OFFER
IN COMPROMISE
ECONOMIC
HARDSHIP
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.
Economic hardship is a
matter that must be considered by the IRS in its consideration of an
Offer in Compromise. Consider the following cases:
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.
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, Pub. L. 105-206, sec. 3001(c),
112 Stat. 727.
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.
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.
Diana
Van Arsdalen, f.k.a. Diana Murray, Petitioner, and Stanley David
Murray, Intervenor v. Commissioner.
Dkt.
No. 1195-04 , TC Memo. 2007-48, 93 TCM 953, March 5,
2007.
[Appealable, barring stipulation to the contrary, to
CA-9. --CCH.]
[Code
Sec. 6015]
Innocent
spouse relief: Equitable relief: Abuse of discretion. --
The IRS abused its
discretion in denying a divorced taxpayer innocent spouse relief
under Code
Sec. 6015(f); based on an
application of the factors set forth in Rev.
Proc. 2000-15, 2001 CB 447
(which, although superseded, applied to the IRS's determination), to
hold her liable would be inequitable. All of the factors either
favored the taxpayer or were neutral. The taxpayer was divorced when
she sought relief and she did not significantly benefit from her
former husband's underpayment of tax. Also, she would suffer economic
hardship if the relief were not granted in that she had a reasonable
need to retain her modest retirement account. Further, the taxpayer
did not know or have reason to believe that the tax at issue would
not be paid. Her husband intentionally mislead her into thinking he
was fulfilling their tax obligations. Another factor favoring the
taxpayer was that the underpaid tax was solely attributable to her
former husband. Her husband's agreement in their property settlement
to pay community debt, including the taxes at issue, also favored
her. Finally, the taxpayer did not participate in any wrongdoing.
--CCH.
Jack B. Schiffman, for
petitioner; Stanley David Murray, pro se; Rachael J. Zepeda,
for respondent.
MEMORANDUM
FINDINGS OF FACT AND OPINION
COLVIN, Chief Judge:
Respondent determined that petitioner is not entitled to relief under
section
6015(b), (c), or (f)1
for 1992, 1993, 1994, 1995, or 1996 (the years in issue). Petitioner
petitioned this Court under section
6015(e)(1) and contends she is
eligible for relief under section
6015(f). Petitioner's former
husband, Stanley Murray (intervenor), intervened and supports her
claim.2
See Rule 325(b). We hold that petitioner is entitled to relief under
section
6015(f) for the years in issue.3
Based on Billings v.
Commissioner [Dec.
56,572], 127 T.C. 7 (2006), and
Commissioner v. Ewing [2006-1
USTC ¶50,191], 439 F.3d 1009
(9th Cir. 2006), revg. [Dec.
54,766] 118 T.C. 494 (2002) and
vacating [Dec.
55,519] 122 T.C. 32 (2004), we
dismissed this case for lack of jurisdiction by order dated October
2, 2006. See also Bartman v. Commissioner [2006-1
USTC ¶50,298], 446 F.3d 785
(8th Cir. 2006), affg. in part and vacating in part [Dec.
55,608(M)] T.C. Memo. 2004-93.
However, Congress subsequently reinstated our jurisdiction to review
the Commissioner's determinations under section
6015(f) with respect to tax
liability remaining unpaid on or after December 20, 2006. Tax Relief
and Health Care Act of 2006, Pub. L. 109-432, div. C, sec. 408, 120
Stat. 3061. The parties reported to the Court that as of December 20,
2006, unpaid taxes remain in this case. On December 27, 2006, we
vacated our order dismissing this case for lack of jurisdiction.
FINDINGS
OF FACT
Some of the facts have
been stipulated and are so found.
A.
Petitioner
and Intervenor
Petitioner resided in
Scottsdale, Arizona, when she filed her petition. Petitioner and
intervenor (collectively, the Murrays) were married in September 1988
and were divorced in June 1998. They had two children.
Petitioner has a high
school education. She was employed full time for several years before
she married intervenor when she was 30. She worked full time until
January 1990. The Murrays had their first child in February 1990.
Petitioner occasionally worked part time from then until they
separated in 1998.
Intervenor was a
self-employed practicing lawyer most of the time he was married to
petitioner.
Intervenor was the
family's primary earner and handled the family finances. He wrote the
majority of checks to pay the family living expenses. The Murrays did
not live well, and money was always tight. In 1993, intervenor
submitted an offer-in-compromise with respect to years not identified
in the record. Petitioner did not know that intervenor filed an
offer-in-compromise in 1993.
B.
The
Murrays' Joint Federal Income Tax Returns
Intervenor was
responsible for making estimated payments of Federal income tax
relating to income from his law practice. He did not make these
payments, even though he told petitioner that he was doing so.
The Murrays filed joint
Federal income tax returns for 1992 through 1996. Intervenor gave
income tax returns to petitioner to sign each year around April 14.
Petitioner reviewed those returns, on which the Murrays reported tax
due (including additions to tax for underpayment of estimated tax) of
$11,131, $14,933, $10,263, $2,114, and $6,252 for 1992, 1993, 1994,
1995, and 1996, respectively. Petitioner knew that their taxes were
not being fully paid when the returns were filed, but intervenor
assured her that he would fully pay those taxes from his future law
practice earnings.
C.
Events
After the Years in Issue
The Murrays sold their
home in mid-1997, and respondent applied the proceeds ($18,818.96) to
their tax liability for 1988 on June 16, 1997.
The Murrays filed for
bankruptcy under chapter 13 in September 1997. The bankruptcy case
was dismissed on August 5, 1998. No taxes were discharged in that
proceeding.
The Murrays were divorced
in June 1998. The property settlement, which was included in the
Murrays' divorce decree, provided, inter alia, that intervenor was
solely responsible for paying their community debts. This included
their joint tax liability.
After her divorce from
intervenor, petitioner had custody of her and intervenor's two
children, found new employment, married Mark Van Arsdalen (Mr. Van
Arsdalen), and had a third child. Petitioner has complied with tax
laws since 1997.
D.
Petitioner's
Request for Relief Under Section 6015
On April 3, 2001,
respondent received petitioner's Form 8857, Request for Innocent
Spouse Relief, in which petitioner sought relief from joint
liabilities of tax under section
6015(b), (c), and (f) for 1989
and 1991 through 1996. Respondent granted petitioner's request for
relief for 1989 and 1991 on December 17, 2001. On October 24, 2003,
respondent determined that petitioner was not qualified for relief
under section
6015 for 1992 through 1996.
E.
Petitioner's
Finances
In May 2005, petitioner
and intervenor owed tax, penalties, and interest in the amount of
$110,114.72. At that time, petitioner was about 47 years old and had
about $63,000 in her section
401(k) retirement plan account
and about $45,000 in credit card debt. Intervenor paid $560 per month
in child support payments to petitioner.
Petitioner's wages in
2001 were $55,217. On May 31, 2001, petitioner gave respondent a list
of six monthly living expenses totaling about $2,300: Mortgage
payment, $1,100; utilities, $200 to $300; food, $400 to $500; car
expenses, $375; car insurance, $150; and clothing (no amount stated).
Petitioner's monthly income in 2001 (including child support
payments) was $4,184.
Petitioner's wages were
about $58,000 in 2002. Petitioner and Mr. Van Arsdalen's total income
(including deferred compensation not further described in the record,
and gross proceeds from the sale of stock by Mr. Van Arsdalen) was
$86,260 in 2001, $120,374 in 2002, and $113,183 in 2003.
Petitioner gave
respondent a list dated June 30, 2003, of eight of her monthly living
expenses for 2003 totaling about $2,900: Child care, $400; car
payment, $500; car insurance, $100; mortgage, $1,200; utilities, $300
to $350; telephone, $100; health insurance, $220; and dental
insurance, $50.
Mr. Van Arsdalen changed
jobs around February 2004, and his income increased slightly. In
2005, petitioner estimated that the cost of some of the items she had
reported to respondent in 2001 and 2003 had increased, that her
monthly clothing expenses were $300, and that she spent $100 per
month for medical expenses for one of her children. In 2005,
petitioner also had monthly expenses totaling at least $1,600 for
several items she had not listed for 2001 or 2003, such as flood
insurance ($125), payments on a home equity loan ($250), credit card
payments ($900), dry cleaning ($80), personal care services (hair and
nails) ($115-$140), telephone, cable, and Internet service ($160),
Federal income and Social Security taxes, and State income tax.
In 2005, petitioner had
no collectibles, art, stock, annuities, life insurance with cash
value, savings bonds, savings account, or any other accounts with
financial institutions other than her section
401(k) retirement account.
As of January 7, 2003,
petitioner and intervenor owed tax, penalties, and interest in the
amount of $27,626.39 for 1992, $34,170.77 for 1993, $21,804.15 for
1994, $2,719.74 for 1995, and $11,351.78 for 1996 for a total of
$97,668.83.
OPINION
A.
Background
If husband and wife file
a joint Federal income tax return, they are jointly and severally
liable for the tax due. Sec.
6013(d)(3); Butler v.
Commissioner [Dec.
53,869], 114 T.C. 276, 282
(2000). However, a spouse may qualify for relief from joint liability
under section
6015(b) or (c) if various
requirements are met. The parties agree that petitioner does not
qualify for relief under section
6015(b) or (c).
If relief is not
available under section
6015(b) or (c), the Commissioner
may relieve an individual of liability for any unpaid tax if, taking
into account all the facts and circumstances, it would be inequitable
to hold the individual liable. Sec.
6015(f). This Court has
jurisdiction to review a denial of equitable relief under section
6015(f). Sec.
6015(e).
We review the
Commissioner's denial of relief for abuse of discretion. Jonson v.
Commissioner [Dec.
54,641], 118 T.C. 106, 125
(2002), affd. [2004-1
USTC ¶50,122] 353 F.3d 1181
(10th Cir. 2003). The taxpayer seeking relief has the burden of
proof. Alt v. Commissioner [Dec.
54,961], 119 T.C. 306, 311
(2002), affd. [2004-1
USTC ¶50,279] 101 Fed. Appx.
34 (6th Cir. 2004). To prevail, the taxpayer must show that the
Commissioner's determination was arbitrary, capricious, or without
sound basis in law or fact. Butler v. Commissioner, supra at
291-292.
B.
Revenue
Procedure 2000-15
The Commissioner
promulgated a list of factors in Rev. Proc. 2000-15, sec. 4, 2000-1
C.B. 447, 448-449, that the Commissioner considers in determining
whether to grant equitable relief under section
6015(f).4
First, the Commissioner will not grant relief unless seven threshold
conditions have been met: (1) The taxpayer must have filed joint
returns for the taxable years for which relief is sought; (2) the
taxpayer does not qualify for relief under section
6015(b) or (c); (3) the taxpayer
must apply for relief no later than 2 years after the date of the
Commissioner's first collection activity after July 22, 1998, with
respect to the taxpayer; (4) the liability must remain unpaid; (5) no
assets were transferred between the spouses filing the joint returns
as part of a fraudulent scheme by such spouses; (6) there were no
disqualified assets transferred to the taxpayer by the nonrequesting
spouse; and (7) the taxpayer did not file the returns with fraudulent
intent. Rev.
Proc. 2000-15, sec. 4.01, 2000-1
C.B. at 448. Respondent concedes that petitioner meets these
conditions.
Rev.
Proc. 2000-15, sec. 4.03, 2000-1
C.B. at 448-449, lists two factors which, if true, the Commissioner
treats as favoring relief: (1) The taxpayer is separated or divorced
from the nonrequesting spouse; and (2) the taxpayer was abused by the
nonrequesting spouse. Rev.
Proc. 2000-15, sec. 4.03, 2000-1
C.B. at 449, also lists two facts which, if true, the Commissioner
treats as not favoring relief: (3) The taxpayer received significant
benefit from the unpaid liability or the item giving rise to the
deficiency; and (4) the taxpayer has not made a good faith effort to
comply with Federal income tax laws in the tax years following the
tax year to which the request for relief relates. See Ferrarese v.
Commissioner [Dec.
54,894(M)], T.C. Memo. 2002-249.
The Commissioner
generally does not consider the absence of factors (1), (2), (3), or
(4) in determining whether to grant relief under section
6015(f). Rev.
Proc. 2000-15, sec. 4.03, 2000-1
C.B. at 448-449. However, on the basis of caselaw deciding whether it
was equitable to relieve a taxpayer from joint liability under former
section
6013(e)(1)(D), we consider the
fact that a taxpayer did not significantly benefit from the unpaid
liability as favoring equitable relief for that taxpayer. See Belk
v. Commissioner [Dec.
46,070], 93 T.C. 434, 440-441
(1989); Ferrarese v. Commissioner, supra; Foley v. Commissioner
[Dec.
50,418(M)], T.C. Memo. 1995-16;
Robinson v. Commissioner [Dec.
50,226(M)], T.C. Memo. 1994-557;
Klimenko v. Commissioner [Dec.
49,191(M)], T.C. Memo. 1993-340;
Hillman v. Commissioner [Dec.
48,971(M)], T.C. Memo. 1993-151.
Rev.
Proc. 2000-15, sec. 4.03, lists
the following four factors which, if true, the Commissioner treats as
favoring relief and which, if not true, the Commissioner treats as
not favoring relief: (5) The taxpayer would suffer economic hardship
if relief were denied; (6) in the case of a liability that was
properly reported but not paid, the taxpayer did not know and had no
reason to know that the liability would not be paid; (7) the
liability for which relief is sought is attributable to the
nonrequesting spouse; and (8) the nonrequesting spouse has a legal
obligation pursuant to a divorce decree or agreement to pay the
outstanding liability (weighs against relief only if the requesting
spouse has the obligation). Rev.
Proc. 2000-15, sec. 4.03, also
states that no single factor is controlling, all factors will be
considered and weighed appropriately, and the list of factors in Rev.
Proc. 2000-15, sec. 4, is not
exhaustive.
For reasons discussed
next, we conclude that none of the factors listed in Rev.
Proc. 2000-15, supra,
supports respondent's determination in this case, and additional
factors discussed below favor relief.
C.
Application
of the Factors Listed in Rev. Proc. 2000-15
1. Petitioner's
Marital Status
Petitioner was divorced
from intervenor when she sought relief. This factor favors
petitioner.
2. Spousal Abuse
Petitioner testified that
there was no abuse in her former marriage. Respondent determined that
this factor is neutral. We agree with respondent's determination on
this point.
3. Significant Benefit
Respondent concedes that
petitioner did not significantly benefit from intervenor's
underpayment of tax for 1992 through 1996. This factor favors
petitioner. See Belk v. Commissioner, supra; Ferrarese v.
Commissioner, supra; Foley v. Commissioner, supra; Robinson v.
Commissioner, supra; Klimenko v. Commissioner, supra; Hillman v.
Commissioner, supra.
4. Compliance With Tax
Laws
Petitioner complied with
Federal income tax laws after 1996, the last of the years to which
petitioner's request for relief relates. This factor is neutral.
5. Economic Hardship
Respondent determined and
contends that petitioner would not suffer economic hardship if relief
were not granted. We disagree.
a. Background
A factor treated by the
Commissioner as weighing in favor of relief under section
6015(f) is that paying the taxes
owed would cause the requesting spouse to suffer economic hardship.
Rev. Proc. 2000-15, sec. 4.03(1)(b), 2000-1 C.B. at 448. Respondent
considers the taxpayer to suffer economic hardship if paying the tax
would prevent the taxpayer from paying reasonable basic living
expenses. Sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs.; Rev.
Proc. 2000-15, secs. 4.02(1)(c)
and 4.03(1)(b), 2000-1 C.B. at 448-449.
The Commissioner
considers any information provided by the taxpayer in determining a
reasonable amount for basic living expenses, including the following:
(1) The taxpayer's age, employment status and history, ability to
earn, and number of dependents; (2) the amount reasonably necessary
for food, clothing, housing, medical expenses, transportation,
current tax payments, alimony, child support, or other court-ordered
payments, and expenses necessary to the taxpayer's production of
income; (3) cost of living in the geographic area where the taxpayer
resides; (4) the amount of property exempt from the levy that is
available to pay the taxpayer's expenses; (5) any extraordinary
circumstances; and (6) any other factor that the taxpayer claims
bears on economic hardship and brings to the Commissioner's
attention. Sec. 301.6343-1(b)(4)(ii), Proced. & Admin. Regs.
b. Petitioner's Income
and Expenses
In recommending that
petitioner not be granted relief under section
6015(f), the Appeals officer said
that petitioner had $1,764 of disposable income per month in 2001,
and that her income had increased since then. That amount roughly
equals the excess of petitioner's monthly income (including child
support) in 2001 of $4,184 over the six monthly expenses petitioner
listed on May 31, 2001.
Respondent concluded that
petitioner's living expenses are much lower than they actually are,
apparently by erroneously assuming that the six expenses petitioner
listed in 2001 were her only expenses. Respondent did not consider
several additional expenses petitioner reported to respondent in
2003. Based on her submissions to respondent in 2001 and 2003,
petitioner's monthly expenses in 2003 included: Mortgage payment,
$1,200; utilities, $300 to $350; food, $400 to $500 (in 2001); car
payment, $500; car insurance, $100; car operating expenses (no amount
given);5
clothing (no amount given); child care, $400; phone, $100; health
insurance, $220; and dental insurance, $50. These monthly expenses
totaled about $3,300. Respondent's estimate included nothing for
out-of-pocket medical expenses for one of her children, or Federal or
State income taxes, Social Security tax, or clothing expenses about
which she told respondent in her June 30, 2003, statement. In 2005,
she estimated that those expenses were $300 and $100 per month,
respectively. She also had expenses in 2005 for several other items,
such as Federal income tax and Social Security taxes, State income
tax, flood insurance, a home equity loan, car repairs, dry cleaning
and personal care services, and cable, telephone, and Internet
service.
c. Petitioner's
Retirement Fund
Petitioner had a balance
of about $63,000 in her section
401(k) retirement plan account in
2005. Section 301.6343-1(b)(4)(ii)(A) through (F), Proced. &
Admin. Regs., provides that the Commissioner will consider, inter
alia, the taxpayer's age, employment status and history, ability to
earn, and number of dependents, and any other factor that the
taxpayer claims bears on economic hardship and brings to the
attention of the Commissioner. We believe these provisions envision
consideration of a taxpayer's pension needs where appropriate. In
2003, petitioner was around age 45, had three children, and had a
modest income. Under these conditions, we believe that she has a
reasonable need to retain her modest retirement account.6
d. Conclusion
Petitioner and intervenor
owed about $110,000 in tax, penalties, and interest in May 2005, a
very substantial sum given her financial situation. We conclude that
this factor favors petitioner.
6. Knowledge or Reason
To Know
a. Background
In determining whether a
taxpayer in an underpayment case qualifies for equitable relief under
section
6015(f), respondent considers
whether the requesting spouse knew or had reason to know that the
reported liability would be unpaid. This factor favors relief if the
taxpayer reasonably believed when the return was filed that the
liability would be paid by the taxpayer's spouse. See Wiest v.
Commissioner [Dec.
55,099(M)], T.C. Memo. 2003-91
(the taxpayer reasonably believed taxes owed would be paid by
spouse). Respondent determined and contends that petitioner knew or
had reason to believe that the tax would not be paid. We disagree for
reasons stated next.
b. The
Offer-in-Compromise
Respondent contends that
an offer-in-compromise submitted to respondent in 1993 by intervenor
gave petitioner reason to know the taxes were not being paid. We
disagree. The offer-in-compromise is not in the record, and there is
nothing to support respondent's contention that petitioner knew about
it. We conclude that petitioner did not know that intervenor filed an
offer-in-compromise in 1993.
c. Petitioner and
Intervenor's Tax Returns
Respondent contends the
fact that petitioner signed and filed balance due returns shows that
she did not reasonably believe the unpaid tax reported on the returns
would be paid. Respondent contends that petitioner's reliance on
intervenor's assurances that he would pay all taxes due was
unreasonable because intervenor had underpaid his estimated taxes and
the Murrays habitually owed money that they could not pay. We
disagree. Intervenor intentionally misled petitioner into thinking he
was fulfilling their tax obligations.
Petitioner had a high
school education and stayed home to raise their children during most
of the years she was married to intervenor. Respondent apparently did
not consider petitioner's education or lack of involvement in family
finances, even though (1) all facts and circumstances are to be
considered in applying section
6015(f), sec.
6015(f)(1); and (2) a taxpayer's
level of education and lack of involvement in family finances are
well-established considerations in determining what a taxpayer knows
or had reason to know, Bliss v. Commissioner [95-2
USTC ¶50,370], 59 F.3d 374,
378 (2d Cir. 1995), affg. [Dec.
49,242(M)] T.C. Memo. 1993-390;
Guth v. Commissioner [90-1
USTC ¶50,133], 897 F.2d 441,
444 (9th Cir. 1990), affg. [Dec.
44,264(M)] T.C. Memo. 1987-522.
We conclude that the
record shows that at the times the returns were filed petitioner
expected intervenor to pay the Murrays' taxes after their returns
were filed.
d. The Lien on the
Murrays' House and the Bankruptcy
Respondent contends that
petitioner knew or had reason to know intervenor would not pay his
taxes because respondent took the proceeds on the sale of the
Murrays' house in mid-1997, and petitioner and intervenor filed for
bankruptcy in September 1997. We disagree. Intervenor misled
petitioner about his intentions to pay their taxes. Any knowledge
about intervenor's intent to pay his taxes that petitioner gleaned
from her discovery of the tax liens on the Murrays' house and their
bankruptcy filing occurred after the Murrays filed the last of the
returns for the years in issue in April 1997.7
e. Conclusion
We conclude that this
factor favors petitioner.
7. Whether the
Underpayment of Tax Is Attributable to Intervenor
Respondent concedes that
the underpaid tax is solely attributable to intervenor. This factor
favors petitioner.
8. Legal Obligation To
Pay Tax
The fact that the
nonrequesting spouse has a legal obligation pursuant to a divorce
decree or agreement to pay the outstanding liability favors granting
relief. Rev.
Proc. 2000-15, sec. 4.03, 2000-1
C.B. at 448. In the property settlement signed in June 1998,
intervenor agreed to pay community debts, which include the taxes
from which petitioner seeks relief from liability.
Respondent contends that,
even if the nonrequesting spouse has a legal obligation pursuant to a
divorce decree or agreement to pay the outstanding tax, this factor
does not favor petitioner because she had reason to know when she
signed the divorce decree that intervenor would not pay the tax due.
We disagree. Respondent provides no grounds to suggest that the
settlement agreement is not fully enforceable against intervenor by
petitioner. We conclude that this factor favors petitioner.
9. Other Factors
The list of factors in
Rev.
Proc. 2000-15, sec. 5, 2000-1
C.B. at 448-449, is not intended to be exhaustive. Id.
Petitioner did not participate in any wrongdoing. The problem
originated with intervenor, who failed to make tax payments while
misrepresenting to petitioner that he would make those payments as
required. Equitable relief is more likely to be appropriate where
concealment, overreaching, or other wrongdoing on the part of the
nonrequesting spouse is present. Hayman v. Commissioner, [93-1
USTC ¶50,272], 992 F.2d
1256, 1262 (2d Cir. 1993), affg. [Dec.
48,160(M)] T.C. Memo. 1992-228.
D.
Conclusion
Petitioner has presented
a strong case for relief from joint liability under factors
promulgated by the Commissioner in Rev. Proc. 2000-15, sec. 4.03.8
All of the factors either favor petitioner or are neutral. We
conclude that respondent's denial of relief under section
6015(f) was an abuse of
discretion, and that, on the basis of all the facts and
circumstances, it would be inequitable to hold petitioner liable for
the underpayment of taxes for 1992-96.
A final procedural note.
Respondent contends that we may consider only the administrative
record in deciding this case. We stated our Court's position on that
issue at Ewing v. Commissioner [Dec.
55,519], 122 T.C. 32, 44 (2004)
(In exercising our jurisdiction under section
6015(e)(1)(A) "to determine"
whether a taxpayer is entitled to relief under section
6015(f), it is appropriate for
this Court to consider the evidence admitted at trial), vacated on
other grounds 439 F.3d 1009 (9th Cir. 2006). However, we need not
consider respondent's contention further because it is clear that
petitioner prevails (and that all factors favor petitioner or are
neutral) whether or not our determination is limited to matter
contained in respondent's administrative record.
To reflect the foregoing,
Decision will be
entered for petitioner.
1
Unless otherwise provided, section references are to the Internal
Revenue Code as amended. Rule references are to the Tax Court Rules
of Practice and Procedure.
2
We previously held that Mr. Murray may intervene to support
petitioner's claim for relief. Van
Arsdalen v. Commissioner
[Dec.
55,702],
123 T.C. 135 (2004).
3
Respondent contends that we may consider only the administrative
record in deciding this case. See discussion below at par. D, p.
20.
4
Respondent's determination was subject to Rev.
Proc. 2000-15,
2000-1 C.B. 447. Rev.
Proc. 2000-15,
supra,
was superseded by Rev.
Proc. 2003-61,
2003-2 C.B. 296, for requests for relief under sec.
6015(f)
that either were filed on or after Nov. 1, 2003, or were pending on
Nov. 1, 2003, and for which no preliminary determination letter had
been issued as of Nov. 1, 2003.
5
Petitioner said that in 2003 her car payments were $500 and car
insurance was $100. Giving the most common meaning to words, those
two categories do not include car expenses, which in 2001 she
estimated to be $375.
6
In George
v. Commissioner
[Dec.
55,804(M)],
T.C. Memo. 2004-261, we said the taxpayer could liquidate part of her
IRA to pay taxes. George
is distinguishable from the instant case because the taxpayer in that
case had no expenses for dependents and would have had about $100,000
in her IRA after paying tax of about $200,000. Petitioner's modest
pension fund could be completely liquidated if it were used to pay
the tax owed.
Shanbaum
v. United States
[94-2
USTC ¶50,512],
32 F.3d 180 (5th Cir. 1994), holding that an ERISA pension is not
exempt from levy, has no bearing here because the Government's
authority to levy is not at issue.
7
The administrative record does not show that respondent took the
proceeds on the sale of the Murray's house in mid-1997 before the
Murrays filed their 1996 tax return around Apr. 15, 1997.
8
The Commissioner ordinarily will grant relief from joint liability
under sec.
6015(f)
where a liability reported in a joint return is unpaid and the
requesting spouse: (1) Is no longer married to the nonrequesting
spouse; (2) had no knowledge or reason to know that the tax would not
be paid; and (3) will suffer economic hardship if relief is not
granted. Rev. Proc. 2000-15, sec. 4.02, 2000-1 C.B. at 448. Those
circumstances are present here; however, for completeness, we have
considered all of the facts and circumstances. Sec.
6015(f)(1).
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.
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