Offer in Compromise IRS  Levy and Wage Garnishments Franchise Tax Board
Innocent Spouse Installment Agreements Trust Fund Penalty

124 T.C. No. 9 


RONALD J. AND JUNE M. SPELTZ, Petitioners v. 

Docket No. 15382-03L. Filed March 23, 2005. 

Ps incurred AMT liability as a result of their 
exercise of incentive stock options in 2000. The stock 
declined precipitously in value after the date of 
exercise. Ps partially paid the tax liability and 
submitted an offer in compromise with respect to the 
unpaid balance. The IRS rejected the offer in 
compromise and filed a lien on Ps’ property. Held: It 
was not an abuse of discretion to reject Ps’ offer in 
compromise and to continue the lien. 
Timothy J. Carlson, for petitioners. 
Albert B. Kerkhove and Stuart D. Murray, for respondent.

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COHEN, Judge: This case is before the Court on respondent’s 
motion for summary judgment, seeking a determination sustaining 
an Appeals officer’s rejection of petitioners’ offer in 
compromise. Petitioners seek a summary determination that it was 
an abuse of discretion to refuse their offer in compromise 
because of the unfair application of the alternative minimum tax 
(AMT) based on their exercise of incentive stock options (ISOs) 
where the stock acquired by exercise of the ISOs has lost 
substantially all of its value subsequent to the acquisition of 
the stock. Unless otherwise indicated, all section references 
are to the Internal Revenue Code as amended, and all Rule 
references are to the Tax Court Rules of Practice and Procedure. 
In ruling on respondent’s motion for summary judgment, 
factual inferences are viewed in the light most favorable to 
petitioners. Preece v. Commissioner, 95 T.C. 594, 597 (1990). 
Thus, the background facts set forth herein are based primarily 
on petitioners’ declaration in opposition to the motion for 
summary judgment and on other materials submitted by petitioners. 
Petitioners resided in Ely, Iowa, at the time that they 
filed their petition. For some years prior to 2000, petitioner 
Ronald J. Speltz (petitioner) was employed by McLeodUSA (McLeod). 
By 2000, petitioner was a senior manager at McLeod earning wages

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in excess of $75,000. By 2004, petitioner’s wages were 
approximately $90,000 per year. As part of his compensation at 
McLeod, petitioner received ISOs for acquisition of McLeod stock. 
During the year 2000, petitioner exercised certain of the 
ISOs that he previously had received. On petitioners’ Form 1040, 
U.S. Individual Income Tax Return, for 2000, petitioners 
reported, for purposes of the AMT, those ISOs as resulting in 
“excess of AMT income over regular tax income” of $711,118. On 
their Form 1040, petitioners reported that their “regular” 
adjusted gross income was $142,070. Their taxable income was 
$105,461, and their “regular” tax was $18,678. Petitioners 
reported AMT of $206,191 for a total tax liability of $224,869. 
After application of Federal income tax withheld, the balance 
owed on petitioners’ tax liability for 2000 was $210,065. 
Petitioners also filed a 2000 Iowa Individual Income Tax Long 
Form, IA 1040, on which they reported Iowa minimum tax of $46,792 
and a total tax liability of $56,769. 
The value of petitioners’ McLeod stock dropped 
precipitously. On their tax return for 2000, petitioners 
reported that they sold 200 shares of McLeod stock on January 14 
for a total of $14,011 and 500 shares of McLeod stock on March 10 
for a total of $52,282. On their tax return for 2002, 
petitioners reported that they sold 2,070 shares of McLeod stock 
on December 30 for a total of $1,647.

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Petitioners partially paid the liability reported on their 
2000 Form 1040 at the time that it was filed and paid an 
additional $75,000 in installments prior to November 2, 2001. 
Petitioners borrowed $134,000 from a bank to pay State and 
Federal taxes reported on their 2000 returns. 
On or about November 2, 2001, petitioners submitted to the 
Internal Revenue Service (IRS) a Form 656, Offer in Compromise. 
Petitioners offered a cash payment of $4,457, the cash value of 
petitioner’s life insurance policy, against the liability that 
then exceeded $125,000. On the Form 656, petitioners checked the 
box for “Doubt as to Collectibility--‘I have insufficient assets 
and income to pay the full amount.’” Petitioners also attached 
to Form 656 a statement in which they explained that an offer in 
compromise was necessary because of the impact the AMT in 2000 
had on their finances and their lifestyle. Specifically, 
petitioner’s income in 2000 was at a comfortable level for a 
family of five including three young daughters; the McLeod stock 
they held was nearly worthless and declining and had been used to 
secure a $134,000 loan with a bank to pay part of the 2000 
Federal and State taxes; and, in the event of a sale of the stock 
(forced or otherwise), petitioners would be unable to carry back 
the capital loss to offset their 2000 gain. They began building 
a new home in 2000 and sold their prior home in 2001, using the 
proceeds of sale to repay the bank. Lifestyle changes were

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necessary, including: Petitioner June M. Speltz had to get a job 
instead of staying home with the children; the oldest daughter 
had to switch schools; petitioners were unable to contribute to 
their retirement and to their children’s education fund; and they 
had to reduce their charitable donations. Finally, they could 
not afford to have a fourth child, which they had wanted. 
Petitioners offered in compromise $4,457, the cash surrender 
value on petitioner’s life insurance. In the statement, 
petitioners expressed their mental anguish and frustration with 
the unfairness of their situation. 
Petitioners’ offer in compromise was reviewed by Revenue 
Officer Robert G. Dallas (Dallas), an offer in compromise 
specialist. Dallas indicated to petitioners that he was 
rejecting the offer in compromise because petitioners had the 
ability to pay the outstanding tax liability in full. On 
October 6, 2002, petitioners wrote to Dallas disputing amounts 
that Dallas had used in his calculation. On October 9, 2002, 
Dallas indicated that certain adjustments that were requested by 
petitioners had been made. He wrote, however: 
The adjustments to the Income/Expense table you 
requested have not been granted because the allowed 
amount * * * is the allowable housing and utility 
standard for families of your number in Linn County, 
Iowa. The excess expenses you have claimed * * * 
cannot be moved * * * solely to circumvent the 
allowable standard amount. 
Based upon your current financial condition, we have 
determined that you have the ability to pay your

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liability in full within the time provided by law. We 
have made this determination based on the following 
Total net equity in assets: $77,948.00 
Total future ability to pay 
and retire debt: $113,568.00 
Total ability to pay: $191,516.00 
Total balance due: $148,744.64 
Amount you offered: $4,457.00 
Copies of our worksheets are enclosed for your review. 
Your options at this time are to pay your liability in 
full, enter into an installment agreement, withdraw 
your offer using the withdrawal letter previously 
provided or withhold your response and appeal your 
offer’s failure to gain acceptance through the appeal 
procedure that you will be offered. Please advise of 
your preferred course of action. 
Please respond within 14 days of the date of this 
letter. If you fail to respond or if your response is 
egregiously inadequate, a Federal Tax Lien will be 
filed if one is not already a matter of record and the 
case will be forwarded to an independent reviewer 
without a recommendation for approval. If the reviewer 
concurs with the conclusion of my investigation, you 
will be notified by mail and advised of your appeal 
rights. If there is a need for additional information 
you will be notified. 
On December 17, 2002, respondent sent to petitioners a 
Letter 3172, Notice of Federal Tax Lien Filing and Your Right to 
a Hearing Under IRC 6320, with respect to their unpaid income tax 
liability for 2000, advising that petitioners could request a 
hearing with respondent’s Office of Appeals. On January 13, 
2003, petitioners submitted a Form 12153, Request for a 
Collection Due Process Hearing. Petitioners stated that they 
were disagreeing with the Notice of Federal Tax Lien because:

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Forms 433-A and 656 have been prepared and filed with 
the IRS as an Offer in Compromise. The only real 
estate owned by the taxpayers is their personal 
residence * * *. Such residence constitutes exempt 
property, and therefore, the IRS’ attempted lien is 
Petitioners’ Request for a Collection Due Process Hearing was 
signed by their then attorney. 
On February 12, 2003, a telephone conference was held 
between respondent’s Appeals Officer Eugene H. DeBoer (DeBoer) 
and petitioners’ attorney. On February 13, 2003, DeBoer wrote to 
petitioners’ attorney a letter summarizing their discussion and 
stating the following: 
In regards to your question about changes to the 
alternative minimum tax laws. At this time there is no 
pending legislation that would retroactively change how 
the AMT was computed for 2000. Accordingly, the tax as 
reported appears to be correct. 
Neither petitioners nor their attorney responded to the 
February 13, 2003, letter from DeBoer. Instead, petitioners’ 
attorney contacted their Senator and the Taxpayer Advocate 
On August 12, 2003, a Notice of Determination Concerning 
Collection Action(s) Under Section 6320 and/or 6330 was sent to 
petitioners. The attachment to the notice explained the 
determination as follows:

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Should the lien be released or withdrawn? 
No, the tax as assessed is deemed correct and the offer 
in compromise proposed by the taxpayers has been 
Mr. and Mrs. Speltz filed their 2000 return showing a 
liability of $209,749.77. They made a payment with the 
return of $17,565. Payments of $70,000 were made prior 
to an installment agreement which was entered into for 
$2,500. Two payments of $2,500 made prior to the 
filing of an offer in compromise of $4,457 on 
11/2/2001. The offer was rejected due to the taxpayers 
having assets and the ability to full pay the 
liability. A lien was then filed. The taxpayers’ 
representative states on the request for a collection 
due process hearing that the personal residence 
constitutes exempt property and therefore the IRS’ 
attempted lien is unenforceable. A phone conference 
was held with the representative, * * * who questioned 
whether there was any pending legislation aimed at 
changing how the alternative minimum tax is computed. 
A check with the national office shows that there is no 
pending legislation to retroactively adjust how the 
alternative minimum tax is computed. 
1. Verification of legal and procedural requirements; 
2. Issues raised by the taxpayer; The offer in 
compromise was rejected. 
3. Balancing of need for efficient collection with 
taxpayer concern that the collection action be no more 
intrusive than necessary. The collection action 
balances the need for the efficient collection of taxes 
with the Speltz’s legitimate concern that the 
collection action be no more intrusive than necessary. 
The petition in this case was filed by petitioners pro se; 
counsel entered his appearance after respondent filed a motion

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for summary judgment. In their petition, petitioners do not 
allege any specific abuse of discretion with respect to the 
notice of determination. Instead, they refer to their 
communications with the Taxpayer Advocate’s Office and to the 
office of their Senator. 
Section 6321 imposes a lien in favor of the United States on 
all property and rights to property of a person when a demand for 
the payment of the person’s taxes has been made and the person 
fails to pay those taxes. Section 6322 provides that such a lien 
arises when an assessment is made. To protect the Government’s 
rights to recover its unpaid taxes, section 6323(a) provides that 
the IRS may file a notice of Federal tax lien in order to 
establish the priority of its claims against the taxpayer’s other 
In the Internal Revenue Service Restructuring and Reform Act 
of 1998 (RRA 1998), Pub. L. 105-206, sec. 3401, 112 Stat. 746, 
Congress enacted sections 6320 (pertaining to liens) and 6330 
(pertaining to levies) to provide protections for taxpayers in 
tax collection matters. Section 6320 requires that the Secretary 
notify a person who has failed to pay a tax liability of the 
filing of a notice of lien under section 6323. The notice 
required by section 6320 must be provided not more than 5 
business days after the day of the filing of the notice of lien,

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pursuant to section 6320(a)(2). Section 6320 further provides 
that the person so notified may request administrative review of 
the matter (in the form of a hearing) within 30 days beginning on 
the day after the 5-day period. Under section 6320(c), the 
hearing generally is to be conducted consistent with the 
procedures set forth in section 6330(c), (d), and (e). Section 
6330(c) permits the person notified to raise collection issues 
such as spousal defenses, the appropriateness of the 
Commissioner’s intended collection action, and possible 
alternative means of collection. 
Section 6330(d) provides for judicial review of the 
administrative determination. Where the validity of the 
underlying tax liability is not properly at issue, the Court will 
review the Commissioner’s administrative determination for abuse 
of discretion. See Sego v. Commissioner, 114 T.C. 604, 609 
(2000); Goza v. Commissioner, 114 T.C. 176, 179 (2000); see also 
H. Conf. Rept. 105-599, at 266 (1998), 1998-3 C.B. 747, 1020. 
Also in 1998, Congress amended section 7122, which 
authorizes compromise of any civil case arising under the 
internal revenue laws. RRA 1998, sec. 3462, 112 Stat. 764. 
Subsections (c) and (d) of section 7122 were amended for proposed 
offers in compromise and installment agreements submitted after 
July 22, 1998, and provide as follows:

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SEC. 7122(c). Standards for Evaluation of 
(1) In general.–-The Secretary shall 
prescribe guidelines for officers and employees of 
the Internal Revenue Service to determine whether 
an offer-in-compromise is adequate and should be 
accepted to resolve a dispute. 
(2) Allowances for basic living expenses.-- 
(A) In general.–-In prescribing 
guidelines under paragraph (1), the Secretary 
shall develop and publish schedules of 
national and local allowances designed to 
provide that taxpayers entering into a 
compromise have an adequate means to provide 
for basic living expenses. 
(B) Use of schedules.–-The guidelines 
shall provide that officers and employees of 
the Internal Revenue Service shall determine, 
on the basis of the facts and circumstances 
of each taxpayer, whether the use of the 
schedules published under subparagraph (A) is 
appropriate and shall not use the schedules 
to the extent such use would result in the 
taxpayer not having adequate means to provide 
for basic living expenses. 
(3) Special rules relating to treatment of 
offers.–-The guidelines under paragraph (1) shall 
provide that-- 
(A) an officer or employee of the 
Internal Revenue Service shall not reject an 
offer-in-compromise from a low-income 
taxpayer solely on the basis of the amount of 
the offer; and 
(B) in the case of an offer-incompromise 
which relates only to issues of 
liability of the taxpayer-- 
(i) such offer shall not be 
rejected solely because the Secretary is 
unable to locate the taxpayer’s return

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or return information for verification 
of such liability; and 
(ii) the taxpayer shall not be 
required to provide a financial 
(d) Administrative Review.–-The Secretary shall 
establish procedures-- 
(1) for an independent administrative review 
of any rejection of a proposed offer-in-compromise 
or installment agreement made by a taxpayer under 
this section or section 6159 before such rejection 
is communicated to the taxpayer; and 
(2) which allow a taxpayer to appeal any 
rejection of such offer or agreement to the 
Internal Revenue Service Office of Appeals. 
Regulations adopted pursuant to section 7122 set forth three 
grounds for the compromise of a liability: (1) Doubt as to 
liability; (2) doubt as to collectibility; or (3) promotion of 
effective tax administration. Sec. 301.7122-1, Proced. & Admin. 
Regs. With respect to the third ground, paragraph (b)(3)(i) of 
the regulation allows for a compromise to be entered into to 
promote effective tax administration where collection in full 
could be achieved but would cause economic hardship. Paragraph 
(c)(3)(i) sets forth factors that would support (but are not 
conclusive of) a finding of economic hardship. With respect to 
the third ground, those regulations state: 
(3) Compromises to promote effective tax 
administration.–-(i) Factors supporting (but not 
conclusive of) a determination that collection would 
cause economic hardship within the meaning of paragraph 
(b)(3)(i) of this section include, but are not limited 

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(A) Taxpayer is incapable of earning a living 
because of a long term illness, medical condition, or 
disability, and it is reasonably foreseeable that 
taxpayer’s financial resources will be exhausted 
providing for care and support during the course of the 
(B) Although taxpayer has certain monthly 
income, that income is exhausted each month in 
providing for the care of dependents with no other 
means of support; and 
(C) Although taxpayer has certain assets, the 
taxpayer is unable to borrow against the equity in 
those assets and liquidation of those assets to pay 
outstanding tax liabilities would render the taxpayer 
unable to meet basic living expenses. 
The regulation states that no compromise may be entered into if 
such compromise of liability would undermine compliance by the 
taxpayer with the tax laws. Sec. 301.7122-1(b)(3)(iii), Proced. 
& Admin. Regs. Paragraph (c)(3)(ii) then sets forth factors that 
support (but are not conclusive of) a determination that a 
compromise would undermine compliance with the tax laws. These 
factors include: (A) A taxpayer who has a history of 
noncompliance with the filing and payment requirements of the 
Internal Revenue Code; (B) a taxpayer who has taken deliberate 
action to avoid the payment of taxes; and (C) a taxpayer who has 
encouraged others to refuse to comply with the tax laws. Sec. 
301.7122-1(c)(3)(ii), Proced. & Admin. Regs. The regulation 
(iii) The following examples illustrate the types 
of cases that may be compromised by the Secretary, at 
the Secretary’s discretion, under the economic hardship 
provisions of paragraph (b)(3)(i) of this section:

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Example 1. The taxpayer has assets sufficient to 
satisfy the tax liability. The taxpayer provides full 
time care and assistance to her dependent child, who 
has a serious long-term illness. It is expected that 
the taxpayer will need to use the equity in his assets 
to provide for adequate basic living expenses and 
medical care for his child. The taxpayer’s overall 
compliance history does not weigh against compromise. 
Example 2. The taxpayer is retired and his only 
income is from a pension. The taxpayer’s 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 
an adequate means to provide for basic living expenses. 
The taxpayer’s overall compliance history does not 
weigh against compromise. 
Example 3. The taxpayer is disabled and lives on 
a fixed income that will not, after allowance of basic 
living expenses, permit full payment of his liability 
under an installment agreement. The taxpayer also owns 
a modest house that has been specially equipped to 
accommodate his disability. The taxpayer’s equity in 
the house is sufficient to permit payment of the 
liability he owes. However, because of his disability 
and limited earning potential, the taxpayer is unable 
to obtain a mortgage or otherwise borrow against this 
equity. In addition, because the taxpayer’s home has 
been specially equipped to accommodate his disability, 
forced sale of the taxpayer’s residence would create 
severe adverse consequences for the taxpayer. The 
taxpayer’s overall compliance history does not weigh 
against compromise. 
Under the regulations, a compromise may also be entered into to 
promote efficient tax administration if there are compelling 
public policy or equity considerations identified by the 
taxpayer. Compromise is justified where, due to exceptional 
circumstances, collection would undermine public confidence that 
tax laws are being administered fairly. Sec.

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301.7122-1(b)(3)(ii), Proced. & Admin. Regs. Some examples where 
a compromise is allowed for purposes of public policy and equity 
are: (1) A taxpayer who was hospitalized regularly for a number 
of years and was unable, at that time, to manage his financial 
affairs and (2) a taxpayer learns at audit that he was given 
erroneous advice and is facing additional taxes, penalties, and 
additions to tax. Sec. 301.7122-1(c)(3)(iv), Proced. & Admin. 
Regs. In addition to the regulations, detailed instructions 
concerning offers in compromise are contained in the Internal 
Revenue Manual, sections 5.8. Relevant portions are as follows: 
Sec. (05-15-2004) 
Public Policy or Equity Grounds 
1. 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 
2. 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

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bear the burden of demonstrating 
circumstances that are compelling enough to 
justify compromise notwithstanding this 
inherent inequity. 
3. Compromise on public policy or equity grounds 
is not authorized based solely on a 
taxpayer’s 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. 
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) 
In 1983, the taxpayer invested in a 
nationally marketed partnership which 
promised the taxpayer tax benefits far 
exceeding the amount of the investment. 
* * * [T]he 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

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now offered to compromise all the penalties 
and interest on terms more favorable than 
those contained in the prior settlement 
offer, arguing that TEFRA [Tax Equity and 
Fiscal Responsibility Act of 1982, Pub. L. 
97-248, 96 Stat. 324] 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. * * * 
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 
statutes 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. [1 Administration, Internal 
Revenue Manual (CCH), sec., at 16,385-7 
to 16,385-8.] 
We need not detail in this opinion the complexities of the 
AMT imposed by sections 55 and 56 or the taxation of ISOs under 
sections 421 and 422. Petitioners do not dispute the 
applicability of those sections or the computations under them. 
The tax liability in this case was based on petitioners’ 
reporting on their Form 1040 for 2000. Nonetheless, petitioners 
devote a substantial portion of their posthearing memorandum to 
arguing that: 
The Speltzes request for relief under the OIC 
Statute, from the unintended harm being caused them by 
the rote application of the AMT ISO Statute, does not 
put the IRS or this Court in a position where Section 
7122 is undermining Congressional intent with respect 
to any other statute–-including the AMT ISO Statute. 
Rather, based on their special circumstances in their 
particular situation, the rote and literal application 
of the internal revenue laws is imposing an impossible

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to-pay 220% tax rate or 11x the tax required of a 
similarly situated taxpayer–-an unintended result not 
consistent with the legislative purpose of Congress for 
any internal revenue law. In such a special case, 
Congress intended that the OIC Statute would operate to 
step in and provide relief from this unintended and 
unfair tax liability arising from unintended results 
arising from the literal application of the internal 
revenue laws (in this case, the AMT ISO Statute). 
Petitioners contend that there was an abuse of discretion 
The IRS failed to consider (or if it did consider it 
failed to properly consider), under the principles and 
processes laid out in Section 7122, corresponding 
regulations 26 CFR 301.7122, and the corresponding IRM 
provisions, the special circumstances raised by the 
Speltzes in their offer in compromise. 
Petitioners argue that “under their special circumstances 
the tax liability being imposed on them is unfair and 
inequitable, a situation for which Congress has fashioned a 
remedy in the law--Section 7122.” The crux of petitioners’ 
position is that section 7122 “trumps” the literal application of 
statutes imposing a tax in their situation and that, therefore, 
it was an abuse of discretion by the Appeals Office not to accept 
their offer in compromise. 
Respondent, on the other hand, contends that the Appeals 
officer correctly applied the statute, the regulations, and the 
Internal Revenue Manual provisions. For the reasons explained 
below, we agree with respondent. 
The unfortunate consequences of the AMT in various 
circumstances have been litigated since shortly after the

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adoption of the AMT. In many different contexts, literal 
application of the AMT has led to a perceived hardship, but 
challenges based on equity have been uniformly rejected. See, 
e.g., Alexander v. Commissioner, 72 F.3d 938 (1st Cir. 1995), 
affg. T.C. Memo. 1995-51; Okin v. Commissioner, 808 F.2d 1338 
(9th Cir. 1987), affg. T.C. Memo. 1985-199; Warfield v. 
Commissioner, 84 T.C. 179 (1985); Huntsberry v. Commissioner, 83 
T.C. 742, 747-753 (1984); Prosman v. Commissioner, T.C. Memo. 
1999-87; Klaassen v. Commissioner, T.C. Memo. 1998-241, affd. 
without published opinion 182 F.3d 932 (10th Cir. 1999). 
In Kenseth v. Commissioner, 259 F.3d 881, 885 (7th Cir. 
2001), affg. 114 T.C. 399 (2000), the Court of Appeals for the 
Seventh Circuit commented: 
it is not a feasible judicial undertaking to achieve 
global equity in taxation * * * especially when the 
means suggested for eliminating one inequity (that 
which Kenseth argues is created by the alternative 
minimum income tax) consists of creating another 
inequity (differential treatment for purposes of that 
tax of fixed and contingent legal fees). And if it 
were a feasible judicial undertaking, it still would 
not be a proper one, equity in taxation being a 
political rather than a jural concept. * * * 
Most recently, in Commissioner v. Banks, 543 U.S. ___, 125 S.Ct. 
826 (2005), the U.S. Supreme Court emphasized that the issue of 
the effect of the AMT on cases such as Kenseth v. Commissioner, 
supra, involving the deductibility of attorney’s fees, has 
partially been addressed by Congress. We believe that here, too, 
the solution must be with Congress.

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Petitioners have submitted materials from congressional, 
Taxpayer Advocate, and bar association sources, dealing with a 
widespread perception that application of the AMT to ISOs is 
unfair and should be the subject of redress. Respondent argues 
that petitioners did not raise efficient tax administration as a 
ground in their original offer in compromise and that we should 
not consider materials beyond the administrative record. The 
Court has indicated that we are not confined to the 
administrative record. Robinette v. Commissioner, 123 T.C. 85, 
94-104 (2004). However, most of the material that petitioners 
attached to their filings is not part of the administrative 
record, is not admissible evidence, and was in large part 
generated subsequent to the notice of determination that is the 
basis of this case. Such material does not show that there was 
an abuse of discretion by the Appeals officer when the notice of 
determination was sent on August 12, 2003. See Sego v. 
Commissioner, 114 T.C. 604, 612 (2000). 
Petitioners’ materials, in any event, could support 
arguments both for and against petitioners’ position. 
Petitioners assert that those materials show “public policy”. In 
our view, however, those materials show that Congress is well 
aware of the claimed inequities resulting from the application of 
the AMT and has, so far, declined to act. In the absence of 
congressional action, we cannot discern public policy from the

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materials tendered by petitioners. Moreover, the materials 
submitted by petitioners show that their situation is, 
unfortunately, not unique. 
We do not discern in section 7122 an intent of Congress to 
override application of specific provisions of the tax laws in 
every instance in which the liability is perceived to be unfair 
or inequitable. As the Court of Appeals for the Seventh Circuit 
observed in Kenseth v. Commissioner, supra, this is not a 
feasible judicial function. A fortiori, individual revenue 
officers and Appeals officers, carrying out their respective 
functions in the IRS collection process, cannot be expected to 
engage in the type of statutory interpretation urged on us by 
petitioners or to nullify unfortunate consequences of the tax 
laws on a case-by-case basis. The terms of section 7122, the 
regulations adopted under it, and the Internal Revenue Manual are 
consistent with the experience and expertise of IRS personnel in 
evaluating financial circumstances. Petitioners do not argue 
that the regulations or the Internal Revenue Manual provisions 
are invalid. They claim that they were not followed. But terms 
such as “promotion of effective tax administration”, “special 
circumstances”, and “compelling public policy or equity 
considerations” have a narrower meaning than that urged by 
petitioners, and the explanations of those terms in the

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regulations and in the Internal Revenue Manual are not 
Unlike the examples set forth under section 301.7122-1(c), 
Proced. & Admin. Regs., petitioners do not claim illness or a 
medical condition or disability; they do not have income that is 
exhausted providing for the care of dependents; and they have 
sufficient income to meet “basic living expenses”. Petitioners’ 
hardship argument is essentially that the tax liability is 
disproportionate to the value that they received from the ISOs 
and that they have already been forced to change their lifestyle 
unreasonably. Although we sympathize with their situation, this 
type of hardship is not unique. 
Petitioners argue that the AMT imposed on their exercise of 
ISOs is a “prepayment” of tax on value that they never received. 
Under the statutory scheme, however, the tax imposed at the time 
of exercise of ISOs is a deferred tax on a form of compensation 
that petitioners received at an earlier time. See Commissioner 
v. LoBue, 351 U.S. 243 (1956). As explained in Luckman v. 
Commissioner, 418 F.2d 381, 384 (7th Cir. 1969), revg. and 
remanding on other grounds 50 T.C. 619 (1968), stock options 
“represent a form of compensation paid to employees in connection 
with successful present and future business performance. They 
constitute a particularly rewarding form of bonus.” See 
generally 1 Mertens, Law of Federal Income Taxation, sec. 601

- 23 - 
(2005 rev.). Because of sections 421(a) and 422, regular tax at 
ordinary rates that would normally be imposed on compensation is 
not imposed on the receipt or exercise of ISOs. See sec. 83(a), 
(e)(1). The offset, however, is that ISOs are treated as “tax 
preference items” for AMT purposes in section 56(b)(3). 
In addition to affecting the time of taxation, the 
complexity of statutes applicable to stock options involves 
differences between taxation at ordinary income rates and capital 
gains rates. See generally Luckman v. Commissioner, supra at 
386-387. Accepting petitioners’ position would result in 
nullification of a portion of the statutory scheme by 
administrative or judicial action. We cannot conclude that 
section 7122 gives the Court a license to make adjustments to 
complex tax laws on a case-by-case basis. Cf. Rank v. United 
States, 345 F.2d 337, 344-345 (5th Cir. 1965) (describing other 
circumstances in which “the attention of Congress was once again 
focused on this highly complex, if not controversial, question of 
employee stock options”). Moreover, we cannot conclude that it 
is an abuse of discretion for the Appeals officer to decline to 
do so. In this case, we conclude that the Appeals officer 
correctly applied the provisions of the regulations and of the 
Internal Revenue Manual, specifically those portions cautioning 
against granting relief based on inequity where to do so would 
undermine congressional intent.

- 24 - 
The Appeals officer considered and adjusted the financial 
information submitted by petitioners and concluded that 
petitioners could pay the balance of their tax liability by use 
of an installment agreement. See generally Orum v. Commissioner, 
123 T.C. 1, 13-14 (2004). Neither the information provided to 
the Appeals officer nor that provided to the Court in this case 
shows that it was not reasonable for the Appeals officer to 
conclude that petitioners have the ability to pay over time the 
balance of the tax liability. Petitioners contend that they 
should not be required to pay the full amount. We are not 
unsympathetic to the burdens and lifestyle changes that 
petitioners have and may suffer as a result of their tax 
liability. Petitioners have not contended or shown, however, any 
invalidity in the Appeals officer’s determination of their basic 
living expenses as that term is used in section 7122. 
Petitioners seek to have the Court redefine “hardship”, “special 
circumstances”, and “efficient tax administration” in a manner 
different from that set forth in the regulations and in the 
Internal Revenue Manual. 
There is a dispute between the parties with respect to the 
individual adjustments used by the Appeals officer in determining 
that petitioners could pay the remaining tax liability under an 
installment plan. Respondent has suggested some revised 
computations and a remand for further consideration of

- 25 - 
petitioners’ offer in compromise if the motion for summary 
judgment is denied. Petitioners have repudiated this suggestion 
and asked us to decide this case on the arguments presented. In 
view of petitioners’ position, for purposes of this case, that 
they should not be required to pay any more than the amount that 
they offered, differences as to the calculation of their ability 
to pay installments are not material and do not preclude 
resolution of this case on summary judgment. See Rule 121(b). 
We are not in a position to determine the amount or duration of 
any installments that petitioners could or should be required to 
pay. The only issue before us is whether there was an abuse of 
discretion in refusing the offer in compromise in the amount of 
$4,457 and concluding that the lien filed by the IRS should 
remain in place. As respondent points out, any levy on 
particular assets of petitioners that the IRS proposes to pursue 
in the future will also require notice and an opportunity to be 
heard under section 6320 or 6330. Petitioners may submit another 
offer in compromise. Petitioners’ income and expenses may 
change. We conclude, however, that there was no abuse of 
discretion in declining to accept petitioners’ offer dated 
November 2, 2001, and continuing the lien in effect. 
Order and Decision will 
be entered for respondent.

The above limited information is intended for informational purposes only.  If legal advice or other expert assistance is required, the services of a competent professional should be sought, and this general information should not be relied upon without such professional assistance. 
For assistance please contact A. Nathan Zeliff, Attorney at Law







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