UNITED STATES TAX COURT
ESTATE OF CAROL ANDREWS, DECEASED, ROBERT ANDREWS, SPECIAL
ADMINISTRATOR, AND ROBERT ANDREWS, Petitioners v
.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18174-04L. Filed February 7, 2007.
Terri A. Merriam
, for petitioners.
Gregory M. Hahn and Thomas N. Tomashek , for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge
: Petitioners filed a petition with this Court in response to a Notice of Determination Concerning Collection Actions Under Section 6330 (notice of determination) for 1981 petitioners’ representative, Terri A. Merriam (Ms. Merriam), requested additional time to submit information. Ms. Cochran extended petitioners’ deadline for producing information to March 31, 2004.
On March 31, 2004, petitioners submitted to Ms. Cochran a
Form 656, Offer in Compromise, a Form 433-A, Collection
Information Statement for Wage Earners and Self-Employed
Individuals, one letter setting forth medical and retirement considerations and explaining the offer amount, and three letters setting out in detail petitioners’ position regarding the offerin-compromise. Petitioners’ letters included several exhibits. The Form 656 indicated that petitioners were seeking an offer-in-compromise based on either doubt as to collectibility with special circumstances or effective tax administration. Petitioners offered to pay $25,000 to compromise their outstanding tax liabilities for 1981 through 1996, which they estimated to be $255,254.
On the Form 433-A, petitioner listed the following assets: Asset Current Balance/Value Loan Balance Checking accounts $881 n/a Savings accounts 53 n/a 401(k) plan account 107,449 -0Life insurance 4,975 $1,737 1998 Chevrolet Lumina 2,465 303 1991 Chevrolet S-10 450 -01988 Pontiac Grand Prix -0House 200,000 164,155 Total 316,273 166,195 The reported value of the section 401(k) plan account reflected only 70 percent of its then-current value. The reported value of the life insurance reflected its then-current cash value. The loan balance on the house included the balance on a mortgage ($121,155), and the balance on a home equity line of credit ($43,000).
Petitioners reported gross monthly income of $5,252, representing Mr. Andrews’s wage income of $2,382, and Mrs. Andrews’s pension/Social Security income of $2,870. Petitioners also reported the following monthly living expenses:
and had to take several medications; (2) due to her heart condition, Mrs. Andrews was forced to retire in March 2004; (3) Mr. Andrews suffered from depression and skin cancer; and (4) due to his health, Mr. Andrews expected to retire at 65 years old. The retirement analysis outlined the likelihood of increased housing and medical costs as petitioners aged. Petitioners also noted that Mr. Andrews had an innocent spouse case pending before the Tax Court at docket No. 19705-02.
In the remaining three letters, petitioners alleged that they were victims of Hoyt’s fraud and asserted various arguments regarding the appropriateness of an offer-in-compromise. On May 21, 2004, petitioners submitted another letter to Ms. Cochran, which included 42 exhibits not provided with the previous letters.
On August 25, 2004, respondent issued petitioners a notice of determination. In evaluating petitioners’ offer-incompromise, respondent made the following changes to the values of assets petitioners reported on the Form 433-A: (1) Respondent determined that the value of the section 401(k) plan account was $153,499 instead of $107,449 (the 70-percent value reported by petitioners) and reduced petitioners’ net realizable equity by $35,700 to $117,799 to reflect estimated tax and penalties; and (2) respondent determined that the house was worth $350,000 instead of $200,000 and reduced petitioners’ net realizable Because petitioners had the ability to pay substantially more than the amount offered, respondent rejected their offer-incompromise based on doubt as to collectibility with special circumstances. Respondent also rejected petitioners’ effective tax administration offer-in-compromise based on economic hardship because they had the ability to pay their tax liability in full. Finally, respondent rejected petitioners’ effective tax administration offer-in-compromise based on public policy or equity ground because the case “fails to meet the criteria for such consideration”.
Respondent determined that petitioners did not offer an acceptable collection alternative and that all requirements of law and administrative procedure had been met. Respondent concluded that the proposed collection action could proceed, but that any activity against Mr. Andrews’s assets should be stayed until his pending innocent spouse case had been decided. In response to the notice of determination, petitioners filed a petition with this Court on September 27, 2004. OPINION Section 7122(a) provides that “The Secretary may compromise any civil * * * case arising under the internal revenue laws”. Whether to accept an offer-in-compromise is left to the Secretary’s discretion. Fargo v. Commissioner , 447 F.3d 706, 712 circumstances justifying acceptance of an amount less than the reasonable collection potential of the case based on public policy or equity considerations. See Internal Revenue Manual (IRM) sec. 5.8.4.3(4). However, in accordance with the Commissioner’s guidelines, an offer-in-compromise based on doubt as to collectibility with special circumstances should not be accepted, even when economic hardship or considerations of public policy or equity circumstances are identified, if the taxpayer does not offer an acceptable amount. See IRM sec. 5.8.11.2.1(11) and .2(12).
The Secretary may also compromise a tax liability on the ground of effective tax administration when: (1) Collection of the full liability will create economic hardship; or (2) exceptional circumstances exist such that collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner; and (3) compromise of the liability would not undermine compliance by taxpayers with the tax laws. Sec. 301.7122-1(b)(3), Proced. & Admin. Regs.
Petitioners proposed an offer-in-compromise based alternatively on doubt as to collectibility with special circumstances or effective tax administration. Petitioners offered to pay $25,000 to compromise their outstanding tax liabilities for 1981 through 1996, which they estimated to be $255,254. Petitioners argued that collection of the full liability would create economic hardship and would undermine public confidence that the tax laws are being administered in a fair and equitable manner. Respondent determined that petitioners’ reasonable collection potential was $380,076 and that their offer-in-compromise did not meet the criteria for an offer-in-compromise based on either doubt as to collectibility with special circumstances or effective tax administration. Because the underlying tax liability is not at issue, our review under section 6330 is for abuse of discretion. See Sego v. Commissioner , 114 T.C. 604, 610 (2000); Goza v. Commissioner , 114 T.C. 176, 182 (2000). This standard does not ask us to decide whether in our own opinion petitioners’ offer-incompromise should have been accepted, but whether respondent’s rejection of the offer-in-compromise was arbitrary, capricious, or without sound basis in fact or law. Woodral v. Commissioner , 112 T.C. 19, 23 (1999); Keller v. Commissioner , T.C. Memo. 2006166; Fowler v. Commissioner , T.C. Memo. 2004-163. Because the same factors are taken into account in evaluating offers-incompromise based on doubt as to collectibility with special circumstances and on effective tax administration (economic hardship or considerations of public policy or equity), we consider petitioners’ separate grounds for their offer-incompromise together. See Murphy v. Commissioner , 125 T.C. 301, 309, 320 n.10 (2005), affd. 469 F.3d 27 (1st Cir. 2006); Barnes v. Commissioner , T.C. Memo. 2006-150 .
A. Economic Hardship
Petitioners assert that Ms. Cochran abused her discretion by rejecting their offer-in-compromise because “There is no indication that SO Cochran gave any substantive consideration to Petitioners’ demonstrated special circumstances or that they would experience a hardship if required to make a full-payment.” In support of this assertion, petitioners argue: (1) Ms. Cochran failed to discuss petitioners’ special circumstances in the notice of determination; and (2) Ms. Cochran erroneously determined petitioners’ reasonable collection potential and failed to take into account their future expenses. Section 301.6343-1(b)(4)(i), Proced. & Admin. Regs., states that economic hardship occurs when a taxpayer is “unable to pay his or her reasonable basic living expenses.” Section 301.71221(c)(3), Proced. & Admin. Regs., sets forth factors to consider in evaluating whether collection of a tax liability would cause economic hardship, as well as some examples. One of the examples involves a taxpayer who provides full-time care to a dependent child with a serious long-term illness. A second example involves a taxpayer who would lack adequate means to pay his basic living expenses were his only asset to be liquidated. A third example involves a disabled taxpayer who has a fixed income and a modest home specially equipped to accommodate his disability, and who is unable to borrow against his home because of his disability. See sec. 301.7122-1(c)(3)(iii), Examples ( 1 ), ( 2 ), and ( 3 ), Proced. & Admin. Regs. None of these examples bears any resemblance to this case, but instead they “describe more dire circumstances”. Speltz v. Commissioner , 454 F.3d 782, 786 (8th Cir. 2006), affg. 124 T.C. 165 (2005); see also Barnes v. Commissioner , supra . Nevertheless, we address petitioners’
arguments.
1. Discussion of Special Circumstances in the Notice of
Determination
Petitioners argue that Ms. Cochran failed “to follow proper procedure by discussing Petitioners’ special circumstances, what equity was considered in relation to their special circumstances, and how the special circumstances affected her determination of their ability to pay.” Petitioners infer that, because the special circumstances were not discussed in detail in the notice of determination, Ms. Cochran failed to adequately take their circumstances into consideration.
We do not believe that Appeals must specifically list in the notice of determination every single fact that it considered in arriving at the determination. See Barnes v. Commissioner , supra . This is especially true in a case such as this, where petitioners provided Ms. Cochran with multiple letters and hundreds of pages of exhibits. As discussed below, Ms. Cochran only 48 months of future income should be considered. Petitioners made a cash offer, but Ms. Cochran used 81 months of future income. At trial, Ms. Cochran acknowledged that she should have used only 48 months of future income. Ms. Cochran recomputed petitioners’ reasonable collection potential using 48 months and determined that it was $351,531, instead of $380,076, as reflected in the notice of determination. Ms. Cochran testified that the change would not have had an effect on her final determination because, using either calculation, petitioners’ reasonable collection potential was greater than their offer amount ($25,000). We find that Ms. Cochran’s error did not amount to an abuse of discretion because, even when the error is corrected, petitioners’ reasonable collection potential of $351,531 far exceeds their offer amount of $25,000. With regard to age, health, and retirement status, petitioners’ argument is not supported by the record. In their letter describing their offer amount, petitioners represented that Mrs. Andrews was retired and Mr. Andrews would retire when he reached 65 years old. Petitioners also indicated that they suffered from various medical conditions and that Mrs. Andrews was taking several medications. On their Form 433-A, petitioners reported monthly medical expenses of $533.
Ms. Cochran accepted petitioners’ monthly medical expenses without change. Ms. Cochran also accepted petitioners’
As reflected in the notice of determination, Ms. Cochran took into consideration the information petitioners presented, but concluded that “these possible future expenses are general projections from the taxpayers’ representative and may never, in fact, be incurred. The present offer, therefore, must be considered within the framework of present facts.” Given the information presented to her, it was not arbitrary or capricious for Ms. Cochran to ignore these speculative future costs in making her final determination.
Petitioners also raise challenges to various other determinations made by Ms. Cochran, including: (1) The determination that their house had a value of $350,000; (2) the inclusion of 100 percent of the value of the section 401(k) plan account (less estimated tax and penalties); (3) the reduction of their housing and utilities expense; and (4) the disallowance of $460 in other expenses. We need not discuss in detail these and other minor disputes raised by petitioners. Even assuming arguendo that petitioners’ income, expenses, and value of assets should have been accepted as reported, we would not find that Ms. Cochran abused her discretion in rejecting petitioners’ offer-incompromise. Ms. Cochran testified that, had she accepted the income, expenses, and value of assets as reported, petitioners’ reasonable collection potential would have been $160,146.
a finding that we decline to make, we would not find that Ms. Cochran’s rejection of petitioners’ offer-in-compromise was an abuse of discretion. As discussed below (in our discussion of petitioners’ “equitable facts” argument), we conclude that acceptance of petitioners’ offer-in-compromise would undermine voluntary compliance with tax laws by taxpayers in general. B. Public Policy and Equity Considerations Petitioners assert that “There are so many unique and equitable facts in this case that this case is an exceptional circumstance” and respondent abused his discretion by not accepting those facts as grounds for an offer-in-compromise. In support of their assertion, petitioners argue: (1) The longstanding nature of this case justifies acceptance of the offer-in-compromise; (2) respondent’s reliance on an example in the IRM was improper; and (3) respondent failed to consider petitioners’ other “equitable facts”.
1. Longstanding Case
Petitioners assert that the legislative history requires respondent to resolve “longstanding” cases by forgiving penalties and interest which would otherwise apply. Petitioners argue that, because this is a longstanding case, respondent abused his discretion by failing to accept their offer-in-compromise. Petitioners’ argument is essentially the same considered and rejected by the Court of Appeals for the Ninth Circuit in Fargo v. Commissioner , 447 F.3d at 711-712. See also Keller v.
Commissioner
, T.C. Memo. 2006-166; Barnes v. Commissioner , supra . We reject petitioners’ argument for the same reasons stated by the Court of Appeals. We add that petitioners’ counsel participated in the appeal in Fargo as counsel for the amici. On brief, petitioners suggests that the Court of Appeals knowingly wrote its opinion in Fargo in such a way as to distinguish that case from the cases of counsel’s similarly situated clients (e.g., petitioners), and to otherwise allow those clients’ liabilities for penalties and interest to be forgiven. We do not read the opinion of the Court of Appeals in Fargo to support that conclusion. See Keller v. Commissioner , supra ; Barnes v.
Commissioner
, supra .
Respondent’s rejection of petitioners’ longstanding case argument was not arbitrary or capricious.
2. The IRM Example
Petitioners argue that respondent erred when he determined that they were not entitled to relief based on the second example in IRM section 5.8.11.2.2(3). Petitioners assert that many of the facts in this case were not present in the example, and, therefore, any reliance on the example was misplaced. Petitioners’ argument is not persuasive.
IRM section 5.8.11.2.2(3) discusses effective tax administration offers-in-compromise based on equity and public policy grounds and states in the second example:
In 1983, the taxpayer invested in a nationally marketed partnership which promised the taxpayer tax benefits far exceeding the amount of the investment.
Immediately upon investing, the taxpayer claimed investment tax credits that significantly reduced or eliminated the tax liabilities for the years 1981 through 1983. In 1984, the IRS opened an audit of the partnership under the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). After issuance of the Final Partnership Administrative Adjustment (FPAA), but prior to any proceedings in Tax Court, the IRS made a global settlement offer in which it offered to concede a substantial portion of the interest and penalties that could be expected to be assessed if the IRS’s determinations were upheld by the court. The taxpayer rejected the settlement offer. After several years of litigation, the partnership level proceeding eventually ended in Tax Court decisions upholding the vast majority of the deficiencies asserted in the FPAA on the grounds that the partnership’s activities lacked economic substance. The taxpayer has now offered to compromise all the penalties and interest on terms more favorable than those contained in the prior settlement offer, arguing that TEFRA is unfair and that the liabilities accrued in large part due to the actions of the Tax Matters Partner (TMP) during the audit and litigation. Neither the operation of the TEFRA rules nor the TMP’s actions on behalf of the taxpayer provide grounds to compromise under the equity provision of paragraph (b)(4)(i)(B) of this section. Compromise on those grounds would undermine the purpose of both the penalty and interest provisions at issue and the consistent settlement principles of TEFRA. * * * 1 Administration, Internal Revenue Manual (CCH), sec. 5.8.11.2.2(3), at 16,378. We agree with respondent that the example presents circumstances similar to those in petitioners’ case, including: Petitioners invested in TEFRA partnerships in the early 1980s; petitioners’ outstanding tax liability is related to their investment in the partnerships; FPAAs were and 1990s. See Keller v. Commissioner , T.C. Memo. 2006-166;
Barnes v. Commissioner
, T.C. Memo. 2006-150.
Of course, the examples in the regulations are not meant to be exhaustive, and petitioners have a more sympathetic case than the taxpayers in Fargo v. Commissioner , 447 F.3d at 714, for whom the Court of Appeals for the Ninth Circuit noted that “no evidence was presented to suggest that Taxpayers were the subject of fraud or deception”. Such considerations, however, have not kept this Court from finding investors in the Hoyt tax shelters to be liable for penalties and interest, nor have they prevented the Courts of Appeals for the Sixth, Ninth, and Tenth Circuits from affirming our decisions to that effect. See Hansen v. Commissioner , 471 F.3d 1021 (9th Cir. 2006), affg. T.C. Memo.
2004-269; Mortensen v. Commissioner , 440 F.3d 375 (6th Cir.
2006), affg. T.C. Memo. 2004-279; Van Scoten v. Commissioner , 439 F.3d 1243 (10th Cir. 2006), affg. T.C. Memo. 2004-275. Ms. Cochran testified that she considered all of Ms. Merriam’s and petitioners’ assertions, including the numerous letters and exhibits. Nevertheless, Ms. Cochran determined that petitioners did not qualify for an offer-in-compromise. The mere fact that petitioners’ “equitable facts” did not persuade respondent to accept their offer-in-compromise does not mean that those assertions were not considered. The notice of determination and Ms. Cochran’s testimony demonstrate respondent’s clear understanding and careful consideration of the facts and circumstances of petitioners’ case. We find that respondent’s determination that the “equitable facts” did not justify acceptance of petitioners’ offer-in-compromise was not arbitrary or capricious, and thus it was not an abuse of discretion.
We also find that compromising petitioners’ case on grounds of public policy or equity would not enhance voluntary compliance by other taxpayers. A compromise on that basis would place the Government in the unenviable role of an insurer against poor business decisions by taxpayers, reducing the incentive for taxpayers to investigate thoroughly the consequences of transactions into which they enter. It would be particularly inappropriate for the Government to play that role here, where the transaction at issue is participation in a tax shelter. Reducing the risks of participating in tax shelters would encourage more taxpayers to run those risks, thus undermining rather than enhancing compliance with the tax laws. See Barnes v. Commissioner , supra .
C. Petitioners’ Other Arguments
1. Compromise of Penalties and Interest in an Effective
Tax Administration Offer-in-Compromise
Petitioners advance a number of arguments focusing on their assertion that respondent determined that penalties and interest could not be compromised in an effective tax administration offer-in-compromise. Petitioners argue that such a determination is contrary to legislative history and is therefore an abuse of discretion. These arguments are not persuasive.
The regulations under section 7122 provide that “If the
Secretary determines that there are grounds for compromise under this section, the Secretary may, at the Secretary’s discretion, compromise any civil * * * liability arising under the internal revenue laws”. Sec. 301.7122-1(a)(1), Proced. & Admin. Regs. In other words, the Secretary may compromise a taxpayer’s tax liability if he determines that grounds for a compromise exist. If the Secretary determines that grounds do not exist, the amount offered (or the way in which the offer is calculated) need not be considered.
Petitioners’ arguments regarding the compromise of penalties and interest do not relate to whether there are grounds for a compromise. Instead, these arguments go to whether the amount petitioners offered to compromise their tax liability was acceptable. As addressed above, respondent’s determination that the facts and circumstances of petitioners’ case did not warrant acceptance of their offer-in-compromise was not arbitrary or capricious and was thus not an abuse of discretion. Because no grounds for compromise exist, we need not address whether respondent can or should compromise penalties and interest in an to be considered. Petitioners’ argument is not supported by the record.
Petitioners assert that they were “initially only given weeks” to provide all information. However, they ignore the fact that Ms. Cochran granted their requested extension and allowed them until March 31, 2004, to submit information. Additionally, petitioners have not identified any documents or other information that they believe Ms. Cochran should have considered but that they were unable to produce because of the deadline for submission. Given the thoroughness and the amount of information submitted, it is unclear why petitioners needed additional time. We do not believe that Ms. Cochran abused her discretion by establishing a deadline for the submission of information. 4. Mr. Andrews’ Pending Innocent Spouse Claim At the time of the section 6330 hearing, Mr. Andrews had an innocent spouse case pending before the Tax Court at docket No. 19705-02. In their petition, petitioners argued that, because of Mr. Andrews’s pending innocent spouse claim: (1) Respondent abused his discretion by considering the assets of both spouses; and (2) the notice of intent to levy was invalid against Mr. Andrews.
Petitioners did not argue on brief that respondent abused his discretion by considering the assets of both spouses.
Therefore, we conclude that petitioners have abandoned this argument.
Petitioners continued to argue on brief that the notice of intent to levy was invalid against Mr. Andrews. However, petitioners’ concern that Mr. Andrews’s property will be levied against before the resolution of his innocent spouse case is without merit. In the notice of determination, respondent specifically stated that any activity against Mr. Andrews’s assets would be stayed until his pending innocent spouse case had been decided.
5. Efficient Collection Versus Intrusiveness
Petitioners argue that respondent failed to balance the need for efficient collection of taxes with the legitimate concern that the collection action be no more intrusive than necessary. See sec. 6330(c)(3)(C). Petitioners’ argument is not supported by the record.
Petitioners have an outstanding tax liability. In their section 6330 hearing, petitioners proposed only an offer-incompromise. Because no other collection alternatives were proposed, there were not less intrusive means for respondent to consider. We find that respondent balanced the need for efficient collection of taxes with petitioners’ legitimate concern that collection be no more intrusive than necessary.
D. Conclusion
Petitioners have not shown that respondent’s determination was arbitrary or capricious, or without sound basis in fact or law. For all of the above reasons, we hold that respondent’s determination was not an abuse of discretion, and respondent may proceed with the proposed collection action as determined in the notice of determination.
In reaching our holdings herein, we have considered all arguments made, and, to the extent not mentioned above, we find them to be moot, irrelevant, or without merit.
To reflect the foregoing, Decision will be entered for respondent .