COLLECTION DUE PROCESS HEARING; ABUSE OF DISCRETION

An IRS Appeals officer's refusal to enter into an installment agreement with an individual and her decision to uphold an IRS proposed collection action did not constitute an abuse of discretion. The taxpayer did not suffer undue hardship as a result of a lien and levy. The officer considered the taxpayer's arguments and properly balanced the interest of pursuing the least intrusive method of collection with the need to efficiently administer the tax laws in the collection of revenue and found that the tax lien against the taxpayer's accounts was the proper collection method. Further, the IRS's refusal to enter into an installment agreement with the taxpayer was not erroneous because the taxpayer had not made her estimated tax payments for two years. Finally, the court lacked jurisdiction to consider her allegations that the IRS lien unjustifiably slandered her credit and precluded her from operating her business because these issues had not been raised at her Collection Due Process hearing. Back references: ¶38,184.12 and ¶38,184.60.

Judicial Review of the IRS' Levy Determination

P did not file Federal income tax returns for the years 1993, 1994, and 1995. R subsequently prepared substitutes for return (SFRs) for P and issued a notice of deficiency to P based on the SFRs covering these years. P filed a petition to this Court, but P's case was later dismissed, and a decision was entered for R because P failed to state a claim upon which relief could be granted. R assessed the tax liabilities for the years 1993, 1994, and 1995. P subsequently filed a petition under ch. 7 of the U.S. Bankruptcy Code. The bankruptcy court entered an order generally releasing P from all dischargeable debts. The bankruptcy court did not expressly determine whether P's unpaid tax liabilities were discharged. R issued a notice of intent to levy, and P requested a hearing before an IRS Appeals officer (A) pursuant to sec. 6330, I.R.C. At the hearing, P claimed that his unpaid liabilities were discharged in bankruptcy. A issued a notice of determination sustaining the levy, and P timely petitioned the Court for review.

Held: We have jurisdiction in this levy proceeding to determine whether P's unpaid liabilities were discharged in bankruptcy. Washington v. Commissioner [Dec. 55,072], 120 T.C. 114 (2003), followed.

Held, further: P's unpaid liabilities were not discharged in the ch. 7 bankruptcy proceeding. Under 11 U.S.C. sec. 523(a)(1)(B) (2000), if a required return is not filed, then the tax debt is generally excepted from discharge. P did not file Federal income tax returns, and the SFRs prepared by R in this case do not constitute "returns" within the meaning of sec. 523(a)(1)(B) of the Bankruptcy Code. Additionally, R is not enjoined from collecting the unpaid liabilities because the liabilities were excepted from discharge and the bankruptcy court did not make an express determination that the liabilities were discharged. Finally, a default judgment has not occurred because the debt at issue is not of a kind that required R to file a complaint in the bankruptcy court. Therefore, the determination to proceed with collection by levy is sustained.

Neal Swanson, pro se. Ann S. O'Blenes, for the respondent.

GOEKE, Judge: The petition in this case was filed in response to a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (the notice of determination). The substantive issue presented is whether the unpaid liabilities that are the subject of the collection action were discharged in petitioner's chapter 7 bankruptcy proceeding. However, before we can reach this issue, we must first address whether we have jurisdiction to decide the issue and whether petitioner is precluded from arguing that his unpaid liabilities were discharged in bankruptcy.

Petitioner did not file Forms 1040, U.S. Individual Income Tax Return, for the taxable years 1993, 1994, and 1995. Copies of MFTRA-X transcripts of petitioner's accounts for the tax years at issue reflect that respondent filed "substitutes for return"¹ (SFRs) for these years on February 24, 1997. On May 28, 1997, respondent issued a notice of deficiency to petitioner determining deficiencies in and additions to his Federal income taxes for 1993, 1994, and 1995. Petitioner filed a petition and an amended petition with this Court seeking a redetermination. On February 3, 1998, the Court dismissed the case for failure to state a claim upon which relief could be granted and decided that petitioner was liable for the following deficiencies and additions to tax:

                                                                  
                                                                     
                                               Additions to Tax      
                                                                     
                                                                     
                                      ________________________________
                                             Sec.                    
  Year                   Deficiency      6651(a)(1)      Sec. 6654(a)
                                                                     
  1993 ..............    $8,307            $896             ---
                                                              
  1994 ..............     8,460           2,115            $436
                                                              
  1995 ..............    10,657           2,524             548
                                                              

On August 5, 1998, petitioner filed a bankruptcy petition under chapter 7 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Texas. On Schedule E, Supplemental Income and Loss, petitioner reported the Internal Revenue Service (IRS) as the holder of unsecured priority claims for the years 1993, 1994, and 1995. On December 7, 1998, the bankruptcy court entered an order of discharge (discharge order) in petitioner's bankruptcy case. The discharge order states:

DISCHARGE OF DEBTOR

It appearing that a petition commencing a case under title 11, United States code, was filed by or against the person named above on 08/05/98, and that an order for relief was entered under chapter 7, and that no complaint objecting to the discharge of the debtor was filed within the time fixed by the court (or that a complaint objecting to discharge of the debtor was filed and, after due notice and hearing, was not sustained);

IT IS ORDERED THAT:

1. The above-name debtor is released from all dischargeable debts.

2. Any judgment heretofore or hereafter obtained in any court other than this court is null and void as a determination of the personal liability of the debtor with respect to any of the following:

(a) debts dischargeable under 11 U.S.C. sec. 523;

(b) unless heretofore or hereafter determined by order of this court to be nondischargeable, debts alleged to be excepted from discharge under clauses (2), (4), (6) and (15) of 11 U.S.C. sec. 523(a);

(c) debts determined by this court to be discharged.

3. All creditors whose debts are discharged by this order and all creditors whose judgments are declared null and void by paragraph 2 above are enjoined from instituting or continuing any action or employing any process or engaging in any act to collect such debts as personal liabilities of the above-named debtor.

Copies of MFTRA-X transcripts reflect that on January 23, 2000, respondent sent to petitioner a notice of intent to levy regarding petitioner's unpaid income tax liabilities for 1993, 1994, and 1995. The copies indicate that on February 10, 2000, petitioner requested a section 6330 hearing. On May 3, 2001, the Appeals Office issued to petitioner a notice of determination regarding petitioner's unpaid liabilities for 1993, 1994, and 1995. The notice states:

Summary of Determination:

It is determined that a levy is appropriate in your case. Appeals has considered the information presented at the Collection Due Process hearing. It is determined that the collection of your unpaid accounts by levy enforcement balances the government's need to efficiently collect your 1993, 1994 and 1995 tax liabilities with your concerns of intrusiveness.

*******

Legal and Procedural Requirements:

It has been concluded that all required laws and procedures have been followed. The only legal requirements before taking general enforcement action are the notice and demand and the notice of intent to levy with a notice of right to a Collection Due Process Hearing.

Internal computer records indicate that notice and demand of payment have been made within the required time periods for the 1993, 1994 and 1995 years at issue.

The notice of intent to levy, Letter 1058, was properly mailed and included with this notice were all required enclosures. These enclosures include the Form 12153, which you used to make your Collection Due Process hearing request.

Issues Raised by the Taxpayer:

In your hearing request you challenged the assessment of the tax liabilities. You previously challenged the assessment in the United States Tax Court. The Court issued its "Order of Dismissal and Decision" dated February 3, 1998. The Court's decision is final. Appeals will not consider challenges to the underlying liability because you previously challenged the liability and the Tax Court has issued its decision that the taxes are due and owing.

The administrative file shows that you filed bankruptcy. You stated that the unpaid taxes were discharged in your bankruptcy. Section 523(a)(1)(B)(i) of the Bankruptcy Code states that a tax liability is not discharged if the return was not filed. SFR assessed income tax returns are not considered voluntarily filed and are not dischargeable per Section 523(a)(1)(B)(i).

Internal Revenue Service records disclose that you have not filed Form 1040 U.S. Individual Income Tax returns for the years 1996, 1997, 1998, 1999. Appeals will not consider an alternative collection solution because you are not in compliance by voluntarily filing these income tax returns.

You did not agree with Appeals and the Internal Revenue Service concerning the interpretation of the income tax and bankruptcy statutues [sic]. However, you expressed an interest in filing your 1996 through 1999 income tax returns through regular Internal Revenue procedures and then submitting an offer in compromise after any additional liabilities were assessed.

Balancing of Need for Efficient Tax Collection With Taxpayer's Concern of Intrusiveness:

An acceptable alternative to the levy is not appropriate due to the fact you are not currently in compliance in filing all required income tax returns. It appears that levy sources currently exist. Accordingly, it is determined that the levy balances the Government's need to efficiently collect the 1993, 1994 and 1995 tax liabilities with your legitimate concern of intrusiveness.

The notice of determination was signed by Leland J. Neubauer, Appeals Team Manager (the Appeals officer).

On May 11, 2001, petitioner submitted to the Court a letter that the Court filed as petitioner's imperfect petition for lien or levy action requesting a review of respondent's determination to proceed with collection. Because the letter did not comply fully with the requirements of Rule 331,³ by order dated May 15, 2001, the Court directed petitioner to file a proper amended petition. On June 12, 2001, petitioner filed a proper amended petition. In the petitions, petitioner alleges that collection by levy is improper because his unpaid liabilities were discharged in bankruptcy.

Respondent claims that petitioner's unpaid liabilities are excepted from discharge under the Bankruptcy Code. Specifically, respondent contends that the taxes are excepted from discharge under 11 U.S.C. sec. 523(a)(1)(B) (2000) because petitioner never filed Forms 1040 for the years in issue. Respondent argues that the bankruptcy court did not enjoin collection of petitioner's unpaid liabilities and that a default judgment has not occurred.

Before deciding the substantive issues, we must decide a jurisdictional issue because petitioner's contention that the bankruptcy court is the only court that can determine whether the unpaid liabilities were discharged raises the question of whether we have the authority to decide this issue. We addressed this question in the context of a lien proceeding in Washington v. Commissioner [Dec. 55,072], 120 T.C. 114 (2003). The instant case involves a levy proceeding under section 6330(d)(1).

In Washington v. Commissioner, supra at 120-121, we stated:

We have held in deficiency proceedings commenced in the Court under section 6213 that we do not have jurisdiction to determine whether a U.S. bankruptcy court has discharged a taxpayer from an unpaid tax liability in a bankruptcy proceeding instituted by such taxpayer. Neilson v. Commissioner [Dec. 46,301], 94 T.C. 1, 9 (1990); Graham v. Commissioner [Dec. 37,460], 75 T.C. 389, 399 (1980). In so holding, we relied on Swanson v. Commissioner [Dec. 33,742], 65 T.C. 1180, 1184 (1976), in which we observed that an action brought for redetermination of a deficiency "has nothing to do with collection of the tax nor any similarity to an action for collection of a debt".

In contrast to a deficiency proceeding, a lien proceeding commenced in the Court under section 6330(d)(1), such as the instant lien proceeding, is closely related to and has everything to do with collection of a taxpayer's unpaid liability for a taxable year. *** We hold that in the instant lien proceeding commenced under section 6330(d)(1) the Court has jurisdiction to determine whether the U.S. Bankruptcy Court for the Southern District of New York discharged petitioners from such unpaid liabilities.

Thus, we exercised jurisdiction in the lien proceeding to decide the bankruptcy discharge issue.⁴

A levy proceeding, like a lien proceeding, is commenced under section 6330(d)(1).⁵ A levy proceeding is also "closely related to and has everything to do with collection of a taxpayer's unpaid liability for a taxable year." Washington v. Commissioner, supra at 120. There is no reason for distinguishing levy proceedings from lien proceedings for purposes of exercising jurisdiction in the context of this case. Accordingly, we hold that in this levy proceeding we have jurisdiction to determine whether the U.S. Bankruptcy Court for the Northern District of Texas discharged petitioner from the unpaid liabilities for the years 1993, 1994, and 1995.

In the instant case, petitioner received a notice of deficiency. Therefore, the existence or amount of petitioner's underlying tax liability was not properly at issue at the hearing. Challenges to the existence or amount of the underlying tax liability that are not properly at issue in this proceeding cannot be considered. See, e.g., Pierson v. Commissioner [Dec. 54,152], 115 T.C. 576, 580 (2000); Sego v. Commissioner [Dec. 53,938], 114 T.C. 604, 612 (2000); Goza v. Commissioner [Dec. 53,803], 114 T.C. 176, 183 (2000) (granting motion to dismiss for failure to state a claim upon which relief can be granted where taxpayer received notice of deficiency but at hearing and in this Court did not raise a spousal defense, challenge the appropriateness of the collection action, or offer collection alternatives).

III. Standard of Review

Where the validity of the underlying tax liability is not properly at issue, we review the Commissioner's administrative determinations for abuse of discretion. Sego v. Commissioner, supra at 610; Goza v. Commissioner, supra at 183. Petitioner received a notice of deficiency, and his arguments are challenges to the appropriateness of the collection action. Therefore, we review the determination to proceed with collection for abuse of discretion.

In this case, respondent's determination regarding whether petitioner's unpaid liabilities were discharged in bankruptcy required the interpretation and application of bankruptcy law. If respondent's determination was based on erroneous views of the law and petitioner's unpaid liabilities were discharged in bankruptcy, then we must reject respondent's views and find that there was an abuse of discretion. See, e.g., Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990) (abuse of discretion occurs if ruling was based on erroneous view of the law); Abrams v. Interco, Inc., 719 F.2d 23, 28 (2d Cir. 1983) (stating that it is not inconsistent with the abuse of discretion standard to decline to honor a purported exercise of discretion that is infected by an error of law).

The administrative file shows that you filed bankruptcy. You stated that the unpaid taxes were discharged in your bankruptcy. Section 523(a)(1)(B)(i) of the Bankruptcy Code states that a tax liability is not discharged if the return was not filed. SFR assessed income tax returns are not considered voluntarily filed and are not dischargeable per Section 523(a)(1)(B)(i).

Thus, we must review respondent's determination that, under 11 U.S.C. sec. 523(a)(1)(B)(i), petitioner's unpaid liabilities were not discharged in bankruptcy. Additionally, we address petitioner's contentions that respondent is enjoined from collecting the unpaid liabilities and that a default judgment has occurred because respondent made no challenge to petitioner's bankruptcy filing.

Paragraph 1 of the discharge order specifically states that petitioner "is released from all dischargeable debts." The discharge order further provides that any judgment obtained in any other court is null and void as a determination of petitioner's personal liability with respect to: (1) Debts dischargeable under 11 U.S.C. sec. 523; (2) unless determined by the bankruptcy court to be nondischargeable, debts alleged to be excepted from discharge under clauses (2), (4), (6), and (15) of 11 U.S.C. sec. 523(a); and (3) debts determined by the bankruptcy court to be discharged. Finally, the discharge order provides that all creditors whose debts are discharged or declared null and void under the order are enjoined from taking any action to collect the debts as personal liabilities of petitioner. Contrary to petitioner's interpretation, the discharge order does not relieve petitioner of liability for all debts. Rather, the order generally releases petitioner from all dischargeable debts, debts alleged to be discharged under certain clauses of 11 U.S.C. sec. 523(a), and other debts the bankruptcy court specifically determined to be discharged.

The general rule is that a debtor who files a chapter 7 bankruptcy petition is discharged from personal liability for all debts incurred before the filing of the petition. 11 U.S.C. sec. 727(b); In re Hatton, 220 F.3d 1057, 1059-1060 (9th Cir. 2000). However, an individual debtor is not to be discharged in a bankruptcy proceeding from certain specified categories of debts. 11 U.S.C. sec. 523(a); Washington v. Commissioner [Dec. 55,072], 120 T.C. at 121. The first category, contained in 11 U.S.C. sec. 523(a)(1), is described in pertinent part as follows:

§523. Exceptions to discharge

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title [title 11] does not discharge an individual debtor from any debt --

(1) for a tax or a customs duty

(A) of the kind and for the periods specified in section 507(a)(2) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;

(B) with respect to which a return, if required

(i) was not filed; or

(ii) was filed after the date on which such return was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or

(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;

The use of the term "dischargeable" in the first paragraph of the bankruptcy court's discharge order requires application of this category to determine whether the unpaid liabilities of petitioner were dischargeable because there is no evidence in the record that the bankruptcy court specifically determined that the unpaid liabilities were to be discharged. We reviewed a similar bankruptcy court order in Washington v. Commissioner, supra, and reached the same conclusion.⁹ Accordingly, we must decide whether the unpaid liabilities are excepted from discharge under 11 U.S.C. sec. 523(a)(1)(B).

As relevant here, 11 U.S.C. sec. 523(a)(1)(B) excepts from discharge a tax debt if "a return, if required, was not filed". The evidence in the record indicates, and petitioner has not disputed, that he was required to file Federal income tax returns for the years 1993, 1994, and 1995. The parties stipulated that petitioner did not file tax returns for these years. Further, the evidence in the record indicates that respondent prepared SFRs for petitioner for each of these years. The relevant issue is whether the SFRs prepared by respondent in this case constitute "returns" within the meaning of 11 U.S.C. sec. 523(a)(1)(B). This is the first opportunity that this Court has had to consider the issue.

A purpose of the return requirement in 11 U.S.C. sec. 523(a)(1)(B) is to prevent a debtor who has ignored the filing requirements from escaping liability for unpaid taxes through the debtor's own misconduct. In re Hindenlang, 164 F.3d 1029, 1032 (6th Cir. 1999); In re Bergstrom, 949 F.2d 341, 342 (10th Cir. 1991). This corresponds with the principle that "'good faith and candor are necessary prerequisites to obtaining a fresh start.' " In re Hindenlang, supra at 1032 (quoting In re Zick, 931 F.2d 1124, 1129 (6th Cir. 1991)). The preparation of an SFR by the Commissioner is a simple administrative step which allows the assessment and collection process to begin. If an SFR constitutes a "return" within the meaning of 11 U.S.C. sec. 523(a)(1)(B), then the result of completing this administrative procedure effectively would be to excuse a nonfiling taxpayer from his own deliberate misconduct. This interpretation would render 11 U.S.C. sec. 523(a)(1)(B) a nullity. In re Pruitt, 107 Bankr. 764, 766 (Bankr. D. Wyo. 1989).

The term "return" is not defined in the Bankruptcy Code. In defining the term under 11 U.S.C. sec. 523(a)(1), other courts have looked to the Internal Revenue Code and cases decided by this Court for assistance. See, e.g., In re Hatton, supra at 1060; In re Hindenlang, supra at 1032; In re Bergstrom, supra at 343. Section 6020 specifically discusses returns prepared for or executed by the Secretary, but neither that section nor any other section of the Internal Revenue Code provides a definition of the term "return".¹⁰ In Beard v. Commissioner [Dec. 41,237], 82 T.C. 766 (1984), affd. [86-2 USTC ¶9496] 793 F.2d 139 (6th Cir. 1986), this Court developed a widely accepted interpretation of the term. In that case, we stated that in order to qualify as a return, a document must meet the following requirements: (1) Purport to be a return; (2) be executed under penalty of perjury; (3) contain sufficient data to allow calculation of tax; and (4) represent an honest and reasonable attempt to satisfy the requirements of the tax law. Id. at 777; see also Cabirac v. Commissioner [Dec. 55,124], 120 T.C. 163, 169 n.10 (2003). This test combines the principles of two Supreme Court cases: Germantown Trust Co. v. Commissioner [40-1 USTC ¶9263], 309 U.S. 304 (1940), and Zellerbach Paper Co. v. Helvering [35-1 USTC ¶9003], 293 U.S. 172 (1934).

In addition to the inconsistency between the purpose of the filing requirement under the bankruptcy statute and the proposition that an SFR can constitute a return under that statute, section 6020 and the requirements set forth in Beard v. Commissioner, supra, support the determination that SFRs do not constitute returns within the meaning of 11 U.S.C. sec. 523(a)(1)(B).

Section 6020 authorizes the Secretary to prepare a "return" in certain situations. Under section 6020(b)(1), if any person fails to make a return as required by law, the Secretary is authorized to prepare a return based on his own knowledge and such other information as he can obtain. Any return prepared and subscribed by the Secretary "shall be prima facie good and sufficient for all legal purposes." Sec. 6020(b)(2).¹¹ However, the return prepared by the Secretary must be signed by the delinquent taxpayer before it can be accepted as the filed return of the taxpayer. Sec. 6020(a); In re Bergstrom, supra at 343.¹² An SFR prepared under section 6020(b) does not constitute a return of the taxpayer for purposes of 11 U.S.C. sec. 523(a)(1)(B) in the absence of the signature of the taxpayer. In re Bergstrom, supra at 343.

In the instant case, petitioner failed to file required returns for the years 1993, 1994, and 1995, and respondent prepared SFRs for these years. Regardless of whether the SFRs were prepared in accordance with section 6020(b), there is no evidence that petitioner signed the SFRs, which is required before an SFR can constitute a return for purposes of 11 U.S.C. sec. 523(a)(1)(B).¹³

As previously mentioned, this Court applies a four-part test, derived by combining the principles of two Supreme Court cases, to determine whether a filing constitutes a "return". Beard v. Commissioner, supra at 777.¹⁴ Petitioner fails two prongs of the test because he did not sign the SFRs and he failed to make an honest and reasonable attempt to satisfy the tax laws.

Petitioner was required to file Federal income tax returns for the years 1993, 1994, and 1995. Petitioner failed to file tax returns for these years either before or after the assessment. Respondent prepared SFRs for the tax years in issue. There is no evidence in the record that petitioner signed the SFRs. Additionally, there is no evidence that he attempted to file any returns on his own initiative or that he cooperated with the Commissioner in a manner that might represent an honest and reasonable attempt to satisfy the requirements of the tax law. On the basis of the facts of this case, no "returns" were filed within the meaning of 11 U.S.C. sec. 523(a)(1)(B).¹⁵ Accordingly, we hold that pursuant to 11 U.S.C. sec. 523(a)(1)(B), the U.S. Bankruptcy Court for the Northern District of Texas did not discharge petitioner from his unpaid liabilities for the taxable years 1993, 1994, and 1995.

1. Whether Respondent Is Enjoined by the Order of Discharge From Collecting the Unpaid Liabilities

Petitioner argues that respondent is enjoined by the discharge order from collecting the unpaid liabilities. However, the discharge order specifically states that only creditors whose debts are discharged by the order or declared null and void under paragraph 2 of the order are enjoined from collecting debts.

Paragraphs 2 and 3 of the discharge order stated:

2. Any judgment heretofore or hereafter obtained in any court other than this court is null and void as a determination of the personal liability of the debtor with respect to any of the following:

(a) debts dischargeable under 11 U.S.C. sec. 523;

(b) unless heretofore or hereafter determined by order of this court to be nondischargeable, debts alleged to be excepted from discharge under clauses (2), (4), (6) and (15) of 11 U.S.C. sec. 523(a);

(c) debts determined by this court to be discharged.

3. All creditors whose debts are discharged by this order and all creditors whose judgments are declared null and void by paragraph 2 above are enjoined from instituting or continuing any action or employing any process or engaging in any act to collect such debts as personal liabilities of the above-named debtor.

As previously explained, the unpaid liabilities were not dischargeable under 11 U.S.C. sec. 523(a)(1)(B) because required returns were not filed. Petitioner has not alleged that the unpaid liabilities are excepted from discharge under 11 U.S.C. sec. 523(a)(2), (4), (6), or (15). Finally, the unpaid liabilities were not determined by the bankruptcy court to be discharged. Therefore, pursuant to the discharge order, respondent is not enjoined from collecting the unpaid liabilities.

Petitioner argues that respondent's failure to object to or file a claim in petitioner's bankruptcy filing resulted in a default judgment in this case. We disagree because the debt at issue is not of a kind that requires an objection or the filing of a complaint during a chapter 7 bankruptcy proceeding in order to later obtain a determination of the dischargeability of the debt.

Bankruptcy courts have exclusive jurisdiction with respect to debts enumerated in 11 U.S.C. sec. 523(a)(2), (4), (6) and (15). 11 U.S.C. sec. 523(c)(1); In re McKendry, 40 F.3d 331, 335 (10th Cir. 1994); In re Galbreath, 83 Bankr. 549, 550 (Bankr. S.D. Ill. 1988); Fed. R. Bankr. P. 4007 Advisory Committee's Note (1983); 4 Collier on Bankruptcy, par. 523.03, at 523-17 (15th ed. rev. 1996). With respect to determining whether other debts, including tax debts,¹⁶ are dischargeable, bankruptcy courts have concurrent jurisdiction with other courts. Whitehouse v. LaRoche, 277 F.3d 568, 576 (1st Cir. 2002); In re McKendry, supra at 335 n.3;In re Galbreath, supra at 551; Fed. R. Bankr. P. 4007 Advisory Committee's Note (1983) ("Jurisdiction over this issue on these debts [debts listed under 11 U.S.C. sec. 523(a)(1), (3), (5), (7), (8), and (9)] is held concurrently by the Bankruptcy Court and any appropriate nonbankruptcy forum."); 4 Collier on Bankruptcy, par. 523.03, at 523-17. As explained below, this concurrent jurisdiction generally allows dischargeability issues relating to certain debts to be decided by a nonbankruptcy court if the issues have not been addressed by the bankruptcy court in a prior chapter 7 proceeding.

Rule 4007(a) of the Federal Rules of Bankruptcy Procedure provides that a debtor or any creditor may file a complaint to obtain a determination of the dischargeability of any debt. Generally, 11 U.S.C. sec. 523(c) provides that a debtor is discharged from a debt of a kind specified in paragraphs (2), (4), (6), or (15) of 11 U.S.C. sec. 523(a) unless, on request of the creditor to whom the debt is owed, and after notice and a hearing, the court determines the debt is excepted from discharge under one of those paragraphs.¹⁷ The instant dispute involves a tax debt, which is not a debt of a kind specified in paragraphs (2), (4), (6), or (15) of 11 U.S.C. sec. 523(a). Thus, respondent was not required in this case to request a determination in the chapter 7 proceeding that petitioner's unpaid liabilities were excepted from discharge. See Whitehouse v. LaRoche, supra at 576; United States v. Comer, 222 Bankr. 555, 561 (Bankr. E.D. Mich. 1998); In re Thompson, 207 Bankr. 7, 9 (Bankr. M.D. Fla. 1996).

A debt of the kind specified in 11 U.S.C. sec. 523(a)(1) is not discharged in a chapter 7 proceeding, and it continues to be an enforceable obligation after the entry of a debtor's discharge, unless there is an express determination that the tax is dischargeable. In re Thompson, supra at 10; In re Ellsworth, 158 Bankr. 856, 858 (M.D. Fla. 1993). A complaint seeking a determination that a tax debt is not excepted from discharge under 11 U.S.C. sec. 523(a)(1) usually comes from the debtor because tax liabilities covered by this section constitute a claim or debt of a kind which would not otherwise be discharged pursuant to 11 U.S.C. sec. 523(c) in the event that the creditor failed to take timely action. In re Ellsworth, supra at 858; 4 Collier on Bankruptcy, par. 4007.02, at 4007-4. "The law is clear that failure to file a complaint for debts protected from discharge under Section 523(a)(1) does not affect the dischargeability or nondischargeability of the debt." In re Ellsworth, supra at 858. Therefore, if a tax liability satisfies the conditions set forth in 11 U.S.C. sec. 523(a)(1), it is not protected by the general discharge received by the debtor in his prior bankruptcy case. In re Thompson, supra at 10.

V. Conclusion

After the bankruptcy proceeding was complete, the Appeals officer determined that petitioner's unpaid liabilities were excepted from discharge because required returns were not filed and sought to proceed with collection by levy. Petitioner contested the Appeals officer's determination and petitioned this Court to review the determination. We have exercised our jurisdiction and decided the dischargeability issue that was not addressed by the bankruptcy court in petitioner's chapter 7 proceeding. As explained earlier, petitioner's unpaid liabilities were excepted from discharge under 11 U.S.C. sec. 523(a)(1). Accordingly, we hold that respondent may proceed with collection action as determined in the notice of determination with respect to petitioner's taxable years 1993, 1994, and 1995.

Decision will be entered for respondent.

After submitting an application to and receiving an adverse determination from respondent (R), petitioner (P) petitioned this Court to seek our determination whether she is entitled to relief from joint liability under sec. 6015(f), I.R.C.

R contends that: (1) In making our determination, we may not consider evidence introduced at trial which was not included in the administrative record; and (2) whether or not our review is limited to R's administrative record, P is not entitled to equitable relief under sec. 6015(f), I.R.C.

Held: Our determination whether P is entitled to relief under sec. 6015(f), I.R.C., is made in a trial de novo; thus, we may consider matter raised at trial which was not included in the administrative record.

Held, further, P is entitled to equitable relief under sec. 6015(f), I.R.C.

Karen L. Hawkins, for the petitioner. Thomas M. Rohall, for the respondent.

COLVIN, Judge: Respondent determined that petitioner is not entitled to relief from joint liability for tax under section 6015(f) for 1995. Petitioner filed a petition under section 6015(e)(1) seeking our determination whether she is entitled to relief under section 6015(f).

The issues for decision are:¹

1. Whether, in determining petitioner's eligibility for relief under section 6015(f), we may consider evidence introduced at trial which was not included in the administrative record. We hold that we may.

2. Whether petitioner is entitled to relief from joint liability for tax under section 6015(f). We hold that she is.

Section references are to the Internal Revenue Code in effect for the applicable years. Rule references are to the Tax Court Rules of Practice and Procedure.

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

Petitioner resided in Martinez, California, when she filed her petition. She married Richard Wiwi (Mr. Wiwi) on September 9, 1995. At the time of trial, they were still married and living together.

Petitioner is a licensed clinical laboratory scientist. In 1995, she worked full time for the Blood Bank of Alameda/Contra Costa Counties as a medical technologist and was eligible for various employee benefits (not described further in the record). Later in 1995, the blood bank changed her position to part time. From 1997 to 1999, petitioner was employed in two temporary medical technologist positions, and she received no employee benefits.

In 1995, Mr. Wiwi was the sole proprietor of a financial services business. He was licensed to trade securities and sell insurance. Petitioner knew about his business, but she did not know how much he earned. He concealed from her the fact that he had prior financial obligations, including unpaid income tax for 1993 and 1994.

Taxes in the amount of $10,862 were withheld from petitioner's wages in 1995. Mr. Wiwi made no estimated tax payments to the United States and was not subject to withholding in 1995. Petitioner and Mr. Wiwi filed a joint Federal income tax return for 1995. On that return, they reported Federal income tax withheld on petitioner's wages of $10,862 and additional tax due of $6,220. However, they paid only $1,620 with their return; petitioner paid $1,069, and Mr. Wiwi paid $551. As a result of withholding and the payment with the return, petitioner paid an amount equal to the tax on her income, but Mr. Wiwi paid less than the tax due on his income.

Mr. Wiwi told petitioner (and she reasonably believed) that he would pay the unpaid 1995 tax as provided in a proposed installment agreement that he submitted with their 1995 income tax return. Mr. Wiwi failed to pay the remaining 1995 tax, but he concealed that fact from petitioner until 1998. Early in 1999, he filed an offer in compromise in which he said he could not pay the unpaid tax for 1995.

Petitioner and Mr. Wiwi have always kept their finances separate. Petitioner paid her own expenses (including Federal income tax on her income) beginning before they were married and continuing until the time of trial. Petitioner paid at least half of their household expenses from the date they were married until 1997. Mr. Wiwi began having medical problems in 1996. He lost his license to sell securities in 1997, and his income decreased dramatically. Since 1997, petitioner has worked at several temporary jobs and paid all of her and about 80 percent of Mr. Wiwi's expenses. Petitioner's total monthly household expenses on behalf of herself and Mr. Wiwi in 1997 and 1998 (including rent, utilities, transportation, food, clothing, and medical insurance) were about $2,800.

Petitioner had about $5,000 in her savings account in 1996 and $13,500 at the time of trial. She received wages of $65,792 in 1997, $65,338 in 1998, $66,315 in 2000, and $79,000 in 2002.²

Mr. Wiwi's medical condition worsened, which prevented him from working in 2000. He had hip replacement surgery in 2000 and 2001.

In 2000, petitioner liquidated an individual retirement account (IRA) and used the proceeds (about $20,000) as part of a $33,000 downpayment to buy a $333,000 residence for Mr. Wiwi and herself. The monthly mortgage payment was about the same as their previous rent payments. At the time of trial, petitioner had a section 401(k) retirement account with the American Red Cross. The record does not indicate the value of that account.

On February 2, 1999, petitioner filed Form 8857, Request for Innocent Spouse Relief (And Separation of Liability and Equitable Relief), in which she sought relief from joint liability for a portion of the amount of the unpaid tax liability shown on the 1995 joint return. On June 6, 1999, respondent sent petitioner a letter which said that respondent had preliminarily determined that petitioner was not entitled to relief under section 6015(f).

An Appeals officer met with petitioner's representative for 3 hours on November 18, 1999, and for 2 hours on September 21, 2000. Respondent determined on October 31, 2000, that petitioner was not entitled to equitable relief under section 6015(f) for 1995. Respondent's only stated reasons were: "You had knowledge of the liability, and you are still married and living with the nonrequesting spouse." Exhibit 10-R, which includes the materials assembled by the examining agent and the Appeals officer in response to petitioner's claim for equitable relief, is respondent's administrative file (the administrative file) for this case. Petitioner timely filed a petition in this Court.

Respondent contends that, in making our determination under section 6015(f), we may not consider evidence introduced at trial which was not included in the administrative record. More specifically, respondent contends that, pursuant to the Administrative Procedure Act (APA), 5 U.S.C. secs. 551-559, 701-706 (2000), and cases decided thereunder, this Court may consider only the administrative record (the record rule) in making our determination in this case.³ See Camp v. Pitts, 411 U.S. 138, 142 (1973); United States v. Carlo Bianchi & Co., 373 U.S. 709, 715 (1963). We disagree. As discussed next, our holding herein is based on more than 75 years of well-established interpretative history and practice before this Court.

Section 6015(f)⁴

Section 6015(e)(1)(A), which authorizes this Court to determine the appropriate relief available under section 6015, is similar to our deficiency jurisdiction in section 6213, which provides that taxpayers who receive a notice of deficiency may petition this Court for a redetermination of the deficiency. Sec. 6213(a).

It is well established that the APA does not apply to deficiency cases in this Court; that is, cases arising under sections 6213 or 6214 in which we may redetermine the taxpayer's tax liability. O'Dwyer v. Commissioner [59-1 USTC ¶9441], 266 F.2d 575, 580 (4th Cir. 1959), affg. [Dec. 22,434] 28 T.C. 698 (1957); Nappi v. Commissioner [Dec. 31,384], 58 T.C. 282, 284 (1972).⁶ In contrast, respondent contends that the APA applies to our proceedings under section 6015(f). As discussed next, we find no convincing reason to treat our determinations under section 6015(f) and section 6213(a) differently for purposes of applicability of the APA.

We make redeterminations under section 6213(a) de novo. O'Dwyer v. Commissioner, supra at 580; Greenberg's Express, Inc. v. Commissioner [Dec. 32,640], 62 T.C. 324, 327-28 (1974); see Clapp v. Commissioner [89-1 USTC ¶9357], 875 F.2d 1396, 1403 (9th Cir. 1989); Raheja v. Commissioner [84-1 USTC ¶9145], 725 F.2d 64, 66 (7th Cir. 1984), affg. [Dec. 38,467(M)] T.C. Memo. 1981-690; Jones v. Commissioner [Dec. 47,439], 97 T.C. 7, 18 (1991) ("a trial before this Court is a proceeding de novo; hence our determination of a taxpayer's liability must be based on the merits of the case and not on any previous record developed at the administrative level"). Congress has used both "determine" and "redetermination" in establishing the jurisdiction of the Tax Court. We see no material difference between the words "determine" in section 6015(e) and "redetermination" in section 6213(a) for purposes of this discussion.

Since 1924, the Tax Court (and the predecessor Board of Tax Appeals, see Consol. Cos. v. Commissioner [Dec. 4916], 15 B.T.A. 645, 652 (1929)) has had jurisdiction to "redetermine" deficiencies and additions to tax, secs. 6213 and 6214(a); and, since 1926, to determine overpayments, sec. 6512(b). Under section 6213(a) and its predecessors, we (and earlier, the Board of Tax Appeals) have "redetermined" deficiencies de novo, not limited to the Commissioner's administrative record, for more than 75 years.

We can presume that Congress was aware of this long history in 1998 when Congress used the word "determine" in section 6015. If Congress includes language from a prior statute in a new statute, courts can presume that Congress intended the longstanding legal interpretation of that language to be applied to the new statute. Commissioner v. Noel's Estate [65-1 USTC ¶12,311], 380 U.S. 678, 680-681 (1965); United States v. 101.80 Acres, 716 F.2d 714, 721 (9th Cir. 1983).

There are other situations in which this Court makes determinations de novo. For example, section 7436(a) provides that the Tax Court may "determine" whether the Commissioner's determination regarding an individual's employment status is correct. Congress intended that we conduct a trial de novo with respect to our determinations regarding employment status. See H. Rept. 105-148, at 639 (1997), 1997-4 C.B. (Vol. 1) 319, 961; S. Rept. 105-33, at 304 (1997), 1997-4 C.B. (Vol. 2) 1067, 1384; H. Conf. Rept. 105-220, at 734 (1997), 1997-4 C.B. (Vol. 2) 1457, 2204. As another example, section 6404 authorizes this Court to "determine" whether the Secretary's refusal to abate interest was an abuse of discretion. Our practice has been to make our determination after providing an opportunity for a trial de novo. See, e.g., Goettee v. Commissioner [Dec. 55,049(M)], T.C. Memo. 2003-43; Jean v. Commissioner [Dec. 54,902(M)], T.C. Memo. 2002-256; Jacobs v. Commissioner [Dec. 53,840(M)], T.C. Memo. 2000-123.

Our long tradition of providing trials de novo in making our determinations, and Congress's use of the word "determine" in our jurisdictional grant in section 6015(e)(1)(A), suggest that Congress intended that we provide an opportunity for a trial de novo in making our determinations under section 6015(f).⁷

Respondent contends that, because a taxpayer is entitled to relief under section 6015(f) only if we determine that the Commissioner's determination was an abuse of discretion, we may consider only the Commissioner's administrative record in making our determination. We disagree. Respondent's view that we should not provide a trial de novo if the standard of review is abuse of discretion is at odds with decades of Tax Court precedent and practice. The traditional effect of applying an abuse of discretion standard in this Court is to alter the standard of review, not to restrict what evidence we consider in making our determination.

Courts have used various, but similar, phrases to describe the meaning of an abuse of discretion standard, such as: The taxpayer bears a heavy burden of proof, the Commissioner's position deserves our deference, and we do not interfere unless the Commissioner's determination is arbitrary, capricious, clearly unlawful, or without sound basis in fact or law. See, e.g., Thor Power Tool Co. v. Commissioner [79-1 USTC ¶9139], 439 U.S. 522, 532-533, 550 (1979); Jonson v. Commissioner [Dec. 54,641], 118 T.C. at 125; see also Patton v. Commissioner [Dec. 54,307], 116 T.C. 206, 210 (2001); Buzzetta Constr. Corp. v. Commissioner [Dec. 45,555], 92 T.C. 641, 648 (1989); Oakton Distribs., Inc. v. Commissioner [Dec. 36,757], 73 T.C. 182, 188 (1979).

Our longstanding practice has been to hold trials de novo in many situations where an abuse of discretion standard applies. In those cases, our practice has not been to limit taxpayers to evidence contained in the administrative record or arguments made by the taxpayer at the administrative level. Examples of actions in which we conduct a trial de novo are whether it was an abuse of discretion for the Commissioner to (1) determine that a taxpayer's method of accounting did not clearly reflect income under section 446, e.g., Thor Power Tool Co. v. Commissioner, supra at 533 (Supreme Court used Tax Court findings in making its determination); Mulholland v. United States [93-1 USTC ¶50,286], 25 Cl. Ct. 748 (1992);⁸ (2) reallocate income or deductions under section 482, e.g., Bausch & Lomb, Inc. v. Commissioner [91-1 USTC ¶50,244], 933 F.2d 1084, 1088 (2d Cir. 1991) (U.S. Court of Appeals for the Second Circuit implicitly approved our de novo consideration of section 482 reallocations), affg. [Dec. 45,547] 92 T.C. 525 (1989); (3) fail to waive penalties and additions to tax, e.g., Krause v. Commissioner [Dec. 48,383], 99 T.C. 132, 179 (1992) (based in part on the Commissioner's expert's testimony that taxpayers were influenced by energy crisis to invest in energy partnerships, failure to waive the addition to tax for underpayment attributable to valuation overstatement under section 6659(e) was an abuse of discretion), affd. sub nom. Hildebrand v. Commissioner [94-2 USTC ¶50,305], 28 F.3d 1024 (10th Cir. 1994); (4) refuse to abate interest under section 6404, see paragraph A-3, above; (5) refuse to grant the taxpayer's request for an extension of time to file, e.g., Estate of Proios v. Commissioner [Dec. 50,100(M)], T.C. Memo. 1994-442 (taxpayer's failure to call witnesses held against the taxpayer); and (6) disallow a bad debt reserve deduction, e.g., Newlin Mach. Corp. v. Commissioner [Dec. 22,475], 28 T.C. 837, 845 (1957) (testimony and evidence considered). We are aware of no reason to depart from this longstanding practice in making our determination under section 6015(f).

In Magana v. Commissioner [Dec. 54,765], 118 T.C. 488 (2002), a case in which we reviewed the Commissioner's determination under section 6330(d)(1) that tax lien filings were appropriate, we held that, absent special circumstances, the taxpayer could not raise before this Court an issue he had not raised in a hearing conducted by the Commissioner's Appeals office under section 6330(b). Id. at 493. The issue the taxpayer first sought to raise before this Court was that collection of tax would cause hardship to him because of his poor health and the resulting cloud on title to his residence, his only significant asset. Id. at 493-494. We said that, absent special circumstances, in our review of whether the Commissioner's determination was an abuse of discretion under section 6330(d),⁹ we consider only arguments, issues, and other matters that were raised at the section 6330(b) hearing or otherwise brought to the attention of the Appeals Office. Id.

Respondent contends that, under our holding in Magana, we may not consider facts or issues that were not previously raised by the taxpayer during the Commissioner's consideration of the taxpayer's request for relief under section 6015(f). We disagree that Magana applies here for several reasons. First, in Magana, we said we were not deciding whether our holding therein applies to claims for relief from joint liability under section 6015 raised in a collection proceeding under section 6330. Id. at 494 n.3. Clearly, then, our holding in Magana does not apply to claims for relief from joint liability not brought under section 6330, e.g., brought as stand alone claims under section 6015(f). Second, we did not say in Magana that the taxpayer would be limited to the administrative record or that the taxpayer may not offer evidence in the proceeding in this Court. Third, in Magana we did not discuss the APA or the record rule. Thus, we conclude that Magana does not govern here.

Adoption of respondent's position would lead to the anomaly of proceedings in some section 6015(f) cases on the basis of the Commissioner's administrative record and trials de novo in others. Consider two examples. First, a trial de novo would be necessary if a taxpayer petitions this Court 6 months after filing an election for section 6015 relief and the Commissioner has made no determination granting or denying relief. Sec. 6015(e)(1)(A)(i)(II). We have jurisdiction to make a determination in this situation, even though there may be no administrative record. Thus, trial de novo is clearly authorized and appropriate.

Second, in a deficiency case, we hold a trial de novo relating to a taxpayer's affirmative defense that he or she is entitled to innocent spouse relief under section 6015(f). See, e.g., Butler v. Commissioner [Dec. 53,869], 114 T.C. at 287, 292. Adoption of respondent's position here would cause us to apply different procedures in our determinations under section 6015 cases.

We have previously indicated our preference for uniform procedures under section 6015(e). For example, we have declined to treat nonelecting spouses in deficiency proceedings differently from nonelecting spouses in stand alone proceedings (i.e., cases in which a taxpayer requests relief from joint and several liability that are independent of any deficiency proceeding). Corson v. Commissioner [Dec. 53,882], 114 T.C. 354, 364 (2000). Similarly, we believe taxpayers should have the same opportunity to have a trial de novo relating to entitlement to relief under section 6015(f) whether relief was raised as an affirmative defense in a deficiency proceeding, in a stand alone proceeding where the Commissioner has issued a final determination denying the taxpayer's request for relief, or in a stand alone proceeding where the Commissioner has failed to rule on the taxpayer's claim within 6 months of its filing. In Corson v. Commissioner, supra at 364, we stated:

we believe that the interests of justice would be ill served if the rights of the nonelecting spouse were to differ according to the procedural posture in which the issue of relief under section 6015 is brought before the Court. Identical issues before a single tribunal should receive similar treatment. * * *

As in Corson, we believe that cases in which the taxpayer seeks relief under section 6015(f) should receive similar treatment and, thus, the same standard of review.

The nonrequesting spouse may elect to intervene in the judicial proceeding in which we determine whether the requesting spouse qualifies for relief under section 6015(f). Sec. 6015(e)(4).¹⁰ This election is available both in deficiency cases in which section 6015 relief is requested, and in stand alone cases, such as this case. Rule 325; King v. Commissioner [Dec. 53,994], 115 T.C. 118, 122-123 (2000); Corson v. Commissioner, supra at 365. The fact that Congress provided for intervention by nonrequesting spouses in the Tax Court proceeding suggests Congress intended that we conduct trials de novo in making our determinations under section 6015(f) to permit the intervenor to offer evidence to challenge the requesting spouse's entitlement to relief.

Part of our interpretative responsibility here is to give proper effect to both section 6015(e) and (f). Courts attempt to read statutory provisions harmoniously, so as to give proper effect to all of the words of the statute. See FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133 (2000) (citing FTC v. Mandel Bros., Inc., 359 U.S. 385, 389 (1959)); Bend v. Hoyt, 38 U.S. 263, 272 (1839). We have done so here. We read these provisions to give effect to the other. Our de novo review of the Commissioner's determinations under section 6015(f) gives effect to the congressional mandate that we determine whether a taxpayer is entitled to relief under section 6015. The measure of deference provided by the abuse of discretion standard is a proper response to the fact that section 6015(f) authorizes the Secretary to provide procedures under which, based on all the facts and circumstances, the Secretary may relieve a taxpayer from joint liability. That approach (de novo review, applying an abuse of discretion standard) properly implements the statutory provisions at issue here, and has a long history in numerous other areas of Tax Court jurisprudence. See supra pp. 14-16.

We conclude that our determination whether petitioner is entitled to equitable relief under section 6015(f) is made in a trial de novo and is not limited to matter contained in respondent's administrative record, and that the APA record rule does not apply to section 6015(f) determinations in this Court.¹¹

Respondent contends that, even if we consider matter raised at trial which was not included in the administrative file, respondent's determination that petitioner is not entitled to equitable relief was not an abuse of discretion. We disagree.

The Commissioner announced a list of factors in Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. 447, 448,¹² that the Commissioner will consider in deciding whether to grant equitable relief under section 6015(f). Rev. Proc. 2000-15, supra, lists the following two facts, which if true, the Commissioner weighs in favor of granting relief: (1) The taxpayer is separated or divorced from the nonrequesting spouse; and (2) the taxpayer was abused by his or her spouse; and the following two facts, which if true, the Commissioner weighs against granting relief: (3) the taxpayer received significant benefit from the unpaid liability or the item giving rise to the deficiency; and (4) the taxpayer has not made a good faith effort to comply with Federal income tax laws in the tax years following the tax year to which the request for relief relates.

Rev. Proc. 2000-15, supra, implies that the Commissioner will generally not consider the absence of facts (1), (2), (3), or (4) in determining whether to grant relief under section 6015(f). However, based on caselaw deciding whether it was equitable to relieve a taxpayer from joint liability under former section 6013(e)(1)(D), we consider the fact that a taxpayer did not significantly benefit from the unpaid liability or item giving rise to the deficiency as a factor in favor of granting relief to that taxpayer.¹³ Ferrarese v. Commissioner [Dec. 54,894(M)], T.C. Memo. 2002-249 (citing Belk v. Commissioner [Dec. 46,070], 93 T.C. 434, 440-441 (1989); Foley v. Commissioner [Dec. 50,418(M)], T.C. Memo. 1995-16; Robinson v. Commissioner [Dec. 50,226(M)], T.C. Memo. 1994-557; Klimenko v. Commissioner [Dec. 49,191(M)], T.C. Memo. 1993-340; Hillman v. Commissioner [Dec. 48,971(M)], T.C. Memo. 1993-151).

Rev. Proc. 2000-15, supra, lists the following four facts which, if true, the Commissioner weighs in favor of granting relief, and if not true, the Commissioner weighs against granting relief: (5) the taxpayer would suffer economic hardship if relief is denied; (6) in the case of a liability that was properly reported but not paid, the taxpayer did not know and had no reason to know that the liability would not be paid; (7) the liability for which relief is sought is attributable to the nonrequesting spouse; and (8) the nonrequesting spouse has a legal obligation pursuant to a divorce decree or agreement to pay the outstanding liability (weighs against relief only if the requesting spouse has the obligation).

Rev. Proc. 2000-15, sec. 4.03(2), supra, also states:

No single factor will be determinative of whether equitable relief will or will not be granted in any particular case. Rather, all factors will be considered and weighed appropriately. The list is not intended to be exhaustive.

As discussed next, none of the factors used by the Commissioner in making section 6015(f) determinations supports respondent's determination in this case.

Petitioner was still married to Mr. Wiwi at the time of trial. Respondent determined without further explanation, but did not otherwise argue before the Court, that the marital status factor weighs against petitioner. We conclude that this factor is neutral.

Mr. Wiwi did not abuse petitioner. Respondent does not contend that the spousal abuse factor weighs against petitioner. We conclude that this factor is neutral.

Respondent does not argue that petitioner significantly benefited from Mr. Wiwi's underpayment of tax for 1995. Petitioner has paid more than one half of her and Mr. Wiwi's expenses since the time they were married. Petitioner has not received any income or other financial benefit from Mr. Wiwi. Petitioner's financial situation worsened after 1995 due to Mr. Wiwi's financial problems. We conclude that petitioner did not significantly benefit from Mr. Wiwi's failure to pay tax on his income and that this factor favors petitioner.

Petitioner filed returns for tax years following 1995 and has complied with tax laws at least since 1995. Respondent contends that petitioner was not in compliance with Federal tax laws because taxes were underwithheld from petitioner's income for 1997. We disagree. Although taxes were underwithheld from petitioner's income for 1997, petitioner paid an amount equal to the tax on her income for that year by paying $4,453 with the 1997 joint return she timely filed with Mr. Wiwi. Respondent does not explain how the fact that petitioner was underwithheld for one tax year shows that she was noncompliant with the tax laws; respondent does not contend that petitioner's payment for 1997 was late or inadequate or that she was underwithheld in any other year. The fact that taxes were underwithheld from petitioner for 1997 does not mean that she was not in compliance with the tax laws. On the contrary, her timely payment of all taxes she owed for that year shows she complied with the tax laws.¹⁴ Rev. Proc. 2000-15, supra, lists tax compliance as a factor which the Secretary will consider only against granting relief. We conclude that this factor is neutral.

Respondent contends that petitioner had enough assets and income from which to pay the unpaid tax for 1995 and that petitioner failed to show that she would suffer economic hardship if relief is denied. Petitioner contends that she would suffer economic hardship if relief were denied because she would be unable to pay for basic living expenses for herself and Mr. Wiwi.

Petitioner paid all of her and at least half of Mr. Wiwi's monthly living expenses, totaling about $2,800, in 1997 and 1998. During that time, petitioner had only temporary and part-time jobs, and had no benefits. Mr. Wiwi's medical condition worsened, and his ability to earn any income decreased. Petitioner remained married to Mr. Wiwi and paid his increasing expenses. Petitioner was prudent in saving some money under these circumstances. On the facts of this case, we disagree with respondent that petitioner would not suffer a hardship if she were required to use her savings, or to borrow against the equity in her house, to pay the unpaid tax attributable to Mr. Wiwi. We conclude that this factor favors petitioner.

In determining whether a taxpayer in an underpayment case is entitled to equitable relief under section 6015(f), we consider whether the requesting spouse knew, or reason to know, that the tax would be unpaid when the return was signed. Hopkins v. Commissioner [Dec. 55,213], 121 T.C. 73, 88 (2003); Wiest v. Commissioner [Dec. 55,099(M)], T.C. Memo. 2003-91.

Respondent contends that, when petitioner signed the 1995 return, she knew or had reason to know that Mr. Wiwi would not pay the tax due for 1995, and that it was not reasonable for petitioner to believe that Mr. Wiwi would pay the tax. We disagree.

When Mr. Wiwi and petitioner filed their 1995 tax return, he told her, and she reasonably believed, that he would pay the unpaid tax for 1995 according to an installment agreement he had attached to the return. However, Mr. Wiwi failed to pay that tax or to pay tax according to the installment agreement. Mr. Wiwi concealed from petitioner until 1998 that he had failed to pay the unpaid 1995 tax. During those years petitioner did not know and had no reason to know of Mr. Wiwi's failure to pay that tax. This fit his pattern of deception; Mr. Wiwi had also concealed from her that he owed tax for 1993 and 1994. Respondent offered no contrary evidence on this factor. We conclude that this factor favors petitioner.

Respondent concedes that the underpayment of tax for 1995 is attributable to Mr. Wiwi.

Respondent does not argue that the legal obligation factor weighs against petitioner. We conclude that the legal obligation factor does not apply here because petitioner and Mr. Wiwi are not divorced. Ferrarese v. Commissioner [Dec. 54,894(M)], T.C. Memo. 2002-249; see Washington v. Commissioner [Dec. 55,120], 120 T.C. 137, 148-149 (2003).

A taxpayer is entitled to equitable relief under section 6015(f) if, taking into account all the facts and circumstances, it is inequitable to hold that individual liable. Rev. Proc. 2000-15, supra, acknowledges that the factors listed therein are not exhaustive. Despite this, respondent did not consider the fact, as discussed above, that petitioner did not participate in any wrongdoing in this case; on the contrary, the problem began with Mr. Wiwi, who, as discussed above, concealed from petitioner that he had not paid the unpaid tax for 1995. In deciding whether it is inequitable to hold a spouse liable under section 6015(b)(1)(D),¹⁵ we have considered whether the failure to report the correct tax liability on the joint return results from concealment, overreaching, or any other wrongdoing on the part of the other spouse. Hayman v. Commissioner [93-1 USTC ¶50,272], 992 F.2d 1256, 1262 (2d Cir. 1993), affg. [Dec. 48,160(M)] T.C. Memo. 1992-228; Alt v. Commissioner [Dec. 54,961], 119 T.C. 306, 314 (2002); Jonson v. Commissioner [Dec. 54,641], 118 T.C. at 119. It is also relevant to petitioner's claim for relief that petitioner and Mr. Wiwi were married for less than 4 months in 1995; all of the problems began with Mr. Wiwi in that most of Mr. Wiwi's underpayment of tax for 1995 apparently occurred because he failed to make estimated tax payments before they were married. These facts support petitioner's claim that she is entitled to relief under section 6015(f).

Petitioner has presented an especially strong case for relief from joint liability under factors promulgated by the Commissioner in Rev. Proc. 2000-15, supra: all of these factors either weigh in favor of petitioner or are neutral, and none of those factors weigh against granting relief to petitioner. Petitioner did not significantly benefit from the underpayment, the underpayment was solely attributable to Mr. Wiwi, she has complied with Federal tax laws at least since 1995, she did not know or have reason to know Mr. Wiwi would not pay the unpaid tax for 1995, and payment of the tax would cause economic hardship. The neutral factors include petitioner's marital status and lack of spousal abuse. The legal obligation factor does not apply here because petitioner and Mr. Wiwi are still married. We determine that respondent's denial of relief under section 6015(f) was an abuse of discretion, and that, on the basis of all the facts and circumstances, it would be inequitable to hold petitioner liable for the underpayment of tax for 1995.

To reflect the foregoing,

Decision will be entered for petitioner.

Reviewed by the Court.

WELLS, COHEN, SWIFT, GERBER, LARO, VASQUEZ, GALE, THORNTON, HAINES, GOEKE, and KROUPA, JJ., agree with this majority opinion.

WHERRY, J., concurs in result only.

THORNTON, J., concurring: I agree with the majority and write separately to address certain points regarding the application of the Administrative Procedure Act (APA), 5 U.S.C. secs. 551-559, 701-706 (2000), to Tax Court proceedings and our application of the abuse of discretion standard in cases for spousal relief under section 6015.

Since its enactment in 1946, the APA has never governed proceedings in this Court (or in its predecessor, the Board of Tax Appeals). See, e.g., O'Dwyer v. Commissioner [59-1 USTC ¶9441], 266 F.2d 575, 580 (4th Cir. 1959) ("The Tax Court * * * is a court in which the facts are triable de novo * * *. We agree that the Tax Court is not subject to the Administrative Procedure Act."), affg. [Dec. 22,434] 28 T.C. 698 (1957). This long-established practice comports with the provisions of the APA and its history.

As a statute of general application, the APA does not supersede specific statutory provisions for judicial review. APA section 704 provides: "Agency action made reviewable by statute and final agency action for which there is no other adequate remedy in a court are subject to judicial review." 5 U.S.C. sec. 704 (2000). APA section 703 governs the form and venue of judicial review under the APA. See 5 U.S.C. sec. 703 (2000). The legislative history of APA section 703 makes clear that where there is a special statutory review proceeding relevant to the subject matter, that special statutory review "shall not be disturbed". S. Comm. on the Judiciary, 79th Cong., 1st Sess., Administrative Procedure Act (Comm. Print 1945), reprinted in Administrative Procedure Act Legislative History, 1944-46, at 37 (1946);¹ see H. Rept. 1980, 79th Cong. 2d Sess. (1946), reprinted in Administrative Procedure Act Legislative History, 1944-46, at 276 (1946) (same). As the U.S. Supreme Court stated in Bowen v. Mass., 487 U.S. 879, 903 (1988), "When Congress enacted the APA to provide a general authorization for review of agency action in the district courts, it did not intend that general grant of jurisdiction to duplicate the previously established special statutory procedures relating to specific agencies."

Applying these principles, the U.S. Court of Appeals for the Fifth Circuit has indicated that the APA is not an appropriate vehicle for challenging the Commissioner's denial of a request to abate interest under section 6404. See Beall v. United States [2003-2 USTC ¶50,551], 336 F.3d 419, 427 n.9 (5th Cir. 2003) ("review under the APA is accordingly available only where 'there is no other adequate remedy in a court.'"). Similarly, in an unpublished opinion involving the validity of the Commissioner's issuance of a notice of deficiency, the Court of Appeals for the Seventh Circuit concluded: "The APA is irrelevant, however, because the IRS's issuance of a notice of tax deficiency and the Tax Court's review of it are governed by the Internal Revenue Code and the rules and procedures of the Tax Court * * * and not by the APA." Bratcher v. Commissioner, 79 AFTR 2d 97-3110, at 97-3112, 97-2 USTC par. 50,495, at 89,016 (7th Cir. 1997), affg. [Dec. 51,373(M)] T.C. Memo. 1996-252; see also Am. Gen. Ins. Co. v. FTC, 359 F. Supp. 887, 893 (S.D. Tex. 1973) (rejecting a jurisdictional claim under the APA because there was no final agency action and plaintiff had an adequate remedy at law under the Clayton Act), affd. 496 F.2d 197 (5th Cir. 1974); Armstrong & Armstrong, Inc. v. United States, 356 F. Supp. 514, 521 (E.D. Wash. 1973) ("As relief is at least available * * * under 28 U.S.C. § 1491 (1970), judicial review may not be predicated on the Administrative Procedure Act."), affd. 514 F.2d 402 (9th Cir. 1975); Poirier v. Commissioner [69-2 USTC ¶9608], 299 F. Supp. 465, 466 (D.C. La. 1969) (rejecting taxpayer's claim that review to restrain enforcement of IRS summons is governed by APA sections 703 and 704 because sections 7602 and 7604 and Reisman v. Caplin, [64-1 USTC ¶9202] 375 U.S. 440 (1964) "[provide] an adequate remedy").²

The Tax Code has long provided a specific statutory framework for reviewing deficiency determinations of the Internal Revenue Service. Section 6015 is part and parcel of this statutory framework. This Court's de novo review procedures emanate from this statutory framework. Accordingly, the APA judicial review procedures do not supplant this Court's longstanding de novo review procedures in cases arising under section 6015.

Moreover, the fact that section 6015 postdates the APA does not render the APA judicial review procedures applicable here. APA section 559 provides that the APA does "not limit or repeal additional requirements imposed by statute or otherwise recognized by law." 5 U.S.C. sec. 559 (2000). When the APA was enacted in 1946, this Court's de novo procedures for reviewing IRS functions were well established and "recognized by law" within the meaning of APA section 559.³ See, e.g., Phillips v. Commissioner [2 USTC ¶743], 283 U.S. 589, 598, 600 (1931) (stating that in deficiency proceedings before the Board of Tax Appeals, "there is a complete hearing de novo * * *. The adequacy of the scope of review * * * is now thoroughly established."); Blair v. Oesterlein Machine Co., 17 F.2d 663, 665 (D.C. Cir. 1927) ("the Board [of Tax Appeals] is vested with full reviewing jurisdiction over the findings of the Commissioner * * *. The appellate power includes the authority, not only to review, but to investigate de novo, the matters in controversy between the government and the taxpayer").⁴ These de novo trial procedures, which have remained essentially unchanged since the APA's enactment, provide a stricter scope of review of the Commissioner's determinations than would obtain under APA review procedures. Consequently, pursuant to APA section 559, the APA does not limit or repeal "additional requirements" arising from this Court's de novo review procedures.

The legislative history of the APA confirms this understanding. See S. Comm. on the Judiciary, 79th Cong., 1st Sess., Administrative Procedure Act (Comm. Print 1945), reprinted in Administrative Procedure Act Legislative History, 1944-46, at 22 (1946) (stating that there are exempted from APA formal adjudication requirements matters that are subject to de novo review of facts and law such "as the tax functions of the Bureau of Internal Revenue (which are triable de novo in The Tax Court)"); S. Rept. 752, 79th Cong., 1st Sess. (1945), reprinted in Administrative Procedure Act Legislative History, 1944-46, at 214 (1946) (explaining that pursuant to APA provisions governing the scope of judicial review, courts establish facts de novo where the agency adjudication is not subject to APA formal adjudication provisions "such as tax assessments * * * not made upon an administrative hearing and record, [where] contests may involve a trial of the facts in the Tax Court"); H. Rept. 1980, 79th Cong., 2d Sess. (1946), reprinted in Administrative Procedure Act Legislative History, 1944-46, at 279 (1946) (same).

The mere fact that judicial review is for abuse of discretion in a spousal relief case arising under section 6015(f) does not trigger application of the APA record rule or preclude this Court from conducting a de novo trial. As the majority opinion correctly notes, this Court has a long tradition of providing trials when reviewing the Commissioner's determinations under an abuse of discretion standard. For example, when reviewing for abuse of discretion the Commissioner's refusal to abate interest under section 6404, this Court has consistently conducted trials. See, e.g., Goettee v. Commissioner [Dec. 55,049(M)], T.C. Memo. 2003-43; Jean v. Commissioner [Dec. 54,902(M)], T.C. Memo. 2002-256; Jacobs v. Commissioner [Dec. 53,840(M)], T.C. Memo. 2000-123.

In sum, the APA does not disturb or supersede this Court's longstanding de novo judicial review procedures for cases involving spousal relief under section 6015. This is not to say, however, that this Court could not or should not, in appropriate circumstances, borrow principles of judicial review embodied in the APA. Indeed, on occasion this Court has done so. For instance, in Dittler Bros., Inc. v. Commissioner, this Court looked to APA caselaw in adopting a "substantial evidence" rule as the appropriate measure for reviewing the reasonableness of the Commissioner's determination as to tax avoidance in a declaratory judgment action arising under former section 7477. Dittler Bros., Inc. v. Commissioner [Dec. 36,266], 72 T.C. 896, 909 (1979), affd. without published opinion 642 F.2d 1211 (5th Cir. 1981). The Court based its decision partly on the legislative history of former section 7477, which made it "clear that Congress did not intend the Court's judgment to be a mere de novo redetermination" but rather a review of the Commissioner's determination. Id.; see also Mailman v. Commissioner [Dec. 45,218], 91 T.C. 1079, 1082 (1988) (holding that the Commissioner's exercise of administrative discretion in failing to waive additions to tax under former section 6661 is subject to judicial review); Estate of Gardner v. Commissioner [Dec. 41,293], 82 T.C. 989, 994 (1984) (looking to principles of administrative law, "now incorporated into the Administrative Procedure Act", as supporting a presumption that the Commissioner's discretionary actions in denying a request for a filing extension under section 2032A were subject to judicial review).

As the majority opinion notes, this Court's rules regarding declaratory judgments involving retirement plans and exempt organizations generally require these actions to be disposed of on the basis of the administrative record. See Rule 217(a). Again, much as in Dittler Bros., Inc. v. Commissioner, supra, the reason for this limited review procedure lies in a legislative directive that "The court is to base its determination upon the reasons provided by the Internal Revenue Service in its notice to the party making the request for a determination, or based upon any new matter which the Service may wish to introduce at the time of trial." H. Rept. 93-807, at 108 (1974), 1974-3 C.B. (Supp.) 236, 343; see Rule 217(a), Explanatory Note, 68 T.C. 1048.⁵

By contrast, Congress has not imposed a restrictive standard for this Court's review of the Commissioner's determinations under section 6015. Clearly, when it enacted section 6015, Congress was aware that this is a trial court that has historically resolved cases by taking evidence and has never been governed by the APA. Nothing in the statute or the legislative history indicates that the APA is to apply to section 6015 cases or that we are to restrict our review to the administrative record. Section 6015 expanded the Court's jurisdiction to review all denials of relief from joint and several liability. As described in the conference report, the House bill "specifically provides that the Tax Court has jurisdiction to review any denial of innocent spouse relief." H. Conf. Rept. 105-599, at 250 (1998), 1998-3 C.B. 747, 1004. Similarly, under the Senate amendment, "The Tax Court has jurisdiction of disputes arising from the separate liability election." Id. at 251, 1998-3 C.B. at 1005. The conference agreement "follows the House bill and the Senate amendment in establishing jurisdiction in the Tax Court over disputes arising in this area." Id.

The legislative purpose in enacting section 6015 was to provide spouses with broader access to relief from joint and several tax liabilities. See id. at 249, 1998-3 C.B. at 1003. In light of that fact, it seems unlikely that Congress would have intended Tax Court review of a spouse's claim to be governed by the more restrictive APA judicial review procedures rather than by the Tax Court's customary de novo review procedures.

In conclusion, I believe that the majority opinion, in its rejection of the APA record rule and in its application of the abuse of discretion standard, is consistent with this Court's well-established practice and appropriately implements legislative intent to provide spouses open and neutral consideration of their claims under section 6015.

WELLS, COHEN, SWIFT, GERBER, LARO, VASQUEZ, GALE, MARVEL, HAINES, GOEKE, and COLVIN, J., agree with this concurring opinion.

HALPERN and HOLMES, JJ., dissenting: This case presents the issue of whether one of the guiding principles of administrative law --the record rule --governs our review of a decision by the Commissioner to deny relief under section 6015(f). The majority concludes that it does not. That conclusion is potentially of great significance because it will likely affect the manner in which we decide other types of cases arising under our expanding nondeficiency jurisdiction.¹ Because the majority's conclusion is contrary to settled principles of administrative law regarding the proper scope of judicial review, and because it misapplies the abuse of discretion standard of review, we respectfully dissent.

Before proceeding, it is important to distinguish between two concepts --"scope of review" and "standard of review" --that delimit judicial review of agency action. As succinctly stated by the U.S. Court of Appeals for the Tenth Circuit:

The scope of judicial review refers merely to the evidence the reviewing court will examine in reviewing an agency decision. The standard of judicial review refers to how the reviewing court will examine that evidence.

Franklin Sav. Association v. Office of Thrift Supervision, 934 F.2d 1127, 1136 (10th Cir. 1991) (emphasis added). The majority concludes that the appropriate scope of review in section 6015(f) cases is "de novo". Used to describe a reviewing court's scope of review, the term "de novo" signifies that the court is not limited to reviewing the administrative record; rather, the parties are free to create a new evidentiary record upon which the reviewing court will base its decision.² As for the appropriate standard of review in this case, the parties agree that we should review respondent's denial of section 6015(f) relief for abuse of discretion. We discuss the disputed scope of review in Part I, and we discuss the majority's application of the undisputed standard of review in Part II.

The specific issue in this case is whether, in reviewing respondent's decision to deny section 6015(f) relief to petitioner, we (1) are limited by the record rule to consideration of the administrative record, as respondent contends, or (2) may consider evidence adduced at trial, as petitioner contends.³ Following respondent's lead, the majority opinion and concurring opinion largely frame that issue in terms of whether the judicial review provisions of the Administrative Procedure Act (APA), 5 U.S.C. secs. 701-706 (2000), apply to proceedings in this Court. That characterization is somewhat overbroad, as should be evident from the following introductory discussions of the record rule and the APA. Whether couched in terms of the record rule or the APA, the dispositive inquiry in this case is whether Congress intended our review of respondent's section 6015(f) determinations to be effected by means of de novo proceedings.

Section 6015(f) provides that, if a joint filer does not qualify for relief from joint and several liability under section 6015(b) or (c), the Secretary may, under procedures prescribed by him, grant such relief on equitable grounds. We have jurisdiction to review the Commissioner's decisions under section 6015(e). Fernandez v. Commissioner [Dec. 53,875], 114 T.C. 324, 330-331 (2000). We have previously held that we review such decisions for abuse of discretion. E.g., Jonson v. Commissioner [Dec. 54,641], 118 T.C. 106, 125 (2002). We adopted that standard on the basis of previous opinions of this Court considering discretionary authority of the Commissioner (i.e., we did so apart from any consideration of the APA judicial review provisions). See id.; Cheshire v. Commissioner [Dec. 54,028], 115 T.C. 183, 198 (2000), affd. [2002-1 USTC ¶50,222] 282 F.3d 326 (5th Cir. 2002).

The record rule refers to the general rule of administrative law that a court can engage in judicial review of an agency action based only on consideration of the record amassed by the agency (the administrative record). 2 Pierce, Administrative Law Treatise, sec. 11.6, at 822 (4th ed. 2002). Of course, in situations where Congress has provided for de novo proceedings in the reviewing court, the record rule by its terms does not apply. On the other hand, "in cases where Congress has simply provided for review, without setting forth the standards to be used or the procedures to be followed, this Court [the Supreme Court] has held that consideration is to be confined to the administrative record and that no de novo proceeding may be held." United States v. Carlo Bianchi & Co., 373 U.S. 709, 715 (1963) (citing pre-APA cases).⁴ Similarly, standards of review such as "arbitrary" and "capricious" (terms we have associated with the abuse of discretion standard we adopted for section 6015(f) cases, see Jonson v. Commissioner, supra at 125) have consistently signified a review limited to the administrative record. United States v. Carlo Bianchi & Co., supra at 715. Thus, regardless of the applicability of the APA in this case, the record rule seemingly would apply unless "abuse of discretion" means something different in tax law than it does elsewhere.

Chapter 7 of the APA, 5 U.S.C. secs. 701-706 (2000), provides rules for judicial review of agency action. The relevant provision for our purposes is APA section 706(2), which lists various circumstances in which a reviewing court must set aside agency action. Two paragraphs of APA section 706(2) are important here: paragraph (A), requiring a reviewing court to reverse agency action that it finds is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law"; and paragraph (F), requiring a reviewing court to reverse agency action that it finds is "unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court."⁵ The Supreme Court has confirmed the applicability of the record rule in cases where APA section 706(2)(A) provides the appropriate standard of review. See Fla. Power & Light Co. v. Lorion, 470 U.S. 729, 743-744 (1985); Camp v. Pitts, 411 U.S. 138, 142 (1973); see also Holy Land Found. for Relief & Dev. v. Ashcroft, 333 F.3d 156, 162 (D.C. Cir. 2003); Beno v. Shalala, 30 F.3d 1057, 1073-1074 (9th Cir. 1994). Conversely, in cases that fall into the de novo category of APA section 706(2)(F), the record rule by its terms does not apply.

Although, as discussed above, the issue is not necessarily dispositive, we begin by addressing the majority's conclusion that the judicial review provisions of the APA are inapplicable in this case. The majority begins with the premise that "[i]t is well established that the APA does not apply to deficiency cases in this Court; that is, cases arising under sections 6213 or 6214 in which we may redetermine the taxpayer's tax liability." Majority op. p. 9. The majority then concludes that it "[finds] no convincing reason to treat our determinations under section 6015(f) and section 6213(a) differently for purposes of applicability of the APA." Majority op. p. 10.

We disagree with the majority's premise that the judicial review provisions of the APA do not apply to ordinary deficiency cases in this Court. It is undoubtedly true that the record rule does not apply to such cases. That is not the consequence of an implied exemption from the APA; rather, it is the consequence of the application of APA section 706(2)(F), which, as discussed above, provides that a reviewing court shall set aside agency action that is "unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court." Both the House report and the Senate report accompanying the APA point to "tax assessments", which "may involve a trial of the facts in the Tax Court", as an example of the type of agency action to which APA section 706(2)(F) applies. S. Rept. 752, 79th Cong., 1st Sess. 28 (1945); H. Rept. 1980, 79th Cong., 2d Sess. 45 (1946). Thus, while it may be accurate to say that the enactment of the APA had no practical effect on our scope of review in deficiency cases, the majority's claim that the APA "does not apply" to such cases is erroneous.⁶

In support of its premise that the judicial review provisions of the APA do not apply to deficiency cases in this Court, the majority primarily relies on O'Dwyer v. Commissioner [59-1 USTC ¶9441], 266 F.2d 575 (4th Cir. 1959), affg. [Dec. 22,434] 28 T.C. 698 (1957).⁷ The taxpayer in O'Dwyer sought to compel the IRS to produce its entire administrative file, based in part on language in APA section 706 directing the reviewing court to "review the whole record". Id. at 578-580. Perhaps out of concern that judicial review of the "whole record" within the meaning of APA section 706 would be inconsistent with the established Tax Court practice of not "looking behind" statutory notices of deficiency,⁸ the court felt compelled to conclude that the Tax Court is not a reviewing court for purposes of the APA. Id. at 580. The court based that conclusion on the premise that the APA judicial review provisions (APA sections 701-706) apply only to "formal" adjudications (i.e., those subject to the procedures set forth in APA sections 554, 556, and 557). Id. Given subsequent caselaw establishing that the judicial review provisions of the APA apply to informal, as well as formal, adjudications, e.g., Fla. Power & Light Co. v. Lorion, supra at 744, the continuing relevance of the APA discussion in O'Dwyer is dubious at best.⁹

Given the legislative history discussed above (and the questionable relevance of the O'Dwyer case), the majority's premise that the judicial review provisions of the APA do not apply to deficiency cases in this Court cannot stand. Furthermore, APA section 559 would seem to preclude the possibility that such provisions do not apply to our relatively new jurisdiction to review section 6015(f) adjudications: "[A] [s]ubsequent statute may not be held to supersede or modify * * * chapter 7 * * * except to the extent that it does so expressly." Section 6015(e), of course, makes no mention of the APA (or the appropriate standard or scope of review, for that matter). We would therefore hold that the APA judicial review provisions apply to section 6015(f) cases as well as deficiency cases.

Assuming the applicability of the APA judicial review provisions in this case, the relevant inquiry becomes whether Congress intended (as it clearly did in the context of deficiency proceedings) our review of section 6015(f) adjudications to fall into the "trial de novo" category of APA section 706(2)(F). The majority, while framing the issue in terms of the propriety of de novo proceedings rather than the applicability of APA section 706(2)(F), concludes that "Congress intended that we provide an opportunity for a trial de novo in making our determinations under section 6015(f)." Majority op. p. 12. The majority bases that conclusion on the similarity between the words "determine" and "redetermination" appearing in sections 6015(e) and 6213(a), respectively. Specifically, the majority reasons that: (1) Section 6213(a), which establishes our jurisdiction over deficiency cases, uses the term "redetermination", and (2) deficiency cases in this Court are decided by trial de novo, so (3) section 6015(e), which uses the term "determine", must reflect a congressional intent for us to review section 6015(f) adjudications by trial de novo. In other words, the majority assumes that, when Congress uses the word "determine" (or a variation thereof) in the context of Tax Court review, such word signifies a trial de novo.

The legislative history of certain declaratory judgment provisions of the Code contradicts the majority's assumption regarding Congress's use of the word "determine". As the majority recognizes, this Court has jurisdiction to issue declaratory judgments in several situations. Majority op. p. 12 note 7. For example, we have jurisdiction under section 7476 to make a declaration with respect to the initial or continuing qualification of certain retirement plans. In that regard, we have stated that "it is clear that Congress did not expect the Tax Court to conduct a trial de novo and make an independent examination of the facts to determine if the subject plan was qualified." Tamko Asphalt Prods., Inc. v. Commissioner [Dec. 35,884], 71 T.C. 824, 837 (1979), affd [81-2 USTC ¶9648] . 658 F.2d 735 (10th Cir. 1981); see also Rule 217(a) and Explanatory Note, 68 T.C. 1031, 1047. While the majority notes that section 7476 authorizes us to make a "declaration" rather than a "determination", majority op. p. 12 note 7, the House report explaining section 7476 describes the provision in part as follows:

The Court is to base its determination upon the reasons provided by the Internal Revenue Service in its notice to the party making the request for a determination, or based upon any new matter which the Service may wish to introduce at the time of the trial.¹⁰ The Tax Court judgment, however, is to be based upon a redetermination of the Internal Revenue Service's determination and not on a general examination of the provisions of the plan or related trust. * * *

* * * * * * *

* * * In order to provide the Court with flexibility in carrying out this provision, the bill authorizes the Chief Judge of the Tax Court to assign the Commissioners of the Tax Court to hear and make determinations with respect to petitions for a declaratory judgment, subject to such conditions and review as the Court may provide.

H. Rept. 93-779 at 107, 108 (1974), 1974-3 C.B. 244, 350, 351 (emphasis added); see also S. Rept. 93-383 at 114, 115 (1974), 1974-3 C.B. (Supp.) 80, 193, 194 (similar). Similar language appears in committee reports describing section 7428 (declaratory judgments relating to section 501(c)(3) status) and former section 7477 (declaratory judgments relating to section 367 transfers). See H. Rept. 94-658 at 244, 245, 285, 288 (1975), 1976-3 C.B. (Vol. 2) 695, 936, 937, 977, 980; S. Rept. 94-938 at 266, 267, 588, 591 (1976), 1976-3 C.B. (Vol. 3) 49, 304, 305, 626, 629. The foregoing would seem to deflate the notion that Congress equates the word "determine" (and variations thereof) with de novo proceedings in the context of Tax Court review.

Congress's use of the word "determination" in a similar, non-tax context is also instructive. Section 636(b)(1) of the Federal Magistrates Act, 28 U.S.C. secs. 631-639 (2000), provides that, in the case of certain "dispositive" motions assigned to a magistrate, a district judge "shall make a de novo determination of those portions of the [magistrate's] report" to which objection is made. In interpreting that provision, the Supreme Court stated:

It should be clear that on these dispositive motions, the statute calls for a de novo determination, not a de novo hearing. We find nothing in the legislative history of the statute to support the contention that the judge is required to rehear the contested testimony in order to * * * make the required "determination." * * *

United States v. Raddatz, 447 U.S. 667, 674 (1980). The Court quoted the following language from the House report accompanying the bill that became the Federal Magistrates Act:

The use of the words "de novo determination" is not intended to require the judge to actually conduct a new hearing on contested issues. Normally, the judge, on application, will consider the record which has been developed before the magistrate and make his own determination on the basis of that record, without being bound to adopt the findings and conclusions of the magistrate. * * *

Id. at 675 (quoting H. Rept. 94-1609 at 3 (1976)). Thus, Congress has used the phrase "de novo determination" in the context of other (non-tax) trial court proceedings to signify an independent determination (i.e., without deference to the result reached by the initial decisionmaker) by the trial court that is nonetheless based on the record developed by the initial decisionmaker.¹¹

The majority acknowledges that the standard of review in this case is abuse of discretion. As discussed above at I.A.3., regardless of the applicability of the APA, the abuse of discretion standard traditionally has been associated with the application of the record rule. The majority therefore is forced to take the position that the abuse of discretion standard of review has different evidentiary consequences in the context of Tax Court review than it does elsewhere: "The traditional effect of applying an abuse of discretion standard in this Court is to alter the standard of review, not to restrict what evidence we consider in making our determination." Majority op. p. 13. The majority proceeds to list six examples of situations in which we have conducted trials de novo to determine whether the Commissioner has abused his discretion: (1) Section 446 cases, (2) section 482 cases, (3) review of the Commissioner's refusal to waive penalties and additions to tax, (4) review of interest abatement denials, (5) review of the Commissioner's refusal to grant filing extensions, and (6) review of the Commissioner's disallowance of a bad debt reserve deduction. Majority op. pp. 14-16.

In all but one of the majority's examples regarding de novo proceedings in the context of this Court's abuse of discretion review, the Commissioner's exercise of discretion is relevant to his determination of the existence or amount of a deficiency in tax or an addition to tax that is subject to our deficiency jurisdiction.¹² Our opinion in Estate of Gardner v. Commissioner [Dec. 41,293], 82 T.C. 989, 999, 1000 (1984), is instructive in that regard:

However, once our deficiency jurisdiction has been properly invoked, we will examine de novo the merits of respondent's deficiency determinations, including his exercise of discretion under section 6081 [filing extension], to the extent that the alleged deficiency and any addition to tax within our deficiency jurisdiction (see sec. 6662) [now sec. 6665] turn upon respondent's discretionary actions. * * *

* * * Rather, our review of respondent's denial of an extension of time to file the estate tax return in this case is necessary for us to determine the merits of respondent's substantive determination of a deficiency. Here the sole reason for denial of the section 2032A special use election (and hence the basis for the major portion of the asserted deficiency) is the assertion that the estate tax return was not timely filed.

The approach suggested by Estate of Gardner (albeit in the context of whether the Commissioner's discretion under section 6081 is reviewable at all) is an appropriate and workable means of determining whether our review of an exercise of discretion by the Commissioner is properly the subject of a trial de novo. Applying that test to section 6015(f), the Commissioner's exercise of discretion under that provision is not relevant to his determination of the existence or amount of a deficiency in tax or an addition to tax that is subject to our deficiency jurisdiction.¹³ Accordingly, we would hold that this Court's review of such adjudications is not properly the subject of de novo proceedings.

The majority opinion states that "[a]doption of respondent's position would lead to the anomaly of proceedings in some section 6015(f) cases on the basis of the Commissioner's administrative record and trials de novo in others." Majority op. p. 17. Assuming that a trial de novo would be appropriate in certain circumstances, see sec. 6015(e)(1)(A)(i)(II),¹⁴ we maintain that a de novo determination of eligibility for section 6015(f) relief on one hand, and a review of the Commissioner's denial of such relief for abuse of discretion on the other, are two fundamentally different judicial exercises for which different procedures are entirely appropriate.

We also disagree with the majority's conclusion that "[t]he fact that Congress provided for intervention by nonrequesting spouses in the Tax Court proceeding suggests Congress intended that we conduct trials de novo in making our determinations under section 6015(f)". Majority op. p. 19. There are numerous examples in administrative law where third parties are allowed to intervene in judicial proceedings involving the review of agency action. See, e.g., Didrickson v. United States Dept. of Interior, 982 F.2d 1332 (9th Cir. 1992). We are not aware of any cases holding that such third parties may introduce matters outside the scope of the relevant administrative record. Cf. Vt. Yankee Nuclear Power Corp. v. Natural Res. Def. Council, Inc., 435 U.S. 519, 549-555 (1978) (upholding Atomic Energy Commission's refusal to consider conservation alternatives raised by intervenor subsequent to initial licensing decision).

We conclude that our scope of review in this case should be limited to the administrative record.

While we disagree with the majority's conclusion that the scope of review --a trial de novo --is correct, we recognize that the Court has previously adopted abuse of discretion as the standard of review for section 6015(f) cases. See, e.g., Jonson v. Commissioner [Dec. 54,641], 118 T.C. at 125. Courts generally hold that a decisionmaker abuses his discretion "when it makes an error of law * * * or rests its determination on a clearly erroneous finding of fact * * * [or] applies the correct law to facts which are not clearly erroneous but rules in an irrational manner." United States v. Sherburne, 249 F.3d 1121, 1125-1126 (9th Cir. 2001); see also Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 402-403 (1990) (same).

The majority describes the abuse of discretion standard as follows: "The taxpayer bears a heavy burden of proof, the Commissioner's position deserves our deference, and we do not interfere unless the Commissioner's determination is arbitrary, capricious, clearly unlawful, or without sound basis in fact or law." Majority op. pp. 13-14. Accepting the majority at its word --the proper approach is de novo review, applying an abuse of discretion standard, majority op. p. 20 --we fail to see how the majority has done anything other than ignore its description of the abuse of discretion standard and, instead, substitute its judgment for respondent's, both as to the procedures prescribed by the Secretary pursuant to section 6015(f) and respondent's determination of various factual issues in this case.

Properly applied, abuse of discretion review recognizes that Congress intended agencies to have considerable leeway in setting standards. Unless those standards are in some way contrary to the statute and so constitute "an error of law", courts should respect them and not substitute their own. We are bound by the following rule of deference:

Federal courts must defer to any reasonable interpretation given to the statute by the agency charged with its administration, as well as to the agency's interpretations and application of its regulations and policies in carrying out its statutory duties, unless plainly erroneous.

Wilkins v. Lujan, 995 F.2d 850, 853 (8th Cir. 1993) (citation and internal quotation marks omitted); see also Citizens Action League v. Kizer, 887 F.2d 1003 (9th Cir. 1989).

Section 6015(f) instructs the Secretary to prescribe procedures for exercising his discretion to provide equitable relief under that section. The Secretary has prescribed the required procedures in Rev. Proc. 2000-15, 2000-1 C.B. 447. Section 4 of the revenue procedure is entitled "General Conditions for Relief". Section 4.01 thereof lists certain necessary ("threshold") conditions for relief; section 4.02 lists circumstances under which the Secretary will ordinarily grant equitable relief; and section 4.03, among other things, lists the factors that the Secretary will consider in determining whether he will grant equitable relief in situations where he would not ordinarily grant it under section 4.02. While the majority does not disregard the general conditions listed in section 4 of the revenue procedure, it does not defer to them, treating them, rather, as suggestions, to be respected to the extent that the majority agrees with them.

The majority substitutes its standards for the Secretary's in at least three ways:

(1) The Secretary does not regard the requesting spouse's lack of significant benefit from an unpaid liability as weighing in favor of relief. The majority does. Majority op. pp. 22-23.

(2) The Secretary does not regard the failure of a requesting spouse to participate in wrongdoing as weighing in favor of relief. The majority does. Majority op. p. 25.

(3) The Secretary does not regard the fact of a requesting spouse's status as a newlywed as weighing in favor of relief. The majority does. Majority op. p. 29.

The majority's standards may be reasonable, but since the majority has made no finding that the Secretary's are not, we should not substitute ours for his. Whatever force the majority attaches to the abuse of discretion standard under which it labors, that force is not apparent in the majority's treatment of the Secretary's prescription in Rev. Proc. 2000-15, supra, of the conditions required for relief under section 6015(f).

Moreover, we fail to see how the abuse of discretion standard has any force in connection with the majority's review of respondent's fact findings. We are principally concerned by the majority's failure to defer to respondent's findings on perhaps the two most important facts that the majority cites in favor of relief --the supposed economic hardship petitioner would suffer were relief not granted, and her supposed lack of knowledge that her husband would not pay his 1995 tax liability under the terms of an installment agreement.

With respect to economic hardship, the majority contradicts respondent's finding that petitioner had enough assets and income from which to pay the unpaid tax for 1995 and that she failed to show she would suffer economic hardship if relief were denied. Among the facts that the majority finds are: (1) In 2002, petitioner received wages of $79,000, (2) she owned a house in which, at least in 2002, she had equity of $33,000, (3) at the time of trial, she had $13,500 in a savings account, and (4) at the time of trial, she owned a 401(k) retirement account of undetermined amount. Certainly, she had expenses in caring for Mr. Wiwi, but the majority does not tell us what they are. Based on the majority's findings, it appears that the 1995 unpaid tax is no more than $6,220 (increased by interest). We fail to see how respondent's finding that petitioner would suffer no economic hardship if relief were denied runs afoul of the majority's recitation of the abuse of discretion standard: "arbitrary, capricious, clearly unlawful, or without sound basis in fact or law."¹⁵ Majority op. p. 14.

With respect to petitioner's knowledge, the majority contradicts respondent's finding that, when petitioner signed the 1995 return, she knew or had reason to know that Mr. Wiwi would not pay the tax for 1995, and that it was not reasonable for petitioner to believe that Mr. Wiwi would pay the tax. The majority finds: "Mr. Wiwi told petitioner * * * that he would pay the unpaid 1995 tax as provided in a proposed installment agreement that he submitted with their 1995 income tax return." Majority op. p. 4. In finding that petitioner reasonably believed that Mr. Wiwi would pay the tax owed, the majority states:

Mr. Wiwi concealed from petitioner until 1998 that he had failed to pay the unpaid 1995 tax. During those years petitioner did not know and had no reason to know of Mr. Wiwi's failure to pay that tax. This fit his pattern of deception; Mr. Wiwi had also concealed from her that he owed tax for 1993 and 1994. Respondent offered no contrary evidence on this factor. We conclude that this factor favors petitioner.

Majority op. p. 27 (emphasis added).

The time for testing petitioner's belief is when she signed the 1995 return. See majority op. p. 26. At that time, petitioner knew that Mr. Wiwi would not presently pay the unpaid tax. He told her that he would pay the tax pursuant to a "proposed" installment agreement that he was submitting with their joint return. The Commissioner, however, is not obligated to accept an installment agreement. See sec. 6159.

The majority finds nothing to establish petitioner's evaluations of the probabilities that: (1) The proposed installment agreement would be accepted or (2) Mr. Wiwi could immediately pay the unpaid tax if the proposed installment agreement were rejected. Indeed, the majority's failure to find that an installment agreement was accepted leads us to believe either that Mr. Wiwi did not actually submit the agreement or that respondent rejected it.¹⁶ More importantly, while we acknowledge that reasonable persons could draw different inferences from that portion of the factual record, we do not understand how the majority can conclude that respondent abused his discretion in finding that it was not reasonable for petitioner to believe that Mr. Wiwi would pay the unpaid tax at the time she signed the return.

The majority has failed to convince us that respondent's ultimate finding of fact --that petitioner was not entitled to equitable relief --was "arbitrary, capricious, clearly unlawful, or without sound basis in fact or law"; in other words, an abuse of discretion. See majority op. pp. 13-14.

We close by returning to our first point: The scope of our review of the Commissioner's denial of section 6015(f) relief should be limited to the administrative record, since the Tax Court is not exempt from the ordinary principles of administrative law that bind other courts reviewing agency action. Had the majority so limited the scope of its review, and had it then examined respondent's denial of relief to petitioner pursuant to a correct application of the abuse of discretion standard, to determine whether it was "arbitrary, clearly unlawful, or without sound basis in fact or law", we believe that respondent would have prevailed.

CHIECHI, J., dissenting: I agree with the majority opinion's rejection of respondent's argument that the APA controls the proceedings in the instant case. However, that conclusion does not require the majority opinion to hold, as it does, nor does it logically lead to holdings (1) that, in determining whether to grant relief under section 6015(f), the Court may consider matters raised at trial that petitioner did not raise with respondent's Appeals Office and (2) that petitioner is entitled to equitable relief under section 6015(f). I dissent from those holdings and disagree with the rationales that the majority opinion offers in support of them.

With respect to the majority opinion's holding that, in determining whether to grant relief under section 6015(f), the Court may consider matters raised at trial that petitioner did not raise with respondent's Appeals Office, nothing in section 6015 requires the Court, in exercising its jurisdiction under section 6015(e)(1)(A) "to determine the appropriate relief available to" petitioner under section 6015(f), to consider matters raised at trial that petitioner did not raise with respondent's Appeals Office. To consider such matters in determining whether respondent abused respondent's discretion in denying relief under section 6015(f) has the effect of vitiating the abuse-of-discretion standard that the Court held in Butler v. Commissioner [Dec. 53,869], 114 T.C. 276, 292 (2000), and its progeny is applicable where a taxpayer claims equitable relief under that section. If a taxpayer seeking relief under section 6015(f) does not raise a matter with, or present sufficient information to, respondent's Appeals Office and if, after reasonable inquiry, respondent's Appeals Office has been unable to ascertain such matter or sufficient information that would support such relief, it would be improper for the Court to permit the taxpayer to present such matter or such information at trial. Moreover, it would be illogical and inappropriate for the Court to conclude in such circumstances that respondent abused respondent's discretion in denying relief under section 6015(f).

With respect to the majority opinion's holding that petitioners are entitled to equitable relief under section 6015(f), the majority opinion purports to have applied an abuse-of-discretion standard in reaching that holding. I do not believe that the majority opinion has in fact applied such a standard in the instant case. Instead, the majority opinion, based upon evidence introduced at trial, has substituted the judgment of the majority for the judgment of respondent. In so doing, the majority opinion offers no explanations about why the conclusions of respondent's Appeals Office as to the effect of the presence or the absence of certain factors set forth in Rev. Proc. 2000-15, 2000-1 C.B. 447, constitute an abuse of discretion by respondent.

FOLEY, J., agrees with this dissenting opinion.

TC, [CCH Dec. 55,698], James M. Robinette v. Commissioner., Collection Due Process hearing: Revocation of offer-in-compromise: Abuse of discretion: Standard of review. -- (July 20, 2004)

The failure of an individual taxpayer to file a return for one of five years specifically required by the terms of an offer-in-compromise was not a material breach of the terms of the offer-in-compromise. Since the offer-in-compromise was not in default, the IRS Appeals officer in a Collection Due Process (CDP) hearing abused his discretion in voiding the offer-in-compromise and determining that it was proper to proceed with the collection of the taxpayer's pre-compromise tax liability. A de novo standard of review did not apply since the underlying tax liability was not at issue. Furthermore, neither the Administrative Procedure Act nor the Federal Rules of Evidence operated to limit the court's review to the documents and testimony that were part of the administrative record. --CCH.

Thomas L. Overbey and Laurie M. Boyd, for petitioner; Martha J. Weber, for respondent.

On Oct. 31, 1995, P and R entered into an offer-in-compromise. The terms of the offer-in-compromise required P to, among other things, timely file his 1995 through 1999 tax returns. On the morning of Oct. 15, 1999, the day P's 1998 return was due, P's accountant (A) prepared P's return. That afternoon, A drove to P's office to obtain P's signature on P's return. A returned to his office. Thereafter, A affixed postage to the envelope containing P's return using a private postage meter. A deposited the envelope containing P's return in a U.S. Postal Service mailbox in his office building.

R's records indicate that R received all of P's returns except for P's 1998 return. R declared P's offer-in-compromise in default. After a hearing in which P raised the issue of compliance with the terms of the offer-in-compromise, R issued a notice of determination in which R determined to proceed with collection of the unpaid tax liabilities.

Held: Pursuant to sec. 6330(c), I.R.C., abuse of discretion is the applicable standard of review.

Held, further, When reviewing R's determination for an abuse of discretion under sec. 6330, I.R.C., we may consider evidence presented at trial which was not included in the administrative record.

Held, further, R abused his discretion in determining to proceed with collection.

VASQUEZ, Judge: This case was commenced in response to a Notice of Determination Concerning Collection Action(s) Under Sections 6320¹ and/or 6330. The issue is whether respondent may proceed with collection of petitioner's 1983, 1984, 1985, 1986, 1987, 1988, 1989, 1990, and 1991 tax liabilities.



FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts, first supplemental stipulation of facts, second supplemental stipulation of facts, and the attached exhibits are incorporated herein by this reference. At the time he filed the petition, petitioner resided in Jonesboro, Arkansas.

Since approximately 1990, Douglas W. Coy has served as petitioner's accountant. Mr. Coy has prepared petitioner's tax returns for all the tax years in which he has represented petitioner.



Petitioner's Offer-in-Compromise

On October 31, 1995, petitioner and respondent entered into an offer-in-compromise. The offer-in-compromise related to income tax liabilities for 1983, 1984, 1985, 1986, 1987, 1988, 1989, 1990, and 1991, and trust fund recovery penalties for unpaid employment taxes for periods ending March 31, June 30, and September 30, 1988, June 30 and December 31, 1989, and March 31, June 30, and September 30, 1990. The offer-in-compromise was submitted on the basis of doubt as to collectibility. The amount of individual income tax and statutory additions compromised totaled $989,475.² Petitioner offered to pay $100,000 to compromise the outstanding liabilities and penalties.³ Petitioner paid $1,000 with the submission of the offer and the remaining $99,000 with borrowed funds within 60 days after acceptance of the offer.

Petitioner agreed to the following terms and conditions:

(d) I * * * will comply with all the provisions of the Internal Revenue Code related to filing my * * * returns * * * for five (5) years from the date IRS accepts the offer.

* * * * * * *

(j) I * * * understand that I * * * remain responsible for the full amount of the tax liability unless and until IRS accepts the offer in writing and I * * * have met all the terms and conditions of the offer. IRS won't remove the original amount of the tax liability from its records until I * * * have met all the terms and conditions of the offer.

* * * * * * *

(o) If I * * * fail to meet any of the terms and conditions of the offer, the offer is in default, and IRS may:

* * * * * * *

(iv) file suit or levy to collect the original amount of tax liability, without further notice of any kind.



Petitioner's 1998 Individual Income Tax Return

Petitioner received an extension to file his 1998 individual income tax return (petitioner's 1998 return) on or before October 15, 1999. On the morning of October 15, 1999, Mr. Coy received via facsimile petitioner's Schedule K-1, Shareholder's Share of Income, Credits, Deductions, etc., for Professional Acres Leasing Group from the accounting firm of Osborne & Osborne. Upon receipt of the Schedule K-1 on October 15, 1999, Mr. Coy completed petitioner's 1998 return. For 1998, petitioner was entitled to a refund of $3,300.

At approximately 3:45 to 4 p.m. on October 15, 1999, Mr. Coy left his office in Little Rock, Arkansas, en route by car to three other cities in Arkansas in order to review State and Federal income tax returns with four of his clients, including petitioner, and to obtain his clients' signatures on their returns. First, Mr. Coy drove to Mount Pleasant, Arkansas, to deliver the returns of Howard and Jane Lamb for review and signatures. After the Lambs signed their tax returns, Mr. Coy drove to Melbourne, Arkansas, to deliver the returns of David and Theresa Sharp for review and signatures. After the Sharps signed their tax returns, Mr. Coy delivered the returns of Fred Lamb, also in Melbourne, Arkansas, for review and signature. After Mr. Lamb signed his tax returns, Mr. Coy drove to Jonesboro, Arkansas, to deliver the returns of petitioner for review and signature.

Mr. Coy arrived at petitioner's office between 8:45 and 9 p.m. Petitioner signed the returns in the presence of Mr. Coy and Frances Robinette, petitioner's wife and office manager.

After the clients signed their tax returns, Mr. Coy took the signed returns from his clients so that he could mail them from his office in Little Rock, Arkansas.

Mr. Coy returned to his office in Little Rock, Arkansas, sometime after 11 p.m., but before midnight. Mr. Coy made a copy of the signature page of petitioner's 1998 return. Mr. Coy affixed postage to the envelope containing petitioner's 1998 return using a private postage meter. The postage from the private postage meter displayed a postmark of October 15, 1999. Before midnight, Mr. Coy placed the envelope containing petitioner's 1998 return in a U.S. Postal Service mailbox in the building where his office is located.

At this same time, Mr. Coy mailed the returns of Mr. Sharp. Mr. Sharp was not assessed late filing penalties or late payments by the Internal Revenue Service (IRS) with respect to his 1998 individual income tax return.



Petitioner's 1995, 1996, 1997, 1999, and 2000 Individual Income Tax Returns

Petitioner received extensions to file his 1995 individual income tax return on or before October 15, 1996. Petitioner's 1995 individual income tax return was prepared by Mr. Coy on October 15, 1996. For 1995, petitioner paid the $2,593 shown as owed on his return.

Petitioner received extensions to file his 1996 individual income tax return on or before October 15, 1997. Petitioner's 1996 individual income tax return was received by the IRS on October 20, 1997. For 1996, petitioner was entitled to a refund of $14,435.

Petitioner received extensions to file his 1997 individual income tax return on or before October 15, 1998. Petitioner's 1997 individual income tax return was prepared by Mr. Coy on October 14, 1998, and received by the IRS on October 19, 1998. For 1997, petitioner was entitled to a refund of $5,644.

Petitioner received extensions to file his 1999 individual income tax return on or before October 15, 2000. Petitioner's 1999 individual income tax return was prepared by Mr. Coy on October 15, 2000, and received by the IRS on October 19, 2000. For 1999, petitioner was entitled to a refund of $2,631.

Petitioner received extensions to file his 2000 individual income tax return on or before October 15, 2001. Petitioner's 2000 income tax return was received by the IRS on October 17, 2001.

Each of the aforementioned years, including 1998, on or about October 15, Mr. Coy, or a person from Mr. Coy's office, delivered to petitioner at petitioner's office his original individual income tax return, and petitioner would sign it.



IRS Collection Efforts

On February 21, 2000, the IRS sent petitioner a "Request for Your Tax Return" for 1998. Petitioner received this letter. On March 17, 2000, the IRS notified petitioner that it had received his required Statement of Annual Income for 1998 but needed a copy of his 1998 Form 1040, U.S. Individual Income Tax Return. On April 17, 2000, the IRS sent petitioner a letter stating: "Your Tax Return is Overdue --Contact us Immediately" for 1998. The letter also stated:

*** OFFER IN COMPROMISE ***

Our records indicate that we've accepted an offer in compromise from you. You agreed to file and pay all your federal taxes for the five (5) year period after we accepted this offer. If you don't file the requested delinquent return, we may reinstate the amount you owe that we previously compromised.

Petitioner forwarded to Mr. Coy by fax all notices from the IRS concerning his 1998 return and offer-in-compromise, as he was "scared to death" of these notices.

The Austin, Texas, Service Center monitored petitioner's offer-in-compromise. Revenue Officer Kathy Santino of the Oklahoma City, Oklahoma, office was assigned to examine whether petitioner's offer-in-compromise was in default. She examined petitioner's offer-in-compromise "as a courtesy to the Austin Service Center [because] they were overloaded in potentially-defaulted offers". Ms. Santino knew of the 5-year filing requirement, but she did not know what years were covered by petitioner's offer-in-compromise. In her courtesy investigation of petitioner's offer-in-compromise, she did not look at the transcripts for 1995, 1996, or 1997. She did not consider petitioner's pattern of filing his returns on or about October 15. Ms. Santino never spoke with petitioner or Mr. Coy.

On July 13, 2000, Ms. Santino sent petitioner a letter declaring petitioner's offer-in-compromise in default. The basis for the default was that the IRS had not received petitioner's Form 1040 for 1998.

On September 28, 2000, the IRS issued a Final Notice --Notice of Intent to Levy and Your Right to a Hearing.

On October 6, 2000, petitioner, through his authorized representative Mr. Coy, filed a Form 12153, Request for a Collection Due Process Hearing. Petitioner stated the basis for the appeal as: "We do not believe the taxpayer owes the amounts stated in the Notice of Intent to Levy and would like the opportunity to resolve these matters at a Collection Due Process Hearing."

On January 10, 2001, Appeals Officer Troy C. Talbott of the Oklahoma City, Oklahoma, office sent Mr. Coy a letter identifying the options available for resolution of petitioner's tax liability (such as full payment, installment agreement, offer-in-compromise, or determination that petitioner's account is currently not collectible) and asking for more details as to why petitioner did not owe the amount stated in the notice of intent to levy. Mr. Talbott also requested and reviewed the IRS administrative file related to the default of the offer-in-compromise. On January 24, 2001, Mr. Talbott looked at petitioner's transcript of account for 1998. Mr. Talbott's case activity record states: "Per research on IDRS, no record of 98 1040 being filed. * * * Per IRP information, TP had a filing requirement, but may have been due a refund." Mr. Talbott concluded that petitioner had defaulted on the offer-in-compromise.

On January 29, 2001, in a telephone section 6330 hearing (the hearing), Mr. Coy stated to Mr. Talbott that he mailed petitioner's 1998 return on October 15, 1999. Specifically, Mr. Coy told Mr. Talbott that he prepared petitioner's return, took the return to petitioner, obtained petitioner's signature, and mailed the return on October 15, 1999.

The only evidence Mr. Talbott would consider for proof of mailing was a certified mail or registered mail receipt. Mr. Talbott did not consider petitioner's pattern of filing returns on October 15, despite having looked at the transcripts for 1995, 1996, 1997, and 1999.

Mr. Talbott believed he had no authority to reinstate petitioner's offer-in-compromise. He believed only the National Office could reinstate the offer-in-compromise. He stated: "The National Office would still have to do the reinstatement by itself" and the "National Office would have the call". Mr. Talbott reviewed the Internal Revenue Manual. The manual was silent as to whether an Appeals officer has authority to reinstate an offer-in-compromise.

Mr. Coy sent Mr. Talbott a copy of petitioner's 1998 return. Mr. Talbott received the copy of petitioner's 1998 return on February 16, 2001. Mr. Talbott forwarded it to the Austin Service Center, where it was processed by the IRS as an original return. Petitioner's transcript of account for 1998 states "return filed and tax assessed" on April 2, 2001.

Petitioner never personally met with, or spoke to, Mr. Talbott.

The Appeals settlement memorandum prepared by Mr. Talbott concluded that the notice of intent to levy was appropriate. Mr. Talbott's evaluation concluded:

The Offer in Compromise was defaulted because the IRS did not have a record of the taxpayer filing Form 1040 for 1998. The taxpayer's representative claimed to have timely mailed the tax return for 1998 on October 15, 1999, but the tax return was not sent by certified mail and the representative does not have any evidence to prove that the return was mailed. The taxpayer did not respond to the IRS's requests to file the tax return, which resulted in the offer being defaulted.

On August 21, 2001, the IRS issued to petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 determining to proceed with collection. Petitioner timely filed a petition with the Court.



OPINION



I. Section 6330

Section 6331(a) provides that if any person liable to pay any tax neglects or refuses to do so within 10 days after notice and demand, the Secretary can collect such tax by levy upon property belonging to such person. Pursuant to section 6331(d), the Secretary is required to give the taxpayer notice of his intent to levy and within that notice must describe the administrative review available to the taxpayer, before proceeding with the levy. See also sec. 6330(a).

Section 6330(b) describes the administrative review process, providing that a taxpayer can request an Appeals hearing with regard to a levy notice. At the Appeals hearing, the taxpayer may raise certain matters set forth in section 6330(c)(2), which provides, in pertinent part:

SEC. 6330(c). Matters Considered at Hearing. --In the case of any hearing conducted under this section --

* * * * * * *

(2) Issues at hearing. --

(A) In general. --The person may raise at the hearing any relevant issue relating to the unpaid tax or proposed levy, including --

(i) appropriate spousal defenses;

(ii) challenges to the appropriateness of collection actions; and

(iii) offers of collection alternatives, which may include the posting of a bond, the substitution of other assets, an installment agreement, or an offer-in-compromise.

(B) Underlying liability. --The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.

Pursuant to section 6330(c)(2)(A), a taxpayer may raise at the section 6330 hearing any relevant issue with regard to the Commissioner's collection activities, including spousal defenses, challenges to the appropriateness of the Commissioner's intended collection action, and alternative means of collection. Sego v. Commissioner [Dec. 53,938], 114 T.C. 604, 609 (2000); Goza v. Commissioner [Dec. 53,803], 114 T.C. 176, 180 (2000).

Pursuant to section 6330(d)(1), within 30 days of the issuance of the notice of determination, the taxpayer may appeal that determination to this Court if we have jurisdiction over the underlying tax liability. Van Es v. Commissioner [Dec. 54,080], 115 T.C. 324, 328 (2000).



II. Standard of Review

The parties dispute the standard of review to be applied in this case. Although section 6330 does not prescribe the standard of review that the Court is to apply in reviewing the Commissioner's administrative determinations, we have stated that where the validity of the underlying tax liability is properly at issue, the Court will review the matter de novo. Where the validity of the underlying tax liability is not properly at issue, however, the Court will review the Commissioner's administrative determination for abuse of discretion. Sego v. Commissioner, supra at 610; Goza v. Commissioner, supra at 181.

Generally, under section 6330(c)(2)(B), issues that are reviewed de novo include those such as a redetermination of the tax on which the Commissioner based the assessment, provided that the taxpayer did not have an opportunity to seek such a redetermination before assessment. See, e.g., Landry v. Commissioner [Dec. 54,224], 116 T.C. 60, 62 (2001) ("Because the validity of the underlying tax liability, i.e., the amount unpaid after application of credits to which petitioner is entitled, is properly at issue, we review respondent's determination de novo."). Whether the Commissioner's assessment was made within the limitation period also constitutes a challenge to the underlying tax liability. Hoffman v. Commissioner [Dec. 54,882], 119 T.C. 140, 145 (2002).

Under an abuse of discretion standard, "we do not interfere unless the Commissioner's determination is arbitrary, capricious, clearly unlawful, or without sound basis in fact or law." Ewing v. Commissioner [Dec. 55,519], 122 T.C. 32, 39 (2004); see also Woodral v. Commissioner [Dec. 53,206], 112 T.C. 19, 23 (1999). Review for abuse of discretion includes "any relevant issue relating to the unpaid tax or the proposed levy", including "challenges to the appropriateness of collection actions" and "offers of collection alternatives" such as offers in compromise. Sec. 6330(c)(2)(A). Questions about the appropriateness of the collection action include whether it is proper for the Commissioner to proceed with the collection action as determined in the notice of determination, and whether the type and/or method of collection chosen by the Commissioner is appropriate. See, e.g., Swanson v. Commissioner [Dec. 55,280], 121 T.C. 111, 119 (2003) (challenge to appropriateness of collection reviewed for abuse of discretion).

Abuse of discretion is the proper standard of review in this case. The introductory language of section 6330(c)(2)(A) encompasses the situation at bar. Mr. Talbott's conclusion that respondent had acted properly in declaring petitioner's offer-in-compromise in default and that issuing a notice of determination was proper is a "relevant issue relating to the unpaid tax or the proposed levy". Further, offers in compromise are a specifically mentioned collection alternative. Sec. 6330(c)(2)(A)(iii). Additionally, whether respondent may proceed with collection of petitioner's unpaid liability is a challenge to the appropriateness of collection. See sec. 6330(c)(2)(A)(ii); Swanson v. Commissioner, supra.

Petitioner argues that a de novo standard of review is appropriate because he "put forth the argument of the validity of the underlying taxes --i.e. the petitioner does not owe the tax, nor the additions to the tax, since the tax was previously discharged by an Offer in Compromise which was improperly defaulted by the respondent". We view petitioner's argument as a challenge to the appropriateness of collection, rather than as a challenge to the underlying tax liability. See Swanson v. Commissioner, supra.



III. Evidentiary Issue

A. The Parties' Contentions

At trial, respondent moved to strike "all documents and testimony not part of the administrative record on the ground that the trial record should be limited to the agency administrative record." Documents and testimony not part of the administrative record include: (1) Petitioner's testimony; (2) petitioner's tax returns for 1995, 1996, 1997, 1999, 2000, and other stipulated facts relating to the date these returns were received by the IRS; (3) Mr. Coy's private postage meter log, cellular telephone records, credit card records, and daily calendar for October 15, 1999; (4) Frances Robinette's testimony; and (5) all statements made by Mr. Coy at trial that he did not make to Mr. Talbott. Respondent contends that this evidence is not relevant because it is not part of the administrative record.

Petitioner contends that this evidence is relevant. Petitioner argues that on account of the informal nature of section 6330 hearings, as there is no formal record, it is impossible to determine the actual statements made at the hearing. Further, petitioner argues that the tax returns for 1995, 1996, 1997, 1999, and 2000 show his pattern and practice of filing returns on or about October 15.

The Court reserved decision on this issue. For the following reasons, we hold that, when reviewing for abuse of discretion under section 6330(d), we are not limited by the Administrative Procedure Act (APA) and our review is not limited to the administrative record. The evidence in this case pertains to issues raised at the hearing. The evidence in this case is relevant and admissible.

B. Applicability of the APA Judicial Review Provisions to Tax Court Proceedings Commenced Under Section 6330(d)

1. Established Practice and Procedure

Since the enactment of section 6330, the Court has applied our traditional de novo procedures in deciding whether an Appeals officer abused his or her discretion in determining to proceed with collection. At trials under section 6330 when reviewing for abuse of discretion, the Court has received into evidence testimony and exhibits that were not included in the administrative record. See, e.g., Wells v. Commissioner [Dec. 55,257(M)], T.C. Memo. 2003-234 (taxpayer's testimony admissible at trial when he was represented by counsel and taxpayer was not present at hearing); Maloney v. Commissioner [Dec. 55,158(M)], T.C. Memo. 2003-143 (taxpayers presented numerous letters sent to Commissioner asking him to recalculate their FICA taxes as evidence of claimed overpayments), affd. 94 Fed. Appx. 969 (3d Cir. 2004); Black v. Commissioner [Dec. 54,963(M)], T.C. Memo. 2002-307 (extensive testimony as to taxpayer's physical limitations due to diabetes and testimony of taxpayer's accountant considered when, at hearing, taxpayers raised issue of illness from diabetes and presented Appeals officer with medical files), affd. 94 Fed. Appx. 968 (3d Cir. 2004); Gougler v. Commissioner [Dec. 54,824(M)], T.C. Memo. 2002-185 (Court considered two documents at trial that were not presented to Appeals officer); Holliday v. Commissioner [Dec. 54,678(M)], T.C. Memo. 2002-67 (Commissioner permitted to present documents, records, and testimony at trial that was not part of administrative record), affd. [2003-1 USTC ¶50,358] 57 Fed. Appx. 774 (9th Cir. 2003) ("Holliday's contention that the Tax Court erred by admitting into evidence documents that were not produced at the * * * [section 6330] hearing fails because the `record review' provisions of the Administrative Procedure Act * * * do not apply to the Tax Court." (Emphasis added.)), cert. denied 124 S. Ct. 1038 (2004).⁴

2. The Court's Specific Statutory Review Provisions

The APA has never governed proceedings in the Court (or in the Board of Tax Appeals). Ewing v. Commissioner [Dec. 55,519], 122 T.C. at 50 (Thornton, J., concurring). It is well established that "The Tax Court, rather than being a `reviewing court' within the meaning of Sec. 10(e) [of the APA] reviewing the `record', is a court in which the facts are triable de novo". O'Dwyer v. Commissioner [59-1 USTC ¶9441], 266 F.2d 575, 580 (4th Cir. 1959), affg. [Dec. 22,434] 28 T.C. 698 (1957). The "Tax Court is not subject to the Administrative Procedure Act." Id. In Nappi v. Commissioner [Dec. 31,384], 58 T.C. 282, 284 (1972), we reasoned that the APA provisions "apply to an `agency' of the Government of the United States, but specifically exclude `the courts of the United States.' * * * the United States Tax Court is established as a court of record under article I of the Constitution of the United States. Being a court of the United States, it is excluded from the provisions of the * * * [APA]."

Although section 6330 postdates the APA, the APA judicial review provisions are not applicable. The APA does not "limit or repeal additional requirements imposed by statute or otherwise recognized by law." 5 U.S.C. sec. 559 (2000). The Court's de novo procedures for reviewing IRS functions were well established and "recognized by law" at the time of the APA's enactment. Ewing v. Commissioner, supra at 52 (Thornton, J., concurring); see also Phillips v. Commissioner [2 USTC ¶743], 283 U.S. 589, 598, 600 (1931); Blair v. Oesterlein Mach. Co. [1927 CCH ¶7053], 17 F.2d 663, 665 (D.C. Cir. 1927); Barry v. Commissioner [Dec. 68], 1 B.T.A. 156, 157 (1924). The Court's de novo procedures provide a stricter scope of review of the Commissioner's determinations than would be obtained under APA judicial review procedures. Ewing v. Commissioner, supra at 52-53 (Thornton, J., concurring).

The APA does not supersede specific statutory provisions for judicial review, as it is a statute of general application. 5 U.S.C. secs. 703, 704 (2000); Ewing v. Commissioner, supra at 50 (Thornton, J., concurring). "The legislative history of APA section 703 makes clear that where there is a special statutory review proceeding relevant to the subject matter, that special statutory review `shall not be disturbed'." Ewing v. Commissioner, supra at 50 (Thornton, J., concurring); see also S. Comm. on the Judiciary, 79th Cong., Administrative Procedure Act (Comm. Print 1945), reprinted in Administrative Procedure Act Legislative History, 1944-46, at 11, 37 (1946); see also H. Rept. 1980, 79th Cong., 2d Sess. (1946), reprinted in the Administrative Procedure Act Legislative History, 1944-46, at 233, 276 (1946). "When Congress enacted the APA to provide a general authorization for review of agency action in the district courts, it did not intend that general grant of jurisdiction to duplicate the previously established special statutory procedures relating to specific agencies." Bowen v. Massachusetts, 487 U.S. 879, 903 (1988).

The Internal Revenue Code has long provided a specific statutory framework for reviewing determinations of the Commissioner. Section 6330 is part and parcel of this statutory framework. The Court's de novo review procedures emanate from this framework. The APA judicial review procedures do not supplant the Court's longstanding de novo review procedures. Thus, the Court's de novo procedures are not limited by the APA.

3. Section 6330 Hearings Are Not Formal Adjudications

Section 6330 hearings do not take the form of the formal adjudicative hearings under the APA. Indeed, the Commissioner's regulations describe the hearing as informal and not subject to the APA:

Q-D6. How are * * * [section 6330] hearings conducted?

A-D6. The formal hearing procedures required under the Administrative Procedure Act, 5 U.S.C. 551 et seq., do not apply to * * * [section 6330] hearings. * * * [Section 6330] hearings are much like Collection Appeal Program (CAP) hearings in that they are informal in nature and do not require the Appeals officer or employee and the taxpayer, or the taxpayer's representative, to hold a face-to-face meeting. A * * * [section 6330] hearing may, but is not required to, consist of a face-to-face meeting, one or more written or oral communications between an Appeals officer or employee and the taxpayer or the taxpayer's representative, or some combination thereof. A transcript or recording of any face-to-face meeting or conversation between an Appeals officer or employee and the taxpayer or taxpayer's representative is not required. The taxpayer or the taxpayer's representative does not have the right to subpoena and examine witnesses at a * * * [section 6330] hearing. [Sec. 301.6330-1(d)(2), Proced. & Admin. Regs.]

The Commissioner vigorously litigated, and we agreed, that hearings are informal. In Davis v. Commissioner [Dec. 53,969], 115 T.C. 35 (2000), we held that taxpayers had no right to subpoena witnesses to appear at a hearing. We stated:

When Congress enacted section 6330 and required that taxpayers be given an opportunity to seek a pre-levy hearing with Appeals, Congress was fully aware of the existing nature and function of Appeals. Nothing in section 6330 or the legislative history suggests that Congress intended to alter the nature of an Appeals hearing so as to compel the attendance or examination of witnesses. When it enacted section 6330, Congress did not provide either Appeals or taxpayers with statutory authority to subpoena witnesses. The references in section 6330 to a hearing by Appeals indicate that Congress contemplated the type of informal administrative Appeals hearing that has been historically conducted by Appeals and prescribed by section 601.106(c), Statement of Procedural Rules. The nature of the administrative Appeals process does not include the taking of testimony under oath or the compulsory attendance of witnesses. * * * [Id. at 41-42; fn. ref. omitted; emphasis added.]

In Katz v. Commissioner [Dec. 54,081], 115 T.C. 329, 337 (2000), we held that the Appeals officer may conduct the hearing by telephone. In Nestor v. Commissioner [Dec. 54,655], 118 T.C. 162, 166-167 (2002), we held that the IRS was not required to provide assessment records to the taxpayer at the hearing. In some instances, we have affirmed the Appeals officer's determination when no hearing was conducted. See Lunsford v. Commissioner [Dec. 54,553], 117 T.C. 183, 189 (2001). In Keene v. Commissioner [Dec. 55,213], 121 T.C. 8 (2003), we held that while the IRS is not required to record the hearing, the taxpayer may make an audio record.

The "administrative record" compiled at the hearing is quite limited. It is nowhere near as comprehensive as the record required to be compiled at a formal APA hearing. See 5 U.S.C. sec. 556(e) ("The transcript of testimony and exhibits, together with all papers and requests filed in the proceeding, constitutes the exclusive record for decision in accordance with * * * [5 U.S.C. section 557]"). Section 6330 hearings were not intended to provide a detailed factual record for judicial review. Rather, they allow for the taxpayer to informally raise matters relevant to the collection actions at hand, such as spousal defenses, propriety of IRS collection activities, and alternatives to collection actions proposed by the IRS. See sec. 6330(c)(2)(A).

4. Legislative History

Nothing in the legislative history of section 6330 or 6320 indicates that the APA applies or that the Court's review is limited to the administrative record. Congress was well aware when it enacted section 6330 that the Court is a trial court which has historically resolved cases by taking evidence and has never been governed by the APA. Section 6330 expanded the Court's jurisdiction. The conference agreement states: "The determination of the appeals officer may be appealed to the Tax Court or, where appropriate, the Federal district court." H. Conf. Rept. 105-559, at 266 (1998), 1998-3 C.B. 747, 1020. The report specifies that where "the validity of the tax liability is not properly part of the appeal, the taxpayer may challenge the determination of the appeals officer for abuse of discretion." Id. Reference to the APA or the administrative record, however, is absent.

5. Other Instances Where the Court Reviews for Abuse of Discretion

"The mere fact that judicial review is for abuse of discretion * * * does not trigger application of the APA record rule or preclude this Court from conducting a de novo trial. * * * [This] Court has a long tradition of providing trials when reviewing the Commissioner's determinations under an abuse of discretion standard." Ewing v. Commissioner [Dec. 55,519], 122 T.C. at 53 (Thornton, J., concurring). In Ewing, we held that when reviewing the Commissioner's determination for an abuse of discretion under section 6015, we may consider evidence presented at trial which was not included in the administrative record. Id. at 44. Our review of section 6330 cases for abuse of discretion is similar to our review of section 6015(f) cases --which are reviewed for an abuse of discretion. Id. at 39; Sego v. Commissioner [Dec. 53,938], 114 T.C. at 610; Goza v. Commissioner [Dec. 53,803], 114 T.C. at 181; Cheshire v. Commissioner [Dec. 54,028], 115 T.C. 183, 198 (2000), affd. [2002-1 USTC ¶50,222] 282 F.3d 326 (5th Cir. 2002); Butler v. Commissioner [Dec. 53,869], 114 T.C. 276, 293 (2000).

The APA does not apply to challenges of the Commissioner's denials of requests to abate interest under section 6404, which are reviewed for abuse of discretion. See Beall v. United States [2003-2 USTC ¶50,551], 336 F.3d 419, 427 n.9 (5th Cir. 2003) ("review under the APA is accordingly available only where `there is no other adequate remedy in a court' "). The Court has consistently conducted trials on the issue of whether the Commissioner's denial of a request to abate interest under section 6404 was an abuse of discretion. See, e.g., Goettee v. Commissioner [Dec. 55,049(M)], T.C. Memo. 2003-43; Jacobs v. Commissioner [Dec. 53,840(M)], T.C. Memo. 2000-123.

Additionally, other cases the Court has decided under the abuse of discretion standard include waiver of additions to tax, Krause v. Commissioner [Dec. 48,383], 99 T.C. 132, 179 (1992), affd. sub nom. Hildebrand v. Commissioner [94-2 USTC ¶50,305], 28 F.3d 1024 (10th Cir. 1994); reallocation of income or deduction under section 482, Bausch & Lomb v. Commissioner [91-1 USTC ¶50,244], 933 F.2d 1084, 1088 (2d Cir. 1991), affg. [Dec. 45,547] 92 T.C. 525 (1989); declaratory judgment, Fujinon Optical, Inc. v. Commissioner [Dec. 37,797], 76 T.C. 499, 506-507 (1981); tax-exempt status, Lowry Hosp. Association v. Commissioner [Dec. 33,971], 66 T.C. 850 (1976); and change of accounting method, Thor Power Tool Co. v. Commissioner [79-1 USTC ¶9139], 439 U.S. 522, 532-533 (1979); Bank One Corp. v. Commissioner [Dec. 55,138], 120 T.C. 174 (2003). In none of these types of cases have we held that the APA applies or that we are limited to the administrative record.

For the reasons set forth supra, we conclude that our review under section 6330(d) of an Appeals officer's determination is not limited to the administrative record.

C. Whether the Evidence Presented at Trial Relates to Issues Raised at the Hearing

Respondent, citing Magana v. Commissioner [Dec. 54,765], 118 T.C. 488, 493 (2002), contends that "only `arguments, issues and other matter' presented to Appeals are relevant to the determination whether an appeals officer abused his or her discretion." Further, respondent argues that "judicial review of respondent's exercise of discretion in this case should be based solely on the information presented to, and considered by, the appeals officer." We disagree with respondent's interpretation of Magana.

In a review for abuse of discretion of the Commissioner's determination under section 6330(d)(1), "generally we consider only arguments, issues, and other matter that were raised at the collection hearing or otherwise brought to the attention of the Appeals Office." Magana v. Commissioner, supra at 493 (emphasis added). "We did not say in Magana that the taxpayer would be limited to the administrative record or that the taxpayer may not offer evidence in the proceeding in this Court." Ewing v. Commissioner, supra at 41.

In Magana, the issue for decision on the Commissioner's motion for summary judgment was whether the Court "shall consider a new issue that was not raised by the petitioner at his collection hearing with respondent's Appeals Office." Magana v. Commissioner, supra at 489 (emphasis added). In the taxpayer's request for a collection hearing and at the hearing, the only issue raised was whether the period of limitations had expired under section 6502. The taxpayer did not raise the issue of hardship. See id. at 490, 491.

In his petition to the Court, the taxpayer "for the first time, raised hardship as an objection to respondent's lien filings (namely, petitioner's physical illness and the resulting cloud on title to petitioner's residence, petitioner's only significant asset)." Id. At the oral argument on the Commissioner's motion for summary judgment, the taxpayer's counsel "acknowledged that * * * [the taxpayer's] ill health was not recent but had extended over 20 years." Id. at 492. In response to the Court's questioning, the taxpayer's counsel "acknowledged that he had had an opportunity at the collection hearing to raise hardship but that he had chosen not to do so." Id.

In the discussion section of the Opinion, under the heading "New Issue", we reasoned:

In this case, because petitioner's alleged longstanding illness and hardship were not raised as an issue and were not otherwise brought to respondent's attention in connection with petitioner's collection hearing with respondent's Appeals Office, petitioner may not now raise hardship for the first time before this Court. * * * [Id. at 493-494.]

The cases cited for support of the holding in Magana were issue preclusion cases. See, e.g., McCoy Enters., Inc. v. Commissioner [95-2 USTC ¶50,332], 58 F.3d 557, 563 (10th Cir. 1995) (Court does not have to rule on an issue when taxpayer "cannot point to a single time at which it presented the * * * issue to the Commissioner to be ruled upon"), affg. [Dec. 48,672(M)] T.C. Memo. 1992-693; Miller v. Commissioner [Dec. 54,164], 115 T.C. 582, 589 n.2 (2000) ("we would not consider petitioner's alternative request * * * because the record does not establish that he raised that issue at his Appeals Office hearing" (Emphasis added.)), affd.[2001-2 USTC ¶50,713] 21 Fed. Appx. 160 (4th Cir. 2001); Inner Office, Inc. v. United States, No. 3:00-CV-2576-L, ("Plaintiff has produced no evidence that the IRS Hearing Officer's determination is legally incorrect or that the IRS Hearing Officer abused his discretion. * * * In seeking district court review of a Notice of Determination, the taxpayer can only ask the court to consider an issue that was raised in the taxpayer's * * * [section 6330] hearing." (Emphasis added.)), adopted on this issue 89 AFTR 2d 2002-1311, 2003-1 USTC par. 50,185 (N.D. Tex. 2002).

Unlike the taxpayer in Magana, petitioner is not raising a new issue in his petition. At the hearing, petitioner raised the issue of compliance with the terms of the offer-in-compromise. Mr. Coy asked Mr. Talbott to reinstate the offer-in-compromise. Mr. Coy brought to the attention of Mr. Talbott the fact that he mailed petitioner's 1998 return on October 15, 1999. Mr. Talbott's notes in his case activity record indicate that Mr. Coy raised the issue and brought to his attention that Mr. Coy mailed the return on October 15, 1999. Shortly after the hearing, Mr. Coy wrote Mr. Talbott stating: "As I had mentioned, I prepared the return for [petitioner], obtained his signature, and mailed the return to the Service Center on the evening of October 15, 1999." This was brought to the attention of Mr. Talbott.

Accordingly, we may consider evidence regarding this issue at trial, if it is otherwise admissible under the Federal Rules of Evidence.

D. Whether the Evidence Is Admissible Under the Federal Rules of Evidence

While we are not limited by the APA's judicial review provisions in our proceedings arising under section 6330(d), our review of materials not included in the Commissioner's administrative record is subject to the Federal Rules of Evidence. Section 7453 and Rule 143(a) provide that the Court's proceedings are to be conducted in accordance with the rules of evidence applicable in trials without a jury in the U.S. District Court for the District of Columbia. Consistent with section 7453 and Rule 143(a), we must decide whether evidence in this case which was not included in the administrative record is admissible under the Federal Rules of Evidence in our proceedings arising under section 6330(d).

Respondent moved to strike the evidence on the ground of relevancy. "All relevant evidence is admissible. * * * Evidence which is not relevant is not admissible." Fed. R. Evid. 402. Relevant evidence "means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence." Fed. R. Evid. 401. Therefore, we must determine whether the evidence presented at trial that respondent characterizes as "outside of the administrative record" has any tendency to make the existence of any fact that is of consequence in determining whether the Appeals officer abused his discretion more probable or less probable than it would be without the evidence. We find that the evidence does have a tendency to show the Appeals officer abused his discretion in determining to proceed with collection.

Petitioner's testimony is relevant. Petitioner was not present at the hearing. Petitioner's testimony shows that he signed the 1998 return on October 15, 1999. Petitioner's testimony shows that he had filed his returns for 1995, 1996, 1997, 1999, and 2000 on or about October 15 in the same pattern and practice as he did for 1998. Petitioner's testimony shows that he acted in good faith in complying with the terms of the offer-in-compromise.

Petitioner's tax returns for 1995, 1996, 1997, 1999, and 2000 are relevant. They show a pattern and practice of petitioner's filing his returns on or about October 15. They show petitioner generally received refunds for the period in issue. While the Appeals officer reviewed petitioner's transcripts for 1995, 1996, 1997, and 1999, he did not consider petitioner's pattern and practice of timely filing. After reviewing petitioner's transcripts, the Appeals officer concluded petitioner was probably entitled to a refund for 1998. These facts, however, were of no consequence to him when he reviewed whether the offer-in-compromise should have been defaulted.

Mr. Coy's private postage meter log, cellular telephone records, credit card records, and daily calendar for October 15, 1999, are relevant. They corroborate Mr. Coy's statements regarding mailing. The Appeals officer, however, refused to consider any evidence of mailing, other than a certified or registered mail receipt.

Frances Robinette's testimony is relevant. Under Davis v. Commissioner [Dec. 53,969], 115 T.C. 35 (2000), taxpayers are not entitled to call witnesses at the hearing. Mrs. Robinette's testimony corroborates petitioner's good faith and compliance with the terms of the offer-in-compromise.

Mr. Coy's statements at trial that he did not make to Mr. Talbott are relevant. Mr. Coy's testimony indicates the Appeals officer's unwillingness to consider in depth certain issues that he raised at the hearing.

Accordingly, respondent's motion to strike will be denied.



IV. Whether Respondent Abused His Discretion

Where, as here, the validity of the underlying tax liability is not at issue, we review the determination for abuse of discretion. Sego v. Commissioner [Dec. 53,938], 114 T.C. at 610; Goza v. Commissioner [Dec. 53,803], 114 T.C. at 181-182. In doing so, we review whether the Appeals officer's determination was arbitrary, capricious, or without sound basis in fact or law. Woodral v. Commissioner [Dec. 53,206], 112 T.C. at 23. Having observed the appearance and demeanor of the witnesses testifying for petitioner at trial, including petitioner, we find them to be honest, forthright, and credible.

Taking into account all the facts and circumstances, we conclude that on the basis of the record before us, respondent abused his discretion in determining to proceed with collection.

A. Whether Petitioner's Return Was Timely Filed

We note at the outset that contrary to petitioner's contentions, we find that petitioner's return was not timely filed. Filing, generally, "is not complete until the document is delivered and received". United States v. Lombardo, 241 U.S. 73, 76 (1916). Section 7502 provides an exception to this rule. Section 7502(a)(1) provides that, in certain circumstances, a timely mailed document will be treated as though it were timely filed. Section 7502(a)(2) provides that the timely mailing/timely filing rule applies if the postmark date on an envelope falls within the prescribed period or on or before the prescribed date.

In the case of postmarks not made by the U.S. Postal Service, the timely mailing/timely filing rule applies "only if and to the extent provided by regulations prescribed by the Secretary". Sec. 7502(b). The postmark in this case was made by a private postage meter. Section 301.7502-1(c)(1)(iii)(b), Proced. & Admin. Regs., provides:

If the postmark on the envelope or wrapper is made other than by the United States Post Office, (1) the postmark so made must bear a date on or before the last date, or the last day of the period, prescribed for filing the document, and (2) the document must be received by the agency, officer, or office with which it is required to be filed not later than the time when a document contained in an envelope or other appropriate wrapper which is properly addressed and mailed and sent by the same class of mail would ordinarily be received if it were postmarked at the same point of origin by the United States Post Office on the last date, or the last day of the period, prescribed for filing the document. However, in case the document is received after the time when a document so mailed and so postmarked by the United States Post Office would ordinarily be received, such document will be treated as having been received at the time when a document so mailed and so postmarked would ordinarily be received, if the person who is required to file the document establishes (i) that it was actually deposited in the mail before the last collection of the mail from the place of deposit which was postmarked (except for the metered mail) by the United States Post Office on or before the last date, or the last day of the period, prescribed for filing the document, (ii) that the delay in receiving the document was due to a delay in the transmission of the mail, and (iii) the cause of such delay. If the envelope has a postmark made by the United States Post Office in addition to the postmark not so made, the postmark which was not made by the United States Post Office shall be disregarded, and whether the envelope was mailed in accordance with this subdivision shall be determined solely by applying the rule of (a) of this subdivision. [Emphasis added.]

Mr. Coy testified that he placed petitioner's return in the mail between 11 p.m. and midnight. Petitioner presented no evidence that this was before the last collection for that mailbox. Petitioner presented no evidence as to a delay in the transmission of the mail. Petitioner presented no evidence as to the cause of a delay. Petitioner has failed to meet the requirements of the regulation. See Fishman v. Commissioner [70-1 USTC ¶9166], 420 F.2d 491, 492 (2d Cir. 1970), affg. [Dec. 29,474] 51 T.C. 869 (1969); cf. Jones v. Commissioner [Dec. 52,721(M)], T.C. Memo. 1998-197 (the taxpayer met requirements of non-U.S.-postmark regulation when evidence established, in part, that he deposited the envelope in the mail before the last collection).

Petitioner argues that Estate of Wood v. Commissioner [90-2 USTC ¶50,488; 90-2 USTC ¶60,031], 909 F.2d 1155 (8th Cir. 1990), affg. [Dec. 45,604] 92 T.C. 793 (1989), and not the regulation, controls this issue. In Estate of Wood, the Court of Appeals for the Eighth Circuit, the court to which an appeal of this case would lie, discussed section 7502 in the situation where the taxpayer's return was not received by the IRS. Petitioner's reliance on Estate of Wood is misplaced. The presumption of delivery discussed in Estate of Wood is raised only when a timely mailing occurs. As petitioner's return was not timely mailed, the presumption of delivery discussed in Estate of Wood has not been raised.

On the basis of the foregoing, we hold that petitioner has not proven that he filed his return on October 15, 1999. Mr. Coy sent Mr. Talbott a copy of petitioner's 1998 return. On February 16, 2001, Mr. Talbott received the copy of petitioner's 1998 return, which he forwarded to the Austin Service Center and which was then processed by the IRS as an original return. Petitioner's transcript of account for 1998 states: "return filed and tax assessed" on April 2, 2001. Thus, petitioner's return was late filed.

B. Whether Petitioner Materially Breached the Offer-in-Compromise

Despite the late filing of petitioner's return, under the facts and circumstances of this case, respondent abused his discretion in determining to proceed with collection. The Appeals officer acted arbitrarily and without sound basis in law and had a closed mind to the arguments presented on petitioner's behalf. He failed to consider the facts and circumstances of this case. He determined to proceed with collection even though the breach in the contract was not material and under contract law the contract remained in effect.

1. Jurisdiction To Consider Petitioner's Offer-in-Compromise

Respondent contends that the Court has no jurisdiction to determine whether petitioner's offer-in-compromise was properly terminated. Respondent contends that only the Court of Federal Claims or a U.S. District Court may review this determination. We disagree.

In Roberts v. United States [2001-1 USTC ¶50,306], 242 F.3d 1065 (Fed. Cir. 2001), the Court of Appeals for the Federal Circuit reversed and remanded the order of the U.S. District Court for the Eastern District of Missouri transferring the case to the Court of Federal Claims for lack of jurisdiction. The Court of Appeals held that the U.S. District Court did have jurisdiction over the taxpayer's claim for refund, even though the tax liability resulted from an offer-in-compromise that the IRS had defaulted. The Court of Appeals reasoned:

Roberts is not requesting, for example, damages from the government for breach of contract, which would constitute a claim based purely upon a government contract. Certainly, the district court does not have jurisdiction over additional contract claims Roberts may wish to assert against the government under the terms of the OIC * * *.

Instead, Roberts has paid taxes that he alleges were illegally or erroneously collected. Tax cases heard in the district courts often involve offers in compromise * * *. The fact that the alleged collection error stems from the cancellation of Roberts's OIC contract with the IRS does not negate the fact that the monies at issue were paid pursuant to the internal-revenue laws. [Id. at 1069.]

The Court of Appeals found that the taxpayer had satisfied the jurisdictional requirements for a tax refund suit. Thus, the U.S. District Court could review whether the taxpayer's offer-in-compromise had been properly defaulted. See id. ⁵

In this case, petitioner is not asserting a cause of action under contract law. See id. at 1068-1069. Petitioner seeks a finding from the Court that respondent abused his discretion in determining to proceed with collection, which is within our jurisdiction under section 6330. Respondent's determination to proceed with collection arises from defaulting petitioner's offer-in-compromise. Whether the offer-in-compromise was properly defaulted is a relevant issue relating to the unpaid tax or proposed levy. Sec. 6330(c)(2)(A). Respondent issued petitioner a notice of intent to levy on the basis of petitioner's unpaid tax liability.

2. Whether the Breach of the Offer-in-Compromise Was Material

a. Applicable Law

"An accepted offer in compromise is properly analyzed as a contract between the parties." Dutton v. Commissioner [Dec. 55,542], 122 T.C. 133, 138 (2004). Offers in compromise are governed by "general principles of contract law." Id. "If the plaintiff's breach is material and sufficiently serious, the defendant's obligation to perform may be discharged. * * * Not so, however, if the plaintiff's breach is comparatively minor." TXO Prod. Corp. v. Page Farms, Inc., 698 S.W.2d 791, 793 (Ark. 1985).

In determining whether a failure to perform is material, the following five circumstances are significant:

In determining whether a failure to render or to offer performance is material, the following circumstances are significant:

(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;

(b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;

(c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;

(d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances;

(e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing. [1 Restatement, Contracts 2d, sec. 241 (1981).]

Arkansas law adopts this analysis. See TXO Prod. Corp. v. Page Farms, Inc., supra; see also DHC Resort, LLC v. Razorback Entertainment Corp., 329 F.3d 974, 976 (8th Cir. 2003) (citing TXO Prod. Corp. v. Page Farms, Inc., supra, and section 241 of 1 Restatement, Contracts 2d when applying Arkansas law). The standard of materiality "is to be applied in the light of the facts of each case in such a way as to further the purpose of securing for each party his expectation of an exchange of performances." 1 Restatement, supra, sec. 241, comment a.

Cases in which courts have found offers in compromise materially breached, and thus in default, generally involve taxpayers who either fail to make payments agreed to in the offer-in-compromise to pay off the amount compromised, or fail to pay taxes owed during the 5-year period after the offer has been accepted. See United States v. Feinberg [67-1 USTC ¶9176], 372 F.2d 352, 356 (3d Cir. 1965) (decedent's installment payments of less than the amount due and estate's complete failure to make payments on offer constituted material breach of offer-in-compromise); United States v. Lane [62-1 USTC ¶9467], 303 F.2d 1, 3-4 (5th Cir. 1962) (taxpayer's failure to comply with terms of collateral agreement by refusing to file annual statements and pay additional money constituted breach of offer-in-compromise); Roberts v. United States [2002-1 USTC ¶50,173], 225 F. Supp. 2d 1138, 1148 (E.D. Mo. 2001) (taxpayer's delay in paying his 1995 tax liability of $246,354 was a material breach of the offer-in-compromise); Fortenberry v. United States, 49 AFTR 2d 82-1027, 82-1 USTC par. 9191 (S.D. Miss. 1981) (taxpayer's failure to pay additional amounts under collateral agreement was breach of the terms of the offer-in-compromise); United States v. Wilson [60-1 USTC ¶9400], 182 F. Supp. 567, 570 (D.N.J. 1960) (taxpayer's failure to pay weekly installments caused IRS to terminate offer-in-compromise).

b. Analysis

Loss of benefit to injured party. In petitioner's late filing of his 1998 return, in which he was due a refund, the extent of the benefit that respondent was deprived of was not significant. Inherent in the requirement that taxpayers comply with the provisions of the Internal Revenue Code for 5 years is the IRS expectation that the taxpayer will pay the taxes owed on time. See Roberts v. United States [2002-1 USTC ¶50,173], 225 F. Supp. 2d at 1148. In this case, however, petitioner was due a refund.

As stated supra, petitioner's return was not timely filed. Not every delay, however, constitutes a material breach. There must also be a causal connection between the delay and the damages suffered by respondent, in order for a material breach to be found on the basis of the delay. 23 Williston on Contracts, sec. 63:18 (4th ed. 2002). Respondent suffered no monetary damage from petitioner's late filing of the 1998 return. Under the facts of this case, the late filing, by itself, is not sufficient basis for a material breach of the contract.

Adequacy of compensation for loss. The IRS was adequately compensated for its "loss". Respondent suffered minimal, if any, damages, as he held petitioner's refund as security.

Forfeiture by party who fails. Under this factor, the comments in the Restatement explain: "[A] failure is less likely to be regarded as material if it occurs late, after substantial preparation or performance, and more likely to be regarded as material if it occurs early, before reliance." 1 Restatement, supra, sec. 241, comment d. In this case, petitioner had substantially performed under the terms of the offer-in-compromise at the time the offer was declared in default. Petitioner's untimely mailing of the return occurred in the fourth year of a 5-year agreement. Petitioner had already paid the full amount of the offer-in-compromise, with borrowed funds, within 60 days after the offer had been accepted. Petitioner had complied with the filing requirements for the first 3 years of the agreement. Further, at the time the Appeals officer determined to proceed with collection, petitioner had filed his 1998 return and complied with all other terms of the offer-in-compromise.

Uncertainty. Under this factor, the comments in the Restatement note:

To the extent that expectation is already reasonably secure, in spite of the failure, there is less reason to conclude that the failure is material. The likelihood that the failure will be cured is therefore a significant circumstance in determining whether it is material * * *. The fact that the injured party already has some security for the other party's performance argues against a determination that the failure is material. [1 Restatement, supra, sec. 241, comment e.]

As stated supra, respondent was reasonably secured. Respondent had possession of petitioner's 1998 refund, making it likely that petitioner would perform under the agreement by filing his 1998 return. Respondent also had received $100,000 within 60 days of his acceptance of the offer, which was the amount offered and accepted as payment of petitioner's outstanding tax liabilities from 1983 to 1991. Additionally, before the Appeals officer determined to proceed with collection, petitioner had cured the defect. Petitioner submitted his 1998 return to the Appeals officer, at the request of the Appeals officer, to be filed as an original return.

Absence of good faith or fair dealing. Petitioner acted in good faith. Petitioner signed his 1998 return on the due date and gave it back to Mr. Coy for mailing. This was the pattern and practice petitioner had used in filing the returns prepared by Mr. Coy. He paid the full amount of the offer-in-compromise within 60 days after acceptance of the offer, with borrowed funds. He timely filed his returns for 1995, 1996, 1997, 1999, and 2000.⁶ Except for 1995, petitioner's returns indicate that petitioner was entitled to refunds. For 1998, petitioner was entitled to a refund. Before respondent issued the notice of determination, petitioner had filed his 1998 return. Indeed, when petitioner received the notices from the IRS, he called Mr. Coy to discuss them and also forwarded the notices by fax to Mr. Coy, as he was "scared to death".

Additionally, Mr. Talbott did not have an open mind to the issues Mr. Coy presented at the hearing. He did not consider that petitioner had acted in good faith. Mr. Talbott did not consider petitioner's pattern of filing of returns on or about October 15, despite having looked at the transcripts for 1995, 1996, 1997, and 1999.

Mr. Talbott did not have an open mind regarding reinstatement. Moreover, he failed to independently analyze whether the terms of the offer-in-compromise had been materially breached. Mr. Talbott believed he had no authority to reinstate petitioner's offer-in-compromise. He believed only the National Office could reinstate the offer-in-compromise. Neither the Internal Revenue Code nor the Internal Revenue Manual, however, states that he could not reinstate the offer-in-compromise. Mr. Talbott reviewed the Internal Revenue Manual. The manual was silent as to whether he could reinstate the offer-in-compromise.

On the basis of the facts and circumstances of this case, we conclude that petitioner did not materially breach the terms of the offer-in-compromise. As the offer-in-compromise was not in default, it was an abuse of discretion for respondent to determine to proceed with collection of petitioner's tax liability.

In reaching all of our holdings herein, we have considered all arguments made by the parties, and to the extent not mentioned above, we find them to be irrelevant or without merit.

To reflect the foregoing,

An appropriate order and decision will be entered.

Reviewed by the Court.

GERBER, COHEN, SWIFT, WELLS, and LARO, JJ., agree with this majority opinion.

CHIECHI, J., dissents.

WELLS, J., concurring: I respectfully write separately to express my belief that the majority opinion may have unnecessarily focused its analysis on contract law to decide whether respondent abused his discretion in the instant case. Section 6330(c)(3)(C) requires the Appeals officer to consider "whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary." This provision requires the Appeals officer, when conducting a hearing under section 6330, to carry out a balancing of competing considerations between the Government and the person against whom the collection action is instituted. Given this balancing requirement, I do not believe the Appeals officer should be required to rigidly apply contract law in determining whether the Government should proceed with collection of a liability where that liability, as in the instant case, has been compromised in an agreement between the Government and the person against whom the collection action has been instituted.¹ Such a requirement would detract from the flexibility and discretion Congress granted the Appeals officer in section 6330(c)(3)(C) to balance competing interests between the Government and those persons. Consequently, I believe the focus of the analysis in the instant case should be on whether respondent failed to undertake the balancing required under section 6330(c)(3)(C).

On the basis of the trial Judge's findings set out in the majority opinion in the instant case it is clear to me that respondent failed to balance the relatively slight harm to respondent of receiving an hours-late² return against the great harm to petitioner of reinstating and collecting a large tax liability. The abuse of discretion in failing to undertake the required balancing becomes apparent when taking into account that petitioner had timely filed his other returns as agreed in the offer-in-compromise agreement, had made a good faith effort to timely file the 1998 return, and had paid all the tax due in that return and was due a refund. See majority op. pp. 4-7. Despite petitioner's technical³ failure to timely file the 1998 return, respondent should have allowed petitioner to present evidence that favored petitioner's position and should have taken those facts into account in balancing the competing interests between the Government and petitioner. Respondent should have considered that evidence, and on the basis of such evidence, should have determined not to proceed with collection. Respondent's failure to do so under these circumstances is an abuse of discretion.

Regarding Magana v. Commissioner [Dec. 54,765], 118 T.C. 488 (2002), I question whether that case has any application to the instant case. The majority opinion properly distinguishes Magana on the grounds that petitioner is not raising a new issue. See majority op. p. 29. However, even if Magana could be read to exclude relevant and admissible evidence not raised during an Appeals Office hearing, it would have no application to the instant case. During the Appeals Office hearing in the instant case, petitioner attempted to present evidence relevant to his position, and respondent refused to consider it. If the Tax Court had no authority to develop a factual record in the instant case, there would not have been a sufficient record to determine whether respondent had abused his discretion. This is important because there are no formal procedures available for Appeals Office hearings. See sec. 301.6330-1(d)(1), Q&A-D6, Proced. & Admin. Regs. As this Court has stated, Appeals Office hearings historically have been informal, and in enacting section 6330, Congress did not intend to alter the nature of Appeals Office hearings. Davis v. Commissioner [Dec. 53,969], 115 T.C. 35, 41 (2000). Thus, if the parties were not allowed to make a record in the trial before this Court, they could be precluded from presenting all of the evidence in support of their respective positions. Even the Commissioner has routinely sought to add evidence to the record in trials before this Court in order to bolster his determination in collection cases. See Chase v. Commissioner [Dec. 54,709(M)], T.C. Memo. 2002-93, affd. [2003-1 USTC ¶50,199] 55 Fed. Appx. 717 (5th Cir. 2002); Lindsey v. Commissioner [Dec. 54,703(M)], T.C. Memo. 2002-87, affd. [2003-1 USTC ¶50,294] 56 Fed. Appx. 802 (9th Cir. 2003); Holliday v. Commissioner [Dec. 54,678(M)], T.C. Memo. 2002-67, affd. [2003-1 USTC ¶50,358] 57 Fed. Appx. 774 (9th Cir. 2003).

Regarding this issue, I also do not believe that allowing petitioner to present evidence in the instant case would mean that in other cases where a person refuses to comply with an Appeals officer's reasonable request for relevant evidence at the hearing, we would be required to receive that evidence in a trial in this Court. In the instant case, petitioner attempted to present a wide array of evidence to support his position, and the Appeals officer refused to receive it. Thus, the case where a person refuses to furnish relevant evidence requested at the Appeals Office hearing is not before us and raises an issue the Court has not addressed and need not address.

Accordingly, I agree with the conclusion of the majority opinion that respondent should be prevented from proceeding with collection in the instant case.

GERBER, FOLEY, MARVEL, and WHERRY, JJ., agree with this concurring opinion.

THORNTON, J., concurring: I agree with the majority opinion's holding that the Administrative Procedure Act (APA), 5 U.S.C. secs. 551-559, 701-706 (2000), does not apply to our proceedings under section 6330. Since its enactment in 1946, the APA has never governed proceedings in this Court (or in its predecessor, the Board of Tax Appeals), and there is no indication that, in enacting section 6330, Congress intended to change this general inapplicability of the APA. See Ewing v. Commissioner [Dec. 55,519], 122 T.C. 32, 50 (2004) (Thornton, J., concurring); see also O'Dwyer v. Commissioner [59-1 USTC ¶9441], 266 F.2d 575, 580 (4th Cir. 1959) ("The Tax Court * * * is a court in which the facts are triable de novo * * *. We agree that the Tax Court is not subject to the Administrative Procedure Act"), affg. [Dec. 22,434] 28 T.C. 698 (1957).

I also agree with the majority opinion's holding that, under the circumstances of this case, we may consider relevant evidence presented at trial which was not included in respondent's administrative record. As discussed in my concurring opinion in Ewing, this Court traditionally has applied de novo trial procedures when reviewing the Commissioner's determinations, including in cases that we review for an abuse of discretion.

The majority opinion should not be construed, however, to hold that the administrative record has no significance in our review of determinations under sections 6320 and 6330. Indeed, the administrative record takes on added significance under these sections given the statutory requirement of an Appeals Office hearing, and we often have relied on the administrative record in reviewing Appeals Office determinations. Moreover, in appropriate circumstances, we might restrict ourselves to the administrative record --for instance, where the taxpayer has failed to cooperate in presenting relevant evidence at the Appeals Office hearing. In the instant case, petitioner attempted to introduce relevant evidence at the Appeals Office hearing, but the Appeals officer refused to consider that evidence and failed to include it in the administrative record. In these circumstances, I agree with the majority opinion that we are not limited to evidence in the administrative record.

Section 6330(c)(2) provides that a taxpayer may raise at the Appeals Office hearing "any relevant issue relating to the unpaid tax or the proposed levy". Section 6330(c)(3) requires that the determination by an Appeals officer shall take into consideration the relevant issues raised by the taxpayer in the Appeals Office hearing. In this case, Judge Vasquez, as the trial Judge, has found that issues relating to whether petitioner defaulted on the offer-in-compromise are relevant issues that petitioner raised in the Appeals Office hearing and which should have been considered by the Appeals officer in his determination, but were not. I defer to Judge Vasquez, as the trial Judge, in identifying the issues raised at the Appeals Office hearing and whether those issues are relevant. I also defer to his conclusions that the Appeals officer failed to consider those relevant issues in his determination. On that basis, I agree with the majority opinion that "it was an abuse of discretion for respondent to determine to proceed with collection of petitioner's tax liability." Majority op. p. 45.

A taxpayer's express agreement to file timely tax returns is an integral condition to the Commissioner's acceptance of an offer-in-compromise, and a reasonable one-it merely confirms an obligation that is statutorily imposed (even in cases where the taxpayer is entitled to a refund), see secs. 6011(a) and 6012, and that is fundamental to our income tax system. Consequently, a taxpayer's failure to honor this obligation is not to be lightly regarded. With that being said, however, I agree with the majority opinion that it was an abuse of discretion to proceed with collection of petitioner's tax liability without considering relevant issues relating to petitioner's offer-in-compromise. I shall defer to Judge Vasquez's judgment in fashioning an appropriate remedy to address that abuse of discretion.

GERBER, COHEN, SWIFT, LARO, FOLEY, GALE, HAINES, GOEKE, WHERRY, and KROUPA, JJ., agree with this concurring opinion.

MARVEL, J. concurring: I agree that the Administrative Procedure Act does not apply and we are not limited to the administrative record, and with the majority's conclusion that the Appeals officer abused his discretion in this case, but I question the majority's reliance on principles of contract law to reach its conclusion. The Appeals officer's failure to refer the case to the National Office for guidance regarding the reinstatement of petitioner's offer-in-compromise before making his determination in this case is more than sufficient to support the conclusion that the Appeals officer abused his discretion in upholding the proposed collection action.

In his brief, petitioner asserted several errors that he contended established an abuse of discretion. One of those errors was that the Appeals officer "did not fully investigate the method of reinstating a revoked Offer in Compromise." The Appeals officer testified at trial that he did not believe that he had the authority to reinstate the offer-in-compromise. He also testified, however, that he could have referred the case to the National Office for guidance concerning the reinstatement of an offer-in-compromise.¹ Given the importance of the reinstatement issue in determining whether the collection action could proceed, the Appeals officer should have obtained the guidance he needed from the National Office before he made his determination in this case.

An Appeals officer is required by section 6330(c)(3) to consider "whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary." Until the Appeals officer had fully explored whether and under what circumstances he had authority to reinstate petitioner's offer-in-compromise, it was impossible for the Appeals officer to conduct the balancing analysis that section 6330(c)(3) requires. Coupled with the Appeals officer's reluctance to fully explore the facts regarding petitioner's compliance with the terms and conditions of the offer-in-compromise, which the majority discusses at length, the failure to obtain the necessary guidance from the National Office supports a conclusion that the balancing required by section 6330(c)(3) did not occur and that the Appeals officer abused his discretion in upholding the proposed collection action.

LARO and WHERRY, JJ., agree with this concurring opinion.

HAINES, J., concurring: I concur with the result reached by the majority that we are not limited by the Administrative Procedure Act in this case, our review is not limited to the administrative record, and respondent abused his discretion in his determination to proceed with collection of petitioner's 1998 tax liability. I write separately to make two points.

First, we have held that an offer-in-compromise is governed by general principles of contract law. Dutton v. Commissioner [Dec. 55,542], 122 T.C. 133, 138 (2004); majority op. p. 39. We have not extended that holding to mean that the general principles of contract law must be determined by application of the law of the State where the taxpayer resides.

The majority opinion uses the Restatement of Contracts to provide the circumstances in which a failure to perform is "material". Majority op. p. 39 (citing 1 Restatement, Contracts 2d, sec. 241 (1981)). The majority opinion further states that "Arkansas law adopts this analysis." Majority op. p. 40. Readers of this Opinion should not infer that the use of State law of a taxpayer's residence, rather than general contract principles, is necessary to reach the majority's result. Given the number of offers-in-compromise negotiated and overseen by the Commissioner, if the terms of each offer-in-compromise had to be analyzed on the basis of the State law of a taxpayer's residence, the result would be an administrative nightmare for the Commissioner. General contract principles as expressed in the Restatement of Contracts should control these determinations.

Second, an offer-in-compromise is an agreement between the taxpayer and the Government which settles a tax liability for payment of less than the full amount owed. 2 Administration, Internal Revenue Manual (CCH), sec. 5.8.1.1.1, at 16,253. In the case at bar, petitioner paid $100,000 to compromise individual income tax and statutory additions totaling $989,475. Majority op. p. 3. By defaulting petitioner, respondent now seeks to collect the remaining sums previously compromised.

Noncompliance with the terms of the offer-in-compromise does not automatically result in the offer's being defaulted. As 2 Administration, Internal Revenue Manual (CCH), sec. 5.19.7.3.22, at 18,507 (Defaults) states:

(1) When a taxpayer fails to meet any term of an offer, the offer may be defaulted and all liabilities reinstated. Any of the following may result in a default of the offer.

* * * * * * *

l Failure to timely file subsequent tax returns and pay all taxes due during the compliance period.

The Internal Revenue Manual further states that "If the taxpayer does not comply with the provisions of the offer in compromise, the offer may be considered in default." 4 Administration, Internal Revenue Manual (CCH), sec. 8.13.2.5.4, at 27,581 (Actions on Defaulted Offers) (emphasis added).

Compromises are favored in the law, Big Diamond Mills Co. v. United States [2 USTC ¶791], 51 F.2d 721, 724 (8th Cir. 1931), and, thus, the Commissioner is under an obligation to be clear on the circumstances before making a default determination. In the case at bar, the Appeals officer failed to consider petitioner's pattern of filing his tax returns on or about October 15, did not speak with petitioner, and failed to independently analyze whether the terms of the offer-in-compromise had been materially breached. Majority op. p. 10. Failure to consider these facts constitutes an abuse of discretion.

GOEKE and WHERRY, JJ., agree with this concurring opinion.

WHERRY, J., concurring: While I agree with the majority in concluding that our review is not limited to the administrative record, I write separately to emphasize the temporal requirement which, in my view, must be met to satisfy the evidentiary burden.

The majority holds:

that, when reviewing for abuse of discretion under section 6330(d), we are not limited by the Administrative Procedure Act (APA) and our review is not limited to the administrative record. The evidence in this case pertains to issues raised at the hearing. The [new] evidence in this case is relevant and admissible. [Majority op. p. 17.]

This conclusion should not be construed as sanctioning the dilatory introduction at trial of new facts or documents previously withheld and not produced at the Appeals hearing in order to justify reversal or remand of the Appeals or settlement officer's determination. "It is the responsibility of the taxpayer to raise all relevant issues at the time of the pre-levy hearing." H. Conf. Rept. 105-599, at 266 (1998), 1998-3 C.B. 747, 1020; see Magana v. Commissioner [Dec. 54,765], 118 T.C. 488, 493 (2002). "Taxpayers will be expected to provide all relevant information requested by Appeals, including financial statements, for its consideration of the facts and issues involved in the hearing." Sec. 301.6330-1(e)(1), Proced. & Admin. Regs.

Nevertheless, pursuant to section 6330(d)(2), the Internal Revenue Service Office of Appeals retains jurisdiction of the collection action after the determination is made and a taxpayer may "apply for consideration of new information, make an offer-in-compromise, request an installment agreement, or raise other considerations at any time, before, during, or after the Notice of Intent to Levy hearing." H. Conf. Rept. 105-599, supra at 266, 1998-3 C.B. at 1020. This Court should consider the entire record of the actions taken by the Appeals Office at the time it conducts its judicial review.

Consequently, where the Appeals officer has invited or requested relevant facts or documents from the taxpayer, before or at the collection hearing, and those facts or documents are not provided within a reasonable time, their attempted introduction as new evidence at trial may not establish an abuse of discretion. This could be the result because of the temporal requirement, even though an abuse of discretion might have been demonstrated had the documentation been timely produced before or at the collection hearing.

In the instant case, the Appeals officer's failure to fairly consider evidence available at the hearing and to request and consider possible corroborating evidence (where petitioner's and his accountant's credibility was, in the Appeals officer's mind, at issue), coupled with the failure to ascertain whether a material breach of the existing offer-in-compromise had occurred, constituted an abuse of discretion.

COHEN, LARO, GALE, THORNTON, HAINES, and GOEKE, JJ., agree with this concurring opinion.

HALPERN and HOLMES, JJ., dissenting:¹ Petitioner admittedly owed almost $1 million in back taxes and additions to tax. Respondent agreed to forgo collection of almost 90 percent of that amount in exchange for petitioner's promise to pay the balance of $100,000 in 60 days and pay additional amounts if his future income exceeded certain levels.² Respondent expressly conditioned his forbearance on petitioner's timely compliance with tax filing and payment requirements over the next 5 years. The majority essentially concludes that, notwithstanding petitioner's failures to (1) comply with the timely filing condition and (2) respond to at least three written requests demanding compliance, respondent may not declare petitioner in default and proceed to collect the compromised amount in accordance with the terms of the offer-in-compromise (OIC). Along the way, the majority (1) eviscerates the Court's holding in Magana v. Commissioner [Dec. 54,765], 118 T.C. 488 (2002), regarding the matters we may properly address in a collection due process case, and (2) unwisely extends Ewing v. Commissioner [Dec. 55,519], 122 T.C. 32 (2004), which involved the evidence we may consider in a proceeding involving section 6015(f) ("equitable" innocent spouse relief). Respectfully, we dissent.



I. Issues Regarding the Scope of Our Review

Before we address the substantive aspect of the majority opinion, we turn our attention to our concerns regarding procedure.

A. "Topical" Scope of Review

As the majority recognizes, majority op. p. 27, we held in Magana v. Commissioner, supra at 493, that, in reviewing determinations of the Commissioner under section 6330(d)(1) for abuse of discretion, "generally we consider only arguments, issues, and other matter that were raised at the collection hearing or otherwise brought to the attention of the Appeals Office." See also sec. 301.6330-1(f)(2), Q&A-F5, Proced. & Admin. Regs. (taxpayer appealing the Commissioner's determination may ask the court to consider only issues that were raised at the administrative hearing). The majority distinguishes Magana on the ground that "petitioner is not raising a new issue in his petition." Majority op. p. 29. As far as it goes, that is a true statement: Neither in the petition nor, previously, in his dealings with the Appeals Office did petitioner raise the issue of "material breach" (the majority does that on its own). The majority overcomes that obstacle by broadly framing the issue as "compliance with the terms of the offer-in-compromise", id., which, by implication, encompasses both actual (strict) compliance (petitioner's position) and deemed (substantial) compliance (the majority's position).

The majority's expansive characterization of the contract issue in this case is simply another way of saying that there is more than one possible argument in support of petitioner's claim that the OIC remained in force. Petitioner argued to the Appeals officer that the OIC remained in force because he had timely filed his 1998 return. He did not present to the Appeals officer the argument underlying the majority's conclusion; viz., that the OIC remained in force because petitioner's untimely filing of his 1998 return was not a material breach. As we stated in Magana v. Commissioner, supra at 493: "[G]enerally it would be anomalous and improper for us to conclude that respondent's Appeals Office abused its discretion under section 6330(c)(3) in failing to grant relief, or in failing to consider arguments, issues, or other matter not raised by taxpayers or not otherwise brought to the attention of respondent's Appeals Office." It is indeed anomalous and improper for the majority to conclude that respondent's Appeals Office abused its discretion in this case for failing to consider an argument not brought to its attention.

B. Evidentiary Scope of Review

1. Unwarranted Extension of Ewing v. Commissioner

In Ewing v. Commissioner, supra (a report reviewed by the Court pursuant to section 7460(b)), the Court held that, in determining whether the Commissioner has abused his discretion in denying "equitable" innocent spouse relief under section 6015(f), the Court is not limited to a review of the administrative record; i.e., the petitioning taxpayer is entitled to a trial de novo. The Commissioner had argued that we are so limited "pursuant to the Administrative Procedure Act (APA), 5 U.S.C. secs. 551-559, 701-706 (2000) and cases decided thereunder".³ Id. at 35.

Although the Court disagreed with the Commissioner's APA argument, id. at 36, it based its holding largely on the language and structure of section 6015. Specifically, the Court focused on the similar language in section 6015(e)(1)(A) (jurisdiction to "determine" the appropriate relief under section 6015) and sections 6213 and 6214(a) (jurisdiction to "redetermine" deficiencies asserted by the Commissioner, which proceedings unquestionably are conducted on a de novo basis). Id. at 38-39. The Court also reasoned that, inasmuch as a section 6015(f) claim (1) does not necessarily involve the review of discretionary action on the part of the Commissioner, see sec. 6015(e)(1)(A)(i)(II), (2) may be raised as an affirmative defense in an otherwise de novo deficiency proceeding, see, e.g., Butler v. Commissioner [Dec. 53,869], 114 T.C. 276, 287-288 (2000), and (3) may involve the intervention of a third party (i.e., the nonrequesting spouse) who may not have participated in the administrative proceeding, see sec. 6015(e)(4), Congress likely intended a uniform, de novo scope of review to apply to such claims. See Ewing v. Commissioner, supra at 42-43.

In the instant case, despite the lack of any reference to the APA in respondent's opening brief, the majority frames the issue regarding the appropriate scope of review as follows: "Applicability of the APA Judicial Review Provisions to Tax Court Proceedings Commenced Under Section 6330(d) ". Majority op. p. 17. The ensuing discussion in the majority opinion is based primarily on Judge Thornton's concurring opinion in Ewing v. Commissioner, supra at 50-56, which focuses exclusively on the APA issue. The majority loses sight of the fact that, in Ewing, a substantial portion of the Court's analysis, as discussed above, was based on the unique aspects of section 6015. The majority's extension of Ewing to section 6330 cases is both unwarranted and uncritical.

2. Additional Criticism of the Majority's Scope of Review Analysis

In our dissenting opinion in Ewing v. Commissioner [Dec. 55,519], 122 T.C. at 56-67 (Halpern and Holmes, JJ., dissenting), we discussed at some length our view that, in the context of our "review" jurisdiction, see id. at 56 n.1 and accompanying text, the appropriate evidentiary scope of review is the administrative record. See, e.g., Camp v. Pitts, 411 U.S. 138, 142 (1973) (in reviewing agency action for abuse of discretion, "the focal point for judicial review should be the administrative record already in existence, not some new record made initially in the reviewing court"); United States v. Carlo Bianchi & Co., 373 U.S. 709, 715 (1963) (the terms "arbitrary" and "capricious" "have frequently been used by Congress and have consistently been associated with a review limited to the administrative record"). While we see no need to repeat here our entire analysis in support of that view,⁴ we do address certain difficulties with the majority's scope of review analysis in this case.

a. Prior Section 6330 Cases in This Court

The majority cites five Memorandum Opinions of this Court in support of the statement that "[a]t trials under section 6330 when reviewing for abuse of discretion, the Court has received into evidence testimony and exhibits that were not included in the administrative record." Majority op. pp. 17-18. None of those opinions addresses the issue in this case; i.e., whether it is appropriate for the Court to go beyond the administrative record in a section 6330 case. The majority also cites three additional Memorandum Opinions of this Court in which "we * * * noted the taxpayer's failure to present evidence at trial." Majority op. p. 19 n.4. Again, none of those opinions addresses the issue of whether it is appropriate for the Court to consider matters beyond the administrative record in a section 6330 case.

The majority also cites and quotes an unpublished opinion of the Court of Appeals for the Ninth Circuit affirming one of the aforementioned cases. Majority op. pp. 18-19; see Holliday v. Commissioner, 91 AFTR 2d 2003-1338, 2003-1 USTC par. 50,358 (9th Cir. 2003), affg. [Dec. 54,678(M)] T.C. Memo. 2002-67. That court did devote two sentences to the "scope of review" issue. Specifically, the Court of Appeals stated that the "record review" provisions of the APA do not apply to the Tax Court.⁵ The Court of Appeals provided the following citation in support of that statement: "See 5 U.S.C. §504(a)(1) (APA does not apply where `a matter [is] subject to a subsequent trial of the law and the facts de novo in a court')." APA section 554, to which the Court of Appeals presumably was referring, provides rules governing agency adjudications "required by statute to be determined on the record after opportunity for an agency hearing" --i.e., formal agency adjudications. APA section 554(a)(1) simply provides that, notwithstanding the general scope of APA section 554, that section (as opposed to the entire APA) does not apply if the matter is subject to a subsequent trial de novo. In other words, the agency adjudication of such a matter need not conform to the "formal" procedural rules set forth in APA section 554. As section 6330 administrative adjudications are not "required by statute to be determined on the record", it follows that APA section 554, including the "de novo" exception of APA section 554(a)(1), is altogether inapplicable to section 6330 proceedings.

b. Analogy to Deficiency Proceedings

Distilled to its essence, this portion of the majority's analysis proceeds from two major premises and one minor premise. The major premises are: (1) Our de novo deficiency procedures were well established before the enactment of the APA in 1946; and (2) Congress did not intend to disturb those existing procedures when it enacted the APA. We have absolutely no quarrel with either of those premises. By definition, then, the judge-made record rule, which is generally applicable to judicial review of agency action, does not apply to deficiency proceedings in this Court. The majority's conclusion that the record rule is inapplicable to our section 6330 cases as well is based on the minor premise that section 6330, enacted in 1998, is "part and parcel" of the "specific statutory framework for reviewing determinations of the Commissioner" (i.e., our de novo deficiency procedures) that Congress did not intend to disturb in 1946. See majority op. p. 21. It is that minor premise that we are unable to accept. Cf. Ewing v. Commissioner, supra at 64 n.11, 65-66 (Halpern and Holmes, JJ., dissenting).

c. Section 6330 Hearings as Informal Adjudications

Here the majority seems to imply that only formal agency adjudications (i.e., those subject to the procedures set forth in APA sections 554, 556, and 557) are subject to the record rule. According to the Supreme Court, however, the record rule is no less applicable to judicial review of informal agency action. See, e.g., Fla. Power & Light Co. v. Lorion, 470 U.S. 729, 744 (1985). In the event the administrative record of such an informal proceeding is insufficiently developed, "the proper course, except in rare circumstances, is to remand to the agency for additional investigation or explanation." Id.; see also United States v. Carlo Bianchi & Co., 373 U.S. at 718 (remand "would certainly be justified where the department had failed to make adequate provision for a record that could be subjected to judicial scrutiny").

d. Other Instances Where the Court Reviews for Abuse of Discretion

The majority notes that the Court "`has a long tradition of providing trials when reviewing the Commissioner's determinations under an abuse of discretion standard.' " Majority op. p. 25 (quoting Judge Thornton's concurring opinion in Ewing v. Commissioner [Dec. 55,519], 122 T.C. at 53). In our Ewing dissent, we suggested (on the basis of language in Estate of Gardner v. Commissioner [Dec. 41,293], 82 T.C. 989, 999, 1000 (1984)) that our application of an abuse of discretion standard is properly the subject of a trial de novo when the exercise of discretion at issue is relevant to the Commissioner's determination of the existence or amount of a deficiency in tax or an addition to tax that is subject to our deficiency jurisdiction. See Ewing v. Commissioner, supra at 65-66 (Halpern and Holmes, JJ., dissenting). We continue to adhere to that view.⁶

The majority cites a number of cases decided under the abuse of discretion standard, stating that "[i]n none of these types of cases have we held * * * that we are limited to the administrative record." Majority op. p. 26 (emphasis added). In three of the types of cases to which the majority alludes (involving section 482 reallocations, section 446 "clear reflection of income" determinations, and waivers of the former section 6659 addition to tax), the inapplicability of the record rule is consistent with the suggested approach discussed in the preceding paragraph. See Ewing v. Commissioner, supra at 65 (Halpern and Holmes, JJ., dissenting).

The other two types of cases cited by the majority involve declaratory judgments with respect to determinations of the Commissioner under section 7428 (tax-exempt status) and section 7476 (qualified status of retirement plans).⁷ De novo proceedings in those types of cases would be inconsistent with the approach we suggested in our Ewing dissent. Contrary to the majority's assertion, we have limited our review to the administrative record in those types of cases. See Houston Lawyer Referral Serv., Inc. v. Commissioner [Dec. 34,924], 69 T.C. 570, 577 (1978) ("To allow oral testimony * * * as to facts not otherwise in the administrative record to be introduced in evidence * * * in a section 7428 declaratory judgment proceeding would convert that proceeding from a judicial review of administrative action to a trial de novo" and "would permit an applicant [for tax-exempt status] to withhold information from the Internal Revenue Service and then to introduce it before the Court"); Tamko Asphalt Prods., Inc. v. Commissioner [Dec. 35,884], 71 T.C. 824, 837 (1979) (rejecting the argument of the taxpayer in a section 7476 proceeding "that it is entitled to a trial as in any other matter before this Court", the Court reasoned that "[t]o permit extrinsic evidence, other than that present in the administrative record, would convert a declaratory judgment proceeding from a judicial review of an administrative determination to a judicial trial de novo"), affd. [81-2 USTC ¶9648] 658 F.2d 735 (10th Cir. 1981).

e. Disregard of District Court Cases

The District Courts of the United States have jurisdiction to hear section 6330 appeals involving taxes over which the Tax Court does not have jurisdiction. Sec. 6330(d)(1)(B). As far as we can tell, those courts have uniformly limited their review for abuse of discretion in such cases to the administrative record. See Muller v. Rossotti, 93 AFTR 2d 2004-1782, 1786-1787, 2004-1 USTC par. 50,239, at 83,495 (M.D. Tenn. 2004) (quoting United States v. Carlo Bianchi & Co., 373 U.S. at 714); Living Care Alternatives, Inc. v. United States, 93 AFTR 2d 2004-761, 764 n.2, 2004-1 USTC par. 50,167, at 83,249 n.2 (S.D. Ohio 2003); Hart v. United States [2003-2 USTC ¶50,680], 291 F. Supp. 2d 635, 640 (N.D. Ohio 2003); Cmty. Residential Servs., Inc. v. United States, 91 AFTR 2d 2003-2190, 2190, 2003-1 USTC par. 50,458, at 88,339 (M.D.N.C. 2003) (citing Camp v. Pitts, 411 U.S. at 142-143); Dudley's Commercial & Indus. Coating, Inc. v. United States [2003-1 USTC ¶50,397], 292 F. Supp. 2d 976, 985 (M.D. Tenn. 2003) (citing Camp v. Pitts, supra at 142); Triad Microsys., Inc. v. United States, 90 AFTR 2d 2002-7332, 7334, 2003-1 USTC par. 50,106, at 87,030 (E.D. Va. 2002) (citing Camp v. Pitts, supra at 142); Carroll v. United States [2002-2 USTC ¶50,500], 217 F. Supp. 2d 852, 858 (W.D. Tenn. 2002) (citing United States v. Carlo Bianchi & Co., supra at 714); Remole v. United States, 89 AFTR 2d 2002-1202, 1208, 2002-1 USTC par. 50,224, at 83,429 (C.D. Ill. 2001); MRCA Info. Servs. v. United States [2000-2 USTC ¶50,683], 145 F. Supp. 2d 194, 198 (D. Conn. 2000) (quoting United States v. Carlo Bianchi & Co., supra at 714). The majority makes no mention of those cases. Are we to believe that Congress intended the appropriate scope of review in section 6330 cases to hinge on the type of tax involved? Certainly, the language of section 6330 suggests no such distinction.



II. The Contract Issue

The contract issue as framed by the majority (i.e., whether the OIC remained in effect despite petitioner's failure to timely file his 1998 return) is more nuanced than the majority opinion leads one to believe. The majority oversimplifies what respondent was bargaining for, disregards the significance of the fact that respondent repeatedly offered petitioner the opportunity to cure his default, and assumes, without analysis, that the concepts of materiality and substantial performance are dispositive of the contract issue.

A. Materiality of Timely Filing Requirement

The majority assumes that the only benefit the Commissioner seeks when accepting an OIC is the actual receipt of moneys owed under its terms: "Respondent suffered no monetary damage from petitioner's late filing of the 1998 return." Majority op. p. 41 (emphasis added). But collecting money is not the Commissioner's only purpose in agreeing to an OIC. The preamble to section 301.7122-1, Proced. & Admin. Regs., explicitly refers to the IRS's interest in promoting the voluntary compliance of taxpayers. T.D. 9007, 2002-2 C.B. 349, 350. Indeed, not only is this one of the policy underpinnings of the regulations; it can even be the basis by itself for accepting an OIC. The timely filing requirement is particularly important to the IRS as a monitoring device with respect to OICs, like the one here, which include future income level triggers that can result in additional payment obligations. See majority op. p. 4 n.3.

B. Opportunities To Cure

It is also important to emphasize how deliberate the IRS was before declaring the OIC in default. Respondent did not default petitioner's OIC as soon as he realized the 1998 return had not been timely filed. Following the guidance of 2 Administration, Internal Revenue Manual (CCH) (IRM), sec. 5.19.7.3.22.5, at 18,513, respondent first contacted petitioner to request the missing return and did so at least two more times thereafter. See majority op. p. 8. Those efforts by respondent were in keeping with the mandate of the IRM that in the event of potential default efforts "will be made to secure compliance". IRM sec. 5.8.9.4, at 16,382. Despite those efforts, petitioner did not provide the missing return until approximately 1 year after he was first requested to do so. That hardly qualifies as a "foot fault".

C. Doctrine of Express Conditions

Regardless of the nature of the breach and respondent's response thereto, we think that the most relevant doctrines of contract law are not "substantial performance" and "material breach."⁸ Petitioner's obligation to timely file all his returns for 5 years was an express condition and so, as a general rule, is subject to strict performance. See Calamari & Perillo, The Law of Contracts, sec. 11.9, at 403 (4th ed. 1998); 13 Williston on Contracts, sec. 38:6, at 384-385 (4th ed. 2000). The relevant question should be whether there is an "excuse of conditions" that may apply. Under that doctrine, petitioner would have to show that (1) strict compliance with the timely filing condition would result in an extreme forfeiture or penalty, and (2) timely filing was not an essential part of the bargain. See 2 Restatement, Contracts 2d, sec. 229 (1981); 1 Restatement, Contracts, sec. 302 (1932). If we are going to say that, as a matter of law, the Appeals officer should not have enforced the OIC in accordance with its terms, that is the line of inquiry we should pursue.⁹

D. United States v. Lane

Quite apart from any discussion of general contract law principles, we also disagree with the majority's treatment of the most similar case we have found, United States v. Lane [62-1 USTC ¶9467], 303 F.2d 1 (5th Cir. 1962). In Lane, the Court of Appeals rejected the taxpayer's argument that strict enforcement of his OIC would result in a forfeiture. As had petitioner, the taxpayer had entered into an OIC which required him to pay a specific amount, pay additional amounts if his annual income exceeded a floor, and make annual statements of his income "regardless of amount". The taxpayer paid the specific amount and then failed to make the annual statements of his income. The taxpayer's OIC provided, like petitioner's, that, in the event of default, the Commissioner could revive and collect the unpaid balance of the original debt. The District Court, ruling in favor of the taxpayer, had reasoned that "`the taxpayer can't be pushed back for years and years and after a settlement is made and have a forfeiture so to speak, of everything he paid in under that settlement agreement.' " Id. at 4.

The Court of Appeals for the Fifth Circuit reversed the District Court, holding that the OIC should be enforced as written. Id. at 5. It is worth considering the Court of Appeals' forceful language in that regard:

In the present case, the contracting parties expressed their mutual intention in clear and unmistakable terms. * * * [The OIC] expressly provided that the Commissioner, upon default by the taxpayer could terminate the compromise agreement and proceed to collect the unpaid balance of the original tax liability. This language is so precise, and the intention which it manifests is so evident, as to leave no doubt that the course of action taken by the Government here was fully authorized by the compromise agreement.

There was nothing illegal, immoral or inequitable in the compromise agreement. It did not provide for any "forfeiture". By express provision, the amounts to be paid under the compromise agreement * * * could not exceed the aggregate amount which the taxpayer conceded that he owed the Government from the start. By allowing the Government to revive the taxpayer's original liability, the taxpayer will not forfeit the amounts he has already paid, for those amounts will be applied to reduce the original liability. The agreement was precise, it was fair, and it was freely consented to by the taxpayer. There is no reason why it should not be enforced as written.

Id. at 4; see also Roberts v. United States [2002-1 USTC ¶50,173], 225 F. Supp. 2d 1138, 1149 (E.D. Mo. 2001) (quoting the latter paragraph in full).



III. Conclusion

We would sustain respondent's evidentiary objections on the basis of Magana v. Commissioner, [Dec. 54,765] 118 T.C. 488 (2002), and the record rule. We would also hold that, in light of petitioner's breach of an express condition of the OIC and his failure to cure that breach despite ample opportunity to do so, respondent's Appeals officer did not abuse his discretion in sustaining the proposed collection activity.

¹ Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure. All amounts are rounded to the nearest dollar.

² The trust fund recovery penalties to be compromised under sec. 6672 were $102,030. By order dated Oct. 21, 2002, the Court granted respondent's motion to dismiss for lack of jurisdiction and to strike as to the trust fund penalties. The parties agree:

The doctrine of collateral estoppel will apply to prohibit the Respondent, as well as the Petitioner, from re-litigating the Petitioner's appeal of the Notice of Determination in the District Court if the Tax Court decides whether the Respondent abused his discretion in proceeding with collection of tax liabilities previously compromised prior to a decision of that issue by the District Court.

³ As additional consideration, petitioner signed a Form 2261, Collateral Agreement, in which he also agreed to pay 40 percent of his annual income in excess of $100,000 and not in excess of $130,000; 50 percent of annual income in excess of $130,000 and not in excess of $150,000; and 60 percent of annual income in excess of $150,000. Petitioner's annual income was less than $100,000 for 1995, 1996, 1997, 1998, and 1999. Accordingly, petitioner was not required to pay additional consideration.

⁴ Additionally, in numerous instances, we have noted the taxpayer's failure to present evidence at trial. This failure to present evidence supported our conclusion that the Appeals officer did not abuse his or her discretion. See, e.g., Dorn v. Commissioner [Dec. 55,209(M)], T.C. Memo. 2003-192 ("Petitioner did not offer sufficient evidence at his section 6330(b) hearing or before this Court to show he is entitled to prevail" when petitioner did not offer any evidence at trial related to the issues raised at his hearing); Maloney v. Commissioner [Dec. 55,158(M)], T.C. Memo. 2003-143 ("Petitioners did not present any evidence that their excess withholdings for 1984 exceeded [the stipulated amount of credits for increased Federal income tax withholdings, including FICA taxes]", and "they presented no evidence that they made deposits or that any FICA taxes were assessed after the applicable period of limitations had expired"), affd. 94 Fed. Appx. 969 (3d Cir. 2004); Schulman v. Commissioner [Dec. 54,757(M)], T.C. Memo. 2002-129 (settlement officer did not abuse her discretion where "petitioners presented no evidence at trial or on brief to otherwise substantiate their expenses" and where "petitioners did not introduce any evidence of any meaningful ties to Ozaukee County, other than the relative proximity of their residence"); Howard v. Commissioner [Dec. 54,697(M)], T.C. Memo. 2002-81 ("Petitioner also did not present any evidence at trial or otherwise show any irregularity in the assessment procedure.").

⁵ On remand, the U.S. District Court held that the taxpayer's failure to timely pay his 1995 taxes was a material breach of the offer-in-compromise. Further, the court held that "the doctrine of substantial performance has no relevance in this case as the Plaintiff completely failed to timely pay his 1995 federal income tax liability, and instead waited to pay it until April 10, 1997, so that he could offset his tax liability for 1995 with his losses in 1996." Roberts v. United States [2002-1 USTC ¶50,173], 225 F. Supp. 2d 1138, 1149 (E.D. Mo. 2001).

⁶ We note that by the terms of the offer-in-compromise, the offer-in-compromise did not apply to 2000.

¹ I do not mean to suggest, however, that respondent could not have considered contract law issues, as well as other facts and issues, as part of the balancing required under sec. 6330(c)(3)(C).

² By "hours-late" I mean hours after the "last collection" requirement of sec. 301.7502-1(c)(1)(iii)(B), Proced. & Admin. Regs.

³ I do not mean to imply that taxpayers are not required to comply with the technical requirements of the Internal Revenue Code and the regulations thereunder. However, respondent should have allowed petitioner to present evidence favoring petitioner's position despite petitioner's failure to comply with the last collection requirement of sec. 301.7502-1(c)(1)(iii)(B), Proced. & Admin. Regs.

¹ Although the Appeals officer's case activity records indicate that he telephoned a person in the National Office on at least two occasions regarding whether a defaulted offer-in-compromise could be reinstated, it does not appear from the records that formal guidance from the National Office was ever obtained.

¹ Seventeen judges voted in conference on Judge Vasquez's report in this case. Including Judge Vasquez, six judges agree fully with the report, while eight concur in the result but take exception to one or more of the report's particulars. Since we do not have a full exposition of the exceptions, we are unable to say exactly how strong the conference agreement is on any of the particulars of the report. We will assume, however, that a majority could be marshaled for each of the particulars we address here, and will refer to the "majority" in discussing those particulars.

² As part of the agreement, petitioner also waived the period of limitations on collection.

³ As we discussed in our dissenting opinion in Ewing v. Commissioner [Dec. 55,519], 122 T.C. 32, 57-59 (2004) (Halpern and Holmes, JJ., dissenting), the issue regarding the applicability of the APA is a red herring. The issue in Ewing was whether our review of the Commissioner's denial of sec. 6015(f) relief is subject to the record rule --the general rule of administrative law that a court can engage in judicial review of an agency action only on the basis of the record amassed by the agency. See id. at 56, 58. The record rule predates, and indeed is not codified in, the APA. Id. at 58 n.4.

⁴ We do note that, in our Ewing dissent, we addressed much of the authority relied on by the majority here in its scope of review analysis. See, e.g., Ewing v. Commissioner, supra at 60-61 (Halpern and Holmes, JJ., dissenting) (criticizing O'Dwyer v. Commissioner [59-1 USTC ¶9441], 266 F.2d 575 (4th Cir. 1959), affg. [Dec. 22,434] 28 T.C. 698 (1957)); id. at 60 n.7 (explaining the context of Nappi v. Commissioner [Dec. 31,384], 58 T.C. 282 (1972)); id. at 61 n.9 (explaining the context of Bowen v. Massachusetts, 487 U.S. 879, 903 (1988), and Beall v. United States [2003-2 USTC ¶50,551], 336 F.3d 419 (5th Cir. 2003)); id. at 64 n.11 (discussing APA sec. 559); id. at 65-66 (distinguishing Thor Power Tool v. Commissioner [79-1 USTC ¶9139], 439 U.S. 522 (1979), Bausch & Lomb, Inc. v. Commissioner [91-1 USTC ¶50,244], 933 F.2d 1084 (2d Cir. 1991), affg. [Dec. 45,547] 92 T.C. 525 (1989), and Krause v. Commissioner [Dec. 48,383], 99 T.C. 132 (1992), affd. sub nom. Hildebrand v. Commissioner [94-2 USTC ¶50,305], 28 F.3d 1024 (10th Cir. 1994)).

⁵ As noted earlier, see supra note 3, the record rule predates, and is not codified in, the APA. See also Ewing v. Commissioner [Dec. 55,519], 122 T.C. at 60 n.8 and accompanying text (Halpern and Holmes, JJ., dissenting).

⁶ The fact that our application of an abuse of discretion standard may be the subject of a trial de novo does not necessarily mean that we are free to substitute our judgment for that of the Commissioner in such cases. See, e.g., Capitol Fed. Sav. & Loan Association v. Commissioner [Dec. 47,169], 96 T.C. 204, 209 (1991) (sec. 446); Bausch & Lomb, Inc. v. Commissioner [Dec. 45,547], 92 T.C. 525 (1989), affd. [91-1 USTC ¶50,244] 933 F.2d 1084 (2d Cir. 1991) (sec. 482).

⁷ Separately, the majority cites two Memorandum Opinions of this Court in support of the proposition that "[t]he Court has consistently conducted trials on the issue of whether the Commissioner's denial of a request to abate interest under section 6404 was an abuse of discretion." Majority op. pp. 25-26. In neither case did the Court address the issue of the appropriate scope of review. Although the issue is not before us today, we would conclude that, for the same reasons discussed herein and in our Ewing dissent, our review of the Commissioner's interest abatement determinations is not properly the subject of de novo proceedings. See Ewing v. Commissioner [Dec. 55,519], 122 T.C. at 65 n.12 (Halpern and Holmes, JJ., dissenting).

⁸ While the majority assumes that Arkansas law governs the contract issue, it is quite possible that, under principles set forth in Clearfield Trust Co. v. United States, 318 U.S. 363, 366-367 (1943), and United States v. Kimbell Foods, Inc., 440 U.S. 715, 727-729 (1979), the Federal common law of contracts is the appropriate choice of law. See Saltzman, IRS Practice and Procedure, par. 15.03[4][b], at 15-82 n.200 (rev. 2d ed. 2002).

⁹ We are aware of authority indicating that, in the context of an executory accord (which an offer-in-compromise resembles), enforcement of the original obligation is justified only if the obligee's noncompliance with the accord is material. See Frank Felix Associates, Ltd. v. Austin Drugs, Inc., 111 F.3d 284, 286-289 (2d Cir. 1997) (reasoning at 287 that, under a rule requiring strict compliance with the accord, the obligee "could obtain payment of a contested debt and, due to a minor breach of the accord, receive the windfall entitlement to reassert its pre-settlement claims" (Emphasis added.)). We are not aware of any authority addressing the interplay between that line of reasoning and the doctrine of express conditions. Again, if we are going to undertake a substantive analysis of contract law, those are the types of issues we should be addressing.


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