UNITED STATES TAX COURT

T.C. Memo. 2012-274

UNITED STATES TAX COURT

A. DEEWAYNE JONES AND SHIRLEY JONES, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 312-10L.

Filed September 26, 2012.

A. DeeWayne Jones and Shirley Jones, pro sese.

Nathan C. Johnston, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: Pursuant to sections 6320 and 6330(d),' petitioners seek

review of respondent's determination to sustain the filing of a notice of Federal tax

'Unless otherwise indicated, all section references are to the Internal

Revenue Code for the relevant period, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

SERVED SEP 26 2012

-2[*2] lien (NFTL) with respect to their unpaid Federal income tax liabilities for

2002-05. The issue for decision is whether respondent's determination was an

abuse of discretion.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of

facts and facts drawn from stipulated exhibits are incorporated herein by this

reference. Petitioners resided in California when they filed their petition.

At the time of respondent's determination A. DeeWayne Jones (Dr. Jones)

was a 74-year-old semiretired dentist, and his wife, Shirley Jones, was a 74-yearold retired secretary.

Petitioners' tax troubles began in 2007 when respondent examined

petitioners' 2002-05 tax returns. As a result of the examinations petitioners agreed

to adjustments to the income tax liabilities shown on their 2002-05 tax returns, and

respondent assessed the resulting deficiencies. As of September 28, 2009,

petitioners had balances outstanding of $16,259, $17,171, $8,059, and $9,976 for

the 2002, 2003, 2004, and 2005 tax years, respectively, totaling $51,465.

On January 27, 2009, respondent mailed to petitioners a Notice of Federal

Tax Lien Filing and Your Right to a Hearing Under IRC 6320 for the 2002-05 tax

years. Petitioners timely submitted a Form 12153, Request for a Collection Due

[*3] Process or Equivalent Hearing (section 6320 hearing request), seeking

withdrawal of the NFTL and acceptance of an offer-in-compromise (OIC) as a

collection alternative. Respondent received petitioners' section 6320 hearing

request on February 7, 2009.2 On February 23, 2009, respondent levied on

petitioners' Bank of America checking accounts, collecting $923.62.3 Respondent

later posted this amount as a payment to petitioners' 2002 tax year account.

On or around February 25, 2009, petitioners submitted a Form 656, Offer in

Compromise, dated February 24, 2009. At the same time, petitioners submitted a

Form 433-A, Collection Information Statement for Wage Earners and Self-

Employed Individuals (first Form 433-A), in support of their OIC. Petitioners'

2The parties stipulated that respondent received petitioners' section 6320

hearing request on February 25, 2009. However, this stipulation is contradicted by

a stipulated exhibit titled "Collection Due Process Case History Record", which

states that respondent received petitioners' section 6320 hearing request on

February 7, 2009. We disregard the stipulation as inconsistent with the stipulated

exhibit in the record. See Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181,

195 (1989).

3At some point before levying on petitioners' bank accounts, respondent

apparently issued a notice of intent to levy under sec. 6330. Upon receiving that

notice, petitioners timely requested a sec. 6330 hearing, on a Form 12153 dated

February 21, 2008, proposing an installment agreement as a collection alternative

for tax years 2002-05. Sometime before December 1, 2008, petitioners'

authorized representative withdrew petitioners' sec. 6330 hearing request for tax

years 2002-03. There is nothing in the record before us as to the status of

petitioners' sec. 6330 hearing request for tax years 2004-05.

[*4] OIC was $5,500, with a $1,100 downpayment and the remainder due within

three months. Petitioners' first Form 433-A listed only one property as real estate

they owned. The address petitioners provided for that property was 722 East Main

Street, Santa Paula, California (Santa Paula property).

Respondent subsequently mailed to petitioners two letters, both dated April

14, 2009. The first was from the Appeals Office in Fresno, California,

acknowledging receipt of petitioners' section 6320 hearing request. The second

was from Offer Specialist P. Pfeiffer, writing from an office in Glendale,

California.

In his letter Offer Specialist Pfeiffer requested, among other items, (1) an

updated Form 433-A and a completed Form 433-B, Collection Information

Statement for Businesses, with proof of payment of all expenses listed on the

Form 433-B; (2) a copy of petitioners' 2008 Federal income tax return; (3) copies

of all books and records relating to petitioners' 2008 tax year; (4) a list of all real

property owned by petitioners within the last five years; (5) copies of residential

rental agreements, including proof of payment for three months; (6) completed

personal questionnaires; (7) an explanation of how petitioners meet their monthly

expenses; and (8) written explanations with respect to several items flagged by

respondent. The written explanations requested included the following: (1) an

-5[*5] explanation of what had happened to various properties that respondent had

on record as belonging to petitioners, or the inclusion of the properties on

petitioners' updated Form 433-A; and (2) an explanation of petitioners' affiliation

with "Canyon Crest Ranch Partners - Moorpark" (Canyon Crest). In particular,

respondent inquired about the following properties: 652 Zurich Drive, Lake

Arrowhead, California (Lake Arrowhead property), and 1035 and 1055 Marine

View Drive, Moorpark, California (Moorpark properties).

Through their authorized representative, Robert D. Heinrich, C.P.A.,

petitioners timely responded to respondent's information request. In a.letter dated

April 22, 2009, and addressed to Offer Specialist Pfeiffer, Mr. Heinrich stated,

among other things, (1) that Dr. Jones works for the county prison system and has

no assets for his business; (2) that petitioners meet their expenses by borrowing

from their children and by using credit cards; (3) that petitioners own two

properties, the Santa Paula property and the Lake Arrowhead property; (4) that

petitioners omitted the Lake Arrowhead property from their first Form 433-A

because "the property was upside down" and in severe disrepair, with needed

repairs totaling almost $75,000; (5) that the Moorpark properties are owned by

Canyon Crest; and (6) that petitioners own 67% of Canyon Crest. Mr. Heinrich

also enclosed, among other documents, (1) an updated Form 433-A and a

-6[*6] completed Form 433-B for petitioners; (2) petitioners' 2008 joint Federal

income tax return; (3) a copy of Dr. Jones' 2008 Form 1099-MISC, Miscellaneous

Income; (4) copies of a check register supporting expenses petitioners reported on

Dr. Jones' Schedule C, Profit or Loss From Business, for 2008; (5) a copy of a

residential rental agreement for a residence at 12317 Willow Hill Drive,

Moorpark, California (Moorpark residence); (6) copies of recent rent checks to the

landlord of the Moorpark residence (paid by Jodi Jones Proud, petitioners'

daughter); (7) completed questionnaires for petitioners; (8) copies of an insurance

cancellation notice for the Lake Arrowhead property; and (9) copies of a bid to

reroof the home on the Lake Arrowhead property and of an estimate of the cost to

repair severe water damage and leakage to the Lake Arrowhead property.

On their updated Form 433-A, petitioners reported, under penalty of perjury,

that they had monthly gross income of $6,626 and monthly living expenses of

$7,079. Petitioners also reported the following assets: (1) two Bank of America

checking accounts with balances of $1,250 and $300, respectively;4 (2) a 1997

Ford Explorer with a current value of $1,000; (3) a 2002 Ford Explorer with a

current value of $2,500; (4) the Santa Paula property with a current value of

4Petitioners erroneously calculated their total checking account balances to

be $5,550.

.

-7[*7] $450,000 and a loan balance of $460,000; (5) the Lake.Arrowhead property

with a current value of $155,000 and a loan balance of $155,468; and (6) furniture

and personal effects with a current value of $3,400.

..

On the completed questionnaires that petitioners submitted to respondent,

Dr. Jones stated that his health was fair, that he was currently employed as a

dentist for the Ventura County Sheriff's Department, and that he planned on

retiring within five years; and Mrs. Jones stated that her health was poor and that

she was retired. As requested, petitioners described the serious, chronic medical

conditions that led them to describe their health as fair and poor, respectively.

In late June or early July respondent informed petitioners that their OIC

would be handled by Appeals because they filed their OI,C after filing their section

6320 hearing request. In a letter dated July 10, 2009, respondent notified

petitioners and Mr. Heinrich that petitioners' "[OIC] had been accepted as

processable and will be worked in Appeals."

In a letter dated September 29, 2009, Settlement Officer Lisanti notified

petitioners and Mr. Heinrich of a scheduled conference call for October 20,.2009,

with respect to petitioners' section 6320 hearing request.

Petitioners and Mr. Heinrich did not call into the October 20, 2009,.

conference call, and in a letter to petitioners and Mr. Heinrich dated that same day,

-8[*8] Settlement Officer Lisanti noted petitioners' failure to call and advised

petitioners that they had until November 3, 2009, to submit materials for

consideration in the section 6320 hearing.

On November 5, 2009, Mr. Heinrich left a voicemail for Settlement Officer

Lisanti, requesting a return phone call. Settlement Officer Lisanti then left a

message on Mr. Heinrich's voicemail, requesting a call back by the close of

business that day. FIearing nothing, Settlement Officer Lisanti left a message on

Mr. Heinrich's voicemail on November 6, 2009, noting that several deadlines had

passed and informing him that he would have to confer with her soon. Settlement

Officer Lisanti further informed Mr. Heinrich that she would not be

recommending the OIC because petitioners had sufficient income and assets to pay

their full account. Settlement Officer Lisanti then gave Mr. Heinrich a deadline of

November 14, 2009, to contact her regarding any installment agreement that

petitioners might be interested in pursuing and stated that otherwise the case

would be closed and a notice of determination would be issued, sustaining the

filing of the NFTL. Oii November 10, 2009, Settlement Officer Lisanti left

another voicemail for Mr. Heinrich, asking him to return her phone call by

November 13, 2009, and also inquiring whether petitioners were interested in

alternatives to an OIC. Also on November 10, 2009, Settlement Officer Lisanti

-9[*9] faxed a copy of her reasonable collection potential analysis (worksheet) to

Mr. Heinrich. This was the first time that Settlement Officer Lisanti provided to

petitioners any information regarding the details of her analysis.

Settlement Officer Lisanti's worksheet showed that petitioners had gross

monthly income of $8,941, monthly expenses of $4,917, and net monthly income

of $4,024.5 Accordingly, the worksheet showed that the present value of

SSpecifically, Settlement Officer Lisanti made the following adjustments to

petitioners' claimed income and expenses:

Gross monthly income

Interest--dividends

Net business income

Pension/SSA (taxpayer)

Pension/SSA (spouse)

Other

Total income

Taxpayers . Appeals

-0$4,600

1,351

675

-06,626

$331

4,600

2,334

-01,676

8,941

$550

3,473

$961

2,236

700

-0-0-

-0100

261 .

1,058

798

500

656

200

503

(continued...)

Monthly expenses

Allowable national standard expense--2 people

Local housing and utilities (Los Angeles)

Local transportation:

Ownership costs--vehicle 1

Operating costs--vehicle 1

Operating costs--vehicle 2

Other allowable expenses:

Health insurance premiums

Life insurance

Taxes (income & FICA)

- 10 [*10] petitioners' future income and expenses was $193,152. Additionally, the

worksheet showed that petitioners had net realizable equity in assets of $193,239.

In calculating petitioners' net realizable equity in assets, Settlement Officer Lisanti

included $5,550 for petitioners' Bank of America checking accounts, $800 for

petitioners' 1997 Ford Explorer, $2,000 for petitioners' 2002 Ford Explorer,

$164,932 for the Lake Arrowhead property, and $19,957 for the total amount of

petitioners' 2007 and 2008 charitable contributions as dissipated assets.6

On November 12, 2009, Mr. Heinrich left a voicemail for Settlement Officer

Lisanti in which he stated that he disagreed with the value that Settlement Officer

Lisanti attributed to the Lake Arrowhead property and with her adjustments to

petitioners' allowable living expenses on the worksheet. Mr. Heinrich also

5(...continued)

Total expenses

7,079

4,917

Net monthly income

(453)

4,024

6Dr. Jones offered into evidence a document dated November 11, 2009, that

Mr. Heinrich claimed he had faxed to Settlement Officer Lisanti, detailing his

disagreements with the adjustments on Settlement Officer Lisanti's worksheet.

We did not admit the document into evidence because Dr. Jones lacked personal

knowledge that the document had been faxed to Settlement Officer Lisanti, see

Fed. R. Evid. 802; Rule 143, and Mr. Heinrich was unavailable to authenticate the

document as having been faxed to Settlement Officer Lisanti.

- 11 [*11] indicated that he would supply further documentation by a date that is

unclear from the record, but possibly as late as November 20, 2009.7

On November 19, 2009, Settlement Officer Lisanti left a voicemail for Mr.

Heinrich, informing him that she would be closing the case and reminding him

that petitioners had the right to seek judicial review of the determination. On

December 3, 2009, Settlement Officer Lisanti terminated the section 6320 hearing.

On December 9, 2009, respondent mailed to petitioners the notice of

determination, sustaining the filing of the NFTL. The Appeals Office attached a

statement prepared by Settlement Officer Lisanti and a copy of her worksheet. In

the statement Settlement Officer Lisanti stated that Dr. Jones is "in apparent good

health" and that Mrs. Jones has "no known health problems." In explaining why

the Appeals Office rejected petitioners' OIC, Settlement Officer Lisanti explained

that a taxpayer's reasonable collection potential is calculated by adding the

taxpayer's net realizable equity in assets to the present value of the taxpayer's

future income and expenses. Settlement Officer Lisanti then stated that

7The parties stipulated, and a document in evidence titled "Case Activity

Record Print" shows, that Mr. Heinrich promised to provide the supporting

documentation to Settlement Officer Lisanti by the end of the next day, November

13, 2009. However, in a statement attached to the Notice of Determination

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

determination), Settlement Officer Lisanti stated that Mr. Heinrich agreed to

provide the supporting documentation via fax by November 20, 2009.

- 12 [*12] petitioners' net realizable equity in assets was $193,239 and that "[n]o

further analysis is required to determine that an OIC based on * * * [doubt as to

collectibility] is not an acceptable resolution to the taxpayers' account."

Settlement Officer Lisanti stated that she determined the value of petitioners' Lake

Arrowhead property by using Zillow.com.8 Settlement Officer Lisanti also noted

that petitioners' net realizable equity in assets, as determined by petitioners' own

financial statements, was $9,050, nearly twice the amount petitioners offered.

According to Settlement Officer Lisanti, this indicated that the offer was

"unacceptable on its face".

As an additional öonsideration, Settlement Officer Lisanti noted that

petitioners had reported $3,968 of interest income on their 2008 Federal income

tax return from accounts that petitioners did not include on the financial

statements they provided.9 According to Settlement Officer Lisanti; this indicated

that "there may be additional * * * assets that should be part of the * * *

[reasonable collection potential] calculation that are not included on my

8The "Zestimate" for the Lake Arrowhead property was $355,500, and the

"Value Range" was $245,295-$369,720.

9On their 2008 Schedule B, Interest and Ordinary Dividends, petitioners

reported interest income from three accounts: $49 from a Community West Bank

account; $670 from a Washington Mutual account; and $3,249 from a JP Morgan

Chase Bank account.

-13 [*13] worksheet." In fact, respondent conceded at trial that Settlement Officer

Lisanti was aware that these accounts contained insurance proceeds from a fire

that destroyed petitioners' home on the Moorpark properties in 2006. Finally,

Settlement Officer Lisanti stated that there were no special circumstances that .

would warrant consideration on any other basis.

Upon receiving the notice of determination, petitioners timely filed their

petition with this Court, contesting respondent's determination to sustain the filing

of the NFTL.

OPINION

I.

Section 6320 Hearings

Section 6321 imlsoses a lien on all property and property rights of a

taxpayer liable for taxes where a demand for the payment of the taxes has been

made and the taxpayer fails to pay. The Internal Revènue Service (IRS) is

authorized to file an NFTL with respect to taxpayers that have outstanding tax

liabilities and fail to pay after notice and demand. Sec. 6323. Section 6320(a)

requires the Secretaryl° to send written notice to the taxpayer of the filing of an'

NFTL and of the taxpayer's right to an administrative hearing on the matter. The

'°The term "Secretary" means the Secretary of the Treasury or his delegate.

Sec. 7701(a)(11)(B).

-14[*14] conduct and scope of section 6320 hearings are governed by section

6330(c), (d) (other than paragraph (2)(B)), and (e). Sec. 6320(c). At the hearing, a

taxpayer may raise any relevant issue, including appropriate spousal defenses,

challenges to the appropriateness of the collection action, and collection

alternatives, such as an OIC or an installment agreement. Sec. 6330(c)(2)(A).

Following the hearing, the Appeals Office must issue a notice of

determination regarding the validity of the filed NFTL. The Appeals Office is

required to take into consideration: (1) verification presented by the Secretary that

the requirements of applicable law and administrative procedure have been met,

(2) relevant issues raised by the taxpayer, and (3) whether the proposed collection

action appropriately balances the need for efficient collection of taxes with a

taxpayer's concerns regarding the intrusiveness of the proposed collection action.

Sec. 6330(c)(3); Wadleigh v. Commissioner, 134 T.C. 280, 287-288 (2010).

We have jurisdiction to review the Appeals Office's determination. Sec.

6330(d)(1); see Murphy v. Commissioner, 125 T.C. 301, 308 (2005), aff'd, 469

F.3d 27 (1st Cir. 2006). Where the underlying tax liability is properly at issue, we

review any determination regarding the underlying tax liability de novo. Sego v.

Commissioner, 114 T.C. 604, 610 (2000). Where, as here, the underlying tax

liability is not properly at issue, we review the administrative determination of the

- 15 [*15] Appeals Office for abuse of discretion. Lunsford v. Commissioner, 117 T.C.

183, 185 (2001); Sego v. Commissioner, 114 T.C. at 610; Goza v. Commissioner;

114 T.C. 176, 182 (2000). In reviewing for abuse of discretion, we do not conduct

an independent review of whether an OIC submitted by a taxpayer was acceptable

or substitute our judgment for that of the Appeals Office. Rather, we must úphold

the Appeals Office's determination unless it is arbitrary, capricious, or without

sound basis in fact or law. See, e.g., Murphy v. Commissioner, 125 T.C. at 320;

Taylor v. Commissioner, T.C. Memo. 2009-27, 97 T.C.M. (CCH) 1109, 1116

(2009); see also Fargo v. Commissioner, 447 F.3d 706, 709 (9th Cir. 2006)

("Abuse of discretion occurs when a decision is based 'on an erroneous view of

the law or a clearly erroneous assessment of-the facts.'" (quoting United States v.

Morales, 108 F.3d 1031, 1035 (9th Cir. 1997))), a_fff'g T.C. Memo. 2004-13.

However, we can uphold the Appeals Office's determination only on grounds

actually relied upon by the Appeals officer in the notice of determination. See .

Salahuddin v. Commissioner, T.C. Memo. 2012-141, slip op. at 16 (citing SEC v.

Chenery Corp., 318 U.S. 80, 93-95 (1943)); Rosenbloom v. Commissioner, T.C.

Memo. 2011-140, 101 T.C.M. (CCH) 1669, 1674 n.17 (2011); see also Safe Air

For Everyone v. EPA, 488 F.3d 1088, 1091 (9th Cir. 2007); Carpenter Family

-16-

[*16] Invs., LLC v. Commissioner, 136 T.C. 373, 380 (2011) (citing SEC v.

Chenery Corp., 332 U.S. 194, 196 (1947)).

II.

Parties'Arguments

A..

Petitioners'Arguments

Petitioners contend that respondent abused his discretion in determining to

sustain the filing of the NFTL for several reasons:

First, petitioners contend that it was their impression that Settlement Officer

Lisanti only denied their OIC because she determined that they had sufficient

equity in the Lake Arrowhead property to satisfy their tax liabilities. In that

regard, petitioners contend that Settlement Officer Lisanti erred by using

Zillow.com to value the property and by ignoring the documented disrepair of the

property and the copies of bids to repair the property that they submitted.

Second, petitioners contend that Settlement Officer Lisanti failed to

consider their advanced age, their poor health, Dr. Jones' stated intention to retire,

and the trauma relating to the 2006 fire that destroyed their home on the Moorpark

properties.

Third, petitioners contend that Settlement Officer Lisanti erroneously

included checking account balances of $5,550 in their net realizable equity in

assets.

- 17 [*17] Fourth, petitioners contend that Settlement Officer Lisanti erroneously

included the amount of their 2007-08 charitable contributions in calculating their

net realizable equity in assets.

Fifth, petitioners contend that Settlement Officer Lisanti made several

erroneous adjustments to the present value of their future income and expenses on

her worksheet.

.

Finally, petitioners assert that their financial condition has worsened

considerably since respondent issued the notice of determination and that Dr.

Jones would like to retire immediately and continues working only because of his

severe debts.

B.

Respondent's Arguments

Respondent contends that Settlement Officer Lisanti did not abuse her

discretion in determining that petitioners' reasonable collection potential was

sufficient to pay their tax liability in full. As an initial matter, respondent

contends that petitioners were afforded ample opportunity to submit materials

supporting their OIC and to participate in a conference with Settlement Officer

Lisanti but failed to do so.

With respect to petitioners' net realizable equity in assets, respondent

contends that Settlement Officer Lisanti properly relied on the Zillow.com

- 18 [*18] estimate of value for the Lake Arrowhead property, rounded up to the

nearest thousand to $356,000, reduced by 10% for a quick sale value (QSV) of

$320,400, and reduced further by the outstanding mortgage balance on the

property of $155,468, leaving equity of $164,932. Moreover, respondent contends

that even if the estimate of $74,240 for the allegedly required repairs on the

property is deducted dollar for dollar, petitioners would still have $90,692 of

equity in the property, which is more than sufficient to satisfy their outstanding tax

liability. Respondent also contends that petitioners have $5,550 deposited in

checking accounts, a Ford Explorer worth $1,000, and a Ford Explorer worth

$2,500, the values of the vehicles being discounted to QSVs of $800 and $2,000,

respectively. With respect to the 2007-08 charitable contributions, respondent

contends that settlement officers are instructed to consider including dissipated

assets in the reasonable collection potential calculation. See Internal Revenue

Manual (IRM) pt. 5.8.5.5 (Sept. 23, 2008).

With respect to petitioners' future income and expenses, respondent

contends that Settlement Officer Lisanti properly determined that the present value

of their future income and expenses was $193,152. According to respondent, part

of this amount is attributable to Settlement Officer Lisanti's determination that

petitioners understated their monthly income, and part of this amount is

-19[*19] attributable to Settlement Officer Lisanti's disallowance of certain of

petitioners' claimed expenses. Moreover, respondent contends that, even

accepting all of petitioners' claimed expenses, the present value of petitioners'

future income and expenses would still be $69,504.

Finally, respondent contends that Settlement Officer Lisanti did not ábuse

her discretion by failin'g to take into áccount the loss of petitioners' home in the

2006 fire and petitioners' continued expense in making payments on that property

because petitioners failed to disclose the property and the payments on their Form ·

433-A.

III.

Petitioners' Section 6320 Hearing

A.

Offers-in-Compromise

Section 7122(a) authorizes the Secretary to compromise any civil or

criminal case arising under the internal revenue laws before its referral to the

Department of Justice. Section 7122(d) authorizes the Secretary to prescribe

guidelines for officers and employees of the IRS to determine whether an OIC is

adequate and should be accepted. Accordingly, we generally uphold the rejection

of an OIC when the Appeals Office has followed the IRM. See, e.g., Churchill v.

Commissioner, T.C. Memo. 2011-182, 102 T.C.M. (CCH) 116, 117 (2011);

- 20 [*20] Atchison v. Commissioner, T.C. Memo. 2009-8, 97 T.C.M. (CCH) 1034,

1036 (2009).

The regulations under section 7122 provide that an OIC is appropriate

where there is doubt as to collectibility. Sec. 301.7122-1(b)(2), Proced. & Admin.

Regs. "Doubt as to collectibility exists in any case where the taxpayer's assets and

income are less than the full amount of the liability." Id. "A determination of

doubt as to collectibility will include a determination of ability to pay. In

determining ability to pay, the Secretary will permit taxpayers to retain sufficient

funds to pay basic living expenses." Sec. 301.7122-1(c)(2)(i), Proced. & Admin.

Regs.; see also sec. 7122(d)(2)(A) and (B). Rev. Proc. 2003-71, sec. 4.02(2),

2003-2 C.B. 517, 517, states that

[d]oubt as to collectibility exists in any case where the taxpayer's

assets and income cannot satisfy the full amount of the liability.

An offer to compromise based on doubt as to collectibility

generally will be considered acceptable if it is unlikely that the tax

can be collected in full and the offer reasonably reflects the amount

the Service could collect through other means, including

administrative and judicial collection remedies. * * * This amount is

the reasonable collection potential of a case. In determining the

reasonable collection potential of a case, the Service will take into

account the taxpayer's reasonable basic living expenses. In some

cases, the Service may accept an offer of less than the total reasonable

collection potential of a case if there are special circumstances.

- 21 [*21] Pursuant to the IRM, "[i]n determining the taxpayer's future ability to pay,

full consideration must be given to the taxpayer's overall general situation

including such factors as age, health, marital status, number and age of

dependents, education or occupational training and work experience." IRM pt.

5.8.4.4 (Sept. 23, 2008).

B.

Petitioners' Reasonable Collection Potential..

Although Settlement Officer Lisanti attached a copy of her worksheet to the

notice of determination, she also stated in the attached statement that because

petitioners' net realizable equity in assets was $193,239, "[n]o further analysis is

required". Settlement Officer Lisanti further stated that the OIC was

"unacceptable on its face" because petitioners' net realizable equity in assets

would have been $9,050 according to the financial statements that petitioners

submitted with their OIC. Settlement Officer Lisanti then explained some of her

reasoning in determining petitioners' net realizable equity in assets, but she did

not explain any of her reasoning regarding the adjustments she made to

petitioners' income and expenses. From this we conclude that Settlement Officer

Lisanti did not rely on her adjustments to petitioners' income and expenses in

determining that petitioners' reasonable collection potential was greater than their

OIC.

- 22 [*22] Respondent goes to great length to explain the adjustments on Settlement

Officer Lisanti's income and expense worksheet and contends that any abuse of

discretion with respect to the net realizable equity in assets calculation was

harmless because of the adjustments to petitioners' future income and expenses.

But "our role under section 6330(d) is to review actions that the IRS took, not

actions that it could have taken." Salahuddin v. Commissioner, slip op. at 16

(citing Chenery, 318 U.S. at 93-95); see also Rosenblöom v. Commissioner, 101

T.C.M. (CCH) at 1674 n.17.

In Chenery, 318 U.S. at 93-94, the Supreme Court explained that

[the agency's] action must be measured by what the * * * [agency]

did, not by what it might have done. * * * The * * * [agency's]

action cannot be upheld merely because findings might have been

made and considerations disclosed which would justify its order as an

appropriate safeguard for the interests protected by the Act. There

must be such a responsible finding. * * *

See also Safe Air For Everyone, 488 F.3d at 1091 ("[O]ur review of an

administrative agency's decision begins and ends with the reasoning that the

agency relied upon in making that decision".). We have found that Settlement

Officer Lisanti did not rely on her adjustments to petitioners' income and expenses

and that she failed to explain any of her reasoning regarding those adjustments.

Accordingly, we decline to consider respondent's post hoc explanations of the

-23 [*23] adjustments on Settlement Officer Lisanti's income and expense worksheet

as a valid basis for sustaining respondent's determination.

Additionally, the notice of determination does not disclose that Settlement.

Officer Lisanti gave any consideration to the impact petitioners' advanced age and

asserted poor health might have on petitioners' ability to pay, as required by IRM

pt. 5.8.4.4. In fact, the statement attached to the notice of determination appears to

confirm that Settlement Officer Lisanti gave no consideration to petitioners' age or

claims of poor health. There is no documentation in the administrative record

showing that Settlement Officer Lisanti ever asked for documentation of or

disputed petitioners' asserted poor health, and respondent has offered no

explanation for Settlement Officer Lisanti's statement that Dr. Jones is "in

apparent good health" and that Mrs. Jones has "no known health problems." .

Although the Appeals Office does not have to list "every single fact that it

considered in arriving at * * * [its] determination", Barnes v. Commissioner, T.C.

Memo. 2006-150, 92 T.C.M. (CCH) 31, 35 (2006), aff'd in part, vacated in part

sub nom. Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009), it cannot misstate

or fail to address significant and obviously relevant facts." Because we cannot

"Significantly, most petitioners' income is Schedule C income from Dr.

Jones' dental practice. Accordingly, Dr. Jones' advanced-age and asserted health

(continued...)

-24[*24] ascertain from the administrative record how Settlement Officer Lisanti

arrived at her conclusion that petitioners were in good health in the face of

information supplied by petitioners during the section 6320 hearing that they were

not, we cannot evaluate whether Settlement Officer Lisanti abused her discretion

in rejecting petitioners' OIC.

C.

Petitioners' Net Realizable Equity in Assets

Pursuant to the IRM, a taxpayer's ability to pay for OIC purposes is

determined in part by calculating the net realizable equity in the taxpayer's assets.

IRM pt. 5.8.5.4.1(1) (Sept. 23, 2008). "Net realizable equity is defined as * * *

(QSV) less amounts owed to secured lien holders with priority over the federal tax

lien." Id. "QSV is defmed 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

period of time, usually 90 calendar days or less." Id. pt. 5.8.5.4.1(2). "Normally,

QSV is calculated at 80% of * * * [fair market value (FMV)]. A higher or lower

"(...continued)

problems clearly have the potential to significantly affect petitioners' future

income. By contrast, in cases such as Johnson v. Commissioner, T.C. Memo.

2007-29, 93 T.C.M. (CCH) 885, 889 (2007), aff'd in part, vacated in part sub nom.

Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009), the failure to address the

taxpayers' age and health was deemed insignificant because the taxpayers relied

principally on income that was not contingent upon employment.

- 25 [*25] percentage may be applied in determining QSV when appropriate,

depending on the type of asset and current market conditions." Id. pt. 5.8.5.4.1(3).

Petitioners contend that Settlement Officer Lisanti erred in her

determination of the FMV of the Lake Arrowhead property, in her calculation of

petitioners' checking account balances, and in her inclusion of the total amount of

petitioners' 2007-08 charitable contributions, as dissipated assets, in her

calculation of petitioners' net realizable equity in assets. We address each of these

contentions in turn.

1.

Lake Arrowhead Property Valuation

a.

Evidentiary Issues

Before we decide whether Settlement Officer Lisanti erred in determining

that petitioners had realizable equity of $164,932 in the Lake Arrowhead property,

we must first resolve an evidentiary dispute regarding two documents that

petitioners sought to introduce into evidence to support their contention that they

had no equity in the Lake Arrowhead property. The first of these documents is a

letter from a loan officer at Mountain West Financial, Inc., dated September 7,

2010, and the second is an appraisal of the Lake Arrowhead property dated

September 17, 2010. Respondent objected to the introduction of these documents

because both postdate the administrative record and are thus irrelevant in

- 26 [*26] determining whether Settlement Officer Lisanti abused her discretion in

sustaining the filing of the NFTL.

Respondent contends, and we agree, that the U.S. Court of Appeals for the

Ninth Circuit, to which an appeal in this case would lie absent a stipulation to the

contrary, see sec. 7482(b)(1)(A), has adopted the administrative record rule in

section 6320 cases where the underlying liability is not at issue, see I(eller, 568

F.3d at 718; Jordan v. Commissioner, 134 T.C. 1, 9 (2010); see also Robinette v.

Commissioner, 439 F.3d 455 (8th Cir. 2006), rev'g 123 T.C. 85 (2004).

Accordingly, under Golsen v. Commissioner, 54 T.C. 742 (1970), aff'd, 445 F.2d

985 (10th Cir. 1971), we must sustain respondent's objections.

b.

Respondent's Valuation of the Lake Arrowhead Property

The IRM in effect during 2009 provided the following methods for

determining the FMV of real estate for OIC purposes: a recent purchase price or

an existing contract to sell; recent appraisals; a real estate tax assessment; a market

comparable; and a homeowner's insurance replacement cost." IRM pt.

5.8.5.4.11(2) (Sept. 23, 2008).

"The current version of the Internal Revenue Manual (IRM) provides that

internal sources, such as Accurint, can also be used to determine the FMV of real

property. IRM pt. 5.8.5.12 (Oct. 22, 2010).

-27[*27] In their Form 433-A petitioners stated under penalty of perjury that the Lake

Arrowhead property had a current value of $155,000. However, in the statement

attached to the notice of determination, Settlement Officer Lisanti determined, on

the basis of a valuation obtained using Zillow.com, that the Lake Arrowhead

property had a fair market value of $356,000, apparently rounded up to the nearest

thousand. In so doing, Settlement Officer Lisanti used the "Zestimate" provided

by Zillow.com, which was near the higher end of the "Value Range"'of $245,295

to $369,720 that accompanied that estimate. Settlement Officer Lisanti then

reduced that amount by 10% for a QSV of $320,400, but she did not explain why

she used a 10% reduction as opposed to the standard 20% reduction used to

calculaté QSV. Settlement Officer Lisanti then subtracted the outstanding

mortgage balance on the property of $155,468, for net realizable equity of

$164,932.

Settlement Officer Lisanti never asked petitioners to provide an appraisal or

to otherwise substantiate the value they placed on the Lake Arrowhead property.

Moreover, petitioners submitted several documents on or around April 22, 2009,

to substantiate their assertion that the Lake Arrowhead property required

significant repairs, but Settlement Officer Lisanti never considered those

documents. Only after Settlement Officer Lisanti faxed Mr. Heinrich a copy of her

- 28 [*28] worksheet on November 10, 2009, were petitioners or Mr. Heinrich aware

that Settlement Officer Lisanti disputed their position that they had no equity in

the Lake Arrowhead property. On November 12, 2009, Mr. Heinrich purportedly

promised Settlement Officer Lisanti additional documents supporting petitioners'

valuation of the Lake Arrowhead property by as late as November 20, 2009. Yet

on November 19, 2009, Settlement Officer Lisanti left a voicemail for Mr.

Heinrich, informing him that she would be closing the case. It is also unclear what

new documents Settlement Officer Lisanti expected Mr. Heinrich to provide on

such short notice.

In this context, Settlement Officer Lisanti's reliance on the "Zestimate"

provided by Zillow.com to determine the FMV of the Lake Arrowhead property,

despite petitioners' sworn statement that the Lake Arrowhead property had a

significantly lower value, without additional investigation, was clearly erroneous.

Zillow.com itself states that its "Zestimate" "is not an appraisal. It.is a starting

point in determining a home's value."° What is a Zestimate?, Zillow.com,

http://www.zillow.com/wikipages/What-is-a-Zestimate/(last visited June 18,

"We note that respondent's counsel also objected to the appraisal that

petitioners were trying to introduce into evidence on the grounds that the appraisal

specifically stated that "This appraisal report is intended for use by the owner and

subject for personal reasons only. This report is not intended for any other use."

-29[*29] 2012). Moreover, Settlement Officer Lisanti did not consider the "Value

Range" provided in the Zillow.com report. Significantly, had Settlement Officer

Lisanti considered that range and the documented disrepair of the Lake Arrowhead

property, she might have agreed with petitioners' position that they had no equity

in the Lake Arrowhead property." At a minimum, Settlement Officer Lisanti

should have provided petitioners a meaningful opportunity to substantiate their

position.

Settlement Officer Lisanti first notified petitioners that she disagreed with

their valuation of the Lake Arrowhead property on November 10, 2009, when she

faxed Mr. Heinrich her worksheet. On November 19, 2009, she left a voicemail

for Mr. Heinrich, informing him that she would be closing the case. We do not

think that this constituted a meaningful opportunity for petitioners to substantiate

their position.

Because we find that Settlement Officer Lisanti erred by failing to consider

the documented disrepair of the property and by failing to provide petitioners a

"For example, if Settlement Officer Lisanti had assumed that the FMV of

the Lake Arrowhead property, without factoring in the required repairs, was

$245,295, which is at the low end of the Zillow.com "Value Range", the QSV of

the property, as calculated by Settlement Officer Lisanti, would have been

$220,766. After subtracting the $74,240 in work estimates that petitioners

provided, the QSV would be $146,526, which is less than the outstanding

mortgage balance on the property of $155,468.

- 30 [*30] meaningful opportunity to substantiate their position, we need not decide at

this time whether Zillow.com, or similar Web sites, are appropriate tools for

determining the FMV of real property in the context of section 6320 hearings or

otherwise. Cf. In re Darosa, 442 B.R. 173, 177 (Bankr. D. Mass. 2010)

(suggesting that Zillow.com's "Zestimates" are unreliable and can be manipulated

by users).

2.

Checking Account Balances

In calculating petitioners' net realizable equity in assets, Settlement Officer

Lisanti included $5,550 for amounts in petitioners' checking accounts. However,

petitioners listed two checking accounts on their Form 433-A, one with a balance

of $1,250 and the other with a balance of $300. Settlement Officer Lisanti should

have realized that petitioners made a typographical error in entering the total as

$5,550, rather than $1,550.

3.

2007 and 2008 Charitable Contributions as Dissipated Assets

Dissipation of assets is "[t]he use of an asset for an illegal or inequitable

purpose". Black's Law Dictionary 541 (9th ed. 2009) (def'ming "dissipation").

Pursuant to IRM pt. 5.8.5.5(1), an asset is dissipated if it has "been sold, gifted,

transferred, or spent on non-priority items or debts and are no longer available to

pay the tax liability." Dissipated assets could be included in a taxpayer's

.

-31[*31] reasonable collection potential either because the tax collector is

understandably concerned that the assets may only appear to have dissipated, see

Tucker v. Commissioner, T.C. Memo. 2011-67, 101· T.C.M. (CCH) 1307, 1314

(2011), aff'd, 676 F.3d 1129 (D.C. Cir. 2012), or "to deter delinquent taxpayers

from wasting money that they owe and should pay as taxes",.id. Accordingly, for

a dissipated asset to be added to a taxpayer's reasonable collection potential, an

.

asset that should otherwise have been available to satisfy the taxpayer's tax

liability must be identified as having been dissipated. See IRM pt. 5.8.5.5(1).

The IRM has specific guidelines for how dissipated assets should be treated

in the context of an OIC: .(1) It must be determined that assets were dissipated and

are no longer available to pay the tax liability. Id. (2) The investigation should

determine whether the dissipated assets should be included in the taxpayer's

reasonable collection potential. Id. pt. 5.8.5.5(2). (3) Inclusion of dissipated

assets in the reasonable collection potential calculation should be documented in

the administrative record. Id. pt. 5.8.5.5(3). (4) The determination that assets

were dissipated should consider: the timing of such dissipation in relation to when

the taxpayer submitted the offer and to when the liability arose; how the assets

were transferred; whether the taxpayer realized funds froni the transfer and how

the funds were used; the value of the transferred assets; and the taxpayer's interest

- 32 [*32] in those assets. Id. (5) Where the taxpayer can show that dissipated assets

were spent on necessary living expenses, the dissipated assets should not be

included in the taxpayer's reasonable collection potential. Id. pt. 5.8.5.5(4).

In her worksheet Settlement Officer Lisanti added $19,957 to petitioners'

net realizable equity in assets on account of petitioners' 2007 and 2008 charitable

contributions." The stated reason for this inclusion was that these contributions

constituted dissipated assets. However, Settlement Officer Lisanti did not explain

her reasoning for characterizing charitable contributions as dissipated assets, nor

did she describe her analysis in the notice of determination or in any part of the

administrative record. Without such an explanation, we cannot properly review

Settlement Officer Lisanti's conclusion and evaluate its impact on the Appeals

Office's determination. See Safe Air For Everyone, 488 F.3d at 1091; Salahuddin

v. Commissioner, slip op. at 16; Rosenbloom v. Commissioner, 101 T.C.M. (CCH)

at 1674 n.17.

"Petitioners claimed charitable contribution deductions of $17,487 and

$2,470 for 2007 and 2008, respectively. We infer that Settlement Officer Lisanti

based her conclusion that assets were dissipated solely on the fact that petitioners

claimed charitable contribution deductions for 2007 and 2008.

.

.

-33 [*33] D.

Petitioners' Failure To Disclose the Washington Mutual Account

The Appeals Office can deny a taxpayer's OIC based on doubt as to

collectibility if it reasonably determines that the taxpayer failed to disclose assets.

See Schropp v. Commissioner, T.C. Memo. 2010-71, 99 T.C.M. (CCH) 1298, 042

1304 (2010), aff'd, 405 Fed. Appx. 800 (4th Cir. 2010).

In the statement attached to the notice of determination, Settlement Officer

Lisanti stated that petitioners had reported $3,968 of interest income from

accounts that petitioners did not include on the financial statements they provided.

According to Settlement Officer Lisanti, this indicated that "there may be

additional * * * assets that should be part of the * * * [reasonable collection

potential] calculation that are not included on my worksheet."

At trial, however, respondent conceded that Settlement Officer Lisanti knew

that these accounts contained insurance proceeds from the fire that destroyed

petitioners' home on the Moorpark properties in 2006. Despite her knowledge of .

the fire and the insurance proceeds, Settlement Officer Lisanti never requested

documents relating to these accounts, and there is no indication in the record that

she was concerned about these accounts before issuing the notice of

determination. We infer that Settlement Officer Lisanti was either satisfied that

these funds should not be included in petitioners' net realizable equity in assets or

- 34 [*34] knew that the funds in the accounts had been depleted. This is consistent

with petitioners' testimony at trial that they could not spend the insurance

proceeds without approval from the banks and that the funds were all used to pay

various necessary expenses. Considering that Settlement Officer Lisanti knew

about the source of the funds in the accounts, we also question her assertion that

she did not know whether any funds remained in the accounts. In any event,

Settlement Officer Lisanti's knowledge of the fire that destroyed petitioners' home

and of the source of the funds in the accounts and her apparent failure to inquire

further about the existence and use of the insurance proceeds render her

conclusion that the accounts were undisclosed unreasonable.

IV.

Propriety of Remand

We may under certain circumstances remand a case to the Commissioner's

Appeals Office while retaining jurisdiction. See Lunsford v. Commissioner, 117

T.C. at 189. The resulting section 6320 hearing on remand provides the parties

with an opportunity to complete the initial section 6320 hearing while preserving

the taxpayer's right to receive judicial review of the ultimate administrative

determination. Drake v. Commissioner, T.C. Memo. 2006-151, 92 T.C.M. (CCH)

37, 44 (2006), aff'd, 511 F.3d 65 (1st Cir. 2007). It is well settled that we may

remand in section 6320 cases where the Appeals Office has abused its discretion

-35 [*35] in some way. See, e.g., Churchill v. Commissioner, 102 T.C.M. (CCH) at

118; Med. Practice Solutions, LLC v. Commissioner, T.C. Memo. 2009-214, 98

T.C.M. (CCH) 242, 247 (2009). Because the administrative record does not

adequately disclose the analysis of the Appeals Office in determining that the OIC

was not acceptable and that the filing of the NFTL should be sustained and

because petitioners were not afforded a meaningful opportunity to substantiate

their position with respect to the valuation of the Lake Arrowhead property,

remand is appropriate in this case.16

V.

Conclusion

We have considered the parties' remaining arguments and, to the extent not

discussed above, conclude that those arguments are irrelevant, moot, or without

merit. For the reasons identified above, we will remand this case to the Appeals

Office for further proceedings consistent with this opinion.

To reflect the foregoing,

An appropriate order will be issued.

16Upon remand the Appeals Office shall consider any additional information

or evidence that petitioners may wish to submit, any new collection alternative

that petitioners may wish to propose, and any asserted change in circumstances.

See Leago v. Commissioner, T.C. Memo. 2012-39, slip op. at 24.