Clayton v. Comm'r , 92 T.C.M. 222 ( 2006 )

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
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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.
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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’
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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.
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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”.
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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.
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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
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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
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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.
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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.
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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.
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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
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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.
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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).
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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
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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.
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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
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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.
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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.
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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
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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.
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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.
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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
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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
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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.