⁴ All Petitioners based their offer on Public Policy and Equity.

amount of time it takes to conclude a tax shelter case. The IRS began auditing the Hoyt tax shelters at some time prior to 1982, according to a June 18, 1982 Memorandum from CID declining an examination criminal referral concerning Jay Hoyt. ER-2 174; ER-10 135-136, 138-139. Thus, the interest date of April 15, 1993, allowed for a minimum of 10 years for the Hoyt tax shelter to process through the system. The best evidence that 10 years was a sufficient amount of time (and that the remainder of the time would fall under the category of “longstanding”) is the fact that the opinion in Bales v. Commissioner was issued in October 1989. ER-11 55-56. SO Cochran denied the OICs for all the ETA only Petitioners except Keller, which was denied by Settlement Officer Vander Linden (“SO Vander Linden”). ER-5 20, 79-89; ER-10 150-164; ER-11 81; ER-14 150, 155.

3. The Special Circumstances Offers:

a. Robert Andrews.

Petitioner Robert Andrews was 61 years old at the time of trial. ER-3 20-21. Carol Andrews would have been 57 years old at the time of trial, but she died on April 29, 2005. ER-3 161, 203. The Andrews offered $25,000.00 to compromise their Hoyt tax liabilities for 1981 to 1996, based on Doubt as to Collectibility (“DATC”) due to their special circumstances and ETA. ER-3 95, 154-155. ER-2 694. The Andrews believed that a DATC was appropriate due to their heath and retirement concerns. The Commissioner rejected this offer and determined that the Andrews could pay at $380,076.00 based upon their financial statement. ER-3, 186.

Mr. Andrews suffers from severe depression and has recently been treated for skin cancer. ER-3 124. Mrs. Andrews suffered from a heart condition that had caused her two heart attacks since 1992. ER-3 124. As a result of her heart condition she underwent several angioplasties and expected to undergo several additional angioplasties. ER-3 124. Mrs. Andrews also had diabetes, suffered from high blood pressure, high cholesterol, acid reflux disease, and depression. ER-3, 124.

The Andrews had net assets available of $161,146, prior to any reduction for their medical and retirement concerns. ER-3 102. The Andrews warned SO Cochran of the severity of their medical conditions. ER-3 123-153, 168-174. Nonetheless, SO Cochran stated that she considered Robert and Carol’s medical and health conditions by looking at “what they were earning” compared to “what they had.” ER-3 86, 175-187. SO Cochran did not specifically address and was unable to show how Petitioners’ health and medical conditions impacted her financial analysis in any specific way. ER-3 85-86, 88, 106.

As a result of Carol Andrews’ passing, Robert may owe more than $471,000 in doctor’s bills. ER-3 28-29, 31-32, 36. A payment of approximately $400,000 to the IRS would force Robert liquidate his home and whatever little savings he has, leaving him impoverished. ER-3 30.

b. Roy and Antonette Barnes.

Petitioners Roy and Antonette (“Toni”) Barnes⁵ were 65 and 62 years old and retired at the time of their CDP hearing. ER-4 78, 87 (line 3a). Given the Barnes’ medical and retirement needs, they offered the IRS $32,000.00 to compromise their Hoyt tax liabilities for 1981 to 1996. ER-4 77, 80. The Commissioner denied this offer and determined that the Barnes could pay at least $139,617.00 after paying ordinary and necessary expenses toward their tax liability. ER-1 188-191, ER-4 103, 115.

The Commissioner’s determination ignored the Barnes age and health concerns. Roy Barnes had gall bladder surgery approximately four (4) years ago and has urinary problems for which he takes the prescription medication Hytren. ER-4 78, 87-102. Toni Barnes suffers from high blood pressure, for which she takes the prescription medication Diovan. ER-4 78, 87-102. The Barnes also live on a fixed income of $4,707.00 per month and had only $1 left over after paying

⁵ Roy and Toni Barnes are not related to Dave and April Barnes, who were coconspirators with Hoyt the ordinary and necessary expenses. ER-4 78, 92.

The major difference between the Commissioner’s determination and the Barnes’ numbers is that SO Cochran determined home equity of $89,000 was a collectible asset. ER-4 111, 113. However, at the time the offer was submitted, the Barnes owned their home outright, i.e., they did not have a mortgage payment. ER-4 92. SO Cochran did not make a corresponding adjustment to compensate for the mortgage payments and/or rent payments that would be needed if the Commissioner’s determination prevailed.

c. Roger and Lora Carter.

The Carters offer $99,851.37 to compromise their Hoyt tax liabilities for 1981 to 1996, based upon the equities and the special circumstances of their case. ER-6 199, 224-225. SO Cochran denied the OIC and determined that it must have equaled or exceeded $380,706.00. ER-6, p. 287.

Roger Carter has arthritis in both of his knees, a bad right hip, and degenerative back problems. ER-6 59-60, 200-201, 257. During 2002 to 2003, Lora Carter was diagnosed with multiple health issues including, collagenous colitis, sacoidosis, Wegener’s disease and an atrial fibrillation. ER-6 77-80, 200, 213-214. She is no longer employed due to her many disabilities. ER-6 77-80.

The Carter’s offer was to be funded by obtaining a loan from the equity in their home. ER-6 199. Roger’s pension was not included as it was retained to provide for their basic and necessary living expenses and foreseeable medical increases during retirement. ER-6 200-202.

Commissioner’s determination ignored Lora’s significant health issues and determined that she would return to the workforce, arbitrarily increased the value of the home, and then lowered the allowable monthly mortgage payments (from actual payments made). ER-6 155, 158-159, 284-287.

d. Roger and Mary Catlow.

The Catlows offered $35,000 to compromise their Hoyt tax liablities for 1981 to 1996, based upon DATC and their special circumstances. ER-7 8, 92. SO Cochran rejected this offer and determined the Catlows must pay at least $193,438.00. ER-7 121.

Commissioner’s determination ignored the Catlows’ finances and age. At the time of the offer, Roger was sixty-one and Mary was sixty-four. ER-7 85, 100. The Catlows were also retired and lived solely on a fixed pension of $4,551.00 per month. ER-7 10, 85, 105, 118 119.

Nonetheless, SO Cochran determined they had realizable equity in their assets of $155,230.00. ER-7 4, 118, 121. In making this calculation SO Cochran used all of the home equity in her analysis, but did not allow an increase in the Catlows’ housing expenses to account for their increased costs upon sale of their land. SO Cochran also erroneously disallowed, in the aggregate, $1,396.00 of the Catlows’ reported monthly expenses, without considering their circumstances or contacting them for any additional information or documentation. The Catlows cannot leverage their property, because they would be unable to afford the additional monthly payments of any such financing on their fixed income. ER-7 105 (compare lines 34 and 45).

SO Cochran also erred when she failed to discount the property to quick sale value or adjust her computations in any way to account for the true realizable value (e.g. reductions for transactions costs). The same is true of the Catlows’ retirement accounts. ER-7 118, 121.

e. Donald and Yvonne Clayton

Donald and Yvonne Clayton were 69 and 72 years old and retired at the time of their CDP hearing. ER-8 101, 120 (lines 3a & 4a). They offered $100,000.00, is settlement of their Hoyt tax liabilities for 1982 to 1996, based upon their retirement needs. That is, they needed to retain some of their asset equity to meet their ordinary and necessary living expenses in their retirement years. ER-8 100101, 105-107, 125 (lines 34 and 45). SO Cochran determined their offer amount must have equaled at least $431,417.00. ER-8 140.

The Claytons reported living on a fixed income of $2,516.00 per month in combined pension/social security income. ER-8 101, 125. They were able to live on such a small amount because they own their home outright. The home had approximately $67,777 of equity. ER-8 122. However, the sale of their home would create an economic hardship due to their fixed income, because they could not pay on a mortgage on their home if forced to obtain one. ER-8 101.

SO Cochran ignored the Clayton’s retirement status. Thus, SO Cochran included the full amount of the home equity in her calculation. Bizarrely, SO Cochran also determined that the Clayton’s monthly $1,000 payments to the Commissioner was a dissipation of assets. This increased reasonable collection potential by $65,700. ER-8 4 thru 9, 139.

f. Donald Ertz.

Mr. Ertz offered $157,824.00 to compromise his 1982 to 1996 Hoyt tax liablities, based on DATC after consideration of his special circumstances. ER-9 135-136. SO Cochran determined that Donald Ertz could pay $503,834.00. ER-9, p. 175.

In making her determination, SO Cochran ignored Mr. Ertx’ health and age. Mr. Ertz had suffered four strokes, beginning in the late 1980s through 1999. ER-9 29-31, 123, 139 (footnote 1). As a result, he lost motor skills, acquired a limp, and was forced into an early retirement after the fourth stroke, which resulted in a reduction in his pension. ER-9 30-31. He has difficulty walking and talking, and he needs assistance filling out forms or writing due to the loss of motor skills. ER9 31-32.

Mr. Ertz estimated that he and his wife required the remaining portion of his pension to fund necessary living expenses and future medical expenses. ER-9 124. He also reported that he has a net zero collection potential from future assets, due to the fact that his monthly income is not sufficient to meet his monthly living expenses. ER-9 153. As far as assets are concerned, Donald Ertz reported the realizable value (pursuant to ER-9, p. 153).

Not only did SO Cochran determine that Mr. Ertz did not need the his estimated value of his assets, she believed those assets were worth more than Mr. Ertz claimed. The disputed valuations involved the home and the 401(k) account. Donald Ertz valued his home at $102,855 ER-9, p. 123 and his 401(k) account at $178,483. ER-9 123, 147 (line 13a – using 70% of fair market value due to taxes), 149 (line 20a).

SO Cochran determined that Donald Ertz could pay, and his offer amount must have equaled or exceeded, $503,834.00. ER-9 175. In making this determination, SO Cochran SO Cochran increased the equity in the home to $229,060, without obtaining an appraisal or viewing the property. ER-9 66, 124, 172, 178. She also increased the collection potential of the 401(k) account to $207,629 by failing to include the tax consequences on liquidation. ER-9 172. Lastly, SO Cochran indicated Mr. Ertz’s mortgage would be paid off soon, and at that time more disposable income would be present, despite the fact that she was using the home as a collectible asset which would mean an adjustment was required for loan or rent payments. See ER-1 439-440.

g. Frank and Janetta Hubbart.

The Hubbarts offtered $60,400 for the Hoyt tax liabilities for 1981 to 1996, based on DATC with consideration for their special circumstances. ER-12 37, 47, 143-144. SO Cochran determined that the Hubbarts could pay $394,318.00. ER12 208. Cochran’s determination ignored the Hubbarts’ age and significant health issues.

The Hubbarts were in their mid sixties at the time of the CDP hearing. ER12 92, 155, 211-214. The Hubbarts’ projections estimated that they would need to retain some of their asset equity to meet their ordinary and necessary living expenses, after incurring a mortgage to fund the proposed offer amount. ER-12 124, 128, 154 (lines 34 and 45). The Hubbarts also warned SO Cochran of the severity of their medical conditions. ER-12 123-125.

Frank Hubbart had a heart attack in 1995 and has regular follow-ups and treatments for his heart condition. ER-12 44, 63-64, 123, 161-196. Janetta Hubbart has ulcerative colitis which forced her to retire prematurely at age 59. ER-12 94-95, 123. She has had a hyperthyroid since approximately 2000 and hypertension for approximately the last ten years. ER-12 98. She also has osteoarthritis in her knee which limits her mobility and requires her to walk with the aid of a cane in her left hand. ER-12 96-97. Despite her limited mobility, Mrs. Hubbart has little difficulty maneuvering through her specially equipped residence, which is a single level home without any steps and sufficiently wide doors for her to use with her cane. ER-12 98. The Hubbarts also take numerous prescription medications. ER-12 63, 96-98, 161-196. Frank and Janetta live on a fixed income of $7,263 per month in combined pension/social security income. ER-12 154. The main disputes between the parties focus on what assets the Hubbarts need to retain during their retirement. There was also a dispute over the value of the specially equipped home. The Hubbarts valued their home at $165,713.00 (ER-12 158 (lines 20a, 20b)), whereas SO Cochran determined the home had a value of $214,141. However, Cochran did not contact the Hubbarts to request an appraisal. ER-12 26-27, 204-205, 211-214. The Hubbarts’ specially equipped home was determined to be a collectible asset.

h. Bobbie Johnson

The Johnsons offered $120,500 for their Hoyt tax liablities for 1981 to 1996, based on DATC with consideration for their special circumstances. ER-13 9, 159, 160. SO Cochran determined that the Johnsons could pay $456,881.00. ER-13, 189.

The determination again ignored the taxpayers’ health and age. Bobbie and Martha Johnson are both retired and were 76 (Bobbie) and 71 (Martha) years old at trial. ER-1 528. They warned SO Cochran that, given their age and medical conditions, additional medical problems and increased costs associated with such problems were likely in the near future. ER-13 140, 145. After submission of the offer, Mrs. Johnson had gall bladder surgery, lost 30 pounds, and spent five days in the hospital. ER-13 46-47. To this day, she has significant problems with her digestive system and can only eat in small portions. ER-13 46. At the time of the hearing Mrs. Johnson also had bilateral tarsal tunnel syndrome, thoracic and lumbosacral myofascial strain with bilateral radicular pain, osteoarthritis of the thoracic and lumbar spine, and right shoulder impingement syndrome. ER-13 151. Mr. Johnson has degenerative disk disease and osteoarthritis of the cervical spine and was prescribed therapy 3x/week for his lower back and leg pain. ER-13 42, 148.

The disputed issues include both expenses and the value of assets. At the CDP Hearing, the Johnsons reported actual housing and utilities expenses of $1,254.00 per month, but SO Cochran limited them to $885 per month. ER-13 173 (line 36), 187. The Johnsons also reported that the realizable value of their investments was $139,627.00 – due to costs of liquidation (including taxes). ER13 168. SO Cochran erroneously included the full fair market value of the investments, only allowing liquidations costs for those assets that the taxpayers planned to liquidate to pay the offer. In other words, did not allow for liquidations of the additional assets she determined needed to be liquidated. ER-13 186-187.

Lastly, the Johnsons reported that although their vehicles were paid in full, if they were to be liquidated replacement vehicles would need to be purchased and future car payments would be incurred. ER-13, p. 141. SO Cochran ignored this statement and liquidated the vehicles in her calculation with no corresponding increase for car payments. ER-13 97, 186, 188.

SO Cochran was unable to show how Mr. and Mrs. Johnson’s age and/or retirement status impacted her decision in any other way. ER-13 95-98, 189-190.

i. William and JoAnne Lindley.

The Lindleys offered $40,413 for their Hoyt tax liablities for 1987 to 1996, based on DATC with consideration for their special circumstances, or in the alternative, ETA. ER-15 177-178. Eventually the Lindleys increased their offer to $150,000. ER-15 202. SO Tom Owens determined that Petitioners could pay $426,439. ER-15. 210. The Tax Court, on the other hand, determined that reasonable collection potential was $175,535. ER-1 727. However, the Tax Court also determined that even though the offer was denied based on DATC, SO Owens would not have abused his discretion by denying it based on DATC with special circumstances or ETA. ER-1 719-721.

The Commissioner’s determination was clearly in error as the Tax Court found that reasonable collection potential was only $175,000. Both the Commissioner and the Tax Court failed to consider the Lindleys’ health and financial issues. Mr. Lindley has Type 2 diabetes, hypertension, and high cholesterol. ER-15 127-129, 171. Mrs. Lindley suffers from inflammation of the arteries and significant hypertension. ER-15 128-129, 171, 175.

SO Owens erred when he only considered actual medical expenses at the time of the hearing even though the Lindley’s provided a detailed analysis substantiating (to the extent possible) the Lindleys’ future medical needs. This projection was substantiated with receipts, medical records, and medical research concerning diabetes, hypertension, and high cholesterol. ER-15, 170-71, 201-202, 205 SO Owens disregarded this substantiation, but was unable to show how the Lindleys’ health and medical conditions impacted SO Owens’ financial analysis in any way. ER-15 212-17.

j. Gary McDonough.

Mr. McDonough offered $102,000 for his Hoyt tax liabilities for 1987 to 1996, based on DATC with consideration for his special circumstances. ER-16 129-130, 159, 171, 188-192. SO Cochran determined that Petitioner could pay $663,914.00. ER-16 221.

As part of the offer Mr. McDonough warned SO Cochran of the continuing nature of his medical conditions. ER-16 129, 145-157, 198. Mr. McDonough had been treated for multiple work related injuries to various parts of his body, including the lumbar, cervical and thoracic spine, bilateral wrists and right elbow. ER-16 32-33, 145-146. Two different doctors expressed concerns about Gary’s injuries and pain, and the future inability to work based on these disabilities. ER16 32-33, 145-146. Despite Mr. McDonough’s demonstrated medical need for retirement, SO Cochran determined that Mr. McDonough could actually work for 10 more years. ER-16 96-97, 107. As such, SO Cochran included $367,024.00 of future income in her computation of his ability to pay. ER-16 96, 220.

Additional disputes concerned the disallowance of actual housing expenses, and the fair market value of Mr McDonough’s home and additional land owned in Arizona. SO Cochran failed to reduce the value of the real estate when she determined relizable value. By ignoring disposition costs, SO Cochran overinflated the value of Mr. McDonough’s two larges assets. ER-16 217.

k. Martin and Sharon Smith.

The Smiths offered $11,552 for their Hoyt tax liabilities for 1984 to 19968, based on DATC with consideration of their special circumstances and on ETA. ER-17 35-42. Settlement Officer Nancy Driver (“SO Driver”) appears to have determined that the Smiths could pay the fully pay the liability and determined that Petitioners’ OIC was not an acceptable collection alternative, and it was rejected. ER-17 107.

Petitioners were 68 (Martin) and 64 (Sharon) years of age at the time of their offer. ER-17 36 & 47 (lines 3a & 4a). They needed to retain their home equity and retirement funds as they were currently on a fixed income and depleting their retirement funds to pay for basic living expenses. ER-17 52 (lines 35 & 45), 79

81. Indeed, they reported monthly gross income of $3,223 and monthly expenses of $4,042. ER-17 52. SO Driver did not challenge or dispute Petitioners’ reported shortfall in income, nor did she find that it was incorrect. See ER-17 99-120.

The Smiths demonstrated with significant supporting documentation, including letters from doctors, that they both had major medical concerns. ER-17, 36, 53-70, 73-78. One of their letters indicated that Martin Smith was currently in the intensive care unit due to a recent bypass surgery. ER-17 36. SO Driver failed to show how age and/or retirement status impacted her decision in any specific way. ER-17 99-120. SO Driver also determined that the Smiths were not good installment agreement candidates because of inadequate monthly disposable income, their age, and their health. ER-17 121 (11/10/2004 entry).

SUMMARY OF THE ARGUMENT

1. Section 6330 of the Code established Collection Due Process (“CDP”) hearings to allow taxpayers an opportunity for a hearing before levy. Taxpayers may raise any relevant issue regarding the unpaid tax or levy, including proposals of collection alternatives such as an offer in compromise (“OIC”). 26 U.S.C. § 6330(c)(2)(A). The Treasury Regulations provide further OIC guidance by indicating “the IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability.” Treas. Reg. § 301.71221(b)(3)(ii)(emphasis added). Moreover, the legislative history behind this regulation explains “the IRS may utilize this new authority to resolve longstanding cases by foregoing penalties and interest which have accumulated as a result of delay in determining the taxpayer’s liability.” H.R. Conf. Rep. No. 105-599, at 289 (1998).

This Court has previously considered an OIC based on Effective Tax Administration (“ETA”) in Fargo v. Commissioner, 447 F.3d 706, 709 (9th Cir. 2006), in which Petitioners’ submitted an amicus brief. When analyzing Fargo, this Court determined there were several factors cutting against relief based on ETA grounds, include the fact that the taxpayers were involved in purely tax motivated transaction, there was no evidence the taxpayers were victims of fraud, the delay in determining liability was due solely to TEFRA procedures, and the taxpayers did not research the investment or maintain contact with the financial agent. Id. at 714. In denying all the OICs, the Settlement Officer’s did not grant ETA relief, despite the fact that all four of the factors that were missing in Fargo are present here. Instead, determinative weight was placed on a provision in the Internal Revenue Manual (“IRM”), which do “have the force and effect of law.” See id. at 713. This resulted in an “erroneous view of the law” and was therefore an abuse of discretion. Id. at 709

All of Petitioners in this case submitted an OIC as part of the CDP hearings claiming they are entitled for relief based on public policy and equity grounds through ETA based on their involvement in cattle and/or sheep partnerships promoted by the late Walter J. Hoyt, III. IRS Settlement Officer Linda Cochran was responsible for hearing all of the cases, with the exception of Keller, Lindley, and Smith.

All available information, including independent publications, ranch tours, auctions where Hoyt cattle brought a hefty price tag, independent cattle counts, and a victory by Hoyt in Bales v. Commissioner, T.C. Memo. 1989-568; 58 T.C.M. (CCH) 431 (1989), showed Petitioners they were involved in a legitimate business. However, as shown by his criminal conviction, these promises were false which resulted in Hoyt being convicted for what the district court labeled the most egregious white collar crime ever committed in the State of Oregon.

Despite at least four criminal investigations by Commissioner between 1984 through 1995, it was the U.S. Postal Inspector who was eventually successful in the prosecution. Commissioner not only failed to convict Jay Hoyt on criminal charges, but she continued to let him practice as an Enrolled Agent until approximately 1997, despite evidence of misconduct going all the way back to 1982. Moreover, between February 1991 and March 1993, Commissioner delayed assessing preparer penalty against Hoyt in exchange for partnership statute of limitations extensions, which furthered the delay and kept Hoyt going even longer. Thus, given all the facts and circumstances of these cases there is certainly compelling public policy and equity considerations identified that provide a sufficient basis for compromising the liability.

1. Relief can be given not only due to “compelling public policy or equity”, but also based on the economic hardship that a taxpayer will face through full collection potential. Commissioner should consider abating penalties and interest in certain special circumstances when collection of the full liability would cause economic hardship. Treas. Reg. § 301.7122-1(b)(3). The regulations do not contain a time limit to the living expense allowance. As such, various Petitioners offered their reasonable collection potential, reduced based on their special circumstances, in addition to making a claim based on public policy and equity. One Petitioner was in intensive care when the offer was submitted and another one died before trial. Others were suffering a variety of serious ailments, advanced age, limited mobility, and limited earning power while in retirement. Nonetheless, Commissioner determined that special circumstances did not exist, and that full collection potential (which varies greatly depending on the manner in which valuations were performed) was the only option. These actions constitute a clearly erroneous assessment of the facts. Fargo, 447 F.3d at 709.

2. The necessary factual findings were not made at the partnership level to support Commissioner’s computational adjustment of tax motivated transaction (“TMT”) interest under Section 6621(c)(1986), repealed by Pub. L. No. 101-239, §

7721(b)(1989). Given that Petitioners have not had the opportunity to dispute TMT interest, they are allowed to dispute TMT interest in the context of a Collection Due Process (“CDP”) hearing. 26 U.S.C. § 6330(c)(2)(B)(d). Moreover, when Commissioner issued notices of determination that affirmed the imposition of TMT interest, the Tax Court obtained jurisdiction to review Commissioner’s findings regarding this issue using a de novo standard of review. Goza v. Commissioner, 114 T.C. 176, 181 (2000); ER-1 454.

This Court’s decision in River City Ranches, #1 (RCR #1), does not divest the Tax Court from jurisdiction to review the partnership record to determine if sufficient factual findings were made. See River City Ranches #1 v. Commissioner, 401 F.3d 1136 (9th Cir. 2005); ER-1 457-459. However, the Tax Court’s review cannot extend to making “findings concerning the character of the partnership[’s] transactions.” RCR #1, 401 F.3d at 1144 (citing 26 U.S.C. § 6231(a)(3)). Nonetheless, jurisdiction clearly exists for the purpose of evaluating Commissioner’s computational adjustments for accuracy using the partnership record. See 26 U.S.C. § 6330(c)(2)(B), (d).

4. In the April 2006 cases the Tax Court granted the Commissioner’s motions in limine concerning evidence purportedly not provided to the settlement officers. Additionally, all Petitioners (both October 2005 and April 2006 cases) were not allowed supplement the record when there motions to remand or reopen the record were denied. Two categories of evidence were not admitted: (1) new evidence obtained by Petitioners after the hearing (all Petitioners) and (2) background evidence (April 2006 cases). Consequently, the Tax Court did not allow newly discovered evidence from IRS central audit files that was provided after the CDP Hearings through ongoing partnership litigation, three stipulation of facts containing background information (April 2006 cases), and the Petitioners’ corroborating testimony (April 2006 cases).

The Tax Court’s failure to allow newly discovered evidence and background information effectively insulated Commissioner from review, as she did not need to provide what was already in her possession, which in this case is superior knowledge regarding the Hoyt organization.

5. After discovering that a government report concerning the Hoyt audit may exist, Petitioners served the Treasury Inspector General for Tax Administration (“TIGTA’) with subpoenas requesting production of any document regarding alleged misconduct by any IRS employee that relates to Petitioners. As it turned out, TIGTA conducted an investigation. While Petitioners do not know exactly what happened in the investigation, they do know from TIGTA’s motion that it “showed no deliberate wrongdoing by IRS personnel or malicious intent by the IRS,” and the Tax Court refused to enforce the subpoena after conducting an in-camera review.

The standard that the Tax Court should have applied was whether the documents were arguably relevant to the cases at issue. It should be noted that any delay is relevant to Petitioners’ ETA argument, even if it was not deliberate or malicious. Consequently, the Tax Court should have granted Petitioners’ motions to enforce the subpoenas, or at least provided Petitioners with more information regarding why the materials were not arguably relevant.

ARGUMENT

A. Standard of Review.

This Court reviews the Tax Court's decisions under the same standard as civil bench trials in district court, i.e., de novo. Fargo v. Commissioner, 447 F.3d 706, 709 (9th Cir. 2006); Boyd Gaming Corp. v. Comm'r, 177 F.3d 1096, 1098 (9th Cir. 1999). “In this instance, de novo review amounts to a fresh analysis of whether the Commissioner abused his discretion. Abuse of discretion occurs when a decision is based on an erroneous view of the law or a clearly erroneous assessment of the facts.’" Fargo, 447 F.3d at 709 (citing United States v. Morales, 108 F.3d 1031, 1035 (9th Cir. 1997)(en banc)(citing Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990)).

B. The History of Section 6330 and Effective Tax Administration Offers.

Section 6330 was enacted as part of the Internal Revenue Service Restructuring and Reform Act of 1998 (the “RRA 1998”). Pub. L. No. 105-206. Congress established Collection Due Process (“CDP”) hearings to temper "any harshness caused by allowing the IRS to levy on property without any provision for advance hearing." Olsen v. United States, 414 F.3d 144, 150 (1st Cir. 2005). During the hearing, a taxpayer may raise "any relevant issue relating to the unpaid tax or the proposed levy, including … offers of collection alternatives, which may include an offer-in-compromise." 26 U.S.C. § 6330(c)(2)(A).

One of the significant changes made concerned Offers in Compromises (“OIC”) pursuant to Section 7122. See RRA 1998, Pub. L. No. 105-206, § 3462(a) (codified as amended at 26 U.S.C. § 7122(c)(1)). Consideration of factors such as equity and public policy represented a significant expansion of the traditional grounds for compromising cases, which formerly were limited to doubt as to liability and doubt as to collectibility. The legislative history clearly states that the Commissioner should consider abating penalties and interest in certain situations:

For example, the conferees anticipate that the IRS will take into account factors such as equity, hardship, and public policy where a compromise of an individual taxpayer’s income tax liability would promote effective tax administration. The conferees anticipate that, among other situations, the IRS may utilize this new authority to resolve longstanding cases by foregoing penalties and interest which have accumulated as a result of delay in determining the taxpayer’s liability. The conferees believe that the ability to compromise tax liability and to make payments of tax liability and to make payments of tax liability by installment enhances taxpayer compliance. In addition, the conferees believe that the IRS should be flexible in finding ways to work with taxpayers who are sincerely trying to meet their obligations and remain in the tax system.

H.R. Conf. Rep. No. 105-599, at 289 (1998).

The Treasury Regulations provide further guidance by indicating “the IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability.” Treas. Reg. § 301.7122-1(b)(3)(ii)(emphasis added). Compromise will not be justified when collection of the full liability will “undermine public confidence that the tax laws are being administered in a fair and equitable manner.” Id. Factors that will undermine public confidence include a history of noncompliance in regards to filing and payment obligations, deliberate actions to avoid payment of taxes, and the encouragement of others to refuse to comply with the tax laws. Id. §§ 301.7122-1(c)(3)(ii)(a)-(c). Moreover, one example that justifies compromise is a taxpayer with a serious illness who was unable to manage any of his financial affairs. Id. § 301.7122-1(c)(3)(iv)(example 1).

C. The Commissioner Abused His Discretion When He Refused to Acknowledge the Equities of the Instant Cases.

1. The Hoyt CDP Cases are Replete with Public Policy and Equity Concerns. “The determination whether to accept or reject an offer to compromise will be based upon consideration of all the facts and circumstances, including whether the circumstances of a particular case warrant acceptance of an amount that might not otherwise be acceptable under the Secretary's policies and procedures.” Treas. Reg. § 301.7122-1(b)(3)(ii)(emphasis added). Consequently, the Commissioner’s Internal Revenue Manual (“IRM”) provisions in regard to TEFRA effective tax administration offers are merely “directory rather than mandatory, are not codified regulations, and clearly do not have the force and effect of law.” Fargo, 447 F.3d at 713; ER-6 279-280 (citing IRM 5.8.11.2.2(3)). Settlement Officer Linda Cochran, by her own admission, refused to deviate from the IRM, while other Settlement Officers felt constrained. See, e.g., ER-2 211-112, 229, 237; ER-3 80-83, 179, 187; ER-12 45-46, 200-201, 209; See also ER-14 90-91 (SO Vander Linden); ER-15 63-64 (SO Owens). The Settlement

Officer’s determination must look beyond the Commissioner’s “prescribed guidelines.” Treas. Reg. § 301.7122-1(c)(1). The failure to do so is an “erroneous view of law,” which constitutes an abuse of discretion.

The regulations do not give a more exact standard or a list of factors to be considered, but illustrate through two examples. See Treas. Reg. § 301.71221(c)(3)(iv). These examples are only a small sampling of the types of cases that can be compromised. It is an abuse of discretion to refuse relief to Petitioners based upon the IRM example, when that example only bears a [slight] resemblance to the instant case. See ER-2 228-229 (citing I.R.M. 5.8.11.2.2(3). There are major differences between I.R.M. 5.8.11.2.2(3) and Petitioners’ facts.

Thus, the TEFRA example in the manual that was routinely given determinative weight by settlement officers merely provided guidance; it did not have the force of law. See IRM 5.8.11.2.2(3) & (4) Public Policy or Equity Grounds (May 15, 2004). ER-2 111-112, 229, 237; ER-3 80-83, 179, 187; ER-6 45; ER-12 45-46, 200-201, 209; See also ER-14 90-91 (SO Vander Linden); ER-15 63-64 (SO Owens).

Both the Manual and the training materials failed to alert the Commissioner’s employees that penalty and interest abatement can be appropriate due to the action of a third party. See ER-2 1083 (T.D. 9007) (7/26/1999)). And, SO Cochran appeared unable to evaluate how the unique Hoyt facts were significantly different than the Manual example. ER-6 164. I.R.M. 5.8.11.2.2(3). Specifically, SO Cochran did not consider:

a) Hoyt’s criminal conviction. ER-6 164, 279-280. b) That Petitioners were defrauded by Hoyt. ER-6 164, 233-234, 279-280,

288. c) Petitioners’ reliance on Hoyt’s Enrolled Agent status. ER-6 147-148, 164, 279-280, 308. d) Appeals Officer McDevitt’s supporting statement. ER-6 145-146, 232, 234, 279-280, 308-309; ER-2 279. e) Petitioners’ medical issues and needs during retirement. ER-6 199-202, 276-289. f) The Commissioner’s delays attributable to the criminal investigation. ER-6 149, 165, 228, 276-289; ER-2 1043. g) The Commissioner’s inexplicable lack of ability to shut Hoyt down. ER-6 276-289. h) That Hoyt was a well-known cattle breeder and that it would be impossible for an average taxpayer to figure out what was going on. ER-6 233, 276-289; ER-2 259, 279-280; RCR #1, 401 F.3d at 1142.

These failures alone constitute an erroneous view of the law and a clearly erroneous assessment of the facts and show that the Commissioner denied interest and penalty abatement in this case only because it was a TEFRA case. It is clear that no other additional facts (no matter how egregious) would change the Commissioner’s position concerning TEFRA cases. ER-6 130-131, 279-280; ER14 86-87. Furthermore, the delay in shutting down the Hoyt tax shelter was due in part to the Commissioner’s actions (and inactions) and only in part to Hoyt himself. ER-14 86-87. This missing analysis deprived the Tax Court of the ability to conduct a “thorough, probing, and in-depth” review of the Commissioner’s determinations and was an abuse of discretion. See Asarco, Inc. v. EPA, 616 F.2d 1153, 1158 (9th Cir. 1980).

The Tax Court correctly noted that it cannot substitute its judgment for the Commissioner. See, e.g., ER-1 54. However, this does not mean that it should engage in a superficial review of the Commissioner’s determination. The opposite is true. This Court has held: “The court cannot adequately discharge its duty to engage in a "substantial inquiry" if it is required to take the agency's word that it considered all relevant matters.” Id. at 1160. The Commissioner effectively required the Tax Court to take his word that all relevant matters were considered, but she failed to provide this Court with sufficient reasons for reaching that conclusion.

The Commissioner’s missing analysis becomes very important in light of Fargo, where this Court stated: There are a number of factors cutting against Taxpayers [the Fargos] which do not lend themselves towards relief on effective tax administration grounds: 1) Taxpayers invested in tax shelters, and purely tax-motivated transactions are frowned upon by the Code; 2) no evidence was presented to suggest that Taxpayers were the subject of fraud or deception; 3) the delay that took place was due to well-established TEFRA procedures and the inability of Taxpayers' TMPs to negotiate quickly; and 4) the primary incentives created by

requiring full payment are to encourage taxpayers to research future investments more carefully and to keep in better contact with financial agents (such as TMPs).  Fargo, 447 F.3d at 714.

These missing Fargo factors are present in the instant cases, but were not properly analyzed by the Commissioner. It is also relevant that Petitioners were some of the amici in the Fargo case, so this Court’s statements were made knowing that Hoyt ETA cases were pending. The four Fargo factors provide a sufficient basis for compromising the liability due to compelling public policy and equity considerations.

a. Petitioners’ Investment Was Not Purely Tax-Motivated.

There is substantial evidence that Petitioners’ investments were not purely tax-motivated. The mere fact that Hoyt was convicted for defrauding Petitioners of their investment establishes that they did not invest primarily for tax benefits. Had they invested principally for tax benefits, then they would have gotten what they paid for -- nothing and they would not have been defrauded. The fact that there were insufficient cattle or values for their investment would not have mattered to the U.S. Attorney because it would have simply been a case of tax fraud, not fraud on the individuals. ER-2 210, 959-960.

Hoyt’s promises of high quality cattle seemed completely legitimate as he was a nationally known and respected cattle breeder. Indeed, the Tax Court performed what the IRS considered to be an “exhaustive analysis of the Shorthorn breeding business, properly crediting the Hoyt family as one of the top breeders in the industry.” ER-2 255; See also Bales, 58 T.C.M (CCH) at 445. Even the Commissioner’s employees do not believe that Petitioners’ principle motivation was tax avoidance. ER-2 279.

Many Petitioners had cattle or agricultural backgrounds and trusted the Hoyt organization would be a good investment. For example, (1) Roy and Toni Barnes were both knowledgeable about artificial insemination, and were hopeful regarding development of superior cattle that would turn a profit after approximately five years. ER-4 85; (2) Bobbie Johnson owned his own dairy farm and worked with cattle for twenty-nine years. ER-13 11-12; (3) Mr. McDonough worked in stables as a young man and had some experience on cattle farms branding cattle. ER-16 12; and (4) Mrs. Carter was raised on a farm and had experience rounding up cattle, birthing calves, and cutting and hauling hay. ER-6 72-73.

Almost all Petitioners believed the investment to be a good investment for their retirement or to help fund their children’s’ education, including but not limited to the following: (1) The Hubbarts invested in the Hoyt partnerships as a means of providing for their son’s college education. ER-12 102-103; (2) Roy and Toni Barnes believed investing in the cattle industry seemed like a good way to save for retirement. ER-4 85; (3) Mr. Lindley was interested in the Hoyt partnerships as a retirement investment and as a means to provide college tuition for his children. ER-15 94; (4) Mr. Abelein invested to provide for his daughters’ educations. ER-2 20; and (5) the Carters invested as a means to save for college tuition and retirement. ER-6 81-82, 109.

The fact that Hoyt was a legitimate cattle breeder was an effective selling tool. Equity requires that the Hoyt investors not be punished for failing to untangle the complex fraud.

b. Petitioners Were Victims of Fraud and Deception.

There is substantial evidence that Petitioners were victims of Hoyt’s fraud. Jay Hoyt and his co-conspirators were indicted concerning their fraud in connection with the Hoyt investor partnerships. ER-2 635-687; see also ER-2 177,

181. The 52-count indictment charged, and the prosecution proved, that Jay Hoyt and others made false representations and promises “to prospective investors and current investors in order to obtain money from them” using the “investors simply as sources of cash.” ER-2 635-727. The promises of real cattle, fertile cattle, and high quality cattle were the same false promises alleged in the indictment and later proved in the criminal conviction. ER-2 639, 717. The Judgment specifically names Petitioners as a victim of Jay Hoyt’s fraud. ER-2 693-702. Hoyt’s crime was labeled the most egregious white collar crime ever committed in the State of Oregon. ER-2 707. Unfortunately, as the Commissioner admits, Hoyt partners, including Petitioners, were “kept in the dark about all the partnerships’ business dealings.” ER-2 280. And, investors were not “given enough written information to allow an objective third party opinion by competent counsel.” ER-2 281.

2. Petitioners Relied on what Appeared to be Independent Evidence that Supported Hoyt’s Assertions. . Despite Hoyt’s subsequent conviction for fraud, the independent evidence available to investors at the time of Petitioners’ investments supported Hoyt’s assertions. ER-2 436-437, 732, 964-966. Indeed, Hoyt won the Bales case in 1989 and all available literature seemed to affirm Hoyt’s statements, including his status as an Enrolled Agent. ER-2 280. There was no way for Petitioners to ascertain that Jay Hoyt was committing fraud that would make his otherwise allowable deductions disallowable. Bales, 58 T.C.M.(CCH) at 451. Petitioners contacted independent third party tax advisors and received advice. Petitioners Roger and Lora Carter reviewed the promotional materials and showed the materials to their tax preparer, Jackie Bevens and their attorney Robert

Scanlon. ER-6 20-21, 86, 104. Additionally, Mr. Abelein also showed the Hoyt promotional materials to Ms. Bevens, Mr. and Mrs. Clayton consulted with an accountant at the firm of Glenn, Burdette, Phillips & Booker, and Mr. Freeman sought independent advice from a business consultant. ER-2 16-19, ER-8 116117, ER-10 17. No one had anything negative to say. Petitioners also visited the Hoyt ranches, saw cattle and large trucks with the Hoyt name, and sometimes worked at the ranches for small periods of time. ER-7 95-97, ER-8, p. 117, ER-11 63, ER-13 21, 23-25, 30-31, ER-16 13.

Hoyt was not only able to convince Petitioners, but he was also able to convince the Tax Court that his operations were legitimate. Bales, 58 T.C.M. (CCH) at 449. Hoyt won Bales even though the Commissioner (presumably) presented significant evidence that was contrary to Hoyt’s claims.

In Bales, this Court rejected the Commissioner’s contentions that the investments were shams, and it found for Hoyt on virtually every issue. See also RCR #1, 401 F.3d at 1142. Immediately after the Bales opinion was released, Hoyt advised the partners of the “win.” ER-2 452, 743-744. Unfortunately, at the time, this Court was unaware of the fact that cow shortages began as early as 1979. ER-2 537, 543 734-735, 811.

There are striking similarities between Bales and the other Hoyt investor partnerships (both sheep and cattle). These similarities include:

a. The investor partnerships (both Bales and Petitioners) were all promoted by Hoyt in an identical manner, making similar claims. Bales; Durham Farms #1, T.C. Memo. 2000-159; ER-4 126, ¶ 6.

b.

The investor partnerships were organized and operated in essentially the same manner. ER-4, p. 126 ¶ 6.

c.

The investors in Bales were also primarily wage earners looking for a retirement investment. Bales, 58 T.C.M. (CCH) at 433.

d.

Hoyt controlled all material aspects of the investor partnerships, including the preparation of tax returns. Bales, 58 T.C.M. (CCH) at 433-434.

e.

The Bales partnerships and Petitioners’ partnerships both had the same fertility warranties. Bales, 58 T.C.M. (CCH) at 441; ER-2 269 & 586 (pp. 28-29).

f.

The Bales Court determined “that the following factors are most important: performance records, production records, ancestry, phenotype, and reputation of the breeder.” Bales, 58 T.C.M. (CCH) at 439-440. These factors would be equally applicable to Petitioners’ partnerships’ cattle.

g.

The cattle in Bales, valued for the purposes of trial, were actually cattle that existed in 1985, not the cattle that existed in 1977 through 1979 (the years at issue in Bales). Bales, 58 T.C.M. (CCH) at 441

442. Therefore, the comments about cattle quality and value would be much more relevant to the cattle that Petitioners initially purchased than it would be to the actual Bales cattle claimed (for depreciation purposes) on the Bales’ partnership tax returns.⁶

h.

That the “Hoyt cattle operation, which encompasses the partnerships’ cattle, is surely one of the top Shorthorn seedstock operations in the

⁶ The Bales Court found: “Needless to say these cattle are above average Shorthorns. Even respondent’s expert, Dr. Allen, opined that these cattle were in the top 30 percent of the breed. Petitioners’ experts were more generous. They put the cattle, on average, at or near the top of the breed.” Bales 58 T.C.M.(CCH) at 445.

United States. Not only is this a quality operation, it is also a large operation. The Hoyts register more Shorthorns per year than any other Shorthorn producer. They sell approximately five hundred range bulls per year. … In our mind there is not much doubt as to the quality of this herd.” Bales, 58 T.C.M. (CCH) at 445. As the Bales trial reflected the facts as they existed in 1985 and 1986, these facts were also true for Petitioners’ partnerships at the time of their investment.

i.

The cattle sales referenced in Bales showed values equal to or greater than the value determined for Petitioners’ partnerships’ cattle. Bales, 58 T.C.M. (CCH) at 444, 446.

j.

That in 1984 and 1985, it was not uncommon for a single breeding heifer to bring $10,000 to $20,000. Bales, 58 T.C.M. (CCH) at 446.

k.

The maker of the promissory notes were the investor partnerships, however, the individual investors assumed liability for the notes. Bales, 58 T.C.M. (CCH) at 435; Hansen, T.C. Memo. 2004-269 (Slip Op. at 12, 24).

l.

The tax aspects of the investor partnerships, including Bales, included individual liability for large promissory notes, potentially carrying back those large initial losses for three years (as allowed by the Internal Revenue Code), and claiming depreciation for the cattle. Bales, 58 T.C.M. (CCH) at 434, fn 4, 435, 449-450.

Neither Petitioners nor other Hoyt partners had reason not to believe the Tax Court. And even though Bales was an adversarial proceeding, where the Commissioner presented a significant amount of evidence, Hoyt still won.

Certainly, this rare occurrence is an equitable factor that must be considered when determining that compromise would not undermine compliance under Commissioner’s Treasury Regulations.

D. The Delay Was Not Caused by TEFRA, And Instead Was Caused In Part By the Commissioner’s Action Or Inaction.

It is difficult to believe that there might be another case similar to the Hoyt tax shelter, i.e., that Hoyt was under investigation (both civilly and criminally) from 1982 and yet was able to continue to sell “cattle” until 1997. The mere fact that it took nearly twenty years to shut Hoyt down shows that something went wrong. The IRS specifically contributed towards the delay by trading partnership statue of limitations extensions for an agreement not to pursue Hoyt for preparer penalties, with staffing problems, and delays due to criminal and penalty investigation. None of these delays were the normal delays one would expect in a TEFRA action.