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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
that TEFRA 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. Neither
the operation of the TEFRA rules nor the TMP’s actions
on behalf of the taxpayer provide grounds to compromise
under the equity provision of paragraph (b)(4)(i)(B) of
this section. Compromise on those grounds would
undermine the purpose of both the penalty and interest
provisions at issue and the consistent settlement
principles of TEFRA. * * *
1 Administration, Internal Revenue Manual (CCH), sec.
5.8.11.2.2(3), at 16,378. We agree with respondent that the
example presents circumstances similar to those in petitioners’
case, including: Petitioners invested in TEFRA partnerships in
the early 1980s; petitioners’ outstanding tax liability is
related to their investment in the partnerships; FPAAs were
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