Judges: "Cohen, Mary Ann"
Attorneys: Terri Ann Merriam , Jaret R. Coles , Brian Gary Isaacson , and Marlyn P. Chu , for petitioners. Gregory M. Hahn and Danae M. Rawson , for respondent.
Filed: Jan. 14, 2008
Latest Update: Dec. 05, 2020
Summary: T.C. Memo. 2008-6 UNITED STATES TAX COURT ROBERT AND GRACE BERGEVIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 6678-06L. Filed January 14, 2008. Terri Ann Merriam, Jaret R. Coles, Brian Gary Isaacson, and Marlyn P. Chu, for petitioners. Gregory M. Hahn and Danae M. Rawson, for respondent. MEMORANDUM OPINION COHEN, Judge: This proceeding was commenced in response to a Notice of Determination Concerning Collection Action Under Section 6330 sent to each petitioner with
Summary: T.C. Memo. 2008-6 UNITED STATES TAX COURT ROBERT AND GRACE BERGEVIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 6678-06L. Filed January 14, 2008. Terri Ann Merriam, Jaret R. Coles, Brian Gary Isaacson, and Marlyn P. Chu, for petitioners. Gregory M. Hahn and Danae M. Rawson, for respondent. MEMORANDUM OPINION COHEN, Judge: This proceeding was commenced in response to a Notice of Determination Concerning Collection Action Under Section 6330 sent to each petitioner with r..
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T.C. Memo. 2008-6
UNITED STATES TAX COURT
ROBERT AND GRACE BERGEVIN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6678-06L. Filed January 14, 2008.
Terri Ann Merriam, Jaret R. Coles, Brian Gary Isaacson, and
Marlyn P. Chu, for petitioners.
Gregory M. Hahn and Danae M. Rawson, for respondent.
MEMORANDUM OPINION
COHEN, Judge: This proceeding was commenced in response to
a Notice of Determination Concerning Collection Action Under
Section 6330 sent to each petitioner with respect to their income
tax liabilities for 1981, 1982, 1983, 1984, and 1986. Unless
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otherwise indicated, all section references are to the Internal
Revenue Code, as amended.
The liabilities arose out of petitioners’ participation in a
so-called Hoyt cattle venture. Petitioners acknowledge that this
case is similar to at least 16 other cases involving Hoyt cattle
breeding partnerships that are currently on appeal to the Court
of Appeals for the Ninth Circuit, including Ertz v. Commissioner,
T.C. Memo. 2007-15. Petitioners offered to stipulate to be bound
by the outcome of the Ertz case or, in the alternative,
petitioners requested that this case be continued pending action
by the Court of Appeals in Ertz and the cases consolidated with
it on appeal. Respondent declined the stipulation to be bound
and objected to the continuance.
This case has certain “procedural” differences from Ertz and
the other cases. Petitioners resided in Minnesota at the time
that their petition was filed, and, absent stipulation to the
contrary, our decision in this case is not appealable to the
Court of Appeals for the Ninth Circuit. Also, unlike the other
cases, there is no section 6621(c) issue in this case, so that
the jurisdictional question raised in Ertz is not involved in
this case. Third, the administrative record in this case was
lost and has been recreated by respondent. Thus, testimony of
the Appeals officer who conducted the hearing under section 6330
was taken, notwithstanding respondent’s objection that review
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should be limited to the administrative record under the Court of
Appeals opinion in Robinette v. Commissioner, 439 F.3d 455 (8th
Cir. 2006), revg.
123 T.C. 85 (2004). In view of the years for
which the interest on the underlying liabilities is accruing, we
have decided to proceed with our opinion in this case. The issue
for decision is whether it was an abuse of discretion to refuse
petitioners’ offer-in-compromise and to determine that collection
efforts should proceed.
Background
Although the record is voluminous, we do not here recount in
detail the background of the Hoyt partnerships; that has been
restated many times. We simply outline those facts necessary to
an understanding of petitioners’ arguments to the settlement
officer who conducted the section 6330 hearing and to the Court.
Walter J. Hoyt III (Hoyt or Jay Hoyt)
Many facts and documents have been stipulated in six
separate stipulations filed in this case, which are incorporated
in our findings by this reference. Background facts concerning
the venture in which petitioners invested are described in
“narrative stipulations” relating to Hoyt. From about 1971
through 1998, Hoyt organized and promoted to thousands of
investors more than 100 cattle breeding partnerships and some
sheep partnerships. The partnerships were all organized and
operated in essentially the same manner. In addition, all of the
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Hoyt organization investor partnerships were marketed and
promoted in an identical fashion. As the general partner
managing each partnership, Hoyt was responsible for and directed
the preparation of the tax returns of each partnership, and he
typically signed and filed each return. Hoyt used his status as
an enrolled agent with the Internal Revenue Service (IRS) to
promote the partnerships.
The Hoyt partnerships were ultimately audited as “a tax
shelter project”. Most of the partnerships were audited under
the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),
Pub. L. 97-248, section 402(a), 96 Stat. 648. See secs. 6221-
6231. Hoyt acted as the tax matters partner (TMP) during the
audit and until his removal by this Court in certain cases,
commencing in 2000.
On or around April 23, 1984, a criminal investigation
reference concerning Hoyt was made. On April 21, 1986, a
recommendation for prosecution was made. Those recommendations,
however, did not lead to prosecution. On or about July 28, 1989,
a second reference for criminal investigation was made. In 1990,
a grand jury investigation of Hoyt concluded without an
indictment. Hoyt’s status as an enrolled agent was revoked in
1998.
A criminal indictment was filed on June 2, 1999, and Hoyt
was convicted of various criminal charges on February 12, 2001.
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The criminal charges included fraud, mail fraud, bankruptcy
fraud, and money laundering. The essence of the criminal charges
was that Hoyt had victimized approximately 4,000 investors,
including petitioners.
Petitioners
On their income tax returns beginning in 1984, petitioners
claimed losses and credits from their involvement in a cattle
investor partnership organized and operated by Hoyt and
identified as Shorthorn Genetic Engineering 1984-4 Ltd.
Petitioners also claimed that losses related to the Hoyt
partnership carried back to 1981, 1982, and 1983. Additional
deductions were claimed on petitioners’ returns for 1985 and
1986. As a result of delays caused by Hoyt’s dealings with the
IRS and the various investigations of Hoyt, the taxes for the
years in issue were not assessed until sometime in 1998.
Section 6330 Proceedings
On March 21, 2005, the IRS sent to each petitioner a
separate Final Notice–-Notice Of Intent To Levy And Notice Of
Your Right To A Hearing for each of the years 1981, 1982, 1983,
1984, and 1986. A Request for a Collection Due Process Hearing
was filed on behalf of petitioners on or about April 7, 2005.
Petitioners’ request for a section 6330 hearing included the
following arguments:
Mr. and Mrs. Bergevin believe that the Notice of Intent
to Levy is improper for the following reasons:
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1. The Equitable Provisions of RRA 1998 Concerning
Offers in Compromise
The Conference Report of RRA 1998 directs that “the IRS
[in formulating these rules] take into account factors
such as equity, hardship, and public policy where a
compromise of an individual taxpayer’s income tax
liability would promote effective tax administration.”
H. Conf. Rep. No. 599, 105th Cong., 2d Sess. 289
(1998). The legislative history also specifies that
the IRS should 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.” Id. The Hoyt
partnership cases clearly qualify as “longstanding”
cases and interest should be abated in an offer in
compromise. The Commissioner’s current position on
these cases, to abate no interest because the IRS does
not believe it contributed to the delay, is
inconsistent with the broad legislative intent to go
outside the narrow constraints of interest abatement
under 26 U.S.C. sec. 6404(e) and simply abate interest
in longstanding cases.
Furthermore, it has been established by Jay Hoyt’s
March 2001 conviction that he defrauded the partners
and that the partners were his unwitting victims. (The
I.R.S. also determined that the partners were
“unwitting victims” in his appeals supporting statement
concerning the TEFRA cases). Thus, application of RRA
1998's equitable provisions should take into account
the extraordinary circumstances of these victims. The
IRS’ refusal to consider the equities of these cases is
inconsistent with legislative intent.
Therefore, the collection alternative of an “effective
tax administration” offer should be considered.
* * * * * * *
3. Opportunity to be Heard
Mr. and Mrs. Bergevin had no opportunity to be heard
during the examination process. Jay Hoyt, the TMP, was
under criminal investigation by the IRS during the
examination process and was subject to impermissible
conflicts of interests due to that investigation that
rendered him incapable of performing his fiduciary
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duties to Mr. and Mrs. Bergevin. During that same time
period, Jay Hoyt was also under tax return preparer
penalty investigation by the IRS, which also
contributed to his conflicts of interest and his
inability to represent Mr. and Mrs. Bergevin.
Notwithstanding the effect of IRS investigations on the
TMP’s fiduciary duties to the partners, the IRS
determined in 1989 that a number of circumstances
caused Jay Hoyt to have debilitating conflicts of
interest and that he, in fact, breached his fiduciary
duty to the partners. For example, Mr. Hoyt apparently
did not raise questions concerning the treatment of
guarantee payments to the investors, when those
payments were not paid to the investors but credited as
IRA payments that were later disallowed by the IRS.
However, to raise this issue, Hoyt would have to admit
to his fraudulent actions concerning the IRA plan,
which of course he did not. The effect of Hoyt’s
conflicts of interest on the tax assessments ultimately
suffered by his victims should be considered under the
expanded RRA 1998 equity provisions.
4. Offer in Compromise or Other Collection Alternative
Mr. and Mrs. Bergevin will not be able to pay the full
Hoyt liability, which is currently estimated to be
approximately $130,000, which amount includes both the
assessed years 1981 through 19861 and the unassessed
years 1987 through 1996. The entire liability should
be considered when determining Mr. and Mrs. Bergevin’s
ability to pay. Consideration should also be give
[sic] to the financial hardship payment will cause when
Mr. and Mrs. Bergevin retire. See Code sec. 7122(c)(1)
as added by section 3462(a) of RRA 1998 (Public Law No.
105-206). Any tax payment by the Bergevins will
significantly impact their ability to provide for
necessary living expenses during retirement. In the
Conference Report of RRA 1998, Congress expressed its
intent “that the IRS [in formulating these rules] take
into account factors such as equity, hardship, and
public policy where a compromise of an individual
taxpayer’s income tax liability would promote effective
tax administration.” H. Conf. Rep. 599, 105th Cong.,
2d Sess 289 (1998). We are currently in process of
updating Mr. and Mrs. Bergevin’s financial information
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and an updated Form 433-A Financial Statement will be
provided upon request.
_____________________
1
1985 has been assessed but has not been included
in the group of Notices to Intent to Levy dated
March 21, 2005.
Petitioners’ financial information provided on Form 433-A,
Collection Information Statement for Wage Earners and Self-
Employed Individuals, listed two checking accounts with a total
balance of $1,186; two investment accounts totaling $44,051; and
two automobiles. They listed their residence as valued at
$131,440, with an outstanding loan of $93,000. Petitioners’
income and expenses were shown as follows:
Total Monthly Income
Source Gross Monthly
Wages (Robert Bergevin) $2,750
Wages (Grace Bergevin) 635
Pension/Social Security (Robert Bergevin) 909
Pension/Social Security (Grace Bergevin) 1,483
Other 363
Total 6,l40
Total Monthly Living Expenses
Expense Items Actual Monthly
Food, clothing, and misc. $1,280
Housing and utilities 1,138
Transportation 1,210
Health care 391
Taxes (income and FICA) 637
Other expenses 545
Total 5,201
After the exchange of financial information, petitioners
proposed to pay $20,652 in full satisfaction of their then
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estimated $130,000 liability. The settlement officer explained
his methodology as follows:
As I indicated in my previous letter, administrative
guidance found in Internal Revenue Manual (“IRM”) sec.
5.8.11.2.2(10) specifically states that:
The Service will not compromise on public policy
or equity grounds based solely on the argument
that the acts of a third party caused the unpaid
tax liability.
The regulations in 26 C.F.R sec. 301.7122-1(b)(3)(iii)
preclude settlement if compromise would undermine the
general public’s compliance with our nation’s tax laws.
IRS has taken this stance with respect to settlement of
TEFRA matters such as your[s]. IRM sec. 5.8.11.2.2(3)
provides an example that resembles your case. The
existing administrative policies and procedures simply
preclude me from being able to secure the necessary
approvals of a non-hardship Effective Tax
Administration (“ETA”) offer in your case. I am not,
however, precluded from considering the merits of your
case under standard doubt as to collectibility or ETA
hardship criteria.
For an offer in compromise based upon doubt as to
collectibility to be accepted, you must generally offer
an amount that meets or exceeds reasonable collection
potential (“RCP”). RCP has two primary components:
1. Net realizable equity in assets, and
2. The present value of your future ability to
pay toward the tax debt
Net realizable equity in assets is simply the
difference between the quick sale values (generally
80 percent of fair market values) of your assets minus
the amounts owed on the interests and encumbrances
having priority over the federal tax liens. The
present value of your future income is determined by
subtracting necessary living expenses (those necessary
for your health, welfare and the production of income)
from your monthly income. For Appeals to accept your
offer under ETA hardship provisions, you must be able
to demonstrate that payment of more than $20,652 would
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cause you to be unable to meet your necessary living
expenses.
Petitioners raised some objections to the settlement
officer’s initial computations. The settlement officer made some
adjustments in response to information submitted. The settlement
officer reduced petitioners’ projected monthly net income and
recomputed the collection potential as follows:
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ASSET/EQUITY TABLE
(AET)
BERGEVIN
Revised Jan. 31, 2006
Fair Market Value Quick Sale Value Encumbrance Net Realizable
(FMV) (QSV) or Exemption Equity
Asset Determination Determination Determination Determination
Cash 0 0 0 0
Checking acct. $1,347 $1,347 0 $1,347
Checking acct.-2 262 262 0 262
Savings acct. 25 25 0 25
401(k) 69,500 69,500 $24,325 45,175
401(k)-2 317 317 0 317
Loan value of
life ins. 0 0 0 0
Stocks, bonds,
mutual funds 0 0 0 0
Pension 0 0 0 0
Personal
residence 181,200 144,960 94,500 50,460
Dissipation
of assets 15,000-50,000 15,000-50,000 0 15,000-50,000
Other real
estate 0 0 0 0
Furniture/
personal effects ‹ 7,200 ‹ 7,200 7,200 0
Vehicle 1–1995
Saturn SL1
83,000 miles 1,000 800 0 800
Vehicle 2-2002
Toyota Camry
50,000 miles 11,000 8,800 6,855 1,945
Accts. receivable 0 0 0 0
Tools/equip.
of trade ‹ 3,600 ‹ 3,600 3,600 0
Total Net Realizable Equity in Assets $115,331-$150,331
Present Value of Future Income (from the IET) Cash Offer - $28,032
TOTAL MINIMUM OFFER (absent exceptional
circumstances) Cash Offer - $143,363-$178,363
(absent exceptional circumstances)
Total Tax Liability (as of 2/15/2006) $150,000
(POA’s estimate)
IRC 6334(a)(2) allows for an exemption of $7,200 for fuel, provisions, furniture, and
personal effects.
IRC 6334(a)(3) allows for an exemption of $3,600 for books and tools of a trade,
business, or profession.
REMARKS:
* The $1,347 value assigned to the checking acct. is the average minimum balance as
reflected on the June, July, and Aug. 2005 bank statements.
* The $69,500 value for the 401(k) acct. based on the 9/30/05 statement. An
estimated 35 percent tax implication is assigned to this 401(k) acct. because it
is being used to fund the offer.
* The $181,200 value for the Personal Residence is the Estimated Market Value as
determined by the Anoka County Assessor and reflected on the 2005 Property Acct.
Statement.
* The Private Party Value of the 2002 Camry is $11,000. Trade-in Value is not used
because the FMV is reduced by 20 percent to arrive at a forced-sale value.
* $15,000-$50,000 dissipation of assets assigned to the portion of the Home Equity
Line of Credit used to fund payment of unsecured credit cards debts and non-
necessary living expenses such as sprinkler.
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Petitioners’ primary arguments were that, at 71 and 70 years
of age, they were approaching retirement age; Mr. Bergevin had
special health problems; and, after retirement, they would have
negative cashflow. Petitioners presented projections claiming
that they would need to retain most of their asset equity to meet
their ordinary and necessary living expenses over the following
5 years. The settlement officer responded in part:
The Bergevin Asset Equity Calculator presented by your
representative’s firm, though an illustration commonly
presented as a contention in an Effective Tax
Administration offer, is non-persuasive. It’s based on
the erroneous premise that the Internal Revenue Service
is charged with making certain taxpayers have
sufficient assets to fund future living expenses. To
agree with this assumption is to conclude that absent
independent wealth no one over the age of 60 should
have to pay any federal tax because he/she will need
such funds for future retirement living expenses.
Congress has made no such exception and IRS, as the
revenue collecting arm of the United States, has no
role in such a social issue. General offer guidelines
require the IRS examiner to make a reasonable
determination as to necessary living expenses and
Effective Tax Administration guidelines further require
the examiner to make a reasonable determination as to
future living expenses within the overall context of
settlement, but the examiner is not required to ensure
the existence level presented by your representative at
the practical disregard for the tax debt. The examples
in Internal Revenue Manual 5.8.11 in no way present
such a requirement.
The taxpayers are each of retirement age. If one or
both retire, their household income would decrease
along with the expense allowances for Taxes and
Transportation. Health Care expenses would likely
increase. The IRM allows a continuing Transportation
Operating expense of $200 once the loan on the 2002
Toyota Camry is paid. Because of the uncertainties and
complexities involved in this case, I used a PV factor
of 24 (months) instead of the standard 48 (months) in
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determining the present value of the Bergevins’ future
ability to pay. This was done in accordance with IRM
5.8.5.5.
During the course of the negotiations through exchange of
documents and meetings between petitioners’ counsel and the
settlement officer, other issues were discussed. The parties
disagreed as to the effect of a decision entered February 9,
2005, in an abatement action brought by petitioners in this
Court. The decision provided that, with respect to the tax years
1984, 1985, and 1986, petitioners are not entitled to an
abatement of interest under section 6404.
In the notices of determination sent March 3, 2006, the
offer-in-compromise was rejected as follows:
Offers of Collection Alternatives
We considered your offer of $20,652 dated September 27,
2005 and were not able to accept the offer under
existing policies and procedures. * * * [Settlement
Officer Dale Veer] previously provided you with the
details of how this determination was made.
You were given the opportunity to amend your offer to
an amount not less than the current balance owed for
years 1981, 1982, 1983, 1984, 1985 and 1986. You were
also offered the opportunity to either pay the
1981-1986 balances in full or present an alternative
proposal to the offer in compromise. You neglected all
such opportunities.
Discussion
Petitioners invoke our jurisdiction under section 6330(d) to
review the notices of determination sent to them with respect to
the proposed levies on their property. Petitioners contend that
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refusal to accept their offer-in-compromise was an abuse of
discretion because of their “special circumstances” of age and
health and postretirement anticipated earnings; that the offer-
in-compromise should have been accepted because factors such as
equity, hardship, and public policy warrant its acceptance to
promote effective tax administration; that the Commissioner
failed to establish sufficient guidelines for resolving
longstanding cases by such means as forgoing penalties and
interest that have accumulated as a result of delay in
determining the taxpayers’ liability; and that interest abatement
should have been considered during the section 6330 hearing.
Respondent contends that the offer-in-compromise petitioners
made was inadequate in view of their financial circumstances
analyzed by the settlement officer; that petitioners’ situation
is neither unique nor exceptional; that effective tax
administration would not be served by acceptance of the low
offer-in-compromise because it would undermine compliance by
other taxpayers; that some of the interest on petitioners’
liabilities had been abated (for 1981, 1982, and 1983); and that
petitioners’ abatement arguments relate only to the total amount
of the liability to be compromised.
Although the record includes six stipulations and over 400
exhibits, the parties agree that the overriding issues in this
case are indistinguishable from issues discussed in other cases,
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some of which are on appeal. Those issues relate to the effect
of Hoyt’s fraud and the years of delay in resolving tax
liabilities of his investors. In addition, petitioners argue:
the other issues that are substantially the same or
identical are how to treat * * * elderly and retired
individuals. Does Respondent need to make some–-does
Respondent need to estimate their basic needs for their
life span? That is probably the overreaching [sic]
issue in a number of the cases where we have elderly
and retired individuals. So an answer to that would
probably answer this case as well.
Respondent has objected to some of the exhibits on the
grounds of hearsay and to others on the grounds that they are not
relevant because they were not presented to the Appeals officer
during the exchanges that constituted the section 6330 hearing.
See Robinette v. Commissioner, 439 F.3d 455 (8th Cir. 2006);
Murphy v. Commissioner,
125 T.C. 301 (2005), affd.
469 F.3d 27
(1st Cir. 2006); Magana v. Commissioner,
118 T.C. 488, 493
(2002). We sustain the objections because, even if the exhibits
are considered for nonhearsay purposes and are relevant, they
constitute needless presentation of cumulative evidence. See
Fed. R. Evid. 403.
Section 7122(c) and (d) provides as follows:
SEC. 7122(c). Standards for Evaluation of
Offers.--
(1) In general.–-The Secretary shall
prescribe guidelines for officers and employees of
the Internal Revenue Service to determine whether
an offer-in-compromise is adequate and should be
accepted to resolve a dispute.
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(2) Allowances for basic living expenses.--
(A) In general.–-In prescribing
guidelines under paragraph (1), the Secretary
shall develop and publish schedules of
national and local allowances designed to
provide that taxpayers entering into a
compromise have an adequate means to provide
for basic living expenses.
(B) Use of schedules.–-The guidelines
shall provide that officers and employees of
the Internal Revenue Service shall determine,
on the basis of the facts and circumstances
of each taxpayer, whether the use of the
schedules published under subparagraph (A) is
appropriate and shall not use the schedules
to the extent such use would result in the
taxpayer not having adequate means to provide
for basic living expenses.
(3) Special rules relating to treatment of
offers.–-The guidelines under paragraph (1) shall
provide that--
(A) an officer or employee of the
Internal Revenue Service shall not reject an
offer-in-compromise from a low-income
taxpayer solely on the basis of the amount of
the offer; and
(B) in the case of an offer-in-
compromise which relates only to issues of
liability of the taxpayer--
(i) such offer shall not be
rejected solely because the Secretary is
unable to locate the taxpayer’s return
or return information for verification
of such liability; and
(ii) the taxpayer shall not be
required to provide a financial
statement.
(d) Administrative Review.–-The Secretary shall
establish procedures--
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(1) for an independent administrative review
of any rejection of a proposed offer-in-compromise
or installment agreement made by a taxpayer under
this section or section 6159 before such rejection
is communicated to the taxpayer; and
(2) which allow a taxpayer to appeal any
rejection of such offer or agreement to the
Internal Revenue Service Office of Appeals.
Regulations adopted pursuant to section 7122 set forth three
grounds for the compromise of a liability: (1) Doubt as to
liability; (2) doubt as to collectibility; or (3) promotion of
effective tax administration. Sec. 301.7122-1, Proced. & Admin.
Regs. With respect to the third ground, paragraph (b)(3)(i) of
the regulation allows for a compromise to be entered into to
promote effective tax administration where collection in full
could be achieved but would cause economic hardship. Paragraph
(c)(3)(i) sets forth factors that would support (but are not
conclusive of) a finding of economic hardship. With respect to
the third ground, those regulations state:
(3) Compromises to promote effective tax
administration.–-(i) Factors supporting (but not
conclusive of) a determination that collection would
cause economic hardship within the meaning of paragraph
(b)(3)(i) of this section include, but are not limited
to--
(A) Taxpayer is incapable of earning a living
because of a long term illness, medical condition, or
disability, and it is reasonably foreseeable that
taxpayer’s financial resources will be exhausted
providing for care and support during the course of the
condition;
(B) Although taxpayer has certain monthly
income, that income is exhausted each month in
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providing for the care of dependents with no other
means of support; and
(C) Although taxpayer has certain assets, the
taxpayer is unable to borrow against the equity in
those assets and liquidation of those assets to pay
outstanding tax liabilities would render the taxpayer
unable to meet basic living expenses.
The regulation states that no compromise may be entered into if
such compromise of liability would undermine compliance by
taxpayers with the tax laws. Sec. 301.7122-1(b)(3)(iii), Proced.
& Admin. Regs. Paragraph (c)(3)(ii) then sets forth factors that
support (but are not conclusive of) a determination that a
compromise would undermine compliance with the tax laws. These
factors include: (A) A taxpayer who has a history of
noncompliance with the filing and payment requirements of the
Internal Revenue Code; (B) a taxpayer who has taken deliberate
action to avoid the payment of taxes; and (C) a taxpayer who has
encouraged others to refuse to comply with the tax laws. Sec.
301.7122-1(c)(3)(ii), Proced. & Admin. Regs. The regulation
continues:
(iii) The following examples illustrate the types
of cases that may be compromised by the Secretary, at
the Secretary’s discretion, under the economic hardship
provisions of paragraph (b)(3)(i) of this section:
Example 1. The taxpayer has assets sufficient to
satisfy the tax liability. The taxpayer provides full
time care and assistance to her dependent child, who
has a serious long-term illness. It is expected that
the taxpayer will need to use the equity in his assets
to provide for adequate basic living expenses and
medical care for his child. The taxpayer’s overall
compliance history does not weigh against compromise.
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Example 2. The taxpayer is retired and his only
income is from a pension. The taxpayer’s only asset is
a retirement account, and the funds in the account are
sufficient to satisfy the liability. Liquidation of
the retirement account would leave the taxpayer without
an adequate means to provide for basic living expenses.
The taxpayer’s overall compliance history does not
weigh against compromise.
Example 3. The taxpayer is disabled and lives on
a fixed income that will not, after allowance of basic
living expenses, permit full payment of his liability
under an installment agreement. The taxpayer also owns
a modest house that has been specially equipped to
accommodate his disability. The taxpayer’s equity in
the house is sufficient to permit payment of the
liability he owes. However, because of his disability
and limited earning potential, the taxpayer is unable
to obtain a mortgage or otherwise borrow against this
equity. In addition, because the taxpayer’s home has
been specially equipped to accommodate his disability,
forced sale of the taxpayer’s residence would create
severe adverse consequences for the taxpayer. The
taxpayer’s overall compliance history does not weigh
against compromise.
Under the regulations, a compromise may also be entered into to
promote efficient tax administration if there are compelling
public policy or equity considerations identified by the
taxpayer. Compromise is justified where, because of exceptional
circumstances, collection of the full liability would undermine
public confidence that tax laws are being administered fairly.
Sec. 301.7122-1(b)(3)(ii), Proced. & Admin. Regs. Some examples
where a compromise is allowed for purposes of public policy and
equity are: (1) A taxpayer who was hospitalized regularly for a
number of years and was unable, at that time, to manage his
financial affairs and (2) a taxpayer learns at audit that he was
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given erroneous advice and is facing additional taxes, penalties,
and additions to tax. Sec. 301.7122-1(c)(3)(iv), Proced. &
Admin. Regs. In addition to the regulations, detailed
instructions concerning offers-in-compromise are contained in the
Internal Revenue Manual. 1 Administration, Internal Revenue
Manual (CCH), pt. 5.8, at 16251.
Notwithstanding minor disputes about the computation of
collection potential by the settlement officer, petitioners have
not shown that payment of more than the amount that they offered
in settlement of their liabilities would render them unable to
meet basic living expenses. Their projections of future expenses
are speculative and unpersuasive. Petitioners’ situation is not
comparable to the examples given in the regulations. In any
event, the settlement officer thoroughly considered and addressed
their arguments.
Except for the specifics of the financial information, this
case is indistinguishable from the other cases decided by this
Court in which we held that it was not an abuse of discretion to
reject the taxpayers’ offer to compromise their outstanding
liabilities relating to the Hoyt investments at a fraction of the
total liabilities. See Smith v. Commissioner, T.C. Memo. 2007-
73; Hansen v. Commissioner, T.C. Memo. 2007-56; Catlow v.
Commissioner, T.C. Memo. 2007-47; Estate of Andrews v.
Commissioner, T.C. Memo. 2007-30; Johnson v. Commissioner, T.C.
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Memo. 2007-29; Freeman v. Commissioner, T.C. Memo. 2007-28;
Hubbart v. Commissioner, T.C. Memo. 2007-26; Carter v.
Commissioner, T.C. Memo. 2007-25; Abelein v. Commissioner, T.C.
Memo. 2007-24; Ertz v. Commissioner, T.C. Memo. 2007-15;
McDonough v. Commissioner, T.C. Memo. 2006-234; Lindley v.
Commissioner, T.C. Memo. 2006-229; Clayton v. Commissioner, T.C.
Memo. 2006-188; Keller v. Commissioner, T.C. Memo. 2006-166;
Barnes v. Commissioner, T.C. Memo. 2006-150.
All of the arguments made by petitioners were thoroughly
discussed in Ertz v. Commissioner, supra. As in the other cases,
petitioners’ arguments were considered by the settlement officer,
although the arguments were not accepted. As we stated in Ertz:
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 [T.C.
Memo. 2006-150].
In concluding that it was not an abuse of discretion to
accept the offer-in-compromise at less than 20 percent of
petitioners’ estimated total liability, we do not determine an
acceptable offer-in-compromise or other alternative means of
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collection. The only issue before us is whether there was an
abuse of discretion in refusing the offer that petitioners made.
See Speltz v. Commissioner, 124 T.C. 165, 180 (2005), affd.
454
F.3d 782 (8th Cir. 2006). The settlement officer adequately
considered the arguments and made a reasoned determination. We
hold that there was no abuse of discretion in that process.
Decision will be entered
for respondent.
