t c memo united_states tax_court donald ertz petitioner v commissioner of internal revenue respondent docket no 20336-04l filed date jaret r coles and terri a merriam for petitioner gregory m hahn and thomas n tomashek for respondent memorandum findings_of_fact and opinion haines judge petitioner filed a petition with this court in response to a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination for through and pursuant to sec_6330 petitioner seeks review of respondent’s determination the issues for decision are whether respondent abused his discretion in sustaining the proposed collection action and whether petitioner is liable for the increased rate of interest on tax-motivated transactions under sec_6621 i r c findings_of_fact some of the facts have been stipulated and are so found the first second third fourth fifth and sixth stipulations of fact and the attached exhibits are incorporated herein by this reference unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure amounts are rounded to the nearest dollar before the tax_reform_act_of_1986 publaw_99_514 sec a 100_stat_2744 subsec c of sec_6621 was designated subsec d the additional interest applies only after date sec_6621 was repealed as of date by the omnibus budget reconciliation act of publaw_101_239 sec b 103_stat_2399 respondent reserved relevancy objections to many of the exhibits attached to the stipulations of fact fed r evid provides the general_rule that all relevant evidence is admissible while evidence which is not relevant is not admissible fed r evid defines relevant evidence as evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence while the relevance of some exhibits is certainly limited we find that the exhibits meet the threshold definition of relevant continued petitioner resided in lodi california when he filed his petition at the time of trial petitioner wa sec_65 years old he had been married for years and his wife mrs ertz wa sec_58 in petitioner became a partner in tbs durham genetic engineering ltd dge a partnership organized and operated by walter j hoyt iii hoyt from about through hoyt organized promoted and operated more than cattle breeding partnerships hoyt also organized promoted and operated sheep breeding partnerships from to his subsequent removal by the tax_court in through hoyt was the tax_matters_partner of each hoyt partnership from approximately through hoyt was a licensed enrolled_agent and as such he represented many of the hoyt partners before the internal_revenue_service irs in hoyt’s enrolled_agent status was revoked hoyt was convicted of various criminal charges in continued evidence and are admissible the court will give the exhibits only such consideration as is warranted by their pertinence to the court’s analysis of petitioner’s case respondent also objected to many of the exhibits on the basis of hearsay even if we were to receive those exhibits into evidence they would have no impact on our findings_of_fact or on the outcome of this case petitioner asks the court to take judicial_notice of certain facts in other hoyt-related cases and apply judicial estoppel to facts respondent has asserted in previous hoyt- related litigation we will do neither continued dge issued petitioner schedules k-1 partner’s share of income credits deductions etc for and the schedules k-1 reflected petitioner’s shares of dge 85-5’s losses and his cost bases in property eligible for investment_credit petitioner timely filed his and federal_income_tax returns reporting total partnership losses from dge of dollar_figure and dollar_figure respectively petitioner reported continued a judicially noticeable fact is one not subject_to reasonable dispute in that it is either generally known within the territorial jurisdiction of the trial_court or capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned fed r evid b petitioner is not asking the court to take judicial_notice of facts that are not subject_to reasonable dispute instead petitioner is asking the court to take judicial_notice of the truth of assertions made by taxpayers and the commissioner in other hoyt-related cases such assertions are not the proper subject of judicial_notice the doctrine_of judicial estoppel prevents a party from asserting in a legal proceeding a claim that is inconsistent with a position successfully taken by that party in a previous proceeding new 532_us_742 among the requirements for judicial estoppel to be invoked a party’s current litigating position must be clearly inconsistent with a prior litigating position id pincite petitioner has failed to identify any clear inconsistencies between respondent’s current position and his position in any previous litigation the schedules k-1 for and were issued jointly to petitioner and mrs ertz petitioner and mrs ertz jointly filed their federal_income_tax returns for all relevant years petitioner and mrs ertz also jointly filed the form_1045 application_for tentative refund however the notice_of_determination was addressed only to petitioner to avoid confusion we will address the schedules returns and forms as if they were issued only to petitioner overpayments of tax and received refunds of dollar_figure and dollar_figure respectively petitioner carried back unused investment credits derived from his investment in dge to and and received refunds of dollar_figure dollar_figure and dollar_figure respectively petitioner also carried forward unused investment credits to and of dollar_figure and dollar_figure respectively using those investment credits deductions related to dge and other deductions petitioner reported overpayments and received refunds of dollar_figure and dollar_figure on date respondent issued dge a notice of final_partnership_administrative_adjustment fpaa for its tax_year on date respondent issued dge an fpaa for its tax_year respondent disallowed all losses and cost bases in property eligible for investment_credit claimed by dge and asserted that additions to tax under sec_6653 and and and increased interest under sec_6621 applied to the individual partners hoyt as the tax_matters_partner for dge filed petitions with the tax_court in response to the fpaas dge 5’s cases were consolidated with other hoyt partnerships’ cases in separate docket numbers see shorthorn genetic engg the petition in response to the fpaa was filed at docket no and the petition in response to the fpaa was filed at docket no ltd v commissioner tcmemo_1996_515 the parties stipulated all issues except whether the partnership items were allocated to the partners in accordance with a settlement agreement dated date between hoyt and respondent’s sacramento california appeals_office id the court determined that respondent’s allocation method was appropriate and entered an order and decision in each docket number id each order and decision reflected the determination of various partnership items and stated in pertinent part that the additions to tax under sec_6653 sec_6653 sec_6659 and sec_6661 and the additional interest under sec_6621 formerly sec_6621 which were all mentioned in the notice of final_partnership_administrative_adjustment are affected items as defined in sec_6231 that require factual determinations to be made at the partner level and are not within the court’s jurisdiction in this case on date respondent sent petitioner a form 4549a- cg income_tax examination changes reflecting changes made for petitioner’s through tax years resulting from the orders and decisions entered pursuant to shorthorn genetic engg respondent determined deficiencies in petitioner’s income_tax of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively respondent did not assert any penalties or additions to tax but determined that petitioner was liable for additional interest on tax-motivated transactions under sec_6621 sec_6621 interest because no penalties or additions to tax were asserted and because respondent assessed the deficiencies in tax and the sec_6621 interest as a computational adjustment no notices of deficiency were issued on date respondent issued petitioner a final notice--notice of intent to levy and notice of your right to a hearing final notice in addition to petitioner’s outstanding tax_liabilities for through the final notice included an unpaid amount of dollar_figure from and interest of dollar_figure and dollar_figure for and respectively the final notice indicated that as of date petitioner owed dollar_figure inclusive of interest on date petitioner submitted a form request for a collection_due_process_hearing petitioner indicated that he would be pursuing an offer-in-compromise based alternatively on doubt as to collectibility with special circumstances or effective tax_administration petitioner also argued that because he had not had a previous opportunity to dispute the imposition of sec_6621 interest it was a proper subject for review in the sec_6330 hearing petitioner’s case was assigned to settlement officer linda cochran ms cochran ms cochran initially scheduled a telephone sec_6330 hearing on date petitioner’s representative terri a merriam ms merriam requested that details regarding petitioner’s and tax years are not in the record the hearing be delayed because of the number of hoyt-related cases her law firm was handling ms cochran did not change the date of the hearing but she extended petitioner’s deadline for producing information to be considered to date on date petitioner submitted to ms cochran a form_656 offer_in_compromise a form 433-a collection information statement for wage earners and self-employed individuals one letter explaining the offer amount and other payment considerations and three letters setting out in detail petitioner’s position regarding the offer-in-compromise petitioner’s letters included several exhibits the form_656 indicated that petitioner was seeking an offer- in-compromise based on either doubt as to collectibility with special circumstances or effective tax_administration petitioner offered to pay dollar_figure to compromise his outstanding tax_liabilities for through on date petitioner submitted an amendment of form seeking to include hi sec_2001 tax_year as part of the offer-in-compromise while the notice_of_determination covered petitioner’s tax_year it does not appear that he sought to include in his offer-in-compromise on the form 433-a petitioner listed the following assets asset current balance value loan balance checking accounts savings accounts fidelity k other stock cash on hand toyota runner toyota pickup yamaha house total dollar_figure big_number big_number big_number big_number de_minimis big_number big_number n a n a -0- -0- n a -0- -0- -0- dollar_figure big_number the reported value of the fidelity sec_401 plan account reflected only percent of its then-current value the reported value of the house reflected an 80-percent quick-sale value petitioner reported gross monthly income of dollar_figure representing petitioner’s and mrs ertz’s pension and social_security payments petitioner also reported the following monthly living_expenses expense item food clothing misc housing and utilities transportation health care taxes income and fica life_insurance other expenses total monthly expense dollar_figure big_number big_number the other expenses represented attorney’s fees petitioner paid to ms merriam’s law firm in connection with the present litigation in the letter explaining the offer amount petitioner stated that he was offering to pay dollar_figure for all hoyt related years to be paid in one lump sum payment this offer fully pays the estimated_tax liability but not interest petitioner indicated that he has suffered four strokes was forced to retire early must visit the doctor twice a month to have his blood pressure checked and must take several medications the letter also included a retirement analysis outlining an estimated dollar_figure needed for home repairs and the purchase of a new car and the likelihood of increased housing and medical costs on account of the aging of petitioner in the remaining three letters petitioner alleged that he was a victim of hoyt’s fraud asserted various arguments regarding the appropriateness of an offer-in-compromise and argued that he was not liable for sec_6621 interest on date petitioner submitted another letter to ms cochran which included exhibits not provided with the date letters on date respondent issued petitioner a notice_of_determination in evaluating petitioner’s offer-in- compromise respondent made the following changes to the values of assets petitioner reported on the form 433-a respondent determined that the value of the sec_401 plan account was dollar_figure instead of dollar_figure the 70-percent value petitioner reported and reduced the estimate of petitioner’s net realizable equity by dollar_figure to dollar_figure to reflect estimated_tax and penalties respondent determined that the house was worth dollar_figure instead of dollar_figure the 80-percent quick-sale value petitioner reported and reduced the value by the dollar_figure outstanding on the mortgage for net realizable equity of dollar_figure respondent determined that the toyota pickup had a quick-sale value of dollar_figure instead of de_minimis and respondent considered only the yamaha 225’s quick-sale value of dollar_figure instead of the fair_market_value of dollar_figure petitioner reported respondent concluded that petitioner had a total net realizable equity of dollar_figure respondent accepted the gross monthly income and expenses petitioner reported on the form 433-a but with one exception respondent reduced the housing and utilities expense to dollar_figure resulting in total monthly expenses of dollar_figure instead of dollar_figure because dollar_figure exceeded petitioner’s gross monthly income of dollar_figure respondent determined that petitioner did not have future disposable income that could fund an offer-in-compromise however respondent determined that petitioner’s mortgage would be paid off in years petitioner’s monthly mortgage payment was dollar_figure and because his current monthly expenses exceeded his income by dollar_figure respondent determined that petitioner would have dollar_figure a month to fund the offer-in-compromise after the mortgage was paid off respondent concluded that over the remaining collection_period there was an amount collectible from retired debt of dollar_figure regarding the possible future increase in expenses outlined in petitioner’s letters respondent determined that these were general projections from the taxpayers’ representative and may never in fact be incurred and thus did not take these into account respondent concluded that petitioner had the ability to pay dollar_figure dollar_figure dollar_figure because petitioner had the ability to pay substantially more than the dollar_figure offered respondent rejected petitioner’s offer-in-compromise based on doubt as to collectibility with special circumstances respondent also rejected petitioner’s effective tax_administration offer-in-compromise based on economic hardship because he had the ability to pay his tax_liability in full finally respondent rejected petitioner’s effective tax_administration offer-in-compromise based on public policy or equity grounds because the case fails to meet the criteria for such consideration regarding sec_6621 interest respondent determined that petitioner has not established why tax-motivated interest was improperly assessed respondent concluded that petitioner did not offer an acceptable collection alternative that all requirements of law and administrative procedure had been met and that respondent could proceed with the proposed collection action in response to the notice_of_determination petitioner filed his petition with this court on date i petitioner’s offer-in-compromise opinion sec_7122 provides that the secretary may compromise any civil case arising under the internal revenue laws whether to accept an offer-in-compromise is left to the secretary’s discretion 447_f3d_706 9th cir affg tcmemo_2004_13 sec_301_7122-1 proced admin regs the regulations under sec_7122 set forth three grounds for the compromise of a tax_liability doubt as to liability doubt as to collectibility or promotion of effective tax_administration sec_301_7122-1 proced admin regs doubt as to liability is not at issue in this case the secretary may compromise a tax_liability based on doubt as to collectibility where the taxpayer’s assets and income are less than the full amount of the assessed liability sec_301_7122-1 proced admin regs generally under the commissioner’s administrative pronouncements an offer-in- compromise based on doubt as to collectibility will be acceptable only if it reflects the taxpayer’s reasonable collection potential revproc_2003_71 sec_4 2003_2_cb_517 in some cases the commissioner will accept an offer-in- compromise of less than the reasonable collection potential if there are special circumstances id special circumstances are circumstances demonstrating that the taxpayer would suffer economic hardship if the irs were to collect from him an amount equal to the reasonable collection potential or circumstances justifying acceptance of an amount less than the while petitioner disputes his liability for sec_6621 interest he did not raise doubt as to liability as a grounds for compromise neither on his form_656 nor during the sec_6330 hearing reasonable collection potential due to public policy or equity considerations see internal_revenue_manual irm sec_5 however in accordance with the commissioner’s guidelines an offer-in-compromise based on doubt as to collectibility with special circumstances should not be accepted even when economic hardship or considerations of public policy or equity circumstances are identified if the taxpayer does not offer an acceptable amount see irm sec_5 and the secretary may also compromise a tax_liability on the ground of effective tax_administration when collection of the full liability will create economic hardship or exceptional circumstances exist such that collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner and compromise of the liability would not undermine compliance by taxpayers with the tax laws sec_301_7122-1 proced admin regs petitioner proposed an offer-in-compromise based alternatively on doubt as to collectibility with special circumstances or effective tax_administration offering to pay dollar_figure to compromise his outstanding tax_liabilities petitioner argued that collection of the full liability would create economic hardship and would undermine public confidence that the tax laws are being administered in a fair and equitable manner respondent determined that petitioner’s reasonable collection potential was dollar_figure and that petitioner’s offer-in- compromise did not meet the criteria for an offer-in-compromise based on either doubt as to collectibility with special circumstances or effective tax_administration insofar as the underlying tax_liability is not at issue our review under sec_6330 is for abuse of discretiondollar_figure see 114_tc_604 goza v commissioner t c this standard does not ask us to decide whether in our own opinion petitioner’s offer-in- compromise should have been accepted but whether respondent’s rejection of the offer-in-compromise was arbitrary capricious or without sound basis in fact or law 112_tc_19 keller v commissioner tcmemo_2006_ fowler v commissioner tcmemo_2004_163 because the same factors are taken into account in evaluating offers-in- compromise based on doubt as to collectibility with special circumstances and on effective tax_administration economic hardship or public policy and equity we consider petitioner’s separate grounds for his offer-in-compromise together see with the exception of his liability for sec_6621 interest petitioner does not argue that his underlying tax_liability is at issue the sec_6621 interest issue is discussed infra 125_tc_301 ndollar_figure affd 469_f3d_27 1st cir barnes v commissioner tcmemo_2006_150 a economic hardship petitioner asserts that ms cochran abused her discretion by rejecting his offer-in-compromise because there is no indication that so cochran gave any substantive consideration to petitioner’s demonstrated special circumstances or that he would experience a hardship if required to make a full-payment in support of this assertion petitioner argues ms cochran failed to discuss petitioner’s special circumstances in the notice_of_determination ms cochran failed to consider that petitioner’s expenses are currently greater than his income and that those expenses will likely increase and ms cochran improperly valued petitioner’s house sec_301_6343-1 proced admin regs states that economic hardship occurs when a taxpayer is unable to pay his or her reasonable basic living_expenses sec_301 c proced admin regs sets forth factors to consider in evaluating whether collection of a tax_liability would cause economic hardship as well as some examples one of the examples involves a taxpayer who provides full-time care to a dependent_child with a serious long-term illness a second example involves a taxpayer who would lack adequate means to pay his basic living_expenses were his only asset to be liquidated a third example involves a disabled taxpayer who has a fixed income and a modest home specially equipped to accommodate his disability and who is unable to borrow against his home because of his disability see sec_301_7122-1 examples and proced admin regs none of these examples bears any resemblance to this case but instead they describe more dire circumstances 454_f3d_782 8th cir affg 124_tc_165 see also barnes v commissioner supra nevertheless we will address petitioner’s arguments discussion of special circumstances in the notice_of_determination petitioner argues that ms cochran failed to follow proper procedure by not discussing petitioner’s special circumstances what equity was considered in relation to his special circumstances and how the special circumstances affected her determination of his ability to pay petitioner infers that because the special circumstances were not discussed in detail in the notice_of_determination ms cochran failed to adequately take petitioner’s circumstances into consideration we do not believe that appeals must specifically list in the notice_of_determination every single fact that it considered in arriving at the determination see barnes v commissioner supra this is especially true in a case such as this where petitioner provided ms cochran with multiple letters and hundreds of pages of exhibits as discussed below ms cochran considered all of the arguments and information presented to her given the amount of information it would be unreasonable to put the burden on ms cochran to specifically address in the notice_of_determination every single asserted fact circumstance and argument presented the fact that all of the information was not specifically addressed in the notice_of_determination does not indicate an abuse_of_discretion petitioner’s income and future expenses petitioner argues that ms cochran failed to adequately consider his and mrs ertz’s age health and retirement status the likelihood of future increases in medical and housing costs and the need to retain retirement assets to cover the difference between income and expenses petitioner’s argument is not supported by the record on his form 433-a petitioner reported monthly medical_expenses of dollar_figure ms cochran accepted that amount without reservation ms cochran also determined that petitioner and mrs ertz were unable to obtain employment because of their age and medical_condition in determining whether petitioner could fund the offer-in-compromise with future income ms cochran used only the monthly pension income reported on the form 433-a ms cochran determined that petitioner’s monthly expenses exceeded his income and therefore concluded that petitioner could not fund the offer-in-compromise with future income until the mortgage on his home was paid offdollar_figure given her acceptance of the medical_expenses as reported and her conclusion that petitioner would not have future income to fund the offer-in-compromise until the mortgage on his home was paid off we reject petitioner’s assertion that ms cochran failed to consider petitioner’s and mrs ertz’s age health retirement status and current medical costs petitioner’s argument is also unavailing with regard to the likelihood of future increases in medical and housing costs petitioner did not inform ms cochran with any specificity that he would have to pay a greater amount of unreimbursed medical_expenses in the future or that his housing_expenses would increase instead he made general assertions about the increase of medical costs as people age and about the need for some seniors to seek in-home care or nursing home care or to make their house handicapped accessible as reflected in the notice_of_determination ms cochran took into consideration the information petitioner presented but while ms cochran determined that petitioner could not otherwise fund the offer-in-compromise with future income she determined that there was an amount collectible from retired debt because petitioner’s mortgage would be paid off within years ms cochran determined that the amount of the monthly mortgage payment less the deficit between income and expenses could then be applied to petitioner’s outstanding tax_liability concluded that these possible future expenses are general projections from the taxpayers’ representative and may never in fact be incurred the present offer therefore must be considered within the framework of present facts given the information presented to her it was not arbitrary or capricious for ms cochran to ignore these speculative future costs in making her final_determination petitioner also asserts that ms cochran abused her discretion by using the value of petitioner’s sec_401 plan account in her calculation of his reasonable collection potential petitioner argues that he must retain the sec_401 plan account to pay future increases in expenses because his income is insufficient to cover even his current expenses as discussed above petitioner’s assertions regarding future expenses are speculative and unsupported and it was not arbitrary or capricious for ms cochran to ignore such costs however even assuming arguendo that petitioner’s expenses will increase we would not find that ms cochran abused her discretion by factoring in petitioner’s sec_401 plan account to determine his reasonable collection potential while it is uncontested that petitioner’s expenses currently exceed his income petitioner ignores the fact that some of the expenses allowed by ms cochran are only temporary ms cochran determined that petitioner’s mortgage would be paid off within years a fact petitioner does not dispute after the mortgage is paid off petitioner’s monthly expenses will decrease by dollar_figure additionally ms cochran allowed petitioner’s other expenses of dollar_figure per month which represented payments petitioner made to ms merriam’s law firm relating to the present litigation there is no indication that this expense will continue once the present litigation has been concluded once these costs cease petitioner will have an additional dollar_figure per month to pay any increased expenses value of petitioner’s house petitioner argues that ms cochran improperly valued his house petitioner also argues that ms cochran failed to take into consideration the need for repairs petitioner’s arguments are not persuasive on his form 433-a petitioner reported that the estimated fair_market_value of his house was dollar_figure with an 80-percent quick-sale value of dollar_figure petitioner’s estimate was based on sales of nearby homes in one of the date letters petitioner listed a variety of problems with the house petitioner did not provide any supporting documentation regarding the need for repairs but instead invited ms cochran to view the house in person other than a broad statement that he needed dollar_figure to pay necessary expenses which also included the purchase of a new car petitioner did not provide estimated costs of the repairs because petitioner did not provide supporting documentation regarding the condition or the value of the house ms cochran did not accept petitioner’s reported value instead she determined a value of dollar_figure on the basis of recent sales of comparable houses petitioner takes exception to ms cochran’s use of sales of comparable houses and asserts that she should have hired a professional valuation expert while an expert might have provided the most reliable opinion of value we do not believe that ms cochran’s failure to seek such an opinion was an abuse_of_discretion notably it appears that petitioner’s estimated value was based on his representative’s comparison of the house with similar houses recently sold and not on an expert’s opinion it was not arbitrary or capricious for ms cochran to value the house in the same manner petitioner believes that despite the lack of supporting documentation ms cochran abused her discretion by not factoring in the cost of repairs petitioner asserts that if ms cochran questioned petitioner’s representations she could have requested more information or accepted petitioner’s invitation to view the house in person given the voluminous information provided to ms cochran we do not believe that she was under an obligation to request more information or to view the house in person the burden was on petitioner to establish that he was entitled to an offer-in-compromise petitioner cannot shift this burden by simply inviting ms cochran to request more information or to view the house in person additionally even assuming arguendo that petitioner’s house valuation should have been accepted we would not find that ms cochran abused her discretion in rejecting petitioner’s offer-in- compromise based on economic hardship on his form 433-a petitioner reported assets with a total value of dollar_figure however petitioner offered to pay only dollar_figure to compromise his outstanding tax_liabilities respondent may accept an offer- in-compromise based on doubt as to collectibility with special circumstances or on effective tax_administration even if the offer is less than petitioner’s reasonable collection potential however given all other considerations discussed herein we do not believe that ms cochran abused her discretion by rejecting an offer-in-compromise that bore no relationship to petitioner’s ability to pay encouraging voluntary compliance with the tax laws we are also mindful that any decision by ms cochran to accept petitioner’s offer-in-compromise based on doubt as to collectibility with special circumstances or effective tax_administration based on economic hardship must be viewed against the backdrop of sec_301_7122-1 proced admin regsdollar_figure see barnes v commissioner tcmemo_2006_150 that section requires that ms cochran deny petitioner’s offer-in- compromise if its acceptance would undermine voluntary compliance with tax laws by taxpayers in general thus even if we were to assume arguendo that petitioner would suffer economic hardship a finding that we decline to make we would not find that ms cochran’s rejection of petitioner’s offer-in-compromise was an abuse_of_discretion as discussed below in our discussion of petitioner’s equitable facts argument we conclude that acceptance of petitioner’s offer-in-compromise would undermine voluntary compliance with tax laws by taxpayers in general b public policy and equity considerations petitioner asserts that there are so many unique and equitable facts in this case that this case is an exceptional circumstance and respondent abused his discretion by not accepting those facts as grounds for an offer-in-compromise in support of his assertion petitioner argues the longstanding nature of this case justifies acceptance of the offer-in-compromise respondent’s reliance on an example in the prospect that acceptance of an offer-in-compromise will undermine compliance with the tax laws militates against its acceptance whether the offer-in-compromise is predicated on promotion of effective tax_administration or on doubt as to collectibility with special circumstances see revproc_2003_71 2003_2_cb_517 irm sec_5 see also barnes v commissioner tcmemo_2006_150 the irm was improper and respondent failed to consider petitioner’s other equitable facts longstanding case petitioner asserts that the legislative_history requires respondent to resolve longstanding cases by forgiving penalties and interest which would otherwise apply petitioner argues that because this is a longstanding case respondent abused his discretion by failing to accept his offer-in-compromise petitioner’s argument is essentially the same one considered and rejected by the court_of_appeals for the ninth circuit in fargo v commissioner f 3d pincite see also keller v commissioner tcmemo_2006_166 barnes v commissioner supra we reject petitioner’s argument for the same reasons stated by the court_of_appeals we add that petitioner’s counsel participated in the appeal in fargo as counsel for the amici on brief petitioner suggests that the court_of_appeals knowingly wrote its opinion in fargo in such a way as to distinguish that case from the cases of counsel’s similarly situated clients eg petitioner and to otherwise allow those clients’ liabilities for penalties and interest to be forgiven we do not read the opinion of the court_of_appeals in fargo to support that conclusion see keller v commissioner supra barnes v commissioner supra respondent’s rejection of petitioner’s longstanding case argument was not arbitrary or capricious the irm example petitioner argues that respondent erred when he determined that petitioner was not entitled to relief based on the second example in irm sec_5 petitioner asserts that many of the facts in this case were not present in the example and therefore any reliance on the example was misplaced petitioner’s argument is not persuasive irm sec_5 discusses effective tax_administration offers-in-compromise based on equity and public policy grounds and states in the second example in the taxpayer invested in a nationally marketed partnership which promised the taxpayer tax benefits far exceeding the amount of the investment immediately upon investing the taxpayer claimed investment tax_credits that significantly reduced or eliminated the tax_liabilities for the years through in the irs opened an audit of the partnership under the provisions of the tax equity and fiscal responsibility act of tefra after issuance of the final_partnership_administrative_adjustment fpaa but prior to any proceedings in tax_court the irs made a global_settlement offer in which it offered to concede a substantial portion of the interest and penalties that could be expected to be assessed if the irs’s determinations were upheld by the court the taxpayer rejected the settlement offer after several years of litigation the partnership level proceeding eventually ended in tax_court decisions upholding the vast majority of the deficiencies asserted in the fpaa on the grounds that the partnership’s activities lacked economic_substance the taxpayer has now offered to compromise all the penalties and interest on terms more favorable than those contained in the prior settlement offer arguing that tefra is unfair and that the liabilities accrued in large part due to the actions of the tax_matters_partner tmp during the audit and litigation neither the operation of the tefra rules nor the tmp’s actions on behalf of the taxpayer provide grounds to compromise under the equity provision of paragraph b i b of this section compromise on those grounds would undermine the purpose of both the penalty and interest provisions at issue and the consistent settlement principles of tefra administration internal_revenue_manual cch sec_5 at big_number ms cochran determined that petitioner’s case is similar to the example some of the most obvious similarities--the year pretty old and that seems to match or correlate to the taxpayer’s circumstances that this was a tefra proceeding that an fpaa was issued they rejected a settlement offer that had been previous-- that the irs had previously made the taxpayers entered litigation for a number of years and--and that there were actions of the tmp that the taxpayer was raising issues of tax-motivated--tmp’s actions as one of his arguments we agree with respondent that the example presents similar circumstances to those in petitioner’s case ms cochran’s testimony accurately reflects those similarities petitioner is correct in asserting that not all the facts in his case are present in the example however it is unreasonable to expect that facts in an example be identical to facts of a particular case before the example can be relied upon the irm example was only one of many factors respondent considered given the similarities to petitioner’s case respondent’s reliance on that example was not arbitrary or capricious petitioner’s other equitable facts petitioner argues that respondent abused his discretion by failing to consider the other equitable facts of this case petitioner’s equitable facts include reference to petitioner’s reliance on bales v commissioner tcmemo_1989_ petitioner’s reliance on hoyt’s enrolled_agent status hoyt’s criminal conviction hoyt’s fraud on petitioner and other letters and cases the basic thrust of petitioner’s argument is that he was defrauded by hoyt and that if he were held responsible for penalties and interest incurred as a result of his investment in a tax_shelter it would be inequitable and against public policy petitioner’s argument is not persuasive while the regulations do not set forth a specific standard for evaluating an offer-in-compromise based on claims of public policy or equity the regulations contain two examples see sec bales v commissioner tcmemo_1989_568 involved deficiencies determined against various investors in several hoyt partnerships this court found in favor of the investors on several issues stating that the transaction in issue should be respected for federal_income_tax purposes taxpayers in many hoyt-related cases have used bales as the basis for a reasonable_cause defense to accuracy-related_penalties this argument has been uniformly rejected by this court and by the courts of appeals for the sixth and tenth circuits see eg 440_f3d_375 6th cir affg tcmemo_2004_279 439_f3d_1243 10th cir affg tcmemo_2004_275 sanders v commissioner tcmemo_2005_163 hansen v commissioner tcmemo_2004_269 c iv 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 unlike the exceptional circumstances exemplified in the regulations petitioner’s situation is neither unique nor exceptional in that his situation mirrors those of numerous other taxpayers who claimed tax_shelter deductions in the 1980s and 1990s see keller v commissioner tcmemo_2006_166 barnes v commissioner tcmemo_2006_150 of course the examples in the regulations are not meant to be exhaustive and petitioner has a more sympathetic case than the taxpayers in fargo v commissioner f 3d pincite for whom the court_of_appeals for the ninth circuit noted that no evidence was presented to suggest that taxpayers were the subject of fraud or deception such considerations however have not kept this court from finding investors in the hoyt tax_shelters to be liable for penalties and interest nor have they prevented the courts of appeals for the sixth and tenth circuits from affirming our decisions to that effect see 440_f3d_375 6th cir affg tcmemo_2004_279 439_f3d_1243 10th cir affg tcmemo_2004_275 ms cochran testified that she considered all of ms merriam’s and petitioner’s assertions including the numerous letters and exhibits nevertheless ms cochran determined that petitioner did not qualify for an offer-in-compromise the mere fact that petitioner’s equitable facts did not persuade respondent to accept petitioner’s offer-in-compromise does not mean that those assertions were not considered the notice_of_determination and ms cochran’s testimony demonstrate respondent’s clear understanding and careful consideration of the facts and circumstances of petitioner’s case we find that respondent’s determination that the equitable facts did not justify acceptance of petitioner’s offer-in-compromise was not arbitrary or capricious and thus it was not an abuse_of_discretion we also find that compromising petitioner’s case on grounds of public policy or equity would not enhance voluntary compliance by other taxpayers a compromise on that basis would place the government in the unenviable role of an insurer against poor business decisions by taxpayers reducing the incentive for taxpayers to investigate thoroughly the consequences of transactions into which they enter it would be particularly inappropriate for the government to play that role here where the transaction at issue is participation in a tax_shelter reducing the risks of participating in tax_shelters would encourage more taxpayers to run those risks thus undermining rather than enhancing compliance with the tax laws see barnes v commissioner supra c petitioner’s other arguments compromise of penalties and interest in an effective tax_administration offer-in-compromise petitioner advances a number of arguments focusing on his assertion that respondent determined that penalties and interest could not be compromised in an effective tax_administration offer-in-compromise petitioner argues that such a determination is contrary to legislative_history and is therefore an abuse_of_discretion these arguments are not persuasive the regulations under sec_7122 provide that if the secretary determines that there are grounds for compromise under this section the secretary may at the secretary’s discretion compromise any civil liability arising under the internal revenue laws sec_301_7122-1 proced admin regs in other words the secretary may compromise a taxpayer’s tax_liability if he determines that grounds for a compromise exist if the secretary determines that grounds do not exist the amount offered or the way in which the offer is calculated need not be considered petitioner’s arguments regarding the compromise of penalties and interest do not relate to whether there are grounds for a compromise instead these arguments go to whether the amount petitioner offered to compromise his tax_liability was acceptable as addressed above respondent’s determination that the facts and circumstances of petitioner’s case did not warrant acceptance of his offer-in-compromise was not arbitrary or capricious and was thus not an abuse_of_discretion because no grounds for compromise exist we need not address whether respondent can or should compromise penalties and interest in an effective tax_administration offer-in-compromise see keller v commissioner supra information sufficient for the court to review respondent’s determination petitioner argues that respondent failed to provide the court with sufficient information so that this court can conduct a thorough probing and in-depth review of respondent’s determinations petitioner’s argument is without merit generally a taxpayer bears the burden of proving the commissioner’s determinations incorrect rule a 290_us_111 dollar_figure the burden was on while sec_7491 shifts the burden_of_proof and or the burden of production to the commissioner in certain circumstances this section is not applicable in this case because respondent’s examination of petitioner’s returns did not commence after date see internal_revenue_service continued petitioner to show that respondent abused his discretion the burden was not on respondent to provide enough information to show that he did not abuse his discretion nevertheless we find that we had more than sufficient information to review respondent’s determination scheduling of the sec_6330 hearing and deadline for submission of documents petitioner argues that ms cochran abused her discretion by not allowing his counsel additional time to prepare for the sec_6330 hearing and to submit additional documentation once the sec_6330 hearing was scheduled ms cochran refused petitioner’s request to delay the hearing however ms cochran did extend the deadline for submission of documents while petitioner wanted to delay the sec_6330 hearing he does not allege that he was unable to adequately prepare for the hearing additionally petitioner has not identified any documents or other information that he believes ms cochran should have considered but that he was unable to produce because of the deadline for submission given the thoroughness and the amount of information submitted it is unclear why petitioner needed additional time we do not believe that ms cochran continued restructuring and reform act of publaw_105_206 sec c 112_stat_727 abused her discretion by establishing a timeframe for the sec_6330 hearing and the submission of documents efficient collection versus intrusiveness petitioner argues that respondent failed to balance the need for efficient collection_of_taxes with the legitimate concern that the collection action be no more intrusive than necessary see sec_6330 petitioner’s argument is not supported by the record petitioner has an outstanding tax_liability in his sec_6330 hearing petitioner proposed only an offer-in-compromise because no other collection alternatives were proposed there were no less intrusive means for respondent to consider we find that respondent balanced the need for efficient collection_of_taxes with petitioner’s legitimate concern that collection be no more intrusive than necessary ii interest on tax-motivated transactions sec_6621 applies an increased rate of interest on substantial underpayments of tax resulting from tax-motivated transactions for purposes of sec_6621 a substantial_underpayment attributable to tax_motivated_transactions means any underpayment_of_tax attributable to one or more tax-motivated transactions if the amount of the underpayment exceeds dollar_figure sec_6621 tax-motivated transactions include any valuation overstatements within the meaning of former sec_6659 or any sham or fraudulent transaction sec_6621 v in the fpaas issued to dge for and respondent asserted that the individual partners might be liable for sec_6621 interest as reflected in the orders and decisions in shorthorn genetic engg ltd v commissioner tcmemo_1996_515 the tax_court determined that it lacked jurisdiction over sec_6621 interest at the partnership level because such interest was not a partnership_item but an affected_item the difference between partnership items and affected items and the impact this distinction has on our jurisdiction are discussed below respondent issued petitioner a form 4549a-cg in which respondent determined that petitioner was liable for sec_6621 interest respondent did not issue a notice_of_deficiency because he treated the interest as a computational matter petitioner has not previously had the opportunity to dispute his liability for sec_6621 interest therefore we have jurisdiction under sec_6330 to review petitioner’s underlying tax_liability as it relates to sec_6621 interest see also sec_6330 we review the sec_6621 interest issue de novo see 114_tc_604 114_tc_176 however 401_f3d_1136 9th cir affg in part and revg in part tcmemo_2003_150 indicates that our jurisdiction to determine petitioner’s liability for sec_6621 interest in this partner-level proceeding may be limited a tax_court jurisdiction generally the tax_court is a court of limited jurisdiction and we may exercise our jurisdiction only to the extent authorized by congress sec_7442 114_tc_171 85_tc_527 although neither party has contested our jurisdiction jurisdiction may not be conferred upon the court by agreement of the parties see 125_tc_108 115_tc_287 naftel v commissioner supra pincite whether the court has jurisdiction to decide an issue is a matter that this court or a court_of_appeals may decide at any time clark v commissioner supra pincite 119_tc_191 b partnership items versus affected items and the court’s jurisdiction to determine the character of a partnership’s transactions congress enacted the partnership audit and litigation procedures to provide a method to uniformly adjust items of partnership income loss deduction or credit that would affect each partner see tax equity and fiscal responsibility act of publaw_97_248 96_stat_648 the statute makes a distinction between partnership items and nonpartnership_items or affected items the tax treatment of partnership items may be determined only in a partnership-level proceeding while the tax treatment of affected items may only be determined in a partner-level proceeding see sec_6221 97_tc_575 87_tc_1279 87_tc_783 this court has previously held that sec_6621 interest is an affected_item which may require findings_of_fact peculiar to a particular partner and as such cannot be determined in a partnership-level proceedingdollar_figure see eg affiliated equip leasing ii v commissioner supra pincite- n c f energy partners v commissio89_tc_741 in river city ranches ltd v commissioner tcmemo_2003_150 a partnership-level proceeding involving hoyt sheep breeding partnerships the taxpayers argued that the tax_court has jurisdiction over sec_6621 interest at the partnership the taxpayer_relief_act_of_1997 tra publaw_105_ sec_1238 111_stat_1026 amended sec_6226 and expanded this court’s jurisdiction in partnership-level proceedings to include the applicability of any penalty addition_to_tax or additional_amount related to the adjustment of a partnership_item this amendment to sec_6226 is effective only for partnership taxable years ending after date and does not apply to the years at issue in the instant case tra sec_1238 111_stat_1027 level citing affiliated equip leasing ii and n c f energy partners the tax_court concluded that it lacked jurisdiction to decide the applicability of sec_6621 interest in a partnership-level proceedingdollar_figure on appeal the court_of_appeals for the ninth circuit reversed the tax_court on the sec_6621 interest issue river city ranches ltd v commissioner f 3d pincite- the court_of_appeals stated a partnership’s tax items which determine the partners’ taxes are litigated in partnership proceedings--not in the individual partners’ cases sec_6221 the nature of the partnerships’ transactions ie whether or not the transactions were tax_motivated_transactions is a partnership_item as a partnership_item the character of the partnerships’ transactions is within the tax court’s scope of review the tax_court erred in holding that it had no jurisdiction to make findings concerning the character of the partnerships’ transactions for purposes of the sec_6621 penalty-interest provisions accordingly we remand for the court to make such findings emphasis added petitioner resided in lodi california when he filed his petition and absent stipulation to the contrary appeal of this case would be to the court_of_appeals for the ninth circuit like the instant case river city ranches ltd v commissioner tcmemo_2003_150 affd in part and revd in part 401_f3d_1136 9th cir involved tax years ending on or before date thus the expanded jurisdiction under tra did not apply see supra note see also tra sec_1238 because the court_of_appeals for the ninth circuit has held that for purposes of the sec_6621 penalty interest provisions the character of a partnership’s transactions is a partnership_item we will treat the character of dge 85-5’s transactions as if it were a partnership_item for purposes of determining our jurisdiction in this case see id 54_tc_742 affd 445_f2d_985 10th cir both parties argue that in the light of 401_f3d_1136 9th cir sec_6621 interest has both a partnership_item component to be determined at the partnership level and affected_item components to be determined at the partner level the partnership_item component is the character of the partnership’s transactions ie whether the transactions were tax motivated see id pincite4 the affected_item components are what amount of the partner’s underpayment_of_tax is attributable to the partnership’s tax-motivated transactions and whether that underpayment is substantial see sec_6621 the determination that dge 85-5’s transactions were tax motivated is a prerequisite to determining petitioner’s liability for sec_6621 interest essentially the parties ask us to use the findings or lack of findings of the tax_court in shorthorn genetic engg ltd v commissioner tcmemo_1996_515 to determine whether dge 85-5’s transactions were tax motivated in the orders and decisions entered pursuant to shorthorn genetic engg the court explicitly stated that it was not considering the sec_6621 interest issue the opinion and the orders and decisions cannot fairly be interpreted as making findings or determinations regarding whether dge 85-5’s transactions were tax motivateddollar_figure as this case is appealable to the ninth circuit we defer to the ninth circuit’s determination that for purposes of sec_6621 the character of a partnership’s transactions is a partnership_item to be determined at the partnership level see river city ranches ltd v commissioner f 3d pincite4 see also golsen v commissioner supra pincite because this is a partner-level case we do not have jurisdiction to determine dge 85-5’s partnership items including whether its transactions were tax motivated see sec_6221 sparks v commissioner supra pincite maxwell v commissioner supra pincite therefore we cannot determine whether petitioner had substantial underpayments of tax resulting from tax-motivated transactions and shall dismiss for lack of jurisdiction petitioner’s claim regarding sec_6621 interest neither party appealed the tax court’s decision in shorthorn genetic engg ltd v commissioner tcmemo_1996_515 and that decision is now final iii conclusion petitioner has not shown that respondent’s determination was arbitrary or capricious or without sound basis in fact or law for all of the above reasons we hold that respondent’s determination was not an abuse_of_discretion and respondent may proceed with the proposed collection action further we hold that we do not have jurisdiction at the partner level to determine whether a partnership’s transactions were tax-motivated transactions in reaching our holdings herein we have considered all arguments made and to the extent not mentioned above we find them to be moot irrelevant or without merit to reflect the foregoing an appropriate order and decision will be entered


t c memo united_states tax_court kelvin l ellis sr petitioner v commissioner of internal revenue respondent docket no filed date kelvin l ellis sr pro_se stephen a haller for respondent memorandum opinion ruwe judge this matter is before the court on respondent’s motion for summary_judgment pursuant to rule petitioner has not responded to 1unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code in effect for the years in issue respondent’s motion despite an order from this court instructing him to do so respondent determined deficiencies additions to tax and penalties with respect to petitioner as follows additions to tax penalty year deficiency sec_6651 sec_6651 sec_6651 sec_6654 sec_6663 dollar_figure - dollar_figure dollar_figure dollar_figure - big_number dollar_figure - - big_number - dollar_figure dollar_figure dollar_figure - big_number dollar_figure - - - dollar_figure big_number - dollar_figure dollar_figure - - - dollar_figure 1the amount of any addition_to_tax pursuant to sec_6651 shall be determined pursuant to sec_6651 b and c the issues for decision are whether petitioner had unreported income for the taxable years and years at issue and whether petitioner is liable for additions to tax under sec_6651 for and sec_6651 and f for and section for and for penalties under sec_6663 for and procedural history on date respondent issued to petitioner a notice_of_deficiency for the years at issue petitioner timely filed a petition disputing the determinations in 2respondent concedes that petitioner is not liable for the addition_to_tax under sec_6654 for the tax_year the notice_of_deficiency on date respondent filed an answer that included detailed affirmative allegations on date respondent filed a motion for entry of an order that the affirmative allegations in the answer be deemed admitted pursuant to rule c by order dated date we directed petitioner to file a reply on or before date as required by rule on date the court received a motion from petitioner requesting an extension of time to file a reply by order dated date the court granted petitioner’s motion in that we extended the time for petitioner to file a reply to date in our order we stated that if petitioner did not file a reply as directed we would grant respondent’s motion petitioner failed to file a reply to respondent’s motion and respondent’s motion was granted on date on date respondent filed a motion for summary_judgment pursuant to rule by order dated date petitioner was directed to file a response to respondent’s motion for summary_judgment on or before date no 3rule c states where a reply is not filed the affirmative allegations in the answer will be deemed denied unless the commissioner within days after expiration of the time for filing the reply files a motion that specified allegations in the answer be deemed admitted response was filed by petitioner based on the procedural history all of the affirmative allegations in the answer are deemed admitted pursuant to rule c background at the time the petition was filed petitioner was incarcerated in north carolina petitioner was employed by the city of east st louis illinois from to petitioner also worked as an independent consultant from through petitioner failed to file a federal_income_tax return for the taxable_year petitioner did not timely file hi sec_2001 federal_income_tax return or request an extension of time to file his return on date respondent received petitioner’ sec_2001 federal_income_tax return petitioner failed to file a federal_income_tax return for the taxable_year petitioner did not timely file his federal_income_tax return or request an extension of time to file his return on date respondent received petitioner’s federal_income_tax return petitioner failed to file a federal_income_tax return for the taxable_year the internal_revenue_service conducted an examination with respect to petitioner for the years at issue petitioner failed to submit for examination complete and adequate books and accounts of his consulting business for the years at issue petitioner failed to report income earned from his work as an independent consultant on his federal_income_tax returns as follows year income from consulting work dollar_figure big_number big_number big_number big_number additionally petitioner failed to report dollar_figure of interest_income for for the taxable_year petitioner also failed to report dollar_figure of wage income from his employer and a dollar_figure settlement he received in a civil suit against the city of east st louis illinois for the taxable_year petitioner also failed to report dollar_figure of gross_proceeds from the sale of stock in for the taxable_year petitioner also failed to report dollar_figure of wage income from his employer as a result of petitioner’s underreporting of income and failure_to_file returns petitioner underpaid his tax by dollar_figure for dollar_figure for dollar_figure for dollar_figure for and dollar_figure for petitioner’s underpayments for the years at issue were due to fraud and his failure_to_file returns for and was fraudulent respondent prepared substitutes for returns sfrs for and pursuant to sec_6020 petitioner used third-party checks and money orders to pay his personal expenses in an effort to conceal his income additionally petitioner dealt in large amounts of cash in order to avoid the use of the banking system and the paper trails that would follow such use petitioner was convicted of criminal_tax_evasion under sec_7201 pursuant to a plea agreement in the u s district_court for the southern district of illinois in which he agreed to plead guilty to one count of tax_evasion under sec_7201 for the tax_year as part of the agreement petitioner signed a stipulation of facts in which he admitted that he knew that moneys and funds he received from his employment with the city of east st louis from his other employment and consulting work and from other sources were reportable as taxable_income petitioner also admitted that for the tax years and he knowingly and willfully failed to report all of his income to the internal_revenue_service in order to evade united_states tax filing_requirements discussion summary_judgment is intended to expedite litigation and to avoid unnecessary and expensive trials 61_tc_861 summary_judgment may be granted where the pleadings and other materials show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law rule b 98_tc_518 aff’d 17_f3d_965 7th cir the burden is on the moving party to demonstrate that no genuine dispute as to any material fact exists and that he is entitled to judgment as a matter of law 116_tc_73 in all cases the evidence is viewed in the light most favorable to the nonmoving party 100_tc_32 however the nonmoving party is required to go beyond the pleadings and by his own affidavits or by the ‘depositions answers to interrogatories and admissions on file ’ designate ‘specific facts showing that there is a genuine issue for trial ’ 477_us_317 see also 119_tc_157 115_tc_554 petitioner failed to respond to respondent’s motion and has failed to indicate that there is a genuine dispute for trial also as previously stated the facts on which respondent’s motion for summary_judgment is based are deemed admitted consequently we conclude that there is no dispute as to any material fact and that a decision may be rendered as a matter of law issue petitioner’s unreported income petitioner received the income that respondent determined he failed to report on his federal_income_tax returns for the years at issue therefore we will grant respondent’s motion for summary_judgment with respect to the deficiencies in petitioner’s federal_income_tax for the years at issue issue additions to tax and penalties respondent determined that petitioner is liable for additions to tax pursuant to sec_6651 for tax_year sec_2001 and sec_6651 for tax years and and sec_6654 for tax_year respondent has the burden of production with respect to these additions to tax see sec_7491 to meet this burden respondent must produce evidence showing that the additions to tax are appropriate see id higbee v 4by failing to respond to the assertions in respondent’s motion for summary_judgment petitioner waived his right to contest them see rule d 117_tc_183 akonji v commissioner tcmemo_2012_56 tax ct memo lexi sec_49 at commissioner 116_tc_438 once respondent satisfies this burden petitioner has the burden_of_proof with respect to exculpatory factors such as reasonable_cause see higbee v commissioner t c pincite sec_6651 sec_6651 imposes an addition_to_tax when a taxpayer fails to file a timely return unless the taxpayer establishes that the failure was due to reasonable_cause and not willful neglect the addition_to_tax is equal to of the amount_required_to_be_shown_as_tax on the delinquent_return for each month or fraction thereof during which the return remains delinquent up to a maximum addition of for returns more than four months delinquent id petitioner did not timely file federal_income_tax returns for and thus we find that respondent has met his burden of production petitioner has not provided any evidence indicating that his failure_to_file returns was due to reasonable_cause accordingly we hold that petitioner is liable for the additions to tax under sec_6651 and sustain respondent’s determinations as set forth in the notice_of_deficiency sec_6651 sec_6651 imposes an addition_to_tax for failure to timely pay the amount of tax shown on a return unless the taxpayer establishes that the failure was due to reasonable_cause and not willful neglect the addition is calculated as of the amount shown as tax on the return but not paid with an additional for each month or fraction thereof during which the failure to pay continues up to a maximum of id under sec_6020 when a taxpayer fails to file a return required_by_law the commissioner acting for the secretary_of_the_treasury may make a return from such information as he can obtain under sec_6651 any return so made is treated as the taxpayer’s return for purposes of determining the amount of the addition under sec_6651 petitioner failed to file federal_income_tax returns for and pursuant to sec_6651 the sfrs respondent made are treated as petitioner’s tax returns petitioner failed to pay the amounts of tax shown on the sfrs for and therefore respondent has met his burden of production petitioner has not provided any evidence indicating that his failure to pay was due to reasonable_cause accordingly we hold that petitioner is liable for the additions to tax under sec_6651 and sustain respondent’s determinations as set forth in the notice_of_deficiency 5the amount of the addition_to_tax under sec_6651 reduces the amount of the addition_to_tax under sec_6651 for any month for which an addition_to_tax applies under both paragraphs sec_6651 sec_6654 sec_6654 imposes an addition_to_tax when a taxpayer fails to pay a required_installment of estimated income_tax each required_installment is equal to of the required_annual_payment sec_6654 the required_annual_payment is equal to the lesser_of of the tax_shown_on_the_return for the taxable_year or if no return is filed of the tax for that year or of the tax_shown_on_the_return if any for the preceding_taxable_year sec_6654 petitioner did not file federal_income_tax returns for the taxable years and therefore petitioner’s required_annual_payment for wa sec_90 of the tax for that year see id missall v commissioner tcmemo_2008_ tax ct memo lexis at respondent has met his burden of production for the sec_6654 addition_to_tax the sec_6654 addition_to_tax is mandatory unless the taxpayer establishes that one of the exceptions in sec_6654 applies verduzco v commissioner tcmemo_2010_278 tax ct memo lexi sec_318 at citing 91_tc_874 petitioner has not shown that any of the statutory exceptions under sec_6654 applies accordingly we hold that petitioner is liable for the addition_to_tax under sec_6654 and sustain respondent’s determination sec_6663 and sec_6651 respondent determined that petitioner is liable for fraud penalties pursuant to sec_6663 for tax_year sec_2001 and and for additions to tax pursuant to sec_6651 for tax years and sec_6663 imposes a penalty on the portion of any underpayment due to fraud sec_6651 imposes an addition_to_tax of up to of the amount of tax required to be shown on the return where the failure_to_file a federal_income_tax return is fraudulent because these sections are analyzed similarly as to the determination of fraudulent intent we consolidate our discussion of respondent’s fraud determinations see 102_tc_632 fraud is defined as an intentional wrongdoing designed to evade tax believed to be owing 252_f2d_56 9th cir 94_tc_316 the commissioner bears the burden of demonstrating fraud by clear_and_convincing evidence sec_7454 rule b the existence of fraud is a question of fact to be resolved upon sec_6663 provides that once the secretary establishes that any portion of an underpayment is attributable to fraud the entire underpayment shall be treated as attributable to fraud except with respect to any portion of the underpayment which the taxpayer establishes by a preponderance_of_the_evidence is not attributable to fraud as petitioner has not provided any evidence in regard to his underpayments pursuant to sec_6663 the entire amount of petitioner’s underpayments is attributable to fraud consideration of the entire record 92_tc_661 to carry the burden_of_proof on the issue of fraud the commissioner must show for each year at issue that an underpayment_of_tax exists and some portion of the underpayment is due to fraud id the commissioner’s burden of proving fraud can be met by facts deemed admitted pursuant to rule c 77_tc_334 vogt v commissioner tcmemo_2007_209 tax ct memo lexi sec_212 at aff’d 336_fedappx_758 9th cir fraud may also be proven by circumstantial evidence and reasonable inferences may be drawn from the facts because direct evidence is rarely available delvecchio v commissioner tcmemo_2001_130 tax ct memo lexis at aff’d 37_fedappx_979 11th cir underpayment_of_tax petitioner underpaid his tax by dollar_figure for dollar_figure for dollar_figure for dollar_figure for and dollar_figure for fraudulent intent all or part of the underpayments of tax for the years at issue was due to fraud petitioner’s failure_to_file federal_income_tax returns for the taxable years and was fraudulent petitioner was convicted of criminal_tax_evasion under sec_7201 for the taxable_year a taxpayer is collaterally estopped from denying civil tax_fraud when convicted of criminal_tax_evasion under sec_7201 for the same taxable_year see 96_tc_858 aff’d 959_f2d_16 2d cir as part of petitioner’s plea agreement to criminal_tax_evasion under sec_7201 petitioner stipulated that he knowingly and willfully failed to report all of his income to the internal_revenue_service in order to evade united_states tax filing_requirements for the taxable_year sec_2001 sec_2002 and petitioner has consistently failed to report substantial amounts of income for each year at issue consistent failure to report substantial amounts of income over a number of years is highly persuasive evidence of fraudulent intent temple v commissioner tcmemo_2000_337 tax ct memo lexi sec_395 at aff’d 62_fedappx_605 6th cir petitioner failed to submit for examination complete and adequate books and accounts of his consulting business for the years at issue failure to maintain adequate_records is a badge of fraud see lain v commissioner tcmemo_2012_99 tax ct memo lexis at petitioner used third-party checks and money orders to pay his personal expenses in an effort to conceal his income petitioner engaged in extensive dealings in cash in order to avoid the use of the banking system dealing in cash to avoid scrutiny of one’s finances is a badge of fraud temple v commissioner tax ct memo lexi sec_395 at citing 796_f2d_303 9th cir aff’g t c memo the record contains clear_and_convincing evidence that petitioner’s underpayment_of_tax and failure_to_file federal_income_tax returns was fraudulent accordingly we hold that petitioner is liable for the fraud penalties under sec_6663 and the additions to tax under sec_6651 and sustain respondent’s determinations as set forth in the notice_of_deficiency in reaching our decision we have considered all arguments made by the parties and to the extent not mentioned or addressed they are irrelevant or without merit to reflect the foregoing decision will be entered for respondent and will reflect respondent’s concession with respect to the addition_to_tax under sec_6654 for


department of the treasury internal_revenue_service washington d c cc dom fs p si uilc number release date date internal_revenue_service national_office field_service_advice memorandum for district_counsel from assistant chief_counsel field service cc dom fs subject this field_service_advice responds to your inquiry dated date 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 a b a-b partnership year issue whether a-b partnership’s filing of an amended tax_return for year and subsequent returns to pass through to its partners qualified_research expenditures as opposed to research credits under sec_41 is an unauthorized change in method_of_accounting conclusion for the reasons set forth below the actions taken by a-b partnership do not constitute a change in accounting_method facts in its original income_tax return for year a-b partnership filed its return as a partnership and calculated the research_credit at the partnership level and then passed the research_credit through to its partners based upon the partners’ distributive_share agreement in an amended tax_return for year a-b partnership changed from passing the research_credit through to its partners as was done in its original year return to passing through to the partners their distributive_share of qualified_research_expenses for inclusion in the partners’ computation of the research_credit on each of the partners’ tax returns law and analysis sec_41 allows a credit against tax for increasing research activities sec_41 provides that the term qualified_research_expenses means the sum of the amounts which are paid_or_incurred by the taxpayer during the taxable_year in carrying on any trade_or_business of the taxpayer for in-house expenses and contract_research_expenses sec_1_41-9 provides that in the case of a partnership the research_credit computed for the partnership for any taxable_year shall be apportioned amount the persons who are partners during the taxable_year in accordance with sec_704 and the regulations sec_1_41-9 provides that with respect to certain joint ventures research expenses to which sec_1_41-2 applies shall be apportioned among the persons who are partners during the taxable_year in accordance with the provisions of that section for purposes of sec_41 these expenses shall be treated as paid_or_incurred directly by the partners rather than by the partnership thus the partnership shall disregard these expenses in computing the credit to be apportioned under sec_41 and in making the computations under sec_41 each partner shall aggregate its distributive_share of these expenses with other research expenses of the partner the limitation on the amount of the credit set out in sec_41 and sec_1_41-9 shall not apply because the credit is computed by the partner not the partnership sec_1_41-2 provides that in general an in-house research expense or a contract research expense paid_or_incurred by a partnership is a qualified_research_expense of the partnership if the expense is paid_or_incurred by the partnership in carrying_on_a_trade_or_business of the partnership determined at the partnership level without regard to the trade_or_business of any partner sec_1_41-2 provides a special rule for partnerships and joint ventures if the qualified_research_expenses are not paid_or_incurred in a trade_or_business of the partnership to which the research relates but the research is related to the trade_or_business of the partners or joint venturers and they are entitled to make independent use of the research results the partners or joint venturers may treat a portion of such expenditures as qualified_research expenditures directly incurred by the partners or joint venturers for purposes of this field_service_advice we are assuming that a-b partnership’s activities rose to the level of a trade_or_business during the period in question and that the research_credit is computed at the partnership level and then distributed to the partners thus a-b partnership does not qualify for the exceptions set out in sec_1_41-9 and sec_1_41-2 which provide that research expenses are apportioned among the persons who are partners during the taxable_year and that for purposes of sec_41 these expenses in question are treated as paid_or_incurred directly by the partners we concur in your conclusion that a-b partnership’s change to allocating qualified_research_expenses to its partners rather than computing the research_credit at the partnership level and distributing the credit in accordance with sec_704 and the regulations is not a change in accounting_method in this case the code and regulations provide the proper method for a partnership engaged in a trade_or_business as our taxpayer is to compute the research_credit it must be done at the partnership level and the credit allocated to the partners the taxpayer’s action does not affect the timing of the credit but affects the amount of the credit for a-b partnership a and b a change in method_of_accounting does not include adjustment of any item_of_income or deduction which does not involve the proper time for the inclusion of the item in income or the taking of a deduction sec_1_446-1 deborah a butler by harve m lewis chief passthroughs special industries branch field service division


tax_exempt_and_government_entities_division department of the treasury internal_revenue_service te_ge exemption organizations examination commerce street mc dal dallas tx date release number release date org address 501-dollar_figure taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will aisu notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at ghee if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely renee b wells acting director eo examinations enclosures publication publication report of examination letter catalog number 34809f schedule number or exhibit form 886-a explanations of items name of taxpayer 20xx12 20xx12 tax identification_number year period ended 20xx12 org ein legend org - organization name co-2 - companies issue xx - date ein - ein state - state cco-1 motto - motto dir-1 dir-2 - dir whether org org continues to qualify for exemption under sec_501 of the internal_revenue_code whether there was inurement or private benefit in the use of organization funds by the president whether sec_482 can be applied to the funds deposited into the org co-1 account facts exemption org filed articles of incorporation with the state of state on august 19xx org filed form_1024 application_for recognition of exemption under sec_501 a of the internal_revenue_code on september 19xx the organization’s stated purpose was to educate the public and policy-makeis about issues related to motto it also states that org is established in conjunction with co-2 co-2 which is currently applying for recognition as a sec_501 organization the organization planned to do this through several media a b c d the organization plans to educate the general_public about motto by developing pamphlets and other printed material and distributing them at fairs public gatherings on their website and through advertising sponsor and work for the passage of initiatives to permit the unregulated production of industrial motto educate policy-makers in various administrative agencies - such as the state health department and the state liquor control commission - on issues such as the medical use of motto plans to fund legal battles that emerge when legislation pertaining to motto and motto is passed the form_10 also stated that the organizations sources of financial support would be contributions benefits wroot exemption was granted under sec_501 and sec_501 of the internal_revenue_code on january 20xx department of the treasury-internal revenue form 886-a service schedule number or exhibit form 886-a yo org explanations of items ein name of taxpayer tax identification_number year period ended 20xx12 20xx12 20xx12 activity president president of both org and co-2 co-2 stated in the initial interview for the examination of co- held on december 20xx that org was currently inactive in a subsequent telephone conversation on june 20xx president stated that org has not been active since about 19xx president stated that prior to the establishment of a bank account for co-2 credit card payments from the operation of its co-2 clinics were deposited into the org account at co-1 examination of orgs bank statements indicate that the majority of deposits made into the account were from credit card payments made to clinics operated by co-2 year 20xx 20xx 20xx totals total deposits credit card deposits other deposits percentage cc deposits ke waek notes in 20xx org had deposits of dollar_figure in debt reversals that were included with other ak of total deposits - deposits if these deposits were not included in other deposits the total credit card deposits would in 20xx org had deposits of dollar_figure dollar_figure in cash dollar_figure in checks from co-2 and dollar_figure in purchase returns check reversals that were included with other deposits if these deposits were not included in other deposits the total credit card deposits would of total deposits - in 20xx org had deposits of dollar_figure that were check reversals included in other deposits if these deposits were not included in other deposits the total credit card deposits would of total deposits - transfers in the form of checks written from the org co-1 account to the co-2 account were a od form 886-a service_department of the treasury-internal revenue schedule number or exhibit explanations of items form 886-a name of taxpayer 20xx12 20xx12 tax identification_number year period ended 20xx12 org ein transfers from org to co-2 amount year 20xx 20xx 20xx inurement private benefit org’s board_of directors consists of the president president dir-1 and dir-2 both dir-1 and dir-2 are independent contractors contracted by co-2 to work in its clinics examination of org’s summoned bank records revealed that the president president used funds deposited into org’s co-1 account for personal expenses such as house rent car payments and cash withdrawals year 20xx 20xx 20xx total expenses paid_by organization reported by president president failed to report any of the payments on his form_1040 sec_482 allocation of income and deductions examination of org’s summoned bank records revealed that the president president used co-2 funds deposited into org’s co-1 account for personal expenses such as house rent car payments and cash withdrawals totaling dollar_figure law sec_501 provides that an organization described in sec_501 is exempt from income_tax code sec_501 exempts from federal_income_tax civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare or local associations of employees the membership department of the treasury-internal revenue form 886-a service schedule number or exhibit explanations of items form 886-a name of taxpayer tax identification_number 20xx12 20xx12 year period ended 20xx12 org ein of which is limited to the employees of a designated person or persons in a particular municipality and the net_earnings of which are devoted exclusively to charitable educational or recreational purposes sec_501 states that the exemption shall not apply to an entity unless no part of the net_earnings of such entity inures to the benefit of any private_shareholder_or_individual regulation sec_1_501_c_4_-1 provides that in order to be exempt as an organization described in code sec_501 a civic_league_or_organization must be both not organized or operated for profit and operated exclusively for the promotion of social welfare regulation a defines an excess_benefit_transaction as any transaction in which an economic benefit is provided by an applicable_tax-exempt_organization directly or indirectly to or for_the_use_of any disqualified_person and the value of the economic benefit provided exceeds the value of the consideration including the performance of services received for providing the benefit subject_to the limitations of paragraph c of this section to determine whether an excess_benefit_transaction has occurred all consideration and benefits exchanged between a disqualified_person and the applicable_tax-exempt_organization and all entities the organization controls within the meaning of paragraph a ii b of this section are taken into account government’s position org does not continue to qualify for exemption under sec_501 of the internal_revenue_code because it has failed to operate exclusively for the promotion of social welfare exemption org filed articles of incorporation with the state of state on august 19xx org filed form_1024 application_for recognition of exemption under sec_501 of the internal_revenue_code on september 19xx the organization’s stated purpose was to educate the public and policy-makers about issues related to motto it also states that org is established in conjunction with co-2 co-2 which is currently applying for recognition as a sec_501 organization the organization planned to do this through several media a the organization plans to educate the general_public about motto by developing pamphlets and other printed material and distributing them at fairs public gatherings on their website and through advertising department of the treasury-internal revenue form 886-a service schedule number or exhibit explanations of items form 886-a name of taxpayer 20xx12 20xx12 tax identification_number year period ended 20xx12 org ein b c d sponsor and work for the passage of initiatives to permit the unregulated production of industrial motto educate policy-makers in various administrative agencies - such as the state health department and the state liquor control commission - on issues such as the medical use of motto plans to fund legal battles that emerge when legislation pertaining to motto and motto is passed the form_1024 also stated that the organizations sources of financial support would be contributions benefits exemption was granted under sec_501 and sec_501 of the internal_revenue_code on january 20xx in order to be exempt as an organization described in code sec_501 a civic_league_or_organization must be both not organized or operated for profit and operated exclusively for the promotion of social welfare regulation sec_1_501_c_4_-1 org has not actively conducted itself as a social_welfare_organization for the period under examination president president of both org and co-2 stated in the initial interview for the examination of co-2 held on december 20xx that org was currently inactive in a subsequent telephone conversation on june 20xx president stated that org has not been active since about 19xx this failure to operate exclusively as for the promotion of social welfare does not allow org to qualify for exemption under sec_501 of the internal_revenue_code regulation sec_1_501_c_4_-1 activity president stated that prior to the establishment of a bank account for co-2 credit card payments from the operation of its co-2 clinics were deposited into the org account at co-1 examination of orgs bank statements from its co-1 account indicate that the majority of deposits made into the account were from credit card payments made to clinics operated by co-2 year 20xx 20xx 20xx totals total deposits credit card deposits other deposits percentage cc deposits department of the treasury-internal revenue form 886-a service schedule number or exhibit form 886-a name of taxpayer 20xx12 20xx12 tax identification_number year period ended 20xx12 org ein explanations of items notes in 20xx org had deposits of dollar_figure in debt reversals that were included with other deposits if these deposits were not included in other deposits the total credit card deposits would of total deposits - in 20xx org had deposits of dollar_figure dollar_figure in cash dollar_figure in checks from co-2 and dollar_figure in purchase returns check reversals that were included with other deposits if these deposits were not included in other deposits the total cc deposits would of total deposits - tn 20xxk org had deposits of dollar_figure that were check reversals included in other deposits if these deposits were not included in other deposits the total credit card deposits would of total deposits - examination of the records showed that the majority of the withdrawals from the account were for the personal_use by the president of org president the rest of the checks written were written to employees of co-2 to doctors paid as independent contractors for their work in the co-2 clinics or as transfers in the form of checks to the co-2 account employee contractor transfers org to co-2 year amount amount 20xx 20xx 20xx examination of the org’s co-1 account confirms the statements made by its president president that the account was used by co-2 as a depository for credit card payments made relating to the operation of co-2 clinics there is no indication that any of the deposited funds were used for any activities by org for the promotion of social welfare org has failed to be operated exclusively for the promotion of social welfare regulation sec_1_501_c_4_-1 inurement private benefit of the president code sec_501 states that the exemption shall not apply to an entity unless no part of the net_earnings of such entity inures to the benefit of any private_shareholder_or_individual org’s board_of directors consists of the president president dir-1 and dir-2 both dir-1 and dir-2 are independent contractors contracted by co-2 to work in its clinics department of the treasury-internal revenue form 886-a service schedule number or exhibit explanations of items form 886-a name of taxpayer tax identification_number 20xx12 20xx12 year period ended 20xx12 org ein examination of org’s records revealed that the president president used funds deposited in the org account for personal expenses such as house rent car payments and cash withdrawals in the amounts listed below year 20xx 20xx 20xx total expenses paid_by organization reported by president in john marshall law school and john marshall university v united_states ct_cl 81-2the court sustained the service’s revocation of the school’s exempt status based on inurement the court found inurement existed when the school provided family members who were officers interest free loans unsecured loans payments for non-business travel payments for non-business entertainment and personal health spa membership as in john marshall law school and john marshall university v united_states ct_cl 81-2the the use of co-2 funds for non-business use by the president president constitutes inurement the president not only used co-2 funds deposited into org’s co-1 account for his own personal expenses he as the one responsible for the day-to-day operations of org failed to report any of the funds used as compensation_for employment_tax and w-2 wage reporting purposes conclusion on the basis of the statements made by its president president and examination of the books records and activities of org the organization fails to qualify for exempt status under sec_501 org failed to operate exclusively for the promotion of social welfare president president of both org and co-2 stated in the initial interview for the examination of co-2 held on december 20xx that org was currently inactive in a subsequent telephone conversation dated june 20xx president stated that org has not been active since about 19xx examination of the org co-1 account confirms the statements made by its president that the account was used by co-2 as a depository for credit card payments made relating to the operation of co-2 clinics there is no indication that any of the deposited funds were used for any activities by org for the promotion of social welfare this inactivity causes org to fail that portion of regulation sec_1_501_c_4_-1 that provides that in order to be exempt as department of the treasury-internal revenue form 886-a service schedule number or exhibit form 886-a name of taxpayer 20xx12 20xx12 tax identification_number year period ended org 20xx12 ein explanations of items an organization described in code sec_501 a civic_league_or_organization must be operated exclusively for the promotion of social welfare president president of both org and co-2 is the only one who signs checks and approves billing he authorized payments of his own personal expenses including house rent car payments and cash withdrawals during the audit years dollar_figure was expended on personal expenses president failed to report any of these payments as compensation on form_990 or form_1040 by statute president as an organization officer is an employee of the organization regulation sec_31_3121_d_-1 sec_501 states that the exemption shall not apply to an entity unless no part of the net_earnings of such entity inures to the benefit of any private_shareholder_or_individual the payment of dollar_figure constitutes inurement to president as president of both org president had complete control_over the operations of org and the movement of funds into and out of the org co-1 account based on the determination that the funds deposited into the org co-1 account were from co-2 clinic operations while org was an inactive organization the following will apply the credit card deposits from the co-2 clinic operations made into org’s co-1 account will be added into the income calculations of the co-2 examination the income reflected in the org account should be allocated to the co-2 account to clearly reflect the correct income for co-2 sec_482 the payments made to the president and the additional checks written to employees and independent contractors of co-2 constitute wages as president of both org and co-2 president is an employee of each organization regulation sec_31_3121_d_-1 therefore all expenses paid to the president other co-2 employees and independent contractors should be treated as wage expenses generated from co- activities as such the expenses paid in the org account should be allocated to co-2 to clearly reflect the correct wage expense deductions for co-2 operations sec_482 based on the examination of the books records and activities revocation of org’s exempt status is being proposed effective january 20xx department of the treasury-internal revenue form 886-a service