Offer
in Compromise
Cases
Dealing With “Abuse of Discretion
The
attached cases have considered “abuse of discretion” in
collection due process appeals. The first case does involve an
abuse of discretion. You will see that “abuse of discretion”
is a very difficult standard to meet. Consider the following sample
cases.
Rudolph
Harris, Sr., and Verline Harris, Petitioners v. Commissioner,
Respondent.
Dkt.
No. 21486-03L , TC Memo. 2006-186, August 30, 2006.
[Appealable,
barring stipulation to the contrary, to CA-11. --CCH.]
[Code
Sec. 6630]
Collection
Due Process hearing: Abuse of discretion: Documentation ignored. --
An IRS settlement
officer's decision to proceed with collection of a married couple's
tax liabilities was an abuse of discretion. The settlement officer
did not conduct an independent administrative review of the IRS's
rejection of an offer-in-compromise and failed to consider supporting
documents provided by the couple. The settlement officer instead
relied on undocumented and unsupported figures from a revenue
officer's determination of reasonable collection potential. --CCH.
Rudolph Harris, Sr., pro
se; Monica J. Miller, for respondent.
MEMORANDUM
FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Pursuant
to section
6330(d),1
petitioners seek review of respondent's determination regarding
collection of their 1995, 1996, 1997, 1998, and 1999 income tax
liabilities.
FINDINGS
OF FACT
At the time they filed
the petition, Rudolph Harris, Sr., and Verline Harris resided in
Tampa, Florida. Mr. and Mrs. Harris filed Federal income tax returns
reporting as follows:2
Withholding
plus
Year
Tax
payments with return
Tax Due
1995
$3,461 $1,761 $1,700
1996
2,262 1,214 1,048
1997
2,591 518 2,073
1998
1,787 981 806
1999
3,555 2,761 794
According to Internal
Revenue Service (IRS) transcripts of account, on or about October 29,
2001, the IRS received an offerin-compromise (OIC) from Mr. and Mrs.
Harris to settle their 1995, 1996, 1997, 1998, and 1999 tax
liabilities (first OIC). The boxes for "Doubt as to
Collectibility" and "Effective Tax Administration" are
marked on the first OIC. On March 29, 2002, the IRS rejected the
first OIC.
On or about July 26,
2002, Mr. and Mrs. Harris submitted another OIC to settle their 1995,
1996, 1997, 1998, and 1999 tax liabilities (second OIC). The boxes
for "Doubt as to Collectibility" and "Effective Tax
Administration" are marked on the second OIC. At this time, Mr.
and Mrs. Harris were 71 years old, were retired, and had an adult
child living with them who was a dependent for tax purposes. On the
second OIC, Mr. Harris wrote: "As the record will verify, I am
re-submitting this Offer in Compromise which will include basically
statements of both our incomes. As you know Verline, my wife and I
are both retired. I am also submitting copies of health status from
our doctors."
On February 20, 2003, an
entry was made on a 10-page document entitled "ICS History
Transcript" (ICS transcript) --which reflects Mr. and Mrs.
Harris's collection case history. The entry states that Mr. Harris
provided a statement from his doctor that Mr. Harris has severe
osteoarthritis, he is totally disabled, and he cannot work. It also
was noted that Mrs. Harris provided statements from two doctors. Mrs.
Harris was diagnosed with a "non-Q wave myocardial infarction".
She has a history of coronary artery disease, class 1 to 11 angina
pectoris, a history of hyperlipidemia even on medication, a history
of goiter, hypothyroidism even on medication, and insulin-dependent
diabetes mellitus with diabetic retinopathy.
An undated and unsigned
handwritten document regarding the reasonable collection potential
for Mr. and Mrs. Harris's 1995, 1996, 1997, 1998, and 1999 tax years,
prepared by a revenue officer,3
lists $574 as available (presumably per month) for payment of the tax
liabilities for these years. This document appears to have been
prepared in response to the second OIC as it notes "1000 offer
7/26/02, 95-99" at the top of the first page. It also notes
"Updated medical info [illegible]". The figures listed by
the revenue officer in the "Claimed" and "Allowed R/O"
columns for income and expenses are not supported by any original
documentation. The "Total RCP per Revenue Officer" is
blank.4
On or about April 21,
2003, the IRS rejected the second OIC.
On or about June 13,
2003, respondent filed a Notice of Federal Tax Lien (NFTL), prepared
and/or filed by Revenue Officer Akil, with the Clerk of the Circuit
Court of Hillsborough County in Tampa, Florida. The NFTL listed the
unpaid balances as follows: $399, $2,352, $3,757, $1,991, and $1,136
for 1995, 1996, 1997, 1998, and 1999, respectively (the NFTL lists a
total unpaid balance of $9,635).
On June 19, 2003,
respondent mailed Mr. and Mrs. Harris separate notices of Federal tax
lien filing and Notices of Federal Tax Lien Filing and Your Right to
a Hearing Under Section
6320.
On July 14, 2003, Mr. and
Mrs. Harris submitted a Form 12153, Request for a Collection Due
Process Hearing, regarding the NFTL for 1995, 1996, 1997, 1998, and
1999.
On August 14, 2003,
Appeals Officer Pamela Ludwig was assigned to Mr. and Mrs. Harris's
hearing request. The Appeals officer's case activity record and case
screening notes, which are scant, indicate that Mr. and Mrs. Harris
are current in filing through tax year 2002, they do not have
outstanding tax liabilities for any other periods, they had filed the
two aforementioned OICs, and their balance due as of November 30,
2003, is $13,543 --an increase of almost $4,000 since the
filing of the NFTL 5 months earlier. According to the Appeals
officer's case activity record, on October 3, 2003, the Appeals
officer transferred the case to a settlement officer to be worked in
conjunction with the appeal of the second OIC that was rejected on
April 21, 2003.
Settlement Officer Peter
Salinger was assigned to Mr. and Mrs. Harris's hearing request. The
settlement officer also was assigned to the appeal of their second
OIC. The settlement officer considered the second OIC as a collection
alternative in connection with Mr. and Mrs. Harris's hearing request.
As part of the section
6330 proceedings, the settlement
officer did not review or consider originals or copies of: The second
OIC (i.e., the Form 656, Offer-in-Compromise); the documents Mr. and
Mrs. Harris previously submitted supporting the second OIC --i.e.,
Forms 433-A, Collection Information Statement for Wage Earners and
Self-Employed Individuals, or the medical records from the three
doctors referred to in the body of the second OIC; or the income and
expense worksheets.5
On November 24, 2003,
respondent issued Mr. and Mrs. Harris a Notice of Determination
Concerning Collection Action(s) Under Section(s) 6320 and/or 6330
determining that the NFTL would not be withdrawn.
OPINION
Section
6320 provides that the Secretary
shall furnish the person described in section
6321 with written notice (i.e.,
the hearing notice) of the filing of a notice of lien under section
6323. Section
6320 further provides that the
taxpayer may request administrative review of the matter (in the form
of a hearing) within a 30-day period. The hearing generally shall be
conducted consistent with the procedures set forth in section
6330(c), (d), and (e) --which
provide for, among other things, the conduct of the hearing, the
making of a determination, and jurisdiction for court review of the
section
6330 determination. Sec.
6320(c).
Pursuant to section
6330(c)(2)(A), a taxpayer may
raise at the section
6330 hearing any relevant issue
with regard to the Commissioner's collection activities, including
spousal defenses, challenges to the appropriateness of the
Commissioner's intended collection action, and alternative means of
collection. Sego v. Commissioner [Dec.
53,938], 114 T.C. 604, 609
(2000); Goza v. Commissioner [Dec.
53,803], 114 T.C. 176, 180
(2000). Mr. and Mrs. Harris are not challenging their underlying
liabilities. See sec.
6330(c)(2)(B). Therefore, we
review respondent's determination for an abuse of discretion. See
Sego v. Commissioner, supra at 610.
Respondent stated that
the settlement officer considered Mr. and Mrs. Harris's second OIC as
part of their section
6330 hearing. Respondent relies
on Schenkel v. Commissioner [Dec.
55,043(M)], T.C. Memo. 2003-37,
for the proposition that there was no abuse of discretion in this
case. Schenkel, however, is distinguishable from the case at
bar.
In Schenkel, the
Appeals officer received a completed Form 433-A directly from the
taxpayer. The taxpayer listed his assets, his monthly income, and his
total monthly living expenses. The Appeals officer reviewed the
taxpayer's OIC considering all the financial information the taxpayer
submitted. The Appeals officer himself calculated the taxpayer's
total allowable monthly living expenses. Upon an independent review
of the underlying documentation, the Appeals officer concluded that
the taxpayer's OIC was unacceptable because the taxpayer could pay
his full tax liability within the period of limitations for
collection.
In this case, the
settlement officer did not conduct an independent review. Although
the settlement officer reviewed documents prepared by respondent's
agents regarding the second OIC, the settlement officer did not
review the second OIC and/or the documents supporting the second OIC
--the Forms 433A and 656, the income and expense worksheets, and the
medical records. Instead, the settlement officer relied solely on the
conclusory, undocumented, and unsupported figures from the
handwritten determination of reasonable collection potential prepared
by the revenue officer.
Accordingly, we conclude
that, unlike the Appeals officer in Schenkel, the settlement
officer in this case did not conduct an independent administrative
review of the rejection of the OIC. Sec.
7122(d)(1). Additionally, the
evidence does not establish that the settlement officer prepared a
monthly income and allowable expense analysis based on all of the
information Mr. and Mrs. Harris provided or that the figures the
settlement officer relied on represented national standard expenses.
Sec.
7122(c)(2); sec.
301.7122-1(b)(2), (k), Proced. & Admin. Regs. (the regulation
applies as the OIC in issue was pending or submitted on or after July
18, 2002).
The officer or employee
of Appeals conducting a section
6330 hearing cannot turn a blind
eye to or ignore relevant documents in the Commissioner's possession
--especially when those documents are specifically mentioned in other
documents the officer or employee of Appeals reviews or the officer
or employee of Appeals knows the documents exist. Upon the basis of
the foregoing, we conclude that the determination for the years in
issue was an abuse of discretion.6
To reflect the foregoing,
Decision will be
entered for petitioners.
1
Unless otherwise indicated, all section references are to the
Internal Revenue Code.
2
All amounts are rounded to the nearest dollar.
3
According to the ICS transcript, on Jan. 9, 2003, Aisha Akil was
assigned to petitioners' case. Accordingly, Revenue Officer Akil
appears to be the revenue officer who prepared this document as well
as the entries on the ICS transcript after Jan. 9, 2003.
4
RCP would appear to stand for reasonable collection potential.
5
Respondent submitted an affidavit of the settlement officer listing
the materials he reviewed before the determination was made in this
case. Neither the settlement officer nor any other IRS employee
testified at trial.
6
Additionally, respondent conceded at trial and on brief that Mr. and
Mrs. Harris's 1995 tax liabilities have been fully satisfied.
William
J. and Lois J. DiCindio v. Commissioner.
Dkt.
No. 7029-03L , TC Memo. 2007-77, 93 TCM 1060, April 2, 2007.
.
--
The IRS's determination
to reject a married couple's offer-in-compromise (OIC) and proceed
with collection of tax liabilities was not an abuse of discretion.
Returning the OIC for additional information was not arbitrary and
capricious, and the decision not to process the OIC because the
couple failed to provide additional requested information was
consistent with the prescribed guidelines and was a reasonable
exercise of the IRS's discretion. It was also not an abuse of
discretion to reject the couple's OIC because they failed to submit
additional information before the court ruled on their pending motion
for reconsideration. An extension of any deadlines related to the
IRS's processing of the OIC would not have changed the OIC's
disposition. --CCH.
William J. and Lois J.
DiCindio, pro se; Donald M. Brachfeld, for respondent.
MEMORANDUM
OPINION
COLVIN, Chief Judge:
Respondent sent a Notice of Determination Concerning Collection
Action(s) Under Section
63201
and/or 6330
to petitioners in which respondent determined that it was appropriate
to sustain collection action with respect to petitioners' unpaid
income taxes for 1985-89 and 1991-2001 (the years in issue).2
Thereafter petitioners timely filed a petition in which they
requested our review of respondent's determination. The issue for
decision is whether respondent's determination to reject petitioners'
offer-in-compromise (OIC) and proceed with collection was an abuse of
discretion. We hold that it was not.
Background
Some of the facts have
been stipulated and are so found. Petitioners are married and resided
in Edison, New Jersey, at the time the petition was filed.
Respondent issued a Final
Notice of Intent to Levy and Notice of Your Right to a Hearing to
petitioners on September 5, 2002. Petitioners timely requested a
collection due process hearing on October 1, 2002. Petitioners'
outstanding tax liability is $463,496 plus statutory additions.
Petitioners did not challenge the assessments or the underlying tax
liabilities. A settlement officer (SO) from respondent's Appeals
Office (Appeals) spoke on the telephone with petitioners'
representative on February 4, 2003. The SO told petitioners'
representative that collection alternatives such as an OIC or an
installment agreement would not be considered because of petitioners'
poor compliance record. Respondent issued the notice of determination
on April 8, 2003, sustaining the levy.
In the petition,
petitioners alleged errors in the notice of determination,
specifically that Appeals failed to give them a fair hearing and that
Appeals failed to act properly with regard to the collection
activity. After the petition was filed, counsel for respondent
requested that Appeals discuss collection alternatives with
petitioners at a face-to-face hearing. Petitioner3
and respondent's SO met on September 9, 2003, and discussed
collection alternatives. Petitioners submitted an OIC on November 6,
2003. On December 1, 2003, the SO sent petitioners a letter
requesting that they complete missing items on the form and submit
additional information.
This case was calendared
for trial at the May 3, 2004, session of this Court in New York, New
York. Petitioners filed a motion for continuance in which they stated
that they would be submitting an OIC. The Court granted the motion.
The case was then calendared for trial at the session of this Court
beginning on January 24, 2005. Petitioners filed another motion for
continuance in order to retain counsel. The Court granted the motion
and ordered petitioners to submit an OIC to respondent no later than
March 1, 2005. Petitioners filed a status report on March 1, 2005,
stating that they had decided not to submit an OIC because they would
have no way of paying the debt. Trial was held on September 19, 2005,
in New York, New York.
Following trial, the
Court ordered petitioners to provide counsel for respondent a
complete Form 656, Offer in Compromise, and an updated Form 433-A,
Collection Information Statement for Wage Earners and Self-Employed
Individuals. Counsel for respondent received petitioners' OIC on
November 15, 2005, and sent it to an offer specialist (OS) for
consideration. In the following months, the OS requested that
petitioners provide additional information by various deadlines.
Petitioners did not meet any of these deadlines.
In April 2006,
petitioners requested that the Court keep the pending OIC open for
consideration until August 15, 2006, so that petitioner could file
his 2005 income tax return. The Court denied petitioners' request.
Thereafter, respondent returned the pending OIC to petitioners and
closed their file because petitioners had failed to provide
additional information necessary to determine the acceptability of
their offer and they failed to verify their compliance with the
estimated income tax requirements for 2005 and 2006.
Discussion
Petitioners contend that
respondent's refusal to consider their offer-in-compromise submitted
on November 15, 2005, for the years in issue was an abuse of
discretion. We disagree. Section
7122(c)(1) provides that the
Secretary shall prescribe guidelines for the Internal Revenue Service
(IRS) to use in determining whether to accept an OIC. The decision to
accept or reject an OIC, as well as the terms and conditions to which
the IRS agrees, is left to the discretion of the Secretary. Sec.
301.7122-1(c)(1), Proced. & Admin. Regs.
Petitioners contend that
returning their OIC for additional information was arbitrary and
capricious. We disagree.
If an offer accepted for
processing does not contain sufficient information to permit the IRS
to evaluate whether the offer should be accepted, the IRS will
request that the taxpayer provide the needed additional information.
Sec. 301.7122-1(d)(2), Proced. & Admin. Regs. On three separate
occasions, respondent's OS contacted petitioners to request
additional information. The OS explained that this additional
information was necessary to account for discrepancies between
petitioners' Form 433-A and the information they had previously
submitted. Petitioners failed to provide the requested information.
If the taxpayer does not submit the requested information to the IRS
within a reasonable time after a request, the IRS may return the
offer to the taxpayer. Id. The decision not to process
petitioners' OIC on account of their failure to provide additional
information was consistent with the prescribed guidelines and was a
reasonable exercise of respondent's discretion.
Petitioners contend that
respondent's rejection of their OIC while a motion for
reconsideration was pending before the Court was an abuse of
discretion. We disagree.
The granting of a motion
to reconsider rests in the discretion of the Court. Louisville &
Nashville R. Co. v. Commissioner [81-1
USTC ¶9212], 641 F.2d 435,
443-444 (6th Cir. 1981), affg. on this issue and revg. on other
issues [Dec.
34,014] 66 T.C. 962 (1976);
Estate of Halas v. Commissioner [Dec.
46,522], 94 T.C. 570, 574 (1990);
Vaughn v. Commissioner [Dec.
43,183], 87 T.C. 164, 166-167
(1986). Motions to reconsider will not be granted unless unusual
circumstances or substantial error is shown. Estate of Halas v.
Commissioner, supra at 574; Vaughn v. Commissioner, supra
at 167. Petitioners submitted their offer-in-compromise to respondent
on November 15, 2005. However, they failed to respond to respondent's
repeated requests for additional information. In April 2006,
petitioners requested an extension until August 15, 2006, so that
petitioner could file his 2005 income tax return. The Court was not
persuaded that petitioners were entitled to an extension of any
deadlines related to respondent's processing of the OIC and denied
their motion. In the interim, respondent rejected petitioners' OIC.
We have no reason to
believe that an extension to August would have changed the
disposition of petitioners' offer-in-compromise. The reason for the
requested extension was to file petitioner's 2005 income tax return.
However, the filing of petitioner's 2005 income tax return was not a
requirement of respondent's acceptance of the offer. The OS knew that
petitioner had requested an extension for filing his 2005 taxes. The
information that the OS needed, however, had to do with additional
information to verify and confirm the data on the submitted OIC.
Therefore, it was not an abuse of discretion to reject petitioners'
OIC on account of their failure to submit additional information
before the Court ruled on petitioners' pending motion for
reconsideration.
We conclude that
respondent may proceed with collection of petitioners' tax
liabilities for 1985-89 and 1991-2001 because respondent's rejection
of petitioners' offer-in-compromise was not an abuse of discretion.
Decision will be
entered for respondent.
1
Unless otherwise indicated, section references are to the Internal
Revenue Code as amended.
2
In the petition, petitioners also disputed the collection action for
taxable year 1990. No notice of determination was issued to
petitioners for that year. By separate order, the Court dismissed
this case as it relates to taxable year 1990.
3
References to petitioner are to William J. DiCindio.
Ronald
J. Speltz, Jane M. Speltz, Petitioners v. Commissioner of Internal
Revenue, Respondent.
U.S. Court of Appeals, 8th Circuit; 05-3054, July 14, 2006,
454 F3d 782.
Affirming the Tax Court, 124 TC 165, Dec.
55,961.
[
Code
Secs. 55
and 7122]
Alternative
minimum tax: Compromises: Acceptance of offer. --
The IRS did not abuse its
discretion by refusing to accept a couple's offer in compromise (OIC)
on an alternative minimum tax liability they incurred for exercising
incentive stock options on stock that then fell precipitously in
value. The rejection by the IRS of the OIC was subject to judicial
review to determine whether the executive decision conformed to law
or represented an abuse of discretion. Back references: ¶5101.10,
¶41,130.175
and ¶41,130.65.
Before:
Loken, Chief Judge, and Bowman and Smith, Circuit Judges.
S
MITH, Circuit Judge: Appellants Ronald and June Speltz ("Taxpayers")
incurred substantial tax liability under the alternative minimum tax
("AMT") after exercising an incentive stock option. After
the time of exercise, the stock value greatly declined. However, the
tax liability remained. Taxpayers paid a portion of their tax
liability and later made an offer-in-compromise ("OIC") to
settle the balance. The Internal Revenue Service ("IRS")
rejected the OIC. Taxpayers then appealed to the United States Tax
Court, which granted summary judgment to the IRS. We affirm.
I.
Background
Ronald
Speltz worked as an engineer and senior manager for McLeod USA
Network Services, Inc., a regional telephone company in Iowa. In the
2000 tax year, he earned approximately $75,000 in wages. As part of
his compensation, Speltz received incentive stock options ("ISOs")
to acquire McLeod stock. During the 2000 tax year, Speltz exercised
his ISOs to purchase 2,070 shares of McLeod stock for $34,254
--$711,118 below the market value of the stock. Unfortunately, the
stock price declined dramatically through the year, going from
approximately $104.56 per share on March 10 to approximately $.80 per
share on December 30. Eventually the Taxpayers sold the 2,070 shares
for $1,647.
On their Form 1040 for the 2000 tax year,
Taxpayers reported regular taxes of $18,678 and $224,869 in AMT. The
large AMT resulted from inclusion of the entire $711,118 in the
computation of the taxpayer's AMT liability notwithstanding the
enormous decline in the stock's value. After credit for federal
income tax withheld, the balance of Taxpayers' tax liability for year
2000 was $210,065. After an additional payment with the filing of
their tax return, Taxpayers still owed $192,184.77. Taxpayers further
whittled the balance paying $75,000 during 2001, receiving a $600 tax
reduction for the year 2000, and receiving credit for overpayments
for tax years 2001 and 2002 of $16,870 and $12,455 respectively.
In
November 2001, Taxpayers submitted to the IRS a Form 656, Offer in
Compromise ("OIC"). The OIC offered cash payment of $4,457,
the cash value of Ronald Speltz's life insurance policy, to settle
the remaining tax liability, which then exceeded $125,000. Taxpayers
explained that they had insufficient assets and income to pay the
full amount owed, gave examples of the lifestyle impact the liability
caused, and expressed frustration over the unfairness of their
situation.
Revenue Officer Robert Dallas notified Taxpayers by
letter that their OIC had been reviewed and rejected because the IRS
"determined that [Taxpayers] have the ability to pay [their]
liability in full within the time provided by law." Taking into
account their net equity in assets of $77,948 and available future
income of $113,568, Dallas determined Taxpayers' ability to pay was
$191,516 --an amount greater than the remaining balance of
$148,744.64.
Taxpayers then requested a collection due process
hearing to appeal the decision made by Dallas. The IRS Appeals Office
issued a Notice of Determination that sustained the lien filing and
rejected the OIC. Despite Taxpayers' arguments regarding
collectibility, equity, hardship, and public policy, the Notice of
Determination merely stated that "there is no pending
legislation to retroactively adjust how the alternative minimum tax
is computed."
Taxpayers then brought a petition for
review in the United States Tax Court, contending that the IRS abused
its discretion. The IRS moved for summary judgment but argued
alternatively that if summary judgment were not granted, the Tax
Court should remand the case for further consideration of the
Taxpayers' OIC. The IRS essentially conceded that it erred in
calculating the Taxpayers' ability to pay. Specifically, the IRS
seemed to acknowledge that Dallas and the Appeals Office failed to
follow the Internal Revenue Manual in making certain computations
relating to the Taxpayers' ability to pay.
Taxpayers disputed
the IRS's request for remand and argued that the Tax Court should
enter an order that the OIC be accepted. The Tax Court instead
granted the IRS's motion for summary judgment, concluding that
"differences as to the calculation of [Taxpayers'] ability to
pay installments are not material and do not preclude resolution of
this case on summary judgment." The Tax Court noted that the
Taxpayers may submit another OIC and that the Taxpayers' income and
expenses may change. However, the Tax Court concluded that there was
no abuse of discretion in declining to accept Taxpayers' OIC dated
November 2, 2001.
II.
Discussion
26
U.S.C. §7122(a)
provides that "[t]he Secretary may compromise any civil ... case
arising under the internal revenue laws." In 1998, §7122
was amended by adding subsection (c), which requires the IRS to
"prescribe guidelines for officers and employees of the Internal
Revenue Service to determine whether an offer-in-compromise is
adequate and should be accepted to resolve a dispute." The
post-1998 IRS regulations state that an OIC may be accepted on three
grounds: (1) doubt as to liability; (2) doubt as to collectibility;
and (3) promotion of effective tax administration. 26 C.F.R.
§301.7122-1(b); see
also
H.R. Conf. Rep. No. 105-599, at 289 (1998) .
1
Taxpayers claim that their OIC should have been accepted due to doubt
as to collectibility and promotion of effective tax administration.
A.
Reviewability
Before
reaching the merits, we must first address the Commissioner's
argument that the agency's rejection of an OIC is an exercise of
administrative discretion that is not subject to judicial review. In
support, the Commissioner cites 26 U.S.C. §7122(a),
which states that "[t]he Secretary may compromise any civil ...
case arising under the internal revenue laws." The Commissioner
contends that the word "may" means that the decision
whether to accept or reject a compromise is made solely at the
Secretary's discretion. Under the Commissioner's reasoning, the
Secretary's discretion is unreviewable pursuant to the Supreme
Court's decision in Heckler
v. Chaney,
470 U.S. 821 (1985).
We disagree. The Secretary's discretion
is not unfettered, as the regulations set forth "grounds for
compromise," §301.7122-1(b), and "special rules for
evaluating offers to compromise," §301.7122-1(c). The
decision in Heckler
v. Chaney
dealt with §701(a)(2) of the Administrative Procedure Act, and
the FDA's decision not to initiate an enforcement action. 470 U.S. at
830. In the case at bar, the Tax Court was granted the power to
review "any relevant issue relating to ... an
offer-incompromise." 26 U.S.C. §6330(c),
(d)(1)(A). Under 26 U.S.C. §7482,
Congress granted courts of appeal authority to review Tax Court
decisions and did not exclude offers-in-compromise. While the
acceptance or rejection of an OIC may be discretionary, the IRS must
follow statutory and regulatory criteria in exercising its
discretion, and we may review the IRS's decision for an abuse of
discretion. See
Olsen v. United States
[ 2005-2
USTC ¶50,637],
414 F.3d 144, 150 (1st Cir. 2005); see
also
H.R. Conf. Rep. No. 105-599, at 266 (1998) ("Where the validity
of the tax liability is not properly part of the appeal, the taxpayer
may challenge the determination of the appeals officer for abuse of
discretion."). Therefore, while the Commissioner is correct that
"the Judicial Branch does not instruct the Executive Branch how
to make executive decisions," Orum
v. Commissioner
[ 2005-2
USTC ¶50,444],
412 F.3d 819, 821 (7th Cir. 2005), the Judiciary does decide whether
the executive decisions conform to law or represent an abuse of
executive discretion. See
id.
B.
Doubt
as to Collectibility
On
the merits, the Taxpayers posit that the IRS abused its discretion by
refusing the OIC for two reasons: (1) doubt as to collectibility; and
(2) promotion of effective tax administration. We disagree.
"Doubt
as to collectibility exists in any case where the taxpayer's assets
and income are less than the full amount of the liability." 26
C.F.R. §301.7122-1(b)(2). "A determination of doubt as to
collectibility will include a determination of ability to pay."
§301.7122-1(c)(2)(i). The regulations require the Secretary to
"permit taxpayers to retain sufficient funds to pay basic living
expenses." Id.
The permissible amount of basic living expenses "will be founded
upon an evaluation of the individual facts and circumstances
presented by the taxpayer's case" but "guidelines published
by the Secretary on national and local living expense standards will
be taken into account." Id.
Here,
the Taxpayers argue that the IRS misapplied the regulations and the
Internal Revenue Manual in computing the Taxpayers' basic living
expenses. (Appellants' Br. at 31-36). Specifically, the Taxpayers
argue that the IRS's failure to follow its own procedures caused it
to conclude erroneously that the Taxpayers' ability to pay was
greater than their liability. Taxpayers assert that a proper
application of the procedures would have shown that the their
liability exceeded their ability to pay. Taxpayers thus contend that
the Tax Court's grant of summary judgment to the IRS was improper
because a genuine issue of material fact remained as to the
Taxpayers' ability to pay.
Taxpayers claim that the IRS
calculated the Taxpayers' ability to pay at $141,943. 2
Because this is less than the Taxpayers' liability of $148,745, 3
Taxpayers contend that --according to the IRS's own numbers before
the Tax Court --Revenue Officer Dallas erred when he concluded that
the Taxpayers' ability to pay exceeded their liability. Thus,
Taxpayers assert it was an abuse of discretion for the IRS to deny
Taxpayers' OIC on the basis of erroneous computations that resulted
in the erroneous conclusion that their ability to pay exceeded their
tax liability.
However, before the Tax Court, the IRS
suggested some revised computations and requested remand for further
consideration of Taxpayers' OIC in the event that the IRS's motion
for summary judgment was denied. Notably, the Taxpayers' response to
summary judgment took the position that no remand was needed and
instead asked the Tax Court to decide the case on the arguments
presented. In the words of the Tax Court, the Taxpayers took the
position that "they should not be required to pay any more than
the amount that they offered." Id.
As a result of Taxpayers' position, the Tax Court concluded that
"differences as to the calculation of their ability to pay
installments are not material and do not preclude resolution of this
case on summary judgment." Id.
The Tax Court held that no abuse of discretion occurred in declining
to accept Taxpayers' OIC. The Tax Court noted that the Taxpayers may
submit another OIC and that the Taxpayers' income and expenses may
change.
We affirm the Tax Court's decision. The Tax Court did
not review the question of whether the IRS may have abused its
discretion in calculating the Taxpayers' ability to pay because it
was never asked to do so. Because the issue was not presented to the
Tax Court, it is not properly before us. As noted by the Tax Court,
the Taxpayers may make another OIC to settle their tax liability.
Should the IRS then erroneously compute the Taxpayers' ability to
pay, the Taxpayers may then appeal that decision through the agency
and the Tax Court, allowing each the opportunity to correct any
alleged error before presenting the issue to this court.
C.
Promotion
of Effective Tax Administration
The
IRS is authorized to compromise tax liability for promotion of
effective tax administration in two situations: (1) where "although
collection in full could be achieved, collection of the full
liability would cause the taxpayer economic hardship within the
meaning of §301.6343-1"; and (2) "where compelling
public policy or equity considerations identified by the taxpayer
provide a sufficient basis for compromising the liability."
§301.7122-1(b)(3)(i), (ii). With respect to the former,
§301.6343-1 states that the economic hardship condition applies
if satisfaction of the liability "will cause an individual
taxpayer to be unable to pay his or her reasonable basic living
expenses." §301.6343-1(b)(4)(i). With respect to the
latter, a "[c]ompromise will be justified only where, due to
exceptional circumstances, collection of the full liability would
undermine public confidence that the tax laws are being administered
in a fair and equitable manner." §301.7122-1(b)(3)(ii).
Further, the latter requires the taxpayer "to demonstrate
circumstances that justify compromise even though a similarly
situated taxpayer may have paid his liability in full." Id.
We
hold that the Taxpayers failed to establish that the IRS abused its
discretion on the basis of the promotion of effective tax
administration when it refused the Taxpayers' OIC. The factors
outlined in 26 C.F.R. §301.7122-1(c)(3)(iii)(A-C) that support a
finding of "economic hardship" describe more dire
circumstances than the contentions made by the Taxpayers. The same is
true with respect to the "public policy and equity" claim,
as the examples outlined in 26 C.F.R. §301.7122-
1(c)(3)(iv)(Examples 1-2), are distinguishable from the complaints
set forth by the Taxpayers in this case. Based upon the record before
us, we hold that the IRS did not abuse its discretion by refusing to
accept the Taxpayers' $4,457 OIC.
III.
Conclusion
The
IRS's rejection of the Taxpayers' OIC is reviewable for an abuse of
discretion by this court. However, on this record, we find no abuse
of discretion, and we affirm the judgment of the Tax Court.
1
H.R. Conf. Rep. No. 105-599, at 289 (1998) provides
[T]he
conferees expect that the present regulations will be expanded so as
to permit the IRS, in certain circumstances, to consider additional
factors ( i.e.,
factors other than doubt as to liability or collectibility) in
determining whether to compromise the income tax liabilities of
individual taxpayers. For example, the conferees anticipate that the
IRS will take into account factors such as equity, hardship, and
public policy where a compromise of an individual taxpayer's income
tax liability would promote effective tax administration. The
conferees anticipate that, among other situations, the IRS may
utilize this new authority to resolve longstanding cases by forgoing
penalties and interest which have accumulated as a result of delay in
determining the taxpayer's liability. The conferees believe that the
ability to compromise tax liability and to make payments of tax
liability by installment enhances taxpayer compliance. In addition,
the conferees believe that the IRS should be flexible in finding ways
to work with taxpayers who are sincerely trying to meet their
obligations and remain in the tax system. Accordingly, the conferees
believe that the IRS should make it easier for taxpayers to enter
into offer-in-compromise agreements, and should do more to educate
the taxpaying public about the availability of such agreements.
2
$82,224 + $59,719=$141,943.
$82,224 represents "the
revised future income by allowing additional tax expense" that
the IRS calculated before the Tax Court. (App. at 197-98). Officer
Dallas determined the amount to be $113,568 --a difference of
$31,344.
$59,719 represents the net realizable equity
calculated by the IRS before the Tax Court, which reduced the amount
calculated by Officer Dallas. (App. at 196, n.8). Dallas calculated
this figure to be $77,948 --a difference of $18,229. The difference
is the result of two corrections (1) allowing the Taxpayers to keep
one of their two cars so that Ronald Speltz can drive to work so that
he can earn a living and pay off his tax debt, see
Internal Revenue Manual §5.8.5.3.3; and (2) taking into account
the penalties that would be assessed for early liquidation of their
retirement assets, see
Internal Revenue Manual §5.8.5.3.8.
Officer Dallas
determined that the Taxpayers' total ability to pay was $191,516,
making the total difference in ability-to-pay calculations of the IRS
before the Tax Court $49,573.
3
(App. at 198).
Gary W. McDonough v. Commissioner.
Dkt.
No. 1201-05L , TC Memo. 2006-234, November 1, 2006.
[Appealable,
barring stipulation to the contrary, to CA-9. --CCH.]
[Code
Sec. 6330]
Collection
Due Process (CDP) hearing: Hearing procedures: Abuse of discretion.
--
Failure to delay a Code
Sec. 6330 Collection Due Process
hearing was not an abuse of an IRS Appeals officer's discretion.
Further, the IRS Appeals officer did not abuse her discretion by
rejecting an individual's offer-in-compromise. The Appeals officer's
testimony demonstrated that she carefully considered the facts and
circumstances of the taxpayer's case. Finally, because the taxpayer
presented only the offer-in-compromise as a collection alternative,
there was no other less-intrusive alternative for the Appeals officer
to consider. --CCH.
[Code
Sec. 7122]
Procedure
and administration: Jeopardy and compromise: Closing agreements and
compromises: Offers-in-compromise. --
An IRS Appeals officer
did not abuse her discretion in rejecting a taxpayer's
offer-in-compromise. The liability arose from claimed losses and
credits allocated to him by two partnerships organized and operated
by Walter J. Hoyt III. The Appeals officer correctly concluded that
acceptance of the offer-in-compromise would not promote effective tax
administration. Further, she did not abuse her discretion in
determining that the taxpayer's real property had a value in excess
of the amount indicated by the taxpayer, which was based on an
outdated appraisal, and she correctly determined that the reasonable
collection potential was greater than the taxpayer's offer amount.
--CCH.
Asher B. Bearman, Jaret
R. Coles, Jennifer A. Gellner, and Terri A. Merriam, for petitioner;
Gregory M. Hahn and Thomas N. Tomashek, for respondent.
MEMORANDUM
FINDINGS OF FACT AND OPINION
HAINES, Judge: Petitioner
filed a petition with this Court in response to a Notice of
Determination Concerning Collection Action(s) Under Section
6320 and/or 6330
for 1989 and 1991.1
Pursuant to section
6330(d), petitioner seeks review
of respondent's determination. The sole issue for decision is whether
respondent abused his discretion in sustaining the proposed levy
action.
FINDINGS
OF FACT
The parties' stipulation
of facts and the attached exhibits are incorporated herein by this
reference. The facts stipulated are so found.2
Petitioner resided in Westminster, California, when he filed his
petition. Petitioner's wife, Mary Jane McDonough, filed separate tax
returns for 1989 and 1991. Petitioner is 57 years old and is
currently employed by the Los Angeles City Fire Department.
Petitioner invested in
two partnerships organized and operated by Walter J. Hoyt III (Hoyt).
The partnerships were Timeshare Breeding Syndicate Joint Venture
(TBS) and Timeshare Breeding Service 1989-1 J.V. (TBS 1989-1).
From about 1971 through
1998, Hoyt organized, promoted, and operated more than 100 cattle
breeding partnerships (Hoyt partnerships). Hoyt also organized,
promoted, and operated sheep breeding partnerships. From 1983 until
his removal by the Tax Court in 2000 through 2003, Hoyt was each
partnership's general partner and tax matters partner. From
approximately 1980 through 1997, Hoyt was a licensed enrolled agent,
and as such, he represented many of the Hoyt partners before the IRS.
In 1998, Hoyt's enrolled agent status was revoked. In 2001, Hoyt was
convicted of criminal charges relating to the promotion of these
partnerships.3
Petitioner reported
partnership losses from TBS and TBS 1989-1 on his Form 1040, U.S.
Individual Income Tax Return, for 1989 of $3,560 and $27,509,
respectively, and for 1991 of $33,782 and $59,179, respectively.
Petitioner's claim to the losses resulted in the underreporting of
his 1989 and 1991 taxable income. On May 13, 2002, additional income
taxes and interest were assessed against petitioner for 1989 and 1991
because of the underreporting.4
On August 23, 2002,
respondent mailed petitioner a Letter L-1058, Final Notice of Intent
to Levy and Notice of Your Right to a Hearing. The notice informed
petitioner that respondent proposed to levy on his property to
collect Federal income taxes owed for 1989 and 1991. The notice
advised petitioner he was entitled to a hearing with respondent's
Appeals Office to review the propriety of the proposed levy. On
August 29, 2002, petitioner submitted a Form 12153, Request for a
Collection Due Process Hearing. Petitioner indicated he would pursue
an offer-in-compromise based on effective tax administration and
would provide financial information upon request.
On March 11, 2003,
Appeals received petitioner's original Form 656, Offer in Compromise,
with a completed Form 433-A, Collection Information Statement for
Wage Earners and Self-Employed Individuals, offering to pay $102,000
to compromise his outstanding tax liability. Petitioner offered to
compromise his outstanding 1985-95 tax liabilities on the grounds of
doubt as to liability and effective tax administration. On March 30,
2004, a section
6330 telephone hearing was held
between Settlement Officer Linda Cochran (Ms. Cochran) and
petitioner's attorney, during which petitioner's attorney argued
that: (1) Appeals should accept the offer as a matter of equity and
public policy; (2) the collection activity should be limited to taxes
owed for 1989 and 1991 until the Tax Court decides the pending
interest and penalty cases;5
and (3) petitioner did not have an opportunity to be heard during the
examination process.
On May 3, 2004,
petitioner submitted to Ms. Cochran a revised Form 656 dated March
24, 2004, with a revised completed Form 433-A dated March 22, 2004,
offering to pay $102,000 to compromise a liability of approximately
$230,000 for 1987-96. Petitioner offered to compromise his
outstanding tax liabilities not only for the years subject to the
proposed collection action, but also for the liabilities arising from
his 1987-88, 1990, and 1992-96 tax years.6
The revised offer-in-compromise was submitted on the grounds of doubt
as to liability7
and effective tax administration. Petitioner's revised Form 433-A
reported no future income potential and assets with a total current
value of $232,436, including the following:8
Assets
Current Value
Cash
$52,251
Stock
25,404
Furniture
960
Vehicles
64,821
Real
property(one-half interest)1
89,000
Total
232,436
1
The real property consisted of petitioner and his wife's house in
Westminster,
California
and property they owned in Prescott, Arizona.
The Form 433-A also
reported the following monthly items of income and expenses:
Total
Income
Amount
Wages
$8,110
Total
Living Expenses
Food,
clothing, and miscellaneous
$2,335
Housing
and utilities
2,742
Transportation
705
Health
care
1,747
Taxes
(income)
1,225
Life
insurance
28
Other
expenses (attorney's fees)
728
Total
9,510
Ms. Cochran determined
that petitioner's net realizable equity in each of his reported
assets was the same as its reported value except that she reduced the
reported value of the stock and of each vehicle by 20 percent to
reflect the assets' quick sale value and increased the reported
values of petitioner's house and Arizona property because they had
not been based upon current appraisals and current market prices. Ms.
Cochran summarized petitioner's assets and liabilities as follows:9
Assets
Current Value
Cash
$52,251
Stock
20,323
Furniture
960
Vehicles
51,856
Real
property(one-half interest)
171,500
Total
296,890
Using petitioner's
average income over 38 months, she determined his monthly income was
$11,012, not $8,110. As to the reported expenses, Ms. Cochran
disallowed actual expenses for food, clothing, and miscellaneous;
housing and utilities; and transportation, and applied the national
and local standard allowances to those items. Ms. Cochran increased
the tax expense to reflect the increased amount of determined income.
As adjusted, the following were the determined monthly items of
expenses:
Total
Living Expenses
Amount
Food,
clothing, and miscellaneous
$1,271
Housing
and utilities
1,603
Transportation
471
Health
care
1,747
Taxes
(income)
2,000
Life
insurance
28
Other
expenses (attorney's fees)
728
Total
7,848
Ms. Cochran determined
that petitioner's monthly excess income (i.e., monthly income less
monthly expenses) was $3,164 ($11,012 - $7,848), his income potential
for the next 116 months was approximately $367,024 ($3,164
116 months = $367,024),10
and the reasonable collection potential was $663,914 (income
potential of $367,024 + net realizable equity of $296,890).
On December 16, 2004,
respondent issued petitioner a notice of determination sustaining the
proposed levy with the provision that the collection activity will
not include the collection of interest or penalties until the
interest and penalty cases were decided. The notice concluded
petitioner's $102,000 offer-in-compromise was not an adequate
collection alternative to the proposed levy because petitioner had
the ability to pay $448,762.
The notice, citing
Internal Revenue Manual (IRM) sections 5.8.11.2.1 and 5.8.11.2.2,
stated that petitioner's offer did not meet the Commissioner's
guidelines for consideration as an offer-in-compromise to promote
effective tax administration. Specifically, the notice stated:
Considered under economic
hardship, the taxpayer has the ability to pay all assessed amounts
and still have assets remaining with equity worth over $200,000 in
addition to an income stream of over $350,000. The taxpayer's
representative contended that the taxpayer was being evaluated for
possible disability. The Settlement Officer noted, however, that no
actual disability has been documented to date. The present offer,
therefore, must be considered within the framework of present facts.
As such, the taxpayer failed to document economic hardship with or
without special circumstances, in accordance with Internal Revenue
Manual 5.8.11.2.1.
When considered under
public policy or equity grounds, the taxpayer's Effective Tax
Administration offer proposal fails to meet the criteria for such
consideration under Internal Revenue Manual 5.8.11.2.2. For the
reasons set forth in No. 1 above, the taxpayer's offer as an
Effective Tax Administration offer based on public policy or equity
grounds, therefore, cannot be considered.
In response to the notice
of determination, petitioner filed his petition with this Court on
January 19, 2005.
OPINION
I.
Standard
of Review
Because the underlying
tax liability is not at issue, this Court's review under section
6330 is for abuse of discretion.
See Sego v. Commissioner [Dec.
53,938], 114 T.C. 604, 610
(2000); Goza v. Commissioner [Dec.
53,803], 114 T.C. 176, 182
(2000). This standard does not require the Court to decide whether
petitioner's offer-in-compromise should have been accepted, but
whether respondent's rejection of the offer was arbitrary,
capricious, or without sound basis in fact or law. See Woodral v.
Commissioner [Dec.
53,206], 112 T.C. 19, 23 (1999);
Keller v. Commissioner [Dec.
56,587(M)], T.C. Memo. 2006-166;
Fowler v. Commissioner [Dec.
55,689(M)], T.C. Memo. 2004-163.
II.
Petitioner's
Offer-in-Compromise
Section
7122(a) provides that "The
Secretary may compromise any civil * * * case arising under the
internal revenue laws". Whether to accept an offer-in-compromise
is left to the Secretary's discretion. Fargo v. Commissioner
[2006-1
USTC ¶50,326], 447 F.3d 706,
712 (9th Cir. 2006), affg.[Dec.
55,514(M)] T.C. Memo. 2004-13;
sec. 301.7122-1(c)(1), Proced. & Admin. Regs.
The regulations under
section
7122 set forth three grounds for
the compromise of a tax liability: (1) Doubt as to liability; (2)
doubt as to collectibility; or (3) promotion of effective tax
administration (ETA). Sec. 301.7122-1(b), Proced. & Admin. Regs.
Doubt as to liability and doubt as to collectibility11
are not at issue in this case.
Petitioner proposed an
offer-in-compromise based on ETA, offering to pay $102,000 to
compromise his estimated outstanding tax liability of $230,000.
Petitioner argued that collection of the full liability would create
economic hardship and that compelling public policy or equity
considerations provide a sufficient basis for compromising the
liability. Respondent determined petitioner's reasonable collection
potential was $663,914, and thus, petitioner's offer did not meet the
criteria for an offer-in-compromise based on ETA.
A tax liability may be
compromised on the ground of ETA when: (1) Collection of the full
liability will create economic hardship; or (2) compelling public
policy or equity considerations provide a sufficient basis for
compromising the liability; and (3) compromise of the liability would
not undermine compliance by taxpayers with the tax laws. Sec.
301.7122-1(b)(3), Proced. & Admin. Regs.
A. Economic Hardship
Petitioner asserts that
Ms. Cochran abused her discretion by rejecting his
offer-in-compromise because "There is no indication that SO
Cochran gave any substantive consideration to petitioner's
demonstrated special circumstances or that he would experience a
hardship if required to make a full-payment." In support of this
assertion, petitioner argues Ms. Cochran: (1) Failed to adequately
consider his health issues; (2) failed to consider that because of
current and future health issues petitioner will retire early,
causing his income to decrease; (3) improperly valued petitioner's
real property; and (4) failed to use actual housing and utility
expenses to determine his total monthly living expenses.
Section
301.6343-1(b)(4)(i), Proced. & Admin. Regs., states that economic
hardship occurs when a taxpayer is "unable to pay his or her
reasonable basic living expenses." Section 301.7122-1(c)(3),
Proced. & Admin. Regs., sets forth factors to consider in
evaluating whether collection of a tax liability would cause economic
hardship, as well as some examples. One example involves a taxpayer
who provides full-time care to a dependent child with a serious
long-term illness. A second example involves a taxpayer who would
lack adequate means to pay his basic living expenses if his only
asset was liquidated. The third example involves a disabled taxpayer
who has a fixed income and a modest home specially equipped to
accommodate his disability, and who is unable to borrow against his
home because of his disability. See sec. 301.7122-1(c)(3)(iii),
Examples (1), (2), and (3), Proced. & Admin. Regs. None of
these examples bears any resemblance to this case, but instead all
"describe more dire circumstances". Speltz v.
Commissioner, 454 F.3d 782, 786 (8th Cir. 2006), affg. [Dec.
55,961] 124 T.C. 165 (2005); see
also Barnes v. Commissioner [Dec.
56,570(M)], T.C. Memo. 2006-150.
Nevertheless, we will address petitioner's arguments.
1. Discussion of
Special Circumstances in the Notice of Determination
Petitioner argues that
Ms. Cochran failed "to follow proper procedure by [not]
discussing Petitioner's special circumstances, what equity was
considered in relation to his special circumstances, and how the
special circumstances affected her determination of his ability to
pay." Petitioner infers that, because the notice of
determination did not discuss the special circumstances in detail,
Ms. Cochran failed to adequately take petitioner's circumstances into
consideration.
This Court does not
believe that Appeals must specifically list in the notice of
determination every single fact it considers in arriving at a
determination. See Barnes v. Commissioner, supra. This is
especially true in a case such as this, where petitioner provided Ms.
Cochran with multiple letters and hundreds of pages of exhibits. Ms.
Cochran considered all of the arguments and information presented to
her. Given the amount of information, it would be unreasonable to
require her to specifically address in the notice of determination
every single asserted fact, circumstance, and argument presented. The
fact that all of the information presented was not specifically
addressed in the notice of determination does not indicate an abuse
of discretion.
2. Petitioner's
Medical Expenses and Possible Retirement
Petitioner argues Ms.
Cochran failed to adequately consider his declining health, the
likelihood his health problems will require early retirement, and
possible future increases in medical expenses.
Included in the
documentation provided to Ms. Cochran were letters from petitioner's
doctors stating that he suffers from work-related injuries to his
lumbar, cervical, and thoracic spine, his wrists, and his right
elbow, resulting in multiple medical procedures, including pain
management therapy. Petitioner asserted the severity of his injuries
will force him to retire in the near future and presented a letter
from his doctor indicating his injuries "may" lead to
future disability.
In the notice of
determination, Ms. Cochran stated: "the taxpayer's
representative contended that the taxpayer was being evaluated for
possible disability". However, no actual disability was
documented, and no evidence was produced indicating petitioner's
present or future medical expenses will cause him to be unable to pay
his basic living expenses. As to petitioner's asserted increasing
expenses due to health problems, Ms. Cochran determined that "the
taxpayer failed to document economic hardship" and the present
offer "must be considered within the framework of present
facts".
Petitioner reported
monthly medical expenses of $1,747 on his Form 433-A, which Ms.
Cochran accepted. Petitioner did not report or substantiate future
amounts of increased medical expenses. Given the information
presented to her, it was not arbitrary or capricious for Ms. Cochran
to ignore speculative future medical costs when making her final
determination. Therefore, this Court rejects petitioner's assertion
that Ms. Cochran failed to consider his current and future medical
costs.
Petitioner also asserts
that Ms. Cochran abused her discretion by using a longer period (116
months) for evaluating income from future earnings when petitioner
stated he would retire early because of health problems. Although
petitioner stated he may retire, he did not state that he would
retire by a certain date or that there was a mandatory retirement
age.
Even when a 48-month
period is used to determine future earnings, petitioner's income
potential of $151,872 still exceeds his offer of $102,000.12
Given the information presented, it was not arbitrary or capricious
that Ms. Cochran was not persuaded by petitioner's statements of
possible retirement when evaluating his income from future earnings.
3. Petitioner's
Property
Petitioner argues Ms.
Cochran improperly increased the value of his house and his Arizona
property. On his Form 433-A, petitioner reported the estimated fair
market value of his house was $460,000, with an 80-percent quick-sale
value of $368,000 and an outstanding encumbrance of $369,000.
Petitioner's estimate was based on a professional appraisal dated May
8, 2003. Ms. Cochran testified she did not accept petitioner's
reported value because the appraisal was over a year old and no
longer reflected current value. Instead, she determined a value of
$550,000, using recent comparable sales13
On his Form 433-A,
petitioner reported the estimated fair market value of his Arizona
property at 1015 Fair Street Prescott, AZ 86305, as $87,000, with an
80-percent quick-sale value of $69,600 and an outstanding encumbrance
of zero. Petitioner's estimate was based upon the Yavapai County,
Arizona, Assessor's Office appraisal dated January 31, 2003. Ms.
Cochran discovered petitioner had given her the Yavapai County
Assessor's address, not the property's actual location. The Arizona
property was at 2320 West Live Oak Drive, Prescott, AZ. Ms. Cochran
did not accept petitioner's reported value. Instead, she determined
the property's value at $150,000 using recent comparable sales.
Assuming petitioner's
professional appraisal and assessor valuation should have been
accepted, this Court would not find Ms. Cochran abused her discretion
in rejecting petitioner's offer-in-compromise based on economic
hardship. On his Form 433-A, petitioner reported assets with a total
value of $232,436 and income potential of approximately $151,872.
However, petitioner offered to pay only $102,000 to compromise his
outstanding tax liabilities. This Court finds Ms. Cochran did not
abuse her discretion by rejecting an offer-in-compromise that bore no
relationship to petitioner's own calculations of his ability to pay.
4. Petitioner's Other
"Financial Circumstances"
Petitioner argues that
pursuant to section
7122(c)(2), respondent was
required to include actual housing and utility expenses when
determining his total monthly living expenses, not the Internal
Revenue Service standard allowances. Section
7122(c)(2) provides that the
Secretary shall publish standard allowances for basic living
expenses. The Commissioner may depart from standard allowances where
"such use would result in the taxpayer not having adequate means
to provide for basic living expenses." Sec.
7122(c)(2)(B).
Ms. Cochran determined
petitioner's circumstances "[were] not sufficient to deviate
from the local guideline amounts". Petitioner did not produce
evidence indicating he would not have adequate means to provide for
his basic living expenses. Ms. Cochran did not abuse her discretion
by using standard allowances instead of petitioner's actual housing
and utility expenses.
Petitioner also asserts
Ms. Cochran abused her discretion by failing to inquire about changes
in his financial circumstances after the offer-in-compromise had been
submitted. The record does not indicate petitioner's financial
situation had substantially changed from the date the offer was
submitted on March 24, 2000, through the date of its denial on
December 16, 2004. Ms. Cochran did not abuse her discretion.
5. Encouraging
Voluntary Compliance With the Tax Laws
Any decision by Ms.
Cochran to accept petitioner's offer-in-compromise because of ETA
based on economic hardship must be viewed against the backdrop of
section 301.7122-1(b)(3)(iii), Proced. & Admin. Regs.14
See Barnes v. Commissioner [Dec.
56,570(M)], T.C. Memo. 2006-150.
This section requires Ms. Cochran to deny petitioner's offer if its
acceptance would undermine voluntary compliance with tax laws by
taxpayers in general. Thus, even if this Court were to assume
arguendo that petitioner would suffer economic hardship, a finding
that it declines to make, this Court would not find that Ms.
Cochran's rejection of petitioner's offer was an abuse of discretion.
As discussed below (in our discussion of petitioner's "equitable
facts" argument), acceptance of petitioner's offer would
undermine voluntary compliance with tax laws by taxpayers in general.
B. Public Policy and
Equity Considerations
Petitioner asserts that
"There are so many unique and equitable facts in this case that
this case is an exceptional circumstance" and respondent abused
his discretion by not accepting those facts as grounds for an
offer-in-compromise. In support of his assertion, petitioner argues
that: (1) The longstanding nature of this case justifies acceptance
of the offer-in-compromise; (2) respondent's reliance on an example
in the Internal Revenue Manual was improper; and (3) respondent
failed to consider petitioner's other "equitable facts".
1. Longstanding Case
Petitioner asserts that
the legislative history requires respondent to resolve "longstanding"
cases by forgiving penalties and interest which would otherwise
apply. Petitioner argues that, because this is a longstanding case,
respondent abused his discretion by failing to accept his
offer-in-compromise.
Petitioner's argument is
essentially the same one considered and rejected by the Court of
Appeals for the Ninth Circuit in Fargo v. Commissioner [2006-1
USTC ¶50,326], 447 F.3d at
711-712. See also Keller v. Commissioner [Dec.
56,587(M)], T.C. Memo. 2006-166;
Barnes v. Commissioner, supra. The Court rejects petitioner's
argument for the same reasons stated by the Court of Appeals. The
Court adds that petitioner's counsel participated in the appeal in
Fargo as counsel for the amici. On brief, petitioner suggests
that the Court of Appeals knowingly wrote its opinion in Fargo
in such a way as to distinguish that case from the cases of counsel's
similarly situated clients (e.g., petitioner), and to otherwise allow
those clients' liabilities for penalties and interest to be forgiven.
The Court does not read the opinion of the Court of Appeals in Fargo
to support that conclusion. See Keller v. Commissioner, supra;
Barnes v. Commissioner, supra.
Respondent's rejection of
petitioner's longstanding case argument was not arbitrary or
capricious.
2. The Internal
Revenue Manual Example
Petitioner argues that
respondent erred when he determined that petitioner was not entitled
to relief according to the second example in IRM section
5.8.11.2.2(3). Petitioner asserts that many of the facts in this case
were not present in the example and, therefore, any reliance on the
example was misplaced. Petitioner's argument is not persuasive.
IRM section 5.8.11.2.2(3)
discusses ETA offers-in-compromise based on equity and public policy
grounds and states in the second example:
In 1983, the taxpayer
invested in a nationally marketed partnership which promised the
taxpayer tax benefits far exceeding the amount of the investment.
Immediately upon investing, the taxpayer claimed investment tax
credits that significantly reduced or eliminated the tax liabilities
for the years 1981 through 1983. In 1984, the IRS opened an audit of
the partnership under the provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA). After issuance of the Final
Partnership Administrative Adjustment (FPAA), but prior to any
proceedings in Tax Court, the IRS made a global settlement offer in
which it offered to concede a substantial portion of the interest and
penalties that could be expected to be assessed if the IRS's
determinations were upheld by the court. The taxpayer rejected the
settlement offer. After several years of litigation, the partnership
level proceeding eventually ended in Tax Court decisions upholding
the vast majority of the deficiencies asserted in the FPAA on the
grounds that the partnership's activities lacked economic substance.
The taxpayer has now offered to compromise all the penalties and
interest on terms more favorable than those contained in the prior
settlement offer, arguing that TEFRA is unfair and that the
liabilities accrued in large part due to the actions of the Tax
Matters Partner (TMP) during the audit and litigation. Neither the
operation of the TEFRA rules nor the TMP's actions on behalf of the
taxpayer provide grounds to compromise under the equity provision of
paragraph (b)(4)(i)(B) of this section. Compromise on those grounds
would undermine the purpose of both the penalty and interest
provisions at issue and the consistent settlement principles of
TEFRA. * * *
1 Administration,
Internal Revenue Manual (CCH), sec. 5.8.11.2.2(3), at 16,378. Ms.
Cochran determined that petitioner's case is similar to the example:
Some of the most obvious
similarities --the year, pretty old, and that seems to match or
correlate to the taxpayer's circumstances, that this was a TEFRA
proceeding, that an FPAA was issued, * * * They rejected a settlement
offer that had been previous --that the IRS had previously made. The
taxpayers entered litigation for a number of years. And --and that
there were actions of the TMP that the taxpayer was raising issues of
tax-motivated --TMP's actions as one of his arguments.
The Court agrees with
respondent that the example presents similar circumstances to those
in petitioner's case. Ms. Cochran's testimony accurately reflects
those similarities.
Petitioner is correct in
asserting that not all the facts in his case are present in the
example. However, it is unreasonable to expect that facts in an
example be identical to facts of a particular case before the example
can be relied upon. The Internal Revenue Manual example was only one
of many factors respondent considered. Given the similarities to
petitioner's case, respondent's reliance on that example was not
arbitrary or capricious.
3. Petitioner's Other
"Equitable Facts"
Petitioner argues that
respondent abused his discretion by failing to consider the other
"equitable facts" of this case. Petitioner's "equitable
facts" include reference to: (1) Petitioner's reliance on Bales
v. Commissioner [Dec.
46,099(M)], T.C. Memo.
1989-568;15
(2) petitioner's reliance on Hoyt's enrolled agent status; (3) Hoyt's
criminal conviction; (4) Hoyt's fraud on petitioner; and (5) other
letters and cases. The basic thrust of petitioner's argument is that
he was defrauded by Hoyt and that, if he were held responsible for
penalties and interest incurred as a result of his investment in a
tax shelter, it would be inequitable and against public policy.
Petitioner's argument is not persuasive.
While the regulations do
not set forth a specific standard for evaluating an
offer-in-compromise based on claims of public policy or equity, the
regulations contain two examples. See sec. 301.7122-1(c)(3)(iv),
Examples (1) and (2), Proced. & Admin. Regs. The first
example describes a taxpayer who is seriously ill and unable to file
income tax returns for several years. The second example describes a
taxpayer who received erroneous advice from the Commissioner as to
the tax effect of the taxpayer's actions. Neither example bears any
resemblance to this case. Unlike the exceptional circumstances
exemplified in the regulations, petitioner's situation is neither
unique nor exceptional in that his situation mirrors those of
numerous other taxpayers who claimed tax shelter deductions in the
1980s and 1990s. See Keller v. Commissioner [Dec.
56,587(M)], T.C. Memo. 2006-166;
Barnes v. Commissioner [Dec.
56,570(M)], 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 [2006-1
USTC ¶50,326], 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. [Dec.
55,824(M)] T.C. Memo. 2004-279;
Van Scoten v. Commissioner, 439 F.3d 1243 (10th Cir. 2006),
affg. [Dec.
55,818(M)] T.C. Memo. 2004-275.
Ms. Cochran testified
that she considered all of petitioner's assertions, including the
numerous letters and exhibits. Nevertheless, Ms. Cochran determined
that petitioner did not qualify for an offer-in-compromise.
The mere fact that
petitioner's "equitable facts" did not persuade respondent
to accept petitioner's offer-in-compromise does not mean that those
assertions were not considered. The notice of determination and Ms.
Cochran's testimony demonstrate respondent's clear understanding and
careful consideration of the facts and circumstances of petitioner's
case. The Court finds that respondent's determination that the
"equitable facts" did not justify acceptance of
petitioner's offer-in-compromise was not arbitrary or capricious and
thus was not an abuse of discretion.
The Court finds that
compromising petitioner's case on grounds of public policy or equity
would not enhance voluntary compliance by other taxpayers. A
compromise on that basis would place the Government in the unenviable
role of an insurer against poor business decisions by taxpayers,
reducing the incentive for taxpayers to investigate thoroughly the
consequences of transactions into which they enter. It would be
particularly inappropriate for the Government to play that role here,
where the transaction at issue is participation in a tax shelter.
Reducing the risks of participating in tax shelters would encourage
more taxpayers to run those risks, thus undermining rather than
enhancing compliance with the tax laws. See Barnes v.
Commissioner, supra.
C. Petitioner's Other
Arguments
1. Compromise of
Penalties and Interest in an ETA Offer-in-Compromise
Petitioner advances a
number of arguments focusing on his assertion that respondent
determined that penalties and interest could not be compromised in an
ETA offer-in-compromise. Petitioner argues that such a determination
is contrary to legislative history and is therefore an abuse of
discretion. These arguments are not persuasive.
The regulations under
section
7122 provide that "If the
Secretary determines that there are grounds for compromise under this
section, the Secretary may, at the Secretary's discretion, compromise
any civil * * * liability arising under the internal revenue laws".
Sec. 301.7122-1(a)(1), Proced. & Admin. Regs. In other words, the
Secretary may compromise a taxpayer's tax liability if he determines
that grounds for a compromise exist. If the Secretary determines that
grounds do not exist, the amount offered (or the way in which the
offer is calculated) need not be considered.
Petitioner's arguments
regarding the compromise of penalties and interest do not relate to
whether there are grounds for a compromise. Instead, these arguments
go to whether the amount petitioner offered to compromise his tax
liability was acceptable. As addressed above, respondent's
determination that the facts and circumstances of petitioner's case
did not warrant acceptance of his offer-in-compromise was not
arbitrary or capricious and was thus not an abuse of discretion.
Because no grounds for compromise exist, this Court need not address
whether respondent can or should compromise penalties and interest in
an ETA offer-in-compromise. See Keller v. Commissioner, supra.
2. Information
Sufficient for the Court to Review Respondent's Determination
Petitioner argues that
respondent failed to provide the Court with sufficient information
"so that this Court can conduct a thorough, probing, and
in-depth review of respondent's determinations." Petitioner's
argument is without merit.
Generally, a taxpayer
bears the burden of proving the Commissioner's determinations
incorrect. Rule 142(a)(1); Welch v. Helvering [3
USTC ¶1164], 290 U.S. 111,
115 (1933).16
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, this Court finds that it had more than sufficient
information to review respondent's determination.
3. Scheduling of the
Section
6330 Hearing and Deadline
for Submission of Documents
Petitioner argues that
Ms. Cochran abused her discretion by not allowing his counsel
additional time to prepare for the section
6330 hearing and to submit
additional documentation. Once the section
6330 hearing was scheduled, Ms.
Cochran refused petitioner's request to delay the hearing. However,
Ms. Cochran did extend the deadline for submission of documents.
While petitioner wanted
to delay the section
6330 hearing, he does not allege
that he was unable to adequately prepare for the hearing.
Additionally, petitioner has not identified any documents or other
information that he believes Ms. Cochran should have considered but
that he was unable to produce because of the deadline for submission.
Given the thoroughness and the amount of information submitted, it is
unclear why petitioner needed additional time. This Court does not
believe that Ms. Cochran abused her discretion by establishing a
timeframe for the section
6330 hearing and the submission
of documents.
4. Efficient
Collection Versus Intrusiveness
Petitioner argues that
respondent failed to balance the need for efficient collection of
taxes with the legitimate concern that the collection action be no
more intrusive than necessary. See sec.
6330(c)(3)(C). Petitioner's
argument is not supported by the record.
Petitioner has an
outstanding tax liability. In his section
6330 hearing, petitioner proposed
only an offer-in-compromise. Because no other collection alternatives
were proposed, there were no less intrusive means for respondent to
consider. The Court finds that respondent balanced the need for
efficient collection of taxes with petitioner's legitimate concern
that collection be no more intrusive than necessary.
In reaching these
holdings, the Court has considered all arguments made and, to the
extent not mentioned, concludes that they are moot, irrelevant, or
without merit.
To reflect the foregoing,
Decision will be
entered for respondent.
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
Respondent reserved relevancy objections to many of the exhibits
attached to the stipulations of fact. Fed. R. Evid. 402 provides the
general rule that all relevant evidence is admissible, while evidence
which is not relevant is not admissible. Fed. R. Evid. 401 defines
relevant evidence as "evidence having any tendency to make the
existence of any fact that is of consequence to the determination of
the action more probable or less probable than it would be without
the evidence." While the relevancy of some exhibits is certainly
limited, this Court finds that the exhibits meet the threshold
definition of relevant evidence and are admissible. The Court will
give the exhibits only such consideration as is warranted by their
pertinence to the Court's analysis of petitioner's case.
Respondent
also objected to many of the exhibits on the basis of hearsay. Even
if the Court were to receive those exhibits into evidence, they would
have no impact on our findings of fact or on the outcome of this
case.
3
Petitioner asks the Court to take judicial notice of certain "facts"
in other Hoyt-related cases and apply judicial estoppel to "facts
respondent has asserted in previous [Hoyt-related] litigation".
The Court will do neither.
A judicially noticeable fact is one
not subject to reasonable dispute in that it is either (1) generally
known within the territorial jurisdiction of the trial court or (2)
capable of accurate and ready determination by resort to sources
whose accuracy cannot reasonably be questioned. Fed. R. Evid. 201(b).
Petitioner is not asking the Court to take judicial notice of facts
that are not subject to reasonable dispute. Instead, petitioner is
asking the Court to take judicial notice of the truth of assertions
made by taxpayers and the Commissioner in other Hoyt-related cases.
Such assertions are not the proper subject of judicial notice.
The
doctrine of judicial estoppel prevents a party from asserting a claim
in a legal proceeding that is inconsistent with a position
successfully taken by that party in a previous proceeding. New
Hampshire v. Maine ,
532 U.S. 742, 749 (2001). Among the requirements for judicial
estoppel to be invoked, a party's current litigating position must be
"clearly inconsistent" with a prior litigating position.
Id.
at 750-751. Petitioner has failed to identify any clear
inconsistencies between respondent's current position and his
position in any previous litigation.
4
TBS 1989-1, one of the partnerships in which petitioner invested, was
involved in a consolidated case decided by this Court in Durham
Farms #1, J.V. v. Commissioner
[Dec.
53,883(M)],
T.C. Memo. 2000-159, affd. [2003-1
USTC ¶50,391]
59 Fed. Appx. 952 (9th Cir. 2003). As a result of that case,
computational adjustments were made, and, on May 13, 2002, additional
income tax and interest were assessed against petitioner for 1989 and
1991.
5
On Apr. 28, 2005, a stipulated decision was entered in McDonough
v. Commissioner,
docket. No. 18866-03, an interest abatement proceeding for 1989
through 1991, in which the Court ordered and decided that petitioner
was not entitled to an abatement of interest under sec.
6404(e)
for those years. To date, no decision has been made by the Court in
McDonough
v. Commissioner,
docket No. 15239-04.
6
At the time of the sec.
6330
hearing, the taxes, penalties, and interest for 1987-88, 1990, and
1992-96 were unassessed.
7
The doubt as to liability issues were not argued on brief and not
considered here.
8
Form 433-A states that each asset reported on the form should be
valued at its "Current value", defined on the form as "The
amount you could sell the asset for today".
9
This amount does not include the value of petitioner's pension.
Petitioner testified that under his pension he will receive 82
percent of his current gross income of approximately $102,000 plus an
annual cost of living raise of 2.5 percent
10
In the notice, Ms. Cochran mistakenly used a 116-month factor to
determine petitioner's income potential. On brief, respondent
corrected the mistake by using a 48-month factor as required when a
taxpayer makes a cash offer. As a result, petitioner's correct income
potential was $151,872 ($3,164
48 = $151,872). See Internal Revenue Manual (IRM) sec. 5.8.5.5.
11
Petitioner alleged respondent erred by not finding there was doubt as
to collectibility. However, petitioner did not present information to
substantiate this claim and did not argue it on brief. This Court
concludes petitioner has abandoned this argument.
12
Ms. Cochran testified at trial that she originally erred by
calculating income potential over 116 months and a 48-month factor
was the correct figure to determine income potential because
petitioner made a cash offer.
13
Ms. Cochran testified at trial that she was not required to use a
quick-sale value (80 percent of fair market value) for the real
property because, as she determined, it could reasonably sell within
90 days. The 90-day period was used because, pursuant to the Form
656, the cash offer had to be paid within 90 days from written notice
of acceptance of the offer.
Ms. Cochran credited petitioner
with a half interest in each property because his wife owned a half
interest in each property.
14
The prospect that acceptance of an offer will undermine compliance
with the tax laws militates against its acceptance. See also Barnes
v. Commissioner
[Dec.
56,570(M)],
T.C. Memo. 2006-150.
15
Bales
v. Commissioner
[Dec.
46,099(M)],
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. [Dec.
55,824(M)]
T.C. Memo. 2004-279; Van
Scoten v. Commissioner,
439 F.3d 1243, 1254-1256 (10th Cir. 2006), affg. [Dec.
55,818(M)]
T.C. Memo. 2004-275; Sanders
v. Commissioner
[Dec.
56,083(M)],
T.C. Memo. 2005-163; Hansen
v. Commissioner
[Dec.
55,812(M)],
T.C. Memo. 2004-269.
16
While sec.
7491
shifts the burden of proof and/or the burden of production to the
Commissioner in certain circumstances, this section is not applicable
in this case 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, PWill
K. Ng v. Commissioner.
Dkt.
No. 3883-05L , TC Memo. 2007-8, 93 TCM 675, January 16,
2007.
[Appealable, barring stipulation to the contrary, to
CA-9. --CCH.]
[Code
Secs. 6330
and 7122]
Offer
in compromise: Default: Material breach: Collection Due Process
hearing: Abuse of discretion. --
The IRS did not abuse its
discretion in determining that an individual had defaulted on an
offer in compromise (OIC) and proceeding with collection of his
unpaid tax liability. The taxpayer failed to comply with the express
terms of the agreement by failing to pay his tax liability for well
over a year after it was due, thereby depriving the government of a
material financial benefit. In addition, requiring the taxpayer to
strictly comply with the terms of the agreement would not result in a
disproportionate forfeiture or penalty. Therefore, because the
condition that the taxpayer timely pay his taxes was a material part
of the OIC agreement, it could not be excused. --CCH.
John Gigounas, for
petitioner; Andrew R. Moore, for respondent.
MEMORANDUM
FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Pursuant
to section
6330(d),1
petitioner seeks review of respondent's determination regarding
collection of his 1993, 1994, and 1995 income tax liabilities. The
issue for decision is whether respondent's determination to proceed
with collection was an abuse of discretion.
FINDINGS
OF FACT
Some of the facts have
been stipulated and are so found.2
The stipulation of facts and the attached exhibits are incorporated
herein by this reference. At the time he filed his petition,
petitioner lived in San Francisco, California. As of February 29,
2000, petitioner owed income taxes and additions to tax for 1993,
1994, and 1995 of $113,417.14, $24,228.67, and $18,789.03,
respectively. On January 18, 2000, petitioner filed a Form 656, Offer
in Compromise (OIC), with respondent. On his OIC, petitioner proposed
to settle his 1993, 1994, and 1995 tax liabilities with a cash
payment of $83,779. Petitioner submitted his OIC on the grounds of
doubt as to collectibility. The OIC stated (in relevant part):
Item 8 - By submitting
this offer, I/we understand and agree to the following conditions:
* * * * * * *
(d) I/we will comply with
all provisions of the Internal Revenue Code relating to filing my/our
returns and paying my/our required taxes for 5 years or until the
offered amount is paid in full, whichever is longer.
* * * * * * *
(j) I/we understand that
I/we remain responsible for the full amount of the tax liability,
unless and until the IRS accepts the offer in writing and I/we have
met all the terms and conditions of the offer. The IRS will not
remove the original amount of the tax liability from its records
until I/we have met all the terms of the offer.
* * * * * * *
(o) If I/we fail to meet
any of the terms and conditions of the offer and the offer defaults,
then the IRS may:
--immediately file suit
to collect the entire unpaid balance of the offer
--immediately file suit
to collect an amount equal to the original amount of the tax
liability as liquidating damages, minus any payment already received
under the terms of this offer
--disregard the amount of
the offer and apply all amounts already paid under the offer against
the original amount of the tax liability
--file suit or levy to
collect the original amount of the tax liability, without further
notice of any kind.
Respondent accepted
petitioner's OIC by a letter dated February 25, 2000. That letter
stated, in relevant part:
"Please note that
the conditions of the offer require you to file and pay all required
taxes for five tax years or the period of time payments are being
made on the offer, whichever is longer." The letter also
reiterated the language above from Item 8, paragraph (o) of the OIC.
Petitioner timely paid
the offer amount of $83,779. Petitioner also timely filed returns and
paid the tax owed for 2001, 2003, and 2004. The dispute in this case
focuses on petitioner's failure to timely pay his 2002 tax.
After respondent granted
petitioner's timely requests for extensions, petitioner timely filed
his 2002 Form 1040, U.S. Individual Income Tax Return, on October 15,
2003. That return showed a tax liability of $86,496, payments of
$9,849, and a remaining liability of $77,540.3
With his 2002 return, petitioner submitted a $15,000 payment and a
Form 9465, Installment Agreement Request. On the Installment
Agreement Request, petitioner proposed to make payments of $20,000 on
the 28th of each month.
Respondent neither
accepted nor rejected petitioner's Installment Agreement Request. At
trial, respondent did not contest petitioner's assertion that
respondent never acted on the Installment Agreement Request.
Moreover, it is not clear from the record whether any employee of
respondent ever considered petitioner's Installment Agreement
Request.
On November 14, 2003,
respondent sent petitioner a letter stating that, as part of his OIC,
petitioner agreed to timely file returns and pay his income taxes for
5 years following the date respondent accepted the offer. The letter
warned petitioner that he needed to pay his remaining 2002 tax
liability of $71,984.36 within 30 days "to prevent termination
of * * * [his] Offer In Compromise." The letter stated that if
petitioner did not comply, respondent would terminate the OIC and
would reinstate the original amount of the compromised liability,
reduced for the payment petitioner had already made.
That letter apparently
never reached petitioner and was returned to respondent by the Postal
Service. Respondent sent a nearly identical letter containing the
same warnings to petitioner at his new address on December 10, 2003.
By that time, because of the accrual of interest and penalties,
petitioner's 2002 liability had increased to $72,683.54. Petitioner
does not contend that he did not receive the December 10 letter.
Petitioner did not pay his 2002 tax liability within 30 days of the
December 10 letter or otherwise reply to the letter.
Petitioner received a
letter from respondent dated February 11, 2004. In that letter,
respondent declared petitioner in default of the OIC and stated that
"arrangements to compromise the liability are terminated."
Respondent applied
petitioner's payment on the OIC to his previously compromised
liabilities. This left balances owing for 1993, 1994, and 1995 of
$29,347.57, $33,763.22 and $30,195.96, respectively.
On March 24, 2004,
petitioner made payments totaling $20,000 toward his 2002 tax
liability.
In a letter dated July 7,
2004, respondent sent petitioner a Final Notice --Notice of Intent to
Levy and Notice of Your Right to a Hearing (notice of intent to levy)
for the outstanding 1994, 1995, and 2002 liabilities. The notice of
intent to levy showed a total of $121,218.36 in unpaid taxes,
interest, and penalties.
On July 14, 2004,
petitioner paid respondent a total of $56,731.05, satisfying his 2002
tax liability.
On July 15, 2004,
respondent sent petitioner a Notice of Federal Tax Lien Filing and
Your Right to a Hearing Under IRC 6320 (NFTL). On August 11, 2004,
petitioner filed a Form 12153, Request for a Collection Due Process
Hearing, with regard to the NFTL.
Appeals Officer Lawrence
Dorr was assigned to petitioner's case. Petitioner's hearing
consisted of an in-person meeting with Officer Dorr on January 19,
2005, and subsequent correspondence. During the hearing, petitioner
raised the argument that although he had violated the literal terms
of the OIC by failing to timely pay his 2002 income tax liability,
his breach was not "material" and that respondent therefore
should not have declared him in default on the OIC. Officer Dorr did
not have petitioner's Installment Agreement Request from October 15,
2003, and Officer Dorr did not consider the Installment Agreement
Request in reaching his determination regarding petitioner's
outstanding tax liabilities. On February 23, 2005, respondent issued
to petitioner two Notices of Determination Concerning Collection
Action(s) Under Section
6320 and/or 6330
(notices of determination)
regarding petitioner's outstanding 1993, 1994, 1995, and 2002 tax
liabilities.4
In the notices of determination, respondent sustained the filing of
the lien. In the Attachment to Determination Letter mailed with the
notices of determination, respondent noted petitioner's argument that
he had been improperly declared in default on the OIC and concluded
that petitioner had been properly declared in default.
On February 28, 2005,
petitioner timely petitioned this Court for review of respondent's
determinations under section
6320 and/or 6330.
OPINION
I.
Standard
of Review
In the context of a
section
6320 or 6330
hearing, a challenge to the
Commissioner's determination that a taxpayer was properly deemed in
default on an OIC is not a dispute of the underlying tax liability.
See Robinette v. Commissioner [Dec.
55,698], 123 T.C. 85, 93-94
(2004), revd. on other grounds [2006-1
USTC ¶50,213] 439 F.3d 455
(8th Cir. 2006). Petitioner has not raised any other issue that
amounts to a challenge of the underlying tax liability.
Where the validity of the
underlying tax liability is not properly in dispute, we review the
Commissioner's determination for an abuse of discretion. Sego v.
Commissioner [Dec.
53,938], 114 T.C. 604, 610
(2000); Goza v. Commissioner [Dec.
53,803], 114 T.C. 176, 181
(2000). Accordingly, we review respondent's determination to proceed
with collection of petitioner's 1993, 1994, and 1995 tax liabilities
for an abuse of discretion. An abuse of discretion has occurred if
the "Commissioner exercised * * * [his] discretion arbitrarily,
capriciously, or without sound basis in fact or law." Woodral
v. Commissioner [Dec.
53,206], 112 T.C. 19, 23 (1999).
II.
Analysis
Applied to Offers-in-Compromise
"An accepted offer
in compromise is properly analyzed as a contract between the
parties." Dutton v. Commissioner [Dec.
55,542], 122 T.C. 133, 138
(2004). When reviewing whether the Commissioner abused his discretion
in declaring a taxpayer in default on an OIC, our analysis is
governed by "general principles of contract law." Id.
III.
Parties'
Arguments
The parties have focused
their disputes in this case on two contentious --and familiar
--issues. Petitioner urges that, when analyzing whether respondent
abused his discretion by finding that petitioner defaulted on his
OIC, we apply the "material breach" analysis as applied in
the majority opinion of this Court's decision in Robinette v.
Commissioner, supra at 109-112. Applying that analysis,
petitioner argues that late payment of his 2002 taxes was not
material, and that respondent therefore abused his discretion by
finding that petitioner defaulted on his OIC. Petitioner also urges
that the Court consider his Installment Agreement Request and his
testimony at trial, neither of which is part of the administrative
record that respondent considered at the section
6330 hearing. Petitioner argues
that, under this Court's decision in Robinette, the evidence
is within the scope of this Court's review of a determination under
section
6320 and/or 6330
for an abuse of discretion. On
the basis of his testimony, respondent's internal procedures, and the
Installment Agreement Request, petitioner urges that we should treat
his Installment Agreement Request as having been granted. Had the
Installment Agreement Request been granted, petitioner argues, late
payment of his 2002 taxes would not have been a material breach of
the OIC.
As to the contractual
issue, respondent argues that we should apply the "doctrine of
express conditions" analysis applied by the U.S. Court of
Appeals for the Eighth Circuit in reversing this Court's decision.
Robinette v. Commissioner [2006-1
USTC ¶50,213], 439 F.3d at
462-463. Respondent also argues that, even under a "material
breach" analysis, respondent did not abuse his discretion by
declaring petitioner in default on his OIC because petitioner's late
payment of his 2002 taxes was a material breach. Finally, relying on
the Court of Appeals' opinion in Robinette, respondent argues
that we may not consider evidence beyond the administrative record
when reviewing a determination under section
6320 and/or 6330
for an abuse of discretion.
IV.
Analysis
A. Applicable Contract
Law
1. Material Breach
Analysis
Under the "material
breach" analysis applied by the Tax Court in Robinette,
"`If the plaintiff's breach is material and sufficiently
serious, the defendant's obligation to perform may be discharged. * *
* Not so, however, if the plaintiff's breach is comparatively
minor.'" Robinette v. Commissioner [Dec.
55,698], 123 T.C. at 108 (quoting
TXO Prod. Corp. v. Page Farms, Inc., 598 S.W.2d 791, 793
(Ark.1985)).
The Court went on to
point out:
"In determining
whether a failure to render or to offer performance is material, the
following circumstances are significant:
(a) the extent to which
the injured party will be deprived of the benefit which he reasonably
expected;
(b) the extent to which
the injured party can be adequately compensated for the part of that
benefit of which he will be deprived;
(c) the extent to which
the party failing to perform or to offer to perform will suffer
forfeiture;
(d) the likelihood that
the party failing to perform or to offer to perform will cure his
failure, taking account of all the circumstances including any
reasonable assurances; [and]
(e) the extent to which
the behavior of the party failing to perform or to offer to perform
comports with standards of good faith and fair dealing." [
Id. at 109, quoting 2 Restatement, Contracts 2d, sec. 241
(1981).]
Although the above
circumstances may by themselves indicate the materiality or
nonmateriality of a breach, the standard of materiality is
necessarily somewhat imprecise and flexible, and should be applied in
light of the facts of each case in such a way as to further the
purpose of securing for each party his expectation of an exchange of
performances. 2 Restatement, supra sec. 241 cmt. a.
2. Doctrine of Express
Conditions
Under the "doctrine
of express conditions" analysis endorsed by the Court of Appeals
in Robinette, an express condition of a contract is subject to
a requirement of strict performance. Robinette v. Commissioner
[2006-1
USTC ¶50,213], 439 F.3d at
462 (citing 13 Williston on Contracts, sec. 38:6 (4th ed. 2000)).
When an express condition fails to occur, the performance subject to
that condition does not become due unless the nonoccurrence of the
condition is excused. 2 Restatement, supra sec. 225(1). Under
that doctrine, a failure to meet express conditions may be excused if
they are immaterial to the exchange and if their enforcement would
result in a disproportionate forfeiture. Robinette v. Commissioner
[2006-1
USTC ¶50,213], 439 F.3d at
463 (citing 2 Restatement, supra sec. 229).
Under this analysis, the
performance conditioned upon strict compliance with the terms of the
OIC is the Commissioner's discharge of the full amount of the tax
liability compromised.
3. Application
Considering all the
relevant facts and circumstances, petitioner's significantly late
payment of a substantial tax liability amounts to both a failure of
an express condition of the OIC and a material breach of the OIC.
Therefore, we need not decide which doctrine applies.
By the plain terms of the
OIC, respondent was not obligated to discharge petitioner's unpaid
1993, 1994, and 1995 tax liabilities until petitioner "[complied]
with all provisions of the Internal Revenue Code relating to filing
[his] returns and paying [his] required taxes for 5 years or until
the offered amount is paid in full, whichever is longer." The
Internal Revenue Code required that petitioner pay his outstanding
2002 income tax liability of $77,540 by April 15, 2003. See secs.
6151(a), 6072(a).
He failed to do so. Petitioner failed to pay the bulk of his 2002 tax
liability for well over a year after it was due, eventually
satisfying his tax debt with his final payment of $56,731.05 on July
14, 2004. Moreover, despite petitioner's failure to pay his 2002
taxes, respondent's letters of November 14 and December 10, 2003,
warned petitioner of the potential for default and gave him an
additional opportunity to pay his taxes without defaulting on the
OIC. Petitioner again failed to pay his 2002 tax liability.
Under the circumstances,
petitioner's failure to satisfy his 2002 tax liability amounted to a
"material breach" of the OIC. By withholding a sizable sum
of money from respondent for a substantial period, petitioner
deprived respondent of a material financial benefit under the OIC.
Also, at the time respondent declared petitioner in default on
February 11, 2004, it appeared unlikely that petitioner would cure
his failure. By that time, petitioner had failed to comply with the
terms not only of the OIC but also of respondent's letter of December
10, 2003 (again requesting payment of petitioner's 2002 taxes),
thereby declining an opportunity to "cure" his failure.
By failing to satisfy his
2002 tax liability for over a year, petitioner committed a material
breach of the terms of the OIC. Nor is there any applicable "excuse
of a condition". As explained supra, an express condition
of a contract may be excused if a contracting party can show that (1)
compliance with the condition would result in a disproportionate
forfeiture or penalty, and (2) the condition was not a material part
of the bargain. See 2 Restatement, supra sec. 229. The record
before us does not indicate that strict compliance would have
resulted in a disproportionate forfeiture or penalty to petitioner.
Moreover, for the reasons discussed supra, we find that the
condition that petitioner timely pay his 2002 taxes was a material
part of the OIC.
B. Scope of Review
Consideration of
petitioner's testimony or the Installment Agreement Request would not
alter any of the conclusions above. At the time petitioner filed his
Installment Agreement Request, the Commissioner's internal procedures
provided that the Commissioner could grant installment agreement
requests from a taxpayer in petitioner's situation without declaring
the taxpayer in default. Internal Revenue Manual sec. 5.19.7.3.17.3
(effective October 1, 2001). While it may have been within
respondent's discretion to overlook petitioner's noncompliance with
the OIC and grant petitioner's Installment Agreement Request, we have
long held that the Commissioner's internal procedures do not have the
effect of law and that noncompliance with those procedures does not
render an action of the Commissioner invalid. Vallone v.
Commissioner [Dec.
43,824], 88 T.C. 794, 807-808
(1987).
Petitioner also argues
that because he was never notified that his Installment Agreement
Request was denied, we should treat the request as having been
granted. We disagree. We note that petitioner failed to comply with
the terms of his proposed Installment Agreement by not making the
monthly payments he had offered. Such noncompliance hardly inspires
the Court to find that petitioner's late payment of his 2002 taxes
did not form adequate grounds upon which to find him in default of
his OIC.
Indeed, consideration of
petitioner's testimony would only bolster the conclusions that his
breach was material and that there was no "excuse of conditions"
because reinstatement of his original tax liability would not work a
disproportionate forfeiture upon him. At trial, petitioner admitted
that the terms of the OIC were explained to him by his tax advisers
when he entered into the compromise. Petitioner also admitted that he
realized a capital gain of $416,895 upon the sale of his home in
December 2002. Even after purchasing a new home and remodeling it,
petitioner admitted he had slightly over $100,000 in cash with which
to satisfy his 2002 tax liability. Under such circumstances,
petitioner's late payment of his 2002 taxes seems to be exactly the
sort of "evasion of the spirit of the bargain, lack of diligence
and slacking off, [and/or] willful rendering of imperfect
performance" that typifies a failure of good faith performance
and therefore indicates a material breach. See 2 Restatement, supra
sec. 205 cmt. d. Accordingly, we need not decide herein whether we
may consider evidence beyond the administrative record.
We conclude that
respondent did not abuse his discretion in proceeding with collection
of petitioner's unpaid 1993, 1994, and 1995 taxes.
To reflect the foregoing,
Decision
will be entered for respondent.1
Unless otherwise indicated, all section references are to the
Internal Revenue Code, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
2
The parties initially stipulated that petitioner's 1993 tax liability
was satisfied by the payment petitioner submitted with his
offer-in-compromise. In their briefs, the parties agree that this is
incorrect. Pursuant to Rule 91(e), we do not treat that portion of
the stipulation as a conclusive admission by either party.
3
The figure of $77,540 includes an estimated tax penalty of $893.
4
Petitioner's 2002 tax year is not at issue in this case.ub. L.
105-206, sec. 3001(c), 112 Stat. 727.
Charles
G. Fargo, Elizabeth A. Fargo, Petitioners-Appellants v. Commissioner
of Internal Revenue, Respondent-Appellee.
U.S. Court of Appeals, 9th Circuit; 04-72190, May 8, 2006,
447 F3d 706.
Affirming the Tax Court, 87 TCM 815, Dec.
55,514(M),
TC Memo. 2004-13.
[ Code
Secs. 6330
and 7122]
Collection:
Offer-in-compromise: Abuse of discretion: Economic hardship:
Exceptional circumstances. --
The IRS Commissioner did
not abuse his discretion by rejecting a married couple's
offer-in-compromise based on economic hardship, given their
considerable accumulation of wealth and the speculative nature of
their future medical expenses. The evidence to support the couple's
argument that medical expenses for the husband's progressive dementia
would bankrupt them in about a decade was thin. The couple's ability
to pay basic living expenses would not be impaired by significantly
greater health care expenses. Further, the couple's case, which had
been outstanding for a number of years and accrued large amounts of
interest, did not amount to exceptional circumstances. The statute's
legislative history, although it indicated that Congress hoped the
IRS would be reasonably generous in accepting compromises, did not
show that the IRS decision to reject the offer-in-compromise was an
abuse of discretion. Back references: ¶38,184.11
and ¶41,130.45.
Dennis N. Brager, Law
Offices of Dennis N. Brager, for petitioners-appellants. Randolph L.
Hutter, Department of Justice, for respondent-appellee. Terri A.
Merriam, Peason, Merriam, for the amici.
Before:
Beezer, Hall and Wardlaw, Circuit Judges.
OPINION
H
ALL, Senior Circuit Judge: Charles and Elizabeth Fargo (Taxpayers)
appeal the decision of the Tax Court holding that the Commissioner of
Internal Revenue did not abuse his discretion by rejecting their
offer to pay $7,500 in compromise of the approximately $104,000
interest owed on their 1983 and 1984 federal income tax liabilities.
We affirm.
I.
Facts
More
than twenty years ago, Taxpayers bought interests in two
partnerships: the Jackson & Associates Partnership (Jackson), and
the Smith & Asher Associates Partnership (Smith & Asher). In
1983, Taxpayers claimed a loss of $30,767 attributable to their
interest in Jackson; in 1984, they claimed a $2,749 loss from Jackson
and a $28,996 loss from Smith & Asher. These partnerships were
themselves partners in yet other partnerships (Wilshire West
Associates and Redwood Associates, respectively), which in turn were
associated with a series of tax shelters called the Swanton Coal
Programs. 1
All of the partnerships were subject to the Tax Equity and Fiscal
Responsibility Act (TEFRA) provisions of 26 U.S.C. §§6221-
6234.
The
Swanton Coal Programs were exposed as purely tax-motivated
transactions in Kelley
v. Commissioner of Internal Revenue
[ CCH
Dec. 49,360(M)],
66 T.C.M. (CCH) 1132 (1993), with the Tax Court opining that the
Programs were "nothing more than an elaborate scam to provide
highly leveraged deductions for nonexistent expenses." The Tax
Court's 1993 ruling in Kelley
had an effect on Taxpayers' liabilities for 1983 and 1984, but the
final liability amount would not be determined until six years later,
in 1999. This delay stemmed from the tiered partnership system:
before the effect of the decision in Kelley
could be determined, the Commissioner had to negotiate with the Tax
Matter Partners (TMPs) for Jackson and Smith & Asher. The delay
led to an accumulation of penalties and interest that increased
Taxpayers' total liability to over $127,000. After the assessment was
finalized in 1999, Taxpayers were informed of their liability --and
while they quickly paid their back taxes (in the amount of $23,977),
they refused to pay the remaining interest ($104,287.91). The
Commissioner sent notice of intent to levy, and Taxpayers requested a
Collection Due Process hearing before the Office of
Appeals.
Taxpayers timely submitted to the Appeals Officer an
offer-in-compromise for $7,500 (about seven percent of their
outstanding liability). At the time of the offer, temporary Treasury
Regulations issued pursuant to 26 U.S.C. §7122
governed the acceptance of offers-in-compromise. 2
Temporary Treasury Regulation §301.7122-1T(b)(4) indicated that
a compromise may be
entered into to promote effective tax administration when --
(i) Collection of the
full liability will create economic hardship within the meaning of
§301.6343-1; or
(ii) Regardless of the
taxpayer's financial circumstances, exceptional circumstances exist
such that collection of the full liability will be detrimental to
voluntary compliance by taxpayers; and
(iii) Compromise of the
liability will not undermine compliance by taxpayers with the tax
laws.
Taxpayers'
offer-in-compromise was based on sections (i) and (ii) of this
regulation; they claimed both economic hardship and exceptional
circumstances. They argued that economic hardship would ensue because
Mr. Fargo's medical expenses would soon balloon to $90,000 per year,
and the large interest payout of $104,000 would both cut into their
overall resources and eventually serve to bankrupt them. Taxpayers
additionally claimed exceptional circumstances, arguing that the IRS
dragged its feet in determining their liability, and thus the delay
was not Taxpayers' fault and should not be held against them. Also
under the "exceptional circumstances" rubric, Taxpayers
contended that Congress specifically contemplated longstanding cases
such as theirs when it enacted 26 U.S.C. §7122,
and all but required that such cases be compromised.
The
Commissioner rejected their offer. The Tax Court, reviewing for abuse
of discretion, affirmed. Fargo
v. Comm'r
[ CCH
Dec. 55,514(M)],
87 T.C.M. (CCH) 815 (2004). Taxpayers appeal, again arguing economic
hardship and exceptional circumstances.
II.
Standard of Review
We
review the Tax Court's decision under the same standard as civil
bench trials in district court, see
Milenbach v. Comm'r
[ 2003-1
USTC ¶50,229],
318 F.3d 924, 930 (9th Cir. 2003), and thus review de
novo.
Boyd
Gaming Corp. v. Comm'r
[ 99-1
USTC ¶50,530],
177 F.3d 1096, 1098 (9th Cir. 1999). In this instance, de
novo
review amounts to a fresh analysis of whether the Commissioner abused
his discretion. Abuse of discretion occurs when a decision is based
"on an erroneous view of the law or a clearly erroneous
assessment of the facts." United
States v. Morales,
108 F.3d 1031, 1035 (9th Cir. 1997) (en banc) (citing Cooter
& Gell v. Hartmarx Corp.,
496 U.S. 384, 405 (1990)).
III.
Discussion
A.
Economic Hardship
The
Tax Court held that the Commissioner did not abuse his discretion in
determining that the Taxpayers would not experience economic hardship
if their offer-in-compromise was rejected. We agree.
[1]
The operative statutory and regulatory framework in this case focuses
on basic expenses. The regulation in effect at the time of the
offer-in-compromise, Temporary Treasury Regulation §301.7122-1T(b),
provides that a compromise "may be entered into to promote
effective tax administration when ... [c]ollection of the full
liability will create economic hardship within the meaning of
§301.6343-1." Economic hardship is defined as the inability
of the taxpayer "to pay his or her reasonable basic living
expenses." 26 C.F.R. §301.6343-1(b)(4)(i). The regulation
goes on to specify that:
The determination of a
reasonable amount for basic living expense will be made by the
director and will vary according to the unique circumstances of the
individual taxpayer. Unique circumstances, however, do not include
the maintenance of an affluent or luxurious standard of living.
Id.
These regulations are consistent with provisions of their authorizing
statute, 26 U.S.C. §7122,
which provides explicitly for a case-by-case analysis "designed
to provide that taxpayers entering into a compromise have an adequate
means to provide for basic living expenses." 26 U.S.C.
§7122(c)(2).
[2]
Taxpayers claim that they will suffer economic hardship if they are
required to pay their full $104,000 liability. They argue that Mr.
Fargo's medical expenses, owing to his progressive dementia, will
soon reach $90,000 per year and bankrupt them in about a decade. The
evidence to support their claim is thin. First, the only medical
evidence Taxpayers present is a diagnosis performed by a clinical
neuropsychologist that indicates that Mr. Fargo suffers from Frontal
Lobe Dementia, contributing to a number of impairments of his mental
abilities. This diagnosis, however, mentions nothing of the necessity
for long-term around-the-clock nursing care, nor of medical
expenses.
[3]
Second, the Taxpayers' current monthly medical expenses, as reported
in the Monthly Income and Expense Analysis section of their
offer-in-compromise, total $288. Their claimed future expenses of
$90,000 per year seems predominantly hypothesized from
publicly-available information that is not particularized to Mr.
Fargo. Thus, their future medical expenses are almost wholly
speculative.
[4]
Third and perhaps most importantly, Taxpayers have considerable
assets, and it is highly unlikely that their ability to pay "basic
living expenses" would be impaired even were Mr. Fargo to
require around-the-clock nursing care. Taxpayers have an annual
adjusted gross income of $144,378; bank accounts and individual
retirement accounts worth $126,179; securities worth $594,628; and
equity in real property amounting to $309,000. Their non-income
assets are worth more than a million dollars combined. Furthermore,
their current reported expenses are $5,888 per month, against a
monthly gross income of $8,859. In other words, Taxpayers can afford
significantly greater health care expenses than they currently pay,
even without liquidating any assets. Accordingly, their contention
that their medical expenses will outrun their net worth in ten years
seems to assume a number of premises unsupported by the record, and
indeed feels like nothing more than back-of-the-napkin
multiplication.
[5]
Taxpayers' hardship claim is particularly weak given that the
relevant inquiry is only whether the Commissioner abused his
discretion. Although one might find some ground upon which to quibble
with the Commissioner's decision, it is impossible to hold that the
Commissioner employed an erroneous view of the law or a clearly
erroneous assessment of the facts. Given the speculative nature of
Taxpayers' expenses, their considerable accumulation of wealth, and
the statutory focus on basic expenses, it stretches reason to contend
that the Commissioner abused his discretion in rejecting the
Taxpayers' claim of hardship.
B.
Exceptional Circumstances
Taxpayers'
claim of exceptional circumstances is also unavailing. Taxpayers
argue that the Commissioner either waited too long after the Tax
Court's decision in Kelley
to contact them with the amount of their liability, or simply took
too long to determine their liability in the first place. The
Commissioner responds that any delay is due to the length of time it
took to negotiate a closing agreement with the TMPs of the
partnerships in which Taxpayers had an interest. The delay, argues
the Commissioner, was part and parcel of the legally-required
procedures under TEFRA. Taxpayers rejoin that the legislative history
of 26 U.S.C. §7122
supports their position and in fact mandates the compromise of
longstanding cases such as theirs. We hold that the Tax Court did not
err in determining that the Commissioner did not abuse his discretion
in rejecting Taxpayers' offer-in-compromise on the basis of
exceptional circumstances.
Taxpayers raise three arguments
based on exceptional circumstances. First, they claim that the
Commissioner abused his discretion by applying the Treasury
Regulations incorrectly in light of their authorizing statute, 26
U.S.C. §7122.
3
Second, they claim that the Commissioner abused his discretion by
flouting internal IRS guidelines with regard to offers-in-compromise.
And third, they claim that the Commissioner abused his discretion by
ignoring certain equity and public policy considerations. We reject
each of these arguments.
1.
Incorrect application of the Treasury Regulations in light of their
authorizing statute, 26 U.S.C. §7122
[6]
The bulk of Taxpayers' arguments with regard to exceptional
circumstances concern whether the Commissioner misapplied the
temporary Treasury Regulations issued pursuant to 26 U.S.C. §7122.
Specifically, Taxpayers contest the application of Temporary Treasury
Regulation §301.7122-1T(b)(4), which provides that the
Commissioner may accept an offer-in-compromise if "exceptional
circumstances exist such that collection of the full liability will
be detrimental to voluntary compliance by taxpayers; and ...
[c]ompromise of the liability will not undermine compliance by
taxpayers with the tax laws." Taxpayers contend that, following
the Tax Court's opinion in Kelley,
the delay in determining their liability constitutes exceptional
circumstances.
[7]
Taxpayers cite repeatedly to the legislative history of 26 U.S.C.
§7122,
claiming that whatever regulations it authorizes should be used to
accommodate compromise in long-standing cases where large amounts of
interest have accrued, even though no such specification occurs in
the statutory text. 4
However, as the Supreme Court has previously noted in the taxation
context, "[l]egislative history can be a legitimate guide to a
statutory purpose obscured by ambiguity, but [i]n the absence of a
clearly expressed legislative intention to the contrary, the language
of the statute itself must ordinarily be regarded as conclusive."
Burlington N. R.R. Co. v. Okla. Tax Comm'n, 481 U.S. 454, 461 (1987)
(internal quotation marks omitted) (citing United States v. James,
478 U.S. 597, 606 (1986)). The Tax Court has also recognized the
primary value of statutory text, indicating that "[i]f the
language of the statute is plain, clear, and unambiguous, we
generally apply it according to its terms." Montgomery v. Comm'r
[ CCH
Dec. 55,501],
122 T.C. 1 (2004) (citing, inter alia, United States v. Ron Pair
Enters., Inc. [ 89-1
USTC ¶9179],
489 U.S. 235, 241 (1989)). Here, the authorization provided by the
statute is discretionary on its face, stating that "the
Secretary may compromise any civil or criminal case arising under the
internal revenue laws." 26 U.S.C. §7122(a)
(emphasis added). Discretion is also given to the Secretary of the
Treasury to determine what standards will govern evaluation of an
offer-in-compromise: "The Secretary shall prescribe guidelines
for officers and employees of the Internal Revenue Service to
determine whether an offer-in-compromise is adequate and should be
accepted to resolve a dispute." 26 U.S.C. §7122
(c)(1) (emphasis added).
Taxpayers contend that these
authorizations of discretion are tempered by the statute's
legislative history, which they say specifically contemplates
compromise of longstanding cases where large amounts of fines and
interest accrue. The House Conference Report, for instance, indicates
that:
[t]he conferees
anticipate that, among other situations, the IRS may utilize
this new authority to resolve longstanding cases by forgoing
penalties and interest which have accumulated as a result of delay in
determining the taxpayer's liability. The conferees believe that the
ability to compromise tax liability and to make payments of tax
liability by installment enhances taxpayer compliance. In addition,
the conferees believe that the IRS should be flexible in
finding ways to work with taxpayers who are sincerely trying to meet
their obligations and remain in the tax system. Accordingly, the
conferees believe that the IRS should make it easier for
taxpayers to enter into offer-in-compromise agreements, and should do
more to educate the taxpaying public about the availability of such
agreements.
H.
Conf. Rep. 105-599, at 289 (1998), reprinted in 1998 U.S.C.C.A.N. 288
(emphasis added). The Senate Report, also seeming to indicate that
Congress hoped the IRS would be reasonably generous in accepting
compromise, states that "[i]t is anticipated that the IRS will
adopt a liberal acceptance policy for offers-in-compromise to provide
an incentive for taxpayers to continue to file tax returns and
continue to pay their taxes." S. Rep. 105-174, at 90
(1998).
[8]
These expressions of legislative intent, though relevant in support
of Taxpayers' position, do not meet the threshold for proving the
Commissioner's abuse of discretion. First, the authorizing statute
remains explicitly discretionary, and in performing statutory
interpretation the text must come first. Second, the legislative
history at issue is, as the emphasis above shows, substantially
discretionary as well. Congressional intent here is probative, but it
does not show that the Commissioner made a decision "on an
erroneous view of the law or a clearly erroneous assessment of the
facts." Morales,
108 F.3d at 1035. Indeed, at least one court has held that not only
is §7122
discretionary, but it does not even confer the right to have one's
offer considered. See
Christopher Cross, Inc. v. United States,
363 F.Supp.2d 855, 858 (E.D. La. 2004). In this case, however, we
need not address the exact scope of §7122
in such a manner; we hold only that the Commissioner did not abuse
his discretion.
2.
Flouting of internal regulations with regard to compromise
Taxpayers
suggest that even if the IRS Appeals Officer was correct to determine
that $7,500 was an inadequate offer, he was duty-bound by the
Internal Revenue Manual to negotiate a better deal rather than reject
the offer outright. The portion of the Manual to which Taxpayers cite
does not exist under the current revisions, and they provide no date
for reference. But even taking Taxpayers at their word that the
Manual exhorts Appeals Officers to negotiate before rejecting an
offer-in-compromise, their contention that they were owed a duty
of negotiation is incorrect.
[9]
The Internal Revenue Manual does not have the force of law and does
not confer rights on taxpayers. This view is shared among many of our
sister circuits. See,
e.g.,
Carlson
v. United States
[ 97-2
USTC ¶50,702],
126 F.3d 915, 922 (7th Cir. 1997); Marks
v. Comm'r
[ 91-2
USTC ¶50,521],
947 F.2d 983, 986 n.1 (D.C. Cir. 1991) (holding that "[i]t is
well-settled ... that the provisions of the [Internal Revenue M]anual
are directory
rather than mandatory,
are not codified regulations, and clearly do not have the force and
effect of law" (emphasis added)); see
also Valen Mfg. Co. v. United States
[ 96-2
USTC ¶50,407],
90 F.3d 1190, 1194 (6th Cir. 1996); United
States v. Horne
[ 83-2
USTC ¶9548],
714 F.2d 206, 207 (1st Cir. 1983); Einhorn
v. DeWitt
[ 80-2
USTC ¶9486],
618 F.2d 347, 349-50 (5th Cir. 1980).
[10]
Further, even if the Manual does recommend negotiation, it contains
numerous provisions that vest Appeals Officers with the discretion to
accept or reject offers-in-compromise. See,
e.g.,
I.R.M. §§5.1.9.3.7.1 (Mar. 24, 2005), 8.1.1.2 (Feb. 1,
2003), 8.13.2.11 (Mar. 2, 2006). Each of these sections confers
considerable discretion, militating against the existence of any duty
to negotiate rather than reject. Even if some duty existed attendant
to the Internal Revenue Manual, Taxpayers' argument does not show
that the Commissioner abused his discretion.
3.
Public policy and equity
[11]
Taxpayers' final claim under the exceptional circumstances rubric is
that a decision ruling against them will discourage future
individuals from paying their taxes, because the delay in this case
was outside of their control and thus unfairly punitive. The
effective tax administration ground for compromise in Temporary
Treasury Regulation §301.7122-1T(b)(4) indicates that two
conditions must be met: first, collection of the full liability must
endanger "voluntary compliance by taxpayers," and second,
compromise must "not undermine compliance ... with the tax
laws." In other words, compromise based on exceptional
circumstances must alleviate potential present nonpayment while
discouraging future nonpayment by others. Taxpayers and amici
claim that the delay in this case, because it rested outside of the
control of Taxpayers, should not be held against them. Amici
in particular are worried about the long-reaching effects of our
decision in this case, fearing that individuals will be hoodwinked
into tax shelters and then stung for the interest on their massive
tax liabilities. 5
But this theory, even if plausible, simply does not fit into the
regulatory scheme. In this case, a decision to collect the full
liability will not discourage voluntary tax payment in the future,
and a compromise could undermine the tax laws.
[12]
The crux of Taxpayers' concerns seem to flow from the background
information to the finalized Treasury Regulation §301.7122-1(b),
in which it is stated that:
The IRS and Treasury
Department do not believe that it would promote effective tax
administration to authorize compromise solely on the basis of an
asserted delay by the IRS, particularly delay that does not support
relief under section 6404(e) ....
Compromise
of Tax Liabilities, 67 Fed. Reg. 48,025, 48,027 (July 23, 2002)
(codified at 26 C.F.R. pt. 301). From this statement, as noted supra,
Taxpayers and amici
draw the idea that the standard for offers-in-compromise is now the
same as that for interest abatement, and delay on the part of the IRS
can never constitute a valid ground for compromise. Thus, goes the
argument, this case and others like it are being decided on a
stricter standard than authorized by 26 U.S.C. §7122,
and that stricter standard also frustrates the policy goals of
Treasury Regulation §301.7122-1(b). This argument is undermined,
however, by a quote later in the background information, which states
that
cases in which a taxpayer
believes the liability was caused, in whole or in part, by delay on
the part of the IRS or by the actions of third parties may be
appropriate for compromise under the public policy and equity
standard. Such cases, however, are expected to be rare, as the
taxpayer must identify compelling public policy or equity concerns
that satisfy the standard set forth above.
Id.
(emphasis added). While Taxpayers chose to focus on the fact that
such equity-based compromises will be "rare," the relevant
question is merely whether the Commissioner has relinquished his
discretion to compromise longstanding cases. He has not.
[13]
Furthermore, in this instance the Commissioner has not abused his
discretion by not accepting Taxpayers' offer-in-compromise. There are
a number of factors cutting against Taxpayers which do not lend
themselves towards relief on effective tax administration grounds: 1)
Taxpayers invested in tax shelters, and purely tax-motivated
transactions are frowned upon by the Code; 6
2) no evidence was presented to suggest that Taxpayers were the
subject of fraud or deception; 3) the delay that took place was due
to well-established TEFRA procedures and the inability of Taxpayers'
TMPs to negotiate quickly; and 4) the primary incentives created by
requiring full payment are to encourage taxpayers to research future
investments more carefully and to keep in better contact with
financial agents (such as TMPs). 7
At the very least, the presence of these policy factors indicates
that the Commissioner did not abuse his discretion in rejecting
Taxpayers' offer on grounds of exceptional
circumstances.
AFFIRMED.
1
For a more detailed description of the relevant partnerships and of
the Swanton Coal Tax Shelters, see Fargo
v. Comm'r
[ CCH
Dec. 55,514(M)],
87 T.C.M. (CCH) 815 (2004), and Kelley
v. Comm'r
[ CCH
Dec. 49,360(M)],
66 T.C.M. (CCH) 1132 (1993).
2
The applicable temporary regulation, §301.7122-1T(b)(4), can be
found at 64 Fed. Reg. 39,020 (July 21, 1999). The final regulation,
codified at 26 C.F.R. §301.7122-1, is substantially identical,
but does not apply here. See
Fargo
[ CCH
Dec. 55,514(M)],
87 T.C.M. 815 at n.2.
3
This claim could be construed as an argument that the Treasury
Regulations themselves are in contradiction of their authorizing
statute. However, Taxpayers explicitly disavow that interpretation,
stating that "[i]t is the IRS application
of the regulations to preclude abatement of interest which is an
abuse of discretion." Opening Brief of Petitioner-Appellant at
21 n.8, Fargo
v. Comm'r,
No. 04-72190 (9th Cir. Jul. 13, 2004).
4
Although this case is about compromise, not interest abatement,
Taxpayers claim that the Tax Court incorrectly adopted the standards
utilized in the interest abatement statute (26 U.S.C. §6404)
as controlling whether to accept an offer-in-compromise. However, the
Tax Court does not so much as mention §6404,
let alone apply it. Instead, it merely mentions (and distinguishes)
the interest abatement case Beagles
v. Commissioner
[ CCH
Dec. 55,075(M)],
85 T.C.M. (CCH) 995 (2003). Taxpayers' erroneous line of reasoning
seems to stem from certain background information to the final
Treasury Regulations, which is analyzed infra
Sub section 3.
5
In an error shared with amici,
Taxpayers also assume that the Tax Court's decision here affects all
"similarly situated" parties equally. We review the case
before us, however, for abuse of discretion, which is highly
case-specific. The fact that the Commissioner chose to reject
Taxpayers' offer-in-compromise here does not mean that he will reject
all similar offers in compromise in the future; indeed, that is the
very definition of discretion. In addition, "exceptional
circumstances" is not the only acceptable ground for accepting
an offer-in-compromise. This case does not necessarily preclude other
similarly-situated taxpayers from reaching a compromise with the
IRS.
6
See,
e.g.,
26 U.S.C. §6621
(applying a higher interest rate to past liabilities resulting from
tax-motivated transactions).
7
We note that the Tax Court indicated that even in the absence of an
abuse of discretion by the Commissioner, Taxpayers may have a right
of action against their TMPs for unnecessary delay, perhaps on
grounds of breach of fiduciary duty. Fargo
[ CCH
Dec. 55,514(M)],
87 T.C.M. (CCH) 815.
Orlando
Bujosa v. Commissioner.
Docket
No. 19816-03S . Filed April 26, 2007.
[Code
Sec. 6330]
Tax
Court: Summary opinion: Collection action:Offer-in-compromise: Abuse
of discretion --
An Appeals officer did
not abuse his discretion when he rejected an offer-in-compromise
because the individual failed to respond to his requests for
additional information. Furthermore, after a de novo review of
the individual's tax liability, conducted because the taxpayer had
been entitled to challenge his underlying liability at his hearing,
but had been prevented from doing so by the Appeals officer, the Tax
Court found nothing to indicate that an adjustment to the
individual's assessments was warranted. The individual had stipulated
to the receipt of income for the tax years at issue and had failed to
advance any credible protests against the assessed liability. --CCH.
PURSUANT TO INTERNAL
REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS
PRECEDENT FOR ANY OTHER CASE.
Ralph J. Pocaro, for
petitioner. Joseph J. Boylan, for respondent.
NIMS, Judge: This case
was heard pursuant to the provisions of section
7463 of the Internal Revenue Code
in effect when the petition was filed. Pursuant to section
7463(b), the decision to be
entered is not reviewable by any other court, and this opinion shall
not be treated as precedent for any other case. Unless otherwise
indicated, all subsequent section references are to the Internal
Revenue Code as amended, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
This case arises from a
petition for judicial review filed in response to a Notice of
Determination Concerning Collection Action(s) Under Section
6320 and/or 6330
(notice of determination). The
issues for decision are: (1) Whether petitioner may challenge his
underlying tax liabilities; (2) if he may, whether remand to Appeals
is necessary; and (3) if remand is not necessary, whether
respondent's rejection of petitioner's offer-in-compromise
constitutes an abuse of discretion.
Background
This case was submitted
fully stipulated pursuant to Rule 122, and the facts as stipulated
are so found. The stipulations of the parties, with accompanying
exhibits, are incorporated herein by this reference. At the time he
filed the petition, petitioner resided in Linden, New Jersey.
Petitioner earned
nonemployee compensation from L&P Trucking in the amounts of
$22,815 for 1987 and $20,830 for 1988, which amounts were reported on
Forms 1099-MISC, Miscellaneous Income. In 1988 petitioner also
received $2,341 in wages reported on Form W-2, Wage and Tax Statement
(Form W-2), from The Newark Group and wages reported on Form W-2 in
the amount of $45 from Beacon Hill Club. However, petitioner failed
to file income tax returns for taxable years 1987 and 1988.
Respondent mailed statutory notices of deficiency for 1987 and 1988
to petitioner at his last known address on March 9, 1994. Petitioner
did not request judicial review of these deficiencies.
On February 5, 2002,
respondent issued and mailed a Final Notice - Notice of Intent to
Levy and Notice of your Right to a Hearing regarding taxable years
1987 and 1988 to petitioner. This notice sought to collect taxes and
additions to tax in the amounts of $9,973.28 and $12,467.41,
respectively, for 1987 and $11,091.20 and $11,194.60, respectively,
for 1988. Petitioner timely requested a hearing regarding the
proposed collection action. Petitioner received a hearing consisting
of telephone conferences on November 25, 2002, and March 25, 2003.
The discussions primarily centered around an offer-in-compromise
(OIC), as the Appeals officer advised that petitioner's underlying
tax liabilities would not be considered.
After several attempted
submissions, on April 23, 2003, petitioner finally made a complete
and reviewable offer based on doubt as to collectibility. The Appeals
officer forwarded the OIC to respondent's offer specialist for
consideration. The offer specialist reviewed the offer and made
repeated requests of petitioner for additional information.
Petitioner failed to respond to any of the requests, so respondent's
offer specialist returned the OIC to the Appeals officer. The Appeals
officer subsequently made the determination that the proposed levy
action was appropriate for the taxable years 1987 and 1988, and a
Notice of Determination was issued.
Discussion
Before a levy may be made
on any property or right to property, a taxpayer is entitled to
notice of the Commissioner's intent to levy and notice of the right
to a fair hearing before an impartial officer of the Internal Revenue
Service (IRS) Appeals Office. Secs.
6330(a) and (b), 6331(d).
Taxpayers may raise challenges to "the appropriateness of
collection actions" and may make "offers of collection
alternatives, which may include the posting of a bond, the
substitution of other assets, an installment agreement, or an
offer-in-compromise." Sec.
6330(c)(2)(A). The Appeals
officer must consider those issues, verify that the requirements of
applicable law and administrative procedures have been met, and
consider "whether any proposed collection action balances the
need for the efficient collection of taxes with the legitimate
concern of the person [involved] that any collection action be no
more intrusive than necessary." Sec.
6330(c)(3)(C).
After the IRS Appeals
hearing process, section
6330 gives this Court
jurisdiction to review the Appeals officer's determination. In an
appeal to this Court pursuant to section
6330(d), a taxpayer may raise in
his petition any issues that he raised at the Appeals hearing. See
sec. 301.6330-1(f)(2), Q&A-F5, Proced. & Admin. Regs. Where
the underlying tax liability is properly at issue, we review the
Appeals determination with respect to the existence and amount of tax
liability de novo. Sego v. Commissioner, 114 T.C. 604, 610
(2000); Goza v. Commissioner, 114 T.C. 176, 181-182 (2000).
When the underlying tax liability is not properly at issue, we review
the Appeals officer's determination using an abuse of discretion
standard. Id.
Underlying
Tax Liability
First, we must decide
whether petitioner's underlying tax liabilities are properly at
issue. Petitioner's petition raises, and only raises, the issue of
his underlying tax liabilities. In addition to checking the
"redetermination of deficiency box," he stated that he "was
a truck driver in 1987-1988 and did not have the income so as to owe
these taxes." In his request for a hearing, he indicated on the
Form 12153, Request for a Collection Due Process Hearing, that he had
filed his taxes every year and was not aware of any deficiency. But,
during the course of his hearing and in response to his assertion on
the Form 12153, the Appeals officer told petitioner that his
underlying tax liabilities would not be considered, and the hearing
proceeded accordingly.
A taxpayer may raise the
issue of the underlying tax liability only if he or she did not
receive a statutory notice of deficiency or did not otherwise have an
opportunity to dispute such tax liability. Sec.
6330(c)(2)(B). Actual receipt of
the notice of deficiency is required. Tatum v. Commissioner,
T.C. Memo. 2003-115. Generally, no challenge to the underlying tax
liability is allowed where there is evidence that a notice of
deficiency was mailed to the taxpayer and no factors are present to
rebut the presumption of delivery. See Sego v. Commissioner, supra
at 611. Where the taxpayer denies receipt of the notice of deficiency
and the Commissioner provides only a copy addressed to the taxpayer
and no evidence of its actual mailing, receipt for purposes of
section
6330(c)(2)(B) is not presumed.
Calderone v. Commissioner, T.C. Memo. 2004-240. In the present
case, petitioner asserted that he was not aware of any deficiency.
Respondent has offered only copies of the notices of deficiency
addressed to petitioner and concedes on brief that actual delivery
cannot be proven. Therefore, petitioner was entitled to challenge his
underlying tax liabilities in his hearing, and the Appeals officer
erred in not allowing petitioner's arguments on that issue.
Our de novo review of
respondent's determination with respect to petitioner's underlying
tax liabilities permits us to consider and resolve the issue. See
Priestly v. Commissioner, T.C. Memo. 2003-267, affd. 125 Fed.
Appx. 201 (9th Cir. 2005). In the case before us, remand to Appeals
for consideration of petitioner's tax liabilities would be neither
necessary nor productive. See Lunsford v. Commissioner, 117
T.C. 183, 189 (2001); Sapp v. Commissioner, T.C. Memo.
2006-104; Priestly v. Commissioner, supra. Further, a remand
to respondent's Appeals Office would, more likely than not,
needlessly delay the collection of petitioner's tax liabilities plus
related additions to tax and interest, which, if the proper amounts
have been assessed, are already long overdue. Priestly v.
Commissioner, supra.
Upon examination of the
record, we find that petitioner has offered nothing to indicate that
any adjustment to respondent's assessments for 1987 and 1988 is
warranted. Petitioner stipulated to the receipt of income from the
multiple sources for both taxable years at issue. Further, petitioner
advanced nothing but nebulous protests against the assessed tax
liabilities. His petition simply asserted that he "was a truck
driver in 1987-1988 and did not have the income so as to owe these
taxes." His Form 12153 stated only that he had filed his taxes
every year, that he was not aware of the liabilities, that he never
owned a company, that he did not have any records reflecting the
15-year-old liabilities, and that he wanted to fix the matter.
Petitioner's challenge lacks any substance, and the underlying tax
liabilities stand as assessed by respondent.
Levy
Action
Having established that
petitioner's tax liabilities were as determined by respondent under
our de novo review standard, we now review respondent's determination
to proceed with collection under an abuse of discretion standard.
Under this standard, a determination will be affirmed unless action
was taken that was arbitrary or capricious, lacks sound basis in
fact, or is not justifiable in light of the facts and circumstances.
Mailman v. Co mm issioner, 91 T.C. 1079, 1084 (1988).
In the case before us,
petitioner did not expressly challenge the Appeals officer's
determination with respect to collection, so we must first decide
whether this determination is even properly before the Court. In his
petition, petitioner checked the box for redetermination of a
deficiency and explicitly only raised the issue of his tax
liabilities. While Rule 331(b)(4) provides that any issue not raised
in the petition is deemed conceded, the circumstances in this case
allow us to consider the issue. Consideration of the issue is proper
so long as petitioner's failure to provide notice to respondent did
not prejudice respondent. See Pagel, Inc. v. Commissioner, 91
T.C. 200, 212 (1988), affd. 905 F.2d 1190 (8th Cir. 1990); Martin
v. Commissioner, T.C. Memo. 2003-288, affd. 436 F.3d 1216 (10th
Cir. 2006). Here, the notice of determination concerning collection
action was attached to the petition. Respondent acknowledged on brief
that this was a "Petition for Lien or Levy Action under Code
Section 6320(c) or 6330(d)."
Further, respondent contemplated a challenge to the Appeals officer's
rejection of petitioner's OIC, which was the only subject of the
hearing. So, respondent cannot be considered surprised or prejudiced
by the Court's consideration of this issue.
We must therefore decide
whether respondent's rejection of petitioner's offer-in-compromise
was an abuse of discretion. Section
7122 provides respondent with the
authority to grant an offer-in-compromise as an alternative to
collection action. Respondent grants an OIC when there is a doubt as
to the actual tax liability, doubt as to collectibility, or for other
purposes relating to effective tax administration. Sec. 301.7122-1,
Proced. & Admin. Regs.; 1 Administration, Internal Revenue Manual
(CCH), sec. 5.8.1.1.2, at 16,253.
Petitioner's offer based
on doubt as to collectibility was taken under consideration by
respondent's offer specialist. Doubt as to collectibility "exists
in any case where the taxpayer's assets and income are less than the
full amount of the liability." Sec. 301.7122-1(b)(2), Proced. &
Admin. Regs. Evaluation of an OIC based on doubt as to collectibility
requires complete financial information from the taxpayer. Roman
v. Commissioner, T.C. Memo. 2004-20. Where the taxpayer fails to
provide the necessary information, rejection of the OIC does not
constitute an abuse of discretion. See id.; Willis v.
Commissioner, T.C. Memo. 2003-302. In this case, respondent's OIC
specialist made, and petitioner failed to respond to, repeated
requests for additional information. Therefore, we hold that there
was no abuse of discretion in the rejection of petitioner's OIC.
Respondent's determination to proceed with collection is upheld.
Decision will be
entered for respondent.
Martin
and Sharon Smith v. Commissioner.
Dkt.
No. 3876-05L , TC Memo. 2007-73, 93 TCM 1047, March 29,
2007.
[Appealable, barring stipulation to the contrary, to
CA-9. --CCH.]
[Code
Secs. 6330
and 7122]
Compromises:
Procedure: Fact finding: Rejection of offer. --
The IRS Appeals Office
did not abuse its discretion in rejecting a married couple's
offer-in-compromise where the taxpayers had underreported their
income for several tax years due to claimed losses and credits from
Hoyt partnership tax shelter investments. The IRS Appeals officer
considered all of the evidence submitted, and reasonably applied the
guidelines for evaluating an offer-in-compromise. The offer was
unacceptable because, among other reasons, the taxpayers were not
forthcoming in establishing their financial status, acceptance of the
offer would undermine compliance with the tax laws by taxpayers in
general, and the taxpayers had the financial wherewithal to pay more
than the offered amount. The officer adequately considered the
taxpayers' unique facts and circumstances, and the taxpayers did not
show that requiring them to pay more than the offer amount would
result in an economic hardship. Public policy did not demand that the
taxpayers' offer be accepted because they were victims of fraud, and
acceptance of the offer would not enhance voluntary compliance by
other taxpayers. --CCH.
[Code
Sec. 6404]
Abatements:
Delays in resolving tax matters. --
The IRS Appeals Office
did not abuse its discretion in rejecting a request by a husband and
wife for abatement of interest related to an offer-in-compromise on
an assessed tax liability due to losses and credits claimed from
investment in Hoyt partnership tax shelters. The taxpayers' argument
that the Appeals officer failed to consider whether they qualified
for an abatement of interest for reasons other than those in Code
Sec. 6404(e) was rejected.
Nothing suggested that the officer believed that the sole remedy for
interest abatement rested on the rules of Code
Sec. 6404(e), and the officer
would have abated interest had she agreed to let the taxpayers
compromise by paying less than the interest amount included within
their liability. There was no evidence supporting an abatement.
--CCH.
Wendy S. Pearson, Terri
A. Merriam, Jennifer A. Gellner, Jaret R. Coles, and Asher B.
Bearman, for petitioners; Thomas N. Tomashek and Gregory M. Hahn, for
respondent.
Wendy S. Pearson,
Terri A. Merriam, Jennifer A. Gellner, Jaret R. Coles, and Asher
B. Bearman, for petitioners.1
Thomas N. Tomashek and Gregory M. Hahn, for respondent.
MEMORANDUM FINDINGS OF
FACT AND OPINION
LARO, Judge:
Petitioners Martin Smith (Smith) and Sharon Smith petitioned the
Court under section
6330(d) to review the
determination of respondent's Office of Appeals (Appeals) sustaining
a proposed levy related to petitioners' assessed Federal income tax
liability (inclusive of additions to tax, penalties, and interest)
for 1984, 1985, 1986, and 1991; that liability totaled $79,461.
Petitioners argue that the proposed levy is improper because, they
argue, Appeals was required to accept their offer to pay $11,552 to
compromise their assessed and unassessed Federal income tax liability
(inclusive of additions to tax, penalties, and interest) for 1984
through 1996; petitioners estimate that liability to total $265,023.
We decide whether Appeals abused its discretion in rejecting
petitioners' offer. We hold it did not.2
FINDINGS OF FACT
The parties filed with
the Court stipulations of fact and accompanying exhibits. The
stipulated facts are found accordingly. Petitioners are husband and
wife, and they resided in Tucson, Arizona, when their petition was
filed.
On their Federal income
tax returns beginning in 1984, petitioners claimed losses and credits
from their investment in several partnerships organized and operated
by Walter J. Hoyt III (Hoyt). The partnerships were subject to the
unified audit and litigation procedures of the Tax Equity and Fiscal
Responsibility Act of 1982, Pub. L. 97-248, sec. 402(a), 96 Stat.
648. Hoyt was convicted on criminal charges relating to the promotion
of these partnerships.
Petitioners' claim to the
partnerships' losses and credits resulted in the underreporting of
their personal 1984, 1985, 1986, and 1991 Federal income taxes. On
November 13, 2003 respondent mailed to petitioners a Letter 1058,
Final Notice of Intent to Levy and Notice of Your Right to a Hearing.
The notice informed petitioners that respondent proposed to levy on
their property to collect amounts owed as to their 1984, 1985, 1986,
and 1991 Federal income taxes; all of these amounts were attributable
to the just referenced underreporting of income. The notice advised
petitioners that they were entitled to a hearing with Appeals to
review the propriety of the proposed levy.
On December 2, 2003,
petitioners requested the referenced hearing with Appeals. The
request asserted in relevant part that the proposed levy was
inappropriate because: (1) Petitioners were entitled to compromise
their liability on account of effective tax administration, given,
they claimed, that the Hoyt partnership cases were "longstanding"
and petitioners were the "unwitting victims" of fraud
perpetrated by Hoyt; (2) interest was required to be abated under
section
6404(e), an issue, petitioners
noted, then pending before the Court of Appeals for the Sixth Circuit
in Mekulsia v. Commissioner [2005-1
USTC ¶50,108], 389 F.3d 601
(6th Cir. 2004), affg. [Dec.
55,152(M)] T.C. Memo. 2003-138;
(3) the Commissioner's imposition of tax-motivated interest for 1984
through 1986 was inappropriate given the facts of the case; and (4)
petitioners were not given an opportunity to be heard during the
examination of the Hoyt partnerships in that, they claimed, they were
represented by Hoyt who had an impermissible conflict of interest and
was thus incapable of representing them properly.
On May 12, 2004, Nancy
Driver (Driver), a settlement officer in Appeals, contacted
petitioners with respect to their request by mailing a letter to
Merriam, petitioners' representative as stated on a power of
attorney. The letter, a copy of which was mailed to petitioners,
stated that Driver would contact petitioners to schedule the hearing
and asked petitioners to tender the following items to Driver before
the Hearing so that she could explore a resolution: "Your
proposal to resolve the outstanding balance"; "Any
documentation supporting your position on any issue you wish to
discuss"; "Completed and signed Form 433-A, Collection
Information Statement for [Wage Earners and Self-Employed]
Individuals, along with supporting documentation"; "Completed
and signed Form 433-B, Collection Information Statement for
Businesses, along with supporting documentation. This is required
only if you own or have interest in a business". The letter
stated that petitioners should provide the referenced information to
Driver by June 2, 2004. Pursuant to the request of Gellner, who was
also listed in a power of attorney as petitioners' representative,
Driver extended the June 2, 2004, date until June 30, 2004.
On June 29, 2004,
petitioners submitted to Driver four letters with accompanying
exhibits; a signed and completed Form 656, Offer in Compromise, with
an accompanying payment of a related $150 fee; and a signed and
completed Form 433-A with supporting documentation. Through this
submission, petitioners offered to pay the Commissioner $11,552 to
compromise what they estimated was their $265,023 assessed and
unassessed Federal income tax liability (inclusive of additions to
tax, penalties, and interest) for 1984 through 1996. Each of the four
letters included in the submission related to a different topic
designated by petitioners as such, the four topics being: (1) A
presentation of the facts and arguments related to the hearing,
including an explanation of the offer amount and medical and
retirement considerations; (2) a delay in the determination and
assessment of their liabilities due to the criminal investigation of
Hoyt; (3) effective tax administration; and (4) tax-motivated
interest under section
6621(c). The Form 656 was signed
by each petitioner on June 14, 2004, and stated that petitioners were
making their offer-in-compromise on the grounds of effective tax
administration and doubt as to collectibility. The Form 433-A was
signed by each petitioner on June 14, 2004, and reported that
petitioners owned the following assets with a current value (net of
reported liabilities) of $124,038:3
Checking
account $933
Money
market account 576
IRAs1:
Vanguard
25,529
Zurich
31,161 56,690
______________
Stock
of GE/Motorola 8,165
Vehicles:
Ford
Ranger 7,085
Less
loan balance 10,997
______________
(3,912 )
Mercury
Grand Marquis 4,920 1,008
______________
Home2
160,648
Less
mortgage loan balance 103,982 56,666
______________
______________
124,038
1The
reported values of the IRAs (individual retirement
accounts)
equal 70 percent of their account balances. Petitioners
reported
the lesser values to reflect their liability for income
tax
on a liquidation of the accounts.
2The
reported value equals the home's assessed value.
The Form 433-A reported
that petitioners had no disposable income, listing that their monthly
income totaled $3,223 and their monthly living expenses totaled
$4,042.4
The income was reportedly attributable to Smith's receipt of Social
Security and/or a pension.5
The living expenses were reportedly attributable to the following
items:
Food,
clothing, and miscellaneous: $801
Housing
and utilities:
11,360
Transportation:
2715
Health
care:
3262
Taxes
(income and FICA): 130
Life
insurance: 259
Attorney
fees:
4479
______________
4,006
1
The Form 433-A reports that petitioners' monthly payment on
their
mortgage loan was $899 and that they were required to
make
these payments until 2026.
2
The Form 433-A reports that petitioners' monthly payment on
their
car loan was $349.
3
Petitioners told Driver that they were experiencing various
medical
complications and were required to take various
prescription
and other medications. Petitioners never claimed
to
Driver that the monthly cost of these complications and
medications
exceeded their reported monthly health care costs.
4
These attorney fees are apparently related to this
litigation.
By way of a letter dated
October 18, 2004, Driver notified petitioners that she had scheduled
their hearing (requested by petitioners as a telephonic hearing) for
November 18, 2004. The letter also stated that Driver had learned
from third parties that petitioners apparently owned certain assets
which were not reported on their Form 433-A, specifically, an IRA
valued at $54,405 with Indianapolis Life Insurance Company
(Indianapolis Life); two lots of real estate sited in Apache County,
Arizona; and one lot of real estate sited in Pima County, Arizona. In
reply to the letter's request that petitioners explain why the
referenced assets were not included on the Form 433-A, petitioners,
on October 28, 2004, acknowledged that they owned the IRA with
Indianapolis Life and the lots of real estate and that they had left
those assets off of their Form 433-A. Petitioners stated in the
letter that the IRA had been overlooked in preparing the Form 433-A.
Petitioners stated in the letter that they had forgotten about the
three unreported lots which, they stated, were worthless.
On November 18, 2004,
Driver held the scheduled hearing with petitioners' counsel. At that
time, Smith and his wife were 68 and 64 years old, respectively.
Driver made the following calculation in determining that
petitioners' net realizable equity in assets was $161,844:
Assets and
Liabilities Reported on Form 433-A
IRAs:
Vanguard
25,529
Zurich
31,161 56,690
______________
Stock
of GE/Motorola 8,165
Home
160,648
Less
mortgage loan balance 103,982 56,666
____________________________
121,521
Other Assets
IRA:
Indianapolis Life
138,823
Lots
in Apache and Pima Counties
21,500
______________
40,323
______________
Net
realizable equity in assets 161,844
1
This amount equals 70 percent of the $55,462 balance in this
account
as of Sept. 30, 2004.
2
This amount equals $1,300 less than the total assessed values of
these
lots.
Driver calculated
petitioners' reasonable collection potential to be $161,844, the same
amount as their net realizable equity in assets; in other words,
Driver determined that petitioners had no disposable income.
On January 26, 2005,
Appeals issued petitioners the notice of determination sustaining the
proposed levy as to 1984, 1985, 1986, and 1991. The notice reflects
Driver's conclusion that petitioners' offer of $11,552 was inadequate
under the applicable guidelines and that the proposed levy balances
the need for the efficient collection of taxes with the concern that
the proposed levy be no more intrusive than necessary. As to the
former conclusion, the notice states:
Taxpayers challenged the
proposed enforcement collection action by levy.
Taxpayers submitted an
Offer in Compromise, Doubt as to Collectibility and Effective Tax
Administration, in the amount of $11,552.00 during the CDP
proceedings. The OIC was not an acceptable collection alternative and
was rejected.
Taxpayers did not
disclose all assets on the Collection Information Statements attached
to the offer. They did not disclose assets which constituted about
25% of their net realizable equity. By not disclosing their complete
financial status, this Appeals Officer is concerned about their good
faith effort to resolve this matter. They were not forthcoming in
establishing their financial status.
This Appeals Officer
concluded the offer should not be accepted under doubt as to
collectibility because taxpayers have sufficient assets to pay the
assessed liability. Further, the offer should not be accepted under
effective tax administration as it would undermine compliance by
taxpayers with the tax laws.
Taxpayers included in the
offer years that have unresolved TEFRA issues, thus the liability has
not been assessed. During the Collection Due Process proceedings
taxpayers did not resolve the years with TEFRA issues by entering
into settlement agreements.
Taxpayers did not propose
any other acceptable collection alternatives. Taxpayers declined to
pay the outstanding liability.
The proposed collection
enforcement action by levy is valid and appropriate.
The notice further
states:
The proposed collection
action by levy balances the need for the efficient collection of
taxes with the concern that collection action be no more intrusive
than necessary. Taxpayer [sic] did not propose any acceptable
collection alternatives.
The notice of
determination also addresses the other claims made by petitioners in
their request for a hearing, in support of their assertion that the
proposed levy was inappropriate. First, the notice notes that the
Court of Appeals for the Sixth Circuit held in Mekulsia v.
Commissioner [2005-1
USTC ¶50,108], 389 F.3d 601
(6th Cir. 2004), that the taxpayer was not entitled to an abatement
of interest. Second, the notice states that petitioners never
established that their facts did not support the imposition of
interest under section
6621(c). Third, the notice
indicates that petitioners never discussed at the hearing their claim
that they were not given an opportunity to be heard during the
examination and, hence, that Driver considered that issue to be
abandoned.
OPINION
This case is yet another
in a long list of cases brought in this Court involving respondent's
proposal to levy on the assets of a partner in a Hoyt partnership to
collect Federal income taxes attributable to the partner's
participation in the partnership. In each of the other prior cases,
all of which were brought by Merriam as either counsel or co-counsel,
this Court has sustained respondent's right to levy on the assets of
the petitioning taxpayer (or, in the case of joint returns, the
petitioning taxpayers). See Hansen v. Commissioner [Dec.
56,861(M)], T.C. Memo. 2007-56;
Catlow v. Commissioner [Dec.
56,850(M)], T.C. Memo. 2007-47;
Estate of Andrews v. Commissioner [Dec.
56,831(M)], T.C. Memo. 2007-30;
Freeman v. Commissioner [Dec.
56,829(M)], T.C. Memo. 2007-28;
Johnson v. Commissioner [Dec.
56,830(M)], T.C. Memo. 2007-29;
Abelein v. Commissioner [Dec.
56,825(M)], T.C. Memo. 2007-24;
Hubbart v. Commissioner [Dec.
56,827(M)], T.C. Memo. 2007-26;
Carter v. Commissioner [Dec.
56,826(M)], T.C. Memo. 2007-25;
Ertz v. Commissioner [Dec.
56,816(M)], T.C. Memo. 2007-15;
McDonough v. Commissioner [Dec.
56,665(M)], T.C. Memo. 2006-234;
Lindley v. Commissioner [Dec.
56,659(M)], T.C. Memo. 2006-229;
Blondheim v. Commissioner [Dec.
56,643(M)], T.C. Memo. 2006-216;
Clayton v. Commissioner [Dec.
56,612(M)], T.C. Memo. 2006-188;
Keller v. Commissioner [Dec.
56,587(M)], T.C. Memo. 2006-166;
Barnes v. Commissioner [Dec.
56,570(M)], T.C. Memo. 2006-150.
As was equally true as to the taxpayers in many of those prior cases,
petitioners here made a lowball offer to Appeals to compromise their
tax debt and now argue in this Court that Appeals's rejection of
their offer was an abuse of discretion because, generally speaking,
they claim that the Appeals officer did not appreciate the specifics
of their case.
Where an underlying tax
liability is not at issue in a case invoking our jurisdiction under
section
6330(d), we review a
determination of Appeals for abuse of discretion. See Sego v.
Commissioner [Dec.
53,938], 114 T.C. 604, 610
(2000). We reject the determination of Appeals only if the
determination was arbitrary, capricious, or without sound basis in
fact or law. See Cox v. Commissioner [Dec.
56,506], 126 T.C. 237, 255
(2006); Murphy v. Commissioner [Dec.
56,232], 125 T.C. 301, 308, 320
(2005), affd. 469 F.3d 27 (1st Cir. 2006). Where we decide the
propriety of Appeals's rejection of an offer-in-compromise, as we do
here, we review the reasoning underlying that rejection to decide
whether the rejection was arbitrary, capricious, or without sound
basis in fact or law. We do not substitute our judgment for that of
Appeals, and we do not decide independently the amount that we
believe would be an acceptable offer-in-compromise. See Murphy v.
Commissioner, supra at 320; Fowler v. Commissioner [Dec.
55,689(M)], T.C. Memo. 2004-163;
Fargo v. Commissioner [Dec.
55,514(M)], T.C. Memo. 2004-13,
affd. [2006-1
USTC ¶50,326] 447 F.3d 706
(9th Cir. 2006). Nor do we usually consider arguments, issues, or
other matters raised for the first time at trial, but we limit
ourselves to matter brought to the attention of Appeals. See Murphy
v. Commissioner, supra at 308; Magana v. Commissioner
[Dec.
54,765], 118 T.C. 488, 493
(2002). "[E]vidence that * * * [a taxpayer] might have presented
at the section
6330 hearing (but chose not to)
is not admissible in a trial conducted pursuant to section
6330(d)(1) because it is not
relevant to the question of whether the Appeals officer abused her
discretion." Murphy v. Commissioner, supra at 315.6
Section
6330(c)(2)(A)(iii) allows a
taxpayer to offer to compromise a Federal tax debt as a collection
alternative to a proposed levy. Section
7122(c) authorizes the
Commissioner to prescribe guidelines to determine when a taxpayer's
offer-incompromise should be accepted. The applicable regulations,
section 301.7122-1(b), Proced. & Admin. Regs., list three grounds
on which the Commissioner may accept an offer-in-compromise of a
Federal tax debt. These grounds are "Doubt as to liability",
"Doubt as to collectibility", and to "Promote
effective tax administration". Sec. 301.7122-1(b)(1), (2), and
(3), Proced. & Admin. Regs.
Petitioners argue in
brief that Appeals (acting through Driver) abused its discretion by
not accepting their offer to compromise their tax liability on the
ground of effective tax administration in that, they assert, Driver
did not adequately consider the specifics of their case.7
The Commissioner may compromise a tax liability to promote effective
tax administration when collection of the full liability will create
economic hardship and the compromise would not undermine compliance
with the tax laws by taxpayers in general. See sec.
301.7122-1(b)(3)(i), (iii), Proced. & Admin. Regs. If a taxpayer
does not qualify for effective tax administration compromise on
grounds of economic hardship, the regulations also allow the
Commissioner to compromise a tax liability to promote effective tax
administration when the taxpayer identifies compelling considerations
of public policy or equity. See sec. 301.7122-1(b)(3)(ii), Proced. &
Admin. Regs.
Driver considered all of
the evidence submitted to her by petitioners, and she applied the
guidelines for evaluating an offer-in-compromise to promote effective
tax administration. She determined that petitioners' offer was
unacceptable because, among other reasons, they were not forthcoming
in establishing their financial status and acceptance of the offer
would undermine compliance with the tax laws by taxpayers in general.
She determined that petitioners' offer to pay $11,552 was
unacceptable because they had the financial wherewithal to pay more
than that amount. Driver's ultimate determination to reject
petitioners' $11,552 offer-in-compromise was not arbitrary,
capricious, or without a sound basis in fact or law, and it was not
abusive or unfair to petitioners. Her determination was based on a
reasonable application of the guidelines, which we decline to
second-guess. See Speltz v. Commissioner [Dec.
55,961], 124 T.C. 165 (2005),
affd. [2006-2
USTC ¶50,403] 454 F.3d 782
(8th Cir. 2006).
In their posttrial
opening brief, petitioners essentially make four arguments in
advocating a contrary result. First, petitioners argue that Driver
did not adequately consider their unique facts and circumstances. We
disagree. Driver reviewed and considered all information given to her
by petitioners. On the basis of the facts and circumstances of
petitioners' case as gleaned from that information, as well as
learned from other information obtained during her independent
analysis, Driver determined that petitioners' offer did not meet the
applicable guidelines for acceptance of an offer-in-compromise to
promote effective tax administration because acceptance of that offer
would undermine compliance with the tax laws by taxpayers in general.
We find no abuse of discretion in that determination. Nor do we find
that Driver inadequately considered the information given to her by
petitioners. Driver accepted all of the values for assets,
liabilities, income, and expenses given to her by petitioners on
their Form 433-A, and she only increased the value of petitioners'
total assets to take into account the unreported assets which she
uncovered during her independent analysis. Indeed, even in the case
of the unreported assets, Driver's valuation of those assets did not
significantly depart from petitioners' valuation of those assets.8
We find that Driver gave thorough consideration to all of
petitioners' claims in the light of all of the facts that were
communicated to her by petitioners or were otherwise learned by her
from other sources.
As petitioners view this
issue, the opinion of the Court of Appeals for the Ninth Circuit in
Fargo v. Commissioner [2006-1
USTC ¶50,326], 447 F.3d 706
(9th Cir. 2006), requires that Appeals accept their $11,552 offer
because, they claim, their investment in the Hoyt partnerships was
not purely tax motivated, they were victims of Hoyt's fraud, and
respondent and Hoyt caused a significant delay in the resolution of
respondent's examinations of the Hoyt partnerships. We do not read
Fargo v. Commissioner, supra, as broadly as petitioners. Fargo
does not support their claim that Appeals was automatically required
to accept petitioners' bargain-basement offer of $11,552. It cannot
be gainsaid that a significant motivation of their investment in the
Hoyt tax shelters was to realize tax savings.
Petitioners also argue
that their offer was required to be accepted because they adequately
demonstrated that they will suffer economic hardship if required to
pay their assessed tax liability in full. To this end, petitioners
state, Driver ignored both their medical issues and their age and
retirement status in making her determination, and it is "reasonably
foreseeable" that they will need all of their home equity and
retirement assets to compensate for this shortfall and to use for
their care and support in the future. By petitioners' count, their
monthly income is exceeded by their monthly expenses, creating a
deficit of $819 (i.e., monthly income of $3,223 less monthly living
expenses of $4,042), and Driver's analysis requires that they
liquidate all of their retirement accounts and home equity in order
to pay their tax liability.
We disagree with
petitioners that they have demonstrated that requiring them to pay
more than $11,552 towards their assessed tax liability will result in
an economic hardship.9
The record establishes that Driver, when she made her determination,
did know the specifics of petitioners' age and financial status
(including the amount and sources of petitioners' income) and that
she accepted the amount of the monthly medical expenses reported to
her by petitioners on their Form 433-A. Driver was not required on
her own initiative to increase arbitrarily the amount of those
reported medical expenses to reflect the possibility that petitioners
would incur additional medical costs in the future. See Fargo v.
Commissioner, supra at 710. Driver's analysis focused on petitioners'
$79,461 assessed liability, and petitioners' net realizable equity in
assets was $161,844, an amount that exceeds petitioners' assessed
liability by $82,383. We do not consider Appeals to have abused its
discretion by rejecting petitioners' claim that they will suffer an
economic hardship if required to pay more than their $11,552 offer.10
Second, petitioners argue
that public policy demands that their offer-in-compromise be accepted
because they were victims of fraud. We disagree. While the
regulations do not set forth a specific standard for evaluating an
offer-in-compromise based on claims of public policy or equity, the
regulations contain two illustrative examples. See sec.
301.7122-1(c)(3)(iv), Examples (1) and (2), Proced. &
Admin. Regs. The first example describes a taxpayer who is seriously
ill and unable to file income tax returns for several years. The
second example describes a taxpayer who received erroneous advice
from the Commissioner as to the tax effect of the taxpayer's actions.
Neither example bears any resemblance to this case. See Speltz v.
Commissioner [Dec.
55,961], 454 F.3d at 786. Unlike
the exceptional circumstances exemplified in the regulations,
petitioners' situation is neither unique nor exceptional in that
petitioners' situation mirrors that of numerous taxpayers who claimed
tax shelter deductions in the 1980s and 1990s, obtained the tax
advantages, promptly forgot about their "investment", and
now realize that paying their taxes may require a change of
lifestyle.11
We also agree with Driver
that compromising petitioners' case on grounds of public policy or
equity would not promote effective tax administration. While
petitioners portray themselves as victims of Hoyt's alleged fraud and
respondent's alleged delay in dealing with Hoyt, they take no
responsibility for their tax predicament. We cannot agree that
acceptance by respondent of petitioners' $11,552 offer to satisfy
their estimated $265,023 tax liability would enhance voluntary
compliance by other taxpayers. A compromise on that basis would place
the Government in the unenviable role of an insurer against poor
business decisions by taxpayers, reducing the incentive for taxpayers
to investigate thoroughly the consequences of transactions into which
they enter. It would be particularly inappropriate for the Government
to play that role here, where the transaction at issue involves a tax
shelter. Reducing the risks of participating in tax shelters would
encourage more taxpayers to run those risks, thus undermining rather
than enhancing compliance with the tax laws.12
Third, petitioners argue
that Driver failed to balance efficient collection with the
legitimate concern that collection through the proposed levy be no
more intrusive than necessary. We disagree. Driver thoroughly
considered this balancing issue on the basis of the information and
proposed collection alternative (offer-in-compromise) given to her by
petitioners. She concluded that the proposed levy action was an
appropriate means for collecting the liabilities at issue. She
thoroughly considered petitioners' arguments for accepting their
offer-incompromise, and she rejected the offer only after concluding
that petitioners could pay more of their tax liability than the
$11,552 they offered. Cf. Internal Revenue Manual sec. 5.8.11.2.1(11)
("When hardship criteria are identified but the taxpayer does
not offer an acceptable amount, the offer should not be recommended
for acceptance").
Fourth, petitioners argue
that Driver inappropriately failed to consider whether they qualified
for an abatement of interest for reasons other than those described
in section
6404(e). We disagree. We find
nothing to suggest that Driver believed that petitioners' sole remedy
for interest abatement in this case rested on the rules of section
6404(e). In fact, regardless of
the rules of section
6404(e), Driver obviously would
have abated interest in this case had she agreed to let petitioners
compromise their liability by paying less than the amount of interest
included within that liability. All the same, we find no basis in the
evidence for an abatement of interest, nor any abuse of discretion by
Driver in denying their request for abatement. Cf. Mekulsia v.
Commissioner [2005-1
USTC ¶50,108], 389 F.3d 601
(6th Cir. 2004).
We hold that Appeals
(acting through Driver) did not abuse its discretion in rejecting
petitioners' $11,552 offer-in-compromise. In so holding, we express
no opinion as to the amount of any compromise that petitioners could
or should be required to pay, or that respondent is required to
accept. The only issue before us is whether Appeals abused its
discretion in refusing to accept petitioners' specific
offer-in-compromise in the amount of $11,552. See Speltz v.
Commissioner [Dec.
55,961], 124 T.C. at 179-180. We
have considered all arguments made by petitioners for a contrary
holding, and we have found those arguments not discussed herein to be
without merit.
An appropriate order
and decision will be entered.
1
Wendy S. Pearson (Pearson), Terri A. Merriam (Merriam), Jennifer A.
Gellner (Gellner), and Jaret R. Coles entered their appearances in
this case by subscribing the petition commencing this proceeding. See
Rule 24(a). (Unless otherwise indicated, Rule references are to the
Tax Court Rules of Practice and Procedure, and section references are
to the applicable versions of the Internal Revenue Code.) Asher B.
Bearman entered his appearance on July 18, 2005, and withdrew on Nov.
17, 2006. Pearson and Gellner withdrew from the case on Oct. 24 and
Nov. 14, 2006, respectively.
2
Petitioners also dispute a determination by Appeals concerning their
liability for increased interest under sec.
6621(c).
As to this dispute, the parties agreed to be bound by a final
decision in Ertz
v. Commissioner,
docket No. 20336-04L, which involved a similar issue. On Jan. 24,
2007, the Court held in Ertz
v. Commissioner
[Dec.
56,816(M)],
T.C. Memo. 2007-15, that the Court lacks jurisdiction to decide the
issue to which the parties agreed to be bound. On the basis of Ertz
v. Commissioner, supra,
we shall dismiss for lack of jurisdiction the portion of this case
that concerns petitioners' liability for increased interest under
sec.
6621(c).
3
Form 433-A states that each asset reported on the form should be
valued at its "Current value", defined on the form as "the
amount you could sell the asset for today".
4
The listed expenses reported as totaling $4,042 actually total
$4,006.
5
Petitioners' 2003 Federal income tax return reported that they had
$34,885 of adjusted gross income and $14,798 of taxable income.
6
In Murphy
v. Commissioner
[Dec.
56,232],
125 T.C. 301 (2005), affd. 469 F.3d 27 (1st Cir. 2006), the Court
declined to include in the record external evidence relating to facts
not presented to Appeals. The Court distinguished Robinette
v. Commissioner
[Dec.
55,698],
123 T.C. 85 (2004), revd. [2006-1
USTC ¶50,213]
439 F.3d 455 (8th Cir. 2006), and held that the external evidence was
inadmissible in that it was not relevant to the issue of whether
Appeals abused its discretion. In a memorandum that petitioners filed
with the Court on April 13, 2006, pursuant to an order of the Court
directing petitioners to explain the relevancy of any external
evidence that they desired to include in the record of this case,
petitioners made no claim that they had offered any of the external
evidence to Driver. Instead, as we read petitioners' memorandum in
the light of the record as a whole, petitioners wanted to include the
external evidence in the record of this case to prove that Driver
abused her discretion by not considering facts and documents that
they had consciously decided not to give to her. Consistent with
Murphy
v. Commissioner, supra,
we sustained respondent's relevancy objections to the external
evidence.
7
Petitioners' posttrial opening brief also states as an issue the
question of whether Appeals abused its discretion by rejecting
petitioners' request for an offer-in-compromise on the ground of
doubt as to collectibility. The brief does not, however, advance any
direct argument on this issue, stating instead that the resolution of
the issue is controlled by our decision on petitioners' claim of
effective tax administration. We consider petitioners to have waived
any independent claim of error related to Appeals's rejection of
their offer-in-compromise on the ground of doubt as to collectibility
and limit our discussion to Appeals's rejection of petitioners'
offer-in-compromise on the ground of effective tax administration.
8
Petitioners' sole dispute with Driver's valuation of their assets
relates to the unreported lots, which petitioners contend had no
value. We cannot fathom that the lots had no value whatsoever, and we
do not believe that it was an abuse of Driver's discretion to value
each lot at a minimal average value of $500.
9
Even if they had shown economic hardship, a compromise on the basis
of effective tax administration will not be made if it would
undermine compliance with the tax laws by taxpayers in general, see
sec. 301.7122-1(b)(3)(iii), Proced. & Admin. Regs., and Driver
determined that petitioners failed to meet that essential
requirement.
10
Petitioners argue that Driver's analysis is flawed in that she
considered only their assessed tax liability and not their assessed
and unassessed tax liability. In that Driver concluded that
petitioners' offer of $11,552 in compromise of their $79,461 assessed
tax liability was unacceptable, petitioners have not explained to our
satisfaction how increasing the stated assessed liability almost
threefold to reflect the amount of the unassessed liability would
then make their offer acceptable.
11
Of course, the examples in the regulations are not meant to be
exhaustive, and petitioners' situation is not identical to that of
the taxpayers in Fargo
v. Commissioner
[2006-1
USTC ¶50,326],
447 F.3d 706, 714 (9th Cir. 2006), affg.[Dec.
55,514(M)]
T.C. Memo. 2004-13, regarding whom the Court of Appeals for the Ninth
Circuit noted that "no evidence was presented to suggest that
Taxpayers were the subject of fraud or deception". Such
considerations, however, have not kept this Court from finding
investors in Hoyt's shelters to be culpable of negligence, see, e.g.,
Keller
v. Commissioner
[Dec.
56,550(M)],
T.C. Memo. 2006-131, nor prevented the Courts of Appeals for the
Sixth, Ninth, and Tenth Circuits from affirming our decisions to that
effect in Hansen
v. Commissioner,
471 F.3d 1021 (9th Cir. 2006), affg. [Dec.
55,812(M)]
T.C. Memo. 2004-269; Mortensen
v. Commissioner,
440 F.3d 375 (6th Cir. 2006), affg. [Dec.
55,824(M)]
T.C. Memo. 2004-279; and Van
Scoten v. Commissioner,
439 F.3d 1243 (10th Cir. 2006), affg. [Dec.
55,818(M)]
T.C. Memo. 2004-275.
12
Nor does the fact that petitioners' case may be "longstanding"
overcome the detrimental impact on voluntary compliance that could
result from respondent's accepting petitioners' offer-in-compromise.
An example in Internal Revenue Manual sec. 5.8.11.2.2 implicitly
addresses the "longstanding" issue. There, the taxpayer
invested in a tax shelter in 1983, thereby incurring tax liabilities
for 1981 through 1983. He failed to accept a settlement offer by
respondent that would have eliminated a substantial portion of his
interest and penalties. Although the example, which is similar to
petitioners' case in several respects, would qualify as a
"longstanding" case by petitioners' standards, the offer
was not acceptable because acceptance of it would undermine
compliance with the tax laws.
Bobbie
E. Johnson v. Commissioner.
Dkt.
No. 20775-04L , TC Memo. 2007-29, 93 TCM 885, February 7,
2007.
[Appealable, barring stipulation to the contrary, to
CA-9. --CCH.]
[Code
Secs. 6330
and 7122]
Compromises:
Doubt as to collectibility: Special circumstances. --
An IRS Appeals officer
did not abuse her discretion by rejecting a married couple's
offer-in-compromise based on doubt as to collectibility with special
circumstances or effective tax administration. The liability arose
from claimed losses and credits from their involvement in a Hoyt
partnership. The taxpayers did not show that the determination by the
IRS was arbitrary or capricious or without sound basis in fact or
law. The guidelines for acceptance based on doubt as to
collectibility with special circumstances were not met because the
taxpayers were able to pay far more than the amount that they
offered. Further, the Appeals officer properly concluded that
acceptance of the offer-in-compromise would not promote effective tax
administration. Acceptance of the offer would undermine compliance
with the tax laws by encouraging more taxpayers to participate in tax
shelters. The couple failed to identify compelling public policy or
equity concerns to show that acceptance of their offer-in-compromise
was appropriate. Therefore, the IRS was permitted to proceed with the
proposed collection action. --CCH.
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), 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
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). In1998,
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.
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 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.
On the Form 433-A,
petitioner listed the following assets:
Asset
Current
Loan
Balance/Value
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 Victoria 12,210 -0-
2002
Chevrolet Cavalier 4,615 -0-
1988
Pace Arrow motor home 6,000 -0-
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:
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
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 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.
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
[2006-1
USTC ¶50,326], 447 F.3d 706,
712 (9th Cir. 2006), affg. [Dec.
55,514(M)] 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$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 [Dec.
53,938], 114 T.C. 604, 610
(2000); Goza v. Commissioner [Dec.
53,803], 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 [Dec.
53,206], 112 T.C. 19, 23 (1999);
Keller v. Commissioner [Dec.
56,587(M)], T.C. Memo. 2006-166;
Fowler v. Commissioner [Dec.
55,689(M)], 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 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 [Dec.
56,570(M)], 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 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.
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 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 [2006-2
USTC ¶50,403], 454 F.3d 782,
786 (8th Cir. 2006), affg. [Dec.
55,961] 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. 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
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. 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,
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 [Dec.
56,570(M)], 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.
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
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 [2006-1
USTC ¶50,326], 447 F.3d at
711-712. See also Keller v. Commissioner [Dec.
56,587(M)], 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.
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 [Dec.
46,099(M)], 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. 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 [Dec.
56,570(M)], 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. [Dec.
55,812(M)] T.C. Memo. 2004-269;
Mortensen v. Commissioner, 440 F.3d 375 (6th Cir. 2006), affg.
[Dec.
55,824(M)] T.C. Memo. 2004-279;
Van Scoten v. Commissioner, 439 F.3d 1243 (10th Cir. 2006),
affg. [Dec.
55,818(M)] 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 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 "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 [3
USTC ¶1164], 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 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
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. 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.
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
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
[Dec.
56,816(M)],
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.
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.
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.
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.
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.
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.
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.
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
[Dec.
56,570(M)],
T.C. Memo. 2006-150.
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.
13
Bales
v. Commissioner
[Dec.
46,099(M)],
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. [Dec.
55,812(M)]
T.C. Memo. 2004-269; Mortensen
v. Commissioner,
440 F.3d 375, 390-391 (6th Cir. 2006), affg. [Dec.
55,824(M)]
T.C. Memo. 2004-279; Van
Scoten v. Commissioner,
439 F.3d 1243, 1254-1256 (10th Cir. 2006), affg. [Dec.
55,818(M)]
T.C. Memo. 2004-275.
14
See supra
note 11.
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.
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.
Estate
of Carol Andrews, Deceased, Robert Andrews, Special Administrator,
and Robert Andrews v. Commissioner.
Dkt.
No. 18174-04L , TC Memo. 2007-30, 93 TCM 891, February 7,
2007.
[Appealable, barring stipulation to the contrary, to
CA-9. --CCH.]
[Code
Secs. 6330
and 7122]
Compromises:
Collection actions. --
The IRS's rejection of an
offer in compromise from investors in a cattle-breeding tax shelter
was not arbitrary, capricious or without sound basis in fact or law.
The IRS did not abuse its discretion in rejecting the offer, based
alternatively on doubt as to collectibility with special
circumstances or effective tax administration, and was allowed to
proceed with its collection action. The offer-in-compromise was only
10 percent of the couple's outstanding tax liability and that bore no
relationship to their ability to pay based on their own calculations.
In addition, the IRS was not required to accept the taxpayer's offer
based on considerations of public policy or equity. The longstanding
nature of the taxpayers' case did not require acceptance of the
offer-in-compromise, the IRS could rely on an example in the Internal
Revenue Manual that was similar although not identical to the
taxpayers' case, and the IRS did not have to consider all of the
taxpayers' equitable facts, including their claim that they were
victims of fraud. Finally, the taxpayers' other arguments regarding
compromise of penalties and interest, the IRS's alleged failure to
provide the court with sufficient information, the IRS's deadline for
submission of information, the husband's pending innocent spouse
claim and the IRS's alleged failure to balance the need for efficient
tax collection of taxes with the concern that collection be no more
intrusive than necessary were rejected. --CCH.
Terri A. Merriam, for
petitioners; Gregory M. Hahn and Thomas N. Tomashek, for respondent.
MEMORANDUM
FINDINGS OF FACT AND OPINION
HAINES, Judge:
Petitioners filed a petition with this Court in response to a Notice
of Determination Concerning Collection Actions Under Section
6330 (notice of determination)
for 1981 through 1987.1
Pursuant to section
6330(d), petitioners seek 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
Petitioners resided in
Lodi, California, when they filed their petition. After filing the
petition, but before trial, Carol Andrews (Mrs. Andrews) passed away
from complications arising after surgery. At the time of her death,
Robert Andrews (Mr. Andrews) and Mrs. Andrews (collectively referred
to as petitioners) had been married for more than 33 years. At the
time of trial, Mr. Andrews was 61 years old.
In 1984, petitioners
became partners in Durham Genetic Engineering 1984-2, Ltd. (DGE
84-2), a cattle breeding partnership organized and operated by Walter
J. Hoyt III (Hoyt). DGE 84-2 was also known as Timeshare Breeding
Service 1984-2, Ltd. (TBS 84-2). After 1984, petitioners became
partners in Durham Genetic Engineering 1985-4, Ltd. (DGE 85-4),
another Hoyt partnership.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 1998,
Hoyt's enrolled agent status was revoked. Hoyt was convicted of
various criminal charges in 2000.5
Beginning in 1984 until
at least 1987, petitioners claimed losses and credits on their
Federal income tax returns arising from their involvement in the Hoyt
partnerships. Petitioners also carried back unused investment credits
to 1981, 1982, and1983. As a result of these losses and credits,
petitioners reported overpayments of tax for 1981 through 1987 and
received refunds in the amounts claimed.
Respondent issued notices
of final partnership administrative adjustments (FPAAs) to TBS 84-2
for its 1984 and 1985 taxable years, to DGE 84-2 for its 1986 taxable
year, and to DGE 85-4 for its 1985 and 1986 taxable years.6
After completion of the partnership-level proceedings, respondent
determined deficiencies in petitioners' income tax for their 1981
through 1987 tax years.
On August 21, 2001,
respondent issued petitioners a Final Notice --Notice of Intent to
Levy and Notice of Your Right to a Hearing (final notice). The final
notice included petitioners' outstanding tax liabilities for 1981
through 1987.
On September 12, 2001,
petitioners submitted a Form 12153, Request for a Collection Due
Process Hearing. Petitioners argued that the proposed levies were
inappropriate, that an offer-in-compromise should be accepted, and
that Mr. Andrews was entitled to innocent spouse relief under section
6015.
Petitioners' case was
assigned to Settlement Officer Linda Cochran (Ms. Cochran). Ms.
Cochran scheduled a telephone section
6330 hearing for March 17, 2004.
During the hearing, petitioners' representative, Terri A. Merriam
(Ms. Merriam), requested additional time to submit information. Ms.
Cochran extended petitioners' deadline for producing information to
March 31, 2004.
On March 31, 2004,
petitioners 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 setting forth medical and
retirement considerations and explaining the offer amount, and three
letters setting out in detail petitioners' position regarding the
offer-in-compromise. Petitioners' letters included several exhibits.
The Form 656 indicated
that petitioners were seeking an offer-in-compromise based on either
doubt as to collectibility with special circumstances or effective
tax administration. Petitioners offered to pay $25,000 to compromise
their outstanding tax liabilities for 1981 through 1996, which they
estimated to be $255,254.
On the Form 433-A,
petitioner listed the following assets:
Current
Loan
Asset
Balance/Value
Balance
Checking
accounts $881 n/a
Savings
accounts 53 n/a
401(k)
plan account 107,449 -0-
Life
insurance 4,975 $1,737
1998
Chevrolet Lumina 2,465 303
1991
Chevrolet S-10 450 -0-
1988
Pontiac Grand Prix -0- -0-
House
200,000 164,155
Total
316,273 166,195
The reported value of the
section
401(k) plan account reflected
only 70 percent of its then-current value. The reported value of the
life insurance reflected its then-current cash value. The loan
balance on the house included the balance on a mortgage ($121,155),
and the balance on a home equity line of credit ($43,000).
Petitioners reported
gross monthly income of $5,252, representing Mr. Andrews's wage
income of $2,382, and Mrs. Andrews's pension/Social Security income
of $2,870. Petitioners also reported the following monthly living
expenses:
Expense
item
Monthly expense
Food,
clothing, misc. $1,005
Housing
and utilities 1,756
Transportation
307
Health
care 533
Taxes
(income and FICA) 707
Life
insurance 121
Other
secured debt 460
Other
expenses 458
Total
5,347
Petitioners did not
explain the "other secured debt" or "other expenses".7
In the letter explaining
the offer amount, petitioners stated that they were offering to pay
$25,000 "in satisfaction for all years related to the Hoyt
investment (1981 through 1996). Our retirement analysis shows that
the Andrews will run out of funds in 2011, even without making the
$25,000.00 payment. Thus, due to their age and medical concerns,
$25,000.00 is a reasonable offer." The letter also included
"medical and retirement considerations" and a "retirement
analysis". Petitioners' medical and retirement considerations
included: (1) Mrs. Andrews had suffered two heart attacks, underwent
several angioplasties, and had to take several medications; (2) due
to her heart condition, Mrs. Andrews was forced to retire in March
2004; (3) Mr. Andrews suffered from depression and skin cancer; and
(4) due to his health, Mr. Andrews expected to retire at 65 years
old. The retirement analysis outlined the likelihood of increased
housing and medical costs as petitioners aged. Petitioners also noted
that Mr. Andrews had an innocent spouse case pending before the Tax
Court at docket No. 19705-02.
In the remaining three
letters, petitioners alleged that they were victims of Hoyt's fraud
and asserted various arguments regarding the appropriateness of an
offer-in-compromise.
On May 21, 2004,
petitioners submitted another letter to Ms. Cochran, which included
42 exhibits not provided with the previous letters.
On August 25, 2004,
respondent issued petitioners a notice of determination. In
evaluating petitioners' offer-in-compromise, respondent made the
following changes to the values of assets petitioners reported on the
Form 433-A: (1) Respondent determined that the value of the section
401(k) plan account was $153,499
instead of $107,449 (the 70-percent value reported by petitioners)
and reduced petitioners' net realizable equity by $35,700 to $117,799
to reflect estimated tax and penalties; and (2) respondent determined
that the house was worth $350,000 instead of $200,000 and reduced
petitioners' net realizable equity by $164,155 to $185,845 to reflect
the amount outstanding on the first and second mortgages. Respondent
concluded that petitioners had a total net realizable equity of
$310,011.
Respondent accepted
petitioners' reported gross monthly income of $5,252 but made the
following adjustments to their monthly expenses: (1) Reduced the
housing and utilities expense from $1,756 to $1,254 because
petitioners failed to document that they were entitled to an amount
higher than the local guideline amount; and (2) disallowed the other
expenses of $458 because petitioners failed to itemize expenses, but
allowed the $460 of "other secured debt" because Ms.
Cochran believed that amount represented the attorney's fees being
paid to Ms. Merriam's law firm. Regarding the possible future
increases in expenses outlined in petitioners' letters, 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 petitioners' monthly expenses, respondent determined that $70,065
was collectible from their future income.8
Respondent concluded that petitioners had a reasonable collection
potential of $380,076.
Because petitioners had
the ability to pay substantially more than the amount offered,
respondent rejected their offer-in-compromise based on doubt as to
collectibility with special circumstances. Respondent also rejected
petitioners' effective tax administration offer-in-compromise based
on economic hardship because they had the ability to pay their tax
liability in full. Finally, respondent rejected petitioners'
effective tax administration offer-in-compromise based on public
policy or equity ground because the case "fails to meet the
criteria for such consideration".
Respondent determined
that petitioners did not offer an acceptable collection alternative
and that all requirements of law and administrative procedure had
been met. Respondent concluded that the proposed collection action
could proceed, but that any activity against Mr. Andrews's assets
should be stayed until his pending innocent spouse case had been
decided.
In response to the notice
of determination, petitioners filed a petition with this Court on
September 27, 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
[2006-1
USTC ¶50,326], 447 F.3d 706,
712 (9th Cir. 2006), affg. [Dec.
55,514(M)] 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
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
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).
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.
Petitioners proposed an
offer-in-compromise based alternatively on doubt as to collectibility
with special circumstances or effective tax administration.
Petitioners offered to pay $25,000 to compromise their outstanding
tax liabilities for 1981 through 1996, which they estimated to be
$255,254. Petitioners argued that collection of the full liability
would create economic hardship and would undermine public confidence
that the tax laws are being administered in a fair and equitable
manner. Respondent determined that petitioners' reasonable collection
potential was $380,076 and that their 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 [Dec.
53,938], 114 T.C. 604, 610
(2000); Goza v. Commissioner [Dec.
53,803], 114 T.C. 176, 182
(2000). This standard does not ask us to decide whether in our own
opinion petitioners' 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 [Dec.
53,206], 112 T.C. 19, 23 (1999);
Keller v. Commissioner [Dec.
56,587(M)], T.C. Memo. 2006-166;
Fowler v. Commissioner [Dec.
55,689(M)], 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 considerations of public policy or equity), we consider
petitioners' separate grounds for their offer-in-compromise together.
See Murphy v. Commissioner [Dec.
56,232], 125 T.C. 301, 309, 320
n.10 (2005), affd. 469 F.3d 27 (1st Cir. 2006); Barnes v.
Commissioner [Dec.
56,570(M)], T.C. Memo. 2006-150.
A.
Economic
Hardship
Petitioners assert that
Ms. Cochran abused her discretion by rejecting their
offer-in-compromise because "There is no indication that SO
Cochran gave any substantive consideration to Petitioners'
demonstrated special circumstances or that they would experience a
hardship if required to make a full-payment." In support of this
assertion, petitioners argue: (1) Ms. Cochran failed to discuss
petitioners' special circumstances in the notice of determination;
and (2) Ms. Cochran erroneously determined petitioners' reasonable
collection potential and failed to take into account their 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 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 [2006-2
USTC ¶50,403], 454 F.3d 782,
786 (8th Cir. 2006), affg. [Dec.
55,961] 124 T.C. 165 (2005); see
also Barnes v. Commissioner, supra. Nevertheless, we address
petitioners' arguments.
1. Discussion of
Special Circumstances in the Notice of Determination
Petitioners argue that
Ms. Cochran failed "to follow proper procedure by discussing
Petitioners' special circumstances, what equity was considered in
relation to their special circumstances, and how the special
circumstances affected her determination of their ability to pay."
Petitioners infer that, because the special circumstances were not
discussed in detail in the notice of determination, Ms. Cochran
failed to adequately take their 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 petitioners 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 was not an abuse of discretion.
2. Petitioners' Income
and Future Expenses
Petitioners assert that
Ms. Cochran erroneously determined their reasonable collection
potential by: (1) Considering 81 months of petitioners' future income
instead of 48 months; and (2) failing to adequately consider their
age, health and retirement status, medical costs, and the likelihood
of future increases in medical and housing costs.10
Petitioners' 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. Petitioners made a cash offer, but Ms. Cochran used 81
months of future income. At trial, Ms. Cochran acknowledged that she
should have used only 48 months of future income. Ms. Cochran
recomputed petitioners' reasonable collection potential using 48
months and determined that it was $351,531, instead of $380,076, as
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, petitioners' reasonable collection
potential was greater than their offer amount ($25,000). We find that
Ms. Cochran's error did not amount to an abuse of discretion because,
even when the error is corrected, petitioners' reasonable collection
potential of $351,531 far exceeds their offer amount of $25,000.
With regard to age,
health, and retirement status, petitioners' argument is not supported
by the record. In their letter describing their offer amount,
petitioners represented that Mrs. Andrews was retired and Mr. Andrews
would retire when he reached 65 years old. Petitioners also indicated
that they suffered from various medical conditions and that Mrs.
Andrews was taking several medications. On their Form 433-A,
petitioners reported monthly medical expenses of $533.
Ms. Cochran accepted
petitioners' monthly medical expenses without change. Ms. Cochran
also accepted petitioners' representation that Mrs. Andrews was
retired, and thus only considered her future income from
pension/Social Security. While petitioners indicated that Mr. Andrews
would retire at 65, he was only 59 at the time of the section
6330 hearing.11
Thus, based on the information submitted by petitioners, Mr. Andrews
would continue to work for at least 5 to 6 more years. Given that Ms.
Cochran accepted petitioners' medical expenses as reported and
considered future income consistent with the retirement
considerations listed by petitioners, we reject petitioners'
assertion that Ms. Cochran failed to consider petitioners' age,
health, retirement status, and current medical costs.
Petitioners' argument is
also unavailing with regard to the likelihood of future increases in
medical and housing costs. Petitioners did not inform Ms. Cochran
with any specificity that they would have to pay a greater amount of
unreimbursed medical expenses in the future, or that their housing
expenses would increase. Instead, they 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 petitioners presented, but 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.
Petitioners also raise
challenges to various other determinations made by Ms. Cochran,
including: (1) The determination that their house had a value of
$350,000; (2) the inclusion of 100 percent of the value of the
section
401(k) plan account (less
estimated tax and penalties); (3) the reduction of their housing and
utilities expense; and (4) the disallowance of $460 in other
expenses. We need not discuss in detail these and other minor
disputes raised by petitioners. Even assuming arguendo that
petitioners' income, expenses, and value of assets should have been
accepted as reported, we would not find that Ms. Cochran abused her
discretion in rejecting petitioners' offer-in-compromise.
Ms. Cochran testified
that, had she accepted the income, expenses, and value of assets as
reported, petitioners' reasonable collection potential would have
been $160,146. Petitioners offered to pay only $25,000 to compromise
their outstanding tax liability, which they estimated to be $255,254.
In some situations, respondent may accept an offer-in-compromise of
less than petitioners' 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 was only 10 percent of petitioners'
outstanding tax liability and that bore no relationship to their
ability to pay based on their own calculations.
3. Encouraging
Voluntary Compliance With the Tax Laws
We are also mindful that
any decision by Ms. Cochran to accept petitioners'
offer-in-compromise due to doubt as to collectibility with special
circumstances or effective tax administration based on economic
hardship must be viewed against the backdrop of section
301.7122-1(b)(3)(iii), Proced. & Admin. Regs.12
See Barnes v. Commissioner, [Dec.
56,570(M)], T.C. Memo. 2006-150.
That section requires that Ms. Cochran deny petitioners'
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 petitioners would suffer economic
hardship, a finding that we decline to make, we would not find that
Ms. Cochran's rejection of petitioners' offer-in-compromise was an
abuse of discretion. As discussed below (in our discussion of
petitioners' "equitable facts" argument), we conclude that
acceptance of petitioners' offer-in-compromise would undermine
voluntary compliance with tax laws by taxpayers in general.
B.
Public
Policy and Equity Considerations
Petitioners assert 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 their assertion, petitioners
argue: (1) The longstanding nature of this case justifies acceptance
of the offer-in-compromise; (2) respondent's reliance on an example
in the IRM was improper; and (3) respondent failed to consider
petitioners' other "equitable facts".
1. Longstanding Case
Petitioners assert that
the legislative history requires respondent to resolve "longstanding"
cases by forgiving penalties and interest which would otherwise
apply. Petitioners argue that, because this is a longstanding case,
respondent abused his discretion by failing to accept their
offer-in-compromise.
Petitioners' argument is
essentially the same considered and rejected by the Court of Appeals
for the Ninth Circuit in Fargo v. Commissioner [2006-1
USTC ¶50,326], 447 F.3d at
711-712. See also Keller v. Commissioner [Dec.
56,587(M)], T.C. Memo. 2006-166;
Barnes v. Commissioner, supra. We reject petitioners' argument
for the same reasons stated by the Court of Appeals. We add that
petitioners' counsel participated in the appeal in Fargo as
counsel for the amici. On brief, petitioners 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., petitioners), 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
petitioners' longstanding case argument was not arbitrary or
capricious.
2. The IRM Example
Petitioners argue that
respondent erred when he determined that they were not entitled to
relief based on the second example in IRM section 5.8.11.2.2(3).
Petitioners assert that many of the facts in this case were not
present in the example, and, therefore, any reliance on the example
was misplaced. Petitioners' 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 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. We
agree with respondent that the example presents circumstances similar
to those in petitioners' case, including: Petitioners invested in
TEFRA partnerships in the early 1980s; petitioners' outstanding tax
liability is related to their investment in the partnerships; FPAAs
were issued to the partnerships; after several years of litigation,
Tax Court decisions upheld the vast majority of the deficiencies
asserted in the FPAAs; and petitioners argue that interest has
accumulated as the result of delays by and other actions of the tax
matters partner.
Petitioners are also
correct in asserting that not all the facts in their 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 petitioners'
case, respondent's reliance on that example was not arbitrary or
capricious.
3. Petitioners' Other
"Equitable Facts"
Petitioners argue that
respondent abused his discretion by failing to consider the other
"equitable facts" of this case. Petitioners' "equitable
facts" include reference to: (1) Petitioners' reliance on Bales
v. Commissioner [Dec.
46,099(M)], T.C. Memo.
1989-568;13
(2) petitioners' reliance on Hoyt's enrolled agent status; (3) Hoyt's
criminal conviction; (4) Hoyt's fraud on petitioners; and (5) other
letters and cases. The basic thrust of petitioners' argument is that
they were defrauded by Hoyt and that, if they were held responsible
for penalties and interest incurred as a result of their investment
in a tax shelter, it would be inequitable and against public policy.
Petitioners' 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. 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, petitioners' situation
is neither unique nor exceptional in that their situation mirrors
those of numerous other taxpayers who claimed tax shelter deductions
in the 1980s and 1990s. See Keller v. Commissioner [Dec.
56,587(M)], T.C. Memo. 2006-166;
Barnes v. Commissioner [Dec.
56,570(M)], T.C. Memo. 2006-150.
Of course, the examples
in the regulations are not meant to be exhaustive, and petitioners
have a more sympathetic case than the taxpayers in Fargo v.
Commissioner [2006-1
USTC ¶50,326], 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, Ninth, and Tenth
Circuits from affirming our decisions to that effect. See Hansen
v. Commissioner, 471 F.3d 1021 (9th Cir. 2006), affg. [Dec.
55,812(M)] T.C. Memo. 2004-269;
Mortensen v. Commissioner, 440 F.3d 375 (6th Cir. 2006), affg.
[Dec.
55,824(M)] T.C. Memo. 2004-279;
Van Scoten v. Commissioner, 439 F.3d 1243 (10th Cir. 2006),
affg. [Dec.
55,818(M)] T.C. Memo. 2004-275.
Ms. Cochran testified
that she considered all of Ms. Merriam's and petitioners' assertions,
including the numerous letters and exhibits. Nevertheless, Ms.
Cochran determined that petitioners did not qualify for an
offer-in-compromise.
The mere fact that
petitioners' "equitable facts" did not persuade respondent
to accept their 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 petitioners'
case. We find that respondent's determination that the "equitable
facts" did not justify acceptance of petitioners'
offer-in-compromise was not arbitrary or capricious, and thus it was
not an abuse of discretion.
We also find that
compromising petitioners' 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 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.
Petitioners'
Other Arguments
1. Compromise of
Penalties and Interest in an Effective Tax Administration
Offer-in-Compromise
Petitioners advance a
number of arguments focusing on their assertion that respondent
determined that penalties and interest could not be compromised in an
effective tax administration offer-in-compromise. Petitioners argue
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.
Petitioners' 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 petitioners offered to compromise their tax
liability was acceptable. As addressed above, respondent's
determination that the facts and circumstances of petitioners' case
did not warrant acceptance of their 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
Petitioners argue 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." Petitioners'
argument is without merit.
Generally, a taxpayer
bears the burden of proving the Commissioner's determinations
incorrect. Rule 142(a)(1); Welch v. Helvering [3
USTC ¶1164], 290 U.S. 111,
115 (1933).14
The burden was on petitioners 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
Petitioners argue that
Ms. Cochran abused her discretion by not allowing their counsel
additional time to submit information to be considered. Petitioners'
argument is not supported by the record.
Petitioners assert that
they were "initially only given weeks" to provide all
information. However, they ignore the fact that Ms. Cochran granted
their requested extension and allowed them until March 31, 2004, to
submit information. Additionally, petitioners have not identified any
documents or other information that they believe Ms. Cochran should
have considered but that they were unable to produce because of the
deadline for submission. Given the thoroughness and the amount of
information submitted, it is unclear why petitioners needed
additional time. We do not believe that Ms. Cochran abused her
discretion by establishing a deadline for the submission of
information.
4. Mr. Andrews'
Pending Innocent Spouse Claim
At the time of the
section
6330 hearing, Mr. Andrews had an
innocent spouse case pending before the Tax Court at docket No.
19705-02. In their petition, petitioners argued that, because of Mr.
Andrews's pending innocent spouse claim: (1) Respondent abused his
discretion by considering the assets of both spouses; and (2) the
notice of intent to levy was invalid against Mr. Andrews.
Petitioners did not argue
on brief that respondent abused his discretion by considering the
assets of both spouses. Therefore, we conclude that petitioners have
abandoned this argument.
Petitioners continued to
argue on brief that the notice of intent to levy was invalid against
Mr. Andrews. However, petitioners' concern that Mr. Andrews's
property will be levied against before the resolution of his innocent
spouse case is without merit. In the notice of determination,
respondent specifically stated that any activity against Mr.
Andrews's assets would be stayed until his pending innocent spouse
case had been decided.
5. Efficient
Collection Versus Intrusiveness
Petitioners argue 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). Petitioners'
argument is not supported by the record.
Petitioners have an
outstanding tax liability. In their section
6330 hearing, petitioners
proposed only an offer-in-compromise. Because no other collection
alternatives were proposed, there were not less intrusive means for
respondent to consider. We find that respondent balanced the need for
efficient collection of taxes with petitioners' legitimate concern
that collection be no more intrusive than necessary.
D.
Conclusion
Petitioners have 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 as
determined in the notice of determination.
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.
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
Petitioners also dispute respondent's determination that they are
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
[Dec.
56,816(M)],
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 petitioners' 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
Petitioners were also partners in another Hoyt-related partnership
identified as HS Truck. The details regarding HS Truck are not in the
record. Though unclear, it appears that all adjustments made to
petitioners' income tax liability for the years 1981-87 arose from
their involvement in DGE 84-2 (or TBS 84-2) and DGE 85-4 only.
5
Petitioners ask 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). Petitioners
are not asking the Court to take judicial notice of facts that are
not subject to reasonable dispute. Instead, petitioners are 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. Petitioners have failed to identify any clear
inconsistencies between respondent's current position and his
position in any previous litigation.
6
The FPAAs and other information specific to TBS 84-2's, DGE 84-2's,
and DGE 85-4's partnership-level proceedings are not in the
record.
7
It appears, however, that the other secured debt represented
petitioners' monthly payment on their home equity line of credit, and
the other expenses represented attorney's fees petitioner paid to Ms.
Merriam's law firm in connection with the present litigation.
8
Respondent determined that petitioners had monthly disposable income
of $865 and multiplied this by 81, the number of months remaining on
the collection statute.
9
While petitioners dispute their liability for sec.
6621(c)
interest, see supra
note 2, they did not raise doubt as to liability as a ground for
compromise.
10
Additionally, petitioners argued on brief that Mr. Andrews has
incurred additional costs arising from the illness and death of Mrs.
Andrews. Petitioners cite Exhibit 427-P, an explanation of benefits
from their insurance provider, as support for this argument. However,
Exhibit 427-P was not offered for the truth of the matter asserted
but was used only to show Mr. Andrews's understanding of what his
medical bills might be. Further, Mr. Andrews testified that he was
unsure as to how much, if any, of the medical bills he would
ultimately be liable for. Because there is no evidence in the record
that establishes Mr. Andrews will incur any additional costs, we
reject petitioners' argument.
11
In the letter explaining the offer amount, petitioners stated that
Mr. Andrews was 62 instead of 59. However, petitioners listed Mr.
Andrews's date of birth as September 5, 1944, which would mean that
he was 59 years old on March 17, 2004 (the date of the sec.
6330
hearing).
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
[Dec.
56,570(M)],
T.C. Memo. 2006-150.
13
Bales
v. Commissioner
[Dec.
46,099(M)],
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. [Dec.
55,812(M)]
T.C. Memo. 2004-269; Mortensen
v. Commissioner,
440 F.3d 375, 390-391 (6th Cir. 2006), affg. [Dec.
55,824(M)]
T.C. Memo. 2004-279; Van
Scoten v. Commissioner,
439 F.3d 1243, 1254-1256 (10th Cir. 2006), affg. [Dec.
55,818(M)]
T.C. Memo. 2004-275.
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 petitioners' 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.
Daniel
O. Abelein v. Commissioner.
Dkt.
No. 24804-04L , TC Memo. 2007-24, 93 TCM 857, February 6,
2007.
[Appealable, barring stipulation to the contrary, to
CA-9. --CCH.]
[Code
Sec. 7122]
Compromises:
Abuse of discretion. --
The IRS did not abuse its
discretion in rejecting an individual's offer-in-compromise (OIC) for
a liability that arose from his claimed losses and credits from his
involvement in a Hoyt partnership. The taxpayer proposed the OIC
based on effective tax administration. However, nothing in the IRS'
rejection of the OIC was arbitrary, capricious, or without a sound
basis in fact or law. The longstanding nature of the taxpayer's case
did not justify acceptance of the offer. In addition, the IRS
reliance on an example in the Internal Revenue Manual was not
misplaced. Accepting the offer would not have promoted effective tax
administration because reducing the risk of participating in tax
shelters would encourage more taxpayers to run those risks, thus
undermining, not enhancing, compliance with the tax laws. --CCH.
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 1982 through 1986.1
Pursuant to section
6330(d), 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
Petitioner resided in
Boring, Oregon, when he filed his petition. Petitioner has a
highschool education, worked as an electrician for many years, and is
now self-employed as a general contractor building houses in the
Greater Portland, Oregon, area. At the time of trial, petitioner was
55 years old.
In 1985, petitioner
became a partner in Durham Genetic Engineering, Ltd. 1985-1 (DGE
85-1) and in Shorthorn Genetic Engineering, Ltd. 1985-1 (SGE 85-1),
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). In1998,
Hoyt's enrolled agent status was revoked. Hoyt was convicted of
various criminal charges in 2000.5
Beginning in 1985 until
at least 1986, 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 1982, 1983, and 1984. As a result of these losses and credits,
petitioner reported overpayments of tax for 1982 through 1986 and
received refunds in the amounts claimed.
Respondent issued notices
of final partnership administrative adjustments (FPAAs) to DGE 85-1
and SGE 85-1 for their 1985 and 1986 taxable years.6
After completion of the partnership-level proceedings, respondent
determined deficiencies in petitioner's income tax for his 1982
through 1986 tax years.
On January 24, 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 1982
through 1986.
On February 12, 2002,
petitioner submitted a Form 12153, Request for a Collection Due
Process Hearing. Petitioner argued that the proposed levy was
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 March 23, 2004.
During the hearing, petitioner's representative, Terri A. Merriam
(Ms. Merriam), requested that petitioner be given more time to submit
information to be considered. Ms. Cochran extended petitioner's
deadline for submitting information to be considered to April 6,
2004.
On April 5, 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.
The Form 656 indicated
that petitioner was seeking an effective tax administration
offer-in-compromise based on public policy and equity grounds.
Petitioner offered to pay $129,230 to compromise his outstanding tax
liabilities for 1982 through 1996.7
On the Form 433-A,
petitioner reported assets worth approximately $420,000 and
outstanding liabilities of approximately $264,000. Petitioner also
reported gross monthly income of $21,728 and monthly living expenses
of $14,382.
In the letter explaining
the offer amount, petitioner stated that he was offering to pay
$129,230 "for all Hoyt-related years to be paid in twenty-four
months * * *. The amount accounts for all the tax liability for 1982
through 1998 * * * and regular interest through April 15, 1993. This
offer assumes that no Tax Motivated Transaction (TMT) interest is
imposed".
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 May 21, 2004,
petitioner submitted another letter to Ms. Cochran, which included 42
exhibits not provided with the previous letters.
On November 23, 2004,
respondent issued petitioner a notice of determination. Respondent
determined that petitioner had:
(1) Total net realizable
equity in his assets of $156,053; (2) an amount collectible from
future income of $1,243,381,8
and (3) a reasonable collection potential of $1,415,173. Respondent
determined that petitioner was not entitled to an effective tax
administration offer-in-compromise based on public policy or equity
ground because the case "fails to meet the criteria for such
consideration". Respondent determined that petitioner did not
offer an acceptable collection alternative and that all requirements
of law and administrative procedure had been met. Respondent
concluded that the proposed collection action could proceed.
In response to the notice
of determination, petitioner filed a petition with this Court on
December 29, 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
[2006-1
USTC ¶50,326], 447 F.3d 706,
712 (9th Cir. 2006), affg. [Dec.
55,514(M)] 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 and doubt as to collectibility are not at issue in
this case.9
As pertinent here, the
Secretary may compromise a tax liability on the ground of effective
tax administration when:
(1) 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 compromise of the liability would
not undermine
(2) compliance by
taxpayers with the tax laws.10
Sec. 301.7122-1(b)(3), Proced. & Admin. Regs.
Petitioner proposed an
offer-in-compromise based on effective tax administration, arguing
that exceptional circumstances existed such that collection of the
full liability would undermine public confidence that the tax laws
are being administered in a fair and equitable manner. Respondent
determined that petitioner's offer-in-compromise did not meet the
criteria for an effective tax administration offer-in-compromise.
Because the underlying
tax liability is not at issue, our review under section
6330 is for abuse of discretion.
See Sego v. Commissioner [Dec.
53,938], 114 T.C. 604, 610
(2000); Goza v. Commissioner [Dec.
53,803], 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 [Dec.
53,206], 112 T.C. 19, 23 (1999);
Keller v. Commissioner [Dec.
56,587(M)], T.C. Memo. 2006-166;
Fowler v. Commissioner [Dec.
55,689(M)], T.C. Memo. 2004-163.
A.
Exceptional
Circumstances
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 the
Internal Revenue Manual (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 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, supra at
711-712. See also Keller v. Commissioner, supra; Barnes v.
Commissioner [Dec.
56,570(M)], T.C. Memo. 2006-150.
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.
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 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. We
agree with respondent that the example presents similar circumstances
to those in petitioner's case, including: Petitioner invested in
TEFRA partnerships in the early 1980s; petitioner's outstanding tax
liability is related to his investment in the partnerships; FPAAs
were issued to the partnerships; after several years of litigation,
Tax Court decisions upheld the vast majority of the deficiencies
asserted in the FPAAs; and petitioner argues that interest has
accumulated as the result of delays by and other actions of the tax
matters partner.
Petitioner is also
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.
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 [Dec.
46,099(M)], T.C. Memo.
1989-568;11
(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 their 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. 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 [Dec.
56,587(M)], T.C. Memo. 2006-166;
Barnes v. Commissioner [Dec.
56,570(M)], 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 [2006-1
USTC ¶50,326], 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, Ninth, and Tenth
Circuits from affirming our decisions to that effect. See Hansen
v. Commissioner, 471 F.3d 1021 (9th Cir. 2006), affg. [Dec.
55,812(M)] T.C. Memo. 2004-269;
Mortensen v. Commissioner, 440 F.3d 375 (6th Cir. 2006), affg.
[Dec.
55,824(M)] T.C. Memo. 2004-279;
Van Scoten v. Commissioner, 439 F.3d 1243 (10th Cir. 2006),
affg. [Dec.
55,818(M)] 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 their 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 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.
B.
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.
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 their 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 [3
USTC ¶1164], 290 U.S. 111,
115 (1933).12
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 four weeks" to provide all
information. However, he ignores the fact that Ms. Cochran granted
his requested extension and allowed him until April 6, 2004, to
submit information. 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 abused her discretion by
establishing a deadline for the submission of information.
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 not 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.
C.
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.
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.
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
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
[Dec.
56,816(M)],
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.
4
The parties stipulated that petitioner became a partner in DGE 85-1
and SGE 85-1 in 1984. However, petitioner testified, and the rest of
the record indicates, that he became a partner in 1985.
Petitioner
was also a partner in other Hoyt-related partnerships identified as
"DGE 1986-A" and "FF #4". 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 1982-86
were attributable to his involvement in DGE 85-1 and SGE 85-1
only.
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.
6
The FPAAs and other information specific to DGE 85-1's and SGE 85-1's
partnership-level proceedings are not in the record.
7
The details of petitioner's 1986-96 tax years are not in the
record.
8
Respondent determined that petitioner had monthly disposable income
of $15,739 and multiplied that amount by 79, the number of months
remaining on the collection statute.
9
While petitioner disputes his liability for sec.
6621(c)
interest, see supra
note 2, he did not raise doubt as to liability as a grounds for
compromise.
10
The regulations also provide that the Secretary may compromise a
liability on the ground of effective tax administration when
collection of the full liability will create economic hardship. See
sec. 301.7122-1(b), Proced. & Admin. Regs. While petitioner
disputes Ms. Cochran's determination of his reasonable collection
potential, he does not argue that collection of the full liability
would create economic hardship.
11
Bales
v. Commissioner
[Dec.
46,099(M)],
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. [Dec.
55,812(M)]
T.C. Memo. 2004-269; Mortensen
v. Commissioner,
440 F.3d 375, 390-391 (6th Cir. 2006), affg. [Dec.
55,824(M)]
T.C. Memo. 2004-279; Van
Scoten v. Commissioner,
439 F.3d 1243, 1254-1256 (10th Cir. 2006), affg. [Dec.
55,818(M)]
T.C. Memo. 2004-275.
12
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.
Michael
Keller v. Commissioner.
Dkt.
No. 000-000A , TC Memo. 2006-166, August 14, 2006.
[Appealable,
barring stipulation to the contrary, to CA-9. --CCH.]
[Code
Secs. 6330
and 7122]
Procedure
and administration: Collection: Seizure of property: Notice of levy
and right to hearing: Issues raised at hearing: Jeopardy and
compromise: Closing agreements and compromises: Offers-in-compromise.
--
The IRS did not abuse its
discretion in rejecting an offer-in-compromise and sustaining a
proposed levy action against a taxpayer who had been a partner in a
cattle breeding partnership through which he claimed deductions for
farming losses and carried back related net operating losses that
gave rise to refunds. The longstanding nature of the case did not
require the IRS to accept his offer-in-compromise for the same
reasons that the Court of Appeals for the Ninth Circuit considered
and rejected that argument in C.G. Fargo, 2006-1
USTC 50,326. Further, the IRS's
reliance on an example in the Internal Revenue Manual was not
arbitrary or capricious. Regarding other equitable matters, the mere
fact that the taxpayer's arguments did not persuade the IRS did not
mean that they were not considered. Finally, the IRS did not fail to
balance the need for efficient collection of taxes with the concern
that the collection action not be more intrusive than necessary. The
IRS did seek to collect the taxpayer's outstanding tax liability
through less intrusive means --an installment agreement but the
taxpayer rejected it. --CCH.
Asher B. Bearman, Jaret
R. Coles, Jennifer A. Gellner, Terri A. Merriam, and Wendy S.
Pearson, for petitioner; Gregory M. Hahn and Thomas N. Tomashek, for
respondent.
MEMORANDUM
FINDINGS OF FACT AND OPINION
HAINES, Judge: Petitioner
filed a petition with this Court in response to a Notice of
Determination Concerning Collection Action(s) Under Section
6320 and/or 6330
for 1991, 1992, and 1993.1
Pursuant to section
6330(d), petitioner seeks review
of respondent's determination. The sole issue for decision is whether
respondent abused his discretion in sustaining the proposed levy
action.
FINDINGS
OF FACT
Some of the facts have
been stipulated and are so found. The first and second stipulations
of fact and the attached exhibits are incorporated herein by this
reference.2
Petitioner resided in Escondido, California, when he filed his
petition.
Petitioner is married. He
has a bachelor of science degree in marine transportation and
management and has been employed by Military Sealift Command since
June 1982.
Petitioner timely filed
Federal income tax returns for 1991, 1992, and 1993 and reported the
following:
Total
Tax
Year
Income
Total Tax
Withheld
Refund Due
1991
$81,574 $10,662 $16,746 $6,084
1992
70,094 9,035 11,226 2,191
1993
107,841 21,043 22,445 1,402
Respondent assessed the
tax as reported and issued the refunds petitioner claimed.
In 1995, petitioner
became a partner in Durham Genetic Engineering 1990-2 J.V. (DGE), 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 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 IRS. In 1998,
Hoyt's enrolled agent status was revoked. Hoyt was convicted of
various criminal charges in 2001.3
Although petitioner did
not invest in DGE until 1995, he began claiming Hoyt-related
deductions on his 1994 return. Despite receiving from DGE Schedules
K-1, Partner's Share of Income, Credits, Deductions, Etc., for 1994
and 1995, petitioner claimed the Hoyt-related deductions on Schedules
F, Profit or Loss From Farming. On his 1994 and 1995 returns,
petitioner reported Schedule F losses of $302,818
and$107,951,respectively.4
In December 1995,
petitioner filed a Form 1045, Application for Tentative Refund,
seeking to carry back a Hoyt-related net operating loss realized in
1994 to 1991, 1992, and 1993. As a result of the carryback,
petitioner reported decreases in tax of $10,662, $9,035, and $21,043,
respectively. Respondent issued refunds in those amounts, plus
interest, on February 5, 1996.
On March 30, 1998,
respondent reversed petitioner's tentative net operating loss
carrybacks claimed on the Form 1045 and reassessed tax due of
$10,662, $9,035, and $21,043 for 1991, 1992, and 1993, respectively,
plus interest.5
To secure payment of the assessed tax, a Federal tax lien was placed
on petitioner's property on August 13, 1999.6
On October 11, 2000,
respondent sent petitioner a settlement proposal. Respondent offered
to not impose any section
6662 penalties if petitioner: (1)
Conceded that he is not entitled to claim any of the Hoyt-related
expenses claimed on his returns; (2) agreed that the higher rate of
interest applicable to tax-motivated transactions will apply; and (3)
waived any claim for the abatement of interest. Petitioner did not
accept the settlement offer.
On March 10, 2003,
respondent sent petitioner a Final Notice of Intent to Levy and
Notice of Your Right to a Hearing relating to 1991, 1992, and 1993.
On April 8, 2003, petitioner submitted a Form 12153, Request for a
Collection Due Process Hearing. Petitioner indicated he would pursue
offers-in-compromise based on doubt as to collectibility and
effective tax administration and would provide financial information
upon request.
On January 21, 2004, a
section
6330 hearing was held by phone
between Settlement Officer Kathleen Lee (Ms. Lee) and Terri A.
Merriam (Ms. Merriam), petitioner's attorney. Ms. Merriam indicated
that petitioner would most likely be able to pay the tax in full, and
thus he wished to pursue only an effective tax administration
offer-in-compromise. However, Ms. Merriam did not provide Ms. Lee
with Form 656, Offer in Compromise, or with Form 433-A, Collection
Information Statement for Wage Earners and Self-Employed Individuals.
On February 4, 2004, Ms.
Merriam sent Ms. Lee a letter indicating that petitioner had not yet
completed a Form 433-A, but one would be obtained "shortly".
Because petitioner would likely be able to pay his tax liability in
full, Ms. Merriam asked Ms. Lee to consider the effective tax
administration offer-in-compromise. The letter set out in detail
petitioner's position regarding an effective tax administration
offer-in-compromise, but a Form 656 was not enclosed.
On March 30, 2004,
respondent sent petitioner a notice of determination sustaining the
proposed collection action. Respondent stated that "We are
unable to determine whether or not an Offer in Compromise is the
appropriate resolution because you failed to provide the financial
information necessary to make a collection determination."
In response to the notice
of determination, petitioner filed his petition with this Court on
May 5, 2004. Petitioner argued that respondent erred by: (1)
Determining that petitioner did not qualify for an effective tax
administration offer-in-compromise; and (2) failing to allow
petitioner sufficient time to provide additional information.7
This case was initially
calendared for trial beginning January 24, 2005. However, the
parties' joint motions for continuance and remand were granted at
calendar call. The case was remanded to respondent's Appeals Office
to give petitioner an opportunity to present information that he did
not present in the first section
6330 hearing. On remand, the case
was assigned to Settlement Officer John Vander Linden (Mr. Vander
Linden).
In connection with the
second section
6330 hearing, petitioner provided
respondent with Forms 433-A and 656 that indicated that petitioner
was requesting an offer-in-compromise based only on effective tax
administration.8
Petitioner offered to compromise his outstanding tax liabilities not
only for the years subject to the proposed collection action, but
also for those arising from his 1994, 1995, and 1996 tax years.9
Petitioner offered to pay $85,344 to compromise an estimated income
tax liability of $228,000, inclusive of penalties and interest. The
$85,344 represented petitioner's total income tax liability,
exclusive of penalties or interest. However, petitioner's
offer-in-compromise did not set forth any grounds on which an
effective tax administration offer could be accepted.
The second section
6330 hearing was held on March
14, 2005. Because the offer-in-compromise did not include any grounds
for accepting the offer, Mr. Vander Linden considered Ms. Merriam's
February 4, 2004, letter outlining petitioner's position. In his
review of this case, Mr. Vander Linden considered all of the
information and arguments presented by petitioner at the hearing, in
the letter, and contained in the administrative record.
On May 10, 2005,
respondent sent petitioner a Supplemental Notice of Determination
Concerning Collection Action(s) Under Section
6320 and/or 6330 (supplemental
notice of determination). Respondent determined that: (1) Petitioner
did not qualify for an effective tax administration
offer-in-compromise; and (2) any compromise relating to 1994, 1995,
and 1996 could not be considered because the taxes, penalties, and
interest for those years had not been assessed. As a result,
respondent sustained the proposed collection action.
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
[2006-1
USTC ¶50,326], 447 F.3d 706,
712 (9th Cir. 2006), affg.[Dec.
55,514(M)] T.C. Memo. 2004-13;
sec. 301.7122-1(c)(1), Proced. & Admin. Regs.
The regulations 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. As pertinent here, the Secretary may compromise a tax
liability on the ground of effective tax administration when: (1)
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 (2) compromise
of the liability would not undermine compliance by taxpayers with the
tax laws.10
Petitioner proposed an
effective tax administration offer-in-compromise, arguing that
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. Respondent
rejected petitioner's argument and determined that "the offers
in compromise under ETA provisions are [not] appropriate given the
circumstances of this case."
Because the underlying
tax liability is not at issue, our review under section
6330 is for abuse of discretion.
See Sego v. Commissioner [Dec.
53,938], 114 T.C. 604, 610
(2000); Goza v. Commissioner [Dec.
53,803], 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 was arbitrary,
capricious, or without sound basis in fact or law. Woodral v.
Commissioner [Dec.
53,206], 112 T.C. 19, 23 (1999);
Fowler v. Commissioner [Dec.
55,689(M)], T.C. Memo. 2004-163.
A. Exceptional
Circumstances
Petitioner asserts that
"There are so many unique and equitable facts in this case that
this case is an exceptional circumstance", and respondent abused
his discretion by not accepting those facts as grounds for an
offer-in-compromise. In support of his assertion, petitioner argues
that: (1) The longstanding nature of this case justifies acceptance
of the offer-in-compromise; (2) respondent's reliance on an example
in the Internal Revenue Manual was misplaced; 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 argument considered and rejected by the Court of
Appeals for the Ninth Circuit in Fargo v. Commissioner, supra
at 711-712. See also Barnes v. Commissioner [Dec.
56,570(M)], T.C. Memo. 2006-150.
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 v. Commissioner, supra, 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 Barnes v. Commissioner, supra.
Respondent's rejection of
petitioner's longstanding case argument was not arbitrary or
capricious.
2. The Internal
Revenue Manual Example
Petitioner argues that
respondent erred when he determined that petitioner was not entitled
to relief based on Example 2 in Internal Revenue Manual section
5.8.11.2.2. 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.
Internal Revenue Manual
section 5.8.11.2.2 discusses effective tax administration
offers-in-compromise based on equity and public policy grounds and
provides the Example 2:
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 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.
In the supplemental
notice of determination, respondent states:
We have also considered
the provision of the Internal Revenue Manual (IRM) Section
5.8.11.2.2, Example 2. This example involves circumstances similar to
the circumstances presented in the taxpayer's case. From this
example, it is clear the government does not consider on [sic] offers
like this to acceptable [sic] under ETA considerations.
We agree with respondent
that the example presents similar circumstances to those in
petitioner's case. The similarities include: Petitioner's outstanding
tax liability is related to his investment in DGE, a TEFRA
partnership; respondent proposed a settlement offer in 2000 in which
respondent offered to forgo penalties; petitioner rejected the
settlement offer; petitioner now proposes a compromise on terms more
beneficial than those in the settlement offer; and petitioner argues
that the penalties and interest have accumulated as a result of the
length of the case.
Petitioner is correct in
asserting that all of the facts in his case are not present in the
example. However, it is unreasonable to expect that facts in an
example be identical to facts of a particular case before the example
can be relied upon. The Internal Revenue Manual example was only one
of many factors respondent considered. Given the similarities to
petitioner's case, respondent's reliance on that example was not
arbitrary or capricious.
3. Petitioner's Other
"Equitable Facts"
Petitioner argues that
respondent abused his discretion by failing to consider the other
"equitable facts" of this case. Petitioner's "equitable
facts" include reference to: (1) Petitioner's reliance on Bales
v. Commissioner [Dec.
46,099(M)], T.C. Memo.
1989-568;11
(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 is 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. 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 Barnes v. Commissioner [Dec.
56,570(M)], 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 [2006-1
USTC ¶50,326], 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. [Dec.
55,824(M)] T.C. Memo. 2004-279;
Van Scoten v. Commissioner, 439 F.3d 1243 (10th Cir. 2006),
affg. [Dec.
55,818(M)] T.C. Memo. 2004-275.
Mr. Vander Linden
testified that he considered all of Ms. Merriam's and petitioner's
assertions, but that the "equitable facts" did not affect
his final determination. Mr. Vander Linden also testified that he
considered Ms. Merriam's February 4, 2004 letter, in which Ms.
Merriam addresses petitioner's "equitable facts" at length.
Additionally, Mr. Vander Linden read and considered many of the cases
cited in that letter. Likewise, the supplemental notice of
determination reflects consideration of the arguments raised in the
letter.
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 supplemental notice of
determination and Mr. Vander Linden'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 was not an abuse of discretion.
B. 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.
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.
C. Petitioner's Other
Arguments
1. 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
[3
USTC ¶1164],
290 U.S. 111, 115 (1933).12
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.
2. Unassessed Years
Petitioner argues that
respondent abused his discretion by failing to consider his
offer-in-compromise as it relates to petitioner's unassessed tax
years, 1994, 1995, and 1996. Respondent has proposed collection
action for only 1991, 1992, and 1993. The ultimate issue in this case
is whether respondent may proceed with the proposed collection
action. Whether respondent can or should compromise petitioner's tax
liability for years outside of those for which collection action has
been proposed is not relevant to our determination. Petitioner's
argument is without merit.
3. 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 second section
6330 hearing, petitioner proposed
only an effective tax administration offer-in-compromise. In the
notice, respondent states: "the only other alternative is to pay
his accounts by means of an installment agreement. Through his
authorized representative he has indicated he does not want to
consider this alternative at this time." Respondent concludes:
Since we are unable to
resolve his accounts by mutually agreeable collection alternatives,
the only alternative is to sustain the levy action proposed to
collect his accounts. This action balances the need for efficient
collection of taxes with the legitimate concern of the taxpayer that
the collection action be no more intrusive than necessary.
The supplemental notice
of determination indicates that respondent sought to collect
petitioner's outstanding tax liability through less intrusive means
(an installment agreement), but petitioner rejected it. Because no
other collection alternatives were proposed, there were not 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. 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.
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
Respondent reserved relevancy objections to 8 exhibits attached to
the first stipulation of facts and to 143 exhibits attached to the
second stipulation of facts. Fed. R. Evid. 402 provides the general
rule that all relevant evidence is admissible, while evidence which
is not relevant is not admissible. Fed. R. Evid. 401 defines relevant
evidence as "evidence having any tendency to make the existence
of any fact that is of consequence to the determination of the action
more probable or less probable than it would be without the
evidence." While the relevancy of some exhibits and portions of
petitioner's testimony is certainly limited, we find that the
exhibits and testimony meet the threshold definition of relevant
evidence and are admissible. The Court will give the exhibits and
testimony 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.
3
Petitioner asks the Court to take judicial notice of certain "facts"
in other Hoyt-related cases and apply judicial estoppel to "facts
respondent has asserted in previous [Hoyt-related] litigation".
We will do neither.
A judicially noticeable fact is one not
subject to reasonable dispute in that it is either (1) generally
known within the territorial jurisdiction of the trial court or (2)
capable of accurate and ready determination by resort to sources
whose accuracy cannot reasonably be questioned. Fed. R. Evid. 201(b).
Petitioner is not asking the Court to take judicial notice of facts
that are not subject to reasonable dispute. Instead, petitioner is
asking the Court to take judicial notice of the truth of assertions
made by taxpayers and the Commissioner in other Hoyt-related cases.
Such assertions are not the proper subject of judicial notice.
The
doctrine of judicial estoppel prevents a party from asserting a claim
in a legal proceeding that is inconsistent with a position
successfully taken by that party in a previous proceeding. New
Hampshire v. Maine ,
532 U.S. 742, 749 (2001). Among the requirements for judicial
estoppel to be invoked, a party's current litigating position must be
"clearly inconsistent" with a prior litigating position.
Id.
at 750-751. Petitioner has failed to identify any clear
inconsistencies between respondent's current position and his
position in any previous litigation.
4
Petitioner's 1994 and 1995 tax years were before the Court at docket
No. 9662-01. See Keller
v. Commissioner
[Dec.
56,550(M)],
T.C. Memo. 2006-131.
5
The details of the reassessment are not in the record, and the
parties do not raise any procedural issues regarding it.
6
The Federal tax lien is not at issue in the present case. Petitioner
received a sec.
6330
hearing with regard to the filing of the lien, and respondent
sustained the collection action. However, the details of the lien and
the related hearing are not in the record.
7
Petitioner also alleged that respondent erred by not finding that
there was doubt as to collectibility. However, petitioner did not
present information to substantiate this claim and does not argue it
on brief. We conclude that petitioner has abandoned this argument.
8
Petitioner actually completed two offers-in-compromise, one for
1991-95 and the other for 1996. Petitioner's arguments are not
particular to one offer or the other, and respondent considered both
together. To avoid confusion, we refer to the offers-in-compromise as
a single offer.
9
At the time of the second sec.
6330
hearing, the taxes, penalties, and interest for petitioner's 1994,
1995, and 1996 tax years were unassessed.
10
The regulations also provide that the Secretary may compromise a
liability on the ground of effective tax administration when
collection of the full liability will create economic hardship. See
sec. 301.7122-1(b), Proced. & Admin. Regs. Petitioner does not
argue that collection of the full liability will create economic
hardship
11
Bales
v. Commissioner
[Dec.
46,099(M)],
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. [Dec.
55,824(M)]
T.C. Memo. 2004-279; Van
Scoten v. Commissioner,
439 F.3d 1243, 1254-1256 (10th Cir. 2006), affg. [Dec.
55,818(M)]
T.C. Memo. 2004-275; Sanders
v. Commissioner
[Dec.
56,083(M)],
T.C. Memo. 2005-163; Hansen
v. Commissioner
[Dec.
55,812(M)],
T.C. Memo. 2004-269.
12
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.
Anthony
Edward and S.F. O'Connor v. Commissioner.
Docket
No. 8378-06S . Filed March 5, 2007.
[Code
Secs. 6330
and 7122]
Tax
Court: Summary opinion: Offer-in-compromise: Abuse of discretion. --
The IRS did not abuse its
discretion by rejecting a married couple's offer-in-compromise (OIC)
and sustaining the notice of federal tax lien filed against the
taxpayers. The couple did not demonstrate that the notice of lien
would cause them economic hardship within the meaning of the
regulations. The taxpayers' account was placed in currently not
collectible status so long as they complied with federal tax laws and
their income did not increase substantially. Thus, the notice of lien
did not deprive the taxpayers of the building they owned, the rental
income therefrom, or any other property. Further, the taxpayers
admitted that the rent from the building allowed them to meet their
monthly living expenses. --CCH.
PURSUANT TO INTERNAL
REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS
PRECEDENT FOR ANY OTHER CASE.
Anthony Edward and S.F.
O'Connor, pro sese. Jeffrey S. Luechtefeld, for respondent.
PANUTHOS, Chief Special
Trial Judge: This case was heard pursuant to the provisions of
sections
6330(d) and 7463
of the Internal Revenue Code in
effect when the petition was filed. The decision to be entered is not
reviewable by any other court, and this opinion should not be cited
as authority. Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect at relevant
times.
This proceeding arises
from a petition for judicial review filed in response to a Notice of
Determination Concerning Collection Action(s) Under Section
6320 and/or 6330
(notice of determination) issued
to petitioners on April 5, 2006. Pursuant to sections
6320(c) and 6330(d),
petitioners seek review of respondent's determination sustaining the
filing of a notice of Federal tax lien against them. The issue for
decision is whether respondent abused his discretion in rejecting an
offer-in-compromise (OIC) that petitioners submitted for the taxable
years 2000 and 2001.
Background
The record consists of
the declaration of respondent's settlement officer, a copy of
respondent's administrative file, and the testimony of petitioner
Anthony O'Connor. At the time the petition was filed, petitioners
resided in Citrus Springs, Florida. Petitioners have a daughter who
was 9 years old at the time of trial.
Respondent made
assessments against petitioners for the taxable years 2000 and 2001
for tax and related interest. Respondent also assessed an
accuracy-related penalty for the taxable year 2000. Respondent filed
a notice of Federal tax lien and sent petitioners a Notice of Federal
Tax Lien Filing and Your Right to a Hearing Under IRC 6320.
Petitioners timely
submitted a Form 12153, Request for a Collection Due Process Hearing.
They also submitted an OIC in which they made a cash offer of $9,500
to compromise their 2000 and 2001 tax liabilities. The OIC was based
on effective tax administration. Petitioners stated that Mr. O'Connor
had been in a serious car accident that resulted in 9 weeks of
hospitalization, including 5 weeks spent in a coma, and rendered him
unable to work.
Petitioners provided
respondent with financial information in support of the OIC.
Petitioners indicated they owned a residence with a fair market value
of $85,000 that was subject to a $55,225 mortgage. Petitioners also
indicated they owned a building with a fair market value of $149,000
that was unencumbered. Petitioners rented a portion of the building
to an unrelated party and used the remainder for Mr. O'Connor's
computer and television repair business. After Mr. O'Connor was
injured, however, the repair business generated little or no income.
Petitioners' case was
assigned to a settlement officer, who conducted an administrative
hearing. Petitioners did not seek to challenge the underlying tax
liabilities during the hearing or offer collection alternatives aside
from the OIC.
After the hearing was
concluded, respondent issued the
notice
of determination sustaining the lien filing and rejecting
petitioners' OIC. Respondent determined that petitioners did not meet
the requirements for effective tax administration. The notice states:
(1) Although petitioners were each unemployed, Mrs. O'Connor could
work if necessary and Mr. O'Connor was only temporarily disabled; (2)
petitioners' residence and the building had fair market values of
$120,500 and $192,128, respectively, providing enough equity to pay
the tax liabilities in full; and (3) the rent petitioners received
from the building allowed them to meet their monthly living expenses.
Respondent did agree, however, to abate the assessment of the
accuracy-related penalty for 2000. Respondent also indicated that
respondent would take no further collection action unless petitioners
failed to file or pay future income taxes or their income increased
substantially.
Discussion
Section
6321 imposes a lien in favor of
the United States on all property and rights to property of a person
when a demand for the payment of the person's liability for taxes has
been made and the person fails to pay those taxes. Such a lien arises
when an assessment is made. Sec.
6322. Section
6323(a) requires the Secretary to
file a notice of Federal tax lien if the lien is to be valid against
any purchaser, holder of a security interest, mechanic's lienor, or
judgment lien creditor. Lindsay v. Commissioner, T.C. Memo.
2001-285, affd. 56 Fed. Appx. 800 (9th Cir. 2003).
Section
6320 provides that a taxpayer
shall be notified in writing by the Secretary of the filing of a
notice of Federal tax lien and provided with an opportunity for an
administrative hearing. An administrative hearing under section
6320 is conducted in accordance
with the procedural requirements of section
6330. Sec.
6320(c). At the administrative
hearing, a taxpayer is entitled to raise any relevant issue relating
to the unpaid tax, including a spousal defense or collection
alternatives such as an offer-in-compromise or an installment
agreement. Sec.
6330(b) and (c)(2)(A); sec.
301.6320-1(e)(1), Proced. & Admin. Regs. A taxpayer also may
challenge the existence or amount of the underlying tax liability,
including a liability reported on the taxpayer's original return, if
the taxpayer "did not receive any statutory notice of deficiency
for such tax liability or did not otherwise have an opportunity to
dispute such tax liability." Sec.
6330(c)(2)(B); see also Urbano
v. Commissioner, 122 T.C. 384, 389-390 (2004); Montgomery v.
Commissioner, 122 T.C. 1, 9-10 (2004).
At the conclusion of the
hearing, the Appeals officer must determine whether and how to
proceed with collection, taking into account, among other things,
collection alternatives proposed by the taxpayer and whether any
proposed collection action balances the need for the efficient
collection of taxes with the legitimate concern of the taxpayer that
the collection action be no more intrusive than necessary. See sec.
6330(c)(3).
Section
6330(d) provides for judicial
review of the administrative determination in the Tax Court or a
Federal District Court, as may be appropriate. Where the validity of
the underlying tax liability is properly at issue, the Court will
review the matter de novo. However, where the validity of the
underlying tax liability is not properly at issue, the Court will
review the Commissioner's administrative determination for abuse of
discretion. Goza v. Commissioner, 114 T.C. 176, 181-182
(2000).
Petitioners do not seek
to challenge their underlying tax liabilities. We therefore review
respondent's determination for abuse of discretion. See Lunsford
v. Commissioner, 117 T.C. 183, 185 (2001); Goza v.
Commissioner, supra.
The sole collection
alternative petitioners proposed was an OIC. Section
7122(a) authorizes the Secretary
to compromise any civil case arising under the internal revenue laws.
The Secretary may compromise a liability on the ground of effective
tax administration when, inter alia, although collection in full
could be achieved, collection of the full liability will create
economic hardship. Speltz v. Commissioner, 124 T.C. 165,
172-174 (2005), affd. 454 F.3d 782 (8th Cir. 2006); sec.
301.7122-1(b)(3)(i), Proced. & Admin. Regs. Factors supporting
(but not conclusive of) a determination that collection would cause
economic hardship include, but are not limited to:
(A) Taxpayer is incapable
of earning a living because of a long term illness, medical
condition, or disability, and it is reasonably foreseeable that
taxpayer's financial resources will be exhausted providing for care
and support during the course of the condition;
(B) Although taxpayer has
certain monthly income, that income is exhausted each month in
providing for the care of dependents with no other means of support;
and
(C) Although taxpayer has
certain assets, the taxpayer is unable to borrow against the equity
in those assets and liquidation of those assets to pay outstanding
tax liabilities would render the taxpayer unable to meet basic living
expenses.
Sec. 301.7122-1(c)(3)(i),
Proced. & Admin. Regs.
Petitioners contend that
Mr. O'Connor's injuries rendered him permanently disabled. Although
Mrs. O'Connor is able to work, petitioners contend any income she
earned likely would be offset by the cost of childcare for their
daughter. Petitioners therefore assert that the rent from the
building is their only source of income.
Mr. O'Connor testified
that he had attempted to borrow against the equity in petitioners'
properties but was unable to do so. Mr. O'Connor believes lenders
view him as a credit risk because of his inability to work. Selling
the building to pay the tax liabilities, he believes, would prevent
petitioners from meeting necessary living expenses.
At trial, respondent did
not dispute Mr. O'Connor's testimony. Respondent contends, however,
that petitioners will not be forced to sell the building. Respondent
maintains that petitioners' account will be placed in currently not
collectible status as long as petitioners comply with Federal tax
laws and their income does not increase substantially.
We note that this is an
action to review a notice of lien and not a levy. A lien is a
security device that assures the Government of its priority over
other creditors. Elliott, Federal Tax Collections, Liens, and Levies,
par. 9.05 (2d ed. 2005). Unlike a levy, a lien does not deprive a
taxpayer of property. Id.; see also United States v.
Whiting Pools, Inc., 462 U.S. 198, 210-211 (1983).
Petitioners do not
dispute that the rent from the building allows them to meet their
monthly living expenses. The notice of lien will not deprive
petitioners of the building, the rental income therefrom, or any
other property. While a notice of lien may adversely affect a
taxpayer in other ways, petitioners have not demonstrated that it
will cause them an economic hardship within the meaning of the
regulations.
We also note that if
respondent were to remove the currently not collectible designation
from petitioners' account and begin further collection activity, any
levy that respondent proposed would require notice and an opportunity
to be heard under section
6320 or 6330.
See Speltz v. Commissioner, supra at 180. Accordingly, we need
not and do not decide whether petitioners would suffer an economic
hardship if respondent pursued a levy action.
On the basis of our
review of the record, we conclude that respondent satisfied the
requirements of section
6330(c) and did not abuse his
discretion by rejecting petitioners' OIC and sustaining the notice of
Federal tax lien filed against petitioners. Respondent's
determination therefore is sustained.
Reviewed and adopted as
the report of the Small Tax Case Division.
To reflect the foregoing,
Decision will be
entered for respondent.
Durham
Farms #1, J.V., Gary L. Blackburn, Tax matters Partner et al. 1
v. Commissioner
Docket
Nos. 2465-94, 2468-94, 5104-94, 5105-94, 5106-94, 9721-94, 9752-94,
9768-94, 9814-94, 18707-94, 18710-94, 20957-94, 22821-94, 23429-94,
23777-94, 8175-95, 10053-95, 11217-95, 12500-95, 13236-95, 14712-95,
20843-95, 20868-95, 21629-95, 24241-95, 24643-95., TC Memo. 2000-159,
79 TCM 2009, Filed May 18, 2000
[Appealable, barring
stipulation to the contrary, to CA-9.--CCH.]
[Code
Sec. 162 ]
Deductions:
Guaranteed payments: Partnerships: Partner's services: Cattle sales:
Ordinary and necessary.--Deductions for guaranteed payments made by
cattle breeding partnerships to a related seller for services or the
use of capital were denied. The taxpayers failed to meet their burden
of proving that the payments qualified as ordinary and necessary
business expenses. They provided little or no information concerning
the nature and services provided by the payee, nor did they establish
whether the payments constituted reasonable compensation for such
services.
[Code
Secs. 162 and
167
]
Deductions:
Partnerships: Cattle breeding: Substantiation: Valuation: Fair market
value.--Cattle breeding partnerships were not entitled to claimed
depreciation or farm deductions, investment tax credits, capital
gains, fuel tax credits, or research and development credits absent
proof that they acquired the benefits and burdens of ownership as to
the specific individual breeding cattle that made up the alleged
breeding herd. The Tax Court accepted the conclusions of an IRS
expert witness regarding the number of cattle. Bills of sale and herd
recap sheets that the taxpayers provided to substantiate the number
of cattle owned were neither reliable nor contemporaneous documents
since the taxpayers' recordkeeping practices were suspect. The
taxpayers also overstated the purchase price of the cattle since the
per-animal price that they asserted did not reasonably approximate
fair market value. Moreover, the taxpayers' asserted valuation was
substantially higher than the prices that a related organization
realized in selling cattle to independent, unrelated third parties in
arm's-length transactions.
[Code
Sec. 163 ]
Deductions:
Interest paid: Partnerships: Cattle sales: Genuine
indebtedness.--Interest deductions claimed with respect to certain
notes paid by a cattle selling partnership in connection with the
transfer of cattle back to a related seller at inflated values were
disallowed. Although in a related case (R.W.
Bales,
TC Memo. 1989-568, Dec. 46,009(M)), the Tax Court determined that the
notes at issue represented valid recourse indebtedness, the
partnership's collateral estoppel claim was not properly before the
Court. Moreover, the facts had changed materially from the prior
decision and the partnership did not actually own the cattle for tax
purposes.
[Code
Sec. 163 ]
Deductions:
Interest paid: Partnerships: Cattle sales: Recourse notes: Economic
substance.--An organization from which cattle breeding partnerships
purchased cattle did not intend to enforce purportedly recourse notes
executed in connection with the transaction. Thus, interest on the
notes was nondeductible. Substance, rather than form, controlled the
treatment of the notes, and the Court rejected testimony that some of
the notes had been paid off, which was offered as evidence of valid
indebtedness. As a result, the notes lacked economic substance, and
the Court characterized them as illusory and held that they were
merely a facade to support tax benefits promised to the partnerships'
investors.
[Tax
Court Rule 142 ]
Deductions:
Burden of proof: Failure to meet burden by taxpayer.--Cattle breeding
partnerships failed to carry their burden of proving their
entitlement to deduct individual retirement account contributions
made for certain partners or accounting and tax return preparation
fees. Also, since a taxpayer partnership provided no evidence to the
contrary, the IRS's adjustments to farm income, capital gains, and
discharge of indebtedness income were sustained.--CCH.
Michael D. Culy, for the
petitioners in Docket Nos. 5104-94, 5105-94, 5106-94, 18710-94, and
22821-94. Timothy G. Buck, for the petitioners in Docket Nos.
5104-94, 5105-94, 22821-94, and 23777-94. Montgomery W. Cobb, for the
petitioners in Docket Nos. 2465-94, 2468-94, 9721-94, 9752-94,
9768-94, 9814-94, 18707-94, 18710-94, 20957-94, 22821-94, 23429-94,
23777-94, 8175-95, 13236-95, 14712-95, 20843-95, 20868-95, 21629-95,
24241-95, and 24643-95. Walter J. Hoyt III, pro se in Docket
Nos. 10053-95, 11217-95, and 12500-95. 2
Walter J. Hoyt III (participant), pro se in Docket Nos.
20843-95, 20868-95, 24241-95, and 24643-95. 3
Gerald W. Douglas, Ann M. Murphy, Wesley F. McNamara, Paul Robeck,
Kathy I. Shaw, Catherine Caballero, and Ralph W. Jones, for the
respondent.
MEMORANDUM
FINDINGS OF FACT AND OPINION
DAWSON, Judge:
These cases were assigned
to Special Trial Judge Stanley J. Goldberg, pursuant to Rules 180,
181, and 183. All Rule references are to the Tax Court Rules of
Practice and Procedure. Section references are to the Internal
Revenue Code in effect for the years in issue. The Court agrees with
and adopts the opinion of the Special Trial Judge, which is set forth
below.
OPINION
OF THE SPECIAL TRIAL JUDGE
GOLDBERG, Special Trial
Judge: Respondent issued a notice of final partnership administrative
adjustment (FPAA) to each partnership involved in these consolidated
cases determining the adjustments in the amounts and for the taxable
years as set forth in appendix A hereto. 4
After concessions, the
primary issues for decision are: (1) Whether each of seven of the
eight partnerships in the instant cases--Durham Farms #1, J.V., Gary
L. Blackburn, Tax Matters Partner (DF #1), Shorthorn Genetic
Engineering 1982-1, J.V., Gary L. Blackburn, Tax Matters Partner (SGE
82-1), Durham Genetic Engineering 1984-3, J.V., Gary L. Blackburn,
Tax Matters Partner (DGE 84-3), Shorthorn Genetic Engineering 1984-5,
J.V., Gary L. Blackburn, Tax Matters Partner (SGE 84-5), Durham
Genetic Engineering 1986-2, J.V., Gary L. Blackburn, Tax Matters
Partner (DGE 86-2), Timeshares Breeding Services 1989-1, J.V., Gary
L. Blackburn, Tax Matters Partner (TBS 89-1), and Timeshares Breeding
Services 1990-1, J.V., Gary L. Blackburn, Tax Matters Partner (TBS
90-1)--purchased and acquired ownership of breeding cattle that are
subject to an allowance for depreciation under section
167 for the years in issue; (2)
whether those seven cattle-breeding partnerships each have
substantiated and are entitled to their claimed depreciation
deductions with respect to their breeding cattle for the years in
issue; (3) whether those seven cattle-breeding partnerships are
entitled to certain interest deductions with respect to the
promissory note each partnership issued in connection with the
purported acquisition of its breeding cattle; (4) whether any of
those seven cattle-breeding partnerships is entitled to farm,
guaranteed payment, and certain other deductions it claimed; (5)
whether DGE 84-3 and SGE 84-5 are entitled to an investment credit
for 1987; (6) whether some of those seven cattle-breeding
partnerships had certain additional farm income for some of the years
in issue; (7) whether the eighth partnership, W.J. Hoyt Sons
Management Co., Gary L. Blackburn, Tax Matters Partner (Management),
is entitled to certain credits and deductions it claimed for the
years in issue; and (8) whether Management had certain additional
farm and other income for the years in issue.
FINDINGS
OF FACT
Some of the facts and
certain documents have been stipulated for trial pursuant to Rule 91
and are found accordingly. The Court incorporates the parties'
stipulations in this opinion by reference.
At the times their
respective petitions herein were filed, DF #1, SGE 82-1, DGE 84-3,
SGE 84-5, DGE 86-2, TBS 89-1, TBS 90-1, and Management each
maintained its principal place of business in Burns, Oregon.
A. Overview
Walter J. Hoyt III (Jay
Hoyt) is a general partner of each of the seven cattle-breeding
partnerships that are involved in the instant cases. These seven
cattle-breeding partnerships were formed and began operating in the
years indicated as follows:
Partnership
Year
DF
#1 ...............................................................
1973
SGE
82-1 ............................................................
1982
DGE
84-3 ............................................................
1984
SGE
84-5 ............................................................
1984
DGE
86-2 ............................................................
1990
TBS
89-1 ............................................................
1989
TBS
90-1 ............................................................
1990
DF
#1, SGE 82-1, DGE 84-3, and SGE 84-5 had each been formed as a
California or Nevada limited partnership.
Jay Hoyt's father was a
prominent breeder of Shorthorn cattle, one of the three major breeds
of cattle in the United States. In order to expand his business and
attract investors, the father had started organizing and promoting
cattle-breeding partnerships by the late 1960's. Before and after the
father's death in early 1972, Jay Hoyt and other members of the Hoyt
family were extensively involved in organizing and operating
cattle-breeding partnerships. From about 1971 through 1992, Jay Hoyt
organized, promoted to numerous investors, and operated as a general
partner a total of almost 100 cattle-breeding partnerships.
Several of these earlier
cattle-breeding partnerships, including DF #1, were the subject of
this Court's opinion in Bales v.Commissioner [Dec.
46,099(M) ], T.C. Memo. 1989-568,
wherein the years in issue generally were 1977, 1978, and 1979. The
Hoyt family originally through W.J. Hoyt & Sons had sold breeding
cows or heifers to these earlier partnerships for no money down and a
promissory note. In general, the promissory note required a
partnership to pay the stated purchase price for its cattle over a
specified long-term period of 10 years or more. For about the first 5
years, no principal payments were required from the partnership but
only annual interest payments at a specified interest rate per annum.
Over the remaining years, the partnership was to pay the note's full
principal amount in equal annual installments. W.J. Hoyt & Sons
was further granted a security interest in the partnership's breeding
cattle, securing payment on the partnership's promissory note. W.J.
Hoyt & Sons and the partnership concurrently also entered into a
management agreement, pursuant to which W.J. Hoyt & Sons
obligated itself to undertake all management with respect to a
partnership's breeding cattle, pay all expenses, and provide stud
bull services, in exchange for receiving all calves produced and any
culled cows (the sharecrop agreement). The sharecrop agreement
further obligated W.J. Hoyt & Sons to replace any partnership
breeding cow that could no longer serve as a breeding cow with
another cow of a specified quality. In addition, W.J. Hoyt & Sons
further guaranteed that there would be a 10-percent annual increase
in the size of the partnership's breeding herd.
Most of the cattle sold
to these earlier partnerships were represented to be registered
Shorthorn heifers on the bills of sale issued to the partnership.
Others were appendix registered and/or crossbred. Some were "grade"
heifers. All of the cattle owned by the partnerships registered with
the American Shorthorn Association (ASA) were registered under the
W.J. Hoyt & Sons name, and not under a partnership's name.
However, other of the Shorthorn cattle sold to the partnerships were
not registered with the ASA. Instead, these cattle were issued
certificates by the Hoyt family (Hoyt certificates).
As indicated previously,
the Hoyt family through W.J. Hoyt & Sons originally had (1) sold
the breeding cattle to earlier cattle-breeding partnerships they
formed and promoted to investors and (2) managed those partnerships'
breeding cattle pursuant to a sharecrop agreement with each
partnership. These arrangements somewhat changed over the years, in
that the Hoyt family conducted these activities through various
entities. 5
At some point before the years in issue, Jay Hoyt decided that when
the Hoyt family sold breeding cattle to a cattle-breeding
partnership, he should not be negotiating as general partner of that
cattle-breeding partnership its purchase of those same cattle and
then managing that partnership's cattle under a sharecrop agreement
between the partnership and W.J. Hoyt & Sons. However, despite
these different entities the Hoyt family employed, Jay Hoyt continued
to head the Hoyt organization and was ultimately in charge of all of
the Hoyt organization's operations. All of the individuals managing
various entities in the Hoyt organization answered to him.
At some point, W.J. Hoyt
Sons Ranches (Ranches) (which originally in the 1960's had been an
oral partnership of Jay Hoyt, his two brothers Ric Hoyt and Seth
Hoyt, and their father) was reformed and became the seller of the
cattle to the cattle-breeding partnerships that Jay Hoyt and the Hoyt
family organized and operated. After it was reformed, Ranches'
partners included Betty Hoyt (Jay Hoyt's wife), Ric Hoyt, and Steve
Hoyt (another of Jay Hoyt's brothers). Ranches operated until about
the late 1980's, as the process of its liquidation was begun around
1987 or 1988. During Ranches' liquidation, some of Ranches' former
operations continued to be carried out by Ranches Trust. After
Ranches was liquidated, around 1992 W.J. Hoyt Sons Ranches MLP became
the seller of more cattle to certain of the cattle-breeding
partnerships. The promissory notes many of the cattle-breeding
partnerships previously had issued to Ranches were transferred to
W.J. Hoyt Sons Ranches MLP.
In addition, during 1976,
Management (a Nevada limited partnership that is one of the eight
partnerships involved in the instant cases) was formed to manage all
of the cattle collectively owned by a group of 17 cattle-breeding
partnerships that the Hoyt family had previously organized. Jay Hoyt
was Management's general partner, and its other limited partners
included the cattle-breeding partnerships whose cattle Management
managed. Other cattle-breeding partnerships that Jay Hoyt organized
after 1976 also became partners in Management. Each cattle-breeding
partnership and Management generally entered into a sharecrop
agreement similar to those previously entered into by various
cattle-breeding partnerships and W.J. Hoyt & Sons.
The Feedlot Co.
partnership was composed of certain Hoyt family members and
Management. Among other things, the Feedlot Co. partnership was
formed to obtain a line of credit from a commercial lender to finance
purchases of feed for the cattle the Hoyt organization managed.
Timeshares Breeding
Services is another operation that was started by the Hoyt
organization around the mid-1980's. It arranged leases of bulls
ostensibly owned by the Timeshares cattle-breeding partnerships the
Hoyt family had organized and promoted to numerous investors. Unlike
the earlier cattle-breeding partnerships, which typically owned
breeding cows or heifers, the Timeshares partnerships owned breeding
bulls. These breeding bulls typically would be leased to owners of
commercial-grade cattle herds under the borrow-a-bull program
Timeshares Breeding Services conducted.
B. Changes in the Hoyt
Organization's Cattle Management and Record-Keeping Practices
By at least the early
1980's, the Hoyt organization's cattle management and record keeping
practices changed dramatically. These changed management and
record-keeping practices continued during the period from 1987
through 1992. The record in the instant cases reflects that many of
the documents, records, and tax returns the Hoyt organization
prepared relating to its transactions with the cattle-breeding
partnerships it formed are inaccurate and unreliable.
For instance, the
cattle-breeding partnerships the Hoyt organization formed in 1983,
1984, 1985, and 1986 had no specific breeding cattle assigned to them
even as of 1987. 6
This is reflected in a report the Hoyt organization prepared with
respect to the 1986 operating results of cattle-breeding partnerships
it had formed. This report, dated December 31, 1986, states that no
operating results were reported on cattle-breeding partnerships
formed in 1983, 1984, 1985, and 1986 because those partnerships were
still "in the process of forming their breeding herds * * * [in
a selection process] which requires approximately 4 years to
complete." It further states that those partnerships' operating
results would be reported annually only when "their investment
period is completed." Similar statements are also made in an
earlier 1984 Annual Report Of Operating Results Of Cattle Breeding
Partnerships that the Hoyt organization prepared. That report states
that "No partnership results have been shown for any
partnerships formed in 1983 and 1984. They, like the 1982
partnerships, are still in the process of forming their breeding herd
through a selection process requiring, approximately 3 years."
Notwithstanding the Hoyt
organization's failure to provide requisite numbers of specific
breeding cattle to them, many of these partnerships formed in 1982,
1983, 1984, 1985, and 1986 filed tax returns for those years claiming
deductions with respect to their "breeding cattle herds". 7
In addition, to support the deductions the partnerships claimed, the
Hoyt organization issued bills of sale, annual herd recap sheets, and
other documents purporting to evidence that sales of large numbers of
specific cattle had been made to these partnerships in those years. 8
During the litigation in
Bales v. Commissioner [Dec.
46,099(M) ], T.C. Memo. 1989-568,
the Hoyt organization scheduled the "herds" of some of the
earlier partnerships the Hoyt family had formed (including those
"herds" of Florin Farms #3 (FF #3) and Florin Farms #4 (FF
#4)) to be liquidated during 1984 and 1985. In a memorandum dated
October 31, 1984, to his brother Ric Hoyt and other of the Hoyt
organization's cattle managers, Jay Hoyt instructed them that any
cows they sold at certain public cattle sales during 1984 and 1985
would be attributed to specified partnerships, like FF #3 and FF #4,
to be liquidated. The memorandum also stated that immediately before
record ownership of such cows was transferred to their buyers,
"ownership" of the cows would be assigned to FF #3 and FF
#4. According to the memorandum, those other partnerships "giving
up" "their cows" to FF #3 and FF #4 were to receive
back "other cows". 9
The numbers of cattle
owned by the cattle-breeding partnerships reflected in Management's
financial statements for its fiscal years ended September 30, 1989
and 1990, were not based upon cattle Management was actually
managing. Jay Hoyt had assigned the preparation of Management's 1989
and 1990 fiscal year financial statements to another individual
working in the Hoyt organization. From about the fall of 1989 through
early 1991, this worker performed this and other related work with
respect to the fiscal year 1989 and 1990 financial statements. In a
memorandum dated October 24, 1989, to Jay Hoyt, the worker (1) noted
that in Management's financial statements for prior years the numbers
of cattle reflected in the original bills of sale the Hoyt
organization had issued each cattle partnership were used as the
cattle counted in each partnership's breeding herd and (2) asked
whether the worker should adjust those cattle numbers to allow for
the 10-percent annual herd increase required in the sharecrop
agreements between the partnerships and Management. In his written
response to the October 24, 1989, memorandum, Jay Hoyt told the
worker not to make allowances in the cattle numbers for the
10-percent annual herd increase requirement. In a later memorandum
dated December 31, 1990, to Jay Hoyt, the worker stated that it was
impossible to reconcile Management's financial statements with the
tax returns the Hoyt organization had prepared. The worker added that
Jay Hoyt was right in previously stating Management's financial
statements to be a "mess". In another memorandum to Jay
Hoyt dated January 7, 1991, the worker raised certain questions with
him concerning the billing of cattle boarding expenses for the 1990
fiscal year to the cattle-breeding partnerships. Among other things,
the worker questioned why Florin Farms #1 (FF #1), FF #3, and FF #4
were to be billed for such expenses, as the worker thought those
partnerships had been liquidated and had no cattle. See supra
note 9. In his written reply to the worker, Jay Hoyt stated that the
money to have been distributed to FF #1, FF #3, and FF #4, had
instead been used by him to pay attorney's fees. He further stated
that all of the cattle collectively owned by the first 17
cattle-breeding partnerships the Hoyt family had organized had been
reallocated among each of those 17 partnerships during 1990, and that
now each partnership had cattle again.
In a memorandum dated
February 4, 1991, issued to various workers in the Hoyt organization,
Jay Hoyt instructed them to register with the ASA a calf for each cow
that had been bred, not just the "live calves". 10According
to Jay Hoyt, this was necessary in order to qualify for a lower
registration fee rate of $6 per animal. 11
In his memorandum dated
October 1, 1993, to the Hoyt organization's cattle managers, Jay Hoyt
instructed them to prepare herd recap sheets for the cattle-breeding
partnerships up through December 31, 1992. He further advised them
that, using some of Management's other cattle record information,
they were to "fill in" Management's cattle records by
recording specific cattle as belonging to a particular partnership.
He commented that all of the cattle a partnership was assigned must
have something in common that would make those cattle different from
cattle assigned to other partnerships. He then suggested possible
groupings the managers might use in assigning cattle among the
partnerships, including common sires, common grandsires, common cow
families, just bulls, just females, ASA appendix registry cattle,
full blood cattle, etc.
C. Transactional
Documentation Relating to the Seven Cattle-Breeding Partnerships'
Purchases of Cattle From 1987 Through 1992
The record contains
almost no transactional documentation relating to DF #1's, SGE
82-1's, DGE 84-3's, SGE 84-5's, DGE 86-2's, TBS 89-1's, and TBS
90-1's purchases of breeding cattle during 1987 through 1992. Unlike
Bales v. Commissioner [Dec.
46,099(M) ], T.C. Memo. 1989-568,
12
among other things, there is no (1) bill of sale issued by Ranches or
its successors to each of the seven cattle-breeding partnerships
listing and identifying the individual breeding cattle sold to each
partnership, (2) "Full Recourse Promissory Note" issued by
each partnership for its cattle, and (3) sharecrop agreement between
Management and each partnership. The record contains documentation
relating only to transactions some of these seven partnerships
entered into before 1987. The record also includes certain annual
herd recap sheets the Hoyt organization issued concerning the
breeding cattle of each partnership. These herd recap sheets are
discussed more fully infra.
D. Some Investors'
Failure To Make Payments
During the period from
1987 through 1992, a large number of investors in the cattle-breeding
partnerships the Hoyt organization had formed (including some
investors in certain of the seven cattle-breeding partnerships in the
instant cases) failed to continue making the specified payments
required of them, including paying their pro rata share of the
payments required under their partnership's "Full Recourse
Promissory Note". The Hoyt organization never sought to enforce
and hold any of the defaulting investors personally liable for the
payments they had defaulted upon. These investors were allowed to
walk away from their partnership's "Full Recourse Promissory
Note".
E. DF #1's, SGE
82-1's, DGE 84-3's, SGE 84-5's, DGE 86-2's, TBS 89-1's, and TBS
90-1's Respective Returns for the Years in Issue
DF #1's returns for some
of the years in issue reflect that it originally claimed depreciation
on a "breeding herd" placed in service in 1990, for which
its cost or other basis was $1,123,972. DF #1 depreciated this
breeding herd over 5 years.
SGE 82-1's returns for
some of the years in issue reflect that it originally claimed
depreciation on a "breeding herd" placed in service in
1990, for which its cost or other basis was $1,923,810. SGE 82-1
depreciated this breeding herd over 12 years.
DGE 84-3's returns for
some of the years in issue reflect that it originally claimed
depreciation on a "breeding herd" it placed in service on
February 1, 1984, for which its cost or other basis was $4,759,500,
and on a "breeding herd" it placed in service on February
1, 1986, for which its cost or other basis was $359,000. DGE 84-3
depreciated each breeding herd over 5 years.
SGE 84-5's returns for
some of the years in issue reflect that it original claimed
depreciation on a "breeding herd" it placed in service on
April 1, 1984, for which its cost or other basis was $4,826,000, and
on a "breeding herd" it placed in service on February 1,
1986, for which its cost or other basis was $350,000. SGE 84-5
depreciated each breeding herd over 5 years.
DGE 86-2's returns for
1991 reflect that it originally claimed depreciation on a "breeding
herd" placed in service in 1991, for which its cost or other
basis was $4,312,237. DGE 86-2 depreciated this breeding herd over 5
years.
TBS 89-1's returns for
1989 and 1991 reflect that it originally claimed depreciation on a
"breeding herd" placed in service on March 1, 1989, for
which its cost or other basis was $5,250,000, and on a "breeding
herd" placed in service on January 1, 1991, for which its cost
or other basis was $2,775,994. TBS 89-1 depreciated each breeding
herd over 5 years.
TBS 90-1's return for
1992 reflects that it originally claimed a $2,174,204 depreciation
deduction on a "bull breeding".
F. Respondent's
Examinations of the Returns of Many Cattle-Breeding Partnerships and
Certain Entities in the Hoyt Organization; the FPAA's Issued in the
Instant Cases; and Petitioners' Respective Petitions
Respondent commenced
examinations of returns for the years 1987 through 1992 that had been
filed by (1) numerous cattle-breeding partnerships the Hoyt
organization had formed (including DF #1, SGE 82-1, DGE 84-3, SGE
84-5, DGE 86-2, TBS 89-1, and TBS 90-1) and (2) certain Hoyt
organization entities (including Management). During these
examinations, respondent asked the cattle-breeding partnerships and
their representatives, among other things, to substantiate the
depreciation and other deductions claimed on those partnerships'
returns.
During the examinations
conducted, respondent noted a number of inconsistencies between the
deductions claimed on the cattle-breeding partnerships' returns and
various documents the partnerships and their representatives
provided. In addition, respondent received bills of sale for some 26
newly formed partnerships (where the 1987 return for each partnership
was the first return that partnership had filed) that reflected those
partnerships to have collectively purchased over 13,000 breeding
cattle during 1987. Only the bills of sale for 21 of the 26 newly
formed partnerships had a Schedule A listing and identifying the
individual animals a partnership had allegedly purchased. The bills
of sales for these 21 partnerships reflected them to have
collectively purchased more than 10,000 breeding cattle during 1987.
Similarly, certain 1991 herd recap sheets respondent received
reflected 18 partnerships, including DGE 86-2, as each purchasing 500
to 600 breeding cows during 1991. For instance, the 1991 herd recap
sheet for DGE 86-2 reflects the partnership to have purchased 545
breeding cows during 1991. 13
During the examination,
respondent issued numerous administrative summonses to the
cattle-breeding partnerships and certain entities in the Hoyt
organization, pursuant to which respondent sought information and
documents relating to the cattle breeding partnerships' alleged
cattle purchases from the Hoyt organization. Among other things,
respondent sought to inspect and count the breeding cattle allegedly
purchased and owned by the cattle-breeding partnerships. The Hoyt
organization initially failed to provide much of this information,
resulting in respondent's commencing a summons enforcement proceeding
in the U.S. District Court for the District of Oregon. On July 17,
1992, the District Court ordered Jay Hoyt to provide certain
information and allow respondent to inspect and count the "Hoyt
cattle" (which was defined to be the various cattle owned,
maintained, or under the custody or control of any of the 92
partnerships that were the subject of the summons enforcement
proceeding). To comply with this July 17, 1992, Order, respondent and
Jay Hoyt executed an October 30, 1992, memorandum of understanding
concerning the cattle count to be conducted by respondent's expert
Ron Daily (Mr. Daily). In his signed statement also dated October 30,
1992, Jay Hoyt further provided information as to 11 specified
locations at which the "commingled Hoyt cattle herd" was
kept. Among other things, Jay Hoyt, in this signed statement,
represented there to be an estimated 16,075 to 16,775 cattle
(including some calves that might later be born) at the 11 locations.
He further stated these 11 locations to be all of the locations for
the Hoyt herd cattle as of October 28, 1992.
In the cattle count he
performed from fall 1992 through spring 1993, Mr. Daily determined
there were a total of 7,993 cattle. Of the 7,993 total cattle he
counted, 4,764 were mature breeding cattle. At every location that he
visited and counted cattle, Mr. Daily asked the ranch manager to sign
a statement agreeing or disagreeing with the numbers of cattle Mr.
Daily determined were present. With just a few exceptions, all of the
ranch managers at each location agreed with Mr. Daily's cattle
numbers. During the cattle count he conducted, Mr. Daily further had
asked Jay Hoyt to disclose whether there were any additional
locations where other cattle might be located. However, in his
witness statement submitted to the District Court on or about January
23, 1993, Jay Hoyt maintained that the specific locations for the
cattle had been provided to respondent and indicated that he saw no
reason why the cattle count could not go on.
In the respective FPAA's
issued to DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1,
and TBS 90-1, respondent, among other things, determined that the
partnerships had failed to substantiate many of their claimed
deductions. For instance, with respect to the depreciation deduction
DF #1 claimed on its breeding cattle for its year ended September 30,
1991, the FPAA issued to DF #1 for that year states, in pertinent
part:
It has been determined
that * * * [DF #1] is not entitled to the depreciation deduction
claimed on its Schedule F because the partnership has not
established: (1) That it possessed depreciable assets which it used
for the production of income or in carrying on a trade or business;
(2) the accumulated depreciation and depreciable basis of its assets;
and (3) the relevant date and proper computation method.
In the FPAA's issued to
Management for its years ended September 30, 1987 through 1990,
respondent, among other things, determined that Management had failed
to report tens of millions of dollars of income from (1) cattle
purportedly transferred to it by numerous cattle-breeding
partnerships as management fees under the sharecrop agreements
between them and Management and (2) large numbers of those same
cattle Management then purportedly transferred to Ranches in payment
for feed, management, consulting, freight services, and other goods
and services provided by Ranches.
DF #1, SGE 82-1, DGE
84-3, SGE 84-5, DGE 86-2, TBS 89-1, TBS 90-1, and Management filed
respective petitions seeking review of the FPAA's that had been
issued to them. In their respective petitions or amended petitions,
these partnerships have modified the depreciation and other
deductions being claimed by them for the years in issue. The total
depreciation, other deductions, and other adjustments now in issue
are given infra in appendix B to this Memorandum Opinion.
OPINION
Petitioners bear the
burden of proving that respondent's determinations in the FPAA's are
incorrect. See Rules 142(a), 240(a); Welch v. Helvering [3
USTC ¶1164 ], 290 U.S. 111
(1933). Particularly, where respondent, as in the instant cases, has
disallowed depreciation and other deductions claimed by a
partnership, it is incumbent on petitioners to substantiate and
establish the partnership's entitlement to those deductions under the
terms of the applicable statutes permitting those deductions. See New
Colonial Ice Co. v. Helvering [4
USTC ¶1292 ], 292 U.S. 435
(1934); Karme v. Commissioner [82-1
USTC ¶9316 ], 673 F.2d 1062,
1065 (9th Cir. 1982), affg. [Dec.
36,843 ] 73 T.C. 1163 (1980).
Issue 1. Depreciation
Deductions Claimed by the Seven Cattle-Breeding Partnerships in the
Instant Cases
Section
167 generally allows as a
depreciation deduction a reasonable allowance for exhaustion and wear
and tear of property used in business or of property held for the
production of income. The person who bears the economic loss of
invested capital resulting from the exhaustion and wear and tear of
business property or property held for the production of income is
the one entitled to the depreciation deduction. See Helvering v.
F. & R. Lazarus & Co. [39-2
USTC ¶9793 ], 308 U.S. 252,
254 (1939).
In the instant cases,
petitioners and respondent recognize that for DF #1, SGE 82-1, DGE
84-3, SGE 84-5, DGE 86-2, TBS 89-1, and TBS 90-1 to be entitled to
their claimed depreciation and other deductions, each partnership
must be the owner for tax purposes of the specific numbers of
breeding cattle that it allegedly purchased and placed in service
during the years in issue. Respondent raises no contention that each
partnership was in an activity not engaged in for profit. Although
respondent has not asserted that each partnership's transaction was a
sham, the parties disagree to some extent with respect to the
transactions' economic substance. They disagree over whether each
partnership's stated purchase price approximated the then fair market
value of the cattle. They also disagree over whether the purportedly
recourse long-term notes the partnerships issued were valid
indebtedness.
For a sale to have
occurred for tax purposes, the benefits and burdens of ownership must
be transferred. See Grodt & McKay Realty, Inc. v. Commissioner
[Dec.
38,472 ], 77 T.C. 1221, 1237-1238
(1981). This test is a practical one, and there are no hard and fast
rules. Instead, the transaction must be viewed as a whole, in light
of realism and practicality. See Commissioner v. Segall [40-2
USTC ¶9676 ], 114 F.2d 706,
709-710 (6th Cir. 1940), revg. on other grounds [Dec.
10,086 ] 38 B.T.A. 43 (1938);
Harmston v. Commissioner [Dec.
32,214 ], 61 T.C. 216, 228-229
(1973), affd. [76-1
USTC ¶9213 ] 528 F.2d 55
(9th Cir. 1976). Some of the factors to be considered are: (1)
Whether legal title passes; (2) how the parties treat the
transaction; (3) whether an equity in the property was acquired; (4)
whether the contract creates a present obligation on the purchaser to
make payments; (5) whether the right of possession is vested in the
purchaser; (6) which party bears the risk of loss or damage to the
property; and (7) which party receives the profits from the operation
and sale of the property. See Grodt & McKay Realty, Inc. v.
Commissioner, supra at 1237-1238; see also Cherin v.
Commissioner [Dec.
44,333 ], 89 T.C. 986, 996-997
(1987).
A.
Whether
DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1, and TBS 90-1
Acquired the Benefits and Burdens of Ownership as to Specific
Breeding Cattle
For DF #1, SGE 82-1, DGE
84-3, SGE 84-5, DGE 86-2, TBS 89-1, and TBS 90-1 to be entitled to
their claimed depreciation deductions, each partnership must
establish that it acquired the benefits and burdens of ownership as
to the specific individual breeding cattle making up its alleged
breeding herd. In that connection, however, the record discloses
petitioners to be in substantial difficulty in establishing that each
partnership actually acquired anywhere near its stated number of
breeding cattle. Indeed, the evidence petitioners presented to
substantiate and identify the specific individual breeding cattle
these partnerships "owned" is considerably lacking,
exhibits major shortcomings, and, at times, is directly contradicted
by the Hoyt organization's own internal documents. Certain of these
internal documents raise serious doubts in the Court's mind as to
whether large numbers of the breeding cattle allegedly sold these
partnerships, in fact, existed.
No registration papers
with respect to specific breeding cattle were obtained in any
partnership's name. Rather, any registration certificates reflect
only the Hoyt family to be the owner of those registered cattle. 14
Petitioners further
acknowledge that there are some problems regarding the records they
have offered in evidence to substantiate the depreciation and other
deductions claimed by the partnerships. Petitioners also have
indicated that the depreciation deductions to which the partnerships
are entitled likely will be less than what the partnerships
originally had claimed.
On brief, however,
petitioners argue that sufficient breeding cattle existed in each
year during the period from 1987 through 1992 to have been purchased
by all of the cattle-breeding partnerships the Hoyt organization
formed (including by the seven partnerships in the instant cases).
Petitioners claim this has been established by (1) the bills of sale
and annual herd recap sheets the Hoyt organization issued (which
petitioners maintain were accurate and contemporaneous documents) 15
and (2) their witness Norm Favre's (Mr. Favre) conclusion there were
a total of 26,205 cattle in the Hoyt universal herd pursuant to the
cattle count he performed from fall 1992 through spring 1993. 16
B.
The
Bills of Sale and Herd Recap Sheets Issued by the Hoyt Organization
As indicated previously,
petitioners argue that various bills of sale and annual herd recap
sheets the Hoyt organization issued substantiate the depreciation
deductions on breeding cattle being claimed for the years in issue in
the instant cases by DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2,
TBS 89-1, and TBS 90-1. 17
They maintain that these bills of sale and herd recap sheets are
reliable and contemporaneous documents evidencing the alleged
specific individual breeding cattle each partnership purportedly
purchased and owned from 1987 through 1992. In making this
contention, petitioners heavily rely on the testimony of Jay Hoyt.
Jay Hoyt specifically
testified that the bills of sale and annual herd recap sheets the
Hoyt organization issued to the cattle-breeding partnerships were
reliable and contemporaneous documents. Although he acknowledged
occasional but inadvertent accounting and/or clerical errors may have
been made in compiling the cattle records the Hoyt organization
maintained, he asserted the annual herd recap sheets were at least 95
percent accurate. He explained the process by which the annual herd
recap sheets were prepared. According to Jay Hoyt, the Hoyt
organization had computerized its cattle records around 1985. During
each year, the cow hands and cattle managers maintained notebooks and
other papers containing pertinent information on individual cattle
they managed (country records). In general, in the fall the cattle
would be rounded up and brought to winter pasture. The cattle
managers near the end of the year would then submit these country
records on all the cattle to other Hoyt organization personnel to
have the information entered onto the Hoyt organization's
computerized cattle record keeping system. From this information that
the cattle managers submitted, a cattle-breeding partnership's herd
recap sheet for that year would be prepared. Jay Hoyt related that
the herd recap sheets for each year would be prepared by the early
part of the following year. He added that once the data from the
original country record source documents had been entered, all of the
country records were typically destroyed, as it was no longer
necessary to maintain those documents because the information on them
had been entered into and was contained in the Hoyt organization's
computerized records.
The Court finds
substantial portions of Jay Hoyt's testimony evasive and less than
forthright. His claims regarding the contemporaneous nature and
reliability of the bills of sale and herd recap sheets are directly
contradicted by substantial other convincing evidence in the record.
The Court considers highly suspect the herd recap sheets and other
documents the Hoyt organization prepared during the period from 1987
through 1992. Indeed, as the Court indicated supra, by the
early 1980's the Hoyt organization's cattle management and
record-keeping practices had changed dramatically. As a result, many
of the documents, records, and tax returns the Hoyt organization
subsequently prepared regarding transactions between itself and the
many cattle-breeding partnerships (which it had formed, promoted to
numerous investors, and managed) were inaccurate and unreliable.
Contrary to petitioners'
and Jay Hoyt's contentions, the Court does not believe that the 1987
through 1992 annual herd recap sheets in evidence are contemporaneous
documents. Among other things, if the 1988, 1989, and 1990 herd recap
sheets had existed and been available during the fall 1989 through
early 1991 period, the Hoyt organization worker preparing
Management's financial statements for its fiscal years ended
September 30, 1989 and 1990, would then have consulted those herd
recap sheets to find out each cattle-breeding partnership's "breeding
herd numbers". Instead, as reflected by the worker's questions
to Jay Hoyt and Jay Hoyt's responses (which we have previously
noted), a far different process was employed to prepare Management's
1989 and 1990 fiscal year financial statements. 18
The Court would further
note (as was stated supra) that the record includes none of
the bills of sale that purportedly were issued to cattle-breeding
partnerships from 1988 through 1992, notwithstanding that a number of
these partnerships (including several of the seven cattle-breeding
partnerships in the instant cases) reported on their tax returns
purchasing breeding cattle during this period for which they are
claiming deductions. A revenue agent for respondent testified that no
bills of sale for any cattle-breeding partnerships were furnished for
years after 1987. Yet, Jay Hoyt testified that he provided to
respondent such bills of sale for the years from 1988 through 1992.
19
With respect to some of
the bills of sale and herd recap sheets issued before 1988 that are
in evidence, there are a number of discrepancies and inconsistencies.
For instance, two bills of sale both dated April 1, 1984, were issued
by the Hoyt organization to SGE 84-5. One bill of sale reflects SGE
84-5 to have acquired 500 breeding cows with calves at side on that
date for a stated price of $5,080,000. The other bill of sale
reflects SGE 84-5 to have acquired 269 breeding cows on that date for
a stated price of $5,080,000. Also, only one of these bills of sale
includes a Schedule A listing and describing the specific individual
cattle SGE 84-5 acquired. Moreover, the 1984 herd recap sheet for SGE
84-5 reflects it to have acquired 693 breeding cattle during 1984.
See supra note 8.
At trial, Jay Hoyt
testified that the above two bills of sale covered a single April 1,
1984, transaction in which 769 breeding cows and 500 calves were sold
to SGE 84-5 for a total price of $5,080,000. He further claimed that
the Schedule A to one bill of sale (listing and identifying the
specific 269 individual breeding cows the partnership purportedly
acquired) had been lost. In his testimony, Jay Hoyt further
acknowledged SGE 84-5's 1984 herd recap sheet (reflecting the
partnership to have purchased 693 breeding cattle during 1984) to be
inconsistent with the two April 1, 1984, bills of sale. However, he
asserted that Management's practice, in preparing the herd recap
sheets for a cattle-breeding partnership's first year of operations,
had been to reflect the net number of cattle later on hand at yearend
as the number of cattle a cattle-breeding partnership purchased. He
further specifically testified that the prospective breeding cows SGE
84-5 was to purchase had been identified in 1983 and that he reviewed
a list of the cows in early 1984. He added that between the April 1,
1984, purchase date and December 31, 1984, some of the cows SGE 84-5
had purchased possibly might have been lost, causing those cows not
to be reflected in SGE 84-5's 1984 herd recap sheet.
The Hoyt organization's
above-asserted "accounting practice" is contrary to
standard accounting principles because its herd recap sheets show
each partnership's breeding herd to have had no cattle born, no
cattle culled, and no deaths or disappearances. It is extremely
unlikely that the breeding herd each of these partnerships
purportedly acquired would, in fact, have produced no calves during
that partnership's first year of operations. Presumably, an important
incident of breeding herd ownership is the right to benefit from any
calves produced by that herd. (The sharecrop agreements provided that
a partnership would still retain the breeding value certificates
(i.e., essentially the rights to any registration papers) on any
calves produced by its breeding herd, even though, pursuant to the
sharecrop agreement, all calves were to belong to the Hoyt
organization entity that managed the partnership's breeding herd.)
For instance, SGE 84-5 (according to Jay Hoyt) entered into its
transaction to acquire 769 breeding cows on April 1, 1984. At least
269 of SGE 84-5's "breeding cows" (the Schedule A to the
bill of sale that should have listed and specifically identified
these 269 cows allegedly having been lost) are reflected as producing
no calves during 1984. Similarly, another important incident of
breeding herd ownership would be the detriment suffered from losses
to that herd. 20
Neither does the Court
believe these and other accounting deficiencies were inadvertent and
attributable to a lack of proper accounting training on the part of
Jay Hoyt and other individuals preparing these records. Several
former Hoyt organization workers testified that, over the years,
substantial fictitious cattle information was created and entered in
the Hoyt organization's computerized cattle records. These witnesses
included: (1) Robert Baker, who was hired by Jay Hoyt in June 1984 to
design a computerized cattle record keeping system for the Hoyt
organization and then established and managed the Hoyt organization's
computerized cattle record keeping system from about 1985 through
1987, 21
(2) Terry Hawkins (Mr. Hawkins), who from around 1987 through 1992
helped to maintain many of the Hoyt organization's cattle records
(including obtaining information on cattle kept at numerous
locations), and (3) Donna Schnitker (Mrs. Schnitker), who as
Management's cattle marketing director handled Management's cattle
sales to third parties. The Court found the testimony of these
individuals to be credible and trustworthy. 22
The record further includes a February 4, 1991, memorandum of Jay
Hoyt to certain workers in the Hoyt organization, instructing them
not to include information on cattle deaths in the cattle inventory
records and to place such information under a "new smoke screen
file name". 23
See also infra note 25.
The Court finds the herd
recap sheets the Hoyt organization prepared highly suspect and
unreliable, as the Hoyt organization failed to employ good
record-keeping practices and did not prepare the recap sheets and its
other cattle records in accordance with standard, fundamental
accounting principles. The Court can also see no good reason or
justification for the Hoyt organization's preparing these annual herd
recap sheets and other cattle records in this highly deficient
manner--if each cattle-breeding partnership, as petitioners maintain,
indeed "owned" anywhere near the number of specific
breeding cattle stated in its "bill of sale". 24Indeed,
the Court finds that the herd recap sheets and other records were
prepared in this manner because the requisite numbers of specific
breeding cattle did not exist and could not, in fact, be assigned to
each partnership. 25
C.
The
Court's Evaluation of the Cattle Counts Conducted by Mr. Daily and
Mr. Favre
Mr. Daily and Mr. Favre
counted the cattle over essentially the same time period from fall
1992 through spring 1993. 26
However, there is a tremendous disparity between the total number of
cattle each of them counted and determined were present.
Mr. Daily, as reflected
in his report, determined the cattle present in the Hoyt organization
herd that might belong to the cattle-breeding partnerships and
counted the following numbers of cattle in the categories indicated:
Category
Mature Cattle Total Cattle
Cows
................................... 3,115 3,115
Bulls
.................................. 761 1,619
Breeding
heifers ....................... 888 1,596
Feedlot
heifers ........................ -- 182
Timeshares
Breeding .................... -- 477
Service
heifers
Calves
................................. -- 904
Steers
................................. -- 10
-------------
------------
Total
............................... 4,764 7,903
=============
============
Mr.
Daily further confirmed that there were 90 bulls on loan to ranchers
under the borrow-a-bull program. He further counted 2,066 steers and
heifers at the Miller Feed Yard in Lasalle, Colorado, and 889 steers
and heifers at the North Platte Feed Yard in North Platte, Nebraska,
but did not include these cattle with those possibly belonging to the
partnerships, because the feedlot managers had told him the cattle
belonged to Ric Hoyt and were being raised for slaughter.
Mr. Favre, on the other
hand, as reflected in his report, determined to be present and
counted the following numbers of cattle in the categories indicated:
Category
Cattle
Cows
.................................................................
3,991
Bulls
................................................................
1,819
Heifers
.............................................................. 5,397
Heifers
and steers ................................................... 470
Mixed
age cattle .....................................................
97
Timeshares
Breeding .................................................. 2,436
Services
bulls
Timeshares
Breeding .................................................. 3,271
Services
heifers
Calves
...............................................................
8,486
Steers
...............................................................
238
------
Total
................................................................
26,205
======
The
cattle numbers contained in Mr. Favre's report were based on tally
sheets he compiled in counting the cattle. These tally sheets
disclose the particular location and the cattle manager. The majority
of the tally sheets further contain columns in which to record the
tag number, tag color, sex, color, brand, class, etc., of individual
cattle. However, in some of the tally sheets, Mr. Favre did not
record any of this information, but he recorded only total numbers of
cattle and type of cattle. Further, as reflected by the cattle tag
numbers that are recorded on Mr. Favre's tally sheets, there were
numerous instances where he counted the same cattle more than once.
Indeed, on brief, petitioners concede there were duplications but
argue the duplication rate to be only 9.6 percent. Petitioners thus
assert there were still a total of 23,689 cattle (the 26,205 total
cattle Mr. Favre determined were present, less a 9.6-percent
discount).
The Court has reviewed
the accuracy of the cattle numbers in Mr. Daily's and Mr. Favre's
respective reports. Generally, the Court found Mr. Daily's numbers
fairly reliable, although it is possible he may have missed or
omitted relatively small numbers of cattle. It is further to be noted
that, in a number of instances, Mr. Daily obtained signed statements
in which the Hoyt organization cattle managers at particular
locations essentially agreed with the numbers of cattle Mr. Daily had
counted at those locations. In contrast, the Court found a number of
instances where Mr. Favre's report numbers were significantly at
variance with his tally sheets. Moreover, an even more substantial
problem exists with respect to his counting the same cattle more than
once. Our examination indicates that his actual duplication rate may
far exceed the 9.6-percent duplication rate petitioners have
conceded.
Mr. Favre stated that he
returned to certain locations to count new cattle that had arrived at
those locations. He claimed he avoided counting again any cattle he
had already counted, because, according to him, he would have
recognized if he had seen those cattle before by their appearance and
through using his intuition. In a related connection, Jay Hoyt did
testify that different colored tags were used by the Hoyt
organization in various parts of the country and that sometimes the
same tag number might appear on the different colored tags worn by
two separate animals. However, this testimony of Jay Hoyt still does
not satisfactorily explain the large number of duplicate tag numbers
found in Mr. Favre's tally sheets. With only a few exceptions, the
tally sheets either disclose no tag color for the duplicate tag
numbers involved or reflect that those duplicate tag numbers were for
the same tag color.
The Court has major
problems with Mr. Favre's cattle numbers and does not consider those
numbers to be reliable. Though it has confidence in the cattle count
performed by respondent's expert Mr. Daily, the Court has no
confidence in the reliability of Mr. Favre's numbers because it does
not believe Mr. Favre's count to have been performed in a competent
and proficient manner. As indicated previously, Mr. Daily was
accepted by the Court as an expert on cattle counting and cattle
appraisal and had extensive prior professional experience in counting
and evaluating cattle. In the cattle count he conducted of the Hoyt
organization herd, Mr. Daily further was assisted by an experienced
crew. In contrast, Mr. Favre testified as a fact witness, and his
report was accepted in evidence as a business record of the Hoyt
organization. Mr. Favre also had only rather limited prior experience
in counting and evaluating cattle, and his level of experience and
expertise was substantially below that of Mr. Daily. In conducting
his count, Mr. Favre was assisted by Jay Hoyt and other of the Hoyt
organization's cattle people.
In connection with
evaluating the reliability of Mr. Favre's cattle count numbers, the
Court further considers noteworthy that, in a combined report Mr.
Favre and certain of the Hoyt organization cattle people issued later
in February of 1994, they, among other things, asserted that
thousands of cattle in the Hoyt herd had perished from 1988 through
1992 as a result of drought conditions. However, as discussed more
fully infra note 31, the Court finds dubious this assertion of
Mr. Favre and these other individuals.
On the basis of the
foregoing discussion and the credible evidence of record, the Court
concludes that, as of April 1993, the Hoyt organization herd included
3,150 cows, 1,855 bulls, 2,000 heifers, 1,000 Timeshares Breeding
Services heifers, and 2,300 calves. In arriving at these numbers, we
have adjusted and modified the cattle numbers Mr. Daily determined in
some situations where we felt it appropriate. It is to be noted,
however, that this still does not provide us with the numbers of
mature breeding cattle contained annually in the Hoyt organization
herd during the period from 1987 through 1992.
D.
The
Total Numbers of Breeding Cattle Present During 1987 Through 1992
Again (as was the case
with the numbers of cattle determined in Mr. Daily's and Mr. Favre's
respective cattle counts) there is a wide disparity in the numbers of
breeding cattle the parties contend were present and available
annually from 1987 thorough 1992 to be "owned" by the
cattle-breeding partnerships. Mr. Daily (respondent's expert)
estimated the following total numbers of cattle, consisting of
breeding cattle and calves, were present annually on the dates
indicated:
Mature
Breeding Cattle
----------------------------------------------------------
Date
Bulls Cows Bred Heifers Subtotal Calves Total Cattle
1-1-87
... 765 3,912 520 5,197 4,725 9,922
1-1-88
... 546 4,246 374 5,166 3,397 8,563
1-1-89
... 550 2,920 513 3,983 2,336 6,319
1-1-90
... 987 3,103 550 4,640 2,482 7,122
1-1-91
... 1,124 3,498 667 5,289 2,798 8,087
1-1-92
... 761 3,115 583 4,459 3,119 7,578
Mr.
Daily based his above 1987 cattle figures on an inventory of the Hoyt
organization's cattle dated January 1, 1987. This inventory listed a
total of 13,481 animals of all classes and ages. 27
Mr. Daily examined the locations, types of cattle, and cattle numbers
listed therein and concluded the inventory represented a reasonable
starting point from which to estimate the numbers of cattle present
annually from 1987 through 1991. He arrived at his 1988 through 1991
cow figures by examining the Hoyt organization's calving records for
those years and concluding that an assumed calf crop rate of 80
percent would be reasonable. He arrived at his 1988 through 1991 bull
figures by concluding that a ratio of one bull to every 20 cows would
be reasonable. His 1992 cattle figures, however, were based on his
own fall 1992 through spring 1993 cattle count.
Petitioners, on the other
hand, contend that much higher numbers of breeding cattle were
present annually during 1987 through 1992. Jay Hoyt, in his
testimony, estimated that the Hoyt herd included the following
numbers of breeding cattle (which numbers he stated include some
calves as well):
Total
Breeding Cattle
Year
(incl. some
calves)
1987
.................................................. 24,000-29,000
1988
.................................................. 18,000-20,000
1989
.................................................. 16,000-18,000
1990
.................................................. 10,000-12,000
1991
.................................................. 16,000-18,000
1992
.................................................. 17,000-18,000
Jay
Hoyt based these estimates on certain unspecified documents he
claimed to have examined--presumably, including the annual herd recap
sheets the Hoyt organization prepared. For instance, although he did
not elaborate and identify the specific documents upon which he
relied, he claimed his 1987 estimate was based on his examination of
certain 1986 and 1987 documents. In addition, petitioners (as was
earlier indicated supra
note 17) maintain the annual herd recap sheets in evidence reflect
the cattle-breeding partnerships to have owned the following total
numbers of cattle on the dates indicated:
Date
Total Number of
Cattle
1-1-87
............................................... 22,457
1-1-88
............................................... 25,613
1-1-89
............................................... 23,418
1-1-90
............................................... 17,336
1-1-92
............................................... 22,148
The Court does not accept
petitioners' contentions concerning the numbers of breeding cattle
present during 1987 through 1992. As was previously discussed, the
Court considers much of Jay Hoyt's testimony in the instant cases
evasive and less than forthright. Accordingly, the Court does not
find his cattle estimates credible. Moreover, as was also previously
discussed, the Court found highly suspect the 1987 through 1992 herd
recap sheets and does not believe those herd recap sheets to be
contemporaneous and reliable documents.
The credible evidence in
the record essentially confirms and supports Mr. Daily's estimates of
breeding cattle that were present during 1987 through 1992. Mrs.
Schnitker, who served as Management's cattle marketing director from
1987 through 1990, 28
estimated Management during those years managed a total of 5,000
cattle annually. Of the 5,000 total cattle, she further estimated
3,000 were mature female cows and another 1,000 cattle consisted of
weaned male and female calves. She also related that the total
numbers of cattle annually present stayed about the same during these
years. Tom James, who had operated and managed Timeshares Breeding
Services since about 1986, testified that Timeshares Breeding
Services had a total of approximately 3,133 to 3,234 cattle in 1993,
and that this would have been the maximum number of cattle Timeshares
Breeding Services had in its operation at any one time. 29
Although petitioners
argue far greater numbers of additional breeding cattle existed and
were available to be purchased and owned by all of the
cattle-breeding partnerships during 1987 through 1992, they have
failed to produce any concrete, convincing evidence establishing
their claim.
Most importantly,
petitioners have failed to account for and establish precisely the
total number of breeding cattle annually present from 1987 through
1992, which the Hoyt organization collectively managed on behalf of
each of the numerous cattle-breeding partnerships it organized,
promoted, and operated. The Court believes that the Hoyt organization
failed to provide such a full and proper accounting because the
requisite numbers of individual breeding cattle it purportedly sold
to and managed on behalf of these partnerships never existed. See
infra note 38. Moreover, there is evidence in the record
indicating that a large number of breeding cattle previously assigned
to many of the partnerships may have been sold off by the Hoyt
organization to meet its financial obligations. 30
In addition, as indicated earlier, the Hoyt organization had claimed
that large numbers of cattle it managed on behalf of the partnerships
died as a result of drought and disease during the 1987 through 1992
period--a claim the Court finds dubious. 31
The Court concludes that
petitioners have failed to establish that, during 1987 through 1992,
substantially more breeding cattle were present than were estimated
by respondent's expert Mr. Daily. 32
The Court further concludes that petitioners have failed to show that
breeding cattle existed in each year during this period in numbers
corresponding with those purportedly purchased and owned by all of
the cattle-breeding partnerships. See Rules 142(a), 240(a). Indeed,
the 1987 bills of sale in evidence (which the Court previously
determined were highly suspect and unreliable) reflect 26 newly
formed partnerships alone to have purportedly purchased over 13,000
breeding cattle during that year.
E.
Whether
a Partnership's Stated Purchase Price Reasonably Approximated the
Cattle's Fair Market Value
Petitioners contend that
the breeding cattle each partnership acquired from the Hoyt
organization had a value of $4,000 per animal and that the total
stated purchase price each partnership paid for its breeding cattle
was reasonable.
Respondent, on the other
hand, contends that during the years relevant to the instant cases,
the Hoyt organization's breeding cattle had a value substantially
below $4,000 per animal. The Court essentially agrees with
respondent.
In asserting their $4,000
per animal valuation, petitioners rely heavily on the testimony of
their expert Mr. Hunsley. Mr. Hunsley has been the ASA's executive
director since about 1983 and was also an expert witness for the
taxpayers in Bales v. Commissioner [Dec.
46,099(M) ], T.C. Memo. 1989-568.
Although Mr. Hunsley had not examined the specific individual cattle
the partnerships in the instant cases purportedly purchased and
owned, he claimed to have seen a number of cattle in the Hoyt
organization herd over the years, including at cattle shows and on
visits he made to certain of the Hoyt ranch properties in 1986 and
1989. He related that during his visit in 1986, when he had been
retained as an expert for the Bales case, he saw about 3,000
cattle and estimated there to have been a total of perhaps 6,000
cattle present.
Mr. Hunsley opined that
the cattle in the Hoyt herd were in the top 25 percent of the
Shorthorn breed. He further opined that the Hoyt Shorthorn cattle had
an average value of $4,000 per head during 1987 through 1992. Mr.
Hunsley noted that in the Bales case, he had also concluded
the cattle he had seen during his 1986 visit were worth $4,000 per
head. He maintained that the general market prices for Shorthorn
cattle had not changed significantly during 1987 through 1992.
The Court does not accept
Mr. Hunsley's conclusions with respect to the value of the Hoyt herd
cattle during 1987 through 1992. Among other things, Mr. Hunsley did
not address how his opinions might have to be revised if (1) a large
number of the breeding cattle a partnership purportedly purchased did
not, in fact, exist, or (2) the parentage or registered status of a
partnership's cattle was suspect or unknown. In addition, the Court
has major reservations concerning some of the assertions Mr. Hunsley
made regarding the Hoyt organization cattle. On cross-examination by
respondent's counsel, Mr. Hunsley denied knowing of any
irregularities with respect to cattle the Hoyt organization
registered with the ASA. He specifically denied that he had waived or
allowed the Hoyt organization to dispense with the ASA rules
requiring blood testing to verify the parentage of certain calves the
Hoyt organization had registered as being produced from embryo
transplants. However, Mr. Hunsley's claims were directly contradicted
by Mrs. Schnitker's later testimony.
Mrs. Schnitker explained
that her husband had been involved in the embryo transplant work done
by the Hoyt organization. She related that around 1990 Jay Hoyt met
with her and her husband and told them a calf had to be registered
with the ASA for each embryo transplant the Hoyt organization had
done, regardless of whether an actual calf had been produced. Mrs.
Schnitker said she agreed to handle the registrations, provided she
could reach an understanding with Mr. Hunsley with respect to any
nonexistent calves being registered. According to Mrs. Schnitker, she
and Mr. Hunsley came to such an understanding permitting the Hoyt
organization to register these nonexistent calves, but he had also
told her the Hoyt organization would not be allowed to register any
subsequent cattle characterized as progeny of these nonexistent
calves.
The Court finds Mrs.
Schnitker's above testimony credible. In addition to believing her to
be a trustworthy witness, the Court notes that other reliable
evidence in the record corroborates various aspects of her testimony.
The record includes a 1991 invoice for the registration work that
Mrs. Schnitker issued to the Hoyt organization and a later note and a
memorandum of Jay Hoyt directing other Hoyt organization workers to
pay Mrs. Schnitker's invoice. 33Moreover,
as indicated earlier, at about this same time: (1) Jay Hoyt, in a
February 4, 1991, memorandum, instructed other Hoyt organization
workers to register with the ASA a calf for each cow bred, not just
"live calves"; and (2) the Hoyt organization proposed to
Mr. Hunsley that it be allowed to register calves with the ASA at a
lower registration fee of $6 per calf, in return for promising to
register a minimum of 4,000 calves annually for 1991 and 1992. See
supra notes 10 and 11. The record further includes a letter
Mr. Hunsley issued to the Hoyt organization on or about February 14,
1991, in which he essentially agreed to the Hoyt organization's
proposal regarding a lower calf registration fee. In that letter, Mr.
Hunsley also mentioned his close work with Mrs. Schnitker in
registering "embryo transplant calves".
The record reflects that
petitioners' asserted valuation of $4,000 per animal is still
substantially higher than the prices the Hoyt organization realized
in selling cattle to independent, unrelated third parties in
arm's-length transactions. 34
Mrs. Schnitker testified as to the prices she obtained in selling
cattle as Management's cattle marketing director from 1987 through
1990. Her sales included sales to feedlots (whereby the cattle
essentially would be sold at meat prices) and other sales to
Shorthorn breeders. She related that the best quality (i.e., "A"
herd) mature breeding cows with registration papers could go for a
price as high as $2,000 or $2,500, depending upon the individual
cow's quality. However, lesser quality cattle without registration
papers (i.e., "B" herd or lower) would sell for
substantially less. Obviously, many of the breeding cattle
purportedly sold the partnerships were nowhere near the quality of an
"A" herd cow selling for $2,000 or $2,500. 35
Indeed, the registered status and parentage of a substantial number
of breeding cattle the partnerships purportedly purchased and owned
are either dubious or unknown.
We conclude the
partnerships' stated purchase prices for their "breeding cattle"
were many times the actual fair market value of those "cattle".
36
Thus, each partnership's stated purchase price for its cattle did not
reasonably approximate those "cattle's" fair market value.
F.
Validity
of the Partnerships' Notes
In deciding the extent to
which a nonrecourse note has economic substance, a number of cases
have relied heavily on whether the fair market value of the property
acquired with the note was within a reasonable range of its stated
purchase price. See Estate of Franklin v. Commissioner [76-2
USTC ¶9773 ], 544 F.2d 1045
(9th Cir. 1976), affg. [Dec.
33,359 ] 64 T.C. 752 (1975);
Hager v. Commissioner [Dec.
37,905 ], 76 T.C. 759 (1981); see
also Hilton v. Commissioner [Dec.
36,962 ], 74 T.C. 305, 363
(1980), affd. [82-1
USTC ¶9263 ] 671 F.2d 316
(9th Cir. 1982); cf. Frank Lyon Co. v. United States [78-1
USTC ¶9370 ], 435 U.S. 561
(1978) (where, among other things, the buyer-lessor in a
sale-leaseback transaction was personally liable on the mortgage). As
the Court of Appeals for the Ninth Circuit in Estate of Franklin
v. Commissioner, supra at 1048, stated, in pertinent part:
An acquisition * * * if
at a price approximately equal to the fair market value of the
property under ordinary circumstances would rather quickly yield an
equity in the property which the purchaser could not prudently
abandon. This is the stuff of substance. It meshes with the form of
the transaction and constitutes a sale.
No such meshing occurs
when the purchase price exceeds a demonstrably reasonable estimate of
the fair market value. Payments on the principal of the purchase
price yield no equity so long as the unpaid balance of the purchase
price exceeds the then existing fair market value. Under these
circumstances the purchaser by abandoning the transaction can lose no
more than a mere chance to acquire an equity in the future should the
value of the acquired property increase. * * *
In addition, even a
purportedly recourse purchase note will not be treated as true debt
where payment, according to its terms, is too contingent. See Waddell
v. Commissioner [Dec.
43,023 ], 86 T.C. 848, 901-903
(1986), affd. [88-1
USTC ¶9192 ] 841 F.2d 264
(9th Cir. 1988). Further, the mere labeling of a purchase note as
recourse is not controlling because substance, not form, must govern.
The note's recourse label thus will not preclude inquiry into the
adequacy of the collateral securing an alleged purchase money debt.
See generally Waddell v. Commissioner, supra at 901-903.
In Ferrell v.
Commissioner [Dec.
44,834 ], 90 T.C. 1154, 1186
(1988), this Court held not to be bona fide debt for tax purposes
certain purportedly long-term recourse purchase notes that allegedly
had been assumed by limited partner investors, and elaborated as
follows:
We are fully aware of the
long line of decisions of this Court and other courts that have dealt
with bona fide long-term recourse notes assumed by limited partners.
In those cases, the courts have given credence to recourse notes as a
basis for supporting claimed losses or establishing section
465 "at risk" amounts.
See, e.g., Pritchett v. Commissioner [87-2
USTC ¶9517 ], 827 F.2d 644
(9th Cir. 1987), revg. and remanding [Dec.
42,449 ] 85 T.C. 580 (1985) (at
risk under sec.
465 ); Follender v.
Commissioner [Dec.
44,305 ], 89 T.C. 943 (1987) (at
risk under sec.
465 ; partnership's basis);
Melvin v. Commissioner [Dec.
43,632 ], 88 T.C. 63, 75 (1987)
(at risk under sec.
465 ); Abramson v.
Commissioner [Dec.
42,919 ], 86 T.C. 360 (1986)
(partnership's basis; at risk under sec.
465).
In all those cases,
however, the recourse notes were given to independent third parties
whose interests did not necessarily coincide with those of the note
makers. Those cases did not involve, as does the instant case,
transactions between two organizations created to carry out a tax
shelter scheme, notes given for amounts having no relationship to
economic reality, or notes which almost certainly would not be paid.
See Goldstein v. Commissioner [66-2
USTC ¶9561 ], 364 F.2d 734,
740-741 (2d Cir. 1966), affg. [Dec.
27,415 ] 44 T.C. 284 (1965),
Durkin v. Commissioner [Dec.
43,548 ], 87 T.C. 1329, 1376-1377
(1986); Waddell v. Commissioner [Dec.
43,023 ], 86 T.C. 848, 902
(1986), affd. [88-1
USTC ¶9192 ] 841 F.2d 264
(9th Cir. 1988); Houchins v. Commissioner [Dec.
39,387 ], 79 T.C. 570, 589-590
(1982).
In the instant case, we
are convinced, as stated above, that the purportedly recourse * * *
notes served merely as a facade for the support of the tax benefits
promised the investors * * *. The possibility that the notes would be
paid was illusory. * * *
In
Ferrell
v. Commissioner, supra,
the Court based its conclusion regarding the invalidity of the notes
on several factors: (1) The note holder's not being an independent
party but an essential member of the tax shelter team; (2) the
amounts of the notes being many times the value of the property
acquired; (3) the unusual form of the notes, including the extremely
long term for payment of any of the notes' principal; and (4) the
prearranged eventual release of the investors from their "assumptions
of personal liability" on the "recourse" notes. See
id.
at 1186-1190.
In the instant cases, the
Court is convinced that Jay Hoyt and the Hoyt organization never
intended to enforce the cattle-breeding partnerships' purportedly
recourse notes against a partnership and its partners on a genuinely
recourse basis. In that regard, the Court does not find believable
Jay Hoyt's testimony to the contrary.
Jay Hoyt testified that
although the cattle-breeding partnerships formed before 1986
(including several of the seven in the instant cases) had been
limited partnerships, by about 1986 many of them had been converted
to general partnerships following the execution of restated
partnership agreements for them. Even before this conversion, he
added, limited partner investors had executed assumption agreements,
pursuant to which they agreed to be fully personally liable for all
amounts owed under the "Full Recourse Promissory Note"
their partnership had issued for its purchased breeding cattle. He
related that he typically had signed an individual investor's name to
an assumption agreement on behalf of that investor, pursuant to a
power of attorney the investors had granted him. 37
However, as the Court
previously determined, the stated purchase prices for a partnership's
"breeding cattle" greatly exceeded those cattle's fair
market value. Neither were these arm's-length transactions. Jay Hoyt,
as managing general partner, represented each partnership in these
transactions and other Hoyt organization entities "sold"
and then "managed" the "breeding cattle" that a
partnership had purportedly purchased. The Hoyt organization greatly
inflated the stated purchase prices in order to increase the
potential tax benefits for investors.
In addition, as was noted
earlier, the Hoyt organization well before 1987 could never properly
account for all the specific individual breeding cattle that
purportedly were "purchased and owned" by the numerous
cattle-breeding partnerships it organized and operated over the
years. This manifested itself in the many accounting deficiencies and
irregularities in the Hoyt organization's cattle management and
record-keeping practices. Indeed, petitioners have been unable to
establish that breeding cattle existed from 1987 through 1992 in
numbers corresponding to those purportedly purchased and owned by all
of the cattle-breeding partnerships.
The Hoyt organization
further allowed a number of defaulting investors to walk away from
their partnership's alleged recourse promissory note debt. In his
testimony, Jay Hoyt maintained that he and the Hoyt organization had
concluded it was not practical to bring collection actions against a
large number of defaulting investors. He further stated that as a
"general principle" the Hoyt organization assumed that the
"cattle" securing a defaulting investor's "note
liability" had a value equal to 110 percent of that "note
liability". However, the Court does not believe Jay Hoyt's
explanation as to why the Hoyt organization never sought to enforce
the "note liability" against these defaulting investors. 38
In his testimony, Jay
Hoyt also noted that certain of the cattle-breeding partnerships had
almost "fully paid off" their "promissory note
liabilities" with respect to some earlier cattle purchase
transactions that they and the Hoyt organization had entered into. He
further indicated that, in substantial part, these notes had been
"paid off" through these partnerships' "transferring
back" cattle to the Hoyt organization. However, the Court does
not consider such "payments" to be convincing evidence
establishing those notes and other subsequent notes various
cattle-breeding partnerships issued were valid recourse indebtedness.
In a number of instances, the Hoyt organization set highly inflated
values on the cattle the partnerships "transferred back" to
it in "note payments". For instance, a Hoyt organization
note payment summary and a payment receipt reflect that, in late
1987, SGE 82-1 transferred to the Hoyt organization 82 registered
Shorthorns having a stated total value of $697,750 (which works out
to an average stated value per cow of approximately $8,508) and that
the Hoyt organization credited this $697,750 "payment"
against SGE 82-1's promissory note, allocating $232,122 to interest
and $465,528 to principal. The Hoyt organization further, over the
years, contrived other transactions pursuant to which small numbers
of breeding cattle (possibly "belonging" to some of the
cattle-breeding partnerships) were purportedly sold for allegedly
high prices at public cattle sales. See supra note 34.
This highly unusual
conduct by the Hoyt organization with respect to these alleged
recourse partnership debts casts considerable doubt upon the bona
fides of the "recourse promissory notes" the partnerships
issued to the Hoyt organization. In the subsequent note payment
"transactions", Jay Hoyt and the Hoyt organization placed
grossly inflated "values" on certain alleged cattle a
partnership "transferred back" to the Hoyt organization,
because the "payment" was only "applied" against
the grossly inflated stated purchase price that partnership
previously purportedly agreed to pay for its "breeding cattle".
In actuality, the Hoyt family and the Hoyt organization never
contemplated that each partnership's promissory note would ever have
to be paid by that partnership and its partners on a genuinely
recourse basis.
Jay Hoyt and the Hoyt
organization entities involved in the partnerships' breeding cattle
purchase transactions were not independent parties acting at arm's
length. Their actions evidence that they themselves viewed the
partnership notes as essentially being illusory and having no
practical economic effect and that the notes were merely a facade to
support the tax benefits Jay Hoyt and the Hoyt organization had
promised investors in the partnerships. See Ferrell v.
Commissioner [Dec.
44,834 ], 90 T.C. at 1186-1190;
see also River City Ranches #4, J.V. v. Commissioner [Dec.
53,432(M) ], T.C. Memo. 1999-209;
Hunter v. Commissioner [Dec.
38,854(M) ], T.C. Memo. 1982-126
n.17.
For the foregoing reasons
and on the record presented, the Court concludes that the partnership
notes were not valid indebtedness.
G.
Conclusions
39
DF #1, SGE 82-1, DGE
84-3, SGE 84-5, DGE 86-2, TBS 89-1, and TBS 90-1 claimed to have
acquired large numbers of breeding cattle which did not exist. In
addition, the annual herd recap sheets and other records petitioners
offered were not reliable and contemporaneous documents. Each
partnership's stated purchase price for its breeding cattle did not
reasonably approximate the cattle's fair market value. The alleged
recourse promissory note each partnership issued was not a valid
recourse indebtedness. In some instances, the Hoyt organization
attributed and reallocated certain breeding cattle originally
assigned to and "owned" by one partnership to another
partnership. Accordingly, we hold that DF #1, SGE 82-1, DGE 84-3, SGE
84-5, DGE 86-2, TBS 89-1, and TBS 90-1 did not acquire the benefits
and burdens of ownership with respect to the breeding cattle each had
purportedly acquired. See Ferrell v. Commissioner, supra at
1186-1190; Grodt & McKay Realty, Inc. v. Commissioner
[Dec.
38,472 ], 77 T.C. at 1237-1238.
We further hold that these foregoing partnerships are not entitled to
the depreciation deductions they claimed upon such breeding cattle
during the years in issue.
Issue 2. Interest
Deductions
As discussed supra
in connection with parts E and F of Issue 1, the Court has concluded
that the purported recourse promissory notes DF #1, SGE 82-1, DGE
84-3, SGE 84-5, DGE 86-2, TBS 89-1, and TBS 90-1 each issued to the
Hoyt organization in transactions subsequent to those involved in
Bales v. Commissioner [Dec.
46,099(M) ], T.C. Memo. 1989-568,
were not a valid indebtedness. Accordingly, we hold that these
foregoing partnerships are not entitled to the interest deductions
they claimed for the years in issue with respect to those notes.
The record further
reflects that DF #1, during some of the years in issue, also claimed
interest deductions with respect to certain notes it issued in
connection with transactions that might have been the subject of the
Bales decision. These alleged interest payments were "made"
by the partnership purportedly transferring back (at inflated values)
"cattle" to the Hoyt organization. For instance, a Hoyt
organization payment summary and a payment receipt reflect that, in
early 1987, DF #1 transferred to the Hoyt organization 14 heifers
having a stated total value of $111,056 (which works out to an
average stated value per heifer of just under $8,000) and that the
Hoyt organization credited this $111,056 "payment" against
three of DF #1's promissory notes, including two notes that DF #1
issued, respectively, in 1976 and 1977. The payment summary further
reflects that the Hoyt organization credited this $111,056 "payment"
against the three notes, allocating $13,231 to interest and $97,925
to principal.
We are aware that the DF
#1 notes issued in connection with the transactions involved in Bales
were previously determined by this Court to be valid recourse
indebtedness. However, in the instant cases, the Court does not
believe DF #1 to be entitled to interest deductions on those notes
for the years in issue. As indicated previously, petitioner's
collateral estoppel claim is not properly before the Court. See supra
note 39. Moreover, by the years in issue, the controlling facts had
changed materially. Among other things, by this time, the Hoyt
organization's cattle management "practices" had changed so
that DF #1 "owned" (for tax purposes) few, if any, actual
individual breeding cattle. It is thus extremely likely that the "14
heifers" purportedly "transferred back" by DF #1 to
the Hoyt organization in "payment" of these notes (1) did
not, in fact, exist and/or (2) were not "owned" by DF #1
for tax purposes. See also the discussion infra concerning
Issue 8. We hold that DF #1 is not entitled to the interest
deductions it claimed for the years in issue on those notes.
Issue 3. Certain Farm
and "Other" Deductions 40
As discussed supra
in connection with Issue 1, the Court has concluded DF #1, SGE 82-1,
DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1, and TBS 90-1 did not acquire
the benefits and burdens of ownership with respect to the breeding
cattle each partnership claimed to have acquired from the Hoyt
organization. Accordingly, we hold that these foregoing partnerships
are not entitled to the farm deductions they claimed for the years in
issue.
Petitioners have further
failed to substantiate the "other deductions" DF #1, SGE
82-1, and DGE 84-3 claimed for the 1990 and 1991 tax years.
Consequently, we sustain respondent's determinations in the FPAA's
disallowing DF #1, SGE 82-1, and DGE 84-3 those deductions for the
1990 and 1991 tax years. See Rules 142(a), 240(a).
Issue 4. Deductions
for Guaranteed Payments
Petitioners assert that
DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1, and TBS 90-1
are entitled to deductions for the years in issue for certain
guaranteed payments made to Jay Hoyt during those years.
Section
707(c) allows a deduction for a
partnership for guaranteed payments to partners. Such payments are
determined without regard to the partnership income and are payments
to a partners for services or the use of capital. See sec.
707(c) . To be deductible by the
partnership, the guaranteed payments must meet the requirements of
section
162 ; they must be ordinary and
necessary expenses, reasonable in amount, and incurred in a trade or
business. See Durkin v. Commissioner [Dec.
43,548 ], 87 T.C. 1329, 1376-1377
(1986), affd. [89-1
USTC ¶9277 ] 872 F.2d 1271
(7th Cir. 1989); sec.
1.707-1(c) , Income Tax Regs.
In deciding whether the
payments are deductible under section
162(a) , the Court must look to
the nature of the services performed by the general partners rather
than to their designation or treatment by the partnership. See Durkin
v. Commissioner, supra at 1388-1389. Payments allocable to
organizational costs and syndication expenses must be capitalized.
Organizational costs, if elected, are amortizable. See secs.
263 , 709
. Petitioners have the burden of
proving what portion of the fee is allocable to nondeductible capital
portions and to deductible expense portions, and such allocation must
reasonably comport with the value of the services performed. See
Durkin v. Commissioner, supra at 1389. Any fees for services
to be rendered in the future are not deductible in the year of
expenditure. See id. Whether payments to a partner represent a
reasonable compensation for services is a question of fact to be
determined on the basis of the particular circumstances of each case.
See id.
In the instant cases, the
evidence presented on the payments these partnerships made to Jay
Hoyt is most unsatisfactory. The record includes a copy of DGE 84-3's
partnership agreement. It provides that the managing general partner,
Jay Hoyt, is to receive a fee equal to 5 percent of that
partnership's profits. Copies of the partnership agreements of the
other partnerships for the years in issue are not in the record.
However, Jay Hoyt testified that he received a fee equal to 1 percent
of a partnership's gross farm income.
Petitioners have failed
to establish that the alleged payments each of these partnerships
made to Jay Hoyt are deductible under section
162(a) by that partnership.
Petitioners provided scant information concerning (1) the nature of
the services Jay Hoyt performed for that partnership and (2) whether
the payments represented reasonable compensation for those services
Jay Hoyt rendered. Thus we hold that DF #1, SGE 82-1, DGE 84-3, SGE
84-5, DGE 86-2, TBS 89-1, and TBS 90-1 are not entitled to the
deductions for guaranteed payments they claimed for the years in
issue. 41
See Durkin v. Commissioner, supra at 1388-1389.
Issue 5. IRA
Deductions
DF #1, DGE 84-3, and SGE
84-5 claimed deductions for some of the years in issue for alleged
individual retirement account (IRA) contributions they made for
certain of their partners.
On brief, respondent
concedes some of the claimed contributions DF #1, DGE 84-3, and SGE
84-5 made have been substantiated. The Court thus holds that these
foregoing partnerships are entitled to IRA deductions for the years
in issue in the amounts respondent conceded. The Court further holds
that these partnerships have not substantiated and are not entitled
to their claimed IRA deductions for the years in issue in excess of
the amounts respondent conceded. See Rules 142(a), 240(a).
Issue 6. Accounting
and Tax Return Preparation Fees Deductions
SGE 82-1, DGE 84-3, SGE
84-5, and TBS 90-1 each claimed deductions for accounting and tax
return preparation fees for its 1992 tax year.
Petitioners have failed
to present sufficient evidence substantiating that SGE 82-1,
DGE-84-3, SGE 84-5, and TBS 90-1 paid such accounting and tax
preparation fees. Consequently, we sustain respondent's
determinations in the FPAA's disallowing the deductions these
foregoing partnerships claimed for the 1992 tax year in issue. See
Rules 142(a), 240(a).
Issue 7. Investment
Tax Credits
Petitioners claim that
DGE 84-3 and SGE 84-5 are entitled to investment credits for 1987 for
cattle each partnership purchased in 1984. They maintain that under
the earlier settlement concluded for these partnerships for 1984
through 1986, the cattle were excluded and not depreciated by each
partnership for those years. Petitioners argue that these "excluded"
cattle were thus placed in service in 1987 and that DGE 84-3 and SGE
84-5 are entitled to investment credits under certain transition
rules provided to section
38 concerning property purchased
under a binding contract.
As discussed supra
in connection with Issue 1, the Court concluded DGE 84-3 and SGE 84-5
did not acquire the benefits and burdens of ownership with respect to
the breeding cattle each partnership claimed to have acquired.
Accordingly, we hold that DGE 84-3 and SGE 84-5 are not entitled to
investment credits for the years in issue.
Issue 8. Capital Gains
and/or Additional Farm Income
In the respective FPAA's
issued to DF #1, SGE 82-1, DGE 84-3, SGE 84-5, and TBS 89-1 for their
1988, 1989, 1990, 1991, and/or 1992 tax years, respondent determined
that (1) each partnership had additional farm income from its
transfer to a Hoyt organization entity of calves produced by that
partnership's breeding herd, and (2) certain income these
partnerships reported from the sale of some of its breeding cattle
and breeding value certificates 42
was ordinary income, rather than capital gains.
As discussed supra
in connection with Issue 1, the Court has determined that, during the
period covering the 1988 through 1992 tax years, SGE 82-1, DGE 84-3,
SGE 84-5, and TBS 89-1 did not acquire the benefits and burdens of
ownership with respect to the breeding cattle they purportedly
acquired from the Hoyt organization. As a result, these partnerships
never owned for tax purposes any breeding cattle to generate this
income respondent determined they had for the years in issue.
Accordingly, we hold that the 1988 through 1992 tax year capital
gains and/or other farm income adjustments respondent determined
against these foregoing partnerships cannot be sustained.
Issue 9. Management's
Deductions and Credits
In the FPAA's issued to
Management for its 1987, 1988, 1989, and 1990 tax years, respondent
disallowed various deductions and credits claimed by Management.
Among the adjustments in
issue between the parties are tens of millions of dollars of other
farm deductions attributable to large numbers of cattle Management
purportedly had received from numerous cattle-breeding partnerships
and then ostensibly transferred to Ranches in payment of feed,
management, consulting, freight services, and other goods and
services Ranches provided to Management. As discussed supra in
connection with Issue 1, the Court has determined certain specified
cattle-breeding partnerships, during 1987 through 1990, did not
acquire the benefits and burdens of ownership with respect to the
breeding cattle they purportedly acquired from the Hoyt organization.
As they and other cattle-breeding partnerships the Hoyt organization
formed and operated from 1987 through 1990, were never the owners for
tax purposes of any breeding cattle, the Court concludes that
Management "received" no cattle from these partnerships to
"transfer" to Ranches in "payment" of these
alleged goods and services Ranches provided to Management.
On brief, respondent has
conceded that Management is entitled to certain deductions for the
years in issue. The Court thus holds that Management is entitled to
farming and other deductions in the amounts respondent conceded. The
Court further holds that Management is not entitled to deductions for
the years in issue in excess of the amounts respondent conceded. See
Rules 142(a), 240(a).
On the record presented,
petitioners have failed to establish that Management is entitled to
fuel tax credits. Consequently, the Court sustains respondent's
determinations in the FPAA's that Management is not entitled to fuel
tax credits for some of the years in issue. See Rules 142(a), 240(a).
Similarly, on the record presented, petitioners have failed to
establish that Management is entitled to deduct research and
development expenses under section
174 . Among other things, the
Court is not satisfied that expenditures were actually incurred in
the amounts claimed for research or experimentation. See sec.
1.174-2(a)(1) , Income Tax Regs.
There is evidence of numerous irregularities in the Hoyt
organization's "cattle records", including the fabrication
of substantial amounts of fictitious cattle information. See supra
note 22. Consequently, the Court sustains respondent's determinations
in the FPAA's that Management is not entitled to deduct research and
development expenses under section
174 for some of the years in
issue. See Rules 142(a), 240(a).
On brief, petitioners
concede they have failed to produce any evidence regarding the
section
179 expense that Management
claimed for its 1989 tax year. Consequently, we sustain respondent's
determination in the FPAA disallowing Management such expense for the
1989 tax year. See Rules 142(a), 240(a).
Issue 10. Management's
Income
In the FPAA's issued to
Management for its 1987, 1988, 1989, and 1990 tax years, respondent
determined that Management (1) had (a) substantial management fees
from its receipt of calves and culls from numerous cattle-breeding
partnerships and (b) substantial sale income from its transfer of
much of those same cattle to Ranches, (2) had unreported 1990 capital
gains income from its sale of certain other assets, (3) received
taxable distributions of assets from Ranches and Hoyt & Sons
Ranch Properties, and (4) had income from the discharge of
indebtedness.
As discussed supra
in connection with Issues 1, 8, and 9, the Court has determined that
cattle-breeding partnerships the Hoyt organization formed and
operated from 1987 through 1992 did not acquire the benefits and
burdens of ownership with respect to breeding cattle they purportedly
acquired from the Hoyt organization and were not the owners for tax
purposes of any breeding cattle. These partnerships thus did not have
any cattle to generate the management fees and sales income (from
Management's then "transferring" to Ranches large numbers
of animals "received" from the partnerships) respondent
determined. Accordingly, we hold that the 1987, 1988, 1989, and 1990
farm income adjustments respondent determined against Management--to
the extent of the management fee income and the sale income from
Ranches--cannot be sustained. In all other respects, the Court
sustains the 1987, 1988, 1989, and 1990 farm income adjustments
respondent determined. See Rules 142(a), 240(a).
Petitioners offered no
evidence concerning the 1990 section
1231 gain adjustment respondent
determined against Management from its sale of certain other assets.
Consequently, the Court sustains respondent's determination in the
FPAA that Management had $720,526 of section
1231 gain for the 1990 tax year.
See Rules 142(a), 240(a).
Petitioners offered no
evidence concerning the 1988, 1989, and 1990 taxable distribution
adjustments respondent determined Management had from its receipt of
assets from Ranches and Hoyt & Sons Ranch Properties. On brief,
respondent acknowledges that since it was unclear whether Management
received $8,160,745 of the assets in 1989 or 1990, the same
$8,160,745 amount was included in both 1989 and 1990. Respondent now
states that he believes the $8,160,745 amount belongs in Management's
income for 1990. Consequently, the Court sustains respondent's
determinations in the FPAA's that Management had $1,450,793 in
taxable distributions for the 1988 tax year and $8,160,745 in taxable
distributions for the 1990 tax year. See Rules 142(a), 240(a). The
Court further holds that Management had $2,648,902 in taxable
distributions (the $10,809,647 respondent originally determined, less
the $8,160,745 respondent now states is properly allocable to 1990)
for the 1989 tax year.
Petitioners offered no
evidence concerning the 1989 and 1990 discharge of indebtedness
adjustments respondent determined Management had from the forgiveness
of amounts owed by it to Hoyt & Sons Ranch Properties on land
leases from 1983 through 1989. On brief, respondent acknowledges that
the same $4,984,403 amount was included in both 1989 and 1990.
Respondent now states he believes this $4,984,403 of income should be
recognized by Management for 1990. Consequently, the Court sustains
respondent's determination in the FPAA that Management had $4,984,403
of discharge of indebtedness income for the 1990 tax year. See Rules
142(a), 240(a). The Court further holds that Management had no
discharge of indebtedness income for the 1989 tax year.
To reflect the foregoing
and the parties' concessions,
Decisions will be
entered under Rule 155.
APPENDIX
A--FPAA Adjustments
DF
#1
TYE
Adjustments
12-31-87
Total Adjustments to Ordinary Income
Farm
income ....................................... $ 129,787
Depreciation
expense .............................. 23,826
Interest
expense .................................. 13,285
Other
farm deductions ............................. 196,258
Guaranteed
payments ............................... 13,841
Other
Adjustments
Self-employment
income ............................ 118,165
IRA
contribution .................................. 8,000
12-31-88
Total Adjustments to Ordinary Income
Farm
income ....................................... 121,264
Interest
expense .................................. 7,038
Other
farm deductions ............................. 207,292
Guaranteed
payments ............................... 10,597
Other
Adjustments
Self-employment
income ............................ 28,265
9-30-89
Total Adjustments to Ordinary Income
Interest
expense .................................. 12,888
Other
farm deductions ............................. 246,107
Guaranteed
payments ............................... 4,906
Other
Adjustments
Self-employment
income ............................ 26,514
9-30-90
Total Adjustments to Ordinary Income
Farm
Income ....................................... 137,299
Depreciation
expense .............................. 280,175
Interest
expense .................................. 82,496
Other
farm deductions ............................. 27,578
Cattle
losses--drought/disease ..................... 520,325
Guaranteed
payments ............................... 280
Other
Adjustments
Self-employment
income ............................ $ 799,505
Other
deductions .................................. 137,299
9-30-91
Total Adjustments to Ordinary Income
Depreciation
expense .............................. 359,651
Interest
expense .................................. 123,750
Sharecrop
calves .................................. 325,360
Cattle
losses--drought/disease ..................... 440,850
Guaranteed
payments ............................... 3,254
Other
Adjustments
Self-employment
income ............................ 1,007,487
Other
deductions .................................. 261,321
9-30-92
Total Adjustments to Ordinary Income
Farm
Income ....................................... 109,981
Depreciation
expense .............................. 439,924
Interest
expense .................................. 131,737
Calves--management
fee ............................. 152,059
Guaranteed
payments ............................... 2,620
Other
Adjustments
Self-employment
income ............................ 574,281
SGE
82-1
TYE
Adjustments
9-30-90
Total Adjustments to Ordinary Income
Farm
income ....................................... 2,349,777
Interest
expense .................................. 91,326
Other
farm deductions ............................. 27,578
Guaranteed
payments ............................... 280
Other
Adjustments
Self-employment
income ............................ 280
Other
deductions .................................. 1,151,341
9-30-91
Total Adjustments to Ordinary Income
Farm
income ....................................... 150,392
Depreciation
expense .............................. 615,619
Sharecrop
calves .................................. 491,360
Cattle
losses--drought/disease ..................... $ 178,263
Guaranteed
payments ............................... 4,919
Other
Adjustments
Self-employment
income ............................ 792,056
Other
deductions .................................. 1,117,006
9-30-92
Total Adjustments to Ordinary Income
Farm
income ....................................... 65,734
Depreciation
expense .............................. 262,938
Interest
expense .................................. 4,000
Calves-management
fee ............................. 272,873
Accounting
fees ................................... 3,086
Guaranteed
payments ............................... 3,386
Other
Adjustments
Self-employment
income ............................ 270,024
DGE
84-3
TYE
Adjustments
12-31-87
Total Adjustments to Ordinary Income
Depreciation
expense .............................. 1,078,475
Interest
expense .................................. 330,319
Other
farm deductions ............................. 92,163
Guaranteed
payments ............................... 17,082
Other
Adjustments
Self-employment
income ............................ 1,392,722
IRA
contribution .................................. 32,000
12-31-88
Total Adjustments to Ordinary Income
Depreciation
expense .............................. 1,074,885
Interest
expense .................................. 179,318
Other
farm deductions ............................. 118,490
Guaranteed
payments ............................... 11,288
Other
Adjustments
Self-employment
income ............................ 1,243,908
IRA
contribution .................................. 20,000
9-30-89
Total Adjustments to Ordinary Income
Depreciation
expense .............................. $ 134,884
Interest
expense .................................. 113,757
Other
farm deductions ............................. 144,498
Guaranteed
payments ............................... 1,486
Other
Adjustments
Self-employment
income ............................ 244,581
9-30-90
Total Adjustments to Ordinary Income
Farm
income ....................................... 2,054,133
Depreciation
expense .............................. 67,940
Interest
expense .................................. 707,820
Other
farm deductions ............................. 27,578
Cattle
losses--drought/disease ..................... 19,500
Guaranteed
payments ............................... 280
Other
Adjustments
Self-employment
income ............................ 794,812
Other
deductions .................................. 869,361
9-30-91
Total Adjustments to Ordinary Income
Farm
income ....................................... 148,621
Depreciation
expense .............................. 656,894
Interest
expense .................................. 230,000
Sharecrop
calves .................................. 401,720
Cattle
losses--drought/disease ..................... 367,633
Guaranteed
payments ............................... 4,017
Other
Adjustments
Self-employment
income ............................ 1,232,481
Other
deductions .................................. 1,058,365
9-30-92
Total Adjustments to Ordinary Income
Farm
income ....................................... 102,918
Depreciation
expense .............................. 411,672
Interest
expense .................................. 42,750
Calves--management
fee ............................. 127,063
Accounting
fees ................................... 3,086
Guaranteed
payments ............................... 2,300
Other
Adjustments
Self-employment
income ............................ 457,508
SGE
84-5
TYE
Adjustments
12-31-87
Total Adjustments to Ordinary Income
Depreciation
expense .............................. $1,090,460
Interest
expense .................................. 187,962
Other
farm deductions ............................. 92,163
Guaranteed
payments ............................... 15,062
Other
Adjustments
Self-employment
income ............................ 1,264,350
12-31-88
Total Adjustments to Ordinary Income
Depreciation
expense .............................. 893,334
Interest
expense .................................. 295
Other
farm deductions ............................. 119,820
Guaranteed
payments ............................... 15,328
Other
Adjustments
Self-employment
income ............................ 880,664
IRA
contribution .................................. 28,000
9-30-89
Total Adjustments to Ordinary Income
Depreciation
expense .............................. 448,101
Interest
expense .................................. 303,687
Other
farm deductions ............................. 141,166
Guaranteed
payments ............................... 1,486
Other
Adjustments
Self-employment
income ............................ 744,396
9-30-90
Total Adjustments to Ordinary Income
Farm
income ....................................... 1,807,147
Depreciation
expense .............................. 138,075
Interest
expense .................................. 666,370
Other
farm deductions ............................. 27,578
Cattle
losses--drought/disease ..................... 152,425
Guaranteed
payments ............................... 280
Other
Adjustments
Self-employment
income ............................ 956,422
Other
deductions .................................. 931,694
9-30-91
Total Adjustments to Ordinary Income
Farm
Income ....................................... $ 150,276
Depreciation
expense .............................. 155,998
Interest
expense .................................. 209,500
Sharecrop
calves .................................. 401,720
Guaranteed
payments ............................... 4,018
Other
Adjustments
Self-employment
income ............................ 292,742
Other
deductions .................................. 381,176
9-30-92
Total Adjustments to Ordinary Income
Farm
income ....................................... 101,493
Depreciation
expense .............................. 405,972
Interest
expense .................................. 42,000
Calves--management
fee ............................. 324,948
Accounting
fees ................................... 3,086
Guaranteed
payments ............................... 3,806
Other
Adjustments
Self-employment
income ............................ 496,884
DGE
86-2
TYE
Adjustments
12-31-91
Total Adjustments to Ordinary Income
Depreciation
expense .............................. 862,447
Sharecrop
calves .................................. 2,479,421
Cattle
losses--drought/disease ..................... 976,369
Other
Adjustments
Self-employment
income ............................ 4,312,237
TBS
89-1
TYE
Adjustments
12-31-89
Total Adjustments to Ordinary Income
Depreciation
expense .............................. 1,056,720
Other
Adjustments
Self-employment
income $1,056,720
12-31-91
Total Adjustments to Ordinary Income
Farm
income ....................................... 11,686
Depreciation
expense .............................. 555,199
Board
expense ..................................... 1,983,470
Cattle
losses--drought/disease ..................... 237,325
Other
Adjustments
Self
employment income ............................ 2,750,837
Other
deductions .................................. 14,578
TBS
90-1
TYE
Adjustments
12-31-92
Total Adjustments to Ordinary Income
Depreciation
expense .............................. 2,174,204
Interest
expense .................................. 137,750
Accounting
fees ................................... 3,086
Other
Adjustments
Self-employment
income ............................ 2,315,040
Management
TYE
Adjustments
9-30-87
Total Adjustments to Ordinary Income
Gross
receipts or sales ........................... 56,813
Sales--livestock
raised ............................ 2,803,274
Management
fees ................................... 74,388,096
Sales
to Ranches .................................. 36,201,929
Reclassified
section 1231 gain .................... 1,159,679
Other
sales ....................................... 2,175,457
Other
income ...................................... 644
Depreciation
expense .............................. 1,006,785
Interest
expense .................................. 3,618
Other
farm deductions ............................. 4,608,140
Other
Adjustments
Self-employment
income ............................ 6,018,585
Fuel
credit ....................................... 10,732
Research
credit ................................... 185,640
Investment
credit ................................. $2,189,204
9-30-88
Total Adjustments to Ordinary Income
Gross
receipts or sales ........................... 217,125
Income--receipt
of distrib. ptrship. assets ........ 1,450,793
Sales--livestock
raised ............................ 1,600,240
Management
fees ................................... 54,610,680
Sales
to Ranches .................................. 41,409,067
Other
sales ....................................... 7,339,811
Other
income ...................................... 99,660
Depreciation
expense .............................. 141,467
Interest
expense .................................. 14,770
Other
farm deductions ............................. 5,924,524
Other
Adjustments
Self-employment
income ............................ 5,574,221
Fuel
credit ....................................... 13,223
9-30-89
Total Adjustments to Ordinary Income
Gross
receipts or sales ........................... 99,751
Income--discharge
of indebtedness .................. 4,984,403
Income--receipt
of distrib. ptrship.assets ......... 10,809,647
Sales--livestock
raised ............................ 6,491,658
Management
fees ................................... 35,889,200
Sales
to Ranches .................................. 54,879,409
Other
sales ....................................... 12,131,943
Depreciation
expense .............................. 141,858
Interest
expense .................................. 369,617
Other
farm deductions ............................. 7,058,246
Other
Adjustments
Self-employment
income ............................ 16,580,142
Fuel
credit ....................................... 13,223
Section
179 expense ............................... 13,566
9-30-90
Total Adjustments to Ordinary Income
Income--receipt
of distrib. ptrship. assets ........ 8,160,745
Basis
livestock sold .............................. 172,739
Sales--livestock
raised ............................ 1,999,969
Management
fees ................................... 46,762,200
Sales
to Ranches .................................. 32,057,283
Other
sales ....................................... 1,441,785
Agriculture
payments .............................. 3,010
Other
income ...................................... $5,527,069
Depreciation
expense .............................. 537,993
Interest
expense .................................. 222,963
Other
farm deductions ............................. 8,014,100
General
Partners' Office expenses ................. 620,731
Laguna
Tax Service expenses ....................... 1,401,315
Income--discharge
of indebtedness .................. 4,984,403
Other
Adjustments
Self-employment
income ............................ 15,016,325
Rental
income ..................................... 56,190
Dividend
income ................................... 1,180
Section
1231 gain ................................. 720,026
Fuel
credit ....................................... 14,462
Section
179 expense ............................... 2,958,692
APPENDIX
B--Adjustments in Issue
DF
#1
TYE
Adjustments
12-31-87
Interest expense ................................ $ 9,054
Other
farm deductions ........................... 83,328
Guaranteed
payments ............................. 833
IRA
contribution ................................ 8,000
12-31-88
Farm income/capital gain ........................ 121,264
Interest
expense ................................ 7,038
Other
farm deductions ........................... 134,037
Guaranteed
payments ............................. 1,340
9-30-89
Interest expense ................................ 12,888
Other
farm deductions ........................... 386,937
Guaranteed
payments ............................. 3,869
9-30-90
Farm income ..................................... 137,299
Depreciation
expense ............................ 280,175
Interest
expense ................................ 56,035
Other
farm deductions ........................... 386,937
Guaranteed
payments ............................. 3,869
Other
deductions ................................ 137,299
9-30-91
Depreciation expense ............................ 359,651
Interest
expense ................................ 125,879
Other
farm deductions ........................... 247,842
Guaranteed
payments ............................. 2,478
9-30-92
Farm income/capital gain ........................ 109,981
Depreciation
expense ............................ 439,924
Interest
expense ................................ 131,737
Other
farm deductions ........................... 283,248
Guaranteed
payments ............................. 2,620
SGE
82-1
TYE
Adjustments
9-30-90
Farm income/capital gain ........................ 2,349,777
Depreciation
expense ............................ 792,666
Interest
expense ................................ 103,962
Other
farm deductions ........................... 771,345
Guaranteed
payments ............................. $ 9,463
Other
deductions ................................ 1,551,341
9-30-91
Farm income/capital gain ........................ 150,392
Depreciation
expense ............................ 792,666
Interest
expense ................................ 20,071
Other
farm deductions ........................... 491,360
Guaranteed
payments ............................. 4,914
9-30-92
Farm income/capital gain ........................ 65,734
Depreciation
expense ............................ 262,938
Interest
expense ................................ 48,985
Other
farm deductions ........................... 272,873
Accounting
fees ................................. 3,086
Guaranteed
payments ............................. 3,386
DGE
84-3
TYE
Adjustments
12-31-87
Depreciation expense ............................ 432,900
Interest
expense ................................ 151,515
Other
farm deductions ........................... 598,176
Guaranteed
payments ............................. 5,981
Investment
credit ............................... 1,425,500
12-31-88
Depreciation expense ............................ 454,545
Interest
expense ................................ 151,515
Other
farm deductions ........................... 598,176
Guaranteed
payments ............................. 8,022
IRA
contribution ................................ 28,000
9-30-89
Depreciation expense ............................ 228,769
Interest
expense ................................ 151,515
Other
farm deductions ........................... 508,329
Guaranteed
payments ............................. 5,159
9-30-90
Farm income/capital gain ........................ 2,054,133
Depreciation
expense ............................ 398,000
Interest
expense ................................ 355,000
Other
farm deductions ........................... 422,343
Guaranteed
payments ............................. 4,223
9-30-91
Farm income/capital gain ........................ 148,621
Depreciation
expense ............................ 398,000
Interest
expense ................................ 182,735
Other
farm deductions ........................... 306,009
Guaranteed
payments ............................. $ 8,022
Other
deductions ................................ 1,058,365
9-30-92
Farm income/capital gain ........................ 102,918
Depreciation
expense ............................ 158,625
Interest
expense ................................ 130,525
Other
farm deductions ........................... 306,009
Accounting
fees ................................. 3,086
Guaranteed
payments ............................. 3,060
SGE
84-5
TYE
Adjustments
12-31-87
Depreciation expense ............................ 557,632
Interest
expense ................................ 195,171
Other
farm deductions ........................... 946,368
Guaranteed
payments ............................. 9,463
Investment
credit ............................... 2,060,100
12-31-88
Depreciation expense ............................ 585,514
Interest
expense ................................ 195,171
Other
farm deductions ........................... 804,222
Guaranteed
payments ............................. 8,022
IRA
contribution ................................ 28,000
9-30-89
Depreciation expense ............................ 324,476
Interest
expense ................................ 195,171
Other
farm deductions ........................... 515,916
Guaranteed
payments ............................. 5,159
9-30-90
Farm income/capital gain ........................ 1,807,147
Depreciation
expense ............................ 447,027
Interest
expense ................................ 211,587
Other
farm deductions ........................... 515,916
Guaranteed
payments ............................. 5,159
9-30-91
Farm income/capital gain ........................ 150,276
Depreciation
expense ............................ 470,657
Interest
expense ................................ 211,587
Other
farm deductions ........................... 452,961
Guaranteed
payments ............................. 4,526
9-30-92
Farm income/capital gain ........................ 101,493
Depreciation
expense ............................ 195,070
Interest
expense ................................ 166,521
Other
farm deductions ........................... 452,691
Accounting
fees ................................. $ 4,526
Guaranteed
payments ............................. 3,806
DGE
86-2
TYE
Adjustments
12-31-91
Depreciation expense ............................ 862,447
Other
farm deductions ........................... 2,479,421
TBS
89-1
TYE
Adjustments
12-31-89
Depreciation expense ............................ 1,050,000
12-31-91
Farm income/capital gain ........................ 11,686
Depreciation
expense ............................ 555,199
Interest
expense ................................ 194,320
Other
farm deductions ........................... 700,533
Guaranteed
payments ............................. 7,005
TBS
90-1
TYE
Adjustments
12-31-92
Depreciation expense ............................ 736,707
Interest
expense ................................ 199,303
Other
farm deductions ........................... 627,921
Accounting
fees ................................. 3,086
Guaranteed
payments ............................. 6,271
Management
TYE
Adjustments
9-30-87
Farm income 1
.................................. 114,755,879
Depreciation
expense ............................ 198,141
Interest
expense ................................ 3,618
Other farm
deductions 2
........................ 40,810,069
Fuel
credit ..................................... 1,862
Research
credit ................................. 1,315,155
1
Includes $74,388,096 of
management fee income from sharecrop
agreements
with cattle-breeding partnerships and $36,201,929 of
sales
income (see comment 2 below) from its transfer of animals
to
Ranches.
2
Includes $36,201,929 payment made
to Ranches to satisfy debt
"over
several years" for feed, management, consulting, freight
services,
etc.
9-30-88
Farm income 1
.................................. $103,783,980
Income
from receipt of distrib. ptrship. assets . 1,450,793
Depreciation
expense ............................ 25,196
Interest
expense ................................ 14,770
Other farm
deductions 2
........................ 47,333,591
Fuel
credit ..................................... 13,223
Research
credit ................................. 1,552,690
1
Includes $54,610,680 of
management fee income from sharecrop
agreements
with cattle-breeding partnerships and $41,409,067 of
sales
income (see comment 2 below) from its transfer of animals
to
Ranches.
2
Includes $41,409,067 payment made
to Ranches to satisfy debt
"over
several years" for feed, management, consulting, freight
services,
etc.
9-30-89
Farm income 1
.................................. 102,989,553
Income
from receipt of distrib. ptrship. assets . 10,809,647
Income
from discharge of indebtedness ........... 4,984,403
Depreciation
expense ............................ 231,521
Interest
expense ................................ 369,617
Other farm
deductions 2
........................ 61,937,655
Fuels
credit .................................... 14,178
Research
credit ................................. 762,645
Section
179 expense ............................. 13,566
1
Includes $35,889,200 of
management fee income from sharecrop
agreements
with cattle-breeding partnerships and $54,879,409 of
sales
income (see comment 2 below) from transfer of animals to
Ranches.
2
Includes $54,879,409 payment made
to Ranches to satisfy debt
"over
several years" for feed, management, consulting, freight
services,
etc.
9-30-90
Farm income 1
.................................. $ 71,585,386
Income
from receipt of distrib. ptrship. assets . 8,160,745
Income
from discharge of indebtedness ........... 4,984,403
Additional
sec. 1231 gain ....................... 720,526
Depreciation
expense ............................ 515,265
Interest
expense ................................ 222,963
Other farm
deductions 2
........................ 40,161,738
Fuel
credit ..................................... 14,462
Research
credit ................................. 1,828,968
1
Includes $47,762,200 of
management fee income from sharecrop
agreements
with cattle-breeding partnerships and $32,057,283 of
sales
income (see comment 2 below) from transfer of animals to
Ranches.
2
Includes $32,057,283 payment made
to Ranches to satisfy debt
"over
several years" for feed, management, consulting, freight
services,
etc.
1
Cases of the following petitioners are consolidated herewith: Durham
Farms #1, J.V., Gary L. Blackburn, Tax Matters Partner, Docket No.
2468-94; W.J. Hoyt Sons Management Company, Gary L. Blackburn, Tax
Matters Partner, Docket No. 5104-94; W.J. Hoyt Sons Management
Company, Gary L. Blackburn, Tax Matters Partner, Docket No. 5105-94;
W.J. Hoyt Sons Management Company, Gary L. Blackburn, Tax Matters
Partner, Docket No. 5106-94; Durham Genetic Engineering 1984-3, J.V.,
Gary L. Blackburn, Tax Matters Partner, Docket No. 9271-94; Shorthorn
Genetic Engineering 1984-5, J.V., Gary L. Blackburn, Tax Matters
Partner, Docket No. 9752-94; Durham Genetic Engineering 1984-3, J.V.,
Gary L. Blackburn, Tax Matters Partner, Docket No. 9768-94; Shorthorn
Genetic Engineering 1984-5, J.V., Gary L. Blackburn, Tax Matters
Partner, Docket No. 9814-94; Timeshares Breeding Service 1989-1,
J.V., Gary L. Blackburn, Tax Matters Partner, Docket No. 18707-94;
W.J. Hoyt Sons Management Company, Gary L. Blackburn, Tax Matters
Partner, Docket No. 18710-94; Durham Farms #1, J.V., Gary L.
Blackburn, Tax Matters Partner, Docket No. 20957-94; Shorthorn
Genetic Engineering 1982-1, J.V., Gary L. Blackburn, Tax Matters
Partner, Docket No. 22821-94; Shorthorn Genetic Engineering 1984-5,
J.V., Gary L. Blackburn, Tax Matters Partner, Docket No. 23429-94;
Durham Genetic Engineering 1984-3, J.V., Gary L. Blackburn, Tax
Matters Partner, Docket No. 23777-94; Durham Farms #1, J.V., Gary L.
Blackburn, Tax Matters Partner, Docket No. 8175-95; Shorthorn Genetic
Engineering 1982-1, J.V., Gary L. Blackburn, Tax Matters Partner,
Docket No. 10053-95; Shorthorn Genetic Engineering 1984-5, J.V., Gary
L. Blackburn, Tax Matters Partner, Docket No. 11217-95; Durham
Genetic Engineering 1984-3, J.V., Gary L. Blackburn, Tax Matters
Partner, Docket No. 12500-95; Durham Genetic Engineering 1986-2,
J.V., Gary L. Blackburn, Tax Matters Partner, Docket No. 13236-95;
Timeshares Breeding Services 1989-1, J.V., Gary L. Blackburn, Tax
Matters Partner, Docket No. 14712-95; Durham Farms #1, J.V., Dan C.
Johnson, A Partner Other Than the Tax Matters Partner, Docket No.
20843-95; Shorthorn Genetic Engineering 1984-5, J.V., Lawrence Dees,
A Partner Other Than the Tax Matters Partner, Docket No. 20868-95;
Shorthorn Genetic Engineering 1982-1, J.V., Gary L. Blackburn, Tax
Matters Partner, Docket No. 21629-95; Durham Genetic Engineering
1984-3, J.V., Thomas Emerson, A Partner Other Than the Tax Matters
Partner, Docket No. 24241-95; Timeshares Breeding Services 1990-1,
J.V., Edgar Marco, A Partner Other Than the Tax Matters Partner,
Docket No. 24643-95. By Order dated Oct. 27, 1999, the Court removed
Walter J. Hoyt III, as tax matters partner in each of the
consolidated cases. In that same Oct. 27, 1999, Order, the Court
appointed Gary L. Blackburn as successor tax matters partner of each
partnership in the cases and also permitted him to be intervening tax
matters partner in those cases commenced by a partner other than a
partnership's tax matters partner.
2
After the trial was held and the parties filed their posttrial
briefs, Walter J. Hoyt III was allowed by the Court to withdraw as
tax matters partner from these cases.
3
See supra note 2.
4
The years in issue for Durham Farms #1 are 1987, 1988, and its years
ended Sept. 30, 1989 through 1992. The years in issue for Shorthorn
Genetic Engineering 1982-1 are its years ended Sept. 30, 1990 through
1992. The years in issue for Shorthorn Genetic Engineering 1984-5 are
1987, 1988, and its years ended Sept. 30, 1989 through 1992. The
years in issue for Durham Genetic Engineering 1984-3 are 1987, 1988,
and its years ended Sept. 30, 1989 through 1992. The year in issue
for Durham Genetic Engineering 1986-2 is 1991. The years in issue for
Timeshares Breeding Services 1989-1 are 1989 and 1991. The year in
issue for Timeshares Breeding Services 1990-1 is 1992. The years in
issue for W.J. Hoyt Sons Management Co. are its years ended Sept. 30,
1987 through 1990. Respondent granted DF #1, SGE 82-1, SGE 84-5, and
DGE 84-3, each permission to change to a taxable year ended Sept. 30,
beginning with that partnership's year ended Sept. 30, 1989.
5
In Bales v. Commissioner [Dec.
46,099(M) ], T.C. Memo. 1989-568
(wherein the years in issue generally were 1977 through 1979), this
Court, among other things, determined with respect to the
transactions of several earlier cattle partnerships (which the Hoyt
family organized and operated, including DF #1) that (1) those
partnerships had acquired the benefits and burdens of ownership with
respect to specific breeding cattle and (2) the promissory notes they
issued were valid recourse indebtedness. In addition, Jay Hoyt (as
tax matters partner) and respondent later concluded settlements with
respect to the years 1980 through 1986 of those partnerships and a
number of other cattle-breeding partnerships the Hoyt family
organized (including settlements for 1980 through 1986 of those 1986
for some of the seven cattle-breeding partnerships involved in the
instant cases). In the instant cases, which involve the years 1987
through 1992 and concern transactions the seven cattle-breeding
partnerships in issue entered into after those in Bales,
however, the parties disagree whether these seven cattle-breeding
partnerships obtained actual ownership of specific breeding cattle
and whether the promissory notes the partnerships issued were valid
indebtness. The terms "sale", "sold", "purchase",
"partnership's cattle", and similar terms, insofar as
relating to subsequent transactions now in issue, are used herein for
convenience and are not intended as ultimate findings or conclusions
concerning the partnerships' acquisition of cattle. Similarly, the
use herein of such terms indicating that interest or principal
payments were due should not be construed as our conveying any legal
conclusion concerning the validity of the partnerships' promissory
notes.
6
Each of the breeding cattle a partnership acquired was supposed to be
listed and identified in the bill of sale Ranches issued that
partnership. According to Jay Hoyt, the Hoyt organization's original
practice had been to attach copies of all the animals' registration
certificates to the bill of sale. He further indicated that after the
Hoyt organization's cattle records were computerized around 1985, a
Schedule A containing all of this same information (including each
individual animal's tag number, registration number, birth date, and
sex, as well as the respective registration numbers of its sire and
dam) was instead prepared and attached to the bill of sale. In
addition, although the sharecrop agreement that Management and a
cattle-breeding partnership entered typically recognized that any
registration papers on a partnership's breeding cattle would be taken
out in the Hoyt family's name, the sharecrop agreement required
Management to know the identity and number of a partnership's
breeding cattle at all times.
7
The Hoyt organization prepared the tax returns for the
cattle-breeding partnerships it formed and operated. Jay Hoyt as the
managing general partner of a partnership typically signed and filed
that partnership's return. For example, the depreciation schedule
included in DGE 84-3's 1988 return reflects that it had "acquired"
breeding herds for $4,759,500 on Feb. 1, 1984, and for $359,000 on
Feb. 1, 1986, each of which it had been depreciating over 5 years.
Similarly, the depreciation schedule included in SGE 84-5's 1987
return reflects that it had "acquired" breeding herds for
$4,826,000 on Apr. 1, 1984, and for $350,000 on Feb. 1, 1986, each of
which it had been depreciating over 5 years.
8
For example, in evidence are two bills of sale both dated Apr. 1,
1984, that the Hoyt organization issued to SGE 84-5. One bill of sale
reflects SGE 84-5 to have acquired 500 breeding cows with calves at
side on that date for a stated price of $5,080,000. The other bill of
sale reflects SGE 84-5 to have acquired 269 head of breeding cows on
that date for a stated price of $5,080,000. Also in evidence is a
1984 herd recap sheet for SGE 84-5 that reflects the partnership to
have purchased 693 breeding cattle during 1984.
9
In the Oct. 31, 1984, memorandum, Jay Hoyt claimed that these "cattle
exchange transactions" between other partnerships and FF #3 and
FF #4 would be "tax free exchanges". He further maintained
that the rationale for the "exchanges" was that the other
partnerships would be "receiving" a more mature, "proven
cow" from FF #3 or FF #4, in return for their "giving up"
an unproven, "glamor girl cow". In fact, the 1984 and 1985
"dispersal sale cattle prices" that FF #3 and FF #4
"realized" were later offered in evidence by the taxpayers
in the Bales v. Commissioner [Dec.
46,099(M) ], T.C. Memo. 1989-568.
This valuation evidence ultimately was relied heavily upon by this
Court in reaching its conclusion that the stated sales prices the
Bales cattle-breeding partnerships had earlier agreed to pay
the Hoyt family for their breeding cattle were within a reasonable
range of those cattle's fair market value. See id. In further
point of fact, as discussed infra, FF #3 and FF #4 were not
liquidated and never received these "dispersal sale proceeds".
10
The ASA generally did not inspect or otherwise verify the existence
of the Shorthorn cattle registered with it, because it generally
accepted to be true the information concerning the animal provided in
the registration application a breeder submitted. However, where an
animal being registered was produced through artificial insemination
techniques, such as embryo transplanting, the ASA's rules required
that the animal's asserted parentage be established through a blood
test.
11
At about this time, the Hoyt organization proposed to Roger Hunsley
(Mr. Hunsley) (who had been the ASA's executive director since about
1983 and an expert witness for the taxpayers in Bales v.
Commissioner, supra,) that it be allowed to register
calves for a lower registration fee of $6 per animal, in return for
its promising to register a minimum of 4,000 calves annually for 1991
and 1992. Mr. Hunsley accepted this proposal.
12
See also River City Ranches #4, J.V. v. Commissioner [Dec.
53,432(M) ], T.C. Memo. 1999-209
(involving similar sheep-breeding partnerships Jay Hoyt organized and
operated).
13
As indicated previously, the record contains no bills of sale
relating to DF #1's, SGE 82-1's, DGE 84-3's, SGE 84-5's, DGE 86-2's,
TBS 89-1's, and TBS 90-1's purchases of breeding cattle during 1987
through 1992. Indeed, the revenue agent who examined the returns
covering the period from 1987 through 1992 of all the cattle-breeding
partnerships the Hoyt organization had formed (including the returns
of the seven partnerships involved in the instant cases) testified
that no bills of sale were provided to respondent for any breeding
cattle purchases any of the partnerships allegedly made from 1988
through 1991. Yet, in his testimony, Jay Hoyt claimed that all of the
bills of sale relating to the partnerships' alleged breeding cattle
purchases from 1988 through 1992 had been provided to respondent.
14
Unlike the parties in River City Ranches #4, J.V. v. Commissioner
[Dec.
53,432(M) ], T.C. Memo. 1999-209
(a case involving similar sheep-breeding partnerships Jay Hoyt formed
and operated), the parties in the instant cases did not introduce in
evidence detailed information from numerous individual animal
registration certificates.
15
On brief, petitioners further cite the cattle count performed during
the litigation of Bales v. Commissioner [Dec.
46,099(M) ], T.C. Memo. 1989-568,
pursuant to which there were estimated to be 6,500 adult cows in the
herds of 29 cattle-breeding partnerships. The Court notes that this
previous count was done in 1985. Moreover, not all of the estimated
6,500 cattle were actually examined and counted. Rather, cattle were
counted in randomly selected portions of 7 out of 26 fields or
pastures. From the 250 to 400 cows counted in what was thought was a
representative sampling, a statistician extrapolated that there were
a total of approximately 6,500 adult cows present. It is further to
be noted that following 1985, the Hoyt organization claimed that
thousands of breeding cattle that it managed on behalf of numerous
cattle-breeding partnerships died as a result of drought and disease.
In fact, many of the cattle-breeding partnerships claimed deductions
on their returns for their alleged large cattle losses from drought
and disease. Although petitioners have now conceded the loss
deductions for drought and disease originally claimed by the
partnerships in the instant cases, the Hoyt organization's prior
position was that thousands of breeding cattle were lost during 1987
through 1992 to drought and disease. In addition, the record also
contains evidence indicating that, following 1985, the Hoyt
organization's may have sold off a large number of breeding cattle
which had been assigned to the cattle-breeding partnerships. These
cattle loss claims, as well as the Hoyt organization's possible sale
of breeding cattle previously assigned to the partnerships, are
discussed more fully notes 30 and 31. At any rate, the figure of
6,500 cattle estimated in the previous 1985 cattle count is neither
conclusive nor unequivocal evidence establishing the numbers of
breeding cattle that actually might have been present during the 1987
through 1992 period.
16
The Hoyt organization hired Mr. Favre to conduct this cattle count.
Originally, Mr. Favre was supposed to count the cattle together with
respondent's expert Mr. Daily. However, because of disagreements
between Mr. Daily and the Hoyt organization concerning (1) the
procedures to be used in performing the count and (2) scheduling the
counts at various locations, Mr. Favre and Mr. Daily conducted their
respective cattle counts separately. It is further to be noted that
unlike Mr. Daily (who testified in the instant cases as an expert
witness on cattle counting and cattle appraisal), Mr. Favre did not
testify as an expert. Rather, Mr. Favre testified as a fact witness,
and his cattle count report was entered in evidence as a business
record of the Hoyt organization.
17
In their brief, petitioners contend that the annual herd recap sheets
in evidence reflect that, collectively, all of the cattle-breeding
partnerships (which in some years may have included perhaps almost
100 separate partnerships) owned the following total numbers of
cattle on the dates indicated:
Date
Total Number of
Cattle
1-1-87
............................................... 22,457
1-1-88
............................................... 25,613
1-1-89
............................................... 23,418
1-1-90
............................................... 17,336
1-1-92
............................................... 22,148
18
It is further to be noted that following Mr. Favre's completion of
his cattle count in about spring 1993 (which count was mentioned
supra note 16, and is discussed in more detail infra),
Jay Hoyt, in a memorandum dated Oct. 1, 1993, instructed the Hoyt
organization's cattle managers to prepare herd recap sheets for the
cattle-breeding partnerships up through Dec. 31, 1992. See supra
note 17.
19
We do not find to be credible this and other similar assertions of
Jay Hoyt regarding these bills of sale. Respondent had been
requesting them from Jay Hoyt, the cattle-breeding partnerships, and
the Hoyt organization since at least about 1992 (when respondent
actively started examining many of the returns filed by the
partnerships and certain Hoyt organizations for the years covering
the 1987 through 1992 period). Jay Hoyt testified these alleged 1988
through 1992 bills of sale had been provided by him to respondent. He
maintained that respondent had been given access to everything the
Hoyt organization had. He also asserted that many of the Hoyt
organization's records later became unavailable, because those
records had been seized by postal inspectors from the Hoyt
organization's offices in June 1995. However, the postal inspector
who conducted the seizure testified that shortly after effecting the
seizure, he had provided Jay Hoyt with an inventory of the seized
documents. This postal inspector also related that, in response to
Jay Hoyt's and the Hoyt organization representatives' later requests,
he had offered them access to the documents that had been seized.
According to the postal inspector, Jay Hoyt had also been provided
with copies of all the seized documents.
20
The Hoyt organization issued certain warranties to the
cattle-breeding partnerships that entered transactions with it. For
instance, Ranches (as the "seller" of the breeding cattle)
generally agreed to replace any cattle that could no longer serve as
breeding cattle during a 10-year period. Similarly, Management (which
managed a partnership's "breeding herd") further guaranteed
there would be a 10-percent annual increase in the size of the
partnership's "breeding herd". However, according to
certain Hoyt organization records, the Hoyt organization for a number
of years had been greatly "in arrears" on its "warranty
obligations" to the cattle-breeding partnerships and by about
1990 "owed" over 5,000 breeding cattle to the partnerships.
These "warranty obligations" apparently were never
satisfied.
21
Mr. Baker testified that, because of the Bales case
litigation, he had been given a May 1985 deadline to establish the
Hoyt organization's computerized cattle records. See Bales v.
Commissioner [Dec.
46,099(M) ], T.C. Memo. 1989-568.
As a result, he began by entering information and generating computer
records "capturing" the Hoyt family's and Hoyt
organization's past 32 years of cattle operations. He related that
Jay Hoyt had also furnished him with a list of random sires to use in
assigning specific sires to many individual cattle whose sires, in
fact, were unknown. He added that he had been instructed by Jay Hoyt
to follow a similar procedure in "capturing" the Hoyt
organization's subsequent "cattle inventories" and in
registering large numbers of cattle with the ASA. He stated that he
attempted to match and attribute each calf to a "random sire"
that had the same matching physical characteristics. He further
acknowledged that the Hoyt organization's registering of calves from
unknown sires as being offspring of known sires violated the ASA's
registration rules, as the random sires he assigned to calves, in
many cases, were unrelated, nonsibling bulls. In addition, Mr. Baker
testified that sometimes, when the Hoyt organization would be selling
an animal to a third party, he had been instructed to fabricate a
false pedigree for that animal, which he did.
22
Indeed, much of these witnesses' testimony regarding the Hoyt
organization's deceptive cattle marketing practices and its
fabrication of pedigree and other cattle record information is
corroborated by Jay Hoyt's own May 27, 1987, written comments to an
Apr. 22, 1987, memorandum that Mr. Baker had submitted to Ric Hoyt.
The following is an excerpt of some of Jay Hoyt's comments to certain
of the complaints expressed in Mr. Baker's memorandum:
[Mr. Baker's first
complaint]: Louie's [a cattle manager handling public cattle sales to
third parties] 'special' deals are starting to mess up the SPR [i.e.,
Shorthorn performance records] side of cattle office.
[Jay Hoyt's comment]:
What percentage? 100 percent--etc.
[Mr. Baker's next
complaint]: I created a paper for Louie because the dam had to be by
Instant Replay so the calf could be registered sired by Copyright.
The calf is rejecting on the SPR weaning sheet because the dam is not
enrolled in SPR and is not in computer. I don't want her in the
computer because she doesn't exist.
[Jay Hoyt's comment]: How
does R.W. [Mr. Baker] know she does not exist. R.W. just knows she
disappeared. She might be at Mayo's, left in California, etc.
*
* * * * * *
[Mr. Baker's next
complaint]: We have to go in and change birth weights in the calf
file because they're too high.
[Jay Hoyt's comment]:
That's R.W.'s job--He doesn't deal with customers and know what they
want.
[Mr. Baker's next
complaint]: Louie takes a bull paper or steer paper that died or was
slaughtered and uses them for bulls he's selling without regard of
what it does to me.
[Jay Hoyt's comment]:
What it does to R.W. is gives him a job. He has absolutely no
understanding where the money comes from to run his office. This
is our fault. He had a chance to turn a paper into cash that
would not have been if he had his way. That should be a success and
not a problem.
[Mr. Baker's next
complaint]: The progeny history of the cow doesn't match, a true
picture of the cow's history can never be assured because we don't
know if its her real calf or not, and when we get slaughter
information back we can't put it in on the right animal because he's
a bull and was sold.
[Jay Hoyt's comment]:
What percentage? This one is sad. It shows how serious the problem
is. The carcass data should just be attached to a copy of the
paper and entered. The bull goes in the sale DATA. The data is STILL
included in every place needed for Seth [Jay Hoyt's brother] and I.
We don't need the original paper to do our tracking. All that must be
done is to record what happened on the copy of the paper.
[Mr. Baker's next
complaint]: That messes up what I tell you, USDA, and Seth. I have to
take up untold hours finding red calves that have red sires and red
dams, knowing full well the sire has to be taken with a grain of
salt. All of these things are easy for Louie because he just says
make it work. It's a nightmare for us because we have to cover the
tracks and make sure everything fits together.
[Jay Hoyt's comment]:
WRONG. R.W. has never been instructed or asked 'to cover
anyone's tracks'. His job is to record what happens IN THE OPEN, in
front of everyone. His personal protection is provided by the Policy.
We take the responsibility. I sense R.W. will think 'if the Policy
said kill someone would that be OK, and wouldn't I be held
accountable?' Sure, but R.W. is not asked to kill anyone. He is asked
to provide them with a gun and shells. He knows what they are going
to do with it, sure, but he isn't doing it. They don't put gun
sellers in jail when the gun kills someone. We are dealing with the
real live problem of giving the marketing people what they ask for
and only they will be held accountable for what they do with it if
R.W. documents it with Louie's or Ric's instructions. R.W. just
records what they did with what he produced under their
instructions.
23
In this same Feb. 4, 1991, memorandum, which was discussed earlier,
Jay Hoyt had also instructed these workers to register with the ASA a
calf for each cow bred, not just existing, "live calves".
See supra note 10.
24
As discussed previously, the record does not contain any of the
alleged bills of sale for years after 1987 that Jay Hoyt claimed were
issued by the Hoyt organization to cattle-breeding partnerships.
25
The record contains a handwritten note of Jay Hoyt to one of the Hoyt
organization's cattle managers. This note states, in pertinent part:
The cattle numbers we
used in the loan application are the numbers in the computer and
balance to the books. They are the numbers. Any difference between
them and yours are assigned to location 'Ric'. It's his job to get
them accounted for. Not yours or mine. This is to be 'fixed' with the
equity in his place. Don't say they don't exist, say they are not in
the herd I'm responsible for. Ric has failed to account for almost
2,000 head. Might explain why he acts so nervous-spooky.
26
See supra note 16, describing how they wound up undertaking
separate counts.
27
In their stipulation, the parties agreed that all joint exhibits
(including the Jan. 1, 1987, inventory) were true copies of the
original and that (although all other evidentiary objections were
reserved) any objections as to authenticity were waived. The Jan. 1,
1987, inventory is further listed and described in the stipulation as
being "a cattle inventory dated January 1, 1987, prepared by
Gayle Wallace. It indicates that there were a total of 13,481 head of
all cattle of all classes and ages as of that date." However, in
the stipulation, petitioners further stated they did not agree with
the description given numerous joint exhibits listed therein,
including the Jan. 1, 1987, inventory. On brief, petitioners dispute
there is any evidence in the record establishing this inventory was
prepared by Gayle Wallace. (Ms. Wallace was a Hoyt organization
worker who in 1987 had worked together with Mr. Hawkins in helping
maintain the Hoyt organization's cattle records. They further
maintain that it and certain other Hoyt organization cattle
inventories in the record are not inventories of the Hoyt
organization's "entire herd" and are only listings "as
of a particular time, of cattle in specific locations".
28
Mrs. Schnitker had begun working for the Hoyt organization as Ric
Hoyt's secretary. She eventually became Ric Hoyt's assistant, as he
traveled extensively on business and was out of the office for
substantial periods during the year. In addition, she had some
background in the cattle business and was familiar with the required
paperwork, as her husband (who also worked for the Hoyt organization)
previously had worked on several ranches. Mrs. Schnitker became
Management's cattle marketing director in late 1987, when Ric Hoyt
either left the Hoyt organization or reduced his activities on the
Hoyt organization's behalf. She served as Management's cattle
marketing director from late 1987 through July 31, 1990. As cattle
marketing director, Mrs. Schnitker reported to another individual who
served as Management's general manager. In connection with being
cattle marketing director, Mrs. Schnitker had to see that sufficient
cattle were sold to generate the funds Management needed to pay its
operating expenses. In addition, she was responsible for Management's
cattle registration department and was Mr. Hawkins' supervisor. (As
indicated previously, Mr. Hawkins helped maintain the Hoyt
organization's cattle records.) Mrs. Schnitker related that generally
the cattle sold to third parties were mostly bulls and steers and
included only a few cows, as she had been told female breeding cattle
were to be sold to the cattle-breeding partnerships. However, she
added that, on occasion, when Management's financial needs were
pressing, a load of heifers would be sold. Mrs. Schnitker further
testified that she did not know whether any of the cattle sold had
belonged to the cattle-breeding partnerships. She elaborated that she
relied on Mr. Hawkins for information on the cattle Management
managed, as she would have to have accurate information regarding
what numbers of cattle were available to be sold to meet Management's
cash operating requirements. She also stated she considered the
cattle information Mr. Hawkins provided to her to be reliable, as she
knew him to be a careful and meticulous individual.
29
Tom James estimated that, in 1993, the Timeshares Breeding Services
operation had a total of 3,133 to 3,234 cattle, consisting of the
following numbers of bulls, cows, and heifers:
Location
or Parties
Holding
Cattle Bulls Cows Heifers
Clements,
CA ................................ 410 -- 370
Trent,
TX ................................... 33 255-256 --
Various
Users ............................... 265 -- 1,800-1,900 1
----- -------
-----------
Total
.................................... 708 255-256 2,170-2,270
===== =======
===========
1
Represents calves owed by users
for their use of bulls in three or
four
breeding seasons.
30
Included in materials the Hoyt organization prepared for a special
meeting in early 1990 of Hoyt & Sons Ranch Properties (another
Hoyt organization entity) unit holders are statements that the Hoyt
"combined herd" was now one-third its former size because
of (1) the Hoyt organization's repayment of loans received from
institutional lenders and (2) reductions due to the drought from 1987
through 1988. See infra note 31.
31
In his written statement submitted to the District Court in the
summons enforcement proceeding in early 1993, Jay Hoyt stated that
"In 1987, 1988 and 1989, because of drought, we were forced to
sell at beef prices, a substantial portion of our purebred cow herd."
Similarly, a Combined Report, Analysis, And Conclusion Of Experts,
dated Feb. 19, 1994 (written by Mr. Favre and several of the Hoyt
organization's cattle people), asserts that, because of the drought
that occurred in California, Oregon, and other western States from
1988 through 1992, the Hoyt organization was unable to determine and
record the deaths of thousands of cattle. This report relates that,
in 1988, the Hoyt organization decided not to sell some cows and
bulls and, instead, to use the drought as part of a natural selection
process that would eliminate cattle unable to forage well in poor
feed conditions. However, Mr. Hawkins (who helped maintain the Hoyt
organization's cattle records) testified that the Hoyt organization
had not suffered any substantial cattle losses during this period as
a result of drought or disease. Moreover, a cattle expert for
petitioners acknowledged that he would question the competence of any
cattle operator that allowed a large number of cattle to perish
during drought. This expert indicated that an operator could either
provide food and water to the cattle, move them, or sell them off. In
any event, petitioners have now conceded the alleged large losses for
drought and disease previously claimed by the partnerships in the
instant cases. See supra note 15.
32
On brief, petitioners note that: (1) Petitioner's expert Mr. Hunsley
(the ASA's executive director) testified that, in 1986 (when he was
serving as an expert witness for the taxpayers in Bales v.
Commissioner [Dec.
46,099(M) ], T.C. Memo.
1989-568), he visited some of the Hoyt ranch properties in Oregon,
saw perhaps 3,000 cattle, and estimated a total of 5,000 to 6,000
cattle were there; and (2) certain State of Oregon brand inspection
reports covering 8,796 head of cattle were issued during 1987.
However, the Court has major reservations (which are discussed more
fully infra) about Mr. Hunsley's veracity and does not give
this testimony much weight. As to the brand inspection reports, the
Court has not found persuasive the numbers of cattle reflected in
these reports, as a new report must be issued for cattle when their
shipment out of State is delayed beyond the scheduled date. In
addition, as respondent points out, the brand inspection and other
health reports in evidence do not firmly establish a definite number
of total cattle, as these papers are required when cattle are moved
and the same cattle may be moved more than once during a year.
33
By this time, Mrs. Schnitker had left her position as Management's
cattle marketing director and was no longer a Hoyt organization
worker.
34
The record discloses that the Hoyt organization contrived certain
transactions pursuant to which small numbers of breeding cattle
(possibly "belonging" to some of the cattle-breeding
partnerships) ostensibly were sold for high prices. For instance, in
an interoffice memorandum dated Dec. 9, 1985, Jay Hoyt outlined plans
to have his brother Bob Hoyt and the brother's business associate
"purchase" a heifer for $19,000 at one of the Hoyt
organization's cattle sales to "help our sales average".
This memorandum further states that (1) Ranches would provide the
brother and the brother's business associate with the funds to
"purchase" the heifer and (2) the brother and business
associate would "transfer" the heifer back as their capital
contribution to a Timeshare partnership. In another instance, in his
memorandum dated Dec. 2, 1991, to various Hoyt organization workers,
Jay Hoyt instructed the workers to have the partnership
representatives line up two individuals to buy two Timeshare bulls at
the Red Bluff and Klamath Falls cattle sales. These two bulls, Jay
Hoyt stated, should "sell" for $4,500 to $5,000 apiece. He
added that if the money had to be provided to the two individuals,
the workers should take it out of the General Partners' Office (an
office in the Hoyt organization) and should get the money back to the
General Partners' Office by deducting the money out of the Feedlot
Co.'s (another entity in the Hoyt organization) first check from the
Red Bluff and Klamath Falls sales. At any rate, the Court finds the
bona fides of these and other similar "transactions" to be
highly suspect and questionable.
35
There is no credible evidence in the record from which the Court can
estimate the actual number of "A" herd cattle annually in
the Hoyt herd from 1987 through 1992. The Court does not believe Jay
Hoyt's claim that, during 1987, of the 24,000 to 29,000 total cattle
he estimated were present in the Hoyt organization herd,
approximately 40 percent were "A" herd animals. The Court
thinks that, in all likelihood, the number of "A" herd
animals in the Hoyt organization herd had greatly declined by 1987 or
1988. Among other things, when Ranches was liquidated, Ric and Steve
Hoyt took some of the cattle Ranches previously either owned and/or
managed. Moreover, in a memorandum dated Sept. 17, 1990, to the Hoyt
organization's cattle and ranch managers, Jay Hoyt advised them that
the "A" herd concept was being abandoned, because,
according to Jay Hoyt, no herd sire prospect (i.e., essentially a
potentially very high quality breeding bull) had been sold in the
last 2 years.
36
The record contains a marketing plan for Management. This plan notes
that in order for Management to make a profit on its bulls, it will
have to sell them for the following specified prices: (1) A weaner
bull for $800, (2) a 10- to 12-month-old bull for $1,050, (3) a 13-
to 15-month-old bull for $1,320, and (4) a 16- to 18-month-old bull
for $1,600. The plan goes on to state that for bulls that cannot be
sold at a profit, one option is to market those bulls to "Time
Share" which will "pay" $3,500 per bull. However, it
states, "Time Share" was not planning to buy a great number
of bulls from Management in 1989. The record further reflects that,
at about this time, the Hoyt organization typically "sold"
bulls to various TBS partnerships for stated prices of around $3,500
per bull.
37
Many of the alleged partnership agreements, promissory notes, and
other related documents that purportedly were executed during the
1987 through 1992 period do not appear in the record. Jay Hoyt
claimed that these documents were unavailable because they had been
seized by postal inspectors from the Hoyt organization's offices in
June 1995. However, as indicated earlier supra note 19, the
postal inspector who conducted the seizure also testified. This
postal inspector related that he had (1) provided Jay Hoyt with an
inventory of the seized documents shortly after the seizure was
effected, and (2) later (a) offered Jay Hoyt and other Hoyt
organization representatives access to the seized documents and (b)
provided them with copies of the seized documents.
38
Among other things, the record contains standard letters a large
group of disgruntled investors (who were allowed to withdraw from
their cattle-breeding partnerships) issued to the Hoyt organization
in 1994 and 1995. In the letters, these investors noted that the Hoyt
organization had represented that the investors would owe no further
money because their respective cattle partnership's assets had a
value sufficient to cover an investor's "note liability".
If not, the letters advised, these investors requested a full
accounting by the Hoyt organization with respect to all cattle that
had been owned by their partnerships.
39
On brief, petitioners assert that this Court's prior decision in
Bales v. Commissioner [Dec.
46,099(M) ], T.C. Memo. 1989-568,
collaterally estops respondent from relitigating a number of issues
concerning the transactions in the instant cases. However,
petitioners failed to raise collateral estoppel as a defense in their
pleadings. The Court thus does not consider petitioners' collateral
estoppel argument to be properly before it. In any event, collateral
estoppel would not apply in the instant cases. The Bales
decision involved several cattle-breeding partnerships organized by
the Hoyt family that had entered into earlier transactions to acquire
breeding cattle. However, the years in issue in Bales
generally were 1977, 1978, and 1979. The instant cases, in contrast,
involve partnerships (which other than DF #1 were not involved in
Bales) that well after 1979 entered into transactions to
acquire breeding cattle from the Hoyt organization. The years in
issue for the partnerships in the instant cases are 1987 through
1992. Most importantly, as the Court has determined, by the early
1980's the Hoyt organization's cattle management and record-keeping
practices had changed dramatically. The issues in the instant cases
thus are not identical to those decided in Bales and
collateral estoppel cannot apply, as different transactions and
substantially different controlling facts are presented. See Peck
v. Commissioner [Dec.
44,544 ], 90 T.C. 162, 166-167
(1988), affd. [90-1
USTC ¶50,311 ] 904 F.2d 525
(9th Cir. 1990); see also Commissioner v. Sunnen [48-1
USTC ¶9230 ], 333 U.S. 591,
599-600 (1948) ("where two cases involve income taxes in
different taxable years, collateral estoppel must be used with its
limitations carefully in mind so as to avoid injustice. It must be
confined to situations where the matter raised in the second suit is
identical in all respects with that decided in the first proceeding
and where the controlling facts and applicable legal rules remain
unchanged.").
40
As indicated earlier, petitioners conceded the deductions these
cattle-breeding partnerships claimed for drought and disease.
41
It is thus unnecessary for the Court to decide whether, for purposes
of sec.
707(c) , the payments Jay Hoyt
received were determined without regard to partnership income, an
issue upon which the parties disagree.
42
The sharecrop agreements provided that a partnership would still
retain the breeding value certificates (i.e., essentially the rights
to any registration papers) on calves produced by its breeding herd,
even though, pursuant to the sharecrop agreement, all calves produced
were to belong to the Hoyt organization entity that managed the
partnership's breeding herd.
Barry
and Sherry Blondheim v. Commissioner.
Dkt.
No. 15549-05L , TC Memo. 2006-216, October 10, 2006.
[Appealable,
barring stipulation to the contrary, to CA-9. --CCH.]
[Code
Sec. 6330]
Notice
of levy and right to hearing: Hearing procedures: Offer in
compromise: IRS abuse of discretion. --
The IRS's Office of
Appeals did not abuse its discretion in rejecting taxpayers'
offer-in-compromise. The liability arose from claimed losses and
credits from their involvement in a Hoyt partnership. An IRS Appeals
settlement officer's determination to reject the taxpayers' offer was
not arbitrary, capricious, or without a sound basis in fact or law,
and it was not abusive or unfair to the taxpayers. Her determination
was based on a reasonable application of the guidelines for
evaluating an offer-in-compromise to promote effective tax
administration. --CCH.
Terri A. Merriam, Jaret
R. Coles, Asher B. Bearman, and Jennifer A. Gellner, for petitioners;
Thomas N. Tomashek and Gregory M. Hahn, for respondent.
MEMORANDUM
FINDINGS OF FACT AND OPINION
LARO, Judge: Petitioners
petitioned the Court under section
6330(d) to review the
determination of respondent's Office of Appeals (Appeals) sustaining
a proposed levy relating to $298,003 of Federal income taxes owed by
petitioners for 1981 through 1986.1
Petitioners argue that Appeals was required to accept their offer of
$83,213 to compromise $298,003 of Federal income tax liability that
respondent's records reported were due from them for 1981 through
1986. We decide whether Appeals abused its discretion in rejecting
that offer.2
We hold it did not.
FINDINGS
OF FACT
The parties filed with
the Court stipulations of fact and accompanying exhibits. The
stipulated facts are found accordingly. When the petition was filed,
petitioners resided in Kennewick, Washington.
Beginning in 1984,
petitioners' Federal income tax returns claimed losses and credits
from their involvement in a partnership organized and operated by
Walter J. Hoyt, III (Hoyt). The partnership was called Shorthorn
Genetic Engineering 1984-3. Hoyt was the partnership's general
partner and tax matters partner, and the partnership was subject to
the unified audit and litigation procedures of the Tax Equity and
Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec. 402(a), 96
Stat. 648. Hoyt was convicted on criminal charges relating to the
promotion of this and other partnerships.
Petitioners' claim to the
losses and credits resulted in the underreporting of their 1981
through 1986 taxable income. On December 16, 2003, respondent mailed
to petitioners a Letter 1058, Final Notice of Intent to Levy and
Notice of Your Right to a Hearing. The notice informed petitioners
that respondent proposed to levy on their property to collect Federal
income taxes that they owed for 1981 through 1986. The notice advised
petitioners that they were entitled to a hearing with Appeals to
review the propriety of the proposed levy.
On January 14, 2004,
petitioners asked Appeals for the referenced hearing. On June 8,
2005, Linda Cochran (Cochran), a settlement officer in Appeals, held
the hearing with petitioners' counsel. Cochran and petitioners'
counsel discussed petitioners' intent to offer to compromise their
1981 through 1986 Federal income tax liability to promote effective
tax administration. Petitioners contended that Appeals should accept
their offer as a matter of equity and public policy. Petitioners
stated that it took a long time to resolve the Hoyt partnership cases
and noted that Hoyt had been convicted on the criminal charges.
On June 8, 2005,
petitioners tendered to Cochran on Form 656, Offer in Compromise, a
written offer to pay $83,213 to compromise their reported $298,003
liability. The offer was limited to a claim of effective tax
administration because petitioners had sufficient assets to pay their
tax liability in full. Petitioners supplemented their offer with a
completed Form 433-A, Collection Information Statement for Wage
Earners and Self-Employed Individuals, four letters totaling
approximately 65 pages, and volumes of documents. The Form 433-A
reported that petitioners owned assets with a total current value of
$1,388,757, inclusive of the following:3
Assets
Current value
Cash
in accounts $46,441
Cash
value of life insurance 12,707
Pensions
& IRA 491,121
Vehicles:
2000
Cadillac Escalade 11,975
1984
Subaru Brat 138
Real
estate (residence)
1136,800
Real
estate (Oregon property) 96,693
Real
estate (other properties) 588,882
Furniture/personal
effects 4,000
_____________________
1,388,757
1Petitioners
reported on Form 433-A that this figure represents 80
percent
of their home's appraised value.
The Form 433-A also
reported that petitioners owed $9,131 on the Cadillac Escalade,
$103,482 on their residence, $166,041 on their various other
properties, and had taken a $10,000 loan against one of their pension
plans. The Form 433-A reported the following monthly items of income
and expense:
Items of income
Amount
Husband's
wages $3,700
Wife's
wages 2,500
Rental
income 4,434
_____________________
10,634
Items of expense
Amount
Food,
clothing, and miscellaneous $1,280
Housing
and utilities 1,953
Transportation
596
Medical
expenses 669
Taxes
2,250
_____________________
6,748
Cochran determined that
petitioners' net realizable equity in their cash was the $46,441
reported in their bank accounts and that petitioners' net realizable
equity in their life insurance, Subaru Brat, and Oregon property was
the same as the reported values.4
Cochran noted the various encumbrances reported by petitioners, and
in the case of the furniture/personal effects, allowed a $7,200
exemption for their entire value under section
6334(a)(2).5
She summarized petitioners' assets and liabilities as follows:
Fair
Encumbrance Net
market
Quick
or realizable
Assets
value
sale value
exemption equity
Cash
$46,441 -- --
$46,441
Cash
value of life insurance 12,707 -- --
12,707
Retirement
accounts 491,121 -- $10,000 481,121
Vehicles:
1984
Subaru Brat
1134 $107 --
107
2000
Cadillac Escalade 11,975 9,580 9,131
449
Real
estate (residence) 171,000 -- 103,482
67,518
Real
estate (Oregon property) 96,693 -- --
96,693
Furniture/personal
effects 4,000 -- 7,200 0
________________________________________________
834,071 9,687
129,813 705,036
1Petitioners
had listed the value of this vehicle as $138.
In her comments following
this summary, Cochran stated that she had not taken into account the
value of petitioners' S corporation, Bear Mart Auto Sales, Inc.6
She also did not include petitioners' real estate holdings, reported
as having a current value of $588,882.
The only adjustment that
Cochran made to petitioners' claimed expenses was that she allowed
$1,093 for housing instead of the $1,953 that petitioners had
claimed. Cochran stated that she made this adjustment in accordance
with current local guidelines and that she considered petitioners'
particular circumstances, but they did not warrant allowing the
higher figure submitted by petitioners.
Cochran determined that
petitioners' net realizable equity in their assets was $705,036 and
that they had a monthly disposable income of $4,746. She calculated
that petitioners could pay $227,808 from their future income.7
In sum, Cochran concluded, petitioners' net realizable equity in
assets and future income equaled $932,844.
On July 22, 2005, Appeals
issued petitioners a notice of determination sustaining the proposed
levy. The notice concludes that petitioners' $83,213
offer-in-compromise is not an appropriate collection alternative to
the proposed levy. The notice, citing Internal Revenue Manual (IRM)
sections 5.8.11.2.1 and 5.8.11.2.2, states that petitioners' offer
does not meet the Commissioner's guidelines for consideration as an
offer-in-compromise to promote effective tax administration on the
basis of economic hardship or equity and public policy. Cochran noted
that since petitioners had not specified the basis on which they were
making their offer, she considered it under both economic hardship
and equity and public policy grounds.
As to petitioners'
offer-in-compromise to promote effective tax administration due to
economic hardship, the notice states:
Considered under economic
hardship, the taxpayers have the ability to pay all amounts owed from
either their assets or their income stream and still have assets and
an income stream remaining worth over $630,000. The amount being
offered by the taxpayers represents 8% of the taxpayers' Reasonable
Collection Potential (RCP). The taxpayers' circumstances were
considered, but the taxpayers would have substantial assets and
income stream remaining ($630,000+) to cover their living and medical
expenses. As such, the taxpayers failed to document economic hardship
in accordance with Internal Revenue Manual 5.8.11.2.1.
As to petitioners'
offer-in-compromise to promote effective tax administration based on
equity and public policy, the notice states: "When considered
under public policy or equity grounds, the taxpayers' Effective Tax
Administration offer proposal fails to meet the criteria for such
consideration under Internal Revenue Manual 5.8.11.2.2 * * * [and],
therefore, cannot be considered." The notice further states as
to Cochran's balancing of efficient collection with the legitimate
concerns of taxpayers that
the Settlement Officer
has evaluated the taxpayers' $83,213 offer to compromise the
underlying liabilities as a collection alternative to the proposed
levy action. Based on that evaluation, the taxpayers' offer of
$83,213 could not be recommended for acceptance, and therefore cannot
be considered as a collection alternative.
In all other respects,
the proposed levy action regarding the taxpayers represents the only
efficient means for collection of the liabilities at issue in this
case.
The notice states that
petitioners have neither offered an argument nor cited any authority
to permit Appeals to deviate from the provisions of the IRM.
OPINION
This case is another in a
long list of cases brought in this Court involving respondent's
proposal to levy on the assets of a partner in a Hoyt partnership to
collect Federal income taxes attributable to the partner's
participation in the partnership. Petitioners argue that Appeals was
required to let them pay $83,213 to compromise a $298,003 Federal
income tax liability for 1981 through 1986. Where an underlying tax
liability is not at issue in a case invoking our jurisdiction under
section
6330(d), we review the
determination of Appeals for abuse of discretion. See Sego v.
Commissioner [Dec.
53,938], 114 T.C. 604, 610
(2000); see also Clayton v. Commissioner [Dec.
56,612(M)], T.C. Memo. 2006-188;
Barnes v. Commissioner [Dec.
56,570(M)], T.C. Memo. 2006-150.
We reject the determination of Appeals only if the determination was
arbitrary, capricious, or without sound basis in fact or law. See Cox
v. Commissioner [Dec.
56,506], 126 T.C. 237, 255
(2006); Murphy v. Commissioner [Dec.
56,232], 125 T.C. 301, 308, 320
(2005).
Where, as here, we decide
the propriety of Appeals's rejection of an offer-in-compromise, we
review the reasoning underlying that rejection to decide whether the
rejection was arbitrary, capricious, or without sound basis in fact
or law. We do not substitute our judgment for that of Appeals, and we
do not decide independently the amount that we believe would be an
acceptable offer-in-compromise. See Murphy v. Commissioner, supra
at 320; see also Clayton v. Commissioner, supra; Barnes v.
Commissioner, supra; Fowler v. Commissioner [Dec.
55,689(M)], T.C. Memo. 2004-163;
Fargo v. Commissioner [Dec.
55,514(M)], T.C. Memo. 2004-13,
affd. [2006-1
USTC ¶50,326] 447 F.3d 706
(9th Cir. 2006). Nor do we usually consider arguments, issues, or
other matters raised for the first time at trial, but we limit
ourselves to matter brought to the attention of Appeals. See Murphy
v. Commissioner, supra at 308; Magana v. Commissioner
[Dec.
54,765], 118 T.C. 488, 493
(2002). "[E]vidence that * * * [a taxpayer] might have presented
at the section
6330 hearing (but chose not to)
is not admissible in a trial conducted pursuant to section
6330(d)(1) because it is not
relevant to the question of whether the Appeals officer abused her
discretion." Murphy v. Commissioner, supra at 315.8
Section
6330(c)(2)(A)(iii) allows a
taxpayer to offer to compromise a Federal tax debt as a collection
alternative to a proposed levy. Section
7122(c) authorizes the
Commissioner to prescribe guidelines to determine when a taxpayer's
offer-in-compromise should be accepted. The applicable regulations,
section 301.7122-1(b), Proced. & Admin. Regs., list three grounds
on which the Commissioner may accept an offer-in-compromise of a
Federal tax debt. These grounds are "Doubt as to liability",
"Doubt as to collectibility", and to "Promote
effective tax administration". Sec. 301.7122-1(b)(1), (2), and
(3), Proced. & Admin. Regs. Petitioners reported on their Form
433-A that they had assets worth $1,388,757. Cochran determined that
petitioners' reasonable collection potential (taking into account
their assets as well as future income) was $932,844. Petitioners can
afford to pay their $298,003 tax liability in full and do not argue
that the liability is in doubt. They seek to qualify for an
offer-in-compromise to promote effective tax administration. See sec.
301.7122-1(b)(3), Proced. & Admin. Regs.; cf. Fargo v.
Commissioner [2006-1
USTC ¶50,326], 447 F.3d 706
(9th Cir. 2006) (taxpayers made an offer-in-compromise to promote
effective tax administration where they had sufficient assets to pay
their tax liability in full).
Petitioners argue that
respondent was required to compromise their tax liability to promote
effective tax administration. The Commissioner may compromise a tax
liability to promote effective tax administration when collection of
the full liability will create economic hardship and the compromise
would not undermine compliance with the tax laws by taxpayers in
general. See sec. 301.7122-1(b)(3)(i), (iii), Proced. & Admin.
Regs. If a taxpayer does not qualify for effective tax administration
compromise on grounds of economic hardship, the regulations also
allow the Commissioner to compromise a tax liability to promote
effective tax administration when the taxpayer identifies compelling
considerations of public policy or equity. See sec.
301.7122-1(b)(3)(ii), Proced. & Admin. Regs.
Cochran considered all of
the evidence submitted to her by petitioners and applied the
guidelines for evaluating an offer-in-compromise to promote effective
tax administration. Although petitioners did not specifically state
on which basis they were submitting their effective tax
administration offer-in-compromise, Cochran considered it under both
economic hardship and public policy and equity grounds. Cochran
determined that petitioners' offer was unacceptable because they had
not demonstrated that they would suffer economic hardship and public
policy and equity reasons did not weigh in favor of accepting their
offer. Cochran's determination to reject petitioners'
offer-in-compromise was not arbitrary, capricious, or without a sound
basis in fact or law, and it was not abusive or unfair to
petitioners. Cochran's determination was based on a reasonable
application of the guidelines, which we decline to second-guess. See
Speltz v. Commissioner [Dec.
55,961], 124 T.C. 165 (2005),
affd. [2006-2
USTC ¶50,403] 454 F.3d 782
(8th Cir. 2006); Clayton v. Commissioner, supra; Barnes v.
Commissioner [Dec.
56,570(M)], T.C. Memo. 2006-150.
Petitioners make seven
arguments in advocating a contrary result. First, petitioners argue
that the Court lacks jurisdiction to review the rejection of their
offer-in-compromise. Petitioners allege that Hoyt had a conflict of
interest that prevented him from extending the periods of limitation
for the partnerships in which petitioners were partners. Petitioners
conclude that any consents signed by Hoyt to extend the periods of
limitation were invalid, which in turn means that the Court lacks
jurisdiction because the applicable periods of limitation have
otherwise expired.
Petitioners' challenge to
this Court's jurisdiction is groundless, frivolous, and unavailing.
It is well settled that the expiration of the period of limitation is
an affirmative defense and not a factor of this Court's jurisdiction.
See Day v. McDonough, 547 U.S. __, 126 S. Ct. 1675, 1681
(2006) ("A statute of limitations defense * * * is not
`jurisdictional'"); Kontrick v. Ryan, 540 U.S. 443, 458
(2004) ("Time bars * * * generally must be raised in an answer
or responsive pleading."); see also Davenport Recycling
Associates v. Commissioner [2000-2
USTC ¶50,643], 220 F.3d
1255, 1259 (11th Cir. 2000), affg. [Dec.
52,893(M)] T.C. Memo. 1998-347;
Chimblo v. Commissioner [99-1
USTC ¶50,540], 177 F.3d 119,
125 (2d Cir. 1999), affg. [Dec.
52,379(M)] T.C. Memo. 1997-535;
Columbia Bldg., Ltd. v. Commissioner [Dec.
48,217], 98 T.C. 607, 611 (1992);
Robinson v. Commissioner [Dec.
31,293], 57 T.C. 735, 737 (1972).
Where, as here, the claim of a time bar relates to items of a
partnership, the claim must be made in the partnership proceeding and
may not be considered at a proceeding involving the personal income
tax liability of one or more of the partners of the partnership. See
Davenport Recycling Associates v. Commissioner, supra at
1259-1260; Chimblo v. Commissioner, supra at 125; Kaplan v.
United States [98-1
USTC ¶50,129], 133 F.3d 469,
473 (7th Cir. 1998).
Second, petitioners argue
that Cochran's rejection of their offer-in-compromise conflicts with
the congressional committee reports underlying the enactment of
section
7122. According to petitioners,
their case is a "longstanding" case, and those reports
require that respondent resolve such cases by forgiving interest and
penalties that otherwise apply. We disagree with petitioners' reading
and application of the legislative history underlying section
7122. Petitioners' argument on
this point is essentially the same argument that was considered and
rejected by the Court of Appeals for the Ninth Circuit in Fargo v.
Commissioner [2006-1
USTC ¶50,326], 447 F.3d at
711-712. We do likewise here for the same reasons stated in that
opinion. We add that petitioners' counsel participated in the appeal
in Fargo v. Commissioner, supra, as counsel for the amici.
While petitioners in their brief suggest that the Court of Appeals
for the Ninth Circuit knowingly wrote its opinion in Fargo in
such a way as to distinguish that case from the cases of counsel's
similarly situated clients (e.g., petitioners), and otherwise to
allow those clients to receive an abatement of their liability
attributable to partnerships such as those here, we do not read the
opinion of the Court of Appeals for the Ninth Circuit in Fargo
to support that conclusion.
Third, petitioners argue
that Cochran inadequately considered their unique facts and
circumstances. We disagree. Cochran reviewed and considered all
information given to her by petitioners. On the basis of the facts
and circumstances of petitioners' case as they had been presented to
her, Cochran determined that petitioners' offer did not meet the
applicable guidelines for acceptance of an offer-in-compromise to
promote effective tax administration based on economic hardship or
public policy or equity grounds. We find no abuse of discretion in
that determination. Nor do we find that Cochran inadequately
considered the information actually given to her by petitioners.
Cochran allowed the full amount of medical expenses that petitioners
submitted on their Form 433-A. While petitioners claimed during the
administrative hearing that they would incur increased medical
expenses in the future, they provided no substantiation of these
costs to Cochran. Because petitioners did not submit any
documentation of future medical expenses, we find that Cochran did
not abuse her discretion in not allowing future medical costs that
are entirely speculative. See Fargo v. Commissioner [2006-1
USTC ¶50,326], 447 F.3d at
710 (it is not an abuse of discretion for Appeals to disregard
claimed medical expenses that are speculative or not related to the
taxpayer); see also Clayton v. Commissioner, supra; Barnes v.
Commissioner, supra.
Fourth, petitioners argue
that Cochran did not adequately take into account the economic
hardship they claim they will suffer by having to pay more than
$83,213 of their tax liability. We disagree. Section
301.6343-1(b)(4)(i), Proced. & Admin. Regs., states that economic
hardship occurs when a taxpayer is "unable to pay his or her
reasonable basic living expenses." Section 301.7122-1(c)(3),
Proced. & Admin. Regs., sets forth factors to consider in
evaluating whether collection of a tax liability would cause economic
hardship, as well as some illustrative examples. One of the examples
involves a taxpayer who provides fulltime care to a dependent child
with a serious longterm illness. A second example involves a taxpayer
who would lack adequate means to pay his basic living expenses were
his only asset to be liquidated. A third example involves a disabled
taxpayer with a fixed income and a modest home specially equipped to
accommodate his disability, and who is unable to borrow against his
home because of his disability. See sec. 301.7122-1(c)(3)(iii),
Examples (1), (2), and (3), Proced. & Admin. Regs. None of
these examples bears any resemblance to this case but instead
"describe more dire circumstances". Speltz v.
Commissioner [2006-2
USTC ¶50,403], 454 F.3d at
786.
Nor have petitioners
articulated with any specificity the purported economic hardship they
will suffer if they are not allowed to compromise their liability for
$83,213. Petitioners have given us no reason to disagree with the
essence of Cochran's determination that petitioners' health does not
render them "incapable of earning a living", nor have we
reason to conclude that petitioners' "financial resources will
be exhausted providing for care and support during the course of the
condition".9
Sec. 301.7122-1(c)(3)(i)(A), Proced. & Admin. Regs.
We also are mindful that
any decision by Cochran to accept petitioners' offer-in-compromise to
promote effective tax administration must be viewed against the
backdrop of section 301.7122-1(b)(3)(iii), Proced. & Admin. Regs.
That section requires that Cochran deny petitioners' offer if her
acceptance of it would undermine voluntary compliance with tax laws
by taxpayers in general. Thus, even if we were to assume arguendo
that petitioners would suffer economic hardship, a finding that we
emphasize we do not make, we would not find that Cochran's rejection
of petitioners' offer was an abuse of discretion because we conclude
below (in our discussion of petitioners' fifth argument) that her
acceptance of that offer would have undermined voluntary compliance
with tax laws by taxpayers in general. The prospect that acceptance
of an offer will undermine compliance with the tax laws militates
against its acceptance. See Rev.
Proc. 2003-71, 2003-2 C.B. 517;
IRM sec. 5.8.11.2.2; see also Clayton v. Commissioner [Dec.
56,612(M)], T.C. Memo. 2006-188;
Barnes v. Commissioner [Dec.
56,570(M)], T.C. Memo. 2006-150.
Fifth, petitioners argue
that public policy demands that their offer-in-compromise be accepted
because they were victims of fraud. We disagree. While the
regulations do not set forth a specific standard for evaluating an
offer-in-compromise based on claims of public policy or equity, the
regulations contain two illustrative examples. See sec.
301.7122-1(c)(3)(iv), Examples (1) and (2),
Proced. & Admin. Regs. The first example describes a taxpayer who
is seriously ill and unable to file income tax returns for several
years. The second example describes a taxpayer who received erroneous
advice from the Commissioner as to the tax effect of the taxpayer's
actions. Neither example bears any resemblance to this case. See
Speltz v. Commissioner [2006-2
USTC ¶50,403], 454 F.3d at
786. Unlike the exceptional circumstances exemplified in the
regulations, petitioners' situation is neither unique nor exceptional
in that petitioners' situation mirrors that of numerous taxpayers who
claimed tax shelter deductions in the 1980s and 1990s, obtained the
tax advantages, promptly forgot about their "investment",
and now realize that paying their taxes may require a change of
lifestyle.10
See Clayton v. Commissioner, supra; Barnes v. Commissioner, supra.
We also believe that
compromising petitioners' case on grounds of public policy or equity
would not promote effective tax administration. While petitioners
portray themselves as victims of Hoyt's alleged fraud and
respondent's alleged delay in dealing with Hoyt, they take no
responsibility for their tax predicament. We cannot agree that
acceptance by respondent of petitioners' $83,213 offer to satisfy
their $298,003 tax liability would enhance voluntary compliance by
other taxpayers. A compromise on that basis would place the
Government in the unenviable role of an insurer against poor business
decisions by taxpayers, reducing the incentive for taxpayers to
investigate thoroughly the consequences of transactions into which
they enter. It would be particularly inappropriate for the Government
to play that role here, where the transaction at issue involves a tax
shelter. Reducing the risks of participating in tax shelters would
encourage more taxpayers to run those risks, thus undermining rather
than enhancing compliance with the tax laws.11
See Clayton v. Commissioner, supra; Barnes v. Commissioner, supra.
Sixth, petitioners argue
that Cochran failed to balance efficient collection with the
legitimate concern that collection be no more intrusive than
necessary. We disagree. Cochran thoroughly considered this balancing
issue on the basis of the information and proposed collection
alternative given to her by petitioners. She concluded that "the
proposed levy action regarding the taxpayers represents the only
efficient means for collection of the liabilities at issue in this
case". While petitioners assert that Cochran did not consider
all of the facts and circumstances of this case, "including
whether the circumstances of a particular case warrant acceptance of
an amount that might not otherwise be acceptable under the
Secretary's policies and procedures", sec. 301.7122-1(c)(1),
Proced. & Admin. Regs., we find to the contrary. Cochran
thoroughly considered petitioners' arguments for accepting their
offer-in-compromise, and she rejected the offer only after concluding
that petitioners could pay much more of their tax liability than the
$83,213 they offered. Cf. IRM sec. 5.8.11.2.1(11) ("When
hardship criteria are identified but the taxpayer does not offer an
acceptable amount, the offer should not be recommended for
acceptance").
Seventh, petitioners
argue that Cochran inappropriately failed to consider whether they
qualified for an abatement of interest for reasons other than those
described in section
6404(e). We disagree. We find
nothing to suggest that Cochran believed that petitioners' sole
remedy for interest abatement in this case rested on the rules of
section
6404(e). In fact, regardless of
the rules of section
6404(e), Cochran obviously would
have abated interest in this case had she agreed to let petitioners
compromise their $298,003 liability by paying less than the amount of
interest included within that liability.
We hold that Appeals did
not abuse its discretion in rejecting petitioners' $83,213
offer-in-compromise. In so holding, we express no opinion as to the
amount of any compromise that petitioners could or should be required
to pay, or that respondent is required to accept. The only issue
before us is whether Appeals abused its discretion in refusing to
accept petitioners' specific offer-in-compromise in the amount of
$83,213. See Speltz v. Commissioner [Dec.
55,961], 124 T.C. at 179-180. We
have considered all arguments made by petitioners for a contrary
holding and have found those arguments not discussed herein to be
irrelevant and/or without merit.
An appropriate order
will be issued.
1
Unless otherwise indicated, section references are to the applicable
versions of the Internal Revenue Code. Dollar amounts are rounded.
2
Petitioners also dispute respondent's determination that they are
liable for increased interest under sec.
6621(c). This interest relates to
deficiencies attributable to "computational adjustments",
see secs.
6230(a)(1) and 6231(a)(6),
made following the Court's decision in Shorthorn Genetic Engg.
1982-2, Ltd. v. Commissioner [Dec.
51,659(M)], T.C. Memo. 1996-515.
As to this dispute, the parties have agreed to be bound by a final
decision in Ertz v. Commissioner, docket No. 20336-04L, which
involves a similar issue.
3
Form 433-A states that each asset reported on the form should be
valued at its "Current value", defined on the form as "the
amount you could sell the asset for today".
4
Cochran was told by petitioners that they had ascertained the value
of each vehicle by using its trade-in value and considering its
condition to be "fair."
5
Whereas sec.
6334(a)(2) limits this exemption
to $6,250, Cochran does not explain in the notice of determination
why she allowed petitioners the greater amount.
6
Petitioners had completed and submitted to Cochran a Form 433-B,
Collection Information Statement for Businesses, which listed the
assets and liabilities of their S corporation.
7
Cochran arrived at $227,808 by multiplying petitioners' monthly
disposable income of $4,746 by a factor of 48.
8
In Murphy v. Commissioner [Dec.
56,232], 125 T.C. 301 (2005), the
Court declined to include in the record external evidence relating to
facts not presented to Appeals. The Court distinguished Robinette
v. Commissioner [Dec.
55,698], 123 T.C. 85 (2004),
revd. [2006-1
USTC ¶50,213] 439 F.3d 455
(8th Cir. 2006), and held that the external evidence was inadmissible
in that it was not relevant to the issue of whether Appeals abused
its discretion. In a memorandum that petitioners filed with the Court
on Apr. 13, 2006, pursuant to an order of the Court directing
petitioners to explain the relevancy of any external evidence that
they desired to include in the record of this case, petitioners made
no claim that they had offered any of the external evidence to
Cochran. Instead, as we read petitioners' memorandum in the light of
the record as a whole, petitioners wanted to include the external
evidence in the record of this case to prove that Cochran abused her
discretion by not considering facts and documents that they had
consciously decided not to give to her. Consistent with Murphy v.
Commissioner, supra, we sustained respondent's relevancy
objections to the external evidence. Accord Clayton v.
Commissioner [Dec.
56,612(M)], T.C. Memo. 2006-188;
Barnes v. Commissioner [Dec.
56,570(M)], T.C. Memo.
2006-150.
9
We also note that the Court of Appeals for the Ninth Circuit in Fargo
v. Commissioner [2006-1
USTC ¶50,326], 447 F.3d 706,
710 (9th Cir. 2006), affg.[Dec.
55,514(M)] T.C. Memo. 2004-13,
dismissed a similar claim of economic hardship advanced by the
taxpayers there. Petitioners here, like the taxpayers in Fargo,
have substantial assets and future income potential and can afford to
pay their tax liability in full.
10
Of course, the examples in the regulations are not meant to be
exhaustive, and petitioners' situation is not identical to that of
the taxpayers in Fargo v. Commissioner [2006-1
USTC ¶50,326], 447 F.3d at
714, regarding whom the Court of Appeals for the Ninth Circuit noted
that "no evidence was presented to suggest that Taxpayers were
the subject of fraud or deception". Such considerations,
however, have not kept this Court from finding investors in Hoyt's
shelters to be culpable of negligence, most recently in Keller v.
Commissioner [Dec.
56,550(M)], T.C. Memo. 2006-131,
nor prevented the Courts of Appeals for the Sixth and Tenth Circuits
from affirming our decisions to that effect in Mortensen v.
Commissioner [2006-1
USTC ¶50,194], 440 F.3d 375
(6th Cir. 2006), affg. [Dec.
55,824(M)] T.C. Memo. 2004-279,
and Van Scoten v. Commissioner [2006-1
USTC ¶50,214], 439 F.3d 1243
(10th Cir. 2006), affg. [Dec.
55,818(M)] T.C. Memo.
2004-275.
11
Nor does the fact that petitioners' case may be "longstanding"
overcome the detrimental impact on voluntary compliance that could
result from respondent's accepting petitioners' offer-in-compromise.
An example in IRM sec. 5.8.11.2.2 implicitly addresses the
"longstanding" issue. There, the taxpayer invested in a tax
shelter in 1983, thereby incurring tax liabilities for 1981 through
1983. He failed to accept a settlement offer by respondent that would
have eliminated a substantial portion of his interest and penalties.
Although the example, which is similar to petitioners' case in
several respects, would qualify as a "longstanding" case by
petitioners' standards, the offer was not acceptable because
acceptance of it would undermine compliance with the tax laws.
Gary
and Johnean Hansen v. Commissioner.
Dkt.
No. 11175-05L , TC Memo. 2007-56, 93 TCM 983, March 8,
2007.
[Appealable, barring stipulation to the contrary, to
CA-9. --CCH.]
[Code
Secs. 6330
and 7122]
Compromises:
Abuse of discretion: Collection Due Process. --
An IRS Appeals officer
did not abuse her discretion in rejecting an offer-in-compromise of
$90,000 on a $260,000 liability and sustaining a proposed levy. The
taxpayers were investors in a tax shelter partnership. The offer was
rejected because the taxpayers did not demonstrate either that they
would suffer economic hardship if required to pay the liability in
full or that public policy and equity reasons weighed in favor of
accepting their offer. Their allegation that the Tax Court lacked
jurisdiction due to the expiration of the statute of limitations was
frivolous and unavailing. Limitations claims must be made at the
partnership level proceedings, not at a partner's Collection Due
Process hearing. The case was not a "longstanding" case in
which forgiveness of penalties and interest was appropriate, and
there was no evidence that the Appeals officer failed to give
adequate consideration to the taxpayers' unique facts and
circumstances. Public policy did not demand acceptance of the offer
because the taxpayers were victims of the shelter promoter's fraud.
Acceptance of the compromise would reduce the risks involved in
investing in tax shelters, undermining voluntary compliance with the
tax laws. --CCH.
Terri A. Merriam, Jaret
R. Coles, Asher B. Bearman, and Jennifer A. Gellner, for petitioners;
Thomas N. Tomashek and Gregory M. Hahn, for respondent.
Terri A. Merriam,
Jaret R. Coles, Asher B. Bearman, and Jennifer A. Gellner,
for petitioners.1
MEMORANDUM
FINDINGS OF FACT AND OPINION
LARO, Judge: Petitioners
petitioned the Court under section
6330(d) to review the
determination of respondent's Office of Appeals (Appeals) sustaining
a proposed levy related to petitioners' 1989 Federal income tax
year.2
Petitioners argue the proposed levy is improper because, they state,
Appeals was required to accept their offer of $90,258 to compromise
what they estimate is their $260,143 Federal income tax liability
(inclusive of additions to tax, penalties, and interest) for 1987
through 1998.3
We decide whether Appeals abused its discretion in rejecting that
offer.4
We hold it did not.
FINDINGS
OF FACT
The parties filed with
the Court stipulations of fact and accompanying exhibits. The
stipulated facts are found accordingly. When the petition was filed,
petitioners resided in Kennewick, Washington.
Beginning in 1987,
petitioners' Federal income tax returns claimed losses and credits
from their investment in partnerships organized and operated by
Walter J. Hoyt III (Hoyt). One of these partnerships was Timeshare
Breeding Service 1989-1 (TBS). Hoyt was TBS's general partner and tax
matters partner, and TBS was subject to the unified audit and
litigation procedures of the Tax Equity and Fiscal Responsibility Act
of 1982, Pub. L. 97-248, sec. 402(a), 96 Stat. 648. Hoyt was
convicted on criminal charges relating to the promotion of TBS and
other partnerships.
Petitioners' claim to
losses and credits passing to them from TBS resulted in the
underreporting of their 1989 taxable income.5
On October 22, 2002, respondent mailed to petitioners a Letter 1058,
Final Notice of Intent to Levy and Notice of Your Right to a Hearing.
The notice informed petitioners that respondent proposed to levy on
their property to collect Federal income tax (and any related amount)
that they owed for 1989. The notice advised petitioners that they
were entitled to a hearing with Appeals to review the propriety of
the proposed levy.
On November 18, 2002,
petitioners asked Appeals for the referenced hearing. On January 11,
2005, Linda Cochran (Cochran), a settlement officer in Appeals, held
the hearing with petitioners' counsel. Cochran and petitioners'
counsel discussed two issues. The first issue concerned petitioners'
intent to offer to compromise their 1987 through 1998 Federal income
tax liability to promote effective tax administration. Petitioners
contended that Appeals should accept their offer as a matter of
equity and public policy. Petitioners stated that it took a long time
to resolve the Hoyt partnership cases and noted that Hoyt had been
convicted on the criminal charges. The second issue concerned an
interest abatement case under section
6404(e) that petitioners then had
pending in this Court at docket No. 18896-03. That case related to
1989, the year at issue here, and petitioners claimed that the
proposed levy should be rejected because the case was pending. On
April 28, 2005, the Court entered a decision in that case stating
that the parties agreed that petitioners were not entitled for 1989
to an abatement of interest under section
6404. That decision is now final.
On February 15, 2005,
petitioners tendered to Cochran on Form 656, Offer in Compromise, a
written offer to pay $90,258 to compromise their estimated $260,143
liability. The offer was limited to a claim of effective tax
administration because petitioners had sufficient assets to pay their
tax liability in full. Petitioners supplemented their offer with a
completed Form 433-A, Collection Information Statement for Wage
Earners and Self-Employed Individuals, four letters totaling
approximately 65 pages, and volumes of documents. The Form 433-A
reported that petitioners owned assets with a total current value of
$311,994, inclusive of the following:6
Assets
Current
value
Cash
in accounts $101,981
Retirement
accounts 120,903
Vehicles:
1992
Chevy Lumina 200
1993
Mercury Villager 1,340
1999
Buick LeSabre 3,230
Home
84,340
__________________
311,994
The Form 433-A also
reported the following monthly items of income and expense:
Items of income
Amount
Husband's
wages $8,512
Wife's
wages 3,427
__________
11,940 (as
rounded)
Items of income
Amount
Food,
clothing, and miscellaneous $2,000
Housing
and utilities 1,500
Transportation
300
Medical
expenses 400
Taxes
4,000
Life
insurance 227
Other
expenses 275
__________
8,702
Cochran determined that
petitioners' net realizable equity in their cash was either the
$101,981 reported in their bank accounts or $96,9547
and that petitioners' net realizable equity in their retirement
accounts and home was the same as the reported values. Cochran also
reduced the values of petitioners' vehicles by 20 percent to reflect
their "quick sale values".8
Cochran summarized petitioners' assets and liabilities as follows:
Fair
market
Quick
Encumbrance or
Net realizable
Assets
value
sale value
exemption
equity
Cash
$101,981 -- --
$101,981
/
96,954
Retirement
120,903 -- --
120,903
accounts
Vehicles:
1992
Chevy 200 $160 --
160
Lumina
1993
Mercury 1,340 1,072 --
1,072
Villager
1999
Buick 3,230 2,584 --
2,584
LeSabre
Real
Estate 84,340 -- --
84,340
_______________________________________________________________
1311,994
3,816 $0 311,200
/
306,013
1Petitioners'
net realizable equity is actually $311,040. This slight
mathematical
error is not significant to the overall calculation.
Cochran made three
adjustments to petitioners' reported expenses. First, she allowed
$1,280 (instead of $2,000) for monthly food, clothing, and
miscellaneous expenses. Cochran made this adjustment in accordance
with respondent's national guideline amounts based on petitioners'
monthly income and household size. Cochran also considered
petitioners' particular circumstances but noted that they did not
warrant allowing the higher figure submitted by petitioners. Second,
Cochran allowed $1,093 (instead of $1,500) for monthly housing
expenses. She made this adjustment in accordance with respondent's
local guideline amounts and noted that petitioners had not documented
any reason for deviating from these guidelines. Finally, Cochran
allowed $2,100 (instead of $4,000) for monthly tax expenses. She
arrived at this figure by calculating petitioners' monthly income and
determining their approximate monthly tax liability. She noted that
petitioners resided in Washington, which does not have a State income
tax. In sum, Cochran concluded that petitioners had allowable monthly
expenses of $5,675.
Cochran determined that
petitioners' net realizable equity in their assets was either
$311,200 or $306,013, see supra note 7, and that petitioners
had a monthly disposable income of $6,265 ($11,940 in monthly income
less $5,675 of monthly allowable expenses). Cochran also determined
that petitioners could pay $300,720 from their future income.9
In sum, Cochran concluded, petitioners' net realizable equity in
assets and future income equaled $611,920 or alternatively $606,734.
On May 12, 2005, Appeals
issued petitioners a notice of determination sustaining the proposed
levy. The notice concludes that petitioners' $90,258
offer-in-compromise is not an appropriate collection alternative to
the proposed levy. The notice, citing Internal Revenue Manual (IRM)
sections 5.8.11.2.1 and 5.8.11.2.2, states that petitioners' offer
does not meet the Commissioner's guidelines for consideration as an
offer-in-compromise to promote effective tax administration on the
basis of economic hardship or equity and public policy. Cochran noted
that since petitioners' representative had not specified the basis on
which they were making their effective tax administration offer, she
considered it under both economic hardship and equity and public
policy grounds.
As to petitioners'
offer-in-compromise to promote effective tax administration due to
economic hardship, the notice states that "the taxpayers have
the ability to meet all their necessary living expenses and to pay
all amounts owed from either their equity in assets or their income
stream and still have equity and income". As to petitioners'
offer-in-compromise to promote effective tax administration based on
equity and public policy, the notice states: "the taxpayers'
Effective Tax Administration offer proposal fails to meet the
criteria for such consideration under Internal Revenue Manual
5.8.11.2.2 * * * [and], therefore, cannot be considered further."
The notice further states as to Cochran's balancing of efficient
collection with the legitimate concerns of taxpayers that
The taxpayers' concerns
about the proposed collection action generally fall into two areas:
(1) pending litigation (the interest abatement case) and (2) a viable
collection alternative in the form of their $90,258 offer in
compromise.
The Settlement Officer
has balanced the taxpayers' first area of concern by withholding
further collection activity regarding [sic] such time as the pending
interest abatement case regarding 1989 (for the accrued interest
still unpaid) or the pending TEFRA penalty case regarding 1989 (for
the accrued failure to pay penalty) is decided.
With respect to the
taxpayers' second area of concern, the Settlement Officer has
evaluated the taxpayers' $90,258 offer to compromise the underlying
liabilities as a collection alternative to the proposed levy action.
Based on that evaluation, the taxpayers' offer of $90,258 could not
be recommended for acceptance, and therefore cannot be considered as
a collection alternative.
The notice states that
petitioners have neither offered an argument nor cited any authority
to permit Appeals to deviate from the provisions of the IRM.
As to petitioners' claim
at the hearing for an interest abatement, Cochran ascertained that
petitioners had filed the case in this Court seeking an abatement of
interest under section
6404(e) for 1989. Cochran stated
in the notice of determination that she had decided to stay
collection activity relating to interest amounts while petitioners'
interest abatement case for 1989 was pending in this Court.
OPINION
This case is another in a
long list of cases brought in this Court involving respondent's
proposal to levy on the assets of a partner in a Hoyt partnership to
collect Federal income taxes attributable to the partner's
participation in the partnership. Petitioners argue that Appeals was
required to let them pay $90,258 to compromise their estimated
$260,143 Federal income tax liability for 1987 through 1998. Where an
underlying tax liability is not at issue in a case invoking our
jurisdiction under section
6330(d), we review the
determination of Appeals for abuse of discretion. See Sego v.
Commissioner [Dec.
53,938], 114 T.C. 604, 610
(2000); see also Clayton v. Commissioner [Dec.
56,612(M)], T.C. Memo. 2006-188;
Barnes v. Commissioner [Dec.
56,570(M)], T.C. Memo. 2006-150.
We reject the determination of Appeals only if the determination was
arbitrary, capricious, or without sound basis in fact or law. See Cox
v. Commissioner [Dec.
56,506], 126 T.C. 237, 255
(2006); Murphy v. Commissioner [Dec.
56,232], 125 T.C. 301, 308, 320
(2005), affd. 469 F.3d 27 (1st Cir. 2006).
Where, as here, we decide
the propriety of Appeals's rejection of an offer-in-compromise, we
review the reasoning underlying that rejection to decide whether the
rejection was arbitrary, capricious, or without sound basis in fact
or law. We do not substitute our judgment for that of Appeals, and we
do not decide independently the amount that we believe would be an
acceptable offer-in-compromise. See Murphy v. Commissioner, supra
at 320; see also Clayton v. Commissioner, supra; Barnes v.
Commissioner, supra; Fowler v. Commissioner [Dec.
55,689(M)], T.C. Memo. 2004-163;
Fargo v. Commissioner [Dec.
55,514(M)], T.C. Memo. 2004-13,
affd. [2006-1
USTC ¶50,326] 447 F.3d 706
(9th Cir. 2006). Nor do we usually consider arguments, issues, or
other matters raised for the first time at trial, but we limit
ourselves to matter brought to the attention of Appeals. See Murphy
v. Commissioner, supra at 308; Magana v. Commissioner
[Dec.
54,765], 118 T.C. 488, 493
(2002). "[E]vidence that * * * [a taxpayer] might have presented
at the section
6330 hearing (but chose not to)
is not admissible in a trial conducted pursuant to section
6330(d)(1) because it is not
relevant to the question of whether the Appeals officer abused her
discretion." Murphy v. Commissioner, supra at 315.10
Section
6330(c)(2)(A)(iii) allows a
taxpayer to offer to compromise a Federal tax debt as a collection
alternative to a proposed levy. Section
7122(c) authorizes the
Commissioner to prescribe guidelines to determine when a taxpayer's
offer-in-compromise should be accepted. The applicable regulations,
section 301.7122-1(b), Proced. & Admin. Regs., list three grounds
on which the Commissioner may accept an offer-in-compromise of a
Federal tax debt. These grounds are "Doubt as to liability",
"Doubt as to collectibility", and to "Promote
effective tax administration". Sec. 301.7122-1(b)(1), (2), and
(3), Proced. & Admin. Regs. Petitioners reported on their Form
433-A that they had assets worth $311,994. Cochran determined that
petitioners' reasonable collection potential (taking into account
their assets as well as future income) was either $611,920 or
$606,734. Petitioners can afford to pay their estimated $260,143 tax
liability in full and do not argue that the liability is in doubt.
They seek to qualify for an offer-in-compromise to promote effective
tax administration. See sec. 301.7122-1(b)(3), Proced. & Admin.
Regs.; cf. Fargo v. Commissioner [2006-1
USTC ¶50,326], 447 F.3d 706
(9th Cir. 2006) (taxpayers made an offer-in-compromise to promote
effective tax administration where they had sufficient assets to pay
their tax liability in full).
Petitioners argue that
respondent was required to compromise their tax liability to promote
effective tax administration. The Commissioner may compromise a tax
liability to promote effective tax administration when collection of
the full liability will create economic hardship and the compromise
would not undermine compliance with the tax laws by taxpayers in
general. See sec. 301.7122-1(b)(3)(i), (iii), Proced. & Admin.
Regs. If a taxpayer does not qualify for effective tax administration
compromise on grounds of economic hardship, the regulations also
allow the Commissioner to compromise a tax liability to promote
effective tax administration when the taxpayer identifies compelling
considerations of public policy or equity. See sec.
301.7122-1(b)(3)(ii), Proced. & Admin. Regs.
Cochran considered all of
the evidence submitted to her by petitioners and applied the
guidelines for evaluating an offer-in-compromise to promote effective
tax administration. Although petitioners did not specifically state
on which basis they were submitting their effective tax
administration offer-in-compromise, Cochran considered it under both
economic hardship and public policy and equity grounds. Cochran
determined that petitioners' offer was unacceptable because they had
not demonstrated that they would suffer economic hardship and public
policy and equity reasons did not weigh in favor of accepting their
offer. Cochran's determination to reject petitioners'
offer-in-compromise was not arbitrary, capricious, or without a sound
basis in fact or law, and it was not abusive or unfair to
petitioners. Cochran's determination was based on a reasonable
application of the guidelines, which we decline to second-guess. See
Speltz v. Commissioner [Dec.
55,961], 124 T.C. 165 (2005),
affd. [2006-2
USTC ¶50,403] 454 F.3d 782
(8th Cir. 2006); Clayton v. Commissioner [Dec.
56,612(M)], T.C. Memo. 2006-188;
Barnes v. Commissioner [Dec.
56,570(M)], T.C. Memo. 2006-150.
Petitioners make six
arguments in advocating a contrary result. First, petitioners argue
that the Court lacks jurisdiction to review the rejection of their
offer-in-compromise. Petitioners allege that Hoyt had a conflict of
interest that prevented him from extending the periods of limitation
for the partnerships in which petitioners were partners. Petitioners
conclude that any consents signed by Hoyt to extend the periods of
limitation were invalid, which in turn means that the Court lacks
jurisdiction because the applicable periods of limitation have
otherwise expired.
Petitioners' challenge to
this Court's jurisdiction is groundless, frivolous, and unavailing.
It is well settled that the expiration of the period of limitation is
an affirmative defense and not a factor of this Court's jurisdiction.
See Day v. McDonough, 547 U.S. ___, 126 S. Ct. 1675, 1681
(2006) ("A statute of limitations defense * * * is not
`jurisdictional'"); Kontrick v. Ryan, 540 U.S. 443, 458
(2004) ("Time bars * * * generally must be raised in an answer
or responsive pleading."); see also Davenport Recycling
Associates v. Commissioner [2000-2
USTC ¶50,643], 220 F.3d
1255, 1259 (11th Cir. 2000), affg. [Dec.
52,893(M)] T.C. Memo. 1998-347;
Chimblo v. Commissioner [99-1
USTC ¶50,540], 177 F.3d 119,
125 (2d Cir. 1999), affg. [Dec.
52,379(M)] T.C. Memo. 1997-535;
Columbia Bldg., Ltd. v. Commissioner [Dec.
48,217], 98 T.C. 607, 611 (1992);
Robinson v. Commissioner [Dec.
31,293], 57 T.C. 735, 737 (1972).
Where, as here, the claim of a time bar relates to items of a
partnership, the claim must be made in the partnership proceeding and
may not be considered at a proceeding involving the personal income
tax liability of one or more of the partners of the partnership. See
Davenport Recycling Associates v. Commissioner, supra at
1259-1260; Chimblo v. Commissioner, supra at 125; Kaplan v.
United States [98-1
USTC ¶50,129], 133 F.3d 469,
473 (7th Cir. 1998).
Second, petitioners argue
that Cochran's rejection of their offer-in-compromise conflicts with
the congressional committee reports underlying the enactment of
section
7122. According to petitioners,
their case is a "longstanding" case, and those reports
require that respondent resolve such cases by forgiving interest and
penalties that otherwise apply. We disagree with petitioners' reading
and application of the legislative history underlying section
7122. Petitioners' argument on
this point is essentially the same argument that was considered and
rejected by the Court of Appeals for the Ninth Circuit in Fargo v.
Commissioner [2006-1
USTC ¶50,326], 447 F.3d at
711-712. We do likewise here for the same reasons stated in that
opinion. We add that petitioners' counsel participated in the appeal
in Fargo as counsel for the amici. While petitioners in their
brief suggest that the Court of Appeals for the Ninth Circuit
knowingly wrote its opinion in Fargo in such a way as to
distinguish that case from the cases of counsel's similarly situated
clients (e.g., petitioners), and otherwise to allow those clients to
receive an abatement of their liability attributable to partnerships
such as those here, we do not read the opinion of the Court of
Appeals for the Ninth Circuit in Fargo to support that
conclusion.
Third, petitioners argue
that Cochran inadequately considered their unique facts and
circumstances. We disagree. Cochran reviewed and considered all
information given to her by petitioners. On the basis of the facts
and circumstances of petitioners' case as they were presented to her,
Cochran determined that petitioners' offer did not meet the
applicable guidelines for acceptance of an offer-in-compromise to
promote effective tax administration based on economic hardship or
public policy or equity grounds. We find no abuse of discretion in
that determination. Nor do we find that Cochran inadequately
considered the information actually given to her by petitioners. With
the exception of expenses that exceeded respondent's guidelines and
excessive claimed tax expenses, Cochran allowed the full amount of
petitioners' expenses. Moreover, Cochran allowed the full $400 that
petitioners claimed in medical expenses even though they provided no
documentation of any such expenses. Finally, Cochran allowed
petitioners more than a month after their collection due process
hearing to submit additional documents to support their position. We
find that Cochran gave thorough consideration to all of petitioners'
claims.
Fourth, petitioners argue
that public policy demands that their offer-in-compromise be accepted
because they were victims of fraud. We disagree. While the
regulations do not set forth a specific standard for evaluating an
offer-in-compromise based on claims of public policy or equity, the
regulations contain two illustrative examples. See sec.
301.7122-1(c)(3)(iv), Examples (1) and (2), Proced. &
Admin. Regs. The first example describes a taxpayer who is seriously
ill and unable to file income tax returns for several years. The
second example describes a taxpayer who received erroneous advice
from the Commissioner as to the tax effect of the taxpayer's actions.
Neither example bears any resemblance to this case. See Speltz v.
Commissioner [2006-2
USTC ¶50,403], 454 F.3d at
786. Unlike the exceptional circumstances exemplified in the
regulations, petitioners' situation is neither unique nor exceptional
in that petitioners' situation mirrors that of numerous taxpayers who
claimed tax shelter deductions in the 1980s and 1990s, obtained the
tax advantages, promptly forgot about their "investment",
and now realize that paying their taxes may require a change of
lifestyle.11
See Clayton v. Commissioner [Dec.
56,612(M)], T.C. Memo. 2006-188;
Barnes v. Commissioner [Dec.
56,570(M)], T.C. Memo. 2006-150.
We also believe that
compromising petitioners' case on grounds of public policy or equity
would not promote effective tax administration. While petitioners
portray themselves as victims of Hoyt's alleged fraud and
respondent's alleged delay in dealing with Hoyt, they take no
responsibility for their tax predicament. We cannot agree that
acceptance by respondent of petitioners' $90,258 offer to satisfy
their estimated $260,143 tax liability would enhance voluntary
compliance by other taxpayers. A compromise on that basis would place
the Government in the unenviable role of an insurer against poor
business decisions by taxpayers, reducing the incentive for taxpayers
to investigate thoroughly the consequences of transactions into which
they enter. It would be particularly inappropriate for the Government
to play that role here, where the transaction at issue involves a tax
shelter. Reducing the risks of participating in tax shelters would
encourage more taxpayers to run those risks, thus undermining rather
than enhancing compliance with the tax laws.12
See Clayton v. Commissioner, supra; Barnes v. Commissioner, supra.
Fifth, petitioners argue
that Cochran failed to balance efficient collection with the
legitimate concern that collection be no more intrusive than
necessary. We disagree. Cochran thoroughly considered this balancing
issue on the basis of the information and proposed collection
alternative given to her by petitioners. She concluded that "the
proposed levy action regarding the taxpayers represents the only
efficient means for collection of the liabilities at issue in this
case". While petitioners assert that Cochran did not consider
all of the facts and circumstances of this case, "including
whether the circumstances of a particular case warrant acceptance of
an amount that might not otherwise be acceptable under the
Secretary's policies and procedures", sec. 301.7122-1(c)(1),
Proced. & Admin. Regs., we find to the contrary. Cochran
thoroughly considered petitioners' arguments for accepting their
offer-in-compromise, and she rejected the offer only after concluding
that petitioners could pay much more of their tax liability than the
$90,258 they offered. Cf. IRM sec. 5.8.11.2.1(11) ("When
hardship criteria are identified but the taxpayer does not offer an
acceptable amount, the offer should not be recommended for
acceptance").
Sixth, petitioners argue
that Cochran inappropriately failed to consider whether they
qualified for an abatement of interest for reasons other than those
described in section
6404(e). We disagree. We note
that in the notice of determination, Cochran decided to stay
collection of interest while petitioners' interest abatement case was
pending in this Court. Moreover, we find nothing to suggest that
Cochran believed that petitioners' sole remedy for interest abatement
in this case rested on the rules of section
6404(e). In fact, regardless of
the rules of section
6404(e), Cochran obviously would
have abated interest in this case had she agreed to let petitioners
compromise their estimated $260,143 liability by paying less than the
amount of interest included within that liability.
We hold that Appeals did
not abuse its discretion in rejecting petitioners' $90,258
offer-in-compromise. In so holding, we express no opinion as to the
amount of any compromise that petitioners could or should be required
to pay, or that respondent is required to accept. The only issue
before us is whether Appeals abused its discretion in refusing to
accept petitioners' specific offer-in-compromise in the amount of
$90,258. See Speltz v. Commissioner [Dec.
55,961], 124 T.C. at 179-180. We
have considered all arguments made by petitioners for a contrary
holding and have found those arguments not discussed herein to be
irrelevant and/or without merit.
An appropriate order
will be issued.
1
Pursuant to their requests, Jennifer A. Gellner and Asher B. Bearman
were allowed to withdraw on Nov. 14 and 20, 2006, respectively.
2
Unless otherwise indicated, section references are to the applicable
versions of the Internal Revenue Code. Dollar amounts are rounded.
3
Petitioners submitted to respondent Form 656, Offer in Compromise,
indicating that they were offering to compromise their tax liability
for 1987 through 1996. Petitioners included with that submission a
letter in which they stated that they wished to compromise their tax
liability for 1987 through 1998. We read petitioners' offer to
include 1987 through 1998.
4
While the petition references sec.
6621(c)
interest, respondent did not determine that petitioners were liable
for such interest in the referenced years. We express no opinion on
the subject.
5
Petitioners' claim to losses and credits passing to them from other
Hoyt partnerships was the subject of an affected items proceeding in
this Court. See Hansen
v. Commissioner
[Dec.
55,812(M)],
T.C. Memo. 2004-269, affd. 471 F.3d 1021 (9th Cir. 2006).
6
Form 433-A states that each asset reported on the form should be
valued at its "Current value", defined on the form as "the
amount you could sell the asset for today".
7
Cochran arrived at the latter figure by reducing the amount of cash
in petitioners' bank accounts by the cash they proposed to pay as
part of the offer-in-compromise. Petitioners stated on their Form 656
that "The taxpayers have placed a total of $85,231 on account as
advance deposits; the remainder is from cash assets." Cochran
subtracted the claimed advance deposits ($85,231) from the offer
amount ($90,258) and reduced the net realizable equity by $5,027
(from $101,981 to $96,954).
8
Cochran was told by petitioners that they had ascertained the value
of each vehicle by using its trade-in value and considering its
condition to be "fair."
9
Cochran arrived at $300,720 by multiplying petitioners' monthly
disposable income of $6,265 by a factor of 48. Cochran used a
48-month factor because petitioners were offering to compromise their
tax liability by paying cash. See Internal Revenue Manual (IRM) sec.
5.8.5.5.
10
In Murphy
v. Commissioner
[Dec.
56,232],
125 T.C. 301 (2005), affd. 469 F.3d 27 (1st Cir. 2006), the Court
declined to include in the record external evidence relating to facts
not presented to Appeals. The Court distinguished Robinette
v. Commissioner
[Dec.
55,698],
123 T.C. 85 (2004), revd. [2006-1
USTC ¶50,213]
439 F.3d 455 (8th Cir. 2006), and held that the external evidence was
inadmissible in that it was not relevant to the issue of whether
Appeals abused its discretion. In a memorandum that petitioners filed
with the Court on April 13, 2006, pursuant to an order of the Court
directing petitioners to explain the relevancy of any external
evidence that they desired to include in the record of this case,
petitioners made no claim that they had offered any of the external
evidence to Cochran. Instead, as we read petitioners' memorandum in
the light of the record as a whole, petitioners wanted to include the
external evidence in the record of this case to prove that Cochran
abused her discretion by not considering facts and documents that
they had consciously decided not to give to her. Consistent with
Murphy
v. Commissioner, supra,
we sustained respondent's relevancy objections to the external
evidence. Accord Clayton
v. Commissioner
[Dec.
56,612(M)],
T.C. Memo. 2006-188; Barnes
v. Commissioner
[Dec.
56,570(M)],
T.C. Memo. 2006-150.
11
Of course, the examples in the regulations are not meant to be
exhaustive, and petitioners' situation is not identical to that of
the taxpayers in Fargo
v. Commissioner
[2006-1
USTC ¶50,326],
447 F.3d 706, 714 (9th Cir. 2006), affg. [Dec.
55,514(M)]
T.C. Memo. 2004-13, regarding whom the Court of Appeals for the Ninth
Circuit noted that "no evidence was presented to suggest that
Taxpayers were the subject of fraud or deception". Such
considerations, however, have not kept this Court from finding
investors in Hoyt's shelters to be culpable of negligence, see, e.g.,
Keller
v. Commissioner
[Dec.
56,550(M)],
T.C. Memo. 2006-131, nor prevented the Courts of Appeals for the
Sixth, Ninth, and Tenth Circuits from affirming our decisions to that
effect in Hansen
v. Commissioner,
471 F.3d 1021 (9th Cir. 2006), affg. [Dec.
55,812(M)]
T.C. Memo. 2004-269; Mortensen
v. Commissioner,
440 F.3d 375 (6th Cir. 2006), affg. [Dec.
55,824(M)]
T.C. Memo. 2004-279; and Van
Scoten v. Commissioner,
439 F.3d 1243 (10th Cir. 2006), affg. [Dec.
55,818(M)]
T.C. Memo. 2004-275.
12
Nor does the fact that petitioners' case may be "longstanding"
overcome the detrimental impact on voluntary compliance that could
result from respondent's accepting petitioners' offer-in-compromise.
An example in IRM sec. 5.8.11.2.2 implicitly addresses the
"longstanding" issue. There, the taxpayer invested in a tax
shelter in 1983, thereby incurring tax liabilities for 1981 through
1983. He failed to accept a settlement offer by respondent that would
have eliminated a substantial portion of his interest and penalties.
Although the example, which is similar to petitioners' case in
several respects, would qualify as a "longstanding" case by
petitioners' standards, the offer was not acceptable because
acceptance of it would undermine compliance with the tax laws.
Bernard
A. Kansky v. Commissioner.
Dkt.
Nos. 9544-04 , 24528-04L , TC Memo. 2007-40, 93 TCM 921, February 20,
2007.
[Appealable, barring stipulation to the contrary, to
CA-1. --CCH.]
[Code
Sec. 6330]
Tax
liens: Seizure of property: Notice requirement: Collection Due
Process (CDP) hearing: Abuse of discretion. --
An IRS Appeals officer's
determination to sustain a tax lien against a practicing attorney who
failed to file tax returns for seven years was not an abuse of
discretion. The taxpayer could not challenge his underlying tax
liabilities because he had received notices of deficiency for all
seven years and had already litigated his tax liabilities for three
of those years in the Tax Court. Moreover, the taxpayer's argument
that the IRS misallocated or failed to properly credit his
installment payments was rejected because there was no evidence that
the taxpayer had made additional payments. Finally, the Appeals
officer properly rejected the taxpayer's offer-in-compromise because
he failed to provide complete current financial information and
failed to submit his offer under penalties of perjury. --CCH.
[Code
Sec. 6404]
Abuse
of discretion: Interest abatement: IRS delays. --
An attorney failed to
show that an IRS Appeals officer abused her discretion by refusing to
abate accumulated interest and penalties for several tax years. The
IRS's application of the taxpayer's installment payments to a certain
year's tax liability was not a ministerial act under Code
Sec. 6404. Moreover, much of the
delay was caused by the taxpayer's failure to cooperate with the
IRS's investigation. --CCH.
[Code
Sec. 7491]
Burden
of proof: Interest abatement: Collection action. --
Code
Sec. 7491 did not operate to
shift the taxpayer's burden of proof to the IRS. He raised the issue
for the first time in his reply brief, which was untimely and
prejudicial to the IRS. In addition, interest is not imposed by
subtitle A or B and, therefore, Code
Sec. 7491 did not apply to his
interest abatement claim. Moreover, since the taxpayer was precluded
from challenging his underlying tax liability, Code
Sec. 7491 did not apply to the
collection action. Consequently, the burden of proof remained with
the taxpayer. --CCH.
Bernard A. Kansky, pro
se; Michael R. Fiore, for respondent.
MEMORANDUM
FINDINGS OF FACT AND OPINION
THORNTON, Judge: In these
consolidated cases, petitioner seeks review pursuant to sections
6320(c) and 6330(d)
of respondent's determination sustaining the filing of tax liens with
respect to petitioner's Federal income taxes for years 1987, 1990,
1991, 1997, 1998, 2000, and 2001; petitioner also seeks review
pursuant to section
6404(h) of respondent's denial of
petitioner's request to abate interest for tax years 1987, 1990, and
1991.1
FINDINGS
OF FACT
The parties have
stipulated some facts, which we incorporate herein by this reference.
When he filed his petition, petitioner resided in Needham,
Massachusetts.
Petitioner's
Tax Years 1987 Through 1991
Petitioner has been a
practicing attorney for over 40 years. For tax years 1987 through
1991, petitioner failed to file Federal income tax returns. In 1992,
respondent issued a summons directing petitioner to appear at the
Stoneham, Massachusetts, IRS office and produce his records relating
to his 1987 through 1991 income. In response to the summons, on
November 12, 1992, petitioner produced seven or eight boxes of
documents relating to personal expenses but not to his income. By
letter dated February 8, 1993, respondent's revenue agent notified
petitioner that the documents he had provided failed to satisfy the
summons and requested petitioner to provide bank deposit records and
all books and records relating to petitioner's income. Subsequently,
at some unspecified date, petitioner produced what he characterizes
as "one small shoe box size of records/receipts".
In February 1996, after
various meetings with respondent's agents, petitioner submitted his
delinquent returns for 1987 through 1991. Petitioner's cover letter
dated February 23, 1996, and addressed to respondent's revenue agent,
alluded to personal problems in petitioner's family as the reason for
the untimely filings and concluded: "Again, thank you for your
professionalism and patience in the above matter during, and as a
result of the difficulties we have faced".
On March 19, 1996,
respondent issued a 30-day letter, proposing adjustments to
petitioner's taxes for 1987 through 1991. By letter dated March 20,
1996, petitioner protested the proposed adjustments.
On September 16, 1998,
after consideration of petitioner's case by the Appeals Office,
respondent issued to petitioner a notice of deficiency for 1987
through 1991. On December 14, 1998, petitioner filed a petition in
this Court, seeking redetermination of the proposed deficiencies and
additions to tax. On November 5, 1999, pursuant to the parties'
stipulation, this Court entered its decision in the deficiency case,
deciding that petitioner had deficiencies of $2,413, $12,000, and
$4,000, for 1987, 1990, and 1991, respectively, and had no
deficiencies or overpayments for 1988 and 1989. Petitioner did not
appeal this decision.
Petitioner's
Returns for 1994 Through 2001
Petitioner filed Federal
tax returns for 1994 through 2001. For every year except 1999,
petitioner failed to fully pay the liabilities shown on those
returns.
Installment
Agreements
Petitioner entered into
one or more installment agreements that eventually covered all years
at issue except 2001. More particularly, according to respondent's
transcripts of petitioner's account, petitioner's liabilities for
various years were made subject to one or more installment agreements
on the following dates:2
Date
Tax Years
May
21, 1999 1994, 1995, and 1997
Oct.
3, 1999 1998
Jan.
1, 2000 1996
Mar.
13, 2000 1987, 1990, and 1991
Mar.
22, 2000 2000
According to respondent's
transcripts of petitioner's account, between June 1999 and March 2002
petitioner made 31 installment payments of about $750 each;
respondent credited these payments variously to petitioner's 1987,
1994, and 1995 years.3
After March 2002, petitioner stopped making installment payments.
Collection
Activity
On April 22, 2003,
respondent sent petitioner a Notice of Federal Tax Lien Filing and
Your Right to a Hearing Under IRC 6320 with respect to petitioner's
Federal income tax liabilities for 1987, 1990, 1991, 1997, 1998,
2000, and 2001. The notice indicated that the total tax petitioner
owed for these years was about $65,231 (exclusive of interest), with
about $42,631 of this amount attributable to 1987, 1990, and 1991.
On April 24, 2003,
petitioner sent respondent a Form 12153, Request for a Collection Due
Process Hearing. On the Form 12153, petitioner disputed his
underlying tax liabilities for 1987, 1990, and 1991 on the ground
that his liabilities for those years should have been eliminated by
net operating loss carrybacks and carryforwards from 1988 and 1989.
Petitioner complained that the time for claiming these carrybacks and
carryforwards had "expired" while respondent's revenue
agents had control of his files. Petitioner alleged that he had
attempted to satisfy his tax debt by making installment payments of
$750 per month until he became ill with cancer. Petitioner also
alleged that the collection activity was "premature"
because his request for "equitable relief" was still "under
review".4
By letter dated April 13,
2004, respondent's settlement officer scheduled a hearing on May 6,
2004. In the letter, the settlement officer stated that if petitioner
wished her to consider collection alternatives, such as an
offer-in-compromise, he had to provide, within 10 days, certain
documentation, including completed collection information statements
and a copy of his filed 2003 Federal income tax return.
At petitioner's request,
the meeting was rescheduled and, by agreement, the hearing was held
by telephone on June 8, 2004. Petitioner expressed a desire to submit
an offer-in-compromise. The settlement officer set a deadline of July
14, 2004, for petitioner to submit a completed offer-in-compromise,
as well as a completed Form 433-A, Collection Information Statement
for Individuals, and Form 433-B, Collection Information Statement for
Businesses. At petitioner's request, the settlement officer extended
this deadline to July 21, 2004.
On July 22, 2004,
respondent received from petitioner Form 656, Offer in Compromise,
and Form 433-A, but no Form 433-B. On the Form 656, petitioner
checked boxes indicating that he was submitting his
offer-in-compromise on the grounds of doubt as to liability, doubt as
to collectibility, and effective tax administration. He offered
"$12,500 * * * to be applied first to pay'ts to my Social
Security Account" in compromise of tax liabilities totaling
approximately $115,000 (including accrued interest). Petitioner
altered the standard terms of the Form 656 so as to eliminate the
statement that he was signing under penalties of perjury. As the
basis for his offer-in-compromise, petitioner alleged that
respondent's revenue agents had engaged in "ministerial and
managerial misconduct" by failing to review more promptly the
boxes of documents he had submitted on November 12, 1992, in response
to the summons. He challenged his underlying tax liabilities for 1987
through 1991.
Petitioner also altered
the standard terms of the Form 433-A so as to eliminate the statement
that he was signing under penalties of perjury. On the Form 433-A,
petitioner failed to disclose his ownership interest in certain real
estate.
After evaluating
petitioner's offer-in-compromise and Form 433-A, by letter dated
September 30, 2004, the settlement officer requested additional
information from petitioner, including a Form 433-B for petitioner's
business, a copy of petitioner's 2003 return, and information about
three specified real properties. In addition, the settlement officer
stated that she had determined the fair market value of petitioner's
residence to be $699,710 and offered petitioner an opportunity to
submit an appraisal if he disputed this value. The settlement officer
requested all information by October 15, 2004, and informed
petitioner that she would be making her determination at that time.
Petitioner provided none
of the additional documentation requested by the settlement officer.
In an October 4, 2004, letter to the settlement officer, petitioner
stated that his personal residence was in a "tired"
condition and that his property assessment had been reduced from
$600,000 to "$400,000. plus". He stated that two of the
real properties for which the settlement officer had requested
information were owned by trusts, and that the other real property
was owned by his wife. He stated that he and his family had
experienced health problems.
By letter dated October
6, 2004, the settlement officer confirmed a telephone conversation
with petitioner in which it was agreed that petitioner would submit
by October 15, 2004, all of the information requested in her letter
dated September 30, 2004. The settlement officer also requested this
additional information: (1) Documents verifying a reduced assessment
on petitioner's residence; (2) verification of petitioner's and his
family's health problems; and (3) the trust documents and beneficiary
schedules for the trusts referenced in petitioner's letter. The
settlement officer requested this additional information by October
21, 2004, and informed petitioner that she would be making her
determination at that time. Petitioner failed to provide any of the
requested documentation.
On November 23, 2004,
respondent sent petitioner a Notice of Determination Concerning
Collection Action(s) Under Section
6320 and/or 6330
for 1987, 1990, 1991, 1997, 1998, 2000, and 2001 (the determination).
The determination concluded that petitioner was not entitled to
challenge his tax liabilities for 1987, 1990, and 1991, as those
liabilities had been litigated in the Tax Court. In her
determination, the settlement officer also concluded that petitioner
did not qualify for an offer-in-compromise on grounds of doubt as to
liability because, as just noted, petitioner was precluded from
challenging his 1987, 1990, and 1991 liabilities. The settlement
officer concluded that petitioner did not qualify for an
offer-in-compromise on the basis of doubt as to collectibility
because, after taking into consideration petitioner's equity in his
residence, petitioner had the means to fully pay the liabilities.5
Finally, she concluded that because petitioner had failed to comply
with her requests to verify his health claims, he did not qualify for
an offer-in-compromise on the basis of effective tax administration.
Accordingly, no viable collection alternative having been proposed,
the settlement officer sustained respondent's collection action.
In his petition in docket
No. 24528-04L, petitioner challenges respondent's collection action.
The petition states that "The only years which should be in
question are the tax years 1987, 1990 and 1991" and adds:
The only reason that the
tax years 1987, 1990 and 1991 remain unpaid is that despite the
taxpayer's earmarking funds for the years due, the IRS nevertheless
applied those payments instead, in such a haphazard manner so as to
leave the oldest years ongoing and outstanding, thereby increasing
the amount of compounding interest for even greater and extended
periods of time.
In his petition,
petitioner alleges that he sustained an overall net loss for 1987
through 1991 and that loss carrybacks and carryforwards should
eliminate any Federal income tax for these years. He claims to have
already paid the IRS $27,000, representing 36 installment payments of
$750 each.
Request
for Interest Abatement
In his Form 843, Claim
for Refund and Request for Abatement, dated June 4, 2001, petitioner
requested abatement of interest and penalties for 1990 on the
following grounds:
1.IRS failed to work on
1990 tax return for 4 years after compelling production of records in
1992 and not getting to those records until early 1996. Interest
caused by IRS delays.
2.IRS failed to allow
$20,281.67 for health ins. and related health benefits offered by
office on 1040C schedule and limited deduction to modified 1040
Schedule A.
3.IRS by its undue delays
i.e. 4 years - willfully and deliberately deprived taxpayer of 1989
carryfoward loss which would have totally eliminated all taxes
interest and penalties and would have resulted in a zero balance for
1990 i.e. no taxes, penalties or interest. * * *
4. Also in furtherance of
willful misconduct, IRS has not applied payments made on account to
oldest principal balance, but applies payments erratically and
sporatically to more recent balance claimed.
5. Also IRS has ignored
payments made in 1996 designated as payment in full of all prior
alleged outstanding claims.
6. IRS failed to advise
that its results reported to MA
By letter dated April 17,
2002, respondent's technical support manager advised petitioner that
his claim for interest abatement would be denied because there was
"no error or delay relating to the performance of a ministerial
act in processing the examination of your return" and because
the IRS could not consider petitioner's claims for income tax
abatements as part of a claim for abatement of interest under section
6404. By letter dated April 22,
2002, petitioner requested reconsideration by respondent's Office of
Appeals.
On January 9, 2004,
respondent sent petitioner a final determination disallowing
petitioner's request for abatement of interest for 1987, 1990, 1991.6
In his petition in docket
No. 9544-04, petitioner assigns error as follows to respondent's
refusal of his request for abatement of interest:
1. The IRS Stoneham, MA
office wrongfully witheld my records after subpoena for nearly 5
years before returning them to amend/file said returns.
2. If timely returned,
the 1988 and 1989 losses could have be used to eliminate all taxes
for 1987, 1990, and 1991.
3. Penalties were
assessed unfairly given the extraordinary family circumstances during
the period which included death of father (1987); death of mother
(1989); daughter becoming total disabled for life;
4. Associate attempting
suicide (April, '91)
5. 18 year old son -
major kidney surgery (emergency) (1989); and
6. TP being in poor
health and under medical care of MGH for multiple medical problems.*
(1987-'91)
7. *Also not given full
credit for $750. per month POA between 1997-2001.
8. Advised for Tax Court
by IRS agent that penalties nominal and not to be concerned about
interest which was incorrect.
OPINION
A.
Burden
of Proof
The burden of proof is
generally upon petitioner, except as may be otherwise provided by
statute or determined by the Court. See Rule 142(a). For the first
time on reply brief, petitioner contends, with little elaboration,
that respondent has the burden of proof pursuant to section
7491. Because petitioner did not
raise this argument or position in his pretrial memorandum, at trial,
or on opening brief, respondent has had no opportunity to address
petitioner's position. Petitioner's attempt to raise this argument on
reply brief is untimely and prejudicial to respondent. See Estate
of Deputy v. Commissioner [Dec.
55,191(M)], T.C. Memo. 2003-176.
More fundamentally,
section
7491 has no applicability to
these consolidated cases.7
Section
7491(a) operates to shift the
burden of proof to the Commissioner in certain circumstances with
respect to any factual issue relevant to ascertaining the taxpayer's
liability for tax imposed by subtitle A or B. See sec.
7491(a)(1); Rule 142(a)(2). In
one of these consolidated cases, petitioner seeks review of
respondent's failure to abate interest.8
Because interest is not imposed by subtitle A or B but instead is
imposed by section
6601, which is part of subtitle
F, section
7491 does not apply to
petitioner's interest-abatement claim. See Hawksley v. Commissioner
[Dec.
54,124(M)], T.C. Memo. 2000-354,
n.13. In the other consolidated case, petitioner seeks review of
respondent's collection action but, as discussed infra, is precluded
from challenging his underlying tax liability. Accordingly, there is
before us no legitimate factual issue relevant to ascertaining
petitioner's liability for tax imposed by subtitle A or B within the
meaning of section
7491(a).9
Consequently, the burden
of proof remains upon petitioner. See Rule 142(a).
B.
Review
of Collection Action
Section
6321 imposes a lien in favor of
the United States on all property and property rights of a person who
is liable for and fails to pay taxes after demand for payment has
been made. The lien arises when assessment is made and continues
until the assessed liability is paid. Sec.
6322. For the lien to be valid
against certain third parties, the Secretary must file a notice of
Federal tax lien; within 5 business days thereafter, the Secretary
must provide written notice to the taxpayer. Secs.
6320(a), 6323(a).
The taxpayer may request an administrative hearing before an Appeals
officer. Sec.
6320(b)(1). Once the Appeals
officer issues a determination, the taxpayer may seek judicial review
in the Tax Court or a District Court, as appropriate. Secs.
6320(c), 6330(d)(1).
Section
6330(c)(2) prescribes the matters
that a person may raise at an Appeals Office hearing, including
spousal defenses, challenges to the appropriateness of the
Commissioner's intended collection action, and possible alternative
means of collection. The existence or amount of the underlying tax
liability may be contested at an Appeals Office hearing only if the
taxpayer did not receive a notice of deficiency or did not otherwise
have an opportunity to dispute that tax liability. Sec.
6330(c)(2)(B); see Sego v.
Commissioner [Dec.
53,938], 114 T.C. 604, 609
(2000); Goza v. Commissioner [Dec.
53,803], 114 T.C. 176, 180-181
(2000).
If the validity of the
underlying tax liability is properly at issue, we review that issue
de novo. See Sego v. Commissioner, supra at 609-610. Other
issues we review for abuse of discretion. Id.
1. Underlying Tax
Liability
Petitioner challenges his
underlying liabilities for 1987, 1990, and 1991 on the ground that
alleged net operating loss carrybacks and carryforwards from 1988 and
1989 should eliminate any liabilities for these years. Because
petitioner received a notice of deficiency for his tax years 1987
through 1991, he is not entitled to challenge the existence or amount
of his tax liabilities for these years in this collection proceeding.
See secs.
6320(c), 6330(c)(2)(B);
Sego v. Commissioner, supra at 609; Goza v. Commissioner,
supra at 180-181. Moreover, because this Court adjudicated
petitioner's liabilities for these years pursuant to a stipulated
decision in the prior deficiency proceeding, the doctrine of res
judicata prevents petitioner from relitigating in this proceeding his
liabilities for 1987, 1990, and 1991. See Newstat v. Commissioner
[Dec.
55,747(M)], T.C. Memo. 2004-208.
2. Application of
Installment Payments
Petitioner alleges that
for some months he made monthly installment payments of $750 each; he
has been vague and inconsistent in describing the total amount of
installment payments he claims to have made.10
Nevertheless, petitioner argues on brief that if his installment
payments to the IRS had been correctly credited to his account, he
would have no outstanding balance due for any year relevant to these
cases. He contends that respondent erred in failing to follow
"standard accounting practices" so as to apply his payments
"to the oldest principal balance first".
Petitioner has failed to
establish that respondent committed error in this regard. The record
indicates that at least some of petitioner's installment payments
were made before March 13, 2000, when petitioner's 1987, 1990,
and 1991 liabilities became subject to an installment agreement.
Clearly, respondent did not err by applying these pre-March 13, 2000,
installment payments to years other than 1987, 1990, and 1991.
Respondent's records indicate that ultimately petitioner received
credit for 31 payments of approximately $750 each, some of which were
in fact credited against petitioner's 1987 liability. The record
contains no credible evidence to suggest that these installment
payments were improperly credited or that petitioner made additional
payments that were not credited.
3. Collection
Alternatives
Petitioner has not
expressly assigned error to the settlement officer's rejection of his
offer-in-compromise. To the extent that the petition might be
construed to raise such a claim by implication, we hold that the
settlement officer did not abuse her discretion in rejecting
petitioner's offer-in-compromise, inasmuch as petitioner was not
entitled to challenge his underlying tax liabilities for 1987, 1990,
and 1991, see sec. 301.7122-1(b)(1), Proced. & Admin. Regs.;
failed to timely comply with the settlement officer's requests for
complete current financial information to establish doubt as to
collectibility or economic hardship, see sec. 301.7122-1(b)(2) and
(3), Proced. & Admin. Regs.; failed to submit a copy of his 2003
tax return to show the settlement officer that he was in current
compliance with filing requirements, see Rodriguez v. Commissioner
[Dec.
55,168(M)], T.C. Memo. 2003-153;
and altered the standard terms of Form 656 so as to delete the
statement that he was signing the form under penalties of perjury,
see Rev.
Proc. 2003-71, sec. 4.01, 2003-2
C.B. 517 (Form 656 must be signed under penalty of perjury and none
of its standard terms may be stricken or altered).
4. Conclusion
Petitioner has failed to
make a valid challenge to the appropriateness of respondent's
collection action.
C.
Request
for Abatement of Interest
In his petition,
petitioner requests us to abate all interest and penalties for 1987,
1990, and 1991.11
Section
6404(e)(1) provides that the
Commissioner may abate interest on any deficiency or payment of
income, gift, estate, and certain excise taxes to the extent that the
deficiency or any error or delay in payment is attributable to
erroneous or dilatory performance of a ministerial act by an officer
or employee of the Commissioner.12
Such an error or delay in performing a ministerial act is taken into
account only if it is in no significant aspect attributable to the
taxpayer, and only if it occurs after the IRS has contacted the
taxpayer in writing regarding the deficiency or payment.
Section
6404(e) is not intended to be
"used routinely to avoid payment of interest" but rather is
to be "utilized in instances where failure to abate interest
would be widely perceived as grossly unfair." H. Rept. 99-426,
at 844 (1985), 1986-3 C.B. (Vol. 2) 1, 844; S. Rept. 99-313, at 208
(1986), 1986-3 C.B. (Vol. 3) 1, 208.
1. Jurisdiction
We have jurisdiction to
decide whether respondent's failure to abate interest under section
6404(e) was an abuse of
discretion. See sec.
6404(h). Review of petitioner's
challenge to his underlying liability for taxes and penalties is
precluded in these cases, if not by the limitations of section
6404(h), which gives the Tax
Court jurisdiction only with respect to claims for abatement of
interest, see Krugman v. Commissioner [Dec.
53,355], 112 T.C. 230, 237
(1999), then, as previously discussed, by virtue of the doctrine of
res judicata and the operation of section
6330(c)(2)(b).
2. Ministerial Error
Petitioner has failed to
show error or delay by respondent's officers or employees in
performing a ministerial act within the meaning of section
6404(e). A "ministerial act"
means a procedural or mechanical act that does not involve the
exercise of judgment or discretion and occurs during the processing
of a taxpayer's case after all the prerequisites to the act, such as
conferences and review by supervisors, have taken place. See Corson
v. Commissioner [Dec.
55,716], 123 T.C. 202, 207
(2004); sec. 301.6404-2T, Temporary Proced. & Admin. Regs., 52
Fed. Reg. 30163 (Aug. 13, 1987). The exercise of judgment or
discretion, such as the Commissioner's deliberation concerning the
proper application of Federal tax law or other law, is not a
ministerial act. Corson v. Commissioner, supra.
Petitioner alleges that
respondent's Stoneham, Massachusetts, office wrongfully "withheld"
his records for nearly 5 years after obtaining them by summons. The
mere passage of time in such circumstances, however, does not
establish erroneous or dilatory ministerial acts by respondent. See
Hanks v. Commissioner [Dec.
54,574(M)], T.C. Memo. 2001-319.
It was not until 1996
that petitioner finally submitted his delinquent returns for 1987
through 1991. Relatively soon thereafter, respondent issued
petitioner a 30-day letter, proposing adjustments. Petitioner filed
an administrative appeal, and after the notice of deficiency was
issued in 1998, petitioner litigated the deficiency in the Tax Court.
That litigation concluded in 1999; petitioner then entered into an
installment agreement with the IRS. In 2002, petitioner stopped
making installment payments. In these circumstances, we discern no
error or delay by respondent's officers or employees in performing a
ministerial act.
Petitioner alleges that
respondent failed to give him proper credit for installment payments
made. As previously discussed, we find petitioner's contentions in
this regard to be unfounded. In any event, respondent's decision in
this case to apply payments to a particular year's tax liability does
not constitute a ministerial act within the meaning of section
6404(e). See Boyd v.
Commissioner [Dec.
53,717(M)], T.C. Memo. 2000-16.
3. Significant Aspects
of Delay Attributable to Petitioner
Moreover, even if we were
to assume, for the sake of argument, that respondent's officers or
employees improperly delayed performing (or failed to perform) one or
more prescribed ministerial acts, we would nevertheless conclude that
significant aspects of any such failure were attributable to
petitioner, so as to preclude relief under section
6404(e). It was petitioner's own
fault that he failed to file returns for 1987 through 1991, forcing
respondent to take action to secure the filing of the returns.
Because of petitioner's lack of cooperation, respondent eventually
resorted to summoning petitioner's records. As previously noted, it
was not until 1996 that petitioners finally submitted his delinquent
returns for 1987 through 1991. Notably, petitioner's accompanying
cover letter attributed the late submission to his health problems
rather than to any error or delay by respondent's employees;
petitioner's letter thanked the IRS agents for their "professionalism
and patience".
In sum, petitioner has
not shown that respondent abused his discretion in failing to comply
with petitioner's request for interest abatement.
We have considered all
arguments made by petitioner and have found those arguments not
discussed herein to be moot or without merit.13
To reflect the foregoing,
Decisions will be
entered for respondent.
1
Unless otherwise indicated, all section references are to the
Internal Revenue Code. All Rule references are to the Tax Court Rules
of Practice and Procedure.
2
The record does not contain copies of any installment agreements or
any detailed information about them. It is unclear from the record
whether respondent and petitioner entered into new installment
agreements on these various dates or whether existing installment
agreements were modified to include additional liabilities on these
various dates.
3
With respect to petitioner's 1987 year, respondent's transcripts of
petitioner's account show installment payments of $750 each on July
30 and Aug. 30, 2000, Feb. 24, Mar. 8, and June 1, 2001, and Mar. 6,
2002. With respect to petitioner's 1994 year, respondent's
transcripts of petitioner's account show 18 installment payments of
$750 each (except for one of $726) between Dec. 1, 1999, and Feb. 5,
2002. With respect to petitioner's 1995 year, respondent's
transcripts of petitioner's account show seven installment payments
of $750 each (except for one of $708) between June 27, 1999, and Jan.
3, 2002.
4
It appears that petitioner's reference to his request for "equitable
relief" refers to his Form 843, Claim for Refund and Request for
Abatement, filed on June 4, 2001, as discussed below.
5
The settlement officer determined that petitioner had $192,892 of
equity in his residence, on the basis of a "forced sale value"
of $508,880, reduced by a $123,096 encumbrance on the real estate and
further reduced by 50 percent to reflect petitioner's joint ownership
with his wife.
6
Although petitioner's Form 843 requested interest abatement for only
1990, it appears that respondent treated petitioner's Form 843 as a
request for interest abatement for 1987, 1990, and 1991.
7
Moreover, petitioner failed to establish that sec.
7491
was in effect at any time relevant to these cases. Sec.
7491
is effective with respect to court proceedings arising from
examinations commenced after July 22, 1998. See Internal Revenue
Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3001(c)(2), 112 Stat. 727. We question whether the "examination"
in this case commenced after July 22, 1998, as required for sec.
7491
to apply. It appears obvious that at least with respect to 1987,
1990, and 1991, the examination commenced well before July 22,
1998.
8
Petitioner also appears to seek abatement of taxes and penalties
under sec.
6404.
As discussed more fully infra,
we lack jurisdiction over those claims.
9
Even if we were to assume, for purposes of argument, that sec.
7491
was in effect for some relevant time and that petitioner had
legitimately raised some factual issue as to which sec.
7491
might be relevant, petitioner has failed to establish that he has met
the prerequisites for shifting the burden of proof under sec.
7491(a)(2).
See Higbee
v. Commissioner
[Dec.
54,356],
116 T.C. 438 (2001) (taxpayers bear the burden of proving that the
requirements of sec.
7491
are met). For instance, for the burden to shift to the Commissioner,
the taxpayer must, among other things, cooperate with reasonable
requests by the Commissioner for "witnesses, information,
documents, meetings, and interviews". Sec.
7491(a)(2)(B).
Petitioner has introduced no evidence to show that he satisfies this
requirement. To the contrary, the evidence in the record indicates
that petitioner failed to comply fully with respondent's requests for
information in a timely fashion, even after respondent issued a
summons.
10
In his petition filed in docket No. 24528-04L, petitioner alleges
that his installment payments totaled $27,000. In his pretrial
memorandum, petitioner states that he made installment payments
totaling "more than $24,000". On opening brief, petitioner
asserts that his installment payments totaled $29,503. On reply
brief, petitioner asserts that his installment payments were
"$27,000. plus".
11
On brief, petitioner seems to suggest that he is also requesting
abatement of income tax for 1987, 1990, and 1991 and may be
requesting abatement of interest, taxes, and penalties for other
years as well. We decline to consider these issues raised for the
first time on brief, for to do so would result in surprise and
prejudice to respondent. See Sundstrand
Corp. v. Commissioner
[Dec.
47,172],
96 T.C. 226, 346-347 (1991); Seligman
v. Commissioner
[Dec.
41,876],
84 T.C. 191, 198 (1985), affd. [86-2
USTC ¶9605]
796 F.2d 116 (5th Cir. 1986). In any event, in the administrative
proceeding, petitioner did not seek interest abatement for years
other than 1987, 1990, and 1991; in this proceeding, petitioner has
alleged no facts or legal basis to support any claim for abatement of
interest for years other than 1987, 1990, and 1991. As discussed
infra,
review of petitioner's challenge to taxes and penalties is precluded
in these cases.
12
In 1996, sec.
6404(e)
was amended to permit abatement of interest for "unreasonable"
error or delay resulting from the performance of ministerial or
"managerial" acts. Taxpayer Bill of Rights 2, Pub. L.
104-168, sec. 301(a)(1) and (2), 110 Stat. 1457 (1996). The amended
provision applies to tax years beginning after July 30, 1996. Id.
sec. 301(c). As previously discussed, in neither the administrative
proceeding nor this proceeding has petitioner properly challenged
respondent's failure to abate interest for years other than 1987,
1990, and 1991. Therefore, the amendment is inapplicable to the
instant cases. We intend no inference that we would reach a different
result in these cases if the amendment were applicable.
13
Although petitioner alleges in his petition that an IRS agent advised
him not to be concerned about interest, which was "incorrect",
petitioner has not expressly raised this issue at trial or on brief.
We deem petitioner to have abandoned any such issue. In any event,
the record contains no evidence corroborating this claim.
Roger
and Lora Carter v. Commissioner.
Dkt.
No. 20719-04L , TC Memo. 2007-25, 93 TCM 861, February 6,
2007.
[Appealable, barring stipulation to the contrary, to
CA-9. --CCH.]
[Code
Secs. 6330
and 7122]
Compromises:
Collection actions. --
The IRS's rejection of an
offer-in-compromise from investors in a cattle-breeding tax shelter
was not arbitrary, capricious or without sound basis in fact or law,
and the IRS was allowed to proceed with its collection action. The
IRS did not abuse its discretion in rejecting the offer despite the
taxpayers' claim of special circumstances or economic hardship. The
IRS was not required to address every aspect of the taxpayers'
special circumstances in the notice of determination and its
calculation of the taxpayers' reasonable collection potential far
exceeded the taxpayers' offer. In addition, the IRS was not required
to accept the taxpayers' offer based on considerations of public
policy or equity. The longstanding nature of the taxpayers' case did
not require acceptance of the offer, the IRS could rely on an example
in the Internal Revenue Manual that was similar although not
identical to the taxpayers' case, and the IRS did not have to
consider the taxpayers' claim that they were victims of fraud.
Finally, the taxpayers' other arguments regarding compromise of
penalties and interest, the IRS's alleged failure to provide the
court with sufficient information, the IRS's refusal to delay the
Code
Sec. 6330 hearing, and the IRS's
alleged failure to balance the need for efficient tax collection with
the concern that collection be no more intrusive than necessary were
rejected. --CCH.
Terri A. Merriam, for
petitioners; Gregory M. Hahn and Thomas N. Tomashek, for respondent
MEMORANDUM
FINDINGS OF FACT AND OPINION
HAINES, Judge:
Petitioners 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 determination) for
1981 through 1988.1
Pursuant to section
6330(d), petitioners seek 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
Petitioners resided in
Corbett, Oregon, when they filed their petition. Petitioners have
been married for 33 years, have two adult children, and one
grandchild. At the time of trial, petitioner Roger Carter (Mr.
Carter) was 55 years old and petitioner Lora Carter (Mrs. Carter) was
53. Mr. Carter has a high school education and is currently employed
as a supervising electrician. Mrs. Carter has a degree as a dental
assistant, but has worked only sporadically since 1974. At the time
of petitioners' section
6330 hearing, Mrs. Carter worked
at Lowe's, a home improvement store.
In 1984, petitioners
became partners in Shorthorn Genetic Engineering, Ltd. 1984-4 (SGE
84-4), a cattle breeding partnership 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 1998,
Hoyt's enrolled agent status was revoked. Hoyt was convicted of
various criminal charges in 2000.5
Beginning in 1984 until
at least 1988, petitioners claimed losses and credits on their
Federal income tax returns arising from their involvement in the Hoyt
partnerships. Petitioners also carried back unused investment credits
to 1981, 1982, and 1983. As a result of these losses and credits,
petitioners reported overpayments of tax for 1981 through 1988 and
received refunds in the amounts claimed.
Respondent issued Notices
of final partnership administrative adjustments (FPAAs) to SGE 84-4
for its 1984 through 1986 taxable years.6
After completion of the partnership-level proceedings, respondent
sent petitioners a Form 4549A-CG, Income Tax Examination Changes,
reflecting changes made for petitioners' 1981 through 1988 tax years
on July 30, 1998. Respondent determined deficiencies in petitioners'
income tax of $8,098, $3,405, $941, $8,421, $14,034, $7,714, $3,239,
and $413, respectively.
On August 17, 2001,
respondent issued petitioners a Final Notice --Notice of Intent to
Levy and Notice of Your Right to a Hearing (final notice). The final
notice included petitioners' outstanding tax liabilities for 1981
through 1988.
On September 14, 2001,
petitioners submitted a Form 12153, Request for a Collection Due
Process Hearing. Petitioners argued that the proposed levies were
inappropriate and that an offer-in-compromise should be accepted.
On May 9, 2002,
petitioners submitted a letter (the May 2002 letter) to respondent's
Appeals Office outlining their position with respect to the proposed
collection action. Petitioners alleged that they were victims of
Hoyt's fraud and asserted various arguments regarding the
appropriateness of an offer-in-compromise.
On October 31, 2003,
petitioners' case was assigned to Settlement Officer Linda Cochran
(Ms. Cochran).
On February 13, 2004,
petitioners submitted a letter (the February 2004 letter) to Ms.
Cochran. Petitioners described their involvement in the Hoyt
partnerships and made various assertions regarding equity and public
policy considerations. Petitioners attached several exhibits to the
February 2004 letter.
On March 8, 2004, Ms.
Cochran sent petitioners a letter scheduling a telephone section
6330 hearing for March 31, 2004.
Petitioners' representative, Terri A. Merriam (Ms. Merriam),
requested that the hearing be delayed due to the number of
Hoyt-related cases her law firm was handling. Ms. Cochran did not
change the date of the hearing, but extended petitioners' deadline
for producing information to be considered to May 14, 2004.
On May 14, 2004,
petitioners submitted to Ms. Cochran a Form 656, Offer in Compromise,
a Form 433-A, Collection Information Statement for Wage Earners and
Self-Employed Individuals, and three letters (the May 14, 2004
letters) explaining the offer amount and other payment considerations
and setting out in detail petitioners' position regarding the
offer-in-compromise. Petitioners attached several exhibits to the May
14, 2004 letters.
The Form 656 indicated
that petitioners were seeking an offer-in-compromise based on either
doubt as to collectibility with special circumstances or effective
tax administration. Petitioners offered to pay $99,851 to compromise
their outstanding tax liabilities for 1981 through 1996.7
At the time of the section
6330 hearing, $187,041 had been
assessed against petitioners with respect to their 1981 through 1996
tax years.
On the Form 433-A,
petitioners listed the following assets:
Asset
Current Balance/
Loan Balance
Value
Checking
account $5,226 n/a
Savings
accounts 322 n/a
Mutual
fund 12,167
-0-
Cash
value of life insurance policy 1,191
-0-
1997
Ford Expedition 7,650
-0-
1978
Ford F-250 De minimis
-0-
1964
Ford Falcon De minimis
-0-
House
220,200
$82,009
Personal
effects 4,000 -0-
Total
250,756
82,009
The reported value of the
house reflected an 80-percent "quick-sale" value.
Petitioners also reported that Mr. Carter had a pension fund valued
at $123,591, but indicated that it was not currently accessible.
Petitioners reported
gross monthly income of $4,458, representing Mr. Carter's wages of
$3,496, Ms. Carter's wages of $827, and other income of $135.8
Petitioners also reported the following monthly living expenses:
Expense item
Monthly Expense
Housing
$1,648
Transportation
390
Health
care 212
Taxes
1,210
Life
insurance 56
Attorney's
fees 299
Other
business-related expenses 176
Total
3,991
In one of the May 14,
2004 letters, petitioners state that they are offering to pay $99,851
"for all Hoyt related years to be paid in one lump sum payment.
The amount accounts for all the tax liability for 1981 through 1998,
and regular interest through April 15, 1993." The letter
included a description of petitioners' medical conditions. Mr. Carter
was diagnosed with a degenerative back problem in 1969 and has
problems with both knees and one hip.9
Mrs. Carter has a congenital birth defect that affects kidney and
bladder function, and she also suffers from collagenous colitis,
sarcoidosis, Wegner's disease, and atrial fibrillation. The letter
also included a "retirement analysis", outlining the need
for home repairs and the likelihood of increased housing and medical
costs as petitioners age.
In the remaining letters,
petitioners alleged that their case was a "longstanding"
case and argued that interest should be compromised due to the
longstanding nature of the case.
On May 21, 2004,
petitioners submitted another letter to Ms. Cochran, which included
42 exhibits not previously provided.
On September 27, 2004,
respondent issued petitioners a notice of determination. In
evaluating petitioners' offer-in-compromise, respondent made the
following changes to the values of assets reported by petitioners on
the Form 433-A: (1) Respondent determined that the house was worth
$275,250 instead of $220,200 (the 80-percent quick-sale value
reported by petitioners) and reduced petitioners' net realizable
equity by$82,009 to $193,241 to reflect the amount outstanding on the
first and second mortgages; (2) respondent included the quick-sale
value of the 1997 Ford Expedition ($6,120) instead of the fair market
value petitioners reported; and (3) respondent did not include the
reported value of petitioners' personal effects. Respondent did not
include the value of Mr. Carter's pension but instead used the
pension as a source of future income, as described below. Respondent
concluded that petitioners had a total net realizable equity of
$218,267.
Using Mr. Carter's Form
W-2, Wage and Tax Statement, from 2003, respondent adjusted Mr.
Carter's gross monthly income upward to $4,941. Based on
representations made by petitioners, respondent determined that Mr.
Carter would retire in February 2008 and thus included 41 months of
Mr. Carter's monthly wages in calculating the amount collectible from
future income.10
Based on the information petitioners provided, respondent determined
that upon retirement Mr. Carter would receive $5,170 per month from
his pension. Thus, respondent included 45 months of Mr. Carter's
pension in calculating the amount collectible from future income.
Using Mrs. Carter's pay
stubs from the first two months of 2004, respondent adjusted Mrs.
Carter's gross monthly income upward to $916. Respondent included
only 41 months of Mrs. Carter's future income.
Respondent accepted
petitioners' monthly expenses as reported but adjusted their housing
and utilities expense and tax expense downward to $1,170 and $915,
respectively. Regarding the possible future increases in expenses
outlined in petitioners' May 14, 2004 letters, 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 petitioners' monthly income and expenses, respondent determined
that $162,439 was collectible from petitioners' future income.
Respondent concluded that petitioners had the ability to pay
$380,706.
Because petitioners had
the ability to pay substantially more than the amount offered,
respondent rejected their offer-in-compromise based on doubt as to
collectibility with special circumstances. Respondent also rejected
petitioners' effective tax administration offer-in-compromise based
on economic hardship because they had the ability to pay their tax
liability in full. Finally, respondent rejected petitioners'
effective tax administration offer-in-compromise based on public
policy or equity ground because the case "fails to meet the
criteria for such consideration".
Respondent concluded that
petitioners did not offer an acceptable collection alternative, that
all requirements of law and administrative procedure had been met,
and that the proposed collection action could proceed.
In response to the notice
of determination, petitioners filed a petition with this Court on
October 29, 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
[2006-1
USTC ¶50,326], 447 F.3d 706,
712 (9th Cir. 2006), affg. [Dec.
55,514(M)] 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.11
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 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 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.
Petitioners proposed an
offer-in-compromise based alternatively on doubt as to collectibility
with special circumstances or effective tax administration.
Petitioners offered to pay $99,851 to compromise their outstanding
tax liabilities for 1981 through 1996, which totaled $187,041 at the
time of the section
6330 hearing.12
Petitioners argued that collection of the full liability would create
economic hardship and would undermine public confidence that the tax
laws are being administered in a fair and equitable manner.
Respondent determined that petitioners' reasonable collection
potential was $380,706 and that their 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 [Dec.
53,938], 114 T.C. 604, 610
(2000); Goza v. Commissioner [Dec.
53,803], 114 T.C. 176, 182
(2000). This standard does not ask us to decide whether in our own
opinion petitioners' 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 [Dec.
53,206], 112 T.C. 19, 23 (1999);
Keller v. Commissioner [Dec.
56,587(M)], T.C. Memo. 2006-166;
Fowler v. Commissioner [Dec.
55,689(M)], 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 considerations of public policy or equity), we consider
petitioners' separate grounds for their offer-in-compromise together.
See Murphy v. Commissioner [Dec.
56,232], 125 T.C. 301, 309, 320
n.10 (2005), affd. 469 F.3d 27 (1st Cir. 2006); Barnes v.
Commissioner [Dec.
56,570(M)], T.C. Memo. 2006-150.
A.
Economic
Hardship
Petitioners assert that
Ms. Cochran abused her discretion by rejecting their
offer-in-compromise because "There is no indication that SO
Cochran gave any substantive consideration to Petitioners'
demonstrated special circumstances or that they would experience a
hardship if required to make a full-payment." In support of this
assertion, petitioners argue: (1) Ms. Cochran failed to discuss
petitioners' special circumstances in the notice of determination;
(2) Ms. Cochran erroneously determined petitioners' future income and
failed to take into account their future expenses; and (3) Ms.
Cochran improperly valued petitioners' 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 fulltime 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 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 [2006-2
USTC ¶50,403], 454 F.3d 782,
786 (8th Cir. 2006), affg. [Dec.
55,961] 124 T.C. 165 (2005); see
also Barnes v. Commissioner, supra. Nevertheless, we address
petitioners' arguments.
1. Discussion of
Special Circumstances in the Notice of Determination
Petitioners argue that
Ms. Cochran failed "to follow proper procedure by discussing
Petitioners' special circumstances, what equity was considered in
relation to their special circumstances, and how the special
circumstances affected her determination of their ability to pay."
Petitioners infer that, because the special circumstances were not
discussed in detail in the notice of determination, Ms. Cochran
failed to adequately take their 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 petitioners 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 was not an abuse of discretion.
2. Petitioners' Income
and Future Expenses
Petitioners assert that
Ms. Cochran erroneously determined their future income and expenses
by: (1) Considering 86 months of petitioners' future income instead
of 48 months; and (2) failing to adequately consider their age,
health, retirement status, medical costs, and the likelihood of
future increases in medical and housing costs. Petitioners' 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.
Petitioners made a cash
offer, but Ms. Cochran used 86 months of future income.13
At trial, Ms. Cochran acknowledged that she should have used only 48
months of future income. Ms. Cochran recomputed petitioners'
reasonable collection potential using 48 months and determined that
it was $304,782, instead of $380,706, as 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, petitioners' reasonable collection potential was greater
than their offer amount ($99,851). We find that Ms. Cochran's error
did not amount to an abuse of discretion because, even when the error
is corrected, petitioners' reasonable collection potential of
$304,782 far exceeds their offer amount of $99,851.
With regard to age,
health, and retirement status, petitioners' argument is not supported
by the record. On their Form 433-A, petitioners reported monthly
medical expenses of $212. In their May 14, 2004, letter describing
their offer amount, petitioners represented that Mr. Carter would
retire at age 58. While they outlined Mrs. Carter's medical
conditions, petitioners gave no indication as to the likelihood of
her retirement.
Ms. Cochran accepted
petitioners' monthly medical expenses without change. Ms. Cochran
also accepted petitioners' representation that Mr. Carter would
retire at 58, and thus considered only 41 months of his future income
from wages. Despite the lack of an estimated retirement date for Mrs.
Carter, Ms. Cochran considered only 41 months of Mrs. Carter's future
income from wages.14
Given her acceptance of the medical expenses as reported and of only
41 months of petitioners' future income from wages, we reject
petitioners' assertion that Ms. Cochran failed to consider each
petitioner's age, health, retirement status, and current medical
costs.
Petitioners' argument is
also unavailing with regard to the likelihood of future increases in
medical and housing costs. Petitioners did not inform Ms. Cochran
with any specificity that they would have to pay a greater amount of
unreimbursed medical expenses in the future, or that their housing
expenses would increase. Instead, they 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 petitioners presented, but 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.
Petitioners also assert
that Ms. Cochran abused her discretion by using Mr. Carter's pension
in her calculation of petitioners' future income. Petitioners argue
that they must retain the money received from the pension to pay for
future increases in expenses. As discussed above, petitioners'
assertions regarding future expenses are speculative and unsupported,
and it was not arbitrary or capricious for Ms. Cochran to ignore such
costs. The use of Mr. Carter's monthly pension payments in
calculating petitioners' reasonable collection potential was not
arbitrary or capricious.
Petitioners also raise
challenges to various other determinations made by Ms. Cochran,
including: (1) The increase of petitioners' wages from the amounts
reported; (2) the reduction of their housing expense and tax expense;
and (3) the disallowance of $600 in monthly insurance payments.15
We need not discuss in detail these and other minor disputes raised
by petitioners. Even assuming arguendo that petitioners' income,
expenses, and value of assets should have been accepted as reported,
we would not find that Ms. Cochran abused her discretion in rejecting
petitioners' offer-in-compromise. Ms. Cochran testified that, had she
accepted the income, expenses, and value of assets as reported,
petitioners' reasonable collection potential would have been
$173,406. This amount includes only 80 percent of the value of
petitioners' house, discussed in more detail below, and does not
include the value of any future pension payments.
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
amount is less than petitioners' 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 petitioners' ability
to pay based on their own calculations.
3. The Value of
Petitioners' House
Petitioners argue that
Ms. Cochran improperly valued their house. Petitioners also argue
that Ms. Cochran failed to take into consideration the need for
repairs. Petitioners' arguments are not persuasive.
On their Form 433-A,
petitioner reported that their house had an estimated 80-percent
quick-sale value of $220,200. Ms. Cochran increased the house's value
to reflect its 100-percent value, $275,250. Petitioners argue that,
if there was a dispute over value, Ms. Cochran should have hired a
professional valuation expert. Petitioners argument is without merit
because there was no dispute over value. Ms. Cochran accepted the
value reported by petitioners, only adjusting it to reflect the
house's 100 percent value. Petitioners offer no support for their use
of an 80-percent quick-sale value. We find that Ms. Cochran's use of
100 percent of the house's value was not arbitrary or capricious.
In one of the May 14,
2004, letters, petitioners listed a variety of problems with their
house. However, petitioners did not provide any supporting
documentation regarding the need for or the cost of repairs, but
instead they invited Ms. Cochran to view the house in person.
Petitioners believe that, despite the lack of supporting
documentation, Ms. Cochran abused her discretion by not factoring in
the cost of repairs. Petitioners assert that, if Ms. Cochran
questioned petitioners' representations, she could have requested
more information or accepted petitioners' invitation to view the
house in person. Given the voluminous nature of the information
provided to Ms. Cochran, we do not believe that she was under an
obligation to request more information or to view the house in
person. The burden was on petitioners to establish that they were
entitled to an offer-in-compromise. Petitioners cannot shift this
burden by simply inviting Ms. Cochran to request more information or
to view the house in person.
4. Encouraging
Voluntary Compliance With the Tax Laws
We are also mindful that
any decision by Ms. Cochran to accept petitioners'
offer-in-compromise due to doubt as to collectibility with special
circumstances or effective tax administration based on economic
hardship must be viewed against the backdrop of section
301.7122-1(b)(3)(iii), Proced. & Admin. Regs.16
See Barnes v. Commissioner, [Dec.
56,570(M)], T.C. Memo. 2006-150.
That section requires that Ms. Cochran deny petitioners'
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 petitioners would suffer economic
hardship, a finding that we decline to make, we would not find that
Ms. Cochran's rejection of petitioners' offer-in-compromise was an
abuse of discretion. As discussed below (in our discussion of
petitioners' "equitable facts" argument), we conclude that
acceptance of petitioners' offer-in-compromise would undermine
voluntary compliance with tax laws by taxpayers in general.
B.
Public
Policy and Equity Considerations
Petitioners assert 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 their assertion, petitioners
argue: (1) The longstanding nature of this case justifies acceptance
of the offer-in-compromise; (2) respondent's reliance on an example
in the IRM was improper; and (3) respondent failed to consider
petitioners' other "equitable facts".
1. Longstanding Case
Petitioners assert that
the legislative history requires respondent to resolve "longstanding"
cases by forgiving penalties and interest which would otherwise
apply. Petitioners argue that, because this is a longstanding case,
respondent abused his discretion by failing to accept their
offer-in-compromise.
Petitioners' argument is
essentially the same considered and rejected by the Court of Appeals
for the Ninth Circuit in Fargo v. Commissioner [2006-1
USTC ¶50,326], 447 F.3d at
711-712. See also Keller v. Commissioner [Dec.
56,587(M)], T.C. Memo. 2006-166;
Barnes v. Commissioner, supra. We reject petitioners' argument
for the same reasons stated by the Court of Appeals. We add that
petitioners' counsel participated in the appeal in Fargo , as
counsel for the amici. On brief, petitioners 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., petitioners), 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
petitioners' longstanding case argument was not arbitrary or
capricious.
2. The IRM Example
Petitioners argue that
respondent erred when he determined that they were not entitled to
relief based on the second example in IRM section 5.8.11.2.2.
Petitioners assert that many of the facts in this case were not
present in the example, and, therefore, any reliance on the example
was misplaced. Petitioners' argument is not persuasive.
IRM section 5.8.11.2.2
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 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 petitioners' case is similar to the example:
It's similar to the case
at hand in that it involved old periods, 1983 periods. It's similar
in the sense that * * * it was a TEFRA proceedings [sic] involving an
audit of a partnership. The taxpayer was offered and rejected a
settlement officer [sic] from IRS. After several years of litigation,
the partnership ended up in Tax Court. * * * FPAAs were issued. The
taxpayer now offered to compromise all the penalties and interest on
terms more favorable than those originally contained in the
settlement offer17
and that there --the taxpayer raised issues about the TMP's actions
on behalf of the taxpayer.
We agree with Ms. Cochran
that the example presents circumstances similar to those in
petitioners' case.
Petitioners are correct
in asserting that not all of the facts in their 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 petitioners' case,
respondent's reliance on that example was not arbitrary or
capricious.
3. Petitioners' Other
"Equitable Facts"
Petitioners argue that
respondent abused his discretion by failing to consider the other
"equitable facts" of this case. Petitioners' "equitable
facts" include reference to: (1) Petitioners' reliance on Bales
v. Commissioner [Dec.
46,099(M)], T.C. Memo.
1989-568;18
(2) petitioners' reliance on Hoyt's enrolled agent status; (3) Hoyt's
criminal conviction; (4) Hoyt's fraud on petitioners; and (5) other
letters and cases. The basic thrust of petitioners' argument is that
they were defrauded by Hoyt and that, if they were held responsible
for penalties and interest incurred as a result of their investment
in a tax shelter, it would be inequitable and against public policy.
Petitioners' 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. 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, petitioners' 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 [Dec.
56,587(M)], T.C. Memo. 2006-166;
Barnes v. Commissioner [Dec.
56,570(M)], T.C. Memo. 2006-150.
Of course, the examples
in the regulations are not meant to be exhaustive, and petitioners
have a more sympathetic case than the taxpayers in Fargo v.
Commissioner [2006-1
USTC ¶50,326], 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, Ninth, and Tenth
Circuits from affirming our decisions to that effect. See Hansen
v. Commissioner, 471 F.3d 1021 (9th Cir. 2006), affg. [Dec.
55,812(M)] T.C. Memo. 2004-269;
Mortensen v. Commissioner, 440 F.3d 375 (6th Cir. 2006), affg.
[Dec.
55,824(M)] T.C. Memo. 2004-279;
Van Scoten v. Commissioner, 439 F.3d 1243 (10th Cir. 2006),
affg. [Dec.
55,818(M)] T.C. Memo. 2004-275.
Ms. Cochran testified
that she considered all of Ms. Merriam's and petitioners' assertions,
including the numerous letters and exhibits. Nevertheless, Ms.
Cochran determined that petitioners did not qualify for an
offer-in-compromise.
The mere fact that
petitioners' "equitable facts" did not persuade respondent
to accept their 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 petitioners'
case. We find that respondent's determination that the "equitable
facts" did not justify acceptance of petitioners'
offer-in-compromise was not arbitrary or capricious, and thus it was
not an abuse of discretion.
We also find that
compromising petitioners' 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 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.
Petitioners'
Other Arguments
1. Compromise of
Penalties and Interest in an Effective Tax Administration
Offer-in-Compromise
Petitioners advance a
number of arguments focusing on their assertion that respondent
determined that penalties and interest could not be compromised in an
effective tax administration offer-in-compromise. Petitioners argue
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.
Petitioners' 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 petitioners offered to compromise their tax
liability was acceptable. As addressed above, respondent's
determination that the facts and circumstances of petitioners' case
did not warrant acceptance of their 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
Petitioners argue 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." Petitioners'
argument is without merit.
Generally, a taxpayer
bears the burden of proving the Commissioner's determinations
incorrect. Rule 142(a)(1); Welch v. Helvering [3
USTC ¶1164], 290 U.S. 111,
115 (1933).19
The burden was on petitioners 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 Information
Petitioners argue that
Ms. Cochran abused her discretion by not allowing their counsel
additional time to prepare for the section
6330 hearing and to submit
additional information. Once the section
6330 hearing was scheduled, Ms.
Cochran refused petitioners' request to delay the hearing. However,
Ms. Cochran did extend the deadline for submission of information.
While petitioners wanted
to delay the section
6330 hearing, they do not allege
that they were unable to adequately prepare for the hearing.
Additionally, petitioners have not identified any documents or other
information that they believe Ms. Cochran should have considered but
that they were unable to produce because of the deadline for
submission. Given the thoroughness and the amount of information
submitted, it is unclear why petitioners needed additional time. We
do not believe that Ms. Cochran abused her discretion by establishing
a timeframe for the section
6330 hearing and the submission
of information.
4. Efficient
Collection Versus Intrusiveness
Petitioners argue 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). Petitioners'
argument is not supported by the record.
Petitioners have an
outstanding tax liability. In their section
6330 hearing, petitioners
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 petitioners' legitimate concern
that collection be no more intrusive than necessary.
D.
Conclusion
Petitioners have 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.
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.
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
Petitioners also dispute respondent's determination that they are
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
[Dec.
56,816(M)],
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 petitioners' 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
Petitioners were also partners in other Hoyt-related partnerships
identified as DSBS 1990-5, HS Truck, TBS 1989-3, and TBS. The details
of these partnerships are not in the record. Though unclear, it
appears that all adjustments made to petitioners' income tax
liability for the years in issue arose from their involvement in SGE
84-4 only.
5
Petitioners ask 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). Petitioners
are not asking the Court to take judicial notice of facts that are
not subject to reasonable dispute. Instead, petitioners are 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. Petitioners have failed to identify any clear
inconsistencies between respondent's current position and his
position in any previous litigation.
6
SGE 84-4 was also issued an FPAA for 1987. However, it does not
appear that the adjustments made to petitioners' income tax liability
for the 1981-88 tax years arose from partnership level proceedings
relating to the 1987 FPAA.
7
The details of petitioners' 1989-1996 taxable years are not in the
record.
8
The Form 433-A in evidence does not include page 6, which would
include "Section 9, Monthly Income and Expense Analysis"
and the signature line. Thus, our findings of fact regarding
petitioners' monthly income and expenses come from representations
made by respondent in the Notice of Determination.
9
Mr. Carter also broke his back in a work-related accident on June 21,
2005, but by the time of trial, he was back to working full-time.
10
Respondent determined that there were 86 months left on the
collection statute, and thus used 41 months of petitioners'
preretirement income and 45 months of petitioners' postretirement
income to calculate the amount collectible from future income.
11
While petitioners contest their liability for sec.
6621(c)
interest, see supra
note 2, they did not raise doubt as to liability as a basis for their
offer-in-compromise.
12
The proposed collection action related to petitioners' outstanding
tax liability for 1981-88 only. Petitioners estimated that their
outstanding tax liability for 1981-88 was $143,911. However,
petitioners sought to compromise their outstanding tax liability for
not only 1981-88, but also for 1989-96. To accurately compare their
offer amount to their outstanding tax liability, we must therefore
consider the total assessed amount for 1981-96, and not for only
1981-88.
13
Ms. Cochran included 41 months of petitioners' future wage income and
45 months of Mr. Carter's future monthly pension payments.
14
At the time of the section
6330
hearing, Mrs. Carter was still working. However, at trial, Mrs.
Carter testified that she was forced to quit work shortly after the
section
6330
hearing due to her medical conditions and does not plan to return to
work. Ms. Cochran could not have considered that Mrs. Carter was
forced to stop working because this did not occur until after the
hearing.
15
The monthly insurance payments were not reported by petitioners on
their Form 433-A, but instead were discussed in their May 14, 2004,
letter regarding the offer amount. Petitioners were covered by
insurance through Mr. Carter's employment. However, they would not be
covered once he retired. Apparently, the $600 payment reflects
petitioners' estimate of their monthly insurance payments once Mr.
Carter retires.
16
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; see also Barnes
v. Commissioner
[Dec.
56,570(M)],
T.C. Memo. 2006-150.
17
Mr. Carter testified that they received a settlement offer from
respondent in or around 1990. Mr. Carter could not remember the
details of the settlement offer, nor was the offer in the record.
18
Bales
v. Commissioner
[Dec.
46,099(M)],
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. [Dec.
55,812(M)]
T.C. Memo. 2004-269; Mortensen
v. Commissioner,
440 F.3d 375, 390-391 (6th Cir. 2006), affg. [Dec.
55,824(M)]
T.C. Memo. 2004-279; Van
Scoten v. Commissioner,
439 F.3d 1243, 1254-1256 (10th Cir. 2006), affg. [Dec.
55,818(M)]
T.C. Memo. 2004-275.
19
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 petitioners' 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.
Irving
and Elaine Steinberg v. Commissioner.
Dkt.
No. 14135-05L , TC Memo. 2006-217, October 16, 2006.
[Appealable,
barring stipulation to the contrary, to CA-9. --CCH.]
[Code
Sec. 6330]
Levy:
Offer-in-compromise: Substantiation: Abuse of discretion. --
The IRS's Appeals Office
did not abuse its discretion by issuing a notice of determination
rejecting a married couple's offer-in-compromise and sustaining the
IRS's levy notice. The Appeals office acted appropriately based on
information it received during its consideration of the taxpayers'
appeal; it was not required to consider documentation that had been
requested by the Appeals officers but that was not timely provided by
the taxpayers. Furthermore, certain expenses that the taxpayers
submitted were not considered because they were new issues. --CCH.
Gerald W. Kelly, Barry H.
Cantor, and Cheryl R. Frank, for petitioners; Derek W. Kaczmarek, for
respondent.
MEMORANDUM
OPINION
SWIFT, Judge: This matter
is before us under Rule 121 on respondent's motion for summary
judgment.
Unless otherwise
indicated, all section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
Background
At the time the petition
was filed, petitioners resided in Las Vegas, Nevada.
For 1990, 1991, 1992, and
1993, petitioners filed with respondent their joint Federal income
tax returns. For these years petitioners still owe respondent
approximately $750,000 in cumulative total Federal income taxes,
including accrued interest.
In November of 2003,
petitioners sold their home and purchased for $589,000 a new home in
an expensive neighborhood of Las Vegas, Nevada, paying $122,000 as a
cash downpayment. None of the proceeds from the 2003 sale of
petitioners' prior home was used by petitioners to make a payment on
petitioners' outstanding Federal income taxes for 1990, 1991, 1992,
and 1993.
On March 8, 2004, in an
effort to collect petitioners' unpaid Federal income taxes,
respondent mailed to petitioners a notice of intent to levy on
petitioners' property.
On March 15, 2004,
petitioners filed a request for a hearing with respondent's Appeals
Office challenging respondent's proposed levy and seeking approval of
an offer-in-compromise, in which petitioners offered to make a total
payment of $77,000 with regard to their Federal income taxes for 1990
through 1993.
Beginning September 9,
2004, petitioners, petitioners' attorney, and respondent held a
series of phone calls and written correspondence relating to
petitioners' Appeals Office hearing. Some financial information was
submitted by petitioners, and respondent's Appeals officer reviewed
that material and asked petitioners for additional information.
Petitioners submitted
some additional financial information to respondent's Appeals Office,
but certain financial information that had been requested by
respondent's Appeals officer was not provided by petitioners. For
example, petitioners never submitted documents requested by
respondent's Appeals officer that would have established the fact of
payment of petitioners' medical and drug expenses.
Based on the financial
information petitioners submitted, respondent's Appeals officer
determined that petitioners had significantly more discretionary
monthly income, equity in assets, and realizable collection potential
(RCP) than petitioners would acknowledge. The figures petitioners and
respondent's Appeals officer respectively calculated are set forth
below:
Petitioners
Respondent
Discretionary
Monthly
Income
$0 $2,937
Equity
in
Assets
82,853 319,535
RCP
127,087 460,511
The disagreement between
petitioners and respondent's Appeals officer focused on whether
certain alleged life insurance and medical and drug expenses should
be treated as discretionary or as nondiscretionary expenses and on
whether petitioners had adequately established that they actually
were incurring and paying the expenses being claimed. During the
Appeals Office hearing, petitioners did not submit the documentation
necessary to substantiate their payment of the disputed expenses.
The chart below sets
forth the respective amounts petitioners claim and respondent would
allow for life insurance and medical and drug expenses:
Type
of Expenses
Petitioners
Respondent
Life
Insurance $2,311 $ 500
Medical
and Drug 1,553 1,200
Petitioners' alleged life
insurance expenses are based on whole life insurance policies on the
life of each petitioner. Respondent's offer-in-compromise guidelines
allow taxpayers' expenses only for term life insurance coverage. See
2 Administration, Internal Revenue Manual (CCH), sec. 5.15.1.10, at
17,662 (May 1, 2004).
Under section
6330, where a taxpayer's
underlying tax liability is not in dispute, our standard of review
over respondent's Appeals Office's determination on a taxpayer's
appeal of a notice of levy is whether respondent's Appeals Office
abused its discretion. Lunsford v. Commissioner [Dec.
54,553], 117 T.C. 183, 185
(2001). We are asked to affirm, as a matter of summary judgment,
respondent's Appeals Office's determination to reject petitioners'
offer-in-compromise and to sustain respondent's notice of levy.
We may grant summary
judgment where there remains no material fact issue and where a party
is entitled to judgment as a matter of law. Rule 122(a); Dahlstrom
v. Commissioner [Dec.
42,486], 85 T.C. 812, 821 (1985);
Espinoza v. Commissioner [Dec.
38,853], 78 T.C. 412, 416 (1982).
The administrative file
herein establishes that respondent's Appeals officer reviewed
petitioners' financial data that was properly and timely submitted
during the Appeals Office's consideration of petitioners' appeal,
that petitioners failed to submit to respondent's Appeals Office
requested information on time, and that petitioners spent over
$100,000 in cash as a downpayment to purchase an expensive new home
at a time when they had substantial Federal income taxes due.
Based on these facts, we
conclude as a matter of law that respondent's Appeals Office did not
abuse its discretion in issuing the notice of determination rejecting
petitioners' offer-in-compromise and sustaining respondent's levy
notice.
The question before us is
not whether respondent's Appeals Office would have decided
differently had it received additional information. Rather, the
question before us is whether respondent's Appeals Office acted
appropriately and within its proper discretion based on information
it received during the Appeals Office consideration of petitioners'
appeal. The record before us answers that question in the
affirmative.
Petitioners now claim
additional legal expenses, transportation expenses, and income
averaging in order to establish that respondent's calculation during
the Appeals Office hearing of petitioners' RCP was too high.
These items constitute
new issues and will not be allowed. See Magana v. Commissioner
[Dec.
54,765], 118 T.C. 488, 493-494
(2002). Furthermore, as we stated in Murphy v. Commissioner
[Dec.
56,232], 125 T.C. 301, 315
(2005), when Appeals officers make reasonable requests for relevant
documentation from taxpayers and taxpayers do not produce the
documentation in a reasonable time, the Appeals officer commits no
abuse of discretion in making a determination without regard to the
missing information.
For the reasons stated,
we shall grant respondent's motion for summary judgment.
To reflect the foregoing,
An appropriate order
and decision will be entered for respondent.
Chi
Wai v. Commissioner.
Dkt.
No. 19316-04L , TC Memo. 2006-179, August 29, 2006.
[Appealable,
barring stipulation to the contrary, to CA-4. --CCH.]
[Code
Secs. 55
and 7122]
Alternative
minimum tax: Offer in compromises. --
The IRS's refusal of an
individual's offer to compromise her alternative minimum tax (AMT)
liability, which arose from the exercise of incentive stock options
(ISO), was not an abuse of discretion. The taxpayer suffered a
substantial economic loss when the stock's value fell dramatically
after the ISOs were exercised but before the stock was sold.
Nonetheless, the fact that the taxpayer's AMT liability was much
higher than the income she received, was not a reason for the IRS to
accept her offer. Any inequity in the application of the AMT in
situations such as the taxpayer's is a question for Congress to
resolve, not the IRS. Moreover, the court rejected the taxpayer's
argument that had the taxpayer filed a joint return with her husband
instead of a separate return, the amount of her AMT liability would
not only have been much less, but also paid in full. The fact that
her AMT liability would have been lowered by filing a joint return
does not negate the fact that she voluntarily choose to file a
separate return for the tax year in question. --CCH.
John S. Harper, for
petitioner; Cleve Lisecki, for respondent.
P incurred alternative
minimum tax liability as a result of her exercise of incentive stock
options in 2000. The stock declined precipitously in value after the
date of exercise. P partially paid her year 2000 tax liability
through withholding, estimated tax payments and application of a
small credit, and submitted an offer-in-compromise for the unpaid
balance. The IRS rejected the offer-in-compromise and notified P of
its intent to levy on P's property. Held: it was not an abuse
of discretion to reject P's offer. IRS may proceed with the levy.
Speltz v. Commissioner [Dec.
55,961], 124 T.C. 165 (2005),
affd. 454 F.3d 782 (8th Cir. 2006), followed.
MEMORANDUM
OPINION
NIMS, Judge: Petitioner
petitioned the Court under section
6330(d)1
to review the determination of the Internal Revenue Service's Office
of Appeals sustaining a proposed levy on petitioner's property
related to petitioner's year 2000 Federal income tax liability.
Unless otherwise indicated, all section references are to sections of
the Internal Revenue Code in effect at relevant times. Petitioner
resided in Virginia at the time she filed her petition.
Background
This case was submitted
fully stipulated. The facts as stipulated are so found.
Petitioner filed her
Federal income tax return for 2000 on the basis of married filing
separate. Petitioner's reported tax liability included an alternative
minimum tax liability (AMT) of $776,447, and "regular" tax
in the amount of $10,100, bringing her total tax liability to
$786,547. Her return reported Federal income tax withheld of $11,080,
and estimated tax payments of $450,000, leaving a balance of tax due
in the amount of $325,467. Petitioner made no remittance with the
return, and except for a $300 credit on December 3, 2001, petitioner
made no additional payments.
Respondent accepted
petitioner's return as filed and in due course assessed the $786,547
tax due shown on the return. In addition, respondent assessed a
$174,480.07 late filing penalty under section
6651(a)(1), and a $31,018.68 late
payment penalty under section
6651(a)(2). Subsequently,
respondent abated $101,250 of the late filing penalty, and $13,122.50
of the late payment penalty.
Petitioner was employed
as an engineer by PMC-Sierra (PMCS) during 2000. During the year,
petitioner exercised several incentive stock options (ISOs) covering
PMCS shares having a value of $2,910,251 on the exercise date.
Petitioner's total exercise price under all the ISOs was $183,263, so
that the value of the shares on the date of exercise exceeded the
exercise price by $2,726,988.
Petitioner's exercise of
the ISOs encompassed an attendant "ISO spread", described
below, within the purview of the AMT system. See sec.
56(b)(3). The beneficial
provisions of sections
421(a) and 83(e) are superseded
for purposes of computing income adjustments in the AMT regime. As a
result, the pertinent AMT income recognition event for incentive
stock option transactions occurs upon the holder's exercise of the
option. The aforementioned ISO spread represents the differential
between the exercise price and the fair market value of the
underlying stock as of the date an option is exercised.
The above-described gain,
although excludable from petitioner's year 2000 taxable income
pursuant to section
421(a), was includable in her
alternative minimum taxable income (AMTI) pursuant to section
56(b)(3). Petitioner did not sell
any of the shares in 2000 and properly reported the $2,726,988 gain
on her return for that year.
The value of petitioner's
PMCS stock purchased under the ISOs fell dramatically after the ISOs
were exercised in 2000 but before the stock was sold in 2001, so that
the actual selling price over petitioner's exercise price under the
ISOs produced for regular tax purposes a gain that was only a small
fraction of the AMT gain required to be reported on petitioner's 2000
Federal income tax return, and a tax that was also substantially less
than the $786,547 tax which petitioner reported on her 2000 return.
Cf. Merlo v. Commissioner [Dec.
56,494], 126 T.C. 205, 209-210
(2006).
On December 20, 2001,
petitioner submitted a Form 656, Offer in Compromise (OIC), which
stated as the reasons Doubt as to Liability, Doubt as to
Collectibility, and Effective Tax Administration. The amount of the
offer was left blank, to which respondent's "offer unit"
inserted $1 to permit the Internal Revenue Service (IRS) to begin
review of the OIC. Petitioner's offer was temporarily put on hold
"pending a review of the ISO rulings by National Office."
Petitioner was later advised by respondent's offer specialist that
"the Effective Tax Administration offer is not feasible as it is
used [only] when the net realizable equity [in the taxpayer's assets]
exceeds the tax amount", which was not the case here.
On May 1, 2003,
petitioner submitted an amended offer-in-compromise (amended OIC),
which contained only doubt as to collectibility and effective tax
administration (ETA) as reasons for the offer, and again contained no
dollar amount, which respondent treated as $1, and again rejected.
Petitioner then filed a protest, and respondent's settlement officer
in general appeals programs sustained the rejection of the amended
OIC.
On May 20, 2004,
respondent mailed to petitioner a Final Notice - Notice of Intent to
Levy and Notice of Your Right to a Hearing, in response to which
petitioner requested a hearing (Appeals hearing). In the request,
petitioner asserted that respondent's rejection of petitioner's OIC
was an abuse of discretion.
On September 8, 2004,
respondent advised petitioner that the Appeals Office had sustained
respondent's Final Notice - Notice of Intent to Levy and Notice of
Your Right to a Hearing for the 2000 year. Respondent's Final Notice
contained the following "Summary of Determination"
(Summary), quoted here in its entirety:
Summary of
Determination
Although we addressed
each of your issues we could not reach an agreement. Based on the
case file the issuing of the Final Notice - Notice of Intent to Levy
and Notice Of Your Right To A Hearing is sustained.
As is apparent, the
Summary does not disclose the issues to which it refers. However, on
November 8, 2003, respondent's settlement officer had issued an
Appeals Case Memorandum which explained in detail respondent's
reasons for rejecting petitioner's OIC, as follows:
SUMMARY
AND RECOMMENDATION
The taxpayer is seeking
to compromise, under the authority of Section
7122 of the Internal Revenue
Code, and as amended by the Restructuring and Reform Act of 1998 to
include provisions under Effective Tax Administration (ETA), the
unpaid taxes plus all statutory additions, relating to the Individual
Income Tax Return, Form 1040, filed Married filing Separate for the
calendar year ending December 31, 2000.
Mrs. Wai's Offer was
submitted solely on the premise of the inequity and unfairness of the
assessment of Alternative Minimum Tax (AMT) that she was subject to
for tax year 2000 as a result of exercising stock options. Her offer,
based on ETA, focused on the fact that had she filed jointly
with her husband for this year, the amount of her AMT tax would not
only have been significantly less, but it would have essentially been
paid in full. Her Power of Attorney, John S. Harper, therefore
reasoned that the provisions of IRC 6015(f) should be applied in
consideration of the Offer.
The rejection of this
Offer has been sustained by Appeals for the following reasons:
1. It is the current
position of Appeals that Offers submitted based solely on the merits
of the ISO-AMT issue, do NOT qualify for consideration under the
principles of ETA. Currently there is no provision in the law that
allows consideration of ETA-OIC's due to AMT on stock options. Our
position remains that Congress must enact a change in the law with
respect to the AMT on stock options before we will give consideration
to the merits of an offer submitted under ETA based solely on this
issue. We will NOT set precedent at this time with reviewing or
accepting ETA-OIC's based on the ISO-AMT issue until a change in the
law has been made. Appeals also has no authority at this time to
suspend any of these ETA-OIC's currently in inventory until such
time, if any, that a change in the law is made. And secondly,
2. Mr. Harper's request
to have the ETA-OIC viewed in light of the provisions of IRC 6015(f)
is flawed. The fact that if the taxpayer's[sic] had filed
jointly would have significantly reduced the amount of Mrs. Wai's AMT
tax does not negate the fact that they voluntarily chose to
file separately for tax year 2000, thus creating a larger tax burden
for themselves individually. As previously discussed with Mr. Harper,
the Wai's [sic] still have the ability to amend their 2000 returns by
filing a joint return, and thus reducing the amount of AMT tax that
Mrs. Wai is asking the IRS to compromise. In addition, Mrs. Wai would
then be in a position to request relief under the Innocent Spouse
provisions, in which Mr. Harper believes she would prevail. Appeals
will not consider the principles under IRC 6015(f) in determining
whether or not the ETA-OIC should be accepted from Mrs. Wai.
The offer is being
rejected without further consideration by Appeals at this time.
During the pendency of
petitioner's CDP matter before respondent's settlement officer,
petitioner's counsel was in contact with other Government officials
(of which he kept the Settlement Officer and her superior informed)
in an attempt to obtain collateral relief for petitioner from her AMT
liability. At various times, counsel was in contact with the National
Taxpayer Advocate's Office, and with the Assistant Secretary of
Treasury for Tax Policy.
By letter dated October
28, 2004, Commissioner of Internal Revenue Mark W. Everson advised
Senators Grassley and Baucus that, as of that date, no formal
guidance had been issued by the IRS to its employees specifically
pertaining to the compromise of liabilities attributable to the AMT
arising from the exercise of ISOs.
Discussion
The facts in this case
giving rise to the AMT almost exactly parallel those of Speltz v.
Commissioner [Dec.
55,961], 124 T.C. 165 (2005),
affd. 454 F.3d 782 (8th Cir. 2006). In each case, the taxpayer
exercised ISOs during the year 2000, and reported on the respective
Federal tax returns, for purposes of the AMT, an excess of AMT income
over "regular tax income" of very substantial amounts. The
value of the taxpayer's stock in each case dropped precipitously
after the exercise, and the amount realized on the later sale of the
stock after year 2000 was a small fraction of the AMTI reported on
the respective year 2000 returns, and also a small fraction of the
AMT in each case. The taxpayers in each case thus suffered
substantial economic losses as a result of what might be called
phantom income which they were required to report in 2000 but never
in the usual sense actually received.
Section
7122(c)(1) and (2) provides:
SEC.
7122(c). Standards for Evaluation
of Offers. --
(1) In general. --The
Secretary shall prescribe guidelines for officers and employees of
the Internal Revenue Service to determine whether an
offer-in-compromise is adequate and should be accepted to resolve a
dispute.
(2) Allowances for basic
living expenses. --
(A) In general. --In
prescribing guidelines under paragraph (1), the Secretary shall
develop and publish schedules of national and local allowances
designed to provide that taxpayers entering into a compromise have an
adequate means to provide for basic living expenses.
(B) Use of schedules.
--The guidelines shall provide that officers and employees of the
Internal Revenue Service shall determine, on the basis of the facts
and circumstances of each taxpayer, whether the use of the schedules
published under subparagraph (A) is appropriate and shall not use the
schedules to the extent such use would result in the taxpayer not
having adequate means to provide for basic living expenses.
Regulations adopted
pursuant to section
7122 set forth three grounds for
the compromise of a liability: (1) Doubt as to liability; (2) doubt
as to collectibility; or (3) promotion of effective tax
administration. Speltz v. Commissioner, supra at 172; sec.
301.7122-1, Proced. & Admin. Regs. In her petition, petitioner
asserts that there was an abuse of discretion as to all three
grounds, although she pursued only promotion of ETA at the CDP
hearing.
Generally, we may
consider only those issues that the taxpayer raised during a section
6330 hearing. Sapp v.
Commissioner [Dec.
56,519(M)], T.C. Memo. 2006-104;
sec. 301.6330-1(f)(2), Q&A-F5, Proced. & Admin. Regs.; see
also Magana v. Commissioner [Dec.
54,765], 118 T.C. 488, 493
(2002). Respondent asserts that petitioner did not raise the issue of
doubt as to liability at her Appeals hearing, which petitioner
disputes. In any event, petitioner has failed to aver facts or legal
argument sufficient to show error in respondent's assessment. See
Poindexter v. Commissioner [Dec.
55,604], 122 T.C. 280, 284-285
(2004), affd. [2005-2
USTC ¶50,508] 132 Fed. Appx.
919 (2d Cir. 2005). Petitioner has not argued that the computation of
the AMT on her year 2000 return is incorrect, but she argues instead
that she is entitled to the benefit of section
59(g), even in the absence of the
regulation permitted thereunder. Section
59(g) provides:
SEC.
59(g). Tax Benefit Rule. --The
Secretary may prescribe regulations under which differently treated
items shall be properly adjusted where the tax treatment giving rise
to such items will not result in the reduction of the taxpayer's
regular tax for the taxable year for which the item is taken into
account or for any other taxable year.
On brief, petitioner
maintains that
The "differently
treated" item in the AMT system (that is, the ISO Spread that
cannot be offset against capital loss, as otherwise permitted by
section
422(c)(2) or as occurs naturally
on a sale that is not a disqualifying disposition on a decline in
value of the ISO stock) is precisely the type of situation that ought
to be remedied under section
59(g). Otherwise, the imposition
of AMT in this situation can produce results that are inequitable and
unfair, by imposing a tax on "phantom income" that is not
true economic income, and accordingly that will never be subject to
tax in the regular tax system.
In the absence of the
regulations that respondent is authorized, but not mandated, to
promulgate under section
59(g), petitioner urges us, in
effect, to do so. Petitioner cites Hillman v. IRS [2001-1
USTC ¶50,354], 250 F.3d 228,
233 (4th Cir. 2001), revg. [Dec.
53,768] 114 T.C. 103 (2000), to
support the proposition that in petitioner's type of situation an
exception can be made to the literal application of the statutory
provision (here, the AMT) because the literal application of the AMT
to petitioner's facts produces an absurd result. Presumably
petitioner believes regulations could be written to ameliorate such
result.
It is not very clear what
kind of regulation petitioner would like to have written even if we
were in position to do so. Be that as it may, and to paraphrase the
words of the Fourth Circuit in Hillman v. IRS, supra at 234,
if there is an inequity in the AMT as applied to petitioner, only
Congress or the Secretary (as the holder of delegated authority from
Congress to modify the effects of the AMT in certain instances) has
the authority to ameliorate the inequity.
Since our Opinion in
Speltz v. Commissioner [Dec.
55,961], 124 T.C. 165 (2005),
contains a detailed analysis of "promotion of effective tax
administration" as a ground for the compromise of a liability,
and the analysis is equally applicable to the facts in this case, it
is unnecessary for us to repeat this extensive analysis here. Thus,
this case is controlled by the result in Speltz.
As did the taxpayers in
Speltz, petitioner has devoted a substantial part of her
argument to the perceived unfairness of the AMT as applied to her
specific facts. The crux of petitioner's position, as in Speltz,
appears to be that section
7122 trumps the literal
application of the AMT statutes, and that, therefore, it was an abuse
of discretion by the Appeals Office not to accept her OIC. See id.
at 175-176. As we pointed out there, "The unfortunate
consequences of the AMT in various circumstances have been litigated
since shortly after the adoption of the AMT. In many different
contexts, literal application of the AMT has led to a perceived
hardship, but challenges based on equity have been uniformly
rejected." Id. at 176 (and cases cited therein).
Petitioner asserts
"economic hardship" as a justification for compromise and
that it should be expansively construed by respondent to constitute
an available ground for accepting the OIC. Pursuant to section
301.7122-1(c), Proced. & Admin. Regs., economic hardship
constitutes a basis for compromise, although the compromise is
classified within the ETA rubric. ETA is bifurcated into
subcategories of enumerated justifications for compromise in section
301.7122-1(c), Proced. & Admin. Regs. --the aforementioned public
policy and equity, and economic hardship. The following three
scenarios are depicted in section 301.7122-1(c), Proced. & Admin.
Regs., as supporting (but not conclusive of) a determination of
economic hardship: A taxpayer suffering from a long-term illness,
medical condition, or disability, which is expected to exhaust the
taxpayer's financial resources; total depletion of a taxpayer's
income resulting as a result of the provision of dependent care; and
an inability of a taxpayer to exploit existing asset wealth in order
to finance both basic living expenses and to satisfy the outstanding
tax liability.
As we said in Speltz
v. Commissioner, supra at 178, under almost identical facts:
Unlike the examples set
forth under section 301.7122-1(c), Proced. & Admin. Regs.,
petitioners do not claim illness or a medical condition or
disability; they do not have income that is exhausted providing for
the care of dependents; and they have sufficient income to meet
"basic living expenses". Petitioners' hardship argument is
essentially that the tax liability is disproportionate to the value
that they received from the ISOs and that they have already been
forced to change their lifestyle unreasonably. ***
Petitioner's urgent plea
in this case does not fall on deaf ears. We sympathize with
petitioner's situation, but regrettably this type of hardship is not
unique in the AMT-ISO arena. Id. at 177. It remains for
Congress to address the issue if it chooses to do so, but as the
Court of Appeals for the Seventh Circuit said in Kenseth v.
Commissioner [2001-2
USTC ¶50,570], 259 F.3d 881,
885 (7th Cir. 2001), affg. [Dec.
53,895] 114 T.C. 399 (2000): "it
is not a feasible judicial undertaking to achieve global equity in
taxation".
We have considered
petitioner's many other arguments, but we find them to be without
merit. We hold that petitioner failed to establish that the IRS
abused its discretion on the basis of the promotion of effective tax
administration when it refused petitioner's OIC.
At the hearing,
petitioner moved orally to admit a "Third Stipulation of Facts"
relating to an OIC by her husband, Kenneth Lee, who contemporaneously
had a similar matter pending before the IRS, which petitioner
maintains is relevant to respondent's exercise of discretion in this
case "under the public policy prong of the effective tax
administration standard." At the hearing, we took the motion
under advisement.
Petitioner's motion
appears to be in support of a convoluted argument made on brief that
respondent should settle petitioner's case on the basis of the result
petitioner would have obtained had she and her husband filed a joint
return for the year 2000, which, in fact, they did not do. We find
this argument irrelevant and unconvincing, and petitioner's oral
motion will be denied.
Respondent may proceed
with the proposed levy.
Order and Decision
will be entered for respondent.
1
The petition refers initially to sec.
6330(c);
however, this appears to be an inadvertence, since sec.
6330(d)
is the statutory provision that provides for judicial review of a
determination by the Internal Revenue Service Office of Appeals.
Berry
Shrier v. Commissioner.
Dkt.
No. 8725-05L , TC Memo. 2006-181, August 29, 2006.
[Appealable,
barring stipulation to the contrary, to CA-11. --CCH.]
[Code
Sec. 7122]
Compromises:
Acceptance of offers: Abuse of discretion. --
An IRS appeals officer
did not abuse his discretion by refusing an individual's offer in
compromise and proceeding to collection when the taxpayer failed to
provide all the required and requested financial statements to
substantiate his offer. --CCH.
Cheryl R. Frank and
Gerald W. Kelly, Jr., for petitioner; Vivian N. Rodriguez, for
respondent.
MEMORANDUM
FINDINGS OF FACT AND OPINION
FOLEY, Judge: The issue
for decision is whether respondent abused his discretion in
proceeding with collection of petitioner's income tax liabilities
relating to 1989 through 2000.
FINDINGS
OF FACT
On May 15, 2003,
respondent issued petitioner a Final Notice of Intent to Levy and
Notice of Your Right to a Hearing relating to 1989 through 2000 (the
years in issue). In the notice, respondent determined that petitioner
was liable for taxes and additions to tax totaling $130,835 and
$41,445, respectively, relating to the years in issue.
On May 27, 2003,
petitioner timely filed a Form 12153, Request for a Collection Due
Process Hearing (request), and stated that he did "not have
sufficient assets to cover the assessed liabilities." On
November 11, 2003, petitioner sent respondent a Form 433-A,
Collection Information Statement for Wage Earners and Self-Employed
Individuals. On November 25, 2003, petitioner supplemented his Form
433-A with copies of statements relating to petitioner's checking,
credit card, and telephone accounts. Petitioner also attached a copy
of a statement relating to a car lease in the name of Leo Shrier,
petitioner's father.
On November 25, 2003,
respondent conducted a telephone conference with petitioner. During
the conference, petitioner requested that his account be placed in
"currently not collectible status" because he was
unemployed. On February 13, 2004, petitioner's counsel informed
respondent that petitioner was employed and would submit an
offer-in-compromise (OIC) relating to his income tax liabilities.
While petitioner was unemployed, petitioner's parents made several
deposits into his checking account (deposits). In a letter dated
February 27, 2004, respondent requested that petitioner provide an
"affidavit from * * * [petitioner's] parents as to the amount of
money they gave him and * * * cancelled checks corresponding to the
deposits." Respondent also asked petitioner to explain the car
lease expense.
On March 23, 2004,
petitioner submitted to respondent a Form 656, Offer in Compromise,
in the amount of $2,000 based on doubt as to collectibility (March
OIC). Petitioner attached an updated Form 433-A to the March OIC but
did not attach any additional financial documents. In a letter dated
November 17, 2004, respondent requested additional financial
information. In a second letter, also dated November 17, 2004,
respondent requested that petitioner "provide the documents
specified on Form 433A * * * [and] an affidavit from * * *
[petitioner's] parents as to the amount of money they gave him."
Respondent warned petitioner that if the requested documents were not
received by December 17, 2004, the March OIC would not be accepted.
On December 17, 2004,
petitioner sent respondent an amended OIC in the amount of $2,000
based on doubt as to collectibility and effective tax administration
(December OIC). Petitioner attached to the December OIC an updated
Form 433-A, statements relating to petitioner's checking account,
statements relating to an employee profit-sharing plan, and wage
statements from his current employer.
In a letter dated March
3, 2005, respondent stated that the December OIC was insufficient
because petitioner did not provide the requisite documentation
relating to petitioner's ability to pay. Respondent also informed
petitioner that his claimed living expenses (e.g., food, housing, and
transportation) were in excess of the allowable amount. Respondent
also asserted that petitioner had not disclosed that he was living
with another individual.
On April 15, 2005,
respondent issued petitioner a Notice of Determination Concerning
Collection Action(s) Under Section
6320 and/or 6330
relating to 1989 and 1991 through
2000. On May 12, 2005, petitioner, while residing in Aventura,
Florida, filed his petition with the Court relating to the years in
issue and 2001. On July 15, 2005, respondent issued petitioner a
Decision Letter Concerning Equivalent Hearing Under Section
6320 and/or 6330
of the Internal Revenue Code
relating to 1990.
On March 2, 2006, the
Court filed respondent's motion to dismiss for lack of jurisdiction
and to strike as to the taxable year 2001. On March 29, 2006, the
Court granted respondent's motion.
OPINION
Petitioner does not
dispute the underlying tax liabilities. Where the validity of the
liability is not at issue, the Court reviews the Commissioner's
administrative determination for abuse of discretion. Goza v.
Commissioner [Dec.
53,803], 114 T.C. 176, 182
(2000). Respondent's determination will be sustained unless the
determination is arbitrary, capricious, clearly unlawful, or without
sound basis in fact or law. Woodral v. Commissioner [Dec.
53,206], 112 T.C. 19, 23 (1999).
Petitioner contends that
respondent abused his discretion by not accepting the December OIC.
Section
71221
authorizes respondent to grant an OIC as an alternative to pursuing a
collection action, but petitioner must provide detailed financial
statements and supporting documentation. Sec. 301.7122-1(d)(2),
Proced. & Admin. Regs. Respondent, on numerous occasions,
requested supporting documentation from petitioner. Petitioner,
however, failed to provide the requested information. Indeed,
respondent was unable to properly evaluate the December OIC because
petitioner did not provide the supporting documentation relating to
petitioner's expenses (i.e., housing, food, transportation, and
health care) and certain deposits. Accordingly, respondent did not
abuse his discretion by not accepting an OIC and proceeding with the
proposed collection action. Id.
Contentions we have not
addressed are irrelevant, moot, or meritless.
To reflect the foregoing,
Decision will be
entered for respondent.
1
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the years in issue.
Gregory
Drake v. Commissioner.
Dkt.
No. 20454-03L , TC Memo. 2006-151, July 24, 2006.
Related
opinion at Dec. 56,166, 125 TC 201.
[Appealable, barring
stipulation to the contrary, to CA-1. --CCH.]
[Code
Secs. 6330,
6861
and 7430
and Statement of Procedural Rules Sec. 601.106]
Collection
of tax: Collection Due Process hearing: Abuse of discretion: Levy and
distraint: Jeopardy assessment: Attorneys' fees. --
An IRS Appeals officer
with no involvement in an individual's original Collection Due
Process hearing did not abuse her discretion in sustaining the
previous determination against the individual that a levy for his
unpaid taxes was proper. The taxpayer was not allowed to dispute his
tax liability since he received a notice of deficiency. A jeopardy
levy was also proper since the individual transferred the proceeds of
a bankruptcy sale to his sons and failed to divulge the transfer on a
collection information statement. In addition, the individual was not
entitled to litigation costs because he was not the prevailing party.
The individual contended that his Fifth Amendment right to due
process was violated, but provided no facts, therefore, no violation
was determined. Since he failed to provide the additional documents
requested after submitting an offer-in-compromise, there was no abuse
of discretion in rejecting the offer when no settlement was reached.
--CCH.
Timothy J. Burke, for
petitioner; Louise R. Forbes, for respondent.*
SUPPLEMENTAL
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS, Judge: The
instant case relates to the administrative hearing and determination
of respondent's Appeals Office pursuant to section
6330 with respect to petitioner's
1991, 1992, 1994, 1995, and 1997 tax years.1
On October 12, 2005, we filed the initial opinion in this case, Drake
v. Commissioner [Dec.
56,166], 125 T.C. 201 (Drake I).
In Drake I, we concluded that a memorandum received by the settlement
officer assigned to conduct petitioner's administrative hearing under
section
6330 (section
6330 hearing) constituted a
prohibited ex parte communication which may have damaged petitioner's
credibility before respondent's Appeals Office. Consequently, we held
that respondent's Appeals officer abused his discretion in
determining that the proposed levy against petitioner should be
sustained. We retained jurisdiction of the case and remanded it to
respondent's Appeals Office for a new section
6330 hearing with an independent
Appeals officer who had received no communication relating to the
credibility of petitioner or petitioner's representative. On November
17, 2005, petitioner filed a motion for litigation costs and fees
pursuant to section
7430 and Rule 231. In accordance
with an order of this Court, a newly assigned Appeals officer
conducted a new section
6330 hearing with petitioner (the
section
6330 hearing on remand). On March
13, 2006, respondent's Appeals Office issued a notice of
determination, sustaining the proposed collection action against
petitioner. On April 13, 2006, petitioner filed a "Motion to
Compel Settlement".
The issues to be decided
are (1) whether the ultimate determination of respondent's Appeals
Office to sustain the proposed collection action is an abuse of
discretion; (2) whether to grant or deny petitioner's "Motion to
Compel Settlement"; and (3) whether petitioner is entitled to an
award of costs and fees pursuant to section
7430.
FINDINGS
OF FACT
I.
General
Background
Some of the underlying
facts of this case are set forth in Drake I, and we incorporate by
reference the portions of Drake I that are relevant to our
disposition of the instant case.
Petitioner Gregory Drake
and Barbara Drake are husband and wife. At the time of the filing of
the petition, petitioner resided in South Yarmouth, Massachusetts.
II.
The
1997 Bankruptcy
As of August 19, 1997,
respondent had filed Notices of Federal Tax Lien against petitioner
for income tax liabilities for 1991, 1992, and 1995. On that date,
Barbara Drake and petitioner filed a joint bankruptcy petition under
chapter 13 of the Bankruptcy Code with the U.S. Bankruptcy Court for
the District of Massachusetts. Thereafter, respondent filed a proof
of claim with respect to the unpaid Federal income tax liabilities of
Barbara Drake and petitioner. During the 1997 bankruptcy proceeding,
Barbara Drake and petitioner received authority to sell three
properties which were subject to Federal tax liens. The sale yielded
$161,250.65, and a Federal tax lien attached to the sale proceeds.
Subsequently, the
bankruptcy trustee filed a motion to dismiss the case for failure to
file a repayment plan, and Barbara Drake and petitioner filed a
Motion for Authority to Disburse Funds. The bankruptcy court granted
the motion to dismiss and issued an order mooting the Motion for
Authority to Disburse Funds. Upon the dismissal of the case on June
30, 1999, Neal E. Satran (Mr. Satran), the attorney representing
Barbara Drake and petitioner in the 1997 bankruptcy, distributed to
Barbara Drake and petitioner sale proceeds in the amount of
$151,139.74 (the 1997 bankruptcy sale proceeds).2
Petitioner gratuitously transferred the 1997 bankruptcy sale proceeds
to his sons, Darren Drake and Gregory Drake, who placed the proceeds
in a joint personal brokerage account under their names.3
At no time were the 1997 bankruptcy sale proceeds commingled with
other funds. On October 6, 1999, Notices of Federal Tax Lien were
filed against Barbara Drake and petitioner with respect to their
1994, 1995, and 1997 tax years.
On January 10, 2000,
respondent issued computer-generated notices of outstanding income
tax liabilities to Barbara Drake and petitioner. On January 14, 2000,
respondent received from Barbara Drake and petitioner a Form 433-A,
Collection Information Statement for Individuals (collection
information statement). On the collection information statement, no
response was provided to the question of whether assets had recently
been sold or otherwise transferred for less than their full value.
III.
The
Initial Section 6330 Hearing
On July 19, 2000,
respondent mailed to Barbara Drake and petitioner a Final Notice,
Notice of Intent to Levy and Notice of Your Right to a Hearing, with
respect to their 1991, 1992, 1994, 1995, and 1997 tax years. The
notice asserted an unpaid tax of $121,478.17 and penalties and
interest of $88,607.27. Pursuant to a power of attorney, Timothy J.
Burke (Mr. Burke) timely requested a section
6330 hearing on behalf of Barbara
Drake and petitioner. Subsequently, on behalf of Barbara Drake, Mr.
Burke submitted a Form 8857, requesting relief from joint and several
liability pursuant to section
6015 for each of the years in
dispute. We discuss Barbara Drake's request for section
6015 relief in greater detail
below.
A. Proceedings Before
Settlement Officer O'Shea
Settlement Officer Eugene
O'Shea was assigned to conduct the requested section
6330 hearing, and he determined
from Internal Revenue Service (IRS) records that petitioner had
previously filed for bankruptcy protection. On January 30, 2002,
prior to the section
6330 hearing, Settlement Officer
O'Shea conferred with Advisor Sid Gordon of the Internal Revenue
Service Insolvency Unit (Advisor Gordon) regarding the 1997
bankruptcy and requested related documentation. On the same date,
Advisor Gordon faxed to Settlement Officer O'Shea a copy of Advisor
Gordon's prior memorandum to respondent's counsel Louise R. Forbes
(Attorney Forbes). In the memorandum, dated October 5, 1999, Advisor
Gordon stated that the 1997 bankruptcy sale proceeds had been
distributed to Barbara Drake and petitioner, that the proceeds should
have been distributed to the creditors of Barbara Drake and
petitioner, and that Advisor Gordon believed that Mr. Satran and
petitioner had "used the Court to bypass the Federal tax Lien."
The memorandum further stated:
According to the
settlement sheets the debtor received $161,094.73 from the three
sales. Although the Bankruptcy Court approved the sales under 11 USC
363 the IRS received nothing. Attorney Satran had knowledge of the
Internal Revenue Service Federal Tax Liens due to the considerable
litigation involved in this case. In fact Attorney Satran filed a
motion with the Court to disburse the funds including [sic] the IRS
liens. It is a mockery to the integrity [of the] Bankruptcy Court if
an Attorney can use it to defeat a Federal Tax Lien allowing a Debtor
to walk away with the proceeds. The Bankruptcy Code was used because
11 USC 363 was authorized by the Court.
I informed Attorney
Campobasso that Attorney Satran had previously been suspended by the
Bankruptcy Court. Chief, US Bankruptcy Court Judge Carol J Keener
suspended attorney Satran from 01/30/1996 through 11/29/1996. The
action of Attorney Satran in a chapter 11 case [involving] Paula
Wyner, Carlton House of Brockton, Inc. was the cause of the
suspension. I think the Court should be informed of the conduct of
Attorney Satran in this case.
On January 30, 2002, Mr.
Burke attended a meeting with Settlement Officer O'Shea on behalf of
both Barbara Drake and petitioner. At the meeting, Settlement Officer
O'Shea did not inform Mr. Burke of his communications with Advisor
Gordon. Mr. Burke provided a copy of a collection information
statement signed by petitioner on January 24, 2002.4
On the collection information statement, petitioner stated that he
had not transferred any assets out of his name for less than their
actual value in the last 10 years. A Form 656, Offer-in-Compromise
(offer-in-compromise form), had been completed but was not submitted
to Settlement Officer O'Shea for consideration. Petitioner concedes
that the parties informally suspended consideration of any
offer-in-compromise pending a determination of Barbara Drake's
request for section
6015 relief, which would
influence whether petitioner filed an individual offer-in-compromise
or a joint offer-in-compromise.
On September 4, 2002,
petitioner submitted to respondent's Appeals Office an "amended"
offer-in-compromise form. The amended offer-in-compromise listed
petitioner alone as the taxpayer and offered to pay $5,500 in
satisfaction of petitioner's tax liabilities for 1991, 1992, 1993,
1994, 1995, 1997, and 1999. In a letter to Mr. Burke dated September
4, 2002, Settlement Officer O'Shea acknowledged receiving the amended
offer-in-compromise but noted that consideration of the original
offer-in-compromise had been informally suspended by the parties
pending the determination of Barbara Drake's request for section
6015 relief. Accordingly,
Settlement Officer O'Shea informed Mr. Burke that no original
offer-in-compromise had been submitted for consideration and returned
the amended offer-in --compromise to Mr. Burke. Petitioner concedes
that the reason for returning the amended offer-in-compromise form
was to avoid any administrative confusion.
B. Proceedings Before
Appeals Officer Kaplan
On January 17, 2003, the
section
6330 matter was transferred from
Settlement Officer O'Shea to Appeals Officer Jeffrey Kaplan, who had
been assigned to the administrative appeal of Barbara Drake's request
for section
6015 relief. Appeals Officer
Kaplan subsequently advised Mr. Burke that no offer-in-compromise was
presently before the Appeals Office, as no original
offer-in-compromise had been submitted for consideration and the
amended offer-in-compromise had been returned to Mr. Burke. Appeals
Officer Kaplan informed Mr. Burke that any offer-in-compromise should
be larger than the $5,500 amended offer-in-compromise submitted on
September 4, 2002. Appeals Officer Kaplan also noted that the former
residence of Barbara Drake and petitioner was now owned by their son
and that the transfer appeared questionable.
In a conversation on June
16, 2003, Mr. Burke informed Appeals Officer Kaplan that Darren
Drake, the son of Barbara Drake and petitioner, had foreclosed upon
and bought petitioner's house. Appeals Officer Kaplan requested
documentation related to the foreclosure and transfer.
In a letter dated July 2,
2003, Appeals Officer Kaplan made the following request, reproduced
verbatim, for the production of documents:
1. Documentation
regarding what was done with the funds received by the taxpayers from
the sale of property as part of their bankruptcy proceedings, along
with how much was actually received.
2. Documentation of the
value of the property located at 40 Keel Cape Drive, South Yarmouth,
MA, prior to the foreclosure.
3. Documentation of the
foreclosure.
4. Documentation
regarding the amount owed on the mortgage by the taxpayers at the
time of the foreclosure.
5. Documentation
regarding the entity that acquired the mortgage from the prior
mortgage holder prior to the foreclosure.
6. Copies of the
mortgage.
7. Documentation of the
acquisition of the property by Darren Drake.
8. An updated Collection
Information Statement for Mr. and Mrs. Drake.
9. Completed
Offer-in-Compromise Questionnaire.
10. An updated Collection
Information Statement for their businesses.
Appeals Officer Kaplan
informed Mr. Burke that he would make a determination pursuant to
section
6330 (section
6330 determination) based on
information already within his possession unless Mr. Burke submitted
the requested documents by July 30, 2003. In addition, Appeals
Officer Kaplan informed Mr. Burke that any offer-in-compromise should
also be submitted. In August of 2003, Mr. Burke provided respondent's
Appeals Office with a portion of the requested documents but did not
submit documentation related to the 1997 bankruptcy sale proceeds. On
August 26, 2003, Appeals Officer Kaplan informed Mr. Burke that he
had not received all of the requested information. Again, on
September 16, 2003, Appeals Officer Kaplan verbally reminded Mr.
Burke that all of the requested information had not been received by
respondent.
On September 30, 2003,
Barbara Drake filed a bankruptcy petition under chapter 13 of the
Bankruptcy Code with the U.S. Bankruptcy Court for the District of
Massachusetts.5
We discuss the 2003 bankruptcy in greater detail below. In October of
2003, Mr. Burke advised Appeals Officer Kaplan that Barbara Drake had
filed a bankruptcy petition under chapter 13 of the Bankruptcy Code,
that the automatic stay of 11 U.S.C. sec. 362 (2000) applied to
petitioner as well as Barbara Drake, and that 11 U.S.C. sec. 1301
precluded any collection action against either Barbara Drake or
petitioner. On October 27, 2003, Appeals Officer Kaplan requested
legal advice from Attorney Forbes concerning the preclusion of any
collection action against petitioner. Attorney Forbes advised that 11
U.S.C. sec. 1301 did not preclude the collection action against
petitioner. Consequently, on October 27, 2003, Appeals Officer Kaplan
advised Mr. Burke that the collection action could and would proceed
against petitioner. Additionally, Appeals Officer Kaplan advised Mr.
Burke that information previously requested had not been received by
the Appeals Office and that the Appeals Office would close the case
and issue a determination based on information already in its
possession unless Mr. Burke submitted the information immediately.
Appeals Officer Kaplan did not receive the requested information and
closed the case file on October 29, 2003.
C. The Original Notice
of Determination
On November 10, 2003,
respondent's Appeals Office issued petitioner a section
6330 determination (the original
notice of determination), determining that all statutory
administrative and procedural requirements had been met and that
available information did not establish that an offer-in-compromise
was a viable collection alternative. The original notice of
determination did not purport to make a determination with respect to
Barbara Drake. Petitioner timely petitioned this Court for judicial
review of the original notice of determination. Both the petition and
a subsequently filed amended petition named Gregory Drake, alone, as
the petitioner, and Mr. Burke signed both documents on behalf of only
Gregory Drake. Neither the petition nor the amended petition
purported to be filed on behalf of Barbara Drake.
IV.
Drake
I
As discussed above, in
Drake I, we held that the communication between Advisor Gordon and
Settlement Officer O'Shea on January 30, 2002, constituted a
prohibited ex parte communication pursuant to Rev.
Proc. 2000-43, 2000-2 C.B. 404,
which may have damaged petitioner's credibility before Settlement
Officer O'Shea and Appeals Officer Kaplan. Accordingly, we held that
Appeals Officer Kaplan abused his discretion in sustaining the
proposed collection action. We retained jurisdiction of the case and
remanded it to respondent's Appeals Office for a new section
6330 hearing with an independent
Appeals officer who had received no communication relating to the
credibility of petitioner or petitioner's representative. Because we
remanded the case for a new hearing, we did not address petitioner's
remaining contentions, which are discussed below.
V.
Petitioner's
Motion for Litigation Costs
On November 17, 2005,
petitioner filed a motion for litigation costs and fees pursuant to
section
7430 and Rule 231. With the
motion, petitioner submitted the affidavit of Mr. Burke, the
affidavit of Mr. Burke's associate Melissa Halbig, and related
billing records. On December 22, 2005, respondent filed a response to
petitioner's motion for litigation costs and fees.
VI.
Barbara
Drake's Request for Section
6015
Relief
On August 30, 2000,
respondent received Barbara Drake's aforementioned request for
section
6015 relief. Respondent denied
Barbara Drake's request for section
6015 relief on February 5, 2002,
and she appealed the determination to respondent's Appeals Office.
The Appeals Office assigned to the case Appeals Officer Kaplan, who
was subsequently assigned to the section
6330 hearing of Barbara Drake and
petitioner. On January 29, 2004, respondent's Appeals Office sent
Barbara Drake a Final Notice of Determination Concerning Your Request
for Relief from Joint and Several Liability under Section
6015 (the section
6015 determination), denying the
requested relief. Barbara Drake subsequently filed with this Court a
Petition for Relief from Joint and Several Liability (the section
6015 petition), challenging the
section
6015 determination. Drake v.
Commissioner [Dec.
55,822], 123 T.C. 320, 321-322
(2004).
At the time that Barbara
Drake filed the section
6015 petition, the 2003
bankruptcy had been neither closed nor dismissed. Id. at 322.
Furthermore, the bankruptcy court had neither granted nor denied
Barbara Drake a discharge. Id. Consequently, we granted
respondent's motion to dismiss Barbara Drake's section
6015 case on the ground that she
filed the section
6015 petition in violation of the
automatic stay imposed under 11 U.S.C. sec. 362(a)(8)(2000). Id.
at 325.
VII.
The
2003 Bankruptcy
The aforementioned 2003
bankruptcy commenced with the filing of Barbara Drake's chapter 13
petition on September 30, 2003. See 11 U.S.C. sec. 301(a)(2000).
Schedule D of Barbara Drake's bankruptcy petition listed, inter alia,
a secured lien of the Internal Revenue Service (IRS) in the amount of
$270,295.76. In re Drake, 336 Bankr. 155, 156 (Bankr. D. Mass.
2006). In November of 2003, the IRS filed a proof of claim with the
bankruptcy court. Id. Barbara Drake filed an objection,
contending that she was entitled to section
6015 relief with respect to the
years listed in the proof of claim. Id. In December of 2004,
Barbara Drake was discharged from bankruptcy. Id.
Subsequently, Barbara Drake filed with the bankruptcy court a "Motion
to Request the Determination of a Tax Liability".6
Id. The IRS moved to dismiss Barbara Drake's motion. Id.
The bankruptcy court held
sua sponte that respondent's Appeals Office had issued the section
6015 determination in violation
of the automatic stay of 11 U.S.C. sec. 362(a)(1).7
Id. at 159. Because Barbara Drake had been discharged from bankruptcy
subsequent to the issuance of the section
6015 determination, however, the
bankruptcy court concluded that the automatic stay no longer bars
administrative action under section
6015.8
Id. at 160. Consequently, rather than deciding Barbara Drake's
section
6015 request, the bankruptcy
court decided that the "interests of justice are better served
by allowing * * * [Barbara Drake's] appeal to proceed at the IRS."
Id. On May 16, 2006, the bankruptcy court denied a motion for
reconsideration filed by the United States. On May 30, 2006, the
United States filed a Notice of Appeal to the U.S. District Court for
the District of Massachusetts.
VIII.
The
Section 6330 Hearing on Remand
On October 17, 2005, in
accordance with our holding in Drake I, we ordered respondent to
offer petitioner a new section
6330 hearing with an independent
Appeals officer on a date no later than November 10, 2005. In
addition, we ordered the parties to each file with the Court a status
report no later than January 6, 2006.
A. Proceedings Before
Appeals Officer Kramer
On behalf of petitioner,
Mr. Burke met with Appeals Officer Linda Kramer at the IRS Appeals
Office in Boston, Massachusetts, on November 4, 2005. Appeals Officer
Kramer had no prior involvement with petitioner and had received no
communication relating to the credibility of petitioner or
petitioner's representative.9
At the conclusion of the aforementioned conference, respondent's
Associate Area Counsel John V. Cardone (Attorney Cardone) met with
Mr. Burke and Appeals Officer Kramer to discuss the possibility of an
offer-in-compromise.10
On behalf of petitioner, Mr. Burke submitted another collection
information statement, and he agreed to submit a new
offer-in-compromise by November 14, 2005. Petitioner was asked to
submit certain documents by November 14, 2005, to verify petitioner's
collection information statement. Attorney Cardone informed Mr. Burke
that any offer-in-compromise should include the 1997 bankruptcy sale
proceeds.
Mr. Burke subsequently
submitted on petitioner's behalf an offer-in-compromise in the amount
of $75,000, representing approximately one-half of the 1997
bankruptcy sale proceeds. The offer-in-compromise was based on doubt
as to collectibility and the promotion of effective tax
administration. On January 19, 2006, respondent accepted the
offer-in-compromise for processing.
B. The Jeopardy Levy
On November 22, 2005,
respondent levied upon the 1997 bankruptcy sale proceeds, and named
Darren Drake and Gregory Drake, Jr., as "nominees and/or
transferees". Respondent notified petitioner of the jeopardy
levy in a letter dated November 28, 2005. In the letter, respondent
made the following contentions in support of the jeopardy levy:
(1) You did not answer a
question about the transfer of funds to your sons on the first
financial statement that you submitted during the CDP process. On a
subsequent financial statement you falsely answered the question
regarding a transfer of assets.
(2) You did not tell the
Appeals Officer where the funds were when requested to do so during
the CDP process.
(3) The funds were in the
name of third parties and can easily be dissipated.
(4) Even after we
informed your representative that the government was now fully aware
of the facts involving the money in the account, you submitted an
offer in compromise that your representative knew in advance would be
unacceptable.
On April 13, 2006,
petitioner filed with the Court a "Motion for Stay of Levy",
requesting that the Court order a stay of the jeopardy levy on
grounds that respondent made the jeopardy levy in bad faith, for the
purpose of advancing respondent's negotiating position in settlement
discussions.
C. The Global
Settlement Negotiations
During the section
6330 hearing on remand, the
parties engaged in negotiations to resolve the tax liabilities of
both Barbara Drake and petitioner for the years in issue (the global
settlement).11
The parties first discussed such a global settlement in a telephone
conference on December 16, 2005.
In a letter to Attorney
Cardone dated December 19, 2005, Mr. Burke stated: "It is my
understanding that the Service has offered to resolve both Mr.
Drake's and Mrs. Drake's matters in exchange for the Drake family's
foregoing all claims relative to the levy which has been made upon
funds held by the Mr. and Mrs. Drake's son(s)." In response to
an apparent request by respondent that petitioner drop his motion for
litigation costs and fees, Mr. Burke's letter further stated that the
award of litigation costs and fees is "a matter for the
consideration by the Court and not a matter for negotiation."
In a letter to Mr. Burke
dated December 20, 2005, Attorney Cardone stated that respondent
would agree to take no further collection action against Barbara
Drake and petitioner with respect to the years in issue upon the
following terms:
Darren Drake and
Gregory Drake, Jr., waive all rights to bring a claim against the
United States under 26 U.S.C. sec.
7426(a).
Darren Drake and
Gregory Drake, Jr., will provide whatever consents are necessary to
allow Citigroup Smith Barney to liquidate the brokerage account that
was the subject of the IRS levy and to turn the proceeds over to the
IRS. Normal costs and commissions would be charged against the
proceeds.
Barbara Drake
would be granted innocent spouse relief for the outstanding balance
of the Subject Liabilities, after application of the Smith Barney
proceeds. Barbara Drake waives any right she may have to file a
refund claim for the Subject Liabilities.
The IRS would
accept the Smith Barney proceeds as an Offer in Compromise from
Gregory Drake for satisfaction of the Subject Liabilities.
Gregory Drake
agrees to a motion to dismiss the above-referenced CDP case as moot,
with no costs or attorneys fees awarded to either party.
Gregory Drake,
Darren Drake, and Gregory Drake, Jr., reserve whatever rights they
may have to file amended income tax returns with respect to this
matter.
The aforementioned terms
are sometimes hereinafter generally referred to as the settlement
terms. In a letter to Mr. Burke dated December 21, 2005, Attorney
Cardone stated that the Appeals officer would be instructed that the
parties were unable to reach a settlement unless Barbara Drake and
petitioner were to accept all of the settlement terms as of December
28, 2005. Accordingly, in a letter dated December 30, 2005, Attorney
Cardone informed Mr. Burke that the settlement terms had not been
accepted and that the offer had, therefore, lapsed.
Despite Attorney
Cardone's letter stating that respondent's offer had lapsed, Mr.
Burke and Attorney Cardone again discussed the prospective global
settlement in a telephone conference on January 6, 2006. During this
conference, Mr. Burke informed Attorney Cardone that Barbara Drake
and petitioner accepted the settlement terms. In a letter to Mr.
Burke on that date, Attorney Cardone stated as follows:
Dear Attorney Burke:
Pursuant to our
conversation of this date, we are enclosing the original and two
copies of a Decision document in the [instant] case. The original and
one copy should be signed, dated, and returned to this office for
filing with the Tax Court. The third copy is for your records.
We are enclosing a
release for Gregory Drake Jr. and Darren Drake. Please review the
document. The release should be signed and dated and returned to this
office.
We are also enclosing
facsimile memorandums from Gregory Drake, Jr. and Darren Drake to
Smith Barney. Gregory Drake, Jr. and Darren Drake need to execute the
appropriate memorandum and fax to Smith Barney.
With the letter, Mr.
Cardone sent the following documents to Mr. Burke: (1) A proposed
stipulated decision with respect to the instant case (the proposed
stipulated decision); (2) a waiver of any claims of Darren Drake and
Gregory Drake, Jr., against the United States pursuant to section
7426(a) (the proposed waiver);
and (3) a memorandum from each of Darren Drake and Gregory Drake,
Jr., authorizing Citigroup to liquidate by sale all assets in their
joint brokerage account containing the 1997 bankruptcy sale proceeds.
Both the proposed stipulated decision and the proposed waiver
referenced the settlement terms.12
None of the aforementioned documents, however, were at any time
signed by Mr. Burke, Barbara Drake, Darren Drake, Gregory Drake, Jr.,
or petitioner.
Petitioner and respondent
each referenced the global settlement negotiations in the status
reports that we ordered to be filed with this Court by January 6,
2006. Petitioner's status report stated that "counsel have
undertaken extensive negotiations to resolve the subject matter and
believe that they have achieved a basis for settlement."
Respondent's status report stated that the "parties have engaged
in settlement negotiations in an attempt to resolve petitioner's
outstanding income tax liabilities. As of this date, the parties have
not resolved the outstanding income tax liabilities but negotiations
are on going."
In a letter to Mr. Burke
dated January 13, 2006, Attorney Forbes stated as follows: "As
of this date, the terms of the settlement have not been accepted by
your client and related parties. * * * We are hereby withdrawing the
proposed January 6, 2006 settlement unless Barbara Drake agrees to
the vacatur of the January 11, 2006 Memorandum Decision and January
12, 2006 Order of the Bankruptcy Court."
In a letter to Appeals
Officer Kramer dated January 28, 2006, Mr. Burke stated, inter alia,
(1) that he believed that the section
6330 hearing on remand included
Barbara Drake as a consequence of the bankruptcy court's decision in
In re Drake, 336 Bankr. at 156; (2) that all parties to the
matter agreed to the settlement terms; and (3) that the "taxpayers"
were amending their offer-in-compromise to reflect the settlement
terms, with the exception of the proposed waiver of petitioner's
claim for litigation costs and fees.
On April 13, 2006,
petitioner filed a "Motion to Compel Settlement",
contending that Mr. Burke accepted a settlement offer from respondent
on January 6, 2006, and requesting that the Court enforce such
settlement.
D.
The
Supplemental Notice of Determination
On March 13, 2006,
respondent's Appeals Office issued to petitioner a notice of
determination (the supplemental notice of determination), setting
forth the following determination:
The proposed collection
action is sustained. You did not provide sufficient information for
the evaluation of your proposed collection alternative. Consequently,
your Offer could not be evaluated and is being rejected. The jeopardy
levy is sustained. The attachment to this Determination Letter
contains additional details.
In the aforementioned
attachment to the supplemental notice of determination, respondent's
Appeals Office stated, inter alia, that (1) the parties had been
unable to settle the instant case; (2) that petitioner was precluded
from challenging the underlying liability for his 1995 tax year
because he had the opportunity to dispute the liability during the
1997 bankruptcy proceeding; (3) that Barbara Drake is not a party to
the instant case because she was not a party to the petition filed
with the Tax Court pursuant to section
6330(d) and Rule 331(a); (4) that
the jeopardy levy was appropriate because petitioner appeared to be
designing to quickly place his property beyond the reach of the
Government and because petitioner's financial solvency appears to be
imperiled; and (5) that petitioner's offer-in-compromise is rejected
on the ground that petitioner failed to submit requested financial
verification documents necessary to evaluate the offer. On April 13,
2006, petitioner filed a response to the supplemental notice of
determination.
OPINION
I.
Sections
6330 and 6331
If any person liable to
pay any tax neglects or refuses to pay such tax within 10 days after
notice and demand for payment, section
6331(a) authorizes the Secretary
to collect such tax by levy upon property belonging to the person.
Notwithstanding section
6331(a), section
6330(a) provides that no levy may
be made unless the Secretary first notifies the person in writing of
the right to a hearing before an impartial officer of respondent's
Appeals Office.13
At the section
6330 hearing, the Appeals officer
must verify that the requirements of any applicable law or
administrative procedure have been met. Sec.
6330(c)(1). The person may raise
any relevant issue relating to the unpaid tax or the proposed levy,
including appropriate spousal defenses, challenges to the
appropriateness of collection actions, and offers of collection
alternatives such as an offer-in-compromise. Sec.
6330(c)(2)(A). The person may
challenge the existence or amount of the underlying tax liability,
however, only if the person did not receive any statutory notice of
deficiency for such tax liability or did not otherwise have an
opportunity to dispute such tax liability. Sec.
6330(c)(2)(B).
At the conclusion of the
hearing, the Appeals officer must determine whether and how to
proceed with collection. See sec.
6330(c)(3). In making that
determination, the Appeals officer must take the following into
consideration: (1) Verification that the requirements of any
applicable law or administrative procedure have been met; (2)
relevant issues raised by the taxpayer; (3) appropriate challenges to
the underlying tax liability by the taxpayer; and (4) whether any
proposed collection action balances the need for the efficient
collection of taxes with the legitimate concern of the taxpayer that
the collection action be no more intrusive than necessary. Sec.
6330(c)(3).
Section
6330(d)(1) provides this Court
with jurisdiction to review a section
6330 determination if we have
jurisdiction over the underlying tax. Where the underlying tax
liability is properly in issue, we review the determination de novo.
Freije v. Commissioner [Dec.
56,095], 125 T.C. 14, 23 (2005).
Where the underlying tax is not in issue, we review the determination
for abuse of discretion. Id.
II.
The
Hearing on Remand
In exercising judicial
review of a section
6330 determination, the Court may
under certain circumstances remand a case to respondent's Appeals
Office while retaining jurisdiction. See Lunsford v. Commissioner
[Dec.
54,553], 117 T.C. 183, 189
(2001); Parker v. Commissioner [Dec.
55,768(M)], T.C. Memo. 2004-226;
Harrell v. Commissioner [Dec.
55,298(M)], T.C. Memo. 2003-271.
The resulting section
6330 hearing on remand provides
the parties with the opportunity to complete the initial section
6330 hearing while preserving the
taxpayer's right to receive judicial review of the ultimate
administrative determination. The section
6330 hearing on remand
supplements the initial section
6330 hearing, and the initial
hearing and the hearing on remand together constitute the taxpayer's
administrative hearing for purposes of section
6330.14
See Parker v. Commissioner, supra ("In appropriate
circumstances, we may remand a case to the Appeals Office for further
investigation and consideration of the taxpayer's contentions.").
In the instant case, respondent's notice of determination, dated
March 13, 2006, is properly treated as a supplemental notice of
determination. Petitioner continues to dispute the issues raised in
the original notice of determination and has raised additional issues
with respect to the supplemental notice of determination. As
petitioner previously had filed a petition under section
6330 with this Court, the
determinations of respondent's Appeals Office are ripe for judicial
review. Sec.
6330(d)(1). We separately address
below the issues raised by petitioner with respect to the original
notice of determination and the supplemental notice of determination.
III.
Issues
With Respect to the Initial Section 6330 Hearing
We now address the issues
that were raised by petitioner with respect to the initial hearing
but not addressed in Drake I.15
A. Whether the Initial
Section
6330 Hearing Was Conducted
in Good Faith.
In response to the
original notice of determination, petitioner contended that
Settlement Officer O'Shea and Appeals Officer Kaplan were biased,
were not impartial, and did not conduct the administrative review in
good faith.16
Since the completion of the initial hearing, however, petitioner
participated in the hearing on remand with Appeals Officer Kramer,
who had no prior involvement with petitioner and had received no
communication relating to the credibility of petitioner or
petitioner's representative. In light of the hearing on remand, we
are satisfied that petitioner received a section
6330 hearing before an impartial
Appeals officer for purposes of section
6330(b)(3), and we conclude that
petitioner's aforementioned contentions are now moot. See Sapp v.
Commissioner [Dec.
56,519(M)], T.C. Memo. 2006-104.
B. Whether
Petitioner's Fifth Amendment Right to Due Process Was Violated.
Petitioner also contends
that his Fifth Amendment right to due process was violated by the
absence of "recognizable" procedures to be followed in the
section
6330 hearing. The Secretary,
however, has promulgated regulations to govern section
6330 hearings, see sec.
301.6330-1, Proced. & Admin. Regs., and respondent's Internal
Revenue Manual sets forth related administrative procedures in
detail, 4 Administration, Internal Revenue Manual (CCH), sec.
8.7.2.3. to 8.7.2.3.14. Petitioner fails to specify how such
regulations and procedures are inadequate or even to acknowledge
their existence. Under the circumstances of the instant case, we
conclude that petitioner's Fifth Amendment right to due process was
not violated. See Rule 142(a).
C. Whether Petitioner
Submitted a Viable Offer-in-Compromise.
We understand petitioner
to contend further that he submitted a viable collection alternative
for consideration and that Settlement Officer O'Shea and Appeals
Officer Kaplan did not balance the need for the efficient collection
of taxes with petitioner's legitimate concern that the collection
action be no more intrusive than necessary.
The record does not
support petitioner's contention. Although petitioner completed an
offer-in-compromise form, Mr. Burke did not submit the form to
Settlement Officer O'Shea for consideration during their meeting on
January 30, 2002, or at any time thereafter. Petitioner concedes that
the parties informally suspended consideration of any
offer-in-compromise pending a determination of Barbara Drake's
request for section
6015 relief. On September 4,
2002, subsequent to respondent's denial of section
6015 relief to Barbara Drake,
petitioner submitted an "amended" offer-in-compromise. In a
letter dated September 4, 2002, Settlement Officer O'Shea informed
Mr. Burke that no original offer-in-compromise had been submitted for
consideration, and he returned the amended offer-in-compromise to Mr.
Burke. Petitioner concedes that the reason for returning the amended
offer-in-compromise was to avoid any administrative confusion. On
April 10, 2003, Appeals Officer Kaplan informed Mr. Burke that no
offer-in-compromise was presently before the Appeals Office. A letter
from Appeals Officer Kaplan to Mr. Burke dated July 2, 2003, stated
as follows:
I have enclosed several
collection information statements and the Offer in Compromise
Questionnaire. If the taxpayers' intent is to submit an Offer in
Compromise as an alternative collection resolution to their case,
please submit this document at this time. I have included the Offer
in Compromise packet in this envelope.
On September 16, 2003,
Appeals Officer Kaplan verbally reminded Attorney Burke that he had
not received the information requested on July 2, 2003. Finally, on
October 27, 2003, Appeals Officer Kaplan informed Mr. Burke that
information previously requested had not been received and that the
Appeals Office would issue a determination based on information
already in its possession unless Mr. Burke submitted the information
immediately.
The record clearly
demonstrates not only that petitioner failed to submit a viable
offer-in-compromise for the consideration of respondent's Appeals
officer, but that Settlement Officer O'Shea and Appeals Officer
Kaplan repeatedly provided petitioner with the opportunity to submit
an offer-in-compromise for consideration. Based on the administrative
record, we hold that Settlement Officer O'Shea and Appeals Officer
Kaplan balanced the need for the efficient collection of taxes with
concern that the collection action be no more intrusive than
necessary.
IV.
Issues
With Respect to the Supplemental Notice of Determination
We now address the issues
raised by petitioner with respect to the supplemental notice of
determination.
A. Whether Barbara
Drake Is Properly Included in Petitioner's Section
6330 Hearing.
Petitioner contends that
the issues raised by Barbara Drake and by petitioner are
"inextricably intertwined" and that respondent's Appeals
Officer erred in determining that Barbara Drake was not properly
included in petitioner's section
6330 hearing on remand.
For this Court to have
jurisdiction of a taxpayer's section
6330 action, the person must be
issued a notice of determination under section
6330 by respondent's Appeals
Office, and the person must timely file a petition with this Court
for judicial review of the section
6330 determination. Sec.
6330(c) and (d); Rules 330 and
331. In the instant case, although Mr. Burke submitted a request for
a section
6330 hearing on behalf of both
Barbara Drake and petitioner, respondent's Appeals Office issued the
original notice of determination to petitioner alone. Subsequently,
Mr. Burke filed a section
6330 petition with this Court on
behalf of petitioner alone. As noted above, neither the petition nor
the amended petition purported to be filed on behalf of Barbara
Drake. Consequently, Barbara Drake is not a party to the instant
case, and this Court has no jurisdiction over the issue of whether
she was entitled to participate in the section
6330 hearing on remand.17
B. Whether Petitioner
May Challenge the Underlying Liability for 1995.
Petitioner contends that
respondent's Appeals officer erred in determining that petitioner may
not challenge the underlying liability for petitioner's 1995 tax
year.
As noted above, in a
section
6330 hearing, a taxpayer may
challenge the existence or amount of the underlying tax liability
only if the taxpayer did not receive a statutory notice of deficiency
for the tax liability or did not otherwise have an opportunity to
dispute the tax liability. Sec.
6330(c)(2)(B). In the instant
case, the record demonstrates that petitioner had the opportunity to
dispute the 1995 tax liability during petitioner's 1997 bankruptcy
proceeding. See Kendricks v. Commissioner [Dec.
55,950], 124 T.C. 69, 77 (2005).
Consequently, we conclude that petitioner may not challenge the
underlying 1995 Federal income tax liability in the instant case. See
id.
C. Whether the
Jeopardy Levy Was Proper.
Petitioner contends that
respondent imposed the jeopardy levy in bad faith as a means of
advancing respondent's negotiating position in settlement discussions
and that respondent's Appeals officer erred in sustaining the
jeopardy levy.
If the Secretary believes
that the assessment or collection of a tax deficiency will be
jeopardized by delay, he shall immediately assess the deficiency and
issue notice and demand for payment to the person liable for the
payment of the tax.18
Sec.
6861(a). The existence of one or
more of the following conditions supports a determination that the
collection of a tax is in jeopardy:
(i) The taxpayer is or
appears to be designing quickly to depart from the United States or
to conceal himself or herself.
(ii) The taxpayer is or
appears to be designing to quickly place his, her, or its property
beyond the reach of the Government either by removing it from the
United States, by concealing it, by dissipating it, or by
transferring it to other persons.
(iii) The taxpayer's
financial solvency is or appears to be imperiled.
Sec.
1.6851-1(a), Income Tax Regs.;
sec. 301.6861-1(a), Proced. & Admin. Regs. Notice and demand may
be issued for the immediate payment of a tax whose collection is
determined to be in jeopardy. Sec.
6331(a). Upon a failure or
refusal to pay such tax, the Secretary may immediately levy upon the
property or rights to property of the person subject to the tax
liability without regard to the 10-day period otherwise required
under section
6331(a).19
Pursuant to section
6330(f), the person subject to
such a jeopardy levy is entitled to a section
6330 hearing within a reasonable
period of time after the jeopardy levy. Pursuant to section
6330(d), this Court has
jurisdiction to review the determination of respondent's Appeals
Office with respect to a jeopardy levy. Dorn v. Commissioner [Dec.
54,974], 119 T.C. 356, 359
(2002). We review such determinations for abuse of discretion. Zapara
v. Commissioner [Dec.
56,023], 124 T.C. 223, 228
(2005).
In the instant case,
respondent's Appeals Office incorporated petitioner's jeopardy levy
hearing into petitioner's section
6330 hearing on remand, and the
Appeals officer sustained the jeopardy levy. The actions of
petitioner with respect to the 1997 bankruptcy sale proceeds
demonstrate that the jeopardy levy was proper. Petitioner received
the bankruptcy sale proceeds after the discharge of Barbara Drake and
petitioner from the 1997 bankruptcy, and a Federal tax lien attached.
Subsequently, petitioner gratuitously transferred the bankruptcy sale
proceeds to Darren Drake and Gregory Drake, Jr., who took the
proceeds subject to the Federal tax lien and who thereafter held the
proceeds in their personal brokerage account. However, on a
collection information statement received by respondent on January
14, 2000, petitioner did not respond to the question of whether
assets had recently been sold or otherwise transferred for less than
their full value. On January 30, 2002, Mr. Burke provided Settlement
Officer O'Shea with a copy of another collection information
statement, signed by petitioner on January 24, 2002, on which
petitioner responded "no" to the question of whether
petitioner had transferred any assets out of his name for less than
their actual value in the last 10 years. Furthermore, during the
initial section
6330 hearing, petitioner failed
to provide documents requested by Appeals Officer Kaplan relating to
the whereabouts of the 1997 bankruptcy sale proceeds.
Petitioner appears to
have been designing to quickly place the 1997 bankruptcy sale
proceeds beyond the reach of the Government by transferring such
proceeds to third parties, who might have dissipated the funds absent
an immediate collection action. Based on the administrative record in
the instant case, we conclude that respondent's Appeals officer did
not abuse her discretion in sustaining the jeopardy levy against
petitioner.
D. Whether the Parties
Completed a Global Settlement Agreement.
Petitioner contends that
respondent set forth a global settlement offer pursuant to the terms
of Attorney Cardone's letter to Mr. Burke dated December 20, 2006;
that Mr. Burke orally accepted respondent's offer on behalf of
petitioner and petitioner's family during Mr. Burke's telephone
conference with Attorney Cardone on January 6, 2006; and that
Attorney Cardone demonstrated that the parties had completed the
global settlement agreement by sending to Mr. Burke the proposed
stipulated decision, the proposed waiver, and the memoranda from
Darren Drake and Gregory Drake, Jr.20
Consequently, petitioner contends that respondent's Appeals officer
erred in determining that the parties did not enter into a settlement
agreement.21
Parties to a controversy
before this Court may settle the matter by agreement. Dorchester
Indus. v. Commissioner [Dec.
52,011], 108 T.C. 320, 329
(1997), affd. without published opinion[2000-1
USTC ¶50,265] 208 F.3d 205
(3d Cir. 2000). The parties may not repudiate a valid settlement. Id.
at 330. In the absence of fraud or mistake, we have declined to set
aside a settlement that was duly executed by the parties and filed
with the Court. Id. We do not, however, enforce a settlement
not intended by both parties. Id.
General principles of
contract law determine whether the parties reached a settlement. Id.
An objective manifestation of mutual assent to essential terms is a
prerequisite to the formation of a contract. Id. Mutual assent
generally requires an offer and an acceptance. Id. A
settlement agreement may be reached in the absence of a writing,
through offer and acceptance. Id.
In the instant case, we
conclude that the parties did not mutually assent to the settlement.
We agree with petitioner that Attorney Cardone's letter to Mr. Burke
dated December 20, 2005, constituted a settlement offer. The record
demonstrates, however, that petitioner did not timely accept
respondent's offer. Mr. Burke's letter to Attorney Cardone dated
December 19, 2005, demonstrates that the parties disagreed as to
whether the global settlement should include a provision barring the
award of litigation costs. Mr. Cardone's letter to Mr. Burke dated
December 21, 2005, stated that respondent's offer would lapse unless
Barbara Drake and petitioner accepted all of the settlement terms by
December 28, 2005. Barbara Drake and petitioner did not accept the
terms of the settlement agreement as of that date, and, consequently,
respondent's offer lapsed by its own terms. We, therefore, conclude
that Mr. Burke's purported oral acceptance of the settlement terms on
January 6, 2006, was late and therefore ineffective.
Although the parties
appear to have neared a settlement agreement during the conference on
January 6, 2006, the parties' subsequent actions demonstrate that
such an agreement was never completed. (1) Although Attorney Cardone
sent to Mr. Burke the proposed stipulated decision and the proposed
waiver, each referencing the settlement terms outlined in Attorney
Cardone's letter to Mr. Burke dated December 20, 2005, the documents
were never signed. (2) The status report filed with this Court by
petitioner in January of 2006 stated that "counsel have
undertaken extensive negotiations to resolve the subject matter and
believe that they have achieved a basis for settlement" but did
not state that the parties had completed the settlement agreement on
January 6, 2006, as petitioner now claims. (3) The status report
filed with this Court by respondent in January of 2006 stated that
"the parties have not resolved the outstanding income tax
liabilities but negotiations are on going." (4) Neither
petitioner nor respondent at any time filed with this Court a
stipulated decision or a related motion for entry of decision. (5)
Although the settlement terms purport to resolve Barbara Drake's
section
6015 claim, Barbara Drake's
"Motion to Request the Determination of a Tax Liability"
remained pending before the bankruptcy court until that court issued
its opinion on January 11, 2006, subsequent to the date on which
petitioner now claims to have completed the global settlement
agreement.22
Finally, (6) Attorney Forbes's letter to Mr. Burke dated January 13,
2006, stated that petitioner and related parties had not accepted the
settlement terms and that respondent was "hereby withdrawing the
proposed January 6, 2006 settlement unless Barbara Drake agrees to
the vacatur of the January 11, 2006 Memorandum Decision and January
12, 2006 Order of the Bankruptcy Court."23
Based on the
administrative record in the instant case, we conclude that no
objective manifestation of mutual assent existed with respect to the
global settlement. Although Mr. Burke and Attorney Cardone attempted
to reach agreement as to most if not all of the settlement terms
outlined in Mr. Cardone's letter of December 20, 2005, the record
demonstrates that the parties did not complete an enforceable
settlement agreement.24
E. Whether Appeals
Officer Kramer Improperly Rejected Petitioner's Offer-in-Compromise.
We understand petitioner
to contend that Appeals Officer Kramer improperly rejected
petitioner's offer-in-compromise.25
Petitioner contends that Appeals Officer Kramer erred in determining
that petitioner did not submit requested financial verification
documents because Appeals Officer Kramer neither requested
documentation nor set forth a deadline for petitioner to submit such
documentation after accepting petitioner's offer-in-compromise for
processing on January 19, 2006. Petitioner further contends that the
global settlement agreement "mooted" any request for
documentation made prior to January 6, 2006.
If an offer-in-compromise
that has been accepted by the IRS for processing does not contain
sufficient information to permit the IRS to evaluate whether the
offer should be accepted, the IRS will request that the taxpayer
provide the needed additional information.26
Sec. 301.7122-1(d)(2), Proced. & Admin. Regs. In the instant
case, during the conference between Mr. Burke and Appeals Officer
Kramer on November 4, 2005, Mr. Burke was asked to submit additional
documents needed for the evaluation of petitioner's
offer-in-compromise by November 14, 2005.
Petitioner neither
disputes that such a request was made nor contends that such
documents were in fact submitted in response to the request.
Based on the
administrative record in the instant case, we are unable to conclude
that the global settlement negotiations affected the document request
as alleged by petitioner. More than 4 months elapsed from the date of
the document request until the issuance of the supplemental notice of
determination, and Appeals Officer Kramer was not required to make
further requests. We conclude that the record demonstrates that
Appeals Officer Kramer's rejection of the offer-in-compromise was not
an abuse of discretion.27
V.
Whether
Petitioner Is Entitled to Litigation Costs
Petitioner contends that
he substantially prevailed with respect to the most significant issue
presented in the proceeding before this Court,28
that he meets the net worth requirements of 28 U.S.C. 2412(d)(2)(B),
that he exhausted administrative remedies, and that he did not
unreasonably protract the court proceedings. Consequently, petitioner
contends that he is entitled to litigation costs in the amount of
$20,007.45.
Section
7430(a) provides that an
individual may recover litigation costs incurred in a court
proceeding brought against the United States in connection with the
determination of a tax or penalty. Litigation costs may be awarded
pursuant to section
7430 if (1) the individual is the
prevailing party, (2) the individual has exhausted administrative
remedies, (3) the individual has not unreasonably protracted the
court proceedings, and (4) the claimed litigation costs are
reasonable. Sec.
7430(a), (b)(1), (3), (c)(4). The
requirements of section
7430 are conjunctive, and the
individual has the burden of proving that each of these requirements
has been satisfied. See Rule 232(e); Minahan v. Commissioner
[Dec.
43,746], 88 T.C. 492, 497 (1987).
To qualify as the
prevailing party, the individual must substantially prevail with
respect to either the amount in controversy or the most significant
issue or set of issues presented in the Court proceeding, and the
individual must satisfy the net worth requirement of section
7430(c)(4)(ii).29
Sec.
7430(c)(4)(A). The Court looks to
the final outcome of the case to determine whether the individual has
substantially prevailed within the meaning of section
7430(c)(4)(A). Cassuto v.
Commissioner [91-2
USTC ¶50,334], 936 F.2d 736,
741 (2d Cir. 1991), affg. in part and revg. in part [Dec.
45,968] 93 T.C. 256 (1989);
Bowden v. Commissioner [Dec.
53,234(M)], T.C. Memo. 1999-30.
The issuance of the Drake I opinion did not represent the final
outcome of the instant case, as we remanded the case to respondent's
Appeals Office for a new section
6330 hearing while retaining
jurisdiction. Consequently, we conclude that petitioner did not
substantially prevail for purposes of section
7430(c)(4)(A) based upon the
decision of this Court in Drake I.
The most significant
issue raised in the instant proceeding is whether the ultimate
determination of respondent's Appeals Office to sustain the proposed
levy action against petitioner constitutes an abuse of discretion.
Petitioner has not prevailed on that issue. Consequently, petitioner
is not the prevailing party and is not entitled to an award of
litigation costs pursuant to section
7430. We need not decide whether
petitioner exhausted administrative remedies, whether petitioner
unreasonably protracted the court proceedings, or whether the claimed
litigation costs are reasonable.
VI.
Conclusion
The record demonstrates
that respondent's Appeals Office (1) verified that the requirements
of applicable laws and administrative procedures had been met, (2)
properly addressed the issues raised by petitioner during the initial
section
6330 hearing and the section
6330 hearing on remand, and (3)
and balanced the need for the efficient collection of taxes with the
concern that the collection action be no more intrusive than
necessary. Consequently, we hold that the decision of respondent's
Appeals Office to sustain the proposed levy against petitioner is not
an abuse of discretion. Accordingly, we hold that petitioner is not
entitled to an award of litigation costs as the prevailing party.
Additionally, petitioner's "Motion to Compel Settlement"
will be denied. We have considered all of the parties' contentions.
To the extent not addressed herein, such contentions are without
merit or are unnecessary to reach.
To reflect the foregoing,
An appropriate order
will be issued.
*
This opinion supplements Drake
v. Commissioner
[Dec.
56,166],
125 T.C. 201 (2005).
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.
2
This amount represents the $161,250.65 received from the bankruptcy
sale, less attorney's fees and expenses.
3
The parties stipulated as follows: "Petitioner gifted the
proceeds, or $151,139.74, from [the 1997] bankruptcy proceeding to
his sons, Darren Drake and Gregory Drake, Jr." We note, however,
that the record otherwise suggests that petitioner gratuitously
transferred only $150,000 of the proceeds to his sons. To the extent
that the parties are unable to hereinafter reconcile this apparent
contradiction, based on the aforementioned stipulation, the Court
finds that petitioner gratuitously transferred the entire $151,139.74
to his sons.
4
Barbara Drake was not listed as a taxpayer and did not sign the
form.
5
The 2003 bankruptcy petition filed by Barbara Drake should not be
confused with the earlier joint bankruptcy petition filed by Barbara
Drake and petitioner and dismissed on June 30, 1999, for failure to
file a repayment plan. The latter bankruptcy petition is described
above with respect to the 1997 bankruptcy. We note that Barbara Drake
subsequently converted the 2003 bankruptcy from ch. 13 to ch. 7. In
re Drake,
336 Bankr. 155, 156 (Bankr. D. Mass. 2006).
6
Barbara Drake filed the aforementioned motion soon after the Tax
Court dismissed her sec.
6015
case for lack of jurisdiction in Drake
v. Commissioner
[Dec.
55,822],
123 T.C. 320 (2004).
7
Although we held in Drake
v. Commissioner
[Dec.
55,822],
123 T.C. at 325, that Barbara Drake filed the sec.
6015
petition in violation of the automatic stay imposed under 11 U.S.C.
sec. 362(a)(8)(2000), we did not address explicitly whether the sec.
6015
determination also violated the automatic stay.
8
In addition, the bankruptcy court noted that there were no assets to
be administered and the property subject to the IRS lien was no
longer the property of the bankruptcy estate. In
re Drake,
336 Bankr. at 160.
9
On Mar. 31, 2006, we ordered petitioner to file a response, setting
forth clear and concise assignment of each and every error which
petitioner alleges to have been committed with respect to the
supplemental notice of determination. Petitioner made no contention
that Appeals Office Kramer either had a prior involvement with
petitioner or had received a communication relating to the
credibility of petitioner or petitioner's representative.
Consequently, those issues are deemed to be conceded by petitioner.
See Rule 331(b)(4).
10
Pursuant to sec.
7122(b),
any offer-in-compromise exceeding $50,000 requires the opinion of the
General Counsel for the Department of the Treasury or his
delegate.
11
The parties' global settlement negotiations should be distinguished
from petitioner's offer-in-compromise, which pertains to the tax
liabilities of petitioner alone.
12
The proposed stipulated decision stated, inter alia, that "petitioner
and respondent will resolve the liabilities that are the subject of
this action in accordance with the terms of the December 20, 2005,
letter from respondent to petitioner's counsel, Timothy J. Burke."
The proposed waiver stated, inter alia, as follows: "In
accordance with the December 20, 2005 letter from [Attorney Cardone
to Mr. Burke] and pursuant to their agreement with the terms of that
letter, Gregory Drake, Jr., and Darren Drake, hereby waive any and
all claims * * *."
13
Such prior notification under sec.
6330(a),
however, is not required where the Secretary finds that the
collection of the tax is in jeopardy. Secs.
6331(a),
6330(f).
We discuss that exception in greater detail below.
14
We note that a person is entitled to only one notification pursuant
to sec.
6330(a)(1)
and one administrative hearing pursuant to sec.
6330(b)(2).
15
Because we held in Drake I that the ex parte communication between
Advisor Gordon and Settlement Officer O'Shea on Jan. 30, 2002,
constituted a prohibited ex parte communication, we did not decide
petitioner's remaining contentions in that opinion.
16
Although the aforementioned contentions appear redundant,
petitioner's briefs set forth separate arguments with respect to
each. Petitioner alleged the following facts in support of his
contentions: (1) Settlement Officer O'Shea and Advisor Gordon engaged
in an ex parte communication on Jan. 30, 2002; (2) Appeals Officer
Kaplan and Attorney Forbes engaged in an ex parte communication on
Oct. 27, 2003; (3) Appeals Officer Kaplan requested that petitioner
submit updated financial documentation without investigating
financial statements previously submitted by petitioner; (4) Appeals
Officer Kaplan simultaneously requested that petitioner submit
financial information and that petitioner increase his
offer-in-compromise; (5) Appeals Officer Kaplan determined that the
transfer of petitioner's home to Darren Drake appeared questionable
even though Appeals Officer Kaplan had no experience and performed no
research with respect to bankruptcy foreclosure issues; and (6)
respondent's Appeals Office authorized Settlement Officer O'Shea and
Appeals Officer Kaplan to both conduct the sec.
6330
hearing and to negotiate an offer-in-compromise.
17
Barbara Drake does not appear to have been issued a notice of
determination under sec.
6330
with respect to the taxable years in issue. While respondent's
Appeals Office may issue a sec.
6330
determination to Barbara Drake upon the resolution of her sec.
6015
matter, unless such a determination is issued and a petition is
timely filed with this Court by her, we lack jurisdiction with
respect to Barbara Drake's collection proceedings.
18
Pursuant to sec.
1.6851-1,
Income Tax Regs., and sec. 301.6861-1, Proced. & Admin. Regs.,
the Secretary authorizes certain IRS employees to determine whether
the collection of a tax is in jeopardy.
19
Assuming that sec.
6331(k)(1)
applies to a jeopardy levy case, in the instant case, sec.
6331(k)(1)
did not preclude a jeopardy levy against petitioner because
respondent accepted petitioner's offer-in-compromise for processing
only after the jeopardy levy had been imposed.
20
The aforementioned contentions are primarily set forth in
petitioner's "Motion to Compel Settlement", which, for
reasons set forth in this opinion, we deny.
21
With respect to the global settlement, an attachment to the
supplemental notice of determination states as follows: "Your
representative and IRS Area Counsel attempted to reach settlement
terms for this and other related cases. That attempt was
unsuccessful." Separately, the attachment stated: "In a
telephone conversation on February 13, 2006, the Settlement Officer
informed your representative that she did not agree that the case now
included Mrs. Drake and that she would no longer hold the CDP case in
abeyance in hopes of an outside settlement."
22
We note that Mr. Burke is listed as a counsel of record in In
re Drake,
336 Bankr. 155 (Bankr. D. Mass. 2006), in addition to representing
petitioner in the instant case.
23
Attorney Forbes's letter is consistent with respondent's position as
set forth in respondent's "Response to Motion to Compel",
which contended that the documents sent by Attorney Cardone to Mr.
Burke on Jan. 6, 2006, constituted a settlement offer requiring the
signature of petitioner and the related parties for acceptance.
24
Because we hold that the global settlement agreement is not
enforceable, we need not address whether the Court has jurisdiction
with respect to a settlement agreement governing parties other than
the petitioner.
25
With respect to petitioner's offer-in-compromise, petitioner's
primary contention is that "Respondent erred in failing to
compromise the parties' dispute on the terms of the [global
settlement] Agreement." Because we previously addressed
petitioner's contention that the parties entered into a settlement
agreement, we now address petitioner's related contention that
petitioner did not receive a request for further information from
respondent.
26
If the taxpayer does not submit the additional information that the
IRS has requested within a reasonable time period after such a
request, sec. 301.7122-1(d)(2), Proced. & Admin. Regs., provides
that the IRS may return the offer to the taxpayer.
27
Petitioner alleges that he received from respondent a letter dated
Jan. 19, 2006, which stated: "If your offer in compromise
requires further actions, the Appeals employee will set a deadline
for completion. These actions can include adding periods of liability
or providing more financial information. If the deadline is not met,
your offer in compromise will be returned." Because respondent
had already requested further financial information as of the date of
the alleged letter, such language appears to be surplusage.
Nonetheless, petitioner had been provided ample opportunity to submit
the requested documents prior to Jan. 19, 2006, and petitioner could
have but apparently did not contact respondent's Appeals officer to
resolve any confusion.
28
Specifically, petitioner contends that he prevailed in Drake I, on
the basis of his argument that the initial sec.
6330
hearing was improper.
29
Sec.
7430(c)(4)(A)(ii),
as relevant here, effectively limits the award of litigation costs to
individuals with a net worth of $2 million or less. Stieha
v. Commissioner
[Dec.
44,269],
89 T.C. 784, 789-790 (1987).
Russel
S. Bankson v. Commissioner.
Docket
No. 22863-04S . Filed May 22, 2006.
[Code
Secs. 6330
and 7122]
Tax
Court: Summary opinion: Notice of determination:
Offer-in-compromise:Failure to provide financial information. --
An IRS Appeals officer
did not abuse his discretion by rejecting an offer in compromise
proposed by an individual who failed to provide required financial
information relating to income he may have earned as president of a
corporation. In addition, the taxpayer, who lived with another
person, refused to provide sufficient information to determine his
share of household living expenses. --CCH.
PURSUANT TO INTERNAL
REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS
PRECEDENT FOR ANY OTHER CASE.
Russel S. Bankson, pro
se. Catherine G. Chang, for respondent.
PANUTHOS, Chief Special
Trial Judge: This case was heard pursuant to the provisions of
sections
6330(d) and 7463
of the Internal Revenue Code in effect when the petition was filed.
The decision to be entered is not reviewable by any other court, and
this opinion should not be cited as authority. Unless otherwise
indicated, all subsequent section references are to the Internal
Revenue Code in effect at relevant times.
This proceeding arises
from a petition for judicial review filed in response to a Notice of
Determination Concerning Collection Action(s) Under Section
6320 and/or 6330
(notice of determination) sent to petitioner on November 4, 2004. The
issue for decision is whether respondent abused his discretion in
sustaining a notice of Federal tax lien filed against petitioner.
Background
Some of the facts have
been stipulated, and they are so found. The record consists of the
stipulation of facts and supplemental stipulation of facts with
attached exhibits, additional exhibits introduced at trial, and the
testimony of petitioner. At the time of filing the petition,
petitioner resided in Emeryville, California.
Petitioner filed Federal
income tax returns for the taxable years 2000 and 2001 but did not
pay the taxes reported thereon. Respondent assessed the taxes shown
on the returns, as well as related penalties and interest, and filed
a notice of Federal tax lien against petitioner on May 29, 2003, in
the total amount of $13,220.86. Respondent sent petitioner a Notice
of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320
on June 3, 2003.
Petitioner timely
submitted a Form 12153, Request for a Collection Due Process Hearing.
Petitioner also submitted an offer-in-compromise (OIC), in which he
offered to pay $3,800 to compromise his tax liabilities for the
taxable years 2000 and 2001.1
The OIC was based on doubt as to collectibility. Included with the
OIC was a Form 433-A, Collection Information Statement for Wage
Earners and Self-Employed Individuals. The Form 433-A states that
petitioner is unemployed, earns no income, and has monthly expenses
of $745. Also included with the OIC was a letter from Heidi Bernd
(Ms. Bernd). The letter is dated June 6, 2003, and states: "I
hereby confirm that Russel S. Bankson * * * has resided in my
household since 9/01/01 and does not pay contractual rent. He does,
however, contribute to household expenses as his available income
allows."
Petitioner's OIC was
assigned to an Appeals officer, who held an administrative hearing
with petitioner by correspondence. In April 2004, the Appeals officer
sent petitioner a letter requesting, inter alia, information about
his employment history and expenses, as well as "verification of
income" for Ms. Bernd. Petitioner's reply letter reiterates that
he is unemployed. It also explains that petitioner performs various
personal services for Ms. Bernd, such as chauffeuring and shopping,
in exchange for living with her. The letter includes copies of
petitioner's credit card statements for certain months in 2003, but
does not include verification of Ms. Bernd's income.
Petitioner and the
Appeals officer exchanged additional correspondence. At some point
during that time, respondent learned that petitioner was president of
an active California corporation (the corporation). This information
is not listed in the OIC or in petitioner's letters to the Appeals
officer. Respondent sent petitioner a letter in August 2004 again
requesting his employment history, as well as "Financial and
other records with respect to any related corporations in which you
were an officer or shareholder."
Petitioner claims he did
not receive respondent's August 2004 letter. He acknowledges,
however, that he did not provide respondent with certain financial
information, including information about the corporation,
verification of Ms. Bernd's income, and a breakdown of the respective
contributions toward living expenses that he and Ms. Bernd made. He
also concedes his OIC does not list any constructive income in the
form of reduced rent that he received from Ms. Bernd in exchange for
performing services for her.
In November 2004,
respondent issued petitioner a notice of determination sustaining the
filing of the notice of Federal tax lien. The notice of determination
states: (1) Petitioner failed to provide adequate financial
information, and (2) petitioner has the ability to pay his tax
liabilities in full.2
The notice of determination does not include an estimate of
petitioner's assets and liabilities. However, the record contains an
undated document titled "Appeals Case Memorandum" (the
Appeals memorandum). This document states that petitioner "has a
credit line of $4,200" and "retirement funds of more than
$2,300. These two assets total $6,500 (which is more than the amount
[petitioner] offered)." Neither the notice of determination nor
the Appeals memorandum includes an estimate of petitioner's future
income.
Discussion
Section
6321 imposes a lien in favor of
the United States on all property and rights to property of a person
when a demand for the payment of the person's liability for taxes has
been made and the person fails to pay those taxes. Such a lien arises
when an assessment is made. Sec.
6322. Section
6323(a) requires the Secretary to
file a notice of Federal tax lien if the lien is to be valid against
any purchaser, holder of a security interest, mechanic's lienor, or
judgment lien creditor. Lindsay v. Commissioner, T.C. Memo.
2001-285, affd. 56 Fed. Appx. 800 (9th Cir. 2003).
Section
6320 provides that a taxpayer
shall be notified in writing by the Secretary of the filing of a
notice of Federal tax lien and provided with an opportunity for an
administrative hearing. An administrative hearing under section
6320 is conducted in accordance
with the procedural requirements of section
6330. Sec.
6320(c). At the administrative
hearing, a taxpayer is entitled to raise any relevant issue relating
to the unpaid tax, including a spousal defense or collection
alternatives such as an offer-in-compromise or an installment
agreement. Sec.
6330(b) and (c)(2); sec.
301.6320-1(e)(1), Proced. & Admin. Regs. A taxpayer also may
challenge the existence or amount of the underlying tax liability,
including a liability reported on the taxpayer's original return, if
the taxpayer "did not receive any statutory notice of deficiency
for such tax liability or did not otherwise have an opportunity to
dispute such tax liability." Sec.
6330(c)(2)(B); see also Urbano
v. Commissioner, 122 T.C. 384, 389-390 (2004); Montgomery v.
Commissioner, 122 T.C. 1, 9-10 (2004).
At the conclusion of the
hearing, the Appeals officer must determine whether and how to
proceed with collection, taking into account, among other things,
collection alternatives proposed by the taxpayer and whether any
proposed collection action balances the need for the efficient
collection of taxes with the legitimate concern of the taxpayer that
the collection action be no more intrusive than necessary. See sec.
6330(c)(3).
Section
6330(d) provides for judicial
review of the administrative determination in the Tax Court or a
Federal District Court, as may be appropriate. Where the validity of
the underlying tax liability is properly at issue, the Court will
review the matter de novo. Where the validity of the underlying tax
liability is not properly at issue, however, the Court will review
the Commissioner's administrative determination for abuse of
discretion. Goza v. Commissioner, 114 T.C. 176, 181-182
(2000).
Here, petitioner does not
seek to challenge his underlying tax liabilities. He disputes only
the rejection of his OIC. We therefore review respondent's
determination for abuse of discretion. See Lunsford v.
Commissioner, 117 T.C. 183, 185 (2001).
Petitioner makes two main
arguments. First, although he acknowledges refusing to provide
respondent with certain financial information, petitioner claims that
such information was irrelevant to his OIC. Second, petitioner
disputes the determination that he was able to pay his tax
liabilities in full. In particular, petitioner challenges the
statement in the Appeals memorandum that his $4,200 line of credit
constitutes an asset available for collection.
Section
7122(a) authorizes the Secretary
to compromise any civil case arising under the internal revenue laws.
Grounds for compromise include doubt as to collectibility, which
"exists in any case where the taxpayer's assets and income are
less than the full amount of the liability." Sec.
301.7122-1(b)(2), Proced. & Admin. Regs. Evaluation of an OIC
based on doubt as to collectibility requires complete financial
information from the taxpayer. See Roman v. Commissioner, T.C.
Memo. 2004-20. Where the taxpayer refuses to provide such
information, the Commissioner's rejection of an OIC does not
constitute abuse of discretion. See id.; Willis v. Commissioner,
T.C. Memo. 2003-302; see also sec. 301.7122-1(d)(2), Proced. &
Admin. Regs.
Petitioner failed to
provide complete financial information to respondent. For example,
petitioner did not mention his role as president of the corporation
in his OIC and failed to supply information on this subject when
requested to do so.3
Petitioner contends he did not have to provide such information
because he has no ownership interest in the corporation. Even if this
is true, however, respondent was entitled to request information to
verify this assertion and to determine whether petitioner earned
income from the corporation.
Respondent also was
entitled to request information concerning petitioner's living
arrangements. Petitioner testified that he refused to provide income
information for Ms. Bernd because he did not wish to impose upon her.
The Internal Revenue Manual (IRM) provides, however, that where a
taxpayer shares living expenses with a person who is not liable for
the taxes owed, the offer investigator "should secure sufficient
information concerning the not liable person to determine the
taxpayer's proportionate share of the total household income and
expenses." IRM sec. 5.8.5.5.3(3) (May 15, 2004). This
information allows the investigator to "Determine which expenses
are shared and which expenses are the sole responsibility of the
taxpayer." IRM sec. 5.8.5.5.3(3)a and d.4
Petitioner also failed to
provide a breakdown of the amount he paid toward his living expenses
or to include in his OIC the value of the constructive income he
received from Ms. Bernd. See, e.g., Langlois v. Commissioner,
T.C. Memo. 1988-415 n.7 (income includes payment in kind for services
rendered), affd. without published opinion 886 F.2d 1316 (6th Cir.
1989). Petitioner appears to argue that detailed income and expense
information was unnecessary because his expenses exceeded his income;
thus, even if he had constructive income, it was entirely offset by
the imputed rent he paid to Ms. Bernd. As noted supra,
however, respondent required complete financial data to evaluate
petitioner's OIC. See Roman v. Commissioner, supra. Petitioner
cannot selectively withhold information because he believes it to be
irrelevant.
We conclude that
petitioner failed to provide complete financial information to
respondent. Respondent's rejection of petitioner's OIC therefore does
not constitute abuse of discretion. See id.; Willis v.
Commissioner, supra. With respect to respondent's
determination of petitioner's ability to pay, we share petitioner's
concern about the statement in the Appeals memorandum that
petitioner's $4,200 line of credit constitutes an asset. We can find
no support in the IRM for this position. Based on our resolution of
the case, however, we do not decide whether this determination is
correct. In reaching our holding, we have considered all arguments
made, and, to the extent not mentioned, we conclude that they are
moot, irrelevant, or without merit.
Reviewed and adopted as
the report of the Small Tax Case Division.
To reflect the foregoing,
Decision will be
entered for respondent.
1
Petitioner's OIC also included the taxable years 1999 and 2002. Those
taxable years are not before the Court.
2
The notice of determination includes other grounds in support of
respondent's position. Based on our resolution of issue for decision
infra,
we do not address these additional grounds.
3
As mentioned supra,
petitioner contends he did not receive respondent's August 2004
letter, which requests information about any corporation in which
petitioner was an officer or shareholder. Even if this is true,
however, both the Form 433-A, Collection Information Statement for
Wage Earners and Self-Employed Individuals, and respondent's April
2004 letter request employment information. Petitioner nevertheless
failed to provide information about the corporation.
4
We have held that reliance on IRM guidelines in evaluating collection
alternatives does not constitute an abuse of discretion. See, e.g.,
Orum
v. Commissioner,
123 T.C. 1, 13 (2004), affd. 412 F.3d 819 (7th Cir. 2005); Etkin
v. Commissioner,
T.C. Memo. 2005-245; Castillo
v. Commissioner,
T.C. Memo. 2004-238; Schulman
v. Commissioner,
T.C. Memo. 2002-129.
Jerry
Joe Kerr v. Commissioner.
Dkt.
No. 22838-04L , TC Memo. 2007-43, 93 TCM 932, February 22,
2007.
[Appealable, barring stipulation to the contrary, to
CA-8. --CCH.]
[Code
Sec. 7122]
Compromises:
Abuse of discretion: Financial information provided. --
The rejection of a
taxpayer's offer in compromise was not an abuse of discretion where
the financial information provided by the taxpayer was not enough to
allow the settlement officer to adequately evaluate the offer. The
taxpayer's marital settlement and separation agreement mentioned a
number of assets, including vehicles, real estate and business
entities. The settlement officer requested information about the
current value and ownership of those assets. The taxpayer provided,
mostly in the form of unsupported assertions, what he contended was
all the information available to him, which he claimed was "complete
and current from his point of view." However, that information
did not explain inconsistencies between the taxpayer's financial
information and the terms of the separation agreement; thus, it was
not sufficient to permit a reasonable analysis of the taxpayer's
offer. --CCH.
Joseph R. Borich III, for
petitioner; Dennis R. Onnen and James E. Cannon, for respondent.
MEMORANDUM
FINDINGS OF FACT AND OPINION
THORNTON, Judge: Pursuant
to section
6330, petitioner seeks review of
a proposed levy.1
The only issue is whether respondent's settlement officer abused his
discretion in rejecting petitioner's offer to compromise his 1992
income tax liability.
FINDINGS
OF FACT
The parties have
stipulated some facts, which we incorporate herein by this reference.
When he petitioned the Court, petitioner resided in Kansas City,
Missouri.
Prior
Deficiency Proceeding
On October 20, 1997,
respondent sent petitioner a notice of deficiency with respect to
income taxes for the years 1992 and 1993. Petitioner timely
petitioned this Court, seeking a redetermination of the deficiencies
and additions to tax. On February 24, 1999, pursuant to the parties'
stipulation, this Court entered its decision that for taxable year
1992 petitioner had a deficiency of $44,948 and owed an $8,990
penalty pursuant to section
6662(a).2
Petitioner's
Marital Settlement
On December 19, 2001,
petitioner and his former wife, DeAnna Daniels Kerr (Ms. Kerr), filed
a marital settlement and separation agreement (the marital
settlement) with the Circuit Clerk, Cass County, Missouri. The
marital settlement provided for the division between petitioner and
Ms. Kerr of personal property, real estate, and financial assets. The
marital settlement provided, among other things, that petitioner
would have ownership of a 1989 Ford pickup truck and that Ms. Kerr
would release any interest or title to "any commercial
vehicles". The marital settlement also provided that petitioner
would retain as his sole and separate property the stock of 7
Materials Corp. and Kerr Construction & Paving Co.; it further
stated that Ms. Kerr would relinquish any interest in the stock of
Redi-Mix Concrete (hereinafter RMC). The marital statement also
stated that petitioner owned no real estate, having quitclaimed to
Ms. Kerr his ownership interests in six parcels of real estate,
including one in Lake Winnebago, Missouri, and one at an address on
"Euclid" in Kansas City, Missouri. In addition, the
agreement indicated that petitioner and Ms. Kerr had made full
disclosure of their income and assets and the values thereof in
Income and Expense Statements and Financial Statements to be filed
with the Cass County Court.
Collection
Proceeding
On March 10, 2003,
respondent issued a Final Notice of Intent to Levy and Notice of Your
Right to a Hearing with respect to petitioner's unpaid 1992 tax
liability, which had grown to $129,220. Petitioner requested a
hearing. On June 30, 2003, before any hearing had been scheduled,
respondent received from petitioner Form 9465, Installment Agreement
Request, wherein petitioner proposed to pay his 1992 taxes with
$10,000 up front and $1,000 per month thereafter.
On June 21, 2004,
respondent's settlement officer held a face-to-face hearing with
petitioner and his representative.3
On July 6, 2004, the Appeals Office received from petitioner Form
656, Offer in Compromise, wherein petitioner offered to compromise
his 1992 income tax liability for $7,500. Petitioner's Form 656
indicated that the offer-in-compromise was predicated on doubt as to
liability and doubt as to collectability. Also on July 6, 2004,
petitioner submitted to respondent Form 433-A, Collection Information
Statement for Wage Earners and Self-Employed Individuals. On the Form
433-A, petitioner reported that his only income was a pension of
$2,201 per month and that he had monthly living expenses of $2,144.
None of the required documentation was attached to the Form 433-A.
The last page of the Form 433-A admitted into evidence contains the
settlement officer's handwritten calculations, which show, without
elaboration, the sum of $9,558.16.
By letter dated July 16,
2004, the settlement officer advised petitioner that, because of the
previous Tax Court decision adjudicating his 1992 income tax
liability, his offer-in-compromise could be not considered on the
basis of doubt as to liability. By letter to petitioner dated
September 7, 2004, the Appeals officer advised that he needed
additional information in order to evaluate the offer-in-compromise
on the basis of doubt as to collectability. The settlement officer
requested, among other things, substantiation of the living expenses
petitioner had claimed on his Form 433-A. In addition, referring to
provisions of the marital settlement, the settlement officer
requested additional information, including the following:
1. Descriptions and
values of the "commercial vehicles" that the marital
settlement indicated Ms. Kerr had relinquished to petitioner.
2. With respect to the
three companies that the marital settlement indicated had been
retained by petitioner, an explanation of the current status of these
companies, including documentation of any sales or transfers of the
companies' assets.
3. Information about the
real properties that, according to the marital settlement, petitioner
had quitclaimed to Ms. Kerr. The settlement officer requested an
explanation as to why petitioner had since used, at different times,
the Lake Winnebago, Missouri, address and the Kansas City "Euclid"
address as his home address on correspondence with the IRS.
4. A copy of the income
and expense statements and financial statements referenced in the
marital settlement.
The settlement officer's
letter indicated that if the requested information were not provided
by October 1, 2004, petitioner's offer-in-compromise would be
rejected.
By letter dated September
29, 2004, petitioner provided a minimal amount of documentation
relating to his expenses, stating that he paid for his expenses in
cash. Petitioner's letter stated that his interest in "commercial
vehicles", as referenced in the marital settlement, was limited
to a single 1989 Ford pickup, which he had already listed on his Form
433-A. Petitioner stated that two of the three companies referenced
in the marital settlement had closed down with no assets, and that
the other company, RMC, was wholly owned by his ex-wife. He provided
no documentation of any sales or transfers of these companies.
Petitioner stated that the Lake Winnebago, Missouri, address was his
"permanent mailing address" and that the Kansas City
"Euclid" address was where "I rent to live";
petitioner stated that he had no copies of quitclaim deeds. Finally,
petitioner stated that the settlement officer's request for financial
statements referenced in the marital settlement was "unclear"
and that he had no copy of the statements.
By notice of
determination dated October 26, 2004 (the notice), the Appeals Office
sustained the proposed levy. An attachment to the notice indicated,
among other things, that petitioner's offer-in-compromise had been
rejected because petitioner's response to the settlement officer's
request for additional information was inadequate to permit the
settlement officer to make a reasonable analysis of petitioner's
offer-in-compromise.4
OPINION
Petitioner does not
dispute his underlying tax liability. We review the settlement
officer's rejection of petitioner's offer-in-compromise for abuse of
discretion. Goza v. Commissioner [Dec.
53,803], 114 T.C. 176, 182
(2000).
Petitioner contends that
the settlement officer abused his discretion in rejecting
petitioner's offer-in-compromise. Petitioner does not dispute that
the settlement officer requested additional information that
petitioner never provided. Petitioner contends, however, that he
provided all the information that he had available, which he says was
"complete and current from his point of view". Petitioner
suggests that the burden was on the settlement officer to develop any
additional information which the settlement officer might wish to
rely upon to reject petitioner's offer-in-compromise. Petitioner's
contentions are unpersuasive.
When requesting an
offer-in-compromise, the taxpayer must provide complete and current
financial information sufficient to enable the Appeals officer to
adequately evaluate the offer. Sec. 301.7122-1(d)(2), Proced. &
Admin. Regs. If the taxpayer fails to do so, the offer-in-compromise
may be rejected. See, e.g., Shrier v. Commissioner [Dec.
56,604(M)], T.C. Memo. 2006-181;
Picchiottino v. Commissioner, [Dec.
55,773(M)], T.C. Memo. 2004-231;
Willis v. Commissioner [Dec.
55,334(M)], T.C. Memo. 2003-302.
The settlement officer
did not abuse his discretion in finding that petitioner's responses
to requests for additional information were insufficient to permit a
reasonable analysis of petitioner's offer-in-compromise. The answers
that petitioner provided to the settlement officer's September 7,
2004, request for additional information were incomplete and
insufficient to resolve legitimate questions raised by the settlement
officer as to apparent discrepancies between petitioner's reported
financial information and the provisions of the marital settlement.
For example, although the marital settlement indicated that Ms. Kerr
had relinquished any interest in RMC, petitioner represented to the
settlement officer, without supporting documentation, that RMC was
wholly owned by Ms. Kerr. Petitioner has not credibly explained these
inconsistencies or his failure to submit complete information as
requested. Similarly, petitioner has offered no explanation as to why
his Form 433-A, submitted with his offer --in-compromise, indicated
that petitioner had the ability to pay only $57 per month, whereas in
his previously requested installment agreement, petitioner had
offered to pay $10,000 up front and $1,000 per month thereafter.
Petitioner refers to the
settlement officer's notations on petitioner's Form 433-A, which
petitioner interprets to mean that the settlement officer might have
been willing to consider an offer-in-compromise of $9,558.16.
Petitioner suggests that the difference between this number and
petitioner's $7,500 offer-in-compromise is not "meaningful"
and that the settlement officer accordingly abused his discretion in
rejecting petitioner's $7,500 offer-in-compromise. We disagree. As
the settlement officer testified, his willingness to consider a
$9,558.16 offer --in-compromise was contingent on petitioner's
providing all the information that had been requested. Having failed
to provide the requested information, petitioner has no cause to
complain that the settlement officer did not further explore the
possibility of an upwardly revised offer-in-compromise.
In sum, the settlement
officer did not abuse his discretion in rejecting petitioner's
offer-in-compromise. Accordingly,
Decision will be
entered for respondent.
1
Unless otherwise indicated, all section references are to the
Internal Revenue Code, as amended.
2
The Court decided that petitioner had no deficiency and owed no
penalties for his taxable year 1993.
3
Apparently, at this hearing petitioner made no mention of his
previous installment agreement request; it is unclear that the
settlement officer was aware of it at the time.
4
In the notice of determination, the settlement officer also
considered petitioner's previous request for an installment
agreement, even though petitioner had not raised this issue at the
collection hearing. The settlement officer rejected the requested
installment agreement on the ground that the proposed payments would
not fully pay petitioner's tax liabilities within the expiration date
for collection. Petitioner has not challenged this determination in
this proceeding.
Edward
F. Murphy, Petitioner, Appellant v . Commissioner of Internal
Revenue, Respondent, Appellee.
U.S. Court of Appeals, 1st Circuit; 06-1109, November 20,
2006.
Affirming the Tax Court, 125 TC 301, Dec.
56,232.
[
Code
Sec. 6330]
Collection
Due Process: Additional information: Abuse of discretion. --
The IRS did not abuse its
discretion in concluding an individual's Collection Due Process (CDP)
hearing without providing him with further extensions of time to
submit additional information. The individual's CDP hearing had been
ongoing for several months during which he missed numerous deadlines
despite repeated extensions. The individual had refused to disclose
the nature of his illness that caused his failure to meet the
deadlines until after the hearing had ended. The IRS Appeals officer
concluded the hearing because she reasonably believed that there was
little hope the individual would timely provide the required
information. Back reference: ¶38,184.11.
[
Code
Sec. 7122]
Collection
Due Process: Offer-in-compromise: Additional information:
Extra-record evidence: Administrative record rule: Abuse of
discretion. --
The Tax Court did not
abuse its discretion when it excluded testimony offered by an
individual and the IRS Appeals officer in charge during the
individual's Collection Due Process (CDP) hearing. Neither the
individual's nor the officer's testimony fell within the exceptions
to the administrative record rule. The individual's testimony
regarding the circumstances that made him unable to offer a larger
settlement payment, and the Appeals officer's testimony concerning
the process she employed to evaluate his offer-in-compromise were
extra-record evidence and, hence, properly excluded. Moreover, the
IRS did not abuse its discretion in rejecting the individual's
offer-in-compromise because the Appeals officer's calculations
indicated that his ability to pay exceeded his compromise offer.
Although he complained to the Appeals officer that her proposed
compromise figure was too high, the individual did not offer an
explanation for why the calculation was unreasonable. Back
references: ¶41,130.29
and ¶41,130.65.
Timothy J. Burke for
petitioner-appellant. Eileen J. O'Connor, Assistant Attorney General,
Rachel I. Wollitzer, Jonathan S. Cohen, Department of Justice, for
respondent-appellee.
Before:
Selya and Howard, Circuit Judges, and Smith *
, District Judge.
H OWARD, Circuit Judge: Edward F.
Murphy owed federal income taxes in excess of $250,000 for 1992-2001.
He offered to settle this liability by paying $10,000. The Internal
Revenue Service (IRS) rejected Murphy's offer, concluding that he
could afford a larger settlement payment. Murphy appealed to the
United States Tax Court, which upheld the IRS's ruling. Murphy now
appeals the Tax Court's decision. We affirm.
I.
In
April 2002, the IRS issued Murphy a notice of intent to levy on his
property to collect on his outstanding income tax liability. Murphy
then exercised his right to request a collection due-process hearing
(CDP hearing) before the IRS executed the levy. See
26 U.S.C. §6330.
In July 2002, the IRS assigned Murphy's case to an appeals
officer.
On October 3, 2002, the appeals officer met with
Murphy's attorney to begin the hearing. At this meeting, counsel
informed the officer that Murphy did not contest his tax liability
but rather would make an "offer-in-compromise" of $10,000
to settle his liability through 2001. Murphy's offer was based on his
claimed inability to pay the full amount owed due to special
circumstances.
In response to a request for information about
Murphy's special circumstances, counsel told the officer that Murphy
was ill but refused to disclose the nature of the illness. The
officer set an October 31, 2002 deadline for Murphy to submit certain
outstanding documents necessary for considering his offer, including
his 2001 tax return. Murphy missed this deadline and several
subsequent extensions before finally filing the 2001 tax return on
January 8, 2003.
On January 22, 2003, the appeals officer
informed counsel that she required additional information from Murphy
by February 5, 2003, including verification that Murphy had tendered
his estimated tax payment for 2002. Murphy missed this deadline by a
week.
A month later, the appeals officer notified counsel that
Murphy's offer-in-compromise was insufficient because she calculated
that he could make a larger settlement payment in light of his
current income and expenses. The letter included a summary of the
officer's calculations, and set an April 9, 2003 deadline for Murphy
to increase his offer. Counsel subsequently told the officer that
Murphy could not make a larger payment and that the calculation was
erroneous. The officer granted Murphy ten days to offer a
counter-proposal or to demonstrate any error in the calculation.
Murphy did not respond by the deadline. A week after the deadline,
counsel telephoned the officer to report that Murphy had been
hospitalized but again declined to disclose the nature of Murphy's
illness. Counsel promised to provide Murphy's counter-proposal by May
9, 2003, but he did not do so.
After Murphy missed the May 9th
deadline, the appeals officer determined that Murphy's
offer-in-compromise could not be accepted because it was not
commensurate with his ability to pay and because he had missed filing
deadlines on multiple occasions. The IRS adopted the appeals
officer's recommendation and sent Murphy a letter stating that the
agency would proceed to levy on his property.
Murphy appealed
this ruling to the Tax Court. The court held an evidentiary hearing
during which Murphy unsuccessfully sought to introduce testimony from
himself and the appeals officer. In a thorough opinion, the Tax Court
ruled that (1) most of the testimony that Murphy sought to offer
during the evidentiary hearing was irrelevant, 1
(2) the appeals officer reasonably terminated Murphy's hearing
without providing further extensions after Murphy missed several
filing deadlines, and (3) the IRS did not abuse its discretion in
determining that Murphy's offer-in-compromise was insufficient.
II.
On
appeal, Murphy raises three arguments. First, he claims that the Tax
Court abused its discretion in excluding his testimony and the
testimony of the appeals officer. Second, he argues that the court
erred in determining that the IRS acted reasonably in ending the CDP
hearing without providing him with further extensions to submit
additional information. Finally, he contends that the court erred in
concluding that the IRS acted within its discretion in rejecting his
offer-in-compromise.
Before addressing these arguments, we
provide a brief summary of the CDP hearing process and the taxpayer's
right to appeal. In 1998, Congress established the CDP hearing
process to temper "any harshness caused by allowing the IRS to
levy on property without any provision for advance hearing."
Olsen
v. United States
[ 2005-2
USTC ¶50,637],
414 F.3d 144, 150 (1st Cir. 2005). The hearing is informal: no
face-to-face meetings are necessary and there is no requirement that
the proceedings be transcribed or recorded. See
Living
Care Alternatives of Utica, Inc. v. United States
[ 2005-1
USTC ¶50,395],
411 F.3d 621, 624 (6th Cir. 2005). During the hearing, a taxpayer may
raise "any relevant issue relating to the unpaid tax or the
proposed levy, including ... offers of collection alternatives, which
may include an offer-in-compromise." 26 U.S.C.
§6330(c)(2)(A).
To
proceed with a levy after a CDP hearing, the IRS must verify that it
has met all the requirements to move forward with a levy, reject the
taxpayer's defenses and proposed collection alternatives, and
determine that the "proposed collection action balances the need
for efficient collection of taxes with the legitimate concern of the
person that any collection be no more intrusive than necessary."
Id.
§6330(c)(3).
An aggrieved taxpayer may appeal to the Tax Court. Id. §6330(d)(1)
(as amended by Pub. L. No. 109-281, §855(a)). 2
A.
Extra-Record Evidence
During
the evidentiary hearing before the Tax Court, Murphy testified about
the circumstances that made him unable to offer a larger settlement
payment, and the appeals officer testified concerning the process
that she employed to evaluate Murphy's offer-in-compromise. The IRS
objected to the introduction of this testimony on the basis that the
Tax Court should not consider evidence that was not part of the
administrative record of the CDP hearing. The court rejected this
argument but still excluded the evidence as irrelevant. The IRS urges
us to affirm this ruling on an alternative ground: Tax Court review
should be limited to the administrative record.
We recently
considered this issue in the context of a taxpayer appeal to the
district court from the denial of an offer-in-compromise made during
a CDP hearing. See
Olsen
[ 2005-2
USTC ¶50,637],
414 F.3d at 154-57; see
also
supra
n.2. We recognized that the Supreme Court has "consistently
stated that review of administrative decisions is 'ordinarily limited
to consideration of the decision of the agency ... and of the
evidence on which it was based.'" [ 2005-2
USTC ¶50,637]
415 [414] F.3d at 155 (quoting United
States v. Carlo Bianchi & Co.,
373 U.S. 709, 714-15 (1963)). We further observed that this rule
applies to judicial review of informal agency adjudications. Id.
We therefore held that, subject to limited exceptions, the district
court could not consider evidence outside of the administrative
record in ruling on a taxpayer's CDP hearing appeal. Id.
We did not decide, however, whether the same rule should apply where
the taxpayer appeals to the Tax Court. Id.
at 154 n.9.
We now conclude that, for the reasons articulated
in Olsen,
the administrative record rule also applies to a taxpayer's CDP
hearing appeal to the Tax Court. See
Robinette
v. Comm'r
[ 2006-1
USTC ¶50,213],
439 F.3d 455, 461 (8th Cir. 2006) (citing Olsen
in support of applying the administrative record rule to CDP hearing
appeals in the Tax Court). Our decision to apply the administrative
record rule in the context of district court appeals was premised on
basic administrative law principles. Olsen
[ 2005-2
USTC ¶50,637],
414 F.3d at 155. The reasons supporting application of the
administrative record rule in district court CDP hearing appeals have
equal force where the appeal takes place in the Tax Court. The Tax
Court, like the district court, is charged with determining whether
the IRS's rulings during a CDP hearing were within its discretion.
Thus, judicial review normally should be limited to the information
that was before the IRS when making the challenged rulings. See
Robinette
[ 2006-1
USTC ¶50,213],
439 F.3d at 461.
As mentioned above, there are limited
exceptions to the administrative record rule. A reviewing court may
accept evidence outside the administrative record where there "is
a strong showing of bad faith or improper behavior" by agency
decisionmakers, Town
of Norfolk v. U.S. Army Corps of Eng'rs,
968 F.2d 1438, 1459 (1st Cir. 1992) (internal citation omitted), or
where there is a "failure to explain administrative action [so]
as to frustrate effective judicial review," Camp
v. Pitts,
411 U.S. 138, 142-43 (1973) ( per
curiam).
Neither
exception applies here. The appeals officer's testimony may have been
admissible if the existing administrative record had been inadequate
to permit effective judicial review, but the record in this case was
clearly sufficient. It included a log of the appeals officer's
actions in considering Murphy's offer, contemporaneous notes that the
officer made during the hearing, copies of correspondence with
Murphy's counsel, and a memorandum outlining the officer's basis for
decision. See
Robinette
[ 2006-1
USTC ¶50,213],
439 F.3d at 461-62 (concluding that a similarly constituted
administrative record was adequate to permit adequate judicial review
of a CDP hearing appeal). Murphy's testimony, providing evidence
about his financial and health situation that was not presented to
the IRS, does not fall within either exception. Accordingly, Murphy's
extra-record evidence was properly excluded.
B.
Conduct of the Hearing
Murphy
contends that the IRS abused its discretion in the conduct of his CDP
hearing. He argues that the appeals officer acted "with a clear
predisposition toward an inflexible and expeditious determination of
... the matter" by declining to grant him additional extensions
to file more information.
The relevant regulations do not
provide a time period within which a CDP hearing must be concluded.
Rather, they instruct the IRS to complete the hearing "as
expeditiously as possible under the circumstances." 26 C.F.R.
§301.6330-1(e)(3). Thus, there is no requirement that an appeals
officer "wait a certain amount of time before rendering [a]
determination as to a proposed levy." Clawson
v. Comm'r
[ CCH
Dec. 55,623(M)],
87 T.C.M. (CCH) 1251, 2004 WL 870523, at *7 (U.S. Tax Ct. Apr. 23,
2004). The reasonableness of the appeals officer's decision to
terminate a CDP hearing must be determined in light of the entire
context of the proceeding. See
Morlino
v. Comm'r
[ CCH
Dec. 56,126(M)],
90 T.C.M. (CCH) 168, 2005 WL 2978531 at *6 (U.S. Tax Ct. Aug. 24,
2005).
Murphy's CDP hearing had been ongoing for eight months
before the appeals officer concluded it. During that time, Murphy
missed numerous deadlines despite repeated extensions. To the extent
that his failure to meet filing deadlines was caused by illness, he
was less than forthcoming with the IRS, as he refused to disclose
even the nature of the illness until after the hearing had ended.
It
is apparent that the appeals officer did not conclude the hearing
because of an unyielding determination to end the matter quickly, but
rather because she reasonably believed that there was little hope
that Murphy would timely provide the required information. Were we to
find an abuse of discretion on this record, we would transform CDP
hearings from a shield against invasive government conduct into a
taxpayer's tool to delay the timely collection of delinquent tax
liabilities by seeking endless extensions. We will not do so. See,
e.g.,
Carlson
v. United States
[ 2005-2
USTC ¶50,606],
394 F.Supp.2d 321, 329-30 (D. Mass. 2005) (declining to find abuse of
discretion where appeals officer declined further extensions after
taxpayer missed several deadlines); Manjourides
v. Comm'r
[ CCH
Dec. 56,171(M)],
90 T.C.M. (CCH) 396, 2005 WL 2591930, at *3 (U.S. Tax Ct. Oct. 13,
2005) (concluding that there was no abuse of discretion in
terminating CDP hearing where taxpayer failed to meet filing
deadline).
C.
Rejection of the Offer-in-Compromise
Finally,
we turn to the IRS's rejection of Murphy's $10,000
offer-in-compromise. We review the Tax Court's decision de
novo.
See
Fargo
v. Comm'r
[ 2006-1
USTC ¶50,326],
447 F.3d 706, 709 (9th Cir. 2006). But our review of the underlying
IRS decision is deferential. We will only disturb the rejection of
Murphy's offer-in-compromise if it represents "a clear abuse of
discretion in the sense of clear taxpayer abuse and unfairness by the
IRS." Olsen
[ 2005-2
USTC ¶50,637],
414 F.3d at 150 (internal citation omitted).
The IRS may
compromise a taxpayer's liability where it has a "[d]oubt as to
collectability" of the debt. 26 C.F.R. §301.7122-1(b)(2). A
doubt as to collectability exists "in any case where the
taxpayer's assets and income are less than the full amount of the
liability." Id.
Once
a doubt as to collectability is established, the "decision to
accept or reject an offer to compromise ... is left to the discretion
of the [IRS]." Id.
§301.7122(c)(1). In exercising this discretion, the IRS must
consider all the facts and circumstances of the taxpayer's case,
including whether they warrant acceptance of an amount that might not
otherwise be acceptable under the IRS's policies and procedures. Id.
There is no dispute that Murphy established a doubt as to
collectability and therefore was eligible to compromise his debt. The
only question is whether the IRS abused its discretion in declining
to accept Murphy's proposed compromise.
The IRS may reject an
offer-in-compromise because the taxpayer's ability to pay exceeds the
compromise proposal. See
Fargo
[ 2006-1
USTC ¶50,326],
447 F.3d at 709-10. Under IRS procedures, the agency will not accept
a compromise that is less than the reasonable collection value of the
case, absent a showing of special circumstances. See
Rev.
Proc. 2003-71(2).
The IRS considers the reasonable collection value of a case to be the
funds available after the taxpayer meets basic living expenses. Id.
Murphy argues that the IRS's determination that the reasonable
collection value of his case exceeded $10,000 was
unreasonable.
Based on information provided by Murphy, the
appeals officer calculated that, after expenses, Murphy had a monthly
surplus of $1,128. The officer multiplied this figure by 60 months (a
reasonable period until Murphy could expect to retire) for a total of
$67,680 in available income. The officer then added realizable equity
to conclude that Murphy could offer to pay $82,164 to settle his tax
liability.
Murphy has never mounted a serious challenge to
these calculations. After complaining to the appeals officer that her
proposed compromise figure was too high, Murphy never offered an
explanation for why the officer's calculations were unreasonable.
Even now, Murphy offers only a conclusory allegation that the appeals
officer's calculation was "preposterous." On this record,
the IRS did not abuse its discretion in rejecting Murphy's
offer-in-compromise. 3
Affirmed.*
Of the District of Rhode Island, sitting by designation.
1
The court did admit testimony from the appeals officer explaining the
meaning of certain notes and symbols that appeared in the record.
2
Prior to the enactment of Pub. L. No. 109-281, appeals from CDP
hearings were heard in federal district court if the Tax Court did
not have jurisdiction over the underlying tax liability. See
26 U.S.C. §6330(d)(1)(B)
(repealed by Pub. L. No. 109-281, §855(a) (2006)).
3
Murphy has not presented a developed argument that the IRS abused its
discretion by declining to accept his offer-in-compromise because of
special circumstances. See
United
States v. Zannino,
895 F.2d 1, 17 (1st Cir. 1990).
Christopher
Cross, Inc., Plaintiff-Appellant v. United States of America,
Defendant-Appellee.
U.S. Court of Appeals, 5th Circuit; 05-30606, August 21,
2006, 461 F3d 610.
Affirming an unreported DC La decision.
[
Code
Sec. 7122]
Offer-in-compromise:
Inadequate offer: Nonprocessable offer: Abuse of discretion. --
An IRS Appeals officer
did not abuse her discretion when she refused a corporation's
offer-in-compromise regarding its unpaid employment taxes. Her
rejection of the offer as nonprocessable and inadequate was in
accordance with the Internal Revenue Code and Treasury regulations.
The corporation was not current on the payment of its estimated tax
for the prior two periods. Its failure to timely pay taxes owed was a
reasonable basis for the Appeals officer to reject its
offer-in-compromise relating to other unpaid taxes. Further, whether
or not the Appeals officer properly relied on the Internal Revenue
Manual when making her determination, it was grounded in the
discretion afforded to her by law. Back reference: ¶41,130.175.
Before:
Jones, Chief Judge, Barksdale and Benavides, Circuit
Judges.
BENAVIDES, Circuit Judge: This case concerns whether
an Internal Revenue Service ("IRS") appeals officer abused
her discretion in returning an offer in compromise submitted by
Christopher Cross, Inc. ("Taxpayer"). Specifically,
Taxpayer challenges the appeals officer's reliance on the Internal
Revenue Manual. For the reasons set forth below, we find that the
appeals officer acted within her discretion in rejecting Taxpayer's
offer in compromise. Therefore, we affirm the district court's
dismissal of Taxpayer's claims.
I.
BACKGROUND
The
facts are undisputed. Taxpayer admittedly owes the IRS unpaid
employment taxes for the periods ending March 31, 2002, June 2 30,
2002, September 30, 2002, and December 31, 2002. On December 10,
2002, the IRS issued to Taxpayer a Notice of Intent to Levy with
respect to unpaid employment taxes, including penalties and interest,
for the first three quarters of 2002. On May 5, 2003, the IRS issued
Taxpayer another Notice of Intent to Levy with respect to unpaid
employment taxes, including penalties and interest, for the fourth
quarter of 2002. Taxpayer's assessed liability totaled $134,078. In
response to each Notice of Intent to Levy, Taxpayer requested a
Collection Due Process ("CDP") hearing. See
I.R.C.
§6330.
IRS Appeals Officer Brenda Esser (the "Officer") conducted
a CDP hearing respecting both Notices.
On August 13, 2003,
Taxpayer submitted an offer in compromise (the "Offer")
with respect to employment taxes due for all four quarters. In the
Offer, Taxpayer proposed to pay a total of $85,000 under a
deferred-payment schedule. On September 10, 2003, the Officer
returned Taxpayer's Offer, stating that, "[Taxpayer] failed to
make its federal tax deposits timely for the entire two quarters
prior to the quarter [Taxpayer] submitted the offer....Unless and
until [Taxpayer] can demonstrate a willingness and ability to meet
these circumstances, [Taxpayer] does not qualify for
offer-in-compromise consideration."
On the same day, the
Officer issued a Notice of Determination upholding the proposed levy
to collect unpaid employment taxes as set forth in the two Notices of
Intent to Levy. Specifically, the Officer stated that (1) the IRS had
met all statutory, procedural, and administrative requirements before
issuing the Notices of Intent to Levy; (2) Taxpayer had not presented
an acceptable payment alternative; and (3) the proposed levy balanced
the need for efficient tax collection with Taxpayer's legitimate
concern that the collection action be no more intrusive than
necessary. Additionally, the Officer stated that Taxpayer's Offer was
"nonprocessable" because Taxpayer had not timely made
federal tax deposits and because Taxpayer had more than sufficient
equity in its current accounts receivable and moveable assets to pay
the tax debts at issue.
Taxpayer filed suit seeking review of
the Notice of Determination. In its complaint, Taxpayer alleged that
the IRS had violated its statutory rights under the Internal Revenue
Code by failing to consider the Offer. The Government subsequently
filed a motion to dismiss, claiming, inter
alia,
that Taxpayer failed to state a valid claim upon which relief could
be granted under Federal Rule of Civil Procedure 12(b)(6).
The
district court dismissed the case for failure to state a claim. It
held that the IRS's procedures for declaring offers to compromise
"nonprocessable" violated neither the Taxpayer's due
process rights nor the Internal Revenue Code and that the Officer was
within her discretion and authority to reject Taxpayer's offer to
compromise. Taxpayer filed a motion for reconsideration, which the
court denied. Taxpayer appeals.
II.
STANDARD OF REVIEW
"In
a collection due process case in which the underlying tax liability
is properly at issue, the Tax Court (and hence this Court) reviews
the underlying liability de
novo
and reviews the other administrative determinations for an abuse of
discretion." Jones
v. Comm'r
[ 2003-2
USTC ¶50,584],
338 F.3d 463, 466 (5th Cir. 2003) (citing Craig
v. Comm'r
[ Dec.
54,933],
119 T.C. 252, 260 (2002)); see
Living Care Alternatives of Utica v. United States
[ 2005-1
USTC ¶50,395],
411 F.3d 621, 626 (6th Cir. 2005) (holding that, when there is no
challenge to the validity of the underlying tax liability at the CDP
hearing, the appeals officer's decision is reviewed under an abuse of
discretion standard). Furthermore, several other circuits have held
that "Congress likely contemplated review for a clear abuse of
discretion in the sense of clear taxpayer abuse and unfairness by the
IRS, lest the judiciary become involved on a daily basis with tax
enforcement details that Congress intended to leave with the IRS."
Robinette
v. Comm'r,
439 F.3d 455, 459 (8th Cir. 2006) (internal quotation marks omitted);
see
Olsen v. United States
[ 2005-2
USTC ¶50,637],
414 F.3d 144, 150 (1st Cir. 2005); Living
Care
[ 2005-1
USTC ¶50,395],
411 F.3d at 631. We adopt this standard.
III.
DISCUSSION
A.
Statutory Framework
Consideration
of an offer in compromise submitted in the context of a CDP hearing
is governed by section
7122
of the Internal Revenue Code, which sets out the exclusive method of
compromising federal tax liabilities. See
Olsen
[ 2005-2
USTC ¶50,637],
414 F.3d at 153; I.R.C.
§7122.
Specifically, section
7122
provides that the "Secretary may
compromise any civil or criminal case arising under the internal
revenue laws prior to reference to the Department of Justice for
prosecution or defense...." I.R.C.
§7122(a)
(emphasis added). The statute further specifies that the "Secretary
shall prescribe guidelines for officers and employees of the [IRS] to
determine whether an offer-in-compromise is adequate and should be
accepted to resolve a dispute." I.R.C.
§7122(c).
The Treasury regulations state that "[t]he IRS may...return an
offer to compromise a tax liability if it determines that the offer
was submitted solely to delay collection or was otherwise
nonprocessable." 26 C.F.R. §301.7122-1(d)(2). The Internal
Revenue Manual (the "Manual") provides specific
circumstances in which an offer is "nonprocessable." One
such circumstance is when an in-business taxpayers has failed to
timely deposit, file, and pay "all required employment tax
returns for the two (2) preceding quarters prior to filing the
offer...." I.R.M. §5.8.3.4.1(1)(a).
B.
The Officer Did not Clearly Abuse her Discretion in Returning the
Offer
Taxpayer
argues that the Officer did not have the authority to return the
Offer based upon a provision of the Manual, and, therefore, the
Officer abused her discretion. We find no abuse of discretion. Even
assuming the Manual is not law and assuming that an appeals officer
should not rely upon the Manual in making its determination, the
Officer in this case acted within her discretion. While the Officer
cited the Manual in making her determination, we are not judging the
appropriateness of that citation. Instead, we judge whether the
Officer abused her discretion in returning the Offer.
The
Officer's determination was in accordance with the Internal Revenue
Code and Treasury regulations. The Internal Revenue Code provides
that the Secretary, through its agents, may compromise a civil case.
See
I.R.C.
§7122(a).
The statute also orders the Secretary to promulgate guidelines to
assist the officers in determining the adequacy of an offer. I.R.C.
§7122(c).
The Treasury regulations provide those guidelines and state that a
"nonprocessable" offer may be returned to the taxpayer. 26
C.F.R. §301.7122-1(d)(2).
Here, the Officer acted under
the power granted to her by the Internal Revenue Code to settle or
not settle this civil case. See
I.R.C.
§7122(a).
She determined that the Offer was inadequate because Taxpayer was not
current on the payment of its estimated tax for two periods ending
March 31, 2003 and June 30, 2003. See
I.R.C.
§7122(c).
Based on this inadequacy, she returned the Offer as "nonprocessable"
under the Treasury regulations. See
26 C.F.R. §301.7122-1(d)(2). The failure to timely pay owed
taxes is a perfectly reasonable basis for rejecting an offer in
compromise relating to other unpaid taxes. Whether or not she
properly relied on the Manual, the Officer made a determination
grounded in the discretion afforded to her by law and provided a
reasonable basis for finding the Offer inadequate. 1
Therefore, the Officer did not clearly abuse her discretion in
returning the Offer.
Furthermore, Taxpayer has offered no
viable support for its contention that the Officer cannot utilize the
guidelines set forth in the Manual when making the discretionary
decision to return a submitted offer in compromise. See
Living Care
[ 2005-1
USTC ¶50,395],
411 F.3d at 631. It therefore has "failed to present sufficient
evidence to justify a remand." Id.
In sum, the Officer did not clearly abuse her discretion in returning
the Offer, and the record evinces no clear taxpayer abuse or
unfairness by the IRS. See
id.
We
find additional support for finding no clear abuse of discretion in
Living
Care.
The Sixth Circuit, addressing whether the IRS may reject a plan to
present an offer in compromise, unequivocally stated that the
"taxpayer must be current on payments for the previous two
quarters to be eligible to submit an offer in compromise."
Living
Care
[ 2005-1
USTC ¶50,395],
411 F.3d at 630. Accordingly, it held that the "IRS was well
within its discretion to reject [the taxpayer's] plan to present an
offer in compromise." Id.
at 631. We join the Sixth Circuit in finding no clear abuse of
discretion where an appeals officer makes a "fully support[ed]"
decision regarding the processability of an offer. 2
Id. at 630.
IV.
CONCLUSION
Our
review of the Officer's determination is for clear abuse of
discretion. Under that standard, the Officer made a reasoned decision
under the Internal Revenue Code and Treasury regulations. Moreover,
Taxpayer has failed to present authority stating the contrary.
Therefore, Taxpayer has not stated a claim upon which relief can be
granted. Accordingly, we AFFIRM the dismissal of Taxpayer's
claims.
1
Additionally, the Officer supported her decision by finding the
following: (1) the IRS had met all statutory, procedural, and
administrative requirements before issuing the Notices of Intent to
Levy; (2) Taxpayer had not presented an acceptable payment
alternative; and (3) the proposed levy balanced the need for
efficient tax collection with Taxpayer's legitimate concern that the
collection action be no more intrusive than necessary.
2
The Seventh Circuit similarly has held that an appeals officer's
consideration of a taxpayer's failure to remit estimated tax was not
an abuse of discretion when that appeals officer denied a second CDP
hearing to a taxpayer who had failed to comply with a previous
installment plan designed to eliminate tax liabilities. See
Orum v. Comm'r
[ 2005-2
USTC ¶50,444],
412 F.3d 819, 820-21 (7th Cir. 2005). Although the officer in Orum
relied on the failure to remit estimated tax and here the Officer
relied on the failure to timely remit, the Seventh Circuit's holding
is persuasive in determining that such reliance is a valid reason for
an appeals officer's decision and within the officer's discretion.