sale of the second would

eliminate an income-producing property. However, the IRS Appeals

technical advisor concluded that the RCP from their bank accounts, life

insurance, IRA, and cars still exceeded the balance due. SO Connolly

offered them penalty abatement for the 2012 tax year and an $850-permonth installment agreement. Their counsel rejected SO Connolly’s

offer, at which point SO Connolly explained that he would receive a

closing letter in the mail.

6 When respondent issued the Notice, Mr. Baumgardner was 71 years old and

Mrs. Baumgardner was 64 years old.

8

[*8] SO Connolly reviewed the Baumgardners’ file and verified that

all requirements of applicable law and administrative procedure were

satisfied. The Notice stated that the only issue that they raised was a

collection alternative but, because they had the ability to pay their

liability in full and there were no special circumstances, IRS Appeals

could not accept their offer amount. Accordingly, SO Connolly

determined that the issuance of the Levy Notice was appropriate and

sustained the proposed collection action.

VI.

Tax Court Proceedings

On June 27, 2019, the Baumgardners timely filed their Petition

with this Court seeking our review of IRS Appeals’ determination to

deny them a collection alternative and sustain the proposed levy. On

July 7, 2020, respondent filed a Motion to remand the case to IRS

Appeals. Respondent sought remand because the administrative record

did not show that respondent’s SO had verified whether the

Baumgardners met the requirements for an OIC based on ETA as

outlined in Treasury Regulation § 301.7122-1 and IRM 5.8.11 (Aug. 5,

2015) and 8.23.3 (Aug. 18, 2017). On August 31, 2020, the Court granted

respondent’s Motion to Remand and ordered the case remanded to IRS

Appeals for a supplemental CDP hearing to consider the Baumgardners’

economic hardship argument.

The supplemental CDP hearing was assigned to SO C. Covey. On

December 6, 7, and 8, 2020, the Baumgardners’ counsel sent documents

to SO Covey to support their economic hardship argument. These

documents addressed their assets, income, future vehicle replacement

expenses, 7 future out-of-pocket health expenses, 8 and future repair and

maintenance expenses relating to their three real estate properties.

On January 20, 2021, SO Covey sent the Baumgardners’ counsel

a letter stating that, based on the documentation submitted, IRS

Appeals determined that they qualified for ETA consideration because

7 The Baumgardners asserted that replacement of two of their vehicles would

cumulatively result in $59,640 of additional transportation expenses.

8 Specifically, the Baumgardners asserted that they reasonably believed that

their medical challenges would worsen with age, that new medical issues would arise,

and that their out-of-pocket medical costs, deductibles, and copays would increase by

no less than 3% annually. They cited an article on the rising costs of health care.

Relying on that article they told SO Covey that their health care expenses would

exceed the $228 monthly out-of-pocket health care expense that OE Goetz initially

allowed by $78 per month (totaling $14,040 over their joint life expectancy of not less

than 15 years).

9

[*9] of economic hardship. As a result, IRS Appeals reevaluated their

assets 9 and future income potential and recalculated their RCP at

$109,605. 10 Specifically, SO Covey decreased the RCP of $354,204 to

$109,605 by allowing them to retain net available equity of $244,599

from (i) one of their real estate properties, (ii) Mrs. Baumgardner’s IRA

account, and (iii) two of their automobiles. SO Covey took their negative

net monthly income into account in allowing them to retain net available

equity of $244,599. Specifically, as part of the RCP calculation, SO

Covey allowed them to retain $1,359 in net equity in assets per month

for a 15-year period ($244,599 in net equity retained). This allowance

resulted in the Baumgardners’ having $40 of positive net monthly

income, and it covered their current and future necessary living

expenses.

On January 30, 2021, the Baumgardners’ counsel sent a letter to

SO Covey’s manager, D. Richardson (ATM Richardson), stating that

they were unable to borrow money against their real estate properties.

In support of that position, their counsel directed ATM Richardson and

SO Covey to a rejection letter from a conventional lender that was

included with his December 5, 2020 correspondence, and he attached

documents from two reverse mortgage lenders stating that they do not

qualify for a reverse mortgage. Only one of the reverse mortgage

application denials identifies the subject property address (114 E.) on

which the applicant was seeking to obtain a reverse mortgage. The

other reverse mortgage application denial does not state the subject

property address on which the reverse mortgage was sought. On

February 1, 2021, their counsel sent a letter to ATM Richardson and SO

Covey stating that IRS Appeals’ determination that their RCP was

$109,605 was arbitrary “because it is based on a fundamentally flawed

analysis.” Their counsel reiterated that IRS Appeals failed to consider

the foreseeable economic consequences relating to their future increased

9 As discussed above, the Baumgardners argued that IRS Appeals should not

have included the surrender value of the whole life insurance policy on Mr.

Baumgardner in the RCP. SO Covey used the insurance policy’s net account value less

loan and loan interest amounts to reach the net equity for purposes of the revised RCP.

We note that this amount was less than each of (i) the cash surrender value of the

policy or (ii) the loan amount available.

10 SO Covey’s RCP determination was primarily based on equity in assets;

however, she considered their negative monthly income and reduced the RCP based on

ETA issues to allow them to retain net equity in certain assets to satisfy their current

and future necessary living expenses.

10

[*10] out-of-pocket health care expenses, 11 vehicle replacement

expenses, 12 and real estate considerations. 13

ATM Richardson

explained to the Baumgardners’ counsel that SO Covey considered these

future expenses and rejected them because they were speculative. He

further specifically explained that in calculating the Baumgardners’

RCP, IRS Appeals made reasonable allowances (by allowing them to

retain $244,599 in net equity in assets) for them to meet their present

and future basic living expenses in light of the fact that they currently

have negative net monthly income.

On February 26, 2021, IRS Appeals issued the Supplemental

Notice of Determination (Supplemental Notice) for the tax year at issue.

In the Supplemental Notice SO Covey stated that she had verified that

the requirements of any applicable law or administrative procedure

were met. SO Covey reviewed the administrative file and confirmed

proper issuance of the notice and demand, Levy Notice, and notice of a

right to a CDP hearing. SO Covey also confirmed that an assessment

was properly made for the tax period identified on the CDP notice. She

also confirmed that the notice and demand for payment was mailed to

the Baumgardners’ last known address and that there was a balance

due when the Levy Notice was issued. Next SO Covey reaffirmed

respondent’s determination that the issuance of the Levy Notice was

valid and appropriate. Before issuing the Supplemental Notice, SO

Covey requested that they increase the offer amount from $1,825 to

SO Covey reviewed the Baumgardners’ health care expenses and, for

purposes of the income expense table and the RCP, allowed their reported out-of-pocket

health care expense of $215 per month and allowed a health care insurance expense of

$539 per month. The health care insurance expense consisted of their claimed $422

per month health insurance expense and an additional health insurance expense of

$117 per month that SO Covey allowed. SO Covey disallowed their claim of an

additional $78 per month in projected health care expense.

11

12 For purposes of the income expense table and the RCP, SO Covey allowed

them $506 per month in car operation expense plus an additional $400 per month

($200 per car) because of the age and mileage of the vehicles, for a total of $906 in

monthly transportation expenses.

13 The Baumgardners assert that, over the next 15 years, 116 E. would require

$116,275 in future repairs to maintain the property’s building components. The

repairs included boiler replacement, plumbing repairs, sidewalk replacement, laundry

machine replacement, window air conditioner unit replacement, painting, siding

replacement, roof replacement, garage roof replacement, fire escape post base

replacement, driveway water runoff remediation, storm door replacement, installation

of railings, installation of weed retention pavers, kitchen appliance and cabinet

replacement, vinyl siding and trim replacement, exterior rear door replacement,

downspout repairs, and garage door replacement.

11

[*11] $109,605. They declined to submit any amended offer. Because

the offer amount was less than their ability to pay, IRS Appeals rejected

the offer amount and sustained the Levy Notice. In an attachment to

the Supplemental Notice SO Covey summarized the parties’

communications and the factors that IRS Appeals considered with

respect to their OIC based on ETA.

OPINION

The question before the Court is whether the SO abused her

discretion in rejecting the Baumgardners’ OIC and sustaining

respondent’s proposed levy with respect to their 2013 federal tax

liability.

Specifically, petitioners argue that the SO erred in

understating out-of-pocket health care costs, vehicle expenses, and

maintenance expenses for their three real estate properties.

I.

Standard of Review

We have jurisdiction to review IRS Appeals’ determination

pursuant to section 6330(d)(1). See Murphy v. Commissioner, 125 T.C.

301, 308 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006). Where, as here, the

underlying tax liability is not at issue, we review the determination of

IRS Appeals for abuse of discretion. See Sego v. Commissioner, 114 T.C.

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

this Court remands a case to IRS Appeals and there is a supplemental

determination, we review the supplemental determination. Hoyle v.

Commissioner, 136 T.C. 463, 467–68 (2011), supplementing 131 T.C. 197

(2008).

In reviewing for abuse of discretion we must uphold IRS Appeals’

determination unless it is arbitrary, capricious, or without sound basis

in fact or law. See Murphy, 125 T.C. at 320; Taylor v. Commissioner,

T.C. Memo. 2009-27, 97 T.C.M (CCH) 1109, 1116. We do not substitute

our judgment for that of IRS Appeals but consider “whether, in the

course of making its determination, the [IRS] Appeals Office complied

with the legal requirements of an administrative hearing.” Charnas v.

Commissioner, T.C. Memo. 2015-153, at *7.

II.

Abuse of Discretion

Petitioners assert that SO Covey abused her discretion in

sustaining the proposed collection action and rejecting their OIC of

$1,825. They also assert that SO Covey abused her discretion because

the proposed collection action does not balance the need for the efficient

12

[*12] collection of taxes and their legitimate concerns that the collection

action be no more intrusive than necessary. In deciding whether IRS

Appeals abused its discretion, we consider whether SO Covey

(a) properly verified that the requirements of applicable law or

administrative procedure have been met, (b) considered any relevant

issues the Baumgardners raised, and (c) weighed “whether any proposed

collection action balances the need for the efficient collection of taxes

with the legitimate concern of [the Baumgardners] that any collection

action be no more intrusive than necessary.” See § 6330(c)(3). Our

review of the record establishes that SO Covey satisfied each of these

requirements.

A.

Verification

Before issuing a notice of determination, IRS Appeals must verify

that all requirements of applicable law and administrative procedure

have been met. § 6330(c)(1), (3)(A). We have authority to review an SO’s

satisfaction of the verification requirement regardless of whether the

taxpayer raised the issue at the CDP hearing. Hoyle, 131 T.C.

at 200–03.

The Petition did not assert that SO Covey failed to satisfy this

requirement, and petitioners have not directed this Court’s attention to

any facts that would support such a finding. See Rule 331(b)(4) (“Any

issue not raised in the assignments of error shall be deemed to be

conceded.”); Rockafellor v. Commissioner, T.C. Memo. 2019-160, at *12.

Nonetheless, we briefly address the verification requirement. SO Covey

reviewed the administrative file and confirmed proper issuance of the

notice and demand, Levy Notice, and notice of a right to a CDP hearing.

SO Covey also confirmed that an assessment was properly made for the

2013 tax year. She also confirmed that the notice and demand for

payment was mailed to the Baumgardners’ last known address and that

there was a balance due when the Levy Notice was issued. Based on our

review of the record before us, we find that SO Covey satisfied the

verification requirement. See § 6330(c)(1).

B.

Issues Raised

1.

Legal Background

Petitioners argue that respondent abused his discretion by

rejecting the OIC. On the Baumgardners’ Form 656, which was based

on ETA, they offered to settle their outstanding income tax liability of

$103,241 for the 2012, 2013, and 2014 tax years for a lump-sum cash

13

[*13] payment of $1,825. Their OIC-ETA collection alternative was

based on their contention that they would suffer economic hardship if

their assets were used to pay their federal tax liabilities.

The crux of the Baumgardners’ economic hardship assertion was

that because of their respective ages and life expectancies (at the time

respondent issued the Notice, Mr. Baumgardner was 71 years old and

Mrs. Baumgardner was 64 years old), inability to work due to health

issues, and obligation to support their adult son, Ralph III, and because

their monthly expenses exceeded their income, they required all the net

equity in their assets, $354,204, to pay their necessary and basic living

expenses for at least the period of their joint life expectancy of not less

than 15 years. They further asserted that their basic living expenses

included increased future out-of-pocket health care expenses, additional

transportation expenses that included future vehicle replacement costs

for two of their vehicles, and future maintenance and component

replacement for their real estate properties. Petitioners argue that SO

Covey’s failure to take these foreseeable and necessary expenses into

account in considering their OIC was an abuse of discretion. Their

arguments that IRS Appeals erred in not allowing greater amounts for

certain future expenses goes to their assertion that certain assets should

have been excluded from SO Covey’s RCP determination and that their

$1,825 OIC reflects the amount the IRS could collect from them without

causing economic hardship.

Section 7122(a) authorizes the IRS to compromise an outstanding

tax liability on grounds that include the promotion of ETA, the ground

that the Baumgardners asserted in IRS Appeals. See Treas. Reg.

§ 301.7122-1(b)(3), (c)(3). The decision to accept or reject an OIC, along

with the terms of the compromise, is within the IRS’s discretion and is

based upon consideration of all facts and circumstances. See § 7122(a);

Treas. Reg. § 301.7122-1(c)(1). However, the IRS may reject an OIC

when the taxpayer’s RCP exceeds his offer.

See Johnson v.

Commissioner, 136 T.C. 475, 486 (2011), aff’d, 502 F. App’x 1 (D.C. Cir.

2013). Generally, the IRS will reject any offer substantially below the

taxpayer’s RCP unless special circumstances justify acceptance of such

an offer. See Abraham v. Commissioner, T.C. Memo. 2021-97, at *13

(first citing Mack v. Commissioner, T.C. Memo. 2018-54, at *10; and

then citing Rev. Proc. 2003-71, § 4.02(2), 2003-2 C.B. 517, 517). A

taxpayer’s RCP is determined, in part, using published guidelines for

certain national and local allowances for basic living expenses and

essentially treating income and assets in excess of those needed for basic

living expenses as available to satisfy federal tax liabilities. See

14

[*14] Lemann v. Commissioner, T.C. Memo. 2006-37, 91 T.C.M. (CCH)

846, 850.

The IRM provides procedures for analyzing a taxpayer’s financial

condition to determine RCP. See IRM 5.8.5.1 (Mar. 23, 2018). A

taxpayer’s RCP is calculated by determining, then adding together:

(1) the taxpayer’s “net realizable equity,” i.e., the quick sale value of the

taxpayer’s assets less amounts owed to secured lien holders with priority

over federal tax liens, and (2) his “future income,” i.e., the amount

collectible from the taxpayer’s expected future gross income after

allowing for necessary living expenses. See IRM 5.8.5.4.1 (Sept. 30,

2013); id. 5.8.5.18 (Mar. 23, 2018); see also Johnson, 136 T.C. at 485;

Lemann, 91 T.C.M. (CCH) at 850.

When an SO has followed the IRS’s guidelines to ascertain a

taxpayer’s RCP and rejected the taxpayer’s proposed collection

alternative on that basis, we have found no abuse of discretion. See

Murphy, 125 T.C. at 321; Lemann, 91 T.C.M. (CCH) at 851. In reviewing

the SO’s determination, we do not make an independent evaluation of

what would be an acceptable collection alternative. See Thompson v.

Commissioner, 140 T.C. 173, 179 (2013); Murphy, 125 T.C. at 320; see

also Randall v. Commissioner, T.C. Memo. 2018-123, at *9. “If the

settlement officer followed all statutory and administrative guidelines

and provided a reasoned, balanced decision, the Court will not reweigh

the equities.”

Thompson, 140 T.C. at 179; see also Lipson v.

Commissioner, T.C. Memo. 2012-252, at *9.

“[W]e judge the propriety of [IRS Appeals’] determination . . . on

the grounds invoked by [IRS] Appeals.” Elkins v. Commissioner, T.C.

Memo. 2020-110, at *24; see also SEC v. Chenery Corp., 332 U.S. 194,

196 (1947); Antioco v. Commissioner, T.C. Memo. 2013-35, at *25

(“Applying Chenery in the CDP context means that we can’t uphold a

notice of determination on grounds other than those actually relied upon

by the Appeals officer.”). In doing so, we look to the reasons offered in

the notice of determination, as further explained in the SO’s

contemporaneous rejection memorandum and case activity notes.

Accord Melasky v. Commissioner, 151 T.C. 93, 106 (2018) (“[W]e will

uphold a notice of determination of less than ideal clarity if the basis for

the determination may reasonably be discerned . . . .”), aff’d, 803 F. App’x

732 (5th Cir. 2020); Kasper v. Commissioner, 150 T.C. 8, 24–25 (2018)

(“Although we may not accept any post hoc rationalizations for agency

action provided by the Commissioner’s counsel, we may consider any

‘contemporaneous explanation of the agency decision’ contained in the

15

[*15] record.” (quoting Tourus Records, Inc. v. DEA, 259 F.3d 731,

738–40 (D.C. Cir. 2001))); see Elkins, T.C. Memo. 2020-110, at *25–29.

2.

The Baumgardners’ OIC

A settlement to promote effective tax administration is justified

(i) when it is determined that full collection could be achieved but would

“cause the taxpayer economic hardship within the meaning of [Treasury

Regulation] § 301.6343-1,” or (ii) when exceptional circumstances exist

such that collection of the full liability would undermine public

confidence that the tax laws are being administered in a fair and

equitable manner. Treas. Reg. § 301.7122-1(b)(3)(i) and (ii); see also

Bogart v. Commissioner, T.C. Memo. 2014-46, at *10. Before IRS

Appeals, the Baumgardners agreed that their request for an OIC-ETA

was not based on Treasury Regulation § 301.7122-1(b)(3)(i) (i.e., public

policy). Accordingly, their CDP hearing and supplemental CDP hearing

focused on whether the IRS’s collection of the tax would create economic

hardship for them.

In the Supplemental Notice, SO Covey determined that the

Baumgardners qualified for ETA consideration under economic

hardship and reevaluated their assets and future income potential. As

a result of that reevaluation, SO Covey decreased the RCP of $354,204

to $109,605 by allowing them to retain net available equity of $244,599

from (i) one of their real estate properties, (ii) Mrs. Baumgardner’s IRA

account, and (iii) two of their automobiles. However, SO Covey

determined that exceptional circumstances did not exist to warrant

acceptance of their OIC because their offer amount was less than the

revised RCP, and the revised RCP allowed them to retain the net equity

in assets to subsidize their negative net monthly income and cover their

necessary and basic living expenses over a 15-year period. In other

words, under the IRS’s RCP calculation, collection of the tax would not

create an economic hardship. See Treas. Reg. § 301.6343-1. Below we

consider their claims of economic hardship.

“An offer to compromise based on economic hardship generally

will be considered acceptable when, even though the tax could be

collected in full, the amount offered reflects the amount the Service can

collect without causing the taxpayer economic hardship.” Rev. Proc.

2003-71, § 4.02(3)(a), 2003-2 C.B. 517, 517; see Dailey v. Commissioner,

T.C. Memo. 2008-148, 95 T.C.M. (CCH) 1582, 1590.

Treasury

Regulation § 301.6343-1(b)(4) defines economic hardship as the inability

to pay reasonable basic living expenses. See also Gustashaw v.

16

[*16] Commissioner, T.C. Memo. 2018-215, at *15–16. Treasury

Regulation § 301.7122-1(c)(3) sets forth the following nonexhaustive list

of factors that an SO may take into account that would support (but are

not conclusive of) a finding of economic hardship: (i) a long-term illness,

medical condition, or disability which is expected to exhaust the

taxpayer’s financial resources, (ii) the total depletion of a taxpayer’s

income resulting from the provision of dependent care, and (iii) the

taxpayer’s inability to borrow against the equity in the taxpayer’s assets

and liquidation of those assets to pay the outstanding tax liability would

render the taxpayer unable to meet basic living expenses. Below, we

discuss the Baumgardners’ expenses that SO Covey disallowed in

rejecting their OIC-ETA based on economic hardship and that

petitioners argue resulted in an abuse of discretion.

a.

Future Health Care Expenses

First, the Baumgardners asserted to SO Covey that they were

entitled to increased health care expenses because of their medical

conditions and ages. Specifically, they asserted that they reasonably

believed that their medical challenges would worsen with age, that new

medical issues would arise, and that their out-of-pocket medical costs,

deductibles, and copays would increase by no less than 3% annually.

They cited an article on the rising costs of health care. Relying on that

article, they told SO Covey that their health care expenses would exceed

the $228 monthly out-of-pocket health care expense that OE Goetz

initially allowed by $78 per month (totaling $14,040 over their joint life

expectancy of not less than 15 years). As a result, they asserted that SO

Covey had erred in disallowing an increase to their out-of-pocket health

care expenses and that SO Covey should have allowed an increase to

their out-of-pocket health care expense by $78 per month. In effect, they

argued that IRS Appeals should have taken future increased out-ofpocket health care expenses into account because the expenses would

affect their future financial wherewithal (i.e., if the tax were collected,

it would cause them economic hardship in meeting these future

expenses).

Under the IRM, taxpayers are entitled to out-of-pocket health

care expenses. The out-of-pocket health care standard amount is

allowed in addition to the amount taxpayers pay for health insurance.

IRM 5.15.1.9(6) and (7) (Aug. 29, 2018). SOs are directed to allow

taxpayers the standard amount of healthcare expenses monthly on a per

person basis without questioning the amounts actually spent by

taxpayers on healthcare costs. Id.; IRM 5.8.5.22.4(6) (Mar. 23, 2018).

17

[*17] Amounts in excess of the out-of-pocket health care standard may

be allowed if taxpayers provide documentation to substantiate and

justify the additional health care expenses.

IRM 5.15.1.9(8).

Additionally, when confronted with special circumstances, the SO must

take into account any long-term illnesses, medical conditions,

disabilities, and care for dependents with special health needs.

Gustashaw, T.C. Memo. 2018-215, at *25 (citing Treas. Reg. § 301.71221(c)(3)). However, an SO does not abuse his or her discretion in

disallowing speculative future medical costs.

See Brombach v.

Commissioner, T.C. Memo. 2012-265, at *24–25; Blondheim v.

Commissioner, T.C. Memo. 2006-216, 92 T.C.M. (CCH) 334, 338, aff’d in

part sub nom. Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009).

In Gustashaw, T.C. Memo. 2018-215, at *26, we rejected the same

argument that petitioners make here. Specifically, we held that IRS

Appeals did not abuse its discretion in denying future health care

expenses based on the taxpayers’ argument that medical expenses

increase as people age. Id. “It is not an abuse of discretion for a

settlement officer to set aside speculative future expenses if the record

does not support their inclusion.” Id. (citing Brombach, T.C. Memo.

2012-265, at *24–25). SO Covey reviewed the Baumgardners’ health

care expenses and allowed their reported out-of-pocket health care

expense of $215 per month and allowed a health care insurance expense

of $539 per month. The health care insurance expense consisted of their

reported $422 per month health insurance expense and an additional

health insurance expense of $117 per month that SO Covey allowed.

They reported an additional $78 per month of out-of-pocket health care

expense based on their position that their health care expenses would

increase by no less than 3% per year and the expenses would be further

increased by their current and future medical problems. As discussed

supra note 11, SO Covey considered their claim for an additional $78 per

month in health care expense (above the additional $117 per month in

health care expense that SO Covey allowed) and rejected it because it

was speculative. SO Covey did not abuse her discretion in disallowing

their claimed additional $78 per month of out-of-pocket health care

expense because it was an unsubstantiated and speculative future

expense. See Gustashaw, T.C. Memo. 2018-215, at *26. Finally, we note

that even if SO Covey had allowed the reported $78 per month health

care expense, it would have resulted in a reduction of $14,040 ($78 × 12

months × 15 years) to their RCP or $95,565 ($109,605 − $14,040).

However, a revised RCP of $95,565 still greatly exceeds their offer

amount.

18

[*18]

b.

Additional Transportation Expenses

The Baumgardners also asserted to SO Covey that they were

entitled to increased transportation ownership expense because it was

reasonably foreseeable and expected that during their joint life

expectancy of not less than 15 years they would need to replace two of

their vehicles. They asserted that replacement of two of their vehicles

would cumulatively result in $59,640 of additional transportation

expense. Finally, they asserted additional transportation ownership

expense for the vehicle used for Ralph III’s welfare and health care

appointments.

SO Covey allowed the Baumgardners $506 per month in car

operation expense plus an additional $400 per month ($200 per car)

because of the age and mileage of the vehicles, for a total of $906 in

monthly transportation expense. They assert that SO Covey abused her

discretion in not permitting them an additional car expense of $35,640

(i.e., the $59,640 vehicle replacement cost reduced by $24,000 (allowed

monthly car expense multiplied by 60 months)).

An SO is required to factor in the taxpayers’ necessary

transportation expenses in computing their RCP. IRM 5.8.5.22.3(1)

(Mar. 23, 2018), 5.15.1.8(5) (July 24, 2019). Transportation expenses

are necessary if “they are used by taxpayers and their families to provide

for their health and welfare and/or the production of income.” Id.

5.8.5.22.3(1). Transportation expenses include ownership expenses for

the purchase or lease of a vehicle and operating expenses to keep the

vehicle on the road. Id. 5.8.5.22.3(2)–(4). A taxpayer is allowed

operating expenses under the local transportation standard, or the

amount reported by the taxpayer, whichever is less. Id. 5.8.5.22.3(4).

Substantiation for the operating expense allowance is not required

unless the amount reported is more than the total allowed under the

transportation standards. Id. For instance, a taxpayer that reports an

amount greater than the transportation standard may be allowed an

amount greater than the standard if the taxpayer commutes long

distances to reach the taxpayer’s place of employment. Id. 5.8.5.22.3(5).

For ownership expenses a taxpayer is “allowed the local standard

or the amount actually paid, whichever is less, unless the taxpayer

provides documentation to verify and substantiate that the higher

expenses are necessary.” IRM 5.8.5.22.3(3). If a taxpayer owns a car

but has no car payment, only the operating costs portion of the

transportation standard is used to calculate the allowable

19

[*19] transportation expense. Gustashaw, T.C. Memo. 2018-215, at *27;

IRM 5.15.1.8(5)(b). However, considering the taxpayer’s income that

may be available for purposes of the RCP, a taxpayer may be allowed an

allowance for a loan payment if the taxpayer provides evidence that the

vehicle will require immediate replacement because of its age or

condition. IRM 5.8.5.22.3(3). If the taxpayer has a vehicle that is

currently over eight years old or has reported mileage of 100,000 miles

or more, an additional monthly operating expense of $200 is generally

allowed per vehicle (up to two vehicles when a joint offer is submitted).

IRM 5.8.5.22.3(6). Written documentation is not required to determine

the exact additional operating costs if the vehicle meets the age or

mileage threshold, unless the additional allowance exceeds the $200

provided. Id.

As discussed supra note 12, SO Covey allowed the Baumgardners

$506 per month in transportation operating expense and an additional

$400 per month ($200 per car) operating expense because of the age and

mileage of the vehicles. Their primary complaint with respect to

transportation expense was that SO Covey did not permit any

ownership expense and did not take into account that two of their

vehicles would need to be replaced during their remaining joint life

expectancy of not less than 15 years.

As we discussed supra

Part II.B.2.a. with respect to future health care expenses, their

argument seems to be that IRS Appeals should have taken these

ownership expenses into account because the expenses would affect

their future financial wherewithal (i.e., if the tax were collected it would

cause them economic hardship in meeting these future expenses).

The record shows that SO Covey considered these expenses but

rejected them for purposes of modifying the RCP because they were

future speculative expenses. As discussed supra note 10, SO Covey’s

RCP determination was based on equity in assets; however, she

considered the Baumgardners’ negative monthly income14 and reduced

the RCP based on ETA issues to allow them to retain net equity in

certain assets to cover their current and future necessary living

expenses. SO Covey’s decision to allow them to retain $244,599 in net

asset equity (or $1,359 per month for 15 years) reflects her

determination that this amount was required to meet their

substantiated and unspeculative current and future expenses.

14 The Baumgardners’ $906 per month transportation expense is a portion of

their negative net monthly income.

20

[*20] SO Covey followed IRM guidance in allowing for transportation

ownership and operating expenses in her evaluation of the OIC-ETA.

But for an exception that is inapplicable here, 15 the IRM does not allow

for vehicle replacement expense where the taxpayer does not have a

vehicle payment. There is no abuse of discretion when an IRS Appeals

officer relies on IRM guidance. See Gustashaw, T.C. Memo. 2018-215,

at *28 n.44 (and cases cited thereat). Finally, petitioners have not

directed the Court to any document in the administrative record that

substantiates any additional current transportation ownership

expenses for the vehicle used for Ralph III’s welfare and health care

appointments. SO Covey did not abuse her discretion in rejecting the

Baumgardners’ request for additional transportation expenses.

c.

Housing Repairs

Petitioners argue that SO Covey abused her discretion by not

reducing the QSV of the non-income-producing properties (114 E.

and 137) by selling costs in the revised RCP and by disallowing future

repair and maintenance expenses for the income-producing property

(116 E.). Specifically, the Baumgardners asserted to SO Covey that the

future repair and maintenance expenses for their income-producing

property (116 E.) would exhaust their financial resources before the end

of their joint life expectancy of not less than 15 years. In support of this

assertion, they presented SO Covey with eight scenarios involving

disposition of certain of their real estate properties and the resulting

effect on their financial resources over their joint life expectancy of not

less than 15 years. They argued that under each of the eight scenarios

their financial resources would be exhausted before the end of their joint

life expectancy and would render them unable to meet their basic living

expenses.

The IRM directs an SO to determine an acceptable offer amount,

based on economic hardship, by analyzing financial information and the

hardship that would be created if certain assets, or a portion of certain

assets, were used to pay the liability. IRM 5.8.11.5.3(1) (Oct. 4, 2019).

Generally, it is the responsibility of the taxpayer to make

decisions and take the appropriate actions needed to fund

the acceptable offer amount. However, due consideration

15 The exception that an allowance of a loan payment may be considered if the

taxpayer provides evidence that the vehicle needs immediate replacement did not

apply in this instance. The Baumgardners did not assert or provide evidence to SO

Covey that either of their vehicles needed immediate replacement.

21

[*21] of these funding options is often needed for the Service to

arrive at an acceptable offer amount.

IRM 5.8.11.5.3(3). When a taxpayer has business assets, an SO

reviewing such assets must determine whether certain assets are

essential for the production of income. IRM 5.8.5.15(1) (Mar. 23, 2018).

Generally, an SO will not include in the RCP the equity of incomeproducing assets unless the assets are not critical to business

operations. IRM 5.8.5.15(3).

“For offer purposes, assets are valued at net realizable equity

(NRE).” IRM 5.8.5.4.1(1). NRE is defined as QSV “less amounts owed

to secured lien holders with priority over the federal tax lien, if

applicable, and applicable exemption amounts.” Id. IRM 5.8.5.4.1(2)

defines QSV as an estimate of the price a seller could get for the asset

in a situation where financial pressures motivate the owner to sell in a

short time, typically 90 calendar days or less. Generally, QSV is

calculated at 80% of an asset’s fair market value (FMV). IRM

5.8.5.4.1(3).

A higher or lower percentage may be applied in

determining QSV depending on the type of asset and market conditions.

Id. For instance, if the property would quickly sell at full FMV because

real estate in the market is selling quickly or above listing price, then a

higher percentage may be used. Id. An SO may reduce the NRE of an

asset for the costs of the sale and the expected current year tax

consequence of the sale. IRM 5.8.5.4.1(4). This reduction to NRE can

occur only when an asset has been sold or is pending sale and the

proceeds will be used to fund the offer. Id. If an SO reduces the NRE of

an asset for the costs of the sale and the expected current year tax

consequence, the actual sale price is used and there is no QSV reduction

allowed. Id.

SO Covey reviewed the Baumgardners’ documentation and

determined that their mixed-use property (114 E.) and rental property

(137) were not income-producing assets. She multiplied the FMV of each

property they reported by 80% to determine the QSV. This figure was

used to compute their equity in each of the non-income-producing

properties. Our review of the relevant portions of the IRM and the

administrative record shows that SO Covey’s determinations to use the

QSV for the non-income-producing properties for purposes of the revised

22

[*22] RCP was consistent with the IRM. 16 Additionally, SO Covey

correctly calculated the NRE by not reducing the NRE of the nonincome-producing properties for the costs of the sale and the expected

current year tax consequences because neither 114 E. nor 137 was sold

or had a sale pending. SO Covey’s determination not to reduce the NRE

for purposes of the revised RCP was consistent with the IRM. See, e.g.,

Gustashaw, T.C. Memo. 2018-215, at *28.

Additionally, SO Covey determined that the Baumgardners’

remaining real estate property, 116 E., was an income-producing asset.

Consistent with the IRM, SO Covey excluded the equity in the incomeproducing property from the revised RCP. As discussed, petitioners

assert that SO Covey abused her discretion in failing to reduce the RCP

by the amount of estimated future repairs and expenses for 116 E. They

assert that over the next 15 years 116 E. will require $116,275 in future

repairs to maintain the property’s building components. The repairs

include boiler replacement, plumbing repairs, sidewalk replacement,

laundry machine replacement, window air conditioner unit

replacement, painting, siding replacement, roof replacement, garage

roof replacement, fire escape post base replacement, driveway water

runoff remediation, storm door replacement, installation of railings,

installation of weed retention pavers, kitchen appliance and cabinet

replacement, vinyl siding and trim replacement, exterior rear door

replacement, downspout repairs, and garage door replacement.

Petitioners’ argument with respect to SO Covey’s refusal to

include the future repairs and expenses for 116 E. in the revised RCP is

the same type of argument that they made with respect to vehicle

replacement and health care costs discussed supra Part II.B.2.a. and b.

SO Covey considered the Baumgardners’ reported future repair

Petitioners, on brief, argue that SO Covey abused her discretion by not

taking into account a reduction in financial resources because, if the Baumgardners’

principal residence in 114 E. had been sold, they would have needed to obtain

alternative comparable living arrangements.

Petitioners assert that the

Baumgardners would incur 100% of their housing and utility expense (which would be

$2,059) whereas, if the property were not sold, they would have to incur only 61% of

that expense because rental of 39% of the property defrays the expense. On the income

and expense table SO Covey allowed the Baumgardners a housing and utility expense

of $1,371. SO Covey’s determination not to increase the housing and utility expense

was not an abuse of discretion. They occupied 61% of the square footage of 114 E. and

rented out the remainder, which was two garages. They did not occupy the 39% of the

property that was rented and thus there is no reason that their housing and utility

expense should be increased to account for a portion of 114 E. or a comparable property

that they did not occupy and will not need in the future.

16

23

[*23] expenses for 116 E. and determined that they were speculative.

We agree with respondent that any future repairs and expenses at

116 E. are speculative. Of the repairs or replacements allegedly needed

over the next 15 years, some appear to be for cosmetic reasons (i.e.,

kitchen cabinets replacement, painting) while others depend on

frequency and amount of use (i.e., kitchen appliances, laundry

machines, air conditioning units). The Petition points to Examples 1

through 3 in Treasury Regulation § 301.7122-1(c)(3)(iii), which illustrate

“the types of cases that may be compromised by the Secretary, at the

Secretary’s discretion, under the economic hardship provisions of

[Treasury Regulation § 301.7122-1(b)(3)(i)].” The examples illustrate

where an SO might exercise discretion to compromise a liability;

however, the examples did not compel SO Covey to compromise the

Baumgardners’ liability in this case. See, e.g., Serna v. Commissioner,

T.C. Memo. 2022-66, at *9–10.

The base premise of each of the examples is that liquidation of an

asset to satisfy a tax liability compromises the taxpayer’s ability to pay

basic living expenses or meet the taxpayer’s or a dependent’s medical

needs. The Notice, Supplemental Notice, and the contemporaneous case

activity record notes show that the SOs assigned to this case, including

SO Covey, weighed these concerns. Specifically, SO Covey recalculated

the Baumgardners’ net available equity for purposes of the revised RCP

and allowed them to retain net available equity in assets of $244,599 to

subsidize their negative net monthly income and pay current and future

basic living expenses for themselves and their adult dependent son. Our

review of the administrative record does not reveal anything to disturb

SO Covey’s conclusion that the IRS could collect more than the $1,825

OIC without imposing economic hardship.

d.

Life Insurance

Petitioners assert that SO Covey erred by including the net equity

of a whole life insurance policy for Mr. Baumgardner in the revised RCP.

Consistent with their other arguments regarding future expenses, they

assert that the inclusion of the net equity from the life insurance policy

would exacerbate the economic hardship and result in inability to meet

basic living expenses. Finally, they argue that the administrative record

does not support IRS Appeals’ allegations that the insurance policy was

not accessed to pay for past or current expenses. In support of this

argument, they point to the Form 433–A, which lists the insurance

policy, its current cash value, and the loan balance from the policy.

24

[*24] IRM 5.8.5.9(2) (Sept. 24, 2021) provides that whole life insurance

is not considered necessary. Because whole life insurance is treated as

an investment, the insurance policy is an asset that must be valued for

purposes of the RCP. If the taxpayer sells the policy, then the equity is

the amount the taxpayer will receive from the sale of the policy. IRM

5.8.5.9(3). If the taxpayer retains or cashes out the policy, then the

equity is the cash surrender value. IRM 5.8.5.9(3), 5.15.1.27(3) (Nov. 22,

2021). If the taxpayer borrows on the policy, then the equity is the cash

loan value less any prior policy loans or automatic premium loans

required to keep the contract in force. IRM 5.8.5.9(3), 5.15.1.27(3).

SO Covey used the insurance policy’s net account value less loan

and loan interest amounts to reach the net equity for purposes of the

revised RCP. We note that this amount was less than each of (i) the

cash surrender value of the policy or (ii) the loan amount available.

Petitioners’ primary argument that the inclusion of the life insurance

policy in the revised RCP was in error is that the asset was needed for

future expenses and that, contrary to SO Covey’s allegation in the

Supplemental Notice, it had been used to pay past expenses. The only

support that we can find in the administrative record for their assertion

is (i) the completed Form 433–A, which lists the insurance policy, its

current cash value, and the loan balance from the policy, and (ii) a life

insurance policy statement indicating the same. However, they do not

point us to any other document in the administrative record that

indicates what the loan proceeds were used for. Even if we assume that

the loan proceeds were used to pay past basic living expenses, that by

itself does not demonstrate that inclusion of the net equity from the

insurance policy would cause economic hardship. Additionally, for the

same reasons discussed supra Part II.B.2.a.–c., we reject their argument

that access to this asset will be needed to pay future health care, vehicle

replacement, and real estate repair and maintenance expenses. Based

on the record that was before SO Covey we do not find that she abused

her discretion by including net equity of the life insurance policy in the

revised RCP.

Accordingly, we find that SO Covey’s conclusion that the

Baumgardners’ offer amount did not reflect the full amount that the IRS

could collect from them without causing economic hardship was not an

abuse of discretion. The administrative record shows that SO Covey

considered their arguments regarding their current and future basic

living expenses and allowed them to retain net available equity in assets

of $244,599 to subsidize their negative net monthly income and pay

those basic living expenses. Ultimately, she reasonably determined that

25

[*25] their equity in assets exceeded their total tax liability such that

they could fully satisfy the liability without economic hardship. As

discussed, we do not substitute our judgment for that of the SO and,

because SO Covey’s conclusion was not arbitrary, capricious, or without

sound basis in fact or law, we hold that SO Covey did not abuse her

discretion in denying their offer amount of $1,825 for an OIC based on

economic hardship.

C.

Balancing

Section 6330(c)(3)(C) requires that an IRS Appeals officer

consider whether the proposed collection action balances the need for

the efficient collection of taxes with the legitimate concern of the

taxpayers that any collection action be no more intrusive than

necessary. SO Covey considered the proposed collection action, the

Baumgardners’ outstanding balance, their ability to pay an amount

greater than the OIC offer amount, and that other collection

alternatives were not viable options for consideration; and she concluded

that the collection action was no more intrusive than necessary. The

record supports SO Covey’s conclusion, and the Court concludes that she

did not abuse her discretion.

III.

Conclusion

Petitioners have not shown that the SO’s actions were arbitrary,

capricious, or without sound basis in fact or law. Therefore, the SO did

not abuse her discretion in rejecting the OIC-ETA based on economic

hardship and in sustaining the proposed collection action.

We have considered all other arguments made and facts

presented in reaching our decision, and, to the extent not discussed

above, we conclude that they are moot, irrelevant, or without merit.

To reflect the foregoing,

An appropriate decision will be entered.