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Respondent’s rejection of petitioner’s longstanding case
argument was not arbitrary or capricious.
2. The Internal Revenue Manual Example
Petitioner argues that respondent erred when he determined
that petitioner was not entitled to relief according to the
second example in IRM section 5.8.11.2.2(3). Petitioner asserts
that many of the facts in this case were not present in the
example and, therefore, any reliance on the example was
misplaced. Petitioner’s argument is not persuasive.
IRM section 5.8.11.2.2(3) discusses ETA offers-in-compromise
based on equity and public policy grounds and states in the
second example:
In 1983, the taxpayer invested in a nationally marketed
partnership which promised the taxpayer tax benefits
far exceeding the amount of the investment.
Immediately upon investing, the taxpayer claimed
investment tax credits that significantly reduced or
eliminated the tax liabilities for the years 1981
through 1983. In 1984, the IRS opened an audit of the
partnership under the provisions of the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA). After
issuance of the Final Partnership Administrative
Adjustment (FPAA), but prior to any proceedings in Tax
Court, the 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 now offered to compromise all the
penalties and interest on terms more favorable than
those contained in the prior settlement offer, arguing
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