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 bankruptc