                               T.C. Memo. 2016-204



                         UNITED STATES TAX COURT



 ESTATE OF ROBERT C. DUNCAN, DECEASED, DAN DUNCAN AND JAN
   DUNCAN, CO-EXECUTORS, AND JANNETTE DUNCAN, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 1722-08L, 20689-09L.              Filed November 8, 2016.



      Melissa L. Ellis, for petitioners.

      Thomas Lee Fenner, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      LAUBER, Judge: In these collection due process (CDP) cases, petitioners

seek review pursuant to section 6330(d)(1)1 of the determination by the Internal



      1
       All statutory references are to the Internal Revenue Code in effect at all
relevant times. We round all monetary amounts to the nearest dollar.
                                        -2-

[*2] Revenue Service (IRS or respondent) to uphold notices of intent to levy. The

IRS served the levy notices to assist in collecting petitioners’ unpaid Federal

income tax liabilities for 1996 and 2000. The issues for decision are whether the

IRS Appeals Office: (1) failed to verify that the tax in question had been properly

assessed or (2) abused its discretion in declining to accept a $40,000 offer-in-com-

promise (OIC). We sustain respondent’s determinations in all respects.

                               FINDINGS OF FACT

      Some of the facts have been stipulated and are so found; the stipulation of

facts and the attached exhibits are incorporated by this reference. Petitioners are

the Estate of Robert C. Duncan, who died in 2003, and his widow, Jannette

Duncan. For convenience, we will use the term “petitioners” to refer to Jannette

Duncan and either Robert C. Duncan or his estate (depending on the date on which

the relevant act occurred). Robert C. Duncan resided in Texas when he died, and

his will was apparently probated in Texas. Jannette Duncan resided in Texas

when the petition was filed, as did both coexecutors of Mr. Duncan’s estate.

A.    The Examination Phase

      Petitioners were the sole partners in a family partnership called RCD Invest-

ments, Ltd. (RCD). In 1999 petitioners participated through RCD in a series of
                                        -3-

[*3] transactions constituting a Son of BOSS (SoB) tax shelter.2 RCD thereby

generated $4,858,240 of fictitious short-term capital losses for 1999 that were

passed through to petitioners’ individual return. Petitioners claimed $1,405,887 of

this loss as a deduction on their 1999 return and carried forward the remaining

$3,452,353 to their 2000 return.

      Separately, RCD claimed deductions of approximately $48 million and $49

million, for 2000 and 2001 respectively, for alleged bad-debt losses. These deduc-

tions were likewise passed through to petitioners’ individual returns. As a result

of these alleged losses and various loss carryforwards, petitioners reported a sub-

stantial net operating loss (NOL) on their 2001 return. In 2002 petitioners filed a

Form 1045, Application for Tentative Refund, claiming a refund attributable to an

NOL carryback of $9,952,668 from 2001 to 1996. The IRS processed this claim

and in November 2002 issued petitioners a refund of $2,839,881 for 1996.

      The IRS selected RCD’s 1999-2000 partnership returns for examination.

The examination was initially conducted by two separate audit teams: one focused

on the SoB transactions and the other focused on the alleged bad-debt losses. The

      2
       An SoB shelter is a variation of an earlier tax shelter known as BOSS,
“bond[s] and options sales strategy.” While the scheme had various flavors, the
goal was to create for the partners artificially high bases in the partnership, en-
abling them to claim fictitious losses on their individual returns. See Kligfeld
Holdings v. Commissioner, 128 T.C. 192, 194 (2007).
                                        -4-

[*4] second team later expanded its examination to include RCD’s 2001

partnership return, and both teams expanded their examinations to include

petitioners’ 1996, 1999, 2000, and 2001 individual returns.

      Revenue Agent Metzner (RA1) began work on the SoB examination in May

2004. She immediately sent petitioners a letter notifying them that the IRS had

announced a settlement initiative for taxpayers who had participated in SoB trans-

actions. See Announcement 2004-46, 2004-1 C.B. 964. This initiative allowed

electing taxpayers to reduce underpayment penalties if they conceded all SoB-

related tax benefits before June 21, 2004. Electing taxpayers were required to

execute a closing agreement and make “[f]ull payment of the liabilities under this

initiative” or “other financial arrangements acceptable to the Service” by the time

the closing agreement was signed. Id., 2004-1 C.B. at 965.

      Petitioners elected to participate in the settlement initiative and submitted

the required election form to RA1 on June 21, 2004. She acknowledged receipt of

petitioners’ election and requested followup information from them regarding pay-

ment arrangements. Pursuant to Announcement 2004-46, supra, on September 24,

2004, petitioners signed Form 13586-A, Settlement Initiative Declaration, report-

ing $4,858,240 of tax benefits claimed on their 1999-2000 individual returns as

attributable to the SoB transactions.
                                         -5-

[*5] Meanwhile, the bad-debt examination was transferred to RA1 from another

revenue agent. In October 2004 petitioners and RA1 agreed to the disallowance of

the $48 million bad-debt loss deduction that RCD had claimed for 2000. Given

the interplay among the partnership and the individual returns, the disallowed bad-

debt loss deduction, the disallowed SoB loss deductions, and the NOL carryfor-

wards and carrybacks, the computation of petitioners’ individual tax liabilities for

the various years was complex. Numerous iterations of these tax computations

followed.

       When the dust appeared to have settled, RA1 in December 2004 sent peti-

tioners a Form 906, Closing Agreement on Final Determination Covering Specific

Matters, that memorialized the parties’ settlement of the SoB transactions, in

which they “concede[d] all claimed benefits and attributes from the Son of BOSS

transaction” for 1999 and 2000. The agreement also stated that “[t]he taxpayers

shall make full payment of their liability for tax, penalties and interest resulting

from the application of the foregoing paragraphs, upon returning this executed

closing agreement to the IRS.”

      RA1 concurrently sent petitioners two Forms 4549, Income Tax Examina-

tion Changes. On the Form 4549 for 2000, RA1 calculated a $1.9 million defi-

ciency attributable to disallowance of RCD’s bad-debt loss deduction and adjust-
                                        -6-

[*6] ments to NOL carryforwards and carrybacks; none of this deficiency was

attributable to the SoB transactions. On the Form 4549 for 1996, RA1 calculated

an overassessment of $2,238,863 attributable largely to NOL carrybacks. Since

the IRS had previously issued petitioners a refund of $2,839,881 for 1996, this

Form 4549 showed a balance due of $601,018. Finally, RA1 sent to petitioners a

Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in

Tax and Acceptance of Overassessment, reflecting the deficiency for 2000 and the

balance due for 1996.

      On December 30, 2004, petitioners executed and mailed to RA1 the Form

906 closing agreement implementing the SoB settlement and the Forms 870 and

4549 waiving restrictions on assessment for 1996 and 2000. RA1 noted in her file

that the disallowance of the SoB-related loss deductions by itself created no tax

liability for 1996 because it operated only to reduce carryforwards and carrybacks.

For that reason, the settlement initiative did not require petitioners to make pay-

ment or payment arrangements upon execution of the closing agreement. RA1 re-

tired from the IRS on December 31, 2004, and the cases were reassigned to Reve-

nue Agent Smith (RA2).

      RA2 received the executed Forms 906, 870, and 4549 on January 3, 2005.

The IRS countersigned the closing agreement on January 14, 2005. RA2 sent
                                         -7-

[*7] petitioners a fully executed copy of the closing agreement on January 24,

2005.

        Thereafter much confusion ensued. RA2 discovered (among other errors)

that the overassessment for 1996 was incorrect because it ignored a $717,797 re-

fund that petitioners had received on account of another NOL carryback. The

revenue officer newly assigned to the SoB portion of the examination, moreover,

erroneously concluded (contrary to RA1’s determination) that petitioners had vio-

lated the terms of the settlement initiative by failing to tender a tax payment for

1996. She recommended that petitioners be removed from the SoB settlement pro-

gram for this reason, a recommendation to which petitioners strongly objected.

On this point IRS management agreed with petitioners, determining that the SoB

closing agreement was binding on both parties and could not be set aside absent

fraud or the like.

        After this additional dust had settled, RA2 determined that petitioners were

liable for the following: (a) an $82,858 deficiency for 1996, none of which was

attributable to the SoB transactions;3 (b) a $2,039,736 deficiency for 2000,

$739,880 of which was attributable to the SoB transactions; and (c) a penalty of


        3
       This $82,858 deficiency took into account both of the refunds attributable
to the NOL carrybacks that RA1 and RA2 had discovered.
                                        -8-

[*8] $73,988 for 2000 (computed at 10% pursuant to the settlement initiative)

attributable to the SoB transactions. In April 2006 RA2 sent petitioners updated

Forms 4549 reflecting these adjustments. She also sent them a Form 870-PT,

Agreement for Partnership Items and Partnership Level Determinations as to

Penalties, Additions to Tax, and Additional Amounts, reflecting the disallowance

of RCD’s $48 million bad-debt loss deduction for 2000.

      At the bottom of the Form 4549 there is a box captioned “Consent to As-

sessment and Collection,” which includes the following text: “I do not wish to

exercise my appeal rights within the Internal Revenue Service or to contest in the

United States Tax Court the findings in this report. Therefore, I give my consent

to the immediate assessment and collection of any increase in tax and penalties

* * * shown above, plus additional interest as provided by law.”

      On July 18, 2006, petitioners signed the “Consent to Assessment and Col-

lection” on the Forms 4549 for 1996 and 2000. They returned to RA2 these exe-

cuted forms, along with the executed Form 870-PT. In December 2006 the IRS

assessed the tax liabilities to which petitioners had agreed, namely, a $82,858 de-

ficiency for 1996 and a liability of $2,113,724 for 2000 (the $2,039,736 deficiency

plus the $73,988 penalty).
                                         -9-

[*9] B.      The Collection Phase

      In an effort to collect petitioners’ unpaid 1996 liability, the IRS in March

2007 mailed them Form 1058, Final Notice of Intent to Levy and Your Right to a

Hearing. Settlement Officer Darling (SO1) was assigned to the 1996 liability case.

Petitioners submitted an OIC premised on doubt as to liability, disputing the vali-

dity of the 1996 assessment. They asserted that they had never agreed to this as-

sessment and that the IRS had failed to issue them a notice of deficiency.

      In response SO1 provided petitioners a copy of the Form 4549 they had

signed on July 18, 2006, which established that they had agreed to the 1996 tax

deficiency and waived restrictions on its assessment. SO1 explained to petitioners

that the IRS was not required to send them a notice of deficiency for 1996 because

they had waived that requirement by signing this form. SO1 concluded that peti-

tioners’ tax liability for 1996 had been properly assessed and that there was no

doubt as to their liability because they had explicitly agreed to it. She therefore

rejected petitioners’ OIC and, on December 20, 2007, issued them a notice of

determination sustaining the levy for 1996.

      In an effort to collect petitioners’ unpaid 2000 liability, the IRS in Novem-

ber 2008 sent them a notice of intent to levy on Form 1058. Petitioners requested

a CDP hearing, stating they wished to dispute their underlying tax liability and
                                        - 10 -

[*10] discuss collection alternatives. Settlement Officer Penny (SO2) was

assigned to the 2000 liability case.

      SO2 informed petitioners that she could not consider a challenge to their

underlying tax liability because they had signed a closing agreement (covering the

SoB issue) and a Form 4549 (covering all issues) by which they had accepted the

2000 tax liability as determined by the IRS and consented to its assessment. Peti-

tioners did not propose any collection alternatives. On July 31, 2009, SO2 issued

petitioners a notice of determination sustaining the levy for 2000.

      On January 22, 2008, petitioners timely petitioned for review of the notice

of determination for 1996. Their petition raised many points but ultimately two

assignments of error. They alleged that: (1) the assessment for 1996 was invalid

because the period of limitations for assessment had lapsed before the tax was as-

sessed and (2) SO1 had failed to verify that all applicable procedural requirements

were met.

      On August 31, 2009, petitioners timely petitioned for review of the notice of

determination for 2000. Although the petition alleged 40 discrete errors, it chiefly

focused on assertions that the assessment for 2000 was invalid and that SO2 had

not given adequate consideration to collection alternatives. On April 2, 2010, we

consolidated the two cases for trial, briefing, and opinion.
                                        - 11 -

[*11] While the cases were pending in this Court, petitioners submitted to the IRS

a new OIC of $60,000. Believing that this offer had been submitted solely to de-

lay collection, the IRS returned it to petitioners without affording them a right to

administrative appeal. Respondent later had second thoughts about this and, on

December 17, 2013, the parties jointly moved to remand the cases to the IRS Ap-

peals Office for a supplemental CDP hearing. We granted that motion.

      On remand, a new settlement officer (SO3) was assigned to evaluate peti-

tioners’ offer. They submitted a copy of their OIC, which offered to discharge tax

liabilities then exceeding $3 million (including interest) by paying $60,000. They

also submitted a schedule of assets and liabilities that showed a net worth of

$8,031,592 as of January 2003. They later submitted a Form 433-A, Collection

Information Statement for Wage Earners and Self-Employed Individuals, showing

net assets and expected future income of $545,897 as of 2014. Puzzled by the as-

serted 93% decline in their net worth, SO3 asked them to explain these calcula-

tions and to submit a new OIC for consideration.

      Petitioners submitted a new OIC of $40,000 based on “Doubt as to Collecti-

bility with Special Circumstances.” Recognizing that their reasonable collection

potential (RCP) (even if only $545,897 as alleged) substantially exceeded their

offer, petitioners asserted that this discrepancy was justified by “special circum-
                                        - 12 -

[*12] stances.” The alleged “special circumstances” included Mrs. Duncan’s age

(91), her asserted lack of future income, monthly losses she had incurred on an

office building, and monthly payments of $11,000 that she was making on life

insurance policy loans.

      SO3 determined that the real estate losses (attributable mostly to depreci-

ation) and policy loan repayments (which appeared to benefit petitioners and their

family members) could not be taken into account in evaluating their ability to pay.

SO3 asked for detailed statements showing what had happened to millions of dol-

lars of assets, previously shown on their balance sheet, which were no longer

there. In particular, SO3 asked for information about the beneficiaries of the life

insurance policies and an accounting of all policy loans and repayments.

       Petitioners’ assets included overlapping interests in numerous closely held

entities, such as partnerships and family trusts, which engaged in numerous rela-

ted-party transactions. These overlapping interests complicated a precise determi-

nation of petitioners’ net worth. For this reason, SO3 was unable to determine

their RCP as an exact dollar amount.

      However, SO3 determined that petitioners’ RCP was sufficiently large to

exceed their $40,000 offer by a very wide margin. He determined that petitioners,

since incurring their 1996 and 2000 tax liabilities, had dissipated assets of at least
                                         - 13 -

[*13] $3.4 million; that their remaining assets exceeded $7.6 million; and that

their remaining assets vastly exceeded their liabilities. Petitioners responded with

an appraisal report purporting to value their assets at less than $200,000; SO3 re-

jected this report as factually deficient in numerous respects.

      On December 22, 2014, SO3 issued a supplemental notice of determination

rejecting petitioners’ $40,000 OIC and sustaining the levies to collect their 1996

and 2000 tax liabilities. He concluded that petitioners had sufficient assets to pay

their 1996 and 2000 tax liabilities in full; that there were no “special circum-

stances” that would justify acceptance of their $40,000 offer; and that acceptance

of their offer would not be in the best interests of the United States.4

      We set these cases for trial in Dallas in October 2015 to review the supple-

mental notice of determination. Before trial the parties filed a stipulation of set-

tled issues, agreeing that the IRS assessments, if valid, were timely for both years.

                                      OPINION

      Section 6330(d)(1) does not prescribe the standard of review that this Court

must apply in reviewing an IRS administrative determination in a CDP case. The

general parameters for such review are marked out by our precedents. Where the

      4
        SO3 noted that the U.S. Department of Justice had commenced litigation
against a trustee of the estate for improperly distributing assets without paying the
estate’s tax liabilities.
                                         - 14 -

[*14] validity of the underlying tax liability is at issue, the Court reviews the IRS’

determination de novo. Goza v. Commissioner, 114 T.C. 176, 181-182 (2000).

Where the taxpayer’s underlying tax liability is not at issue, the Court reviews the

IRS decision for abuse of discretion. Id. at 182. Abuse of discretion exists when a

determination is arbitrary, capricious, or without sound basis in fact or law.

Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir.

2006). A taxpayer may dispute her underlying tax liability in a CDP case only if

she did not receive a notice of deficiency or otherwise have a prior opportunity to

contest that liability. Sec. 6330(c)(2)(B). The term “underlying tax liability”

includes the total amount of tax, penalties, and interest assessed for the relevant

year. Callahan v. Commissioner, 130 T.C. 44 (2008); see also Katz v.

Commissioner, 115 T.C. 329, 339 (2000).

      The validity of petitioners’ underlying tax liabilities is not at issue here.

SO1 and SO2 concluded that petitioners could not challenge their underlying lia-

bility for 1996 or 2000 because they had signed Forms 4549 agreeing to the tax

liabilities in question. SO3 concurred in this conclusion. Petitioners thus waived

their right to challenge these liabilities at the IRS Appeals Office or in this Court.

See Aguirre v. Commissioner, 117 T.C. 324, 327 (2001); Hall v. Commissioner,

T.C. Memo. 2013-93, at *10-*11. We accordingly review the IRS’ determina-
                                          - 15 -

[*15] tions for abuse of discretion only. Sego v. Commissioner, 114 T.C. 604, 610

(2000).

         In deciding whether SO3 in the supplemental notice of determination ab-

used his discretion in rejecting petitioners’ OICs and sustaining the levies, we con-

sider whether he: (1) properly verified that the requirements of applicable law or

administrative procedure had been met; (2) considered any relevant issues peti-

tioners raised; and (3) determined whether the proposed collection action “bal-

ances the need for the efficient collection of taxes” against petitioners’ legitimate

concern that the collection action be no more intrusive than necessary. See sec.

6330(c)(3).

A.       Validity of the Assessments

         Petitioners’ principal contention is that, during the initial CDP hearings,

SO1 and SO2 failed to verify that the tax liabilities in question had been properly

assessed. Petitioners advance two arguments to support this contention: that the

IRS failed to issue notices of deficiency before making the assessments; and that

the assessments were barred by the SoB closing agreement. Neither argument has

merit.

         As a rule, the IRS may not assess a tax deficiency unless it has first mailed

the taxpayer a notice of deficiency, enabling her to challenge the deficiency in this
                                        - 16 -

[*16] Court before the IRS assesses the tax and proceeds to collect it. Sec.

6213(a); McKay v. Commissioner, 89 T.C. 1063, 1067 (1987) (referring to the

notice of deficiency as a taxpayer’s “ticket to the Tax Court”), aff’d, 886 F.2d

1237 (9th Cir. 1989). But there are well-established exceptions to this rule. One

such exception appears in section 6213(d), which allows the IRS to assess a

deficiency without issuing a notice of deficiency if a taxpayer waives restrictions

on assessment.

      A taxpayer can waive restrictions on assessment in various ways. One way

of doing this is by executing the “Consent to Assessment and Collection” that ap-

pears on Form 4549. See Perez v. United States, 312 F.3d 191, 197 n.23 (5th Cir.

2002); Aguirre, 117 T.C. at 327. Petitioners did that here: On the Forms 4549 for

1996 and 2000 they explicitly waived their right “to contest in the United States

Tax Court” the liabilities appearing on those Forms and gave their “consent to the

immediate assessment and collection” of those liabilities. Under section 6213(d),

petitioners thus waived their right to receive a notice of deficiency for either year.

      Petitioners’ second argument is based on the closing agreement. Although

the SoB settlement initiative generally required electing taxpayers to make pay-

ment when executing the closing agreement, SO1 did not require payment or pay-

ment arrangements from petitioners at that time. Petitioners accordingly argue
                                         - 17 -

[*17] that the closing agreement had an implicit term that no tax or penalty would

be due. In petitioners’ view the IRS violated the closing agreement when it later

assessed, for the year 2000, a deficiency of $739,880 and a penalty of $73,988 on

account of the SoB transactions.

      Section 7121(a) permits the IRS to enter into closing agreements, which are

final and conclusive and bind the parties as to matters agreed upon. Sec. 7121(b);

Urbano v. Commissioner, 122 T.C. 384, 393 (2004). The IRS has prescribed two

forms of closing agreements. See sec. 301.7121-1(d), Proced. & Admin. Regs.

One type, completed on Form 866, Agreement as to Final Determination of Tax

Liability, conclusively determines a taxpayer’s liability for a particular year or

years. See Urbano, 122 T.C. at 393; Zaentz v. Commissioner, 90 T.C. 753, 760-

761 (1988); Rev. Proc. 68-16, 1968-1 C.B. 770. The second type, completed on

Form 906, finally determines one or more “specific matters” that affect the tax-

payer’s liability. See Urbano, 122 T.C. at 393; sec. 601.202(b), Statement of

Procedural Rules. A Form 906 closing agreement does not determine the taxpay-

er’s final liability for any particular year but simply binds the parties to the tax

treatment of the “specific matters” upon which they have agreed. Zaentz, 90 T.C.

at 761; see Estate of Magarian v. Commissioner, 97 T.C. 1, 7 (1991).
                                         - 18 -

[*18] Petitioners executed a “specific matters” closing agreement on a Form 906

in which they “concede[d] all claimed benefits and attributes from the Son of

BOSS transaction” for 1999 and 2000. This agreement did not address any other

items affecting their tax liabilities (such as the claimed bad-debt losses), and it

made no reference to the dollar amount of their tax liability for any year. The

agreement simply provided that, in determining petitioners’ tax liabilities for the

relevant years, their concession of all SoB tax benefits would be given full force

and effect.

      Like other closing agreements executed pursuant to the SoB settlement

initiative, petitioners’ agreement stated that “[t]he taxpayers shall make full pay-

ment of their liability for tax, penalties and interest resulting from the application

of the forgoing paragraphs, upon returning this executed closing agreement to the

IRS.” When accepting the closing agreement from petitioners, the IRS did not re-

quire any tax payment because it believed, at the time, that disallowance of the

SoB tax benefits would operate merely to reduce carryforwards and carrybacks.

The IRS later discovered various errors and omissions that required recalculation

of petitioners’ tax liabilities for 1996 and 2000. This recalculation revealed that a

portion of the 2000 deficiency, $739,880, was in fact attributable to the disallowed
                                        - 19 -

[*19] SoB tax benefits, and the IRS computed a 10% penalty, $73,988,

accordingly. Nothing in the closing agreement prevented the IRS from doing this.

      Closing agreements are interpreted under ordinary principles of contract

law. Smith v. United States, 850 F.2d 242, 245 (5th Cir. 1988); United States v.

Lane, 303 F.2d 1, 4 (5th Cir. 1962). We confine our view to the “four corners” of

the agreement unless it is ambiguous as to essential terms. Silverman v. Commis-

sioner, 105 T.C. 157, 161 (1995), aff’d, 86 F.3d 260 (1st Cir. 1996); Rink v. Com-

missioner, 100 T.C. 319, 325 (1993), aff’d, 47 F.3d 168 (6th Cir. 1995). The clos-

ing agreement at issue here is unambiguous: It makes no reference to petitioners’

overall tax liability for any year, and it therefore does not foreclose the IRS from

determining liabilities in any particular amount.

       Petitioners desire to read into the closing agreement an implicit representa-

tion by the IRS that, if it did not require them to tender a tax payment upon execu-

tion of the Form 906, it would not determine a tax deficiency attributable to the

SoB transactions. But a closing agreement binds the parties only as to the matters

expressly agreed upon therein. See sec. 7121(b); Zaentz, 90 T.C. at 761. The IRS

made no representation or promise of the sort petitioners imagine; it could not

have done so, because a “specific matters” closing agreement does not address the

taxpayer’s overall liability for any year at issue. The clause in the closing agree
                                         - 20 -

[*20] ment requiring that payment be tendered was designed to protect the fisc;

petitioners improperly seek to convert this shield into a sword to bind the IRS to a

promise that it never made.

      In sum, we conclude that the IRS Appeals Office correctly verified that

petitioners’ tax liabilities for 1996 and 2000 had been properly assessed. Because

petitioners explicitly consented to those assessments by executing the respective

Forms 4549, a notice of deficiency was not required as a prerequisite to assess-

ment for either year. And there is nothing in the SoB closing agreement that

barred assessment of the tax deficiencies and penalties to which petitioners had

expressly agreed.

B.    Petitioners’ OIC

      Section 7122(a) authorizes the IRS to compromise an outstanding tax liabi-

lity. The regulations set forth three grounds for such compromise: (1) doubt as to

liability; (2) doubt as to collectibility; or (3) promotion of effective tax administra-

tion. Sec. 301.7122-1, Proced. & Admin. Regs. Petitioners initially based their

OIC on doubt as to liability, urging that the 1996 and 2000 assessments were in-

valid. The IRS Appeals Office rejected that theory for the reasons set forth above.

      At the supplemental CDP hearing, petitioners based their OIC on doubt as

to collectibility and “special circumstances.” The Secretary may compromise a tax
                                        - 21 -

[*21] liability on the basis of doubt as to collectibility where the taxpayer’s assets

and income render full collection unlikely. Id. para. (b)(2). Conversely, the IRS

may reject an OIC when the taxpayer’s RCP exceeds the amount he proposes to

pay. See Johnson v. Commissioner, 136 T.C. 475, 486 (2011), aff’d, 502 F. App’x

1 (D.C. Cir. 2013). Generally, Appeals officers are directed to reject offers sub-

stantially below the taxpayer’s RCP unless “special circumstances” justify ac-

ceptance of such an offer. See Fairlamb v. Commissioner, T.C. Memo. 2010-22;

Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517, 517.

      We do not independently review the reasonableness of the taxpayer’s pro-

posed offer. Our review is limited to ascertaining whether the decision to reject

that offer was arbitrary, capricious, or without sound basis in fact or law. Murphy,

125 T.C. at 320. We do not substitute our judgment for the settlement officer’s as

to the acceptability of any particular offer. See, e.g., Johnson, 136 T.C. at 488.

      SO3 did not act arbitrarily or capriciously in determining that petitioners’

RCP exceeded their $40,000 offer. Petitioners acknowledged that their net worth

in 2003 exceeded $8 million. SO3 determined that petitioners during the inter-

vening years had dissipated at least $3.4 million of assets that could have been

used to pay their 1996 and 2000 tax liabilities. He did not abuse his discretion in

determining that the values of these assets should be included in the calculation of
                                        - 22 -

[*22] their RCP. See id. at 487; Taggart v. Commissioner, T.C. Memo. 2013-113;

Internal Revenue Manual (IRM) pt. 5.8.5.18 (Sept. 30, 2013). Even ignoring

dissipated assets, petitioners acknowledged that their RCP was at least $545,897,

which exceeded their offer by more than $500,000.5

         Since petitioners’ RCP vastly exceeded their offer, SO3 was directed to re-

ject that offer in the absence of “special circumstances.” Rev. Proc. 2003-71, sec.

4.02(2). “Special circumstances” are defined as: (1) facts demonstrating that the

taxpayer would suffer “economic hardship” if the IRS were to collect from him an

amount equal to the RCP; and (2) compelling public policy or equity considera-

tions that provide sufficient basis for compromise. See Murphy, 125 T.C. at 309;

McClanahan v. Commissioner, T.C. Memo. 2008-161; IRM pt. 5.8.4.2(4) (June 1,

2010).

      On their Form 433-A petitioners alleged that petitioner Jannette Duncan is

age 91, that she has limited future earning potential, and that she was paying

$11,253 monthly on life insurance policy loans. SO3 did not abuse his discretion

in determining that the loan repayments (which appeared to benefit petitioners and


      5
        Petitioners repeatedly assert that SO3 erred by failing to determine their
exact RCP. Determination of their exact RCP would be a meaningless exercise
where (as here) the taxpayers admitted that their RCP exceeded their offer by at
least 1,250%.
                                           - 23 -

[*23] their family members) should be ignored in assessing their ability to pay.

And because petitioners failed to adduce facts setting forth Jannette’s current

financial situation with any specificity, the SO did not abuse his discretion in

determining that they had failed to establish the grave level of “economic

hardship” that the regulations require.6

      Finally, SO3 did not abuse his discretion in concluding that petitioners had

failed to show any compelling public policy or equity considerations that would

justify compromising their liability. Quite the contrary: The estate’s dissipation

of more than $3 million of assets demonstrated a blatant disregard of their Federal

tax obligations. SO3 was amply justified in concluding that acceptance of peti-

tioners’ $40,000 offer was not in the best interests of the United States. See IRM

pt. 5.8.5.18(3).7


      6
        Factors indicating “economic hardship” include: (1) a long-term illness,
medical condition, or disability that renders the taxpayer incapable of earning a
living, where it is “reasonably foreseeable that taxpayer’s financial resources will
be exhausted providing for care and support during the course of the condition”;
(2) a situation where the taxpayer’s monthly income is exhausted by providing for
care of dependents without other means of support; and (3) a situation where
liquidation of assets would render the taxpayer unable to meet basic living ex-
penses. Sec. 301.7122-1(c)(3)(i), Proced. & Admin. Regs.; Internal Revenue
Manual pt. 5.8.11.2.1(6) (Sept. 23, 2008). Petitioners neither alleged nor proved
any of these conditions.
      7
          The IRS has specified certain situations that may warrant rejection of an
                                                                         (continued...)
                                       - 24 -

[*24] Finding no abuse of discretion in any respect, we will sustain the proposed

collection action. To reflect the foregoing,



                                                Decisions will be entered

                                       for respondent.




      7
        (...continued)
offer as not being in the best interests of the Government. These situations include
(among other things) failure to account for dissipated assets. IRM pt. 5.8.5.18(3)
(Sept. 30, 2013). The U.S. Department of Justice commenced suit against the
estate for precisely ths reason. See supra note 4.
