Opinion
16739-19L
02-03-2023
JACOB & MARSHA ROZBRUCH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER AND DECISION
DAVID GUSTAFSON JUDGE
This is a “collection due process" ("CDP") case brought under section 6330(d),in which petitioners Jacob and Marsha Rozbruch challenge notices of determination issued by the Independent Office of Appeals of the Internal Revenue Service ("IRS Appeals") concerning liabilities for trust fund recovery penalties ("TFRPs") under section 6672(a) for seven quarters in 2011 through 2014 and for income tax in 2012, 2013, and 2016, totaling about $700,000. Now before the Court are cross-motions for summary judgment. The sole issue for decision is whether IRS Appeals abused its discretion in denying the Rozbruchs' request for "currently not collectible" ("CNC") status. We hold in favor of the Commissioner. (In considering his motion, we draw factual inferences and resolve doubts in favor of the Rozbruchs, for the reasons stated in Part I.A below.)
Unless otherwise indicated, statutory references are to the Internal Revenue Code ("the Code", Title 26 of the United States Code) as in effect at the relevant times; and Rule references are to the Tax Court Rules of Practice and Procedure. Each citation in this Opinion to a "Doc." refers to a document so numbered in the Tax Court docket record of this case, and a pinpoint citation therein refers to the pagination as generated in the portable document format ("PDF") file.
On July 1, 2019, the IRS Appeals Office was renamed the "Internal Revenue Service Independent Office of Appeals". See Taxpayer First Act, Pub. L. No. 116-25, sec. 1001(a), 133 Stat. at 983 (2019). Some of the events in this case predate that renaming. We use the term "IRS Appeals" without distinction to refer to the office both before and after the name change.
After controversy over whether all seven of the TFRP quarters are properly at issue in this case (see Doc. 47), the Rozbruchs have, with the Commissioner's consent, amended their petition to explicitly name all the quarters (see Docs. 48-51), and the Commissioner has served notice (Doc. 54) that he withdraws his previous motion (Doc. 33) to dismiss those quarters.
Background
Petitioners' and DOJ's settlement of previous liabilities
Not at issue in this case, but important to its context, is the Rozbruchs' June 2015 settlement with the U.S. Department of Justice ("DOJ") of a case ("the DOJ Action") involving previous unpaid liabilities of the Rozbruchs and of Dr. Rozbruch's business. The complaint in that case was first filed in October 2011 and was thereafter amended to add subsequent unpaid liabilities. A third amended complaint filed in June 2013 addressed liabilities of Dr. Rozbruch's business (for income tax for 2001 and for payroll and employment taxes for 33 calendar quarters in 2000-2006 and 2008-2012) and liabilities of the Rozbruchs for income tax for the years 1999 through 2011 and for TFRPs for 15 calendar quarters in 2000, 2002-2005, and 2008. The amended complaint tallied those liabilities as exceeding $5 million (Doc. 42 at 260 (paras. 13-16) and 274 (para. 60)), and judgment was granted to the United States (see id. at 88). The Rozbruchs describe the subsequent settlement as follows:
TFRPs are liabilities assessed against an individual responsible for payroll tax withholding that an employer failed to pay over to the IRS. See § 6672.
Petitioners settled an action in the United States District Court for the Southern District of New York ("DOJ Action"). In the DOJ Action, the United States sought to reduce certain of Petitioners' tax liabilities to judgment and to foreclose on shares in co-operative apartment units owned by Petitioners. Pursuant to the settlement, Petitioners sold the residential co-operative apartment in which they lived and paid the net proceeds to the United States. They also agreed to a sizeable wage garnishment (over $14,000/month) . . . . [Doc. 38 at 7 (para. 14).]
The settlement further provided that, at the end of Dr. Rozbruch's employment agreement [in June 2018], Petitioners would sell the office units and remit some or all the proceeds to satisfy the DOJ Periods liabilities. [Doc.24 at 11-12 (para. 39); Doc. 42 at 90.]
Despite the end of the employment agreement, Dr. Rozbruch continued to work for his employer as an at-will employee, and his "compensation remain[ed] unchanged"; but he requested a 24-month extension of the June 2018 deadline for selling the office units to satisfy his outstanding liabilities. (Doc. 42 at 194.) However, the $14,000-per-month wage garnishment did not continue for those 24 months; rather, the last garnishment was made in September 2019. (Doc. 43 at 60.)
By April 2019, approximately $3 million of the liabilities for these "DOJ periods" (not at issue here) still remained unpaid (see Doc. 42 at 195). During the pendency of that DOJ Action, the Rozbruchs incurred and failed to pay additional income tax and TFRP liabilities for other periods (which are at issue here), as discussed below.
Liabilities at issue
In late June 2015 (after the signing of the DOJ settlement agreement) the IRS assessed against Dr. Rozbruch additional TFRPs for additional quarters in the years 2011-2014. For 2012, 2013, and 2016, the Rozbruchs filed tax returns on Form 1040, "U.S. Individual Income Tax Return", on which they reported liabilities that they did not fully pay. (The 2012 return was filed in April 2013; the 2013 return was filed in September 2014; and the 2016 return was filed in October 2017 (Doc. 42 at 14, 21, 26)-more than two years after the June 2015 settlement with DOJ.) The Rozbruchs do not challenge these underlying liabilities. (See Doc. 9, para. 2.)
By April 2019 approximately $700,000 of the liabilities from these "non-DOJ periods" remained unpaid. (Doc. 42 at 195; id. at 324, 332.) It is collection of these liabilities that is at issue in this case.
Collection notices and CDP hearing before IRS Appeals
In February 2018, after non-payment by the Rozbruchs despite notice and demand, the IRS sent to each of Mr. and Mrs. Rozbruch lien and levy collection notices for the income tax, and the IRS also sent to Mr. Rozbruch such notices for TFRP that had been assessed against him, for the periods mentioned above, advising them of their right to a CDP hearing. In March 2018 the Rozbruchs submitted a request for a CDP hearing on Form 12153, with attachments. (Doc. 42 at 71-109.)
The Commissioner's motion (Doc. 41 at 4-9, paras. 5-23), supported by Exhibits 1-R through 14-R (Doc. 42 at 13-70), sets out the history of the IRS's assessment of the liabilities and sending of collection notices to the Rozbruchs. The Rozbruchs do not dispute these procedural facts.
IRS Appeals conducted a CDP hearing for the Rozbruchs as to both lien and levy for all the liabilities at issue here. IRS Appeals' characterization of the Rozbruchs' position at the hearing was that they "indicated that [they did] not have the ability to pay the liabilities included in this hearing." (Doc. 42 at 321.) (In this subsequent litigation both parties view this as a request to be placed in CNC status.)
The Rozbruchs provided financial information about themselves to IRS Appeals on Form 433-A, "Collection Information Statement", updated on June 3, 2019. (Doc. 42 at 279.) They reported monthly income of $58,542 (including rental income of $14,187), and expenses of $48,905 (including "Housing / utilities" expense of $8,095 and DOJ garnishments of $14,769). The difference between these two totals was the Rozbruch's ostensible positive monthly income of $11,637. However, their information also included an explanation that the rental income would soon cease, which would result in a reduction in total income to a negative monthly income of -$2,550.
IRS Appeals determined to deny the Rozbruchs' request for CNC status and to sustain both the lien and the levy collection notices. On August 12, 2019, IRS Appeals issued three notices of determination-i.e., two notices (one to each of the Rozbruchs) as to the income tax liabilities for three years, and one notice to Mr. Rozbruch as to the TFRP liabilities for seven calendar quarters (Doc. 42 at 320-338), holding:
You provided financial information that indicates that you do have an ability to pay and that you are not in fact experiencing an economic hardship. . . .
Without regards to national/local standards and what the Service considers basic and necessary living expenses, the taxpayer reported [on Form 433-A] $11,637.00 positive monthly income. The court ordered payment listed on the above table [$14,769] is the payments being remitted to DOJ monthly. The financial information provided does not substantiate the taxpayer's claim that he does not have the ability to remit payment to the liabilities owed in this hearing. Bank statements for one Citibank account were provided showing transactions for the months of March, April and May 2019. During this period, approximately $83,200.00 of funds were paid to unsecured credit card debt and approximately $38,260.00 of funds were transferred to investment accounts. There were multiple transfers in/out of this account therefore not all bank account information was provided. Furthermore, in addition to the rent and utility expenses for his rental apartment in Manhattan, the bank statements provided reflected housing and utility expenses being paid in Suffolk County New York (electric and cable bills as well as trash removal and pool cleaning expenses).
The bank statement information provided clearly does not support the taxpayer's claim that the wage garnishment of $14,769.00 being paid to DOJ monthly is causing a financial hardship and inability to remit funds to the unpaid taxes for the periods included in this hearing.
That is, IRS Appeals determined that even using the Rozbruchs' numbers, they had a positive monthly income of more than $11,000, which they could use to pay off the $700,000 of liabilities at issue here. IRS Appeals also disputed the Rozbruchs' proposed "Housing / utilities" expense of $8,095 and proposed to instead allow $3,371 on the basis of "national / local standards", which would yield additional positive monthly income of about $4,700. IRS Appeals also observed transactions that suggested that the Rozbruchs had other accounts or assets that they were using to make other expenditures (and which could provide additional sources for payment of taxes). (Doc. 42 at 327-328.)
In September 2019 (i.e., after the issuance of the August 2019 notices of determination), the DOJ garnishments of $14,769 per month ceased. The Rozbruchs assert, and we assume, that this was unanticipated by and unknown to IRS Appeals when it issued those notices.
The Rozbruchs assert: "Petitioners expected the garnishment to continue until such time as the liability was paid in full (or Dr. Rozbruch stopped working for the hospital). In fact, in September 2019, Petitioners' counsel was attempting to negotiate a reduction in the garnishment amount with the Department of Justice. While those negotiations were ongoing, also in about September 2019, Beth Israel hospital unilaterally determined to end the garnishment because the hospital believed the garnishment was satisfied. Thereafter, Petitioners never received a response from DOJ regarding the garnishment. . . . At the time of the original due process hearing, there was no expectation that the garnishment would cease." (Doc. 44, paras. 5-6.)
The Tax Court petition and remand
The Rozbruchs timely filed their petition on September 10, 2019. In September 2020 the Commissioner filed a motion for summary judgment, contending that "SO Samuel's determination to sustain the collection actions was not an abuse of discretion and should be sustained." (Doc. 6 at 33.) The Rozbruchs opposed, arguing that "Respondent's determination was result driven and failed to properly compute Petitioners' income and allowable expense" (Doc. 9, para. 2) and stating, as the most salient error, that the Rozbruchs' income would decrease by $14,930 beginning August 1, 2019 (id., para. 3). We denied the Commissioner's motion for summary judgment in a very short order (Doc. 16) dated January 27, 2021, that stated:
Upon due consideration of the parties' motion papers and pursuant to a telephone conference with the parties on January 26, 2021, it is
ORDERED that respondent's Motion for Summary Judgment, filed September 9, 2020, is denied. It is further
ORDERED that this case is remanded to respondent's Independent Office of Appeals, sua sponte, for a supplemental hearing to reconsider petitioners' financial circumstances, taking into account all of petitioners' income, expenses, assets, and liabilities as reported by petitioners in their supporting financial documentation, and issue a supplemental determination letter as to whether petitioners qualify for a collection alternative or whether the tax liabilities at issue are entitled to "currently not collectible" status. [Emphasis added.]
(The phrase "as reported", which we italicize above, is important to the Rozbruchs' position, as we explain below in Part II.A.)
Supplemental hearing before IRS Appeals
IRS Appeals described as follows the purpose of the remand: "The case was remanded for Appeals to reconsider your financial circumstances and clarify any ambiguity as it relates to your ability to pay."
IRS Appeals held telephone conferences with the Rozbruchs' representative on April 2 and September 8, 2021. By that second conference, the Rozbruchs' financial information updated in June 2019 on Form 433-A was more than two years old. The Appeals Officer's notes state as follows:
I explained the question is whether the TP [taxpayer] qualifies for CNC status? I explained that was difficult to determine based on a CIS [Collection Information Statement, Form 433-A] that was over two years old. Not to mention, part of the dispute was over $14K of income that should have ceased well [over] 18 months ago. I advised the most prudent thing to do would be for me to secure updated financials. The POA [i.e., "Power of Attorney", the representative] was not in complete agreement. The POA believes the old info justifies CNC status . . . . [Doc. 42 at 202.]
The Rozbruchs proposed only CNC status and not another collection alternative (such as an Installment Agreement or an Offer in Compromise). They acknowledge that IRS Appeals "did request updated financial information" and admit that "no new financial information was provided" (Doc. 38 at 4-5, para. 8; see also Doc. 45 at 4, para. 6). In particular, their representative did not provide an updated Form 433-A.
IRS Appeals nonetheless proceeded as best it could with the outdated information. Lengthy and detailed notes thereafter entered in the "Case Activity Report" (see Doc. 21 at 203-207) are recapitulated at length in the Commissioner's memorandum (Doc. 41 at 33-37, paras. 101-117), and they show that IRS Appeals personnel gave detailed attention to analyzing the information relevant to the disputed items of income and expense that the Rozbruchs had contended were overlooked or misunderstood in IRS Appeals' previous analysis.
Supplemental notices of determination
IRS Appeals determined for the second time to sustain the collection notices. On February 1, 2022, it issued supplemental notices of determination (Doc. 42 at 373, 384, 396) that stated its "Summary of Determination" as follows:
A collection alternative was not proposed. No liability issues were raised. You have requested that your account be reported as currently not collectible. Based on the financial information submitted, it is not
considered appropriate to report your account as currently not collectible. The Notice of Intent to levy was appropriate at the time it was issued. The proposed levy action has been sustained. You have not provided an appropriate basis for the withdrawal of the Notice of Federal Tax Lien. The Notice of Federal Tax Lien will remain in full force and effect until satisfied or unenforceable. [Doc. 42 at 373.]
The detailed attachment to the notice also recounted the Rozbruchs' rejecting requests for updated financial information:
During each conference, [the representative] re-affirmed his assertion that he believed that the submitted financial information was sufficient to justify your request for a Currently Not Collectible determination. [IRS Appeals] advised [the representative] on September 8, 2021, that it would be helpful if you would submit updated financial information. [The representative] stated that he believed that the submitted financial information was sufficient to justify your request for a Currently Not Collectible determination but stated that he would discuss the request with you and contact [IRS Appeals] by September 22, 2021 with your answer on whether you would be willing to submit any updated financial information. [IRS Appeals] set a follow-up response date of September 22, 2021 with [the representative] failing to further respond. [Doc. 42 at 375.]
The attachments to the supplemental notices of determination repeated: "You have opted not to provide any current financial information . . . . It should be noted that you have not provided updated investment account statements or an updated financial statement." (Doc. 42 at 382, 394, 405.)
The attachment addressed particular issues of income and expense, some of them as in the August 2019 determination, and some new in February 2022. IRS Appeals apparently determined to assume that the Rozbruchs had stopped receiving the $14,187 of monthly rental income (Doc. 42 at 378) and seems to have further assumed that the monthly DOJ garnishments of $14,769 continued (Doc. 42 at 380).
Post-remand motions in this case
In January 2022 (before the issuance of the supplemental notices of determination upon remand) the Rozbruchs filed a motion for summary judgment (Doc. 24). When the Commissioner reported the issuance of those notices (see Doc. 29), we ordered the Rozbruchs to supplement their motion. They did so (see Doc. 38); the Commissioner then filed a cross-motion for summary judgment (Doc. 41); and those cross-motions have now been fully briefed.
Discussion
I. Applicable legal principles
A. Summary judgment standard
The purpose of summary judgment is to expedite litigation and avoid unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). We may grant a motion for summary judgment when there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Rule 121(b); Electronic Arts, Inc v. Commissioner, 118 T.C. 226, 238 (2002). The moving party bears the burden of showing that no genuine dispute of material fact exists, and the Court will construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). If the movant makes the showing required by Rule 121(b), then the opposing party "must set forth specific facts showing that there is a genuine dispute for trial", in contrast to "mere allegations or denials". Rule 121(d).
B. CDP procedures
If a taxpayer fails to pay any tax liability after notice and demand, Congress has given the IRS two main collection tools-lien and levy. As for lien, section 6321 imposes a lien in favor of the United States on all the property of the delinquent taxpayer, and section 6323(f) authorizes the IRS to file notice of that lien. However, no later than five business days after filing an NFTL, the IRS must provide written notice of that filing to the taxpayer. § 6320(a). After receiving such a notice, the taxpayer may request an administrative hearing ("the CDP hearing") with respect to the lien. § 6320(b)(1). As for levy, section 6331(a) authorizes the IRS to collect the tax by levy upon the taxpayer's property and rights to property. However, before issuing such a levy, the IRS must send the taxpayer a written notice informing the taxpayer that levy may commence in 30 days and that the taxpayer has the right to request a CDP hearing with respect to the levy. Secs. 6330(a), 6331(d). If the taxpayer requests such a hearing in writing and states the grounds for the requested hearing, the hearing shall be held by IRS Appeals. Sec. 6330(a)(3)(B), (b)(1), (b)(3).
In order to determine at the CDP hearing whether the IRS's proposed collection action may proceed, the appeals officer shall consider the following: (1) the verification obtained from the Secretary that the requirements of applicable law or administrative procedure have been met; (2) the issues raised by the taxpayer, including appropriate spousal defenses, challenges to the appropriateness of collection action, offers of collection alternatives, and the underlying liability; and (3) whether the proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary. Sec. 6330(c). (Of all those potential issues, the only one maintained in this case by the Rozbruchs is their request that their tax liabilities be placed in CNC status, which is a collection alternative. See Chadwick v. Commissioner, 154 T.C. 84, 95 (2020) ("Suspension of collection activity is a collection alternative that the taxpayer may propose and that the Appeals Office must consider. See sec. 6330(c)(2)(A)(iii), (3)(B)").)
The taxpayer may challenge the underlying liability if the taxpayer "did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability." § 6330(c)(2)(B). At the CDP hearing the Rozbruchs did not challenge their underlying liabilities, so that issue is not in dispute in this case.
Once IRS Appeals issues its determination, the taxpayer may, within 30 days of a determination, "petition the Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter)." Sec. 6330(d)(1).
C. Tax Court review: abuse of discretion
In reviewing a determination by IRS Appeals in a CDP case when (as here) the issue of the taxpayer's underlying tax liability is not in dispute, we review the IRS Appeals' determination as to other issues for abuse of discretion. Id. at 182. "Applying that abuse-of-discretion standard, we decide whether IRS Appeals' determination to deny the [petitioners] a collection alternative and to sustain the proposed levy action was arbitrary, capricious, or without sound basis in fact or law. See Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd, 469 F.3d 27 (1st Cir. 2006). We do not, however, substitute our judgment for that of IRS Appeals, and we do not decide independently whether we believe that the levy should be withdrawn", Lipka v. Commissioner, T.C. Memo 2022-116, at *7.
II. Collection alternative: CNC status
We explained CNC status as follows in Norberg v. Commissioner, T.C. Memo. 2022-30, at *5:
To be entitled to this collection alternative taxpayers must demonstrate that, on the basis of their assets, equity, income, and expenses, they have no apparent ability to make payments on the outstanding tax liability. See Foley v. Commissioner, T.C. Memo. 2007-242, 94 T.C.M. (CCH) 210, 212.
A taxpayer's ability to make payments is determined by calculating the excess of income over necessary living expenses. Rosendale v. Commissioner, T.C. Memo. 2018-99, 116 T.C.M. (CCH) 4, 6; IRM 5.16.1.2.9 (Sept. 18, 2018). An SO [i.e., an IRS Appeals Settlement Officer] does not abuse his discretion when he employs local and national standards to calculate the taxpayer's expenses and ability to pay. See Friedman v. Commissioner, T.C. Memo. 2013-44, 105 T.C.M. (CCH) 1288, 1290 (noting that burden is on taxpayer to justify departure from local standards). In reviewing for abuse of discretion, the Court
does not substitute its judgment for that of the SO or recalculate a taxpayer's ability to pay. See O'Donnell v. Commissioner, T.C. Memo. 2013-247, 106 T.C.M. (CCH) 477, 481.See also Willis v. Commissioner, T.C. Memo. 2003-302, 86 T.C.M. (CCH) 506, 507 (to the same effect). Financial information is thus critical to CNC status. Consequently, "to justify an account's being placed in CNC status, the taxpayer must supply evidence of his financial circumstances, including 'the money that is available to him and the expenses that he bears.' Pitts v. Commissioner, T.C. Memo. 2010-101, 99 T.C.M. (CCH) 1406, 1411; see 26 C.F.R. § 301.6330-1(e)(1). IRS Appeals does not abuse its discretion in denying CNC status where the taxpayer has not submitted the necessary financial information." Chadwick v. Commissioner, 154 T.C. at 95.
III. Abuse-of-discretion analysis
A. The Rozbruchs' failure to provide updated financial information
In the supplemental CDP hearing, IRS Appeals requested that the Rozbruchs update their financial information, which by then was more than two years out of date, but the Rozbruchs declined. This failure alone warranted IRS Appeals' denying CNC status and sustaining the lien and levy notices, since it is a truism that IRS Appeals does not abuse its discretion when it denies CNC status (or any other collection alternative) to a taxpayer who fails to provide financial information. See Chadwick, supra.
The Rozbruchs resist the application of that principle to this case because our remand order stated that, at the supplemental CDP hearing, IRS Appeals was "to reconsider petitioners' financial circumstances, taking into account all of petitioners' income, expenses, assets, and liabilities as reported by petitioners in their supporting financial documentation" (Doc. 16; emphasis added). They construe this instruction to limit IRS Appeals' analysis exclusively to information that the Rozbruchs previously submitted and to disallow any demand for updated information. We have seen similar contentions before, and we rejected one such in Rosenberg v. Commissioner, T.C. Memo. 2019-52 at *13, as follows:
[P]etitioner contends that . . . respondent should not have been afforded an opportunity to supplement the record. We disagree. We may remand a case to the Appeals Office for further hearing in appropriate circumstances. See Lunsford v. Commissioner, 117 T.C. 183, 189 (2001). After remand we properly review the CDP determination and record as supplemented. Kelby v. Commissioner, 130 T.C. 79, 86 (2008). The Appeals Office on remand is not limited to the original administrative record because the purpose of remand is often to augment a deficient record. See Hoyle v. Commissioner, 136 T.C. 463 (2011), supplementing
131 T.C. 197 (2008); Lunnon v. Commissioner, T.C. Memo. 2015-156, at *18, aff'd, 652 Fed.Appx. 623 (10th Cir. 2016).
Our remand order can be construed to instruct IRS Appeals to include in its consideration the Rozbruchs' information "as [previously] reported"-but it cannot reasonably be construed to allow consideration of only that previous information. Our instruction was to "take[] into account" that information in the process of "reconsider[ing] petitioners' financial circumstances." Assuming that there might sometimes be an occasion in which, in a remand order, the Court has the discretion to confine IRS Appeals to an existing record, we did not so confine IRS Appeals here; and it would have been very odd to do so in this situation. The relief that the Rozbruchs request is the status of "currently not collectible"; but the remand as they conceive it would have the IRS determine whether to forestall collection (and would have the Court review that determination) on the basis of a showing that they were not collectible four years ago-i.e., to determine not that they are currently not collectible but that they were previously not collectible. Of course, financial information in a CDP hearing can never be up to the minute, but a four-year lag would undermine the logic of CNC.
Such a retrospective limitation on a CDP remand would also contradict the inevitably provisional nature of the CNC remedy. If someone is relieved from tax collection because in his current financial circumstances his debt is not collectible, then if and when his circumstances change in a way that makes the debt now collectible, he ought to be subject to collection. Consequently, the IRS's CNC status is designed to be subject to "systemic follow-up". The Rozbruchs object that during the supplemental hearing IRS Appeals derived information from a recent tax return they had filed; but if they had been determined eligible for CNC status, the routine "follow-up" of that determination could have included an annual review of their "Total Positive Income (TPI) . . . when a taxpayer files an income tax return". IRM Part 5.16.1.2.9 (04-13-2021).
To state the obvious, the IRS has the critical function of collecting tax. Congress's enactment of the CDP procedures in sections 6320 and 6330 indicates an intention that the IRS's collection activity be reasonable and humane, and the job of the Tax Court in a CDP case is to assure that the IRS does not abuse its discretion in deciding when to proceed with collection. So far in this case, this CDP procedure has stalled IRS attempts to collect $700,000 from the Rozbruchs for nearly five years (i.e., since they filed their CDP request in March 2018). But tax must be collected; and no creditor, however humane, would forego, on "uncollectible" grounds, collection from a debtor who refuses to show that his debt really is uncollectible. The IRS's procedures requiring proof of a taxpayer's current financial situation are not an abuse of the agency's discretion, and an individual Appeals Officer does not abuse his discretion when he follows those procedures. Even assuming we have the power to order IRS Appeals to do otherwise, we did not order it in this case.
Our analysis could end there. Whatever arithmetical or other errors IRS Appeals might have made in its attempt to evaluate the Rozbruchs' financial situation, those errors would be harmless errors, overwhelmed by the Rozbruchs' wholesale failure to show their current assets, income, and expenses. Any attempted computation using their four-year-old information necessarily sheds little light on the question whether their overdue taxes are "currently not collectible"-the question as to which the Rozbruchs were obliged to provide information. Since they failed to do so, IRS Appeals did not abuse its discretion by denying CNC status.
B. Specific disputes about IRS Appeals' supplemental determination
We nonetheless proceed to consider two of the disagreements that, in the pending cross-motions, the parties have articulated as to the Rozbruchs' ability to pay. As we do so, we bear in mind that deciding this case does not require much fine-tuning as to the Rozbruchs' ability to pay. This is not an instance in which IRS Appeals proposed one amount for a monthly installment while the taxpayers proposed a somewhat smaller amount. Rather, the Rozbruchs proposed (and still propose) that they pay nothing toward their $700,000 tax debt. Their proposed number is zero. This means that if the Rozbruchs are capable of make any monthly payment at all-if they have total positive income in any non-de minimis amount- then IRS Appeals rightly reckoned that the debts are not CNC.
See Vinatieri v. Commissioner, 133 T.C. 392, 401 (2009); Willis v. Commissioner, T.C. Memo.2003-302 (holding that taxpayers' ability to make some payments toward their cumulative liability made them ineligible to have the cumulative liability classified as currently not collectible).
1. Apartment expense
To determine whether a taxpayer can be expected to receive income greater than his necessary living expenses, one of the important items taken into account is rental expense for housing. Generally, IRS Appeals does not abuse its discretion when it relies on "prevailing local standards . . . in assessing [the taxpayers'] ability to pay, and it [is the taxpayers'] burden to justify a departure from the local standards." Norberg v. Commissioner, T.C. Memo. 2022-30, at *6 (citing Friedman v. Commissioner, T.C. Memo. 2013-44, at *9).
The Rozbruchs allege that, when they entered into a settlement agreement with DOJ in June 2015, they and the Government had an understanding that, in order to facilitate Dr. Rozbruch's work (and to facilitate his ability to pay his overdue taxes), the Rozbruchs would live in an apartment that was near to his place of employment but that required rent in an amount ($6,000, yielding a housing expense total of $8,095 with utilities and other expenses) that is above the national and regional averages normally used by IRS Appeals in computing allowable living expenses (which totaled the lower amount of $3,371). The approximately $4,700 difference is, if IRS Appeals is right, an addition to total positive income that should be available to make payments against the $700,000 liability.
The Rozbruchs argue: "Pursuant to the settlement, Petitioners sold the residential cooperative apartment in which they lived and paid the net proceeds to the United States. They also agreed to a sizeable wage garnishment (over $14,000/month). During settlement discussions, Petitioners made it clear to the United States they would need to find alternate housing in New York City. Dr. Rozbruch was and is required to be near his office. The apartment to be rented by Petitioners was disclosed to the United States and the initial monthly rent was more than $6000. Given the cost of residential rental properties in New York City, neither the United States nor its client, Respondent, opposed the rental. Said another way, Respondent accepted the sizeable garnishment knowing that a New York City doctor's salary is commensurate with the cost of New York City housing. . . . Despite accepting the benefit of the settlement, the 2019 determinations disallow the actual housing expense that is a requisite to generating the salary from which the garnishment came. . . . The actual cost of Petitioners' housing and utilities, as set forth on their 2019 Form 433-A, was $8,095. Exhibit 4-P. Given the undisputed circumstances, Respondent should be estopped from disallowing any portion of the housing expense. Respondent was aware of the expense in 2015, implicitly agreed to the expense, and received the full benefit from the sale of Petitioners' residence and the voluntary wage garnishment." (Doc. 39 at 7-8.)
When IRS Appeals used those averages in the initial CDP hearing and on remand in the supplemental CDP hearing, the Rozbruchs contended that this constituted an abuse of discretion. They do not point us, however, to any term of their DOJ agreement that entitled them to continue that rental arrangement-much less, that entitled them to continue that arrangement even if they were to fail (as they did) to pay yet additional liabilities that arose after the DOJ agreement. It would be strange if a tax collection agreement for previous liabilities were to guarantee the delinquent taxpayer's right to maintain a given above-average standard of living no matter what additional taxes the taxpayer might thereafter fail to pay, and we have no indication that DOJ agreed to such a term with the Rozbruchs.
The outcome is the same if the Rozbruchs do not mean that they were actually entitled to maintain their expensive apartment but rather that their doing so was important to Dr. Rozbruch's ability to earn his wages, so that a creditor should be willing to agree to the apartment expense to maximize the debtor's ability to pay his debt. This is not an absurd suggestion, but it is a suggestion that is within a creditor's discretion to accept or reject. Apart from their agreement with DOJ to resolve $3 million in back taxes, the Rozbruchs piled up subsequent liabilities for another $700,000. We cannot say it was an abuse of discretion if IRS Appeals concluded that continued approval of high rent on that theory was a bad bet. Therefore, IRS Appeals' reduction of housing expense increased the Rozbruch's available income by $4,700 per month.
Even if we otherwise assume correct the Rozbruch's outdated Form 433-A (yielding ostensible positive income of $11,637) and the anticipated $14,187 reduction of rental income, with the resulting negative monthly income of -$2,550, this $4,700 reduction of housing expense that IRS Appeals determined moves the Rozbruchs' monthly income into the positive range-i.e., a positive monthly income of $2,150. If IRS Appeals was right only about the housing expense correction, then the Rozbruchs had $2,150 per month that was available to be paid against the liabilities of $700,000. Since they proposed instead to pay zero, under hoped-for CNC status, IRS Appeals did not abuse its discretion in denying them that status.
2. Garnishment
Housing expense is not the only appropriate correction to the Rozbruchs' proposed negative monthly income of -$2,550. That negative amount presumes, as part of the living expense, the monthly garnishment of $14,769 to which the Rozbruchs and DOJ agreed. However, after the Rozbruchs completed their June 2019 Form 433-A, and after IRS Appeals issued the August 2019 notices of determination, the garnishments ceased in September 2019. This reduced their expenses below the amount reported. Consequently, even if their negative monthly income of -$2,550 was otherwise correct, as supported by their uncorrected Form 433-A, this $14,769 reduction of expense increases their monthly income into the positive range-i.e., a positive monthly income of $12,219. If the Commissioner is right only about the garnishment correction, then the Rozbruchs had a monthly $12,219 that was available to be paid against the liabilities of $700,000.
The Rozbruchs do not dispute the factual accuracy of the garnishment's cessation. Nor do they dispute its potential implications for their positive monthly income. Rather, their only response is, again, that IRS Appeals' determination and this Court's review must be confined to the information available at the time of the initial notices of determination:
The Rozbruchs do not contend that, in considering the Commissioner's motion for summary judgment, we cannot consider (and that we cannot sustain IRS Appeals' determination on the basis of) an argument not relied on by IRS Appeals in making that determination, and we therefore treat any such contention as waived. If we were instead to sustain such a contention, the consequence would be that we would remand the case for a second time so that IRS Appeals could verify the facts of the cessation of the garnishment; but such a remand would be futile, since the Rozbruchs admit the facts without reservation. We need not delay the case further with another remand.
At the time of the original due process hearing, there was no expectation that the garnishment would cease. Instead, Petitioners were attempting to reduce the amount of the garnishment due to the loss of the office rental income and their resulting inability to meet their monthly expenses. The [employer-]hospital's unilateral action [stopping the garnishment] and the government's nonresponse were unanticipated, not within Petitioners' control, and took place after the initial determination was issued. Again, this is a review of Petitioners' financial condition as of August 19, 2019, and not future unanticipated events. [Doc. 44, para. 6.]
We do not adopt the Rozbruchs' premise that new information is impermissible in a remand, so we conclude that their ability to pay was indeed greater than they reported, by no less than $14,769 (the amount of the discontinued garnishment). Consequently, since the Rosbruchs proposed to pay zero, under hoped-for CNC status, IRS Appeals did not abuse its discretion in denying them that status.
For the foregoing reasons, it is
ORDERED that the Clerk of the Court shall correct the title of the Commissioner's recent notice (Doc. 54) to be "Notice of Withdrawal of Motion to Dismiss for Failure to State a Claim upon Which Relief Can Be Granted". It is further
ORDERED that the motion to dismiss (Doc. 33) is denied as withdrawn. It is further
ORDERED that the Rozbruch's motion for summary judgment (Doc. 24), as supplemented (see Doc. 38), is denied and that the Commissioner's motion for summary judgment (Doc. 41) is granted. It is further
ORDERED AND DECIDED that respondent may proceed with collection of petitioners' unpaid income tax and trust fund recovery penalty liabilities as described in both "Supplemental Notice[s] of Determination Concerning IRS Collection Actions under Internal Revenue Code Sections 6320 or 6330" dated February 1, 2022.