FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

CHARLES G. FARGO; ELIZABETH A. 

FARGO, No. 04-72190

Petitioners-Appellants, D.C. No.

v.  Tax Ct. No.

9492-02L COMMISSIONER OF INTERNAL

REVENUE, OPINION

Respondent-Appellee. 

Appeal from a Decision of the

United States Tax Court

Argued and Submitted

December 5, 2005—Pasadena, California

Filed May 8, 2006

Before: Robert R. Beezer, Cynthia Holcomb Hall, and

Kim McLane Wardlaw, Circuit Judges.

Opinion by Judge Hall

5139
COUNSEL

Dennis N. Brager, Law Offices of Dennis N. Brager, Los

Angeles, California, for the appellants. 

Randolph L. Hutter, Tax Division, United States Department

of Justice, Washington, D.C., for the appellee.

Terri A. Merriam, Pearson Merriam, Seattle, Washington, for

the amici. 

OPINION

HALL, Senior Circuit Judge: 

Charles and Elizabeth Fargo (Taxpayers) appeal the decision of the Tax Court holding that the Commissioner of Internal Revenue did not abuse his discretion by rejecting their

offer to pay $7,500 in compromise of the approximately

$104,000 interest owed on their 1983 and 1984 federal

income tax liabilities. We affirm.

I. Facts

More than twenty years ago, Taxpayers bought interests in

two partnerships: the Jackson & Associates Partnership (Jackson), and the Smith & Asher Associates Partnership (Smith &

FARGO v. COMMISSIONER OF INTERNAL REVENUE 5143
Asher). In 1983, Taxpayers claimed a loss of $30,767 attributable to their interest in Jackson; in 1984, they claimed a

$2,749 loss from Jackson and a $28,996 loss from Smith &

Asher. These partnerships were themselves partners in yet

other partnerships (Wilshire West Associates and Redwood

Associates, respectively), which in turn were associated with

a series of tax shelters called the Swanton Coal Programs.1 All

of the partnerships were subject to the Tax Equity and Fiscal

Responsibility Act (TEFRA) provisions of 26 U.S.C.

§§ 6221-6234. 

The Swanton Coal Programs were exposed as purely taxmotivated transactions in Kelley v. Commissioner of Internal

Revenue, 66 T.C.M. (CCH) 1132 (1993), with the Tax Court

opining that the Programs were “nothing more than an elaborate scam to provide highly leveraged deductions for nonexistent expenses.” The Tax Court’s 1993 ruling in Kelley had an

effect on Taxpayers’ liabilities for 1983 and 1984, but the

final liability amount would not be determined until six years

later, in 1999. This delay stemmed from the tiered partnership

system: before the effect of the decision in Kelley could be

determined, the Commissioner had to negotiate with the Tax

Matter Partners (TMPs) for Jackson and Smith & Asher. The

delay led to an accumulation of penalties and interest that

increased Taxpayers’ total liability to over $127,000. After

the assessment was finalized in 1999, Taxpayers were

informed of their liability—and while they quickly paid their

back taxes (in the amount of $23,977), they refused to pay the

remaining interest ($104,287.91). The Commissioner sent

notice of intent to levy, and Taxpayers requested a Collection

Due Process hearing before the Office of Appeals. 

Taxpayers timely submitted to the Appeals Officer an

offer-in-compromise for $7,500 (about seven percent of their

1For a more detailed description of the relevant partnerships and of the

Swanton Coal Tax Shelters, see Fargo v. Comm’r, 87 T.C.M. (CCH) 815

(2004), and Kelley v. Comm’r, 66 T.C.M. (CCH) 1132 (1993). 

5144 FARGO v. COMMISSIONER OF INTERNAL REVENUE
outstanding liability). At the time of the offer, temporary

Treasury Regulations issued pursuant to 26 U.S.C. § 7122

governed the acceptance of offers-in-compromise.2 Temporary Treasury Regulation § 301.7122-1T(b)(4) indicated that

a compromise may be entered into to promote effective tax administration when— 

(i) Collection of the full liability will create

economic hardship within the meaning of

§ 301.6343-1; or 

(ii) Regardless of the taxpayer’s financial

circumstances, exceptional circumstances

exist such that collection of the full liability

will be detrimental to voluntary compliance

by taxpayers; and 

(iii) Compromise of the liability will not

undermine compliance by taxpayers with

the tax laws. 

Taxpayers’ offer-in-compromise was based on sections (i)

and (ii) of this regulation; they claimed both economic hardship and exceptional circumstances. They argued that economic hardship would ensue because Mr. Fargo’s medical

expenses would soon balloon to $90,000 per year, and the

large interest payout of $104,000 would both cut into their

overall resources and eventually serve to bankrupt them. Taxpayers additionally claimed exceptional circumstances, arguing that the IRS dragged its feet in determining their liability,

and thus the delay was not Taxpayers’ fault and should not be

held against them. Also under the “exceptional circum2The applicable temporary regulation, § 301.7122-1T(b)(4), can be

found at 64 Fed. Reg. 39,020 (July 21, 1999). The final regulation, codified at 26 C.F.R. § 301.7122-1, is substantially identical, but does not

apply here. See Fargo, 87 T.C.M. 815 at n.2. 

FARGO v. COMMISSIONER OF INTERNAL REVENUE 5145
stances” rubric, Taxpayers contended that Congress specifically contemplated longstanding cases such as theirs when it

enacted 26 U.S.C. § 7122, and all but required that such cases

be compromised. 

The Commissioner rejected their offer. The Tax Court,

reviewing for abuse of discretion, affirmed. Fargo v. Comm’r,

87 T.C.M. (CCH) 815 (2004). Taxpayers appeal, again arguing economic hardship and exceptional circumstances.

II. Standard of Review

We review the Tax Court’s decision under the same standard as civil bench trials in district court, see Milenbach v.

Comm’r, 318 F.3d 924, 930 (9th Cir. 2003), and thus review

de novo. Boyd Gaming Corp. v. Comm’r, 177 F.3d 1096,

1098 (9th Cir. 1999). In this instance, de novo review

amounts to a fresh analysis of whether the Commissioner

abused his discretion. Abuse of discretion occurs when a decision is based “on an erroneous view of the law or a clearly

erroneous assessment of the facts.” United States v. Morales,

108 F.3d 1031, 1035 (9th Cir. 1997) (en banc) (citing Cooter

& Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990)). 

III. Discussion

A. Economic Hardship

The Tax Court held that the Commissioner did not abuse

his discretion in determining that the Taxpayers would not

experience economic hardship if their offer-in-compromise

was rejected. We agree. 

[1] The operative statutory and regulatory framework in

this case focuses on basic expenses. The regulation in effect

at the time of the offer-in-compromise, Temporary Treasury

Regulation § 301.7122-1T(b), provides that a compromise

“may be entered into to promote effective tax administration

5146 FARGO v. COMMISSIONER OF INTERNAL REVENUE
when . . . [c]ollection of the full liability will create economic

hardship within the meaning of § 301.6343-1.” Economic

hardship is defined as the inability of the taxpayer “to pay his

or her reasonable basic living expenses.” 26 C.F.R.

§ 301.6343-1(b)(4)(i). The regulation goes on to specify that:

The determination of a reasonable amount for basic

living expense will be made by the director and will

vary according to the unique circumstances of the

individual taxpayer. Unique circumstances, however,

do not include the maintenance of an affluent or luxurious standard of living. 

Id. These regulations are consistent with provisions of their

authorizing statute, 26 U.S.C. § 7122, which provides explicitly for a case-by-case analysis “designed to provide that taxpayers entering into a compromise have an adequate means to

provide for basic living expenses.” 26 U.S.C. § 7122(c)(2). 

[2] Taxpayers claim that they will suffer economic hardship

if they are required to pay their full $104,000 liability. They

argue that Mr. Fargo’s medical expenses, owing to his progressive dementia, will soon reach $90,000 per year and

bankrupt them in about a decade. The evidence to support

their claim is thin. First, the only medical evidence Taxpayers

present is a diagnosis performed by a clinical neuropsychologist that indicates that Mr. Fargo suffers from Frontal

Lobe Dementia, contributing to a number of impairments of

his mental abilities. This diagnosis, however, mentions nothing of the necessity for long-term around-the-clock nursing

care, nor of medical expenses. 

[3] Second, the Taxpayers’ current monthly medical

expenses, as reported in the Monthly Income and Expense

Analysis section of their offer-in-compromise, total $288.

Their claimed future expenses of $90,000 per year seems predominantly hypothesized from publicly-available information

FARGO v. COMMISSIONER OF INTERNAL REVENUE 5147
that is not particularized to Mr. Fargo. Thus, their future medical expenses are almost wholly speculative. 

[4] Third and perhaps most importantly, Taxpayers have

considerable assets, and it is highly unlikely that their ability

to pay “basic living expenses” would be impaired even were

Mr. Fargo to require around-the-clock nursing care. Taxpayers have an annual adjusted gross income of $144,378; bank

accounts and individual retirement accounts worth $126,179;

securities worth $594,628; and equity in real property

amounting to $309,000. Their non-income assets are worth

more than a million dollars combined. Furthermore, their current reported expenses are $5,888 per month, against a

monthly gross income of $8,859. In other words, Taxpayers

can afford significantly greater health care expenses than they

currently pay, even without liquidating any assets. Accordingly, their contention that their medical expenses will outrun

their net worth in ten years seems to assume a number of

premises unsupported by the record, and indeed feels like

nothing more than back-of-the-napkin multiplication. 

[5] Taxpayers’ hardship claim is particularly weak given

that the relevant inquiry is only whether the Commissioner

abused his discretion. Although one might find some ground

upon which to quibble with the Commissioner’s decision, it

is impossible to hold that the Commissioner employed an

erroneous view of the law or a clearly erroneous assessment

of the facts. Given the speculative nature of Taxpayers’

expenses, their considerable accumulation of wealth, and the

statutory focus on basic expenses, it stretches reason to contend that the Commissioner abused his discretion in rejecting

the Taxpayers’ claim of hardship. 

B. Exceptional Circumstances

Taxpayers’ claim of exceptional circumstances is also

unavailing. Taxpayers argue that the Commissioner either

waited too long after the Tax Court’s decision in Kelley to

5148 FARGO v. COMMISSIONER OF INTERNAL REVENUE
contact them with the amount of their liability, or simply took

too long to determine their liability in the first place. The

Commissioner responds that any delay is due to the length of

time it took to negotiate a closing agreement with the TMPs

of the partnerships in which Taxpayers had an interest. The

delay, argues the Commissioner, was part and parcel of the

legally-required procedures under TEFRA. Taxpayers rejoin

that the legislative history of 26 U.S.C. § 7122 supports their

position and in fact mandates the compromise of longstanding

cases such as theirs. We hold that the Tax Court did not err

in determining that the Commissioner did not abuse his discretion in rejecting Taxpayers’ offer-in-compromise on the

basis of exceptional circumstances. 

Taxpayers raise three arguments based on exceptional circumstances. First, they claim that the Commissioner abused

his discretion by applying the Treasury Regulations incorrectly in light of their authorizing statute, 26 U.S.C. § 7122.3

Second, they claim that the Commissioner abused his discretion by flouting internal IRS guidelines with regard to offersin-compromise. And third, they claim that the Commissioner

abused his discretion by ignoring certain equity and public

policy considerations. We reject each of these arguments. 

1. Incorrect application of the Treasury Regulations in

light of their authorizing statute, 26 U.S.C. § 7122 

[6] The bulk of Taxpayers’ arguments with regard to

exceptional circumstances concern whether the Commissioner

misapplied the temporary Treasury Regulations issued pursuant to 26 U.S.C. § 7122. Specifically, Taxpayers contest the

3This claim could be construed as an argument that the Treasury Regulations themselves are in contradiction of their authorizing statute. However, Taxpayers explicitly disavow that interpretation, stating that “[i]t is

the IRS application of the regulations to preclude abatement of interest

which is an abuse of discretion.” Opening Brief of Petitioner-Appellant at

21 n.8, Fargo v. Comm’r, No. 04-72190 (9th Cir. Jul. 13, 2004). 

FARGO v. COMMISSIONER OF INTERNAL REVENUE 5149
application of Temporary Treasury Regulation § 301.7122-

1T(b)(4), which provides that the Commissioner may accept

an offer-in-compromise if “exceptional circumstances exist

such that collection of the full liability will be detrimental to

voluntary compliance by taxpayers; and . . . [c]ompromise of

the liability will not undermine compliance by taxpayers with

the tax laws.” Taxpayers contend that, following the Tax

Court’s opinion in Kelley, the delay in determining their liability constitutes exceptional circumstances. 

[7] Taxpayers cite repeatedly to the legislative history of 26

U.S.C. § 7122, claiming that whatever regulations it authorizes should be used to accommodate compromise in longstanding cases where large amounts of interest have accrued,

even though no such specification occurs in the statutory text.4

However, as the Supreme Court has previously noted in the

taxation context, “[l]egislative history can be a legitimate

guide to a statutory purpose obscured by ambiguity, but [i]n

the absence of a clearly expressed legislative intention to the

contrary, the language of the statute itself must ordinarily be

regarded as conclusive.” Burlington N. R.R. Co. v. Okla. Tax

Comm’n, 481 U.S. 454, 461 (1987) (internal quotation marks

omitted) (citing United States v. James, 478 U.S. 597, 606

(1986)). The Tax Court has also recognized the primary value

of statutory text, indicating that “[i]f the language of the statute is plain, clear, and unambiguous, we generally apply it

according to its terms.” Montgomery v. Comm’r, 122 T.C. 1

(2004) (citing, inter alia, United States v. Ron Pair Enters.,

Inc., 489 U.S. 235, 241 (1989)). Here, the authorization pro4Although this case is about compromise, not interest abatement, Taxpayers claim that the Tax Court incorrectly adopted the standards utilized

in the interest abatement statute (26 U.S.C. § 6404) as controlling whether

to accept an offer-in-compromise. However, the Tax Court does not so

much as mention § 6404, let alone apply it. Instead, it merely mentions

(and distinguishes) the interest abatement case Beagles v. Commissioner,

85 T.C.M. (CCH) 995 (2003). Taxpayers’ erroneous line of reasoning

seems to stem from certain background information to the final Treasury

Regulations, which is analyzed infra Subsection 3. 

5150 FARGO v. COMMISSIONER OF INTERNAL REVENUE
vided by the statute is discretionary on its face, stating that

“the Secretary may compromise any civil or criminal case

arising under the internal revenue laws.” 26 U.S.C. § 7122(a)

(emphasis added). Discretion is also given to the Secretary of

the Treasury to determine what standards will govern evaluation of an offer-in-compromise: “The Secretary shall prescribe guidelines for officers and employees of the Internal

Revenue Service to determine whether an offer-incompromise is adequate and should be accepted to resolve a

dispute.” 26 U.S.C. § 7122 (c)(1) (emphasis added). 

Taxpayers contend that these authorizations of discretion

are tempered by the statute’s legislative history, which they

say specifically contemplates compromise of longstanding

cases where large amounts of fines and interest accrue. The

House Conference Report, for instance, indicates that:

[t]he conferees anticipate that, among other situations, the IRS may utilize this new authority to

resolve longstanding cases by forgoing penalties and

interest which have accumulated as a result of delay

in determining the taxpayer’s liability. The conferees

believe that the ability to compromise tax liability

and to make payments of tax liability by installment

enhances taxpayer compliance. In addition, the conferees believe that the IRS should be flexible in finding ways to work with taxpayers who are sincerely

trying to meet their obligations and remain in the tax

system. Accordingly, the conferees believe that the

IRS should make it easier for taxpayers to enter into

offer-in-compromise agreements, and should do

more to educate the taxpaying public about the availability of such agreements. 

H. Conf. Rep. 105-599, at 289 (1998), reprinted in 1998

U.S.C.C.A.N. 288 (emphasis added). The Senate Report, also

seeming to indicate that Congress hoped the IRS would be

reasonably generous in accepting compromise, states that “[i]t

FARGO v. COMMISSIONER OF INTERNAL REVENUE 5151
is anticipated that the IRS will adopt a liberal acceptance policy for offers-in-compromise to provide an incentive for taxpayers to continue to file tax returns and continue to pay their

taxes.” S. Rep. 105-174, at 90 (1998). 

[8] These expressions of legislative intent, though relevant

in support of Taxpayers’ position, do not meet the threshold

for proving the Commissioner’s abuse of discretion. First, the

authorizing statute remains explicitly discretionary, and in

performing statutory interpretation the text must come first.

Second, the legislative history at issue is, as the emphasis

above shows, substantially discretionary as well. Congressional intent here is probative, but it does not show that the Commissioner made a decision “on an erroneous view of the law

or a clearly erroneous assessment of the facts.” Morales, 108

F.3d at 1035. Indeed, at least one court has held that not only

is § 7122 discretionary, but it does not even confer the right

to have one’s offer considered. See Christopher Cross, Inc. v.

United States, 363 F. Supp. 2d 855, 858 (E.D. La. 2004). In

this case, however, we need not address the exact scope of

§ 7122 in such a manner; we hold only that the Commissioner

did not abuse his discretion. 

2. Flouting of internal regulations with regard to

compromise

Taxpayers suggest that even if the IRS Appeals Officer was

correct to determine that $7,500 was an inadequate offer, he

was duty-bound by the Internal Revenue Manual to negotiate

a better deal rather than reject the offer outright. The portion

of the Manual to which Taxpayers cite does not exist under

the current revisions, and they provide no date for reference.

But even taking Taxpayers at their word that the Manual

exhorts Appeals Officers to negotiate before rejecting an

offer-in-compromise, their contention that they were owed a

duty of negotiation is incorrect. 

[9] The Internal Revenue Manual does not have the force

of law and does not confer rights on taxpayers. This view is

5152 FARGO v. COMMISSIONER OF INTERNAL REVENUE
shared among many of our sister circuits. See, e.g., Carlson

v. United States, 126 F.3d 915, 922 (7th Cir. 1997); Marks v.

Comm’r, 947 F.2d 983, 986 n.1 (D.C. Cir. 1991) (holding that

“[i]t is well-settled . . . that the provisions of the [Internal

Revenue M]anual are directory rather than mandatory, are

not codified regulations, and clearly do not have the force and

effect of law” (emphasis added)); see also Valen Mfg. Co. v.

United States, 90 F.3d 1190, 1194 (6th Cir. 1996); United

States v. Horne, 714 F.2d 206, 207 (1st Cir. 1983); Einhorn

v. DeWitt, 618 F.2d 347, 349-50 (5th Cir. 1980). 

[10] Further, even if the Manual does recommend negotiation, it contains numerous provisions that vest Appeals Officers with the discretion to accept or reject offers-incompromise. See, e.g., I.R.M. §§ 5.1.9.3.7.1 (Mar. 24, 2005),

8.1.1.2 (Feb. 1, 2003), 8.13.2.11 (Mar. 2, 2006). Each of these

sections confers considerable discretion, militating against the

existence of any duty to negotiate rather than reject. Even if

some duty existed attendant to the Internal Revenue Manual,

Taxpayers’ argument does not show that the Commissioner

abused his discretion. 

3. Public policy and equity

[11] Taxpayers’ final claim under the exceptional circumstances rubric is that a decision ruling against them will discourage future individuals from paying their taxes, because

the delay in this case was outside of their control and thus

unfairly punitive. The effective tax administration ground for

compromise in Temporary Treasury Regulation § 301.7122-

1T(b)(4) indicates that two conditions must be met: first, collection of the full liability must endanger “voluntary compliance by taxpayers,” and second, compromise must “not

undermine compliance . . . with the tax laws.” In other words,

compromise based on exceptional circumstances must alleviate potential present nonpayment while discouraging future

nonpayment by others. Taxpayers and amici claim that the

delay in this case, because it rested outside of the control of

FARGO v. COMMISSIONER OF INTERNAL REVENUE 5153
Taxpayers, should not be held against them. Amici in particular are worried about the long-reaching effects of our decision

in this case, fearing that individuals will be hoodwinked into

tax shelters and then stung for the interest on their massive tax

liabilities.5 But this theory, even if plausible, simply does not

fit into the regulatory scheme. In this case, a decision to collect the full liability will not discourage voluntary tax payment in the future, and a compromise could undermine the tax

laws. 

[12] The crux of Taxpayers’ concerns seem to flow from

the background information to the finalized Treasury Regulation § 301.7122-1(b), in which it is stated that:

The IRS and Treasury Department do not believe

that it would promote effective tax administration to

authorize compromise solely on the basis of an

asserted delay by the IRS, particularly delay that

does not support relief under section 6404(e) . . . . 

Compromise of Tax Liabilities, 67 Fed. Reg. 48,025, 48,027

(July 23, 2002) (codified at 26 C.F.R. pt. 301). From this

statement, as noted supra, Taxpayers and amici draw the idea

that the standard for offers-in-compromise is now the same as

that for interest abatement, and delay on the part of the IRS

can never constitute a valid ground for compromise. Thus,

goes the argument, this case and others like it are being

decided on a stricter standard than authorized by 26 U.S.C.

5

In an error shared with amici, Taxpayers also assume that the Tax

Court’s decision here affects all “similarly situated” parties equally. We

review the case before us, however, for abuse of discretion, which is

highly case-specific. The fact that the Commissioner chose to reject Taxpayers’ offer-in-compromise here does not mean that he will reject all

similar offers in compromise in the future; indeed, that is the very definition of discretion. In addition, “exceptional circumstances” is not the only

acceptable ground for accepting an offer-in-compromise. This case does

not necessarily preclude other similarly-situated taxpayers from reaching

a compromise with the IRS. 

5154 FARGO v. COMMISSIONER OF INTERNAL REVENUE
§ 7122, and that stricter standard also frustrates the policy

goals of Treasury Regulation § 301.7122-1(b). This argument

is undermined, however, by a quote later in the background

information, which states that

cases in which a taxpayer believes the liability was

caused, in whole or in part, by delay on the part of

the IRS or by the actions of third parties may be

appropriate for compromise under the public policy

and equity standard. Such cases, however, are

expected to be rare, as the taxpayer must identify

compelling public policy or equity concerns that satisfy the standard set forth above. 

Id. (emphasis added). While Taxpayers chose to focus on the

fact that such equity-based compromises will be “rare,” the

relevant question is merely whether the Commissioner has

relinquished his discretion to compromise longstanding cases.

He has not. 

[13] Furthermore, in this instance the Commissioner has

not abused his discretion by not accepting Taxpayers’ offerin-compromise. There are a number of factors cutting against

Taxpayers which do not lend themselves towards relief on

effective tax administration grounds: 1) Taxpayers invested in

tax shelters, and purely tax-motivated transactions are

frowned upon by the Code;

6

 2) no evidence was presented to

suggest that Taxpayers were the subject of fraud or deception;

3) the delay that took place was due to well-established

TEFRA procedures and the inability of Taxpayers’ TMPs to

negotiate quickly; and 4) the primary incentives created by

requiring full payment are to encourage taxpayers to research

future investments more carefully and to keep in better contact with financial agents (such as TMPs).7

 At the very least,

6

See, e.g., 26 U.S.C. § 6621 (applying a higher interest rate to past liabilities resulting from tax-motivated transactions). 

7We note that the Tax Court indicated that even in the absence of an

abuse of discretion by the Commissioner, Taxpayers may have a right of

action against their TMPs for unnecessary delay, perhaps on grounds of

breach of fiduciary duty. Fargo, 87 T.C.M. (CCH) 815. 

FARGO v. COMMISSIONER OF INTERNAL REVENUE 5155
the presence of these policy factors indicates that the Commissioner did not abuse his discretion in rejecting Taxpayers’

offer on grounds of exceptional circumstances. 

AFFIRMED. 

5156 FARGO v. COMMISSIONER OF INTERNAL REVENUE