number release date cc dom fs p si tl-n-5643-98 uilc department of the treasury internal_revenue_service washington d c date internal_revenue_service national_office field_service_advice memorandum for district_counsel from assistant chief_counsel field service cc dom fs income forecast depreciation--mortgage servicing rights subject this field_service_advice responds to your memorandum dated field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend taxpayer parent subsidiary year year year issues whether the income_forecast_method_of_depreciation may be used to amortize purchased mortgage servicing rights assuming that the income forecast method may be so used whether income forecast amortization reported on original returns using mid-year data may be recomputed on amended returns using end-year data conclusions the income forecast method has been allowed as an acceptable method of computing depreciation only for specified types of assets for which time-based methods of depreciation are not suitable pools of mortgage servicing rights are not among the specified types of assets and have been treated by case law as appropriate for straight_line time-based depreciation further pools of mortgage servicing rights do not qualify for the income forecast method because they are not characterized by an erratic income stream dependent upon popularity but rather by a steadily declining stream of income the filings of amended returns changing from use of mid-year data to end-year data in the calculation of taxpayer s depreciation deduction on its amended returns for year sec_1 and are unauthorized changes in method_of_accounting and cannot be done without the permission of the commissioner in addition the amended returns did not treat the amortization of the pools of mortgage servicing rights in an allowable manner and therefore are unacceptable and invalid facts taxpayer is a wholly-owned subsidiary of parent subsidiary is a wholly-owned subsidiary of taxpayer taxpayer and subsidiary filed consolidated income_tax returns with parent for year sec_1 and taxpayer originates purchases sells and services residential mortgage loans at issue is servicing purchased from other servicers servicing involves collecting the homeowners monthly payments remitting principal and interest to the investors handling an escrow fund for payment of insurance and taxes and handling delinquencies taxpayer receives a portion of the homeowners interest payments for performing its services taxpayer acquired the servicing at issue through asset purchases rather than stock acquisitions making taxpayer s basis in this purchased servicing the purchase_price less accumulated depreciation subsidiary also had purchased servicing a decline in interest rates during year sec_1 and caused a substantial increase in loan payoffs due to an increase in refinancing as well as increased home sales the dollar value of taxpayer s servicing portfolio consequently decreased purchased mortgage servicing rights are an amortizable intangible asset taxpayer acquired purchased mortgage servicing rights in each of the year sec_1 and as it did in a number of years prior to year taxpayer utilized the income forecast method for amortizing its purchased mortgage servicing rights the amortization was computed by multiplying the unamortized basis of the purchased servicing asset by a percentage based on the portion of income expected to be received in the current period divided by the total amount of income expected to be received over the balance of the servicing period the expected income for the current period and the total expected income were reestimated each year during year sec_1 and taxpayer s book treatment of purchased servicing was governed by statement of financial_accounting standards no accounting for certain mortgage banking activities in part statement no provides that a t he amount capitalized as the right to service mortgage loans shall be amortized in proportion to and over the period of estimated net servicing income servicing revenue in excess of servicing costs each year taxpayer used a computer model to estimate income expected to be received in the current period and future expected income the calculation considered factors such as principal balance remaining life servicing fee rate servicing costs tax costs usage of principal and interest float usage of escrow foreclosure losses income from fees and insurance and prepayment speeds principal balance and prepayment speed were the most important factors for year taxpayer calculated new amortization rates each month there were different rates for the servicing assets grouped by year of acquisition for year taxpayer changed the asset composition grouping all pre-year purchased servicing into one asset for purposes of calculating its monthly amortization and using a certain amortization rate for the first three months of year and another certain amortization rate for the last nine months of year for the year purchased servicing yet other rates were used for the first three months and the last nine months of year for year a particular amortization rate was used for all pre-year purchased servicing except for the largest purchase which received a different rate yet another rate was used for the year purchased servicing on their consolidated income_tax returns for year sec_1 and taxpayer and subsidiary claimed certain amounts as aother deductions for amortization of their purchased servicing assets the total amortization taken on the original income_tax returns was identical to book amortization except that the enactment of i r c ' f required straight-line month amortization of those purchased after date an m-1 adjustment was accordingly made subsequently parent filed amended income_tax returns requesting additional deductions with respect to amortization of the purchased mortgage servicing rights for year sec_1 and the amended returns used the same computer model as had been used on the original returns though the data input into the model changed the loans were grouped differently for purposes of computing amortization on the amended returns from the groupings used in calculating amortization on the original returns for the amended returns loan amortization rates were calculated on a group basis for each of the year and acquisitions the acquisitions for the first pre-year year and the acquisitions for the remaining pre-year years treated as a group for year taxpayer determined which group a loan belonged to based on the loan s year of origination for year sec_2 and taxpayer determined which group a loan belonged to based on the year when taxpayer acquired the loan moreover the amortization rates used for the amended returns varied from the book amortization indicated by the original returns except for the amortization for the first pre- year year grouping claimed for the year the amortization claimed with respect to each grouping of mortgage servicing rights was larger on the amended returns than on the original in the instance of the amortization rate for the first pre-year grouping claimed for year the revised amortization rate was twice as high on the original returns as on the original the increased amortization reflected the use of year-end data for the computer modeling rather than the mid-year data reflected in the original returns the mid-year data input one half of year end principal and escrow into the formula and assumed a zero percent payoff for the first year however end-year data reflected lower principal than had been originally expected moreover use of year end data input higher prepayment speeds reflecting the unexpected high prepayments which occurred into the model the income_forecast_method_of_depreciation calculates depreciation by applying a fraction whose numerator is the actual income earned during the taxable_year and whose denominator is the estimated total income to be earned during the asset s useful_life an estimate made at the end of the year is presumably more accurate than estimates at the beginning of or during the year since more information is available however taxpayer s original returns used mid-year data and used estimated figures for both income to be earned during the year and total income to be derived from the asset as did the amended returns law and analysis sec_167 provides for a depreciation deduction and allows a reasonable allowance for the exhaustion wear_and_tear including a reasonable allowance for obsolescence of property_used_in_the_trade_or_business or held_for_the_production_of_income for tangible_property sec_168 provides that except as otherwise provided in sec_168 the depreciation deduction provided by sec_167 shall be determined by using the applicable_depreciation_method recovery_period and convention the modified accelerated_cost_recovery_system macrs which sec_168 prescribes for tangible_property was enacted by the tax_reform_act_of_1986 for property placed_in_service after sec of pub_l_no date for intangible_property treas reg ' a -3 provides that an intangible asset known from experience or other factors to be of use in the business or in the production_of_income for only a limited period whose length can be estimated with reasonable accuracy may be the subject of a depreciation allowance treas reg ' a -1 a provides the general_rule that the allowance provided by sec_167 is that amount which should be set_aside for the taxable_year in accordance with a reasonably consistent plan not necessarily at a uniform rate so that the aggregate of the amounts set_aside plus salvage_value will equal the cost or other basis of the property at the end of its useful_life the allowance shall not reflect amounts representing a mere reduction in market_value treas reg ' a -1 b provides that the estimated_useful_life of an asset is not necessarily the useful_life inherent in the asset but is the period over which the asset may be expected to be useful in the trade_or_business or in the production_of_income the period is determined by reference to the taxpayer s experience with similar_property taking into account present conditions and probable future developments if the taxpayer s experience is inadequate the general experience of the industry may be used until the taxpayer s experience forms an adequate basis for the determination the estimated remaining useful_life may be subject_to modification by reason of conditions known to exist at the end of the taxable_year and shall be redetermined when necessary but only when the change in useful_life is significant and there is a clear_and_convincing basis for the redetermination treas reg ' b -1 provides that the straight_line method may be used in determining a reasonable allowance for depreciation for any property which is subject_to depreciation under sec_167 and shall be used in all cases where the taxpayer has not adopted a different acceptable method taxpayer in this case has not applied the straight_line method of amortization to its purchased pools of mortgage servicing contract rights but has determined amortization by using an income forecast method taxpayer s amortization has been computed by multiplying the unamortized basis of the purchased servicing asset by a percentage based on the portion of income expected to be received in the current period divided by the total amount of income expected to be received over the balance of the servicing period revrul_60_358 1960_2_cb_68 administratively allowed the aincome forecast method as an acceptable method for computing a reasonable allowance for depreciation under sec_167 with respect to a specified type of property leased or rented television films this method requires the application of a fraction whose numerator is the actual income for the films for the taxable_year and whose denominator is the forecasted or estimated total income to be derived from the films during their useful_life if in subsequent years it is found that the income forecast was substantially over- or underestimated an adjustment of the remaining income forecast for the subsequent years may be made the total forecast income should be based on the conditions known to exist at the end of the period for which the return is made the estimate can be revised upward or downward at the end of subsequent taxable periods revrul_60_358 reasoned that the income from television films has a strikingly uneven erratic flow resulting from audience appeal additional income will be received from the reruns of successful film series depending upon popularity the usefulness of such assets is measurable over the income it produces and cannot be adequately measured by the passage of time alone to avoid distortion depreciation must follow the flow of income revrul_60_358 states that the principle of aincome forecast is limited in its application to television films taped shows for reproduction and other_property of a similar character revrul_64_273 1964_2_cb_62 held that motion picture film is included in property of a similar character revrul_78_28 1978_1_cb_61 holds that since the reason for using the income forecast method to depreciate movie films is to minimize the distortion_of_income by matching depreciation_deductions with income derived from assets giving rise to the deductions income reflected in the numerator of the fraction used to compute the depreciation deduction for the tax_year must reflect the same gross_income used to compute taxable_income from the film for the same period revrul_78_28 also described sound_recordings and books as other similar_property described under the income forecast method revrul_79_285 1979_2_cb_91 holds that the income_forecast_method_of_depreciation may be used to compute depreciation_deductions for book manuscripts patents and master recordings revrul_89_62 1989_1_cb_78 examined the treatment of video cassette rental recordings it noted that sec_168 provides that sec_168 does not apply to any motion picture film or video tape and held that videotapes are among the video tapes excluded from the scope of sec_168 but may be depreciated under the straight_line or income forecast method revrul_89_62 further stated that the income forecast method recognizes that certain assets generate uneven flows of income and have unique income producing potential to properly apply the income forecast method there must be income projections for each asset subject_to the method groupings by videocassette title are permissible for making income projections but broader groupings are not revrul_95_52 1995_2_cb_27 holds that consumer durable property subject_to rent-to- own contracts is not property depreciable under the income forecast method revrul_95_52 notes the television and movie films taped shows for reproduction book manuscripts patents master recordings and other_property of a similar character allowed by rev ruls supra supra and supra it describes these assets as assets of an artistic or creative character generating uneven flows of income and having unique income-producing potential revrul_95_52 states that the passage of time generally is not an appropriate measure of the useful_life of this property whereas the useful_life of consumer durable property is appropriately measured by the passage of time and not by the income produced use of income forecast method for purchased mortgage servicing rights pools of mortgage serving rights are intangible assets treas reg ' a -3 provides that an intangible asset known from experience or other factors to be of use in the business for only a limited period whose length can be estimated with reasonable accuracy may be the subject of a depreciation allowance the right to service a pool or portfolio of mortgage servicing rights has been held to constitute an intangible asset within the meaning of treas reg ' a -3 which has an average life span whose length can be estimated with reasonable accuracy 308_fsupp_333 c d cal 460_f2d_261 9th cir 56_tc_677 acq 1972_1_cb_2 460_f2d_261 9th cir first national bank of omaha v commissioner tcmemo_1975_67 moreover for property acquired after date sec g of pub_l_no date the internal_revenue_code explicitly recognizes that mortgage servicing rights are intangible assets in sec_167 and sec_197 sec_167 provides that if a depreciation deduction is allowable under sec_167 with respect to a mortgage servicing right described in sec_197 the deduction is computed using the straight-line method and a 108-month useful_life sec_197 excepts mortgage servicing rights secured_by residential real_estate from the usual 15-year amortization provided by sec_197 for intangibles unless such right is acquired in a transaction involving the acquisition of assets constituting a trade_or_business prior to being stricken generally for property placed_in_service after date sec a and c of pub_l_no date sec_167 determined that certain methods of accelerated_depreciation including the declining balance and sum of the years-digits methods were reasonable allowances for purposes of sec_167 sec_167 provided that this determination applied only for property other than intangible_property with a useful_life of three years or more however there was no such determination in the internal_revenue_code of methods of depreciation considered reasonable for intangible_property of course the straight_line method is always deemed to be a areasonable allowance for depreciation treas reg ' b -1 states that the straight_line method may be used in determining a reasonable allowance for any property which is subject_to depreciation under sec_167 and shall be used in all cases where the taxpayer has not adopted a different acceptable method for other methods of depreciation with respect to intangible assets any method which the taxpayer uses must be shown to be reasonable pursuant to sec_167 the income forecast method is not an acceptable method_of_depreciation for pools of mortgage servicing rights but is an acceptable method depreciation only for specified types of property which have an erratic stream of income and a usefulness dependent upon consumer appeal the income_forecast_method_of_depreciation was created by revrul_60_358 and specifically limited to television films including taped shows for reproduction and other_property of a similar character in discussing television films revrul_60_358 states that they have a distortion_of_income caused by a strikingly uneven erratic flow of income resulting from audience appeal a successful film series will receive additional income from reruns over a period of years depending upon popularity while unsuccessful series may produce little or no income after the initial exhibition the usefulness of such assets is measurable over the income they produce and cannot be measured by the passage of time alone revrul_60_358 therefore states that it is the position of the service that the income forecast method constitutes an acceptable method for computing a reasonable allowance for depreciation of television films under sec_167 other rulings make plain that the income forecast method is not a method of general application but is suitable only for specified other_property with a character similar to that of the television films considered in revrul_60_358 revrul_64_273 supra ruled that motion pictures are other_property of a similar character to the television films revrul_78_28 supra states that sound_recordings and books are similar_property revrul_79_285 supra additionally mentions patents revrul_89_62 supra states that videocassettes are among the amotion picture film or video tape s which sec_168 excludes from the application of sec_168 ie from macrs sec_168 still current was added by sec a of pub_l_no moreover the legislative_history of former sec_167 indicates a congressional awareness that the income forecast method was only available for certain types of property sec_167 was amended to provide that paragraphs and of sec_167 do not apply to any motion picture film video tape or sound_recording sec d of pub_l_no date effective generally for property placed_in_service after date sec of pub_l_no h_rep_no 99th cong 1st sess vol c b states that films videotapes and sound_recordings were not eligible for the accelerated_depreciation methods of former sec_167 or but the income forecast method or similar methods were available there is no mention of the income forecast method as being suitable for any type of property other than those specified the rulings also make plain that those types of property which may receive the benefit of the income forecast method are those having uneven flows of income and uniquely influenced by popularity revrul_89_62 refers to the unique income producing potential of the eligible assets and moreover states that groupings of videotapes broader than by title are impermissible under the income forecast method revrul_95_52 refers to the eligible assets as artistic or creative with uneven flows of income and unique income producing potential those assets for which the income forecast method is permissible are characterized by an erratic flow of income revrul_60_358 refers to the astrikingly uneven flow of income revrul_60_358 further states that the usefulness of such assets in the taxpayer s trade_or_business is measurable over the income produced and cannot be measured by the passage of time alone revrul_78_28 makes plain that the income forecast method is only available for specified_assets for which the measurement of depreciation by time would fail to produce a reasonable matching of depreciation and income revrul_78_28 states that the reason for the income forecast method is to minimize the distortion_of_income by amatching depreciation_deductions with income derived from assets giving rise to the deductions individual mortgage servicing rights msr s have a contractual life in terms of years and the life is co-terminus with the underlying mortgage obligation the industry readily estimates average useful lives of pools of msr s using accepted statistical analysis reflecting the impact of refinancing home sales and other factors while the income derived from the pool of msr s declines over time as the outstanding balance of the underlying mortgages declines due to principal pay down refinancing sale of homes and other reasons such income is measured over time the anticipated declining income stream over time can be projected and is the basis for determining the purchase_price of a pool of msr s the availability of such projection makes the asset depreciation determinable though not necessarily level over time under sec_167 this income stream is not erratic nor a function of the popularity of the underlying mortgages taxpayer s pools of mortgage servicing rights are not influenced by considerations of popularity and are not characterized by uneven income flows the decision to refinance a mortgage or to pay off a mortgage and move to another home as a result of a decline in interest rates is a purely economic decision unrelated to any passing subjective consumer or esthetic appeal of the mortgage moreover television films and similar assets can have truly erratic income streams which may increase or decline each year for a completely unpredictable number of years the income stream from a pool of mortgage servicing rights is not erratic and can be projected to average a certain useful_life at the time of the pool s acquisition this income stream never increases but only declines over time this steady decline is contrary to the concern which rev ruls and expressed with the income producing apotential of an eligible asset ie with the possibility of significant upswings the most that can be said is that the refinancing of individual mortgages amounts to their retirement treas reg ' a -8 governs losses on the retirement or permanent withdrawal of depreciable_property from the trade_or_business the tax consequences of a retirement depend upon whether the asset is accounted for in a separate or mass asset account taxpayer s mortgage servicing rights are pooled assets treas reg ' a - d and provides that an early loss is not allowable on the retirement of an asset in a multiple asset account taxpayer s pools of mortgage servicing rights are unlike the specific assets for which the income forecast method was held permissible in the above cited rulings for the assets named in the rulings depreciation over time creates a distortion from non-time related uneven income generated by the assets this is the reason why the rulings administratively recognize that the income forecast method is an acceptable method for computing a reasonable depreciation allowance under sec_167 only for specific assets under specific conditions of erratic income see 65_tc_18 and 78_tc_943 stating that the commissioner has authorized the use of the income forecast method under sec_167 for amortizing films because of the uneven flow of income earned by this type of property the income forecast method however is not a reasonable method for computing a reasonable depreciation allowance for all types of asset under any condition there is no statutory or regulatory authority that treats any assets other than those specified administratively or by legislation as eligible for the income forecast method pursuant to sec_167 it may be inferred that congress agrees with this interpretation section a of pub_l_no date added sec_197 to the internal_revenue_code effective for property placed_in_service after date sec c of pub_l_no sec_197 limits use of the income forecast method to films video tapes sound_recordings copyrights books patents and other_property specified in regulations while this legislation is prospective the legislative_history describes this provision as clarifying ie not as changing the types of property to which the income forecast method may be applied h_r rep no 105th cong 1st sess h_r rep no 105th cong 1st sess that there is no regulatory authority for treating assets other than those specified in the rulings and legislation as eligible for the income forecast method may be inferred from treas reg ' a -1 this provision allows for a change in the scheduled depreciation allowance for a modification of an asset s estimated_useful_life by reason of conditions known to exist at the end of the taxable_year though only when the change in the useful_life is significant and there is a clear_and_convincing basis for the redetermination however there is no general regulatory authority for allowing changes in depreciation in later years of the asset s useful_life to reflect changes in projected income as is done under the income forecast method the regulation denies a depreciation allowance for changes in value 90_tc_505 aff d 909_f2d_1101 8th cir concerned the depreciation for the years through of tangible_property including railroad rolling_stock automotive equipment aircraft and data processing equipment which the taxpayer leased out under short-term leases this property was found eligible for the double-declining balance method under sec_167 but ineligible for the income forecast method the tax_court stated that revrul_60_358 was tailored to meet the inadequacies of time-based methods of depreciation which when applied to the unique property film resulted in distortions of income with respect to the tangible assets under consideration the tax_court stated that the usefulness of such assets is adequately measured by the passage of time whereas the income forecast method keys the useful_life of the asset to the income provided however the recent case of abc rentals of san antonio inc v commissioner tcmemo_1994_601 rev d 97_f3d_392 10th cir reh g 142_f3d_1200 7th cir considered the depreciation for the years and of consumers durables which the taxpayers leased out on short-term leases the tenth circuit held that the taxpayer could elect to exclude its tangible_property from macrs pursuant to sec_168 a proposition which is not here relevant because taxpayer s pools of mortgage servicing rights are intangible assets which do not fall withing the macrs scheme but are instead depreciated pursuant to sec_167 the tenth circuit stated that the taxpayer bears the burden of proving that the method_of_depreciation produces a reasonable allowance for depreciation the tenth circuit cited treas reg ' a -1 a for the proposition that a reasonable allowance is that amount which should be set_aside for the tax_year ain accordance with a reasonably consistent plan not necessarily at a uniform rate so that the aggregate of the amounts set_aside plus salvage_value will at the end of the estimated_useful_life of the depreciable_property equal the cost or other basis of the property a the tenth circuit also cited treas reg ' b -0 a which provides that any reasonable and consistent method of computing depreciation may be used under sec_167 but also states that depreciation_deductions shall not exceed asuch amounts as may be necessary to recover the unrecovered cost or other basis less salvage_value during the remaining useful_life of the property the tenth circuit noted that the commissioner had conceded that the income forecast method was the most economically accurate method of depreciating the property thus conceding the reasonableness of the method the tenth circuit s reliance on treas regs ' a -1 a and b -0 a was inappropriate these regulations allow the use of a reasonable_time based method over an asset s useful_life but the income forecast method is not keyed to an asset s useful_life it is a reasonable method_of_depreciation under sec_167 only for assets specified in rulings and later in legislation that are recognized to have an erratic income stream dependent upon popularity the simple fall off of income which occurs to pools of mortgage servicing rights is not an erratic stream of income and is not a result of subjective consumer popularity the tenth circuit s second opinion in abc rentals supra acknowledged that the above mentioned legislative_history of sec_197 which limits use of the income forecast method to specified types of property for property placed_in_service after date characterized this change as a clarification however it stated that the views of one congress on the meaning of legislation passed by an earlier congress are ordinarily not entitled to great weight 513_us_64 the tenth circuit failed to consider the effect on the above-mentioned legislative_history of the last sentence of sec_167 effective for property placed_in_service after date congress stated that under the bill afilms video tapes and sound recordingsa are not eligible for the accelerated_depreciation methods under sec_167 or but the income forecast method was available h_rep_no supra pincite thus it is evident that an earlier congress envisioned the income forecast method only in terms of certain specified types of property while the legislative_history does not explicitly so state films videotapes and sound_recordings are all characterized by erratic income flows depended upon popularity the very factors which led to the adoption of the income forecast method in revrul_60_358 supra lastly even if the income forecast method were available taxpayer has not applied it properly revrul_60_358 requires the application of a fraction whose numerator is the actual income from the asset for the taxable_year and whose denominator is the estimated total income to be derived from the asset revrul_60_358 further states that the estimated income to be derived from the asset should be based on conditions known to exist at the end of the period for which the return is made revrul_78_28 supra requires that the income reflected in the numerator of the fraction used to compute the depreciation deduction for the tax_year must reflect the same gross_income used to compute taxable_income from the asset for the same period amended_return using end-year data on both its original and amended income_tax returns taxpayer used estimated rather than actual figures for current_year income morever the use of mid-year data on the original return is inconsistent with the requirement that estimated income be based on information known to exist at the end of the taxable_period in addition taxpayer applied the calculated depreciation_rate to a redefined asset in subsequent years in light of all the above taxpayer s pools of mortgage servicing rights are not among the types of assets specified by revenue rulings or legislation as those for which the income_method provides a reasonable allowance for depreciation under sec_167 additionally pools of mortgage servicing rights do not qualify for the income forecast method because they are not subject_to strikingly uneven income streams dependent upon consumer popularity taxpayer s original returns computed amortization of its pools of mortgage servicing rights under the income forecast method using mid-year data the data input one half of year- end principal and escrow into taxpayer s formula taxpayer filed amended returns which computed amortization using end-year data while reflecting lower principal and higher prepayment speeds than had originally been expected it does not appear the amended returns correct errors on the original returns and it has not been established that the original returns contain miscalculations while taxpayer s amended returns used end-year rather than mid-year data the amended returns were based on facts that existed at the time that the original returns were filed the question arises whether taxpayer s original returns should be considered to have made a binding election to use mid-year data precluding use of the end-year data aoversight poor judgment ignorance of the law misunderstanding of the law unawareness of the tax consequences of making an election miscalculation and unexpected subsequent events have all been held insufficient to mitigate the binding effect of elections made under a variety of provisions of the code 55_tc_468 while estimates whose accuracy depends upon the judgment of the person who established them may not be retroactively corrected under the doctrine_of_election mathematical errors in computation may be corrected 48_tc_118 rev d on another issue 413_f2d_55 9th cir it would appear that taxpayer s decision to use end-year data on the amended returns was a judgment as to the type of variables to be used in its formula rather than correction of a mathematical mistake however such cases dealing with the doctrine_of_election generally concern a situation where the taxpayer is required by statue or regulation to make an affirmative action of election between two allowable methods of treating an item moreover the form_4562 depreciation and amortization does not indicate any election to be made with regard to intangible assets or the income forecast method there is no such indication on line sec_39 and sec_40 dealing with amortization of costs beginning respectively in the current and prior years or on the line total amortization to be carried to the aother deductions line of the form_1120 u s corporate_income_tax return where taxpayer reported the income even if the taxpayer were deemed to have made an election on its original returns with respect to the income forecast method its use of mid-year data conflicted with the requirement of revrul_60_358 supra that the estimated income to be derived from the asset should be based on conditions known to exist at the end of the period for which the return is made in 346_f2d_1016 rev g 41_tc_572 the taxpayer made an election of the deferred payment method of reporting the gain from a sale however the deferred payment was unavailable where the notes had an ascertainable fair_market_value the commissioner sought to treat the entire profit as currently taxable rather alternatively to allow use of the installment_method the tax_court denied use of the installment_method noting noncompliance with the regulation s requirement that election of the installment_method be made in the year_of_sale the ninth circuit stated that the taxpayer could not be bound by his original election because it was a nonallowable choice no one was bound although the consideration that the taxpayer therein was not using hindsight to seek a more advantageous method also influenced the ninth circuit the point remains that it does seem inequitable to seek to hold a taxpayer to a nonallowable choice similarly in 56_tc_765 the taxpayer used the double declining balance method_of_depreciation on his original return not knowing that statute made it inapplicable for used_property by amended_return he chose the 150-percent declining balance method the court stated that the commissioner could not avail himself of the taxpayer s mistake to force upon him the least favorable method_of_depreciation straight_line in this instance in the present case taxpayer s amended returns which did however continue to have the infirmity of using estimated actual income for the current taxable_year contrary to rev_rul were at least less incorrect than the original returns even if the assumption is made that pools of mortgage servicing rights are among the types of property for which the income forecast method is allowable and the further assumption is made that taxpayer s amended returns had properly applied the income forecast method the amended returns were unauthorized changes in a method_of_accounting taxpayer used mid-year data in its calculation of the income forecast method in its original returns for year sec_1 and where a taxpayer seeks to change the treatment in a material_item used in an overall plan of accounting such a change is a change in a method_of_accounting treas reg '1 e ii a where a taxpayer has applied an erroneous method_of_accounting for two consecutive returns the taxpayer has adopted a method_of_accounting revrul_90_38 1990_1_cb_57 a taxpayer cannot make a change in a method_of_accounting without permission of the commissioner sec_446 whether the taxpayer will be allowed to change its method_of_accounting is within the discretion of the service in this instance the service will not follow gimble bros inc v united_states 535_f2d_14 ct_cl in which the court permitted the taxpayer to file amended returns for prior years to effect a change in method_of_accounting for a material_item revrul_90_38 supra with respect to the yearly changes in the composition of the asset to which taxpayer applied the income forecast method because taxpayer has not used a consistent erroneous method for two consecutive returns taxpayer has not established a method_of_accounting revrul_90_38 supra based on foley supra and 55_tc_1101 the taxpayer is entitled to adopt a proper method_of_accounting by a amended_return however the filing of amended returns is not a statutory right and their acceptance or rejection is a matter of administration within the discretion of the commissioner shall co v united_states 129_fsupp_137 s d n y the service considers an amended_return filed by the due_date of the original return to be the taxpayer s return for the period but has discretion to accept or reject an amended_return filed after that time obvious administration and legal problems could result from allowing the filing of supplemental returns at the taxpayer s option m saltzman i r s practice and procedure 2d ed 65_tc_113 states that cases which uphold the validity of amended returns fall within one of the following factual contexts the amended_return was filed prior to the date prescribed for filing the original the taxpayer s treatment of the item in the amended_return was not inconsistent with the treatment in the original return or the taxpayer s treatment of the item in the original return was improper and the taxpayer elected one of several allowable alternatives in the amended_return in the present case taxpayer has failed to follow the requirements for filing an amended_return none of the above-mentioned three conditions applies to the present case the amended returns were filed after the prescribed dates for the original returns secondly taxpayer s treatment of the contested item in the amended returns was inconsistent with its treatment in the original returns substituting end-year for mid-year data and grouping the mortgages differently thirdly taxpayer s treatment of the item in its original returns was improper but taxpayer did not elect an allowable alternative in the amended_return and merely chose to submit a less objectionable modification of its improper original treatment taxpayer s treatment on the original returns was incorrect because pools of mortgage servicing rights are not assets having erratic income streams due to popularity as required by revrul_60_358 the treatment was improper because it used an estimate of the income for the current taxable_year whereas revrul_60_358 contemplates actual income for the taxable_year the treatment on the original returns was additionally improper because rev_rul states that total estimated income should be based on conditions known to exist at the end of the period for which the return is made yet the original return was based on mid-year data further revrul_60_358 contemplates application of an annually revised income forecast ratio to the same asset year after year the original returns grouped the servicing rights by year of acquisition for year grouped all pre-year servicing into one asset distinct from the year servicing for year and treated year similarly to year except that the largest pre-year asset was also treated as a distinct asset the amended returns cured the last impropriety but others remain the amended returns treated the pools of mortgage servicing rights as the type of asset for which the income forecast method is available despite the lack of an erratic income stream due to popularity the amended returns still used an estimate of the income for the current taxable_year moreover revrul_60_358 contemplates application of an annually revised income forecast ratio to the same asset year after year for year the amended returns grouped loans by year of origination but for year sec_2 and the amended_return grouped loans by year of acquisition there also does not appear to be an adequate explanation of why the groupings on the amended returns were different from the groupings on the original returns per-year asset pools accounting is beyond the scope of this memorandum case development hazards and other considerations with regard to the issue whether the income forecast method may be used to depreciate pools of mortgage servicing rights the tenth circuit s adverse holding in abc rentals inc supra that the income forecast method was reasonable was based on the commissioner s concession that the income forecast method was the most economically accurate method of depreciating the leased consumers durables therein such a concession should not be made it is inconsistent with the position that the mortgage servicing pools are inappropriate for the income forecast method because they are subject_to steadily declining rather than erratic income morever inconsistencies in taxpayer s methodology such as computing servicing by month for year and by year for year on the original return and grouping loans by year of origination for year and by year of acquisition for year sec_2 and on the amended returns indicate that taxpayer will have a heavy burden in arguing that its use of the income forecast method was economically accurate deborah a butler by harve m lewis chief passthroughs special industries branch field service


tcmemo_2007_73 united_states tax_court martin and sharon smith petitioners v commissioner of internal revenue respondent docket no 3876-05l filed date wendy s pearson terri a merriam jennifer a gellner jaret r coles and asher b bearman for petitioners thomas n tomashek and gregory m hahn for respondent wendy s pearson pearson terri a merriam merriam jennifer a gellner gellner and jaret r coles entered their appearances in this case by subscribing the petition commencing this proceeding see rule a unless otherwise indicated rule references are to the tax_court rules_of_practice and procedure and section references are to the applicable versions of the internal_revenue_code asher b bearman entered his appearance on date and withdrew on date pearson and gellner withdrew from the case on oct and date respectively memorandum findings_of_fact and opinion laro judge petitioners martin smith smith and sharon smith petitioned the court under sec_6330 to review the determination of respondent’s office of appeals appeals sustaining a proposed levy related to petitioners’ assessed federal_income_tax liability inclusive of additions to tax penalties and interest for and that liability totaled dollar_figure petitioners argue that the proposed levy is improper because they argue appeals was required to accept their offer to pay dollar_figure to compromise their assessed and unassessed federal_income_tax liability inclusive of additions to tax penalties and interest for through petitioners estimate that liability to total dollar_figure we decide whether appeals abused its discretion in rejecting petitioners’ offer we hold it did not petitioners also dispute a determination by appeals concerning their liability for increased interest under sec_6621 as to this dispute the parties agreed to be bound by a final_decision in ertz v commissioner docket no 20336-04l which involved a similar issue on date the court held in ertz v commissioner tcmemo_2007_15 that the court lacks jurisdiction to decide the issue to which the parties agreed to be bound on the basis of ertz v commissioner supra we shall dismiss for lack of jurisdiction the portion of this case that concerns petitioners’ liability for increased interest under sec_6621 findings_of_fact the parties filed with the court stipulations of fact and accompanying exhibits the stipulated facts are found accordingly petitioners are husband and wife and they resided in tucson arizona when their petition was filed on their federal_income_tax returns beginning in petitioners claimed losses and credits from their investment in several partnerships organized and operated by walter j hoyt iii hoyt the partnerships were subject_to the unified_audit and litigation procedures of the tax equity and fiscal responsibility act of publaw_97_248 96_stat_648 hoyt was convicted on criminal charges relating to the promotion of these partnerships petitioners’ claim to the partnerships’ losses and credits resulted in the underreporting of their personal and federal income taxes on date respondent mailed to petitioners a letter 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 amounts owed as to their and federal income taxes all of these amounts were attributable to the just referenced underreporting of income the notice advised petitioners that they were entitled to a hearing with appeals to review the propriety of the proposed levy on date petitioners requested the referenced hearing with appeals the request asserted in relevant part that the proposed levy was inappropriate because petitioners were entitled to compromise their liability on account of effective tax_administration given they claimed that the hoyt partnership cases were longstanding and petitioners were the unwitting victims of fraud perpetrated by hoyt interest was required to be abated under sec_6404 an issue petitioners noted then pending before the court_of_appeals for the sixth circuit in 389_f3d_601 6th cir affg tcmemo_2003_138 the commissioner’s imposition of tax-motivated interest for through was inappropriate given the facts of the case and petitioners were not given an opportunity to be heard during the examination of the hoyt partnerships in that they claimed they were represented by hoyt who had an impermissible conflict of interest and was thus incapable of representing them properly on date nancy driver driver a settlement officer in appeals contacted petitioners with respect to their request by mailing a letter to merriam petitioners’ representative as stated on a power_of_attorney the letter a copy of which was mailed to petitioners stated that driver would contact petitioners to schedule the hearing and asked petitioners to tender the following items to driver before the hearing so that she could explore a resolution your proposal to resolve the outstanding balance any documentation supporting your position on any issue you wish to discuss completed and signed form 433-a collection information statement for wage earners and self-employed individuals along with supporting documentation completed and signed form 433-b collection information statement for businesses along with supporting documentation this is required only if you own or have interest in a business the letter stated that petitioners should provide the referenced information to driver by date pursuant to the request of gellner who was also listed in a power_of_attorney as petitioners’ representative driver extended the date date until date on date petitioners submitted to driver four letters with accompanying exhibits a signed and completed form_656 offer_in_compromise with an accompanying payment of a related dollar_figure fee and a signed and completed form 433-a with supporting documentation through this submission petitioners offered to pay the commissioner dollar_figure to compromise what they estimated was their dollar_figure assessed and unassessed federal_income_tax liability inclusive of additions to tax penalties and interest for through each of the four letters included in the submission related to a different topic designated by petitioners as such the four topics being a presentation of the facts and arguments related to the hearing including an explanation of the offer amount and medical and retirement considerations a delay in the determination and assessment of their liabilities due to the criminal investigation of hoyt effective tax_administration and tax-motivated interest under sec_6621 the form_656 was signed by each petitioner on date and stated that petitioners were making their offer-in-compromise on the grounds of effective tax_administration and doubt as to collectibility the form 433-a was signed by each petitioner on date and reported that petitioners owned the following assets with a current value net of reported liabilities of dollar_figure checking account dollar_figure money market account ira sec_1 vanguard big_number zurich big_number big_number stock of ge motorola big_number vehicles ford ranger big_number less loan balance big_number big_number mercury grand marquis big_number big_number 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 home2 big_number less mortgage loan balance big_number big_number big_number the reported values of the iras individual_retirement_accounts equal percent of their account balances petitioners reported the lesser values to reflect their liability for income_tax on a liquidation of the accounts the reported value equals the home’s assessed value the form 433-a reported that petitioners had no disposable income listing that their monthly income totaled dollar_figure and their monthly living_expenses totaled dollar_figure the income was reportedly attributable to smith’s receipt of social_security and or a pension the living_expenses were reportedly attributable to the following items food clothing and miscellaneous dollar_figure housing and utilities big_number transportation health care taxes income and fica life_insurance attorney fees big_number the form 433-a reports that petitioners’ monthly payment on their mortgage loan was dollar_figure and that they were required to make these payments until the form 433-a reports that petitioners’ monthly payment on their car loan was dollar_figure petitioners told driver that they were experiencing the listed expenses reported as totaling dollar_figure actually total dollar_figure petitioners’ federal_income_tax return reported that they had dollar_figure of adjusted_gross_income and dollar_figure of taxable_income various medical complications and were required to take various prescription and other medications petitioners never claimed to driver that the monthly cost of these complications and medications exceeded their reported monthly health care costs these attorney fees are apparently related to this litigation by way of a letter dated date driver notified petitioners that she had scheduled their hearing requested by petitioners as a telephonic hearing for date the letter also stated that driver had learned from third parties that petitioners apparently owned certain assets which were not reported on their form 433-a specifically an ira valued at dollar_figure with indianapolis life_insurance_company indianapolis life two lots of real_estate sited in apache county arizona and one lot of real_estate sited in pima county arizona in reply to the letter’s request that petitioners explain why the referenced assets were not included on the form 433-a petitioners on date acknowledged that they owned the ira with indianapolis life and the lots of real_estate and that they had left those assets off of their form 433-a petitioners stated in the letter that the ira had been overlooked in preparing the form 433-a petitioners stated in the letter that they had forgotten about the three unreported lots which they stated were worthless on date driver held the scheduled hearing with petitioners’ counsel at that time smith and his wife were and years old respectively driver made the following calculation in determining that petitioners’ net realizable equity in assets was dollar_figure assets and liabilities reported on form 433-a iras vanguard big_number zurich big_number big_number stock of ge motorola big_number home big_number less mortgage loan balance big_number big_number big_number other assets ira indianapolis life big_number lots in apache and pima counties big_number big_number net realizable equity in assets big_number this amount equals percent of the dollar_figure balance in this account as of date this amount equals dollar_figure less than the total assessed values of these lots driver calculated petitioners’ reasonable collection potential to be dollar_figure the same amount as their net realizable equity in assets in other words driver determined that petitioners had no disposable income on date appeals issued petitioners the notice_of_determination sustaining the proposed levy as to and the notice reflects driver’s conclusion that petitioners’ offer of dollar_figure was inadequate under the applicable guidelines and that the proposed levy balances the need for the efficient collection_of_taxes with the concern that the proposed levy be no more intrusive than necessary as to the former conclusion the notice states taxpayers challenged the proposed enforcement collection action by levy taxpayers submitted an offer_in_compromise doubt as to collectibility and effective tax_administration in the amount of dollar_figure during the cdp proceedings the oic was not an acceptable collection alternative and was rejected taxpayers did not disclose all assets on the collection information statements attached to the offer they did not disclose assets which constituted about of their net realizable equity by not disclosing their complete financial status this appeals officer is concerned about their good_faith effort to resolve this matter they were not forthcoming in establishing their financial status this appeals officer concluded the offer should not be accepted under doubt as to collectibility because taxpayers have sufficient assets to pay the assessed liability further the offer should not be accepted under effective tax_administration as it would undermine compliance by taxpayers with the tax laws taxpayers included in the offer years that have unresolved tefra issues thus the liability has not been assessed during the collection_due_process proceedings taxpayers did not resolve the years with tefra issues by entering into settlement agreements taxpayers did not propose any other acceptable collection alternatives taxpayers declined to pay the outstanding liability the proposed collection enforcement action by levy is valid and appropriate the notice further states the proposed collection action by levy balances the need for the efficient collection_of_taxes with the concern that collection action be no more intrusive than necessary taxpayer sic did not propose any acceptable collection alternatives the notice_of_determination also addresses the other claims made by petitioners in their request for a hearing in support of their assertion that the proposed levy was inappropriate first the notice notes that the court_of_appeals for the sixth circuit held in 389_f3d_601 6th cir that the taxpayer was not entitled to an abatement of interest second the notice states that petitioners never established that their facts did not support the imposition of interest under sec_6621 third the notice indicates that petitioners never discussed at the hearing their claim that they were not given an opportunity to be heard during the examination and hence that driver considered that issue to be abandoned 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 taxes attributable to the partner’s participation in the partnership in each of the other prior cases all of which were brought by merriam as either counsel or co-counsel this court has sustained respondent’s right to levy on the assets of the petitioning taxpayer or in the case of joint returns the petitioning taxpayers see hansen v commissioner tcmemo_2007_56 catlow v commissioner tcmemo_2007_47 estate of andrews v commissioner tcmemo_2007_30 freeman v commissioner tcmemo_2007_28 johnson v commissioner tcmemo_2007_29 abelein v commissioner tcmemo_2007_24 hubbart v commissioner tcmemo_2007_26 carter v commissioner tcmemo_2007_25 ertz v commissioner tcmemo_2007_15 mcdonough v commissioner tcmemo_2006_234 lindley v commissioner tcmemo_2006_229 blondheim v commissioner tcmemo_2006_216 clayton v commissioner tcmemo_2006_188 keller v commissioner tcmemo_2006_166 barnes v commissioner tcmemo_2006_150 as was equally true as to the taxpayers in many of those prior cases petitioners here made a lowball offer to appeals to compromise their tax debt and now argue in this court that appeals’s rejection of their offer was an abuse_of_discretion because generally speaking they claim that the appeals officer did not appreciate the specifics of their case where an underlying tax_liability is not at issue in a case invoking our jurisdiction under sec_6330 we review a determination of appeals for abuse_of_discretion see 114_tc_604 we reject the determination of appeals only if the determination was arbitrary capricious or without sound basis in fact or law see 126_tc_237 125_tc_301 affd 469_f3d_27 1st cir where we decide the propriety of appeals’s rejection of an offer-in-compromise as we do here 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 pincite fowler v commissioner tcmemo_2004_163 fargo v commissioner tcmemo_2004_13 affd 447_f3d_706 9th cir 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 pincite 118_tc_488 e vidence that a taxpayer might have presented at the sec_6330 hearing but chose not to is not admissible in a trial conducted pursuant to sec_6330 because it is not relevant to the question of whether the appeals officer abused her discretion murphy v commissioner supra pincite in 125_tc_301 affd 469_f3d_27 1st cir the court declined to include in the record external evidence relating to facts not presented to appeals the court distinguished 123_tc_85 revd 439_f3d_455 8th cir and held that the external evidence was inadmissible in that it was not continued sec_6330 allows a taxpayer to offer to compromise a federal tax debt as a collection alternative to a proposed levy sec_7122 authorizes the commissioner to prescribe guidelines to determine when a taxpayer’s offer-in- compromise should be accepted the applicable regulations sec_301_7122-1 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 and proced admin regs petitioners argue in brief that appeals acting through driver abused its discretion by not accepting their offer to compromise their tax_liability on the ground of effective tax_administration in that they assert driver did not adequately continued relevant to the issue of whether appeals abused its discretion in a memorandum that petitioners filed with the court on date 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 driver 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 driver 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 consider the specifics of their case 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 iii proced admin regs if a taxpayer does not qualify for effective tax_administration compromise on grounds of economic hardship 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 proced admin regs driver considered all of the evidence submitted to her by petitioners and she applied the guidelines for evaluating an offer-in-compromise to promote effective tax_administration she determined that petitioners’ offer was unacceptable because among other reasons they were not forthcoming in establishing petitioners’ posttrial opening brief also states as an issue the question of whether appeals abused its discretion by rejecting petitioners’ request for an offer-in-compromise on the ground of doubt as to collectibility the brief does not however advance any direct argument on this issue stating instead that the resolution of the issue is controlled by our decision on petitioners’ claim of effective tax_administration we consider petitioners to have waived any independent claim of error related to appeals’s rejection of their offer-in-compromise on the ground of doubt as to collectibility and limit our discussion to appeals’s rejection of petitioners’ offer-in- compromise on the ground of effective tax_administration their financial status and acceptance of the offer would undermine compliance with the tax laws by taxpayers in general she determined that petitioners’ offer to pay dollar_figure was unacceptable because they had the financial wherewithal to pay more than that amount driver’s ultimate determination to reject petitioners’ dollar_figure 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 her determination was based on a reasonable application of the guidelines which we decline to second-guess see 124_tc_165 affd 454_f3d_782 8th cir in their posttrial opening brief petitioners essentially make four arguments in advocating a contrary result first petitioners argue that driver did not adequately consider their unique facts and circumstances we disagree driver reviewed and considered all information given to her by petitioners on the basis of the facts and circumstances of petitioners’ case as gleaned from that information as well as learned from other information obtained during her independent analysis driver determined that petitioners’ offer did not meet the applicable guidelines for acceptance of an offer-in-compromise to promote effective tax_administration because acceptance of that offer would undermine compliance with the tax laws by taxpayers in general we find no abuse_of_discretion in that determination nor do we find that driver inadequately considered the information given to her by petitioners driver accepted all of the values for assets liabilities income and expenses given to her by petitioners on their form 433-a and she only increased the value of petitioners’ total assets to take into account the unreported assets which she uncovered during her independent analysis indeed even in the case of the unreported assets driver’s valuation of those assets did not significantly depart from petitioners’ valuation of those assets we find that driver gave thorough consideration to all of petitioners’ claims in the light of all of the facts that were communicated to her by petitioners or were otherwise learned by her from other sources as petitioners view this issue the opinion of the court_of_appeals for the ninth circuit in 447_f3d_706 9th cir requires that appeals accept their dollar_figure offer because they claim their investment in the hoyt partnerships was not purely tax motivated they were victims of hoyt’s fraud and respondent and hoyt caused a significant delay in the resolution of respondent’s examinations of the hoyt partnerships we do not read fargo v commissioner supra as petitioners’ sole dispute with driver’s valuation of their assets relates to the unreported lots which petitioners contend had no value we cannot fathom that the lots had no value whatsoever and we do not believe that it was an abuse of driver’s discretion to value each lot at a minimal average value of dollar_figure broadly as petitioners fargo does not support their claim that appeals was automatically required to accept petitioners’ bargain-basement offer of dollar_figure it cannot be gainsaid that a significant motivation of their investment in the hoyt tax_shelters was to realize tax savings petitioners also argue that their offer was required to be accepted because they adequately demonstrated that they will suffer economic hardship if required to pay their assessed tax_liability in full to this end petitioners state driver ignored both their medical issues and their age and retirement status in making her determination and it is reasonably foreseeable that they will need all of their home equity and retirement assets to compensate for this shortfall and to use for their care and support in the future by petitioners’ count their monthly income is exceeded by their monthly expenses creating a deficit of dollar_figure ie monthly income of dollar_figure less monthly living_expenses of dollar_figure and driver’s analysis requires that they liquidate all of their retirement accounts and home equity in order to pay their tax_liability we disagree with petitioners that they have demonstrated that requiring them to pay more than dollar_figure towards their assessed tax_liability will result in an economic hardship the even if they had shown economic hardship a compromise on the basis of effective tax_administration will not be made if it continued record establishes that driver when she made her determination did know the specifics of petitioners’ age and financial status including the amount and sources of petitioners’ income and that she accepted the amount of the monthly medical_expenses reported to her by petitioners on their form 433-a driver was not required on her own initiative to increase arbitrarily the amount of those reported medical_expenses to reflect the possibility that petitioners would incur additional medical costs in the future see fargo v commissioner supra pincite driver’s analysis focused on petitioners’ dollar_figure assessed liability and petitioners’ net realizable equity in assets was dollar_figure an amount that exceeds petitioners’ assessed liability by dollar_figure we do not consider appeals to have abused its discretion by rejecting petitioners’ claim that they will suffer an economic hardship if required to pay more than their dollar_figure offerdollar_figure continued would undermine compliance with the tax laws by taxpayers in general see sec_301_7122-1 proced admin regs and driver determined that petitioners failed to meet that essential requirement petitioners argue that driver’s analysis is flawed in that she considered only their assessed tax_liability and not their assessed and unassessed tax_liability in that driver concluded that petitioners’ offer of dollar_figure in compromise of their dollar_figure assessed tax_liability was unacceptable petitioners have not explained to our satisfaction how increasing the stated assessed liability almost threefold to reflect the amount of the unassessed liability would then make their offer continued second 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 examples and 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 f 3d pincite 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 may require a change_of lifestyledollar_figure continued acceptable 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 447_f3d_706 9th cir affg tcmemo_2004_13 regarding whom the court_of_appeals for the ninth circuit noted that no evidence continued we also agree with driver 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’ dollar_figure offer to satisfy their estimated dollar_figure 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 the transaction at issue involves a tax_shelter reducing the risks of participating in tax_shelters would encourage more continued 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 eg keller v commissioner tcmemo_2006_131 nor prevented the courts of appeals for the sixth ninth and tenth circuits from affirming our decisions to that effect in 471_f3d_1021 9th cir affg tcmemo_2004_269 440_f3d_375 6th cir affg tcmemo_2004_279 and 439_f3d_1243 10th cir affg tcmemo_2004_275 taxpayers to run those risks thus undermining rather than enhancing compliance with the tax lawsdollar_figure third petitioners argue that driver failed to balance efficient collection with the legitimate concern that collection through the proposed levy be no more intrusive than necessary we disagree driver thoroughly considered this balancing issue on the basis of the information and proposed collection alternative offer-in-compromise given to her by petitioners she concluded that the proposed levy action was an appropriate means for collecting the liabilities at issue she thoroughly considered petitioners’ arguments for accepting their offer-in- compromise and she rejected the offer only after concluding that petitioners could pay more of their tax_liability than the dollar_figure they offered cf internal_revenue_manual sec_5 when hardship criteria are identified but the taxpayer does not offer an acceptable amount the offer should not be recommended for acceptance 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 internal_revenue_manual sec_5 implicitly addresses the longstanding issue there the taxpayer invested in a tax_shelter in thereby incurring tax_liabilities for through 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 fourth petitioners argue that driver inappropriately failed to consider whether they qualified for an abatement of interest for reasons other than those described in sec_6404 we disagree we find nothing to suggest that driver believed that petitioners’ sole remedy for interest abatement in this case rested on the rules of sec_6404 in fact regardless of the rules of sec_6404 driver obviously would have abated interest in this case had she agreed to let petitioners compromise their liability by paying less than the amount of interest included within that liability all the same we find no basis in the evidence for an abatement of interest nor any abuse_of_discretion by driver in denying their request for abatement cf 389_f3d_601 6th cir we hold that appeals acting through driver did not abuse its discretion in rejecting petitioners’ dollar_figure 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 dollar_figure see speltz v commissioner t c pincite we have considered all arguments made by petitioners for a contrary holding and we have found those arguments not discussed herein to be without merit an appropriate order and decision will be entered


internal_revenue_service number release date index numbers ----------------------------------------------------- ---------------------------------------------- -------------------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ---------------- telephone number ------- ------------ refer reply to cc psi b03 plr-131838-15 date date x a b ---------------------------------------------------------------- ------------------------ ------------------------------------------ --------------- state ---------- date ------------------------ date ----------------- year n -------------- --- dear ----- -------- this letter responds to a letter received by our office on date and subsequent correspondence submitted on behalf of x by its authorized representatives requesting a ruling that x be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an election under sec_754 of the internal_revenue_code code for year plr-131838-15 facts x is a limited_liability_company organized under the laws of state on date on date a a member of x died x intended to make an election under sec_754 for year the year in which a died after a’s death a’s n interest in x was transferred to b x relied on its advisor to file an election under sec_754 however the advisor failed to make an election under sec_754 for year law sec_754 provides that a partnership may elect to adjust the basis of partnership property when there is a distribution_of_property or transfer of a partnership_interest an election under sec_754 applies with respect to all distributions of property by the partnership and to all transfers of property in the partnership during the taxable_year to which the election was filed and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership shall be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1 e including extensions thereof for filing the return for that taxable_year sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that a regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to plr-131838-15 the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based on the facts submitted and representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly x is granted an extension of time of days from the date of this letter to make an election under sec_754 effective for its year taxable_year the election should be made in a written_statement filed with the appropriate service_center for association with x’s year tax_return a copy of this letter should be attached to the statement filed except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely associate chief_counsel passthroughs and special industries by ____________________________ james a quinn senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc