Clayton v. Comm'r

T.C. Memo. 2006-188

UNITED STATES TAX COURT

DONALD AND YVONNE CLAYTON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17704-05L. Filed September 5, 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 $203,798

of Federal income taxes owed by petitioners for 1982 through
 - 2 -

1986.1 Petitioners argue that Appeals was required to accept

their offer of $100,000 to compromise what they estimate is their

approximately $275,000 Federal income tax liability for 1982

through 1996.2 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

accordingly. When the petition was filed, petitioners resided in

Benton City, Washington.

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 1982 through 1986,
petitioners offered to compromise their liability for 1987
through 1996 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 40-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.
 - 3 -

Beginning in 1985, 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

1985-4, Timeshare Breeding Services 1987-2, Timeshare Breeding

Services J.V., Timeshare Breeding Services 1989-1, and Shorthorn

Genetic Engineering 1985-5. 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 1982 through 1986 taxable income. On

March 8, 2004, respondent mailed to petitioners a Form CP-90,

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 1982 through 1986. The notice advised

petitioners that they were entitled to a hearing with Appeals to

review the propriety of the proposed levy.

On April 6, 2004, petitioners asked Appeals for the

referenced hearing. On June 8, 2005, Linda Cochran (Cochran), a

settlement officer in Appeals, held the hearing with petitioners’
 - 4 -

counsel.5 Cochran and petitioners’ counsel discussed two issues.

The first issue concerned petitioners’ intent to offer to

compromise their 1982 through 1996 Federal income tax liability

to promote effective tax administration. Petitioners contended

that Appeals should accept their offer as a matter of economic

hardship, 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 June 7, 2005, petitioners tendered to Cochran on Form

656, Offer in Compromise, a written offer to pay $100,000 to

compromise their estimated approximately $275,000 liability. The

offer was limited to a claim of effective tax administration

because petitioners had sufficient assets to pay the liability in

full. Petitioners supplemented their offer with a completed Form

433-A, Collection Information Statement for Wage Earners and

Self-Employed Individuals, four letters totaling approximately 75

pages, and volumes of documents. The Form 433-A reported that

5
Petitioners were 69 and 72 years old at the time of the
hearing.
 - 5 -

petitioners owned assets with a total current value of $547,510,

inclusive of the following:6

Assets Current value

Cash in accounts $3,600
Cash on hand 165
Vehicles:
1993 Chevy 1500 pickup 2,040
1998 Dolphin motor home 42,160
2003 Dodge Grand Caravan 9,810
Real estate 154,090
Retirement Account 335,645
547,510

The Form 433-A reported that petitioners’ debt consisted of

$43,822 owed as to the 1998 Dolphin motor home, $67,777 owed as

to the real estate, and $1,491 owed on credit cards. The Form

433-A reported the following monthly items of income and expense:

Items of income Amount

Husband’s pension $1,854
Wife’s pension 662
2,516

Items of expense Amount

Food, clothing, and miscellaneous $800
Housing 1,498
Transportation 296
Medical expenses 528
Taxes (Income) 529
Debt secured by motor home 478
Other expense 1,300
5,429

6
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”.
 - 6 -

Cochran determined that petitioners’ net realizable equity

in their cash was the $3,600 reported in their bank accounts and

that petitioners’ net realizable equity in their real estate and

vehicles was the same as the reported values (as reduced by the

related liabilities), except she reduced the reported value of

each vehicle by 20 percent to reflect their “quick sale values”.7

As to the retirement account, Cochran noted that petitioners’

representative had informed her that the value of the account was

reported at 15 percent less than the actual value in order to

reflect taxes and concluded that the full value of the retirement

account was $385,992.8 Alternatively, Cochran determined, the

value of the retirement account was $270,992 after subtracting

from the $385,992 a withdrawal of $115,000 to pay petitioners’

$100,000 proposed offer and related taxes at 15 percent. Cochran

summarized petitioners’ assets and liabilities as follows:

7
Cochran 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”.
8
We are unable to determine the specifics underlying
Cochran’s calculation of the $385,992.
 - 7 -
Fair Quick Net
market sale realizable
Assets value value Encumbrance equity

Cash $3,600 -- -- 3,600
Retirement account 385,992 -- -- 385,992/
270,992
Vehicles:
1993 Chevy pickup 2,040 1,632 -- 1,632
1998 Dolphin motor home 42,160 33,728 43,822 -0-
2003 Dodge Grand Caravan 9,810 7,848 –- 7,848
1
Real estate 154,090 –- 67,777 89,913
597,692 43,208 111,599 488,985/
373,985
1
Petitioners’ net realizable equity in their home is actually
$86,313. This slight mathematical error is not significant to the
overall calculation.

Cochran increased petitioners’ reported income by $290 per

month to reflect the monthly portion of $3,493 in wages that

petitioners reported on their 2004 Form 1040, U.S. Individual

Income Tax Return, ($3,493/12 = $291.08). Cochran also adjusted

some of petitioners’ reported expenses. First, she disallowed $6

of the reported $800 in monthly food, clothing, and miscellaneous

expenses to reflect her application of respondent’s guidelines

(i.e., the national standard) to petitioners’ reported monthly

income of $2,516 and petitioners’ household size of two

individuals. Second, she disallowed $405 of the reported

household expenses to reflect her application of local guidelines

to petitioners’ circumstances. Third, she disallowed the

reported $478 monthly expense for the motor home because the

expense was not a basic living expense within the meaning of
 - 8 -

Internal Revenue Manual (IRM) section 5.8.11.2.1; she also noted

that petitioners had two other vehicles. Finally, she reduced

petitioners’ other expense of $1,300 to $255, noting that

petitioners had not substantiated the $1,300 but that $255

represented the average amount of attorney’s fees paid by

petitioners in the preceding 29 months. Cochran concluded that

petitioners’ monthly income was $2,806 (reported income of $2,516

+ $290), that petitioners’ monthly expenses totaled $3,495

(reported amount of $5,429 - $6 - $405 - $478 - $1,300 + $255),

and that petitioners had had no monthly excess income or future

income potential.

Cochran also observed that petitioners received in 2004 a

$65,700 taxable distribution from an individual retirement

account. Cochran noted that petitioners’ monthly allowable

expenses of $3,495 exceeded their monthly income of $2,806 by

$689 and allotted $8,268 ($689 x 12) of the $65,700 distribution

to the payment of petitioners’ necessary living expenses.

Cochran considered the balance of the distribution, $57,432, to

be a dissipation of assets and factored that balance into

petitioners’ reasonable collection potential. Cochran concluded

that petitioners’ net realizable equity in their assets was
 - 9 -

either $488,985 or $373,985 and that their reasonable collection

potential was either $546,417 or $431,417.

On August 18, 2005, Appeals issued petitioners a notice of

determination sustaining the subject levy proposed by respondent

to collect petitioners’ Federal income tax liability. The notice

concludes that petitioners’ $100,000 offer-in-compromise is not

an appropriate collection alternative to the proposed levy. The

notice, citing IRM sections 5.8.11.2.1 and 5.8.11.2.2, states

that petitioners’ offer does not meet the Commissioner’s

guidelines for consideration as an offer-in-compromise to promote

effective tax administration on the basis of economic hardship,

equity, or public policy. As to petitioners’ offer-in-compromise

to promote effective tax administration due to economic hardship,

the notice states:

Considered under economic hardship, the taxpayers have
the ability to pay all assessed amounts and still have
assets with equity remaining worth over $285,000. The
amount being offered by the taxpayers represents 18% of
the taxpayers’ Reasonable Collection Potential. The
taxpayers’ ages and medical conditions were considered
but were insufficient to overlook the taxpayers’
substantial equity in their assets. The taxpayers have
sufficient equity in their assets to pay the tax
amounts owed and still meet their necessary living
expenses for the foreseeable future. The taxpayers,
therefore, failed to document economic hardship in
accordance with Internal Revenue Manual 5.8.11.2.1.
 - 10 -

As to petitioners’ offer-in-compromise to promote effective tax

administration based on equity and public policy, the notice

states: “When considered under public policy or equity grounds,

the taxpayers’ Effective Tax Administration offer proposal fails

to meet the criteria for such consideration under Internal

Revenue Manual 5.8.11.2.2 * * * [and], therefore, cannot be

considered.” 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
$100,000 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,
with the decision being that the taxpayers have
conceded the interest abatement issue for the years
1982, 1983, 1984, 1985, and 1986.

With respect to the taxpayers’ second area of concern,
the Settlement Officer has evaluated the taxpayers’
$100,000 offer to compromise the underlying liabilities
as a collection alternative to the proposed levy
action. Based on that evaluation, the taxpayers’ offer
of $100,000 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.
 - 11 -

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 under section

6404(e) for the same years at issue here. She also learned that

the parties to that case had on February 7, 2005, filed with this

Court a stipulated decision through which petitioners conceded

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.

OPINION

This case is another 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

$100,000 to compromise what they estimate is their approximately

$275,000 Federal income tax liability for 1982 through 1996.

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.
 - 12 -

Commissioner, 114 T.C. 604, 610 (2000); see also Barnes v.

Commissioner, T.C. Memo. 2006-150. 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 Barnes v. Commissioner, supra; Fowler v.

Commissioner, T.C. Memo. 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
 - 13 -

relevant to the question of whether the Appeals officer abused

her discretion.” Murphy v. Commissioner, supra at 315.9

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

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.

9
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 Apr. 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. Accord Barnes v. Commissioner, T.C. Memo.
2006-150.
 - 14 -

Petitioners argue that respondent was required to compromise

their tax liability to promote effective tax administration. 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. Regs. If a taxpayer

does not qualify for effective tax administration compromise on

grounds of economic hardship, 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.

Cochran determined that petitioners’ reasonable collection

potential was either $546,417 or $431,417. Under either

calculation, petitioners can afford to pay their estimated

approximately $275,000 tax liability and therefore only 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).
 - 15 -

Cochran considered all of the evidence submitted to her by

petitioners and applied the guidelines for evaluating an

offer-in-compromise to promote effective tax administration.

Cochran determined that petitioners’ offer was unacceptable

because they were able to pay more than the $100,000 that they

offered to compromise their tax liability. 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 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. 454 F.3d 782 (8th Cir.

2006); Barnes v. Commissioner, supra.

Petitioners make seven arguments in advocating a contrary

result. First, 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
 - 16 -

Circuit in Fargo v. Commissioner, 447 F.3d at 711-712. We do

likewise here for the same reasons stated in that opinion.

Accord Barnes v. Commissioner, T.C. Memo. 2006-150. We add that

petitioners’ counsel participated in the appeal in Fargo v.

Commissioner, supra, 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.

Second, 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 to promote

effective tax administration based on economic hardship or public

policy or equity grounds. We find no abuse of discretion in that

determination.
 - 17 -

Petitioners take exception to the fact that the notice of

determination does not list either petitioners’ age or their

employment status, speculating from this fact that Cochran did

not adequately take into account their special circumstances.

Petitioners also assert that Cochran failed to 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. See Barnes v. Commissioner, supra. Nor do we

find that Cochran inadequately considered the information

actually given to her by petitioners. Cochran allowed the full

amount of medical expenses that petitioners submitted on their

Form 433-A. While petitioners argue that Cochran abused her

discretion by not allowing additional medical expenses that they

claim they will incur in future years on account of their age, we

disagree. Petitioners’ claim to these expenses is too

speculative in that it is based not on their specific situation

but on their reading of Government studies on the relationship

between health costs and the elderly in general. We do not

believe that Appeals abused its discretion in not allowing

petitioners’ proffered anticipated future medical costs. See
 - 18 -

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).

Third, petitioners argue that Cochran did not adequately

take into account the economic hardship they claim they will

suffer by having to pay more than $100,000 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

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, 454 F.3d at 786.
 - 19 -

Nor have petitioners articulated with any specificity the

purported economic hardship they will suffer if they are not

allowed to compromise their liability for $100,000. Petitioners

have given us 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”.10 Sec. 301.7122-1 (c)(3)(i)(A), Proced, & Admin.

Regs.

We also are mindful that any decision by Cochran to accept

petitioners’ offer-in-compromise to promote effective tax

administration 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

10
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 $100,000 offer.
 - 20 -

we emphasize we do not 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’

fourth argument) that her acceptance of that offer would have

undermined voluntary compliance with tax laws by taxpayers in

general. The prospect that acceptance of an offer will undermine

compliance with the tax laws militates against its acceptance.

See Rev. Proc. 2003-71, 2003-2 C.B. 517; IRM sec. 5.8.11.2.2; see

also Barnes v. Commissioner, T.C. Memo. 2006-150.

Fourth, 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. See Speltz v. Commissioner,

454 F.3d at 786. Unlike the exceptional circumstances

exemplified in the regulations, petitioners’ situation is neither

unique nor exceptional in that petitioners’ situation mirrors
 - 21 -

that of numerous taxpayers who claimed tax shelter deductions in

the 1980s and 1990s, obtained the tax advantages, promptly forgot

about their “investment”, and now realize that paying their taxes

will require a change of lifestyle.11 See Barnes v.

Commissioner, supra.

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’ $100,000 offer to satisfy their

approximately $275,000 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

11
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, 447 F.3d 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.
 - 22 -

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.

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.12

Fifth, 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

taxpayers represents the only efficient means for collection of

the liability at issue in this case”. While petitioners assert

that Cochran did not consider all of the facts and circumstances

of this case, “including whether the circumstances of a

particular case warrant acceptance of an amount that might not

12
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.
5.8.11.2.2 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.
 - 23 -

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 offer-in-compromise, and she

rejected the offer only after concluding that petitioners could

pay more of their tax liability than the $100,000 they offered.

Cf. IRM sec. 5.8.11.2.1.11 (“When hardship criteria are

identified but the taxpayer does not offer an acceptable amount,

the offer should not be recommended for acceptance”).

Sixth, 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 their 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 $275,000 liability by paying less than the amount

of interest included within that liability.

Seventh, petitioners argue that Cochran erred in not

allowing their counsel additional time to submit documents for
 - 24 -

her consideration and by not informing petitioners of the

contents of the notice of determination before it was issued. We

disagree on 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. See Barnes v. Commissioner, T.C. Memo. 2006-150.

By their own admission, petitioners’ counsel failed to meet many

of Cochran’s deadlines (before Cochran extended them) because

petitioners’ counsel was pressed by other business from their

acceptance of many 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.

Id.; 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). In this regard, 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. See Barnes v. Commissioner, supra.

We hold that Appeals did not abuse its discretion in

rejecting petitioners’ $100,000 offer-in-compromise. In so
 - 25 -

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

whether Appeals abused its discretion in refusing to accept

petitioners' specific offer-in-compromise in the amount of

$100,000. 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.