T.C. Memo. 2004-13
UNITED STATES TAX COURT
CHARLES G. AND ELIZABETH A. FARGO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9492-02L. Filed January 16, 2004.
Dennis N. Brager, for petitioners.
Linette B. Angelastro, for respondent.
MEMORANDUM OPINION
HOLMES, Judge: The petitioners, Charles and Elizabeth
Fargo, bought two tax shelters 20 years ago. When respondent
disallowed their losses and sent them a notice of deficiency in
2000, time and the compounding of interest had nearly quadrupled
their total bill. Petitioners paid the tax portion of the
deficiencies in full. We consider whether respondent abused his
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discretion under section 6330 in refusing to compromise the
remainder.
Background
Petitioners filed joint returns for the tax years 1983 and
1984. For 1983, they claimed a Schedule E loss of $30,767
attributable to their interest in a partnership named Jackson &
Associates (Jackson). For 1984, they claimed Schedule E losses
of $2,749 attributable to their interest in Jackson and $28,996
attributable to their interest in another partnership, Smith &
Asher Associates (Smith/Asher). Both Jackson and Smith/Asher
were partners in other partnerships: Jackson in a partnership
called Wilshire West Associates (Wilshire), and Smith/Asher in a
partnership called Redwood Associates (Redwood). All these
partnerships were subject to the TEFRA provisions of sections
6221-6234.1
These partnerships were all affiliated with a group of tax
shelters known as the Swanton Coal Programs, a coal mining
venture which produced much more litigation than coal. See,
e.g., Smith v. Commissioner, 92 T.C. 1349 (1989); Beagles v.
1
Section references are to the Internal Revenue Code of
1986, as amended. Secs. 6221 to 6234 were added by the Tax
Equity and Fiscal Responsibility Act (TEFRA) of 1982, Pub. L. 97-
248, sec. 402(a) 96 Stat. 648, and provide for the determination
of partnership items at the partnership, rather than at the
individual partner, level. The Commissioner is generally unable
to assess a deficiency relating to a TEFRA partnership item until
after the completion of partnership-level proceedings. See
generally Katz v. Commissioner, 116 T.C. 5, 8 (2001), revd. on
other grounds 335 F.3d 1121 (10th Cir. 2003).
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Commissioner, T.C. Memo. 2003-67; Kelley v. Commissioner, T.C.
Memo. 1993-495. In Kelley, we concluded that “The formation and
operation of the Swanton Coal Programs appear to have as
substance little more than a grandiose serving of whimsy”, and
that they were “nothing more than an elaborate scam to provide
highly leveraged deductions for nonexistent expenses.” We
therefore disallowed the partnership losses at issue, and
sustained the Commissioner’s imposition of increased interest
pursuant to section 6621(c) because the programs were so clearly
tax-motivated transactions.
Because the programs used tiered partnerships, however, our
decision in Kelley did not automatically resolve the tax
liability of partners in Jackson or Smith/Asher, and the
Commissioner continued to negotiate with the tax matters partners
(TMPs) for these partnerships until finally reaching closing
agreements with both of them by mid-1999. After Jackson and
Smith/Asher concluded their closing agreements, respondent
contacted petitioners in November 1999, sending them a notice of
examination that proposed changes to their 1983 and 1984 returns.
In March 2000, respondent sent out notices of deficiency.
Petitioners paid the entire tax portion of their outstanding 1983
and 1984 deficiencies (amounting to $23,977), but did not pay any
of the accrued interest (which had grown to more than $100,000).
After assessing the deficiencies, respondent sent petitioners a
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final notice of intent to levy. Petitioners timely requested a
hearing, the focus of which was their offer to compromise the
nearly two decades of compound interest for $7,500. The Appeals
officer rejected their offer and determined that a levy was
appropriate. This action followed. The case was calendared for
trial in California, where the Fargos resided when they filed
their petition. The parties stipulated the relevant facts, and
moved to submit the case for decision without trial under Rule
122.
Discussion
Section 7122(c) directs the Secretary to prescribe
guidelines for determining whether to accept or reject specific
offers in compromise. Under section 301.7122-1T(b), Temporary
Proced. & Admin. Regs., 64 Fed. Reg. 39024 (July 21, 1999),2
there are three grounds for compromise: Doubt as to liability,
doubt as to collectibility, and promotion of effective tax
administration. Petitioners argue that their compromise offer
met two of the temporary regulations’ separate standards for
acceptance “in furtherance of effective tax administration”--
collection of the full amount would cause them economic hardship,
2
As petitioners submitted their offer in compromise after
July 21, 1999, and before July 18, 2002, it is governed by the
temporary regulations that were then in force. (The portions
relevant to this case survived in substantially similar form in
the final regulations at sec. 301.7122-1(b), Proced. & Admin.
Regs.)
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see sec. 301.7122-1T(b)(4)(i), Temporary Proced. & Admin. Regs.,
supra; and, even if it did not, would because of “exceptional
circumstances” be “detrimental to voluntary compliance by
taxpayers” by creating doubt as to the fair administration of the
tax laws, see sec. 301.7122-1T(4)(ii), Temporary Proced. & Admin.
Regs., supra.
Respondent rejected both arguments. He concluded that
petitioners could fully satisfy both their tax debt and their
foreseeable expenses without economic hardship. He also
concluded that they had failed to show “exceptional
circumstances” sufficient to justify accepting their compromise.
We examine each issue in turn, mindful that our review under
section 6330 is for abuse of discretion. See Davis v.
Commissioner, 115 T.C. 35, 39 (2000). This standard does not ask
us to decide whether in our own opinion the offer in compromise
should have been accepted, but whether the Commissioner exercised
his “discretion arbitrarily, capriciously, or without sound basis
in fact or law.” Woodral v. Commissioner, 112 T.C. 19, 23
(1999).
A. Hardship
Petitioners suggest that although they currently enjoy
fairly substantial means, their economic future is tainted by a
diagnosis that petitioner Charles Fargo suffers from a
progressive neurological condition that may eventually require
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round-the-clock nursing care. They claim that such care is so
expensive (almost $90,000/year, by their estimate) that it would
cause them to wholly consume their liquid assets in 10 years.
They argue that respondent should have accepted their offer as a
viable alternative to a levy because of this foreseeable economic
hardship.
As we already noted, we look to respondent’s determination
for anything that runs counter to established law or suggests the
lack of a “sound basis in fact or law.” In that light, we
decline to second-guess his determination that petitioners’
resources are sufficient to warrant collection of the entire
outstanding liability. The record compiled by respondent
indicates that petitioners possess substantial wealth--over a
million dollars in total assets (if equity in real estate is
counted) and a large income even in their retirement. While
petitioners certainly present a legitimate view of their possible
future needs, we do not find that the record shows respondent to
have abused his discretion in concluding that petitioners can pay
their debt without suffering substantial economic hardship.
B. Exceptional Circumstances
Petitioners also renew here the arguments in favor of a
finding of “exceptional circumstances” that they made to
respondent. First, they contend the IRS had no justification for
its extraordinary delay in assessing their unpaid tax liability
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after we decided Kelley v. Commissioner, supra. Quoting
extensively from legislative history, petitioners argue that the
delay between the adjudication of the underlying tax issues in
1993 and the first contact they received from the IRS in 1999
falls within the class of situations contemplated by Congress
when it described the offer in compromise program as a method for
resolving “longstanding cases * * * which have accumulated as a
result of delay in determining the taxpayer’s liability.” H.
Conf. Rept. 105-599, at 289 (1998), 1998-3 C.B. 747, 1043.
Petitioners suggest that the IRS was at the very least
complicit, and perhaps negligent or malicious, in allowing their
original tax savings of $23,977 to balloon into a total liability
of more than $127,000. They allege that this IRS conduct should
have compelled respondent to accept their offer in compromise.
Respondent, while acknowledging the length of time that
passed between our decision in Kelley v. Commissioner, T.C. Memo.
1993-495, and his contacting petitioners, contends that it was
due not to any improprieties by the IRS, but rather to the
deliberate pace at which TEFRA partnership audits may progress.
The partnership interests which petitioners held were not in the
partnerships directly at issue in Kelley, but rather in
partnerships which themselves were partners in the partnerships
that Kelley analyzed. This tiered structure meant that under
TEFRA, even after Kelley, respondent had to negotiate a closing
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agreement with the TMPs of the partnerships in which petitioners
had an interest before starting collection activity at their
level.
The Appeals officer determined that the delay in
petitioners’ learning of their snowballing liability is a matter
they should address with the TMPs of their partnerships. We
agree. TEFRA contemplates that it is generally a TMP’s
responsibility to keep his partners informed.3 Sec. 6233(g);
sec. 301.6223(g)-1T, Temporary Proced. & Admin. Regs., 52 Fed
Reg. 6785 (Mar. 5, 1987). We decline to decide that the failure
of the IRS to contact petitioners sooner is reason to compel
respondent to accept a settlement of approximately 7 percent of
petitioners’ interest liability.
We do agree with petitioners that there is something
disconcerting about their not receiving notice of the
ramifications for them of the Swanton coal litigation until 1999.
Indeed, respondent’s determination notes that petitioners may
have received no correspondence at all from their TMPs since
3
One part of respondent’s determination regarding the long
delay between Kelley and assessment does seem mistaken. The
Appeals officer found that “no link had been established” between
the Swanton Coal Programs and petitioners’ tax liabilities. This
statement is fundamentally in error if it was intended to mean
that Kelley did not at least indirectly affect petitioners’ tax
liabilities. Nevertheless, it appears to be dictum. Regardless
of the interrelation of the partnerships involved in the Swanton
Programs, respondent is correct that legal responsibility for
more promptly notifying petitioners and trying to resolve their
partnerships’ tax issues lay ultimately with their TMPs.
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1991. We believe however, that if there is a remedy, it does not
lie in denying the Government the interest to which it is legally
entitled.
Petitioners also call our attention to the decision in
Beagles v. Commissioner, T.C. Memo. 2003-67, which indicates that
the Commissioner abated over 6 years’ worth of interest arising
out of a similar liability for the taxpayers in that case, which
also arose from the Swanton Coal Programs. Petitioners argue
that this makes it inequitable for respondent to have denied
their offer in compromise, which sought only similar relief.
We are unpersuaded. The Commissioner’s decision to grant
interest abatement to one Swanton participant would hardly
suffice to show that he abused his discretion in denying
another’s request for an offer in compromise. Different factors
are relevant to each form of relief, and of course, different
taxpayers face different circumstances: in Beagles, the
Commissioner may have abated interest at least in part because
the taxpayer became terminally ill during the collection process.
Id.
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In any event, review for abuse of discretion allows
different decisions even in similar cases, so long as none
represent a clear error in judgment by the decisionmaker.
Rasbury v. IRS, 24 F.3d 159, 168 (11th Cir. 1994).
Decision will be entered for
respondent.