Ronald J. and June M. Speltz v. Commissioner

124 T.C. No. 9

UNITED STATES TAX COURT

RONALD J. AND JUNE M. SPELTZ, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15382-03L. Filed March 23, 2005.

Ps incurred AMT liability as a result of their
exercise of incentive stock options in 2000. The stock
declined precipitously in value after the date of
exercise. Ps partially paid the tax liability and
submitted an offer in compromise with respect to the
unpaid balance. The IRS rejected the offer in
compromise and filed a lien on Ps’ property. Held: It
was not an abuse of discretion to reject Ps’ offer in
compromise and to continue the lien.

Timothy J. Carlson, for petitioners.

Albert B. Kerkhove and Stuart D. Murray, for respondent.
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OPINION

COHEN, Judge: This case is before the Court on respondent’s

motion for summary judgment, seeking a determination sustaining

an Appeals officer’s rejection of petitioners’ offer in

compromise. Petitioners seek a summary determination that it was

an abuse of discretion to refuse their offer in compromise

because of the unfair application of the alternative minimum tax

(AMT) based on their exercise of incentive stock options (ISOs)

where the stock acquired by exercise of the ISOs has lost

substantially all of its value subsequent to the acquisition of

the stock. Unless otherwise indicated, all section references

are to the Internal Revenue Code as amended, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

Background

In ruling on respondent’s motion for summary judgment,

factual inferences are viewed in the light most favorable to

petitioners. Preece v. Commissioner, 95 T.C. 594, 597 (1990).

Thus, the background facts set forth herein are based primarily

on petitioners’ declaration in opposition to the motion for

summary judgment and on other materials submitted by petitioners.

Petitioners resided in Ely, Iowa, at the time that they

filed their petition. For some years prior to 2000, petitioner

Ronald J. Speltz (petitioner) was employed by McLeodUSA (McLeod).

By 2000, petitioner was a senior manager at McLeod earning wages
 - 3 -

in excess of $75,000. By 2004, petitioner’s wages were

approximately $90,000 per year. As part of his compensation at

McLeod, petitioner received ISOs for acquisition of McLeod stock.

During the year 2000, petitioner exercised certain of the

ISOs that he previously had received. On petitioners’ Form 1040,

U.S. Individual Income Tax Return, for 2000, petitioners

reported, for purposes of the AMT, those ISOs as resulting in

“excess of AMT income over regular tax income” of $711,118. On

their Form 1040, petitioners reported that their “regular”

adjusted gross income was $142,070. Their taxable income was

$105,461, and their “regular” tax was $18,678. Petitioners

reported AMT of $206,191 for a total tax liability of $224,869.

After application of Federal income tax withheld, the balance

owed on petitioners’ tax liability for 2000 was $210,065.

Petitioners also filed a 2000 Iowa Individual Income Tax Long

Form, IA 1040, on which they reported Iowa minimum tax of $46,792

and a total tax liability of $56,769.

The value of petitioners’ McLeod stock dropped

precipitously. On their tax return for 2000, petitioners

reported that they sold 200 shares of McLeod stock on January 14

for a total of $14,011 and 500 shares of McLeod stock on March 10

for a total of $52,282. On their tax return for 2002,

petitioners reported that they sold 2,070 shares of McLeod stock

on December 30 for a total of $1,647.
 - 4 -

Petitioners partially paid the liability reported on their

2000 Form 1040 at the time that it was filed and paid an

additional $75,000 in installments prior to November 2, 2001.

Petitioners borrowed $134,000 from a bank to pay State and

Federal taxes reported on their 2000 returns.

On or about November 2, 2001, petitioners submitted to the

Internal Revenue Service (IRS) a Form 656, Offer in Compromise.

Petitioners offered a cash payment of $4,457, the cash value of

petitioner’s life insurance policy, against the liability that

then exceeded $125,000. On the Form 656, petitioners checked the

box for “Doubt as to Collectibility--‘I have insufficient assets

and income to pay the full amount.’” Petitioners also attached

to Form 656 a statement in which they explained that an offer in

compromise was necessary because of the impact the AMT in 2000

had on their finances and their lifestyle. Specifically,

petitioner’s income in 2000 was at a comfortable level for a

family of five including three young daughters; the McLeod stock

they held was nearly worthless and declining and had been used to

secure a $134,000 loan with a bank to pay part of the 2000

Federal and State taxes; and, in the event of a sale of the stock

(forced or otherwise), petitioners would be unable to carry back

the capital loss to offset their 2000 gain. They began building

a new home in 2000 and sold their prior home in 2001, using the

proceeds of sale to repay the bank. Lifestyle changes were
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necessary, including: Petitioner June M. Speltz had to get a job

instead of staying home with the children; the oldest daughter

had to switch schools; petitioners were unable to contribute to

their retirement and to their children’s education fund; and they

had to reduce their charitable donations. Finally, they could

not afford to have a fourth child, which they had wanted.

Petitioners offered in compromise $4,457, the cash surrender

value on petitioner’s life insurance. In the statement,

petitioners expressed their mental anguish and frustration with

the unfairness of their situation.

Petitioners’ offer in compromise was reviewed by Revenue

Officer Robert G. Dallas (Dallas), an offer in compromise

specialist. Dallas indicated to petitioners that he was

rejecting the offer in compromise because petitioners had the

ability to pay the outstanding tax liability in full. On

October 6, 2002, petitioners wrote to Dallas disputing amounts

that Dallas had used in his calculation. On October 9, 2002,

Dallas indicated that certain adjustments that were requested by

petitioners had been made. He wrote, however:

The adjustments to the Income/Expense table you
requested have not been granted because the allowed
amount * * * is the allowable housing and utility
standard for families of your number in Linn County,
Iowa. The excess expenses you have claimed * * *
cannot be moved * * * solely to circumvent the
allowable standard amount.

Based upon your current financial condition, we have
determined that you have the ability to pay your
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liability in full within the time provided by law. We
have made this determination based on the following
computations:

Total net equity in assets: $77,948.00
Total future ability to pay
and retire debt: $113,568.00
Total ability to pay: $191,516.00
Total balance due: $148,744.64
Amount you offered: $4,457.00

Copies of our worksheets are enclosed for your review.

Your options at this time are to pay your liability in
full, enter into an installment agreement, withdraw
your offer using the withdrawal letter previously
provided or withhold your response and appeal your
offer’s failure to gain acceptance through the appeal
procedure that you will be offered. Please advise of
your preferred course of action.

Please respond within 14 days of the date of this
letter. If you fail to respond or if your response is
egregiously inadequate, a Federal Tax Lien will be
filed if one is not already a matter of record and the
case will be forwarded to an independent reviewer
without a recommendation for approval. If the reviewer
concurs with the conclusion of my investigation, you
will be notified by mail and advised of your appeal
rights. If there is a need for additional information
you will be notified.

On December 17, 2002, respondent sent to petitioners a

Letter 3172, Notice of Federal Tax Lien Filing and Your Right to

a Hearing Under IRC 6320, with respect to their unpaid income tax

liability for 2000, advising that petitioners could request a

hearing with respondent’s Office of Appeals. On January 13,

2003, petitioners submitted a Form 12153, Request for a

Collection Due Process Hearing. Petitioners stated that they

were disagreeing with the Notice of Federal Tax Lien because:
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Forms 433-A and 656 have been prepared and filed with
the IRS as an Offer in Compromise. The only real
estate owned by the taxpayers is their personal
residence * * *. Such residence constitutes exempt
property, and therefore, the IRS’ attempted lien is
unenforceable.

Petitioners’ Request for a Collection Due Process Hearing was

signed by their then attorney.

On February 12, 2003, a telephone conference was held

between respondent’s Appeals Officer Eugene H. DeBoer (DeBoer)

and petitioners’ attorney. On February 13, 2003, DeBoer wrote to

petitioners’ attorney a letter summarizing their discussion and

stating the following:

In regards to your question about changes to the
alternative minimum tax laws. At this time there is no
pending legislation that would retroactively change how
the AMT was computed for 2000. Accordingly, the tax as
reported appears to be correct.

Neither petitioners nor their attorney responded to the

February 13, 2003, letter from DeBoer. Instead, petitioners’

attorney contacted their Senator and the Taxpayer Advocate

Service.

On August 12, 2003, a Notice of Determination Concerning

Collection Action(s) Under Section 6320 and/or 6330 was sent to

petitioners. The attachment to the notice explained the

determination as follows:
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SUMMARY AND RECOMMENDATION

Should the lien be released or withdrawn?

No, the tax as assessed is deemed correct and the offer
in compromise proposed by the taxpayers has been
rejected.

BRIEF BACKGROUND

Mr. and Mrs. Speltz filed their 2000 return showing a
liability of $209,749.77. They made a payment with the
return of $17,565. Payments of $70,000 were made prior
to an installment agreement which was entered into for
$2,500. Two payments of $2,500 made prior to the
filing of an offer in compromise of $4,457 on
11/2/2001. The offer was rejected due to the taxpayers
having assets and the ability to full pay the
liability. A lien was then filed. The taxpayers’
representative states on the request for a collection
due process hearing that the personal residence
constitutes exempt property and therefore the IRS’
attempted lien is unenforceable. A phone conference
was held with the representative, * * * who questioned
whether there was any pending legislation aimed at
changing how the alternative minimum tax is computed.
A check with the national office shows that there is no
pending legislation to retroactively adjust how the
alternative minimum tax is computed.

DISCUSSION AND ANALYSIS

1. Verification of legal and procedural requirements;
Yes

2. Issues raised by the taxpayer; The offer in
compromise was rejected.

3. Balancing of need for efficient collection with
taxpayer concern that the collection action be no more
intrusive than necessary. The collection action
balances the need for the efficient collection of taxes
with the Speltz’s legitimate concern that the
collection action be no more intrusive than necessary.

The petition in this case was filed by petitioners pro se;

counsel entered his appearance after respondent filed a motion
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for summary judgment. In their petition, petitioners do not

allege any specific abuse of discretion with respect to the

notice of determination. Instead, they refer to their

communications with the Taxpayer Advocate’s Office and to the

office of their Senator.

Discussion

Section 6321 imposes a lien in favor of the United States on

all property and rights to property of a person when a demand for

the payment of the person’s taxes has been made and the person

fails to pay those taxes. Section 6322 provides that such a lien

arises when an assessment is made. To protect the Government’s

rights to recover its unpaid taxes, section 6323(a) provides that

the IRS may file a notice of Federal tax lien in order to

establish the priority of its claims against the taxpayer’s other

creditors.

In the Internal Revenue Service Restructuring and Reform Act

of 1998 (RRA 1998), Pub. L. 105-206, sec. 3401, 112 Stat. 746,

Congress enacted sections 6320 (pertaining to liens) and 6330

(pertaining to levies) to provide protections for taxpayers in

tax collection matters. Section 6320 requires that the Secretary

notify a person who has failed to pay a tax liability of the

filing of a notice of lien under section 6323. The notice

required by section 6320 must be provided not more than 5

business days after the day of the filing of the notice of lien,
 - 10 -

pursuant to section 6320(a)(2). Section 6320 further provides

that the person so notified may request administrative review of

the matter (in the form of a hearing) within 30 days beginning on

the day after the 5-day period. Under section 6320(c), the

hearing generally is to be conducted consistent with the

procedures set forth in section 6330(c), (d), and (e). Section

6330(c) permits the person notified to raise collection issues

such as spousal defenses, the appropriateness of the

Commissioner’s intended collection action, and possible

alternative means of collection.

Section 6330(d) provides for judicial review of the

administrative determination. Where the validity of the

underlying tax liability is not properly at issue, the Court will

review the Commissioner’s administrative determination for abuse

of discretion. See Sego v. Commissioner, 114 T.C. 604, 609

(2000); Goza v. Commissioner, 114 T.C. 176, 179 (2000); see also

H. Conf. Rept. 105-599, at 266 (1998), 1998-3 C.B. 747, 1020.

Also in 1998, Congress amended section 7122, which

authorizes compromise of any civil case arising under the

internal revenue laws. RRA 1998, sec. 3462, 112 Stat. 764.

Subsections (c) and (d) of section 7122 were amended for proposed

offers in compromise and installment agreements submitted after

July 22, 1998, and provide as follows:
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SEC. 7122(c). Standards for Evaluation of
Offers.--

(1) In general.–-The Secretary shall
prescribe guidelines for officers and employees of
the Internal Revenue Service to determine whether
an offer-in-compromise is adequate and should be
accepted to resolve a dispute.

(2) Allowances for basic living expenses.--

(A) In general.–-In prescribing
guidelines under paragraph (1), the Secretary
shall develop and publish schedules of
national and local allowances designed to
provide that taxpayers entering into a
compromise have an adequate means to provide
for basic living expenses.

(B) Use of schedules.–-The guidelines
shall provide that officers and employees of
the Internal Revenue Service shall determine,
on the basis of the facts and circumstances
of each taxpayer, whether the use of the
schedules published under subparagraph (A) is
appropriate and shall not use the schedules
to the extent such use would result in the
taxpayer not having adequate means to provide
for basic living expenses.

(3) Special rules relating to treatment of
offers.–-The guidelines under paragraph (1) shall
provide that--

(A) an officer or employee of the
Internal Revenue Service shall not reject an
offer-in-compromise from a low-income
taxpayer solely on the basis of the amount of
the offer; and

(B) in the case of an offer-in-
compromise which relates only to issues of
liability of the taxpayer--

(i) such offer shall not be
rejected solely because the Secretary is
unable to locate the taxpayer’s return
 - 12 -

or return information for verification
of such liability; and

(ii) the taxpayer shall not be
required to provide a financial
statement.

(d) Administrative Review.–-The Secretary shall
establish procedures--

(1) for an independent administrative review
of any rejection of a proposed offer-in-compromise
or installment agreement made by a taxpayer under
this section or section 6159 before such rejection
is communicated to the taxpayer; and

(2) which allow a taxpayer to appeal any
rejection of such offer or agreement to the
Internal Revenue Service Office of Appeals.

Regulations adopted pursuant to section 7122 set forth three

grounds for the compromise of a liability: (1) Doubt as to

liability; (2) doubt as to collectibility; or (3) promotion of

effective tax administration. Sec. 301.7122-1, Proced. & Admin.

Regs. With respect to the third ground, paragraph (b)(3)(i) of

the regulation allows for a compromise to be entered into to

promote effective tax administration where collection in full

could be achieved but would cause economic hardship. Paragraph

(c)(3)(i) sets forth factors that would support (but are not

conclusive of) a finding of economic hardship. With respect to

the third ground, those regulations state:

(3) Compromises to promote effective tax
administration.–-(i) Factors supporting (but not
conclusive of) a determination that collection would
cause economic hardship within the meaning of paragraph
(b)(3)(i) of this section include, but are not limited
to--
 - 13 -

(A) Taxpayer is incapable of earning a living
because of a long term illness, medical condition, or
disability, and it is reasonably foreseeable that
taxpayer’s financial resources will be exhausted
providing for care and support during the course of the
condition;

(B) Although taxpayer has certain monthly
income, that income is exhausted each month in
providing for the care of dependents with no other
means of support; and

(C) Although taxpayer has certain assets, the
taxpayer is unable to borrow against the equity in
those assets and liquidation of those assets to pay
outstanding tax liabilities would render the taxpayer
unable to meet basic living expenses.

The regulation states that no compromise may be entered into if

such compromise of liability would undermine compliance by the

taxpayer with the tax laws. Sec. 301.7122-1(b)(3)(iii), Proced.

& Admin. Regs. Paragraph (c)(3)(ii) then sets forth factors that

support (but are not conclusive of) a determination that a

compromise would undermine compliance with the tax laws. These

factors include: (A) A taxpayer who has a history of

noncompliance with the filing and payment requirements of the

Internal Revenue Code; (B) a taxpayer who has taken deliberate

action to avoid the payment of taxes; and (C) a taxpayer who has

encouraged others to refuse to comply with the tax laws. Sec.

301.7122-1(c)(3)(ii), Proced. & Admin. Regs. The regulation

continues:

(iii) The following examples illustrate the types
of cases that may be compromised by the Secretary, at
the Secretary’s discretion, under the economic hardship
provisions of paragraph (b)(3)(i) of this section:
 - 14 -

Example 1. The taxpayer has assets sufficient to
satisfy the tax liability. The taxpayer provides full
time care and assistance to her dependent child, who
has a serious long-term illness. It is expected that
the taxpayer will need to use the equity in his assets
to provide for adequate basic living expenses and
medical care for his child. The taxpayer’s overall
compliance history does not weigh against compromise.

Example 2. The taxpayer is retired and his only
income is from a pension. The taxpayer’s only asset is
a retirement account, and the funds in the account are
sufficient to satisfy the liability. Liquidation of
the retirement account would leave the taxpayer without
an adequate means to provide for basic living expenses.
The taxpayer’s overall compliance history does not
weigh against compromise.

Example 3. The taxpayer is disabled and lives on
a fixed income that will not, after allowance of basic
living expenses, permit full payment of his liability
under an installment agreement. The taxpayer also owns
a modest house that has been specially equipped to
accommodate his disability. The taxpayer’s equity in
the house is sufficient to permit payment of the
liability he owes. However, because of his disability
and limited earning potential, the taxpayer is unable
to obtain a mortgage or otherwise borrow against this
equity. In addition, because the taxpayer’s home has
been specially equipped to accommodate his disability,
forced sale of the taxpayer’s residence would create
severe adverse consequences for the taxpayer. The
taxpayer’s overall compliance history does not weigh
against compromise.

Under the regulations, a compromise may also be entered into to

promote efficient tax administration if there are compelling

public policy or equity considerations identified by the

taxpayer. Compromise is justified where, due to exceptional

circumstances, collection would undermine public confidence that

tax laws are being administered fairly. Sec.
 - 15 -

301.7122-1(b)(3)(ii), Proced. & Admin. Regs. Some examples where

a compromise is allowed for purposes of public policy and equity

are: (1) A taxpayer who was hospitalized regularly for a number

of years and was unable, at that time, to manage his financial

affairs and (2) a taxpayer learns at audit that he was given

erroneous advice and is facing additional taxes, penalties, and

additions to tax. Sec. 301.7122-1(c)(3)(iv), Proced. & Admin.

Regs. In addition to the regulations, detailed instructions

concerning offers in compromise are contained in the Internal

Revenue Manual, sections 5.8. Relevant portions are as follows:

Sec. 5.8.11.2.2 (05-15-2004)
Public Policy or Equity Grounds

1. Where there is no Doubt as to Liability (DATL), no
Doubt as to Collectibility (DATC), and the
liability could be collected in full without
causing economic hardship, the Service may
compromise to promote Effective Tax Administration
(ETA) where compelling public policy or equity
considerations identified by the taxpayer provide
a sufficient basis for accepting less than full
payment. Compromise is authorized on this basis
only where, due to exceptional circumstances,
collection in full would undermine public
confidence that the tax laws are being
administered in a fair and equitable manner.
Because the Service assumes that Congress imposes
tax liabilities only where it determines it is
fair to do so, compromise on these grounds will be
rare.

2. The Service recognizes that compromise on
these grounds will often raise the issue of
disparate treatment of taxpayers who can pay
in full and whose liabilities arose under
substantially similar circumstances.
Taxpayers seeking compromise on this basis
 - 16 -

bear the burden of demonstrating
circumstances that are compelling enough to
justify compromise notwithstanding this
inherent inequity.

3. Compromise on public policy or equity grounds
is not authorized based solely on a
taxpayer’s belief that a provision of the tax
law is itself unfair. Where a taxpayer is
clearly liable for taxes, penalties, or
interest due to operation of law, a finding
that the law is unfair would undermine the
will of Congress in imposing liability under
those circumstances.

Example:

The taxpayer argues that collection would be
inequitable because the liability resulted
from a discharge of indebtedness rather than
from wages. Because Congress has clearly
stated that a discharge of indebtedness
results in taxable income to the taxpayer it
would not promote Effective Tax
Administration (ETA) to compromise on these
grounds. See Internal Revenue Code (IRC)
61(a)(12).

Example:

In 1983, the taxpayer invested in a
nationally marketed partnership which
promised the taxpayer tax benefits far
exceeding the amount of the investment.
* * * [T]he IRS made a global settlement
offer in which it offered to concede a
substantial portion of the interest and
penalties that could be expected to be
assessed if the IRS’s determinations were
upheld by the court. The taxpayer rejected
the settlement offer. After several years of
litigation, the partnership level proceeding
eventually ended in Tax Court decisions
upholding the vast majority of the
deficiencies asserted in the FPAA on the
grounds that the partnership’s activities
lacked economic substance. The taxpayer has
 - 17 -

now offered to compromise all the penalties
and interest on terms more favorable than
those contained in the prior settlement
offer, arguing that TEFRA [Tax Equity and
Fiscal Responsibility Act of 1982, Pub. L.
97-248, 96 Stat. 324] is unfair and that the
liabilities accrued in large part due to the
actions of the Tax Matters Partner (TMP)
during the audit and litigation. * * *

Note:

In both of these examples, the taxpayers are
essentially claiming that Congress enacted unfair
statutes and are arguing that the Service should
use its compromise authority to rewrite those
statutes based on a perception of unfairness.
Compromise for that reason would not promote
effective tax administration. The compromise
authority under Section 7122 is not so broad as to
allow the Service to disregard or override the
judgments of Congress. [1 Administration, Internal
Revenue Manual (CCH), sec. 5.8.11.2.2, at 16,385-7
to 16,385-8.]

We need not detail in this opinion the complexities of the

AMT imposed by sections 55 and 56 or the taxation of ISOs under

sections 421 and 422. Petitioners do not dispute the

applicability of those sections or the computations under them.

The tax liability in this case was based on petitioners’

reporting on their Form 1040 for 2000. Nonetheless, petitioners

devote a substantial portion of their posthearing memorandum to

arguing that:

The Speltzes request for relief under the OIC
Statute, from the unintended harm being caused them by
the rote application of the AMT ISO Statute, does not
put the IRS or this Court in a position where Section
7122 is undermining Congressional intent with respect
to any other statute–-including the AMT ISO Statute.
Rather, based on their special circumstances in their
particular situation, the rote and literal application
of the internal revenue laws is imposing an impossible-
 - 18 -

to-pay 220% tax rate or 11x the tax required of a
similarly situated taxpayer–-an unintended result not
consistent with the legislative purpose of Congress for
any internal revenue law. In such a special case,
Congress intended that the OIC Statute would operate to
step in and provide relief from this unintended and
unfair tax liability arising from unintended results
arising from the literal application of the internal
revenue laws (in this case, the AMT ISO Statute).

Petitioners contend that there was an abuse of discretion

because:

The IRS failed to consider (or if it did consider it
failed to properly consider), under the principles and
processes laid out in Section 7122, corresponding
regulations 26 CFR 301.7122, and the corresponding IRM
provisions, the special circumstances raised by the
Speltzes in their offer in compromise.

Petitioners argue that “under their special circumstances

the tax liability being imposed on them is unfair and

inequitable, a situation for which Congress has fashioned a

remedy in the law--Section 7122.” The crux of petitioners’

position is that section 7122 “trumps” the literal application of

statutes imposing a tax in their situation and that, therefore,

it was an abuse of discretion by the Appeals Office not to accept

their offer in compromise.

Respondent, on the other hand, contends that the Appeals

officer correctly applied the statute, the regulations, and the

Internal Revenue Manual provisions. For the reasons explained

below, we agree with respondent.

The unfortunate consequences of the AMT in various

circumstances have been litigated since shortly after the
 - 19 -

adoption of the AMT. In many different contexts, literal

application of the AMT has led to a perceived hardship, but

challenges based on equity have been uniformly rejected. See,

e.g., Alexander v. Commissioner, 72 F.3d 938 (1st Cir. 1995),

affg. T.C. Memo. 1995-51; Okin v. Commissioner, 808 F.2d 1338

(9th Cir. 1987), affg. T.C. Memo. 1985-199; Warfield v.

Commissioner, 84 T.C. 179 (1985); Huntsberry v. Commissioner, 83

T.C. 742, 747-753 (1984); Prosman v. Commissioner, T.C. Memo.

1999-87; Klaassen v. Commissioner, T.C. Memo. 1998-241, affd.

without published opinion 182 F.3d 932 (10th Cir. 1999).

In Kenseth v. Commissioner, 259 F.3d 881, 885 (7th Cir.

2001), affg. 114 T.C. 399 (2000), the Court of Appeals for the

Seventh Circuit commented:

it is not a feasible judicial undertaking to achieve
global equity in taxation * * * especially when the
means suggested for eliminating one inequity (that
which Kenseth argues is created by the alternative
minimum income tax) consists of creating another
inequity (differential treatment for purposes of that
tax of fixed and contingent legal fees). And if it
were a feasible judicial undertaking, it still would
not be a proper one, equity in taxation being a
political rather than a jural concept. * * *

Most recently, in Commissioner v. Banks, 543 U.S. ___, 125 S.Ct.

826 (2005), the U.S. Supreme Court emphasized that the issue of

the effect of the AMT on cases such as Kenseth v. Commissioner,

supra, involving the deductibility of attorney’s fees, has

partially been addressed by Congress. We believe that here, too,

the solution must be with Congress.
 - 20 -

Petitioners have submitted materials from congressional,

Taxpayer Advocate, and bar association sources, dealing with a

widespread perception that application of the AMT to ISOs is

unfair and should be the subject of redress. Respondent argues

that petitioners did not raise efficient tax administration as a

ground in their original offer in compromise and that we should

not consider materials beyond the administrative record. The

Court has indicated that we are not confined to the

administrative record. Robinette v. Commissioner, 123 T.C. 85,

94-104 (2004). However, most of the material that petitioners

attached to their filings is not part of the administrative

record, is not admissible evidence, and was in large part

generated subsequent to the notice of determination that is the

basis of this case. Such material does not show that there was

an abuse of discretion by the Appeals officer when the notice of

determination was sent on August 12, 2003. See Sego v.

Commissioner, 114 T.C. 604, 612 (2000).

Petitioners’ materials, in any event, could support

arguments both for and against petitioners’ position.

Petitioners assert that those materials show “public policy”. In

our view, however, those materials show that Congress is well

aware of the claimed inequities resulting from the application of

the AMT and has, so far, declined to act. In the absence of

congressional action, we cannot discern public policy from the
 - 21 -

materials tendered by petitioners. Moreover, the materials

submitted by petitioners show that their situation is,

unfortunately, not unique.

We do not discern in section 7122 an intent of Congress to

override application of specific provisions of the tax laws in

every instance in which the liability is perceived to be unfair

or inequitable. As the Court of Appeals for the Seventh Circuit

observed in Kenseth v. Commissioner, supra, this is not a

feasible judicial function. A fortiori, individual revenue

officers and Appeals officers, carrying out their respective

functions in the IRS collection process, cannot be expected to

engage in the type of statutory interpretation urged on us by

petitioners or to nullify unfortunate consequences of the tax

laws on a case-by-case basis. The terms of section 7122, the

regulations adopted under it, and the Internal Revenue Manual are

consistent with the experience and expertise of IRS personnel in

evaluating financial circumstances. Petitioners do not argue

that the regulations or the Internal Revenue Manual provisions

are invalid. They claim that they were not followed. But terms

such as “promotion of effective tax administration”, “special

circumstances”, and “compelling public policy or equity

considerations” have a narrower meaning than that urged by

petitioners, and the explanations of those terms in the
 - 22 -

regulations and in the Internal Revenue Manual are not

unreasonable.

Unlike the examples set forth under section 301.7122-1(c),

Proced. & Admin. Regs., petitioners do not claim illness or a

medical condition or disability; they do not have income that is

exhausted providing for the care of dependents; and they have

sufficient income to meet “basic living expenses”. Petitioners’

hardship argument is essentially that the tax liability is

disproportionate to the value that they received from the ISOs

and that they have already been forced to change their lifestyle

unreasonably. Although we sympathize with their situation, this

type of hardship is not unique.

Petitioners argue that the AMT imposed on their exercise of

ISOs is a “prepayment” of tax on value that they never received.

Under the statutory scheme, however, the tax imposed at the time

of exercise of ISOs is a deferred tax on a form of compensation

that petitioners received at an earlier time. See Commissioner

v. LoBue, 351 U.S. 243 (1956). As explained in Luckman v.

Commissioner, 418 F.2d 381, 384 (7th Cir. 1969), revg. and

remanding on other grounds 50 T.C. 619 (1968), stock options

“represent a form of compensation paid to employees in connection

with successful present and future business performance. They

constitute a particularly rewarding form of bonus.” See

generally 1 Mertens, Law of Federal Income Taxation, sec. 601
 - 23 -

(2005 rev.). Because of sections 421(a) and 422, regular tax at

ordinary rates that would normally be imposed on compensation is

not imposed on the receipt or exercise of ISOs. See sec. 83(a),

(e)(1). The offset, however, is that ISOs are treated as “tax

preference items” for AMT purposes in section 56(b)(3).

In addition to affecting the time of taxation, the

complexity of statutes applicable to stock options involves

differences between taxation at ordinary income rates and capital

gains rates. See generally Luckman v. Commissioner, supra at

386-387. Accepting petitioners’ position would result in

nullification of a portion of the statutory scheme by

administrative or judicial action. We cannot conclude that

section 7122 gives the Court a license to make adjustments to

complex tax laws on a case-by-case basis. Cf. Rank v. United

States, 345 F.2d 337, 344-345 (5th Cir. 1965) (describing other

circumstances in which “the attention of Congress was once again

focused on this highly complex, if not controversial, question of

employee stock options”). Moreover, we cannot conclude that it

is an abuse of discretion for the Appeals officer to decline to

do so. In this case, we conclude that the Appeals officer

correctly applied the provisions of the regulations and of the

Internal Revenue Manual, specifically those portions cautioning

against granting relief based on inequity where to do so would

undermine congressional intent.
 - 24 -

The Appeals officer considered and adjusted the financial

information submitted by petitioners and concluded that

petitioners could pay the balance of their tax liability by use

of an installment agreement. See generally Orum v. Commissioner,

123 T.C. 1, 13-14 (2004). Neither the information provided to

the Appeals officer nor that provided to the Court in this case

shows that it was not reasonable for the Appeals officer to

conclude that petitioners have the ability to pay over time the

balance of the tax liability. Petitioners contend that they

should not be required to pay the full amount. We are not

unsympathetic to the burdens and lifestyle changes that

petitioners have and may suffer as a result of their tax

liability. Petitioners have not contended or shown, however, any

invalidity in the Appeals officer’s determination of their basic

living expenses as that term is used in section 7122.

Petitioners seek to have the Court redefine “hardship”, “special

circumstances”, and “efficient tax administration” in a manner

different from that set forth in the regulations and in the

Internal Revenue Manual.

There is a dispute between the parties with respect to the

individual adjustments used by the Appeals officer in determining

that petitioners could pay the remaining tax liability under an

installment plan. Respondent has suggested some revised

computations and a remand for further consideration of
 - 25 -

petitioners’ offer in compromise if the motion for summary

judgment is denied. Petitioners have repudiated this suggestion

and asked us to decide this case on the arguments presented. In

view of petitioners’ position, for purposes of this case, that

they should not be required to pay any more than the amount that

they offered, differences as to the calculation of their ability

to pay installments are not material and do not preclude

resolution of this case on summary judgment. See Rule 121(b).

We are not in a position to determine the amount or duration of

any installments that petitioners could or should be required to

pay. The only issue before us is whether there was an abuse of

discretion in refusing the offer in compromise in the amount of

$4,457 and concluding that the lien filed by the IRS should

remain in place. As respondent points out, any levy on

particular assets of petitioners that the IRS proposes to pursue

in the future will also require notice and an opportunity to be

heard under section 6320 or 6330. Petitioners may submit another

offer in compromise. Petitioners’ income and expenses may

change. We conclude, however, that there was no abuse of

discretion in declining to accept petitioners’ offer dated

November 2, 2001, and continuing the lien in effect.

Order and Decision will

be entered for respondent.