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of discretion by respondent is defined as any action that is
unreasonable, arbitrary or capricious, clearly unlawful, or
lacking sound basis in law, taking into account all the facts and
circumstances. See, e.g., Thor Power Tool Co. v. Commissioner,
439 U.S. 522, 532-533 (1979); Swanson v. Commissioner, 121 T.C.
111, 119 (2003).
During the telephone conference call with the Appeals
officer, petitioner husband did not dispute the underlying
deficiency but raised the misapplied payment issue. On January
5, 1990, shortly after receipt of Form 668, Notice of Federal Tax
Lien, petitioners had filed for bankruptcy. Petitioner husband
testified he and his wife filed for bankruptcy on the advice of
Revenue Agent Robert Spivey, whom they had been meeting in
connection with their liabilities. In their bankruptcy petition,
petitioners included the IRS as a creditor. As previously
stated, petitioners owed the IRS a total of $14,533 arising from
tax deficiencies for the taxable years 1972, 1977, 1978, 1985,
and 1986, but the IRS could collect only on the deficiencies from
1985 and 1986.
As noted earlier, in their bankruptcy proceeding,
petitioners listed a second mortgage held by them that had been
“attached” by the IRS. The mortgage had a value of $15,000, and,
upon the advice of Mr. Spivey, petitioners assigned the mortgage
to the IRS for collection. At one of their meetings, petitioner
husband testified Mr. Spivey assisted him in preparing his tax
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