                        T.C. Memo. 2007-47



                      UNITED STATES TAX COURT



          ROGER D. AND MARY M. CATLOW, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11319-05L.            Filed March 1, 2007.



     Terri A. Merriam, Jennifer A. Gellner, Jaret R. Coles, and

Asher B. Bearman, for petitioners.1

     Thomas N. Tomashek and Gregory M. Hahn, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   Petitioners petitioned the Court under section

6330(d) to review the determination of respondent’s Office of


     1
       Pursuant to their requests, Jennifer A. Gellner and Asher
B. Bearman were allowed to withdraw on Nov. 14 and 17, 2006,
respectively.
                                 - 2 -

Appeals (Appeals) sustaining a proposed levy relating to $541,620

of Federal income taxes (inclusive of additions to tax,

penalties, and interest) owed by petitioners for 1981 through

1991.2   Petitioners argue that Appeals was required to accept

their offer of $35,000 to compromise what they estimate is their

approximately $575,000 Federal income tax liability for 1981

through 1998.3    We decide whether Appeals abused its discretion

in rejecting that offer.4    We hold it did not.

                           FINDINGS OF FACT

     The parties filed with the Court stipulations of fact and

accompanying exhibits.    The stipulated facts are found

accordingly.     When the petition was filed, petitioners resided in

Mattawa, Washington.

     2
       Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code. Dollar amounts
are rounded.
     3
       Petitioners submitted to respondent Form 656, Offer in
Compromise, indicating that they were offering to compromise
their tax liability for 1981 through 1996. However, petitioners
also submitted to respondent a letter accompanying the Form 656
in which they stated that they wished to compromise their tax
liability for 1981 through 1998. We read petitioners’ offer to
include the years 1981 through 1998.
     4
       Petitioners also dispute respondent’s determination that
they are liable for increased interest under sec. 6621(c). This
interest relates to deficiencies attributable to “computational
adjustments”, see secs. 6230(a)(1) and 6231(a)(6), made following
the Court’s decision in Shorthorn Genetic Engg. 1982-2, Ltd. v.
Commissioner, T.C. Memo. 1996-515. As to this dispute, the
parties have agreed to be bound by a final decision in Ertz v.
Commissioner, docket No. 20336-04L, which involves a similar
issue.
                                 - 3 -

     Beginning in 1984, petitioners’ Federal income tax returns

claimed losses and credits from their investment in a partnership

organized and operated by Walter J. Hoyt III (Hoyt).     The

partnership was Shorthorn Genetic Engineering 1984-5.     Hoyt was

the partnership’s general partner and tax matters partner, and

the partnership was subject to the unified audit and litigation

procedures of the Tax Equity and Fiscal Responsibility Act of

1982, Pub. L. 97-248, sec. 402(a), 96 Stat. 648.    Hoyt was

convicted on criminal charges relating to the promotion of this

and other partnerships.

     Petitioners’ claim to the losses and credits resulted in the

underreporting of their 1981 through 1991 taxable income.      On

May 9, 2003, respondent mailed to petitioners a Letter 1058,

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

Hearing.   The notice informed petitioners that respondent

proposed to levy on their property to collect Federal income

taxes that they owed for 1981 through 1991.    The notice advised

petitioners that they were entitled to a hearing with Appeals to

review the propriety of the proposed levy.

     On May 29, 2003, petitioners asked Appeals for the

referenced hearing.     On March 25, 2004, Linda Cochran (Cochran),

a settlement officer in Appeals, held the hearing with

petitioners’ counsel.    Cochran and petitioners’ counsel discussed

two issues.   The first issue concerned petitioners’ intent to
                               - 4 -

offer to compromise their 1981 through 1998 Federal income tax

liability due to doubt as to collectibility with special

circumstances and to promote effective tax administration.

Petitioners contended that Appeals should accept their offer as a

matter of equity and public policy.    Petitioners stated that it

had taken a long time to resolve the Hoyt partnership cases and

noted that Hoyt had been convicted on the criminal charges.   The

second issue concerned an interest abatement case under section

6404(e) that petitioners mistakenly stated they had pending with

respondent.5   Petitioners stated that the interest abatement case

related to the same years at issue here and that the proposed

levy should be rejected because that case was pending.6

     On May 7, 2004, petitioners tendered to Cochran on Form 656,

Offer in Compromise, a written offer to pay $35,000 to compromise

their estimated approximately $575,000 liability.   Petitioners

supplemented their offer with a completed Form 433-A, Collection

Information Statement for Wage Earners and Self-Employed

Individuals, four letters totaling approximately 80 pages, and

volumes of documents.   The Form 433-A reported that petitioners


     5
       While petitioners stated that they had the interest
abatement case pending in this Court, they never petitioned this
Court with respect to the interest abatement issue.
     6
       Petitioner Mary Catlow also requested relief under sec.
6015(b) and (f). In that Mary Catlow later agreed that she was
not entitled to her requested relief, petitioners do not advance
that claim in this proceeding.
                               - 5 -

owned assets with a total current value of $177,598, inclusive of

the following:7

                    Assets                     Current value

          Cash in accounts                       $13,418
          Retirement accounts                    105,440
          Furniture/personal effects               3,000
          Real Estate                             36,000
          Mobile home                              8,950
          Vehicles:
            1977 Ford Van                       de minimis
            1981 VW Pickup                            -0-
            1990 VW Jetta                             460
            2001 VW Passat                         10,330
                                                  177,598

The Form 433-A also reported that petitioners had a single debt

of $7,948, which was attributable to the 2001 VW Passat, and the

following monthly items of income and expense:

                   Item of income                Amount

           Husband’s pension                     $4,551

                   Items of expense              Amount

           Food, clothing, and miscellaneous     $1,271
           Housing                                  682
           Transportation                         1,244
           Medical expenses                       1,103
           Taxes (Income)                           446
           Life insurance                             5
           Other expenses                           400
                                                  5,151




     7
       Form 433-A states that each asset reported on the form
should be valued at its “Current value”, defined on the form as
“the amount you could sell the asset for today”.
                                      - 6 -

     Cochran determined that petitioners’ net realizable equity

in their cash was the $13,110 reported in their bank accounts8

and that petitioners’ net realizable equity in their retirement

accounts and real estate was the same as the reported values.

Cochran reduced the reported value of the vehicles and mobile

home by 20 percent to reflect their quick sale value.                 She also

noted the encumbrance on the 2001 VW Passat and allowed a $7,200

exemption9 under section 6334(a)(2) for the motor home.10                 Cochran

summarized petitioners’ assets and liabilities as follows:

                                    Fair      Quick                      Net
                                    market    sale     Encumbrance/   realizable
                Assets              value     value    exemption        equity

  Cash/bank                        $13,110       --        --         $13,110
  Retirement accounts              105,440       --        --         105,440
  Real estate                       36,000       --        --          36,000
  Mobile home                        8,950    $7,160    $7,200            -0-
  Vehicles:
    1990 VW Jetta                      480     384        --              384
                                                                      [1]
    2001 VW Passat                  10,330   8,264      7,948            296
                                   174,310 15,808      15,148       155,230
     1
          There is a $20 discrepancy that is immaterial to our analysis.

     As to the reported expenses, Cochran accepted petitioners’

figures for their housing, taxes, life insurance, and other

expenses.      Cochran made some adjustments to petitioners’ claimed


     8
       Petitioners had actually reported that they had $13,418 in
their bank accounts. However, $308 of this amount was listed on
a separate document that supplemented the Form 433-A; it appears
that Cochran overlooked this item.
     9
       Whereas sec. 6334(a)(2) limits this exemption to $6,250,
Cochran does not explain in the notice of determination why she
allowed petitioners the greater amount.
     10
       Cochran did not take into account $3000 of furniture and
personal effects that petitioners had listed on their Form 433-A.
                               - 7 -

expenses for food, clothing, miscellaneous items, transportation,

and health care.   First, Cochran determined that petitioners were

allowed a food, clothing, and miscellaneous items expense of

$1,020 instead of the $1,271 that they claimed.   Cochran stated

that she made this adjustment in accordance with current national

guidelines and that she considered petitioners’ particular

circumstances but that they did not warrant allowing the higher

figure submitted by petitioners.   Cochran also reduced

petitioners’ transportation expenses from $1,244 to $902 in

accordance with the applicable guidelines.   Finally, Cochran

adjusted petitioners’ allowable health care expenses from the

$1,103 that they claimed on their Form 433-A to $300.     Cochran

noted that petitioners had not mentioned any health issues nor

provided any documentation of medical bills.   She also commented

that the only health care-related expense that petitioners had

documented was a long-term care insurance policy expense of $182

a month.   In sum, Cochran reduced petitioners’ monthly allowable

expenses to $3,755.

     Cochran determined that petitioners’ monthly excess income

(i.e., monthly income less monthly expenses) was $796 ($4,551 -

$3,755), that petitioners’ income potential for the next

48 months was approximately $38,208 ($796 x 48 = $38,208),11 and

     11
       Cochran used a 48-month factor because petitioners were
offering to compromise their tax liability by paying cash. See
                                                   (continued...)
                               - 8 -

that petitioners’ reasonable collection potential was $193,438

(future income potential of $38,208 + net realizable equity of

$155,230).

     On May 19, 2005, Appeals issued petitioners the notice of

determination sustaining the proposed levy.   The notice concludes

that petitioners’ $35,000 offer-in-compromise is not an

appropriate collection alternative to the proposed levy.    The

notice, citing Internal Revenue Manual (IRM) sections 5.8.5.5.1

and 5.8.5.3.1, states that petitioners’ offer does not meet the

Commissioner’s guidelines for consideration of an offer-in-

compromise due to doubt as to collectibility with special

circumstances.   The notice, citing IRM section 5.8.11.1(3),

states that petitioners’ offer also does not meet the

Commissioner’s guidelines for consideration as an offer-in-

compromise to promote effective tax administration.

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

collectibility with special circumstances, the notice states:

     the taxpayers [petitioners] have the ability to pay
     more than the offer amount from either the equity in
     their assets or their income stream while still meeting
     their necessary basic living expenses, in accordance
     with IRM 5.8.5.5.1. The taxpayers’ representative
     contended that the taxpayers’ equity in their assets
     and any collection potential from future income should
     be offset against possible future expenses that might
     be incurred throughout the rest of the taxpayers’
     lives. The Settlement Officer noted, however, that

     11
      (...continued)
Internal Revenue Manual (IRM) sec. 5.8.5.5.
                              - 9 -

     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.

     The taxpayers have an ability to pay substantially more
     than the amount being offered, as per the guidelines of
     Internal Revenue Manual 5.8.5.3.1. The taxpayers’
     circumstances have been documented and considered but
     are insufficient to permit acceptance of an offer
     amount that is 18% of the RCP [reasonable collection
     potential] ($35,000/$193,438).

As to petitioners’ offer-in-compromise to promote effective tax

administration, the notice states:

     Analysis of the taxpayers’ finances shows that the
     taxpayers’ equity in assets plus present and future
     income are less than the assessed amounts to be
     compromised. The taxpayers, therefore, fail to meet
     the requirements for consideration of an offer in
     compromise based on Effective Tax Administration, as
     per the guidelines of Internal Revenue Manual
     5.8.11.1(3).

The notice further states as to Cochran’s balancing of efficient

collection with the legitimate concerns of taxpayers that

     The taxpayers’ concerns about the proposed collection
     action generally fall within two areas: (1) pending
     litigation (the innocent spouse case and the interest
     abatement case) and (2) a viable collection alternative
     in the form of their $35,000 offer in compromise.

     The Settlement Officer has balanced the taxpayers’
     first area of concern by researching both cases. The
     Settlement Officer confirmed that on February 25, 2005
     a stipulation has [sic] been entered into [sic] Tax
     Court regarding the taxpayer-wife’s innocent spouse
     case. In that stipulation, with [sic] the taxpayer-
     wife conceding [sic] that she is not entitled to relief
     under IRC § 6015(b), (c), or (f), and that she waives
     the restrictions of IRC § 6015(e)(1)(B)(i). The
     Settlement Officer also researched the taxpayers’
     interest abatement case and was unable to locate
     evidence that this case has been considered by IRS to
                             - 10 -

     date. As a result, the Settlement Officer considered
     the taxpayers’ request for interest abatement within
     the present hearing.

     With respect to the taxpayers’ second area of concern,
     the Settlement Officer has evaluated the taxpayers’
     $35,000 offer to compromise the underlying liabilities
     as a collection alternative to the proposed levy
     action. Based on that evaluation, the taxpayers’ offer
     of $35,000 could not be recommended for acceptance, and
     therefore cannot be considered as a collection
     alternative. The taxpayers requested no other
     collection alternative to be considered.
     In all other respects, therefore, the proposed levy
     action regarding the taxpayers represents the only
     efficient means for collection of the liability at
     issue in this case.

The notice states that petitioners have neither offered an

argument nor cited any authority to permit Appeals to deviate

from the provisions of the IRM.

     As to petitioners’ claim at the hearing for an interest

abatement, Cochran ascertained that petitioners had previously

filed a request for interest abatement with respondent but that

the request had not yet been acted upon.   She therefore

considered the interest abatement request as part of petitioners’

hearing. Cochran ultimately determined that petitioners were not

entitled to their claim for an abatement of interest, either

under section 6404(e) or as part of an offer-in-compromise.

                             OPINION

     This case is yet another in a long list of cases brought in

this Court involving respondent’s proposal to levy on the assets

of a partner in a Hoyt partnership to collect Federal income
                               - 11 -

taxes attributable to the partner’s participation in the

partnership.    Petitioners argue that Appeals was required to let

them pay $35,000 to compromise what they estimate is their

approximately $575,000 Federal income tax liability for 1981

through 1998.   Where an underlying tax liability is not at issue

in a case invoking our jurisdiction under section 6330(d), we

review the determination of Appeals for abuse of discretion.    See

Sego v. Commissioner, 114 T.C. 604, 610 (2000); see also Clayton

v. Commissioner, T.C. Memo. 2006-188; Barnes v. Commissioner,

T.C. Memo. 2006-150.    We reject the determination of Appeals only

if the determination was arbitrary, capricious, or without sound

basis in fact or law.    See Cox v. Commissioner, 126 T.C. 237, 255

(2006); Murphy v. Commissioner, 125 T.C. 301, 308, 320 (2005),

affd. 469 F.3d 27 (1st Cir. 2006).

     Where, as here, we decide the propriety of Appeals’s

rejection of an offer-in-compromise, we review the reasoning

underlying that rejection to decide whether the rejection was

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

We do not substitute our judgment for that of Appeals, and we do

not decide independently the amount that we believe would be an

acceptable offer-in-compromise.   See Murphy v. Commissioner,

supra at 320; see also Clayton v. Commissioner, supra; Barnes v.

Commissioner, supra; Fowler v. Commissioner, T.C. Memo. 2004-163;

Fargo v. Commissioner, T.C. Memo. 2004-13, affd. 447 F.3d 706
                                - 12 -

(9th Cir. 2006).    Nor do we usually consider arguments, issues,

or other matters raised for the first time at trial, but we limit

ourselves to matter brought to the attention of Appeals.

See Murphy v. Commissioner, supra at 308; Magana v. Commissioner,

118 T.C. 488, 493 (2002).    “[E]vidence that * * * [a taxpayer]

might have presented at the section 6330 hearing (but chose not

to) is not admissible in a trial conducted pursuant to section

6330(d)(1) because it is not relevant to the question of whether

the Appeals officer abused her discretion.”     Murphy v.

Commissioner, supra at 315.12

     Section 6330(c)(2)(A)(iii) allows a taxpayer to offer to

compromise a Federal tax debt as a collection alternative to a

proposed levy.     Section 7122(c) authorizes the Commissioner to


     12
       In Murphy v. Commissioner, 125 T.C. 301 (2005), affd.
469 F.3d 27 (1st Cir. 2006), the Court declined to include in the
record external evidence relating to facts not presented to
Appeals. The Court distinguished Robinette v. Commissioner,
123 T.C. 85 (2004), revd. 439 F.3d 455 (8th Cir. 2006), and held
that the external evidence was inadmissible in that it was not
relevant to the issue of whether Appeals abused its discretion.
In a memorandum that petitioners filed with the Court on Apr. 13,
2006, pursuant to an order of the Court directing petitioners to
explain the relevancy of any external evidence that they desired
to include in the record of this case, petitioners made no claim
that they had offered any of the external evidence to Cochran.
Instead, as we read petitioners’ memorandum in the light of the
record as a whole, petitioners wanted to include the external
evidence in the record of this case to prove that Cochran abused
her discretion by not considering facts and documents that they
had consciously decided not to give to her. Consistent with
Murphy v. Commissioner, supra, we sustained respondent’s
relevancy objections to the external evidence. Accord Clayton v.
Commissioner, T.C. Memo. 2006-188; Barnes v. Commissioner, T.C.
Memo. 2006-150.
                               - 13 -

prescribe guidelines to determine when a taxpayer’s offer-in-

compromise should be accepted.   The applicable regulations,

section 301.7122-1(b), Proced. & Admin. Regs., list three grounds

on which the Commissioner may accept an offer-in-compromise of a

Federal tax debt.   These grounds are “Doubt as to liability”,

“Doubt as to collectibility”, and to “Promote effective tax

administration”.    Sec. 301.7122-1(b)(1), (2), and (3), Proced. &

Admin. Regs.

     Petitioners argue that respondent was required to compromise

their tax liability on the bases of the latter two grounds.    As

to the first of these grounds, the Commissioner may compromise a

tax liability due to doubt as to collectibility where the

taxpayer’s assets and income are less than the full amount of the

assessed liability.   See sec. 301.7122-1(b)(2), Proced. & Admin.

Regs.   In such a case, the Commissioner also may accept an offer-

in-compromise due to doubt as to collectibility with special

circumstances; i.e., the Commissioner may accept an offer of less

than the total reasonable collection potential of the case.    See

Rev. Proc. 2003-71, sec. 4.02, 2003-2 C.B. 517, 517.   As to the

second ground, the Commissioner may compromise a tax liability to

promote effective tax administration when collection of the full

liability will create economic hardship and the compromise would

not undermine compliance with the tax laws by taxpayers in

general.   See sec. 301.7122-1(b)(3)(i), (iii), Proced. & Admin.
                                - 14 -

Regs.   If a taxpayer does not qualify for the just stated

effective tax administration compromise on grounds of economic

hardship, and does not qualify for an offer-in-compromise due to

doubt as to either liability or collectibility, the regulations

also allow the Commissioner to compromise a tax liability to

promote effective tax administration when the taxpayer identifies

compelling considerations of public policy or equity.   See sec.

301.7122-1(b)(3)(ii), Proced. & Admin. Regs.

     Petitioners made their offer-in-compromise due to doubt as

to collectibility with special circumstances and to promote

effective tax administration.    Petitioners reported on their Form

433-A that they had assets worth $169,650 (i.e., their assets’

total reported current value of $177,598 minus a $7,948

encumbrance on their VW Passat).    Cochran determined petitioners’

reasonable collection potential to be $193,438.   Therefore,

petitioners cannot fully pay their estimated $575,000 tax

liability and thus do not qualify for an offer-in-compromise to

promote effective tax administration.    See sec. 301.7122-1(b)(3),

Proced. & Admin. Regs.; cf. Fargo v. Commissioner, 447 F.3d 706

(9th Cir. 2006) (taxpayers made an offer-in-compromise to promote

effective tax administration where they had sufficient assets to

pay their tax liability in full).    As to petitioners’ offer-in-

compromise due to doubt as to collectibility with special

circumstances, the Commissioner evaluates such an offer by
                              - 15 -

applying the same factors (economic hardship or considerations of

public policy or equity) as in the case of an offer-in-compromise

to promote effective tax administration.   See IRM sec. 5.8.11.2.1

and .2.   In accordance with the Commissioner’s guidelines, an

offer-in-compromise due to 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).

     Cochran considered all of the evidence submitted to her by

petitioners and applied the guidelines for evaluating an

offer-in-compromise due to doubt as to collectibility with

special circumstances or to promote effective tax administration.

As to the former, Cochran determined that petitioners’ offer was

unacceptable because they were able to pay more than the $35,000

that they offered to compromise their tax liability.     As to the

latter, Cochran determined that petitioners’ offer did not

qualify as an offer-in-compromise to promote effective tax

administration because petitioners were unable to pay their

liability in full.   Cochran’s determination to reject

petitioners’ offer-in-compromise was not arbitrary, capricious,

or without a sound basis in fact or law, and it was not abusive

or unfair to petitioners.   Cochran’s determination was based on a

reasonable application of the guidelines, which we decline to
                                - 16 -

second-guess.    See Speltz v. Commissioner, 124 T.C. 165 (2005),

affd. 454 F.3d 782 (8th Cir. 2006); Clayton v. Commissioner, T.C.

Memo. 2006-188; Barnes v. Commissioner, T.C. Memo. 2006-150.

     Petitioners make eight arguments in advocating a contrary

result.   First, petitioners argue that the Court lacks

jurisdiction to review the rejection of their offer-in-

compromise.     Petitioners allege that Hoyt had a conflict of

interest that prevented him from extending the periods of

limitation for the partnerships in which petitioners were

partners.   Petitioners conclude that any consents signed by Hoyt

to extend the periods of limitation were invalid, which in turn

means that the Court lacks jurisdiction because the applicable

periods of limitation have otherwise expired.

     Petitioners’ challenge to this Court’s jurisdiction is

groundless, frivolous, and unavailing.     It is well settled that

the expiration of the period of limitation is an affirmative

defense and not a factor of this Court’s jurisdiction.     See Day

v. McDonough, 547 U.S.       , ___, 126 S. Ct. 1675, 1681 (2006) (“A

statute of limitations defense * * * is not ‘jurisdictional’”);

Kontrick v. Ryan, 540 U.S. 443, 458 (2004) (“Time bars * * *

generally must be raised in an answer or responsive pleading.”);

see also Davenport Recycling Associates v. Commissioner, 220 F.3d

1255, 1259 (11th Cir. 2000), affg. T.C. Memo. 1998-347; Chimblo

v. Commissioner, 177 F.3d 119, 125 (2d Cir. 1999), affg. T.C.
                              - 17 -

Memo. 1997-535; Columbia Bldg., Ltd. v. Commissioner, 98 T.C.

607, 611 (1992); Robinson v. Commissioner, 57 T.C. 735, 737

(1972).   Where, as here, the claim of a time bar relates to items

of a partnership, the claim must be made in the partnership

proceeding and may not be considered at a proceeding involving

the personal income tax liability of one or more of the partners

of the partnership.   See Davenport Recycling Associates v.

Commissioner, supra at 1259-1260; Chimblo v. Commissioner, supra

at 125; Kaplan v. United States, 133 F.3d 469, 473 (7th Cir.

1998).

     Second, petitioners argue that Cochran’s rejection of their

offer-in-compromise conflicts with the congressional committee

reports underlying the enactment of section 7122.    According to

petitioners, their case is a “longstanding” case, and those

reports require that respondent resolve such cases by forgiving

interest and penalties that otherwise apply.    We disagree with

petitioners’ reading and application of the legislative history

underlying section 7122.   Petitioners’ argument on this point is

essentially the same argument that was considered and rejected by

the Court of Appeals for the Ninth Circuit in Fargo v.

Commissioner, 447 F.3d at 711-712.     We do likewise here for the

same reasons stated in that opinion.    We add that petitioners’

counsel participated in the appeal in Fargo v. Commissioner,

supra, as counsel for the amici.   While petitioners in their
                                - 18 -

brief suggest that the Court of Appeals for the Ninth Circuit

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 otherwise to allow

those clients to receive an abatement of their liability

attributable to partnerships such as those here, we do not read

the opinion of the Court of Appeals for the Ninth Circuit in

Fargo to support that conclusion.

     Third, petitioners argue that Cochran inadequately

considered their unique facts and circumstances.   We disagree.

Cochran reviewed and considered all information given to her by

petitioners.   On the basis of the facts and circumstances of

petitioners’ case as they had been presented to her, Cochran

determined that petitioners’ offer did not meet the applicable

guidelines for acceptance of an offer-in-compromise due to doubt

as to collectibility with special circumstances or to promote

effective tax administration.    We find no abuse of discretion in

that determination.   Nor do we find that Cochran inadequately

considered the information actually given to her by petitioners.

In fact, Cochran computed petitioners’ future income potential by

using the same income figures that petitioners reported on their

Form 433-A, and the reported item of income was a type of

retirement income that could reasonably be expected to remain

constant over the next 48 months.    The record also shows that
                               - 19 -

Cochran conducted a thorough review of the documentation

submitted to her by petitioners.    Petitioners acknowledged that

they had no “extraordinary health issues” yet claimed monthly

health care expenses of $1,103.    Cochran reviewed the Form 433-A

and found that petitioners’ only documented health-related

expense was a monthly long-term care insurance premium of $182.

Nonetheless, she allowed petitioners a monthly health care

expense of $300.    Although petitioners believe that Cochran’s

calculation should have reflected increased medical expenses in

the 48-month period and thereafter, we do not agree.    See Fargo

v. Commissioner, 447 F.3d at 710 (it is not an abuse of

discretion to disregard claimed medical expenses that are

speculative or not related to the taxpayer).    Moreover, besides

their health care expenses, Cochran gave petitioners the benefit

of the doubt in other instances as well.    For example, she

accepted petitioners’ claimed values of their vehicles even

though they provided no substantiation of this and also claimed

that some of their vehicles had either no or de minimis value.

Cochran also accepted petitioners’ valuation of their real estate

and mobile home even though they obtained these values from tax

assessments and the fair market value of these properties could

have been higher.    Although Cochran made some adjustments to some

of petitioners’ claimed expenses, she did so in accordance with

the Commissioner’s national and local guidelines and after
                               - 20 -

evaluating petitioners’ particular circumstances.    We find no

abuse of discretion in these adjustments.

     Fourth, petitioners argue that Cochran did not adequately

take into account the economic hardship they claim they will

suffer by having to pay more than $35,000 as to their tax

liability.   We disagree.   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

illustrative 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 with 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 “describe more dire circumstances”.    Speltz

v. Commissioner, 454 F.3d at 786.
                                - 21 -

     Nor have petitioners articulated with any specificity the

purported economic hardship they will suffer if they are not

allowed to compromise their liability for $35,000.    While

petitioners claim generally that the sale of their residence

would create an economic hardship in that they would be unable to

afford paying either rent or a mortgage, this claim is vague,

speculative, undocumented, and unavailing.13    See Barnes v.

Commissioner, T.C. Memo. 2006-150.

     We also are mindful that any decision by Cochran to accept

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

collectibility with special circumstances must be viewed against

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

Regs.     That section requires that Cochran deny petitioners’ offer

if her acceptance of it 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 emphasize we decline to make, we would not find

that Cochran’s rejection of petitioners’ offer was an abuse of

discretion because we conclude below (in our discussion of

petitioners’ fifth argument) that her acceptance of that offer



     13
       We note that our opinion here does not necessarily mean
that respondent may in fact levy on petitioners’ residence in
payment of their tax debt. Pursuant to sec. 6334(a)(13)(B) and
(e), a taxpayer’s principal residence is exempt from levy absent
the written approval of a U.S. District Court Judge or
Magistrate. See also sec. 301.6334-1(d), Proced. & Admin. Regs.
                                - 22 -

would have undermined voluntary compliance with tax laws by

taxpayers in general.    The prospect that acceptance of an offer

will undermine compliance with the tax laws militates against its

acceptance whether the offer is predicated on promotion of

effective tax administration or on doubt as to collectibility

with special circumstances.    See Rev. Proc. 2003-71, sec. 4.02,

2003-2 C.B. 517; see also IRM sec. 5.8.11.2.2.

     Fifth, petitioners argue that public policy demands that

their offer-in-compromise be accepted because they were victims

of fraud.   We disagree.   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

illustrative 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.      See Speltz v. Commissioner,

454 F.3d at 786.   Unlike the exceptional circumstances

exemplified in the regulations, petitioners’ situation is neither

unique nor exceptional in that petitioners’ situation mirrors

that of numerous taxpayers who claimed tax shelter deductions in

the 1980s and 1990s, obtained the tax advantages, promptly forgot

about their “investment”, and now realize that paying their taxes
                              - 23 -

may require a change of lifestyle.14   See Clayton v.

Commissioner, T.C. Memo. 2006-188; Barnes v. Commissioner, supra.

     We also believe that compromising petitioners’ case on

grounds of public policy or equity would not promote effective

tax administration.   While petitioners portray themselves as

victims of Hoyt’s alleged fraud and respondent’s alleged delay in

dealing with Hoyt, they take no responsibility for their tax

predicament.   We cannot agree that acceptance by respondent of

petitioners’ $35,000 offer to satisfy their estimated

approximately $575,000 tax liability would 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



     14
       Of course, the examples in the regulations are not meant
to be exhaustive, and petitioners’ situation is not identical to
that of the taxpayers in Fargo v. Commissioner, 447 F.3d at 714,
regarding 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
Hoyt’s shelters to be culpable of negligence, see, e.g., Keller
v. Commissioner, T.C. Memo. 2006-131, nor prevented the Courts of
Appeals for the Sixth, Ninth, and Tenth Circuits from affirming
our decisions to that effect in 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; and Van Scoten v. Commissioner, 439 F.3d 1243 (10th
Cir. 2006), affg. T.C. Memo. 2004-275.
                              - 24 -

the transaction at issue involves 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.15   See Clayton v.

Commissioner, supra; Barnes v. Commissioner, supra.

     Sixth, petitioners argue that Cochran failed to balance

efficient collection with the legitimate concern that collection

be no more intrusive than necessary.   We disagree.   Cochran

thoroughly considered this balancing issue on the basis of the

information and proposed collection alternative given to her by

petitioners.   She concluded that “the proposed levy action

regarding the taxpayers represents the only efficient means for

collection of the liability at issue in this case”.    While

petitioners assert that Cochran did not consider all of the facts

and circumstances of this case, “including whether the

circumstances of a particular case warrant acceptance of an

amount that might not otherwise be acceptable under the



     15
       Nor does the fact that petitioners’ case may be
“longstanding” overcome the detrimental impact on voluntary
compliance that could result from respondent’s accepting
petitioners’ offer-in-compromise. An example in IRM sec.
5.8.11.2.2 implicitly addresses the “longstanding” issue. There,
the taxpayer invested in a tax shelter in 1983, thereby incurring
tax liabilities for 1981 through 1983. He failed to accept a
settlement offer by respondent that would have eliminated a
substantial portion of his interest and penalties. Although the
example, which is similar to petitioners’ case in several
respects, would qualify as a “longstanding” case by petitioners’
standards, the offer was not acceptable because acceptance of it
would undermine compliance with the tax laws.
                               - 25 -

Secretary’s policies and procedures”, sec. 301.7122-1(c)(1),

Proced. & Admin. Regs., we find to the contrary.    Cochran

thoroughly considered petitioners’ arguments for accepting their

offer-in-compromise, and she rejected the offer only after

concluding that petitioners could pay much more of their tax

liability than the $35,000 they offered.    Cf. IRM sec.

5.8.11.2.1(11) (“When hardship criteria are identified but the

taxpayer does not offer an acceptable amount, the offer should

not be recommended for acceptance”).

     Seventh, petitioners argue that Cochran inappropriately

failed to consider whether they qualified for an abatement of

interest for reasons other than those described in section

6404(e).   We disagree.   While Cochran declined to accept

petitioners’ request to reject the proposed levy because she had

considered their request for interest abatement and found that

they were not entitled to such relief, we find nothing to suggest

that Cochran believed that petitioners’ sole remedy for interest

abatement in this case rested on the rules of section 6404(e).

In fact, regardless of the rules of section 6404(e), Cochran

obviously would have abated interest in this case had she agreed

to let petitioners compromise their estimated approximately

$575,000 liability by paying less than the amount of interest

included within that liability.

     Eighth, petitioners argue that Cochran erred by not

informing petitioners of the contents of the notice of
                              - 26 -

determination before it was issued.    We disagree.   We do not

believe that Cochran abused her discretion by rejecting

petitioners’ offer-in-compromise simply because she may not have

discussed with petitioners the contents of the notice of

determination (and given them a chance to dispute it) before

issuing the notice of determination to them.    Cf. Fargo v.

Commissioner, 447 F.3d at 712-713 (holding that Appeals has no

duty to negotiate with a taxpayer before rejecting the taxpayer’s

offer-in-compromise).

     We hold that Appeals did not abuse its discretion in

rejecting petitioners’ $35,000 offer-in-compromise.     In so

holding, we express no opinion as to the amount of any compromise

that petitioners could or should be required to pay, or that

respondent is required to accept.   The only issue before us is

whether Appeals abused its discretion in refusing to accept

petitioners’ specific offer-in-compromise in the amount of

$35,000.   See Speltz v. Commissioner, 124 T.C. at 179-180.       We

have considered all arguments made by petitioners for a contrary

holding and have found those arguments not discussed herein to be

without merit.


                                               An appropriate order

                                          will be issued.
