Smith v. Comm'r

T.C. Memo. 2007-73

UNITED STATES TAX COURT

MARTIN AND SHARON SMITH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3876-05L. Filed March 29, 2007.

Wendy S. Pearson, Terri A. Merriam, Jennifer A. Gellner,

Jaret R. Coles, and Asher B. Bearman, for petitioners.1

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

1
Wendy S. Pearson (Pearson), Terri A. Merriam (Merriam),
Jennifer A. Gellner (Gellner), and Jaret R. Coles entered their
appearances in this case by subscribing the petition commencing
this proceeding. See Rule 24(a). (Unless otherwise indicated,
Rule references are to the Tax Court Rules of Practice and
Procedure, and section references are to the applicable versions
of the Internal Revenue Code.) Asher B. Bearman entered his
appearance on July 18, 2005, and withdrew on Nov. 17, 2006.
Pearson and Gellner withdrew from the case on Oct. 24 and Nov.
14, 2006, respectively.
 - 2 -

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Petitioners Martin Smith (Smith) and Sharon

Smith petitioned the Court under section 6330(d) to review the

determination of respondent’s Office of Appeals (Appeals)

sustaining a proposed levy related to petitioners’ assessed

Federal income tax liability (inclusive of additions to tax,

penalties, and interest) for 1984, 1985, 1986, and 1991; that

liability totaled $79,461. Petitioners argue that the proposed

levy is improper because, they argue, Appeals was required to

accept their offer to pay $11,552 to compromise their assessed

and unassessed Federal income tax liability (inclusive of

additions to tax, penalties, and interest) for 1984 through 1996;

petitioners estimate that liability to total $265,023. We decide

whether Appeals abused its discretion in rejecting petitioners’

offer. We hold it did not.2

2
Petitioners also dispute a determination by Appeals
concerning their liability for increased interest under sec.
6621(c). As to this dispute, the parties agreed to be bound by a
final decision in Ertz v. Commissioner, docket No. 20336-04L,
which involved a similar issue. On Jan. 24, 2007, the Court held
in Ertz v. Commissioner, T.C. Memo. 2007-15, that the Court lacks
jurisdiction to decide the issue to which the parties agreed to
be bound. On the basis of Ertz v. Commissioner, supra, we shall
dismiss for lack of jurisdiction the portion of this case that
concerns petitioners’ liability for increased interest under sec.
6621(c).
 - 3 -

FINDINGS OF FACT

The parties filed with the Court stipulations of fact and

accompanying exhibits. The stipulated facts are found

accordingly. Petitioners are husband and wife, and they resided

in Tucson, Arizona, when their petition was filed.

On their Federal income tax returns beginning in 1984,

petitioners claimed losses and credits from their investment in

several partnerships organized and operated by Walter J. Hoyt III

(Hoyt). The partnerships were subject to the unified audit and

litigation procedures of the Tax Equity and Fiscal Responsibility

Act of 1982, Pub. L. 97-248, sec. 402(a), 96 Stat. 648. Hoyt was

convicted on criminal charges relating to the promotion of these

partnerships.

Petitioners’ claim to the partnerships’ losses and credits

resulted in the underreporting of their personal 1984, 1985,

1986, and 1991 Federal income taxes. On November 13, 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 amounts owed as to their 1984, 1985, 1986,

and 1991 Federal income taxes; all of these amounts were

attributable to the just referenced underreporting of income.

The notice advised petitioners that they were entitled to a
 - 4 -

hearing with Appeals to review the propriety of the proposed

levy.

On December 2, 2003, petitioners requested the referenced

hearing with Appeals. The request asserted in relevant part that

the proposed levy was inappropriate because: (1) Petitioners

were entitled to compromise their liability on account of

effective tax administration, given, they claimed, that the Hoyt

partnership cases were “longstanding” and petitioners were the

“unwitting victims” of fraud perpetrated by Hoyt; (2) interest

was required to be abated under section 6404(e), an issue,

petitioners noted, then pending before the Court of Appeals for

the Sixth Circuit in Mekulsia v. Commissioner, 389 F.3d 601 (6th

Cir. 2004), affg. T.C. Memo. 2003-138; (3) the Commissioner’s

imposition of tax-motivated interest for 1984 through 1986 was

inappropriate given the facts of the case; and (4) petitioners

were not given an opportunity to be heard during the examination

of the Hoyt partnerships in that, they claimed, they were

represented by Hoyt who had an impermissible conflict of interest

and was thus incapable of representing them properly.

On May 12, 2004, Nancy Driver (Driver), a settlement officer

in Appeals, contacted petitioners with respect to their request

by mailing a letter to Merriam, petitioners’ representative as

stated on a power of attorney. The letter, a copy of which was

mailed to petitioners, stated that Driver would contact
 - 5 -

petitioners to schedule the hearing and asked petitioners to

tender the following items to Driver before the Hearing so that

she could explore a resolution: “Your proposal to resolve the

outstanding balance”; “Any documentation supporting your position

on any issue you wish to discuss”; “Completed and signed Form

433-A, Collection Information Statement for [Wage Earners and

Self-Employed] Individuals, along with supporting documentation”;

“Completed and signed Form 433-B, Collection Information

Statement for Businesses, along with supporting documentation.

This is required only if you own or have interest in a business”.

The letter stated that petitioners should provide the referenced

information to Driver by June 2, 2004. Pursuant to the request

of Gellner, who was also listed in a power of attorney as

petitioners’ representative, Driver extended the June 2, 2004,

date until June 30, 2004.

On June 29, 2004, petitioners submitted to Driver four

letters with accompanying exhibits; a signed and completed Form

656, Offer in Compromise, with an accompanying payment of a

related $150 fee; and a signed and completed Form 433-A with

supporting documentation. Through this submission, petitioners

offered to pay the Commissioner $11,552 to compromise what they

estimated was their $265,023 assessed and unassessed Federal

income tax liability (inclusive of additions to tax, penalties,

and interest) for 1984 through 1996. Each of the four letters
 - 6 -

included in the submission related to a different topic

designated by petitioners as such, the four topics being:

(1) A presentation of the facts and arguments related to the

hearing, including an explanation of the offer amount and medical

and retirement considerations; (2) a delay in the determination

and assessment of their liabilities due to the criminal

investigation of Hoyt; (3) effective tax administration; and

(4) tax-motivated interest under section 6621(c). The Form 656

was signed by each petitioner on June 14, 2004, and stated that

petitioners were making their offer-in-compromise on the grounds

of effective tax administration and doubt as to collectibility.

The Form 433-A was signed by each petitioner on June 14, 2004,

and reported that petitioners owned the following assets with a

current value (net of reported liabilities) of $124,038:3

Checking account $933

Money market account 576

IRAs1:
Vanguard 25,529
Zurich 31,161 56,690

Stock of GE/Motorola 8,165

Vehicles:
Ford Ranger 7,085
Less loan balance 10,997
(3,912)
Mercury Grand Marquis 4,920 1,008

3
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”.
 - 7 -

Home2 160,648
Less mortgage loan balance 103,982 56,666
124,038
1
The reported values of the IRAs (individual retirement
accounts) equal 70 percent of their account balances.
Petitioners reported the lesser values to reflect their
liability for income tax on a liquidation of the accounts.
2
The reported value equals the home’s assessed value.

The Form 433-A reported that petitioners had no disposable

income, listing that their monthly income totaled $3,223 and

their monthly living expenses totaled $4,042.4 The income was

reportedly attributable to Smith’s receipt of Social Security

and/or a pension.5 The living expenses were reportedly

attributable to the following items:

Food, clothing, and miscellaneous: $801
1
Housing and utilities: 1,360
2
Transportation: 715
3
Health care: 262
Taxes (income and FICA): 130
Life insurance: 259
4
Attorney fees: 479
4,006
1
The Form 433-A reports that petitioners’ monthly
payment on their mortgage loan was $899 and that they
were required to make these payments until 2026.
2
The Form 433-A reports that petitioners’ monthly
payment on their car loan was $349.
3
Petitioners told Driver that they were experiencing

4
The listed expenses reported as totaling $4,042 actually
total $4,006.
5
Petitioners’ 2003 Federal income tax return reported that
they had $34,885 of adjusted gross income and $14,798 of taxable
income.
 - 8 -

various medical complications and were required to take
various prescription and other medications.
Petitioners never claimed to Driver that the monthly
cost of these complications and medications exceeded
their reported monthly health care costs.
4
These attorney fees are apparently related to
this litigation.

By way of a letter dated October 18, 2004, Driver notified

petitioners that she had scheduled their hearing (requested by

petitioners as a telephonic hearing) for November 18, 2004. The

letter also stated that Driver had learned from third parties

that petitioners apparently owned certain assets which were not

reported on their Form 433-A, specifically, an IRA valued at

$54,405 with Indianapolis Life Insurance Company (Indianapolis

Life); two lots of real estate sited in Apache County, Arizona;

and one lot of real estate sited in Pima County, Arizona. In

reply to the letter’s request that petitioners explain why the

referenced assets were not included on the Form 433-A,

petitioners, on October 28, 2004, acknowledged that they owned

the IRA with Indianapolis Life and the lots of real estate and

that they had left those assets off of their Form 433-A.

Petitioners stated in the letter that the IRA had been overlooked

in preparing the Form 433-A. Petitioners stated in the letter

that they had forgotten about the three unreported lots which,

they stated, were worthless.

On November 18, 2004, Driver held the scheduled hearing with

petitioners’ counsel. At that time, Smith and his wife were 68
 - 9 -

and 64 years old, respectively. Driver made the following

calculation in determining that petitioners’ net realizable

equity in assets was $161,844:

Assets and Liabilities Reported on Form 433-A

IRAs:
Vanguard 25,529
Zurich 31,161 56,690

Stock of GE/Motorola 8,165

Home 160,648
Less mortgage loan balance 103,982 56,666
121,521
Other Assets
1
IRA: Indianapolis Life 38,823
2
Lots in Apache and Pima Counties 1,500
40,323

Net realizable equity in assets 161,844
1
This amount equals 70 percent of the $55,462 balance
in this account as of Sept. 30, 2004.
2
This amount equals $1,300 less than the total assessed
values of these lots.

Driver calculated petitioners’ reasonable collection potential to

be $161,844, the same amount as their net realizable equity in

assets; in other words, Driver determined that petitioners had no

disposable income.

On January 26, 2005, Appeals issued petitioners the notice

of determination sustaining the proposed levy as to 1984, 1985,

1986, and 1991. The notice reflects Driver’s conclusion that

petitioners’ offer of $11,552 was inadequate under the applicable

guidelines and that the proposed levy balances the need for the
 - 10 -

efficient collection of taxes with the concern that the proposed

levy be no more intrusive than necessary. As to the former

conclusion, the notice states:

Taxpayers challenged the proposed enforcement
collection action by levy.

Taxpayers submitted an Offer in Compromise, Doubt as to
Collectibility and Effective Tax Administration, in the
amount of $11,552.00 during the CDP proceedings. The
OIC was not an acceptable collection alternative and
was rejected.

Taxpayers did not disclose all assets on the Collection
Information Statements attached to the offer. They did
not disclose assets which constituted about 25% of
their net realizable equity. By not disclosing their
complete financial status, this Appeals Officer is
concerned about their good faith effort to resolve this
matter. They were not forthcoming in establishing
their financial status.

This Appeals Officer concluded the offer should not be
accepted under doubt as to collectibility because
taxpayers have sufficient assets to pay the assessed
liability. Further, the offer should not be accepted
under effective tax administration as it would
undermine compliance by taxpayers with the tax laws.

Taxpayers included in the offer years that have
unresolved TEFRA issues, thus the liability has not
been assessed. During the Collection Due Process
proceedings taxpayers did not resolve the years with
TEFRA issues by entering into settlement agreements.

Taxpayers did not propose any other acceptable
collection alternatives. Taxpayers declined to pay the
outstanding liability.

The proposed collection enforcement action by levy is
valid and appropriate.

The notice further states:

The proposed collection action by levy balances the
need for the efficient collection of taxes with the
 - 11 -

concern that collection action be no more intrusive
than necessary. Taxpayer [sic] did not propose any
acceptable collection alternatives.

The notice of determination also addresses the other claims

made by petitioners in their request for a hearing, in support of

their assertion that the proposed levy was inappropriate. First,

the notice notes that the Court of Appeals for the Sixth Circuit

held in Mekulsia v. Commissioner, 389 F.3d 601 (6th Cir. 2004),

that the taxpayer was not entitled to an abatement of interest.

Second, the notice states that petitioners never established that

their facts did not support the imposition of interest under

section 6621(c). Third, the notice indicates that petitioners

never discussed at the hearing their claim that they were not

given an opportunity to be heard during the examination and,

hence, that Driver considered that issue to be abandoned.

OPINION

This case is yet 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. In each of the other prior cases, all of which were

brought by Merriam as either counsel or co-counsel, this Court

has sustained respondent’s right to levy on the assets of the

petitioning taxpayer (or, in the case of joint returns, the

petitioning taxpayers). See Hansen v. Commissioner, T.C. Memo.
 - 12 -

2007-56; Catlow v. Commissioner, T.C. Memo. 2007-47; Estate of

Andrews v. Commissioner, T.C. Memo. 2007-30; Freeman v.

Commissioner, T.C. Memo. 2007-28; Johnson v. Commissioner, T.C.

Memo. 2007-29; Abelein v. Commissioner, T.C. Memo. 2007-24;

Hubbart v. Commissioner, T.C. Memo. 2007-26; Carter v.

Commissioner, T.C. Memo. 2007-25; Ertz v. Commissioner, T.C.

Memo. 2007-15; McDonough v. Commissioner, T.C. Memo. 2006-234;

Lindley v. Commissioner, T.C. Memo. 2006-229; Blondheim v.

Commissioner, T.C. Memo. 2006-216; Clayton v. Commissioner, T.C.

Memo. 2006-188; Keller v. Commissioner, T.C. Memo. 2006-166;

Barnes v. Commissioner, T.C. Memo. 2006-150. As was equally true

as to the taxpayers in many of those prior cases, petitioners

here made a lowball offer to Appeals to compromise their tax debt

and now argue in this Court that Appeals’s rejection of their

offer was an abuse of discretion because, generally speaking,

they claim that the Appeals officer did not appreciate the

specifics of their case.

Where an underlying tax liability is not at issue in a case

invoking our jurisdiction under section 6330(d), we review a

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,
 - 13 -

125 T.C. 301, 308, 320 (2005), affd. 469 F.3d 27 (1st Cir. 2006).

Where we decide the propriety of Appeals’s rejection of an

offer-in-compromise, as we do here, 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; 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 relevant to the question of whether

the Appeals officer abused her discretion.” Murphy v.

Commissioner, supra at 315.6

6
In Murphy v. Commissioner, 125 T.C. 301 (2005), affd.
469 F.3d 27 (1st Cir. 2006), 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
(continued...)
 - 14 -

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.

Petitioners argue in brief that Appeals (acting through

Driver) abused its discretion by not accepting their offer to

compromise their tax liability on the ground of effective tax

administration in that, they assert, Driver did not adequately

6
(...continued)
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 Driver. 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 Driver 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.
 - 15 -

consider the specifics of their case.7 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.

Driver considered all of the evidence submitted to her by

petitioners, and she applied the guidelines for evaluating an

offer-in-compromise to promote effective tax administration. She

determined that petitioners’ offer was unacceptable because,

among other reasons, they were not forthcoming in establishing

7
Petitioners’ posttrial opening brief also states as an
issue the question of whether Appeals abused its discretion by
rejecting petitioners’ request for an offer-in-compromise on the
ground of doubt as to collectibility. The brief does not,
however, advance any direct argument on this issue, stating
instead that the resolution of the issue is controlled by our
decision on petitioners’ claim of effective tax administration.
We consider petitioners to have waived any independent claim of
error related to Appeals’s rejection of their offer-in-compromise
on the ground of doubt as to collectibility and limit our
discussion to Appeals’s rejection of petitioners’ offer-in-
compromise on the ground of effective tax administration.
 - 16 -

their financial status and acceptance of the offer would

undermine compliance with the tax laws by taxpayers in general.

She determined that petitioners’ offer to pay $11,552 was

unacceptable because they had the financial wherewithal to pay

more than that amount. Driver’s ultimate determination to reject

petitioners’ $11,552 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. Her 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).

In their posttrial opening brief, petitioners essentially

make four arguments in advocating a contrary result. First,

petitioners argue that Driver did not adequately consider their

unique facts and circumstances. We disagree. Driver reviewed

and considered all information given to her by petitioners. On

the basis of the facts and circumstances of petitioners’ case as

gleaned from that information, as well as learned from other

information obtained during her independent analysis, Driver

determined that petitioners’ offer did not meet the applicable

guidelines for acceptance of an offer-in-compromise to promote

effective tax administration because acceptance of that offer

would undermine compliance with the tax laws by taxpayers in

general. We find no abuse of discretion in that determination.
 - 17 -

Nor do we find that Driver inadequately considered the

information given to her by petitioners. Driver accepted all of

the values for assets, liabilities, income, and expenses given to

her by petitioners on their Form 433-A, and she only increased

the value of petitioners’ total assets to take into account the

unreported assets which she uncovered during her independent

analysis. Indeed, even in the case of the unreported assets,

Driver’s valuation of those assets did not significantly depart

from petitioners’ valuation of those assets.8 We find that

Driver gave thorough consideration to all of petitioners’ claims

in the light of all of the facts that were communicated to her by

petitioners or were otherwise learned by her from other sources.

As petitioners view this issue, the opinion of the Court of

Appeals for the Ninth Circuit in Fargo v. Commissioner, 447 F.3d

706 (9th Cir. 2006), requires that Appeals accept their $11,552

offer because, they claim, their investment in the Hoyt

partnerships was not purely tax motivated, they were victims of

Hoyt’s fraud, and respondent and Hoyt caused a significant delay

in the resolution of respondent’s examinations of the Hoyt

partnerships. We do not read Fargo v. Commissioner, supra, as

8
Petitioners’ sole dispute with Driver’s valuation of their
assets relates to the unreported lots, which petitioners contend
had no value. We cannot fathom that the lots had no value
whatsoever, and we do not believe that it was an abuse of
Driver’s discretion to value each lot at a minimal average value
of $500.
 - 18 -

broadly as petitioners. Fargo does not support their claim that

Appeals was automatically required to accept petitioners’

bargain-basement offer of $11,552. It cannot be gainsaid that a

significant motivation of their investment in the Hoyt tax

shelters was to realize tax savings.

Petitioners also argue that their offer was required to be

accepted because they adequately demonstrated that they will

suffer economic hardship if required to pay their assessed tax

liability in full. To this end, petitioners state, Driver

ignored both their medical issues and their age and retirement

status in making her determination, and it is “reasonably

foreseeable” that they will need all of their home equity and

retirement assets to compensate for this shortfall and to use for

their care and support in the future. By petitioners’ count,

their monthly income is exceeded by their monthly expenses,

creating a deficit of $819 (i.e., monthly income of $3,223 less

monthly living expenses of $4,042), and Driver’s analysis

requires that they liquidate all of their retirement accounts and

home equity in order to pay their tax liability.

We disagree with petitioners that they have demonstrated

that requiring them to pay more than $11,552 towards their

assessed tax liability will result in an economic hardship.9 The

9
Even if they had shown economic hardship, a compromise on
the basis of effective tax administration will not be made if it
(continued...)
 - 19 -

record establishes that Driver, when she made her determination,

did know the specifics of petitioners’ age and financial status

(including the amount and sources of petitioners’ income) and

that she accepted the amount of the monthly medical expenses

reported to her by petitioners on their Form 433-A. Driver was

not required on her own initiative to increase arbitrarily the

amount of those reported medical expenses to reflect the

possibility that petitioners would incur additional medical costs

in the future. See Fargo v. Commissioner, supra at 710.

Driver’s analysis focused on petitioners’ $79,461 assessed

liability, and petitioners’ net realizable equity in assets was

$161,844, an amount that exceeds petitioners’ assessed liability

by $82,383. We do not consider Appeals to have abused its

discretion by rejecting petitioners’ claim that they will suffer

an economic hardship if required to pay more than their $11,552

offer.10

9
(...continued)
would undermine compliance with the tax laws by taxpayers in
general, see sec. 301.7122-1(b)(3)(iii), Proced. & Admin. Regs.,
and Driver determined that petitioners failed to meet that
essential requirement.
10
Petitioners argue that Driver’s analysis is flawed in
that she considered only their assessed tax liability and not
their assessed and unassessed tax liability. In that Driver
concluded that petitioners’ offer of $11,552 in compromise of
their $79,461 assessed tax liability was unacceptable,
petitioners have not explained to our satisfaction how increasing
the stated assessed liability almost threefold to reflect the
amount of the unassessed liability would then make their offer
(continued...)
 - 20 -

Second, 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

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

may require a change of lifestyle.11

10
(...continued)
acceptable.
11
Of course, the examples in the regulations are not meant
to be exhaustive, and petitioners’ situation is not identical to
that of the taxpayers in Fargo v. Commissioner, 447 F.3d 706, 714
(9th Cir. 2006), affg. T.C. Memo. 2004-13, regarding whom the
Court of Appeals for the Ninth Circuit noted that “no evidence
(continued...)
 - 21 -

We also agree with Driver 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’ $11,552 offer to satisfy their

estimated $265,023 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 involves a tax shelter. Reducing the

risks of participating in tax shelters would encourage more

11
(...continued)
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, see, e.g., Keller v. Commissioner, T.C. Memo.
2006-131, nor prevented the Courts of Appeals for the Sixth,
Ninth, and Tenth Circuits from affirming our decisions to that
effect in 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; and Van Scoten v.
Commissioner, 439 F.3d 1243 (10th Cir. 2006), affg. T.C. Memo.
2004-275.
 - 22 -

taxpayers to run those risks, thus undermining rather than

enhancing compliance with the tax laws.12

Third, petitioners argue that Driver failed to balance

efficient collection with the legitimate concern that collection

through the proposed levy be no more intrusive than necessary.

We disagree. Driver thoroughly considered this balancing issue

on the basis of the information and proposed collection

alternative (offer-in-compromise) given to her by petitioners.

She concluded that the proposed levy action was an appropriate

means for collecting the liabilities at issue. She 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

$11,552 they offered. Cf. Internal Revenue Manual 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”).

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 Internal Revenue
Manual 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
acceptance of it would undermine compliance with the tax laws.
 - 23 -

Fourth, petitioners argue that Driver inappropriately failed

to consider whether they qualified for an abatement of interest

for reasons other than those described in section 6404(e). We

disagree. We find nothing to suggest that Driver 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), Driver obviously would have abated

interest in this case had she agreed to let petitioners

compromise their liability by paying less than the amount of

interest included within that liability. All the same, we find

no basis in the evidence for an abatement of interest, nor any

abuse of discretion by Driver in denying their request for

abatement. Cf. Mekulsia v. Commissioner, 389 F.3d 601 (6th Cir.

2004).

We hold that Appeals (acting through Driver) did not abuse

its discretion in rejecting petitioners’ $11,552 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 whether Appeals abused its discretion in

refusing to accept petitioners' specific offer-in-compromise in

the amount of $11,552. See Speltz v. Commissioner, 124 T.C. at

179-180. We have considered all arguments made by petitioners
 - 24 -

for a contrary holding, and we have found those arguments not

discussed herein to be without merit.

An appropriate order and

decision will be entered.