SectJack E. and Ruth I. Christians v. Commissioner.

Dkt. No. 21555-07 , TC Memo. 2008-220, September 29, 2008.



[Code Secs. 6663 and 7201]Penalties, civil: Fraud penalty: Collateral estoppel. --
A married couple was collaterally estopped from contesting their liability for the civil fraud penalty after they were convicted of willfully attempting to evade taxes under Code Sec. 7201. The couple admitted that they did not report the gain from the sale of their property on their Form 1040 but that they reported the gain on Form 1041 for one of the two trusts they created prior to the sale of the property. They asserted that their individual tax return did not contain a false statement when read in conjunction with the trust's return, thus, claiming that they should not be held liable for the civil fraud penalty. However, their conviction under Code Sec. 7201 conclusively established fraud in the subsequent civil tax fraud proceeding through the doctrine of collateral estoppel. Further, since a charitable contribution deduction was not addressed in the criminal proceeding, they were not estopped from raising that issue, which would be resolved at trial. Thus, the extent of the couple's liability will be determined after the issue relating to the claimed charitable deduction is resolved.





MEMORANDUM OPINION

JACOBS, Judge:1 This matter is before the Court on respondent's motion for summary judgment filed pursuant to Rule 121. Petitioners filed a response opposing respondent's motion. The issues presented are: (1) Whether petitioners, each of whom was indicted and subsequently convicted under section 7201 for

willfully attempting to evade and defeat a large part of the income tax due * * * for the calendar year 1995, by filing and causing to be filed * * * a false and fraudulent joint U.S. Individual Income Tax Return, Form 1040, wherein approximately TWO MILLION NINE HUNDRED FORTY SIX THOUSAND FIFTY dollars ($2,946,050) of income was excluded from the return causing an underpayment of approximately EIGHT HUNDRED TWENTY FOUR THOUSAND EIGHT HUNDRED NINETY FOUR Dollars ($824,894)in taxes,

are collaterally estopped from contesting their liability for the civil fraud penalty under section 6663 for the same taxable year; and (2) whether petitioners are entitled to a $25,600 charitable contribution deduction for taxable year 1995.

All section references are to the Internal Revenue Code (Code) as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.


Background

Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. The parties stipulated that any appeal in this case will lie to the Court of Appeals for the Sixth Circuit.

The Court of Appeals for the Sixth Circuit, in United States v. Christians, 105 Fed. Appx. 748 (6th Cir. 2004), affirmed petitioners' convictions under section 7201. The Court of Appeals identified the relevant facts to be as follows.

In 1995, Meijer, Inc., a large retailer, entered into negotiations with the Christians [petitioners herein] for the purchase of their Michigan home and an accompanying 20-acre tract of land. On the day before Meijer made its final offer of approximately $3.1 million, the Christians created Cornerstone Management Trust, naming themselves as trustees, and deeded their property to the trust for $10. The Christians accepted Meijer's $3.1 million offer.

A few days before the closing on the land sale, the Christians created Ottawa Trust, again naming themselves as trustees. After receiving a check written to the Cornerstone Management Trust for $3,072,699.94, the Christians deposited the funds in Ottawa Trust's account. In the months following the sale, the Christians moved most of the money to Barclays Bank in the Cayman Islands, ultimately sending over $3 million there.

On April 15, 1996, the Christians filed their individual IRS Form 1040, which omitted any reference to the real-property sale or to the gain realized from it.2 The Christians also filed an IRS Form 1041 for Cornerstone Management Trust. This return disclosed the property sale, calculated the tax due at over $1.1 million, and was signed by Jack Christians. Instead of paying the tax, however, Jack Christians attached a disclaimer, which read in part: "The assessment and payment of income taxes is voluntary with no distraint.... The above named taxpayer(s) respectfully disclaim any liability and decline to volunteer concerning assessment and payment of any [tax]." The disclaimer closed by suggesting that if the taxpayer "shows the tax to be zero," then the IRS has the obligation of assessing any tax deficiency.

The IRS audited the Christians, who refused to cooperate, even after Agent Rogowski of the IRS's Criminal Investigation Division became involved. After a court enforced an administrative summons for their records, the Christians produced documentation regarding the real property sale and the trusts. The documents revealed that the Christians maintained control of the two trusts and, as a result, retained control over the transfer of their real property and the proceeds from the sale.

After meeting with Agent Rogowski and after receiving an accountant's advice that the proceeds of the sale belonged on their individual tax return, the Christians filed an amended 1995 return using an IRS Form 1040X on July 17, 1997. The return listed the tax due at approximately $1.1 million,3 stated that the "admitted tax liability is zero," then added a tax disclaimer nearly identical to the one attached to Cornerstone Management Trust's earlier return.

On February 27, 2002, a grand jury indicted the Christians on a single count of willfully attempting to evade the payment of income tax due from the sale of their property "by filing ... a false and fraudulent joint U.S. Individual Income Tax Return, Form 1040" in violation of 26 U.S.C. § 7201. The jury returned a guilty verdict against both defendants. The court sentenced them each to 27-month prison sentences. [Id. at 749-750; joint appendix refs. omitted.]

On their 1995 return petitioners claimed a $25,600 charitable contribution deduction consisting of $600 in cash and $25,000 of other property. Attached to the return was a Form 8283, Noncash Charitable Contributions, which described the donated property as a house in good condition with a fair market value of $25,000 and identified the donee as the Evangelistic Center of Grand Rapids, Michigan. A letter of thanks and a receipt for $25,000, both signed by Pastor Harry Dunn of the Evangelistic Center, were attached to the return. In their amended 1995 return, filed July 17, 1997, in addition to increasing the amount of their adjusted gross income to include the gain from the sale of property to Meijer, Inc., petitioners claimed an additional $120,025 charitable contribution deduction.

Respondent issued a notice of deficiency on June 29, 2007. Respondent determined that petitioners' income should be increased by $2,948,000 to reflect the sale of property to Meijer, Inc., and disallowed the $25,600 charitable contribution deduction claimed in the original return. The resulting tax, according to respondent, is $845,049, leaving a deficiency of $835,580 after taking into account the amount of tax ($9,469) shown on the original return. Respondent acknowledges that petitioners made a payment of $824,894 on January 24, 2003, which will be applied to the deficiency amount. Respondent also determined that petitioners are liable for the section 6663 civil fraud penalty in the amount of $626,685.

Petitioners admit that the gain from the sale of property to Meijer, Inc., is includable in their income for 1995 and generated tax. They assert, however, that their tax liability was not understated but rather was reported by means of two returns --a Form 1040, U.S. Individual Income Tax Return, and a Form 1041, U.S. Income Tax Return for Estates and Trusts, filed by Cornerstone Management Trust.

Petitioners concede in their response opposing respondent's motion that "the law is not generally in their favor", but they maintain "they should be allowed to contest the fraud penalty on the basis of the facts which establish that no fraudulent tax returns were filed but rather the Petitioners refused to pay the original amounts due, and moved their assets out of the jurisdiction of the United States to frustrate collection efforts by the IRS."

In summarizing their position, petitioners state:

This is clearly a willful refusal to pay, tax protest type case not a fraudulent attempt to evade liability. Although convicted of violating IRC § 7201, it is clear that Petitioners were engaged in conduct to attempt to validate their incorrect positions that no taxes were due and owing at that time.

This should not result in collateral preclusion by fraud. It was not necessary under § 7201 for the jury to find a fraudulent filing to sustain or support the conviction. Therefore, the facts should be viewed as admitted by Respondent, thus precluding summary judgment on the issue.

Petitioners also assert that they are entitled to contest respondent's disallowance of their $25,600 claimed charitable contribution. Finally, petitioners claim that their $824,894 payment of January 24, 2003, extinguished their tax liability.


Discussion

As a preliminary matter, we note that summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). The Court may grant summary judgment where there is no genuine issue of any material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994). The moving party bears the burden of proving that no genuine issue of material fact exists, and the Court will view any factual material and inferences in the light most favorable to the nonmoving party. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). A partial summary adjudication may be made even if it does not dispose of all the issues in the case. Rule 121(b); Naftel v. Commissioner, 85 T.C. 527, 529 (1985). Rule 121(d) provides that where the moving party properly makes and supports a motion for summary judgment, "an adverse party may not rest upon the mere allegations or denials of such party's pleading," but must set forth specific facts, by affidavits or otherwise, "showing that there is a genuine issue for trial."

We now turn to the first of the two issues; namely, whether petitioners' convictions for income tax evasion under section 7201 collaterally estop them from litigating the issue of their liability for the civil fraud penalty under section 6663.

In Montana v. United States, 440 U.S. 147, 153-154 (1979), the Supreme Court provided guidance on the application of the doctrine of collateral estoppel as follows: "Under collateral estoppel, once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation."

The two Code sections involved herein are section 6663 and section 7201. Section 6663 provides:

SEC. 6663. IMPOSITION OF FRAUD PENALTY.

(a) Imposition of Penalty. --If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

(b) Determination of Portion Attributable to Fraud. --If the Secretary establishes that any portion of an underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud, except with respect to any portion of the underpayment which the taxpayer establishes (by a preponderance of the evidence) is not attributable to fraud.

(c) Special Rule for Joint Returns. --In the case of a joint return, this section shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse.

An "underpayment" for purposes of section 6663 is defined in section 6664(a), in relevant part, as the amount by which the tax imposed exceeds the amount shown as the tax by the taxpayer on his return.

The record shows, and petitioners admit, that they filed a 1995 individual tax return on which they did not report the gain from the sale of their property to Meijer, Inc., or the tax imposed on the gain. However, petitioners assert that their tax liability was not understated but rather was reported by means of two returns --a Form 1040 and a Form 1041 filed by Cornerstone Management Trust. Petitioners made this same assertion in appealing their convictions under section 7201. The Court of Appeals for the Sixth Circuit rejected this argument, stating:

Nor may the Christians sidestep this conclusion [that they willfully evaded their taxes] by pointing out that their 1995 individual tax return did not contain a false statement when read in conjunction with Cornerstone Management Trust's IRS Form 1041, which did disclose the tax owed and proceeded to disclaim any liability for it. The Government prosecuted the Christians for income tax evasion with respect to their individual tax return, not the return of Cornerstone Management Trust. And their individual return neither acknowledged nor paid the tax due. No doubt, a jury could have concluded that the acknowledgment of the sale and the tax due on the Cornerstone Management Trust form undermined a finding that the Christians acted willfully and committed an affirmative act of evasion. But in view of the Christians' prior tax-filing experiences, their sudden decision no longer to use an accountant, their creation of the sham trusts and offshore accounts and their non-cooperative conduct once the Government inquired about the sale, the Christians cannot tenably argue that the jury was compelled to reach such a conclusion on the basis of the Cornerstone tax filing. [United States v. Christians, 105 Fed. Appx. at 752].

We are mindful that petitioners, in their amended return, admitted an underpayment of tax for 1995. See Badaracco v. Commissioner, 464 U.S. 386, 399 (1984).4 Therefore, there is no doubt that there was an "underpayment of tax required to be shown on a return" with respect to petitioners' 1995 return as required by section 6663.

Section 7201 provides:

SEC. 7201. ATTEMPT TO EVADE OR DEFEAT TAX.

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

Petitioners were convicted of violating section 7201. We have repeatedly held that "A conviction for an attempt to evade or defeat tax pursuant to section 7201, either upon a guilty plea or upon a jury verdict, conclusively establishes fraud in a subsequent civil tax fraud proceeding through the application of the doctrine of collateral estoppel." Marretta v. Commissioner, T.C. Memo. 2004-128 (citing DiLeo v. Commissioner, 96 T.C. 858, 885 (1991), affd. 959 F.2d 16 (2d Cir. 1992) and Frey v. Commissioner, T.C. Memo. 1998-226), affd. 168 Fed. Appx. 528 (3d Cir. 2006); see also Montalbano v. Commissioner, T.C. Memo. 2007-349 ("It is well established that a final criminal judgment for tax evasion under section 7201 collaterally estops relitigation of the issue of fraudulent intent in a subsequent proceeding over the civil fraud penalty."); Uscinski v. Commissioner, T.C. Memo. 2006-200 ("Because the elements of criminal tax evasion and civil tax fraud are identical, petitioner's prior conviction under section 7201 conclusively establishes the elements necessary for finding fraud under section 6663."); Wilson v. Commissioner, T.C. Memo. 2002-234 ("We hold that the doctrine of collateral estoppel bars * * * [the taxpayer convicted under section 7201] from relitigating in the instant case the matters litigated in * * * [the taxpayer's] criminal tax proceeding, i.e., whether * * * [the taxpayer] underpaid his tax for each of the taxable years * * * and whether his underpayment of such tax for each such year was due to fraud."). Our holding in this regard has been affirmed by the Court of Appeals for the Sixth Circuit. Shah v. Commissioner, 208 F.3d 215 (6th Cir. 2000), affg. without published opinion T.C. Memo. 1999-71; Gray v. Commissioner, 708 F.2d 243, 246 (6th Cir. 1983), and cases cited thereat, affg. T.C. Memo. 1981-1.5

As recounted supra, petitioners were indicted and convicted for willfully attempting to evade the payment of income tax due from the sale of their property by filing a false and fraudulent joint tax return for 1995 in violation of section 7201. As the Court of Appeals noted, the petitioners' filing of a false Form 1040 constituted the affirmative act of evasion under section 7201 charged in the indictment. United States v. Christians, 105 Fed. Appx. at 753. Therefore, contrary to petitioners' claim, the issue of whether they filed a false and fraudulent return for 1995 was in fact "actually and necessarily determined by a court of competent jurisdiction", Montana v. United States, 440 U.S. at 153. Thus, petitioners are estopped from relitigating that issue in this proceeding.

On the record presented, we find that there is no genuine issue of material fact with respect to the section 6663 penalty insofar as it relates to petitioners' 1995 underpayment attributable to petitioners' failure to report the gain from the sale of their property to Meijer, Inc., in their 1995 return. We thus hold that a decision may, and should, be entered against petitioners on that issue as a matter of law. Accordingly, we sustain respondent's determination to impose a penalty under section 6663 with respect to the portion of petitioners' 1995 underpayment attributable to the omitted gain from the sale.

We now turn to that portion of petitioners' 1995 underpayment which is attributable to petitioners' $25,600 claimed charitable contribution deduction. Petitioners' entitlement to the charitable contribution deduction was not addressed in the criminal proceeding which resulted in their convictions under section 7201, and petitioners dispute respondent's disallowance of the charitable contribution deduction. Summary judgment with respect to this matter is not appropriate. A trial with respect to this issue should proceed.

A determination of the extent to which petitioners have paid their outstanding tax liability must await the resolution of the issue relating to the claimed charitable contribution deduction.

To reflect the foregoing,

An order granting in part and denying in part respondent's motion for summary judgment will be issued.

1 This case was assigned to Judge Julian I. Jacobs for disposition of respondent's motion for summary judgment by order of the Chief Judge on Aug. 12, 2008.

2 The return showed a total tax of $9,469.

3 The amended return increased petitioners' adjusted gross income by $2,948,000, with the explanation "Ottawa Revocable Living Trust Not Included in Original Filing of Form 1040", and showed $1,118,112 as the correct amount of total tax.

4 Petitioners do not appear to argue that their amended return, filed after they were notified that the IRS's Criminal Investigation Division had become involved, remedied the fraudulent underpayment with respect to their original return. Indeed, as the Supreme Court noted in Badaracco v. Commissioner, 464 U.S. 386, 394 (1984), "once a fraudulent return has been filed, the case remains one 'of a false or fraudulent return,' regardless of the taxpayer's later revised conduct, for purposes of criminal prosecution and civil fraud liability" and "a taxpayer who submits a fraudulent return does not purge the fraud by subsequent voluntary disclosure".

5 Petitioners, in their opposition to respondent's motion for summary judgment, rely on the dissenting opinion in Gray v. Commissioner, 708 F.2d 243, 247 (6th Cir. 1983) Merritt, J., dissenting, affg. T.C. Memo. 1981-1. The taxpayer in Gray, who entered a guilty plea to income tax evasion under sec. 7201, claimed that he did not understand that his guilty plea would have collateral consequences in subsequent civil proceedings. The dissent objected to application of collateral estoppel under those circumstances. Even were we to recognize a difference between a guilty plea and a jury verdict for purposes of application of collateral estoppel in these circumstances, which we do not, see Marretta v. Commissioner, T.C. Memo. 2004-128, affd. 168 Fed. Appx. 528 (3d Cir. 2006), petitioners' convictions were the result of a jury verdict of income tax evasion under sec. 7201 rather than the result of guilty pleas to those charges. In any event, apart from our own precedent, we would be constrained by the majority position in Gray v. Commissioner, supra, to apply the doctrine of collateral estoppel to the case at bar. See Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971).

Conviction estops denial of fraud. --Fraud Penalty: Criminal Fraud: Conviction estops denial of fraud

An individual who pleaded guilty to a charge of criminal tax evasion for one tax year in return for a dismissal of charges for other years was collaterally estopped from denying that he had underpaid his taxes and that the underpayment was due to fraud. The criminal conviction established that part of the underpayment for the tax year at issue was attributable to fraud. Collateral estoppel applied regardless of whether the conviction arose from a trial on the merits or a plea of guilty.

J.C. Stepien, 71 TCM 1688, Dec. 51,108(M), TC Memo. 1996-6.

Conviction of fraud estops taxpayer from denying applicability of fraud penalty.

J.W. Amos, CA-4, 66-1 USTC ¶9130, 360 F2d 358.

J.H. Moore, CA-4, 66-1 USTC ¶9399, 360 F2d 353.

H.M. Plunkett, CA-7, 72-2 USTC ¶9541, 465 F2d 299.

A.H. Fontneau, CA-1, 81-2 USTC ¶9557, 654 F2d 8.

G. Weber, Sr., 69 TCM 2216, Dec. 50,541(M), TC Memo. 1995-125., TC Memo. 1998-226.

D.T. Madge, 80 TCM 804, Dec. 54,144(M), TC Memo. 2000-370. Aff'd, per curiam, on another issue, CA-8 (unpublished opinion), 2001-2 USTC ¶50,761.

S.M. Zamzam, 80 TCM 808, Dec. 54,145(M), TC Memo. 2000-371. Aff'd, per curiam, CA-4 (unpublished opinion), 2002-1 USTC ¶50,180.

L.J. Moore, 81 TCM 1442, Dec. 54,291(M), TC Memo. 2001-77.

R.P. Console, 82 TCM 479, Dec. 54,471(M), TC Memo. 2001-232. Aff'd, CA-3 (unpublished opinion) 2003-2 USTC ¶50,593.

Y. Yang-Wu, 83 TCM 1363, Dec. 54,681(M), TC Memo. 2002-68.

M.C. Wilson, 84 TCM 321, Dec. 54,876(M), TC Memo. 2002-234.

S.C. Carter, 86 TCM 229,Dec. 55,258(M), TC Memo. 2003-235.

H.J. Uscinski, 92 TCM 285, Dec. 56,626(M), TC Memo. 2006-200.

In cases that probably will no longer be followed, it was held that criminal conviction does not estop taxpayer from denying fraud penalty.

S.L. Anderson, DC, 66-1 USTC ¶9441, 245 FSupp 177.

M.J. Safra, 30 TC 1026, Dec. 23,126 (Nonacq.).

R.F. Smith, 31 TC 1, Dec. 23,197 (Acq.).

H.L. Blackwell, 20 TCM 599, Dec. 24,816(M), TC Memo. 1961-124.

W.F. Slater Est., 21 TCM 1355, Dec. 25,733(M), TC Memo. 1962-256.

A prior criminal conviction for fraudulent failure to file income tax returns and to pay the taxes due estops the taxpayer from seeking a refund of the civil penalties assessed for the same fraudulent action. This is true even in the case of a fraudulent joint return where one party to the return was not prosecuted and is a party to the refund suit merely because he signed the joint return.

Lefkowitz, 64-2 USTC ¶9623, 334 F2d 262. Cert. denied, 379 US 962.

O.K. Armstrong, CtCls, 66-1 USTC ¶9119, 354 F2d 274.

An individual who had pleaded guilty to charges of tax evasion for one of the three years in dispute was estopped from denying that he had filed fraudulent returns. The fact that he faced numerous personal and legal problems at the time was not a sufficiently special circumstance to waive collateral estoppel.

J.G. Paschal, CA-3 (unpublished opinion), 96-1 USTC ¶50,013.

A self-employed manufacturer's representative was not collaterally estopped by his Code Sec. 7203 criminal conviction from denying that his failure to file returns was willful. The IRS had not raised the affirmative defense of collateral estoppel with respect to the addition to tax for fraud. The taxpayer's suspicious actions concerning bank deposits and accounts were not sufficient individually to prove fraud but provided support for the IRS's determination of fraud.

P.E. Niedringhaus, 99 TC 202, Dec. 48,411.

A corporation was not collaterally estopped by a stockholder's conviction for filing and causing it to file false and fraudulent returns. It was not a party to the criminal proceeding and did not participate in his defense.

C.B.C. Supermarkets, Inc., 54 TC 882, Dec. 30,081 (Nonacq.).

American Lithofold Corp., 55 TC 904, Dec. 30,681.

Although the taxpayer, a traffic court clerk, was estopped from denying participation in a bribery scheme because of conclusions of law entered by a Federal district court, he was not collaterally estopped by the findings of the court as to the specific amounts of money he received. However, based on reasonable inferences drawn from the circumstances of the case, and in light of the taxpayer's credible testimony, the Tax Court concluded that he lacked the specific intent to avoid the payment of tax.

R.C. Cipparone, 49 TCM 1492, Dec. 42,090(M), TC Memo. 1985-234.

An IRS agent who was convicted of conspiracy to bribe was not collaterally estopped from denying that he received bribes. The jury had not been required to find that the agent actually received bribe payments in the amounts that the IRS included in his income.

W. Kale, 71 TCM 2854, Dec. 51,311(M), TC Memo. 1996-197.

An individual who pleaded guilty to charges of criminal fraud was collaterally estopped from contesting the IRS's determination that he was liable for the fraud penalty. The individual's allegation that his guilty plea was coerced and involuntary did not constitute an exceptional circumstance. An appellate court that affirmed his conviction was not persuaded by his arguments, and the U.S. Supreme Court denied review. As a result, the criminal conviction was final.

J.R. Taylor, 73 TCM 2028, Dec. 51,887(M), TC Memo. 1997-82.

An individual who was convicted of criminal tax evasion was collaterally estopped from denying that he had underpaid his taxes for the years at issue and that part of those underpayments were due to fraud. The IRS was not required to prove the exact amounts of the underpayments or the taxes owed as an element of the criminal proceeding; consequently, the individual was not precluded from contesting the amounts of the deficiencies. No exception to the application of collateral estoppel was warranted by the individual's alleged ineffective assistance of counsel at the criminal trial.

H. Wapnick, 73 TCM 2317, Dec. 51,941(M), TC Memo. 1997-133.

A medical practice was liable for the additions to tax for fraud for the tax years in issue. The conviction of the doctor for criminal fraud for one tax year collaterally estopped it from denying civil fraud in a subsequent suit.

Richard A. Cole, M.D., Inc., 76 TCM 1055, Dec. 53,004(M), TC Memo. 1998-452.

The fraud penalty was imposed on a former state senator whose conviction for criminal tax evasion collaterally estopped him from denying that he had fraudulently underpaid his taxes. The elements for criminal and civil tax fraud were virtually identical, the criminal and civil proceedings involved the same parties, and it was immaterial that his conviction resulted from a guilty plea, rather than a trial. Also, the record did not support his claim that language in his plea agreement barred the government from asserting collateral estoppel or imposing penalties and interest.

J.L. Boettner, Jr., 76 TCM 622, Dec. 52,905(M), TC Memo. 1998-359.

An individual who voluntarily pleaded guilty to the charge of violating Code Sec. 7201 and was convicted of income tax evasion by a federal district court was collaterally estopped from denying in his Tax Court proceeding that some part of his tax underpayment was due to fraud. A clarification to his plea agreement indicating that the tax issues were not resolved did not prevent the application of collateral estoppel, because the district court subsequently entered judgment against the taxpayer for tax evasion.

J.S. Fagan, 82 TCM 443, Dec. 54,457(M), TC Memo. 2001-222.

When a petition is filed with the Board, it is its duty to review the administrative action of the Commissioner in determining a deficiency and penalties (here fraud and failure to file). It is not relieved of this duty by the fact that, in a criminal proceeding, the taxpayer was sentenced to pay and did pay the amount determined as the tax by the court.

Epstein, 34 BTA 925, Dec. 9461.

Fraud penalties were imposed against an attorney who admitted to having understated taxable income from his law practice by overstating business expenses. He was collaterally estopped from challenging the IRS's determination of a fraud penalty for one tax year because he had pleaded guilty to tax evasion charges.

D.R.. Cooley, 86 TCM 1025, Dec. 55,558(M), TC Memo. 2004-49.

A taxpayer was liable for penalties for fraud, under Code Sec. 6663, based on admissions he had made while pleading guilty in a criminal case and on his conviction in that case. The taxpayer was estopped from challenging the IRS's determination that he had taxable income and that he had filed a false tax return with the intent to evade income tax for that year. The taxpayer's guilty plea and conviction for attempting to evade or defeat the tax, under Code Sec. 7201, conclusively established fraud in the subsequent civil tax fraud proceeding.

J. Marretta, 87 TCM 1371, Dec. 55,649(M), TC Memo. 2004-128.

Because the elements of criminal tax evasion and civil tax fraud are identical, an attorney's prior conviction under Code Sec. 7201 conclusively established the elements necessary for finding fraud under Code Sec. 6663. His prior conviction collaterally estopped him from denying in the civil tax proceeding: (1) that his failure to report funds received from a former client resulted in an underpayment in his income tax; and (2) that at least part of the underpayment was due to fraud within the meaning of Code Sec. 6663. However, the IRS failed to carry its initial burden to show that there was no triable issue of fact with respect to the precise amount of the attorney's unreported income for the year at issue.

The sole owner of an S corporation who pled guilty to criminal tax evasion for failure to report in excess of $650,000 of corporate income was liable for the civil fraud penalty and was collaterally estopped from denying fraud. He argued that he suffered from diminished mental capacity based on the fact that in his criminal proceeding the government stipulated, and the sentencing court found, diminished capacity resulting from his bipolar disorder but that diminished capacity did not serve as a basis for waiving collateral estoppel.

C. Montalbano, 94 TCM 499, Dec. 57,183(M), TC Memo. 2007-349.


Failure to report income. --Willful Failure to File Return, Supply Information, or Pay Tax: Failure to report income

Taxpayer was a close friend of prominent political figures, and by virtue of his public offices was able to grant them favors in the way of contracts for materials and machinery in the construction of public works. The evidence sustains his conviction for failure to report the sums he received.

Murray, CA-8, 41-1 USTC ¶9247, 117 F2d 40.

Barrow, CA-5, 49-1 USTC ¶9112, 171 F2d 286.

Tax evasion conviction was upheld for failure to include in income a fee for arranging a mortgage loan.

B. Cohen, CA-5, 66-2 USTC ¶9560, 363 F2d 321.

Conviction of taxpayer who failed to report as taxable income the amounts extorted from another was upheld.

Rutkin, 52-1 USTC ¶9260, 343 US 130.

[Note: See also Rutkin at ¶41,318.20. --CCH.]

But a conviction for embezzling done before Rutkin was decided when Wilcox, 46-1 USTC ¶9188, was in effect (holding that embezzled funds are not taxable) was reversed since a willful attempt to evade could not be established so long as the law contained the gloss put upon it by Wilcox.

E.C. James, SCt, 61-1 USTC ¶9449, 81 SCt 1052.

Since funds which the taxpayer failed to report in his income tax returns were embezzled funds, and the embezzlement occurred before Wilcox was overruled, the taxpayer could not be prosecuted for willful evasion of income tax for his failure to include the funds in his tax returns.

M. Pitoscia, DC, 65-1 USTC ¶9281, 238 FSupp 135.

Conviction for failure to report certain funds which taxpayer acquired through his employment before James, was sustained, since the taking of the fund was not technically an embezzlement under local law.

R.C. Jannsen, CA-7, 65-1 USTC ¶9142, 339 F2d 941.

Failure to report funds embezzled 3 days before James was decided was willful evasion of income tax for the year 1961.

H.B. Nordstrom, CA-8, 66-1 USTC ¶9437, 360 F2d 734. Cert. denied, 385 US 826.

A taxpayer who acquired property and money by fraud and deceit, obtained such funds unlawfully in the first instance; therefore the Wilcox doctrine was inapplicable and the taxpayer could be found guilty of filing fraudulent returns as a result of his failure to include these amounts in gross income.


Conviction for tax evasion was reversed and a new trial was ordered, to find out if unreported income was embezzled funds or income from some other source, following James, above.

D.D. Beck, CA-9, 62-1 USTC ¶9227, 298 F2d 622.

To the contrary, where reliance on the James decision was first presented on appeal.

B.C. Wallace, CA-4, 62-1 USTC ¶9330, 300 F2d 525. Cert. denied, 370 US 923.

Dismissal of indictment for tax evasion before determining whether or not defendant had an interest in part of a fund allegedly embezzled was premature.

O.P. Colamatteo, CA-7, 63-1 USTC ¶9206, 312 F2d 154.

Proof that taxpayers deliberately omitted to report side payments received in connection with over-ceiling sales of whiskey and that after investigation had begun each taxpayer filed an amended return disclosing a part of the income previously omitted was sufficient.

Rosenblum, CA-7, 49-1 USTC ¶9314, 176 F2d 321. Cert. denied, 338 US 893.

Conviction for failure to report suppliers' cash discounts as income was sustained. Since the case was built on the correct amount of the discount receipts, the government was not required to prove the correct amount of the purchases, even though such discounts are normally reflected as reductions of purchases.

A.L. Wainwright, CA-10, 69-2 USTC ¶9503, 413 F2d 796. Cert. denied, 396 US 1009.

Circumstantial evidence supported the District Court's determination that the taxpayer made no agreement to repay unreported income from trade-outs in which businesses exchanged merchandise for newspaper advertising.

H.B. Brown, Jr., CA-10, 71-2 USTC ¶9557, 446 F2d 1119.

Taxpayer's conviction for failing to report long-term capital gain by using false basis was sustained.

R.R. Krilich, CA-7, 72-2 USTC ¶9767, 470 F2d 341. Cert. denied, 411 US 938.

Taxpayer's tax evasion conviction for fraudulently understating income was affirmed on appeal.


Taxpayer's conviction of willfully and knowingly attempting to evade and defeat federal income taxes for two years by omitting from gross income money received as salary was upheld. The court held that the taxpayer knew that money received from a partnership was income and that he deliberately omitted such sums from his returns. Such payments could not be construed as a return of equity since the taxpayer, as a limited partner, had not made any capital contributions and was not responsible for any partnership losses.

T.M. Fahey, CA-2, 75-1 USTC ¶9102, 510 F2d 302.

Taxpayer's conviction for willfully attempting to evade taxes by concealing his Irish Sweepstakes winnings of approximately $130,000 in a foreign bank account was affirmed on appeal.

F.L. McNulty, CA-9, 76-1 USTC ¶9215, 528 F2d 1223. Cert. denied, 425 US 972.

Although an individual correctly and timely reported the amount of tax due, his concealment of assets alone was a sufficient act to support a conviction for tax evasion. Congress did not intend that Code Sec. 7206(4) be the sole remedy for concealment of assets or be interpreted to limit the scope of Code Sec. 7201.

F.L. Hook, CA-6, 86-1 USTC ¶9179, 781 F2d 1166.

It was not shown that a payment received from a corporation for which the taxpayers were selling products, which payment was the only income they failed to report, was a discount or rebate rather than a bonus payment.

M.L. Schutterle, CA-8, 78-2 USTC ¶9773, 586 F2d 1201.

No error was committed when the defendant was found guilty of tax evasion for the years 1975 and 1976. Although the defendant had formal legal control over all of certain unreported funds prior to 1976, that did not preclude a conviction for 1976 because there had been an issue of facts as to when he felt free to use the funds. The funds in his bank account did not result in reportable income until he had "practical control" over the funds.

D. Dixon, CA-11, 83-1 USTC ¶9213.

Where the government in a tax evasion prosecution established that a resident alien received unreported income and that his nondisclosure resulted in a tax deficiency, the resident alien did not negate the deficiency by claiming a foreign tax credit when there had been no firmly established taxable amount owed the Dominican Republic and determined by it before the discovery of the federal tax deficiency.

J.M.A. Cruz, CA-11, 83-1 USTC ¶9216, 698 F2d 1148. Cert. denied, 104 SCt 391.

The conviction of an engineering president for failure to report income on his individual income tax returns was upheld. The firm's general business practices included depositing in the corporation's account payments received for engineering services rendered to its clients. For the tax years at issue, a number of the clients' checks were either cashed by the president or deposited in his personal checking account.

T.P. Meyer, CA-8, 87-1 USTC ¶9132, 808 F2d 1304.

A personal injury lawyer who concealed and attempted to conceal the nature, extent, and ownership of his assets by placing his assets, funds, and other property in the names of others and by transacting his personal business in cash to avoid creating a financial record was properly convicted by a jury on three counts of willful attempt to evade and defeat the payment of his personal income tax.

E.J. Conley, CA-7, 87-2 USTC ¶9469, 826 F2d 551.

The conviction of an individual for tax evasion was upheld. The taxpayer forged documents charging personal expenses to her family corporation, failed to report interest income on 10 money market accounts and deposited large amounts of cash that were not attributable to any known source into her bank accounts.

R.R. Walker, CA-8, 90-1 USTC ¶50,084, 896 F2d 295.

An individual's conviction for tax evasion was upheld. The government properly determined that the individual had unreported income under the cash expenditures and bank deposits method of reconstructing income. The individual's cash on hand at the beginning of each year was established with reasonable certainty based on the individual's personal records and safety deposit box access records.

C.T. Conaway, CA-5, 94-1 USTC ¶50,009, 11 F3d 40.

The evidence was sufficient to sustain an individual's conviction for willful failure to file tax returns and tax evasion. He could not claim that his taxes were not deficient by treating fees received from an insurance adjusting company as a nontaxable settlement award for personal injuries. The company stated that no settlement was ever agreed upon, and, even if one had been reached, the damages would have flowed from a breach of contract.

W.J. Benson, CA-7, 95-2 USTC ¶50,540, 67 F3d 641.

There was sufficient evidence for a jury to find that the majority shareholder, president, and director of a corporation was guilty of tax evasion based on his exercise of control over a liquidating dividend that was due another shareholder. The money was not used for the alleged purpose of providing a contingency fund to protect former officers and directors from claims arising out of the liquidation but, instead, was for the taxpayer's benefit.

R.P. Mueller, CA-11, 96-1 USTC ¶50,190.

Insufficient evidence was presented to support married taxpayers' convictions for tax evasion where the government failed to prove the required existence of a tax deficiency. Under the "no earnings and profits, no income" rule established in P.F. DiZenzo, CA-2, 65-2 USTC ¶9518, amounts that the couple diverted from their wholly owned corporation could not be taxable to them personally as a constructive dividend, where the company had no earnings or profits. Instead, the diverted funds constituted a nontaxable reduction of the couple's shareholder loan account.

J. D'Agostino, CA-2, 98-1 USTC ¶50,380, 145 F3d 69.

The taxpayer's contention that the bonus and interest payments were motivated solely by tax concerns and that they did not constitute taxable income and, thus, could not result in a tax deficiency, was rejected.

M.Y. Khalaf, CA-9 (unpublished opinion), 2002-1 USTC ¶50,297, aff'g an unreported District Court decision.

A federal district court properly determined the amounts embezzled by an individual from his employers. The individual produced no evidence in support of his claim that he embezzled less than the amounts alleged by the victim, and he failed to refute the reliability of the victim's allegations.

D.J. Peterson, CA-10, 2003-1 USTC ¶50,168.

An individual's conviction for filing false tax returns was not set aside because the evidence supported the jury's finding beyond a reasonable doubt that the individual's tax returns contained false information as to material matters in that he did not report income he should have reported. The evidence also showed that the individual exerted control over funds he obtained from his business trust but did not report those funds as income on his personal returns or otherwise properly account for the funds.

M.E. Diesel, DC Kan., 2006-2 USTC ¶50,398.

Two individuals who operated a printing and copying business were properly convicted for willful tax evasion. They concealed business assets using a secret bank account that was not known to their accountant and used the funds in that account for personal expenses. They also handled affairs in cash to avoid making records and repeatedly failed to report large amounts of income.

L.K. Spurlock, CA-5 (unpublished opinion), 2007-1 USTC ¶50,384, aff'g an unreported DC Texas decision.

An individual's conviction and sentence for tax evasion and failure to account for and pay over withholding taxes was proper. The government presented evidence that the individual was the hidden owner of a partnership, he diverted the partnership's funds for personal purposes without reporting the income, and misused taxes withheld from the partnership's employees. Further, contrary to the individual's arguments, an assessment is not necessary to prove tax evasion.

P. Lombardo, CA-3 (unpublished opinion), 2008-1 USTC ¶50,381, aff'g an unreported DC Pa. decision.
ion 7201 tax fraud also permits section 6663 penalty

Section 7206 fraud - filing false statements

It is very important to seek the immediate attention of a tax attorney when a return preparer is being investigated by the IRS Criminal Tax Division. The very best time to defend actions taken is before the IRS. It is far more difficult to fashion a defense at the time the case is being considered by the Department of Justice.


Section 7206 fraud by return preparers apply when the preparer willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document.

There was a conviction in the case just published. The tax preparer was sentenced following his conviction for aiding in the preparation and filing of false tax returns. In determining the base offense level under the sentencing guidelines, the tax loss was properly calculated based on the aggregate amount of underpaid income tax determined by an IRS examination of each fraudulent return.

The district court was not required to reduce the government's tax loss from the fraud by any unclaimed worthless investment capital loss deductions to which the preparer's taxpayer clients were legitimately entitled. The investors' offsetting capital losses were unrelated to the tax fraud committed by the preparer, and the losses that he had his clients fraudulently claim were ordinary business losses that were neither related to nor in lieu of the worthless investment losses. Additionally, the unclaimed capital losses were tax benefits available to the investor-taxpayers, not to the tax preparer. Consequently, the tax preparer's fraud did not result in any offsetting tax benefit to the government.
Affirming an unreported DC Mo. decision.



United States of America, Plaintiff-Appellee v. Leon Travis Blevins, Defendant-Appellant.

U.S. Court of Appeals, 8th Circuit; 07-3298, September 16, 2008.Affirming an unreported DC Mo. decision.

[ Code Sec. 7206]

Tax crimes: Aiding in preparation and filing of false returns: Conviction and sentence: Sentencing Guidelines: Tax loss calculation. --


LOKEN, Chief Judge: Tax preparer Leon Travis Blevins prepared and filed twenty federal income tax returns for seven taxpayers that falsely claimed Schedule C business losses, Schedule E rental losses, and Form 4797 losses from the sale of business property for the 1999-2002 tax years. At least six of the taxpayers were investors in a foundering business run by Blevins that bought and sold home mortgages and engaged in other real estate activities. Some returns falsely claimed the business's ordinary losses as if they were incurred by the investor-taxpayers. Other claimed losses were wholly fictitious. Blevins pleaded guilty to twenty counts of aiding in the preparation and filing of false tax returns in violation of 26 U.S.C. § 7206(2). He appeals his twenty-one month sentence, arguing that the district court 1 erred in determining tax loss under U.S.S.G. § 2T1.1 because the court failed to take into account the tax effect of investment losses to which his taxpayer clients were entitled. The court released Blevins on his personal recognizance pending resolution of the appeal. Reviewing the district court's interpretation of the Sentencing Guidelines de novo, we affirm. See United States v. Vickers, 528 F.3d 1116, 1120 (8th Cir. 2008) (standard of review).

For sentencing purposes, the Guidelines provide that the base offense level for the offense of filing fraudulent tax returns is the tax loss level from § 2T4.1, or six if there is no tax loss. U.S.S.G. § 2T1.1(a). Tax loss is "the total amount of loss that was the object of the offense ( i.e., the loss that would have resulted had the offense been successfully completed)." § 2T1.1(c)(1). Notes (A)-(C) to § 2T1.1(c)(1) provide that tax loss equals 28% of the underreported income and improperly claimed deductions (34% if the taxpayer is a corporation), plus 100% of any falsely claimed tax credits, "unless a more accurate determination of the tax loss can be made."

At sentencing, the government argued that the tax loss attributable to Blevins's offense conduct was $100,029, the aggregate amount of underpaid income tax determined by an IRS examination of each fraudulent return. 2 This level of loss produced a base offense level of sixteen, see U.S.S.G. § 2T4.1(F), and an advisory guidelines range of 21-27 months in prison. Blevins countered with a letter report from his tax and business valuation expert. Using investment data from the fraud investigation, the expert opined that each taxpayer's investment in Blevins's failed business was "a total loss" and that these losses "appear to be capital losses." Based on the assumption that each investor would use these losses to offset $3,000 of ordinary income each year until the losses were exhausted, the expert calculated that the investors were entitled to capital loss deductions totaling $32,177, "resulting in a net tax loss to the government of $68,074." 3 This lower level of tax loss would produce a base offense level of fourteen, see § 2T4.1(E), resulting in an advisory guidelines sentencing range of 15-21 months in prison.

Relying on the expert's calculations and on the Second Circuit's decision in United States v. Gordon, 291 F.3d 181, 187 (2d Cir. 2002), cert. denied, 537 U.S. 1114 (2003), Blevins argued to the district court, as he does on appeal, that the determination of tax loss under § 2T1.1(c)(1) must take into account the legitimate, unclaimed capital loss deductions to which his taxpayer clients are entitled on account of their worthless investments. The government disagreed, urging the court instead to follow decisions in other circuits concluding that the definition of tax loss in § 2T1.1(c)(1) --"total amount of loss that was the object of the offense" --does not allow a sentencing court to take into account "other unrelated mistakes on the return such as unclaimed deductions." United States v. Chavin, 316 F.3d 666, 677 (7th Cir. 2002); accord United States v. Delfino, 510 F.3d 468, 472-73 (4th Cir. 2007), petition for cert. filed, 76 U.S.L.W. 3569 (Apr. 7, 2008); United States v. Phelps, 478 F.3d 680, 681-82 (5th Cir. 2007), cert. denied, 128 S. Ct. 436 (2007); United States v. Spencer, 178 F.3d 1365, 1368-69 (10th Cir. 1999). The district court agreed with the government.

On appeal, the parties again frame the issue as turning on a conflict between other circuits on the broad question of whether a taxpayer's "unclaimed" deductions or losses may ever be taken into account in determining tax loss for purposes of § 2T1.1(c)(1). The apparent conflict developed after § 2T1.1 was amended in 1993. The prior version defined "tax loss" as "the greater of (1) the total amount of tax that the taxpayer evaded or attempted to evade or (2) 28% of the amount by which the greater of gross income and taxable income was understated;" a comment explained that alternative (2) "should make irrelevant the issue of whether the taxpayer was entitled to offsetting adjustments that he failed to claim." U.S.S.G. § 2T1.1 & cmt. n.4 (1992). The 1993 amendment deleted this comment, leading the Second Circuit to suggest in dicta that § 2T1.1 no longer precluded using legitimate unclaimed deductions to offset a tax loss. United States v. Martinez-Rios, 143 F.3d 662, 670-71 (2d Cir. 1998). The Seventh Circuit disagreed, concluding that the comment was deleted "because the new tax-loss definition specifically excludes consideration of unclaimed deductions on its face by defining tax loss as the 'object of the offense.'" Chavin, 316 F.3d at 678. Three other circuits have agreed with the Seventh.

In Gordon, defendant was convicted of tax evasion for failing to report income he received from a company he controlled. On appeal, he argued that the district court erred in refusing to reduce the tax loss resulting from this unreported income by the tax benefit the company would have received if it had treated the payments as a deductible salary expense. Adopting the reasoning of Martinez-Rios, the Second Circuit agreed in principle but concluded that the error was harmless because Gordon failed to prove that the company would have treated the income he received as a salary expense, as opposed to non-deductible dividends. 291 F.3d at 187.

The theory argued but not proved in Gordon presents the strongest case for allowing unclaimed tax benefits to reduce the government's tax loss because the unclaimed deduction in that case was a tax consequence of the fraud. Taking this type of offsetting tax benefit into account at least arguably comports with the plain language of § 2T1.1(c)(1) --"the loss that would have resulted had the offense been successfully completed." On the other hand, the defendant's failure to claim the offsetting tax benefit in Gordon by taking a corporate salary expense deduction for payments he intended not to report as income helped conceal the fraud. No doubt reflecting this aspect of the issue, the four circuits that have rejected the Second Circuit's reasoning explicitly refuse to interpret § 2T1.1(c)(1) "as giving taxpayers a second opportunity to claim deductions after having been convicted of tax fraud." Spencer, 178 F.3d at 1368, quoted in Chavin, 316 F.3d at 679, in Phelps, 478 F.3d at 682, and in Delfino, 510 F.3d at 473.

In this case, we need not decide whether an unclaimed tax benefit may ever offset tax loss determined by aggregating the offense conduct of underreported income, improper deductions, and false tax credits. First, Gordon is clearly distinguishable. Here, the investors' offsetting capital losses that Blevins is claiming are unrelated to the tax fraud he committed. The Schedule C and Schedule E losses that Blevins had his clients fraudulently claim were ordinary business losses. Such losses presuppose an on-going business, however distressed, not a failed business that has become a worthless investment. Thus, the fraudulently claimed losses were neither related to nor in lieu of worthless investment losses. Indeed, the worthless investment losses were tax benefits that the investors could claim whether or not the fraud was perpetrated. Taking into account unclaimed tax benefits wholly unrelated to the offense of conviction is contrary to the plain meaning of the definition of tax loss in § 2T1.1(c)(1), "the total amount of loss that was the object of the offense ( i.e., the loss that would have resulted had the offense been successfully completed)."

Second, the unclaimed capital losses in this case are tax benefits available to the investor-taxpayers, not to Blevins. So far as this record reveals, those capital losses have not been claimed and remain potentially available to the taxpayers in the future (if they have not already been claimed). Thus, Blevins's fraud did not result in any offsetting tax benefit to the government. Indeed, should the investors properly claim and be entitled to worthless investment capital losses on future returns (or amended past returns), the government will incur a loss of tax revenue in addition to the loss that was the object of Blevins's offense. In these circumstances, the district court properly declined to reduce the government's tax loss from the fraud by the taxpayers' allegedly unclaimed capital loss deductions.

The judgment of the district court is affirmed.

1 The HONORABLE RICHARD E. DORR, United States District Judge for the Western District of Missouri.

2 Application of the 28% default rule in the notes to § 2T1.1(c)(1) would have produced a tax loss of $164,326. However, the IRS calculated its losses based on the investor-taxpayers' marginal tax rates, which were less than 28%. The government proposed the lower figure as reflecting a "more accurate determination," as the notes to § 2T1.1(c)(1) envision.

3 The expert's letter report relied on assumptions not supported by the record. First, the expert opined that capital loss treatment of the taxpayers' worthless investments "is consistent with IRC Section 165." But the record contains no evidence that the investments would qualify as "worthless securities" as defined in 26 U.S.C. § 165(g)(2). Then, having assumed the investments are worthless and qualify for capital loss deductions, she assumed that each investor-taxpayer would offset his or her loss against $3,000 of ordinary income in each tax year to which any unused portion of the losses could be carried forward under 26 U.S.C. § 1212(b). But an investor must apply such losses to any capital gains before offsetting up to $3,000 in ordinary income. See 26 U.S.C. § 1211(b). Nothing in the record supports the expert's assumption that the investors would have no capital gains in the tax years in question. Like the district court, we need not consider these failures of proof.

United States of America, Appellant v. Talmus R. Taylor, Defendant-Appellee.

U.S. Court of Appeals, 1st Circuit; 06-2216, July 9, 2008.

On remand from the SCt, 2008-2 USTC ¶50,432, Remanding an unreported DC Mass. decision..

[ Code Sec. 7206]


A sentence of probation and time in a halfway house imposed on an individual for aiding and assisting in the preparation of false tax returns was remanded for reconsideration. The sentencing court was directed to provide justifications for its sentence in light of the scope and extent of the sentencing court's discretion under the federal sentencing guidelines.


Michael J. Sullivan, United States Attorney, John A. Capin, Paul G. Levenson, Assistant United States Attorneys, for appellant. Bruce T. Macdonald, for defendant-appellee.

Before: Lynch, Chief Judge, and Newman and Torruella, Circuit Judges.

Before Lynch, Chief Judge, Newman and Torruella, Circuit Judges. *


ON REMAND FROM THE SUPREME COURT OF THE UNITED STATES


TORRUELLA, Circuit Judge: Talmus Taylor was sentenced to one year in a halfway house, five years of probation, and a $10,000 fine, for aiding and assisting in the preparation of false tax returns, in violation of 26 U.S.C. §7206(2). Following an appeal by the Government, we vacated the sentence as substantively unreasonable and remanded to the district court. See United States v. Taylor [ 2007-2 USTC ¶50,653], 499 F.3d 94 (1st Cir. 2007), vacated, 128 S.Ct. 878 (2008). The case returns to us on remand from the Supreme Court for further consideration in light of Gall v. United States, 128 S.Ct. 586 (2007).

The Court's decision in Gall, combined with its decisions in Kimbrough v. United States, 128 S.Ct. 558 (2007), and Rita v. United States, 127 S.Ct. 2456 (2007), makes clear that in the post- Booker world, district judges are empowered with considerable discretion in sentencing, as long as the sentence is generally reasonable and the court has followed the proper procedures. In accordance with these decisions, our recent opinions have elaborated on the broad scope of this discretion. See, e.g., United States v. Martin, 520 F.3d 87 (1st Cir. 2008); see also United States v. Rodríguez, 527 F.3d 221 (1st Cir. 2008); United States v. Politano, 522 F.3d 69 (1st Cir. 2008). Recently, in another sentencing case vacated by Gall, we noted this expanded discretion and concluded that the fairest course of action was to provide the district court the opportunity to reconsider its sentence in view of the Supreme Court's elucidation of sentencing procedures, as well as some of the concerns we had expressed in the prior opinion. See United States v. Tom, No. 07-1074, 2008 WL 1886608 (1st Cir. Apr. 30, 2008) (unpublished). We think that course appropriate under the circumstances here as well.

In so doing, we first reiterate some of the important sentencing principles underscored in all of these recent decisions. As clearly outlined in Gall, we review a district court's sentence under a deferential abuse of discretion standard, which involves both a procedural and a substantive inquiry. See Gall, 128 S.Ct. at 597; see also Politano, 522 F.3d at 72. This deference arises from the advantages inherent in the district court's position: "a superior coign of vantage, greater familiarity with the individual case, the opportunity to see and hear the principals and the testimony at first hand, and the cumulative experience garnered through the sheer number of district court sentencing proceedings that take place day by day." Martin, 520 F.3d at 92. Indeed, once the district court has followed the proper procedures, our review of substantive reasonableness is highly discretionary. See id. ("[R]eversal will result if - and only if - the sentencing court's ultimate determination falls outside the expansive boundaries of that universe [of reasonableness].").

Yet, along with this increased discretion to fashion an appropriate sentence goes an accompanying "need for an increased degree of justification commensurate with an increased degree of variance." Martin, 520 F.3d at 91. To be clear, there is no strict formula for determining the bounds of an appropriate sentence, but there is "a certain `sliding scale' effect [that] lurks in the penumbra of modern federal sentencing law; the guidelines are the starting point for the fashioning of an individualized sentence, so a major deviation from them must `be supported by a more significant justification than a minor one.' " Id. (quoting Gall, 128 S.Ct. at 597).

In our prior review of the sentence in this case, we expressed concern that the district court had failed to take all of the 18 U.S.C. §3553(a) factors into account in fashioning the defendant's entirely non-jail sentence for such a serious crime. Our conclusion was not based on any requirement that the justification be "proportional" to the deviation or that the result comply with a mathematic formula defining the outer bounds of reasonableness. Rather, it was that in our view, the court's explanations had failed to justify the overall result.

As in Tom, a ruling on the sentence based on the present record would not fully actualize Gall's effect in "shed[ding] considerable light on the scope and extent of a district court's discretion under the now-advisory federal sentencing guidelines." Martin, 520 F.3d at 88. Given the intervening cases which have further elucidated the district court's discretion in sentencing (as well as underscored the importance of the district court's justifications for that sentence), we think it best to remand to the district court for reconsideration with the benefit of all of these developments, as well as the concerns we expressed in our prior opinion.

So ordered.

* Of the Federal Circuit, sitting by designation.
Sentence. --Fraud and False Statements: Sentence

The Court upheld the taxpayer's conviction for wilfully and knowingly subscribing to joint returns which he did not believe to be true and correct as to every material matter. The taxpayer was not deprived of his constitutional rights by the District Court's denial of his motion to reduce the sentence to merely a fine and not a jail sentence. The sentence was within the maximum penalties provided for violations of Code Sec. 7206(1).

J. Brown, CA-7, 70-2 USTC ¶9521, 428 F2d 1191. Cert. denied, 400 US 941.

There was no error in the refusal of the district court to disclose the contents of a pre-sentence report to the taxpayer's attorney, where there was no constitutional necessity for disclosure and the report contained no adverse information.

J.C. Knupp, CA-4, 71-2 USTC ¶9637, 448 F2d 412.

The trial judge did not abuse his discretion in sentencing the taxpayer to jail for one year for aiding in the preparation of a false return merely because others convicted of similar offenses in the same district were not incarcerated.

W.M. Metcalf, CA-4, 76-1 USTC ¶9192.

The court held that the sentencing judge improperly conditioned taxpayer's probation for willfully and knowingly filing a false income tax return on the condition that he resign as a member of the bar. The court held that this special condition denied him due process by depriving him of his license to practice law without notice or an appropriate hearing.

V.M. Pastore, CA-2, 76-2 USTC ¶9513, 537 F2d 675.

An accountant's conviction for violating Code Sec. 7206(2), which prohibits willfully aiding or assisting in the preparation of a false or fraudulent tax return, constituted a conviction of a criminal offense under the revenue laws of the United States for which he was validly disbarred from practice before the IRS.

P.C. Washburn, DC, 76-1 USTC ¶9323, 409 FSupp 3.

The defendants were not sentenced unduly severely because of their failure to cooperate with the government. The trial judge did not state that leniency would be conditioned upon cooperation, nor was the trial judge required to explain each sentence imposed.

R.S. Bacheler, CA-3, 79-2 USTC ¶9695, 611 F2d 443.

Because 18 U.S.C. §3651 limits to six months the permissible period of actual confinement when a part of a sentence is suspended upon probation, a suspended sentence that involved thirteen months of incarceration was invalid.

M.H. Cohen, CA-4, 80-1 USTC ¶9288, 617 F2d 56.

The sentence of a taxpayer who was convicted of tax fraud was vacated and remanded for resentencing because no record was available to show why his sentence was increased at a second trial.

F.F. Solomon, Jr., CA-9, 87-2 USTC ¶9482, 825 F2d 1292.

The trial court did not abuse its discretion by considering all of the evidence for sentencing purposes, including conduct of which the taxpayers had been acquitted at trial.

C.W. Lawrence, Jr., CA-7, 91-2 USTC ¶50,522.

A federal district court properly determined the sentence of an individual who was convicted of preparing fraudulent tax returns. The trial record supported enhancement of the base offense level under the U.S. Sentencing Guidelines due to the amount of the tax loss, and no evidentiary hearing was necessary.

M.G. Marshall, CA-8, 96-2 USTC ¶50,678, 92 F3d 758.

A tax protestor convicted of various tax crimes under Code Secs. 7206 and 7212 was appropriately sentenced under the United States Sentencing Guidelines. Instead of the usual tax protestor tactic of ignoring tax administration, the defendant filed income tax forms seeking a refund, setting forth huge and obviously fictitious sums of money as his earnings. Although the IRS never considered making the claimed refunds, and the returns harassed and impeded IRS employees, there was no tax evasion, tax loss or false tax credits involved. Thus, the government did not suffer the actual loss required to impose a longer sentence.

M. Krause, DC N.Y., 92-1 USTC ¶50,193, 786 FSupp 1151.

A defendant's conviction for conspiracy to defraud the IRS was upheld because there was no reversible error. The government was permitted to seek enhancement of the defendant's sentence because it proved his intent to accomplish illegal transactions that would cause a tax loss to the government, even though the tax loss would not occur in the year of the transactions.

R.M. Hirschfeld, CA-4, 93-1 USTC ¶50,098.

An individual's conviction and sentence for filing false tax returns were upheld based on sufficient evidence of underreported income. A transaction in which amounts were loaned from a business account of the individual's S corporation to his friend, the loan repayment was deposited into the individual's personal account, and the loan was deducted as a business expense, along with the resulting tax loss to the government, were properly treated as relevant conduct in sentencing the individual under the U.S. Sentencing Guidelines.

T.G. Georges, CA-8, 98-1 USTC ¶50,477.

An individual convicted of aiding and abetting a tax fraud was properly denied a withdrawal of his guilty plea and a continuance to seek assistance of a lawyer at his sentencing. Furthermore, he was correctly adjudged to serve an enhanced sentence in light of the evidence and given his behavior during the proceedings.

R.J. Jagim, CA-8, 93-1 USTC ¶50,093, 978 F2d 1032.

An office manager's conviction for filing a fraudulent return was upheld. However, the trial court erred in imposing a sentence of three years' supervised release because a conviction under Code Sec. 7206(1) is a Class E offense, not a Class D felony. Therefore, a sentence of a one year's supervised release was imposed.

E.A. Pratt Stokes, CA-5, 93-2 USTC ¶50,545, 998 F2d 279.

An unlicensed professional sports agent, who was convicted of aiding in the preparation of false income tax returns and sentenced to a prison term, several years of supervision, and a fine, unsuccessfully appealed his prison sentence, but prevailed in obtaining a reduced period of supervised release. The trial court properly followed the sentencing guidelines for organized tax fraud from which one derives a substantial part of one's income and the guidelines applicable to those in the business of preparing or assisting in the preparation of false returns. However, the trial court improperly classified the nature of the agent's felony.

A.Q. Welch, CA-5, 94-2 USTC ¶50,358.

An individual's sentence following conviction for filing false tax returns was upheld where there was no clear error in the trial court's determination.

J. Swanson, III, CA-4 (unpublished opinion), 97-1 USTC ¶50,398, aff'g, per curiam, an unreported District Court decision.

The trial court erred in failing to determine whether state (California) law prohibited payments for unsolicited client referrals in calculating the base offense level for a former attorney's tax fraud conviction based on his deduction of referral payments. The trial court erroneously used the entire amount that the taxpayer deducted to compute the tax loss for sentencing purposes without considering whether it constituted illegal payments for which deductions were disallowed under Code Sec. 162(c)(2). Since state law did not prohibit payments for unsolicited referrals, the taxpayer was entitled to deduct such payments as business expenses. As a result, payments for unsolicited referrals should not have been included for purposes of computing the tax loss.

R.M. Standard, CA-9, 2000-1 USTC ¶50,319.

The sentence imposed on a taxpayer who was convicted of filing a false return was properly enhanced by the trial court in light of his use of sophisticated means to conceal his offense, his abuse of a position of trust, and his actions in obstructing or impeding the administration of justice during his case.

J.D. Tindall, CA-8 (unpublished opinion), 2000-2 USTC ¶50,585, aff'g an unreported District Court decision.

An individual's conviction for aiding another to file a fraudulent tax return and subsequent sentencing were upheld. The sentence requested by the government was reasonable under the sentencing guidelines given the number of violations and the amount of tax involved. The court was also within its discretion to enhance the sentence because of taxpayer's attempts to intimidate government witnesses before trial.

C. Bruno, CA-2 (unpublished opinion), 2001-1 USTC ¶50,112, aff'g an unreported District Court decision.

A taxpayer who pled guilty to 12 counts of aiding and assisting in the preparation of false tax returns was properly sentenced to a period of 41 months of imprisonment, which was longer than the three-year maximum sentence authorized by statute for each count. The district court had the discretion to run consecutively the sentences for separate counts. However, the court could not sentence him to 41 months for each of his 12 convictions because 41 months exceeded the statutory maximum for any single count.

J. Darden, CA-9 (unpublished opinion), 2002-1 USTC ¶50,291, vac'g and rem'g an unreported District Court decision.

Sentencing guidelines imposed with respect to an individual convicted of tax evasion permitted the inclusion of conditions that the taxpayer refrain from consuming alcohol and participate in community service activities. Those conditions were reasonably related to the goals of probation and rehabilitation. Further, amounts previously remitted by the taxpayer were not deducted from the current taxes owing because those funds were paid in connection with a fraudulent offer-in-compromise that was entered into after the crimes were committed.

F.F. Paul, CA-6 (unpublished opinion), 2003-1 USTC ¶50,222, aff'g, per curiam, an unreported District Court decision.

Sentences imposed were upheld.

K.P. Kontny, CA-7, 2001-1 USTC ¶50,197. Cert. denied, 5/14/2001.

K.L. Utecht, CA-7, 2001-1 USTC ¶50,311.

M. Wick, CA-9 (unpublished opinion), 2002-1 USTC ¶50,456, aff'g an unreported District Court decision.

W.N. Jackson, CA-2 (unpublished opinion), 2003-1 USTC ¶50,478, 65 FedAppx 754, aff'g an unreported District Court decision.

The sentence imposed on an individual convicted of aiding and assisting in the preparation of false federal income tax returns was affirmed. The individual failed to demonstrate that the court's consideration of the relevant sentencing factors was deficient or that the sentence imposed was unreasonable.

A. Jones, CA-6 (unpublished opinion), 2007-1 USTC ¶50,340, 218 FedAppx 488, aff'g an unreported DC Mich. decision.

A federal district court erred in imposing four consecutive one-year terms of supervised release on an individual who pleaded guilty to tax fraud and agreed to make restitution to the IRS. The federal sentencing guidelines require multiple terms of supervised release to run concurrently.

M.J. Spangler, CA-11 (unpublished opinion), 2007-1USTC ¶50,400, 224 FedAppx 890, aff'g in part, vac'g and rem'g in part an unreported DC Fla. decision.

A federal district court did not miscalculate the tax loss when sentencing an individual convicted for filing a false income tax return and assisting others in the preparation of false returns. The calculation was based on the fraudulent tax returns and the testimony of two IRS agents and the taxpayers for whom the individual had prepared false returns.

J.H. Bell, CA-7 (unpublished opinion), 2007-1 USTC ¶50,407, 226 FedAppx 596, aff'g an unreported DC Ill. decision.

A four-level leadership enhancement to the sentence imposed on a tax return preparer who was convicted for aiding and assisting in the preparation of false federal income tax returns was proper. The individual organized a tax fraud scheme that involved a number of taxpayers and caused a large tax loss.

R.E. Reiss, CA-8 (unpublished opinion), 2007-2 USTC ¶50,532, 230 FedAppx, aff'g, per curiam, an unreported DC Minn. decision.

A lawyer and former federal prosecutor's sentence for tax fraud was substantially and procedurally reasonable. Although the individual failed to report as income bribes he received from city vendors while the mayor of Atlanta, the trial court imposed the minimum sentence recommended by the sentencing guidelines. The court followed Booker to calculate the sentence; first establishing the base level of the offense by estimating the government's tax loss and then enhancing the base level for use of sophisticated means of concealment and obstruction of justice. The individual failed to show that his public service was so extraordinary as to justify a downward departure from the sentencing guidelines. The sentence was not excessive because it was less than the maximum allowed by Code Sec. 7206.

W.C. Campbell, CA-11, 2007-2 USTC ¶50,609, 491 F3d 1306.

A federal district court's adoption of the government's tax loss calculation when sentencing an individual convicted for willfully filing false tax returns was reasonable. The court reasonably concluded that, even though he had not reported all of his sales income, the individual had claimed all of his deductible expenses.

V. Roudakov, CA-3 (unpublished opinion), 2007-2 USTC ¶50,700, 239 FedAppx 776, aff'g an unreported DC Pa., decision.

An individual's conviction and sentence for aiding and abetting the filing of fraudulent tax returns was upheld. The trial court properly considered the pre-sentence report, the amount of loss, the severity of the crime, the necessity for deterrence and the defendant's statement, and the sentence imposed was 18 months less than the minimum in the applicable sentencing guidelines range. Therefore, the sentence imposed was reasonable.

C. Contreras, CA-2 (unpublished opinion), 2007-2USTC ¶50,712, 247 FedAppx 293, aff'g an unreported DC N.Y. decision.

The sentence imposed on a certified public accountant for aiding and advising the filing of a false income tax return was reasonable. The trial court properly imposed a sentence of a one year's supervised release, as recommended by the sentencing guidelines, since he was convicted of a Class E felony and also sentenced to more than one year imprisonment. Further, the trial court had a reasoned basis for imposing the sentence.

L.P. Bridges, CA-9 (unpublished opinion), 2007-2 USTC ¶50,779, aff'g, an unreported DC Wash., decision.

A tax return preparer's sentence for aiding in the preparation of a false tax return was upheld. The trial court did not err in calculating the tax loss attributable to his conduct, and the court was entitled to consider uncharged and acquitted conduct in determining the return preparer's sentence when such conduct was proven by a preponderance of the evidence.

A.T. Fokkoun-Ngassa, CA-4 (unpublished opinion), 2007-2 USTC ¶50,794, aff'g, per curiam, an unreported DC Va., decision.

The sentence imposed on an individual for filing false, fictitious and fraudulent income tax returns was reasonable. The district court did not abuse its discretion when it denied a downward departure or variance of the sentence based on exceptional family circumstances because it found that the individual's criminal history and utilization of family members in the commission of his offense constituted as factors weighing against a variance. Moreover, the court considered the properly calculated guidelines range before imposing the sentence and did not treat the sentencing guidelines as mandatory.

V.T. Carter, CA-6, 2008-1 USTC ¶50,124, 510 F3d 593.

The winner of a reality television show failed to establish that he was improperly convicted and sentenced for filing false tax returns. The sentence imposed, which was at the higher end of the sentencing guidelines range, was not unreasonable. The court was entitled to accept the testimony of the government's witness as providing a more accurate determination of the tax loss than would be determined using the sentencing guidelines. A perjury enhancement was also properly applied after the court noted that he lied on the witness stand.

R. Hatch, CA-1, 2008-1 USTC ¶50,166.

Sentence imposed on a tax preparer for willfully preparing false or fraudulent income tax returns was reasonable and within the Sentencing Guidelines range. The court did not err in applying a sentencing enhancement for obstruction of justice or in calculating the tax loss based on IRS interviews with the individual's customers.

G.D. Goosby, CA-6, 2008-1 USTC ¶50,331.

An individual who pleaded guilty to two counts of filing false income tax returns was properly sentenced to the statutory maximum of three years imprisonment on each count, to be served concurrently. The court could have imposed the sentences consecutively, its comment comparing the individual's tax offense to drug trafficking crimes was not illegal or improper and the court acted within its discretion by allowing and considering testimony regarding the basis of a pending state charge to address the history and character of the individual.

B. Tockes, CA-7, 2008-2 USTC ¶50,411.

An individual could not appeal the sentence imposed on him following his conviction for conspiracy and aiding and assisting in the preparation of false tax returns. The individual had entered a guilty plea and waived his right to appeal.

D. Shields, CA-9 (unpublished opinion), 2008-2 USTC ¶50,425, aff'g an unreported DC Calif. decision.

The U.S. Supreme Court has summarily vacated and remanded a Court of Appeals ruling that a sentence of probation and time in a halfway house imposed on a part-time income tax preparer for aiding and assisting in the preparation of false tax returns was unreasonable. The Court requested the Appeals court reconsider its ruling in light of Gall v. United States, 128 S. Ct. 586 (2007).

T.R. Taylor, SCt, 2008-2 USTC ¶50,432, vac'g and rem'g, CA-1, 2007-2 USTC ¶50,653.

A sentence of probation and time in a halfway house imposed on an individual for aiding and assisting in the preparation of false tax returns was remanded for reconsideration. The sentencing court was directed to provide justifications for its sentence in light of the scope and extent of the sentencing court's discretion under the federal sentencing guidelines.

T.R. Taylor, CA-1, 2008-2 USTC ¶50,436, on rem'd from SCt, 2008-2 USTC ¶50,432.

The sentence imposed on an individual for tax preparer fraud was vacated and remanded a second time for resentencing because the government did not prove the amount of the tax loss by a preponderance of the evidence and did not consider family circumstances as a mitigating circumstance. The court prejudged the amount of tax loss without giving due consideration to the individual's challenges to the amount of tax loss and whether the individual was responsible for the loss, thereby undermining the fairness of the sentencing hearing. Further, the district court did not consider whether the individual's incarceration would impose an extraordinary hardship on his family, thereby constituting a mitigating factor that would justify imposing a below-guidelines sentence.

J.P. Schroeder, CA-7, 2008-2 USTC ¶50,477.


SEC. 7206. FRAUD AND FALSE STATEMENTS.
Any person who --

7206(1) DECLARATION UNDER PENALTIES OF PERJURY. --Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or

7206(2) AID OR ASSISTANCE. --Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; or

7206(3) FRAUDULENT BONDS, PERMITS, AND ENTRIES. --Simulates or falsely or fraudulently executes or signs any bond, permit, entry, or other document required by the provisions of the internal revenue laws, or by any regulation made in pursuance thereof, or procures the same to be falsely or fraudulently executed or advises, aids in, or connives at such execution thereof; or

7206(4) REMOVAL OR CONCEALMENT WITH INTENT TO DEFRAUD. --Removes, deposits, or conceals, or is concerned in removing, depositing, or concealing, any goods or commodities for or in respect whereof any tax is or shall be imposed, or any property upon which levy is authorized by section 6331, with intent to evade or defeat the assessment or collection of any tax imposed by this title; or

7206(5) COMPROMISES AND CLOSING AGREEMENTS. --In connection with any compromise under section 7122, or offer of such compromise, or in connection with any closing agreement under section 7121, or offer to enter into any such agreement, willfully --

7206(5)(A) CONCEALMENT OF PROPERTY. --Conceals from any officer or employee of the United States any property belonging to the estate of a taxpayer or other person liable in respect of the tax, or

7206(5)(B) WITHHOLDING, FALSIFYING, AND DESTROYING RECORDS. --Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement, relating to the estate or financial condition of the taxpayer or other person liable in respect of the tax;

shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation) or imprisoned not more than 3 years, or both, together with the costs of prosecution.

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For more information about tax return preparer fraud or taxpayer fraud, contact ab@irstaxattorney.com 888 712-7690 ex 106
Labels: section 7206 tax preparer fraud




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Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax: Synopsis - trust fund recovery penalty (100% penalty)

An employer is required to withhold federal income taxes, Federal Insurance Contributions Act (FICA) taxes and Railroad Retirement Act (RRA) taxes from employees and to pay over those amounts to the IRS (Code Sec. 3402 and Code Sec. 3501). These taxes withheld from the employee are referred to as trust fund taxes. In addition, the employer is required to pay FICA taxes equivalent to the amount withheld from the employee and to pay Federal Unemployment Tax Act (FUTA) taxes on the employee's wages (Code Sec. 3111 and Code Sec. 3301). Such amounts are generally referred to as the employer's share of employment taxes or non-trust fund taxes.

When the person responsible for collection and payment of such taxes willfully fails to pay over withheld trust fund taxes, a penalty equal to the amount of the delinquent trust fund taxes is assessed (Code Sec. 6672(a)). The trust fund recovery penalty (also known as the 100 percent penalty) only applies to the failure to collect, account for and pay over third-party taxes. It, therefore, does not apply to taxes that are directly paid, such as the employer's share of employment taxes, or to delinquency penalties or interest owed on the delinquent trust fund taxes (Reg. §301.6672-1). The trust fund recovery penalty is generally intended to encourage the prompt payment of the affected taxes and to insure ultimate collection of the taxes from a secondary source.

The penalty may be assessed against the employer, but is most often levied on at least one "responsible person," an individual within the organization who had sufficient authority to pay over the withheld taxes (Code Sec. 6672(a)). See ¶39,780.02 for a discussion of "responsible person."

In typical situations, a struggling business that has fallen behind in its bills pays other creditors before the IRS to assure a continued supply of needed goods and services. Individuals responsible for paying the business's bills may hope that by the time the IRS catches up, the business will have turned around and will have sufficient funds available to satisfy employment taxes and other liabilities. Alternatively, such persons may hope that if the business goes bankrupt, the employment tax debt will be discharged. These individuals often fail to realize that, not only do the business's liabilities gain a measure of priority in bankruptcy (11 U.S.C. §507 and 11 U.S.C. §724(b)), but the persons responsible for paying other business creditors in preference to the IRS may be personally liable for 100 percent of the unpaid trust fund taxes. Furthermore, this personal liability is neither dischargeable in bankruptcy, nor deductible as a business expense or bad debt (see ¶39,780.53). However, a responsible person who pays the penalty has a right of contribution against other responsible persons

Part 8. Appeals
Chapter 23. Offers in Compromise
Section 1. Offer in Compromise Overview
________________________________________
8.23.1 Offer in Compromise Overview
• 8.23.1.1 General
• 8.23.1.2 Suspension of Levy While Offer is Pending
• 8.23.1.3 Conference and Settlement Practices
• 8.23.1.4 Requirements for Compromise
8.23.1.1 (10-16-2007)
General
1. This IRM provides instructions for Appeals personnel for offer in compromise cases. The procedures in IRM 8.23 are intended to be consistent with the procedures in IRM 5.8, Offer in Compromise, IRM 5.15, Financial Analysis, as well as with other sections of IRM Part 8 - Appeals. Section 509 of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) significantly impacted the offer in compromise program. Appeals' responsibilities under TIPRA differ between Collection Due Process (CDP) and non-CDP offers, so separate sections are written for each.
2. IRM 5.8 contains the primary policies and procedures for both Collection and Appeals for processing, evaluating and making determinations on offers. IRM 8.6.1, Conferencing and Issue Resolution, and IRM 8.6.4, Conference and Settlement Practices, contain general conference and settlement practice procedures applicable to all Appeals work streams.
3. An offer in compromise (OIC) is an agreement between a taxpayer and the government that settles a tax liability in exchange for payment of less than the full amount owed. IRM 5.8.1 contains a general overview of the OIC program, including:
• Authority
• Policy
• Objectives
• Bases for Compromise
• Payment terms
• Fees and required initial payments
4. Appeals has jurisdiction to make decisions on OIC cases in the following circumstances:
A. Offers appealed after being rejected by Collection.
B. Offers based wholly or in part on doubt as to liability (DATL) after being rejected by Exam, or if the liability was previously determined by Appeals.
C. Offers submitted directly to Appeals as an alternative to the proposed collection in a CDP or equivalent hearing (EH) case.
D. Offers being evaluated by Collection when a Notice of Federal Tax Lien (NFTL) is filed and the taxpayer requests a CDP or EH hearing.
Note:
Appeals will not accept jurisdiction over an OIC if we do not have the authority to determine the type of tax that is being compromised, e.g. Alcohol, Tobacco and Firearm (ATF) taxes.
Note:
Appeals has no authority to compromise a liability if the Department of Justice (DOJ) can settle the case. This is identified by a Transaction Code (TC) 550 with definer code "04." Also, a TC 520 with a Closing Code (cc) 80 indicates a judgment was obtained and a TC 520 cc 70 indicates litigation is pending. See IRM 5.8.1, Offer in Compromise Overview, Tax Cases Controlled by Department of Justice.
5. Per Q-A 6 in Section 3 of Rev. Proc. 2000-43, OIC cases are subject to ex parte provisions. The third party contact waiver provision found in paragraph (n) in Section V of Form 656 pertains to non-IRS contacts only and is not a waiver of prohibited ex parte communications between Appeals and either the Collection or Examination functions.
6. While following the general OIC procedures found in IRM 5.8, Appeals exercises independent judgment concerning the disputed valuations and business decisions made by Collection. Appeals also makes independent determinations regarding offers based upon DATL, which are evaluated in the same manner as in a proposed deficiency case.
8.23.1.2 (10-16-2007)
Suspension of Levy While Offer is Pending
1. IRC 6331(k) provides that no levy may be made
• during the period that the offer is pending,
• for an additional 30 days after the offer is rejected, and
• during the time any appeal is pending.
2. Treasury Regulation 301.7122-1(d)(2) states that an offer becomes pending once it's accepted for processing. This is the date the Service official signs the Form 656, Offer in Compromise.
3. Treasury Regulation 301.7122-1(f)(1) provides that an offer in compromise has not been rejected until IRS issues a written notice to the taxpayer or his representative advising of:
• The rejection
• The reason(s) for rejection
• The right to an appeal
4. Treasury Regulation 301.7122(1)(f)(5) further provides that a taxpayer may administratively appeal the rejection of an offer to the IRS Office of Appeals if, within the 30-day period commencing the day after the date on the letter of rejection, the taxpayer requests such an administrative review in the manner provided by the Secretary.
5. IRC 6331(i)(5)provides that the period of limitations to collect the tax under IRC 6502 shall be suspended for the period during which levy is prohibited. See also Treasury Regulation 301.7122-1(i)(1).
Note:
The suspension of the CSED was repealed by the Community Renewal Tax Relief Act effective December 21, 2000. The Job Creation and Workers Assistance Act re-established the suspension of the CSED effective March 9, 2002. Appeals and Settlement Officers working cases involving older liabilities with multiple prior OICs must be aware of the proper CSED date. IRM 5.8.10and IRM 8.21contain detailed information on CSED issues involving OICs.
8.23.1.3 (10-16-2007)
Conference and Settlement Practices
1. As previously indicated, IRM 5.8 contains the primary policies and procedures for processing, evaluating and making determinations on offers. Appeals does not have the authority to disregard established policies or procedures. However, the Appeals process in an OIC case is not merely an extension of the Small Business Self Employed (SBSE) Collection process. The role and mission of Appeals is different than that of SBSE Collection . Appeals personnel must employ Appeals' standard conference and settlement practices for all work streams, including OICs.
2. IRM 8.6.1, Conferencing and Issue Resolution, and IRM 8.6.4, Conference and Settlement Practices, contain general guidance on Appeals conference and settlement practices. Because a taxpayer may not (generally) seek judicial review of Appeals' decision to sustain Collection's rejection of an offer, not all of 8.6.1 and 8.6.4 relate to OICs. Some relevant portions of those sections are:
A. Conduct conferences in an open atmosphere that fosters cooperation in the resolution of disputes. Above all, it is of utmost importance to be a good listener.
B. The judicial attitude is one which reasonably appraises the facts, law, and litigating prospects; uses sound judgment and ability to see both sides of a question; and is objective and impartial. Any approach which contemplates a maximum possible result in favor of the Government or a deficiency in every case is incompatible with a judicial attitude and the Appeals mission.
C. Do not take advantage of a taxpayer's lack of technical knowledge. The Appeals Officer or Settlement Officer will assist the pro se taxpayer in every way possible. In the absence of an agreement, explain the taxpayer's further appeal rights.
8.23.1.4 (10-16-2007)
Requirements for Compromise
1. This section contains only the most basic compromise requirement details plus some information that's unique to Appeals. Appeals personnel working offers must be familiar with the revised guidelines in IRM 5.8 , which contain numerous post-TIPRA changes. To avoid duplication of procedures, the bulk of what you need to know in terms of OIC processability, perfecting and payment requirements is found in IRM 5.8.2, Offer in Compromise, Offer Receipts, and IRM 5.8.3, Offer in Compromise, Processability.
2. Except as indicated below, an offer must be filed on the current revision of Form 656 to be accepted. The Form 656 instruction booklet provides specific details for completing the offer.
Note:
Collection will process an offer even if the Form 656 does not list all outstanding tax debts. However, an amended Form 656 listing all known tax debts must be secured prior to accepting the offer.
3. If you are working an OIC case where the original offer was mailed before July 16, 2006, the offer may be accepted using the July 2004 revision of Form 656. This is a pre-TIPRA offer. If an amendment is needed on a pre-TIPRA offer, you may use the July 2004 revision of Form 656 as the taxpayer is not required to make a TIPRA payment with the amended offer.
4. A Form 656-L, Offer in Compromise (Doubt as to Liability), is used for an offer based upon doubt as to liability where the assessment at issue is other than a Trust Fund Recovery Penalty (TFRP) or Personal Liability for Excise Tax (PLET) liability. There is no DATL option on the February 2007 revision of Form 656 because Notice 2006-68 provides that taxpayers submitting offers based only on DATL are not required to make TIPRA payments with the offers.
5. Each separate tax period and type of tax must be listed on the Form 656. If an offer involving a Trust Fund Recovery Penalty (TFRP) assessment is accepted, the case file must include information identifying the Business Master File (BMF) periods comprising the TFRP assessment(s). A TFRP assessed prior to August of 2000 reflects only the last quarterly period that was the subject of the TFRP. In August of 2000, IRS began assessing TFRPs for each respective quarter. Verification on the Integrated Data Retrieval System (IDRS) is required to determine how the assessment was completed.
6. IRC 7122(b) requires an opinion from the Office of Chief Counsel on all offers recommended for acceptance in which the unpaid liability (including tax, penalties and interest) is $50,000 or more. Counsel's review of a proposed acceptance has two separate and distinct components:
A. Certification that the legal requirements for compromise were met.
B. Review of the proposed compromise for consistent application of the Service's acceptance policies.
Note:
Further details concerning Counsel's review and statutorily required opinion are in IRM 8.23.4.2.2, Counsel Review of Acceptance Recommendations.
8.23.1.4.1 (10-16-2007)
Application Fees, Offer Terms, Payments and Deposits
1. On May 17, 2006, TIPRA was signed into law by the president. Offers received on or after July 16, 2006 must include the applicable fee and an additional partial payment under TIPRA. The offer terms and associated initial partial payment requirements are:
A. Lump Sum Cash Offer: Payable in five or fewer installments from notice of acceptance. The Form 656 must be accompanied by either payment of 20% of the amount of the proposed offer or a signed Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment.
B. Short-term Periodic Payment Offer: Payable in six or more installments within two years (24 months) from the IRS received date. The Form 656 must be accompanied by either the first proposed installment or a signed Form 656-A. Additional installments must be paid in accordance with the taxpayer's proposed terms while the offer is being considered unless the offer is based upon DATL or the taxpayer meets the low-income exclusion via an approved Form 656-A. See paragraph (4) below for information on the low-income exclusion.
Note:
If an amended offer is secured, the 24-month period begins the date the amended offer is received.
Note:
If the offer is either based upon DATL or the taxpayer qualifies for the Form 656-A waiver and the offer is accepted, the 24-month time frame for paying the accepted offer amount starts on the date of the written notice of acceptance.
C. Deferred Periodic Payment Offer: Payable in six or more installments over 25 or more months from the IRS received date, but within the time remaining on the statutory period for collection. The Form 656 must be accompanied by either the first proposed installment or a signed Form 656-A. Additional installments must be paid in accordance with the taxpayer's proposed terms while the offer is being considered unless the offer is based upon DATL or the taxpayer meets the low-income exclusion via an approved Form 656-A. See paragraph (4) below for information on the low-income exclusion.
Note:
If the offer is accepted and is either based upon DATL or the taxpayer qualified for the Form 656-A waiver, the taxpayer must begin making periodic payments in accordance with the terms of the accepted offer after Appeals issues the written notice of acceptance.
2. Note:
3. TIPRA does not require the taxpayer to make periodic payments on either a regular basis or in equal amounts, although the revised Form 656 is set up for the taxpayer to make such a proposal. The amounts and due dates of payments must be specified.
4. The IRS now requires that installment agreements in effect prior to receipt of an OIC remain in effect while an offer is being considered only with regard to Lump Sum Cash offers. Installment agreement payments are not required for Periodic Payment offers because the taxpayer is required to make proposed installment payments pursuant to TIPRA while the offer is under consideration.
5. IRC 7122 provides that the Secretary may issue regulations waiving any partial payments required with the submission of the offer. The only available waivers per Notice 2006–68 are for offers based upon doubt as to liability and offers received from low-income taxpayers. Such taxpayers are not required to pay the $150 processing fee, initial payment, or periodic installment payments.
6. The IRS OIC Monthly Low Income Guidelines found in the Form 656 information booklet were increased to 250% of the most current Health & Human Services poverty guideline, so an increased percentage of taxpayers will be exempt from the application fee and TIPRA payment requirements. A taxpayer seeking a low-income exemption must submit a Form 656-A with the offer. The low-income exemption applies only to individuals.
7. IRM 5.8.3 and Collection's July 26, 2007 Replacement TIPRA Interim Guidance contain detailed information concerning OIC payment terms, processability issues and initial payment requirements for offers.
8.23.1.4.1.1 (10-16-2007)
Processing OIC Payments
1. Appeals can process all "pre-acceptance" TIPRA payments using a Form 3244, Payment Posting Voucher, except for the payment that's due with the original Form 656. The processing fee and initial payment are part of the overall processability determination so they must be forwarded to the appropriate Centralized Offer in Compromise (COIC) site. Subsequent periodic installment payments made prior to acceptance of the offer may be processed by Appeals as follows:
A. Apply designated payments for tax debts other than employment or excise taxes per the written designation using Designated Payment Code (DPC) 35.
B. Apply undesignated payments for tax debts other than employment or excise taxes to the liability with the earliest CSED using DPC 35.
C. Apply designated payments received with an amended Form 656 for tax debts other than employment or excise taxes per the written designation using DPC 34.
D. Apply undesignated payments received with an amended Form 656 for tax debts other than employment or excise taxes to the liability with the earliest CSED using DPC 34.
E. Apply payments designated to trust fund taxes for employment or excise tax (trust fund) debts per the written designation using DPC 02.
F. Apply undesignated payments for employment or excise tax debts to all unpaid Forms 1120 and 940 liabilities and then to other non-trust fund liabilities beginning with the liability with the earliest CSED using DPC 35.
Note:
This is different than the standard TFRP payment application procedures outlined in IRM 5.7.4.3, Trust Fund Compliance - Investigation and Recommendation of the Trust Fund Recovery Penalty, Calculating the TFRP, because offer payments are applied in the best interest of the government, unless otherwise designated.
G. Apply payments designated to trust fund taxes that are received with an amended Form 656 per the written designation using DPC 02.
H. Apply undesignated payments for employment or excise tax debts that are received with an amended Form 656 to all unpaid non-trust fund liabilities beginning with the liability with the earliest CSED using DPC 34.
2. Per IRC 7122(c)(2)(A) and Notice 2006-68, taxpayers are entitled to designate all payments required under TIPRA while the offer is under consideration. The designation must be made in writing at the time the payment is made. Absent a written designation, the payments will be applied in the best interest of the government. Once the taxpayer designates application of a payment, it cannot be changed at a later date.
Note:
The OIC application fee cannot be designated and will be applied to the taxpayer's liability in the best interest of the government.
3. Once the offer is accepted, the taxpayer no longer has the right to designate subsequent offer payments. All post-acceptance payments must be processed by the Monitoring Offer in Compromise (MOIC) unit.
Part 8. Appeals
Chapter 23. Offers in Compromise
Section 2. Receipt and Control of Non-CDP Offers
________________________________________
8.23.2 Receipt and Control of Non-CDP Offers
• 8.23.2.1 Receipt
• 8.23.2.2 Assignment of OIC Case
• 8.23.2.3 Initial Case Review
• 8.23.2.4 When Taxpayer Does Not Remain in Compliance
8.23.2.1 (10-16-2007)
Receipt
1. This section provides guidance for the receipt and control of non-CDP offers in compromise. There are a number of TIPRA issues impacting CDP offers that do not affect non-CDP offers, so a separate section containing procedures for CDP offers is in IRM 8.23.5, Collection Due Process OIC Procedures.
2. Field Collection, Field Examination and the Centralized Offer in Compromise (COIC) sites forward taxpayer appeals of rejected offers. The campus Appeals offices in Brookhaven and Memphis work the bulk of the cases coming out of the COIC sites. Cases worked by field compliance offices, the most complex COIC offers, and cases where the taxpayer wants to meet with Appeals in person are generally assigned to the Appeals office that covers the taxpayer's location. Appeals Management will occasionally assign or re-assign cases to other areas as part of effectively managing inventory levels.
3. The Appeals Team Manager or their designee will generally issue the Uniform Acknowledgement Letter 4141 to the taxpayer within 30 days from the date of receipt by Appeals. Enclose Publication 4227, Overview of Appeals Process, and Publication 4167, Appeals-Introduction to Alternative Dispute Resolution. The purpose of this acknowledgement letter is to:
• Advise the taxpayer of receipt of the case in Appeals
• Explain what the taxpayer can expect during the Appeals process, including their right to meet with an Appeals Officer or Settlement Officer (AO/SO) in person
• Provide the contact person's name and telephone number
Note:
Appeals campus sites in Brookhaven and Memphis should not enclose Publication 4167 with the Letter 4141 because OICs considered at an Appeals campus site are not eligible for alternative dispute resolution processes.
4. See IRM 8.23.6, OIC Processing and Closing Procedures, for initial case receipt guidance for Appeals Processing Section (APS) personnel.
8.23.2.2 (10-16-2007)
Assignment of OIC Case
1. As previously indicated, Appeals receives rejected OIC cases from a variety of sources. Assignments should be based upon case complexity and the experience level of the employee. Appeals must also strive to accommodate a taxpayer's reasonable request for an in-person conference. Taxpayers should make clear their desire for an in-person hearing before substantive negotiations begin. If the complexity of a certain case extends beyond the technical skills available in a particular location, the case should be re-assigned.
2. OICs rejected by a COIC site using "Obvious Full Pay" criteria will generally require less technical expertise. See IRM 8.23.3.9, Centralized Offer in Compromise and "Obvious Full Pay" Offers, for guidance on working these types of cases.
3. OICs rejected by a COIC site but not based upon "Obvious Full Pay" criteria can generally be resolved through written or telephone contact. The Settlement Officer working these cases must be knowledgeable with this IRM text as well as with IRM 5.8, Offer in Compromise, IRM 5.15, Financial Analysis, IRM 5.14, Installment Agreements, IRM 5.16, Currently Not Collectible, and Collection's July 26, 2007 Replacement TIPRA Interim Guidance .
4. OICs rejected by Collection Field OIC groups are generally more complex and require more detailed financial analysis skills, familiarity with asset valuation techniques, and sound negotiation and communication skills. Appeals and Settlement Officers working these more complex cases must be well versed in the aforementioned IRM sections and have an in-depth understanding of
• the impact and priority of the federal tax lien,
• the impact of state and local statutes on asset ownership, valuation and equities,
• enforced collection actions such as levy and administrative seizure and sale,
• judicial actions such as a suit to foreclose a federal tax lien or reduce a tax claim to a judgment, and
• Trust Fund Recovery Penalty (TFRP) issues.
5. OICs filed on the basis of Effective Tax Administration (ETA) or Doubt as to Collectibility with Special Circumstances (DCSC) require a level of experience commensurate with the facts of the case as described above.
8.23.2.2.1 (10-16-2007)
Transfer of OIC Cases
1. If Appeals cannot resolve a case easily and it requires a face-to-face discussion, the case may be transferred to the Appeals office nearest to the taxpayer. To reduce the length of time a case is in Appeals, it's important to initiate the transfer of appropriate cases as quickly in the overall Appeals process as practical.
2. Situations occur where a taxpayer will request to have a case transferred to the Appeals office closest to the taxpayer after engaging in substantive negotiations with Appeals. This often occurs when the taxpayer believes an adverse decision is likely or imminent. It's important to point out to the taxpayer in both the acknowledgement letter and initial substantive contact letter or during the initial telephone contact that he/she may ask meet with someone from Appeals in person, but that the decision to do so should be made before meaningful negotiations begin and must be made well in advance of an imminent decision. Appeals will not transfer a case simply because the taxpayer disagrees with its determination.
3. Prior to transferring a case, conduct a preliminary review to avoid unnecessary delays. If the review shows that the taxpayer is not in compliance with filing or payment requirements or the entire liability is clearly collectible and the taxpayer presents no special circumstances, the offer may be rejected without transfer.
4. If acceptance of the offer is possible and the Appeals office with the case cannot resolve it easily, transfer the case to the Appeals office nearest to the taxpayer.
5. Upon completion of Appeals' action, return the entire case file to Appeals Processing Section.
8.23.2.3 (10-16-2007)
Initial Case Review
1. This section provides procedures for preliminary case review to make sure the offer is ready for Appeals' consideration. If the offer was sent to Appeals prematurely, it must be returned to the referring office. Follow the procedures in IRM 8.23.3 after determining the case is ready for Appeals' consideration.
Note:
Premature referrals should be returned to the originating Compliance office within 45 days of Appeals' receipt of the case.
2. Appeals must screen new OIC receipts to make sure the appeal was timely. As indicated in IRM 8.23.1.2(4), a taxpayer has 30 calendar days from the date of the rejection letter to request an administrative Appeals hearing.
3. IRC 7502 and IRC 7503 apply to OIC appeals.
A. Per IRC 7502, if the appeal is mailed within 30 calendar days after the date of Compliance's rejection letter, it is a timely appeal. It must be postmarked or mailed via certified or registered mail so that the mailing date can be proven. If the postmark is made by a non-U.S. Postal Service system such as a private postage meter stamp or a non-USPS carrier such as UPS or FedEx, Treasury Regulation 301.7502-1(b) provides that such postmark must be legible and dated on or before the due date and the appeal must be received not later than the time when a letter sent by the same class of mail would ordinarily have been received if it were sent from the same point of origin by the U.S. Post Office on the last day for timely mailing the appeal.
B. Per IRC 7503, if the 30th day falls on a Saturday, Sunday, or legal holiday, a request for appeal is considered timely if mailed on the next business day.
Note:
IRC 7508and 7508A postpone certain time-sensitive acts when a person is serving in the armed forces in a combat zone, or there is a Presidentially declared disaster. Rev. Proc. 2005-27, 2005-20-IRB 1050 includes the 30-day period for appealing a rejection of an OIC as an act that may be postponed.
4. If the appealed offer is based upon both Doubt as to Collectibility and Doubt as to Liability (a combination offer), the offer must be evaluated and rejected by both functions. If either Collection or Exam has not yet made a determination on the combination offer, it must be returned as a premature referral.
5. If the case involves unpaid trust fund tax, the assessment statute expiration date(s) (ASED) is not suspended by the offer in compromise. Collection should have taken the necessary steps to protect the ASED(s) prior to sending the case to Appeals. See IRM 5.8.4.13.2 and IRM 5.8.4.13.3. If an ASED was not properly protected by Collection per IRM 5.8.4.13.2 or 5.8.4.13.3 and will expire within 12 months of the Appeals received date, the case should be returned as a premature referral.
6. Collection often receives additional information as part of the taxpayer's appeal or protest letter. Before sending the case to Appeals, the originating Collection office should review the additional information and document such information's impact, if any, on its determination of reasonable collection potential (RCP). If Collection did not review the information received with the appeal, the offer may be returned to Collection so that the information may be considered. The determination to return the case to Collection to fully address issues raised by the taxpayer in the protest letter should be made within 45 days of Appeals' receipt of the case. If Collection still believes the offer should be rejected after considering the new information, the offer will be returned to Appeals along with documentation of Collection's findings and Appeals will continue to process the appeal.
7. Initial case review may also show that Collection failed to comply with significant IRM requirements or that substantial additional information is necessary. Unlike the other premature referral issues detailed in this section, the decision to return a case as a premature referral in either of these instances is subjective and Collection may not necessarily agree with Appeals' decision. The feedback transmittal must clearly identify the IRM requirement that Collection failed to follow and/or the case development action needed.
8. There are other issues that should be screened out before proceeding with case evaluation. These are rare, but if found, the case should be returned to Collection as a premature referral:
• Taxpayer paid in full before direct or written contact was initiated by Appeals
• Taxpayer submitted a claim for relief from joint and several liability (innocent spouse claim) as the requesting spouse and the claim was filed before the offer was rejected and the claim is still open. IRM 5.8.4.12.2 states that Collection should have suspended the offer pending disposition of the claim. If the claim was filed before the offer was rejected and is still open, the case may be returned to Collection as a premature referral.
Note:
See IRM 8.23.3.3.1.1 if a claim for relief from joint and several liability was filed after the offer was rejected and the taxpayer is either the requesting or the non-requesting spouse.
• Taxpayer filed bankruptcy before the offer was rejected. Collection should have returned the offer without appeal rights per IRM 5.8.10.2.1. Return the offer to Collection as a premature referral.
Note:
The only premature referral issues identified above that cause jurisdictional problems for Appeals are if the taxpayer did not appeal timely or if the taxpayer filed bankruptcy before the offer was rejected. In those instances, Appeals has no jurisdictional basis to consider the offer. As a courtesy, if either of these issues are identified after 45 days has lapsed since the date Appeals received the case, either the AO/SO or the ATM should contact the Collection manager and explain why the case will be returned as a premature referral before sending it back. The other premature referral issues listed above do not cause jurisdictional problems for Appeals, so the cases should not be sent back as premature referrals if more than 45 days has lapsed since the date Appeals received the case.
9. If it's determined that the case is ready for Appeals' consideration, send Letter 4141 if one was not previously sent and document such in the case activity record.
8.23.2.3.1 (10-16-2007)
Liability Previously Determined by Appeals
1. When an OIC is based upon doubt as to liability and the liability was previously determined by Appeals, the offer will be assigned directly to Appeals for consideration. Appeals is responsible for:
• Assembling the information and documents necessary to evaluate the offer
• Determining the merits of the offer
• Reaching a conclusion
• Preparing the closing documents
2. The taxpayer must offer some amount of consideration. An offer of $0.00 is an abatement request and not an offer. The offer would generally be the amount of the expected corrected liability, penalties and interest. The taxpayer is not required to pay an OIC application fee or make any sort of TIPRA payment if the sole basis of the offer is doubt as to liability.
3. The Appeals Officer should negotiate a settlement in the same manner as in a proposed deficiency case.
A. If an agreement is reached, the Appeals Officer will request that the taxpayer withdraw the offer and then process the necessary adjustment by completing Form 3870, Request for Adjustment.
B. If the prior case disposition involved a Form 870-ADagreement, approval by either the Appeals Director of Field Operations or Appeals Director of Technical Services is required for re-opening. (See Policy Statement P-8-3 (formerly P-8-50), which is also IRM 1.2.17.1.3.)
C. If an agreement is not reached or the taxpayer will not withdraw the offer, the Appeals Officer will act upon the offer based upon the settlement negotiations and recommend acceptance or rejection of the offer, as appropriate.
4. Process the offer in accordance with IRM 8.23.6, OIC Processing and Closing Procedures.
8.23.2.4 (10-16-2007)
When Taxpayer Does Not Remain in Compliance
1. One of the stated goals of the OIC program per Policy Statement P-5-100 (which is found in IRM 1.2.14.1.17) is that acceptance of an offer will create for the taxpayer an expectation of a fresh start toward compliance with all future filing and payment requirements. As additional consideration for an accepted offer based upon doubt as to collectibility, the taxpayer is required to timely file all federal returns and timely pay all tax when due for a period of five years after acceptance or until the offer amount is paid in full, whichever is longer. (See Section V of Form 656.) The prospect of this "fresh start" is eliminated when a taxpayer ceases being compliant with filing and/or payment requirements while the offer is being considered.
2. If a taxpayer whose rejected offer is being considered by Appeals fails to timely file all required federal tax returns or pay current taxes, including required estimated tax payments and federal tax deposits, Appeals will contact the taxpayer and attempt to verify and remedy the problem.
3. The noncompliant taxpayer must promptly resolve the issue(s) of noncompliance. Give the taxpayer a short time frame (no more than 21 days) to remedy the issue(s). It's critical in these instances for Appeals to provide the taxpayer with clear and specific instructions as to exactly what is required of the taxpayer, when such is due, and the consequence of Appeals sustaining rejection of the offer if the compliance issue is not promptly resolved. To enable Appeals to continue with consideration of the taxpayer's appeal, the noncompliant taxpayer must do all of the following:
A. File all past-due returns or provide sufficient documentation to support a claim of having no filing requirement
B. Pay all tax, penalties and interest due on any return that was filed after the offer was processed and not included by Collection as part of the offer. This includes the past due returns identified in a) above
C. Make all required estimated tax payments or federal tax deposits by the established deadline or provide sufficient documentation to support claim of having no estimated tax requirement
4. IRM 5.8.7provides instructions to Collection on when to return an offer based upon a taxpayer's noncompliance. Appeals cannot "return" an offer that's already been rejected by Collection, but the same criteria in IRM 5.8.7 may be used by Appeals as a basis to sustain Collection's rejection of the taxpayer's offer.
Note:
It is no longer a requirement for an In-Business Trust Fund (IBTF) taxpayer to be compliant with the prior two quarterly tax returns, or to have made timely deposits prior to submitting the offer. However, it is necessary for the IBTF taxpayer to be current with the quarter that the offer was submitted and remain in compliance with all filing and deposit requirements during the offer evaluation and appeal processes. Per IRM 5.8.4.13.1, an untimely tax deposit during the investigation will result in a return of the offer. To be consistent with Collection's procedures, an untimely tax deposit during the investigation will result in Appeals sustaining rejection of the offer.

Part 8. Appeals
Chapter 23. Offers in Compromise
Section 3. Evaluation of Offers in Compromise
________________________________________
8.23.3 Evaluation of Offers in Compromise
• 8.23.3.1 Consideration of Doubt as to Collectibility Offers
• 8.23.3.2 Rejected Offers
• 8.23.3.3 Appeals OIC Evaluation Procedures
• 8.23.3.4 Amended Offers
• 8.23.3.5 Collateral Agreements
• 8.23.3.6 Offer from an Operating Business
• 8.23.3.7 Offers for Other Liabilities
• 8.23.3.8 Effective Tax Administration Offers
• 8.23.3.9 Centralized Offer in Compromise and "Obvious Full Pay" Offers
• 8.23.3.10 Consideration of Doubt as to Liability Offers
• 8.23.3.11 Consideration of Combination Offers
• 8.23.3.12 Alternative Resolutions for Offers
• 8.23.3.13 Actions on Defaults Offers
• 8.23.3.14 Mediation and Arbitration
8.23.3.1 (10-16-2007)
Consideration of Doubt as to Collectibility Offers
1. The purpose of this section is to provide Appeals personnel with the procedures necessary to properly evaluate a taxpayer's appeal of a rejected offer in compromise (OIC). Appeals does not have its own set of rules or procedures for determining reasonable collection potential (RCP) in an OIC case. For this reason, this section does not reiterate what's already in IRM 5.8, Offers in Compromise. Rather, it discusses some of the more basic elements of the OIC evaluation process and provides guidance unique to Appeals' role in the OIC process.
2. Collection, under the Commissioner, Small Business/Self Employed, is responsible for processing and analyzing a taxpayer's offer, negotiating with the taxpayer, making an RCP determination and communicating the final determination to the taxpayer. Collection's IRM 5.8.4, Offer in Compromise, Investigation, and IRM 5.8.5, Offer in Compromise, Financial Analysis, and Collection's July 26, 2007 Replacement TIPRA Interim Guidance contain OIC guidance concerning:
• Components of collectibility
• Procedures for evaluating specific types of taxpayers and tax debts, including trust fund, excise, partnership, and child support liabilities
• Financial analysis, including determining equity in assets and a taxpayer's future ability to make payments
• Issues involving the dissipation of assets
• Financial information documentation and verification requirements
• Payment terms
3. If it's determined that the taxpayer cannot pay in full, there is a legal basis for compromise under IRC 7122based on doubt as to collectibility. If the taxpayer has the ability to pay in full, there may still be a legal basis for compromise if it's further determined that such compromise would promote effective tax administration. See IRM 8.23.3.8 for guidance on Effective Tax Administration (ETA) offers.
Note:
An offer based upon doubt as to collectibility with "special circumstances" will be evaluated using the same criteria as an ETA offer.
4. Policy Statement P-5-100 ( IRM 1.2.14.1.17) states, in part:
The Service will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An offer in compromise is a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the Government.
5. IRM 5.8 is the primary authority for evaluating offers and should be followed when evaluating an appealed rejection. Appeals does not have the authority to disregard established guidance. However, the Appeals process in an OIC case is not merely an extension of the SBSE Collection process. The role and mission of Appeals is different than that of SBSE Collection and AO/SOs must employ general Appeals settlement and conference practices to appealed offers.
6. IRC 7122(d)(2)requires IRS to publish schedules of national and local allowances designed to ensure that taxpayers seeking to compromise their tax debts have an adequate means to provide for basic living expenses. This code section further requires that IRS (including Appeals) "shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph A [of that IRC section] is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses."
A. A taxpayer must be able to substantiate that limiting him/her to the national or local standard allowance(s) would not provide for his or her basic living expenses.
B. Allowances in excess of national or local standards must be documented in the Appeals Case Memorandum.
7. If the taxpayer disagrees with the rejection of an offer by Collection, they can request Appeals consideration and review of Collection's determination. The appeal must be in writing. A Form 13711, Request for Appeal of Offer in Compromise, will generally be used but is not required.
8. Appeals and Settlement Officers evaluating appealed OICs must be knowledgeable in the procedures detailed in IRM 5.8 as well as other parts of the IRM such as IRM 8.6.1, Conferencing and Issue Resolution, IRM 8.6.4, Conference and Settlement Practices, IRM 5.15, Financial Analysis, IRM 5.1, General Collecting Procedures, IRM 5.12, Federal Tax Liens, IRM 5.14, Installment Agreements, IRM 5.16, Currently Not Collectible, IRM 5.7, Trust Fund Compliance, IRM 5.17, Legal Reference Guide for Revenue Officers, Collection's July 26, 2007 Replacement TIPRA Interim Guidance, and other legal and administrative guidance.
8.23.3.1.1 (10-16-2007)
The Tax Increase Prevention and Reconciliation Act of 2005
1. The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) was enacted May 17, 2006 and became effective July 16, 2006. TIPRA brought about major changes to the OIC program, most of which do not affect non-CDP offers in Appeals. Notice 2006-68, Downpayments for Offers in Compromise, provides guidance on TIPRA issues until the regulations are updated.
2. Offers mailed prior to July 16, 2006 are not affected by TIPRA. Amended offers for these cases may be secured using the July 2004 revision of Form 656 and taxpayers are not required to remit TIPRA payments with any subsequent amended offer.
3. IRS began using a Form 656-L, Offer in Compromise (Doubt as to Liability), in January of 2006. The new Form 656 (Rev. 02-2007) does not include doubt as to liability as an option because Notice 2006-68 provides that taxpayers submitting offers based only on doubt as to liability are not required to make TIPRA payments with the offers.
4. IRM 8.23.1.4.1contains TIPRA information concerning:
• Changes in OIC payment terms
• Installment agreement in effect prior to receipt of the OIC
• Taxpayer's right to designate offer payments
• Appeals procedures for processing TIPRA payments
8.23.3.1.1.1 (10-16-2007)
General Changes Resulting from TIPRA
1. As a result of TIPRA, IRS changed the rules for determining the processability of post-TIPRA offers. Now, an offer will be deemed non-processable only if one or more of the following criteria are present:
A. Taxpayer in Bankruptcy: An offer will not be considered during an open bankruptcy proceeding.
B. Taxpayer did not submit the application fee with the offer: An application fee of $150 or a signed Form 656-A, Income Certification for Offer in Compromise Application Fee (For Individual Taxpayer Only), must accompany the Form 656. The Form 656-A applies to individual taxpayers only. No application fee or Form 656-A is required if the sole basis of the offer is Doubt as to Liability.
C. Taxpayer did not submit the required initial payment with the offer: See IRM 8.23.1.4.1 for initial payment requirements. No initial payment or Form 656-A is required if the sole basis of the offer is Doubt as to Liability.
Note:
Collection has procedures for handling cases where the determination that a taxpayer qualified for the Form 656-A waiver was later found to be erroneous. Appeals will not get involved in addressing erroneous Form 656-A qualification issues on a non-CDP offer. The issue before Appeals on a non-CDP offer is the overall acceptability of the offer itself ( See IRM 8.23.3.3.). Collection had ample opportunity to make the proper Form 656-A qualification determination before the case was referred to Appeals and such a matter would be considered a "new issue" in that it doesn't pertain to the overall acceptability of the offer.
2. The IRS will no longer automatically return an offer as not processable if IMF and BMF taxpayers are not in filing compliance or if BMF taxpayers seeking to compromise employment tax debts are not compliant with FTDs prior to submitting the offer. An offer will be returned without appeal rights if the taxpayer does not come into filing compliance within the time the IRS provides after the offer is processed. See section 5.8.3.13 of the Collection's July 26, 2007 Replacement TIPRA Interim Guidance. The new criteria are reflected on the revised processability Letters 3820 and 3821 that are available on APGolf.
3. Taxpayers are encouraged (but not required) to send separate checks for the application fee and 20% initial payment or initial periodic installment payment. The reason for this is the 20% initial payment and initial periodic installment payment are not refunded if IRS determines that the offer is not processable, but the application fee may be refunded. Page 12 of the February 2007 Form 656 instruction booklet set out the various OIC application fee and initial TIPRA payment scenarios.
4. The TIPRA requirement for a taxpayer to make periodic installment payments while a Periodic Payment offer is being considered ends when Collection rejects the offer. Taxpayers are not required to continue making periodic installment payments while a rejected offer is being considered by Appeals unless Appeals secures an amended offer. See IRM 8.23.3.1.1.2. for additional TIPRA guidance on amended offers secured by Appeals.
5. During the course of an offer investigation, if a tax period is fully satisfied by a TIPRA payment(s) that includes the initial payment submitted with the offer and subsequent periodic installment payments, the period must remain part of the offer and must be listed on any subsequent amended Form 656. Even though the tax debt is fully paid, the payment or payments used to satisfy the tax debt are still part of the overall offer amount, so all satisfied periods must remain part of the offer.
6. Similarly, if a taxpayer’s total liability exceeded $50,000 and TIPRA payments made during the course of an OIC investigation cause the total to fall below $50,000 at the time the case is submitted for approval, the offer still requires an opinion from Counsel. If a non-TIPRA payment such as a refund offset is applied to the taxpayer’s account, you need to see if the non-TIPRA payment or payments alone was sufficient to cause the total liability to fall below $50,000. If so, then no Counsel opinion is needed.
7. The 24-month mandatory acceptance period provided for in IRC 7122(f) ends when Collection rejects or returns the offer, or the offer is withdrawn. The non-CDP offer will not be deemed accepted if Appeals doesn't render a decision on the appealed offer within 24 months after the date the offer was submitted. Appeals' responsibilities are considerably different with a CDP offer. See IRM 8.23.5, Collection Due Process OIC Procedures.
8.23.3.1.1.2 (10-16-2007)
OIC Payments and Amended TIPRA Offers
1. IRC 7122(c)(2)allows a taxpayer to designate all payments required under TIPRA while the offer is under consideration. The designation must be made in writing at the time the payment is made. Absent an express designation the payments will be applied in the best interest of the government. The taxpayer loses the right to designate offer payments after the offer is accepted.
2. If an amended offer is secured by Appeals, the taxpayer is given credit toward the amount of the amended offer for all OIC payments made prior to receipt of such amended offer. The taxpayer may be required to remit an additional offer payment(s) with the amended offer depending on the amount and payment terms of such amended offer relative to the amount and payment terms of the original offer. The following table reflects various amended offer scenarios and the associated TIPRA payment requirements:
If ... And ... Then ...
Original was a Lump Sum Cash offer Amended offer is Lump Sum Cash with greater proposed offer amount Taxpayer must pay with the amended offer 20% of the revised amount minus the partial payment made with the original offer
Original was a Periodic Payment offer Amended offer is Lump Sum Taxpayer must pay with the amended offer 20% of the revised amount minus the total amount of the periodic installment payments already paid toward the original Periodic Payment offer
Original was a Periodic Payment offer Amended offer is Periodic Payment with a greater proposed offer amount and/or different proposed installment amounts or schedule Taxpayer must make the initial proposed installment in accordance with the terms of the amended offer and make additional proposed periodic installment payments that come due during the evaluation of the amended offer
Original was a Lump Sum Cash offer Revised offer is Periodic Payment with greater proposed offer amount Taxpayer must make the initial proposed installment in accordance with the terms of the amended offer and make additional proposed periodic installments payments that come due during the evaluation of the amended offer
3. IRM 8.23.1.4.1.1 provides guidance for Appeals in how to process OIC payments.
4. Amended offers secured by Appeals must be signed and dated by the Appeals Officer or Settlement Officer as of the date of receipt. Retain the original (initial) Form 656 and include it as part of the offer file along with the original copy of the amended Form 656.
5. Taxpayers who do not meet the exemption requirement must include a partial payment with the amended offer. If an amended offer is received without the required partial payment, contact the taxpayer and explain the TIPRA requirement. Collection treats cases where a taxpayer fails to make partial payments on an amended offer as a "processable return," so follow the procedures in IRM 8.23.2.4 concerning other similar processable return-type issues that surface while the offer is pending in Appeals.
8.23.3.2 (10-16-2007)
Rejected Offers
1. When evaluating offers (other than "Obvious Full Pay" offers - See IRM 8.23.3.9), Collection generally sends a pre-decision letter to the taxpayer telling them why they are proposing to reject the offer. This letter provides the taxpayer with the rationale and financial analysis for Collection’s preliminary conclusion and an opportunity to supply additional information or, if applicable, to amend the offer to reflect the RCP determined by Collection.
A. Collection is responsible for reviewing any information provided by the taxpayer before the offer is rejected and any new information provided by the taxpayer as part of the appeal of the rejection. Collection should address each disputed item in their narrative or case history.
2. If the offer must be rejected, copies of Collection's Income/Expense (IET) and Asset/Equity (AET) Tables will be attached to the rejection letter.
3. As a result of the pre-decision letter and IET and AET information provided with the rejection letter, a taxpayer should be fully aware of why the offer was rejected. The Form 13711, Request for Appeal of Offer in Compromise, though not mandatory, directs the taxpayer to provide in the appeal:
• the disagreed item,
• reason(s) for the disagreement, and
• supporting documentation, as appropriate
Appeals can then try to narrow the focus of consideration to the specific issues for which the offer was rejected.
8.23.3.3 (10-16-2007)
Appeals OIC Evaluation Procedures
1. Appeals must exercise independent judgment concerning the RCP determination made by Collection and the issues disputed by the taxpayer on appeal. IRM 5.8 is the primary authority for evaluating offers and should be followed when evaluating an appealed rejection. Appeals does not have the authority to disregard established guidance. However, the Appeals process in an OIC case is not merely an extension of the SBSE Collection process. The role and mission of Appeals is different than that of SBSE Collection and AO/SOs must employ general Appeals settlement and conference practices to appealed offers.
Note:
Having found a basis to reject the offer, Collection may cease its evaluation and simply reject the offer. As such, they may not have addressed all the issues necessary for acceptance of a doubt as to collectibility or Effective Tax Administration (ETA) offer. If Appeals agrees with arguments made by the taxpayer, Appeals may need to address the issues not addressed by Collection before accepting the offer.
2. Appeals and Settlement Officers evaluating appealed OICs must be knowledgeable in the procedures detailed in IRM 5.8 as well as other parts of the IRM such as IRM 8.6.1, Conferencing and Issue Resolution, IRM 8.6.4, Conference and Settlement Practices, IRM 5.15, Financial Analysis, IRM 5.1, General Collecting Procedures, IRM 5.12, Federal Tax Liens, IRM 5.14, Installment Agreements, IRM 5.16, Currently Not Collectible, IRM 5.7, Trust Fund Compliance, IRM 5.17, Legal Reference Guide for Revenue Officers, Collection's July 26, 2007 Replacement TIPRA Interim Guidance, and other legal and administrative guidance.
3. RCP issues that were previously addressed during the investigation by Collection should not generally be re-examined unless there is convincing evidence that such reinvestigation is necessary. Appeals will generally consider only the items disputed in the taxpayer's appeal, provided the case referred from Collection is fully and adequately developed. However, the overall acceptability of the taxpayer's offer remains the primary issue before Appeals, so if Collection has overlooked or underdeveloped an important issue that will affect whether the offer is accepted or rejected, then the issue must be properly developed and/or addressed. Counsel's opinion is statutorily required for acceptance of a significant number of appealed offers (See IRM 8.23.4.2.2) and Appeals must present an acceptance recommendation that adequately addresses all aspects of the taxpayer's RCP.
4. If Collection neglected to address or did not fully develop an issue that significantly affects the taxpayer's overall RCP determination and the Appeals employee cannot quickly resolve the issue, the offer should be returned to Collection so that the information can be considered and the issue fully developed and addressed. If Collection continues to believe that the offer should be rejected after considering and addressing the issue, the offer will be returned to Appeals with Collection's views and Appeals will continue to process the appeal.
5. The financial information in the case file should generally be less than 12 months old. If the financial information becomes older than 12 months, contact the taxpayer to update the necessary information. Updated financial information and/or a new Form 433-A and/or Form 433-B is not necessary unless the taxpayer's financial situation has significantly changed. Appeals also needs to be aware of situations where the financial information became outdated because of delays by Collection (or Appeals) and through no fault of the taxpayer. Pen and ink changes to the existing Form 433-A/B are sufficient for cases where the taxpayer's financial situation has not changed significantly. IRM 5.8.5.2.2 contains additional guidance for cases with old or outdated information.
6. A taxpayer who had a Periodic Payment offer rejected by Collection is not required to continue making the periodic installment payments while the case is being considered in Appeals. See IRM 8.23.3.1.1.1. The TIPRA requirement to make periodic installment payments ended when Collection rejected the offer. However, if Appeals secures an amended Periodic Payment offer, then the taxpayer must once again start making the periodic installment payments proposed in the amended offer. See IRM 8.23.3.1.1.2. for a table with guidance on TIPRA payment requirements for amended offers.
7. Document all significant case actions on the case activity record in a timely, accurate and complete manner.
8.23.3.3.1 (10-16-2007)
Preliminary Evaluation Procedures
1. IRM 8.23.2.3 provides initial case review procedures for making sure the case is ready for Appeals' consideration. This section contains preliminary evaluation procedures for cases that were not prematurely referred by Collection.
2. Appeals should not "re-work" an offer that was rejected by Collection. Unless there are obvious issues needing additional development and consideration, Appeals should generally restrict the in-depth review to the issues the taxpayer is protesting. If the analysis in other areas appears to be reasonable and the taxpayer is not disagreeing with all items, limit your consideration to the items of protest.
3. Determine whether and how much additional financial documentation and/or verification is needed. See IRM 5.8.4, Offer in Compromise, Investigation, and IRM 5.8.5, Offer in Compromise, Financial Analysis. In most instances, the required verification and substantiation can be completed in-house without a field investigation. If the case is complex and requires field investigation or verification, then send an Appeals Referral Investigation (ARI) to a Field Revenue Officer group. See IRM 8.23.5.6 and IRM 8.22 for more details about ARIs.
4. Appeals will:
A. Review the offer, the rejection narrative and tables prepared by Collection. The review should be documented in the ACDS Case Activity Record.
B. Verify that the taxpayer is compliant in filing all returns, paying balances due, making estimated payments and, if applicable, federal tax deposits on any related business entities for which the offer taxpayer is responsible (such as a sole proprietorship, single-member LLC, or closely held corporation). See also IRM 8.23.2.4.
C. Review the taxpayer’s Form 13711 or other written appeal.
D. Conduct the conference; explain the offer process and how an acceptable amount is computed. Explain how the financial data presented supports an acceptance or rejection of an amended offer. If the taxpayer objects to other issues, or contends that additional documentation will change the RCP determination, set a short but reasonable deadline for the taxpayer to provide all of that information. Explain that failure to provide that information will result in sustention of Collection’s rejection.
E. Follow up in a timely manner and review any information submitted as soon as possible. Timeliness of case actions is an important component in making the Appeals determination without needing to ask the taxpayer to update previously supplied financial information. Unwarranted inactivity gaps should be avoided.
5. Within 30 days of case assignment (as opposed to case receipt - see IRM 8.23.2.1), Appeals will send out an initial substantive contact letter which:
• Explains the Appeals process, including the taxpayer's rights concerning meeting with Appeals in-person. Be sure to further explain that if the taxpayer prefers a face-to-face hearing, he or she should contact the AO/SO as soon as possible and certainly before meaningful negotiations begin. See also IRM 8.23.2.2.1.
• Identifies the disputed issues
• Asks the taxpayer to provide any other information that he or she wants Appeals to consider
• Identifies any supplemental information or verification needed to properly evaluate the offer and lists a clear date when such information is due ( See IRM 8.23.3.3.1.2for addition guidance on requesting supplemental information.)
• Sets clear expectations and a specific date for providing any requested supplemental information. Generally, this date should be within the next 30 days and before any scheduled conference date
• Schedules the conference or requests the taxpayer to contact Appeals by a specific date
• Advises the taxpayer of the consequences of either not providing requested information by the established due date or failing to participate in the conference
Note:
Avoid sending blanket requests for supplemental information or documentation that either may not actually be needed in the analysis or that may have been previously provided.
6. If initial substantive contact is made by telephone, be sure to cover all of the above and document the case activity record accordingly.
8.23.3.3.1.1 (10-16-2007)
Coordination with Other Functions
1. The AO/SO needs to be alert to issues that may prevent Appeals from making a final determination on an appealed offer. Issues such as an open claim for relief from joint and several liability (also known as an innocent spouse claim) or an open criminal investigation require coordination with other functions before proceeding with considering the appealed offer.
Caution:
Carefully review Rev. Proc. 2000-43 before any contact with another function. Be sure to document the case activity record with the purpose of the contact, what was discussed and the information that was received.
2. For procedures concerning an open Examination matter, follow IRM 5.8.4.12.1.
3. IRM 5.8.4.12.2 contains information regarding a claim for relief from joint and several liability. The following table reflects Appeals procedures for the various scenarios that may occur where a claim for relief from joint and several liability was filed after the offer was rejected by Collection (see IRM 8.23.2.3 for details regarding such claims filed before the offer was rejected):
If ... And ... Then ...
The spouse whose appealed offer is being considered is not the spouse who filed the innocent spouse claim The innocent spouse claim is still open Contact the Service employee at the Cincinnati Centralized Innocent Spouse Operations Unit (CCISO) considering the innocent spouse claim to make sure there are no reasons to delay Appeals' consideration of the non-requesting spouse's offer until the claim is resolved
The spouse whose appealed offer is being considered is the same spouse who filed the innocent spouse claim The innocent spouse claim is still open Ask the taxpayer to withdraw the offer unless CCISO indicates that the claim will be closed immediately with no change
The spouse whose appealed offer is being considered is the same spouse who filed the innocent spouse claim CCISO indicates that the innocent spouse claim has merit and the taxpayer won't withdraw the appealed offer Suspend consideration of the appealed offer pending disposition of the innocent spouse claim
4. Caution:
5. Contacting CCISO is considered an administrative or ministerial contact for ex parte purposes provided such contact is limited to simply making sure there are no reasons to delay Appeals' consideration of the non-requesting spouse's offer or checking on the status of the requesting spouse's claim when the requesting spouse's offer is in Appeals. Be sure to document the case activity record with the purpose of the contact, what was discussed and the information that was received.
6. For procedures concerning an open criminal investigation, follow IRM 5.8.4.12.4. The AO/SO must exercise caution and good judgment before contacting someone from Criminal Investigation (CI). Discuss the issue with your ATM and Counsel before initiating contact with CI.
8.23.3.3.1.2 (10-16-2007)
Requesting Supplemental Information
1. Collection may not address or fully develop all of the issues in a case after finding a reasonable basis to reject the offer. Taxpayers and their representatives are often more willing to amend their offers during the Appeals process because they realize Appeals is their last chance. Although Appeals must avoid sending blanket requests and strive to keep supplemental information requests to a minimum, the AO/SO must have the latitude to secure the information believed necessary to properly determine RCP in order to maintain the integrity of the OIC program and our voluntary system of taxation as a whole. It generally takes considerably more effort for both the taxpayer and Appeals to work through, document and resolve all issues while working an offer to eventual acceptance than it does for Appeals to arrive at a decision to reject the offer. Because relevant issues in the offer case file may not always be fully developed, supplemental information is often necessary to:
• Properly evaluate the offer
• Verify information per the requirements of IRM 5.8.5
• Prepare the case file for supervisory and Counsel approvals
2. When supplemental information is needed, it's important for Appeals to clearly communicate to the taxpayer:
A. Exactly what information is needed
B. That such information is necessary to properly evaluate the offer
C. Exactly when the information must be to Appeals
D. That Appeals must sustain Collection's rejection of the offer (unless the conference has not yet been held) if all of the requested information is not provided in a timely manner
3. Set a reasonable deadline for the taxpayer to provide the requested information or documentation. The general rule is 30 days, but the amount of time to give the taxpayer to respond will depend on the amount and type of information requested.
Example:
If the taxpayer raised a number of issues in the appeal and a significant amount of supplemental information is needed to adequately analyze such issues, the full 30-day response period is probably appropriate. This is especially true if some of the requested information must come from a third party such as a written statement from a lender, insurance company, physician, etc.
Example:
If the taxpayer is asked to provide only a few supplemental information items that are generally readily available such as bank statements, wage/earning statements, utility bills, etc., a shorter period of time to respond is appropriate.
4. If the supplemental information request is made prior to the hearing, allow a sufficient amount of time between the date by which the taxpayer is to provide the information and the conference date, so you have time to review the information before the hearing. If the supplemental information request is made the hearing and the taxpayer does not provide complete information for all of the requested items by the established due date, the case may be closed by sustaining Collection's rejection of the offer. Document the case activity record as to exactly what was received and when it was received. Follow the procedures in IRM 8.23.4, Acceptance, Rejection Sustention, and Withdrawal Procedures (non-CDP).
5. IRM 8.23.2.4 contains separate guidance for situations when the taxpayer does not remain in compliance while the offer is being considered by Appeals.
8.23.3.3.2 (10-16-2007)
Financial Analysis and RCP Determination
1. As previously indicated, IRM 5.8 is the primary authority for evaluating offers in compromise. Appeals does not have its own set of rules or guidelines for evaluating an offer. IRM 5.8.4, Offer in Compromise, Investigation, and IRM 5.8.5, Offer in Compromise, Financial Analysis, contain comprehensive instructions for analyzing a taxpayer's financial situation and for determining RCP.
2. Depending on the complexity of the issue, a certain amount of documentation may be required to verify the accuracy of the financial information being relied upon to determine RCP. Most of the verification items should be in the administrative file that was received from Collection. Substantiation of issues not fully developed by Collection and/or supplemental information received while the case is in Appeals may require additional verification. IRM 5.8.5.2.1 and IRM 5.8.5.2.2 contain details as to the information needing verification and required level of such verification. Verification efforts and results should be documented in the case activity record.
A. The Property Appraisal and Liquidation Specialists (PALS) web site at PALS Home Page contains links to a number of property valuation resources.
3. Most of the required verification can be obtained from either the taxpayer or internal sources. Occasionally, however, issues may require the assistance of a field investigator. IRM 8.23.5.6 and IRM 8.22 contain procedures for sending an Appeals Referral Investigation (ARI) to a Field Revenue Officer group and the ex parte considerations for the ARI process.
4. The numerical factors used to determine the present value of the taxpayer's future ability to pay were changed to accommodate changes brought about by TIPRA. The following table reflects the present value factors to be used when determining the present value of the taxpayer's future ability to pay:
Payment Type Payment Terms Number of Months Future Income Required
Lump Sum Cash Five installments within five months of acceptance 48
Lump Sum Cash Five installments paid in more than five months but less than 24 months of acceptance 60
Lumps Sum Cash Five installments paid in more than 24 months of acceptance Number of months remaining on the collection statute
Short-term Periodic Payment Paid within six to 24 months 60
Long-term Periodic Payment Paid within the time remaining on the collection statute Number of months remaining on the collection statute
5. Note:
6. Use the number of months actually remaining on the CSED for Lump Sum Cash and Short-term Periodic Payment offers when there are less than 48 or 60 months remaining. See IRM 5.8.5 for details on how to properly compute the CSED.
7. A key requirement for accepted offers with a liability of over $100,000 is the need to review a full credit report. This requirement only applies to offers recommended for acceptance. If warranted, Appeals can secure a credit report on any case over $100,000 although this should not be routine.
8. If it becomes apparent that Appeals must sustain Collection's rejection of the offer, contact the taxpayer and advise him/her of the decision and the reason(s) why the offer cannot be accepted. Provide a copy of the financial analysis reflecting Appeals' determination of RCP (generally IET and/or AET) and allow the taxpayer a reasonable opportunity to provide feedback or amend the offer to the revised RCP amount and then follow the instructions in the following table:
If ... Then ...
The taxpayer provides feedback causing a substantive change in the RCP determination Continue to try to negotiate an appropriate settlement
The taxpayer provides feedback that causes no appreciable change to the RCP determination or is unwilling/unable to amend the offer to the necessary amount, if applicable Contact the taxpayer, explain any legal or administrative remedies and advise that Appeals must sustain rejection of the offer. Follow the procedures in paragraph (10) of this section before proceeding with closing out the case
The taxpayer contacts Appeals and indicates an inability to amend the offer to the necessary amount, or if amending the offer doesn't apply because RCP exceeds the liability and there is no basis for ETA consideration Advise the taxpayer that Appeals must sustain rejection of the offer and follow the procedures in Paragraph (10) of this section before proceeding with closing out the case
The taxpayer and Appeals agree to an alternative resolution such as an installment agreement or having the account placed in currently-not collectible status Consider having the taxpayer withdraw the offer and proceed with closing out the case. See IRM 8.23.4 for instructions for closing out the OIC case. If the agreed upon alternative resolution is an installment agreement, prepare the Form 433-D, Installment Agreement.
The taxpayer and Appeals agree to an alternative resolution and the taxpayer won't withdraw the offer Proceed with processing the applicable alternative resolution as part of closing out the case by sustaining rejection of the offer
The taxpayer doesn't respond Proceed with closing out the case by sustaining rejection of the offer
9. Note:
10. Providing the taxpayer with a copy of Appeals' financial analysis is not necessary if there are no substantive changes to the analysis that was completed by Collection. The taxpayer has already had an opportunity to provide relevant feedback to Collection's RCP analysis.
11. IRM 5.8.4.9 calls for the filing of a Notice of Federal Tax Lien (NFTL) in certain instances even though the offer is accepted. The following table reflects the general NFTL filing criteria for accepted offers when the unpaid balance of assessments exceeds $5,000:
If ... Then ...
Lump sum cash offer with five or fewer installments paid in five months or less No NFTL is necessary
Lump sum cash offer with five or fewer installments paid in six months or more A NFTL will generally be filed
Short-term periodic payment offer A NFTL will generally be filed
Deferred periodic payment offer A NFTL will generally be filed
12. If a NFTL will be filed per standard administrative procedures, advise the taxpayer accordingly. Explain CDP rights under IRC 6320 and document the case activity record. Indicate in the "Brief Remarks" section of the Form 5402 that the IRM calls for a lien to be filed and indicate the tax periods to be listed on the NFTL.
13. The circumstances and reasons for not filing a NFTL in the above situations must be clearly documented in the case activity record.
14. Appeals will sustain Examination's rejection of a Doubt as to Liability offer when the tax is believed to be correct as assessed.
15. Since Appeals already has detailed financial information and familiarity with the taxpayer's current circumstances with a Doubt as to Collectibility offer, there may be instances when an offer cannot be accepted but both the taxpayer and Appeals believe that an alternative resolution such as an installment payment agreement (IA) or having the account placed in currently non-collectible (CNC) status is appropriate. Document any discussions of alternative resolutions in the case activity record.
Reminder:
Appeals is responsible to input Transaction Code (TC) 971 with Action Code (AC) 043 upon receipt of an installment payment proposal. Use a Form 4844, Request for Terminal Action, to request input of the TC 971 AC 043 to all tax periods. Appeals does not input the TC 971 AC 063.
16. See IRM 8.23.3.12 for details on alternative resolutions for a non-CDP offer.
8.23.3.3.2.1 (10-16-2007)
Bankruptcy Considerations
1. The Service will not consider an offer while a taxpayer is in bankruptcy. When a taxpayer files bankruptcy, the Bankruptcy Code provides legal remedies and procedures to resolve the government's claim. If the taxpayer files bankruptcy while the case is being considered by Appeals, the offer must be closed as Appeals sustaining Collection's rejection of the offer. In this instance, the offer has already been rejected (by Collection) and Appeals no longer has a basis to overturn Collection's decision. Follow the procedures in IRM 8.23.4 for closing the offer.
2. If the taxpayer threatens to file bankruptcy if the offer is not accepted, consider whether the tax liability can be discharged and follow the guidance in IRM 5.8.5.5 and IRM 5.8.10.2.2. Make a general analysis of collectibility if the taxpayer files bankruptcy and the liabilities that would be discharged and attempt to negotiate an agreeable settlement, as appropriate. Keep in mind when making this analysis that it's generally advantageous for the taxpayer to avoid bankruptcy.
Note:
Procedures involving ex parte communications must be followed when discussing case information with Insolvency Unit personnel. Clearly document the case activity record concerning exactly what information was requested from Insolvency, why such information was requested, and the results of the contact. See Rev. Proc. 2000-43 for additional guidance.
3. If the taxpayer files bankruptcy after the offer is accepted, follow the procedures in IRM 5.8.10, Offer in Compromise Special Case Processing. In accordance with the Bankruptcy Code, the offer should not be defaulted or payments solicited while the taxpayer is in bankruptcy.
4. If the taxpayer files an offer as part of a CDP or EH case and subsequently files bankruptcy, return the offer to the taxpayer. The cover letter should simply indicate that Appeals cannot consider the offer while the taxpayer is in bankruptcy. The underlying CDP or EH case, however, must remain open. See IRM 8.22 for CDP and EH case procedures.
5. See IRM 8.7.6.3, Appeals Bankruptcy Cases, Offer in Compromise Cases, for additional information on bankruptcy issues.
8.23.3.3.2.2 (10-16-2007)
Dissipation of Assets
1. Dissipation of assets is a frequent issue of dispute in an appealed offer in compromise. If a determination is made that a taxpayer dissipated an asset(s) and such asset is no longer available to pay the tax liability, a secondary determination must be as to whether including the value of the dissipated asset as part of RCP is justified.
2. Including the value of the dissipated asset as part of the RCP determination is not automatic. Such inclusion must be clearly justified in the case file and documented in the case activity record. If the taxpayer can show that all or a portion of the asset was used to provide for necessary living expenses, the applicable portion of the asset should not be included in the RCP calculation. The taxpayer must be able to provide a reasonable accounting of the dissipated asset.
3. If the investigation clearly reveals that the asset was dissipated with a disregard of the outstanding tax debt, the value of the asset should generally be considered for inclusion in the RCP calculation. As indicated, however, an exception may be appropriate to the extent of the amount that the taxpayer can establish was used to fund necessary living expenses.
Caution:
Avoid "double counting" if a decision is made to include a dissipated asset as part of RCP and all or part of the dissipated asset was used to improve the value of another asset that is also being included as part of RCP.
Example:
A taxpayer secured a second mortgage of $60,000 on her residence after accruing a tax liability and before IRS filed a NFTL. She provided documentation to show that she used $40,000 of the loan proceeds to put an addition on to her home and make other necessary repairs and improvements. She paid unsecured credit card debts with the remaining $20,000. With the improvements, the residence is now valued at $300,000. She has a first mortgage with a balance of $100,000, so net realizable equity in the residence is now $80,000 ($300,000 x 0.80 = $240,000 - $100,000 (first mortgage) - $60,000 (second mortgage) = $80,000). If the full $60,000 is going to be treated as a dissipated asset, a concurrent determination must be made as to the increase in value to the residence that is attributable to the amount of the second mortgage (dissipated asset) that went toward improving or increasing its value. To include both the full $60,000 second mortgage loan and the full $80,000 net realizable equity in the residence in the RCP calculation would cause a "double counting" of a portion of the $40,000 that went toward improving and thus increasing the value of the residence. The AO/SO will have to use judgment in deciding how much the residence increased in value because of the $40,000 in improvements.
4. IRM 5.8.5.4 contains the primary guidance for dissipated asset issues.
8.23.3.4 (10-16-2007)
Amended Offers
1. Because TIPRA allows the taxpayer to propose not just the amount of the offer, but also the terms of payment, consideration must be given to such terms before deciding to recommend acceptance of the offer. Appeals must now evaluate and negotiate not just an acceptable offer amount, but also agreeable payment terms. Appeals is not required to accept the taxpayer's offer simply because it otherwise meets or exceeds RCP. If the taxpayer's proposed payment terms cause the offer itself to be unacceptable, the terms must be sufficiently renegotiated. If the taxpayer is not willing to propose acceptable terms, the offer may be denied as not being in the best interest of the government.
Example:
The taxpayer owes $65,000 and there are 50 months remaining on the CSED. RCP is $24,000. The taxpayer has proposed a Deferred Periodic Payment offer of $24,000 with 49 monthly payments of $100 and a final payment in the 50th month of $19,100. The terms of this offer are not acceptable and must be renegotiated before approval. The CSED is no longer suspended after the offer is accepted and the risk of the taxpayer paying only a small portion of the offered amount is high given the structure of the proposed payment terms. If the taxpayer cannot/will not make the final payment, the CSED will expire before the Monitoring Offer in Compromise unit (MOIC) is able to properly respond.
2. If an amended offer is secured by Appeals, the AO/SO must sign the Form 656 as the "Authorized Internal Revenue Official" .
If ... Then ...
The original Form 656 was received on or before July 21, 2006 You may use the July 2004 revision of Form 656 for the amended offer because the taxpayer is not required to make a TIPRA payment
The original Form 656 was received on or after July 22, 2006 Use the February 2007 revision of Form 656 for the amended offer because the taxpayer must make an additional required TIPRA payment
3. See IRM 8.23.3.1.1.2 to determine the required TIPRA payment if the taxpayer is amending a TIPRA offer.
4. If the amended offer is a Periodic Payment TIPRA offer, the taxpayer must once again start making the proposed periodic installment payments. Appeals is responsible to make sure the taxpayer makes the proposed periodic installment payments while the case is pending in Appeals. The offer may be considered withdrawn under IRC 7122(c)(1)(B)(ii) if the taxpayer fails to make all proposed periodic installment payments. See IRM 8.23.5.3.1 for Appeals mandatory withdrawal procedures.
Note:
If a tax period that was part of the original offer is subsequently paid in full via TIPRA payments, the period must still be listed on all amended offer. Even though the tax period is fully paid, the funds used to satisfy it are part of the overall offer amount, so the tax period must remain on the Form 656. If a tax period is paid in full via a non-TIPRA payment, such as a refund offset, there is no need to list such period on the amended Form 656.
8.23.3.5 (10-16-2007)
Collateral Agreements
1. Follow IRM 5.8.6 with regard to collateral agreements. In addition to the terms specifically stated in the offer, collateral agreements enable the government to either collect funds or restrict a taxpayer's ability to claim future losses or credits. Do not use them to allow the taxpayer to submit an offer for a lower amount than the collection potential of the case dictates. You can also use a collateral agreement to clarify an offer, as in the case of a co-obligor agreement. Usage of collateral agreements should not be routine. Secure them only when you expect significant recovery or the taxpayer has identifiable future losses or credits. It may be appropriate to secure a collateral agreement when a significant increase in income is expected. It would be inappropriate to secure a collateral agreement simply to guard against an unexpected windfall such as a lottery.
2. Use standard collateral agreements whenever possible to aid in the monitoring of the agreements. The standard agreements are listed below:
A. Form 2261, Collateral Agreement-Future Income-Individual, and Form 2261-A, Collateral Agreement-Future Income-Corporation
B. Form 2261-B, Collateral Agreement-Adjusted Basis of Specific Assets
C. Form 2261-C, Collateral Agreement-Waiver of Net Operating Losses, Capital Losses, and Unused Investment Credits
D. Co-Obligor Agreements, IRM Exhibit 5.8.6-1 and IRM Exhibit 5.8.6-2
Caution:
These forms need to be modified to delete reference to the Collection statutes.
3. The collateral agreement is signed by the authorized official in Delegation Order 5-1, which is available on the Appeals website at Appeals OIC Home Page.
8.23.3.5.1 (10-16-2007)
Co-obligor Agreement
1. When a compromise is accepted from one party to a jointly owed tax liability, the other party is not released from their several liability. Secure a co-obligor agreement from the taxpayer submitting the offer to clarify the effect of the compromise on the obligations of the other parties.
2. IRM 5.8.6.2 contains details as to the type of co-obligor agreements needed for based on various state laws. Co-obligor agreements are available in IRM Exhibit 5.8.6-1 and IRM Exhibit 5.8.6-2.
3. Co-obligor agreements will not be solicited from individuals seeking to compromise Trust Fund Recovery Penalty assessments. The Trust Fund Recovery Penalty is not treated as a joint obligation.
8.23.3.6 (10-16-2007)
Offer from an Operating Business
1. When an offer is accepted to compromise trust fund tax owed by an operating business, the taxpayer is relieved of a significant operating expense. The effect is to grant the delinquent taxpayer an economic advantage over competitors who are in tax compliance. Recovery of the unpaid trust fund tax amount is a significant issue when considering an offer from a business taxpayer. In the interest of "fairness to all taxpayers" the Service must be cautious to avoid providing financial advantages to those taxpayers through the forgiveness of employment tax debt, as this may be detrimental to competitors who are remaining in compliance with their tax obligations. Procedures in IRM 5.8.4.13 must be followed when considering an appealed offer from all In-business Trust Fund (IBTF) taxpayers, including sole proprietorships, partnerships, LLCs and corporations.
2. If an offer to compromise trust fund tax is being considered for a corporation that is still in business, all of the issues outlined in IRM 5.8.4.13 should be addressed and the ASED(s) for the Trust Fund Recovery Penalty (TFRP) properly protected. IRM 8.23.2.3 provides guidance on returning the case to Collection as a premature referral if the ASED(s) were not adequately protected by Collection when the case was received in Appeals. It is the responsibility of the AO/SO to follow IRM 5.8.4.13 and properly protect the ASED(s) if the offer is being accepted by Appeals. See IRM 8.23.3.6.1..
8.23.3.6.1 (10-16-2007)
Corporate Trust Fund Offer Procedures
1. It is no longer a requirement for an In-business Trust Fund (IBTF) taxpayer to be compliant with the prior two quarterly tax returns, or to have made timely deposits prior to submitting the offer. However, it is necessary for the IBTF taxpayer to be current with the quarter that the offer was submitted and remain in compliance with all filing and deposit requirements during the offer evaluation and appeal processes. However, per IRM 5.8.4.13.1, an untimely tax deposit during the investigation will result in a return of the offer. To be consistent with Collection's procedures, an untimely tax deposit during the investigation will result in Appeals sustaining rejection of the offer.
2. If the Service enters into a compromise with an employer for a portion of the trust fund tax liability, the remainder of the trust fund taxes may still be collected from a responsible person pursuant to Section 6672 of the Internal Revenue Code. See IRM 5.8.4.13.2, Corporate Trust Fund Liabilities, IRM 5.8.3.4, Processability and IRM 5.8.7.6, Rejection.
3. Per IRM 5.8.4.13.2, it is the Service’s policy that the amount offered to compromise a corporate employment tax liability must include, in addition to what can be collected from the corporation, an amount equal to what can be collected from all responsible persons, up to the amount of the TFRP (plus interest, if the penalty has been assessed). If the offer is accepted, post-acceptance payments will be applied first to non-trust fund components of the corporation's tax liability (see IRM 5.19.7.3 , Application of OIC Payments on Corporate OICs). The Service will pursue collection of the TFRP (unless the trust fund portion has been full paid) assessed against the responsible persons.
Note:
Offer payments (other than properly designated pre-acceptance payments made under TIPRA in conjunction with the offer) are applied in the best interest of the government. The corporate taxpayer does not have the right to designate any offer payment made after the offer is formally accepted. By signing the Form 656 , the taxpayer agreed that IRS will apply payments made after acceptance in the best interest of the government. See Paragraph (a) of Section V of the February 2007 revision of Form 656.
4. The value of the business as a going concern should also be evaluated. See IRM 5.8.5.3.14 .
5. Follow the procedures in IRM 5.8.4.13.2 for situations where the amount offered by the corporation combined with the payments already made on related assessed TFRP assessments exceed the total employment tax liability of the corporation for the same tax periods.
6. Carefully review IRM 5.8.4.13.2 and secure the necessary Form 2750, Waiver Extending Statutory Period for Assessment of Trust Fund Recovery Penalty, and Form 2751, Proposed Assessment of Trust Fund Recovery Penalty, before proceeding with accepting the corporate trust fund offer.
8.23.3.7 (10-16-2007)
Offers for Other Liabilities
1. IRM 5.8.4.13 contains additional guidance for offers involving:
A. Excise tax liabilities,
B. Partnership liabilities, and
C. Child support obligations
8.23.3.8 (10-16-2007)
Effective Tax Administration Offers
1. If it's determined that there is no basis to accept an offer under doubt as to collectibility (DATC) or doubt as to liability (DATL), the offer may still be accepted if it's determined that doing so:
A. would promote effective tax administration, and
B. would not undermine other taxpayers' compliance with the tax laws.
2. IRM 5.8.11 , Offer in Compromise, Effective Tax Administration, contains information about Effective Tax Administration (ETA) offers and doubt as to collectibility offers where the taxpayer presents "special circumstances" (DATC-SC) as a basis to accept the offer, and the procedures for evaluating such offers.
3. Under ETA, the taxpayer does not dispute being financially capable of paying the liability in full. To accept an ETA offer, the taxpayer must establish that:
• Paying the full tax liability would cause an undue economic hardship (see below), or
• Compelling public policy or equity/fairness considerations exist that would undermine public confidence that the tax laws are being administered in a fair and equitable manner if required to pay in full. These "public policy" or "equity" offers are sometime referred to as "non-hardship" ETA offers.
4. Under DATC-SC, the taxpayer does not have the ability to pay in full, but does not dispute being financially capable of paying more than the amount being offered. To accept a DATC-SC offer, the taxpayer must establish that:
• Paying the full RCP amount would cause an undue economic hardship (see below), or
• Compelling public policy or equity/fairness considerations exist that would undermine public confidence that the tax laws are being administered in a fair and equitable manner if required to pay the full RCP amount
5. ETA and DATC-SC offers require a more subjective evaluation. Although IRM 5.8.11 is comprehensive, it's simply not practical to try to draft guidance that encompasses every event or situation.
6. ETA and DATC-SC offers based upon economic hardship are not uncommon. The definition of an undue economic hardship for ETA and DATC-SC offer purposes is found in Treasury Regulation 301.6343-1. Often a taxpayer presents circumstances reflecting one or more of the factors outlined in IRM 5.8.11.2.1 , or closely resembling many aspects of an example cited in the IRM or Treasury Regulation 301.7122-1, but the case for ETA or DATC-SC acceptance falls apart when actual dollars are factored in. A decision in an ETA or DATC-SC hardship offer requires a three-tiered approach:
0. Does the taxpayer present exceptional circumstances meriting ETA or DATC-SC consideration?
1. Would payment of more than the offered amount cause the taxpayer to be unable to meet future necessary living expenses?
2. Would acceptance of the offer undermine other taxpayers' compliance with the tax laws?
An acceptable offer requires affirmative answers to questions 1 and 2, and a negative answer to question 3.
7. Offers based upon public policy or equity considerations are rarer.
. Any disposition of an ETA or DATC-SC offer based in whole or in part on public policy or equity considerations requires review and approval by the Director, Field Operations (DFO). Coordination at the DFO level allows Appeals to support Service efforts through consistency.
Note:
When a case is forwarded for DFO approval, a copy of the Appeals Case Memorandum and Form 5402 should also be e-mailed to the Tax Policy and Procedures OIC Analyst.
8. See Delegation Order 5-1, which is available on the Appeals web site at Appeals OIC Home Page, for the required levels of approval for accepting or rejecting ETA and DATC-SC offers.
9. IRM 5.8 does not contain separate ETA offer procedures for when filing a NFTL is generally required. See IRM 8.23.3.3.2 for information regarding lien filing criteria and procedures if the offer is going to be accepted.
8.23.3.9 (10-16-2007)
Centralized Offer in Compromise and "Obvious Full Pay" Offers
1. All new offers are either received in or forwarded to the Centralized Offer in Compromise (COIC) sites for initial processing. Once the COIC unit has loaded the offer onto the Automated Offer in Compromise (AOIC) system and determined the offer to be processable, a decision is made as where the case will be assigned. Collection's field offer groups work the more complex cases.
2. Some taxpayers look to compromise their tax debts yet their application ( Form 433-A, Form 433-B) reflects an ability to pay the account in full. COIC will reject such offers unless the taxpayer presents special circumstances warranting consideration under ETA. COIC will not contact the taxpayer to clarify any information or submit any further documentation if it's apparent to COIC that the account can be paid in full based upon the financial information provided by the taxpayer. The formal rejection letter will be the first response the taxpayer receives from COIC.
3. If the taxpayer submits new information with his or her appeal, COIC is required to consider such information before sending the case to Appeals. If Collection did not consider the information and such information could result in a different determination, the offer may be returned to COIC as a premature referral so that the information can be considered. If COIC still believes the offer should be rejected after considering the information, they will return the offer to Appeals with their response and Appeals will process the appeal.
8.23.3.9.1 (10-16-2007)
Appeals Procedures for "Obvious Full Pay" Offers
1. Standard Appeals conference and settlement practices require Appeals to afford taxpayers whose offers were rejected by Collection as "obvious full pay" cases the same opportunities for discussion and negotiation as with any other Appeals case. There may very well be settlement opportunities available in these cases because Collection's "obvious full pay" procedures:
• Assume the taxpayer knew what he/she was doing when completing the Form 433-A/B
• Do not adjust any asset values or apply necessary national or local expenses standards
• Call for rejection of the offer without any contact with the taxpayer
However, depending on the circumstances, there may also be little to discuss and no opportunity for settlement absent information from the taxpayer indicating a basis for compromise.
2. In order to meet the basic mission of Appeals and adhere to standard conference and settlement practices (see IRM 8.23.1.3), Appeals should take the following actions in a case referred by COIC to Appeals as an"obvious full pay" case:
A. Send a letter to the taxpayer which explains both the Appeals and OIC processes. Enclose Publication 4227, Overview of the Appeals Process. The letter should clearly explain to the taxpayer that the offer was rejected by Collection because the financial information that the taxpayer provided in the Form 433-A/B reflected an ability to pay in full. Enclose a copy of Collection's Full Pay Worksheet and offer the taxpayer the opportunity to either provide feedback to dispute Collection's findings or pay in full. If the taxpayer qualifies under either a guaranteed or streamlined installment agreement, offer him/her the opportunity to discuss such an alternative resolution. See IRM 5.14.5 for guaranteed and streamlined IA criteria.
B. Give the taxpayer a reasonable period of time to respond, with a specific response date provided in the letter.
C. Set a follow-up date allowing for mail time beyond the response date provided in the letter.
D. Follow the procedures in the following table based upon the taxpayer's response or lack of response.
If ... Then ...
The taxpayer does not respond by the response due date Sustain Collection's rejection of the offer by preparing the following closing documents:
• Closing letter
• Generate a Customized Form 5402, Appeals Case Transmittal and Case Memorandum, from APGolf and attach a copy of Collection's Full Pay Worksheet. (The Form 5402 will be used in lieu of an ACM, so be sure to document the basis of your decision in the Brief Remarks section of the Form.)
• A copy of the Form 1271 completed by Collection
The taxpayer responds to Appeals with new information not previously considered by Collection Review the information and determine whether it could make the offer acceptable
Appeals determines the new information could make the offer acceptable and is able to sufficiently address and develop all issues on its own Continue working with the taxpayer in accordance with standard Appeals OIC procedures
The new information requires significant evaluation or development to determine whether it could make the offer acceptable Consider returning the offer to Collection to address the new information
The offer is sent back to Collection to consider the new information and they determine that the offer should still be rejected. Collection will return the offer to Appeals for us to resume working with the taxpayer in accordance with standard Appeals OIC procedures
The new information makes the offer acceptable Verify the information in accordance with IRM 5.8.5 and follow the procedures in IRM 8.23.4.2 to close the case as an acceptance
The taxpayer responds with new information that will not make the offer acceptable Provide the taxpayer with your revised Income/Expense (IET) and Asset/Equity (AET) Tables. Set a reasonable deadline for the taxpayer to respond with feedback to your findings. Be sure to advise the taxpayer that Appeals must sustain rejection of the offer if the taxpayer:
H. neglects to respond by the established date,
I. does not provide information that will impact the IET and AET determinations, or
J. does not amend the offer to the RCP amount reflected on the revised IET and AET, if applicable
The taxpayer:
• neglects to provide feedback to the revised IET and AET,
• responds with additional information that does not make the offer acceptable, or
• if applicable, neglects to submit an amended offer along with the appropriate TIPRA payment
. Close out the offer by sustaining Collection's rejection of the offer as noted above
3. Document all significant case actions on the case activity record in a timely, accurate and complete manner.
8.23.3.10 (10-16-2007)
Consideration of Doubt as to Liability Offers
1. Appeals considers offers based in whole or in part on doubt as to liability (DATL) where
• the offer was rejected by Exam, or
• the liability to be compromised was determined by Appeals
2. IRM 4.18 , Exam Offer in Compromise, contains administrative procedures for working DATL offers.
3. Appeals should make an independent determination regarding the offer, which should be evaluated in the same manner as in a proposed deficiency case. Consider the facts and law as well as the hazards to litigation in determining the degree of doubt as to the liability. IRC 7122(d)(3) provides that a DATL offer may not be rejected solely because the Service cannot locate the taxpayer’s return or return information. The Service is also prohibited from requesting a financial statement if an offer is based solely on doubt as to liability.
Note:
If the DATL offer case came to Appeals after being rejected by Exam, the case file should be fully developed and documented. The case may be returned as a premature referral if the case is materially undeveloped and Appeals is not able to adequately address the issue(s) in dispute.
Note:
If the DATL offer case came to Appeals because the liability at issue was previously determined by Appeals, then Appeals has exclusive jurisdiction over the case and Exam is not responsible for either developing the case or securing the closed administrative case file before forwarding the case to Appeals.
4. The following table reflects general decision and case closing guidelines.
If ... Then ...
It's determined that the actual liability is less than or equal to the amount offered The balance of the assessment in excess of the proper liability amount should be abated.
A. If the proper adjustments have or will be made, ask the taxpayer to withdraw the offer.
B. If the taxpayer does withdraw the offer, it should be rejected.
It's determined that the actual liability is greater than the amount offered but less than the amount assessed The excess balance of the assessment should be abated.
C. Inform the taxpayer of the amount of the re-determined liability and advise him/her to pay the correct amount.
D. Ask the taxpayer to withdraw the offer
E. If the taxpayer does not withdraw the offer, it should be rejected.
If it is determined that there is doubt as to liability based upon hazards of litigation The case should be closed by accepting the offer. The acceptable amount depends on the degree of doubt based upon the hazards relative to the amount assessed.
It's determined that there is no doubt as to the liability Close the case by sustaining Exam's rejection of the offer.
5. Bankruptcy filing or non-compliance in filing other required federal tax returns does not preclude Appeals from considering an appealed DATL offer.
8.23.3.10.1 (10-16-2007)
TEFRA Liability Offers
1. Upon receipt of an offer in compromise case, secure an AMDIS or AMDISA print.
A. If there is a Partnership Investor Control File (PIFC) Code 5, there is at least one open TEFRA key case linkage. The taxpayer should have been advised by the investigating officer or function that an offer cannot be considered until all TEFRA partnership (or TEFRA S corporation) issues have been resolved. See IRM 5.8.4.12.1. Attempt to secure a withdrawal. If the taxpayer refuses to withdraw the offer, it should be returned to the investigating officer as a premature referral.
B. If there is a PICF Code 7, there is at least one closed TEFRA key case linkage. Verify that any assessment as a result of the TEFRA key case was made and that the additional liability is included in the offer.
2. In general, DATL and non-hardship ETA liability offers pertaining to an assessment resulting from a TEFRA proceeding should not be considered. TEFRA assessments are generally final determinations.
3. Appeals employees considering acceptance of either a DATL or non-hardship ETA liability offer that pertains to an assessment resulting from a TEFRA proceeding must discuss the issue with the Appeals Technical Guidance Coordinator for TEFRA who will coordinate a response with the Appeals Program Analyst responsible for the Offer program.
4. Similar to an offer based on doubt as to collectibility, consideration can be given to individual circumstances supporting acceptance of an ETA offer based on economic hardship where the liability includes an assessment resulting from a TEFRA proceeding. See IRM 8.23.3.8 for ETA offer guidance.
8.23.3.10.2 (10-16-2007)
Offers Involving TFRP and PLET Liabilities
1. IRM 8.25 has instructions for working Trust Fund Recovery Penalty (TFRP) cases in Appeals. IRM 5.8.4.2 contains instructions for working doubt as to liability offers involving Trust Fund Recovery Penalty (TFRP) and Personal Liability for Excise Tax assessments. Per IRM 5.8.4.2, resolution of an agreed case can be achieved by:
• Preparing and submitting a Form 3870, Request for Adjustment, to correct the assessment and securing a withdrawal of the offer from the taxpayer, or
• Recommending acceptance of the offer for the correct amount
2. Acceptance of a doubt as to liability offer sufficiently concludes the TFRP or PLET matter for the taxpayer. There are no five-year compliance or refund offset provisions on a doubt as to liability offer.
3. Collection cannot settle a TFRP or PLET case based upon hazard of litigation considerations, so IRM 5.8.4.2 doesn't address this type of such settlement. For this reason, simply recommending acceptance of the doubt as to liability offer is generally a simpler approach when settling a TFRP or PLET matter based on hazards.
8.23.3.11 (10-16-2007)
Consideration of Combination Offers
1. Combination offers based upon both doubt as to collectibility (DATC) and doubt as to liability (DATL) must be fully considered by both the Collection and Examination functions prior to being transmitted to Appeals. See IRM 5.8.4.10 and IRM 4.18.4. A combination offer case will be returned to the referring Collection function as a premature referral if both functions have not yet completed their respective reviews. If both functions have completed their reviews and continue to believe that the offer should be rejected, Collection will return the offer to Appeals with each function's recommendation and Appeals will continue to process the appeal.
2. The DATC aspect of the offer should be reviewed first. Collectibility determinations generally take less time and if the matter can be resolved as a DATC offer, then it saves Appeals time and resources. If a Settlement Officer determines that there is no basis to accept the DATC offer, the DATL aspect of the offer should be reviewed by an Appeals Officer. The Settlement Officer, however, can generally make the DATL determination on the following:
• TFRP liabilities
• Liabilities consisting exclusively of basic late filing, late payment, or late deposit penalties
• Certain civil penalties assessed under IRC 6721 for failure to file correct information returns, such as failure to file Form W-2 and Form W-3
3. Appeals should see fewer combination offers than in years past. IRS began using a separate Form 656-L, Offer in Compromise (Doubt as to Liability), in January of 2006. The February 2007 revision of Form 656 , Offer in Compromise, no longer lists DATL as an option because taxpayers are not required to pay an OIC application fee or an up-front TIPRA payment when the sole basis for the offer is DATL.
4. Combination offers may arrive in Appeals after a prolonged period in Collection and/or Exam. See IRM 8.23.3.3 and IRM 5.8.5.2.2 if the financial information is outdated. Appeals should avoid sending these financial statements back to Collection to be reworked whenever possible.
8.23.3.12 (10-16-2007)
Alternative Resolutions for Offers
1. Taxpayers will occasionally express an interest in alternative resolutions when it's apparent that an offer is not a viable option. If the AO/SO determines that an alternative resolution such as an installment agreement (IA) or having the account placed in currently not collectible (CNC) status is appropriate, Appeals may initiate the alternative resolution using its general authority.
2. Refer to:
• IRM 5.14, Installment Agreements
• IRM 5.15, Financial Analysis
• IRM 5.16, Currently Not Collectible
• IRM 8.1, Appeals Program
3. If the taxpayer wants to enter into an IA and Appeals agrees that such is an appropriate resolution, follow the procedures in IRM 5.14. . Similarly, follow procedures in IRM 5.16 to determine the propriety of placing the account in CNC status.
Reminder:
IA and CNC criteria are different than that for an OIC.
Note:
Just because the taxpayer can pay in full via installment payments doesn't mean Appeals should automatically attempt to set up an IA. If the taxpayer has equity in assets, IRM 5.14.1.5 requires the taxpayer to either fully or partially pay using the equity in assets before an IA can be recommended for acceptance. If the offer is withdrawn or must be rejected and the AO/SO is not comfortable setting up an IA because of equity in assets or other such issues, Appeals should simply proceed with closing the OIC case and referring the matter back to Collection.
Note:
Appeals must rely of the Multi-functional Installment Agreement Authority (see IRM 5.14.6) for non-CDP offers. The Multi-functional Installment Agreement is for cases with an aggregate unpaid balance of assessments of less than $100,000 and is limited to individual taxpayers, out-of-business sole proprietors, and corporations owing income tax only. ATMs should negotiate appropriate local procedures with area Collection management for securing the necessary approvals on installment agreements that don't fit under the multi-functional authority.
4. Appeals is responsible to input Transaction Code (TC) 971 with Action Code (AC) 043 upon receipt of an installment payment proposal. Use a Form 4844, Request for Terminal Action, to request input of the TC 971 AC 043 to all tax periods. Appeals does not input the TC 971 AC 063.
5. IRS increased its IA user fees on January 1, 2007. Individual taxpayers meeting a low-income standard may apply to have the user fee reduced, but must do so within 30 days after the Letter 238, is issued. When generating the Letter 238 from APGolf, be sure to use the optional paragraph with details about Form 13844, Application for Reduced User Fee for Installment Agreements, and include a blank form as an attachment. If the financial information secured while the offer was being considered indicates the taxpayer may be eligible for a reduced IA user fee, discuss the reduced fee process with him/her when negotiating the actual IA payment terms.
6. Appeals is also responsible for making a lien filing determination as part of the alternative resolution. If a NFTL will be filed per standard administrative procedures, advise the taxpayer accordingly. Explain CDP rights under IRC 6320 and document the case activity record. Indicate in the "Brief Remarks" section of the Form 5402 that the IRM calls for a lien to be filed and indicate the tax periods to be listed on the NFTL. The circumstances and reasons for not filing a NFTL if a NFTL is generally required must be clearly documented in the case activity record.
7. The Appeals Processing Section will input/process the applicable alternative resolution. Be sure to prominently indicate the alternative resolution on the Form 5402 so it's clearly visible to the Appeals technician handling the back-end processing. See IRM 8.23.4 for specific non-CDP OIC case closing procedures.
8.23.3.13 (10-16-2007)
Actions on Defaults Offers
1. A taxpayer must agree to the terms set forth in the Form 656, and the compromised amount remains a tax liability until the taxpayer meets all the terms and conditions of the offer. See Paragraph (i) of Section V of Form 656.
2. Taxpayers entering into either a DATC or ETA offer must agree to comply with all filing and paying obligations under the Internal Revenue Code for a period of 5 years after the offer is accepted. See Paragraph (d) of Section V of Form 656.
3. If a taxpayer fails to meet any of the terms of the offer, the Service has the right to terminate the offer, reinstate the compromised liability, and pursue collection action against the taxpayer. The default provisions apply only to the party failing to comply if the liabilities are jointly owed and the offer was jointly submitted. See Paragraph (d) of Section V of Form 656.
4. If an offer was originally accepted by Appeals, Monitoring Offer in Compromise (MOIC) will refer the case to the appropriate Appeals office for review and, if necessary, issuance of the default letter. See IRM 5.8.9.3, Possible Actions on Accepted Offers, Potential Default Cases.
5. The referral from Collection is usually on Form 2209, Courtesy Investigation. The case will be opened as an offer on ACDS in order to place time on a specific case. APS should note it as a pending defaulted offer in compromise.
6. If the offer in default was accepted as part of a CDP hearing, the taxpayer may be entitled to a retained jurisdiction hearing before Appeals. See IRM 8.22 concerning retained jurisdiction. These defaults will be worked like offers accepted by Appeals upon review of rejected offers. Do not establish a retained jurisdiction case on ACDS. It should be noted on ACDS as a defaulted offer and not a new offer.
7. The Service may accept a compromise of a compromise. There is no standard form for such a proposal. It should be submitted in letter format and addressed to the Commissioner of the Internal Revenue. IRM Exhibit 5.8.9-1 should be used for this purpose. If Appeals initially accepted the offer, Appeals will consider the taxpayer's compromise of a compromise proposal. Exhibits 5.8.9-2 and 5.8.9-3 should be used to notify the taxpayer of either acceptance or rejection of the compromise of a compromise proposal. See IRM 5.8.9.4 for procedures.
8. For information on CDP Hearings on terminated OICs refer to IRM 8.22.
8.23.3.14 (10-16-2007)
Mediation and Arbitration
1. Post-Appeals mediation takes place while the offer is under Appeals' jurisdiction, which means the written request for mediation must be made before the case is closed by Appeals. Post-Appeals mediation procedures are found in Rev. Proc. 2002-44. Arbitration procedures are found in Rev. Proc. 2006-44. Appeals is presently addressing both post-Appeals mediation and arbitration requests on a case-by case basis. If an AO/SO receives a written request for post-Appeals mediation, contact the OIC Program Analyst for Appeals Tax Policy and Procedure.
2. Fast Track Mediation takes place while the offer is still under either Collection's or Examination's jurisdiction. The goal of Fast Track Mediation (FTM) is to help taxpayers resolve disputes arising in Examination and Collection source work without having to send the case to Appeals.
3. Currently, mediation is not available for any offers worked in the Centralized Offer in Compromise sites. While FTM will be considered in all other cases, the decision to mediate a particular case remains discretionary for both the Service and the taxpayer.
4. FTM will be considered only after an offer specialist has fully developed the case facts and made a reasonable attempt to negotiate an acceptable offer. If the case meets the criteria for FTM described below, the offer specialist will inform the taxpayer of the option to mediate, provide a copy of Publication 3605, Fast Track Mediation-A Process for Prompt Resolution of Tax Issues, and answer any questions. Taxpayers who express an interest in mediating must first request a conference with the Compliance group manager.
5. When the taxpayer’s request for FTM is granted, the offer specialist will complete Form 13369, Agreement to Mediate, and also provide a summary of the issues. Even though mediation may result in the specialist’s recommendation to accept, the actual decision to accept is still subject to counsel review and approval of the official with delegated authority according to the category of the offer.
6. The case will remain in the jurisdiction of Compliance. The case will not be reassigned to Appeals on the Automated Offer in Compromise (AOIC) program. Because it may not always be feasible to have a face-to-face conference, it may be necessary to hold the mediation process via conference call.
7. It is not appropriate to mediate in the following situations:
A. When the taxpayer has the ability to pay in full, based on the financial data submitted by the taxpayer with the offer,
B. When the taxpayer declines to increase the amount offered and does not indicate disagreement with the values, figures, or methodology used to arrive at the increased amount,
C. When the issue is explicitly covered by procedural guidance; i.e., unsecured debt, college expenses, or non-qualifying charitable contributions,
D. When the proposed rejection is based on public policy.
8. Examples of matters that generally are appropriate for mediation are the following:
A. The value of an ongoing business’ good will,
B. Artwork with collector or sentimental value,
C. Value of any assets, including real estate,
D. Projections of future income based on calculations other than current income,
E. Whether assets are held as nominee or transferee of a taxpayer,
F. Taxpayer’s proportion of interest in jointly held assets,
G. Calculation of ability to pay from future income when expenses are shared with a nonliable person.
9. For additional information on this topic, see Publication 3605, Fast Track Mediation-A Process for Prompt Resolution of Tax Issues, and the Appeals Alternative Dispute Resolution web site.
Part 8. Appeals
Chapter 23. Offers in Compromise
Section 4. Acceptance, Rejection Sustention, and Withdrawal Procedures (non-CDP)
________________________________________
8.23.4 Acceptance, Rejection Sustention, and Withdrawal Procedures (non-CDP)
• 8.23.4.1 AO/SO Procedures for Closing Non-CDP Offers
• 8.23.4.2 Accepted Offers
• 8.23.4.3 Sustaining Offer Rejection
• 8.23.4.4 Withdrawn Offers
• 8.23.4.5 Potential Default Offers
8.23.4.1 (10-16-2007)
AO/SO Procedures for Closing Non-CDP Offers
1. When Appeals makes a decision on an offer in compromise (OIC) case, the basis of that decision must be adequately documented. The Appeals Officer or Settlement Officer (AO/SO) must also prepare the appropriate closing documents in order to obtain the necessary approvals and meet statutory requirements. This section provides procedures for the AO/SO to close out an accepted, rejected, or withdrawn non-CDP Offer in Compromise (OIC). Back-end closing procedures for the Appeals Processing Section (APS) are found in IRM 8.23.6 , OIC Processing and Closing Procedures.
2. The Appeals Case Memorandum (ACM) contains the detailed basis for the AO/SO's recommendation. The approving official relies significantly on the information detailed in the ACM. Also, just as Appeals owes a taxpayer an explanation as to why the offer was not acceptable, Appeals owes Collection an explanation as to why their decision to reject the offer was overturned. The ACM may include a brief or long narrative depending on the complexity of the case. The ACM:
A. Should include all information having a bearing on the overall decision in the case.
B. Should not include confidential comments. Relevant facts of a confidential nature are rare, but if they exist and are pertinent to the case, include them in a supplemental report.
3. The customized Form 5402, Appeals Case Transmittal and Case Memorandum, contains essential taxpayer identification information, resolution reason codes, case closing codes and case routing information.
Note:
It's important to generate the Form 5402 directly from APGolf as opposed to using a templated version. The Appeals Centralized Database System (ACDS) captures the case's Resolution Reason and Closing Codes when the Form 5402 is generated on APGolf. Appeals provides this information back to Collection and works with them on efforts to improve the overall OIC process based upon the data collected.
4. APGolf also has the appropriate letters that notify the taxpayer of Appeals' decision in the case.
8.23.4.2 (10-16-2007)
Accepted Offers
1. An OIC accepted under doubt as to collectibility (DATC) or Effective Tax Administration (ETA) must include all unpaid tax liabilities for which the taxpayer is liable. Appeals may consider an offer that incudes an unassessed liability, but the liability must be assessed before the offer can be accepted.
2. A compromise is effective for the entire assessed liability for tax, penalties, and interest for the years or periods covered by the offer. An accepted OIC conclusively settles all tax debts listed on the Form 656 . Neither the taxpayer nor the government can re-open a compromise tax year or period unless there was a:
• Falsification of information or documents
• Mutual mistake of a material fact that would be sufficient to set aside or reform a contract
• Concealment of assets and/or ability to pay
See IRM 5.8.9 , Offer in Compromise, Possible Actions on Accepted Offers, for more information.
3. Before preparing the closing documents, check the Integrated Data Retrieval System (IDRS) to make sure there are no other pending liabilities that are not included on the Form 656. A subsequent liability could cause IRS to default the offer. Matters that will later require the time and attention of the AO/SO and other IRS personnel can be avoided by checking for and resolving possible pending liability issues before closing out the case. The following are some ways to look for possible pending liabilities:
• Check IDRS Command Code (CC) AMDIS
• Check IDRS CC UNLCER to see if there are any Trust Fund Recovery Penalties not listed on the Form 656
• Look for Transaction Codes (TCs) 420, 922, 976 or 977 to see if there is an amended return or any examination or underreporter activity
If an open audit is found, follow the instructions in IRM 5.8.8.3 and IRM 5.8.4.12.1 .
Caution:
Review ex parte procedures in Rev. Proc. 2000-43 before contacting a Compliance function.
4. If the offer includes Trust Fund Recovery Penalties (TFRPs), make sure all TFRP assessments are listed on the Form 656 . Generally, TFRPs assessed before August 2000 combined all unpaid corporate tax periods and were assessed using the latest quarterly period. TFRP assessments after August 2000 are made for each quarterly period. The Form 7249 and Form 656 must match by reflecting each assessed TFRP period.
5. Order a MFTRA-X transcript as close to the acceptance date as possible without delaying acceptance. Sanitize the transcript to redact the taxpayer's identification number (both the primary and secondary SSNs if it's a joint offer) and all other tax information that should not be disclosed to the public. IRM 5.8.8.3 contains a detailed listing of the information that must be redacted.
6. An amended Form 656 secured by Appeals must be signed by the AO/SO as the "Authorized Internal Revenue Service Official" (Section VIII of Form 656).
8.23.4.2.1 (10-16-2007)
Accepted Offer Closing Documents and AO/SO Procedures
1. The ACM for an accepted offer should contain the following:
A. The amount of the original offer and a description of the payment terms
B. The amended offer amount, if applicable, and a description of its payment terms
Note:
Provide a complete explanation if the amount of the amended offer that's being recommended for acceptance is less than the amount of the original offer.
C. The type of tax and periods (if the report covers individual and joint liabilities, clearly describe them in separate paragraphs)
Note:
If a tax period that was part of the original offer is subsequently paid in full via TIPRA payments, the period must still be listed on any amended offer. Even though the tax period is fully paid, the funds used to satisfy it are part of the overall offer amount, so the tax period must remain on the Form 656 . If a tax period is paid in full via a non-TIPRA payment, such as a refund offset, there is no need to list such period on the amended Form 656.
D. The cause of the tax problem and status of current compliance, including estimated tax payments or federal tax deposits
E. Collection's reason for rejecting the offer
F. The issues raised by the taxpayer
G. An analysis of the taxpayer's financial condition including any documentation upon which the AO/SO's position is based (e.g. type, location or condition of assets, or the taxpayer's age, health, education or future income prospects)
H. A comparison of the financial figures claimed by the taxpayer, the amounts allowed by Collection, and the amounts allowed by Appeals. Sample RCP Comparison Tables are available at the Appeals web site.. If the taxpayer simply amends the offer to the RCP amount determined by Collection and the AO/SO agrees that this is the proper amount, there is no need for the financial figure comparison. Simply attach a copy of Collection's financial analysis tables to the ACM.
Reminder:
It's important for Appeals to document a clear and concise explanation of the factors considered in accepting the offer. This may include information that was not previously provided to Collection, or a different interpretation of the facts of the case or the policies procedures outlined in the IRM.
I. The source of the offer funds
J. The total amount of TIPRA payments already applied to the offer
K. An affirmative statement that the offer being recommended for acceptance reasonably reflects collection potential or that special circumstances exist that otherwise justify compromise.
L. An explanation of the special circumstances justifying acceptance under Doubt as to Collectibility with special circumstances (DATC-SC) or Effective Tax Administration (ETA) and why payment of more than the offered amount would either cause the taxpayer to be unable to meet necessary living expenses or would undermine public confidence that the tax laws are being administered in a fair and equitable manner
Reminder:
DATC-SC and ETA acceptance recommendations also require an affirmative statement indicating acceptance of the offer would not undermine other taxpayers' compliance with the tax laws.
M. If the offer being accepted involves a federal employee, document whether public policy implications exist based on the sensitivity of the employee's position or area of responsibility
Note:
An offer involving an IRS employee requires Area Director approval.
2. When recommending acceptance of two or more related offers based upon a single financial analysis, only one ACM is necessary. To ensure proper processing of the related offers, create separate files/folders marked "1 of 2," and "2 of 2." It's not necessary to duplicate information pertaining to both taxpayers, but the separate files/folders should contain the documents listed below in paragraph (3), except for only one consolidated ACM.
3. Review Delegation Order 5-1, which is available at the Appeals OIC Home Page to determine the appropriate approving official.
A. If the offer is being accepted based upon public policy or equity considerations (ETA or DATC-SC), approval from the Director of Field Operations is required and copies of the ACM and Form 5402 must be e-mailed to the OIC program analyst for Appeals Tax Policy and Procedure.
B. It is not necessary to e-mail copies of the ACM or Form 5402 to Appeals Tax Policy and Procedure if the ETA or DATC-SC offer is based upon economic hardship.
4. When accepting a non-CDP offer, prepare and assemble the following:
A. Form 7249 , Offer Acceptance Report,
B. Sanitized MFTRA-X transcripts for each tax debt listed on the Form 656
C. Customized Form 5402 generated from APGolf
D. ACM
E. Letter 673 to notify the taxpayer of the accepted offer
F. Form 656 or amended Form 656
G. Collateral agreement, if applicable
Note:
Enclose a copy of the Form 656 and any collateral agreements with the taxpayer's (and POA's) copy of the Letter 673
5. See IRM 8.23.6, OIC Processing and Closing Procedures, for APS OIC case closing procedures.
8.23.4.2.2 (10-16-2007)
Counsel Review of Acceptance Recommendations
1. IRC 7122(b) requires an opinion from Counsel if the liability, including tax, penalties and interest, is $50,000 or more. Counsel's review of a proposed acceptance has two separate and distinct components:
A. Certification that the legal requirements for compromise were met.
B. If the legal requirements for compromise were met, then Counsel reviews the proposed acceptance for consistent application of the Service’s policies regarding whether the proposed compromise amount is acceptable. Review of the proposed compromise for consistent application of the Service's acceptance policies.
2. Counsel's signature on the Form 7249 indicates that the legal requirements for compromise were met. If Counsel does not sign the Form 7249, the legal issues must be resolved before the case can be closed as an accepted offer.
3. Per CCDM 33.3.2, Chief Counsel Directives Manual - Legal Advice, Other Legal Advice, Offers in Compromise, a finding by Counsel that a proposed acceptance is not in keeping with Service policy is not a justification for withholding an opinion if all of the legal requirements for compromise have been met. If Counsel signs the Form 7249 but disagrees with the amount of the offer, they will communicate their disagreement in a separate memorandum.
4. Counsel's signature on Form 7249 is required for compromise, but their concurrence with the decision to accept the offer is not. However, the approving official for Appeals must review and carefully consider any opinion from Counsel prior to accepting the offer. If Counsel raised substantive policy concerns, it's appropriate to document the case activity record indicating the approving official carefully considered the issues before accepting the offer. See IRM 5.8.8.5.
8.23.4.3 (10-16-2007)
Sustaining Offer Rejection
1. When the facts of the case do not support acceptance, the taxpayer should be informed that Appeals must sustain rejection of the offer. See IRM 8.23.3.3.2 for additional information.
2. Appeals will sustain Collection's rejection of a Doubt as to Collectibility offer when Appeals determines that the taxpayer can pay more than the offered amount.
3. Appeals will sustain Examination's rejection of a Doubt as to Liability offer when Appeals determines that the tax is correct as assessed.
4. Since Appeals already has detailed financial information and familiarity with the taxpayer's current circumstances, there may be instances when an offer cannot be accepted but both the taxpayer and Appeals believe that an alternative resolution such as an installment payment agreement (IA) or having the account placed in currently non-collectible (CNC) status is appropriate. Document any discussions of alternative resolutions in the case activity record.
5. See IRM 8.23.3.12 for details concerning alternative resolutions in a non-CDP offer case.
Reminder:
Appeals is responsible to input Transaction Code (TC) 971 with Action Code (AC) 043 upon receipt of an installment payment proposal. Use a Form 4844 , Request for Terminal Action, to request input of the TC 971 AC 043 to all tax periods. Appeals does not input the TC 971 AC 063.
6. APS can process alternative resolutions as part of closing out the OIC case. Remember, APS isn't necessarily looking for IA or CNC information when closing out an OIC case, so be sure to prominently indicate the alternative resolution on the Form 5402 so it is noticeable. A Form 53 is not needed to have the account placed in CNC status. Simply request input of the proper TC 530 CC 24-32 in the "Remarks" section of the Form 5402.
7. Appeals is responsible to make a lien filing determination as part of the alternative resolution. If a Notice of Federal Tax Lien (NFTL) will be filed per standard administrative procedures, advise the taxpayer accordingly. Explain CDP rights under IRC 6320 and document the case activity record. Indicate in the "Brief Remarks" section of the Form 5402 that the IRM calls for a lien to be filed and indicate the tax periods to be listed on the NFTL. The circumstances and reasons for not filing a NFTL must be clearly documented in the case activity record if such filing is generally required.
8. If a deposit was received with the offer, the deposit will be returned unless the taxpayer provides written authorization to apply it to the tax debt. Use a Form 3040 , Authorization to Apply Offer in Compromise Deposit to Liability, for this purpose. The deposit is credited as of the date it was received by the Service.
Note:
If the offer at issue is a TIPRA offer, the 20% initial payment for a Lump Sum Cash offer and the proposed periodic installment payments for either a Short-term Periodic Payment offer or a Deferred Periodic Payment offer are not deposits and will not be refunded. Also, if the taxpayer pays more than 20% with the submission of a Lump Sum Cash offer, the excess amount is considered a payment of tax and will be applied in the government's best interest, unless otherwise designated. The same applies to periodic installments in excess of the proposed amounts.
8.23.4.3.1 (10-16-2007)
Closing Documents and AO/SO Procedures for Sustaining Offer Rejection
1. The ACM for a case in which Appeals is sustaining the rejection of the offer should contain the following:
A. Sufficient information to support the decision, including a complete financial analysis.
Note:
If the decision is simply to sustain Collection's RCP determination, the Offer Examiner's financial analysis tables (Income/Expense Table (IET), Asset/Equity Table (AET) or Full Pay Worksheet) are sufficient.
B. Any counter proposals either offered to or received from the taxpayer.
C. Information as to the disposition of any offer deposits.
Note:
The Customized Form 5402 may be used in place of an ACM if there is sufficient room to reflect the above.
D. Information as to alternative resolution proposals considered by Appeals and/or recommended for approval.
2. Review Delegation Order 5-1, which is available at the Appeals OIC Home Page to determine the appropriate approving official.
A. If rejection of the offer is being sustained based upon public policy or equity considerations, approval from the Director of Field Operations is required and copies of the ACM and Form 5402 must be e-mailed to the OIC program analyst for Appeals Tax Policy and Procedure.
B. It is not necessary to e-mail copies of the ACM or Form 5402 to Appeals Tax Policy and Procedure if rejection is being sustained on an ETA or DATC-SC offer based upon economic hardship.
3. When recommending Appeals sustain rejection of the non-CDP offer, prepare and assemble the following:
A. Customized Form 5402 generated from APGolf
B. ACM
C. An undated Letter 238 to notify the taxpayer that Appeals sustained rejection of the offer
D. Form 3040 or other written authorization, as applicable
E. Form 433-D , Installment Agreement, and a Form 13844 , Application for Reduced User Fee for Installment Agreement, if applicable
F. Form 1271 , Rejection and Withdrawal Memorandum, unless the Form 1271 that was prepared by Collection is still in the file.
4. Once all of the above documents are complete and assembled, update the ACDS case status to AC/FR and submit the case file to the ATM for approval.
8.23.4.4 (10-16-2007)
Withdrawn Offers
1. IRM 5.8.7.4 contains details for withdrawn offers. There are now two kinds of withdrawals:
A. Voluntary withdrawal, and
B. Mandatory withdrawal
2. A taxpayer may voluntarily withdraw an offer at any time after its submitted, including the time the case is in Appeals. A voluntary withdrawal may be made verbally, by fax, or in writing. Written withdrawals are encouraged. Letter 3504 (SC/SG), Offer in Compromise Withdrawal, and Letter 3504-A (SC/SG), Offer in Compromise Withdrawal - Joint, may be used for withdrawal purposes. The letters must be modified with respect to the taxpayer waiver appeal rights. However, if a taxpayer or authorized representative provides a clear oral statement requesting withdrawal of the offer, the offer may be closed as withdrawn. Be sure to adequately document the case activity record as to the taxpayer's or representative's withdrawal request.
3. If the taxpayer mails a written withdrawal via certified mail or hand-delivers the withdrawal, the offer is considered withdrawn as of the date the withdrawal is received. Date stamp the withdrawal document with the received date, as that is the date the statutory period to collect the tax starts running.
4. If the taxpayer verbally withdraws the offer or sends a written withdrawal via regular mail or fax, the offer will be considered withdrawn as of the date Appeals mails the Letter 241 (CG), Offer in Compromise Withdrawal Letter, to the taxpayer.
5. Document the case activity record as to the manner in which the withdrawal was received.
6. Since Appeals already has detailed financial information and familiarity with the taxpayer's current circumstances, there may be instances when an offer cannot be accepted but both the taxpayer and Appeals believe that an alternative resolution such as an installment payment agreement (IA) or having the account placed in currently non-collectible (CNC) status is appropriate. Document any discussions of alternative resolutions in the case activity record. See IRM 8.23.3.12 for details concerning alternative resolutions in a non-CDP offer case.
Reminder:
Appeals is responsible to input Transaction Code (TC) 971 with Action Code (AC) 043 upon receipt of an installment payment proposal. Use a Form 4844, Request for Terminal Action, to request input of the TC 971 AC 043 to all tax periods. Appeals does not input the TC 971 AC 063.
7. Appeals is responsible to make a lien filing determination as part of the alternative resolution. If a NFTL will be filed per standard administrative procedures, advise the taxpayer accordingly. Explain CDP rights under IRC 6320 and document the case activity record. Indicate in the "Brief Remarks" section of the Form 5402 that the IRM calls for a lien to be filed and indicate the tax periods to be listed on the NFTL. The circumstances and reasons for not filing a NFTL must be clearly documented in the case activity record if such filing is generally required.
8. The offer may also be considered withdrawn under IRC 7122(c)(1(B)(ii) if the taxpayer fails to make a proposed periodic installment payment. However, taxpayers are not required to continue making proposed periodic installment payments on either a Short-term Periodic Payment or Deferred Periodic Payment offer after such offer is rejected by Collection. For this reason, instances of mandatory withdrawal of a non-CDP offer should be uncommon.
Note:
Periodic installment payment requirements start again upon receipt of an amended Short-term Periodic Payment or Deferred Periodic Payment offer. The AO/SO is responsible to secure the TIPRA payment required with the amended offer and to monitor receipt of the proposed periodic installment payments until the case is closed by Appeals. If Appeals secures an amended offer well in advance of closing out the non-CDP offer and the taxpayer fails to make a proposed periodic installment payment, follow the procedures in IRM 8.23.5.3.1 regarding mandatory withdrawal.
8.23.4.4.1 (10-16-2007)
Withdrawn Offer Closing Documents and AO/SO Procedures
1. The ACM for a withdrawn offer case should contain the following:
A. Sufficient information indicating the type of withdrawal (voluntary or mandatory) and the manner in which the offer was withdrawn, e.g. verbal, written, certified mail, mandatory, etc.
B. The taxpayer's reason for withdrawing the offer, if known.
C. Information as to alternative resolution proposals considered by Appeals and/or recommended for approval.
D. Information as to the disposition of any offer deposits.
Note:
The Form 5402 may be used in place of an ACM if there is sufficient room to reflect the above.
2. Review Delegation Order 5-1, which is available at the Appeals OIC Home Page to determine the appropriate approving official.
3. When closing out a non-CDP offer as withdrawn, prepare and assemble the following:
A. Customized Form 5402 generated from APGolf
B. ACM, if more details are needed than can fit in the Form 5402
C. An undated Letter 241 (CG) to notify the taxpayer that the offer is withdrawn, the effective date of the withdrawal, and the disposition of any offer deposit
D. Form 3040 or other written authorization, as applicable
E. Form 433-D, Installment Agreement, and a Form 13844, Application for Reduced User Fee for Installment Agreement, as applicable
Note:
A Form 1271 is not needed for a withdrawn offer. See IRM 5.8.7.
4. Once all of the above documents are complete and assembled, update the ACDS case status to AC/FR and submit the case file to the ATM for approval.
8.23.4.5 (10-16-2007)
Potential Default Offers
1. A potential default offer is loaded onto ACDS as an OIC case.
2. If the taxpayer was able to remedy the potential default issue and Appeals is not going to default or terminate the offer, document the case activity record and close the case using Closing Code 15. Close the Form 2209 back to MOIC advising that the offer should not be defaulted.
3. If the taxpayer was not able to remedy the potential default issue, Appeals must issue the formal default or termination letter. See IRM Exhibit 5.8.9-4. The letter notifying the taxpayer of the termination of the offer must be signed by the Appeals official who accepted the offer or his or her successor. See Delegation Order 5-1, which is available on the Appeals web site at the Appeals OIC Home Page. Document the case activity record and close the case using Closing Code 14. Close the Form 2209 back to MOIC advising that the offer was defaulted. Attach a copy of the signed default letter and MOIC will then reinstate the compromise liability.
4. When the Form 2209 advises Appeals of the death of a taxpayer, the AO/SO must determine whether there is an estate. An Appeals Referral Investigation (ARI) may be needed. See IRM 8.23.5.6 regarding ARI procedures. If there is an estate, the Service should file a proof of claim for the balance owed on the offer. If there is no estate, the offer should simply be closed out as satisfied. Use Closing Code 14 and send the Form 2209 back to MOIC advising that the offer should not be defaulted.
5. Follow the same general procedures outlined above for a compromise of a compromise case.

Part 8. Appeals
Chapter 23. Offers in Compromise
Section 5. Collection Due Process OIC Procedures
________________________________________
8.23.5 Collection Due Process OIC Procedures
• 8.23.5.1 Offers Received During Collection Due Process and Equivalent Hearings
• 8.23.5.2 Processing CDP/EH Offer Receipts
• 8.23.5.3 TIPRA Considerations
• 8.23.5.4 Offers Filed Concurrent with Request for CDP/EH Hearing
• 8.23.5.5 NFTL Filed by Collection During a Non-CDP OIC Investigation
• 8.23.5.6 Requesting Assistance from Compliance
• 8.23.5.7 Closing Procedures for CDP and EH Offers
8.23.5.1 (07-22-2008)
Offers Received During Collection Due Process and Equivalent Hearings
1. IRM 8.23.5 was prematurely obsoleted in February 2008. The information contained in the version issued on October 16, 2007 remains in effect and is reinstated.
2. IRC 6320 and IRC 6330 generally afford taxpayers with an opportunity for an administrative Appeals hearing after IRS
A. files a Notice of Federal Tax Lien (NFTL), or
B. issues a Notice of Intent to Levy and Notice of Your Right to a Hearing.
3. Alternatives to collection, including an offer in compromise (OIC), are among the issues taxpayers may raise for Appeals' consideration as part of a Collection Due Process (CDP) or equivalent hearing (EH) matter.
4. IRM 8.22, Collection Due Process, contains Appeals procedures for CDP and EH cases.
5. The OIC constitutes a component of the final determination/decision that Appeals is required to reach with regard to the hearing. An OIC being considered by Appeals as an alternative to collection in a CDP or EH case is considerably different than a rejected offer received from Collection. Appeals' jurisdiction over the CDP/EH generally runs from its initial receipt through its conclusion and is continuous. Appeals is generally responsible for:
A. securing the CDP/EH offer
B. perfecting and submitting it for initial processing
C. developing all aspects of the offer
D. determining the offer's acceptability
E. preparing the required closing documents
F. securing the necessary approvals
6. It's the responsibility of the taxpayer to raise collection alternatives in CDP/EH hearings. The Appeals or Settlement Officer will make reasonable efforts to assist the taxpayer in preparing the required offer forms. This may be especially important with an unrepresented taxpayer.
Caution:
Policy Statement P-5-100 (which is also IRM 1.2.14.1.17 ) states, in part (emphasis added): The taxpayer will be responsible for initiating the first specific proposal for compromise. Despite the increased financial investment that a taxpayer must now make to have an offer considered, it is not appropriate for Appeals to negotiate an acceptable offer amount before an OIC is submitted. This kind of "pre-negotiation" potentially leads to the government negotiating against itself and the taxpayer offering as little as possible to settle the liability. The OIC program is not about relieving a taxpayer's liability for the least possible amount.
7. Inform the taxpayer of the following:
• General OIC policies and procedures including processability requirements, how reasonable collection potential (RCP) is generally determined, and basic compliance and acceptance requirements
• OIC application fee, and that such fee is refundable if the offer is not processed, but is not refundable once the offer is processed
• Up-front TIPRA payment required with submission of the offer and that such payment is not refundable regardless of whether the offer is processed
• That the application fee and TIPRA payment(s) are applied to the taxpayer's liability
• Taxpayer's right to designate application of required TIPRA payments, but that such designation must be in writing at the time the payment is made, and that the right to designate offer payments ends once the offer is accepted
• That the application fee and TIPRA payment requirements don't apply if the basis of the offer is doubt as to liability or the taxpayer meets the low-income qualifications
• Approvals needed in the event the AO/SO is able to make an acceptance recommendation
8. IRM 5.8.3 and Collection's July 26, 2007 Replacement TIPRA Interim Guidancecontain OIC processability requirements and procedures.
9. IRM 8.22 contains guidance on Appeals procedures for processing OICs received as part of an open CDP case.
10. An offer received as an alternative to collection in a CDP or EH case will not be added to Collection's Automated Offer in Compromise (AOIC) database. The CDP/EH offer is entered on a separate Appeals database that does not interface with AOIC. This stand-alone platform was created to enable Collection to reconcile the OIC application fee collected by Appeals in the CDP/EH offer.
Note:
An offer case will remain open on AOIC pending the outcome of an appeal if Collection issues its rejection letter, concurrently files a Notice of Federal Tax Lien (NFTL) and then receives both an appeal of the rejected offer and a request for a 6320 hearing.
11. Sometimes taxpayers will submit an offer to COIC and request a CDP/EH hearing at the same time, or they will send an offer to COIC while an open CDP/EH case is pending. If Collection identifies an offer case as having an open CDP or EH control, the COIC site's CDP coordinator will research ACDS to determine whether the CDP/EH is still open and whether the determination or decision letter was issued. If ACDS indicates the CDP/EH case is still open and the Case Summary screen doesn't indicate the determination or decision letter was issued, COIC will contact the AO/SO to determine the status of the case. The purpose of COIC's contact is simply to find out whether the determination or decision letter was issued. If a determination or decision letter has not yet been issued, the offer is under Appeals' jurisdiction and COIC will forward the offer to the proper AO/SO. If the determination or decision letter was issued, COIC will retain and work the offer.
8.23.5.1.1 (10-16-2007)
Certain CDP/EH Liability Offers Precluded
1. IRC 6330 states that the underlying liability may not be raised at the CDP/EH hearing unless the taxpayer did not receive a statutory notice of deficiency or did not otherwise have an opportunity to dispute the tax liability. An offer based upon doubt as to liability concerns the underlying tax liability, and therefore such an offer generally should not be considered if challenges to the liability itself are precluded.
2. The statute, which also applies to CDP hearings under IRC 6320, also precludes issues from the hearing if they were considered at a prior administrative Appeals or judicial proceeding in which the taxpayer meaningfully participated. Examples include, among others:
A. Taxpayer properly received a Letter 1153, and neglected to exercise his/her appeal right regarding a proposed Trust Fund Recovery Penalty (TFRP) assessment, or had a prior Appeals hearing on the TFRP liability
B. The current CDP/EH case concerns an IRC 6330 hearing and the taxpayer had a prior Appeals hearing for the same tax liability under IRC 6320, or vice versa.
3. IRM 8.22, Collection Due Process, for additional information on when liability issues are precluded from consideration in a CDP/EH matter.
8.23.5.2 (10-16-2007)
Processing CDP/EH Offer Receipts
1. For consistency purposes and OIC application fee processing, the Centralized Offer in Compromise (COIC) sites in Brookhaven, NY and Memphis, TN are responsible for processability determinations. Generally, the COIC site will try to make the processability determination within 14 days of receipt.
2. IRS changed the rules for determining the processability of post-TIPRA offers. Now, an offer will be deemed non-processable only if one or more of the following criteria are present:
A. Taxpayer in Bankruptcy: An offer will not be considered during an open bankruptcy proceeding.
B. Taxpayer did not submit the application fee with the offer: An application fee of $150 or a signed Form 656-A, Income Certification for Offer in Compromise Application Fee (For Individual Taxpayer Only), must accompany the Form 656. The Form 656-A applies to individual taxpayers only. No application fee or Form 656-A is required if the sole basis of the offer is Doubt as to Liability.
C. Taxpayer did not submit the required initial payment with the offer: See the above for initial payment requirements. No initial payment or Form 656-A is required if the sole basis of the offer is Doubt as to Liability.
The IRS will no longer automatically return an offer as not processable if IMF and BMF taxpayers are not in filing compliance or if BMF taxpayers seeking to compromise employment tax debts are not compliant with FTDs prior to submitting the offer. An offer will be returned as not processable if the taxpayer does not come into filing compliance within the time the IRS provides after the offer is submitted. The new criteria are reflected on the revised processability letters available on APGolf.
3. Taxpayers are encouraged (but not required) to send separate checks for the application fee and 20% initial payment or initial periodic installment payment. The reason for this is the 20% initial payment and initial periodic installment payment are not refunded if IRS determines that the offer is not processable, but the application fee may be refunded. Page 12 of the February 2007 Form 656 instruction booklet portrays the various OIC application fee and initial TIPRA payment scenarios.
4. See IRM 5.8.3, Offer in Compromise Processability and Collection's July 26, 2007 Replacement TIPRA Interim Guidance.
8.23.5.2.1 (10-16-2007)
Appeals Procedures
1. When an offer is received in Appeals as part of a CDP/EH case:
A. Date stamp the Form 656 (upper right corner of Page 1) with the date the offer was received in Appeals and document its receipt in the case activity record. DO NOT SIGN THE FORM 656.
Note:
The date the CDP/EH offer is received in Appeals begins the 24-month period after which the offer will be deemed accepted under IRC 7122(f). Proper documentation of the received date is critical.
B. Review the offer package and make sure it meets the basic processability requirements detailed above. If it doesn't, remedy any deficiency prior to sending the offer package to COIC for the processability determination.
C. Determine whether the offer was submitted solely to delay collection. See IRM 5.8.3.19.
Caution:
A determination that the offer was submitted solely to delay collection is an issue for which the taxpayer could seek judicial review under CDP. Make sure the case fits the criteria spelled out in IRM 5.8.3.19 before arriving at this conclusion.
D. Prepare Form 3210, Document Transmittal, Letter 3820, Offer is Processable, and Letter 3821, Offer is Not Processable. The Letters 3820 and 3821 must contain all Appeals contact information. Do not sign or date either Letter. The COIC unit will complete these items after its processability review.
Note:
A package Form 3210, which includes Letters 3820 and 3821, is available on APGolf.
2. Send the following items to the appropriate COIC site:
• Form 3210 (two copies) which includes the sender's name, phone and fax numbers and is clearly labeled "CDP Offer in Compromise"
• Form 656
• Either the required OIC application fee and TIPRA payment or a Form 656-A
• Any written documentation from the taxpayer as to designation of the TIPRA payment
• Form 433-A and/or Form 433-B
• Letters 3820 and 3821 (including POA copies, if applicable)
• A return envelope to assist COIC in returning the offer to the correct person
Note:
Review the Form 433-A/B to see if the taxpayer lists a prior bankruptcy filing which was likely closed out. Advise the taxpayer to include the discharge or dismissal date on the Form 433-A/B. COIC will now check the Integrated Data Retrieval System (IDRS), Automated Insolvency System (AIS) and the Public Access to Court Electronic Records (PACER) system before returning the offer as not processable.
8.23.5.2.2 (10-16-2007)
COIC Processability Procedures for CDP/EH Offers
1. IRM 5.8.3.4.2 contains COIC's processability procedures for Appeals' CDP/EH offers.
2. If the CDP/EH offer is processed, COIC will:
A. Sign the Form 656
B. Mail Letter 3820 to the taxpayer (and POA, if applicable)
C. Input a TC 480 to all OIC periods
D. Input a STAUP 71 to the OIC periods that are not part of the underlying CDP case (and not already in ST 53 or 60) if it's a timely CDP case
Note:
The CDP periods are already protected from levy by the TC 520 and ST 72.
E. Input a STAUP 71 to all of the OIC periods (if not already in ST 53 or 60) if it's an EH case
F. Fax a copy of the Letter 3820 to the AO/SO advising that the offer was processed
G. Mail the offer package, including the signed Form 656 and Letter 3820, to the AO/SO
Reminder:
The OIC is under Appeals' jurisdiction, so the AO/SO is responsible to make sure the TC 480 is properly input to all periods, both CDP and non-CDP, and a STAUP 71 is input to the appropriate non-CDP periods. Appeals is also responsible to resolve the TC 480 with the appropriate TC 481, 482, 483 or 780 when the offer case is concluded.
3. COIC will also advise Appeals if an additional Form 656, application fee or initial payment is needed.
4. If the CDP/EH offer is not processable, COIC will:
A. Mail Letter 3821 to the taxpayer (and POA, if applicable)
B. Send the original Form 656 back to the taxpayer as an attachment to the Letter 3821
C. Fax a copy of the Letter 3821 and Form 2515, Record of Offer in Compromise, to the AO/SO. (The Form 2515 reflects application of the application fee and TIPRA payment and the unprocessable issues)
Note:
The taxpayer may dispute the determination that the CDP/EH offer was not processable, so Appeals must concur with COIC's unprocessable determination. Be sure to fully document the case activity record as to the reason(s) why the offer was not processable in case the taxpayer petitions Tax Court over Appeals' CDP determination and lists the unprocessable determination as an issue.
5. If Collection is notified that either the OIC application fee or the up-front TIPRA payment are dishonored (returned due to non-sufficient funds), COIC will query ACDS to determine the Appeals employee assigned the case and telephone the AO/SO to advise of the dishonored payment(s). COIC will fax a copy to Appeals. The AO/SO must promptly contact the taxpayer by telephone or letter to advise of the dishonored payment and that the offer will be returned if a replacement payment in certified form (money order, cashier's check, etc.) is not received within 14 days of the date of the letter or telephone contact. If the contact is made by telephone, document the case activity record. If the taxpayer has to overnight the payment to meet the deadline, follow the procedures for such in IRM 5.8.3.6.
A. If the taxpayer properly replaces the dishonored payment, proceed with considering the offer.
B. If the taxpayer does not properly replace the dishonored payment, the offer is considered "returned." Submit a Form 4844, Request for Terminal Action, to the Appeals Processing Section (APS) to have a TC 482 input to the OIC periods. Document the case activity record and return the taxpayer's offer with a cover letter containing the following language:
We are returning your Form 656, Offer in Compromise, because the check you sent for the offer in compromise application fee and/or offer in compromise initial payment was not honored by your bank. We gave you an opportunity to replace the dishonored check with certified payment, but did not receive the required replacement payment. We cannot consider your offer.
6. See IRM 8.22 for procedures regarding establishing a separate work unit (WUNO) on ACDS for the CDP/EH offer
8.23.5.2.3 (10-16-2007)
Non-CDP Periods in the CDP/EH Offer
1. Many offers received as an alternative to collection in a CDP/EH case include tax periods that are not the subject of the underlying CDP/EH case. These may include:
• Tax debts owed by the CDP/EH taxpayer but not listed on the CDP notice,
• Joint tax debts owed by a spouse who did not request a CDP/EH hearing, or
• Tax debts owed by a related entity such as a closely held corporation, partnership or LLC.
2. Appeals can use its general authority to render a decision on an offer in compromise listing non-CDP/EH tax debts even though there has been no appealable action taken by a Compliance function with regard to the non-CDP/EH periods.
3. IRC 6331(k) generally prohibits the IRS from levying to collect the tax debts which are the subject of the offer. The TC 520 and STAUP 72 protect from levy the tax debts which are the subject of a timely CDP case, but we must take the necessary steps to ensure both the TC 480 and STAUP 71 are input to all non-CDP tax periods, including EH periods, to make sure all OIC tax debts are protected from levy.
8.23.5.3 (10-16-2007)
TIPRA Considerations
1. The Tax Increase Prevention Act of 2005 (TIPRA) greatly impacted the offer in compromise (OIC) program. TIPRA did not significantly impact Non-CDP offers received in Appeals, but Appeals' responsibilities and procedures for CDP/EH offers have changed considerably.
2. An offer received as an alternative to collection in a CDP/EH case is subject to IRC 7122(f), which states that an offer is deemed accepted if such offer is not rejected, returned or withdrawn before the date which is 24 months after the date the offer is submitted. The regulations for IRC 7122 state that an offer is considered "submitted" as of the day IRS receives the offer. For this reason, it's important to date stamp the Form 656 and document the case activity record upon receipt of the offer.
3. Appeals employees can process all pre-acceptance TIPRA payments using a Form 3244except for the initial payment due with the Form 656. See IRM 8.23.1.4.1.1 for OIC payment processing procedures.
8.23.5.3.1 (10-16-2007)
Mandatory Withdrawal Procedures
1. If a taxpayer fails to make a proposed installment payment (other than the first installment), IRC 7122(c)(1)(B)(ii) allows the IRS to consider the offer withdrawn. Sections 5.8.4.7.2.1 and 5.8.7.4.2 of Collection's July 26, 2007 Replacement TIPRA Interim Guidancerefer to this as a "mandatory withdrawal."
Note:
Mandatory withdrawal procedures do not apply to a non-CDP offer because such an offer has already been rejected by Collection and the taxpayer is not required to continue making proposed periodic installment payments after the offer is rejected.
2. It is the AO/SO's responsibility to monitor the taxpayer's compliance with proposed periodic installment payment requirements while the offer is being worked by Appeals, which may include monitoring IDRS if the taxpayer is not sending such payments to Appeals. If COIC is doing a preliminary evaluation of the CDP/EH offer, Appeals is not responsible to monitor the proposed periodic installment payment requirements during the time the case is being worked by COIC.
3. The taxpayer will be allowed one opportunity to make up the missed payment. Notify the taxpayer by either telephone or correspondence of the need to make the payment and allow 14 calendar days to do so. Clearly document the case activity record. If such contact is attempted by telephone and no direct contact is made, send a letter.
A. If the taxpayer pays the missing payment within 31 days after the date of the telephone contact or letter (additional grace period to allow for mail time and to coincide with Collection's interim procedures), continue with the offer investigation.
B. If the taxpayer fails to pay the missing payment within 31 days after the date of the telephone contact or letter, the offer may be considered withdrawn.
Note:
The taxpayer will be afforded one opportunity to make up only one missed installment payment, unless special circumstances exist. An amended offer does not create an additional opportunity.
4. If a decision has already been made to reject the offer, then no contact is needed. Follow the procedures in IRM 8.22 to close out the CDP/EH case and the OIC for addressing other issues raised as part of the CDP/EH case and/or closing out the underlying CDP/EH case.
5. If the offer is withdrawn under IRC 7122(c)(1)(B)(ii) , follow the procedures in IRM for addressing other issues raised as part of the CDP/EH case and/or closing out the underlying CDP/EH case.
8.23.5.4 (10-16-2007)
Offers Filed Concurrent with Request for CDP/EH Hearing
1. Occasionally, a taxpayer will submit an offer to one of the COIC processing units and request a CDP or equivalent hearing at or around the same time. Depending on the timing and type CDP hearing request, different processes may be used. The following table reflects various scenarios:
If ... And ... Then ...
The timely CDP hearing request was made under IRC 6330 The Notice of Intent to Levy and Notice of Your Right to a Hearing was issued after the offer was processed IRS was prohibited from levy under IRC 6331(k) and the Notice of Intent to Levy must be rescinded. Follow procedures in IRM 8.22.
The timely CDP hearing request was made under IRC 6330 The Notice of Intent to Levy and Notice of Your Right to a Hearing was issued before the offer was processed There is no need to rescind the Notice of Intent to Levy. Appeals has jurisdiction over both the CDP case and the offer
The request for a CDP hearing under IRC 6330 was not made timely The Notice of Intent to Levy and Notice of Your Right to a Hearing was issued either before or after the offer was processed There is no need to rescind the Notice of Intent to Levy. Appeals has jurisdiction over both the EH case and the offer
Either a timely or late request for a CDP hearing was made under IRC 6320 The Notice of Federal Tax Lien was filed either before or after the offer was processed There is no prohibition against the IRS filing a Notice of Federal Tax Lien while an offer is pending, so there is no need to have the lien withdrawn. Appeals has jurisdiction over both the CDP/EH case and the offer
2. As discussed in previous sections of this IRM, Appeals has jurisdiction over an offer submitted to Appeals as an alternative to collection in an open CDP/EH case. If a taxpayer submits an offer directly to Collection while a CDP/EH case is open in Appeals, COIC will perform its standard processability review and send the offer to Appeals. If COIC receives an offer and determines that the CDP/EH case was closed with a determination/decision letter, waiver or withdrawal before it received the offer, COIC will process and work the offer.
8.23.5.5 (10-16-2007)
NFTL Filed by Collection During a Non-CDP OIC Investigation
1. IRM 5.8.4.9 requires the Offer Examiner to make a lien filing determination as part of the initial case review. There is no prohibition against filing a Notice of Federal Tax Lien (NFTL) while an offer is pending.
2. If Collection determines that a NFTL must be filed while the offer is still under consideration and the taxpayer requests a CDP hearing, the offer then becomes an alternative to collection in the CDP case. Both the CDP and OIC cases are under the jurisdiction of Appeals.
3. If the offer case is fully resolved and Collection is going to recommend acceptance, the taxpayer may withdraw the request for a CDP hearing. See IRM 8.22, Collection Due Process. A Form 12556, Withdrawal of Request for Collection Due Process Hearing, or other written request may be used (Form 12256 is preferred).
4. If it's an EH case, either a written or verbal withdrawal is sufficient.
5. Either Collection or Appeals can secure the withdrawal. If Appeals secures the withdrawal, the case file must be clearly documented with the following:
• The taxpayer did not want a resolution from Appeals
• The taxpayer understands the rights given up by withdrawing the CDP/EH hearing request
Note:
Appeals should not solicit a withdrawal if the offer resolution is reached with Appeals. A IRM 12257 waiver should be used instead. This way, the taxpayer doesn't lose retained jurisdiction rights.
6. Even though Collection is going to recommend acceptance of the offer, the taxpayer may not want to withdraw a timely CDP hearing request because Appeals retains jurisdiction over the determinations made in a CDP case. See IRM 8.22 for information on retained jurisdiction in a CDP case. If the taxpayer does not withdraw the request for a CDP/EH hearing, Collection will forward the complete offer file. The AO/SO must then decide whether to accept or reject the offer as part of the CDP/EH case.
8.23.5.6 (10-16-2007)
Requesting Assistance from Compliance
1. CDP and EH cases generally come to Appeals with little or no development of the factual issues. When an offer is submitted by the taxpayer as an alternative to collection in a CDP or EH case, Appeals has the sole jurisdiction to render a decision as to the acceptability of the offer. Appeals will generally work the offer investigation internally using electronic research sources and taxpayer documentation. However, if complex issues surface and additional documentation or verification is necessary to determine whether the offer is acceptable, Appeals may require the assistance of Compliance Field personnel. In these situations, Appeals may send an Appeals Referral Investigation (ARI) to Collection for asset verification, financial analysis, or other assistance with complex issues, or to Exam concerning the validity or legality of the assessment or other complex issues.
Note:
Per Q-A 6 in Section 3 of Rev. Proc. 2000-43, OIC cases are subject to ex parte provisions. The third party contact waiver provision found in paragraph (n) in Section V of Form 656 pertains to non-IRS contacts only.
Note:
In general, the ARI should be issued only if there is a reasonable probability that the offer will be accepted if the results of the ARI favor the taxpayer's position or if the acceptability of the offer simply cannot be determined without the information that will be asked for in the ARI. In other words, there is no point in issuing an ARI if its results will have little or no impact on the likely decision on the offer.
2. Appeals retains full jurisdiction of the open OIC while Collection or Exam is working the ARI. The offer will be deemed accepted by operation of law if it's not rejected, returned or withdrawn within 24 months after the date the offer was submitted. See IRM 8.23.5.3. This means that Appeals is responsible to monitor the ARI's completion as it relates to the 24-month period.
3. Appeals Officers or Settlement Officers will follow the procedures in IRM 8.22 regarding the CDP Tracking System and ARIs on CDP/EH OIC cases.
4. Collection has concentrated its Field OIC Groups in a few select areas. Offer in Compromise Specialists are not Field personnel and thus are generally no better equipped to handle the types of complex issues requiring an ARI than a Settlement Officer. For this reason, ARIs will only be issued to a Field Revenue Officer Group. If a complex Doubt as to Collectibility or ETA hardship offer is being worked by an Appeals Officer who is not sufficiently experienced in Collection issues, seek the assistance of a Settlement Officer. See also IRM 8.23.2.2, Assignment of OIC Case.
5. Before sending an ARI, review and analyze the supporting documentation already provided by the taxpayer and utilize all internal verification resources.
6. Generally if the taxpayer is a wage earner or a self-employed individual without employees the Appeals Officer or Settlement Officer can easily and quickly verify the financial statement through internal research.
7. If the taxpayer was given a proper opportunity to provide information necessary to adequately determine reasonable collection potential (RCP), then Appeals may use the criteria in IRM 5.8.7.2.2 used by Collection to "return" a processed offer as a basis to not accept the CDP/EH offer.
8. Carefully review the ex parte procedures in Rev. Proc. 2000-43.
8.23.5.6.1 (10-16-2007)
ARI to Field Revenue Officer Group
1. A request for Collection's expeditious treatment of the ARI may be made in accordance with locally agreed upon discussions or agreements. Appeals will follow up with Collection after 30 days from the ARI's issuance to ensure appropriate priority is being given. Because of ex parte issues, limit the extent of the discussion to only the general time frame of the ARI's completion. Be sure to carefully document the case activity record as to why you contacted the Revenue Officer, what question(s) was asked and the answer(s) received. See Rev. Proc. 2000-43.
2. The ARI will be sent to the Collection Field Revenue Officer Group to investigate the following:
• Collection Information Statement (CIS) analysis and verification when complex, specific questions or concerns exist,
• Asset verification requiring actual field observation, such as a search of court house records or personal observation and evaluation of the assets of an operating business,
• Potential alter ego, nominee or transferee issues,
• Trust Fund Recovery Program (TFRP) investigation.
3. This type of ARI may be appropriate when the assets on the financial statement are extensive, unusually complex, or in the hands of third parties, etc. An ARI will be sent to the Field Revenue Officer group covering the taxpayer's location.
4. The following are examples of offers that may require an asset investigation.
Example: The taxpayer’s financial statement shows she has antiques worth $10,000. Her offer is $15,000 and she owes $55,000. She incurred the liability when she was working for an art gallery but is now employed as a wage earner. She is buying her home worth $200,000 and drives a vehicle worth $85,000. You completed internal research but there was no information available on the antiques. The taxpayer states she does not have any papers authenticating the pieces and does not have any documentation of value. She provided an itemized list with the values based on her knowledge. She does not plan to sell the antiques to fund the offer. The offer funds will be a loan from a friend. The offer might be acceptable if the antiques are only worth $10,000 as stated on the financial statement. You request that the field make an on-site visit to visually inspect the antiques and or any other assets and obtain the values.
Example: The taxpayer submitted an offer on a Trust Fund Recovery Penalty (TFRP). The liability arose from a construction company that he formerly owned. The taxpayer submits a financial statement indicating that he is no longer in business and is working for wages. During the conference, he states that he works for his wife and has sufficient withholding. The taxpayer indicates that he has no administrative duties with his wife’s business. He further states that he does not have the financial savvy to run a business. In verifying the financial statement, the Appeals Officer or Settlement Officer discovers that for the past three years the wife had no income. Internal research revealed that the new corporation began almost immediately after the other one closed and the type of business is construction. Based on these facts there may be potential for an alter ego or nominee. Further investigation is required by Collection before a resolution can be determined.
8.23.5.6.2 (10-16-2007)
ARI to Examination
1. Before sending the ARI to Exam, make sure the taxpayer is not precluded from raising liability issues under IRC 6330(c).
2. With regard to liability issues, an ARI will be sent to Examination to provide Appeals a report of findings as to the validity and legality of the assessment, or other issues. Because of ex parte issues, limit the extent of the discussion to only the general time frame of the ARI's completion. Be sure to carefully document the case activity record as to why you contacted the Revenue Officer, what question(s) was asked and the answer(s) received. See Rev. Proc. 2000-43
3. Examination will initiate action on these referrals within 30 days.
4. Follow the procedures in IRM 8.22, regarding the CDP Tracking System and CDP/EH OIC cases.
8.23.5.6.3 (10-16-2007)
Originating Appeals Office ARI Responsibilities
1. When sending an ARI to Collection or Exam, the taxpayer should be notified via a brief referral letter stating, in part:
"You have requested consideration of certain issues that require the expertise of the investigative functions of the Service. While the Office of Appeals will maintain jurisdiction of your case, we have requested further assistance to research and verify the information you have provided. It may be necessary for a Revenue Officer/Agent to contact you for information necessary to expedite this review. The Revenue Officer/Agent may need to contact third parties to verify some of this information. The information we have requested is needed to help us reach a resolution of your appeal."
Note:
There is no need to verify the issuance of the Notice of Third Party Contact. The Form 656 operates as a waiver of the Third Party Notice requirement beginning with the January 2000 revision of Form 656.
2. If Collection will be verifying a financial statement on an ARI, Appeals is responsible for securing the verification required in IRM 5.8
3. The AO/SO will attach a copy of the taxpayer referral letter to the ARI. The purpose of the letter is two-fold: the taxpayer is more fully informed of the purpose and scope of Compliance's involvement, and the Collection or Examination employee is assured that the taxpayer is aware that contact may be necessary and appropriate while the case is under Appeals jurisdiction.
4. Prepare and forward Form 2209, Courtesy Investigation, and Form 10467 , Appeals Division Feedback Report and Transmittal Memorandum, or any other acceptable local form.
5. Annotate in red ink at the top "CDP Case in Appeals."
6. Provide specific instructions so that the Revenue Officer or Revenue Agent knows precisely what action(s)/information is needed.
7. Attach any relevant documents that will assist the Revenue Officer or Revenue Agent in providing the requested information and/or performing the requested investigation.
8. Appeals will follow up with the Compliance function after 30 days from the ARI's issuance to make sure appropriate priority is given. It's important to keep in mind that the offer is deemed accepted by operation of law 24 months after the offer is submitted. Management involvement may be required if the ARI has been open for an extended period of time or there are concerns with regard to the 24-month mandatory acceptance period.
9. Upon receipt of the ARI information from Compliance, Appeals must share such information with the taxpayer.
8.23.5.7 (10-16-2007)
Closing Procedures for CDP and EH Offers
1. Offers received as part of a CDP and EH are often one of multiple issues raised by the taxpayer. There are a number of aspects to closing the CDP/EH offer that are different than closing a non-CDP offer. Refer to IRM 8.22, Collection Due Process, for CDP/EH offer closing procedures.
Part 8. Appeals
Chapter 23. Offers in Compromise
Section 6. OIC Processing and Closing Procedures
________________________________________
8.23.6 OIC Processing and Closing Procedures
• 8.23.6.1 Establishing New OIC Receipts
• 8.23.6.2 Offer in Compromise Closing Procedures (non-CDP)
• 8.23.6.3 Examination Originated OIC Cases
• 8.23.6.4 Potentially Defaulted OIC Cases
8.23.6.1 (10-16-2007)
Establishing New OIC Receipts
1. This section provides instructions for Appeals Processing Section (APS) personnel in establishing new offer in compromise (OIC) receipts and controls.
2. On the case inventory screen, follow normal procedures except for the following:
A. TYPE — Enter OIC
Note:
If the offer is based upon Effective Tax Administration (ETA), add a Feature Code of "ET."
B. Proposed Offer Amount (WUpropsdOfrAmt) Enter the amount of offer as shown on Form 656, Offer in Compromise.
Note:
One case folder could have more than one Form 656 all related to the same taxpayer such as an individual Form 656, a joint Form 656, and a sole proprietor Form 656. Be careful to input the proper WUpropsdOfrAmt to the work unit number (WUNO) associated with that particular Form 656.
3. On the return information screen, enter the following:
A. AIMS Indicator — Enter E since these cases are not controlled on AIMS
B. Tax Period — Enter all tax periods associated with the case
C. Statute Date —Leave blank
D. Statute Code — Enter SUSP
E. Proposed Def/-OA (Tax) — Enter the total unpaid liability amount on the earliest tax period. This may be found on Form 1271 Form 1271. On all subsequent tax periods, enter $ -0- (zero). If the tax has not been assessed, enter $ -0- (zero) for all tax periods.
F. Duplication — Leave blank
4. If the offer involves multiple MFTs, the case will be treated as one work unit number, unless multiple TINs are present, such as with an individual owing income tax under his SSN and employment tax as a sole proprietor under an EIN. Separate work units are required for each TIN even if both TINs belong to the same taxpayer. Use the MFT of the earliest tax period as the key case, enter the amount of the offer in the NOTES field, and enter the total of all unpaid liabilities on the first tax period and enter zero in any remaining tax periods. On each related case, list all tax periods involved for that MFT but zero dollars for all tax periods.
Note:
If there are different entities in the same case file, such as individual and joint, different WUNOs would apply.
8.23.6.1.1 (10-16-2007)
Previously Accepted OIC (Potential Default) Cases Returned to Appeals
1. If an earlier "accepted" offer is proposed for default , Collection will send Form 2209, Other Investigation, to Appeals to consider issuing a formal termination letter. Establish the case on Appeals Centralized Database System (ACDS) as a new receipt. Follow the procedures above except for the following:
A. Notes: enter "Proposed Default - Appeals OIC"
2. Appeals also occasionally receives a taxpayer's request to consider a "compromise of a compromise." See IRM 5.8.9.4. Sometimes the taxpayer's request is made through one of the Monitoring Offer in Compromise (MOIC) units, in which case Appeals will receive a Form 2209. Often times, however, the request is made directly to the Appeals Officer or Settlement Officer (AO/SO), so there is no Form 2209 involved. If the request is made directly to the AO/SO, then open a new case following the same procedures as with a potential default case above except for the following:
• Notes: enter "Compromise of a Compromise - Appeals OIC"
8.23.6.1.2 (10-16-2007)
OICs Received with CDP/EH Case
1. OIC’s received with or initiated during the course of a Collection Due Process (CDP) or equivalent hearing (EH) may be added to ACDS as a separate work unit.
2. A CDP/EH case could result in more than one OIC. For example, related entities such as a joint return and a sole proprietorship will each be carded as a separate OIC work unit.
3. No periods should be added to the CDP/EH case merely because they are included on the OIC.
4. If the OIC and CDP/EH cases are received in Appeals together, and the OIC has already been determined to be processable (signed on page 4 of the Form 656 by an authorized IRS employee), both the CDP/EH case and the OIC case will be carded into ACDS at the same time, as separate work units. If the OIC is not signed on page 4, only the CDP/EH case will be carded in.
5. Follow normal procedures except for the following;
• Type= OIC
• Feature Code= DP, also input this feature code on the CDP/EH work unit, to indicate there is a related OIC.
• Entries in SOURCE, DO, and PBC for the OIC(s) will be the same as those entries in the related CDP/EH case(s).
• REQAPPL – date the authorized Service employee signed on page 4 of the Form 656.
6. If the OIC is received or determined to be processable after the CDP/EH case has been carded in, the AO/SO will provide a package to APS requesting they add the OIC unit to ACDS. The package will include:
• A copy of the related CDP/EH case summary card noted at the top in red ""Please input OIC work unit" " with feature code = DP and Notes – XREF (work unit number of the related OIC case)
• A copy of page one of Form(s) 656 identifying all periods included on the OIC. Input TPNAME, ADDRESS, TIN, MFT, Tax Periods, and offer amount as shown on Form 656
• A copy of page four (signature page) of Form(s) 656.
• IMFOLI or BMFOLI (AO/SO will add the TOTAL MOD BALANCE for all periods – input this amount in proposed tax on the earliest period.
8.23.6.2 (10-16-2007)
Offer in Compromise Closing Procedures (non-CDP)
1. This section provides procedures for closing out completed OIC cases, except for offers worked as part of a CDP or EH case. CDP/EH offer procedures are in IRM 8.22.3.10, Back-end Processing for CDP and Equivalent Hearing Cases.
2. The following types of offers originate in the Collection function and are controlled on the Automated Offer in Compromise (AOIC) system:
• Doubt as to Collectibility (DATC)
• Effective Tax Administration (ETA) based upon both economic hardship and public policy/equity considerations
• Combination Doubt as to Liability (DATL) and either DATC or ETA
3. DATL offers involving Trust Fund Recovery Penalty (TFRP) or Personal Liability for Excise Tax (PLET) assessments are worked by Collection and are controlled on AOIC.
4. DATL offers involving liabilities other than TFRP and PLET assessments originate in the Examination function and are not controlled on AOIC:
8.23.6.2.1 (10-16-2007)
Counsel Review of Accepted OIC
1. Counsel is required to review all offers when the total unpaid liability (including all assessed and accrued penalties and interest) for all related offers on the same taxpayer is $50,000 or more. This amount is generally shown on the Form 7249, Offer Acceptance Report. However, taxpayers must now make up-front payments when filing an offer and sometimes make additional periodic installment payments while the offer is being considered. These offer payments are applied directly to the tax debts and are not refundable. If the balance owed exceeded $50,000 before the offer payments were applied, Counsel's review is still required, so there may be cases where the Form 7249 shows a total balance owed of less than $50,000, but the case must still be sent to Counsel for review.
Example:
John and Jennifer Maple owe joint income tax debts for years 2002, 2003 and 2004. The amounts owed for are $36,000 for 2002; $16,000 for 2003; and $3,000 for 2004. The total amount owed for all three years is $55,000, so Counsel's review is required.
Example:
Bill Elm owes a TFRP totaling $47,000. He also owes a $7,000 joint income tax debt with Betty Elm. This is Betty's only tax debt. Counsel must approve Bill's offer because he owes a total of $54,000. Counsel is not required to approve Betty's offer. However, the separate offers are part of one case file, so the entire file must be sent to Counsel.
Example:
Jack Oak owes income tax debts for 2004 and 2005 totaling $48,000. He submitted a non-refundable up-front payment of $5,000 with his offer. Since he owed $53,000 before the offer up front payment, the case must be sent to Counsel for review even though the Form 7249 shows Oak now owes less than $50,000.
2. If acceptance of the offer is subject to Counsel's approval, local procedures will dictate how to proceed. Due to the variables involved in managing different sized offices and employees in remote offices, each office may utilize APS differently in order to most effectively manage and control the flow of cases and input the required data at the appropriate time.
A. The ATM will either sign or initial (per local procedures) but not date the Form 5402. This indicates the ATM's preliminary approval of the offer.
B. If the ATM routes the case to Counsel through APS, update ACDS to indicate when the case was sent to Counsel and then forward the file to Counsel using Form 3210.
C. If the ATM bypasses APS and forwards the case directly to Counsel, the ATM should contact APS so ACDS can be updated accordingly.
3. Counsel will sign and date Form 7249 to certify that all of the legal requirements for compromise have been met.
A. If Counsel does not sign the form, the case must be returned to the AO/SO or ATM (per local procedures) as the Offer cannot be compromised until the legal issues are resolved.
B. If Counsel signs the Form 7249, route the case to either the AO/SO or ATM (per local procedures) so the CAR can be updated, closing documents signed and ACAPDATE input.
8.23.6.2.2 (10-16-2007)
Collection Originated OIC Acceptance Procedures
1. The work unit will be assigned to the Tax Examiner on the Processing Employees Automated System (PEAs) for closing, with PEAs TYPE "CLS" and the appropriate SubTYPE for the case. Generally, PEAs SubTYPE "ACDS Only" will apply.
2. For an accepted OIC, the case will flow as follows:
1. The AO/SO completes the case and submits it to the ATM for approval. See IRM 8.23.6.2.1 if Counsel review is required.
2. The ATM signs the Form 7249 and OIC Acceptance Letter 673), dates and signs the Form 5402, and enters the ACAPDATE on ACDS.
3. The ATM submits the case to APS for final closing.
Note:
If the offer is based upon either Doubt as to Collectibility or Effective Tax Administration - Hardship, the Form 656 provides that IRS will keep any refund due the taxpayer for tax periods extending through the calendar year in which the IRS accepts the offer. In some cases, especially toward the end or beginning of a calendar year, the Acceptance Letter 673 have the wrong tax years. This typically occurs when the AO/SO prepares the acceptance letter near the end of a calendar year and for various reasons, including time the case is in Counsel for review, the case is not ready for the acceptance letter to be issued until the following calendar year. The acceptance letter should be mailed the same calendar year that it's signed by the ATM. If a new calendar year has begun and the acceptance letter contains the wrong years, return the case file to the ATM to have the acceptance letter corrected.
3. The Appeals Office will send the case to the appropriate APS office in either Brookhaven, NY or Memphis, TN for closing. The next section has information on closing the case on AOIC.
4. The OIC case file will contain the following documents:
• Original Form 656, Offer in Compromise
• Original Amended Form 656, if applicable
• Original Form 7249, Offer Acceptance Report
• Sanitized MFTRAX transcripts
• Form 5402, Appeals Transmittal and Case Memorandum
• Appeals Case Memorandum, if applicable
• Financial information, including Form 433-A and/or Form 433-B, bank statements, property records, and other information used to make the acceptability determination
5. If an offer is received from one spouse on a joint liability, the MOIC site is responsible for creating mirror assessments on the accepted OIC.
6. Close the OIC work unit on ACDS following general closing instructions. In addition:
. CLOSINGCD = 15 (OIC Accepted)
A. WUaccptOfrAmt = amount of accepted offer (see Form 5402 or the "Terms of this Offer" section on Form 7249)
B. RevsdTax = 0 (zero) for all tax periods
C. Paycode = 7
D. LACTION - Accepted OIC file to XXXXXXX (Offers worked by Collection Field), or Accepted OIC file closed on AOIC (Offers work by Collection Campus) and sent to XXXXXXXX
7. The following table provides information on when Appeals can and cannot close the case on AOIC. The next section of this IRM contains information for actually closing applicable cases on AOIC.
If ... Then ...
The offer was originally worked by a COIC campus site Update AOIC with the appropriate closing information. See IRM 8.23.6.2.2.1.
The offer was originally worked by a Collection Field offer group • Print the first page of AOIC and attach it to the front of the case file.
• Forward the file to the appropriate Area Collection Field Office OIC Coordinator as shown on the , which is available in the APS section on the Appeals web site at Non-CDP OIC Cases (with CO Source Code) Field Area Drop Points for Closed Cases.
• Collection will then update AOIC with the appropriate closing information.
8. Date and mail the acceptance letter to the taxpayer and/or POA and include as attachments:
. A copy of the Form 656 or amended Form 656
A. A copy of the co-obligor agreement, if applicable (used only if one spouse is compromising a joint tax debt)
B. A copy of the collateral agreement ( Form 2061), if applicable (collateral agreements are rare)
9. Make copies of the above and the Form 7249 for the office administrative file.
10. Send one copy of Form 7249 and the sanitized MFTRAX to the applicable Area Collection Field Office for filing in the Public Inspection File. The address list for where to send the OIC Public Inspection Files is in the APS section on the Appeals web site at OIC Public Inspection File Locations.
11. Send the case file to the appropriate campus MOIC unit based on the state where the taxpayer resides. The listing of states associated with both the Brookhaven and Memphis MOIC units (back-end OIC) and their mailing addresses are available on SERP under the "Who/Where" tab.
12. Close PEAs using Closing Code 03 with a completion date equal to the date the above actions were completed.
13. Process any OIC payments to the campus OIC unit. After the case is closed, the taxpayer should send payments directly to the campus OIC unit.
14. Collection also works Doubt as to Liability offers when the tax debt involves a TFRP or PLET assessments. These case are also loaded on AOIC.
15. Closing procedures for OICs that are part of a CDP case are found in IRM 8.22.3.10.
8.23.6.2.2.1 (10-16-2007)
AOIC Closing Procedures for Accepted Offer
1. This section provides general information for closing an accepted OIC case on the Automated Offer in Compromise (AOIC) system. This applies only to offers that originated out of the applicable COIC site.
2. As soon as possible after the Acceptance Letter 673 is issued, the case must be closed, validated and released on AOIC with the case file sent to the appropriate MOIC campus for monitoring. It is critical that the necessary actions are promptly taken to close the case on AOIC and the case immediately sent to MOIC because:
• MOIC is responsible to monitor the taxpayer's compliance with the terms and conditions of the offer and won't know what to do with incoming payments without the closing information and case file
• IRS has 30 days by law to release a tax lien if the taxpayer pays the accepted offer amount in full
3. The case must be reassigned back to the Collection offer employee on AOIC immediately prior to closing the case on AOIC. The AOIC system will not let Appeals close the case until this step is done. ("C" = Control and "A" = Assign) Screen 12 provides the AOIC case assignment history to assist in determining the reassignment number (follow local procedures if a locally developed assignment number was provided). Be sure all information needed to input the closure is available prior to reassigning the case. The case must remain assigned to Appeals until all closure issues are resolved.
4. AOIC INPUT (Query Offer Number)
Note:
Make sure all screens are updated if an amended offer was secured.
Screen Number Input Fields
One • Offer amount
• Amended/Original
• Proposed Disposition
• DATC/Special Circumstances or ETA update Screen 1 with AOIC TYPE = "A"
• If strictly DATC, leave as TYPE = "C"
Note:
Check all of the above fields for accuracy and update as appropriate.
Five • MFT periods must match Form 656/amended Form 656
• To ADD - Add/Update
• To REMOVE - Control U
Six • Accepted Terms match Form 656/amended Form 656 and the terms shown on Form 7249
• Update Co-obligor or collateral terms, as appropriate
Screen four is the final screen for input to finalize the AOIC closure Keystrokes:
• C = Control
• D = Disposition
• F = Final
• 2 = Accepted by Appeals
Note:
There must be a prior disposition before you can input a final disposition. The prior disposition in these cases will be "2" Reject with appeal rights. If there is no prior disposition, return the case to the originator for closure off of AOIC due to unique circumstances. Such a case requires special handling.
Other Input Items:
• Date of Appeals Acceptance Letter
• Mailing date of the rejection letter previously issued by Collection before the case was referred to Appeals
New Field on OIC:
• Was Offer Accepted Under ETA/DCSC Criteria [ ] (Enter Y or N)
• Enter the number for the Accepted Criteria [ ]
• 1 = Economic Hardship ETA offer
• 2 = Equity/Public Policy ETA offer
• 3 = Economic Hardship DCSC (Doubt as to Collectibility with Special Circumstances
• 4 = Equity/Public Policy DCSC
5. Validate and Release the Closed Offer to the appropriate MOIC campus for monitoring as soon as possible after closing the accepted offer on AOIC. Validation and release on AOIC is required.
A. Maintenance Screen: V = Validate. Locate the case you have in the list and indicate "Y." Follow the screen prompts for entering. You can do multiple cases at one time.
B. Once the case is validated, the control of that offer goes to MOIC and the file must be sent to them as soon as possible. Use the destination list at the top to assist in determining where the case file should be sent.
Note:
If there are related cases with different BODs (SB and WI), the SB campus will monitor both offers.
6. Prepare Form 3210 and mail to the appropriate MOIC campus. Be sure the file contains the original copies of:
• Initial Form 656, Offer in Compromise
• Amended Form 656, if applicable
• Form 7249, Offer Acceptance Report
• Co-obligor agreement, if applicable
• Collateral agreement, if applicable
7. Update AOIC history screen with the actions taken on the case.
8.23.6.2.3 (10-16-2007)
Collection Originated Withdrawn OIC Procedures
1. The case file for a rejected or withdrawn offer in compromise should contain:
• Form 5402
• ACM
• Withdrawal Letter 241 signed by the ATM
• Form 3040, Authorization to Apply Offer in Compromise Deposit to Liability, if applicable
• Form 433-D, Installment Agreement, if applicable
2. If an offer is received from one spouse on a joint liability, mirror assessment procedures apply. Collection is responsible for mirror assessment actions on a rejected OIC.
3. Close ACDS following general closing instructions. In addition:
A. CLOSINGCD = 16 (OIC withdrawn)
B. Paycode = 7
C. WUaccptOfrAmt = 0
D. RevsdTax for earliest tax period = same as proposed tax (which should be the amount of the total unpaid liability). RevsdTax for other periods = $0
E. LACTION - Withdrawn offer file to XXXXXXXX (Collection Field) or closed on AOIC (Collection Campus). The notation will inform anyone where the case was shipped or how it was closed.
4. If an alternative resolution was reached, such as an installment agreement (Form 433-D) or having the account placed in currently non-collectible (CNC) status, process the collection alternative. If the alternative is to have the account placed in CNC status, the AO/SO should clearly state such a request and indicate the appropriate TC 530 Closing Code (24-32) on the Form 5402.
5. The following table provides information on when Appeals can and cannot close the case on AOIC. The next section of this IRM contains information for actually closing applicable cases on AOIC.
If ... Then ...
The offer was originally worked by a COIC campus site Update AOIC with the appropriate closing information. See IRM 8.23.6.2.3.1.
The offer was originally worked by a Collection Field offer group • Print the first page of AOIC and attach it to the front of the case file.
• Forward the file to the appropriate Area Collection Field Office OIC Coordinator as shown on the Non-CDP OIC Cases (with CO Source Code) Field Area Drop Points for Closed Cases, which is available in the APS section on the Appeals web site.
• Collection will then update AOIC with the appropriate closing information.
6. Date and mail the Withdrawal Letter 241 to the taxpayer and/or POA concurrent with closing the case on ACDS. Keep a copy in the administrative file.
Note:
The legal withdrawal date is the IRS received date if the taxpayer’s withdrawal letter was mailed certified or hand delivered, in which case the date should be indicated by the AO/SO in the body of the Letter 241. If the request to withdraw was received via regular mail, fax or phone, it is the date the withdrawal letter is mailed to the taxpayer.
7. If an offer deposit was made and input onto AOIC, direct the disposition of the payment by selecting the appropriate option on ACDS.
Note:
An offer deposit is normally returned to the taxpayer unless the taxpayer provides written authorization allowing IRS to apply the deposit to the existing tax liability. A Form 3040 is typically used, but any written authorization satisfies the requirement. The Form 3040 or other written authorization signed by the taxpayer should be included in the file and routed to the MOIC campus that processed the payment.
8. Close PEAs using PEAs Closing Code 03 with a completion date equal to the date the above actions were completed.
9. Collection also works Doubt as to Liability offers when the tax debt involves a TFRP or PLET assessments. These case are also loaded on AOIC.
10. Closing procedures for OICs that are part of a CDP case are found in IRM 8.22.3.10.
8.23.6.2.3.1 (10-16-2007)
AOIC Closing Procedures for Withdrawn Offer
1. This section provides general information for closing a withdrawn OIC case on the Automated Offer in Compromise (AOIC) system. This applies only to offers that originated out of the applicable COIC site.
2. The case must be reassigned back to the Collection offer employee on AOIC immediately prior to closing the case on AOIC. The AOIC system will not let Appeals close the case until this step is done. ("C" = Control and "A" = Assign) Screen 12 provides the AOIC case assignment history to assist in determining the reassignment number (follow local procedures if a locally developed assignment number was provided). Be sure all information needed to input the closure is available prior to reassigning the case. The case must remain assigned to Appeals until all closure issues are resolved.
3. AOIC INPUT (Query Offer Number)
Note:
Make sure all screens are updated if an amended offer was secured.
4. KEYSTROKES: "C" = Control, "D" = Disposition, and "F" = Final
A. Final Disposition - 9 = withdrawn in Appeals
Note:
There must be a prior disposition before you can input a final disposition. The prior disposition in these cases will be "2" = Rejected with appeal rights. If there is no prior disposition, return the case to the originator for closure off of AOIC due to unique circumstances. Such a case requires special handling.
5. Input Items:
• Mail date of the Rej w/ Apl Right Ltr
• Mail date of the Appeals Withdrawal Ltr
• Legal withdrawal date ( See IRM 8.23.6.2.3 in paragraph (6) to determine the date)
6. If an offer deposit was made and input onto AOIC Screen 1 (Offer Deposit Amt), a pop-up box will appear at the time of closure asking what should happen with the deposit. Enter one of the following options:
• AN = Apply No Special Instructions
• AS = Apply Special Instructions
• RN = Refund No Special Instructions
• RS = Refund Special Instructions
Note:
An offer deposit is normally refunded unless the taxpayer provided written authorization allowing the IRS to apply the deposit to the existing tax liability. A Form 3040 is typically used, but any written authorization satisfies the requirement. The Form 3040 or other written authorization should be included in the file and routed to the appropriate MOIC campus that processed the payment.
7. Update AOIC history screen with the actions taken on the case.
8. Print the first page of AOIC for the case and attach it to the front of the closed file. Route the case file back to the Area Office/COIC Offer Coordinators. They will maintain the closed offer file until time to ship to FRC. Attaching the first page from AOIC will assist them in routing the case properly.
8.23.6.2.4 (10-16-2007)
Collection Originated Rejected OIC Procedures
1. The file for a case where Appeals sustained Collection's rejection of the offer should contain:
• Form 5402
• ACM
• Rejection Sustention Letter 238 signed by the ATM
• Form 1271
Note:
The Form 1271 in the file will most likely be the one that was originally prepared by Collection. Appeals will prepare a Form 1271 if one was not previously prepared by Collection.
• Form 3040, if applicable
• Form 433-D, if applicable
2. If an offer is received from one spouse on a joint liability, mirror assessment procedures apply. Collection is responsible for creating mirror assessment actions on a rejected OIC.
3. Close the OIC work unit on ACDS following general closing instructions. In addition:
A. CLOSINGCD = 14 (OIC rejection sustained)
B. WUaccptOfrAmt = 0
C. Paycode = 7
D. RevsdTax for earliest tax period = same as proposed tax (which should be the amount of the total unpaid liability). RevsdTax for other periods = $0
E. LACTION - Rejected offer file to XXXXXXXX, or rejected offer closed on AOIC.
4. If an alternative resolution was reached, such as an installment agreement (Form 433-D) or having the account placed in currently non-collectible (CNC) status, process the collection alternative. If the alternative is to have the account placed in CNC status, the AO/SO should clearly state such a request and indicate the appropriate TC 530 Closing Code (24-32) on the Form 5402.
5. The following table provides information on when Appeals can and cannot close the case on AOIC. The next section of this IRM contains information for actually closing applicable cases on AOIC.
If ... Then ...
The offer was originally worked by a COIC campus site Update AOIC with the appropriate closing information. See IRM 8.23.6.2.4.1.
The offer was originally worked by a Collection Field offer group • Print the first page of AOIC and attach it to the front of the case file.
• Forward the file to the appropriate Area Collection Field Office OIC Coordinator as shown on the Non-CDP OIC Cases (with CO Source Code) Field Area Drop Points for Closed Cases, which is available in the APS section on the Appeals web site.
• Collection will then update AOIC with the appropriate closing information.
6. Date and mail the OIC rejection sustention Letter 238 to the taxpayer and/or POA concurrent with closing the case on ACDS. Keep a copy in the administrative file.
7. If an offer deposit was made and it was input onto AOIC, direct the disposition of the payment by selecting the appropriate option on ACDS.
Note:
An offer deposit is normally refunded unless the taxpayer provided written authorization allowing the IRS to apply the deposit to the existing tax liability. A Form 3040 is typically used, but any written authorization satisfies the requirement. The Form 3040 or other written authorization should be included in the file and routed to the appropriate MOIC campus that processed the payment.
8. Close PEAs using PEAs closing code 03 with a completion date equal to the date the above actions were completed.
9. Collection also works Doubt as to Liability offers when the tax debt involves a TFRP or PLET assessments. These case are also loaded on AOIC.
10. Closing procedures for OICs that are part of a CDP case are found in IRM 8.22.3.10.
8.23.6.2.4.1 (10-16-2007)
AOIC Closing Procedures for Rejected Offer
1. This section provides general information for closing are rejected OIC case on the Automated Offer in Compromise (AOIC) system. This applies only to offers that originated out of the applicable COIC site.
2. The case must be reassigned back to the Collection offer employee on AOIC immediately prior to closing the case on AOIC. The AOIC system will not let Appeals close the case until this step is done. ("C" = Control and "A" = Assign) Screen 12 provides the AOIC case assignment history to assist in determining the reassignment number (follow local procedures if a locally developed assignment number was provided). Be sure all information needed to input the closure is available prior to reassigning the case. The case must remain assigned to Appeals until all closure issues are resolved.
3. AOIC INPUT (Query Offer Number)
Note:
Make sure all screens are updated if an amended offer was secured.
Screen Number Input Fields
One • Offer amount
• Amended/Original
• Proposed Disposition
• DATC/Special Circumstances or ETA update Screen 1 with AOIC TYPE = "A"
• If strictly DATC, leave as TYPE = "C"
Note:
Check all of the above fields for accuracy and update as appropriate.
Five • MFT periods must match Form 656/amended Form 656
• To ADD - Add/Update
• To REMOVE - Control U
Screen four is the final screen for input to finalize the AOIC closure Keystrokes:
• C = Control
• D = Disposition
• F = Final
• 3 = Accepted by Appeals
Note:
There must be a prior disposition before you can input a final disposition. The prior disposition in these cases will be "2" = Reject with appeal rights. If there is no prior disposition, return the case to the originator for closure off of AOIC due to unique circumstances. Such a case requires special handling.
Other Input Items:
• Mailing date of Collection's Reject with appeal right letter
• Mailing date of Appeals letter sustaining rejection of the offer (Letter 238)
• Enter the Reasonable Collection Potential (RCP) amount determined by Appeals (from Form 5402 or ACM)
Note:
If an offer deposit was made and input onto AOIC Screen 1 (Offer Deposit Amt), a pop-up box will appear at the time of closure asking what should happen with the deposit. Enter one of the following options:
• AN = Apply No Special Instructions
• AS = Apply Special Instructions
• RN = Refund No Special Instructions
• RS = Refund Special Instructions
4. An offer deposit is normally refunded unless the taxpayer provided written authorization allowing the IRS to apply the deposit to the existing tax liability. A Form 3040 is typically used, but any written authorization satisfies the requirement. The Form 3040 or other written authorization should be included in the file and routed to the appropriate MOIC campus that processed the payment.
5. Close PEAs using PEAs Closing Code 03 with a completion date equal to the date the above actions were completed.
6. Collection also works Doubt as to Liability offers when the tax debt involves a TFRP or PLET assessments. These case are also loaded on AOIC.
8.23.6.3 (10-16-2007)
Examination Originated OIC Cases
1. Offers originating in Exam are referred to a Doubt as to Liability, or DATL offers. Exam will also handle Effective Tax Administration (ETA) offers based upon public policy or issues of equity.
2. DATL offers are not controlled on the Automated Offer in Compromise (AOIC) system. ETA offers based upon public policy/equity consideration are controlled on the AOIC system.
3. The work unit will be assigned to the Tax Examiner on PEAs for closing, with PEAs TYPE "CLS" and the appropriate SubTYPE for the case.
4. Closing procedures for OICs that are part of a CDP case are found in IRM 8.22.3.10.
5. Collection handles DATL offers involving Trust Fund Recovery Penalties (TFRPs) and Personal Liability for Excise Tax (PLET) liabilities. For closing procedures for TFRP and PLET cases, See IRM 8.23.6.2.2 for closing procedures on accepted offers. See IRM 8.23.6.2.3 for closing procedures on withdrawn offers. See IRM 8.23.6.2.4 for closing procedures on rejected offers.
Reminder:
TFRP and PLET liabilities are loaded onto AOIC, so follow the AOIC closing procedures for accepted, withdrawn and rejected cases.
8.23.6.3.1 (10-16-2007)
Examination Originated OIC Acceptance Procedures
1. The OIC case file will contain the following documents:
• Original Form 656, Offer in Compromise
Note:
Counsel review and approval/signature on Form 7249, Offer Acceptance Report, is required when the total unpaid liability (including all assessed and accrued penalties and interest) for all related offers on the same taxpayer is $50,000 or more. See See IRM 8.23.6.2.1.
• Amended Form 656, if applicable
• Original Form 7249
• Sanitized MFTRAX transcripts
• Form 5402, Appeals Transmittal and Case Memorandum
• Appeals Case Memorandum, if applicable
• Acceptance Letter 673 signed by the ATM
2. The AO/SO will indicate if adjustment actions are required. If yes, input the appropriate adjustments to IDRS. If the case is controlled on AIMS, close the case on AIMS according to standard procedures.
3. Close the OIC work unit on ACDS following general closing instructions. In addition:
A. CLOSINGCD = 15 (OIC Accepted)
B. WUaccptOfrAmt = Amount of the accepted offer (see Form 5402 or the "Terms of this Offer" section on Form 7249)
C. RevsdTax = 0 (zero) for all tax periods
D. Paycode = 7
4. The following closing actions should occur on the date the case is closed on ACDS:
. Date and mail the acceptance letter to the taxpayer and/or POA and include copies of the Form 656 or amended Form 656 and all collateral agreements as attachments
A. Copy the acceptance letter with attachments for the administrative file
B. Send one copy of Form 7249 and the sanitized MFTRAX to the applicable Area Collection Field Office for filing in the Public Inspection File. The address list for where to send the OIC Public Inspection Files is in the APS section on the Appeals web site at OIC Public Inspection File Locations.
C. Ensure the OIC file contains the information in (1) above (except MFTRAX)
D. Close PEAs using PEAs Closing Code 03 with a completion date equal to the date the above actions were completed
E. Return the case file to the originating Exam office.
F. Process any OIC payments to the campus OIC unit. After the case is closed, the taxpayer should send payments directly to the campus OIC unit.
8.23.6.3.2 (10-16-2007)
Examination Originated Withdrawn OIC Procedures
1. When the AO and the taxpayer reach an agreement on the correct tax liability, a "compromise" is not required and the taxpayer will generally withdraw the offer in compromise.
2. The case file for a withdrawn offer in compromise should contain:
A. Form 5402
B. ACM, if information not already contained in Form 5402
C. Withdrawal Letter 241 signed by the ATM
D. Form 3040, Authorization to Apply Offer in Compromise Deposit to Liability, if applicable
E. Form 3870, Request for Adjustment, if applicable
F. Form 433-D, Installment Agreement, if applicable
3. Close ACDS following general closing instructions. In addition:
A. CLOSINGCD = 16 (OIC withdrawn)
B. Paycode = 7
C. WUaccptOfrAmt = 0
D. RevsdTax for earliest tax period = same as proposed tax (which should be the amount of the total unpaid liability). RevsdTax for other periods = $0
4. If an alternative resolution was reached, such as an installment agreement (Form 433-D) or having the account placed in currently non-collectible (CNC) status, process the collection alternative. If the alternative is to have the account placed in CNC status, the AO/SO should clearly state such a request and indicate the appropriate TC 530 Closing Code (24-32) on the Form 5402.
5. The AO will indicate if adjustment actions are required. If yes, input the appropriate adjustments to IDRS.
6. If an offer deposit was made and it was input onto AOIC, direct the disposition of the payment by selecting the appropriate option on ACDS.
Note:
An offer deposit is normally refunded unless the taxpayer provided written authorization allowing the IRS to apply the deposit to the existing tax liability. A Form 3040 is typically used, but any written authorization satisfies the requirement. The Form 3040 or other written authorization should be included in the file and routed to the appropriate MOIC campus that processed the payment.
7. Date and mail the Withdrawal Letter 241 to the taxpayer and/or POA. Keep a copy in the administrative file.
8. Return the case to the originating Exam office.
9. Close PEAs using PEAs Closing Code 03 with a completion date equal to the date the above actions were completed.
8.23.6.3.3 (10-16-2007)
Examination Originated Rejected OIC Procedures
1. A case is processed as Appeals sustaining rejection of the offer when the taxpayer does not agree with the AO's conclusions and does not otherwise withdraw the offer.
2. The case file for a rejected offer in compromise should contain:
A. Form 5402
B. Rejection sustention Letter 238 signed by the ATM
C. ACM
D. Form 1271, Rejection and Withdrawal Memorandum
Note:
The Form 1271 in the file will most likely be the one that was originally prepared by Exam. Appeals will prepare a Form 1271 if one was not previously prepared by Exam.
E. Form 3040, Authorization to Apply Offer in Compromise Deposit to Liability, if applicable
F. Form 3870, Request for Adjustment, if applicable
G. Form 433-D, Installment Agreement, if applicable
3. Close ACDS following general closing instructions. In addition:
A. CLOSINGCD = 14 (OIC withdrawn)
B. Paycode = 7
C. WUaccptOfrAmt = 0
D. RevsdTax for earliest tax period = same as proposed tax (which should be the amount of the total unpaid liability). RevsdTax for other periods = $0
4. If an alternative resolution was reached, such as an installment agreement or having the account placed in currently non-collectible (CNC) status, process the collection alternative. If the alternative is to have the account placed in CNC status, the AO/SO should clearly state such a request and indicate the appropriate TC 530 Closing Code (24-32) on the Form 5402.
5. The AO will indicate if adjustment actions are required. If yes, input the appropriate adjustments to IDRS.
6. If an offer deposit was made and it was input onto AOIC, direct the disposition of the payment by selecting the appropriate option on ACDS.
Note:
An offer deposit is normally refunded unless the taxpayer provided written authorization allowing the IRS to apply the deposit to the existing tax liability. A Form 3040 is typically used, but any written authorization satisfies the requirement. The Form 3040 or other written authorization should be included in the file and routed to the appropriate MOIC campus that processed the payment.
7. Date and mail the Rejection Sustention Letter 238 to the taxpayer and/or POA. Keep a copy in the administrative file.
8. Return the case to the originating Exam office.
9. Close PEAs using PEAs Closing Code 03 with a completion date equal to the date the above actions were completed.
8.23.6.4 (10-16-2007)
Potentially Defaulted OIC Cases
1. A taxpayer must agree to the terms set forth in the Form 656and the compromised amount remains a tax liability until the taxpayer meets all the terms and conditions of the offer. See Paragraph (i) of Section V of Form 656 (Rev. 02-2007).
2. Taxpayers entering into either a DATC or ETA offer must agree to comply with all filing and paying obligations under the Internal Revenue Code for a period of 5 years after the offer is accepted, or until the deferred payment offer amount is paid in full, whichever is later. See Paragraph (d) of Section V of Form 656.
3. If a taxpayer fails to meet any of the terms of an offer, the Service has the right to terminate the offer, reinstate the compromised liability, and pursue collection action against the taxpayer. The default provisions apply only to the party failing to comply if the liabilities are jointly owed and the offer was jointly submitted. See Paragraph (d) of Section V of Form 656.
4. If an offer was originally accepted by Appeals, Collection's Monitoring Offer in Compromise (MOIC) unit will refer the case to the appropriate Appeals office via a Form 2209, Other Investigation, for review of the case and, if necessary, issuance of the default letter. See IRM 5.8.9.3, Possible Actions on Accepted Offers, Potential Default Cases.
5. MOIC takes care of all AOIC aspects of a potential default case. Appeals is responsible only for ACDS input. See IRM 8.23.6.1.1 for details on carding in a potential default OIC case.
A. If Appeals determines the offer is in default the AO/SO will prepare a formal Default Letter for the ATM's signature. See IRM Exhibit 5.8.9-4. Mail the signed letter to the taxpayer and/or POA and close the case on ACDS using Closing Code 14. Send the Form 2209 back to the originating MOIC unit. Be sure to include a copy of the signed Default Letter.
B. If the taxpayer remedies the problem that gave rise to the potential default, Appeals will not issue the default letter. Close the case on ACDS using Closing Code 15. Send the Form 2209 back to the originating MOIC unit.
6. Follow the same procedures as above in a "Compromise of a Compromise" case.

§301.7122-1., Compromises - Effective Tax Administration

In general

(1) If the Secretary determines that there are grounds for compromise under this section, the Secretary may, at the Secretary's discretion, compromise any civil or criminal liability arising under the internal revenue laws prior to reference of a case involving such a liability to the Department of Justice for prosecution or defense.

(2) An agreement to compromise may relate to a civil or criminal liability for taxes, interest, or penalties. Unless the terms of the offer and acceptance expressly provide otherwise, acceptance of an offer to compromise a civil liability does not remit a criminal liability, nor does acceptance of an offer to compromise a criminal liability remit a civil liability.

(b) Grounds for compromise

(1) Doubt as to liability. --Doubt as to liability exists where there is a genuine dispute as to the existence or amount of the correct tax liability under the law. Doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability. See paragraph (f)(4) of this section for special rules applicable to rejection of offers in cases where the Internal Revenue Service (IRS) is unable to locate the taxpayer's return or return information to verify the liability.
(2) Doubt as to collectibility. --Doubt as to collectibility exists in any case where the taxpayer's assets and income are less than the full amount of the liability.

(3) Promote effective tax administration

(i) A compromise may be entered into to promote effective tax administration when the Secretary determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship within the meaning of §301.6343-1.
(ii) If there are no grounds for compromise under paragraphs (b)(1), (2), or (3)(i) of this section, the IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability. Compromise will be justified only where, due to exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. A taxpayer proposing compromise under this paragraph (b)(3)(ii) will be expected to demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid his liability in full.
(iii) No compromise to promote effective tax administration may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws.


(1) In general. --Once a basis for compromise under paragraph (b) of this section has been identified, the decision to accept or reject an offer to compromise, as well as the terms and conditions agreed to, is left to the discretion of the Secretary. The determination whether to accept or reject an offer to compromise will be based upon consideration of all the facts and circumstances, including whether the circumstances of a particular case warrant acceptance of an amount that might not otherwise be acceptable under the Secretary's policies and procedures.
(2) Doubt as to collectibility
(i) Allowable Expenses. --A determination of doubt as to collectibility will include a determination of ability to pay. In determining ability to pay, the Secretary will permit taxpayers to retain sufficient funds to pay basic living expenses. The determination of the amount of such basic living expenses will be founded upon an evaluation of the individual facts and circumstances presented by the taxpayer's case. To guide this determination, guidelines published by the Secretary on national and local living expense standards will be taken into account.
(ii) Nonliable spouses
(A) In general. --Where a taxpayer is offering to compromise a liability for which the taxpayer's spouse has no liability, the assets and income of the nonliable spouse will not be considered in determining the amount of an adequate offer. The assets and income of a nonliable spouse may be considered, however, to the extent property has been transferred by the taxpayer to the nonliable spouse under circumstances that would permit the IRS to effect collection of the taxpayer's liability from such property (e.g., property that was conveyed in fraud of creditors), property has been transferred by the taxpayer to the nonliable spouse for the purpose of removing the property from consideration by the IRS in evaluating the compromise, or as provided in paragraph (c)(2)(ii)(B) of this section. The IRS also may request information regarding the assets and income of the nonliable spouse for the purpose of verifying the amount of and responsibility for expenses claimed by the taxpayer.

(B) Exception. --Where collection of the taxpayer's liability from the assets and income of the nonliable spouse is permitted by applicable state law (e.g., under state community property laws), the assets and income of the nonliable spouse will be considered in determining the amount of an adequate offer except to the extent that the taxpayer and the nonliable spouse demonstrate that collection of such assets and income would have a material and adverse impact on the standard of living of the taxpayer, the nonliable spouse, and their dependents.
(3) Compromises to promote effective tax administration
(i) Factors supporting (but not conclusive of) a determination that collection would cause economic hardship within the meaning of paragraph (b)(3)(i) of this section include, but are not limited to --
(A) Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the condition;
(B) Although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and
(C) Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.
(ii) Factors supporting (but not conclusive of) a determination that compromise would undermine compliance within the meaning of paragraph (b)(3)(iii) of this section include, but are not limited to --

(A) Taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code;
(B) Taxpayer has taken deliberate actions to avoid the payment of taxes; and
(C) Taxpayer has encouraged others to refuse to comply with the tax laws.
(iii) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the economic hardship provisions of paragraph (b)(3)(i) of this section:
Example 1. The taxpayer has assets sufficient to satisfy the tax liability. The taxpayer provides full time care and assistance to her dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in his assets to provide for adequate basic living expenses and medical care for his child. The taxpayer's overall compliance history does not weigh against compromise.
Example 2. The taxpayer is retired and his only income is from a pension. The taxpayer's only asset is a retirement account, and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. The taxpayer's overall compliance history does not weigh against compromise.
Example 3. The taxpayer is disabled and lives on a fixed income that will not, after allowance of basic living expenses, permit full payment of his liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate his disability. The taxpayer's equity in the house is sufficient to permit payment of the liability he owes. However, because of his disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayer's home has been specially equipped to accommodate his disability, forced sale of the taxpayer's residence would create severe adverse consequences for the taxpayer. The taxpayer's overall compliance history does not weigh against compromise.

(iv) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the public policy and equity provisions of paragraph (b)(3)(ii) of this section:
Example 1. In October of 1986, the taxpayer developed a serious illness that resulted in almost continuous hospitalizations for a number of years. The taxpayer's medical condition was such that during this period the taxpayer was unable to manage any of his financial affairs. The taxpayer has not filed tax returns since that time. The taxpayer's health has now improved and he has promptly begun to attend to his tax affairs. He discovers that the IRS prepared a substitute for return for the 1986 tax year on the basis of information returns it had received and had assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill is more than three times the original tax liability. The taxpayer's overall compliance history does not weigh against compromise.
Example 2. The taxpayer is a salaried sales manager at a department store who has been able to place $2,000 in a tax-deductible IRA account for each of the last two years. The taxpayer learns that he can earn a higher rate of interest on his IRA savings by moving those savings from a money management account to a certificate of deposit at a different financial institution. Prior to transferring his savings, the taxpayer submits an e-mail inquiry to the IRS at its Web Page, requesting information about the steps he must take to preserve the tax benefits he has enjoyed and to avoid penalties. The IRS responds in an answering e-mail that the taxpayer may withdraw his IRA savings from his neighborhood bank, but he must redeposit those savings in a new IRA account within 90 days. The taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, the taxpayer learns that he has been misinformed about the required rollover period and that he is liable for additional taxes, penalties and additions to tax for not having redeposited the amount within 60 days. Had it not been for the erroneous advice that is reflected in the taxpayer's retained copy of the IRS e-mail response to his inquiry, the taxpayer would have redeposited the amount within the required 60-day period. The taxpayer's overall compliance history does not weigh against compromise.
(d) Procedures for submission and consideration of offers
(1) In general. --An offer to compromise a tax liability pursuant to section 7122 must be submitted according to the procedures, and in the form and manner, prescribed by the Secretary. An offer to compromise a tax liability must be made in writing, must be signed by the taxpayer under penalty of perjury, and must contain all of the information prescribed or requested by the Secretary. However, taxpayers submitting offers to compromise liabilities solely on the basis of doubt as to liability will not be required to provide financial statements.
(2) When offers become pending and return of offers. --An offer to compromise becomes pending when it is accepted for processing. The IRS may not accept for processing any offer to compromise a liability following reference of a case involving such liability to the Attorney General for prosecution or defense. If an offer accepted for processing does not contain sufficient information to permit the IRS to evaluate whether the offer should be accepted, the IRS will request that the taxpayer provide the needed additional information. If the taxpayer does not submit the additional information that the IRS has requested within a reasonable time period after such a request, the IRS may return the offer to the taxpayer. The IRS may also return an offer to compromise a tax liability if it determines that the offer was submitted solely to delay collection or was otherwise nonprocessable. An offer returned following acceptance for processing is deemed pending only for the period between the date the offer is accepted for processing and the date the IRS returns the offer to the taxpayer. See paragraphs (f)(5)(ii) and (g)(4) of this section for rules regarding the effect of such returns of offers.
(3) Withdrawal. --An offer to compromise a tax liability may be withdrawn by the taxpayer or the taxpayer's representative at any time prior to the IRS' acceptance of the offer to compromise. An offer will be considered withdrawn upon the IRS' receipt of written notification of the withdrawal of the offer either by personal delivery or certified mail, or upon issuance of a letter by the IRS confirming the taxpayer's intent to withdraw the offer.
(e) Acceptance of an offer to compromise a tax liability
(1) An offer to compromise has not been accepted until the IRS issues a written notification of acceptance to the taxpayer or the taxpayer's representative.

(2) As additional consideration for the acceptance of an offer to compromise, the IRS may request that taxpayer enter into any collateral agreement or post any security which is deemed necessary for the protection of the interests of the United States.

(3) Offers may be accepted when they provide for payment of compromised amounts in one or more equal or unequal installments.

(4) If the final payment on an accepted offer to compromise is contingent upon the immediate and simultaneous release of a tax lien in whole or in part, such payment must be made in accordance with the forms, instructions, or procedures prescribed by the Secretary.

(5) Acceptance of an offer to compromise will conclusively settle the liability of the taxpayer specified in the offer. Compromise with one taxpayer does not extinguish the liability of, nor prevent the IRS from taking action to collect from, any person not named in the offer who is also liable for the tax to which the compromise relates. Neither the taxpayer nor the Government will, following acceptance of an offer to compromise, be permitted to reopen the case except in instances where --

(i) False information or documents are supplied in conjunction with the offer;

(ii) The ability to pay or the assets of the taxpayer are concealed; or

(iii) A mutual mistake of material fact sufficient to cause the offer agreement to be reformed or set aside is discovered.
(6) Opinion of Chief Counsel. --Except as otherwise provided in this paragraph (e)(6), if an offer to compromise is accepted, there will be placed on file the opinion of the Chief Counsel for the IRS with respect to such compromise, along with the reasons therefor. However, no such opinion will be required with respect to the compromise of any civil case in which the unpaid amount of tax assessed (including any interest, additional amount, addition to the tax, or assessable penalty) is less than $50,000. Also placed on file will be a statement of --

(i) The amount of tax assessed;

(ii) The amount of interest, additional amount, addition to the tax, or assessable penalty, imposed by law on the person against whom the tax is assessed; and

(iii) The amount actually paid in accordance with the terms of the compromise.

(f) Rejection of an offer to compromise

(1) An offer to compromise has not been rejected until the IRS issues a written notice to the taxpayer or his representative, advising of the rejection, the reason(s) for rejection, and the right to an appeal.

(2) The IRS may not notify a taxpayer or taxpayer's representative of the rejection of an offer to compromise until an independent administrative review of the proposed rejection is completed.

(3) No offer to compromise may be rejected solely on the basis of the amount of the offer without evaluating that offer under the provisions of this section and the Secretary's policies and procedures regarding the compromise of cases.

(4) Offers based upon doubt as to liability. --Offers submitted on the basis of doubt as to liability cannot be rejected solely because the IRS is unable to locate the taxpayer's return or return information for verification of the liability.

(5) Appeal of rejection of an offer to compromise

(i) In general. --The taxpayer may administratively appeal a rejection of an offer to compromise to the IRS Office of Appeals (Appeals) if, within the 30-day period commencing the day after the date on the letter of rejection, the taxpayer requests such an administrative review in the manner provided by the Secretary.

(ii) Offer to compromise returned following a determination that the offer was nonprocessable, a failure by the taxpayer to provide requested information, or a determination that the offer was submitted for purposes of delay. --Where a determination is made to return offer documents because the offer to compromise was nonprocessable, because the taxpayer failed to provide requested information, or because the IRS determined that the offer to compromise was submitted solely for purposes of delay under paragraph (d)(2) of this section, the return of the offer does not constitute a rejection of the offer for purposes of this provision and does not entitle the taxpayer to appeal the matter to Appeals under the provisions of this paragraph (f)(5). However, if the offer is returned because the taxpayer failed to provide requested financial information, the offer will not be returned until a managerial review of the proposed return is completed.

(g) Effect of offer to compromise on collection activity
(1) In general. --The IRS will not levy against the property or rights to property of a taxpayer who submits an offer to compromise, to collect the liability that is the subject of the offer, during the period the offer is pending, for 30 days immediately following the rejection of the offer, and for any period when a timely filed appeal from the rejection is being considered by Appeals.

(2) Revised offers submitted following rejection. --If, following the rejection of an offer to compromise, the taxpayer makes a good faith revision of that offer and submits the revised offer within 30 days after the date of rejection, the IRS will not levy to collect from the taxpayer the liability that is the subject of the revised offer to compromise while that revised offer is pending.
(3) Jeopardy. --The IRS may levy to collect the liability that is the subject of an offer to compromise during the period the IRS is evaluating whether that offer will be accepted if it determines that collection of the liability is in jeopardy.

(4) Offers to compromise determined by IRS to be nonprocessable or submitted solely for purposes of delay. --If the IRS determines, under paragraph (d)(2) of this section, that a pending offer did not contain sufficient information to permit evaluation of whether the offer should be accepted, that the offer was submitted solely to delay collection, or that the offer was otherwise nonprocessable, then the IRS may levy to collect the liability that is the subject of that offer at any time after it returns the offer to the taxpayer.

(5) Offsets under section 6402. --Notwithstanding the evaluation and processing of an offer to compromise, the IRS may, in accordance with section 6402, credit any overpayments made by the taxpayer against a liability that is the subject of an offer to compromise and may offset such overpayments against other liabilities owed by the taxpayer to the extent authorized by section 6402.

(6) Proceedings in court. --Except as otherwise provided in this paragraph (g)(6), the IRS will not refer a case to the Department of Justice for the commencement of a proceeding in court, against a person named in a pending offer to compromise, if levy to collect the liability is prohibited by paragraph (g)(1) of this section. Without regard to whether a person is named in a pending offer to compromise, however, the IRS may authorize the Department of Justice to file a counterclaim or third-party complaint in a refund action or to join that person in any other proceeding in which liability for the tax that is the subject of the pending offer to compromise may be established or disputed, including a suit against the United States under 28 U.S.C. 2410. In addition, the United States may file a claim in any bankruptcy proceeding or insolvency action brought by or against such person.

(h) Deposits. --Sums submitted with an offer to compromise a liability or during the pendency of an offer to compromise are considered deposits and will not be applied to the liability until the offer is accepted unless the taxpayer provides written authorization for application of the payments. If an offer to compromise is withdrawn, is determined to be nonprocessable, or is submitted solely for purposes of delay and returned to the taxpayer, any amount tendered with the offer, including all installments paid on the offer, will be refunded without interest. If an offer is rejected, any amount tendered with the offer, including all installments paid on the offer, will be refunded, without interest, after the conclusion of any review sought by the taxpayer with Appeals. Refund will not be required if the taxpayer has agreed in writing that amounts tendered pursuant to the offer may be applied to the liability for which the offer was submitted.

(i) Statute of limitations
(1) Suspension of the statute of limitations on collection. --The statute of limitations on collection will be suspended while levy is prohibited under paragraph (g)(1) of this section.
(2) Extension of the statute of limitations on assessment. --For any offer to compromise, the IRS may require, where appropriate, the extension of the statute of limitations on assessment. However, in any case where waiver of the running of the statutory period of limitations on assessment is sought, the taxpayer must be notified of the right to refuse to extend the period of limitations or to limit the extension to particular issues or particular periods of time.

(j) Inspection with respect to accepted offers to compromise. --For provisions relating to the inspection of returns and accepted offers to compromise, see section 6103(k)(1).



situations where doubt as to collectibility or doubt as to liability would not be grounds for acceptance of an offer, the IRS may accept the offer in order to promote effective tax administration if:
(1) collection of the full amount of the liability will create economic hardship under Reg. §301.6343-1; or

(2) regardless of the taxpayer's financial condition, exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance by the taxpayer; and

(3) compromise of the liability will not undermine compliance by taxpayers with the tax laws (Reg. §301.7122-1(b)(3)).

Factors that support (but are not conclusive of) a determination that acceptance of the offer would not undermine compliance by taxpayers with the tax laws include:
(1) the taxpayer does not have a history of noncompliance with the filing and payment requirements under the Code;

(2) the taxpayer has not taken deliberate actions to avoid payment of taxes; and

(3) the taxpayer has not encouraged others to refuse to comply with the tax laws (Reg. §301.7122-1(c)(3)(ii)).

In determining whether to accept or reject an offer to compromise, all facts and circumstances are considered, including whether the circumstances of a particular case warrant acceptance of an amount that might not otherwise be acceptable under the Secretary's policies and procedures (Reg. §301.7122-1(c)).

Examples of factors or special circumstances that might be considered by the IRS when evaluating whether economic hardship or special circumstances exist in a particular case may include, but are not limited to:
(1) advanced age;

(2) serious illness where recovery is unlikely; or

(3) any other factors that might impact the taxpayer's ability to pay the reasonable potential collection amount and still provide for the taxpayer's family.

Economic hardship. Factors that support a finding of economic hardship for purposes of Reg. §301.7122-1(c)(3)(i) may include factors such as:
(1) the taxpayer is incapable of earning a living due to a long-term illness, medical condition, or disability and it is reasonably foreseeable that the taxpayer's financial resources will be exhausted providing for care and support during the course of the condition;

(2) the liquidation of the taxpayer's assets would render the taxpayer unable to meet basic living expenses; and

(3) the taxpayer cannot borrow against the equity in the taxpayer's assets and disposition or seizure of such assets would have sufficient negative consequences such that enforced collection is unlikely (Reg. §301.7122-1(c)(3)(i)).

Example (1):
Jamie Jones has submitted an offer in compromise but has sufficient assets to satisfy her outstanding tax liability. However, Jamie provides full-time care and assistance to Sue, her dependent child who suffers from a rare kidney disorder. It is expected that Jamie will need to use the equity in her assets to provide for the basic living expenses and medical care for her child. If Jamie has an overall compliance history that does not weigh against compromise, her offer will be accepted.

Example (2):
Marcia Munson is retired and her only income is from her pension. Marcia's only asset is an IRA and the funds are sufficient to satisfy the liability. However, liquidation of the IRA would leave Marcia without means to pay for her basic living expenses. If Marcia has an overall compliance history that does not weigh against compromise, her offer will be accepted.

Example (3):
Mortenson Marketing, Inc. suffered an embezzlement loss despite retaining outside auditors and adopting other precautions. Although Mike Mortenson, the president and CEO, signed employment tax returns and signed checks for payment of all employment tax liabilities, the embezzling employee was able to intercept the checks and divert the funds. At the time the embezzlement is discovered, Mike contacts the IRS and begins recovery efforts. However, Mike's recovery efforts fail miserably. Although the company has sufficient accounts receivable to satisfy the tax liability, the company would not be able to remain in business if the funds were seized. Further, while the company would continue to generate a profit if it remained in business, those profits would not be sufficient to pay the liability before the statute of limitations expired with respect to the liability. If the company's overall compliance history does not weigh against compromise, the company's offer will be accepted.

Exceptional circumstances. The following examples illustrate situations when offers may be accepted for exceptional circumstances:

Example (4):
In October, 2007, Mark Day developed a serious illness that resulted in almost continuous hospitalizations for a number of years. Mark's medical condition was such that he was not able to attend to his financial affairs or file his tax returns during his illness. Mark's health has now improved and he has promptly begun to attend to his tax affairs. Mark discovers that the IRS filed a substitute return for the 2007 tax year based on information returns it had received and assessed a tax deficiency. When Mark discovers the liability, the total tax bill is more than three times the original tax liability. If Mark's tax compliance history does not weigh against compromise, his offer will be accepted.
FINAL-REG, 2008FED ¶41,111, §301.7122-1., Compromises
Caution: Reg. §301.7122-1 does not reflect recent law changes. For details, see ¶41,111.01.




Compromises
In general

(1) If the Secretary determines that there are grounds for compromise under this section, the Secretary may, at the Secretary's discretion, compromise any civil or criminal liability arising under the internal revenue laws prior to reference of a case involving such a liability to the Department of Justice for prosecution or defense.

(2) An agreement to compromise may relate to a civil or criminal liability for taxes, interest, or penalties. Unless the terms of the offer and acceptance expressly provide otherwise, acceptance of an offer to compromise a civil liability does not remit a criminal liability, nor does acceptance of an offer to compromise a criminal liability remit a civil liability.




(b) Grounds for compromise

(1) Doubt as to liability. --Doubt as to liability exists where there is a genuine dispute as to the existence or amount of the correct tax liability under the law. Doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability. See paragraph (f)(4) of this section for special rules applicable to rejection of offers in cases where the Internal Revenue Service (IRS) is unable to locate the taxpayer's return or return information to verify the liability.

(2) Doubt as to collectibility. --Doubt as to collectibility exists in any case where the taxpayer's assets and income are less than the full amount of the liability.




(3) Promote effective tax administration

(i) A compromise may be entered into to promote effective tax administration when the Secretary determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship within the meaning of §301.6343-1.

(ii) If there are no grounds for compromise under paragraphs (b)(1), (2), or (3)(i) of this section, the IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability. Compromise will be justified only where, due to exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. A taxpayer proposing compromise under this paragraph (b)(3)(ii) will be expected to demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid his liability in full.

(iii) No compromise to promote effective tax administration may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws.




(c) Special rules for evaluating offers to compromise

(1) In general. --Once a basis for compromise under paragraph (b) of this section has been identified, the decision to accept or reject an offer to compromise, as well as the terms and conditions agreed to, is left to the discretion of the Secretary. The determination whether to accept or reject an offer to compromise will be based upon consideration of all the facts and circumstances, including whether the circumstances of a particular case warrant acceptance of an amount that might not otherwise be acceptable under the Secretary's policies and procedures.

(2) Doubt as to collectibility

(i) Allowable Expenses. --A determination of doubt as to collectibility will include a determination of ability to pay. In determining ability to pay, the Secretary will permit taxpayers to retain sufficient funds to pay basic living expenses. The determination of the amount of such basic living expenses will be founded upon an evaluation of the individual facts and circumstances presented by the taxpayer's case. To guide this determination, guidelines published by the Secretary on national and local living expense standards will be taken into account.

(ii) Nonliable spouses

(A) In general. --Where a taxpayer is offering to compromise a liability for which the taxpayer's spouse has no liability, the assets and income of the nonliable spouse will not be considered in determining the amount of an adequate offer. The assets and income of a nonliable spouse may be considered, however, to the extent property has been transferred by the taxpayer to the nonliable spouse under circumstances that would permit the IRS to effect collection of the taxpayer's liability from such property (e.g., property that was conveyed in fraud of creditors), property has been transferred by the taxpayer to the nonliable spouse for the purpose of removing the property from consideration by the IRS in evaluating the compromise, or as provided in paragraph (c)(2)(ii)(B) of this section. The IRS also may request information regarding the assets and income of the nonliable spouse for the purpose of verifying the amount of and responsibility for expenses claimed by the taxpayer.

(B) Exception. --Where collection of the taxpayer's liability from the assets and income of the nonliable spouse is permitted by applicable state law (e.g., under state community property laws), the assets and income of the nonliable spouse will be considered in determining the amount of an adequate offer except to the extent that the taxpayer and the nonliable spouse demonstrate that collection of such assets and income would have a material and adverse impact on the standard of living of the taxpayer, the nonliable spouse, and their dependents.




(3) Compromises to promote effective tax administration

(i) Factors supporting (but not conclusive of) a determination that collection would cause economic hardship within the meaning of paragraph (b)(3)(i) of this section include, but are not limited to --

(A) Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the condition;

(B) Although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and

(C) Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.

(ii) Factors supporting (but not conclusive of) a determination that compromise would undermine compliance within the meaning of paragraph (b)(3)(iii) of this section include, but are not limited to --

(A) Taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code;

(B) Taxpayer has taken deliberate actions to avoid the payment of taxes; and

(C) Taxpayer has encouraged others to refuse to comply with the tax laws.

(iii) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the economic hardship provisions of paragraph (b)(3)(i) of this section:

Example 1. The taxpayer has assets sufficient to satisfy the tax liability. The taxpayer provides full time care and assistance to her dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in his assets to provide for adequate basic living expenses and medical care for his child. The taxpayer's overall compliance history does not weigh against compromise.

Example 2. The taxpayer is retired and his only income is from a pension. The taxpayer's only asset is a retirement account, and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. The taxpayer's overall compliance history does not weigh against compromise.

Example 3. The taxpayer is disabled and lives on a fixed income that will not, after allowance of basic living expenses, permit full payment of his liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate his disability. The taxpayer's equity in the house is sufficient to permit payment of the liability he owes. However, because of his disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayer's home has been specially equipped to accommodate his disability, forced sale of the taxpayer's residence would create severe adverse consequences for the taxpayer. The taxpayer's overall compliance history does not weigh against compromise.

(iv) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the public policy and equity provisions of paragraph (b)(3)(ii) of this section:

Example 1. In October of 1986, the taxpayer developed a serious illness that resulted in almost continuous hospitalizations for a number of years. The taxpayer's medical condition was such that during this period the taxpayer was unable to manage any of his financial affairs. The taxpayer has not filed tax returns since that time. The taxpayer's health has now improved and he has promptly begun to attend to his tax affairs. He discovers that the IRS prepared a substitute for return for the 1986 tax year on the basis of information returns it had received and had assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill is more than three times the original tax liability. The taxpayer's overall compliance history does not weigh against compromise.

Example 2. The taxpayer is a salaried sales manager at a department store who has been able to place $2,000 in a tax-deductible IRA account for each of the last two years. The taxpayer learns that he can earn a higher rate of interest on his IRA savings by moving those savings from a money management account to a certificate of deposit at a different financial institution. Prior to transferring his savings, the taxpayer submits an e-mail inquiry to the IRS at its Web Page, requesting information about the steps he must take to preserve the tax benefits he has enjoyed and to avoid penalties. The IRS responds in an answering e-mail that the taxpayer may withdraw his IRA savings from his neighborhood bank, but he must redeposit those savings in a new IRA account within 90 days. The taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, the taxpayer learns that he has been misinformed about the required rollover period and that he is liable for additional taxes, penalties and additions to tax for not having redeposited the amount within 60 days. Had it not been for the erroneous advice that is reflected in the taxpayer's retained copy of the IRS e-mail response to his inquiry, the taxpayer would have redeposited the amount within the required 60-day period. The taxpayer's overall compliance history does not weigh against compromise.

(d) Procedures for submission and consideration of offers

(1) In general. --An offer to compromise a tax liability pursuant to section 7122 must be submitted according to the procedures, and in the form and manner, prescribed by the Secretary. An offer to compromise a tax liability must be made in writing, must be signed by the taxpayer under penalty of perjury, and must contain all of the information prescribed or requested by the Secretary. However, taxpayers submitting offers to compromise liabilities solely on the basis of doubt as to liability will not be required to provide financial statements.

(2) When offers become pending and return of offers. --An offer to compromise becomes pending when it is accepted for processing. The IRS may not accept for processing any offer to compromise a liability following reference of a case involving such liability to the Attorney General for prosecution or defense. If an offer accepted for processing does not contain sufficient information to permit the IRS to evaluate whether the offer should be accepted, the IRS will request that the taxpayer provide the needed additional information. If the taxpayer does not submit the additional information that the IRS has requested within a reasonable time period after such a request, the IRS may return the offer to the taxpayer. The IRS may also return an offer to compromise a tax liability if it determines that the offer was submitted solely to delay collection or was otherwise nonprocessable. An offer returned following acceptance for processing is deemed pending only for the period between the date the offer is accepted for processing and the date the IRS returns the offer to the taxpayer. See paragraphs (f)(5)(ii) and (g)(4) of this section for rules regarding the effect of such returns of offers.

(3) Withdrawal. --An offer to compromise a tax liability may be withdrawn by the taxpayer or the taxpayer's representative at any time prior to the IRS' acceptance of the offer to compromise. An offer will be considered withdrawn upon the IRS' receipt of written notification of the withdrawal of the offer either by personal delivery or certified mail, or upon issuance of a letter by the IRS confirming the taxpayer's intent to withdraw the offer.

(e) Acceptance of an offer to compromise a tax liability

(1) An offer to compromise has not been accepted until the IRS issues a written notification of acceptance to the taxpayer or the taxpayer's representative.

(2) As additional consideration for the acceptance of an offer to compromise, the IRS may request that taxpayer enter into any collateral agreement or post any security which is deemed necessary for the protection of the interests of the United States.

(3) Offers may be accepted when they provide for payment of compromised amounts in one or more equal or unequal installments.

(4) If the final payment on an accepted offer to compromise is contingent upon the immediate and simultaneous release of a tax lien in whole or in part, such payment must be made in accordance with the forms, instructions, or procedures prescribed by the Secretary.

(5) Acceptance of an offer to compromise will conclusively settle the liability of the taxpayer specified in the offer. Compromise with one taxpayer does not extinguish the liability of, nor prevent the IRS from taking action to collect from, any person not named in the offer who is also liable for the tax to which the compromise relates. Neither the taxpayer nor the Government will, following acceptance of an offer to compromise, be permitted to reopen the case except in instances where --

(i) False information or documents are supplied in conjunction with the offer;

(ii) The ability to pay or the assets of the taxpayer are concealed; or

(iii) A mutual mistake of material fact sufficient to cause the offer agreement to be reformed or set aside is discovered.
(6) Opinion of Chief Counsel. --Except as otherwise provided in this paragraph (e)(6), if an offer to compromise is accepted, there will be placed on file the opinion of the Chief Counsel for the IRS with respect to such compromise, along with the reasons therefor. However, no such opinion will be required with respect to the compromise of any civil case in which the unpaid amount of tax assessed (including any interest, additional amount, addition to the tax, or assessable penalty) is less than $50,000. Also placed on file will be a statement of --

(i) The amount of tax assessed;

(ii) The amount of interest, additional amount, addition to the tax, or assessable penalty, imposed by law on the person against whom the tax is assessed; and

(iii) The amount actually paid in accordance with the terms of the compromise.
(f) Rejection of an offer to compromise

(1) An offer to compromise has not been rejected until the IRS issues a written notice to the taxpayer or his representative, advising of the rejection, the reason(s) for rejection, and the right to an appeal.

(2) The IRS may not notify a taxpayer or taxpayer's representative of the rejection of an offer to compromise until an independent administrative review of the proposed rejection is completed.

(3) No offer to compromise may be rejected solely on the basis of the amount of the offer without evaluating that offer under the provisions of this section and the Secretary's policies and procedures regarding the compromise of cases.

(4) Offers based upon doubt as to liability. --Offers submitted on the basis of doubt as to liability cannot be rejected solely because the IRS is unable to locate the taxpayer's return or return information for verification of the liability.

(5) Appeal of rejection of an offer to compromise

(i) In general. --The taxpayer may administratively appeal a rejection of an offer to compromise to the IRS Office of Appeals (Appeals) if, within the 30-day period commencing the day after the date on the letter of rejection, the taxpayer requests such an administrative review in the manner provided by the Secretary.

(ii) Offer to compromise returned following a determination that the offer was nonprocessable, a failure by the taxpayer to provide requested information, or a determination that the offer was submitted for purposes of delay. --Where a determination is made to return offer documents because the offer to compromise was nonprocessable, because the taxpayer failed to provide requested information, or because the IRS determined that the offer to compromise was submitted solely for purposes of delay under paragraph (d)(2) of this section, the return of the offer does not constitute a rejection of the offer for purposes of this provision and does not entitle the taxpayer to appeal the matter to Appeals under the provisions of this paragraph (f)(5). However, if the offer is returned because the taxpayer failed to provide requested financial information, the offer will not be returned until a managerial review of the proposed return is completed.

(g) Effect of offer to compromise on collection activity
(1) In general. --The IRS will not levy against the property or rights to property of a taxpayer who submits an offer to compromise, to collect the liability that is the subject of the offer, during the period the offer is pending, for 30 days immediately following the rejection of the offer, and for any period when a timely filed appeal from the rejection is being considered by Appeals.
(2) Revised offers submitted following rejection. --If, following the rejection of an offer to compromise, the taxpayer makes a good faith revision of that offer and submits the revised offer within 30 days after the date of rejection, the IRS will not levy to collect from the taxpayer the liability that is the subject of the revised offer to compromise while that revised offer is pending.
(3) Jeopardy. --The IRS may levy to collect the liability that is the subject of an offer to compromise during the period the IRS is evaluating whether that offer will be accepted if it determines that collection of the liability is in jeopardy.

(4) Offers to compromise determined by IRS to be nonprocessable or submitted solely for purposes of delay. --If the IRS determines, under paragraph (d)(2) of this section, that a pending offer did not contain sufficient information to permit evaluation of whether the offer should be accepted, that the offer was submitted solely to delay collection, or that the offer was otherwise nonprocessable, then the IRS may levy to collect the liability that is the subject of that offer at any time after it returns the offer to the taxpayer.

(5) Offsets under section 6402. --Notwithstanding the evaluation and processing of an offer to compromise, the IRS may, in accordance with section 6402, credit any overpayments made by the taxpayer against a liability that is the subject of an offer to compromise and may offset such overpayments against other liabilities owed by the taxpayer to the extent authorized by section 6402.

(6) Proceedings in court. --Except as otherwise provided in this paragraph (g)(6), the IRS will not refer a case to the Department of Justice for the commencement of a proceeding in court, against a person named in a pending offer to compromise, if levy to collect the liability is prohibited by paragraph (g)(1) of this section. Without regard to whether a person is named in a pending offer to compromise, however, the IRS may authorize the Department of Justice to file a counterclaim or third-party complaint in a refund action or to join that person in any other proceeding in which liability for the tax that is the subject of the pending offer to compromise may be established or disputed, including a suit against the United States under 28 U.S.C. 2410. In addition, the United States may file a claim in any bankruptcy proceeding or insolvency action brought by or against such person.

(h) Deposits. --Sums submitted with an offer to compromise a liability or during the pendency of an offer to compromise are considered deposits and will not be applied to the liability until the offer is accepted unless the taxpayer provides written authorization for application of the payments. If an offer to compromise is withdrawn, is determined to be nonprocessable, or is submitted solely for purposes of delay and returned to the taxpayer, any amount tendered with the offer, including all installments paid on the offer, will be refunded without interest. If an offer is rejected, any amount tendered with the offer, including all installments paid on the offer, will be refunded, without interest, after the conclusion of any review sought by the taxpayer with Appeals. Refund will not be required if the taxpayer has agreed in writing that amounts tendered pursuant to the offer may be applied to the liability for which the offer was submitted.

(i) Statute of limitations
(1) Suspension of the statute of limitations on collection. --The statute of limitations on collection will be suspended while levy is prohibited
(2) Extension of the statute of limitations on assessment. --For any offer to compromise, the IRS may require, where appropriate, the extension of the statute of limitations on assessment. However, in any case where waiver of the running of the statutory period of limitations on assessment is sought, the taxpayer must be notified of the right to refuse to extend the period of limitations or to limit the extension to particular issues or particular periods of time.
(j) Inspection with respect to accepted offers to compromise. --For provisions relating to the inspection of returns and accepted offers to compromise, see section 6103(k)(1).


301.6343-1(b)(4) Economic hardship

(i) General rule . --The levy is creating an economic hardship due to the financial condition of an individual taxpayer. This condition applies if satisfaction of the levy in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the director and will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living.

(ii) Information from taxpayer . --In determining a reasonable amount for basic living expenses the director will consider any information provided by the taxpayer including --

(A) The taxpayer's age, employment status and history, ability to earn, number of dependents, and status as a dependent of someone else;

(B) The amount reasonably necessary for food, clothing, housing (including utilities, home-owner insurance, home-owner dues, and the like), medical expenses (including health insurance), transportation, current tax payments (including federal, state, and local), alimony, child support, or other court-ordered payments, and expenses necessary to the taxpayer's production of income (such as dues for a trade union or professional organization, or child care payments which allow the taxpayer to be gainfully employed);

(C) The cost of living in the geographic area in which the taxpayer resides;

(D) The amount of property exempt from levy which is available to pay the taxpayer's expenses;

(E) Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster; and

(F) Any other factor that the taxpayer claims bears on economic hardship and brings to the attention of the director.

(iii) Good faith requirement . --In addition, in order to obtain a release of a levy under this subparagraph, the taxpayer must act in good faith. Examples of failure to act in good faith include, but are not limited to, falsifying financial information, inflating actual expenses or costs, or failing to make full disclosure of assets.

Part 5. Collecting Process
Chapter 8. Offer in Compromise
Section 11. Effective Tax Administration
________________________________________
5.8.11 Effective Tax Administration
• 5.8.11.1 Overview
• 5.8.11.2 Legal Basis for Effective Tax Administration Offer
• 5.8.11.3 Initial Processing of Effective Tax Administration Offers
• 5.8.11.4 Evaluation of Offers
• 5.8.11.5 Documentation and Verification
• 5.8.11.6 Final Processing
• Exhibit 5.8.11-1 Non-Hardship Effective Tax Administration (ETA) Offer in Compromise (OIC) Check Sheet
5.8.11.1 (09-01-2005)
Overview
1. As part of the IRS Restructuring and Reform Act of 1998 (RRA 98), Congress added section 7122(c) to the Internal Revenue Code. That section provides that the Service shall set forth guidelines for determining when an offer in compromise should be accepted. Congress explained that these guidelines should allow the Service to consider:
• Hardship,
• Public policy, and
• Equity

Treasury Regulation § 301.7122-1 authorizes the Service to consider offers raising these issues. These offers are called Effective Tax Administration (ETA) offers.
2. The availability of an Effective Tax Administration (ETA) offer encourages taxpayers to comply with the tax laws because taxpayers will:
• Believe the laws are fair and equitable, and
• Gain confidence that the laws will be applied to everyone in the same manner.

The Effective Tax Administration (ETA) offer allows for situations where tax liabilities should not be collected even though:
• The tax is legally owed, and
• The taxpayer has the ability to pay it in full.
3. If a taxpayer submits an Effective Tax Administration (ETA) offer, first investigate the offer for:
• Doubt as to Liability (DATL), and/or
• Doubt as to Collectibility (DATC).
An Effective Tax Administration (ETA) offer can only be considered when the Service has determined that the taxpayer does not qualify for consideration under Doubt as to Liability (DATL) and/or Doubt as to Collectibility (DATC).
The taxpayer must include the Collection Information Statement (Form 433-A and/or Form 433-B) when submitting an offer requesting consideration under Effective Tax Administration (ETA).
4. Economic hardship standard of § 301.6343-1 specifically applies only to individuals.
5.8.11.2 (09-01-2005)
Legal Basis for Effective Tax Administration Offer
1. Compared to Doubt as to Collectibility (DATC)
In a Doubt as to Collectibility (DATC) offer, the tax liability equals or exceeds the taxpayers reasonable collection potential (RCP) which is:
• Net equity, plus
• Future income
In an Effective Tax Administration (ETA) offer, the tax liability is less than the taxpayers reasonable collection potential (RCP). The taxes owed can be collected in full either:
• In a lump sum, or
• Through an installment agreement (IA)
A Doubt as to Collectibility (DATC) offer does not convert to an Effective Tax Administration (ETA) offer if the Offer Investigator and the taxpayer cannot agree on an acceptable offer amount.
2. Compared to Doubt as to Collectibility with Special Circumstances (DCSC)
Taxpayers may qualify for an Effective Tax Administration (ETA) offer when their reasonable collection potential (RCP) is greater than the liability but there are economic or public policy/equity circumstances that would justify accepting the offer for an amount less than full payment.
Example:
The taxpayer owes $20,000. The reasonable collection potential (RCP) is $25,000. The taxpayer could have an offer accepted for less than the total liability of $20,000 under the Effective Tax Administration (ETA) provisions if economic hardship, or public policy/equity issues exist which would support an acceptance recommendation.

Taxpayers could have an offer accepted under Doubt as to Collectibility with Special Circumstance (DCSC) when their reasonable collection potential (RCP) is less than their liability, but there are economic hardship or public policy/equity factors that would justify accepting the offer for an amount less than the reasonable collection potential (RCP).
Example:
The taxpayer owes $20,000. However his reasonable collection potential (RCP) is $15,000. The offer does not meet the legal basis for an Effective Tax Administration (ETA) because the RCP is lower than the liability. However, applying the same factors of economic hardship, or public policy/equity, an offer could be accepted for less than the RCP ($15,000) under Doubt as to Collectibility with Special Circumstance (DCSC) provisions.
3. Compared to Doubt as to Liability
An offer can be considered under Effective Tax Administration (ETA) provisions only when there are no doubt to liability issues.
4. In reaching these determinations:
If… Then…
The Service determines that there is doubt as to the amount of the liability the taxpayer owes Taxpayer is not eligible for Effective Tax Administration (ETA) consideration. The offer is considered based on the Doubt as to Liability (DATL) issue.
The Service determines that the taxpayers equity in assets plus future income (RCP) does not exceed the amount of the tax liability Taxpayer is not eligible for an Effective Tax Administration (ETA) offer. The offer is considered based on Doubt as to Collectibility (DATC).
However, hardship or public policy/equity may be present in the case to allow consideration under Doubt as to Collectibility with Special Circumstances (DCSC).
The Service determines the taxpayer is not eligible for compromise based on Doubt as to Liability (DATL) or Doubt as to Collectibility (DATC) and the taxpayer can demonstrate that collection of the tax liability in full would create economic hardship, or demonstrate that there is compelling public policy or equity issues in the case that would provide sufficient basis for compromise The taxpayer would be eligible for Effective Tax Administration (ETA) consideration.
5. Before we can consider a compromise based on economic hardship or public policy/equity considerations, three factors must exist:
A. A liability has been or will be assessed against taxpayer(s) before acceptance of the offer.
B. The net equity in assets plus future income or reasonable collection potential (RCP) must be greater than the amount owed.
C. Exceptional circumstances exist, such as the collection of the tax would create an economic hardship, or there is compelling public policy or equity considerations that provide sufficient basis for compromise.
5.8.11.2.1 (09-01-2005)
Economic Hardship
1. When a taxpayers liability can be collected in full but collection would create an economic hardship, an Effective Tax Administration (ETA) offer based on economic hardship can be considered.
2. The definition of economic hardship as it applies to Effective Tax Administration (ETA) offers is derived from Treasury Regulations § 301.6343-1. Economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the Commissioner and will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living.
Note:
Because economic hardship is defined as the inability to meet reasonable basic living expenses, it applies only to individuals (including sole proprietorship entities). Compromise on economic hardship grounds is not available to corporations, partnerships, or other non-individual entities.
3. The taxpayers financial information and special circumstances must be examined to determine if they qualify for an Effective Tax Administration (ETA) offer based on economic hardship. Financial analysis includes reviewing basic living expenses as well as other considerations.
4. The taxpayers income and basic living expenses must be considered to determine if the claim for economic hardship should be accepted. Basic living expenses are those expenses that provide for health and welfare and production of income of the taxpayer and the taxpayers family. Some basic living expenses are limited to the National Standards while other expenses are limited to Local Standards. Deviation from these standards is permissible if and when the taxpayer is able to justify expenses that exceed these limits.
5. In addition to the basic living expenses, other factors to consider that impact upon the taxpayers financial condition include:
• The taxpayers age and employment status,
• Number, age, and health of the taxpayers dependents,
• Cost of living in the area the taxpayer resides, and
• Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster.
Note:
This list is not all-inclusive. Other factors may be considered in making an economic hardship determination.
6. Factors that support an economic hardship determination may include:
1. The taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability and it is reasonably foreseeable that the financial resources will be exhausted providing for care and support during the course of the condition.
2. The taxpayer may have a set monthly income and no other means of support and the income is exhausted each month in providing for the care of dependents.
3. The taxpayer has assets, but is unable to borrow against the equity in those assets, and liquidation to pay the outstanding tax liabilitie(s) would render the taxpayer unable to meet basic living expenses.
Note:
These factors are representative of situations the Service regularly encounters when working with taxpayers to resolve delinquent accounts. They are not intended to provide an exhaustive list of the types of cases that can be compromised based on economic hardship.
7. Compromise under the Effective Tax Administration (ETA) economic hardship provision is permissible if acceptance does not undermine compliance. The public should not perceive that the taxpayer whose offer is accepted benefited by not complying with the tax laws. Factors supporting a determination that compromise would undermine compliance include, but are not limited to:
• The taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code.
• The taxpayer has taken deliberate actions to avoid the payment of taxes.
• The taxpayer has encouraged others to refuse to comply with the tax laws.
Note:
There may be other situations where compromise would be undermined.
8. The following examples illustrate the types of cases that may be compromised under the economic hardship standard.
Example:
The taxpayer has assets sufficient to satisfy the tax liability and provides full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. The taxpayers overall compliance history does not weigh against compromise.

Example:
The taxpayer is retired and the only income is from a pension. The only asset is a retirement account and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without adequate means to provide for basic living expenses. The taxpayers overall compliance history does not weigh against compromise.

Example:
The taxpayer is disabled and lives on a fixed income that will not, after allowance of adequate basic living expenses, permit full payment of the liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate for a disability. The equity in the house is sufficient to permit payment of the liability owed. However, because of the disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayers home has been specially equipped to accommodate the disability, forced sale of the taxpayers residence would create severe adverse consequences for the taxpayer, making such a sale unlikely. The taxpayers overall compliance history does not weigh against compromise.
9. The economic hardship standard authorizes compromise regardless of the cause of the liability, provided compromise does not undermine compliance by other taxpayers.
Example:
The taxpayer submitted an Effective Tax Administration (ETA) offer based on economic hardship. The financial statement appears to support the offer. When a research of the county property records is conducted, it is noted that the home was transferred to a child for $100 plus love and affection. The transfer of the home was made after the tax was assessed. It is confirmed that deliberate actions were taken to avoid the payment of tax; therefore, the offer should not be accepted.
10. In economic hardship cases, an acceptable offer amount is determined by analyzing the financial information, supporting documentation, and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.
Example:
The taxpayer was diagnosed with an illness that eventually will hinder any ability to work. Although currently employed, the taxpayer will soon be forced to quit their job and use personal funds for basic living expenses. The taxpayer owes $100,000 and has a reasonable collection potential of $150,000. An offer was submitted for $35,000. Through the investigation, it is determined that collecting more than $50,000 would cause an economic hardship for the taxpayer since it would hinder the ability to meet reasonable living expenses, including ongoing medical expenses. The taxpayer is advised to raise the offer to $50,000 since it is an amount the Service can collect without creating an economic hardship.
11. The existence of economic hardship criteria does not dictate that an offer must be accepted. An acceptable offer amount must still be determined based on a full financial analysis and negotiation with the taxpayer. When hardship criteria are identified but the taxpayer does not offer an acceptable amount, the offer should not be recommended for acceptance.
5.8.11.2.2 (09-01-2005)
Public Policy or Equity Grounds
1. Where there is no Doubt as to Liability (DATL), no Doubt as to Collectibility (DATC), and the liability could be collected in full without causing economic hardship, the Service may compromise to promote Effective Tax Administration (ETA) where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for accepting less than full payment. Compromise is authorized on this basis only where, due to exceptional circumstances, collection in full would undermine public confidence that the tax laws are being administered in a fair and equitable manner. Because the Service assumes that Congress imposes tax liabilities only where it determines it is fair to do so, compromise on these grounds will be rare.
2. The Service recognizes that compromise on these grounds will often raise the issue of disparate treatment of taxpayers who can pay in full and whose liabilities arose under substantially similar circumstances. Taxpayers seeking compromise on this basis bear the burden of demonstrating circumstances that are compelling enough to justify compromise notwithstanding this inherent inequity.
3. Compromise on public policy or equity grounds is not authorized based solely on a taxpayers belief that a provision of the tax law is itself unfair. Where a taxpayer is clearly liable for taxes, penalties, or interest due to operation of law, a finding that the law is unfair would undermine the will of Congress in imposing liability under those circumstances.
Example:
The taxpayer argues that collection would be inequitable because the liability resulted from a discharge of indebtedness rather than from wages. Because Congress has clearly stated that a discharge of indebtedness results in taxable income to the taxpayer it would not promote Effective Tax Administration (ETA) to compromise on these grounds. See Internal Revenue Code (IRC) 61(a)(12).
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. Depending on the taxpayers particular facts and circumstances, however, compromise may be authorized on the grounds of Doubt as to Collectibility (DATC), or because collection of the full liability would cause an economic hardship within the meaning of paragraph (b)(4)(i)(A) of this section.
Note:
In both of these examples, the taxpayers are essentially claiming that Congress enacted unfair statutes and are arguing that the Service should use its compromise authority to rewrite those statute based on a perception of unfairness. Compromise for that reason would not promote effective tax administration. The compromise authority under Section 7122 is not so broad as to allow the Service to disregard or override the judgments of Congress.
4. Section 6404(e) grants the Service the discretion to abate interest attributable to certain errors and delays by the Service. It would not promote Effective Tax Administration (ETA) to compromise a liability based solely on an assertion of delay by the Service if that delay would not support relief from interest under section 6404(e).
5. Compromise may promote Effective Tax Administration (ETA) where the taxpayer was incapacitated and thus unable to comply with the tax laws.
Example:
In October 1986, the taxpayer developed a serious illness that resulted in almost continuous hospitalization for a number of years. The medical condition was such that during this period, the taxpayer was unable to manage any of their financial affairs. The taxpayer has not filed tax returns since that time. The taxpayers health has now improved and has promptly begun to attend to tax matters. The taxpayer discovered that the IRS prepared a substitute for return for the 1986 tax year based on information documents received and assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill was more than three times the original tax liability. The taxpayers overall compliance history does not weigh against compromise.

Note:
In this situation, the Service should first work with the taxpayer and attempt to prepare an accurate return for the 1986 tax year and adjust the taxpayers account accordingly. Following that, the Service should consider accepting a compromise that would approximate the amount the taxpayer would have been assessed had there been an ability to comply with his filing and payment responsibilities in a timely manner. Such a compromise would be fair and equitable to the taxpayer and, under these circumstances, would advance the public policy of voluntary compliance with the tax laws.
6. It would not promote Effective Tax Administration (ETA) to compromise with the taxpayer in (5), above, if the investigation revealed that the taxpayer was able to attend to matters other than those due in 1986 during the time of the illness. For example, assume the taxpayer discussed, paid all other bills and continued to successfully operate a business during the illness. Under such circumstances, compromise would not promote Effective Tax Administration (ETA), and could serve to undermine compliance by other taxpayers.
7. Compromise may promote Effective Tax Administration (ETA) where the taxpayers liability was caused by reasonable reliance on a statement issued by the Service that caused the taxpayer to incur a tax liability that would not otherwise have been incurred.
Example:
The taxpayer is a salaried sales manager at a department store who has been able to place $2,000 in a tax-deductible IRA account for each of the last two years. The taxpayer learns that a higher rate of interest can be earned on his IRA savings by moving the savings from a Money Management account to a Certificate of Deposit at a different financial institution. Prior to transferring the savings, the taxpayer submits an E-mail inquiry to the IRS at its Web Page, requesting information about the steps needed to preserve the tax benefits currently enjoyed and to avoid any penalty. The IRS responds by answering the E-mail that the taxpayer may withdraw the IRA savings from the neighborhood bank, but it must redeposited in a new IRA account within 90 days. The taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, the taxpayer learns that he has been misinformed about the required rollover period and is now liable for additional taxes, penalties and interest for not redepositing the amount within 60 days. Had the advice provided been accurate, the taxpayer would have redeposited the funds timely. The taxpayer retained a copy of the IRS E-mail for his records. The taxpayers overall compliance history does not weigh against compromise.

Note:
Because the tax liability in this example was caused by relying on the Service's erroneous statement, and the taxpayer clearly could have avoided the liability had the Service given correct information, it is reasonable to conclude that collection in full would cause other taxpayers to question the fairness of the tax system. The Service may consider accepting a compromise that would reflect the amount the taxpayer would now owe had the service not made an error.
8. Compromise may also promote Effective Tax Administration (ETA) where a taxpayers liability was directly caused by the Service and through no fault of the taxpayer.
Example:
The taxpayer is a closely-held corporation. The IRS audited the taxpayers tax returns for 1996, 1997, and 1998 and determined that the taxpayer was a personal holding company liable for personal holding company tax. The taxpayer agreed to immediate assessment of the tax, but attempted to take advantage of the deduction for deficiency dividends under section 547. Although the taxpayer made the distributions necessary to qualify for the deduction, the IRS made several errors in executing the required agreements and other paperwork. As a result, the taxpayer could not avail itself of the section 547 deduction. Under the statute, applicable regulations, and pertinent case law, there is no means by which the mistakes can be corrected to allow the taxpayer to take advantage of the deduction. There is documentary evidence that all of the required Service officials intended to complete the processing of the agreements and that, but for their failure to do so, the taxpayer would have qualified for the deduction. The taxpayer has no prior history of noncompliance.

Note:
That the tax liability was caused solely by an error on the part of the Service supports the determination that collection in full would cause other taxpayers to question the fairness of the tax system. Furthermore, the policies underlying the imposition of the personal holding company tax and the rules regarding deficiency deductions are not undermined by compromise under these circumstances. The Service may consider accepting a compromise that would reflect the amount the taxpayer would now owe had the Service not made an error.
9. In contrast, compromise would not be authorized based on mistakes by the Service that did not cause the tax liability. For example, providing an incorrect statement of the balance due does not authorized the compromise of additional interest that may have later accrued. However, any relief from interest attributable to errors or delays by the Service should be granted under the standards set forth in section 6404(e). Compromise that would undermine those standards would not promote Effective Tax Administration (ETA). Similarly, relief from penalties attributable to errors by the Service should be granted pursuant to the standards for relief set forth in section 6404(e) and the IRM.
10. The Service will not compromise on public policy or equity grounds based solelyon the argument that the acts of a third party caused the unpaid tax liability. Third parties include the taxpayers:
• Representative,
• Partner,
• Agent, or
• employee
Note:
The actions of a third party may be part of a fact pattern that, viewed as a whole, presents compelling public policy or equity concerns justifying compromise. As with all compromises based on public policy or equity, the taxpayers situation must be compelling enough to justify compromise even though similarly situated taxpayers may have paid in full.
11. Compromise on public policy or equity grounds promotes Effective Tax Administration (ETA) only where it does not undermine compliance by other taxpayers. In general, compromise would undermine compliance where other taxpayers viewing the compromise may conclude that the taxpayer benefited from a failure to comply with the tax laws (i.e. the result of the compromise places the taxpayer in a position better than they would occupy had they timely and fully met their obligations). Such cases present the danger that other taxpayers may consider it beneficial to take the chance of not complying with the tax laws or litigating an issue they would otherwise concede or settle, and relying on compromise at some later date as a safety net. Factors supporting a determination that compromise would undermine include, but are not limited to:
• The taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code.
• The taxpayer has taken deliberate actions to avoid the payment of taxes.
• The taxpayer has encouraged others to refuse to comply with the tax laws.
Note:
Additional factors such as the cause of the delinquency, length of non-compliance, and efforts to resolve non-compliance should also be considered. Generally a review of the last 3–5 years of compliance should be completed.
12. Once it has been determined that a case raises compelling public policy or equity considerations justifying compromise, the Service must still determine whether the amount offered by the taxpayer should be accepted to resolve the case. An acceptable offer amount should be based on a determination of what is fair and equitable under the circumstances. When public policy or equity considerations are identified but the taxpayer does not offer an acceptable amount, the offer should not be recommended for acceptance.
5.8.11.2.3 (09-01-2005)
Compromise Would Not Undermine Compliance With Tax Laws
1. No compromise to promote Effective Tax Administration (ETA) may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws. See IRM 5.8.11.2.1(7), 5.8.11.2.1(9) and 5.8.11.2.2(11) above, for additional information.
5.8.11.3 (09-01-2005)
Initial Processing of Effective Tax Administration Offers
1. Offers submitted on the grounds of Effective Tax Administration (ETA) will be worked either by the COIC units or field specialists.
2. Taxpayers seeking a compromise under Effective Tax Administration (ETA) will submit the Form 656, Offer in Compromise, selecting ETA in Item 6, along with the Collection Information Statement (CIS) (Form 433-A and/or Form 433-B). Taxpayers must complete the Form 656, Item 9 and document their special circumstances. The documentation should explain why collection of the liability in full would cause economic hardship, or the public policy/equity issues present that would justify compromising the liability. An additional attachment can be provided if additional space is needed. If the taxpayer does not submit a financial statement with the offer, normal correspondence activity should be undertaken to secure the financial statement, and any other data determined necessary for evaluation of the offer. If the taxpayer fails to provide the requested information, normal "return" procedures should be followed since Effective Tax Administration (ETA) criteria can not be considered until all other bases have been addressed.
3. Like all other offers, the Service will only consider an Effective Tax Administration (ETA) offer when taxpayers have met the processability criteria (e.g. paid the application fee or filed Form 656-A; filed all required tax returns; submitted the Form 656, Form 433-A and/or Form 433-B on the latest revision of the forms; and are not a debtor in a bankruptcy proceeding). In-business taxpayers must have timely filed and timely deposited their quarterly federal taxes for the 2 preceding quarters and paid all federal tax deposits during the quarter in which the offer was filed.
Note:
Follow IRM 5.8.3, Processability Determination, for initial processing of offers.
4. Elements necessary to perfect an offer also apply to Effective Tax Administration (ETA) offers. The requirement to submit complete financial statements for ETA offers is the same as for Doubt as to Collectibility (DATC) offers.
Note:
Follow IRM 5.8.3.11, Types of Perfection, for procedures on perfecting offers.
5. Effective Tax Administration (ETA) offers are initially added to AOIC as Doubt as to Collectibility (DATC) offers. Once the offer investigation reveals that the taxpayers assets and future income exceed the tax liability thereby indicating no basis for a Doubt as to Collectibility (DATC), the offer should be considered under the ETA provisions. AOIC must be updated to reflect the correct basis for the compromise (e.g. ETA). Refer to IRM 5.8.11.7 below for a full discussion of requirements to update AOIC prior to final processing of ETA and Doubt as to Collectibility with Special Circumstances (DCSC) offers.
5.8.11.4 (09-01-2005)
Evaluation of Offers
1. Effective Tax Administration (ETA) offers cannot be considered if the taxpayer qualifies for Doubt as to Collectibility (DATC) or Doubt as to Liability (DATL).
Note:
Follow IRM 5.8.4, Evaluation of Offers, for Doubt as to Collectibility (DATC) issues and determining reasonable collection potential (RCP).
2. If the assets and future income do not exceed the tax liability and special circumstances exist, the taxpayers offer must be considered under Doubt as to Collectibility with Special Circumstance (DCSC). The taxpayers may have checked the ETA box and given an explanation of circumstance on the Form 656, however unless they have the ability to full pay the liability, the offer would not meet the legal standard for Effective Tax Administration (ETA) consideration. The offer must be considered under Doubt as to Collectibility with Special Circumstance (DCSC).
3. If the taxpayer submits an offer based on Doubt as to Collectibility (DATC) but collection potential exceeds the liability and there are special circumstances, the offer should be considered on the basis of Effective Tax Administration (ETA). The employee that investigates the offer is required to address any potential special circumstances during first contact with the taxpayer or the taxpayers representative. This will be accomplished in conjunction with the current requirement to verify receipt of Publication 1 and Publication 594 and must be documented in the offer case history. This requirement does not apply where the only taxpayer contact is through correspondence.
4. If the offer is rejected, the narrative should describe the considerations of both bases. If the offer is accepted the offer report must reflect the basis upon which the offer is accepted.
5.8.11.4.1 (09-01-2005)
Public Policy/Equity Issues
1. Offers submitted under the Public Policy/Equity provisions are authorized under these guidelines only when there are exceptional circumstances. While compromise under these guidelines is expected to be rare, appropriate recommendations for acceptance will be made.
2. In order to develop consistency in the interpretation and application of Treasury Regulations (TD 9007) published on July 22, 2002, a Specialty Group has been set up in Austin, Texas to work these offers.
3. Only after consideration has been given to all other potential bases for acceptance (e.g. Doubt as to Liability (DATL), Doubt as to Collectibility (DATC), Doubt as to Collectibility with Special Circumstance (DCSC), and/or Effective Tax Administration (ETA) based on economic hardship) will ETA-Public Policy/Equity be considered. Therefore, all cases must have been completely developed under all other bases before transfer will be accepted by the Austin Group.
4. After all other potential bases have been considered, complete Exhibit 5.8.11-1 "Non-Economic Hardship Effective Tax Administration (ETA) OIC Check Sheet." The check sheet must be completed and sent to the Austin group before any cases are transferred. The purpose of the check sheet is to document that all issues other than Public Policy/Equity ETA have been evaluated and to provide information on the non-economic ETA factors present.
5. The completed check sheet and a copy of the entire Form 656 should be faxed to offer Group Manager in Austin. The sender should include a copy of any letter or document presented by the taxpayer to support the special circumstances. The group will evaluate the information and respond to the sender within 10 workdays. This response will either be an explanation of why the taxpayers offer cannot be investigated under Public Policy/Equity ETA provisions, or a request to transfer the offer to the Austin group.
6. If the Austin group determines that the offer cannot be investigated under the Public Policy/Equity ETA provisions, the information will be faxed back to the sender who will be responsible for issuing the proposed rejection letter to the taxpayer, covering all factors considered.
7. If the Austin group determines that the information presented requires further analysis, the sender will be notified to transfer the case to Austin.
• The sender should contact the taxpayer by telephone and advise the taxpayer of the results of the collectibility and liability portions of the offer investigation prior to transfer. If the taxpayer cannot be reached by phone then a standard transfer letter should be sent.
• The file should be sent by overnight mail on Form 3210 to the Austin group.
• At the time of mailing, the case should be transferred on AOIC to Area 10.
• A history item should be added to AOIC to show the case is being sent to Austin, Area 10.
• The Austin group will maintain the faxed copies of all check sheets received and appropriate documentation on all offers accepted for transfer. This documentation will provide a historical record to support a decision to accept or reject the offer.
Note:
The Offer Examiner or Offer Specialist may also seek guidance from the Austin group on a Doubt as to Collectibility with Special Circumstances (DCSC) offers that involve Public Policy/Equity issues. The guidance should be solicited by preparing the check sheet and documenting the issues involved in the case. However, these cases will not be transferred to the Austin group.
5.8.11.4.2 (09-01-2005)
Financial Statement Analysis
1. Offers submitted under Effective Tax Administration (ETA) require the same full financial analysis as Doubt as to Collectibility (DATC) offers in order to determine reasonable collection potential (RCP) and to determine an acceptable offer amount. Procedures for financial analysis are contained in IRM 5.8.5, Financial Analysis.
2. Once reasonable collection potential (RCP) is completed a determination can be made as to whether the offer qualifies for consideration under Effective Tax Administration (ETA) or Doubt as to Collectibility (DATC).
3. If the taxpayers assets and future income exceed the tax liability, the taxpayers offer can be considered under the Effective Tax Administration (ETA) basis.
5.8.11.4.3 (09-01-2005)
Determining an Acceptable Offer Amount
1. An acceptable offer amount, based on economic hardship, is determined by analyzing the financial information and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.
Example:
The taxpayer has a $100,000 liability and a reasonable collection potential (RCP) of $125,000. To avoid economic hardship, it is determined that the taxpayer will need $75,000. The remaining $50,000 should be considered the acceptable offer amount.
2. In offers based on Public Policy/Equity, the Service would expect the taxpayer to offer an amount that is fair and equitable under the circumstances.
3. Generally, it is the responsibility of the taxpayer to make decisions and take the appropriate actions needed to fund the acceptable offer amount. However, due consideration of these funding options is often needed for the Service to arrive at an acceptable offer amount. For example, in some locations the availability of funding options such as reverse mortgages, assigning deeds of trust, etc. may allow the taxpayer to tap into available equity without creating economic hardship. These options should be taken into consideration in determining an acceptable offer amount for an Effective Tax Administration (ETA) offer based on economic hardship.
5.8.11.5 (09-01-2005)
Documentation and Verification
1. To verify the taxpayers special circumstances and support a basis of Effective Tax Administration (ETA):
A. Request supporting documentation of the taxpayers situation. Exercise sound judgement in determining the degree of verification necessary. For example, verification of a health problem could be a doctor’s letter or copies of medical expenses.
B. When special circumstances are found to exist, the amount offered will be less than reasonable collection potential (RCP). For Effective Tax Administration (ETA), reasonable collection potential (RCP) is always greater than the full liability. In the report narrative, explain clearly the rationale for acceptance of the amount offered. The documentation must include reasons why some or all of the equity in certain assets is not being offered, how the offer amount is being funded, and any other pertinent information that indicates how the amount offered was determined to be acceptable.
5.8.11.6 (09-01-2005)
Final Processing
1. Prior to final processing, AOIC must be updated to indicate the correct basis for closing the offer. This will ensure that all final closing reports generated from AOIC reflect the correct basis. The approval levels indicated on closing reports and letters must be consistent with the basis for closure.
2. The following is a guide to these determinations:
If… And… Then…
The offer was submitted under Effective Tax Administration (ETA) An economic hardship has been determined to exist, but the reasonable collection potential (RCP) is less than the liability balance due 1. Update the AOIC offer screen to indicate a "C" under the offer type.
2. Generate all closing reports with the proper approving official for Doubt as to Collectibility with Special Circumstances (DCSC).
The offer was submitted under Doubt as to Collectibility (DCSC) An economic hardship has been determined to exist, and the reasonable collection potential (RCP) is greater than the liability balance due 1. Update AOIC offer screen to indicate "A" under offer type.
2. Generate closing reports with the proper approving official for Effective Tax Administration (ETA) offers.
The offer was submitted under Effective Tax Administration (ETA) The offer is being recommended for acceptance under Doubt as to Collectibility (DATC) with the offer exceeding the reasonable collection potential (RCP) 1. AOIC offer screen does not require updating for special circumstances. The type of offer on AOIC should reflect "C" for Doubt as to Collectibility (DATC).
Generate closing reports with the proper approving official for Doubt as to Collectibility (DATC) without special circumstances.
The offer was submitted under Doubt as to Collectibility with item 9 of Form 656 completed with circumstances that do not meet any of the elements that define economic hardship, or Public Policy/Equity criteria The offer cannot be recommended for acceptance under Doubt as to Collectibility (DATC). Generate closing reports with the proper approving official for Doubt as to Collectibility (DATC) without special circumstances. Address in the history, why the circumstances described in item 9 do not meet defined economic hardship, or Public Policy/Equity criteria.
The offer was submitted under Effective Tax Administration (ETA) with item 9 of Form 656 completed with circumstances that do not meet ETA criteria The taxpayer does not qualify for ETA because the reasonable collection potential (RCP) is less than the liability and the offer cannot be recommended for acceptance under Doubt as to Collectibility with Special Circumstances (DCSC). 1. Update AOIC offer screen to indicate a "C" under special circumstances.
2. Generate closing reports with the proper approving official for Doubt as to Collectibility with Special Circumstances (DCSC).
The offer was submitted under Effective Tax Administration (ETA) with item 9 of the Form 656 completed with circumstances that the investigation reveals do not meet ETA criteria The offer cannot be recommended for acceptance and the reasonable collection potential (RCP) exceeds the liability 1. Update AOIC offer screen to indicate "A" under offer type.
3. Generate closing reports with the proper approving official for Effective Tax Administration (ETA) offers.
The offer was submitted under Effective Tax Administration (ETA) The special circumstances do meet economic hardship, or Public Policy/Equity criteria and the reasonable collection potential (RCP) exceeds the tax liability. However, the offer cannot be recommended for acceptance. 1. Update AOIC offer screen to indicate "A" under offer type.
3. Generate closing reports with the proper approving official for Effective Tax Administration (ETA) offers.
The offer was submitted under Doubt as to Collectibility with Special Circumstances (DCSC) The special circumstances do meet economic hardship, or Public Policy/Equity criteria and the reasonable collection potential (RCP) is less than the tax liability, however, the offer cannot be recommended for acceptance. Generate closing reports with the proper approving official for Doubt as to Collectibility with Special Circumstances (DCSC).
5.8.11.6.1 (09-01-2005)
Rejection/Return/Withdrawal Processing
1. The procedures in IRM 5.8.7, Return, Terminate, Withdraw, and Reject Processing, discussing rejections, withdrawals and returns should be followed when processing Effective Tax Administration (ETA) rejected, withdrawn or returned offers.
2. IRM 5.8.12, Independent Administrative Review, provides instructions for independent administrative review of rejected offers.
3. See Delegation Order No. 5-1 (formerly Delegation Order 11, Rev. 29) for the official with delegated authority based on Effective Tax Administration (ETA). The delegated official’s signature is required on the Form 1271 and the closing letter.
5.8.11.6.2 (09-01-2005)
Acceptance Processing
1. The procedures in IRM 5.8.8, Acceptance Processing , should be followed when processing accepted Effective Tax Administration (ETA) offers.
2. Area Counsel’s opinion is required on ETA offers where the unpaid amount of tax assessed (including any interest, addition to the tax, or assessable penalty) is $50,000 or more.
3. See Delegation Order No. 5-1 (formerly Delegation Order 11, Rev. 29) for the official with delegated authority to accept offers based on Effective Tax Administration (ETA). The delegated official’s signature is required on the Form 7249, Offer Acceptance Report, and the acceptance letter.

8.23.3.8 (10-16-2007)
Effective Tax Administration Offers
1. If it's determined that there is no basis to accept an offer under doubt as to collectibility (DATC) or doubt as to liability (DATL), the offer may still be accepted if it's determined that doing so:
A. would promote effective tax administration, and
B. would not undermine other taxpayers' compliance with the tax laws.
2. IRM 5.8.11 , Offer in Compromise, Effective Tax Administration, contains information about Effective Tax Administration (ETA) offers and doubt as to collectibility offers where the taxpayer presents "special circumstances" (DATC-SC) as a basis to accept the offer, and the procedures for evaluating such offers.
3. Under ETA, the taxpayer does not dispute being financially capable of paying the liability in full. To accept an ETA offer, the taxpayer must establish that:
• Paying the full tax liability would cause an undue economic hardship (see below), or
• Compelling public policy or equity/fairness considerations exist that would undermine public confidence that the tax laws are being administered in a fair and equitable manner if required to pay in full. These "public policy" or "equity" offers are sometime referred to as "non-hardship" ETA offers.
4. Under DATC-SC, the taxpayer does not have the ability to pay in full, but does not dispute being financially capable of paying more than the amount being offered. To accept a DATC-SC offer, the taxpayer must establish that:
• Paying the full RCP amount would cause an undue economic hardship (see below), or
• Compelling public policy or equity/fairness considerations exist that would undermine public confidence that the tax laws are being administered in a fair and equitable manner if required to pay the full RCP amount
5. ETA and DATC-SC offers require a more subjective evaluation. Although IRM 5.8.11 is comprehensive, it's simply not practical to try to draft guidance that encompasses every event or situation.
6. ETA and DATC-SC offers based upon economic hardship are not uncommon. The definition of an undue economic hardship for ETA and DATC-SC offer purposes is found in Treasury Regulation 301.6343-1. Often a taxpayer presents circumstances reflecting one or more of the factors outlined in IRM 5.8.11.2.1 , or closely resembling many aspects of an example cited in the IRM or Treasury Regulation 301.7122-1, but the case for ETA or DATC-SC acceptance falls apart when actual dollars are factored in. A decision in an ETA or DATC-SC hardship offer requires a three-tiered approach:
0. Does the taxpayer present exceptional circumstances meriting ETA or DATC-SC consideration?
1. Would payment of more than the offered amount cause the taxpayer to be unable to meet future necessary living expenses?
2. Would acceptance of the offer undermine other taxpayers' compliance with the tax laws?
An acceptable offer requires affirmative answers to questions 1 and 2, and a negative answer to question 3.
7. Offers based upon public policy or equity considerations are rarer.
. Any disposition of an ETA or DATC-SC offer based in whole or in part on public policy or equity considerations requires review and approval by the Director, Field Operations (DFO). Coordination at the DFO level allows Appeals to support Service efforts through consistency.
Note:
When a case is forwarded for DFO approval, a copy of the Appeals Case Memorandum and Form 5402 should also be e-mailed to the Tax Policy and Procedures OIC Analyst.
8. See Delegation Order 5-1, which is available on the Appeals web site at Appeals OIC Home Page, for the required levels of approval for accepting or rejecting ETA and DATC-SC offers.
9. IRM 5.8 does not contain separate ETA offer procedures for when filing a NFTL is generally required. See IRM 8.23.3.3.2 for information regarding lien filing criteria and procedures if the offer is going to be accepted

IRS Publishes SILO and LILO settement initiatives
Sales & Lease backs




Attachment 1 - LILO Initiative



A. General
 The Taxpayer agrees to use its best efforts to terminate its LILO transactions on or before December 31, 2008.

 If the Taxpayer is unable to terminate all of its LILO transactions by December 31, 2008, then any of its LILO transactions that are not terminated by that date will be deemed terminated as of that date ("Deemed Termination").

 If a Deemed Termination has occurred, the taxpayer will be permitted to claim the benefit of an Actual Termination if its LILO transactions are terminated on or before December 31, 2010.



B. Definitions
 Actual Termination - An Actual Termination occurs when a Taxpayer terminates its LILO transactions.

 Actual Termination Gain - Actual Termination Gain is equal to the Actual Termination Proceeds less the Taxpayer's Adjusted Basis on the termination date.

 Actual Termination Proceeds - The net proceeds the Taxpayer receives when it actually terminates its LILO transactions (expected to be the balance in the equity defeasance account).

 Deemed Termination - If the Taxpayer is unable to terminate all of its LILO transactions by December 31, 2008, then any of its LILO transactions that are not terminated by that date will be deemed terminated as of that date.

 Deemed Termination Date - December 31, 2008.

 Deemed Termination Gain - The difference between the Deemed Termination Proceeds and the Taxpayer's Adjusted Basis on the Deemed Termination Date.

 Deemed Termination Proceeds - The amount which, at the Deemed Termination Date, is equal to the value of the equity defeasance account.

 Taxpayer's Adjusted Basis - The Taxpayer's Adjusted Basis includes all of the following items:

1) The Taxpayer's equity investment (equity collateral + accommodation fees) plus transaction fees;

Less
2) The allowed deductions (20% of the losses previously claimed) through the 2007 tax year;

Plus
3) 80% of the Original Issue Discount ("OID") that accrued through the tax year 2007.



Other Basis Adjustments
4) In the event that Taxpayer claimed losses in taxable years that the Service is now barred by the statute of limitations under I.R.C. §6501 from adjusting, basis will be reduced by the losses claimed in those barred years.



C. Terms



1. Tax Years Through 2007

a. 80% Disallowance of LILO Transactions
 The Taxpayer agrees to concede 80% of any claimed interest expense deduction, amortized transaction costs, and head lease rent expense for each tax year through 2007.

 The IRS agrees to disregard 80% of any reported taxable rental income with respect to Taxpayer's LILO transactions for each tax year through 2007.

b. Report 80% of Accrued OID
 The Taxpayer agrees to report in 2008, 80% of the OID accrued with respect to its LILO transactions for each tax year through 2007.



2. Tax Treatment of an Actual Termination on or before December 31, 2008
 In the event of an Actual Termination on or before December 31, 2008, the Taxpayer agrees to recognize as ordinary income the Actual Termination Gain.



3. Tax Treatment Under a Deemed Termination
 If the Taxpayer is unable to terminate all of its LILO transactions by December 31, 2008, then its non-terminated LILO transactions will be deemed terminated as of the Deemed Termination Date.

 If there is a Deemed Termination, the Taxpayer agrees to recognize as ordinary income the Deemed Termination Gain.

 If there is a Deemed Termination, the Taxpayer agrees to recognize as ordinary income 100% of the OID that accrues each year from the Deemed Termination Date until the date of an Actual Termination.



4. Tax Treatment of an Actual Termination occurring after the Deemed Termination on December 31, 2008, but before January 1, 2011
 If an Actual Termination occurs after December 31, 2008 but before January 1, 2011, and the Actual Termination Gain is less than the Deemed Termination Gain, then the Taxpayer will be entitled to an ordinary deduction for the difference between the gain that was recognized as a result of the Deemed Termination and the Actual Termination Gain in the taxable year of Actual Termination.



5. Other Terms
 The Taxpayer will not be liable for any penalties under I.R.C. §§6662 and 6662A.

 The Taxpayer will waive the prohibition against ex parte communications between Appeals and Compliance and Office of Chief Counsel employees as to any LILO and/or SILO transactions that are the subject of this initiative.

 The Taxpayer will sign the Closing Agreement that is part of this initiative.

 The Taxpayer will agree that all exit strategies will be disregarded for tax purposes. The Taxpayer will agree that if it has already received any such tax benefits, it will recapture such tax benefits as of the Deemed Termination Date.

 The Taxpayer will agree that its acceptance of this settlement initiative indicates its agreement that it is not entitled to claim or receive tax benefits from the LILO transactions other than those outlined herein.

 The Service will not resolve any of the Taxpayer's LILO transactions unless all of its LILO transactions are resolved. In the event that the Taxpayer also engaged in SILO transactions and is invited to participate in the SILO Settlement Initiative, the Taxpayer must also agree to participate fully in that initiative. The Service will not resolve any of the Taxpayer's LILO transactions unless the Taxpayer also agrees to fully resolve all of its SILO transactions.

 If applicable, resolution of the Taxpayer's LILO transactions will be reported to the Joint Committee on Taxation pursuant to I.R.C. §6405 .

Sale leaseback transactions



IRS Letter 4394 (7-2008): Resolution of Sale-In/Lease-Out (SILO) Transactions

August 7, 2008

Internal Revenue Service : IRS Letter 4394 : Sale-In/Lease-Out (SILO) transactions : Settlement initiative .



Internal Revenue Service



Department of the Treasury

K85CB

Digitally signed by K85CB

DN: CN = K85CB

Reason: I have

reviewed this document

Date: 2008.07.30

14:42:54 -04'00'

Dear


Resolution of Sale-In/Lease-Out (SILO) Transactions


The Internal Revenue Service (the Service) is willing to resolve all Sale-In/Lease-Out (SILO) transactions entered into by (the Taxpayer) based on the terms stated in Attachment 1.

This resolution offer will remain effective until 30 days from the date of this letter. In order to accept this offer, Taxpayer must advise the listed contact in writing of its acceptance of all of the terms stated in Attachment 1. The Taxpayer must also provide the documents listed in Attachment 2 within 30 days of accepting the terms of this offer. Additional documents may be needed depending on the specific transactions. No counterproposals will be entertained. If the Taxpayer fails to agree to all of the terms within the specified timeframe, the Service will take whatever action is necessary to protect the Government's interest and to bring the case to conclusion.

Thank you for your cooperation.

Sincerely yours,

Enclosures:

Attachment 1

Attachment 2

Letter 4394 (7-2008)

Catalog Number 51812Q


IRS Letter 4395 (7-2008): Resolution of Lease-In/Lease-Out (LILO) Transactions

August 7, 2008

Internal Revenue Service : IRS Letter 4395 : Lease-In/Lease-Out (LILO) transactions : Settlement initiative .



Internal Revenue Service



Department of the Treasury

K85C B

Digitally signed by K85CB

DN: CN = K85CB

Reason: I have

reviewed this document

Date: 2008.07.30

14:41:20 -04'00'



Resolution of Lease-In/Lease-Out (LILO) Transactions

Dear

The Internal Revenue Service (the Service) is willing to resolve all Lease-In/Lease-Out (LILO) transactions entered into by (the Taxpayer) based on the terms stated in Attachment 1.

This resolution offer will remain effective until 30 days from the date of this letter. In order to accept this offer, Taxpayer must advise the listed contact in writing of its acceptance of all of the terms stated in Attachment 1. The Taxpayer must also provide the documents listed in Attachment 2 within 30 days of accepting the terms of this offer. Additional documents may be needed depending on the specific transactions. No counterproposals will be entertained. If the Taxpayer fails to agree to all of the terms within the specified timeframe, the Service will take whatever action is necessary to protect the Government's interest and to bring the case to conclusion.

Thank you for your cooperation.

Sincerely yours,

Enclosures:

Attachment 1

Attachment 2

Letter 4395 (7-2008)

Catalog Number 51813B
IRS Announces Penalty-Free LILO/SILO Tax Shelter Settlement Initiative
The IRS has unveiled a settlement initiative for lease-in, lease-out (LILO) and sale-in, lease-out (SILO) tax shelters. Speaking by telephone with reporters on August 6, IRS Commissioner Douglas Shulman explained that the IRS will soon be sending out settlement offer letters to approximately 45 of the nation's largest corporations across a broad spectrum of industries, including banking.

These letters will contain identical offers that carry the same terms and must be accepted for all of a taxpayer's LILO or SILO leases within 30 days; after that time, the offer will be rescinded and no longer available. In return for "putting these cases behind them" and being excused of all underreporting penalties, each corporation will be required in effect to give up most of the deferral benefits of the shelter. The shelters targeted by the initiative represent "billions of dollars in lost tax revenues," Shulman reported.

The initiative is not universal but is "by-invitation-only." The IRS is planning no further announcement of this initiative to the public.

While hundreds of LILO and SILO transactions have taken place, many large corporations reportedly have participated in multiple shelter transactions. Shulman noted that some corporations will not be receiving settlement letters. Neither Shulman nor other IRS officials at the briefing, however, elaborated on how many taxpayers are being excluded from this initiative. Nor did anyone suggest that other taxpayers will be added to the offer-letter list over time. If a corporation that has participated in a LILO or SILO does not receive a letter, Shulman stated that the taxpayer could contact Paul DeNard, LMSB Deputy Commissioner, for the reason.

Settlement Offers
Shulman explained, and the settlement documentation (letters and attachments) distributed with his announcement show, that the settlement has five main features:

--The taxpayer must agree to concede 80 percent of any claimed interest expense deduction, amortized transaction costs, and head lease rent expense for each tax year through 2007;

--The IRS agrees to disregard 80 percent of any reported taxable rental income with respect to SILO or LILO transactions for each tax year through 2007;

--The taxpayer must agree to report in 2008, 80 percent of the original issue discount (OID) connected with the SILO or LILO transactions for each tax year through 2007;

--The taxpayer must exercise best efforts to terminate its SILO or LILO transactions on or before December 31, 2008; and

--The taxpayer must agree to recognize as ordinary income any termination gain, whether realized under an actual or deemed termination.

SILO/LILO Victories
The settlement initiative comes after a recent string of major IRS court victories involving these transactions earlier in the year. In AWG Leasing Trust (DC Ohio, 2008-1 USTC ¶50,370, TAXDAY, 2008/06/10, J.7), a federal district court denied tax benefits to a U.S. partnership related to its alleged purchase of a German waste-to-energy facility as an abusive SILO transaction. In BB&T Corp. (CA-4, 2008-1 USTC ¶50,306, TAXDAY, 2008/05/01, J.6), the Court of Appeals for the Fourth Circuit struck down the tax treatment of a financial services company's lease of wood-pulp manufacturing equipment as a LILO tax shelter, finding a lack of a genuine lease or genuine indebtedness. In Fifth Third Bancorp, DC Ohio, a federal district court jury, applying the economic substance doctrine, denied tax benefits related to a bank's leasing arrangement for passenger rail cars as an abusive LILO transaction.

Taxpayer Equity/IRS Pragmatism
Shulman was clear in representing the issue as one of fairness and equity among the taxpaying populace. "The public has a right to expect that large corporations be good corporate citizens and meet their legal and compliance obligations," he stated. "The nation's leading commercial enterprises have the legal and accounting resources to take full advantage of favorable provisions of the tax law," he continued, "but they are not entitled to use their extensive resources to twist provisions of the tax law to the point that they no longer reflect Congress's intent. As a basic matter of fairness to all taxpayers, the IRS cannot allow LILO and SILO deals to stand."

At the same time, however, Shulman reasoned that the settlement initiative also represented a pragmatic approach. Noting that "hundreds of these transactions" have not yet been examined and/or adjudicated, Shulman concluded that "the time has come to find the most effective way to resolve these existing disputes ... the settlement initiative achieves this." He added that pursuing this initiative against the most blatant offenders instead of following the usual examination and litigation route will allow the IRS to reclaim most of this revenue more quickly and free up its resources for other matters.

The Service expects, Shulman concluded, that offenders will take advantage of the penalty-free settlement as an "opportunity to clean up liabilities and move on."
LILO/SILO Initiative Frequently Asked Questions, Updated

September 22, 2008

Internal Revenue Service : Sale-in, lease-out (SILO) : Lease-in, lease-out (LILO) : Tax shelters : Settlement initiative .



LILO/SILO Initiative Frequently Asked Questions


___________________________________________________________________________________
What's New:

___________________________________________________________________________________
Examples added to the following
Revisions to FAQs New FAQs FAQs
(posted 09-19-08): (posted 09-19-08): (posted 09-19-08):




 FAQ 1.3  FAQ 3.20  FAQ 1.3

 FAQ 6.8s  FAQ 5.6  FAQ 4.20

 FAQ 5.7  FAQ 4.21

 FAQ 6.13  FAQ 5.1

 FAQ 7.6  FAQ 5.3

 FAQ 5.4

 FAQ 5.5

 FAQ 6.8

___________________________________________________________________________________


Table of Contents for FAQs:

Initiative Election

Appeals Process

Initiative Procedure

Termination

Basis

OID

General or Miscellaneous Questions


____________________________________________________________________________________
Initiative Election:

____________________________________________________________________________________
Questions Answers

____________________________________________________________________________________
1.1 What is the due date for responding To provide taxpayers with sufficient
to the IRS LILO/SILO offer? time to evaluate the offer, the due
date is extended to the date that is
60 days from the date of the
taxpayer's offer letter.

____________________________________________________________________________________
1.2 Can we make different elections for If by "distinct taxpayer," you mean a
different taxpayers? We have received taxpayer who is not included on a
letters for a number of distinct Consolidated return that received an
taxpayers. Should we evaluate the offer letter, but a taxpayer who
offer independently for each received it's own offer letter, then
recipient or jointly for the entire each taxpayer stands on its own.
"controlled group"?

____________________________________________________________________________________
1.3 If the taxpayer is a TEFRA Yes, the tax matters partner has to
partnership, does the partnership accept the proposal and all partners
have to accept the proposal? Does need to accept.
each partner also need to accept?
The Service expands its answer to FAQ
(further explanation). What if a 1.3. For a TEFRA partnership to
partnership has three partners, and settle its LILOs and SILOs, the
the controlling partner does not want partnership and all its partners must
to enter the Settlement Initiative accept the Initiative. However,
and refuses to make "best efforts" to individual partners may separately
terminate the leases. Will the settle with the IRS regarding their
remaining two partners be barred from respective interests in the
entering the Settlement Initiative? partnership's LILOs and SILOs. For a
TEFRA partnership to settle, the TMP
must exercise best efforts; failure
to do so will not penalize the other
individual partners if they wish to
settle their partnership interests.

____________________________________________________________________________________


Example to FAQ 1.3:

Assume that the Taxpayer from Example 4.20 received free cash in 2005 of $1,700,000. Following is the Deemed Termination Gain/(Loss) calculation:


___________________________________________________________________________________
Deemed Termination Gain/(Loss)

___________________________________________________________________________________
Termination Proceeds - 12/31/08 Accreted Value of Equity Deposit 26,000,000

___________________________________________________________________________________
Less: Basis (as defined in the Initiative)

___________________________________________________________________________________
Equity Investment + Transaction Fees 38,500,000

___________________________________________________________________________________
Less: 20% of Pre- 2008 Net Income/Loss ($101,000,000 * 20%) (20,200,000)

___________________________________________________________________________________
Plus 80% OID - Pre-2008 Years ($9,375,000 * 80%) 7,500,000

___________________________________________________________________________________
Less: 100% of Pre-2008 Free Cash (1,700,000)

___________________________________________________________________________________
Total Basis (as defined in the Initiative) 24,100,000

___________________________________________________________________________________
Deemed Termination Gain/Loss 1,900,000

___________________________________________________________________________________



____________________________________________________________________________________
1.4 If the Taxpayer is the owner of a Yes, the FSC is required to accept
Foreign Sales Corporation (FSC) and the proposal and all of its
the Taxpayer accepts the proposal is shareholders have to accept the
the FSC required to accept the proposal.
proposal? If a FSC accepts the
proposal, do all of its shareholders
have to accept the proposal?

____________________________________________________________________________________
1.5 If a taxpayer, through an abundance There are a limited number of
of caution, disclosed as a listed circumstances in which sale/leaseback
transaction a transaction that it transactions are not considered to be
does not consider to be a listed SILOs or substantially similar to
transaction, will the taxpayer be SILO transactions.The IRS will make
allowed to exclude this transaction that determination. If a taxpayer is
from the settlement offer? unsure whether a transaction is a
SILO, it should ask the IRS contact
person for a review of the
transaction within the window for
accepting the Initiative and the
Service will determine whether a
transaction is included within the
Initiative.

____________________________________________________________________________________
1.6 How can a taxpayer determine which The IRS will determine whether the
transactions will be treated as SILO transaction is a SILO or LILO as
transactions that must be included in described in Notice 2005-13 and
any settlement? Attachment 2 to the Notice 2000-15, respectively. This
SILO letter states that the taxpayer settlement initiative was intended
must provide a list of all for the settlement of SILO and/or
transactions "that are the same as or LILO transactions.
substantially similar to those
described in Notice 2005-13 for which
losses or deductions were claimed in
any taxable year." It is not clear
which transactions will be considered
substantially similar to the SILO
transactions described in Notice
2005-13. Notice 2005-13 identifies as
a SILO a transaction that includes
(1) a tax indifferent entity (e.g.,
foreign corporation or governmental
body), (2) economic defeasance of
rent and purchase option price, and
(3) limited risk of loss or profit
due to change in value of leased
property. Does the inclusion or
absence of any one particular item
above affect whether a transaction is
considered a SILO? For example, would
a transaction with a U.S. corporate
lessee that is liable for U.S. income
tax at the time of the transaction be
treated as a SILO? Would a
transaction that does not have
economic defeasance (or includes only
partial economic defeasance) be
treated as a SILO? If a taxpayer
excludes a transaction from a
settlement agreement because of a
reasonable belief that the
transaction is not a SILO, what would
be the consequences if the Service
contends that the transaction should
be treated as a SILO?

____________________________________________________________________________________
1.7 What if a taxpayer already has a The settlement Initiative only
closing agreement with respect to all requires that the Taxpayer resolve
its LILOs, but the taxpayer still has its outstanding SILOs or LILOs which
SILOs outstanding? are not subject to a previously
executed closing agreement.

____________________________________________________________________________________
1.8 If a taxpayer has not yet received a If a taxpayer believes that it has a
letter, will it not be included in LILO or SILO transaction and it did
the settlement initiative? Will a not receive an offer letter, the
settlement be available at a later taxpayer should contact their local
date to those taxpayers that do not case manager or appeals officer to
receive a letter? discuss the matter.

____________________________________________________________________________________
1.9 How would entities that are currently If the Service decides to extend an
in litigation be folded into the offer to a Taxpayer in litigation,
Initiative? the Taxpayer will be notified by
letter. If a Taxpayer is currently in
litigation and wants to make inquiry
about whether it may participate in
the Initiative, it should contact the
Department of Justice.

____________________________________________________________________________________



____________________________________________________________________________________



____________________________________________________________________________________



____________________________________________________________________________________
Appeals Process:

____________________________________________________________________________________
Questions Answers

____________________________________________________________________________________
2.1 How will a LILO/SILO case be handled Taxpayers who choose not to avail
in Appeals if a taxpayer declines the themselves of the initiative can
offer? pursue the resolution of their case
in Appeals. However, in consideration
of consistency of tax administration
and finality, Appeals will require,
as part of any resolution, the
termination of all leases, deemed or
actual, as described in the offer.

____________________________________________________________________________________
2.2 If the matter is not in Appeals, is Yes, in order to protect the
the ex parte waiver still required? government's interest, the ex parte
If so, what is the rationale for this waiver is still required.
requirement?

____________________________________________________________________________________
2.3 Before I received the initiative No, no offset will be available
offer, I had been in extensive against other terms or other issues.
discussions with Appeals about my
lease transactions and have exchanged
one or more settlement offers with
Appeals. If I choose to work with
Appeals, will I receive some type of
offset or reduction in my settlement
percentage or settlement amount due
to the added tax and costs related to
the termination requirement?

____________________________________________________________________________________
2.4 Will Appeals engage in settlement No. Appeals has suspended settlement
discussions on LILO/SILO issues discussions on LILOs/SILOs during the
during the extended election period? initiative election period. Taxpayers
should carefully consider the
initiative as a way to resolve these
matters.

____________________________________________________________________________________
2.5 After the 60-day period expires, what If a taxpayer has not elected to
happens if I have not elected into participate in the initiative
the settlement initiative? offering by the end of the election
period, and the case is under Appeals
jurisdiction, Appeals will discuss
settlement that in Appeals' view
reflects a fair assessment of the
litigation hazards should the case
continue unagreed to court. Such
settlements will not only reflect the
hazards posed by litigation analysis
through the date of signing a Closing
Agreement but will, in addition,
include the termination requirement.
However, taxpayers should be aware
that Appeals' view of particular
terms, such as the percentage allowed
or the imposition of penalties, could
well result in less favorable
outcomes from Appeals than from the
settlement initiative. Thus,
taxpayers should not expect to
receive a better offer in Appeals
than that offered under the
settlement initiative and may, in
fact, receive a less favorable
outcome.

____________________________________________________________________________________
2.6 I have other issues, unrelated to Any other issues in your case are not
LILOs/SILOs pending in Appeals. Can I impacted by the IRS initiative offer
get them resolved separately? and these discussions. You may pursue
resolution of those other issues even
while considering the IRS initiative
offer on LILOs/SILOs.

____________________________________________________________________________________



____________________________________________________________________________________



____________________________________________________________________________________



____________________________________________________________________________________
Initiative Procedure:

____________________________________________________________________________________
Questions Answers

____________________________________________________________________________________
3.1 What is the definition of "best "Best efforts" is defined as a
efforts" to terminate LILO/SILO taxpayer's good faith effort to
transactions by December 31, 2008? terminate by December 31, 2008. The
taxpayer should provide the IRS with
a specific list of the steps that it
took to terminate each transaction.

____________________________________________________________________________________
3.2 Who determines whether the Taxpayer The IRS will determine whether the
exerted best efforts? taxpayer exerted best efforts after
review of any documentation provided
by the taxpayer that describes the
steps taken.

____________________________________________________________________________________
3.3 If a Taxpayer and its affiliates have Yes, see answers to questions 3.1 and
multiple SILOs/LILOs, will it need to 3.2, above.
exert best efforts on all
transactions?

____________________________________________________________________________________
3.4 In what particular form must a The taxpayer must state, in writing,
taxpayer provide its acceptance of that it accepts all of the settlement
the Initiative? terms outlined in the offering
letter.

____________________________________________________________________________________
3.5 Is it adequate to state that the No.
terms are accepted subject to
negotiating a closing agreement?

____________________________________________________________________________________
3.6 Is the mailing date adequate to The IRS must receive the taxpayer's
establish the date of acceptance? acceptance by the 60th day from the
date of the offer letter. A Taxpayer
may mail or fax its acceptance.

____________________________________________________________________________________
3.7 Will the Taxpayer receive notice of Yes, the taxpayer will be notified by
its qualification for the settlement the IRS point of contact.
proposal?

____________________________________________________________________________________
3.8 Does the expression of understanding Yes. A Taxpayer should provide all of
of undefined terms constitute a its questions to the IRS and must
counterproposal? obtain express concurrence from the
IRS to the understanding of the
undefined terms in advance of sending
its acceptance of the offer.

____________________________________________________________________________________
3.9 When will a Closing Agreement be A Closing Agreement will be executed
executed? when the IRS determines that the
Taxpayer has complied with all of the
terms of the offering and when all
necessary computations are completed.

____________________________________________________________________________________
3.10 Can the terms of the LILO/SILO No.
settlement initiative be incorporated
in a closing agreement covering other
issues?

____________________________________________________________________________________
3.11 How does the consistency rule in A Taxpayer, who has LILO/SILO
Section 5 (which says the Service transactions both individually and as
will not resolve any of the a partner in a partnership that has
Taxpayer's SILO transactions unless LILO/SILO transactions, must settle
all of its SILO transactions are all of its LILO/SILO transactions. A
resolved) apply where the Taxpayer partner in a TEFRA partnership may
has both (i) directly engaged in SILO accept the terms of the initiative
transactions and (ii) is a partner in and settle out of the partnership.
a partnership (either a TEFRA or
non-TEFRA partnership) that engaged
in SILO transactions? Is a
partnership a separate "taxpayer" for
purposes of this initiative?

____________________________________________________________________________________
3.12 Will transactions with Ownership Yes.
Foreign Sales Corporations ("OFSCs")
be treated as SILOs?

____________________________________________________________________________________
3.13 What is intended by the fifth bullet The fifth bullet point under Item 5,
point under Item 5, Other Terms, of states, "The Taxpayer will agree that
the attachment? its acceptance of this settlement
initiative indicates its agreement
that it is not entitled to claim or
receive tax benefits from the LILO
transactions other than those
outlined herein." This means that the
Taxpayers are not entitled to claim
any tax benefits from these
transactions other than those
available through the Initiative.

____________________________________________________________________________________
3.14 If the Taxpayer makes good faith The original date for acceptance of
efforts to, but fails to provide the the settlement offer has been
documents listed in Attachment 2 extended to 60 days from the original
within 30 days, is the proposal still letter date. Taxpayers have 30 days
available? from that date to provide the
documents. Under unusual
circumstances, the IRS will use its
discretion to determine whether to
allow an extension and will do so for
good cause.

____________________________________________________________________________________
3.15 In regards to Attachment #2, Item #2 The Taxpayer's computations should
(taxpayer computations) - What are relate directly to the transaction,
IRS expectations as to scope, i.e., including the disallowances, OID
computations only for items directly calculations and termination gain
related to the lease and addressed in calculations. Additional documents
the offer, as opposed to other items may be requested at a later date.
on the return that may change as a
result of the adjustment?

____________________________________________________________________________________
3.16 How binding is the acceptance of the An acceptance of the Initiative by
Initiative that we are asked to make the taxpayer is not binding until a
by 60 days after the date of the closing agreement is executed by both
initial offer letter? parties.

____________________________________________________________________________________
3.17 When will a closing agreement be A Closing Agreement will be executed
signed? Can provisions covering other when the IRS determines that the
issues be incorporated in a closing Taxpayer has complied with all of the
agreement? Will the particular facts terms of the offering and when all
and circumstances of the taxpayer necessary computations are completed.
(e.g., NOLs, foreign tax credit, amt, Other issues will not be incorporated
etc.) be reflected in the closing into such closing agreement.
agreement? Computational issues, such as NOLs,
foreign tax credits, AMT, etc., will
not be included in the Initiative
closing agreement.

____________________________________________________________________________________
3.18 Does a reasonable determination that The terms of the settlement
there is an economic or accounting initiative should not be interpreted
loss on a termination of the equity to require a taxpayer to incur a
collateral account, the debt, or the significant economic loss to effect
debt collateral account preclude the an actual termination. However, it is
need to exercise additional best expected that the taxpayer will show
efforts? what actions it took to achieve
termination, and why it could not do
so. For example, the taxpayer might
show that it contacted the tax exempt
entity, the lender, the equity
account holder, the custodian, etc.
and attempted to negotiate terms. The
taxpayer might inform those entities
why it needs to terminate the leases
and that this involves the settlement
of a tax dispute with the U.S. tax
authorities and try to get those
entities to work with the taxpayer.
The actions taken and the reasons
termination could not be achieved
(including significant economic loss)
will be taken into consideration by
the IRS in making the best efforts
determination. Furthermore, the fact
that there would be an accounting
loss would not, by itself, relieve
the taxpayer of the obligation to
take actions, such as those described
above, to achieve termination. In
summary, if the taxpayer makes a good
faith effort to follow the IRS's
instructions to actually terminate
prior to 2009, it is not the
intention of the IRS to unduly
challenge the taxpayer's efforts as
inadequate.

____________________________________________________________________________________
3.19 Will lack of best efforts be a reason Yes. Whether the Taxpayer has
for voiding an acceptance of the demonstrated best efforts will be
proposal? based on the IRS's review of the
facts in each case.

____________________________________________________________________________________
3.20 Assume a Taxpayer has already sold
some of its LILO and/or SILO
transactions to a third party prior
to this Settlement Initiative and
reported gain at that time:

____________________________________________________________________________________
a. Since there has been a sale to a The Taxpayer's sold transactions will
third party, the Taxpayer has no be included in the Initiative and
ability to terminate the transaction considered to be actually terminated
(using best efforts or otherwise). at the time of their sale. Best
Will the Taxpayer be excepted from efforts are still required to
this requirement? terminate any transactions that have
not already been sold prior to the
Settlement Initiative.

____________________________________________________________________________________
b. How is OID taken into account when OID accrues until the date of
a Taxpayer has already sold LILO/SILO disposition.
transactions?

____________________________________________________________________________________



____________________________________________________________________________________



___________________________________________________________________________________
Termination:

___________________________________________________________________________________
Questions Answers

___________________________________________________________________________________
4.1 Can a sale to a third party be an A sale to a third party is not an
Actual Termination or must the Actual Termination under the
transaction be unwound? Initiative. In an Actual
Termination, the transaction must be
unwound.

___________________________________________________________________________________
4.2 Will a Taxpayer be able to recognize Yes, but to recognize a tax loss on
a tax loss on either an Actual an Actual Termination it must occur
Termination or a Deemed Termination? before January 1, 2011.

___________________________________________________________________________________
4.3 What happens if a lessee does not If a taxpayer provides the IRS with
want to unwind a transaction or acts an acceptance of the terms of the
to delay an Actual Termination? offering, there will be a Deemed
Termination of transactions, in
which the lessee refuses to, or
delays, the termination of the
transactions.

___________________________________________________________________________________
4.4 If there is no Actual Termination by The difference will not be recovered
December 31, 2010, and "Actual if there is an Actual Termination
Termination Gain" is less than after December 31, 2010.
"Deemed Termination Gain", will the
difference be recovered?

___________________________________________________________________________________
4.5 Would any tax payment due as a result The taxes will be due when they are
of the 2008 deemed termination be due ordinarily due for 2008. The deemed
at the time the closing agreement was termination gain will be recognized
executed, at the time taxes in the taxpayer's 2008 tax return.
ordinarily would be due for 2008, or
at another time?

___________________________________________________________________________________
4.6 What is the value of the equity The value of the equity defeasance
defeasance account referenced in the account is the accreted value.
definition of Deemed Termination
Proceeds-is it accreted value or fair
market value?

___________________________________________________________________________________
4.7 What if there is no equity defeasance If there is no equity defeasance
account? account, the taxpayer should submit
information regarding its equity
deposits, including its equity
investment and fees paid to
counterparties.

___________________________________________________________________________________
4.8 What if the lessee established a The defeasance account will be
defeasance account but it has not valued based on the available
been pledged to the lessor and the information. The OID accreted value
lessor may not have any access to (as computed by the Service) will be
information regarding the value of the basis for settlement. Such
that account? transactions are SILOs unless the
taxpayer can establish that the
money circles do not exist, that the
nonrecourse loan will not be paid in
full on the EBO/Purchase Option
date, and that the taxpayer will not
receive its return.

___________________________________________________________________________________
4.9 Is it not sufficient to have a deemed It is not sufficient to have a
termination of the transactions and a deemed termination and a new OID
new OID Note going forward? Note going forward.

___________________________________________________________________________________
4.10 What is the tax consequence of an The tax consequences of an actual
actual termination prior to August termination prior to August 2008
2008? would be consistent with the terms
of the Initiative.

___________________________________________________________________________________
4.11 What is the tax consequence of The transaction is deemed to
payments received/made on the leases terminate at December 31, 2008. Rent
after 2008 but before an actual payments and terms of all operative
termination? For example, are rent documents would be disregarded after
payments received completely December 31, 2008. Only OID would be
disregarded? Does the answer change reported going forward until actual
if the actual termination does not termination. The Initiative
occur before 2011? Does the answer anticipates the exercise of the EBO.
change if the lessee does not
exercise the EBO?

___________________________________________________________________________________
4.12 If the transactions, based on its The 20% amount that will be
original lease profile, has "turned recognized according to the terms of
around" and has generated positive the settlement will be added to the
taxable income in years before 2008, taxpayer's adjusted basis.
under the guidelines, the taxpayer
needs to include 20% of such income
in the year the income was generated
(Item C.1.a.) In calculating the
taxpayer's Adjusted Basis for
purposes of determining Actual or
Deemed Termination Gain, can the
taxpayer add such previously included
income to its Adjusted Basis?

___________________________________________________________________________________
4.13 What is meant by "net proceeds" in The "net proceeds" equal the actual
the definition of Actual Termination proceeds received upon termination,
Proceeds? For example, how does the which is expected to equal the
taxpayer take into account balance of the equity collateral
transaction costs incurred, which may account. The transactions costs will
include legal fees of the taxpayer be added to the taxpayer's basis.
and perhaps even legal fees or other
costs of the lessee that the taxpayer
is required to reimburse as part of
the termination agreement?

___________________________________________________________________________________
4.14 As a result of changes in market The value of the equity defeasance
conditions, the amount in the equity account would be the accreted value
defeasance account may be higher or based on the OID calculations as of
lower than the amount expected at the December 31, 2008.
outset of the transaction. For
purposes of calculating "Deemed
Termination Proceeds," should the
equity defeasance be recorded at the
actual fair market value or the
scheduled values?

___________________________________________________________________________________
4.15 What if there is a gain on an Actual Under the terms of the Initiative,
Termination after 2010? Would that be such gains would not be taxed,
taxed? provided the transaction is not
amended in any way after the
taxpayer agrees to accept the
Initiative.

___________________________________________________________________________________
4.16 What is the tax consequence of a loss A loss on a Deemed Termination will
on a deemed termination? Will it be be treated as an ordinary loss.
treated as an ordinary loss?

___________________________________________________________________________________
4.17 What is the tax consequence if the If there is an Actual Termination
Actual Termination Gain on an actual Gain after 2008 but before 2011 that
termination after 2008 but before exceeds the Deemed Termination Gain,
2011 is more than the Deemed the excess gain will not be taxed,
Termination Gain? The attachment only provided the transaction is not
speaks to the situation where Actual amended in any way after the
Termination Gain is less than Deemed taxpayer agrees to accept the
Termination Gain. Initiative.

___________________________________________________________________________________
4.18 Can a sale to a third party, other No.
disposition or charitable
contribution of the taxpayer's
position in a transaction qualify as
an "actual termination"?

___________________________________________________________________________________
4.19 Confirm intended application in a a. Does "tax years through 2007"
fiscal year context. The Taxpayer is mean "tax years through September
on a September 30 fiscal year 30, 2008"?
reporting date.




 Yes.




b. Does "actual termination
on/before December 31, 2008" mean
"actual termination on/before
September 30, 2009"?




 No. The taxpayer will have a
Deemed Termination on
December 31, 2008 if it does
not actually terminate the
transaction on or before
that date.




c. Does the deemed termination date
of December 31, 2008 mean September
30, 2009"?




 No. The Deemed Termination
date is December 31, 2008
regardless of the Taxpayer's
fiscal year end.




d. Does "actual termination after
December 31, 2008 but before January
1, 2011" mean "after September 30,
2009 but before October 1, 2012"?




 No. The Actual Termination
dates after December 31,
2008 but before January 1,
2011 do not change
regardless of the Taxpayer's
fiscal year end.

___________________________________________________________________________________
4.20 How is the Actual Termination after If there is an Actual Termination
the Deemed Termination computed? after December 31, 2008 but before
January 1, 2011, the Actual
Termination gain will be computed as
defined in the terms of the
Initiative. For such terminations,
basis will include OID reported
after December 31, 2008 but before
January 1, 2011. The Actual
Termination gain/loss will be
compared to the Deemed Ttermination
gain/loss. If the Actual Termination
gain is less than the Deemed
Termination gain, the Taxpayer will
be allowed to recognize an ordinary
loss for the difference in the year
of Actual Termination.

___________________________________________________________________________________




Example to FAQ 4.20:

First, the Taxpayer would compute its Deemed Termination in 2008. Assume the following:
 The Taxpayer's equity investment (equity investment = equity collateral + accommodation fees) was $38,000,000.

 The Taxpayer incurred transaction costs of $500,000.

 The Taxpayer deducted on its tax returns cumulative losses through 2007 of $(101,000,000).

 OID accrued through tax year 2007 was $9,375,000.

 The accreted value of the equity collateral at 12/31/2008 is $26,000,000.

The Taxpayer's Deemed Termination Gain/(Loss) is computed as follows:


___________________________________________________________________________________
Deemed Termination Gain/(Loss)

___________________________________________________________________________________
Termination Proceeds - 12/31/08 Accreted Value of Equity 26,000,000
Collateral

___________________________________________________________________________________
Less: Basis (as defined in the Initiative)

___________________________________________________________________________________
Equity Investment + Transaction Fees 38,500,000

___________________________________________________________________________________
Less: 20% of Pre- 2008 Net Income/Loss ($101,000,000 * (20,200,000)
20%)

___________________________________________________________________________________
Plus 80% OID - Pre-2008 Years ($9,375,000 * 80%) 7,500,000

___________________________________________________________________________________
Total Basis (as defined in the Initiative) 25,800,000

___________________________________________________________________________________
Deemed Termination Gain/Loss 200,000

___________________________________________________________________________________


Second, the Taxpayer had an Actual Termination in 2010 with termination proceeds of $24,000,000. In 2009, the Taxpayer recognized 100% of OID accrued in the amount of $1,600,000. The Taxpayer's Actual Termination gain/loss in 2010 is calculated as follows:


___________________________________________________________________________________
Actual Termination Gain/Loss

___________________________________________________________________________________
Actual Termination Proceeds 24,000,000

___________________________________________________________________________________
Less: Basis (as defined in the Initiative)

___________________________________________________________________________________
Equity Investment + Transaction Fees 38,500,000

___________________________________________________________________________________
Less: 20% of Pre- 2008 Net Income/Loss ($101,000,000 * (20,200,000)
20%)

___________________________________________________________________________________
Plus 80% OID - Pre-2008 Years ($9,375,000 * 80%) 7,500,000

___________________________________________________________________________________
Plus 100% of 2009 OID 1,600,000

___________________________________________________________________________________
Total Basis (as defined in the Initiative) 27,400,000

___________________________________________________________________________________
Actual Termination Gain/(Loss) (3,400,000)

___________________________________________________________________________________


In this example the Actual Termination in 2010 resulted in a loss of $3,400,000. The Taxpayer can claim an ordinary loss in the amount of $3,600,000 (the difference between the Deemed Termination Gain of $200,000 and the Actual Termination Loss) on its 2010 tax return. The Taxpayer would calculate its 2010 ordinary loss from the Actual Termination of this transaction as follows:


_____________________________________________________________________________________
Actual Termination Gain/(Loss) (3,400,000)

_____________________________________________________________________________________
Less: Deemed Termination Gain/(Loss) - 200,000

_____________________________________________________________________________________
2010 Ordinary Loss on Actual Termination (3,600,000)

_____________________________________________________________________________________


If there is an Actual Termination after December 31, 2010, the Taxpayer will report 100% of OID after 2008 through the Actual Termination date. If there is an Actual Termination after December 31, 2010, no gain or loss will be recognized.


____________________________________________________________________________________
4.21 How would transactions that have No, these transactions will not be
already had an EBO before 12/31/08 be ignored. For transactions with an
handled? Would these transactions be exercised EBO before December 31,
ignored for settlement purposes? 2008, the tax consequences of the EBO
termination gain will be calculated
consistent with an Actual Termination
under the Initiative. If termination
occurred before the date of election,
then OID accrues until the date of
termination and is reported in the
year of termination.

____________________________________________________________________________________




Example to FAQ 4.21:

Assume the following facts:
 The Taxpayer receives EBO proceeds on January 2, 2006.

 The Taxpayer's equity investment was $23,100,000.

 The Taxpayer also incurred transaction costs of $1,100,000.

 The Taxpayer deducted cumulative losses through 2005 of $(42,800,000).

 OID through tax year 2005 was computed as $18,000,000.

 The equity portion of the EBO price was $33,400,000.

For each tax year prior to 2006, the year of the EBO, there will be a tax adjustment for 80% of the claimed income/(losses) in each of the open tax years. In this example, 80% of the cumulative losses claimed by the Taxpayer in tax years prior to 2006 equals $34,240,000. The 2006 adjustments will include 80% of all OID that has accrued prior to the EBO. Also, the Taxpayer will report an EBO gain/(loss) in 2006. The Taxpayer's EBO gain as determined by the initiative is computed as follows:


___________________________________________________________________________________
2006 EBO Gain/(Loss) (Calculated like an Actual Termination under the
Initiative)

___________________________________________________________________________________
EBO Proceeds - (Equity portion of EBO price) 33,400,000

___________________________________________________________________________________
Less: Basis (as defined in the Initiative)

___________________________________________________________________________________
Equity Investment + Transaction Fees 24,200,000

___________________________________________________________________________________
Less: 20% of Pre- 2006 Net Income/Loss ($42,800,000 * (8,560,000)
20%)

___________________________________________________________________________________
Plus 80% OID - Pre-2006 Years ($18,000,000 * 80%) 14,400,000

___________________________________________________________________________________
Total Basis (as defined in the Initiative) 30,040,000

___________________________________________________________________________________
EBO Gain/(Loss) 3,360,000

___________________________________________________________________________________


This EBO gain/(loss) would be compared with the gain/(loss) as originally calculated and an adjustment made in the 2006 return.


____________________________________________________________________________________
4.22 With respect to a deemed termination No. The Initiative does not deem the
is the Taxpayer deemed to acquire an taxpayer to acquire an OID note.
OID note with an issue price equal to
the Termination Proceeds and a stated
redemption price equal to the EBO?
Does the accrual of OID increase the
Taxpayer's basis in the OID note?

____________________________________________________________________________________
4.23 If a deemed termination or an actual Yes, losses may be offset against
termination prior to 1/1/11 produces gains from other transactions.
a tax loss, would any such loss be
offset against any gains from other
LILO or SILO transactions?

____________________________________________________________________________________



____________________________________________________________________________________



Basis:

____________________________________________________________________________________
Questions Answers

____________________________________________________________________________________
5.1 Will transaction costs of terminating Transaction costs of terminating a
a transaction be included in basis or transaction before January 1, 2011,
as reduction of proceeds? are includable in basis.

____________________________________________________________________________________




Example to FAQ 5.1:

Assume that the Taxpayer from Example 4.20 actually terminated on December 31, 2010 and incurred additional transaction costs of $1,000,000 on the termination. The Actual Termination Gain/(Loss) is calculated as follows:


___________________________________________________________________________________
Actual Termination Gain/Loss

___________________________________________________________________________________
Actual Termination Proceeds 24,000,000

___________________________________________________________________________________
Less: Basis (as defined in the Initiative)

Equity Investment + Transaction Fees 38,500,000

___________________________________________________________________________________
Less: 20% of Pre- 2008 Net Income/Loss ($101,000,000 * (20,200,000)
20%)

___________________________________________________________________________________
Plus 80% OID - Pre-2008 Years ($9,375,000 * 80%) 7,500,000

___________________________________________________________________________________
Plus 100% of 2009 OID 1,600,000

___________________________________________________________________________________
Plus Costs Incurred to Terminate 1,000,000

___________________________________________________________________________________
Total Basis (as defined in the Initiative) 28,400,000

___________________________________________________________________________________
Actual Termination Gain/(Loss) (4,400,000)

___________________________________________________________________________________



____________________________________________________________________________________
5.2 What detail is necessary to A Taxpayer should provide all
substantiate transaction costs? documents that evidence the amount of
its transaction costs, including, but
not limited to, all contracts and
agreements and a breakdown of the
transaction costs by amount, nature,
and recipient.

____________________________________________________________________________________
5.3 Is it possible to have negative basis Yes. For example, if a Taxpayer
attributable to closed years? claimed tax benefits in closed years,
the losses claimed in those closed
years will be subtracted from the
Taxpayer's basis and, if large
enough, could result in a negative
basis.

____________________________________________________________________________________




Example to FAQ 5.3:

If the Taxpayer from Example 4.20 has tax losses in barred tax years of $(39,000,000), and there was no Actual Termination, the Taxpayer would have a Deemed Termination on December 31, 2008. Thus, the cumulative losses claimed in the tax years that are currently open for examination equal $(62,000,000) (i.e., $101,000,000 - 39,000,000 = $62,000,000). The Deemed Termination calculation would include the recapture of the tax benefits from barred years, because no tax adjustments were made to disallow the transaction for those years. The Taxpayer's Deemed Termination gain is calculated as follows:


___________________________________________________________________________________
Deemed Termination Gain/(Loss)

___________________________________________________________________________________
Termination Proceeds - 12/31/08 Accreted Value of Equity 26,000,000
Collateral

___________________________________________________________________________________
Less: Basis (as defined in the Initiative)

___________________________________________________________________________________
Equity Investment + Transaction Fees 38,500,000

___________________________________________________________________________________
Less: 20% of Pre- 2008 Net Income/Loss ($62,000,000 * (12,400,000)
20%)

___________________________________________________________________________________
Plus 80% OID - Pre-2008 Years ($9,375,000 * 80%) 7,500,000

___________________________________________________________________________________
Less: Other Adjustments to Basis (Recaptured tax (39,000,000)
benefits from barred years)

___________________________________________________________________________________
Total Basis (as defined in the Initiative) (5,400,000)

___________________________________________________________________________________
Deemed Termination Gain/(Loss) 20,600,000

___________________________________________________________________________________



____________________________________________________________________________________
5.4 In calculating the Taxpayer's If there is an Actual Termination
adjusted Basis for purposes of after 2008 but before 2011, the
computing Actual Termination Gain on Actual Termination gain would be
an Actual Termination after 2008 but calculated using the actual proceeds
before 2011, does the Taxpayer received less adjusted basis.
receive credit for either (a) the Adjusted basis will include 100% of
gain recognized on the Deemed OID required to be included in
Termination or (b) the 100% OID taxable income after 2008.
required to be picked up after 2008?

____________________________________________________________________________________




Example to FAQ 5.4:

See calculation of Actual Termination Gain/(Loss) in Example 4.20 and the comparison of the Actual Termination Gain/(Loss) to the Deemed Termination Gain/(Loss). The OID recognized in income in 2009 is added to the basis to determine the Actual Termination Gain/(Loss) in 2010.


____________________________________________________________________________________
5.5 What happens if third parties (e.g. There will be a Deemed Termination as
lenders) charge fees for permitting of December 31, 2008 if the Taxpayer
unwind? Would such fees be deductible is not permitted to unwind the
or added to basis? transaction. Substantiated
transaction costs in an Actual
Termination will be added to basis if
they are incurred before January 1,
2011.

____________________________________________________________________________________




Example to FAQ 5.5:

See calculation of basis in Example 5.1. Costs incurred to terminate the transaction were added to basis.


____________________________________________________________________________________
5.6 Item B(4) of the SILO Initiative Yes, Taxpayers must reduce their SILO
provides that the SILO "basis" must basis by all of the losses claimed in
be reduced by losses claimed in barred years (see Example to FAQ
barred years. Is it correct that the 5.3), and will get a corresponding
IRS is requiring that Taxpayers increase in basis for income
reduce their SILO "basis" by 100% of recognized with respect to the SILO
those losses and in essence recapture in closed years.
all those losses whether they arose
from depreciation, interest, etc.? As
a related question, do Taxpayers get
a corresponding increase in "basis"
for amounts that they took into
income with respect to the SILO in
closed years?

____________________________________________________________________________________
5.7 How is "free cash" (cash rent Under the terms of the Initiative
received in excess of debt service when computing gain or loss on a
during the lease term) received by Deemed Termination or an Actual
the lessor prior to the 12/31/2008 Termination, it is necessary to treat
deemed termination to be treated? Is "free cash" as a reduction to basis.
it ignored, treated as a reduction in The free cash adjustment to basis is
tax basis, treated as a payment of necessary to reflect the economic
OID or some other assumption? impact of the transaction.

____________________________________________________________________________________



____________________________________________________________________________________



____________________________________________________________________________________
OID:

____________________________________________________________________________________
Questions Answers

____________________________________________________________________________________
6.1 How is OID treated if there is a The taxpayer will recognize 100% of
Deemed Termination but no actual OID accrued yearly until there is an
termination occurs before January 1, actual termination or the early
2011? buyout (EBO) date.

____________________________________________________________________________________
6.2 Does a taxpayer get basis for 100% of If the Taxpayer has an Actual
OID for the period from December 31, Termination during the period from
2008 through December 31, 2010? January 1, 2009 through December 31,
2010, the Taxpayer receives basis for
100% of the OID reported during such
period until the year of Actual
Termination.

____________________________________________________________________________________
6.3 Is cumulative OID (accrued through Yes.
2007) included in 2008 income?

____________________________________________________________________________________
6.4 Should OID for 2008 be included in The 2008 OID would be included in the
income and then deducted, or ignored Deemed Termination proceeds. There
altogether? will be no basis offset for the 2008
OID, thus the 2008 OID will be
recognized as part of the gain. In an
Actual Termination in 2008, the 2008
OID will be disregarded.

____________________________________________________________________________________
6.5 Does OID apply if not previously Yes.
proposed in Revenue Agents Reports
(e.g., LILOs)?

____________________________________________________________________________________
6.6 According to the offering, if there If there is no Actual Termination by
is no Actual Termination by December December 31, 2010, then 100% of OID
31, 2010, then 100% OID applies for accrued on a year by year basis will
each subsequent year. Will OID be recognized as income in each year
accrued after 12/31/10 be included in until there is an Actual Termination
basis? or the EBO date. No gain and/or loss
will be recognized for tax purposes
with respect to transactions
terminated after December 31, 2010
for purposes of this initiative,
provided the transaction is not
amended in any way after the taxpayer
agrees to accept the Initiative.
Thus, OID accruing after December 31,
2010 will not be included in any tax
basis calculations.

____________________________________________________________________________________
6.7 Will taxpayer's be entitled to claim No.
deductions for OID if there is an
"Actual Termination" after December
31, 2010?

____________________________________________________________________________________
6.8 What is the base for calculating OID? The total of all deposits in the
equity collateral account is the base
for calculating OID.

____________________________________________________________________________________




Example to FAQ 6.8:

The Taxpayer made an equity investment totaling $38,000,000, of that amount $23,000,000 was the equity collateral and $15,000,000 was the accommodation fee. The $23,000,000 equity collateral is the base for calculating OID.


____________________________________________________________________________________
6.9 How is OID calculated? We understand OID is calculated as the Service has
taxpayers have considered the done in the SILO Notice Of Proposed
following methods: (1) using an Adjustments (NOPA). The base is the
effective interest rate that original equity collateral deposit.
discounts future net cash flows less Term is closing date through the EBO.
the equity investment (including Free cash returns and EBO
transaction costs); and (2) using the installments actually going back to
scheduled rate applied to the amount the investor is considered to be the
of the cash deposited in the equity total earnings on the investment.
deposit account.

____________________________________________________________________________________
6.10 Who will compute OID (Taxpayer or The IRS will review the OID
IRS)? computation submitted by the
taxpayer.

____________________________________________________________________________________
6.11 How does the taxpayer report 80% of The 80% of OID accrued for tax years
the OID accrued through 2007 in 2008? through 2007 will be reported on the
original 2008 tax return as ordinary
income.




a. Is the Taxpayer expected to report
the OID with its original 2007 tax
return?




The settlement initiative does not
require the taxpayer to report OID on
its 2007 return.




The IRS recommends that the taxpayer
include a disclosure on the tax
return that it has elected to
participate in the settlement
initiative and describing the
complete tax treatment of the
transaction as actually reported.




b. Is the Taxpayer expected to report
OID on an amended return? The
settlement initiative does not
require the taxpayer to file an
amended return to report OID on its
2007 return.

____________________________________________________________________________________
6.12 If OID from previous years is Interest would not be imposed on any
reported in 2008, would interest be underpayment relating to OID not
imposed on any underpayment on the reported prior to 2008.
pre-2008 OID?

____________________________________________________________________________________
6.13 Does the settlement proposal require Yes, OID must be included for closed
taxpayers to include OID for closed years in 2008.
years in 2008 as well as for open
years?

____________________________________________________________________________________



____________________________________________________________________________________
General or Miscellaneous Questions:

____________________________________________________________________________________
Questions Answers

7.1 Can federal income tax assessments be No.
staggered so as to reduce
administrative burden on filing
state/local returns?

____________________________________________________________________________________
7.2 If a Taxpayer closed its LILO/SILO Provided no closing agreement has
transactions as an agreed issue been executed by the Service, such
during the examination and now wants taxpayer is eligible for the
a refund, what happens? Initiative.

____________________________________________________________________________________
7.3 There is no mention of Section 6707A Section 6707A has not been waived as
penalties. Can resolution of this part of the Initiative, but all
matter be incorporated into a closing matters that are resolved will be in
agreement? the closing agreement.

____________________________________________________________________________________
7.4 What is the reason that Taxpayer is The Service wants to encourage
being encouraged to prematurely termination of these transactions for
terminate transactions? effective tax administration.

____________________________________________________________________________________
7.5 Would exit strategy tax return They will be reversed at 12/31/08.
benefits taken prior to 12/31/08 be
reversed at 12/31/08, or would such
benefits be removed from prior open
tax years?

____________________________________________________________________________________
7.6 Could an example of a resolution No, the Service will not be able to
computation be provided that provide such an example because facts
incorporates the FSC or ETI benefits? and circumstances will vary.

____________________________________________________________________________________



____________________________________________________________________________________
IRS Letter 4394 Attachment 1 --SILO Initiative

August 7, 2008

Internal Revenue Service : IRS Letter 4394, Attachment 1 : Sale-In/Lease-Out (SILO) transactions : Settlement initiative .



Attachment 1 - SILO Initiative



A. General
 The Taxpayer agrees to use its best efforts to terminate its SILO transactions on or before December 31, 2008.

 If the Taxpayer is unable to terminate all of its SILO transactions by December 31, 2008, then any of its SILO transactions that are not terminated by that date will be deemed terminated as of that date ("Deemed Termination").

 If a Deemed Termination has occurred, the taxpayer will be permitted to claim the benefit of an Actual Termination if its SILO transactions are terminated on or before December 31, 2010.



B. Definitions
 Actual Termination - An Actual Termination occurs when a Taxpayer terminates its SILO transactions.

 Actual Termination Gain - Actual Termination Gain is equal to the Actual Termination Proceeds less the Taxpayer's Adjusted Basis on the termination date.

 Actual Termination Proceeds - The net proceeds the Taxpayer receives when it actually terminates its SILO transactions (expected to be the balance in the equity defeasance account).

 Deemed Termination - If the Taxpayer is unable to terminate all of its SILO transactions by December 31, 2008, then any of its SILO transactions that are not terminated by that date will be deemed terminated as of that date.

 Deemed Termination Date - December 31, 2008.

 Deemed Termination Gain - The difference between the Deemed Termination Proceeds and the Taxpayer's Adjusted Basis on the Deemed Termination Date.

 Deemed Termination Proceeds - The amount which, at the Deemed Termination Date, is equal to the value of the equity defeasance account.

 Taxpayer's Adjusted Basis - The Taxpayer's Adjusted Basis includes all of the following items:

1) The Taxpayer's equity investment (equity collateral + accommodation fees) plus transaction fees;

Less
2) The allowed deductions (20% of the losses previously claimed) through the 2007 tax year;

Plus
3) 80% of the Original Issue Discount ("OID") that accrued through the tax year 2007.



Other Basis Adjustments
4) In the event that Taxpayer claimed losses in taxable years that the Service is now barred by the statute of limitations under I.R.C. §6501 from adjusting, basis will be reduced by the losses claimed in those barred years.



C. Terms



1. Tax Years Through 2007

a. 80% Disallowance of SILO Transactions
 The Taxpayer agrees to concede 80% of any claimed interest expense deduction, depreciation deduction, and amortized transaction costs for each tax year through 2007.

 The IRS agrees to disregard 80% of any reported taxable rental income with respect to Taxpayer's SILO transactions for each tax year through 2007.



b. Report 80% of Accrued OID
 The Taxpayer agrees to report in 2008, 80% of the OID accrued with respect to its SILO transactions for each tax year through 2007.

2. Tax Treatment of an Actual Termination on or before December 31, 2008
 In the event of an Actual Termination on or before December 31, 2008, the Taxpayer agrees to recognize as ordinary income the Actual Termination Gain.



3. Tax Treatment Under a Deemed Termination
 If the Taxpayer is unable to terminate all of its SILO transactions by December 31, 2008, then its non-terminated SILO transactions will be deemed terminated as of the Deemed Termination Date.

 If there is a Deemed Termination, the Taxpayer agrees to recognize as ordinary income the Deemed Termination Gain.

 If there is a Deemed Termination, the Taxpayer agrees to recognize as ordinary income, 100% of the OID that accrues each year from the Deemed Termination Date until the date of an Actual Termination.



4. Tax Treatment of an Actual Termination occurring after the Deemed Termination on December 31, 2008, but before January 1, 2011
 If an Actual Termination occurs after December 31, 2008 but before January 1, 2011, and the Actual Termination Gain is less than the Deemed Termination Gain, then the Taxpayer will be entitled to an ordinary deduction for the difference between the gain that was recognized as a result of the Deemed Termination and the Actual Termination Gain in the taxable year of Actual Termination.



5. Other Terms
 The Taxpayer will not be liable for any penalties under I.R.C. §§6662 and 6662A.

 The Taxpayer will waive the prohibition against ex parte communications between Appeals and Compliance and Office of Chief Counsel employees as to any LILO and/or SILO transactions that are the subject of this initiative.

 The Taxpayer signs the Closing Agreement that is part of this initiative.

 The Taxpayer agrees that all exit strategies will be disregarded for tax purposes. The Taxpayer agrees that if it has already received any such tax benefits, it will recapture such tax benefits as of the Deemed Termination Date.

 The Taxpayer agrees that its acceptance of this settlement initiative indicates its agreement that it is not entitled to claim or receive tax benefits from the SILO transactions other than those outlined herein.

 The Service will not resolve any of the Taxpayer's SILO transactions unless all of its SILO transactions are resolved. In the event that the Taxpayer also engaged in LILO transactions and is invited to participate in the LILO Settlement Initiative, the Taxpayer must also agree to participate fully in that initiative. The Service will not resolve any of the Taxpayer's SILO transactions unless the Taxpayer also agrees to fully resolve all of its LILO transactions.

 If applicable, resolution of the Taxpayer's SILO transactions will be reported to the Joint Committee on Taxation pursuant to I.R.C. §6405 .

IRS Letter 4394 Attachment 2 --SILO Initiative

August 7, 2008

Internal Revenue Service : IRS Letter 4394, Attachment 2 : Sale-In/Lease-Out (SILO) transactions : Settlement initiative .


Attachment 2- SILO Initiative


1. A list of all Sale-In/Lease-Out (SILO) transactions that are the same as or substantially similar to those described in Notice 2005-13 for which losses or deductions were claimed in any taxable year (The Commissioner and the Department of the Treasury designated SILO transactions as "listed transactions" in Notice 2005-13 ).

2. Computations in electronic (Excel) format reflecting the settlement terms outlined in Section C of Attachment 1.

3. Interet/ABC Reports up through and including the EBO date showing annual cash flow analysis, annual tax presentation, and accretion of equity collateral balance.

4. Equity collateral schedules (schedules detailing beginning equity collateral and equity portion of rent, and/or EBO payments).

5. Documents evidencing EBO purchase price.

6. Documents evidencing amount of equity investment and transaction costs.

7. Detailed breakdown of transaction costs by amount, nature, and recipient



Remarks of IRS Commissioner Doug Shulman

August 7, 2008

IRS Commissioner Doug Shulman : Lease-In/Lease-Out (LILO) transactions : Sale-in/Lease-Out (SILO) transactions .


Remarks of IRS Commissioner Doug Shulman



August 6, 2008


In the last several years, as you know, the IRS has reinvigorated its enforcement program. A major part of this has been the IRS' stepped up efforts to detect and deter aggressive tax shelters. We have been particularly effective in rooting out tax shelter transactions. And I've said publicly that during my tenure here at the IRS, you can expect these efforts to continue. Promoters and participants in aggressive tax shelters should know that the IRS will remain vigilant.

Our success in uncovering tax shelters, however, is just the start of the process to resolving these issues. Today, I'm pleased to announce that the IRS has decided to launch a settlement initiative for both Lease-In/Lease-Out (LILO) and Sale-in/Lease-Out (SILO) transactions. Under this initiative, more than 45 of the nation's largest corporations that participated in these shelters will receive a letter with an offer. Shelter participants will have 30 days to make a decision to accept the offer.

Let me refresh everyone's memory, LILOs and SILOs involved complex and convoluted purported leasing arrangements in which some of the nation's largest corporations supposedly leased or purchased large assets, such as foreign rail systems or sewer systems, and then immediately leased them back to their original owners. Under the arrangement, these corporations, which include companies in the Fortune 500, buoyed their balance sheets by gaining billions of dollars of tax deferrals. Using LILOs and SILOs, these companies, which include many of the nation's top banks, put off recognition of current income for tax purposes for many years.

The IRS designated LILOs as "listed transactions" in 2000. SILOs were designated in 2005. Since then, the government has gone to court and successfully challenged these deals as having no purpose other than creating tax benefits. But there are hundreds of these transactions that have yet to be fully examined and/or adjudicated. With the government's recent victories in court demonstrating the strength of our position, the time has come to find the most effective way to resolve these existing disputes. As IRS Commissioner, I believe that the settlement initiative that the IRS is offering today achieves this.

The public has a right to expect that large corporations be good corporate citizens and meet their legal and compliance obligations. The nation's leading commercial enterprises have the legal and accounting resources to take full advantage of favorable provisions of the tax law. But they are not entitled to use their extensive resources to twist provisions of the tax law to the point that they no longer reflect Congress's intent. As a basic matter of fairness to all taxpayers, the IRS cannot allow LILO and SILO deals to stand. The time has come for these shelter participants to put these cases behind them. And the best way for them to do so is to act on the settlement offer they will receive today.
S publishes sales/leaseback guidance

IRS abuse of discretion in CDP cases documented by TIGTA


Treasury Inspector General for Tax Administration (TIGTA) Report: The Office of Appeals Continues to Show Improvement in Processing Collection Due Process Cases (Reference Number: 2008-10-160)

September 19, 2008

Treasury Inspector General for Tax Administration (TIGTA) report : IRS Appeals Office : Collection Due Process cases .




TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION





The Office of Appeals Continues to Show Improvement in Processing Collection Due Process Cases


September 12, 2008

Reference Number: 2008-10-160

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

Redaction Legend :

1 = Tax Return/Return Information

Phone Number | 202-622-6500 Email Address | inquiries@tigta.treas.gov Web Site | http://www.tigta.gov




DEPARTMENT OF THE TREASURY





WASHINGTON, D.C. 20220


September 12, 2008

MEMORANDUM FOR CHIEF, APPEALS

FROM: Michael R. Phillips Deputy Inspector General for Audit

SUBJECT: Final Audit Report --The Office of Appeals Continues to Show Improvement in Processing Collection Due Process Cases (Audit # 200810003)

This report presents the results of our review of the Collection Due Process (CDP). 1 The overall objective of this review was to determine whether the Internal Revenue Service (IRS) complied with the provisions of 26 United States Code Sections 6320 and 6330 when taxpayers exercised their rights to appeal the filing of a Notice of Federal Tax Lien or the issuance of a notice of intent to levy. 2 The Treasury Inspector General for Tax Administration is required to determine annually whether the IRS complied with the legal guidelines and procedures for the filing of a Notice of Federal Tax Lien or the issuance of a notice of intent to levy and the right of the taxpayer to appeal. 3



Impact on the Taxpayer

The Office of Appeals (Appeals) has continued to improve the processing of CDP cases as a whole by generally classifying taxpayer requests properly, developing additional CDP procedures, and ensuring that the Collection Statute Expiration Dates 4 for taxpayer accounts were correct. However, we identified a few instances in which taxpayers were not provided with their right to a hearing because Appeals employees did not make sufficient attempts to contact the taxpayers before closing their cases. Additionally, correspondence to some taxpayers was not accurate or clear or did not fully address all issues raised by the taxpayers. As a result, taxpayers could experience increased burden if they have to contact the IRS for additional assistance.



Synopsis

Appeals has improved the handling of CDP cases when taxpayers exercised their rights to appeal the filing of a Notice of Federal Tax Lien or the issuance of a notice of intent to levy. In our prior review, 5 we reported that hearing officers were still not consistently including impartiality statements in their case files. Our current review discovered that although this condition still exists, Appeals has implemented revised procedures that will address the condition for the next review period. Also, previously, the hearing officers were not always documenting whether the Collection function met all legal and administrative requirements, and some taxpayers had their Collection Statute Expiration Dates incorrectly extended. This audit found 1) that Appeals is documenting whether all legal and administrative requirements have been met, and 2) no instances of incorrect extensions of Collection Statute Expiration Dates.

However, we identified a small portion of CDP and Equivalent Hearing cases in which the hearing officers did not include the impartiality statements. In addition, we identified a few instances in which taxpayers were not provided with their right to a hearing because Appeals employees did not make sufficient attempts to contact the taxpayers before closing their cases. Also, some taxpayers might not have received an appropriate or complete response to the issues raised in their appeals because some case files did not include documentation required for us to evaluate the completeness of the response. Some taxpayers received correspondence that was not accurate or clear or did not fully address the issues raised by the taxpayers. As a result, we could not determine if taxpayer rights were potentially violated. Finally, we identified taxpayer accounts that did not contain required coding to identify those taxpayers who had exercised their appeal rights for a CDP hearing or an Equivalent Hearing.



Recommendations

We recommended that the Chief, Appeals, re-emphasize to Appeals employees the requirements for 1) contacting taxpayers (or their authorized representatives) and ensuring that these procedures are being followed before approving case closings and 2) including certain documentation in the Appeals files, such as the taxpayer's hearing request and correspondence to the taxpayer. The Chief, Appeals, should also 3) re-emphasize to employees that letters must be accurate and understandable to the taxpayer and that all taxpayer issues must be addressed before the taxpayer's case is closed, 4) revise Appeals policies and procedures to ensure that appropriate computer coding is entered for each type of hearing request for all tax periods, and 5) ensure that all taxpayer accounts we identified in our samples as being incorrectly coded are corrected.



Response

The IRS agreed with all of our recommendations. Appeals management will post an article to the Appeals web site to remind employees of the requirement for contacting taxpayers (or their authorized representatives) who have requested a CDP hearing. In addition, Appeals management will conduct meetings with their employees in the campus 6 sites where CDP cases are closed and closed office files are prepared to review which documents are required to be retained in a closed office file. Appeals management will also post articles to the Appeals web site to remind all personnel that they must ensure the letters are accurate and presented in a manner that is understandable to the taxpayer, as well as remind employees of the requirement to address all taxpayer issues before closing the taxpayer's case. Further, Appeals management will revise procedures to ensure that CDP and Equivalent Hearing requests are properly posted to the CDP Tracking System when received in Appeals and will develop new procedures for verifying appropriate and correct front and back-end IDRS coding. Finally, Appeals management has corrected all inaccurate taxpayer IDRS accounts that we identified during this audit. Management's complete response to the draft report is included as Appendix VI.

Copies of this report are also being sent to the IRS managers affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or Nancy A. Nakamura, Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs), at (202) 622-8500.




Table of Contents


Background

Results of Review


Taxpayers Were Not Always Given the Opportunity for a Hearing, and Certain Documentation Was Not Available to Determine Whether the Office of Appeals Addressed All Taxpayer Issues



Recommendations 1 and 2 :



Hearing Officers Did Not Document Their Impartiality in a Few Cases



Letters to Taxpayers Were Not Always Accurate or Clear or Did Not Fully Address All Issues Raised by Taxpayers



Recommendation 3 :



Some Office of Appeals Cases Did Not Include the Correct Computer Coding on Taxpayer Accounts



Recommendation 4 :



Recommendation 5 :


Appendices


Appendix I --Detailed Objective, Scope, and Methodology



Appendix II --Major Contributors to This Report



Appendix III --Report Distribution List



Appendix IV --Outcome Measures



Appendix V --Collection Due Process Procedures



Appendix VI --Management's Response to the Draft Report





Abbreviations

ACDS Appeals Centralized Database System

CDP Collection Due Process

EH Equivalent Hearing

IDRS Integrated Data Retrieval System

IRS Internal Revenue Service

U.S.C. United States Code







Background


When initial contacts by the Internal Revenue Service (IRS) do not result in the successful collection of unpaid tax, the IRS has the authority to attach a claim-a Notice of Federal Tax Lien (lien)-to a taxpayer's assets. 1 The IRS also has the authority to seize or impose a levy on a taxpayer's property, such as wages or bank accounts, to satisfy a taxpayer's debt. 2

In February 1996, the IRS established procedures that allowed taxpayers to appeal the filing of a lien and proposed or actual levies. Congress enacted legislation to protect taxpayers' rights in the IRS Restructuring and Reform Act of 1998. 3 Taxpayers now have the right to a hearing with the Office of Appeals (Appeals) under the Collection Due Process (CDP). 4 Appeals is independent of other IRS offices, and its mission is to resolve tax controversies, without litigation, on a basis that is fair and impartial to both the Federal Government and the taxpayer.

When a taxpayer requests an Appeals hearing regarding the filing of a lien or the issuance of a notice of intent to levy within the required time period, the taxpayer is granted a CDP hearing. If the IRS does not receive the taxpayer's request within the required period (generally 30 calendar days), the taxpayer might be granted an Equivalent Hearing (EH). Additionally, the taxpayer must request the EH within 1 year of the issuance of the CDP notice. Appeals changed its procedures to comply with these November 16, 2006, amended CDP regulations.

Taxpayers have the right to petition the United States Tax Court if they disagree with the Appeals decision from a CDP hearing. When Appeals makes a final decision on a taxpayer's case, the hearing officer issues a Determination Letter on CDP cases 5 or a Decision Letter on EH cases. During Fiscal Year 2007, Appeals closed 25,212 CDP cases and 9,436 EH cases.

The Treasury Inspector General for Tax Administration is required to determine annually whether the IRS has complied with legal guidelines and procedures for the filing of a lien or a notice of intent to levy and the rights of the taxpayer to appeal. 6 This is our eighth annual audit of taxpayer appeal rights.

Our previous audit report on the Appeals process was issued in September 2007, 7 and the related corrective actions were planned for implementation by January 2008. The scope period for this year's audit covered CDP and EH cases closed between October 1, 2006, and September 30, 2007, which was earlier than the planned implementation date for the corrective actions. Because the cases in this audit were closed prior to completion of corrective actions by the IRS, we did not make recommendations in this report for conditions repeated from the previous audit.

This review was performed by contacting Appeals personnel in Detroit, Michigan; San Francisco, California; and the National Headquarters in Washington, D.C., during the period October 2007 through June 2008. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.




Results of Review


Appeals has continued to show improvements in the processing of CDP cases as a whole by generally classifying taxpayer requests properly, developing additional CDP procedures, and ensuring that the Collection Statute Expiration Dates 8 for taxpayer accounts were correct. For example, previously, the hearing officers were not always documenting whether the Collection function met all legal and administrative requirements, and some taxpayers had their Collection Statute Expiration Dates incorrectly extended. This audit found that Appeals is documenting whether all legal and administrative requirements were met and no instances of incorrect extensions of Collection Statute Expiration Dates.

However, we identified a few instances in which taxpayers were not provided with their right to a hearing because Appeals employees did not make sufficient attempts to contact the taxpayers before closing their cases. In addition, some taxpayers might not have received an appropriate or complete response to the issues raised in their appeals because some case files did not include required documentation. Without the appropriate case documentation, we could not identify the issues raised by the taxpayer or whether Appeals adequately addressed all issues in the taxpayer's hearing. Further, hearing officers are still not always documenting their impartiality in the case files.

We also found correspondence to some taxpayers was not accurate or clear or did not fully address all issues raised by the taxpayers. As a result, taxpayers could experience increased burden if they have to contact the IRS for additional assistance.

Finally, we identified taxpayer accounts that did not contain required computer coding to identify those taxpayers who had exercised their appeal rights for a CDP hearing or an EH. As a result, IRS employees who access the taxpayers' accounts for review or to take subsequent actions will not be aware of the taxpayers' appeals. This could result in erroneous collection actions, inappropriate suspension of collection activity, or incorrect information or advice from IRS personnel.



Taxpayers Were Not Always Given the Opportunity for a Hearing, and Certain Documentation Was Not Available to Determine Whether the Office of Appeals Addressed All Taxpayer Issues

Some taxpayers were not given an opportunity for a CDP hearing or an EH because Appeals employees did not make sufficient attempts to contact taxpayers or their authorized representatives as required. In addition, some case files were incomplete and did not contain necessary documentation. Therefore, we could not determine if all Appeals actions were appropriate and fully addressed all issues raised by the taxpayers.



Some Appeals employees did not make the required number of attempts to contact taxpayers or their authorized representatives

Appeals policies and procedures require the Appeals employee to make at least two documented attempts to contact the taxpayer or his or her authorized representative when a hearing is requested. The intent of these procedures is to allow taxpayers or their representatives a reasonable opportunity to make contact with or provide information to Appeals.

***** of 70 statistically sampled CDP cases and ***** of 70 statistically sampled EH cases, ***** We identified *****

*****

We estimated that 721 of the 25,212 CDP and 135 of the 9,436 EH cases 9 were closed without a hearing because they did not have at least 2 documented attempts to contact the taxpayer or his or her representative as required by Appeals procedures. Failure to follow the procedures for contacting the taxpayer after he or she has requested a CDP hearing could result in a denial of taxpayer rights because the taxpayer is not being provided with adequate access to a CDP hearing.

In our opinion, these cases were closed prematurely, and the taxpayers were not provided with adequate due process. This occurred because hearing officers did not follow the procedures for contacting taxpayers or their representatives. We could not determine why certain hearing officers closed taxpayer cases prematurely. However, it is possible that they were unaware of these procedures.



We could not always determine whether all taxpayer Issues were adequately addressed

Appeals has detailed guidance describing the information that should be in the CDP and EH case files. However, in a few of our sample case files, important documents such as the taxpayer's hearing request and letters to the taxpayer were not included in the case files.

In 45 of our 70 sample CDP cases, Appeals issued a Determination Letter at the conclusion of the CDP hearing. In the sample of 70 EH cases, Appeals issued a Decision Letter in 50 cases. 10 We determined that ***** of the 45 CDP cases were ***** and ***** of the 50 EH cases ***** During our review, we could not determine why important documentation such as letters sent to taxpayers was missing from the case files.

At a minimum, these Letters to taxpayers must include:


1. Verification that the requirements of applicable laws and administrative procedures have been met.



2. Issues raised by the taxpayer to be considered in the appeal.



3. Determination that the proposed collection action balances the need for efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary.


In addition, ***** of the 70 CDP cases and 4 (6 percent) of the 70 EH cases were ***** Because some closing letters to taxpayers were missing, we could not fully evaluate whether hearing officers addressed all of the taxpayers' issues completely, clearly, and accurately and explained the basis for their decision. In addition, because the hearing requests were sometimes missing, we could not determine if the taxpayers were granted the proper type of hearing (CDP or EH) as required. As a result, we could not determine if taxpayer rights were potentially violated.

Based on our results, we estimated that the following numbers of taxpayers in our sample period might not 1) have received adequate responses from Appeals, or 2) had their hearing requests properly classified, resulting in potential violations of taxpayer rights:


Ÿ 720 taxpayers whose case files did not contain the Determination Letters.



Ÿ 135 taxpayers whose case files did not contain the Decision Letters.



Ÿ 721 taxpayers whose CDP hearing requests were missing.



Ÿ 539 taxpayers whose EH requests were missing.




Recommendations

The Chief, Appeals, should re-emphasize to Appeals employees the requirements for:

Recommendation 1: Contacting taxpayers (or their authorized representatives) who have requested a CDP hearing. In addition, Appeals management should re-emphasize that established procedures for contacting taxpayers are being followed before approving cases for closure, particularly when there have been no contacts with the taxpayers.


Management's Response: IRS management agreed with our recommendation and will post an article to the Appeals web site to remind Appeals employees of the requirement for contacting taxpayers (or their authorized representatives) who have requested a CDP hearing. The article will emphasize the procedures in the Internal Revenue Manual 11 when there has been no contact with the taxpayer, and management's role in reviewing cases for closure.


Recommendation 2: Including certain documentation in the Appeals files, such as the taxpayer's hearing request and correspondence to the taxpayer.


Management's Response: IRS management agreed with our recommendation and will conduct meetings with their employees in the campus 12 sites where CDP cases are closed and closed office files are prepared. The meeting will include a review of which documents are required to be retained in the closed office file.




Hearing Officers Did Not Document Their Impartiality in a Few Cases

Both a CDP hearing and an EH must be conducted by a hearing officer who has had no prior involvement with respect to the unpaid tax. However, the taxpayer may waive this requirement. If a hearing officer does not document the case file with a statement of his or her impartiality, there is a risk of prior involvement in the taxpayer's case and lack of independence. To comply with this requirement, closing letters to taxpayers and waivers 13 must include an impartiality statement.

Lack of this documentation in case files does not mean that hearing officers were not impartial or that taxpayers received unfair hearings. However, we determined that case files for 3 (4 percent) of the 70 CDP cases and ***** of the 70 EH cases ***** We estimated that 1,081 of the 25,212 CDP cases and 270 of the 9,436 EH cases closed in Fiscal Year 2007 did not contain the impartiality statement. As a result, we could not determine if taxpayer rights were potentially violated in these cases.

We have brought these issues to the attention of Appeals management in prior reports. Appeals management agreed to revise written guidance and provide training to hearing officers for documenting impartiality. We confirmed that Appeals had revised its Internal Revenue Manual in December 2006, requiring that hearing officers include an impartiality statement in the case activity record during the initial analysis of the case. This revision should preclude instances of the impartiality statement not being included, particularly when the hearing request is withdrawn and a Determination/Decision Letter is thus not sent to the taxpayer. Because most of the sample cases in this audit were initiated prior to December 2006, we are making no further recommendations regarding impartiality.



Letters to Taxpayers Were Not Always Accurate or Clear or Did Not Fully Address All Issues Raised by Taxpayers

Appeals has developed detailed guidance describing the information that should be included in Letters sent to taxpayers. Specifically, Appeals procedures state that the Determination and Decision Letters should contain a clear and detailed explanation of the basis for the hearing officer's decision.

Letters issued to some taxpayers were inaccurate or unclear or did not fully address all issues or tax periods raised in the taxpayers' appeals. As a result, we could not determine if taxpayer rights were potentially violated. For example, we identified *****

Specifically, we found problems with correspondence to taxpayers in 4 (9 percent) of the 45 CDP sample cases for which Appeals issued Determination Letters and 5 (10 percent) of the 50 EH cases for which Appeals issued Decision Letters. 14 Table 1 shows the types of errors we identified in correspondence to taxpayers.




Table 1: Problems Identified In Correspondence to Taxpayers

_____________________________________________________________________________________
Inaccurate, Unclear, or Incomplete Letters Number of Cases

_____________________________________________________________________________________
Letter was inaccurate *****

Letter was unclear or did not address all issues *****

Letter did not address all tax periods *****

_____________________________________________________________________________________
Total 9

_____________________________________________________________________________________
Source: Our review of a sample of CDP and EH cases closed in Fiscal Year 2007.




We estimated that 1,441 Determination Letters and 674 Decision Letters 1) did not adequately address all issues raised by the taxpayer, and/or 2) included misleading or unclear information.

We believe that hearing officers should not only address all issues but also clearly explain their decisions so that taxpayers do not have to recontact Appeals or another IRS function for clarification. In some cases, taxpayers may pursue further appeals or petition the United States Tax Court if they believe that Appeals did not adequately explain or address their issues.

Appeals management did not provide a cause for all of the errors we identified in the correspondence sent to taxpayers. However, we believe that some hearing officers might not have conducted adequate research on the taxpayers' accounts to identify the pertinent issues before they prepared the Determination or Decision Letters.



Recommendation

Recommendation 3: The Chief, Appeals, should re-emphasize the following requirements to Appeals personnel: 1) letters must be accurate and presented in a manner that is understandable to the taxpayer; and 2) all taxpayer issues must be addressed before the taxpayer's case is closed.


Management's Response: IRS management agreed with our recommendation and will post an article to the Appeals web site to remind all personnel that when they prepare and/or approve a Decision Letter or Notice of Determination, they must ensure the letters are accurate and presented in a manner that is understandable to the taxpayer. In addition, an article will be posted to remind all employees of the requirement to address all taxpayer issues before closing the taxpayer's case.




Some Office of Appeals Cases Did Not Include the Correct Computer Coding on Taxpayer Accounts

The IRS uses specific coding on its computer system (the Integrated Data Retrieval System - IDRS) 15 to identify those taxpayers who exercised their appeal rights for CDP hearings and EHs. Because IRS employees use the IDRS as the primary tool for researching a taxpayer's account, the computer transcript must reflect all actions that occurred, including taxpayer appeals.

If the receipt of an Appeals hearing request and closure of the hearing are not recorded on the IDRS, inappropriate collection activity (or unnecessary suspension of collection activity) could occur. Further, the IRS might provide inaccurate information or advice to a taxpayer such as suggesting that a CDP hearing or an EH could still be held when the taxpayer had already received a hearing. 16 For example, taxpayers might call the IRS Customer Service function or the Taxpayer Advocate Service 17 to obtain information on the status of their accounts or seek assistance related to ongoing IRS activities. If the coding for Appeals hearings is inaccurate, taxpayers might experience increased burden by obtaining incorrect advice about their issues, as well as being denied requests for additional CDP hearings because they have already received a prior hearing and are not entitled to additional hearings.

When a taxpayer's hearing request is received by the IRS, it is first routed through Compliance personnel in the Wage and Investment Division or the Small Business/Self-Employed Division. A Compliance function employee initially enters the taxpayer's appeal in a tracking system 18 to document that a hearing request was received.

Subsequently, when a Compliance function employee transfers the taxpayer's case to Appeals, Appeals is required to verify that the case has been entered in the tracking system. When Appeals closes a CDP hearing or an EH, it is required to input a code on the tracking system to indicate that a hearing was held and a determination/decision was made. Information on the tracking system is systemically uploaded onto the IDRS, which allows certain IRS personnel to track the taxpayer's appeal through the entire hearing process.

Recently, Appeals implemented additional procedures to ensure that the appropriate coding is entered on the tracking system by the Compliance functions. Specifically, Appeals personnel are responsible for ensuring the accuracy of the data entered in the tracking system when the case arrives in and leaves Appeals. If a case comes to Appeals without having been entered on the tracking system, the Appeals employee is required to return it to the originator to input the appropriate code.

For ***** of the 70 CDP cases and 11 (16 percent) of the 70 EH cases in our samples, there ***** We estimated that 361 CDP cases and 1,483 EH cases did not contain the required IDRS coding to identify the receipt (hearing request) and/or closing actions (letters) on the taxpayers' accounts. Table 2 shows the types of errors we identified.




Table 2: Coding Errors Identified on Taxpayer Accounts

_____________________________________________________________________________________
Information Not Recorded on the IDRS Number of Cases

_____________________________________________________________________________________
Issuance of Determination/Decision Letter 3

Receipt of Hearing Request and Issuance of Determination/Decision 9
Letter

Total 12

_____________________________________________________________________________________
Source: Our review of a sample of CDP and EH cases closed in Fiscal Year 2007.

_____________________________________________________________________________________



In January 2008, Appeals revised its Internal Revenue Manual to require Appeals personnel to verify, upon receipt of a hearing request, that the case has been entered on the tracking system. Appeals advised us that the recent enhancements to the tracking system should help alleviate the problems we identified. However, we do not believe that these changes will fully address situations in which taxpayers receive both a CDP hearing and an EH for multiple tax periods (e.g., a CDP hearing for one period and an EH for another tax period). Further, we do not believe that the new procedures emphasize the need to verify that all applicable tax periods are entered or that the appropriate closing code is entered when the taxpayer's case is finalized.



Recommendations

The Chief, Appeals, should:

Recommendation 4: Revise Appeals policies and procedures to ensure that appropriate IDRS coding is entered for each type of hearing request for all tax periods involved. The guidance should emphasize both front-end and back-end IDRS coding. Appeals employees should be reminded to verify that the correct coding is reflected on the taxpayer's account.


Management's Response: IRS Management agreed with this recommendation and will revise the procedures to ensure that CDP and EH requests are properly posted to the CDP Tracking System when received in Appeals. New procedures will include verifying appropriate and correct front and back-end IDRS coding.


Recommendation 5: Correct all taxpayer accounts we identified in our samples to ensure that the proper codes are reflected on the IDRS.


Management's Response: IRS management agreed with our recommendation and reviewed and corrected all of the inaccurate taxpayer accounts.




Appendix I




Detailed Objective, Scope, and Methodology


The objective of this review was to determine whether the IRS complied with the provisions of 26 U.S.C. §§ 6320 and 6330 when taxpayers exercised their rights to appeal the filing of a Notice of Federal Tax Lien (lien) or the issuance of a notice of intent to levy. 1 To accomplish this objective, we:


I. Determined whether any new procedures or processes had been developed since completion of the prior Treasury Inspector General for Tax Administration statutory review. 2 This involved requesting documentation from Office of Appeals (Appeals) personnel supporting the implementation of corrective actions to our prior audit reports and other procedural or process changes.



II. Determined whether Appeals CDP 3 and EH office and administrative case files could be secured and contained minimum documentation required for a hearing.




A. Obtained a computer extract of CDP and EH cases closed between October 1, 2006, and September 30, 2007, from the Appeals Centralized Database System (ACDS) 4 file maintained at the Treasury Inspector General for Tax Administration Data Center Warehouse. 5 We validated the computer extract using information from the Data Center Warehouse, reviewed the appropriateness of data within fields requested, and compared population totals to information obtained from Appeals personnel.



B. Selected samples of 70 CDP and 70 EH case files.




1. Selected statistical attribute samples of 70 CDP cases (from a population of 25,212 CDP cases) and 70 EH cases (from a population of 9,436 EH cases) based on a confidence level of 90 percent, a precision rate of ± percent, and an expected error rate of 10 percent. We selected a statistical sample because we wanted to project results to the entire universe.



2. Requested and determined whether Appeals could provide the sampled office files and whether we could secure the sampled administrative files.



3. For each sample case file received, determined whether the file contained the minimum documentation required to support a CDP hearing or an EH, which included Notice of Intent to Levy (Letter 1058/LT11) and/or Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (Letter 3172); Request for a Collection Due Process Hearing or Equivalent Hearing (Form 12153) or similar taxpayer request; ACDS Case Summary Card; ACDS Case Activity Record; Appeals Transmittal and Case Memo (Form 5402); Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (Letter 3193/3194); Summary Notice of Determination, Waiver of Right to Judicial Review of a Collection Due Process Determination, and Waiver of Suspension of Levy Action (Form 12257); Decision Letter Concerning Equivalent Hearing Under Section 6320 and/or 6330 of the Internal Revenue Code (Letter 3210); transcript of the taxpayer's account; and Collection case history. We discussed exceptions with Appeals personnel.



III. Determined whether CDP and EH cases were misclassified (i.e., should have been an EH or a CDP case, respectively).




A. Using the samples selected in Step II.B.1., reviewed the ACDS, case files, and tax account transcript information to determine whether the taxpayers' hearing requests were received within the required time periods and were properly classified.



B. Discussed exceptions with Appeals personnel.



IV. Determined whether Appeals was in compliance with 26 U.S.C. §§ 6320 and 6330 when handling CDP hearing and EH requests.




A. Using the samples selected in Step II.B.1., determined whether the following items were addressed by the hearing officer:




1. The taxpayer was provided only one hearing for the tax period related to the unpaid tax specified in the lien/levy notice. [26 U.S.C. §§ 6320(b)(2) and 6330(b)(2)]



2. The taxpayer was provided with an impartial hearing officer or waived this requirement. [26 U.S.C. §§ 6320(b)(3) and 6330(b)(3)]



3. The hearing officer obtained verification that the requirements of any applicable law or administrative procedure were met. [26 U.S.C. § 6330(c)(1)]



4. The taxpayer was allowed to raise issues at the hearing relating to the unpaid tax, the filing of the lien, and/or the proposed levy action. This could include appropriate spousal defenses, challenges to the appropriateness of collection activities, offers of collection alternatives, and/or questions about the underlying liability. [26 U.S.C. § 6330(c)(2)]



5. The hearing officer made a determination after considering whether any proposed collection action balances efficient tax collection with the taxpayer's legitimate concern that any collection action be no more intrusive than necessary. [26 U.S.C. § 6330(c)(3)]



B. Discussed exception cases with Appeals personnel to confirm and determine causes. After confirmation, we estimated the number of potential exceptions within the population.



V. Determined whether the collection statutes were properly suspended.




A. Using the samples selected in Step II.B.1., determined whether the collection statutes had been properly suspended for CDP cases and not suspended for EH cases.




Appendix II




Major Contributors to This Report


Nancy A. Nakamura, Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Program)

Jeffrey M. Jones, Director

Janice M. Pryor, Audit Manager

Yasmin B. Ryan, Lead Auditor

Mary F. Herberger, Senior Auditor

Margaret A. Anketell, Senior Auditor



Appendix III




Report Distribution List


Commissioner C

Office of the Commissioner --Attn: Chief of Staff C

Deputy Chief, Appeals AP

Chief Counsel CC

National Taxpayer Advocate TA

Director, Office of Legislative Affairs CL:LA

Director, Office of Program Evaluation and Risk Analysis RAS:O

Office of Internal Control OS:CFO:CPIC:IC

Audit Liaison: Chief, Appeals AP



Appendix IV




Outcome Measures


This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to Congress.



Type and Value of Outcome Measure:


Ÿ Taxpayer Rights --Potential; closed CDP 1 case files for 2,523 taxpayers did not meet 1 or more requirements (see pages 4 and 7).




Methodology Used to Measure the Reported Benefit:

Using a computer extract from the ACDS, 2 we identified a population of 25,212 CDP cases closed in Fiscal Year 2007. We selected a statistical attribute sample of 70 CDP cases and found that 7 (10 percent) case files did not meet requirements in 1 or more of the following ways: taxpayer or his or her authorized representative was not given the opportunity for a hearing, taxpayer's written hearing request was missing, and/or an impartiality statement by the hearing officer was not documented. Using a 90 percent confidence level and a precision rate of ±10.52 percent, we estimated that the rights of 2,523 taxpayers were potentially affected.



Type and Value of Outcome Measure:


Ÿ Taxpayer Rights --Potential; closed EH case files for 944 taxpayers did not meet 1 or more requirements (see pages 4 and 7).




Methodology Used to Measure the Reported Benefit:

Using a computer extract from the ACDS, we identified a population of 9,436 EH cases closed in Fiscal Year 2007. We selected a statistical attribute sample of 70 EH cases and found that 7 (10 percent) case files did not meet requirements in 1 or more of the following ways: taxpayer or his or her authorized representative was not given the opportunity for a hearing, taxpayer's written hearing request was missing, and/or an impartiality statement by the hearing officer was not documented. Using a 90 percent confidence level and a precision rate of ±10.14 percent, we estimated that the rights of 944 taxpayers were potentially affected.



Type and Value of Outcome Measure:


Ÿ Taxpayer Rights --Potential; closed CDP case files for 720 taxpayers were missing the Determination Letters (see page 4).




Methodology Used to Measure the Reported Benefit:

Using a computer extract from the ACDS, we identified a population of 25,212 CDP cases closed in Fiscal Year 2007. We selected a statistical attribute sample of 70 CDP cases and found that Appeals had issued Determination Letters in 45 cases. The remaining 25 taxpayers in the sample had withdrawn their hearing requests. ***** We are 90 percent confident that the error rate falls between ***** using the Clopper-Pearson exact Binomial method. 3 Based on this method, we estimated that the rights of ***** taxpayers were potentially affected.



Type and Value of Outcome Measure:


Ÿ Taxpayer Rights --Potential; closed EH case files for 135 taxpayers were missing the Decision Letters (see page 4).




Methodology Used to Measure the Reported Benefit:

Using a computer extract from the ACDS, we identified a population of 9,436 EH cases closed in Fiscal Year 2007. We selected a statistical attribute sample of 70 EH cases and found that Appeals had issued Decision Letters in 50 cases. The remaining 20 taxpayers in the sample had withdrawn their hearing requests. ***** We are 90 percent confident that the error rate falls between ***** using the Clopper-Pearson exact Binomial method. Based on this method, we estimated that the rights of ***** taxpayers were potentially affected.



Type and Value of Outcome Measure:


Ÿ Taxpayer Rights --Potential; closed CDP case files for 1,441 taxpayers did not contain Determination Letters that were accurate or clear or that fully addressed all issues raised in the taxpayers' appeals (see page 7).




Methodology Used to Measure the Reported Benefit:

Using a computer extract from the ACDS, we identified a population of 25,212 CDP cases closed in Fiscal Year 2007. We selected a statistical attribute sample of 70 CDP cases and found that Appeals had issued Determination Letters in 45 cases. The remaining 25 taxpayers in the sample had withdrawn their hearing requests. Four of the 45 Determination Letters sent to the taxpayers were not accurate or clear or did not fully address all issues raised in the taxpayers' appeals. We are 90 percent confident that the error rate falls between 3.1 percent and 19.20 percent using the Clopper-Pearson exact Binomial Method. Based on this method, we estimated that the rights of 1,441 (4*25,212/70) taxpayers were potentially affected.



Type and Value of Outcome Measure:


Ÿ Taxpayer Rights --Potential; closed EH case files for 674 taxpayers did not contain Decision Letters to taxpayers that were accurate or clear or that fully addressed all issues raised in the taxpayer's appeal (see page 7).




Methodology Used to Measure the Reported Benefit:

Using a computer extract from the ACDS, we identified a population of 9,436 EH cases closed in Fiscal Year 2007. We selected a statistical attribute sample of 70 EH cases and found that Appeals had issued Decision Letters in 50 cases. The remaining 20 taxpayers in the sample had withdrawn their hearing requests. Five of the 50 Decision Letters sent to taxpayers were not accurate or clear or did not fully address all issues raised in the taxpayers' appeals. We are 90 percent confident that the error rate falls between 4.02 percent and 19.88 percent using the Clopper-Pearson exact Binomial method. Based on this method, we estimated that the rights of 674 (5*9,436/70) taxpayers were potentially affected.



Type and Value of Outcome Measure:


Ÿ Reliability of Data --Potential; taxpayer accounts for 361 closed CDP case files did not contain the correct computer coding (see page 9).




Methodology Used to Measure the Reported Benefit:

Using a computer extract from the ACDS, we identified a population of 25,212 CDP cases closed in Fiscal Year 2007. We selected a statistical attribute sample of 70 CDP cases and found that the taxpayer account for *****

Using a 90 percent confidence level and a precision rate of ± 2.33 percent, we estimated that taxpayer accounts for 361 CDP case files did not contain the correct computer coding.



Type and Value of Outcome Measure:


Ÿ Reliability of Data - Potential; taxpayer accounts for 1,483 closed EH case files did not contain the correct computer coding (see page 9).




Methodology Used to Measure the Reported Benefit:

Using a computer extract from the ACDS, we identified a population of 9,436 EH cases closed in Fiscal Year 2007. We selected a statistical attribute sample of 70 EH cases and found that the taxpayer accounts for 11 (16 percent) case files did not contain the correct computer coding. Using a 90 percent confidence level and a precision rate of ±7.13 percent, we estimated that taxpayer accounts for 1,483 EH case files did not contain the correct computer coding. The Office of Appeals Continues to Show Improvement in Processing Collection Due Process Cases

Appendix V




Collection Due Process Procedures


The IRS is required to notify taxpayers in writing that a Notice of Federal Tax Lien (lien) has been filed or when it intends to issue a notice of intent to levy. 1 A taxpayer is allowed to appeal the filing of the lien or proposed levy action through the CDP by filing a hearing request. This hearing request must be received within 30 calendar days plus 5 business days of the filing of the lien or within 30 calendar days of the date of the notice of intent to levy. If a taxpayer's hearing request is submitted on time, the IRS will suspend all collection efforts and the Office of Appeals (Appeals) will give the taxpayer a CDP hearing.

If the taxpayer disagrees with the Appeals decision, he or she may petition the courts. If the IRS does not receive the taxpayer's request within the required period (generally 30 calendar days), the taxpayer may be granted an EH. Additionally, the taxpayer must request the EH within 1 year of the issuance of the CDP notice. However, in an EH, the IRS is not required to suspend collection action, and the taxpayer does not have the right to a judicial review.

Taxpayers are entitled to one hearing per tax period for which a lien or notice of intent to levy has been issued. The hearing is conducted by an Appeals officer or settlement officer (hearing officer) who has had no prior involvement with the unpaid tax. During the hearing, the hearing officer must verify whether the requirements of all applicable laws or administrative procedures related to the lien or notice of intent to levy have been met. The hearing officer must also 1) address any issues the taxpayer might raise relevant to the unpaid tax, the filing of the lien, and/or the proposed levy, such as whether the taxpayer is an innocent spouse, 2) determine if collection actions were appropriate, and 3) decide whether other collection alternatives would facilitate the payment of the tax. The hearing officer must determine whether any proposed collection action balances the need for efficient collection of taxes with the taxpayer's legitimate concerns. The taxpayer may not raise an issue that was considered at a prior administrative or judicial hearing if the taxpayer participated meaningfully in the prior proceeding.

At the conclusion of a hearing, Appeals gives the taxpayer a letter that includes the hearing officer's findings, agreements reached with the taxpayer, any relief provided to the taxpayer, and any actions the taxpayer and/or the IRS are required to take. For a CDP case, the taxpayer receives either a Determination Letter-which provides an explanation of the right to a judicial review-or a Summary Notice of Determination, which is used when the taxpayer agrees with Appeals, waives the right to a judicial review, and waives the suspension of collection action. For an EH case, the taxpayer receives a Decision Letter.

At the completion of the case, the hearing officer's manager reviews the CDP or EH case to evaluate whether the hearing officer followed all requirements and procedures.

After Appeals has made a determination on a case, if the taxpayer has a change in circumstances that affects the Appeals determination or if the Collection function does not carry out the determination, the taxpayer has the right to return to Appeals. The Appeals office that made the original determination generally retains jurisdiction over the case. The Office of Appeals Continues to Show Improvement in Processing Collection Due Process Cases

Appendix VI



Management's Response to the Draft Report

DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON D.C. 20224

MEMORANDUM FOR MICHAEL R. PHILLIPS


TREASURY INSPECTOR GENERAL FOR TAX ADMNISTRATION


From: Sarah Hall Ingram Chief, Appeals

Subject: Draft Audit Report - The Office of Appeals Continues to Show Improvement in Processing Collection Due Process Cases (Audit 2008-10-003)

I have reviewed the subject draft audit report. I appreciate your recognition of our continued improvement in the processing of Collection Due Process (CDP) cases and value your recommendations to help us improve our processes. Appeals has and will continue to work aggressively and diligently to protect taxpayers rights, enhance the final work product, and ensure accurate computer coding on taxpayer accounts. Your recommendations have furthered our efforts on these fronts.

We agree that we need to reemphasize with our employees the requirements for contacting taxpayers or their authorized representative, particularly when there has been no contact with the taxpayer. We also agree that we must maintain a complete closed office file and will remind our employees which documents need to be retained in that file. We will reemphasize with our employees that letters must be accurate and presented in a manner that is understandable to the taxpayer and that all of the taxpayer's issues must be addressed before the case is closed.

Finally, Appeals will revise its policies and procedures to ensure appropriate computer coding is entered and incorrect coding is timely corrected on IRS systems such as the Integrated Data Retrieval System (IDRS) and the Collection Due Process Tracking System (CDPTS), both front-end and back-end, for all tax and periods involved in the hearing. Appeals is committed to working with the Operating Divisions in its efforts. Attached are our corrective actions in response to your recommendations.

If you have any questions, please have a member of your staff contact Diane Ryan, Director, Technical Services, at (314) 612-4640.

Attachment

RECOMMENDATION 1: The Chief, Appeals, should re-emphasize to Appeals employees the requirements for contacting taxpayers (or their authorized representatives) who have requested a CDP hearing. In addition, Appeals management should re-emphasize established procedures for contacting taxpayers are being followed before approving cases for closure, particularly when there have been no contacts with the taxpayer.

PROPOSED CORRECTION ACTION: The Director, Tax Policy and Procedure (Collection and Processing), will post an article to the Appeals website to remind Appeals employees of the requirement for contacting taxpayers (or their authorized representatives) who have requested a CDP hearing. The article will emphasize the procedures in IRM 8.22.2.2.6.1 when there has been no contact with the taxpayer, and management's role in reviewing cases for closure.

IMPLEMENTATION DATE: December 15, 2008

RESPONSIBLE OFFICIAL: Director, Technical Services

CORRECTIVE ACTION MONITORING PLAN: The Director, Tax Policy and Procedure (Collection and Processing), will inform the Director, Technical Services, of any delays in implementing this action.

RECOMMENDATION 2: The Chief, Appeals, should re-emphasize to Appeals employees the requirements for including certain documentation in the Appeals files, such as the taxpayer's hearing request and correspondence to the taxpayer.

PROPOSED CORRECTION ACTION: Appeals Processing Services will conduct meetings with their employees in the campus sites where CDP cases are closed and closed office files are prepared. The meeting will include a review of which documents are required to be retained in a closed office file.

IMPLEMENTATION DATE: December 15, 2008

RESPONSIBLE OFFICIAL: Director, Technical Services

CORRECTIVE ACTION MONITORING PLAN: The Director, Tax Policy and Procedure (Collection and Processing), will inform the Director, Technical Services, of any delays in implementing this action.

RECOMMENDATION 3: The Chief, Appeals, should re-emphasize the following requirements to Appeals personnel: 1) letters must be accurate and presented in a manner that is understandable to the taxpayer and 2) all taxpayer issues be addressed before the taxpayer's case is closed.

PROPOSED CORRECTION ACTION 3a: The Director, Tax Policy and Procedure (Collection and Processing), will post an article to the Appeals website to remind all personnel that when they prepare and/or approve a Decision Letter or Notice of Determination they must ensure the letters are accurate and presented in a manner that is understandable to the taxpayer.

IMPLEMENTATION DATE: December 15, 2008

RESPONSIBLE OFFICIAL: Director, Technical Services

CORRECTIVE ACTION MONITORING PLAN: The Director, Tax Policy and Procedure (Collection and Processing), will inform the Director, Technical Services, of any delays in implementing this action.

PROPOSED CORRECTION ACTION 3b: The Director, Tax Policy and Procedure (Collection and Processing), will post an article to the Appeals website to remind all employees of the requirement to address all taxpayer issues before closing the taxpayer's case. The article will emphasize the procedures in IRM 8.22.2.2.16.5 that discuss the documentation requirement for issues raised by the taxpayer.

IMPLEMENTATION DATE: December 15, 2008

RESPONSIBLE OFFICIAL: Director, Technical Services

CORRECTIVE ACTION MONITORING PLAN: The Director, Tax Policy and Procedure (Collection and Processing), will inform the Director, Technical Services, of any delays in implementing this action.

RECOMMENDATION 4: The Chief, Appeals, should revise Appeals policies and procedures to ensure that appropriate IDRS coding is entered for each type of hearing request for all tax periods involved. The guidance should emphasize both front-end and back-end IDRS coding. Appeals employees should be reminded to verify that the correct coding is reflected on the taxpayer's account.

PROPOSED CORRECTION ACTION: The Director, Tax Policy and Procedure (Collection and Processing), will revise the procedures in IRM 8.22 to ensure that CDP and equivalent hearing requests are properly posted to the CDP Tracking System (CDPTS) when received in Appeals. New procedures will include verifying appropriate and correct front and back-end IDRS coding. Specifically:


Ÿ Appeals Processing Services, upon receiving a CDP or equivalent hearing request, will print a "screen shot" of the case listing page on CDPTS to confirm that Collection has accurately added the case. Inaccurate or no postings will be promptly returned to Collection for necessary action. This will be added to the next revision of IRM 8.22.1.



Ÿ Technical employees will be required to review and compare the CDPTS "screen shot" to the ACDS case summary card. Corrections will be submitted immediately to Appeals Processing Services and the Settlement Officer will monitor that corrections are made timely. This will be added to the next revision of IRM 8.22.2.



Ÿ Appeals Processing Services, after updating the case to Stage 13, will print CDPTS "screen shot" and include it in the closed office file. This will be added to the next revision of IRM 8.22.3.


IMPLEMENTATION DATE: May 15, 2009

RESPONSIBLE OFFICIAL: Director, Technical Services

CORRECTIVE ACTION MONITORING PLAN: The Director, Tax Policy and Procedure (Collection and Processing), will inform the Director, Technical Services, of any delays in implementing this action.

RECOMMENDATION 5: The Chief, Appeals, should correct all taxpayer accounts we identified in our samples to ensure the proper codes are reflected on the IDRS.

PROPOSED CORRECTION ACTION: During our review of the exception cases identified by TIGTA during this audit, Appeals reviewed and corrected all of the inaccurate taxpayer IDRS accounts.

IMPLEMENTATION DATE: Implemented

RESPONSIBLE OFFICIAL: Director, Technical Services

1 A detailed explanation of the CDP and Equivalent Hearing procedures is included in Appendix V.

2 26 U.S.C. Sections (§§) 6320 and 6330 (Supp. III 2000).

3 26 U.S.C. §§ 7803(d)(1)(A)(iii) and (iv) (Supp. III 2000).

4 The date when the statute of limitations for collection of an outstanding balance expires. The statutory period for collecting a tax is normally 10 years from the date of assessment (26 U.S.C. § 6502).

5 The Office of Appeals Has Improved Its Processing of Collection Due Process Cases (Reference Number 2007-10-139, dated September 21, 2007).

6 The data processing arm of the IRS. The campuses process paper and electronic submissions, correct errors, and forward data to the Computing Centers for analysis and posting to taxpayer accounts.

1 26 United States Code (U.S.C.) Section (§) 6321 (Supp. III 2000).

2 26 U.S.C. § 6331 (Supp. III 2000).

3 Pub. L. No. 105-206, 112 Stat. 685 (codified as amended in scattered sections of 2 U.S.C., 5 U.S.C. app., 16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., and 49 U.S.C.).

4 Appendix V provides an explanation of the CDP and Equivalent Hearing procedures.

5 For some CDP cases, the hearing officer gives the taxpayer a Summary Notice of Determination.

6 26 U.S.C. §§ 7803(d)(1)(A)(iii) and (iv) (Supp. III 2000).

7 The Office of Appeals Has Improved Its Processing of Collection Due Process Cases (Reference Number 2007-10-139, dated September 21, 2007).

8 The date when the statute of limitations for collection of an outstanding balance expires. The statutory period for collecting a tax is normally ten years from the date of assessment (26 U.S.C. § 6502).

9 Details about these and all other outcome measures presented in the Results of Review are included in Appendix IV.

10 Appeals did not issue closing letters in the remaining cases because taxpayers withdrew their requests for a hearing.

11 The Internal Revenue Manual is the single official source for IRS policies, directives, guidelines, procedures, and delegations of authority in the IRS.

12 The data processing arm of the IRS. The campuses process paper and electronic submissions, correct errors, and forward data to the Computing Centers for analysis and posting to taxpayer accounts.

13 CDP Determination Letters, CDP Summary Notices of Determination (waivers), and EH Decision Letters all must include an impartiality statement.

14 We selected 2 random samples of 70 CDP and 70 EH cases. However, Letters were issued in only 45 CDP and 50 EH cases.

15 IRS computer system capable of retrieving or updating stored information. It works in conjunction with a taxpayer's account records.

16 A taxpayer is entitled to only one CDP hearing regarding the tax period with the unpaid tax.

17 The Taxpayer Advocate Service is an independent organization within the IRS that helps taxpayers resolve problems with the IRS and recommends changes that will prevent the problems.

18 This tracking system is a database within Appeals that is used to monitor the progress and location of hearing requests.

1 26 U.S.C. §§ 6320 and 6330 (Supp. III 2000).

2 The Office of Appeals Has Improved Its Processing of Collection Due Process Cases (Reference Number 2007-10-139, dated September 21, 2007).

3 A detailed explanation of the CDP and EH procedures is included in Appendix V.

4 The ACDS is a computerized case control system used to control and track cases throughout the appeals process.

5 The Treasury Inspector General for Tax Administration Data Center Warehouse stores taxpayer data and allows auditors to query and download data needed for audit work.

1 A detailed explanation of the CDP and EH procedures is included in Appendix V.

2 The ACDS is a computerized case control system used to control and track cases throughout the appeals process.

3 The Normal approximation method was not used because the number of errors relative to the sample size was too small to conclude that the sampling distribution of error rates was normally distributed. The Clopper-Pearson method did not produce confidence interval limits that are equidistant from the observed error rates because the sampling distribution of error rates for the small sample size is skewed rather than symmetric.

1 26 U.S.C. Sections 6321 and 6331 (Supp. III 2000).

Under section 7122 of the Internal Revenue Code, the terms of a compromise agreement, including the amount acceptable to resolve a case, are policy matters within the discretion of the Commissioner. Insistence upon an agreement allowing the Government to collect from particular assets in the future is a permissible exercise of that discretion.
Don Bear v. Commissioner

Docket No. 11582-91., T.C. Memo. 1992-690, 64 TCM 1430, Filed December 3, 1992

An individual was denied a capital loss deduction on the sale of a mobile home because he used the mobile home as his residence. Further, the negotiation by the IRS of a check tendered by the taxpayer did not constitute an accord and satisfaction of the taxpayer's deficiencies. The taxpayer and the IRS did not enter into a closing agreement or compromise as required by the regulations, and the U.S. government, as a sovereign, was not bound by the provisions of the Uniform Commercial Code. Additionally, the taxpayer was held to be liable for additions to tax for failure to file, negligence and underpayment of estimated tax. The taxpayer failed to demonstrate reasonable cause for his failure to file returns. Finally, the taxpayer was not entitled to a refund of withheld taxes because he did not pay the taxes within two years of the issuance of a notice of deficiency. The two-year statute of limitations applied to the claim for refund because the taxpayer failed to file a tax return.

Memorandum Opinion
SCOTT, Judge:
This case was assigned to Special Trial Judge Joan Seitz Pate pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183. 1 The Court agrees with and adopts the opinion of the Special Trial Judge which is set forth below.
Opinion of the Special Trial Judge
PATE, Special Trial Judge: Respondent determined the following deficiencies in and additions to petitioner's income tax: (1) For 1984, a deficiency of $12,304 and additions to tax under section 6651(a)(1) of $3,022, section 6653(a)(1) of $615, section 6653(a)(2) of 50 percent of the interest on $12,089, and section 6654 of $756; (2) for 1985, a deficiency of $10,468 and additions to tax under section 6651(a)(1) of $2,386, section 6653(a)(1) of $523, section 6653(a)(2) of 50 percent of the interest on $9,543, and section 6654 of $534; (3) for 1986, a deficiency of $5,796 and additions to tax under section 6651(a)(1) of $868, section 6653(a)(1)(A) of $290, section 6653(a)(1)(B) of 50 percent of the interest on $3,472, and section 6654 of $141; and (4) for 1987,a deficiency of $2,249 and additions to tax under section 6651(a)(1) of $538, section 6653(a)(1)(A) of $112, section 6653(a)(1)(B) of 50 percent of the interest on $2,249, and section 6654 of $113.
Petitioner was a resident of Kennewick, Washington, at the time he filed his petition. Some of the facts have been stipulated and they are so found. The Stipulation of Facts and attached exhibits are incorporated herein by this reference.
During all of the years in issue, petitioner was employed as a mechanical designer by Hughes Aircraft in Tucson, Arizona. He received the following amounts of gross income during those years:
(1) For 1984, wages of $37,072 and interest income of $35;
(2) For 1985, wages of $43,485 and interest income of $17;
(3) For 1986, wages of $36,632; and
(4) For 1987, wages of $5,711 and other income of $2,106.
Nonetheless, petitioner failed to file Federal income tax returns for 1984, 1985, 1986, and 1987.
After concessions by the parties, the only issues for our decision are: (1) Whether petitioner may deduct a capital loss of $660 sustained from the sale of a mobile home in 1985; (2) whether the Internal Revenue Service's negotiation of a check dated November 26, 1985, constitutes an accord and satisfaction of petitioner's Federal income tax liabilities for 1984 and 1985; (3) whether petitioner is liable for additions to tax under section 6651(a)(1) for failure to timely file Federal income tax returns for each of the years in issue; (4) whether petitioner is liable for additions to tax under section 6653(a)(1) and (2) for 1984 and 1985 and under section 6653(a)(1)(A) and (B) for 1986 and 1987, for negligence or disregard of rules or regulations; (5) whether petitioner is liable for additions to tax under section 6654 for underpayment of estimated tax for each of the years in issue; and (6) whether petitioner is entitled to a credit or refund for an overpayment of tax for 1987. For purposes of clarity, we have combined our findings of fact and conclusions of law as to each issue.
Loss on Mobile Home
In 1985, petitioner sold the mobile home in which he lived, thereby sustaining a loss of $660. Petitioner claims the loss is deductible, whereas respondent maintains that the loss is personal and, therefore, not deductible.
In general, section 262 provides that expenditures for personal, living, or family expenses are not deductible. The regulations under that section specifically provide that losses sustained by the taxpayer upon the sale or other disposition of property for residential purposes are not deductible. Sec. 1.262-1(b)(4) , Income Tax Regs.
Petitioner admittedly used the mobile home at issue as his residence. Consequently, we hold that he may not deduct the loss he sustained when he sold his mobile home.
Accord and Satisfaction
In November 1985, petitioner tendered a check to the Internal Revenue Service (hereinafter the IRS) in the amount of $1,177.67, on the back of which he had written "Endorsement of this draft constitutes agreement that all taxes, interest, penalties, or other indebtedness is paid in full through 11/30/85." The IRS negotiated the check. Petitioner contends that the IRS's acceptance of his check constitutes an accord and satisfaction of his 1984 and 1985 income tax liabilities and that, therefore, he is not liable for the deficiencies determined by respondent for those years.
Sections 7121 and 7122 set forth the exclusive method for settling claims arising under the Internal Revenue laws. Section 7121(a) authorizes the Commissioner to enter into agreements in writing with any person relating to the liability of that person for any taxable period. Set forth in the regulations thereunder are formal procedures for closing agreements and compromises which must be followed to effect a settlement. Laurins v. Commissioner [89-2 USTC ¶9636 ], 889 F.2d 910 (9th Cir. 1989), affg. Norman v. Commissioner [Dec. 43,943(M) ], T.C. Memo. 1987-265. Secs. 301.7121-1 and 301.7122-1 , Proced. & Admin. Regs.
Petitioner did not follow the procedures set forth in those regulations, nor did respondent agree to conclude any closing agreement or compromise as set forth in the regulations. Consequently, there was no closing agreement or compromise effectuated between the parties and, therefore, respondent is not bound by the payment made by petitioner in November 1985.
Nevertheless, petitioner argues that his submission of the check with the endorsement language contained thereon together with the negotiation of the check by the IRS constitutes an accord and satisfaction under the Uniform Commercial Code. However, the United States Government, as the sovereign, is not bound by such State statutes as the Uniform Commercial Code. See Burnet v. Harmel [3 USTC ¶990 ], 287 U.S. 103, 110 (1932); Texas Learning Technology Group v. Commissioner [Dec. 47,318 ], 96 T.C. 686, 693 (1991), affd. [92-1 USTC ¶50,224 ] 958 F.2d 122 (5th Cir. 1992). As we noted earlier, the only way income tax liabilities can be settled or compromised is by following the procedures set forth in the Internal Revenue Code and the regulations thereunder. Since the parties' actions do not fulfill these requirements, no settlement was effectuated thereby.
Failure To File
Petitioner contends that he is not liable for the additions to tax under section 6651(a)(1) for failing to timely file his income tax returns for each of the years in issue. Section 6651(a)(1) provides:
In case of failure--
(1) to file any return * * * unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as taxon such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month * * * not exceeding 25 percent in the aggregate * * *
To be absolved of the liability, the taxpayer must show that his failure to file was due to reasonable cause and not due to willful neglect. Sec. 301.6651-1(c)(1) , Proced. & Admin. Regs. Illness or incapacity may constitute reasonable cause if the taxpayer establishes that he was so ill that he was unable to file. See Williams v. Commissioner [Dec. 18,247 ], 16 T.C. 893 (1951). The taxpayer bears the burden of proving that this addition to tax does not apply. Rule 142(a); BJR Corp. v. Commissioner [Dec. 34,078 ], 67 T.C. 111, 131 (1976).
Petitioner admits that he did not file income tax returns for any of the years in issue, but argues that he had reasonable cause for not doing so. He claims that he was severely depressedduring all of those years, and that his mental state was so extreme that he could not cope with the negative reaction he had when contemplating such filing. However, the fact that petitioner worked as a mechanical designer for Hughes Aircraft on a full-time basis at a substantial salary during this time period refutes his contention. Consequently, we hold that petitioner has not shown that he had reasonable cause for not filing his income tax returns. Accordingly, we sustain respondent's determination on this issue.
Negligence
Next, petitioner contends that he is not liable for the additions to tax under section 6653(a)(1) and (2) for 1984 and 1985 and under section 6653(a)(1)(A) and (B) for 1986 and 1987. These sections provide that, if any portion of the underpayment of tax is due to negligence or intentional disregard of rules or regulations, an amount equal to 5 percent of the underpayment and 50 percent of the interest on the portion of the underpayment attributable to negligence is added to the tax.
Negligence has been defined as the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Zmuda v. Commissioner [84-1 USTC ¶9442 ], 731 F.2d 1417, 1422 (9th Cir. 1984), affg. [Dec. 39,468 ] 79 T.C. 714 (1982); Marcello v. Commissioner [67-2 USTC ¶9516 ], 380 F.2d 499, 506(5th Cir. 1967), affg. in part, remanding in part [Dec. 27,043 ] 43 T.C. 168 (1964); Neely v. Commissioner [Dec. 42,540 ], 85 T.C. 934, 947 (1985). Because an addition to tax under section 6653(a) is presumptively correct, the taxpayer bears the burden of establishing that respondent's determination was erroneous. Betson v. Commissioner [86-2 USTC ¶9862], 802 F.2d 365, 372(9th Cir. 1986), affg. in part, revg. in part [Dec. 41,219(M) ] T.C. Memo. 1984-264; Bixby v. Commissioner [Dec. 31, 493], 58 T.C. 757, 791-792 (1972); Enoch v. Commissioner [Dec. 31,301 ], 57 T.C. 781, 802-803 (1972).
Petitioner again argues that his mental condition precluded him from acting prudently with regard to filing income tax returns and, therefore, we should absolve him of the addition to tax. Again, we disagree. His employment during the years in issue evidences far too much ability on his part to cope with the ordinary requirements of the business world for us to accept his reasoning. Furthermore, there is evidence in this record, such as the small amount of the tax withheld from petitioner's wages and the allegations contained in the petition, that indicates that petitionerwas a tax protestor and intentionally did not file his returns. For these reasons, we uphold respondent's determination on this issue.
Estimated Tax
Next, petitioner asks this Court to absolve him of the additions to tax under section 6654 . Section 6654 imposes an addition to tax in the case of any underpayment of estimated tax by an individual.
It is clear on this record that petitioner paid no estimated tax for the years in issue although he was required to do so. The imposition of an addition to tax under section 6654 is mandatory unless the taxpayer can show that one of the computational exceptions applies. Grosshandler v. Commissioner [Dec. 37,317 ], 75 T.C. 1, 20-21 (1980). Petitioner has failed to do so. Accordingly, we hold that petitioner is subject to the addition to tax under section 6654 .
Refund of Overpayment
Finally, petitioner claims that he is entitled to a refund of $100 for 1987. The parties agree that, due to concessions, petitioner's taxable income for 1987 is zero and that he had withholding credits of $100 for that year. However, respondent maintains that petitioner is not entitled to have his withholding credits refunded to him because the period of limitations on such refundhad expired at the time the notice of deficiency was issued.
In general, section 6511(a) provides that a claim for refund of tax must be filed by a taxpayer within 3 years from the time the income tax return was filed or 2 years from the time the tax was paid, whichever period expires later. Moreover, if no return is filed, the claim must be filed within 2 years from the time the tax was paid. Sec. 6511(a) . Since petitioner did not file anyincome tax return for 1987, the 2-year period applies in this case.
All of the tax paid by petitioner for 1987 was withheld from his wages. Withheld taxes are deemed to have been paid by a taxpayer on the 15th day of the 4th month following the close of the taxable year. Sec. 6513(b) ; Stokes v. Commissioner [Dec. 46,212(M) ], T.C. Memo. 1989-661; sec. 301.6513-1(a) , Proced. & Admin. Regs. Therefore, petitioner's withheld taxes are deemed paidon April 15, 1988.
Where a taxpayer fails to file a return and a notice of deficiency has been issued, the taxpayer is entitled to a credit or refund of amounts paid within 2 years preceding the mailing of the notice. Secs. 6511(b)(2)(C) , 6512(b)(2)(B)(now sec. 6512(b)(3)(B) ). Respondent issued the notice of deficiency with regard to petitioner's 1987 tax year on March 19, 1991, a date almost 3 years from the April 15, 1988 date on which his taxes are deemed paid. Because petitioner did not pay the taxes he is claiming within 2 years of the issuance of the notice of deficiency, he is not entitled to a refund or credit for such taxes. Allen v. Commissioner [Dec. 48,566 ], 99 T.C. 23 (Oct. 6, 1992); Braman v. Commissioner [Dec. 48,612(M) ], T.C. Memo. 1992-636.
Because of concessions by both parties,
Decision will be entered under Rule 155.
1 All section references are to the Internal Revenue Code in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.



Donald Eugene Rudisill and Barbara Jean Rudisill v. Commissioner

Docket No. 7903-91., T.C. Memo. 1992-388, 64 TCM 93, Filed July 13, 1992


[Code Secs. 7121 and 7122 ]


An investor in computer software was not granted immunity by the IRS. Although the taxpayer met with a desk clerk of the Criminal Investigation Division of the IRS and was allegedly toldhe did not have to refile his taxes, the clerk had no authority to grant immunity or consummate an agreement. Since closing agreements and compromise agreements are the exclusive means of settling disputes over civil taxes and since no such agreement existed, the taxpayer was not entitled to immunity. Accordingly, the penalties determined by the IRS and conceded by the taxpayer were upheld.

Memorandum Opinion
FAY, Judge:
By statutory notice of deficiency, respondent determined deficiencies in and additions to petitioners' Federal income tax in the following amounts:
Additions to Tax
----------------
Year Deficiency Sec. 6653(a) Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6659
1980 ....... $5,976 $299 $1,793
1981 ....... 6,443 $322 1 1,933
1982 ....... 7,779 389 1 2,334
1983 ....... 6,983 349 1 2,095
------------------------------------------------------------------------------
1 Fifty percent of interest computed on $6,443, $7,779, and $6,983 of the
deficiency for taxable years 1981, 1982, and 1983, respectively.

All section references are to the Internal Revenue Code in effect for the years in issue.
The sole issue before this Court is whether petitioners were granted immunity by respondent and are thereby relieved of the deficiencies and additions to tax as set forth in the notice ofdeficiency for the years at issue. We hold petitioners were not granted immunity by respondent. For purposes of clarity, the findings of fact and opinion have been combined.
The Stipulation of Facts and exhibits are incorporated herein by this reference. Petitioners were residents of Bonita, California, at the time the petition in this case was filed.
On their 1983 Federal income tax return, petitioners claimed a Schedule C loss in the amount of $9,181 and an investment tax credit (ITC) in the amount of $25,134, both in connection withtheir investment in Courseware Research Corp. (CRC), a computer software leasing program.
Petitioners deducted $4,937 of the total claimed ITC on their 1983 Federal income tax return and carried back $5,976, $6,443, and $7,779 of the ITC to their 1980, 1981, and 1982 tax years, respectively.
In the notice of deficiency, respondent disallowed the claimed loss and ITC on the primary grounds that the transactions were not bona fide arm's length transactions at fair market value and that the transactions lacked economic substance.
Petitioners do not dispute that they are not entitled to the claimed loss and ITC. Instead, petitioners assert that they should not be held liable for the deficiencies and additions to tax for the years at issue on the ground that they were granted immunity by a desk clerk employed by the Internal Revenue Service. 1
Mr. Rudisill (petitioner) contacted the Criminal Investigation Division (C.I.D.) of the Internal Revenue Service on April 1, 1985, on his own initiative for the purpose of having the CRC computer leasing program "declared illegal" and to refile his taxes for the years at issue.
Petitioner asserts that he met with Catherine MacNeill (MacNeill), a desk clerk employed by respondent, who proceeded to take down information provided by petitioner. Petitioner claims that during his April 1, 1985, contact with C.I.D., he was advised by MacNeill as follows: "Mr. Rudisill, you were a victim. You don't have to refile your taxes. You go home and forget about it."
Respondent concedes that MacNeill was the employee of respondent who wrote down the information provided by petitioner. Respondent, however, does not concede that MacNeill made the statements alleged by petitioner. Respondent further argues that MacNeill did not have authority to grant petitioners immunity or to make any type of agreement relating to petitioners' civil tax liabilities and that, in fact, no such agreement ever existed between the parties.
In the context of a civil tax dispute, closing agreements under section 7121 and compromise agreements under section 7122 provide the exclusive means of settling such controversy. See Botany Worsted Mills v. United States [1 USTC ¶348 ], 278 U.S. 282, 288 (1929); Shumaker v. Commissioner [81-2 USTC ¶9508 ], 648 F.2d 1198, 1200 (9th Cir. 1981); see also Estate of Meyer v. Commissioner [Dec. 31,336 ], 58 T.C. 69, 70 (1972). We consider petitioners' claim of immunity from the tax deficiencies and additions to tax before us as a claim arising under each of these sections. Both closing agreements under section 7121 and compromise agreements under section 7122 , however, are required to be in writing and to be accepted by the Secretary. Sec. 301.7121-1 and sec. 301.7122-1 , Proced. & Admin. Regs.
Petitioners were unable to show that any written agreement complying with the applicable rules and regulations was entered into with respondent relating to petitioners' civil tax liabilities for 1980 through 1983. In addition, we discern no other evidence in the record before us that supports petitioners' claim of immunity. 2
We therefore hold petitioners' allegations of a grant of immunity by respondent to be meritless.
Decision will be entered for respondent.
1 In paragraph 8 of the Stipulation of Facts, the parties stipulated to reduced amounts of the deficiencies in income taxes and additions to tax due from petitioners in the event that this Court holds for respondent. The reduced deficiencies and additions to tax are consistent with settlement offers given to other investors in CRC.
2 At trial, neither party called MacNeill to testify as a witness before this Court. Because we find that the record is devoid of any evidence supporting the existence of a written agreement within the context of sec. 7121 or sec. 7122 , we need not resolve whether MacNeill made the statements attributed to her by petitioner or whether MacNeill was authorized by respondent toenter into any such agreement.



Robert F. and Frances H. Haiduk v. Commissioner

Docket No. 36632-87., TC Memo. 1990-506, 60 TCM 864, Filed September 24, 1990



[Code Sec. 7121 ]

Commissioner of Internal Revenue: Closing agreements: Nonstatutory agreements.--An IRS settlement letter for one tax year that was accepted by the taxpayers was a binding contract and could not be set aside despite the IRS's unilateral error in calculating the amount of taxes owed under the agreement. The IRS objected to the settlement because of deductions that taxpayers had taken in earlier years barred by the statute of limitations in another case. Formal stipulations of settlement or decision were not absolute prerequisites to a binding agreement to settle pending litigation if the intent of the parties and settlement terms were otherwise ascertainable and a closing agreement was not necessary to settle a case before the Tax Court. Nothing in the settlement agreement required the taxpayers to make adjustments in tax years prior to the year at issue because the IRS failed to include such terms. The IRS failed to offer argument or authority to support findings of impermissible tax benefits or that the agreement was voidable on the basis of mutual mistake or that a manifest injustice would result from the enforcement of the agreement.

Memorandum Opinion
COUVILLION, Special Trial Judge:
This case was assigned pursuant to section 7443A(b)(3) 1 and Rule 180 et seq.
At issue is a motion by petitioners for entry of decision as to which respondent has filed a notice of objection. At the time the petition was filed, petitioners were residents of El Toro, California.
Respondent determined a deficiency in Federal income tax, for petitioners' 1983 tax year, of $6,119; additions to tax under section 6653(a)(1) and (2), respectively, of $305.95 and 50 percent of the interest due on $6,119; the addition to tax under section 6659 in the amount of $1,835.70; and additional interest under section 6621(c) .
Petitioners were investors in a program known as "Philatelic Leasing" (Philatelic) which has been identified by respondent as a national litigation project. In general, participants in Philatelic paid cash and executed promissory notes in consideration for which they received rights to the exploitation of a stamp master. All of the deductions and credits claimed by participants in the program were disallowed by respondent.
Respondent, by letter, extended an offer to petitioners for settlement of this case. Essentially, the offer allowed investors a deduction of 50 percent of their cash investment in the year at issue. In the letter, respondent represented that petitioners could accept the offer, within 14 days, by (1) returning a checklist properly marked to indicate acceptance of the settlement offer; and (2) establishing proof of their cash investment in the Philatelic program. Petitioners timely complied with both requirements. Respondent now refuses to proceed with the settlement for the reason that the offer, as respondent envisioned it, contemplated that taxpayers would not enjoy any tax benefits from Philatelic for other years and, since petitioners realized tax benefits from Philatelic for four years not before the Court, the settlement is not binding upon respondent.
Petitioners entered the Philatelic program in 1982. On their 1982 return, they claimed certain deductions and the investment credit relating to the stamp master. Because petitioners could not utilize the entire investment credit against their 1982 taxes, they carried back the credit to 1979, 1980, and 1981. These three years apparently utilized the credit in full. On their 1983 return (which is the only year at issue in this case), petitioners claimed certain expenses relating to Philatelic which respondent disallowed in the notice of deficiency. The claimed expenses related to cash payments totaling $17,527.37 petitioners made in 1983.
Respondent's objection to settlement of the 1983 tax year is based upon the disposition which came about as to petitioners four earlier years, 1979, 1980, 1981, and 1982. A separate notice of deficiency had been issued with respect to these four years, disallowing the expenses and investment credit arising out of Philatelic, and petitioners filed a petition with this Court at docket No. 26658-88. That case was settled by the parties through a stipulated decision which decreed no deficiencies in income taxes and no additions to tax. The case was settled because of respondent's concession that the four years were barred by the statute of limitations. It appears that, while the 1982 tax year was under audit, petitioners and respondent had jointly agreed to an open-ended consent to extend the period of limitations through execution of a Form 872-A. In accordance with the provisions of Form 872-A, petitioners later executed and delivered to respondent a Form 872-T, which terminated the extension of the period of limitations. Under the Form 872-A, respondent was allowed 90 days to issue the notice of deficiency once respondent received a Form 872-T. Respondent failed to issue the notice of deficiency within this time period; the defense was properly raised by petitioners and resulted in the stipulated decision referred to. In the decision in docket No. 26658-88, petitioners were awarded litigation costs in the amount of $2,856.76 pursuant to section 7430 . Because petitioners enjoyed the tax benefits for these earlier years from Philatelic, respondent contends he should be allowed to "back out" of the accepted settlement offer for this case involving the 1983 tax year.
Respondent argues that no binding settlement agreement has ever been entered into by the parties since the offer and the purported acceptance were evidenced only by letters between the parties. Alternatively, respondent argues that, even if an agreement was entered into, the agreement should not be enforced.
Respondent first takes the position that the letters between the parties, without additional documentation, are insufficient to constitute an enforceable settlement agreement because there are no documents memorializing the agreement other than a "form" letter from respondent and a letter from petitioners' counsel accepting the offer contained in respondent's letter. Respondent contends that, in the absence of a stipulation of settled issues, filed decision documents, or administrative forms such as a closing agreement under section 7121 , there is no binding settlement.
Formal stipulations of settlement or decision documents are not absolute prerequisites to a binding agreement to settle pending litigation if the intent of the parties to settle and the terms of the settlement are otherwise ascertainable. Further, respondent's contention that a closing agreement under section 7121 is necessary to settle a case pending in this Court is simply not correct. The regulations under section 7121 provide a procedure whereby taxpayers may, at the Commissioner's option, administratively settle their tax liabilities with finality by entering into closing agreements, but exclusive use of such agreements to settle cases docketed in this Court is clearly not contemplated by the regulations:
A request for a closing agreement which relates to a prior taxable period may be submitted at any time before a case with respect to the tax liability involved is docketed in the Tax Court of the United States * * * [Emphasis added.] Section 301.7121-1(d)(1) , Proced. & Admin. Regs.
An agreement to settle a lawsuit, voluntarily entered into, is binding upon the parties, whether or not made in the presence of the court and even in the absence of a writing. Green v. John H. Lewis and Co., 436 F.2d 389 (3d Cir. 1971). The compromise and settlement of tax cases is governed by general principles of contract law. Robbins Tire and Rubber Co. v. Commissioner [Dec. 29,612 ], 52 T.C. 420, 435-436 (1969); Quinones v. Commissioner [Dec. 44,848(M) ], T.C. Memo. 1988-269. Settlement offers made and accepted by letters have been enforced as binding agreements by this Court. See Tompkins v. Commissioner [Dec. 45,864(M) ], T.C. Memo. 1989-363, where a settlement offer made by letter from the Commissioner's Appeals Officer and accepted by a letter from taxpayers' counsel was enforced over the taxpayers' objection; Himmelwright v. Commissioner [Dec. 44,644(M) ], T.C. Memo. 1988-114, where a settlement agreement of the parties, memorialized in a letter to the Commissioner from the taxpayer's counsel, was enforced upon the Commissioner's motion.
It is undisputed that an offer to settle this case was made by respondent, and petitioners, through counsel, timely notified respondent of their acceptance of the settlement offer. Respondent does not contend that the settlement offer was unauthorized, that petitioners failed to properly accept the offer, or that petitioners failed to establish their cash investment in Philatelic. Therefore, under general principles of contract law, petitioners established the basic elements of an enforceable contract: a valid offer and acceptance. The Court finds that the parties entered into an agreement to settle the case, the terms of which were set forth in respondent's letter to petitioners' counsel.
Respondent's next position, that the agreement entered into by the parties should not be enforced, incorporates two contentions: (1) That the settlement agreement is unenforceable under its own terms because disallowance of the deductions and credits for petitioners four earlier years was barred, and/or (2) that petitioners already received the benefit of the settlement agreement by virtue of having been allowed the tax benefits of Philatelic for the four earlier years.
With respect to the first contention, respondent argues that, since no deductions or credits attributable to Philatelic were eliminated and no additions to tax were imposed for the four earlier years, no further deductions from Philatelic are allowable in taxable year 1983 "under the terms of the settlement agreement." Respondent points to nothing in the settlement agreement to buttress this contention, offering instead an unsupported allegation that the settlement offer was based upon "the assumption that all petitioners had not received any benefit from their actual cash investment." This assumption is not evident from the terms of the settlement offer made by respondent. Respondent's offer provided:
1. Taxpayer would be allowed an ordinary deduction equal to 50% of his cash investment, if proof of payment is provided.
2. No investment tax credits would be allowed in any year.
3. Penalties under section 6653(a) would be evaluated on an individual basis and would be conceded by the government, if the taxpayer could demonstrate a reasonable basis for entering into this leasing activity.
4. Section 6659 would apply in full (30%) only to the portion of the deficiencies resulting from depreciation deductions and investment tax credits, since those items are directly attributable to valuation overstatements of the stamp masters. Section 6659 would not be applied to any other portion of the deficiencies in issue.
5. Section 6621(c) increased rate of interest would apply to the entire deficiencies.
6. Section 6661 would not apply to any year.
7. In addition, your clients would be required to enter into a closing agreement for subsequent years which is consistent with the above modified settlement.
Under the modified offer, section 6659 would be applied to those portions of the deficiencies which result from investment tax credit or depreciation. Thus, section 6659 would apply to all carryback years and would apply only to that portion of 1982 and 1983 deficiencies resulting from investment tax credits or depreciating deductions.
At the outset, respondent's offer specifically references the instant case by its Tax Court docket number. The only taxable year at issue in the instant case is 1983. Therefore, the only other years (other than 1983) which were made part of respondent's offer were "subsequent" years, referred to in paragraph 7 above. This meant only years subsequent to 1983 and clearly could not mean years prior to 1983. If respondent had intended that the settlement was conditioned upon disallowance of tax benefits for prior years, a provision to that effect could have easily been included in the settlement offer. However, no such provision was included by respondent, and the Court will not rewrite the parties' agreement to include one.
Although not clearly articulated, respondent also appears to argue that the settlement agreement is unenforceable because the offer was predicated upon a mistaken belief that prior years would be open to disallowance of deductions and credits when the agreement was implemented. If that is the case, it would appear that respondent would not have extended the offer if respondent realized that adjustments in the prior years were barred. However, any misapprehension about the status of the periods of limitation for the four earlier years appears to have been a unilateral mistake on respondent's part and, therefore, does not, without additional evidence, offer sufficient grounds for setting aside the settlement agreement. Respondent does not suggest any misrepresentation by petitioners or their counsel and offers no argument or authorities to support a finding that the settlement agreement is avoidable on the basis of mutual mistake, or that enforcement of the agreement will result in manifest injustice.
In Stamm Intl. Corp. v. Commissioner [Dec. 44,584 ], 90 T.C. 315 (1988), the Court held that a unilateral error by respondent's counsel in calculating the amount of taxes that would be owed under a settlement agreement, in the absence of misrepresentation by the adverse party, was not a sufficient ground to vacate the agreement. Similarly, the Court refused to set aside the parties' settlement agreement on the basis of the unilateral mistake of the taxpayers in Korangy v. Commissioner [Dec. 45,403(M) ], T.C. Memo. 1989-2, affd. [90-1 USTC ¶50,030 ] 893 F.2d 69 (4th Cir. 1990).
Finally, respondent contends that, because petitioners realized tax benefits for the four earlier years, these benefits should be held to offset the concessions by respondent in the agreement to settle the case for 1983. Respondent offers no argument or authority in support of this contention, and it is not evident to the Court that the terms of the settlement agreement justify the interpretation respondent urges.
The Court finds that insufficient reason exists to set aside the settlement agreement of the parties. Respondent is bound by the settlement offer extended to and accepted by petitioners as to their 1983 tax year. Accordingly, petitioners' motion for entry of decision will be granted.
An appropriate order will be issued. 2
1 All section references are to the Internal Revenue Code of 1954 as amended and in effect for the taxable year in question unless otherwise indicated. All Rule references are to the Tax Court Rules of Practice and Procedure.
2 The Court is unable to enter a decision because the agreement fails to compute the deficiency or additions to tax. Additionally, the agreement, as framed, does not resolve the addition to tax under section 6653(a), since resolution of that issue is based upon petitioners' demonstrating "a reasonable basis for entering into this leasing activity." The order will allow the parties the opportunity to resolve such factual matters and, if the parties are unable to resolve such matters, they will so report to the Court, and litigation of this case will be limited to those factual matters within the framework of the agreement of the parties.


Chief Counsel Advice 200133040 , June 13, 2001

CCH IRS Letter Rulings Report No. 1277, 08-22-01

IRS REF: Symbol: CC:PA:CBS:Br2-GL-114892-01

Uniform Issue List Information:
UIL No. 17.10.00-00

Compromises

UIL No. 9999.98-00

Miscellaneous issues

- Not able to identify under present list

[Code Sec. 7122]


MEMORANDUM FOR ASSOCIATE AREA COUNSEL (SB/SE), AREA 2, NEWARK

FROM: Joseph W. Clark, Senior Technician Reviewer, Branch 2 (Collection, Bankruptcy & Summonses)

SUBJECT: Collateral Agreements in Effective Tax Administration Offers in Compromise

This Chief Counsel Advice responds to your request dated March 16, 2001. In accordance with I.R.C. §6110(k)(3), this Chief Counsel Advice should not be cited as precedent. This writing may contain privileged information. Any unauthorized disclosure of this writing may have an adverse effect on privileges, such as the attorney client privilege. If disclosure becomes necessary, please contact this office for our views.

ISSUE:

Can the Internal Revenue Service accept, as additional consideration for an offer in compromise, a collateral agreement or other document which will entitle the Government to the proceeds from the sale of a particular asset at some point in the future?

CONCLUSION:

Yes. Although Treasury regulations establish certain conditions that must be satisfied in order to compromise under section 7122 of the Internal Revenue Code, the terms of a compromise agreement, including the amount acceptable to resolve a case, are policy matters within the discretion of the Commissioner. Insistence upon an agreement allowing the Government to collect from particular assets in the future is a permissible exercise of that discretion.

BACKGROUND:

The Compliance Area Director has asked your advice on the following scenario. The taxpayers, an elderly couple who are not employed, have submitted an offer in compromise. An analysis of the taxpayers' financial condition shows that the tax could be collected in full. The major source of potential collection is their home, which has substantial net equity. However, the Service has determined that seizure of the home would cause the taxpayers economic hardship, and that collection in full cannot be accomplished otherwise. Based on the determination that collection in full would create economic hardship, the Service is considering accepting the taxpayers' offer on the basis of the promotion of effective tax administration. The Area Director is concerned, however, that compromise under such circumstances would only serve to create a windfall for the taxpayers' heirs. He has proposed obtaining a collateral agreement in such compromises which would allow the taxpayers to reside in their home until their deaths. Thereafter, the home would be sold with the proceeds going to the Government as part of the compromise.

LAW & ANALYSIS:

Section 7122 of the Internal Revenue Code grants the Secretary the authority to compromise and establishes certain rules to be followed in exercising that authority. Treasury regulations further define the Secretary's authority by establishing permissible bases for compromise. See Temp. Treas. Reg. §301.7122-1T(b). The regulations provide procedures for the submission and processing of offers to compromise, as well as other rules relating to the acceptance or rejection of offers and how the submission of offers impacts upon the Service's ability to continue collection efforts. See Temp. Treas. Reg. §301.7122-1T(c)-(i).

None of these rules, however, address how much should be accepted to resolve a case, or what terms or conditions should be included in a compromise agreement. The preamble to the temporary regulations explains this omission, stating:

Although the temporary regulations set forth the conditions that must be satisfied to accept an offer to compromise liabilities arising under the internal revenue laws, they do not prescribe the terms or conditions that should be contained in such offers. Thus, the amount to be paid, future compliance or other conditions precedent to satisfaction of a liability for less than the full amount due are matters left to the discretion of the Secretary.

T.D. 8829, Compromises, 64 Fed. Reg. 39020, 39023 (July 21, 1999). In exercising this discretion, the Service may request, "[a]s additional consideration, ... that the taxpayer enter into any collateral agreement or post any security which is deemed necessary for the protection of the interests of the United States." Temp. Treas. Reg. §301.7122-1T(d)(2).

Terms and conditions applicable to all compromises are set forth in Form 656, Offer in Compromise, which must be submitted by all taxpayers offering to compromise with the Service. The Service's procedures recognize that additional terms may be appropriate in some cases. These agreements, commonly known as "collateral agreements," are discussed in Chapter 6 of the Offer in Compromise Handbook, IRM 5.8. Standard collateral agreements include: waivers net operating losses; agreements reducing the basis in particular assets; or agreements to pay a set percentage of future income over a certain base amount. See IRM 5.8.6.3(1). Such agreements allow the Service to recover part of the difference between the amount of the offer and the total liability. However, collateral agreements should not be used to allow acceptance of an amount less than the financial analysis dictates, or to recover amounts that should have been included on the Form 656 as part of the compromise. See IRM 5.8.6.1(3). Similar to the foregoing examples of collateral agreements, an additional agreement like the one proposed by the Area Director is legally permissible, and insisting on such an agreement would be within the Service's discretion.

As with the other types of collateral agreements, whatever obligation a taxpayer undertook (for example, to sell the house and forward the proceeds to the Service) would have to take place within the statute of limitations applicable to the tax to which the proceeds would be applied. Section 6502(a) establishes a ten-year statute of limitations within which a tax liability must be collected or a proceeding in court commenced. Prior to the amendment of that section by the IRS Restructuring and Reform Act of 1998 (RRA), the Form 656 and any collateral agreements provided that the statute of limitations for collection was waived for the period of time that any terms of the compromise or collateral agreement remained outstanding. However, following the amendment of section 6502(a) of the Code by section 3461 of RRA, the ten-year statute of limitations can no longer be extended by agreement for this purpose. As a result, the terms of compromises and collateral agreements can last only for the period remaining on the collection statute.

An agreement for the limited amount of time remaining on the collection statute would not appear to address the concerns raised by the Area Director. One alternative might be the acceptance of some other type of debt instrument granting the Service the ability to collect as a state-law creditor rather than through the administrative collection provisions of the Internal Revenue Code. Courts have long recognized that the Service may accept bonds, letters of credit, or mortgages as a means of securing the payment of taxes, and have upheld the Service's right to collect on such instruments as separate debts not subject to the administrative collection procedures set forth in the Internal Revenue Code. See Royal Indemnity Co. v. United States, 313 U.S. 289 (1941) [41-1 USTC ¶9487], Gulf States Steel Co. v. United States, 287 U.S. 32 (1932) [3 USTC ¶989], United States v. John Barth Co., 268 U.S. 370 (1929) [1 USTC ¶402] (bonds); United States v. Citizens Bank, 50 F.Supp. 2d 107 (D.R.I. 1999) [99-2 USTC ¶50,615] (promissory note secured by mortgage); Julicher v. Internal Revenue Service, 95-2 U.S.T.C. ¶50,379 (USDC, E.D. Pa. 1995) (irrevocable letter of credit).

In each of those cases, the taxpayers attempted to defeat the Government's right to collect on the debt instrument by arguing that the statute of limitations for collection under the Code had expired. Each court held that the instrument executed in the Government's favor created a new debt not subject to the period of limitations for taking administrative collection action or bringing suit. See Royal Indemnity, 313 U.S. at 283 [41-1 USTC ¶9487]; Gulf States, 287 U.S. at 39 [3 USTC ¶989]; Barth, 279 U.S. at 374 [1 USTC ¶402]. The court in Citizens Bank summed up the reasoning in this line of cases as follows:

The principle to be derived from Barth and Julicher is that where the government suspends the collection of a tax at the request of a taxpayer, who in turn provides the government with security for later payment, the government is not thereafter bound by the statute of limitations applicable to the original obligation. Instead, the government may proceed against the security provided to it in consideration of its earlier forbearance.

Citizens Bank, 50 F.Supp. 2d at 111 [99-2 USTC ¶50,615].

Thus, a mortgage on the taxpayers' personal residence may give the Service an enforceable agreement of the sort contemplated by the Area Director. There is no mention of this kind of arrangement in the offer in compromise handbook, but mortgages, bonds and other similar arrangements are discussed in IRM 5.6, Collateral Agreement and Security Type Collateral. That handbook contemplates the use of mortgages not as a replacement lien on property already subject to the lien arising under section 6321 of the Code, but as a means of securing the Government's right to collect from property the assessment lien does not attach to, such as real property held as a tenancy by the entirety. See IRM 5.6.1.2.3(4).1 The handbook further states: "The Service should never obtain a consensual lien in lieu of filing a notice of federal tax lien and reducing the tax claim to judgment or requiring the taxpayer post a bond." IRM 5.6.1.2.3(5). This instruction is in keeping with the handbook's recognition that the filing of a notice of federal tax lien provides the Service greater protection than a debt instrument enforceable only under state law. See IRM 5.6.1.1(3)a.

Although the IRM authorizes the use of mortgages and other consensual security arrangements in certain limited circumstances, the offer in compromise handbook does not appear to have considered the use of such instruments as part of a compromise. Because of the novelty of such an arrangement, we recommend that the Area Director consult with the Office of Compliance Policy, SB/SE, for guidance as to whether and under what circumstances a collateral agreement allowing the Service to collect from a personal residence in the future can be secured as consideration for a compromise.

If you have any questions or need further assistance, please contact the attorney assigned to this matter at 202-622-3620.

1 It is significant that the mortgage in Citizens Bank gave the Service a security interest in property that was not already subject to the lien created by the failure to pay the tax liability. The personal residence used as an example in the Area Director's question is already subject to the Government's lien and is reachable by levy.


The transfer of an individual's suit in connection with an Offer in Compromise (OIC) regarding his unpaid tax liabilities from district court to the Court of Federal Claims was improper. The determination of jurisdiction depended not simply on whether the case involved contract issues, but on whether, despite the presence of a contract, the claim was founded only on a contract, or whether it stemmed from a statute or the Constitution. Although the parties agreed that the OIC was a contract, the suit was based on a refund theory and not on the interpretation of a contract. The taxpayer claimed that the IRS wrongfully terminated the OIC and that, since he paid taxes that he alleges were wrongfully or illegally collected, he was entitled to a refund. Because the taxpayer satisfied all necessary jurisdictional requirements for a tax refund suit, the district court should have retained jurisdiction.

M.J. Roberts, CA-FC, 2001-1 USTC ¶50,306.

Agreements compromising tax litigation are contracts and, as such, they are subject to the rules applicable to contracts generally.

R.C. Lane, CA-5, 62-1 USTC ¶9467, 303 F2d 1.

B. Feinberg, CA-3, 67-1 USTC ¶9176, 372 F2d 352. Rehearing denied.

B.R. Kurio, DC Tex., 71-1 USTC ¶9112.

An agreement signed by an executor consenting that property transferred by the decedent without consideration within two years of his death be included in the taxable estate on condition that other property, similarly transferred, be not so included and that other property be valued at a specified amount was not a compromise.

Leach, CA-1, 1 USTC ¶269, 23 F2d 275.

A married couple's letter to an IRS revenue officer requesting a release of tax liens and proposing that the IRS accept a specified amount in full satisfaction of its proofs of claim did not constitute a compromise of their tax liability. No notation or instructions for application of the payment accompanied their subsequent payment of the specified amount. The purported offer in compromise did not follow the required procedures, the IRS's actions in discharging liens and retaining the payment did not constitute acceptance of an offer to compromise the full tax liability, and the IRS was not bound by principles of satisfaction and accord.

F.G. Harper, BC-DC Va., 96-2 USTC ¶50,676.

An individual debtor's motion to enforce a tax liability settlement with the IRS was granted where the amount agreed upon was actually paid to the IRS approximately one year after the agreement was approved and signed. Because the binding settlement agreement constituted a full and complete resolution of the IRS's claim, the IRS could not subsequently assess post-petition penalties and interest.

E.B. Adelstein, BC-DC Ariz., 94-1 USTC ¶50,270.

Documents that by express agreement of the IRS and a group of affiliated corporations constituted the terms of a settlement did not support the corporations' contention that one of the agreed to terms was the resolution of a foreign income sourcing issue in their favor.

ITT Corp., DC N.Y., 91-2 USTC ¶50,372.

The IRS was allowed to contest an installment agreement and enforce the immediate payment of an assessment of unpaid withholding taxes plus a 100-percent penalty. The installment agreement was only signed by one of the IRS's Group Managers, an employee who did not have authority to compromise tax liabilities on behalf of the IRS. In addition, the installment agreement was not a compromise pursuant to Code Sec. 7122, and the agreement stated on its face that permission to make installment payments could be withdrawn.

J.R. McGee, DC Fla., 83-1 USTC ¶9245.

Internal Revenue Manual Instructions read in conjunction with Code Sec. 7122 are not an offer in compromise that the taxpayer could contend he accepted. Instructional materials are advisory and do not narrow IRS discretion in regard to entering into compromises.

B.E. Shanahan, DC Mo., 78-1 USTC ¶9404.

An attorney was required to abide the terms of a settlement agreement he mistakenly signed with the IRS. The settlement agreement was subject to the general principles of contract law; the attorney's unilateral mistake was not sufficient grounds to set aside an otherwise enforceable agreement.

E.W. Goss, 93 TCM 706, Dec. 56,817(M), TC Memo. 2007-16.

The IRS's rejection of a 73 year old insurance salesman and his wife's $2000 offer to compromise a tax liability in excess of $200,000 was not arbitrary or unreasonable in light of the taxpayers' collection potential. The IRS considered the husband's age, health and the fact that the husband remained active in the insurance business. The IRS's refusal of the second offer was justified by the income generated from the husband's insurance business, the value of the transferred automobile, and the taxpayers' increased expenditures since the first settlement offer.

S. Alaniz, 89 TCM 660, Dec. 55,905(M), TC Memo. 2005-4.

Innocent spouse relief granted- section 6015 -

M. Brown v. Commissioner.

Docket No. 23720-05S . Filed September 16, 2008.

[ Code Sec. 6015]


An individual who was not allowed by her husband to review the family's financial information or tax returns prior to filing was entitled to equitable innocent spouse relief from the couple's unpaid tax liabilities. The husband's control and abuse established her fear of retaliation if she were to challenge the preparation of the couple's return. Further, since her medical condition prevented her from working, she would suffer economic hardship if she were not relieved of liability for the unpaid taxes.



SWIFT, Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case.



The issue for decision is whether petitioner is entitled to relief from joint and several liability under section 6015(f) with respect to Federal income tax liability for the year 2000.



Unless otherwise indicated, all section references are to the Internal Revenue Code.





Background



Some of the facts are stipulated and are so found.



At the time the petition was filed, petitioner resided in Nevada.



Before 1991 petitioner married Stephen Brown (Brown). During the 1990s Brown and petitioner worked in real estate in Florida, California, and Hawaii.



Brown and petitioner had two children, but Brown was unstable and abusive. Brown had problems with alcohol and at times would grab or hit petitioner and threaten to take the children away from her.



In 1999 Brown and petitioner moved to Nevada for new opportunities in real estate. In 2000, the year in issue, Brown and petitioner worked in Las Vegas for two time-share companies for both of which Brown was the sales manager and petitioner was a salesperson working under Brown. As manager Brown would receive petitioner's occasional commission checks for distribution to petitioner, but Brown would not give the checks to petitioner except to obtain her endorsement. Brown would then take petitioner's checks and cash or deposit them as he saw fit.



In September 2000 Brown and petitioner had a major altercation at their home, and police were called. When petitioner arrived at work the next morning, Brown prevented petitioner from entering the office. Brown and petitioner separated, and Brown effectively prevented petitioner from working the remainder of 2000.



In 2001 petitioner again went to work for the same real estate company but not under Brown's supervision and in a separate department and building from Brown.



In January 2002 Brown and petitioner were divorced. Pursuant to the divorce decree, Brown was obligated to pay petitioner $40,000. Brown, however, made only one $700 payment to petitioner.



As a result of Brown's abuse of and threats made to petitioner, petitioner was constantly in fear of Brown. Throughout the marriage, petitioner had no access to any of the family's financial accounts, and Brown paid all the bills.



Brown had the only key to the mailbox, and Brown would not allow petitioner to pick up or read the mail. Brown was in total control of the finances relating to the marriage and the family including income petitioner earned in her work.



As a result of the abuse she experienced, the divorce, and several serious accidents, petitioner's physical condition is poor. Petitioner takes medication for her pain and anxiety, and petitioner is not able to work.



At some point in 2001 Brown prepared or had prepared the 2000 joint Federal income tax return. It included a Schedule C, Profit or Loss From Business, on which was reported a total net income of $20,918, a zero income tax liability (after a $656 child tax credit), and a $2,956 self-employment tax liability.



Attached to the 2000 joint Federal income tax return was a Schedule SE, Self-Employment Tax, on which the reported Schedule C net income of $20,918 was allocated by Brown equally between Brown and petitioner ($10,459 each), and accordingly a self-employment tax liability was reported for Brown and for petitioner of $1,478 each.



Other than to sign, petitioner did not in any way participate in the preparation of the 2000 tax return, and petitioner was not allowed to review the 2000 return before signing it. Petitioner was not aware of the equal allocation on the 2000 tax return of the Schedule C net income between Brown and herself, and petitioner was not aware of the self-employment tax liability of $1,478 reported by Brown for her.



On approximately October 31, 2001, Brown filed the 2000 joint Federal income tax return late.



In 2004, in connection with preparing and filing her 2003 individual Federal income tax return, petitioner learned of significant unpaid joint Federal income taxes for 1991, 1997, 1998, and 2000 that Brown had never paid and about which Brown had never informed her.



On October 28, 2004, petitioner filed with respondent a Form 8857, Request for Innocent Spouse Relief, requesting relief from joint liability for the outstanding Federal income taxes for 1991, 1997, 1998, and 2000. Under section 6015, respondent granted in full petitioner's request for relief from joint Federal income tax liability for 1991, 1997, and 1998.



For 2000 respondent granted petitioner relief from one-half of the $2,956 reported self-employment taxes shown on the return on the ground that half was attributable to Brown. Respondent, however, determined that the other half of the reported $2,956 self-employment taxes was attributable to petitioner's taxable income and that relief therefrom was not warranted.



At the time of trial Brown continued to live in the home he had shared with petitioner before their divorce, and petitioner lived in a motel and had custody of their daughter.



Petitioner's father has been giving petitioner $500 per month. Because of petitioner's medical condition, petitioner is not able to work. At the time of trial, petitioner was seeking Social Security disability benefits.





Discussion



Generally, taxpayers filing joint Federal income tax returns are jointly liable for taxes reported due thereon. Sec. 6013(d)(3). However, equitable relief from joint liability for Federal income taxes may be available to a spouse when it would be inequitable to hold the spouse liable. Sec. 6015(f)(1).



Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. 296, 297, sets forth seven threshold conditions which a taxpayer seeking equitable relief from joint liability under section 6015(f) is required to satisfy. With regard to half of the Schedule C reported income that Brown on the 2000 tax return attributed to petitioner and with respect to which respondent has denied petitioner relief from self-employment tax liability, respondent argues that one of the seven threshold conditions is not satisfied; namely, that the income in question was "attributable to" petitioner. See id. sec. 4.01(1) through (7), 2003-2 C.B. at 297-298. 1



Petitioner challenges respondent's determination on the ground that the $10,459 in question was earned by Brown, not by her, and that the $10,459 therefore was not attributable to her. Petitioner also challenges respondent's determination on the ground that petitioner qualifies for the abuse exception to this seventh threshold condition. See id. sec. 4.01(7)(d), 2003-2 C.B. at 298. We agree with petitioner as to the abuse exception.



Regardless of whether the $10,459 was attributable to petitioner, on the basis of the record before us and on petitioner's credible testimony at trial we conclude that petitioner qualifies for the exception under Rev. Proc. 2003-61, sec. 4.01(7)(d). 2 Brown's control and abuse of petitioner was extensive and establishes that petitioner for fear of Brown's retaliation and further abuse did not challenge Brown's preparation of the 2000 Federal income tax return, Brown's allocation of the Schedule C income reported thereon equally between himself and petitioner, or Brown's allocation of the self-employment taxes between himself and petitioner.



Respondent also determined that petitioner knew or had reason to know that Brown would not pay the self-employment taxes shown due on petitioner and Brown's joint return. See Rev. Proc. 2003-61, sec. 4.02(1)(b), 2003-2 C.B. at 298. Respondent argues that because of their difficult relationship and because petitioner, at the time she signed the 2000 joint return, knew of the financial troubles of the marriage, petitioner should have anticipated that Brown would fail to pay the reported self-employment taxes.



We disagree. Brown kept petitioner entirely in the dark about the family's finances, including the payment or nonpayment of taxes. Brown did not allow petitioner to review any of their financial records or tax returns. Brown exercised so much control over the finances for such an extended period of time that petitioner had essentially no knowledge of any of the family's finances or tax liabilities. We conclude that petitioner has established that it was reasonable for her to believe Brown would pay the self-employment taxes reported on the joint 2000 Federal income tax return.



Respondent also determined that petitioner would not suffer economic hardship if she were denied relief from liability for the $1,478 of 2000 self-employment taxes. See id. sec. 4.02(1)(c), 2003-2 C.B. at 298. Economic hardship under Rev. Proc. 2003-61, sec. 4.02(1)(c), exists if satisfaction of the liability in whole or in part would result in petitioner's inability to pay reasonable living expenses. Sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs.



As noted, petitioner is living from day to day, being assisted by her father and friends. Petitioner's medical condition prevents her from working and earning any income. We conclude that petitioner's medical condition makes it unlikely that petitioner will be able to find employment.



The fact that petitioner's father provides some assistance to petitioner is not particularly relevant to our economic hardship analysis. We conclude that denial of petitioner's request from relief would cause petitioner economic hardship.



Because we conclude that it would be inequitable to deny petitioner relief under Rev. Proc. 2003-61, sec. 4.02, we need not reach the issue of equitable relief under Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B. at 298.



To reflect the foregoing,



Decision will be entered for petitioner.


1 In describing, in part, the threshold condition in question, Rev. Proc. 2003-61, sec. 4.01(7), 2003-2 C.B. 296, 297, states: "The income tax liability from which the requesting spouse seeks relief is attributable to an item of the [other] individual with whom the requesting spouse filed the joint return". The exceptions are: (a) Attribution solely due to the operation of community property law; (b) nominal ownership; (c) misappropriation of funds; and (d) abuse.

2 Rev. Proc. 2003-61, sec. 4.01(7)(d), 2003-2 C.B. at 298, allows the Commissioner to grant equitable relief even though the underpayment in question may be attributable in full or in part to an item of income of the requesting spouse.

Offer in compromise as a contract

Donald Eugene Rudisill and Barbara Jean Rudisill v. Commissioner

Docket No. 7903-91., T.C. Memo. 1992-388, 64 TCM 93, Filed July 13, 1992


[Code Secs. 7121 and 7122 ]


Additions to tax: Immunity: Closing agreements: Compromise agreements: Penalties, civil.--An investor in computer software was not granted immunity by the IRS. Although the taxpayer met with a desk clerk of the Criminal Investigation Division of the IRS and was allegedly told he did not have to refile his taxes, the clerk had no authority to grant immunity or consummate an agreement. Since closing agreements and compromise agreements are the exclusive means of settling disputes over civil taxes and since no such agreement existed, the taxpayer was not entitled to immunity. Accordingly, the penalties determined by the IRS and conceded by the taxpayer were upheld.
Donald Eugene Rudisill, pro se. Sylvia Shaughnessy, for the respondent.
Memorandum Opinion
FAY, Judge:
By statutory notice of deficiency, respondent determined deficiencies in and additions to petitioners' Federal income tax in the following amounts:
Additions to Tax
----------------
Year Deficiency Sec. 6653(a) Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6659
1980 ....... $5,976 $299 $1,793
1981 ....... 6,443 $322 1 1,933
1982 ....... 7,779 389 1 2,334
1983 ....... 6,983 349 1 2,095
------------------------------------------------------------------------------
1 Fifty percent of interest computed on $6,443, $7,779, and $6,983 of the
deficiency for taxable years 1981, 1982, and 1983, respectively.

All section references are to the Internal Revenue Code in effect for the years in issue.
The sole issue before this Court is whether petitioners were granted immunity by respondent and are thereby relieved of the deficiencies and additions to tax as set forth in the notice ofdeficiency for the years at issue. We hold petitioners were not granted immunity by respondent. For purposes of clarity, the findings of fact and opinion have been combined.
The Stipulation of Facts and exhibits are incorporated herein by this reference. Petitioners were residents of Bonita, California, at the time the petition in this case was filed.
On their 1983 Federal income tax return, petitioners claimed a Schedule C loss in the amount of $9,181 and an investment tax credit (ITC) in the amount of $25,134, both in connection withtheir investment in Courseware Research Corp. (CRC), a computer software leasing program.
Petitioners deducted $4,937 of the total claimed ITC on their 1983 Federal income tax return and carried back $5,976, $6,443, and $7,779 of the ITC to their 1980, 1981, and 1982 tax years, respectively.
In the notice of deficiency, respondent disallowed the claimed loss and ITC on the primary grounds that the transactions were not bona fide arm's length transactions at fair market value and that the transactions lacked economic substance.
Petitioners do not dispute that they are not entitled to the claimed loss and ITC. Instead, petitioners assert that they should not be held liable for the deficiencies and additions to tax for the years at issue on the ground that they were granted immunity by a desk clerk employed by the Internal Revenue Service. 1
Mr. Rudisill (petitioner) contacted the Criminal Investigation Division (C.I.D.) of the Internal Revenue Service on April 1, 1985, on his own initiative for the purpose of having the CRC computer leasing program "declared illegal" and to refile his taxes for the years at issue.
Petitioner asserts that he met with Catherine MacNeill (MacNeill), a desk clerk employed by respondent, who proceeded to take down information provided by petitioner. Petitioner claims that during his April 1, 1985, contact with C.I.D., he was advised by MacNeill as follows: "Mr. Rudisill, you were a victim. You don't have to refile your taxes. You go home and forget about it."
Respondent concedes that MacNeill was the employee of respondent who wrote down the information provided by petitioner. Respondent, however, does not concede that MacNeill made the statements alleged by petitioner. Respondent further argues that MacNeill did not have authority to grant petitioners immunity or to make any type of agreement relating to petitioners' civil tax liabilities and that, in fact, no such agreement ever existed between the parties.
In the context of a civil tax dispute, closing agreements under section 7121 and compromise agreements under section 7122 provide the exclusive means of settling such controversy. See Botany Worsted Mills v. United States [1 USTC ¶348 ], 278 U.S. 282, 288 (1929); Shumaker v. Commissioner [81-2 USTC ¶9508 ], 648 F.2d 1198, 1200 (9th Cir. 1981); see also Estate of Meyer v. Commissioner [Dec. 31,336 ], 58 T.C. 69, 70 (1972). We consider petitioners' claim of immunity from the tax deficiencies and additions to tax before us as a claim arising under each of these sections. Both closing agreements under section 7121 and compromise agreements under section 7122 , however, are required to be in writing and to be accepted by the Secretary. Sec. 301.7121-1 and sec. 301.7122-1 , Proced. & Admin. Regs.
Petitioners were unable to show that any written agreement complying with the applicable rules and regulations was entered into with respondent relating to petitioners' civil tax liabilities for 1980 through 1983. In addition, we discern no other evidence in the record before us that supports petitioners' claim of immunity. 2
We therefore hold petitioners' allegations of a grant of immunity by respondent to be meritless.
Decision will be entered for respondent.
1 In paragraph 8 of the Stipulation of Facts, the parties stipulated to reduced amounts of the deficiencies in income taxes and additions to tax due from petitioners in the event that this Court holds for respondent. The reduced deficiencies and additions to tax are consistent with settlement offers given to other investors in CRC.
2 At trial, neither party called MacNeill to testify as a witness before this Court. Because we find that the record is devoid of any evidence supporting the existence of a written agreement within the context of sec. 7121 or sec. 7122 , we need not resolve whether MacNeill made the statements attributed to her by petitioner or whether MacNeill was authorized by respondent toenter into any such agreement.



Robert F. and Frances H. Haiduk v. Commissioner

Docket No. 36632-87., TC Memo. 1990-506, 60 TCM 864, Filed September 24, 1990

[Appealable, barring stipulation to the contrary, to CA-9.

[Code Sec. 7121 ]

Commissioner of Internal Revenue: Closing agreements: Nonstatutory agreements.--An IRS settlement letter for one tax year that was accepted by the taxpayers was a binding contract and could not be set aside despite the IRS's unilateral error in calculating the amount of taxes owed under the agreement. The IRS objected to the settlement because of deductions that taxpayers had taken in earlier years barred by the statute of limitations in another case. Formal stipulations of settlement or decision were not absolute prerequisites to a binding agreement to settle pending litigation if the intent of the parties and settlement terms were otherwise ascertainable and a closing agreement was not necessary to settle a case before the Tax Court. Nothing in the settlement agreement required the taxpayers to make adjustments in tax years prior to the year at issue because the IRS failed to include such terms. The IRS failed to offer argument or authority to support findings of impermissible tax benefits or that the agreement was voidable on the basis of mutual mistake or that a manifest injustice would result from the enforcement of the agreement.
Memorandum Opinion
COUVILLION, Special Trial Judge:
This case was assigned pursuant to section 7443A(b)(3) 1 and Rule 180 et seq.
At issue is a motion by petitioners for entry of decision as to which respondent has filed a notice of objection. At the time the petition was filed, petitioners were residents of El Toro, California.
Respondent determined a deficiency in Federal income tax, for petitioners' 1983 tax year, of $6,119; additions to tax under section 6653(a)(1) and (2), respectively, of $305.95 and 50 percent of the interest due on $6,119; the addition to tax under section 6659 in the amount of $1,835.70; and additional interest under section 6621(c) .
Petitioners were investors in a program known as "Philatelic Leasing" (Philatelic) which has been identified by respondent as a national litigation project. In general, participants in Philatelic paid cash and executed promissory notes in consideration for which they received rights to the exploitation of a stamp master. All of the deductions and credits claimed by participants in the program were disallowed by respondent.
Respondent, by letter, extended an offer to petitioners for settlement of this case. Essentially, the offer allowed investors a deduction of 50 percent of their cash investment in the year at issue. In the letter, respondent represented that petitioners could accept the offer, within 14 days, by (1) returning a checklist properly marked to indicate acceptance of the settlement offer; and (2) establishing proof of their cash investment in the Philatelic program. Petitioners timely complied with both requirements. Respondent now refuses to proceed with the settlement for the reason that the offer, as respondent envisioned it, contemplated that taxpayers would not enjoy any tax benefits from Philatelic for other years and, since petitioners realized tax benefits from Philatelic for four years not before the Court, the settlement is not binding upon respondent.
Petitioners entered the Philatelic program in 1982. On their 1982 return, they claimed certain deductions and the investment credit relating to the stamp master. Because petitioners could not utilize the entire investment credit against their 1982 taxes, they carried back the credit to 1979, 1980, and 1981. These three years apparently utilized the credit in full. On their 1983 return (which is the only year at issue in this case), petitioners claimed certain expenses relating to Philatelic which respondent disallowed in the notice of deficiency. The claimed expenses related to cash payments totaling $17,527.37 petitioners made in 1983.
Respondent's objection to settlement of the 1983 tax year is based upon the disposition which came about as to petitioners four earlier years, 1979, 1980, 1981, and 1982. A separate notice of deficiency had been issued with respect to these four years, disallowing the expenses and investment credit arising out of Philatelic, and petitioners filed a petition with this Court at docket No. 26658-88. That case was settled by the parties through a stipulated decision which decreed no deficiencies in income taxes and no additions to tax. The case was settled because of respondent's concession that the four years were barred by the statute of limitations. It appears that, while the 1982 tax year was under audit, petitioners and respondent had jointly agreed to an open-ended consent to extend the period of limitations through execution of a Form 872-A. In accordance with the provisions of Form 872-A, petitioners later executed and delivered to respondent a Form 872-T, which terminated the extension of the period of limitations. Under the Form 872-A, respondent was allowed 90 days to issue the notice of deficiency once respondent received a Form 872-T. Respondent failed to issue the notice of deficiency within this time period; the defense was properly raised by petitioners and resulted in the stipulated decision referred to. In the decision in docket No. 26658-88, petitioners were awarded litigation costs in the amount of $2,856.76 pursuant to section 7430 . Because petitioners enjoyed the tax benefits for these earlier years from Philatelic, respondent contends he should be allowed to "back out" of the accepted settlement offer for this case involving the 1983 tax year.
Respondent argues that no binding settlement agreement has ever been entered into by the parties since the offer and the purported acceptance were evidenced only by letters between the parties. Alternatively, respondent argues that, even if an agreement was entered into, the agreement should not be enforced.
Respondent first takes the position that the letters between the parties, without additional documentation, are insufficient to constitute an enforceable settlement agreement because there are no documents memorializing the agreement other than a "form" letter from respondent and a letter from petitioners' counsel accepting the offer contained in respondent's letter. Respondent contends that, in the absence of a stipulation of settled issues, filed decision documents, or administrative forms such as a closing agreement under section 7121 , there is no binding settlement.
Formal stipulations of settlement or decision documents are not absolute prerequisites to a binding agreement to settle pending litigation if the intent of the parties to settle and the terms of the settlement are otherwise ascertainable. Further, respondent's contention that a closing agreement under section 7121 is necessary to settle a case pending in this Court is simply not correct. The regulations under section 7121 provide a procedure whereby taxpayers may, at the Commissioner's option, administratively settle their tax liabilities with finality by entering into closing agreements, but exclusive use of such agreements to settle cases docketed in this Court is clearly not contemplated by the regulations:
A request for a closing agreement which relates to a prior taxable period may be submitted at any time before a case with respect to the tax liability involved is docketed in the Tax Court of the United States * * * [Emphasis added.] Section 301.7121-1(d)(1) , Proced. & Admin. Regs.
An agreement to settle a lawsuit, voluntarily entered into, is binding upon the parties, whether or not made in the presence of the court and even in the absence of a writing. Green v. John H. Lewis and Co., 436 F.2d 389 (3d Cir. 1971). The compromise and settlement of tax cases is governed by general principles of contract law. Robbins Tire and Rubber Co. v. Commissioner [Dec. 29,612 ], 52 T.C. 420, 435-436 (1969); Quinones v. Commissioner [Dec. 44,848(M) ], T.C. Memo. 1988-269. Settlement offers made and accepted by letters have been enforced as binding agreements by this Court. See Tompkins v. Commissioner [Dec. 45,864(M) ], T.C. Memo. 1989-363, where a settlement offer made by letter from the Commissioner's Appeals Officer and accepted by a letter from taxpayers' counsel was enforced over the taxpayers' objection; Himmelwright v. Commissioner [Dec. 44,644(M) ], T.C. Memo. 1988-114, where a settlement agreement of the parties, memorialized in a letter to the Commissioner from the taxpayer's counsel, was enforced upon the Commissioner's motion.
It is undisputed that an offer to settle this case was made by respondent, and petitioners, through counsel, timely notified respondent of their acceptance of the settlement offer. Respondent does not contend that the settlement offer was unauthorized, that petitioners failed to properly accept the offer, or that petitioners failed to establish their cash investment in Philatelic. Therefore, under general principles of contract law, petitioners established the basic elements of an enforceable contract: a valid offer and acceptance. The Court finds that the parties entered into an agreement to settle the case, the terms of which were set forth in respondent's letter to petitioners' counsel.
Respondent's next position, that the agreement entered into by the parties should not be enforced, incorporates two contentions: (1) That the settlement agreement is unenforceable under its own terms because disallowance of the deductions and credits for petitioners four earlier years was barred, and/or (2) that petitioners already received the benefit of the settlement agreement by virtue of having been allowed the tax benefits of Philatelic for the four earlier years.
With respect to the first contention, respondent argues that, since no deductions or credits attributable to Philatelic were eliminated and no additions to tax were imposed for the four earlier years, no further deductions from Philatelic are allowable in taxable year 1983 "under the terms of the settlement agreement." Respondent points to nothing in the settlement agreement to buttress this contention, offering instead an unsupported allegation that the settlement offer was based upon "the assumption that all petitioners had not received any benefit from their actual cash investment." This assumption is not evident from the terms of the settlement offer made by respondent. Respondent's offer provided:
1. Taxpayer would be allowed an ordinary deduction equal to 50% of his cash investment, if proof of payment is provided.
2. No investment tax credits would be allowed in any year.
3. Penalties under section 6653(a) would be evaluated on an individual basis and would be conceded by the government, if the taxpayer could demonstrate a reasonable basis for entering into this leasing activity.
4. Section 6659 would apply in full (30%) only to the portion of the deficiencies resulting from depreciation deductions and investment tax credits, since those items are directly attributable to valuation overstatements of the stamp masters. Section 6659 would not be applied to any other portion of the deficiencies in issue.
5. Section 6621(c) increased rate of interest would apply to the entire deficiencies.
6. Section 6661 would not apply to any year.
7. In addition, your clients would be required to enter into a closing agreement for subsequent years which is consistent with the above modified settlement.
Under the modified offer, section 6659 would be applied to those portions of the deficiencies which result from investment tax credit or depreciation. Thus, section 6659 would apply to all carryback years and would apply only to that portion of 1982 and 1983 deficiencies resulting from investment tax credits or depreciating deductions.
At the outset, respondent's offer specifically references the instant case by its Tax Court docket number. The only taxable year at issue in the instant case is 1983. Therefore, the only other years (other than 1983) which were made part of respondent's offer were "subsequent" years, referred to in paragraph 7 above. This meant only years subsequent to 1983 and clearly could not mean years prior to 1983. If respondent had intended that the settlement was conditioned upon disallowance of tax benefits for prior years, a provision to that effect could have easily been included in the settlement offer. However, no such provision was included by respondent, and the Court will not rewrite the parties' agreement to include one.
Although not clearly articulated, respondent also appears to argue that the settlement agreement is unenforceable because the offer was predicated upon a mistaken belief that prior years would be open to disallowance of deductions and credits when the agreement was implemented. If that is the case, it would appear that respondent would not have extended the offer if respondent realized that adjustments in the prior years were barred. However, any misapprehension about the status of the periods of limitation for the four earlier years appears to have been a unilateral mistake on respondent's part and, therefore, does not, without additional evidence, offer sufficient grounds for setting aside the settlement agreement. Respondent does not suggest any misrepresentation by petitioners or their counsel and offers no argument or authorities to support a finding that the settlement agreement is avoidable on the basis of mutual mistake, or that enforcement of the agreement will result in manifest injustice.
In Stamm Intl. Corp. v. Commissioner [Dec. 44,584 ], 90 T.C. 315 (1988), the Court held that a unilateral error by respondent's counsel in calculating the amount of taxes that would be owed under a settlement agreement, in the absence of misrepresentation by the adverse party, was not a sufficient ground to vacate the agreement. Similarly, the Court refused to set aside the parties' settlement agreement on the basis of the unilateral mistake of the taxpayers in Korangy v. Commissioner [Dec. 45,403(M) ], T.C. Memo. 1989-2, affd. [90-1 USTC ¶50,030 ] 893 F.2d 69 (4th Cir. 1990).
Finally, respondent contends that, because petitioners realized tax benefits for the four earlier years, these benefits should be held to offset the concessions by respondent in the agreement to settle the case for 1983. Respondent offers no argument or authority in support of this contention, and it is not evident to the Court that the terms of the settlement agreement justify the interpretation respondent urges.
The Court finds that insufficient reason exists to set aside the settlement agreement of the parties. Respondent is bound by the settlement offer extended to and accepted by petitioners as to their 1983 tax year. Accordingly, petitioners' motion for entry of decision will be granted.
An appropriate order will be issued. 2
1 All section references are to the Internal Revenue Code of 1954 as amended and in effect for the taxable year in question unless otherwise indicated. All Rule references are to the Tax Court Rules of Practice and Procedure.
2 The Court is unable to enter a decision because the agreement fails to compute the deficiency or additions to tax. Additionally, the agreement, as framed, does not resolve the addition to tax under section 6653(a), since resolution of that issue is based upon petitioners' demonstrating "a reasonable basis for entering into this leasing activity." The order will allow the parties the opportunity to resolve such factual matters and, if the parties are unable to resolve such matters, they will so report to the Court, and litigation of this case will be limited to those factual matters within the framework of the agreement of the parties.


Chief Counsel Advice 200133040 , June 13, 2001

CCH IRS Letter Rulings Report No. 1277, 08-22-01

IRS REF: Symbol: CC:PA:CBS:Br2-GL-114892-01

Uniform Issue List Information:
UIL No. 17.10.00-00

Compromises

UIL No. 9999.98-00

Miscellaneous issues

- Not able to identify under present list

[Code Sec. 7122]


MEMORANDUM FOR ASSOCIATE AREA COUNSEL (SB/SE), AREA 2, NEWARK

FROM: Joseph W. Clark, Senior Technician Reviewer, Branch 2 (Collection, Bankruptcy & Summonses)

SUBJECT: Collateral Agreements in Effective Tax Administration Offers in Compromise

This Chief Counsel Advice responds to your request dated March 16, 2001. In accordance with I.R.C. §6110(k)(3), this Chief Counsel Advice should not be cited as precedent. This writing may contain privileged information. Any unauthorized disclosure of this writing may have an adverse effect on privileges, such as the attorney client privilege. If disclosure becomes necessary, please contact this office for our views.

ISSUE:

Can the Internal Revenue Service accept, as additional consideration for an offer in compromise, a collateral agreement or other document which will entitle the Government to the proceeds from the sale of a particular asset at some point in the future?

CONCLUSION:

Yes. Although Treasury regulations establish certain conditions that must be satisfied in order to compromise under section 7122 of the Internal Revenue Code, the terms of a compromise agreement, including the amount acceptable to resolve a case, are policy matters within the discretion of the Commissioner. Insistence upon an agreement allowing the Government to collect from particular assets in the future is a permissible exercise of that discretion.

BACKGROUND:

The Compliance Area Director has asked your advice on the following scenario. The taxpayers, an elderly couple who are not employed, have submitted an offer in compromise. An analysis of the taxpayers' financial condition shows that the tax could be collected in full. The major source of potential collection is their home, which has substantial net equity. However, the Service has determined that seizure of the home would cause the taxpayers economic hardship, and that collection in full cannot be accomplished otherwise. Based on the determination that collection in full would create economic hardship, the Service is considering accepting the taxpayers' offer on the basis of the promotion of effective tax administration. The Area Director is concerned, however, that compromise under such circumstances would only serve to create a windfall for the taxpayers' heirs. He has proposed obtaining a collateral agreement in such compromises which would allow the taxpayers to reside in their home until their deaths. Thereafter, the home would be sold with the proceeds going to the Government as part of the compromise.

LAW & ANALYSIS:

Section 7122 of the Internal Revenue Code grants the Secretary the authority to compromise and establishes certain rules to be followed in exercising that authority. Treasury regulations further define the Secretary's authority by establishing permissible bases for compromise. See Temp. Treas. Reg. §301.7122-1T(b). The regulations provide procedures for the submission and processing of offers to compromise, as well as other rules relating to the acceptance or rejection of offers and how the submission of offers impacts upon the Service's ability to continue collection efforts. See Temp. Treas. Reg. §301.7122-1T(c)-(i).

None of these rules, however, address how much should be accepted to resolve a case, or what terms or conditions should be included in a compromise agreement. The preamble to the temporary regulations explains this omission, stating:

Although the temporary regulations set forth the conditions that must be satisfied to accept an offer to compromise liabilities arising under the internal revenue laws, they do not prescribe the terms or conditions that should be contained in such offers. Thus, the amount to be paid, future compliance or other conditions precedent to satisfaction of a liability for less than the full amount due are matters left to the discretion of the Secretary.

T.D. 8829, Compromises, 64 Fed. Reg. 39020, 39023 (July 21, 1999). In exercising this discretion, the Service may request, "[a]s additional consideration, ... that the taxpayer enter into any collateral agreement or post any security which is deemed necessary for the protection of the interests of the United States." Temp. Treas. Reg. §301.7122-1T(d)(2).

Terms and conditions applicable to all compromises are set forth in Form 656, Offer in Compromise, which must be submitted by all taxpayers offering to compromise with the Service. The Service's procedures recognize that additional terms may be appropriate in some cases. These agreements, commonly known as "collateral agreements," are discussed in Chapter 6 of the Offer in Compromise Handbook, IRM 5.8. Standard collateral agreements include: waivers net operating losses; agreements reducing the basis in particular assets; or agreements to pay a set percentage of future income over a certain base amount. See IRM 5.8.6.3(1). Such agreements allow the Service to recover part of the difference between the amount of the offer and the total liability. However, collateral agreements should not be used to allow acceptance of an amount less than the financial analysis dictates, or to recover amounts that should have been included on the Form 656 as part of the compromise. See IRM 5.8.6.1(3). Similar to the foregoing examples of collateral agreements, an additional agreement like the one proposed by the Area Director is legally permissible, and insisting on such an agreement would be within the Service's discretion.

As with the other types of collateral agreements, whatever obligation a taxpayer undertook (for example, to sell the house and forward the proceeds to the Service) would have to take place within the statute of limitations applicable to the tax to which the proceeds would be applied. Section 6502(a) establishes a ten-year statute of limitations within which a tax liability must be collected or a proceeding in court commenced. Prior to the amendment of that section by the IRS Restructuring and Reform Act of 1998 (RRA), the Form 656 and any collateral agreements provided that the statute of limitations for collection was waived for the period of time that any terms of the compromise or collateral agreement remained outstanding. However, following the amendment of section 6502(a) of the Code by section 3461 of RRA, the ten-year statute of limitations can no longer be extended by agreement for this purpose. As a result, the terms of compromises and collateral agreements can last only for the period remaining on the collection statute.

An agreement for the limited amount of time remaining on the collection statute would not appear to address the concerns raised by the Area Director. One alternative might be the acceptance of some other type of debt instrument granting the Service the ability to collect as a state-law creditor rather than through the administrative collection provisions of the Internal Revenue Code. Courts have long recognized that the Service may accept bonds, letters of credit, or mortgages as a means of securing the payment of taxes, and have upheld the Service's right to collect on such instruments as separate debts not subject to the administrative collection procedures set forth in the Internal Revenue Code. See Royal Indemnity Co. v. United States, 313 U.S. 289 (1941) [41-1 USTC ¶9487], Gulf States Steel Co. v. United States, 287 U.S. 32 (1932) [3 USTC ¶989], United States v. John Barth Co., 268 U.S. 370 (1929) [1 USTC ¶402] (bonds); United States v. Citizens Bank, 50 F.Supp. 2d 107 (D.R.I. 1999) [99-2 USTC ¶50,615] (promissory note secured by mortgage); Julicher v. Internal Revenue Service, 95-2 U.S.T.C. ¶50,379 (USDC, E.D. Pa. 1995) (irrevocable letter of credit).

In each of those cases, the taxpayers attempted to defeat the Government's right to collect on the debt instrument by arguing that the statute of limitations for collection under the Code had expired. Each court held that the instrument executed in the Government's favor created a new debt not subject to the period of limitations for taking administrative collection action or bringing suit. See Royal Indemnity, 313 U.S. at 283 [41-1 USTC ¶9487]; Gulf States, 287 U.S. at 39 [3 USTC ¶989]; Barth, 279 U.S. at 374 [1 USTC ¶402]. The court in Citizens Bank summed up the reasoning in this line of cases as follows:

The principle to be derived from Barth and Julicher is that where the government suspends the collection of a tax at the request of a taxpayer, who in turn provides the government with security for later payment, the government is not thereafter bound by the statute of limitations applicable to the original obligation. Instead, the government may proceed against the security provided to it in consideration of its earlier forbearance.

Citizens Bank, 50 F.Supp. 2d at 111 [99-2 USTC ¶50,615].

Thus, a mortgage on the taxpayers' personal residence may give the Service an enforceable agreement of the sort contemplated by the Area Director. There is no mention of this kind of arrangement in the offer in compromise handbook, but mortgages, bonds and other similar arrangements are discussed in IRM 5.6, Collateral Agreement and Security Type Collateral. That handbook contemplates the use of mortgages not as a replacement lien on property already subject to the lien arising under section 6321 of the Code, but as a means of securing the Government's right to collect from property the assessment lien does not attach to, such as real property held as a tenancy by the entirety. See IRM 5.6.1.2.3(4).1 The handbook further states: "The Service should never obtain a consensual lien in lieu of filing a notice of federal tax lien and reducing the tax claim to judgment or requiring the taxpayer post a bond." IRM 5.6.1.2.3(5). This instruction is in keeping with the handbook's recognition that the filing of a notice of federal tax lien provides the Service greater protection than a debt instrument enforceable only under state law. See IRM 5.6.1.1(3)a.

Although the IRM authorizes the use of mortgages and other consensual security arrangements in certain limited circumstances, the offer in compromise handbook does not appear to have considered the use of such instruments as part of a compromise. Because of the novelty of such an arrangement, we recommend that the Area Director consult with the Office of Compliance Policy, SB/SE, for guidance as to whether and under what circumstances a collateral agreement allowing the Service to collect from a personal residence in the future can be secured as consideration for a compromise.

If you have any questions or need further assistance, please contact the attorney assigned to this matter at 202-622-3620.

1 It is significant that the mortgage in Citizens Bank gave the Service a security interest in property that was not already subject to the lien created by the failure to pay the tax liability. The personal residence used as an example in the Area Director's question is already subject to the Government's lien and is reachable by levy.




The transfer of an individual's suit in connection with an Offer in Compromise (OIC) regarding his unpaid tax liabilities from district court to the Court of Federal Claims was improper. The determination of jurisdiction depended not simply on whether the case involved contract issues, but on whether, despite the presence of a contract, the claim was founded only on a contract, or whether it stemmed from a statute or the Constitution. Although the parties agreed that the OIC was a contract, the suit was based on a refund theory and not on the interpretation of a contract. The taxpayer claimed that the IRS wrongfully terminated the OIC and that, since he paid taxes that he alleges were wrongfully or illegally collected, he was entitled to a refund. Because the taxpayer satisfied all necessary jurisdictional requirements for a tax refund suit, the district court should have retained jurisdiction.

M.J. Roberts, CA-FC, 2001-1 USTC ¶50,306.

Agreements compromising tax litigation are contracts and, as such, they are subject to the rules applicable to contracts generally.

R.C. Lane, CA-5, 62-1 USTC ¶9467, 303 F2d 1.

B. Feinberg, CA-3, 67-1 USTC ¶9176, 372 F2d 352. Rehearing denied.

B.R. Kurio, DC Tex., 71-1 USTC ¶9112.

An agreement signed by an executor consenting that property transferred by the decedent without consideration within two years of his death be included in the taxable estate on condition that other property, similarly transferred, be not so included and that other property be valued at a specified amount was not a compromise.

Leach, CA-1, 1 USTC ¶269, 23 F2d 275.

A married couple's letter to an IRS revenue officer requesting a release of tax liens and proposing that the IRS accept a specified amount in full satisfaction of its proofs of claim did not constitute a compromise of their tax liability. No notation or instructions for application of the payment accompanied their subsequent payment of the specified amount. The purported offer in compromise did not follow the required procedures, the IRS's actions in discharging liens and retaining the payment did not constitute acceptance of an offer to compromise the full tax liability, and the IRS was not bound by principles of satisfaction and accord.

F.G. Harper, BC-DC Va., 96-2 USTC ¶50,676.

An individual debtor's motion to enforce a tax liability settlement with the IRS was granted where the amount agreed upon was actually paid to the IRS approximately one year after the agreement was approved and signed. Because the binding settlement agreement constituted a full and complete resolution of the IRS's claim, the IRS could not subsequently assess post-petition penalties and interest.

E.B. Adelstein, BC-DC Ariz., 94-1 USTC ¶50,270.

Documents that by express agreement of the IRS and a group of affiliated corporations constituted the terms of a settlement did not support the corporations' contention that one of the agreed to terms was the resolution of a foreign income sourcing issue in their favor.

ITT Corp., DC N.Y., 91-2 USTC ¶50,372.

The IRS was allowed to contest an installment agreement and enforce the immediate payment of an assessment of unpaid withholding taxes plus a 100-percent penalty. The installment agreement was only signed by one of the IRS's Group Managers, an employee who did not have authority to compromise tax liabilities on behalf of the IRS. In addition, the installment agreement was not a compromise pursuant to Code Sec. 7122, and the agreement stated on its face that permission to make installment payments could be withdrawn.

J.R. McGee, DC Fla., 83-1 USTC ¶9245.

Internal Revenue Manual Instructions read in conjunction with Code Sec. 7122 are not an offer in compromise that the taxpayer could contend he accepted. Instructional materials are advisory and do not narrow IRS discretion in regard to entering into compromises.

B.E. Shanahan, DC Mo., 78-1 USTC ¶9404.

An attorney was required to abide the terms of a settlement agreement he mistakenly signed with the IRS. The settlement agreement was subject to the general principles of contract law; the attorney's unilateral mistake was not sufficient grounds to set aside an otherwise enforceable agreement.

E.W. Goss, 93 TCM 706, Dec. 56,817(M), TC Memo. 2007-16.

The IRS's rejection of a 73 year old insurance salesman and his wife's $2000 offer to compromise a tax liability in excess of $200,000 was not arbitrary or unreasonable in light of the taxpayers' collection potential. The IRS considered the husband's age, health and the fact that the husband remained active in the insurance business. The IRS's refusal of the second offer was justified by the income generated from the husband's insurance business, the value of the transferred automobile, and the taxpayers' increased expenditures since the first settlement offer.

S. Alaniz, 89 TCM 660, Dec. 55,905(M), TC Memo. 2005-4.

The negotiation by the IRS of a check tendered by an individual did not constitute an accord and satisfaction of the taxpayer's deficiencies. The taxpayer and the IRS did not enter into a closing agreement or compromise as required by the regulations, and the U.S. government, as a sovereign, was not bound by the provisions of the Uniform Commercial Code.

D. Bear, 64 TCM 1430, Dec. 48,669(M), TC Memo. 1992-690. Aff'd, CA-9 (unpublished opinion 3/24/94).

An investor in computer software was not granted immunity by the IRS. Although the taxpayer met with a desk clerk of the Criminal Investigation Division of the IRS and was allegedly told that he did not have to refile his taxes, the clerk had no authority to grant immunity or to consummate an agreement. There was no evidence of a written closing agreement or compromise agreement.

D.E. Rudisill, 64 TCM 93, Dec. 48,337(M), TC Memo. 1992-388.

An IRS settlement offer for one tax year that was timely accepted by the taxpayers formed a binding contract and could not be set aside, despite the IRS's intent that the taxpayers also should not have received tax benefits for other tax years. Formal stipulations of settlement or decision were not prerequisites to the creation of a binding agreement to settle pending litigation, as long as the parties' intent to settle and the settlement terms were ascertainable. In addition, a closing agreement was not necessary to settle the case. Finally, nothing in the settlement agreement required the taxpayers to make adjustments to tax years prior to the year covered by the settlement, merely because the IRS failed to include such adjustments.

R.F. Haiduk, 60 TCM 864, Dec. 46,888(M), TC Memo. 1990-506.

An offer in compromise may insist upon an agreement allowing the government to collect from particular assets at some point in the future. The IRS has discretionary authority to request that the taxpayer enter into a collateral agreement or post security deemed necessary to protect the interests of the United States. The case involved an elderly couple who were not employed, who could not pay their taxes and had only their home as an asset. The IRS determined that seizing their home would cause the taxpayers economic hardship and hence declined to seize the home in payment of the taxes due.

CCA Letter Ruling 200133040, June 13, 2001.

Offer in Compromise – 7122 - Breach of agreementThe IRS may not unilaterally default a joint offer in compromise in the case of a taxpayer-husband that breached his obligations under a separate, but related, offer in compromise on the basis of an oral agreement tying the two offers together. The regulations specifically require that offers in compromise be reduced to writing and thus cannot be altered by an oral agreement.

Field Service Advice Memorandum 200130043, June 25, 2001.

UIL No. 7122.03-00 Compromises, Breach, Field Service Advice 200130043
IRS Letter Rulings Report No. 1274, 08-01-01

IRS REF: Symbol: CC:PA:CBS:Br2

Uniform Issue List Information:
UIL No. 7122.03-00

Compromises

- Breach

[Code Sec. 7122]


INTERNAL REVENUE SERVICE NATIONAL OFFICE FIELD SERVICE ADVICE

MEMORANDUM FOR ASSOCIATE AREA COUNSEL (SBSE), AREA 4, DETROIT, MICHIGAN

FROM: Lawrence H. Schattner, Chief, Branch 2 (Collection, Bankruptcy & Summonses)

SUBJECT: Default of Offer-in-Compromise

This Chief Counsel Advice responds to your memorandum dated May 8, 2001. In accordance with I.R.C. §6110(k)(3), this Chief Counsel Advice should not be cited as precedent.

ISSUES

Whether the Internal Revenue Service ("Service") may unilaterally default a joint offer in compromise when Taxpayer-Husband breached his obligations under a separate but related offer in compromise on the basis of an oral agreement tying the two offers together.

CONCLUSIONS

No. Treasury Regulations specifically require that offers in compromise be reduced to writing and thus cannot be altered by an oral agreement.

FACTS

A joint offer in compromise was accepted by the Service to resolve Taxpayers' outstanding income tax liabilities. The notice of acceptance stated, "our acceptance is subject to the terms and conditions on the enclosed form 656, Offer in Compromise." Taxpayers fulfilled their obligations under the offer in compromise by paying the total due plus interest.

The Service also accepted Taxpayer-Husband's individual offer in compromise to resolve his outstanding employment tax liabilities. The notice of acceptance contained the same language as above. Taxpayer-Husband never made any payments under his offer in compromise and the Service defaulted both compromise agreements.

According to your memo, it was the practice of the local offer in compromise group to inform taxpayers orally that individual and joint agreements were tied together. Your memo does not state if Taxpayers in this case were specifically told that default of one offer would result in default of the other and whether Taxpayers agreed. Your memo also states that current practice is to make agreements tying the two offers together in writing.

LAW AND ANALYSIS

The Nature of an Offer in Compromise

An offer in compromise is a statutory creation. I.R.C. section 7122(a) states:

The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.

I.R.C. §7122(a). Thus, any offer in compromise is to be strictly construed according to the statutory requirements. Botany Worsted Mills v. United States, 278 U.S. 282 (1929) [1 USTC ¶348]; Klien v. Commissioner, 899 F.2d 1149 (11th Cir. 1990) [90-1 USTC ¶50,251]; Bowling v. United States, 510 F.2d 112 (5th Cir. 1975) [75-1 USTC ¶9333];

It has also been said that an offer in compromise is a contract and is subject to the general rules governing contracts. United States v. Feinberg, 372 F.2d 352 (3rd Cir. 1967) [67-1 USTC ¶9176]; United States v. Lane, 303 F.2d 1 (5th Cir. 1962) [62-1 USTC ¶9467]; Kurio v. United States, 429 F.Supp. 42 (S.D. Tex. 1970) [71-1 USTC ¶9112]. However, the rules of contracts cannot abrogate the statutory requirements governing offers in compromise. Bowling, 510 F.2d at 113 [75-1 USTC ¶9333].

Requirement of a Writing

Temporary Treasury Regulation section 301.7122-1T(c)(1) requires that all offers in compromise be submitted in writing on forms prescribed by the Service.1 In accordance with this regulation the Service now requires that all offers must be submitted on Form 656. IRM 5.8.1.4(1)

In Boulez v. Commissioner, 810 F.2d 209 (D.C. Cir. 1987) [87-1 USTC ¶9177] a taxpayer challenged the Treasury regulation's writing requirement, arguing that he had a binding oral compromise agreement. Pierre Boulez ran afoul of U.S. tax law by failing to include certain income on his tax returns. Id. at 210. After extensive negotiations, Boulez reached an oral compromise agreement with the Service. Id. In an unrelated audit, the Service discovered more tax deficiencies and issued a notice of deficiency. Id. at 211. Boulez argued that the oral agreement settled all of his tax liabilities, including these newly discovered deficiencies, and was binding on the Service. Id. The court of appeals disagreed and found that Treasury Regulation section 301.7122-1(d) (1960) required an offer in compromise to be set out in writing and that this requirement was "entirely reasonable, and a wholly permissible interpretation of Section 7122." Boulez, 810 F.2d at 214 [87-1 USTC ¶9177]. In addition the court stated that the writing requirement could not simply be overlooked as it is "a fundamental tenet of formalizing agreements." Id. at 216. Thus, because the agreement did not conform to statutory requirements it was not binding on the Service.

The holding of Boulez was followed in In re Aberl, 159 B.R. 792 (Bankr. N.D. Ohio 1993), aff'd, 175 B.R. 915 (N.D. Ohio 1994), aff'd, 78 F.2d 241 (6th Cir. Ohio 1996). The Aberl court refused to find that oral negotiations between a taxpayer and the Service constituted an offer in compromise. "This Court agrees...that '[Treas. Reg. §301.7122-1(d)], which requires that all compromises be reduced to writing, has the force and effect of law, and that the [IRS] lacked authority to waive it." In re Aberl, 159 B.R. at 799, citing Boulez, 810 F.2d at 211 [87-1 USTC ¶9177] (alteration in original) (citations omitted).

The issue you have presented, however, deals with an oral term within a written offer in compromise rather than an entirely oral agreement. In Keating v. United States, 794 F.Supp. 888 (D. Neb. 1992) [92-2 USTC ¶50,413] the district court concluded that an oral agreement could not supersede the written terms of Form 656. The Keatings submitted a written offer in compromise on Form 656, which expressly informed taxpayers that the United States would retain any tax refunds that arose within the period of the offer. Id. at 889. The Keatings then negotiated with the Service to increase the amount of their offer with the oral understanding that the Service would refund any tax overpayments, notwithstanding the language of Form 656. Id. The Service kept the Keatings' refund and applied it to their tax liability. Id. at 888.

The District Court stated:

Even assuming that an oral agreement existed between the parties that attempted to supersede Form 656, an oral agreement with the Internal Revenue Service with respect to federal income tax liability cannot bind the government...The Internal Revenue Code and the Treasury regulations specifically require a written offer and acceptance of an offer in compromise. (citations omitted)

Id. at 891. Thus, according to the statutory scheme and regulations governing offers in compromise, an oral term cannot be added to a written offer2 But see, Engelken v. United States, 823 F.Supp. 845 (D. Colo. 1993) (denying summary judgment because plaintiffs should have been allowed to show an oral modification to their offer in compromise). Without a contract term tying the two offers together, they must each stand alone. The joint offer in compromise has been fully paid. Assuming Taxpayers have complied with all of the filing and payment requirements of the I.R.C. for the five year period following acceptance of their offer as required by condition (d) of Form 656 (Rev. 9-93), the liability has been extinguished. See, Temp. Treas. Reg. §301.7122-1T(d)(5); Treas. Reg. §301.7122-1(c) (1960).

Contract Rules Governing Oral Terms

It is our position that I.R.C. section 7122(a) and the regulations thereunder govern the requirements of an offer in compromise and that pursuant to these authorities all the terms of the offer and acceptance of the offer must be in writing. Even under general contract principles, we believe the conclusion would be the same

At the outset, in considering an offer in compromise a court should look to "the rules applicable to contracts generally." Lane, 303 F.2d at 4 [62-1 USTC ¶9467]; see also, United States v. Wainer, 211 F.2d 669, 673 (7th Cir. 1954) [54-1 USTC ¶49,032] (applying common law when analyzing a compromise agreement with the Service).

The parole evidence rule governs when testimony will be allowed to prove an oral term of a written contract. The general rule is that evidence of a prior or contemporaneous agreement, not included in an integrated writing, is not admissible to prove the existence of that agreement. Restatement (Second) of Contracts §§215, 216 (1981); Samuel Williston, 4 Williston on Contracts §631 (3d ed. 1961).3 Parole evidence is admissible to prove: (1) that the writing is not integrated; (2) the writing is only partially integrated; (3) the meaning of the writing; (4) illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause; (5) grounds for recission, reformation, specific performance, or other remedy. Restatement (Second) of Contracts §214 (1981). Thus, parole evidence may be used to show that an agreement is not integrated. If the Service were able to prove that Form 656 is not integrated then it could introduce evidence of a contemporaneous oral agreement to tie the two offers in compromise together.

An agreement is determined to be integrated when the writing constitutes "a final expression of one or more terms of an agreement." Restatement (Second) of Contracts §209 (1981). Whether an agreement is integrated is to be determined by the court, however, written agreements are presumed to be integrated. Id.; Samuel Williston, 4 Williston on Contracts §633 (3d ed. 1961). This presumption is particularly strong when the parties use a standardized agreement. Restatement (Second) of Contracts §211 (1981). Even if an agreement is not fully integrated courts generally will not allow parole evidence of an additional term if that term would normally be included in that type of agreement. Arthur Linton Corbin, 3 Corbin on Contracts §583 (1960).

A further hazard for the Service is the rule that "in choosing among the reasonable meanings of a promise or agreement or a term thereof, that meaning is generally preferred which operates against the part who supplies the words or from whom a writing otherwise proceeds." Restatement (Second) of Contracts §206 (1981).4 A court is particularly likely to construe a contract against the government as the drafting party. Restatement (Second) of Contracts §207 cmt. a (1981).

The use of parole evidence is decided on a case by case basis by the courts, however, given the rules of contracts as discussed above it is unlikely that the Service would prevail in proving that Form 656 is an unintegrated agreement and that evidence of an oral agreement should be admitted.

This writing may contain privileged information. Any unauthorized disclosure of this writing may have an adverse effect on privileges, such as the attorney client privilege. If disclosure becomes necessary, please contact this office for our views.

If you have any further questions please contact the attorney assigned to this matter at (202) 622-3620.

1 Acceptances must also be in writing. Temp. Treas. Reg. §301.7122-1T(d)(1). These writing requirements were also in effect when the offers at issue were accepted. See, Treas. Reg. §301.7122-1(d) (1960).

2 It does not matter that the Keating court dealt with an attempt to supersede a written term of the offer whereas this case deals with an attempt to add a consistent term because the analysis under the statutory scheme is the same. Oral agreements are not enforceable.

3 Michigan law is in accord with the common law on parole evidence. NAG Enterprise, Inc. v. All State Industries, Inc. 407 Mich. 407 (1979); UAW-GM Human Resource Center v. KSL Recreation Corp., 228 Mich. App. 486 (1998).

4 Michigan law is in accord. Hanley v. Porter, 238 Mich. 617 (1927); Stark v. Kent Products, Inc. 62 Mich. App. 546 (1975); Elby v. Livernois Eng'g Co., 37 Mich. App. 252 (1971).


Where the taxpayer failed to plead in the District Court the three-year statute of limitations on assessment as a defense to the Government's suit on an assessment to collect taxes, after the taxpayer had defaulted on payments to be made under a compromise agreement entered into after the three-year limitations period had passed, he could not raise for the first time on appeal the question of whether the compromise agreement was an effective waiver of the limitations period. A waiver of the statute of limitations found in the compromise agreement was fully effective against the taxpayer.

B. Feinberg, CA-3, 67-1 USTC ¶9176, 372 F2d 352.

Similarly, where the taxpayer failed to meet the monthly installment payments under an agreement for compromise of his tax liability. The doctrines of estoppel and modification of contract by subsequent conduct were not applicable merely because the Government did not bring action immediately after the breach of the first installment and before the taxpayer made any other payments.

S. Saladoff, CA-3, 65-2 USTC ¶9645.

On retrial, the trial court properly entered summary judgment for the Government for the amount of taxes proved to be due, where the taxpayer offered no counter proof, and also properly dismissed a separate injunction suit.

R.C. Lane, CA-5, 64-1 USTC ¶9273, 328 F2d 602.

Where the taxpayer failed to file sworn statements of annual income pursuant to the terms of a collateral income agreement which accompanied an agreement for compromise of his tax liability, the compromise agreement was breached and the Government was entitled to revive the original tax liability, subject to credit for previous payments made under the compromise agreement.

R.C. Lane, CA-5, 62-1 USTC ¶9467, 303 F2d 1.

The IRS was not liable for a breach of contract claim with respect to a settlement agreement because the individual bringing suit failed to show the existence of an enforceable contract to settle his outstanding tax liabilities. The IRS agent's written reply to the individual's offer did not constitute a valid offer or counteroffer that could be accepted by the individual to create a binding contract with the IRS. Moreover, the IRS agent was not authorized to enter into any such contract with the individual.D.W. Jordan, FedCl, 2007-2 USTC ¶50,601. Dennis W. Jordan, Plaintiff v. The United States, Defendant. U.S. Court of Federal Claims; 06-96C, July 30, 2007, 77 FedCl 565.

[ Code Sec. 7122]

Jurisdiction: Settlement offer: Breach of contract. --
The IRS was not liable for a breach of contract claim with respect to a settlement agreement because the individual bringing suit failed to show the existence of an enforceable contract to settle his outstanding tax liabilities. The IRS agent's written reply to the individual's offer did not constitute a valid offer or counteroffer that could be accepted by the individual to create a binding contract with the IRS. Moreover, the IRS agent was not authorized to enter into any such contract with the individual.
The Court of Federal Claims lacked jurisdiction over an individual's claims seeking a refund and injunctive and declaratory relief. The court had no authority to grant the individual's requests for declaratory judgment or for specific performance of a contract, and the Anti-Injunction Act barred his claims to enjoin the IRS's tax collection activities. Further, the individual did not satisfy the jurisdictional prerequisites before filing his suit for refund.

.

[ Code Sec. 7421]

Injunctive relief: Declaratory relief: Anti-Injunction Act. --
The Court of Federal Claims lacked jurisdiction over an individual's claims seeking injunctive and declaratory relief. The Anti-Injunction Act barred his claims seeking to enjoin IRS's collection of his outstanding tax liabilities for the years at issue. Moreover, the Claims court had no authority to grant the individual's requests for a declaratory judgment or for specific performance of any contract entered with the IRS to settle his tax liability.



[ Code Sec. 7422]

Jurisdiction: Refund claim. --
The Court of Federal Claims lacked subject matter jurisdiction over an individual's claim for refund. The individual had not paid the full amount of his tax liability and filed an administrative claim with the IRS before filing his suit for refund.


OPINION AND ORDER ON DEFENDANT'S MOTION TO DISMISS


WHEELER, Judge: This case is before the Court on Defendant's August 4, 2006 motion under Rules 12(b)(1) and (b)(6) to dismiss for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted. Plaintiff Dennis Jordan brought this suit against the United States on February 7, 2006, alleging that the Internal Revenue Service ("IRS") breached an express contract to settle his outstanding tax liabilities for the years 1999 and 2000. Following the briefing of Defendant's motion to dismiss, the Court requested supplemental briefs regarding the authority of the pertinent IRS representatives to bind the United States to the alleged settlement agreement. Order, Dec. 5, 2006. Thereafter, the parties requested a stay of proceedings to discuss a compromise of this action. When those discussions proved unsuccessful, the parties filed their supplemental briefs with the Court on May 1, 2007. Defendant's motion to dismiss now is ready for decision.

Mr. Jordan claims that he entered into a binding settlement agreement with the IRS to pay $12,721.00 in full satisfaction of $38,200.87 in tax liabilities for the years 1999 and 2000. Mr. Jordan asserts that IRS representatives with delegated authority extended a counteroffer to him in May 2003 which he promptly accepted. Mr. Jordan states that the IRS breached the settlement contract by failing to discharge the balance of Mr. Jordan's tax liabilities, and he asks for "money damages for such breach equal to the balance of such tax liabilities." Plaintiff's Sept. 6, 2006 Response at 2. Mr. Jordan, however, has not paid any portion of his tax liability to the IRS for the years 1999 and 2000, and he has not filed an administrative claim for refund with the IRS.

Defendant contends that no such settlement contract was formed with Mr. Jordan, and that, in any event, the IRS employee with whom Mr. Jordan corresponded lacked the authority to bind the IRS. Defendant further asserts that the absence of a contract leaves Mr. Jordan without an actionable claim and deprives this Court of subject matter jurisdiction. Lacking a binding contract, Mr. Jordan's action could only be for an income tax refund. However, since Mr. Jordan has not paid any of his taxes and has not filed an administrative claim for refund, the Court is without jurisdiction to hear such a claim. To the extent Mr. Jordan is requesting specific performance, a declaratory judgment, or injunctive relief, Defendant asserts that the Court similarly does not possess jurisdiction.

For the reasons explained below, the Court finds that the IRS did not enter into a binding settlement contract with Mr. Jordan. As the parties' correspondence demonstrates, the IRS did not make a counteroffer to Mr. Jordan, and thus Mr. Jordan was not in a position to accept a counteroffer. Instead, the Court finds that Mr. Jordan submitted an amended offer to the IRS, which the IRS did not accept. Further, the Court agrees with Defendant that the IRS employee who corresponded with Mr. Jordan did not possess authority to bind the IRS. Without a contract claim, Mr. Jordan cannot maintain a tax refund action, because he has not fulfilled any of the necessary jurisdictional prerequisites.

In reaching this decision, the Court has considered and relied upon supporting materials beyond the pleadings from both parties. In such circumstances, Rule 12(b) provides that Defendant's motion should be treated as one for summary judgment under Rule 56. Accordingly, the Court grants summary judgment for Defendant.


Factual Background 1


Plaintiff Mr. Jordan has outstanding federal tax liabilities for 1999 ($20,946.04) and 2000 ($17,254.83), plus penalties and interest. Complaint, ¶ ¶3, 4. On March 12, 2002, the IRS received a Form 656 "Offer in Compromise" from Mr. Jordan to settle these tax liabilities for $10,000. Defendant's Appendix ("Deft's App.") at 1-4. Mr. Jordan claimed that he was unable to pay the tax liabilities in full. Id. at 3. On May 19, 2003, an IRS Offer Specialist, Ms. Marianna Caldera, responded to Mr. Jordan by stating that "we cannot accept an offer for less than $12,721.00 for a cash offer (payable within 90 days)." Ms. Caldera further stated that "[i]f you do not respond to this letter within 14 days of the date of this letter, your offer cannot be recommended for acceptance, and a Federal Tax Lien will be filed." Id. at 5 (emphasis in original).

By letter dated May 30, 2003, Mr. Jordan submitted a revised Form 656 "Offer in Compromise" to the IRS stating that he would pay $12,721.00 to settle his 1999 and 2000 tax liabilities. Complaint, Exh. C. Mr. Jordan also sent a check to the IRS for $12,721.00 on August 18, 2003 representing what he believed was the agreed upon payment. Deft's App. at 18-20. Thereafter, from a review of records provided by Mr. Jordan, Ms. Caldera learned that Mr. Jordan's financial condition would improve as of October 2003 when his obligation to pay his former wife monthly support payments of $3,000.00 expired. Deft's App. at 24-27. By letter dated August 15, 2003, Ms. Caldera informed Mr. Jordan of the IRS's preliminary analysis that Mr. Jordan had "the ability to pay [his] liability in full within the time provided by law." Id. at 14-15. For this reason, the IRS considered but ultimately rejected Mr. Jordan's $12,721.00 offer. IRS Transcript History, Plaintiff's Appendix ("Pltf's App.") at 19-20, 22.

On March 2, 2004, an IRS Group Manager, Ms. Donna Seibel, officially rejected Mr. Jordan's $12,721.00 offer, stating that "[b]ased on the financial information you submitted, we have determined you can pay the amount due in full." Deft's App. at 21. On May 6, 2004, the IRS sent a check to Mr. Jordan for $12,721.00 drawn upon the United States Treasury. Complaint ¶18. On May 24, 2004, through his counsel, Mr. Jordan appealed the IRS's rejection of his offer. Id. ¶19. The IRS Office of Appeals sustained the rejection of Mr. Jordan's offer on February 23, 2005. Deft's App. at 28.


Discussion



A. Standards for Decision


In deciding a motion to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1), the Court accepts as true the undisputed allegations in the Complaint, and draws all inferences in favor of the non-moving party. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Reynolds v. Army & Air Force Exch. Serv., 846 F.2d 746 (Fed. Cir. 1988). Plaintiff bears the burden to establish by a preponderance of the evidence the facts sufficient to invoke the Court's jurisdiction. See Reynolds, 846 F.2d at 748. In determining whether Plaintiff has met his burden, the Court may look "beyond the pleadings and 'inquire into jurisdictional facts' in order to determine whether jurisdiction exists." Lechliter v. United States, 70 Fed.Cl. 536, 543 (2006) (citing Rocovich v. United States [ 91-1 USTC ¶60,072], 933 F.2d 991, 993 (Fed. Cir. 1991)). In the present case, both Plaintiff and Defendant have submitted documents in support of their pleadings. The Court refers to these materials "to the extent that they allow the court to determine whether it has jurisdiction over this case." Id.

The standard for dismissal under Rule 12(b)(6) parallels the standard for review of jurisdictional issues under Rule 12(b)(1). Baird v. United States, 71 Fed.Cl. 536, 542 (2006). However, where "matters outside the pleading" are before the Court on a motion to dismiss for failure to state a claim, the Court regards the motion as one for summary judgment. Rule 12(b) provides:
If, on a motion...to dismiss for failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in RCFC 56.

As noted, the Court has accepted from both parties supporting materials beyond the pleadings, and therefore it is appropriate to convert Defendant's Rule 12(b)(6) motion into a motion for summary judgment under Rule 56. District of Columbia v. United States, 67 Fed.Cl. 292, 301-02 (2005) (citing De Brousse v. United States, 28 Fed.Cl. 187, 188 (1993) and Schultz v. United States, 5 Cl.Ct. 412, 416 (1984)). In such circumstances, Rule 12(b) directs the Court to provide the parties with "a reasonable opportunity to present all material made pertinent to such a motion by RCFC 56." The parties in the present case have had this opportunity. The Complaint, Defendant's Motion to Dismiss, and Plaintiff's Response each include attached exhibits that the Court has accepted and relied upon in reaching this decision. See District of Columbia, 67 Fed.Cl. at 301 ("In this instance, because defendant moved in the alternative for summary judgment, plaintiff has had ample time to submit materials and arguments opposing summary judgment. This is evidenced most clearly by the exhibits submitted by plaintiff with its original motion for summary judgment and its opposition briefs.").

Under Rule 56, the moving party is entitled to summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Rule 56(c). A genuine issue of material fact is one that would change the outcome of the litigation. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The burden to establish the absence of disputed genuine issues of material fact in this case belongs to Defendant. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). This initial burden may be discharged, however, if Defendant can demonstrate "an absence of evidence to support the nonmoving party's case." Buesing v. United States [ 99-1 USTC ¶50,246], 42 Fed.Cl. 679, 693 (1999) (citing Celotex, 477 U.S. at 325). If Defendant succeeds, "the burden then shifts to the nonmoving party to demonstrate that a genuine factual dispute exists[.]" Id. (citations omitted).


B. Whether The Parties Formed An Enforceable Contract


Setting aside the jurisdictional question of whether Mr. Jordan has properly stated a complaint for money damages, the Court will first consider Defendant's Rule 12(b)(6) motion for failure to state a claim upon which relief can be granted. For purposes of this discussion, the Court will assume that Plaintiff has properly alleged a breach of contract within the Court's jurisdiction. See, e.g., Gould, Inc. v. United States, 67 F.3d 925, 929 (Fed. Cir. 1995) ("[T]he court must assume jurisdiction to decide whether the allegations state a cause of action on which the court can grant relief as well as to determine issues of fact arising in the controversy. Jurisdiction, therefore, is not defeated...by the possibility that the averments might fail to state a cause of action on which petitioners could actually recover[.]") (citations omitted). With this assumption, the question to be decided is whether the IRS and Mr. Jordan entered into an enforceable contract settling Mr. Jordan's tax liability for 1999 and 2000.

A review of the relevant correspondence reveals that the IRS did not at any time make an offer or counteroffer to Mr. Jordan, and thus Mr. Jordan was not in a position to create a binding contract through his acceptance. Although Mr. Jordan refers to Ms. Marianna Caldera's May 19, 2003 letter as a "counteroffer," and his response as an "acceptance" (Complaint ¶ ¶9, 10), the exchange between the parties does not support Mr. Jordan's contention. Ms. Caldera's letter on behalf of the IRS contains the following statements:
If the payment terms of your amended offer exceed ninety days, a notice of Federal Tax Lien will be filed....You may also provide any other information you believe we should consider in making a final determination as to whether to accept your offer ....Also, if your offer is accepted, your compliance will be monitored for 5 years. In that time, if you do not comply with all filing and paying requirements... your offer will be defaulted....If you do not respond within 14 days of the date of this letter, your offer cannot be recommended for acceptance ....[If] your offer is rejected you will receive information regarding how to appeal....

Complaint, Exh. B; Deft's App. at 5-6 (emphasis added). This letter on its face solicited an amended offer from Mr. Jordan, and did not itself constitute an IRS offer or counteroffer. Indeed, the IRS Form 656 that Mr. Jordan sent back to Ms. Caldera is entitled "Offer in Compromise." Deft's App. at 7. This exchange did not constitute a valid offer and acceptance. The IRS formally rejected Mr. Jordan's amended offer through the March 2, 2004 letter from an IRS Group Manager, Ms. Donna Seibel. Deft's App. at 21-23.

Even if the May 19 and 30, 2003 exchanges between Ms. Caldera and Mr. Jordan could be regarded as a contract, the Court must examine whether Ms. Caldera possessed the authority to bind the IRS. In addition to the standard elements of offer, acceptance, and consideration, a valid contract with the Unites States requires authority "on the part of the government representative who entered or ratified the agreement to bind the United States in contract." Total Medical Management, Inc. v. United States, 104 F.3d 1314, 1319 (Fed. Cir. 1997). See also Trauma Serv. Group v. United States, 104 F.3d 1321, 1325 (Fed. Cir. 1997) ("A contract with the United States also requires that the Government representative who entered or ratified the agreement had actual authority to bind the United States.") (emphasis added).

As Defendant notes, a government agent's apparent authority "is not sufficient to bind the government...even where the agent in question believed that he held such authority[.]" See Arakaki v. United States, 71 Fed.Cl. 509, 515 (2006) (citing City of El Centro v. United States, 922 F.2d 816, 820 (Fed. Cir. 1990)). When negotiating a contract with the Government, therefore, it is incumbent on a private party to determine whether his public counterpart has the necessary authority to bind the United States. See, e.g., Brooks v. United States, 70 Fed.Cl. 479, 486 (2006) (citing Fed. Crop Ins. Corp. v. Merrill, 332 U.S. 380 (1947)). Moreover, the risk of accurately assessing the scope of a government agent's authority is squarely on the private party. Merrill, 332 U.S. at 384 ("[A]nyone entering into an arrangement with the Government takes the risk of having accurately ascertained that he who purports to act for the Government stays within the bounds of his authority."). The private party retains this risk even where a Government agent displays apparent authority. Trauma Serv. Group, 104 F.3d at 1325) ("this risk remains with the contractor even when the Government agents themselves may have been unaware of the limitations on their authority."). This rule shields the Government from the acts of its own agents. Brooks, 70 Fed.Cl. at 486 (citing Flexfab, LLC v. United States, 424 F.3d 1254, 1263 (Fed. Cir. 2005) ("Surely the assurances from a government agent, having no authority to give them, cannot expose the government to risk of suit for the nonperformance of an obligation that it did not intentionally accept.")). Commensurate with this risk is a plaintiff's burden to prove the scope of the authority asserted. See Arakaki, 71 Fed.Cl. at 516.

Here, as the IRS previously explained to Mr. Jordan, Ms. Caldera did not have the authority to enter into a contract with Mr. Jordan. Deft's App. at 28. The IRS Group Manager, Ms. Seibel, possessed the requisite authority, but in her only correspondence with Mr. Jordan, she rejected Mr. Jordan's amended offer. Id. at 21-23, March 2, 2004 letter. Thus, no person with authority to bind the IRS entered into a binding contract with Mr. Jordan.


C. The Court Lacks Jurisdiction Over Plaintiff's Other Claims


Upon the rejection of Plaintiff's breach of contract claim, the Court is without jurisdiction to consider Mr. Jordan's other claims for relief. In general, the Court does possess jurisdiction to adjudicate Federal tax refund suits. See New York Life Ins. Co. v. United States [ 97-2 USTC ¶50,569], 118 F.3d 1553, 1558 (Fed. Cir. 1997); Fisher v. United States, 69 Fed.Cl. 193, 196 (Fed.Cl. 2006); Hunsaker v. United States [ 2005-2 USTC ¶50,474], 66 Fed.Cl. 129 (2005). A plaintiff may assert a tax refund claim in this Court, provided the taxpayer has made full payment of the tax liability, penalties, and interest. See Flora v. United States [ 60-1 USTC ¶9347], 362 U.S. 145, 163 (1960); Hunsaker [ 2005-2 USTC ¶50,474], 66 Fed.Cl. at 131. Moreover, the taxpayer in this Court also must have "duly filed" a tax refund claim with the IRS for the tax year(s) in controversy. 26 U.S.C. §7422(a) (no tax suit or proceeding shall be maintained until a claim for refund or credit has been duly filed with the Secretary of the Treasury); 26 U.S.C. §6532(a)(1) (tax suit or proceeding may not be commenced until six months after the date of filing the required claim).

To the extent that Mr. Jordan's Complaint could be construed as a suit for tax refund, the Court lacks jurisdiction to consider it because Mr. Jordan has failed to satisfy the prerequisites to filing such a suit.

Similarly, the Court lacks jurisdiction over any action to enjoin the IRS from collecting assessed taxes. The Anti-Injunction Act, 26 U.S.C. §7421, precludes the Court from exercising jurisdiction over Mr. Jordan's apparent claim to prevent the IRS from collecting $38,200.87, plus interest and penalties, for 1999 and 2000. The Anti-Injunction Act states in relevant part:
[N]o suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.

26 U.S.C. §7421(a).

The Supreme Court has held that "the manifest purpose of §7421(a) is to permit the United States to assess and collect taxes alleged to be due without judicial intervention, and to require that the legal right to the disputed sums be determined in a suit for refund." Enochs v. Williams Packing & Navigation Co. [ 62-2 USTC ¶9545], 370 U.S. 1, 7 (1962). Our Court has explained that "[i]n order to bring suit in this Court, the plaintiff must pay the taxes assessed, file a claim for refund with the IRS in accordance with [Internal Revenue Code] §7422(a), and then wait six months[.]" Lyashenko v. United States [ 98-2 USTC ¶50,674], 41 Fed.Cl. 626, 630 (1998). Thus, any apparent effort by Mr. Jordan to enjoin the IRS from collecting properly assessed taxes is contrary to law and must be rejected.

The claim for relief in Mr. Jordan's Complaint also might be construed as seeking a declaratory judgment that he had a valid contract with the IRS which ought to be enforced, such as through specific performance. However, our Court is not authorized to grant a declaratory judgment or to direct specific performance in the circumstances presented here. Id. (explaining that the Court is generally proscribed from issuing declaratory judgments); Rig Masters, Inc. v. United States, 42 Fed.Cl. 369, 373 (1998) (citing United States v. King [ 69-1 USTC ¶9410], 395 U.S. 1, 3-4 (1969) (Court does not possess jurisdiction over claims for specific performance)). The Anti-Injunction Act, explained above, prevents the Court from entertaining suits for a declaratory judgment or specific performance in tax matters.


Conclusion


Based upon the foregoing, Defendant's motion to dismiss under Rules 12(b)(1) and (b)(6) is GRANTED. For the reasons stated, the Court is treating Defendant's motion for failure to state a claim as a motion for summary judgment under Rule 56, and accordingly, summary judgment is entered for Defendant. The Clerk is directed to enter judgment for Defendant. No costs are awarded to either party.

IT IS SO ORDERED.

1 The facts in this matter are derived from the documents provided as attachments to Plaintiff's complaint, and in the appendices accompanying Defendant's motion and Plaintiff's response. The Court is satisfied that the facts necessary to decide this matter are not in dispute.

The IRS properly terminated an offer in compromise (OIC) submitted by the president and majority shareholder of S corporations in connection with his delinquent taxes for five tax years and a trust fund recovery penalty imposed with respect to one of the entities. The taxpayer materially breached his obligation under the OIC when he incurred a delinquent tax liability for a subsequent tax year. As a result, the government was authorized, under the terms of the OIC, to declare the taxpayer in default of the agreement and to pursue collection activities against him. The substantial performance doctrine was irrelevant because the taxpayer failed to timely pay his taxes in order to offset his tax liability for that year with his losses from the following year.Michael J. Roberts, Plaintiff v. United States of America, Defendant

U.S. District Court, East. Dist. Mo., East. Div., 4:99CV489 ERW , 12/10/2001, Previous decisions in this same case, 99-2 USTC ¶50,959, 2001-1 USTC ¶50,306

[ Code Sec. 7122]

Offers in compromise: Rescission: Material breach: Failure to timely pay taxes: Default: Substantial performance doctrine inapplicable. --
The IRS properly terminated an offer in compromise (OIC) submitted by the president and majority shareholder of S corporations in connection with his delinquent taxes for five tax years and a trust fund recovery penalty imposed with respect to one of the entities. The taxpayer materially breached his obligation under the OIC when he incurred a delinquent tax liability for a subsequent tax year. As a result, the government was authorized, under the terms of the OIC, to declare the taxpayer in default of the agreement and to pursue collection activities against him. The substantial performance doctrine was irrelevant because the taxpayer failed to timely pay his taxes in order to offset his tax liability for that year with his losses from the following year.

BACK REFERENCES: ¶41,130.20 and ¶41,130.55





MEMORANDUM AND ORDER
WEBBER, District Judge:

This matter is before the Court on Defendant's Motion to Dismiss [doc. #46] and Defendant's Motion for Summary Judgment [doc. #46]. Plaintiff has filed his Acquiescence in Defendant's Limited Motion to Dismiss, indicating that he consents to the motion to dismiss filed by the Government. Therefore, Plaintiff's claim for tax refund relative to the 1993 tax year will be dismissed based on the fact that Plaintiff's claim for a refund of federal income taxes for the 1993 taxable year is time-barred under §6511 of the Internal Revenue Code.



I. Statement of Facts.



A. Circumstances Leading up to the Offer in Compromise.
Plaintiff Michael J. Roberts, the plaintiff and taxpayer in this case, resides at 10428 Jade Forest Drive in St. Louis, Missouri and has lived there since 1991. Before that, he lived at 10627 Tesshire, St. Louis, Missouri. In 1984 or 1985, Plaintiff started two businesses: (1) M.J. Roberts Construction, which provided demolition and excavation services, and (2) Roberts Disposal, Inc., a construction debris trash company. Both of these were formed as sub-chapter S-Corporations, and were located at 10627 Tesshire, St. Louis, Missouri. Plaintiff was the president and majority stockholder in both businesses, and his brother, Thomas E. Roberts, was an employee. Arnold J. Lohbeck, a certified public accountant in Fenton, prepared corporate income tax returns (Forms 1120) for M.J. Roberts Construction, Inc. He has known Plaintiff since he was sixteen years old, and has prepared Plaintiff's personal income tax returns (Forms 1040) since the 1983 taxable year. Plaintiff was divorced from his former wife, Diane, in 1988.

By 1989, both of Plaintiff's businesses, according to Plaintiff, "were on real shaky ground," and went out of business around 1990. On January 7, 1992, IRS Revenue Agent Donna R. Mecey sent Plaintiff a letter informing him that his 1989 federal income tax return had been selected for examination by the Internal Revenue Service. After Plaintiff received the January 7, 1992 IRS letter, he asked his CPA, Mr. Lohbeck, to help with the IRS audit. Lohbeck then prepared Plaintiff's 1989, 1990 and 1991 federal income tax returns. The first page of Plaintiff's 1989 tax return shows that Agent Mecey received his 1989 return on May 4, 1992. The IRS subsequently received Plaintiff's 1990 and 1991 tax returns on September 2, 1993. Following her examination of Plaintiff's 1989-1991 tax returns, Agent Mecey prepared a Revenue Agent Report (RAR) which proposed the assessment of the following income tax deficiencies against Plaintiff: for the taxable year 1989, a proposed tax deficiency of $25,067; for the taxable year 1990, a proposed tax deficiency of $53,903; for the taxable year 1991, a proposed tax deficiency of $1,350. Together with statutory interest, the amounts which the IRS determined Plaintiff owed for each of the taxable years under examination were: $34,686 (1989), $68,089 (1990), and $1,521 (1991). During the IRS examination of Plaintiffs' 1989-1991 federal income tax returns, CPA Lohbeck and attorney Charles M. Locke represented Plaintiff under a "Power of Attorney and Declaration of Representative" (IRS Form 2848). This "Power of Attorney" form covered Plaintiff's 1989-1993 federal income tax liabilities. Using the authority given him under the "Power of Attorney" form, Lohbeck signed the RAR prepared by Agent Mecey on November 17, 1993 to agree with her findings that Plaintiff was liable for unpaid federal income taxes and interest for the taxable years 1989-1991. Before signing the RAR, Lohbeck discussed the RAR with Plaintiff. By signing this RAR, Lohbeck waived Plaintiff's right to contest the proposed 1989-1991 income tax deficiencies with the United States Tax Court and consented to the immediate assessment and collection of the deficiencies. On the following dates, a delegate of the Secretary of the Treasury properly and timely made assessments against Plaintiff for unpaid federal income taxes and statutory interest:



Unpaid
Balance of
Accruals as
of
Date of Amount of November 1,
Taxable Period Ending Assessment Assessment 1 2001

$
12/31/89 ................. 10/05/92 24,585.79(1)

1,809.40(2)

1,008.30(3)

2,599.92(4)

12/20/93 25,067.00(5)

9,733.04(4)

1,512.45(2)

1,336.09(5)

06/09/97 2,305.15(3)

$32,214.81

$
12/31/90 ................. 12/20/93 54,903.00(5)

13,407.43(4)

05/09/94 1,445.25(3)

05/13/96 7,312.00(5)

04/28/97 10,323,26(3)

41,293.00(5)

$55,797.81

$
12/31/91 ................. 12/27/93 2,873.00(5)

377.78(4)

12/20/93 1,350.00(5)

174.59(4)

04/13/98 3,128.00(5)

$ 2,703.43

$
12/31/92 ................. 3/14/94 78,228.00(1)

2,859.21(6)

9,038.79(2)

3,682.47(3)

4,678,67(4)

04/13/98 2,859.21(6)

9,038.79(2)

66,954.00(5)

68,947.68

1(1) Refers to tax assessed per tax return

(2) Refers to the late tax return filing penalty

(3) Refers to the late payment of tax penalty

(4) Refers to the statutory interest

(5) Refers to the additional tax assessed after IRS examination

(6) Refers to the underpayment of estimated tax penalty





The IRS also assessed a $9,953.75 penalty against Plaintiff under 26 U.S.C. §6672 of the Internal Revenue Code in connection with Plaintiff's wilful failure, as a person responsible for withholding, collecting and paying over to the IRS the federal income and social security taxes which were withheld from the wages of the employees of Plaintiff's company, Roberts Disposal, Inc., to pay over the withheld taxes for the fourth quarter of 1989 to the IRS. 2



B. Plaintiff Enters into the Offer in Compromise.
On or about August 24, 1994, Plaintiff submitted an Offer in Compromise (the "settlement agreement" or "OIC") (Form 656) to the IRS with respect to his unpaid federal income tax liabilities for 1989-1993 and a Trust Refund Recovery Penalty (also referred to as a "100-percent penalty" or "Section 6672 penalty") with respect to Roberts Disposal, Inc., for the taxable quarter ending December 31, 1989. Plaintiff's OIC provided, in pertinent part, that he was to pay $30,000 to the IRS to compromise his 1989-1993 federal income tax liabilities and the Trust Fund Recovery Penalty (TFRP) assessed against him. The OIC specifically provided that the $30,000 was to be paid within sixty days following notice of its acceptance by the IRS. Paragraph 6 of the OIC stated that "I/we submit this offer for the reason(s) checked below:"

[X] Doubt as to collectibility ("I can't pay.").

As additional consideration for the Government's acceptance of the OIC, Plaintiff agreed, in a collateral agreement to the OIC, to waive the benefit of any net capital losses that he might be entitled to claim in connection with the failure, demise or sale of M.J. Roberts Construction, Inc., and Roberts Disposal, Inc. Paragraph (d) of the "Terms and Conditions" printed on the reverse side of the Form 656 OIC signed by Roberts provided as follows: "I/we will comply with all provisions of the Internal Revenue Code relating to my filing my/our returns and paying my/our required taxes for five (5) years from the date IRS accepts the offer." Paragraph (o) of the "Terms and Conditions" printed on the reverse side of the Form 656 OIC signed by Plaintiff provided as follows:
If I/we fail to meet any of the terms and conditions of the offer, the offer is in default, and IRS may:

(i) immediately file suit to collect the entire unpaid balance of the offer;

(ii) immediately file suit to collect an amount equal to the original amount of the tax liability as liquidated damages, minus any payments already received under the terms of this offer;

(iii) disregard the amount of the offer and apply all amounts already paid under the offer against the original amount of tax liability;

(iv) file suit or levy to collect the original amount of the tax liability, without further notice of any kind.

IRS will continue to add interest, as required by section 6621 of the Internal Revenue Code, on the amount IRS determines is due after default... .

At the time he submitted the OIC on August 24, 1994, Plaintiff was represented by his attorney, Mr. Locke. Plaintiff paid $30,000 to the IRS at the time he submitted the OIC in August 24, 1994. The $30,000 was a loan from his brother's company, Commercial Development Company, Inc. By letter dated September 28, 1994, the IRS notified Plaintiff that the OIC had been accepted. This letter stated, in pertinent part, that "We have accepted the offer in compromise (Form 656) you submitted, subject to the terms and conditions outlined in the enclosed document(s). These terms including filing and paying all taxes due for the next five years." When asked at his deposition about the significance or importance to him of the September 28, 1994 IRS letter accepting the OIC, Plaintiff stated that he had "to pay taxes on time over the next five years and forfeit any refunds for M.J. Roberts Construction or Roberts Disposal."



C. Plaintiff's Payment of his 1995 Tax Return.
Plaintiff obtained two extensions of time to file his 1995 U.S. Individual Income Tax Return (Form 1040), prepared by CPA Ronald J. Kanterman of the accounting firm of Brown, Smith & Wallace LLC. Plaintiff signed his 1995 income tax return on October 15, 1996. Plaintiff's 1995 federal income tax return reported total income of $726,902.00. This included a salary of $81,923 from Commercial Development Company, Inc., business income of $23,204, capital gain of $479,292, and $137,214 from "rental real estate, royalties, partnerships, S corporations, trusts, etc." Plaintiff's 1995 Form 1040 also reported that he underpaid his federal income tax liabilities by $246,254. Plaintiff testified that he was aware of this underpayment when he signed his 1995 tax return on October 15, 1996. Plaintiff also testified that he was concerned about the $246,254 tax liability when he signed his 1995 tax return because "[a]t the time I don't believe we had money to pay that." When asked why he was unable to pay his 1995 tax liability, Plaintiff stated that he though "it was invested in other projects."

Prior to signing his 1995 Form 1040, Plaintiff discussed with his accountant, Ronald Kanterman, the extent of his income tax liability for the 1995 taxable year. Kanterman was aware of the amount of Plaintiff's 1995 tax liability at least thirty days prior to October 15, 1996, the date on which Plaintiff signed his 1995 tax return. Kanterman was also aware of the OIC which Plaintiff entered into with the IRS, and that the OIC required Plaintiff to file his returns and pay his taxes for five years from the date the OIC was accepted by the IRS. At the time Plaintiff signed his Form 1040 for 1995, he told Kanterman that he would be unable to pay the $246,000 tax liability shown as due and owing on that return. Plaintiff's 1040 shows that he paid no estimated tax payments for the 1995 taxable year, despite Kanterman having discussed Plaintiff's need to do so. Plaintiff told Kanterman that he could not afford to make the estimated payments.

The Government states that Kanterman explained the reasons for delaying the filing of Plaintiff's 1995 tax return until October 15, 1996, the maximum time permitted by law. The Government contends that Kanterman stated the first reason for the delay was that Plaintiff lacked the financial resources to pay his 1995 tax liability in full. However, Plaintiff disputes this contention, stating that Kanterman stated that Plaintiff needed the six month extension because "the company was short of money at the time... ." Plaintiff's Response to Defendant's Statement of Uncontroverted Facts ¶37. This, according to Plaintiff, means that Plaintiff did not have the cash on hand to pay the bill, but could have borrowed the money to do so. Plaintiff states in his Declaration, attached as Plaintiff's Exhibit 2 to Plaintiffs opposition to Defendant's Motion for Summary Judgment, that although he lacked "any appreciable amount of cash as of October 15, 1996, I did have the capacity to borrow sums at this time. As of January 1, 1997, I stood ready, willing, and able to pay the IRS the amount shown as due upon my 1995 federal tax return after all offsets were given for the carryback of my 1996 net operating losses. Id. The other reasons that Kanterman expressed when explaining the reason for the delay in filing the 1995 return are not contested, and are (2) the unavailability of records and the need to complete tax returns for other entities; and (3) Kanterman's concern that his firm would not be paid its accounting fees.

Kanterman also prepared the 1996 Form 1040 for Roberts and his wife, filed with the IRS on or about January 8, 1997. Kanterman testified that the reason for filing the 1996 return early was that "[t]here was an amount due on the 1995 return to the IRS that was known by the taxpayer that there would be a loss for 1996, 1996 taxable year that would reduce the amount due for the 1995 year. It was the taxpayer's wish that we complete the return as fast as possible so that the taxpayer could make payment to the IRS vis-a-vis the net operating loss carryback." Plaintiff received notice and demand for payment of his 1995 federal income tax liabilities from the IRS prior to the preparation and filing of the 1996 return in January of 1996. Plaintiff's 1996 return indicated a negative total income of $485,087 and a negative adjusted gross income of $488,159. Plaintiff's net operating loss for the 1996 tax year was reported on an Application for Tentative Refund (Form 1045) which was filed simultaneously with Plaintiff's 1996 Form 1040, and carried back, in order, to the 1993, 1994 and 1995 tax years.

Paragraphs 42 and 43 of Defendant's Statement of Uncontroverted Facts are not disputed by Plaintiff, but he attempts to clarify them in his response. Paragraphs 42 and 43 read:

42. Although plaintiff carried back a net operating loss of nearly half a million dollars from the 1996 tax year to the 1993, 1994 and 1995 tax years, he remained indebted to the United States (according to his accountant's calculations) for unpaid 1995 federal income taxes in the amount of $129,539.00 after the 1996 loss had been carried back to the preceding three taxable years.

43. Even after the income tax refunds generated by the carryback of the 1996 net operating loss to the 1993-1995 tax years were applied to Robert's 1995 tax liability, an unpaid balance of $101,076 remained for that taxable year.

Plaintiff states the following to clarify these two statements:
In January and, again, in April of 1997, Plaintiff made two separate Form 1045 filings carrying back losses from 1996 to the three preceding tax years --i.e., 1993, 1994, and 1995 --as required by the Internal Revenue Code §172 3 . Both of these filings separately generated credits and offsets against the 1995 tax liability as originally reported by Plaintiff. Also, Plaintiff's 1996 individual income tax return showed a refund due which constitutes a third source of offsets against Plaintiff's 1995 tax liability. A reading of [Defendant's] paragraphs 42 and 43 ... , when read separated [sic], appear to contradict each other. Also, they do not clearly indicate that Mr. Kanterman is giving subtotals in the process of determining Mr. Robert's 1995 tax liability after application of all credits and offsets generated by his 1996 losses. To recap, there were three sources of credits and offsets for use to decrease the 1995 tax liability generated by Mr. Roberts' 1996 individual income tax return: (a) January 1997 form 1045 tentative carryback application, (b) April 1997 form 1045 tentative carryback application and (c) the tax refund reported on the 1996 return itself (as originally filed in January 1997 and amended in April of 1997). Although not stated (which leads to confusion), paragraph 42 of Defendant's Statement of Material Facts is a recitation by Mr. Kanterman of a subtotal of his calculation of the amount due by Mr. Roberts for his 1995 tax year after application of the credits and offsets made available by the first named source of said credits and offsets: i.e., the January 1997 form 1045 tentative carryback application. This is just one of three sources for credits and offsets against Mr. Robert's 1995 tax liability. Paragraph 43 of Defendant's Statement of Material Facts is again a recitation by Mr. Kanterman of a second subtotal of his calculation of the amount due by Mr. Roberts for his 1995 tax return after application of both the first and second named sources of said credits: i.e., both the January and April 1997 form 1045 tentative carryback applications. Paragraphs 42 and 43 do not clearly indicated [sic] their status as merely subtotals, not final tabulations. Paragraph 46 of Defendant's Statement of Material Facts gives Kanterman's final calculation of Roberts' 1995 tax liability after application of the three sources of offsets and credits generated by Roberts' 1996 tax losses: $61,682.00.

Plaintiff's Response to Defendant's Statement of Material Facts §42-43.
By letter dated April 4, 1997, the IRS notified Plaintiff that he had not complied with the terms of the OIC, and "therefore your offer is declared in default and the arrangements to compromise the liability are terminated." In April of 1997, Plaintiff filed an amended 1996 federal income tax return (Form 1040X) and an amended Application for Tentative Refund (form 1045) to carry back an additional net operating loss of $99,481 from 1996 to the 1995 taxable year. Even after Plaintiff's amended 1996 tax return and Application for Tentative Refund were filed with the IRS in April of 1997, Plaintiff remained indebted for unpaid 1995 federal income taxes (according to Kanterman) in the amount of $61,682. To pay this amount, Kanterman sent the IRS in Kansas City, Missouri a check drawn on the account of Commercial Development Co. in the amount of $65,000 to be applied to Plaintiff's 1995 federal income tax liabilities. The letter accompanying the check stated, in pertinent part:

Enclosed is the estimated balance due on the above-named taxpayer's 1995 tax filing after carrybacks of 1996 net operating losses. If the amount due the [IRS] is different than the amount estimated, please contact me and we will provide an additional check.

On the same day that Kanterman sent the $65,000 check to the IRS, he mailed another letter to the IRS in Kansas City which stated, in pertinent part:
We received a communication last month from your office that the taxpayers [sic] Offer in Compromise would be revoked as a result of having unpaid 1995 tax. We responded by calling the indicated person requesting the remaining balance due after the carryback claim [for the 1996 tax year]. I was told that this amount was unknown.

We are forwarding today to the Kansas City Service Center our estimate of the remaining tax due in 1995 for the taxpayer --$65,000. Any amount that remains we will pay when you contact us.

We request that you reconsider the revocation of the taxpayers [sic] previous offer based on our effort to determine the net tax due through the Service and the taxpayers [sic] obvious attempt to comply with all required tax payments.



D. THE IRS Dedclares the OIC to be in Default on April 4, 1997.
Three months after Plaintiff filed his 1995 Form 1040 showing an unpaid income tax liability of $246,254, and two weeks after he filed his 1996 Form 1040 tax return and Application for Tentative Refund (form 1045) which carried back a NOL from 1996 to the 1993-1995 tax years, the IRS sent him a letter dated January 21, 1997 which demanded that he pay his reported 1995 income tax liability within thirty days. The letter stated, in pertinent part:

When your Offer in Compromise was accepted, you agreed to comply with all provisions of the Internal Revenue Code relating to the filing and paying of required taxes due for five years from the date we accepted the offer.

However, a review of your account indicates the following:

Our records show that you have a balance owing for the tax period ending December 31, 1995. To remain in compliance with offer, you must pay the balance within 30 days of the date of this letter. The balance owed, with penalty and interest computed to February 10, 1997, is $2777,143.512.

If you do not comply with our request, we will refer your offer to the Missouri District Office for possible termination of the Offer in Compromise and reinstatement of the original tax liability.

The "contact person" on the January 21, 1997 letter described above was Clara Jacobs. The figure of $2777,143.512, as set forth in the January 21, 1997 letter was erroneous. Plaintiff was not indebted to the United States for unpaid 1995 federal income tax (and statutory additions to tax) in the amount of $2777,143.512 on January 21, 1997. On April 4, 1997, six days before Plaintiff's representatives sent a $65,000 check to the IRS to pay off the balance of his 1995 federal income tax liabilities, the IRS sent Roberts a letter which declared his OIC to be in default and terminated the arrangements previously made to compromise his 1989-1993 federal income tax liabilities and his TFRP. The April 4, 1997 letter stated, in pertinent part:
This refers to our letter of September 28, 1994 accepting your offer of $30,000 in compromise of your Individual Income Tax liability plus statutory additions for December 31, 1989, 1990, 1991, 1992, and Trust Fund Recovery Penalty as a responsible person of Roberts Disposal, Inc. for the period ended December 31, 1989.

Under the terms of your offer $30,000 was to be paid within sixty (60) days of acceptance. On November 28, 1994, $30,000 was paid as agreed but as part of the consideration for the offer you agreed to comply with all the provisions of the Internal Revenue Code relating to the filing of returns and the paying of taxes for a period of five (5) years following acceptance of the offer. As a conditional consideration of the offer, you agreed to waive any net capital losses for which you would be entitled personally for all taxable years after 1993.

Our records indicate that you have now incurred a delinquent liability for your 1995 individual income tax. You have also filed Form 1045, Application for Tentative Refund to carry back capital losses to years 1993, 1994 and 1995.

You have not complied with the terms of the offer, therefore your offer is declared in default and the arrangements to compromise the liability are terminated. All payments made toward the offer will be applied to the liability.

The letter dated April 4, 1997 erroneously stated or implied that Plaintiff had improperly filed Form 1045, Application for Tentative Refund, to carry back capital losses to years 1993, 1994, and 1995, when in fact he had filed the Form 1045 to carry back a net operating loss from the 1996 taxable year to the 1993-1995 tax years. After the OIC was declared in default, the IRS reassessed the amounts of the federal income taxes which Plaintiff (through his authorized representative, Lohbeck) agreed that he owed for 1989 through 1993, together with the TFRP.



E. Evants Following the Declaration of Default by the IRS.
On May 19, 1997, approximately six weeks after the IRS declared Plaintiff's OIC to be in default, CPA Arthur M. Seltzer, a colleague of CPA Kanterman at the accounting firm of Brown, Smith and Wallace, submitted a sworn "Application for Taxpayer Assistance Order (ATAO)" to the IRS on behalf of the Plaintiff, their client. Attached to the ATAO was a narrative "Description of Significant Hardship" prepared by Seltzer. The ATAO stated, in pertinent part:

As the taxpayer's accountant and preparer of his 1995 and 1996 returns, colleague Ronald J. Kanterman, CPA was aware that the taxpayer's inability to pay the 1995 taxes in a timely fashion constituted a technical breach of the terms of the 1994 Offer, and might well result in an effort by the IRS to rescind the Offer and attempt to collect the compromised taxes. He was aware that the unpaid balance due for 1995 would be substantially, if not completely, offset by the carryback of 1996 losses. He therefore directed his efforts to minimizing the economic impact of the breach by arranging for prompt filing of the taxpayer's 1996 return and related carryback claim, and full payment of the 1995 tax liability as promptly as possible... .

On April 4, 1997, the taxpayer received a letter form [sic] the Service Center ... advising that, because of the delinquent liability for 1995 and because of a purported breach of the terms of the Offer, the Service has declared in default... .

We suggest that, although the Service has the right to rescind the Offer because of the technical breach committed by the taxpayer in failing to pay his 1995 taxes in full in [sic] timely fashion, rescission is not mandated but is optional with the Service. We believe that if the Service successfully persists in sustaining the rescission of the Offer, unwarranted injury totally disproportionate to the extent of the offense would be sustained by a taxpayer who has acted in good faith in a difficult situation, and in fact at this time has overpaid his 1995 taxes.

On July 30, 1998, Plaintiff filed administrative claims for refund with the IRS with respect to certain federal income taxes, penalties and interest allegedly paid by him for the 1989-1993 taxable years following the termination of the OIC on April 4, 1997. Plaintiff also filed an administrative claim for refund with respect to that portion of the TFRP which he allegedly paid following the termination of the OIC on April 4, 1997. Plaintiff commenced the instant civil action in this Court on March 26, 1999.



II. Summary Judgment Standards.
The standards applicable to summary judgment motions are well settled. Pursuant to Federal Rule of Civil Procedure 56(c), a court may grant a motion for summary judgment if all of the information before the court shows "there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law." See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The United States Supreme Court has noted that "[s]ummary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the federal rules as a whole, which are designed to 'secure the just, speedy and inexpensive determination of every action.' " Id. At 327 (quoting Fed. R. Civ. P. 1).

In order to obtain summary judgment, the moving party must demonstrate "an absence of evidence to support the non-moving party's case." Celotex, 477 U.S. at 325. Once the moving party carries this burden, the nonmoving party must "do more than simply show there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The nonmoving party may not rest on allegations or denials in the pleadings, but must "come forward with 'specific facts showing that there is a genuine issue for trial.' " Id. at 587 (quoting Fed .R .Civ .P. 56(3)).

In analyzing summary judgment motions, the Court is required to view the facts in a light most favorable to the non-moving party, and must give the non-moving party the benefit of any inferences that can logically be drawn from those facts. Matsushita, 475 U.S. at 587; Buller v. Buechler, 706 F.2d 844, 846 (8th Cir. 1983). Moreover, this Court is required to resolve all conflicts in favor of the non-moving party. Robert Johnson Grain Co. v. Chemical Interchange Co., 541 F.2d 207, 210 (8th Cir. 1976). The trial court may not consider the credibility of the witnesses or the weight of the evidence. White v. Pence, 961 F.2d 776, 779 (8th Cir. 1992).

Under the standards applicable to summary judgment motions, before ruling on the legal issues presented, the Court must find that there are no genuine issues of material fact. See Celotex Corp., 477 U.S. at 322.

[T]he plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. In such a situation, there can be "no genuine issue as to any material fact," since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial. The moving party is "entitled to a judgment as a matter of law" because the nonmoving party has failed to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof.

Id. at 322-23. "By its very terms, [Rule 56(c)(1)] provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Hufsmith v. Weaver, 817 F.2d 455, 460 n. 7 (8th Cir. 1987) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986) (emphasis supplied by Supreme Court)). Material facts are "those 'that might affect the outcome of the suit under the governing law... .' " Id. "'While the materiality determination rests on the substantive law, it is the substantive law's identification of which facts are critical and which facts are irrelevant that governs.' " Id. Rule 56 requires also that the material fact be genuine. Id. A genuine material fact is one such that "'a reasonable jury could return a verdict for the nonmoving party.' " Id.



III. Analysis.
The Plaintiff states, in his Memorandum in Opposition to Plaintiff's Motion for Summary Judgment, that "[t]his entire case turns upon the propriety of the IRS's termination of the OIC under contract law." Plaintiff's Memorandum in Opposition at 7. The ground upon which the IRS terminated the OIC and declared Plaintiff in default is "a delinquent liability for [his] 1995 individual income tax." Id. Plaintiff argues that his failure to pay his 1995 income tax on time was at most an immaterial breach of the OIC, and, as such, the IRS wrongfully declared him in default of the OIC, terminated the OIC, and began the process of collecting all taxes, plus penalties, originally owed by Plaintiff.

"It has long been settled that an agreement compromising unpaid taxes is a contract and, consequently, that it is governed by the rules applicable to contracts generally. The cardinal rule of contract construction 'is to ascertain the intention of the contracting parties and to give effect to that intention if it can be done consistently with legal principles.' " United States v. Lane [62-1 USTC ¶9467], 303 F.2d 1, 4 (5th Cir. 1962) (citations omitted). The Government, based on the Court's review of the undisputed facts in this case and the relevant precedent, had the right to terminate the OIC based on Plaintiff's failure to pay his 1995 taxes until April 10, 1997. Federal income taxes are due, and constitute a liability as of, the date the tax return is required to be filed. See United States v. Ressler [77-1 USTC ¶9459], 433 F.Supp. 459, 463 (S.D. Fla. 1977) ("Regardless of when federal taxes are actually assessed, taxes are considered as due and owing, and constitute a liability, as of date the tax return for the particular period is required to be filed.") (citing Hartman v. Lauchli [57-1 USTC ¶9571], 238 F.2d 881, 887 (8th Cir. 1956) ("by the terms of the Internal Revenue Code income tax liability matures on the day the return is required to be filed, and the correct amount of the tax liability becomes due at that time, regardless of when the deficiency assessment may be made... ."), cert. denied, 353 U.S. 965 (1957)). This means that Plaintiff breached his obligation to pay his federal income taxes in 1995 when he failed to pay them by April 15, 1996. See Ott v. United States [98-1 USTC ¶50,331], 141 F.3d 1306, 1309 (9th Cir. 1998) (in a case involving the non-payment of estate taxes owed, the Ninth Circuit stated "The Tax Code provides: 'when a return of tax is required under this title or regulations, the person required to make such return shall, without assessment or notice and demand from the Secretary ... pay such tax at the time and place fixed for filing the return (determined without regard to any extension of time for filing the return).' ") (quoting 26 U.S.C. §6151(a)). According to the specific terms of the OIC, entered into by the Government and the Plaintiff, Plaintiff promised to "comply with all provisions of the Internal Revenue Code relating to filing my[] returns and paying my[] required taxes for five (5) years from the date the IRS accepts the offer." When Plaintiff failed to pay his 1995 federal income tax liability of $246,354.00 when it became due, he violated this provision of the OIC, authorizing the Government to declare Plaintiff in default of the express terms of the OIC and "file suit or levy to collect the original amount of tax liability, without further notice of any kind." See Statement of Facts, supra at 6 (quoting Offer in Compromise at ¶(o)). The right of the Government to terminate the Offer in Compromise where there has been a breach by the taxpayer of its provisions has been upheld in United States v. Feinberg [67-1 USTC ¶9176], 372 F.2d 352, 357-58 (3d Cir. 1967). The Third Circuit stated that "By the clear language of the offer in compromise Mr. Saladoff agreed that, upon his default, the Commissioner of Internal Revenue could terminate the compromise agreement." Feinberg [67-1 USTC ¶9176], 372 F.2d at 357-58. As in Feinbeirg, the default by the Plaintiff is undisputed. Plaintiff has admitted that he failed to pay his 1995 income taxes until April 10, 1997. Despite Plaintiff's argument that the Government lacked authority to terminate the OIC upon his default of any of the provisions, the OIC specifically empowered the Government to declare him in default and pursue collection of his original tax liability, effectively terminating the OIC.

With respect to Plaintiff's argument that he did not materially breach the OIC, the Court finds this argument unpersuasive. Plaintiff promised and agreed in the OIC that he would abide by the terms of the Internal Revenue Code for the next five years. Failure to abide by this promise allowed the Government to declare him in default and collect his original tax liability. Nothing in the OIC allowed him to delay payment of his 1995 tax liability until April 10, 1997 under the guise of the substantial performance doctrine. While it is true that contract principles guide the Court in interpreting and OIC, this Court is not persuaded that the Government, in this case, lacked authority to declare Plaintiff in default of the OIC when he failed to timely pay his 1995 income taxes. See Lane [62-1 USTC ¶9467], 303 F.2d at 4 (holding that the language of the compromise agreement allowing the Government to terminate the OIC upon default was "so precise, and the intention which it manifests is so evident, as to leave no doubt that the course of action taken by Government here was fully authorized by the compromise agreement."). The doctrine of substantial performance has no relevance in this case as the Plaintiff completely failed to timely pay his 1995 federal income tax liability, and instead waited to pay it until April 10, 1997 so that he could offset his tax liability for 1995 with his losses in 1996.

Finally, with respect to Plaintiff's argument that the Government's termination of the OIC will cause him to suffer a forfeiture, the Court finds United States v. Lane on point.

There was nothing illegal, immoral or inequitable in the compromise agreement. It did not provide for any 'forfeiture'. By express provision, the amounts to be paid under the compromise agreement, including both the Form 656- C and the collateral agreement, could not exceed the aggregate amount which the taxpayer conceded that he owed the Government from the start. By allowing the Government to revive the taxpayer's original liability, the taxpayer will not forfeit the amounts he has already paid, for those amounts will be applied to reduce the original liability. The agreement was precise, it was fair, and it was freely consented to by the taxpayer. There is no reason why it should not be enforced as written.

Lane [62-1 USTC ¶9467], 303 F.2d at 4. The Court finds Plaintiff's argument that he will suffer a forfeiture if the OIC is enforced as written is without merit.
Accordingly,

IT IS HEREBY ORDERED that Defendant's Motion to Dismiss and Motion for Summary Judgment [doc. #46] are GRANTED.

2 At this point in Defendant's statement of material facts, Defendant details certain facts concerning a residence purchased by Michael Roberts that was transferred to his brother's company. However, Plaintiff objects to the inclusion of these facts as immaterial because they are not mentioned nor referred to in the argument portion of Defendant's briefs. The Court therefore will not include these facts in the Court's statement of facts as they appear not to be material to the issues involved in Defendant's Motion for Summary Judgment.

3 IRC §172, as in effect in 1996, required carryback of NOLs 3 years. It has since been amended to require NOL carrybacks of 2 years.


The mere fact that the IRS had cashed money orders tendered by a taxpayer was insufficient to support his claim that the government had breached a settlement agreement. A letter from his counsel indicating that an IRS agent had requested a payment in the amount of those money orders was insufficient to state a claim for breach of settlement agreement absent proof that the taxpayer had been notified in writing of the IRS's acceptance of his offer of compromise.
[98-2 USTC ¶50,827] L.R. Ousley, Plaintiff v. J.F. Gritis, et al., Defendants
U.S. District Court, Dist. Nev., CV-S-97-427-DWH(LRL), 10/6/98

[Code Sec. 7122 ]

Compromises: Settlement agreement: Breach of agreement.--The mere fact that the IRS had cashed money orders tendered by a taxpayer was insufficient to support his claim that the government had breached a settlement agreement. A letter from his counsel indicating that an IRS agent had requested a payment in the amount of those money orders was insufficient to state a claim for breach of settlement agreement absent proof that the taxpayer had been notified in writing of the IRS's acceptance of his offer of compromise.

[Code Sec. 7402 ]

Suits by taxpayers: Jurisdiction: District court: Sovereign immunity: Constitutionality: Due process: Intentional violations.--An individual's action seeking to enjoin IRS agents from collecting taxes was dismissed for lack of jurisdiction. His claims against the agents were essentially claims against the government, which had not waived its immunity from suit. The taxpayer's conclusory allegations that the agents had acted outside of their authority were insufficient to establish that intentional constitutional violations had occurred.

[Code Sec. 7421 ]

Suits to enjoin assessment: Anti-Injunction Act: Basis for equitable relief: Exceptional circumstances not proven.--An individual's action seeking to enjoin IRS agents from collecting taxes was barred by the Anti-Injunction Act since he established no basis for equitable relief.

[Code Sec. 7422 ]

Suits by taxpayers: Refund action: Condition of suit: Payment of entire tax.--Jurisdiction was lacking over an individual's suit seeking to enjoin IRS agents from pursuing tax collection efforts because he failed to pay the disputed taxes in full prior to filing the action.
ORDER
HAGEN, District Judge:
Before the court is defendants' motion (#34) to dismiss or, in the alternative, for summary judgment.
I. Factual Background
In this action, plaintiff seeks to stop agents of the Internal Revenue Service ("IRS") from collecting taxes under Form 940, 941, and 1040 tax returns that plaintiff contends are not due and owing and to enforce a settlement agreement between plaintiff and the IRS. First Amended Complaint (#20) at 1. Plaintiff alleges that individual defendants J.F. Gritis, Ron Smith and Bryon P McMahon, employees of the IRS, have acted outside the scope of their employment by assessing and levying taxes and by forcibly collecting taxes that were not due and owing. Id. at 2. He also contends that defendants failed to give notice of a deficiency as required by 26 U.S.C. §§6212(a) and 6213(a) and that the IRS has refused to grant plaintiff's request for a formal hearing.
In his complaint, plaintiff alleges the following causes of action: (1) denial of due process; (2) unlawful assessment and collection of taxes; (3) breach of settlement agreement; (4) interference with contract advantage; (5) slander of title; (6) conspiracy to deny civil rights; (7) intentional infliction of emotional distress: and (8) injunctive relief. Id. at 2-10. Plaintiff asserts that this court has jurisdiction over his complaint based upon 28 U.S.C. §§1331, 1340, 1343, 1346(a)(1), 1355, 1356, 1361, and 1367, 42 U.S.C. §§1985 and 1986, and Amendments 4, 5, and 16 of the United States Constitution.
On January 5, 1998, the court denied (#31) plaintiff's motion for a preliminary injunction. Defendants now move (#34) to dismiss or, in the alternative, for summary judgment based on lack of subject matter jurisdiction and plaintiff's failure to state claims upon which relief can be granted.
II. Analysis
A. Motion to Dismiss Standard
In considering a motion to dismiss, all material allegations in the complaint must be accepted as true and construed in the light most favorable to the nonmoving party. Russell v. Landrieu, 621 F.2d 1037, 1039 (9th Cir. 1980). The purpose of a motion to dismiss under Fed.R.Civ.P. 12(b)(6) is to test the legal sufficiency of the complaint. North Star Inter'l v. Arizona Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983). If the motion is to be granted, it must appear to a certainty that the plaintiff will not be entitled to relief under any set of facts that could be proven under the allegations of the complaint. Rae v. Union Bank, 725 F.2d 478, 479 (9th Cir. 1984).
B. Sovereign Immunity As a Bar to Plaintiff's Claims
The government and the individual defendants (all IRS employees) assert that plaintiff's First Amended Complaint fails to allege a proper basis for the court's subject matter jurisdiction because it does not identify any specific statutory provisions waiving the immunity of the United States as to plaintiff's claims. The United States may be sued only to the extent that it has consented to suit by statute. United States v. Dalm [90-1 USTC ¶50,154; 90-1 USTC ¶60,012], 494 U.S. 596, 608 (1990). Any waiver of sovereign immunity cannot be implied but must be unequivocally expressed and is strictly construed in favor of the sovereign. United States v. Testan, 424 U.S. 392, 399-400 (1976). Thus, no suit may be maintained against the United States unless the suit is brought in compliance with the terms of a specific statute under which the United States has consented to be sued. Id. Where the United States has not consented to suit or the plaintiff has not met the terms of the statute, the court lacks jurisdiction and the action must be dismissed. See Fed.R.Civ.P. 12(h)(3); Dalm [90-1 USTC ¶50,154; 90-1 USTC ¶60,012], 494 U.S. at 608.
Plaintiff has the burden of identifying specific statutes waiving the government's sovereign immunity and showing that the requirements of such statues have been met. Holloman v. Watt, 708 F.2d 1399, 1401 (9th Cir. 1983). In his First Amended Complaint, plaintiff based jurisdiction on 28 U.S.C. §§1331, 1340, 1343, 1346(a)(1), 1355, 1356, 1361, and 1367, 42 U.S.C. §§1985 and 1986, and Amendments 4, 5, and 16 of the United States Constitution. Most of the statutory provisions relied upon by plaintiff confer general jurisdiction and, without more, do not constitute a waiver of sovereign immunity. See 28 U.S.C. §1331 (federal question jurisdiction), §1340 (jurisdiction over actions arising under the Internal Revenue Code), §1343 (jurisdiction over actions arising under the Civil Rights Act), §1355 (jurisdiction over actions by public officers on behalf of public treasury to collect fines and penalties), §1356 (jurisdiction over seizures made pursuant to any law of the United States not within admiralty or maritime jurisdiction), §1367 (supplemental jurisdiction over certain state claims); see also Hughes v. United States [92-1 USTC ¶50,086], 953 F.2d 531, 539 n. 5 (9th Cir. 1992) (general jurisdictional statutes such as sections 1331 and 1340 cannot waive the government's sovereign immunity); Sipe v. Amerada Hess Corp., 689 F.2d 396, 405-07 (9th Cir. 1982) (section 1355 only authorizes suit by public officer on behalf of public treasury to collect fines and penalties); Smith v. Grimm, 534 F.2d 1346, 1352 n.9 (9th Cir. 1976) (section 1361 not a waiver); Rhyne v. Henderson County, 973 F.2d 386 (5th Cir. 1992) (section 1367 only provides for supplemental jurisdiction, not original jurisdiction); Brian v. Gugin, 853 F.Supp. 358, 363 (D. Idaho 1994) (section 1343 "cannot be used to waive the government's sovereign immunity and the government cannot be sued for damages for alleged violations of the Constitution").
Other statutory provisions and Constitutional amendments cited by plaintiff do not operate to waive sovereign immunity in this case. For example, 42 U.S.C. §§1985 and 1986 are inapplicable to actions against the United States and therefore cannot provide a basis for finding a waiver of sovereign immunity. Hohri v. United States, 782 F.2d 227, 245 n. 43) (D.C. Cir. 1986), vacated on other grounds, 482 U.S. 64 (1987); United States v. Timmons, 672 F.2d 1373, 1380 (11th Cir. 1982); Unimex v. Department of Housing and Urban Development, 594 F.2d 1060, 1061 (5th Cir. 1979). Likewise, the Constitution does not waive sovereign immunity. See Arnsberg v. United States, 757 F.2d 971, 980 (9th Cir. 1985). 1 Nor can plaintiff rely on section 1346(a)(1)'s limited waiver of sovereign immunity because plaintiff fails to show that he has meet the prerequisites of obtaining relief under this provision. 2 Relief under section 1346(a)(1) is only available where plaintiff has paid the full amount of tax assessed. United States v. Williams [95-1 USTC ¶50,218], 514 U.S. 527, 531-532 (1995); see also Latch v. United States [88-1 USTC ¶9242], 842 F.2d 1031, 1033 (9th Cir. 1988). Because plaintiff's First Amended Complaint fails to allege that he has paid the disputed taxes in full, he cannot invoke the jurisdiction of the court under section 1346(a)(1).
Despite plaintiff's failure to name a specific applicable statute and his improper reliance on other statutes, plaintiff's First Amended Complaint need not be dismissed if the court can determine the appropriate source of jurisdiction from the allegations in the complaint. Boarhead Corp. v. Erickson, 923 F.2d 1011, 1017-18 (3rd Cir. 1991) (citing 5 C. Wright & A. Miller, Federal Practice and Procedure §1209, at 112-13 (2d ed. 1990)); see also Haines v. Kerner 404 U.S. 519 (1972) (per curiam) (allegations of a pro se plaintiff's complaint are held to a less stringent standard than those drafted by a lawyer). Here, plaintiff's complaint can be characterized as an action to enjoin the collection of taxes improperly assessed, to recover sums wrongfully retained by the IRS, and to obtain damages for breach of settlement agreement. Plaintiff also alleges common law torts and constitutional violations.
Actions to enjoin the assessment and collection of taxes by the IRS are narrowly limited by the Anti-Injunction Act., 26 U.S.C. §7421. Although the court ruled on the motion for preliminary injunction that some of plaintiff's claims may fall within a statutory exception to the Act as set forth in 26 U.S.C. §6213, 3 section 6213 itself does not expressly authorize suits against the government and thus cannot form the basis for waiver of sovereign immunity. See 26 U.S.C. §6213; but see Guthrie v. Sawyer [92-2 USTC ¶50,391], 970 F.2d 733, 737 (10th Cir. 1992). Suits for a tax refund are brought pursuant to 28 U.S.C. §1346(a)(1), but, as noted above, plaintiff failed to show he meets the prerequisites to suit under that statute.
Moreover, even though the government has waived its sovereign immunity in taxpayer actions brought pursuant 26 U.S.C. §7433 and 28 U.S.C. §2410, neither statute applies in this case. Under section 7433, a taxpayer can challenge improper acts in connection with the collection of any federal tax, but may not sue for damages in connection with the determination or assessment of tax. Miller v. United States [95-2 USTC ¶50,516], 66 F.3d 220, 223 (9th Cir. 1995). Similarly, under section 2410, a taxpayer can contest the procedural validity of a tax lien, but may not attack the merits of an assessment. See Elias v. Connett [90-2 USTC ¶50,397], 908 F.2d 521, 527 (9th Cir. 1990). In addition to challenging the validity of the tax assessment, plaintiff claims that the government failed to send notices of deficiency in compliance with section 6213(a) and breached a purported settlement agreement. The Ninth Circuit has held that "claims that the IRS failed to properly notice deficiencies address the merits of an assessment." Huff v. United States [93-2 USTC ¶50,633], 10 F.3d 1440, 1445 (9th Cir. 1993). Thus, such claims are not actionable under sections 2410 or 7433. Id.; Elias [90-2 USTC ¶50,397], 908 F.2d at 527; see also Miller [95-2 USTC ¶50,516], 66 F.3d at 222-23 (finding that violation of "notice and demand" requirement in 26 U.S.C. §6303 could trigger section 7433 liability because section 6303 is contained in Chapter 64 of the Internal Revenue Code entitled "Collection"; in contrast, the deficiency notice requirement at issue here is part of section 6213 which is contained in Chapter 63 entitled "Assessment").
As to plaintiff's breach of settlement claim, the motion to dismiss must be granted because the regulations and procedures for compromises under 26 U.S.C. §7122 are the exclusive methods of settling tax disputes, see Laurins v. C.I.R. [89-2 USTC ¶9636], 889 F.2d 910, 912 (9th Cir. 1989), and plaintiff fails to demonstrate that those procedures and regulations have been followed in this case. For example, a taxpayer's offer of compromise will not be considered to have been accepted until and unless the taxpayer is notified in writing of the acceptance. Id.; 26 C.F.R. §301.7122-1(d)(1), (d)(3). Plaintiff fails to allege that he was notified in writing that the IRS accepted his offer of compromise. Instead, he relies on a letter from his own counsel indicating only that an IRS agent has requested a $5,000 payment and that plaintiff's money orders to the IRS in the amount of $5,000 were cashed. See First Amended Complaint ¶9, Exhs. D & E. This is insufficient to state a claim for breach of settlement agreement. See id.; Bowling v. United States [75-1 USTC ¶9333], 510 F.2d 112, 113 (5th Cir. 1975) ("no theory founded upon general concepts of accord and satisfaction can be used to impute a compromise settlement [in a tax case] and therefore none resulted from the government's accepting and cashing of [taxpayer's] check").
Plaintiff also alleges that the individual defendants (all IRS agents) have violated his constitutional rights. Individual IRS agents acting as employees of the United States enjoy qualified immunity for constitutional violations. Butz v. Economou, 438 U.S. 478, 507 (1978). Under the theory of qualified immunity, an IRS agent "will not be liable for mere mistakes in judgment," only intentional and knowing constitutional violations. Id. at 498. Although plaintiff alleges that the individual defendants in this case acted outside the scope of their authority, these allegations are wholly conclusory and do not meet the standard set forth in Butz.
Plaintiff's common law tort claims must also fail. The government's waiver of sovereign immunity for tort actions as set forth in the Federal Tort Claims Act expressly excludes actions involving the assessment or collection of tax. 28 U.S.C. §2680(c); Hutchinson v. United States [82-1 USTC ¶9405], 677 F.2d 1322, 1327 (9th Cir. 1982). Thus, sovereign immunity bars the plaintiff's tort claims against the United States and its agencies.
III. Conclusion
Accordingly, IT IS ORDERED that defendants' motion to dismiss (#34) be GRANTED without leave to amend.
1 The Ninth Circuit in Arnsberg noted, however, that "actions brought under the takings clause of the fifth amendment are, of course, an exception to the rule that sovereign immunity is a bar to damages against the United States for direct constitutional violations." Id. at 980 n. 7. Here, plaintiff does not seek relief under the takings clause of the Fifth Amendment.
2 Section 1346 is a limited waiver of sovereign immunity that confers federal courts with jurisdiction over tax refund lawsuits brought by the taxpayer.
3 Only plaintiffs' claims regarding the assessment of personal income taxes for the tax years 1981, 1982, and 1983 may fall within the exception of section 6213(a).


A taxpayer who breached the payment terms of his compromise agreement was not entitled to notice of the amount due thereunder before the IRS collected the balance of his original liability. The agreement specifically stated that he would not be entitled to notice in this situation.



The government was awarded summary judgment in the suit brought by the taxpayer who protested that taxes he owed were collected after the running of the statute of limitations. The government and the taxpayer had entered into a compromise agreement as to the amount of taxes owed by the taxpayer. A provision of the agreement provided that the statute of limitations would be extended if the taxpayer missed a payment, and the court concluded that, since the taxpayer showed no detriment suffered, the provision was not void as against public policy.
[82-1 USTC ¶9191]Dr. Jerry Fortenberry, Plaintiff v. United States of America, Defendant
U. S. District Court, So. Dist. Miss., Hattiesburg Div., Civil No. H 80-0119(C), 8/28/81

[Code Sec. 7122]

Compromises of tax liability: Breach of agreement: Notice.--A taxpayer was not entitled to a reasonable notice of the amount due under an offer in compromise nor was he entitled to a reasonable period of time in which to raise such amount prior to the Internal Revenue Service's declaration that his offer was in default. The taxpayer's failure to make the required payments constituted a default and under the terms of the collateral agreement, the IRS was authorized to collect the balance of the original liability without further notice of any kind.
COX, District Judge:
This cause came on for hearing before the Court on August 20, 1981, on the motion of the defendant, United States of America, for summary judgment and the Court having considered the record herein and having heard the argument of counsel now makes the following findings of fact and conclusions of law:
Findings of Fact
1. This action was instituted by the plaintiff, Dr. Jerry Fortenberry, against the defendant, the United States of America, seeking the refund of federal income taxes and statutory additions thereto for the years 1962-1967, inclusive, in the amount of $22,055.82, plus interest as provided by law.
2. For the years 1962-1967, inclusive the Internal Revenue Service assessed federal income taxes and statutory additions thereto against the plaintiff, Dr. Jerry Fortenberry, in the aggregate amount of $23,835.70.
3. Under date of June 13, 1969, the plaintiff submitted to the Internal Revenue Service an Offer in Compromise of the foregoing assessed tax liability for the total sum of $7,000, payable in installments. In the Offer in Compromise, the plaintiff stated that his offer should be accepted because he was unable to pay the tax liability assessed against him.
4. The plaintiff thereafter submitted to the Internal Revenue Service, on IRS Form 2261, a Collateral Agreement as additional consideration for the acceptance of the foregoing Offer in Compromise. By letter of July 17, 1969, the Internal Revenue Service notified the plaintiff of its acceptance of the Offer of Compromise and the Collateral Agreement.
5. Under the terms of the Offer in Compromise and Collateral Agreement, the plaintiff could, by making payments of graduated percentages of his 1969-1976 annual income in excess of $10,000, satisfy his 1962-1967 tax liability for less than the full amount assessed against him for those years. However, the plaintiff was required to make the indicated payments on a timely basis, (i. e. by April 15th of the year following the year of receipt of such annual income), and upon default in that regard, the Internal Revenue Service was authorized to disregard the amount of the offer and the Collateral Agreement, apply the amounts previously paid thereunder against the plaintiff's 1962-1967 tax liability, and without notice of any kind, proceed to collect from him the full remaining balance of such liability. 1
6. The plaintiff complied with the provisions of the offer in Compromise referred to in paragraph 3 above by making the prescribed payment of $7,000 to the Internal Revenue Service.
7. For the years 1974 and 1975, the plaintiff filed statements with the Internal Revenue Service reflecting annual income in the respective amounts of $5,744.13 and $12,838.30; and remitted a payment for the year 1975 under the Collateral Agreement in the amount of $387.93, plus interest of $1.94. However, the plaintiff's 1974 and 1975 income tax returns were subsequently audited by the Internal Revenue Service, and in December of 1974, the plaintiff agreed to certain deficiencies which increased his annual income for those years to $17,734.09 and $21,954.18, respectively.
8. Notwithstanding the plaintiff had annual income in each of the years 1974 and 1975 in excess of $10,000, he failed to pay over to the Internal Revenue Service on or before the due dates (April 15, 1975 and April 15, 1976, respectively) the percentages of such excess as required by the Collateral Agreement. Consequently, the Internal Revenue Service, by letter dated July 5, 1978, declared the plaintiff's offer to be in default, applied the payments previously made under the Offer in Compromise and Collateral Agreement to the tax liability assessed against the plaintiff for 1962-1967 and collected from him the remaining balance of such liability.
9. Even though the Collateral Agreement expressly provides that for each year his annual income for 1969-1976 was in excess of $10,000 the plaintiff was required to make an annual payment of a graduated percentage of such excess without the necessity of notice of any kind from the Internal Revenue Service, on January 18, 1978, the Internal Revenue Service, as a matter of courtesy, mailed a letter to the plaintiff advising him that the sum of $6,748.82 was due under the terms of the Collateral Agreement for the years 1974 and 1975, including interest of $26.50 for the year 1976. On June 2, 1978, when no payment was received as a result of such advice, the Internal Revenue Service mailed a second letter to the plaintiff indicating that such liability, including interest accrued to June 30, 1978, amounted to $6,897.68, and that the offer would be declared in default if the payments due under the Collateral Agreement were not made by June 30, 1978. Payment was not made by June 30, 1978, and, as heretofore noted, the Internal Revenue Service declared the offer to be in default on July 5, 1978.
10. By a Letter dated May 24, 1979, the plaintiff forwarded $22,055.82 to the Internal Revenue Service in full satisfaction of the remaining liability due for the years 1962 through 1967. Subsequently, he filed a claim for refund thereof. The instant suit, in which the plaintiff seeks to recover such amount, was thereafter timely filed.
11. The plaintiff contends that the Internal Revenue Service was without right to declare the offer in default because (1) he performed under the contract in good faith and was entitled to reasonable notice of the amount due and a reasonable period of time to raise such amount; and (2) because he substantially performed the terms of the contract.
Conclusions of Law
1. None of the plaintiff's factual contentions has any merit.
2. The Internal Revenue Service is authorized by 26 U. S. C. §7122(a) to compromise any civil case arising under the internal revenue laws (prior to reference to the Department of Justice for prosecution or defense) and as a condition to the acceptance of a taxpayer's offer in compromise, the Internal Revenue Service may require such a taxpayer to enter into any collateral agreement which it deems necessary for the protection of the interest of the United States (Treasury Regulation on Procedure and Administration (1954 Code), §301.7122-(d)(3)).
3. The law is well-settled that the Offer in Compromise and Collateral Agreement submitted by the plaintiff and accepted by the Internal Revenue Service on July 17, 1969, constitute a contract and that the plaintiff, as a party thereto, is bound by its terms. James v. First National Bldg. Corp. [46-1 USTC ¶9270], 155 F. 2d 815 (10th Cir. 1946); Colorado Milling & Elevator Co. v. Howbert, 57 F. 2d 769 (10th Cir. 1932). Accordingly, when the plaintiff failed to make the payments required thereunder with respect to 1974 and 1975, the Internal Revenue Service was authorized thereby, at its option, inter alia, to "disregard the amount of the offer and [the Collateral Agreement], and apply all amounts previously paid thereunder against the amount of the liability sought to be compromised and [could] without further notice of any kind, assess and/or collect by levy or suit [the restrictions against assessment and/or collection being specifically waived) the balance of such liability." United States v. Lane [62-1 USTC ¶9467], 303 F. 2d 1 (5th Cir. 1962). Provisions were made in both the Offer in Compromise and the Collateral Agreement for the Internal Revenue Service to notify the plaintiff of the acceptance of the offer. Such notice was given by letter of July 17, 1969, and thereafter the default provisions of the Offer in Compromise and the Collateral Agreement were effective "without further notice of any kind" from the Internal Revenue Service.
3. The plaintiff had annual income in excess of $10,000 for each of the years 1974 and 1975, but failed to pay over to the Internal Revenue Service the required percentages of such excess on or before the due dates. Therefore, in accordance with the terms of the Collateral Agreement, the defendant properly declared the contract in default and collected the full balance of the liability assessed against the plaintiff for 1962-1967.
4. In United States v. Lane, supra, a case involving facts which are very similar to those involved herein, the United States Court of Appeals for the Fifth Circuit held that the United States was, upon violation of its terms, entitled to declare in default a collateral agreement identical to the one here in question and concluded that the issue of the property of such action was appropriate for summary judgment in the Government's favor. In reaching this conclusion, the Fifth Circuit stated (p. 4):
This language is so precise, and the intention which it manifests is so evident, as to leave no doubt that the course of action taken by the Government here was fully authorized by the compromise agreement.
There was nothing illegal, immoral or inequitable in the compromise agreement. It did not provide for any "forfeiture". By express provision, the amounts to be paid under the compromise agreement, including both the Form 656-C and the collateral agreement, could not exceed the aggregate amount which the taxpayer conceded that he owed the Government from the start. By allowing the Government to review the taxpayer's original liability, the taxpayer will not forfeit the amounts he has already paid, for those amounts will be applied to reduce the original liability. The agreement was precise, it was fair, and it was freely consented to by the taxpayer. There is no reason why it should not be enforced as written.
5. The plaintiff contends that the Internal Revenue Service was without right to declare his offer in default because he substantially performed its terms, because he was entitled to reasonable notice of the amount due thereunder, and because he was entitled to a reasonable period of time to raise said amount. Such contentions, however, are without merit. The plaintiff failed to make the required payments for 1974 and 1975 on the due dates therefor. Each such failure constituted a default and, upon either such default, under the express terms of the Collateral Agreement, the Internal Revenue Service was authorized, "without further notice of any kind" to the plaintiff, to collect, as it did, the balance of the original liability.
6. The fact that the Internal Revenue Service mailed courtesy letters to the plaintiff in January and June of 1978, advising him of his past due liability for 1974 and 1975 under the Collateral Agreement, does not alter the conclusions reached herein. The Collateral Agreement provides (par. 4) that payment of the liability for each of those years should have been made, respectively, "to the District Director, without notice from him, on or before the fifteenth day of the fourth month next following the close of the calendar * * * year." As stated by the Third Circuit in United States v. Feinberg [65-2 USTC ¶9645], 372 F. 2d 353, 357 (1965), "by the clear language of the Offer in Compromise, Mr. Saladoff agreed that, upon his default, the Commissioner of Internal Revenue could terminate the Compromise Agreement. The default is undisputed. The Government cannot be held to the 'warning shot' the appellant suggests is required here."
7. The Defendant's Motion for Summary Judgment is well-taken. There is no genuine issue as to any material fact and the defendant is entitled to judgment as a matter of law. Accordingly, the defendant's motion should be, and is hereby, granted and summary judgment should, and will, be entered herein in favor of the defendant, United States of America, dismissing the plaintiff's Complaint with prejudice.
Summary Judgment
The defendant, United States of America, having moved the Court to enter summary judgment herein in its favor on the grounds that there is no genuine issue as to any material fact and that the defendant is entitled to judgment as a matter of law and the Court having entered its Findings of Fact and Conclusions of Law to the effect that said motion is well-taken, it is, in accordance with such Findings of Fact and Conclusions of Law--
ORDERED and ADJUDGED that the plaintiff, Dr. Jerry Fortenberry, take nothing, that the action be dismissed with prejudice, that the defendant, the United States of America, recover of the plaintiff, Dr. Jerry Fortenberry, its costs of action.
1 The default provision of the Collateral Agreement (par. 6) provides as follows:
That upon notice to the taxpayer of the acceptance of the offer in compromise of the liability aforesaid, the taxpayer shall have no right, in the event of default in payment of any installment of principal or interest due under the terms of the offer and this agreement, or in the event any other provision of this agreement is not carried out in accordance with its terms, to contest in court or otherwise the amount of the liability sought to be compromised; and that in the event of such default or non-compliance, or in the event the taxpayer becomes the subject of any proceeding under the Bankruptcy Act, or the subject of any proceeding whereby the affairs of the taxpayer are placed under the control and jurisdiction of a court or other party, the Commissioner or his delegate at his option, (a) may proceed immediately by suit to collect the entire unpaid balance of the offer and this agreement, or (b) may proceed immediately by suit to collect as liquidated damages an amount equal to the tax liability sought to be compromised minus any payments already received under the terms of the offer in compromise and this agreement, with interest at the rate of 6% per annum from the date of default, or (c) may disregard the amount of such offer and this agreement, and apply all amounts previously paid thereunder against the amount of the liability sought to be compromised and may, without further notice of any kind, assess and/or collect by levy or suit (the restrictions against assessment and/or collection being specifically waived) the balance of such liability.

A.J. Parenteau, DC N.J., 74-1 USTC ¶9270. 74-1 USTC ¶9270]U. S. District Court, Dist. N. J., No. 1297-72, 12/20/73

[Code Secs. 6501 and 7122]

Compromises: Breach of agreement: Statute of limitations: Waiver: Compromise as.--The government was awarded summary judgment in the suit brought by the taxpayer who protested that taxes he owed were collected after the running of the statute of limitations. The government and the taxpayer had entered into a compromise agreement as to the amount of taxes owed by the taxpayer. A provision of the agreement provided that the statute of limitations would be extended if the taxpayer missed a payment, and the court concluded that, since the taxpayer showed no detriment suffered, the provision was not void as against public policy.
Opinion and Order
BARLOW, District Judge:
This case is before the Court on cross-motions for summary judgment. FED. R. CIV. P. 56.
The plaintiff seeks to recover certain income and employment taxes which the Internal Revenue Service (IRS) collected by distraint in 1971 and 1972. The plaintiff insists that the collection was barred by the applicable statute of limitations, 26 U. S. C. A. §6502. The Government demurs, asserting that it acted in timely fashion.
The plaintiff made an offer to compromise his original tax liability, which the IRS accepted on February 23rd, 1962. 26 U. S. C. A. §7122. There is no dispute that, once accepted, the terms of the offer became binding contractual obligations on both parties. United States v. Lane [62-1 USTC ¶9467], 303 F. 2d 1, 4 (5th Cir. 1962). The agreement called for plaintiff to pay over the entire compromised sum on March 30th, 1962. Plaintiff failed to make the required payment and, on April 9th, 1962, the Government warned him, by letter, that he might be declared in default of the agreement. Plaintiff responded on April 23rd, 1962, by "withdrawing" his offer, or, in contractual terms, repudiating the agreement. 1 Plaintiff received no further communication from the IRS until February 17th, 1965, some three years later, when he was notified that the compromise agreement had been declared in default.
Of critical importance to the resolution of thses motions is Paragraph 6 of the compromise agreement (Government Form 656, entitled "Offer in Compromise"). Paragraph 6 tolls the applicable statute of limitations under certain explicit circumstances:
"6. The undersigned proponent waives the benefit of any statute of limitations applicable to the assessment and/or collection of the liability sought to be compromised, and agrees to the suspension of the statutory period of limitations on assessment and collection for the period during which the offer is pending or the period during which any installment remains unpaid, and for one year thereafter." (Emphasis added.)
It is the Government's view that the statute of limitations remained tolled until the February 17th, 1965, notification of default; however, the plaintiff argues that the statute should have commenced running once again on April 23rd, 1962, the date plaintiff sent his letter repudiating the compromise agreement.
Plaintiff's Motion for Summary Judgment
Since the Government refuses to concede, for the purpose of this motion, that the plaintiff actually sent the April 23rd letter, there exists a factual dispute which precludes resolution of the plaintiff's motion for summary judgment. FED. R. CIV. P. 56. Accordingly, that motion is denied.
Defendant's Motion for Summary Judgment
The explicit language of Paragraph 6 of Form 656, supra, supports the Government's calculation of the statutory period of limitation. The statute remains tolled, according to that paragraph, as long as ". . . any installment remains unpaid". Clearly, the one-installment payment due on March 30th, 1962, remained unpaid until February 17th, 1965, when the entire compromise agreement became a nullity as a result of the Government's declaration of default. Accordingly, we accept the contention of the United States that the statute of limitations did not expire until after the monies in question had been collected.
However, the plaintiff alternatively asks this Court to void Paragraph 6 as offensive to public policy. The fact that the Government, when confronted with a breach of the compromise agreement, has no time limit within which it must choose its remedy 2 is, the plaintiff contends, unfair to a taxpayer. We disagree.
First, despite a conclusory assertion to the contrary, the plaintiff has pleaded no specific detriment suffered as a result of the delay in the collection of the taxes. Indeed, in view of this plaintiff's history of bankruptcy and subsequent recovery, the hiatus was, in all probability, beneficial rather than detrimental. Further, the fact that plaintiff made no attempt to communicate with the IRS after his April 23rd letter also dilutes his assertion of hardship. Finally, the Third Circuit has previously upheld the default provision and, by implication, the waiver of the statute of limitations provision contained in Form 656. United States v. Feinberg [67-1 USTC ¶9176], 372 F. 2d 352, 356 (3rd Cir. 1967). In that case, the Court sustained a governmental declaration of default which was received more than four years after the initial breach of the compromise agreement.
Under all of the circumstances, we cannot accept plaintiff's contention that Paragraph 6 of Form 656 is so blatantly unfair to the taxpayer that it must be declared void as against public policy.
Accordingly, the defendant United States' motion for summary judgment must be granted, without costs.
1 The fact that plaintiff did send such a letter of repudiation is stipulated for the purpose of the Government's motion only.
2 Paragraph 4 of the compromise agreement basically allows the Government, in the event of a default, to institute action to collect either the compromised or the original liability.
"4. It is further agreed that upon notice to the proponent of the acceptance of this offer in compromise of the liability aforesaid, the proponent shall have no right to contest in court or otherwise the amount of the liability sought to be compromised; and that in the event this offer is a deferred payment offer and there is a default in payment of any installment of principal or interest due under the terms of the offer, the Commissioner of Internal Revenue (or his delegate), at his option, (a) may proceed immediately by suit to collect the entire unpaid balance of the offer, or (b) may proceed immediately by suit to collect as liquidated damages an amount equal to the liability sought to be compromised, minus any deposits already received under the terms of the offer in compromise, with interest on the unpaid balance at the rate of 6 percent per annum from the date of default, or (c) may disregard the amount of such offer and apply all amounts previously deposited thereunder against the amount of the liability sought to be compromised and may, without further notice of any kind, assess and/or collect by levy or suit the balance of such liability, the right of appeal to the Tax Court of the United States and the restrictions against assessments and/or collection being hereby waived."


Although a later, independent decision changed the time for which interest would be payable on accumulated earnings tax deficiencies, the Attorney General had authority to settle three pending cases on the understanding that other suits not filed would be disposed of on the same basis. The compromise settlement could not be abrogated.
D.D.I. Inc., CtCls, 72-2 USTC ¶9703, 467 F2d 497. Cert. denied, 414 US 830. [72-2 USTC ¶9703]D. D. I., Inc.
U. S. Court of Claims, No. 258-71, 199 CtCls 380, 467 F2d 497, 10/13/72

[Code Sec. 7122(a)]

Compromises: Authority to enter: Attorney General: Package settlement of cases pending and cases not in suit: Estoppel from opening agreement: Interest as part of compromise.--Where a compromise agreement called for the settlement by the Attorney General of three pending suits conditioned on the agreement that accumulated earnings tax deficiencies of the plaintiff corporations would be settled at the same time on the same basis, the Attorney General was found to have had the authority to enter the compromise. The plaintiffs' requirement that settlement of their deficiencies be a condition to settlement of the three tax refund suits caused their deficiency settlements to be germane to the refund suits and within the Attorney General's authority. Also, the Treasury Department authorized the Department of Justice to make the settlement. Further, the plaintiffs are estopped from opening the compromise agreement since the Commissioner cannot open the cases of the litigating corporations and, in a package deal such as this, does not have a full right of set-off or recoupment. Finally, the compromise included the payment of interest computed according to the law as both parties thought it to be at the time of the compromise (interest commencing to run from tax return due date) and not just the lawful interest according to a later decision in Motor Fuel Carriers, Inc., (Ct. Cls.) 70-1 USTC ¶9191 (taxpayer's liability for interest on accumulated earnings tax beginning 10 days after date of Notice and Demand).
On Plaintiffs' Motion and Defendant's Cross Motion for Summary Judgment
KUNZIG, Judge, delivered the opinion of the court:
Plaintiffs are suing for a refund of interest paid as part of a settlement of accumulated earnings taxes.
After audit, the Commissioner of Internal Revenue proposed to assess accumulated earnings taxes 1 of varying amounts against the plaintiffs. As a result of negotiations between plaintiffs and the Commissioner, it was agreed that the years under audit would remain "in suspense" until the outcome of three tax refund suits involving identical facts and circumstances with three other corporations.
On April 16, 1968, counsel for the litigating corporations (who was also counsel for plaintiffs) proposed to the Assistant Attorney General a settlement of the three pending suits. The offer however was conditioned upon agreement by the Commissioner to settle the plaintiffs' cases at the same time and on the same basis (twenty-five per cent of the proposed assessment plus interest).
After consultations between the Justice Department and the Commissioner, the settlement offer was accepted on December 17, 1968 conditioned on the
. . . payment of the deficiencies of the corporations not in suit within thirty days of verification of the amounts thereof by the service under the terms of settlement, plus interest.
On February 17, 1969, the Commissioner prepared and submitted verified deficiencies to plaintiffs on Form 870 in accordance with the settlement. On the same date plaintiffs duly executed and delivered to the Commissioner these Forms 870. Each plaintiff, except Volusia Locations, Inc., received a Notice and Demand dated April 18, 1969, for payment of the agreed deficiencies along with interest computed from the due date of each plaintiff's tax return for the year in respect to which the accumulated earnings tax was assessed. Each of the plaintiffs, except Volusia, paid the full amount of tax and interest shown on its Notice and Demand on Arpil 24, 1969. 2
No closing agreement or other document purporting to bind the Government or plaintiff was executed.
On July 18, 1969, pursuant to the Settlement Agreement, the three refund suits then pending were dismissed on stipulation of the parties.
On January 23, 1970, this court issued its opinion in Motor Fuel Carriers, Inc. v. United States [70-1 USTC ¶9191], 190 Ct. Cl. 385, 420 F. 2d 702 (1970), which held that a taxpayer's liability for interest on accumulated earnings tax commences ten days after the date shown on the Notice and Demand, and not on the due date of the tax return for the taxable year in respect to which the accumulated earnings tax was assessed.
Upon learning of Motor Fuel Carriers, plaintiffs filed claims for refund of the deficiency interest paid on the Section 531 compromise. These claims for refund were disallowed by Notices of Disallowances dated August 21, 1970 and September 3, 1970. Suit was thereafter timely instituted in this court.
The matter is presently before this court on motions for summary judgment by both parties. We agree with the position of the defendant.
There are three primary issues involved in this case:
(1) Whether the Attorney General had the authority to enter into a compromise with plaintiffs;
(2) Whether, assuming there were valid informal compromises, plaintiffs are estopped from opening these agreements; and
(3) Whether the interest payments were part of the compromise.
Plaintiffs first contend that the Attorney General had no authority to enter into a compromise with them, since the statute merely authorizes him to "compromise any . . . case after reference to the Department of Justice for prosecution or defense." 3 An opinion of the Attorney General 4 states that the Attorney General has authority to compromise any matters "germane to the case which the Attorney General may find it necessary and proper to consider . . .." This authority has been exercised for almost forty years. It is a reasonable interpretation of Section 7122, which divides the compromise authority between the two departments. We see no compelling reason now to disapprove of this administrative practice.
Since the plaintiffs in this case required the Attorney General to settle their cases as a basis for settling the tax refund suits (which were undeniably within the jurisdiction of the Attorney General) it may be said that it is the plaintiffs themselves who made their cases "germane." Furthermore, plaintiffs do not contest the fact that the Treasury Department authorized the Department of Justice to make this settlement.
On the basis of the above, we find that plaintiffs' case is germane to the refund suits. We, therefore, hold that the Attorney General was acting within the purview of his authority when the settlements were made.
Plaintiffs next assert that either side was free to open the case because the settlement was made only pursuant to Forms 870 and letters between the parties. There was no formal closing agreement, which plaintiffs contend is necessary in order to make a binding settlement. The Supreme Court's decision in Botany Worsted Mills v. United States [1 USTC ¶348], 278 U. S. 282, 288 (1929) made it clear that the exact requirements of the Internal Revenue Code had to be followed in order to make a compromise binding on the parties. However, the case left open the question of estoppel to be decided on an individual case basis.
This court has held that where the statute of limitations has run on the collection of further deficiencies between the time an informal compromise agreement was executed and the time the refund claim was filed, the principle of estoppel would prevent the plaintiff from pursuing the matter further. The court said:
[i]t would obviously be inequitable to allow the plaintiff to renounce the agreement . . . [since] the Commissioner cannot be placed in the same position he was when the agreement was executed. A clear case for the application of the doctrine of equitable estoppel exists . . ..
Guggenheim v. United States [48-1 USTC ¶9232], 111 Ct. Cl. 165, 182, 77 F. Supp. 186, 196 (1948), cert. denied, 335 U. S. 908, rehearing denied, 336 U. S. 911 (1949).
The Guggenheim rationale was successfully overcome by taxpayers in Morris White Fashions, Inc. v. United States [60-1 USTC ¶9146], 176 F. Supp. 760 (S. D. N. Y. 1959) where that court stated that,
[t]he key factor ignored in the Guggenheim [case] . . . is that the defense of equitable recoupment may be pleaded by the Government as a set-off to plaintiff's claim for refund, even though the statute of limitations has run against the Government. . . . Clearly equitable estoppel would not be appropriate where the Government could set off against taxpayer's claim an amount sufficient to compensate for its inability to assess additional deficiencies because of the tolling of the statute of limitations.
Id. at 765.
However valid the reasoning of Morris White might be in a case concerning an informal compromise with a single taxpayer, it is totally invalid when the compromise is a "package deal." Defendant, in this case, cannot open the cases of the litigating corporations even for use as set-offs. In a case similar to ours, a district court, in Cooper Agency v. United States [69-2 USTC ¶9560], 301 F. Supp. 871 (D. S. C. 1969), aff'd per curiam, [70-1 USTC ¶9321] 422 F. 2d 1331 (4th Cir. 1970), cert. denied, 400 U. S. 904 (1970), distinguished Morris White by stating that,
. . . where there is not a full right of set-off or recoupment by the Government, an estoppel based upon the maturing of the statute of limitations against suit by the Commission, in reliance of the agreement, may properly arise.
Id. at 877. Accord, Cain v. United States, 255 F. 2d 193 (8th Cir. 1958); see also Girard v. Gill [56-2 USTC ¶9849], 142 F. Supp. 770 (M. D. N. C 1956), aff'd per curiam, [57-1 USTC ¶9584] 243 F. 2d 166 (4th Cir. 1957). That situation clearly exists in the instant case.
We, therefore, hold that plaintiffs are estopped from opening the compromise agreement entered into between plaintiffs and the Attorney General.
The third and last issue is whether the interest was part of the compromise. Plaintiffs contend that they intended to settle their tax liability, but that they only intended to pay "lawful" interest. However, we feel that under a common sense understanding of compromise, it is not possible to believe that plaintiffs entered into a compromise settlement of $652,247.52 and totally ignored the $204,800.00 of interest which they were to pay.
This large amount of interest was assumed by both plaintiffs and defendant to be the correct amount due. Plaintiffs admit that at the time of the compromise they believed that interest was to be computed from the filing dates of the tax returns. Not until our decision in the Motor Fuel Carriers case did plaintiffs think otherwise. 5
The law to be applied in the instant case is the law as the parties thought it to be at the time of the settlement. Even if it is subsequently determined that that law would not have required payment, the settlement will be deemed binding on the parties. Trumbull Steel Co. v. United States [1932 CCH ¶9533], 76 Ct. Cl. 391, 1 F. Supp. 762 (1932). This court has clearly stated:
In testing the validity of the settlement we must consider the circumstances and the law then applicable thereto. [emphasis added.]
Id. at 400. Accord, Bankers Reserve Co. v. United States [2 USTC ¶556], 70 Ct. Cl. 379, 42 F. 2d 313, cert. denied, 282 U. S. 871 (1930); see Hord v. United States [3 USTC ¶955], 75 Ct. Cl. 516, 59 F. 2d 125 (1932).
The Attorney General properly entered into a compromise with plaintiffs, as part of a settlement with the litigating corporations. Plaintiffs are now estopped from opening that compromise. This compromise included payment of interest computed according to the law as both parties thought it to be at the time of the compromise.
Accordingly, plaintiffs' motion for summary judgment is denied and defendant's cross-motion for summary judgment is granted. Plaintiffs' petition is hereby dismissed.
1 Int. Rev. Code of 1954, §531. All Section references hereinafter are to the Internal Revenue Code of 1954.
2 In the case of Volusia Locations, Inc., payment was effected through an offset of an over-assessment from the calendar year 1961 arising from a net operating loss carryback from the calendar year 1964.
3 §7122(a).
4 38 Op. Att'y Gen. 98,102 (1934).
5 The present case is clearly distinguishable from those cases which allow a recomputation of interest based upon Motor Fuel Carriers because they do not entail compromise settlements between the parties. See generally Bardahl Mfg. Corp. v. United States [72-1 USTC ¶9158], 452 F. 2d 604 (9th Cir. 1971); Ray E. Loper Lumber Co. v. United States [71-2 USTC ¶9514], 444 F. 2d 301 (6th Cir. 1971); Alexander Proudfoot Co. v. United States, 197 Ct. Cl. 219 [72-1 USTC ¶9256], 454 F. 2d 1379 (1972).


Taxpayer was estopped from seeking recovery of a payment made in a compromise settlement of income tax assessments against it and some fourteen other parties which was assigned to the extinguishment or abatement of various tax assessments against the taxpayer as transferee. The taxpayer was barred by equitable estoppel from violating the compromise agreement since the agreement represented a so-called package deal, involving several taxpayers in addition to the taxpayer, and the Government, in reliance on the settlement, had permitted the statute to run against the claims against the other taxpayers involved in the settlement and could not recoup, through its right of set-off, against these taxpayers. There was no merit to the taxpayer's contention that all unabated assessments against it were paid in full and not compromised or settled because the Government, at the taxpayer's request, allocated the payment to all unabated transferee claims against the taxpayer.
69-2 USTC ¶9560]Cooper Agency, Plaintiff v. United States of America, Defendant
U. S. Dist. Court, Dist. S. C., Columbia Div., Civil Action No. 68-533, 301 FSupp 871, 7/16/69

[Code Sec. 7122]

Compromises: Equitable estoppel: Refund claim after execution of compromise agreement: Government's right of set-off or recoupment.--In a follow-up action to Cooper Agency, (CA-4) 65-2 USTC ¶9603, 348 Fed. (2d) 919, the taxpayer was estopped from seeking recovery of a payment made in a compromise settlement of income tax assessments against it and some fourteen other parties which was assigned to the extinguishment or abatement of various tax assessments against the taxpayer as transferee. The taxpayer was barred by equitable estoppel from violating the compromise agreement since the agreement represented a so-called package deal, involving several taxpayers in addition to the taxpayer, and the Government, in reliance on the settlement, had permitted the statute to run against the claims against the other taxpayers involved in the settlement and could not recoup, through its right of set-off, against these taxpayers. The taxpayer's contention that all unabated assessments against it were paid in full and not compromised or settled because the Government, at the taxpayer's request, allocated the payment to all unabated transferee claims against the taxpayer was without merit. The payment was made incident to a compromise agreement against fifteen separate taxpayers, including the taxpayer, and the fact that some of the assessments against the taxpayer were marked paid in full and others abated in full did not change the fact that the payment, however applied, was a part of a single settlement figure and was made as an essential part and parcel of the compromise agreement.
Opinion and Order
RUSSELL, District Judge:
This suit seeks recovery of that portion of a payment (i.e., $1,192,405.43) made in compromise settlement of certain income tax assessments against the plaintiff and some fourteen other parties which was assigned to the extinguishment or abatement of various tax assessments against the plaintiff as transferee.
[Taxpayer's Contention]
It is the contention of the plaintiff that its liability on the assessments, refund of which is sought herein, was as transferee and that such derivative liability was imperfect both because the transfers to it were for full value and because the notices of deficiency on which the assessments were based were defective. While admitting the execution of a compromise settlement by the terms of which it bound itself not to seek a refund, it urges that such compromise agreement is not a bar, since, as to it, the agreement did not represent a compromise and, even if it did, the agreement is voidable for duress and coercion.
[Government Defense]
The defendant, on the other hand, rests its defense on (1) the compromise agreement and, particularly, the express provision thereof under which the plaintiff bound itself not to seek or sue for a refund and (2) on an estoppel against the plaintiff to repudiate such settlement. It, also, asserts that a small part of plaintiff's claim was not filed within time and is accordingly barred in any event.
[Motions for Summary Judgment]
Certain interrogatories have been exchanged between the parties. In addition, both parties have filed certain affidavits. They have both cited and rely, though for different reasons, on the compromise agreement between the parties. On the basis of the record so made, both parties have moved for summary judgment.
It is obvious that, if the provision in the undisputed compromise settlement agreement proscribing any suit by the plaintiff for a refund is valid and enforceable, the motion of the defendant for summary judgment must be granted and the motion of the plaintiff denied. It is necessary, therefore, to review at the outset the undisputed facts, about which there is no genuine issue, leading up to and involved in the compromise settlement.
[Facts]
From the undisputed facts in the record before me, it appears that on September 16, 1963, there were tax assessments "in a total amount of approximately $9,000,000" outstanding against the plaintiff and "certain members of the Cooper family" and their "corporations and associations", as well as "proposed additional deficiencies * * * in substantial amounts." 1 None of the taxpayers involved either in such outstanding or proposed assessments, within the allowable period for that action, petitioned the Tax Court for a redetermination of their respective tax liabilities. To the contrary, the plaintiff and its associated interests hastened to file "ten actions", seeking of this Court injunctive relief against the outstanding or proposed assessments, contending, among other things, that the notices of deficiencies upon which the assessments were based were defective, thereby rendering "null and void" the assessments. Relief in those proceedings was denied the plaintiff and its associated interests. In the course of denying relief, the Court explicitly sustained the sufficiency of the notices of deficiency. 2
Following the dismissal of this initial injunctive action, the plaintiff and associated parties began compromise negotiations. The plaintiff contended that, during such negotiations, an agent of the Commissioner "conceded" that the plaintiff's liability was "at most, only $198,000", even though, as plaintiff's complaint thereafter alleged, the actual assessments made against the plaintiff itself at the time aggregated $1,508,033.10. The extent of liability of the other transferees, as discussed during these negotiations, was not indicated in the record. Arguing that any assessments against it in excess of $198,000 were void as a result of such alleged "concession" and renewing its objections to the assessments made in its earlier action for defect in the notices of deficiency, the plaintiff filed a second injunctive suit against the District Director on September 27, 1965. Relief was denied plaintiff in this second action on October 28, 1965. 3
[Settlement Negotiations]
Settlement negotiations on behalf of both the plaintiff and all associated parties were thereupon renewed. In the meantime, the District Director had levied upon certain property of the plaintiff and its associated interests and was in the process of advertising same for sale under levy. On November 24, 1965, the plaintiff, acting "on behalf of all taxpayers involved", and represented by four able and experienced counsel, submitted in writing an offer of $1,250,000 in compromise settlement of "all assessments made or proposed * * * including any issues now pending before the Appellate Division, Internal Revenue Service, whether assessed or not" "for all years up to and including taxable years ending in 1961" against the plaintiff and related interests or family connections. The taxpayers to be granted relief under the proposed settlement included 10 corporate parties and 5 named individuals along with "their children, wives, and grandchildren." The offer included these two specific conditions:
"1. No claims or suits for refund will be made for the years involved in the settlement.
* * *
"4. The parties shall agree upon the allocation of the payment made hereunder, upon any effect that the payment hereunder may have on basis of property and otherwise upon the basis of property which may be involved, but it is expressly stipulated and agreed that no controversy or issue of any kind or character whether as to basis or allocation or any other dispute as to mechanics or details of carrying out the agreement shall prevent or delay payment of the $1,250,000.00 beyond sixty (60) days from the date hereof."
After submission to and approval by the Commissioner of Internal Revenue and the Attorney General of the United States, 4 the offer of the plaintiff, as incorporated in its letter, was accepted and the District Director, Internal Revenue Service, duly evidenced such acceptance on their behalf by affixing his signature to a form of acceptance included in the letter of the plaintiff, copy of which was furnished the plaintiff.
After acceptance of the offer, the plaintiff paid, within the sixty days provided, the sum agreed upon and the District Director proceeded to release the federal tax liens and property seizures, to abandon any sales under advertisement and to cancel all collection activities arising out of the assessments described in plaintiff's letter of November 24, 1965. In addition, the Internal Revenue Service abandoned its claims of liability pending in the Appellate Division and agreed to Orders in the Tax Court to the same effect, thereby fulfilling that part of its agreement.
[Allocation of Compromise Payment]
After payment was made by the taxpayers, the District Director requested the plaintiff and its associated taxpayers to submit their proposed allocation of the compromise settlement payment among the various assessments as contemplated in condition 4, quoted supra, of the settlement offer. The plaintiff, acting apparently again for all the taxpayers, proposed that $1,192,405.43 be "allocated to cover full payment of any transferee liability claims against Cooper Agency" and that the remaining $57,594.57 "be allocated to the complete settlement of all tax deficiencies through the year 1961 and all transferee liabilities of all those named in the agreement except any amounts owed by Cooper Agency as transferee." As of November 24, 1965, the net outstanding assessments against the plaintiff totaled, with interest and penalties, $1,795,466.63, and the outstanding assessments against the other parties involved in the settlement were in excess of $15,000,000. An employee of the District Director thereafter advised the plaintiff that the District Director accepted the proposal for allocation of the payment as submitted by the plaintiff.
[Claim for Refund]
Exactly two years to the day after the settlement agreement (but within two years of payment of all the settlement save $70,000 thereof), the plaintiff filed a claim for refund in the amount of $1,192,405.43, being the amount of the settlement assigned to the discharge of plaintiff's tax liabilities. The basis for such claim, as assigned therein by the plaintiff, was that the plaintiff was "not liable for any amount as a transferee of property from any taxpayer at any time." Upon the rejection of that claim this action was commenced.
[Recovery Barred]
The defendant, by its motion, contends that the admitted compromise agreement and settlement between the parties, in which the plaintiff specifically waived any right to sue for a refund, bars the plaintiff from recovery herein and requires summary judgment in its favor. I agree.
[Compromise Settlement]
It is well-settled that a compromise settlement of tax liabilities, conforming to the requirements of Section 7122, 26 U. S. C. A., is a contract, governed by the rules applicable to contracts generally; 5 and its terms are to be enforced as expressed, unless they violate some public policy. And this is true, even though it later appears no tax was due. Seattle-First Nat. Bank v. United States (D. C. Wash. 1942) [42-1 USTC ¶9447] 44 F. Supp. 603, 610, aff. [43-1 USTC ¶9454] 136 F. 2d 676, aff. [44-1 USTC ¶9259] 321 U. S. 583, 64 S. Ct. 713, 88 L. Ed. 944. The instant settlement includes as one of its express terms and conditions, the explicit agreement of the plaintiff, that "No claims or suits for refund will (would) be made" by it. Such a condition does not transgress public policy. There is nothing improper or even unusual in such a condition in a tax settlement agreement. In varying phraseology, sucy a condition is a standard provision in tax settlements; and, where the settlement is properly authorized, the provision has been enforced without question. Monge v. Smyth (C. C. A. Cal. 1956) [56-1 USTC ¶9213] 229 F. 2d 361, 368, cert. den. 351 U. S. 976, 76 S. Ct. 1055, 100 L. Ed. 1493; Hamilton v. United States (Ct. Cl. 1963) [63-2 USTC ¶9829] 324 F. 2d 960, 964-5. The plaintiff does not contend that this settlement was not properly authorized. The affidavit of the District Director shows that the settlement was authorized by the Attorney General, who, since these cases had been referred to the Department of Justice, was the proper official under Section 7122 to approve and authorize it on behalf of the Government. 6 It accordingly follows that the voluntary renunciation by the plaintiff in its settlement offer of any right either to claim or to sue for a refund forecloses it from the maintenance of this suit.
Even were there some defect in the settlement agreement--even were it not properly authorized by the Attorney General 7--the plaintiff would be estopped, by its express renunciation of a right to institute this suit for refund, from maintaining this action. It is true that there is a sharp conflict in the decisions on the necessary elements of an estoppel in tax refund cases. Under one line of authorities, permitting the statute of limitations to run against the affirmative assertion of the tax liability in reliance on the finality of an imperfect settlement is deemed such prejudice to the Government as to support an equitable estoppel against the maintenance of a suit for refund by the taxpayer. 8 The other view is that, in tax refund cases, an estoppel will not arise merely because the statute of limitations, in reliance on the agreement, has matured as a bar to any claim by the Government; there must have been an actual misrepresentation by the taxpayer, inducing the prejudicial inaction of the Government. 9 But to a substantial extent this second view is influenced, it would appear from observations made in a number of opinions sustaining such view, by a circumstance peculiar to tax refund cases. In any such action, the Government, even though the statute has run, may, by way of equitable recoupment, set-off its otherwise barred claim against that asserted by the taxpayer. Cuba Railroad Co. v. United States (C. C. A. N. Y. 1958) [58-1 USTC ¶9461] 254 F. 2d 280, 282, cert den. 358 U. S. 840, 79 S. Ct. 64, 3 L. Ed. 2d 5. In such a situation, of course, the Government cannot be prejudiced; and it is that want of prejudice which lies at the heart of this "strict" rule as to estoppel in tax refund cases. 10
[Right of Set-off v. Recoupment]
But, even in those jurisdictions in which the "strict" rule is applied, it would seem that where there is not a full right of set-off or recoupment by the Government, an estoppel based upon the maturing of the statute of limitation against suit by the Commission, in reliance of the agreement, may properly arise. Thus, where the settlement agreement (invalid for want of approval as required under Section 7122) represents a so-called "package deal", involving several taxpayers in addition to the plaintiff, and the Government, in reliance on the settlement, has permitted the statute to run against the claims against the taxpayers involved in the settlement other than the plaintiff-taxpayer and cannot recoup, through its right of set-off, against these other taxpayers in the suit filed by the plaintiff-taxpayer, 11 then the running of the statute will bar, by way of an equitable estoppel, any right of the plaintiff-taxpayer to violate his agreement. This principle is illustrated in the well-reasoned opinion in Girard v. Gill (D. C. N. C. 1956) [56-2 USTC ¶9849] 142 F. Supp. 770, 772, aff. [57-1 USTC ¶9584] 243 F. 2d 166. And this principle is applicable to this case.
[Settlement on Behalf of All Taxpayers]
The Government had tax assessments against the plaintiff and some fourteen other persons and corporations. This settlement agreement was made on behalf of all of them and settled, by compromise, the tax claims for the years stated against all of them. The Government relied on the agreement, particularly the agreement not to seek a refund, and permitted the statute to run against its claims against each of the fifteen taxpayers involved in the settlement; indeed, as to some of such taxpayers (but not including the plaintiff) it abandoned proceedings in the Appellate Division and consented to adverse decrees in the Tax Court. Only one of the taxpayers, the plaintiff, has sued for a refund. The Government has, by operation of the statute of limitations, thus lost its right to collect from the fourteen other taxpayers embraced in the settlement and has no right of recoupment against them in this action. This prejudice is sufficient to support an estoppel under either statement of the essential elements of an estoppel in a tax refund action, as set forth in the two lines of authority outlined above.
[Allocation of Settlement Payment]
Actually, as has been noted already, the plaintiff does not challenge the settlement or question its validity, including the prohibition against a suit for refund. The theory of its claim follows an entirely different line. It points to its request of the District Director that "the $1,192,405.43 paid by Cooper Agency (be applied) to the payment of any of these transferee claims you choose; however, we assume that you will abate the excessive claims above this amount, under Section 6404 of the Internal Revenue Code, so that your records will show full payment of all unabated, transferee claims against Cooper Agency, which will of course be in accordance with our agreement of November 24, 1965." (Italics added.) This request followed the language of paragraph 4 of the compromise agreement. The District Director agreed to this request. As a result of these allocations, the plaintiff argues in its brief herein that "all unabated assessments against the plaintiff, totaling $1,192,405.43, were paid in full, and not compromised or settled", and that, so far as any valid assessments against it were concerned, there was no compromise, it has paid all it validly owed. It would thus deny any application of the conditions of the settlement agreement to its suit. Accordingly, it asserts the basis for the defendant's motion for summary judgment (i.e., the settlement agreement) passes from the picture, and the plaintiff is entitled to contest in this action the validity of the tax assessments asserted originally against it.
Such argument overlooks the fact that the payment of $1,250,000 was made pursuant to and as an incident of the compromise agreement involving well over $9,000,000 in assessments against fifteen separate taxpayers, including approximately $1,900,000 in assessments against the plaintiff, and that the allocation of such payment among the assessments against these fifteen parties was, by the plaintiff's own language, "in accordance with our agreement of November 24, 1965." It is impossible, under these circumstances, to isolate that portion of the settlement figure, which, for bookkeeping purposes, was thereafter allocated to the tax liabilities of the plaintiff from the over-all compromise agreement covering all the taxpayers. The mere fact that, as a result of the manner of application and of bookkeeping entries, some of the assessments against the plaintiff were marked paid in full and others abated in full--not, on the basis of the respective merits of the assessments but simply because plaintiff requested it that way--cannot obscure the fact that the payment, however, applied, was a portion of a single settlement figure of $1,250,000 and was made as an essential part and parcel of the compromise agreement, indeed, of section 4 of that very agreement, under which the Government released tax assessments in excess of $9,000,000. The argument of the plaintiff is thus based on fiction, not reality. It cannot, by such an argument, escape from the conditions it proposed and the defendant accepted.
Plaintiff's argument really boils down to the contention that, by its inducing the District Director to apply the compromise payment in a particular way on the books of the Commissioner, it could transform what was a part payment, made by way of a compromise settlement, into a payment in full of a portion of the assessments. Such an agreement would make a nullity of the settlement and the intention of the parties and would invest a bookkeeper in the office of the District Director with the power to create a liability for refund on the part of the Government, where, by the very agreement under which the payment was made by authority of the Attorney General, there was no such right. This would be creating a right where none existed before. It would elevate form over substance.
[Compromise Under Duress]
Equally without merit is plaintiff's point that its compromise payment was made under duress. One who seeks to void a contract for duress must show that he was without other remedy. This plaintiff had two plain remedies whereby it could legally have contested the validity of the assessments against it. By acting in due time, the plaintiff could have tested the noticed deficiencies in the Tax Court, as Judge Martin remarked in 235 F. Supp. 283. The plaintiff was not ignorant of this right. Several of the parties involved in this settlement, including this plaintiff, and represented by the same counsel as appears for the plaintiff here followed this procedure in connection with earlier assessments against the plaintiff and parties associated with it. See, Biltmore Homes, Inc. v. C. I. R. (C. A. S. C. 1961) [61-1 USTC ¶9344] 288 F. 2d 336, cert. den. 368 U. S. 825, 82 S. Ct. 46, 7 L. Ed. 2d 30, and Cooper's Estate v. C. I. R. (C. A. S. C. 1961) [61-2 USTC ¶9548] 291 F. 2d 831, cert. den. 368 U. S. 919, 82 S. Ct. 241, 7 L. Ed. 2d 135. Perhaps its previous lack of success under this procedure induced the plaintiff to avoid this remedy. But, even after it had foregone this remedy, the plaintiff could have paid the assessments against it. It is true that this would have required a payment greater than that paid under the compromise agreement (assuming, of course, that the plaintiff's share of the compromise payment was $1,192,405.43). It may have been a hardship, but, "Hardship in raising money with which to pay taxes is now common to all taxpayers", (Reams v. Vrooman-Fehn Printing Co. (C. A. Ohio 1944) 140 F. 2d 237, 241) and does not represent duress. 12 The plaintiff chose to follow neither of these remedies; it compromised the assessments. Under such circumstances, the plaintiff may not avoid its compromise settlement. Little v. Bowers (1889) 134 U. S. 547, 556, 10 S. Ct. 620, 33 L. Ed. 1016; cf., however, Girard v. Gill (C. C. A. N. C. 1958 [59-1 USTC ¶9144] 261 F. 2d 695, 699. Moreover, even if this right existed on the part of the plaintiff, it is ordinarily the rule that the plaintiff is required promptly to disaffirm the agreement and, as a condition of relief, restore the opposite party to its former position. Without question, the plaintiff in this case could not restore the defendant to the position it enjoyed against all the fifteen taxpayers involved in the settlement. The defendant has lost its claims against these other taxpayers and the plaintiff cannot revive such claims.
[Unfair Dealings]
While unnecessary to the decision I have reached, one additional argument of the plaintiff might be noted. Even if sound, it probably would not invalidate the settlement. It would indicate, however, that the Government had been unfair in its dealings with the plaintiff. Thus, the plaintiff argues that, as evidenced by an admission extracted from the defendant by one of plaintiff's interrogatories, the total outstanding assessments against the plaintiff on September 16, 1963, were only $463,118.55. Despite this, the defendant, through threat of levies, forced the plaintiff to pay $1,192,405.43 in settlement of such assessments. This is not the full story, though; and the facts will not support the plaintiff's contentions in this regard. On September 16, 1963, the defendant issued against the plaintiff additional notices of deficiencies in the aggregate of $1,412,522.58, plus interest. Before the plaintiff filed its injunction suits, these notices had matured into assessments. As a consequence, the assessments outstanding against the plaintiff at the filing of its injunctive suits were $1,508,033.10, by the allegations of plaintiff's own complaint in the second injunction suit. What was involved in the subsequent settlement was thus not assessments in the amount of $463,118.55 but assessments aggregating $1,795,466.63, 13 against the plaintiff. Plaintiff would apparently disregard these additional assessments because, in its view, the notices of deficiencies were defective. However, this objection of the plaintiff had been raised and decided adversely to it in both of the injunction suits. Moreover, the plaintiff would completely disregard the fact that the compromise settlement covered not only its one tax liability but also those of fourteen other parties and that the aggregate tax liabilities involved totaled well over $15,000,000.00.
The motion of the defendant for summary judgment herein is accordingly granted.
AND IT IS SO ORDERED.
1 235 F. Supp. (D. C. S. C. 1964) 276, 278.
2 Cooper Agency, Inc. v. McLeod (D. C. S. C. 1964) [64-2 USTC ¶9776] 235 F. Supp. 276, 283, [65-2 USTC ¶9603] affirmed, 348 F. 2d 919.
3 Cooper Agency v. McLeod (D. C. S. C. 1965) [65-2 USTC ¶9745] 245 F. Supp. 57.
4 Apparently, since time for appealing had not expired in the injunction suit, the Department of Justice retained control over the proceedings and the approval of the Attorney General was required for any compromise settlement.
5 United States v. Lane (C. C. A. Fla. 1962) [62-1 USTC ¶9467] 303 F. 2d 1, 4; Lowe v. United States (D. C. Mont. 1963) [63-2 USTC ¶9778] 223 F. Supp. 948, 949; United States v. McCue (D. C. Conn. 1959) [60-1 USTC ¶9147] 178 F. Supp. 426, 432.
6 Compliance is presumed in the absence of a contrary showing. Anderson v. P. W. Madsen Inv. Co. (C. C. A. Utah 1934) [4 USTC ¶1334] 72 F. 2d 768, 771. Or, as phrased in Stearns Co. v. United States (1934) [4 USTC ¶1210] 291 U. S. 54, 64, 54 S. Ct. 325, 78 L. Ed. 647, there is always a "presumption of official regularity".
See, also, Hamilton v. United States (Ct. Cl. 1963) [63-2 USTC ¶9829] 324 F. 2d 960, 964:
"Plaintiffs (taxpayers) have not shown us that the requirements of section 7122 have not been met. Before their claim for refund can be considered, in face of the unequivocal terms of the compromise agreement and the express prohibition against the filing or prosecution of a claim for refund, they must show that this section has not been complied with. This they have not done. On the contrary, on the face of the documents that have been exhibited, it would seem that the section has been complied with."
7 See 11 A. L. R. 2d 913:
"There are several thousand cases each year in which there are proposed deficiencies and which are suitable material for a formal agreement such as will preclude the reopening of the question of tax liability under §3760 of the Internal Revenue Code, and there are numerous cases in which a final compromise agreement under §3761 would be the ideal way of closing the matter. But the administrative burden placed on the Secretary and Undersecretary of the Treasury by these statutes makes it impossible for them to handle more than a small proportion of the cases and the remainder must be closed by agents not authorized by law to enter into binding agreements. The Commissioner has attempted to devise an informal type of agreement which will be binding on both parties and end controversies, but without success. See Dean Griswold's article in 57 Harv. L. Rev. 912."
8 Daugette v. Patterson (C. A. Ala. 1957) [58-1 USTC ¶9156] 250 F. 2d 753, 757, cert. den. 356 U. S. 902, 78 S. Ct. 561, 2 L. Ed. 580; Cain v. United States (C. A. Ark. 1958) [58-1 USTC ¶9476] 255 F. 2d 193, 198-9; Guggenheim v. United States (Ct. Cl. 1948) [48-1 USTC ¶9232] 77 F. Supp. 186, cert. den. 335 U. S. 908, 69 S. Ct. 411, 93 L. Ed. 441, reh. den. 336 U. S. 911, 69 S. Ct. 513, 93 L. Ed. 1075; Girard v. Gill (D. C. N. C. 1956) [56-2 USTC ¶9849] 142 F. Supp. 770, 772, aff. [57-1 USTC ¶9584] 243 F. 2d 166; Schneider v. Kelm (D. C. Minn. 1956) [56-1 USTC ¶9280] 137 F. Supp. 871, 875-6, aff. [56-2 USTC ¶9995] 237 F. 2d 721; Lowe v. United States (D. C. Mont. 1963) [63-2 USTC ¶9778] 223 F. Supp. 948, 949.
9 Joyce v. Gentsch (C. A. Ohio, 1944) [44-1 USTC ¶9277] 141 F. 2d 891, 896-7; Bank of New York v. United States (C. A. N. J. 1948) [48-2 USTC ¶10,636] 170 F. 2d 20, 24; Bennett v. United States (C. A. Ill. 1956) [56-1 USTC ¶11,600] 231 F. 2d 465, 467; Cooney v. United States (D. C. N. J. 1963) [63-2 USTC ¶12,149] 218 F. Supp. 896, 898; Hamil v. Fahs (D. C. Fla. 1955) [55-1 USTC ¶11,546] 129 F. Supp. 837, 841-2; Steiden Stores v. Glenn (D. C. Ky. 1950) [50-2 USTC ¶9423] 94 F. Supp. 712, 721.
In a note, Morris White Fashions, Inc. v. United States (D. C. N. Y. 1959) 176 F. Supp. 760, 766, lists Girard v. Gill (C. C. A. N. C. 1958) [59-1 USTC ¶9144] 261 F. 2d 695, 698-700, as indicative of a leaning in this direction by this Circuit.
See, also, Finality of Administrative Settlement in Tax Cases, 57 Harv. L. Rev. 912 (1944).
10 In Morris White Fashions, Inc. v. United States (D. C. N. Y. 1959) [60-1 USTC ¶9146] 176 F. Supp. 760, 765, the Court, after an exhaustive review of the conflicting authorities, thus stated the reasoning behind the strict rule:
"The key factor ignored in the Guggenheim and Cain v. United States decisions, supra, is that the defense of equitable recoupment may be pleaded by the Government as a set-off to plaintiff's claim for refund, even though the statute of limitations has run against the Government. Such a defense is never barred by the statute of limitations, so long as the main action is timely."
See, also, Joyce v. Gentsch (C. C. A. Ohio 1944) [44-1 USTC ¶9277] 141 F. 2d 891, 895-6.
11 That the right of recoupment is strictly limited to the actual parties to the action, see Smith v. United States (C. C. A. Md. 1966) [67-1 USTC ¶9161] 373 F. 2d 419, 421.
12 Walker v. Alamo Foods Co. (C. A. Texas, 1927) [1 USTC ¶207] 16 F. 2d 694, cert. den. 274 U. S. 741, 47 S. Ct. 587, 71 L. Ed. 1320.
13 The difference between this item (i.e., $1,799,466.63) and that stated in the second injunction suit (i.e., $1,508,033.10) was apparently represented by additional interest and penalties accruing subsequent to the date referred to in the injunction suit.
14 The District Court held that Treas. Reg. §301.7701-2(h) is invalid in its entirety. We hold it to be invalid only to the extent stated in this opinion.
The taxpayer failed to fulfill his obligations under an agreement collateral to an executed offer in compromise --where the agreement called for additional consideration to be based on graduated percentages of annual income --by transferring income-producing property held at the time of the agreement without consideration. Contract rules under Tennessee law permit the implication of terms in a contract. Were the promise not to transfer income-producing property held at the time of the agreement not to be implied, the taxpayer could have effectively destroyed the value of the collateral agreement. However, the implied promise did not apply to income-producing property acquired after execution of the collateral agreement. 69-1 USTC ¶9407]R. C. Hoskins v. United States of America U. S. District Court, East. Dist. Tenn., No. Div., Civil Action No. 6464, 299 FSupp 1229, 4/16/69

[Code Sec. 7122]

Compromises: Collateral agreements: Breach: Contracts: State law: Implied promises.--The taxpayer failed to fulfill his obligations under an agreement collateral to an executed offer in compromise--where the agreement called for additional consideration to be based on graduated percentages of annual income--by transferring income-producing property held at the time of the agreement without consideration. Contract rules under Tennessee law permit the implication of terms in a contract. Were the promise not to transfer income-producing property held at the time of the agreement not to be implied, the taxpayer could have effectively destroyed the value of the collateral agreement. However, the implied promise did not apply to income-producing property acquired after execution of the collateral agreement.
Memorandum
TAYLOR, District Judge:
Plaintiff seeks refund of sums paid the Internal Revenue Service under assessments which the Government claims were due under an agreement to compromise a tax liability. Jurisdiction is derived from Title 28 U. S. C. 1346(a)(1).
In 1945 and 1946 plaintiff, R. C. Hoskins, failed to pay the proper amount of taxes. In 1955 he entered an agreement with the Internal Revenue Service whereby he admitted he was liable for taxes and penalties in excess of $200,000.00. The agreement provided that his businesses would be operated under the supervision of a Government agent. The contract listed his business assets, then provided at page two that before plaintiff could sell and transfer any business assets he would have to get permission of the Nashville Director of Internal Revenue and pay at least part of the proceeds of sale toward satisfaction of his tax debt.
During the period of Government supervision the businesses lost money. As a consequence on November 2, 1966 Hoskins and the Government agreed to compromise plaintiff's remaining tax liability of some $183,000.00. The first section of the two part agreement was entitled "offer in compromise" and provided that plaintiff should pay $75,000.00 in six annual installments. Attached to the offer in compromise was a statement of plaintiff's net worth and a list of all his business and personal property. This statement showed that the fair market value of his equity in all property held at that time was $81,973.42 (see affidavit and brief filed by plaintiff's counsel on February 24, 1969).
The second section of the contract, called the collateral agreement, provided in part as follows:
"The purpose of this collateral agreement . . . is to provide additional consideration for acceptance of the above-described offer in compromise. It is understood and agreed:
"That in addition to the payment of the aforesaid sum of $75,000 the taxpayer will pay out of annual income for the years 12-31-57 to 12-31-64, inclusive:
"(a) Nothing with respect to the first $5,000 of annual income.
"(b) 20% of annual income in excess of $5,000 and not in excess of $7,000.
"(c) 30% of annual income in excess of $7,000 and not in excess of $10,000.
"(d) 50% of annual income in excess of $10,000.
"That the term 'annual income' as used herein means adjusted gross income as defined in section 62 of the Internal Revenue Code of 1954, (except that in computing such 'annual income,' deductions for depreciation, depletion, and losses from sales or exchange of property shall not be allowed) plus all nontaxable earnings, profits, bequests, devises, or inheritances) minus (a) the Federal income tax due for the year in question and paid, and (b) the payments made on the offer in compromise during the year in question."
There is no expressed limitation on plaintiff's rights to dispose of his property in the contract. Although plaintiff was married to Katherine Hoskins before any negotiations for compromise began, she did not sign the contract because the marriage date in 1949 was after Mr. Hoskins had incurred the tax liability.
In full performance of his obligation under the offer in compromise Hoskins paid a total of $87,000.00 including interest over a period of seven years. The question in this controversy is whether he fulfilled his obligations under the collateral agreement.
In conjunction with his wife and two other persons, Hoskins in 1958 incorporated and capitalized the Acme Drug Company. Plaintiff contributed $2,600.00 for 26% of the shares and Mrs. Hoskins purchased 24%. Plaintiff testified that he purchased his share of the enterprise from that portion of his income which was left to his use under the collateral agreement. Three years later, on December 31, 1961, Hoskins made a gift to his wife of the 26% interest which he held in Acme and paid the gift tax thereon.
In 1962 Hoskins incorporated Hoskins Drug Store No. 1, in which he owned a 75% interest, and Norris Drug Store, in which he owned 100% of the shares. In December of that year he transferred without any consideration all his interests in the two businesses to Mrs. Hoskins and paid the appropriate gift tax.
Hoskins testified that he turned the stores over to his wife as he did not have time to oversee their operations, because of his state of health, and upon the advice of his accountant as a recommended estate planning device. Katherine Hoskins exercised control over the stores after the transfer and exerted substantial efforts in their operation. During the time remaining under the collateral agreement all three stores made substantial earnings.
After the transfers plaintiff reported the income from the three businesses as income of Katherine Hoskins but did not include for the years 1962-64 any earnings from them in his statements of gross income on which were figured the amounts due under the collateral agreement. The Government contended that the part of the earnings from those stores which is proportional to plaintiff's former ownership interest should be charged to his gross income for purposes of the contract. It accordingly assessed against him the following amounts:
1962 .... $ 4,886.34
1963 .... 7,781.89
1964 .... 16,976.23

Plaintiff paid those sums and proceeded under the refund procedure to contest his liability.
All of the facts in this case have been stipulated or testified to without contradiction. After introduction of all the testimony and after both parties had moved for a directed verdict, it appeared that there was no question of fact for the jury. The liabilities of the respective parties depend upon the construction of the contract in light of all the circumstances, which is a question for the Court rather than for a jury. Petty v. Sloan, 197 Tenn. 630; Hibernia Bank & Trust Co. v. Boyd, 164 Tenn. 376.
The Government insists that the collateral agreement impliedly prohibited Hoskins from transferring his income-producing property without consideration because otherwise the purpose of the agreement could readily be thwarted.
Plaintiff argues that the contract is a public contract in which nothing may pass by implication and in support of his argument relies on Volunteer Electric Cooperative v. TVA, 139 F. Supp. 22 (E. D. Tenn., S. D., 1954). Further, plaintiff insists that Hoskins' uncontradicted testimony establishes that he did not intend such an implication when he signed the agreement twelve years ago, and that an implied promise may only be found when consistent with the intent of the parties. See, E. O. Bailey & Co. v. Union Planters Title Guaranty Co., 33 Tenn. App. 439. Plaintiff relies on the rule that the inclusion of some matters of a class in a contract means the exclusion of all other matters in the same class. Aetna Life Ins. Co. v. Bidwell, 192 Tenn. 627.
The parties agree that the collateral agreement is to be construed as an ordinary Tennessee contract without reference to the Internal Revenue Code. See United States v. Lane [62-1 USTC ¶9467], 303 F. 2d 1 (C. A. 5, 1962). Because this case presents a new question, an extensive discussion of the authorities is necessary.
A contract in compromise of a tax liability is not such a contract for public services as was involved in Volunteer Electric Cooperative v. TVA, supra, which held that nothing can pass by implication. Rather, it has been held that a compromise agreement with relation to interest due on a disputed tax liability was subject to the implied condition that if the ultimate liability for the principal was not subsequently found, the Government must return the interest agreed upon in the compromise. Phelps v. United States [39-2 USTC 9583], 105 F. 2d 904 (C. A. 2, 1939); Big Diamond Mills Co. v. United States [2 USTC ¶791], 51 F. 2d 721 (C. A. 8, 1931).
The contract rules followed in Tennessee permit the implication of terms in a contract. Dunlap Lumber Co. v. Nashville, C. & St. L. Ry. Co., 129 Tenn. 163. The rule was stated in Weatherly v. American Agricultural Chemical Co., 16 Tenn. App. 613, that a covenant may be implied when necessary to give effect to the purpose of the contract as a whole. Our Sixth Circuit has applied this rule in a case arising in Tennessee that, "when the whole contract is 'instinct with an obligation', an agreement by a party to perform may be implied." Big Cola Corporation v. World Bottling Co., 134 F. 2d 718, 721.
The most recent word of the Sixth Circuit on the subject is contained in the case of United States ex rel. TVA v. Hughes, April 9, 1969, as follows:
". . . Obviously, the provision requiring removal of existing structures by necessary implication prohibits the erection later of identical or similar structures." Slip Opinion, p. 4.
No case has been cited or discovered by the Court which determines whether an obligation not to give away income-producing property must be implied when, as part of consideration for the compromise of a tax liability, the taxpayer agrees to pay portions of his income for subsequent years. However, closely analogous are those cases in which is implied a covenant to produce income when the consideration for a grant of property lies wholly in the payment of sums of money based on the earnings of the property transferred. Mechanical Ice Tray Corp. v. General Motors Corp., 144 F. 2d 720 (C. A. 2, 1944), and cases cited therein; Parev Products Co. v. I. Rokeach & Sons, 124 F. 2d 147 (C. A. 2, 1941); Crossland v. Kentucky Blue Grass Seed Growers' Coop. Ass'n, 103 F. 2d 665 (C. A. 6, 1939) (contract for employment of a sales agent); Kentucky Rock Asphalt Co. v. Milliner, 234 Ky. 217, 27 S. W. 2d 937 (lease of mineral rights).
Considering all the circumstances and the language of the collateral agreement and offer in compromise, the Court must construe the contract to require plaintiff not to dispose of his business property without consideration. Otherwise, plaintiff could destroy the value of the agreement by giving away all his sources of income. To the offer in compromise was attached a list of plaintiff's business and personal assets which included both the Hoskins Drug Store No. 1 and the Norris store. That it was intended and expected that the property left in Hoskins' hands would produce either income or liquidation proceeds for the Government is the only logical construction of the collateral agreement under the circumstances and when read with the offer in compromise. The Government could have taken all plaintiff's property in satisfaction of the tax liability, but the Government chose to allow plaintiff to retain it if he would pay $75,000.00 and portions of his income during the next seven years. The reason for accepting the offer (including the collateral agreement) was stated in the offer in compromise to be that selling the assets would not yield the amount tendered in settlement.
Hoskins Drug Store No. 1 and Norris Drug were owned by plaintiff at the time he entered the compromise and were listed in the schedule attached to the offer. Those properties were clearly contemplated to be the source of further consideration for the Government. However, the Acme store stands on a different footing. The Internal Revenue office left portions of plaintiff's income for his own use. At the time he paid his part of Acme's original capital in 1958, he was paying all amounts due under the agreements. Hoskins testified that he purchased the $2,600.00 interest from those sums left to him. Under the contract plaintiff could dispose in any way of that income not due the Government and that right carries with it the right to give away the property acquired from savings that were exempt under the compromise agreement.
In summary, the Government in computing Hoskins income under the collateral agreement may treat as belonging to plaintiff the income proportionate to his former interest in Hoskins Drug Store No. 1 and Norris Drug, but may not include any earnings of Acme after plaintiff gave the stock to Katherine Hoskins. The parties will compute the amount of the refund to plaintiff in conformity with the principles declared herein.
Brief mention should be made of plaintiff's contention that Hoskins Drug Store No. 1 and Norris Drug Store should be charged with reasonable salaries for the work done by Mrs. Hoskins during the years involved in the tax dispute. This is a matter that addresses itself to the Commissioner of Internal Revenue rather than the Court. For purposes of this suit, the Court is bound by what was done rather than what could have been done.



An IRS Appeals officer did not abuse her discretion by sustaining the default of a married taxpayer's offer in compromise (OIC) and determining to proceed with collection. The taxpayer failed to comply with the terms of the OIC, which required him to timely pay all required taxes for five years following its acceptance. Further, the taxpayer failed to timely respond to an IRS letter notifying him that failure to pay the balances due within 30 days would result in a default of the OIC. Finally, the taxpayer did not propose any collection alternatives during his Collection Due Process (CDP) hearing. Michael Poindexter v. Commissioner.
Dkt. No. 14979-05L , TC Memo. 2008-99, 95 TCM 1378, April 15, 2008.

An IRS Appeals officer did not abuse her discretion by sustaining the default of a married taxpayer's offer in compromise (OIC) and determining to proceed with collection. The terms of the OIC required the taxpayer to timely pay all required taxes for five years following its acceptance. However, the taxpayer incurred delinquent tax liabilities for two years during the compliance period and failed to timely respond to an IRS letter notifying him that failure to pay the balances due within 30 days would result in a default of the OIC. Further, the taxpayer did not propose any collection alternatives during his Collection Due Process (CDP) hearing. Finally, the Appeals officer was not required to adhere to certain instructions contained in the Internal Revenue Manual because the instructions were promulgated several years after the OIC default.


MEMORANDUM FINDINGS OF FACT AND OPINION

FOLEY, Judge: The issue for decision is whether respondent abused his discretion in sustaining the default of petitioner's offer-in-compromise and determining to proceed with collection.


FINDINGS OF FACT

On November 21, 1997, respondent accepted petitioner and his wife Nancy Poindexter's joint offer-in-compromise (OIC) relating to tax years 1990, 1991, 1992, 1993, 1994, and 1995 (original tax liability). The OIC required petitioner to file timely all Federal income tax returns and pay timely all Federal income taxes due for the 5 years following acceptance of the OIC or until the OIC was paid in full, whichever was longer. Petitioner failed to timely pay his 2000 and 2001 Federal income taxes. On October 22, 2003, respondent sent petitioner a letter advising him of the outstanding balances relating to 2000 and 2001 and notifying him that failure to pay the balances within 30 days would result in a default on the OIC and reinstatement of the original tax liability. Petitioner, in a letter dated November 22, 2003, requested an additional 6 months to pay the outstanding balances relating to 2000 and 2001.

On December 19, 2003, respondent entered petitioner's default on the OIC in the system. On September 9, 2004, respondent mailed petitioner a Notice of Intent to Levy and Your Right to a Hearing relating to 1993, 1994, and 1995. On September 23, 2004, petitioner timely filed a Form 12153, Request for a Collection Due Process Hearing. On December 21, 2004, more than a year after the OIC default, petitioner paid the outstanding balances relating to 2000 and 2001.

On or about April 26, 2005, a collection due process hearing (CDP hearing) was held, during which petitioner contended that collection was improper because the OIC should not have been defaulted. On July 14, 2005, respondent issued petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 finding that default of the OIC was procedurally and legally correct, and that it was proper to proceed with the levy.

Petitioner filed his petition with the Court on August 12, 2005, while residing in Colorado.


OPINION

Pursuant to Robinette v. Commissioner [Dec. 55,698] 123 T.C. 85, 93-94 (2004), revd. on other grounds [2006-1 USTC ¶50,213] 439 F.3d 455 (8th Cir. 2006), the underlying tax liabilities are not at issue and we review respondent's determination for an abuse of discretion. To prevail on an abuse of discretion claim, the taxpayer must show that the Commissioner's actions were arbitrary, capricious, or without sound basis in law or fact. See Giamelli v. Commissioner [Dec. 57,155] 129 T.C. 107, 111 (2007); Woodral v. Commissioner [Dec. 53,206] 112 T.C. 19, 23 (1999). Section 6330(c)(3) 1 provides that in making a determination, the Appeals officer must verify that the requirements of applicable law and administrative procedure have been met, consider the issues raised by the taxpayer, and consider whether the proposed collection action balances the need for the efficient collection of taxes with the taxpayer's legitimate concern that any collection be no more intrusive than necessary. Petitioner contends that the Appeals officer abused her discretion by sustaining the default of the OIC. We disagree.

The OIC, which was accepted on November 21, 1997, required petitioner to pay timely all Federal income taxes due for the 5 years following acceptance. Petitioner failed to pay his 2000 and 2001 taxes in a timely manner and did not respond in a timely manner to respondent's letter advising him of the impending OIC default. In addition, petitioner did not propose collection alternatives. Under these circumstances, the Appeals officer's actions were appropriate. We also note that petitioner asserts that the Appeals officer abused her discretion by failing to adhere to certain instructions that petitioner contends were contained in the Internal Revenue Manual. The instructions upon which petitioner relies, however, were promulgated several years after the OIC default. Thus, we reject petitioner's contentions and sustain respondent's determination.

Contentions we have not addressed are irrelevant, moot, or meritless.

Decision will be entered for respondent.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended.




The IRS Appeals office did not abuse its discretion by sustaining a levy against a married couple whose repeated violations of the terms of their offer-in-compromise (OIC) resulted in the offer's termination. The couple's failure to keep their tax obligations current during the compliance period was a significant and material breach of the OIC. Moreover, the IRS's failure to send copies of correspondence to the couple's representative did not provide a basis to reject the collection action because the notices were sent to the couple's last know address.
John E. and Sandra L. West v. Commissioner.

Dkt. No. 5376-06L , TC Memo. 2008-30, 95 TCM 1116, February 13, 2008.



[Code Secs. 6330 and 7122]

The IRS Appeals office did not abuse its discretion by sustaining a levy against a married couple whose repeated violations of the terms of their offer-in-compromise (OIC) resulted in the offer's termination. The couple's argument that their failure to timely file tax returns and to pay taxes during the OIC's compliance period was not a material breach of the OIC and, therefore, did not justify the termination of the OIC was rejected. The couple's failure to keep their tax obligations current during the compliance period was a significant and material breach of the OIC. Moreover, the IRS sent the couple a number of notices alerting them to the possibility of a default and giving them an opportunity to correct the problem. However, the couple had moved to a new address and failed to notify the IRS. Further, the IRS's failure to send copies of correspondence to the couple's representative did not provide a basis to reject the collection action. Notices are generally valid as long as they are properly mailed to the taxpayer and the notices were sent to the couple's last know address.
MEMORANDUM OPINION

SWIFT, Judge: Under section 6330, petitioners challenge respondent's notice of determination sustaining respondent's levy notice.

Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.

The primary issue for decision is whether respondent's Appeals Office abused its discretion in sustaining a notice of intent to levy relating to petitioners' outstanding 1993 Federal income taxes.


Background

The facts of this case have been submitted fully stipulated under Rule 122 and are so found.

At the time the petition was filed, petitioners resided in Orange County, California.

Petitioners have a history of failing to timely pay estimated Federal income taxes due and failing to timely file their Federal income tax returns.

On April 24, 1998, petitioners and respondent agreed on an offer-in-compromise (OIC) on the grounds of doubt as to collectibility relating to approximately $148,350 in petitioners' unpaid 1993 Federal income taxes.1 Among other things, respondent's acceptance of petitioners' OIC was contingent on petitioners': (1) Paying, within 60 days of respondent's acceptance of the OIC, to respondent $10,000 (OIC amount); (2) timely filing Federal income tax returns that became due during the 5-year period subsequent to their entering into the OIC or until the OIC amount was paid in full, whichever was longer (5-year compliance period); and (3) timely paying the taxes reported due on their Federal income tax returns filed during the 5-year compliance period. Specifically, paragraph (d) on petitioners' Form 656, Offer in Compromise, stated: "I/We will comply with all provisions of the Internal Revenue Code relating to filing my/our returns and paying my/our required taxes for 5 years from the date the IRS accepts the offer".

Under the express terms of the OIC, if petitioners failed to meet any of the express conditions of the OIC, respondent had the right to revoke the OIC and to attempt to collect from petitioners the full amount of petitioners' unpaid 1993 Federal income taxes.

On May 7, 1998, petitioners paid to respondent the $10,000 OIC amount. Petitioners' 5-year compliance period thus began when respondent accepted the OIC on April 24, 1998.

During the 5-year compliance period, petitioners, among other things, failed to pay estimated taxes, failed to timely file their tax returns, and/or failed to timely pay taxes reported due on their filed Federal income tax returns, as follows:



Year Petitioners Failed To

______________ ______________________________________________________

1998 Timely file their return

Timely pay the tax liability stated on the return

1999 Timely pay estimated taxes

Timely pay the tax liability stated on the return

2000 Timely pay the tax liability stated on the return

2001 Timely file their return

Timely pay the tax liability stated on the return

2002 Timely pay estimated taxes

Timely pay the tax liability stated on the return


In April 2000, petitioners moved to a new address, but petitioners did not notify respondent of their change of address. Before this move, petitioners filed with respondent IRS Form 2848, Power of Attorney and Declaration of Representative, in which petitioners directed respondent to send to petitioners' representative copies of any correspondence sent to petitioners.

Petitioners' 2000, 2001, and 2002 Federal income tax returns filed with respondent continued to show petitioners' old address and did not show the new address to which petitioners moved in April 2000. Petitioners did not otherwise notify respondent of their new address until sometime after March 2004.

From November 2002 through January 2004, respondent sent to petitioners (at the old address shown on petitioners' 2000, 2001, and 2002 Federal income tax returns; namely, 23382 Via Chirpia, Mission Viejo, CA) at least seven notices relating to various late filing and late payment additions to tax and penalties that respondent had assessed against petitioners relating to petitioners' 2000, 2001, and 2002 Federal income tax returns and warning petitioners of the potential for default on the OIC that had been entered into if petitioners did not pay the various additions to tax and penalties that had been assessed against them.

Specifically, in November 2003, respondent mailed to petitioners at their Via Chirpia, Mission Viejo, address a notice alerting petitioners that the OIC was subject to likely termination if petitioners' outstanding additions to tax and penalties for 2001 and 2002 were not paid.

In January 2004, respondent mailed to petitioners (at the Via Chirpia, Mission Viejo, address) a notice of default on the OIC, informing petitioners that the OIC was terminated.

On June 18, 2005, respondent mailed to petitioners a notice of intent to levy and a notice of petitioners' right to a hearing relating to the approximate $148,350 balance of petitioners' unpaid 1993 Federal income taxes.

On July 21, 2005, petitioners filed a Form 12153, Request for a Collection Due Process Hearing, with regard to respondent's notice of intent to levy, in which petitioners requested that respondent reinstate the OIC.

On January 6, 2006, an Appeals Office hearing was held by telephone conference among respondent's Appeals Office, petitioners, and petitioners' attorney.

On February 8, 2006, respondent's Appeals Office issued to petitioners a notice of determination sustaining respondent's levy notice.

In the notice of determination, respondent's Appeals Office indicated that because petitioners had defaulted on the OIC and because petitioners had not provided any financial or other information applicable to other collection alternatives, respondent's levy notice was sustained.


Discussion

Because the underlying tax liability is not in dispute, we review the actions of respondent's Appeals Office for abuse of discretion. See Goza v. Commissioner [Dec. 53,803] 114 T.C. 176, 182 (2000). Abuse of discretion occurs where the actions of the Commissioner's Appeals Office are arbitrary or capricious, lack sound basis in law, or are not justifiable in light of the facts and circumstances. Woodral v. Commissioner [Dec. 53,206] 112 T.C. 19, 23 (1999).

Pursuant to section 6330(c)(3), respondent's Appeals Office must verify that the requirements of applicable law and administrative procedure have been met, consider issues raised by petitioners, and consider whether the proposed collection action balances the need for the efficient collection of taxes with petitioners' legitimate concern that respondent's collection be no more intrusive than necessary.

In reviewing whether respondent's Appeals Office abused its discretion in sustaining respondent's notice of intent to levy, our analysis is governed by "general principles of contract law." See Dutton v. Commissioner [Dec. 55,542] 122 T.C. 133, 138 (2004).

Under the "material breach of contract" analysis applied in Robinette v. Commissioner [Dec. 55,698] 123 T.C. 85, 108 (2004), revd. [2006-1 USTC ¶50,213] 439 F.3d 455 (8th Cir. 2006), "If * * * [petitioners'] breach is material and sufficiently serious, * * * [respondent's] obligation to perform may be discharged. * * * Not so, however, if * * * [petitioners'] breach is comparatively minor."

On appeal, the Court of Appeals for the Eighth Circuit noted that the failure to comply with an express condition of an OIC is itself grounds for the Commissioner to revoke the OIC, regardless of materiality. Robinette v. Commissioner, 439 F.3d at 462.

Generally, for purposes of section 6330, a notice mailed to the taxpayer's "last known address" is proper and sufficient. Tadros v. Commissioner [85-2 USTC ¶9448] 763 F.2d 89, 91 (2d Cir. 1985); Buffano v. Commissioner [Dec. 56,833(M)] T.C. Memo. 2007-32. In determining petitioners' last known address, unless otherwise notified respondent may rely upon petitioners' most recently filed return. See Abeles v. Commissioner [Dec. 45,203] 91 T.C. 1019, 1025 (1988); Brown v. Commissioner [Dec. 38,765] 78 T.C. 215, 219 (1982).

Petitioners argue that petitioners' failure timely to file tax returns, to pay estimated taxes, and to pay the various additions to tax and penalties assessed against them during the 5-year compliance period did not constitute a material breach of the OIC and did not justify respondent's revocation of the OIC and therefore that respondent's Appeals Office abused its discretion in sustaining respondent's notice of intent to levy.

We disagree. The numerous instances of petitioners' failure to keep their tax obligations current during the 5-year compliance period constitute, under any standard, a significant and material breach of the requirements of the OIC.

We need not address different standards that, in other cases, might be considered and that might be applicable. See Ng v. Commissioner [Dec. 56,809(M)] T.C. Memo. 2007-8.

Respondent mailed to petitioners a number of notices alerting petitioners to the potential for default on the OIC and giving petitioners opportunity to bring current their tax and other payments due.

Although petitioners moved to a new address, petitioners failed to apprise respondent of their new address, and respondent cannot now be faulted for mailing the notices to the address shown on petitioners' tax returns. Petitioners, not respondent, must bear the consequences of petitioners' failure to properly file their tax returns with, or otherwise apprise respondent of, petitioners' new address.

Petitioners argue that respondent should have, but did not, mail to petitioners' representative a copy of the various dunning letters. Failure of respondent to mail to petitioners' representative a copy of a notice that was mailed to petitioners provides no basis to reject respondent's collection action in this case. See Amsler v. Commissioner [Dec. 48,930(M)] T.C. Memo. 1993-114 (notice generally will be valid even when a copy is not mailed to a taxpayer's representative so long as properly mailed to the taxpayer); Foster v. Commissioner [Dec. 38,841(M)] T.C. Memo. 1982-115 (citing Houghton v. Commissioner [Dec. 28,566] 48 T.C. 656, 661 (1967)).

Because of petitioners' repeated violations of the conditions of the OIC, respondent's Appeals Office did not abuse its discretion in sustaining the notice of intent to levy. Other arguments petitioners make herein have been considered and rejected.

To reflect the foregoing,

Decision will be entered for respondent.

1 Because of a credit offset, petitioners' outstanding Federal income tax liability for 1995 (including interest, penalties, additions to tax, and interest) has been paid in full, and any issue herein relating to 1995 is now moot.

The IRS did not abuse its discretion in determining that an individual had defaulted on an offer in compromise (OIC) and proceeding with collection of his unpaid tax liability. The taxpayer materially breached the terms of the OIC by incurring a delinquent tax liability for a subsequent tax year. The taxpayer failed to comply with the express terms of the agreement by failing to pay his tax liability for well over a year after it was due, thereby depriving the government of a material financial benefit. The record did not indicate that requiring the taxpayer to strictly comply with the terms of the agreement would result in a disproportionate forfeiture or penalty. Therefore, because the condition that the taxpayer timely pay his taxes was a material part of the OIC agreement, it could not be excused.
Will K. Ng v. CommissionerDkt. No. 3883-05L , TC Memo. 2007-8, January 16, 2007.



[Code Secs. 6330 and 7122]
The IRS did not abuse its discretion in determining that an individual had defaulted on an offer in compromise (OIC) and proceeding with collection of his unpaid tax liability. The taxpayer failed to comply with the express terms of the agreement by failing to pay his tax liability for well over a year after it was due, thereby depriving the government of a material financial benefit. In addition, requiring the taxpayer to strictly comply with the terms of the agreement would not result in a disproportionate forfeiture or penalty. Therefore, because the condition that the taxpayer timely pay his taxes was a material part of the OIC agreement, it could not be excused. --CCH.





MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge: Pursuant to section 6330(d),1 petitioner seeks review of respondent's determination regarding collection of his 1993, 1994, and 1995 income tax liabilities. The issue for decision is whether respondent's determination to proceed with collection was an abuse of discretion.


FINDINGS OF FACT

Some of the facts have been stipulated and are so found.2 The stipulation of facts and the attached exhibits are incorporated herein by this reference. At the time he filed his petition, petitioner lived in San Francisco, California. As of February 29, 2000, petitioner owed income taxes and additions to tax for 1993, 1994, and 1995 of $113,417.14, $24,228.67, and $18,789.03, respectively. On January 18, 2000, petitioner filed a Form 656, Offer in Compromise (OIC), with respondent. On his OIC, petitioner proposed to settle his 1993, 1994, and 1995 tax liabilities with a cash payment of $83,779. Petitioner submitted his OIC on the grounds of doubt as to collectibility. The OIC stated (in relevant part):

Item 8 - By submitting this offer, I/we understand and agree to the following conditions:

* * * * * * *

(d) I/we will comply with all provisions of the Internal Revenue Code relating to filing my/our returns and paying my/our required taxes for 5 years or until the offered amount is paid in full, whichever is longer.

* * * * * * *

(j) I/we understand that I/we remain responsible for the full amount of the tax liability, unless and until the IRS accepts the offer in writing and I/we have met all the terms and conditions of the offer. The IRS will not remove the original amount of the tax liability from its records until I/we have met all the terms of the offer.

* * * * * * *

(o) If I/we fail to meet any of the terms and conditions of the offer and the offer defaults, then the IRS may:

--immediately file suit to collect the entire unpaid balance of the offer

--immediately file suit to collect an amount equal to the original amount of the tax liability as liquidating damages, minus any payment already received under the terms of this offer

--disregard the amount of the offer and apply all amounts already paid under the offer against the original amount of the tax liability

--file suit or levy to collect the original amount of the tax liability, without further notice of any kind.

Respondent accepted petitioner's OIC by a letter dated February 25, 2000. That letter stated, in relevant part:

"Please note that the conditions of the offer require you to file and pay all required taxes for five tax years or the period of time payments are being made on the offer, whichever is longer." The letter also reiterated the language above from Item 8, paragraph (o) of the OIC.

Petitioner timely paid the offer amount of $83,779. Petitioner also timely filed returns and paid the tax owed for 2001, 2003, and 2004. The dispute in this case focuses on petitioner's failure to timely pay his 2002 tax.

After respondent granted petitioner's timely requests for extensions, petitioner timely filed his 2002 Form 1040, U.S. Individual Income Tax Return, on October 15, 2003. That return showed a tax liability of $86,496, payments of $9,849, and a remaining liability of $77,540.3 With his 2002 return, petitioner submitted a $15,000 payment and a Form 9465, Installment Agreement Request. On the Installment Agreement Request, petitioner proposed to make payments of $20,000 on the 28th of each month.

Respondent neither accepted nor rejected petitioner's Installment Agreement Request. At trial, respondent did not contest petitioner's assertion that respondent never acted on the Installment Agreement Request. Moreover, it is not clear from the record whether any employee of respondent ever considered petitioner's Installment Agreement Request.

On November 14, 2003, respondent sent petitioner a letter stating that, as part of his OIC, petitioner agreed to timely file returns and pay his income taxes for 5 years following the date respondent accepted the offer. The letter warned petitioner that he needed to pay his remaining 2002 tax liability of $71,984.36 within 30 days "to prevent termination of * * * [his] Offer In Compromise." The letter stated that if petitioner did not comply, respondent would terminate the OIC and would reinstate the original amount of the compromised liability, reduced for the payment petitioner had already made.

That letter apparently never reached petitioner and was returned to respondent by the Postal Service. Respondent sent a nearly identical letter containing the same warnings to petitioner at his new address on December 10, 2003. By that time, because of the accrual of interest and penalties, petitioner's 2002 liability had increased to $72,683.54. Petitioner does not contend that he did not receive the December 10 letter. Petitioner did not pay his 2002 tax liability within 30 days of the December 10 letter or otherwise reply to the letter.

Petitioner received a letter from respondent dated February 11, 2004. In that letter, respondent declared petitioner in default of the OIC and stated that "arrangements to compromise the liability are terminated."

Respondent applied petitioner's payment on the OIC to his previously compromised liabilities. This left balances owing for 1993, 1994, and 1995 of $29,347.57, $33,763.22 and $30,195.96, respectively.

On March 24, 2004, petitioner made payments totaling $20,000 toward his 2002 tax liability.

In a letter dated July 7, 2004, respondent sent petitioner a Final Notice --Notice of Intent to Levy and Notice of Your Right to a Hearing (notice of intent to levy) for the outstanding 1994, 1995, and 2002 liabilities. The notice of intent to levy showed a total of $121,218.36 in unpaid taxes, interest, and penalties.

On July 14, 2004, petitioner paid respondent a total of $56,731.05, satisfying his 2002 tax liability.

On July 15, 2004, respondent sent petitioner a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (NFTL). On August 11, 2004, petitioner filed a Form 12153, Request for a Collection Due Process Hearing, with regard to the NFTL.

Appeals Officer Lawrence Dorr was assigned to petitioner's case. Petitioner's hearing consisted of an in-person meeting with Officer Dorr on January 19, 2005, and subsequent correspondence. During the hearing, petitioner raised the argument that although he had violated the literal terms of the OIC by failing to timely pay his 2002 income tax liability, his breach was not "material" and that respondent therefore should not have declared him in default on the OIC. Officer Dorr did not have petitioner's Installment Agreement Request from October 15, 2003, and Officer Dorr did not consider the Installment Agreement Request in reaching his determination regarding petitioner's outstanding tax liabilities. On February 23, 2005, respondent issued to petitioner two Notices of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notices of determination) regarding petitioner's outstanding 1993, 1994, 1995, and 2002 tax liabilities.4 In the notices of determination, respondent sustained the filing of the lien. In the Attachment to Determination Letter mailed with the notices of determination, respondent noted petitioner's argument that he had been improperly declared in default on the OIC and concluded that petitioner had been properly declared in default.

On February 28, 2005, petitioner timely petitioned this Court for review of respondent's determinations under section 6320 and/or 6330.


OPINION




I. Standard of Review
In the context of a section 6320 or 6330 hearing, a challenge to the Commissioner's determination that a taxpayer was properly deemed in default on an OIC is not a dispute of the underlying tax liability. See Robinette v. Commissioner [Dec. 55,698], 123 T.C. 85, 93-94 (2004), revd. on other grounds [2006-1 USTC ¶50,213] 439 F.3d 455 (8th Cir. 2006). Petitioner has not raised any other issue that amounts to a challenge of the underlying tax liability.

Where the validity of the underlying tax liability is not properly in dispute, we review the Commissioner's determination for an abuse of discretion. Sego v. Commissioner [Dec. 53,938], 114 T.C. 604, 610 (2000); Goza v. Commissioner [Dec. 53,803], 114 T.C. 176, 181 (2000). Accordingly, we review respondent's determination to proceed with collection of petitioner's 1993, 1994, and 1995 tax liabilities for an abuse of discretion. An abuse of discretion has occurred if the "Commissioner exercised * * * [his] discretion arbitrarily, capriciously, or without sound basis in fact or law." Woodral v. Commissioner [Dec. 53,206], 112 T.C. 19, 23 (1999).



II. Analysis Applied to Offers-in-Compromise
"An accepted offer in compromise is properly analyzed as a contract between the parties." Dutton v. Commissioner [Dec. 55,542], 122 T.C. 133, 138 (2004). When reviewing whether the Commissioner abused his discretion in declaring a taxpayer in default on an OIC, our analysis is governed by "general principles of contract law." Id.



III. Parties' Arguments
The parties have focused their disputes in this case on two contentious --and familiar --issues. Petitioner urges that, when analyzing whether respondent abused his discretion by finding that petitioner defaulted on his OIC, we apply the "material breach" analysis as applied in the majority opinion of this Court's decision in Robinette v. Commissioner, supra at 109-112. Applying that analysis, petitioner argues that late payment of his 2002 taxes was not material, and that respondent therefore abused his discretion by finding that petitioner defaulted on his OIC. Petitioner also urges that the Court consider his Installment Agreement Request and his testimony at trial, neither of which is part of the administrative record that respondent considered at the section 6330 hearing. Petitioner argues that, under this Court's decision in Robinette, the evidence is within the scope of this Court's review of a determination under section 6320 and/or 6330 for an abuse of discretion. On the basis of his testimony, respondent's internal procedures, and the Installment Agreement Request, petitioner urges that we should treat his Installment Agreement Request as having been granted. Had the Installment Agreement Request been granted, petitioner argues, late payment of his 2002 taxes would not have been a material breach of the OIC.

As to the contractual issue, respondent argues that we should apply the "doctrine of express conditions" analysis applied by the U.S. Court of Appeals for the Eighth Circuit in reversing this Court's decision. Robinette v. Commissioner [2006-1 USTC ¶50,213], 439 F.3d at 462-463. Respondent also argues that, even under a "material breach" analysis, respondent did not abuse his discretion by declaring petitioner in default on his OIC because petitioner's late payment of his 2002 taxes was a material breach. Finally, relying on the Court of Appeals' opinion in Robinette, respondent argues that we may not consider evidence beyond the administrative record when reviewing a determination under section 6320 and/or 6330 for an abuse of discretion.



IV. Analysis
A. Applicable Contract Law

1. Material Breach Analysis

Under the "material breach" analysis applied by the Tax Court in Robinette, "'If the plaintiff's breach is material and sufficiently serious, the defendant's obligation to perform may be discharged. * * * Not so, however, if the plaintiff's breach is comparatively minor.'" Robinette v. Commissioner [Dec. 55,698], 123 T.C. at 108 (quoting TXO Prod. Corp. v. Page Farms, Inc., 598 S.W.2d 791, 793 (Ark.1985)).

The Court went on to point out:

"In determining whether a failure to render or to offer performance is material, the following circumstances are significant:

(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;

(b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;

(c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;

(d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; [and]

(e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing." [ Id. at 109, quoting 2 Restatement, Contracts 2d, sec. 241 (1981).]

Although the above circumstances may by themselves indicate the materiality or nonmateriality of a breach, the standard of materiality is necessarily somewhat imprecise and flexible, and should be applied in light of the facts of each case in such a way as to further the purpose of securing for each party his expectation of an exchange of performances. 2 Restatement, supra sec. 241 cmt. a.

2. Doctrine of Express Conditions

Under the "doctrine of express conditions" analysis endorsed by the Court of Appeals in Robinette, an express condition of a contract is subject to a requirement of strict performance. Robinette v. Commissioner [2006-1 USTC ¶50,213], 439 F.3d at 462 (citing 13 Williston on Contracts, sec. 38:6 (4th ed. 2000)). When an express condition fails to occur, the performance subject to that condition does not become due unless the nonoccurrence of the condition is excused. 2 Restatement, supra sec. 225(1). Under that doctrine, a failure to meet express conditions may be excused if they are immaterial to the exchange and if their enforcement would result in a disproportionate forfeiture. Robinette v. Commissioner [2006-1 USTC ¶50,213], 439 F.3d at 463 (citing 2 Restatement, supra sec. 229).

Under this analysis, the performance conditioned upon strict compliance with the terms of the OIC is the Commissioner's discharge of the full amount of the tax liability compromised.

3. Application

Considering all the relevant facts and circumstances, petitioner's significantly late payment of a substantial tax liability amounts to both a failure of an express condition of the OIC and a material breach of the OIC. Therefore, we need not decide which doctrine applies.

By the plain terms of the OIC, respondent was not obligated to discharge petitioner's unpaid 1993, 1994, and 1995 tax liabilities until petitioner "[complied] with all provisions of the Internal Revenue Code relating to filing [his] returns and paying [his] required taxes for 5 years or until the offered amount is paid in full, whichever is longer." The Internal Revenue Code required that petitioner pay his outstanding 2002 income tax liability of $77,540 by April 15, 2003. See secs. 6151(a), 6072(a). He failed to do so. Petitioner failed to pay the bulk of his 2002 tax liability for well over a year after it was due, eventually satisfying his tax debt with his final payment of $56,731.05 on July 14, 2004. Moreover, despite petitioner's failure to pay his 2002 taxes, respondent's letters of November 14 and December 10, 2003, warned petitioner of the potential for default and gave him an additional opportunity to pay his taxes without defaulting on the OIC. Petitioner again failed to pay his 2002 tax liability.

Under the circumstances, petitioner's failure to satisfy his 2002 tax liability amounted to a "material breach" of the OIC. By withholding a sizable sum of money from respondent for a substantial period, petitioner deprived respondent of a material financial benefit under the OIC. Also, at the time respondent declared petitioner in default on February 11, 2004, it appeared unlikely that petitioner would cure his failure. By that time, petitioner had failed to comply with the terms not only of the OIC but also of respondent's letter of December 10, 2003 (again requesting payment of petitioner's 2002 taxes), thereby declining an opportunity to "cure" his failure.

By failing to satisfy his 2002 tax liability for over a year, petitioner committed a material breach of the terms of the OIC. Nor is there any applicable "excuse of a condition". As explained supra, an express condition of a contract may be excused if a contracting party can show that (1) compliance with the condition would result in a disproportionate forfeiture or penalty, and (2) the condition was not a material part of the bargain. See 2 Restatement, supra sec. 229. The record before us does not indicate that strict compliance would have resulted in a disproportionate forfeiture or penalty to petitioner. Moreover, for the reasons discussed supra, we find that the condition that petitioner timely pay his 2002 taxes was a material part of the OIC.

B. Scope of Review

Consideration of petitioner's testimony or the Installment Agreement Request would not alter any of the conclusions above. At the time petitioner filed his Installment Agreement Request, the Commissioner's internal procedures provided that the Commissioner could grant installment agreement requests from a taxpayer in petitioner's situation without declaring the taxpayer in default. Internal Revenue Manual sec. 5.19.7.3.17.3 (effective October 1, 2001). While it may have been within respondent's discretion to overlook petitioner's noncompliance with the OIC and grant petitioner's Installment Agreement Request, we have long held that the Commissioner's internal procedures do not have the effect of law and that noncompliance with those procedures does not render an action of the Commissioner invalid. Vallone v. Commissioner [Dec. 43,824], 88 T.C. 794, 807-808 (1987).

Petitioner also argues that because he was never notified that his Installment Agreement Request was denied, we should treat the request as having been granted. We disagree. We note that petitioner failed to comply with the terms of his proposed Installment Agreement by not making the monthly payments he had offered. Such noncompliance hardly inspires the Court to find that petitioner's late payment of his 2002 taxes did not form adequate grounds upon which to find him in default of his OIC.

Indeed, consideration of petitioner's testimony would only bolster the conclusions that his breach was material and that there was no "excuse of conditions" because reinstatement of his original tax liability would not work a disproportionate forfeiture upon him. At trial, petitioner admitted that the terms of the OIC were explained to him by his tax advisers when he entered into the compromise. Petitioner also admitted that he realized a capital gain of $416,895 upon the sale of his home in December 2002. Even after purchasing a new home and remodeling it, petitioner admitted he had slightly over $100,000 in cash with which to satisfy his 2002 tax liability. Under such circumstances, petitioner's late payment of his 2002 taxes seems to be exactly the sort of "evasion of the spirit of the bargain, lack of diligence and slacking off, [and/or] willful rendering of imperfect performance" that typifies a failure of good faith performance and therefore indicates a material breach. See 2 Restatement, supra sec. 205 cmt. d. Accordingly, we need not decide herein whether we may consider evidence beyond the administrative record.

We conclude that respondent did not abuse his discretion in proceeding with collection of petitioner's unpaid 1993, 1994, and 1995 taxes.

To reflect the foregoing,

Decision will be entered for respondent.1 Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.

2 The parties initially stipulated that petitioner's 1993 tax liability was satisfied by the payment petitioner submitted with his offer-in-compromise. In their briefs, the parties agree that this is incorrect. Pursuant to Rule 91(e), we do not treat that portion of the stipulation as a conclusive admission by either party.

3 The figure of $77,540 includes an estimated tax penalty of $893.

4 Petitioner's 2002 tax year is not at issue in this case.

The following represents the position of the IRS on offers in compromise and bankruptcy including some cases dealing with Offers in Compromise and bankruptcy
IRS Internal Revenue Manual - Bankruptcies

5.8.10.1 (09-01-2005)

Overview

1. During the investigation of an offer, certain situations may be encountered that require consideration before a final determination can be made. This section discusses how to treat these situations when evaluating an offer.
5.8.10.2 (09-01-2005)
Bankruptcy
1. Bankruptcy can have a specific impact on the Service's consideration of an offer. A taxpayer may attempt to file both bankruptcy and an offer simultaneously, a taxpayer may file an offer in an attempt to avoid bankruptcy or a taxpayer may file an offer after a bankruptcy has been concluded. The following discusses these situations.

5.8.10.2.1 (09-01-2005)

Offer in Compromise During Bankruptcy

1. The Service will not consider an offer under its administrative offer in compromise procedures while a taxpayer is in bankruptcy. When a taxpayer files bankruptcy, the Bankruptcy Code provides procedures to resolve the Service's claim.
2. An offer will not be considered under administrative offer in compromise procedures until the bankruptcy is concluded. In Chapter 7 cases, an administrative compromise with the taxpayer can be considered after the taxpayer has received a discharge. See IRM 5.8.10.2.3.. In Bankruptcy Chapter 11, 12, and 13 cases, an administrative compromise will not be considered until the taxpayer completes payments under the plan or the bankruptcy is dismissed by the court.
3. If a taxpayer is in bankruptcy when an administrative offer is submitted or during a pending offer investigation, the offer is returned.
5.8.10.2.2 (09-01-2005)

Offers in Compromise Before Bankruptcy

1. When a taxpayer threatens bankruptcy, the impact of bankruptcy on the Service's ability to collect must be considered. If the Offer Investigator believes, based upon factual information, that the taxpayer is seriously considering filing bankruptcy, the employee should discuss the benefits of filing an administrative offer instead.

2. Benefits to the Service:

• The Service can negotiate for amounts collectible from future income and from assets beyond the reach of the government, that may not be collectible if the taxpayer files bankruptcy.
• Negotiations may result in an offer amount that exceeds the amount recoverable in an insolvency proceeding.
• Terms for payment of an offer may result in the funds being collected in a shorter time than through bankruptcy.

3. Benefits to the Taxpayer:
• Bankruptcy carries certain negative repercussions that an offer in compromise will not cause, such as the effect on credit ratings.
• Bankruptcy does not discharge all tax liabilities.
• If a Notice of Federal Tax Lien (NFTL) has been filed, the federal tax lien may survive bankruptcy against certain assets.

4. While evaluating the acceptability of an offer when the threat of bankruptcy is a consideration, determine the reasonable collection potential as defined in IRM 5.8.5, Financial Analysis. To determine the amount that would be collected through bankruptcy and what liabilities would be discharged contact an advisor in the Insolvency Section and discuss the facts of the case.

5. Analysis of the collectibility if bankruptcy were filed along with the financial analysis and a determination of liabilities that would be fully discharged, should result in the information necessary to make an informed decision regarding the offer and to attempt negotiation with the taxpayer.

6. When doing the analysis consider the following questions:
• Is the Service the sole or major creditor?

• Would taxes be dischargeable in bankruptcy?

• Does the offer amount equal or exceed what we can reasonably expect to recover from bankruptcy?

• Are there other considerations, such as what can be collected on liabilities that would not be discharged or from property outside of the bankruptcy, including third parties?
Note:
Under no circumstances will the Service accept less than would be recoverable from a Chapter 7 bankruptcy, unless special circumstances exist.

7. If it is determined that processing an offer under the Service's administrative procedures is the better alternative, then proceed with the offer process.

5.8.10.2.3 (09-01-2005)
Acceptance of Offer in Compromise After Chapter 7 Bankruptcy
1. In most Chapter 7 bankruptcies, the discharge is issued and the stay lifted in approximately 5 months. An offer will not normally be considered under the Service's administrative procedures until the discharge is granted.
2. For debtors discharged by Chapter 7 where the case is still pending, it is uncertain whether the Service would still have a valid claim in bankruptcy if an offer is accepted. Therefore, the amount acceptable for an offer should include the amount we reasonably expect to recover from the bankruptcy in addition to what can be collected from the taxpayer on non-discharged liabilities or from property outside the bankruptcy.
5.8.10.2.4 (09-01-2005)
Bankruptcy After Offer In Compromise Acceptance
1. When a taxpayer files bankruptcy after an offer is accepted, the Service may need to take specific actions to secure unpaid offer funds or to secure payment of tax through the bankruptcy proceeding. (See IRM 25.17, Bankruptcy, for additional information.)
2. In accordance with the Bankruptcy Code, the offer should not be defaulted or payments solicited while the taxpayer is in bankruptcy.
3. When we become aware that a bankruptcy has been filed after the acceptance of an offer in compromise:
If… Then…
The offer funds have been paid in full The bankruptcy filing has no effect on the accepted offer.
The offer funds have not been paid in full Contact the Insolvency Unit to determine necessary action to secure the Service's interest in the bankruptcy proceeding.
5.8.10.3 (09-01-2005)
Other Insolvency Cases
1. A copy of the court order or other evidence should accompany Form 656.
2. The following should be secured in "Receiverships" and other non-bankruptcy insolvencies:
• A general statement of the circumstances which resulted in the receivership and the purpose of the receivership; that is, whether the objective is liquidation of assets, conservation of assets, foreclosure of a mortgage or reorganization.
• A copy of the petition for the appointment of a receiver and a copy of the court order appointing the receiver or trustee can be used in lieu of a general statement, if the petition provides the information above.
• Copies of all pertinent schedules filed with the court.
3. Consideration of an offer frequently presents questions concerning the rights of the government to priority in the collection of the tax claims over the claims of other creditors of the taxpayer.
4. The rights of other creditors are based on liens which may be recognized by state law, but because of the taxpayers assignment of assets for the benefit of other creditors, the provisions of 31 U.S.C. 3713 apply.
5. When considering the offer:
• Evaluate the rights of all creditors,
• Evaluate all facts and circumstances relating to the various claims,
• Verify all pertinent dates, such as the origin and filing of all claims and liens, and
• Verify the steps which have been taken towards the enforcement of the claimant's alleged rights.
If… Then…
The priority rights of the United States are disregarded when the funds of the estate are disbursed An assignee for the benefit of creditors, as well as an executor or administrator of a decedent's estate, may become personally liable.
A corporation is the assignor and the tax liability sought to be compromised consists of withholding of Federal Insurance Contribution Act (FICA) taxes, or taxes which the assignor might be required to withhold or collect from others and pay over to the government Consider the possibility of enforcing the TFRP provisions of the code.
6. When questions arise regarding the priority rights of the United States contact Area Counsel.
5.8.10.4 (09-01-2005)
Death of Taxpayer
1. When the Service is notified of the death of the taxpayer who submitted an offer that is currently under consideration, the Service can no longer consider the offer. A termination letter will be generated from AOIC and the offer should be closed with the termination closure option.
2. Many times the offer under consideration was submitted jointly by a husband and wife. In that situation contact with the surviving spouse should be made to determine whether there is a probate proceeding pending.
If… Then…
There is a probate. Explain that consideration of the offer will be terminated and that another offer can be submitted once the probate has been concluded. Contact Technical Support and advise of the probate proceeding and the tax liability due. Terminate consideration of the offer.
There will be no probate proceeding and the surviving spouse does not want us to continue considering the offer. Terminate consideration of the joint offer due to the death of the spouse.
There will be no probate proceeding, the surviving spouse does want us to continue considering the offer, and the surviving spouse was appointed executor by a will. Obtain a copy of the will and an amended offer reflecting the spouse as deceased and continue consideration of the joint offer.
There is no probate proceeding and the surviving spouse wants the Service to continue consideration the offer, however the spouse was not appointed executor by a will. Since the surviving spouse does not have rights to compromise the liability of the deceased taxpayer, secure an amended offer removing the deceased spouse's name and continue consideration of an offer for the surviving spouse's obligation only.
5.8.10.5 (09-01-2005)
Transferee
1. When an offer investigation reveals the potential for a transferee situation, the burden of proof of transferee liability rests with the government.
Note:
If a determination that a transferee investigation should be initiated, it will not be conducted by the Offer Investigator. Instead, it will be conducted by a field Revenue Officer (RO) by generating an Other Investigation (OI).
OIs referred per these instructions should be considered high risk cases, code 100, and processed accordingly.
If… Then…
A potential transferee is discovered during an offer investigation Conduct an investigation to determine if a transferee exists.
A transferee liability exits 1. Determine the amount the Service may reasonably expect to collect from the transferee.
2. Include a sum substantially equal to the value determined in the calculation of reasonable collection potential (RCP).
3. Attempt to negotiate an acceptable offer amount with the transferee value included in the reasonable collection potential (RCP) calculation.
There is a question whether a transferee liability may be established and sustained 1. Determine the value of the transferee based on the degree of doubt regarding the transferee being sustained.
2. Attempt to negotiate an acceptable offer amount including this value in the reasonable collection potential (RCP).
Note:
Flexibility should be exercised during negotiations if the transferee assessment will not be pursued.
While investigating an offer and the Offer Investigator determines that a transferee assessment should be pursued and negotiations have not resulted in an acceptable offer amount
1. Attempt to secure a withdrawal letter from the taxpayer
2. If the taxpayer does not withdraw the offer, prepare the rejection closing documents and follow procedures for recommending rejection with appeal rights. Include the value of the transferee in the reasonable collection potential (RCP).
Prepare an Other Investigation (OI) to be issue to a field revenue officer to investigate the transferee issue.
5.8.10.6 (09-01-2005)
Discharge and Subordination Requests
1. The government is bound by the payment terms of an accepted offer period. We cannot require payment of the offer amount in different terms, other than agreed to in the offer agreement.
Note:
In these cases, the discharge or subordination investigation will not be conducted by the Offer Investigator. Instead, it must be conducted by the appropriate Technical Support by generating an Other Investigation (OI).
OIs referred per these instructions should be considered high risk cases, code 100, and processed accordingly.
2. Requests for discharge or subordination received while an offer is pending are to be handled as follows:
If… Then…
The discharge or subordination request is approved. Advise the taxpayer that proceeds from the discharge or subordination will be applied to the offer, if accepted. If the offer is not accepted, the proceeds will be applied to the tax liability. Before delivering the discharge or subordination, require the taxpayer to execute a Form 3040, Authorization to Apply Offer in Compromise Deposit to Liability. In the signature block have them write the word "irrevocable" . Retain the signed Form 3040 in the offer case file for use in the event the offer is returned, withdrawn or rejected.
Note:
For those taxpayers who have submitted a discharge or subordination while the offer is pending, the taxpayer should check the box and place their initials next to that box. This will serve the same purpose as having the taxpayer write "irrevocable" on the Form 3040.
3. Requests for discharge or subordination received after an offer has been accepted but before all the payment terms have been met should be handled as follows:
If… Then…
The taxpayer does not intend to apply the proceeds received from the discharge or subordination to the offer amount Deny the discharge or subordination request.
The taxpayer does intend to apply the proceeds toward the offer amount Request an investigation of the discharge or subordination from Technical Support and then coordinate with Technical Support to apply the proceeds to the offer amount.
5.8.10.7 (09-01-2005)
Effect of Previous Offers on Collection Statute
1. Over the years there have been numerous changes in the law and IRS procedures relating to the extension of the statutory period for collection while offers are being considered. The information provided in this section will assist in determining the correct CSED, which can impact the number of required payments.
2. Treasury Regulation § 301.7122-1(f) 1960 states that suspension of the statute of limitations for collection will be for the period the offer is being considered, while any term of an accepted offer is not completed, and for one additional year. Consideration of an offer is conditioned upon the taxpayer signing a waiver.
3. For offers pending prior to 1/1/2000, the taxpayer executed a waiver of the statutory period for collection, extending the collection statute for the period the offer was under consideration and for an additional one year. For offers accepted prior to 1/1/2000 this waiver of the statutory period for collection also included the period of time the terms of an accepted offer were still in effect.
Note:
RRA 98 imposed a limitation for offers subject to the waiver of collection statute. The waiver cannot extend the Collection Statute Expiration Date (CSED) beyond either 12/31/2002, or the original CSED, whichever is later.
4. For offers submitted or pending after 12/31/1999, the statutory period for collection was suspended, by operation of law, while the offer was pending, for 30 calendar days following rejection of an offer, and for the period the rejection was being considered in Appeals. This suspension of the collection statute is effective through 12/20/2000.
5. For offers that were pending prior to 1/1/2000 and were still pending on or after 1/1/2000, the collection statute is extended by both waiver periods and by the suspension period (See paragraphs 2 and 3 above).
Note:
The limitation on the waiver of collection statute applies to these offer periods.
6. The Community Renewal Tax Relief Act of 2000 was signed into law on 12/21/2000. This act eliminated the suspension of the statutory period for collection, effective on the day of enactment (12/21/2000).
7. The Job Creation and Workers Assistance Act was signed into law March 9, 2002. This law reinstated the suspension of the statutory period for collection, by operation of law, while the offer is pending, for 30 calendar days following rejection of an offer, and for the period the rejection is being considered in Appeals.
8. Cases may be encountered where prior rules were in effect. The following chart shows the changes that have occurred in this area.
If the offer has a… and was… then…
Pending date of 1/1/2000 or later Accepted prior to 12/21/2000 The CSED is extended from the pending date (TC 480) until the acceptance date (TC 781/788).
Pending date of 1/1/2000 or later Accepted between 12/21/2000 and 3/8/2002 The CSED is only extended from the pending date (TC 480) through 12/20/2000.
Pending date of 1/1/2000 or later Accepted after 3/8/2002 The CSED is extended from the pending date (TC 480) through 12/20/2000 and if the offer was still pending, it was also extended from 3/9/02 until the date of acceptance (TC 780).
Pending date of 1/1/2000 or later Rejected and taxpayer does not appeal The CSED is extended from the pending date (TC 480) until 30 calendar days after the rejection letter is issued (TC 481), excluding any portion of that period which falls between 12/21/2000 and 3/8/2002.
Note:
As of 2/2/2004, the AOIC system automatically 30 days to the date of the TC 481 on Rejected Not Appealed offer closures prior to transmission to masterfile. Appealed rejections carry the Appeals rejection date.
Pending date of 1/1/2000 or later Rejected and sustained in Appeals The CSED is extended from the pending date (TC 480) until Appeals issues a decision letter (TC 481), excluding any portion of that period which falls between 12/21/2000 and 3/8/2002.
Pending date prior to 1/1/2000 Accepted prior to 1/1/2000 The CSED is extended from the pending date (TC 480) until all payment installments are made (TC 780) plus 1 year. The CSED cannot be extended beyond 12/31/2002 or the original CSED date whichever is later.
Pending date prior to 1/1/2000 Accepted after 12/31/1999 but prior to 12/21/2000 The CSED is extended from the pending date (TC 480) through 12/31/99 plus one year. The CSED cannot be extended beyond 12/31/2002 or the original CSED date whichever is later. If the offer was still pending on 1/1/2000, the CSED would also be extended from that date until it was accepted (TC 780).
Pending date prior to 1/1/2000 Accepted after 12/20/2000 The CSED is extended from the pending date (TC 480) through 12/31/99 plus one year. The CSED cannot be extended beyond 12/31/2002 or the original CSED date whichever is later. In addition, the CSED is extended from 1/1/2000 through 12/20/2000. However, the CSED would not be extended from 12/21/2000 until 3/8/2002. If the offer was still pending on 3/9/2002 the CSED would also be extended from that date until it was accepted (TC 780).
Pending date prior to 1/1/2000 Rejected prior to 1/1/2000 The CSED is extended from the pending date (TC 480) until the rejection date (TC 481) plus 1 year. The CSED cannot be extended beyond 12/31/2002 or the original CSED date whichever is later.
Pending date prior to 1/1/2000 Rejected 1/1/2000 or later The CSED is extended from the pending date (TC 480) until 12/31/1999 plus 1 year. The extension cannot extend the CSED beyond 12/31/2002 In addition, CSED is extended from 1/1/2000 until 12/20/2000 or the rejection date (TC 481) plus 30 calendar days, whichever is earlier, and from 3/9/2002 until the rejection date (TC 481) plus 30 calendar days.
9. If only one party to a joint assessment files an offer, then the statute is suspended just for that person. The appropriate CSED suspension code must be input on IDRS to identify the specific taxpayer for which the offer applies. They are described in the table below.
P Primary
S Secondary
B Both
5.8.10.8 (09-01-2005)
Indicators of Practitioner Fraud
1. During the verification of financial statements, employees should always be aware of any indications that a practitioner violated the duties relating to practice before the Service Circular No. 230 Sections 10.20 to 10.23 or engaged in incompetent or disreputable conduct (Circular No. 230 Section 10.51) relating to offers in compromise. Also, be aware of indicators of fraud. A referral to the Office of Professional Responsibility (OPR) may be appropriate. Some examples of those indicators are:
A. Failure to exercise due diligence is conduct that is more than a simple error but less than willful or reckless misconduct. Simply put, it is negligence.
B. Deceptive advertising with respect to offers (such as unqualified promises of settlement, or "pennies on the dollar" ) should be referred to the Office of Professional Responsibility (OPR).
2. Section 822 of the American Jobs Creation Act of 2004, PL. 108-357, 118 Stat. 1418, expands the sanctions that the Secretary may impose on representatives to include both censure and monetary penalties. If the employee is acting on behalf of an employer or other entity, the Secretary may impose a monetary penalty on the employer or other entity if it knew, or reasonably should have known, of the conduct.
3. A referral should also be made if the employee becomes aware that a suspended or disbarred practitioner is practicing or attempting to practice before the IRS, or when it is noted that an unenrolled return preparer has been added to an otherwise valid Form 2848, Power of Attorney and Declaration of Representative , to attempt to have this person represent the taxpayer before the IRS during the course of the investigation.
Note:
The referral process is required by Section 10.53(a) and 10.53(b) of Circular No. 230.
4. Employees should also report suspected violations of Title 18, U.S.C. 207: Post Employment Conflicts of Interest (Circular 230, Section 10.25) to TIGTA.
5.8.10.8.1 (09-01-2005)
The Role of the Office of Professional Responsibility
1. Under the authority provided by 31 U.S.C. 330 and 31 CFR 10, which is published asTreasury Department Circular No. 230 " Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers before the Internal Revenue Service" (Revised 7/26/2002), Offer of Professional Responsibility (OPR) renders decision on applications for enrollment to practice, makes inquiries into matters under its jurisdiction, and institutes disciplinary proceedings against tax practitioners who are found to have violated any part of Circular No. 230. OPR's authority under Circular No. 230 to regulate practice before the Service and to discipline practitioners is generally limited to individuals, not entities.
5.8.10.8.2 (09-01-2005)
Badges of Tax Practitioner Abuse in the Offer in Compromise Program
1. A pattern of inappropriate conduct is a factor that the Office of Professional Responsibility (OPR) will consider in determining whether to bring disciplinary action against a practitioner under Circular No. 230.
2. Below are some indicators of abuse by practitioners.
A. Badge of Abuse #1 — Establishing a pattern on several Offer in Compromise investigations to influence the case disposition or Service employee to obtain the desired results by:
• Using abusive language
• Threatening claims of misconduct (e.g. Section 1203)
• Making false claims of misconduct
• Making false accusations
• Verbal/Physical threats or assaults
• Making a bribe (e.g. offering gifts or other things of value)
Note:
Verbal and/or physical threats/assaults should be referred directly to the local TIGTA office or by calling the TIGTA National Hotline at 1–800–366–4484 or 1–800–589–3718 after hours.

B. Badge of Abuse #2 — Establishing a pattern on several offer cases in which investigations are delayed by the practitioner performing one or several of the following actions:
• Missing appointments
• Canceling appointments at the last moment with no good cause provided
• Agreeing to provide requested documentation and/or information and then refusing to follow through, hindering the ability of the employee to complete the investigation of the offer
• Providing partial information requiring repeated call backs/correspondence and delays.
Note:
Circular No. 230 Section 10.20 states a referral must clearly document all case actions leading to the request for information/documents/substantiation, and the practitioner's failure to comply. This set of facts may also support a referral under Section 10.22 (Diligence as to accuracy) and Section 10.23 (Prompt disposition of pending matters) of Circular 230. In the event that a practitioner refused to provide documentation on grounds of privilege, the Office of Chief Counsel should be consulted.

C. Badge of Abuse #3 — Establishing a pattern on several offer submissions, which would include significant omissions, or significant and unreasonable discounts on a number of assets. The information provided must be shown to be materially misrepresented, not merely a simple error. The omissions or material misrepresentations could include, but are not limited to the following areas:
• Assets are omitted
• Listed assets are undervalued
• Understating the taxpayers income
• Over stating the taxpayers expenses
• Collection Information Statement(s) (CIS) reflect a large number of claimed dependents
• CIS reflects similar dollar amounts in both checking and savings accounts
• CIS reflects no available credit, including credit cards
• CIS reflects omissions of assets
• CIS shows similar listings for monthly income and expenses (e.g. same low wages, same child care expenses)
Note:
Due diligence also includes deceptive advertising with respect to offers; such as, unqualified promises of settlement, or pennies on the dollar.
3. The badges of practitioner abuse may also be indicators of potential fraud. The inappropriate misconduct should be discussed with your Fraud Technical Advisor (FTA) if appropriate. If a decision is made to refer the practitioner to TIGTA and/or the Fraud program for potential criminal sanctions, these actions must be clearly documented in the Office of Professional Responsibility (OPR) referral.
5.8.10.8.3 (09-01-2005)
Referring Tax Practitioner Abuse to the Office of Professional Responsibility
1. Employees should be alert to the patterns and/or trends of inappropriate conduct as discussed in IRM 5.8.10.8.2 above. When patterns and/or trends are identified through offers submitted by a tax practitioner, or when reported to an employee by any other person other than an officer or employee of the Service, the employee should complete the Form 8484, Report of Suspected Practitioner Misconduct and Report of Appraiser Penalty to the Office of Professional Responsibility (OPR), and refer the suspected practitioner misconduct for appropriate disciplinary action.
2. Circular No. 230 Section 10.53 states a referral should include all of the basic information, as well as reasons to support why it is believed the information submitted by the practitioner was below the expected standard.
3. Mail or fax the Form 8484, the accompanying narrative, and any other supporting documents to:
Office of Professional Responsibility
SE:OPR
Attn: Misconduct Reports Desk
1111 Constitution Ave, NW
Washington, DC 20224


FAX: (202) 622–2207
4. Additional information about reporting suspected practitioner misconduct may be found on the Office of Professional Responsibility (OPR) Intranet Website at http://nhq.no.irs.gov/OPR/ or go to irweb.irs.gov. The Office of Professional Responsibility has established an e-mail address to answer questions about Circular No. 230 issues at OPR@irs.gov.
5.8.10.8.4 (09-01-2005)
Preparation of Form 8484, Report of Suspected Practitioner Misconduct and Report of Appraiser Penalty to the Office of Professional Responsibility (OPR)
1. Part A – Practitioner Information


Practitioner information must include the practitioner's name, mailing address, telephone number, fax number, social security number, and CAF number. Indicate whether the practitioner is an attorney, certified public accountant, enrolled agent, or enrolled actuary.
2. Part B – Evidence of Practice before the IRS

If available, attach a copy of the Form 2848, Power of Attorney and Declaration of Representative , or an IDRS CAF printout to the Form 8484. If neither a copy of the Form 2848 nor a CAF printout is available, but the employee has personal knowledge of the practice, provide the following statement, " I dealt with this practitioner during (year) regarding a collection matter. The Form 2848 was not put on the CAF and I do not have access to the closed case file." The Office of Professional Responsibility (OPR) must be able to accurately identify and locate the tax practitioner in order to process the referral and establish proof of practice before the Internal Revenue Service.
3. Part C – Explanation of Suspected Misconduct

Complete and attach a narrative to the Form 8484. The narrative should be detailed enough to allow the Office of Professional Responsibility (OPR) to give the practitioner fair notice of the suspected misconduct. It should list all significant events that illustrate the inappropriate conduct in chronological order, explain how the conduct impacts on the administration of the tax laws, as well as any other supporting information that will establish a pattern of abuse. It should include appropriate quotations from the case history that would support the alleged misconduct. If applicable, hand-written material should be transcribed. The narrative should be specific and should include: who, what, when, where, and why.
4. Part D – Contact Person and Address

The contact person is not necessarily the person with first-hand knowledge of the suspected misconduct. Rather, the contact person may be an Area employee responsible for collecting misconduct reports and submitting them to the Office of Professional Responsibility (OPR). The OPR will direct questions concerning the referral to the contact person.
5. Part E – Management Approval

While the Office of Professional Responsibility does not require any particular level of management approval, referrals made by Offer in Compromise (OIC) employees should be reviewed and approved by field Group Managers or Offer Examiner Unit Managers (COIC) before documents are sent to the OPR.
6. Part F – Office of Professional Responsibility (OPR) Acknowledgement of Report

Upon receiving the Form 8484 and the corresponding narrative, the OPR will complete Part F and return a copy to the contact person.
5.8.10.9 (09-01-2005)
Indicators of Taxpayer Fraud
1. The following are potential fraud warning signs most identifiable during an interview:
A. Failing to keep proper books and records in a business or profession.
B. No records, poorly kept records, or attempts to falsify or alter records.
C. Destroying books and records without plausible explanation or refusal to make certain records available.
D. Extent of taxpayers control of sales and receipts and the apparent unwillingness to delegate this function to employees.
E. Engaging in illegal activities.
F. Personal living standard and asset acquisition is inconsistent with reported income.
G. Indications that valuable assets belonging to the taxpayer are being acquired and held in the name of others.
H. Self-serving statements with no documented proof.
I. Repeated procrastination of the part of the taxpayer in making and keeping appointments.
J. Hasty agreement to adjust and undue concern about immediate closing of the case may indicate that more through examination may be necessary.
2. The following are potential fraud warning signs most identifiable during verification of the financial statement:
A. Uncooperative attitude displayed by:
• Not providing requested information
• Refusal to make certain records available
• Not furnishing adequate explanations for discrepancies or questionable items
B. Trying to conceal a pertinent fact or record.
C. Failing to deposit all receipts to the business account.
D. Use of nominees or false names.
E. Unusual depletion of assets shortly before filing an offer.
F. Inflated salaries, payment of bonuses or cash withdrawals by officers, directors, shareholders, or other insiders.
G. Transfers of property to insiders, shareholders, or relatives shortly before filing the offer.
H. Payoff of loans to directors, officers, shareholders, relatives, or other insiders shortly before filing of the offer.
I. Complicated corporate structures and relationships.
J. Undervaluing of assets.
K. Overstatement of liabilities.
3. The fraud indicators below can fall into any of the categories in paragraphs (1) and (2) above:
A. Making false, misleading, and inconsistent statements.
B. Using currency instead of bank accounts or making large expenditures in currency.
C. Concealment of bank accounts and other property.
4. If indications of fraud are identified follow established procedures for preparing a referral to Criminal Investigation and suspend the investigation until the following:
If Criminal Investigation… Then…
Rejects the referral Investigation of the offer may continue.
Accepts the referral No contact will be made with the taxpayer regarding the status of the offer until Criminal Investigation informs the taxpayer of the criminal investigation and /or authorizes the Offer Investigator to contact the taxpayer.
5. Once the taxpayer has been notified by Criminal Investigation of the pending investigation and Collection has been authorized to contact the taxpayer, the Offer Investigator will advise the taxpayer of the following:
• The offer could be returned because other investigations are pending that may affect the liability sought to be compromised or the grounds on which it was submitted
• Action on the offer will be suspended pending the outcome of the criminal investigation
• The offer could be withdrawn.



An individual's offer-in-compromise, which was based on doubt as to collectibility, was properly rejected because the individual had a reasonable collection potential in excess of $1,000 and he was not in compliance with federal income tax laws. The individual's contention that he was protected under a state law (California) bankruptcy exemption was rejected because it was not properly raised before the IRS Appeals Office. Even if the issue had been properly raised, a federal tax lien would survive a subsequent bankruptcy filing, regardless of any state statute. See 11 U.S.C. sec. 522(c)(2)(B) (2006) (providing that exempt property remains subject to a properly filed tax lien even though the underlying tax claim may have been discharged); Iannone v. Commissioner [Dec. 55,618], 122 T.C. 287, 293 (2004) ("Federal tax liens are not extinguished by personal discharge in bankruptcy.").



A.M. Kun, Dec. 57,513(M), TC Memo. 2008-192.


[Code Secs. 6330 and 7122]



A decision by the IRS to proceed with collection of a tax deficiency, in the form of a filed lien action, was sustained. The 10-year statute of limitations for collection had not expired because it was tolled by the individual's request for a Collection Due Process (CDP) hearing, as well as his submission of an offer-in-compromise. Further, the offer-in-compromise, which was based on doubt as to collectibility, was properly rejected because the individual had a reasonable collection potential in excess of $1,000 and he was not in compliance with federal income tax laws. The individual's contention that he was protected under a state law (California) bankruptcy exemption was rejected because it was not properly raised before the IRS Appeals Office. Even if the issue had been properly raised, a federal tax lien would survive a subsequent bankruptcy filing, regardless of any state statute.

[Code Sec. 6673


A $1,500 penalty for maintaining a suit in order to delay collection was imposed against an attorney. Arguments he raised in a Collection Due Process hearing and in front of the court were clearly groundless.




P filed a petition for review pursuant to sec. 6320, I.R.C., in response to a determination by R that lien action was appropriate.

Held: R's determination to proceed with collection is sustained.


MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge: This case is before the Court on a petition for review of a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notice of determination).1 The issue for decision is whether respondent may proceed with collection, in the form of a filed tax lien, for the total amount of petitioner's Federal income tax liabilities for 1994, 2000, 2001, 2002, and 2003.


FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulations of the parties, with accompanying exhibits, are incorporated herein by this reference.

Petitioner, a self-employed attorney, filed Federal income tax returns for 1994, 2000, 2001, 2002, and 2003. For each of those years petitioner reported a tax liability, which was assessed, but has not paid any of the tax due.

On February 4, 2005, respondent sent petitioner a Notice of Federal Tax Lien Filing and Your Right to a Hearing under IRC 6320 for 1994, 2000, 2001, 2002, and 2003. Petitioner was informed that the notice of Federal tax lien had been filed a day earlier, on February 3, 2005. On February 25, 2005, petitioner filed a Form 12153, Request for a Collection Due Process Hearing, with respect to those 5 taxable years. As the basis for his disagreement, he stated "STATUTE OF LIMITATIONS, WAIVER AND ESTOPPEL."

Petitioner and respondent's settlement officer participated in an in-person Appeals hearing on May 17, 2005. That same day petitioner submitted an offer-in-compromise of $1,000 on the basis of doubt as to liability and doubt as to collectibility. Petitioner's offer-in-compromise covered his Federal income tax liabilities for 1991 through 2004. As of the date the lien at issue was filed, for the 5 taxable years at issue in this case alone, petitioner's income tax liabilities exceeded $66,000. As to those tax liabilities, petitioner, in his offer-in-compromise, asserted only that "I DO NOT OWE THE TAX FOR THE YEAR 1994 BECAUSE THE STATUTE OF LIMITATIONS HAS RUN."

Petitioner also provided a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, indicating that he was an unmarried, self-employed attorney with total monthly income of $2,999 and total monthly living expenses of $3,206.

The settlement officer informed petitioner that the offer-in-compromise could not be considered at that time because some of the years petitioner listed in the offer were still pending before the Court of Appeals for the Ninth Circuit. On November 16, 2005, the Court of Appeals issued a decision affirming this Court's decision in Kun v. Commissioner [Dec. 55,749(M)], T.C. Memo. 2004-209, in which this Court had sustained respondent's determination that a notice of Federal tax lien filing was an appropriate enforcement action with respect to petitioner's 1995, 1996, 1997, 1998, and 1999 Federal income tax liabilities.2 Kun v. Commissioner, 157 Fed. Appx. 971 (9th Cir. 2005).

On June 8, 2006, respondent's Appeals Office sent petitioner the aforementioned notice of determination.3 Therein, the Appeals Office determined that all legal and procedural requirements for filing the notice of Federal tax lien had been met. The Appeals Office rejected petitioner's $1,000 offer-in-compromise because his reasonable collection potential was believed, on the basis of his financial statement and supporting documentation, to be $10,652.4 The Appeals Office further noted that petitioner was not in compliance with the filing and payment requirements with respect to his 2005 taxable year.5

On June 23, 2006, petitioner filed a timely petition with the Court contesting the notice of determination. At the time the petition was filed, petitioner resided in California. A trial was held on May 15, 2007, in San Francisco, California.


OPINION




I. Collection Action
A. Statute of Limitations

There is a 10-year limitations period for collection that commences upon the assessment of the tax. Sec. 6502(a)(1). If a hearing is requested under section 6320(a)(3)(B) or 6330(a)(3)(B), the collection action(s) that are the subject(s) of the requested hearing and the running of any period of limitations under section 6502 are suspended for the period during which the hearing and appeals thereof are pending. See secs. 6320(c), 6330(e)(1).

Petitioner alleges in his petition that "respondent is attempting to collect taxes for years in which the statute of limitations has clearly run." Petitioner is incorrect.

A Federal income tax deficiency and additions to tax were assessed for each of the 5 tax years now at issue. The first such assessment was for 1994 and was made on September 11, 1995. Respondent filed the notice of Federal tax lien with respect to the 5 taxable years now at issue, which included 1994, on February 3, 2005, within the 10-year limitations period for collection. In addition, on February 25, 2005, petitioner requested a hearing with respect to his 1994, 2000, 2001, 2002, and 2003 tax years. That request suspended (and continues to suspend) the period of limitations on collection for 1994 and the other tax years at issue. Respondent therefore is not time barred from taking collection action with respect to 1994 (and the other 4 years at issue).

Petitioner's entire statute-of-limitations argument focuses on whether the limitations period was also tolled by an offer-in-compromise that he submitted on April 22, 2002, which he contends was for 1995 and 1996, not 1994.6 That entire issue is a red herring because, as explained above, the limitations period for collection action as to 1994 remains open whether or not that limitations period was tolled by petitioner's April 2002 offer-in-compromise.

B. General Rules Regarding an Appeals Hearing

If a taxpayer liable to pay taxes fails to do so after demand for payment, the tax liability becomes a lien in favor of the United States against all of the taxpayer's real and personal property and rights to such property. Sec. 6321. The lien arises at the time the assessment is made and continues until the liability is satisfied or becomes unenforceable by reason of lapse of time. Sec. 6322. The Secretary is obliged to notify the taxpayer within 5 business days that a notice of a Federal tax lien has been filed and that administrative appeals are available to the taxpayer. Sec. 6320(a). Upon timely request a taxpayer is entitled to a hearing before the Internal Revenue Service Office of Appeals regarding the propriety of the filing of the lien. Sec. 6320(b). This hearing is conducted in accordance with the procedural requirements of section 6330. Sec. 6320(c).

The taxpayer is entitled to appeal the determination of the Appeals Office, made on or before October 16, 2006, to the Tax Court or a U.S. District Court, depending on the type of tax at issue. Sec. 6330(d).7 Where the validity of the underlying tax liability is properly at issue, the Court will review the matter de novo. Sego v. Commissioner [Dec. 53,938], 114 T.C. 604, 610 (2000); Goza v. Commissioner [Dec. 53,803], 114 T.C. 176, 181-182 (2000). The Court reviews any other administrative determination for an abuse of discretion. Sego v. Commissioner, supra at 610; Goza v. Commissioner, supra at 182. An abuse of discretion has occurred if the "Commissioner exercised * * * [his] discretion arbitrarily, capriciously, or without sound basis in fact or law." Woodral v. Commissioner [Dec. 53,206], 112 T.C. 19, 23 (1999).

Aside from his statute of limitations argument, petitioner raises no argument as to the underlying tax liabilities for the 5 taxable years at issue. See Boyd v. Commissioner [Dec. 54,495], 117 T.C. 127, 130 (2001) (noting that an argument that the limitations period on collection has run is a challenge to the underlying tax liability that we review de novo). The only issue left to be addressed is the rejection of petitioner's offer-in-compromise.

C. Petitioner's Offer-in-Compromise

Among the issues that may be raised at the Appeals Office and are reviewed for an abuse of discretion are "offers of collection alternatives" such as an offer-in-compromise. Sec. 6330(c)(2)(A)(iii). The Court reviews the Appeals officer's rejection of an offer-in-compromise to decide whether the rejection was arbitrary, capricious, or without sound basis in fact or law and therefore an abuse of discretion. Murphy v. Commissioner Dec. [Dec. 56,232], 125 T.C. 301, 320 (2005), affd. 469 F.3d 27 (1st Cir. 2006); Woodral v. Commissioner, supra at 23.

Section 7122(a) authorizes the Secretary to compromise any civil case arising under the internal revenue laws. In general, the decision to accept or reject an offer, as well as the terms and conditions agreed to, are left to the discretion of the Secretary. Sec. 301.7122-1(c)(1), Proced. & Admin. Regs. However, regulations promulgated under section 7122 provide that "No offer to compromise may be rejected solely on the basis of the amount of the offer without evaluating that offer under the provisions" of the regulations "and the Secretary's policies and procedures regarding the compromise of cases." Sec. 301.7122-1(f)(3), Proced. & Admin. Regs.

The grounds for compromise of a tax liability are doubt as to liability, doubt as to collectibility, and promotion of effective tax administration. Sec. 301.7122-1(b), Proced. & Admin. Regs. Petitioner based his offer-in-compromise on doubt as to collectibility, which "exists in any case where the taxpayer's assets and income are less than the full amount of the liability."8 Sec. 301.7122-1(b)(2), Proced. & Admin. Regs. In determining the taxpayer's ability to pay, the individual facts and circumstances of the taxpayer's case are considered and the taxpayer is permitted "to retain sufficient funds to pay basic living expenses." Sec. 301.7122-1(c)(2), Proced. & Admin. Regs.

Petitioner contends that it was an abuse of discretion for respondent's settlement officer to reject his offer-in-compromise without considering "the Bankruptcy Exemption", apparently a California statute that allegedly exempts from creditors certain property belonging to a debtor in bankruptcy.9 Respondent asserts that because petitioner raised the issue of a potential bankruptcy filing for the first time at trial, the issue is not relevant as to whether respondent's settlement officer abused his discretion. As to the merits of petitioner's argument, respondent asserts that any State law exemption is not effective against a Federal tax lien and that, in any event, because the notice of Federal tax lien was filed before petitioner would have filed a bankruptcy petition, the Federal tax lien would continue to attach to any exempt property.

In reviewing the Commissioner's decision to reject an offer-in-compromise for abuse of discretion, we cannot consider issues that were not raised before the Commissioner's Appeals Office. See Giamelli v. Commissioner [Dec. 57,155], 129 T.C. 107, 115 (2007) ("We hold today that we do not have authority to consider section 6330(c)(2) issues that were not raised before the Appeals Office"); Magana v. Commissioner [Dec. 54,765], 118 T.C. 488, 493 (2002) ("in our review for an abuse of discretion under section 6330(d)(1) of respondent's determination, generally we consider only arguments, issues, and other [matters] that were raised at the collection hearing or otherwise brought to the attention of the Appeals Office"); sec. 301.6330-1(f)(2), Q&A-F5, Proced. & Admin. Regs.

There is nothing in the record reflecting that petitioner raised the issue of a potential bankruptcy filing before the Appeals Office, nor does petitioner assert, at least in a comprehensible manner, to the contrary.10 Moreover, respondent is correct that the notice of Federal tax lien filed in February 2005 would survive a subsequent bankruptcy filing by petitioner, regardless of any California statute. See 11 U.S.C. sec. 522(c)(2)(B) (2006) (providing that exempt property remains subject to a properly filed tax lien even though the underlying tax claim may have been discharged); Iannone v. Commissioner [Dec. 55,618], 122 T.C. 287, 293 (2004) ("Federal tax liens are not extinguished by personal discharge in bankruptcy.").

Because the settlement officer based his decision on an analysis of financial information provided by petitioner indicating a reasonable collection potential in excess of $1,000, see supra p. 4, and on the fact that petitioner was not in compliance with Federal income tax laws, see supra note 5, respondent's settlement officer did not abuse his discretion in rejecting petitioner's offer-in-compromise. We shall therefore sustain respondent's determination to proceed with collection by lien.



II. Section 6673(a)(1) Penalty
Although respondent does not ask the Court to impose a penalty upon petitioner under section 6673(a)(1), the Court may impose such a penalty sua sponte. See Pierson v. Commissioner [Dec. 54,152], 115 T.C. 576, 581 (2000).

Petitioner is an attorney with a longstanding habit of failing to pay Federal income tax. As an attorney, he knew or should have known that he was instituting this case primarily for delay. Indeed, both of his arguments --the argument regarding the statute of limitations and the argument regarding bankruptcy --are clearly groundless in light of the relevant statutes and this Court's caselaw. His dilatory tactics are further evidenced by the fact that he raised an unsupported statute-of-limitations argument in his prior Tax Court case. See supra note 2. Because we are convinced that petitioner instituted this case primarily in order to delay collection, we shall impose upon petitioner a $1,500 penalty pursuant to section 6673(a)(1).

The Court has considered all of petitioner's contentions, arguments, requests, and statements. To the extent not discussed herein, we conclude that they are meritless, moot, or irrelevant.

To reflect the foregoing,

An appropriate order and decision will be entered.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended.

2 Petitioner filed a motion to vacate or revise the decision entered by the Court in accordance with that Memorandum Opinion. The Court denied that motion in a Supplemental Memorandum Opinion. See Kun v. Commissioner [Dec. 55,816(M)], T.C. Memo. 2004-273. Therein, the Court noted that petitioner was merely repeating his argument "that respondent did not timely assess the liabilities in question." Id. The Court then concluded that "Petitioner failed to present any evidence at trial in support of his contention that his 1995-99 income tax liabilities were not timely assessed, and that failure also infects his motion." Id.

3 By that time, the Court of Appeals for the Ninth Circuit's decision had become final.

4 The $10,652 was petitioner's "Net Realizable Equity in assets". The Appeals Office calculated that number by first adding together the fair market value of petitioner's assets, which included, among other things, a checking account and a car. The Appeals Office then reduced the value of the noncash assets by 20 percent to determine the "Quick Sale Value" and then further reduced the value of petitioner's encumbered or exempt assets by the amount of the encumbrances or exempt amount.

5 Pursuant to the Internal Revenue Manual (IRM), an offer-in-compromise "will be deemed not processable" if "All tax returns for which the taxpayer has a filing requirement" are not filed. 1 Administration IRM (CCH), pt. 5.8.3.4.1(1), at 16,276 (Sept. 1, 2005). As of June 8, 2006, petitioner had not filed a 2005 Federal income tax return or an extension request. Nor had he made estimated tax payments or had any tax withheld for that year.

6 This is in response to a statement by the settlement officer and an argument by respondent that the limitations period for collection with respect to 1994 was tolled under sec. 6331(k) and (i)(5) from April 2002 until 90 days after the Court of Appeals for the Ninth Circuit's November 2005 decision.

7 Determinations made after Oct. 16, 2006, are appealable only to the Tax Court. See Pension Protection Act of 2006, Pub. L. 109-280, sec. 855, 120 Stat. 1019.

8 In the interest of completeness, petitioner also based his offer-in-compromise on doubt as to liability with respect to the 1994 taxable year on the basis that the applicable limitations period on collections had run with respect to that taxable year. We have already addressed that issue.

9 The statute referred to by petitioner is Cal. Civ. Proc. Code sec. 703.140(b)(1) (West Supp. 2008).

10 In his reply brief petitioner appears to point to respondent's brief, or some other document, in what might constitute an effort to demonstrate that petitioner raised the bankruptcy issue before the Appeals Office. We remain unpersuaded that petitioner raised the issue before the Appeals Office.



The IRS did not violate 11 U.S.C. §525 when it returned a corporation's offer in compromise (OIC) as nonprocessable during the pendency of its chapter 11 bankruptcy proceeding. IRS policy and procedures provided that, because the corporation was in bankruptcy, processing its OIC was not in the government's best interest. Moreover, mandamus relief was not available to the corporation as an alternative means to compel the government to consider its OIC. The IRS owed no clear duty to the corporation to act as required for mandamus relief. Its discretion to compromise carried with it the discretion not to exercise that discretion.

1900 M Restaurant Associates, Inc., 2007-1 USTC ¶50,116; aff'g, BC-DC D.C., 2005-1 USTC ¶50,313, 319 BR 302.

The IRS was not required to process an offer-in-compromise submitted by debtors in bankruptcy. That type of requirement would be a remedy in the nature of mandamus and that remedy was not appropriate. The IRS owed no clear duty to the debtors and its decision to not process offers-in-compromise submitted by debtors in bankruptcy was solely within its discretion. The plan confirmation process was an adequate alternative remedy to obtain a compromised tax liability from the IRS. Requiring the IRS to negotiate with the debtors outside of the plan confirmation process would not further the provisions of the Internal Revenue Code nor would it foster the ultimate goal of achieving a confirmed plan. The reasoning of 1900 M Restaurant Associates, Inc., BC-DC D.C., 2005-1 USTC ¶50,313, was adopted.

W. Uzialko, BC-DC Pa., 2006-1 USTC ¶50,297.

The District Court affirmed a Bankruptcy Court order requiring the IRS to consider an offer in compromise made by an individual in bankruptcy. The Bankruptcy Court had jurisdiction to make such an order under 11 U.S.C. §105, which states that a bankruptcy court can issue any order necessary to carry out the provisions of the Bankruptcy Code.

W.K. Holmes, DC Ga., 2005-1 USTC ¶50,230.

The IRS was ordered to process and consider an offer in compromise submitted by a debtor despite the agency's published policy of not considering offers in compromise from taxpayers who have filed for bankruptcy. The IRS position of not accepting less than what is required to be paid by a Chapter 13 reorganization plan, as set forth in Rev. Proc. 2003-71, was not required by the Tax Code or Treasury Regulations and did not carry the force and effect of law. Also, the IRS determination not to entertain offers in compromise from those in bankruptcy was not exempt from judicial review as an "agency action."

C. Peterson, BC-DC Neb., 2005-1 USTC ¶50,142, 317 BR 532.

A federal district court upheld a bankruptcy court order compelling the IRS to consider an individual debtor's offer in compromise. The bankruptcy court properly reasoned that the IRS could not dismiss the debtor's offer without processing and considering it, as the IRS does with non-debtor offers. The court reasoned that the offer was not submitted as a request for a discharge of taxes, but rather as a reflection of what the debtor was able to pay. The IRS's policy of mechanically disregarding the debtor's offer in compromise did not allow a "fresh start", as generally promoted by the Bankruptcy laws. Moreover, the rejection of such offers contradicted the IRS's general practice of being flexible in negotiating with debtors. The court rejected the government's claim that the order exceeded the bankruptcy court's jurisdiction pursuant to Bankruptcy Code sections 1129(a)(9) and 1129(a)(7). It was determined that Congress only intended to bar consideration of offers during Chapter 11 proceedings where a debtor did not agree to different treatment of his claim. Finally, the court was not persuaded that the order violated the Anti-Injunction Act.

R.H. Macher, DC Va., 2004-1 USTC ¶50,114, aff'g BC-DC Va., 2003-2 USTC ¶50,537.

The IRS has announced its nonacquiescence with respect to In re Macher, in which a federal district court upheld a bankruptcy court's order compelling the IRS to consider an individual debtor's offer in compromise. The district court found that the IRS's policy of mechanically rejecting a debtor's offer in compromise did not allow the "fresh start," generally promoted by the bankruptcy laws. The district court also found that the IRS's rejection of such offers contradicted the IRS's general practice of being flexible in negotiating with debtors.

Nonacquiescence Announcement, I.R.B. 2004-32, August 9, 2004.

The Chief Counsel has recommended nonacquiescence with respect to In re Macher. In Macher a federal district court upheld a bankruptcy court's order compelling the IRS to consider an individual debtor's offer in compromise. The district court found that the IRS's policy of mechanically rejecting a debtor's offer in compromise did not allow the "fresh start," generally promoted by the bankruptcy laws. The district court also found that the IRS's rejection of such offers contradicted the IRS's general practice of being flexible in negotiating with debtors.

AOD 2004-03, August 5, 2004.

An individual failed to prove that he entered into a contract with the IRS to release a federal tax lien on his real property. Since an IRS agent lacked statutory authority to release the lien prior to the taxpayer's discharge in bankruptcy, he could not accept the taxpayer's offer to release the lien for payment and, thus, there was no mutual assent to a settlement agreement. Moreover, even if a contract had been formed, the existence of a material misrepresentation on the part of the taxpayer would have made the contract voidable.

G.J. Buesing, FedCl, 2000-2 USTC ¶50,724, 228 FSupp2d 908.

An IRS policy not to consider offers in compromise from taxpayers who had filed for bankruptcy was impermissibly discriminatory because it was based solely on the bankruptcy status of the taxpayer and not on the merits of the offer. Failure to consider offers in compromise made by bankruptcy debtors denied the debtors access to procedures set forth in Code Sec. 7122 that were available to all other taxpayers. Further, investigation of offers in compromise did not violate the automatic stay. It was also irrelevant that a bankruptcy filing might transfer the IRS's authority to accept a compromise offer to the Department of Justice. Therefore, married taxpayers who had filed for bankruptcy were entitled to have their offer in compromise considered by the IRS under the same standards as non-debtor taxpayers.

G.E. Chapman, BC-DC W.Va., 99-2 USTC ¶50,690.

Similarly.

D.A. Mills, BC-DC W.Va., 2000-1 USTC ¶50,103, 240 BR 689.

The IRS's rejection of married taxpayers' two offers-in-compromise with respect to both income and employment taxes was not an abuse of discretion. The taxpayers had already filed for bankruptcy when they submitted their first offer-in-compromise (OIC) and the Appeals officer rejected the offer because it was less than what the IRS expected to receive from the bankruptcy distribution and because accepting the offer would risk, if not extinguish, all claims the IRS had to the bankruptcy estate's assets. The IRS also did not abuse its discretion when rejecting the taxpayers' second OIC with respect to the husband's employment tax liabilities because the taxpayers' financial situation had improved by the time the second OIC was submitted and the IRS determined that the taxpayers could pay their liabilities in their entirety. In addition, the taxpayers did not present any argument or evidence to suggest that the rejection of the second OIC was an abuse of discretion.

C.E. Salazar, 95 TCM 1149, Dec. 57,342(M) , TC Memo. 2008-38.

The IRS did not abuse its discretion in rejecting a taxpayer's offer-in-compromise of his outstanding tax liabilities. In evaluating his reasonable collection potential, the taxpayer argued that the IRS failed to make an allowance for his basis living expenses greater than provided in published guidance and that the IRS failed to take into consideration his option to file for bankruptcy and potentially discharge some of the tax liabilities. However, the taxpayer had not disclosed any special circumstances that would warrant allowing him a standard of living more lavish that the standard for the area where he lived. The evidence also indicated that the IRS did consider the possibility that the taxpayer might file for bankruptcy; however, in light of the changes to the bankruptcy law, the IRS believed that the taxpayer would not be able to avoid paying the total tax liability by filing for bankruptcy.

C. Klein, 94 TCM 423, Dec. 57,156(M), TC Memo. 2007-325.




The IRS has issued the 2007 allowable living expense standards. Allowable living expense standards, also known as collection financial standards, are used to determine the ability of a taxpayer to pay a delinquent tax liability. The standards are effective October 1, 2007. For bankruptcy purposes, the effective date for the standards will be January 1, 2008. IRS News Release IR-2007-163 , October 1, 2007.

[ Code Sec. 7122]


Delinquent tax liability: Allowable living standards: Expenses. --
The IRS has issued the 2007 allowable living expense standards. Allowable living expense standards, also known as collection financial standards, are used to determine the ability of a taxpayer to pay a delinquent tax liability. The standards are effective October 1, 2007. For bankruptcy purposes, the effective date for the new standards will be January 1, 2008.



The Internal Revenue Service issued the 2007 allowable living expense standards.

Allowable living expense standards, also known as collection financial standards, are used to determine the ability of a taxpayer to pay a delinquent tax liability. For purposes of federal tax administration the standards are effective Oct. 1, 2007.

This year the standards have been redesigned to incorporate:
 a new category for out of pocket health care expenses

 the elimination of income ranges for national standards for food, clothing and other items

 a nationwide set of tables for national standard expenses, eliminating separate tables for Alaska and Hawaii

 an expanded number of household categories for housing and utilities

 an allowance for cell phone costs in housing and utilities

 equal allowances for first and second vehicles under transportation expenses

 fewer Metropolitan Statistical Areas for vehicle operating costs

 a separate nationwide public transportation allowance

The Allowable Living Expense standards rely on data from the Bureau of Labor Statistics, the Medical Expense Panel Survey and other governmental surveys of actual consumer expenditures and provide a basis for allowances. The IRS adjusts survey data for inflation according to the Consumer Price Index.

Expense information for use in bankruptcy calculations can be found on the Department of Justice U.S Trustee Program Web site. For bankruptcy purposes, the effective date for the new standards will be Jan. 1, 2008.

IRS News Release, IR-2007-163, October 1, 2007.

Section 6321 – Creation of a tax lien

In re Joe L. Thomas, Debtor. Joe L. Thomas, Plaintiff v. Department of the Treasury, Internal Revenue Service, Defendant.

U.S. Bankruptcy Court, Dist. N.J.; 07:1588 (DHS), July 23, 2008.

[ Code Sec. 6320]

Bankruptcy: Assessment: Tax liens: Notice and demand. --
The IRS complied with notice requirements by sending the notices of federal tax lien to a debtor's last known address. Non-receipt of the notices did not affect the validity and priority of the liens and the IRS was not required to send the notices to the debtor's accountants. Moreover, the accountant's participation in negotiations with the IRS on the debtor's behalf clearly showed that the debtor had sufficient notice.



[ Code Sec. 6321]

Bankruptcy: Assessment: Tax liens: Notice and demand. --
IRS liens were validly perfected. The liens were created and attached when the IRS made its assessment using the debtor's calculation of income tax owed as set forth on his filed tax returns.



[ Code Sec. 6323]

Bankruptcy: Assessment: Tax liens: Notice and demand: Secured claims. --
The IRS complied with notice requirements by sending notices of federal tax lien to a debtor's last known address. The timely filing of the notices prior to the bankruptcy petition date provided the IRS with a secured claim to the extent of value of the property upon which the liens attached. Thus, the IRS retained its secured claims which could not be modified to allowed unsecured claims with priority status.


OPINION




THE HONORABLE DONALD H. STECKROTH, BANKRUPTCY JUDGE

STECKROTH, UNITED STATES BANKRUPTCY JUDGE: Before the Court is a motion for summary judgment filed by the Department of the Treasury, Internal Revenue Service (hereinafter "IRS") seeking dismissal of the instant adversary complaint filed by Joe L. Thomas (hereinafter "Debtor" or "Plaintiff") on the following grounds: (i) the IRS properly notified the Debtor of the federal tax liens pursuant to 26 U.S.C. § 6320; (ii) Section 507(a)(8) of the Bankruptcy Code is inapplicable to the IRS's secured claim; and (iii) the Debtor misconstrued the perfection requirements for federal tax liens. In opposition, the Debtor contended that: (i) the IRS failed to properly perfect the federal tax lien; (ii) the IRS Proof of Claim arising from tax years ending December 31, 2001, 2002, 2004 should be modified from secured to general unsecured claims pursuant to Section 507(a)(8) as they are outside of the three-year "look back" period; and (iii) the Debtor did not receive the Notice of Federal Tax Liens.

For the reasons stated hereafter, the IRS's motion for summary judgment is hereby granted. The Court has jurisdiction over this motion pursuant to 28 U.S.C. § 1334 and the Standing Order of Reference from the United States District Court for the District of New Jersey dated July 23, 1984. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(K). Venue is proper under 28 U.S.C. §§ 1408 and 1409. The following shall constitute the Court's findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052.


Statement of Facts and Procedural History


The Debtor, Joe L. Thomas, filed a voluntary petition for Chapter 11 bankruptcy protection on April 30, 2007. The IRS filed a Proof of Claim for $2,035,999.08 on May 8, 2007. Id. at ¶ 4. At that time, Debtor's Counsel was advised by the Debtor's pre-petition accountants that notices of federal tax liens were not served upon the Debtor or his accountants. See Certification of Melinda D. Middlebrooks, Esq. In Support of the Objection on Behalf of Plaintiff Joe L. Thomas to the Motion for Summary Judgment ("Middlebrooks Cert."), at ¶ 2. On November 15, 2007, the Debtor commenced the instant adversary proceeding against the IRS to determine the validity, priority, and extent of the IRS's liens pursuant to Sections 101 and 545 of the Bankruptcy Code and Bankruptcy Rule 7001.

The Proof of Claim indicates that the total amount of the claim is as follows: (i) $1,846,869.87 is secured; (ii) $157,086.69 is a priority claim; and (iii) $32,042.52 is unsecured. See Objection on Behalf of Plaintiff ("Pls. Obj."), at Exhibit A. Furthermore, the secured liability exclusive of penalties and pre-petition interest is: (i) $801,746.28 for the tax period ending December 31, 2001 ("2001 Tax"); (ii) $192,712.00 for the tax period ending December 31, 2002 ("2002 Tax"); and (iii) $109,930.00 for the tax period ending December 31, 2004 ("2004 Tax"). Id., at Exhibit B; Middlebrooks Cert. at ¶ 7. The Debtor submits that the IRS first filed a "Notice of Tax Lien" on November 3, 2003 in Bergen County, New Jersey and New York County, New York. Middlebrooks Cert. at ¶ 8. However, the Proof of Claim attached to the Debtor's Objection states that the Notice of Tax Lien filed on November 3, 2003 was with respect to the 2001 Tax. See Pls. Obj., at Exhibit B. Subsequently, Notices of Tax Lien were filed in Bergen County on April 5, 2004 and October 31, 2006 for the 2002 Tax and the 2004 Tax, respectively. Id.

In its certification accompanying the instant motion, the IRS details its efforts to file and serve the Notice of Federal Tax Lien upon the Debtor. For the 2001 Tax, the IRS states that it filed its Notice in New York County and Bergen County on October 22, 2003 and served the Debtor via certified mail on October 27, 2003. Declaration of Gertrude Maughan ("Maughan Decl."), at ¶¶ 2-5. 1 On March 9, 2004, the IRS filed the Notice in Bergen County for the 2002 Tax and served such Notice on the Debtor on March 12, 2004 via certified mail. Id. at ¶¶ 6-7. On October 24, 2006, the IRS filed a Notice in Bergen County for the 2004 Tax and served the Notice on the Debtor on October 31, 2006. Id. at ¶¶ 8-9.

In the certification accompanying Debtor's Objection, Counsel to the Debtor certifies that upon searches of the certified mail numbers for the various letters sent with the Notices, the United States Postal Service records indicate that there was no record of the letters being mailed or received. See Middlebrooks Cert., at ¶¶ 13-18. Specifically, Counsel for the Debtor submits that identical certified mail numbers were used for letters mailed on October 17, 2003 and October 27, 2003. Id. at ¶ 16. Additionally, the zip code for Saddle River, where the Debtor had real property, was incorrect. Id. at ¶ 17. Thus, the Debtor argues that the Notices of Federal Tax Liens were never received (even if mailed). The Debtor's accountants pre- and post-petition, Wlodinguer, Erk & Chanzis, corroborate the Debtor's assertion. See Certification of Arthur Erk, CPA In Support of Plaintiff's Objection ("Erk Cert."), at ¶ 7.


Discussion


The issues for the Court to consider in the instant motion are: (i) whether the tax liens were properly perfected; (ii) whether the Debtor received notice of the federal tax liens; and (iii) whether the tax liens satisfy the requirements of Section 507(a)(8) allowing for a modification of the tax claim from a secured to either a priority or general unsecured claim. The Court will address these issues in turn below.



I. Summary Judgment Standard

A court may grant summary judgment under Federal Rule of Civil Procedure 56(c), made applicable to adversary proceedings pursuant to Federal Rule of Bankruptcy Procedure 7056, "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Id. At the summary judgment stage, the role of the court "is not to weigh evidence, but to determine whether there is a genuine issue for trial." Knauss v. Dwek, 289 F. Supp. 2d 546, 549 (D.N.J. 2003) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986)). The court must construe facts and inferences in a light most favorable to the non-moving party. See Am. Marine Rail NJ, LLC v. City of Bayonne, 289 F. Supp. 2d 569, 578 (D.N.J. 2003) (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986)). "Only evidence admissible at trial may be used to test a summary judgment motion. Thus, evidence whose foundation is deficient must be excluded from consideration." Williams v. Borough of West Chester, Pa., 891 F.2d 458, 471 (3d Cir. 1989) (citations omitted).

The moving party must make an initial showing that there is no genuine issue of material fact. See Knauss, 289 F. Supp. 2d at 549 (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)). The burden then shifts to the non-moving party to "'make a showing sufficient to establish the existence of [every] element essential to the party's case, and on which that party will bear the burden of proof at trial.'" Cardenas v. Massey, 269 F.3d 251, 254-55 (3d Cir. 2001) (questioned on other grounds) (quoting Celotex Corp., 477 U.S. at 322). The "mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson, 477 U.S. at 247-48 (emphasis in original). An issue of fact is "genuine" if a reasonable juror could return a verdict for the non-moving party. See id. at 248. Furthermore, a material fact is determined by the substantive law at issue. See Crane v. Yurick, 287 F. Supp. 2d 553, 556 (D.N.J. 2003) (citing Anderson, 477 U.S. at 248). A fact is "material" if it might affect the outcome of the suit under governing law. Id. Disputes over irrelevant or unnecessary facts are insufficient to defeat a motion for summary judgment. Anderson, 477 U.S. at 248 (citation omitted).

However, even if material facts remain disputed, summary judgment may be proper if, after all inferences are drawn in the non-moving party's favor, the moving party is entitled to judgment as a matter of law. Id. at 248-50. Such a judgment is appropriate "as a matter of law" when the non-moving party has failed to make an adequate showing on an essential element of his or her case, as to which he or she has the burden of proof. See Celotex Corp., 477 U.S. at 322-23. When one party moves the court for summary judgment, Federal Rules of Civil Procedure 54(c) and 56, taken together, permit the court to enter summary judgment on behalf of the non-movant, even if the non-movant has not filed a cross-motion for summary judgment. See Peiffer v. Lebanon Sch. Dist., 673 F. Supp. 147, 151-52 (M.D. Pa. 1987) (citation omitted). On the other hand, a court must deny a motion for summary judgment when a genuine issue of material fact remains to be tried, or where the moving party is not entitled to a judgment as a matter of law.



II. Perfection of Federal Tax Liens

Section 6321 of the Internal Revenue Code, found at Title 26 of the United States Code, provides:
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

26 U.S.C. § 6321 (2008). Furthermore, Section 6322 provides that the lien against the delinquent taxpayer's property arises at the time the IRS the assessment is made. 26 U.S.C. § 6322 (2008); see United States v. Jamas Day Care Ctr. Corp., 04-4586, 2005 U.S. App. LEXIS 22886, at *4 (3d Cir. October 21, 2005); United States v. Green, 201 F.3d 251, 253 (3d Cir. 2000); Pittsburgh Nat'l Bank v. United States, 657 F.2d 36, 38 (3d Cir. 1981). An assessment is the recording of the taxpayer's liability with the Secretary. 26 U.S.C. § 6203 (2008). Federal tax liens attach to all property of the taxpayer at the time of assessment. See 26 U.S.C. § 6321; United States v. Kudasik, 21 F. Supp. 2d 501, 506 (W.D. Pa. 1998).

In the instant matter, the IRS acknowledged at the hearing it made the assessment using the Debtor's calculation of income tax owed as set forth on his filed tax returns. The IRS further noted that it had no dispute as to the amount owed. Despite the Debtor's contentions, the IRS's liens were created and attached at the time of the filed assessment by the IRS. Thus, the liens are validly perfected. See 26 U.S.C. § 6303 (2008).



III. Proper Notice of Federal Tax Liens

Upon the filing of a tax lien, the IRS must provide notice of the lien and specific information to the taxpayer pursuant to Section 6320(a), which specifically states:
(2) Time and method for notice. The notice required under paragraph (1) shall be-

(A) given in person;

(B) left at the dwelling or usual place of business of such person; or

(C) sent by certified or registered mail to such person's last known address, not more than 5 business days after the day of the filing of the notice of lien.

(3) Information included with notice. The notice required under paragraph (1) shall include in simple and nontechnical terms-

(A) the amount of unpaid tax;

(B) the right of the person to request a hearing during the 30- day period beginning on the day after the 5-day period described in paragraph (2);

(C) the administrative appeals available to the taxpayer with respect to such lien and the procedures relating to such appeals; and

(D) the provisions of this title and procedures relating to the release of liens on property.

26 U.S.C. § 6320 (2008). The IRS employed the notice method under Section 6320(a)(1)(C) by sending Notices of Federal Tax Lien to the Debtor at his last known address. The parties dispute whether such notice was actually received. However, a plain reading of the relevant Internal Revenue Code sections shows that the IRS's compliance with the notice requirements turns simply upon the filing and mailing of the Notice of Federal Tax Lien. See Walker v. United States, 04-5448, 2008 U.S. Dist. LEXIS 15568, at *13-14 (D.N.J. February 29, 2008).

In Walker, the plaintiff argued that he failed to receive the IRS's notice of revocation and thus the government failed to comply with 26 U.S.C. § 6325(f)(2)(A). Section 6325(f)(2)(A)'s notice requirements are verbatim those of Section 6320(a), the applicable Internal Revenue Code section in the instant matter. Compare 26 U.S.C. § 6320(a) with 26 U.S.C. § 6325(f)(2)(A) (2008). The Walker Court held that Section 6325(f) only requires the revocation notice to be mailed to the taxpayer's last known address without any further requirement that such notice is received. See Walker, 2008 U.S. Dist. LEXIS 15568, at * 13-14. Although revocation notices are not at issue in the instant matter, the notice requirements for the imposition of a federal tax lien derive from the same statutory language and principles of statutory construction require the same meaning to be applied to both. Any different reading of Section 6320(a) would lead to a dichotomous result within the Internal Revenue Code.

Moreover, the Code of Federal Regulations further elaborates upon the IRS's obligations to notify the taxpayer of a federal tax lien. Specifically 26 C.F.R. § 301.6320-1(a)(2) provides a question and answer section which states:
A [Notice of Federal Tax Lien ("NFTL")] becomes effective upon filing. The validity and priority of a NFTL is not conditioned on notification to the taxpayer pursuant to section 6320. Therefore, the failure to notify the taxpayer concerning the filing of a NFTL does not affect the validity or priority of the NFTL. When the IRS determines that it failed properly to provide a taxpayer with a [Collection Due Process Hearing Notice ("CDP Notice")], it will promptly provide the taxpayer with a substitute CDP Notice and provide the taxpayer with an opportunity to request a CDP hearing.

IRS, Procedure and Administration Collection Lien for Taxes, 26 C.F.R. § 301.6320-1(a)(2) Q&A A-12 (2008), 26 CFR s 301.6320-1(a)(2) (LEXIS) (citations omitted). "[F]ailure to send proper notice after the filing of the lien does not invalidate the lien, but rather extends the time in which the taxpayer may file a CDP appeal." Don Johnson Motors, Inc. v. United States, 532 F. Supp. 2d 844, 858 n.4 (S.D. Tex. Brownsville Div. 2007) (citing 26 C.F.R. § 301.6320-1(a)(2) Q&A A-12). Therefore, even if an issue of fact exists as to receipt of notice, as the Debtor argues, the validity and priority of the tax lien is not affected; simply, the Debtor's time to request a hearing becomes an issue.

Additionally, the Debtor contends that his pre-petition accountants served as his agent for financial matters, therefore, the IRS was required to also send Notice of the Federal Tax Liens to their attention. The Debtor's argument is misplaced as the IRS is only obligated to notify the delinquent taxpayer pursuant to Section 6320. Section 6321 clearly states that the IRS will provide notice to the "person" who refuses or neglects to pay a tax liability. "'Person' is defined as the person liable to pay the tax due after notice and demand who refuses or neglects to pay the tax due (i.e., the taxpayer. The taxpayer, and only the taxpayer, is entitled to notice." Don Johnson Motors, Inc. v. United States, 532 F. Supp. 2d 844, 860 (S.D. Tex. Brownsville Div. 2007) (citing 26 C.F.R. § 301.6320-1(a)(2) Q&A A-1 & A-7). Thus, whether the Debtor's accountants were entitled to receive notice is not at issue.

Lastly, Arthur Erk, in his certification accompanying the Debtor's opposition to the instant motion, stated that he had personal communications with the IRS on an ongoing basis with respect to negotiations addressing the Debtor's tax liability for the relevant time periods. Participation in the IRS's offer of compromise process "necessarily imports prior notice." United States v. Berk, 374 B.R. 385, 394 (D. Mass. 2007). Clearly, the Debtor's argument at the hearing that formal written demand was required is incorrect. As the Debtor's accountants admittedly engaged in negotiations with the IRS on the Debtor's behalf, the Debtor had sufficient demand for payment and notice of the federal tax liens.



IV. Modification of Proof of Claim Pursuant to Section 507(a)(8) of the Bankruptcy Code

Finally, the IRS argues that the Debtor's reliance upon Bankruptcy Code Section 507(a)(8) is misplaced and the IRS's liens retain their secured status, while the Debtor contends that due to the application of the "three-year look back" period, the IRS's claims should be modified to general unsecured claims. Section 507 of the Bankruptcy Code provides the priority for claims distribution with subsection (a)(8)(i) applying specifically to allowed unsecured claims of governmental units. Such claims are for taxes "measured by income or gross receipts for a taxable year ending on or before the Petition Date... .for which a return... .is due, [inclusive of] extensions, after three years before the date of the filing of the petition." 11 U.S.C. § 507(a)(8)(i) (2008). A plain reading of Section 507(a)(8) clearly shows that it is applicable to allowed unsecured claims and has no relevance to secured claims.

The filing of a Notice of Federal Tax Lien prior to the Petition Date provides the IRS with a secured claim to the extent of value of the property upon which the lien attaches. See United States v. TM Building Prods., Ltd., 231 B.R. 364, 370-71 (S.D. Fla. 1998) distinguished on other grounds in Herckner v. United States, 2005 U.S. Dist. LEXIS 8539, at *5 (D.N.J. March 18, 2005) (holding that secured claims of the IRS may not simultaneously be treated as a priority unsecured claim); Secured Tax Claims and Priority of Tax Claims, Bankruptcy Taxation, 15-TX4 COLLIER ON BANKRUPTCY P TX4.04, (Lawrence P. King, ed., 15th ed. rev.) (2007). "The presence or absence of a recorded Notice of Federal Tax Lien at the time a petition for Chapter 11 is filed will control how a claim... .is treated in bankruptcy." United States v. TM Building Prods., 231 B.R. at 370-371 (citing United States v. Creamer, 195 B.R. 154, 156 (M.D. Fla. 1996); In re Reichert, 138 B.R. 522, 526-27 (Bankr. W.D. Mich. 1992)). Here, the IRS timely filed Notices of Federal Tax Liens for 2001, 2002, and 2004 pre-petition; thus, the IRS retains secured claims against the Debtor and these may not be modified to allowed unsecured claims with priority status. See id. at 371.


Conclusion


For the reasons stated above, the IRS's motion for summary judgment is hereby granted. The adversary complaint in the instant matter is hereby dismissed. An Order in conformance with this Opinion has been entered by the Court and a copy is attached hereto.

1 Gertrude Maughan is a Revenue Officer for the Internal Revenue Service.

The United States has no lien for taxes where there is no evidence as to when any assessment had been made.

Kennebec Box Co., 1925 CCH ¶7081, CA-2, 5 F2d 951.

Hill, 1928 CCH D-8156, DC, 25 F2d 1007.

Interest accruing from the date tax liens were filed enjoyed the same priority in interpleaded funds as the priority of the perfected tax liens themselves. Since interest is to be collected in the same manner as taxes and tax liens include all interest due from the date a tax payment is due until the date the payment is made, it was proper for the interest owed and the tax liens to have the same priority status. As the perfected tax liens had first priority, interest on the taxes owed also had first priority.

Paul Revere Life Ins. Co., CA-6, 94-2 USTC ¶50,519.

IRS liens for unpaid excise and employment taxes did not have priority over a state (New Jersey) tax division's liens for unpaid motor fuels taxes because the state liens were choate before the IRS liens arose. The amount of the state's liens were sufficiently established even though the corporate taxpayer had the right to appeal the state's assessment. The state's liens had not terminated despite the expiration of a warrant of execution because the warrant did not create the lien. The state's liens were also considered summarily enforceable even though the state was not required to take possession of the taxpayer's property.

Monica Fuel, Inc., CA-3, 95-2 USTC ¶50,477, 56 F3d 508.

A state (Virginia) did not qualify as a judgment lien creditor and its claim against an estate's assets did not have priority over federal tax liens that were first in time. Despite the fact that Virginia law gave the state lien the "effect" of a judgment, the state did not satisfy the tax code criteria to be a judgment lien creditor because its lien was not obtained in a court of record or from any type of judicial authority. Monica Fuel, Inc., CA-3, 95-2 USTC ¶50,477, distinguished.

South Independence, Inc., BC-DC Va., 2001-1 USTC ¶50,312, 256 BR 861.

Where no assessments had been made prior to the taxpayer's death, jointly owned assets that passed directly to his surviving spouse were not subject to a lien.

Rev. Rul. 78-299, 1978-2 CB 304.

The government failed to prove that it had made a formal demand for taxes.

J.R. Coson, CA-9, 61-1 USTC ¶9219, 286 F2d 453.

Cattani, N.J. SCt, 54-1 USTC ¶9262, 103 A2d 51.

A formal demand was unnecessary where the taxpayer offered to pay an amount to compromise his tax liability and the government, in turn, ultimately accepted his offer.

Guaranty Trust Co., CA-4, 1 USTC ¶130, 5 F2d 553.

A tax lien did not arise prior to a demand for a penalty imposed as a result of a failure to pay over withholding taxes.

Mrizek, DC, Ill., 59-2 USTC ¶9678.

A contemporaneous act of filing a lien at a time when a demand for payment was taped to the taxpayer's mailbox did not render the lien void.

Macey & Sikes, DC Ga., 86-1 USTC ¶9176, 628 FSupp 52.

A taxpayer was properly convicted of failing to disclose a "tax lien" to HUD when signing a loan application, although no tax lien existed because no demand was made by the IRS. The use of the word "lien" in the indictment was unnecessary, and the variance was harmless.

M. Guon, CA-9, 71-1 USTC ¶9441.

A demand on a partnership was a demand upon all of its partners and was sufficient for making assessed taxes a lien on property of individual partners.

American Surety Co. of New York, Wash. SCt, 61-2 USTC ¶9574, 363 P2d 99. Cert. denied, 368 US 989.

Similarly, with respect to "silent partner."

R. Adams, DC Neb., 71-1 USTC ¶9492, 328 FSupp 228.

A filing of a claim for taxes with a referee in bankruptcy related back to the date of the assessment against the bankrupt and satisfied the statutory requirement that there be a demand for payment in order for a tax lien to arise.

Fidelity Tube Corp., CA-3, 60-1 USTC ¶9446, 278 F2d 776.

A tax lien against a recognized creditor of a bankrupt was without effect where notice was given to the trustee in bankruptcy without the court's permission.

Eagle Frosted Foods Corp., DC Del., 52-1 USTC ¶9295.

Tax liens were created at the time of assessment.

B & H Opticks, Inc., DC Mo., 86-1 USTC ¶9480, 63 FSupp 1356.

R.F. Morgan, BC-DC Fla., 97-2 USTC ¶50,739.

S.J. Larrew, DC Texas, 2006-2 USTC ¶50,461.

A creditor's argument that because the IRS originally filed a jeopardy assessment against the debtor, which was paid within ten days of filing, the IRS did not have a secured claim was rejected because the lien arose at the time the assessment was made and continued until the liability was satisfied.

R.M. Gibout, BC-DC Mich., 2000-2 USTC ¶50,583.

An individual who failed to pay assessed taxes after demand was required to surrender his stock certificates to the government in payment of the assessed taxes. The government had made timely assessments and had perfected liens on each assessment. Therefore, the liens could be reduced to judgment. Execution of the judgment could reach any property, real or personal, belonging to the individual. The individual did not carry his burden of proving that the assessments were wrong.

D.J. Mueller, DC Pa., 93-2 USTC ¶50,597.

A federal tax lien was valid against a subsequent purchaser in the chain of title to property encumbered by the tax lien. The lien was valid and choate at the time of the assessment and the lien was perfected on the date that it was filed.

B.J. Glass, DC Ky., 88-2 USTC ¶9600, 703 FSupp 38.

Code Sec. 6325(a)(1) does not require the IRS to release valid tax liens when the underlying tax debt is discharged in bankruptcy. Although a discharge in bankruptcy prevents the IRS from taking any action to collect the debt as a personal liability of the debtor, their property may remain liable for a debt secured by a valid tax lien.

R.H. Isom, CA-9, 90-1 USTC ¶50,216, 901 F2d 744.

Although debtors' personal liability for taxes had been discharged in a Chapter 7 bankruptcy proceeding, the IRS's tax liens survived and attached to the debtors' prepetition property and rights to property. Even though bankruptcy is defined as a fresh start for debtors, Congress intended that valid tax liens would survive bankruptcy. The debtors could not employ the expansive powers under Chapter 11 of the Bankruptcy Code to avoid the tax liens in their Chapter 7 case.

M. Avola, BC-DC N.J., 97-2 USTC ¶50,813.

The taxpayer's argument that a forfeiture provision in his franchise agreement prevented attachment of a tax lien was without merit. These provisions are not effective against a federal tax lien.

H.J. Mathews, DC Mo., 90-1 USTC ¶50,268.

Federal tax liens for taxes owed and statutory additions were valid against an individual who failed to file federal income tax returns for six consecutive years. Conveyances of a residence and farm to relatives were fraudulent under state law and were set aside. Federal tax liens attached to the fraudulently conveyed property. The U.S. was granted judgment foreclosing its tax liens on the fraudulently conveyed property and was authorized to sell such property to satisfy the tax liens and additions to tax.

E.D. Christensen, DC Utah, 90-2 USTC ¶50,543, 751 FSupp 1532. Dism'd, CA-10 (unpublished opinion 4/8/92).

Liens filed against the taxpayer's property with respect to unpaid assessments for income taxes, failure to pay over employment tax penalties and return preparer penalties were valid. The IRS had complied with the statutory procedures and had properly mailed notices of assessment and demands for payment to the taxpayer's last known address within sixty days of the assessments.

D.E. Coplin, DC Mich., 91-1 USTC ¶50,035. Aff'd, CA-6 (unpublished opinion 12/17/91).

An IRS tax lien was procedurally valid. Taxes were assessed because the taxpayer did not respond to a Notice of Deficiency within 90 days and the lien for unpaid taxes arose at the time of assessment. The taxpayer presented no evidence to refute the amounts assessed or to establish that the lien was unenforceable. His argument that the IRS failed to assess and collect tax within the permissible time period was without merit because 10 years had not passed since the assessments were made.

J.D. Snavely, DC Ala., 93-2 USTC ¶50,517.

The government was entitled, as a matter of law, to the proceeds from an auction of a tenant's property, as the landlords failed to establish that they had a super-priority security interest in the proceeds.

M.R. Eskanos, DC Colo., 91-2 USTC ¶50,492, 768 FSupp 759.

A federal tax lien seeking the unpaid employment taxes of a prime contractor had priority over a Miller Act letter sent by a subcontractor to the prime contractor, which antedated the federal tax lien. The notification letter sent by the subcontractor did not create a choate lien in the surety established by the prime contractor because it did not identify the property to which it attached.

J.D. Grainger Co., Inc., CA-9, 91-2 USTC ¶50,552.

An order to invalidate the certificate of sale of seized property was granted because the minimum 10-day requirement under Code Sec. 6335 was not met prior to the sale. The motion to return the property, however, was denied. The property remained subject to a valid seizure, which was effected after the IRS provided notice of the tax assessment creating a statutory lien in favor of the government.

J.J. Kulawy, DC Conn., 92-2 USTC ¶50,601. Aff'd, CA-2 (unpublished opinion 4/10/94).

The IRS acted properly when it released tax liens shortly after the tax owed was paid by the taxpayer; it was not required to release the tax liens prior to this time. The tax liens had been properly filed since an IRS officer had certified on the Notice of Federal Tax Lien that demand for payment had been made. The taxpayer's argument that all collection activities were suspended when it filed an appeal of the initial assessment was rejected.

Amber Truck Lines, DC Utah, 92-2 USTC ¶50,599, 805 FSupp 32.

Federal tax liens filed against a dairy company's property to satisfy the tax debt of the majority shareholders were valid and properly enforced. The IRS's rights to a corporate checking account levied upon were superior to the rights of a bank which held a security interest in the account. The bank did not properly perfect its interest in the property; it failed to establish that it had exercised its right of setoff.

Horton Dairy, Inc., CA-8, 93-1 USTC ¶50,195, 986 F2d 286.

An individual who failed to notify the IRS of a change of address was not entitled to the removal of tax liens that resulted from deficiencies assessed because of his failure to file returns. The IRS mailed the deficiency notices to the taxpayer's last known address and otherwise proceeded properly in assessing the deficiencies.

L.C. Tupper, DC Wis., 93-1 USTC ¶50,133.

A state (Florida) court's pre-judgment order requiring the deposit of cashier's checks that were in the possession of a delinquent taxpayer in a bank account pending the outcome of a case to determine ownership of said funds did not create a security interest for the creditors who were payees of the checks that could defeat a subsequently filed tax lien. The tax lien, which was filed prior to the entry of final judgment, had priority over the creditors' claim because the amount of their inchoate lien had not been conclusively established. The tax lien had priority over both the creditors' judgment lien and their pre-judgment interest obtained when the funds were ordered held in accordance with federal and state law. Although the checks were payable to the creditors, they were in the possession of the taxpayer's counsel up until their deposit in the bank account. Thus, the taxpayer held an interest in the funds to which the tax lien could attach.

Central Bank of Tampa, DC Fla., 93-2 USTC ¶50,586.

A tax lien that was filed prior to entry of a final judgment rendered in state (Florida) court had priority over creditors' claims. The tax lien also attached before the initiation of an interpleader action by the bank holding the deposited amount to recover attorney fees and costs. The creditors failed to prove that the government waived its right to the deposited funds when it allowed them to relinquish a landlord lien based on the belief that the funds were available to satisfy the debt owed to them.

Central Bank of Tampa, DC Fla., 94-1 USTC ¶50,290, 845 FSupp 860. Aff'd, per curiam, CA-11 (unpublished opinion), 95-2 USTC ¶50,558.

IRS liens for petroleum excise taxes had priority over the claims of an oil company that sold oil encumbered by the liens to a buyer who refused to pay for the oil, but instead deposited the sales proceeds with the court in an interpleader action. The IRS had recorded its notices of liens prior to the sale of the oil. The liens remained attached to the oil and extended to the proceeds even though the buyer was an innocent third party. Since the IRS established that it was entitled to the interpleaded funds and there were no material issues of fact, the IRS's motion for summary judgment was granted and the funds were awarded to the government to satisfy the liens.

Petro Source Partners, Ltd., DC Tex., 94-1 USTC ¶50,053.

A federal tax lien that arose when an audit deficiency was assessed against a taxpayer had priority over the rights of a transferee of oil and gas properties and was enforceable through a foreclosure sale of the transferred properties. Under state (Texas) law, the delinquent taxpayer had an interest in the mineral rights when the tax liens attached since the transfer deed had not yet been recorded. Similarly, stock owned by the taxpayer was subject to the tax liens because she transferred title in the shares after the liens attached.

R.L. Huszagh, DC Ill., 94-1 USTC ¶50,147, 846 FSupp 1352.

The IRS was entitled to foreclose on its federal tax liens on the real property of an individual. The IRS had created the liens by filing a certificate of assessments and payments in the office of the recorder of deeds where the taxpayer's property interests were recorded. The certificate identified the taxpayer, the character of the liability assessed, the taxable period and the amount of the assessment. The certificate was properly signed and dated. The taxpayer presented no evidence to rebut the presumption of the validity and propriety of the tax assessments.

G.E. Bass, DC Tenn., 93-2 USTC ¶50,504.

Married taxpayers' motion to dismiss an IRS action seeking to reduce their outstanding tax liabilities to judgment for failure of service was denied. The IRS's tax lien was a charge against property, not a self-executing seizure. Thus, there were no other judicial actions to which the taxpayers were denied notice and a hearing, and as a result, the taxpayers were properly served.

G.D. Bell, DC Calif., 97-1 USTC ¶50,426.

Alleged threats by an IRS agent were not deemed to be the substantial equivalent of a lien or levy because the threats were not so intimidating as to convert a voluntary payment of the taxes into an involuntary one.

R.C. Krause, DC Mich., 97-1 USTC ¶50,307.

The IRS correctly assessed tax against an individual who was denied a bad debt deduction for a loan that had not become totally worthless. Therefore, it had valid tax liens upon all property belonging to the taxpayer. Furthermore, the IRS perfected its liens, and a judicial sale of the property was appropriate.

S.A. Stemm, DC Fla., 97-2 USTC ¶50,838. Aff'd, per curiam, CA-11 (unpublished opinion), 98-2 USTC ¶50,636, 152 F3d 934.

A taxpayer who failed to contest the assessment of fees imposed by the IRS in connection with the placement of tax liens and levies on his property was liable for the fees.

G.M. Brown, FedCl, 99-1 USTC ¶50,337, 43 FedCl 463. Aff'd, CA-FC (unpublished opinion), 99-2 USTC ¶50,948.

The conveyance of real property by delinquent married taxpayers to the wife's daughter and son-in-law was set aside as fraudulent because it was intended to defeat the rights of the IRS as a creditor. Although the assessments were made shortly after the conveyance, the taxpayers knew they were in severe financial difficulty at the time they transferred the property. Since the IRS was deemed to be a creditor from the date the obligation to pay taxes accrued, rather than from the date the assessment was made, the tax liens filed against the taxpayers and against their daughter and son-in-law as nominees for the taxpayers were valid and could be foreclosed.

U. Freudenberg, DC Tenn., 99-2 USTC ¶50,623.

Federal tax liens against proceeds from the sale of a delinquent taxpayer's liquor license were superior to most of the state (Pennsylvania) tax liens filed against the taxpayer. Although the state liens attached as soon as proper notice was filed by the state, the notice did not constitute a judgment or allow the state to qualify as a judgment creditor. Accordingly, the federal liens were perfected as soon as the taxpayer's federal deficiencies were assessed, regardless of when the IRS filed notice of them, and only a state lien that was filed prior to the assessment of the taxpayer's federal deficiencies was superior to the federal liens. Finally, state law prohibiting the sale of a liquor license by a party that owed state taxes did not give the state a lien interest in the license; also, to the extent that the law granted the state a reserved interest in the license that amounted to a superpriority over federal tax liens, it was preempted by the Supremacy Clause of the U.S. Constitution.

R&E Corp., DC Pa., 99-2 USTC ¶50,813.

Chief Counsel concluded that Florida Collection personnel who desired to continue their long standing practice of filing both individual and joint notices of federal tax lien could continue to do so. Its previous recommendation against the use of a joint notice of federal tax lien when spouses owned property as tenants by the entirety and were jointly and severally liable did not preclude the Service Center from continuing its practice.

CCA Letter Ruling 200135028, July 31, 2001.

The government was entitled to set aside as fraudulent an individual's conveyance of real property to her daughter despite the fact that it assessed its tax liability more than a year and half after the taxpayer acquired and then transferred the subject property. Under state (Florida) law it was entitled to have the conveyance set aside as fraudulent since the government's claim arose as of the date on which the taxes were due and owing and constituted a liability as of the date when the tax return was required to be filed. Moreover, the transfer was to the taxpayer's daughter, the taxpayer received no consideration and conceded that she was insolvent as a result of the government's attempts to collect her tax debt, and the daughter did not take possession of the property until two years after the sale.

P. Labato, DC Fla., 2002-2 USTC ¶50,541.

Liens against a married couple who failed or refused to pay income and employment taxes properly arose on the date of assessment and attached to the taxpayers' residence. The taxpayers' contention that the liens were invalid because the IRS failed to issue a notice of deficiency prior to filing them was rejected. The IRS was not required to issue a notice of deficiency because the income taxes at issue were based on amounts voluntarily reported and because employment taxes are not subject to the Code Sec. 6212 deficiency procedures.

S.C. Burdine, DC Wash., 2002-2 USTC ¶50,560, 205 FSupp2d 1175.

The government was not entitled to a final judgment under Fed. R. Civ. P. 54(b) on its claim for a money judgment against an individual because his liability for the tax assessment was a threshold issue for the government's claim to foreclose a tax lien. Because the money judgment claim was not wholly distinct from its foreclosure claims, a final judgment would create the risk of duplicative appellate review. Further, the government's interests would not be seriously impaired by any resulting delay.

S.J. Gaynor, DC Ill., 2002-2 USTC ¶50,687.

The government was not entitled to summary judgment with respect to a claim by an attorney who created an escrow fund that she was entitled to superpriority to collect her fees from the fund. The funds arose from the settlement of a lawsuit and were held in escrow in connection with a federal tax lien against an individual. Although the government claimed that the attorney did not timely perfect her attorney's charging lien, the tax code does not require a charging lien before attorney's fees may be given priority, and an issue of fact existed as to whether the parties intended for the attorney's fees to be paid from any recovery obtained by the attorney on the taxpayer's behalf.

T.W. Strickland, Jr., DC Fla., 2002-2 USTC ¶50,734.

The IRS was entitled to file a federal tax lien against an individual during the pendency of the taxpayer's claim for relief from joint and several liability. The language found in Code Sec. 6015(e)(1)(B)(i) operated to prohibit only a "proceeding in court" during the pendency of an innocent spouse claim and, as a result, did not apply to the filing of a federal tax lien. The court determined that a "proceeding in court" referred to the formal filing of a lawsuit or complaint, not the informal administrative procedures involved in filing a lien. Further, no additional provisions under Code Sec. 6015(e)(1)(B)(i), or the lien and levy procedures, expressly prohibited such a filing.

J.E. Beery, 122 TC 184, Dec. 55,553.

The IRS was not entitled to a lien upon any of the property acquired by the trustee as a result of the settlement with the spendthrift trust. The tax lien dated back prior to the creation of the purported trust. While the IRS's claim was entitled to a presumption of validity, there was no presumption that its claim was secured. There was no evidence that the IRS's lien attached to the property which the spendthrift trust used as consideration for the settlement and the release of the trustee's claim.

J.C. Ball, DC Va., 2004-1 USTC ¶50,220.

Individuals' arguments were styled tax-protestor type arguments, and their motion to dismiss the case was denied. Implementing regulations are not required for Code Sec. 6321.

D.W. Dawes, DC Kan., 2004-1 USTC ¶50,222. Aff'd, CA-10 (unpublished opinion), 2006-1 USTC ¶50,139.

Federal tax liens attached to an individual's property and rights to property upon the issuance of an assessment for taxes. It was not necessary for notices of federal tax lien to be filed to be valid.

N. Choate, DC Tenn., 2004-2 USTC ¶50,384.

The IRS was warranted in filing a notice of federal tax lien against a taxpayer whose prior payment to the IRS had been forfeited. The taxpayer had made a payment of $2 million to the IRS, which was subsequently ordered forfeited to the U.S. Marshals Service in an unrelated nontax criminal case. The IRS was not obliged todefend the forfeiture order on the grounds that it was a bona fide purchaser for value, and could initiate additional collection activities against the taxpayer.

W.J. McCorkle, 124 TC 56, Dec. 55,937.

Although the IRS had accepted an installment agreement from a taxpayer, the IRS was not precluded from maintaining a tax lien while there was a balance due.

D.A. Ramirez, 90 TCM 85, Dec. 56,102(M), TC Memo. 2005-179.

IRS could foreclose on property of successor corporate owner despite purchasing the property from the original corporate owner in a bankruptcy sale because there was no final adjudication of the validity or amounts of any junior liens on the property. The tax liens attached upon issuance of an assessment for unpaid taxes and remain until satisfied, discharged or lapsed. Since the liens were not discharged, they continue to be attached to the property.

Grass Lake All Seasons Resort, Inc., DC Mich., 2005-2 USTC ¶50,580.

Although an individual entered into a contract to purchase real property before the IRS filed notices of federal tax liens on the property, the assessment of tax liability was made prior to the time the contract was entered into. Therefore, the property remained encumbered by the liens

R..G. Ruggerio, CA-4 (unpublished opinion), 2005-2 USTC ¶50,645, 153 FedAppx 242, rev'g and rem'g DC Md., 2005-1 USTC ¶50,328.

A valid federal tax lien on an individual's property arose without the need for a court order. A lien automatically arises upon assessment of a tax and continues until the taxpayer's liability is satisfied or becomes unenforceable.

D. Kyler, CA-10 (unpublished opinion), 2006-1 USTC ¶50,258, aff'g an unreported District Court decision.

Certificates of Assessments and Payments constituted presumptive proof of the existence and validity of tax assessments against an individual prior to the issuance of notices of lien for the relevant tax years. Moreover, issuance of the notice of federal tax lien was not a prerequisite for the creation of a lien.

R.J. Samuelson, DC Kan., 2008-1 USTC ¶50,203. Aff'd, CA-10 (unpublished opinion), 2008-2 USTC ¶50,445.

An individual's claim seeking removal and cancellation of various notices of federal tax lien was frivolous. The notices were not invalidated merely because the government did not bring an action to foreclose its liens before filing the notices. If a notice of deficiency is issued and the taxpayer is provided with an opportunity to petition the Tax Court before the tax deficiency was assessed, due process requirements are met.

M.E. Acevedo, DC Mo., 2008-1 USTC ¶50,355.

An individual's claim seeking removal and cancellation of various notices of federal tax lien was frivolous. The notices were not invalidated merely because the government did not bring an action to foreclose its liens before filing the notices. If a notice of deficiency is issued and the taxpayer is provided with an opportunity to petition the Tax Court before the tax deficiency was assessed, due process requirements are met.

M.E. Acevedo, DC Mo., 2008-1 USTC ¶50,355.

A former major league baseball player and his ex-wife's interests in his pension plan were excluded, not exempted, from their bankruptcy estates. Thus, the federal tax liens that arose under Code Sec. 6321 prior to their bankruptcy filings survived and attached in rem to their interests in the plan, regardless of whether a Notice of Federal Tax Lien was filed. Moreover, government was not required to issue a new notice and demand to the taxpayers after the liens were erroneously released and then reinstated and the government's failure to refile the liens in the individual's new county of residence affected only the priority not the attachment of the lien. Finally, the taxpayers' bankruptcies had no impact on the value of the liens since their plan interests were not part of their bankruptcy estates. The value of the lien included the accrued interest on the underlying tax liability and extended to appreciation in the plan's value after the liens were filed because the taxpayer was fully vested in the plan prior to filing for bankruptcy.

S.D. Rogers, DC Ohio, 2008-1 USTC ¶50,385.

IRS liens against a debtor were validly perfected. The liens were created and attached when the IRS made its assessment using the debtor's calculation of income tax owed as set forth on his filed tax returns.

In re J.L. Thomas, BC-DC N.J., 2008-2 USTC ¶50,459.

5. Collecting Process
Chapter 12. Federal Tax Liens
Section 2. Lien Filing Requirements
________________________________________
5.12.2 Lien Filing Requirements
• 5.12.2.1 Purpose and Effect of Filing a Notice of Federal Tax Lien (NFTL).
• 5.12.2.2 Creation and Duration
• 5.12.2.3 Taxpayer Contact
• 5.12.2.4 Notice of Federal Tax Lien Determination
• 5.12.2.5 Lien Filing Approval
• 5.12.2.6 Preparing the NFTL
• 5.12.2.7 Mutual Collection Assistance Requests (MCAR)
• 5.12.2.8 Place for Filing of Notice of Federal Tax Lien
5.12.2.1 (05-20-2005)
Purpose and Effect of Filing a Notice of Federal Tax Lien (NFTL).
1. The purpose of filing the NFTL is to protect the Government’s right of priority against certain third parties, typically a purchaser, holder of a security interest, mechanic’s lienor, or judgment lien creditor (For additional information see IRM 5.17.2, Federal Tax Liens).
Note:
The NFTL is not a negotiating tool and is to be used only in accordance with IRM 5.17.2 and 5.12.
5.12.2.2 (05-20-2005)
Creation and Duration
1. A Federal Tax Lien (FTL) is created by statute and attaches to a taxpayer’s property and rights to property for the amount of the liability. This is the "statutory" or "silent" FTL. See IRC 6321. The following must occur for the FTL to arise:
A. An assessment must have been made.
B. A demand for payment must have been made.
C. The taxpayer must have neglected or refused to pay. (As a matter of IRS policy the taxpayer is normally given 10 days from notification to pay the amount due.)
Note:
In jeopardy situations the 10 day period may not always apply. You should confer with your manager and local Counsel.
2. The FTL will continue until the liability is satisfied or becomes unenforceable by lapse of time or a bond is accepted in the amount of the liability.
5.12.2.3 (05-20-2005)
Taxpayer Contact
1. The Service is required to make reasonable efforts to contact the taxpayer before filing a NFTL. The efforts to contact the taxpayer are to advise that a NFTL may be filed if full payment is not made when requested. Issuance of the statutory assessment notice and the balance due notices sent during the collection process will constitute reasonable efforts. Publication 594 (IRS Collection Process), CP 501 (Balance Due - Reminder), CP 504 (Balance Due - Urgent Notice), and Letter 1058 (Final Notice - Intent to Levy), advises the taxpayer that a NFTL may be filed. Also the ACS letters LT-39 (Reminder Notice) and LT-11 (Final Notice of Intent to Levy and Your Notice of Your Right to Hearing) warns taxpayers of possible NFTL filing.
2. While the notices sent in the notice stream are sufficient for filing a NFTL, generally when a NFTL has not been previously filed the revenue officer’s determination with respect to the filing of the NFTL will be done in conjunction with the initial contact or initial contact attempt. Contact (request for full payment) may be made by:
A. field contact (preferably).
B. telephone.
C. mailing a notice or letter to the last known address (when appropriate).
3. If full payment is not received during initial contact, explain to the taxpayer that a lien may be filed. See below 5.12.2.4.1 for lien filing criteria. Explain the possible effects of the NFTL filing on normal business operations and their credit rating.
4. If the taxpayer disagrees with the proposed lien filing, advise the taxpayer of their right to appeal under the Collection Appeals Program (CAP). Also explain to the taxpayer their right to request a Collection Due Process (CDP) hearing under IRC 6320once the lien has been filed. See IRM 5.12.1
5.12.2.4 (05-20-2005)
Notice of Federal Tax Lien Determination
1. A NFTL filing determination must be made on all balance due cases including reactivated balance due cases within established time frames. The request for lien filing or the appropriate non-filing documentation must be prepared within 10 calendar days of initial or attempted contact, with the taxpayer or taxpayer representative. See IRM 5.1.10.3.2, Effective Initial Contact, for established time frames.
2. If the taxpayer has not made full payment or other security arrangements (such as a Bond) to satisfy the liability, a lien determination will be made.
3. When making a determination to file a NFTL, consider whether issuance of the L-1058 is also warranted, if it was not sent previously.
For Example:Issuance of the L-1058 is appropriate when a taxpayer has been given a deadline and was advised of levy action for failure to comply. This action should only occur when a L - 1058 was not previously issued for the module(s) in question.
Note:
By issuing the L-1058 at the same time the NFTL is being filed, the taxpayer will receive CDP hearing rights for the lien and levy concurrently. If the taxpayer chooses to exercise their CDP rights, both the lien and levy issues can and should be addressed together in Appeals
4. The taxpayer’s filing and payment compliance should always be considered when the non-filing of a notice of Federal Tax Lien is being determined.
5. When considering an extension of time to pay (up to 120 days) in accordance with IRM 5.14.5.5, NFTL(s) should be filed unless the case meets the criteria of IRM 5.12.2.4.2 below.
5.12.2.4.1 (05-20-2005)
Criteria for Filing a NFTL
1. In general, a NFTL should be filed in the following situations:
If Then
there is an Unpaid Balance of Assessment (UBA) below $5,000 and filing the lien will promote payment compliance. you may file a NFTL.
Note:
This will also apply to additional assessments on currently open cases and those being reported as currently not collectable. You should take into account if assets are owned or the possibility of future assets being acquired during the collection statute period. In the case of accrual only liens, consider the amount of the accruals. (Accrual liens are discussed further in IRM 5.12.2.6(6).
If there is a UBA of any amount for an entity and the entity is not adhering to compliance requirements such as federal tax deposits, return filings, etc. file a NFTL.
the aggregate UBA is $5,000 or more file a NFTL
Note:
Determine the need to file a NFTL when there are additional assessments. Use the transaction code date as the date of assessment for the liability.
an installment agreement does not meet streamlined, guaranteed, or in-business trust fund express criteria file a NFTL.
an open account with an aggregate UBA of $5,000 or more is being reported as currently not collectible file a NFTL.
a case involving both assessed and unassessed periods will be reported currently not collectible the NFTL filing may be held up to include both period types on the NFTL.
Note:
You may also choose to file a NFTL on the current assessments and wait for the unassessed periods to be assessed, and then file for those periods as well.
the property is exempt by the Federal Bankruptcy Code or state insolvency proceeding file a NFTL to protect the government’s interest.
the taxpayer resides outside the U.S. and has known assets file a NFTL. Contact requirements are waived.
2. Note:
3. Even though there is no mandatory NFTL filing requirement prior to service of a Notice of Levy, before levying the Service should consider, for purposes of lien priority, filing a NFTL.
4. Accrued interest and penalties added to tax should be collected during the limitation period for collecting the tax. Therefore a NFTL may be filed on accruals only modules if all assessed liabilities have been full paid. The limitation period does not apply to bad checks, fraud penalty or certain other penalties that carry a separate collection statute expiration date.
5. Examples of when it is appropriate to file a notice of Federal Tax Lien are listed below:
A. After your initial analysis of a law firm with three quarters of Form 941 liabilities, you determine that all notices requesting payment have been sent. You then make a field visit on 4/3/2004 to the taxpayer at the last known address. The office is closed and you leave a 2246 (calling card) with Publication 1 and 594 in a sealed envelope under the door. The calling card instructs the taxpayer to contact you by 4/12/2004. On 4/13/2004 you still do not receive any communication from the taxpayer. In this situation it is appropriate to file the Notice of Federal Tax Lien.
B. During a field visit to a self employed taxpayer you request full payment of the tax liability of $4,000. As part of your compliance check you also inform the taxpayer that they are not current with their estimated tax payments and they must make those payments as well. The taxpayer makes payment for a portion of the tax liability ($1,000) and tells you they will make their estimated payments in 30 days. In this situation since the taxpayer is not in compliance and has not made full payment of the liability a NFTL may be filed.
5.12.2.4.2 (06-09-2005)
Criteria for Not Filing the NFTL
1. When considering the non-filing of a NFTL determine if the taxpayer is in filing and payment (Federal Tax Deposits, estimated tax payments, notice accounts, etc.) compliance. You should also consider:
A. The use of a collateral agreement(see IRM 5.6.1 for additional information).
B. The subordination of the lien (for loan and financing situations)
C. The discharge of the property (for removing specific property from the Federal Tax Lien)
in lieu of not filing a NFTL (see IRM 5.12.3).
2. In general, liens should not be filed when:
A. The taxpayer is a defunct corporation whose assets have been previously liquidated.
B. The taxpayer is deceased and there are no known assets in an estate.
C. The taxpayer resides abroad and has no known assets in the United States.
3. Liens should not be filed in the following circumstances:
A. The taxpayer is a corporate entity that has gone through a liquidating bankruptcy or receivership regardless of dollar amount. Document the proceeding number in the case history.
B. When a non-paying officer has been assessed the Trust Fund Recovery Penalty (TFRP) and an adjustment to the TFRP is pending because the assessment has been paid by another officer.
C. There is an indication that the liability has been satisfied or that credits are available to satisfy the liability.
D. The taxpayer is a financial institution under control of the Resolution Trust Corporation (RTC). See the section on "Withdrawal of Filed Notice of Federal Tax Lien" if a NFTL has been filed.
E. The taxpayer is in bankruptcy and the NFTL relates to liabilities incurred before the taxpayer filed for bankruptcy. Section 362(a) of the Bankruptcy Code imposes an automatic stay that prohibits all creditors from taking certain collection actions against debtors in bankruptcy. A NFTL may be filed once the stay is lifted. In some circumstances, a NFTL may be filed for liabilities incurred after the taxpayer filed for bankruptcy. Consult Counsel to determine if a NFTL may be filed.
F. There is genuine doubt as to the validity of the liability. But the revenue officer must document the taxpayer’s justification and the method of resolution (payment tracer, amended return, credit transfer etc.).
4. A decision may be made to defer or not file a NFTL when the revenue officer can document a reasonable certainty that filing the NFTL will hamper collection.
Example:
Following are examples of when it is appropriate to delay or not file a NFTL:
A. During a field visit on 5/01/2003 to a "Not for Profit" taxpayer you are asked not to file a NFTL and consider an in-business installment agreement. It is explained that if a NFTL is filed, state funding, which is the principle funding source for the entity will be eliminated and they will not be able to make installment payments. You agree to delay filing the NFTL and request appropriate documentation from the entity be sent to you by 05/12/2003 and you will consider the IA or a NFTL will be filed. On 05/09/2003 you receive the documents and are able to document a reasonable certainty that the NFTL would hamper collection of the liability and determine not to file the NFTL and place the taxpayer in a manually monitored IA. You inform the taxpayer of the IA and the condition that a NFTL will be filed if they default on the installment agreement.
B. During a field visit to a taxpayer who is in the business of selling vacation time shares, you determine that the tax liability cannot be paid immediately and that in all likelihood an installment agreement may resolve the unpaid balance. However, in order to obtain the funds to make the installment payments and pay other operating expenses, the taxpayer must sell accounts receivable to a factor on a weekly basis. The factor also requires that the taxpayer gives a security interest in all current and future accounts receivable. Filing a NFTL in this case would end the factoring arrangement. You agree to withhold the filing of the NFTL provided the taxpayer provides a copy of the contract, and remains cooperative and compliantwhile the installment agreement is being considered. You inform the taxpayer that not complying with the provisions will result in your immediate filing of the NFTL.
Example:
Below are examples of when it is not appropriate to delay or not file a NFTL:
C. During a field visit a taxpayer asks that you do not file a NFTL because it will negatively affect their credit. You ask if they can prove that the negative affect on their credit rating will "hamper" their ability to pay the liability. They inform you that they cannot prove that it will. In this situation filing the NFTL would be appropriate.
D. During a field visit, the taxpayer informs you that they are planning to purchase a new car or possibly lease one to replace their current vehicle and the filing of the NFTL will negatively affect their credit. They ask you not file the NFTL. You ask if the car is essential to generate income to assist in the payment of the liability. The taxpayer informs you that the car is not essential for them to generate income. It would be appropriate to file a NFTL in this case.
E. During a field visit on 4/1/2003 a taxpayer informs you that he/she has applied for a loan to pay the liability and other operating expenses of the business and requests that you do not file a NFTL. He/she explains that the loan agreement has a clause which indicates any additional lien filings will cause the proposed agreement to be null and void. You agree to delay filing a NFTL if the taxpayer supplies you with back up documentation for the completed financial statement and loan agreement from his financial institution by 4/15/2003 and become current with all FTD deposits. You also inform the taxpayer that if the documents are not received by the 15th, you will file the NFTL. You return to your office on 4/2/2003 and document your case history with the reason why you delayed filing the NFTL and indicate a follow up date of 4/15/2003. On 4/16/2003 you still have not received the documentation from the taxpayer or confirmation of the FTD payments. Since the taxpayer did not meet the specified deadline it is appropriate to file the Notice of Federal Tax Lien at this time without further contact with the taxpayer.
F. After returning to the office from a field visit the previous day you have determined to file a NFTL because the taxpayer did not make full payment and they were not in compliance. The taxpayer calls you and asks that you not file the lien because they are selling their current home to full pay the liability and avoid enforcement actions. You tell the taxpayer that the lien is going to be filed to protect the Government’s interest in the home. The taxpayer tells you that the sale will not go through because of the lien. You then tell the taxpayer that a Release of Lien can be issued at the time full payment is made at the sale.
G. After your initial analysis of a BMF taxpayer you plan to visit in the field tomorrow, you determine that they have not file several 941 returns and has not made federal tax deposits (FTD) for the current quarter. During your field visit the taxpayer informs you that they are currently under contract to sell their rights to a patent for a product they developed and the sale will more than pay the liability and the amount they estimate will be owed for the delinquent returns. They tell you that part of the agreement for sale is that there can be no liens associated with the patent and ask that you do not file a NFTL, at least until after the sale in 15 days. You review the contract and confirm the taxpayer’s claim. You tell them that you will delay the filing of the NFTL if they file all delinquent returns and pay all delinquent FTD within 10 days. On the tenth day you receive all delinquent returns but do not receive any of the funds promised for the FTD. Filing the NFTL in this situation would be appropriate due to the taxpayer’s non compliance and failure to meet the deadline set.
H. During a field visit to the Power of Attorney’s office, the POA informs you that filing a NFTL will embarrass the taxpayer in their business community. In this case it would be appropriate to file the NFTL, unless the POA can prove that the NFTL would hamper the payment of the liability.
I. During a field visit to an IMF taxpayer you request full payment of the $200,000 liability. The taxpayer tells you that they are in negotiations to sell their home (primary residence) but there is only $100,000 of equity in the home so they can’t full pay even with the sale. They ask that you not file the NFTL because it will ruin the sale. You ask the taxpayer to supply you with the appropriate documents (these may vary by location) to confirm their statement. They say that they cannot. In this situation it would be appropriate to file the NFTL and inform the taxpayer that they may request a discharge of the specific property when they are prepared to go to sale.
5. The filing of a NFTL may affect a taxpayer’s credit rating, and in and of itself, this is not sufficient reason to withhold filing the NFTL.
6. When a revenue officer determines not to file a NFTL temporarily, the action must be supported by an Integrated Collection System (ICS) history entry that clearly states why filing a NFTL is not proper at that time. The entry must also include a follow-up date by which the revenue officer will receive the requested information and/or payment, or the date the NFTL will be filed.
7. The revenue officer will withhold filing the NFTL if the taxpayer has entered into a collateral agreement with the Service as provided in IRM 5.6. Revenue officers should document their case files and consult with Technical Services to ensure legal sufficiency.
8. A taxpayer may submit a faxed request for non-filing of the NFTL if the revenue officer has made contact with the taxpayer by phone or in person. The revenue officer should document the case history with the date of contact and note the reasons why the taxpayer wishes the NFTL not to be filed. The revenue officer should also include the faxed document in the case file.
5.12.2.4.2.1 (05-20-2005)
Integrated Collection System (ICS) Documentation When Not Filing the NFTL
1. A decision not to file a NFTL must be supported by a history entry that clearly states why filing a NFTL is not appropriate.
2. When the decision not to file the NFTL is made the revenue officer should ensure that the ICS lien determination field is properly updated on the case summary screen for each module.
5.12.2.4.2.2 (05-20-2005)
Extension of the Lien Determination Date
1. The extension of the Lien Determination Date is not the same as deferring the filing of the NFTL. The Lien Determination Date extension is used only when a determination cannot be made prior to the lien determination date indicated on ICS when the entity or module is first received. This may occur in situations such as when the revenue officer has generally had no contact with the taxpayer and:
A. Inventory is assigned and the revenue officer is placed on a detail assignment.
B. Inventory is assigned and the revenue officer is attending training.
C. Inventory is reassigned or transferred to the revenue officer.
D. The revenue officer is out due to illness or planned leave.
Example:
This is an example of when it is appropriate to extend the lien determination date:
A revenue officer receives five new Bal. Due cases (all X coded for contact within 30 days) on Monday 4/11/2003. The lien determination date is indicated on ICS as 5/22/2003. The revenue officer is assigned a long term detail and is to report on Monday 4/25/2003 and will not return to their POD until Monday 6/13/2003. In this situation the lien determination date may be extended for a reasonable time frame allowing the RO to make an appropriate determination.
In the above situation the RO should also have an appropriate history entry explaining why the initial contact was not timely.
5.12.2.5 (02-01-2007)
Lien Filing Approval
1. Revenue officer group managers will note their review and approval of the lien filing in the ICS history for revenue officers below the GS-9 level or they may assign the lien filing responsibility to a revenue officer at the appropriate grade level.
2. Liens filed by Dyed Fuel Compliance Officers below GS-9 will be reviewed and approved by a designated Examination manager.
3. When a manual (ICS generated) NFTL is prepared, managers will sign the NFTL for revenue officers below GS-9 or the NFTL may be signed by a revenue officer at the appropriate grade level.
4. In all cases document the case file.
5.12.2.5.1 (02-01-2007)
Approving the NFTL Determination
1. A determination to file a NFTL by revenue officers below GS-9 must be approved by the manager prior to the NFTL being filed.
2. If authorized by the group manager, GS-9 and above revenue officers may approve the NFTL determination for revenue officers below GS-9 and initiate the ICS NFTL request.
5.12.2.5.2 (03-01-2004)
The Manager’s Review Process
1. Managers of revenue officers below GS-9 are required to:
A. review the taxpayer’s information
B. verify the balance due, and
C. affirm that the lien filing is appropriate given the taxpayer’s circumstances, considering the amount due and the value of the property or rights to property.
2. In all cases, revenue officers must document the following information:
A. A summary of any information the taxpayer provides that may affect the decision to file a lien.
B. If the taxpayer provided information, the employee is to explain their review of the information and findings; and
C. Verification that the amount is owed, e.g., the balance has been checked on IDRS.
5.12.2.6 (06-01-2007)
Preparing the NFTL
1. The correct and timely preparation of the NFTL is the responsibility of the person assigned the balance due account.
2. Revenue officers will use ICS to prepare NFTLs for cases in their inventories, except NFTLs with special conditions (see IRM 5.12.2.6.4).
3. Group managers will create modules that require a NFTL for revenue officers on ICS for:
A. periods that are not assigned to the revenue officer, or
B. do not exist on ICS.
4. Revenue officers will use ICS to create liens that require expedited processing, i.e., prompt assessments and/or jeopardy or termination situations.
Note:
Functional managers (other than revenue officers) may at their discretion have lower graded employees input NFTLs to the Automated Lien System. The manager is responsible for the accuracy of those documents.
5. NFTLs must show the taxpayer's last known address. Employees will not include SSN's in the street address field. The word "Local" will be used ONLY if it is part of the street name. "Local" alone is not sufficient for mailing purposes. Further, a city, state and zip code, must be input to the appropriate data fields.
6. Multiple assessments against the same taxpayer may be included on one Form 668(Y)(c)
If Then
there are one or more balance dues with multiple assessments prepare a separate entry in each column for each balance due. The dollar amount for each unpaid balance of assessment will be shown.
there are multiple assessments on one balance due show the assessment dates and unpaid balance of all unpaid assessments including those penalties which carry a separate collection statute.
an unassessed accrued amount remains outstanding and the assessed amount is paid file a NFTL on the total accrued amount as of the date the NFTL is requested.
the taxpayer’s name on the balance due is incorrect the NFTL should state the taxpayer’s name correctly. Take the actions necessary to correct master file.
Note:
There may be instances when the name on the NFTL does not agree with what is on the balance due, e.g., if the statute has been extended on one taxpayer on a joint assessment, only the name of the still liable taxpayer should appear on the NFTL.
the balance due has the name of a third party, i.e., accountant, attorney, etc., and a NFTL is being filed ensure that the address on the NFTL is the taxpayer’ s. A NFTL should never show the name and/or address of a third party or the names of corporate officers. When dealing with "c/o" be sure that the name and address on the NFTL is that of the taxpayer.
7. Where a partnership is the taxpayer and employment taxes are involved, the NFTL should be prepared showing the words "a partnership" after the partnership name and list the names of known general partners, e.g.,
A. XYZ, a partnership
B. A, a partner
C. B, a partner
D. C, a partner
Note:
When a general partner is listed on the NFTL, a copy of L3172 must be provided. See IRM 5.12.1.2.5
8. File a NFTL in the jurisdiction where each general partner resides as well as where the partnership is located. When the place of filing changes, file a separate NFTL, i.e., file two NFTLs if the partnership and one of the general partners lives in a different jurisdiction, etc. Provide multiple address information to CLU, if appropriate, or create the NFTL.
9. The NFTL should be prepared for a corporation showing the words "a corporation" after the corporate name, e.g., XYZ, Inc., a corporation.
10. Revenue officers at the GS-9 level and above have the authority to issue Form 668(Y)(c). The employee’s name and identification number should be typed in the lower portion of the form and the title inserted in the appropriate block.
11. Signatures are not required. However, documents generated by the ALS have facsimile signatures.
12. Use the period when beginning (07-01-92) rather than the ending date (06-30-93) when preparing a NFTL for a Form 2290, Heavy Highway Vehicle Use Tax Return. This is very important when there is more than one period for a specific TIN. The period beginnings must be used to separate each assessment to ensure that we receive the module satisfaction indicator from the master file when each module is satisfied.
5.12.2.6.1 (03-01-2004)
Use of Trade Names
1. The abbreviation ‘d/b/a’ for ‘doing business as’ should be used only when an individual is actually doing business as a sole proprietor under a trade name, i.e., Edwin E. Kelly d/b/a Kelly’s Garage. The abbreviation should never be used in a partnership situation.
2. The same degree of care should be exercised when using the abbreviation ‘t/a’ for ‘trading as’. This is used where a corporate or partnership entity operates under a trade name other than the corporate or partnership name, e.g., Werk Hard, Inc., t/a The Diggers.
5.12.2.6.2 (02-01-2007)
Partnership
1. General partners are individually liable for partnership debts, and separate assessments against them are not essential to sustain their individual liability. The separate liability of the partners is not an issue unless the partnership neglects or fails to pay the assessed liability. See IRC 6332 and 6303.
2. Partnerships normally have one employer identification number (EIN).
If Then
a single partnership has multiple outlets or businesses one EIN should be assigned to that partnership.
the same person established several partnerships each partnership should be assigned a different EIN.
there is any doubt that a change in name will affect the entity request an advisory opinion from Area Counsel through appropriate channels. See IRM 5.1.11.7.13, Entity Changes, for entity change procedures. BMF must reflect the name change.
Note:
Although a change in name due to a change in membership of a partnership resulting from death, withdrawal, substitution or addition of a partner does not, in itself, effect a termination of a partnership for FICA or FUTA purposes, it does have an effect on the composition of the entity at law insofar as the collection of debts from the separate partners is concerned.
Area Counsel advises that a new form should be submitted prepare either a Form SS-4, Application for Employer Identification Number or Form 2363, Master File Entity Change.
adding to or changing a partnership entity list all partners adding "PTR" following the name of the last partner.
3. A supplemental assessment will not be required when adding a general partner’s name to the partnership assessment. The Service will rely on the proposition that the assessment against the partnership creates a FTL against each general partner.
5.12.2.6.3 (02-01-2007)
Limited Liability Company (LLC)
1. When filing an NFTL on a single member disregarded LLC entity, only the name of the single member should appear on the lien document. Do not include the name of the disregarded LLC. Such action would indicate to a potential creditor that the government has perfected a lien interest in the assets of the LLC. Including the name of the LLC would create a situation parallel to a "doing business as" or "trading as" secondary name line. IRM 5.12.2.6.1, Use of Trade Names, does not apply to single member LLCs.
2. When a NFTL is incorrectly filed in the name of the disregarded LLC, file a new NFTL in the name of the single member.
3. Withdraw the previously filed NFTL where the name of the disregarded entity was used.
A. Do not release a previously filed NFTL filed in the name of the disregarded entity. This action would extinguish the underlying statutory lien.
B. Filing under the correct name will not preserve the priority of the NFTL filed under the name of the disregarded LLC.
4. The EIN used in the assessment should be used for the lien, despite the resulting mismatch between the entity name and the EIN, to ensure systemic notifications for the lien release in the Automated Lien system.
Note:
Certain mistakes on the NFTL are permissible so long as the name on the NFTL is sufficient to put third parties on notice of a lien outstanding against the single member. Thus, even if the EIN used in the assessment and in the NFTL has that of a disregarded entity, the NFTL is still valid when it is filed in the name of the single member.
5. The entity type for the single member will dictate where the NFTL is filed with regard to the recording official specified in a state’s version of the Uniform Federal Lien Registration Act.
If the single member is then the NFTL filing location is the
a corporation Secretary of State or equivalent official specified in state law.
a partnership location provided for partnership filing in state law.
an individual residence of the individual (for personal property).
Note:
To perfect the lien against real property, owned by the single member, state law generally requires filing with the jurisdiction where the property is physically located.
another LLC location specified for the tax status elected by LLC or member status if single member LLC is also disregarded.
5.12.2.6.3.1 (02-01-2007)
Creating New Name Line Using ICS
1. The NFTL must properly identify the name of the taxpayer so that the public is placed on notice. You must determine the tax classification of the Limited Liability Company (LLC) to identify the taxpayer.
2. Care should be taken to ensure that the NFTL is filed properly by selecting the correct name and address for the taxpayer, determining whether the entity is a sole proprietorship, corporation or partnership, depending on the tax classification of the LLC; and the correct location for filing under state law, depending on the tax classification of the LLC.
3. When creating a new name line using ICS, take the following steps.
Step Action
1 At the ICS Summary Screen, enter F5, Entity Detail; select C, Name/Address; enter F10, Add REC.
2 Select Case Address; select Domestic Format, if applicable; selection O - Other Address.
3 Create a new name and address using only the name and address of the identified taxpayer, the LLC itself or the single member, as the primary name. If the LLC is the taxpayer, the new name may include the trade name. Enter F2, Save, enter ESC two times.
5.12.2.6.4 (02-01-2007)
Special NFTL Conditions
1. Revenue Officers may encounter situations where the taxpayer has transferred property and circumstances indicate actual or constructive fraud. Property may have been acquired in the name of another person or entity and the taxpayer controls the property to such an extent that the title holder is possessed of ‘color of title’. This may result in an administrative transferee assessment, suit to assert a transferee liability, or a suit to set aside a fraudulent conveyance.
Note:
See IRM 5.12.2.6.5 through 5.12.2.6.8 for obtaining approval of special condition liens.
2. Persons determined to be nominees or alter-egos are not entitled to collection due process appeal rights, however, they are entitled to appeal under the Collection Appeals Program (CAP). Issue L-3177 and related publications after the lien has been filed.
3. The taxpayer whose liabilities for which the nominee liens were filed is entitled a collection due process hearing only if they have not received CDP notification (L3172) previously for the identified periods. Issue L3886, Notice to Taxpayer of Nominee/Alter Ego Federal Tax Lien Filing.
4. L3886 is not generated by the Automated Lien System and must be manually prepared.
5. Notification must be made by certified mail within five business days of the NFTL filing.
6. See IRM 5.12.1 for more information on lien appeals. Additional information may also be found in IRM 5.17.2.4.8, Legal Reference Guide.
5.12.2.6.4.1 (06-01-2007)
Preparing Special Condition NFTLs
1. Revenue officers or Advisory will prepare NFTLs with special conditions (nominee, alter ego or transferee) that require property descriptions or special identifying language.
2. The revenue officer will establish and document the decision to request a special condition NFTL. The request will be forwarded to the group manager for approval of the decision. The approved request will be forwarded to Advisory for review.
3. Advisory will review the lien request and will forward the request to Area Counsel for review and approval to issue the NFTL.
4. After receiving approval the revenue officer or Advisory will prepare NFTLs with special conditions (nominee, alter ego or transferee) that require property descriptions or special identifying language.
5. ALS will allow users to input entity information for NFTLs with special conditions, but will not allow input of any data other than the standard information, i.e., MFT, tax period, TIN, etc. The NFTL must be manually prepared. DO NOT USE ALS TO CREATE THE NFTL.
6. Use the ICS Form 668(Y)(c) macro. An option will be displayed that allows the selection of a special condition NFTL.
7. Complete the entity section of the NFTL, identifying the special condition, i.e., nominee of, alter ego of, or transferee of taxpayer (input taxpayer name).
Note:
DO NOT ENTER ANY INFORMATION IN THIS SECTION OTHER THAN THE APPROPRIATE ADDRESS. SPECIAL IDENTIFYING LANGUAGE, INCLUDING IRC REFERENCES PROVIDED BY COUNSEL, MUST BE INPUT IN THE BODY OF THE NFTL.
8. On the face of the form, type the following:
"THIS IS A SPECIFIC LIEN ATTACHING ONLY THE PROPERTY DESCRIBED."
9. If the property description is short, type the description on the face of the form.
Example: 1965 Ford Mustang, VIN 23J89765P777
Example: Seascape Yacht, VIN 65T23465, Location: Blackrock Court, Seaside, FL 94899.
10. If the property description is lengthy, additional pages are available.
11. Type the property description or language provided by area counsel into the template.
12. Revenue officers will use ICS to secure a serial lien identification number.
13. Advisory will secure the lien serial identification (SLID) number from ALS. The SLID may be obtained in two ways:
A. directly creating a NFTL on ALS by inputting all applicable entity and tax period information.
•Select the entity type as nominee to suppress the printing of the regular CDP notice. Also, selecting that entity type will automatically populate the first line of the lien with "Nominee of"
•If created directly in ALS, Advisory will suppress the printing of the lien by answering (N)o to the question "Print and Store" before inputting the revenue officer's assignment number.
•If the lien is to be field by the field, the question "On Voucher" should be marked as "N" .
B. Request the SLID from CLU.
•Complete Form 12636, Request for Filing or Refiling Notice of Federal Tax Lien.
•Check the applicable box on the request form (SLID Only) to have the printing of the NFTL suppressed.
•Insert the SLID on the NFTL.
•Insert required entity and tax period, place of filing, etc., on the NFTL.
•Scan the document into a PDF file and secure email the NFTL and any attachments to CLU. If scanning is not an option, mail or fax the NFTL to CLU. CLU will complete the billing and issuance process.
14. Forward the completed document to CLU for processing, if the document is not hand carried for recording by the revenue officer.
15. Advisory will notify the revenue officer of the lien filing, if necessary. The revenue office will prepare and issue the appropriate CDP and/or CAP letter(s) with attachments within the allotted time frame. ALS does not generate these letters. The Revenue officer must issue them. See IRM 5.12.2.6.4 above.
16. Employees not using ICS and that do not have ALS access, should forward requests for nominee, alter ego, or transferee NFTLs to Advisory. Advisory will ensure that counsel has approved the determination and complete the lien filing process. Advisory must also ensure that the appropriate CDP notice is issued.
5.12.2.6.4.2 (02-01-2007)
Recording Fee Payment for Special Documents
1. Revenue officers preparing special documents hand carried to recording offices may be required to pay the recording fee.
2. If recording fees are paid out-of pocket, use TRAS for reimbursement.
3. Recording offices in some jurisdiction accept the submission of Form 3982, Billing Support Voucher, for fee payment. The cost of filing will be added to their monthly invoice and submitted to CLU for payment.
Note:
Fees may be more than the cost of a regular lien filing because of attachments. You should contact the recording office prior to recordation.
4. Revenue officers may also forward documents via secure email or regular mail to CLU for processing and fee payment. These documents will be issued (mailed) with the next Tuesday or Thursday lien document issuance to recording offices, after receipt.
Example: RO Smith forwards a nominee lien to CLU via secure email Wednesday morning. The document is retrieved by CLU Wednesday afternoon. The normal document print cycle is Thursday. RO Smith's nominee lien will be batched and mailed with documents scheduled for the Thursday print cycle.
Note:
CDP notices for these documents must be manually prepared if they are hand carried to recording offices other than Tuesday or Thursday.
5.12.2.6.5 (02-01-2007)
Preparing Nominee Liens
1. A nominee is someone designated to act for another. As used in the federal tax lien context, a nominee is generally a third person who holds legal title to property of a taxpayer while the taxpayer enjoys full use and benefit of that property. The FTL extends to property actually owned by the taxpayer even though a third person holds legal title. The third person can be any person listed in IRC 7701 (a) (1).
Note:
See IRM 5.12.1.2.11 for procedures for issuing nominee collection due processing notices.
2. A nominee situation normally involves a fraudulent conveyance or transfer of a taxpayer’s property to avoid legal obligations. To establish a nominee lien situation, it must be shown that while a third party may have legal title to the property, it is the taxpayer that owns the property and who enjoys the full use and benefits.
3. Request Area Counsel advice before filing a nominee lien. Consider the following circumstances when developing your case:
A. the taxpayer is paying maintenance expenses,
B. the taxpayer is using the property as collateral for loans,
C. the taxpayer is paying state and local taxes on the property,
D. other use or benefit from the property
E. other relevant facts.
4. You may not file a nominee lien without the written approval of Area Counsel.
A. Cases should be developed to withstand court challenge (with minimal additional development).
B. Focus should be for advice as to the need for a supplemental assessment, a new notice and demand and the language to be incorporated in the NFTL.
C. Prepare a report containing all of the facts of the case to accompany the request.
D. Request Area Counsel direction regarding enforcement of the lien.
5. Subsequent enforcement action is at the Area Office’s discretion once Area Counsel has approved application of the nominee theory in writing.
6. In determining what additional enforcement action should be taken, consideration must be given to the confusion in the chain of title and redemption rights of the taxpayer. These conditions may depress the sale of the property.
7. A judicial lien foreclosure or seizure followed by suit to foreclose the NFTL will generally bring a greater sale price particularly for real property.
8. The administrative seizure and sale process may be used if prompt action is needed to protect the governments' interest. If there is any doubt, request an opinion from Area Counsel.
9. See IRM 5.17.2, Federal Tax Liens, for additional information.
5.12.2.6.6 (02-01-2007)
Determining When a Nominee Lien is Required
1. Under certain circumstances a statutory lien continues to attach to transferred property even though a NFTL was not filed at the time of transfer. For example,
A. The taxpayer (transferrer) transfers property to a party (transferee) and does not receive adequate and full consideration in money or money's worth. The transferee is not considered a purchaser. See section 6323(h)(6), Internal Revenue Code for a more complete definition of purchaser
B. If a NFTL is filed in the name of the taxpayer before the transferee encumbers or sells the property to a valid purchaser, the government's lien interest is fully perfected.
C. In these circumstances, the lien can be enforced by a seizure of the property from the transferee or subsequent valid purchaser, or by a suit to foreclose the lien.
2. A nominee lien or a "specific property" lien filed in the name of the taxpayer and specifically describing the transferred property is not required to protect the government's interest when these conditions are met. Such liens should not be recorded.
3. The taxpayer may record fraudulent transfer documents that make it appear as if the transfer of the property was to a valid purchaser prior to the filing of the NFTL. For example, the taxpayer may record a warranty deed showing the transferee paid fair market value for the property instead of a quit-claim deed for love and affection. In these circumstances consider filing:
A. a nominee lien (if the transfer was in name only), or
B. a transferee lien (if the taxpayer gave title and use and control of the property to the transferee although no consideration was received).
4. Minnie College owes $70,000 for tax periods 199912 and 20012. Minnie deeds property valued at $150,000 to her daughter, Molly for no cost. Minnie continues to maintain the property and uses it as collateral for obtaining a car. Molly lives on the property. Molly is a nominee for Minnie because consideration was not received for the property.
5. William and Mary Black give a $600,000 home to their son Bob. William and Mary, have outstanding tax liabilities and state they have no property and cannot pay their liability. Bob maintains the property, the deed is in his name and he refinanced the home. Bob is the transferee in this case. Bob did not pay for the home. Bob also uses the home for collateral.
5.12.2.6.7 (02-01-2007)
Alter-Ego Liens
1. The "‘alter-ego’" (second self) doctrine has been summarized as follows: The obligation of a corporation will be recognized as those of another person, and vice versa, where it appears that the corporation is not only influenced and governed by that person, but there is such a unity of interest and ownership that the individuality or separateness, of the person and the corporation has ceased. Also the facts are such that an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote an injustice.
Note:
It is generally more difficult to establish alter-ego relationships than a nominee situation.
2. There are two elements to the alter ego doctrine:
A. Unity of ownership and interest,
B. Fraud or inequity would result from the failure to disregard the corporate entity.
3. Some factors pertinent to a determination to disregard the corporate entity are whether the individual:
A. is in a position of control or authority over the entity;
B. controls the entity to shield himself from personal liability;
C. uses the business entity for his or her own financial benefit;
D. uses the business entity to assume personal debts, or debts of another, or
E. uses personal funds to pay the business entity’s debts.
4. Some facts establishing the factors in (3) above are:
A. commingling of funds and other assets,
B. failure to segregate funds of the separate entities,
C. an unauthorized diversion of corporate funds or assets to other than corporate uses,
D. treatment by an individual of the assets of the corporation as his own,
E. failure to obtain authority to issue stock or to subscribe to or issue the same,
F. holding out by an individual that he or she is personally liable for the debts of the corporation,
G. failure to maintain minutes or adequate corporate records, and the confusion of records of separate entities,
H. the identical equitable ownership in two entities,
I. the failure to adequately capitalize a corporation, the total absence of corporate assets, and under capitalization,
5. Explore the possibility of using the administrative process of jeopardy transferee assessment, nominee lien, emergency lien foreclosure action or emergency transferee or fraudulent conveyance suit before filing a NFTL in the name of an alter-ego.
6. Do not file a NFTL in the name of an alter-ego without legal review, advice, and written direction from Area Counsel as to:
A. the need for a supplemental assessment,
B. a new notice and demand, and
C. the language to be incorporated in the NFTL.
7. Refer to the Legal Reference Guide for Revenue Officers, 5.17, for additional information.
5.12.2.6.8 (03-01-2004)
Transferee Liens
1. There are two methods the government can use to collect an unpaid tax liability where a taxpayer (the transferrer) has transferred property to a third party (the transferee) prior to or after the assessment of the tax. Collection of the tax is based on finding that the transfer was a fraudulent conveyance. However, liability may arise under contract, various federal liability statutes or state statutes governing bulk sales, corporate dissolutions, and corporate reorganizations.
A. The first method, a suit to set aside a fraudulent conveyance, the government collects the transferrers tax from the transferred property. This is done by filing a civil action in U.S. District Court. See IRM 5.17.14.1.
B. The second method is administratively imposing transferee liability, which results in the imposition of personal liability for a tax on a third party. The liability is then collected from the third party’s property. To do this, the Commissioner mails a notice of transferee liability to the transferee, then, if a tax court petition is not filed or the liability is sustained by the Tax Court, assesses the tax against the transferee under the authority of IRC 6901.
C. Once the assessment is made, a notice of demand and payment is issued, and if the transferee does not pay, a NFTL may be issued.
2. You will find many of the same issues in transferee situations that are found in nominee and alter-ego situations. Refer to IRM 5.17.14 for additional information on fraudulent conveyances and transferee liability.
3. Contact local Counsel for written authorization before issuing a transferee lien.
5.12.2.6.9 (03-01-2004)
Estate and Gift Tax
1. Estate and Gift Tax Liens are discussed in IRM 5.5.8, Estate Tax Liens.
2. To file a notice of the estate tax lien, Form 668(J) or Form 668(H) must be manually prepared
3. Manually post estate tax lien recording fees if applicable. These fees may be different than those fees used for recording Form 668(Y)(c).
5.12.2.6.10 (03-01-2004)
Name Changes
1. Taxpayers may change names after the NFTL has been filed. To avoid disputes over lien priority in subsequently acquired assets, file another NFTL reflecting the name or alias.
A. Place the new name on the first line.
B. Place the previous name on the second name line, preceded by either ‘aka’ for ‘formerly known as’.
2. Add the following statement to reference the original NFTL: This Notice of Federal Tax Lien is filed to modify Notice of Federal Tax Lien number (serial number), recorded (date), in Book ___, Page ___,by reflecting a new or proper name.
3. Use this procedure when the taxpayer’s name has been misspelled. See IRM 5.17.2.3.5, Effect of Errors in Notice of Federal Tax Lien for guidelines on whether the error makes the NFTL defective.
4. With the advent of the DIAL interface, amended or corrected NFTLs should be rare. Amended or corrected NFTLs could affect the priority of the original NFTL.
5.12.2.6.11 (02-01-2007)
Correcting Lien Notices
1. Some errors, such as an incorrect name, will make the NFTL invalid while other errors such as TIN, MFT and period will prevent the module satisfaction notification from posting.
2. Incorrect NFTLs must be linked to corrected NFTLs and/or corrected information.
3. Module satisfaction notification must be associated with correct TIN/name control and MFT/period and tied back to the incorrect NFTL so that the Certificate of Release can be generated for BOTH the correct and incorrect notice upon satisfaction or expiration. A "not to be filed" lien is prepared by CLU to correct the error.
4. Guidance is provided in IRM 5.17.2.3.5, Effect of Errors in Notice of Federal Tax Lien, regarding errors in the taxpayer’s name as it appears on the notice.
If Then
it is determined that the NFTL should be corrected file a new NFTL.
the error on the original NFTL was made to the name control portion of the name line only and a new NFTL is not filed change the name control on the original NFTL record.
5. NFTLs may be corrected prior to filing. If the NFTL is been filed, an amended NFTL must be created.
5.12.2.6.12 (06-01-2007)
Other Types of Errors
1. Use ALS to create amended liens. ICS does not have an amend program. Revenue officers may use the ALS Amend NFTL option or request the amendment through CLU by secure emailing Form 12636.
2. Listed below is a chart that explains how to correct other types of errors.
ERROR TYPE EXPLANATION
Taxpayer Identification Number (TIN) This error type does not require a corrected NFTL document. Prepare a "not to be filed NFTL" in the database.
MFT This type of error does not require a corrected NFTL document. Prepare a "not to be filed NFTL" in the database.
Tax Period Based on provisions of IRC 6320, taxpayers are entitled to collection due process appeal rights for each tax period with a liability for which a NFTL has been filed. File a new NFTL when the tax period is incorrect.
Assessment Date An amended NFTL document is required. The life of the NFTL is directly related to this date. The last day for refiling is computed within the ALS using the assessment date. If the assessment date is incorrect, the last day for refiling will be computed incorrectly. Amend the NFTL to correct the assessment date. If the NFTL self-releases, the self-release must be revoked. Revocation and filing a new NFTL is required to reestablish priority. Do not prepare a not to be filed NFTL. Do not issue a new CDP notice.
Last Date for Refiling The refile date on recorded liens may not be amended. The last date for refiling will be systemically corrected when the assessment date is corrected. Changes will not be made to that field for any reason. See IRC 6323(g).
Dollar Amount Amend the NFTL when there is a substantial increase or decrease to the dollar amount as the result of an audit or keystroke (input) error.
Address No action is required to correct the original NFTL. If the city, state and/or zip code are incorrect, a new NFTL may have to be filed in the correct recording office.
3. Note:
4. This statement or a similar statement will be printed on the face of amended NFTLs.THIS NOTICE OF FEDERAL TAX LIEN IS FILED TO CORRECT(insert what is being corrected, i.e., tax period, assessment date, MFT, minor misspelling) ON THE ORIGINAL LIEN RECORDED (insert date of filing) AS RECORDING NUMBER (insert recorder’s number). ALL OTHER INFORMATION ON THE ORIGINAL NOTICE FILED IS CORRECT AND THAT INSTRUMENT REMAINS IN FULL FORCE AND EFFECT.
5. The NFTL issued to the recording office is identified as an AMENDED LIEN.
5.12.2.6.13 (02-01-2007)
Amending the NFTL Using the ALS Amend Option
1. Recorded NFTLs may be amended using the ALS Amend option. If recording data (i.e., the recording date, book, page, or other recorder information) is not in the ALS database, the amendment option may not be used.
2. Do not use this option to add a new person or entity to the recorded NFTL.
3. ALS amendments are restricted to:
A. tax periods;
B. taxpayer name (limited to occasions where the taxpayer is not identifiable by lenders);
C. assessment date; and
D. amount due on NFTLs (if the amendment is due to input error and results in a signification increase or decrease in the amount.)
4. To amend the NFTL, take the following actions.
A. Type "Amend" at the prompt or select the Amend option from the menu.
B. Search for the appropriate NFTL by SLID, TIN, Last Name or Name.
C. Select #7 Amend.
D. Select from Prompts that appear at the bottom of the screen.
•Select #3TP_INFO to correct the taxpayer name
Note:
Amend should not be used to add a new name or entity to the NFTL.
.
•select #5PERIODS and [E]dit periods to change the tax periods, assessment dates, or dollar amount.
Note:
Dollar amounts may be amended only when a tax period or name is being amended.
E. Select [P]rocess change or [N]o change from the prompts at the bottom of the screen.
F. Press #5 Process, to complete the amendment. If process is not selected, you will not create a print file for the lien nor will the CDP notice be created.
G. Select #8 Entity to return to the initial screen after receiving the message that the lien is in the print queue.
5. Document the ALS history with the reason the amendment was required.
Note:
ALS will generate the appropriate CDP notice.
5.12.2.7 (05-20-2005)
Mutual Collection Assistance Requests (MCAR)
1. The U.S. treaties with Canada, Denmark, France, Netherlands, and Sweden provide for collection assistance. A treaty partner may send a Mutual Collection Assistance Request (MCAR) to the United States Competent Authority for tax treaties, the Office of the Deputy Commissioner (International), LMSB.
2. MCARs are received and processed by the Chief, International Operations, SB/SE.
3. The Service can take distraint action against U.S. assets to collect foreign taxes for these five treaty partners, as well as other U.S. treaty partners in limited situations. Collection may require filing a Notice of Federal Tax Lien.
5.12.2.7.1 (03-01-2006)
Preparation of MCARs on Form 668(Y)
1. Process all MCARs lien requests as follows:
A. Use the format shown in Exhibit 5.12.2-1 as a guide to prepare Form 668(Y), Notice of Federal Tax Lien. The information needed to complete Form 668(Y) is provided with the MCAR investigation sent to the revenue officer group.
B. International will provide the serial number for the NFTL. Do not use any other number.
C. Use the Taxpayer Control Number (TCN) assigned to the MCAR assessment by International as the identifying number on Form 668(Y), if the taxpayer identification number (TIN) is not known.
D. Use the Last Day for Refiling collection statute date provided by International.
2. The NFTL will be filed in the appropriate recording office. Return a copy of the NFTL to International.
3. Do not request input of TC 582 or TC 360 for the NFTL filing fee. NFTL fees are not assessed against MCAR taxpayers.
5.12.2.7.2 (03-01-2006)
Procedures for Refiling and Release
1. International will be responsible for determining whether to refile any NFTLs and for requesting the release.
2. Notices of Federal Tax Lien for refiling and certificates of release will be:
A. Prepared by International and
B. Forwarded to the appropriate revenue officer group for recording.
3. Do not request input of TC 582 or TC 360 for the NFTL filing fees. Filing fees are not assessed against MCAR taxpayers.
5.12.2.8 (02-01-2007)
Place for Filing of Notice of Federal Tax Lien
1. It is important that Notices of Federal Tax Lien be filed in the proper jurisdiction to protect the governments' interest amongst other creditors. State law dictates the place of filing.
2. Individuals:
A. Real Property - file the NFTL in the recorder's office for the county where the real property is located;
B. Personal Property (tangible or intangible) - In general, file the NFTL at the recorder's office for the county where the taxpayer resides at the time the NFTL is recorded because that is where the property is deemed to be located.
3. Corporations and Partnerships:
A. Personal Property - file the NFTL in the state and county where the principal executive office of the business is located. The principal executive office is deemed to be the residence of the corporation or partnership. Do not confuse the principal executive office with the principal place of business.
B. Real Property - file in the recorder's office for the county where the real property is physically located.
4. Clerk of the United States District Court - File with the office clerk if the state has not designated one office within the state that comports with federal law.
5. Recorder of deeds of the District of Columbia - Personal property whether tangible or intangible, is deemed to be located in the District of Columbia if the taxpayer’s residence is located there or outside the United States at the time the notice of lien is filed.
Note:
Exhibit 5.12.2-4, State Filling Locations, gives the filing locations for each state, the District of Columbia and Puerto Rico. Names of recording offices may be different in different states. many states now designate the Secretary of State as the one office for filing notices of lien against personal property of corporations, partnerships, and other entities.
6. A NFTL encumbers motor vehicles, airplanes and vessels in the same manner as other personal property when a NFTL is filed in the recording office designated by state law as the residence of the taxpayer. Do not file Form 668(Y)(c) with Departments of Vehicles, FAA, or the U.S. Coast Guard or similar agencies. (See IRC 6323(f)(5)).
7. Consult Area Counsel if there is any uncertainty regarding lien filing locations. Also, see IRM 5.17.2, Federal Tax Liens, for additional information.
5.12.2.8.1 (02-01-2007)
Additional Information Filing Information for Texas
1. The Texas Uniform Federal Lien Registration Act, Section 24.004, "Duties of the Filing Officer" specifies in paragraph (2) that county clerks will file Federal liens alphabetically in the real property records. If requested by the party submitting the document, it may be entered alphabetically in the personal property index, as appropriate. These additional entries include the same filing and certification information that was entered into the real property records.
2. Employees requesting NFTLs for Texas will ensure liens are recorded in real property records. Further, to ensure recorders are aware of this requirement, CLU will attach an information notice to the front of batched documents forwarded to Texas recording offices.

Section 7122 – Offer in Compromise Acceptance – Form 656

Edward A. Brinskele, Plaintiff v. The United States, Defendant.

U.S. Court of Federal Claims; 02-911T, July 3, 2008.

Related decision at 2006-2 USTC ¶50,555.

[ Code Sec. 7122]

Settlement agreement: Acceptance letter: Counteroffer: Valid and binding agreement. --
The government's letter to an individual did not constitute an acceptance of his settlement offer and did not create a valid and binding settlement of the parties' dispute. The letter did not mirror the terms of the individual's offer because it made no reference to the interest that would accrue if he failed to pay the settlement amount within 120 days of the government's acceptance. Instead, it provided that the offer would be accepted on condition that payment is made within 120 days; therefore, the letter altered the terms of the offer and was construed as a counteroffer by the government.




ORDER DENYING GOVERNMENT'S MOTION TO DISMISS


FIRESTONE Judge: Pending before the court is a motion by the defendant, the United States ("defendant" or "government"), to dismiss the above-captioned case pursuant to Rule 12(b)(6) of the Rules of the United States Court of Federal Claims ("RCFC"). The government contends that the parties entered into a final and binding settlement agreement in January of 2008, when the government alleges that it accepted the settlement offer made by the plaintiff, Edward A. Brinskele ("plaintiff" or "Brinskele"). For the reasons set forth below, the government's motion is DENIED.


BACKGROUND FACTS


The parties in the instant case have been engaged in settlement discussions since January 2007. In accordance with the practice of this court, the parties' negotiations were facilitated by Judge Christine O.C. Miller, serving as an Alternative Dispute Resolution ("ADR") judge ("ADR judge"). As a result of a settlement conference held on March 1, 2007, the plaintiff prepared a formal settlement offer, which was submitted to the government on June 29, 2007. In his offer, the plaintiff provided that he was willing to settle the case under the following conditions:
(1) The plaintiff would pay $500,000 to the government in full satisfaction of all issues raised in the case;

(2) The plaintiff would make payment within 120 days after approval of the settlement offer by the government;

(3) No interest would be paid by the plaintiff, except that interest would be payable at the statutory rate for tax liabilities if the plaintiff did not make payment within 120 days, with interest beginning on the 121st day; and

(4) If the plaintiff was able to sell property prior to approval of the settlement, the Department of Justice would recommend to the Internal Revenue Service that the federal tax liens be discharged from the property in order to facilitate the sale.

Def.'s Ex. 1. In his offer, the plaintiff also provided as follows: "Each of the parties intends to and does hereby extinguish the obligations heretofore existing between them and arising from the dispute. This agreement is not, and shall not be treated as, an admission of liability or misconduct by either party for any purpose." Id.

On September 10, 2007, the government sent the plaintiff notice that it had received the plaintiff's offer letter and that it interpreted the plaintiff's offer as follows:
The offer calls for plaintiff, Edward R. Brinskele, to pay the sum of $500,000.00 within 120 days after plaintiff is advised by the Department of Justice that his settlement has been accepted. If payment is made after the 120-day period, interest will be payable at the underpayment rate beginning on the first day after the expiration of the 120-day period. The $500,000.00, and any interest that might accrue thereon, will herinafter be referred to as the "Settlement Amount." The Department of Justice, in a letter to Steve Bugos of the Internal Revenue Service, copy attached, has advised the IRS that it can release any liens to allow plaintiff to sell any of his real property provided proper escrow arrangements are made to ensure that the proceeds of any such sale will be held for the benefit of the Government. Once the settlement has been approved by the Department of Justice, the funds held in escrow will be used to satisfy the terms of the settlement... . Each party is to bear its own costs, including any attorneys' fees or expenses related to the above-captioned case.

Def.'s Ex. 2. In the letter, the government requested that the plaintiff advise the government in writing whether the letter comported with the plaintiff's understanding of the terms of the offer by signing and returning a copy of the letter. Id. It is not disputed that the plaintiff did not respond to the government's request. The parties filed joint status reports on September 20, 2007 and December 20, 2007, in which they indicated that the plaintiff's offer was being reviewed by the Department of Justice.

On January 29, 2008, the government sent the plaintiff what it alleges was notice of acceptance of the plaintiff's settlement offer, in which it stated:
This refers to your letter of June 29, 2007, transmitting an offer submitted by Edward Brinskele to compromise the above-entitled case and the Government's counterclaim against Mr. Brinskele for a Section 6672 penalty with respect to Marin Telecommunications Corporation for 1992 through the first three quarters of 1994, on the basis of a payment of $500,000.00.

This is to advise you that the offer has been accepted on behalf of the Attorney General on condition that payment be made within 120 days of this date and, with the understanding that this settlement does not constitute a compromise of any income tax liability of Edward R. Brinskele. The Chief Counsel of the Internal Revenue Service has been notified of this action.

Please deposit with this office within 120 days of this date a cashier's or certified check in the amount of $500,000.00, made payable to the "United States Treasury."

Def.'s Ex. 3 (emphasis added). The letter made no reference to the possible accrual of interest in the event of a late payment. Attached to the government's alleged notice of acceptance was a proposed Stipulation for Dismissal, which stated, "It is hereby stipulated and agreed that the complaint in the above-captioned case be dismissed with prejudice, the parties to bear their respective costs, including possible attorneys' fees or other expenses of litigation." Def.'s Ex. 4.

Sometime in late February 2008, the plaintiff requested another conference with the ADR judge to discuss the settlement. The ADR judge requested that the parties submit supplemental memoranda regarding the settlement; the government submitted its memorandum on March 6, 2008, and the plaintiff submitted his memorandum on March 12, 2008. 1 On March 12, 2008, the ADR judge issued an order returning the case to this court "for implementation of the settlement agreement." During a March 21, 2008 status conference, the plaintiff indicated his belief that the parties had not reached a settlement agreement because he understood the phrase "on condition that payment be made within 120 days of this date," contained in the government's acceptance letter, to mean that if payment were not made within 120 days the settlement would be null and void, and therefore did not believe that the acceptance letter mirrored the terms of his offer. The plaintiff also indicated that he believed that the reference to attorneys' fees in the proposed Stipulation of Dismissal constituted a material change to his offer, as his offer did not mention attorneys' fees. On April 2, 2008, the government filed the instant motion in an effort to enforce the settlement agreement between the parties. The plaintiff filed his response on June 2, 2008, and the government filed its reply on June 16, 2008.


DISCUSSION


In its motion, the government contends that the parties entered into a final and binding settlement agreement on January 29, 2008, when the government sent a letter to the plaintiff in which it accepted the plaintiff's offer. The government asserts that its acceptance did not vary in any material way from the plaintiff's offer, and accordingly, a binding settlement agreement was reached. See, e.g., Busing v. United States [ 99-1 USTC ¶50,246], 42 Fed.Cl. 679, 686-87, 690 (1999) (finding that two letters between parties could constitute an offer and an acceptance because there was "no substantive difference in the terms contained in the two letters"); Principal Mut. Life Ins. Co. v. United States [ 93-2 USTC ¶50,480], 29 Fed.Cl. 157, 161 (1993) ("[A] purported acceptance must mirror the terms of the offer to result in the formation of a contract... . If the purported acceptance attempts to restate the terms of the offer, such restatement must be accurate in every material respect." (quoting A.L. CORBIN, CORBIN ON CONTRACTS §86 (1963) (emphasis added))), aff'd [ 95-1 USTC ¶50,160] 50 F.3d 1021 (Fed. Cir. 1995). The government contends that the plaintiff offered to settle the case by paying the government $500,000.00 within 120 days of the acceptance of his offer in consideration of the government dismissing its counterclaim against the plaintiff, and that the government accepted the plaintiff's offer by agreeing to these terms.

The government asserts that its acceptance mirrored the plaintiff's offer and argues that the phrase "on condition that payment be made within 120 days of this date" simply provides that if the plaintiff complies with his obligation to pay within 120 days, he will not owe interest, and if he breaches that obligation, he will owe interest until payment is made. The government maintains that this phrase does not modify the plaintiff's offer in any material way. The government further contends that the reference to attorneys' fees in the proposed Stipulation of Dismissal does not constitute a material change to the plaintiff's offer, because the plaintiff's offer did not mention attorneys' fees, but did provide that the settlement would extinguish all "obligations heretofore existing between [the parties] and arising from the dispute." Def.'s Ex. 1. The government contends that any potential claim for the recovery of attorneys' fees by the plaintiff would constitute an obligation that, under the plaintiff's offer, would be extinguished by the settlement. Accordingly, the government contends that neither its acceptance letter nor its proposed Stipulation of Dismissal materially changed the plaintiff's offer in any way.

The plaintiff contends that the government's January 29, 2008 letter was not an acceptance of his offer, but was instead a rejection of the plaintiff's offer and a counteroffer because it added a new and material condition that was not part of the plaintiff's original offer. The plaintiff argues that his offer provided that, if payment was not made within 120 days, interest would begin to accrue, and he would owe $500,000 plus the total interest that had accrued by the actual date of payment. He asserts that the phrase in the government's acceptance letter, "on condition that payment be made within 120 days of this date," means that the proposed settlement would be null and void if the plaintiff did not pay within 120 days, which is a condition that was not included in the plaintiff's offer. The plaintiff also asserts that the mention of attorneys' fees in the government's proposed Stipulation of Dismissal, attached to its January 2008 letter, is a material change to the plaintiff's offer, as his offer made no mention of attorneys' fees. 2

The court agrees with the plaintiff that the government's January 2008 letter did not constitute an acceptance of the plaintiff's offer because the letter did not mirror the terms of the plaintiff's offer. While the notice sent by the government to the plaintiff in September 2007 indicated that interest would accrue if the plaintiff did not pay the settlement amount within 120 days of the government's acceptance, the formal acceptance letter sent by the government in January 2008 made no reference to the accrual of interest. Instead, the government's letter stated, "This is to advise you that the offer has been accepted on behalf of the Attorney General on condition that payment be made within 120 days of this date and, with the understanding that this settlement does not constitute a compromise of any income tax liability of Edward R. Brinskele." Def.'s Ex. 3 (emphasis added). This court has held that an acceptance letter must mirror the terms of an offer in order to give rise to a binding settlement agreement. See Principal Mutual [ 93-2 USTC ¶50,480], 29 Fed.Cl. at 161. Because the alleged acceptance letter provided that the plaintiff would pay the government $500,000.00 to settle the case, and provided that payment would be made within 120 days, but did not provide that interest would begin accruing on the 121st day if payment was not made before that, the letter altered the terms of the plaintiff's offer in a material respect. Accordingly, the January 2008 letter must be construed as a counteroffer by the government, and the parties have not entered into a binding settlement agreement.


CONCLUSION


For all of the foregoing reasons, the government's motion to dismiss is DENIED. The government shall file a status report by Monday, July 14, 2008 proposing a discovery schedule and a trial date. The plaintiff shall respond to the government's proposed schedule by Friday, August 1, 2008.

IT IS SO ORDERED.

1 On March 4, 2008, the plaintiff's counsel filed a motion to withdraw as counsel, which was granted on March 13, 2008. Accordingly, the plaintiff is now proceeding pro se.

2 The plaintiff further contends that he was induced into making a settlement offer by the government because the government withheld an assessor's report from the plaintiff and made false statements to the plaintiff with regard to the basis for the assessment against the plaintiff. The plaintiff relies upon an assessment report dated June 23, 1998, which the plaintiff argues demonstrates that the government's assessor did not know the exact amount of tax for which the plaintiff should be held responsible. The government argues that the plaintiff's assertions are incorrect and are not supported by the discovery completed by the parties before the plaintiff filed a motion for summary judgment in 2005. Because the court has determined that the parties have not reached a settlement, the court need not consider the plaintiff's additional arguments regarding the assessment report at this time.

An IRS Appeals officer did not abuse her discretion when she refused a corporation's offer-in-compromise regarding its unpaid employment taxes. Her rejection of the offer as nonprocessable and inadequate was in accordance with the Internal Revenue Code and Treasury regulations. The corporation was not current on the payment of its estimated tax for the prior two periods. Its failure to timely pay taxes owed was a reasonable basis for the Appeals officer to reject its offer-in-compromise relating to other unpaid taxes.


Part 5. Collecting Process
Chapter 8. Offer in Compromise
Section 8. Acceptance Processing
________________________________________
5.8.8 Acceptance Processing
• 5.8.8.1 Overview
• 5.8.8.2 Amending Form 656
• 5.8.8.3 Closing a Case as an Acceptance
• 5.8.8.4 Acceptance Processing for Specific Types of Offers
• 5.8.8.5 Legal Opinion of Counsel
• 5.8.8.6 Public Inspection File
• 5.8.8.7 Accepted Offer File Processing
5.8.8.1 (09-01-2005)
Overview
1. The determination to accept an offer in compromise is based on sound decisions relating to an analysis of the individual taxpayers facts and circumstances and financial situation. Documentation supporting this decision and proper approval levels are required to complete the acceptance. This section describes the process for accepting an offer in compromise.
5.8.8.2 (09-01-2005)
Amending Form 656
1. When an offer is being recommended for acceptance, the tax periods owing and/or payment terms may need to be adjusted. This will require the taxpayer to submit an amended Form 656 to reflect the new terms.
A. Mark it "amended" in red on the top margin of page one.
B. Input "A" (amended) on screen one of the AOIC record to reflect receipt of an amended offer, but do notchange the "offer pending date" .
C. Add any new tax periods not included on the original Form 656 to the MFT screen. The date the IRS official signed the amended offer should be added to the MFT screen as the waiver date for the new periods only.
D. Delete any tax periods found on the MFT screen that are no longer owing and/or are not included on the amended offer.
E. Add the new terms for payment, if any, to the terms screen.
5.8.8.3 (09-01-2005)
Closing a Case as an Acceptance
1. Prior to preparing an acceptance report, IDRS command code " AMDIS" should be checked to ensure that no additional assessments are pending. If an open audit is found contact should be made to resolve the issue per instructions in IRM 5.8.4.12.1, Cases Pending in Examination. Tax must not be compromised unless it is assessed and legally due, therefore IDRS should also be checked to ensure that all tax included on the accepted offer has been properly assessed and is still due and owing.
2. Before closing a case as an acceptance, document the case history on AOIC regarding the decision. Include any special instructions for the Monitoring Offer in Compromise (MOIC) unit regarding application of funds or requesting a lien re-filing if one will be required during the terms of any deferred payment offer. See IRM 5.12, Federal Tax Liens, for more information about when a re-file may be required.
3. Order a MFTRA-X as close to the acceptance date as possible without delaying acceptance. Sanitize the MFTRA-X to "black out" or redact all tax information that is not to be disclosed to the public as follows:
Note:
The AOIC download process may be used to generate and print a sanitized report, which may be used instead of the MFTRA-X.
A. Name and SSN of a co-obligor spouse if the spouse is not a party to the compromise.
B. Number of exemptions.
C. Filing status.
D. Adjusted gross income.
E. Taxable income.
F. Principal Industry Activity Code.
G. Transaction Codes with neither debit or credit money amounts. The entire line including the date should be redacted.
H. Transactions Codes and explanations dealing with fraud, negligence, or criminal investigations, but not the date and amount of the transaction.
I. Power of Attorney/Tax Information Authorization (POA/TIA) on file.
4. Prepare an Acceptance Report. The Offer in Compromise Recommendation Report referenced in IRM Exhibit 5.8.4–3, Offer in Compromise Recommendation Report, may be used for this purpose. The report should contain at a minimum:
A. The taxpayers personal information such as age, health, dependents, education and occupation.
B. The cause of the delinquency and state of current compliance.
C. The amount of reasonable collection potential (RCP) and an explanation of how the RCP was calculated.
Note:
The Asset/Equity Table (AET) and Income/Expense Table (IET) shown in IRM Exhibits 5.8.4–1 and 5.8.4–2, respectively will generally fulfill this requirement.
D. Whether or not special circumstances exist and how they affected the amount agreed upon.
E. Negotiations resulting in the acceptable offer amount.
F. A conclusion that summarizes the basis for acceptance.
5. In the rare situation where relevant facts of a confidential nature exist that should not be included in the recommendation report, complete a supplemental memorandum for the record and include it in the case file. Do not include information already discussed in the offer recommendation report.
6. Update the AOIC record as follows:
A. Main Screen — Update to reflect the correct basis for compromise and if appropriate to indicate the existence of special circumstances. Update the disposition code to "1" (proposed acceptance).
B. MFT Screen — Input the assessment date for each module. Press "I" to update interest to the current date using the INTST command.
Note:
If any modules have restricted penalty or interest, use IDRS command code COMPAD and/or COMPAF to determine the accrued amounts. Include the accrued amounts in the total liability listed on the MFT screen. The manually accrued amounts must also be added to the paper transcript.
Note:
If any modules are Non-Master File and not on IDRS, secure an Automated Non-Master File (ANMF) transcript and update it as necessary using IDRS command code COMPAD and/or COMPAF.

C. K-Data Request Screen — Do a re-request for an IDRS download on all applicable TINS to update the AOIC screens with the accruals to the current date. Once the screens are updated generate and print the Public Offer report to use in lieu of a MFTRA-X.
Note:
A MFTRA-X may be requested through IDRS instead of taking this step.

D. Terms screen — Update the terms to those reflected on the offer that is being accepted ensuring that any collateral agreement(s) are referenced as necessary.
7. Generate and print the Form 7249, Offer Acceptance Report, for the required signatures. The accepting official is the official that has delegated responsibility for accepting based on the type and dollar amount of the case. Delegation Order Number No. 5-1 (formerly Delegation Order 11, Rev. 29) provides the level of authority for approving all Offer in Compromise dispositions.
8. Generate and print the appropriate acceptance letter for the signature of the delegated official. Attach copies of the accepted Form 656 and any applicable collateral agreement(s).
9. Generate and print the Power of Attorney (POA) letter if there is an authorized representative.
10. Assemble the file using Document 9600 B, Tab Dividers for Offer-in-Compromise Case Files Document.
Note:
The use of labeled dividers is required.
11. Submit the file for approval, routing to Counsel ( See IRM 5.8.8.5), and signing of the letter(s).
12. Upon approval and signature, date and mail the acceptance letter(s). Ensure that signed and dated copies are retained in the offer file.
13. Make a copy of the Form 7249, Offer Acceptance Report, and mail it together with the sanitized transcripts to the appropriate office for placing in the public offer file.
14. Close the case on AOIC and process. See IRM 5.8.8.7.
5.8.8.4 (09-01-2005)
Acceptance Processing for Specific Types of Offers
1. When two or more related offers are being recommended for acceptance, but acceptance is based on one financial analysis, one acceptance narrative may be used. Multiple files should be created containing the separate items that pertain to each offer. It is not necessary to duplicate the information that pertains to both files. The files should be clearly marked indicating that there are related offers, for example 1 of 2 and 2 of 2.
2. When the accepted offer includes Trust Fund Recovery Penalty (TFRP) assessments, a careful review must be made to ensure all TFRP assessments are included. Generally TFRP assessments made before August, 2000, will lump together all unpaid corporate tax quarters and be assessed under the tax period of the latest quarterly period owed by the corporation. Beginning in August, 2000, TFRP assessments are made for each quarterly period that was owed by the corporation. The Form 656 and the Form 7249, Offer Acceptance Report, must match and must reflect each individually assessed TFRP tax period.
3. Offers from Federal employees require a determination of whether public policy implications exist based on the sensitivity of the employee's position or area of responsibility. The result of this consideration should be documented in the case file. Offer acceptances for employees of the Internal Revenue Service additionally require the approval of the Territory Manager or SB/SE Compliance Operations Manager.
Note:
Offers from Federal civil service retirees are to be considered under normal procedures.
5.8.8.5 (09-01-2005)
Legal Opinion of Counsel
1. Counsel is required to review offers when the total liability for all related offers on the same taxpayer is $50,000 or more. The purpose of counsel's review is to determine whether the offer legally meets the standards of Doubt as to Liability (DATL), Doubt as to Collectibility (DATC) or the promotion of Effective Tax Administration (ETA). Counsel reviews the offer to ensure it meets the legal requirements for compromise and conforms to the Services' policy and procedures.
2. Counsel’s signature on the Form 7249, Offer Acceptance Report, constitutes the legal opinion required by IRC 7122(b). By signing the form, Counsel is certifying that all of the legal requirements for compromise have been met. If Counsel does not sign the form, the case cannot be compromised unless any legal issues are resolved.
3. Counsel’s signature does not necessarily indicate concurrence with the acceptance decision, but only that there are no legal barriers to compromise. In some cases Counsel may determine that the compromise is legally permissible, but may raise concerns of a policy or other issues of a non-legal nature. In such cases, the Form 7249, Offer Acceptance Report, will be signed and any other issues will be communicated by separate memorandum.
4. It is not required that Counsel concur in the acceptance decision in order for a compromise to go forward. However, the accepting official will review and consider any opinion from Counsel prior to making the acceptance final. Where major policy concerns have been raised, it is appropriate to document the case history indicating that the accepting official fully considered the issues before accepting the offer.
5.8.8.6 (09-01-2005)
Public Inspection File
1. Public inspection of certain information regarding all offers in compromise accepted under Internal Revenue Code (IRC) Section 7122 and is authorized by IRC Section 6103(k)(1).
2. A separate file of accepted Offer in Compromise records will be maintained for this purpose and made available to the public for a period of one year. The public inspection file will be maintained in a location designated by the Area office. The Area office may destroy the Public Inspection file after the year has expired.
3. For each accepted offer the file will only contain the following items:
• A copy of the Form 7249, Offer Acceptance Report
• The sanitized MFTRA-X or ANMF transcript.
4. The office that has accepted the offer will be responsible for providing all required documents as soon as possible after acceptance, for inclusion in the public inspection file.
5.8.8.7 (09-01-2005)
Accepted Offer File Processing
1. Once an offer has been closed on AOIC it should be held in-house until the following Monday. On Monday or as soon as practical thereafter, the offer should be released on AOIC and the entire file mailed to the proper Monitoring Offer in Compromise (MOIC) unit. Care must be used to ensure that the offer is mailed to the same unit it is released to on AOIC. If two related offers are accepted and one has a Business Operating Division (BOD) code of Small Business (SB) and the other is coded Wage & Investment (WI), change the BOD code on the WI offer on AOIC to match the BOD code of the SB offer before releasing it to the MOIC unit and ship both to the designated SB site.
2. If the case is chosen for Embedded Quality (EQ) review, copies of the following documents should be made and placed in the file in lieu of the originals before the offer is forwarded for review. The following original documents should be sent to the MOIC unit in a file folder clearly indicating that the remaining information was mailed to EQ.
A. Original and amended Form 656, Offer in Compromise
B. Form 7249, Offer Acceptance Report
C. Copy of the Acceptance letter(s)
D. Any collateral agreements
Note:
Before forwarding the case to the MOIC unit take the following steps:
• Verify that the original and any amended Form(s) 656 are in the case file
• Check to be sure that the Form(s) 656, Form 7249, IDRS, and AOIC all reflect the same tax liability period(s).
• Validate the waiver dates on the Form(s) 656, IDRS, and AOIC are correct and consistent.
3. Accepted offer files should be mailed with a Form 3210. Shipping offices must ensure that a receipted copy of the Form 3210 is received. If a receipted copy of the Form 3210 is not received within 30 calendar days of mailing, contact should be made with the receiving office and tracing actions taken. Appropriate actions must be taken to recover or replace missing files



Christopher Cross, Inc., CA-5, 2006-2 USTC ¶50,524, 461 F3d 610.

The IRS did not abuse its discretion by refusing to accept a couple's offer in compromise on an alternative minimum tax liability they incurred for exercising incentive stock options.

R.J. Speltz, CA-8, 2006-2 USTC ¶50,403.

An Appeals officer's determination to reject an individual's offer in compromise and sustain a levy to collect trust fund recovery penalties was not an abuse of discretion. The record established that the determination complied with all the requirements of the Internal Revenue Code and the Treasury Regulations. Moreover, the Appeals officer sustained the levy only after a complete review of the individual's financial information and after determining that the individual's offer in compromise was insufficient. The taxpayer conceded that IRS was not required to negotiate an acceptable offer in compromise.

R.E. Marshall, DC Fla., 2007-2 USTC ¶50,802.

The IRS was not liable for a breach of contract claim with respect to a settlement agreement because the individual bringing suit failed to show the existence of an enforceable contract to settle his outstanding tax liabilities. The IRS agent's written reply to the individual's offer did not constitute a valid offer or counteroffer that could be accepted by the individual to create a binding contract with the IRS. Moreover, the IRS agent was not authorized to enter into any such contract with the individual.

D.W. Jordan, FedCl, 2007-2 USTC ¶50,601.

The government was not estopped from collecting an individual's unpaid taxes merely because he alleged that an IRS employee advised or enticed him to file offers-in-compromise relating to his tax liabilities.

J.C. Ryals, DC Fla., 2006-1 USTC ¶50,293.

The IRS could not be compelled to accept an offer in compromise submitted by a company after the commencement of a bankruptcy proceeding but before the filing of a proposed Chapter 11 plan.Rev. Proc. 2003-71, 2003-2 CB 517, which directs IRS personnel to treat any offer in compromise as nonprocessable if the taxpayer has a bankruptcy case pending, does not violate a clear nondiscretionary duty on the part of the IRS.

1900 M Restaurant Associates, Inc., BC-DC D.C., 2005-1 USTC ¶50,313, 319 BR 302.

The IRS did not abuse its discretion in refusing to accept an individual's multiple offers to compromise her liability for the trust fund recovery penalty. The taxpayer's first offer was for significantly less than her collection potential, and she failed to explain why the IRS's two counter offers would pose a hardship. In calculating its counter offers, the IRS took into consideration the taxpayer's age and numerous medical problems. The IRS also offered to forgo collection until the taxpayer's financial situation improved, or the collection action expired. The taxpayer made the second offer at a Collection Due Process (CDP) hearing, arguing that there was doubt as to her liability for the penalty.

A. Siquieros, DC Tex., 2005-1 USTC ¶50,244. Aff'd, per curiam, CA-5 (unpublished opinion), 2005-1 USTC ¶50,245, 124 FedAppx 279.

A taxpayer was not entitled to monetary damages resulting from the IRS's referral of a collection action against the taxpayer to the Department of Justice (DOJ) while one or more offers in compromise were allegedly pending. The IRS's referral of the taxpayer's case to the DOJ predated temporary regulations precluding any levy to collect outstanding tax debts while an offer in compromise for those tax debts is pending and final regulations, Reg. §301.7122-1(g)(6), prohibiting the referral of cases to the DOJ for the collection of unpaid taxes through judicial proceedings while an offer in compromise is pending. The IRS's failure to include provisions preventing referral of such cases to the DOJ in the temporary regulations was not actionable under the Taxpayer Bill of Rights (P.L. 104-168), as codified under Code Sec. 7433(a). There was also no proof that there were any offers in compromise pending when the taxpayer's case was referred to the DOJ. At least six offers in compromise submitted by the taxpayer were rejected or returned as "unprocessable." Documents evidencing the IRS's acceptance of an offer in compromise submitted by the taxpayer's accountant on behalf of the taxpayer were forgeries.

J.R. Evseroff, DC N.Y., 2005-1 USTC ¶50,112.

Married debtors' tender of a check to the government did not constitute an offer in compromise that would have discharged their tax liability. The government and the debtors agreed that an offer to compromise the tax liability of the debtors was never accepted in writing by an authorized official. Moreover, a certificate of assessment reflected that the debtors' offer in compromise was rejected.

L.M. Smallwood, BC-DC Ark., 2002-1 USTC ¶50,166.

A proposed tax levy and collection action against an individual was not barred because the government failed to entertain a settlement or other compromise of her liability. The taxpayer failed to assert any Internal Revenue Code provision that establishes the government's legal obligation to compromise its action against her. The government has discretion to accept or reject any offer in compromise of a tax liability but is not legally obligated to even consider such an offer.

D.G. Asbury, DC Pa., 2002-1 USTC ¶50,117.

A Cayman Islands corporation's suit for refund of federal withholding taxes was dismissed, with prejudice, in accordance with a closing agreement with the government. A letter sent by the taxpayer that purported to modify its settlement offer to include an offer-in-compromise with regard to tax years not at issue was ineffective. The taxpayer presented no evidence that the proper parties received the letter before the government accepted its offer.

Inverworld, Ltd., DC D.C., 2001-1 USTC ¶50,350. Aff'd, per curiam, CA-D.C. (unpublished opinion), 2002-1 USTC ¶50,113, 22 FedAppx 5.

The co-owner of property foreclosed by a federal tax lien failed to show that he and the government had reached a settlement to release the property from the lien. There was no evidence that the government accepted his offer in compromise.

E.F. Ressler, DC Ala., 98-1 USTC ¶50,417.

Correspondence between a mutual insurance corporation and the government did not reflect an intention that the filing of a stipulation of dismissal would be a condition precedent to the completion of settlement negotiations. Because the parties entered into a valid settlement agreement, the government's acceptance letter merely stated that a stipulation of dismissal would "reflect" the agreement which had already been reached. As such, a stipulation was not essential to the validity of the parties' settlement agreement.

Principal Mutual Life Insurance Co., FedCl, 93-2 USTC ¶50,480, 29 FedCl 157. Aff'd on another issue, CA- FC, 95-1 USTC ¶50,160, 50 F3d 1021.

The IRS was not estopped from denying that it settled tax liabilities, even though it retained money offered as a settlement, because the procedures set forth for settling disputes were not followed. Since the statutory requirements were not followed, there could be no settlement, and thus no estoppel.

W.F. Brooks, DC W.Va., 86-2 USTC ¶9548.

A taxpayer's offer of compromise that contained a waiver of limitations was rejected by the IRS, and, therefore, the IRS could not assert that it accepted the portion of the offer containing the waiver.

G. Hamm, DC Ky., 79-2 USTC ¶9731.

The Commissioner effectively accepted an offer to compromise a refund claim when he mailed the taxpayer's attorney a letter accepting the offer and informing the taxpayer that the refund settlement would be credited against the unpaid tax liability of a later tax year. The court rejected the taxpayer's argument that the IRS letter constituted a counteroffer rather than an acceptance because it materially altered the terms of the offer.

J.P. Kehoe, DC N.Y., 79-2 USTC ¶9524.

There was no acceptance of a compromise settlement, which was negotiated during the trial, where the government's acceptance was not timely and unequivocal and where the taxpayer's counsel decided not to accept the settlement offer. Therefore, the taxpayer was not bound by the settlement agreement.

B.R. Kurio, DC Tex., 71-1 USTC ¶9112.

The IRS did not abuse its discretion when it refused married taxpayers' offer in compromise even though their tax liability arose from the application of the alternative minimum tax (AMT) as a result of the exercise of an incentive stock option on stock which then fell precipitously in value. The taxpayers had the ability to meet their obligation in full (albeit with a substantial reduction in their standard of living). The fact that their tax bill was much higher than the value of what they ended up receiving was not a reason for the IRS to accept the taxpayers' offer. The IRS was precluded from accepting an offer in compromise that would undermine compliance with the tax laws. Whether or not AMT is unfair is a question for Congress, not the IRS.

R.J. Speltz, 124 TC 165, Dec. 55,961.

Disallowance of tithes as allowable expenses in determining a taxpayer's ability to pay outstanding tax liabilities for purposes of an offer in compromise was not an abuse of an IRS Appeals officer's discretion even though the taxpayer argued that tithes were required as a condition of employment. At the Appeals hearing, the taxpayers were given the opportunity to substantiate that the husband was a minister but they failed to do so and the court was not persuaded that tithing was a condition of employment.

B.M. Pixley, 123 TC 269, Dec. 55,744.

An IRS Appeals officer did not abuse her discretion in rejecting an individual's offers-in-compromise where those offers did not provide for an immediate payment equal to the available cash value of the taxpayer's life insurance policies. The court found no authority requiring the IRS to accept less than the full value on the grounds suggested by the taxpayer, that he and his wife are "in their older years."

L.D. McClanahan, 95 TCM 1625, Dec. 57,478(M), TC Memo. 2008-161.

The IRS did not abuse its discretion when it rejected multiple offers-in-compromise submitted by a married couple; therefore, a proposed levy and filing of a federal tax lien were appropriate. The offers contained a number of defects with regard to the taxpayers' reasonable collection potential, which was largely based on the amount they could realize from the equity in their home. The IRS found that their initial offer used outdated appraisals for the home and questioned the validity of a second mortgage on the property held by husband's father, which was recorded shortly before the filing of the notice of federal tax lien. The taxpayers' second offer, based on a recommendation by an IRS Appeals officer, was also insufficient. The IRS's Engineering Group had found that the market value of the taxpayers' home could be 30 percent to 40 percent higher than that stated in the second offer.

W.G. Schwartz, 95 TCM 1427, Dec. 57,424(M), TC Memo. 2008-117.

The Appeals office did not abuse its discretion when it rejected an individual's offer-in-compromise (OIC) and sustained the IRS's notice of federal tax lien. The Appeals officer properly concluded that the offer was inadequate because it failed to include the value of an interest in real property that was awarded to her as part of her divorce settlement. The taxpayer failed to provide an adequate explanation as to why the property interest was not included when it constituted a dissipated asset that should have been included in her OIC.

J.L. Ashlock, 95 TCM 1220, Dec. 57,363(M), TC Memo. 2008-58.

The IRS Appeals Office did not abuse its discretion by rejecting a married couple's offer-in-compromise where the taxpayers had underreported their income for several tax years due to claimed losses and credits from Hoyt partnership tax shelter investments. The taxpayers argued that their offer should have been accepted because of their age, health and anticipated postretirement earnings. However, the court found that the taxpayers failed to show that payment of more than they offered would render them unable to meet their basis living expenses in retirement.

R. Bergevin, 95 TCM 1031, Dec. 57,307(M) , TC Memo. 2008-6.

An IRS Appeals officer abused her discretion by including the full amount of an individual's dissipated assets in his net realizable equity (NRE) during her evaluation of his offer-in-compromise. His NRE should not have included amounts paid for: attorney's fees incurred in the representation in his tax case; attorney's fees incurred in a civil lawsuit he filed for unpaid wages; an estimated tax payment made for one of the tax years at issue; and a lump-sum payment of delinquent child support.

D.L. Samuel, 94 TCM 392, Dec. 57,141(M), TC Memo. 2007-312.

The IRS did not abuse its discretion in rejecting an individual's offer-in-compromise (OIC). The OIC was for less than one-third of his total tax liability and the individual's assets and income were valued at more than the full amount of his assessed tax liability. The individual, while lacking sufficient income to fund an installment agreement, held a one-half interest in two parcels of real estate. The value of the individual's interest in the real estate exceeded the amount of his tax liability. The individual's argument that he owed his brother, who owned the other half interest in the real estate, more than the value of his interest, was rejected because it was unsupported by evidence of such liability.

W.A. Mootz, 94 TCM 362, Dec. 57,131(M), TC Memo. 2007-303.

The IRS Appeals Office did not abuse its discretion in rejecting a married couple's offer-in-compromise where the taxpayers had underreported their income for several tax years due to claimed losses and credits from Hoyt partnership tax shelter investments. The IRS Appeals officer considered all of the evidence submitted, and reasonably applied the guidelines for evaluating an offer-in-compromise. The offer was unacceptable because, among other reasons, the taxpayers were not forthcoming in establishing their financial status, acceptance of the offer would undermine compliance with the tax laws by taxpayers in general, and the taxpayers had the financial wherewithal to pay more than the offered amount. The officer adequately considered the taxpayers' unique facts and circumstances, and the taxpayers did not show that requiring them to pay more than the offer amount would result in an economic hardship. Public policy did not demand that the taxpayers' offer be accepted because they were victims of fraud, and acceptance of the offer would not enhance voluntary compliance by other taxpayers.

M. Smith, 93 TCM 1047, Dec. 56,880(M), TC Memo. 2007-73.

Refusal to accept a married couple's offer-in-compromise was not an abuse of discretion. The taxpayers did not demonstrate either that they would suffer economic hardship from the proposed collection method or that public policy and equity reasons weighed in favor of accepting their offer. The case was not a "longstanding" case in which forgiveness of penalties and interest was appropriate, and there was no evidence that the IRS Appeals officer failed to give adequate consideration to the taxpayers' unique facts and circumstances. Public policy did not demand acceptance of the offer because the taxpayers were victims of a shelter promoter's fraud. Acceptance of the compromise would reduce the risks involved in investing in tax shelters, undermining voluntary compliance with the tax laws.

G. Hansen, 93 TCM 983, Dec. 56,861(M), TC Memo. 2007-56.

Rejection of a taxpayer's offer in compromise was not an abuse of discretion where the financial information provided by the taxpayer conflicted with the implications of the terms of the taxpayer's marital settlement and separation agreement. The information provided did not explain the inconsistencies with regard to the ownership of various assets; thus, it was not sufficient to permit a reasonable analysis of the taxpayer's offer.

J.J. Kerr, 93 TCM 932, Dec. 56,846(M), TC Memo. 2007-43.

The IRS's rejection of an offer-in-compromise from investors in a cattle-breeding tax shelter was not arbitrary, capricious or without sound basis in fact or law, and the IRS was allowed to proceed with its collection action. The IRS did not abuse its discretion in rejecting the offer despite the taxpayer's claim of special circumstances or economic hardship. The IRS was not required to address every aspect of the taxpayers' special circumstances in the notice of determination and its calculation of the taxpayers' reasonable collection potential far exceeded the taxpayers' offer. In addition, the IRS was not required to accept the taxpayer's offer based on considerations of public policy or equity. The longstanding nature of the taxpayers' case did not require acceptance of the offer-in-compromise, the IRS could rely on an example in the Internal Revenue Manual that was similar although not identical to the taxpayers' case, and the IRS did not have to consider all of the taxpayers' equitable facts, including their claim that they were victims of fraud. Finally, the taxpayers' other arguments regarding compromise of penalties and interest, the IRS's alleged failure to provide the court with sufficient information, the IRS's deadline for submission of information, the husband's pending innocent spouse claim and the IRS's alleged failure to balance the need for efficient tax collection of taxes with the concern that collection be no more intrusive than necessary were rejected.

C. Andrews Est., 93 TCM 891, Dec. 56,831(M), TC Memo. 2007-30.

The IRS's rejection of an offer-in-compromise from investors in a cattle-breeding tax shelter was not arbitrary, capricious or without sound basis in fact or law, and the IRS was allowed to proceed with its collection action. The IRS did not abuse its discretion in rejecting the offer despite the taxpayer's claim of exceptional circumstances. In addition, the IRS was not required to accept the taxpayer's offer based on considerations of public policy or equity. The longstanding nature of the taxpayers' case did not require acceptance of the offer, the IRS could rely on an example in the Internal Revenue Manual that was similar although not identical to the taxpayers' case, and the IRS did not have to consider the taxpayers' claim that they were victims of fraud. Finally, the taxpayers' other arguments regarding compromise of penalties and interest, the IRS's alleged failure to provide the court with sufficient information, the IRS's refusal to delay the Code Sec. 6330 hearing, the wife's pending innocent spouse claim, and the IRS's alleged failure to balance the need for efficient tax collection with the concern that collection be no more intrusive than necessary were rejected.

G. Freeman, 93 TCM 879, Dec. 56,829(M), TC Memo. 2007-28.

The IRS's rejection of an offer-in-compromise from investors in a cattle-breeding tax shelter was not arbitrary, capricious or without sound basis in fact or law, and the IRS was allowed to proceed with its collection action. The IRS did not abuse its discretion in rejecting the offer despite the taxpayers' claim of special circumstances or economic hardship. The IRS was not required to address every aspect of the taxpayers' special circumstances in the notice of determination and its calculation of the taxpayers' reasonable collection potential far exceeded the taxpayers' offer. In addition, the IRS was not required to accept the taxpayers' offer based on considerations of public policy or equity. The longstanding nature of the taxpayers' case did not require acceptance of the offer, the IRS could rely on an example in the Internal Revenue Manual that was similar although not identical to the taxpayers' case, and the IRS did not have to consider the taxpayers' claim that they were victims of fraud. Finally, the taxpayers' other arguments regarding compromise of penalties and interest, the IRS's alleged failure to provide the court with sufficient information, the IRS's refusal to delay the Code Sec. 6330 hearing, and the IRS's alleged failure to balance the need for efficient tax collection with the concern that collection be no more intrusive than necessary were rejected.

R. Carter, 93 TCM 861, Dec. 56,826(M), TC Memo. 2007-25.

An IRS Appeals officer did not abuse her discretion in rejecting a taxpayer's offer-in-compromise. The Appeals officer correctly concluded that acceptance of the offer-in-compromise would not promote effective tax administration. Further, she did not abuse her discretion in determining that the taxpayer's real property had a value in excess of the amount indicated by the taxpayer, which was based on an outdated appraisal, and she correctly determined that the reasonable collection potential was greater than the taxpayer's offer amount.

G.W. McDonough, 92 TCM 386, Dec. 56,665(M), TC Memo. 2006-234.

The IRS did not abuse its discretion when it rejected an elderly couple's compromise offer that amounted to less than half of their estimated tax liability. The IRS was not required to compromise the couple's tax liability in order to promote effective tax administration based on economic hardship, public policy or equity grounds because the taxpayers had sufficient assets to pay the tax owed and still meet their necessary living expenses for the foreseeable future. Further, it did not abuse its discretion in disregarding the couple's speculative future medical expenses. In addition, the IRS was not required to accept the offer based on the taxpayers' claim that they were the victims of fraud because the couple's situation was typical of many tax shelter participants who claimed deductions, obtained tax advantages and were now required to pay their tax liability. Thus, the IRS's determination to reject the offer-in-compromise was not arbitrary, capricious, or without a sound basis in fact or law, and it was not abusive or unfair to the taxpayers.

D. Clayton, 92 TCM 222, Dec. 56,612(M), TC Memo. 2006-188.

IRS representatives did not accept or intend to accept the offer of a husband and wife to settle their tax deficiency case. The IRS appeals officer to whom the offer letter was sent did not make a written or oral response, and did not accept the offer. The IRS's counsel in the case did not accept the offer, where the offer was not made to him, he was unaware of its specifics, and the appeals officer conducted the negotiations. Although it was disputed whether the IRS's counsel had told taxpayers' counsel that a settlement had been reached, IRS counsel's statement was, at best, his understanding of the intent or actions of the appeals officer or her office.

R.R. Smith, 92 TCM 219, Dec. 56,611(M), TC Memo. 2006-187.

The IRS's refusal of an individual's offer to compromise her alternative minimum tax (AMT) liability, which arose from the exercise of incentive stock options (ISO), was not an abuse of discretion. The fact that the taxpayer's AMT liability was much higher than the value of income she actually received, was not a reason for the IRS to accept her offer. Any inequity in the application of the AMT in situations such as the taxpayer's is a question for Congress to resolve and not the IRS.

C. Wai, 92 TCM 181, Dec. 56,602(M), TC Memo. 2006-179.

An IRS Appeals officer did not abuse her discretion in rejecting an taxpayer's offer-in-compromise. The Appeals officer's rejection of the offer-in-compromise was justified because the disclosure that the taxpayer had incurred additional tax liability without making payment suggested that the taxpayer preferred consumption over meeting his legal obligations. The Appeals officer had also agreed to allow a collection alternative if the taxpayer met certain conditions, but the taxpayer did not agree to those conditions. Finally, collection of the full tax liability would not have caused the taxpayer and his family financial hardship. Delaying his retirement plans was not considered a hardship.

J.G. Dostal, 90 TCM 496, Dec. 56,194(M), TC Memo. 2005-264.

An IRS Appeals officer's determination to proceed with collection of an individual's unpaid tax liability was not an abuse of discretion. Although the taxpayer's allegation of economic hardship was worthy of review, the taxpayer's substantial equity in his home, against which he could borrow, weighed against a finding of economic hardship. Accordingly, the IRS did not abuse its discretion by rejecting the taxpayer's offer to compromise.

K. Hawkins,, 89 TCM 1075, Dec. 55,999(M), TC Memo. 2005-88.

A settlement agreement between an individual and the IRS did not allow the taxpayer to claim business losses related to his wife's furniture business in a specific tax year. The IRS disallowed the losses, categorizing the expenses as start-up costs required to be capitalized. The IRS and the taxpayer reached a settlement for that year that included, in part, the disallowance of the business loss. The taxpayer argued, however, that the prior to signing the settlement an agreement was reached to allow the loss in the following year. Although the IRS agreed that the loss might be allowed in a subsequent year, there was no assent to allow the loss in any specific tax year. Moreover, the settlement did not contain any express agreement as to the business losses. Therefore, there was no binding agreement as to the losses.

K.J. Barela, 88 TCM 65, Dec. 55,707(M), TC Memo. 2004-175.

An IRS Appeals officer abused his discretion in denying a couple's offer in compromise on the grounds that the taxpayers had inadequate income to meet their living expenses and pay the proposed monthly payments. The officer appeared to rely exclusively on the IRS's prescribed schedule of national and local average living expenses to determine that the taxpayers' basic living expenses exceeded their monthly income. However, all of the facts and circumstances, including the schedule of actual expenses submitted by the taxpayers, should have been considered in determining whether the taxpayers could pay both their expenses and the installment payments (Code Sec. 7122(c)(2)). The filing of the federal tax liens to secure the IRS's interest in the unpaid tax liability was not an abuse of discretion.

M. Fowler, 88 TCM 17, Dec. 55,689(M), TC Memo. 2004-163.

Married taxpayers' challenge to an adverse Collection Due Process determination was rejected because they failed to establish an abuse of discretion on the part of the IRS. The officer's determination that the taxpayers had some ability to pay was supported by their proposed offer in compromise. In light of the unresolved question regarding the taxpayers' ownership of real property, the rejection of their proposed offer in compromise was sustained.

D.G. Willis, 86 TCM 506, Dec. 55,334(M), TC Memo. 2003-302.

A married couple's offer to settle their tax liability for the amount of their deficiency, but excluding penalties and interest, did not constitute a binding compromise agreement. The taxpayers had received an oral confirmation from the IRS auditor that their offer had been accepted; however, the auditor believed their offer was a request for additional time to pay. In fact, the taxpayers had not submitted the offer on the appropriate form and had not received a written confirmation that the offer was accepted. Further, there was no mutual assent to the offer since the auditor misunderstood the nature of their request.

J. Ringgold, 86 TCM 28, Dec. 55,218(M), TC Memo. 2003-199.

The IRS's action in cashing a check submitted by an exempt association with a letter that purported to be an offer in compromise did not amount to an acceptance of the entity's offer and did not bar the IRS from asserting that its income activity gave rise to unrelated business taxable income. Rather, the letter merely constituted a settlement offer to resolve the dispute resulting from the IRS audit of the taxpayer for three of the tax years in issue. Moreover, no compromise was effected because the letter failed to meet the specific requirements of Code Sec. 7122.

Education Athletic Assoc., Inc., 77 TCM 1525, Dec. 53,284(M), TC Memo. 1999-75.

Married taxpayers who were assessed deficiencies did not have a binding settlement agreement with the IRS regarding the years at issue. Although the taxpayers submitted several Forms 656, Offer in Compromise in Any Civil or Criminal Case, and District Director's Recommendation, the IRS never accepted any of their settlement offers. An IRS employee's signing of the forms to indicate that the IRS accepted the taxpayers' waiver of the limitations period did not constitute an acceptance of their offers. Further, the IRS employee and the taxpayers' accountant testified that the IRS employee never orally agreed to accept the taxpayers' proposals. Since the husband had a history of dishonest, criminal behavior, his testimony with respect to the alleged oral agreement lacked credibility. Thus, the taxpayers failed to establish that a binding agreement existed.

D.L. Streck, 74 TCM 545, Dec. 52,240(M), TC Memo. 1997-407. Aff'd, CA-6 (unpublished opinion), 99-2 USTC ¶50,650.

The IRS and an investor did not enter into a binding settlement agreement on deficiencies related to a tax shelter because the parties did not mutually assent to a settlement. The taxpayer failed to indicate his belief that a settlement agreement had been entered into until six months after he received written indications that the IRS did not believe that a settlement agreement existed.

T.W. Heil, 68 TCM 513, Dec. 50,071(M), TC Memo. 1994-417.

The government was not bound by an alleged proposed settlement between a former attorney and his wife and the IRS. A proposed decision document did not conform to the formalities required to execute a binding settlement. Even if the document constituted a formal settlement offer, there was no evidence that the taxpayers executed the agreement. Moreover, the IRS never executed the agreement, and no such document was filed with the Tax Court.

B.J. O'Sullivan, 68 TCM 407, Dec. 50,046(M), TC Memo. 1994-395. Aff'd, CA-9 (unpublished opinion), 96-2 USTC ¶50,496.

A notice of deficiency was not invalidated on account of a prior assessment where it was sent to a taxpayer who, along with her husband (who was also her business partner), had signed a Form 870-L(AD) settlement offer that was not signed by the IRS until after the husband filed for bankruptcy. The settlement agreement was void as to both spouses because acceptance of the offer was precluded by the automatic stay provision of the Bankruptcy Code.

N.J. Gillian, 66 TCM 398, Dec. 49,218(M), TC Memo. 1993-366.

In a case involving a delinquent taxpayer who entered into a compromise agreement with the IRS to discharge the federal tax lien on her home in order to facilitate its sale, and who subsequently sought to compromise her tax liability after a collateral agreement was signed, Chief Counsel determined that the Service could accept the offer. The taxpayer submitted a separate offer in compromise conditioned on the Service's release of the mortgage on her home. However, acceptance of such an offer did not require the IRS to release the mortgage. A collateral agreement in which the taxpayer grants additional security to the IRS creates an independent cause of action and, thus, the original unpaid taxes giving rise to the statutory liens remain as separate liabilities. Absent language to the contrary in the compromise agreement, the mortgage remains unaffected.

IRS Letter Ruling 200133028, July 17, 2001.

Chief Counsel determined that a Compliance Area Director is entitled to compromise a case notwithstanding an opinion by Associate Area Counsel that opposed acceptance of a taxpayer's offer based upon a purported economic hardship that would ensue from collection in full. Although Code Sec. 7122(b) requires the opinion of the Associate Area Counsel whenever an offer in compromise is made, the opinion need not favor acceptance of the compromise in order for the IRS to accept the offer. The ultimate determination of whether an offer is accepted lies with the Area Director or other delegated official. However, an offer may not be accepted unless one of the bases for compromise recognized by Reg. 301.7122-1T has been established.

CCA Letter Ruling 200128054, May 29, 2001.

The IRS could exercise its discretion to accept an offer in compromise in spite of the fact that processability rules pertaining to deposit, payment and filing of employment taxes changed prior to acceptance of the offer. Chief Counsel determined that the in-business corporation could not compel the IRS to apply the former rule that it demonstrated compliance by showing that it had been current in the preceding two quarters, rather than demonstrating compliance by having timely filed and timely deposited the previous two quarters' taxes. Nothing in the Internal Revenue Code or regulations prevented the Service from exercising its discretion to process an offer based on criteria that existed when the offer was first submitted.

CCA Letter Ruling 200137001, April 12, 2001.

The government's letter to an individual did not constitute an acceptance of his settlement offer. The letter did not mirror the terms of the offer because it made no reference to the interest that would accrue if the individual failed to pay the settlement amount within 120 days of acceptance. Instead, it provided that the offer would be accepted on condition that payment is made within 120 days; therefore, the letter altered the terms of the offer and was construed as a counteroffer.

E.A. Brinskele, FedCl, 2008-2 USTC ¶50,493.

Section 6015 - An individual taxpayer was entitled to equitable relief as an innocent spouse with respect to an addition to tax and interest imposed on a tax underpayment that resulted from an overstatement of withheld tax. The overstated withholding credit was attributable to the taxpayer's former husband because he prepared the return and wrongfully reported the overstated withholding; thus, a threshold condition for considering whether innocent spouse relief may be granted on the basis equitable considerations was satisfied. Equitable relief was appropriate because the taxpayer was separated from her former husband at the time relief was requested, a property settlement provided that the former husband would pay any additional tax liabilities for the tax year at issue, and the taxpayer received no significant benefit as a result of the unpaid tax liability attributable to the overstated withholding. Although the taxpayer was granted innocent spouse relief with respect to the unpaid addition to tax and interest assessed on the underpayment, she was not entitled to a refund of withholding from her salary or the portion of a payment made by her former husband toward the unpaid tax liability to which she contributed. Payments made with a joint return and joint payments are not eligible for refund on the basis of equitable innocent spouse relief.


[T.C. Summary Opinion 2008-119]


Docket No. 12663-06S . Filed September 9, 2008.

Jane Frances Schwind, f.k.a. Jane Frances Skolnick v. Commissioner.

[ Code Sec. 6015]


Tax Court: Summary opinion: Innocent spouse relief: Equitable relief: Payments made with joint return and joint payments. --


GOLDBERG, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.



This case arises from a request for relief from joint and several liability under section 6015(f) with respect to petitioner's unpaid joint tax liability for 2003. No notice of deficiency was issued. The issues for decision are whether petitioner is entitled to relief from joint and several liability under section 6015(f) and whether she is entitled to a refund of amounts paid towards the liability under section 6015(g)(1). 1





Background



Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits received into evidence are incorporated herein by reference. When the petition was filed, petitioner resided in Maryland.



In September 2001 petitioner married David Skolnick (Mr. Skolnick). Petitioner worked and continues to work as a registered nurse. Mr. Skolnick was employed as an engineer by Zeta Associates, Inc. (Zeta), until June 2003 when his employer terminated his employment, but he found new employment by the end of 2003.



On December 13, 2003, Mr. Skolnick sold his stock holdings in Zeta for $99,899.91; no Federal income tax was withheld. Around March 2004 Mr. Skolnick deposited the check for the stock proceeds into his and petitioner's joint checking account. Although the joint account was used to deposit their paychecks and to pay household bills, petitioner was not allowed to open or to review the account statements.



Around April 2004 Mr. Skolnick prepared and electronically filed a joint Form 1040, U.S. Individual Income Tax Return, for 2003. Petitioner's participation in the preparation of the Form 1040 was limited to providing Mr. Skolnick with her "W-2s". But petitioner was allowed to review the Form 1040 after Mr. Skolnick had filed it. Among other things, Mr. Skolnick reported the following:





Description Amount

Taxable income (line 40) $205,171

Total tax (line 60) 41,482

Withholdings (line 61) 66,332

Excess Social Security 1,831

Overpayment 26,681





Third-party-payor records, however, showed withholdings totaling $36,331 ($3,795 was withheld on petitioner's wages and $32,536 was withheld on Mr. Skolnick's wages). Respondent determined that the Skolnicks had overstated their withholdings by $30,001, and he reduced their "Payments" by that amount. In May 2005 respondent issued a Notice CP2000, reflecting a "Proposed Balance Due" of $31,656.



In the interim Mr. Skolnick had left the marital home in January 2005. Petitioner left the marital home in March 2005. Mr. Skolnick and petitioner instituted divorce proceedings in 2005; the divorce was finalized in February 2006. In January 2006 petitioner and Mr. Skolnick entered into a "Property And Support Settlement Agreement" (property settlement). In pertinent part, the property settlement provides:



[t]he parties agree that they have potential joint tax liability for 2003 for at least [$31,656 * * * Mr. Skolnick paid $31,656 to the Internal Revenue Service (IRS), and petitioner paid half of the amount to him as her share of the liability. If there are additional tax liabilities for 2003, Mr. Skolnick agrees to pay them. If the IRS determines that any part of the 2003 tax liability is not due and refunds it, the parties agree to split it. If penalties or interest for 2003 are refunded, the parties agree that Mr. Skolnick is entitled to it].



While the divorce was pending, petitioner submitted a Form 8857, Request for Innocent Spouse Relief (And Separation of Liability and Equitable Relief), to the IRS in June 2005. 2 In August 2005 she submitted a Form 12510, Questionnaire for Requesting Spouse. The IRS issued a preliminary determination in November 2005. It denied relief under section 6015(b), (c), and (f), reasoning:



Information contained in your case indicates that you had knowledge and/or reason to know of the item that gave rise to the tax deficiency. There was too much withholding claimed on the return and you did not review the return. You failed your duty of inquiry at the time of filing.



Petitioner appealed to the Appeals Office (Appeals) in December 2005. Appeals issued a notice of determination on March 30, 2006. It states that relief was denied because the item "leading to the understatement was not attributable" to Mr. Skolnick.



In the interim Mr. Skolnick had made a $31,656 payment on behalf of himself and petitioner in January 2006. On February 6, 2006, the IRS determined that petitioner and Mr. Skolnick were liable for a $3,000 addition to tax under section 6651(a)(2), plus interest. According to the notice of determination, the unpaid balance of income tax due from petitioner was $4,367.17 as of March 30, 2006. The amount of relief of 2003 income tax petitioner sought was $30,001.





Discussion




I. Burden of Proof


Except as otherwise provided in section 6015, petitioner bears the burden of proof with respect to her entitlement to relief from joint and several liability. See Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34 (6th Cir. 2004).




II. Joint and Several Liability and Section 6015(f) Relief


Section 6013(d)(3) provides that if a joint return is filed, the tax is computed on the taxpayers' aggregate income, and liability for the resulting tax is joint and several. See also sec. 1.6013-4(b), Income Tax Regs. But the IRS may relieve a taxpayer from joint and several liability under section 6015 in certain circumstances. An individual may be relieved from joint and several liability under section 6015(f) if, taking into account all the facts and circumstances, it is inequitable to hold the taxpayer liable for any unpaid tax or deficiency and he does not qualify for relief under section 6015(b) or (c).



To guide IRS employees in exercising their discretion, the Commissioner has issued revenue procedures that list the factors they should consider. The Court also uses the factors when reviewing the IRS's denial of relief. See Washington v. Commissioner, 120 T.C. 137, 147-152 (2003); Rev. Proc. 2003-61, 2003-2 C.B. 296, modifying and superseding Rev. Proc. 2000-15, 2000-1 C.B. 447.




III. Rev. Proc. 2003-61, Sec. 4.01: Seven Threshold Conditions for Relief


Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297, begins with a list of seven threshold conditions that a taxpayer must satisfy in order to qualify for equitable relief. The Court will not recite them all since the only factor at issue is the so-called attribution factor. Rev. Proc. 2003-61, sec. 4.01(7), 2003-2 C.B. at 297, provides that the tax liability from which the requesting spouse seeks relief must be attributable to the nonrequesting spouse unless certain exceptions apply which are not relevant here.



Petitioner contends that the claimed $30,001 of excess withholdings is attributable to Mr. Skolnick because he overstated their withheld amounts when he prepared and electronically filed their Form 1040.



Respondent contends that petitioner's request for relief seems to be based on the assumption that the overstated withholding credits are directly related to Mr. Skolnick's stock sale. According to respondent, Appeals determined that that was not the case: the overstated withholdings could have been a math error, a "typo when the electronic return was computed using whatever computer software was used[,] * * * an inflated number pulled out of the air," or any one of a number of explanations.



The Appeals officer's "Case Activity Record" states that the understatement was "caused by reporting withholding in relation to a 1099B. There was no withholding on the 1099B." The record further states: "She argues it was due to the 1099b. * * * [I told her] it had not been filed. I stated that there is nothing on the 1099b so that is just a guess." The record also states that he explained that withholding is "normally considered a joint and several liability because it normally cannot be allocated." The officer's "workpapers" state that the item was not attributable to either spouse because they had claimed too much withholding. Further, her arguments that the item should be attributed to Mr. Skolnick because he claimed the withholding in relation to a Form 1099 were "without merit and it would be inequitable to attribute the disallowed withholding to the NRS based upon an assumption."



The Court is not persuaded by respondent's arguments. In deciding the issue of to whom inaccurate, false, or "phony" deductions or credits are attributable, the Court has attributed such deductions or credits to the spouse who wrongfully reported or claimed the item (with certain exceptions not applicable here). See Lawson v. Commissioner, T.C. Memo. 1994-286 (spouse who mischaracterized stock sale as an ordinary loss rather than a capital loss was attributed the item); Gill v. Commissioner, T.C. Memo. 1993-274 (phony Schedule A deductions were attributed to spouse who prepared the return and claimed the items); Perry v. Commissioner, T.C. Memo. 1992-258 (phony Schedule C deductions were attributed to spouse who claimed the items); Davis v. Commissioner, T.C. Memo. 1992-240 (phony Schedule A deduction was attributed to spouse who claimed it), affd. without published opinion 26 F.3d 130 (9th Cir. 1994); see also Belk v. Commissioner, 93 T.C. 434, 437 (1989) (clerical mistake, i.e., claiming a $15,000 deduction rather than a $1,500 loss, was attributed to spouse who claimed the deduction). 3



On the basis of the foregoing, the Court finds that the overstated withholding credits are attributable to Mr. Skolnick --he prepared the return and wrongfully reported the overstated amounts. 4 Therefore, the Court also finds that petitioner has satisfied the seventh threshold condition of Rev. Proc. 2003-61, sec. 4.01.




IV. Rev. Proc. 2003-61, Sec. 4.02: Circumstances Ordinarily Allowing for Relief


Where the requesting spouse satisfies the threshold conditions of Rev. Proc. 2003-61, sec. 4.01, then Rev. Proc. 2003-61, sec. 4.02, 2003-2 C.B. at 298, sets forth the circumstances in which the IRS will ordinarily grant relief under section 6015(f) with respect to an underpayment of a properly reported liability. To qualify for relief under Rev. Proc. 2003-61, sec. 4.02, the requesting spouse must: (1) No longer be married to, be legally separated from, or have not been a member of the same household as the nonrequesting spouse at any time during the 12-month period ending on the date of the request for relief; (2) have had no knowledge or reason to know when she signed the return that the nonrequesting spouse would not pay the tax liability; and (3) suffer economic hardship if relief is not granted.



Petitioner was not divorced or legally separated from Mr. Skolnick when she requested relief. Additionally, petitioner and Mr. Skolnick resided together within the 6-month period preceding her request: she testified that he moved out in January 2005, while her Form 8857 is dated June 11, 2005. Thus, she fails requirement 1, and the Court need not discuss the others. Accordingly, petitioner does not qualify for relief under Rev. Proc. 2003-61, sec. 4.02.




V. Rev. Proc. 2003-61, Sec. 4.03: Other Factors


Where the requesting spouse fails to qualify for relief under Rev. Proc. 2003-61, sec. 4.02, the IRS may nevertheless grant relief under Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B. at 298. The Court's analysis with respect to the nonexhaustive list of factors contained in Rev. Proc. 2003-61, sec. 4.03 is described below.



A. Marital Status



The IRS will take into consideration whether the requesting spouse is divorced or separated (whether legally separated or living apart) from the nonrequesting spouse. Rev. Proc. 2003-61, sec. 4.03(2)(a)(i), 2003-2 C.B. at 298.



Petitioner and Mr. Skolnick were separated, i.e., living apart, when she requested relief. This factor weighs in favor of relief. See id.; cf. Nihiser v. Commissioner, T.C. Memo. 2008-135 (living apart under Rev. Proc. 2000-15 weighs in favor of relief); Beatty v. Commissioner, T.C. Memo. 2007-167 (remaining married or residing together is a neutral factor under Rev. Proc. 2003-61); Butner v. Commissioner, T.C. Memo. 2007-136 (same under Rev. Proc. 2000-15).



B. Economic Hardship



The IRS will take into consideration whether the requesting spouse will suffer economic hardship if relief is not granted. Rev. Proc. 2003-61, sec. 4.03(2)(a)(ii), 2003-2 C.B. at 298. Generally, economic hardship exists if collection of the tax liability will cause the taxpayer to be unable to pay reasonable basic living expenses. Butner v. Commissioner, supra.



In determining a reasonable amount for basic living expenses, the Court considers, among other things: (1) The taxpayer's age, employment status and history, ability to earn, and number of dependents; (2) an amount reasonably necessary for food, clothing, housing, medical expenses, transportation, current tax payments, and expenses necessary to the taxpayer's production of income; (3) the cost of living in the taxpayer's geographic area; (4) the amount of property available to satisfy the taxpayer's expenses; (5) any extraordinary circumstances; i.e., special education expenses, a medical catastrophe, or a natural disaster; and (6) any other factor bearing on economic hardship. See sec. 301.6343-1(b)(4)(ii), Proced. & Admin. Regs.



The IRS has issued guidelines for allowable expenses. 5 "Necessary expenses are those that meet the necessary expense test; i.e., 'they must provide for a taxpayer and his or her family's health and welfare and/or the production of income' and they must be reasonable." Schulman v. Commissioner, T.C. Memo. 2002-129 n.6. There are three types of necessary expenses: (1) Those based on national standards; i.e., food, housekeeping supplies, clothing, and personal care products and services; (2) those based on local standards; i.e., housing, utilities, and transportation; and (3) other expenses, which are not based on national or local standards. Id.



Petitioner testified that she estimated the expenses on her Form 12510 for herself and her two children. With the exception of the $1,435 for monthly rent, she has not substantiated her expenses; i.e., by providing receipts or statements. Therefore, the Court will use the national and local standards.



The monthly national standard allows a family of three:





Expenditure Amount

Food $626

Housekeeping supplies 61

Apparel & services 209

Personal care products &
services 58

Miscellaneous 197

Out-of-pocket health care 171

Total 1,322





Petitioner is allowed $217 as operating costs for her automobile (local standard). The Court has determined total expenditures of $2,974, while she claimed net wages of $3,088. Petitioner's net wages exceed her expenditures by $114. Although petitioner is supporting two children, she is gainfully employed as a nurse --earning approximately $60,000 a year. In addition, there is no information in the record as to the costs of her children's private school tuition or the value of any assets that could be used to satisfy the liability (she testified that she has since moved and is making payments on a home). The Court also notes that petitioner may seek to enforce the terms of the property settlement against Mr. Skolnick for the additional penalties and interest. Consequently, the Court finds that petitioner has not shown that she will suffer economic hardship if she is not relieved of the liability. See Monsour v. Commissioner, T.C. Memo. 2004-190 (requesting spouse must prove that the expenses qualify and that they are reasonable). This factor weighs against granting relief. See Banderas v. Commissioner, T.C. Memo. 2007-129 (lack of economic hardship weighs against relief under Rev. Proc. 2003-61); cf. Butner v. Commissioner, supra (same under Rev. Proc. 2000-15).



C. Knowledge or Reason To Know



The IRS will also consider whether the requesting spouse did not know or had no reason to know that the nonrequesting spouse would not pay the liability. Rev. Proc. 2003-61, sec. 4.03(2)(a)(iii)(A), 2003-2 C.B. at 298. As is relevant here, the IRS will consider any deceit or evasiveness of the nonrequesting spouse, the requesting spouse's involvement in the household's finances, and any lavish or unusual expenditures compared with past spending levels in determining whether the requesting spouse had reason to know of the underpayment (the factors specified in Price v. Commissioner, 887 F.2d 959, 965 (9th Cir. 1989)). Id. sec. 4.03(2)(a)(iii)(C).



Typically, in the case of a reported but unpaid liability, the relevant knowledge is whether the taxpayer knew or had reason to know when the return was signed that the tax would not be paid. See Washington v. Commissioner, 120 T.C. at 151; see also Feldman v. Commissioner, T.C. Memo. 2003-201, affd. 152 Fed. Appx. 622 (9th Cir. 2005). The general rule for unpaid liabilities is that the requesting spouse must establish that: (1) When she signed the return, she had no knowledge or reason to know that the tax reported on the return would not be paid; and (2) it was reasonable for her to believe that the nonrequesting spouse would pay the tax shown due. See Morello v. Commissioner, T.C. Memo. 2004-181; Ogonoski v. Commissioner, T.C. Memo. 2004-52; Collier v. Commissioner, T.C. Memo. 2002-144.



Petitioner testified that: (1) Mr. Skolnick prepared and electronically filed the return; (2) she was not present when he filed it; (3) she was able to review the return but only after he filed it; and (4) she does not recall signing a signature page. 6



The Appeals officer's "Case Activity Record" states: "Knowledge --The NRS e-filed the return. The RS did not review." His workpapers merely state that she did not review the return for accuracy, "she would also be charged with constructive knowledge of the item", and since the "withholding was reported on the return, she has actual knowledge of the item."



Petitioner and Mr. Skolnick's Form 1040 showed an overpayment for 2003 on account of overstated withholdings --not taxes due. Petitioner was not alerted to the fact that there was a $31,165 "Proposed Balance Due" until she received the Notice CP2000 in May 2005. Moreover, with respect to the Price factors, petitioner's involvement in their finances was insufficient to put her in a position to have reason to know that the Form 1040 contained overstated withholdings when she signed it. There is no evidence that their expenditures were unusual or extravagant or that their overall standard of living significantly improved during 2003 to put petitioner on notice that Mr. Skolnick overstated their withholdings.



Arguably, weighing against petitioner is the officer's conclusion that "the 2003 refund was way out of line with prior years. This should have triggered something." Although the 2002 and 2003 returns are not in evidence, respondent represented that $10,743.61 of the claimed $26,681 overpayment for 2003 was applied to their joint liability for 2002. 7



Without the 2002 and 2003 returns, the Court is hesitant to agree with the officer's conclusion that the claimed $26,681 refund for 2003 "should have triggered something." There is nothing in the record establishing what that $10,743.61 liability for 2002 consists of (i.e., a deficiency, interest, or penalties). In addition, 2002 was the first year that the Skolnicks had filed a joint return; thus, there was no real filing history by which petitioner could have tested the 2003 refund for accuracy. The January 2006 property settlement indicates they were going to claim a $2,047.03 overpayment for 2002 by January 31, 2006, which corroborates petitioner's testimony that she did not learn about the issues with the 2002 return until after the issues with the 2003 return had come to light. On the basis of the evidence in the record, it does not appear that "the 2003 refund was way out of line with prior years" such that petitioner should have had reason to know that Mr. Skolnick had overstated their withholdings for 2003.



On the basis of the foregoing, the Court finds that this factor is neutral. See, e.g., Alpha Med., Inc. v. Commissioner, 172 F.3d 942 (6th Cir. 1999) (a factor favoring neither party is neutral), revg. T.C. Memo. 1997-464.



D. Nonrequesting Spouse's Legal Obligation



The IRS will also consider whether the nonrequesting spouse has a legal obligation to pay the outstanding income tax liability pursuant to a divorce decree or agreement. See Rev. Proc. 2003-61, sec. 4.03(2)(a)(iv), 2003-2 C.B. at 298. But if the requesting spouse knew or had reason to know when the agreement was entered into that the nonrequesting spouse would not pay the liability, then this factor will not weigh in favor of relief. Id.



The property settlement provides that Mr. Skolnick agreed to pay any additional liabilities for 2003. There is nothing in the record indicating that petitioner knew or should have known when she entered into the agreement that Mr. Skolnick would not pay the liability --he paid his half of the $31,656 liability when they entered into the agreement in January 2006, and respondent did not determine the addition to tax until February 2006. This factor weighs in favor of relief. See id.; see also Magee v. Commissioner, T.C. Memo. 2005-263 (applying Rev. Proc. 2003-61); cf. Billings v. Commissioner, T.C. Memo. 2007-234 (applying Rev. Proc. 2000-15).



E. Significant Benefit



The IRS will consider whether the requesting spouse received significant benefit beyond normal support as a result of the unpaid tax liability. Rev. Proc. 2003-61, sec. 4.03(2)(a)(v), 2003-2 C.B. at 299.



On petitioner's Form 12510, she claimed that she believed that the refund was used to pay the Skolnicks' household expenses. There is no evidence indicating that she received significant benefit as a result of the unpaid tax liability. Therefore, the Court concludes that this factor weighs in favor of relief. See Magee v. Commissioner, T.C. Memo. 2007-136 (lack of significant benefit weighs in favor of relief under Rev. Proc. 2003-61); cf. Butner v. Commissioner, supra (lack of significant benefit weighed in favor of relief under former section 6013(e) notwithstanding that Rev. Proc. 2000-15 stated that it was neutral).



F. Compliance With Federal Tax Laws



The IRS will take into consideration whether the requesting spouse has made a good faith effort to comply with the Federal tax laws in the succeeding years. See Rev. Proc. 2003-61, sec. 4.03(2)(a)(vi), 2003-2 C.B. at 299.



This factor is neutral because no evidence or argument was presented as to the issue. See Knorr v. Commissioner, T.C. Memo. 2004-212.



G. Abuse



The IRS will also consider whether the nonrequesting spouse abused the requesting spouse. See Rev. Proc. 2003-61, sec. 4.03(2)(b)(i), 2003-2 C.B. at 299. The presence of abuse is a factor favoring relief, and a history of abuse may mitigate the requesting spouse's knowledge or reason to know. Id.



Petitioner testified that Mr. Skolnick was "not necessarily physically abusive." Therefore, this factor is neutral. Id. (the presence of abuse weighs in favor of relief while lack of abuse does not weigh against relief); see also Magee v. Commissioner, supra (lack of abuse is a neutral factor under Rev. Proc. 2003-61); cf. Butner v. Commissioner, supra (same under Rev. Proc. 2000-15).



H. Mental or Physical Health



The IRS will take into consideration whether the requesting spouse was in poor mental or physical health on the date she signed the return or at the time relief was requested. See Rev. Proc. 2003-61, sec. 4.03(2)(b)(ii), 2003-2 C.B. at 299.



There is no evidence in the record that petitioner's mental or physical health was poor; therefore, this factor is neutral. See id.; see also Magee v. Commissioner, supra.



I. Conclusion: Weight of the Factors



Petitioner has presented a strong case for relief from joint and several liability. Three factors weigh in favor of relief, one, economic hardship, weighs against relief, and four factors are neutral. While the economic hardship factor weighs against her, it does not outweigh the other factors. Accordingly, petitioner is entitled to relief under section 6015(f).




VI. Petitioner's Refund Claim


Petitioner has requested a refund of amounts paid towards the 2003 tax liability.



In pertinent part, section 6015(g)(1) provides that a refund shall be allowed to the extent it is attributable to the operation of section 6015 except to the extent that it may be affected by other specified sections.



Rev. Proc. 2003-61, sec. 4.04(2), 2003-2 C.B. at 299, provides that in a case involving an underpayment of income tax, a requesting spouse is eligible for a refund of separate payments made after July 22, 1998, if she establishes that she provided the funds used to make the payment for which she seeks a refund. But a requesting spouse is not eligible for refunds of payments made with the joint return, joint payments, or payments that the nonrequesting spouse made. Id.



Respondent has represented that petitioner and Mr. Skolnick's 2003 return was timely filed; the filing date is deemed to be April 15, 2004. See sec. 6513(a). On April 15, 2004, petitioner paid $3,795 in the form of withholdings. See sec. 6513(b)(1) (certain withheld amounts are paid on the 15th day of the 4th month following the close of the taxable year). Her withholdings constitute a payment made with the joint return; consequently, she is not eligible for a refund with respect to that payment. See Rev. Proc. 2003-61, sec. 4.04(2); cf. Rosenthal v. Commissioner, T.C. Memo. 2004-89. In January 2006 Mr. Skolnick submitted a $31,656 payment, of which petitioner paid half. 8 The January 2006 payment encompasses a $31,656 joint payment and in part a payment made by a nonrequesting spouse. Consequently, petitioner is not eligible for a refund with respect to the January 2006 payment. See Rev. Proc. 2003-61, sec. 4.04(2); cf. Rosenthal v. Commissioner, supra.



In conclusion, the Court holds that petitioner is entitled to relief from joint and several liability under section 6015(f) with respect to the unpaid addition to tax under section 6651(a)(2) and interest for 2003. But petitioner is not entitled to any refund for 2003.



To reflect the foregoing,



An appropriate decision will be entered.


1 Although petitioner requested relief under sec. 6015(b), (c), or (f), her liability results from an underpayment of tax on account of overstated withholdings, not an understatement of tax (as defined by sec. 6662(d)(2)(A)) or a deficiency (defined by sec. 6211). See sec. 6015(b)(3), (c)(1). Thus, petitioner is not entitled to relief under sec. 6015(b) or (c), and the Court's review is limited to sec. 6015(f).

2 Mr. Skolnick was notified that petitioner was seeking relief from joint and several liability and that he had a right to intervene in the matter. He did not respond to letters from the IRS or exercise his right to intervene in petitioner's Tax Court case.

3 Although these cases arose under former sec. 6013(e), the Court has determined that cases interpreting similar terms under sec. 6013(e) remain instructive in its analysis. See Alt v. Commissioner, 119 T.C. 306, 314 (2002), affd. 101 Fed. Appx. 34 (6th Cir. 2004); Juell v. Commissioner, T.C. Memo. 2007-219; Becherer v. Commissioner, T.C. Memo. 2004-282. The terms "attributable to an item of the individual with whom the requesting spouse filed the joint return ('the nonrequesting spouse')" of Rev. Proc. 2003-61, sec. 4.01(7), 2003-2 C.B. 296, 297, is similar to the terms "attributable to grossly erroneous items of one spouse" of sec. 6013(e). The analysis for attributing items to one spouse or the other is essentially the same.

4 In addition, there is a strong implication that Mr. Skolnick was the culpable person since he: (1) Accepted responsibility for any additional liabilities in their property settlement; and (2) has not contested petitioner's assertions or otherwise intervened in the matter, see supra note 2.

5 The guidelines are published on the IRS's Web site at http://www.irs.gov/individuals/article/0,,id=96543,00.html (last visited May 30, 2008). The amount listed as the national or local standard is effective as of Oct. 1, 2007.

6 Whether petitioner failed to sign the 2003 Form 1040 necessarily implicates issues regarding whether she filed a joint return and whether she is entitled to relief under sec. 6015(f). See sec. 1.6015-4(a), Income Tax Regs. (the filing of a joint return is a prerequisite to sec. 6015 relief). The Court finds that petitioner intended to and did file a joint return with Mr. Skolnick because she has not otherwise renounced the 2003 Form 1040 and she provided her "W-2s" to Mr. Skolnick. See Heim v. Commissioner, 27 T.C. 270, 273 (1956), affd. 251 F.2d 44 (8th Cir. 1958); Gudenschwager v. Commissioner, T.C. Memo. 1989-6; sec. 1.6013-1(a)(2), Income Tax Regs.; see also Ziegler v. Commissioner, T.C. Memo. 2003-282 (the Court assumed that the taxpayer conceded the filing of a joint return or ratified the joint return that the nonrequesting spouse filed because she continued to assert her entitlement to sec. 6015(f) relief).

7 At trial respondent asserted that he did not include a copy of the 2003 return because it was not part of the administrative record, although he could have obtained one.

8 Petitioner's Form 8857, received by the IRS on June 20, 2005, is a claim for a refund. See Washington v. Commissioner, 120 T.C. 137, 161-162 (2003). Her petition, filed on July 3, 2006, also includes a refund claim. Petitioner's refund claims are timely with respect to both payments. See sec. 6511(a) (a claim for credit or refund of an overpayment of any tax shall be filed by the taxpayer within: (1) 3 years from the time the return was filed, or (2) 2 years from the time the tax was paid, whichever period expires later).

Equitable relief. --Innocent Spouse Relief: Equitable relief

The IRS has provided guidance for individuals seeking equitable relief from tax liabilities under the innocent spouse provisions of Code Secs. 66(c) or 6015(f). The guidance enumerates the threshold conditions that must be satisfied for any request for equitable relief to be considered, sets forth the criteria under which relief will ordinarily be granted, and includes a nonexclusive list of factors that are to be considered in determining whether it would be inequitable to hold a requesting spouse jointly and severally liable for a deficiency or for an unpaid liability. Those factors also apply in determining whether to relieve a spouse of tax liability resulting from the operation of the community property laws. Rev. Proc. 2000-15, 2000-1 CB 447, is superseded.


[Full Text --Rev. Proc. 2003-61]




SECTION 1. PURPOSE AND SCOPE

01. Purpose. This revenue procedure provides guidance for a taxpayer seeking equitable relief from income tax liability under section 66(c) or section 6015(f) of the Internal Revenue Code (a "requesting spouse"). Section 4.01 of this revenue procedure provides the threshold requirements for any request for equitable relief. Section 4.02 of this revenue procedure sets forth the conditions under which the Internal Revenue Service ordinarily will grant equitable relief under section 6015(f) from an underpayment of income tax reported on a joint return. Section 4.03 of this revenue procedure provides a nonexclusive list of factors for consideration in determining whether relief should be granted under section 6015(f) because it would be inequitable to hold a requesting spouse jointly and severally liable for an underpayment of income tax on a joint return where the conditions of section 4.02 are not met, or for a deficiency. The factors in section 4.03 also will apply in determining whether to relieve a spouse from income tax liability resulting from the operation of community property law under the equitable relief provision of section 66(c).

.02 Scope. This revenue procedure applies to spouses who request either equitable relief from joint and several liability under section 6015(f), or equitable relief under section 66(c) from income tax liability resulting from the operation of community property law.



SECTION 2. BACKGROUND

.01 Section 6013(d)(3) provides that married taxpayers who file a joint return under section 6013 will be jointly and severally liable for the income tax arising from that joint return. For purposes of section 6013(d)(3) and this revenue procedure, the term "tax" includes penalties, additions to tax, and interest. See sections 6601(e)(1) and 6665(a)(2).

.02 Section 3201(a) of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, 112 Stat. 685, 734 (RRA), enacted section 6015, which provides relief in certain circumstances from the joint and several liability imposed by section 6013(d)(3). Section 6015(b) and (c) specifies two sets of circumstances under which relief from joint and several liability is available. If relief is not available under section 6015(b) or (c), section 6015(f) authorizes the Secretary to grant equitable relief if, taking into account all the facts and circumstances, the Secretary determines that it is inequitable to hold a requesting spouse liable for any unpaid tax or any deficiency (or any portion of either). Section 66(c) provides relief from income tax liability resulting from the operation of community property law to taxpayers domiciled in a community property state who do not file a joint return. Section 3201(b) of RRA amended section 66(c) to add an equitable relief provision similar to section 6015(f).

.03 Section 6015 provides relief only from joint and several liability arising from a joint return. If an individual signs a joint return under duress, the election to file jointly is not valid and there is no valid joint return. The individual is not jointly and severally liable for any income tax liabilities arising from that return. Therefore, section 6015 does not apply.

.04 Under section 6015(b) and (c), relief is available only from a proposed or assessed deficiency. Section 6015(b) and (c) does not authorize relief from an underpayment of income tax reported on a joint return. Section 66(c) and section 6015(f) permit equitable relief for an underpayment of income tax. The legislative history of section 6015 provides that Congress intended for the Secretary to exercise discretion in granting equitable relief if a requesting spouse "does not know, and had no reason to know, that funds intended for the payment of tax were instead taken by the other spouse for such other spouse's benefit." H.R. Conf. Rep. No. 105-599, at 254 (1998). Congress also intended for the Secretary to exercise the equitable relief authority under section 6015(f) in other situations if, "taking into account all the facts and circumstances, it is inequitable to hold an individual liable for all or part of any unpaid tax or deficiency arising from a joint return." Id.



SECTION 3. CHANGES

This revenue procedure supersedes Rev. Proc. 2000-15, changing the following:

.01 Section 4.01 of this revenue procedure adds a new threshold requirement under section 4.01(7).

.02 Section 4.03(2)(a)(iii) of this revenue procedure revises the weight given to the knowledge or reason to know factor.

.03 Section 4.04 of this revenue procedure broadens the availability of refunds if equitable relief is granted under section 66(c) or section 6015(f).



SECTION 4. GENERAL CONDITIONS FOR RELIEF

.01 Eligibility for equitable relief. A requesting spouse must satisfy all of the following threshold conditions to be eligible to submit a request for equitable relief under section 6015(f). With the exception of conditions (1) and (2), a requesting spouse must satisfy all of the following threshold conditions to be eligible to submit a request for equitable relief under section 66(c). The Service may relieve a requesting spouse who satisfies all the applicable threshold conditions set forth below of all or part of the income tax liability under section 66(c) or section 6015(f), if, taking into account all the facts and circumstances, the Service determines that it would be inequitable to hold the requesting spouse liable for the income tax liability. The threshold conditions are as follows:

(1) The requesting spouse filed a joint return for the taxable year for which he or she seeks relief.

(2) Relief is not available to the requesting spouse under section 6015(b) or (c).

(3) The requesting spouse applies for relief no later than two years after the date of the Service's first collection activity after July 22, 1998, with respect to the requesting spouse. See Treas. Reg. §1.6015-5(b)(2)(i) for the definition of collection activity.

(4) No assets were transferred between the spouses as part of a fraudulent scheme by the spouses.

(5) The nonrequesting spouse did not transfer disqualified assets to the requesting spouse. If the nonrequesting spouse transferred disqualified assets to the requesting spouse, relief will be available only to the extent that the income tax liability exceeds the value of the disqualified assets. For this purpose, the term "disqualified asset" has the meaning given the term by section 6015(c)(4)(B).

(6) The requesting spouse did not file or fail to file the return with fraudulent intent.

(7) The income tax liability from which the requesting spouse seeks relief is attributable to an item of the individual with whom the requesting spouse filed the joint return (the "nonrequesting spouse"), unless one of the following exceptions applies:

(a) Attribution solely due to the operation of community property law. If an item is attributable or partially attributable to the requesting spouse solely due to the operation of community property law, then for purposes of this revenue procedure, that item (or portion thereof) will be considered to be attributable to the nonrequesting spouse.

(b) Nominal ownership. If the item is titled in the name of the requesting spouse, the item is presumptively attributable to the requesting spouse. This presumption is rebuttable. For example, H opens an individual retirement account (IRA) in W's name and forges W's signature on the IRA in 1998. Thereafter, H makes contributions to the IRA and in 2002 takes a taxable distribution from the IRA. H and W file a joint return for the 2002 taxable year, but do not report the taxable distribution on their joint return. The Service later proposes a deficiency relating to the taxable IRA distribution and assesses the deficiency against H and W. W requests relief from joint and several liability under section 6015. W establishes that W did not contribute to the IRA, sign paperwork relating to the IRA, or otherwise act as if W were the owner of the IRA. W thereby rebutted the presumption that the IRA is attributable to W.

(c) Misappropriation of funds. If the requesting spouse did not know, and had no reason to know, that funds intended for the payment of tax were misappropriated by the nonrequesting spouse for the nonrequesting spouse's benefit, the Service will consider granting equitable relief although the underpayment may be attributable in part or in full to an item of the requesting spouse. The Service will consider relief in this case only to the extent that the funds intended for the payment of tax were taken by the nonrequesting spouse.

(d) Abuse not amounting to duress. If the requesting spouse establishes that he or she was the victim of abuse prior to the time the return was signed, and that, as a result of the prior abuse, the requesting spouse did not challenge the treatment of any items on the return for fear of the nonrequesting spouse's retaliation, the Service will consider granting equitable relief although the deficiency or underpayment may be attributable in part or in full to an item of the requesting spouse.

.02 Circumstances under which the Service ordinarily will grant equitable relief under section 6015(f) with respect to underpayments on joint returns.

(1) If an income tax liability reported on a joint return is unpaid, the Service ordinarily will grant equitable relief under section 6015(f) (subject to the limitations of paragraph (2) below) in cases in which all of the following elements are satisfied:

(a) On the date of the request for relief, the requesting spouse is no longer married to, or is legally separated from, the nonrequesting spouse, or has not been a member of the same household as the nonrequesting spouse at any time during the 12-month period ending on the date of the request for relief.

(b) On the date the requesting spouse signed the joint return, the requesting spouse had no knowledge or reason to know that the nonrequesting spouse would not pay the income tax liability. The requesting spouse must establish that it was reasonable for the requesting spouse to believe that the nonrequesting spouse would pay the reported income tax liability. If a requesting spouse would otherwise qualify for relief under this section, except for the fact that the requesting spouse's lack of knowledge or reason to know relates only to a portion of the unpaid income tax liability, then the requesting spouse may receive relief to the extent that the income tax liability is attributable to that portion.

(c) The requesting spouse will suffer economic hardship if the Service does not grant relief. For purposes of this revenue procedure, the Service will base its determination of whether the requesting spouse will suffer economic hardship on rules similar to those provided in Treas. Reg. §301.6343-1(b)(4). After the requesting spouse is deceased, there can be no economic hardship. See Jonson v. Commissioner, 118 T.C. 106, 126 (2002), appeal docketed, No. 02-9009 (10th Cir. May 24, 2002) (taxpayer appeal filed on other grounds).

(2) Relief under this section 4.02 is subject to the following limitation: If the Service adjusts the joint return to reflect an understatement of income tax, relief will be available only to the extent of the income tax liability shown on the joint return prior to the Service's adjustment.

.03 Factors for determining whether to grant equitable relief.

(1) Applicability. This section 4.03 applies to requesting spouses who did not file a joint return in a community property state, who request relief under section 66(c), and satisfy the applicable threshold conditions of section 4.01. This section 4.03 also applies to requesting spouses who filed a joint return, request relief under section 6015, and satisfy the threshold conditions of section 4.01, but do not qualify for relief under section 4.02.

(2) Factors. The following is a nonexclusive list of factors that the Service will consider in determining whether, taking into account all the facts and circumstances, it is inequitable to hold the requesting spouse liable for all or part of the unpaid income tax liability or deficiency, and full or partial equitable relief under section 66(c) or section 6015(f) should be granted. No single factor will be determinative of whether to grant equitable relief in any particular case. Rather, the Service will consider and weigh all relevant factors, regardless of whether the factor is listed in this section 4.03.

(a) Factors that may be relevant to whether the Service will grant equitable relief include, but are not limited to, the following:

(i) Marital status. Whether the requesting spouse is separated (whether legally separated or living apart) or divorced from the nonrequesting spouse. A temporary absence, such as an absence due to incarceration, illness, business, vacation, military service, or education, shall not be considered separation for purposes of this revenue procedure if it can be reasonably expected that the absent spouse will return to a household maintained in anticipation of his or her return. See Treas. Reg. §1.6015-3(b)(3)(i) for the definition of a temporary absence.

(ii) Economic hardship. Whether the requesting spouse would suffer economic hardship (within the meaning of section 4.02(1)(c) of this revenue procedure) if the Service does not grant relief from the income tax liability.

(iii) Knowledge or reason to know.

(A) Underpayment cases. In the case of an income tax liability that was properly reported but not paid, whether the requesting spouse did not know and had no reason to know that the nonrequesting spouse would not pay the income tax liability.

(B) Deficiency cases. In the case of an income tax liability that arose from a deficiency, whether the requesting spouse did not know and had no reason to know of the item giving rise to the deficiency. Reason to know of the item giving rise to the deficiency will not be weighed more heavily than other factors. Actual knowledge of the item giving rise to the deficiency, however, is a strong factor weighing against relief. This strong factor may be overcome if the factors in favor of equitable relief are particularly compelling. In those limited situations, it may be appropriate to grant relief under section 66(c) or section 6015(f) even though the requesting spouse had actual knowledge of the item giving rise to the deficiency.

(C) Reason to know. For purposes of (A) and (B) above, in determining whether the requesting spouse had reason to know, the Service will consider the requesting spouse's level of education, any deceit or evasiveness of the nonrequesting spouse, the requesting spouse's degree of involvement in the activity generating the income tax liability, the requesting spouse's involvement in business and household financial matters, the requesting spouse's business or financial expertise, and any lavish or unusual expenditures compared with past spending levels.

(iv) Nonrequesting spouse's legal obligation. Whether the nonrequesting spouse has a legal obligation to pay the outstanding income tax liability pursuant to a divorce decree or agreement. This factor will not weigh in favor of relief if the requesting spouse knew or had reason to know, when entering into the divorce decree or agreement, that the nonrequesting spouse would not pay the income tax liability.

(v) Significant benefit. Whether the requesting spouse received significant benefit (beyond normal support) from the unpaid income tax liability or item giving rise to the deficiency. See Treas. Reg. §1.6015-2(d).

(vi) Compliance with income tax laws. Whether the requesting spouse has made a good faith effort to comply with income tax laws in the taxable years following the taxable year or years to which the request for relief relates. (b) Factors that, if present in a case, will weigh in favor of equitable relief, but will not weigh against equitable relief if not present in a case, include, but are not limited to, the following:

(i) Abuse. Whether the nonrequesting spouse abused the requesting spouse. The presence of abuse is a factor favoring relief. A history of abuse by the nonrequesting spouse may mitigate a requesting spouse's knowledge or reason to know.

(ii) Mental or physical health. Whether the requesting spouse was in poor mental or physical health on the date the requesting spouse signed the return or at the time the requesting spouse requested relief. The Service will consider the nature, extent, and duration of illness when weighing this factor.

.04 Refunds.

(1) Deficiency cases. In a case involving a deficiency, a requesting spouse is eligible for a refund of certain payments made pursuant to an installment agreement that the requesting spouse entered into with the Service, if the requesting spouse has not defaulted on the installment agreement. Only installment payments made after the date the requesting spouse filed the request for relief are eligible for refund. Additionally, the requesting spouse must establish that he or she provided the funds for which he or she seeks a refund. For purposes of this revenue procedure, a requesting spouse is not in default if the Service did not issue a notice of default to the requesting spouse or take any action to terminate the installment agreement.

(2) Underpayment cases. In a case involving an underpayment of income tax, a requesting spouse is eligible for a refund of separate payments that he or she made after July 22, 1998, if the requesting spouse establishes that he or she provided the funds used to make the payment for which he or she seeks a refund. A requesting spouse is not eligible for refunds of payments made with the joint return, joint payments, or payments that the nonrequesting spouse made.

(3) Other limitations. The availability of refunds is subject to the refund limitations of section 6511.



SECTION 5. PROCEDURE

A requesting spouse seeking equitable relief under section 66(c) or section 6015(f) must file Form 8857, Request for Innocent Spouse Relief (and Separation of Liability, and Equitable Relief), or other similar statement signed under penalties of perjury, within two years of the first collection activity against the requesting spouse. See Treas. Reg. §1.6015-5(b)(2)(i) for the definition of collection activity.



SECTION 6. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2000-15, 2000-1 C.B. 447, is superseded.



SECTION 7. EFFECTIVE DATE

This revenue procedure is effective for requests for relief filed on or after November 1, 2003. In addition, this revenue procedure is effective for requests for relief pending on November 1, 2003, for which no preliminary determination letter has been issued as of November 1, 2003.



DRAFTING INFORMATION

The principal author of this revenue procedure is Robin M. Tuczak of the Office of Associate Chief Counsel, Procedure and Administration (Administrative Provisions and Judicial Practice Division). For further information regarding this revenue procedure, contact Ms. Tuczak at (202) 622-4940 (not a toll-free call).

Rev. Proc. 2003-61, 2003-2 CB 296.

A widow was not entitled to innocent spouse relief from tax liens that attached to community property that had belonged to her and her late husband. Their deficiencies arose from joint returns on which the husband claimed false deductions. Thus, he was jointly and severally liable for the entire amount of the deficiencies, and state (California) law permitted a creditor to reach the entire community property in order to satisfy a debt owed by one spouse. Moreover, the government was not attempting to collect against the widow personally; it was merely pursuing liens that arose against her husband. Innocent spouse relief did not prevent the government from collecting against community property in accordance with state law.

H. Stolle, DC Calif., 2000-1 USTC ¶50,329.

An individual was eligible for equitable innocent spouse relief under Code Sec. 6015(f) in connection with her joint income tax liability that arose from her former husband's illegal drug income. The income was reported on the return for the year in question, which was prior to the enactment of Code Sec. 6015(f), but was only partially paid. In a case of first impression, the court ruled that the new innocent spouse provisions of Code Sec. 6015(f) applied retroactively to the entire liability basis, rather than to just the liability for the unpaid portion.

M. Flores, FedCl, 2002-1 USTC ¶50,108, 51 FedCl 49.

An individual who successfully sought equitable innocent spouse relief from joint liability for tax was entitled to a refund of her garnished wages and a tax overpayment that the IRS had applied to her unpaid tax liability for an earlier tax year. The IRS unsuccessfully contended that the benefits of Code Sec. 6015(g) were limited to the portion of the tax liability that remained uncollected as of July 22, 1998, the date of enactment of Code Sec. 6015 pursuant to the IRS Restructuring and Reform Act of 1998 (P.L. 105-206). Code Sec. 6015 applies to the full amount of any preexisting tax liability for a particular tax year if any of such liability remains unpaid as of the date of enactment. It is not limited to portions of tax liability that remain unpaid after July 22, 1998. M. Flores, FedCl, 2002-1 USTC ¶50,108, followed.

C.A. Washington, 120 TC 137, Dec. 55,120.

A bankrupt widow was not entitled to summary judgment with respect to her claim for innocent spouse relief from tax liabilities arising from joint returns that she had filed with her late husband. She failed to show that she satisfied the threshold elements for equitable relief that were listed in Notice 98-61, 1998-2 CB 758. Moreover, the parties disputed the extent to which she had been involved in her late husband's business affairs.

D.S. French, BC-DC Ohio, 2000-1 USTC ¶50,122, 242 BR 369.

The Tax Court had jurisdiction to determine whether a wife was entitled to equitable relief under Code Sec. 6015(f) even though no deficiency had been asserted. Although the amount of taxes owing was correctly indicated on the couple's joint return, the full amount owed was not paid. Relief was available under Code Sec. 6015(f), which applies where it is inequitable to hold a taxpayer liable for "any unpaid tax." The 2001 amendment (P.L. 106-554) to Code Sec. 6015(e) did not preclude Tax Court jurisdiction to review the denial of equitable relief under Code Sec. 6015(f) where no deficiency had been asserted.

G.A. Ewing, 118 TC 494, Dec. 54,766.

The estate of a wife who died while still married to, and living with, her husband was denied innocent spouse relief under Code Sec. 6015(f) from the deficiencies that arose when the IRS disallowed losses claimed on the couple's joint returns with respect to the husband's tax shelter investment. Applying the guidelines set forth in Rev. Proc. 2000-15, 2000-1 CB 447, the wife had reason to know of the items giving rise to the deficiencies and benefited from those items. In light of the fact that she was deceased, there could be no economic hardship to her personally upon the denial of equitable relief.

D.C. Jonson, 118 TC 106, Dec. 54,641. Aff'd on another issue, CA-10, 2004-1 USTC ¶50,122, 353 F3d 1181.

The Tax Court had jurisdiction to hear an argument, raised as an affirmative defense, regarding whether the wife of a deceased individual was entitled to relief from joint liability pursuant to Code Sec. 6015 when her deceased husband's estate petitioned to appeal the IRS's determination not to abate interest based upon an increase in taxes for three tax years. Although jurisdiction over the estate's suit was limited to determining whether the IRS's failure to abate interest was an abuse of discretion, the court followed its line of reasoning in U.R. Neely, Dec. 54,062 (dealing with the court's jurisdiction over issues raised as an affirmative defense), and held that no additional jurisdiction was required to address the issue of relief from joint liability.

E. Wenner Est., 116 TC 284, Dec. 54,335.

The IRS properly denied an individual's request for equitable innocent spouse relief with respect to retirement distributions and interest income that were omitted from her joint return, and the substantial understatement penalty imposed as the result of the omitted interest income. The taxpayer failed to show reasonable cause for the omissions. However, the IRS's denial of equitable relief in connection with the substantial understatement penalty imposed in connection with the retirement distributions was an abuse of discretion. The taxpayer reasonably relied on statements by her ex-husband that he consulted an accountant concerning the tax implication of the distributions.

K. Cheshire, CA-5, 2002-1 USTC ¶50,222, 282 F3d 326.

The Tax Court had jurisdiction to review the IRS's decision to deny a surgeon's wife equitable innocent spouse relief from deficiencies arising in connection with the couple's joint return. Her request for relief was not a decision that was committed to IRS discretion as a matter of law; instead, it constituted an affirmative defense that became part of the couple's deficiency proceeding. The wife was not, however, entitled to reopen the record in order to present additional evidence regarding her right to proportional relief under Code Sec. 6015(b)(2). The parties conceded that the issues under both statutes were largely identical, and she did not identify the evidence that she intended to offer or explain how it would support her claim for partial relief.

M.B. Butler, 114 TC 276, Dec. 53,869.

Followed.

D. Fernandez, 114 TC 324, Dec. 53,875 (Acq.).

F.L. Charlton, 114 TC 333, Dec. 53,879.

To the extent that an ex-wife failed to qualify for innocent spouse relief under Code Sec. 6015(b) or Code Sec. 6015(c), she was entitled to equitable relief pursuant to Code Sec. 6015(f). Not only did she not have actual knowledge of the items giving rise to the deficiencies but the record indicated that she would suffer economic hardship if relief was not grante. Further, it was clear that she did not significantly benefit, either during or after her marriage, from the items giving rise to the deficiencies.

J.A. Rowe, 82 TCM 1020, Dec. 54,582(M), TC Memo. 2001-325.

The IRS's concession under Code Sec. 6015(c) that the wife of an individual who had been convicted of tax evasion and drug trafficking was entitled to innocent spouse relief for one tax year relieved her of all liability for that year and resolved the controversy between her and the IRS. However, she sought an additional ruling regarding her entitlement to relief under Code Sec. 6015(b) because it might enhance her future efforts to recover attorneys' fees. The court refused to make that determination on the ground of mootness; such a decision would amount to an advisory opinion and would contravene the principle that courts are not to gratuitously decide complex issues that would not affect the disposition of the case.

T.R. Livingston, Sr., 79 TCM 1828, Dec. 53,837(M), TC Memo. 2000-121.

The Tax Court had jurisdiction over a married taxpayer's timely "stand alone"petition for spousal relief under Code Sec. 6015. The IRS treated the request for relief as an election under Code Secs. 6015(b), 6015(c) and 6015(f).

R.E. Alt, 119 TC 306, Dec. 54,961. Aff'd, CA-6 (unpublished opinion), 2004-1 USTC ¶50,279.

The IRS abused its discretion in denying equitable innocent spouse relief under Code Sec. 6015(f) to an individual who suffered from mental illness during the tax years at issue. The taxpayer had a limited education, was completely dependent upon her husband in regard to the filing of their tax returns and the payment of their taxes, and had no knowledge or reason to know that the income taxes would not be paid at the time she signed her return. Moreover, the taxpayer would have suffered economic hardship if equitable relief were not granted.

T.J. August 84 TCM 183, Dec. 54,841(M), TC Memo. 2002-201.

A divorced individual was not entitled to equitable innocent spouse relief under Code Sec. 6015(f) in connection with his wife's unreported pension income. The taxpayer did not establish that he would suffer economic hardship if he were held liable for all or part of the unpaid deficiency. Additionally, he received significant benefit from his wife's pension distributions. Therefore, the IRS had not abused its discretion in denying such relief or in asserting the substantial understatement component of the accuracy-related penalty.

C.A. Penfield, 84 TCM 424, Dec. 54,900(M), TC Memo. 2002-254.

A taxpayer was not entitled to relief under Code Secs. 6015(b), (c) or (f) because she failed to file a joint return for the year at issue. Code Secs. 6015(b) and (c) explicitly require that a joint return for relief to be granted. Moreover, while on its face, Code Sec. 6015(f) does not require the a joint return be filed in order for equitable relief to be granted, a threshold condition of Rev. Proc. 2000-15, 2000-1 C.B. 447, which the IRS uses to determine the availability of equitable relief, dictates that a joint return must be filed.

R.M. Raymond, 119 TC 191, Dec. 54,915.

A taxpayer failed to establish that the IRS abused its discretion in denying innocent spouse relief under Code Sec. 6015(f) by acting arbitrarily, capriciously or without sound basis in fact. Applying the guidelines set forth in Rev. Proc. 2000-15, 2000-1 CB 447, the Tax Court concluded that the taxpayer failed to carry her burden of establishing that if she were to pay the unpaid liability, she would not have a reasonable amount remaining for her basic living expenses. Moreover, the taxpayer failed to carry her burden of establishing that, other than the attribution factor, the positive factors set forth in the revenue procedure that must be considered were present in her situation or that, other than the noncompliance negative factor, the negative factors that must be considered were not present.

E.C. Mellen, 84 TCM 530, Dec. 54,931(M), TC Memo. 2002-280.

An individual was not barred by the doctrine of res judicata under Code Sec. 6015(g)(2) from litigating her entitlement to equitable relief from joint and several liability under the innocent spouse provisions of Code Sec. 6015(f)(2). In a prior Tax Court proceeding that resulted in a final determination regarding the tax year at issue, the taxpayer was precluded from raising her claim for relief from joint and several liability based on uncertainty of law. Her meeting with the Appeals officer occurred around the same time that Congress finalized Code Sec. 6015 and at least 10 days prior to its effective date. Although the Tax Court decision was entered several months later, neither the taxpayer nor the Appeals officer with whom she negotiated a settlement were aware of the new relief provisions, and the effect of res judicata on a final Tax Court decision regarding her deficiency was not discussed.

J.M. Trent, 84 TCM 554, Dec. 54,938(M), TC Memo. 2002-285.

The IRS properly denied an individual's request for innocent spouse relief with respect to delinquent taxes on her former husband's unreported earnings. The taxpayer was aware that her ex-husband had received compensation for his work driving rental trucks, but she did not report any income from that employer on the joint return that she prepared. The taxpayer was not entitled to equitable innocent spouse relief with respect to the deficiency because she knew of the omitted income, failed to establish economic hardship and failed to establish that she had not benefited from the additional income.

L.L. Brooks, 85 TCM 1465, Dec. 55,181(M), TC Memo. 2003-166.

A lawyer was not entitled to equitable innocent spouse relief from joint and several liability for tax deficiencies with respect to joint returns he filed with his former wife because he had constructive knowledge of the deficiencies. Further, because he made out a check for only a small portion of the tax shown due on the return for the subsequent year, he had actual knowledge that the liability was not paid. Moreover, the taxpayer did not show that he would suffer economic hardship if relief was denied.

M.S. Feldman, 86 TCM 50, Dec. 55,220(M), TC Memo. 2003-201.

A divorced individual was not entitled to innocent spouse relief under Code Sec. 6015(f) from her joint tax liability that was reported on separate returns. The taxpayer was aware of the joint tax liability, which resulted from her former husband's retirement plan distributions that were deposited into her daughter's bank account.

C.E. Weight, 86 TCM 98, Dec. 55,234(M), TC Memo. 2003-214.

An individual was not entitled to spousal relief under Code Sec. 6015(f) for an understatement of income resulting from deductions claimed in connection with the repair of her home. Additionally, the taxpayer was not entitled to spousal relief in connection with two additional tax years under Code Sec. 6015(b), (c) or (f) because such relief does not apply to underpayments of tax reported on joint tax returns.

M. Hopkins, 121 TC 73, Dec. 55,243.

A divorced individual was not entitled to innocent spouse relief for deficiencies resulting from an understatement of gross receipts for three restaurants owned by her husband. Relief was not available under Code Sec. 6015(f) because the taxpayer knew of the unreported gross receipts, failed to establish that she would suffer economic hardship if relief were denied, benefitted significantly from the unreported income and had a legal obligation under her divorce decree to pay half of the couple's tax liability.

F. Entezam, 86 TCM 320, Dec. 55,276(M), TC Memo. 2003-253.

A lending officer was not entitled to innocent spouse relief under to protect her from a tax understatement resulting from the couple's failure to include her husband's early pension withdrawals in income on their joint return. Because the couple's legal separation was motivated by tax-avoidance reasons, the assets transferred as part of the separation agreement were deemed "disqualified assets." As such, the taxpayer did not qualify for equitable relief from her joint and several liability because she failed to meet the seven threshold conditions of Rev. Proc. 2000-15, 2000-1 CB 447.

R.G. Ohrman, 86 TCM 499, Dec. 55,332(M), TC Memo. 2003-301. Aff'd, CA-9 (unpublished opinion), 2006-1 USTC ¶50,128, 157 FedAppx 997.

A widow was not entitled to innocent spouse relief under Code Secs. 6015(b), 6015(c) and 6015(f) from joint and several tax liability. The tax liability at issue was generated solely from the taxpayer's income. Moreover, there was no understatement nor any erroneous items from her deceased spouse. The taxpayer's deceased husband, who initially filed a separate return during the tax year at issue, filed an amended joint return to report the income of the taxpayer. The Tax Court rejected the taxpayer's argument that she was entitled to equitable relief because she was unemployed at the time the amended return was filed.

B. Wallace, 86 TCM 667, Dec. 55,364(M), TC Memo. 2003-330.

The Tax Court had jurisdiction to address an argument regarding whether an individual was entitled to relief from joint liability pursuant to Code Sec. 6015. The taxpayer originally petitioned the court for review of the IRS's determination not to abate interest under Code Sec. 6404. She then amended her pleading to include a claim for relief from joint and several liability. Because the taxpayer's appeal had been pending for more than six months without a final determination by the IRS, which satisfied Code Sec. 6015(e)(1)(a)(II), she was entitled to separately petition the court under that section.

L. Sirianni, 86 TCM 690, Dec. 55,371(M), TC Memo. 2003-336.

The Tax Court did not have jurisdiction to review an individual's equitable innocent spouse claim because the IRS had not asserted a deficiency against her. The plain language of Code Sec. 6015(e) permits Tax Court jurisdiction only if a deficiency has been asserted against the individual claiming relief.

G.A. Ewing, CA-9, 2006-1 USTC ¶50,191, 439 F3d 1009, rev'g and vac'g 122 TC 32, Dec. 55,519.

An individual taxpayer was not entitled to relief from joint and several liability from understatements reported on joint returns filed with her ex-husband. Because the tax reported on her amended returns was treated as the amount of tax reported on her original return, no deficiency was outstanding in the years for which the taxpayer sought relief. Moreover, even if the taxpayer claimed relief for the correct year, the court noted that she failed to satisfy the requirements of Code Secs. 6015(b) and 6015(c). Finally, the IRS did not abuse its discretion in denying the taxpayer relief from liability under Code Sec. 6015(f). Upon filing her first amended return, the taxpayer failed to ask her ex-husband how her income was reported. As such, she failed to fulfill her duty of inquiry, and was thus charged with constructive knowledge of her income on the first amended return.

L. Demirjian, 87 TCM 841, Dec. 55,524(M), TC Memo. 2004-22.

An individual was not entitled to innocent spouse relief under Code Sec. 6015(f) because the taxpayer knew of the understatement on her joint return and failed to establish that she would suffer economic hardship if relief were denied.

V. Doyel, 87 TCM 960, Dec. 55,540(M), TC Memo. 2004-35.

The IRS did not abuse its discretion in denying equitable innocent spouse relief to a wife who knew that her husband had a pattern of not paying the tax liabilities reported on their joint returns. By signing the returns, the wife assumed the risk that she would be called upon to pay the remaining joint liabilities, which were attributable to the husband's business activities, if the IRS sought to collect the funds from her. She failed to comply with the tax laws by continuing to help prepare, sign, and file tax returns without paying the reported liabilities on those returns.

A.C. Ogonoski, 87 TCM 1038, Dec. 55,561(M), TC Memo. 2004-52.

An individual was entitled to innocent spouse relief under Code Sec. 6015(f), relieving her of joint and several liability for delinquent taxes owed by her and her former spouse in six tax years. The revenue agent abused his discretion in denying the taxpayer relief because the taxpayer satisfied most of the factors set forth in Rev. Proc. 2004-15, 2004-1 CB 490. The overdue taxes resulted from the former spouse's failure to withhold an adequate amount of taxes. Had the taxpayer filed as single, her withholding would have exceeded her tax liability. The IRS conceded that the taxpayer would suffer undue hardship if relief was not granted and that the taxpayer did not significantly benefit from the unpaid taxes. Moreover, the taxpayer made a good faith effort to comply with the income tax laws following the years in issue.

J.T. Foor, 87 TCM 1046, Dec. 55,563(M), TC Memo. 2004-54.

A married individual was not entitled to innocent spouse relief under Code Secs. 6015(b) or (f). The taxpayer was not entitled to equitable relief because she failed to satisfy any of the six factors set forth in Rev. Proc. 2000-15, 2000-1 CB 447. The taxpayer knew of the items giving rise to the understatements, which were attributable to both her and her husband. In addition, the taxpayer failed to establish that she would suffer economic hardship if held liable for the delinquent tax.

P.J. Ellison, 87 TCM 1062, Dec. 55,567(M), TC Memo. 2004-57.

The IRS abused its discretion in denying equitable innocent spouse relief to a taxpayer who was unaware that her husband had failed to pay their taxes for one year. The wife did not significantly benefit from the tax underpayment; the deficiency was solely attributable to the husband; the wife complied with the tax laws for all of the years following the one at issue; and she lacked knowledge of the underpayment.

D.M. Keitz, 87 TCM 1118, Dec. 55,585(M), TC Memo. 2004-74.

A taxpayer was not entitled to equitable relief because she failed to satisfy any of the six factors set forth in Rev. Proc. 2000-15, 2000-1 CB 447. The taxpayer knew of the items giving rise to the understatements, which were attributable to both her and her husband. Finally, the taxpayer failed to establish that she would suffer economic hardship if held liable for the delinquent tax.

A.E. Bartak, 87 TCM 1152, Dec. 55,596(M), TC Memo. 2004-83. Aff'd, CA-9 (unpublished opinion), 2006-1 USTC ¶50,111, 158 FedAppx 43.

A widower was entitled to innocent spouse relief pursuant to Code Sec. 6015(f), allowing for a refund of taxes. Because the taxpayer satisfied a majority of the requirements in Rev. Proc. , 2000-1 CB 447, she was eligible for relief despite the fact that she paid the tax attributable to her deceased husband. Moreover, the taxpayer established that she did not have knowledge of, or benefit from, the unreported income.

C. Rosenthal, 87 TCM 1183, Dec. 55,603(M), TC Memo. 2004-89.

A teacher was not entitled to innocent spouse relief. Her request for equitable relief from underpayments from two tax years was evaluated using the factors in Rev. Proc. 2000-15, 2000-1 CB 447. Only two factors weighed in favor of relief: the taxpayer was divorced and her divorce settlement allocated the liabilities to her former husband. For three additional tax years, the IRS had already granted her request for separate liability relief, which relieved her of tax liabilities attributable to her ex-husband's tax items. She was not entitled to additional relief because she failed to show that she did not know or have reason to know of the understatements on the returns, especially in light of her advanced education and her representation by an attorney and an accountant when she filed her delinquent returns. For the last tax year at issue, relief was denied because she and her husband had filed separate returns, and their subsequent attempt to file an amended joint return was untimely.

A. Barriga, 87 TCM 1236, Dec. 55,617(M), TC Memo. 2004-102.

The IRS did not abuse its discretion in denying equitable innocent spouse relief to a taxpayer who had reason to know that her former husband would not pay the tax liabilities reported on their joint returns when she signed those returns. At the times she signed the returns, she and her former husband were plagued by financial difficulties and were in danger of losing their home in foreclosure. Furthermore, the taxpayer had lesser amounts of tax withheld from her wages than the amount that would become due on her portion of the joint income. The Tax Court applied the guidelines set forth in Rev. Proc. 2000-15, 2000-1 CB 447, and concluded that the factors weighing against granting relief outweighed those factors weighing in favor of relief.

A.L. Morello, 88 TCM 112, Dec. 55,713(M), TC Memo. 2004-181.

The IRS's decision to deny a wife Code Sec. 6015(f) relief from joint and several liability was not an abuse of discretion. She knew when the joint return was filed that she had an obligation to pay the joint liability and that some of her assets would be used to pay it. The fact that the IRS applied her subsequent year's refund to the tax liability instead of waiting for the bankruptcy court to satisfy the liability with her individual retirement account was not sufficient to qualify her for relief.

N.M. O'Neill, 88 TCM 118, Dec. 55,717(M), TC Memo. 2004-183.

The IRS's decision to deny a former spouse relief from joint and several liability was not an abuse of discretion. The taxpayer failed to present any evidence with regard to the Rev. Proc. 2000-15, sec. 4.03, threshold factors that are weighed in determining whether equitable relief should be granted.

M.A. Durham, 88 TCM 120, Dec. 55,718(M), TC Memo. 2004-184.

Applying the guidelines contained in Rev. Proc. 2000-15, 2000-1 CB 447, the court held that the taxpayer failed to carry her burden of proof in a number of areas, including the showing of economic hardship and that she did not know, and had no reason to know that the tax liability would not be paid.

M. Monsour, 88 TCM 144, Dec. 55,726(M), TC Memo. 2004-190.

The IRS did not abuse its discretion by denying innocent spouse relief under Code Sec. 6015(f) to a divorced taxpayer who sought relief from additions to tax and interest with respect to the tax liabilities reported on the joint income tax returns for the tax years at issue. The Tax Court applied the guidelines set forth in Rev. Proc. 2000-15, 2000-1 CB 447, and determined that the factors weighing against granting relief outweighed those in favor of relief.

D.H. Knorr, 88 TCM 1288, Dec. 55,752(M), TC Memo. 2004-212.

The IRS abused its discretion in denying a taxpayer's request for equitable relief as an innocent spouse under Code Sec. 6015(f). The IRS argued that under section 5 of Rev. Proc. 2000-15 the taxpayer had to make her request for equitable relief within two years of the first collection activity. Yet in notifying the taxpayer of the first collection activity --withholding a refund to offset the unpaid joint liability --the IRS failed to notify the taxpayer of her innocent spouse rights, contrary to section 3501 of the Internal Revenue Service Restructuring and Reform Act of 1998 (P.L. 105-206). The IRS asserted that for purposes of the limitations period in the revenue procedure, the offset was a collection activity; but for purposes of its obligation to inform the taxpayer of her rights, the notice of offset was not a collection-related notice. The court, however, viewed the IRS's position as incongruous and ruled that notice of the offset was a collection-related notice and that the IRS should have informed the taxpayer of her rights under Code Sec. 6015. Because the IRS failed to do so, the offset did not commence the two-year period, and the IRS's contrary interpretation of Rev. Proc. 2000-15, 2000-1 CB 447, was an abuse of discretion.

N.W. McGee, 123 TC 314, Dec. 55,781.

The IRS did not abuse its discretion by denying innocent spouse relief under Code Sec. 6015(f) to a widowed taxpayer who sought relief from joint and several liability. While the taxpayer satisfied the seven threshold conditions of Rev. Proc. 2000-15, 2000-1 CB 447 for the IRS to consider equitable relief, she knew or had reason to know that the liabilities would not be paid because her husband was deceased at the time she signed the tax returns.

M.A. George, 88 TCM 456, Dec. 55,804(M), TC Memo. 2004-261.

A divorced taxpayer was not entitled to relief under Code Sec. 6015(f) because, given the taxpayer's status as an investor, it would not be inequitable to hold her liable for the deficiency.

D.J. Barnes, 88 TCM 479, Dec. 55,809(M), TC Memo. 2004-266.

A widow was not entitled to Code Sec. 6015(f) equitable relief from joint and several liability for liabilities incurred with respect to a tax shelter. The erroneous items that gave rise to the understatement of tax were attributable both to her and to her husband because she played a substantial role in managing the family's investments. Although she claimed to be concerned about the large deductions on the couple's tax returns, she made no inquiry to verify the accuracy of those items. Further, the individual's husband did not abuse or mislead her and she received a significant benefit from the understatement in the form of erroneous tax refunds. There was no evidence that she would suffer economic hardship if she were held liable for the deficiencies.

I. Capehart, 88 TCM 492, Dec. 55,811(M), TC Memo. 2004-268. Aff'd, CA-9 (unpublished opinion), 2007-1 USTC ¶50,149, 204 FedAppx 618.

An individual was denied equitable innocent spouse relief for deficiencies resulting from the failure to report five items of income, three of which were his spouse's compensation from different employers. The individual did not qualify for innocent spouse relief under Code Sec. 6015(b), (c) or (f) because he had actual knowledge of his spouse's work for the three employers, and there was no concealment creating an inequity against the individual.

T.R. Becherer, 88 TCM 617, Dec. 55,827(M), TC Memo. 2004-282.

The IRS abused its discretion in denying an individual equitable innocent spouse relief. The request for relief was filed more than two years after the IRS began to apply the taxpayer's overpayments spanning seven years to tax underpayments that arose during her marriage. The IRS notified the taxpayer of the offsets, but failed to inform the taxpayer that she might be eligible for relief under Code Sec. 6015 until more than three years after the first offset, contrary to section 3501(b) of the Internal Revenue Service Restructuring and Reform Act of 1998 (P.L. 105-206). Following N.W. McGee, (123 TC 314, Dec. 55,781), the notice of offset was a collection-related activity that triggered the IRS's obligation to notify the taxpayer of her rights. The IRS, therefore, could not summarily reject the taxpayer's request based solely on its timeliness. Relief could not be granted under Code Secs. 6015(b) or (c) because no deficiency existed.

K. Nelson, 89 TCM 685, Dec. 55,910(M), TC Memo. 2005-9.

An individual who had knowledge of her husband's gambling activities, which gave rise to tax deficiencies, was entitled to innocent spouse relief on equitable grounds. The factors weighing in favor of the relief included: (1) the taxpayer's divorce, (2) the fact that she would face economic hardship if relief were not granted, (2) the divorce decree stated that her former husband was responsible for the income tax liability, (3) the entire deficiency was attributable to him, (4) the taxpayer was current with all of her Federal tax obligations and (5) the existence of abuse.

S.K. Baumann, 89 TCM 790, Dec. 55,935(M), TC Memo. 2005-31.

A divorced individual failed to establish that the IRS abused its discretion in denying innocent spouse relief under Code Sec. 6015(f) by acting arbitrarily, capriciously or without sound basis in fact. The individual filed joint returns with her husband for a period of four years, knew that each return showed tax due resulting from underwithholding attributable to both of them, and at all times had access to the joint bank account from which the taxes were to be paid. She failed to carry her burden of proving that she had no knowledge of or reason to know that the taxes would not be paid by her husband, as he had stated. In fact, the individual filed the last joint return with her husband after the IRS had levied on their joint bank account for unpaid tax liabilities. Therefore, she clearly had actual knowledge that taxes remained unpaid when the fourth return was jointly filed. By applying the guidelines set forth in Rev. Proc. 2000-15, 2000-1 CB 447, the Tax Court concluded that the individual failed to establish economic hardship and the knowledge or reason to know factor weighed heavily against granting relief.

Y.C. Lopez, 89 TCM 810, Dec. 55,941(M).

An individual who received over $1 million in constructive dividends that she failed to report on her tax return was not entitled to relief from joint and several liability under Code Sec. 6015. The taxpayer did not qualify for full or apportioned relief because (1) the understatement was attributable to her, and (2) she knew of the understatement when she filed the return. Moreover, the taxpayer was not entitled to equitable relief because the taxpayer filed the joint tax return for the year at issue with fraudulent intent. Therefore, the taxpayer failed to qualify for equitable relief under Rev. Proc. 2003-61, 2003-2 CB 296.

L. Bussell, 89 TCM 1032, Dec. 55,987(M), TC Memo. 2005-77.

The IRS abused its discretion when it denied a divorced individual equitable innocent spouse relief for several tax years. The taxpayer did not know or have reason to know, at the time she signed the tax returns, that her ex-husband would not pay the tax liabilities. In fact, her ex-husband concealed his nonpayment of the tax liabilities and his serious gambling problem from her for many years. Moreover, those liabilities were solely attributable to the ex-husband and the couple were separated at the time she filed her request for innocent spouse relief. Further, the ex-husband had the legal obligation to pay the liabilities according to the couple's marital settlement agreement.

J.P. Levy, 89 TCM 1101, Dec. 56,004(M), TC Memo. 2005-92.

An individual was entitled to innocent spouse relief pursuant to Code Sec. 6015(f) because she satisfied a majority of the requirements in Rev. Proc. 2000-15, 2000-1 CB 447. The individual's spouse failed to have any taxes withheld on his earnings, made no estimated tax payments, did not pay the balance due on the returns at issue and concealed the nonpayment. The individual had no reason to know that her spouse failed to pay the balance due on the returns. The Tax Court held that it was reasonable and credible for the individual to believe her spouse's assertions that the tax deficiencies resulted from denial of tax shelter deductions.

R.E. Neal, 90 TCM 161, Dec. 56,124(M), TC Memo. 2005-201.

The IRS did not abuse its discretion in denying a taxpayer equitable innocent spouse relief. She failed to carry her burden of establishing any factors to weigh in favor of granting relief under Code Sec. 6015(f) and Rev. Proc. 2000-15, 2000-1 CB 447. Although she claimed that she was "hurried" when she signed the return, because she signed the return, she was held to have had constructive knowledge of the tax shown due on the return, and she should have inquired about whether the tax shown was paid. The amount of the tax shown due was large enough to put her on notice that further inquiry should have been made.

E. Simon, 90 TCM 302, Dec. 56,146(M), TC Memo. 2005-220.

An IRS Appeals officer's rejection of a spouse's request for equitable relief under Code Sec. 6015(f) did not constitute an abuse of discretion because all of the seven threshold conditions set forth in Rev. Proc. 2000-15, 2000-1 CB 447, were not satisfied. The nonrequesting husband added his wife's name on the deed of his house and transferred a boat and a car to her shortly after their tax liabilities arose and the IRS's notice of levy was received. Because the couple did not provide any logical or substantial reason for the transfer, the Appeals officer correctly concluded that the transfer had a tax-avoidance purpose and constituted a transfer of disqualified assets. In addition, the evidence showed that, at the time the requesting spouse signed the returns, she should have known that the tax for the years in question would not be paid.

D. Etkin, 90 TCM 417, Dec. 56,174(M), TC Memo. 2005-245.

Although her ex-husband may have forged her signature on a joint return, the taxpayer was not entitled to equitable innocent spouse relief. A joint return can be valid, even if signed only by one spouse, as long as both spouses intended to file jointly and the taxpayer knew or should have known about the unpaid tax liability as she had earned income for the year at issue, but failed to make estimated payments.

D.A. Magee, 90 TCM 489, Dec. 56,193(M), TC Memo. 2005-263.

The IRS did not abuse its discretion in determining that a woman was not an innocent spouse entitled to equitable relief from joint and several liability for taxes reported on a joint return but not paid. The Tax Court found that the woman met the threshold conditions for equitable relief under Section 4.02 of Rev. Proc. 2000-15, 2000-1 CB 447, but relief was not available under that section because the couple had lived together for part of the 12-month period preceding the request for relief, the woman had reason to know that the reported liability would not be paid, and she provided no evidence regarding her financial status to support her claim of economic hardship. Consideration of the factors weighing for or against equitable relief under section 4.03 of Rev. Proc. 2000-15, 2000-1 CB 447, uncovered no reason to suggest that the IRS's finding was an abuse of discretion.

P.J. Merendino, 91 TCM 646, Dec. 56,403(M), TC Memo. 2006-2.

Similarly.

J.A. Madden, 91 TCM 652, Dec. 56,405(M), TC Memo. 2006-4.

The ex-wife of a convicted drug trafficker was not entitled to innocent spouse relief in excess of the abatement of fraud penalties and related interest granted by the IRS in a notice of determination; Tax Court affirmed. The notice stated that relief was granted under "§ 6015(b)." The IRS had no authority under Code Sec. 6015(b) to grant partial relief that did not include the tax understatement, but did have authority under Code Sec. 6015(f) to grant equitable relief limited to the fraud penalty and interest. The reference to "§ 6015(b)" in the notice was not dispositive and did not prejudice the taxpayer.

N. Aranda, CA-10, 2006-1 USTC ¶50,136, 432 F3d 1140.

The IRS did not abuse its discretion when it denied a taxpayer innocent spouse relief under Code Sec. 6015(f). The taxpayer failed the safe harbor and the balancing tests set forth in Rev. Proc. 2000-15, 2000-1 CB 447, because a preponderance of the factors enumerated in that procedure weighed against relief. The taxpayer had reason to know or actually knew at the time he signed the joint returns that the tax liabilities would not be paid. In addition, the taxpayer would not suffer economic hardship if the relief were not granted because he had many assets that he could sell without undue hardship. The taxpayer also failed to show that he received no significant benefit from the tax underpayment. Finally, at least part of the tax liabilities were attributable to the taxpayer's income-producing activities.

M.R. Motsko, 91 TCM 711, Dec. 56,423(M), TC Memo. 2006-17.

The IRS did not abuse its discretion when it denied a taxpayer innocent spouse relief under Code Sec. 6015(f). The liability was due the improper reporting of a distribution from the taxpayer's husband's Code Sec. 401(k) plan prior to the couple's divorce. The taxpayer was not entitled to equitable relief under Code Sec. 6015(f) and the guidelines of Rev. Proc. 2003-61, 2003-2 CB 298, because she had knowledge of the item giving rise to the deficiency and failed to comply with tax laws in subsequent years, factors that outweighed the facts that she and her husband were divorced and that she suffered abuse.

T.J. Fox, 91 TCM 731, Dec. 56,428(M), TC Memo. 2006-22.

It was not equitable to hold a spouse, who had limited involvement in the family's finances, jointly and severally liable with respect to a tax deficiency attributable to her husband's participation in a sham straddle transaction because she did not benefit from the transaction and, given her assets and limited number of years remaining in the work force, imposing the tax liability on her would result in a severe economic hardship.

P.E. Campbell, 91 TCM 735, Dec. 56,430(M), TC Memo. 2006-24.

The IRS's denial of equitable innocent spouse relief to a requesting ex-spouse was not an abuse of discretion. The requesting spouse failed to prove that denial of such relief would subject her to economic hardship.

J.H. Krasner, 91 TCM 765, Dec. 56,437(M), TC Memo. 2006-31.

The Tax Court properly found that it lacked jurisdiction to review the IRS's denial of an innocent spouse's refund claim for one tax year because no deficiency notice had been issued for that year. However, the Tax Court improperly decided that the taxpayer's refund request for another tax year was time-barred. The Tax Court lacked jurisdiction to make that determination because no deficiency notice had been issued for that year either.

T.E. Bartman, CA-8, 2006-1 USTC ¶50,298, aff'g in part and rev'g in part 87 TCM 1213, Dec. 55,608(M), TC Memo. 2004-93.

An individual was not entitled to additional innocent spouse relief from joint liability for income taxes, related penalty, additions to tax, and interest. She was not entitled to relief under Code Sec. 6015(b) because she had knowledge of interest on the home mortgages and of the various business activities of her former husband's sales business. The IRS correctly concluded that she qualified generally for relief under Code Sec. 6015(c). However, the court held that she qualified for relief with regard to the entire deficiency, not just 50 percent thereof, because the entire deficiency was attributable to her husband. The IRS incorrectly rejected her request for Code Sec. 6015(f) equitable relief as to half the income tax underpayment nominally attributable to her. The IRS abused its discretion in not granting her relief for the entire amount, and not half, of the balance of the tax underpayment and the related penalty, additions to tax, and interest. The severity of the spousal abuse she suffered during her marriage strongly favored granting her relief.

C. McKnight, 92 TCM 76, Dec. 56,576(M), TC Memo. 2006-155.

A 69-year-old research scientist was entitled to innocent spouse relief from deficiencies that resulted from her husband's investment in a tax shelter partnership. The taxpayer would have suffered economic hardship; therefore, it would have been inequitable to deny her innocent spouse relief.

H.M. Korchak, 92 TCM 199,Dec. 56,609(M), TC Memo. 2006-185.

The IRS abused its discretion in denying a divorced taxpayer innocent spouse relief under Code Sec. 6015(f); based on an application of the factors set forth in Rev. Proc. 2000-15, 2001 CB 447 (which, although superseded, applied to the IRS's determination), to hold her liable would be inequitable. All of the factors either favored the taxpayer or were neutral. The taxpayer was divorced when she sought relief and she did not significantly benefit from her former husband's underpayment of tax. Also, she would suffer economic hardship if the relief were not granted in that she had a reasonable need to retain her modest retirement account. Further, she did not know or have reason to believe that the tax at issue would not be paid. Her husband intentionally mislead her into thinking he was fulfilling their tax obligations. Also, the underpaid tax was solely attributable to her former husband. His agreement in their property settlement to pay community debt, including the taxes at issue, also favored her. Finally, the taxpayer did not participate in any wrongdoing.

D. Van Arsdalen, 93 TCM 953, Dec. 56,852(M), TC Memo. 2007-48.

The IRS abused its discretion in denying a divorced taxpayer innocent spouse relief under Code Sec. 6015(f) based on an application the factors set forth in Rev. Proc. 2000-15, 2001 CB 447 (which, although superseded by Rev. Proc. 2003-61, 2003 C.B. 296, was still applicable in this case). All of the factors either favored the taxpayer or were neutral. The taxpayer participated as a helper in her ex-husband's business, signed their joint income tax returns, and admitted that she knew their tax liabilities would not be paid. However, her ex-husband controlled the receipts from the business, she had no access to the money and she had no or little influence over the use of those funds. Thus, her knowledge that the taxes would not be paid was not fatal to her request for relief. Further, the taxpayer's debts far exceeded the value of her assets and her current income was below her expenses. The fact that she had remarried was not enough to show that she would not suffer economic hardship if she had to pay the taxes, especially since she received no support from her current husband.

L.D. Farmer, 93 TCM 1052, Dec. 56,881(M), TC Memo. 2007-74.

The IRS did not abuse its discretion in denying a taxpayer innocent spouse relief under Code Sec. 6015(f). Although all of the tax liability was attributable to her husband's business activities, the taxpayer had received significant benefit from the underpayment; she knew, or had reason to know the liability would be unpaid; and she failed to produce any evidence of economic hardship should she be held jointly liable for the unpaid taxes.

B. Ware, 93 TCM 1196, Dec. 56,924(M), TC Memo. 2007-112.

There was no abuse of discretion in the IRS's denial of equitable innocent spouse to a widow who failed to establish that the taxes at issue would be paid within a reasonable period of time and that she would suffer economic hardship if innocent spouse relief was denied. The widow alleged that at the time she signed the tax returns she believed the taxes would be paid from her husband's bankruptcy estate, from his pension funds, or from future earnings derived from her husband's return to work. Her hope that payment would eventually be made based on various contingencies was not reasonable. Furthermore, financial information submitted to the IRS Appeals officer showed excess monthly income over expenses of almost $3,000 and her court testimony, although providing generalized approximations of an updated and different financial picture, was not substantiated by any supporting documentation. Finally, the widow's shortcomings with regard to income tax delinquencies in subsequent years failed to show good faith efforts on her part.

D.A. Banderas, 93 TCM 1247, Dec. 56,943(M), TC Memo. 2007-129.

A married taxpayer was not eligible for equitable innocent spouse relief under Code Sec. 6015(f). Although the taxpayer met the threshold requirements for equitable relief, she failed to meet the conditions set out in Rev. Proc. 2000-15, 2000-1 CB 447, because she was still married to the nonrequesting spouse at the time relief was requested, she was not abused, she knew or had reason to know that the liability reported on the returns would not be paid, she was not in compliance with federal tax laws and she failed to verify that she would suffer economic hardship if relief was not granted.

T.G. Butner, 93 TCM 1290, Dec. 56,952(M), TC Memo. 2007-136.

The IRS abused its discretion in denying an individual equitable relief from joint and several liability under Code Sec. 6015(f). Most of the factors in section 4.03 of Rev. Proc. 2003-61, 2003-2 CB 296, either favored granting her relief or were of neutral impact. Although the taxpayer had constructive knowledge of the taxes due because she signed the returns, the liabilities reported on those returns were solely attributable to her husband's businesses. Further, she derived no significant benefit from the failure to pay the tax liabilities for the years at issue and she would suffer even greater economic hardship than already existed if forced to pay the outstanding tax liability.

C.K. Beatty, 93 TCM 1422, Dec. 56,984(M), TC Memo. 2007-167.

A former wife was denied innocent spouse relief with regard to tax liability related to a disallowed charitable contribution deduction because she was aware at the time the couple signed their joint return that a charitable contribution claimed on the return had not been made. She did not qualify for equitable relief under Code Sec. 6015(f) because, since no contribution was made by either spouse, the tax liability was attributable to both her and the former husband.

C.R. Schwendeman, Dec. 57,047(M), TC Memo. 2007-227.

The IRS abused its discretion in denying innocent spouse relief based on the factors set forth in Rev. Proc. 2000-15, 2001 CB 447. The IRS acted arbitrarily in using the taxpayer's knowledge at the time he signed the amended return. The husband did not significantly benefit from the embezzlement income or from not paying the taxes on that income, where the income was not significant to their life, and the husband did not have the unpaid tax money available for his personal use. The fact that the husband lacked economic hardship was not enough to justify denying relief. The parties agreed on the other factors set forth in the revenue procedure.

D.B. Billings, Dec. 57,056(M), TC Memo. 2007-234.

A former spouse was denied equitable relief for one tax year at issue, but was granted relief for the second tax year. The IRS did not abuse its discretion in denying her innocent spouse relief for the first tax year at issue because she knew of the distribution, failed to establish economic hardship, benefitted from the distribution, and, therefore, failed to act with reasonable cause and good faith in the filing of the return for that tax year. With respect to the second tax year at issue, however, the IRS abused its discretion in denying equitable relief to the individual because most of the factors in section 4.03 of Rev. Proc. 2003-61, 2003-2 CB 296, favored granting her relief, in that: the individual was divorced from her husband who had abused her throughout the marriage; she derived no significant benefit from the distribution from his IRA during that tax year; she did not sign the return; and was not aware of a tax liability until she began filing her own individual returns.

S.K. Dowell, Dec. 57,157(M), TC Memo. 2007-326.

The taxpayer was not eligible for equitable relief from liability. It was not reasonable for petitioner to rely on her husband to pay the tax, given her knowledge of their financial history. Nor did she show that she would suffer economic hardship if the relief was not granted. Several of the factors listed in section 4.03 of Rev. Proc. 2003-61 weighed against the granting of equitable relief. In particular, the court noted that no showing of hardship had been made, the taxpayer had knowledge of the items leading to the deficiency, and the divorce decree did not relieve the taxpayer of liability for the couple's taxes.

S.L. Gonce, Dec. 57,161(M), TC Memo. 2007-328.

A husband was not entitled to innocent spouse relief from income tax liabilities, interest and penalties assessed against the couple. He failed to demonstrate that the taxes at issue were understated or that he and his wife were no longer married, living together or legally separated. He did not qualify for equitable relief because he failed to demonstrate that the IRS had denied relief under Code Sec. 6015(f) or that he had petitioned the Tax Court under Code Sec. 6015(e).

W. Bucy, DC W.Va., 2007-2 USTC ¶50,822.

The IRS did not abuse its discretion by denying a married woman's claim for innocent spouse relief. Equitable relief under Code Sec. 6015(f) was not available because a wife did not provide any evidence that she would suffer economic hardship if relief was not granted, or that she did not have sufficient assets to pay the tax liability or that the burden of paying it would fall on her instead of her husband.

J.D. Dunne, Dec. 57,368(M), TC Memo. 2008-63.

The IRS abused its discretion in denying a request for equitable innocent spouse relief under Code Sec. 6015(f). With regard to the factors set out in Rev. Proc. 2000-15, 2000-1 CB 448, applicable at the time relief was requested, the IRS abused its discretion in failing to consider whether the couple was still married, whether there was abuse or if a finding of liability would impose economic hardship on the wife. Although the couple was not divorced at the time of the request and they were living in the same home, they were using separate bedrooms, so the marital status factor was deemed to favor the wife. Evidence of abuse and economic hardship was present, but the IRS failed to follow up on the evidence. Relief was proper because the only factor that ultimately weighed against the wife was her knowledge of the underpayment.

C. Nihiser, Dec. 57,445(M), TC Memo. 2008-135.

The IRS properly denied innocent spouse relief under the equitable relief rules of Code Sec. 6015(f) based on the factors presented in Rev. Proc. 2003-61. The taxpayer failed to present any evidence that she would suffer economic hardship if relief was not granted despite being given ample opportunity to do so by the IRS.

R.M. Toppi, Dec. 57,471(M), TC Memo. 2008-156.

The Office of Chief Counsel determined that an individual who had requested innocent spouse relief under Code Sec. 6015, and who had her account reduced to zero in an administrative procedure, did not have her liability abated; therefore, that liability could be reinstated. The IRS initially determined that the taxpayer was entitled to complete relief from three years of tax liability, and entered a transaction code in her file that reduced her liability account balance to zero. It was later determined that the taxpayer was, in fact, not entitled to innocent spouse relief. The taxpayer's contention that the zeroing of her account constituted an abatement of liability was incorrect. Abatement, under Code Sec. 6404, applies to a liability that is excessive, erroneous, or assessed after expiration of the limitation period. In this case, the zeroing of the taxpayer's account was a mere administrative procedure, unrelated to the abatement procedure. If the IRS chose to reinstate her liability, it could enter a new transaction code and reverse its previous grant of relief.

CCA Letter Ruling 200802030.

Unlawful levy - SEC. 7426. CIVIL ACTIONS BY PERSONS OTHER THAN TAXPAYERS.
7426(a) ACTIONS PERMITTED. --
7426(a)(1) WRONGFUL LEVY. --If a levy has been made on property or property has been sold pursuant to a levy, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States. Such action may be brought without regard to whether such property has been surrendered to or sold by the Secretary.

7426(a)(2) SURPLUS PROCEEDS. --If property has been sold pursuant to a levy, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property junior to that of the United States and to be legally entitled to the surplus proceeds of such sale may bring a civil action against the United States in a district court of the United States.

7426(a)(3) SUBSTITUTED SALE PROCEEDS. --If property has been sold pursuant to an agreement described in section 6325(b)(3) (relating to substitution of proceeds of sale), any person who claims to be legally entitled to all or any part of the amount held as a fund pursuant to such agreement may bring a civil action against the United States in a district court of the United States.

7426(a)(4) SUBSTITUTION OF VALUE. --If a certificate of discharge is issued to any person under section 6325(b)(4) with respect to any property, such person may, within 120 days after the day on which such certificate is issued, bring a civil action against the United States in a district court of the United States for a determination of whether the value of the interest of the United States (if any) in such property is less than the value determined by the Secretary. No other action may be brought by such person for such a determination.

7426(b) ADJUDICATION. --The district court shall have jurisdiction to grant only such of the following forms of relief as may be appropriate in the circumstances:

7426(b)(1) INJUNCTION. --If a levy or sale would irreparably injure rights in property which the court determines to be superior to rights of the United States in such property, the court may grant an injunction to prohibit the enforcement of such levy or to prohibit such sale.

7426(b)(2) RECOVERY OF PROPERTY. --If the court determines that such property has been wrongfully levied upon, the court may --

7426(b)(2)(A) order the return of specific property if the United States is in possession of such property;

7426(b)(2)(B) grant a judgment for the amount of money levied upon; or

7426(b)(2)(C) if such property was sold, grant a judgment for an amount not exceeding the greater of --

7426(b)(2)(C)(i) the amount received by the United States from the sale of such property, or

7426(b)(2)(C)(ii) the fair market value of such property immediately before the levy.

For purposes of subparagraph (C), if the property was declared purchased by the United States at a sale pursuant to section 6335(e) (relating to manner and conditions of sale), the United States shall be treated as having received an amount equal to the minimum price determined pursuant to such section or (if larger) the amount received by the United States from the resale of such property.

7426(b)(3) SURPLUS PROCEEDS. --If the court determines that the interest or lien of any party to an action under this section was transferred to the proceeds of a sale of such property, the court may grant a judgment in an amount equal to all or any part of the amount of the surplus proceeds of such sale.

7426(b)(4) SUBSTITUTED SALE PROCEEDS. --If the court determines that a party has an interest in or lien on the amount held as a fund pursuant to an agreement described in section 6325(b)(3) (relating to substitution of proceeds of sale), the court may grant a judgment in an amount equal to all or any part of the amount of such fund.

7426(b)(5) SUBSTITUTION OF VALUE. --If the court determines that the Secretary's determination of the value of the interest of the United States in the property for purposes of section 6325(b)(4) exceeds the actual value of such interest, the court shall grant a judgment ordering a refund of the amount deposited, and a release of the bond, to the extent that the aggregate of the amounts thereof exceeds such value determined by the court.

7426(c) VALIDITY OF ASSESSMENT. --For purposes of an adjudication under this section, the assessment of tax upon which the interest or lien of the United States is based shall be conclusively presumed to be valid.

7426(d) LIMITATION ON RIGHTS OF ACTION. --No action may be maintained against any officer or employee of the United States (or former officer or employee) or his personal representative with respect to any acts for which an action could be maintained under this section.

7426(e) SUBSTITUTION OF UNITED STATES AS PARTY. --If an action, which could be brought against the United States under this section, is improperly brought against any officer or employee of the United States (or former officer or employee) or his personal representative, the court shall order, upon such terms as are just, that the pleadings be amended to substitute the United States as a party for such officer or employee as of the time such action was commenced upon proper service of process on the United States.

7426(f) PROVISION INAPPLICABLE. --The provisions of section 7422(a) (relating to prohibition of suit prior to filing claim for refund) shall not apply to actions under this section.

7426(g) INTEREST. --Interest shall be allowed at the overpayment rate established under section 6621 --

7426(g)(1) in the case of a judgment pursuant to subsection (b)(2)(B), from the date the Secretary receives the money wrongfully levied upon to the date of payment of such judgment;

7426(g)(2) in the case of a judgment pursuant to subsection (b)(2)(C), from the date of the sale of the property wrongfully levied upon to the date of payment of such judgment; and

7426(g)(3) in the case of a judgment pursuant to subsection (b)(5) which orders a refund of any amount, from the date the Secretary received such amount to the date of payment of such judgment.

7426(h) RECOVERY OF DAMAGES PERMITTED IN CERTAIN CASES. --

7426(h)(1) IN GENERAL. --Notwithstanding subsection (b), if, in any action brought under this section, there is a finding that any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence, disregarded any provision of this title the defendant shall be liable to the plaintiff in an amount equal to the lesser of $1,000,000 ($100,000 in the case of negligence) or the sum of --

7426(h)(1)(A) actual, direct economic damages sustained by the plaintiff as a proximate result of the reckless or intentional or negligent disregard of any provision of this title by the officer or employee (reduced by any amount of such damages awarded under subsection (b)); and

7426(h)(1)(B) the costs of the action.

7426(h)(2) REQUIREMENT THAT ADMINISTRATIVE REMEDIES BE EXHAUSTED; MITIGATION; PERIOD. --The rules of section 7433(d) shall apply for purposes of this subsection.

7426(h)(3) PAYMENT AUTHORITY. --Claims pursuant to this section shall be payable out of funds appropriated under section 1304 of title 31, United States Code.

7426(i) CROSS REFERENCE. --

For period of limitation, see section 6532(c).
SEC. 6532. PERIODS OF LIMITATION ON SUITS.
6532(a) SUITS BY TAXPAYERS FOR REFUND. --

6532(a)(1) GENERAL RULE. --No suit or proceeding under section 7422(a) for the recovery of any internal revenue tax, penalty, or other sum, shall be begun before the expiration of 6 months from the date of filing the claim required under such section unless the Secretary renders a decision thereon within that time, nor after the expiration of 2 years from the date of mailing by certified mail or registered mail by the Secretary to the taxpayer of a notice of the disallowance of the part of the claim to which the suit or proceeding relates.

6532(a)(2) EXTENSION OF TIME. --The 2-year period prescribed in paragraph (1) shall be extended for such period as may be agreed upon in writing between the taxpayer and the Secretary.

6532(a)(3) WAIVER OF NOTICE OF DISALLOWANCE. --If any person files a written waiver of the requirement that he be mailed a notice of disallowance, the 2-year period prescribed in paragraph (1) shall begin on the date such waiver is filed.

6532(a)(4) RECONSIDERATION AFTER MAILING OF NOTICE. --Any consideration, reconsideration, or action by the Secretary with respect to such claim following the mailing of a notice by certified mail or registered mail of disallowance shall not operate to extend the period within which suit may be begun.

6532(a)(5) CROSS REFERENCE. --

For substitution of 120-day period for the 6-month period contained in paragraph (1) in a title 11 case, see section 505(a)(2) of title 11 of the United States Code.

6532(b) SUITS BY UNITED STATES FOR RECOVERY OF ERRONEOUS REFUNDS. --Recovery of an erroneous refund by suit under section 7405 shall be allowed only if such suit is begun within 2 years after the making of such refund, except that such suit may be brought at any time within 5 years from the making of the refund if it appears that any part of the refund was induced by fraud or misrepresentation of a material fact.

6532(c) SUITS BY PERSONS OTHER THAN TAXPAYERS. --

6532(c)(1) GENERAL RULE. --Except as provided by paragraph (2), no suit or proceeding under section 7426 shall be begun after the expiration of 9 months from the date of the levy or agreement giving rise to such action.

6532(c)(2) PERIOD WHEN CLAIM IS FILED. --If a request is made for the return of property described in section 6343(b), the 9-month period prescribed in paragraph (1) shall be extended for a period of 12 months from the date of filing of such request or for a period of 6 months from the date of mailing by registered or certified mail by the Secretary to the person making such request of a notice of disallowance of the part of the request to which the action relates, whichever is shorter.




Next Generation Wireless, Ltd., Plaintiff v. United States of America, Defendant.

U.S. District Court, So. Dist. Ohio, East. Div.; 06-CV-838, August 28, 2008.



[ Code Secs. 6532 and 7426]

Suits by nontaxpayers: Wrongful levy: Nine-month limitations period: Written request to IRS: Procedural requirements. --

A federal district court lacked subject matter jurisdiction over a corporation's wrongful levy suit that was not filed within the nine-month limitations period. The Form 911, Application for Assistance Order, that the corporation sent to the IRS's Taxpayer Advocate Service did not constitute a proper written request to the IRS for return of the levied funds and did not extend the limitations period from nine months to 12 months under Code Sec. 6532 (c)(2). Furthermore, even assuming that the Form 911 was a proper written request, it did not comply with the procedural requirements of Reg. §301.6343-2(c) because the corporation did not address its request to the district director for the IRS district in which the levy was made.



OPINION AND ORDER



I. INTRODUCTION


MARBLEY, United States District Court Judge: Plaintiff Next Generation Wireless, Ltd. ("Next Generation") claims that the Internal Revenue Service ("IRS") improperly levied $15,736.68 from its bank accounts as payment for the tax liability of other business entities. Next Generation brought suit under the wrongful-levy statute, 26 U.S.C. § 7246(a)(1), for recovery of the levied funds. Defendant United States has moved for summary judgment on the grounds that this Court lacks subject matter jurisdiction over Next Generation's case because Next Generation failed to file suit within the nine-month limitations period governing wrongful-levy claims. For the reasons described below, the Court GRANTS the Government's motion.


II. BACKGROUND


On April 27, 2005, the IRS notified Next Generation that it was imposing a lien in the amount of $627,795.72 on Next Generation's property for the unpaid tax liability of Next Generation Wireless, Inc. ("NG II") and Allied Communications, Inc. ("Allied"). The IRS claimed that Next Generation was the transferee, alter ego, and/or nominee of NG II and Allied. Because the imposition of a federal tax lien is not sufficient for the Government to collect an unpaid tax liability, on December 15, 2005, the IRS served Key Bank and Next Generation with a notice of levy upon Next Generation's bank accounts. See EC Term of Years Trust v. United States, __U.S. __; 127 S. Ct. 1763, 1765 (2007) (stating that "[a] federal tax lien ... is not selfexecuting, and the IRS must take affirmative action to enforce collection of the unpaid taxes") (internal quotation marks and citation omitted). On January 6, 2006, the contents of Next Generation's Key Bank accounts, totaling $15,736.68, were transferred to the IRS pursuant to the notice of levy.

On January 12, 2006, Next Generation sent a Form 911, entitled "Application for Taxpayer Assistance Order" ("Form 911"), to the Taxpayer Advocate Service, a division within the IRS. The Form 911 explained that Next Generation was in danger of going out of business if the levied funds were not restored to its bank accounts. The Form was faxed to the attention of Trish Dinser. At her deposition, Dinser testified that she forwarded the Form to John Rice, an IRS revenue officer, who investigated the circumstances giving rise to the levy. In his report back to Dinser, Rice concluded that there was no basis for releasing the levy "because the taxpayer continues to deny responsibility for the liability and has made no effort to negotiate a settlement, despite having several opportunities to do so prior to the issuance of the levies." Rice confirmed that he had consulted with his superiors and that they agreed with this conclusion. As a result, the Taxpayer Advocate Service sent Next Generation a rejection letter on January 18, 2006, stating that the levy was valid and the funds would not be returned.

On October 4, 2006, nine months and twenty-one days after the IRS served the notice of levy, Next Generation filed this action, seeking to recover the levied funds under the wrongfullevy statute, 26 U.S.C. § 7246(a)(1). The United States moved to dismiss the complaint on November 30, 2006, for lack of subject matter jurisdiction on the grounds that Next Generation had failed to file suit within the applicable nine-month limitations period. On December 1, 2006, Next Generation filed an amended complaint alleging that because it had made a written request of the IRS to return the levied funds, the nine-month limitations period had been extended pursuant to 26 U.S.C. § 6532(c)(2). On June 14, 2007, this Court denied the United States' motion to dismiss, finding that because Next Generation's written request to the IRS was not attached to its complaint, the Court had no way of ascertaining whether the request contained all the information necessary to extend the limitations period. See Next Gen. Wireless, Ltd. v. United States, No. 06-CV-838, 2007 WL 1731212 (S.D. Ohio June 14, 2007). The United States now moves for summary judgment.


III. STANDARD OF REVIEW


Summary judgment is appropriate where the record shows that "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The movant has the burden of proving the absence of any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). In determining whether the movant has carried its burden, the Court views the evidence in the light most favorable to the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). The central inquiry is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986).


IV. ANALYSIS


The United States Government cannot be sued unless Congress waives its sovereign immunity. Block v. North Dakota, 461 U.S. 273, 287 (1983). "A necessary corollary of this rule is that when Congress attaches conditions to legislation waiving the sovereign immunity of the United States, those conditions must be strictly observed, and exceptions thereto are not to be lightly implied." Id. A statute-of-limitations provision is one such condition that must be strictly applied. Id.; see also United States v. Ranger Elec. Communs., 210 F.3d 627, 631 (6th Cir. 2000) ("Courts have consistently held that a statutory time limit is an integral condition of the sovereign's consent."). Therefore, if a plaintiff exceeds the statute of limitations, a court is deprived of subject matter jurisdiction to entertain the matter. Ranger, 210 F.3d at 631.

Congress has provided for a waiver of sovereign immunity in cases where a third party asserts that the Government has wrongfully levied his/her property in order to satisfy someone else's tax liability. See 26 U.S.C. § 7426(a)(1) (stating that "[i]f a levy has been made on property ... any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in ... such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court"). The Government's waiver of sovereign immunity is conditioned upon a nine-month statute of limitations, measured from the date the notice of levy was served. See 26 U.S.C. § 6532(c)(1); see also State Bank of Fraser v. United States, 861 F.2d 954, 967 (6th Cir. 1988). Because compliance with the statute of limitations is a term of the Government's consent to be sued, noncompliance with the nine-month limitations period deprives a district court of subject matter jurisdiction over the claim. See, e.g., Amwest Surety Ins. Co. v. United States, 28 F.3d 690, 694 (7th Cir. 1994). However, if the claimant submits a request for the return of the levied property, the limitations period will be extended by twelve months from the date of filing such request, or six months from the date of the Government's response denying the request, whichever is shorter. See 26 U.S.C. § 6532(c)(2).

To qualify for the statute-of-limitations extension, the claimant must satisfy the requirements for a "request," as set forth in 26 C.F.R. § 301.6343-2. First, the request must be in writing and "must be addressed to the district director (marked for the attention of the Chief, Special Procedures Staff) for the Internal Revenue district in which the levy was made." 1 Id. at § 301.6343-2(b). Second, the request must contain the following specific information: (1) the name and address of the person submitting the request; (2) a detailed description of the levied property; (3) a description of the claimant's interest in the levied property; and (4) the name and address of the taxpayer, the originating Internal Revenue district, and the date of the levy. Id.

A written request for the return of wrongfully levied property that does not contain all the foregoing information will not be deemed adequate. See 26 C.F.R. § 301.6343-2(c). A deficient request will be treated as adequate, however, if the Government fails to inform the claimant of the inadequacies within thirty days of receiving the request. Id.

There is no dispute that Next Generation did not file its complaint within nine months of service of the notice of levy (the record suggests that the statute expired twenty-one days before Next Generation filed suit). The question is whether Next Generation's submission of its Form 911 constituted a written request for the return of its levied funds sufficient to extend the limitations period as authorized by § 6532(c)(2). The Government argues that a Form 911 can never constitute a proper written request under § 6532(c)(2) for the return of wrongfully levied property. A Form 911, reasons the Government, is a mechanism for providing relief to persons at risk of suffering "significant hardship as a result of the manner in which the internal revenue laws are being administered," 26 U.S.C. § 7811(a)(1)(A), whereas the wrongful-levy statute sets up an administrative mechanism for reviewing the merits of the challenged levy. Given these contrasting purposes, the Government contends that a wrongful-levy claimant cannot fulfill the procedural requirements of that statute by resorting to a Form 911. But putting aside this issue, and assuming that a Form 911 could serve as a proper "written request" for purposes of extending the statute of limitations, the real question is whether Next Generation complied with all the procedural requirements of 26 C.F.R. § 301.6343-2. As described below, it did not.

Next Generation concedes that it did not address its Form 911 to "the district director (marked for the attention of the Chief, Special Procedures Staff) for the Internal Revenue district in which the levy was made," as expressly required by the wrongful-levy regulations. 2 26 C.F.R. § 301.6343-2. Instead, Next Generation sent its "request," if it may be called that, to an altogether different division of the IRS, namely, the Taxpayer Advocate Service, and specifically, its Cincinnati, Ohio office. Next Generation argues that its request must be treated as adequate despite this "technical[] insufficien[cy]" because the district director never notified it of the deficiency, i.e., Next Generation's failure to address its request to the proper IRS recipient. Citing the wrongful-levy regulations, Next Generation points out that when the district director fails to notify the claimant within thirty days of any inadequacies plaguing a request, the request must be treated as adequate. 26 C.F.R. §301.6343-2(c).

There is an obvious logical flaw to Next Generation's argument: how could the district director inform Next Generation that its request was improperly addressed when the district director never received the request in the first place, precisely because it was improperly addressed? See, e.g., Amwest, 28 F.3d at 697 ("It only makes sense ... that before the district director can notify the claimant of any inadequacies, it is first necessary that the district director actually received the request."). Next Generation gets around this problem by charging the district director with knowledge of its request to have the levied funds restored to its bank accounts based on the fact that the Taxpayer Advocate Service and the revenue officer in charge of Next Generation's case knew about its request. In other words, because certain IRS officials knew that Next Generation was seeking the return of its levied funds, Next Generation claims that all other relevant IRS officials are presumed to have known as well.

There is certainly a fairness appeal to Next Generation's argument. It ought not be asking too much for the left hand to know what the right hand is doing, especially when otherwise the burden is placed on the public to independently open multiple channels of identical communication with the same federal agency. But things are not so straightforward here because courts have strictly observed, to say the least, the requirements of the wrongful-levy regulations, including the requirement that the written request seeking the return of levied property be addressed to "the district director (marked for the attention of the Chief, Special Procedures Staff) for the Internal Revenue district in which the levy was made." 26 C.F.R. § 301.6343-2(b).

In Amwest, for example, the wrongful-levy claimant mailed its request to the IRS revenue officer in charge of its case, rather than the district director. 28 F.3d at 692. While acknowledging that this "seemed the most logical thing to do," id., given that the notice of levy advised the claimant to contact the revenue officer with any questions, the Seventh Circuit nonetheless held that wrongful-levy claimants must comply with the requirements of 26 C.F.R. § 301.6343-2(b) to the letter, that Amwest's improperly addressed request did not meet this standard, and that therefore the statute of limitations had not been extended and the claim had to be dismissed as time barred. Id. at 696.

In LaBonte v. United States, 233 F.3d 1049 (7th Cir. 2000), the Seventh Circuit again dismissed a wrongful-levy claim for failure strictly to observe the procedural requirements for making a written request. The claimant there did virtually everything right: he addressed his request to the correct IRS division (the Special Procedures Staff), sent it to the same address and fax number as the district director, and specifically requested in the body of the letter that the "district director" release the levy on his property. Id. at 1052-53. All the claimant neglected to do was specifically address his letter to "the district director, marked to the attention of the Chief of the Special Procedures Staff." Id. at 1053. The Seventh Circuit concluded that this omission alone was enough to require dismissal of his claim. Similarly, in BSC Term of Years Trust v. United States, No. 00-CA-270, 2000 U.S. Dist. LEXIS 20058, *10 (W.D. Tex. Dec. 28, 2000), the court dismissed a claim where the request for the return of the levied property was properly addressed to the district director, but was mailed to the wrong address in Austin, Texas. See also Peoples Banking Co. v. United States, No. C2-93-785, 1994 U.S. Dist. LEXIS 7151, *13 (S.D. Ohio May 18, 1994) (holding that the filing of a cross-claim against the United States in an underlying state-court action did not constitute a written request for the return of levied property under 26 C.F.R. § 301.6343-1(b) and therefore the limitations period had not been extended).

The foregoing precedent, although not binding on this Court, plainly support dismissing Next Generation's claim as untimely. Next Generation has not pointed to any authorities holding to the contrary. Moreover, this Court recognizes the good reasons supporting the requirement that a request for the return of levied property be addressed to the proper recipient. As the Amwest Court noted, it is the district director who is vested with administrative authority to resolve wrongful-levy claims and so directing requests to any other IRS official is pointless. See Amwest, 28 F.3d at 696. And, "given the size of the IRS, it is possible that a request mailed to someone besides the district director will languish on some subordinate's desk ... and never find its way to the district director." Id.

The Court is persuaded by the reasoning in Amwest, LaBonte, and the other cases cited above. But, like those other courts, this Court is not indifferent to the apparent "harshness" of the result. Amwest, 28 F.3d at 697; LaBonte, 233 F.3d at 1053. The Seventh Circuit has twice expressed concern that the IRS' communications with wrongful-levy claimants were not all they could, and perhaps should, have been. See Amwest, 28 F.3d at 697; LaBonte, 233 F.3d at 1053. In both Amwest and LaBonte, the Seventh Circuit's criticism stemmed mainly from the fact that IRS officials conducted settlement negotiations with the claimants for extended periods of time without ever mentioning that the claimants' written requests were deficient. There is no evidence showing that the IRS engaged in similarly confusing (if not misleading) behavior here.

Nonetheless, the general concern articulated in Amwest and LaBonte about the adequacy of the IRS' "procedures" in dealing with wrongful-levy claimants is still very much at play. Amwest, 28 F.3d at 698. The IRS knew, even if the precise district director did not, that Next Generation was seeking relief from the levy imposed on its bank accounts. There is no evidence, though, suggesting that the IRS did anything to educate Next Generation about its rights and responsibilities under the wrongful-levy statute, nor did the IRS forward Next Generation's dispute to the district director. 3 Of course, there does not appear to be anything that compelled the IRS to take these steps, and therefore the Court's opinion should not be read as rebuking the agency for failing to live up to its established duties.

The Court's purpose, rather, is to make plain that where the IRS has crafted specific regulations governing wrongful-levy claims, where the IRS has taken the position that courts must strictly enforce those regulations, and where the law of sovereign immunity demands that courts do so, the wisdom of the IRS' judgment --its minimalist approach of declining to provide claimants with any meaningful information about preserving their claims --is open to considerable debate. The inevitable consequence of what might be regarded as the IRS' lack of initiative is that wrongful-levy claimants are forced to independently "navigate their way through a 'regulatory maze.'" BSC, 2000 U.S. Dist. LEXIS 20058 at *12. Penalizing claimants when they go astray in a way that the IRS easily could have prevented is indeed a "disappointment," in the words of the BSC court. Id.; see also LaBonte, 233 F.3d at 1053 (commenting that "we are especially hard-pressed to explain the IRS' behavior in light of its recent efforts to improve its image in the eyes of a skeptical public"). The burden imposed on wrongful-levy claimants is especially ironic here because Next Generation sought help from, of all places, the IRS' Taxpayer Advocate Service. The mission of the Taxpayer Advocate Service is, among other things, to "assist taxpayers in resolving problems with the Internal Revenue Service." 26 U.S.C. § 7803(c)(2)(A). One may well wonder about the usefulness of a Taxpayer Advocate Service if it does not at least help taxpayers acquire the information necessary to preserve their claims.

It is not for this Court to tell the IRS how to do its job, but this case reinforces Judge Cudahy's belief, articulated in his Amwest concurrence, that "the Internal Revenue Service ought to be able to do a great deal better than its performance here indicates." Id. at 698.


V. CONCLUSION


For the foregoing reasons, the United States' motion for summary judgment is GRANTED and this case is dismissed.

IT IS SO ORDERED.
s/Algenon L. Marbley

ALGENON L. MARBLEY

United States District Court Judge

1 The wrongful-levy regulations were amended in 2007. Rather than requiring a claimant's written request to be addressed to "the district director (marked for the attention of the Chief, Special Procedures Staff)," the amended regulation, § 301.6343-2T, now provides that the written request "must be given to the IRS official, office and address specified in IRS Publication 4528, 'Making an Administrative Wrongful Levy Claim Under Internal Revenue Code (IRC) Section 6343(b)' ... ." 26 C.F.R. § 301.6343-2T(b). The amended regulation goes on to state that "a request for the return of property wrongfully levied upon is not effective if it is given to an office other than the office listed in the relevant publication." Id. Because the amended regulation was not promulgated until after the events giving rise to this suit occurred, the Court will continue to apply the prior version, which required the claimant to address the request to the district director.

2 Next Generation does not argue that the IRS' regulations are not part of the conditions Congress attached to its waiver of sovereign immunity. The Amwest Court considered the issue and concluded that "the requirement that requests for the return of property be mailed specifically to the district director [is binding on the courts], and therefore constitutes an additional condition to the government's consent to be sued under § 7426(a)(1)." 28 F.3d at 696.

3 The Government does not defend, nor could it, by arguing that Next Generation's submission of its Form 911 was insufficient to apprise the IRS that Next Generation was challenging the imposition of the levy. The Form 911 specifically sought return of the levied funds and stated that "[t]his levy is for taxes owed by Allied Communications."

Next Generation Wireless, Ltd., Plaintiff v. The United States of America, Defendant.

U.S. District Court, So. Dist. Ohio, East. Div.; 06-CV-838, June 14, 2007.

[ Code Secs. 6532 and 7426]

Limitations period: Suits by nontaxpayers: Wrongful levy: Request to IRS: Tolling. --
A federal district court denied the government's motion to dismiss as untimely a corporation's wrongful levy complaint. Although the complaint was filed after the Code Sec. 6532 limitations period had expired, the complaint alleged that the claimant made a proper written request to the IRS for return of the levied funds. While the government conceded that under Code Sec. 6532(c)(2) the limitations period is extended from nine months to 12 months if a proper written request for return of the funds is made by a claimant, it contended that the company failed to prove that its request was proper and, therefore, the extended period did not apply. Despite the government's contention, the claimant was not required to prove the truth of its allegation that it had made a proper written request for return of the levied funds because all allegations in a complaint are taken as true for purposes of deciding a motion to dismiss.




OPINION AND ORDER



I. INTRODUCTION


MARBLEY, District Judge: This matter comes before the Court on Defendant United States of America's ("Defendant") Motion to Dismiss for want of jurisdiction pursuant to FED. R. CIV. P. 12. Specifically, Defendant avers that Plaintiff, Next Generation Wireless, Ltd. ("Plaintiff") failed to file this action within the applicable statute of limitations. For the reasons stated herein, Defendant's Motion to Dismiss is DENIED.


II. BACKGROUND


From February 2000 until November 2003, the Internal Revenue Service ("IRS") made assessments against Allied Communications, Inc. ("Allied") and Next Generation Wireless, Inc. ("NG II") for unpaid federal unemployment and employment taxes. Based on the alleged "alter ego" relationship between Allied, NGII, and Plaintiff, the IRS filed notices of federal tax liens in the amount of $639,496,67 against Plaintiff. On or about February 14, 2006, pursuant to a levy, Key Bank transferred a payment in the amount of $15,760.86 from Plaintiff's account to the IRS.

On October 4, 2006, Plaintiff filed this action, seeking to recover the $15,760.86 transferred from Key Bank to the IRS pursuant to the wrongful levy statute, 26 U.S.C. 7426(a)(1). 1 On November 30, 2006, Defendant moved to dismiss the complaint for lack of jurisdiction. On December 1, 2006, Plaintiff amended its complaint to include the allegation that it made a written request to the IRS on or about January 13, 2006 to return the levied funds. On the same day, Plaintiff filed its opposition to Defendant's Motion to Dismiss. Plaintiff replied and the Motion is now ripe for adjudication.


III. STANDARD OF REVIEW


Defendants contend that dismissal is warranted under FED. R. CIV. P. 12(b)(1), which enables a defendant to raise by motion the defense of "lack of jurisdiction over the subject matter." When a defendant argues that the plaintiff has not alleged sufficient facts in the complaint to establish subject matter jurisdiction, the court takes the allegations in the complaint as true. Nichols v. Muskingum College, 318 F.3d 674, 677 (6th Cir. 2003). The plaintiff bears the burden of proving jurisdiction. Rogers v. Stratton Indus., 798 F.2d 913, 915 (6th Cir. 1986). In considering such a motion, however, the court has wide discretion to consider evidence outside the pleadings to resolve disputed jurisdictional facts. Nichols, 318 F.3d at 677.


IV. LAW and ANALYSIS


Defendant contends that this Court lacks jurisdiction over Plaintiff's complaint because Plaintiff filed it after the expiration of the nine month statute of limitations. The United States government may be sued only where Congress has waived its sovereign immunity. United States v. Mitchell, 463 U.S. 206 (1983). The government may attach conditions to its waiver such as a statute of limitations; when they do so, the limitations provision constitutes a condition on the waiver of sovereign immunity. Block v. North Dakota, 461 U.S. 273, (1983). When such conditions are attached, they must be strictly construed. See, Whittle v. United States, 7 F.3d 1259, 1261 (6th Cir. 1993).

Congress has provided for a waiver of sovereign immunity in cases where a claimant seeks the return of property seized to satisfy the tax liability of another. 26 U.S.C. §7426(a)(1). In order for the Government to waive its sovereign immunity under Section 7426, a non-taxpayer plaintiff bringing a wrongful levy action under must commence the action within nine months of the levy. 26 U.S.C. §6532(c)(1) 2 . The statute of limitations begins to run on the date on which the notice of levy is served. State Bank of Fraser v. United States [ 88-2 USTC ¶9592], 861 F.2d 954, 966-67 (6 th Cir. 1988).

Defendant issued a notice of levy to Key Bank on December 15, 2005. Plaintiff commenced this action on October 4, 2006, outside the nine month statute of limitations.

Plaintiff retorts that the statute of limitations was tolled when it filed a request with the IRS for return of the levied funds on or about January 13, 2006. Section 6532(c)(2) extends the statute of limitations to twelve months from the filing of a request with the IRS or six months from the IRS's response, whichever is shorter. 3

In its reply, Defendant concedes that a properly filed request to the IRS tolls the statute of limitations and grants the Court jurisdiction in this case. Defendant, however, states that Plaintiff did not "prove the facts necessary to establish that the provisions of Section 6532(c) were strictly complied with." In its amended complaint, Plaintiff did not plead that the request: (1) was directed to the district director of the IRS; or (2) included Plaintiff's name and address; as required by the applicable Treasury Regulations. 4 Defendant claims that the burden of proof regarding whether the request was procedurally proper lies with Plaintiff. In doing so, Defendant relies on Labonte vs. United States [ 2001-1 USTC ¶50,104], 233 F.3d 1049, 1052 (7th Cir. 2000), in which the Seventh Circuit refused to toll the statute of limitations in a wrongful levy action pursuant to 26 U.S.C. §6532(c)(2) because the plaintiff's request was not sent to the district director of the IRS.

In this case, however, because Plaintiff did not attach the request to the IRS to the complaint, the Court cannot ascertain whether the request met the requirements of 26 C.F.R. §301.6343-2. Defendant asks this Court to dismiss the action because, without proof that Plaintiff's requests met the requirements of the IRS regulations, the statute of limitations is not tolled, the action was filed late, the Government has not waived sovereign immunity, and thus, the Court does not have subject matter jurisdiction. While the burden of proving subject matter jurisdiction lies with the Plaintiff, there is no precedent which indicates that the burden is on Plainitiff to establish the validity of its request at this stage in the proceeding. The Court must take the allegations in the complaint as true. Nichols v. Muskingum College, 318 F.3d 674, 677 (6th Cir. 2003). Plaintiff specifically pled that its request was in "conformity with 26 U.S.C. Section 6532(c)(2)." The Court can extrapolate from this assertion, that Plaintiff also contends that its request met the standards proscribed in 26 C.F.R. §301.6343-2. Defendant's theory that Plaintiff failed to proffer evidence sufficient to show that the request met the IRS regulations is best saved for summary judgment. Therefore, Defendant's Motion to Dismiss is DENIED .


V. CONCLUSION


For the reasons stated herein, Defendant's Motion to Dismiss is DENIED.

IT IS SO ORDERED.

1 26 U.S.C. §7426. Civil actions by persons other than taxpayers:

(a) Actions permitted: (1) Wrongful levy. --If a levy has been made on property or property has been sold pursuant to a levy, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States. Such action may be brought without regard to whether such property has been surrendered to or sold by the Secretary.

2 26 U.S.C. §6532(c)(1) states:

Suits by persons other than taxpayers. --

(1) General rule. --Except as provided by paragraph (2), no suit or proceeding under section 7426 shall be begun after the expiration of 9 months from the date of the levy or agreement giving rise to such action.

3 26 U.S.C. §6532(c)(2) states:

Period when claim is filed. --

If a request is made for the return of property described in section 6343(b), the 9-month period prescribed in paragraph (1) shall be extended for a period of 12 months from the date of filing of such request or for a period of 6 months from the date of mailing by registered or certified mail by the Secretary to the person making such request of a notice of disallowance of the part of the request to which the action relates, whichever is shorter.

4 In order to qualify for the exception under Section 6532(c)(2), the claimant must satisfy the specific requirements for a proper written request as set forth by 26 C.F.R. §301.6343-2. The request must be "addressed to the district director (marked for the attention of the Chief, Special Procedures Staff) for the Internal Revenue district in which the levy was made." 26 C.F.R. §301.6343-2(b). The request must also contain certain specific information, including (1) the name and address of the person submitting the request; (2) a detailed description of the property levied upon; (3) a description of the claimant's basis for claiming an interest in the property levied upon; (4) the name and address of the taxpayer, the originating Internal Revenue district and the date of the levy. See 26 C.F.R. §301.6343-2(b)(1)-(4). If the written request does not contain the proper information, it will still be considered an adequate written request "unless a notification is mailed by the director to the claimant within 30 days of receipt of the request to inform the claimant of the inadequacies...." 26 C.F.R. §301.6343-2(c).

Labonte vs. United States [ 2001-1 USTC ¶50,104], 233 F.3d 1049, 1052 (7th Cir. 2000).

[88-2 USTC ¶9592] The State Bank of Fraser, Plaintiff-Appellee, Cross-Appellant v. United States of America, Defendant-Appellant, Cross-Appellee
(CA-6), U.S. Court of Appeals, 6th Circuit, 87-1666, 87-1789, 11/18/88, 861 F2d 954, Affirming and reversing an unreported District Court decision

[Code Secs. 6323 , 6332 , 6532 , and 7426 --Results unchanged by the Tax Reform Act of 1986 ]

Levy: Liens: Suits by nontaxpayer: Statute of limitations.--A bank whose security interest gave it a right to apply a depositor's checking account proceeds against a debt owed to it by the depositor could not apply the proceeds after it was served with a notice of levy by the IRS to enforce a federal tax lien. The IRS's lien took priority. Given the strength of the law forbidding the bank's setoff of the proceeds, the setoff was unreasonable, warranting a penalty (half of the size of the proceeds) against the bank for failure to turn over the proceeds to the IRS. In addition, the bank's security interest in the depositor's contract rights amounted to an interest in the accounts receivable that arose under the contracts. Since an exception under the rules on tax liens permitted the security interest to take precedence over the federal tax lien against the accounts receivables, the bank could recover sums claimed by the IRS in a levy against the individuals or entities that owed the receivables to the depositor. The bank was time-barred from pressing a wrongful levy action to recover other sums levied by the IRS. Service of notice of levy started the running of the statute of limitations. BACK REFERENCES: 88FED ¶5362.0196, 88FED ¶5362.0199, 88FED ¶5371.13, 88FED ¶5498.25 and 88FED ¶5784K.195
G. Timothy Moore, Blomberg, Anderson & Moore, P.C., Seven N. Gratiot, Mount Clemens, Mich. 48043, for plaintiff-appellee, cross-appellant. William S. Rose, Jr., Assistant Attorney General, William S. Estabrook III, Gary R. Allen, Douglas Coulter, Department of Justice, Washington, D.C. 20530, for defendant-appellant, cross-appellee.
Before MARTIN and NELSON, Circuit Judges, and CONTIE, Senior Circuit Judge.
CONTIE, Senior Circuit Judge:
The United States (the Government) appeals and The State Bank of Fraser (the Bank) cross appeals from the judgment of the district court in this wrongful levy action brought under 26 U.S.C. §7426 1 in which the Government counterclaimed for the purpose of enforcing a levy pursuant to 26 U.S.C. §6332(c) . 2 For the following reasons, we affirm in part and reverse in part the judgment of the district court.
I.
On March 11, 1982, Cannon Electric Company 3 entered into a written security agreement with the Bank. Under the terms of the agreement, the Bank received a security interest in all of Cannon's existing and after acquired assets, including accounts and contract rights. 4 This agreement secured a promissory note executed by Cannon in favor of the Bank. At all relevant times, Cannon owed the Bank the principal sum of not less than $162,541.40.
On November 29, 1982, a delegate of the Secretary of the Treasury made an assessment against Cannon for social security and withheld income taxes due for the third quarter of 1982. Similar assessments were made for the fourth quarter of 1982 and the first two quarters of 1983. Despite notice and demand for payment, Cannon failed or refused to pay the assessed tax liabilities, which amounted to $150,853.11 exclusive of accrued interest and penalties.
On September 26, 1983, the Secretary filed a Notice of Federal Tax Lien with the Michigan Secretary of State with respect to the tax liabilities for the third and fourth quarter of 1982 and the first quarter of 1983. On November 1, 1983, a notice was filed with respect to the liabilities for the second quarter of 1983.
Commencing on September 12, 1983, the Secretary began serving notices of levy on various accounts receivable debtors of Cannon. Pursuant to these notices of levy, the Government received $88,447.24, which it applied to Cannon's outstanding assessments. The only documents served on the accounts receivable debtors were the notices of levy.
On November 4, 1983, the IRS delivered a notice of levy to the Bank on account of the outstanding tax liabilities of Cannon. At that time, Cannon maintained a checking account with the Bank which contained a balance of $21,225.14 and was in default on its loan with the Bank. After receiving the notice of levy, the Bank debited Cannon's account in the amount of $21,225 and offset the amount against the delinquent loan balance owed to the Bank. The Bank did not make any payment with respect to the November 4th notice of levy.
On October 2, 1984, the Bank made a formal written claim to the IRS for return of funds received by the IRS from Cannon's accounts receivable debtors. On October 23, 1984, the IRS denied the Bank's claim.
On April 19, 1985, the Bank filed a complaint seeking return of funds received by the Government pursuant to the notice of levy served on Cannon's accounts receivable debtors. The basis of its complaint was that its security interest in the accounts receivable took priority over the tax lien. On July 10, 1985, the Government answered and pled as one of its defenses that as to certain of the levies the statute of limitations had run. The Government also filed a counterclaim for enforcement of the November 4, 1983 levy. It sought $21,225.14, the amount in Cannon's checking account, and a fifty percent penalty for failure to honor the levy.
The Bank filed a motion for summary judgment and the Government filed a motion for partial summary judgment. A hearing was held, after which the district court made the following orders:
--The Bank was awarded a judgment of $22,957.22 plus interest. This amount represented the funds received by the Government pursuant to notices of levy served on or after January 2, 1984.
--The Government was awarded a judgment of $21,225.14 on its counterclaim for enforcement of the November 4, 1983 levy.
--The Government's claim for the fifty percent penalty was dismissed for the reason that the court found that the Bank had reasonable cause for failing to honor the levy.
--The Bank's claim for return of $34,370.49 which represented the funds received by the Government pursuant to notices of levy served prior to January 2, 1984 was dismissed.
--A trial was ordered to determine when three additional notices of levy were served, since there was a factual dispute over whether they were served prior to January 2, 1984.
The matter was tried on March 5, 1987, after which the court found that the three notices of levy in question were served prior to January 2, 1984 and, therefore, the Bank's action to recover funds received pursuant to these notices was time barred. Judgment for the Government was entered on May 12, 1987.
On July 9, 1987, the Government filed a notice of appeal. It appeals from the judgment for the Bank for return of the funds received by the Government pursuant to notices of levy served after January 2, 1984 and from the dismissal of the claim for the fifty percent penalty. On July 24, 1987, the Bank cross-appealed from the judgment in favor of the Government on its action to enforce the November 4, 1983 levy and from the dismissal of its claim to funds received by the Government pursuant to notices of levy served prior to January 2, 1984.
This case presents five issues. Three issues arise from the Government's action to enforce the November 4, 1983 levy. The Bank argues that since it exercised its right to setoff on Cannon's account after receiving the notice of levy it did not hold property or rights to property belonging to Cannon. The Bank also argues that the Government should have been estopped from asserting its counterclaim for enforcement of the levy. The Government argues that the Bank did not have reasonable cause for failing to honor the levy and, therefore, it should have been assessed the fifty percent penalty. The last two issues arise from the Bank's wrongful levy action. The Government argues that the Bank did not have a priority interest in Cannon's after-acquired accounts receivables. Finally, the Bank argues that its wrongful levy action was not time barred.
II.
In United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713 (1985), the Supreme Court summarized the statutory scheme whereby the Government collects taxes from recalcitrant taxpayers.
Section 6321 of the Code, 26 U.S.C. §6321 , provides: "if any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." Under the succeeding §6322 , the lien generally arises when an assessment is made, and it continues until the taxpayer's liability "is satisfied or becomes unenforceable by reason of lapse of time."
The statutory language "all property and rights to property," appearing in §6321 . . ., is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have. 'Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes.'
A federal tax lien, however, is not self-executing. Affirmative action by the IRS is required to enforce collection of the unpaid taxes. The Internal Revenue Code provides two principal tools for that purpose. The first is the lien-foreclosure suit. Section 7403(a) authorizes the institution of a civil action in federal district court to enforce a lien 'to subject any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax.' Section 7403(b) provides: 'All persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto.' The suit is a plenary action in which the court 'shall . . . adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property.' §7403(c) . The second tool is the collection of the unpaid tax by administrative levy. The levy is a provisional remedy and typically 'does not require any judicial intervention.' The governing statute is §6331(a) . It authorizes collection of the tax by levy which, by §6331(b) , 'includes the power of distraint and seizure by any means.'
In the situation where a taxpayer's property is held by another, a notice of levy upon the custodian is customarily served pursuant to §6332(a) . This notice gives the IRS the right to all property levied upon, and creates a custodial relationship between the person holding the property and the IRS so that the property comes into the constructive possession of the Government. If the custodian honors the levy, he is 'discharged from any obligation or liability to the delinquent taxpayer with respect to such property or rights to property arising from such surrender or payment.' §6332(d) . If, on the other hand, the custodian refuses to honor a levy, he incurs liability to the Government for his refusal. §6332(c)(1) .
The administrative levy has been aptly described as a 'provisional remedy.' In contrast to the lien-foreclosure suit, the levy does not determine whether the Government's rights to the seized property are superior to those of other claimants; it, however, does protect the Government against diversion or loss while such claims are being resolved. 'The underlying principle' justifying the administrative levy is 'the need of the government promptly to secure its revenues.' 'Indeed, one may readily acknowledge that the existence of the levy power is an essential part of our self-assessment tax system,' for it 'enhances voluntary compliance in the collection of taxes.' 'Among the advantages of administrative levy is that it is quick and relatively inexpensive.'
Id. at 719-20 (citations omitted).
The first three issues arise from the Bank's failure to honor the November 4, 1983 notice of levy.
A.
The extent of personal liability for failing to honor a levy is the value of the property or rights to property not surrendered. 26 U.S.C. §6332(c)(1) . "The courts uniformly have held that a bank served with an IRS notice of levy 'has only two defenses for a failure to comply with the demand.' One defense is that the bank, in the words of §6332(a) , is neither in 'possession of' nor 'obligated with respect to' property or rights to property belonging to the delinquent taxpayer. The other defense . . . is that the taxpayer's property is 'subject to a prior judicial attachment or execution.' " National Bank of Commerce, 472 U.S. at 722-23 (citations omitted). The Bank argues that the levy was unenforceable against it because it was not in possession of or obligated with respect to property or rights to property belonging to Cannon.
Factually, there was no dispute on this issue. The parties stipulated that on November 4, 1983 Cannon had a checking account with the Bank which had $21,225.14 in it. Cannon had the right to withdraw funds from that account. There is also no dispute that under its security agreement the Bank had the contractual right to set off these funds against Cannon's delinquent loan with the Bank. Finally, it is also undisputed that the Bank chose to set off against these funds after it was served with the notice of levy. 5
" '[I]n the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer has in the property. . . .' " Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 (1960) (quoting Morgan v. Commissioner [40-1 USTC ¶9210 ], 309 U.S. 78, 82 (1940)). The Bank correctly asserts that under Michigan law, funds on general deposit in a bank are the property of the bank. See Guilds v. Monroe County Bank, 41 Mich. App. 616, 619 (1972) (adopting rule stated in 10 Am. Jur. 2d, Banks §666 pp. 636-37). It argues that the Government can only acquire the rights that Cannon had at the time of the levy and that since Cannon's rights to the funds in the account were "severely restricted" by the security agreement entered into between the Bank and Cannon, the Government's rights were likewise restricted. In support of its argument, it relies on United States v. Intermountain Region Concrete Co. [86-1 USTC ¶9304 ], 636 F. Supp. 280 (D. Utah 1986), appeal filed sub nom. United States v. Cache Valley Bank, No. 86-2432 (10th Cir. Oct. 1, 1986), and Trust Company v. United States [84-2 USTC ¶9614 ], 735 F.2d 447 (11th Cir. 1984).
In Intermountain, a lien foreclosure action, the district court summarized the relevant facts as follows:
At or about 9:20 a.m. on July 27, 1981, the bank received notice of an IRS levy purporting to attach all property of Intermountain then in the bank's possession. The bank's vice president, Michael Gomm, examined Intermountain's accounts and determined that its funds were negligible. Accordingly, Mr. Gomm returned the notice of levy to the IRS with the notation, '7/27/81, 9:30 a.m.; MG, NO FUNDS AVAILABLE.' Later that same day, deposits totalling $28,416.06 were made to Intermountain's checking account. Those deposits included a check for $27,000 from Interwest Construction Company in payment for services rendered by Intermountain. Understandably alarmed by the notice of levy, the bank on July 28, 1981, offset the entire amount in Intermountain's checking account--$29,614.41--against loans 269 U and 270 U. The IRS now seeks to recover that amount from the bank.
636 F. Supp. at 282 (footnotes omitted). The court in granting summary judgment for the bank, looked to Utah law to determine whether the bank would have had to honor a demand by the taxpayer for the funds in its account when the account holder was indebted to the bank. The court found that the depositor in that circumstance does not have an unrestricted right to withdraw the funds and the depositor's right to withdraw was subject to the bank's right of offset. Citing to the rule that the government " 'stands in the taxpayer's shoes' when it seeks to enforce a tax assessment against a third party allegedly holding a taxpayer's 'property' ", the court held that the government could not enforce its foreclosure lien. Id. at 285 (quoting United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 691 (1983)).
The applicability of the court's holding in Intermountain to this case is severely limited by the fact that it was a lien foreclosure and not a levy enforcement action and the fact that the setoff did not occur after the notice of levy was served. If this case had been a levy enforcement case, and if the bank had attempted to setoff against the accounts of the taxpayer after the notice of levy was served, the court indicated that it would have reached a different result and enforced the levy. See Intermountain, 636 F. Supp. at 282. ("The government concedes that a levy is effective only against 'amounts in the taxpayer's account which have not previously been removed by actual exercise of the bank's right to setoff.' ")
Trust Company [84-2 USTC ¶9614 ], 735 F.2d 447, the other case relied on by the Bank, is equally unavailing since it also was not a levy enforcement action, but rather involved a wrongful levy action brought by the bank after it complied with a notice of levy served by the Government.
Therefore, the Bank's cases do not provide much guidance in resolving the issue of whether a bank which has a right to offset against a depositor's account can exercise that right against the Government after it has been served with a notice of levy.
The Government argues that since Cannon had the right to withdraw funds at the time of the levy, the Bank held property or rights to property of the taxpayer which the Government could levy upon. It asserts that the Bank cannot defeat the levy by a post-levy exercising of its right to setoff. Decisions from several other jurisdictions support the Government's position. See United States v. Central Bank, [88-1 USTC ¶9256 ], 843 F.2d 1300, 1309-10 (10th Cir. 1988); J.A. Wynne Co. v. R.D. Phillips Construction Co. [81-1 USTC ¶9305 ], 641 F.2d 205, 209 (5th Cir. 1981) (per curiam); United States v. Citizens and Southern Nat'l Bank [76-2 USTC ¶9665 ], 538 F.2d 1101, 1107 (5th Cir. 1976), cert. denied, 430 U.S. 945 (1977); United States v. Sterling Nat'l Bank & Trust Co. [74-1 USTC ¶9336 ], 494 F.2d 919, 922-23 (2d Cir. 1974); Bank of America Nat'l Trust and Savings Assoc. v. United States [65-1 USTC ¶9429 ], 345 F.2d 624, 625 (9th Cir.) (per curiam), cert. denied, 382 U.S. 927 (1965); Bank of Nevada v. United States [58-1 USTC ¶9228 ], 251 F.2d 820, 826-27 (9th Cir.), cert. denied, 356 U.S. 938 (1958); United States v. Bell Credit Union [86-1 USTC ¶9337 ], 635 F.Supp 501, 503 (D. Kansas 1986).
The Bank tries to distinguish these cases by arguing that they are inapplicable because they do not deal with Michigan law. It relies on the Aquilino principle that courts look to state law to determine the existence of property or rights of property. This argument is unpersuasive, however, since the key factor relied upon by the cases cited by the Government was the fact that the right of setoff in those cases was not automatic and that it had to be exercised by the bank. See e.g., Citizens and Southern, 538 F.2d at 1107 ("Georgia cases involving the right of banks to set off debts against depositor's accounts uniformly indicate the requirement of some positive act.") It is also true under Michigan law that the right of setoff is not automatic, but must be exercised. See Monroe County Bank, 41 Mich. App. at 620 ("until the bank elects to exercise its right of setoff anyone in favor of whom checks are drawn and paid takes the funds free of any claim by the bank.")
This position is also supported by section 4 -303 of the Uniform Commercial Code which Michigan adopted in section 440.4303 of the Michigan Compiled Laws. Section 4303 deals inter alia with the effectiveness of setoffs exercised by the payor bank. The official comments to section 4 -303 state that the effective time for determining whether a stop-order is too late is when a setoff is actually made. See U.C.C. §4 -303 (Official Comments ¶5). See also Baker v. Euclid City Bank, 511 F.2d 1016, 1018 (6th Cir. 1975). Thus, it is clear that a right to setoff has to be exercised or actually made to be effective.
We are persuaded by the Government's position and the cases upon which it relies. The Bank has cited to no case which has allowed a bank to use a setoff to avoid the enforcement of a levy. In this case, it is stipulated that Cannon was permitted to draw checks and otherwise withdraw funds from its account when the Bank received the notice of levy. Michigan law, while it does hold that funds on general deposit are the property of the bank, also holds that the bank's right of setoff is not automatic but must be exercised by the bank. It is further stipulated that the bank did not exercise its right of setoff until after it was served with the notice of levy. Since a depositor's access to funds in its account is not restricted until the bank exercises its right of setoff and since the Bank in this case did not exercise its right of setoff until after the levy was served, we conclude that at the time of the levy, the Bank held property or rights to property of Cannon which were subject to the levy. Therefore, since the priority of the Bank's lien or its right of setoff is not a proper defense to a levy enforcement action, we affirm the district court's ruling on this issue.
B.
The Bank argues that the Government is estopped from asserting its enforcement of levy counterclaim because it did not move to enforce the levy when it was notified by the Bank that it was going to setoff the funds levied upon, and that the Bank acted to its detriment by setting off those funds and crediting them to Cannon's loan account. 6 The basis of its detrimental reliance argument seems to be that because the Government did not seek prompt enforcement of the levy the Bank was forced to defend the counterclaim and that it would lose the funds it credited to the Cannon loan account even though it had a priority interest in them. 7
"Ordinarily the United States is not estopped by acts of individual officers and agents. At the very minimum some affirmative misconduct by a government agent is required as a basis of estoppel." United States v. River Coal Co., 748 F.2d 1103, 1108 (6th Cir. 1984) (citations omitted).
The Bank argues that because a local Internal Revenue Service collection policy was contrary to controlling law, it represented affirmative misconduct. The policy that the Bank refers to is an unwritten policy carried out by some revenue agents who when informed that the Bank was exercising a setoff based on a claimed priority interest would satisfy themselves that the priority was genuine and proceed no further. We are not persuaded by the Bank's argument. The fact that in certain circumstances the IRS may not have pursued levies when a bank notified it of a prior lien and setoff, does not establish affirmative misconduct in this case. The allegation that the Government committed an affirmative act is tenuous, since although the Government may have had this local policy there is no evidence that it followed the policy in this case. This is demonstrated by the fact that the Government decided to enforce the levy.
We also believe that the Bank's reliance was unreasonable. The law concerning levy enforcement actions is settled, notwithstanding the unofficial local IRS policy. The effect of serving the notice of levy was to convert Cannon's bank account to the Government. There is no time limit on the Government's right to enforce the levy and the claim of a priority interest is not a proper defense to a levy enforcement action. Rather, such a defense should be raised in a wrongful levy action. Given the foregoing, we believe the Bank when served with the notice of levy should have filed a wrongful levy action to protect its interests rather than rely on a local unwritten policy.
C.
The final issue involving the levy enforcement action concerns the district court's decision not to impose the fifty percent penalty on the Bank.
Section 6332(c) provides for a fifty percent penalty if a person required to surrender property or rights to property fails or refuses to do so without reasonable cause. In this case, although the district court found that the Bank was liable for the funds levied upon, it did not impose the penalty since it found that the Bank had reasonable cause for failing to honor the levy.
The Government argues that the Bank's position concerning this levy, i.e., that because it had the right of setoff it did not possess property of the taxpayer, would have been shown to be wrong by a "reasonable investigation" into the controlling law. The Government asserts that there was no "bona fide dispute" 8 as to the levied funds and therefore the penalty should have been applied.
The Bank argues that the district court correctly decided that it had reasonable cause for failing to honor the levy. It relies in part 9 on United States v. Citizens and Southern National Bank [76-2 USTC ¶9665 ], 538 F.2d 1101 (5th Cir. 1976) and United States v. Sterling National Bank & Trust Co. [74-1 USTC ¶9336 ], 494 F.2d 923 (2d Cir. 1974), where courts confronted with a similar issue chose not to impose the fifty percent penalty. In Sterling National Bank, the court in refusing to impose the fifty percent penalty, raised the following question: "The question here is whether we should penalize the Sterling Bank for forcing the government to litigate an unsettled question of law." Sterling National Bank, 494 F.2d at 919. The Bank asserts that in this case the effect of the setoff right on the question of whether the Bank held property which could be levied upon was an unsettled question of Michigan law.
We do not agree with the Bank's position. Although there is no authority interpreting Michigan law on this issue, the Bank has not articulated any aspect of Michigan law which would distinguish this case from the great weight of authority from other jurisdictions. Also, the fact that the Bank has not cited to any case where a bank's unexecuted right of setoff was allowed to defeat a levy enforcement action provides further evidence that the Bank was not litigating an unsettled question of law. As Judge Friendly noted in dissent in Sterling National Bank, " 'reasonable cause' should not be read to include a clearly erroneous view of the law, stubbornly adhered to after investigation should have disclosed the error." Sterling National Bank, 494 F.2d at 924.
Accordingly, we hold that given the state of the law the Bank did not have reasonable cause for failing to honor the levy. Therefore, the district court erred in failing to impose the section 6332(c) penalty.
III.
The final two issues concern the Bank's wrongful levy action which was brought to recover funds collected by the Government pursuant to notices of levy served on Cannon's accounts receivable debtors.
A.
Under section 6321 of the Internal Revenue Code, the failure of a taxpayer to pay taxes after demand gives rise to a tax lien in favor of the Government which attaches to all property and rights to property, whether real or personal belonging to such a person. Pursuant to section 6322 , the tax lien arises automatically at the time of assessment, continues until the tax liability is satisfied or collection is barred by the statute of limitations, and attaches to after acquired property. Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267 (1945). The priority of federal liens vis-a-vis other liens is governed by the principles that first in time is first in right and that tax liens are superior to inchoate liens. United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 85-86 (1954). "The Federal Tax Lien Act of 1966, 80 Stat. 1125, as amended, 26 U.S.C. §6323 , . . . modified the Federal Government's preferred position under the choateness and first-in-time doctrines and recognized the priority of many state claims over federal tax liens." United States v. Kimbell Foods, Inc. 440 U.S. 715, 738 (1979) (footnote omitted).
This issue involves the provisions of section 6323(c) which reads in pertinent part as follows:
Protection for certain commercial transactions financing agreements, etc.
(1) In general.--To the extent provided in this subsection, even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing but which--
(A) is in qualified property covered by the terms of a written agreement entered into before tax lien filing and constituting--
(i) a commercial transactions financing agreement, and . . .
(B) is protected under local law against a judgment lien arising, as of the time of the tax lien filing, out of an unsecured obligation.
(2) Commercial transactions financing agreement--For purposes of this subsection--
(A) Definition.--the term "commercial transactions financing agreement" means an agreement (entered into by a person in the course of his trade or business)--
(i) to make loans to the taxpayer to be secured by commercial financing security acquired by the taxpayer in the ordinary course of his trade or business, or
(ii) to purchase commercial financing security (other than inventory) acquired by the taxpayer in the ordinary course of his trade or business;
but such an agreement shall be treated as coming within the term only to the extent that such loan or purchase is made before the 46th day after the date of tax lien filing or (if earlier) before the lender or purchaser had actual notice or knowledge of such tax lien filing.
(B) Limitation on qualified property.--The term "qualified property", when used with respect to a commercial transactions financing agreement, includes only commercial financing security acquired by the taxpayer before the 46th day after the date of tax lien filing.
(C) Commercial financing security defined.--The term "commercial financing security" means (i) paper of a kind ordinarily arising in commercial transactions, (ii) accounts receivable . . . .
The commercial security agreement entered into between the Bank and Cannon gave the Bank a security interest in all assets of Cannon, including accounts. The agreement defined accounts as follows: " 'Accounts' shall consist of accounts, documents, chattel paper, instruments, contract rights, general intangibles, and choses in action. . . ."
At issue on appeal are funds remitted to the Government which were earned after November 11, 1983 10 from contracts entered into before November 11, 1983.
The district court ruled that the Bank could recover from the Government certain funds which the Government had received from the accounts receivable debtors of Cannon:
As to priority, the Court notes that Regulation 6323(c)(1)(c)(2) distinguishes between a contract right and an account receivable, and the Court finds that the account receivable term is the point at which the bank has an entitlement to--well, first of all, the electric company had the entitlement to the funds which are here in issue. The accounts receivable are the right to payment for goods sold or for services rendered under the regulation. So once performance was rendered by Cannon for the contracts which it had, they became federally defined accounts receivable and constituted proceeds of the contract rights of Cannon Electric.
Cannon acquired rights to property or property in those contracts, then on or before 11-11-83, and the bank had priority over the United States, and to those entered after September 26th, '83, and on or before November 11th, '83.
Although these accounts receivables were earned after November 11, 1983, the contracts which gave rise to the accounts receivable were entered into before November 11, 1983. The Bank had a security interest in the proceeds of contract rights of Cannon. The Bank successfully relied on 26 C.F.R. §301.6323(c)-1(d) below to obtain the proceeds of the contracts received after November 11, 1983. 11
Section 301.6323(c)-1(d) provides that a tax lien is not valid with respect to a security interest which comes into existence after the tax lien filing, is in qualified property covered by the terms of a commercial transactions financing agreement entered into before the tax lien filing, and is protected under local law against a judgment arising, as of the time of the tax lien filing, out of an unsecured obligation. The section provides the following definitions of key terms:
Contract rights: any right to payment under a contract not yet earned by performance and not evidenced by an instrument or chattel paper.
Accounts receivable: any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper.
Qualified property consists solely of commercial financing security acquired by the taxpayer-debtor before the 46th day after the date of tax lien filing.
Section 6323(c) -1 provides that an account receivable is acquired by the taxpayer at the time, and to the extent, a right to payment is earned by performance. A contract right is acquired at the time the contract is made. Identifiable proceeds which arise from the collection or disposition of qualified property by the taxpayer are considered to be acquired at the time such qualified property is acquired. 26 C.F.R. §301.6323(c)-1(d) .
The Bank argued that although the contract rights turned into accounts receivable upon performance of the contract, the succeeding accounts receivable were proceeds of the contract rights and therefore were acquired before November 11, 1983.
The government argues that this ruling is contrary to the statute. It argues that accounts receivable are not acquired for the purposes of section 6323 until the services giving rise to them are performed. It contests the district court's holding that the funds received in this case were proceeds of contract rights and therefore acquired at the time the contract rights were acquired. It argues that since the accounts receivable in this case were not received until after the 45 day time period the Bank did not have a superior interest in them.
The resolution of this issue centers on a determination of whether the accounts receivables were identifiable proceeds of the contract rights in which the Bank had a protected interest.
One of the purposes of the Federal Tax Lien Act was to "conform the lien provisions of the internal revenue laws to the concepts developed in [the] Uniform Commercial Code." S. Rep. No. 1708, 89th Cong. 2d Sess. 1, reprinted in 1966 U.S. Code Cong. & Admin. News 3722. Many of the definitions set forth in section 6323 were taken from the provisions of Article 9 of the U.C.C. At the time of the Federal Tax Lien Acts enactment, the U.C.C. included the following in its definition of the term proceeds. "The term also includes the account arising when the right to payment is earned under a contract right." U.C.C. §9-306 (Text prior to 1972 amendment). 12
Section 301.6323(c)-1(d) states that "identifiable proceeds which arise from the collection or disposition of qualified property by the taxpayer, are considered to be acquired at the time such qualified property is acquired. . . ." To accept the Government's argument that the Bank had a priority interest in the contract right, but had no interest in the right when the contract was executed, would render the term collection in section 301.6323(c)-1(d) a nullity as far as contract rights were concerned since the secured creditor cannot collect on the contract rights until the contract is executed. Considering the language of section 301.6323(c)-1(d) and the language of the pre-1972 version of section 9-306 of the U.C.C., we believe the district court correctly determined that the accounts receivable were proceeds of contract rights in which the Bank had a protected security interest under section 6323 . 13
B.
The last issue which confronts us is whether the district court erred in ruling that the Bank's wrongful levy action to recover payments made to the IRS pursuant to notices of levy served on Cannon's accounts receivable debtors prior to January 2, 1984 was time barred.
The statute of limitations applicable to the Bank's section 7426 wrongful levy suit is found in 26 U.S.C. §6532(c) . See 26 U.S.C. §7426(h) .
(c) Suits by persons other than taxpayers.--
(1) General rule.--Except as provided by paragraph (2), no suit or proceeding under section 7426 shall be begun after the expiration of 9 months from the date of the levy or agreement giving rise to such action.
(2) Period when claim is filed.--If a request is made for the return of property described in section 6343(b) , the 9-month period prescribed in paragraph (1) shall be extended for a period of 12 months from the date of filing of such request or for a period of 6 months from the date of mailing by registered or certified mail by the Secretary or his delegate to the person making such request of a notice of disallowance of the part of the request to which the action relates, whichever, is shorter.
In this case, the Bank filed a formal written claim to the IRS for return of the funds collected from Cannon's accounts receivable debtors on October 2, 1984. The district court ruled that the Bank was foreclosed from recovering payments remitted to the IRS in response to notices of levy served prior to January 2, 1984. 14
The Bank correctly argues that the date that the statute of limitations begins to run is the date of levy. The term date of levy is not defined in section 6532 or any other part of the code. The Bank argues that "date of levy" is defined by section 6502(b) . Section 6502 reads in pertinent part as follows:
§6502 . Collection after assessment
(a) Length of period.--Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun--
(1) within 6 years after the assessment of the tax, . . . .
(b) Date when levy is considered made.--The date on which a levy on property or rights to property is made shall be the date on which the notice of seizure provided in section 6335(a) is given. 15
The only authority for the Bank's position is found in an example which follows Treasury Regulation 301.6532-3(c) . 16
Example (1). On June 1, 1970, a tax is assessed against A with respect to his delinquent tax liability. On July 19, 1970, a levy is wrongfully made upon certain tangible personal property of B's which is in A's possession at that time. On July 20, 1970, notice of seizure is given to A. Thus, under section 6502(b) , July 20, 1970, is the date on which the levy is considered to be made. Unless a request for the return of property is sooner made to extend the 9-month period, no suit or proceeding under section 7426 may be begun by B after April 20, 1971, which is 9 months from the date of levy.
26 C.F.R. §301.6532-3(c) (emphasis added).
While this example does reference section 6502(b) in relation to a proceeding under 7426, it provides limited support since the instant case does not involve a wrongful levy on tangible personal property.
The Government counters the Bank's argument by first noting that a levy upon intangible property which cannot be physically seized is effected by service of the appropriate forms upon the party holding the property. The Supreme Court reviewed this procedure in G.M. Leasing Corp. v. United States [77-1 USTC ¶9140 ], 429 U.S. 338, 350 (1977):
Both real estate and personal property, tangible and intangible, are subject to levy. Levy upon tangible property normally is effected by service of forms of levy or notice of levy and physical seizure of the property. Where that is not feasible the property is posted or tagged. Because intangible property is not susceptible of physical seizure, posting, or tagging, levy upon it is effected by serving the appropriate form upon the party holding the property or rights to property. See Treas. Reg. §301.6331-1(a)(1) , 26 CFR §301.6331-1(a)(1) (1976).
Section 301.6331-1(a)(1) differs from section 6502 in its answer to the question when is a levy made.
Levy may be made by serving a notice of levy on any person in possession of, or obligated with respect to, property or rights to property subject to levy, including receivables, bank accounts, evidences of debt, securities, and salaries, wages, commissions, or other compensation.
26 C.F.R. §301.6331-1(a)(1) (emphasis added).
The Government goes on to argue that the service of the notice of levy in this case was sufficient to begin the running of the statute of limitations.
We agree with the Government's position and hold that the service of the notices of levy on Cannon's accounts receivable debtors commenced the running of the statute of limitations set forth in section 6532(c) . We note that several courts have acknowledged this interpretation of the statute. See American Honda Motor Co. v. United States [73-2 USTC ¶9670 ], 363 F.Supp. 988, 993 (S.D. N.Y. 1973); DeGregory v. United States [75-1 USTC ¶9498 ], 395 F.Supp. 171, 173 (E.D. Mich. 1975); Newport Nat'l Bank v. United States [83-1 USTC ¶9191 ], 556 F.Supp. 94, 97 (D. R.I. 1983); Carlos v. New York State Dept. of Taxation [82-1 USTC ¶9142 ], 531 F.Supp. 359, 362 (N.D. N.Y. 1981); Universal Specialties Inc. v. United States [77-2 USTC ¶9621 ], 443 F.Supp. 87, 88 (D. D.C. 1977); Stuyvesant Ins. Co. v. Department of Treasury [75-1 USTC ¶9287 ], 378 F.Supp. 7, 10 (S.D. N.Y. 1974). See also Mertens, Law of Federal Taxation §54A. 72 (1987) ("The nine month period acts as a statute of limitations and commences on the date on which the notice of levy is served.").
Accordingly, we conclude that the district court correctly determined that the Bank's action to recover funds received by the Government from notices of levy served prior to January 2, 1984 were time barred.
IV.
For the foregoing reasons, the district court's judgment concerning the fifty percent penalty is REVERSED. All other aspects of the judgment are AFFIRMED and the case is REMANDED for imposition of the fifty percent penalty.
1 Section 7426 reads in pertinent part as follows:
Civil actions by persons other than taxpayers
(a) Actions permitted.--
(1) Wrongful levy.--If a levy has been made on property or property has been sold pursuant to a levy, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States.
2 Section 6332(c) reads in pertinent part as follows:
Surrender of property subject to levy
(c) Enforcement of levy.--
(1) Extent of personal liability.--Any person who fails or refuses to surrender any property or rights to property, subject to levy, upon demand by the Secretary, shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered. . . .
(2) Penalty for violation.--In addition to the personal liability imposed by paragraph (1), if any person required to surrender property or rights to property fails or refuses to surrender such property or rights to property without reasonable cause, such person shall be liable for a penalty equal to 50 percent of the amount recoverable under paragraph (1). . . .
3 Cannon Electric Company is the taxpayer in this case. It was not a party below.
4 The Bank filed a financing statement with respect to this agreement with the Michigan Secretary of State on March 13, 1982.
5 Had the Bank set off against Cannon's account before being served with the levy, its position would have been much stronger. See e.g., Pittsburgh National Bank v. United States [81-2 USTC ¶9626 ], 657 F.2d 36 (3d Cir. 1981).
6 There is no time limit on the Government's right to pursue claims against those who fail to honor levies.
Since the notice of levy served on appellant reduced the debt owed to Andrews to the constructive possession of the United States, it would make no sense to impose a time limit upon bringing an action to enforce the notice of levy, which appellant wrongfully failed to honor, to reduce the property right to the actual possession of the United States.
The appropriate remedy for one in appellant's position, upon whom a notice of levy has been served which he believes to be wrongful, is to surrender the property and bring an action against the government pursuant to Internal Revenue Code §7426 .
United States v. Weintraub [80-1 USTC ¶9172 ], 613 F.2d 612, 621-22 (6th Cir. 1979), cert. denied, 447 U.S. 905 (1980) (footnote omitted).
7 The issue of whether the Bank actually had a priority interest in these funds was not developed by the parties.
8 A Senate Report accompanying the Tax Lien Act stated that "it is intended that a bona fide dispute over the amount owing to the taxpayer (by the property holder) or over the legal effectiveness of the levy itself is to constitute reasonable cause under [section 6332(c) ]." S. Rep. No. 1708, 89th Cong., 2d Sess., reprinted in 1966 U.S. Code Cong. & Admin. News 3722, 3740.
9 The Bank also argues that it had reasonable cause for failing to honor the levy due to the actions of the local IRS office. Since we have already concluded that the Bank's reliance on the unwritten local policy was not reasonable, we are not persuaded by this argument.
10 This date is the outside limit of the 45 day cutoff provided in section 6323 since the tax lien was filed on September 26, 1983.
11 The Bank relied on the following portion of section 301.6323(c)-1(d) which reads as follows:
Identifiable proceeds, which arise from the collection or disposition of qualified property by the taxpayer, are considered to be acquired at the time such qualified property is acquired if the secured party has a continuously perfected security interest in the proceeds under local law. The term "proceeds" includes whatever is received when collateral is sold, exchanged, or collected.
12 Although the U.C.C. was amended in 1972 to eliminate the separate terms accounts and contract rights and merge the two concepts into one under the term account, neither the Internal Revenue Code nor the Regulations were amended to incorporate the U.C.C. changes. One of the official reasons for the U.C.C. change was that the term contract rights had "been troublesome in creating a 'proceeds' problem where a contract right becomes an 'account' by performance . . .". U.C.C. §9-106 (Official Reasons for 1972 Change).
13 The Government's argument that this interpretation would make the accounts financing provisions of section 6323(c) irrelevant is not persuasive since not all contract rights are contained in a written document and not all accounts receivable are proceeds of a contract.
14 The district court arrived at this date by subtracting nine months from the date the Bank filed its claim with the Government.
15 Section 6335(a) reads as follows:
(a) Notice of seizure.--As soon as practicable after seizure of property, notice in writing shall be given by the Secretary to the owner of the property (or, in the case of personal property, the possessor thereof), or shall be left at his usual place of abode or business if he has such within the internal revenue district where the seizure is made. If the owner cannot be readily located, or has no dwelling or place of business within such district, the notice may be mailed to his last known address. Such notice shall specify the sum demanded and shall contain, in the case of personal property, an account of the property seized and, in the case of real property, a description with reasonable certainty of the property seized.
The Bank argues that the notices of levy served in this case do not comply with section 6335(a) since they were not given after service and they do not contain the mandatory accounting of property seized.
16 The Bank does not cite to any case nor did this court's research uncover any case which applies section 6502(b) 's definition of date when levy is made to an action governed by section 6532 .
Concurring and Dissenting Opinion
NELSON, Circuit Judge
I concur in the disposition of all but one of the issues raised on appeal. That one is the issue of whether it was error for the district court to refrain from imposing a 50% penalty on the Bank. I cannot say that the district court was wrong in concluding that the Bank had "reasonable cause" for acting as it did when served with the Government's demand for the proceeds of Cannon's bank account, and I would therefore affirm the judgment of the district court across the board.
Before the Government had any tax lien on Cannon's property, the Bank had a security interest in the property. It is undisputed that the Bank's security interest extended to Cannon's checking account, which had a balance of $21,225.14 when the notice of levy was served in November of 1983. The Bank believed--honestly, if erroneously--that if it were to pay the $21,225.14 over to the Government, as demanded in the notice of levy, it could get the money back through a wrongful levy action brought under 26 U.S.C. §7426 . Such an action would have to be brought within the nine month period prescribed by 26 U.S.C. §6532(c) ; the statute of limitations would run in August of 1984.
Doing exactly what it had always done in the past in such situations, the Bank paid the proceeds of the customer's account directly to itself and told the Government, in writing, what it had done. There was no dissembling, no misrepresentation, and no fraudulent concealment. The Government knew perfectly well that from the Bank's vantage point, the Bank had merely put itself in the position it would have been in had it incurred the trouble and expense of paying the money over to the Government and then recovering it back under §7426 . The Government had not objected to the Bank's use of the alternative "self-help" procedure in the past.
On November 17, 1983, the Government hand-delivered a "final demand" (IRS Form 680-C) to a "vault clerk" of the Bank. (What the vault clerk may have done with the final demand form is uncertain; the officers of the Bank apparently knew nothing about it until the filing of the Government's counterclaim in July of 1985.) The Form 680-C did not assert that the Government's tax lien was superior to the Bank's security interest, nor did it deny that the Bank would ultimately be able to recover the $21,225.14 in a wrongful levy action. In bold print, indeed, the form said "Please see the provisions of section 6332 of the Internal Revenue Code on the back of this form"--and the Supreme Court has made it clear that §6332 of the Internal Revenue Code gives the Government nothing more than a "provisional remedy" which "does not determine whether the Government's rights to the seized property are superior to those of other claimants. . . ." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 721 (1985).
Almost a year and a half went by without any further action on the Government's part. Only after the Bank had sued the Government in April of 1985 did the Government bestir itself to countersue for the disputed $21,225.14. By that time, of course, the Government could take comfort in the knowledge that a wrongful levy claim by the Bank with respect to the $21,225.14 would be barred by the statute of limitations. The fact that the Government ultimately prevailed on its counterclaim does not mean that the Bank had acted unreasonably. The district court was not persuaded that the Government had shown the Bank to have acted without reasonable cause, and I am not persuaded that the Government has shown the district court to have erred in this regard. Insofar as this court's judgment is to the contrary, I respectfully dissent.
of Limitation on Suits: Suits by Nontaxpayers: Levy

Under Code Sec. 6532(c)(1), an action for wrongful levy by a person other than the taxpayer must be commenced within nine months from the time the notice of levy is served, unless within that period the third-party claimant files with the IRS a request for return of the property seized. Such a request is an absolute prerequisite for the applicability of Code Sec. 6532(c)(2), which extends the period within which such an action may be commenced to twelve months from the filing of the request or six months from the disallowance of the request, whichever is shorter. Because the request was not timely filed in this case, the District Court lacked jurisdiction to hear the claim. The district director's erroneous advice of a right to sue did not estop the government from asserting the statute of limitations.

R. De Gregory, DC, 75-1 USTC ¶9498, 395 FSupp 171.

In an action for damages allegedly arising from the wrongful seizure of a nontaxpayer's property, his claims for lost rent and profit were dismissed. None of the possible forms of relief for wrongful levy permit recovery by the owner of lost rent or profits incurred during the period in which the government was wrongfully in possession. The court also noted that Code Sec. 6532 is a section setting forth the statute of limitations to be applied to nontaxpayer actions under Code Sec. 7426 and that this nontaxpayer's action was judicially time-barred insofar as claims under this Code section were asserted.

W.F. Young, DC, 75-2 USTC ¶9574.

Taxpayer's suit challenging a levy on his personal bank account for payment of taxes owed by his corporation was dismissed because he filed the refund suit more than nine months after receiving a notice disallowing his claim for refund. There is a nine-month statute of limitations on suits by a person other than the person against whom the tax out of which such levy arose is assessed.

J.S. Bascom, DC, 74-1 USTC ¶9218.

Similarly.

R.R. Dieckmann, CA-10, 77-1 USTC ¶9224, 550 F2d 622.

The taxpayer-pharmacy's suit, claiming that all or a major portion of approximately $103,000 seized in its former vice-president's home on February 28, 1970 actually belonged to the pharmacy, was dismissed on the IRS's motion for summary judgment. Such action was barred by the nine-month statute of limitations that began to run on March 16, 1970, the date of the levy. The taxpayer was also collaterally estopped from asserting that it was the true owner of the money by a previous decision.

Petworth Pharmacy, Inc., DC, 77-1 USTC ¶9150.

The government was awarded summary judgment in a suit brought by nontaxpayers requesting the return of property upon which they alleged the government had lawfully levied. The court concluded that the tax assessment was conclusively presumed. Further, the government had properly filed its notice of levy. Thus, since the suit was filed more than a year after the notice of levy was made, the suit was barred by the statute of limitations.

Stuyvesant Ins. Co., DC, 75-1 USTC ¶9287.

An action by the state of Vermont on a prior lien to recover from the United States the proceeds of a forced sale of chattels by the Internal Revenue Service was dismissed where the action was filed more than 12 months from the date of request for the return of the property. Since the expiration date was shorter in time than the six-month period from the denial letter, the earlier expiration date controlled. Consequently, the action was barred by the statute of limitations.

State of Vt., DC, 75-1 USTC ¶9175.

A complaint filed to obtain the release of funds levied on by the IRS was properly filed within the statutory period, since the filing of a request letter seeking IRS permission for the release of funds effectively extended such period.

W.J. Jones & Sons, Inc., DC, 74-2 USTC ¶9589.

Since the suit for wrongful levy here was commenced almost 34 months after the claim was filed, and two years after its rejection, it was barred by the applicable statute of limitations. The foreclosing company was not the nominee of the debtor against which the deficiency was originally assessed. Therefore, it could not be treated as a taxpayer, and the Court lacked jurisdiction for lack of timely filing.

Mill Factors Corp., DC, 75-1 USTC ¶9334, 391 FSupp 387.

A bank which held a perfected security interest in a portion of a bankrupt's accounts receivable and which filed a petition as an intervenor in a suit brought against the IRS by a trustee in bankruptcy to recover levies made by the IRS against the bankrupt's accounts receivable was barred from recovery by the statute of limitations since the suit was not begun within nine months of the levies.

J & H Electric Co., DC, 76-2 USTC ¶9640.

Taxpayer's disclaimer of his life interest in real property relieved him of any interest in that property that could be subject to a tax lien. Hence the remaindermen could enjoin the levy and sale of that property. The District Court had jurisdiction to hear the suit for wrongful levy, since the levy could irreparably injure plaintiffs' rights in the property. The suit here was not barred by the statute of limitations since it related back to a prior suit and preliminary injunction.

A.L. Stickell, Jr., DC, 78-1 USTC ¶9328.

A third party's motion to intervene in a levy action so as to assert a claim to $30,000 of the contents of a safe-deposit box was barred since her claim was not filed within nine months from the date of the levy. There was no tolling of the statute of limitations because of any lack of actual or constructive notice. Moreover, the intervenor's contention that the government's stipulation allowing intervention was a waiver of the statute was clearly invalid.

Bowery Saving Bank, DC, 76-2 USTC ¶9796.

An action by a third party claiming an interest in property under government levy was not barred by the statute of limitations. A written request from the third party had reached the IRS prior to the expiration of the nine-month period following the date of levy.

Dependable Insurance Co., DC, 78-2 USTC ¶9721. Aff'd, CA-4 (in an unpublished opinion 6/20/79).

An action for wrongful levy was barred by the statutory time limit. The fact that an IRS employee assured the party that he had more time to file did not prevent the IRS from raising the limitations issue.

R. Sanchez, DC, 79-1 USTC ¶9137.

An action for wrongful levy of property belonging to a nontaxpayer was barred by the statute of limitations even though the IRS failed to keep its promise to inform the nontaxpayer that it would receive notification prior to the sale of the property. The government was not estopped from raising the limitations issue because it had no duty to give notice of a levy or sale to a nontaxpayer.

Act Leasing Co., Inc., DC, 79-2 USTC ¶9558.

A suit by a subcontractor to recover funds of a general contractor that had been levied upon by the IRS to satisfy unpaid tax obligations was barred by the running of the statute of limitations because the suit was brought more than nine months after the subcontractor's request for payment had been denied by the IRS.

United Sand & Gravel Contractors, Inc., CA-5, 80-2 USTC ¶9626, 624 F2d 677.

An individual who sought to intervene in a suit to compel a bank to comply with a levy on the contents of his brother's safe deposit box was barred for lack of filing a timely motion. The motion alleging ownership of the funds in the box was filed past the expiration of the nine-month statute of limitations and the period was not extended by application of the taxpayer to extend the collection period or through lack of notice to the intervenor.

Atlantic Bank of America, DC, 80-1 USTC ¶9320.

The plaintiff's suit on an alleged security interest in accounts receivable levied on to satisfy a taxpayer's federal tax debts was barred because it was commenced 22 months after the alleged wrongful levy. Such a suit was required to be filed within 9 months of the levy, absent a 12-month extension triggered by a request that the property be returned by the Commissioner.

A.M. Cleveland, DC, 80-2 USTC ¶9523.

A counterclaim asserting an interest in cash, jewelry and furs on which the United States sought to reduce a lien to judgment was barred because it was not filed within nine months of the date the United States levied on the property.

R. Benveniste, DC, 81-1 USTC ¶9321.

A suit brought by a nontaxpayer-plaintiff, who was the spiritual leader of a church seeking recovery of an amount which he had deposited with a surety and which was subsequently levied on to collect a tax deficiency owed by the church was time-barred. Third-party levy contests are not governed by the 6-year statute of limitations under the Tucker Act. Legislative history of Code Sec. 6532(c) indicates that claims must be asserted within 9 months of levy.

K. Gordon, CtCls, 81-1 USTC ¶9409, 649 F2d 837.

An action by a nontaxpayer for the return of property was untimely because it had not been commenced within 12 months from the date of the plaintiff's formal request for the property's return.

R. Bustamante Carlos, DC, 82-1 USTC ¶9142, 531 FSupp 359.

The IRS's levy and seizure of funds in a wife's bank account to satisfy the employment tax liabilities of her former husband was wrongful and the IRS was ordered to refund the amounts seized. Although the ex-wife filed her action for return of the money more than one year after she had filed an administrative request for return of the seized funds, the IRS was estopped to raise the limitations period as a bar to her claim. The ex-wife had been lulled into inaction by an IRS agent's advice to file forms to recover the wrongfully seized funds and the agency's subsequent failure to act on the request.

B. Belton, DC, 82-2 USTC ¶9455.

The court denied the government's motion for reconsideration of the court's prior judgment in this case, above. The IRS was required to return to the taxpayer all funds wrongfully levied upon and seized without notice from her bank account, apparently to satisfy the tax owed by her ex-husband. The government's conduct estopped it from relying on the statute of limitations as a defense. The taxpayer had been lulled into inaction by an agent's advice and the subsequent inactivity of the agency. Also, the government was unable to locate the pertinent administrative records.

B. Belton, DC, 83-1 USTC ¶9181, 562 FSupp 30.

A corporation that paid a portion of another party's tax liability to prevent the IRS from levying on the business that they had purchased from that party was not a taxpayer within the meaning of Code Sec. 7422. Thus, its refund suit was barred by the six-month statute of limitations applicable to refund claims by nontaxpayers. Although the IRS expressly stated to the corporation that it had two years to file a civil refund action in the letter denying the refund claim, the government was not estopped from raising the six-month limitation period as a defense.

Spa World International, DC, 82-2 USTC ¶9632.

The plaintiffs were not entitled to recover monies allegedly wrongfully levied upon by the IRS to satisfy the tax liability of a third person because their action was not timely filed. The government was granted judgment on the pleadings where it was clear from the face of the complaint that the suit was not filed within the nine-month limitations period for filing such third-party actions. Furthermore, the complaint failed to allege facts sufficient to establish that the plaintiffs made a written request entitling them to an extension of the limitations period.

Maple Lane Farms, DC, 82-2 USTC ¶9661.

An action for wrongful levy brought by a nontaxpayer was dismissed because it was filed more than 21 months from the date of the levy on her savings account. The limitations period could not be waived on the ground that the nontaxpayer did not receive a notice of levy. It was sufficient that the savings and loan association received a notice of levy. The IRS is under no duty, constitutional or otherwise, to notify every person claiming an interest in property levied upon.

E. Douglas, DC, 83-1 USTC ¶9182, 562 FSupp 593.

The District Court granted the IRS's motion to dismiss a third-party bank's action to enjoin a levy by the IRS on a depositor-delinquent taxpayer's bank account where the bank's action was not instituted within the limitation period.

Newport National Bank, DC, 83-1 USTC ¶9191, 556 FSupp 94.

In an action for wrongful levy brought by secured creditors of a bankrupt taxpayer the government's motion for summary judgment was granted and the creditor's suit dismissed. The creditors did not file suit demanding return of the debtor-taxpayer's levied assets within the 9-month time limit. Although an involuntary petition in bankruptcy was filed against the taxpayer and an order granting such relief was issued, the automatic stay provisions of the Bankruptcy Act (which would have tolled the time limitation within which the creditors were required to file suit) did not apply. Because the assets were levied upon prior to the date on which the petition in bankruptcy was filed and the bankrupt-taxpayer had no legal or equitable interest in the assets after they were levied upon, the assets could not become part of the bankrupt's estate.

D.G. DiFlorio, DC, 83-2 USTC ¶9492, 30 BR 815.

The statute of limitations for wrongful levy barred an action by a Panamanian corporation that was seeking to recover funds initially seized from a bank account pursuant to a DEA seizure warrant and then levied upon by the IRS. The court held that it was unnecessary for the DEA to institute forfeiture proceedings prior to the disbursement of the funds because the IRS's levy reaches property in the hands of a government agency and, following the levy, the government's claim to the funds was based upon the levy and not the original seizure. Further, the court rejected the corporation's argument that its suit should not be barred because it did not have notice. There is no requirement that third parties be given notice of a levy and, in addition, the record in the instant case indicated that the corporation did have notice but failed to take the proper steps to preserve its rights.

Expoimpe, a Panamanian Corp., DC Fla., 85-1 USTC ¶9393, 609 FSupp 1098.

The district court held that a corporation's suit seeking enforcement of its order directing that assets which were being held in a court-ordered and court-supervised escrow account be transferred to the corporation was not barred by the statute of limitations. At the time the Notice of Levy was served on the escrowed assets, the assets were in the constructive custody of the district court, having already been placed in an escrow account under the jurisdiction of the court. Therefore, pursuant to Code Sec. 6332(a), because the escrowed assets were already in the constructive possession and actually under the jurisdiction of the court, such assets were immune from levy.

Securities and Exchange Commission, DC D.C., 85-2 USTC ¶9588.

An insurance company brought suit to recover retainage funds held by a corporation which were levied upon by the IRS. The insurance company, as surety, was required to complete a contract defaulted upon by the subcontractor and then claimed the retainage funds by right of subrogation. In the interim, the IRS levied upon and seized the funds to satisfy the delinquent taxes owed by the subcontractor. Although the insurance company had priority to the retainage funds held by the corporation by virtue of the surety agreement, it lost its right to such funds by failing to assert its claim within nine months of the levy placed on such funds by the IRS. Therefore, the IRS was entitled to judgment as a matter of law in that the insurance company's claim was barred by the statute of limitations.

American Fidelity Fire Insurance Co., DC Tenn., 85-2 USTC ¶9794, 623 FSupp 722.

A civil suit brought by a nontaxpayer challenging an IRS levy placed on the entity's bank account was dismissed by a district court due to lack of subject matter jurisdiction, since the nontaxpayer's petition was not filed within the 9-month statutory period for commencing such actions. Despite allegations by the nontaxpayer that the IRS had erroneously confused it with another business enterprise with a similar name, the court was not persuaded that the two businesses were not in fact related or that the government was given sufficient notice of a third-party interest in the levied property to warrant extension of the limitations period.

Barrett Treaty Limited, DC N.Y., 85-2 USTC ¶9801, 624 FSupp 166.

An action for wrongful levy brought against the IRS by an individual nontaxpayer to recover accounts receivable pledged to a bank as security was dismissed. The bank failed to file an action to recover the accounts within the statutory time period or to make a timely request for an extension to bring an action. Therefore, even assuming the individual stood in the bank's shoes, the action was barred by the statute of limitations. Further, there was no merit to the argument that the bank received erroneous information from the IRS regarding the time limits within which to file a suit. The action was barred prior to the time the information was received.

J. Strong, DC Tex., 85-2 USTC ¶9834.

Neither a statute-of-limitations defense nor a governmental-immunity defense operated to bar a creditor from obtaining a recovery from the United States after IRS officials lulled the creditor into inaction during the limitation period and then made a wrongful levy upon the assets of a taxpayer-creditor. Although it was argued that IRS officials did not have authority to enter into an agreement with the creditor before instituting the assessments, the statute of limitations was extended beyond the normal nine month period because the creditor reasonably relied upon their misrepresentations. Thereafter, the statute was extended further when the bank made a timely and adequate demand for compensation. R.R. Dieckmann (CA-10, 77-1 USTC ¶9224) did not require a different result because that case did not involve allegations of misrepresentations by the government.

Bank of Commerce and Trust Co. of Tulsa, DC Okla., 86-1 USTC ¶9111.

A civil action brought by a nontaxpayer challenging an IRS levy upon property owned by a third-party in which the nontaxpayer held a secured interest was summarily dismissed by a district court, since the nine-month statutory period for commencing such actions had expired.

The National Bank of Texas at Fort Worth, DC Tex., 86-1 USTC ¶9208.

An action for wrongful levy, brought by the owner of a paper and chemical company, was dismissed for lack of subject matter jurisdiction because the owner's complaint was not filed within the nine month time period prescribed in Code Sec. 6532(c)(1) or the extension period within Code Sec. 6532(c)(2). In a small claims proceeding, an IRS agent allegedly admitted that the owner's property was mistakenly levied; the agent stated that he would send forms to correct the mistake. The owner of the levied property never received the forms and he took no other action until he filed his claim 26 months after his property was levied. The owner's claim that the United States was estopped from raising the statute of limitations as an affirmative defense was rejected because the scope of the waiver of sovereign immunity was subject to the time limitations of Code Sec. 6532. The owner's untimely claim was outside the government's waiver of sovereign immunity and, therefore, the action was outside the court's subject matter jurisdiction.

E.J. O'Neal, DC N.C., 86-1 USTC ¶9264.

A nine-month statute of limitations barred a corporation from recovering amounts contained in a bank account that had been levied by the IRS; however, a larger portion of the corporation's claim was subject to a six-year statute of limitations under 28 U.S.C. 1491(a)(1). The six-year statute of limitations period was subject to a judicial exception for implied-in-fact contract levy contests set forth in Gordon, 81-1 USTC ¶9409, 227 CtCl 328, 649 F2d 837. Consequently, the nine-month time limit under Code Secs. 6532(c) and 7426(a)(1) partially prevailed over the six-year limitations period for the amount of money in the bank account that was actually levied. There was no overlapping between the remainder of the taxpayer's implied-in-fact contract remedy and the nontaxpayer remedy provided in Code Sec. 7426(a)(1). Permitting the suit under the six-year statute of limitations period was reasonable because it was unlikely that Congress intended that a victim of an allegedly improper and coercive agreement should take action the moment the agreement is made. The IRS motion to dismiss was granted only for the portion of the corporation's claim which was time barred by Code Sec. 7426(a)(1).

Document Management Group, Inc., ClsCt, 87-1 USTC ¶9125, 11 ClsCt 463.

Summary judgment was granted to the government because a petition filed by the plaintiffs for the return of a Mercedes Benz that was seized from their son because of his failure to pay taxes was untimely filed approximately thirteen months after the car was seized. According to the court, the parents, who contended that the car belonged to them and not to their son, failed to file their petition within the required nine-month filing period. Their presentation of a bill of sale to a revenue officer in --collection division of the IRS did not constitute a proper written request for an extension of the filing period and they failed to set forth specific facts showing why the filing period should be extended.

G.H. Edwards, Sr., DC Ill., 87-1 USTC ¶9281, 657 FSupp 36.

The taxpayer's suit to obtain a tax refund, which the IRS had applied to payment of the 100% penalty for his failure to pay over his corporation's withholding taxes, was dismissed for lack of subject matter jurisdiction because the nine-month limitation period for a wrongful levy suit had run. The IRS had received funds pursuant to a levy of a third party, and it applied the funds to payment of corporate tax liabilities other than the corporation's unpaid withholding taxes. The taxpayer asserted that the IRS had wrongfully levied funds that were owed to him personally rather than to his corporation. Thus, the action was characterized as one for wrongful levy rather than a refund suit, and the shorter limitation period applied. Also, because the suit essentially sought to force the IRS to reallocate the third-party payments, it was barred by the Anti-Injunction Act.

D.R. Ellis, DC-WD Wis., 87-2 USTC ¶9418.

A third-party complaint filed against the IRS, charging it with wrongful levy, was barred by the statute of limitations since the suit was filed more than five years after the levy was imposed. A timely suit would have been filed within 21 months after the levy.

Commonwealth of Kentucky, CA-6, 87-1 USTC ¶9119, 805 F2d 628.

A suit by a nontaxpayer and a taxpayer challenging an IRS levy against insurance proceeds received by the taxpayer and assigned to the nontaxpayer was dismissed. The nontaxpayer's claim was denied because more than nine months had elapsed after the service of the notice of levy and before the action was filed. The district court rejected the nontaxpayer's contention that the nine-month statute of limitations did not commence until the insurance company agreed to pay on the policies. The taxpayer's cause of action was dismissed because the statutory provision allowing challenges to wrongful levies expressly forbids suits by a taxpayer against whom the IRS has filed its original levy.

B. Glaze, DC Ind., 88-1 USTC ¶9384.

An individual occupying property that was the subject of a tax levy lacked standing to bring a wrongful levy action. Further, the trust to which the individual had allegedly transferred the property was barred by the statute of limitations from bringing an action for wrongful levy. The government met the requirements for an ejectment action by demonstrating that it held title to the property.

R.E. Spurgeon, DC Neb., 89-1 USTC ¶9345.

A construction company's surety could not sue a county that had paid the IRS funds due the company because the payment was made in response to a valid IRS tax levy. The evidence established the existence, service, and validity of the levy. Thus, the county was entitled to summary judgment, since the proper remedy was a suit for wrongful levy, rather than an action against the county, because custodians of property are held harmless in such circumstances.

Commonwealth of Kentucky, CA-6, 89-1 USTC ¶9295, 869 F2d 985.

Federal district court jurisdiction did not exist over a third-party action to recover amounts wrongfully levied by the IRS that was instituted more than nine months after the date of levy. Further, the third-party had no right to contribution from the government of the amount of its possible liability for funds owed to a corporation but paid to the IRS under the levy.

Creditbank, DC Fla., 89-1 USTC ¶9209, 707 FSupp 513.

A nontaxpayer bank's action for wrongful levy relating to amounts paid or owed by a corporation to the government was barred by the statute of limitations. The bank's request that the government return the subject property did not extend the nine-month period for filing the wrongful levy suit, since the request was made more than nine months after the notice of levy was served.

Southtrust Bank of Etowah County, DC Ala., 89-2 USTC ¶9603.

Notices of levy, served on a bank by the IRS, started the nine-month statute of limitations running. Over a year later, the plaintiff bank requested that the property seized by the IRS be returned. The court rejected the theory that the government's affirmative misconduct should delay the start of the running of the statute of limitations.

Royalton State Bank, DC Minn., 90-1 USTC ¶50,126, 725 FSupp 438.

The court lacked jurisdiction to entertain a wrongful levy claim because the request for return of the property was made after expiration of the statute of limitations. The claim that the government waived this defense by its failure to plead the defense affirmatively was not persuasive.

R. Pederson, DC Mont., 90-1 USTC ¶50,169.

A federal district court lacked jurisdiction over a suit filed seeking relief from an IRS levy on real property because both the owner of the property and the individual in possession of the property failed to timely file a wrongful levy action.

E. Winebrenner, CA-9, 91-1 USTC ¶50,057, 924 F2d 851.

A wrongful levy suit brought with respect to liens and levies placed on the taxpayers' property for failure to pay tax assessments was dismissed. Since the government has consented to suit only where a wrongful levy is alleged by third parties, the government did not waive sovereign immunity. Additionally, the court lacked jurisdiction over the suit because it was not brought within the nine-month period of limitations.

R.P. Detrick, DC Ore., 91-1 USTC ¶50,063.

A federal district court lacked jurisdiction over a suit filed by individuals seeking relief from an IRS levy on their real property because they failed to timely file a wrongful levy action. They had discovered the existence of a tax lien on the realty after purchasing it from a delinquent taxpayer.

R.R. Sheridan, DC Calif., 91-1 USTC ¶50,130.

An individual could not challenge a levy six years after its issuance since the applicable statute of limitations is nine months. The IRS levied upon an amount of money seized during an arrest. Six years later, one of the arrested men alleged that the money was his and did not belong to the person named in the levy. The argument that this claim was brought within two years of the IRS actually receiving the money, based on the two-year limitation period associated with refund denials, was disallowed.

B. Williams, CA-2, 91-2 USTC ¶50,529.

An investment company's wrongful levy action under Code Sec. 7426 was properly dismissed as untimely because it was brought more than nine months after the last levy was made. A letter issued for the purpose of dissuading the IRS from seizing the company's property did not change the status of the company's complaint because the complaint was not filed within 12 months of the date of the letter. A refund claim on Form 843 did not constitute a valid request for the release of the levy because it was mailed to an IRS office other than the office that imposed the levies. The company could not substitute substantial compliance for full compliance under the regulations because it did not comply with the terms under which the government consented to suit under Code Sec. 7426. However, in accordance with the ruling in Williams (SCt, 95-1 USTC ¶50,218), the company had standing to file suit for a refund under 28 U.S.C. §1346. The fact that a wrongful levy caused the company to pay the tax did not require, as its exclusive remedy, a suit under Code Sec. 7426.

WWSM Investors, CA-9, 95-2 USTC ¶50,454.

A secured creditor's claim against the IRS for wrongful levy was barred by the nine-month statute of limitations. The statute of limitations was not tolled because the creditor failed to establish that a payment of the excess proceeds of a tax sale by a state (Colorado) Department of Revenue to the IRS was actively concealed. Neither the IRS nor the state Department of Revenue had a duty to notify the creditor of the payment. Additionally, the secured creditor did not exercise reasonable diligence in attempting to determine whether the state Department of Revenue retained possession of the excess proceeds. Although the state Department of Revenue had filed an interpleader action within the nine-month statute of limitations to request that a court distribute the excess proceeds, the payment to the IRS was not disclosed until the state Department of Revenue filed an amended complaint after the statute of limitations had expired. However, the secured creditor had facts in its possession within three months of the notice of levy that would have allowed it to discover that the excess proceeds had been levied upon.

Mountain States Bank, DC Colo., 92-2 USTC ¶50,309.

Despite an individual's claim that the IRS wrongfully levied upon his bank account for the delinquent taxes owed by his son, his wrongful levy action, which was filed 16 months after the bank received notice of the IRS levy, was dismissed for failure to comply with the nine-month statute of limitations for wrongful levy actions. The individual did not demonstrate that the nine-month period should have been extended since he failed to file an administrative claim for return of the levied account.

D. Meminger, Sr., DC N.Y., 93-1 USTC ¶50,129.

A federal district court lacked jurisdiction over an insurance company's claim that the government wrongfully levied the company's property to satisfy an individual's tax liability. The company filed its complaint after the expiration of the statute of limitations under Code Sec. 6532(c). The company's request for a return of the levied property did not serve to extend the statute of limitations because the company mailed the request to a revenue agent rather than the district director, as required by the regulations that would allow the statute of limitations to be extended.

Amwest Surety Insurance Co., CA-7, 94-2 USTC ¶50,376.

A taxpayer's suit challenging a levy on his safe deposit box and bank account for payment of certain tax liabilities was dismissed because he filed a refund suit more than 12 months from the date of his request for return of the property. The taxpayer was allowed to extend the period for filing suit by 12 months from the date of the request for return of the property or six months from the date of disallowance, whichever was shorter. The IRS was not estopped from asserting its statute of limitations defense even though it did not inform the taxpayer of the disallowance until after the six-month limitations period had lapsed. The taxpayer did not demonstrate the required detrimental reliance on the government's conduct because he was statutorily required to preserve his rights within 12 months even if the IRS had not acted upon his claim.

K. Uddin, DC N.Y., 93-2 USTC ¶50,598.

An action for wrongful levy of property belonging to a nontaxpayer was barred by the statute of limitations because it was commenced 22 months after the date of the levy. The general nine-month period for bringing the suit was not extended because the claimant did not file the action within twelve months of making an administrative claim or within six months of the date when the administrative claim was denied.

R.M. Goossens, DC Calif., 94-1 USTC ¶50,116.

A wrongful levy action commenced by nontaxpayers was not barred by the statute of limitations because the limitations period had never commenced to run. The IRS's failure to give proper notice of the levy prevented the running of the limitations period.

D.S. Bonacci, DC Utah, 94-1 USTC ¶50,265.

An action of wrongful levy of funds belonging to a nontaxpayer bank was barred by the statute of limitations because the bank failed to file the action within the nine-month period after receiving notice of levy. Furthermore, the limitations period could not be extended because the bank failed to properly request a return of the property levied upon within the nine-month period. The bank's cross-claim filed in an interpleader action in state court was not equivalent to submitting a formal written request addressed to the District Director of the IRS.

Peoples Banking Company, DC Ohio, 94-1 USTC ¶50,271.

A corporation's lawsuit against the IRS for wrongfully levying on its customs duty refunds was improperly dismissed as untimely. The record established a likelihood that the corporation could prove that equitable tolling applied to extend the limitations period. In an attempt to collect a debt owed by the corporation's former attorneys, the IRS had levied upon the entity's customs duty refunds without providing notice to the corporation. Upon discovering the levy, the corporation promptly requested a return of the funds from the IRS office that imposed the levy, but was directed by the IRS to file its request with another office. The appellate court concluded that it was possible that facts could be proven that would toll the nine-month limitations period for filing refund requests until the date on which the corporation received actual notice of the levy. Alternatively, the corporation might be able to show that the 12-month period for filing a wrongful levy action was equitably tolled from the date when its initial refund request was filed until the date when it filed a second request with another IRS office.

Supermail Cargo, Inc., CA-9, 95-2 USTC ¶50,575.

A wrongful levy action instituted by the former spouse of a delinquent taxpayer with respect to amounts paid to the IRS was barred by the statute of limitations because the suit was filed more than nine months after the levy on the property. It was irrelevant that neither the government nor the insurance company that issued the annuity contract to which a federal tax lien had attached notified the former spouse, since neither party had a duty to notify potential third-party claimants. The lien attached to the annuity payments awarded to the spouse notwithstanding the fact that the property was in the divorce court's custody at the time of attachment, and the insurance company was obligated to surrender the property upon demand.

A. Mock, DC Pa., 94-2 USTC ¶50,360. Aff'd, CA-3 (unpublished opinion 10/18/94).

The wrongful levy action instituted by an attorney who sought to recover his legal fees and amounts owed to one of his clients out of an award made to a delinquent taxpayer and levied upon by the IRS was dismissed as untimely. The attorney's claims were filed with an IRS agent, not with the district director and not within nine months of the date of the IRS's levy. Upon receipt of the attorney's claim, the government was under no obligation to either act on the request or regard the claim as a request for an extension of the limitations period. Since an inadequate claim cannot extend the limitations period, the federal district court lacked jurisdiction over the matter.

J.L. Stevens, DC Mich., 94-2 USTC ¶50,367.

An individual's wrongful levy action contesting the seizure of his funds in satisfaction of his father's tax liabilities was dismissed due to his failure to file suit or to make a written request for the return of the property within nine months of the levy. The individual's verbal demand for the return of the property during the nine-month statutory period was an invalid claim and did not extend the statute of limitations.

J. Bannister, DC Tex., 94-2 USTC ¶50,403.

A title company's refund suit for recovery of levied property was improper. The proper action for recovery of property was a wrongful levy action. Because more than nine months had passed since the levy on the property, the statute of limitation had expired and the company's action was dismissed.

Industrial Valley Title Insurance Co., DC D.C., 94-2 USTC ¶50,436.

A refund suit brought by an individual, who claimed that taxes were erroneously collected from the sale of real property, was dismissed because she failed to file her claim within the nine-month statute of limitations. The property was levied upon and sold to satisfy the tax obligations of the individual's husband. The statute of limitations pursuant to this section expired nine months after the date of the levy. The refund claim was filed almost four years after the date of the levy. Therefore, the claim was barred by the statute of limitations.

J.B. Kopp, DC Calif., 94-2 USTC ¶50,517.

A corporation's action against the government to quiet title was barred by the statute of limitations because the corporation failed to file the claim of wrongful levy within one year of making a request for the return of levied property. The government levied on property of the corporation believing that the corporation was a nominee, transferee or agent of delinquent taxpayers. Because the corporation requested the return of the property within nine months of the levy, it had twelve months to file a wrongful levy action. However, the corporation filed its claim more than two years after making the request. Therefore, the wrongful levy claim was barred by the statute of limitations.

Towe Farms, Inc., DC Tex., 94-2 USTC ¶50,588.

An assignee corporation's wrongful levy suit was barred by the statute of limitations because the suit was filed more than nine months after the levies were filed. The corporation's assumption of the debtor's loans and succession to rights to the debtor's assets did not give the corporation greater rights to oppose the levy than those of a third party. Letters written by the corporation's attorney disputing the levy to an IRS representative were technically and procedurally insufficient to allow a 12-month tolling of the limitations period.

Edwards Machine Products, Co., DC Ga., 95-1 USTC ¶50,011.

A corporation that had bank funds wrongfully levied against by the IRS was not entitled to a return of its property because the extended statute of limitations had run. Even though the IRS admitted that the corporation was not the taxpayer who owed the money, the corporation did not file its suit to recover the property within six months from the date of the notice of disallowance of its request to return the property. The corporation's argument that the filing was within the statute of limitations because the last day for filing fell on a Sunday and was followed by a Monday holiday was rejected.

Equity Hernando Woods, Inc., DC Fla., 95-2 USTC ¶50,500.

A creditor who obtained a judgment against a fugitive evangelist's foundation did not file his wrongful levy complaint within the nine-month period following either the IRS's notice of seizure given to the foundation or the IRS's notice of levy on the warehouse where the assets were stored. The creditor was not entitled to the notice of seizure or notice of levy. A requirement that the IRS notify all creditors of a delinquent taxpayer would be burdensome. Finally, the limitations period was not equitably tolled when the IRS served notice on the warehouse, which held the taxpayer's assets as an agent of the IRS. The IRS's notice responsibility was to the party in possession.

R.A. Miller, DC Tenn., 95-2 USTC ¶50,606.

Two individuals were precluded from recovering property wrongfully levied by the IRS because they failed to properly request the return of the property or to file a wrongful levy suit before the statute of limitations had expired. Although the individuals took several steps to recover their property, they failed to file an action for the return of wrongfully levied property within nine months of the levy.

L.A. Fanning, DC Ga., 96-1 USTC ¶50,277.

A wrongful levy action brought by a law firm to clarify its rights with respect to funds it received as compensation for legal services as part of a settlement agreement between a client, upon whose proceeds from litigation the IRS had levied, and another party was time barred. The law firm failed to file its suit within the nine-month limitations period. The action could not be recharacterized as a quiet title action because a wrongful levy action was the exclusive remedy available to the law firm.

Tompkins & McMaster, CA-4 (unpublished opinion), 96-2 USTC ¶50,372.

A wrongful levy suit brought by an individual seeking compensation for property that was seized and sold by the IRS in satisfaction his parents' tax debts was dismissed as untimely because the lawsuit was not filed within the statutory nine-month limitations period. The son could not recover under Williams (SCt, 95-1 USTC ¶50,218) because he did not pay his parents' taxes in order to secure the immediate release of encumbered property. Williams does not change the principle that §7426 provides the exclusive remedy for a wrongful levy. In addition, agents of the IRS could not be sued in a Bivens action in light of the comprehensive administrative scheme in place to resolve tax-related disputes.

K. Dahn, CA-10, 97-2 USTC ¶50,847.

A wrongful levy suit brought by a divorced taxpayer in connection with her former husband's tax liabilities was properly dismissed as untimely. Because sovereign immunity barred subject matter jurisdiction over untimely claims against the U.S., the government's failure to raise the issue in its answer did not amount to a waiver. Accordingly, the issue was properly presented in a motion to dismiss. Also, the district court's dismissal of the complaint before the taxpayer presented her arguments regarding equitable tolling was not an abuse of discretion because the court fully discussed that issue when it rejected her post-trial motion for reconsideration. Finally, the court properly refused to allow her to amend her petition to include a refund claim under 28 U.S.C. §1346. Because she never filed an administrative refund claim, she did not exhaust her administrative remedies and, thus, could not maintain a refund claim.

J.M. Compagnoni, CA-11, 99-1 USTC ¶50,508.

A wrongful levy action brought by several individuals that challenged a foreign country's seizure and sale of property to satisfy their father's U.S. tax liability was time barred. The notice received by their father from the foreign country was sufficient to trigger the commencement of the limitations period. It was not necessary for the children as known putative owners to receive notice of the seizure because notice must be sent only to the possessor of personal property, not to potential third-party owners. As the named renter of the safe deposit box, the father was in possession of its contents and was the only one entitled to notice.

Q.A. Miller, DC Ohio, 96-2 USTC ¶50,660.

Individuals lacked standing to bring a wrongful levy action to recover funds obtained by the IRS from accounts belonging to their corporations or its alter-ego trust. The individuals failed to show they had an interest in the levied bank accounts. Also, the claims were barred by the expiration of the nine-month limitation period on wrongful levy actions, and an alternative statute of limitations did not apply.

Mathis Implement Trust, DC S.D., 97-1 USTC ¶50,406. Aff'd, CA-8 (unpublished opinion), 98-1 USTC ¶50,167.

An ex-wife's action against the IRS for wrongful levy of money owed to her ex-husband, which she also sought to garnish for back support, was not dismissed as untimely as a matter of law because she had filed an administrative claim against the levied property within the nine-month period, in addition to numerous other contacts with the IRS concerning the levy. Her actions could have extended the limitations period under Code Sec. 6532(c)(2).

D.S. Evert, DC Mo., 97-2 USTC ¶50,985.

A wrongful levy suit instituted by a bank that claimed to hold a security interest in accounts receivables of a delinquent taxpayer was dismissed as untimely because it failed to file suit within one year of the date that it filed a written request for a refund of the seized monies.

South Louisiana Bank, DC La., 98-1 USTC ¶50,143.

An unincorporated business trust was entitled to bring a refund suit challenging the IRS's collection and retention of funds belonging to the trust in satisfaction of the delinquent tax liabilities of the trustee and his wife. The trial court erred in characterizing the trust's claim as an untimely wrongful levy action. The government subsequently conceded that the trust's claim was one for a refund; the trust could bring a refund suit based on its assertion that it was wrongfully compelled to pay the couple's taxes. As a refund suit, the trust's claim was timely filed pursuant to Code Sec. 6511.

G.P. Walker, CA-9 (unpublished opinion), 2000-1 USTC ¶50,191, rev'g and rem'g DC Ore., 97-2 USTC ¶50,663.

A suit by an attorney to recover funds from a marine services corporation that had been levied upon by the IRS to satisfy unpaid payroll taxes of the attorney's corporate client was barred because the petition was not filed within the nine-month statutory period for commencing a third-party civil suit. He also failed to file a direct request with the IRS for the return of the funds pursuant to Reg. §301.6343-1(c).

G.A. Miller, DC La., 98-2 USTC ¶50,753.

Jurisdiction was lacking over an employer's wrongful levy action seeking to recover the value of an employee's pension and retirement benefits that it had remitted to the IRS in response to tax levies against the employee. Even though the taxpayer failed to initiate suit within the statutory nine-month period under Code Sec. 6532(c), it claimed that it was entitled to the value of the seized assets as restitution for fraud perpetrated on it by the employee. The statute of limitations, however, is a jurisdictional bar. While Code Sec. 7426 provides a limited waiver of the government's immunity from suit, exceptions to the limitations period are strictly observed. There was no indication that an equitable tolling exception existed. M. Brockamp (SCt), 97-1 USTC ¶50,216, distinguished.

Becton Dickinson and Co., CA-3, 2000-2 USTC ¶50,542. Cert. denied, 1/8/2001.

The government's sovereign immunity barred a trust's wrongful levy suit that was filed more than nine months after trust assets were seized to satisfy an individual's tax liabilities. The limitation period for filing a wrongful levy suit had to be strictly construed as it was a condition of the government's waiver of sovereign immunity. The trust's arguments regarding related state court litigation were irrelevant, and the trust's claim that an assistant U.S. attorney verbally waived the statute of limitations and sovereign immunity was meritless because an assistant U.S. attorney lacked the authority to do so.

Four Gees Trust, DC La., 99-1 USTC ¶50,356. Aff'd, per curiam, CA-5 (unpublished opinion), 99-2 USTC ¶50,897.

A bank's wrongful levy suit was dismissed for lack of subject matter jurisdiction because it was filed more than nine months after the IRS levied upon a delinquent taxpayer's funds in which the bank had a security interest. Equitable tolling did not extend the limitations period for the bank's suit because there was no evidence that circumstances beyond the bank's control prevented it from filing a timely claim or that the IRS took affirmative measures to lull the bank into inaction or purposefully frustrated the bank's efforts to file a claim.

Gothenburg State Bank & Trust Co., DC Neb., 99-1 USTC ¶50,476.

The government's sovereign immunity barred jurisdiction over a corporation's suit to foreclose its lien on a delinquent taxpayer's personal property that was held in trust and to determine lien priority between itself as a judgment creditor and the government's tax lien. The corporation failed to exercise its exclusive remedy under federal law by bringing a wrongful levy suit within nine months of the date of the levy. Moreover, the IRS's failure to physically seize the property within nine months after the levy was issued did not allow the corporation to pursue a quiet-title action since physical seizure of the property was irrelevant to the corporation's ability to initiate a wrongful levy action.

Entenmann's, Inc., DC Neb., 99-2 USTC ¶50,639.

An individual's claim of wrongful levy on monies being held by a third party was dismissed for lack of subject matter jurisdiction because it was not timely filed. The period within which the individual was required to file the wrongful levy action was not extended since his request for return of the property did not qualify as a proper administrative request. The request was not addressed to the appropriate IRS district director.

J.N. LaBonte, CA-7, 2001-1 USTC ¶50,104.

A law firm that lacked standing to maintain a wrongful levy suit against the government because it had no interest in the subject real property was also barred by the nine-month statute of limitations that began running on the date of the levy. Moreover, since the firm never requested return of the levied property, the nine-month period was not extended to 12 months. The law firm cited no authority that would permit it to extend the limitations period based on the request of another party.

Lawyers Title Insurance Corp., DC Ga., 2000-1 USTC ¶50,407.

Jurisdiction was lacking over an untimely wrongful levy suit brought by several trusts because their written request for the return of the property, which would have extended the statute of limitations, was not received by the IRS. The trusts demanded the return of all property levied because the IRS assessed new deficiencies against the trusts' creators, even though the parties had previously entered into an agreement that the levied property would completely satisfy the creators' tax liability. However, their written request was improperly addressed and was, therefore, never received by the proper party in the IRS.

BSC Term of Years Tr., DC Tex., 2001-1 USTC ¶50,174. Aff'd, sub nom. EC Term of Years Trust, on another issue, CA-5, 2006-1 USTC ¶50,171. Aff'd on another issue, SCt, 2007-1 USTC ¶50,466.

A trust contended that a levy was improper because the seizure and sale of the property affected the ownership interests of persons who were not the taxpayer subject to the liens. However, because the claim was brought more than one year after the expiration of the limitations period for filing a wrongful levy action, it was not viable.

Audio Investments, CA-4 (unpublished opinion), 2003-1 USTC ¶50,531, aff'g, per curiam, DC S.C., 2002-2 USTC ¶50,757.

Code Sec. 7426 is the exclusive remedy for wrongful levy actions, and such suits must be filed within the statute of limitations provided by Code Sec. 6532(c). The conclusion was reached in determining whether a third party alleging that it was wrongfully levied upon could maintain a refund suit for levied pension plan distributions.

CCA Letter Ruling 200238043, August 14, 2002.

The statute of limitations applicable to the plaintiff's wrongful levy claim was not jurisdictional in nature and, therefore, the plaintiff's failure to commence the action within the statute of limitations did not deprive the court of subject matter jurisdiction.

Mallard Automotive Group, Ltd., DC Nev., 2005-1 USTC ¶50,113.

A property co-owner's claim for wrongful levy upon the property for taxes owed by another co-owner was barred by the nine-month statute of limitations.

R.W. Jarvi, DC Mich., 2005-1 USTC ¶50,185.

A third person's remedy with respect to a levy against his property to satisfy the tax debt of another under Code Sec. 7426(a) is subject to the nine-month time limit for filing imposed by Code Sec. 6532(c)(1).

Rev. Rul. 2005-49, 2005-2 CB 125.

An individual's wrongful levy action was time barred under Code Sec. 6532(c). The IRS had not waived the limitations defense by failing to assert it in its answer. Because the taxpayer bought suit under 28 USC section 1346(a)(1), which applies to tax refund suits, and not 28 USC section 1346(e), which applies to Code Sec. 7426 wrongful levy actions, the IRS was not required to raise the limitations defense as an affirmative answer.

S.D. Young, DC N.Y., 2005-2 USTC ¶50,608.

An intervener's claim of wrongful levy against the government was barred by the statute of limitations because her intervention came more than 10 years, instead of within the nine-month statutory period, from the date of the alleged wrongful levy against her husband.

D. Purk, DC Ohio, 2006-1 USTC ¶50,358.

A bank's petition seeking to recover funds levied by the government from a corporation's receivables over which the bank had perfected its security interest was not barred by the statute of limitations although it was filed more than nine months after the notice of levy was issued because the limitations period was equitably tolled. Equitable tolling was appropriate because the bank had no actual or constructive notice of the levy until after the statute of limitations had expired and had proceeded diligently to protect its rights once it learned of the levy.

Fifth Third Bank, DC Ohio, 2007-1 USTC ¶50,244.

The Court of Federal Claims lacked jurisdiction over a corporation's wrongful levy claims and its request for injunctive relief against IRS collection actions. The corporation's wrongful levy claim was untimely because it was not filed within nine months of the levy. Furthermore, congressional intent showed that equitable tolling should not extend the statutory limitations period. Moreover, even if it were available, the corporation was not entitled to equitable tolling to consider the contention that the IRS had violated the automatic stay provision of the bankruptcy code by not assessing the penalty until after the corporation had filed for bankruptcy. The bankruptcy code in effect at that time allowed the IRS to assess taxes after the bankruptcy filing.

Four Rivers Investments, Inc., FedCl, 2007-2 USTC ¶50,608.

A federal district court denied the government's motion to dismiss as untimely a corporation's wrongful levy complaint. The complaint was filed after the Code Sec. 6532 limitations period had expired but contained an allegation that the company had made a proper written request for return of the levied funds. While the government conceded that under Code Sec. 6532(c)(2) the limitations period is extended from nine months to 12 months if a proper written request for return of the levied funds is made, it contended that the company failed to prove that its request was proper and, therefore, the extended period did not apply. Despite the government's contention, the claimant was not required to prove the truth of its allegation that it made a proper written request for return of the levied funds at this stage of the proceedings.

Next Generation Wireless, Ltd., DC Ohio, 2007-2USTC ¶50,705.

A corporation's motion for reconsideration of the dismissal of its wrongful levy and injunctive relief claims for lack of jurisdiction was denied. The new evidence and new arguments presented by the corporation were previously available and the corporation had a prior opportunity to present them.

Four Rivers Investments, Inc., FedCl, 2007-2USTC ¶50,746.

Civil Actions by Nontaxpayers: Statute of limitations

A trust that missed the Code Sec. 7426(a)(1) deadline for challenging a levy could not bring a challenge as a tax refund claim under the general tax refund jurisdiction of 28 USC §1346(a)(1). Congress specifically tailored Code Sec. 7426(a)(1) to provide the exclusive remedy for third-party wrongful levy claims. The precisely drawn, detailed statute pre-empted more general remedies. If third parties could avail themselves of §1346(a)(1)'s general tax refund jurisdiction, they could evade Code Sec. 7426(a)(1)'s much shorter limitations period.

EC Term of Years Trust, SCt, 2007-1 USTC ¶50,466.

Nine-month statute of limitations provided by Code Sec. 7426 was not applicable in a suit brought by the plaintiff-purchase money security holder against the insurer where the latter brought the Government into the suit as a third-party defendant. Insurer, not the purchase money security holder, had sued the Government charging not wrongful levy, but improper endorsement of a draft which was properly drawn by the insurer as defendant and third party plaintiff. Further, since there was no claim against the Government by the purchase money security holder, and since the insurer as defendant/third party plaintiff could not assert the jurisdictional defense against the purchase money security holder's action for nonpayment, that defense was not available to the Government.

Chrysler Credit Corp., DC, 73-1 USTC ¶9263.

Because an action to recover amounts paid on account of the tax liability of another was not commenced within nine months after the levy on the subject property, it was dismissed for lack of jurisdiction.

D. DeJesus, DC, 74-2 USTC ¶9502.

The court ruled that a suit to enjoin a levy for nonpayment of FICA and withholding taxes owed by plaintiff's husband was barred by the nine-month statute of limitations provided for such suits.

E. McCreary, DC, 73-2 USTC ¶9741.

A counterclaim asserting an interest in cash, jewelry, and furs on which the United States sought to reduce a lien to judgment and the defendant's cross-claim against the police for wrongful seizure of the property under New York law were barred by the statute of limitations.

R. Benveniste, DC, 81-1 USTC ¶9321.

A complaint to obtain the release of funds levied on by the IRS was properly filed within the statutory time period because the filing of a request letter seeking IRS permission for the release of these funds effectively extended such period.

W.J. Jones, Inc., DC, 74-2 USTC ¶9589.

An action by the State of Vermont on a prior lien to recover the proceeds of a forced sale of chattels by the IRS was dismissed where the action was filed more than 12 months from the date of request for the return of the property.

State of Vt., DC, 75-1 USTC ¶9175.

A suit for wrongful levy for taxes brought against the Government by a person other than the taxpayer was barred by the statute of limitations.

Penetryn International, Inc., DC, 75-1 USTC ¶9361, 391 FSupp 729.

J.S. Bascom, DC, 74-1 USTC ¶9218.

W.C. Goodwin, III, DC, 77-1 USTC ¶9230.

Stuyvesant Ins. Co., DC, 75-1 USTC ¶9287.

Mill Factors Corp., DC, 75-1 USTC ¶9334, 391 FSupp 387.

United Sand and Gravel Contractors, Inc., DC, 79-1 USTC ¶9240.

M.P. Schroeder, DC Minn., 84-1 USTC ¶9430.

F. Liptak, DC Minn., 84-1 USTC ¶9243.

First National Bank and Trust Co., DC Pa, 85-2 USTC ¶9798.

J. Strong, DC Tex., 85-2 USTC ¶9834.

The National Bank of Texas at Fort Worth, DC Tex., 86-1 USTC ¶9208.

E.J. O'Neal, DC N.C., 86-1 USTC ¶9264.

E.R. Zimmerman, DC Va., 86-2 USTC ¶9834.

H. Williams, Jr., ClsCt, 86-2 USTC ¶9840, 11 ClsCt 189.

The Document Management Group, Inc., ClsCt, 87-1 USTC ¶9125, 11 ClsCt 463.

D.R. Ellis, DC Wis., 87-2 USTC ¶9418.

Creditbank, DC Fla., 89-1 USTC ¶9209, 707 FSupp 513.

R.E. Spurgeon, DC Neb., 89-1 USTC ¶9345.

Southtrust Bank of Etowah County, DC Ala., 89-2 USTC ¶9603.

E. Winebrenner, CA-9, 91-1 USTC ¶50,057, 924 F2d 851.

R. Pederson, DC Mont., 90-1 USTC ¶50,169.

R.P. Detrick, DC Ore., 91-1 USTC ¶50,063. Aff'd, CA-9 (unpublished opinion 5/8/92).

R.R. Sheridan, DC Calif., 91-1 USTC ¶50,130.

D. Meminger, Sr., DC N.Y., 93-1 USTC ¶50,129.

L. Evangelista, DC N.Y., 92-2 USTC ¶50,533.

K. Uddin, DC N.Y., 93-2 USTC ¶50,598.

F.C. Geissler, DC Ida., 94-1 USTC ¶50,060.

A. Mock, DC Pa., 94-2 USTC ¶50,360. Aff'd, CA-3 (unpublished opinion 10/18/94).

J.L. Stevens, DC Mich., 94-2 USTC ¶50,367.

J. Bannister, DC Tex., 94-2 USTC ¶50,403.

Industrial Valley Title Insurance Co., DC S.C., 94-2 USTC ¶50,436.

J.B. Kopp, DC Calif., 94-2 USTC ¶50,517.

Towe Farms, Inc., DC Tex., 94-2 USTC ¶50,588.

Hanna Coal Co., Inc., DC Va., 94-2 USTC ¶50,603. Vac'd, 11/18/94.

D. Clark, CA-9 (unpublished opinion), 95-2 USTC ¶50,358.

R.A. Miller, DC Tenn., 95-2 USTC ¶50,606.

Tompkins & McMaster, CA-4, (unpublished opinion), 96-2 USTC ¶50,372, aff'g, per curiam, an unreported District Court decision.

J.M. Compagnoni, CA-11, 99-1 USTC ¶50,508.

K. Dahn, CA-10, 97-2 USTC ¶50,847, 127 F3d 1249.

Mathis Implement Trust, DC S.D., 97-1 USTC ¶50,406. Aff'd sub nom. R. Mathis, CA-8 (unpublished opinion), 98-1 USTC ¶50,167.

G.A. Miller, DC La., 98-2 USTC ¶50,753.

J.W. Veith, Jr., DC Va., 99-1 USTC ¶50,138.

Four Gees Trust, DC La., 99-1 USTC ¶50,356. Aff'd, per curiam, CA-5 (unpublished opinion), 99-2 USTC ¶50,897.

Merisel of Americas, Inc., DC R.I., 2000-1 USTC ¶50,385.

R.W. Jarvi, DC Mich., 2005-1 USTC ¶50,185.

An unincorporated business trust was entitled to bring a refund suit challenging the IRS's collection and retention of funds belonging to the trust in satisfaction of the delinquent tax liabilities of the trustee and his wife. The trial court erred in characterizing the trust's claim as an untimely wrongful levy action. As a refund suit, the trust's claim was timely filed.

G.P. Walker, CA-9 (unpublished opinion), 2000-1 USTC ¶50,191, aff'g in part, rev'g in part and rem'g DC Ore., 97-2 USTC ¶50,663.

The statute of limitations was not tolled by any lack of actual or constructive notice of the levy. It did not matter that the government had not notified the intervenor of the levy, even though she claimed an interest in the proceeds levied upon. Nor was the statute of limitations waived by the government's stipulation allowing intervention.

Bowery Savings Bank, DC, 76-2 USTC ¶9796.

The government was not estopped from asserting the statute of limitations. The plaintiff did not show that the government actually knew that the seized money belonged to him; so there was no reason to abrogate the rule that the statute begins to run when notice of levy is served on the person in possession of the property, not when creditors receive notices.

J.R. McCoy, DC, 77-2 USTC ¶9556.

Notice of a lien against real property transferred to the plaintiff pursuant to a divorce decree was equivalent to a notice of levy, and it commenced the nine-month limitation period for a civil action against the United States for a levy wrongful as to a person other than the taxpayer.

E.M. Busse, DC, 75-2 USTC ¶9714.

An action to enjoin an attempt by the IRS to collect taxes can be brought only if a levy has been made. The court in this case was, therefore, without power to enjoin a merely threatened levy. Furthermore, the taxpayer's wife lacked standing to attack the constitutionality of the Louisiana community property statutory scheme because she did not have a direct economic interest adverse to the defendants sued nor did she demonstrate any injury in fact as a result of their actions.

Bullock, DC, 76-1 USTC ¶9173, 403 FSupp 913.

A bank which held a perfected security interest in a portion of a bankrupt's accounts receivable and which filed a petition as an intervenor in a suit brought against the IRS by a trustee in bankruptcy to recover levies made by the IRS against the bankrupt's accounts receivable was barred from recovery by the statute of limitations since the suit was not begun within nine months of the levies.

J & H Electric Co., DC, 76-2 USTC ¶9640.

There can be no equitable extension of the statute of limitations in a suit brought by a nontaxpayer since waivers of sovereign immunity must be strictly construed. Nor was the limitations period extended by the government's failure to give notice of the seizure of property, as the government was under no duty to do so.

R.R. Dieckmann, CA-10, 77-1 USTC ¶9224, 550 F2d 622.

A corporation's wrongful levy action in which it challenged the IRS's levy on a bond that the corporation posted for an individual was not time barred even though it was filed after the limitations period had expired. The limitations period was equitably tolled until a related case was decided which held that federal district courts have jurisdiction to determine the rightful owner of bail funds. Since the law in the area was unsettled, the corporation's failure to know that it could only reclaim its bond by a wrongful levy action was not due to a lack of diligence.

Capital Tracing, Inc., CA-9, 95-2 USTC ¶50,473.

A corporation's suit against the IRS for wrongfully levying on its customs duty refunds to satisfy the tax liability of its legal counsel was improperly dismissed as untimely. Since the IRS did not provide notice of the levy, the company might have been able to show that the limitations period was equitably tolled until it discovered the levy. In addition, since the corporation requested a return of the funds from the IRS office that imposed the levy but was instructed to file the request with another office, it might have been able to show that the period for filing suit was equitably tolled from the date of its first request until the date that its second request was filed with the other IRS office.

Supermail Cargo, Inc., CA-9, 95-2 USTC ¶50,575, 68 F3d 1204.

Neither a statute-of-limitations defense nor a governmental-immunity defense operated to bar a creditor from obtaining a recovery from the United States after IRS officials lulled the creditor into inaction during the limitation period and then made a wrongful levy upon the assets of a taxpayer-creditor. Although it was argued that the IRS officials did not have authority to enter into an agreement with the creditor before instituting the assessments, the statute of limitations was extended beyond the normal nine-month period because the creditor reasonably relied upon their misrepresentations. Thereafter, the statute was extended further when the bank made a timely and adequate demand for compensation. R.R. Dieckmann (CA-10, 77-1 USTC ¶9224) did not require a different result because that case did not involve allegations of misrepresentations by the government.

Bank of Commerce and Trust Co. of Tulsa, DC Okla., 86-1 USTC ¶9111.

The statute of limitations began to run when notice of levy was served on the debtor even though a court case was pending at that time involving the amount he owed another party under a personal service contract. The amount of his obligation was contractually fixed at the time of levy despite the pendency of the litigation.

R.C. Reiling, Jr., DC, 77-1 USTC ¶9269.

The nine-month limitations period begins running whether or not the plaintiff has received notice of the seizure.

Universal Specialties, Inc., DC, 77-2 USTC ¶9621, 443 FSupp 87.

Similarly.

Expoimpe, a Panamanian Corp., DC Fla., 85-1 USTC ¶9393, 609 FSupp 1098.

A nontaxpayer action that sought to enjoin government conduct that had previously been enjoined related back to the original, timely suit in which the injunction was issued and was itself timely.

A.L. Stickell, Jr., DC, 78-1 USTC ¶9328.

A plaintiff cannot evade the bar of the statute of limitations by bringing suit against "unknown Internal Revenue Service agents".

Act Leasing Co., Inc., DC, 79-2 USTC ¶9558.

The dismissal by the bankruptcy court of an action to establish a prior right to funds collected pursuant to an IRS levy did not toll the statute of limitations for purposes of determining the timeliness of a subsequent filing of an identical action in the district court. The action was not officially transferred from the bankruptcy court to the district court, nor was a notice of appeal from the judgment of the bankruptcy court ever filed.

R. Smith, DC, 81-1 USTC ¶9139.

The Internal Revenue Service's levy and seizure of funds in a wife's bank account to satisfy the employment tax liabilities of her former husband was wrongful and the IRS was ordered to refund the amounts seized. Although the ex-wife filed her action for return of the money more than one year after she had filed an administrative request for return of the seized funds, the IRS was estopped to raise the limitations period as a bar to her claim. The ex-wife had been lulled into inaction by an IRS agent's advice to file forms to recover the wrongfully seized funds and the agency's subsequent failure to act on the request. Moreover, the IRS had seized the funds without notice and was unable to locate the records in the case and the initial seizure should not have occurred in the first place.

B. Belton, DC, 82-2 USTC ¶9455.

The court denied the government's motion for reconsideration of the court's prior judgment in this case, 82-2 USTC ¶9455. The IRS was required to return to the taxpayer all funds wrongfully levied upon and seized without notice from her bank account, apparently to satisfy the tax owed by her ex-husband. The government's conduct estopped it from relying on the statute of limitations as a defense. The taxpayer had been lulled into inaction by an agent's advice an the subsequent inactivity of the agency. Also, the government was unable to locate the pertinent administrative records.

B. Belton, DC, 83-1 USTC ¶9181, 562 FSupp 30.

An action for wrongful levy brought by a nontaxpayer was dismissed because it was filed more than 21 months from the date of the levy on her savings account. The limitations period could not be waived on the ground that the nontaxpayer did not receive a notice of levy. It was sufficient that the savings and loan association received a notice of levy. The IRS is under no duty, constitutional or otherwise, to notify every person claiming an interest in property levied upon.

E. Douglas, DC, 83-1 USTC ¶9182, 562 FSupp 593.

In an action for wrongful levy brought by secured creditors of a bankrupt taxpayer, the government's motion for summary judgment was granted and the creditors' suit dismissed. The creditors did not file suit demanding return of the debtor-taxpayer's levied assets within the time limits required under Code Sec. 6532(c). Although an involuntary petition in bankruptcy was filed against the taxpayer and an order granting such relief was issued, the automatic stay provisions of the Bankruptcy Act (which would have tolled the time limitation within which the creditors were required to file suit) did not apply. Because the assets were levied upon prior to the date on which the petition in bankruptcy was filed and the bankrupt-taxpayer had no legal or equitable interest in the assets after they were levied upon, the assets could not become part of the bankrupt's estate.

D.G. DiFlorio, DC, 83-2 USTC ¶9492, 30 BR 815.

A civil suit brought by a nontaxpayer challenging an IRS levy placed on the entity's bank account was dismissed by a district court due to lack of subject matter jurisdiction, since the nontaxpayer's petition was not filed within the nine-month statutory period for commencing such actions. Despite allegations by the nontaxpayer that the IRS had erroneously confused it with another business enterprise with a similar name, the court was not persuaded that the two businesses were not in fact related or that the government was given sufficient notice of a third-party interest in the levied property to warrant extension of the limitations period.

Barrett Treaty Limited, DC N.Y., 85-2 USTC ¶9801, 624 FSupp 166.

The government was granted summary judgment in a wrongful levy suit brought by two individuals who alleged that the government improperly seized property stored in a safety deposit box in the Netherlands in order to satisfy their father's tax debt (see Q.A. Miller, 96-1 USTC ¶50,164). Although the issue should have been contested in the Dutch judicial system, even under U.S. law, the suit was time barred. The father received sufficient notice of the seizure and sale from the Dutch government to trigger the statute of limitations period, and the period expired before the suit was filed.

Q.A. Miller, DC Ohio, 96-2 USTC ¶50,660.

A partner's action to recover monies collected nearly three years earlier by an IRS levy on his bank account was dismissed as untimely. Because the accounts had been levied upon to collect penalties assessed for the delinquent filing of partnership information returns, the court ruled that the partnership, and not the partner, was considered to be the taxpayer against whom the penalties had been assessed. Thus, the partner's suit was barred by the nine-month limitation period applicable to actions for wrongful levy brought by nontaxpayers.

F.E. Bader, ClsCt, 86-1 USTC ¶9432, 10 ClsCt 78.

An insurance company failed to assert a cause of action over which a federal district court could exercise jurisdiction when it sought reimbursement from a construction company and the IRS. The cause failed as a claim for wrongful levy. The nine-month period for filing such an action had expired before the suit was filed.

American States Ins. Co., DC W.Va., 87-2 USTC ¶9640. Aff'd, CA-4 (unpublished opinion, 7/20/89).

A suit by a nontaxpayer and a taxpayer challenging an IRS levy against insurance proceeds received by the taxpayer and assigned to the nontaxpayer was dismissed. The nontaxpayer's claim was denied because more than nine months had elapsed after the service of the notice of levy and before the action was filed. The district court rejected the nontaxpayer's contention that the nine-month statute of limitations did not commence until the insurance company agreed to pay on the policies.

B. Glaze, DC Ind., 88-1 USTC ¶9384.

The statute of limitations barred an untimely wrongful levy claim by a bank that held a perfected security interest in property seized and sold by the State (Colorado) Department of Revenue to satisfy tax liens. The bank unsuccessfully argued that, because the DOR failed to state that it paid the funds to the IRS until it filed the amended complaint in an interpleader suit to distribute the excess sale proceeds, equity required that the limitations period begin on the date the amended complaint was filed. The court disagreed since payment by the DOR on demand of the IRS levy released the state from liability with respect to the funds. Moreover, the IRS had no duty to give the bank notice of the payment it received from the DOR. Thus, the bank failed to show concealment of the claim by the DOR or the IRS. Moreover, the bank failed to exercise due diligence since it had facts less than 3 months after the original notice of levy that would have enabled it to discover that its secured property had been levied upon.

Mountain States Bank, DC Colo., 92-1 USTC ¶50,309.

An individual could not challenge a levy six years after its issuance since the nine-month statute of limitations period had run and the district court lacked jurisdiction. Further, the two-year limitation period associated with refund denials could not be applied, since the IRS did not levy upon the seized money to satisfy any tax debts of the individual.

B. Williams, CA-2, 91-2 USTC ¶50,529, 947 F2d 37. Cert. denied, 5/26/92.

A wrongful levy action that was brought more than nine months after the last levy was made was dismissed as untimely. Furthermore, a letter meant to dissuade the IRS from seizing the property and a refund claim on Form 843 that were sent to the IRS failed to constitute adequate requests for the return of property and did not extend the nine-month limitations period for wrongful levy actions. However, in accordance with the ruling in L.R. Williams (SCt, 95-1 USTC ¶50,218), the company had standing to file a suit for a refund under 28 U.S.C. §1346. The fact that a wrongful levy caused the company to pay the tax did not limit its exclusive remedy to a suit under Code Sec. 7426. E. Winebrenner (CA-9, 91-1 USTC ¶50,057) was overruled to the extent that it conflicts with the holding in the instant case.

WWSM Investors, CA-9, 95-2 USTC ¶50,454, 64 F3d 456.

A wrongful levy action was the exclusive remedy available to a surety who sought reimbursement for amounts paid upon a contractor's default from funds that were due to the contractor from a city construction project but that had been levied upon by the IRS for the contractor's unpaid employment taxes. The surety could not turn to a quiet title action under 28 U.S.C. §2410(a)(1) because the wrongful levy suit was foreclosed due to expiration of the limitations period. The surety's case was not distinguishable from E. Winebrenner (CA-9, 91-1 USTC ¶50,057, ¶41,713.10), which held that Code Sec. 7426 was the exclusive remedy for a wrongful levy. E. Winebrenner remained good law following the decisions in L.R. Williams (SCt, 95-1 USTC ¶50,218, ¶41,713.42) and WWSM Investors (CA-9, 95-2 USTC ¶50,454, above), which involved refund suits under 28 U.S.C. §1346(a)(1) and not quiet title actions.

Fidelity and Deposit Co. of Maryland, CA-9, 96-2 USTC ¶50,332.

A wrongful levy suit instituted by a bank that claimed to hold a security interest in a delinquent taxpayer's accounts receivables that were seized by the IRS was dismissed as untimely. Even if the bank made a proper written request for the seized monies within the statutory nine-month period, it failed to bring its wrongful levy suit within one year of the date of that request. The bank also could not bring a refund action under 28 U.S.C. §1346 because it did not have possession of the accounts that were levied upon and it did not actually pay the delinquent taxpayer's liabilities to the IRS.

South Louisiana Bank, DC La., 98-1 USTC ¶50,143.

The IRS's motion to dismiss was granted where a individual did not have standing to assert a claim for a refund of funds he alleged were wrongfully seized by the IRS. The individual's proper cause of action would have been under Code Sec. 7426, which allows an action by persons other than taxpayers for wrongful levy on property. However, the individual was time-barred from bringing such a claim because the nine-month statute of limitations for a wrongful levy claim had expired.

J. Swiriduk, DC Mass., 92-1 USTC ¶50,057.

Creditors with a prior lien on a debtor's property could not maintain a garnishment action against the IRS, which had levied on and sold the same property to satisfy an unpaid tax assessment. The IRS was immune from suit in the garnishment action and had not waived its immunity by intervening in another action brought by the creditors against different property of the debtor. The creditors' sole recourse against the government lay in a wrongful levy suit which was time-barred.

R.A. Miller, CA-8, 98-1 USTC ¶50,153, 134 F3d 910.

An issue of fact existed regarding the validity of the service of levy and the notice of seizure, which prevented the court from making a determination on the IRS summary judgment motion. The validity of the levy and of the notice of seizure affected the statute of limitations issue of whether the plaintiff's suit for wrongful levy was timely. The parties were given leave to file supplemental briefs concerning the validity of such service and notice.

C. Berlanga, DC Mich., 92-2 USTC ¶50,544.

A federal district court lacked jurisdiction over an insurance company's claim that the government wrongfully levied the company's property to satisfy an individual's tax liability. The company filed its complaint after the expiration of the statute of limitations under Code Sec. 6532(c). The company's request for a return of the levied property did not serve to extend the statute of limitations because the company mailed the request to a revenue agent rather than to the district director, as required by the applicable regulations.

Amwest Surety Insurance Co., CA-7, 94-2 USTC ¶50,376, 28 F3d 690.

The IRS's motion to dismiss an individual's wrongful levy action on the ground that it was not brought within the nine-month limitations period was denied. It was factually uncertain whether the individual had filed a written request for the release of the levy that would have extended the period for filing suit. Moreover, the individual did not possess the levied upon funds when the notices of levy were issued. Finally, the company of the individual's ex-husband that owed the taxes at issue and had surrendered the funds to the IRS was not a proper defendant and was dismissed from the case.

D.S. Evert, DC Mo., 97-2 USTC ¶50,985.

A delinquent taxpayer's relatives were entitled to the return of their jewelry that the IRS had levied upon to satisfy the taxpayer's tax liability and that it had seized from a safety deposit box. The levy was wrongful, and the nine-month limitations period had not run at the time the action was filed.

D.S. Bonacci, DC Utah, 94-1 USTC ¶50,265.

Two individuals were precluded from recovering personal property levied upon by the IRS to satisfy the unpaid tax liability of the mother of one of the individuals. Although the individuals spoke to an IRS agent and took several steps to recover their property, they failed to follow the strict procedures set forth in Code Sec. 7426, which required them to request return of the property or to file a wrongful levy suit before the statute of limitations had expired.

L.A. Fanning, DC Ga., 96-1 USTC ¶50,277.

A district court's improper dismissal of a company's suit for wrongful levy on the ground that it was untimely was vacated. Although the company did not send the required written request for return of the property to the IRS district director, the court should have considered the possibility that the IRS had adequate notice through a letter sent to an IRS attorney and a conversation between the company's legal counsel and the IRS district counsel about the letter. Thus, the company was given leave to amend its complaint to add these allegations.

Small and Small, P.A., DC Fla., 96-1 USTC ¶50,030, vac'g, DC Fla., 95-2 USTC ¶50,583

A bank's wrongful levy suit was dismissed for lack of subject matter jurisdiction because it was filed more than nine months after the IRS levied upon a delinquent taxpayer's funds in which the bank had a security interest. Equitable tolling did not extend the limitations period for the bank's suit because there was no evidence that circumstances beyond the bank's control prevented it from filing a timely claim or that the IRS took affirmative measures to lull the bank into inaction or purposefully frustrated its efforts to file a claim.

Gothenburg State Bank & Tr. Co., DC Neb., 99-1 USTC ¶50,476.

Similarly.

Entenmann's, Inc., DC Neb., 99-2 USTC ¶50,639.

Corporate taxpayers filed a timely wrongful levy claim seeking recovery of their portion of a joint award that had been seized by the government. The monies had been awarded in a case in which a levy had also been imposed. Because the taxpayers did not challenge the government's levy, which was imposed more than three years earlier, but sued based on the seizure, their claim fell within the nine-month limitation period. Consequently, the court had jurisdiction over the claim.

New Fairview, Inc., DC Mass., 2001-2 USTC ¶50,756.

Chief Counsel concluded in a CCA that Code Sec. 7426 is the exclusive remedy for wrongful levy actions, and that such suits must be filed within the statute of limitations provided by Code Sec. 6532(c).

CCA 200238043, August 14, 2002.

A daughter's claim challenging IRS allocations of sale proceeds of prunes acquired by levy to satisfy the tax liabilities of a corporation solely owned by her father was barred as untimely. Her attempt to recharacterize the claim by asserting that she was not seeking to recover the funds did not change the fact that she was seeking a determination that the proceeds were wrongly applied to one taxpayer and should have been applied to another taxpayer.

Cal Fruit International, Inc., DC Calif., 2006-2 USTC ¶50,600.

A federal district court denied the government's motion to dismiss as untimely a corporation's wrongful levy complaint. The complaint was filed after the Code Sec. 6532 limitations period had expired but contained an allegation that the company had made a proper written request for return of the levied funds. While the government conceded that under Code Sec. 6532(c)(2) the limitations period is extended from nine months to 12 months if a proper written request for return of the levied funds is made, it contended that the company failed to prove that its request was proper and, therefore, the extended period did not apply. Despite the government's contention, the claimant was not required to prove the truth of its allegation that it made a proper written request for return of the levied funds at this stage of the proceedings.

Next Generation Wireless, Ltd., DC Ohio, 2007-2USTC ¶50,705.

An individual and her attorney could not bring a wrongful levy claim because the IRS established the validity of its tax lien, which it could enforce independent from the levy. Furthermore, even if the IRS did not have a valid tax lien, the individuals did not file a wrongful levy suit under Code Sec. 7426 within the nine-month statute of limitations.

M.A. Norem v. G.A. Norem, DC Texas, 2008-1 USTC ¶50,368.

An individual's action challenging an IRS levy on her joint bank account that was filed 26 months after the levy on the account and 14 months after she became aware of the levy was not filed within the nine-month statutory period required for commencing a wrongful levy suit. Further, under controlling precedent in the circuit (Becton Dickinson and Co., CA-3, 2000-2 USTC ¶50,542) the statute of limitations could not be equitably tolled.

J R. Scheafnocker,, DC Pa., 2008-1 USTC ¶50,372.

Offer in Compromise Regulations §301.7122-1In general

(1) If the Secretary determines that there are grounds for compromise under this section, the Secretary may, at the Secretary's discretion, compromise any civil or criminal liability arising under the internal revenue laws prior to reference of a case involving such a liability to the Department of Justice for prosecution or defense.

(2) An agreement to compromise may relate to a civil or criminal liability for taxes, interest, or penalties. Unless the terms of the offer and acceptance expressly provide otherwise, acceptance of an offer to compromise a civil liability does not remit a criminal liability, nor does acceptance of an offer to compromise a criminal liability remit a civil liability.
(b) Grounds for compromise

(1) Doubt as to liability. --Doubt as to liability exists where there is a genuine dispute as to the existence or amount of the correct tax liability under the law. Doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability. See paragraph (f)(4) of this section for special rules applicable to rejection of offers in cases where the Internal Revenue Service (IRS) is unable to locate the taxpayer's return or return information to verify the liability.
(2) Doubt as to collectibility. --Doubt as to collectibility exists in any case where the taxpayer's assets and income are less than the full amount of the liability.
(3) Promote effective tax administration
(i) A compromise may be entered into to promote effective tax administration when the Secretary determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship within the meaning of §301.6343-1.
(ii) If there are no grounds for compromise under paragraphs (b)(1), (2), or (3)(i) of this section, the IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability. Compromise will be justified only where, due to exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. A taxpayer proposing compromise under this paragraph (b)(3)(ii) will be expected to demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid his liability in full.

(iii) No compromise to promote effective tax administration may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws.

(c) Special rules for evaluating offers to compromise

(1) In general. --Once a basis for compromise under paragraph (b) of this section has been identified, the decision to accept or reject an offer to compromise, as well as the terms and conditions agreed to, is left to the discretion of the Secretary. The determination whether to accept or reject an offer to compromise will be based upon consideration of all the facts and circumstances, including whether the circumstances of a particular case warrant acceptance of an amount that might not otherwise be acceptable under the Secretary's policies and procedures.

(2) Doubt as to collectibility

(i) Allowable Expenses. --A determination of doubt as to collectibility will include a determination of ability to pay. In determining ability to pay, the Secretary will permit taxpayers to retain sufficient funds to pay basic living expenses. The determination of the amount of such basic living expenses will be founded upon an evaluation of the individual facts and circumstances presented by the taxpayer's case. To guide this determination, guidelines published by the Secretary on national and local living expense standards will be taken into account.

(ii) Nonliable spouses

(A) In general. --Where a taxpayer is offering to compromise a liability for which the taxpayer's spouse has no liability, the assets and income of the nonliable spouse will not be considered in determining the amount of an adequate offer. The assets and income of a nonliable spouse may be considered, however, to the extent property has been transferred by the taxpayer to the nonliable spouse under circumstances that would permit the IRS to effect collection of the taxpayer's liability from such property (e.g., property that was conveyed in fraud of creditors), property has been transferred by the taxpayer to the nonliable spouse for the purpose of removing the property from consideration by the IRS in evaluating the compromise, or as provided in paragraph (c)(2)(ii)(B) of this section. The IRS also may request information regarding the assets and income of the nonliable spouse for the purpose of verifying the amount of and responsibility for expenses claimed by the taxpayer.

(B) Exception. --Where collection of the taxpayer's liability from the assets and income of the nonliable spouse is permitted by applicable state law (e.g., under state community property laws), the assets and income of the nonliable spouse will be considered in determining the amount of an adequate offer except to the extent that the taxpayer and the nonliable spouse demonstrate that collection of such assets and income would have a material and adverse impact on the standard of living of the taxpayer, the nonliable spouse, and their dependents.
(3) Compromises to promote effective tax administration

(i) Factors supporting (but not conclusive of) a determination that collection would cause economic hardship within the meaning of paragraph (b)(3)(i) of this section include, but are not limited to --

(A) Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the condition;

(B) Although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and

(C) Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.

(ii) Factors supporting (but not conclusive of) a determination that compromise would undermine compliance within the meaning of paragraph (b)(3)(iii) of this section include, but are not limited to --

(A) Taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code;

(B) Taxpayer has taken deliberate actions to avoid the payment of taxes; and

(C) Taxpayer has encouraged others to refuse to comply with the tax laws.

(iii) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the economic hardship provisions of paragraph (b)(3)(i) of this section:

Example 1. The taxpayer has assets sufficient to satisfy the tax liability. The taxpayer provides full time care and assistance to her dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in his assets to provide for adequate basic living expenses and medical care for his child. The taxpayer's overall compliance history does not weigh against compromise.

Example 2. The taxpayer is retired and his only income is from a pension. The taxpayer's only asset is a retirement account, and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. The taxpayer's overall compliance history does not weigh against compromise.

Example 3. The taxpayer is disabled and lives on a fixed income that will not, after allowance of basic living expenses, permit full payment of his liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate his disability. The taxpayer's equity in the house is sufficient to permit payment of the liability he owes. However, because of his disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayer's home has been specially equipped to accommodate his disability, forced sale of the taxpayer's residence would create severe adverse consequences for the taxpayer. The taxpayer's overall compliance history does not weigh against compromise.

(iv) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the public policy and equity provisions of paragraph (b)(3)(ii) of this section:

Example 1. In October of 1986, the taxpayer developed a serious illness that resulted in almost continuous hospitalizations for a number of years. The taxpayer's medical condition was such that during this period the taxpayer was unable to manage any of his financial affairs. The taxpayer has not filed tax returns since that time. The taxpayer's health has now improved and he has promptly begun to attend to his tax affairs. He discovers that the IRS prepared a substitute for return for the 1986 tax year on the basis of information returns it had received and had assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill is more than three times the original tax liability. The taxpayer's overall compliance history does not weigh against compromise.

Example 2. The taxpayer is a salaried sales manager at a department store who has been able to place $2,000 in a tax-deductible IRA account for each of the last two years. The taxpayer learns that he can earn a higher rate of interest on his IRA savings by moving those savings from a money management account to a certificate of deposit at a different financial institution. Prior to transferring his savings, the taxpayer submits an e-mail inquiry to the IRS at its Web Page, requesting information about the steps he must take to preserve the tax benefits he has enjoyed and to avoid penalties. The IRS responds in an answering e-mail that the taxpayer may withdraw his IRA savings from his neighborhood bank, but he must redeposit those savings in a new IRA account within 90 days. The taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, the taxpayer learns that he has been misinformed about the required rollover period and that he is liable for additional taxes, penalties and additions to tax for not having redeposited the amount within 60 days. Had it not been for the erroneous advice that is reflected in the taxpayer's retained copy of the IRS e-mail response to his inquiry, the taxpayer would have redeposited the amount within the required 60-day period. The taxpayer's overall compliance history does not weigh against compromise.

(d) Procedures for submission and consideration of offers

(1) In general. --An offer to compromise a tax liability pursuant to section 7122 must be submitted according to the procedures, and in the form and manner, prescribed by the Secretary. An offer to compromise a tax liability must be made in writing, must be signed by the taxpayer under penalty of perjury, and must contain all of the information prescribed or requested by the Secretary. However, taxpayers submitting offers to compromise liabilities solely on the basis of doubt as to liability will not be required to provide financial statements.

(2) When offers become pending and return of offers. --An offer to compromise becomes pending when it is accepted for processing. The IRS may not accept for processing any offer to compromise a liability following reference of a case involving such liability to the Attorney General for prosecution or defense. If an offer accepted for processing does not contain sufficient information to permit the IRS to evaluate whether the offer should be accepted, the IRS will request that the taxpayer provide the needed additional information. If the taxpayer does not submit the additional information that the IRS has requested within a reasonable time period after such a request, the IRS may return the offer to the taxpayer. The IRS may also return an offer to compromise a tax liability if it determines that the offer was submitted solely to delay collection or was otherwise nonprocessable. An offer returned following acceptance for processing is deemed pending only for the period between the date the offer is accepted for processing and the date the IRS returns the offer to the taxpayer. See paragraphs (f)(5)(ii) and (g)(4) of this section for rules regarding the effect of such returns of offers.
(3) Withdrawal. --An offer to compromise a tax liability may be withdrawn by the taxpayer or the taxpayer's representative at any time prior to the IRS' acceptance of the offer to compromise. An offer will be considered withdrawn upon the IRS' receipt of written notification of the withdrawal of the offer either by personal delivery or certified mail, or upon issuance of a letter by the IRS confirming the taxpayer's intent to withdraw the offer.

(e) Acceptance of an offer to compromise a tax liability

(1) An offer to compromise has not been accepted until the IRS issues a written notification of acceptance to the taxpayer or the taxpayer's representative.

(2) As additional consideration for the acceptance of an offer to compromise, the IRS may request that taxpayer enter into any collateral agreement or post any security which is deemed necessary for the protection of the interests of the United States.

(3) Offers may be accepted when they provide for payment of compromised amounts in one or more equal or unequal installments.

(4) If the final payment on an accepted offer to compromise is contingent upon the immediate and simultaneous release of a tax lien in whole or in part, such payment must be made in accordance with the forms, instructions, or procedures prescribed by the Secretary.

(5) Acceptance of an offer to compromise will conclusively settle the liability of the taxpayer specified in the offer. Compromise with one taxpayer does not extinguish the liability of, nor prevent the IRS from taking action to collect from, any person not named in the offer who is also liable for the tax to which the compromise relates. Neither the taxpayer nor the Government will, following acceptance of an offer to compromise, be permitted to reopen the case except in instances where --

(i) False information or documents are supplied in conjunction with the offer;

(ii) The ability to pay or the assets of the taxpayer are concealed; or

(iii) A mutual mistake of material fact sufficient to cause the offer agreement to be reformed or set aside is discovered.
(6) Opinion of Chief Counsel. --Except as otherwise provided in this paragraph (e)(6), if an offer to compromise is accepted, there will be placed on file the opinion of the Chief Counsel for the IRS with respect to such compromise, along with the reasons therefor. However, no such opinion will be required with respect to the compromise of any civil case in which the unpaid amount of tax assessed (including any interest, additional amount, addition to the tax, or assessable penalty) is less than $50,000. Also placed on file will be a statement of --

(i) The amount of tax assessed;

(ii) The amount of interest, additional amount, addition to the tax, or assessable penalty, imposed by law on the person against whom the tax is assessed; and

(iii) The amount actually paid in accordance with the terms of the compromise.
(f) Rejection of an offer to compromise

(1) An offer to compromise has not been rejected until the IRS issues a written notice to the taxpayer or his representative, advising of the rejection, the reason(s) for rejection, and the right to an appeal.

(2) The IRS may not notify a taxpayer or taxpayer's representative of the rejection of an offer to compromise until an independent administrative review of the proposed rejection is completed.

(3) No offer to compromise may be rejected solely on the basis of the amount of the offer without evaluating that offer under the provisions of this section and the Secretary's policies and procedures regarding the compromise of cases.

(4) Offers based upon doubt as to liability. --Offers submitted on the basis of doubt as to liability cannot be rejected solely because the IRS is unable to locate the taxpayer's return or return information for verification of the liability.
(5) Appeal of rejection of an offer to compromise

(i) In general. --The taxpayer may administratively appeal a rejection of an offer to compromise to the IRS Office of Appeals (Appeals) if, within the 30-day period commencing the day after the date on the letter of rejection, the taxpayer requests such an administrative review in the manner provided by the Secretary.

(ii) Offer to compromise returned following a determination that the offer was nonprocessable, a failure by the taxpayer to provide requested information, or a determination that the offer was submitted for purposes of delay. --Where a determination is made to return offer documents because the offer to compromise was nonprocessable, because the taxpayer failed to provide requested information, or because the IRS determined that the offer to compromise was submitted solely for purposes of delay under paragraph (d)(2) of this section, the return of the offer does not constitute a rejection of the offer for purposes of this provision and does not entitle the taxpayer to appeal the matter to Appeals under the provisions of this paragraph (f)(5). However, if the offer is returned because the taxpayer failed to provide requested financial information, the offer will not be returned until a managerial review of the proposed return is completed.

(g) Effect of offer to compromise on collection activity
(1) In general. --The IRS will not levy against the property or rights to property of a taxpayer who submits an offer to compromise, to collect the liability that is the subject of the offer, during the period the offer is pending, for 30 days immediately following the rejection of the offer, and for any period when a timely filed appeal from the rejection is being considered by Appeals.

(2) Revised offers submitted following rejection. --If, following the rejection of an offer to compromise, the taxpayer makes a good faith revision of that offer and submits the revised offer within 30 days after the date of rejection, the IRS will not levy to collect from the taxpayer the liability that is the subject of the revised offer to compromise while that revised offer is pending.
(3) Jeopardy. --The IRS may levy to collect the liability that is the subject of an offer to compromise during the period the IRS is evaluating whether that offer will be accepted if it determines that collection of the liability is in jeopardy.

(4) Offers to compromise determined by IRS to be nonprocessable or submitted solely for purposes of delay. --If the IRS determines, under paragraph (d)(2) of this section, that a pending offer did not contain sufficient information to permit evaluation of whether the offer should be accepted, that the offer was submitted solely to delay collection, or that the offer was otherwise nonprocessable, then the IRS may levy to collect the liability that is the subject of that offer at any time after it returns the offer to the taxpayer.

(5) Offsets under section 6402. --Notwithstanding the evaluation and processing of an offer to compromise, the IRS may, in accordance with section 6402, credit any overpayments made by the taxpayer against a liability that is the subject of an offer to compromise and may offset such overpayments against other liabilities owed by the taxpayer to the extent authorized by section 6402.

(6) Proceedings in court. --Except as otherwise provided in this paragraph (g)(6), the IRS will not refer a case to the Department of Justice for the commencement of a proceeding in court, against a person named in a pending offer to compromise, if levy to collect the liability is prohibited by paragraph (g)(1) of this section. Without regard to whether a person is named in a pending offer to compromise, however, the IRS may authorize the Department of Justice to file a counterclaim or third-party complaint in a refund action or to join that person in any other proceeding in which liability for the tax that is the subject of the pending offer to compromise may be established or disputed, including a suit against the United States under 28 U.S.C. 2410. In addition, the United States may file a claim in any bankruptcy proceeding or insolvency action brought by or against such person.

(h) Deposits. --Sums submitted with an offer to compromise a liability or during the pendency of an offer to compromise are considered deposits and will not be applied to the liability until the offer is accepted unless the taxpayer provides written authorization for application of the payments. If an offer to compromise is withdrawn, is determined to be nonprocessable, or is submitted solely for purposes of delay and returned to the taxpayer, any amount tendered with the offer, including all installments paid on the offer, will be refunded without interest. If an offer is rejected, any amount tendered with the offer, including all installments paid on the offer, will be refunded, without interest, after the conclusion of any review sought by the taxpayer with Appeals. Refund will not be required if the taxpayer has agreed in writing that amounts tendered pursuant to the offer may be applied to the liability for which the offer was submitted.

(i) Statute of limitations
(1) Suspension of the statute of limitations on collection. --The statute of limitations on collection will be suspended while levy is prohibited under paragraph (g)(1) of this section.

(2) Extension of the statute of limitations on assessment. --For any offer to compromise, the IRS may require, where appropriate, the extension of the statute of limitations on assessment. However, in any case where waiver of the running of the statutory period of limitations on assessment is sought, the taxpayer must be notified of the right to refuse to extend the period of limitations or to limit the extension to particular issues or particular periods of time.
(j) Inspection with respect to accepted offers to compromise. --For provisions relating to the inspection of returns and accepted offers to compromise, see section 6103(k)(1).

(k) Effective date. --This section applies to offers to compromise pending on or submitted on or after July 18, 2002. [Reg. §301.7122-1.]

.01 Historical Comment: Adopted 7/18/2002 by T.D. 9007. [Reg. §301.7122-1 does not reflect P.L. 109-222 (2006).

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Part 5. Collecting Process
Chapter 8. Offer in Compromise
Section 5. Financial Analysis

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5.8.5 Financial Analysis
5.8.5.1 Overview
5.8.5.2 Verification
5.8.5.3 Equity in Assets
5.8.5.4 Dissipation of Assets
5.8.5.5 Future Income
5.8.5.6 Payment Terms
Exhibit 5.8.5-1 Deferred Payments Limited by Short Statute
Exhibit 5.8.5-2 Deferred Payments Limited by Small Amount Due
Exhibit 5.8.5-3 Deferred Payments Limited by Application of Payment From Equity in Assets
5.8.5.1 (09-01-2005)
Overview
This chapter provides instructions for analyzing the taxpayers financial condition to determine reasonable collection potential (RCP). IRM 5.15, Financial Analysis Handbook, provides information for the analyzing and verifying of financial information and should be used in conjunction with this section.

5.8.5.2 (09-01-2005)
Verification
A thorough verification of the taxpayers Collection Information Statement (CIS) involves reviewing information available from internal sources and requesting that the taxpayer provide additional information or documents that are necessary to determine reasonable collection potential (RCP).

Collection issues that have been previously addressed during a balance due investigation by field personnel will not be re-examined unless there is convincing evidence that such reinvestigation is absolutely necessary. It is expected that the results of a previous collection investigation will be used and only supplemented when necessary to make a determination on an offer in compromise. Investigative actions that are less than 12 months old may be used to evaluate the offer in compromise.

Example:
If a Revenue Officer has completed a full CIS analysis including verification of assets, income, and expenses and has made a determination of the fair market value (FMV) of assets, equity in assets and monthly ability to pay, this information should not be reinvestigated. The Offer Examiner (OE) should use the Revenue Officer's (RO) determinations to calculate reasonable collection potential (RCP). If the balance due case file does not provide documentation to indicate the source of the offer amount, the taxpayer will be contacted to determine the source of the offer funds


5.8.5.2.1 (09-01-2005)
Internal Sources
Verify as much of the collection information statement (CIS) as possible through internal sources.

When internal locator services are not available, or indicate a discrepancy, request that the taxpayer provide reasonable information necessary to support the Collection Information Statement (CIS).

A full credit report should be requested prior to accepting an offer when the current balance due exceeds $100,000.

Regardless of the amount of the liability the following information sources may be considered:

Internal Sources Review
ENMOD and INOLES Identify cross reference TINs for related business activity not declared on the CIS.
SUMRY, IMFOL and BMFOL Verify full compliance.
RTVUE (IMF) or copy of the last filed income tax return • Compare the amount of reported income to that declared on the CIS.
• Identify past sources of income:
Schedule B — interest and dividends
Schedule C — self-employment income
Schedule D — capital gains or losses
Schedule E — rental or other investment income, net operating loss deduction
Schedule F — farm income
IRPTRO and/or copy of older year income tax returns
•Compare real estate tax and mortgage interest deductions to the amounts declared on the CIS. Higher amounts may indicate present or past real property ownership not declared on the CIS. Lower amounts may indicate property has been recently sold or transferred.
•Identify accounts not reported on the CIS, such as certificates of deposit or investment accounts.
•Verify sources of income, such as employers, bank accounts, and retirement accounts.
•Identify recently dissipated assets.
BRTVUE (BMF) or copy of last filed income tax return • Compare the amount of reported income to that declared on the CIS.
• Compare the value of assets and the amount of reported depreciation to the asset values declared on the CIS.
State Motor Vehicle Records Identify motor vehicles registered to the taxpayer but not declared on the CIS. Also check for ownership in business names.
Real Estate Records • Identify real property titled to the taxpayer but not declared on the CIS.
• Identify property held by transferee, nominee, or alter ego. Also check for ownership in business names.
Credit Bureau Report • Identify past residences and employers.
• Verify competing lien holders, balances due and payment history.
•Identify property not listed on CIS.


5.8.5.2.2 (09-01-2005)
Taxpayer Submitted Documents
Collection Information Statements (CIS) submitted with an offer in compromise should reflect information no older than the prior six months. If during the processing of the offer, the financial information becomes older than 12 months, contact should be made with the taxpayer to update the information. However, in certain situations information may become outdated due to significant processing delays caused by the Service and through no fault of the taxpayer. In those cases, it may be appropriate to rely on the outdated information if there is no indication the taxpayers overall situation has significantly changed. Judgment should be exercised to determine whether, and to what extent, updated information is necessary. If there is any reason to believe the taxpayers situation may have significantly changed, secure a new CIS.

Do not make a blanket request for information. Tailor your request to each taxpayers specific situation. Do not require the taxpayer to provide information that is available from internal sources.

Offer Investigators may receive offers (other than those identified by the "Screen for Obvious Full Pay" process) where the taxpayers have not provided, either proof of payment for certain monthly expenses claimed in Section 9 of Form 433-A, or statements showing current real estate mortgage or motor vehicle loan balance. Often the taxpayers are not actually paying claimed expenses, or they are not allowable under offer program guidelines. For example, taxpayers frequently list their unsecured credit card bills under "secured debt" or " other expenses" . While a taxpayer may have a liability for a court ordered judgment that is senior to the Notice of Federal Tax Lien (NFTL), unless they are actually making payments on that liability it is not considered as an allowable monthly expense.

If taxpayers do not substantiate claimed expenses for Form 433-A categories of health care expenses, court ordered payments, child/dependent care, life insurance, other secured debt, or other expenses, Offers Investigators will complete the Income/Expense Table (IET) assuming that the taxpayer is not making any payments for the particular unsubstantiated expense, except for health care. In those cases, refer to LEM 5.3.1.

When computing equity in real estate or allowable motor vehicles, and the taxpayer has not submitted substantiation of loan balances claimed on the Form 433-A, Offers Investigators should request a credit report and use that loan balance information to determine the current balances of any relevant loans from commercial lenders. If the loan is from a private source, it may be necessary to contact the taxpayer/representative for the information.

If not present in the file when assigned for investigation, appropriate documentation from the chart below should be requested to verify the information on the Collection Information Statement (CIS).

Taxpayer Documentation Review
Wage Earner — wage statements for the prior three months or a current or a statement with current year–to–date figures. • Compare average earnings to the income declared on the CIS.
• Verify adequate tax withholding.
• Identify payroll deductions to ensure the expense is necessary and not claimed again on the CIS.
•Identify deductions to savings accounts, credit union accounts, or retirement accounts.
Self-employed — proof of gross income (invoices, accounts receivable, commission statements, etc.) for the prior three months. • Compare average earnings to the income declared on the CIS.
• Identify deductions to ensure the expense is necessary and not claimed again on the CIS.
Three (3) current months of bank statements that show the monthly transactions, withdrawals, and deposits. Compare deposit amounts to income reported on the tax return and CIS. Question deposits that exceed reported income and unusual expenses paid. Consider asking for the cancelled checks and deposit items for a specified time frame if questionable items cannot be adequately explained.
Retirement account statements and brochures, brokerage account statements, securities, or other investments Identify the type, conditions for withdrawal, and current market value.
Life insurance policies •Identify the type, conditions for borrowing or cancellation, and the current loan and cash values.
• Verify the amount of the required premiums and ensure payments are being made.
Motor vehicle purchase or lease contracts, statements from the lender indicating the payoff amount Verify equity and monthly payment expense.
Real estate warranty deeds, mortgage deeds, HUD closing statements, statements from the lender indicating the pay off amount Identify the type of ownership, amount of equity, and monthly payment expense.
Homeowners or renters insurance policies and riders. • Compare the insured value to the value declared on the CIS.
• Identify high value personal items such as jewelry, antiques or artwork.
Financial statements recently provided to lending institutions or others. Compare the financial information on the CIS to those submitted to other lending institutions.
Divorce court orders. Verify disposition of assets in the property settlement.
Court orders for child support and proof of payment. Verify responsibility for child support, that the payments are actually being made, and the length of time payments are required to be made. A copy of the court order is not critical or required if the taxpayer does not provide supporting documentation that payments are being made. In those cases, the payment will be disallowed as an expense. If the payment is to be allowed, a copy of the Court Order must be secured.


5.8.5.3 (09-01-2005)
Equity in Assets
Proper asset valuation is essential to determine reasonable collection potential (RCP).

Field calls may be made to locate or personally ascertain the condition of assets.

Assets will not be eliminated or valued at zero dollars simply because the Service may choose not to take enforcement action against the asset, even though the net result is rejection of the offer and reporting the case currently not collectible.

5.8.5.3.1 (09-01-2005)
Net Realizable Equity
For offer purposes, assets are valued at net realizable equity (NRE). Net realizable equity is defined as quick sale value (QSV) less amounts owed to secured lien holders with priority over the federal tax lien.

Quick sale value (QSV) is defined as an estimate of the price a seller could get for the asset in a situation where financial pressures motivate the owner to sell in a short period of time, usually 90 calendar days or less. Generally, QSV is an amount less than fair market value (FMV) but greater than forced sale value (FSV). FSV is defined as no less than 75% of FMV.

Normally, quick sale value (QSV) is calculated at 80% of fair market value (FMV). A higher or lower percentage may be applied in determining QSV when appropriate, depending on the type of asset and/or current market conditions. If, based on the current market and area economic conditions, it is believed that the property would quickly sell at full FMV, then it may be appropriate to consider QSV to be the same as FMV. This is occasionally found to be true in real estate markets where real estate is selling quickly at or above the listing price. As long as the value chosen represents a fair estimate of the price a seller could get for the asset in a situation where the asset must be sold quickly (usually 90 calendar days or less) then it would be appropriate to use of a percentage other than 80%. Generally, it is the policy of the Service to apply QSV in valuing property for offer purposes.

When a particular asset has been sold (or a sale is pending) in order to fund the offer, no reduction for quick sale value (QSV) should be made. Instead, verify the actual sale price, ensuring that the sale is an arms length transaction, and use that amount as the QSV. A reduction may be made for the costs of the sale and the expected current year tax consequence to arrive at the net realizable equity (NRE) of the asset.

5.8.5.3.2 (09-01-2005)
Jointly Held Assets
When taxpayers submit separate offers but have jointly owned assets, allocate equity in the assets equally between the owners. However:

If… Then…
The joint owners demonstrate their interest in the property is not equally divided Allocate the equity based on each owner's contribution to the value of the asset.
The joint owners have joint and individual tax liabilities included in the offer investigation Apply the equity first to the joint liability and then to the individual liability.


See IRM 5.8.5.3.11(4) below for the treatment of assets held as tenancies by the entirety.

5.8.5.3.3 (09-01-2005)
Income-Producing Assets
When determining the reasonable collection potential (RCP) for an offer that includes business assets, an analysis is necessary to determine if certain assets are essential for the production of income. When it is determined that an asset or a portion of an asset is necessary for the production of income, it may be appropriate to adjust the income or expense calculation for that taxpayer to account for the loss of income stream if the asset was either liquidated or used as collateral to secure a loan to fund the offer .

When valuing income-producing assets:

If… Then…
There is no equity in the assets There is no adjustment necessary to the income stream.
There is equity and no available income stream (i.e. profit) produced by those assets There is no adjustment necessary to the income stream. Consider including the equity in the asset in the RCP.
There are both equity in assets that are determined to be necessary for the production of income and an available income stream produced by those assets Compare the value of the income stream produced by the income producing asset(s) to the equity that is available.
Determine if an adjustment to income or expenses is appropriate.
An asset used in the production of income will be liquidated to help fund an offer Adjusting the income to account for the loss of the asset.
A taxpayer borrows against an asset that is necessary for the production of income, and devotes the proceeds to the payment of the offer Consider the effect that loan will have on future expenses and the future income stream.
The taxpayer is either unable or unwilling to secure a loan on the equity in income producing assets Compare the equity in the assets with the income produced by those assets. Determine if an adjustment to income stream is appropriate to account for the potential loss of the assets.

These considerations should be fully documented in the case history. For example:

If… Then…
A self-employed construction tradesman sells a truck, which he used to haul materials, and devotes the proceeds to the offer Consider allowing the expected cost of delivery services as a business expense.
A tradesman borrows against the truck instead of selling it and devotes the proceeds to the offer Consider allowing the loan repayment as a business expense.
A loan cannot be secured and loss of the truck would create an economic hardship When special circumstances warrant acceptance of less than RCP, document the circumstances and recommend acceptance to the authorized official in Delegation Order No. 5-1 (formerly DO 11, Rev. 29).
An outside salesman has a luxury car when all that is necessary is a moderate value sedan The equity should be included in the offer. Consider allowing only a portion of the loan repayment that would be required to purchase a moderate value replacement vehicle.
An outside salesman has a luxury car but no ability to make installment payments for purchase of a moderate value replacement vehicle The equity should be included in the offer. When special circumstances warrant acceptance of less than the RCP, document the circumstances and recommend acceptance to the authorized official in Delegation Order No. 5-1 (formerly DO 11, Rev. 29). Determine the acceptable amount of a special circumstances offer by allowing the taxpayer to retain only enough equity to purchase a moderate value replacement vehicle.
A business owns a vacation property, which is used for annual board meetings. The equity should be included in the offer. Do not allow any loan repayment.


5.8.5.3.4 (09-01-2005)
Assets Held By Others as Transferees, Nominees, or Alter Egos
A critical part of the financial analysis is to determine what degree of control the taxpayer has over assets and income in the possession of others. This is especially true when the offer will be funded by a third party.

When these issues arise, apply the principles in IRM 5.17.1, Legal Reference Guide for Revenue Officers, or request a counsel opinion.

It is not necessary to actually seek or obtain any specific legal remedy in order to address these issues in an offer.

If the taxpayer has a beneficial interest in the asset or income stream then the value should be reflected in the reasonable collection potential (RCP).

5.8.5.3.5 (09-01-2005)
Cash
Review checking account statements over a reasonable period of time, normally three months.

Note:
Determine if there are funds in the account that are not spent on a monthly basis. Generally this would be the amount reflected on each month's statement when the account is at its lowest point. Treat overdrafts as a zero balance. This should represent the amount available in the account each month after all deposits and withdrawals. Average the lowest daily ending balance on each of the three statements and use this amount as the value of the account. This amount will be added to the AET as an asset, however, it cannot be valued for less than zero.


Determine the taxpayers interest in bank accounts by ascertaining the manner in which they are held and applying the principles described in IRM 5.17.1, Legal Reference Guide for Revenue Officers.

If analysis of the bank statements and/or discussions with the taxpayer reveal that an adjustment to the balance is appropriate based on unusual expenses that are necessary for the production of income or the health and welfare of the taxpayer, consider adjusting the balance. The case file should clearly document these determinations.

Analyze the statement for any unusual activity, i.e. deposit in excess of reported income, withdrawals, transfers, or checks for expenses not reflected on the Collection Information Statement (CIS). The Offer Investigator should question these inconsistencies, as appropriate.

Review savings accounts statements over a reasonable period of time, normally three months.

If the account has little withdrawal activity use the ending balance on the latest statement as the asset value for the AET.

If it is apparent that the account is used for paying monthly living expenses, treat it as a checking account and follow the instructions in paragraphs (1) through (4) above to determine its value.


If analysis of the bank statement reveals recently dissipated funds, see 5.8.5.4 below for a full discussion of the treatment of dissipated assets.

If the taxpayer offers the balances of accounts to fund the offer, allow for any penalty for early withdrawal and the expected current year tax consequence.

Verify whether deposits in escrow or trust accounts are actually held for the benefit of others.

For funds on deposit with the offer in compromise, allow as an encumbrance any amount borrowed under the provision that, if the offer is not accepted, it must be repaid.

5.8.5.3.6 (09-01-2005)
Securities
Financial securities are considered an asset and their value should be determined and included in the reasonable collection potential (RCP) when investigating an offer.

When the taxpayer will liquidate the investment to fund the offer, allow any penalty for early withdrawal and the current year tax consequence.

To determine the value of publicly traded stock, research a daily paper or inquire with a broker for the current market price. Then, allow for the estimated costs of the sale to arrive at the quick sale value (QSV).

To determine the value of closely held stock that is either not traded publicly or for which there is no established market, consider the following methods of valuing the company and assign a proportion of the company's value to the taxpayers stock:

Secure and verify a Collection Information Statement (CIS).

Review recent year's annual report to stockholders.

Review recent year's corporate income tax returns.

Request an appraisal of the business as a going concern by a qualified and impartial appraiser.


When a taxpayer holds only a negligible or token interest, has made no investment and exercises no control over the corporate affairs, it is permissible to assign no value to the stock.

5.8.5.3.7 (09-01-2005)
Life Insurance
Life insurance as an investment is not considered necessary. However, reasonable premiums for term life policies may be allowed as a necessary expense.

When determining the value in a taxpayers insurance policy, consider:

If… Then…
The taxpayer will retain or sell the policy to help fund the offer Equity is the cash surrender value.
The taxpayer will borrow on the policy to help fund the offer Equity is the cash loan value less any prior policy loans or automatic premium loans required to keep the contract in force.


5.8.5.3.8 (09-01-2005)
Retirement or Profit Sharing Plans
Funds held in a retirement or profit sharing plan are considered an asset and must be valued for offer purposes.

Contributions to voluntary retirement plans are not a necessary expense. Review of the retirement plan document is generally necessary to determine the taxpayers benefits and options under the plan.

When determining the value of a taxpayers pension and profit sharing plans consider:

If… And… Then…
The account is an Individual Retirement Account (IRA) or Keogh Account The taxpayer is not retired or close to retirement Equity is the cash value less any expense for liquidating the account and early withdrawal penalty.
The account is an Individual Retirement Account (IRA), 401(k), or Keogh Account The taxpayer is retired or close to retirement Equity is the cash value less any expense for liquidating the account and early withdrawal penalty. The plan may be considered as income, if the income from the plan is necessary to provide for necessary living expenses.
The contribution to a retirement plan is required as a condition of employment The taxpayer is able to withdraw funds from the account Equity is the amount the taxpayer can withdraw less any expense associated with the withdrawal
The contribution to an employer's plan is required as a condition of employment The taxpayer is unable to withdraw funds from the account but is permitted to borrow on the plan Equity is the available loan value.
Any retirement plan that may not be borrowed on or liquidated until separation from employment The taxpayer is retired, eligible to retire, or close to retirement Equity is the cash value less any expense for liquidating the account and early withdrawal penalty, or consider the plan as income if the income from the plan is necessary to provide for necessary living expenses.
The plan may not be borrowed on or liquidated until separation from employment The taxpayer is not eligible to retire until after the period for which we are calculating future income The plan has no equity.
The plan includes a stock option The taxpayer is eligible to take the option Equity is the value of the stock at current market price less any expense to exercise the option.


When the taxpayer will liquidate the retirement plan to fund the offer, allow any penalty for early withdrawal and the current year tax consequence.

When the taxpayer will borrow against the retirement plan to fund the offer, allow any penalty for early withdrawal and the current year tax consequence.

5.8.5.3.9 (09-01-2005)
Furniture, Fixtures, and Personal Effects
The taxpayers declared value of household goods is usually acceptable unless there are articles of extraordinary value; such as, antiques, artwork, jewelry, or collector's items. Exercise discretion in determining whether the assets warrant personal inspection.

There is a statutory exemption from levy that applies to the taxpayers furniture and personal effects. This exemption amount is updated on an annual basis.

Note:
This exemption applies only to individual taxpayers.


When determining the value consider the following:

If… Then…
The taxpayer qualifies as head of household, single, or married Grant a reduction in the value of personal effects for the levy exemption amount.
The property is owned jointly with any person who is not liable for the tax Determine the value of the taxpayers proportionate share of property before allowing the levy exemption.
Some of the furniture or fixtures are used in a business They are not personal effects, but they may qualify for the levy exemption as tools of a trade.


5.8.5.3.10 (09-01-2005)
Motor Vehicles, Airplanes, and Boats
Equity in motor vehicles, airplanes, and boats must be determined and included in the reasonable collection potential (RCP). The general rule for determining net realizable equity (NRE), as discussed in IRM 5.8.5.3.1 above, applies when determining equity in these assets. Unusual assets such as airplanes and boats may require an appraisal to determine fair market value (FMV), unless the items can be located in a trade association guide. The case file should document how the values were determined.

Generally, it is not necessary to personally inspect automobiles used for personal transportation. When it appears reasonable, accept the taxpayers stated value. No further investigation is required except for vehicles that are three years old or newer with no lien. For these vehicles, consult a trade association guide and discount the fair market value (FMV) to 80% to arrive at the quick sale value (QSV).

Example:
When investigating an offer in the year 2003, a 2001 model year is 3 years old or newer.


When these assets are used for business purposes they may be considered income producing assets. See IRM 5.8.5.3.3 above for a full discussion on the treatment of income producing assets.

5.8.5.3.11 (09-01-2005)
Real Estate
Equity in real estate is included when calculating the taxpayers reasonable collection potential (RCP) and in an acceptable offer amount.

When determining equity in real estate, the fair market value (FMV) of the property must be established. FMV is defined as the price a willing buyer will pay for the property, given time to obtain the best and highest possible price. The following methods may be used to establish FMV:

Recent purchase price or an existing contract to sell

Recent appraisals

Real estate tax assessment

Market comparable

Homeowners insurance replacement cost


Once the fair market value (FMV) of real estate is established, a determination regarding a reduction of value for offer purposes must be made. Procedures outlining reduction to quick sale value (QSV) are discussed in IRM 5.8.5.3.1 above. If the value of real estate is reduced beyond 80% or if FMV is not reduced to QSV, the case file should document the basis for the value used.

For real estate and other related property held as tenancies by the entirety when the tax is owed by only one spouse, the taxpayers portion is usually 50% of the property's net realizable equity (NRE).

5.8.5.3.12 (09-01-2005)
Accounts and Notes Receivable
Accounts and notes receivable are considered assets unless a determination is made to treat them as part of the income stream when they are required for the production of income. When it is determined that liquidation of a receivable would be detrimental to the continued operation of an otherwise profitable business, it may be treated as future income.

To determine the value of accounts receivable:

Consider discounting the value of accounts that are over 90 calendar days past due.

When the receivables have been sold at a discount or pledged as collateral on a loan, apply the provisions of IRC 6323(c) to determine the lien priority of commercial transactions and financing agreements.

Closely examine accounts of significant value that the taxpayer is not attempting to collect, or that are receivable from officers, stockholders, or relatives.


To determine the value of a note receivable, consider the following:

Whether it is secured and if so by what asset(s)

What is collectable from the borrower

If it could be successfully levied upon.


5.8.5.3.13 (09-01-2005)
Inventory, Machinery, and Equipment
Inventory, machinery and equipment may be considered income producing assets. See IRM 5.8.5.3.3 above when it is determined that liquidation of these assets would be detrimental to the continued operation of an otherwise profitable business.

To determine the value of business assets use the following:

For assets commonly used in many businesses such as automobiles and trucks, the value may be easily determined by consulting trade association guides.

For specialized machinery and equipment suitable for only certain applications, consult a trade association guide, secure an appraisal from a knowledgeable and impartial dealer, or contact the manufacturer.

When the property is unique or difficult to value and no other resource will meet the need, follow local procedure to request the services of an IRS valuation engineer.

Consider asking the taxpayer to secure an appraisal from a qualified business appraiser.


There is a statutory exemption from levy that applies to an individual taxpayers tools used in a trade or business. This exemption for tools of the trade generally does not apply to automobiles. The levy exemption amount is updated on an annual basis.

5.8.5.3.14 (09-01-2005)
Business as a Going Concern
Evaluation of a business as a going concern is sometimes necessary when determining reasonable collection potential (RCP) of an operating business owned individually or by a corporation, partnership, or LLC. This analysis recognizes that a business may be worth more than the sum of its parts, when sold as a going concern.

To determine the value of a business as a going concern consider the value of assets, future income, and intangible assets such as:

Good will

Ability or reputation of a professional

Established customer base

Prominent location

Well known trade name, trademark, or telephone number

Possession of government licenses, copyrights, or patents



Generally, the difference between what an ongoing business would realize if sold on the open market as a going concern and the traditional reasonable collection potential (RCP) analysis is attributable to the value of these intangibles.

Request the assistance of an IRS valuation engineer when a difficult or complex valuation is necessary.

When determining reasonable collection potential (RCP) for an individual taxpayer that has an interest in a business entity, flexibility should be used with consideration given to the taxpayers control over the business.

5.8.5.4 (09-01-2005)
Dissipation of Assets
During an offer investigation it may be discovered that assets (liquid or non-liquid) have been sold, gifted, transferred, or spent on non-priority items and/or debts and are no longer available to pay the tax liability. This section discusses treatment of the value of these assets when considering an offer in compromise.

Note:
The scope of an offer investigation should not be expanded beyond the requirements defined in IRM 5.8.5.4, for the sole purpose of attempting to locate dissipated assets.


Once it is determined that a specific asset has been dissipated, the investigation should address whether the value of the asset, or a portion of the value, should be included in an acceptable offer amount.

Inclusion of the value of dissipated assets must clearly be justified in the case file and documented on the ICS/AOIC history. Justification should include an analysis of the following facts:

When the asset(s) were dissipated in relation to the offer submission,

How the asset was dissipated,

If the taxpayer realized any funds from the dissipation of assets,

How any funds realized from the dissipation of assets were used,

The value of dissipated assets and the taxpayers interest in those assets.


When the taxpayer can show that assets have been dissipated to provide for necessary living expenses, these amounts should not be included in the reasonable collection potential (RCP) calculation.
For Example:

Dissolving an IRA account to pay for necessary living expenses during unemployment

Using bank accounts to pay for medical expenses

An asset that was dissipated and the funds were used to purchase another asset that is included in the offer evaluation.


If the investigation clearly reveals that assets have been dissipated with a disregard of the outstanding tax liability, consider including the value in the reasonable collection potential (RCP) calculation.

Note:
The examples below are only guidelines and the value of the dissipated assets should not automatically be included in the calculation of the RCP. Each particular case must be evaluated on it's own merit and with the factors in (3) above in mind. In addition, if the tax liability did not exist prior to the dissipation or the dissipation occurred prior to the taxable event giving rise to the tax liability, a taxpayer cannot be said to have dissipated the assets with a disregard of the outstanding tax liability. For example, if a taxpayer withdraws funds from an IRA to invest in a business opportunity but does not have any tax liability prior to the withdrawal, the fact that taxes are not withheld from the distribution does not result in the value of the funds being included in the RCP calculation.


For Example:

Dissolving an IRA account to pay unsecured credit card debt

Sale of real estate and "gifting" the funds from the sale to family members.

A recent refinancing of equity in property and using the funds to pay unsecured debt.


If the taxpayer cannot or will not provide information showing the disposition of funds from dissipated assets, consider including a portion or all of these values in an acceptable offer amount.

5.8.5.5 (09-01-2005)
Future Income
Future income is defined as an estimate of the taxpayers ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. The number of months used depends on the payment terms of the offer.

For cash offers — project for the next 48 months.

For short term deferred offers — project for the next 60 months.

For deferred payment offers — project for the number of months remaining on the statutory period for collection.


Detailed instructions for calculating future income are contained in IRM 5.8.5.5.5 below.

Consider the taxpayers overall general situation including such facts as age, health, marital status, number and age of dependents, highest education or occupational training, and work experience.

Retired Debts — A taxpayers ability to pay in the future may change during the period it is being considered because necessary expenses may increase or decrease. Adjust the amount or number of payments to be included in the future income calculation, based on the expected change in necessary expenses.


Example:
The taxpayer may pay off an auto loan 24 months from the date the offer is accepted. This would increase the monthly future income by the amount of the loan payment. Child support payments may stop before the future income period is complete because the child turns a certain age. It is expected that these retired payments would increase the taxpayers ability to pay.


Note:
Inclusion of retired debt should not be added automatically in the calculation of the reasonable collection potential (RCP). The Offer Investigator should use judgment in determining whether inclusion of the retired debt is appropriate based on the facts of the case; such as special circumstance or Effective Tax Administration (ETA) situations. In all instances, the case histories should be documented to support the inclusion and/or exclusion of the retired debt.


Some situations may warrant placing a different value on future income than current or past income indicates:

If… Then…
Income will increase or decrease or current necessary expenses will increase or decrease Adjust the amount or number of payments to what is expected during the appropriate number of months.
A taxpayer is temporarily unemployed or underemployed Use the level of income expected if the taxpayer were fully employed and if the potential for employment is apparent. Each case should be judged on its own merit, including consideration of special circumstance or ETA issues.
Example:
Underemployed – If a taxpayer is a teacher but recently moved and is currently working as a janitor until a teaching position becomes available; or has been hired and does not begin work until the school season begins, is considered to be currently underemployed.

A taxpayer has a sporadic employment history or fluctuating income Average earnings over several prior years. Usually this is the prior 3 years.
Note:
This practice does not apply to wage earners.

A taxpayer is elderly, in poor health, or both and the ability to continue working is questionable Adjust the amount or number of payments to the expected earnings during the appropriate number of months. Consider special circumstance situations when making any adjustments.
A taxpayer will file a petition for liquidating bankruptcy Consider reducing the value of future income. The total value of future income should not be reduced to an amount less than what could be paid toward non-dischargeable periods, or what could be recovered through bankruptcy. When considering a reduction in future income also consider the intangible value to the taxpayer of avoiding bankruptcy.


Below are some examples on when it is and is not appropriate to income average. Judgment should be used in determining the appropriate time to apply income averaging on a case by case basis. All circumstances of the taxpayer should be considered when determining the appropriate application of income averaging, including special circumstance and Effective Tax Administration considerations.

The examples below are instances when income averaging may or may not be appropriate.


Example:
A taxpayer is a commissioned sales person and the income varies year to year. It would be appropriate to income average in this case.


Example:
Mr. taxpayer was on a fixed retirement and Mrs. taxpayer had not worked for over 2 1/2 years with no promise of future employment. Do not average income for the spouse during past employment.


Example:
The taxpayer had been unemployed for over a year and provided proof that Social Security Disability was the sole source of income. Do not apply income averaging in this case.


Example:
The taxpayer was incarcerated and unable to work for the past 4 years and provided proof that a relative was paying for all expenses, including child support payments. The taxpayer had no skills or promise of work in the near future but was planning on attending trade school to improve his chances of getting a job. Do not include income from the 4 years of employment prior to the incarceration. In this case, the income and expenses would be zero. Consideration should be given whether it would be in the best interest of the Government to accept the offer or to place it in Currently Not Collectible (CNC) status.


Example:
The taxpayer recently began working after several months of unemployment. Use the most recent 3 months pay statements to determine future income. Do not income average.


In some instances, a future income collateral agreement may be used in lieu of including the estimated value of future income in reasonable collection potential (RCP). When investigating an offer where current or past income does not provide an ability to accurately estimate future income, the use of a future income collateral agreement may provide a better means of calculating an acceptable offer amount. Future income collateral agreements should not be used to enable a taxpayer to submit an offer in a lesser amount than the current or past financial condition dictates. However, if the future is uncertain, but it is reasonably expected that the taxpayer will be receiving a substantial increase in income, it may be appropriate.

Example:
A taxpayer is currently in medical school and it is anticipated that upon graduation income should increase dramatically. See IRM 5.8.6.3.1, Future Income, for instructions on completing collateral agreements.


Example:
A taxpayer recently secured a job as an attorney with a starting salary at $80,000 per year, with potential for significant increases in salary.


5.8.5.5.1 (09-01-2005)
Allowable Expenses
Allowable expenses as defined in IRM 5.15.1, Financial Analysis Handbook, are those expenses that are necessary for the production of income or for the health and welfare of the taxpayers family. That handbook also contains national and local standard expense amounts designed to provide accuracy and consistency in determining a taxpayers basic living expenses. The standards are updated periodically based upon Bureau of Labor Statistics and Census Bureau information.

National and local expense standards are guidelines. If it is determined that a standard amount is inadequate to provide for a specific taxpayers basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file.

Example:
A taxpayer with a physical disability or an unusually large family requires a housing cost that is not anticipated by the local standard. Require the taxpayer to provide copies of mortgage or rent payments, utility bills and maintenance costs to verify the necessary amount.


Generally, the total number of persons allowed for national standard expenses should be the same as those allowed as dependents on the taxpayers current year income tax return. There may be reasonable exceptions. Fully document the reasons for any exceptions.

Example:
Foster children or children for whom adoption is pending.


A deviation from the local standard is not allowed merely because it is inconvenient for the taxpayer to dispose of excessively valued assets. In some situations, taxpayers may be expected to make life-style choices that will facilitate collection of the delinquent tax.

5.8.5.5.2 (09-01-2005)
Treatment of Non-Business Transportation Expenses
Transportation expenses are considered necessary when they are used by taxpayers and their families to provide for their health and welfare and/or the production of income. Employees investigating offers in compromise are expected to exercise appropriate judgment in determining whether claimed transportation expenses meet these standards. Expenses that appear to be excessive should be questioned and, in appropriate situations, disallowed.

Operating Expenses — Allow the full operating costs portion of the local transportation standard, or the amount actually claimed by the taxpayer, whichever is less .

Note:
Substantiation for this allowance is not required.


Ownership Expenses — Expenses are allowed for purchase and/or lease of a vehicle, with different rates established for a first car and, if allowed, a second or more cars.
Taxpayers will be allowed the local standard or the amount actually paid, whichever is less. Generally, auto loan and/or lease payments will not continue as allowed expenses after the terms of the loan/lease have been satisfied. However, depending on the age and/or condition of the vehicle, the complete disallowance of the ownership expense may result in a transportation expense allowance that does not adequately meet the necessary expenses of the taxpayer.
Therefore, in situations where the taxpayer owns a vehicle that is currently over six years old and/or has reported mileage of 75,000 miles or more, an additional operating expense of $200 will generally be allowed for the collection period that remains after the loan/lease has been "retired" plus the operating expense.

Note:
This also applies to those taxpayers that have no loan/lease on a vehicle over six years old and/orhas reported mileage of 75,000 miles or more.


Example:
The taxpayer, who lives in the Midwest Region, owns a 1995 Ford Taurus, with 90,000 reported miles. The vehicle was bought used, and the auto loan will be fully paid in 30 months, at $300 per month. In this situation, the taxpayer will be allowed the ownership expense until the loan is fully paid; i.e., $300 plus the allowable operating expense of $231 per month (unless less is claimed), for a total transportation allowance of $531 per month. After the auto loan is "retired" in 30 months, the ownership expense is not applicable; however, at that point, the taxpayer will be allowed a $200 operating expense allowance, in addition to the standard $231, for a total operating expense allowance of $431 per month.


Example:
The taxpayer who owns a 1998 Chevrolet Caviler with 50,000 miles, will be allowed the standard of $231 per month (unless less is claimed) plus $200 per month operating expense (because of the age of the vehicle), for a total operating expense allowance of $431 per month.


5.8.5.5.3 (09-01-2005)
Conditional Expenses
Conditional expenses are defined in IRM 5.15, Financial Analysis Handbook, as those that may be allowed when the tax will be paid in full by an installment agreement. For offers purposes, the full amount of the tax will not be collected; therefore, the rules for conditional expenses are different.

The one year rule which allows time for a taxpayer to adjust current expenses to meet the terms of an installment agreement is not allowed for Offers in Compromise.

The purchase of discretionary investments is not allowed.

Example:
Payroll savings plans, purchase of whole life policies, mutual funds or voluntary retirement plan contributions.


Repayment of loans incurred to fund the offer and secured by the taxpayers’ assets are allowed when those assets are of reasonable value and necessary to provide for the health and welfare of the taxpayers family. The same rule applies whether the equity is paid to tax before the offer is submitted or will be paid upon acceptance of the offer. See IRM 5.8.5.3.3, Income-Producing Assets, to determine when to allow repayment of loans on those assets used to fund the offer.

Repayment of student loans secured by the federal government is allowed only for the taxpayers higher education. If student loans are owed but no payments are being made, do not allow them.

Education expense is allowed only for the taxpayer and only if it is required as a condition of present employment. Expenses for dependents to attend colleges, universities or private schools are not allowed unless the dependents have special needs that cannot be met by public schools.

Child support payments for natural children or legally adopted dependents may be allowed, based on the taxpayers situation, even when they are not court ordered. Regardless of whether they are court ordered, if no child support payments are being made, do not allow them.

Monthly payments to state or local taxing agencies should not be allowed as a necessary expense, even if the state or local taxing agency has a lien that was choate prior to our lien or is collecting funds via a wage attachment or approved installment agreement. State and federal lien (regardless of priority) attach simultaneously to after acquired property. In general, if the federal tax lien attaches to after acquired property simultaneously with a competing perfected lien, the federal tax lien will take priority (see IRM 5.17.2, Legal Reference Guide). Since future earnings of the taxpayer are after acquired property the Service has first right to the earnings. Explain to the taxpayer that although the payment may be allowed in an installment agreement where the tax will be paid in full, it will not be allowed for computation of an acceptable offer amount because the Federal government has priority rights to the funds.

Note:
State or local liens may enjoy a priority in fixed payment streams such as annuity payments. If necessary, consult with area counsel to determine lien priorities.


Charitable contributions are not allowed.

Payments being made to fund or re-pay loans from voluntary plans will not be allowed. Taxpayers who cannot repay these loans will have a tax consequence in the year that the loan is declared in default and that consequence should be estimated and allowed as an additional tax expense on the IET for the required number of months necessary to cover the additional tax consequence. Request the taxpayer or their representative estimate the tax ramification of the failure to re-pay the loan or the Offers Investigator may request assistance from the Examination function or Customer Service to determine the tax consequences.

5.8.5.5.4 (09-01-2005)
Shared Expenses
This situation can happen one of two ways:

Separate offers are submitted by two or more persons who owe joint liabilities and/or separate liabilities and who share the same household.

An offer is submitted by a taxpayer who shares living expenses with a not liable person.


Generally, the assets and income of a not liable person are excluded from the computation of the taxpayers ability to pay. One notable exception is in community property states. Follow the community property laws in these states to determine what assets and income of the otherwise not liable person are subject to collection of the tax.

Regardless of community property laws, the Offers Investigator should secure sufficient information concerning the not liable person to determine the taxpayers proportionate share of the total household income and expenses. Review the entire household's information and:

Determine the total actual household income and expense.

Determine what percentage of the total household income the taxpayer contributes.

Determine necessary and allowable expense amounts using the rules in this chapter and IRM 5.15, Financial Analysis Handbook.

Determine which expenses are shared and which expenses are the sole responsibility of the taxpayer.

Apply the taxpayers percentage of income to the shared expenses.

Verify that the taxpayer actually contributes at least this amount to the total household expense.

Do not allow the taxpayer any amount paid toward a not liable person's discretionary expenses.


When the taxpayer can provide documentation that income is not commingled (as in the case of roommates who share housing) and responsibility for household expenses are divided equitably between co-habitants, (as documented by rental agreements, bank statement analysis, etc.) the total allowable expense should not exceed the total allowable housing standard for the taxpayer. In this situation, it would not be necessary to obtain the income information of the non-liable person(s), however sufficient financial information must be secured to verify the total household expenses and prove that the taxpayer is paying his/her proportionate share. The investigating employees should exercise sound judgment in these situations to determine which approach is most appropriate, based on the facts of each case.

Note:
In the situation where the taxpayer is renting an apartment or room and the owner of the property is the non-liable person, the rental agreement or signed statement from the owner of the property should support the decision to not require the owner to divulge any personal information regarding income or household expenses. In these cases, the investigating employee should accept the information provided by the taxpayer and make a determination based on that information.

If an in-house verification is conducted on the non-liable person, this information cannot be relayed to the taxpayer. This is not a Unauthorized Access (UNAX) violation but would be considered disclosure if any information is shared with someone other than the non-liable person in question.


5.8.5.5.5 (09-01-2005)
Calculation of Future Income
Generally, the amount to be collected from future income is calculated by taking the projected gross monthly income less allowable expenses and multiplying the difference times the number of months remaining on the statutory period for collection.

For cash and short term deferred offers, when there are less than 48 or 60 months remaining on the statutory period for collection, use the number of months remaining. To determine the amount collectible from future income on a deferred payment offer through the life of the statutory period for collection, take the following steps:

Subtract allowable expenses from the monthly income to determine the monthly installment amount.

Determine the valid Collection Statute Expiration Date (CSED) for each tax period included in the offer.

Sort the tax periods by earliest CSED.

For each tax period, determine the number of months remaining on the statutory period for collection. Begin with the day the offer was determined to be processable and end on the CSED. Round partial months up to the nearest whole month.

For each tax period, determine the number of installments that may be applied before running out available funds. Round partial payments up to the nearest whole payment.

Calculate the number of installments applied to each period. For succeeding periods, do not count months on the CSED that were used for applying installments to prior periods.

Caution:
If the allowed payment terms call for the first installment to begin later than 30 calendar days from acceptance, there will be one less month available to apply payments.


Add the number of installments applied to all the periods and multiply the sum by the monthly installment amount to arrive at the total amount collectible from future income. For examples of situations where the amount that may be applied to a period is limited. See Exhibits 5.8.5-1 through 5.8.5-3.


5.8.5.5.6 (09-01-2005)
Deferred Payment Offer in Compromise Received After Collection Statute Expiration Date Extension
Taxpayers that previously extended the Collection Statute Expiration Date (CSED) in connection with an installment agreement, may request approval of a deferred payment offer in compromise (DPOIC).

On March 24, 1998 the Service issued procedures that limited the length of CSED extensions. See IRM 5.14, Installment Agreements , for further instruction on the policy of the Service.

By policy, if extensions granted prior to October 18, 1999:

resulted in collection periods longer than 15 years; and,

a deferred payment offer in compromise (DPOIC) is later submitted on the balance due accounts (subject to the extension), then, for the purpose of reviewing the DPOIC request, CSEDs are considered to be the later of the following:


The original CSED (10 years from the tax assessment upon which the liability is based); or,

5 years from the date of acceptance of the offer in compromise.


IDRS will not reflect any adjustments based on these procedures; therefore, it is essential that case histories be fully documented and reflect the following statement:

"Time left prior to the CSED (per IDRS) was not used for computation of the deferred offer payment amount, per IRM 5.8.5.5.6. "

Note:
These procedures do not apply to extensions up to 6 years, but only applies to CSED extensions longer than 5 years as agreed to prior to October 18, 1999 and were granted in conjunction with an installment agreement.


5.8.5.6 (09-01-2005)
Payment Terms
Payment terms are negotiable, but should provide for payment of the offered amount in the least time possible. If a taxpayer is planning to sell asset(s) to fund all or a portion of the offer, the payment terms for the offer should provide for immediate payment of the amounts received from the sale. If the taxpayer is planning to borrow a portion of the money, the Offer Investigator should determine when the loan will be received and the payment terms of the offer should provide for payment of the borrowed portion at the time the funds are received.

For those taxpayers who agree to shorter payment terms, fewer months of future income is required:


Payment Type Payment Terms Number of Months Future Income Required
Cash Within 90 calendar days 48
Short term Deferred Within 2 years 60
Deferred Payment Within time remaining on the statute Number of months remaining on the statute


There are three possibilities for deferred payment terms:

Payment of an amount equal to the net realizable equity (NRE) in assets within 90 calendar days and payment of the future income amount by monthly installments over the time remaining on the statutory period for collection, or

Payment of a portion of the net realizable equity (NRE) in assets within 90 calendar days and payment of the balance of the equity in assets and the future income amount by monthly installments over the time remaining on the statutory period for collection, or

Payment of the entire compromise amount by monthly installments over the time remaining on the statutory period for collection.

Note:
A third party source of funds may be required to make the portion of the monthly payment that is greater than we determined the taxpayer can afford from future income.



Exhibit 5.8.5-1 (09-01-2005)
Deferred Payments Limited by Short Statute
For example, the taxpayer has accrued the following tax liability:

MFT–Period CSED Liability
30-9312 07/20/2005 $29,000
30-9412 07/20/2005 $61,000
30-9512 09/27/2006 $ 8,900
30-9612 09/20/2007 $ 7,400


The offer was determined processable on May 31, 1999. The taxpayer has no equity in assets and can pay $300 per month.

MFT–Period Months on the statute Installments Due Installments Applied
30-9312 74 96 74
30-9412 74 203 0
30-9512 87 29 14
30-9612 99 24 12
Total 99


The amount collectible from future income is: $300 times 100 months = $30,000.

Exhibit 5.8.5-2 (09-01-2005)
Deferred Payments Limited by Small Amount Due
For example the taxpayer accrued the following liability:

MFT–Period CSED Liability
30-8912 07/20/2000 $100,000
30-9512 09/27/2006 $ 1,200
30-9612 09/20/2007 $ 600


The offer was determined processable on May 31, 1999. The taxpayer has no equity in assets and can pay $300 per month.

MFT–Period Months on the statute Installments Due Installments Applied
30-8912 14 333 14
30-9512 87 4 4
30-9612 99 2 2
Total 20


The amount collectible from future income is $300 times 20 months = $6,000.

Exhibit 5.8.5-3 (09-01-2005)
Deferred Payments Limited by Application of Payment From Equity in Assets
For example the taxpayer accrued the following liability:

MFT–Period CSED Liability
30-8912 07/20/2000 $30,000
30-9512 09/27/2006 $ 1,200
30-9612 09/20/2007 $ 600


The offer was determined processable on May 31, 1999. The taxpayer has $30,000 equity in assets which he will pay within 90 calendar days and can pay $300 per month which he will begin paying within 30 calendar days.

MFT–Period Months on the statute Installments Due Installments Applied
30-8912 13 0 0
30-9512 87 4 4
30-9612 99 2 2
Total 6


After applying the $30,000 payment for the equity in assets, the amount collectible from future income is $300 times 6 months = $1,800. Reasonable collection potential is $31,800.

Case remanded on Effective Tax Administration for an Offer in Compromise. Economic hardship as it pertains to an ETA offer in compromise means that you have the equity in assets to full pay the debts but have extraordinary circumstances that would warrant acceptance of less than full payment. Some factors considered include advanced age, the health of dependents, special education needs of said dependents, medical catastrophe, or natural disaster. These factors do not pertain to your current financial condition. * * *




Vincent F. and Elizabeth R. Dailey v. Commissioner.

Dkt. No. 10693-06L , TC Memo. 2008-148, 95 TCM 1582, June 9, 2008.


[Code Sec. 7122]


IRS Appeals Office: Abuse of discretion: Offer-in-compromise: Effective tax administration. --
An IRS Appeals officer's determination to reject the taxpayers' offer-in-compromise was remanded because he failed to consider certain relevant factors before rejecting the offer. The record was unclear as to why the Appeals officer found that the taxpayers were not good candidates for an offer-in-compromise. Among the matters that were unclear on the record were whether the taxpayers could earn sufficient income to pay their liabilities, as well as reasonable living expenses, the impact that a lien might have on the taxpayers' ability to obtain employment, the impact that payment of the taxpayers' children's medical bills might have on the taxpayers' financial condition, and the effect of the health of the taxpayers' children on the ability of the taxpayers to earn a living.






Discussion and Analysis

IRC Section 6320 gives a taxpayer the right to a Collection Due Process (CDP) hearing with Appeals in response to the filing of a Notice of Federal Tax Lien (NFTL). The Service is required to inform a taxpayer of a lien not more than 5 business days after the date of the filing of Notice of Lien. A taxpayer must file the hearing request within a 30 calendar day period that begins the day after the conclusion of the 5-day notification period. A taxpayer who timely requests a hearing has the right to protest an Appeals determination in Tax Court or United States District Court, depending on the type of tax issue. In certain instances, a taxpayer may return to Appeals after the case has been closed under the "retained jurisdiction" clause in the statute.

A taxpayer may raise any relevant issues related to the unpaid tax including the appropriateness of collection actions, collection alternatives, and spousal defenses as well as to challenge the existence or amount of the tax if (s)he did not receive a Notice of Deficiency for that liability or did not have the opportunity to dispute the tax liability previously.

Appeals is required to:

 Verify that the requirements of any applicable law or administrative procedures have been met;

 Consider issues raised by the taxpayer;

 Efficiently collection taxes while avoiding unnecessarily intrusive collection actions.


Law and Procedure

With the best information available, the requirements of various applicable law or administrative procedures have been met. Based on transcripts of your accounts, the following was confirmed:

 Assessment was made on the above considered periods per IRC Section 6201 and notice and demand for payment was mailed within 60 days of the assessment as required by IRC Section 6303;

 The filing of the Notice of Federal Tax Lien was not requested until at least 31 days after the issuance of an Urgent Notice (CP 504);

 There was a balance due when the NFTL was filed and Notice of Your Right to a Hearing was issued per IRC Sections 6322 and 6331(a);

 Letter 3172 was sent by certified mail to your last known address no later than 5 business days after the NFTL was mailed for recordation per IRC Section 6320(a);

 The filing of the NFTL was approved by an employee with sufficient delegated authority;

 Collection action was suspended upon receipt of the timely CDP request;

 The Settlement Officer had no prior involvement with this matter in Compliance or Appeals.


Issues Raised by the Taxpayer

You stated on Form 12153 that you were experiencing an economic hardship. You also mentioned Effective Tax Administration (ETA), which is a type of the offer in compromise. [The settlement officer] * * * agreed that you are currently suffering an economic hardship. As such, she determined that declaring the balances currently not collectible would be the best alternative to enforcement at the moment. She also addressed offer in compromise possibilities although you did not submit offer Form 656. She explained that because there is sufficient equity in your primary residence to full pay the debts, you are not a good candidate for an offer based on doubt as to collectibility. Because you are currently underemployed, you do not have the ability to secure the equity to pay the debts.

Economic hardship as it pertains to an ETA offer in compromise means that you have the equity in assets to full pay the debts but have extraordinary circumstances that would warrant acceptance of less than full payment. Some factors considered include advanced age, the health of dependents, special education needs of said dependents, medical catastrophe, or natural disaster. These factors do not pertain to your current financial condition. Therefore, you are not a good candidate for an ETA offer.

You did not raise liability issues. No other collection issues were raised.


Intrusiveness versus Efficiency

Because the NFTL was filed properly, its filing is sustained. Because you cannot afford to secure equity in your home to pay the debts and because you cannot afford to make monthly payments at this time, the balances are to be declared currently not collectible. [Reproduced literally.]

On June 5, 2006, petitioners filed a petition commencing this case. On July 27, 2006, petitioners filed an amended petition. In the amended petition, petitioners alleged in pertinent part:

I wish to appeal decision to lien home, as it will cause my family economic hardship. As a person, seeking financial officer placement, it would almost certainly hinder me getting a job.

I also wish to appeal 2/05 decisions not to accept my OIC under ETA. I wish for the court to find a way to give us a fresh start without us having to sell our home. We believe the facts & exceptional circumstances of our case justify such a finding based on some of the following economic hardship, exceptional & special circumstances, equity, fairness, adverse consequences, similar granting's, inability to manage affairs, overall past compliance, reasonable collection potential vs. an acceptable OIC amount.


OPINION

Where, as is the case here, the validity of the underlying tax liability for each of the taxable years 2002 and 2003 is not properly placed at issue, the Court will review the determination of the Commissioner of Internal Revenue for abuse of discretion.11 See Sego v. Commissioner [Dec. 53,938] 114 T.C. 604, 610 (2000); Goza v. Commissioner [Dec. 53,803] 114 T.C. 176, 181-182 (2000).

As we understand it, it is petitioners' position that they qualify for an offer-in-compromise based on effective tax administration and that the Appeals Office abused the Appeals Office's discretion in making the determinations in the notice of determi-nation.12

Section 7122(a) authorizes the Secretary of the Treasury (Secretary) to compromise, inter alia, any civil case arising under the internal revenue laws. Section 7122(c) authorizes the Secretary to prescribe guidelines for the officers and the employees of the Internal Revenue Service to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute. The regulations promulgated under section 7122 indicate that the promotion of effective tax administration is a ground for the compromise of a liability (effective tax administration offer-in-compromise).13 Sec. 301.7122-1(b)(3), Proced. & Admin. Regs.

Section 301.7122-1(b)(3)(i), Proced. & Admin. Regs., provides:

(3) Promote effective tax administration. --(i) A compromise may be entered into to promote effective tax administration when the Secretary determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship within the meaning of § 301.6343-1.14

Section 301.6343-1(b)(4)(i), Proced. & Admin. Regs., provides:

(4) Economic hardship --(i) General rule --The levy is creating an economic hardship due to the financial condition of an individual taxpayer. This condition applies if satisfaction of the levy in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the director and will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living.

Section 301.6343-1(b)(4)(ii), Proced. & Admin. Regs., provides that, for purposes of determining the taxpayer's reasonable amount of living expenses, any information that is provided by the taxpayer is to be considered, including the following:

(A) The taxpayer's age, employment status and history, ability to earn, number of dependents, and status as a dependent of someone else;

(B) The amount reasonably necessary for food, clothing, housing * * *, medical expenses * * *, transportation, current tax payments * * *, alimony, child support, or other court-ordered payments, and expenses necessary to the taxpayer's production of income * * *;

(C) The cost of living in the geographic area in which the taxpayer resides;

(D) The amount of property exempt from levy which is available to pay the taxpayer's expenses;

(E) Any extraordinary circumstances such as spe cial education expenses, a medical catastrophe, or natural disaster; and

(F) Any other factor that the taxpayer claims bears on economic hardship and brings to the attention of the director.

Factors that support a determination that collection would cause economic hardship include, but are not limited to, the following:

(A) Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the condition;

(B) Although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and

(C) Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.

Sec. 301.7122-1(c)(3)(i), Proced. & Admin. Regs.

Respondent has prescribed procedures in the Internal Revenue Manual (IRM) that are consistent with section 7122 and the regulations thereunder in order to determine whether an effective tax administration offer-in-compromise based on economic hardship should be considered and accepted. Consistent with section 301.7122-1(b)(3)(i), Proced. & Admin. Regs., part 5.8.11.2.1(1) of the IRM (Sept. 1, 2005) provides that an effective tax administration offer-in-compromise based on economic hardship may be considered "When a taxpayers [sic] liability can be collected in full but collection would create an economic hardship".

Also consistent with section 301.7122-1(b)(3)(i), Proced. & Admin. Regs., part 5.8.11.2.1(2) of the IRM (Sept. 1, 2005) defines the term "economic hardship" as it applies to an effective tax administration offer-in-compromise in pertinent part as follows:

The definition of economic hardship as it applies to Effective Tax Administration (ETA) offers is derived from Treasury Regulations § 301.6343-1. Economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses. * * *

In determining whether a taxpayer qualifies for an effective tax administration offer-in-compromise based on economic hardship, part 5.8.11.2.1(3) of the IRM (Sept. 1, 2005), which is consistent with section 301.6343-1(b)(4)(i) and (ii), Proced. & Admin. Regs., provides that the taxpayer's financial information and special circumstances must be examined. That part of the IRM further provides that "Financial analysis includes reviewing basic living expenses as well as other considerations." IRM pt. 5.8.11.2.1(3) (Sept. 1, 2005).

In reviewing a taxpayer's basic living expenses, part 5.8.11.2.1(4) of the IRM (Sept. 1, 2005), which is consistent with section 301.6343-1(b)(4)(ii)(B), Proced. & Admin. Regs., provides in pertinent part:

Basic living expenses are those expenses that provide for health and welfare and production of income of the taxpayer and the taxpayers [sic] family. * * *

Part 5.8.11.2.1(5) of the IRM (Sept. 1, 2005) provides that, in addition to a taxpayer's basic living expenses, other factors that are to be considered that impact the taxpayer's financial condition include, but are not limited to, the following:15

 The taxpayers [sic] age and employment status,

 Number, age, and health of the taxpayers [sic] dependents,

 Cost of living in the area the taxpayer resides, and

 Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster.

Part 5.8.11.2.1(11) of the IRM (Sept. 1, 2005) provides that

The existence of economic hardship criteria does not dictate that an offer must be accepted. An acceptable offer amount must still be determined based on a full financial analysis and negotiation with the taxpayer. When hardship criteria are identified but the taxpayer does not offer an acceptable amount, the offer should not be recommended for acceptance.

According to part 5.8.11.2.1(10) of the IRM (Sept. 1, 2005),

an acceptable offer amount is determined by analyzing the financial information, supporting documentation, and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.

Consistent with section 301.7122-1(b)(3)(i), Proced. & Admin. Regs., part 5.8.11.2(5) of the IRM (Sept. 1, 2005) provides that, before an effective tax administration offer-in-compromise may be considered, the following three factors must exist:

a. A liability has been or will be assessed against taxpayer(s) before acceptance of the offer.

b. The net equity in assets plus future income or reasonable collection potential (RCP) must be greater than the amount owed.

c. Exceptional circumstances exist, such as the collection of the tax would create an economic hardship * * *.

In the notice of determination, the Appeals Office determined (1) that respondent assessed a liability with respect to each of petitioners' taxable years 2002 and 2003 and (2) that the net equity in petitioners' residence was greater than the total amount of petitioners' unpaid 2002 liability and petitioners' unpaid 2003 liability. Thus, the Appeals Office implicitly determined in that notice that the first two requirements set forth in part 5.8.11.2(5) of the IRM (Sept. 1, 2005) for considering an effective tax administration offer-in-compromise were met with respect to those unpaid liabilities.

In the notice of determination, the Appeals Office agreed with the position of petitioners in petitioners' Form 12153 and determined that they were "suffering an economic hardship".16 By determining in the notice of determination that petitioners were suffering an economic hardship, the Appeals Office implicitly acknowledged (1) that they were unable to pay their reasonable basic living expenses, see sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs.; IRM pt. 5.8.11.2.1(2) (Sept. 1, 2005), and (2) that the payment of petitioners' unpaid 2002 liability and petitioners' unpaid 2003 liability would cause petitioners an even greater economic hardship than they were already experiencing.

Since the Appeals Office determined in the notice of determination that petitioners were suffering an economic hardship, it appears that the Appeals Office should have determined that the third requirement set forth in part 5.8.11.2(5) of the IRM (Sept. 1, 2005) for considering an effective tax administration offer-in-compromise was met with respect to petitioners' unpaid 2002 liability and petitioners' unpaid 2003 liability, i.e., "Exceptional circumstances exist, such as the collection of the tax would create an economic hardship". However, the Appeals Office did not make that determination. Instead, the Appeals Office determined in the notice of determination that petitioners were not a "good candidate" for an effective tax administration offer-in-compromise17 and that "declaring the balances currently not collectible would be the best alternative to enforcement at the moment."18

The record is unclear as to why the Appeals Office determined in the notice of determination that petitioners were not a good candidate for an effective tax administration offer-in-compromise.19 The only explanation in the notice of determination for that determination is:

Economic hardship as it pertains to an ETA offer in compromise means that you have the equity in assets to full pay the debts but have extraordinary circumstances that would warrant acceptance of less than full payment. Some factors considered include advanced age, the health of dependents, special education needs of said dependents, medical catastrophe, or natural disaster. These factors do not pertain to your current financial condition. * * *

In determining in the notice of determination that petitioners were not a good candidate for an effective tax administration offer-in-compromise, the Appeals Office appears to have considered at least the following factors: "advanced age, the health of dependents, special education needs of said dependents, medical catastrophe, or natural disaster." According to the Appeals Office, those factors did not "pertain to * * * [petitioners'] current financial condition." Even if the Appeals Office were correct that the factors listed in the notice of determination and quoted above did not "pertain to * * * [petitioners'] current financial condition", the record is unclear as to whether the Appeals Office considered any other factors or circumstances that might impact petitioners' financial condition, which it was permitted to do, see IRM pt. 5.8.11.2.1(5) (Sept. 1, 2005). For example, the record is unclear as to whether the Appeals Office considered (1) the ability of Ms. Dailey and Mr. Dailey, who at the time they submitted petitioners' Form 433-A were 50 years old and 55 years old, respectively, to earn sufficient income to pay petitioners' unpaid 2002 liability and petitioners' unpaid 2003 liability as well as their reasonable basic living expenses; (2) the impact that a tax lien on petitioners' residence might have on Mr. Dailey's ability to obtain a position as a stockbroker or a real estate agent20 or a similar position and to earn an amount of income that, when added to the amount of income from Ms. Dailey's position, was sufficient to pay those unpaid liabilities as well as those expenses; (3) the impact that petitioners' payment of the medical bills attributable to the serious health problems of petitioners' daughter and petitioners' older son might have on petitioners' financial condition, even though those children may not qualify as petitioners' dependents for tax purposes; and (4) the impact that the serious health problems of petitioners' daughter and petitioners' older son might have on petitioners' ability to earn sufficient income to pay petitioners' unpaid 2002 liability and petitioners' unpaid 2003 liability as well as their reasonable basic living expenses.21

On the record before us, we are unable to decide whether we should sustain the determinations in the notice of determination with respect to petitioners' taxable years 2002 and 2003. Accordingly, we shall remand this case to respondent's Appeals Office for clarification and for further consideration. To reflect the foregoing,

An appropriate order will be issued.

1 All section references are to the Internal Revenue Code in effect at all relevant times.

2 The notice of determination pertained to petitioners' taxable years 1999, 2002, and 2003. Respondent concedes that respondent abused respondent's discretion in making the determinations in the notice of determination with respect to petitioners' taxable year 1999.

3 In view of respondent's concession with respect to petitioners' taxable year 1999, we do not find facts relating to that year except where needed for clarity.

4 In petitioners' Form 12153, petitioners also indicated their disagreement with a "Notice of Levy/Seizure". The record does not establish that respondent issued any such notice to petitioners.

5 Although not altogether clear from the record, we believe that petitioners' income for 2002 and 2003 consisted of certain withdrawals from Mr. Dailey's IRA.

6 Secs. 1 through 9 of Form 433-A requested the following types of information:

Section Type of Information Requested
1 Personal
2 Business
3 Employment
4 Other income
5 Banking, investing, cash, credit, and
life insurance
6 Financial condition
7 Assets and liabilities
8 Accounts/notes receivable
9 Monthly income and expense analysis


7 In the stipulation of facts, the parties stipulated that the fair market value of petitioners' residence on the date on which the parties executed that stipulation was more than $1,400,000.

8 Although petitioners indicated in sec. 7 of petitioners' Form 433-A that they had a loan balance of $153,700 with respect to their residence, as discussed below, that loan balance pertained to certain loans from various family members of Mr. Dailey and did not pertain to petitioners' residence.

9 Petitioners attached to petitioners' 2005 return Form W-2, Wage and Tax Statement, which showed that during 2005 Mr. Dailey received wages of $2,006.39 from Seaboard Securities, Inc. The record does not explain why petitioners reported only $2,000 of those wages in petitioners' 2005 return.

10 See supra note 2.

11 It does not appear that petitioners are disputing the existence or the respective amounts of petitioners' unpaid 2002 liability and petitioners' unpaid 2003 liability. In fact, petitioners acknowledge the existence of an unpaid tax liability of a substantial amount with respect to each of their taxable years 2002 and 2003. Assuming arguendo that petitioners were disputing the respective amounts of petitioners' unpaid 2002 liability and petitioners' unpaid 2003 liability and that they had challenged the respective amounts of those unpaid liabilities at the Appeals Office hearing with respect to petitioners' Form 12153, a fact which is not established by the record, petitioners have presented no evidence as to why the respective amounts of petitioners' unpaid 2002 liability and petitioners' unpaid 2003 liability are incorrect. Nor have petitioners presented any evidence to establish the respective correct amounts of petitioners' unpaid 2002 liability and petitioners' unpaid 2003 liability.

12 Our discussion of the determinations in the notice of determination pertains to the determinations with respect to petitioners' taxable years 2002 and 2003, and not 1999. That is because respondent concedes that respondent abused respondent's discretion in making the determinations in that notice with respect to petitioners' taxable year 1999. See supra note 2.

13 The regulations promulgated under sec. 7122 further indicate that doubt as to liability and doubt as to collectibility are grounds for the compromise of a liability. Sec. 301.7122-1(b)(1) and (2), Proced. & Admin. Regs. Petitioners are not claiming that they qualify for an offer-in-compromise on either of those grounds.

14 Sec. 301.7122-1(b)(3)(iii), Proced. & Admin. Regs., provides that "No compromise to promote effective tax administration may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws." Respondent does not argue that an effective tax administration offer-in-compro-mise with respect to petitioners' unpaid 2002 liability and petitioners' unpaid 2003 liability would undermine compliance by taxpayers with the tax laws.

15 The factors listed in pt. 5.8.11.2.1(5) of the IRM (Sept. 1, 2005) are some, but not all, of the factors listed in sec. 301.6343-1(b)(4)(ii), Proced. & Admin. Regs. That part of the IRM provides that "Other factors may be considered in making an economic hardship determination." IRM pt. 5.8.11.2.1(5) (Sept. 1, 2005).

16 In determining in the notice of determination that petitioners were suffering an economic hardship, the Appeals Office determined in that notice that they were underemployed and that they did "not have the ability to secure the equity [in their primary residence] to pay the debts." In addition, in the settlement officer's "Case Activity Records", the settlement officer indicated (1) that petitioners were "earning very little", (2) that it was unlikely that they would be able to obtain a "second mortgage" with respect to their residence, and (3) that they were unable to sell their residence because they had a minor living with them who was in school.

17 In petitioners' Form 12153, petitioners placed the settlement officer on notice that they were seeking an effective tax administration offer-in-compromise. Nonetheless, the settlement officer did not ask petitioners in her February 24, 2006 letter to submit to her Form 656, Offer in Compromise, and petitioners did not submit that form to her. The record does not establish that at any time after the settlement officer sent petitioners that letter she asked them to submit to her Form 656.

18 A balance may be declared currently not collectible when, inter alia, "collection of the liability would create an undue hardship for taxpayers by leaving them unable to meet necessary living expenses". IRM pt. 5.16.1.1(2) (Sept. 19, 2005).

19 The Appeals Office did not determine in the notice of determination that petitioners did not offer an acceptable amount to compromise petitioners' unpaid 2002 liability and petitioners' unpaid 2003 liability on the basis of effective tax administration. See IRM pt. 5.8.11.2.1(11) (Sept. 1, 2005). Instead, it appears that the Appeals Office determined that petitioners were not a good candidate for an effective tax administration offer-in-compromise regardless of what might constitute such an acceptable amount. See supra note 17.

20 In petitioners' brief, petitioners contend that Mr. Dailey was working as a real estate agent. In respondent's brief, respondent acknowledges that Mr. Dailey began working as a "real estate broker" after he resigned from his position as a stockbroker.

21 If in determining in the notice of determination that petitioners were not a good candidate for an effective tax administration offer-in-compromise the Appeals Office had considered other factors or circumstances, such as those that we describe above, the record does not establish the other factors or circumstances that it considered and its evaluation of them.

Chapter 8. Offer in Compromise
Section 11. Effective Tax Administration


5.8.11 Effective Tax Administration
• 5.8.11.1 Overview
• 5.8.11.2 Legal Basis for Effective Tax Administration Offer
• 5.8.11.3 Initial Processing of Effective Tax Administration Offers
• 5.8.11.4 Evaluation of Offers
• 5.8.11.5 Documentation and Verification
• 5.8.11.6 Final Processing
• Exhibit 5.8.11-1 Non-Hardship Effective Tax Administration (ETA) Offer in Compromise (OIC) Check Sheet
5.8.11.1 (09-01-2005)
Overview
1. As part of the IRS Restructuring and Reform Act of 1998 (RRA 98), Congress added section 7122(c) to the Internal Revenue Code. That section provides that the Service shall set forth guidelines for determining when an offer in compromise should be accepted. Congress explained that these guidelines should allow the Service to consider:
• Hardship,
• Public policy, and
• Equity

Treasury Regulation § 301.7122-1 authorizes the Service to consider offers raising these issues. These offers are called Effective Tax Administration (ETA) offers.
2. The availability of an Effective Tax Administration (ETA) offer encourages taxpayers to comply with the tax laws because taxpayers will:
• Believe the laws are fair and equitable, and
• Gain confidence that the laws will be applied to everyone in the same manner.

The Effective Tax Administration (ETA) offer allows for situations where tax liabilities should not be collected even though:
• The tax is legally owed, and
• The taxpayer has the ability to pay it in full.
3. If a taxpayer submits an Effective Tax Administration (ETA) offer, first investigate the offer for:
• Doubt as to Liability (DATL), and/or
• Doubt as to Collectibility (DATC).
An Effective Tax Administration (ETA) offer can only be considered when the Service has determined that the taxpayer does not qualify for consideration under Doubt as to Liability (DATL) and/or Doubt as to Collectibility (DATC).
The taxpayer must include the Collection Information Statement (Form 433-A and/or Form 433-B) when submitting an offer requesting consideration under Effective Tax Administration (ETA).
4. Economic hardship standard of § 301.6343-1 specifically applies only to individuals.
5.8.11.2 (09-01-2005)
Legal Basis for Effective Tax Administration Offer
1. Compared to Doubt as to Collectibility (DATC)
In a Doubt as to Collectibility (DATC) offer, the tax liability equals or exceeds the taxpayers reasonable collection potential (RCP) which is:
• Net equity, plus
• Future income
In an Effective Tax Administration (ETA) offer, the tax liability is less than the taxpayers reasonable collection potential (RCP). The taxes owed can be collected in full either:
• In a lump sum, or
• Through an installment agreement (IA)
A Doubt as to Collectibility (DATC) offer does not convert to an Effective Tax Administration (ETA) offer if the Offer Investigator and the taxpayer cannot agree on an acceptable offer amount.
2. Compared to Doubt as to Collectibility with Special Circumstances (DCSC)
Taxpayers may qualify for an Effective Tax Administration (ETA) offer when their reasonable collection potential (RCP) is greater than the liability but there are economic or public policy/equity circumstances that would justify accepting the offer for an amount less than full payment.
Example:
The taxpayer owes $20,000. The reasonable collection potential (RCP) is $25,000. The taxpayer could have an offer accepted for less than the total liability of $20,000 under the Effective Tax Administration (ETA) provisions if economic hardship, or public policy/equity issues exist which would support an acceptance recommendation.

Taxpayers could have an offer accepted under Doubt as to Collectibility with Special Circumstance (DCSC) when their reasonable collection potential (RCP) is less than their liability, but there are economic hardship or public policy/equity factors that would justify accepting the offer for an amount less than the reasonable collection potential (RCP).
Example:
The taxpayer owes $20,000. However his reasonable collection potential (RCP) is $15,000. The offer does not meet the legal basis for an Effective Tax Administration (ETA) because the RCP is lower than the liability. However, applying the same factors of economic hardship, or public policy/equity, an offer could be accepted for less than the RCP ($15,000) under Doubt as to Collectibility with Special Circumstance (DCSC) provisions.
3. Compared to Doubt as to Liability
An offer can be considered under Effective Tax Administration (ETA) provisions only when there are no doubt to liability issues.
4. In reaching these determinations:
If… Then…
The Service determines that there is doubt as to the amount of the liability the taxpayer owes Taxpayer is not eligible for Effective Tax Administration (ETA) consideration. The offer is considered based on the Doubt as to Liability (DATL) issue.
The Service determines that the taxpayers equity in assets plus future income (RCP) does not exceed the amount of the tax liability Taxpayer is not eligible for an Effective Tax Administration (ETA) offer. The offer is considered based on Doubt as to Collectibility (DATC).
However, hardship or public policy/equity may be present in the case to allow consideration under Doubt as to Collectibility with Special Circumstances (DCSC).
The Service determines the taxpayer is not eligible for compromise based on Doubt as to Liability (DATL) or Doubt as to Collectibility (DATC) and the taxpayer can demonstrate that collection of the tax liability in full would create economic hardship, or demonstrate that there is compelling public policy or equity issues in the case that would provide sufficient basis for compromise The taxpayer would be eligible for Effective Tax Administration (ETA) consideration.
5. Before we can consider a compromise based on economic hardship or public policy/equity considerations, three factors must exist:
A. A liability has been or will be assessed against taxpayer(s) before acceptance of the offer.
B. The net equity in assets plus future income or reasonable collection potential (RCP) must be greater than the amount owed.
C. Exceptional circumstances exist, such as the collection of the tax would create an economic hardship, or there is compelling public policy or equity considerations that provide sufficient basis for compromise.
5.8.11.2.1 (09-01-2005)
Economic Hardship
1. When a taxpayers liability can be collected in full but collection would create an economic hardship, an Effective Tax Administration (ETA) offer based on economic hardship can be considered.
2. The definition of economic hardship as it applies to Effective Tax Administration (ETA) offers is derived from Treasury Regulations § 301.6343-1. Economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the Commissioner and will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living.
Note:
Because economic hardship is defined as the inability to meet reasonable basic living expenses, it applies only to individuals (including sole proprietorship entities). Compromise on economic hardship grounds is not available to corporations, partnerships, or other non-individual entities.
3. The taxpayers financial information and special circumstances must be examined to determine if they qualify for an Effective Tax Administration (ETA) offer based on economic hardship. Financial analysis includes reviewing basic living expenses as well as other considerations.
4. The taxpayers income and basic living expenses must be considered to determine if the claim for economic hardship should be accepted. Basic living expenses are those expenses that provide for health and welfare and production of income of the taxpayer and the taxpayers family. Some basic living expenses are limited to the National Standards while other expenses are limited to Local Standards. Deviation from these standards is permissible if and when the taxpayer is able to justify expenses that exceed these limits.
5. In addition to the basic living expenses, other factors to consider that impact upon the taxpayers financial condition include:
• The taxpayers age and employment status,
• Number, age, and health of the taxpayers dependents,
• Cost of living in the area the taxpayer resides, and
• Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster.
Note:
This list is not all-inclusive. Other factors may be considered in making an economic hardship determination.
6. Factors that support an economic hardship determination may include:
1. The taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability and it is reasonably foreseeable that the financial resources will be exhausted providing for care and support during the course of the condition.
2. The taxpayer may have a set monthly income and no other means of support and the income is exhausted each month in providing for the care of dependents.
3. The taxpayer has assets, but is unable to borrow against the equity in those assets, and liquidation to pay the outstanding tax liabilitie(s) would render the taxpayer unable to meet basic living expenses.
Note:
These factors are representative of situations the Service regularly encounters when working with taxpayers to resolve delinquent accounts. They are not intended to provide an exhaustive list of the types of cases that can be compromised based on economic hardship.
7. Compromise under the Effective Tax Administration (ETA) economic hardship provision is permissible if acceptance does not undermine compliance. The public should not perceive that the taxpayer whose offer is accepted benefited by not complying with the tax laws. Factors supporting a determination that compromise would undermine compliance include, but are not limited to:
• The taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code.
• The taxpayer has taken deliberate actions to avoid the payment of taxes.
• The taxpayer has encouraged others to refuse to comply with the tax laws.
Note:
There may be other situations where compromise would be undermined.
8. The following examples illustrate the types of cases that may be compromised under the economic hardship standard.
Example:
The taxpayer has assets sufficient to satisfy the tax liability and provides full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. The taxpayers overall compliance history does not weigh against compromise.

Example:
The taxpayer is retired and the only income is from a pension. The only asset is a retirement account and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without adequate means to provide for basic living expenses. The taxpayers overall compliance history does not weigh against compromise.

Example:
The taxpayer is disabled and lives on a fixed income that will not, after allowance of adequate basic living expenses, permit full payment of the liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate for a disability. The equity in the house is sufficient to permit payment of the liability owed. However, because of the disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayers home has been specially equipped to accommodate the disability, forced sale of the taxpayers residence would create severe adverse consequences for the taxpayer, making such a sale unlikely. The taxpayers overall compliance history does not weigh against compromise.
9. The economic hardship standard authorizes compromise regardless of the cause of the liability, provided compromise does not undermine compliance by other taxpayers.
Example:
The taxpayer submitted an Effective Tax Administration (ETA) offer based on economic hardship. The financial statement appears to support the offer. When a research of the county property records is conducted, it is noted that the home was transferred to a child for $100 plus love and affection. The transfer of the home was made after the tax was assessed. It is confirmed that deliberate actions were taken to avoid the payment of tax; therefore, the offer should not be accepted.
10. In economic hardship cases, an acceptable offer amount is determined by analyzing the financial information, supporting documentation, and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.
Example:
The taxpayer was diagnosed with an illness that eventually will hinder any ability to work. Although currently employed, the taxpayer will soon be forced to quit their job and use personal funds for basic living expenses. The taxpayer owes $100,000 and has a reasonable collection potential of $150,000. An offer was submitted for $35,000. Through the investigation, it is determined that collecting more than $50,000 would cause an economic hardship for the taxpayer since it would hinder the ability to meet reasonable living expenses, including ongoing medical expenses. The taxpayer is advised to raise the offer to $50,000 since it is an amount the Service can collect without creating an economic hardship.
11. The existence of economic hardship criteria does not dictate that an offer must be accepted. An acceptable offer amount must still be determined based on a full financial analysis and negotiation with the taxpayer. When hardship criteria are identified but the taxpayer does not offer an acceptable amount, the offer should not be recommended for acceptance.
5.8.11.2.2 (09-01-2005)
Public Policy or Equity Grounds
1. Where there is no Doubt as to Liability (DATL), no Doubt as to Collectibility (DATC), and the liability could be collected in full without causing economic hardship, the Service may compromise to promote Effective Tax Administration (ETA) where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for accepting less than full payment. Compromise is authorized on this basis only where, due to exceptional circumstances, collection in full would undermine public confidence that the tax laws are being administered in a fair and equitable manner. Because the Service assumes that Congress imposes tax liabilities only where it determines it is fair to do so, compromise on these grounds will be rare.
2. The Service recognizes that compromise on these grounds will often raise the issue of disparate treatment of taxpayers who can pay in full and whose liabilities arose under substantially similar circumstances. Taxpayers seeking compromise on this basis bear the burden of demonstrating circumstances that are compelling enough to justify compromise notwithstanding this inherent inequity.
3. Compromise on public policy or equity grounds is not authorized based solely on a taxpayers belief that a provision of the tax law is itself unfair. Where a taxpayer is clearly liable for taxes, penalties, or interest due to operation of law, a finding that the law is unfair would undermine the will of Congress in imposing liability under those circumstances.
Example:
The taxpayer argues that collection would be inequitable because the liability resulted from a discharge of indebtedness rather than from wages. Because Congress has clearly stated that a discharge of indebtedness results in taxable income to the taxpayer it would not promote Effective Tax Administration (ETA) to compromise on these grounds. See Internal Revenue Code (IRC) 61(a)(12).
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. Depending on the taxpayers particular facts and circumstances, however, compromise may be authorized on the grounds of Doubt as to Collectibility (DATC), or because collection of the full liability would cause an economic hardship within the meaning of paragraph (b)(4)(i)(A) of this section.
Note:
In both of these examples, the taxpayers are essentially claiming that Congress enacted unfair statutes and are arguing that the Service should use its compromise authority to rewrite those statute based on a perception of unfairness. Compromise for that reason would not promote effective tax administration. The compromise authority under Section 7122 is not so broad as to allow the Service to disregard or override the judgments of Congress.
4. Section 6404(e) grants the Service the discretion to abate interest attributable to certain errors and delays by the Service. It would not promote Effective Tax Administration (ETA) to compromise a liability based solely on an assertion of delay by the Service if that delay would not support relief from interest under section 6404(e).
5. Compromise may promote Effective Tax Administration (ETA) where the taxpayer was incapacitated and thus unable to comply with the tax laws.
Example:
In October 1986, the taxpayer developed a serious illness that resulted in almost continuous hospitalization for a number of years. The medical condition was such that during this period, the taxpayer was unable to manage any of their financial affairs. The taxpayer has not filed tax returns since that time. The taxpayers health has now improved and has promptly begun to attend to tax matters. The taxpayer discovered that the IRS prepared a substitute for return for the 1986 tax year based on information documents received and assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill was more than three times the original tax liability. The taxpayers overall compliance history does not weigh against compromise.

Note:
In this situation, the Service should first work with the taxpayer and attempt to prepare an accurate return for the 1986 tax year and adjust the taxpayers account accordingly. Following that, the Service should consider accepting a compromise that would approximate the amount the taxpayer would have been assessed had there been an ability to comply with his filing and payment responsibilities in a timely manner. Such a compromise would be fair and equitable to the taxpayer and, under these circumstances, would advance the public policy of voluntary compliance with the tax laws.
6. It would not promote Effective Tax Administration (ETA) to compromise with the taxpayer in (5), above, if the investigation revealed that the taxpayer was able to attend to matters other than those due in 1986 during the time of the illness. For example, assume the taxpayer discussed, paid all other bills and continued to successfully operate a business during the illness. Under such circumstances, compromise would not promote Effective Tax Administration (ETA), and could serve to undermine compliance by other taxpayers.
7. Compromise may promote Effective Tax Administration (ETA) where the taxpayers liability was caused by reasonable reliance on a statement issued by the Service that caused the taxpayer to incur a tax liability that would not otherwise have been incurred.
Example:
The taxpayer is a salaried sales manager at a department store who has been able to place $2,000 in a tax-deductible IRA account for each of the last two years. The taxpayer learns that a higher rate of interest can be earned on his IRA savings by moving the savings from a Money Management account to a Certificate of Deposit at a different financial institution. Prior to transferring the savings, the taxpayer submits an E-mail inquiry to the IRS at its Web Page, requesting information about the steps needed to preserve the tax benefits currently enjoyed and to avoid any penalty. The IRS responds by answering the E-mail that the taxpayer may withdraw the IRA savings from the neighborhood bank, but it must redeposited in a new IRA account within 90 days. The taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, the taxpayer learns that he has been misinformed about the required rollover period and is now liable for additional taxes, penalties and interest for not redepositing the amount within 60 days. Had the advice provided been accurate, the taxpayer would have redeposited the funds timely. The taxpayer retained a copy of the IRS E-mail for his records. The taxpayers overall compliance history does not weigh against compromise.

Note:
Because the tax liability in this example was caused by relying on the Service's erroneous statement, and the taxpayer clearly could have avoided the liability had the Service given correct information, it is reasonable to conclude that collection in full would cause other taxpayers to question the fairness of the tax system. The Service may consider accepting a compromise that would reflect the amount the taxpayer would now owe had the service not made an error.
8. Compromise may also promote Effective Tax Administration (ETA) where a taxpayers liability was directly caused by the Service and through no fault of the taxpayer.
Example:
The taxpayer is a closely-held corporation. The IRS audited the taxpayers tax returns for 1996, 1997, and 1998 and determined that the taxpayer was a personal holding company liable for personal holding company tax. The taxpayer agreed to immediate assessment of the tax, but attempted to take advantage of the deduction for deficiency dividends under section 547. Although the taxpayer made the distributions necessary to qualify for the deduction, the IRS made several errors in executing the required agreements and other paperwork. As a result, the taxpayer could not avail itself of the section 547 deduction. Under the statute, applicable regulations, and pertinent case law, there is no means by which the mistakes can be corrected to allow the taxpayer to take advantage of the deduction. There is documentary evidence that all of the required Service officials intended to complete the processing of the agreements and that, but for their failure to do so, the taxpayer would have qualified for the deduction. The taxpayer has no prior history of noncompliance.

Note:
That the tax liability was caused solely by an error on the part of the Service supports the determination that collection in full would cause other taxpayers to question the fairness of the tax system. Furthermore, the policies underlying the imposition of the personal holding company tax and the rules regarding deficiency deductions are not undermined by compromise under these circumstances. The Service may consider accepting a compromise that would reflect the amount the taxpayer would now owe had the Service not made an error.
9. In contrast, compromise would not be authorized based on mistakes by the Service that did not cause the tax liability. For example, providing an incorrect statement of the balance due does not authorized the compromise of additional interest that may have later accrued. However, any relief from interest attributable to errors or delays by the Service should be granted under the standards set forth in section 6404(e). Compromise that would undermine those standards would not promote Effective Tax Administration (ETA). Similarly, relief from penalties attributable to errors by the Service should be granted pursuant to the standards for relief set forth in section 6404(e) and the IRM.
10. The Service will not compromise on public policy or equity grounds based solelyon the argument that the acts of a third party caused the unpaid tax liability. Third parties include the taxpayers:
• Representative,
• Partner,
• Agent, or
• employee
Note:
The actions of a third party may be part of a fact pattern that, viewed as a whole, presents compelling public policy or equity concerns justifying compromise. As with all compromises based on public policy or equity, the taxpayers situation must be compelling enough to justify compromise even though similarly situated taxpayers may have paid in full.
11. Compromise on public policy or equity grounds promotes Effective Tax Administration (ETA) only where it does not undermine compliance by other taxpayers. In general, compromise would undermine compliance where other taxpayers viewing the compromise may conclude that the taxpayer benefited from a failure to comply with the tax laws (i.e. the result of the compromise places the taxpayer in a position better than they would occupy had they timely and fully met their obligations). Such cases present the danger that other taxpayers may consider it beneficial to take the chance of not complying with the tax laws or litigating an issue they would otherwise concede or settle, and relying on compromise at some later date as a safety net. Factors supporting a determination that compromise would undermine include, but are not limited to:
• The taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code.
• The taxpayer has taken deliberate actions to avoid the payment of taxes.
• The taxpayer has encouraged others to refuse to comply with the tax laws.
Note:
Additional factors such as the cause of the delinquency, length of non-compliance, and efforts to resolve non-compliance should also be considered. Generally a review of the last 3–5 years of compliance should be completed.
12. Once it has been determined that a case raises compelling public policy or equity considerations justifying compromise, the Service must still determine whether the amount offered by the taxpayer should be accepted to resolve the case. An acceptable offer amount should be based on a determination of what is fair and equitable under the circumstances. When public policy or equity considerations are identified but the taxpayer does not offer an acceptable amount, the offer should not be recommended for acceptance.
5.8.11.2.3 (09-01-2005)
Compromise Would Not Undermine Compliance With Tax Laws
1. No compromise to promote Effective Tax Administration (ETA) may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws. See IRM 5.8.11.2.1(7), 5.8.11.2.1(9) and 5.8.11.2.2(11) above, for additional information.
5.8.11.3 (09-01-2005)
Initial Processing of Effective Tax Administration Offers
1. Offers submitted on the grounds of Effective Tax Administration (ETA) will be worked either by the COIC units or field specialists.
2. Taxpayers seeking a compromise under Effective Tax Administration (ETA) will submit the Form 656, Offer in Compromise, selecting ETA in Item 6, along with the Collection Information Statement (CIS) (Form 433-A and/or Form 433-B). Taxpayers must complete the Form 656, Item 9 and document their special circumstances. The documentation should explain why collection of the liability in full would cause economic hardship, or the public policy/equity issues present that would justify compromising the liability. An additional attachment can be provided if additional space is needed. If the taxpayer does not submit a financial statement with the offer, normal correspondence activity should be undertaken to secure the financial statement, and any other data determined necessary for evaluation of the offer. If the taxpayer fails to provide the requested information, normal "return" procedures should be followed since Effective Tax Administration (ETA) criteria can not be considered until all other bases have been addressed.
3. Like all other offers, the Service will only consider an Effective Tax Administration (ETA) offer when taxpayers have met the processability criteria (e.g. paid the application fee or filed Form 656-A; filed all required tax returns; submitted the Form 656, Form 433-A and/or Form 433-B on the latest revision of the forms; and are not a debtor in a bankruptcy proceeding). In-business taxpayers must have timely filed and timely deposited their quarterly federal taxes for the 2 preceding quarters and paid all federal tax deposits during the quarter in which the offer was filed.
Note:
Follow IRM 5.8.3, Processability Determination, for initial processing of offers.
4. Elements necessary to perfect an offer also apply to Effective Tax Administration (ETA) offers. The requirement to submit complete financial statements for ETA offers is the same as for Doubt as to Collectibility (DATC) offers.
Note:
Follow IRM 5.8.3.11, Types of Perfection, for procedures on perfecting offers.
5. Effective Tax Administration (ETA) offers are initially added to AOIC as Doubt as to Collectibility (DATC) offers. Once the offer investigation reveals that the taxpayers assets and future income exceed the tax liability thereby indicating no basis for a Doubt as to Collectibility (DATC), the offer should be considered under the ETA provisions. AOIC must be updated to reflect the correct basis for the compromise (e.g. ETA). Refer to IRM 5.8.11.7 below for a full discussion of requirements to update AOIC prior to final processing of ETA and Doubt as to Collectibility with Special Circumstances (DCSC) offers.
5.8.11.4 (09-01-2005)
Evaluation of Offers
1. Effective Tax Administration (ETA) offers cannot be considered if the taxpayer qualifies for Doubt as to Collectibility (DATC) or Doubt as to Liability (DATL).
Note:
Follow IRM 5.8.4, Evaluation of Offers, for Doubt as to Collectibility (DATC) issues and determining reasonable collection potential (RCP).
2. If the assets and future income do not exceed the tax liability and special circumstances exist, the taxpayers offer must be considered under Doubt as to Collectibility with Special Circumstance (DCSC). The taxpayers may have checked the ETA box and given an explanation of circumstance on the Form 656, however unless they have the ability to full pay the liability, the offer would not meet the legal standard for Effective Tax Administration (ETA) consideration. The offer must be considered under Doubt as to Collectibility with Special Circumstance (DCSC).
3. If the taxpayer submits an offer based on Doubt as to Collectibility (DATC) but collection potential exceeds the liability and there are special circumstances, the offer should be considered on the basis of Effective Tax Administration (ETA). The employee that investigates the offer is required to address any potential special circumstances during first contact with the taxpayer or the taxpayers representative. This will be accomplished in conjunction with the current requirement to verify receipt of Publication 1 and Publication 594 and must be documented in the offer case history. This requirement does not apply where the only taxpayer contact is through correspondence.
4. If the offer is rejected, the narrative should describe the considerations of both bases. If the offer is accepted the offer report must reflect the basis upon which the offer is accepted.
5.8.11.4.1 (09-01-2005)
Public Policy/Equity Issues
1. Offers submitted under the Public Policy/Equity provisions are authorized under these guidelines only when there are exceptional circumstances. While compromise under these guidelines is expected to be rare, appropriate recommendations for acceptance will be made.
2. In order to develop consistency in the interpretation and application of Treasury Regulations (TD 9007) published on July 22, 2002, a Specialty Group has been set up in Austin, Texas to work these offers.
3. Only after consideration has been given to all other potential bases for acceptance (e.g. Doubt as to Liability (DATL), Doubt as to Collectibility (DATC), Doubt as to Collectibility with Special Circumstance (DCSC), and/or Effective Tax Administration (ETA) based on economic hardship) will ETA-Public Policy/Equity be considered. Therefore, all cases must have been completely developed under all other bases before transfer will be accepted by the Austin Group.
4. After all other potential bases have been considered, complete Exhibit 5.8.11-1 "Non-Economic Hardship Effective Tax Administration (ETA) OIC Check Sheet." The check sheet must be completed and sent to the Austin group before any cases are transferred. The purpose of the check sheet is to document that all issues other than Public Policy/Equity ETA have been evaluated and to provide information on the non-economic ETA factors present.
5. The completed check sheet and a copy of the entire Form 656 should be faxed to offer Group Manager in Austin. The sender should include a copy of any letter or document presented by the taxpayer to support the special circumstances. The group will evaluate the information and respond to the sender within 10 workdays. This response will either be an explanation of why the taxpayers offer cannot be investigated under Public Policy/Equity ETA provisions, or a request to transfer the offer to the Austin group.
6. If the Austin group determines that the offer cannot be investigated under the Public Policy/Equity ETA provisions, the information will be faxed back to the sender who will be responsible for issuing the proposed rejection letter to the taxpayer, covering all factors considered.
7. If the Austin group determines that the information presented requires further analysis, the sender will be notified to transfer the case to Austin.
• The sender should contact the taxpayer by telephone and advise the taxpayer of the results of the collectibility and liability portions of the offer investigation prior to transfer. If the taxpayer cannot be reached by phone then a standard transfer letter should be sent.
• The file should be sent by overnight mail on Form 3210 to the Austin group.
• At the time of mailing, the case should be transferred on AOIC to Area 10.
• A history item should be added to AOIC to show the case is being sent to Austin, Area 10.
• The Austin group will maintain the faxed copies of all check sheets received and appropriate documentation on all offers accepted for transfer. This documentation will provide a historical record to support a decision to accept or reject the offer.
Note:
The Offer Examiner or Offer Specialist may also seek guidance from the Austin group on a Doubt as to Collectibility with Special Circumstances (DCSC) offers that involve Public Policy/Equity issues. The guidance should be solicited by preparing the check sheet and documenting the issues involved in the case. However, these cases will not be transferred to the Austin group.
5.8.11.4.2 (09-01-2005)
Financial Statement Analysis
1. Offers submitted under Effective Tax Administration (ETA) require the same full financial analysis as Doubt as to Collectibility (DATC) offers in order to determine reasonable collection potential (RCP) and to determine an acceptable offer amount. Procedures for financial analysis are contained in IRM 5.8.5, Financial Analysis.
2. Once reasonable collection potential (RCP) is completed a determination can be made as to whether the offer qualifies for consideration under Effective Tax Administration (ETA) or Doubt as to Collectibility (DATC).
3. If the taxpayers assets and future income exceed the tax liability, the taxpayers offer can be considered under the Effective Tax Administration (ETA) basis.
5.8.11.4.3 (09-01-2005)
Determining an Acceptable Offer Amount
1. An acceptable offer amount, based on economic hardship, is determined by analyzing the financial information and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.
Example:
The taxpayer has a $100,000 liability and a reasonable collection potential (RCP) of $125,000. To avoid economic hardship, it is determined that the taxpayer will need $75,000. The remaining $50,000 should be considered the acceptable offer amount.
2. In offers based on Public Policy/Equity, the Service would expect the taxpayer to offer an amount that is fair and equitable under the circumstances.
3. Generally, it is the responsibility of the taxpayer to make decisions and take the appropriate actions needed to fund the acceptable offer amount. However, due consideration of these funding options is often needed for the Service to arrive at an acceptable offer amount. For example, in some locations the availability of funding options such as reverse mortgages, assigning deeds of trust, etc. may allow the taxpayer to tap into available equity without creating economic hardship. These options should be taken into consideration in determining an acceptable offer amount for an Effective Tax Administration (ETA) offer based on economic hardship.
5.8.11.5 (09-01-2005)
Documentation and Verification
1. To verify the taxpayers special circumstances and support a basis of Effective Tax Administration (ETA):
A. Request supporting documentation of the taxpayers situation. Exercise sound judgement in determining the degree of verification necessary. For example, verification of a health problem could be a doctor’s letter or copies of medical expenses.
B. When special circumstances are found to exist, the amount offered will be less than reasonable collection potential (RCP). For Effective Tax Administration (ETA), reasonable collection potential (RCP) is always greater than the full liability. In the report narrative, explain clearly the rationale for acceptance of the amount offered. The documentation must include reasons why some or all of the equity in certain assets is not being offered, how the offer amount is being funded, and any other pertinent information that indicates how the amount offered was determined to be acceptable.
5.8.11.6 (09-01-2005)
Final Processing
1. Prior to final processing, AOIC must be updated to indicate the correct basis for closing the offer. This will ensure that all final closing reports generated from AOIC reflect the correct basis. The approval levels indicated on closing reports and letters must be consistent with the basis for closure.
2. The following is a guide to these determinations:
If… And… Then…
The offer was submitted under Effective Tax Administration (ETA) An economic hardship has been determined to exist, but the reasonable collection potential (RCP) is less than the liability balance due 1. Update the AOIC offer screen to indicate a "C" under the offer type.
2. Generate all closing reports with the proper approving official for Doubt as to Collectibility with Special Circumstances (DCSC).
The offer was submitted under Doubt as to Collectibility (DCSC) An economic hardship has been determined to exist, and the reasonable collection potential (RCP) is greater than the liability balance due 1. Update AOIC offer screen to indicate "A" under offer type.
2. Generate closing reports with the proper approving official for Effective Tax Administration (ETA) offers.
The offer was submitted under Effective Tax Administration (ETA) The offer is being recommended for acceptance under Doubt as to Collectibility (DATC) with the offer exceeding the reasonable collection potential (RCP) 1. AOIC offer screen does not require updating for special circumstances. The type of offer on AOIC should reflect "C" for Doubt as to Collectibility (DATC).
Generate closing reports with the proper approving official for Doubt as to Collectibility (DATC) without special circumstances.
The offer was submitted under Doubt as to Collectibility with item 9 of Form 656 completed with circumstances that do not meet any of the elements that define economic hardship, or Public Policy/Equity criteria The offer cannot be recommended for acceptance under Doubt as to Collectibility (DATC). Generate closing reports with the proper approving official for Doubt as to Collectibility (DATC) without special circumstances. Address in the history, why the circumstances described in item 9 do not meet defined economic hardship, or Public Policy/Equity criteria.
The offer was submitted under Effective Tax Administration (ETA) with item 9 of Form 656 completed with circumstances that do not meet ETA criteria The taxpayer does not qualify for ETA because the reasonable collection potential (RCP) is less than the liability and the offer cannot be recommended for acceptance under Doubt as to Collectibility with Special Circumstances (DCSC). 1. Update AOIC offer screen to indicate a "C" under special circumstances.
2. Generate closing reports with the proper approving official for Doubt as to Collectibility with Special Circumstances (DCSC).
The offer was submitted under Effective Tax Administration (ETA) with item 9 of the Form 656 completed with circumstances that the investigation reveals do not meet ETA criteria The offer cannot be recommended for acceptance and the reasonable collection potential (RCP) exceeds the liability 1. Update AOIC offer screen to indicate "A" under offer type.
3. Generate closing reports with the proper approving official for Effective Tax Administration (ETA) offers.
The offer was submitted under Effective Tax Administration (ETA) The special circumstances do meet economic hardship, or Public Policy/Equity criteria and the reasonable collection potential (RCP) exceeds the tax liability. However, the offer cannot be recommended for acceptance. 1. Update AOIC offer screen to indicate "A" under offer type.
3. Generate closing reports with the proper approving official for Effective Tax Administration (ETA) offers.
The offer was submitted under Doubt as to Collectibility with Special Circumstances (DCSC) The special circumstances do meet economic hardship, or Public Policy/Equity criteria and the reasonable collection potential (RCP) is less than the tax liability, however, the offer cannot be recommended for acceptance. Generate closing reports with the proper approving official for Doubt as to Collectibility with Special Circumstances (DCSC).
5.8.11.6.1 (09-01-2005)
Rejection/Return/Withdrawal Processing
1. The procedures in IRM 5.8.7, Return, Terminate, Withdraw, and Reject Processing, discussing rejections, withdrawals and returns should be followed when processing Effective Tax Administration (ETA) rejected, withdrawn or returned offers.
2. IRM 5.8.12, Independent Administrative Review, provides instructions for independent administrative review of rejected offers.
3. See Delegation Order No. 5-1 (formerly Delegation Order 11, Rev. 29) for the official with delegated authority based on Effective Tax Administration (ETA). The delegated official’s signature is required on the Form 1271 and the closing letter.
5.8.11.6.2 (09-01-2005)
Acceptance Processing
1. The procedures in IRM 5.8.8, Acceptance Processing , should be followed when processing accepted Effective Tax Administration (ETA) offers.
2. Area Counsel’s opinion is required on ETA offers where the unpaid amount of tax assessed (including any interest, addition to the tax, or assessable penalty) is $50,000 or more.
3. See Delegation Order No. 5-1 (formerly Delegation Order 11, Rev. 29) for the official with delegated authority to accept offers based on Effective Tax Administration (ETA). The delegated official’s signature is required on the Form 7249, Offer Acceptance Report, and the acceptance

The existence of fraud is a question of fact to be resolved upon consideration of the entire record. King's Court Mobile Home Park, Inc. v. Commissioner [Dec. 48,173], 98 T.C. 511, 516 (1992). Fraud will never be presumed. Id.; Beaver v. Commissioner [Dec. 30,380], 55 T.C. 85, 92 (1970). Fraud may, however, be proved by circumstantial evidence and inferences drawn from the facts because direct proof of a taxpayer's intent is rarely available. Niedringhaus v. Commissioner [Dec. 48,411], 99 T.C. 202, 210 (1992). The taxpayer's entire course of conduct may establish the requisite fraudulent intent. Stone v. Commissioner [Dec. 30,767], 56 T.C. 213, 223-224 (1971). Fraudulent intent may be inferred from various kinds of circumstantial evidence, or "badges of fraud", including the consistent understatement of income, inadequate records, implausible or inconsistent explanations of behavior, concealing assets, and failure to cooperate with tax authorities. Bradford v. Commissioner [ 86-2 USTC ¶9602], 796 F.2d 303, 307 (9th Cir. 1986), affg. [Dec. 41,615(M)] T.C. Memo. 1984-601. Dealing in cash is also considered a "badge of fraud" by the courts because it is indicative of a taxpayer's attempt to avoid scrutiny of his finances. See id. at 308. Whether a taxpayer has consistently underreported income over an extended period of time is also a relevant factor in analyzing whether the taxpayer had a fraudulent intent in understating his tax liability. Solomon v. Commissioner [84-1 USTC ¶9450], 732 F.2d 1459, 1461 (6th Cir. 1984), affg. [Dec. 39,427(M)] T.C. Memo. 1982-603.


Timothy and Barbara Kosinski v. Commissioner.

Dkt. No. 9911-04 , TC Memo. 2007-173, July 2, 2007.



[Code Sec. 6015]

Innocent spouse relief: Evidence not presented. --
A wife's request for an innocent spouse relief with respect to underpayments of tax resulting from overstatement of cost of goods sold allegedly incurred by her husband's pass-through construction business was denied because she failed to meet all the requirements of Code Sec. 6015(b). Her education and previous work experience as a bank teller, as well as her substantive and active role in numerous fraudulent cash transactions intended to understate the taxpayers' income and tax liability, prevented her from satisfying the Code Sec. 6015(b)(1)(C) test. She also did not establish that it would be inequitable to hold her liable for the tax deficiency on the joint return.


[Code Sec. 6501


The assessment of a married couple's tax liability was not barred by the statute of limitations because the taxpayers participated in a fraudulent scheme resulting in understatement of their income and tax liability and filing of a fraudulent return. The evidence indicated the taxpayers' fraudulently overstated the cost of goods sold claimed to be incurred by the husband's pass-through construction business.


[Code Sec. 6663]


A married couple was subject to the fraud penalty under Code Sec. 6663. The couple fraudulently overstated the cost of goods sold by the husband's pass-through construction business, which resulted in understatement of their taxable income for the year in question. The record showed that the taxpayers understated their income by similarly substantial amounts for the years immediately before and after that year. Both taxpayers also engaged in structuring a great number of fraudulent cash transactions over several years and purposefully made withdrawals of cash just below the threshold at which financial institutions are required to report to the government. They also did not keep good records of those transactions and even destroyed records regarding cash disbursements to a contractor. Moreover, the failure to inform the tax return preparers of the existence of these cash transactions, and the husband's conviction for subscribing fraudulent returns, also presented an evidence of fraudulent intent. The taxpayers also did not prove that any part of the underpayments was not attributable to fraud.








MEMORANDUM FINDINGS OF FACT AND OPINION



COHEN, Judge: Respondent determined a deficiency of $1,205,548 and an addition to tax for fraud pursuant to section 6663 of $904,161 with respect to petitioners' Federal income tax for 1997. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. After concessions, the issues for decision are:



(1) Whether petitioners have unreported flowthrough income for 1997 resulting from overstated cost of goods sold on the Federal income tax return for petitioner Timothy Kosinski's solely owned S corporation;



(2)whether petitioners are liable for the fraud penalty pursuant to section 6663 for the year in issue, or, in the alternative, whether petitioners are liable for the accuracy-related penalty pursuant to section 6662;



(3)whether petitioner Barbara Kosinski is entitled to relief pursuant to section 6015 for 1997; and



(4) whether the statute of limitations bars assessment and collection of petitioners' income tax liabilities for 1997.





FINDINGS OF FACT



Some of the facts have been stipulated, and the stipulated facts are incorporated into our findings by this reference. Petitioners are married and resided in Novi, Michigan, at the time that they filed their petition.



Petitioner Timothy Kosinski (petitioner) has been a licensed dentist since 1984 and was employed as an associate in a dental practice until 1991. In 1992, petitioner incorporated Timothy F. Kosinksi, P.C., his solely owned corporation, and was practicing dentistry under this name in 1997.



At the time of trial, petitioner Barbara Kosinski (Mrs. Kosinski) had been married to petitioner for 22 years. She received a bachelor's degree in psychology from the University of Michigan in Dearborn and was employed part time as a bank teller at two different banks consecutively during the 1980s. At the time of trial, Mrs. Kosinski was a full-time homemaker.




Petitioner's Contracting Business


After the death of his father in 1991, petitioner incorporated T.J. Construction Co. (T.J. Construction) to continue certain building projects on which his father had been working prior to his death. Petitioner's father had been a carpenter and independent contractor and had worked primarily with Thyssen Steel Inc. (Thyssen Steel), which manufactures steel wire, steel coil, and other steel products. From 1991 through 1999, Thyssen Steel was the only customer of T.J. Construction.



Much of the work performed by T.J. Construction was as a contractor for foundation cement work for two Thyssen Steel plants. Most of the work for the plant in Detroit, Michigan, was subcontracted out by T.J. Construction to Melvin Phillips (Phillips), the sole owner of Phillips Contracting Co. (Phillips Contracting), and Phillips was one of several subcontractors for the plant in Richburg, South Carolina. Phillips and petitioner were close family friends, and Phillips substantially facilitated petitioner's entrance into the contracting field. On the Thyssen Steel projects, Phillips performed the work at the sites, and petitioner, through T.J. Construction, primarily handled the paperwork between Phillips and Thyssen Steel.



The Thyssen Steel projects involved numerous jobs for which individual proposals were submitted by Phillips to petitioner, who then forwarded the proposals to Thyssen Steel. Phillips included a 20-percent profit margin in his proposal for each job, and petitioner added a 10-percent administrative fee to the figure proposed by Phillips before submitting the final proposal to Al Paas (Paas), the project manager for Thyssen Steel, who then submitted the proposals for final approval by Thyssen Steel management. Petitioner typically requested payment from Paas for work completed, and payments were received from Thyssen Steel in checks made out to T.J. Construction. Petitioner then remitted to Phillips whatever petitioner determined was owed to Phillips, after deducting funds previously advanced to Phillips by petitioner.



On several occasions, envelopes containing $5,000 in $100 bills were given by petitioner to Paas, petitioner's contact for payment from Thyssen Steel. Paas was instrumental in T.J. Construction's receiving a performance bonus nearly double that which was required by the contract between Thyssen Steel and T.J. Construction. Petitioner did not require that Paas use the cash in a particular manner or keep receipts for the cash he used, and petitioner kept no record of the cash he advanced to Paas.



Various methods of payment were used at various times by petitioner to pay Phillips or to advance money to Phillips. During the first couple of years that T.J. Construction was in business, it was petitioner's practice simply to write checks to cash from T.J. Construction's account to pay himself and Phillips. During their compilation at a later date, he would inform his accountants which of the checks that were written to cash went to Phillips and which ones went to petitioner. However, petitioner was advised by his accountants in late 1993 that checks written to cash would no longer be deducted and that petitioner would need documentation, such as checks to a specific payee, in order to claim a business deduction for those expenses.



Until mid-June 1996, petitioner paid Phillips and advanced funds on current projects by writing checks in the amount of $9,500 to Phillips from T.J. Construction's account, which checks Phillips cashed. Around that time, however, petitioner changed his practice and began to advance cash to Phillips as well as to write checks made out to Phillips from T.J. Construction's account, which checks were then endorsed by Phillips back to petitioner and deposited by petitioner into petitioners' personal bank account, allegedly as repayments for cash advanced. Petitioner did not inform his accountants that he was advancing cash to Phillips in addition to writing the checks or that the checks were endorsed back to petitioner and deposited in petitioners' personal bank account. All of the checks that were endorsed back to petitioner were deducted as business expenses on T.J. Construction's Forms 1120S, U.S. Income Tax Return for an S Corporation.



The nature of the cash transactions between petitioner and Phillips was such that the actual amount of money paid to Phillips could be verified only by petitioner and Phillips. Petitioner kept track of the amounts owed to Phillips by T.J. Construction, but he destroyed those records regularly. Phillips did not keep records of the amounts he was owed, but rather relied on petitioner to handle the paperwork with regard to the Thyssen Steel projects.



From 1994 through 1998, Phillips paid his employees with a combination of checks and cash. He did not withhold any taxes and did not issue any Forms 1099 or Forms W-2, Wage and Tax Statement, with regard to payments to his employees. With the cash he received from petitioner, Phillips customarily made cash payments to temporary workers, to subcontractors, to regular employees as incentives and bonuses, and to suppliers.



In addition to substantial cash payments, petitioner made three large wire transfers to Phillips Contracting totaling $1,440,500 between 1996 and 1997. Petitioner treated these amounts as cost of goods sold for the relevant years. However, petitioner also treated these amounts as cash advances or loans to Phillips, and he made out to Phillips from T.J. Construction's account, and had Phillips endorse back to him, checks equal to the total of the wire transfers, which checks petitioner then deposited into petitioners' personal bank account, even though petitioner had not advanced his own funds with regard to the wire transfers. Both the amounts transferred by wire transfer and the checks made payable to Phillips that were endorsed back to petitioner were treated as cost of goods sold during the preparation of petitioners' and T.J. Construction's tax returns, resulting in the full amounts of the wire transfers being so treated twice.



In late December 1998, Phillips needed a personal loan of $101,000. Petitioner advanced funds to Phillips out of his personal accounts, but he then had Phillips endorse checks out of T.J. Construction's account back to him, which checks were then deposited in petitioners' personal bank account. The checks made payable to Phillips and endorsed back to petitioner were then treated as cost of goods sold on T.J. Construction's return for 1998.



Petitioners regularly kept hundreds of thousands of dollars in cash in their home safe and safe-deposit boxes, as well as at petitioner's dentistry office.



Between 1995 and 1999, petitioners, Phillips, and Nina Spratt, an employee of petitioner's dental office, cashed checks and withdrew cash totaling $7,676,000 in $9,500 increments both from petitioners' personal account and from that of T.J. Construction. The $9,500 amount was just below the $10,000 threshold at which banks are required to report large transactions to the Federal Government, which resulted in these cash transactions' avoiding at least immediate scrutiny. In 1997, the year in issue, petitioner cashed or caused to be cashed checks totaling $1,976,000. In 1996 and 1998, petitioner cashed or caused to be cashed checks totaling $1,957,000 and $2,527,000, respectively.



Mrs. Kosinski regularly withdrew cash in $9,500 increments from petitioners' checking accounts at her husband's direction. Between 1995 and 1999, she cashed nearly 300 checks for her husband totaling approximately $2.85 million. In 1997 alone, Mrs. Kosinski cashed 87 checks, each for $9,500. On one occasion, she wrote a check to cash for $10,000 and left the check in an envelope under a doormat for Phillips to pick up.



Petitioner wrote 36 checks totaling $2,919,974 in 1997 to Phillips or Phillips Contracting that were endorsed back to petitioner and deposited into the personal bank account of petitioners. In 1996 and 1998, petitioner wrote checks totaling $2,079,253 and $3,144,398, respectively, that were endorsed back to petitioner and deposited into the personal bank account of petitioners. All of the checks that were made payable to Phillips or to Phillips Contracting but endorsed back to petitioner were treated as cost of goods sold on the Forms 1120S of T.J. Construction for tax years 1996 through 1998.



From early 1996 through 1998, petitioner's brother, George Kosinski, performed substantial home improvements on petitioners' personal residence and on the home in which petitioner's mother lived, which home was owned by petitioners. The work performed by George Kosinski was billed by his company, Rougewood Construction, to "Tim Kosinski" but was paid for by checks out of T.J. Construction's account. Until December 1997, invoices from Rougewood Construction were addressed to petitioners' personal residence. Beginning in December 1997, the invoices were addressed to petitioner at his business address. All of the checks to Rougewood Construction, totaling nearly $141,000 from 1996 through 1998, were signed by petitioner, and none had any notation indicating that they were for personal expenses. Payments to Rougewood Construction for personal home improvement expenses of petitioners were deducted as business expenses on the Forms 1120S of T.J. Construction. Some of the personal home improvement work for petitioners was performed by Star Mechanical, a subcontractor of Rougewood Construction, and Star Mechanical billed its expenses to T.J. Construction at the direction of George Kosinski.




Preparation of Petitioners' Federal Tax Returns


Susan Pereira (Pereira), an employee of Plotnik & Associates, was the certified public accountant (C.P.A.) who did the accounting for T.J. Construction and for petitioner's dental practice from 1991 through 1999. She also prepared the Forms 1040, U.S. Individual Income Tax Return, for petitioners and the Forms 1120S for T.J. Construction during that period. The returns prepared by Pereira were signed by Steven J. Plotnik, also a C.P.A.



For purposes of preparing the Forms 1040, petitioner generally provided Pereira with Forms W-2, yearend bank statements indicating any interest or dividend accounts, and copies of some relevant canceled checks and bills. For purposes of preparing the Forms 1120S for T.J. Construction, petitioner generally provided Pereira with bank statements, check stubs, check stubs received from Thyssen Steel, and green sheets, which were petitioner's handwritten ledgers recording gross receipts and expenditures from T.J. Construction's account. Pereira did not use the green sheets provided unless she had a question about something in her review of the bank statements and check registers during the course of her compilation and preparation of petitioners' and T.J. Construction's tax returns.



Pereira relied on deposits into T.J. Construction's bank account in determining the company's gross receipts and on T.J. Construction's check stubs, which were categorized by Pereira based on the information recorded on the check stubs, in determining cost of goods sold, operating expenses, and other deductible expenditures. All checks written to Phillips or to Phillips Contracting from T.J. Construction's bank account were included in the cost of goods sold listed on the Forms 1120S. Once the Forms 1120S were completed, the returns and a financial statement were hand delivered or mailed by Plotnik & Associates to petitioner, who was directed to sign and mail the returns. Petitioner never informed Pereira that he was advancing large amounts of cash to Phillips or that the checks made payable to Phillips were being endorsed back to petitioner and deposited into petitioners' personal account. She first became aware of the cash transactions and of the checks that were endorsed back to petitioner when the IRS initiated a criminal investigation of petitioners, as discussed below.



The green sheets that petitioner provided to Pereira included as business deductions of T.J. Construction estimated tax payments made on behalf of petitioner personally. On one occasion in 1995 or 1996, Pereira compared petitioner's figures on his green sheets with the figures she calculated and explained to him that tax payments made on behalf of petitioner personally, when paid by T.J. Construction, were additional income to petitioner and not business expenses of the company.



Pereira had frequent discussions with petitioner regarding the books and records of T.J. Construction, but petitioner never disclosed to her that payments to Rougewood Construction and to Star Mechanical out of T.J. Construction's account were for his personal benefit or that they were related to personal home improvements. When Pereira sorted the check stubs that she was provided during her compilation for T.J. Construction, she categorized these payments under cost of goods sold as payments to subcontractors, because the names of the payees did not trigger any suspicion regarding whether the payments were business items, no notation was made on the check stubs that the payments were personal, petitioner's green sheets listed the payments as miscellaneous expenses of T.J. Construction, and Pereira was never informed otherwise by petitioner. In addition, T.J. Construction issued Forms 1099 to Rougewood Construction and to Star Mechanical for 1996 through 1998 for payments made to those entities to cover the personal expenses of petitioners.




Criminal Investigation and Conviction


During an initial interview with special agents of the Criminal Investigation Division of the Internal Revenue Service (IRS) on July 20, 1999, when asked why he and his wife had been consistently withdrawing large sums of cash from their accounts, petitioner represented to the special agents that he was putting away money "in anticipation of the Y2K problem". Petitioner stated that he had $300,000 in cash in petitioners' personal safe at home and another $200,000 in cash in safe-deposit boxes. Upon review of the contents of the home safe, the special agents found 37 envelopes, each containing $5,000 in $100 bills, totaling $185,000. When asked why he withdrew cash in $9,500 increments, petitioner stated that he did it because that was the way his father used to make cash withdrawals and that he understood that a form must be filled out if cash transactions exceed $10,000. At the initial interview with the special agents, petitioner did not mention that he made regular cash payments to Phillips.



At petitioner's second interview 2 days later, the special agents' review of the contents of petitioners' safe-deposit boxes revealed 60 envelopes, each containing $5,000 in cash, totaling $300,000. When the special agents asked about the balance of the cash that petitioners had withdrawn over the last 3 years, which the special agents estimated at approximately $1.8 million, petitioner said that "he spent it". He did mention to the special agents at that time that Phillips, his main contractor, preferred to be paid in cash, and informed them that petitioner issued Forms 1099 to Phillips each year, but Phillips did not sign receipts for the cash payments he received from T.J. Construction.



On June 20, 2002, a grand jury returned a nine-count indictment against petitioner including: (a) One count of conspiracy to defraud the IRS and to structure currency transactions to evade reporting requirements; (b) five counts of subscribing a false Federal tax return; and (c) three counts of structuring a currency transaction to evade reporting requirements. The grand jury also returned a three-count indictment against Mrs. Kosinski, including one count of conspiracy and two counts of structuring currency transactions. The Government alleged in the indictment that petitioners withdrew cash amounting to $7,666,500 for the purpose of concealing Phillips's payment of taxable wages in cash to his employees between 1995 and 1999.



A jury found petitioner guilty of seven counts (the conspiracy count, all of the false tax return counts, and one structuring count) and not guilty on two of the three structuring counts. Petitioner was initially sentenced to imprisonment of two concurrent 30-month sentences and a 2-year and 1-year concurrent supervised release. The case was appealed to the United States Court of Appeals for the Sixth Circuit, which remanded the case for resentencing. Upon resentencing, petitioner was sentenced to 6 months in a halfway house, 6 months in home confinement, and 3 years of probation, in addition to being ordered to pay a $60,000 fine. The United States Court of Appeals for the Sixth Circuit has again remanded the case for resentencing. United States v. Kosinski, 480 F.3d 769 (6th Cir. 2007).



Mrs. Kosinski pleaded guilty to one count of structuring currency transactions and received probation, in addition to being ordered to pay a $5,000 fine and perform 100 hours of community service. When she pleaded guilty, Mrs. Kosinski testified under oath that no one had threatened her or her loved ones to induce her to plead guilty and no one had promised her favorable treatment if she pleaded guilty. She also explained her involvement in petitioner's currency structuring transactions:



My husband and I agreed that I would go to the bank hundreds of times, almost always, and took money out in the amount of $9500. This is between 1996 and 1999. The account usually had a [sic] substantial more money in it than what I withdrew. The withdrawals were kept in an amount so that the bank would not have to fill out the federal reports for cash withdrawals over $10,000.



Phillips was indicted and pleaded guilty to conspiracy to defraud the United States and to tax evasion for the taxable year 1998 with respect to paying his employees in cash with no income tax withholdings, failing to issue Forms 1099 and Forms W-2, and failing to file his own income tax returns. He was sentenced to 21 months' incarceration and 2 years' supervised release, and he was ordered to file income tax returns for the taxable years 1996 through 1998.





OPINION




Unreported Flowthrough Income


As a general rule, a taxpayer challenging the Commissioner's determinations in a notice of deficiency bears the burden of proof. Rule 142(a). That burden may shift to the Commissioner if the taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the taxpayer's tax liability. Sec. 7491(a)(1). However, section 7491(a)(1) applies with respect to an issue only if the taxpayer has complied with the requirements under the Code to substantiate any item, has maintained all records required by the Code, and has cooperated with reasonable requests by the Commissioner for witnesses, information, documents, meetings, and interviews. Sec. 7491(a)(2)(A) and (B). Petitioners have not satisfied the conditions for shifting the burden of proof to respondent. In any event, the evidence establishes overstatement of cost of goods sold resulting in understated income and understated tax liability.



In calculating gross income, taxpayers may offset gross receipts by the cost of goods sold. Metra Chem Corp. v. Commissioner [Dec. 43,787], 88 T.C. 654, 661 (1987); sec. 1.61-3(a), Income Tax Regs. In order to substantiate claimed cost of goods sold, taxpayers are expected to maintain adequate records. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.



On the 1997 Form 1120S for petitioner's solely owned corporation, T.J. Construction, petitioners claimed cost of goods sold in the amount of $7,857,791. All checks made payable to Phillips or to Phillips Contracting were treated as cost of goods sold, including $2,919,974 in checks that were issued to Phillips, endorsed back to petitioner, and then deposited in petitioners' personal bank account. Respondent disallowed the costs of good sold for these checks. Respondent concedes that petitioner made cash advances of $1 million to Phillips in 1997 and may treat $1 million of the checks that were endorsed back to petitioner as cost of goods sold. Petitioners assert that their estimation of cash advanced to Phillips in 1997 is closer to $2.5 million.



Petitioners have presented no credible evidence that more than $1 million was advanced to Phillips. In 1997, petitioner cashed or caused to be cashed checks totaling $1,976,000. This amount is far less than the $2.5 million in cash that petitioners claim was advanced to Phillips that year. Petitioner has presented no credible substantiating documentation regarding the amount of cash he claims to have advanced to Phillips. Rather, he regularly destroyed the records he created to keep track of such cash advances and the balances owed Phillips.



Additionally, the record shows that petitioners' dealings in cash extended beyond his transactions with Phillips. On several occasions, petitioner gave cash to Paas, who was responsible for approving his bids and recommending him for bonuses from Thyssen Steel. Petitioners kept substantial cash hoards in their home safe and in safe-deposit boxes. Petitioner made a $101,000 personal loan to Phillips in December 1998, for which he then wrote checks made payable to Phillips out of T.J. Construction's account and had Phillips endorse them back to petitioner, who then deposited them in his personal accounts. Those checks were deducted as a business expense of T.J. Construction on its Form 1120S for that year.



One of the checks that was endorsed back to petitioner for $450,000 is related to a $450,000 wire transfer from T.J. Construction to Phillips. Petitioner's accountants treated as cost of goods sold both the wire transfer amount and the endorsed back check made payable to Phillips, which supposedly represented Phillips's indebtedness for receipt of the wired funds, and thus resulted in the $450,000 amount's being subtracted twice from gross receipts as cost of goods sold. Both the wire transfer and the matching endorsed back check occurred on October 3, 1997. Petitioners have conceded the $450,000 duplication of cost of good sold related to the wire transfer in 1997, and they have also conceded that additional wire transfers totaling $1 million were treated similarly in 1996, resulting in $1 million of costs of good sold being subtracted from gross receipts twice in 1996. However, that year is not before the Court in this case.



Petitioners argue that the cash advances to Phillips and the endorsed back checks should be viewed as two independent liabilities stemming from separate and unrelated facts. Under such treatment, the cash advances from petitioner to Phillips would be viewed as personal loans, and the endorsed back checks would be viewed first as compensatory payments to Phillips and then as repayments to petitioner of the borrowed funds when the check was endorsed back to petitioner. Thus, because the endorsed back checks would be viewed as compensatory payments when issued from T.J. Construction, all of the endorsed back checks would be deductible business expenses of T.J. Construction, and the taxability to petitioner of the endorsed back checks would be dependent on how much cash was advanced as loans to Phillips. Petitioners argue that the tax treatment outlined above is required because it is undisputed that T.J. Construction owed Phillips money, and thus the checks issued to Phillips were payments of legitimate corporate obligations.



We are not persuaded by petitioners' retroactive portrayal of the transactions between Phillips and petitioners. It is not a necessary conclusion that all of the checks made payable to Phillips were payments of legitimate obligations of T.J. Construction. There is no credible evidence in the record regarding the amounts that T.J. Construction owed to Phillips, and petitioner kept no reliable records to substantiate any liabilities or payments.



Because T.J. Construction is a flowthrough entity, petitioners claimed the benefit of the corporate deductions and costs of good sold taken for checks written to Phillips for which Phillips did not actually receive payment. Due to the volume of the cash withdrawn by petitioners and the absence of any accurate records as to how much actually was given to Phillips, it is impossible to determine how much of the amount paid out in endorsed back checks represented payments received by Phillips. However, respondent has conceded $1 million as an approximation of cash received by Phillips from petitioner, and thus $1 million of the endorsed back checks is allowable as cost of goods sold in 1997.



In an amended answer, respondent alleged that the cost of goods sold of T.J. Construction was overstated by an additional $21,253 because T.J. Construction paid for personal home improvement expenses of petitioner in that amount in 1997 for work performed by petitioner's brother and his brother's subcontractor. Petitioners concede that these payments are personal, but they allege that they were not improperly treated under cost of goods sold for 1997 on the Form 1120S because petitioner allegedly had contributed funds to T.J. Construction in prior years in order to cover the home improvement expenses. Although the capital contributions made by petitioner in prior years were not included in the income of T.J. Construction, petitioners argue that they should have been included and then the later deductions should be allowed. In support of their argument, petitioners cite Lemler v. Commissioner [Dec. 37,399(M)], T.C. Memo. 1980-507, where this Court held that payments made to a corporation in reimbursement by the owner of the corporation should be included in the corporation's income. Because we are not persuaded by the evidence petitioners have presented in support of their allegation that prior contributions were made to T.J. Construction as reimbursements in advance, we need not reach the question of whether such reimbursements should be included in the corporation's income. We hold that the disbursements from T.J. Construction to pay for improvements on the personal home of petitioners and on the home occupied by petitioner's mother are not cost of goods sold and create additional flowthrough income to petitioners in 1997.




Fraud Penalty


The penalty in the case of fraud is a civil sanction provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud. Helvering v. Mitchell [38-1 USTC ¶9152], 303 U.S. 391, 401 (1938); Sadler v. Commissioner [Dec. 53,476], 113 T.C. 99, 102 (1999). Respondent has the burden of proving, by clear and convincing evidence, an underpayment for the year in issue and that some part of the underpayment for that year is due to fraud. Sec. 7454(a); Rule 142(b). If respondent establishes that any portion of the underpayment is attributable to fraud, the entire underpayment is treated as attributable to fraud and subjected to a 75-percent penalty, unless the taxpayer establishes that some part of the underpayment is not attributable to fraud. Sec. 6663(b). Respondent must show that the taxpayer intended to conceal, mislead, or otherwise prevent the collection of taxes. Katz v. Commissioner [Dec. 44,832], 90 T.C. 1130, 1143 (1988).



The existence of fraud is a question of fact to be resolved upon consideration of the entire record. King's Court Mobile Home Park, Inc. v. Commissioner [Dec. 48,173], 98 T.C. 511, 516 (1992). Fraud will never be presumed. Id.; Beaver v. Commissioner [Dec. 30,380], 55 T.C. 85, 92 (1970). Fraud may, however, be proved by circumstantial evidence and inferences drawn from the facts because direct proof of a taxpayer's intent is rarely available. Niedringhaus v. Commissioner [Dec. 48,411], 99 T.C. 202, 210 (1992). The taxpayer's entire course of conduct may establish the requisite fraudulent intent. Stone v. Commissioner [Dec. 30,767], 56 T.C. 213, 223-224 (1971). Fraudulent intent may be inferred from various kinds of circumstantial evidence, or "badges of fraud", including the consistent understatement of income, inadequate records, implausible or inconsistent explanations of behavior, concealing assets, and failure to cooperate with tax authorities. Bradford v. Commissioner [ 86-2 USTC ¶9602], 796 F.2d 303, 307 (9th Cir. 1986), affg. [Dec. 41,615(M)] T.C. Memo. 1984-601. Dealing in cash is also considered a "badge of fraud" by the courts because it is indicative of a taxpayer's attempt to avoid scrutiny of his finances. See id. at 308. Whether a taxpayer has consistently underreported income over an extended period of time is also a relevant factor in analyzing whether the taxpayer had a fraudulent intent in understating his tax liability. Solomon v. Commissioner [84-1 USTC ¶9450], 732 F.2d 1459, 1461 (6th Cir. 1984), affg. [Dec. 39,427(M)] T.C. Memo. 1982-603.



Respondent's burden regarding the underpayment of tax in support of the fraud penalty has been met. Petitioners have conceded more than $450,000 in overstatements of cost of goods sold, and we have found clear and convincing evidence, for the reasons set forth above, that approximately $1.5 million more was overstated by petitioners in 1997. Those overstatements resulted in substantial understatements of petitioners' tax liability for that year.



The evidence in this case also establishes the existence of several "badges of fraud" in petitioners' financial dealings. Petitioners understated their income in 1997 by approximately $2 million, and the record shows that they understated their income by similarly substantial amounts in at least 1996 and 1998, the years immediately before and after the year in issue. Petitioner kept some detailed records regarding expenses, but regularly destroyed those that recorded his cash disbursements to Phillips. Petitioner did not inform his accountants about the substantial cash withdrawals and payments to Phillips, and the records he provided to his accountants did not disclose such cash transactions on their face. He adopted this course after being advised by his accountants that checks to cash would not be deducted on returns prepared by the accountants.



There are multiple inconsistencies and implausible explanations of behavior in the testimony of both petitioners. For instance, petitioner testified at one point that his profit margin was from work performed by subcontractors other than Phillips. At another time, he admitted that Phillips was his primary contractor and represented the majority of his cost of goods sold expenditures. When asked at his first meeting with special agents from the IRS about why he kept hundreds of thousands of dollars in cash on hand, petitioner claimed that he was accumulating cash "in anticipation of the Y2K problem", never mentioning his cash dealings with Phillips. At his second interview with them, when asked what happened to the additional $1.8 million in cash petitioners had withdrawn over the preceding 3 years, petitioner told the special agents that he had spent the cash and mentioned Phillips for the first time.



Mrs. Kosinski, who had worked previously as a teller at two different banks, admitted to withdrawing personally nearly $3 million in $9,500 cash increments on behalf of her husband from 1995 through 1999, nearly $1 million of which was withdrawn in 1997 alone. Although she testified in her criminal proceeding that she made hundreds of $9,500 withdrawals so that the bank would not have to fill out Federal reports for cash transactions over $10,000, Mrs. Kosinski testified in this case that she did not know and never inquired about her husband's purpose in withdrawing the cash, why the money was withdrawn in $9,500 increments, or what her husband did with the money once she gave it to him. Mrs. Kosinski also testified that she did not know that her husband was making substantial cash payments to Phillips; yet she also testified that on one occasion she left a $10,000 check payable to cash under a doormat for Phillips at her husband's direction. Not only did petitioners both participate in structuring substantial cash transactions, they both gave inconsistent and implausible testimony regarding that issue.



Evidence of fraud in this case also includes the substantial number of structured cash transactions outlined above in which petitioners regularly engaged over several years. Petitioners purposefully made withdrawals just below the threshold at which financial institutions are required to report to the Government and documented (or failed to document) their use of the cash in such a way that not even petitioner could verify where the money went.



Petitioners had on hand nearly half a million dollars in cash in their personal safe at home and in their safety deposit boxes when criminal investigators from the IRS first interviewed them. Petitioner's statements to the criminal investigators at his first meeting with them regarding his purpose in hoarding cash differed from those statements made at his second meeting with them.



Although petitioner's conviction for subscribing false Federal tax returns does not collaterally estop him from denying that he fraudulently understated petitioners' income tax liability, his conviction is evidence of fraudulent intent. See Wright v. Commissioner [Dec. 42,013], 84 T.C. 636, 643-644 (1985).



Petitioners assert that any inaccuracies in their reported tax liabilities for the relevant years are attributable primarily to miscommunication between them and their return preparers and accountants, Susan Pereira and Steven J. Plotnik. Petitioners claim that their accountants should have caught several of the checks that were for personal expenses by looking at records, some of which were made available to the accountants, outside of the bank statements and check stubs of T.J. Construction. However, petitioners' accountants were hired by petitioners to perform only a compilation of their accounts and prepare their tax returns. The evidence does not show that the accountants could have discerned the nature of the extensive cash dealings by petitioners if the additional documents had been reviewed. Although petitioner's accountants had warned him that checks must be made payable to the actual recipients of the money, petitioner never informed them of his cash transactions, which were obviously designed to circumvent their advice to him. The first time the accountants were made aware of any cash dealings was when approached by IRS agents investigating petitioners for criminal tax violations.



A taxpayer is not entitled to shift responsibility for inaccurate returns onto his return preparer where the preparer is not provided with complete and accurate information regarding the taxpayer's income and expenses. See Korecky v. Commissioner [86-1 USTC ¶9232], 781 F.2d 1566, 1569 (11th Cir. 1986), affg. per curiam [Dec. 41,878(M)] T.C. Memo. 1985-63; Merritt v. Commissioner [62-1 USTC ¶9408], 301 F.2d 484, 487 (5th Cir. 1962), affg. [Dec. 23,741(M)] T.C. Memo. 1959-172. The responsibility of filing accurate returns remains principally with the taxpayer, especially where the taxpayer has taken an active and controlling role regarding the information that is used for the preparation of the returns. See Medlin v. Commissioner [Dec. 55,246(M)], T.C. Memo. 2003-224, affd. 138 Fed. Appx. 298 (11th Cir. 2005). Petitioners cannot blame their return preparers for the substantial errors in reporting their tax liability for 1997 when petitioner, who alone possessed the information that would have indicated potential discrepancies between petitioners' actual tax liabilities and the amounts reported on their returns, provided the accountants with misleading information and documentation regarding the nature of disbursements out of T.J. Construction. See Bacon v. Commissioner [Dec. 54,003(M)], T.C. Memo. 2000-257, affd. without published opinion [2001-2 USTC ¶50,686] 275 F.3d 33 (3d Cir. 2001). Furthermore, petitioner's failure to inform the accountants, despite regular meetings with them, of the existence of the cash advances from petitioner to Phillips or that Phillips was endorsing checks received from T.J. Construction back to petitioner, who was then depositing those funds in petitioners' personal bank account, is indicative of fraud. See Medlin v. Commissioner, supra; Ishler v. Commissioner [Dec. 54,695(M)], T.C. Memo. 2002-79.



Petitioners cite McGowan v. Commissioner [Dec. 55,669(M)], T.C. Memo. 2004-146, affd. [2006-2 USTC ¶50,456] 187 Fed. Appx. 915 (11th Cir. 2006), in support of their contention that the errors on petitioner's tax returns are due to confusion between petitioner and his accountants, and not fraudulent intent. We have found, for the reasons stated above, that the errors were deliberately designed by petitioner and were coupled with several other indications of fraudulent intent.



As outlined above, the evidence indicates the fraudulent intent of both petitioner and Mrs. Kosinski with regard to the overstatement of cost of goods sold and understatement of their taxable income for 1997. Petitioners have not proven that any part of the underpayments was not attributable to fraud. See sec. 6663(b). On consideration of the entire record, we conclude that petitioners are liable for the fraud penalty determined under section 6663(a).




Section 6015 Relief


Generally, married taxpayers may elect to file a joint Federal income tax return. Sec. 6013(a). After making the election, each spouse is fully responsible for the accuracy of the return and jointly and severally liable for the entire tax due for that year. Sec. 6013(d)(3); Butler v. Commissioner [Dec. 53,869], 114 T.C. 276, 282 (2000). A spouse (requesting spouse) may, however, seek relief from joint and several liability by following procedures established in section 6015. Sec. 6015(a). A requesting spouse may seek relief from liability under section 6015(b) or, if eligible, may allocate liability according to provisions under section 6015(c). Sec. 6015(a). If relief is not available under section 6015(b) or (c), an individual may seek equitable relief under section 6015(f). Section 6015(f) permits relief from joint and several liability where "it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either)".



Mrs. Kosinski seeks relief under section 6015(b) for 1997. Section 6015(b) provides, in pertinent part, as follows:



SEC. 6015(b). Procedures For Relief From Liability Applicable to All Joint Filers. --



(1) In general. --Under procedures prescribed by the Secretary, if --



(A) a joint return has been made for a taxable year;



(B) on such return there is an understatement of tax attributable to erroneous items of 1 individual filing the joint return;



(C) the other individual filing the joint return establishes that in signing the return he or she did not know, and had no reason to know, that there was such understatement;



(D) taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the



deficiency in tax for such taxable year attributable to such understatement; and



*******



then the other individual shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such understatement.



The requirements of section 6015(b)(1) are stated in the conjunctive. Accordingly, a failure to meet any one of them prevents a requesting spouse from qualifying for the relief offered therein. Alt v. Commissioner [Dec. 54,961], 119 T.C. 306, 313 (2002), affd. [2004-1 USTC ¶50,279] 101 Fed. Appx. 34 (6th Cir. 2004).



Respondent argues that Mrs. Kosinski has failed to meet the requirements of subparagraphs (C) and (D) of section 6015(b)(1). Petitioners argue that Mrs. Kosinski meets the requirements of section 6015(b)(1)(C) because she had no actual knowledge of improper deductions taken on petitioners' tax return and because she did not benefit from the improper deductions "because of the volume of income on the tax return." Petitioners urge the Court to consider "how a reasonable person would react to a 1997 tax return where $1,392,874.00 of taxable income is reported and $521,305.00 of tax is paid, knowing that her spouse had withdrawn large amounts of cash from the bank." We understand petitioners' argument to be that Mrs. Kosinski was not capable of understanding that excessive costs of good sold and deductions were improperly claimed on their tax return for 1997 because there was too much money involved overall for her to notice the discrepancy. Given Mrs. Kosinski's education and employment history, as well as her substantial and active role in the cash structuring transactions, we are not persuaded by this argument.



Petitioners also argue that Mrs. Kosinski was unaware of any necessary increase in petitioners' income due to the $21,252 of expenses related to improvements to petitioners' home that was paid out of T.J. Construction's account and deducted as business expenses. Petitioners make no argument with regard to section 6015(b)(1)(D) that it would be inequitable to hold Mrs. Kosinski liable for the deficiencies in tax stated on petitioners' 1997 joint return.



Mrs. Kosinski is a college graduate and has previous work experience as a bank teller for two different banks. From 1995 through 1999, she cashed approximately $2.85 million in checks, all in $9,500 increments, from petitioners' personal and business accounts. She cashed 87 checks totaling over $800,000 during 1997. Mrs. Kosinski testified that she did not know her husband's purpose for the cash withdrawn or what he did with it once she gave it to him. On one occasion, at her husband's direction, she wrote a check to cash in the amount of $10,000 and left the check in an envelope under a doormat for Phillips. She testified that she never asked her husband why they were withdrawing millions of dollars of cash in $9,500 increments from their bank accounts.



Mrs. Kosinski testified that she did not know that checks from T.J. Construction's bank account rather than from petitioners' personal account were written to pay for approximately $141,000 of improvements on petitioners' home and the home of petitioner's mother between 1996 and 1998. Mrs. Kosinski was aware of the extensive improvements being made to her home, and the majority of the invoices from Rougewood Construction in 1997 for the home improvements were addressed to petitioners' personal residence. Petitioners shared a joint checking account for personal finances, Mrs. Kosinski's name was on the account, and she wrote checks on that account. Even if her husband was responsible for balancing their joint checking account, as Mrs. Kosinski testified, it is implausible that Mrs. Kosinski was not aware that the expenses for improvements to petitioners' home were paid out of T.J. Construction's bank account and not from petitioners' personal account.



We do not believe Mrs. Kosinski's implausible testimony and conclude that she was an active participant in a fraudulent scheme to understate petitioners' income and tax liability. She has not met the requirement of section 6015(b)(1)(C), nor has she established, pursuant to section 6015(b)(1)(D), that it would be inequitable to hold her liable for the deficiency in petitioners' tax for 1997.




Statute of Limitations


As a general rule, section 6501 provides that any tax must be assessed within 3 years of the date on which the pertinent tax return was filed. Sec. 6501(a). However, an exception exists in the case of a "false or fraudulent return", under which exception tax may be assessed at any time. Sec. 6501(c)(1). Respondent bears the burden of proving fraud in this context. Sec. 7454(a); Rule 142(b). Because respondent has done so here for the reasons explained above, assessment of petitioners' 1997 tax liability is not barred by the statute of limitations.



We have considered the arguments of the parties that were not specifically addressed in this opinion. Those arguments are either without merit or irrelevant to our decision.



To reflect the foregoing,

Timothy Kosinski; Barbara Kosinski, Petitioners-Appellants v. Commissioner of Internal Revenue, Respondent-Appellee.

U.S. Court of Appeals, 6th Circuit; 07-2136, August 29, 2008.
Affirming the Tax Court, 94 TCM 15; Dec. 56,990(M); TC Memo. 2007-173. Related case at 2005-1 USTC ¶50,241.

[ Code Sec. 6663]


The Tax Court's decision upholding a fraud penalty against a married couple was proper. The government was not required to prove that the couple's entire underpayment resulted from fraud. The Tax Court identified "several badges of fraud," including, the couple's practice of destroying records regarding cash transactions, designing and executing a scheme of cash withdrawals, failure to apprise accountants of cash disbursements and inconsistent and implausible explanations for the cash they had on hand when first interviewed by the government. The couple also did not prove that any part of the underpayment was not attributable to fraud. Moreover, the wife was not entitled to innocent-spouse relief because she was aware of the fraudulent transactions.



[ Code Sec. 7206]




The Tax Court's deficiency determination against a married couple was not precluded by a federal district court's tax loss finding during their sentencing for various tax crimes and imposition of the fraud penalty was proper. The exact amount of the couple's underpayment for the tax year at issue in the Tax Court was not raised or litigated during their sentencing hearing. The district court made only aggregate findings regarding the tax loss for several years combined. Moreover, the government did not have a full and fair opportunity to litigate the tax-loss issue because the procedural rules for criminal-sentencing proceedings differ considerably from the rules that govern civil actions.




OPINION


SUTTON, Circuit Judge. Timothy and Barbara Kosinski challenge a decision by the Tax Court upholding a tax deficiency and a fraud penalty. They raise two issues: that earlier findings made by a federal district court in the course of imposing a sentence on Timothy Kosinski in a criminal case precluded the Tax Court's deficiency findings, and that the government failed to show that the deficiency resulted from fraud. Because the district court's sentencing findings lack issuepreclusive effect and because the government carried its burden of proving fraud, we affirm.




I.


This case arises from a complex, multi-year tax-evasion scheme, for which the government successfully prosecuted the Kosinskis and for which it now seeks to collect one year's worth of unpaid taxes and penalties. In 1991, Timothy Kosinski founded T.J. Construction, a wholly owned S corporation, to perform construction contracts for a single customer, Thyssen Steel. T.J. Construction generally farmed out the work to subcontractors --principally Melvin Phillips and his own wholly owned company --while it focused on acquiring the contracts and handling the paperwork. Thyssen paid T.J. Construction directly for completed projects, and T.J. Construction in turn paid Phillips, deducting the payments to Phillips from its gross income as part of its cost of goods sold.

To the end of minimizing their taxes, the Kosinskis began processing the payments differently in 1996. Phillips would endorse the checks from T.J. Construction over to the Kosinskis, who would then deposit them in their personal bank accounts. In 1997, the year at issue in this case, the endorsed-back checks totaled $2,919,974. The Kosinskis left some of the money in their accounts but withdrew much of it (nearly $2 million in 1997) in cash through hundreds of less-than-$10,000 transactions.

No one knows exactly where all of the money went --save initially to the Kosinskis, who "regularly destroyed" what records they kept. JA 51. All agree that some large amount (the parties dispute how much) went back to Phillips. The Kosinskis characterize these payments as cash advances that Phillips repaid with more endorsed-back checks; the government characterizes these payments as under-the-table exchanges that allowed Phillips to handle his payroll in cash and to evade federal employment taxes and withholding requirements. The government also points out that this scheme allowed the Kosinskis to duck significant tax liability, because neither they nor T.J. Construction (their wholly owned flow-through S corporation) reported these amounts on their annual returns.

The government filed criminal charges against the Kosinskis (and Phillips) for a number of tax-related offenses. Barbara Kosinski pleaded guilty to structuring currency transactions, and a jury convicted Timothy Kosinski of several counts of filing false tax returns, one count of structuring currency transactions and one count of conspiring to defraud the IRS and structure currency transactions.

The district court sentenced Timothy Kosinski in 2003. As directed by the then-mandatory sentencing guidelines, see U.S.S.G. §§ 2T1.1, 2T4.1 (1995), the court based the sentence on its determination of the "tax loss" attributable to Kosinski's conduct, namely the amount of taxes Kosinski and others avoided paying due to the conspiracy. The government told the court that the scheme resulted in an aggregate tax loss of $2.3 million, while Kosinski argued that the loss was less than $200,000. The district court in effect split the difference, finding a loss of $973,176, after which it imposed two concurrent, 30-month (within-guidelines) sentences. We vacated those sentences in light of United States v. Booker, 543 U.S. 220 (2005), see United States v. Kosinski ( Kosinski I), 127 F. App'x 742, 751 (6th Cir. Mar. 22, 2005), and we likewise vacated (for Bookerrelated reasons) the sentence the district court imposed on remand, see United States v. Kosinski ( Kosinski II), 480 F.3d 769, 777-78 (6th Cir. 2007).

In the meantime, the government in 2004 sent the Kosinskis a deficiency notice for 1997, alleging a tax underpayment of $1,205,548 and imposing a $904,161 fraud penalty. The Kosinskis filed a petition for redetermination of their deficiency with the Tax Court, in which they claimed they "owed no tax" for 1997. JA 8. After a trial, the Tax Court upheld the government's original calculation of the deficiency, as modified by the government's concession that $1 million of the alleged understatement was legitimate, as well as the modified fraud penalty.




II.


The Kosinskis first challenge the Tax Court's deficiency determination on issue-preclusion grounds, maintaining that the district court's findings of fact at Timothy's criminal sentencing hearing barred the Tax Court in his civil tax-deficiency proceeding from imposing a $812,182 deficiency. To invoke issue preclusion successfully, a litigant must show four things:


(1) the precise issue raised in the present case must have been raised and actually litigated in the prior proceeding; (2) determination of the issue must have been necessary to the outcome of the prior proceeding; (3) the prior proceeding must have resulted in a final judgment on the merits; and (4) the party against whom estoppel is sought must have had a full and fair opportunity to litigate the issue in the prior proceeding.


United States v. Cinemark USA, Inc., 348 F.3d 569, 583 (6th Cir. 2003) (internal quotation marks omitted).

These requirements demand more than the Kosinskis can supply. First, their claim stumbles over the initial demand that they identify the "precise issue" decided by the sentencing court that purportedly estops the government here. While they maintain that the government "is collaterally estopped from using other numbers that were previously determined in the criminal conviction in the Tax Court," Br. at 17, they never clarify what "other numbers" they are talking about. As best we can tell, they contend that the district court's assessment of the "tax loss" attributable to Timothy Kosinski's crimes foreclosed the Tax Court's determination of the amount of their tax underpayment. Yet how the district court's decision could do so remains a mystery, not least because it made only aggregate findings for several years combined, while the Tax Court case concerned just 1997. In the absence of a finding by the sentencing court on the "precise issue" before the Tax Court, preclusion is a guessing game.

Second, the Kosinskis have not shown that the sentencing court's relevant fact findings --whatever they were --were "necessary" to its judgment. As we explained in rejecting a similar request to tie a Tax Court's hands after a related criminal proceeding, the sentencing court's determination of the underpayment "was not essential to the district court's judgment because it was not an element of the crime of conviction." Hickman v. Comm'r, 183 F.3d 537, 538 (6th Cir. 1999). The same thing happened here. See Kosinski I, 127 F. App'x at 751. Kosinski's conviction cannot preclude the Tax Court from making findings on an issue the jury never had any reason to decide.

It is true that the district judge estimated the tax loss in determining Kosinski's guidelines range. And it is true that the guidelines direct the district judge to gauge the tax loss in ascertaining a criminal's base-offense level. See U.S.S.G. § 2T1.1. But the broad tax-loss bands of the guidelines diminish the contention that a given tax-loss finding was necessary to the sentence. Here, for example, the district court could have reached the same within-guidelines, 30-month sentence so long as the tax loss fell anywhere between $550,000 and $2,500,000. See id. §§ 2T4.1, 5A. The sentencing judge himself appeared to appreciate this fact, adopting Kosinski's calculation of the tax loss for one charge, instead of the government's much higher figure, apparently because the difference would not have affected Kosinski's base-offense level.

But that is only half the problem. In the aftermath of Booker, the guidelines could not constitutionally cause his sentence to turn on the district court's tax-loss finding. That indeed is why we vacated Kosinski's initial sentence, explaining that the use of non-jury-found facts in applying mandatory guidelines presented the same constitutional problem at issue in Booker. Kosinski I, 127 F. App'x at 750-51. And when the district court on remand resentenced Kosinski without making any findings whatsoever regarding the tax-loss amount --laboring "under the misapprehension that it simply could not do so" after Booker --we vacated the sentence again, clarifying that the district court "should recognize and exercise its discretion to consider --or not to consider --[Kosinski's] tax loss." Kosinski II, 480 F.3d at 777. That discretion undermines the Kosinskis' contention that the district court's tax-loss finding was necessary to the final judgment. Cf. Hickman, 183 F.3d at 538 (holding that a district court's discretionary determination of the amount of restitution a criminal tax-evasion defendant had to pay was unnecessary to the judgment and thus could not be given preclusive effect); Morse v. Comm'r, 419 F.3d 829, 834 (8th Cir. 2005) (same).

Third, even if the district court's determination of Timothy Kosinski's criminal sentence had hinged entirely on the district court's tax-loss determination, that finding still would not entitle the Kosinskis to preclusion because no final judgment existed in the criminal proceeding when the Tax Court issued its decision. Only final judgments, not surprisingly, possess issue-preclusive power, Cinemark USA, 348 F.3d at 583, and "[a] judgment that has been vacated, reversed, or set aside on appeal is thereby deprived of all conclusive effect, both as res judicata and as collateral estoppel," Erebia v. Chrysler Plastic Prods. Corp., 891 F.2d 1212, 1215 (6th Cir. 1989); see also Dykstra v. Wayland Ford, Inc., 134 F. App'x 911, 917 (6th Cir. June 15, 2005); cf. Durning v. Citibank, NA, 950 F.2d 1419, 1424 n.2 (9th Cir. 1991) (noting that "[a] decision may be reversed on other grounds, but a decision that has been vacated has no precedential authority whatsoever").

While the district court issued serial judgments in Kosinski's criminal case, this court serially vacated them, and not one of those judgments could be characterized as final before the Tax Court's decision. Thus, the district court issued a judgment in imposing Kosinski's initial October 2003 sentence, but this court vacated that judgment on March 22, 2005 . Kosinski I, 127 F. App'x at 750-51. The district court issued a second judgment in imposing Kosinski's second sentence in September 2005, but this court vacated that judgment on March 22, 2007. See Kosinski II, 480 F.3d at 778. The district court did not hold another resentencing hearing until January 15, 2008 --months after the Tax Court issued its memorandum opinion on July 2, 2007, and its August 23, 2007, final decision. When the Tax Court decided this case, in short, there was no valid final judgment to which it could give preclusive effect.

Fourth, Timothy Kosinski's sentencing proceeding did not give the government a full and fair opportunity to litigate the tax-loss issue. As the Supreme Court recognized when it first approved the offensive use of issue preclusion, allowing a litigant to invoke the doctrine "might be unfair ... where the second action affords the [opposing party] procedural opportunities unavailable in the first action that could readily cause a different result" or where the opposing party "ha[d] little incentive to defend vigorously" in the first action. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 330-31 (1979). Efforts to bind adjudicators presiding over civil cases to fact findings made in prior sentencing proceedings, as other circuits have recognized and as this case illustrates, raise this precise problem. See Maciel v. Comm'r, 489 F.3d 1018, 1023-26 (9th Cir. 2007); SEC v. Monarch Funding Corp., 192 F.3d 295, 305 (2d Cir. 1999); see also United States v. U.S. Currency in the Amount of $119,984, 304 F.3d 165, 175-78 (2d Cir. 2002).

The procedural ground rules for criminal-sentencing proceedings differ considerably from the ground rules that govern civil actions. At sentencing, the defendant may have a limited opportunity to take discovery and "has no absolute right either to present his own witnesses or to receive a full-blown evidentiary hearing," Monarch, 192 F.3d at 305. And he does not enjoy the protection of the Federal Rules of Evidence, where the "judge is largely unlimited either as to the kind of information he may consider, or the source from which it may come, so long as the information has sufficient indicia of reliability to support its probable accuracy." Id. (internal quotation marks, citations and brackets omitted).

The prosecution, too, faces disparities between the two settings. It may lack "procedural mechanisms crucial to [its] ability to gather probative evidence" relevant to the subsequent civil matter. $119,984, 304 F.3d at 176-77 (noting that in a later civil action, unlike at sentencing, the government "could rely on [the rules of evidence] to challenge the admissibility of the financial records" offered by the defendant at sentencing). In contrast to "the full array of civil discovery procedures against the defendant" available in a civil action, "including interrogatories, requests for admissions, document requests, depositions, and so forth," the Federal Rules of Criminal Procedure applicable at sentencing allow the government to seek "discovery of documents and tangible objects from the defendant only if the defendant seeks reciprocal discovery from the Government, and only of such material 'which the defendant intends to introduce as evidence in chief at the trial.'" Id. at 177 (quoting Fed. R. Crim. P. 16(b)(1)(A)).

Unlike the defendant, moreover, the government at sentencing faces constitutional restrictions that either do not apply to civil cases or that as a practical matter will not limit it in a civil trial. The Fifth Amendment's Self-Incrimination Clause bars the prosecution from compelling the defendant's testimony and from advancing an adverse inference from his decision not to testify --a limitation that is generally absent in civil proceedings, see Baxter v. Palmigiano, 425 U.S. 308, 318-19 (1976), and one that a defendant cannot invoke in a Tax Court case to satisfy his burden of proving that the government miscalculated his tax deficiency. After all, "[t]he Fifth Amendment privilege cannot be used by a taxpayer to meet his burden of proof in a proceeding which he himself has instituted." Tweeddale v. Comm'r, 841 F.2d 643, 645 (5th Cir. 1988). A defendant's privilege not to testify likewise limits the government's ability to show the sentencing court the implausibility of the defendant's version of events, a limitation that might well have made a difference in this case: The Tax Court found Timothy Kosinski's testimony "inconsistent and implausible," JA 52, a finding that surely hurt the Kosinskis' cause, while at sentencing (where he did not testify) Kosinski escaped such scrutiny. Cf. Monarch, 192 F.3d at 305 (noting that "a defendant, though uniquely knowledgeable about underlying events, may be reluctant to testify during sentencing" for "a number of reasons ... not the least of which is that if the defendant is disbelieved, his sentence may be enhanced under Guideline § 3C1.1"). And although giving issue-preclusive effect to sentencing findings undoubtedly would increase the parties' incentives to litigate issues in the sentencing court, it likely would do so to a perverse degree, potentially transforming sentencing hearings into "minitrials," undercutting the very efficiency goals preclusion is designed to serve. See Monarch, 192 F.3d at 306.

Perhaps most importantly, the burden of persuasion differs in each setting. In a sentencing hearing, the government carries the burden of persuasion when it comes to proving relevant sentencing facts. See United States v. Silverman, 889 F.2d 1531, 1535 (6th Cir. 1989); United States v. Snipe, 515 F.3d 947, 955 (9th Cir. 2008). In a civil tax case, the taxpayer carries the burden of persuasion when it comes to proving that the deficiency is incorrect. See Indmar Prods. Co. v. Comm'r, 444 F.3d 771, 776 (6th Cir. 2006).

The parties' incentives to litigate an issue also may differ between a sentencing hearing and a later civil proceeding. A defendant "will often choose not to challenge sensitive issues during sentencing for any number of reasons, including a belief, or at least a hope, that the sentencing court will grant a prosecutorial downward departure motion or other recommendation." Monarch, 192 F.3d at 305. And while, "[i]n some cases, the government's obligation to seek a sentence consonant with a criminal defendant's culpability will be incentive enough to ensure that relevant issues are litigated vigorously," that will not always be the case. Maciel, 489 F.3d at 1025. Where a district court's finding on an issue likely will have little effect on a defendant's sentence --for example, where any conclusion the district court reached would have led to the same guidelines range --the government's motivation to litigate the issue before the sentencing court reflects a fraction of its incentive to contest the issue in later civil proceedings. See id. (declining to extend preclusive effect in a subsequent Tax Court proceeding to a sentencing court's pre- Booker finding that the defendant had not intended to defraud the government because "the government had virtually no incentive to litigate" the issue, given that the finding made no difference to the defendant's mandatory guidelines range).

Here the district court's tax-loss findings had little if any effect on Kosinski's base-offense level --a fact the district court itself appreciated --much less his ultimate sentence given the overlapping guidelines ranges. The Kosinskis brought this case in the Tax Court, by contrast, precisely to challenge the amount of (and associated penalties for) their tax deficiency as calculated by the government. We need not say that the government had no incentive to litigate the issue in the sentencing proceeding; it suffices for issue-preclusion purposes to establish that the government lacked sufficient incentives and procedural opportunities to litigate the issue vigorously in the district court.

After reading all of this, one might question how a determination reached in a criminalsentencing proceeding could ever satisfy this issue-preclusion requirement --whether an individual or the government seeks to invoke the defense. And, to be sure, we know of no case (and the parties have cited none) where a federal court has ascribed preclusive effect to a sentencing court's findings of fact, and two other circuits have held issue preclusion presumptively inapplicable to sentencing findings. See Maciel, 489 F.3d at 1025; Monarch, 192 F.3d at 306. But to resolve this case we need not, and therefore do not, decide whether sentencing determinations categorically or even presumptively lack preclusive power. We simply conclude, for the reasons given, that the Kosinskis' claim falls far short of the mark and therefore presents no ground for overturning the Tax Court's conclusion concerning the amount of their tax deficiency.




III.


The Kosinskis next challenge the Tax Court's finding that they fraudulently understated their 1997 taxes, a finding that subjected them to a 75% penalty. See 26 U.S.C. § 6663(a). In seeking to impose this penalty, the government undertook the burden of proving fraudulent intent by clear and convincing evidence. Richardson v. Comm'r, 509 F.3d 736, 743 (6th Cir. 2007); 26 U.S.C. § 7454(a); Tax Ct. R. 142(b). In seeking to overturn this finding on appeal, the Kosinskis undertook the burden of establishing that the Tax Court's fraud finding suffers from clear error. See Richardson, 509 F.3d at 740.

In establishing fraud, the government need not establish direct evidence of the taxpayer's untoward state of mind. Because "[i]t is the rare taxpayer who announces to the world his intent to defraud the Federal Government," the government may prove fraudulent intent by circumstantial evidence, and we can infer fraud from "any conduct, the likely effect of which would be to mislead or to conceal." Richardson, 509 F.3d at 743 (internal quotation marks omitted). While any effort to catalogue a list of evidence that satisfies this standard would be doomed to incompleteness, there are several telltale "badges of fraud": where the individual fails to report income, fails to maintain and produce "adequate books and records" of financial activities, "conceal[s] [his] income by dealing in cash" and, even though he has "business experience," "give[s] implausible explanations of conduct." Id. (internal quotation marks omitted).

Nor need the government show that a taxpayer's entire tax underpayment resulted from fraud. Once it "establishes that any portion of an underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud," and the burden shifts to the taxpayer to prove (under a preponderance standard) that any part of the underpayment "is not attributable to fraud." 26 U.S.C. § 6663(b) (emphasis added). To the extent the taxpayer fails to make that showing, the government may assess the 75% fraud penalty based on the entire amount of the tax underpayment. Id. § 6663(a).

The Tax Court did not clearly err in finding that the government met its burden of proving that at least part of the Kosinskis' 1997 tax underpayment arose from fraud. The court permissibly identified several "badges of fraud" revealing that the Kosinskis' large underpayment did not reflect an unfortunate but innocent "miscommunication between them and their [tax-]return preparers": It relied on their similar understatement of income in 1996 and 1998, their practice of keeping detailed records for other matters but "regularly destroy[ing]" records regarding their many cash transactions, their failure to apprise their accountants of their cash disbursements, their carefully designed and systematically executed scheme of cash withdrawals (utilizing Barbara Kosinski's inside knowledge as a former bank teller) that enabled them to come just under federal reporting requirements (and thus just under the regulators' radar), the large amount of cash (nearly $500,000) they had on hand when first interviewed by the government and their inconsistent and implausible explanations as to where the money came from and why they kept so much cash at the ready. JA 50-53. Even after accepting the Kosinskis' argument that their criminal convictions and guilty pleas (and those of their coconspirators) did not preclude them from denying fraud in the civil deficiency case, the Tax Court also permissibly treated those convictions and pleas as probative evidence of fraud. See Morse, 419 F.3d at 833.

On appeal, the Kosinskis offer no cognizable reason why this evidence falls short of showing that at least some of their underpayment reflected fraud. They argue that the Tax Court should not have believed Melvin Phillips's testimony at trial because he "is concealing assets from the government," "owes the [IRS] money" and "has a history of demonstrating that honesty is not the best policy." Br. at 21. And as they told the Tax Court, Phillips's testimony did not deserve credence because the government "can (and did) use the threat of tax prosecution to control [his] testimony ... like the dance of a marionette." JA 625. But these arguments do not offer a colorable reason for overturning the Tax Court's finding because they amount to nothing more than attacks on the credibility of a witness the Tax Court observed. We have long given considerable deference to the Tax Court's (and other fact finders') first-hand assessment of the credibility of witnesses before them, see Indmar Prods., 444 F.3d at 778; Conti v. Comm'r, 39 F.3d 658, 664 (6th Cir. 1994), and the Kosinskis offer no tenable basis for second guessing that assessment here.

As an apparent afterthought, the Kosinskis challenge the Tax Court's finding that Barbara Kosinski was not entitled to innocent-spouse relief from the fraud penalty. See 26 U.S.C. § 6015. This argument runs into two problems. First, the Kosinskis failed to develop the argument beyond the most cursory mention of the issue, Br. at 11; Reply Br. at 7, and thus they have waived this objection. See McPherson v. Kelsey, 125 F.3d 989, 995-96 (6th Cir. 1997); cf. Kosinski I, 127 F. App'x at 750. Second, their claim fails on the merits because Barbara, a former bank teller, plainly knew of many of the fraudulent transactions and played an active part in structuring hundreds of currency transactions to avoid regulators' scrutiny. Cf. Richardson, 509 F.3d at 745-46.




IV.


For these reasons, we affirm the Tax Court's decision.

* The Honorable Ann Aldrich, United States District Judge for the Northern District of Ohio, sitting by designation.



Decision will be entered under Rule 155.

An IRS Appeals officer properly applied standard allowances to determine a taxpayer's living expenses in rejecting his offer in compromise based on doubt as to collectability. The taxpayer's reasonable collection potential was much greater than his offer in compromise and also much greater than his total tax liability. The taxpayer's contention that his actual living expenses, rather than standard allowances, should be used to determine reasonable collection potential was rejected. Nothing on the record showed that the Appeals officer's determination was arbitrary or unreasonable.




Luciano Fernandez v. Commissioner.

Dkt. No. 15538-07L , TC Memo. 2008-210, September 3, 2008.

[Appealable, barring stipulation to the contrary, to CA-11. --CCH.]

[Code Sec. 7122]



MEMORANDUM OPINION



COHEN, Judge: This action was commenced in response to a Notice of Determination Concerning Collection Action(s) Under Section 6320 (Lien) of the Internal Revenue Code (notice of determination) with respect to petitioner's Federal income tax liabilities for 2000, 2003, and 2004 and unpaid trust fund recovery penalties under section 6672 for periods ended June 30, 2000, September 30, 2000, December 31, 2000, March 31, 2001, September 30, 2001, December 31, 2001, and March 31, 2002. The issue for decision is whether the Appeals officer abused his discretion in rejecting petitioner's offer-in-compromise and sustaining the lien actions. Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.





Background



This case was submitted fully stipulated under Rule 122. The stipulated facts are incorporated as our findings by this reference. Petitioner resided in Florida at the time that he filed his petition.



Federal income tax liabilities arose because petitioner failed to pay in full the tax reported on his returns for 2000, 2003, and 2004. Petitioner also failed to pay trust fund recovery penalties under section 6672 for periods ended June 30, 2000, September 30, 2000, December 31, 2000, March 31, 2001, September 30, 2001, December 31, 2001, and March 31, 2002.



On July 12, 2006, the Internal Revenue Service (IRS) sent a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (notice of Federal tax lien) to petitioner with respect to his 2003 and 2004 Federal income tax liabilities and all the trust fund recovery penalties at issue. On the same date, the IRS sent a separate notice of Federal tax lien to petitioner and his spouse with respect to their 2000 Federal income tax liability. The total amount of petitioner's outstanding tax liabilities and penalties, reflected by both notices, was $47,228.02 at that time.



Petitioner responded to the notices of Federal tax lien by submitting a timely request for an administrative hearing (section 6330 hearing). In his request petitioner explained that he had "tried to do a payment plan" but that the IRS would not accept it because his account was labeled "uncollectable". After receiving the request, the Appeals Office contacted petitioner about the section 6330 hearing and, in order to consider alternative collection methods, requested and received certain financial information on Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and Form 433-B, Collection Information Statement for Businesses.



On February 23, 2007, the Appeals officer conducted a section 6330 hearing with petitioner by telephone. The underlying tax liabilities were not raised. Petitioner wanted to pursue a collection alternative by employing a deferred offer-in-compromise of $5,000. The Appeals officer advised petitioner of additional financial information that would need to be submitted along with Form 656, Offer in Compromise. Having reviewed petitioner's living expenses, the Appeals officer cautioned that some of these expenses could be calculated, for offer-in-compromise purposes, at allowance amounts less than what petitioner claimed.



On March 8, 2007, the Appeals Office received petitioner and his spouse's offer-in-compromise and all other requested information. Their offer proposed a compromise of $4,272 as full satisfaction of their liabilities and penalties to be paid over a 2-year period in monthly payments of $178. On their Form 656 petitioner and his spouse did not check any of the provided boxes stating the legal grounds on which the compromise was based. Because no grounds had been selected, the Appeals Office processed their offer-in-compromise under "Doubt as to Collectibility".



On June 25, 2007, the Appeals Office sent to petitioner the notice of determination upon which this case is based. In the notice of determination, the Appeals officer determined the reasonable collection potential to be $205,220, on the basis of the information petitioner provided. The Appeals officer explained to petitioner how the reasonable collection potential was calculated, including how the amounts of some of his living expenses were based upon current national and local allowance schedules instead of petitioner's provided figures. With respect to petitioner's monthly housing and utilities expense, the Appeals officer allowed $1,450, on the basis of the local standard amount for South Florida of $1,291, which was markedly less than petitioner's claimed amount of $3,678.



Because the reasonable collection potential was significantly greater than petitioner's offer-in-compromise (and significantly greater than the total tax liabilities and penalties), the Appeals officer did not recommend acceptance of the offer. The notice of determination concluded that the Federal tax lien filings were proper in that they conformed with IRS procedures and were no more intrusive than necessary for the efficient collection of taxes.





Discussion



Neither the amount of petitioner's liability nor the procedural facts in this case are in dispute. Petitioner contends that the use of the local standard allowance for his housing and utilities monthly expense caused an unrealistic result in determining his reasonable collection potential. Ultimately, petitioner argues that it was an abuse of discretion for the Appeals officer to reject his offer-in-compromise and sustain the lien.



We have jurisdiction to review the Appeals Office determination in a section 6330 hearing. Secs. 6320(c), 6330(d)(1); see Ginsberg v. Commissioner, 130 T.C. ___, ___ (2008) (slip. op. at 6-7) (explaining that the Court's jurisdiction includes review of all appeals of collection determinations made after October 16, 2006, including when trust fund recovery penalties are part of the underlying tax liabilities); Greene-Thapedi v. Commissioner, 126 T.C. 1, 6 (2006). Review is for abuse of discretion. Murphy v. Commissioner, 125 T.C. 301, 320 (2005), affd. 469 F.3d 27 (1st Cir. 2006); Speltz v. Commissioner, 124 T.C. 165, 170-171 (2005), affd. 454 F.3d 782 (8th Cir. 2006); Woodral v. Commissioner, 112 T.C. 19, 23 (1999).



Section 7122(a) authorizes compromise of a taxpayer's Federal income tax liability. "The decision to entertain, accept or reject an offer in compromise is squarely within the discretion of the appeals officer and the IRS in general." Kindred v. Commissioner, 454 F.3d 688, 696 (7th Cir. 2006). Generally, where the Appeals officer has followed the IRS guidelines to ascertain a taxpayer's reasonable collection potential and rejected the taxpayer's collection alternative on that basis, we have found no abuse of discretion. See McClanahan v. Commissioner, T.C. Memo. 2008-161; Lemann v. Commissioner, T.C. Memo. 2006-37; Schulman v. Commissioner, T.C. Memo. 2002-129.



Regulations adopted pursuant to section 7122 set forth three grounds for the compromise of a liability: (1) Doubt as to liability, (2) doubt as to collectibility, or (3) promotion of effective tax administration. Sec. 301.7122-1(b), Proced. & Admin. Regs. On a Form 656, the taxpayer selects the legal grounds he or she proposes for compromise. Petitioner did not select the grounds for compromise on his Form 656. The Appeals Office processed his offer-in-compromise on the grounds of doubt as to collectibility.



Doubt as to collectibility exists where a taxpayer's assets and income are less than the full amount of the liability. Sec. 301.7122-1(b)(2), Proced. & Admin. Regs. A taxpayer's assets (the net realizable equity in his assets) and income (the present value of a taxpayer's future ability to pay toward the tax debt as determined by his monthly income minus necessary living expenses) are the two primary components that make up reasonable collection potential (the amount, which is less than the full liability, that the IRS could collect through means such as administrative and judicial collection remedies). See Murphy v. Commissioner, supra at 309; Bergevin v. Commissioner, T.C. Memo. 2008-6. Generally a doubt-as-to-collectibility offer amount must equal or exceed the taxpayer's reasonable collection potential in order to be considered for acceptance. 1 Administration, Internal Revenue Manual (CCH), pt. 5.8.1.1.3(3), at 16,253-16,254 (Sept. 1, 2005); see also Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517, 517 (stating that an offer will be considered acceptable if it reflects the taxpayer's reasonable collection potential).



The Appeals officer determined petitioner's reasonable collection potential to be $205,220. If this determination is reasonable, then petitioner's reasonable collection potential is substantially higher than petitioner's offer of $4,272, and it was proper for the Appeals officer to find the offer unacceptable. Similarly, because the reasonable collection potential is substantially higher than petitioner's total tax liability of approximately $45,000, doubt as to collectibility would not exist. Therefore, petitioner's arguments hinge on whether the Appeals officer's determination of petitioner's reasonable collection potential is actually reasonable. See Murphy v. Commissioner, supra at 321.



Petitioner contests the use of standard allowances provided by IRS guidelines in determining his total monthly living expenses. Petitioner argues that if his actual housing and utilities expense was used, his reasonable collection potential would be more in line with economic reality. Section 7122(d) authorizes the IRS to prescribe guidelines as follows:



SEC. 7122(d). Standards for Evaluation of Offers. --



(1) In general. --The Secretary shall prescribe guidelines for officers and employees of the Internal Revenue Service to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute.



(2) Allowances for basic living expenses. --



(A) In general. --In prescribing guidelines under paragraph (1), the Secretary shall develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.



(B) Use of schedules. --The guidelines shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph (A) is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses.



Regulations for doubt as to collectibility cases further provide:



A determination of doubt as to collectibility will include a determination of ability to pay. * * * To guide this determination [of the amount of the taxpayer's basic living expenses], guidelines published by the Secretary on national and local living expense standards will be taken into account. [Sec. 301.7122-1(c)(2)(i), Proced. & Admin. Regs.]



Use of the IRS's published national and local allowances as guidelines for basic living expenses is an appropriate method to determine a taxpayer's monthly expenses. See Speltz v. Commissioner, supra at 179; McDonough v. Commissioner, T.C. Memo. 2006-234 (finding no abuse of discretion where the Appeals officer used the standard allowance instead of the taxpayer's actual housing and utilities expense); Hawkins v. Commissioner, T.C. Memo. 2005-88. The Appeals officer considered and adjusted the financial information petitioner submitted and determined that $1,450 was sufficient to provide petitioner with the basic monthly living expense of housing and utilities. The Appeals officer properly applied the provisions of the Code, the regulations, and the Internal Revenue Manual.



Petitioner contends that the housing and utilities allowance of $1,450 would make it "almost impossible to own a family size house" in South Florida. However, nothing in the record of this case shows that the Appeals officer's determination was arbitrary or unreasonable. We therefore conclude that there was no abuse of discretion in rejecting petitioner's offer and in sustaining the liens.



Decision will be entered for respondent.


----------------

The following should be helpful in considering Offer in Compromise issues:

An offer in compromise based on Doubt as to Collectibility (DATC) amount must generally equal or exceed a taxpayers reasonable collection potential (RCP) in order to be considered for acceptance (Internal Revenue Manual 5.8.1.1.3, 09-01-2005, CCH IRS OFFER IN COMPROMISE HANDBOOK). There may be exceptions for cases with unusual or special circumstances, such as advanced age, serious illness from which recovery is unlikely, or unusual circumstances that impact the ability to pay the tax and continue to provide for the taxpayer's family. If special circumstances apply, the taxpayer should fill out the "Explanation of Circumstances" portion of Form 656, Offer in Compromise.

A taxpayer's reasonable collection potential is the net equity of the taxpayer's assets plus the amount that the IRS could collect from the taxpayer's future income. If the IRS's analysis indicates that the taxpayer has the ability to pay the tax liability in full, either immediately or through an installment arrangement, then the IRS will not accept the offer in compromise.

The IRS provides a worksheet for the taxpayer to use to estimate the amount that the IRS will view as the taxpayer's reasonable collection potential (Instructions to Form 656, Offer in Compromise). The worksheet indicates that the IRS will generally expect to collect all of a taxpayer's financial assets, plus 80 percent of the taxpayer's equity in cars and real estate, plus 80 percent of the taxpayer's equity in other personal assets, reduced by a small allowance (less than $10,000). The IRS will also expect to collect an additional amount based on the taxpayer's income. The amount the IRS expects to collect from a taxpayer is made up of the following components:
(1) the amount collectible from the taxpayer's assets;

(2) the amount collectible from the taxpayer's future income;

(3) the amount collectible from third parties, such as transferees; and

(4) the amount collectible from the taxpayer that the taxpayer should reasonably be expected to raise from assets in which he has an interest that is beyond the reach of the government, such as property located outside the United States or property owned by tenancy by the entirety.

The starting point in the consideration of an offer submitted based on doubt as to collectibility is the value of the taxpayer's assets less encumbrances that have priority over the federal tax lien. Ordinarily, the liquidating or quick sale value of assets is to be used. In some cases, it is reasonable to consider minimum bid price in determining collection potential. All assets must be considered in determining the amount collectible from the taxpayer (Internal Revenue Manual 5.8.5, 09-01-2005, CCH IRS OFFER IN COMPROMISE HANDBOOK).

A taxpayer's education, profession or trade, age and experience, health, and past and present income will be considered in evaluating his future income prospects for purposes of determining collectibility. An evaluation must be made of the likelihood that any increase in real income will be available to pay the delinquent taxes. Cost of living increases must also be taken into account in determining amounts potentially collectible from future income (Internal Revenue Manual 5.8.5, 09-01-2005, CCH IRS OFFER IN COMPROMISE HANDBOOK).

Frivolous submissions. The civil penalty for frivolous tax returns has been increased from $500 to $5,000, and now applies to all taxpayers and all types of federal taxes and submissions (Code Sec. 6702(a), as amended by the Tax Relief and Health Care Act of 2006 (P.L. 109-432)). Therefore, the $5,000 civil penalty now also applies to any request for a collection due process hearing, an installment agreement, or an offer-in-compromise that raises frivolous arguments. The Secretary will prescribe, and periodically revise, a list of positions identified as frivolous.

As extended, the penalty applies to any "person" who files a return, not just to an "individual" (Code Sec. 6702(a), as amended by P.L. 109-432). The definition of the term "person" includes an individual, a trust, estate, partnership, association, company or corporation, as defined in Code Sec. 7701(a)(1).

A "specified frivolous submission" is a specified submission that either:
-- based on a position that the Secretary has identified as frivolous in his prescribed frivolous positions list; or

-- reflects a desire to delay or impede the administration of federal tax laws

(Code Sec. 6702(b)(2)(A), as added by P.L. 109-432). A "specified submission" is:
(1) a request for a hearing after --

(a) the IRS files a notice of lien under Code Sec. 6320, or

(b) the taxpayer receives a pre-levy Collection Due Process Hearing Notice under Code Sec. 6330,

and
(2) an application relating to --

(a) agreements for payment of tax liability in installments under Code Sec. 6159;

(b) compromises under Code Sec. 7122; or

(c) taxpayer assistance orders under Code Sec. 7811

(Code Sec. 6702(b)(2)(B), as added by P.L. 109-432). Any portion of an application for an offer-in-compromise under Code Sec. 7122 or for an installment agreement under Code Sec. 6159 will be treated as if it were never submitted and will not be subjected to any further administrative or judicial review, if that portion of the application meets either requirement for a specified frivolous submission (Code Sec. 7122(f)[(g)], as added by P.L. 109-432).

The IRS has issued a news release announcing updated guidance which describes and rebuts frivolous arguments that taxpayers should avoid when filing their tax returns (IRS News Release, IR-2006-45, March 16, 2006). The IRS has also updated the document entitled "The Truth About Frivolous Tax Arguments" (November 30, 2006; available at www.irs.com), that addresses false arguments about the legality of not paying taxes or filing returns.

Fact finding. --Compromises: Fact finding

The IRS's determination to reject a married couple's offer-in-compromise (OIC) and proceed with collection of tax liabilities was not an abuse of discretion. The couple's OIC was rejected because they failed to provide additional requested information needed to evaluate the offer. Further, the couple had been given several opportunities and extensions of time to file their completed OIC. Moreover, they were not current with their estimated taxes.

W.J. DiCindio, CA-3, 2008-1 USTC ¶50,196; aff'g. in part and vac'g and rem'g in part, per curiam, 93 TCM 1060, Dec. 56,884(M), TC Memo. 2007-77.

When computing amounts due to the IRS under a collateral agreement, married taxpayers could not deduct amounts paid in prior years under the agreement. Although the collateral agreement on Form 2261 referred to the wrong line of the couple's offer in compromise on Form 656 when it set out how the payments should be computed, the reference was only a clerical error. Since the reference did not create an ambiguity in the agreement under state (Georgia) law, the agreement was enforced according to its plain terms. Thus, only same-year payments made under the offer in compromise, not prior-year payments made under the collateral agreement, were deductible in determining the couple's annual income.

A.I. Begner, CA-11, 2005-2 USTC ¶50,510.

The issue as to whether or not a settlement agreement was reached, what the terms of such agreement were, and whether the terms were followed was remanded to the District Court since the matter was factual and should first be decided by the District Court.

Six Seam Co., CA-6, 75-2 USTC ¶9765, 524 F2d 347.

Conviction of evasion of taxes for four tax years was affirmed on appeal. The taxpayer argued that the government had improperly granted the chief witness in the trial civil immunity with respect to a tax liability of more than $700,000. However, authorization is provided to the Secretary of the Treasury, or his delegate, or to the Attorney General, if the matter is before the Department of Justice, to compromise any civil or criminal case. Thus, the compromise was not unlawful. Other claims, such as prejudicial publicity, failure to suppress evidence, etc., were overruled.

E.J. Barrett, CA-7, 75-1 USTC ¶9340, 505 F2d 1091. Cert. denied, 421 US 964.

The District Court properly denied taxpayer's suit seeking an injunction against the collection of an income tax assessment. The IRS did not waive any right to a further assessment by agreeing to a settlement and the IRS agent had no authority to compromise taxpayer's tax liability. The taxpayer also had an adequate remedy at law by paying the assessment and suing in the district court for a refund.

C.J. Reimer, CA-5, 71-1 USTC ¶9355, 441 F2d 1129.

A compromise agreement related only to renegotiation matters then pending in the Tax Court and did not include a settlement of an excess profits tax assessment.

H.J. Brubaker, CA-7, 65-1 USTC ¶9274, 342 F2d 655.

The government's receipt of a taxpayer's check and application of funds to a liability under investigation do not comprise a compromise which can be a bar to a later criminal prosecution.

R.G. Jonson, CA-9, 60-2 USTC ¶9680, 281 F2d 884.

Petitioner's contention that a compromise had been entered into was not supported by the evidence where the copy of the supposed compromise offer showed on its face that the form had not been printed until after the date on which the agreement allegedly had been executed.

Hanby, CA-4, 67 F2d 125.

A voluntary disclosure (see ¶41,318.04 and ¶41,318.37) is not a compromise.

Lustig, CA-2, 47-2 USTC ¶9325, 163 F2d 85. Cert. denied, 332 US 775.

Taxpayers who claimed that they had entered into a settlement agreement with the government, but failed to establish the existence of a valid settlement agreement, were not entitled to a refund.

J.P. Devin, DC Wyo., 2006-1 USTC ¶50,264, 423 FSupp2d 1232.

An Appeals officer did not abuse her discretion by denying a taxpayer's offer in compromise, despite the taxpayer's assertion that a change in circumstances had detrimentally affected his financial position and ability to earn future wages. In addition, although there were questions regarding whether the taxpayer could obtain the proceeds of a loan, the IRS's treatment of the loan as an asset was within its discretion and did not constitute an error in judgment.

Alliance Services, Inc., DC Ga., 2005-1 USTC ¶50,248, 363 FSupp2d 1367.

The IRS properly rejected a delinquent accountant's offer in compromise because he had not questioned his tax liability, and collection of the full liability would not cause him economic hardship. Although the taxpayer was unemployed, that appeared to be a temporary situation. Moreover, he had adequate income and assets to pay the liability, his spouse was employed, and he received financial assistance from his adult children who lived at home. Further, no compelling public policy or equity considerations compelled acceptance of the offer.

W.N. Ramos, DC N.Y., 2005-1 USTC ¶50,160.

The IRS did not abuse its discretion when it rejected an individual's offer in compromise. There was evidence that the individual had additional assets that he should have taken into consideration when he made his offer based on the uncollectibility of the tax due.

B.R. Splawn, DC Tenn., 2004-2 USTC ¶50,392.

Taxpayers failed to show they were denied a fair hearing on their appeal of the IRS's determination to levy their property. The IRS did not abuse its discretion by issuing notices of levy following the taxpayers' failure to submit requested documents in support of an offer in compromise by the designated deadline. As a result of the taxpayers' failure to provide the requested information, the IRS officer was faced with incomplete offers-in-compromise and therefore was unable to consider the offers as an alternative to the levy.

Allglass Systems, Inc., DC Pa., 2004-2 USTC ¶50,387, 330 FSupp2d 540.

The terms of taxpayers' Form 2261, Future Income Collateral Agreement, executed as a condition of IRS acceptance of their Form 656, Offer in Compromise, did not permit the deduction of collateral agreement payments when calculating the amount due on the compromise agreement. The agreement required the taxpayers to pay specified percentages of excess income if their income exceeded a stated level of annual income. The taxpayers attempted to deduct from annual income collateral payments relating to prior year tax obligations. However, the clear unambiguous language of the agreement limits deductions to payments for the year in which the annual income is being computed.

A.I. Begner, DC Ga., 2004-1 USTC ¶50,269.

A small payment made by married taxpayers to the IRS did not constitute a compromise for the entire amount of their delinquent tax liabilities that would entitle them to the release of federal tax liens on real property. The parties had no written offer of compromise, and there was no written acceptance by the IRS of such an offer. The record established that the payment related to a tax year for which no liens had been recorded or asserted. Moreover, the IRS did not file a certificate of release relating to the existing tax liens. Finally, the taxpayers failed to prove that the IRS agent who allegedly entered into a compromise with them was authorized to bind the IRS to such an agreement.

R.S. Mungan, BC-DC Tenn., 2003-1 USTC ¶50,146, 292 BR 613.

An appeals officer did not abuse his discretion when he did not accept a taxpayer's offer-in-compromise and instituted collection proceedings for past-due payroll taxes. The taxpayer had a long history of noncompliance with payroll tax laws. In addition, it was not meeting current payroll tax obligations at the time of the appeals hearing. Similarly, the officer's decision not to give the taxpayer a full quarter to demonstrate an ability to comply was not an abuse of discretion.

AJP Management, DC Calif., 2001-1 USTC ¶50,184.

Similarly.

TTK Management, DC Calif., 2001-1 USTC ¶50,185.

A tax shelter investor's action seeking an award of damages against the IRS in connection with its refusal to accept his offers in compromise regarding his tax liability was dismissed because he failed to plead any facts demonstrating a violation upon which relief could be granted. The taxpayer argued that the IRS's Office of Taxpayer Assistance improperly referred his complaints to the Problem Resolution Office, that the IRS failed to negotiate the offers in compromise in good faith, and that the IRS improperly attempted to seize his assets. However, he did not plead any facts from which a trier of fact could infer either a violation of Code Sec. 7811, which governs the issuance of Taxpayer Assistance Orders, or of Code Sec. 7122, which governs offers in compromise.

J.B. Evseroff, DC N.Y., 2000-2 USTC ¶50,807. Aff'd, CA-2 (unpublished opinion), 2001-2 USTC ¶50,486.

An individual failed to prove that he entered into a contract with the IRS to release a federal tax lien on his real property. Since an IRS agent lacked statutory authority to release the lien prior to the taxpayer's discharge in bankruptcy, he could not accept the taxpayer's offer to release the lien for payment and, thus, there was no mutual assent to a settlement agreement. Moreover, even if a contract had been formed, the existence of a material misrepresentation on the part of the taxpayer would have made the contract voidable.

G.J. Buesing, FedCl, 2000-2 USTC ¶50,724.

The Court of Federal Claims properly dismissed married taxpayers' claim that the IRS had wrongfully retained refunds due them as a result of overpayments for several tax years. Although the taxpayers had submitted an offer in compromise for the years at issue, the submission of an offer did not automatically stay the collection of the taxpayers' tax liability. Further, although the IRS may stay the collection of tax while an offer is pending, it was not required to, and could enforce the collection of the liability.

J.R. Smith, FedCl, 2000-1 USTC ¶50,386. Aff'd, per curiam, CA-FC (unpublished opinion), 2001-1 USTC ¶50,177.

Individual taxpayers' motion to dismiss their action against the IRS was without merit. They had not complied with statutes, regulations and procedures governing compromises, which prescribe the exclusive method for settling claims with the IRS. Further, they were not seeking to enforce an agreement to compromise their tax liability but, rather, to extinguish it.

D.W. Pack, DC Calif., 97-2 USTC ¶50,969.

The IRS could assess additional income tax and interest because it had not entered into a settlement agreement with a married couple for the years in question. Code Sec. 7121 and Code Sec. 7122 exclusively govern the settlement of disputed tax liabilities, and no agreement was entered into under those provisions. Letters from the IRS purported to be a settlement offer applied to a different tax year and were not signed by an official authorized to enter into settlement agreements. Further, the taxpayers' filing of amended returns for the disputed years containing changes based on the alleged settlement terms was not evidence of a settlement agreement; the taxpayer cited no authority for such a rule and the use of amended returns as a means of settlement would be contrary to the explicit settlement procedures set out in the Code.

N. Segel, DC Fla., 97-1 USTC ¶50,404.

A debtor's tax liabilities were dischargeable in bankruptcy because 240 days had passed between the date of the IRS assessment of the liabilities and the date of the debtor's bankruptcy petition. Although the debtor made an offer in compromise that tolled the 240-day period, an IRS letter to the debtor constituted a formal rejection, which terminated the pendency of the offer, thus allowing in excess of 240 days to pass between the assessment date and the petition date. The letter stated that the debtor's appeal of the initial rejection of his offer was terminated and that the debtor would have to submit a new offer. Finally, an earlier letter sent by the debtor's representative did not terminate the offer because it indicated that the debtor wanted the offer to be accepted.

C.L. Hobbs, BC-DC Iowa, 97-1 USTC ¶50,127.

IRS admissions, given in response to a corporate taxpayer's request, did not unilaterally settle factual issues in a case after administrative proceedings were completed and the case was referred to the Department of Justice. Therefore, counsel for the government could take a position contrary to that of the IRS concerning volumes and fair market values of the taxpayer's timber that suffered hurricane damage.

International Paper Co., FedCl, 96-2 USTC ¶50,686.

Cross motions regarding the validity of a consent order concerning the release of property wrongfully seized by the IRS from a nominee agent in satisfaction of a bankrupt corporation's tax liability were resolved by the court. Portions of the consent order relating to the individual tax liabilities of the bankrupt corporation's owner were unenforceable because the parties only agreed that the owner would pay an amount in consideration of his offer-in-compromise, not that the government would be bound by the offer.

Barmat, Inc., DC Ga., 95-1 USTC ¶50,089.

A federal tax lien filed against a bankrupt debtor with respect to which the debtor made a partial payment was not released because the lien did not become unenforceable, the debt was not paid in full, and no offer in compromise was accepted by the IRS. There was no evidence that an offer in compromise was submitted or that an agreement between the debtor and the IRS to accept a lesser amount was reached. A request for release of the lien that was sent with the partial payment did not establish that an offer in compromise was submitted and accepted by the IRS. Thus, the bankruptcy estate, to the extent it had funds, was liable for the unsatisfied amount.

Robert Turner Optical, Inc., BC-DC Ala., 94-2 USTC ¶50,555.

On a taxpayer's objections to the magistrate's recommendation (92-1 USTC ¶50,178), the court adopted the earlier finding that Form 656 was binding on the taxpayer. The evidence did not support the contention that Form 656 was superseded by subsequent oral or written agreements.

G.H. Keating, DC Neb., 92-2 USTC ¶50,413.

Since an offer in compromise was valid and binding, the taxpayers could not escape its conclusive bar to their refund suit. The original offer, which was made on Form 656, was later revised and then amended by letter. The letter offered additional consideration for the acceptance of the offer in compromise and did not otherwise supersede the Form 656.

G.H. Keating, DC Neb., 92-1 USTC ¶50,178, 794 FSupp 888.

Since an offer in compromise was valid and binding, the taxpayers could not escape its conclusive bar to their refund suit. The original offer, which was made on Form 656, was later amended by letter. The amendment letter constituted a collateral agreement, which simply offered additional consideration for the acceptance of the offer in compromise. The validity of the offer in compromise on two documents was recognized by both parties and had to be recognized by the court. Furthermore, the taxpayers submitted no evidence of fraud or mutual mistake in entering the compromise agreement, and it appeared that they would have no grounds to make such an allegation.

T. Waller, DC Calif., 91-1 USTC ¶50,288, 767 FSupp 1042.

A settlement report signed by the taxpayer and a representative of the IRS was found to contain provisions settling all issues between the parties and, at the time the report was signed, complete settlement was the clear understanding of the parties. Taxpayer could not later contend that a refund and credits were still due from the IRS.

I.A. Edens, DC S.C., 82-2 USTC ¶9692.

The taxpayer was found liable for the amount of taxes determined in a conference between him and an IRS officer. The taxpayer's contention that there was an agreement reached in that conference which reduced the amount owed was rejected since there was insufficient evidence to find that an agreement had been reached. Further, the IRS officer was not authorized to accept such an agreement even if one had been made.

H.T. Teti, DC Conn., 75-2 USTC ¶9709.

No compromise agreement was found to have been made.

E.O. Piper, DC Ill., 62-1 USTC ¶9194, 202 FSupp 657.

A.F. Pereira, 35 TCM 290, Dec. 33,698(M), TC Memo. 1976-66.

M.E. Roberts, DC Tex., 77-2 USTC ¶9702, 436 FSupp 553.

A collector was not estopped from the collection of income and excess profits taxes legally due but not yet assessed by a compromise agreement, which, although ambiguously worded, both parties intended to relate only to the government's claim for tax upon liquors alleged to have been diverted to beverage use.

Guckenheimer & Bros. Co., DC Pa., 40-1 USTC ¶9271.

The IRS did not abuse its discretion when it rejected an individual's offer in compromise that was based on effective tax administration and doubts as to collectibility. The ability to pay the entire deficiency is a precondition to an offer based on effective tax administration, but it was undisputed that the taxpayer could not pay the full amount of his liability. The taxpayer's offer based on collectibility was also unacceptable because it was substantially less than the IRS calculated he could pay, and he failed to demonstrate any special circumstances that justified his lower offer. The IRS did not improperly refuse to negotiate with the taxpayer, especially since he failed to present a counter-offer after his original offer was rejected. Thus, the IRS rejection of the offer in compromise was not arbitrary, capricious or without sound basis in fact or law.

E.F. Murphy, 125 TC 301, Dec. 56,232.

The IRS Appeals office abused its discretion when it rejected a married couple's offer-in-compromise because of the couple's alleged nominee interest in trust property. The record failed to establish that the Appeals officer even considered whether the taxpayers had an attachable interest in the trust property under state (Maine) law. Therefore, the IRS's motion for summary judgment was denied and the case remanded to the IRS Appeals office to determine whether the IRS may assert an interest in the trust property taking into account both state and federal law.

A. Dalton, Jr., 96 TCM 3, Dec. 57,484(M), TC Memo. 2008-165.

The IRS's determination to proceed with a proposed levy action against a married couple who failed to file a timely return and pay the taxes due was not an abuse of discretion. The copy of the return presented by the taxpayers bore a date after the due date of the return and the taxpayers could not show that the return was filed before the IRS's notification that the return was not received. They also failed to prove that they had paid the tax shown on the return. In addition, the IRS did not abuse its discretion in denying the taxpayers' offers in satisfaction of their tax liability. The taxpayers never submitted an offer-in-compromise as required by applicable guidelines and their informal offers were of unacceptable amounts.

W.R. Kohler, 95 TCM 1493, Dec. 57,434(M), TC Memo. 2008-127.

The IRS did not abuse its discretion in rejecting an offer-in-compromise (OIC) from a businessman who filed tax returns but failed to pay the taxes due over a period in excess of ten years. The OIC, submitted based on doubt as to collectibility, was returned as not processable because the businessman was noncompliant as to his current year return.

R.M. Scharringhausen, 95 TCM 1109, Dec. 57,329(M), TC Memo. 2008-26.

The IRS did not abuse its discretion by rejecting an attorney's offer-in-compromise when there were outstanding excise and income liabilities, nor by determining the attorney's reasonable collection potential (RCP) to be the full amount of his liabilities. Moreover, the IRS properly calculated the future income component of his RCP by using the attorney's average wage income over 3 years since the Internal Revenue Manual recommends averaging over 3 years for similar circumstances and averaging over more years would still have yielded more than the amount he offered. Finally, the IRS effectively balanced the need for efficient tax collection against the concern that collection be no more intrusive than necessary.

H.M. Lloyd, 95 TCM 1061, Dec. 57,316(M), TC Memo. 2008-15.

The IRS Appeals Office did not abuse its discretion by rejecting a married couple's offer-in-compromise where the taxpayers had underreported their income for several tax years due to claimed losses and credits from Hoyt partnership tax shelter investments. The taxpayers argued that their offer should have been accepted because of their age, health and anticipated postretirement earnings. However, the court found that the taxpayers failed to show that payment of more than they offered would render them unable to meet their basis living expenses in retirement.

R. Bergevin, 95 TCM 1031, Dec. 57,307(M) , TC Memo. 2008-6.

The IRS did not abuse its discretion in rejecting a taxpayer's offer-in-compromise of his outstanding tax liabilities. In evaluating his reasonable collection potential, the taxpayer argued that the IRS failed to make an allowance for his basis living expenses greater than provided in published guidance and that the IRS failed to take into consideration his option to file for bankruptcy and potentially discharge some of the tax liabilities. However, the taxpayer had not disclosed any special circumstances that would warrant allowing him a standard of living more lavish that the standard for the area where he lived. The evidence also indicated that the IRS did consider the possibility that the taxpayer might file for bankruptcy; however, in light of the changes to the bankruptcy law, the IRS believed that the taxpayer would not be able to avoid paying the total tax liability by filing for bankruptcy.

C. Klein, 94 TCM 423, Dec. 57,156(M), TC Memo. 2007-325.

The IRS did not abuse its discretion in rejecting an individual's offer in compromise. He had previously made an offer in compromise for one of the years at issue that had been accepted, but he promptly defaulted. His latest offer in compromise was rejected because it did not reflect his ability to pay. Although the individual argued that the IRS erroneously took into account various assets, the existence of other sources of funds supported the findings of the IRS settlement officer.

N.D. Newton, 94 TCM 255, Dec. 57,086(M), TC Memo. 2007-264.

An IRS Appeals officer did not abuse her discretion by determining that an individual could pay her outstanding tax liabilities and sustaining a tax lien. Although the taxpayer made an offer-in-compromise on hardship grounds, the information she submitted on Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, indicated that she had liquid assets in excess the amount of her unpaid tax liabilities for the years at issue.

M.H. Salmassi, 94 TCM 248, Dec. 57,083(M), TC Memo. 2007-261.

The IRS Appeals Office did not abuse its discretion in rejecting a married couple's offer-in-compromise where the taxpayers had underreported their income for several tax years due to claimed losses and credits from Hoyt partnership tax shelter investments. The IRS Appeals officer considered all of the evidence submitted, and reasonably applied the guidelines for evaluating an offer-in-compromise. The offer was unacceptable because, among other reasons, the taxpayers were not forthcoming in establishing their financial status, acceptance of the offer would undermine compliance with the tax laws by taxpayers in general, and the taxpayers had the financial wherewithal to pay more than the offered amount. The officer adequately considered the taxpayers' unique facts and circumstances, and the taxpayers did not show that requiring them to pay more than the offer amount would result in an economic hardship. Public policy did not demand that the taxpayers' offer be accepted because they were victims of fraud, and acceptance of the offer would not enhance voluntary compliance by other taxpayers.

M. Smith, 93 TCM 1047, Dec. 56,880(M), TC Memo. 2007-73.

Refusal to accept a married couple's offer-in-compromise was not an abuse of discretion. The taxpayers did not demonstrate either that they would suffer economic hardship from the proposed collection method or that public policy and equity reasons weighed in favor of accepting their offer. The case was not a "longstanding" case in which forgiveness of penalties and interest was appropriate, and there was no evidence that the IRS Appeals officer failed to give adequate consideration to the taxpayers' unique facts and circumstances. Public policy did not demand acceptance of the offer because the taxpayers were victims of a shelter promoter's fraud. Acceptance of the compromise would reduce the risks involved in investing in tax shelters, undermining voluntary compliance with the tax laws.

G. Hansen, 93 TCM 983, Dec. 56,861(M), TC Memo. 2007-56.

Rejection of a taxpayer's offer in compromise was not an abuse of discretion where the financial information provided by the taxpayer conflicted with the implications of the terms of the taxpayer's marital settlement and separation agreement. The information provided did not explain the inconsistencies with regard to the ownership of various assets; thus, it was not sufficient to permit a reasonable analysis of the taxpayer's offer.

J.J. Kerr, 93 TCM 932, Dec. 56,846(M), TC Memo. 2007-43.

The IRS's rejection of an offer-in-compromise from investors in a cattle-breeding tax shelter was not arbitrary, capricious or without sound basis in fact or law, and the IRS was allowed to proceed with its collection action. The IRS did not abuse its discretion in rejecting the offer despite the taxpayer's claim of special circumstances or economic hardship. The IRS was not required to address every aspect of the taxpayers' special circumstances in the notice of determination and its calculation of the taxpayers' reasonable collection potential far exceeded the taxpayers' offer. In addition, the IRS was not required to accept the taxpayer's offer based on considerations of public policy or equity. The longstanding nature of the taxpayers' case did not require acceptance of the offer-in-compromise, the IRS could rely on an example in the Internal Revenue Manual that was similar although not identical to the taxpayers' case, and the IRS did not have to consider all of the taxpayers' equitable facts, including their claim that they were victims of fraud. Finally, the taxpayers' other arguments regarding compromise of penalties and interest, the IRS's alleged failure to provide the court with sufficient information, the IRS's deadline for submission of information, the husband's pending innocent spouse claim and the IRS's alleged failure to balance the need for efficient tax collection of taxes with the concern that collection be no more intrusive than necessary were rejected.

C. Andrews Est., 93 TCM 891, Dec. 56,831(M), TC Memo. 2007-30.

An IRS Appeals officer did not abuse her discretion by rejecting a married couple's offer-in-compromise based on doubt as to collectibility with special circumstances and effective tax administration. The guidelines for acceptance based on doubt as to collectibility with special circumstances were not met because the taxpayers were able to pay far more than the amount that they offered. Further, the Appeals officer properly concluded that acceptance of the offer-in-compromise would not promote effective tax administration. Acceptance of the offer would undermine compliance with the tax laws by encouraging more taxpayers to participate in tax shelters. The couple failed to identify compelling public policy or equity concerns to show that acceptance of their offer-in-compromise was appropriate. Therefore, the IRS was permitted to proceed with the proposed collection action.

B.E. Johnson, 93 TCM 885, Dec. 56,830(M), TC Memo. 2007-29.

The IRS's rejection of an offer-in-compromise from investors in a cattle-breeding tax shelter was not arbitrary, capricious or without sound basis in fact or law, and the IRS was allowed to proceed with its collection action. The IRS did not abuse its discretion in rejecting the offer despite the taxpayer's claim of exceptional circumstances. In addition, the IRS was not required to accept the taxpayer's offer based on considerations of public policy or equity. The longstanding nature of the taxpayers' case did not require acceptance of the offer, the IRS could rely on an example in the Internal Revenue Manual that was similar although not identical to the taxpayers' case, and the IRS did not have to consider the taxpayers' claim that they were victims of fraud. Finally, the taxpayers' other arguments regarding compromise of penalties and interest, the IRS's alleged failure to provide the court with sufficient information, the IRS's refusal to delay the Code Sec. 6330 hearing, the wife's pending innocent spouse claim, and the IRS's alleged failure to balance the need for efficient tax collection with the concern that collection be no more intrusive than necessary were rejected.

G. Freeman, 93 TCM 879, Dec. 56,829(M), TC Memo. 2007-28.

An IRS Appeals officer did not abuse her discretion by rejecting a married couple's offer-in-compromise based on doubt as to collectibility with special circumstances and effective tax administration. The guidelines for acceptance based on doubt as to collectibility with special circumstances were not met because the taxpayers were able to pay far more than the amount that they offered. Further, the Appeals officer properly concluded that acceptance of the offer-in-compromise would not promote effective tax administration. Acceptance of the offer would undermine compliance with the tax laws by encouraging more taxpayers to participate in tax shelters. The couple failed to identify compelling public policy or equity concerns to show that acceptance of their offer-in-compromise was appropriate. Therefore, the IRS was permitted to proceed with the proposed collection action.

F. Hubbart, 93 TCM 870, Dec. 56,827(M), TC Memo. 2007-26.

The IRS's rejection of an offer-in-compromise from investors in a cattle-breeding tax shelter was not arbitrary, capricious or without sound basis in fact or law, and the IRS was allowed to proceed with its collection action. The IRS did not abuse its discretion in rejecting the offer despite the taxpayers' claim of special circumstances or economic hardship. The IRS was not required to address every aspect of the taxpayers' special circumstances in the notice of determination and its calculation of the taxpayers' reasonable collection potential far exceeded the taxpayers' offer. In addition, the IRS was not required to accept the taxpayers' offer based on considerations of public policy or equity. The longstanding nature of the taxpayers' case did not require acceptance of the offer, the IRS could rely on an example in the Internal Revenue Manual that was similar although not identical to the taxpayers' case, and the IRS did not have to consider the taxpayers' claim that they were victims of fraud. Finally, the taxpayers' other arguments regarding compromise of penalties and interest, the IRS's alleged failure to provide the court with sufficient information, the IRS's refusal to delay the Code Sec. 6330 hearing, and the IRS's alleged failure to balance the need for efficient tax collection with the concern that collection be no more intrusive than necessary were rejected.

R. Carter, 93 TCM 861, Dec. 56,826(M), TC Memo. 2007-25.

The IRS did not abuse its discretion in rejecting an individual's offer-in-compromise (OIC) for a liability that arose from his claimed losses and credits from his involvement in a Hoyt partnership. Accepting the offer would not have promoted effective tax administration because reducing the risk of participating in tax shelters would encourage more taxpayers to run those risks, thus undermining, not enhancing, compliance with the tax laws.

D.O. Abelein, 93 TCM 857, Dec. 56,825(M), TC Memo. 2007-24.

An IRS Appeals officer did not abuse her discretion in rejecting a taxpayer's offer-in-compromise. The liability arose from claimed losses and credits arising from the taxpayer's involvement in a Hoyt partnership. The taxpayer did not show that the determination by the IRS was arbitrary or capricious, or without sound basis in fact or law; therefore, the IRS was permitted to proceed with the proposed collection action.

D. Ertz, 93 TCM 696, Dec. 56,816(M), TC Memo. 2007-15.

An IRS Appeals officer did not abuse her discretion in rejecting a taxpayer's offer-in-compromise. The Appeals officer correctly concluded that acceptance of the offer-in-compromise would not promote effective tax administration. Further, she did not abuse her discretion in determining that the taxpayer's real property had a value in excess of the amount indicated by the taxpayer, which was based on an outdated appraisal, and she correctly determined that the reasonable collection potential was greater than the taxpayer's offer amount.

G.W. McDonough, 92 TCM 386, Dec. 56,665(M), TC Memo. 2006-234.

The IRS's decision to reject an individual's offer in compromise and proceed with collection of his federal tax liabilities was remanded for further consideration and clarification. Although the IRS's analysis of the offer indicated that the taxpayer's reasonable collection potential was zero, the IRS concluded that acceptance of the offer would not be in the best interest of the government under Internal Revenue Manual (IRM) sec. 5.8.7.6(5) because of the taxpayer's egregious history of noncompliance and the likelihood that he would be unable to remain in compliance during the offer term. However, the IRS's application of IRM sec. 5.8.7.6(5) was inconsistent with IRS policy statement P-5-100, on which the IRM relies. Policy statement P-5-100 describes "best interest of the government" only in terms of the potentially collectible amount and does not mention past non-compliance as a criterion for rejection of an offer. Because the reasoning behind the rejection of the offer was unclear, the Tax Court could not determine whether the IRS's decision to reject the offer and proceed with collection was an abuse of discretion.

R.W. Oman, 92 TCM 372, Dec. 56,662(M), TC Memo. 2006-231.

An IRS Appeals officer did not abuse his discretion in rejecting married taxpayers' offer-in-compromise. The Appeals officer correctly concluded that the taxpayers had withdrawn their arguments in favor of a compromise based on doubt as to collectibility with special circumstances and effective tax administration based upon the taxpayers' correspondence. Although the Appeals officer made errors in his calculation of collection potential, he nevertheless correctly determined that the reasonable collection potential was greater than the taxpayers' offer amount. The taxpayers' arguments that the Appeals officer (1) failed to provide sufficient information for review, (2) abused his discretion by refusing to consider an offer-in-compromise for unassessed years, and (3) failed to consider less intrusive collection alternatives were properly rejected.

W.H. Lindley, 92 TCM 363, Dec. 56,659(M), TC Memo. 2006-229.

An Appeals officer acted within her discretion by waiting to schedule a hearing until after a married couple's appeal to the Court of Appeals was resolved because once the IRS has referred a case to the Department of Justice for defense or prosecution, only the Attorney General or his delegate has the authority to compromise it.

H.D. Summers, 92 TCM 345, Dec. 56,647(M), TC Memo. 2006-219.

The IRS properly rejected the offer-in-compromise based on doubt as to collectibility with special circumstances because the taxpayers had assets adequate to pay more than their offer and failed to prove the existence of any special circumstances. The IRS also properly rejected the offer-in-compromise made on grounds of public policy and equitable consideration. The taxpayer's argument that penalties and interest are required to be forgiven in longstanding cases was rejected. The taxpayer's argument that the IRS improperly relied upon a similar example in the Internal Revenue Manual was also rejected. Also, the fact that the taxpayer may have been defrauded by Hoyt was not persuasive as many other investors in these partnerships had been deemed liable for the interest and penalties despite supposed fraud. All of the taxpayer's arguments that the IRS abused its discretion were also rejected.

D. Ertz, 92 TCM 296, Dec. 56,630(M), TC Memo. 2006-204.

IRS representatives did not accept or intend to accept the offer of a husband and wife to settle their tax deficiency case. The IRS appeals officer to whom the offer letter was sent did not make a written or oral response, and did not accept the offer. The IRS's counsel in the case did not accept the offer, where the offer was not made to him, he was unaware of its specifics, and the appeals officer conducted the negotiations. Although it was disputed whether the IRS's counsel had told taxpayers' counsel that a settlement had been reached, IRS counsel's statement was, at best, his understanding of the intent or actions of the appeals officer or her office.

R.R. Smith, 92 TCM 219, Dec. 56,611(M), TC Memo. 2006-187.

The IRS did not abuse its discretion in rejecting an offer-in-compromise and sustaining a proposed levy action against a taxpayer who was a partner in a cattle breeding partnership through which he claimed deductions for farming losses and carried back related net operating losses that gave rise to refunds. The Tax Court rejected the taxpayer's argument that the longstanding nature of the case required the IRS to accept his offer-in-compromise for the same reasons that the Court of Appeals for the Ninth Circuit considered and rejected that argument in C.G. Fargo, CA-9, 2006-1 USTC 50,326, 447 F3d 706. Further, IRS's reliance on an example in the Internal Revenue Manual was not arbitrary or capricious. Also, the mere fact that certain "equitable facts" present in the case did not persuade the IRS did not mean that they were not considered. Finally, the IRS did not fail to balance the need for efficient collection of taxes with the concern that the collection action not be more intrusive than necessary. The IRS did seek to collect the taxpayer's outstanding tax liability through less intrusive means --an installment agreement. But the taxpayer rejected it.

M. Keller, 92 TCM 114, Dec. 56,587(M), TC Memo. 2006-166.

An IRS Appeals officer did not abuse her discretion in rejecting a $32,000 offer-in-compromise from a husband and wife who had more than $400,000 in unpaid tax liabilities, including interest and penalties, resulting from participation in discredited tax shelter partnerships organized and operated by A.J. Hoyt. The guidelines for acceptance due to collectibility with special circumstances were not met because the amount offered was inadequate relative to the $140,000 in assets admittedly owned by the taxpayers. All special circumstances presented by the taxpayers regarding their financial situation had been reviewed by the Appeals officer and failed to establishment economic hardship. The guidelines for acceptance based on effective tax administration were not satisfied because acceptance would actually tend to encourage taxpayers to risk participation in tax shelters and, thereby, reduce effective tax administration. Furthermore, acceptance based on effective tax administration requires that a taxpayer's equity in assets plus future income equal or exceed the amount to be compromised and this condition was not met. The IRS was, therefore, entitled to move forward with its proposed levy.

R. Barnes, 92 TCM 31, Dec. 56,570(M), TC Memo. 2006-150.

An IRS Appeals officer did not abuse his discretion in rejecting both offers in compromise submitted by married taxpayers. Both offers were substantially less than the amount collectible determined by an IRS officer using published guidelines. Since the taxpayers failed to demonstrate any special circumstances, the determination to levy for the full tax liability was proper.

A.A. Lemann III, 91 TCM 846, Dec. 56,443(M), TC Memo. 2006-37.

The IRS did not abuse its discretion in determining to proceed with collection of an individual's unpaid tax liability. The IRS's failure to consider the taxpayer's offer to compromise his tax liability for a nominal amount was not an abuse of discretion. The taxpayer submitted the offer in compromise after the scheduled CDP hearing and final notice was issued. Accordingly, the IRS could not have considered the offer at the CDP hearing.

M.H. Hajiyani,, 90 TCM 153, Dec. 56,121(M), TC Memo. 2005-198.

An IRS settlement officer did not abuse her discretion in rejecting a married couple's offer in compromise. The officer rejected the offer after determining that the taxpayers had sufficient income and assets to satisfy the liability in full. The officer complied with the requirements of Code Sec. 6330 and did not abuse her discretion under Code Sec. 7122.

D.A. Singer, 90 TCM 67, Dec. 56,098(M), TC Memo. 2005-175.

An Appeals officer's determination that the IRS could proceed with a levy against an individual taxpayer was not an abuse of discretion. The taxpayer's claim that she had requested, but was not granted, a face-to-face interview was not persuasive. Moreover, the taxpayer had been given 30 days to revise her offer in compromise, and her case was not closed for six weeks after that time period had lapsed, but even with the additional time, the taxpayer did not revise her offer or provide the additional information that had been requested.

M.J. Chandler, 89 TCM 1113, Dec. 56,011(M), TC Memo. 2005-99.

The IRS did not act arbitrarily, capriciously or without sound basis in fact or law when it rejected a delinquent taxpayer's offer in compromise (OIC). Thus, its determination to proceed with the collection action against him was sustained. The record reflected that throughout the administrative process, the taxpayer was given multiple and repeated opportunities to submit sufficient information to support his offer in compromise. Because such information was not provided in a timely manner, the IRS's decision to the reject the OIC was sustained.

S. Roman, 87 TCM 835, Dec. 55,522(M), TC Memo. 2004-20.

The IRS did not act arbitrarily, capriciously, or without sound basis in fact or law when it rejected a delinquent taxpayer's offer in compromise. Thus, its determination to proceed with the collection action against her was sustained. The IRS considered the taxpayer's circumstances in light of the prescribed guidelines for accepting offers. It reasonably concluded that the evidence failed to establish either the requisite economic hardship or other exceptional factors demonstrating that compromise of the liability would not undermine voluntary compliance with the tax laws.

D.M. Chandler, 87 TCM 804, Dec. 55,508(M), TC Memo. 2004-7.

An IRS Appeals officer's rejection of an individual's Form 656, Offer in Compromise, was not an abuse of discretion. The Tax Court noted the possibility that an IRS revenue officer's financial analysis of the taxpayer, based on information that the taxpayer provided, was flawed. However, the Tax Court declined to conclude that the information the taxpayer provided was reasonable or that consideration of his amended offer in compromise would have changed the Appeals officer's determination. The determination also indicated that a levy was necessary to induce payment, which was reasonable based on the taxpayer's long history of delinquency. Consequently, neither rejection of the taxpayer's initial offer nor his amended offer constituted an abuse of discretion.

R.G. Van Vlaenderen, 86 TCM 736, Dec. 55,382(M), TC Memo. 2003-346.

The IRS did not act arbitrarily, capriciously, or without sound basis in fact or law when it rejected a delinquent couple's offer in compromise. Thus, its determination to proceed with the collection action against them was sustained. The IRS considered the taxpayers' circumstances in light of the prescribed guidelines for accepting offers. It reasonably concluded that the evidence failed to establish either the requisite economic hardship or other exceptional factors demonstrating that compromise of the liability would not undermine voluntary compliance with the tax laws.

J.J. Crisan, 86 TCM 601, Dec. 55,350(M), TC Memo. 2003-318.

The IRS did not act arbitrarily, capriciously, or without sound basis in fact or law when it rejected a delinquent taxpayer's offer in compromise. Thus, its determination to proceed with the collection action against him was sustained. The taxpayer failed to submit a properly completed Form 656, Offer in Compromise, and the required financial information for the consideration of his request.

C.R. Neugebauer, 86 TCM 467, Dec. 55,323(M), TC Memo. 2003-292.

The IRS did not act arbitrarily, capriciously, or without sound basis in fact or law when it rejected a delinquent taxpayer's offer in compromise. Thus, its determination to proceed with the collection action against her was sustained. The IRS considered the taxpayer's circumstances in light of the prescribed guidelines for accepting offers. Further, it reasonably concluded that the evidence failed to establish either the requisite economic hardship or other exceptional factors demonstrating that compromise of the liability would not undermine voluntary compliance with the tax laws.

A.H. O'Brien, 86 TCM 461, Dec. 55,321(M), TC Memo. 2003-290.

An IRS Appeals officer did not abuse his discretion in presenting a proposed offer in compromise and refusing an offer in compromise proposed by married taxpayers during a Collection Due Process hearing. The IRS's proposal for the collection of the taxpayers' delinquent taxes, which spanned 14 years, was computed according to the guidelines provided in the IRS manual, taking into consideration the husband's age and poor health.

R.M. Galvin, 86 TCM 353, Dec. 55,289(M), TC Memo. 2003-263.

An IRS Appeals officer did not abuse her discretion in denying a taxpayer's offer in compromise relating to her underlying tax liability for several tax years. The offer in compromise was considered in detail and it was appropriately concluded that it did not fairly represent the taxpayer's ability to pay her tax debt. Moreover, contrary to the taxpayer's assertion, the IRS's failure to send her a written rejection of her in compromise for one tax year did not deprive her of any administrative appeal rights.

D. Moorhous, 85 TCM 1538, Dec. 55,198(M), TC Memo. 2003-183.

The IRS's refusal to consider an individual's offer in compromise because she had not filed all required tax returns was not an abuse of discretion. The taxpayer's testimony and copies of some of her returns were not as persuasive in showing that she had filed returns for the thirteen tax years at issue as the IRS's certificate of official record and the testimony of agents in showing that her tax returns had not been filed. The IRS required all of the financial information supporting her offer in compromise in order to evaluate its acceptability. Thus, it was a reasonable exercise of discretion for the IRS to deny the taxpayer's offer in compromise.

S.S. Rodriguez, 85 TCM 1414, Dec. 55,168(M), TC Memo. 2003-153.

An IRS Appeals officer did not abuse her discretion in denying a taxpayer's offer in compromise relating to his underlying tax liability for several tax years. The taxpayer's history of noncompliance, the late filing of his income tax return for one tax year, and the delinquency on his estimated tax payments for a subsequent tax year established his failure to be in current compliance with his federal income tax liabilities and supported the Appeals officer's determination disapproving of the offer in compromise. The taxpayer's argument that the Appeals officer failed to have her proposed rejection of the offer in compromise reviewed by an "independent reviewer" was not supported by the record.

C. Londono, 85 TCM 1121, Dec. 55,107(M), TC Memo. 2003-99.

An IRS Appeals Office agent did not abuse his discretion in denying a taxpayer's second offer in compromise relating to his underlying tax liability for six tax years. Contrary to the taxpayer's assertion, the offer in compromise was considered in detail and it was appropriately concluded that it did not fairly represent the taxpayer's ability to pay his tax debt.

A.C. Schenkel, 85 TCM 839, Dec. 55,043(M), TC Memo. 2003-37.

A dentist who attempted to repay a loan from a profit-sharing plan via a prohibited transaction several years later, and who actually repaid the loan with interest in a subsequent tax year as part of a settlement with the IRS, was allowed a deduction for the investment interest payment in that subsequent year. The IRS was bound by the settlement and, thus, could not claim that the taxpayer had repaid the loan early through the prohibited transaction.

F.E. Hickman, 74 TCM 1346, Dec. 52,390(M), TC Memo. 1997-545.

Negotiations between individuals and the IRS regarding alleged deficiencies arising out of tax-shelter investments and occurring before the docketing of any cases in the Tax Court were not compromises that were formally submitted using the appropriate documents. Therefore, the negotiations did not bind the IRS. In one instance, the evidence failed to establish acceptance of the IRS offer; in another, it showed that the IRS offer had been rejected; and, in a third, it demonstrated that no offer had ever been made.

R.W. Rohn, 67 TCM 3030, Dec. 49,876(M), TC Memo. 1994-244.

The parties to a settlement agreement did not intend for the agreed-upon increases in the taxpayers' income to be mitigated by additional claims of tax deductions and benefits, such as income averaging, an increased general sales tax deduction, the deduction for a married couple when both work, and the offset of the corporate taxpayer's additional taxable income with a net operating loss. None of the additional items were mentioned in the settlement or raised prior to settlement, and what the taxpayers mistakenly failed to insert into the terms of the agreement could not thereafter be included.

Yoo Han & Co., 62 TCM 83, Dec. 47,455(M), TC Memo. 1991-308.

A couple's payment for release of a tax lien that resulted from unpaid 1983 taxes did not constitute a settlement of their entire 1983 tax liability and did not preclude the IRS from subsequently determining a deficiency for unpaid self-employment taxes for the same year. Although the IRS had issued a certificate of lien release, the evidence was insufficient to establish that the IRS, either orally or in writing, had agreed to compromise the taxpayers' entire tax liability in exchange for payment to release the lien.

R. Foulds, 56 TCM 1112, Dec. 45,433(M), TC Memo. 1989-29.

An agreed-upon settlement agreement based upon a specific dollar amount and not upon concessions of any underlying legal or factual issues was enforced by the court under principles of contract law. The taxpayer made a unilateral mistake of fact in thinking that such amounts could be further reduced by net operating loss carrybacks where the Commissioner was not aware of the existence of such carrybacks and the issue was not raised by the taxpayer.

V.F. Himmelwright, 55 TCM 403, Dec. 44,644(M), TC Memo. 1988-114.

The taxpayer was required to recognize the entire long-term capital gain it realized upon the 1969 sale of property it had originally acquired through its acquisition and liquidation of another corporation. It was not shown that the Commissioner had agreed in a 1964 audit to eliminate any capital gain derived from the future sale of the property in question.

Baker Industries, Inc., 37 TCM 1842, Dec. 35,504(M), TC Memo. 1978-440.

Chief Counsel advised that the IRS could not accept an offer in compromise submitted by one of the general partners of a defunct partnership to compromise the partner's individual derivative share of the employment tax obligations of the partnership. The employment tax obligations represented a single liability assessed against the partnership. The partnership liability was the only liability subject to compromise and any compromise of the liability had to involve a thorough analysis of the partnership assets and the assets of the other general partners.

CCA Letter Ruling 200127009, March 30, 2001.

The IRS's rejection of an offer in compromise wherein the non-liable spouse refused to provide all financial information needed to evaluate the taxpayer's percentage of shared expenses was a permissible exercise of its discretion. The mere fact that the non-liable spouse provided a sworn statement that all of the taxpayer's income was contributed toward their living expenses was insufficient to preclude the IRS's rejection of the taxpayer's offer. Although IRS procedures do not clearly show that rejection is permissible under the given circumstances, each offer in compromise may be evaluated on its merits. Therefore, the IRS was entitled to conclude that the offer was not in its best interest and reject it.

CCA Letter Ruling 200129010, March 26, 2001.

Chief Counsel concluded that an individual who erroneously believed that she was not entitled to innocent spouse relief because she filed a joint return and subsequently entered into an offer in compromise with the IRS was not entitled to set aside the compromise. The government was not mistaken in law or fact regarding the taxpayer's liability for those tax years. Likewise, the taxpayer was not mistaken regarding facts surrounding her case. However, she failed to affirmatively raise the issue of innocent spouse relief prior to the government's acceptance of the offer. Because the taxpayer's mistake was unilateral, based upon her misunderstanding of the law, there were no grounds to set aside the offer in compromise.

Technical Advice Memorandum 200120009, February 6, 2001.

. 7122. COMPROMISES.
7122(a) AUTHORIZATION. --The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.

7122(b) RECORD. --Whenever a compromise is made by the Secretary in any case, there shall be placed on file in the office of the Secretary the opinion of the General Counsel for the Department of the Treasury or his delegate, with his reasons therefor, with a statement of --

7122(b)(1) The amount of tax assessed,

7122(b)(2) The amount of interest, additional amount, addition to the tax, or assessable penalty, imposed by law on the person against whom the tax is assessed, and

7122(b)(3) The amount actually paid in accordance with the terms of the compromise.

Notwithstanding the foregoing provisions of this subsection, no such opinion shall be required with respect to the compromise of any civil case in which the unpaid amount of tax assessed (including any interest, additional amount, addition to the tax, or assessable penalty) is less than $50,000. However, such compromise shall be subject to continuing quality review by the Secretary.

7122(c) RULES FOR SUBMISSION OF OFFERS-IN-COMPROMISE. --

7122(c)(1) PARTIAL PAYMENT REQUIRED WITH SUBMISSION. --

7122(c)(1)(A) LUMP-SUM OFFERS. --

7122(c)(1)(A)(i) IN GENERAL. --The submission of any lump-sum offer-in-compromise shall be accompanied by the payment of 20 percent of the amount of such offer.

7122(c)(1)(A)(ii) LUMP-SUM OFFER-IN-COMPROMISE. --For purposes of this section, the term "lump-sum offer-in-compromise" means any offer of payments made in 5 or fewer installments.

7122(c)(1)(B) PERIODIC PAYMENT OFFERS. --

7122(c)(1)(B)(i) IN GENERAL. --The submission of any periodic payment offer-in-compromise shall be accompanied by the payment of the amount of the first proposed installment.

7122(c)(1)(B)(ii) FAILURE TO MAKE INSTALLMENT DURING PENDENCY OF OFFER. --Any failure to make an installment (other than the first installment) due under such offer-in-compromise during the period such offer is being evaluated by the Secretary may be treated by the Secretary as a withdrawal of such offer-in-compromise.

7122(c)(2) RULES OF APPLICATION. --

7122(c)(2)(A) USE OF PAYMENT. --The application of any payment made under this subsection to the assessed tax or other amounts imposed under this title with respect to such tax may be specified by the taxpayer.

7122(c)(2)(B) APPLICATION OF USER FEE. --In the case of any assessed tax or other amounts imposed under this title with respect to such tax which is the subject of an offer-in-compromise to which this subsection applies, such tax or other amounts shall be reduced by any user fee imposed under this title with respect to such offer-in-compromise.

7122(c)(2)(C) WAIVER AUTHORITY. --The Secretary may issue regulations waiving any payment required under paragraph (1) in a manner consistent with the practices established in accordance with the requirements under subsection (d)(3).

7122(d) STANDARDS FOR EVALUATION OF OFFERS. --

7122(d)(1) IN GENERAL. --The Secretary shall prescribe guidelines for officers and employees of the Internal Revenue Service to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute.

7122(d)(2) ALLOWANCES FOR BASIC LIVING EXPENSES. --

7122(d)(2)(A) IN GENERAL. --In prescribing guidelines under paragraph (1), the Secretary shall develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.

7122(d)(2)(B) USE OF SCHEDULES. --The guidelines shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph (A) is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses.

7122(d)(3) SPECIAL RULES RELATING TO TREATMENT OF OFFERS. --The guidelines under paragraph (1) shall provide that --

7122(d)(3)(A) an officer or employee of the Internal Revenue Service shall not reject an offer-in-compromise from a low-income taxpayer solely on the basis of the amount of the offer,

7122(d)(3)(B) in the case of an offer-in-compromise which relates only to issues of liability of the taxpayer --

7122(d)(3)(B)(i) such offer shall not be rejected solely because the Secretary is unable to locate the taxpayer's return or return information for verification of such liability; and

7122(d)(3)(B)(ii) the taxpayer shall not be required to provide a financial statement, and

7122(d)(3)(C) any offer-in-compromise which does not meet the requirements of subparagraph (A)(i) or (B)(i), as the case may be, of subsection (c)(1) may be returned to the taxpayer as unprocessable.

7122(e) ADMINISTRATIVE REVIEW. --The Secretary shall establish procedures --

7122(e)(1) for an independent administrative review of any rejection of a proposed offer-in-compromise or installment agreement made by a taxpayer under this section or section 6159 before such rejection is communicated to the taxpayer; and

7122(e)(2) which allow a taxpayer to appeal any rejection of such offer or agreement to the Internal Revenue Service Office of Appeals.

7122(f) DEEMED ACCEPTANCE OF OFFER NOT REJECTED WITHIN CERTAIN PERIOD. --Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer. For purposes of the preceding sentence, any period during which any tax liability which is the subject of such offer-in-compromise is in dispute in any judicial proceeding shall not be taken into account in determining the expiration of the 24-month period.

Code Sec. 7122(f)[(g)]), below, as added by P.L. 109-432, §407(d), applies to submissions made and issues raised after the date on which the Secretary first prescribes a list under Code Sec. 6702(c), as amended by P.L. 109-432, §407(a).
7122(f)[(g)] FRIVOLOUS SUBMISSIONS, ETC. --Notwithstanding any other provision of this section, if the Secretary determines that any portion of an application for an offer-in-compromise or installment agreement submitted under this section or section 6159 meets the requirement of clause (i) or (ii) of section 6702(b)(2)(A), then the Secretary may treat such portion as if it were never submitted and such portion shall not be subject to any further administrative or judicial review.