state of duncan versus commissioner of internal revenue who first coined the phrase quote i know it when i see all that approach may be appropriate and answering questions obscenity law which is how justice stewart used it is not an appropriate approach and deciding how much the taxpayer can afford to pay the i r s in connection with a proposed settlement of its tax cuts now are we going back all through the years it took can enforce and collect the taxes that they have or now say you're correct your honor this this case has quite the history however the single or i should say the primary issue before this court is the i r s determination on their offer a compromise which was kind of the last stage that we were not we're not deciding whether  with but it seems to me like we're not just going where the figures the government is now talking about as versus the say is i believe that's correct your honor basically what is the primary issue before the court is not whether the duncans owed a specific tax liability it has to do with whether the iris abused its discretion in choosing not to accept  their offer in compromise status collectability so we are out here to ask this court today to overturn the tax course decision to sustain the irises denial of their offer in compromise and to remand this case back to the tax  with instructions that the duncans offer be sent to iris appeals for proper evaluation affects my tension today on the irises conduct in evaluating and determining the offer of compromise their offer to settle their past tax that's the other issue dispute in this case has been fully briefed so when we're looking at the issue of whether the iris abused his discretion and we're looking to evaluate the summit officers conduct the appropriate benchmark is the internal revenue manual and we know this for two reasons first because the internal revenue manual essentially tells us that in section one point eleven point two point two it states it is the primary official compilation of instructions to the i r s personnel and that is designed to ensure employees have approved policy and guidance they need to carry out their responsibilities in administering the tax loss translated the internal revenue manual exists to prevent iris actions that are arbitrary capricious and without sound basis which is the definition of an abuse of discretion we also know that the internal revenue manual is the purport benchmark in this case because the courts have time and time again used the internal revenue manual to gauge the result in this virus conduct and because of this president and the internal revenue manual that the government concedes as a mosque that the internal revenue manual is an appropriate benchmark in this case odd dollar tax liability forty thousand dollars was just one component of their offer loan in and later was admitted that that was at least five hundred seven thousand dollars and so well i should think the government's position is we shouldn't have to a requester honor for special circumstances where they asked the i r s to further reduce the amount that they could afford to pay from five hundred forty five thousand down to forty thousand dollars based upon special circumstances but that was simply an add on feature of their offer  and we see evidence that it's not on peach or in two ways one the internal revenue manual it states that where a offer includes special circumstances if the irish decide special circumstances do not exist that the offered should still be considered base public the taxpayer contends is the amount that they can afford to pay which is the five hundred forty five thousand dollars in this case secondly what we see is how the sum and officer settlement officer taylor evaluated the offer it's clear that he was considering it based upon the duncan's ability to pay had he simply determined special circumstances here it would not have been necessary for him to make as many requests as he did to make as many inquiries into the value of their assets so the in evaluating their offer and again that the offer of five hundred forty five thousand which was again a component their offer the settlement officer was instructed by the internal revenue manual to calculate r c p reasonable collection potential what can the duncans afford to pay so he was charged with the task of valuing that bob hundred forty five thousand the internal revenue was clear that's the starting point for working an offer in compromise and the internal revenue manual go so far as to state that the decision to accept or reject an offer usually resides with the are such determination of reasonable collection potential selman officer in this case did not calculate reasonable collection potential his reasoning well he offered two reasons neither of which really have much merit the first was that the duncan it was obvious to him that the duncans could for to pay the taxes approximately three million dollars and dissipate however that also represents a violation of internal revenue manual procedures he breached a standard of conduct to being even considering dissipated assets whether toward those filed in the probate court in january of two thousand and three however that inventory only reported gross values did not report claims against the state and there were significant claims against the state liabilities and we see that in six with the state so as you can see there was a number of errors committed here the eight million dollars does not take into account at approximately three point seven million dollars debt that existed against the state but back to the issue dissipated assets the internal revenue manual states that as a general proposition that should not be considered and there is a narrow exception to that general rule that only applies for an asset is  transferred essentially for an improper purpose or use and it occurs after the date the taxes have been assessed or six months prior so there's the threshold condition that needs to be met before dissipate assets are properly considered in this case the settlement officer in clue doing over three million dollars to dissipate assets didn't identify a single specific transfer that he believed was an act of dissipation really he simply looked at a general overall decline in value going all the way back to two thousand and two which is four years before the date of assessment and comparing it to values in two thousand and twelve further and going back to the issue of how do you calculate that three million because he didn't identify specific asset there was no value that he could assign to it other than to basically take as a plug the amount of taxes that were the balance of the taxes due at the time he was considering the offer which is that three million dollars so we see that there was really no methodology or rhyme or reason including dissipate assets and certainly wasn't authorized under the rules and regulations of the internal revenue manual the second biggest area we really see a breach in the internal revenue manual standards of conduct is so much officers failure to seek help on complex issues arris recognizes that business valuations are complex and so the internal revenue menu includes several provisions where it instructs iris agents to seek the help of specially trained experts employed by the iris or a valuation of a business is an issue collection in calculating reasonable connection with an offer in compromise that a referral to an of field specialist must be made it's mandatory and yet suddenly an officer tailor in this case despite testifying that he was aware of these procedures and aware that these experts were available to a system in this case he chose not to make that referral his reasoning because he concluded that it would not be necessary since it was obvious that duncan's could fully of pay their taxes again i know it when i see it now there's an irony in that because he also testified that this was by far the most complicated complex offer that he had ever worked now in going for discounts and valuing the partnership interests held by the duncans as this court held in its two thousand and twelve a decision in the keller versus united states discounts or per prius and valuing partnership interest to reflect the fact that a partnership interest lacks marketability and in case of a minority held interest of which the duncans held several there's a lack of control and both of those components affect value second big mistake i would say  egregious mistake that some one officer made in attempting to put value on the duncans assets is his treatment of related party transactions and we see this play out in how some an officer approached r c d investments which is one of the entities the held twenty percent proximate twenty percent interest in and valuing the assets of that partnership he disregarded nineteen million dollars of debt simply because the creditor was a related party this court has held in its two thousand and four a decision of kimball versus united states simply because of transactions between related parties is not a basis to disregard that transaction now adding insult to injury so many off the taylor then proceeded in a very whipsaw fashion to regard or respect six or seven million dollars of assets that were to related party so on the one hand when he's valuing r c b investments he's disregarding nineteen million dollars of related party debt and yet regarding him respecting approximately seven million dollars of assets and by virtue of this approach he assigned a ten million dollar value to r c b investments when in fact the balance sheet showed that the end that he was completely underwater so when we are evaluating the so many officers conduct in this case and we see that he failed to determine exactly what the duncans could afford to pay in connection with evaluating their offer in compromise which was based upon collectability we see his failure to seek out trained experts at the i r s based upon conclusions that he believed that it was obvious that they could fully poured afford to pay their taxes and as a result mishandled significantly valuing of certain assets of the duncans and then we see him considering dissipated assets again in violation of internal revenue manual procedures failure to identify specific assets and just using the plug value becomes clear that some one off there's no case that we know of and including the cases cited by the taxpayers in their brief that a violation of the internal revenue manual as per se an abuse of discretion and that is assuming for the sake of argument that the i r s office that here failed to follow the internal revenue manual taxpayers here also did not show that any of these violations had made a difference in their ability to pay all in their lack of special circumstances and this was an offer with doubt as to collectability with special circumstances and under the revenue ruling  procedure or rather two thousand and three dash seventy one are you have to have either economic hardship or some sort of public policy equity oh in order to constitute special circumstances the taxpayers that not assert either and when you look at the big fear the bigger simpler right the big picture you've got a liability a thousand about three million dollars by the time of the offer and at mit it undisputed a the ability to pay a five hundred forty five thousand and you've got these huge insurance policies that were never cashed out even in part for years and years to pay the tax liability of six figures in a brokerage account and the other six figures taken out in the first months of that offer to fund the operating expenses of the company you've got the eight million dollar estate here i want to take a little detour to address the quote unquote to prompt offer that of their first offer was forty thousand dollars and then they're all turret alternative offer was five interim forty five thousand the tax payers never raised this argument in the tax court for in their opening brief they didn't bring those up until we emphasized that five hundred forty five thousand dollar figure in our answer brief that it's really not our understanding off the  the starting point of the of the consideration often offer but nowhere in the manual does it say that you have to calculate the this figure down to the dollar down to the cent as specially as in this case information it was kind of like pulling teeth to get the taxpayers to get the information but the taxpayers i think mentioned for entity interest in their initial in their initial mission and then when the i r s officer asked well what about these other entities that i think you might or might not have a connection with then they came and gave more information about those  few months and the liabilities on that building were taking taken into account and a separate columns that was in because of that as far as the related party transactions it is true they are not per se discounte officer acted within is this for his discretion in kind of this canting that a little bit because well you don't know how much he did those notes half what's the relationship between the partners have they ever been sued on have payments been made on them those notes that kind of record it's not in the record in front of the i r s officer as far as the discount for control of that is another thing if you go through the appraisals and you company controlled by mrs dr all right so that took a fifteen percent discount for lack of control on that company doesn't make sense and you can see that in the rest of the entities as well and on that point i think it's important to keep in mind that this is an informal process the ira's officer doesn't have discovery powers he can't call in the appraiser and cross examine him  he has to use his judgment and ask himself does this make sense or not and going back to the point that i make earlier about the big ticket items he says well ok i don't think this was worth going any further just on those and in fact he really gave the taxpayers a better shot than they would have gotten by by going through the studio regions and this you can see in exhibit one twenty seven where is this where  britain notes and i realize that they would have been a lot easier for the court if you had written like a great narrative but he that the work there and that was not a totally undocumented mentioned in a brief that the cutoff is usually three years before the offer and he took that with respect to the loan payments on the insurance policies are you can see and i think it's a bit one nineteen and in the chart the be contrary to the revenue procedure that takes into account amounts that the government can collect in the future through administrative or judicial mean and that makes sense i mean if you can collect from somebody else and credited to her account why should you give somebody three million right off right now great and so that would be all the points that i counsel for the government stated that they're not aware of any case where the the court found and the lack of it here insta the internal revenue manual procedures and standards of conduct was a abuse of discretion there is one case i'd considered in connection with the insurance policies settlement officer looked at proximate three or four years back with the loans that had been taken out of the policies but then immediately reinvested in the policies to pay premiums to keep the policies lot what's interesting here is that those policies were declared assets and form part of the five hundred forty five thousand dollars duncan's had set forth that they could afford to pay and so it's ironic that the i r s would be using essentially assets that were the loans that they were acts of asset preservation to keep the policies in place and treat them as x dissipation and in fact internal revenue manual warns that this kind of results in the double count of value and should not be undertaken i keep hearing this eight million dollars figure and it was a figure that some an officer taylor had identified and in state inventory referenced earlier the tax court latched on to it the government continues to talk about this eight million dollars value for the state when you look at exhibit one thirteen and you look at the state inventory it makes clear that identifying the assets of the estate and list of and it lists claims doing owing to the state does not purport to identify claims doing owing by the state ok there were debts encumbering the state and we see that in the form seven those with the filed with the internal revenue service and form part of the record in this case exhibit thirteen a government counsel also said it was appropriate or within the someone officers discretion to disregard certain related party transactions in particular the nineteen million dollars related party debt i would say that on a blanket basis tax this court's precedent says that's not proper that further inquiry needs to be made as to the bonafied of the transaction further we only need to look at his treatment of related party assets including those assets to say that this is this is misconduct that you can't disregard related party transactions where it suits the government's interest and then regard them again where it's it's the government's interests that there's a disparity between the treatment there lastly there was some discussion about the consideration of this potential lawsuit where the government might be able to collect part of the debts from a co executor of the state this is been a very confusing issue i think this i'm an officer was even confused on  because the government's ability to collect these taxes from another party it doesn't make sense that that would be treated or should be treated as an asset of the duncans and in fact some an officer taylor testified that he wasn't sure whether it would be considered a macit simply that it could be filing with respect to the five hundred forty five thousand it's true that the duncan submitted an offer five hundred forty five thousand with a request for special circumstances of only forty thousand but if you look at the offer paperwork if you look at what is required of a taxpayer and submitting an offer in compromise there is no separate set of forms for an offer with special circumstances it's virtually the identical submission the only  only two situations in which pressure circumstances are allowed in that you didn't establish either one of those here is that right there was a determination of special circumstances your honor what we're focused on is the thousand and it's clear that the i r s was following the internal revenue manual in evaluating the five hundred forty five thousand offer because all the due diligence and increased made by some an officer were designed to try to calculate eight of the form for thirty three eight states what is your minimum offer and what is calculated there is five hundred forty five thousand so that was before the internal revenue service also i would say that the  the provision or the opportunity to amend the offer there was testimony that they had asked whether they being willing