The opinion
T.C. Memo. 2006-234
UNITED STATES TAX COURT
GARY W. McDONOUGH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1201-05L. Filed November 1, 2006.
Asher B. Bearman, Jaret R. Coles, Jennifer A. Gellner, and
Terri A. Merriam, for petitioner.
Gregory M. Hahn and Thomas N. Tomashek, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge: Petitioner filed a petition with this Court
in response to a Notice of Determination Concerning Collection
Action(s) Under Section 6320 and/or 6330 for 1989 and 1991.1
1
Unless otherwise indicated, all section references are to
(continued...)
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Pursuant to section 6330(d), petitioner seeks review of
respondent’s determination. The sole issue for decision is
whether respondent abused his discretion in sustaining the
proposed levy action.
FINDINGS OF FACT
The parties’ stipulation of facts and the attached exhibits
are incorporated herein by this reference. The facts stipulated
are so found.2 Petitioner resided in Westminster, California,
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
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 relevancy of some exhibits is certainly limited, this
Court finds 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 petitioner’s case.
Respondent also objected to many of the exhibits on the
basis of hearsay. Even if the Court were to receive those
exhibits into evidence, they would have no impact on our findings
of fact or on the outcome of this case.
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when he filed his petition. Petitioner’s wife, Mary Jane
McDonough, filed separate tax returns for 1989 and 1991.
Petitioner is 57 years old and is currently employed by the Los
Angeles City Fire Department.
Petitioner invested in two partnerships organized and
operated by Walter J. Hoyt III (Hoyt). The partnerships were
Timeshare Breeding Syndicate Joint Venture (TBS) and Timeshare
Breeding Service 1989-1 J.V. (TBS 1989-1).
From about 1971 through 1998, Hoyt organized, promoted, and
operated more than 100 cattle breeding partnerships (Hoyt
partnerships). Hoyt also organized, promoted, and operated sheep
breeding partnerships. From 1983 until his removal by the Tax
Court in 2000 through 2003, Hoyt was each partnership’s general
partner and tax matters partner. From approximately 1980 through
1997, Hoyt was a licensed enrolled agent, and as such, he
represented many of the Hoyt partners before the IRS. In 1998,
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Hoyt’s enrolled agent status was revoked. In 2001, Hoyt was
convicted of criminal charges relating to the promotion of these
partnerships.3
Petitioner reported partnership losses from TBS and TBS
1989-1 on his Form 1040, U.S. Individual Income Tax Return, for
1989 of $3,560 and $27,509, respectively, and for 1991 of $33,782
and $59,179, respectively. Petitioner’s claim to the losses
resulted in the underreporting of his 1989 and 1991 taxable
income. On May 13, 2002, additional income taxes and interest
3
Petitioner asks 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”. The Court will 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). Petitioner is not asking the Court to take judicial
notice of facts that are not subject to reasonable dispute.
Instead, petitioner is 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 a claim in a legal proceeding 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.
Petitioner has failed to identify any clear inconsistencies
between respondent’s current position and his position in any
previous litigation.
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were assessed against petitioner for 1989 and 1991 because of the
underreporting.4
On August 23, 2002, respondent mailed petitioner a Letter L-
1058, Final Notice of Intent to Levy and Notice of Your Right to
a Hearing. The notice informed petitioner that respondent
proposed to levy on his property to collect Federal income taxes
owed for 1989 and 1991. The notice advised petitioner he was
entitled to a hearing with respondent’s Appeals Office to review
the propriety of the proposed levy. On August 29, 2002,
petitioner submitted a Form 12153, Request for a Collection Due
Process Hearing. Petitioner indicated he would pursue an offer-
in-compromise based on effective tax administration and would
provide financial information upon request.
On March 11, 2003, Appeals received petitioner’s original
Form 656, Offer in Compromise, with a completed Form 433-A,
Collection Information Statement for Wage Earners and Self-
Employed Individuals, offering to pay $102,000 to compromise his
outstanding tax liability. Petitioner offered to compromise his
outstanding 1985-95 tax liabilities on the grounds of doubt as to
4
TBS 1989-1, one of the partnerships in which petitioner
invested, was involved in a consolidated case decided by this
Court in Durham Farms #1, J.V. v. Commissioner, T.C. Memo. 2000-
159, affd. 59 Fed. Appx. 952 (9th Cir. 2003). As a result of
that case, computational adjustments were made, and, on May 13,
2002, additional income tax and interest were assessed against
petitioner for 1989 and 1991.
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liability and effective tax administration. On March 30, 2004, a
section 6330 telephone hearing was held between Settlement
Officer Linda Cochran (Ms. Cochran) and petitioner’s attorney,
during which petitioner’s attorney argued that: (1) Appeals
should accept the offer as a matter of equity and public policy;
(2) the collection activity should be limited to taxes owed for
1989 and 1991 until the Tax Court decides the pending interest
and penalty cases;5 and (3) petitioner did not have an
opportunity to be heard during the examination process.
On May 3, 2004, petitioner submitted to Ms. Cochran a
revised Form 656 dated March 24, 2004, with a revised completed
Form 433-A dated March 22, 2004, offering to pay $102,000 to
compromise a liability of approximately $230,000 for 1987-96.
Petitioner offered to compromise his outstanding tax liabilities
not only for the years subject to the proposed collection action,
but also for the liabilities arising from his 1987-88, 1990, and
1992-96 tax years.6 The revised offer-in-compromise was
5
On Apr. 28, 2005, a stipulated decision was entered in
McDonough v. Commissioner, docket. No. 18866-03, an interest
abatement proceeding for 1989 through 1991, in which the Court
ordered and decided that petitioner was not entitled to an
abatement of interest under sec. 6404(e) for those years. To
date, no decision has been made by the Court in McDonough v.
Commissioner, docket No. 15239-04.
6
At the time of the sec. 6330 hearing, the taxes,
penalties, and interest for 1987-88, 1990, and 1992-96 were
unassessed.
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submitted on the grounds of doubt as to liability7 and effective
tax administration. Petitioner’s revised Form 433-A reported no
future income potential and assets with a total current value of
$232,436, including the following:8
Assets Current Value
Cash $52,251
Stock 25,404
Furniture 960
Vehicles 64,821
Real property(one-half
interest)1 89,000
Total 232,436
1
The real property consisted of petitioner and his wife’s
house in Westminster, California and property they owned in
Prescott, Arizona.
The Form 433-A also reported the following monthly items of
income and expenses:
Total Income Amount
Wages $8,110
Total Living Expenses
Food, clothing, and miscellaneous $2,335
Housing and utilities 2,742
Transportation 705
Health care 1,747
Taxes (income) 1,225
Life insurance 28
7
The doubt as to liability issues were not argued on brief
and not considered here.
8
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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Other expenses (attorney’s fees) 728
Total 9,510
Ms. Cochran determined that petitioner’s net realizable
equity in each of his reported assets was the same as its
reported value except that she reduced the reported value of the
stock and of each vehicle by 20 percent to reflect the assets’
quick sale value and increased the reported values of
petitioner’s house and Arizona property because they had not been
based upon current appraisals and current market prices. Ms.
Cochran summarized petitioner’s assets and liabilities as
follows:9
Assets Current Value
Cash $52,251
Stock 20,323
Furniture 960
Vehicles 51,856
Real property(one-half
interest) 171,500
Total 296,890
Using petitioner’s average income over 38 months, she
determined his monthly income was $11,012, not $8,110. As to the
reported expenses, Ms. Cochran disallowed actual expenses for
food, clothing, and miscellaneous; housing and utilities; and
transportation, and applied the national and local standard
9
This amount does not include the value of petitioner’s
pension. Petitioner testified that under his pension he will
receive 82 percent of his current gross income of approximately
$102,000 plus an annual cost of living raise of 2.5 percent
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allowances to those items. Ms. Cochran increased the tax expense
to reflect the increased amount of determined income. As
adjusted, the following were the determined monthly items of
expenses:
Total Living Expenses Amount
Food, clothing, and miscellaneous $1,271
Housing and utilities 1,603
Transportation 471
Health care 1,747
Taxes (income) 2,000
Life insurance 28
Other expenses (attorney’s fees) 728
Total 7,848
Ms. Cochran determined that petitioner’s monthly excess
income (i.e., monthly income less monthly expenses) was $3,164
($11,012 - $7,848), his income potential for the next 116 months
was approximately $367,024 ($3,164 x 116 months = $367,024),10
and the reasonable collection potential was $663,914 (income
potential of $367,024 + net realizable equity of $296,890).
On December 16, 2004, respondent issued petitioner a notice
of determination sustaining the proposed levy with the provision
that the collection activity will not include the collection of
interest or penalties until the interest and penalty cases were
10
In the notice, Ms. Cochran mistakenly used a 116-month
factor to determine petitioner’s income potential. On brief,
respondent corrected the mistake by using a 48-month factor as
required when a taxpayer makes a cash offer. As a result,
petitioner’s correct income potential was $151,872 ($3,164 x 48 =
$151,872). See Internal Revenue Manual (IRM) sec. 5.8.5.5.
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decided. The notice concluded petitioner’s $102,000 offer-in-
compromise was not an adequate collection alternative to the
proposed levy because petitioner had the ability to pay $448,762.
The notice, citing Internal Revenue Manual (IRM) sections
5.8.11.2.1 and 5.8.11.2.2, stated that petitioner’s offer did not
meet the Commissioner’s guidelines for consideration as an
offer-in-compromise to promote effective tax administration.
Specifically, the notice stated:
Considered under economic hardship, the taxpayer
has the ability to pay all assessed amounts and still
have assets remaining with equity worth over $200,000
in addition to an income stream of over $350,000. The
taxpayer’s representative contended that the taxpayer
was being evaluated for possible disability. The
Settlement Officer noted, however, that no actual
disability has been documented to date. The present
offer, therefore, must be considered within the
framework of present facts. As such, the taxpayer
failed to document economic hardship with or without
special circumstances, in accordance with Internal
Revenue Manual 5.8.11.2.1.
When considered under public policy or equity grounds, the
taxpayer’s Effective Tax Administration offer proposal fails to
meet the criteria for such consideration under Internal Revenue
Manual 5.8.11.2.2. For the reasons set forth in No. 1 above, the
taxpayer’s offer as an Effective Tax Administration offer based
on public policy or equity grounds, therefore, cannot be
considered.
In response to the notice of determination, petitioner filed
his petition with this Court on January 19, 2005.
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OPINION
I. Standard of Review
Because the underlying tax liability is not at issue, this
Court’s 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
require the Court to decide whether petitioner’s offer-in-
compromise should have been accepted, but whether respondent’s
rejection of the offer was arbitrary, capricious, or without
sound basis in fact or law. See 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.
II. Petitioner’s Offer-in-Compromise
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 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 (ETA). Sec. 301.7122-1(b), Proced.
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& Admin. Regs. Doubt as to liability and doubt as to
collectibility11 are not at issue in this case.
Petitioner proposed an offer-in-compromise based on ETA,
offering to pay $102,000 to compromise his estimated outstanding
tax liability of $230,000. Petitioner argued that collection of
the full liability would create economic hardship and that
compelling public policy or equity considerations provide a
sufficient basis for compromising the liability. Respondent
determined petitioner’s reasonable collection potential was
$663,914, and thus, petitioner’s offer did not meet the criteria
for an offer-in-compromise based on ETA.
A tax liability may be compromised on the ground of ETA
when: (1) Collection of the full liability will create economic
hardship; or (2) compelling public policy or equity
considerations provide a sufficient basis for compromising the
liability; 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.
11
Petitioner alleged respondent erred by not finding there
was doubt as to collectibility. However, petitioner did not
present information to substantiate this claim and did not argue
it on brief. This Court concludes petitioner has abandoned this
argument.
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A. Economic Hardship
Petitioner asserts that Ms. Cochran abused her discretion by
rejecting his offer-in-compromise because “There is no indication
that SO Cochran gave any substantive consideration to
petitioner’s demonstrated special circumstances or that he would
experience a hardship if required to make a full-payment.” In
support of this assertion, petitioner argues Ms. Cochran: (1)
Failed to adequately consider his health issues; (2) failed to
consider that because of current and future health issues
petitioner will retire early, causing his income to decrease; (3)
improperly valued petitioner’s real property; and (4) failed to
use actual housing and utility expenses to determine his total
monthly living expenses.
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 example
involves a taxpayer who provides full-time 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 if his only asset was liquidated. The
third example involves a disabled taxpayer who has a fixed income
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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 all “describe
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, T.C. Memo. 2006-150. Nevertheless, we will
address petitioner’s arguments.
1. Discussion of Special Circumstances in the Notice
of Determination
Petitioner argues that Ms. Cochran failed “to follow proper
procedure by [not] discussing Petitioner’s special circumstances,
what equity was considered in relation to his special
circumstances, and how the special circumstances affected her
determination of his ability to pay.” Petitioner infers that,
because the notice of determination did not discuss the special
circumstances in detail, Ms. Cochran failed to adequately take
petitioner’s circumstances into consideration.
This Court does not believe that Appeals must specifically
list in the notice of determination every single fact it
considers in arriving at a determination. See Barnes v.
Commissioner, supra. This is especially true in a case such as
this, where petitioner provided Ms. Cochran with multiple letters
and hundreds of pages of exhibits. Ms. Cochran considered all of
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the arguments and information presented to her. Given the amount
of information, it would be unreasonable to require her to
specifically address in the notice of determination every single
asserted fact, circumstance, and argument presented. The fact
that all of the information presented was not specifically
addressed in the notice of determination does not indicate an
abuse of discretion.
2. Petitioner’s Medical Expenses and Possible
Retirement
Petitioner argues Ms. Cochran failed to adequately consider
his declining health, the likelihood his health problems will
require early retirement, and possible future increases in
medical expenses.
Included in the documentation provided to Ms. Cochran were
letters from petitioner’s doctors stating that he suffers from
work-related injuries to his lumbar, cervical, and thoracic
spine, his wrists, and his right elbow, resulting in multiple
medical procedures, including pain management therapy.
Petitioner asserted the severity of his injuries will force him
to retire in the near future and presented a letter from his
doctor indicating his injuries “may” lead to future disability.
In the notice of determination, Ms. Cochran stated: “the
taxpayer’s representative contended that the taxpayer was being
evaluated for possible disability”. However, no actual
disability was documented, and no evidence was produced
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indicating petitioner’s present or future medical expenses will
cause him to be unable to pay his basic living expenses. As to
petitioner’s asserted increasing expenses due to health problems,
Ms. Cochran determined that “the taxpayer failed to document
economic hardship” and the present offer “must be considered
within the framework of present facts”.
Petitioner reported monthly medical expenses of $1,747 on
his Form 433-A, which Ms. Cochran accepted. Petitioner did not
report or substantiate future amounts of increased medical
expenses. Given the information presented to her, it was not
arbitrary or capricious for Ms. Cochran to ignore speculative
future medical costs when making her final determination.
Therefore, this Court rejects petitioner’s assertion that Ms.
Cochran failed to consider his current and future medical costs.
Petitioner also asserts that Ms. Cochran abused her
discretion by using a longer period (116 months) for evaluating
income from future earnings when petitioner stated he would
retire early because of health problems. Although petitioner
stated he may retire, he did not state that he would retire by a
certain date or that there was a mandatory retirement age.
Even when a 48-month period is used to determine future
earnings, petitioner’s income potential of $151,872 still exceeds
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his offer of $102,000.12 Given the information presented, it was
not arbitrary or capricious that Ms. Cochran was not persuaded by
petitioner’s statements of possible retirement when evaluating
his income from future earnings.
3. Petitioner’s Property
Petitioner argues Ms. Cochran improperly increased the
value of his house and his Arizona property. On his Form 433-A,
petitioner reported the estimated fair market value of his house
was $460,000, with an 80-percent quick-sale value of $368,000 and
an outstanding encumbrance of $369,000. Petitioner’s estimate
was based on a professional appraisal dated May 8, 2003. Ms.
Cochran testified she did not accept petitioner’s reported value
because the appraisal was over a year old and no longer reflected
current value. Instead, she determined a value of $550,000,
using recent comparable sales.13
12
Ms. Cochran testified at trial that she originally erred
by calculating income potential over 116 months and a 48-month
factor was the correct figure to determine income potential
because petitioner made a cash offer.
13
Ms. Cochran testified at trial that she was not required
to use a quick-sale value (80 percent of fair market value) for
the real property because, as she determined, it could reasonably
sell within 90 days. The 90-day period was used because,
pursuant to the Form 656, the cash offer had to be paid within 90
days from written notice of acceptance of the offer.
Ms. Cochran credited petitioner with a half interest in each
property because his wife owned a half interest in each property.
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On his Form 433-A, petitioner reported the estimated fair
market value of his Arizona property at 1015 Fair Street
Prescott, AZ 86305, as $87,000, with an 80-percent quick-sale
value of $69,600 and an outstanding encumbrance of zero.
Petitioner’s estimate was based upon the Yavapai County, Arizona,
Assessor’s Office appraisal dated January 31, 2003. Ms. Cochran
discovered petitioner had given her the Yavapai County Assessor’s
address, not the property’s actual location. The Arizona
property was at 2320 West Live Oak Drive, Prescott, AZ. Ms.
Cochran did not accept petitioner’s reported value. Instead, she
determined the property’s value at $150,000 using recent
comparable sales.
Assuming petitioner’s professional appraisal and assessor
valuation should have been accepted, this Court would not find
Ms. Cochran abused her discretion in rejecting petitioner’s
offer-in-compromise based on economic hardship. On his Form 433-
A, petitioner reported assets with a total value of $232,436 and
income potential of approximately $151,872. However, petitioner
offered to pay only $102,000 to compromise his outstanding tax
liabilities. This Court finds Ms. Cochran did not abuse her
discretion by rejecting an offer-in-compromise that bore no
relationship to petitioner’s own calculations of his ability to
pay.
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4. Petitioner’s Other “Financial Circumstances”
Petitioner argues that pursuant to section 7122(c)(2),
respondent was required to include actual housing and utility
expenses when determining his total monthly living expenses, not
the Internal Revenue Service standard allowances. Section
7122(c)(2) provides that the Secretary shall publish standard
allowances for basic living expenses. The Commissioner may
depart from standard allowances where “such use would result in
the taxpayer not having adequate means to provide for basic
living expenses.” Sec. 7122(c)(2)(B).
Ms. Cochran determined petitioner’s circumstances “[were]
not sufficient to deviate from the local guideline amounts”.
Petitioner did not produce evidence indicating he would not have
adequate means to provide for his basic living expenses. Ms.
Cochran did not abuse her discretion by using standard allowances
instead of petitioner’s actual housing and utility expenses.
Petitioner also asserts Ms. Cochran abused her discretion by
failing to inquire about changes in his financial circumstances
after the offer-in-compromise had been submitted. The record
does not indicate petitioner’s financial situation had
substantially changed from the date the offer was submitted on
March 24, 2000, through the date of its denial on December 16,
2004. Ms. Cochran did not abuse her discretion.
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5. Encouraging Voluntary Compliance With the Tax Laws
Any decision by Ms. Cochran to accept petitioner’s offer-in-
compromise because of ETA based on economic hardship must be
viewed against the backdrop of section 301.7122-1(b)(3)(iii),
Proced. & Admin. Regs.14 See Barnes v. Commissioner, T.C. Memo.
2006-150. This section requires Ms. Cochran to deny petitioner’s
offer if its acceptance would undermine voluntary compliance with
tax laws by taxpayers in general. Thus, even if this Court were
to assume arguendo that petitioner would suffer economic
hardship, a finding that it declines to make, this Court would
not find that Ms. Cochran’s rejection of petitioner’s offer was
an abuse of discretion. As discussed below (in our discussion of
petitioner’s “equitable facts” argument), acceptance of
petitioner’s offer would undermine voluntary compliance with tax
laws by taxpayers in general.
B. Public Policy and Equity Considerations
Petitioner asserts 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 his assertion, petitioner argues that: (1) The
longstanding nature of this case justifies acceptance of the
14
The prospect that acceptance of an offer will undermine
compliance with the tax laws militates against its acceptance.
See also Barnes v. Commissioner, T.C. Memo. 2006-150.
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offer-in-compromise; (2) respondent’s reliance on an example in
the Internal Revenue Manual was improper; and (3) respondent
failed to consider petitioner’s other “equitable facts”.
1. Longstanding Case
Petitioner asserts that the legislative history requires
respondent to resolve “longstanding” cases by forgiving penalties
and interest which would otherwise apply. Petitioner argues
that, because this is a longstanding case, respondent abused his
discretion by failing to accept his offer-in-compromise.
Petitioner’s argument is essentially the same one 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.
The Court rejects petitioner’s argument for the same reasons
stated by the Court of Appeals. The Court adds that petitioner’s
counsel participated in the appeal in Fargo as counsel for the
amici. On brief, petitioner 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., petitioner), and to otherwise allow those
clients’ liabilities for penalties and interest to be forgiven.
The Court does not read the opinion of the Court of Appeals in
Fargo to support that conclusion. See Keller v. Commissioner,
supra; Barnes v. Commissioner, supra.
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Respondent’s rejection of petitioner’s longstanding case
argument was not arbitrary or capricious.
2. The Internal Revenue Manual Example
Petitioner argues that respondent erred when he determined
that petitioner was not entitled to relief according to the
second example in IRM section 5.8.11.2.2(3). Petitioner asserts
that many of the facts in this case were not present in the
example and, therefore, any reliance on the example was
misplaced. Petitioner’s argument is not persuasive.
IRM section 5.8.11.2.2(3) discusses ETA 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
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
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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
petitioner’s case is similar to the example:
Some of the most obvious similarities--the year, pretty
old, and that seems to match or correlate to the
taxpayer’s circumstances, that this was a TEFRA
proceeding, that an FPAA was issued, * * * They
rejected a settlement offer that had been previous--
that the IRS had previously made. The taxpayers
entered litigation for a number of years. And--and
that there were actions of the TMP that the taxpayer
was raising issues of tax-motivated--TMP’s actions as
one of his arguments.
The Court agrees with respondent that the example presents
similar circumstances to those in petitioner’s case. Ms.
Cochran’s testimony accurately reflects those similarities.
Petitioner is correct in asserting that not all the facts in
his case are present in the example. However, it is unreasonable
to expect that facts in an example be identical to facts of a
particular case before the example can be relied upon. The
Internal Revenue Manual example was only one of many factors
respondent considered. Given the similarities to petitioner’s
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case, respondent’s reliance on that example was not arbitrary or
capricious.
3. Petitioner’s Other “Equitable Facts”
Petitioner argues that respondent abused his discretion by
failing to consider the other “equitable facts” of this case.
Petitioner’s “equitable facts” include reference to: (1)
Petitioner’s reliance on Bales v. Commissioner, T.C. Memo. 1989-
568;15 (2) petitioner’s reliance on Hoyt’s enrolled agent status;
(3) Hoyt’s criminal conviction; (4) Hoyt’s fraud on petitioner;
and (5) other letters and cases. The basic thrust of
petitioner’s argument is that he was defrauded by Hoyt and that,
if he were held responsible for penalties and interest incurred
as a result of his investment in a tax shelter, it would be
inequitable and against public policy. Petitioner’s argument is
not persuasive.
15
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 and Tenth Circuits. See, e.g., 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; Sanders v.
Commissioner, T.C. Memo. 2005-163; Hansen v. Commissioner, T.C.
Memo. 2004-269.
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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, petitioner’s 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 petitioner has 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 the Hoyt tax shelters
to be liable for penalties and interest, nor have they prevented
the Courts of Appeals for the Sixth and Tenth Circuits from
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affirming our decisions to that effect. See 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
petitioner’s assertions, including the numerous letters and
exhibits. Nevertheless, Ms. Cochran determined that petitioner
did not qualify for an offer-in-compromise.
The mere fact that petitioner’s “equitable facts” did not
persuade respondent to accept petitioner’s 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 petitioner’s case. The Court finds
that respondent’s determination that the “equitable facts” did
not justify acceptance of petitioner’s offer-in-compromise was
not arbitrary or capricious and thus was not an abuse of
discretion.
The Court finds that compromising petitioner’s case on
grounds of public policy or equity would not 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
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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. See Barnes
v. Commissioner, supra.
C. Petitioner’s Other Arguments
1. Compromise of Penalties and Interest in an
ETA Offer-in-Compromise
Petitioner advances a number of arguments focusing on his
assertion that respondent determined that penalties and interest
could not be compromised in an ETA offer-in-compromise.
Petitioner argues 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
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
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offered (or the way in which the offer is calculated) need not be
considered.
Petitioner’s 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
petitioner offered to compromise his tax liability was
acceptable. As addressed above, respondent’s determination that
the facts and circumstances of petitioner’s case did not warrant
acceptance of his offer-in-compromise was not arbitrary or
capricious and was thus not an abuse of discretion. Because no
grounds for compromise exist, this Court need not address whether
respondent can or should compromise penalties and interest in an
ETA offer-in-compromise. See Keller v. Commissioner, supra.
2. Information Sufficient for the Court to Review
Respondent’s Determination
Petitioner argues 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.” Petitioner’s argument is without merit.
Generally, a taxpayer bears the burden of proving the
Commissioner’s determinations incorrect. Rule 142(a)(1); Welch
v. Helvering, 290 U.S. 111, 115 (1933).16 The burden was on
16
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
(continued...)
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petitioner 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, this
Court finds that it had more than sufficient information to
review respondent’s determination.
3. Scheduling of the Section 6330 Hearing and
Deadline for Submission of Documents
Petitioner argues that Ms. Cochran abused her discretion by
not allowing his counsel additional time to prepare for the
section 6330 hearing and to submit additional documentation.
Once the section 6330 hearing was scheduled, Ms. Cochran refused
petitioner’s request to delay the hearing. However, Ms. Cochran
did extend the deadline for submission of documents.
While petitioner wanted to delay the section 6330 hearing,
he does not allege that he was unable to adequately prepare for
the hearing. Additionally, petitioner has not identified any
documents or other information that he believes Ms. Cochran
should have considered but that he was unable to produce because
of the deadline for submission. Given the thoroughness and the
amount of information submitted, it is unclear why petitioner
needed additional time. This Court does not believe that Ms.
16
(...continued)
because respondent’s examination of petitioner’s 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.
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Cochran abused her discretion by establishing a timeframe for the
section 6330 hearing and the submission of documents.
4. Efficient Collection Versus Intrusiveness
Petitioner argues 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). Petitioner’s argument is not supported
by the record.
Petitioner has an outstanding tax liability. In his section
6330 hearing, petitioner proposed only an offer-in-compromise.
Because no other collection alternatives were proposed, there
were no less intrusive means for respondent to consider. The
Court finds that respondent balanced the need for efficient
collection of taxes with petitioner’s legitimate concern that
collection be no more intrusive than necessary.
In reaching these holdings, the Court has considered all
arguments made and, to the extent not mentioned, concludes that
they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be
entered for respondent.