                        T.C. Memo. 2007-26



                      UNITED STATES TAX COURT



           FRANKLIN AND JANETTA HUBBART, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18722-04L.            Filed February 6, 2007.



     Jaret R. Coles and 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 6320 (notice of determination) for 1981

through 1986.1   Pursuant to section 6330(d), petitioners seek


     1
         Unless otherwise indicated, all section references are to
                                                    (continued...)
                               - 2 -

review of respondent’s determination.   The issue for decision is

whether respondent abused his discretion in sustaining the

proposed collection action.2

                        FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The first, second, third, fourth, and fifth stipulations of fact

and the attached exhibits are incorporated herein by this

reference.3



     1
      (...continued)
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure. Amounts
are rounded to the nearest dollar.
     2
        Petitioners also dispute respondent’s determination that
they are liable for the increased rate of interest on tax-
motivated transactions under sec. 6621(c), I.R.C. 1986. As to
this dispute, the parties filed a stipulation to be bound by the
Court’s determination in Ertz v. Commissioner, T.C. Memo. 2007-
15, which involves a similar issue.
     3
        Respondent reserved relevancy objections to many of the
exhibits attached to the stipulations of fact. Fed. R. Evid. 402
provides the general rule that all relevant evidence is
admissible, while evidence which is not relevant is not
admissible. Fed. R. Evid. 401 defines relevant evidence as
“evidence having any tendency to make the existence of any fact
that is of consequence to the determination of the action more
probable or less probable than it would be without the evidence.”
While the relevance of some exhibits is certainly limited, we
find that the exhibits meet the threshold definition of relevant
evidence and are admissible. The Court will give the exhibits
only such consideration as is warranted by their pertinence to
the Court’s analysis of petitioners’ case.

     Respondent also objected to many of the exhibits on the
basis of hearsay. Even if we were to receive those exhibits into
evidence, they would have no impact on our findings of fact or on
the outcome of this case.
                               - 3 -

     Petitioners resided in Valley Springs, California, when they

filed their petition.   Petitioners have been married for 37

years.   At the time of trial, petitioner Franklin Hubbart (Mr.

Hubbart) was 66 years old, and petitioner Janetta Hubbart (Mrs.

Hubbart) was 64.   Mr. Hubbart retired in 2001, and Mrs. Hubbart

retired in 2000.

     In 1984, petitioners became partners in Shorthorn Genetic

Engineering, Ltd. 1984-3 (SGE 84-3), a cattle breeding

partnership organized and operated by Walter J. Hoyt III (Hoyt).4

     From about 1971 through 1998, Hoyt organized, promoted, and

operated more than 100 cattle breeding partnerships.   Hoyt also

organized, promoted, and operated sheep breeding partnerships.

From 1983 to his subsequent removal by the Tax Court in 2000

through 2003, Hoyt was the tax matters partner of each Hoyt

partnership.   From approximately 1980 through 1997, Hoyt was a

licensed enrolled agent, and as such, he represented many of the

Hoyt partners before the Internal Revenue Service (IRS).   In




     4
        Petitioners were also partners in another Hoyt-related
partnership identified as Hoyt and Sons Trucking (HS Truck). The
details of HS Truck are not in the record. Though unclear, it
appears that all adjustments made to petitioners’ income tax
liability for the years in issue arose from their involvement in
SGE 84-3 only.
                                - 4 -

1998, Hoyt’s enrolled agent status was revoked.    Hoyt was

convicted of various criminal charges in 2000.5

     Beginning in 1984 until at least 1986, petitioners claimed

losses and credits on their Federal income tax returns arising

from their involvement in the Hoyt partnerships.    Petitioners

also carried back unused investment credits to 1981, 1982, and

1983.    As a result of these losses and credits, petitioners

reported overpayments of tax for 1981 through 1986 and received

refunds in the amounts claimed.




     5
        Petitioners ask the Court to take judicial notice of
certain “facts” in other Hoyt-related cases and apply judicial
estoppel to “facts respondent has asserted in previous [Hoyt-
related] litigation”. We do neither.

     A judicially noticeable fact is one not subject to
reasonable dispute in that it is either (1) generally known
within the territorial jurisdiction of the trial court or (2)
capable of accurate and ready determination by resort to sources
whose accuracy cannot reasonably be questioned. Fed. R. Evid.
201(b). Petitioners are not asking the Court to take judicial
notice of facts that are not subject to reasonable dispute.
Instead, petitioners are asking the Court to take judicial notice
of the truth of assertions made by taxpayers and the Commissioner
in other Hoyt-related cases. Such assertions are not the proper
subject of judicial notice.

     The doctrine of judicial estoppel prevents a party from
asserting in a legal proceeding a claim that is inconsistent with
a position successfully taken by that party in a previous
proceeding. New Hampshire v. Maine, 532 U.S. 742, 749 (2001).
Among the requirements for judicial estoppel to be invoked, a
party’s current litigating position must be “clearly
inconsistent” with a prior litigating position. Id. at 750-751.
Petitioners have failed to identify any clear inconsistencies
between respondent’s current position and his position in any
previous litigation.
                               - 5 -

     Respondent issued notices of final partnership

administrative adjustments (FPAAs) to SGE 84-3 for its 1984

through 1986 taxable years.6   After completion of the

partnership-level proceedings, respondent sent petitioners a Form

4549A-CG, Income Tax Examination Changes, reflecting changes made

for petitioners’ 1981 through 1986 tax years.   Respondent

determined deficiencies in petitioners’ income tax of $10,731,

$7,001, $5,552, $2,641, $5,463, and $5,268, respectively.

     On November 22, 2001, respondent issued petitioners a Notice

of Federal Tax Lien and Your Right to a Hearing Under IRC 6320

(notice of lien).   The notice of lien informed petitioners that a

Federal tax lien had been filed to secure payment of their

outstanding tax liabilities for 1981 through 1986.

     On December 21, 2001, petitioners submitted a Form 12153,

Request for a Collection Due Process Hearing.   Petitioners argued

that the Federal tax lien was inappropriate and caused them

financial hardship.

     On October 31, 2003, petitioners’ case was assigned to

Settlement Officer Linda Cochran (Ms. Cochran).   Ms. Cochran

scheduled petitioners’ section 6330 hearing for March 23, 2004.

During the hearing, petitioners’ representative, Terri A. Merriam

(Ms. Merriam), requested additional time to submit information.



     6
        The FPAAs and other information specific to SGE 84-3’s
partnership-level proceedings are not in the record.
                               - 6 -

While Ms. Cochran normally required documents to be submitted

before the section 6330 hearing, she extended petitioner’s

deadline for producing information to April 9, 2004.

     On April 9, 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 explaining the offer amount and other

payment considerations, and three letters setting out in detail

petitioners’ position regarding the offer-in-compromise.

Petitioners’ letters included several exhibits.

     The Form 656 indicated that petitioners were seeking an

offer-in-compromise based alternatively on doubt as to

collectibility with special circumstances or effective tax

administration.   Petitioners offered to pay $60,400 to compromise

their outstanding tax liability for 1981 through 1996.    At the

time of the section 6330 hearing, $345,145 had been assessed

against petitioners with respect to their 1981 through 1996 tax

years.
                               - 7 -

     On the Form 433-A, petitioners listed the following assets:

        Asset          Current Balance/Value    Loan Balance
Checking accounts             $9,876                n/a
Savings accounts                 525                n/a
Life insurance                 1,174               $9,900
2002 Ford F350                 9,195               36,687
1989 Nissan Maxima               538                -0-
5th Wheel Camper                 -0-                -0-
Boat & Trailer                11,000                -0-
House                        164,713                -0-
  Total                      197,021               46,587


The reported value of the life insurance reflected its then-

current cash value.   The reported value of the house reflected

both the value of the land ($11,313) and the value of the house

($154,400).

     Petitioners reported gross monthly income of $7,263,

representing Mr. Hubbart’s pension/Social Security income of

$3,381, and Mrs. Hubbart’s pension/Social Security income of

$3,882.   Petitioners also reported the following monthly living

expenses:
                               - 8 -

         Expense item             Monthly expense
     Food, clothing, misc.              $2,011
     Housing and utilities               1,156
     Transportation                      1,212
     Health care                         1,130
     Taxes (income and FICA)               817
     Court ordered payments                364
     Life insurance                        100
     Other expenses                        429
       Total                             7,219

The transportation expense included the cost of gas to and from

Mr. Hubbart’s medical treatments, described below.     The court-

ordered payments represented an installment agreement with the

State of California Franchise Tax Board to resolve petitioners’

outstanding State tax liabilities.     The other expenses

represented attorney’s fees petitioners paid to Ms. Merriam’s law

firm in connection with the present litigation.

     In the letter explaining the offer amount, petitioners

stated that they were offering to pay $60,400:

     for all Hoyt-related years, 1981 through 1996, to be
     paid in ninety days from the acceptance of the offer.
     * * * We have attached an estimate [of the tax due] *
     * * It does not include any penalties, including the
     tax motivated transaction interest penalty or failure
     to pay penalty.

The letter also included “medical and retirement considerations”

and a “retirement analysis”.   Petitioners’ medical and retirement

considerations included:   (1) Petitioners were retired; (2) Mrs.
                                - 9 -

Hubbart had a history of ulcerative colitis, and has to have a

colonoscopy each year, for which she has to pay $1,000; and (3)

Mr. Hubbart suffered from heart problems, had an angioplasty and

an angiogram during 2004, required 35 sessions of a treatment

called External Counterpulsion System beginning April 19 and

ending June 4, 2004, and would likely require heart bypass

surgery in the future.    The retirement analysis outlined the

likelihood of increased housing and medical costs as petitioners

age.

       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 April

9, 2004, letters.

       On September 1, 2004, respondent issued petitioners a notice

of determination.    In evaluating petitioners’ offer-in-

compromise, respondent made the following changes to the values

of assets reported by petitioners on the Form 433-A:    (1)

Determined that the house was worth $214,141 instead of $164,713,

based on the value assigned to the property by the Calaveras

County Assessor’s Office in 2002; (2) included the quick-sale

value of the 1989 Nissan Maxima of $431 instead of the fair

market value petitioners reported; (3) included the quick-sale
                               - 10 -

value of the boat and carrier of $8,800 instead of the fair

market value petitioners reported; and (4) estimated that the

quick-sale value of the fifth wheel camper was $400.    Respondent

did not include the value of the life insurance or the 2002 Ford

F350 because the loans on the items exceeded their value.

Respondent concluded that petitioners had a total net realizable

equity of $234,172.

     Respondent accepted petitioners’ reported gross monthly

income of $7,219.    Respondent made the following adjustments to

petitioners’ monthly expenses:    (1) Reduced the housing and

utilities expense from $1,156 to $726 to reflect the actual

documented costs; (2) reduced the transportation expense from

$1,212 to $758 because Mr. Hubbart’s medical treatments were

completed by the time of the section 6330 hearing and thus an

additional allowance for gas was not needed; (3) reduced medical

expenses from $1,130 to $912 to reflect actual documented out-of-

pocket expenses; and (4) allowed the payments to the State of

California Franchise Tax Board only through July 2007 because

petitioners estimated that their State tax liability would be

paid by that time.    Regarding the possible future increases in

expenses outlined in petitioners’ April 9, 2004 letters,

respondent determined that these were “general projections from

the taxpayers’ representative and may never, in fact, be

incurred” and thus did not take them into account.
                               - 11 -

     After making adjustments to petitioners’ monthly expenses,

respondent determined that $145,222 was collectible from

petitioners’ future income.7   Because petitioners’ State tax debt

would be satisfied by July 2007, respondent determined that there

was an “amount collectible from retired debt” over the period

remaining on the collection statute of $14,924.    Respondent

concluded that petitioners had a reasonable collection potential

of $394,318.

     Because petitioners had the ability to pay substantially

more than the amount offered, respondent rejected their offer-in-

compromise based on doubt as to collectibility with special

circumstances.    Respondent also rejected their 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 their 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 concluded that petitioners did not offer an

acceptable collection alternative, that all requirements of law

and administrative procedure had been met, and that the Federal

tax lien represented the most efficient means to protect the


     7
        Respondent determined that petitioners had monthly
disposable income of $1,886 and multiplied this by 77, the number
of months remaining on the collection statute.
                                - 12 -

Government’s interest in petitioners’ assets until their

outstanding tax liabilities are satisfied.

     In response to the notice of determination, petitioners

filed a petition with this Court on October 4, 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

(9th Cir. 2006), affg. T.C. Memo. 2004-13; sec. 301.7122-1(c)(1),

Proced. & Admin. Regs.

     The regulations under section 7122(a) set forth three

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

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

effective tax administration.    Sec. 301.7122-1(b), Proced. &

Admin. Regs.   Doubt as to liability is not at issue in this

case.8

     The Secretary may compromise a tax liability based on doubt

as to collectibility where the taxpayer’s assets and income are

less than the full amount of the assessed liability.    Sec.

301.7122-1(b)(2), Proced. & Admin. Regs.    Generally, under the

Commissioner’s administrative pronouncements, an offer-in-


     8
        While petitioners disputed their liability for sec.
6621(c) interest, see supra note 2, they did not raise doubt as
to liability as a grounds for compromise.
                                   - 13 -

compromise based on doubt as to collectibility will be acceptable

only if it reflects the taxpayer’s reasonable collection

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

517.    In some cases, the Commissioner will accept an offer of

less than the reasonable collection potential if there are

“special circumstances”.     Id.    Special circumstances are:   (1)

Circumstances demonstrating that the taxpayer would suffer

economic hardship if the IRS were to collect from him an amount

equal to the reasonable collection potential; or (2)

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. 5.6.4.3(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
                               - 14 -

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 $60,400 to compromise their outstanding tax

liability for 1981 through 1996, which totaled $345,145 at the

time of the section 6330 hearing.9      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

$394,318 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.




     9
        The Federal tax lien was filed to secure repayment of
petitioners’ outstanding tax liability for 1981-86 only.
Petitioners estimated that their outstanding tax liability for
1981-86 was $257,012. However, petitioners sought to compromise
their outstanding tax liability for not only 1981-86, but also
for 1987-96. To accurately compare their offer amount to their
outstanding tax liability, we must therefore consider the total
assessed amount for 1981-96, and not for only 1981-86.
                              - 15 -

     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-in-

compromise 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. 2006-

166; Fowler v. Commissioner, T.C. Memo. 2004-163.   Because the

same factors are taken into account in evaluating offers-in-

compromise 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-in-

compromise 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.”
                              - 16 -

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’ future income, improperly valued

petitioners’ assets, 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 301.7122-

1(c)(3), Proced. & Admin. Regs., sets forth factors to consider

in evaluating whether collection of a tax liability would cause

economic hardship, as well as some examples.    One of the examples

involves a taxpayer who provides fulltime care to a dependent

child with a serious long-term illness.   A second example

involves a taxpayer who would lack adequate means to pay his

basic living expenses were his only asset to be liquidated.     A

third example involves a disabled taxpayer who has a fixed income

and a modest home specially equipped to accommodate his

disability, and who is unable to borrow against his home because

of his disability.   See sec. 301.7122-1(c)(3)(iii), Examples (1),

(2), and (3), Proced. & Admin. Regs.   None of these examples

bears any resemblance to this case, but instead they “describe

more dire circumstances”.   Speltz v. Commissioner, 454 F.3d 782,

786 (8th Cir. 2006), affg. 124 T.C. 165 (2005); see also Barnes
                               - 17 -

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

considered all of the arguments and information presented to her.

Given the amount of information, it would be unreasonable to put

the burden on Ms. Cochran to specifically address in the notice

of determination every single asserted fact, circumstance, and

argument presented.    The fact that all of the information was not

specifically addressed in the notice of determination was not an

abuse of discretion.
                                - 18 -

     2.   Petitioners’ Income, Assets, and Future Expenses

     Petitioners assert that Ms. Cochran erroneously determined

their reasonable collection potential by:   (1) Considering 77

months of petitioners’ future income instead of 48 months; (2)

failing to adequately consider their age, health, retirement

status, medical costs, and the likelihood of future increases in

medical and housing costs; and (3) improperly valuing

petitioners’ house.   Petitioners’ arguments are not persuasive.

     Section 5.8.5.5 of the IRM provides that, when a taxpayer

makes a cash offer to compromise an outstanding tax liability,

only 48 months of future income should be considered.

Petitioners made a cash offer, but Ms. Cochran used 77 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 $329,068, instead of $394,318,

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 ($60,400).    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 $329,068 far exceeds their offer amount of $60,400.
                               - 19 -

     With regard to age, health, and retirement status,

petitioners’ argument is not supported by the record.     In the

information submitted to Ms. Cochran, petitioners represented

that they were retired and, due to their medical conditions,

could not obtain employment.   Ms. Cochran did not dispute this.

In calculating petitioners’ reasonable collection potential, she

used only their reported pension income.

     Ms. Cochran allowed only $912 of petitioners’ reported

monthly medical expenses of $1,130.     As reflected in the notice

of determination, the allowable medical expenses were “based on

documentation for out-of-pocket expenses provided by

[petitioners] and reflect costs for February 2003 through March

2004 (14 months).   The [petitioners’] expenses totaled $12,756,

which, divided by 14 months, equals $911.14.”    While petitioners

dispute the reduction of their allowable medical expenses, they

have not disputed the accuracy of Ms. Cochran’s determination

that petitioners’ actual documented monthly medical expenses were

only $912.

     Given her inclusion of pension income as the only source of

future income and her acceptance of petitioners’ documented

medical expenses, we reject petitioners’ assertion that Ms.

Cochran failed to consider their age, health, retirement status,

and current medical costs.
                                - 20 -

     Petitioners’ argument is also unavailing with regard to the

likelihood of future increases in medical and housing costs.

Petitioners did not inform Ms. Cochran with any specificity that

they would have to pay a greater amount of unreimbursed medical

expenses in the future, or that their housing expenses would

increase.   Instead, they made general assertions about the

increase of medical costs as people age and about the need for

some seniors to seek in-home care or nursing home care or to make

their houses handicapped accessible.

     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 dispute Ms. Cochran’s determination that their

house was worth $214,141 instead of $164,713.    They argue that,

if Ms. Cochran did not agree with their reported value, she

should have hired a professional valuation expert instead of

making her own determination.    Ms. Cochran did not arbitrarily

assign a value to petitioners’ house, but instead used the value
                               - 21 -

determined by the Calaveras County Assessor’s Office in 2002.      We

find that Ms. Cochran’s use of the county assessor’s valuation

was not arbitrary or capricious.

     Petitioners raise various other challenges and arguments,

including:    (1) Ms. Cochran abused her discretion by taking into

consideration only future decreases in expenses and not future

increases; (2) Ms. Cochran improperly disallowed petitioners’

actual housing and utility expenses; and (3) Ms. Cochran

improperly disallowed petitioners’ actual transportation

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-in-

compromise.   Ms. Cochran testified that, had she accepted the

income, expenses, and value of assets as reported, petitioners’

reasonable collection potential would have been $178,656.

Petitioners offered to pay only $60,400 to compromise their

outstanding tax liability.    In some situations, respondent may

accept an offer amount of less than petitioners’ reasonable

collection potential.   However, given all other considerations

discussed herein, we do not believe that Ms. Cochran abused her

discretion by rejecting an offer-in-compromise that bore no
                               - 22 -

relationship to petitioners’ ability to pay based on their own

calculations.

     3.    Encouraging Voluntary Compliance With the Tax Laws

     We are also mindful that any decision by Ms. Cochran to

accept petitioners’ offer-in-compromise due to doubt as to

collectibility with special circumstances or effective tax

administration based on economic hardship must be viewed against

the backdrop of section 301.7122-1(b)(3)(iii), Proced. & Admin.

Regs.10   See Barnes v. Commissioner, T.C. Memo. 2006-150.   That

section requires that Ms. Cochran deny petitioners’ offer-in-

compromise if its acceptance would undermine voluntary compliance

with tax laws by taxpayers in general.   Thus, even if we were to

assume arguendo that petitioners would suffer economic hardship,

a finding that we 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




     10
        The prospect that acceptance of an offer-in-compromise
will undermine compliance with the tax laws militates against its
acceptance whether the offer-in-compromise is predicated on
promotion of effective tax administration or on doubt as to
collectibility with special circumstances. See Rev. Proc. 2003-
71, 2003-2 C.B. 517; IRM sec. 5.8.11.2.2; see also Barnes v.
Commissioner, T.C. Memo. 2006-150.
                              - 23 -

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
                                - 24 -

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
                               - 25 -

     through 1983. In 1984, the IRS opened an audit of the
     partnership under the provisions of the Tax Equity and
     Fiscal Responsibility Act of 1982 (TEFRA). After
     issuance of the Final Partnership Administrative
     Adjustment (FPAA), but prior to any proceedings in Tax
     Court, the IRS made a global settlement offer in which
     it offered to concede a substantial portion of the
     interest and penalties that could be expected to be
     assessed if the IRS’s determinations were upheld by the
     court. The taxpayer rejected the settlement offer.
     After several years of litigation, the partnership
     level proceeding eventually ended in Tax Court
     decisions upholding the vast majority of the
     deficiencies asserted in the FPAA on the grounds that
     the partnership’s activities lacked economic substance.
     The taxpayer has now offered to compromise all the
     penalties and interest on terms more favorable than
     those contained in the prior settlement offer, arguing
     that TEFRA is unfair and that the liabilities accrued
     in large part due to the actions of the Tax Matters
     Partner (TMP) during the audit and litigation. Neither
     the operation of the TEFRA rules nor the TMP’s actions
     on behalf of the taxpayer provide grounds to compromise
     under the equity provision of paragraph (b)(4)(i)(B) of
     this section. Compromise on those grounds would
     undermine the purpose of both the penalty and interest
     provisions at issue and the consistent settlement
     principles of TEFRA. * * *

1 Administration, Internal Revenue Manual (CCH), sec.

5.8.11.2.2(3), at 16,378.   Ms. Cochran testified that:

     I determined that this example was very similar and on
     point with [petitioners’] case. * * * These were
     similar years that [petitioners] were associated with.
     This had to do with a TEFRA proceeding with an FPAA
     issued with a settlement offer[11] proposed by IRS and
     subsequently rejected, subsequent litigation.
     [Petitioners] now offered to compromise all penalties
     and interest than those contained in the original
     settlement offer. It involved issues relative to the
     TMP’s actions, and those seemed to be issues--all of



     11
          The details of the settlement offer are not in the
record.
                              - 26 -

     those were issues that, in fact, were being raised
     wholly or in part in this case.

We agree with Ms. Cochran that the example presents circumstances

similar to those in petitioners’ case.

     Petitioners are correct in asserting that not all of the

facts in their case are present in the example.   However, it is

unreasonable to expect that facts in an example be identical to

facts of a particular case before the example can be relied upon.

The IRM example was only one of many factors respondent

considered.   Given the similarities to petitioners’ case,

respondent’s reliance on that example was not arbitrary or

capricious.

     3.   Petitioners’ Other “Equitable Facts”

     Petitioners argue that respondent abused his discretion by

failing to consider the other “equitable facts” of this case.

Petitioners’ “equitable facts” include reference to:   (1)

Petitioners’ reliance on Bales v. Commissioner, T.C. Memo. 1989-

568;12 (2) petitioners’ reliance on Hoyt’s enrolled agent status;


     12
        Bales v. Commissioner, T.C. Memo. 1989-568, involved
deficiencies determined against various investors in several Hoyt
partnerships. This Court found in favor of the investors on
several issues, stating that “the transaction in issue should be
respected for Federal income tax purposes.” Taxpayers in many
Hoyt-related cases have used Bales as the basis for a reasonable
cause defense to accuracy-related penalties. This argument has
been uniformly rejected by this Court and by the Courts of
Appeals for the Sixth, Ninth, and Tenth Circuits. See, e.g.,
Hansen v. Commissioner, 471 F.3d 1021 (9th Cir. 2006), affg. T.C.
Memo. 2004-269; Mortensen v. Commissioner, 440 F.3d 375, 390-391
                                                   (continued...)
                                - 27 -

(3) Hoyt’s criminal conviction; (4) Hoyt’s fraud on petitioners;

and (5) other letters and cases.     The basic thrust of

petitioners’ argument is that they were defrauded by Hoyt and

that, if they were held responsible for penalties and interest

incurred as a result of their investment in a tax shelter, it

would be inequitable and against public policy.     Petitioners’

argument is not persuasive.

     While the regulations do not set forth a specific standard

for evaluating an offer-in-compromise based on claims of public

policy or equity, the regulations contain two examples.     See sec.

301.7122-1(c)(3)(iv), Examples (1) and (2), Proced. & Admin.

Regs.     The first example describes a taxpayer who is seriously

ill and unable to file income tax returns for several years.       The

second example describes a taxpayer who received erroneous advice

from the Commissioner as to the tax effect of the taxpayer’s

actions.     Neither example bears any resemblance to this case.

Unlike the exceptional circumstances exemplified in the

regulations, petitioners’ situation is neither unique nor

exceptional in that his situation mirrors those of numerous other

taxpayers who claimed tax shelter deductions in the 1980s and




     12
      (...continued)
(6th Cir. 2006), affg. T.C. Memo. 2004-279; Van Scoten v.
Commissioner, 439 F.3d 1243, 1254-1256 (10th Cir. 2006), affg.
T.C. Memo. 2004-275.
                              - 28 -

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
                              - 29 -

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
                              - 30 -

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
                              - 31 -

effective tax administration offer-in-compromise.    See Keller v.

Commissioner, supra.

     2.   Information Sufficient for the Court To Review
          Respondent’s Determination

     Petitioners argue that respondent failed to provide the

Court with sufficient information “so that this Court can conduct

a thorough, probing, and in-depth review of respondent’s

determinations.”   Petitioners’ argument is without merit.

     Generally, a taxpayer bears the burden of proving the

Commissioner’s determinations incorrect.    Rule 142(a)(1); Welch

v. Helvering, 290 U.S. 111, 115 (1933).13    The burden was on

petitioners to show that respondent abused his discretion.       The

burden was not on respondent to provide enough information to

show that he did not abuse his discretion.    Nevertheless, we find

that we had more than sufficient information to review

respondent’s determination.

     3.   Deadline for Submission of Information

     Petitioners argue that Ms. Cochran abused her discretion by

not allowing their counsel additional time to submit information




     13
        While sec. 7491 shifts the burden of proof and/or the
burden of production to the Commissioner in certain
circumstances, this section is not applicable in this case
because respondent’s examination of petitioners’ returns did not
commence after July 22, 1998. See Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3001(c), 112 Stat. 727.
                                - 32 -

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 April 9, 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.     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-in-

compromise.     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
                               - 33 -

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.

       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.
