The opinion
T.C. Memo. 2007-29
UNITED STATES TAX COURT
BOBBIE E. JOHNSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20775-04L. Filed February 7, 2007.
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 6330 (notice of determination) for 1981
through 1986, 1988, and 1992.1 Pursuant to section 6330(d),
1
Unless otherwise indicated, all section references are to
(continued...)
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petitioner seeks review of respondent’s determination. The issue
for decision is whether respondent abused his discretion in
sustaining the proposed collection action.2
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The first, second, third, fourth, and fifth stipulations of fact
and the attached exhibits are incorporated herein by this
reference.3
1
(...continued)
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure. Amounts
are rounded to the nearest dollar.
2
Petitioner also disputes respondent’s determination that
he is liable for the increased rate of interest on tax-motivated
transactions under sec. 6621(c). As to this dispute, the parties
filed a stipulation to be bound by the Court’s determination in
Ertz v. Commissioner, T.C. Memo. 2007-15, which involves a
similar issue.
3
Respondent reserved relevancy objections to many of the
exhibits attached to the stipulations of fact. Fed. R. Evid. 402
provides the general rule that all relevant evidence is
admissible, while evidence which is not relevant is not
admissible. Fed. R. Evid. 401 defines relevant evidence as
“evidence having any tendency to make the existence of any fact
that is of consequence to the determination of the action more
probable or less probable than it would be without the evidence.”
While the relevance of some exhibits is certainly limited, we
find that the exhibits meet the threshold definition of relevant
evidence and are admissible. The Court will give the exhibits
only such consideration as is warranted by their pertinence to
the Court’s analysis of 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.
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Petitioner resided in Lodi, California, when he filed his
petition. At the time of trial, petitioner was 76 years old, his
wife (Mrs. Johnson) was 71 years old, and they had been married
for more than 50 years. Petitioner and Mrs. Johnson are retired.
In 1984, petitioner became a partner in Durham Genetic
Engineering, Ltd. 1984-4 (DGE 84-4) and Shorthorn Genetic
Engineering, Ltd. 1984-4 (SGE 84-4), cattle breeding partnerships
organized and operated by Walter J. Hoyt III (Hoyt).4
From about 1971 through 1998, Hoyt organized, promoted, and
operated more than 100 cattle breeding partnerships. Hoyt also
organized, promoted, and operated sheep breeding partnerships.
From 1983 to his subsequent removal by the Tax Court in 2000
through 2003, Hoyt was the tax matters partner of each Hoyt
partnership. From approximately 1980 through 1997, Hoyt was a
licensed enrolled agent, and as such, he represented many of the
Hoyt partners before the Internal Revenue Service (IRS). In
4
Petitioner was also a partner in other Hoyt-related
partnerships identified as TBS 87-1, TBS JV, HS Truck, and TBS
1989-3. The details of these partnerships are not in the record.
Though unclear, it appears that all adjustments made to
petitioner’s income tax liability for 1981-86, 1988, and 1992
arose from his involvement in DGE 84-4 and SGE 84-4 only.
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1998, Hoyt’s enrolled agent status was revoked. Hoyt was
convicted of various criminal charges in 2000.5
Beginning in 1984 until at least 1992, petitioner claimed
losses and credits on his Federal income tax returns arising from
his involvement in the Hoyt partnerships. Petitioner also
carried back unused investment credits to 1981, 1982, and 1983.
As a result of these losses and credits, petitioner reported
overpayments of tax for 1981 through 1986, 1988, and 1992, and
received refunds in the amounts claimed.
5
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 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 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.
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Respondent issued Notices of final partnership
administrative adjustments (FPAAs) to DGE 84-4 for at least its
1986 taxable year and to SGE 84-4 for its 1984 through 1986
taxable years.6 After completion of the partnership-level
proceedings, respondent determined deficiencies in petitioner’s
income tax for his 1981 through 1986 tax years.7
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). The final notice included petitioner’s
outstanding tax liabilities for 1981 through 1986, 1988 and 1992.
On March 17, 2002, petitioner submitted a Form 12153,
Request for a Collection Due Process Hearing. Petitioner argued
that the proposed levies were inappropriate and that an offer-in-
compromise should be accepted.
Petitioner’s case was assigned to Settlement Officer Linda
Cochran (Ms. Cochran). Ms. Cochran scheduled a telephone section
6330 hearing for April 13, 2004. On March 25, 2004, petitioner’s
representative, Terri A. Merriam (Ms. Merriam), requested
additional time to submit information to be considered during the
6
The FPAAs and other information specific to DGE 84-4’s
and SGE 84-4’s partnership-level proceedings are not in the
record.
7
It does not appear that the changes made to petitioner’s
income tax for 1988 and 1992 were made pursuant to the orders and
decisions. The details regarding petitioner’s 1988 and 1992
taxable years are not in the record.
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hearing. Ms. Cochran extended petitioner’s deadline for
producing information to June 1, 2004.
On May 21, 2004, petitioner submitted to Ms. Cochran a
letter with 42 exhibits. On May 29, 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
three letters setting out in detail petitioner’s position
regarding the offer-in-compromise. Petitioner’s letters included
several exhibits not provided with the May 21, 2004, letter.
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 $120,500 to compromise his outstanding
tax liabilities for 1981 through 1996. Petitioner estimated that
his outstanding tax liabilities for 1981 through 1986, 1988, and
1992 only were $480,034.
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On the Form 433-A, petitioner listed the following assets:
Asset Current Balance/Value Loan Balance
Checking account $452 n/a
Money market account 2,738 n/a
Stocks 30,745 -0-
Retirement accounts 108,882 -0-
2003 Ford Crown 12,210 -0-
Victoria
2002 Chevrolet 4,615 -0-
Cavalier
1988 Pace Arrow 6,000 -0-
motor home
House 81,325 $30,119
Pasture land 26,325 -0-
Total 273,292 30,119
The reported value of the retirement accounts included only 70
percent of their then-current value.
Petitioner reported gross monthly income of $3,140,
representing petitioner’s pension/Social Security income of
$2,199, Mrs. Johnson’s pension/Social Security income of $725,
net rental income of $155, and interest income of $61.
Petitioner also reported the following monthly living expenses:
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Expense item Monthly expense
Food, clothing, misc. $904
Housing and utilities 1,254
Transportation 375
Health care 322
Taxes (income and FICA) 408
Life insurance 14
Attorney’s fees 414
Total 3,691
In the letter explaining the offer amount, petitioner stated
that he was offering $120,500:
to be paid by withdrawing the funds from the retirement
account and from other cash assets. This offer is for
all Hoyt related years to be paid in one lump sum
payment. The remainder of the retirement funds and the
equity in the home is needed for necessary living
expenses. * * * This offer amount fully pays the
majority of estimated tax liability, but does not
include interest.
The letter also included “medical and retirement considerations”
and a “retirement analysis”. Petitioner’s medical and retirement
considerations included: (1) Petitioner and Mrs. Johnson are
retired; (2) petitioner suffers from arthritis and must take
medications and undergo therapy for his condition; (3) Mrs.
Johnson suffers from high blood pressure and must take
medications for her condition; and (4) due to their age and
health, “it is certain that they will have continuing and
substantial medical expenses.” The retirement analysis outlined
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the likelihood of increased housing and medical costs as
petitioner and Mrs. Johnson aged.
In the remaining three letters, petitioner alleged that he
was a victim of Hoyt’s fraud and asserted various arguments
regarding the appropriateness of an offer-in-compromise.
On September 29, 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 reported by petitioner on the Form 433-A: (1)
Determined that the house was worth $250,000 instead of $81,325;
(2) determined that the pasture land was worth $52,651 instead of
$26,325; (3) included the full value of petitioner’s and Mrs.
Johnson’s retirement accounts instead of their 70-percent value;
and (4) included the quick-sale value of the vehicles and the
motor home. Respondent determined that petitioner had total net
realizable equity in assets of $428,066.
Respondent accepted petitioner’s pension and interest income
as reported but increased the net rental income from $155 to $165
based on petitioner’s 2003 Federal income tax return. Respondent
accepted the majority of petitioner’s monthly expenses, but made
the following changes: (1) Reduced the foods, clothing, etc.
expense from $904 to $801 to reflect the national standard; (2)
reduced the housing expense from $1,254 to $885 to reflect actual
documented costs; and (3) disallowed the taxes expense because
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petitioner paid no Federal income tax in 2003 and provided no
documentation regarding State taxes. Regarding the possible
future increases in expenses outlined in petitioner’s letter
explaining the offer amount, respondent determined that these
were “general projections from the taxpayers’ representative and
may never, in fact, be incurred” and thus did not take them into
account.
After making adjustments to petitioner’s monthly expenses,
respondent determined that $28,815 was collectible from
petitioner’s future income.8 Respondent concluded that
petitioner had the ability to pay $456,881.
Because petitioner had the ability to pay substantially more
than the amount offered, respondent rejected his offer-in-
compromise based on doubt as to collectibility with special
circumstances. Respondent also rejected petitioner’s effective
tax administration offer-in-compromise because he did not have
the ability to pay his outstanding tax liability in full.
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.
8
Respondent determined that petitioner had monthly
disposable income of $339 and multiplied this by 85, the number
of months remaining on the collection statute.
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In response to the notice of determination, petitioner filed
a petition with this Court on November 1, 2004.
OPINION
Section 7122(a) provides that “The Secretary may compromise
any civil * * * case arising under the internal revenue laws”.
Whether to accept an offer-in-compromise is left to the
Secretary’s discretion. Fargo v. Commissioner, 447 F.3d 706, 712
(9th Cir. 2006), affg. T.C. Memo. 2004-13; sec. 301.7122-1(c)(1),
Proced. & Admin. Regs.
The regulations under section 7122(a) set forth three
grounds for the compromise of a tax liability: (1) Doubt as to
liability; (2) doubt as to collectibility; or (3) promotion of
effective tax administration. Sec. 301.7122-1(b), Proced. &
Admin. Regs. Doubt as to liability is not at issue in this
case.9
Petitioner proposed an offer-in-compromise based
alternatively on doubt as to collectibility with special
circumstances or effective tax administration. Petitioner
offered to pay $120,500 to compromise his outstanding tax
liabilities for 1981 through 1996, which totaled at least
9
While petitioner contests his liability for sec. 6621(c)
interest, see supra note 2, he did not raise doubt as to
liability as a basis for his offer-in-compromise.
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$480,034.10 Respondent determined that petitioner’s reasonable
collection potential was $456,881 and that his 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.
Because the underlying tax liability is not at issue, our
review under section 6330 is for abuse of discretion. See Sego
v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner,
114 T.C. 176, 182 (2000). This standard does not ask us to
decide whether in our own opinion 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.
A. Effective Tax Administration
If the taxpayer has the ability to pay his tax liability in
full, the Secretary may compromise the 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
10
Petitioner estimated that his total outstanding tax
liabilities for 1981-86, 1988, and 1992 were $480,034. This
amount does not include his outstanding tax liabilities for 1987,
1989-91, and 1993-96. Thus, it appears that petitioner is
actually seeking to compromise an amount greater than $480,034.
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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.
Ms. Cochran determined that petitioner could not afford to
pay his outstanding tax liability in full and therefore did not
qualify for an effective tax administration offer-in-compromise.
Petitioner does not argue that he has the ability to pay his tax
liability in full. Because he did not have the ability to pay
his outstanding tax liability in full, petitioner does not
qualify for an effective tax administration offer-in-compromise.
See Barnes v. Commissioner, T.C. Memo. 2006-150; sec. 301.7122-
1(b)(3), Proced. & Admin. Regs. Ms. Cochran’s determination that
petitioner did not qualify for an effective tax administration
offer-in-compromise was not arbitrary or capricious and was not
an abuse of discretion.
B. Doubt as to Collectibility With Special Circumstances
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
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only if it reflects the taxpayer’s reasonable collection
potential. Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517,
517. In some cases, the Commissioner will accept an offer of
less than the reasonable collection potential if there are
“special circumstances”. Id. Special circumstances are: (1)
Circumstances demonstrating that the taxpayer would suffer
economic hardship if the IRS were to collect from him an amount
equal to the reasonable collection potential; or (2)
circumstances justifying acceptance of an amount less than the
reasonable collection potential of the case based on public
policy or equity considerations. See Internal Revenue Manual
(IRM) sec. 5.8.4.3(4). However, in accordance with the
Commissioner’s guidelines, an offer-in-compromise based on doubt
as to collectibility with special circumstances should not be
accepted, 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).
Petitioner argues that his offer-in-compromise based on
doubt as to collectibility with special circumstances should have
been accepted because collection of an amount equal to his
reasonable collection potential would create an economic hardship
and public policy and equity considerations justify acceptance of
an amount less than his reasonable collection potential.
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1. 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 to the fact
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; and (2) Ms. Cochran erroneously
determined petitioner’s reasonable collection potential income
and failed to take into account his future 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 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
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
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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 address petitioner’s
arguments.
a. Discussion of Special Circumstances in the Notice
of Determination
Petitioner argues that Ms. Cochran failed “to follow proper
procedure by discussing [petitioner’s and Mrs. Johnson’s] special
circumstances * * * what equity was considered in relation to
[their] special circumstances, and how the special circumstances
affected her determination of [petitioner’s] 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 the 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
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.
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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 was not an
abuse of discretion.
b. Petitioner’s Reasonable Collection Potential
Petitioner asserts that Ms. Cochran erroneously determined
his reasonable collection potential by: (1) Considering 85
months of petitioner’s future income instead of 48 months; (2)
failing to adequately consider petitioner’s and Mrs. Johnson’s
age, health, retirement status, medical costs, and the likelihood
of future increases in medical and housing costs; and (3)
erroneously redetermining the value of petitioner’s assets and
the amount of his expenses. Petitioner’s arguments are not
persuasive.
Section 5.8.5.5 of the IRM provides that, when a taxpayer
makes a cash offer to compromise an outstanding tax liability,
only 48 months of future income should be considered. Petitioner
made a cash offer, but Ms. Cochran used 85 months of future
income. At trial, Ms. Cochran acknowledged that she should have
used only 48 months of future income. Ms. Cochran recomputed
petitioner’s reasonable collection potential using 48 months and
determined that it was $442,338, instead of $456,881, as
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reflected in the notice of determination. Ms. Cochran testified
that the change would not have had an effect on her final
determination because, using either calculation, petitioner’s
reasonable collection potential was much greater than his offer
amount ($120,500). We find that Ms. Cochran’s error did not
amount to an abuse of discretion because, even when the error is
corrected, petitioner’s reasonable collection potential of
$442,338 far exceeds his offer amount of $120,500.
With regard to age, health, and retirement status,
petitioner’s argument is not supported by the record. On his
Form 433-A, petitioner reported monthly medical expenses of $322.
In his letter describing the offer amount, petitioner represented
that he and Mrs. Johnson were retired.
Ms. Cochran accepted petitioner’s monthly medical expenses
without change. Because petitioner and Mrs. Johnson were
retired, Ms. Cochran considered only pension income and other
income not contingent upon employment. Given that Ms. Cochran
accepted petitioner’s medical expenses as reported and considered
future income consistent with the retirement considerations
listed by petitioner, we reject petitioner’s assertion that Ms.
Cochran failed to consider his and Mrs. Johnson’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.
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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 houses handicapped accessible.
As reflected in the notice of determination, Ms. Cochran
took into consideration the information petitioner presented, but
concluded that “these possible future expenses are general
projections from the taxpayer’s 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 raises challenges to various other
determinations made by Ms. Cochran, including: (1) The
determination that the house was worth more than what petitioner
reported; (2) the determination that the pasture land was worth
more than what petitioner reported; and (3) the reduction of his
food, clothing, etc., housing, and tax expenses. We need not
discuss in detail these and other minor disputes raised by
petitioner. Even assuming arguendo that petitioner’s income,
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expenses, and value of assets should have been accepted as
reported, we would not find that Ms. Cochran abused her
discretion in rejecting petitioner’s offer-in-compromise. Ms.
Cochran testified that, had she accepted the income, expenses,
and value of assets as reported, petitioner’s reasonable
collection potential would have been $238,592.
Respondent may accept an offer-in-compromise based on doubt
as to collectibility with special circumstances even if the offer
amount 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 based on his own calculations.
c. 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 must be viewed against
the backdrop of section 301.7122-1(b)(3)(iii), Proced. & Admin.
Regs.11 See Barnes v. Commissioner, T.C. Memo. 2006-150. That
section requires that Ms. Cochran deny petitioner’s offer-in-
11
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.
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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.
2. Public Policy and Equity Considerations
Petitioner asserts that respondent abused his discretion by
not accepting the equitable facts of this case 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; and (2) respondent failed
to consider petitioner’s other “equitable facts”.12
12
Petitioner also argues that respondent abused his
discretion by relying on the second example in IRM sec.
5.8.11.2.2(3). This section deals with effective tax
administration offers-in-compromise. See 1 Administration,
Internal Revenue Manual (CCH), sec. 5.8.11.2.2(3), at 16,378. As
discussed above, petitioner does not qualify for an effective tax
administration offer-in-compromise because he does not have the
ability to pay his outstanding tax liability in full. Thus, we
need not consider whether the example in the IRM is analogous to
petitioner’s case.
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a. 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 their offer-in-compromise.
Petitioner’s argument is essentially the same considered and
rejected by the Court of Appeals for the Ninth Circuit in Fargo
v. Commissioner, 447 F.3d at 711-712. See also Keller v.
Commissioner, T.C. Memo. 2006-166; Barnes v. Commissioner, supra.
We reject 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.
Respondent’s rejection of petitioner’s longstanding case
argument was not arbitrary or capricious.
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b. 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, Ninth, and Tenth Circuits. See, e.g.,
Hansen v. Commissioner, 471 F.3d 1021 (9th Cir. 2006), affg. T.C.
Memo. 2004-269; Mortensen v. Commissioner, 440 F.3d 375, 390-391
(6th Cir. 2006), affg. T.C. Memo. 2004-279; Van Scoten v.
Commissioner, 439 F.3d 1243, 1254-1256 (10th Cir. 2006), affg.
T.C. Memo. 2004-275.
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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, supra; 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, supra 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, Ninth, and Tenth Circuits
from affirming our decisions to that effect. See Hansen v.
Commissioner, 471 F.3d 1021 (9th Cir. 2006), affg. T.C. Memo.
2004-269; Mortensen v. Commissioner, 440 F.3d 375 (6th Cir.
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2006), affg. T.C. Memo. 2004-279; Van Scoten v. Commissioner, 439
F.3d 1243 (10th Cir. 2006), affg. T.C. Memo. 2004-275.
Ms. Cochran testified that she considered all of Ms.
Merriam’s and 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 his 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.14 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
14
See supra note 11.
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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 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. As discussed above, petitioner does not qualify for
an effective tax administration offer-in-compromise because he
does not have the ability to pay his outstanding tax liability in
full. Thus, we do not need to consider whether respondent can or
should compromise penalties and interest in an effective tax
administration offer-in-compromise.
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 the Court can conduct a
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“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).15 The burden was on
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. Deadline for Submission of Information
Petitioner argues that Ms. Cochran abused her discretion by
not allowing his counsel additional time to submit information to
be considered. Petitioner’s argument is not supported by the
record.
Petitioner asserts that he was “initially only given weeks”
to provide all information. However, he ignores the fact that
Ms. Cochran granted his requested extension and allowed him until
June 1, 2004, to submit information. Additionally, petitioner
has not identified any documents or other information that he
15
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
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3001(c), 112 Stat. 727.
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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 abused her discretion by establishing a deadline
for the submission of information.
4. Mrs. Johnson’s Pending Innocent Spouse Case
Petitioner argues that Ms. Cochran abused her discretion by
considering Mrs. Johnson’s income and assets even though Mrs.
Johnson currently has an innocent spouse case pending before the
Tax Court.16 Petitioner’s argument is without merit.
The final notice and the notice of determination were issued
to petitioner only. Nevertheless, petitioner filed a Form 656
jointly with Mrs. Johnson and indicated that he was seeking to
compromise both his and Mrs. Johnson’s outstanding tax
liabilities for 1981 through 1996. Additionally, the Form 433-A
was submitted jointly and included the assets of both petitioner
and Mrs. Johnson. Petitioner did not identify which assets, if
any, belonged to Mrs. Johnson, and instead grouped all of the
assets together. It is not reasonable to expect Ms. Cochran to
16
In support of his argument, petitioner cites sec.
6015(e)(1)(B)(i), which states that “no levy or proceeding in
court shall be made, begun, or prosecuted against” a taxpayer
requesting innocent spouse relief. This section is not relevant.
There is no indication that respondent has sought to levy against
Mrs. Johnson’s separate property.
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separate petitioner’s assets from Mrs. Johnson’s assets when
petitioner has given her no information on which to base that
separation. Given that petitioner was offering to compromise
both his and Mrs. Johnson’s outstanding tax liabilities, and
given the manner in which petitioner presented the information to
Ms. Cochran, it was not arbitrary or capricious for Ms. Cochran
to consider Mrs. Johnson’s income and assets in evaluating the
joint offer-in-compromise.
5. 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.
D. Conclusion
Petitioner has not shown that respondent’s determination was
arbitrary or capricious, or without sound basis in fact or law.
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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.
In reaching our holdings herein, we have considered all
arguments made, and, to the extent not mentioned above, we find
them to be moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be
entered for respondent.