# Ertz v. Comm'r

> United States Tax Court · January 24, 2007 · 93 T.C.M. 696

URL: https://www.frixlaw.com/law-library/cases/4336301

## Case

- **Full name:** DONALD ERTZ v. COMMISSIONER OF INTERNAL REVENUE
- **Court:** United States Tax Court
- **Decided:** January 24, 2007
- **Citations:** 93 T.C.M. 696; 2007 T.C. Memo. 15; 2007 Tax Ct. Memo LEXIS 16
- **Precedential status:** Unpublished
- **Opinion:** Opinion
- **Judges:** "Haines, Harry A."
- **Cited by:** 3 later opinions in the Frix Law Library

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## Opinion text

T.C. Memo. 2007-15

UNITED STATES TAX COURT

DONALD ERTZ, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20336-04L. Filed January 24, 2007.

Jaret R. Coles 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 (notice of
- 2 -

determination) for 1982 through 1988, 1993, and 1997.1 Pursuant

to section 6330(d), petitioner seeks review of respondent’s

determination. The issues for decision are: (1) Whether

respondent abused his discretion in sustaining the proposed

collection action; and (2) whether petitioner is liable for the

increased rate of interest on tax-motivated transactions under

section 6621(c), I.R.C. 1986.2

FINDINGS OF FACT

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

The first, second, third, fourth, fifth, and sixth stipulations

of fact and the attached exhibits are incorporated herein by this

reference.3

1
Unless otherwise indicated, all section references are to
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
Before the Tax Reform Act of 1986, Pub. L. 99-514, sec.
1511(a), 100 Stat. 2744, subsec. (c) of sec. 6621 was designated
subsec. (d). The additional interest applies only after Dec. 31,
1984. Sec. 6621(c) was repealed as of Dec. 31, 1989, by the
Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec.
7721(b), 103 Stat. 2399.
3
Respondent reserved relevancy objections to many of the
exhibits attached to the stipulations of fact. Fed. R. Evid. 402
provides the general rule that all relevant evidence is
admissible, while evidence which is not relevant is not
admissible. Fed. R. Evid. 401 defines relevant evidence as
“evidence having any tendency to make the existence of any fact
that is of consequence to the determination of the action more
probable or less probable than it would be without the evidence.”
While the relevance of some exhibits is certainly limited, we
find that the exhibits meet the threshold definition of relevant
(continued...)
- 3 -

Petitioner resided in Lodi, California, when he filed his

petition. At the time of trial, petitioner was 65 years old, he

had been married for 32 years, and his wife (Mrs. Ertz) was 58.

In 1985, petitioner became a partner in TBS Durham Genetic

Engineering 1985-5, Ltd. (DGE 85-5), a partnership organized and

operated by Walter J. Hoyt III (Hoyt).

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

operated more than 100 cattle breeding partnerships. Hoyt also

organized, promoted, and operated sheep breeding partnerships.

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

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

partnership. From approximately 1980 through 1997, Hoyt was a

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

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

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

convicted of various criminal charges in 2000.4

3
(...continued)
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 we were to receive those exhibits into
evidence, they would have no impact on our findings of fact or on
the outcome of this case.
4
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”. We will do neither.
(continued...)
- 4 -

DGE 85-5 issued petitioner Schedules K-1, Partner’s Share of

Income, Credits, Deductions, etc., for 1985 and 1986.5 The

Schedules K-1 reflected petitioner’s shares of DGE 85-5’s losses

and his cost bases in “property eligible for investment credit”.

Petitioner timely filed his 1985 and 1986 Federal income tax

returns, reporting total partnership losses from DGE 85-5 of

$42,378 and $36,324, respectively. Petitioner reported

4
(...continued)
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 in a legal proceeding a claim that is inconsistent with
a position successfully taken by that party in a previous
proceeding. New Hampshire v. Maine, 532 U.S. 742, 749 (2001).
Among the requirements for judicial estoppel to be invoked, a
party’s current litigating position must be “clearly
inconsistent” with a prior litigating position. Id. at 750-751.
Petitioner has failed to identify any clear inconsistencies
between respondent’s current position and his position in any
previous litigation.
5
The Schedules K-1 for 1985 and 1986 were issued jointly
to petitioner and Mrs. Ertz. Petitioner and Mrs. Ertz jointly
filed their Federal income tax returns for all relevant years.
Petitioner and Mrs. Ertz also jointly filed the Form 1045,
Application for Tentative Refund. However, the notice of
determination was addressed only to petitioner. To avoid
confusion, we will address the schedules, returns, and forms, as
if they were issued only to petitioner.
- 5 -

overpayments of tax and received refunds of $14,517 and $10,674,

respectively.

Petitioner carried back unused investment credits derived

from his investment in DGE 85-5 to 1982, 1983, and 1984 and

received refunds of $11,556, $5,059, and $7,637, respectively.

Petitioner also carried forward unused investment credits to 1987

and 1988 of $2,914 and $312, respectively. Using those

investment credits, deductions related to DGE 85-5, and other

deductions, petitioner reported overpayments and received refunds

of $7,045 and $1,306.

On June 13, 1989, respondent issued DGE 85-5 a notice of

final partnership administrative adjustment (FPAA) for its 1985

tax year. On October 1, 1990, respondent issued DGE 85-5 an FPAA

for its 1986 tax year. Respondent disallowed all losses and cost

bases in “property eligible for investment credit” claimed by DGE

85-5 and asserted that additions to tax under sections 6653(a)(1)

and (2), 6659, and 6661 and increased interest under section

6621(c) applied to the individual partners.

Hoyt, as the tax matters partner for DGE 85-5, filed

petitions with the Tax Court in response to the FPAAs.6 DGE 85-

5’s cases were consolidated with other Hoyt partnerships’ cases

in 23 separate docket numbers. See Shorthorn Genetic Engg. 1982-

6
The petition in response to the 1985 FPAA was filed at
docket No. 22070-89, and the petition in response to the 1986
FPAA was filed at docket No. 28577-90.
- 6 -

2, Ltd. v. Commissioner, T.C. Memo. 1996-515. The parties

stipulated all issues except whether the partnership items were

allocated to the partners in accordance with a settlement

agreement dated May 20, 1993, between Hoyt and respondent’s

Sacramento, California, Appeals Office. Id. The Court

determined that respondent’s allocation method was appropriate

and entered an order and decision in each docket number. Id.

Each order and decision reflected the determination of various

partnership items and stated in pertinent part:

That the additions to tax under I.R.C. §§6653(a)(1),
6653(a)(2), 6659, and 6661, and the additional interest
under I.R.C. §6621(c), formerly §6621(d), which were
all mentioned in the Notice of Final Partnership
Administrative Adjustment * * * are affected items as
defined in I.R.C. §6231(a)(5) that require factual
determinations to be made at the partner level, and are
not within the Court’s jurisdiction in this case.

On March 12, 1998, respondent sent petitioner a Form 4549A-

CG, Income Tax Examination Changes, reflecting changes made for

petitioner’s 1982 through 1988 tax years resulting from the

orders and decisions entered pursuant to Shorthorn Genetic Engg.

Respondent determined deficiencies in petitioner’s income tax of

$11,556, $5,059, $7,367, $6,856, $6,106, $2,914, and $312,

respectively. Respondent did not assert any penalties or

additions to tax but determined that petitioner was liable for

additional interest on tax-motivated transactions under section

6621(c) (section 6621(c) interest). Because no penalties or

additions to tax were asserted, and because respondent assessed
- 7 -

the deficiencies in tax and the section 6621(c) interest as a

computational adjustment, no notices of deficiency were issued.

On March 7, 2002, respondent issued petitioner a Final

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

Hearing (final notice). In addition to petitioner’s outstanding

tax liabilities for 1982 through 1988, the final notice included

an unpaid amount of $59 from 1993 and interest of $164 and $692

for 1993 and 1997, respectively.7 The final notice indicated

that, as of April 6, 2002, petitioner owed $213,258, inclusive of

interest.

On March 18, 2002, petitioner submitted a Form 12153,

Request for a Collection Due Process Hearing. Petitioner

indicated that he would be pursuing an offer-in-compromise based

alternatively on doubt as to collectibility with special

circumstances or effective tax administration. Petitioner also

argued that, because he had not had a previous opportunity to

dispute the imposition of section 6621(c) interest, it was a

proper subject for review in the section 6330 hearing.

Petitioner’s case was assigned to Settlement Officer Linda

Cochran (Ms. Cochran). Ms. Cochran initially scheduled a

telephone section 6330 hearing on April 6, 2004. Petitioner’s

representative, Terri A. Merriam (Ms. Merriam), requested that

7
Details regarding petitioner’s 1993 and 1997 tax years
are not in the record.
- 8 -

the hearing be delayed because of the number of Hoyt-related

cases her law firm was handling. Ms. Cochran did not change the

date of the hearing, but she extended petitioner’s deadline for

producing information to be considered to May 14, 2004.

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

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

Statement for Wage Earners and Self-Employed Individuals, one

letter explaining the offer amount and other payment

considerations, and three letters setting out in detail

petitioner’s position regarding the offer-in-compromise.

Petitioner’s letters included several exhibits.

The Form 656 indicated that petitioner was seeking an offer-

in-compromise based on either doubt as to collectibility with

special circumstances or effective tax administration.

Petitioner offered to pay $157,824 to compromise his outstanding

tax liabilities for 1982 through 1996. On July 21, 2004,

petitioner submitted an “Amendment of Form 656”, seeking to

include his 2001 tax year as part of the offer-in-compromise.8

8
While the notice of determination covered petitioner’s
1997 tax year, it does not appear that he sought to include 1997
in his offer-in-compromise.
- 9 -

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

Asset Current Balance/Value Loan Balance
Checking accounts $2,515 n/a
Savings accounts 3,031 n/a
Fidelity 401(k) 178,483 -0-
Other stock 7,597 -0-
Cash on hand 200 n/a
1990 Toyota 4- 1,350 -0-
Runner
1981 Toyota Pickup De minimis -0-
1993 Yamaha 225 950 -0-
House 140,000 $37,145
Total 334,126 37,145

The reported value of the Fidelity section 401(k) plan account

reflected only 70 percent of its then-current value. The

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

value.

Petitioner reported gross monthly income of $3,929,

representing petitioner’s and Mrs. Ertz’s pension and Social

Security payments. Petitioner also reported the following

monthly living expenses:
- 10 -

Expense item Monthly expense
Food, clothing, misc. $904
Housing and utilities 1,254
Transportation 402
Health care 511
Taxes (income and FICA) 654
Life insurance 31
Other expenses 400
Total 4,156

The other expenses represented attorney’s fees petitioner paid to

Ms. Merriam’s law firm in connection with the present litigation.

In the letter explaining the offer amount, petitioner stated

that he was offering to pay $157,824 “for all Hoyt related years

to be paid in one lump sum payment. * * * This offer fully pays

the estimated tax liability, but not interest.” Petitioner

indicated that he has suffered four strokes, was forced to retire

early, must visit the doctor twice a month to have his blood

pressure checked, and must take several medications.

The letter also included a “retirement analysis” outlining

an estimated $44,000 needed for home repairs and the purchase of

a new car and the likelihood of increased housing and medical

costs on account of the aging of petitioner.

In the remaining three letters, petitioner alleged that he

was a victim of Hoyt’s fraud, asserted various arguments
- 11 -

regarding the appropriateness of an offer-in-compromise, and

argued that he was not liable for section 6621(c) interest.

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

Cochran, which included 42 exhibits not provided with the May 14,

2004, letters.

On September 23, 2004, respondent issued petitioner a notice

of determination. In evaluating petitioner’s offer-in-

compromise, respondent made the following changes to the values

of assets petitioner reported on the Form 433-A: (1) Respondent

determined that the value of the section 401(k) plan account was

$254,976 instead of $178,483 (the 70-percent value petitioner

reported) and reduced the estimate of petitioner’s net realizable

equity by $47,347 to $207,629 to reflect estimated tax and

penalties; (2) respondent determined that the house was worth

$240,000 instead of $140,000 (the 80-percent quick-sale value

petitioner reported) and reduced the value by the $37,145

outstanding on the mortgage, for net realizable equity of

$229,060; (3) respondent determined that the 1981 Toyota Pickup

had a quick-sale value of $80 instead of de minimis; and (4)

respondent considered only the 1993 Yamaha 225’s quick-sale value

of $760 instead of the fair market value of $950 petitioner

reported. Respondent concluded that petitioner had a total net

realizable equity of $452,714.
- 12 -

Respondent accepted the gross monthly income and expenses

petitioner reported on the Form 433-A, but with one exception.

Respondent reduced the housing and utilities expense to $1,102,

resulting in total monthly expenses of $4,004 instead of $4,156.

Because $4,004 exceeded petitioner’s gross monthly income of

$3,929, respondent determined that petitioner did not have future

disposable income that could fund an offer-in-compromise.

However, respondent determined that petitioner’s mortgage would

be paid off in 4 years. Petitioner’s monthly mortgage payment

was $795, and because his current monthly expenses exceeded his

income by $75, respondent determined that petitioner would have

$720 a month to fund the offer-in-compromise after the mortgage

was paid off. Respondent concluded that over the remaining

collection period there was an “amount collectible from retired

debt” of $51,120. Regarding the possible future increase in

expenses outlined in petitioner’s letters, respondent determined

that these were “general projections from the taxpayers’

representative and may never, in fact, be incurred” and thus did

not take these into account. Respondent concluded that

petitioner had the ability to pay $503,834 ($452,714 + $51,120).

Because petitioner had the ability to pay substantially more

than the $157,824 offered, respondent rejected petitioner’s

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

special circumstances. Respondent also rejected petitioner’s
- 13 -

effective tax administration offer-in-compromise based on

economic hardship because he had the ability to pay his tax

liability in full. Finally, respondent rejected petitioner’s

effective tax administration offer-in-compromise based on public

policy or equity grounds because the case “fails to meet the

criteria for such consideration”.

Regarding section 6621(c) interest, respondent determined

that petitioner “has not established why [tax-motivated interest]

was improperly assessed”.

Respondent concluded that petitioner did not offer an

acceptable collection alternative, that all requirements of law

and administrative procedure had been met, and that respondent

could proceed with the proposed collection action.

In response to the notice of determination, petitioner filed

his petition with this Court on October 25, 2004.

OPINION

I. 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.
- 14 -

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. Sec. 301.7122-1(b), Proced. &

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

case.9

The Secretary may compromise a tax liability based on doubt

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

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

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

Commissioner’s administrative pronouncements, an offer-in-

compromise based on doubt as to collectibility will be acceptable

only if it reflects the taxpayer’s reasonable collection

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

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

compromise of less than the reasonable collection potential if

there are “special circumstances”. Id. Special circumstances

are: (1) Circumstances demonstrating that the taxpayer would

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

amount equal to the reasonable collection potential; or (2)

circumstances justifying acceptance of an amount less than the

9
While petitioner disputes his liability for sec. 6621(c)
interest, he did not raise doubt as to liability as a grounds for
compromise, neither on his Form 656 nor during the sec. 6330
hearing.
- 15 -

reasonable collection potential due to public policy or equity

considerations. See Internal Revenue Manual (IRM) sec.

5.8.4.3(4). However, in accordance with the Commissioner’s

guidelines, an offer-in-compromise based on doubt as to

collectibility with special circumstances should not be accepted,

even when economic hardship or considerations of public policy or

equity circumstances are identified, if the taxpayer does not

offer an acceptable amount. See IRM sec. 5.8.11.2.1(11) and

.2(12).

The Secretary may also compromise a tax liability on the

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

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

exceptional circumstances exist such that collection of the full

liability would undermine public confidence that the tax laws are

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

compromise of the liability would not undermine compliance by

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

Admin. Regs.

Petitioner proposed an offer-in-compromise based

alternatively on doubt as to collectibility with special

circumstances or effective tax administration, offering to pay

$157,824 to compromise his outstanding tax liabilities.

Petitioner argued that collection of the full liability would

create economic hardship and would undermine public confidence
- 16 -

that the tax laws are being administered in a fair and equitable

manner. Respondent determined that petitioner’s reasonable

collection potential was $503,834 and that petitioner’s offer-in-

compromise did not meet the criteria for an offer-in-compromise

based on either doubt as to collectibility with special

circumstances or effective tax administration.

Insofar as the underlying tax liability is not at issue, our

review under section 6330 is for abuse of discretion.10 See Sego

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

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

decide whether in our own opinion petitioner’s offer-in-

compromise should have been accepted, but whether respondent’s

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

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

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

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

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

compromise based on doubt as to collectibility with special

circumstances and on effective tax administration (economic

hardship or public policy and equity), we consider petitioner’s

separate grounds for his offer-in-compromise together. See

10
With the exception of his liability for sec. 6621(c)
interest, petitioner does not argue that his underlying tax
liability is at issue. The sec. 6621(c) interest issue is
discussed infra.
- 17 -

Murphy v. Commissioner, 125 T.C. 301, 309, 320 n.10 (2005), affd.

469 F.3d 27 (1st Cir. 2006); Barnes v. Commissioner, T.C. Memo.

2006-150.

A. Economic Hardship

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: (1) Ms. Cochran

failed to discuss petitioner’s special circumstances in the

notice of determination; (2) Ms. Cochran failed to consider that

petitioner’s expenses are currently greater than his income and

that those expenses will likely increase; and (3) Ms. Cochran

improperly valued petitioner’s house.

Section 301.6343-1(b)(4)(i), Proced. & Admin. Regs., states

that economic hardship occurs when a taxpayer is “unable to pay

his or her reasonable basic living expenses.” Section 301.7122-

1(c)(3), Proced. & Admin. Regs., sets forth factors to consider

in evaluating whether collection of a tax liability would cause

economic hardship, as well as some examples. One of the examples

involves a taxpayer who provides 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
- 18 -

basic living expenses were his only asset to be liquidated. A

third example involves a disabled taxpayer who has a fixed income

and a modest home specially equipped to accommodate his

disability, and who is unable to borrow against his home because

of his disability. See sec. 301.7122-1(c)(3)(iii), Examples (1),

(2), and (3), Proced. & Admin. Regs. None of these examples

bears any resemblance to this case, but instead they “describe

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

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

v. Commissioner, supra. Nevertheless, we 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 special circumstances were not discussed in detail in

the notice of determination, Ms. Cochran failed to adequately

take petitioner’s circumstances into consideration.

We do not believe that Appeals must specifically list in the

notice of determination every single fact that it considered in

arriving at the determination. See Barnes v. Commissioner,

supra. This is especially true in a case such as this, where
- 19 -

petitioner provided Ms. Cochran with multiple letters and

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

considered all of the arguments and information presented to her.

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

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

of determination every single asserted fact, circumstance, and

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

specifically addressed in the notice of determination does not

indicate an abuse of discretion.

2. Petitioner’s Income and Future Expenses

Petitioner argues that Ms. Cochran failed to adequately

consider his and Mrs. Ertz’s age, health, and retirement status,

the likelihood of future increases in medical and housing costs,

and the need to retain retirement assets to cover the difference

between income and expenses. Petitioner’s argument is not

supported by the record.

On his Form 433-A, petitioner reported monthly medical

expenses of $511. Ms. Cochran accepted that amount without

reservation. Ms. Cochran also determined that petitioner and

Mrs. Ertz were unable to obtain employment because of their age

and medical condition. In determining whether petitioner could

fund the offer-in-compromise with future income, Ms. Cochran used

only the monthly pension income reported on the Form 433-A. Ms.

Cochran determined that petitioner’s monthly expenses exceeded
- 20 -

his income and therefore concluded that petitioner could not fund

the offer-in-compromise with future income until the mortgage on

his home was paid off.11 Given her acceptance of the medical

expenses as reported and her conclusion that petitioner would not

have future income to fund the offer-in-compromise until the

mortgage on his home was paid off, we reject petitioner’s

assertion that Ms. Cochran failed to consider petitioner’s and

Mrs. Ertz’s age, health, retirement status, and current medical

costs.

Petitioner’s argument is also unavailing with regard to the

likelihood of future increases in medical and housing costs.

Petitioner did not inform Ms. Cochran with any specificity that

he would have to pay a greater amount of unreimbursed medical

expenses in the future, or that his housing expenses would

increase. Instead, he made general assertions about the increase

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

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

their house handicapped accessible.

As reflected in the notice of determination, Ms. Cochran

took into consideration the information petitioner presented but

11
While Ms. Cochran determined that petitioner could not
otherwise fund the offer-in-compromise with future income, she
determined that there was an “amount collectible from retired
debt”. Because petitioner’s mortgage would be paid off within 4
years, Ms. Cochran determined that the amount of the monthly
mortgage payment, less the deficit between income and expenses,
could then be applied to petitioner’s outstanding tax liability.
- 21 -

concluded that “these possible future expenses are general

projections from the taxpayers’ representative and may never, in

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

considered within the framework of present facts.” Given the

information presented to her, it was not arbitrary or capricious

for Ms. Cochran to ignore these speculative future costs in

making her final determination.

Petitioner also asserts that Ms. Cochran abused her

discretion by using the value of petitioner’s section 401(k) plan

account in her calculation of his reasonable collection

potential. Petitioner argues that he must retain the section

401(k) plan account to pay future increases in expenses because

his income is insufficient to cover even his current expenses.

As discussed above, petitioner’s assertions regarding future

expenses are speculative and unsupported, and it was not

arbitrary or capricious for Ms. Cochran to ignore such costs.

However, even assuming arguendo that petitioner’s expenses will

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

discretion by factoring in petitioner’s section 401(k) plan

account to determine his reasonable collection potential.

While it is uncontested that petitioner’s expenses currently

exceed his income, petitioner ignores the fact that some of the

expenses allowed by Ms. Cochran are only temporary. Ms. Cochran

determined that petitioner’s mortgage would be paid off within 4
- 22 -

years, a fact petitioner does not dispute. After the mortgage is

paid off, petitioner’s monthly expenses will decrease by $795.

Additionally, Ms. Cochran allowed petitioner’s “other expenses”

of $400 per month, which represented payments petitioner made to

Ms. Merriam’s law firm relating to the present litigation. There

is no indication that this expense will continue once the present

litigation has been concluded. Once these costs cease,

petitioner will have an additional $1,195 per month to pay any

increased expenses.

3. Value of Petitioner’s House

Petitioner argues that Ms. Cochran improperly valued his

house. Petitioner also argues that Ms. Cochran failed to take

into consideration the need for repairs. Petitioner’s arguments

are not persuasive.

On his Form 433-A, petitioner reported that the estimated

fair market value of his house was $175,000, with an 80-percent

quick-sale value of $140,000. Petitioner’s estimate was based on

“sales of nearby homes”. In one of the May 14, 2004, letters,

petitioner listed a variety of problems with the house.

Petitioner did not provide any supporting documentation regarding

the need for repairs but instead invited Ms. Cochran to view the

house in person. Other than a broad statement that he needed

$44,000 to pay necessary expenses, which also included the
- 23 -

purchase of a new car, petitioner did not provide estimated costs

of the repairs.

Because petitioner did not provide supporting documentation

regarding the condition or the value of the house, Ms. Cochran

did not accept petitioner’s reported value. Instead, she

determined a value of $240,000 on the basis of recent sales of

comparable houses.

Petitioner takes exception to Ms. Cochran’s use of sales of

comparable houses and asserts that she should have hired a

professional valuation expert. While an expert might have

provided the most reliable opinion of value, we do not believe

that Ms. Cochran’s failure to seek such an opinion was an abuse

of discretion. Notably, it appears that petitioner’s estimated

value was based on his representative’s comparison of the house

with similar houses recently sold and not on an expert’s opinion.

It was not arbitrary or capricious for Ms. Cochran to value the

house in the same manner.

Petitioner believes that, despite the lack of supporting

documentation, Ms. Cochran abused her discretion by not factoring

in the cost of repairs. Petitioner asserts that, if Ms. Cochran

questioned petitioner’s representations, she could have requested

more information or accepted petitioner’s invitation to view the

house in person. Given the voluminous information provided to

Ms. Cochran, we do not believe that she was under an obligation
- 24 -

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

burden was on petitioner to establish that he was entitled to an

offer-in-compromise. Petitioner cannot shift this burden by

simply inviting Ms. Cochran to request more information or to

view the house in person.

Additionally, even assuming arguendo that petitioner’s house

valuation should have been accepted, we would not find that 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 $297,742.

However, petitioner offered to pay only $157,824 to compromise

his outstanding tax liabilities. Respondent may accept an offer-

in-compromise based on doubt as to collectibility with special

circumstances or on effective tax administration even if the

offer is less than petitioner’s reasonable collection potential.

However, given all other considerations discussed herein, we do

not believe that Ms. Cochran abused her discretion by rejecting

an offer-in-compromise that bore no relationship to petitioner’s

ability to pay.

4. Encouraging Voluntary Compliance With the Tax Laws

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

accept petitioner’s offer-in-compromise based on doubt as to

collectibility with special circumstances or effective tax

administration based on economic hardship must be viewed against
- 25 -

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

Regs.12 See Barnes v. Commissioner, T.C. Memo. 2006-150. That

section requires that Ms. Cochran deny petitioner’s offer-in-

compromise if its acceptance would undermine voluntary compliance

with tax laws by taxpayers in general. Thus, even if we were to

assume arguendo that petitioner would suffer economic hardship, a

finding that we decline to make, we would not find that Ms.

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

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

petitioner’s “equitable facts” argument), we conclude that

acceptance of petitioner’s offer-in-compromise 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: (1) The

longstanding nature of this case justifies acceptance of the

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

12
The prospect that acceptance of an offer-in-compromise
will undermine compliance with the tax laws militates against its
acceptance whether the offer-in-compromise is predicated on
promotion of effective tax administration or on doubt as to
collectibility with special circumstances. See Rev. Proc. 2003-
71, 2003-2 C.B. 517; IRM sec. 5.8.11.2.3; see also Barnes v.
Commissioner, T.C. Memo. 2006-150.
- 26 -

the IRM 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.

We reject petitioner’s argument for the same reasons stated by

the Court of Appeals. We add 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. We do not

read the opinion of the Court of Appeals in Fargo to support that

conclusion. See Keller v. Commissioner, supra; Barnes v.

Commissioner, supra.
- 27 -

Respondent’s rejection of petitioner’s longstanding case

argument was not arbitrary or capricious.

2. The IRM Example

Petitioner argues that respondent erred when he determined

that petitioner was not entitled to relief based on 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 effective tax

administration offers-in-compromise based on equity and public

policy grounds and states in the second example:

In 1983, the taxpayer invested in a nationally marketed
partnership which promised the taxpayer tax benefits
far exceeding the amount of the investment.
Immediately upon investing, the taxpayer claimed
investment tax credits that significantly reduced or
eliminated the tax liabilities for the years 1981
through 1983. In 1984, the IRS opened an audit of the
partnership under the provisions of the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA). After
issuance of the Final Partnership Administrative
Adjustment (FPAA), but prior to any proceedings in Tax
Court, the IRS made a global settlement offer in which
it offered to concede a substantial portion of the
interest and penalties that could be expected to be
assessed if the IRS’s determinations were upheld by the
court. The taxpayer rejected the settlement offer.
After several years of litigation, the partnership
level proceeding eventually ended in Tax Court
decisions upholding the vast majority of the
deficiencies asserted in the FPAA on the grounds that
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
- 28 -

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.

We agree 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 IRM

example was only one of many factors respondent considered.

Given the similarities to petitioner’s case, respondent’s

reliance on that example was not arbitrary or capricious.
- 29 -

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;13 (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.

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.

13
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.
- 30 -

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

affirming our decisions to that effect. See Mortensen v.

Commissioner, 440 F.3d 375 (6th Cir. 2006), affg. T.C. Memo.
- 31 -

2004-279; Van Scoten v. Commissioner, 439 F.3d 1243 (10th Cir.

2006), affg. T.C. Memo. 2004-275.

Ms. Cochran testified that she considered all of Ms.

Merriam’s and 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. We find 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 it was not an abuse of

discretion.

We also find 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

transactions into which they enter. It would be particularly

inappropriate for the Government to play that role here, where
- 32 -

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 Effective
Tax Administration 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 effective tax administration

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

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

considered.
- 33 -

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, we need not address whether

respondent can or should compromise penalties and interest in an

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

Commissioner, supra.

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

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).14 The burden was on

14
While sec. 7491 shifts the burden of proof and/or the
burden of production to the Commissioner in certain
circumstances, this section is not applicable in this case
because respondent’s examination of petitioner’s returns did not
commence after July 22, 1998. See Internal Revenue Service
(continued...)
- 34 -

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, we find

that we had more than sufficient information to review

respondent’s determination.

3. Scheduling of the Section 6330 Hearing and Deadline for
Submission of 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. We do not believe that Ms. Cochran

14
(...continued)
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3001(c), 112 Stat. 727.
- 35 -

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. We find

that respondent balanced the need for efficient collection of

taxes with petitioner’s legitimate concern that collection be no

more intrusive than necessary.

II. Interest on Tax-Motivated Transactions

Section 6621(c) applies an increased rate of interest on

substantial underpayments of tax resulting from tax-motivated

transactions. For purposes of section 6621(c), a “substantial

underpayment attributable to tax motivated transactions” means

any underpayment of tax attributable to one or more tax-motivated

transactions if the amount of the underpayment exceeds $1,000.

Sec. 6621(c)(2). Tax-motivated transactions include any

valuation overstatements within the meaning of former section
- 36 -

6659(c) or any sham or fraudulent transaction. Sec.

6621(c)(3)(A)(i), (v).

In the FPAAs issued to DGE 85-5 for 1985 and 1986,

respondent asserted that the individual partners might be liable

for section 6621(c) interest. As reflected in the orders and

decisions in Shorthorn Genetic Engg. 1982-2, Ltd. v.

Commissioner, T.C. Memo. 1996-515, the Tax Court determined that

it lacked jurisdiction over section 6621(c) interest at the

partnership level because such interest was not a partnership

item but an affected item. The difference between partnership

items and affected items and the impact this distinction has on

our jurisdiction are discussed below.

Respondent issued petitioner a Form 4549A-CG, in which

respondent determined that petitioner was liable for section

6621(c) interest. Respondent did not issue a notice of

deficiency because he treated the interest as a computational

matter.

Petitioner has not previously had the opportunity to dispute

his liability for section 6621(c) interest. Therefore, we have

jurisdiction under section 6330(d) to review petitioner’s

underlying tax liability as it relates to section 6621(c)

interest. See also sec. 6330(c)(2)(B). We review the section

6621(c) interest issue de novo. See Sego v. Commissioner, 114

T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 181-182
- 37 -

(2000). However, River City Ranches #1 Ltd. v. Commissioner, 401

F.3d 1136 (9th Cir. 2005), affg. in part and revg. in part T.C.

Memo. 2003-150, indicates that our jurisdiction to determine

petitioner’s liability for section 6621(c) interest in this

partner-level proceeding may be limited.

A. Tax Court Jurisdiction Generally

The Tax Court is a court of limited jurisdiction, and we may

exercise our jurisdiction only to the extent authorized by

Congress. Sec. 7442; Moore v. Commissioner, 114 T.C. 171, 175

(2000); Naftel v. Commissioner, 85 T.C. 527, 529 (1985).

Although neither party has contested our jurisdiction,

jurisdiction may not be conferred upon the Court by agreement of

the parties. See Clark v. Commissioner, 125 T.C. 108, 109

(2005); Neely v. Commissioner, 115 T.C. 287, 291 (2000); Naftel

v. Commissioner, supra at 530. Whether the Court has

jurisdiction to decide an issue is a matter that this Court or a

Court of Appeals may decide at any time. Clark v. Commissioner,

supra at 109; Raymond v. Commissioner, 119 T.C. 191, 193 (2002).

B. Partnership Items Versus Affected Items and the Court’s
Jurisdiction To Determine the Character of a
Partnership’s Transactions

Congress enacted the partnership audit and litigation

procedures to provide a method to uniformly adjust items of

partnership income, loss, deduction, or credit that would affect

each partner. See Tax Equity and Fiscal Responsibility Act of
- 38 -

1982, Pub. L. 97-248, sec. 402(a), 96 Stat. 648. The statute

makes a distinction between partnership items and nonpartnership

items, or “affected items”. The tax treatment of partnership

items may be determined only in a partnership-level proceeding,

while the tax treatment of affected items may only be determined

in a partner-level proceeding. See sec. 6221; Affiliated Equip.

Leasing II v. Commissioner, 97 T.C. 575, 576 (1991); Sparks v.

Commissioner, 87 T.C. 1279, 1284 (1986); Maxwell v. Commissioner,

87 T.C. 783, 789 (1986). This Court has previously held that

section 6621(c) interest is an affected item which may require

findings of fact peculiar to a particular partner and as such

cannot be determined in a partnership-level proceeding.15 See,

e.g., Affiliated Equip. Leasing II v. Commissioner, supra at 578-

579; N.C.F. Energy Partners v. Commissioner, 89 T.C. 741, 745-746

(1987).

In River City Ranches #1 Ltd. v. Commissioner, T.C. Memo.

2003-150, a partnership-level proceeding involving Hoyt sheep

breeding partnerships, the taxpayers argued that the Tax Court

has jurisdiction over section 6621(c) interest at the partnership

15
The Taxpayer Relief Act of 1997 (TRA 1997), Pub. L. 105-
34, sec. 1238(b)(1), 111 Stat. 1026, amended sec. 6226(f) and
expanded this Court’s jurisdiction in partnership-level
proceedings to include the applicability of “any penalty,
addition to tax, or additional amount” related to the adjustment
of a partnership item. This amendment to sec. 6226(f) is
effective only for partnership taxable years ending after Aug. 5,
1997, and does not apply to the years at issue in the instant
case. TRA 1997 sec. 1238(c), 111 Stat. 1027.
- 39 -

level. Citing Affiliated Equip. Leasing II and N.C.F. Energy

Partners, the Tax Court concluded that it lacked jurisdiction to

decide the applicability of section 6621(c) interest in a

partnership-level proceeding.16

On appeal, the Court of Appeals for the Ninth Circuit

reversed the Tax Court on the section 6621(c) interest issue.

River City Ranches #1 Ltd. v. Commissioner, 401 F.3d at 1143-

1144. The Court of Appeals stated:

A partnership’s tax items, which determine the
partners’ taxes, are litigated in partnership
proceedings--not in the individual partners’ cases. 26
U.S.C. § 6221 * * *.

The nature of the partnerships’ transactions
[i.e., whether or not the transactions were tax
motivated transactions] is a “partnership item” * * *.
As a “partnership item,” the character of the
partnerships’ transactions is within the Tax Court’s
scope of review.

The Tax Court erred in holding that it had no
jurisdiction to make findings concerning the character
of the partnerships’ transactions, for purposes of the
26 U.S.C. § 6621 penalty-interest provisions.
Accordingly, we remand for the court to make such
findings. [Emphasis added.]

Petitioner resided in Lodi, California, when he filed his

petition, and, absent stipulation to the contrary, appeal of this

case would be to the Court of Appeals for the Ninth Circuit.

16
Like the instant case, River City Ranches #1 Ltd. v.
Commissioner, T.C. Memo. 2003-150, affd. in part and revd. in
part 401 F.3d 1136 (9th Cir. 2005), involved tax years ending on
or before Aug. 5, 1997. Thus, the expanded jurisdiction under
TRA 1997 did not apply. See supra note 15; see also TRA 1997
sec. 1238(c).
- 40 -

Because the Court of Appeals for the Ninth Circuit has held that,

for purposes of the section 6621 penalty interest provisions, the

character of a partnership’s transactions is a partnership item,

we will treat the character of DGE 85-5’s transactions as if it

were a partnership item for purposes of determining our

jurisdiction in this case. See id.; Golsen v. Commissioner, 54

T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971).

Both parties argue that in the light of River City Ranches

#1 Ltd. v. Commissioner, 401 F.3d 1136 (9th Cir. 2005), section

6621(c) interest has both a partnership item component to be

determined at the partnership level and affected item components

to be determined at the partner level. The partnership item

component is the character of the partnership’s transactions;

i.e., whether the transactions were tax motivated. See id. at

1143-1144. The affected item components are what amount of the

partner’s underpayment of tax is attributable to the

partnership’s tax-motivated transactions and whether that

underpayment is substantial. See sec. 6621(c)(2).

The determination that DGE 85-5’s transactions were tax

motivated is a prerequisite to determining petitioner’s liability

for section 6621(c) interest. Essentially, the parties ask us to

use the findings (or lack of findings) of the Tax Court in

Shorthorn Genetic Engg. 1982-2, Ltd. v. Commissioner, T.C. Memo.

1996-515, to determine whether DGE 85-5’s transactions were tax
- 41 -

motivated. In the orders and decisions entered pursuant to

Shorthorn Genetic Engg., the Court explicitly stated that it was

not considering the section 6621(c) interest issue. The opinion

and the orders and decisions cannot fairly be interpreted as

making findings or determinations regarding whether DGE 85-5’s

transactions were tax motivated.17 As this case is appealable to

the Ninth Circuit, we defer to the Ninth Circuit’s determination

that, for purposes of section 6621(c), the character of a

partnership’s transactions is a partnership item to be determined

at the partnership level. See River City Ranches #1 Ltd. v.

Commissioner, 401 F.3d at 1143-1144; see also Golsen v.

Commissioner, supra at 757. Because this is a partner-level

case, we do not have jurisdiction to determine DGE 85-5’s

partnership items, including whether its transactions were tax

motivated. See sec. 6221; Sparks v. Commissioner, supra at 1284;

Maxwell v. Commissioner, supra at 789. Therefore, we cannot

determine whether petitioner had substantial underpayments of tax

resulting from tax-motivated transactions and shall dismiss for

lack of jurisdiction petitioner’s claim regarding section 6621(c)

interest.

17
Neither party appealed the Tax Court’s decision in
Shorthorn Genetic Engg. 1982-2, Ltd. v. Commissioner, T.C. Memo.
1996-515, and that decision is now final.
- 42 -

III. Conclusion

Petitioner has not shown that respondent’s determination was

arbitrary or capricious, or without sound basis in fact or law.

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

determination was not an abuse of discretion, and respondent may

proceed with the proposed collection action. Further, we hold

that we do not have jurisdiction at the partner level to

determine whether a partnership’s transactions were tax-motivated

transactions.

In reaching our holdings herein, we have considered all

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

them to be moot, irrelevant, or without merit.

To reflect the foregoing,

An appropriate order

and decision will be

entered.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4336301. Public record. Not legal advice.