T.C. Memo. 2006-150
UNITED STATES TAX COURT
ROY AND ANTONETTE BARNES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10788-05L. Filed July 24, 2006.
Terri A. Merriam, Jaret R. Coles, Asher B. Bearman, and
Jennifer A. Gellner, for petitioners.
Thomas N. Tomashek and Gregory M. Hahn, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: Petitioners petitioned the Court under section
6330(d) to review the determination of respondent’s Office of
Appeals (Appeals) sustaining a proposed levy relating to $342,012
of Federal income taxes (inclusive of interest) owed by
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petitioners for 1981 through 1986.1 Petitioners argue that
Appeals was required to accept their offer of $32,000 to
compromise what they estimate is their approximately $400,000
Federal income tax liability (inclusive of interest) for 1981
through 1998.2 We decide whether Appeals abused its discretion
in rejecting that offer.3 We hold it did not.
FINDINGS OF FACT4
The parties filed with the Court stipulations of fact and
accompanying exhibits. The stipulated facts are found
1
Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code. Dollar amounts
are rounded.
2
While the proposed levy related only to 1981 through 1986,
petitioners offered to compromise their liability for 1987
through 1998 as well.
3
Petitioners also dispute respondent’s determination that
they are liable for increased interest under sec. 6621(c). This
interest relates to deficiencies attributable to “computational
adjustments”, see secs. 6230(a)(1) and 6231(a)(6), made following
the Court’s decision in Shorthorn Genetic Engg. 1982-2, Ltd. v.
Commissioner, T.C. Memo. 1996-515. As to this dispute, the
parties have agreed to be bound by a final decision in Ertz v.
Commissioner, docket No. 20336-04L, which involves a similar
issue.
4
Following a trial of this case, the Court ordered each
party to file an opening brief of no more than 25 pages.
Petitioners filed a 25-page opening brief that attempts to
circumvent the Court’s order by incorporating (1) lengthy
arguments made in their 38-page pretrial memorandum and (2) 90
paragraphs of stipulated facts. To the extent that an argument
or proposed finding of fact is not specifically set forth in
petitioners’ opening brief, we decline to consider it.
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accordingly. When the petition was filed, petitioners resided in
Pasco, Washington.
Beginning in 1984, petitioners’ Federal income tax returns
claimed losses and credits from their involvement in various
partnerships organized and operated by Walter J. Hoyt, III
(Hoyt). The partnerships were Shorthorn Genetic Engineering
1984-4, Timeshare Breeding Services 1989-1, Timeshare Breeding
Syndicate Joint Venture, Timeshare Breeding Service 1989-3 J.V.,
and Hoyt and Sons Trucking. Hoyt was each partnership’s general
partner and tax matters partner, and the partnerships were all
subject to the unified audit and litigation procedures of the Tax
Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248,
sec. 401, 96 Stat. 648. Hoyt was convicted on criminal charges
relating to the promotion of these partnerships.
Petitioners’ claim to the losses and credits resulted in the
underreporting of their 1981 through 1986 taxable income. On
August 16, 2003, respondent mailed to petitioners a Letter 1058,
Final Notice of Intent to Levy and Notice of Your Right to a
Hearing. The notice informed petitioners that respondent
proposed to levy on their property to collect Federal income
taxes that they owed for 1981 through 1986. The notice advised
petitioners that they were entitled to a hearing with Appeals to
review the propriety of the proposed levy.
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On September 5, 2003, petitioners asked Appeals for the
referenced hearing. On January 11, 2005, Linda Cochran
(Cochran), a settlement officer in Appeals, held the hearing with
petitioners’ counsel. Cochran and petitioners’ counsel discussed
two issues. The first issue concerned petitioners’ intent to
offer to compromise their 1981 through 1998 Federal income tax
liability due to doubt as to collectibility with special
circumstances and to promote effective tax administration.
Petitioners contended that Appeals should accept their offer as a
matter of equity and public policy. Petitioners stated that it
took a long time to resolve the Hoyt partnership cases and noted
that Hoyt had been convicted on the criminal charges. The second
issue concerned an interest abatement case under section 6404(e)
that petitioners had pending in this Court. That case related to
the same years at issue here. Petitioners claimed that the
proposed levy should be rejected because that case was pending.
On February 15, 2005, petitioners tendered to Cochran on
Form 656, Offer in Compromise, a written offer to pay $32,000 to
compromise their approximately $400,000 liability. Petitioners
supplemented their offer with a completed Form 433-A, Collection
Information Statement for Wage Earners and Self-Employed
Individuals, four letters totaling approximately 65 pages, and
volumes of documents. The Form 433-A reported that petitioners
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owned assets with a total current value of $144,322, inclusive of
the following:5
Assets Current value
Cash $3,528
Investments 3,438
Cash value of life insurance 22,771
Vehicles:
1989 Pontiac LE 225
1997 Chevrolet Scottsdale 500
1999 Buick LeSabre 3,860
2000 BMW motorcycle 3,500
Home 89,000
Other real property 17,500
144,322
The Form 433-A also reported that petitioners had a single debt
of $7,236, all of which was attributable to the 1999 Buick
LeSabre, and the following monthly items of income and expense:
Items of income Amount
Husband’s pension $3,572
RAVA annuity payout 1,029
IDS life insurance annuity 106
4,707
Items of expense Amount
Food, clothing, and miscellaneous $1,020
Utilities 657
Transportation--Purchase 189
Transportation--Operation 399
Medical expenses 1,087
Taxes (Income) 554
Life insurance 300
Other expense 500
4,706
5
Form 433-A states that each asset reported on the form
should be valued at its “Current value”, defined on the form as
“The amount you could sell the asset for today”.
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Cochran determined that petitioners’ net realizable equity
in each of their reported assets was the same as its reported
value, except she reduced the reported value of each vehicle by
20 percent.6 Cochran summarized petitioners’ assets and
liabilities as follows:
Fair Quick Net
market sale realizable
Assets value value Encumbrance equity
Cash $3,528 -- -- 3,528
Investments 3,438 -- -- 3,438
Cash value of life insurance 22,771 -- -- 22,771
Vehicles:
1989 Pontiac LE 225 180 -- 180
1997 Chevrolet Scottsdale 500 400 -- 400
1999 Buick LeSabre 3,860 3,080 7,236 -0-
2000 BMW motorcycle 3,500 2,800 –- 2,800
Home 89,000 -- -- 89,000
Other real property 17,500 -- –- 17,500
144,322 6,460 7,236 139,617
As to the reported expenses, Cochran accepted all of those
expenses except for the $500 “other expense” which petitioners
failed to substantiate as to either its source or amount.7
Cochran determined that petitioners’ monthly excess income (i.e.,
monthly income less monthly expenses) was $501 ($4,707 - ($4,706
- $500)), that petitioners’ income potential for the next
6
Cochran noted that the reported values of petitioners’
home and other real property were ascertained from their assessed
values and not from appraisals or current market prices, which
could be higher. Cochran also was told by petitioners that they
had ascertained the value of each vehicle by using its trade-in
value and considering its condition to be “fair”.
7
Cochran allowed petitioners’ medical expenses in full,
although she considered the amount to be greater than average.
Cochran noted that petitioners’ 2003 Federal income tax return
claimed a deduction for $8,641 of medical expenses that they paid
during that year.
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48 months was approximately $24,000 ($501 x 48 = $24,048),8 and
that petitioners’ reasonable collection potential was $163,617
(future income potential of $24,000 + net realizable equity of
$139,617). As an alternate calculation, Cochran took into
account petitioners’ $500 other expense (so as to eliminate any
consideration of future income potential) and recomputed their
reasonable collection potential at their net realizable equity of
$139,617.9 Cochran performed the alternate calculation because
she believed that the “other expense” could represent an
otherwise allowable expense such as attorney’s fees, although not
reported as such.
On May 12, 2005, Appeals issued petitioners the notice of
determination sustaining the proposed levy. The notice concludes
that petitioners’ $32,000 offer-in-compromise is not an
appropriate collection alternative to the proposed levy. The
notice, quoting in part Internal Revenue Manual (IRM) section
5.8.11.2.2.3, states that petitioners’ offer does not meet the
Commissioner’s guidelines for consideration of an offer-in-
compromise due to doubt as to collectibility with special
circumstances. The notice, citing IRM sections 5.8.11.1.2 and
8
Cochran used a 48-month factor because petitioners were
offering to compromise their tax liability by paying cash. See
Internal Revenue Manual (IRM) sec. 5.8.5.5.
9
Cochran noted that the alternate calculations would be
$131,617 and $107,617 were she to take into account the $32,000
proposed offer.
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5.8.11.2.5, states that petitioners’ offer also does not meet the
Commissioner’s guidelines for consideration as an offer-in-
compromise to promote effective tax administration.
As to petitioners’ offer-in-compromise due to doubt as to
collectibility, the notice states more specifically that
the taxpayers [petitioners] have the ability to pay
more than the offer amount from the equity in their
assets while still meeting their necessary basic living
expenses, in accordance with IRM 5.8.5.5.1. The
taxpayers have an ability to pay substantially more
than the amount being offered, as per the guidelines of
Internal Revenue Manual 5.8.5.3.1. The taxpayers’
circumstances have been documented and considered but
are insufficient to permit acceptance of an offer
amount that is, at best, less than 30% of the RCP
[reasonable collection potential] ($32,000/$107,617).
As to petitioners’ offer-in-compromise to promote effective tax
administration, the notice states:
Analysis of the taxpayers’ finances shows that the
taxpayers’ equity in assets plus present and future
income are less than the assessed amounts to be
compromised. The taxpayers, therefore, fail to meet
the requirements for consideration of an offer in
compromise based on Effective Tax Administration, as
per the guidelines of Internal Revenue Manual
5.8.11.1(2).
The notice further states as to Cochran’s balancing of efficient
collection with the legitimate concerns of taxpayers that
The taxpayers’ concerns about the proposed collection
action generally fall within two areas: (1) pending
litigation (the interest abatement case) and (2) a
viable collection alternative in the form of their
$32,000 offer in compromise.
The Settlement Officer has balanced the taxpayers’
first area of concern by confirming that the taxpayers’
interest abatement case has been decided in Tax Court,
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with the decision being that the taxpayers have
conceded the interest abatement issue for the years
1981, 1982, 1983, 1984, 1985, and 1986.
With respect to the taxpayers’ second area of concern,
the Settlement Officer has evaluated the taxpayers’
$32,000 offer to compromise the underlying liabilities
as a collection alternative to the proposed levy
action. Based on that evaluation, the taxpayers’ offer
of $32,000 could not be recommended for acceptance, and
therefore cannot be considered as a collection
alternative.
In all other respects, the proposed levy action
regarding the taxpayers represents the only efficient
means for collection of the liability at issue in this
case.
The notice states that petitioners have neither offered an
argument nor cited any authority to permit Appeals to deviate
from the provisions of the IRM.
As to petitioners’ claim at the hearing for an interest
abatement, Cochran ascertained that petitioners had filed the
case in this Court seeking an abatement of interest upon section
6404(e) for the same years at issue here. She also ascertained
that the parties to that case had on February 9, 2005, filed with
this Court a stipulated decision through which petitioners
conceded that they were not entitled to their requested interest
abatement. Cochran determined that petitioners were not entitled
in this case to their claim for an abatement of interest, either
under section 6404(e) or as part of an offer-in-compromise.
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OPINION
This case is one in a long list of cases brought in this
Court involving respondent’s proposal to levy on the assets of a
partner in a Hoyt partnership to collect Federal income taxes
attributable to the partner’s participation in the partnership.
Petitioners argue that Appeals was required to let them pay
$32,000 to compromise what they estimate is their approximately
$400,000 Federal income tax liability for 1981 through 1998.
Where an underlying tax liability is not at issue in a case
invoking our jurisdiction under section 6330(d), we review the
determination of Appeals for abuse of discretion. See Sego v.
Commissioner, 114 T.C. 604, 610 (2000). We reject the
determination of Appeals only if the determination was arbitrary,
capricious, or without sound basis in fact or law. See Cox v.
Commissioner, 126 T.C. 237, 255 (2006); Murphy v. Commissioner,
125 T.C. 301, 308, 320 (2005).
Where, as here, we decide the propriety of Appeals’s
rejection of an offer-in-compromise, we review the reasoning
underlying that rejection to decide whether the rejection was
arbitrary, capricious, or without sound basis in fact or law.
We do not substitute our judgment for that of Appeals, and we do
not decide independently the amount that we believe would be an
acceptable offer-in-compromise. See Murphy v. Commissioner,
supra at 320; see also Fowler v. Commissioner, T.C. Memo.
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2004-163; Fargo v. Commissioner, T.C. Memo. 2004-13, affd.
447 F.3d 706 (9th Cir. 2006). Nor do we usually consider
arguments, issues, or other matters raised for the first time at
trial, but we limit ourselves to matter brought to the attention
of Appeals. See Murphy v. Commissioner, supra at 308; Magana v.
Commissioner, 118 T.C. 488, 493 (2002). “[E]vidence that * * *
[a taxpayer] might have presented at the section 6330 hearing
(but chose not to) is not admissible in a trial conducted
pursuant to section 6330(d)(1) because it is not relevant to the
question of whether the Appeals officer abused her discretion.”
Murphy v. Commissioner, supra at 315.10
Section 6330(c)(2)(A)(iii) allows a taxpayer to offer to
compromise a Federal tax debt as a collection alternative to a
proposed levy. Section 7122(c) authorizes the Commissioner to
10
In Murphy v. Commissioner, 125 T.C. 301 (2005), the Court
declined to include in the record external evidence relating to
facts not presented to Appeals. The Court distinguished
Robinette v. Commissioner, 123 T.C. 85 (2004), revd. 439 F.3d 455
(8th Cir. 2006), and held that the external evidence was
inadmissible in that it was not relevant to the issue of whether
Appeals abused its discretion. In a memorandum that petitioners
filed with the Court on April 13, 2006, pursuant to an order of
the Court directing petitioners to explain the relevancy of any
external evidence that they desired to include in the record of
this case, petitioners made no claim that they had offered any of
the external evidence to Cochran. Instead, as we read
petitioners’ memorandum in the light of the record as a whole,
petitioners wanted to include the external evidence in the record
of this case to prove that Cochran abused her discretion by not
considering facts and documents that they had consciously decided
not to give to her. Consistent with Murphy v. Commissioner,
supra, we sustained respondent’s relevancy objections to the
external evidence.
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prescribe guidelines to determine when a taxpayer’s offer-in-
compromise should be accepted. The applicable regulations,
section 301.7122-1(b), Proced. & Admin. Regs., list three grounds
on which the Commissioner may accept an offer-in-compromise of a
Federal tax debt. These grounds are “Doubt as to liability”,
“Doubt as to collectibility”, and to “Promote effective tax
administration”. Sec. 301.7122-1(b)(1), (2), and (3), Proced. &
Admin. Regs.
Petitioners argue that respondent was required to compromise
their tax liability on the bases of the latter two grounds. As
to the first of these grounds, the Commissioner may compromise a
tax liability due to doubt as to collectibility where the
taxpayer’s assets and income are less than the full amount of the
assessed liability. See sec. 301.7122-1(b)(2), Proced. & Admin.
Regs. In such a case, the Commissioner also may accept an offer-
in-compromise due to doubt as to collectibility with special
circumstances; i.e., the Commissioner may accept an offer of less
than the total reasonable collection potential of the case. See
Rev. Proc. 2003-71, sec. 4.02, 2003-2 C.B. 517. As to the second
ground, the Commissioner may compromise a tax liability to
promote effective tax administration when collection of the full
liability will create economic hardship and the compromise would
not undermine compliance with the tax laws by taxpayers in
general. See sec. 301.7122-1(b)(3)(i), (iii), Proced. & Admin.
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Regs. If a taxpayer does not qualify for the just stated
effective tax administration compromise on grounds of economic
hardship, and does not qualify for an offer-in-compromise due to
doubt as to either liability or collectibility, the regulations
also allow the Commissioner to compromise a tax liability to
promote effective tax administration when the taxpayer identifies
compelling considerations of public policy or equity. See sec.
301.7122-1(b)(3)(ii), Proced. & Admin. Regs.
Petitioners made their offer-in-compromise due to doubt as
to collectibility with special circumstances and to promote
effective tax administration. Petitioners reported on their Form
433-A that their reasonable collection potential was $140,462
(i.e., their assets’ total reported current value of $144,322 -
their $3,860 Buick LeSabre which was fully encumbered by debt).
Cochran determined petitioners’ reasonable collection potential
by way of alternative calculations. Under each of those
calculations, petitioners cannot fully pay their approximately
$400,000 tax liability and thus do not qualify for an offer-in-
compromise to promote effective tax administration. See sec.
301.7122-1(b)(3), Proced. & Admin. Regs.; cf. Fargo v.
Commissioner, 447 F.3d 706 (9th Cir. 2006) (taxpayers made an
offer-in-compromise to promote effective tax administration where
they had sufficient assets to pay their tax liability in full).
As to petitioners’ offer-in-compromise due to doubt as to
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collectibility with special circumstances, the Commissioner
evaluates such an offer by applying the same factors (economic
hardship or considerations of public policy or equity) as in the
case of an offer-in-compromise to promote effective tax
administration. See IRM sec. 5.8.11.2.1 and .2. In accordance
with the Commissioner’s guidelines, an offer-in-compromise due to
doubt as to collectibility with special circumstances should not
be accepted even when economic hardship or considerations of
public policy or equity circumstances are identified, if the
taxpayer does not offer an acceptable amount. See IRM sec.
5.8.11.2.1.11 and .12.
Cochran considered all of the evidence submitted to her by
petitioners and applied the guidelines for evaluating an
offer-in-compromise due to doubt as to collectibility with
special circumstances or to promote effective tax administration.
As to the former, Cochran determined that petitioners’ offer was
unacceptable because they were able to pay more than the $32,000
that they offered to compromise their tax liability. As to the
latter, Cochran determined that petitioners’ offer did not
qualify as an offer-in-compromise to promote effective tax
administration because petitioners were unable to pay their
liability in full. Cochran’s determination to reject
petitioners’ offer-in-compromise was not arbitrary, capricious,
or without a sound basis in fact or law, and it was not abusive
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or unfair to petitioners. Cochran’s determination was based on a
reasonable application of the guidelines, which we decline to
second-guess. See Speltz v. Commissioner, 124 T.C. 165 (2005),
affd. F.3d (8th Cir. 2006).
Petitioners make eight arguments in advocating a contrary
result. First, petitioners argue that the Court lacks
jurisdiction to review the rejection of their offer-in-
compromise. Petitioners allege that Hoyt had a conflict of
interest that prevented him from extending the periods of
limitation for the partnerships in which petitioners were
partners. Petitioners conclude that any consents signed by Hoyt
to extend the periods of limitation were invalid, which in turn
means that the Court lacks jurisdiction because the applicable
periods of limitation have otherwise expired.
Petitioners’ challenge to this Court’s jurisdiction is
groundless, frivolous, and unavailing. It is well settled that
the expiration of the period of limitation is an affirmative
defense and not a factor of this Court’s jurisdiction. See Day
v. McDonough, 547 U.S. , 126 S. Ct. 1675, 1681 (2006) (“A
statute of limitations defense * * * is not ‘jurisdictional’”);
Kontrick v. Ryan, 540 U.S. 443, 458 (2004) (“Time bars * * *
generally must be raised in an answer or responsive pleading.”);
see also Davenport Recycling Associates v. Commissioner, 220 F.3d
1255, 1259 (11th Cir. 2000), affg. T.C. Memo. 1998-347; Chimblo
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v. Commissioner, 177 F.3d 119, 125 (2d Cir. 1999), affg. T.C.
Memo. 1997-535; Columbia Bldg., Ltd. v. Commissioner, 98 T.C.
607, 611 (1992); Robinson v. Commissioner, 57 T.C. 735, 737
(1972). Where, as here, the claim of a time bar relates to items
of a partnership, the claim must be made in the partnership
proceeding and may not be considered at a proceeding involving
the personal income tax liability of one or more of the partners
of the partnership. See Davenport Recycling Associates v.
Commissioner, supra at 1259-1260; Chimblo v. Commissioner, supra
at 125; Kaplan v. United States, 133 F.3d 469, 473 (7th Cir.
1998).
Second, petitioners argue that Cochran’s rejection of their
offer-in-compromise conflicts with the congressional committee
reports underlying the enactment of section 7122. According to
petitioners, their case is a “longstanding” case, and those
reports require that respondent resolve such cases by forgiving
interest and penalties that otherwise apply. We disagree with
petitioners’ reading and application of the legislative history
underlying section 7122. Petitioners’ argument on this point is
essentially the same argument that was considered and rejected by
the Court of Appeals for the Ninth Circuit in Fargo v.
Commissioner, 447 F.3d at 711-712. We do likewise here for the
same reasons stated in that opinion. We add that petitioners’
counsel participated in the appeal in Fargo v. Commissioner, 447
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F.3d 706 (9th Cir. 2006), as counsel for the amici. While
petitioners in their brief suggest that the Court of Appeals for
the Ninth Circuit knowingly wrote its opinion in Fargo in such a
way as to distinguish that case from the cases of counsel’s
similarly situated clients (e.g., petitioners), and otherwise to
allow those clients to receive an abatement of their liability
attributable to partnerships such as those here, we do not read
the opinion of the Court of Appeals for the Ninth Circuit in
Fargo to support that conclusion.
Third, petitioners argue that Cochran inadequately
considered their unique facts and circumstances. We disagree.
Cochran reviewed and considered all information given to her by
petitioners. On the basis of the facts and circumstances of
petitioners’ case as they had been presented to her, Cochran
determined that petitioners’ offer did not meet the applicable
guidelines for acceptance of an offer-in-compromise due to doubt
as to collectibility with special circumstances or to promote
effective tax administration. We find no abuse of discretion in
that determination.
Petitioners take exception to the fact that the notice of
determination does not state specifically that petitioners are in
their sixties and retired, speculating from this fact that
Cochran did not adequately take into account their special
circumstances. Petitioners also assert that Cochran failed to
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take their special circumstances into account because, they
assert, she did not reflect that they both have “significant
medical conditions” and that their medical expenses will increase
in later years. Petitioners’ assertions and speculation are
without merit. We do not believe that Appeals must specifically
list in the notice of determination every single fact that it
considered in arriving at the determination. Nor do we find that
Cochran inadequately considered the information actually given to
her by petitioners. In fact, Cochran computed petitioners’
future income potential by using the same income figures that
petitioners reported on their Form 433-A, and the reported items
of income were all types of retirement income that could
reasonably be expected to remain constant over the next 48
months. Cochran’s calculations also reflected her generous
assessment that: (1) In the 48-month period, petitioners would
pay $1,087 of medical expenses monthly, although she believed
that amount to be greater than average, (2) petitioners had
overstated the values of their vehicles and were entitled to a
20-percent reduction in those values, although petitioners had
reported their vehicles at their trade-in values, (3) petitioners
had properly valued their home and other real property at their
assessed values, although appraisals or current market value may
be higher, and (4) petitioners may be allowed to claim their $500
“other expense” as a monthly expense, although the nature of the
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expense had not been identified. Although petitioners believe
that Cochran’s calculation should have reflected increased
medical expenses in the 48-month period and thereafter, we do not
agree. We are unable to find that petitioners ever told Cochran
with specificity that they would have to pay a greater amount of
unreimbursed medical expenses in the future. Under the facts at
hand, we consider it reasonable for Cochran to have used
petitioners’ $1,087 monthly estimate, particularly when the
estimate, if annualized, exceeded petitioners’ prior year’s
actual medical expenses. See Fargo v. Commissioner, 447 F.3d at
710 (it is not an abuse of discretion to disregard claimed
medical expenses that are speculative or not related to the
taxpayer).
Fourth, petitioners argue that Cochran did not adequately
take into account the economic hardship they claim they will
suffer by having to pay more than $32,000 as to their tax
liability. We disagree. Section 301.6343-1(b)(4)(i), Proced. &
Admin. Regs., states that economic hardship occurs when a
taxpayer is “unable to pay his or her reasonable basic living
expenses.” Section 301.7122-1(c)(3), Proced. & Admin. Regs.,
sets forth factors to consider in evaluating whether collection
of a tax liability would cause economic hardship, as well as some
illustrative examples. One of the examples involves a taxpayer
who provides fulltime care to a dependent child with a serious
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longterm illness. A second example involves a taxpayer who would
lack adequate means to pay his basic living expenses were his
only asset to be liquidated. A third example involves a disabled
taxpayer with a fixed income and a modest home specially equipped
to accommodate his disability, and who is unable to borrow
against his home because of his disability. See sec.
301.7122-1(c)(3)(iii), Examples (1), (2), and (3), Proced. &
Admin. Regs. None of these examples bears any resemblance to
this case but instead “describe more dire circumstances”. Speltz
v. Commissioner, F.3d at .
Nor have petitioners articulated with any specificity the
purported economic hardship they will suffer if they are not
allowed to compromise their liability for $32,000. While
petitioners claim generally that the sale of their residence
would create an economic hardship in that they would be unable to
afford paying either rent or a mortgage, this claim is vague,
speculative, undocumented, and unavailing.11 Nor are we
persuaded by petitioners’ suggestion that their health is an
“economic hardship” by virtue of section 301.7122-1(c)(3)(i)(A),
Proced. & Admin. Regs. In this regard, petitioners have given us
11
We note that our opinion here does not necessarily mean
that respondent may in fact levy on petitioners’ residence in
payment of their tax debt. Pursuant to sec. 6334(a)(13)(B) and
(e), a taxpayer’s principal residence is exempt from levy absent
the written approval of a U.S. District Court Judge or
Magistrate. See also sec. 301.6334-1(d), Proced. & Admin. Regs.
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no reason to disagree with the essence of Cochran’s determination
that petitioners’ health does not render them “incapable of
earning a living”, nor have we reason to conclude that
petitioners’ “financial resources will be exhausted providing for
care and support during the course of the condition”.12 Id.
We also are mindful that any decision by Cochran to accept
petitioners’ offer-in-compromise due to doubt of collectibility
with special circumstances must be viewed against the backdrop of
section 301.7122-1(b)(3)(iii), Proced. & Admin. Regs. That
section requires that Cochran deny petitioners’ offer if her
acceptance of it would undermine voluntary compliance with tax
laws by taxpayers in general. Thus, even if we were to assume
arguendo that petitioners would suffer economic hardship, a
finding that we emphasize we decline to make, we would not find
that Cochran’s rejection of petitioners’ offer was an abuse of
discretion because we conclude below (in our discussion of
petitioners’ fifth argument) that her acceptance of that offer
would have undermined voluntary compliance with tax laws by
12
We also note that the Court of Appeals for the Ninth
Circuit in Fargo v. Commissioner, 447 F.3d 706, 710 (9th Cir.
2006), affg. T.C. Memo. 2004-13, dismissed a similar claim of
economic hardship advanced by the taxpayers there. Although
those taxpayers had more assets than petitioners, the court
emphasized that a finding of economic hardship is within the
discretion of Appeals. Under the facts at hand, we find no abuse
of discretion in Cochran’s determination that petitioners would
suffer no economic hardship were they required to pay more than
their $32,000 offer.
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taxpayers in general. The prospect that acceptance of an offer
will undermine compliance with the tax laws militates against its
acceptance whether the offer is predicated on promotion of
effective tax administration or on doubt as to collectibility
with special circumstances. See Rev. Proc. 2003-71, 2003-2 C.B.
517; see also IRM sec. 5.8.11.2.2.
Fifth, petitioners argue that public policy demands that
their offer-in-compromise be accepted because they were victims
of fraud. We disagree. While the regulations do not set forth a
specific standard for evaluating an offer-in-compromise based on
claims of public policy or equity, the regulations contain two
illustrative examples. See sec. 301.7122-1(c)(3)(iv), Examples
(1) and (2), Proced. & Admin. Regs. The first example describes
a taxpayer who is seriously ill and unable to file income tax
returns for several years. The second example describes a
taxpayer who received erroneous advice from the Commissioner as
to the tax effect of the taxpayer’s actions. Neither example
bears any resemblance to this case. Accord Speltz v.
Commissioner, supra. Unlike the exceptional circumstances
exemplified in the regulations, petitioners’ situation is neither
unique nor exceptional in that their situation mirrors numerous
taxpayers who claimed tax shelter deductions in the 1980s and
1990s, obtained the tax advantages, promptly forgot about their
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“investment”, and now realize that paying their taxes will
require a change of lifestyle.13
We also agree with a claim by respondent that compromising
petitioners’ case on grounds of public policy or equity would not
promote effective tax administration. While petitioners portray
themselves as victims of Hoyt’s alleged fraud and respondent’s
alleged delay in dealing with Hoyt, they take no responsibility
for their tax predicament. We cannot agree that acceptance by
respondent of petitioners’ $32,000 offer to satisfy their
approximately $400,000 tax liability would enhance voluntary
compliance by other taxpayers. A compromise on that basis would
place the Government in the unenviable role of an insurer against
poor business decisions by taxpayers, reducing the incentive for
taxpayers to investigate thoroughly the consequences of
transactions into which they enter. It would be particularly
inappropriate for the Government to play that role here, where
the transaction at issue is participation in a tax shelter.
13
Of course, the examples in the regulations are not meant
to be exhaustive, and petitioners have a more sympathetic case
than the taxpayers in Fargo v. Commissioner, supra at 714, for
whom the Court of Appeals for the Ninth Circuit noted that “no
evidence was presented to suggest that Taxpayers were the subject
of fraud or deception”. Such considerations, however, have not
kept this Court from finding investors in Hoyt’s shelters to be
culpable of negligence, most recently in Keller v. Commissioner,
T.C. Memo. 2006-131, nor prevented the Courts of Appeals for the
Sixth and Tenth Circuits from affirming our decisions to that
effect in Mortensen v. Commissioner, 440 F.3d 375 (6th Cir.
2006), affg. T.C. Memo. 2004-279, and Van Scoten v. Commissioner,
439 F.3d 1243 (10th Cir. 2006), affg. T.C. Memo. 2004-275.
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Reducing the risks of participating in tax shelters would
encourage more taxpayers to run those risks, thus undermining
rather than enhancing compliance with the tax laws.14
Sixth, petitioners argue that Cochran failed to balance
efficient collection with the legitimate concern that collection
be no more intrusive than necessary. We disagree. Cochran
thoroughly considered this issue on the basis of the information
and proposed collection alternative given to her by petitioners.
She concluded that “the proposed levy action regarding the
taxpayer represents the only efficient means for collection of
the liability at issue”. While petitioners assert that Cochran
did not consider all of their facts and circumstances, “including
whether the circumstances of a particular case warrant acceptance
of an amount that might not otherwise be acceptable under the
Secretary’s policies and procedures”, sec. 301.7122-1(c)(1),
Proced. & Admin. Regs., we find to the contrary. Cochran
thoroughly considered petitioners’ arguments for accepting their
14
Nor does the fact that petitioners’ case may be
“longstanding” overcome the detrimental impact on voluntary
compliance that could result from respondent’s accepting
petitioners’ offer-in-compromise. An example in IRM sec.
5.8.11.2.3 implicitly addresses the “longstanding” issue. There,
the taxpayer invested in a tax shelter in 1983, thereby incurring
tax liabilities for 1981 through 1983. He failed to accept a
settlement offer by respondent that would have eliminated a
substantial portion of his interest and penalties. Although the
example, which is similar to petitioners’ case in several
respects, would qualify as a longstanding case by petitioners’
standards, the offer was not acceptable because accepting it
would undermine compliance with the tax laws.
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offer-in-compromise, and she rejected the offer only after
concluding that petitioners could pay more of their tax liability
than the $32,000 they offered. Cf. IRM sec. 5.8.11.2.1.11 (“When
[economic] hardship criteria are identified but the taxpayer does
not offer an acceptable amount, the offer should not be
recommended for acceptance”).
Seventh, petitioners argue that Cochran inappropriately
failed to consider whether they qualified for an abatement of
interest for reasons other than those described in section
6404(e). We disagree. While Cochran declined to accept
petitioners’ request to reject the proposed levy because of their
interest abatement case, given that the interest abatement case
had been resolved, we find nothing to suggest that Cochran
believed that petitioners’ sole remedy for interest abatement in
this case rested on the rules of section 6404(e). In fact,
regardless of the rules of section 6404(e) and the stipulated
decision, Cochran obviously would have abated interest in this
case had she agreed to let petitioners compromise their
approximately $400,000 liability by paying less than the amount
of interest included within that liability.
Eighth, petitioners argue that Cochran erred in not allowing
their counsel additional time to submit documents for Cochran’s
consideration and by not informing petitioners of the contents of
the notice of determination before it was issued. We disagree on
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both counts. We do not believe that Cochran abused her
discretion by rejecting petitioners’ offer-in-compromise simply
because she may have established a due date for submission of
information. As a matter of fact, petitioners’ counsel by their
own admission acknowledge that Cochran had regularly granted
counsel’s repeated requests for extensions made in part because
counsel was mired from their acceptance of many of these cases
involving other partners of the Hoyt partnerships. Nor do we
believe that Cochran abused her discretion by rejecting
petitioners’ offer-in-compromise simply because she may not have
discussed with petitioners the contents of the notice of
determination (and given them a chance to dispute it) before
issuing the notice of determination to them. Cf. Fargo v.
Commissioner, 447 F.3d at 712-713 (holding that Appeals has no
duty to negotiate with a taxpayer before rejecting the taxpayer’s
offer-in-compromise). We also disagree with petitioners that
Cochran had an affirmative duty to attempt unilaterally to find
additional facts in support of their case as soon as she came to
the conclusion that their offer-in-compromise should be denied.
We hold that Appeals did not abuse its discretion in
rejecting petitioners’ $32,000 offer-in-compromise. In so
holding, we express no opinion as to the amount of any compromise
that petitioners could or should be required to pay, or that
respondent is required to accept. The only issue before us is
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whether Appeals abused its discretion in refusing to accept
petitioners’ specific offer-in-compromise in the amount of
$32,000. See Speltz v. Commissioner, 124 T.C. at 179-180. We
have considered all arguments made by petitioners for a contrary
holding and have found those arguments not discussed herein to be
without merit.
An appropriate order will
be issued.