Barnes v. Commissioner

Walter Hoyt III (Hoyt) established a series of partnerships engaged in livestock breeding. Hoyt designed the partnerships as tax shelters and marketed partnership interests to potential investors. The Barneses (plaintiffs) purchased interests and claimed losses generated by the partnerships on their taxes for several tax years in the 1980s. Hoyt’s operation was found to be unlawful, and Hoyt was criminally convicted. In 2003, the Internal Revenue Service (IRS) (defendant) concluded that the partnership losses the Barneses claimed in the 1980s were improper and that the Barneses had an outstanding tax liability of approximately $400,000. By this time, the Barneses were in their 60s, were retired, and had substantial medical expenses. Both the IRS and the Barneses calculated the Barneses’ repayment potential to be about $140,000. That figure included virtually all the Barneses’ assets and all their discretionary income. The Barneses made a $32,000 offer in compromise due to doubt of collectability and to promote effective tax administration. Among the Barneses’ arguments was that, because the Barneses were victims of Hoyt’s fraud, public policy required the IRS to accept their offer. An IRS appeals agent rejected the Barneses’ offer because, she found, the offer was for an amount lower than the Barneses were able to pay. The agent also sustained a levy that the IRS placed on the Barneses’ assets. The Barneses filed a petition with the United States Tax Court for redetermination.