## Facts

- Roy and Antonette Barnes invested in cattle-related partnerships promoted by Walter J. Hoyt III and claimed partnership losses on their federal income tax returns for several years in the 1980s.
- The partnership losses were later disallowed after partnership-level proceedings; Hoyt was criminally convicted for fraud connected to the partnerships.
- In 2003, the IRS determined the Barneses owed roughly $400,000 in tax, interest, and penalties for the affected years.
- The Barneses were retired and reported significant medical and necessary living expenses; both sides’ financial analyses indicated they could pay about $140,000 over time (i.e., most assets plus future discretionary income).
- The Barneses submitted an offer in compromise (OIC) of $32,000, asserting (i) doubt as to collectibility and (ii) effective tax administration based on age, health, and fraud-victim status.
- An IRS Appeals officer rejected the OIC as less than reasonable collection potential and not qualifying for effective tax administration relief, and sustained a proposed levy.
- The Barneses petitioned the Tax Court to review the Notice of Determination in a collection due process (CDP) case under I.R.C. § 6330.

## Issues

1. Whether Appeals abused its discretion under I.R.C. § 6330 by rejecting the Barneses’ $32,000 OIC based on doubt as to collectibility and effective tax administration.
2. Whether Appeals abused its discretion by sustaining the proposed levy to collect the Barneses’ unpaid liabilities.

## Decision

- The Tax Court upheld the Notice of Determination.
- The court found no abuse of discretion in rejecting the $32,000 OIC.
- The court found no abuse of discretion in sustaining the proposed levy.

## Legal Principles

- In a CDP case where the underlying liability is not properly at issue, the Tax Court reviews Appeals’ collection determinations for abuse of discretion (i.e., whether the decision was arbitrary, capricious, or without sound basis in fact or law).
- For an OIC based on doubt as to collectibility, Appeals may rely on reasonable collection potential (net realizable asset equity plus future disposable income); an offer substantially below that amount may be rejected without abuse of discretion.
- Effective tax administration OICs require a showing such as economic hardship (inability to meet basic living expenses) or exceptional public policy/equity considerations; sympathetic circumstances do not compel acceptance absent a sufficient showing under the governing standards.
- Fraud-victim status connected to an abusive tax shelter, without more, does not require acceptance of a discounted OIC when Appeals reasonably determines collection at a higher amount is feasible without qualifying hardship.
- A levy may be sustained when Appeals verifies procedural compliance, considers proposed collection alternatives, and reasonably balances efficient collection against intrusiveness.

## Conclusion

The Tax Court sustained Appeals’ determination because the OIC was far below the Barneses’ reasonable collection potential and the record did not establish hardship or other qualifying grounds requiring an effective tax administration compromise; with procedures followed and alternatives considered, sustaining the levy was a reasonable exercise of discretion under § 6330.


Barnes v. Comm’r, T.C. Memo. 2006-150 (2006)