Gary W. McDonough - Page 24

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         case, respondent’s reliance on that example was not arbitrary or             
                   3.   Petitioner’s Other “Equitable Facts”                          
              Petitioner argues that respondent abused his discretion by              
         failing to consider the other “equitable facts” of this case.                
         Petitioner’s “equitable facts” include reference to:  (1)                    
         Petitioner’s reliance on Bales v. Commissioner, T.C. Memo. 1989-             
         568;15 (2) petitioner’s reliance on Hoyt’s enrolled agent status;            
         (3) Hoyt’s criminal conviction; (4) Hoyt’s fraud on petitioner;              
         and (5) other letters and cases.  The basic thrust of                        
         petitioner’s argument is that he was defrauded by Hoyt and that,             
         if he were held responsible for penalties and interest incurred              
         as a result of his investment in a tax shelter, it would be                  
         inequitable and against public policy.  Petitioner’s argument is             
         not persuasive.                                                              

               15  Bales v. Commissioner, T.C. Memo. 1989-568, involved               
          deficiencies determined against various investors in several Hoyt           
          partnerships.  This Court found in favor of the investors on                
          several issues, stating that “the transaction in issue should be            
          respected for Federal income tax purposes.”  Taxpayers in many              
          Hoyt-related cases have used Bales as the basis for a reasonable            
          cause defense to accuracy-related penalties.  This argument has             
          been uniformly rejected by this Court and by the Courts of                  
          Appeals for the Sixth and Tenth Circuits.  See, e.g., Mortensen             
          v. Commissioner, 440 F.3d 375, 390-391 (6th Cir. 2006), affg.               
          T.C. Memo. 2004-279; Van Scoten v. Commissioner, 439 F.3d 1243,             
          1254-1256 (10th Cir. 2006), affg. T.C. Memo. 2004-275; Sanders v.           
          Commissioner, T.C. Memo. 2005-163; Hansen v. Commissioner, T.C.             
          Memo. 2004-269.                                                             

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