T.C. Memo. 2006-179



                 UNITED STATES TAX COURT



        CHI WAI, Petitioner v. COMMISSIONER OF
              INTERNAL REVENUE, Respondent



Docket No.   19316-04L.           Filed August 29, 2006.



     P incurred alternative minimum tax liability as a
result of her exercise of incentive stock options in
2000. The stock declined precipitously in value after
the date of exercise. P partially paid her year 2000
tax liability through withholding, estimated tax
payments and application of a small credit, and
submitted an offer-in-compromise for the unpaid
balance. The IRS rejected the offer-in-compromise and
notified P of its intent to levy on P’s property.
Held: it was not an abuse of discretion to reject P’s
offer. IRS may proceed with the levy. Speltz v.
Commissioner, 

(2005), affd. 

(8th Cir. 2006), followed.



John S. Harper, for petitioner.

Cleve Lisecki, for respondent.
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                          MEMORANDUM OPINION

     NIMS, Judge:    Petitioner petitioned the Court under section

6330(d)1 to review the determination of the Internal Revenue

Service’s Office of Appeals sustaining a proposed levy on

petitioner’s property related to petitioner’s year 2000 Federal

income tax liability.   Unless otherwise indicated, all section

references are to sections of the Internal Revenue Code in effect

at relevant times.   Petitioner resided in Virginia at the time

she filed her petition.

                              Background

     This case was submitted fully stipulated.      The facts as

stipulated are so found.

     Petitioner filed her Federal income tax return for 2000 on

the basis of married filing separate.      Petitioner’s reported tax

liability included an alternative minimum tax liability (AMT) of

$776,447, and “regular” tax in the amount of $10,100, bringing

her total tax liability to $786,547.       Her return reported Federal

income tax withheld of $11,080, and estimated tax payments of

$450,000, leaving a balance of tax due in the amount of $325,467.




     1
      The petition refers initially to sec. 6330(c); however,
this appears to be an inadvertence, since sec. 6330(d) is the
statutory provision that provides for judicial review of a
determination by the Internal Revenue Service Office of Appeals.
                                - 3 -

Petitioner made no remittance with the return, and except for a

$300 credit on December 3, 2001, petitioner made no additional

payments.

     Respondent accepted petitioner’s return as filed and in due

course assessed the $786,547 tax due shown on the return.     In

addition, respondent assessed a $174,480.07 late filing penalty

under section 6651(a)(1), and a $31,018.68 late payment penalty

under section 6651(a)(2).   Subsequently, respondent abated

$101,250 of the late filing penalty, and $13,122.50 of the late

payment penalty.

     Petitioner was employed as an engineer by PMC-Sierra (PMCS)

during 2000.   During the year, petitioner exercised several

incentive stock options (ISOs) covering PMCS shares having a

value of $2,910,251 on the exercise date.    Petitioner’s total

exercise price under all the ISOs was $183,263, so that the value

of the shares on the date of exercise exceeded the exercise price

by $2,726,988.

     Petitioner’s exercise of the ISOs encompassed an attendant

“ISO spread”, described below, within the purview of the AMT

system.   See sec. 56(b)(3).   The beneficial provisions of

sections 421(a) and 83(e) are superseded for purposes of

computing income adjustments in the AMT regime.    As a result, the

pertinent AMT income recognition event for incentive stock option

transactions occurs upon the holder’s exercise of the option.
                                - 4 -

The aforementioned ISO spread represents the differential between

the exercise price and the fair market value of the underlying

stock as of the date an option is exercised.

     The above-described gain, although excludable from

petitioner’s year 2000 taxable income pursuant to section 421(a),

was includable in her alternative minimum taxable income (AMTI)

pursuant to section 56(b)(3).   Petitioner did not sell any of the

shares in 2000 and properly reported the $2,726,988 gain on her

return for that year.

     The value of petitioner’s PMCS stock purchased under the

ISOs fell dramatically after the ISOs were exercised in 2000 but

before the stock was sold in 2001, so that the actual selling

price over petitioner’s exercise price under the ISOs produced

for regular tax purposes a gain that was only a small fraction of

the AMT gain required to be reported on petitioner’s 2000 Federal

income tax return, and a tax that was also substantially less

than the $786,547 tax which petitioner reported on her 2000

return.   Cf. Merlo v. Commissioner, 

, 209-210 (2006).

     On December 20, 2001, petitioner submitted a Form 656, Offer

in Compromise (OIC), which stated as the reasons Doubt as to

Liability, Doubt as to Collectibility, and Effective Tax

Administration.   The amount of the offer was left blank, to which

respondent’s “offer unit” inserted $1 to permit the Internal

Revenue Service (IRS) to begin review of the OIC.   Petitioner’s
                               - 5 -

offer was temporarily put on hold “pending a review of the ISO

rulings by National Office.”   Petitioner was later advised by

respondent’s offer specialist that “the Effective Tax

Administration offer is not feasible as it is used [only] when

the net realizable equity [in the taxpayer’s assets] exceeds the

tax amount”, which was not the case here.

     On May 1, 2003, petitioner submitted an amended offer-in-

compromise (amended OIC), which contained only doubt as to

collectibility and effective tax administration (ETA) as reasons

for the offer, and again contained no dollar amount, which

respondent treated as $1, and again rejected.   Petitioner then

filed a protest, and respondent’s settlement officer in general

appeals programs sustained the rejection of the amended OIC.

     On May 20, 2004, respondent mailed to petitioner a Final

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

Hearing, in response to which petitioner requested a hearing

(Appeals hearing).   In the request, petitioner asserted that

respondent’s rejection of petitioner’s OIC was an abuse of

discretion.

     On September 8, 2004, respondent advised petitioner that the

Appeals Office had sustained respondent’s Final Notice - Notice

of Intent to Levy and Notice of Your Right to a Hearing for the
                                - 6 -

2000 year.   Respondent’s Final Notice contained the following

“Summary of Determination” (Summary), quoted here in its

entirety:

     Summary of Determination

     Although we addressed each of your issues we could not
     reach an agreement. Based on the case file the issuing
     of the Final Notice - Notice of Intent to Levy and
     Notice Of Your Right To A Hearing is sustained.

     As is apparent, the Summary does not disclose the issues to

which it refers.   However, on November 8, 2003, respondent’s

settlement officer had issued an Appeals Case Memorandum which

explained in detail respondent’s reasons for rejecting

petitioner’s OIC, as follows:

                    SUMMARY AND RECOMMENDATION

     The taxpayer is seeking to compromise, under the
     authority of Section 7122 of the Internal Revenue Code,
     and as amended by the Restructuring and Reform Act of
     1998 to include provisions under Effective Tax
     Administration (ETA), the unpaid taxes plus all
     statutory additions, relating to the Individual Income
     Tax Return, Form 1040, filed Married filing Separate
     for the calendar year ending December 31, 2000.

     Mrs. Wai’s Offer was submitted solely on the premise of
     the inequity and unfairness of the assessment of
     Alternative Minimum Tax (AMT) that she was subject to
     for tax year 2000 as a result of exercising stock
     options. Her offer, based on ETA, focused on the fact
     that had she filed jointly with her husband for this
     year, the amount of her AMT tax would not only have
     been significantly less, but it would have essentially
     been paid in full. Her Power of Attorney, John S.
     Harper, therefore reasoned that the provisions of IRC
     6015(f) should be applied in consideration of the
     Offer.
                          - 7 -


The rejection of this Offer has been sustained by
Appeals for the following reasons:

     1.    It is the current position of Appeals that
           Offers submitted based solely on the merits
           of the ISO-AMT issue, do NOT qualify for
           consideration under the principles of ETA.
           Currently there is no provision in the law
           that allows consideration of ETA-OIC’s due to
           AMT on stock options. Our position remains
           that Congress must enact a change in the law
           with respect to the AMT on stock options
           before we will give consideration to the
           merits of an offer submitted under ETA based
           solely on this issue. We will NOT set
           precedent at this time with reviewing or
           accepting ETA-OIC’s based on the ISO-AMT
           issue until a change in the law has been
           made. Appeals also has no authority at this
           time to suspend any of these ETA-OIC’s
           currently in inventory until such time, if
           any, that a change in the law is made. And
           secondly,

      2.   Mr. Harper’s request to have the ETA-OIC
           viewed in light of the provisions of IRC
           6015(f) is flawed. The fact that if the
           taxpayer’s[sic] had filed jointly would
           have significantly reduced the amount of
           Mrs. Wai’s AMT tax does not negate the
           fact that they voluntarily chose to file
           separately for tax year 2000, thus
           creating a larger tax burden for
           themselves individually. As previously
           discussed with Mr. Harper, the
           Wai’s[sic] still have the ability to
           amend their 2000 returns by filing a
           joint return, and thus reducing the
           amount of AMT tax that Mrs. Wai is
           asking the IRS to compromise. In
           addition, Mrs. Wai would then be in a
           position to request relief under the
           Innocent Spouse provisions, in which Mr.
           Harper believes she would prevail.
                              - 8 -

               Appeals will not consider the
               principles under IRC 6015(f) in
               determining whether or not the ETA-
               OIC should be accepted from Mrs.
               Wai.

     The offer is being rejected without further consideration by
     Appeals at this time.

     During the pendency of petitioner’s CDP matter before

respondent’s settlement officer, petitioner’s counsel was in

contact with other Government officials (of which he kept the

Settlement Officer and her superior informed) in an attempt to

obtain collateral relief for petitioner from her AMT liability.

At various times, counsel was in contact with the National

Taxpayer Advocate’s Office, and with the Assistant Secretary of

Treasury for Tax Policy.

     By letter dated October 28, 2004, Commissioner of Internal

Revenue Mark W. Everson advised Senators Grassley and Baucus

that, as of that date, no formal guidance had been issued by the

IRS to its employees specifically pertaining to the compromise of

liabilities attributable to the AMT arising from the exercise of

ISOs.

                           Discussion

     The facts in this case giving rise to the AMT almost exactly

parallel those of Speltz v. Commissioner, 

(2005),

affd. 

(8th Cir. 2006).   In each case, the taxpayer

exercised ISOs during the year 2000, and reported on the

respective Federal tax returns, for purposes of the AMT, an
                               - 9 -

excess of AMT income over “regular tax income” of very

substantial amounts.   The value of the taxpayer’s stock in each

case dropped precipitously after the exercise, and the amount

realized on the later sale of the stock after year 2000 was a

small fraction of the AMTI reported on the respective year 2000

returns, and also a small fraction of the AMT in each case.    The

taxpayers in each case thus suffered substantial economic losses

as a result of what might be called phantom income which they

were required to report in 2000 but never in the usual sense

actually received.

     Section 7122(c)(1) and (2) provides:

     SEC. 7122(c).   Standards for Evaluation of Offers.--

          (1) In general.--The Secretary shall prescribe
     guidelines for officers and employees of the Internal
     Revenue Service to determine whether an offer-in-
     compromise is adequate and should be accepted to
     resolve a dispute.

          (2)   Allowances for basic living expenses.--

               (A) In general.--In prescribing
          guidelines under paragraph (1), the Secretary
          shall develop and publish schedules of
          national and local allowances designed to
          provide that taxpayers entering into a
          compromise have an adequate means to provide
          for basic living expenses.

               (B) Use of schedules.--The guidelines
          shall provide that officers and employees of
          the Internal Revenue Service shall determine,
          on the basis of the facts and circumstances
          of each taxpayer, whether the use of the
          schedules published under subparagraph (A) is
          appropriate and shall not use the schedules
                                - 10 -

          to the extent such use would result in the
          taxpayer not having adequate means to provide
          for basic living expenses.

     Regulations adopted pursuant to section 7122 set forth three

grounds for the compromise of a liability:   (1) Doubt as to

liability; (2) doubt as to collectibility; or (3) promotion of

effective tax administration.    Speltz v. Commissioner, supra at

172; sec. 301.7122-1, Proced. & Admin. Regs.     In her petition,

petitioner asserts that there was an abuse of discretion as to

all three grounds, although she pursued only promotion of ETA at

the CDP hearing.

     Generally, we may consider only those issues that the

taxpayer raised during a section 6330 hearing.     Sapp v.

Commissioner, T.C. Memo. 2006-104; sec. 301.6330-1(f)(2), Q&A-F5,

Proced. & Admin. Regs.; see also Magana v. Commissioner, 

, 493 (2002).   Respondent asserts that petitioner did not

raise the issue of doubt as to liability at her Appeals hearing,

which petitioner disputes.   In any event, petitioner has failed

to aver facts or legal argument sufficient to show error in

respondent’s assessment.   See Poindexter v. Commissioner, 

, 284-285 (2004), affd. 

(2d Cir.

2005).   Petitioner has not argued that the computation of the AMT

on her year 2000 return is incorrect, but she argues instead that
                             - 11 -

she is entitled to the benefit of section 59(g), even in the

absence of the regulation permitted thereunder.   Section 59(g)

provides:

          SEC. 59(g). Tax Benefit Rule.--The Secretary may
     prescribe regulations under which differently treated
     items shall be properly adjusted where the tax
     treatment giving rise to such items will not result in
     the reduction of the taxpayer’s regular tax for the
     taxable year for which the item is taken into account
     or for any other taxable year.

     On brief, petitioner maintains that

          The “differently treated” item in the AMT system
     (that is, the ISO Spread that cannot be offset against
     capital loss, as otherwise permitted by section
     422(c)(2) or as occurs naturally on a sale that is not
     a disqualifying disposition on a decline in value of
     the ISO stock) is precisely the type of situation that
     ought to be remedied under section 59(g). Otherwise,
     the imposition of AMT in this situation can produce
     results that are inequitable and unfair, by imposing a
     tax on “phantom income” that is not true economic
     income, and accordingly that will never be subject to
     tax in the regular tax system.


     In the absence of the regulations that respondent is

authorized, but not mandated, to promulgate under section 59(g),

petitioner urges us, in effect, to do so.   Petitioner cites

Hillman v. IRS, 

, 233 (4th Cir. 2001), revg. 

(2000), to support the proposition that in petitioner’s type

of situation an exception can be made to the literal application

of the statutory provision (here, the AMT) because the literal
                              - 12 -

application of the AMT to petitioner’s facts produces an absurd

result.   Presumably petitioner believes regulations could be

written to ameliorate such result.

     It is not very clear what kind of regulation petitioner

would like to have written even if we were in position to do so.

Be that as it may, and to paraphrase the words of the Fourth

Circuit in Hillman v. IRS, supra at 234, if there is an inequity

in the AMT as applied to petitioner, only Congress or the

Secretary (as the holder of delegated authority from Congress to

modify the effects of the AMT in certain instances) has the

authority to ameliorate the inequity.

     Since our Opinion in Speltz v. Commissioner, 

(2005), contains a detailed analysis of “promotion of effective

tax administration” as a ground for the compromise of a

liability, and the analysis is equally applicable to the facts in

this case, it is unnecessary for us to repeat this extensive

analysis here.   Thus, this case is controlled by the result in

Speltz.

     As did the taxpayers in Speltz, petitioner has devoted a

substantial part of her argument to the perceived unfairness of

the AMT as applied to her specific facts.   The crux of

petitioner’s position, as in Speltz, appears to be that section

7122 trumps the literal application of the AMT statutes, and

that, therefore, it was an abuse of discretion by the Appeals
                                - 13 -

Office not to accept her OIC.    See

  As we pointed

out there, “The unfortunate consequences of the AMT in various

circumstances have been litigated since shortly after the

adoption of the AMT.    In many different contexts, literal

application of the AMT has led to a perceived hardship, but

challenges based on equity have been uniformly rejected.”

(and cases cited therein).

       Petitioner asserts “economic hardship” as a justification

for compromise and that it should be expansively construed by

respondent to constitute an available ground for accepting the

OIC.    Pursuant to section 301.7122-1(c), Proced. & Admin. Regs.,

economic hardship constitutes a basis for compromise, although

the compromise is classified within the ETA rubric.    ETA is

bifurcated into subcategories of enumerated justifications for

compromise in section 301.7122-1(c), Proced. & Admin. Regs.--the

aforementioned public policy and equity, and economic hardship.

The following three scenarios are depicted in section 301.7122-

1(c), Proced. & Admin. Regs., as supporting (but not conclusive

of) a determination of economic hardship:    A taxpayer suffering

from a long-term illness, medical condition, or disability, which

is expected to exhaust the taxpayer’s financial resources; total

depletion of a taxpayer’s income resulting as a result of the

provision of dependent care; and an inability of a taxpayer to

exploit existing asset wealth in order to finance both basic
                              - 14 -

living expenses and to satisfy the outstanding tax liability.

     As we said in Speltz v. Commissioner, supra at 178, under

almost identical facts:

          Unlike the examples set forth under section
     301.7122-1(c), Proced. & Admin. Regs., petitioners do
     not claim illness or a medical condition or disability;
     they do not have income that is exhausted providing for
     the care of dependents; and they have sufficient income
     to meet “basic living expenses”. Petitioners’ hardship
     argument is essentially that the tax liability is
     disproportionate to the value that they received from
     the ISOs and that they have already been forced to
     change their lifestyle unreasonably. ***

Petitioner’s urgent plea in this case does not fall on deaf ears.

We sympathize with petitioner’s situation, but regrettably this

type of hardship is not unique in the AMT-ISO arena.

It remains for Congress to address the issue if it chooses to do

so, but as the Court of Appeals for the Seventh Circuit said in

Kenseth v. Commissioner, 

, 885 (7th Cir. 2001), affg.

(2000):   “it is not a feasible judicial undertaking

to achieve global equity in taxation”.

     We have considered petitioner’s many other arguments, but we

find them to be without merit.   We hold that petitioner failed to

establish that the IRS abused its discretion on the basis of the

promotion of effective tax administration when it refused

petitioner’s OIC.

     At the hearing, petitioner moved orally to admit a “Third

Stipulation of Facts” relating to an OIC by her husband, Kenneth

Lee, who contemporaneously had a similar matter pending before
                             - 15 -

the IRS, which petitioner maintains is relevant to respondent’s

exercise of discretion in this case “under the public policy

prong of the effective tax administration standard.”    At the

hearing, we took the motion under advisement.

     Petitioner’s motion appears to be in support of a convoluted

argument made on brief that respondent should settle petitioner’s

case on the basis of the result petitioner would have obtained

had she and her husband filed a joint return for the year 2000,

which, in fact, they did not do.   We find this argument

irrelevant and unconvincing, and petitioner’s oral motion will be

denied.

     Respondent may proceed with the proposed levy.


                                    Order and Decision will be

                              entered for respondent.