On April 5, 2022, the Tax Court issued a Memorandum Opinion in the case of Norberg v. Commissioner (T.C. Memo. 2022-30). The primary issue presented in Norberg v. Commissioner was whether the settlement officer abused its discretion in upholding a notice of intent to levy and denying the petitioners’ request to be placed in currently not collectible status (despite having the ability to make payments).
Background to Norberg v. Commissioner
In February 2019, the petitioners filed a delinquent Federal income tax return for 2016. That return reported a tax liability of $42,000. The petitioners did not enclose full payment with the return, and as of September 2019, their outstanding liability for 2016 was about $9,200.
In September 2019, in an effort to collect this liability, the IRS issued a levy notice to the petitioners, and they timely requested a CDP hearing. They expressed interest in a collection alternative, checking the box “I Cannot Pay Balance.” The petitioners did not challenge, in their hearing request or at any subsequent point during the CDP proceeding, their underlying tax liability for 2016.
Petitioners’ case was assigned to a settlement officer (SO1) in the Jacksonville, Florida Appeals office. SO1 verified that the petitioners’ tax for 2016 had been properly assessed and that all other legal and administrative requirements had been met. SO1 scheduled a telephone conference in June 2020. Both petitioners participated.
During the conference, SO1 explained that the only tax year properly before her was 2016, the sole year covered by the levy notice. Petitioners requested that their 2016 account be placed in currently not collectible (CNC) status, meaning the debt is not forgiven or extinguished, but collection is deferred. They indicated that they had submitted financial information to support their request, but SO1 was unable to retrieve the documents because of pandemic-related office closures.
The case was reassigned to a new settlement officer (SO2), who secured petitioners’ Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and supporting bank statements. Employing an “allowable expense calculator,” SO2 made a slight downward adjustment to petitioners’ claimed monthly expenses, conforming those costs to the expenses allowable for the Florida county in which they lived. Subtracting their allowable monthly expenses from their reported monthly income, SO2 determined that the petitioners could pay $62 a month toward their 2016 income tax liability.
In September 2020, SO2 called the petitioner-husband and explained that the petitioners were not eligible for CNC status. Instead, he offered them a “partial pay installment agreement” (PPIA) calling for monthly payments of $62. He requested a response by the following Tuesday, allowing the petitioners a weekend to consider his offer. Having received no response, SO2 telephoned the petitioners that Wednesday, leaving a voice message that asked them to call him back the following day.
When the petitioners failed to respond by that deadline or subsequently, SO2 decided to close the case. Fifteen days later, the IRS issued the petitioners a notice of determination sustaining the levy, and the petitioners timely petitioned the Tax Court. They alleged that the levy “would constitute a financial hardship” and that their “cost of living exceed[ed their] income.”
A month after filing their Tax Court Petition, the petitioners filed for bankruptcy. This case was accordingly stayed while the bankruptcy case remained pending. The Tax Court lifted the stay in November 2021, having ascertained that the bankruptcy court had granted the petitioners a discharge under 11 U.S.C. IRC § 727.
The IRS then filed the Motion for Summary Judgment, and the petitioners responded. In the petitioners’ response they acknowledge that SO2 offered them a PPIA calling for monthly payments of $62. However, they contended that they “cannot afford to pay this amount as it would create an undue hardship.”
Underlying Tax Liability and Bankruptcy
As a result of petitioners’ bankruptcy case, the IRS has abated the additions to tax, totaling $4,429, that were determined under IRC § 6651(a)(1) and (2) for 2016. However, the IRS has not abated the balance of their outstanding tax liability.
Although 11 U.S.C. IRC § 727(a) contains broad discharge provisions to give debtors a fresh start, 11 U.S.C. IRC § 727(b) provides that certain debts are nondischargeable. If a debtor files an untimely Federal income tax return within the two years preceding the debtor’s bankruptcy petition, the debt associated with the untimely return is nondischargeable.
The petitioners filed a delinquent Federal income tax return for 2016 in February 2019. Because that date was within two years of November 2020, the date on which they filed their bankruptcy petition, the petitioners’ 2016 income tax liability was nondischargeable. The petitioners do not dispute that proposition, and they did not otherwise challenge their underlying tax liability during the CDP hearing or in their Petition to the Tax Court.
Abuse of Discretion Analysis
In deciding whether the SOs abused their discretion, the Tax Court considered whether they: (1) properly verified that the requirements of any applicable law or administrative procedure have been met; (2) considered any relevant issues the petitioners raised; and (3) determined whether “any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of [the petitioners] that any collection action be no more intrusive than necessary.”
The Tax Court’s review of the record established that SO1 and SO2 properly discharged all of their responsibilities under IRC § 6330(c).
The only issue the petitioners raised was their entitlement to have their 2016 account placed in CNC status. 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.
A taxpayer’s ability to make payments is determined by calculating the excess of income over necessary living expenses. An SO does not abuse his discretion when he employs local and national standards to calculate the taxpayer’s expenses and ability to pay. In reviewing for abuse of discretion, the Tax Court does not substitute its judgment for that of the SO or recalculate a taxpayer’s ability to pay.
In determining the petitioners’ ability to pay, SO2 calculated their allowable monthly expenses by reference to local standards prevailing in the Florida county where they resided. This caused a slight downward adjustment to one of the expenses reported on their Form 433-A. Having made that adjustment, SO2 determined that the petitioners could pay the IRS $62 per month and so were not entitled to CNC status. He offered them a PPIA calling for monthly payments of $62, but they did not accept his offer.
Thus, unsurprisingly, the Tax Court found no abuse of discretion in Norberg v. Commissioer. Although the petitioners allege that their cost of living exceeds their income, this allegation appears only to be based on the expenses reported on their Form 433-A, without reference to prevailing local standards. Unfortunately for the Norbergs, SO2 was authorized to rely on those standards in assessing their ability to pay, and it was their burden to justify a departure from the local standards.
Finding no abuse of discretion in any respect, the Tax Court sustained the proposed collection action.
- See IRM 126.96.36.199. ↑
- See 11 U.S.C. § 362(a)(8). ↑
- See 11 U.S.C. § 362(c)(2)(C). ↑
- See 11 U.S.C. § 523(a)(1)(B)(ii); Washington v. Commissioner, 120 T.C. 114, 121-22 (2003). ↑
- See IRC § 6330(c)(3). ↑
- See Foley v. Commissioner, T.C. Memo. 2007-242. ↑
- Rosendale v. Commissioner, T.C. Memo. 2018-99; IRM 188.8.131.52.9. ↑
- See Friedman v. Commissioner, T.C. Memo. 2013-44 (noting that burden is on taxpayer to justify departure from local standards). ↑
- See O’Donnell v. Commissioner, T.C. Memo. 2013-247. ↑
- See Friedman, T.C. Memo. 2013-44. ↑