Carter v. Comm'r

T.C. Memo. 2007-25

UNITED STATES TAX COURT

ROGER AND LORA CARTER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20719-04L. Filed February 6, 2007.

Terri A. Merriam, for petitioners.

Gregory M. Hahn and Thomas N. Tomashek, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HAINES, Judge: Petitioners filed a petition with this Court

in response to a Notice of Determination Concerning Collection

Action(s) Under Section 6320 and/or 6330 (notice of

determination) for 1981 through 1988.1 Pursuant to section

1
Unless otherwise indicated, all section references are to
(continued...)
 - 2 -

6330(d), petitioners seek review of respondent’s determination.

The issue for decision is whether respondent abused his

discretion in sustaining the proposed collection action.2

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The first, second, third, fourth, and fifth stipulations of fact

and the attached exhibits are incorporated herein by this

reference.3

1
(...continued)
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure. Amounts
are rounded to the nearest dollar.
2
Petitioners also dispute respondent’s determination that
they are liable for the increased rate of interest on tax-
motivated transactions under sec. 6621(c). As to this dispute,
the parties filed a stipulation to be bound by the Court’s
determination in Ertz v. Commissioner, T.C. Memo. 2007-15, which
involves a similar issue.
3
Respondent reserved relevancy objections to many of the
exhibits attached to the stipulations of fact. Fed. R. Evid. 402
provides the general rule that all relevant evidence is
admissible, while evidence which is not relevant is not
admissible. Fed. R. Evid. 401 defines relevant evidence as
“evidence having any tendency to make the existence of any fact
that is of consequence to the determination of the action more
probable or less probable than it would be without the evidence.”
While the relevance of some exhibits is certainly limited, we
find that the exhibits meet the threshold definition of relevant
evidence and are admissible. The Court will give the exhibits
only such consideration as is warranted by their pertinence to
the Court’s analysis of petitioners’ case.

Respondent also objected to many of the exhibits on the
basis of hearsay. Even if we were to receive those exhibits into
evidence, they would have no impact on our findings of fact or on
the outcome of this case.
 - 3 -

Petitioners resided in Corbett, Oregon, when they filed

their petition. Petitioners have been married for 33 years, have

two adult children, and one grandchild. At the time of trial,

petitioner Roger Carter (Mr. Carter) was 55 years old and

petitioner Lora Carter (Mrs. Carter) was 53. Mr. Carter has a

high school education and is currently employed as a supervising

electrician. Mrs. Carter has a degree as a dental assistant, but

has worked only sporadically since 1974. At the time of

petitioners’ section 6330 hearing, Mrs. Carter worked at Lowe’s,

a home improvement store.

In 1984, petitioners became partners in Shorthorn Genetic

Engineering, Ltd. 1984-4 (SGE 84-4), a cattle breeding

partnership organized and operated by Walter J. Hoyt III (Hoyt).4

From about 1971 through 1998, Hoyt organized, promoted, and

operated more than 100 cattle breeding partnerships. Hoyt also

organized, promoted, and operated sheep breeding partnerships.

From 1983 to his subsequent removal by the Tax Court in 2000

through 2003, Hoyt was the tax matters partner of each Hoyt

partnership. From approximately 1980 through 1997, Hoyt was a

licensed enrolled agent, and as such, he represented many of the

4
Petitioners were also partners in other Hoyt-related
partnerships identified as DSBS 1990-5, HS Truck, TBS 1989-3, and
TBS. The details of these partnerships are not in the record.
Though unclear, it appears that all adjustments made to
petitioners’ income tax liability for the years in issue arose
from their involvement in SGE 84-4 only.
 - 4 -

Hoyt partners before the Internal Revenue Service (IRS). In

1998, Hoyt’s enrolled agent status was revoked. Hoyt was

convicted of various criminal charges in 2000.5

Beginning in 1984 until at least 1988, petitioners claimed

losses and credits on their Federal income tax returns arising

from their involvement in the Hoyt partnerships. Petitioners

also carried back unused investment credits to 1981, 1982, and

1983. As a result of these losses and credits, petitioners

reported overpayments of tax for 1981 through 1988 and received

refunds in the amounts claimed.

5
Petitioners ask the Court to take judicial notice of
certain “facts” in other Hoyt-related cases and apply judicial
estoppel to “facts respondent has asserted in previous [Hoyt-
related] litigation”. We do neither.

A judicially noticeable fact is one not subject to
reasonable dispute in that it is either (1) generally known
within the territorial jurisdiction of the trial court or (2)
capable of accurate and ready determination by resort to sources
whose accuracy cannot reasonably be questioned. Fed. R. Evid.
201(b). Petitioners are not asking the Court to take judicial
notice of facts that are not subject to reasonable dispute.
Instead, petitioners are asking the Court to take judicial notice
of the truth of assertions made by taxpayers and the Commissioner
in other Hoyt-related cases. Such assertions are not the proper
subject of judicial notice.

The doctrine of judicial estoppel prevents a party from
asserting in a legal proceeding a claim that is inconsistent with
a position successfully taken by that party in a previous
proceeding. New Hampshire v. Maine, 532 U.S. 742, 749 (2001).
Among the requirements for judicial estoppel to be invoked, a
party’s current litigating position must be “clearly
inconsistent” with a prior litigating position. Id. at 750-751.
Petitioners have failed to identify any clear inconsistencies
between respondent’s current position and his position in any
previous litigation.
 - 5 -

Respondent issued Notices of final partnership

administrative adjustments (FPAAs) to SGE 84-4 for its 1984

through 1986 taxable years.6 After completion of the

partnership-level proceedings, respondent sent petitioners a Form

4549A-CG, Income Tax Examination Changes, reflecting changes made

for petitioners’ 1981 through 1988 tax years on July 30, 1998.

Respondent determined deficiencies in petitioners’ income tax of

$8,098, $3,405, $941, $8,421, $14,034, $7,714, $3,239, and $413,

respectively.

On August 17, 2001, respondent issued petitioners a Final

Notice--Notice of Intent to Levy and Notice of Your Right to a

Hearing (final notice). The final notice included petitioners’

outstanding tax liabilities for 1981 through 1988.

On September 14, 2001, petitioners submitted a Form 12153,

Request for a Collection Due Process Hearing. Petitioners argued

that the proposed levies were inappropriate and that an offer-in-

compromise should be accepted.

On May 9, 2002, petitioners submitted a letter (the May 2002

letter) to respondent’s Appeals Office outlining their position

with respect to the proposed collection action. Petitioners

alleged that they were victims of Hoyt’s fraud and asserted

6
SGE 84-4 was also issued an FPAA for 1987. However, it
does not appear that the adjustments made to petitioners’ income
tax liability for the 1981-88 tax years arose from partnership
level proceedings relating to the 1987 FPAA.
 - 6 -

various arguments regarding the appropriateness of an offer-in-

compromise.

On October 31, 2003, petitioners’ case was assigned to

Settlement Officer Linda Cochran (Ms. Cochran).

On February 13, 2004, petitioners submitted a letter (the

February 2004 letter) to Ms. Cochran. Petitioners described

their involvement in the Hoyt partnerships and made various

assertions regarding equity and public policy considerations.

Petitioners attached several exhibits to the February 2004

letter.

On March 8, 2004, Ms. Cochran sent petitioners a letter

scheduling a telephone section 6330 hearing for March 31, 2004.

Petitioners’ representative, Terri A. Merriam (Ms. Merriam),

requested that the hearing be delayed due to the number of Hoyt-

related cases her law firm was handling. Ms. Cochran did not

change the date of the hearing, but extended petitioners’

deadline for producing information to be considered to May 14,

2004.

On May 14, 2004, petitioners submitted to Ms. Cochran a Form

656, Offer in Compromise, a Form 433-A, Collection Information

Statement for Wage Earners and Self-Employed Individuals, and

three letters (the May 14, 2004 letters) explaining the offer

amount and other payment considerations and setting out in detail

petitioners’ position regarding the offer-in-compromise.
 - 7 -

Petitioners attached several exhibits to the May 14, 2004

letters.

The Form 656 indicated that petitioners were seeking an

offer-in-compromise based on either doubt as to collectibility

with special circumstances or effective tax administration.

Petitioners offered to pay $99,851 to compromise their

outstanding tax liabilities for 1981 through 1996.7 At the time

of the section 6330 hearing, $187,041 had been assessed against

petitioners with respect to their 1981 through 1996 tax years.

On the Form 433-A, petitioners listed the following assets:

Asset Current Balance/Value Loan Balance
Checking account $5,226 n/a
Savings accounts 322 n/a
Mutual fund 12,167 -0-
Cash value of life 1,191 -0-
insurance policy
1997 Ford Expedition 7,650 -0-
1978 Ford F-250 De minimis -0-
1964 Ford Falcon De minimis -0-
House 220,200 $82,009
Personal effects 4,000 -0-
Total 250,756 82,009

7
The details of petitioners’ 1989-1996 taxable years are
not in the record.
 - 8 -

The reported value of the house reflected an 80-percent “quick-

sale” value. Petitioners also reported that Mr. Carter had a

pension fund valued at $123,591, but indicated that it was not

currently accessible.

Petitioners reported gross monthly income of $4,458,

representing Mr. Carter’s wages of $3,496, Ms. Carter’s wages of

$827, and other income of $135.8 Petitioners also reported the

following monthly living expenses:

Expense item Monthly Expense
Housing $1,648
Transportation 390
Health care 212
Taxes 1,210
Life insurance 56
Attorney’s fees 299
Other business-related 176
expenses
Total 3,991

In one of the May 14, 2004 letters, petitioners state that

they are offering to pay $99,851 “for all Hoyt related years to

be paid in one lump sum payment. The amount accounts for all the

8
The Form 433-A in evidence does not include page 6, which
would include “Section 9, Monthly Income and Expense Analysis”
and the signature line. Thus, our findings of fact regarding
petitioners’ monthly income and expenses come from
representations made by respondent in the Notice of
Determination.
 - 9 -

tax liability for 1981 through 1998, and regular interest through

April 15, 1993.” The letter included a description of

petitioners’ medical conditions. Mr. Carter was diagnosed with a

degenerative back problem in 1969 and has problems with both

knees and one hip.9 Mrs. Carter has a congenital birth defect

that affects kidney and bladder function, and she also suffers

from collagenous colitis, sarcoidosis, Wegner’s disease, and

atrial fibrillation. The letter also included a “retirement

analysis”, outlining the need for home repairs and the likelihood

of increased housing and medical costs as petitioners age.

In the remaining letters, petitioners alleged that their

case was a “longstanding” case and argued that interest should be

compromised due to the longstanding nature of the case.

On May 21, 2004, petitioners submitted another letter to Ms.

Cochran, which included 42 exhibits not previously provided.

On September 27, 2004, respondent issued petitioners a

notice of determination. In evaluating petitioners’ offer-in-

compromise, respondent made the following changes to the values

of assets reported by petitioners on the Form 433-A: (1)

Respondent determined that the house was worth $275,250 instead

of $220,200 (the 80-percent quick-sale value reported by

petitioners) and reduced petitioners’ net realizable equity by

9
Mr. Carter also broke his back in a work-related accident
on June 21, 2005, but by the time of trial, he was back to
working full-time.
 - 10 -

$82,009 to $193,241 to reflect the amount outstanding on the

first and second mortgages; (2) respondent included the quick-

sale value of the 1997 Ford Expedition ($6,120) instead of the

fair market value petitioners reported; and (3) respondent did

not include the reported value of petitioners’ personal effects.

Respondent did not include the value of Mr. Carter’s pension but

instead used the pension as a source of future income, as

described below. Respondent concluded that petitioners had a

total net realizable equity of $218,267.

Using Mr. Carter’s Form W-2, Wage and Tax Statement, from

2003, respondent adjusted Mr. Carter’s gross monthly income

upward to $4,941. Based on representations made by petitioners,

respondent determined that Mr. Carter would retire in February

2008 and thus included 41 months of Mr. Carter’s monthly wages in

calculating the amount collectible from future income.10 Based

on the information petitioners provided, respondent determined

that upon retirement Mr. Carter would receive $5,170 per month

from his pension. Thus, respondent included 45 months of Mr.

Carter’s pension in calculating the amount collectible from

future income.

10
Respondent determined that there were 86 months left on
the collection statute, and thus used 41 months of petitioners’
preretirement income and 45 months of petitioners’ postretirement
income to calculate the amount collectible from future income.
 - 11 -

Using Mrs. Carter’s pay stubs from the first two months of

2004, respondent adjusted Mrs. Carter’s gross monthly income

upward to $916. Respondent included only 41 months of Mrs.

Carter’s future income.

Respondent accepted petitioners’ monthly expenses as

reported but adjusted their housing and utilities expense and tax

expense downward to $1,170 and $915, respectively. Regarding the

possible future increases in expenses outlined in petitioners’

May 14, 2004 letters, respondent determined that these were

“general projections from the taxpayers’ representative and may

never, in fact, be incurred” and thus did not take them into

account.

After making adjustments to petitioners’ monthly income and

expenses, respondent determined that $162,439 was collectible

from petitioners’ future income. Respondent concluded that

petitioners had the ability to pay $380,706.

Because petitioners had the ability to pay substantially

more than the amount offered, respondent rejected their offer-in-

compromise based on doubt as to collectibility with special

circumstances. Respondent also rejected petitioners’ effective

tax administration offer-in-compromise based on economic hardship

because they had the ability to pay their tax liability in full.

Finally, respondent rejected petitioners’ effective tax

administration offer-in-compromise based on public policy or
 - 12 -

equity ground because the case “fails to meet the criteria for

such consideration”.

Respondent concluded that petitioners did not offer an

acceptable collection alternative, that all requirements of law

and administrative procedure had been met, and that the proposed

collection action could proceed.

In response to the notice of determination, petitioners

filed a petition with this Court on October 29, 2004.

OPINION

Section 7122(a) provides that “The Secretary may compromise

any civil * * * case arising under the internal revenue laws”.

Whether to accept an offer-in-compromise is left to the

Secretary’s discretion. Fargo v. Commissioner, 447 F.3d 706, 712

(9th Cir. 2006), affg. T.C. Memo. 2004-13; sec. 301.7122-1(c)(1),

Proced. & Admin. Regs.

The regulations under section 7122(a) set forth three

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

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

effective tax administration. Sec. 301.7122-1(b), Proced. &

Admin. Regs. Doubt as to liability is not at issue in this

case.11

11
While petitioners contest their liability for sec.
6621(c) interest, see supra note 2, they did not raise doubt as
to liability as a basis for their offer-in-compromise.
 - 13 -

The Secretary may compromise a tax liability based on doubt

as to collectibility where the taxpayer’s assets and income are

less than the full amount of the assessed liability. Sec.

301.7122-1(b)(2), Proced. & Admin. Regs. Generally, under the

Commissioner’s administrative pronouncements, an offer-in-

compromise based on doubt as to collectibility will be acceptable

only if it reflects the taxpayer’s reasonable collection

potential. Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517,

517. In some cases, the Commissioner will accept an offer of

less than the reasonable collection potential if there are

“special circumstances”. Id. Special circumstances are: (1)

Circumstances demonstrating that the taxpayer would suffer

economic hardship if the IRS were to collect from him an amount

equal to the reasonable collection potential; or (2)

circumstances justifying acceptance of an amount less than the

reasonable collection potential of the case based on public

policy or equity considerations. See Internal Revenue Manual

(IRM) sec. 5.8.4.3(4). However, in accordance with the

Commissioner’s guidelines, an offer-in-compromise based on doubt

as to collectibility with special circumstances should not be

accepted if the taxpayer does not offer an acceptable amount.

See IRM sec. 5.8.11.2.1(11) and .2(12).

The Secretary may also compromise a tax liability on the

ground of effective tax administration when: (1) Collection of
 - 14 -

the full liability will create economic hardship; or (2)

exceptional circumstances exist such that collection of the full

liability would undermine public confidence that the tax laws are

being administered in a fair and equitable manner; and (3)

compromise of the liability would not undermine compliance by

taxpayers with the tax laws. Sec. 301.7122-1(b)(3), Proced. &

Admin. Regs.

Petitioners proposed an offer-in-compromise based

alternatively on doubt as to collectibility with special

circumstances or effective tax administration. Petitioners

offered to pay $99,851 to compromise their outstanding tax

liabilities for 1981 through 1996, which totaled $187,041 at the

time of the section 6330 hearing.12 Petitioners argued that

collection of the full liability would create economic hardship

and would undermine public confidence that the tax laws are being

administered in a fair and equitable manner. Respondent

determined that petitioners’ reasonable collection potential was

$380,706 and that their offer-in-compromise did not meet the

criteria for an offer-in-compromise based on either doubt as to

12
The proposed collection action related to petitioners’
outstanding tax liability for 1981-88 only. Petitioners
estimated that their outstanding tax liability for 1981-88 was
$143,911. However, petitioners sought to compromise their
outstanding tax liability for not only 1981-88, but also for
1989-96. To accurately compare their offer amount to their
outstanding tax liability, we must therefore consider the total
assessed amount for 1981-96, and not for only 1981-88.
 - 15 -

collectibility with special circumstances or effective tax

administration.

Because the underlying tax liability is not at issue, our

review under section 6330 is for abuse of discretion. See Sego

v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner,

114 T.C. 176, 182 (2000). This standard does not ask us to

decide whether in our own opinion petitioners’ offer-in-

compromise should have been accepted, but whether respondent’s

rejection of the offer-in-compromise was arbitrary, capricious,

or without sound basis in fact or law. Woodral v. Commissioner,

112 T.C. 19, 23 (1999); Keller v. Commissioner, T.C. Memo. 2006-

166; Fowler v. Commissioner, T.C. Memo. 2004-163. Because the

same factors are taken into account in evaluating offers-in-

compromise based on doubt as to collectibility with special

circumstances and on effective tax administration (economic

hardship or considerations of public policy or equity), we

consider petitioners’ separate grounds for their offer-in-

compromise together. See Murphy v. Commissioner, 125 T.C. 301,

309, 320 n.10 (2005), affd. 469 F.3d 27 (1st Cir. 2006); Barnes

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

A. Economic Hardship

Petitioners assert that Ms. Cochran abused her discretion by

rejecting their offer-in-compromise because “There is no

indication that SO Cochran gave any substantive consideration to
 - 16 -

Petitioners’ demonstrated special circumstances or that they

would experience a hardship if required to make a full-payment.”

In support of this assertion, petitioners argue: (1) Ms. Cochran

failed to discuss petitioners’ special circumstances in the

notice of determination; (2) Ms. Cochran erroneously determined

petitioners’ future income and failed to take into account their

future expenses; and (3) Ms. Cochran improperly valued

petitioners’ house.

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 examples. One of the examples

involves a taxpayer who provides fulltime care to a dependent

child with a serious long-term 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 who has 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 they “describe
 - 17 -

more dire circumstances”. Speltz v. Commissioner, 454 F.3d 782,

786 (8th Cir. 2006), affg. 124 T.C. 165 (2005); see also Barnes

v. Commissioner, supra. Nevertheless, we address petitioners’

arguments.

1. Discussion of Special Circumstances in the Notice of
Determination

Petitioners argue that Ms. Cochran failed “to follow proper

procedure by discussing Petitioners’ special circumstances, what

equity was considered in relation to their special circumstances,

and how the special circumstances affected her determination of

their ability to pay.” Petitioners infer that, because the

special circumstances were not discussed in detail in the notice

of determination, Ms. Cochran failed to adequately take their

circumstances into consideration.

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. This is especially true in a case such as this, where

petitioners provided Ms. Cochran with multiple letters and

hundreds of pages of exhibits. As discussed below, Ms. Cochran

considered all of the arguments and information presented to her.

Given the amount of information, it would be unreasonable to put

the burden on Ms. Cochran to specifically address in the notice

of determination every single asserted fact, circumstance, and

argument presented. The fact that all of the information was not
 - 18 -

specifically addressed in the notice of determination was not an

abuse of discretion.

2. Petitioners’ Income and Future Expenses

Petitioners assert that Ms. Cochran erroneously determined

their future income and expenses by: (1) Considering 86 months

of petitioners’ future income instead of 48 months; and (2)

failing to adequately consider their age, health, retirement

status, medical costs, and the likelihood of future increases in

medical and housing costs. Petitioners’ arguments are not

persuasive.

Section 5.8.5.5 of the IRM provides that, when a taxpayer

makes a cash offer to compromise an outstanding tax liability,

only 48 months of future income should be considered.

Petitioners made a cash offer, but Ms. Cochran used 86 months of

future income.13 At trial, Ms. Cochran acknowledged that she

should have used only 48 months of future income. Ms. Cochran

recomputed petitioners’ reasonable collection potential using 48

months and determined that it was $304,782, instead of $380,706,

as reflected in the notice of determination. Ms. Cochran

testified that the change would not have had an effect on her

final determination because, using either calculation,

petitioners’ reasonable collection potential was greater than

13
Ms. Cochran included 41 months of petitioners’ future
wage income and 45 months of Mr. Carter’s future monthly pension
payments.
 - 19 -

their offer amount ($99,851). We find that Ms. Cochran’s error

did not amount to an abuse of discretion because, even when the

error is corrected, petitioners’ reasonable collection potential

of $304,782 far exceeds their offer amount of $99,851.

With regard to age, health, and retirement status,

petitioners’ argument is not supported by the record. On their

Form 433-A, petitioners reported monthly medical expenses of

$212. In their May 14, 2004, letter describing their offer

amount, petitioners represented that Mr. Carter would retire at

age 58. While they outlined Mrs. Carter’s medical conditions,

petitioners gave no indication as to the likelihood of her

retirement.

Ms. Cochran accepted petitioners’ monthly medical expenses

without change. Ms. Cochran also accepted petitioners’

representation that Mr. Carter would retire at 58, and thus

considered only 41 months of his future income from wages.

Despite the lack of an estimated retirement date for Mrs. Carter,

Ms. Cochran considered only 41 months of Mrs. Carter’s future

income from wages.14 Given her acceptance of the medical

expenses as reported and of only 41 months of petitioners’ future

14
At the time of the section 6330 hearing, Mrs. Carter was
still working. However, at trial, Mrs. Carter testified that she
was forced to quit work shortly after the section 6330 hearing
due to her medical conditions and does not plan to return to
work. Ms. Cochran could not have considered that Mrs. Carter was
forced to stop working because this did not occur until after the
hearing.
 - 20 -

income from wages, we reject petitioners’ assertion that Ms.

Cochran failed to consider each petitioner’s age, health,

retirement status, and current medical costs.

Petitioners’ argument is also unavailing with regard to the

likelihood of future increases in medical and housing costs.

Petitioners did not inform Ms. Cochran with any specificity that

they would have to pay a greater amount of unreimbursed medical

expenses in the future, or that their housing expenses would

increase. Instead, they made general assertions about the

increase of medical costs as people age and about the need for

some seniors to seek in-home care or nursing home care or to make

their houses handicapped accessible.

As reflected in the notice of determination, Ms. Cochran

took into consideration the information petitioners presented,

but concluded that “these possible future expenses are general

projections from the taxpayers’ representative and may never, in

fact, be incurred. The present offer, therefore, must be

considered within the framework of present facts.” Given the

information presented to her, it was not arbitrary or capricious

for Ms. Cochran to ignore these speculative future costs in

making her final determination.

Petitioners also assert that Ms. Cochran abused her

discretion by using Mr. Carter’s pension in her calculation of

petitioners’ future income. Petitioners argue that they must
 - 21 -

retain the money received from the pension to pay for future

increases in expenses. As discussed above, petitioners’

assertions regarding future expenses are speculative and

unsupported, and it was not arbitrary or capricious for Ms.

Cochran to ignore such costs. The use of Mr. Carter’s monthly

pension payments in calculating petitioners’ reasonable

collection potential was not arbitrary or capricious.

Petitioners also raise challenges to various other

determinations made by Ms. Cochran, including: (1) The increase

of petitioners’ wages from the amounts reported; (2) the

reduction of their housing expense and tax expense; and (3) the

disallowance of $600 in monthly insurance payments.15 We need

not discuss in detail these and other minor disputes raised by

petitioners. Even assuming arguendo that petitioners’ income,

expenses, and value of assets should have been accepted as

reported, we would not find that Ms. Cochran abused her

discretion in rejecting petitioners’ offer-in-compromise. Ms.

Cochran testified that, had she accepted the income, expenses,

and value of assets as reported, petitioners’ reasonable

collection potential would have been $173,406. This amount

15
The monthly insurance payments were not reported by
petitioners on their Form 433-A, but instead were discussed in
their May 14, 2004, letter regarding the offer amount.
Petitioners were covered by insurance through Mr. Carter’s
employment. However, they would not be covered once he retired.
Apparently, the $600 payment reflects petitioners’ estimate of
their monthly insurance payments once Mr. Carter retires.
 - 22 -

includes only 80 percent of the value of petitioners’ house,

discussed in more detail below, and does not include the value of

any future pension payments.

Respondent may accept an offer-in-compromise based on doubt

as to collectibility with special circumstances or on effective

tax administration even if the offer amount is less than

petitioners’ reasonable collection potential. However, given all

other considerations discussed herein, we do not believe that Ms.

Cochran abused her discretion by rejecting an offer-in-compromise

that bore no relationship to petitioners’ ability to pay based on

their own calculations.

3. The Value of Petitioners’ House

Petitioners argue that Ms. Cochran improperly valued their

house. Petitioners also argue that Ms. Cochran failed to take

into consideration the need for repairs. Petitioners’ arguments

are not persuasive.

On their Form 433-A, petitioner reported that their house

had an estimated 80-percent quick-sale value of $220,200. Ms.

Cochran increased the house’s value to reflect its 100-percent

value, $275,250. Petitioners argue that, if there was a dispute

over value, Ms. Cochran should have hired a professional

valuation expert. Petitioners argument is without merit because

there was no dispute over value. Ms. Cochran accepted the value

reported by petitioners, only adjusting it to reflect the house’s
 - 23 -

100 percent value. Petitioners offer no support for their use of

an 80-percent quick-sale value. We find that Ms. Cochran’s use

of 100 percent of the house’s value was not arbitrary or

capricious.

In one of the May 14, 2004, letters, petitioners listed a

variety of problems with their house. However, petitioners did

not provide any supporting documentation regarding the need for

or the cost of repairs, but instead they invited Ms. Cochran to

view the house in person. Petitioners believe that, despite the

lack of supporting documentation, Ms. Cochran abused her

discretion by not factoring in the cost of repairs. Petitioners

assert that, if Ms. Cochran questioned petitioners’

representations, she could have requested more information or

accepted petitioners’ invitation to view the house in person.

Given the voluminous nature of the information provided to Ms.

Cochran, we do not believe that she was under an obligation to

request more information or to view the house in person. The

burden was on petitioners to establish that they were entitled to

an offer-in-compromise. Petitioners cannot shift this burden by

simply inviting Ms. Cochran to request more information or to

view the house in person.

4. Encouraging Voluntary Compliance With the Tax Laws

We are also mindful that any decision by Ms. Cochran to

accept petitioners’ offer-in-compromise due to doubt as to
 - 24 -

collectibility with special circumstances or effective tax

administration based on economic hardship must be viewed against

the backdrop of section 301.7122-1(b)(3)(iii), Proced. & Admin.

Regs.16 See Barnes v. Commissioner, T.C. Memo. 2006-150. That

section requires that Ms. Cochran deny petitioners’ offer-in-

compromise if its acceptance 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 decline to make, we would not find that Ms.

Cochran’s rejection of petitioners’ offer-in-compromise was an

abuse of discretion. As discussed below (in our discussion of

petitioners’ “equitable facts” argument), we conclude that

acceptance of petitioners’ offer-in-compromise would undermine

voluntary compliance with tax laws by taxpayers in general.

B. Public Policy and Equity Considerations

Petitioners assert that “There are so many unique and

equitable facts in this case that this case is an exceptional

circumstance”, and respondent abused his discretion by not

accepting those facts as grounds for an offer-in-compromise. In

support of their assertion, petitioners argue: (1) The

16
The prospect that acceptance of an offer-in-compromise
will undermine compliance with the tax laws militates against its
acceptance whether the offer-in-compromise 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; IRM sec. 5.8.11.2; see also Barnes v.
Commissioner, T.C. Memo. 2006-150.
 - 25 -

longstanding nature of this case justifies acceptance of the

offer-in-compromise; (2) respondent’s reliance on an example in

the IRM was improper; and (3) respondent failed to consider

petitioners’ other “equitable facts”.

1. Longstanding Case

Petitioners assert that the legislative history requires

respondent to resolve “longstanding” cases by forgiving penalties

and interest which would otherwise apply. Petitioners argue

that, because this is a longstanding case, respondent abused his

discretion by failing to accept their offer-in-compromise.

Petitioners’ argument is essentially the same considered and

rejected by the Court of Appeals for the Ninth Circuit in Fargo

v. Commissioner, 447 F.3d at 711-712. See also Keller v.

Commissioner, T.C. Memo. 2006-166; Barnes v. Commissioner, supra.

We reject petitioners’ argument for the same reasons stated by

the Court of Appeals. We add that petitioners’ counsel

participated in the appeal in Fargo, as counsel for the amici.

On brief, petitioners suggests that the Court of Appeals

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 to otherwise allow

those clients’ liabilities for penalties and interest to be

forgiven. We do not read the opinion of the Court of Appeals in
 - 26 -

Fargo to support that conclusion. See Keller v. Commissioner,

supra; Barnes v. Commissioner, supra.

Respondent’s rejection of petitioners’ longstanding case

argument was not arbitrary or capricious.

2. The IRM Example

Petitioners argue that respondent erred when he determined

that they were not entitled to relief based on the second example

in IRM section 5.8.11.2.2. Petitioners assert that many of the

facts in this case were not present in the example, and,

therefore, any reliance on the example was misplaced.

Petitioners’ argument is not persuasive.

IRM section 5.8.11.2.2 discusses effective tax

administration offers-in-compromise based on equity and public

policy grounds and states in the second example:

In 1983, the taxpayer invested in a nationally marketed
partnership which promised the taxpayer tax benefits
far exceeding the amount of the investment.
Immediately upon investing, the taxpayer claimed
investment tax credits that significantly reduced or
eliminated the tax liabilities for the years 1981
through 1983. In 1984, the IRS opened an audit of the
partnership under the provisions of the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA). After
issuance of the Final Partnership Administrative
Adjustment (FPAA), but prior to any proceedings in Tax
Court, the 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
 - 27 -

the partnership’s activities lacked economic substance.
The taxpayer has now offered to compromise all the
penalties and interest on terms more favorable than
those contained in the prior settlement offer, arguing
that TEFRA 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. Neither
the operation of the TEFRA rules nor the TMP’s actions
on behalf of the taxpayer provide grounds to compromise
under the equity provision of paragraph (b)(4)(i)(B) of
this section. Compromise on those grounds would
undermine the purpose of both the penalty and interest
provisions at issue and the consistent settlement
principles of TEFRA. * * *

1 Administration, Internal Revenue Manual (CCH), sec.

5.8.11.2.2(3), at 16,378. Ms. Cochran determined that

petitioners’ case is similar to the example:

It’s similar to the case at hand in that it involved
old periods, 1983 periods. It’s similar in the sense
that * * * it was a TEFRA proceedings [sic] involving
an audit of a partnership. The taxpayer was offered
and rejected a settlement officer [sic] from IRS.
After several years of litigation, the partnership
ended up in Tax Court. * * * FPAAs were issued. The
taxpayer now offered to compromise all the penalties
and interest on terms more favorable than those
originally contained in the settlement offer17 and that
there--the taxpayer raised issues about the TMP’s
actions on behalf of the taxpayer.

We agree with Ms. Cochran that the example presents circumstances

similar to those in petitioners’ case.

Petitioners are correct in asserting that not all of the

facts in their case are present in the example. However, it is

17
Mr. Carter testified that they received a settlement
offer from respondent in or around 1990. Mr. Carter could not
remember the details of the settlement offer, nor was the offer
in the record.
 - 28 -

unreasonable to expect that facts in an example be identical to

facts of a particular case before the example can be relied upon.

The IRM example was only one of many factors respondent

considered. Given the similarities to petitioners’ case,

respondent’s reliance on that example was not arbitrary or

capricious.

3. Petitioners’ Other “Equitable Facts”

Petitioners argue that respondent abused his discretion by

failing to consider the other “equitable facts” of this case.

Petitioners’ “equitable facts” include reference to: (1)

Petitioners’ reliance on Bales v. Commissioner, T.C. Memo. 1989-

568;18 (2) petitioners’ reliance on Hoyt’s enrolled agent status;

(3) Hoyt’s criminal conviction; (4) Hoyt’s fraud on petitioners;

and (5) other letters and cases. The basic thrust of

petitioners’ argument is that they were defrauded by Hoyt and

that, if they were held responsible for penalties and interest

18
Bales v. Commissioner, T.C. Memo. 1989-568, involved
deficiencies determined against various investors in several Hoyt
partnerships. This Court found in favor of the investors on
several issues, stating that “the transaction in issue should be
respected for Federal income tax purposes.” Taxpayers in many
Hoyt-related cases have used Bales as the basis for a reasonable
cause defense to accuracy-related penalties. This argument has
been uniformly rejected by this Court and by the Courts of
Appeals for the Sixth, Ninth, and Tenth Circuits. See, e.g.,
Hansen v. Commissioner, 471 F.3d 1021 (9th Cir. 2006), affg. T.C.
Memo. 2004-269; Mortensen v. Commissioner, 440 F.3d 375, 390-391
(6th Cir. 2006), affg. T.C. Memo. 2004-279; Van Scoten v.
Commissioner, 439 F.3d 1243, 1254-1256 (10th Cir. 2006), affg.
T.C. Memo. 2004-275.
 - 29 -

incurred as a result of their investment in a tax shelter, it

would be inequitable and against public policy. Petitioners’

argument is not persuasive.

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 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.

Unlike the exceptional circumstances exemplified in the

regulations, petitioners’ situation is neither unique nor

exceptional in that his situation mirrors those of numerous other

taxpayers who claimed tax shelter deductions in the 1980s and

1990s. See Keller v. Commissioner, T.C. Memo. 2006-166; Barnes

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

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
 - 30 -

kept this Court from finding investors in the Hoyt tax shelters

to be liable for penalties and interest, nor have they prevented

the Courts of Appeals for the Sixth, Ninth, and Tenth Circuits

from affirming our decisions to that effect. See Hansen v.

Commissioner, 471 F.3d 1021 (9th Cir. 2006), affg. T.C. Memo.

2004-269; Mortensen v. Commissioner, 440 F.3d 375 (6th Cir.

2006), affg. T.C. Memo. 2004-279; Van Scoten v. Commissioner, 439

F.3d 1243 (10th Cir. 2006), affg. T.C. Memo. 2004-275.

Ms. Cochran testified that she considered all of Ms.

Merriam’s and petitioners’ assertions, including the numerous

letters and exhibits. Nevertheless, Ms. Cochran determined that

petitioners did not qualify for an offer-in-compromise.

The mere fact that petitioners’ “equitable facts” did not

persuade respondent to accept their offer-in-compromise does not

mean that those assertions were not considered. The notice of

determination and Ms. Cochran’s testimony demonstrate

respondent’s clear understanding and careful consideration of the

facts and circumstances of petitioners’ case. We find that

respondent’s determination that the “equitable facts” did not

justify acceptance of petitioners’ offer-in-compromise was not

arbitrary or capricious, and thus it was not an abuse of

discretion.

We also find that compromising petitioners’ case on grounds

of public policy or equity would not enhance voluntary compliance
 - 31 -

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.

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. See Barnes

v. Commissioner, supra.

C. Petitioners’ Other Arguments

1. Compromise of Penalties and Interest in an Effective
Tax Administration Offer-in-Compromise

Petitioners advance a number of arguments focusing on their

assertion that respondent determined that penalties and interest

could not be compromised in an effective tax administration

offer-in-compromise. Petitioners argue that such a determination

is contrary to legislative history and is therefore an abuse of

discretion. These arguments are not persuasive.

The regulations under section 7122 provide that “If the

Secretary determines that there are grounds for compromise under

this section, the Secretary may, at the Secretary’s discretion,

compromise any civil * * * liability arising under the internal

revenue laws”. Sec. 301.7122-1(a)(1), Proced. & Admin. Regs. In
 - 32 -

other words, the Secretary may compromise a taxpayer’s tax

liability if he determines that grounds for a compromise exist.

If the Secretary determines that grounds do not exist, the amount

offered (or the way in which the offer is calculated) need not be

considered.

Petitioners’ arguments regarding the compromise of penalties

and interest do not relate to whether there are grounds for a

compromise. Instead, these arguments go to whether the amount

petitioners offered to compromise their tax liability was

acceptable. As addressed above, respondent’s determination that

the facts and circumstances of petitioners’ case did not warrant

acceptance of their offer-in-compromise was not arbitrary or

capricious and was thus not an abuse of discretion. Because no

grounds for compromise exist, we need not address whether

respondent can or should compromise penalties and interest in an

effective tax administration offer-in-compromise. See Keller v.

Commissioner, supra.

2. Information Sufficient for the Court To Review
Respondent’s Determination

Petitioners argue that respondent failed to provide the

Court with sufficient information “so that this Court can conduct

a thorough, probing, and in-depth review of respondent’s

determinations.” Petitioners’ argument is without merit.

Generally, a taxpayer bears the burden of proving the

Commissioner’s determinations incorrect. Rule 142(a)(1); Welch
 - 33 -

v. Helvering, 290 U.S. 111, 115 (1933).19 The burden was on

petitioners to show that respondent abused his discretion. The

burden was not on respondent to provide enough information to

show that he did not abuse his discretion. Nevertheless, we find

that we had more than sufficient information to review

respondent’s determination.

3. Scheduling of the Section 6330 Hearing and Deadline for
Submission of Information

Petitioners argue that Ms. Cochran abused her discretion by

not allowing their counsel additional time to prepare for the

section 6330 hearing and to submit additional information. Once

the section 6330 hearing was scheduled, Ms. Cochran refused

petitioners’ request to delay the hearing. However, Ms. Cochran

did extend the deadline for submission of information.

While petitioners wanted to delay the section 6330 hearing,

they do not allege that they were unable to adequately prepare

for the hearing. Additionally, petitioners have not identified

any documents or other information that they believe Ms. Cochran

should have considered but that they were unable to produce

because of the deadline for submission. Given the thoroughness

19
While sec. 7491 shifts the burden of proof and/or the
burden of production to the Commissioner in certain
circumstances, this section is not applicable in this case
because respondent’s examination of petitioners’ returns did not
commence after July 22, 1998. See Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3001(c), 112 Stat. 727.
 - 34 -

and the amount of information submitted, it is unclear why

petitioners needed additional time. We do not believe that Ms.

Cochran abused her discretion by establishing a timeframe for the

section 6330 hearing and the submission of information.

4. Efficient Collection Versus Intrusiveness

Petitioners argue that respondent failed to balance the need

for efficient collection of taxes with the legitimate concern

that the collection action be no more intrusive than necessary.

See sec. 6330(c)(3)(C). Petitioners’ argument is not supported

by the record.

Petitioners have an outstanding tax liability. In their

section 6330 hearing, petitioners proposed only an offer-in-

compromise. Because no other collection alternatives were

proposed, there were no less intrusive means for respondent to

consider. We find that respondent balanced the need for

efficient collection of taxes with petitioners’ legitimate

concern that collection be no more intrusive than necessary.

D. Conclusion

Petitioners have not shown that respondent’s determination

was arbitrary or capricious, or without sound basis in fact or

law. For all of the above reasons, we hold that respondent’s

determination was not an abuse of discretion, and respondent may

proceed with the proposed collection action.
 - 35 -

In reaching our holdings herein, we have considered all

arguments made, and, to the extent not mentioned above, we find

them to be moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be

entered for respondent.