Friday, August 29, 2008

An IRS Appeals Officer's determination sustaining the IRS's lien filing and proposed levy against a taxpayer was not an abuse of discretion. The taxpayer's contention that the IRS failed to assess the taxes within the assessment period of limitations was not permitted. Although the IRS's assessment of taxes for wages left off of the return was made in a second notice of deficiency, the taxpayer did not file a petition for redetermination for either the first or second notices and so was barred from challenging the underlying tax liability. During the Collection Due Process hearing for the lien filing, the taxpayer failed to submit financial information and request collection alternatives. The taxpayer also failed to allege any specific facts to show that there was a genuine issue as to whether the Appeals Office abused its discretion.


Valdy Olender v. Commissioner.

Dkt. Nos. 1082-06L ; 21969-06L , TC Memo. 2008-205, August 28, 2008.



[Code Sec. 6330]






Valdy Olender, pro se; Lauren B. Epstein, for respondent.





MEMORANDUM OPINION



SWIFT, Judge: These consolidated matters are before us under Rule 121 on respondent's motion for summary judgment. Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.



Respondent moves for summary judgment as to petitioner's challenges to respondent's lien filing and proposed levy relating to petitioner and his wife's outstanding Federal income tax liability for 1999 in the approximate total amount of $20,700. Petitioner objects to respondent's motion for summary judgment and contends that respondent failed to assess petitioner and his wife's 1999 Federal income tax liability within the assessment period of limitations set out in section 6501. Petitioner also challenges generally the amount of his and his wife's 1999 Federal income tax liability as determined by respondent. For the reasons stated, we will grant respondent's motion for summary judgment.





Background



The facts set forth below are established in the pleadings, moving papers, responses thereto, and attachments.



In 1999 petitioner and his wife received wages in the approximate total amount of $72,500.



On April 15, 2000, petitioner and his wife filed with respondent a 1999 joint Federal income tax return reporting zero in wages and zero for their taxable income, which respondent treated as a valid return for filing purposes.



On November 21, 2001, and after an audit of petitioner and his wife's 1999 Federal income tax return, respondent did not charge petitioner and his wife with the above $72,500 in wage income, but respondent did determine a deficiency in petitioner and his wife's 1999 Federal income tax of $518. Respondent timely mailed to petitioner and his wife and they received a notice of deficiency (first notice of deficiency) for this additional $518. Neither petitioner nor his wife filed a petition in this Court with regard to the first notice of deficiency, and on May 6, 2002, respondent assessed against petitioner and his wife the $518.



On May 29, 2003, respondent mailed to petitioner and his wife a second notice of deficiency, which they received. In the second notice of deficiency respondent charged petitioner and his wife with the $72,500 in wage income which petitioner and his wife had omitted from their 1999 joint Federal income tax return (and which respondent had not included in the first notice of deficiency), resulting in an additional $11,169 deficiency in petitioner and his wife's Federal income taxes for 1999. Neither petitioner nor his wife filed a petition in this Court with regard to the second notice of deficiency, and on October 22, 2003, respondent assessed against petitioner and his wife the $11,169.



On June 7, 2005, respondent timely mailed to petitioner and his wife a notice of Federal tax lien relating to the October 22, 2003, assessment. On July 5, 2005, petitioner requested an Appeals Office collection hearing relating thereto. In connection with this hearing, petitioner did not provide respondent with the financial information which respondent requested. Petitioner did challenge the assessment as untimely.



On December 16, 2005, respondent's Appeals Office mailed to petitioner and his wife a notice of determination sustaining respondent's lien filing against them. On January 13, 2006, petitioner filed with this Court his petition challenging respondent's determination sustaining respondent's lien filing.



On February 10, 2006, respondent timely mailed to petitioner and his wife a final notice of intent to levy relating to the October 22, 2003, assessment. On March 7, 2006, petitioner requested an Appeals Office hearing relating to respondent's proposed levy. In connection with this hearing, petitioner submitted to respondent's Appeals Office limited financial information. On September 28, 2006, respondent's Appeals Office mailed to petitioner and his wife a notice of determination sustaining respondent's proposed levy.



On October 30, 2006, petitioner filed with this Court his petition challenging respondent's Appeals Office's determination sustaining respondent's levy.





Discussion



Petitioner contends that respondent's October 22, 2003, assessment of petitioner's 1999 Federal income tax liability was not made within the assessment period of limitations prescribed by section 6501. A taxpayer's contention, however, that an assessment period of limitations lapsed before the Commissioner made an assessment against the taxpayer constitutes a challenge to the underlying tax liability. In a collection case under section 6320 or section 6330, a taxpayer is not permitted to challenge his underlying Federal income tax liability if he or she had a prior opportunity to do so. Hoffman v. Commissioner, 119 T.C. 140, 145 (2002); Hoffenberg v. Commissioner, T.C. Memo. 2008-139 n.4; see also Boyd v. Commissioner, 117 T.C. 127, 130 (2001); MacElvain v. Commissioner, T.C. Memo. 2000-320.



Upon receipt of respondent's first and second notices of deficiency petitioner had the opportunity to challenge his wife's joint 1999 Federal income tax liability. Petitioner did not file a petition in this Court within the 90-day period prescribed by section 6213(a). Petitioner is now barred in this case from challenging his and his wife's joint Federal income tax liability for 1999 and from raising any issue as to the timeliness of respondent's assessment.



Generally under section 6501 the Commissioner has 3 years from the time a taxpayer files a Federal income tax return to assess a deficiency. Petitioners' joint 1999 Federal income tax return --which respondent treated as a valid return --was filed April 15, 2000, and the 3-year period for assessment would have expired on April 15, 2003.



Section 6503(a)(1), however, provides that the running of the 3-year assessment period of limitations under section 6501 will "be suspended for the period during which the Secretary is prohibited from making the assessment * * * and for 60 days thereafter", and section 6213(a) provides that after the Commissioner mails a notice of deficiency to a taxpayer, no assessment of the tax deficiency shall be made during the 90-day period during which the taxpayer may file a petition in this Court.



Accordingly, under section 6213(a) respondent was barred from making any assessment for each of the 90-day periods immediately following respondent's mailing to petitioner of the first and the second notices of deficiency, dated November 21, 2001, and May 29, 2003, respectively. Thus under section 6503 the running of the 3-year assessment period of limitations was suspended for 180 days plus an additional 120 days. Respondent's two notices of deficiency resulted in a total 300-day extension in the assessment period of limitations running against respondent and in favor of petitioner and his wife relating to their 1999 Federal income taxes.



This 300-day extension established a lapse date for the assessment period of limitations that is applicable to this case of February 9, 2004.1 Respondent's October 22, 2003, assessment falls well within this extended period of limitations.



Petitioner raises several other vague grounds for challenging respondent's Appeals Office's determination sustaining respondent's lien filing and proposed levy. Petitioner contends that he did not receive fair Appeals Office hearings and that he was denied an installment plan for payment of his Federal income taxes.2



Summary judgment is proper where there remains no genuine issue of material fact and where the moving party is entitled to judgment as a matter of law. Beery v. Commissioner, 122 T.C. 184, 187 (2004). In a collection action where the taxpayer's tax liability is not at issue, we review the appropriateness of the Commissioner's determination for abuse of discretion. Sego v. Commissioner, 114 T.C. 604, 609-610 (2000); Goza v. Commissioner, 114 T.C. 176, 182 (2000).



In connection with petitioner's first Appeals Office hearing, petitioner failed to submit financial information and failed to request collection alternatives. In connection with petitioner's first and second Appeals Office hearings, petitioner has not alleged any specific facts showing there is a genuine issue as to whether respondent's Appeals Office abused its discretion in sustaining respondent's lien filing and proposed levy action. See Rule 121(d); Celotex Corp. v. Catrett, 477 U.S. 317, 322-323 (1986).



On the record before us and as a matter of law we conclude that respondent's Appeals Office's determination sustaining respondent's lien filing and proposed levy was not an abuse of discretion.



For the reasons stated, we shall grant respondent's motion for summary judgment.



An appropriate order and decisions will be entered.


1 Apr. 15, 2000, plus 3 years plus 300 days fell on Feb. 9, 2004.

2 We note that where a taxpayer raises a reasonable dispute regarding an item of income which a third-party payor reported to the Commissioner on an information return and where the taxpayer fully cooperates with the Commissioner, the burden of production as to the income shifts to the Commissioner. Sec. 6201(d). Petitioner, however, has not raised any such dispute and would be precluded from doing so under sec. 6330(c)(2)(B), and sec. 6201(d) presents no barrier to our granting summary judgment.

Thursday, August 28, 2008

When Offers in Compromise are accepted. The following is the internal revenue manual that deals with accepted offers in compromise. There is an additional levy of review where the amount settled is over $50,000. Note also that the public is entitled to review accepted offers in compromise.


Part 5. Collecting Process
Chapter 8. Offer in Compromise
Section 8. Acceptance Processing

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5.8.8 Acceptance Processing
5.8.8.1 Overview
5.8.8.2 Amending Form 656
5.8.8.3 Closing a Case as an Acceptance
5.8.8.4 Acceptance Processing for Specific Types of Offers
5.8.8.5 Legal Opinion of Counsel
5.8.8.6 Public Inspection File
5.8.8.7 Accepted Offer File Processing
5.8.8.1 (09-01-2005)
Overview
The determination to accept an offer in compromise is based on sound decisions relating to an analysis of the individual taxpayers facts and circumstances and financial situation. Documentation supporting this decision and proper approval levels are required to complete the acceptance. This section describes the process for accepting an offer in compromise.

5.8.8.2 (09-01-2005)
Amending Form 656
When an offer is being recommended for acceptance, the tax periods owing and/or payment terms may need to be adjusted. This will require the taxpayer to submit an amended Form 656 to reflect the new terms.

Mark it "amended" in red on the top margin of page one.

Input "A" (amended) on screen one of the AOIC record to reflect receipt of an amended offer, but do notchange the "offer pending date" .

Add any new tax periods not included on the original Form 656 to the MFT screen. The date the IRS official signed the amended offer should be added to the MFT screen as the waiver date for the new periods only.

Delete any tax periods found on the MFT screen that are no longer owing and/or are not included on the amended offer.

Add the new terms for payment, if any, to the terms screen.


5.8.8.3 (09-01-2005)
Closing a Case as an Acceptance
Prior to preparing an acceptance report, IDRS command code " AMDIS" should be checked to ensure that no additional assessments are pending. If an open audit is found contact should be made to resolve the issue per instructions in IRM 5.8.4.12.1, Cases Pending in Examination. Tax must not be compromised unless it is assessed and legally due, therefore IDRS should also be checked to ensure that all tax included on the accepted offer has been properly assessed and is still due and owing.

Before closing a case as an acceptance, document the case history on AOIC regarding the decision. Include any special instructions for the Monitoring Offer in Compromise (MOIC) unit regarding application of funds or requesting a lien re-filing if one will be required during the terms of any deferred payment offer. See IRM 5.12, Federal Tax Liens, for more information about when a re-file may be required.

Order a MFTRA-X as close to the acceptance date as possible without delaying acceptance. Sanitize the MFTRA-X to "black out" or redact all tax information that is not to be disclosed to the public as follows:

Note:
The AOIC download process may be used to generate and print a sanitized report, which may be used instead of the MFTRA-X.


Name and SSN of a co-obligor spouse if the spouse is not a party to the compromise.

Number of exemptions.

Filing status.

Adjusted gross income.

Taxable income.

Principal Industry Activity Code.

Transaction Codes with neither debit or credit money amounts. The entire line including the date should be redacted.

Transactions Codes and explanations dealing with fraud, negligence, or criminal investigations, but not the date and amount of the transaction.

Power of Attorney/Tax Information Authorization (POA/TIA) on file.


Prepare an Acceptance Report. The Offer in Compromise Recommendation Report referenced in IRM Exhibit 5.8.4–3, Offer in Compromise Recommendation Report, may be used for this purpose. The report should contain at a minimum:

The taxpayers personal information such as age, health, dependents, education and occupation.

The cause of the delinquency and state of current compliance.

The amount of reasonable collection potential (RCP) and an explanation of how the RCP was calculated.

Note:
The Asset/Equity Table (AET) and Income/Expense Table (IET) shown in IRM Exhibits 5.8.4–1 and 5.8.4–2, respectively will generally fulfill this requirement.




Whether or not special circumstances exist and how they affected the amount agreed upon.

Negotiations resulting in the acceptable offer amount.

A conclusion that summarizes the basis for acceptance.


In the rare situation where relevant facts of a confidential nature exist that should not be included in the recommendation report, complete a supplemental memorandum for the record and include it in the case file. Do not include information already discussed in the offer recommendation report.

Update the AOIC record as follows:

Main Screen — Update to reflect the correct basis for compromise and if appropriate to indicate the existence of special circumstances. Update the disposition code to "1" (proposed acceptance).

MFT Screen — Input the assessment date for each module. Press "I" to update interest to the current date using the INTST command.

Note:
If any modules have restricted penalty or interest, use IDRS command code COMPAD and/or COMPAF to determine the accrued amounts. Include the accrued amounts in the total liability listed on the MFT screen. The manually accrued amounts must also be added to the paper transcript.


Note:
If any modules are Non-Master File and not on IDRS, secure an Automated Non-Master File (ANMF) transcript and update it as necessary using IDRS command code COMPAD and/or COMPAF.





K-Data Request Screen — Do a re-request for an IDRS download on all applicable TINS to update the AOIC screens with the accruals to the current date. Once the screens are updated generate and print the Public Offer report to use in lieu of a MFTRA-X.

Note:
A MFTRA-X may be requested through IDRS instead of taking this step.





Terms screen — Update the terms to those reflected on the offer that is being accepted ensuring that any collateral agreement(s) are referenced as necessary.


Generate and print the Form 7249, Offer Acceptance Report, for the required signatures. The accepting official is the official that has delegated responsibility for accepting based on the type and dollar amount of the case. Delegation Order Number No. 5-1 (formerly Delegation Order 11, Rev. 29) provides the level of authority for approving all Offer in Compromise dispositions.

Generate and print the appropriate acceptance letter for the signature of the delegated official. Attach copies of the accepted Form 656 and any applicable collateral agreement(s).

Generate and print the Power of Attorney (POA) letter if there is an authorized representative.

Assemble the file using Document 9600 B, Tab Dividers for Offer-in-Compromise Case Files Document.

Note:
The use of labeled dividers is required.


Submit the file for approval, routing to Counsel ( See IRM 5.8.8.5), and signing of the letter(s).

Upon approval and signature, date and mail the acceptance letter(s). Ensure that signed and dated copies are retained in the offer file.

Make a copy of the Form 7249, Offer Acceptance Report, and mail it together with the sanitized transcripts to the appropriate office for placing in the public offer file.

Close the case on AOIC and process. See IRM 5.8.8.7.

5.8.8.4 (09-01-2005)
Acceptance Processing for Specific Types of Offers
When two or more related offers are being recommended for acceptance, but acceptance is based on one financial analysis, one acceptance narrative may be used. Multiple files should be created containing the separate items that pertain to each offer. It is not necessary to duplicate the information that pertains to both files. The files should be clearly marked indicating that there are related offers, for example 1 of 2 and 2 of 2.

When the accepted offer includes Trust Fund Recovery Penalty (TFRP) assessments, a careful review must be made to ensure all TFRP assessments are included. Generally TFRP assessments made before August, 2000, will lump together all unpaid corporate tax quarters and be assessed under the tax period of the latest quarterly period owed by the corporation. Beginning in August, 2000, TFRP assessments are made for each quarterly period that was owed by the corporation. The Form 656 and the Form 7249, Offer Acceptance Report, must match and must reflect each individually assessed TFRP tax period.

Offers from Federal employees require a determination of whether public policy implications exist based on the sensitivity of the employee's position or area of responsibility. The result of this consideration should be documented in the case file. Offer acceptances for employees of the Internal Revenue Service additionally require the approval of the Territory Manager or SB/SE Compliance Operations Manager.

Note:
Offers from Federal civil service retirees are to be considered under normal procedures.


5.8.8.5 (09-01-2005)
Legal Opinion of Counsel
Counsel is required to review offers when the total liability for all related offers on the same taxpayer is $50,000 or more. The purpose of counsel's review is to determine whether the offer legally meets the standards of Doubt as to Liability (DATL), Doubt as to Collectibility (DATC) or the promotion of Effective Tax Administration (ETA). Counsel reviews the offer to ensure it meets the legal requirements for compromise and conforms to the Services' policy and procedures.

Counsel’s signature on the Form 7249, Offer Acceptance Report, constitutes the legal opinion required by IRC 7122(b). By signing the form, Counsel is certifying that all of the legal requirements for compromise have been met. If Counsel does not sign the form, the case cannot be compromised unless any legal issues are resolved.

Counsel’s signature does not necessarily indicate concurrence with the acceptance decision, but only that there are no legal barriers to compromise. In some cases Counsel may determine that the compromise is legally permissible, but may raise concerns of a policy or other issues of a non-legal nature. In such cases, the Form 7249, Offer Acceptance Report, will be signed and any other issues will be communicated by separate memorandum.

It is not required that Counsel concur in the acceptance decision in order for a compromise to go forward. However, the accepting official will review and consider any opinion from Counsel prior to making the acceptance final. Where major policy concerns have been raised, it is appropriate to document the case history indicating that the accepting official fully considered the issues before accepting the offer.

5.8.8.6 (09-01-2005)
Public Inspection File
Public inspection of certain information regarding all offers in compromise accepted under Internal Revenue Code (IRC) Section 7122 and is authorized by IRC Section 6103(k)(1).

A separate file of accepted Offer in Compromise records will be maintained for this purpose and made available to the public for a period of one year. The public inspection file will be maintained in a location designated by the Area office. The Area office may destroy the Public Inspection file after the year has expired.

For each accepted offer the file will only contain the following items:

A copy of the Form 7249, Offer Acceptance Report

The sanitized MFTRA-X or ANMF transcript.


The office that has accepted the offer will be responsible for providing all required documents as soon as possible after acceptance, for inclusion in the public inspection file.

5.8.8.7 (09-01-2005)
Accepted Offer File Processing
Once an offer has been closed on AOIC it should be held in-house until the following Monday. On Monday or as soon as practical thereafter, the offer should be released on AOIC and the entire file mailed to the proper Monitoring Offer in Compromise (MOIC) unit. Care must be used to ensure that the offer is mailed to the same unit it is released to on AOIC. If two related offers are accepted and one has a Business Operating Division (BOD) code of Small Business (SB) and the other is coded Wage & Investment (WI), change the BOD code on the WI offer on AOIC to match the BOD code of the SB offer before releasing it to the MOIC unit and ship both to the designated SB site.

If the case is chosen for Embedded Quality (EQ) review, copies of the following documents should be made and placed in the file in lieu of the originals before the offer is forwarded for review. The following original documents should be sent to the MOIC unit in a file folder clearly indicating that the remaining information was mailed to EQ.

Original and amended Form 656, Offer in Compromise

Form 7249, Offer Acceptance Report

Copy of the Acceptance letter(s)

Any collateral agreements

Note:
Before forwarding the case to the MOIC unit take the following steps:
• Verify that the original and any amended Form(s) 656 are in the case file
• Check to be sure that the Form(s) 656, Form 7249, IDRS, and AOIC all reflect the same tax liability period(s).
• Validate the waiver dates on the Form(s) 656, IDRS, and AOIC are correct and consistent.



Accepted offer files should be mailed with a Form 3210. Shipping offices must ensure that a receipted copy of the Form 3210 is received. If a receipted copy of the Form 3210 is not received within 30 calendar days of mailing, contact should be made with the receiving office and tracing actions taken. Appropriate actions must be taken to recover or replace missing files.

Part 5. Collecting Process
Chapter 8. Offer in Compromise
Section 12. Independent Administrative Review

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5.8.12 Independent Administrative Review
5.8.12.1 Overview
5.8.12.2 Role of the Independent Administrative Reviewer
5.8.12.3 Rejections
5.8.12.4 Independent Review Process
5.8.12.1 (09-01-2005)
Overview
IRC Section 7122(d)(1) requires the Service to conduct an independent administrative review of all proposed offer in compromise rejections. The review must be conducted prior to the rejection being communicated to the taxpayer.

The Independent Administrative Reviewer (IAR) is responsible for conducting this review. Generally, the IAR should report to the Technical Support manager.

5.8.12.2 (09-01-2005)
Role of the Independent Administrative Reviewer
The Independent Administrative Reviewer (IAR) is responsible for reviewing each case to determine if the proposed rejection is reasonable based on the taxpayer's facts and circumstances. The Offer Investigator's analysis of the taxpayers financial information should be reviewed to determine if there are special circumstances that should have been considered. The IAR should compare the amount that the taxpayer offered with the reasonable collection potential (RCP) or the Asset/Equity Table (AET) for legal sufficiency.

The IAR should consider if the taxpayers rights have been observed during the offer investigation and during communication and discussions with the taxpayer or authorized representative. These considerations should be based on issues that would impact the recommended rejection.

The IAR must also consider if the taxpayers facts and circumstances were considered during the investigation. If the file indicates any circumstances that could impact either future earning potential or allowable expenses, the file should document this information and the determinations relating to the taxpayers circumstances.

If the case file indicates issues are raised that meet either Effective Tax Administration (ETA) or Doubt as to Collectibility with Special Circumstance (DCSC) criteria, as defined in IRM .8.11, Effective Tax Administration, the case history must address these issues and discuss the determinations made.

5.8.12.3 (09-01-2005)
Rejections
The IAR should ensure that all of the facts and circumstances of the case were considered during the investigation and that the decision to reject the offer is reasonable, based on the case analysis.

Note:
The IAR is not responsible for conducting a quality analysis of completeness and accuracy of the documents used to support the case decision. That is the responsibility of the manager.


The following items should be present in the file and used as an aid for the IAR to ensure the decision was appropriate.

Form 656, Offer in Compromise

Form 1271, Rejection or Withdrawal memorandum

Rejection Letter

Asset/Equity Table (AET)

Income/Expense Table (IET)

Rejection Narrative

Collection Information Statements (CIS)

Case History

Supporting Documents


If any information is missing or unavailable that hinders the IAR in making a determination that the decision was appropriate, the case file should be returned or a memorandum sent to the Offer Investigator or the manager requesting the missing documentation or supporting information. In the case where the IAR is located off-site, the information needed may be faxed to the IAR for inclusion in the analysis.

The case file should indicate an attempt to communicate the results of the offer investigation with the taxpayer or authorized representative, prior to recommending the rejection. This communication can be accomplished by personal contact or by letter.

Exception:
The only exception is for those cases rejected based on the Screen for Obvious Full Pay criteria as outlined in IRM 5.8.4.5, Screen for Obvious Full Pay.


5.8.12.3.1 (09-01-2005)
Communication
The IAR should consider if required communication with the taxpayer or authorized representative was attempted and if these communications were reasonable based on the facts of the case. Communications need not necessarily include phone calls. They may be conducted entirely in the form of letters to the taxpayers or their authorized representatives.

The case file should document these communications and any specific issues that are in dispute.

5.8.12.4 (09-01-2005)
Independent Review Process
Prior to the proposed rejection being submitted to the IAR, the authorized official must have reviewed the file and signed the Form 1271, Rejection or Withdrawal Memorandum, indicating concurrence with the proposed disposition.

Once the approving official has signed the Form 1271, the offer must be re-assigned to the IAR on AOIC. The file is then forwarded to the IAR for review using a Form 3210, Document Transmittal.

Upon receipt of the file by the IAR, AOIC should be updated to reflect the individual independent reviewers assignment number.

Once the offer is reviewed by the IAR, AOIC must be updated to reflect the results of the review.

5.8.12.4.1 (09-01-2005)
Rejections Sustained by the Independent Administrative Reviewer
If the proposed rejection of the offer is sustained by the IAR, the reviewer will:

Update the IAR Main Screen on AOIC indicating the appropriate disposition.

Sign the Form 1271, Rejection or Withdrawal Memorandum , as the reviewer, indicating concurrence with the proposed disposition.

Return the case file to the originator using a Form 3210, Document Transmittal.


5.8.12.4.2 (09-01-2005)
Rejections Not Sustained by the Independent Administrative Reviewer
If the proposed rejection is not sustained by the IAR, the reviewer will:

Update the IAR Main Screen on AOIC indicating the appropriate IAR disposition.

Prepare the Form 5942, Reviewers Report, providing an explanation of why the determination was not sustained and indicating additional actions necessary by the investigating employee.

Route the Form 5942 and the offer case file to the IAR Manager for approval.


After the IAR Manager approves the Form 5942, the case will be routed as follows:

The original Form 5942 and the offer file will be returned to the Offer Investigator's manager.

A copy of the Form 5942 will be sent to the Offer Investigator's second level manager.

A copy of the 5942 will be retained by the IAR.


The following procedures describe necessary actions once the offer file is received by the originating office:

If… Then…
Reconsideration of the offer based on recommendations from the IAR results in a determination to accept the offer Process the acceptance recommendation following procedures defined in IRM 5.8.8, Acceptance Processing.
Reconsideration of the offer based on recommendations from the IAR results in a determination to continue to recommend rejection of the offer Update the case file with the additional case actions and any new information and re-submit to the IAR for a second review.
The investigating employee determines that the rejection is the correct action without further development, after reviewing the Form 5942 The offer file will be returned to the IAR for reconsideration. If necessary, additional history should be included to further support the offer rejection.
After a second review by the IAR, the rejection is still not sustained by the IAR and the Offer Investigator and the manager disagree with the decision of the IAR The decision will be raised to the second level manager for resolution.
The IAR Manager will forward a memorandum to the Offer Manager with an explanation of why the rejection cannot be sustained.

A copy of the memorandum will be forwarded to the second level manager.

The IAR manager and the second level manager will discuss the issues to reach a resolution.

The final decision will be made by the field second level manager for cases assigned to the field and the second level manager for those cases decided by the COIC sites.



The original Form 5942 and any other documentation regarding second level management involvement and decisions must be retained in the offer file as a record of actions taken during the IAR process.
Offer in Compromise - "effective tax administration"

Below is the Internal Revenue Manual dealing with the settlement of a tax debt under the "effective tax administration" option for an Offer in Compromise. Generally, effective tax administration applies when there is a "hardship" and the taxpayer had the funds or assets to pay the tax debt but needs the assets or income because of the hardship. The tax regulations consider health and age as factors to take into account in determining "hardship." The same principles appy if taxpayers do not have the assets of income to full pay their tax debt. In these circumstances, the IRS refers to "special circumstances" will include the same elements of "hardship."

5.8.11 Effective Tax Administration
5.8.11.1 Overview
5.8.11.2 Legal Basis for Effective Tax Administration Offer
5.8.11.3 Initial Processing of Effective Tax Administration Offers
5.8.11.4 Evaluation of Offers
5.8.11.5 Documentation and Verification
5.8.11.6 Final Processing
Exhibit 5.8.11-1 Non-Hardship Effective Tax Administration (ETA) Offer in Compromise (OIC) Check Sheet
5.8.11.1 (09-01-2005)
Overview
As part of the IRS Restructuring and Reform Act of 1998 (RRA 98), Congress added section 7122(c) to the Internal Revenue Code. That section provides that the Service shall set forth guidelines for determining when an offer in compromise should be accepted. Congress explained that these guidelines should allow the Service to consider:


Hardship,

Public policy, and

Equity


Treasury Regulation § 301.7122-1 authorizes the Service to consider offers raising these issues. These offers are called Effective Tax Administration (ETA) offers.

The availability of an Effective Tax Administration (ETA) offer encourages taxpayers to comply with the tax laws because taxpayers will:


Believe the laws are fair and equitable, and

Gain confidence that the laws will be applied to everyone in the same manner.


The Effective Tax Administration (ETA) offer allows for situations where tax liabilities should not be collected even though:

The tax is legally owed, and

The taxpayer has the ability to pay it in full.


If a taxpayer submits an Effective Tax Administration (ETA) offer, first investigate the offer for:


Doubt as to Liability (DATL), and/or

Doubt as to Collectibility (DATC).

An Effective Tax Administration (ETA) offer can only be considered when the Service has determined that the taxpayer does not qualify for consideration under Doubt as to Liability (DATL) and/or Doubt as to Collectibility (DATC).
The taxpayer must include the Collection Information Statement (Form 433-A and/or Form 433-B) when submitting an offer requesting consideration under Effective Tax Administration (ETA).

Economic hardship standard of § 301.6343-1 specifically applies only to individuals.

5.8.11.2 (09-01-2005)
Legal Basis for Effective Tax Administration Offer
Compared to Doubt as to Collectibility (DATC)
In a Doubt as to Collectibility (DATC) offer, the tax liability equals or exceeds the taxpayers reasonable collection potential (RCP) which is:

Net equity, plus

Future income

In an Effective Tax Administration (ETA) offer, the tax liability is less than the taxpayers reasonable collection potential (RCP). The taxes owed can be collected in full either:

In a lump sum, or

Through an installment agreement (IA)

A Doubt as to Collectibility (DATC) offer does not convert to an Effective Tax Administration (ETA) offer if the Offer Investigator and the taxpayer cannot agree on an acceptable offer amount.

Compared to Doubt as to Collectibility with Special Circumstances (DCSC)
Taxpayers may qualify for an Effective Tax Administration (ETA) offer when their reasonable collection potential (RCP) is greater than the liability but there are economic or public policy/equity circumstances that would justify accepting the offer for an amount less than full payment.

Example:
The taxpayer owes $20,000. The reasonable collection potential (RCP) is $25,000. The taxpayer could have an offer accepted for less than the total liability of $20,000 under the Effective Tax Administration (ETA) provisions if economic hardship, or public policy/equity issues exist which would support an acceptance recommendation.


Taxpayers could have an offer accepted under Doubt as to Collectibility with Special Circumstance (DCSC) when their reasonable collection potential (RCP) is less than their liability, but there are economic hardship or public policy/equity factors that would justify accepting the offer for an amount less than the reasonable collection potential (RCP).

Example:
The taxpayer owes $20,000. However his reasonable collection potential (RCP) is $15,000. The offer does not meet the legal basis for an Effective Tax Administration (ETA) because the RCP is lower than the liability. However, applying the same factors of economic hardship, or public policy/equity, an offer could be accepted for less than the RCP ($15,000) under Doubt as to Collectibility with Special Circumstance (DCSC) provisions.


Compared to Doubt as to Liability
An offer can be considered under Effective Tax Administration (ETA) provisions only when there are no doubt to liability issues.

In reaching these determinations:

If… Then…
The Service determines that there is doubt as to the amount of the liability the taxpayer owes Taxpayer is not eligible for Effective Tax Administration (ETA) consideration. The offer is considered based on the Doubt as to Liability (DATL) issue.
The Service determines that the taxpayers equity in assets plus future income (RCP) does not exceed the amount of the tax liability Taxpayer is not eligible for an Effective Tax Administration (ETA) offer. The offer is considered based on Doubt as to Collectibility (DATC).
However, hardship or public policy/equity may be present in the case to allow consideration under Doubt as to Collectibility with Special Circumstances (DCSC).
The Service determines the taxpayer is not eligible for compromise based on Doubt as to Liability (DATL) or Doubt as to Collectibility (DATC) and the taxpayer can demonstrate that collection of the tax liability in full would create economic hardship, or demonstrate that there is compelling public policy or equity issues in the case that would provide sufficient basis for compromise The taxpayer would be eligible for Effective Tax Administration (ETA) consideration.


Before we can consider a compromise based on economic hardship or public policy/equity considerations, three factors must exist:

A liability has been or will be assessed against taxpayer(s) before acceptance of the offer.

The net equity in assets plus future income or reasonable collection potential (RCP) must be greater than the amount owed.

Exceptional circumstances exist, such as the collection of the tax would create an economic hardship, or there is compelling public policy or equity considerations that provide sufficient basis for compromise.


5.8.11.2.1 (09-01-2005)
Economic Hardship
When a taxpayers liability can be collected in full but collection would create an economic hardship, an Effective Tax Administration (ETA) offer based on economic hardship can be considered.

The definition of economic hardship as it applies to Effective Tax Administration (ETA) offers is derived from Treasury Regulations § 301.6343-1. Economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the Commissioner and will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living.

Note:
Because economic hardship is defined as the inability to meet reasonable basic living expenses, it applies only to individuals (including sole proprietorship entities). Compromise on economic hardship grounds is not available to corporations, partnerships, or other non-individual entities.


The taxpayers financial information and special circumstances must be examined to determine if they qualify for an Effective Tax Administration (ETA) offer based on economic hardship. Financial analysis includes reviewing basic living expenses as well as other considerations.

The taxpayers income and basic living expenses must be considered to determine if the claim for economic hardship should be accepted. Basic living expenses are those expenses that provide for health and welfare and production of income of the taxpayer and the taxpayers family. Some basic living expenses are limited to the National Standards while other expenses are limited to Local Standards. Deviation from these standards is permissible if and when the taxpayer is able to justify expenses that exceed these limits.

In addition to the basic living expenses, other factors to consider that impact upon the taxpayers financial condition include:

The taxpayers age and employment status,

Number, age, and health of the taxpayers dependents,

Cost of living in the area the taxpayer resides, and

Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster.


Note:
This list is not all-inclusive. Other factors may be considered in making an economic hardship determination.


Factors that support an economic hardship determination may include:

The taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability and it is reasonably foreseeable that the financial resources will be exhausted providing for care and support during the course of the condition.

The taxpayer may have a set monthly income and no other means of support and the income is exhausted each month in providing for the care of dependents.

The taxpayer has assets, but is unable to borrow against the equity in those assets, and liquidation to pay the outstanding tax liabilitie(s) would render the taxpayer unable to meet basic living expenses.


Note:
These factors are representative of situations the Service regularly encounters when working with taxpayers to resolve delinquent accounts. They are not intended to provide an exhaustive list of the types of cases that can be compromised based on economic hardship.


Compromise under the Effective Tax Administration (ETA) economic hardship provision is permissible if acceptance does not undermine compliance. The public should not perceive that the taxpayer whose offer is accepted benefited by not complying with the tax laws. Factors supporting a determination that compromise would undermine compliance include, but are not limited to:

The taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code.

The taxpayer has taken deliberate actions to avoid the payment of taxes.

The taxpayer has encouraged others to refuse to comply with the tax laws.


Note:
There may be other situations where compromise would be undermined.


The following examples illustrate the types of cases that may be compromised under the economic hardship standard.


Example:
The taxpayer has assets sufficient to satisfy the tax liability and provides full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. The taxpayers overall compliance history does not weigh against compromise.






Example:
The taxpayer is retired and the only income is from a pension. The only asset is a retirement account and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without adequate means to provide for basic living expenses. The taxpayers overall compliance history does not weigh against compromise.






Example:
The taxpayer is disabled and lives on a fixed income that will not, after allowance of adequate basic living expenses, permit full payment of the liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate for a disability. The equity in the house is sufficient to permit payment of the liability owed. However, because of the disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayers home has been specially equipped to accommodate the disability, forced sale of the taxpayers residence would create severe adverse consequences for the taxpayer, making such a sale unlikely. The taxpayers overall compliance history does not weigh against compromise.



The economic hardship standard authorizes compromise regardless of the cause of the liability, provided compromise does not undermine compliance by other taxpayers.


Example:
The taxpayer submitted an Effective Tax Administration (ETA) offer based on economic hardship. The financial statement appears to support the offer. When a research of the county property records is conducted, it is noted that the home was transferred to a child for $100 plus love and affection. The transfer of the home was made after the tax was assessed. It is confirmed that deliberate actions were taken to avoid the payment of tax; therefore, the offer should not be accepted.



In economic hardship cases, an acceptable offer amount is determined by analyzing the financial information, supporting documentation, and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.


Example:
The taxpayer was diagnosed with an illness that eventually will hinder any ability to work. Although currently employed, the taxpayer will soon be forced to quit their job and use personal funds for basic living expenses. The taxpayer owes $100,000 and has a reasonable collection potential of $150,000. An offer was submitted for $35,000. Through the investigation, it is determined that collecting more than $50,000 would cause an economic hardship for the taxpayer since it would hinder the ability to meet reasonable living expenses, including ongoing medical expenses. The taxpayer is advised to raise the offer to $50,000 since it is an amount the Service can collect without creating an economic hardship.



The existence of economic hardship criteria does not dictate that an offer must be accepted. An acceptable offer amount must still be determined based on a full financial analysis and negotiation with the taxpayer. When hardship criteria are identified but the taxpayer does not offer an acceptable amount, the offer should not be recommended for acceptance.

5.8.11.2.2 (09-01-2005)
Public Policy or Equity Grounds
Where there is no Doubt as to Liability (DATL), no Doubt as to Collectibility (DATC), and the liability could be collected in full without causing economic hardship, the Service may compromise to promote Effective Tax Administration (ETA) where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for accepting less than full payment. Compromise is authorized on this basis only where, due to exceptional circumstances, collection in full would undermine public confidence that the tax laws are being administered in a fair and equitable manner. Because the Service assumes that Congress imposes tax liabilities only where it determines it is fair to do so, compromise on these grounds will be rare.

The Service recognizes that compromise on these grounds will often raise the issue of disparate treatment of taxpayers who can pay in full and whose liabilities arose under substantially similar circumstances. Taxpayers seeking compromise on this basis bear the burden of demonstrating circumstances that are compelling enough to justify compromise notwithstanding this inherent inequity.

Compromise on public policy or equity grounds is not authorized based solely on a taxpayers belief that a provision of the tax law is itself unfair. Where a taxpayer is clearly liable for taxes, penalties, or interest due to operation of law, a finding that the law is unfair would undermine the will of Congress in imposing liability under those circumstances.


Example:
The taxpayer argues that collection would be inequitable because the liability resulted from a discharge of indebtedness rather than from wages. Because Congress has clearly stated that a discharge of indebtedness results in taxable income to the taxpayer it would not promote Effective Tax Administration (ETA) to compromise on these grounds. See Internal Revenue Code (IRC) 61(a)(12).




Example:
In 1983, 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 1981 through 1983. In 1984, the IRS opened an audit of the partnership under the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (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)(4)(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. Depending on the taxpayers particular facts and circumstances, however, compromise may be authorized on the grounds of Doubt as to Collectibility (DATC), or because collection of the full liability would cause an economic hardship within the meaning of paragraph (b)(4)(i)(A) of this section.



Note:
In both of these examples, the taxpayers are essentially claiming that Congress enacted unfair statutes and are arguing that the Service should use its compromise authority to rewrite those statute based on a perception of unfairness. Compromise for that reason would not promote effective tax administration. The compromise authority under Section 7122 is not so broad as to allow the Service to disregard or override the judgments of Congress.


Section 6404(e) grants the Service the discretion to abate interest attributable to certain errors and delays by the Service. It would not promote Effective Tax Administration (ETA) to compromise a liability based solely on an assertion of delay by the Service if that delay would not support relief from interest under section 6404(e).

Compromise may promote Effective Tax Administration (ETA) where the taxpayer was incapacitated and thus unable to comply with the tax laws.



Example:
In October 1986, the taxpayer developed a serious illness that resulted in almost continuous hospitalization for a number of years. The medical condition was such that during this period, the taxpayer was unable to manage any of their financial affairs. The taxpayer has not filed tax returns since that time. The taxpayers health has now improved and has promptly begun to attend to tax matters. The taxpayer discovered that the IRS prepared a substitute for return for the 1986 tax year based on information documents received and assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill was more than three times the original tax liability. The taxpayers overall compliance history does not weigh against compromise.





Note:
In this situation, the Service should first work with the taxpayer and attempt to prepare an accurate return for the 1986 tax year and adjust the taxpayers account accordingly. Following that, the Service should consider accepting a compromise that would approximate the amount the taxpayer would have been assessed had there been an ability to comply with his filing and payment responsibilities in a timely manner. Such a compromise would be fair and equitable to the taxpayer and, under these circumstances, would advance the public policy of voluntary compliance with the tax laws.


It would not promote Effective Tax Administration (ETA) to compromise with the taxpayer in (5), above, if the investigation revealed that the taxpayer was able to attend to matters other than those due in 1986 during the time of the illness. For example, assume the taxpayer discussed, paid all other bills and continued to successfully operate a business during the illness. Under such circumstances, compromise would not promote Effective Tax Administration (ETA), and could serve to undermine compliance by other taxpayers.

Compromise may promote Effective Tax Administration (ETA) where the taxpayers liability was caused by reasonable reliance on a statement issued by the Service that caused the taxpayer to incur a tax liability that would not otherwise have been incurred.


Example:
The taxpayer is a salaried sales manager at a department store who has been able to place $2,000 in a tax-deductible IRA account for each of the last two years. The taxpayer learns that a higher rate of interest can be earned on his IRA savings by moving the savings from a Money Management account to a Certificate of Deposit at a different financial institution. Prior to transferring the savings, the taxpayer submits an E-mail inquiry to the IRS at its Web Page, requesting information about the steps needed to preserve the tax benefits currently enjoyed and to avoid any penalty. The IRS responds by answering the E-mail that the taxpayer may withdraw the IRA savings from the neighborhood bank, but it must redeposited in a new IRA account within 90 days. The taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, the taxpayer learns that he has been misinformed about the required rollover period and is now liable for additional taxes, penalties and interest for not redepositing the amount within 60 days. Had the advice provided been accurate, the taxpayer would have redeposited the funds timely. The taxpayer retained a copy of the IRS E-mail for his records. The taxpayers overall compliance history does not weigh against compromise.





Note:
Because the tax liability in this example was caused by relying on the Service's erroneous statement, and the taxpayer clearly could have avoided the liability had the Service given correct information, it is reasonable to conclude that collection in full would cause other taxpayers to question the fairness of the tax system. The Service may consider accepting a compromise that would reflect the amount the taxpayer would now owe had the service not made an error.


Compromise may also promote Effective Tax Administration (ETA) where a taxpayers liability was directly caused by the Service and through no fault of the taxpayer.


Example:
The taxpayer is a closely-held corporation. The IRS audited the taxpayers tax returns for 1996, 1997, and 1998 and determined that the taxpayer was a personal holding company liable for personal holding company tax. The taxpayer agreed to immediate assessment of the tax, but attempted to take advantage of the deduction for deficiency dividends under section 547. Although the taxpayer made the distributions necessary to qualify for the deduction, the IRS made several errors in executing the required agreements and other paperwork. As a result, the taxpayer could not avail itself of the section 547 deduction. Under the statute, applicable regulations, and pertinent case law, there is no means by which the mistakes can be corrected to allow the taxpayer to take advantage of the deduction. There is documentary evidence that all of the required Service officials intended to complete the processing of the agreements and that, but for their failure to do so, the taxpayer would have qualified for the deduction. The taxpayer has no prior history of noncompliance.





Note:
That the tax liability was caused solely by an error on the part of the Service supports the determination that collection in full would cause other taxpayers to question the fairness of the tax system. Furthermore, the policies underlying the imposition of the personal holding company tax and the rules regarding deficiency deductions are not undermined by compromise under these circumstances. The Service may consider accepting a compromise that would reflect the amount the taxpayer would now owe had the Service not made an error.


In contrast, compromise would not be authorized based on mistakes by the Service that did not cause the tax liability. For example, providing an incorrect statement of the balance due does not authorized the compromise of additional interest that may have later accrued. However, any relief from interest attributable to errors or delays by the Service should be granted under the standards set forth in section 6404(e). Compromise that would undermine those standards would not promote Effective Tax Administration (ETA). Similarly, relief from penalties attributable to errors by the Service should be granted pursuant to the standards for relief set forth in section 6404(e) and the IRM.

The Service will not compromise on public policy or equity grounds based solelyon the argument that the acts of a third party caused the unpaid tax liability. Third parties include the taxpayers:

Representative,

Partner,

Agent, or

employee


Note:
The actions of a third party may be part of a fact pattern that, viewed as a whole, presents compelling public policy or equity concerns justifying compromise. As with all compromises based on public policy or equity, the taxpayers situation must be compelling enough to justify compromise even though similarly situated taxpayers may have paid in full.


Compromise on public policy or equity grounds promotes Effective Tax Administration (ETA) only where it does not undermine compliance by other taxpayers. In general, compromise would undermine compliance where other taxpayers viewing the compromise may conclude that the taxpayer benefited from a failure to comply with the tax laws (i.e. the result of the compromise places the taxpayer in a position better than they would occupy had they timely and fully met their obligations). Such cases present the danger that other taxpayers may consider it beneficial to take the chance of not complying with the tax laws or litigating an issue they would otherwise concede or settle, and relying on compromise at some later date as a safety net. Factors supporting a determination that compromise would undermine include, but are not limited to:

The taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code.

The taxpayer has taken deliberate actions to avoid the payment of taxes.

The taxpayer has encouraged others to refuse to comply with the tax laws.

Note:
Additional factors such as the cause of the delinquency, length of non-compliance, and efforts to resolve non-compliance should also be considered. Generally a review of the last 3–5 years of compliance should be completed.



Once it has been determined that a case raises compelling public policy or equity considerations justifying compromise, the Service must still determine whether the amount offered by the taxpayer should be accepted to resolve the case. An acceptable offer amount should be based on a determination of what is fair and equitable under the circumstances. When public policy or equity considerations are identified but the taxpayer does not offer an acceptable amount, the offer should not be recommended for acceptance.

5.8.11.2.3 (09-01-2005)
Compromise Would Not Undermine Compliance With Tax Laws
No compromise to promote Effective Tax Administration (ETA) may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws. See IRM 5.8.11.2.1(7), 5.8.11.2.1(9) and 5.8.11.2.2(11) above, for additional information.

5.8.11.3 (09-01-2005)
Initial Processing of Effective Tax Administration Offers
Offers submitted on the grounds of Effective Tax Administration (ETA) will be worked either by the COIC units or field specialists.

Taxpayers seeking a compromise under Effective Tax Administration (ETA) will submit the Form 656, Offer in Compromise, selecting ETA in Item 6, along with the Collection Information Statement (CIS) (Form 433-A and/or Form 433-B). Taxpayers must complete the Form 656, Item 9 and document their special circumstances. The documentation should explain why collection of the liability in full would cause economic hardship, or the public policy/equity issues present that would justify compromising the liability. An additional attachment can be provided if additional space is needed. If the taxpayer does not submit a financial statement with the offer, normal correspondence activity should be undertaken to secure the financial statement, and any other data determined necessary for evaluation of the offer. If the taxpayer fails to provide the requested information, normal "return" procedures should be followed since Effective Tax Administration (ETA) criteria can not be considered until all other bases have been addressed.

Like all other offers, the Service will only consider an Effective Tax Administration (ETA) offer when taxpayers have met the processability criteria (e.g. paid the application fee or filed Form 656-A; filed all required tax returns; submitted the Form 656, Form 433-A and/or Form 433-B on the latest revision of the forms; and are not a debtor in a bankruptcy proceeding). In-business taxpayers must have timely filed and timely deposited their quarterly federal taxes for the 2 preceding quarters and paid all federal tax deposits during the quarter in which the offer was filed.

Note:
Follow IRM 5.8.3, Processability Determination, for initial processing of offers.


Elements necessary to perfect an offer also apply to Effective Tax Administration (ETA) offers. The requirement to submit complete financial statements for ETA offers is the same as for Doubt as to Collectibility (DATC) offers.

Note:
Follow IRM 5.8.3.11, Types of Perfection, for procedures on perfecting offers.


Effective Tax Administration (ETA) offers are initially added to AOIC as Doubt as to Collectibility (DATC) offers. Once the offer investigation reveals that the taxpayers assets and future income exceed the tax liability thereby indicating no basis for a Doubt as to Collectibility (DATC), the offer should be considered under the ETA provisions. AOIC must be updated to reflect the correct basis for the compromise (e.g. ETA). Refer to IRM 5.8.11.7 below for a full discussion of requirements to update AOIC prior to final processing of ETA and Doubt as to Collectibility with Special Circumstances (DCSC) offers.

5.8.11.4 (09-01-2005)
Evaluation of Offers
Effective Tax Administration (ETA) offers cannot be considered if the taxpayer qualifies for Doubt as to Collectibility (DATC) or Doubt as to Liability (DATL).

Note:
Follow IRM 5.8.4, Evaluation of Offers, for Doubt as to Collectibility (DATC) issues and determining reasonable collection potential (RCP).


If the assets and future income do not exceed the tax liability and special circumstances exist, the taxpayers offer must be considered under Doubt as to Collectibility with Special Circumstance (DCSC). The taxpayers may have checked the ETA box and given an explanation of circumstance on the Form 656, however unless they have the ability to full pay the liability, the offer would not meet the legal standard for Effective Tax Administration (ETA) consideration. The offer must be considered under Doubt as to Collectibility with Special Circumstance (DCSC).

If the taxpayer submits an offer based on Doubt as to Collectibility (DATC) but collection potential exceeds the liability and there are special circumstances, the offer should be considered on the basis of Effective Tax Administration (ETA). The employee that investigates the offer is required to address any potential special circumstances during first contact with the taxpayer or the taxpayers representative. This will be accomplished in conjunction with the current requirement to verify receipt of Publication 1 and Publication 594 and must be documented in the offer case history. This requirement does not apply where the only taxpayer contact is through correspondence.

If the offer is rejected, the narrative should describe the considerations of both bases. If the offer is accepted the offer report must reflect the basis upon which the offer is accepted.

5.8.11.4.1 (09-01-2005)
Public Policy/Equity Issues
Offers submitted under the Public Policy/Equity provisions are authorized under these guidelines only when there are exceptional circumstances. While compromise under these guidelines is expected to be rare, appropriate recommendations for acceptance will be made.

In order to develop consistency in the interpretation and application of Treasury Regulations (TD 9007) published on July 22, 2002, a Specialty Group has been set up in Austin, Texas to work these offers.

Only after consideration has been given to all other potential bases for acceptance (e.g. Doubt as to Liability (DATL), Doubt as to Collectibility (DATC), Doubt as to Collectibility with Special Circumstance (DCSC), and/or Effective Tax Administration (ETA) based on economic hardship) will ETA-Public Policy/Equity be considered. Therefore, all cases must have been completely developed under all other bases before transfer will be accepted by the Austin Group.

After all other potential bases have been considered, complete Exhibit 5.8.11-1 "Non-Economic Hardship Effective Tax Administration (ETA) OIC Check Sheet." The check sheet must be completed and sent to the Austin group before any cases are transferred. The purpose of the check sheet is to document that all issues other than Public Policy/Equity ETA have been evaluated and to provide information on the non-economic ETA factors present.

The completed check sheet and a copy of the entire Form 656 should be faxed to offer Group Manager in Austin. The sender should include a copy of any letter or document presented by the taxpayer to support the special circumstances. The group will evaluate the information and respond to the sender within 10 workdays. This response will either be an explanation of why the taxpayers offer cannot be investigated under Public Policy/Equity ETA provisions, or a request to transfer the offer to the Austin group.

If the Austin group determines that the offer cannot be investigated under the Public Policy/Equity ETA provisions, the information will be faxed back to the sender who will be responsible for issuing the proposed rejection letter to the taxpayer, covering all factors considered.

If the Austin group determines that the information presented requires further analysis, the sender will be notified to transfer the case to Austin.

The sender should contact the taxpayer by telephone and advise the taxpayer of the results of the collectibility and liability portions of the offer investigation prior to transfer. If the taxpayer cannot be reached by phone then a standard transfer letter should be sent.

The file should be sent by overnight mail on Form 3210 to the Austin group.

At the time of mailing, the case should be transferred on AOIC to Area 10.

A history item should be added to AOIC to show the case is being sent to Austin, Area 10.

The Austin group will maintain the faxed copies of all check sheets received and appropriate documentation on all offers accepted for transfer. This documentation will provide a historical record to support a decision to accept or reject the offer.


Note:
The Offer Examiner or Offer Specialist may also seek guidance from the Austin group on a Doubt as to Collectibility with Special Circumstances (DCSC) offers that involve Public Policy/Equity issues. The guidance should be solicited by preparing the check sheet and documenting the issues involved in the case. However, these cases will not be transferred to the Austin group.


5.8.11.4.2 (09-01-2005)
Financial Statement Analysis
Offers submitted under Effective Tax Administration (ETA) require the same full financial analysis as Doubt as to Collectibility (DATC) offers in order to determine reasonable collection potential (RCP) and to determine an acceptable offer amount. Procedures for financial analysis are contained in IRM 5.8.5, Financial Analysis.

Once reasonable collection potential (RCP) is completed a determination can be made as to whether the offer qualifies for consideration under Effective Tax Administration (ETA) or Doubt as to Collectibility (DATC).

If the taxpayers assets and future income exceed the tax liability, the taxpayers offer can be considered under the Effective Tax Administration (ETA) basis.

5.8.11.4.3 (09-01-2005)
Determining an Acceptable Offer Amount
An acceptable offer amount, based on economic hardship, is determined by analyzing the financial information and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.

Example:
The taxpayer has a $100,000 liability and a reasonable collection potential (RCP) of $125,000. To avoid economic hardship, it is determined that the taxpayer will need $75,000. The remaining $50,000 should be considered the acceptable offer amount.


In offers based on Public Policy/Equity, the Service would expect the taxpayer to offer an amount that is fair and equitable under the circumstances.

Generally, it is the responsibility of the taxpayer to make decisions and take the appropriate actions needed to fund the acceptable offer amount. However, due consideration of these funding options is often needed for the Service to arrive at an acceptable offer amount. For example, in some locations the availability of funding options such as reverse mortgages, assigning deeds of trust, etc. may allow the taxpayer to tap into available equity without creating economic hardship. These options should be taken into consideration in determining an acceptable offer amount for an Effective Tax Administration (ETA) offer based on economic hardship.

5.8.11.5 (09-01-2005)
Documentation and Verification
To verify the taxpayers special circumstances and support a basis of Effective Tax Administration (ETA):

Request supporting documentation of the taxpayers situation. Exercise sound judgement in determining the degree of verification necessary. For example, verification of a health problem could be a doctor’s letter or copies of medical expenses.

When special circumstances are found to exist, the amount offered will be less than reasonable collection potential (RCP). For Effective Tax Administration (ETA), reasonable collection potential (RCP) is always greater than the full liability. In the report narrative, explain clearly the rationale for acceptance of the amount offered. The documentation must include reasons why some or all of the equity in certain assets is not being offered, how the offer amount is being funded, and any other pertinent information that indicates how the amount offered was determined to be acceptable.


5.8.11.6 (09-01-2005)
Final Processing
Prior to final processing, AOIC must be updated to indicate the correct basis for closing the offer. This will ensure that all final closing reports generated from AOIC reflect the correct basis. The approval levels indicated on closing reports and letters must be consistent with the basis for closure.

The following is a guide to these determinations:

If… And… Then…
The offer was submitted under Effective Tax Administration (ETA) An economic hardship has been determined to exist, but the reasonable collection potential (RCP) is less than the liability balance due 1. Update the AOIC offer screen to indicate a "C" under the offer type.
2. Generate all closing reports with the proper approving official for Doubt as to Collectibility with Special Circumstances (DCSC).
The offer was submitted under Doubt as to Collectibility (DCSC) An economic hardship has been determined to exist, and the reasonable collection potential (RCP) is greater than the liability balance due 1. Update AOIC offer screen to indicate "A" under offer type.
2. Generate closing reports with the proper approving official for Effective Tax Administration (ETA) offers.
The offer was submitted under Effective Tax Administration (ETA) The offer is being recommended for acceptance under Doubt as to Collectibility (DATC) with the offer exceeding the reasonable collection potential (RCP) 1. AOIC offer screen does not require updating for special circumstances. The type of offer on AOIC should reflect "C" for Doubt as to Collectibility (DATC).
Generate closing reports with the proper approving official for Doubt as to Collectibility (DATC) without special circumstances.
The offer was submitted under Doubt as to Collectibility with item 9 of Form 656 completed with circumstances that do not meet any of the elements that define economic hardship, or Public Policy/Equity criteria The offer cannot be recommended for acceptance under Doubt as to Collectibility (DATC). Generate closing reports with the proper approving official for Doubt as to Collectibility (DATC) without special circumstances. Address in the history, why the circumstances described in item 9 do not meet defined economic hardship, or Public Policy/Equity criteria.
The offer was submitted under Effective Tax Administration (ETA) with item 9 of Form 656 completed with circumstances that do not meet ETA criteria The taxpayer does not qualify for ETA because the reasonable collection potential (RCP) is less than the liability and the offer cannot be recommended for acceptance under Doubt as to Collectibility with Special Circumstances (DCSC). 1. Update AOIC offer screen to indicate a "C" under special circumstances.
2. Generate closing reports with the proper approving official for Doubt as to Collectibility with Special Circumstances (DCSC).
The offer was submitted under Effective Tax Administration (ETA) with item 9 of the Form 656 completed with circumstances that the investigation reveals do not meet ETA criteria The offer cannot be recommended for acceptance and the reasonable collection potential (RCP) exceeds the liability 1. Update AOIC offer screen to indicate "A" under offer type.
3. Generate closing reports with the proper approving official for Effective Tax Administration (ETA) offers.
The offer was submitted under Effective Tax Administration (ETA) The special circumstances do meet economic hardship, or Public Policy/Equity criteria and the reasonable collection potential (RCP) exceeds the tax liability. However, the offer cannot be recommended for acceptance. 1. Update AOIC offer screen to indicate "A" under offer type.
3. Generate closing reports with the proper approving official for Effective Tax Administration (ETA) offers.
The offer was submitted under Doubt as to Collectibility with Special Circumstances (DCSC) The special circumstances do meet economic hardship, or Public Policy/Equity criteria and the reasonable collection potential (RCP) is less than the tax liability, however, the offer cannot be recommended for acceptance. Generate closing reports with the proper approving official for Doubt as to Collectibility with Special Circumstances (DCSC).


5.8.11.6.1 (09-01-2005)
Rejection/Return/Withdrawal Processing
The procedures in IRM 5.8.7, Return, Terminate, Withdraw, and Reject Processing, discussing rejections, withdrawals and returns should be followed when processing Effective Tax Administration (ETA) rejected, withdrawn or returned offers.

IRM 5.8.12, Independent Administrative Review, provides instructions for independent administrative review of rejected offers.

See Delegation Order No. 5-1 (formerly Delegation Order 11, Rev. 29) for the official with delegated authority based on Effective Tax Administration (ETA). The delegated official’s signature is required on the Form 1271 and the closing letter.

5.8.11.6.2 (09-01-2005)
Acceptance Processing
The procedures in IRM 5.8.8, Acceptance Processing , should be followed when processing accepted Effective Tax Administration (ETA) offers.

Area Counsel’s opinion is required on ETA offers where the unpaid amount of tax assessed (including any interest, addition to the tax, or assessable penalty) is $50,000 or more.

See Delegation Order No. 5-1 (formerly Delegation Order 11, Rev. 29) for the official with delegated authority to accept offers based on Effective Tax Administration (ETA). The delegated official’s signature is required on the Form 7249, Offer Acceptance Report, and the acceptance letter.

Exhibit 5.8.11-1 (09-01-2005)
Non-Hardship Effective Tax Administration (ETA) Offer in Compromise (OIC) Check Sheet
Hobby (personal pleasure) or business expense


Ralph Thomas Whitecavage v. Commissioner.

Dkt. No. 788-06 , TC Memo. 2008-203, August 27, 2008.


[Code Secs. 183 and 6662]


A former IRS auditor was not entitled to deduct expenses incurred in his greyhound racing activities to the extent they exceeded his income from the activity. The taxpayer failed to establish that he engaged in the greyhound activity with the predominant, primary or principle objective of making a profit because most of the factors to be considered in making the determination weighed against him. The taxpayer failed to carry on the activity in a businesslike manner because he neither kept complete and accurate records nor maintained a business plan or budget for the activity. While the taxpayer may have had some knowledge about the mechanics of greyhound breeding and racing, he failed to demonstrate that he either consulted with economic experts or acquired his own personal economic expertise about the activity. Further, the taxpayer was a full-time employee while engaged in the activity and did breed enough litters of pups annually to be profitable. The value of the greyhounds generally depreciated over the years, a number of which did not survive training or were euthanized at the end of their racing lives. Finally, the taxpayer had 10 straight years of losses and never realized a profit from the activity, which was partially recreational for him. The taxpayer failed to present evidence that he had reasonable cause and acted in good faith to avoid the accuracy-related penalty for a substantial understatement of tax. Any defense could have been problematic, however, given the taxpayer's former employment.




Accuracy-Related
Penalty

Year Deficiency Sec. 6662(a)

2001 $1,590 --

2002 14,521 $2,904

2003 2,490 --





The issues for decision are: (1) Whether during 2001, 2002, and 2003 petitioner engaged for profit in the activity of breeding greyhounds for racing; and (2) whether petitioner is liable for a section 6662 accuracy-related penalty for 2002.



All section references are to the Internal Revenue Code in effect for the taxable years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.





FINDINGS OF FACT



The parties have stipulated some facts, which are so found. When he petitioned the Court, petitioner resided in Arizona.



Petitioner was an auditor for the Internal Revenue Service (IRS) for 21 years, including the years at issue. He was stationed in the Yuma, Arizona, office of the IRS, where he worked about 42.5 hours a week before retiring in 2006.



Petitioner resided on his property about 3 miles from Yuma. In 1994 petitioner began breeding greyhounds there for the purpose of entering them in dog races. Each year he bred a litter of pups. Over 10 years he raised about 88 greyhounds.



Before 2002 petitioner kept his greyhounds in crates in his garage; twice a day he would take them out for exercise. During 2002 petitioner built a 1,000-square-foot kennel and added a new run and fencing.



Because of his full-time job at the IRS, petitioner could not spend much time with the dogs during workdays, but he fed and cleaned up after them mornings and evenings. Petitioner did not hire any caretaker to tend the dogs while he was at work.



Petitioner would keep the pups on his property until they were a little over 1 year old. Then he would send them to Florida, Oklahoma, or New Mexico to train for racing on a track. After being trained, petitioner's greyhounds were taken to be raced in Florida and Arizona. Petitioner received a percentage of any winnings.



Not all the greyhounds survived training; petitioner "lost" about 20 greyhounds because of bad training methods by the trainers in the racing kennels. The greyhounds that survived spent the rest of their racing lives on the track and generally did not return to petitioner. Instead, at the end of their racing lives the greyhounds generally would be "petted out"; i.e., sent into an adoption program or to a veterinarian, presumably to be euthanized. Petitioner received no money for these dogs upon their retirement.



Before he commenced breeding greyhounds for racing, petitioner did not consult an economist or other professional business adviser. Although he received some racetrack winnings, petitioner never realized a profit from breeding and racing greyhounds. Petitioner ceased his greyhound activity in 2006, the same year he retired from the IRS.



On Schedules C, Profit or Loss From Business, of his Forms 1040, U.S. Individual Income Tax Return, petitioner reported losses from his greyhound activity as follows:





2001 2002 2003

Gross dog-race
winnings $5,695 $3,746 $4,210

Total expenses 15,340 53,230 19,873

Net loss 9,645 49,484 15,663





By notice of deficiency respondent determined that these reported losses were not allowable under section 183 because petitioner's greyhound activity was not entered into for profit.1 Respondent also determined that for 2002 petitioner was liable for the section 6662 accuracy-related penalty, on the basis that petitioner's corrected income tax liability for 2002 was $20,513 rather than the $5,992 that petitioner had reported, giving rise to a substantial understatement of income tax within the meaning of section 6662(d).





OPINION




A. Petitioner's Greyhound Activity


Under section 183(b)(2), if an individual engages in an activity without the primary objective of making a profit, deductions attributable to the activity are allowable only to the extent of gross income from the activity. See Allen v. Commissioner, 72 T.C. 28, 33 (1979). The critical inquiry is whether making a profit is the taxpayer's "predominant, primary, or principal objective". Wolf v. Commissioner, 4 F.3d 709, 713 (9th Cir. 1993), affg. T.C. Memo. 1991-212; Machado v. Commissioner, T.C. Memo. 1995-526, affd. without published opinion 119 F.3d 6 (9th Cir. 1997); Warden v. Commissioner, T.C. Memo. 1995-176, affd. without published opinion 111 F.3d 139 (9th Cir. 1997). Although the taxpayer need not have a reasonable expectation of realizing a profit, he or she must have a bona fide objective to do so. Burger v. Commissioner, 809 F.2d 355, 358 (7th Cir. 1987), affg. T.C. Memo. 1985-523; Golanty v. Commissioner, 72 T.C. 411, 425-426 (1979), affd. without published opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(a), Income Tax Regs. Whether the taxpayer has the requisite objective to realize a profit is a question of fact, to be resolved on the basis of all relevant circumstances, with greater weight being given to objective factors than to mere statements of intent. Dreicer v. Commissioner, 78 T.C. 642, 645-646 (1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983); Golanty v. Commissioner, supra at 426. The taxpayer generally bears the burden of establishing that the activity was engaged in for profit.2 See Rule 142(a).



The regulations under section 183 provide a nonexclusive list of factors to be considered in determining whether an activity is engaged in for profit. The factors include: (1) The manner in which the taxpayer carried on the activity; (2) the expertise of the taxpayer or his advisers; (3) the time and effort the taxpayer spent in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the taxpayer's success in carrying on other activities; (6) the taxpayer's history of income or losses with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the taxpayer's financial status; and (9) whether elements of personal pleasure or recreation are involved. Sec. 1.183-2(b), Income Tax Regs.; see Golanty v. Commissioner, supra at 426.



As discussed below, on the basis of all the evidence in the record we conclude that petitioner did not engage in his greyhound activity for profit within the meaning of section 183.



1. Manner in Which Petitioner Carried on the Activity



Petitioner did not carry on his greyhound activity in a businesslike manner. He did not maintain complete and accurate books and records regarding his greyhound activity, did not maintain a written business plan, and did not contemporaneously prepare budgets or financial analyses for his greyhound activity. Although petitioner claims to have prepared a "cost analysis plan", at trial he acknowledged that this plan was prepared only in the course of the audit and examination of the tax years at issue. His substantiation of claimed expenses was spotty and consisted largely of some canceled checks supported by his vague testimony. He had no written contracts with the third parties who trained, hauled, and raced his greyhounds.3



Petitioner was licensed with the Arizona Department of Racing, at least for 2001; he alleges that he was also licensed with the Texas Department of Racing and the Florida Department of Racing. He also alleges that he had "some of the best blood lines in Greyhound Racing in the State of Arizona." Such circumstances do not suffice to establish, however, that petitioner conducted his greyhound activity in a businesslike manner. This factor weighs against petitioner.



2. Expertise of Petitioner or Advisers



Preparation for an activity by extensive study of its accepted business, economic, and scientific practices, or consultation with those who are expert therein, may indicate a profit motive if the taxpayer carries on the activity in accordance with such practices. Sec. 1.183-2(b)(2), Income Tax Regs. In analyzing profit motive, a distinction must be drawn between expertise in the mechanics of an activity and expertise in the business and economic aspects of an activity. See Burger v. Commissioner, supra at 359. Failure to consult economic experts or to develop an economic expertise may indicate a lack of a profit motive. Id.



Although petitioner presumably acquired some knowledge about the mechanics of greyhound breeding and racing before he commenced his greyhound activity, he has not demonstrated that he consulted economic experts or developed any personal economic expertise as to how to make a profitable business of his greyhound activity. This factor weighs against petitioner.



3. Time and Effort Expended in Activity



Time and effort expended in carrying on an activity may be indicative of profit motive, particularly in the absence of substantial personal or recreational elements associated with the activity. Sec. 1.183-2(b)(3), Income Tax Regs. During the years at issue, petitioner was a full-time IRS employee. At trial petitioner acknowledged that his full-time IRS job limited the time he could devote to the greyhound activity. Petitioner had time to breed only one litter of pups annually. At trial he conceded that for his greyhound activity to be profitable he would have needed to breed at least three or four litters annually. This factor weighs strongly against petitioner.



4. Expectation That Assets May Appreciate in Value



On brief petitioner contends that the expectation that one or more of his greyhounds might become a winning "Stakes Dog" was "a major component" in his decision to engage in his greyhound activity. He claims that such a dog "could easily have an expected value price of between $100,000 to $250,000." The evidence strongly suggests, however, that petitioner's greyhounds generally depreciated in value, being either "lost" during training or else "petted out" at the end of their racing careers.4 Insofar as the record shows, in all the years that petitioner engaged in his greyhound activity, he never sold any of his dogs. On the basis of the evidence in the record, we are unpersuaded that petitioner had a bona fide expectation of making a profit on his greyhound activity by selling his dogs at a price that would generate sufficient income to offset past losses.



Petitioner claims that improvements made to his property in 2002, such as the addition of a kennel house, added "considerable value" to his property. There is no evidence, however, that petitioner held his property with a view of subsequently selling it for a profit to defray the costs of his greyhound activity. Accordingly, we do not take these improvements into account in judging petitioner's objective in conducting the greyhound activity. See Golanty v. Commissioner, 72 T.C. at 430. In any event, the evidence in the record does not establish either the cost of the improvements or the extent to which they might have added to the property's value. This factor weighs against petitioner.



5. Petitioner's Success in Other Activities



If the taxpayer has engaged in similar activities in the past and converted them from unprofitable to profitable enterprises, it may tend to show that the current activity was entered into for profit, even though it is presently unprofitable. Sec. 1.183-2(b)(5), Income Tax Regs. Insofar as the record reveals, petitioner has not engaged in other activities similar to the greyhound activity by which we might evaluate his success in those other activities.5 This factor is neutral.



6. History of Income or Losses From Activity



Where losses continue beyond the period which is customarily necessary to bring the operation to profitable status, it may be an indication that the activity is not engaged in for profit. Sec. 1.183-2(b)(6), Income Tax Regs. As of 2003 petitioner had realized losses from his greyhound activity for 10 straight years. This factor weighs against petitioner.



7. Amount of Occasional Profits



The amount and frequency of occasional profits earned from the activity may be indicative of a profit objective. Sec. 1.183-2(b)(7), Income Tax Regs. Petitioner never realized a profit from his greyhound activity. This factor weighs against petitioner.



8. Petitioner's Financial Status



Substantial income from sources other than the activity may indicate lack of a profit motive, especially if there are personal or recreational elements involved. Sec. 1.183-2(b)(8), Income Tax Regs. During the years at issue, petitioner had a full-time job with the IRS. This factor weighs against petitioner.



9. Elements of Personal Pleasure



The presence of personal motives in carrying on an activity, especially if recreational or personal elements are involved, may indicate that the activity is not for profit. Sec. 1.183-2(b)(9), Income Tax Regs. The mere fact that a taxpayer derives pleasure from an activity, however, does not show a lack of profit objective if the activity is conducted for profit as evidenced by other factors. Id.



Certain aspects of petitioner's activity, such as feeding, grooming, and cleaning up after the greyhounds, generally might not be considered pleasurable, even though they are not so different from the duties of any pet owner. Ultimately, however, it seems to us that petitioner's activity of breeding greyhounds for racing, although conducted by petitioner in a seemingly inhumane manner (for many years keeping numerous dogs confined in crates in his Yuma, Arizona, garage, while he worked a full-time job at the IRS, sending the pups off to "training" that almost a fourth of them would not survive, and ultimately casting off most of the others for possible adoption or destruction)6 involved recreational elements as are common to other forms of recreational gambling, with those elements being enhanced by such sense of sport or gamesmanship as might derive from having one's own dogs in the races. This factor weighs against petitioner.



On the basis of all the evidence, we conclude that petitioner failed to establish that he engaged in his greyhound activity with a predominant, primary, or principal objective to make a profit within the meaning of section 183.




B. Section 6662 Accuracy-Related Penalty


Section 6662(a) and (b)(2) imposes a 20-percent accuracy-related penalty on any portion of a tax underpayment that is attributable to, among other things, any substantial understatement of income tax, defined in section 6662(d)(1)(A) as an understatement that exceeds the greater of 10 percent of the tax required to be shown on the return or $5,000. Sec. 6662(d)(1). Petitioner's understatement of tax for 2002 ($14,521) exceeds $5,000 (which is greater than 10 percent of the tax required to be shown on his 2002 return ($2,051)). Respondent has satisfied his burden of production under section 7491(c).



The accuracy-related penalty does not apply with respect to any portion of the underpayment if it is shown that the taxpayer had reasonable cause and acted in good faith. Sec. 6664(c)(1). Petitioner has not shown (or even expressly claimed) that he had reasonable cause or acted in good faith with respect to his understatements of income tax. Any such defense appears especially problematic in the light of petitioner's employment as an IRS auditor.



Contentions advanced by the parties and not addressed herein we conclude to be moot or without merit.7



Decision will be entered for respondent.


1 Respondent allowed petitioner miscellaneous itemized deductions equal to the amounts of gross income reported from the greyhound activity.

2 Petitioner has not claimed or shown that he meets the requirements under sec. 7491(a)(1) to shift the burden of proof to respondent as to any factual issue relating to his liability for tax.

3 At trial petitioner indicated that he wished to call as a witness Lonnie Boyle, who allegedly hauled petitioner's dogs to training sites and leased petitioner's dogs to run under Mr. Boyle's kennel name. Petitioner stated that he expected to elicit from Mr. Boyle testimony about the "mechanics of the racing kennel" and "basically what happens to the dogs through the racing end of it and what happens when it's petted out." Having failed to subpoena Mr. Boyle, however, petitioner failed to have him available at trial. The Court declined petitioner's request to continue the trial to receive Mr. Boyle's testimony at some later date. Insofar as it might be pertinent to our analysis of whether petitioner engaged in his greyhound activity for profit within the meaning of sec. 183, the subject matter of Mr. Boyle's expected testimony, as described by petitioner, appears largely redundant of undisputed information already in the record. Moreover, insofar as petitioner may have sought to elicit expert testimony from Mr. Boyle, petitioner failed to submit an expert report pursuant to Rule 143(f).

4 Petitioner claims that in 2000 one of his greyhounds won a race but acknowledges that by 2001 the greyhound had "finished her career" as a brood on his farm.

5 On brief, petitioner alleges that before going to work for the IRS he worked in the hotel industry.

6 In making these observations, we intend no inference as to any finding of criminal liability of petitioner, an issue which is beyond the purview of this Court.

7 In particular, petitioner states on brief that he "believes" that he has been audited twice for tax years 2001 and 2002, the first time as part of an investigation by the U.S. Treasury Inspector General for Tax Administration (TIGTA). He appears to suggest that because of this purported TIGTA investigation, the subsequent IRS examination which resulted in the notice of deficiency that is the subject of this proceeding was a second examination of petitioner's books and records that was prohibited pursuant to sec. 7605(b). Petitioner cites no authority (and we are aware of none) for the proposition that sec. 7605(b) applies to a TIGTA investigation of an IRS employee. In any event, the evidence in the record does not establish that respondent ever examined petitioner's books and records in connection with any TIGTA audit. To the contrary, according to petitioner's representations on brief, the TIGTA audit appears to have been concluded upon the basis of an interview with petitioner.