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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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