Favorable Innocent Spouse case under section 615 of the Code. A widowed taxpayer was entitled to equitable innocent spouse equitable relief under Code Sec. 6015(f) with respect to two tax years, but not for two other years. Since the taxpayer knew or had reason to know that the tax liabilities for two tax years were unpaid, the court applied the list of factors contained in Section 4.03 of Rev. Proc. 2003-61, 2003-2 C.B. 296, to determine whether equitable relief was appropriate.

Factors favoring equitable relief included: (1) the taxpayer's single status at the time relief was requested; (2) that economic hardship would be caused by payment of the outstanding tax liability as evidenced by her modest income and overall precarious financial circumstances; (3) she received no significant benefit from the unpaid taxes; (4) all tax returns due after her husband's death were filed and the related taxes paid; and (5) the taxpayer's mental health was under great strain while caring for her dying husband.

Moreover, certain other factors also favored equitable relief. The taxpayer appeared to have paid an unnecessary 10 percent penalty for an early distribution from her husband's retirement account made during her husband's illness. The distribution should have been penalty-free due to her husband's medical condition. Furthermore, it appeared that the taxpayer failed to itemize deductions for her husband's medical expenses. The unnecessary taxes paid would have offset or nearly offset one year's tax liability for which equitable relief was sought.
Finally, the taxpayer's good faith effort to resolve the issue was demonstrated by the fact that she had already paid more than $35,000 in installment payments over an eight-year period that represented approximately 75 percent of all unpaid tax liabilities for the 1992 through 2000 tax years. Back reference: 2008FED ¶35,192.25.
Cynthia M. Martinez v. Commissioner. Docket No. 12652-06S . Filed December 29, 2008.
A widowed taxpayer was entitled to equitable innocent spouse equitable relief under Code Sec. 6015(f) with respect to two tax years. Factors favoring equitable relief included: (1) the taxpayer's single status at the time relief was requested; (2) that economic hardship would be caused by payment of the outstanding tax liability as evidenced by financial statements provided to the IRS; (3) no significant benefit resulted from the unpaid taxes; (4) all tax returns due since her husband's death were filed along with the required tax payments; and (5) the taxpayer's mental health was under great strain while caring for her dying husband. In addition, the taxpayer may have unnecessarily overpaid her taxes by failing to itemize medical expenses and by paying an unnecessary penalty for a distribution from her husband's retirement account. The taxpayer also made a good-faith effort to pay her back taxes through installment payments over an eight-year period. Equitable relief was not available for two other tax years because the unpaid tax liability for those years was entirely attributable to her own wages. --CCH.

GOLDBERG, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect at the time the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Respondent issued a notice of determination dated May 4, 2006, denying petitioner's request for innocent spouse relief from joint and several liability for 1992, 1995, 1998, and 1999, which as of April 17, 2007, had remaining balances due of $7,038, $1,914, $4,882, and $5,965, respectively, for a total of $19,799. The issue for decision is whether petitioner is entitled to innocent spouse relief for any or all of the years at issue.
Background

Some of the facts have been stipulated and are so found. The stipulations of facts and the attached exhibits are incorporated herein by this reference. Petitioner resided in California when she filed her petition.

Petitioner married Frank Martinez in 1971 when they were both young, and they remained loving partners until his death 30 years later on April 2, 2001, at age 47. Mr. Martinez died after struggling since 1985 with worsening pancreatic problems, which compounded quickly with diabetes and then diabetes II. Later, doctors discovered a hole in his colon. These deteriorating conditions required frequent doctor's care, hospital stays, many operations, removal of two-thirds of his colon, four shots per day of insulin, and spending every night at home pumping fluids out of his body. Petitioner nursed him at home. The medical problems remained unanswerable, and despite everyone's efforts, Mr. Martinez died, as noted above, on April 2, 2001. 1

Mr. Martinez started out serving in the U.S. Air Force for 8 years. After an honorable discharge he eventually secured a job as a telephone service representative for Pacific Bell, a telephone company. He worked there from 1981 until July 28, 1995, when he had to stop working because of his declining health.

Petitioner has 13 years of education. She at first stayed at home as a housewife raising their two children, and then she worked in different jobs: Marketing, graphic artist, and later as a secretary for Ingersoll Dresser Pump Co., which was her employer during the years at issue.

The Martinezes' financial arrangement was that their bank account was in petitioner's name, but Mr. Martinez decided which bills to pay and when to pay them. The record is not clear as to whether Mr. Martinez had signatory authority over the account. Petitioner did not review the monthly bank statements, did not balance the checkbook, and did not pick up or open the mail. Regarding their tax returns, Mr. Martinez would show her a preliminary draft, then had her sign a blank original so that he could complete and mail the return.

Before the years at issue the Martinezes had a balance due for their Federal income tax for 1988, 3 years after the medical problems began. The Internal Revenue Service (IRS) collected the unpaid balance by means of a levy in 1994. At trial petitioner acknowledged that she was aware of the 1994 levy, but thought that Mr. Martinez went back to paying the balance due on the income tax returns that they filed afterwards.

The couple's tax problems began in earnest in 1991. By then Mr. Martinez's health had been deteriorating significantly for about 6 years to the point where he was in and out of work frequently for short-and long-term disability to take care of his medical problems. Below is a table showing for the years at issue the balances due, attribution, and other pertinent information:
IRS Balance Applic. Balance Bal. Due On Of Date IRS Attrib. Pet.'s Due Received Tax To As Of Year Return Return Petitioner Payments 4/17/07 1992 11/4/98 $3,054 $1,680 $3,207 $7,038 1995 11/4/98 6,851 4,316 11,666 1,914 1998 4/15/99 2,822 12,794 775 4,882 1999 9/22/00 2,650 2,645 -0- 5,965 Total 15,377 11,435 15,648 19,799 1Of the couple's 1999 adjusted gross income of $37,611, only $71 of dividend income, or less than 1 percent, was attributable to Mr. Martinez. The record is silent on attribution for 1998, but because Mr. Martinez had been drawing down his investments and retirement funds since he stopped working in 1995, we estimate that he had a small investment residual in 1998 that continued shrinking into 1999. As a consequence, we find petitioner was 99 percent liable for the 1998 liability and 100 percent for the 1999 liability.

In 1992 petitioner and Mr. Martinez earned equivalent wages, had equivalent withholdings, earned $4,967 in investment income, and withdrew $485 from petitioner's retirement fund. The draw of retirement funds at her age, late thirties, is an indication of the Martinezes' worsening financial condition. Petitioner was 55 percent responsible for the 1992 underpayment.

By 1995 the Martinezes were experiencing significant troubles. In July of 1995 Mr. Martinez, at only age 41, had to stop working because of his health problems, and he was never able to return. Their two children were still dependents. To make ends meet, the Martinezes withdrew $21,809 from their retirement plans: $18,840 from Mr. Martinez's plan and $2,969 from petitioner's plan. In calculating their tax liability for 1995 their preparer properly included the withdrawals in the Martinezes' gross income. The preparer also reported a 10-percent additional tax of $2,181 for premature distributions from retirement plans: $1,884 attributable to Mr. Martinez, and $297 attributable to petitioner.

The IRS mistakenly attributed only 8 percent responsibility to petitioner for the 1995 underpayment because the IRS failed to give Mr. Martinez credit for the 20 percent withholding on his retirement plan withdrawal. After crediting Mr. Martinez with the proper withholdings, the correct attribution to petitioner is 63 percent. The reason for petitioner's higher percentage is that although she and Mr. Martinez had similar amounts of taxes withheld from their wages, she earned about twice as much pay because Mr. Martinez stopped working around mid-1995.

In 1996 the Martinezes moved from southern to northern California where they hoped they could live a less stressful life. They had read that adrenalin in the fight-or-flight response to stress worsened diabetes. Mr. Martinez told petitioner he was going to transfer to a Pacific Bell office up north, but he had in fact already stopped working on July 28, 1995. He hid this fact from petitioner.

Shortly after the move in 1996 petitioner learned that Mr. Martinez had not filed their 1992 and 1995 tax returns. To prepare their delinquent returns the Martinezes engaged a regional law firm that specialized in taxes. After 2 years the law firm completed the returns and dated its preparer signature October 19, 1998. The Martinezes dated their signatures October 30, 1998, and they promptly filed the returns such that respondent recorded receiving the returns on November 4, 1998.

Regarding the final 2 years at issue, 99 percent of the 1998 underpayment and 100 percent of the 1999 underpayment were attributable to petitioner, except for some minor interest income, as her job was the couple's only source of income. In 1998 petitioner's withholdings of $212 were less than 1 percent of her earnings, and in 1999 her withholdings were less than 3 percent of her earnings.

For all 4 years at issue, 1992, 1995, 1998, and 1999, the Martinezes claimed the standard deduction and accordingly did not itemize their deductible expenses.

By the end of 1998 or 1999, the couple had no financial resources other than petitioner's paycheck. Mr. Martinez had stopped working in 1995, and they had exhausted their retirement accounts and emptied their after-tax investments and savings. On petitioner's salary in the low-to mid-thirty thousands, they lived in California, a high cost-of-living State, and had to contend with medical bills while Mr. Martinez was in and out of doctors' offices and hospitals. Petitioner later discovered that because of pride, or financial concern, or the mental effect of diabetes, Mr. Martinez was not filling some of his prescriptions, was ignoring certain medical devices, and was not requesting medical reimbursements. Petitioner stated that if Mr. Martinez had purchased better medicines and better equipment and sought health care reimbursements, they might have lessened some of their problems.

Sometime in 1999 or 2000 petitioner found Mr. Martinez at home, unconscious, in a coma. Paramedics rushed him to a hospital. He revived but felt numbness in his feet. He died, as noted above, on April 2, 2001.

Shortly before Mr. Martinez's death, while she was looking for medical supplies, petitioner discovered shoe boxes full of unopened letters from the IRS and tax returns that she had signed but Mr. Martinez had not mailed. Petitioner reengaged the same law firm that had prepared the prior delinquent returns to resolve the matter. The firm determined that the Martinezes had outstanding balances for each of the 8 years 1992 to 2000, except for 1996 where they had a refund due. The total amount due, including additions, was $48,684. On behalf of the Martinezes the law firm prepared an offer-in-compromise, offering $1,000 to settle the entire debt. The firm submitted the offer to the IRS during the summer of 2001 after Mr. Martinez's death in April 2001.

By February 2002 for unclear reasons but perhaps because the IRS indicated that it was going to reject the offer, petitioner notified the law firm that she had decided to enter into an installment agreement with the IRS instead of pursuing the offer-in-compromise. Petitioner signed a Form 433-D, Installment Agreement, dated it March 27, 2002, and agreed to pay $775 per month to resolve the entire accumulated debt of $48,684 for 1992 through 2000.

Petitioner began making the installment payments in May 2002. Although the record is not entirely clear, it appears that she kept making the monthly payments until November 2005 and then made about four additional monthly payments of $775 in 2006 (February through May 2006). Petitioner stopped making payments in 2005 because the IRS stopped sending her monthly payment coupons. In total petitioner paid approximately $35,650 in installment payments ($775 times 46 months). The IRS applied the couple's 1996 refund to the 1993 underpayment. The record is silent on the amount of that refund.

Petitioner's payments of approximately $35,650 represent 73 percent of the entire $48,684 debt. The IRS applied the installment payments in a seemingly haphazard manner, extinguishing in full the balances owing on 1993, 1994, 1997, and 2000 while leaving balances due on 1992, 1995, 1998, and 1999.

In July 2002 the IRS sent a Final Notice, IRS Intent to Levy, for 1994 despite, as noted above, having entered into an installment contract just a few months earlier and where petitioner was complying with the payment arrangement. Similarly, in a letter dated April 7, 2004, the IRS requested that petitioner execute a new installment agreement solely for the year 2000 even though petitioner was still performing under the existing installment agreement that included the year 2000.

To help prepare her 2004 tax return in early 2005 petitioner retained a national tax preparation firm, which, when reviewing her records, questioned her regarding the installment payments. After a discussion the firm suggested that she apply to the IRS for innocent spouse relief, which she did around August 2005 for years 1992, 1995, 1998, 1999, and 2000. Petitioner's application included a Form 12510, Questionnaire for Requesting Spouse. The form includes a worksheet for monthly income and expenses, upon which petitioner reported a monthly net income of $2,636 and expenses of $2,480 (including the $775 monthly installment payment to the IRS) for a surplus of $156 per month. In a letter dated December 13, 2005, the IRS compliance division formally denied petitioner's request for innocent spouse relief.

Petitioner timely appealed the denial to the IRS's Office of Appeals. The Appeals officer determined that petitioner was in tax compliance and that petitioner satisfied the IRS threshold requirements for relief on the portion of the liability attributable to her deceased husband. However, the Appeals officer rejected petitioner's request for relief because of the following factors: (1) Reason to know: petitioner did not meet her duty of inquiry because the checking account was in her name, and as noted above, petitioner should have been on alert after a 1994 levy paid off their 1988 tax debt; (2) attribution: in 1999 and 2000 nearly all or all of the underpayments were attributable to petitioner's earnings (the 1998 return was not available, and therefore the officer did not base the decision for 1998 on attribution); (3) economic hardship: paying the debt would not cause petitioner economic hardship because the $156 monthly surplus that petitioner reported on Form 12510 in August 2005 already included a provision of $775 for the monthly repayment of back taxes; (4) Mr. Martinez did not abuse petitioner; and (5) petitioner had no health problems. The officer did not take into account or did not find relevant the total amount of money and the percentage of the overall income tax debt that petitioner had paid through installment payments. The Appeals officer also did not talk with petitioner, although the officer did send a preliminary notice of determination to which petitioner never responded.

The IRS sent a notice of determination dated May 4, 2006, to petitioner formally denying innocent spouse relief for all remaining open years: 1992, 1995, 1998, and 1999. The IRS had been applying most of petitioner's final installment payments during 2005 and 2006 to year 2000 such that by the time of the IRS's notice, year 2000 had a zero balance.

Petitioner received no money or property from her deceased husband's estate. Petitioner moved to Southern California, and doing so was expensive. Petitioner received a small death benefit resulting from the death of her first husband; however, she spent the sum on transporting his body to Southern California and on funeral expenses.

The record does not indicate that the parties conducted a pretrial settlement conference. At trial a little more than 2 years after her initial submission of Form 12510, petitioner presented a new Form 12510 that showed a monthly cashflow shortfall of $322, based on net income of $2,448 and monthly expenses of $2,770. The expenses did not include a provision for the repayment of outstanding taxes. Petitioner remarried on November 7, 2006. Petitioner's worsened financial condition is due to the financial arrangement that she has with her new husband. He has limited income from which he pays the mortgage (the home is solely in his name), and he pays for child support for his child from a prior relationship. She pays the rest of their expenses, including food, utilities, telephone, insurance, and his car payment. She owns a 1992 Honda; however, she drives his car to work because it is newer and more reliable. Petitioner's employer is downsizing, and to retain her job, she drives a long, expensive commute to a new location.
Discussion
I. Overarching Considerations
A. Joint and Several Liability

When two individuals file a joint Federal income tax return, they are each responsible for the accuracy of the return and both are liable together and separately for the entire tax liability. Sec. 6013(d)(3); Butler v. Commissioner, 114 T.C. 276, 282 (2000); sec. 1.6013-4(b), Income Tax Regs.

B. Section 6015(f) Equitable Relief

Section 6015 provides relief from joint and several liability in certain circumstances. As relevant here, if the taxpayer does not qualify for relief under section 6015(b) or (c), then the taxpayer may seek an equitable remedy under section 6015(f), which provides relief if, after taking into account all the facts and circumstances, it would be inequitable to hold the taxpayer liable for the unpaid tax or any portion thereof. Sec. 6015(f)(2); Butler v. Commissioner, supra at 287-292. Petitioner does not qualify for relief under section 6015(b) or (c) because the joint tax returns reported the full amount of tax due, and therefore the liabilities are due to underpayment of tax, and not deficiencies. Accordingly, petitioner's sole avenue of relief is through section 6015(f).

C. Jurisdiction

In 2006 Congress amended section 6015(e) to expressly grant the Tax Court jurisdiction over the Commissioner's denial of relief under section 6015(f) "'with respect to liability for taxes arising or remaining unpaid on or after the date of the enactment of this Act [December 20, 2006]'." Christensen v. Commissioner, 523 F.3d 957, 959 (9th Cir. 2008) (quoting Tax Relief and Health Care Act of 2006, Pub. L. 109-432, div. C., sec. 408(c), 120 Stat. 3062), affg. T.C. Memo. 2005-299. Petitioner's liabilities remain unpaid after December 20, 2006, and accordingly, we have jurisdiction.

D. Standard of Review

Respondent requested in his pretrial memorandum that we limit our review to the administrative file. In the past, we applied abuse of discretion as the standard of review for the Commissioner's denial of equitable relief under section 6015(f). See Washington v. Commissioner, 120 T.C. 137, 146 (2003); Cheshire v. Commissioner, 115 T.C. 183, 198 (2000), affd. 282 F.3d 326 (5th Cir. 2002). However, in a recent case we focused specifically on this issue, and we ruled that when seeking section 6015(f) relief, it is permissible for a taxpayer to introduce evidence at trial that was not in the administrative record. Porter v. Commissioner, 130 T.C. ___ (2008). Further, we need not decide the standard of review because we would reach the same result.

E. Burden of Proof

To gain joint and several liability relief under section 6015(f), the taxpayer bears the burden of proof. Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34 (6th Cir. 2004).
II. Applying the Law to the Facts and Circumstances of Petitioner's Case
The Commissioner has promulgated a review process that IRS employees should follow when determining whether a spouse qualifies for equitable relief under section 6015(f). Rev. Proc. 2003-61, 2003-2 C.B. 296, modifying and superseding Rev. Proc. 2000-15, 2000-1 C.B. 447. 2 This Court employs those factors when reviewing the Commissioner's denials. Washington v. Commissioner, supra at 147-152.

A. Rev. Proc. 2003-61, Sec. 4.01 --Threshold Criteria for Granting Relief

The review process begins with seven threshold criteria that a taxpayer must satisfy before the Commissioner will consider equitable relief. Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297. The Court will not address the criteria for 1992 and 1995 because the Court agrees with respondent's determination that petitioner has met the threshold requirements on the portion of the liability that is attributable to her deceased husband.

The Court agrees further that on the basis of the attribution factor of Rev. Proc. 2003-61, sec. 4.01(7), respondent will not consider relief for 1999 because at the threshold, nearly all or all of the unpaid balance is attributable to petitioner. We reach the same conclusion for 1998. We note for completeness the importance of the attribution criterion. One of the changes that the Commissioner made in revising the revenue procedure from 2000 to 2003 was to move up the attribution factor from being one of many considerations to being a threshold factor. Compare Rev. Proc. 2003-61, sec. 3.01, 2003-2 C.B. at 297 with Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. at 449. Accordingly, petitioner's request for relief from joint and several liability for 1998 and 1999 is not appropriate because the liability is her own.

B. Rev. Proc. 2003-61, Sec. 4.02 --Circumstances Under Which the IRS Will Ordinarily Grant Relief

Where a requesting spouse has satisfied the threshold requirements of Rev. Proc. 2003-61, sec. 4.01, the Commissioner will ordinarily grant equitable relief under section 6015(f) if the requesting spouse's circumstances satisfy all three elements of Rev. Proc. 2003-61, sec. 4.02, 2003-2 C.B. at 298: (1) Marital status, (2) knowledge or reason to know, and (3) economic hardship.

Petitioner satisfies the first element because Mr. Martinez's death in April 2001 was before her application for relief in August 2005. Regarding the second and third elements, knowledge or reason to know and hardship, Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B. at 298, incorporates those two elements as part of its analysis. Because petitioner does not satisfy at least one of the tests, to reduce redundancy we reserve our discussion of the two elements until the section immediately below.

C. Rev. Proc. 2003-61, Sec. 4.03 --Factors for Determining Whether To Grant Equitable Relief

For requesting spouses who fail to qualify under Rev. Proc. 2003-61, sec. 4.02, the revenue procedure provides a list of nonexclusive factors that the Commissioner will consider to determine whether to grant full or partial equitable relief under section 6015(f). Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B. at 298. The revenue procedure provides further that no single factor is determinative, and the reviewer shall weigh all relevant factors, regardless of whether Rev. Proc. 2003-61, sec. 4.03, lists the factor.

1. Marital Status

Mr. Martinez died in April 2001, before petitioner requested relief in August 2005. Thus, this factor favors relief.

2. Economic Hardship

The Commissioner determines economic hardship relying on rules that the Secretary promulgated in section 301.6343-1(b)(4), Proced. & Admin. Regs. Rev. Proc. 2003-61, sec. 4.03(2)(a)(ii) (referencing Rev. Proc.2003-61, sec. 402(1)(c)). The regulation defines economic hardship as the condition where a taxpayer is "unable to pay his or her reasonable basic living expenses". Sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs. In determining a reasonable amount for basic living expenses, the Commissioner shall consider information such as: (1) The taxpayer's age, employment status, history, and ability to earn; (2) the amount reasonably necessary for living expenses such as food, clothing, housing, medical expenses, insurances, tax payments, and child support; (3) the cost of living in the geographic area in which the taxpayer resides; and (4) any extraordinary circumstances such as a medical catastrophe. Sec. 301.6343-1(b)(4)(ii), Proced. & Admin Regs. The requesting spouse bears the burden of proving economic hardship. Monsour v. Commissioner, T.C. Memo. 2004-190.

In determining that petitioner would not suffer economic hardship from denial of relief, the Appeals officer properly relied on the Form 12510 that petitioner filed with her August 2005 request for relief, where petitioner self-reported monthly income of $2,636 and expenses of $2,480 which included a provision of $775 per month to pay the back taxes, for a monthly surplus of $156 in her basic living expenses. Petitioner subsequently corroborated respondent's determination by: (1) Stating that the main reason she stopped making installment payments in November 2005 was that the IRS stopped sending her payment coupons, not that she was suffering from financial need, and (2) recommencing the payments in 2006 and paying the IRS $775 per month from February through May 2006.

Normally our analysis of the economic hardship factor would end at this point with an affirmation of the Appeals officer's determination. However, section 6015(f) requires that we take into account "all the facts and circumstances". At trial in October 2007 more than 2 years after petitioner submitted the original Form 12510 in August 2005, petitioner provided a new Form 12510 that showed monthly income of $2,448 and expenses of $2,770, for a monthly deficit of $322. The expenses do not include a provision for payment of back taxes or for housing. Petitioner did not explain why her net income decreased by $188 per month, and respondent challenged the accuracy of the expense amounts that petitioner reported.

We are not required to accept a taxpayer's self-serving and unsubstantiated statements at trial. Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). However, we do find credible that petitioner, whose lifestyle was already modest, did suffer a diminution in her financial circumstances. We note that she received no assets as a result of the death of Mr. Martinez, she incurred expenses to relocate to Southern California, she lives in an expensive State in a home that she does not own, and she drives and pays for an automobile that is also not her own. The car that she does own is 16 years old. She emptied her after-tax and retirement savings to provide for her children and to care for her dying husband. Her new husband has modest income and pays court-ordered child support.

Further, petitioner is now in her mid-fifties, has 13 years of education, works as a secretary, and earns in the mid-thirty thousands from a company that is downsizing and requires a long, expensive commute. Her combination of age, education, and work situation suggests limited earnings prospects. Moreover, if petitioner had to pay for housing or buy a new car, or if the couple suffered a significant financial or medical setback, then they or petitioner would be hard pressed to pay for their basic living expenses.

On similar grounds in Washington v. Commissioner, 120 T.C. at 150, we disagreed with the Commissioner and found that the requesting spouse would suffer economic hardship if we did not grant her relief. Although the taxpayer was supporting two children and earned less than petitioner here, the requesting spouse's financial circumstances were similar in that she received no assets from the marriage, did not own a house, did not take vacations, and did not own the automobile she drove, and the IRS liens harmed her credit rating and limited her ability to borrow. Id.

We will not go as far here as we did in Washington to disagree with respondent because petitioner no longer has dependent children, her income is higher than that of the taxpayer in Washington, and petitioner did not substantiate her expenses. However, even without precise numbers detailing the family's or petitioner's current financial condition, we find that petitioner is in a precarious financial circumstance: Living paycheck to paycheck, maintaining a low standard of living, and having no significant savings or other financial cushion. For the foregoing reasons, we find the economic hardship factor is neutral.

3. Knowledge or Reason To Know

Respondent contends that petitioner fails this test because she knew or had reason to know at the time she signed the returns that Mr. Martinez would not pay the 1992 and 1995 tax liabilities. In a case such as this where the couple accurately reported but did not pay the balances due, the relevant standard is whether the taxpayer requesting relief did not know and had no reason to know that her spouse would not pay the income tax liability. Rev. Proc. 2003-61, sec. 4.03(2)(a)(iii)(A); see Washington v. Commissioner, supra at 150-151; see also Feldman v. Commissioner, T.C. Memo. 2003-201, affd. 152 Fed. Appx. 622 (9th Cir. 2005). As is pertinent here, in making a determination whether the requesting spouse had reason to know of the nonpayment, the IRS will consider the requesting spouse's level of education, any deceit or evasiveness of the nonrequesting spouse, the requesting spouse's involvement in household financial matters, and any lavish or unusual expenditures compared with past spending levels. Rev. Proc. 2003-61, sec. 4.03(2)(a)(iii)(C); see also Price v. Commissioner, 887 F.2d 959, 965 (9th Cir. 1989) (specifying the factors).

To establish that she had no reason to know, the alleged innocent spouse must establish that: (1) When she signed the return, she had no knowledge or reason to know that her spouse would not pay the tax reported on the return; and (2) it was reasonable for her to believe that the nonrequesting spouse would pay the tax shown as due. Collier v. Commissioner, T.C. Memo. 2002-144.

In making his determination to deny relief to petitioner, respondent noted that: (1) The family's sole checking account was in petitioner's name; (2) the IRS collected a 1988 tax debt in 1994 through a levy; and (3) after engaging a law firm to prepare the returns, petitioner signed the 1992 and 1995 returns in October 1998 with the returns showing balances due. Petitioner on the other hand argues that Mr. Martinez handled the family's finances and that he was not forthcoming with her. For example, he did not tell her he had quit his job, he did not seek reimbursement for medical expenses, and he hid from her correspondence from the IRS. She said that she thought the checking account had sufficient funds and that he would pay the balances due. She added that she believes diabetes contributed to his mental state.

Because we find that petitioner is a smart and responsible person, and given her situation, we find that her lack of knowledge is improbable. We believe that sometime after Mr. Martinez became ill in 1985, she assumed sufficient responsibility over their delinquent tax filings so as to encourage seeking help from a law firm, which they did in 1996. We find that Mr. Martinez lack of a separate or joint bank account suggests a certain degree of evasiveness on his part, and his deteriorating medical condition probably required her greater involvement in the household finances. In this regard, the awareness petitioner gained from the 1994 tax levy is significant. If simple compliance was the only objective, an ordinary tax preparation firm would have sufficed. We suspect that they specifically sought a law firm because petitioner knew that they had unfiled returns and unpaid balances from 1992 to 1995, and she wanted legal advice on how best to resolve the situation.

Even if we were to assume that petitioner was unaware until October 1998, by the time she or they sat down in the law firm's conference room and the attorney presented them with up to five delinquent returns (1992 to 1997) with four showing a balance due (1996 showed a refund), we find it is likely that petitioner and Mr. Martinez had had several conversations discussing how they would pay the balances due that then aggregated to several thousands of dollars. Moreover, even if the above speculation is wrong and petitioner was still unaware, we find that it strains credibility to believe that, at the time petitioner signed the 1992 and 1995 returns on October 30, 1998, she did not know that the returns would not include payment checks. The checking account was solely in her name. Given all the opportunities that petitioner had to discover the problem, if she was still unaware, then we would have to apply our consistent holding that Congress designed the provisions for relief from joint and several liability "'to protect the innocent, not the intentionally ignorant'". Morello v. Commissioner, T.C. Memo. 2004-181 (quoting Dickey v. Commissioner, T.C. Memo. 1985-478).

One last comment on petitioner's knowledge. The main reason for the balances due for 1992 to 2000 was that petitioner had her employer withhold too little tax from her paycheck. To cause this result petitioner must have claimed too many withholding allowances at work. We speculate that petitioner maintained this situation year after year because it helped pay her family's daily living expenses, especially after Mr. Martinez stopped working. Significantly, only petitioner, and not Mr. Martinez, could have filed the withholding certificate with her employer.

For all the foregoing reasons, we find that petitioner knew or had reason to know that she and Mr. Martinez would not pay the balances due when they filed the 1992 and 1995 tax returns. In summary, this test strongly disfavors relief.

Regarding the significance of this factor, the prior revenue procedure stated that the knowledge factor was "an extremely strong factor" in determining whether to grant relief. Rev. Proc. 2000-15, sec. 4.03(2)(b), 2000-1 at 449. However, in promulgating the new revenue procedure the Commissioner explicitly downgraded the factor's significance to one of the many criteria where "No single factor [is] determinative of whether to grant equitable relief in any particular case." Rev. Proc. 2003-61, secs. 3.03, 4.03, 2003-2 C.B. 297-298. Even under the former, stronger weighting, we have granted relief where we found that "'the factors in favor of equitable relief are unusually strong, it may be appropriate to grant relief under section 6015(f) in limited situations where the requesting spouse knew or had reason to know that the liability would not be paid'". Washington v. Commissioner, 120 T.C. at 151.

4. Legal Obligation

This factor comes into effect only when "the nonrequesting spouse has a legal obligation to pay the outstanding income tax liability pursuant to a divorce decree or agreement." Rev. Proc. 2003-61, sec. 4.03(2)(iv). This factor is inapplicable because the Martinezes did not divorce.

5. Significant Benefit

In Washington v. Commissioner, supra at 151-152, we held that the requesting spouse did not significantly benefit from the unpaid taxes because during and after the marriage she did not receive expensive jewelry, drive a luxurious car, wear designer clothes, take expensive vacations, own a home, receive assets from the marriage, or own the automobile that she drove.

Petitioner suffered from a similar lack of benefits. During and after the marriage she did not receive jewelry, luxury cars, or designer clothes. She did not receive and does not own a home, and does not own the car she drives. Further, she drained her savings and retirement assets trying to support her family and help her dying husband, and she incurred costs in moving to Southern California after his death. We hold this factor significantly favors relief.

6. Compliance With Federal Tax Laws

With respect to compliance with Federal tax laws, the Martinezes filed their 1988 return on time, but respondent stated they filed their 1999 return "a few months late" (in September 2000 with no information on extensions). However, since Mr. Martinez's death, the Appeals officer noted that petitioner has been in compliance. This factor is neutral or in favor of relief.

7. Abuse

Because we find that petitioner was not abused, this factor is neutral.

8. Mental or Physical Health

We believe petitioner was under great mental strain dealing with her long-suffering and dying husband while supporting her family solely on her modest wages. This factor strongly favors relief.

9. Other Factors

Rev. Proc. 2003-61, sec. 4.03(2), states that the Commissioner will "consider and weigh all relevant factors, regardless of whether the factor is listed in this section 4.03." We find four additional factors merit consideration.

First, with respect to the 1995 tax return, on the basis of the requirement of section 72(t)(1), petitioner's attorney included a 10-percent additional tax of $2,181 because of the Martinezes' premature retirement plan distributions totaling $21,809. Mr. Martinez's withdrawal of $18,840 accounted for $1,884 of the additional tax. The record does not indicate that petitioner, her attorney, or respondent considered section 72(t)(2)(A)(iii), which provides an exception to the additional tax if the distribution was attributable to the employee's being disabled within the meaning of section 72(m)(7). Section 72(m)(7) provides that "an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determined physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration." See sec. 1.72-17(f)(1), Income Tax Regs.; see also Dwyer v. Commissioner, 106 T.C. 337, 340 (1996). Because Mr. Martinez stopped working permanently in 1995 and because his illness was progressively degenerative and ultimately resulted in his death, he was a good candidate for section 72(t)(2)(A)(iii) relief. Consequently, if one were to reduce the original 1995 balance due by $1,884 to remove the 10-percent additional tax attributable to Mr. Martinez and remove the related accumulation of interest and the other additions to tax (for late filing and late payment), the result would be that respondent's application of petitioner's payments would have paid the entire remaining liability for 1995.

Likewise, we consider the possibility that in the years after Mr. Martinez stopped working in 1995 and until his death in 2001 the couple might have been able to reduce their balances due by itemizing their deductions instead of claiming the standard deduction. We observe that because Mr. Martinez likely had high medical expenses as a result of his illness, and the couple's income was low because petitioner's earnings were their only income, they might have qualified for a medical expense deduction. We do not know whether they owned a home for which they paid mortgage interest and property taxes. Our point in analyzing the possible itemized deductions and the exception to the 10-percent additional tax is that we need to consider that the liabilities may have been higher than necessary; i.e., that there was doubt as to liability.

The second supplemental consideration is petitioner's installment payments. Petitioner has paid $35,650 or 73 percent of the entire liability for 1992 through 2000, which includes a portion that was attributable to her deceased husband. We suspect that in 2001, when petitioner first proposed an offer-in-compromise for $1,000, respondent would have accepted an offer-in-compromise or other collection alternative that would yield 73 cents on the dollar, especially considering Mr. Martinez's then-recent death in April 2001. Additionally, by paying 73 percent petitioner has already paid an amount that in one analytical sense, reimburses the Treasury in full for the unpaid taxes and the interest. In other words, from one viewpoint, the Government has received back its entire principal and the time value of money for all years 1992-2000. This factor is not dispositive, but it indicates petitioner's good faith effort to resolve the problem.

We noted earlier that respondent's application of payments seems haphazard. Because petitioner's payments under the installment agreement were voluntary, she had the right to direct the application as she chose. See Muntwyler v. United States, 703 F.2d 1030, 1032 (7th Cir. 1983). However, because petitioner did not instruct the IRS where to apply her payments, the option is moot now because "'In the absence of a designation, it is well settled that the IRS enjoys the right to apply payments in the manner it chooses.'" Isley v. United States, 272 Fed. Appx. 640, 641 (9th Cir. 2008) (quoting United States v. Plummer 174 Bankr. 284, 286 (Bankr. C.D. Cal. 1992)).

Nonetheless, in reexamining the table supra page 5, we note that even accepting respondent's application as given, petitioner has paid more than her share of the liabilities for 1992 and 1995. Further, if one were to double petitioner's share as an approximation to incorporate additions to tax and accrued interest, the table still would show that petitioner is within $153 of fully paying the doubled amount for 1992 and has overpaid for 1995. 3

The third additional factor is that the 1992 and 1995 liabilities are old, particularly the 1992 liability, where the IRS has strangely applied less of the payments. We would be remiss in an equity situation not to point out that the debt has already aged 16 years and is imposed on a widow and petitioner has made a good faith effort to repay the obligation.

Fourth, a review of the conference report accompanying the enactment of section 6015 shows that the conferees agreed to include the provision in the House bill "expanding the circumstances in which innocent spouse relief is available" and that Congress enacted section 6015 as part of the broader Title III, "Taxpayer Protection and Rights". H. Conf. Rept. 105-599, at 238, 249 (1998), 1998-3 C.B. 747, 992, 1005. Thus, to the extent the legislative history is significant here, we find that the history favors an expansive interpretation of relief.

For the foregoing reasons, the other factors strongly favor relief.

D. Summary of the Factors

To aid the reader we summarize below the results of the above analysis:

1. Marital status --favors relief.

2. Economic hardship --neutral.

3. Knowledge or reason to know --strongly disfavors relief.

4. Legal obligation --inapplicable or neutral.

5. Significant benefit --significantly favors relief.

6. Compliance with Federal tax laws --neutral or favors relief.

7. Abuse --neutral

8. Mental health --strongly favors relief

9. Other factors --strongly favor relief.

Accordingly, one factor strongly disfavor relief, three or four are neutral, and four or five favor or strongly favor relief. "No single factor [is] determinative of whether to grant equitable relief in any particular case." Rev. Proc. 2003-61, sec. 4.03.

This case is admittedly a close call. In favor of denying relief, more than half of the couple's unpaid balances in 1992 and 1995 were attributable to petitioner's underwithholdings. Also, after experiencing the 1994 levy petitioner knew, or had reason to know there was a problem at the time of engaging a law firm in 1996, or she knew or had reason to know that Mr. Martinez was not going to pay the balances due for the 1992 and 1995 returns at the time she signed the returns on October 30, 1998. The checking account was in her name. Further, petitioner has not met her burden of proving that a denial of relief will cause her to suffer economic hardship.

In favor of granting relief, we are particularly compelled by the following factors. Petitioner remained loyal to Mr. Martinez throughout his illness, and after discovering the tax problem she promptly engaged a law firm to resolve the matter. Petitioner has made an enormous effort through her installment payments to satisfy the debt. From one point of view, the amount that respondent has applied to 1992 and 1995 is already sufficient for petitioner to have paid her share of the debt for 1992 and 1995, or alternatively, petitioner has already paid an amount in total that is sufficient to pay all of the principal and interest from 1992 to 2000, including the amounts attributable to Mr. Martinez. Moreover, petitioner accomplished these payments on modest income. The underlying tax liabilities may have been overstated because of the medical exception to the 10-percent additional tax on premature retirement distributions, and perhaps because of the couple's failure to itemize their deductions. Though she did not prove economic hardship, petitioner's financial situation is clearly not strong. She lives in expensive California, and at least since 1992 she has lived only a modest lifestyle. She exhausted her savings and her retirement assets caring for her children and Mr. Martinez, and she has left herself in a precarious financial position. The 1992 debt is 16 years old and is imposed on a widow who in good faith has done her best to meet her tax obligations.

Balancing the equities, on the basis of the foregoing analysis we hold that for 1992 and 1995 the factors in favor of relief outweigh the factors disfavoring relief, with no single factor being determinative. We deny relief for years 1998 and 1999 because petitioner's request for relief failed at the threshold test of attribution.
Conclusion

We end by noting petitioner and her situation are highly sympathetic and credible. Because we grant relief for 1992 and 1995 and deny relief for 1998 and 1999, petitioner will still owe respondent around $12,000 for debts from long ago. 4 If petitioner is truly suffering from economic hardship, or is unable to pay the debt, then she may want to approach the IRS with a request for relief under a different principle, such as an offer-in-compromise or other collection alternative, where the parties can further explore petitioner's ability to pay on the basis of her new financial situation.

To reflect our disposition of the issues,

An appropriate decision will be entered.
1 The death certificate shows that his immediate causes of death were cardiorespiratory arrest and a ruptured aortic aneurysm, with contributing factors of diabetes mellitus and renal insufficiency.2 The later revenue procedure applies to requests for relief, such as this one, that taxpayers file on or after Nov. 1, 2003, or those pending on Nov. 1, 2003, for which no preliminary determination letter has been issued as of that date. Rev. Proc. 2003-61, sec. 7, 2003-2 C.B. 296, 299.3 For 1992 petitioner's share of the balance due was $1,680. Multiplying that by 2 as an approximation for additions and interest yields $3,360, minus her payments applied of $3,207, results in a shortfall of $153.4 By the time the parties receive this opinion, the $10,847 (= $4,882 + $5,965) aggregate balance for 1998 and 1999 as of April 17, 2007, will have grown with interest to a figure around $12,000.

Section 7122(f)[(g)] deals with frivolous submissions of an Offer in Compromise and provides that notwithstanding any other provision of section 7122, if the Secretary determines that any portion of an application for an offer-in-compromise or installment agreement submitted under section 7122 or section 6159 meets the requirement of clause (i) or (ii) of section 6702(b)(2)(A), then the Secretary may treat such portion as if it were never submitted and such portion shall not be subject to any further administrative or judicial review.

In short, an OIC will not be accepted if it is a frivolous submission. Just as important is the fact that the penalty for a frivolous submission is $5,000.


SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.
6702(a) CIVIL PENALTY FOR FRIVOLOUS TAX RETURNS. --A person shall pay a penalty of $5,000 if --

6702(a)(1) such person files what purports to be a return of a tax imposed by this title but which --

6702(a)(1)(A) does not contain information on which the substantial correctness of the self-assessment may be judged, or

6702(a)(1)(B) contains information that on its face indicates that the self-assessment is substantially incorrect, and

6702(a)(2) the conduct referred to in paragraph (1) --

6702(a)(2)(A) is based on a position which the Secretary has identified as frivolous under subsection (c), or

6702(a)(2)(B) reflects a desire to delay or impede the administration of Federal tax laws.

6702(b) CIVIL PENALTY FOR SPECIFIED FRIVOLOUS SUBMISSIONS. --

6702(b)(1) IMPOSITION OF PENALTY. --Except as provided in paragraph (3), any person who submits a specified frivolous submission shall pay a penalty of $5,000.

6702(b)(2) SPECIFIED FRIVOLOUS SUBMISSION. --For purposes of this section --

6702(b)(2)(A) SPECIFIED FRIVOLOUS SUBMISSION. --The term "specified frivolous submission" means a specified submission if any portion of such submission --

6702(b)(2)(A)(i) is based on a position which the Secretary has identified as frivolous under subsection (c), or

6702(b)(2)(A)(ii) reflects a desire to delay or impede the administration of Federal tax laws.

6702(b)(2)(B) SPECIFIED SUBMISSION. --The term "specified submission" means --

6702(b)(2)(B)(i) a request for a hearing under --

6702(b)(2)(B)(i)(I) section 6320 (relating to notice and opportunity for hearing upon filing of notice of lien), or

6702(b)(2)(B)(i)(II) section 6330 (relating to notice and opportunity for hearing before levy), and

6702(b)(2)(B)(ii) an application under --

6702(b)(2)(B)(ii)(I) section 6159 (relating to agreements for payment of tax liability in installments),

6702(b)(2)(B)(ii)(II) section 7122 (relating to compromises), or

6702(b)(2)(B)(ii)(III) section 7811 (relating to taxpayer assistance orders).

6702(b)(3) OPPORTUNITY TO WITHDRAW SUBMISSION. --If the Secretary provides a person with notice that a submission is a specified frivolous submission and such person withdraws such submission within 30 days after such notice, the penalty imposed under paragraph (1) shall not apply with respect to such submission.

6702(c) LISTING OF FRIVOLOUS POSITIONS. --The Secretary shall prescribe (and periodically revise) a list of positions which the Secretary has identified as being frivolous for purposes of this subsection. The Secretary shall not include in such list any position that the Secretary determines meets the requirement of section 6662(d)(2)(B)(ii)(II).

6702(d) REDUCTION OF PENALTY. --The Secretary may reduce the amount of any penalty imposed under this section if the Secretary determines that such reduction would promote compliance with and administration of the Federal tax laws.

6702(e) PENALTIES IN ADDITION TO OTHER PENALTIES. --The penalties imposed by this section shall be in addition to any other penalty provided by law.

Section 6334 of the Code limites the mount the IRS can levy from any taxpayer. Section 6343 of the Code prohibits any levy if it creates an "economic hardship."

Notice 2008-114December 22, 2008Code Sec. 6334Levies : Exempt property : Tables : 2009 .Tables for Figuring Amount Exempt From Levy on Wages, Salary, and Other IncomeNotice 2008-1141. Table for Figuring Amount Exempt From Levy on Wages, Salary, and Other Income (Forms 668-W(c), 668-W(c)(DO), 668-W(ICS)) 2009Publication 1494, shown below, provides tables that show the amount of an individual's income that is exempt from a notice of levy used to collect delinquent tax in 2009.(Amounts are for each pay period.) __________________________________________________________________________________ Filing Status: Single __________________________________________________________________________________ Number of Exemptions Claimed on Statement _______________________________________________________________________Pay Period 1 2 3 4 5 6 More Than 6 __________________________________________________________________________________ Daily 35.96 50.00 64.04 78.08 92.12 106.1521.92 plus 14.04 for each exemption __________________________________________________________________________________ Weekly 179.81 250.00 320.19 390.38 460.58 530.77 109.62 plus 70.19 for each exemption __________________________________________________________________________________ Biweekly 359.62 500.00 640.38 780.77 921.15 1061.54 219.23 plus 140.38 for each exemption __________________________________________________________________________________ Semi 389.58 541.67 693.75 845.83 997.92 1150.00 237.50 monthly plus 152.08 for each exemption __________________________________________________________________________________ Monthly 779.17 1083.33 1387.50 1691.67 1995.83 2300.00 475.00 plus 304.17 for each exemption __________________________________________________________________________________
__________________________________________________________________________________ Filing Status: Unmarried Head of Household __________________________________________________________________________________ Number of Exemptions Claimed on Statement _______________________________________________________________________Pay Period 1 2 3 4 5 6 More Than 6 __________________________________________________________________________________ Daily 46.15 60.19 74.23 88.27 102.31 116.3532.12 plus 14.04 for each exemption __________________________________________________________________________________ Weekly 230.77 300.96 371.15 441.35 511.54 581.73 160.58 plus 70.19 for each exemption __________________________________________________________________________________ Biweekly 461.54 601.92 742.31 882.69 1023.08 1163.46 321.15 plus 140.38 for each exemption __________________________________________________________________________________ Semi 500.00 652.08 804.17 956.25 1108.33 1260.42 347.92 monthly plus 152.08 for each exemption __________________________________________________________________________________ Monthly 1000.00 1304.17 1608.33 1912.50 2216.67 2520.83 695.83 plus 304.17 for each exemption __________________________________________________________________________________
__________________________________________________________________________________ Filing Status: Married Filing Joint Return (and Qualifying Widow(er)s) __________________________________________________________________________________ Number of Exemptions Claimed on Statement _______________________________________________________________________Pay Period 1 2 3 4 5 6 More Than 6 __________________________________________________________________________________ Daily 57.88 71.92 85.96 100.00 114.04 128.0843.85 plus 14.04 for each exemption __________________________________________________________________________________ Weekly 289.42 359.62 429.81 500.00 570.19 640.38 219.23 plus 70.19 for each exemption __________________________________________________________________________________ Biweekly 578.85 719.23 859.62 1000.00 1140.38 1280.77 438.46 plus 140.38 for each exemption __________________________________________________________________________________ Semi 627.08 779.17 931.25 1083.33 1235.42 1387.50 475.00 monthly plus 152.08 for each exemption __________________________________________________________________________________ Monthly 1254.17 1558.33 1862.50 2166.67 2470.83 2775.00 950.00 plus 304.17 for each exemption __________________________________________________________________________________
__________________________________________________________________________________ Filing Status: Married Filing Separate Return __________________________________________________________________________________ Number of Exemptions Claimed on Statement _______________________________________________________________________Pay Period 1 2 3 4 5 6 More Than 6 __________________________________________________________________________________ Daily 35.96 50.00 64.04 78.08 92.12 106.1521.92 plus 14.04 for each exemption __________________________________________________________________________________ Weekly 179.81 250.00 320.19 390.38 460.58 530.77 109.62 plus 70.19 for each exemption __________________________________________________________________________________ Biweekly 359.62 500.00 640.38 780.77 921.15 1061.54 219.23 plus 140.38 for each exemption __________________________________________________________________________________ Semi 389.58 541.67 693.75 845.83 997.92 1150.00 237.50 monthly plus 152.08 for each exemption __________________________________________________________________________________ Monthly 779.17 1083.33 1387.50 1691.67 1995.83 2300.00 475.00 plus 304.17 for each exemption __________________________________________________________________________________
2. Table for Figuring Additional Exempt Amount for Taxpayers at Least 65 Years Old and/or Blind
Additional Exempt Amount
_________________________________________________________________________________Filing Status * Daily Weekly Biweekly Semimonthly Monthly _________________________________________________________________________________Single or Head 1 5.38 26.92 53.85 58.33 116.67 of Household 2 10.77 53.85 107.69 116.67 233.33 _________________________________________________________________________________Any Other 1 4.23 21.15 42.31 45.83 91.67 Filing Status 2 8.46 42.31 84.62 91.67 183.33 3 12.69 63.46 126.92 137.50 275.00 4 16.92 84.62 169.23 183.33 366.67 _________________________________________________________________________________ * ADDITIONAL STANDARD DEDUCTION claimed on Parts 3, 4, & 5 of levy.
Examples
These tables show the amount exempt from a levy on wages, salary, and other income. For example:1. A single taxpayer who is paid weekly and claims three exemptions (including one for the taxpayer) has $320.19 exempt from levy.2. If the taxpayer in number 1 is over 65 and writes 1 in the ADDITIONAL STANDARD DEDUCTION space on Parts 3, 4, & 5 of the levy, $347.11 is exempt from this levy ($320.19 plus $26.92).3. A taxpayer who is married, files jointly, is paid biweekly, and claims two exemptions (including one for the taxpayer) has $719.23 exempt from levy.4. If the taxpayer in number 3 is over 65 and has a spouse who is blind, this taxpayer should write 2 in the ADDITIONAL STANDARD DEDUCTION space on Parts 3, 4, & 5 of the levy. Then, $803.85 is exempt from this levy ($719.23 plus $84.62).SEC. 6334. PROPERTY EXEMPT FROM LEVY.
6334(a) ENUMERATION. --There shall be exempt from levy --

6334(a)(1) WEARING APPAREL AND SCHOOL BOOKS. --Such items of wearing apparel and such school books as are necessary for the taxpayer or for members of his family;

6334(a)(2) FUEL, PROVISIONS, FURNITURE, AND PERSONAL EFFECTS. --So much of the fuel, provisions, furniture, and personal effects in the taxpayer's household, and of the arms for personal use, livestock, and poultry of the taxpayer, as does not exceed $6,250 in value;

6334(a)(3) BOOKS AND TOOLS OF A TRADE, BUSINESS, OR PROFESSION. --So many of the books and tools necessary for the trade, business, or profession of the taxpayer as do not exceed in the aggregate $3,125 in value.

6334(a)(4) UNEMPLOYMENT BENEFITS. --Any amount payable to an individual with respect to his unemployment (including any portion thereof payable with respect to dependents) under an unemployment compensation law of the United States, of any State, or of the District of Columbia or of the Commonwealth of Puerto Rico.

6334(a)(5) UNDELIVERED MAIL. --Mail, addressed to any person, which has not been delivered to the addressee.

6334(a)(6) CERTAIN ANNUITY AND PENSION PAYMENTS. --Annuity or pension payments under the Railroad Retirement Act, benefits under the Railroad Unemployment Insurance Act, special pension payments received by a person whose name has been entered on the Army, Navy, Air Force, and Coast Guard Medal of Honor roll (38 U. S. C. 562), and annuities based on retired or retainer pay under chapter 73 of title 10 of the United States Code.

6334(a)(7) WORKMEN'S COMPENSATION. --Any amount payable to an individual as workmen's compensation (including any portion thereof payable with respect to dependents) under a workmen's compensation law of the United States, any State, the District of Columbia, or the Commonwealth of Puerto Rico.

6334(a)(8) JUDGMENTS FOR SUPPORT OF MINOR CHILDREN. --If the taxpayer is required by judgment of a court of competent jurisdiction, entered prior to the date of levy, to contribute to the support of his minor children, so much of his salary, wages, or other income as is necessary to comply with such judgment.

6334(a)(9) MINIMUM EXEMPTION FOR WAGES, SALARY, AND OTHER INCOME. --Any amount payable to or received by an individual as wages or salary for personal services, or as income derived from other sources, during any period, to the extent that the total of such amounts payable to or received by him during such period does not exceed the applicable exempt amount determined under subsection (d).

6334(a)(10) CERTAIN SERVICE-CONNECTED DISABILITY PAYMENTS. --Any amount payable to an individual as a service-connected (within the meaning of section 101(16) of title 38, United States Code) disability benefit under --

6334(a)(10)(A) subchapter II, III, IV, V, or VI of chapter 11 of such title 38, or

6334(a)(10)(B) chapter 13, 21, 23, 31, 32, 34, 35, 37, or 39 of such title 38.

6334(a)(11) CERTAIN PUBLIC ASSISTANCE PAYMENTS. --Any amount payable to an individual as a recipient of public assistance under --

6334(a)(11)(A) title IV or title XVI (relating to supplemental security income for the aged, blind, and disabled) of the Social Security Act, or

6334(a)(11)(B) State or local government public assistance or public welfare programs for which eligibility is determined by a needs or income test.

6334(a)(12) ASSISTANCE UNDER JOB TRAINING PARTNERSHIP ACT. --Any amount payable to a participant under the Job Training Partnership Act (29 U.S.C. 1501 et seq.) from funds appropriated pursuant to such Act.

6334(a)(13) RESIDENCES EXEMPT IN SMALL DEFICIENCY CASES AND PRINCIPAL RESIDENCES AND CERTAIN BUSINESS ASSETS EXEMPT IN ABSENCE OF CERTAIN APPROVAL OR JEOPARDY. --

6334(a)(13)(A) RESIDENCES IN SMALL DEFICIENCY CASES. --If the amount of the levy does not exceed $5,000 --

6334(a)(13)(A)(i) any real property used as a residence by the taxpayer; or

6334(a)(13)(A)(ii) any real property of the taxpayer (other than real property which is rented) used by any other individual as a residence.

6334(a)(13)(B) PRINCIPAL RESIDENCES AND CERTAIN BUSINESS ASSETS. --Except to the extent provided in subsection (e) --

6334(a)(13)(B)(i) the principal residence of the taxpayer (within the meaning of section 121); and

6334(a)(13)(B)(ii) tangible personal property or real property (other than real property which is rented) used in the trade or business of an individual taxpayer.

6334(b) APPRAISAL. --The officer seizing property of the type described in subsection (a) shall appraise and set aside to the owner the amount of such property declared to be exempt. If the taxpayer objects at the time of the seizure to the valuation fixed by the officer making the seizure, the Secretary shall summon three disinterested individuals who shall make the valuation.

6334(c) NO OTHER PROPERTY EXEMPT. --Notwithstanding any other law of the United States (including section 207 of the Social Security Act), no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a).

6334(d) EXEMPT AMOUNT OF WAGES, SALARY, OR OTHER INCOME. --

6334(d)(1) INDIVIDUALS ON WEEKLY BASIS. --In the case of an individual who is paid or receives all of his wages, salary, and other income on a weekly basis, the amount of the wages, salary, and other income payable to or received by him during any week which is exempt from levy under subsection (a)(9) shall be the exempt amount.

6334(d)(2) EXEMPT AMOUNT. --For purposes of paragraph (1), the term "exempt amount" means an amount equal to --

6334(d)(2)(A) the sum of --

6334(d)(2)(A)(i) the standard deduction, and

6334(d)(2)(A)(ii) the aggregate amount of the deductions for personal exemptions allowed the taxpayer under section 151 in the taxable year in which such levy occurs, divided by

6334(d)(2)(B) 52.

Unless the taxpayer submits to the Secretary a written and properly verified statement specifying the facts necessary to determine the proper amount under subparagraph (A), subparagraph (A) shall be applied as if the taxpayer were a married individual filing a separate return with only 1 personal exemption.

6334(d)(3) INDIVIDUALS ON BASIS OTHER THAN WEEKLY. --In the case of any individual not described in paragraph (1), the amount of the wages, salary, and other income payable to or received by him during any applicable pay period or other fiscal period (as determined under regulations prescribed by the Secretary) which is exempt from levy under subsection (a)(9) shall be an amount (determined under such regulations) which as nearly as possible will result in the same total exemption from levy for such individual over a period of time as he would have under paragraph (1) if (during such period of time) he were paid or received such wages, salary, and other income on a regular weekly basis.

6334(e) LEVY ALLOWED ON PRINCIPAL RESIDENCES AND CERTAIN BUSINESS ASSETS IN CERTAIN CIRCUMSTANCES. --

6334(e)(1) PRINCIPAL RESIDENCES. --

6334(e)(1)(A) APPROVAL REQUIRED. --A principal residence shall not be exempt from levy if a judge or magistrate of a district court of the United States approves (in writing) the levy of such residence.

6334(e)(1)(B) JURISDICTION. --The district courts of the United States shall have exclusive jurisdiction to approve a levy under subparagraph (A).

6334(e)(2) CERTAIN BUSINESS ASSETS. --Property (other than a principal residence) described in subsection (a)(13)(B) shall not be exempt from levy if --

6334(e)(2)(A) a district director or assistant district director of the Internal Revenue Service personally approves (in writing) the levy of such property; or

6334(e)(2)(B) the Secretary finds that the collection of tax is in jeopardy.

An official may not approve a levy under subparagraph (A) unless the official determines that the taxpayer's other assets subject to collection are insufficient to pay the amount due, together with expenses of the proceedings.

6334(f) LEVY ALLOWED ON CERTAIN SPECIFIED PAYMENTS. --Any payment described in subparagraph (B) or (C) of section 6331(h)(2) shall not be exempt from levy if the Secretary approves the levy thereon under section 6331(h).

6334(g) INFLATION ADJUSTMENT. --

6334(g)(1) IN GENERAL. --In the case of any calendar year beginning after 1999, each dollar amount referred to in paragraphs (2) and (3) of subsection (a) shall be increased by an amount equal to --

6334(g)(1)(A) such dollar amount, multiplied by

6334(g)(1)(B) the cost-of-living adjustment determined under section 1(f)(3) for such calendar year, by substituting "calendar year 1998" for "calendar year 1992" in subparagraph (B) thereof.

6334(g)(2) ROUNDING. --If any dollar amount after being increased under paragraph (1) is not a multiple of $10, such dollar amount shall be rounded to the nearest multiple of $10.

Treasury Decision 8829, filed with the Federal Register on July 19, 1999., I.R.B. 1999-32, 235, provided termporary t Offer in Compromise Regulations

These regulations have important historical significance

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains temporary regulations that provide additional guidance regarding the compromise of internal revenue taxes. The temporary regulations reflect changes to the law made by the Internal Revenue Service Restructuring and Reform Act of 1998 and the Taxpayer Bill of Rights II. The text of these temporary regulations serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.

DATES: Effective date. These temporary regulations are effective July 21, 1999.


Applicability date. For dates of applicability, see §301.7122-1T(j) of these regulations.


FOR FURTHER INFORMATION CONTACT: Carol A. Campbell, (202) 622-3620 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background


This document contains temporary regulations amending the Procedure and Administration Regulations (26 CFR part 301) under section 7122 of the Internal Revenue Code (Code). The regulations reflect the amendment of section 7122 by section 3462 of the Internal Revenue Service Restructuring and Reform Act of 1998 ("RRA 1998") Public Law 105-206, (112 Stat. 685, 764) and by section 503 of the Taxpayer Bill of Rights II Public Law 104-168, (110 Stat. 1452, 1461).


As amended by RRA 1998, section 7122 provides that the Secretary will develop guidelines to determine when an offer to compromise is adequate and should be accepted to resolve a dispute. The legislative history accompanying RRA 1998 explains that Congress intended that factors such as equity, hardship, and public policy be evaluated in the compromise of individual tax liabilities, in certain circumstances, if such consideration would promote effective tax administration. H. Conf. Rep. 599, 105th Cong., 2d Sess. 289 (1998).


The current regulations under Treasury regulation §301.7122-1 permit the compromise of cases on only the grounds of doubt as to collectibility, doubt as to liability, or both. These regulations are being removed. Like the current regulations, the temporary regulations provide for compromise based on doubt as to liability and doubt as to collectibility; however, they also provide for compromise based upon specific hardship and/or equitable criteria if such a compromise would promote effective tax administration. The inclusion in these regulations of a standard that will allow compromise on grounds other than doubt as to liability or doubt as to collectibility represents a significant change in the IRS' exercise of compromise authority.


Section 7122 of the Code provides broad authority to the Secretary to compromise any case arising under the internal revenue laws, as long as the case has not been referred to the Department of Justice for prosecution or defense. Although the statutory language of Section 7122 does not explicitly place limits on the Secretary's authority to compromise, opinions of the Attorney General and the regulations issued under section 7122 prior to RRA 1998 authorized the Secretary to compromise a liability under the revenue laws only when there was doubt as to liability (uncertainty as to the existence or amount of the tax obligation) or doubt as to collectibility (uncertainty as to the taxpayer's ability to pay). The opinion of the Attorney General most often cited as the principal source of these limitations is the 1933 opinion of Attorney General Cummings that was issued in response to an inquiry from then Acting Secretary of the Treasury Acheson.


In requesting an opinion from the Attorney General, Acting Secretary of the Treasury Acheson expressed concern that the country was trying to recover from the depression. He suggested that the public interest required compromise of tax claims where collection of the tax would "destroy a business, ruin a tax producer, throw men out of employment, or result in the impoverishment of widows or minor children of a deceased taxpayer." The Secretary expressed the belief that in ordinary times, compromise of cases on public policy grounds should be rare but that, in light of the current state of the country, public policy should play a significantly greater role. Expressing the belief that it was more important that "the business of the taxpayer be preserved and not destroyed," Acting Secretary Acheson suggested that cases should be compromised where the taxpayer is insolvent, even though the tax is fully collectible, and that penalties and certain interest charges should be "compromisable wherever justice, equity, or public policy seems to justify the compromise...." Letter from Treasury Department, XIII-47-7137 (July 31, 1933).


Attorney General Cummings replied that "[t]here is much to be said for the proposition that a liberal rule should exist, but my opinion is that if such a course is to be taken it should be at the instance of Congress. I conclude that where liability has been established by a valid judgment or is certain, and there is no doubt as to the ability of the Government to collect, there is no room for 'mutual concessions,' and therefore no basis for a 'compromise.' " Op. Atty. Gen. 6, XIII-47-7138 (October 24, 1933). See also Op. Atty. Gen. 7, XIII-47-7140 (October 2, 1934), wherein Attorney General Cummings stated that "[t]here appears to be no statutory authority to compromise solely upon the ground that a hard case is presented, which excites sympathy or is merely appealing from the standpoint of equity, but the power to compromise clearly authorizes the settlement of any case about which uncertainty exists as to liability or collection."


Although the 1933 opinion of Attorney General Cummings is the most often cited opinion regarding the limits of the IRS' compromise authority (prior to RRA 1998), the conclusion he reached mirrored conclusions reached by a number of his predecessors. Thus, since 1868, a number of Attorneys General opined that when liability is not at issue, the Secretary's compromise authority permitted compromise only when "the full amount of the debt" could not be collected. See, e.g., 12 Op. Atty. Gen. 543 (1868); 16 Op. Atty. Gen. 617 (1879) (the Secretary's authority to compromise does not permit the "voluntary relinquishment" of any part of a lawfully assessed tax from a solvent person or corporation).


Following the issuance of Attorney General Cummings' 1933 opinion, Commissioner Helvering established a policy that IRS tax collectors should make every endeavor to secure offers that represent the taxpayer's "maximum capacity to pay." Commissioner's Statement of Policy with Respect to the Compromise of Taxes, Interest, and Penalties, July 2, 1934. Commissioner Helvering recognized that the Attorney General's opinion did not specify or quantify the amount of doubt necessary to compromise, but concluded that "... the Treasury Department does not propose to compromise when there is merely the possibility of doubt. The doubt as to liability or collectibility must be supported by evidence and must be substantial in character, and when such doubt exists, the amount acceptable will depend upon the degree of doubt found in the particular case." Id. Implementing the policy established by Commissioner Helvering, the IRS concluded that an offer premised upon doubt as to collectibility should be accepted only when the amount offered represented the maximum amount the taxpayer could pay, taking into account net equity in assets and both current and future income.


The interpretation of section 7122 adopted by Attorney General Cummings (and reflected in Treasury reg. §301.7122-1(a) ), together with the "maximum capacity to pay" policy established by Commissioner Helvering, have been the fundamental guiding principles for IRS offer in compromise programs for the past 65 years. From the 1930's to the early 1990's, offers to compromise were not widely used to resolve tax cases. In the early 1990s, however, the IRS determined that expanded use of offers to compromise could contribute to more effective tax administration in two important respects. First, the IRS determined that compromise could be used as a technique to enhance overall compliance by providing taxpayers with a reasonable avenue to resolve past difficulties. Second, the IRS determined that it should make more effective use of offers to compromise to help manage the inventory of delinquent tax accounts. Accordingly, while still operating within the basic legal and policy guidelines established in the 1930's, the IRS initiated two significant changes intended to enhance the compromise program.


In 1992, the IRS adopted a new compromise policy and issued revised compromise procedures. The policy provides that an offer to compromise will be accepted when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. As set forth in the new policy statement, the goal of the compromise program is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the government while providing taxpayers with a fresh start toward future voluntary compliance. Policy Statement, P-5-100. In administering its policies under the offer program, the threshold question of "doubt as to liability or doubt as to collectibility" set forth in the regulations constituted a legal requirement that must be followed; once that threshold was met, however, the IRS could legally accept less than the taxpayer's maximum capacity to pay. References in the offer procedures to "maximizing collection" and "maximum capacity to pay" were replaced with "reasonably reflects collection potential." Id.


In determining whether an offer reasonably reflects collection potential, the IRS takes into consideration amounts that might be collected from (1) the taxpayer's assets, (2) the taxpayer's present and projected future income, and (3) third parties (e.g., persons to whom the taxpayer had transferred assets). Although most doubt as to collectibility offers only involve consideration of the taxpayer's equity in assets and future disposable income over a fixed period of time, the IRS on occasion also will consider whether the taxpayer should be expected to raise additional amounts from assets in which the taxpayer's interest is beyond the reach of enforced collection (e.g., interests in property located in foreign jurisdictions or held in tenancies by the entirety). IRM 57(10)(10).1.


The compromise program was also affected by a 1995 IRS initiative designed to ensure uniform treatment of similarly situated taxpayers. In administering its collection operations, including both the installment agreement program and the compromise program, the IRS has always permitted taxpayers to retain sufficient funds to pay reasonable living expenses. Certain commentators had asserted that there were wide variances in the type and amount of such reasonable expense allowances within and between districts. In September of 1995, the IRS adopted and published national and local standards for determining allowable expenses, designed to apply to all collection actions, including offers to compromise. National expense standards derived from the Bureau of Labor Statistics Consumer Expenditure Survey were promulgated for expense categories such as food, clothing, personal care items, and housekeeping supplies. Local expense standards derived from Census Bureau data were promulgated for housing, utilities, and transportation.


The IRS allowable expense criteria play an important role in determining whether taxpayers are candidates for compromise or installment agreements. Although offers to compromise and installment agreements are separate mechanisms for resolving outstanding tax liabilities, there often is a significant interplay between the two programs, because a taxpayer's income available to satisfy the tax liability is determined after the deduction of allowable expenses. In some cases, the allowable expense criteria may be the determining factor in whether the taxpayer receives an installment agreement or a compromise. An installment agreement must provide for payment in full of the amount of the outstanding liability through regular, periodic payments (generally monthly). I.R.C. §6159 . An offer to compromise, by contrast, reflects the fact that the taxpayer has no ability to pay the liability in full. Accordingly, taxpayers entering into compromise agreements can pay an amount less than the full amount due in satisfaction of the liability.


Congress now has directed the Secretary to consider factors other than doubt as to collectibility and doubt as to liability in determining whether to accept an offer to compromise. Under §7122(c) , added by RRA 1998, factors such as equity, hardship, and public policy will be considered in certain circumstances where such consideration will promote effective tax administration. The legislative history of this provision (H. Conf. Rep. 599, 105th Cong., 2d Sess. 289 (1998)) states that--


... the conferees expect that the present regulations will be expanded so as to permit the IRS, in certain circumstances, to consider additional factors (i.e., factors other than doubt as to liability or collectibility) in determining whether to compromise the income tax liabilities of individual taxpayers. For example, the conferees anticipate that the IRS will take into account factors such as equity, hardship, and public policy where a compromise of an individual taxpayer's income tax liability would promote effective tax administration. The conferees anticipate that, among other situations, the IRS may utilize this new authority, to resolve longstanding cases by forgoing penalties and interest which have accumulated as a result of delay in determining the taxpayer's liability. The conferees believe that the ability to compromise tax liability and to make payments of tax liability by installment enhances taxpayer compliance. In addition, the conferees believe that the IRS should be flexible in finding ways to work with taxpayers who are sincerely trying to meet their obligations and remain in the tax system. Accordingly, the conferees believe that the IRS should make it easier for taxpayers to enter into offer-in-compromise agreements, and should do more to educate the taxpaying public about the availability of such agreements.


Another consideration for compromise cases is Chief Counsel review. Since its enactment in section 102 of the Act of July 20, 1868 (15 Stat. 166), the statute authorizing the Secretary to compromise liabilities has contained a requirement that Counsel issue opinions regarding certain of those compromises. Section 7122(b) of the Code requires that the opinion of Counsel, with the reasons therefor, be placed on file whenever a compromise is made by the IRS. Chief Counsel opinions assess both whether the offer meets the legal requirements for compromise and whether the offer conforms to IRS policy and procedure. The opinion provided by Chief Counsel, however, does not have to be in favor of compromise. Pursuant to delegated authority, district directors, service center directors, and regional directors of Appeals have the authority to accept an offer that Counsel has opined does not conform to IRS policy.


Until passage of the Taxpayer Bill of Rights II (TBOR 2), Chief Counsel review was required in all cases in which the liability compromised was $500 or more. Under TBOR 2, such an opinion is required only in cases where the compromised liability is $50,000 or more.


Explanation of Provisions


The temporary regulations continue the traditional grounds for compromise based on doubt as to liability or doubt as to collectibility. In addition, to reflect the changes made in RRA 1998, the temporary regulations allow a compromise where there is no doubt as to liability or as to collectibility, but where either (1) collection of the liability would create economic hardship, or (2) exceptional circumstances exist such that collection of the liability would be detrimental to voluntary compliance. Compromise based on these hardship and equity bases may not, however, be authorized if it would undermine compliance. 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.


The temporary regulations also add provisions relating to the promulgation of requirements for providing for basic living expenses, evaluating offers from low income taxpayers, and reviewing rejected offers, as required by RRA 1998. The temporary regulations also add provisions relating to staying collection, modifying the dollar criteria for requiring the opinion of Chief Counsel in accepted offers, and setting forth the requirements regarding waivers and suspensions of the statute of limitations. Except for the provision related to dollar criteria for Chief Counsel review, all of the additional provisions of §301.7122-1T are authorized by RRA 1998. The modification of dollar criteria for Chief Counsel review is authorized by section 503(a) of the Taxpayer Bill of Rights II.


As required by §7122(c)(2)(A) and (B) , added by RRA 1998, the temporary regulations provide for the development and publication of national and local living allowances that permit taxpayers entering into offers to compromise to have an adequate means to provide for their basic living expenses. The determination whether the published standards should be applied in any particular case must be based upon an evaluation of the individual facts and circumstances presented. The Secretary will determine the appropriate means to publish these national and local living allowances.


In accordance with §7122(c)(3)(A) , the temporary regulations also require the development of supplemental guidelines for the evaluation of offers from "low income" taxpayers. The temporary regulations permit the Secretary to determine which taxpayers qualify as "low income" taxpayers based upon current dollar criteria applied by the U.S. Department of Health and Human Service under authority of section 673(2) of the Omnibus Budget Reconciliation Act of 1981, or any other measure reasonably designed to identify such taxpayers.


In accordance with §7122(d)(1) , the temporary regulations provide that all proposed rejections of offers to compromise will receive independent administrative review prior to final rejection. Section 7122(d)(2) requires and the temporary regulations also provide that the taxpayer has the right to appeal any rejection of an offer to compromise to the IRS Office of Appeals. The temporary regulations provide, however, that when the IRS returns an offer to compromise because it was not processable under IRS procedures, because the offer was submitted solely to delay collection or because the taxpayer failed to provide requested information required by the IRS to evaluate the offer, such a return of the offer does not constitute a rejection and thus, does not entitle the taxpayer to appeal rights under this provision. In the event that an offer to compromise is returned under these circumstances and the IRS institutes collection action, the taxpayer may have the right to consideration of the whole of his or her collection case under other provisions of the Code.


Pursuant to section 6331(k) of the Code , as amended by section 3462 of RRA 1998, the temporary regulations also provide that for offers pending on or submitted on or after January 1, 2000, no enforced collection activity may be taken by the IRS to collect a liability while an offer to compromise is pending, or for the 30 days following any rejection of an offer to compromise, or during any period that an appeal of any rejection, when such appeal is instituted within the 30 days following rejection, is being considered. Collection activity will not, however, be precluded in any case where collection is in jeopardy or the offer to compromise was submitted solely to delay collection.


Effective through December 31, 1999, the temporary regulations continue to require the taxpayer to waive the running of the statutory period of limitations on collection as a condition of acceptance of an offer to compromise. Effective January 1, 2000, waivers of the statute of limitations on collection will no longer be required for the acceptance of an offer to compromise. Instead, the statute of limitations for collection will be suspended during the period the offer to compromise is under consideration by the IRS. This provision of the temporary regulations implements section 3461 of RRA 1998.


The temporary regulations also implement section 503(a) of the Taxpayer Bill of Rights II by specifying that Chief Counsel review of an accepted offer to compromise is required only for offers in compromise involving $50,000 or more in unpaid liabilities.


Special Analyses


It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It also has been determined that sections 553(b) & (d) of the Administrative Procedure Act (5 U.S.C. chapter 5) do not apply to these regulations. Please refer to the cross-referenced notice of proposed rulemaking published elsewhere in this issue of the Federal Register for the applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6). Pursuant to section 7805(f) of the Internal Revenue Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.


Drafting Information


The principal

IRS liberalizes tax liens

In an effort to slow the rate of foreclosures, the IRS announced Tuesday that it will make it easier for financially distressed homeowners who are behind on their taxes to refinance or sell their homes.



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The IRS issues more than 600,000 tax liens a year against taxpayers who are delinquent on their taxes. When these liens are attached to homes, they can make it difficult for homeowners to refinance or sell their homes, IRS Commissioner Doug Shulman said.

"At the IRS, we need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today," Shulman said.

Toward that end, Shulman said, the IRS will:

n Accelerate homeowners' requests to make their federal tax liens subordinate to a lender's claims on the property. Many lenders won't refinance or restructure a loan unless their claim on the property has priority over all others.

Ordinarily, it takes about 30 days for the IRS to process an application to subordinate a tax lien. Shulman said he has assigned additional IRS employees to the program in an effort to speed up approval of those applications.

n Speed up requests for removal of a tax lien from homeowners who are selling their property for less than they owe on their mortgage. When a home has a tax lien against it, it's difficult for buyers to get a mortgage. Removing the lien won't relieve the taxpayers' obligations, Shulman said.

Benefits reliable taxpayers
Shulman said the measures will focus on taxpayers who have historically paid their taxes, but have fallen behind because of economic hard times. "The IRS is doing whatever it can, under the constraints of the law and common sense, to avoid getting in the way of people trying to save their homes or sell their homes," he said.

There are more than 1 million outstanding federal tax liens tied to real and personal property, the IRS said.

John Taylor, chief executive of the National Community Reinvestment Coalition, said he doubts the IRS program will have much of an impact on foreclosures. Instead of taking incremental steps, he said, the administration should launch "a meaningful foreclosure-prevention program, which involves getting control of these mortgages and having them modified in a substantive way."

More information is available at www.irs.gov.

2004ARD 231-1 IRS Response to Sen. Baucus About Offer in Compromise Program December 1, 2004





DEPARTMENT OF THE TREASURY





INTERNAL REVENUE SERVICE


WASHINGTON, D.C. 20224

October 28, 2004

COMMISSIONER

The Honorable Max Baucus
Ranking Member
Committee on Finance
United States Senate
Washington, DC 20510
Dear Senator Baucus:

I am responding to your September 2, 2004, request for information about IRS' administration of the offer in compromise (OIC) program. The Treasury Department and the Congress share a common interest in ensuring that tax administration is carried out efficiently, effectively, and fairly. I believe this response will illustrate that, while there remains room for improvement, we have made considerable progress in the OIC program.

Your letter states you have received feedback from practitioners and other interested parties maintaining the IRS has placed improving inventory management above quality casework. I can assure you we are maintaining a focus on quality casework while accomplishing improvements to inventory management and cycle time. The expectation is to efficiently and conscientiously evaluate each case based on its individual merits.

I have responded to your specific questions below:

1. Please provide the offer-in-compromise inventory and cycle time for processing offers for the past ten years.

The tables below show the OIC ending inventory and processing cycle time. The OIC inventory is at its lowest point since early 1999, and the number of cases we are able to process in less than six months has steadily improved since 2001. Revised procedures and the implementation of two Centralized OIC (COIC) processing sites in 2001 have contributed significantly to reversing upward trends in both categories. In particular, the centralized sites have proven effective in handling certain front-end case actions, such as processability determinations and the processing of application fees. They also operate in a very cost effective manner and provide timely service on less-complex OIC cases. I want to reiterate that we are maintaining a focus on quality casework while accomplishing these improvements.





_____________________________________________________________________________
OIC Ending Inventory


_____________________________________________________________________________
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 *


_____________________________________________________________________________
30817 38384 39554 32279 37941 62551 87456 94931 74765 65327 49683


_____________________________________________________________________________
*Through June 2004







___________________________________________________________________________

OIC Cycle Time

___________________________________________________________________________

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 *

___________________________________________________________________________

0-6 53% 56% 59% 64% 61% 51% 38% 32% 38% 56% 55%
months

___________________________________________________________________________

6-12 35% 34% 32% 29% 33% 40% 45% 43% 36% 28% 28%
months

___________________________________________________________________________

Over 12 12% 10% 9% 7% 7% 9% 17% 25% 26% 16% 17%
months

___________________________________________________________________________

*Through June 2004




2. The IRS is expected to use national standards as a guideline when considering a taxpayer's offer-in-compromise. The IRS is also expected to consider a taxpayer's facts and circumstances in determining whether the national standards are an appropriate guideline for a taxpayer. Please explain the current practices used by the IRS in considering an offer-in-compromise.

We developed national and local standards to promote consistency among IRS collectors in the amounts routinely allowed for taxpayer expenses. Our employees are, however, authorized to deviate from these standards in certain situations. Internal Revenue Manual, IRM 5.8.5.5.1(2) states:


"National and local expense standards are guidelines. If it is determined that a standard amount is inadequate to provide for a specific taxpayer's basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file."


We reemphasize this direction to OIC personnel on a regular basis. During the past year, the IRS also has asked the Taxpayer Advocate Service (TAS) and the American Institute of Certified Public Accountants (AICPA) to provide examples of any unreasonably rigid adherence to the national standards in OIC casework for evaluation. Upon receipt of these examples, we plan to use them to enhance OIC processing.

3. It is our understanding that prior to 2000, the IRS would consider an offer-in-compromise when a bankruptcy proceeding was pending. Why was this practice discontinued? We further understand that recent court proceedings have directed the IRS to consider an offer-in-compromise during a bankruptcy proceeding. What is the current IRS position on this matter?

The IRS Office of Chief Counsel explained the policy against considering offers in compromise from taxpayers in bankruptcy in Notice CC-2004-025 released July 12, 2004 (copy enclosed).

4. How many offers-in-compromise did the IRS return in fiscal years 2002, 2003, and 2004? What circumstances resulted in their return? How many offers were rejected over the same period? For what reasons were the offers rejected? For those offers returned or rejected in fiscal years 2002 and 2003, how much has been collected, and by what means, since the return or rejection of the offer? Does the IRS have procedures allowing it to collect information and analyze whether rejected offers should have been accepted (e.g., procedures ensuring that accounts are being worked and information about amounts that have been collected)? If so, please provide.

The table below shows annual figures:





________________________________________________________________________________
Offers In Compromise


________________________________________________________________________________
FY 2002 FY 2003 FY 2004 *


________________________________________________________________________________
Returned As Not
Processable 33,044 30,440 35,764


________________________________________________________________________________
Returned After
Deemed Processable 50,584 49,118 30,035


________________________________________________________________________________
Rejected 17,031 27,345 23,115


________________________________________________________________________________
Accepted 29,166 21,629 17,740


________________________________________________________________________________
*Through August




We return offers as not processable for five reasons. The reasons, in order of volume of occurrence, are:


(1) The taxpayer has not filed all required returns.



(2) The taxpayer did not attach the application fee or waiver request.



(3) The taxpayer did not include all appropriate forms.



(4) The taxpayer is in bankruptcy.



(5) The offer is from a business with employees and the business has failed to timely make required federal tax deposits for the current quarter and the two immediate quarters.


We reject offers when the amount offered does not meet or exceed what we determine to be the reasonable collection potential.

We are currently working with the Office of Program Evaluation & Risk Analysis (OPERA) to analyze the ultimate outcomes of cases that involve returned or rejected OICs. The purposes are to validate the methods used to determine reasonable collection potential and to make adjustments as appropriate. While the OPERA analysis is not complete, we have already used early results to improve our processes. More detailed information is provided in items 8 and 9 below.

To reduce the number of un-processable offers we return, we recently revised the OIC application package, Form 656. The new instructions include additional direction and guidance to help taxpayers avoid submitting un-processable OICs. We received considerable input from internal and external stakeholders that went into the development of the revised Form 656 package. Because of the improved instructions, we believe we will receive fewer un-processable OICs in FY05.

5. The Chief of Appeals has indicated that 86% of all offers rejected are appealed. Does the IRS have research identifying the number of rejected offers reversed on appeal? If so, please provide. Does the IRS have a system for reviewing the reasons why reversed decisions were not resolved correctly through initial contact with the IRS? If so, please provide. Has the IRS provided feedback to employees so that corrective actions can be taken to promote a reduction in cases going to Appeals?

Data shows taxpayers appeal 58 percent of rejected OICs. The Chief of Appeals has validated this percentage and confirmed they previously used an incorrect figure. Appeals accepts offers from 30 percent of those taxpayers. Many involve situations where taxpayers provide information to Appeals that they did not submit to OIC personnel. Others involve taxpayers increasing their offers during the appeals process.

OIC program management communicates regularly with Appeals to identify issues contributing to OIC rejections that Appeals routinely reverses. For example, the Small Business/Self-Employed (SB/SE) Division revised its approach to evaluating transportation expenses. The ongoing sharing of information with Appeals was a major contributing factor to this revision. Additionally, SB/SE and Appeals have scheduled a comprehensive review of rejected OIC cases that Appeals subsequently accepted. This joint review, the first since the OIC program was revamped, is scheduled for the first quarter of FY05. It will give both organizations a comprehensive analysis of this issue and could lead to additional process changes.

6. Describe the case quality measures for the field and centralized offers-in-compromise program. Does the IRS conduct a separate customer satisfaction survey of the offers-in-compromise program? If so, please provide detailed information, including the adequacy of the survey sample size.

We are in the process of implementing an improved quality measurement system in our OIC operations. We implemented this new process in the COIC operation this fiscal year and we anticipate implementing it in the OIC field operation during FY05. The enhanced system better links to the evaluations of employees actually conducting OIC casework and measures various aspects of quality in areas such as procedural accuracy, regulatory accuracy, timeliness, customer accuracy, and professionalism.

While we do not conduct a separate OIC program customer satisfaction survey, the enhancements outlined above will provide information to assist in addressing factors impacting customer satisfaction.

7. Taxpayers sometimes submit offers based on both doubt as to collectibility (DATC) and doubt as to liability (DATL). It is our understanding that the IRS first processes the DATC component before determining whether the taxpayer actually owes the tax, in whole or in part (DATL). Please explain the IRS rationale for this processing approach.

We have found that in cases where the taxpayer requests consideration of an OIC on the basis of both doubt as to collectibility (DATC) and doubt as to liability (DATL), liability issues rarely exist. Generally, these cases involved requests for interest and/or penalty abatements or other adjustments to the balances due that do not require reexamination of the tax returns. Our assessment is that taxpayers who request both DATC and DATL consideration are generally trying to cover all options when in reality DATC is the appropriate option. Therefore, we process the DATC aspect of combination offers first. If the recommendation is to reject the DATC offer, we forward it to examination personnel for consideration.

In the past, examination consideration of DATL offers involved a lengthy and costly process. We recently completed a pilot project that involved centralizing the processing of DATL claims. We found that one unit can efficiently process most DATL offers. We plan to implement this approach in FY05. We believe processing all DATL OICs in one unit at the Brookhaven Service Center will enable them to service these requests in a much timelier manner.

Recently, the National Taxpayer Advocate (NTA) commented that, in combination cases where the IRS accepts an offer based on DATC, current procedures assume the DATL claim is moot and not considered. We are revising our procedures to ensure taxpayers clearly understand that they can request consideration of a DATL offer to continue in this situation if a legitimate concern about the validity of the tax liability exists. We have asked the NTA for specific examples of cases that involve this issue, which we can use to further improve the processing of OIC cases.

8. When a DATC offer is submitted, we understand that the IRS first determines whether the taxpayer can full-pay the outstanding liability, based on information provided by the taxpayer on financial statements. Further, we understand that in making this determination, the IRS calculates the ability to pay, in part by computing the monthly installment payment the taxpayer can pay for the remainder of the statutory collection period, plus 5 years. Please explain the IRS's basis for this decision, particularly in light of the IRS's policy statement language that an offer is a viable collection alternative to a protracted installment agreement.

The law permits the IRS to ask a taxpayer to extend the collection statute in conjunction with the acceptance of an installment agreement. IRS policy limits these extensions to five years.

One of the considerations during the evaluation of an OIC is whether a taxpayer can full pay the liability within the parameters of an installment agreement, i.e., the time remaining until the collection statute expiration date, plus five years.

As I mentioned before, the OPERA analysis on returned and rejected OICs showed a need for the IRS to revisit this concept and decide if the approach is the most appropriate way to consider OIC applications. We are looking for and evaluating data that will assist in determining if the reasonable collection potential calculations that result from this approach are reasonable and realistic.

9. We understand that the IRS has recently implemented a user fee for offers. Taxpayers whose offers have initially passed screening for full-pay and initial processability will be returned, without appeal rights, and the user fee retained, if they do not respond to an IRS request for additional information. Other taxpayers who have offers returned without appeal rights have their user fee refunded. Why is there a difference in handling of user fees between these two types of returned offers? How many of these taxpayers resubmit offers? What happens when these offers are re-submitted (e.g., are taxpayers required to pay the user fee again)?

We refund the OIC application fee to taxpayers who submit un-processable offers. Please refer to the outline in question 4 about items considered during the processability determination. We can identify these conditions with little investment of resources.

The application fee regulations specify, however, that the IRS will not refund the fee to taxpayers whose offers the IRS returns after initial acceptance for processing. Generally, returns following a determination that an offer was "processable" result when taxpayers fail to provide complete and timely responses to IRS requests for additional information. In these situations, we have invested considerable resources in a processability determination, application fee processing, and initial financial analysis. If these taxpayers choose to submit another OIC at a later date, they must pay another application fee. The ongoing OPERA analysis will provide additional information about offer resubmissions.

These return procedures have been valuable in our efforts to process the entire OIC inventory in a timely and responsible manner. Past analysis showed that multiple follow-ups on requests for additional information contributed to inventory backlogs. We based its return procedures on the concept that inappropriate delays by some should not negatively impact its ability to provide timely service to all. The IRS believes requiring taxpayers who want OIC approval to respond timely and completely to requests for information necessary to fully process their cases is reasonable. In FY04, 40 percent of the cases in our COIC operations where the IRS accepted the offer package for processing, but later returned it to the taxpayer, involved taxpayers who did not provide a response to requests for additional information.

We continue to evaluate our return procedures this year to ensure all returns are reasonable and appropriate. For example, in situations where taxpayers made substantially complete responses to additional information requests, but did not include some information, they try an additional contact to obtain the missing information before returning the OIC. We also developed reconsideration procedures to address situations where taxpayers could not respond due to circumstances beyond their control. Returns following initial acceptance for processing have declined 30 percent in FY04, a good indication that the revised procedures are working as intended.

10. Please describe the implementation of the conference report language pertaining to effective tax administrations (ETA) offers, including the issuance and implementation of Treasury regulation section 301.7122-1(c)(3). What is the process for identifying offers based on equitable considerations and public policy, particularly where the taxpayer does not specifically check the "ETA" box on Form 656? Which employees and/or managers identify these offers? Please provide us with copies of any guidance, training, desk procedures, and check sheets that assist IRS employees in identifying these offers.

The Treasury Department published temporary and proposed regulations expanding the IRS' authority to compromise in July 1999 and adopted them as final regulations in July 2002. In adopting the final regulations on compromise based on public policy or equity, the IRS committed to a three-pronged implementation plan to:


(1) Conduct training for all offer specialists in identifying such cases



(2) Establish a specialized group of offer specialists to work the cases



(3) Periodically convene a "policy-level" group, with representatives from SB/SE, Appeals, NTA, and the Office of Chief Counsel, to review closed cases and determine whether further guidance is needed


We developed procedures for identifying and working OICs on the basis of effective tax administration (ETA) and issued them in Internal Revenue Manual, IRM 5.8.11 (copy enclosed). We trained all OIC investigators on ETA issues in FY03. I also enclosed a copy of this material for your review. Our procedures direct OIC investigators to be aware of issues for consideration under the ETA criteria, and give full consideration to those issues even in situations where taxpayers did not specifically check the ETA box on Form 656.

Because we give full consideration to ETA criteria regardless of whether the ETA box is checked and because many taxpayers check the ETA box when the DATC box is more appropriate, we have not systemically tracked the number of OICs involving requests for ETA consideration.

11. We understand that a separate group of Revenue Officers (RO) evaluates "non-hardship" ETA offers. How many levels of review does such an offer go through prior to being evaluated by this group? Do ROs in this group discuss these offers with taxpayers or their representatives prior to rejection? If not, please explain. How many "non-hardship" ETA offers were accepted in fiscal years 2002 and 2003 and fiscal year 2004 to date?

Our response to questions 11 and 12 are combined below.

12. What factors does the IRS take into consideration in determining whether to accept or reject a non-hardship ETA offer? What is the difference, if any, between the analysis of non-hardship ETA offers and DATC offers raising special circumstances? Are DATC offers raising special circumstances involving equity and public policy also considered by the ETA group?

The "non-hardship" ETA OIC is a situation where no doubt that the liability is valid exists, and the taxpayer has the financial ability to pay the delinquency in full. Additionally, payment of the tax would not create an economic hardship on the taxpayer. However, due to the circumstances of the case, the inequity of requiring the taxpayer to pay the entire liability would be so apparent that as a matter of IRS policy, the IRS should allow the taxpayer to compromise the tax debt for less than the amount owed. In theory, this component of the OIC program was designed to allow the IRS to settle difficult or unusual cases, where other collection alternatives did not seem appropriate. In practice, however, we have found very few cases meet these criteria.

In FY03, we decided to centralize the processing of non-hardship ETA OICs in one field group in Cincinnati, Ohio. We did this to ensure consistency in processing these cases and to facilitate oversight of the process. This summer, representatives from SB/SE, TAS, Counsel, and Appeals reviewed this process. The group reviewed the work papers of all referrals into the ETA group and all OICs worked to completion within the group during its first year of operation. Although the group identified opportunities to improve the referral process and document case decisions, the review team did not identify any cases in which the IRS rejected an offer it should have accepted as a "non-hardship" ETA OIC.

One of the charges of the review team was to identify examples of issues or factors that could warrant the acceptance of an ETA OIC. While they did not identify any one issue or factor that standing alone would routinely warrant the acceptance of an ETA offer, they did recognize a combination of factors that lead the IRS to accepting such an offer. We expect to issue enhanced directions, including these examples to SB/SE and Appeals in FY05.

The analysis indicates the most problematic component of the "non-hardship" ETA OIC involves the requirement that the taxpayer have a clear ability to full pay the tax liability without creating economic hardship. While the NTA has shared anecdotal and theoretical examples of such cases, they have not provided any actual cases where compromise on the basis of public policy or equity was clearly the appropriate resolution for the tax debt. The examples they have provided as potential candidates, as well as many of the cases included in the joint review, would actually create the appearance of inequity if the IRS did accept the offers. Routine acceptance of offers in such cases would have a detrimental impact on voluntary compliance.

We believe cases that could warrant consideration as "non-hardship" ETA offers are actually resolved through the OIC program earlier in the process. Generally, experience shows that the inequitable conditions that contribute to the tax delinquencies also tend to create economic hardship on the affected taxpayers. We routinely accepts ETA OICs based on economic hardship, as well as doubt as to collectibility OICs involving special circumstances. These OIC categories are worked within all OIC field groups, as well as COIC. Because DATC OICs with special circumstances do not involve situations where the taxpayers can clearly full pay the tax debts, the ETA group does not control them. Rather, we handle them as routine cases and local management has the authority to approve these case decisions.

13. What guidance has the IRS issued to its employees (including training guides, IRM, memoranda, and desk guides for OIC, RO and Appeals employees) pertaining to the implementation of the provision in the RRA 98 Conference Report directing the IRS to compromise long-standing cases where penalty and interest have accrued because of delay in determining the tax liability? What is the IRS's position about the interplay between that language and interest abatement under IRC 6404(e)?

We have not issued any internal guidance that specifies when delays in determining the liability will represent compelling public policy or equity considerations justifying compromise under the regulations. We evaluate such cases on their particular facts and circumstances. The preamble to the final regulations sets forth the IRS' position on the interplay between compromise authority under section 7122 and the authority to abate interest under section 6404(e) as follows:


"The IRS and Treasury Department do not believe that it would promote effective tax administration to authorize compromise solely on the basis of an asserted delay by the IRS, particularly delay that does not support relief under section 6404(e) with respect to accrued interest ... Nevertheless, cases in which a taxpayer believes the liability was caused, in whole or in part, by delay on the part of the IRS ... may be appropriate for compromise under the public policy and equity standard. Such cases, however, are expected to be rare, as the taxpayer must identify compelling public policy or equity concerns that satisfy the standard set forth above."



(Compromise of Tax Liabilities, 67 Fed. Reg. 48025, 48027) (July 23, 2002).


We do not interpret section 7122 to preclude the compromise of interest whenever the IRS denies abatement under section 6404. We do, however, continue to adhere to the principle that the IRS should never exercise settlement authority in a manner that would cavalierly disregard the effect of settlement policy, or a particular settlement, on the administration of other provisions of the Code. Using the interest abatement provisions as an example, our view is that the compromise of interest, whether or not the interest is subject to abatement under section 6404, should take place only under the standards articulated in the compromise regulations. We have in fact used its settlement authority to compromise interest attributable to delays by IRS employees. In such situations, the accepting official has determined that the standard in the regulations is met and that the circumstances are of such a compelling and unique nature that the interest abatement rules of section 6404 are not undermined by the compromise of interest on fairness grounds.

14. What guidance has the IRS issued to its employees (including training guides, IRM, memoranda, and desk guides for OIC, RO, and Appeals employees) pertaining to the compromise of liabilities attributable to the Alternative Minimum Tax arising from the exercise of incentive stock options?

We have issued no formal guidance to its employees specifically pertaining to the compromise of liabilities attributable to the Alternative Minimum Tax issue. However, we have issued the following guidance in IRM 5.8.11.2.2(3):


"Compromise on public policy or equity grounds is not authorized based solely on a taxpayer's 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."


The Alternative Minimum Tax's interaction with incentive stock options is a component of the Tax Code that falls within this direction.

In closing, administration of the OIC program in a manner that ensures the IRS makes reasonable collection decisions, with the proper context of fairness for all taxpayers, is challenging. For several years, the NTA has reported the OIC program as one of the most significant problems facing taxpayers in dealing with the IRS. While the NTA may believe this to be true, the IRS notes that less than 1 percent of all IRS collection cases are actually resolved through the OIC process. In addition, OIC matters account for less than 2 percent of TAS' total workload. Based on the Taxpayer Advocate Management Information System (TAMIS), this percentage has been consistent over the last three years.

I believe we have made significant progress in improving the OIC program over the past several years and will continue to seek ways to make further improvements.

I am sending a similar response to Senator Grassley. I would be happy to meet with you to discuss these issues. If you have questions or would like to schedule a meeting, please contact me or Floyd Williams, National Director, Office of Legislative Affairs at (202) 622-9511.


Sincerely,



Mark W. Everson


Enclosures (3)




MANUAL Department Internal 5.8.11

TRANSMITTAL of the Revenue

Treasury Service MAY 15, 2004

____________________________________________________________________________________





PURPOSE


(1) This transmits a change to IRM 5.8, Offer in Compromise, Section 11 - Effective Tax Administration.




NATURE OF CHANGES


(1) This transmittal issues the following changes:



Ÿ Section 5.8.11.1(5) - Adds language to clarify that economic hardship standards only apply to individuals.



Ÿ Section 5.8.11.2(3)b - Changes detriment to voluntary compliance to public policy or equity



Ÿ Section 5.8.11.2(4) - Changes to public policy or equity



Ÿ Section 5.8.11.2.1 - Rewrite of this section and clarification that economic hardship offers only apply to individuals.



Ÿ Section 5.8.11.2.2 - Rewrite of this section under the new definition of Public Policy or Equity.



Ÿ Section 5.8.11.3(3) - Adds a note that the ETA economic hardship only applies to individuals



Ÿ Section 5.8.11.4(2) - Describes initial steps in determining whether effective tax administration should be considered.



Ÿ Section 5.8.11.4(3) - Adds the requirement to address potential special circumstances on the first personal contact.



Ÿ Section 5.8.11.4.2(2) - Changes language to public policy or equity.



Ÿ Section 5.8.11.6(2) - Changes the If-Then chart to reflect the current AOIC procedures.




AUDIENCE

SB/SE Compliance employees


Cheryl Sherwood



Director



Payment Compliance




5.8.11 Effective Tax Administration




Offer in Compromise IRM 5.8.11





Table of Contents





_____________________________________________________________________________________
5.8.11

Effective Tax Administration




5.8.11.1 Overview

5.8.11.2 Legal Basis for Effective Tax Administration Offer

5.8.11.2.1 Economic Hardship

5.8.11.2.2 Public Policy or Equity Grounds

5.8.11.2.3 Compromise Would Not Undermine Compliance With Tax Laws

5.8.11.3 Initial Processing of Effective Tax Administration Offers

5.8.11.4 Evaluation of Offers

5.8.11.4.1 Public Policy/Equity Issues

5.8.11.4.2 Financial Statement Analysis

5.8.11.4.3 Determining an Acceptable Offer Amount

5.8.11.5 Documentation and Verification

5.8.11.6 Final Processing

5.8.11.6.1 Rejection/Return/Withdrawal Processing

5.8.11.6.2 Acceptance Processing




Exhibits

Non-Hardship Effective Tax Administration (ETA) Offer in Compromise
5.8.11-1 (OIC) Check Sheet




5.8.11.1 (05-15-2004)



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:



Ÿ Hardship,



Ÿ Public policy, and



Ÿ 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:



Ÿ Believe the laws are fair and equitable, and



Ÿ 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:



Ÿ The tax is legally owed, and



Ÿ 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:



Ÿ Doubt as to Liability (DATL), and/or



Ÿ 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 (05-15-2004) 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 taxpayer's reasonable collection potential (RCP) which is:



Ÿ Net equity, plus



Ÿ Future income





In an Effective Tax Administration (ETA) offer, the tax liability is less than the taxpayer's reasonable collection potential (RCP). The taxes owed can be collected in full either:



Ÿ In a lump sum, or



Ÿ 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 Taxpayer is not eligible for Effective
doubt as to the amount of the liability Tax Administration (ETA) consideration.
the taxpayer owes The offer is considered based on the
Doubt as to Liability (DATL) issue.

____________________________________________________________________________________
The Service determines that the Taxpayer is not eligible for an Effective
taxpayer's equity in assets plus future Tax Administration offer. The offer is
income (RCP) does not exceed the amount considered based on Doubt as to
of the tax liability 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 The taxpayer would be eligible for
not eligible for compromise based on Effective Tax Administration (ETA)
Doubt as to Liability (DATL) or Doubt as consideration.
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

____________________________________________________________________________________




(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 (05-15-2004) Economic Hardship


(1) When a taxpayer's 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 taxpayer's 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 taxpayer's 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 taxpayer's 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 taxpayer's financial condition include:



Ÿ The taxpayer's age and employment status,



Ÿ Number, age and health of the taxpayer's dependents,



Ÿ Cost of living in the area the taxpayer resides, and



Ÿ 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:



Ÿ The taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code.



Ÿ The taxpayer has taken deliberate actions to avoid the payment of taxes.



Ÿ 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 taxpayer's 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 taxpayer's overall compliance history does not weigh against compliance.





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 taxpayer's home has been specially equipped to accommodate the disability, forced sale of the taxpayer's residence would create severe adverse consequences for the taxpayer, making such a sale unlikely. The taxpayer's overall compliance history does not weigh against compliance.



(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.





Note: Regardless of the economic hardship issue, the Service will not accept an offer when it is demonstrated that acceptance would undermine compliance.



(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) (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 (05-15-2004) 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 taxpayer's 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 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 taxpayer's 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 6040(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 taxpayer's 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 taxpayer's 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 taxpayer's account accordingly. Following that, the Service should consider accepting a compromise that would approximate the amount the taxpayer would have 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 taxpayer's 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 taxpayer's overall compliance history does not weight 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 taxpayer's 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 taxpayer's 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 statue, application 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 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(d) and the IRM.



(10) The Service will not compromise on public policy or equity grounds based solely on the argument that the acts of a third party caused the unpaid tax liability. Third parties include the taxpayers:



Ÿ Representative,



Ÿ Partner,



Ÿ Agent, or



Ÿ 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 taxpayer's 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:



Ÿ The taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code.



Ÿ The taxpayer has taken deliberate actions to avoid the payment of taxes.



Ÿ 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 noncompliance, 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 of 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 (11-01-2000) 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) for additional information.




5.8.11.3 (05-15-2004) Initial Processing of Effective Tax Administration Offers


(1) Offers submitted under the basis 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 From 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 "retum"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) (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 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 taxpayer's 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 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 (05-15-2004) 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 taxpayer's 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 taxpayer's 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 (05-15-2004) 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 Cincinnati, Ohio 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 Cincinnati 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 Cincinnati 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 Cincinnati. 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 taxpayer's offer cannot be investigated under Public Policy/Equity ETA provisions, or a request to transfer the offer to the Cincinnati group.



(6) If the Cincinnati 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 Cincinnati group determines that the information presented requires further analysis, the sender will be notified to transfer the case to Cincinnati.




Ÿ 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.



Ÿ The file should be sent by overnight mail on Form 3210 to the Cincinnati group.



Ÿ At the time of mailing, the case should be transferred on AOIC to Area 6.



Ÿ A history item should be added to AOIC to show the case is being sent to Cincinnati, Area 6.



Ÿ The Cincinnati 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 too support a decision to accept or reject the offer.


Note: The Offer Examiner or Offer Specialist may also seek guidance from the Cincinnati 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 a check sheet and documenting the issues involved in the case. However, these cases will not be transferred to the Cincinnati group.



5.8.11.4.2 (05-15-2004) 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.



(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 taxpayer's assets and future income exceed the tax liability, the taxpayer's offer can be considered under the effective tax administration basis.




5.8.11.4.3 (05-15-2004) 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 (11-01-2000) Documentation and Verification


(1) To verify the taxpayer's special circumstances and support a basis of Effective Tax Administration (ETA):




a. Request supporting documentation of the taxpayer's situation. Exercise sound judgement in determining the degree of verification necessary. For example, verification of a health problem could be a doctor's letter.



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 (05-15-2004) 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 An economic 1. Update the
submitted under hardship has AOIC offer
Effective Tax been determined screen to
Administration to exist, but indicate a "C"
(ETA) the reasonable under the offer
collection type.
potential (RCP)
is less than the 2. Generate all
liability closing reports
balance due with the proper
approving
official for
Doubt as to
Collectibility
with Special
Circumstances
(DCSC).


___________________________________________________
The offer was An economic 1. Update AOIC
submitted under hardship has offer screen to
Doubt as to been determined indicate "A"
Collectibility to exist, and under offer
(DCSC) the reasonable type.
collection
potential (RCP) 2. Generate
is greater than closing reports
the liability with the proper
balance due approving
official for
Effective Tax
Administration
(ETA) offers.


___________________________________________________
The offer was The offer is 1. AOIC offer
submitted under being screen does not
Effective Tax recommended for require updating
Administration acceptance under for special
(ETA) Doubt as to circumstances.
Collectibility The type of
(DATC) with the offer on AOIC
offer exceeding should reflect
the reasonable "C" for Doubt as
collection to
potential (RCP) Collectibility
(DATC).
Generate closing
reports with the
proper approving
official for
Doubt as to
Collectibility
(DATC) without
special
circumstances.


___________________________________________________
The offer was The offer cannot Generate closing
submitted under be recommended reports with the
Doubt as to for acceptance proper approving
Collectibility under Doubt as official for
with item 9 of to Doubt as to
Form 656 Collectibility Collectibility
completed with (DATC). (DATC) without
circumstances special
that do not meet circumstances.
any of the Address in the
elements that history, why the
define economic circumstances
hardship, or described in
Public item 9 do not
Policy/Equity meet defined
criteria. economic
hardship, or
Public
Policy/Equity
criteria.


___________________________________________________
The offer was The taxpayer 1. Update AOIC
submitted under does not qualify offer screen to
Effective Tax for ETA because indicate a "C"
Administration the reasonable under special
(ETA) with item collection circumstances.
9 of Form 656 potential (RCP)
completed with is less than the 2. Generate
circumstances liability and closing reports
that do not meet the offer cannot with the proper
ETA criteria. be recommended approving
for acceptance official for
under Doubt as Doubt as to
to Collectibility
Collectibility with Special
with Special Circumstances
Circumstances (DCSC).
(DCSC).


___________________________________________________
The offer was The offer cannot 1. Update AOIC
submitted under be recommended offer screen to
Effective Tax for acceptance indicate "A"
Administration and the under offer
(ETA) with item reasonable type.
9 of the Form collection
656 completed potential (RCP) 3. Generate
with exceeds the closing reports
circumstances liability with the proper
that the approving
investigation official for
reveals do not Effective Tax
meet ETA Administration
criteria (ETA) offers.


___________________________________________________
The offer was The special 1. Update AOIC
submitted under circumstances do offer screen to
Effective Tax meet economic indicate "A"
Administration hardship, or under offer
(ETA) Public type.
Policy/Equity
criteria and the 3. Generate
reasonable closing reports
collection with the proper
potential (RCP) approving
exceeds the tax official for
liability. Effective Tax
However, the Administration
offer cannot be (ETA) offers.
recommended for
acceptance.


___________________________________________________
The offer was The special Generate closing
submitted under circumstances do reports with the
Doubt as to meet economic proper approving
Collectibility hardship, or official for
with Special Public Doubt as to
Circumstances Policy/Equity Collectibility
(DCSC) criteria and the with Special
reasonable Circumstances
collection (DCSC).
potential (RCP)
is less than the
tax liability,
however, the
offer cannot be
recommended for
acceptance.


___________________________________________________





5.8.11.6.1 (11-30-2001) Rejection/Return/Withdrawal Processing


(1) The procedures in IRM 5.8.7, discussing rejections, withdrawals and returns should be followed when processing Effective Tax Administration (ETA) rejected, withdrawn or returned offers.



(2) IRM 5.8.12 provides instructions for independent administrative review of rejected offers.



(3) See Delegation Order 11 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 (11-01-2000) 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 11 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 and the acceptance letter.




Exhibit 5.8.11-1 (05-15-2004)



Non-Hardship Effective Tax Administration (ETA) Offer in Compromise (OIC) Check Sheet




Non-Hardship Effective Tax Administration OIC Check Sheet


Taxpayer: ____________________SSN/EIN: ____________________

Employee Name: ____________________Employee Ph #: ____________________

Manager Approval: _________________________Date: _______________

(signature)

Answer the following questions Yes or No:




Yes No

1. Can an offer be accepted under "standard" Doubt as to
  Collectibillty guidelines?

2. Can an offer be accepted under Doubt as to Collectibility -
  Special Circumstances?

  3. Can an offer be accepted under Doubt as to Liability?

  4. Can an offer be accepted under ETA - Hardship?




If the answer is YES to any of questions 1 - 4, proceed with the appropriate acceptance recommendation.

If the answer is NO to Questions 1 - 4, but the taxpayer has provided documentation of possible Doubt as to Collectibility with Special Circumstances outlining a public policy or equity issue, or has provided documentation outlining possible ETA Public Policy/Equity factors, outline those factors in the space below. Indicate that you are requesting advice on the applicability of those factors and include your opinion of the information presented by the taxpayer. Use additional sheets if necessary.

__________ Request guidance/advice on applicability of public policy/equity factors on a Doubt as to Collectibility Offer.

Fax this check sheet, along with a copy of the complete Form 656, and any other documentation provided by the taxpayer, to OFFER MANAGER at 513-263-4577 for consideration by the ETA group.




Public Policy/Euity Factors


____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

____________________ (This section for use of Cincinnati ETA Processing Site.) ____________________

 Offer may meet non-hardship ETA criteria and should be sent to Cincinnati for further consideration.

 Offer does not meet non-hardship ETA criteria, and cannot be processed in Cincinnati for the following reasons:

____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Revised 5/22/03




Offers In Compromise





Promotion of Effective Tax Administration




Course Overview



Introduction

In July 2002, the Internal Revenue Service issued Treasury Regulation 301.7122-1, which made permanent the authority to compromise to promote effective tax administration ("ETA offers"). This expansion of the Service's compromise program was authorized by the IRS Restructuring and Reform Act of 1998 (RRA '98).



Purpose of This Course

The purpose of this Continuing Professional Education course is to provide you with the knowledge and skills:


Ÿ to identify and evaluate ETA offers and



Ÿ to determine if they can be accepted based on economic hardship or public policy or equity grounds.




Target Audience

This course is intended for experienced Revenue Officer OIC specialists, Tax Examiners at the Centralized OIC Campuses, Settlement Officers in Appeals, Independent Administrative Reviewers, CQMS reviewers, and Taxpayer Advocate Service employees.



Course Length

The estimated time for completion of the course is two hours.



Student Materials

Student Materials needed for this course include:


Ÿ student coursebook



Ÿ IRM 5.8.11, Effective Tax Administration.




In This Course

This course contains the following lesson:





_______________________________________________________________________
See
Topic Page


_______________________________________________________________________
Promotion of Effective Tax Administration 1-1






Name Disclaimer

The taxpayer names shown in this publication are hypothetical. They were chosen at random from a list of American colleges and universities as shown in Webster's Dictionary or from a list of names of counties in the United States as listed in the United States Government Printing Office Style Manual.




Lesson 1





Promotion of Effective Tax Administration




Overview



Introduction

This lesson discusses the effective tax administration (ETA) offer in compromise (OIC) and the circumstances under which this type of offer can be accepted.



Objectives

At the end of this lesson you will be able to:


Ÿ Determine if an offer qualifies for consideration based on economic hardship



Ÿ Determine if an offer qualifies for consideration based on compelling public policy or equity considerations



Ÿ Determine if an offer considered on either of these bases should be accepted




Materials


Ÿ Coursebook



Ÿ IRM 5.8.11, Effective Tax Administration




References


Ÿ IRC section 7122(a)



Ÿ Treas. Reg. section 301.6343-1



Ÿ Treas. Reg. section 301.7122-1, Compromises




In This Lesson

This lesson contains the following topics:




_____________________________________________________________________________________
Topic See Page

_____________________________________________________________________________________
Effective Tax Administration Offers 1-2

_____________________________________________________________________________________
Economic Hardship 1-3

_____________________________________________________________________________________
Exercises - Economic Hardship 1-8

_____________________________________________________________________________________
Public Policy or Equity 1-10

_____________________________________________________________________________________
Exercises - Public Policy or Equity 1-15

_____________________________________________________________________________________





Effective Tax Administration Offers



Introduction

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:


Ÿ hardship,



Ÿ public policy, and



Ÿ equity.


________________________________________

Treasury Regulation 301.7122-1 authorizes the Service to consider these offers raising these issues. These offers are called Effective Tax Administration offers.



Benefits

The availability of effective tax administration offers encourages taxpayers to comply with the tax laws because taxpayers will:


Ÿ believe the laws are fair and equitable, and



Ÿ gain confidence the laws will be applied to everyone in the same manner.




When to Consider

If a taxpayer submits an ETA offer, you must first investigate the offer for:


Ÿ doubt as to liability, and/or



Ÿ doubt as to collectibility


You can only consider an ETA offer if the taxpayer does not qualify for the other two types.



Compared to Doubt as to Collectibility

In a doubt as to collectibility offer, the tax liability equals or exceeds the taxpayer's reasonable collection potential (RCP) which is:


Ÿ net equity in assets, plus



Ÿ future income.


In an ETA offer, the tax liability is less than the taxpayer's RCP. The taxes owed can be collected in full either:


Ÿ in a lump sum, or



Ÿ through an installment agreement (IA)


A doubt as to collectibility offer does not convert to an ETA offer if you and the taxpayer cannot agree on an acceptable offer amount.



Compared to Doubt as to Collectibility with Special Circumstances

A taxpayer would have an ETA offer when their RCP is greater than the liability but there are economic hardship or public policy/equity circumstances that would justify accepting the offer for an amount less than full payment. For example: The taxpayer owes $20,000. His RCP is $25,000. The taxpayer could have an OIC accepted for less than the total liability ($20,000) under the ETA provisions.

A taxpayer would have a Doubt as to Collectibility with Special Circumstances when their 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 RCP. For example: The taxpayer owes $20,000. However his RCP is $15,000. The offer cannot be accepted under 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 the Doubt as to Collectibility with Special Circumstance provisions.



Compared to Doubt as to Liability

An offer can be considered under ETA provisions only when there is not doubt as to liability.



Legal Standards

A taxpayer meets the legal requirements for an ETA offer if:


Ÿ there is no doubt as to liability, and



Ÿ there is no doubt as to collectibility, and



Ÿ there are exceptional circumstances such that collecting the tax would create an economic hardship, or there is compelling public policy or equity considerations that provide sufficient basis for compromise.




Economic Hardship



Introduction

When a taxpayer's liability can be collected in full but collection would create an economic hardship, they can submit an ETA OIC based on economic hardship.



Definition

The definition of economic hardship as it applies to ETA offers is derived from Treas. Reg. 301.6343-1. This regulation concerns release of levy.

Economic hardship occurs when a taxpayer is "...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."



Qualifications

To qualify for consideration as an economic hardship ETA offer:


Ÿ the taxes must be collectable in full, and



Ÿ the taxpayer must be an individual, not a corporation, partnership or other non-individual entity.


Only individuals qualify because economic hardship means the inability to meet reasonable basic living expenses.

The taxpayer must fully explain:


Ÿ their special circumstances, and



Ÿ why they qualify for an ETA offer based on economic hardship.




Investigation

You must examine the taxpayer's financial information and special circumstances to determine if they qualify for an ETA offer based on economic hardship. Financial analysis includes reviewing basic living expenses as well as other considerations.



Basic Living Expenses

You must consider the taxpayer's income and basic living expenses when you determine if their ETA hardship offer is acceptable.

Basic living expenses are those expenses that provide for the:


Ÿ health and welfare, and



Ÿ production of income


of the taxpayer and their family.

Some basic living expenses are limited to the National Standards while other expenses are limited to local standards. The taxpayer must justify expenses that exceed these limits.



Other Considerations

In addition to the basic living expenses, you must consider other factors that impact upon the taxpayer's financial condition, including:


Ÿ the taxpayer's age and employment status



Ÿ number, age and health of the taxpayer's dependents



Ÿ cost of living in the area the taxpayer resides, and



Ÿ any extraordinary circumstances such as special education expenses, a medical catastrophe or natural disaster.


This list is not all-inclusive. You may consider other factors in your economic hardship determination.



Supporting Factors

Some factors that support an economic hardship determination are that the taxpayer:


Ÿ cannot earn a living because of a long-term illness, medical condition or disability and it is foreseeable that they will exhaust their financial resources for their support and care.



Ÿ exhausts his or her monthly income providing for the care of a dependent, such as a parent or other family member, with no other means of support.



Ÿ is unable to borrow against the equity in assets because repayment of the loan would not allow them to meet necessary living expenses.


These factors are not all inclusive. They represent situations the Service frequently encounters. You may encounter other situations that would support an economic hardship ETA offer.



Compliance Considerations

When you consider recommending acceptance of an ETA offer based on economic hardship you must ensure 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.

Accepting an ETA offer in compromise would undermine compliance if the taxpayer:


Ÿ has a history of noncompliance.



Ÿ took deliberate actions to avoid paying the tax, such as transferring assets.



Ÿ encouraged others not to comply with tax laws.


There may be other situations where compliance would be undermined.



Examples of Economic Hardship

The following examples illustrate when an ETA offer under the economic hardship standard may be appropriate. You can assume that the taxpayers' overall compliance histories do not weigh against compromise.



Example 1

John Perry was diagnosed with an illness that will eventually make him unable to work. Although currently employed, he was forced to reduce his hours. Mr. Perry has sufficient funds in his bank account to full pay the tax liability, however, he will soon need to quit his job and use those funds to support himself.



Example 2

Margaret Hudson supports her daughter who requires extensive medical care and physical therapy for a disability. Ms. Hudson has sufficient equity in her home to full pay the tax liability but will need the equity to continue to pay her daughter's medical expenses.



Example 3

Carol Ross is retired and receives social security and a small teacher's retirement pension. She is not eligible for an installment agreement. Ms. Ross owns her house, which is unencumbered. The value of the house is sufficient to full pay the tax liability. She does not qualify for a loan against the house and if she sells it, she would not be able to find an affordable place to live.



Determining an Acceptable Offer Amount

To determine an acceptable amount, analyze:


Ÿ financial information



Ÿ supporting documents, and



Ÿ the hardship that would be created if the taxpayer liquidated all or a portion of certain assets.


The existence of economic hardship does not require you to recommend acceptance of the offer. When you identify economic hardship criteria, but the taxpayer does not offer an amount that is the difference between their total equity and the amount necessary to prevent economic hardship, you should not recommend acceptance of the offer.



Examples of Acceptable Amounts



Example 1

Dennis Zavala was diagnosed with an illness that eventually make him unable to work. He is currently employed but will soon need to quit his job and use personal funds to support himself. His tax liability is $8,500. He submitted an offer for $500. His RCP is $35,000. Through your investigation, you determine that collecting more than $5,000 would cause an economic hardship for Mr. Zavala. He would not be able to meet his reasonable living expenses. An acceptable offer is $5,000. It is the amount the Service can collect without creating an economic hardship. You advise the taxpayer to increase his offer from $500 to $5,000.



Example 2

Diana Duquesne owes $17,500 and has a reasonable collection potential of $25,000. She submits an offer for $3,500. Ms. Duquesne supports her father who requires extensive medical care and physical therapy for a disability. As a result of your investigation you conclude that collection of more than $2,000 would cause economic hardship for her because she would be unable to meet her reasonable basic living expenses. You should recommend acceptance of her $3,500 offer.



Example 3

Bill Hope lives on a fixed income that does not, after payment of reasonable basic living expenses, allow full payment of his liability through an installment agreement. He owes $65,000 and submitted an offer for $15,000. Mr. Hope owns his house which has a small mortgage but has equity sufficient to pay the tax liability in full. He does not qualify for a loan against the house and if he sells it, he would not be able to find an affordable place to live. Based on your investigation you determine that collection of more than $42,000 would cause the taxpayer economic hardship. You advise Mr. Hope he must increase his offer to $42,000.



Compliance Considerations Not Supporting Acceptance

Regardless of economic hardship, the Service will not accept an offer where compliance is undermined. The following examples illustrate some of these situations.



Example 1

Charlotte Becker qualifies for an ETA offer to compromise income and self-employment taxes based on economic hardship. You conduct a compliance check and learn Ms. Becker did not make estimated tax payments for several years prior to the liability years included in the offer. For the last three years she had employees. She filed Form 941 late each quarter and did not pay the tax on time. Since Ms. Becker has a history of noncompliance, her offer should not be accepted. Acceptance of the offer would undermine the public's confidence that the tax laws are being administered fairly.



Example 2

Phil McMurray submitted an ETA offer based on economic hardship. His financial statement appears to support the offer. When you research the county property records you learn Mr. McMurray transferred his home to his daughter for $100 plus love and affection. He transferred the home after the tax was assessed. Mr. McMurray took deliberate actions to avoid the payment of tax, therefore his offer should not be accepted.



Example 3

Jim King qualifies for an ETA offer based on economic hardship according to the financial information you secured. During the course of your investigation, you learn he is a member of an organization that conducts tax evasion seminars. Since this factor undermines compliance, Mr. King's offer should not be accepted.



Cause of the Liability

The cause of the liability for which the economic hardship offer is made does not affect acceptance unless it undermines compliance. For example, if the liability is due to unpaid self-employment tax, the offer can be accepted unless the taxpayer has a long history of failing to make estimated tax payments.



Exercises - Economic Hardship



Exercise 1

Answer the following questions true or false.

Question 1

Elena Racine wants to submit an ETA offer under the economic hardship provision. Her net realizable equity is less than her tax liability. She should submit this offer.




_____true _____false




Question 2

An economic hardship occurs whenever a taxpayer can no longer maintain their current lifestyle.




_____true _____false




Question 3

A partnership can submit an ETA offer under economic hardship provisions.




_____true _____false




Question 4

A sole proprietor can submit an ETA offer under economic hardship provisions.




_____true _____false




Question 5

In addition to economic hardship, you must consider compliance factors before recommending acceptance of an ETA economic hardship offer.




_____true _____false






Exercise 2

Answer the following questions as indicated.

Question 1

List three factors to consider in an economic hardship ETA case besides basic living expenses.

l

l

l

Question 2

Andy Osborne appears to qualify for an ETA economic hardship offer. Shortly before the audit assessment for which he is submitting the OIC, he retitled his house and his car to a corporation. He is the president and sole shareholder of the corporation. Would you recommend accepting his ETA offer? State your reasons.



Public Policy or Equity



Definitions

According to Black's Law Dictionary, public policy is:


"Community common sense and common conscience, extended and applied throughout the state to matters of public morals, health, safety, and welfare, and the like; it is that general and well-settled public opinion relating to man's plain, palpable duty to his fellowmen, having due regard to all circumstances of each particular relation and situation."


The same source defines equity as:


"Justice administered according to fairness as contrasted with the strictly formulated rules of common law."


The definition of these terms provide the basis for understanding ETA offers for which public policy or equity standards are applied. This type of offer was previously known as a compromise because collection would be detrimental to voluntary compliance.



Criteria

In order for an ETA offer based on public policy or equity to be accepted the following criteria must be present:


Ÿ there is no doubt as to liability



Ÿ there is no doubt as to collectibility, and



Ÿ the liability could be collected in full without causing economic hardship.


Compromise is authorized because there are exceptional circumstances such that collecting the tax in full would cause the public to doubt the tax laws are being administered fairly. When you investigate this type of offer you should ask yourself:


Are there exceptional circumstances in this case such that the general public would view full collection of the tax liability as unfair or inequitable?


Compromise under these guidelines will be rare.



Burden of Proof

The taxpayer bears the burden of proof to show their offer qualifies for public policy or equity consideration. They must show that their circumstances are compelling enough to justify acceptance of their offer compared to other taxpayers in similar circumstances.

It is important that the public does not perceive that some taxpayers receive more favorable treatment that others.



Determining an Acceptable Amount

Once you decide to recommend acceptance of an OIC under public policy or equity criteria, you must determine if the amount offered is appropriate. You must base your determination on what is fair and equitable under the circumstances. Thoroughly document the case file history with the basis for your determination.



Examples

The following examples illustrate situations where an ETA offer under the public policy or equity standard may be appropriate.



Example 1

In January of 1995, Ed Yuma became seriously ill and was hospitalized on and off for five years. During that time, he was unable to manage his financial affairs. He did not file any tax returns. In 2001 his health improved. During the same year he was contacted by a revenue officer and subsequently filed and paid all the delinquent tax returns. The IRS, however, had prepared a substitute for return for 1994. The balance due for 1994 including interest and penalties was now three times more than the original tax liability.

An ETA offer under the public policy and equity criteria can be considered. Mr. Yuma's failure to comply occurred because he was incapacitated and unable to comply with the tax laws. He is now in compliance and his overall compliance history does not weigh against compromise. It is reasonable to compromise the 1994 liability because Mr. Yuma was physically unable to do anything about the unfilled return and unpaid tax until much later. You should first work with Mr. Yuma to prepare an accurate 1994 return. You can then investigate the offer under public policy or equity grounds.

An acceptable offer amount should approximate the amount Mr. Yuma would have to pay if he had complied timely with filing and payment requirements.

If the investigation reveals that the taxpayer was able to attend to matters other than his taxes during that timeframe, it would not promote effective tax administration to accept his offer.



Example 2

Bonnie Grant is the manager of a local department store. Each year for the past three years she contributed $2,000 to an individual retirement account (IRA). Ms. Grant learned she could earn more interest on her account by transferring the funds to a certificate of deposit at another bank. Before she transferred the money, she contacted the IRS by e-mail to find out how to preserve the tax benefits of an IRA account and not incur any penalties. The IRS responded with an e-mail that told her she could withdraw the funds without penalty as long as she redeposited them in a qualifying account within 90 days. Ms. Grant withdrew the funds and 63 days later redeposited them in the new account.

Two years later Ms. Grant is audited. The auditor informed her that she received incorrect information. IRA funds must be redeposited in 60 days to avoid penalties and interest. Ms. Grant is in compliance with all filing and paying requirements. She is eligible to have an ETA offer based on public policy or equity accepted.

Ms. Grant relied on the Service's erroneous information to make her decision. She could have avoided the liability if the Service had given the correct information. It is reasonable to conclude that collection of the liability would cause other taxpayers to question the fairness of the tax system.

An acceptable offer amount should be based on the amount the taxpayer would now owe if the Service had not made an error.



Acts of Third Parties

Generally the Service will not compromise on public policy or equity grounds based solely on the argument that the acts of a third party caused the unpaid tax liability. Third parties include the taxpayer's:


Ÿ representative



Ÿ partner, or



Ÿ employee


Occasionally there may be situations in which the criminal or fraudulent acts of a third party make the payment of a tax liability seem unfair. If the taxpayer were compelled to pay the tax, other taxpayers would question the fairness of the tax system. These include situations where:


Ÿ the failure to comply can be directly attributed to intervention by a third party, and



Ÿ the taxpayer made every effort to comply and took all reasonable precautions to prevent the criminal or fraudulent act.


Consider any actions the taxpayer took to lessen the effects of the third party's actions. For example, did the taxpayer take reasonable precautions to prevent the acts and pursue collection from the third party once the acts were discovered.



"The law is unfair."

A taxpayer is not eligible for a public policy or equity ETA offer in situations:


Ÿ where they are liable for taxes, penalties or interest due to an operation of law. In other words, the Service cannot accept an offer in compromise because the taxpayer believes that a provision of a tax law is unfair. Or,



Ÿ when there are already statutes in place that grant the same relief they are seeking through an offer.


IRC section 7122 is not so broad that it allows the Service to disregard or override the judgments of Congress and statutory provisions.



Example 1

Karla Barton owes taxes due to the discharge of a debt. She submitted an ETA offer based on public policy or equity. She states it is unfair to consider a discharged debt as income.

Congress defined discharge of an indebtedness as income in IRC section 61(a)(12). It would not promote effective tax administration to accept Ms. Barton's offer under these circumstances.



Example 2

Daryl Meeker invested in a nationally marketed partnership that promised a return greater than the amount invested. Mr. Meeker then claimed tax credits for the three preceding tax years that significantly reduced his tax liability. The following year, the IRS began an audit of the partnership. It issued a final report that would increase the taxes of Mr. Meeker as well as numerous other taxpayers. Before the case was heard in Tax Court, the IRS offered to concede a substantial portion of the interest and penalties it expected to assess following a favorable court decision. Mr. Meeker rejected the settlement offer. After several years of litigation, the Tax Court upheld most of the deficiencies assessed by IRS.

Mr. Meeker submitted an ETA offer based on public policy and equity. He claimed there were two reasons his offer qualified for this consideration. The first was that much of the liability was a result of the actions taken by the tax matter partner (TMP) during the audit and litigation. The second was that the underlying law that allowed the IRS to prevail in tax court was unfair.

The offer should not be accepted. Neither the acts of a third party, the TMP, nor the taxpayer's belief that the law is unfair is sufficient to support accepting a public policy or equity ETA offer.



Example 3

Paul Martin is a self-employed carpenter. His 1996 income tax return was audited in 1998. The audit resulted in a deficiency of $11,000 plus applicable interest. In May 2000, Mr. Martin contacted the Service and requested a statement of the balance of his account. The offer investigation later showed that the Service inadvertently issued an incorrect statement.

In January 2001, Mr. Martin submitted an ETA offer on public policy and equity grounds. He claimed that he should not be required to pay the accrued interest on his account due to the Service's error.

Compromise on public policy and/or equity grounds is not appropriate in this situation since the Service's error did not cause the deficiency. IRC section 6404(e) provides relief from interest caused by IRS errors or delay. Acceptance of an ETA offer in this situation would not promote effective tax administration.



Compliance Considerations

You must address the same compliance considerations with public policy or equity ETA offers as you do with economic hardship ETA offers.



Exercises --Public Policy or Equity



Exercise 1

Answer the following questions true or false.



Question 1

A public policy or equity ETA offer may also include doubt as to collectibility issues.

_____true _____false



Question 2

A public policy or equity ETA offer allows a taxpayer to compromise if they think the law is unfair.

_____true _____false



Question 3

It is not necessary for a taxpayer to have a history of complying with the tax laws to qualify for a public policy or equity ETA offer.

_____true _____false



Question 4

If a third party caused the liability, a compromise based on public policy or equity is always acceptable.

_____true _____false



Exercise 2



Question 1

What are the criteria for an ETA offer based on public policy or equity?

l

l

l



Answers to Exercises --Economic Hardship



Exercise 1

Question 1

False. The taxpayer must have the ability to pay the tax liability in full to submit an ETA offer.

Question 2

False. If the taxpayer is maintaining an affluent lifestyle, it is not an economic hardship for them to reduce their living expenses.

Question 3

False. Only an individual can submit an economic hardship ETA.

Question 4

True. As long as the taxpayer is an individual, the types of_taxes compromised do not matter.

Question 5

True. The public must not perceive that the taxpayer benefited by not complying with the tax laws.



Exercise 2

Question 1

Three factors to consider for an economic hardship ETA are:


Ÿ The taxpayer cannot earn a living because of a long-term illness, medical condition or disability.



Ÿ The taxpayer cares for a dependent with no other means of support and exhausts their income.



Ÿ The taxpayer is unable to borrow against the equity in assets because repayment of then loan would not allow them to meet necessary living expenses.


Question 2

You should not recommend accepting the ETA offer in this situation. Mr. Osborne took steps to avoid paying the tax by transferring his assets to a corporation.



Answers to Exercise --Public Policy and Equity



Exercise 1

Question 1

False. There may be no doubt as to collectibility issues for a Public policy or equity ETA offer.

Question 2

True. The purpose of public policy or equity ETA offers is not to over ride laws already in existence.

Question 3

False. The taxpayer must have an overall history of compliance with the tax laws to qualify for a public policy or equity ETA offer.

Question 4

False. Generally the Service will not compromise a liability based solely on the argument that a third party caused the liability.



Exercise 2

Question 1

To qualify for an ETA offer based on public policy or equity the following criteria must be present:


Ÿ There is no doubt as to liability



Ÿ There is no doubt as to collectibility



Ÿ The liability can be collected in full without causing a hardship




Department of the Treasury



Internal Revenue Service




Office of Chief Counsel




Notice

CC-2004-25

July 12, 2004

Upon incorporation

Subject: Offers in Compromise in Bankruptcy Cancel Date: into CCDM



Purpose

This Notice explains the Service's policy of returning administrative offers in compromise as nonprocessable to taxpayers currently in a bankruptcy proceeding. Additionally, this Notice provides clarification regarding the Service's authority to acquiesce in treatment of its claims in bankruptcy cases that is less favorable than that provided for under the Bankruptcy Code.



Discussion

The Service's authority to compromise tax liabilities is provided by I.R.C. § 7122(a), which states as follows:


(a) AUTHORIZATION. --The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.


The decision to compromise, including whether to consider a compromise and how much to accept, is within the Service's discretion. See Treas. Reg. § 301.7122-1(a). It has been the Service's long-standing policy to compromise cases only when settlement furthers the best interests of both the taxpayer and the Government. See Policy Statement P-5-100 (approved Jan. 30, 1992), reprinted in IRM 1.2.1.5.18. See also Policy Statement P-5-89 (approved July 26, 1960), reprinted in IRM 1.2.1.5.16.

The Commissioner is charged with the power to administer and supervise the execution and application of the Internal Revenue Code. See I.R.C. § 7803(a)(2). Pursuant to



Department of the Treasury



Internal Revenue Service



Office of Chief Counsel



Notice

CC-2004-25

July 12, 2004

Upon incorporation

Subject: Offers in Compromise in Bankruptcy Cancel Date: into CCDM



Purpose

This Notice explains the Service's policy of returning administrative offers in compromise as nonprocessable to taxpayers currently in a bankruptcy proceeding. Additionally, this Notice provides clarification regarding the Service's authority to acquiesce in treatment of its claims in bankruptcy cases that is less favorable than that provided for under the Bankruptcy Code.



Discussion

The Service's authority to compromise tax liabilities is provided by I.R.C. § 7122(a), which states as follows:


(a) AUTHORIZATION. --The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.


The decision to compromise, including whether to consider a compromise and how much to accept, is within the Service's discretion. See Treas. Reg. § 301.7122-1(a). It has been the Service's long-standing policy to compromise cases only when settlement furthers the best interests of both the taxpayer and the Government. See Policy Statement P-5-100 (approved Jan. 30, 1992), reprinted in IRM 1.2.1.5.18. See also Policy Statement P-5-89 (approved July 26, 1960), reprinted in IRM 1.2.1.5.16.

The Commissioner is charged with the power to administer and supervise the execution and application of the Internal Revenue Code. See I.R.C. § 7803(a)(2). Pursuant to

The IRS has supplemented and clarified the procedures identified in Reg. §301.7122-1 for submitting and processing offers to compromise a tax liability under Code Sec. 7122. An offer to compromise, which must be submitted in writing on Form 656, Offer in Compromise, should include the legal grounds for compromise, as well as the amount the taxpayer proposes to pay and the payment terms. An offer becomes processable when the IRS determines that it meets the following minimum requirements: (1) the offer is submitted on the proper version of Form 656 and Form 433-A or B, as appropriate; (2) the taxpayer is not in bankruptcy; (3) the taxpayer has complied with all filing and payment requirements listed in the Form 656 instructions; (4) the taxpayer has enclosed the application fee, if required; and (5) the offer meets any other minimum requirements established by the IRS. The decision as to whether to accept an offer to compromise is within the discretion of the IRS and an offer will only be accepted if it is determined to be in the best interest of both the taxpayer and the IRS. A taxpayer may withdraw an offer to compromise anytime prior to acceptance of the offer. An offer to compromise is not considered accepted until the IRS issues written notification of acceptance to the taxpayer. This procedure is effective August 21, 2003, but provisions relating to the offer in compromise application fee are not effective for offers submitted before November 1, 2003. Rev. Proc. 96-38, 1996-2 CB 300, is obsoleted.





Revenue Procedure 2003-71 , to be published in I.R.B. 2003-36, September 8, 2003.






SECTION 1. PURPOSE

The purpose of this revenue procedure is to explain the procedures applicable to the submission and processing of offers to compromise a tax liability under section 7122 of the Internal Revenue Code. These procedures reflect changes to the law made by the Internal Revenue Service Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat. 685, 764).



SECTION 2. BACKGROUND

.01 Section 7122 permits the Secretary of the Treasury or his delegate to compromise any civil or criminal liability arising under the internal revenue laws before the case is referred to the Department of Justice for prosecution or defense.

.02 The Secretary has developed guidelines and procedures for the submission and evaluation of offers to compromise under section 7122. These guidelines can be found in § 301.7122-1 of the Regulations on Procedure and Administration, the Internal Revenue Manual, and various forms and publications issued by the Internal Revenue Service (Service). This revenue procedure supplements and clarifies the procedures identified in § 301.7122-1.

.03 This revenue procedure includes provisions relating to the offer in compromise application fee, required under § 300.3 of the Regulations on User Fees and effective November 1, 2003.



SECTION 3. SCOPE

This revenue procedure applies to all offers to compromise a civil or criminal liability under section 7122 submitted to the Service, except for those offers submitted directly to the Office of Appeals. This revenue procedure does not apply to offers to compromise a tax liability after a case involving a civil or criminal liability has been referred to the Department of Justice for prosecution or defense.



SECTION 4. SUBMITTING AN OFFER TO COMPROMISE

.01 An offer to compromise a tax liability must be submitted in writing on the Service's Form 656, Offer in Compromise. None of the standard terms may be stricken or altered, and the form must be signed under penalty of perjury. The offer should include all liabilities to be covered by the compromise, the legal grounds for compromise, the amount the taxpayer proposes to pay, and the payment terms. Payment terms include the amounts and due dates of the payments. The offer should also contain any other information required by Form 656. The Service occasionally revises Form 656 and may require offers to be submitted on the most recent version of the form. The most recent version of the form and instructions are available on the Service's website at www.irs.gov.

.02 An offer to compromise a tax liability should set forth the legal grounds for compromise and should provide enough information for the Service to determine whether the offer fits within its acceptance policies.

(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 of the liability.

An offer to compromise based on doubt as to liability generally will be considered acceptable if it reasonably reflects the amount the Service would expect to collect through litigation. This analysis includes consideration of the hazards of litigation that would be involved if the liability were litigated. The evaluation of the hazards of litigation is not an exact science and is within the discretion of the Service.

(2) Doubt as to collectibility. Doubt as to collectibility exists in any case where the taxpayer's assets and income cannot satisfy the full amount of the liability.

An offer to compromise based on doubt as to collectibility generally will be considered acceptable if it is unlikely that the tax can be collected in full and the offer reasonably reflects the amount the Service could collect through other means, including administrative and judicial collection remedies. See Policy Statement P-5-100. This amount is the reasonable collection potential of a case. In determining the reasonable collection potential of a case, the Service will take into account the taxpayer's reasonable basic living expenses. In some cases, the Service may accept an offer of less than the total reasonable collection potential of a case if there are special circumstances.

(3) Promotion of effective tax administration.


(a) The Service may compromise to promote effective tax administration where it determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship. Economic hardship is defined as the inability to pay reasonable basic living expenses. See § 301.6343-1(d). No compromise may be entered into on this basis if compromise of the liability would undermine compliance by taxpayers with the tax laws.





An offer to compromise based on economic hardship generally will be considered acceptable when, even though the tax could be collected in full, the amount offered reflects the amount the Service can collect without causing the taxpayer economic hardship. The determination to accept a particular amount will be based on the taxpayer's individual facts and circumstances.



(b) If there are no other grounds for compromise, the Service 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. The taxpayer will be expected to demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid his liability in full. No compromise may be entered into on this basis if compromise of the liability would undermine compliance by taxpayers with the tax laws.





An offer to compromise based on compelling public policy or equity considerations generally will be considered acceptable if it reflects what is fair and equitable under the particular facts and circumstances of the case.


.03 The offer should include all information necessary to verify the grounds for compromise. Except for offers to compromise based solely on doubt as to liability, this includes financial information provided in a manner approved by the Service. Individual or self-employed taxpayers must submit a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, together with any attachments or other documentation required by the Service. Corporate or other business taxpayers must submit a Form 433-B, Collection Information Statement for Businesses, together with any attachments or other documentation required by the Service. The Service may require the corporate officers or individual partners of a business taxpayer to complete a Form 433-A.

.04 An offer to compromise a tax liability should be mailed to the appropriate address listed on Form 656. The Service may, in its discretion, receive offers to compromise in other manners. Simply because the Service has received an offer does not mean that it has accepted the offer for processing such that the offer is considered pending within the meaning of section 6331(k)(1). Accepting an offer for processing is addressed in Section 5.01 of this revenue procedure.

.05 If a deposit is submitted with the offer to compromise and the taxpayer authorizes application of a deposit to tax liabilities, it will be credited to the taxpayer's account as of the day the deposit is first received.



SECTION 5. WHEN AN OFFER BECOMES PENDING AND RETURN OF OFFERS

.01 Section 6331(k)(1) generally prohibits the Service from making a levy on a taxpayer's property or rights to property while an offer to compromise a liability is pending with the Service, for 30 days after the rejection of an offer to compromise, or while an appeal of a rejection is pending. The statute of limitations on collection is suspended while levy is prohibited. An offer to compromise becomes pending when it is accepted for processing. The Service accepts an offer to compromise for processing when it determines that: the offer is submitted on the proper version of Form 656 and Form 433-A or B, as appropriate; the taxpayer is not in bankruptcy; the taxpayer has complied with all filing and payment requirements listed in the instructions to Form 656; the taxpayer has enclosed the application fee, if required; and the offer meets any other minimum requirements established by the Service. A determination that the offer meets these minimum requirements means that the offer is processable.

.02 A determination is made to accept an offer to compromise for processing when a Service official with delegated authority to accept an offer for processing signs the Form 656. The date the Service official signs the Form 656 is recorded on the Service's computers. As of this date, levy is prohibited unless the Service determines that collection of the liability is in jeopardy.

.03 If the Service determines that an offer to compromise a liability does not meet the minimum requirements the Service has established for a processable offer, the offer to compromise is not processable and may be returned to the taxpayer. Because the offer to compromise was never accepted for processing, it was never pending and levy was never prohibited.

.04 If an offer to compromise accepted for processing does not contain sufficient information to permit the Service to evaluate whether the offer should be accepted, the Service will request that the taxpayer provide the needed additional information. These requests for information are described in Section 6 below. If the taxpayer does not submit the additional information that the Service has requested within a reasonable time period after such a request, the Service may return the offer to the taxpayer. The Service also may return the offer after it has been accepted for processing if:

(1) The Service determines that the offer was submitted solely to delay collection;

(2) The taxpayer fails to file a return or pay a liability;

(3) The taxpayer files for bankruptcy;

(4) The offer is no longer processable; or

(5) The offer was accepted for processing in error.

When an offer is returned under this Section 5.04, the Service will not refund the application fee submitted with the offer unless the offer was accepted for processing in error.

.05 If a determination is made to return the offer to compromise as described in Sections 5.03 and 5.04, the return of the offer does not constitute a rejection. The taxpayer is not entitled to appeal the matter to Appeals under the provisions of § 301.7122-1(f)(5). If the Service initiates collection action following a return of an offer to compromise, the taxpayer may be able to appeal the collection action under section 6320, section 6330, or under the Collection Appeals Program.

.06 An offer to compromise is considered to be returned on the day the Service mails, or personally delivers, a written letter to the taxpayer informing the taxpayer of the decision to return the offer. 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 offer is returned. The Service may levy to collect the liability that was the subject of the offer anytime after it returns the offer to the taxpayer.



SECTION 6. CASE BUILDING, INVESTIGATION, AND EVALUATION

.01 Once the Service accepts an offer to compromise for processing, it begins to gather the basic information necessary to begin evaluating the offer. During this initial processing, the Service may contact the taxpayer to secure information or documentation that was incorrect or omitted from the offer documents.

.02 After all of the basic information has been obtained from the taxpayer, the Service evaluates the information and determines whether the taxpayer's offer is acceptable. In the course of evaluating the offer to compromise, the Service may request additional information or documentation from the taxpayer.

.03 The decision whether and when to accept an offer to compromise a liability is within the discretion of the Service. In keeping with Policy Statement P-5-100, an offer will only be accepted if it is determined to be in the best interest of both the taxpayer and the Service. In addition to the criteria discussed in Section 4.02, the Service may take into account public policy and tax administration concerns in determining whether an offer to compromise is acceptable.

.04 For all offers to compromise, except for those based solely on doubt as to liability, the Service verifies the taxpayer's income and assets according to the Service's policies and procedures. Verification allows the Service to determine whether or not the taxpayer can fully pay the liability and, if not, to determine the reasonable collection potential of the liability.

(1) The Service uses a variety of sources to verify the taxpayer's valuation of the taxpayer's property. The Service relies on internal sources, such as its computer databases or other records, public and electronic sources, such as state motor vehicle records and credit bureau reports, and taxpayer supplied documentation.

(2) Section 7122 requires the Service to prescribe and publish guidelines to ensure that taxpayers entering into a compromise have an adequate means to provide for basic living expenses. The amount of basic living expenses will be determined based on an evaluation of the individual facts and circumstances presented by the taxpayer's case. The Service maintains a schedule of national and local allowances to account for the basic living expenses of taxpayers seeking to compromise. To determine whether an offer is adequate, the Service uses these schedules to analyze the income and expenses of the taxpayer to determine the monthly income available to pay the liability. These schedules are available in the Financial Analysis Handbook, IRM 5.15, and on the Service's website at www.irs.gov. The schedules are not applied when doing so would leave the taxpayer without adequate means to provide for basic living expenses.

(3) For purposes of evaluating an offer to compromise, the Service allows expenses only to the extent it determines they are necessary for the health and welfare of the taxpayer or the taxpayer's family or are necessary for the production of income.



SECTION 7. WITHDRAWING AN OFFER TO COMPROMISE

.01 The taxpayer may withdraw an offer to compromise a liability anytime prior to acceptance of the offer. An offer that has been withdrawn is no longer pending and the Service may levy to collect the liability that was the subject of the offer. When an offer is withdrawn the Service will not refund the application fee submitted with the offer.

.02 The taxpayer may withdraw an offer to compromise by delivery of written notification of the withdrawal in person, by mail, or by fax. An offer assigned to Centralized Offer in Compromise Units, however, may not be withdrawn by personal delivery, because documents cannot be personally delivered to these units. A taxpayer may also request withdrawal of an offer telephonically. A notice of intent to withdraw an offer should be directed to the Service office assigned to the case.

(1) If the taxpayer withdraws an offer to compromise by personal delivery, the offer will be considered withdrawn when written notification of the withdrawal is received by the Service.

(2) If the taxpayer withdraws an offer to compromise by mailing written notification of the withdrawal via U.S. certified mail, the offer will be considered withdrawn on the date the Service receives the certified mail.

(3) In all other cases, including withdrawal by non-certified mail, fax, or phone, the offer will be considered withdrawn on the date the Service mails, or personally delivers, a written letter to the taxpayer acknowledging the withdrawal.



SECTION 8. ACCEPTING AN OFFER TO COMPROMISE

.01 An offer to compromise has not been accepted until the Service issues written notification of acceptance to the taxpayer. Acceptance is effective as of the date on the acceptance letter.

.02 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 any person not named in the offer who is also liable for the tax to which the offer relates. The Service may take action to collect from any person not named in the offer.



SECTION 9. REJECTING AN OFFER TO COMPROMISE

.01 An offer to compromise has not been rejected until the Service issues written notification of rejection to the taxpayer. Section 7122(d) requires the Service to conduct an independent administrative review before the rejection of an offer to compromise is communicated to the taxpayer. The Service reviews each case to determine if the proposed rejection is reasonable based on the facts and circumstances of the case. Rejection is effective as of the date on the rejection letter. When an offer is rejected the Service will not refund the application fee submitted with the offer.

.02 The taxpayer may appeal the rejection of an offer to compromise to Appeals. The taxpayer must timely file the appeal with the Service office that rejected the offer. An appeal is timely filed if it is delivered to the Service or postmarked within thirty days from the date of the letter of rejection.

.03 Pursuant to section 6331, the Service may not make a levy on the taxpayer's property or rights to property for thirty days following the rejection of an offer to compromise or while an appeal of a rejection is pending.



SECTION 10. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 96-38 is obsoleted.



SECTION 11. EFFECTIVE DATE

This revenue procedure is effective August 21, 2003, the date this revenue procedure was announced by news release, except that the provisions relating to the offer in compromise application fee are not effective for offers submitted prior to November 1, 2003.



SECTION 12. DRAFTING INFORMATION

The principal author of this revenue procedure is Sheara L. Krvaric of the Office of the Associate Chief Counsel (Procedure and Administration), Collection, Bankruptcy & Summonses Division. For further information regarding this revenue procedure contact Branch 2 of Collection, Bankruptcy & Summonses on (202) 622-3620 (not a toll free call).

Change in OIC law in The Tax Increase Prevention and Reconciliation Act of 2005

Notice 2006-68 , I.R.B. 2006-31, July 11, 2006, reflects the changes in The Tax Increase Prevention and Reconciliation Act of 2005. The Tax Increase Prevention and Reconciliation Act of 2005 ( P.L. 109-222) made major changes to the offers in compromise (OIC) program, tightening the rules for lump-sum and periodic payment offers received by the IRS on or after July 16, 2006. Taxpayers submitting a request for a lump-sum OIC, defined as an offer of payment made in five or fewer installments, must include a payment of 20 percent of the amount offered. Taxpayers submitting requests for periodic-payment OICs must include the first proposed installment payment with their application and continue making payments under the terms proposed while the offer is being evaluated. The IRS will treat the payments as payments of tax, rather than refundable deposits. Unless a waiver applies, failure to pay the 20 percent on a lump-sum offer, or the first installment payment on a periodic payment offer may result in the IRS returning the offer to the taxpayer as nonprocessable. Taxpayers qualifying as low-income or filing an offer based solely on doubt as to liability can receive a waiver of the new partial payment requirements. The IRS will deem an OIC accepted that is not withdrawn, returned or rejected within 24 months after receipt of the offer. When submitting Form 656, taxpayers must include user fee of $150 unless they qualify for a waiver.


The Internal Revenue Service and the Department of the Treasury are currently revising Form 656, Offer in Compromise, and developing regulations under section 7122 of the Internal Revenue Code to implement the amendments to section 7122 made by section 509 of the Tax Increase Prevention and Reconciliation Act of 2005 ("TIPRA"), Pub. L. No. 109-222. The TIPRA amendments to section 7122 apply to offers in compromise submitted on or after July 16, 2006.

As amended, section 7122 provides that a lump-sum offer (one payable in five or fewer installments) must be accompanied by the payment of 20 percent of the amount of the offer. Section 7122 also provides that a periodic payment offer (one payable in six or more installments) must be accompanied by the payment of the amount of the first proposed installment and additional installments must be paid while the offer is being evaluated by the Internal Revenue Service.

This Notice provides interim guidance under section 7122, as amended by section 509 of TIPRA, until regulations or other guidance is issued and Form 656 is revised. Taxpayers may rely on this Notice until regulations or other guidance is issued and may continue to use the current version of Form 656 (Rev. 7-2004) to submit offers until a revised Form 656 is available. The revised Form 656 will be made available on the Internal Revenue Service's website at www.IRS.gov and taxpayers may call 1 (800) Tax-Form to request a copy of Form 656.



SECTION 1. BACKGROUND AND GENERAL RULES

.01 Section 7122 permits the Service to compromise any civil liability arising under the internal revenue laws before the case is referred to the Department of Justice for prosecution or defense. Section 509 of TIPRA amended section 7122, effective for offers in compromise submitted on or after July 16, 2006. An offer in compromise will be treated as submitted on or after July 16, 2006, if the offer is received on or after that date by the Service. The postmark date is irrelevant in determining when an offer is submitted.

.02 Section 7122(c)(1), as amended by TIPRA, requires that an offer in compromise be accompanied by a partial payment. In the case of a lump-sum offer, the partial payment required is 20 percent of the amount of the offer. If the taxpayer does not make the required 20-percent payment, the offer may be returned to the taxpayer as unprocessable. Section 7122(d)(3)(C). The Service will treat the required 20-percent payment as a payment of tax, rather than a refundable deposit under section 7809(b) or Treas. Reg. §301.7122-1(h). Voluntary payments submitted in connection with an offer in compromise, to the extent they exceed the payment or payments required under section 7122(c)(1), will be treated as refundable deposits if they are not designated as tax payments by the taxpayer.

.03 If the taxpayer submits a periodic payment offer, the taxpayer must include the first proposed installment with the offer. If the taxpayer does not make the first installment payment, the offer may be returned to the taxpayer as unprocessable. Section 7122(d)(3)(C). While a periodic payment offer is being evaluated by the Service, the taxpayer must make subsequent proposed installment payments as they become due. If the taxpayer fails to make an installment payment other than the first installment, the failure may be treated as a withdrawal of the offer. Section 7122(c)(1)(B)(ii). The Service will treat installment payments required for a periodic payment offer as payments of tax, rather than refundable deposits under section 7809(b) or Treas. Reg. §301.7122-1(h). Voluntary payments submitted in connection with an offer in compromise, to the extent they exceed the payment or payments required under section 7122(c)(1), will be treated as refundable deposits if they are not designated as tax payments by the taxpayer.

.04 Section 7122(c)(2)(A) allows the taxpayer to specify how any payment made pursuant to section 7122(c)(1) is to be applied to the assessed taxes, penalties, interest, etc. The specification must be made in writing when the offer is submitted or when the payment is made. The specification should clearly indicate how the partial payment or partial payments (in the case of a periodic payment offer) are to be applied to specific taxable years (or other taxable periods) or to specific liabilities (e.g., income taxes, employment taxes, and trust fund recovery penalties under section 6672(a)). Once the taxpayer specifies how a payment is to be applied, the specification cannot later be changed. In the absence of a specification, the Service will apply the payment or payments required by section 7122(c) in the best interests of the government.

.05 Section 7122(c)(2)(B) provides that the assessed tax or other amounts shall be reduced by any user fee imposed with respect to the taxpayer's offer in compromise. The applicable regulations provide that a $150 user fee is generally charged for processing an offer in compromise, but no fee is charged if the offer is based solely on doubt as to liability or is made by a low-income taxpayer. Treas. Reg. §300.3(b)(1). Because a taxpayer may not specify how the $150 user fee for processing an offer in compromise will be applied, the Service will apply the user fee in the best interests of the government.

.06 Section 7122(c)(2)(C) provides that the Secretary may issue regulations waiving any payment required under section 7122(c)(1) in a manner consistent with the practices established in accordance with the requirements under section 7122(d)(3). See Section 4 of this Notice for information concerning waivers for low-income taxpayers and for offers based solely on doubt as to liability.

.07 Section 7122(f) provides that if an offer in compromise is not rejected within 24 months after submission of the offer, the offer shall be deemed to be accepted. Any period during which any tax liability which is the subject of the offer is in dispute in any judicial proceeding is not taken into account in determining the expiration of the 24-month period. The date of submission of an offer for purposes of section 7122(f) is the date on which the offer is received by the Service. The postmark date is irrelevant in determining when an offer is submitted. An offer will not be deemed to be accepted if the offer is, within the 24-month period, rejected by the Service, returned by the Service to the taxpayer as nonprocessable or no longer processable, withdrawn by the taxpayer, or deemed withdrawn under section 7122(c)(1)(B)(ii) because of the taxpayer's failure to make the second or later installment due on a periodic payment offer. The date an offer is rejected for purposes of section 7122(f) is the date on which the Service issues a written notice of rejection under Treas. Reg. §301.7122-1(f)(1). The period during which the IRS Office of Appeals considers a rejected offer in compromise is not included as part of the 24-month period because the offer was rejected by the Service within the meaning of section 7122(f) prior to consideration of the offer by the Office of Appeals.



SECTION 2. GUIDANCE FOR LUMP-SUM OFFERS

.01 Unless a waiver under Section 4 of this Notice applies, a lump-sum offer in compromise received on or after July 16, 2006, will be returned as not processable if the offer is not accompanied by a partial payment of the amount of the offer.

.02 If the taxpayer makes a partial payment when a lump-sum offer is submitted, but the payment is less than the 20-percent required amount, the Service may accept the offer for processing and solicit payment of the remaining portion of the 20-percent amount. If the taxpayer does not pay the balance of the 20-percent amount within the time allowed by the Service, the Service may return the offer as not processable unless the Service determines that continued processing of the offer would be in the best interests of the government.



SECTION 3. GUIDANCE FOR PERIODIC PAYMENT OFFERS

.01 Unless a waiver under Section 4 of this Notice applies, a periodic payment offer in compromise received on or after July 16, 2006, will be returned as not processable if the submission of the offer is not accompanied by the full amount of the first proposed installment.

.02 If a periodic payment offer has been accepted for processing and the taxpayer fails to make full payment of the second or subsequent proposed installment while the offer is being evaluated, the Service may solicit payment from the taxpayer of the unpaid amount of the subsequent installment. The Service may issue a letter advising the taxpayer that the offer is considered withdrawn if the taxpayer does not make full payment of the installment within the time allowed unless the Service determines that continued processing of the offer is in the best interests of the government.



SECTION 4. WAIVER OF PAYMENTS UNDER SECTION 7122(c)(2)(C)

.01 The Treasury Department and the Service intend to issue regulations pursuant to section 7122(c)(2)(C) that will waive payments otherwise required by section 7122(c)(1) in two situations. Waivers will apply with respect to offers submitted by low-income taxpayers and with respect to offers submitted by other taxpayers based solely on doubt as to liability. Although regulations have not been issued, on an interim basis the Service will waive the payments otherwise required by section 7122(c)(1) using the criteria described in Sections 4.02 and 4.03 below.

.02 No payment under section 7122(c)(1) will be required when an offer is submitted by a low-income taxpayer. A low-income taxpayer is an individual whose income falls at or below poverty levels based on guidelines established by the U.S. Department of Health and Human Services under the authority of section 673(2) of the Omnibus Reconciliation Act of 1981 (95 Stat. 357, 511), or another measure that is adopted by the Secretary. Until further guidance is issued, a taxpayer should use the worksheet to Form 656-A, Income Certification for Offer in Compromise Application Fee, to determine if the taxpayer qualifies as a low-income taxpayer who is not required to make partial payments pursuant to section 7122(c)(1).

.03 No payment under section 7122(c)(1)will be required when an offer is submitted by a taxpayer based solely on doubt as to liability. An offer is considered to be submitted solely on the basis of doubt as to liability if the taxpayer submits the offer on Form 656-L, Offer in Compromise (Doubt as to Liability), or, if the offer is submitted on Form 656, Offer in Compromise, it is clear on the face of the Form that the only basis on which the taxpayer relies in making the offer is doubt as to liability.



SECTION 5. REQUEST FOR COMMENTS

.01 The Treasury Department and the Service request comments from the public on the issues addressed in this Notice and on additional issues that should be addressed in regulations or other guidance as a result of the recent amendments to section 7122.

.02 Comments are requested regarding the definition of low-income for purposes of section 7122(c)(2)(C). For purposes of this interim guidance, Section 4.02 of this notice defines low-income in a manner consistent with Treas. Reg. §300.3(b)(1)(ii) regarding user fees for processing offers to compromise. However, the Treasury Department and the Service recognize that commentators have previously raised concerns regarding the definition of low-income in the context of the user fee regulations. Treasury and the Service are considering modifications to the definition of low-income for purposes of the user fee charged for processing an offer in compromise. Treasury and the Service anticipate that any modification to the definition of low-income for purposes of the user fee will be reflected in subsequent guidance issued under new section 7122(c)(2)(C).

.03 Comments should be submitted in writing on or before October 9, 2006 to the Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044, Attn: CC:PA:CBS ( Notice 2006- 68). Submissions may also be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to the Courier's Desk at 950 L'Enfant Plaza, 5 th Floor, Washington, DC 20024 by contacting the Legal Processing Division at (202) 874-9752. Submissions may also be sent electronically via the internet to the following email address: Notice.comments@irscounsel.treas.gov. Include the notice number ( Notice 2006-68) in the subject line. All comments will be available for public inspection and copying.



SECTION 6. DRAFTING INFORMATION

The principal author of this Notice is William F. Conroy of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this notice contact William F. Conroy at (202) 622-3600 (not a toll-free call).

Offer in Compromise Legislative History - General Explanation of 1998 Tax Legislation (Blue Book), JCS-6-98, November 24, 1998, 105th Congress
[JOINT COMMITTEE PRINT]GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN 1998
PREPARED BY THE STAFF OF THE JOINT COMMITTEE ON TAXATION NOVEMBER 24, 1998 U.S. GOVERNMENT PRINTING OFFICE


TITLE III. TAXPAYER PROTECTION AND RIGHTS





b. Offers-in-compromise (sec. 3462 of the Act and secs. 6331 and 7122 of the Code)



Present and Prior Law


The Code permits the IRS to compromise a taxpayer's tax liability. An offer-in-compromise is an offer by the taxpayer to settle unpaid tax accounts for less than the full amount of the assessed balance due. An offer-in-compromise may be submitted for all types of taxes, as well as interest and penalties, arising under the Internal Revenue Code.

There are two bases on which an offer can be made: doubt as to liability for the amount owed and doubt as to ability to pay the amount owed.

A compromise agreement based on doubt as to ability to pay requires the taxpayer to file returns and pay taxes for five years from the date the IRS accepts the offer. Failure to do so permits the IRS to begin immediate collection actions for the original amount of the liability. The Internal Revenue Manual provides guidelines for revenue officers to determine whether an offer-in-compromise is adequate. An offer is adequate if it reasonably reflects collection potential. Although the revenue officer is instructed to consider the taxpayer's assets and future and present income, the IRM advises that rejection of an offer solely based on narrow asset and income evaluations should be avoided.

Pursuant to the IRM, collection normally is withheld during the period an offer-in-compromise is pending, unless it is determined that the offer is a delaying tactic or collection is in jeopardy.


Reasons for Change


The Congress believed that the ability to compromise tax liability and to make payments of tax liability by installment enhances taxpayer compliance. In addition, the Congress believed that the IRS should be flexible in finding ways to work with taxpayers who are sincerely trying to meet their obligations and remain in the tax system. Accordingly, the Congress believed that the IRS should make it easier for taxpayers to enter into offer-in-compromise agreements, and should do more to educate the taxpaying public about the availability of such agreements.Explanation of Provision


Rights of taxpayers entering into offers-in-compromise. --The Act requires the IRS to develop and publish schedules of national and local allowances that will provide taxpayers entering into an offerin-compromise with adequate means to provide for basic living expenses. The IRS also is required to consider the facts and circumstances of a particular taxpayer's case in determining whether the national and local schedules are adequate for that particular taxpayer. If the facts indicate that use of scheduled allowances would be inadequate under the circumstances, the taxpayer is not limited by the national or local allowances.

The Act prohibits the IRS from rejecting an offer-in-compromise from a low-income taxpayer solely on the basis of the amount of the offer. The Act provides that, in the case of an offer-in-compromise submitted solely on the basis of doubt as to liability, the IRS may not reject the offer merely because the IRS cannot locate the taxpayer's file. The Act prohibits the IRS from requesting a financial statement if the taxpayer makes an offer-in-compromise based solely on doubt as to liability.

Publication of taxpayer's rights with respect to offers-in-compromise. --The Act requires the IRS to publish guidance on the rights and obligations of taxpayers and the IRS relating to offers in compromise, including a compliant spouse's right to apply to reinstate an agreement that would otherwise be revoked due to the nonfiling or nonpayment of the other spouse, providing all payments required under the compromise agreement are current.

Suspend collection by levy while offer-in-compromise or installment agreement is pending. --The Act prohibits the IRS from collecting a tax liability by levy (1) during any period that a taxpayer's offer-in-compromise for that liability is being processed, (2) during the 30 days following rejection of an offer, and (3) during any period in which an appeal of the rejection of an offer is being considered. Collection by levy is also prohibited while an installment agreement is pending, under similar rules. Taxpayers whose offers are rejected and who made good faith revisions of their offers and resubmitted them within 30 days of the rejection or return would be eligible for a continuous period of relief from collection by levy. This prohibition on collection by levy does not apply if the IRS determines that collection is in jeopardy or that the offer was submitted solely to delay collection. The Act provides that the statute of limitations on collection is tolled for the period during which collection by levy is barred.

Procedures for reviews of rejections of offers-in-compromise and installment agreements. --The Act requires that the IRS implement procedures to review all proposed IRS rejections of taxpayer offers-in-compromise and requests for installment agreements prior to the rejection being communicated to the taxpayer. The Act requires the IRS to allow the taxpayer to appeal any rejection of such offer or agreement to the IRS Office of Appeals. The IRS must notify taxpayers of their right to have an appeals officer review a rejected offer-in-compromise on the application form for an offer-in-compromise.

Guidelines to determine whether an offer-in-compromise should be accepted. --The Act authorizes the Secretary to prescribe guidelines for the IRS to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute. Accordingly, it is expected that the present regulations will be expanded so as to permit the IRS, in certain circumstances, to consider additional factors (i.e., factors other than doubt as to liability or collectibility) in determining whether to compromise the income tax liabilities of individual taxpayers. For example, it is anticipated that the IRS will take into account factors such as equity, hardship, and public policy where a compromise of an individual taxpayer's income tax liability would promote effective tax administration. It is anticipated that, among other situations, the IRS may utilize this new authority to resolve longstanding cases by forgoing penalties and interest which have accumulated as a result of delay in determining the taxpayer's liability.


Effective Date


The provision is generally effective for offers-in-compromise and installment agreements submitted after the date of enactment (after July 22, 1998). The provision suspending levy is effective with respect to offers-in-compromise pending on or made after December 31, 1999.


Revenue Effect


The provision is estimated to reduce the Federal fiscal year budget receipts by $1 million in 1998, have no revenue effect in 1999, and to increase such receipts by $9 million in 2000 and by $4 million in each of the years 2001 through 2007.


c. Notice of deficiency to specify deadlines for filing Tax Court petition (sec. 3463 of the Act and sec. 6213 of the Code)



Prior Law


Taxpayers were required to file a petition with the Tax Court within 90 days after the deficiency notice is mailed (150 days if the person is outside the United States) (sec. 6213). If the petition was not filed within that time period, the Tax Court did not have jurisdiction to consider the petition.


Reasons for Change


The Congress believed that taxpayers should receive assistance in determining the time period within which they must file a petition in the Tax Court and that taxpayers should be able to rely on the computation of that period by the IRS.


Explanation of Provision


The Act requires the IRS to include on each deficiency notice the date determined by the IRS as the last day on which the taxpayer may file a petition with the Tax Court. The provision provides that a petition filed with the Tax Court by this date is treated as timely filed.


Effective Date


The provision is effective with respect to notices mailed after December 31, 1998.


Revenue Effect


The provision is estimated to have a negligible effect on Federal fiscal year budget receipts.

IRS revoked an offer in compromise

David W. Trout v. Commissioner.

Dkt. No. 5690-05L , 131 TC --, No. 16, December 16, 2008.

[Appealable, barring stipulation to the contrary, to CA-9. --CCH.]

[ Code Secs. 6330, 7122 and 7502]

Levy and distraint: Returns: Mailing date: Offer-in-compromise agreement: Collection due process hearing. --

An Appeals officer did not abuse his discretion in cancelling an offer-in-compromise (OIC) agreement, reinstating a taxpayer's original tax bill and sustaining a levy, based on the taxpayer's breach of the OIC. As a condition for the OIC, the taxpayer agreed to file his tax returns and pay tax due for five years. However, the taxpayer failed to timely file returns for two years and pay tax for one of those years. Because the returns were never received by the IRS and there was no record of either a postmark, or certified or registered-mail receipt, the taxpayer could not rely on the presumption of delivery. Even assuming the Appeals officer had found the returns were timely filed, the IRS's evidence of nonreceipt was overwhelming. By not timely filing the returns and paying tax, the taxpayer was not in compliance with the express terms of the OIC. As a contract, the OIC was governed by general principles of federal common law. Clarifying its decision in J.M. Robinette, 123 TC 85, Dec. 55,698, the Tax Court stated that a national legal standard for construing OIC agreements was supported by three factors: federal government agency as litigant, contracts entered into under federal law and the need for nationwide uniformity in administration. Under general principles of the federal common law of contracts the taxpayer's obligation to file and pay taxes was an express condition of the contract that required strict compliance. The IRS used plain language to explain the terms and conditions of the OIC and the risk of forfeiture did not weigh against finding that the obligation to file and pay was an express condition of the OIC. Even without relying on principles of contract law, other federal courts have upheld the IRS's right to cancel an OIC when the taxpayer is in default because of the express language in the agreement. Finally, the IRS provided the taxpayer with several opportunities to become compliant and the only consideration for forgiveness of 95 percent of his tax debt was to timely file and pay his taxes for five years. Thus, the Appeal's officer's decision not to excuse the breach and reinstate the OIC was not an abuse of discretion.







In 1997, P entered into an offer-in-compromise (OIC) covering tax years 1989, 1990, 1991, and 1993. The OIC included a term requiring P to timely file and pay his taxes for five years. P filed his 1996 tax return late, then failed to file 1998 and 1999 returns. P filed his 1998 taxes, showing a refund due, in November 2003, but failed to sign his 1999 return, which showed a liability of $164. In March 2004, R sent P a notice of intent to levy and P requested a CDP hearing. P paid his liability for 1999 but still failed to file a signed return. R issued a notice of determination upholding the collection action in March 2005. P claims failure to file the 1999 return was not a material breach, relying on Robinette v. Commissioner, 123 T.C. 85 (2004). P claims that R abused his discretion (1) in finding that P had not timely filed his 1998 and 1999 returns and (2) in refusing to reinstate the OIC because the breach of the OIC's obligation to timely file was not material. Held, P did not gain the benefit of the exceptions listed in sec. 7502, I.R.C., to the general rule that a tax return is filed when received. Under Rule 122, the Court could not make a finding on P's credibility and overwhelming evidence indicated that R did not receive either return on time. Therefore, R's finding that 1998 and 1999 tax returns were not timely filed was not an abuse of discretion. Held, further, applying general principles of the federal common law of contracts, P's OIC agreement made timely filing and payment of tax express conditions. P was not powerless to avoid the breach, and the failure to reinstate his OIC caused no forfeiture, so R did not abuse his discretion in finding P had breached the OIC and determining to proceed with collection.





OPINION



HOLMES, Judge: David Trout offered the IRS $6,000 to settle his 1989, 1990, 1991, and 1993 tax bills which totaled $128,736.45. The Commissioner accepted this offer in 1997. As part of the deal, Trout agreed to file his tax returns, and pay any tax due, on time for the next five years. The Commissioner says that Trout broke that deal, and now wants to collect the original bill. Trout says that he did file his returns on time but that, even if he didn't, his failure was too immaterial to be a breach of his contract with the IRS. And even if it was a breach, he argues that his default did not justify reinstating his original tax bill.



In Robinette v. Commissioner, 123 T.C. 85 (2004), we faced a very similar question and in our lead opinion looked at least in part to the state law of Arkansas to resolve it. Id. at 109. The Eighth Circuit carefully noted that "it is not clear that the Tax Court applied or relied upon Arkansas law. To the extent that Arkansas law might differ from the contract principles that derive from federal common law, * * * federal law governs this case." Robinette v. Commissioner, 439 F.3d 455, 462 n.6 (8th Cir. 2006). Today, we revisit the issue and state more plainly that the federal common law of contracts applies. Using that law, we conclude that Trout breached his contract with the Commissioner, and we hold that the Commissioner did not abuse his discretion in refusing to reinstate the original deal.





Background



Before offering to compromise his tax debt, Trout had not always filed on time. In the years before he signed the deal in January 1997, he was late more often than not:





Year Due Received

1989 4/15/90 6/13/91

1990 4/15/91 4/15/91

1991 4/15/92 4/15/92

1992 4/26/93 8/15/93

1993 10/15/94 3/25/96

1994 10/15/95 4/9/96

1995 8/15/96 11/7/96





Settling with the IRS in the form he did --called an offer-in-compromise (OIC) --gave Trout a chance for a fresh start with the tax system. But there was a catch --the OIC provided that he had to satisfy "all of the terms and conditions of the offer" or the Commissioner could reinstate his original tax liability. One of these terms was that Trout had to both file his returns on time, and pay the tax due, for five years after signing the OIC.



Trout, however, flopped back to his old ways within a year, by not filing his 1996 tax return until April 1998. The Commissioner either wanted to give Trout another chance or didn't notice, because the OIC wasn't defaulted. Trout filed and paid his 1997 taxes on time, but then fell back into trouble for 1998 and 1999. His 1998 return was due (with extensions) in October 1999. His 1999 tax return was due (again with an extension) in August 2000. The IRS says it never received either one, and the Commissioner finally noticed and sent "potential OIC default letters" to Trout and his lawyer in September 2001. 1 These letters gave him 30 days to file and pay any taxes that he owed for 1999, and threatened him with termination of the OIC and the reinstatement of any of his original tax liabilities remaining unpaid if he didn't.



After hearing nothing for almost seven months, the Commissioner sent Trout an "OIC default letter" on April 15, 2002. He sent this letter to Trout's address in Phoenix, Arizona --the same address to which he sent the "potential OIC default letter" and the address which both parties agree was Trout's residence during the 2001 and 2002 tax years. Another year passed, and in May 2003 the Commissioner sent a "Notice of Intent to Levy" (NIL) to Trout --and sent it not to Phoenix, but to a concededly wrong address.



Trout never responded to the NIL that the Commissioner mailed to the wrong address, so the IRS went ahead and levied on his salary in September 2003. Trout complained, but the Commissioner took the position that when Trout didn't timely file his 1998 return and pay the tax due, he was in default on the OIC's condition that he file and pay his taxes on time for five years.



Trout blames the accountant who prepared both his 1998 and 1999 returns, arguing that the accountant put the wrong Social Security number on them by turning a "5" into a "2" and so it was the accountant who caused those returns to lose their way. Trout claims that this was just an honest clerical mistake. The wrong number belonged to a man who died in 1978, however, and the Commissioner has no record of taxes being timely filed for those years under either the correct or the mistaken number. When Trout learned this, he said he would file the missing returns.



The Commissioner's heart then softened --he told Trout to go ahead and mail his missing 1998 and 1999 returns and resubmit the OIC. This got Trout moving, and the Commissioner finally received and filed the missing 1998 tax return in November 2003 (nearly four years after its extended due date). It showed the IRS owed him a small refund of about $1,350.



Trout's 1999 return remains a problem --the Commissioner claims that he still has not received it in proper form even after all these years, despite several requests and the active involvement of Trout's lawyers. The Commissioner did receive an unsigned copy of the 1999 return with a self-reported liability of $164 in late 2003. In December 2003, the Commissioner asked Trout to sign this late-filed 1999 return and send copies of both the 1998 and 1999 original returns (the ones that Trout claimed the IRS must have misfiled because his accountant got the social security number wrong) to prove that he had filed them when due. Trout never did so, and in March 2004 the Commissioner sent Trout another notice of his intent to levy. 2 Trout requested a "Collection Due Process" (CDP) hearing. In May 2004, the Commissioner released the first levy and postponed levying under the second, having concluded that Trout was indeed entitled to a pre-levy hearing.



The 1999 return continued to bedevil both parties --on May 14, 2004, the Commissioner told Trout that that return was still unfiled. In November 2004, the Commissioner received another unsigned 1999 return which he promptly sent back for signing. In December 2004 --although the Commissioner still hadn't gotten a signed 1999 return --he did get two checks. One was from Trout for $163, and the other one, written by Trout's lawyers, was for $1. The Commissioner incorrectly posted these checks to Trout's 1989 and 1990 accounts.



The missing 1999 return popped up again on January 12, 2005, when Trout's lawyer faxed another unsigned 1999 return with a hand-corrected social security number. The Commissioner again bounced this one back for lack of a signature. Trout's lawyer responded on January 27, 2005, with a letter insisting that Trout had filed his 1999 return (and citing Robinette). In February 2005, Trout's lawyer finally sent in a signed 1999 return, but again with an incorrect social security number.



The CDP process ground on while the 1999 returns were being batted back and forth. In March 2005, the Appeals officer issued a notice of determination upholding the levy, and denying reinstatement of the OIC. The Appeals officer determined that Trout did not timely file his returns for 1998 and 1999 or timely pay the balance due for 1999. (He also noted that Trout had been late in filing his 1996 tax return.) The Appeals officer concluded that there wasn't a less intrusive alternative to the levy, since Trout offered no collection alternatives besides the reinstatement of the OIC. 3



Trout contends that the Appeals officer ignored Robinette by not considering whether the alleged nonfiling of the returns was a material breach of contract. The Appeals officer acknowledged that Trout believes Robinette to be the controlling precedent, but concluded in his case memorandum: "In my opinion, whether there was or was not a material breech [sic] of contract does not matter. The taxpayer failed to comply with the terms of the [OIC]."



The case was set for trial in Chicago, though Trout was a resident of Arizona when he filed his petition. 4 The parties submitted the case for decision under Rule 122, and stipulated most of the record. They disagree only on whether Trout timely filed his 1998 and 1999 tax returns, whether he timely paid his 1999 tax due, and whether a letter from the USPS can be introduced into evidence. Only Trout's tax liability for 1993 remains at issue, because the Commissioner has conceded that the statute of limitations for collection after assessment has expired for tax years 1989, 1990, and 1991.



Trout argues that the Appeals officer abused his discretion in refusing Trout's request to reinstate his OIC. He relies heavily on the similarities between his case and Robinette, and so argues that even if he didn't file his returns, the Commissioner should still have reinstated the OIC because his purported breach is immaterial. He also asserts that the ten-year collection statute has expired even for 1993. 5





Discussion



Both parties agree that we're reviewing not a challenge to Trout's underlying tax liability, but only the Commissioner's decision to sustain the levy. See sec. 6330(c)(2)(A). The question therefore is whether the Commissioner abused his discretion. We look to see if he "'ma[de] an error of law * * * or rest[ed] [his] determination on a clearly erroneous finding of fact * * * [or] applie[d] the correct law to the facts which are not clearly erroneous but rule[d] in an irrational manner.'" Indus. Investors v. Commissioner, T.C. Memo. 2007-93 (quoting United States v. Sherburne, 249 F.3d 1121, 1125-26 (9th Cir. 2001)); see also Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 402-03 (1990).



In Robinette, we held that the Commissioner abused his discretion by not reinstating an OIC despite Robinette's failure to timely file his tax returns. In that case, we held that



[d]espite the late filing * * *, under the facts and circumstances of this case, [the Commissioner] abused his discretion in determining to proceed with collection. The Appeals officer acted arbitrarily and without sound basis in law and had a closed mind to the arguments presented on petitioner's behalf. He failed to consider the facts and circumstances of this case. He determined to proceed with collection even though the breach in the contract was not material and under contract law the contract remained in effect.



123 T.C. at 107.



Trout argues that his case is just like Robinette's --even the Appeals officer in this case is the same --and so he argues that we have to reach the same result here, even though we were reversed on appeal. 6 He claims that his case is even stronger than Robinette's because the facts show that he didn't actually breach his OIC, much less breach it materially.



We first address whether the Commissioner erred in finding that Trout breached the OIC by not timely filing his 1998 and 1999 returns. We then analyze whether our decision in Robinette compels us to hold that the OIC was still in effect because any breach was not material. And, finally, we review the Commissioner's exercise of discretion in ultimately sustaining the levy.




A. Did the Appeals Officer Abuse his Discretion in Finding that Trout Didn't Timely File and Pay for 1998 and 1999?


Trout claims that he timely filed his returns for 1998 and 1999. He argues that his accountant prepared returns for both years, but explains the absence of any IRS record of their receipt by suggesting that they might have been filed under the wrong social security number. We're skeptical about this explanation at the outset, because Trout filed requests for extensions of his filing deadlines for both those years using the same wrong social security number, and the Commissioner managed to successfully process both of them.



The Commissioner also argues that it's up to Trout to prove timely filing. And, other than unsigned copies of his returns, Trout points to nothing in the record (e.g. a certified mail receipt) that proves he mailed the returns, proffered no testimony from his accountant, and most importantly, introduced no canceled checks or bank records suggesting that he timely paid the balance due on his 1999 taxes, or received his refund for 1998. When the Appeals officer checked IRS records for Trout's 1999 tax return, he found that it still hadn't been processed as of January 12, 2005 --despite numerous requests for a signed 1999 tax return and the assistance of two attorneys from two different law firms.



The general rule is that a tax return is filed when it's received. United States v. Lombardo, 241 U.S. 73, 76 (1916). Section 7502 provides exceptions to this general rule for returns received after, but postmarked by the USPS on or before, their due date --and even for returns not received at all if they were sent by registered or certified mail. Sec. 7502; sec. 301.7502-1(c)(1)(iii)(A),(2), Proced. & Admin. Regs. Trout's original returns were never received. And there is no evidence in the record of either a postmark, or a certified or registered-mail receipt. Sec. 7502(a)(1) and (c). This was also an issue in Robinette, but in that case there was a detailed explanation of the postmark, physical evidence of the postmark, and a detailed itinerary of the whereabouts of the accountant who mailed the return. Robinette, 123 T.C. at 88, 106.



Some courts allow other evidence that the taxpayer has fulfilled the requirements of section 7502. In Anderson v. United States, 966 F.2d 487, 490-92 (9th Cir. 1992), the Ninth Circuit held that although section 7502 created a statutory mailbox rule, it did not displace the common-law mailbox rule that the proper mailing of an envelope creates a rebuttable presumption of its receipt. But this presumption, absent physical evidence such as a postmark, requires a finding on the credibility of the taxpayer. In Anderson v. United States, 746 F. Supp. at 15,(E.D. Wash. 1990), the District Court found credible the taxpayer's testimony that she saw the postal clerk postmark her return and place the envelope in the mail. The Anderson court also found that the government lacked credibility when it claimed not to have received the tax return, since it admitted losing other taxpayers' documents. Id. at 16.



Because Trout submitted this case for decision without trial under Rule 122, we are unable to make findings of credibility on this issue. Nor has Trout offered any evidence to prove that he ever mailed his tax returns before the IRS started levying on his property, much less that he timely mailed them. So Trout cannot rely on any presumption of delivery. Cf. Robinette, 123 T.C. at 106.



Even if the Appeals officer had found that Trout timely mailed his tax returns, the Commissioner rebutted whatever advantage the common-law mailbox rule might have given Trout. See Smith v. Commissioner, T.C. Memo. 1994-270, affd. without published opinion 81 F.3d 170 (9th Cir. 1996). The Commissioner's evidence of nonreceipt was overwhelming: The Appeals officer conducted a nationwide search on the master files of the IRS to see if any return had been filed for 1998 or 1999 under either Trout's real social security number or the one he says he used. The Commissioner also notes that the IRS issued no refund for 1998, even though Trout requested a refund on his return. And Trout offered no proof that he received the refund he was owed on his 1998 taxes. As for the 1999 tax year, the IRS had no record of a timely $164 payment, and Trout has no canceled check to back up his claim.



We conclude that the Appeals officer did not clearly err in finding that the IRS did not receive the 1998 and 1999 returns on time. See Walden v. Commissioner, 90 T.C. 947, 951-52 (1988). We therefore find no abuse of discretion in his determination that Trout failed to timely file those returns.



But was that enough to justify the Commissioner's decision to pull the OIC?




B. Did the Appeals Officer Abuse His Discretion in Defaulting the OIC?


Trout believes that his case is exactly like Robinette, and he specifically appeals to our holding that Robinette's failure to timely file was not a material breach of his OIC. Because the breach wasn't material, we held that the OIC was still in effect under general principles of contract law. Id. at 108 (citing TXO Prod. Corp. v. Page Farms, Inc., 698 S.W.2d 791, 793, (Ark. 1985)). And since "the offer-in-compromise was not in default, it was an abuse of discretion for [the Commissioner] to determine to proceed with collection of [Robinette's] tax liability." Robinette, 123 T.C. at 112.



In this case, the Appeals officer decided that Trout breached his OIC by not timely filing his 1998 and 1999 returns, not timely paying his 1999 taxes, and because timely filing and paying was an express condition of the OIC. The Appeals officer knew about Robinette, but believed that Trout's noncompliance with the express terms of the OIC made irrelevant the materiality of those breaches. After the Eighth Circuit issued its opinion, we have faced a similar problem at least twice. But in both Ng v. Commissioner, T.C. Memo. 2007-8, and West v. Commissioner, T.C. Memo. 2008-30, we were able to conclude that the taxpayer had both materially breached his OIC and violated its express conditions.



We think it best now to decide the issue of whether the Commissioner should analyze violations of OICs for materiality of breach or express conditions, rather than require both the Commissioner and taxpayers to argue both theories in every case because of the uncertainty now present in the caselaw.



We start by being precise in describing what it was that we held in Robinette. We began with the proposition that OICs are contracts, and so their construction is governed by general principles of contract law. Id. at 108 Our lead opinion cited Arkansas law --Robinette being a resident of Arkansas when he filed the petition and during the tax years at issue --for the proposition that a material breach discharges a party's obligation to perform, whereas a minor breach does not. Id. We then analyzed whether the breach was material under the five-factor test from 2 Restatement, Contracts 2d, sec. 241 (1981), carefully noting that Arkansas had adopted this analysis. These five factors balance:



(a) the extent to which the injured party (here the Commissioner) is deprived of the benefit he reasonably expected from entering into the OIC;



(b) the extent to which the Commissioner is adequately compensated for the loss of that benefit;



(c) the extent to which the breaching party (here the taxpayer) suffers forfeiture;



(d) the probability that the breaching party will cure his breach, taking into account all of the circumstances including "reasonable assurances"; and



(e) the extent to which the breaching party's behavior comports with standards of good faith and fair dealing.



After balancing these factors, we found that the breach wasn't material. Robinette, 123 T.C. at 112.



This opinion garnered the votes of 6 of the 17 judges then in office. It also attracted a number of concurrences. Judge Wells wrote that our focus on contract law was unnecessary in deciding that the Commissioner abused his discretion, and that Appeals officers shouldn't be "required to rigidly apply contract law." Id. at 112-13. He would have focused the analysis on whether the Appeals officer conducted a proper balancing analysis of the competing interests of the taxpayer and Commissioner under section 6330(c)(3)(C) --the intrusiveness of collection action with the Commissioner's interest in efficient tax collection. Id. at 113. His position attracted 4 other votes, including 2 from judges who also agreed with the lead opinion.



Judge Thornton's concurrence emphasized that a taxpayer's "express agreement" to timely file his returns is an "integral condition" to the Commissioner's acceptance of the OIC, and that such a condition is reasonable because it merely confirms a statutory obligation even in cases where a refund is due. Id. at 116. This position won the approval of a majority of the Court --11 of 17, including 5 of the 6 votes in favor of the lead opinion.



Judge Marvel's concurrence questioned the lead opinion's reliance on principles of contract law, but concluded that the Appeals officer's failure to investigate whether the OIC could be reinstated (when this was obviously an important collection alternative) was a more than sufficient basis to sustain a finding of abuse of discretion. Id. at 117-18. Her position was joined by two judges, one of whom had supported the lead opinion, and one who had joined Judge Wells's concurrence.



And Judge Haines wrote to warn specifically that the lead opinion's citations to Arkansas state law shouldn't be construed as requiring the use of the law of a taxpayer's state of residence rather than general contract principles. Id. at 118. He warned of the "administrative nightmare" that would result from requiring Appeals officers to apply state, rather than general, contract law. He also noted that the Internal Revenue Manual said that an OIC may be defaulted when subsequent tax returns aren't timely filed. Id. at 119. This position was supported by 2 other judges.



Judge Wherry's concurrence didn't touch on any questions of contract law, and the dissent (which gathered only 2 votes), only echoed the concerns of Judge Haines's concurring opinion on this point. Id. at 130 n.8.



Given the multiple opinions in Robinette, it is not clear whether a majority of the Court supported the possible reliance on Arkansas contract law --on that issue, the vote seems to have been 6-5 (the lead opinion having 6 votes, and the dissent plus Judge Haines's concurring opinion together having 5). This led the Eighth Circuit on appeal to be unsure whether we had. Robinette, 439 F.3d at 462 n.6. That court made it clear nevertheless that it thought federal, rather than state, common-law principles govern OICs. Id. (citing United States v. Kimbell Foods, Inc., 440 U.S. 715, 726 (1979)).



In light of the Eighth Circuit's reversal, we think it necessary to clarify our position in Robinette that the "general principles of contract law" that we applied in Robinette are the general principles of the federal common law of contracts. See West v. Commissioner, T.C. Memo. 2008-30 (citing Dutton v. Commissioner, 122 T.C. 133, 138 (2004)). See also Clearfield Trust Co. v. United States, 318 U.S. 363, 366-67 (1943).



We have several reasons to do so. First, this is litigation between an agency of the federal government and a taxpayer. Though not sufficient in itself, this is a factor weighing in favor of using federal common law. See Boyle v. United Techs. Corp., 487 U.S. 500, 504 (1988). Second, OICs are a creation of several provisions of the Code and regulations --all federal law. See Kimbell Foods, 440 U.S. at 726, 728. It is also a program that the IRS has to run across the country, and the "administrative nightmare" that Judge Haines referred to in his concurrence supports a uniform national legal standard for construing OIC agreements. These three factors --a federal government agency as litigant, contracts entered into under federal law, and the need for nationwide uniformity in administration, all point us to the federal common law of contracts as our source of rules. See Boyle, 487 U.S. at 504; Kimbell Foods, 440 U.S. at 728.



Our cites to Arkansas law in Robinette should henceforth be taken to illustrate general principles of the federal common law of contracts. That many states --like Arkansas --use the Restatement of Contracts tends to prove that the Restatement is a good source for discerning these general principles. Courts applying federal common law find in the Restatement "the standard principles of contract law --more precisely, the core principles of the common law of contract that are in force in most states." United States v. Natl. Steel Corp., 75 F.3d 1146, 1150 (7th Cir. 1996) (citing Fleming v. United States Postal Serv., 27 F.3d 259, 260-61 (7th Cir. 1994)).



Precedents from the Court of Federal Claims are also a rich source of this federal common law. And that court, like the Restatement, tells us to give contractual language the "meaning that would be derived from the contract by a reasonable intelligent person acquainted with the contemporaneous circumstances. * * * [A] court must give reasonable meaning to all parts of the contract and not render portions of the contract meaningless." Gutz v. United States, 45 Fed. Cl. 291, 296-97 (1999) (citations omitted); see also 2 Restatement, Contracts 2d, sec. 203(a) (1981).



The interpretation of the OIC agreement is crucial here because the parties disagree about whether the five-years-of-timely-filing requirement is an "express condition." Trout claims that even if he didn't timely file and pay, his breach is immaterial. But it is literally hornbook law that an express condition is subject to strict performance, thus making the materiality of the breach irrelevant. Calamari & Perillo on Contracts, sec. 11.15 (5th ed. 2003). So if Trout's obligation to file and pay taxes is an express condition, strict performance is required, and filing late for even one year is enough to find that he breached the OIC.



Whether a condition is an express condition is a matter of contractual interpretation. Id. Express conditions can be made by agreement of the parties, and there are certain words that are often used to create express conditions such as "on condition that", "provided that", and "if". 2 Restatement, Contracts 2d, sec. 226 cmt. a (1981). The Ninth Circuit, applying federal common-law principles, has favored interpretation of OICs according to the plain meaning of their words, unless the parties manifest a different intention. Johnston v. Commissioner, 461 F.3d 1162, 1165 (9th Cir. 2006), (citing 2 Restatement, sec. 202(3)), affg. 122 T.C. 124 (2004).



The OIC agreement that Trout signed says in bold type in paragraph 7:



By submitting this offer, I/we understand and agree to the following terms and 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 five (5) years from the date IRS accepts the offer, * * *



(j) I/we understand that I/we remain responsible for the full amount of the tax liability unless and until IRS accepts the offer in writing and I/we have met all the terms and conditions of the offer. IRS won't remove the original amount of the tax liability from its records until I/we have met all the terms and conditions of the offer.



(k) I/we understand that the tax I/we offer to compromise is and will remain a tax liability until I/we meet all the terms and conditions of this offer.* * *



(o) If I/we fail to meet any of the terms and conditions of the offer, the offer is in default, and IRS may:



* * * * * * *



(iii) disregard the amount of the offer and apply all amounts already paid under the offer against the original amount of tax liability;



The "Instructions" part of the OIC agreement says in the "Tax Compliance" paragraph: "Please note that the terms of the offer also require your future compliance (i.e. filing and paying for five years) after acceptances." And it cautions in item 7:



It is important that you understand that when you make this offer, you are agreeing that:



* * *(d) [I]RS can reinstate the entire amount owed if you don't comply with all the terms and conditions of the offer, including the requirement to file returns and pay tax for five years.



The Commissioner could hardly have used plainer language to explain the terms and conditions of the OIC or to express his intent. He repeatedly cautioned the taxpayer who signs the OIC: "It is important that you understand that", and "Please note that"; he used a bold font, and he stated that he can reinstate the original liability for failure to meet any of the terms and conditions in paragraph o. Finally, just to be sure that Trout understood that the terms of the offer required timely filing and payment for five years after entering into the OIC, the OIC form lists it clearly and in boldface, as a "term and condition" in paragraph d. It's listed on the Instruction part of the OIC agreement to boot.



Courts may in borderline cases nevertheless favor construction against finding an express condition, especially if doing so would avoid a forfeiture. 2 Restatement, Contracts 2d, sec. 227 and cmt. b (1981). This is also true if the occurrence or nonoccurrence of a condition was outside the contracting party's control. Id. But there's neither a risk of forfeiture nor evidence that Trout was powerless to avoid a breach here. There's no forfeiture because payments Trout made under the OIC remain credited to his account, and there's nothing in the record to suggest that the timely filing of his tax returns was not under his control. In any event, we don't have to rely too much on general principles of the contract law of express conditions --other federal courts construing OICs have already upheld the Commissioner's right to cancel them when a taxpayer defaults because the agreement expressly provided "with language * * * 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." United States v. Lane, 303 F.2d 1, 4 (5th Cir. 1962). The Third Circuit had similarly held that the Commissioner could default an OIC when a taxpayer failed to make a payment because "[b]y the clear language of the offer-in-compromise [the taxpayer] agreed that, upon his default, the Commissioner * * * could terminate the compromise agreement." United States v. Feinberg, 372 F.2d 352, 357-58 (3d Cir. 1965). The court relied on this conclusion in Fortenberry v. United States, 49 AFTR 2d 82-1027, 82-1 USTC par. 9191 (S.D. Miss. 1981), to hold that the Commissioner could declare a compromise agreement in default when the taxpayer didn't make payments as agreed. And of course, the Eighth Circuit in Robinette itself held that the terms of an OIC were express conditions. Robinette, 439 F.3d at 462.



So we hold that the Appeals officer committed no error of law in concluding that Trout's timely-filing-and-paying requirement was an express condition of his contract with the IRS, and that it required strict compliance to avoid breach --making the question of whether his breach was material irrelevant. Or, as the Ninth Circuit has said in reviewing the obligations of an OIC: "[A] deal is a deal, even with the tax man." Johnston, 461 F.3d at 1164.




C. Did the Appeals Officer Abuse His Discretion in Sustaining the Levy?


Even though we hold timely filing and payment was an express condition, and so agree with the Appeals officer that Trout did breach his OIC agreement, we must not end our analysis there. Section 6330(c)(3)(C) commands the Commissioner to balance the need for efficient collection of taxes with the legitimate concern that collection be no more intrusive than necessary. In Robinette, we found that the Appeals officer "had a closed mind to the arguments presented on petitioner's behalf" in deciding to proceed with collection even though the breach in the contract wasn't material. Id. at 107. A major conclusion of the lead and concurring opinions was that the Commissioner abused his discretion in not carrying out his mandate under section 6330 to conduct the required balancing analysis. We homed in on the Commissioner's refusal even to consider reinstatement of the OIC as proof that his analysis was flawed.



This case is different. Here the Commissioner did not lightly default the OIC and reinstate the liability for a de minimis fault, but made several efforts to bring Trout back into the taxpaying fold. First, he ignored Trout's late filing in 1996. When the 1999 tax return wasn't filed, he waited almost two years before sending a potential OIC default letter, even though the terms of the OIC said that the OIC could be defaulted without warning if it wasn't strictly complied with. Although Trout claims to have received no notice, it's understandable why the Appeals officer might not have found this claim credible since this letter was also mailed to his lawyer and it's improbable that neither received the letter. Nor is there any evidence from the lawyer on this point. And although the potential OIC default letter warned Trout that he had 30 days to pay his taxes, the Commissioner actually waited almost seven months to default the OIC.



The Appeals officer understood even then that he had the discretion to excuse the breach of the express condition and reinstate the OIC. He chose not to. This is understandable --Trout's only consideration for the potential forgiveness of almost 95 percent of his tax debt was his promise to timely file and pay his taxes for five years after the OIC. In Robinette, the consideration given by the taxpayer for the OIC was not only a timely-filing-and-paying promise but also an agreement to pay substantial portions of his income exceeding $100,000. Not so here: All the IRS was getting other than the small $6,000 in upfront money was Trout's promise to comply with the law. This focused the Appeals officer's concentration on Trout's compliance history (both before and after the OIC) --which featured multiple requests for extensions of his filing deadlines, followed by returns that he filed late or not at all. Trout also offered no other collection alternatives, such as an installment agreement, even though he was doing fairly well. 7



The Appeals officer balanced the competing interests of the taxpayer and Commissioner, as required under section 6330(c)(3)(C). Stated in the OIC agreement itself is the paragraph entitled "IRS policy," which told Trout that the purpose of the OIC program is to give taxpayers a fresh start in tax compliance by allowing them to settle tax debts for less than they owe. This is undermined if a taxpayer can reduce his liabilities with an OIC, yet still indulge in late-filing recidivism. The record before the Appeals officer here was not the record before him in Robinette, where, for example, the taxpayer probably missed one filing deadline by only a few hours. 439 F.3d at 459 n.2. It is instead the story of a taxpayer who filed months late or not at all for three of the five years after he signed the OIC.



The stated goal of the OIC program --returning wayward taxpayers to the path of tax righteousness --would be entirely blocked if we were to hold that the express condition of timely filing agreed to by a taxpayer really meant that he could file returns late as long as they showed a net refund. We'd be stripping the Commissioner not only of his chosen remedy (reinstatement of the original debt), but also of his chosen emphasis on a taxpayer's future compliance as an aim of the OIC program.



We therefore find that the Appeals officer didn't abuse his discretion in not excusing an express condition of Trout's contract with the IRS. The Appeals officer considered reinstatement of the OIC as a collection alternative, but believed that Trout wasn't entitled to a second chance after looking at his pattern of noncompliance. Moreover, Trout's failure to successfully file his 1999 return (which he just had to sign and file under his correct social security number), even with the help of two attorneys, and even while the CDP hearing was pending, reasonably failed to inspire the Appeals officer's confidence that Trout was serious about timely filing and paying his taxes going forward.



In conclusion, we sustain the Appeals officer's finding that Trout didn't timely file his returns for 1998 and 1999 or timely pay his tax for 1999, and also sustain his decision not to reinstate the OIC. Accordingly,



An order and decision for respondent as to tax year 1993 will be entered.



Reviewed by the Court.



COHEN, WELLS, HALPERN, FOLEY, GALE, THORNTON, HAINES, GOEKE, WHERRY, KROUPA, GUSTAFSON, PARIS, and MORRISON, JJ., agree with this majority opinion.



MARVEL, J., concurring in the result: I agree with the result reached by the majority. I write separately, however, to emphasize the obligation of the Appeals Office of the IRS to verify whether applicable administrative procedures governing the default of an offer-in-compromise (OIC) were followed in a section 6330 proceeding involving a defaulted OIC for an alleged breach of the OIC's timely filing/payment provision (compliance provision). Although petitioner clearly breached his OIC and the IRS properly exercised its discretion in reinstating petitioner's original tax liability, there have been and no doubt will be other cases where that conclusion is not so evident.



The majority points out that an express condition is subject to strict performance. See majority op. p. 21. It then examines the language of the OIC and concludes that petitioner's obligation to file timely returns and to pay all required taxes for a 5-year period beginning on the date the OIC is accepted is an "express condition" of the IRS's obligation to perform under the OIC. The majority holds "that the Appeals officer committed no error of law in concluding that * * * [petitioner's] timely-filing-and-paying requirement was an express condition of his contract with the IRS, and that it required strict compliance to avoid breach --making the question of whether his breach was material irrelevant." Majority op. p. 25.



The majority quotes from the OIC to which petitioner and the IRS agreed to be bound. The relevant language of the OIC states that (1) if the taxpayer fails to meet any of the terms and conditions of the offer, "the offer is in default"; 1 and (2) the IRS may take certain actions because of the taxpayer's failure, including reinstating and collecting the compromised liability. See 2 Administration, Internal Revenue Manual (IRM) (CCH), pt. 5.19.7.3.26(1), at 18,537 (Dec. 5, 2006). 2 However, the OIC does not state that the IRS must terminate it (or that the OIC automatically terminates) in the event of a breach. Rather, the OIC states that the IRS may terminate it (by reinstating the original liability and collecting it). I construe this language as giving the IRS discretion to terminate an OIC if the taxpayer breaches one of the OIC's terms and conditions.



The discretion that I believe the OIC confers on the IRS to deal with a breach of the compliance provision is also reflected in the procedures that IRS personnel are expected to follow in monitoring an OIC and determining a course of action in the event of an alleged breach. The IRM contains provisions that instruct IRS personnel how to proceed with potential default cases. For example, 1 Administration, IRM (CCH), pt. 5.8.9.3(1)(B), at 16,404 (Sept. 23, 2008), states that an offer can reach "potential default status" if "The taxpayer has not adhered to the compliance provisions of the offer". In such cases, the "Campus MOIC [Monitoring Offer in Compromise] units have responsibility and authority to make determinations on potential offer default cases", 1 Administration, IRM (CCH), pt. 5.8.9.3(2), at 16,404 (Sept. 23, 2008), pursuant to procedures currently set forth in 2 Administration, IRM (CCH), pt. 5.19.7.3.26.5, at 18,544-18,550 (Dec. 5, 2006). The IRM further states:



The MOIC unit will make an attempt to secure compliance. If the taxpayer fails to comply with any requests for delinquent returns or payments, the MOIC unit will default the offer. After all appropriate letters have been sent, generate a * * * [Taxpayer Delinquent Investigation] or * * * [Taxpayer Delinquent Account], as appropriate and close the case as a default. [1 Administration, IRM (CCH), pt. 5.8.9.3(3), at 16,404 (Sept. 23, 2008).]



The procedures that the MOIC units are expected to follow when a potential default is attributable to the taxpayer's alleged failure to file a required return include sending a letter to the taxpayer about the missing return. See 2 Administration, IRM (CCH), pt. 5.19.7.3.26.5(7), at 18,544-18,545 (Dec. 5, 2006). Under IRM procedures the taxpayer is supposed to be given an opportunity to explain why a return is not due and/or to file the delinquent return if one is due and unfiled. See 2 Administration, IRM (CCH), pt. 5.19.7.3.26.5(8), at 18,545-18,548 (Dec. 5, 2006). Only after IRS employees have followed the procedures governing "Failure to Adhere to Compliance Terms" are the employees instructed to process a default in accordance with the provisions of the IRM. See, e.g., 2 Administration, IRM (CCH), pt. 5.19.7.3.26.5(7) and (8). The IRM recognizes that it may not always be in the best interests of the IRS to terminate an OIC even though the taxpayer has breached one of the OIC's terms and conditions. See, e.g., 2 Administration, IRM (CCH), pt. 5.19.7.3.27(3) at 18,552 (Dec. 5, 2006).



The majority points out that section 6330(c)(3)(C) requires the Appeals Office, in making its determination, to take into consideration "whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary." The majority's analysis on this point distinguishes the factual situation in Robinette v. Commissioner, 123 T.C. 85 (2004), revd. 439 F.3d 455 (8th Cir. 2006), and emphasizes that "the Commissioner did not lightly default the OIC and reinstate the liability for a de minimis fault, but made several efforts to bring * * * [petitioner] back into the taxpaying fold." Majority op. p. 26.



The "Discussion and Analysis" attached to the notice of determination issued to petitioner summarily states that "All legal and procedural requirements are concluded to have been met in this case" without specifying whether the Appeals Office verified that the procedures specified in the IRM for terminating an agreed OIC for noncompliance with the OIC's compliance provision were followed. Nevertheless, the facts recited in the attachment to the notice of determination and as found by the majority confirm that the Appeals officer verified the IRS had warned petitioner about his missing returns and had given him an opportunity to file the missing returns before the IRS terminated the OIC and decided to proceed with collection by levy. The facts recited in the attachment to the notice of determination also confirm that unlike the taxpayer in Robinette who had missed one filing deadline by only a few hours, see majority op. p. 28, petitioner had an extended post-OIC record of noncompliance that the Appeals Office took into account in deciding whether the levy could proceed. In addition, petitioner did not offer any collection alternative other than the reinstatement of the original OIC. 3 Consequently, I agree with the majority's conclusion that the Appeals Office did not abuse its discretion in determining that the proposed levy can proceed.



I remain concerned, however, about how the Appeals Office articulates, and will continue to describe, its obligations under section 6330 in a case involving the termination of an OIC where the IRS does not attempt to notify a taxpayer of an alleged failure to satisfy the OIC's compliance provision or to provide the taxpayer with a reasonable opportunity to cure an alleged breach of that provision, or where the totality of the facts and circumstances reveals an immaterial breach in Robinette parlance. See Robinette v. Commissioner, supra at 108-112. Although this Court and others have held that procedures set forth in the IRM "do not have the force or effect of law" and a failure to adhere to them does not rise to the level of a constitutional violation, see, e.g., Vallone v. Commissioner, 88 T.C. 794, 807-808 (1987) (checks obtained in violation of IRM not a constitutional violation requiring suppression); Riland v. Commissioner, 79 T.C. 185 (1982) (failure to abide by IRM procedures not a violation of due process), and that the IRM does not create any enforceable rights for taxpayers, see Fargo v. Commissioner, 447 F.3d 706, 713 (9th Cir. 2006), affg. T.C. Memo. 2004-13, section 6330(c)(1) specifically requires that the Appeals officer at the section 6330 hearing shall obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met. Moreover, section 6330(c)(3) provides that the determination by an Appeals officer under section 6330(c) shall take into consideration the verification presented under section 6330(c)(1).



In Chief Counsel Notice CC-2006-019 (Aug. 18, 2006), respondent's Office of Chief Counsel describes what an Appeals officer dealing with a collection due process case is expected to do regarding the section 6330(c)(1) verification requirement:



IV. Sections 6320 and 6330



5. Matters considered at hearing



a. Section 6330(c)(1) verification



Sections 6320(c) and 6330(c)(1) require the appeals officer to obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met. Verification can be obtained at any time prior to the issuance of the determination by Appeals. Treas. Reg. § § 301.6320-1(e)(1), 301.6330-1(e)(1). The requirements the appeals officer [is] verifying are those things that the Code, Treasury Regulations, and the IRM require the Service to do before collection can take place. [Emphasis added.]



The quoted language recognizes that in enacting section 6330, Congress clearly expressed its intention (1) that the IRS present verification during the section 6330 hearing that it followed all applicable administrative procedures before enforced collection action may proceed and (2) that the Appeals officer conducting the section 6330 hearing take that verification into account in deciding whether to proceed with collection. See sec. 6330(c)(1), (3).



Although there may be an unresolved issue of statutory interpretation regarding the meaning of "any applicable * * * administrative procedure" under section 6330(c), 4 the IRM contains procedures that the IRS expects its personnel to follow in administering Federal tax law. See 1 Administration, IRM (CCH), pt. 1.11.2.1.1(1), at ___ (Apr. 1, 2007). 5 More precisely, the IRM contains procedures that IRS personnel are expected to follow before terminating an agreed OIC after a breach of the OIC's compliance provision. These procedures regarding potential OIC defaults are sensible and reflect the fact that an OIC authorizes but does not require the IRS to terminate the OIC if a taxpayer allegedly fails to comply with his filing obligation under the compliance provision. The IRM procedures instruct IRS employees monitoring OICs to investigate the alleged failure to comply and, if there is such a failure, to give the taxpayer a chance to correct it before a decision is made to default (terminate) the offer. These procedures (which have been in place for many years in one form or another) reflect a wise and balanced approach to monitoring existing OICs and dealing with potential defaults. When the IRS takes the very serious step of terminating an OIC and reinstating a taxpayer's original tax liability, the Appeals Office should verify that the IRS's administrative procedures for defaulting (terminating) the OIC were followed before it sustains a determination to proceed with collection. Sensible tax administration and section 6330(c) would appear to require it.



COLVIN, COHEN, VASQUEZ, GALE, HAINES, WHERRY, and PARIS, JJ., agree with this concurring opinion.


1 In fairness to Trout, we do note that he then had a run of timely filed and paid returns for tax years 2000-02.

2 The IRS hadn't released the first levy at this point, but apparently sent this second NIL because such notices are supposed to be sent to a taxpayer's last known address. Sec. 6330(a)(2)(C); Buffano v. Commissioner, T.C. Memo. 2007-32.

Unless otherwise indicated, all section references are to the Internal Revenue Code; all Rule references are to the Tax Court Rules of Practice and Procedure.

3 Trout had asked for an installment agreement in his request for a CDP hearing, but he never pursued the issue at that hearing or in his petition to our Court.

4 This means that any appeal would lie to the Ninth Circuit unless the parties stipulate otherwise. See sec. 7482(b)(1)(A) and (2).

5 Trout does not, however, argue the point at any length. Nor could he do so successfully, because the 1993 tax was assessed on May 6, 1996. Section 6502(a)(1)'s ten-year period for collection began on that date, but it is tolled during the pendency of an OIC, a CDP hearing, and a Tax Court case. Secs. 6330(e)(1), 6331(i)(5) and (k)(1), 6502(a), and 6503. Even disregarding language in paragraph 7(n) of the OIC waiving the statute of limitations, the statute was at least tolled from the date of the OIC's submission to the date of its acceptance (from June 10, 1996 to January 15, 1997), during the CDP hearing process (from April 5, 2004 to March 3, 2005), and while this case is pending in our Court. This is more than enough time to keep this case within the ten-year limitation period.

6 We follow our reviewed opinions in later cases, Lawrence v. Commissioner, 27 T.C. 713, 717 (1957), revd. on other grounds 258 F.2d 562 (9th Cir. 1958), unless doing so would as a practical matter be pointless, because appeal lies to a circuit court that has ruled to the contrary, Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971). But nothing in Golsen or in Lawrence precludes us from revisiting an issue, as we do here, when the issue on which there has been an intervening reversal arises anew. We said in Lawrence, 27 T.C. at 717, that in these circumstances, we "must thoroughly reconsider the problem in the light of the reasoning of the reversing appellate court and, if convinced thereby, the obvious procedure is to follow the higher court."

7 Unlike Robinette, who had an annual income of less than $100,000 in tax years 1995-99, but whose reinstated tax liability was for roughly $1 million, Robinette, 123 T.C. at 86 n.2, Trout had earned between $130,000 and $836,000 annually in the three years before his request for a CDP hearing. And by the time the Commissioner got around to collecting Trout's tax debt, the statute of limitations had run on all but one year, leaving him with a reinstated liability of less than $90,000.

1 The IRM seems to use the term "default" in two different contexts. It uses the term "default" to describe the situation when a taxpayer reaches potential default status by not adhering to the compliance provisions of the offer. See, e.g., 1 Administration, IRM (CCH), pt. 5.8.9.3(1)(B), at 16,404 (Sept. 23, 2008). It also uses the term "defaulted" to describe the process of reinstating the original liability. See, e.g., 2 Administration, IRM (CCH), pt. 5.19.7.3.27(1), at 18,551 (Dec. 5, 2006). For purposes of this concurrence, I use the term "breach" to mean a failure to comply with the OIC's compliance provision and "terminate" or its derivative to refer to the process of reinstating the original liability because of a breach.

2 References to the IRM are to the current edition.

3 The part in the IRM captioned "Actions on Defaults Offers" contains a provision that states: "The Service may accept a compromise of a compromise" and "There is no standard form for such a proposal." 4 Administration, IRM (CCH), pt. 8.23.3.13(7), at 27,997-487 (Oct. 16, 2007). A taxpayer who has breached the compliance provision of an OIC might propose a new OIC containing substantially the same terms as the previous OIC or different terms (e.g. an enhanced compliance period, a collateral agreement, an additional lump-sum payment or deferred payment) designed to convince the IRS that it is still in the best interests of the IRS to compromise the liability despite the taxpayer's breach. A taxpayer might also propose other collection alternatives such as an installment agreement, a third-party payment or transfer of an asset that is otherwise unavailable to the IRS. In this case, the only collection alternative apparently presented by petitioner was the reinstatement of the original OIC. The IRS, however, has taken the position that "If the hearing officer determines that there was a default, the termination of the OIC was legally authorized; neither Headquarters nor the Office of Appeals can 'reinstate' the OIC." 4 Administration, IRM (CCH), pt. 8.22.2.2.9(1), at 27,997-366 (Dec. 1, 2006); see also Chief Counsel Advice 200113031 (Mar. 30, 2001).

4 Compare Drake v. Commissioner, T.C. Memo. 2006-151, affd. 511 F.3d 65 (1st Cir. 2007) with Carlson v. United States, 394 F. Supp. 2d 321, 329 (D. Mass. 2005).

5 1 Administration, IRM (CCH), pt. 1.11.2.1.1(1), at ___ (Apr. 1, 2007), states in pertinent part as follows:

The IRM serves as the single, official source of IRS "instructions to staff" relating to the administration and operation of the Service. The IRM provides a central repository of uniform guidelines on operating policies and procedures for use by all IRS offices. It contains guidance on IRS policies and directions our employees need to carry out their responsibilities in administering the tax laws or other agency obligations.

Before its amendment in 2007, 1 Administration, IRM (CCH) pt. 1.11.2.1(2), at 5,027 (Oct. 10, 2003), stated in pertinent part as follows:

The IRM outlines business rules and administrative procedures and guidelines used by the agency to conduct business. It contains policy, direction and delegations of authority that are necessary to carry out IRS responsibilities to administer tax law and other legal provisions. The business rules, operating guidelines and procedures and delegations guide managers and employees in carrying out day to day responsibilities. [Emphasis added.]

IRS tax lien relief

IR-2008-141

December 17, 2008

Code Sec. 6323

Code Sec. 7425

Federal tax lien : Subordination of tax lien : Discharge of tax lien : Expedited procedure by IRS .




IRS Speeds Lien Relief for Homeowners Trying to Refinance, Sell




IR-2008-141, Dec. 16, 2008

WASHINGTON --The Internal Revenue Service today announced an expedited process that will make it easier for financially distressed homeowners to avoid having a federal tax lien block refinancing of mortgages or the sale of a home.

If taxpayers are looking to refinance or sell a home and there is a federal tax lien filed, there are options. Taxpayers or their representatives, such as their lenders, may request that the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan. Taxpayers or their representatives may request that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien under certain circumstances.

The process to request a discharge or a subordination of a tax lien takes approximately 30 days after the submission of the completed application, but the IRS will work to speed those requests in wake of the economic downturn.

"We don't want the IRS to be a barrier to people saving or selling their homes. We want to raise awareness of these lien options and to speed our decision-making process so people can refinance their mortgages or sell their homes," said Doug Shulman, IRS commissioner.

"We realize these are difficult times for many Americans," Shulman said. "We will ensure we have the resources in place to resolve these issues quickly and homeowners can complete their transactions."

Filing a Notice of Federal Tax Lien is a formal process by which the government makes a legal claim to property as security or payment for a tax debt. It serves as a public notice to other creditors that the government has a claim on the property.

In some cases, a federal tax lien can be made secondary to another lien, such as a lending institution's, if the IRS determines that taking a secondary position ultimately will help with collection of the tax debt. That process is called subordination. Taxpayers or their representatives may apply for a subordination of a federal tax lien if they are refinancing or restructuring their mortgage. Without lien subordination, taxpayers may be unable to borrow funds or reduce their payments. Lending institutions generally want their lien to have priority on the home being used as collateral.

To apply for a certificate of lien subordination, people must follow directions in Publication 784 , How to Prepare an Application for a Certificate of Subordination of a Federal Tax Lien. Again, there is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235 , Collection Advisory Group Addresses, for address information.

Taxpayers or their representatives may apply for a certificate of discharge of a tax lien if they are giving up ownership of the property, such as selling the property, at an amount less than the mortgage lien if the mortgage lien is senior to the tax lien. The IRS may also issue a certificate of discharge in other circumstances if the taxpayer has sufficient equity in other assets, can substitute other assets, or is able to pay the IRS its equity in the property. Without a tax lien discharge, the taxpayer may be unable to complete the home ownership change and the ownership title will remain clouded.

To apply for a tax lien discharge, applicants must follow directions in Publication 783 , Instructions on How to Apply for a Certificate of Discharge of a Federal Tax Lien. There is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235 for address information.

The IRS also urges people to contact the agency's Collection Advisory Group early in the home sale or refinancing process so that it can begin work on their requests. People sometimes delay informing lenders of the tax liens, which only serves to delay the transaction.

Currently, there are more than 1 million federal tax liens outstanding tied to both real and personal property. The IRS issues more than 600,000 federal tax lien notices annually.

IRS Guidance on Proving Gambling Income or Losses from Slot Machines

IRS Advice Memorandum AM 2008-011

December 15, 2008

Internal Revenue Service : Chief Counsel : Advice Memoranda : Income : What is included in gross income : Gambling income, legal : Deductions : Losses : Wagering losses : Losses exceeding gain .



Office of Chief Counsel Internal Revenue Service



Memorandum

Release Number: AM2008-011

Release Date: 12/12/08

CC:ITA:B01

POSTN-138904-08
Third Party Communication: None Date of Communication: Not Applicable

UILC: 165.08-00, 61.00-00

date: December 05, 2008

to: Roland Barral
Area Counsel
(Large & Mid-Size Business)

from: George J. Blaine
Associate Chief Counsel
(Income Tax & Accounting)

subject: Reporting of Wagering Gains and Losses

This Chief Counsel Advice responds to your request for assistance about a recurring issue in litigation. This advice may not be used or cited as precedent.



ISSUE

How does a casual gambler determine wagering gains and losses from slot machine play?



FACTS

The taxpayer (Mrs. X) is a casual gambler. The taxpayer uses the cash receipts and disbursements method of accounting and files her returns on a calendar year basis. The taxpayer properly substantiates all gains and losses incurred in her wagering transactions pursuant to § 6001 of the Internal Revenue Code and Rev. Proc. 77-29, 1977-2 C.B. 538.

The taxpayer is retired on a modest, fixed income. Therefore, she carefully limits the amount of money she gambles. Her practice is to commit only $100 to slot machine play on any visit to a casino. She wagers until she loses the original $100 committed to gambling or until she stops gambling and "cashes out." Upon cashing out, the taxpayer may have $100 (the basis of her wagers), less than $100 (a wagering loss), or more than $100 (a wagering gain).

The taxpayer went to a casino to play the slot machines on ten separate occasions throughout the year. On each visit to the casino, the taxpayer exchanged $100 of cash for $100 in slot machine tokens and used the tokens to gamble. Taxpayer did not use cash, credit or "player's cards" to gamble. On five occasions, the taxpayer lost her entire $100 in tokens before terminating play. On the other five occasions, the taxpayer redeemed her remaining tokens for the following amounts of cash: $20, $70, $150, $200 and $300.



ANALYSIS

Section 61 provides that gross income means all income from whatever source derived. Rev. Rul. 54-339, 1954-2 C.B. 89, holds that wagering gains are included in gross income. See Umstead v. Commissioner , T.C. Memo. 1982-573, 44 TCM 1294, 1295 (1982).

Section 165(a) allows a deduction for any loss sustained during the taxable year and not compensated for by insurance or otherwise.

Section 165(d) provides that losses from wagering transactions are allowed only to the extent of the gains from such transactions.

Section 1.165-10 of the Income Tax Regulations provides that losses sustained during the taxable year on wagering transactions shall be allowed as a deduction but only to the extent of the gains during the taxable year from such transactions.



Wagering Gains and Wagering Losses

Section 165(d) uses the words "gains" and "losses" from wagering transactions without ascribing a technical meaning to the terms. In the absence of a stated definition to the contrary, the literal language of the statute should control. If the language of a statute is plain, clear, and unambiguous, the statutory language is to be applied according to its terms, unless a literal interpretation of the statutory language would lead to absurd results. United States v. Ron Pair Enterprises, Inc. , 489 U.S. 235, 241 (1989); Burke v. Commissioner , 105 T.C. 41, 59 (1995). In ordinary parlance, a wagering "gain" means the amount won in excess of the amount bet (basis). See Rev. Rul. 83-103, 1983-2 C.B. 148, at 149, holding that in calculating wagering gains, the cost (or basis) of the wager is excluded. That is, the wagering gain is the total winnings less the amount of the wager. The term wagering "loss" means the amount of the wager (basis) lost.

Casual gamblers may deduct their wagering losses only to the extent of their wagering gains; gamblers may not carry over excess wagering losses to offset wagering gains in another taxable year or offset non-wagering income. Skeeles v. United States , 118 Ct. Cl. 362 (1951), cert. denied , 341 U.S. 948 (1951). Casual gamblers may not net their gains and losses from slot machine play throughout the year and report only the net amount for the year. See United States v. Scholl , 166 F.3d 964 (9 th Cir. 1999). 1

A key question in interpreting § 165(d) is the significance of the term "transactions." The statute refers to gains and losses in terms of wagering transactions. Some would contend that transaction means every single play in a game of chance or every wager made. Under that reading, a taxpayer would have to calculate the gain or loss on every transaction separately and treat every play or wager as a taxable event. The gambler would also have to trace and recompute the basis through all transactions to calculate the result of each play or wager. Courts considering that reading have found it unduly burdensome and unreasonable. See Green v. Commissioner , 66 T.C. 538 (1976); Szkirscak v. Commissioner , T.C. Memo. 1980-129. Moreover, the statute uses the plural term "transactions" implying that gain or loss may be calculated over a series of separate plays or wagers.

The better view is that a casual gambler, such as the taxpayer who plays the slot machines, recognizes a wagering gain or loss at the time she redeems her tokens. We think that the fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate the amount above or below basis (the wager) realized. See Commissioner v. Glenshaw Glass Co. , 348 U.S. 426 (1955). For example, a casual gambler who enters a casino with $100 and redeems his or her tokens for $300 after playing the slot machines has a wagering gain of $200 ($300 - $100). This is true even though the taxpayer may have had $1,000 in winning spins and $700 in losing spins during the course of play. Likewise, a casual gambler who enters a casino with $100 and loses the entire amount after playing the slot machines has a wagering loss of $100, even though the casual gambler may have had winning spins of $1,000 and losing spins of $1,100 during the course of play. 2



Calculating the Taxpayer's Gains and Losses

Under the facts presented, the taxpayer purchased and subsequently lost $100 worth of tokens on five separate occasions. As a result, the taxpayer sustained $500 of wagering losses ($100  5). The taxpayer also sustained losses on two other occasions, when the taxpayer redeemed tokens in an amount less than the $100 (basis) of tokens originally purchased. The loss is the basis of the bet ($100 in tokens) minus the amount of the tokens eventually redeemed. Therefore, on the day the taxpayer redeemed $20 worth of tokens, the taxpayer incurred an $80 wagering loss ($100-$20). On the day the taxpayer redeemed $70 worth of tokens, the taxpayer incurred a $30 wagering loss ($100-$70).

On three occasions, the taxpayer redeemed tokens in an amount greater than the $100 of tokens originally purchased. The amount redeemed less the $100 basis of the wager constitutes a wagering gain. See Rev. Rul. 83-130, supra . On the day the taxpayer redeemed $150 worth of tokens, the taxpayer had a $50 wagering gain ($150-$100). On the day the taxpayer redeemed $200 worth of tokens, the taxpayer had a $100 wagering gain ($200-$100). And on the day the taxpayer redeemed $300 worth of tokens, the taxpayer had a $200 wagering gain ($300-$100).

For the year, the taxpayer had total wagering gains of $350 ($50 + $100 + $200) and total wagering losses of $610, ($500 from losing the entire basis of $100 on five occasions + $80 and $30 from two other occasions). The taxpayer's wagering losses exceeded her wagering gains for the taxable year by $260 ($610 - $350). The taxpayer must report the $350 of wagering gains as gross income under § 61. Scholl , supra . However, under §165(d), the taxpayer may deduct only $350 of the $610 wagering losses. The taxpayer may not carry over the excess wagering losses to offset wagering gains in another taxable year or offset non-wagering income. Skeeles , supra .

A casual gambler who elects to itemize deductions may deduct wagering losses, up to wagering gains, on Form 1040, Schedule A. In this case, the taxpayer may deduct only $350 of her $610 of wagering losses as an itemized deduction. A casual gambler who takes the standard deduction rather than electing to itemize may not deduct any wagering losses. See Rev. Rul. 54-339, 1954-2 C.B. 89.



CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

This writing may contain privileged information. Any unauthorized disclosure of this writing may undermine our ability to protect the privileged information. If disclosure is determined to be necessary, please contact this office for our views.

Please call Clifford M. Harbourt at (202) 622-4800 if you have any further questions.

1 Gamblers must report wagering gains, even though their losses over a tax year exceed their gains. That increases a casual gambler's AGI and has a significant tax impact (especially on low income taxpayers), because many tax benefits phase out as AGI increases, e.g., exclusion of social security payments.

2 We note that § 6041 requires gambling businesses to report payments over certain dollar amounts, "gross receipts" reporting. The amount reported as gross receipts from many types of gambling is not reduced by the amount (basis) of the wager. See Rev. Proc. 77-29, 1977-2 C.B. 538. However, such reported payments are not necessarily taxable wagering gains. A gambling business may issue an information return for a casual gambler's winning spin, but the gambler continues play and wagers and loses that amount during slot machine play. Wagering gain or loss is determined at the time the casual gambler redeems his or her tokens at the end of slot machine play. Gambling income, legal. --What Is Included in Gross Income: Gambling income, legal



A cash-method taxpayer who was required to receive a $26 million lottery jackpot in annual installments over a 20-year period did not constructively receive the winnings in the year the jackpot was hit. Rather, the taxpayer received annual installment payments over the payout period, resulting in taxable income for the tax year at issue. The taxpayer's inability to draw upon the jackpot at any time constituted a substantial limit or restriction on his control over the winnings and precluded application of the constructive receipt doctrine under Reg. §1.451-2(a). Even assuming the taxpayer could have sold his right to future payments, the constructive receipt doctrine was inapplicable because the lottery winner's ability to assign the prize did not accelerate the time in which the lottery is required to make the payment.

A.B. Jombo, CA-D.C., 2005-1 USTC ¶50,197.

A gambler's slot machine winnings for two years were includible in his gross income. The absence of withholding at the source did not affect the individual's obligation to report the winnings as income.

V. Lyszkowski, CA-3 (unpublished opinion), 96-1 USTC ¶50,170.

The amount of income received by the taxpayer for wagering on horses was determined for two tax years. A record book of gambling income and losses constituted adequate proof of the amount of the taxpayer's losses as well as the amount of winnings.

B.L. Dunnock, 41 TCM 146, Dec. 37,326(M), TC Memo. 1980-449.

The taxpayer's testimony established that he accurately reported his wagering income on his income tax return when he could not produce records of his gambling activities for that year because they had been lost. Similar records from a prior year that tied into gambling income reported on the prior year's return convinced the court that the taxpayer had properly reported his gambling income from the lost records.

M. Rockin, 41 TCM 145, Dec. 37,325(M), TC Memo. 1980-448.

Despite an absence of documentary evidence and of consistent testimony, the fact that the taxpayer engaged in gambling activities established that he did incur some gambling losses, but his court-determined gambling winnings still exceeded his losses and such excess constituted taxable income.

W.L. Wagoner, 54 TCM 1332, Dec. 44,387(M), TC Memo. 1987-614.

The taxpayer was required to include gambling winnings from horse races in his income, as reported on his return and which he denied at trial.

K.V. Hall, 44 TCM 256, Dec. 39,134(M), TC Memo. 1982-356.

Similarly.

D. Bodine, 47 TCM 1337, Dec. 41,081(M), TC Memo. 1984-143.

E. Whitman, 50 TCM 1322, Dec. 42,445(M), TC Memo. 1985-537.

G.B. Bauman, 65 TCM 2165, Dec. 48,928(M), TC Memo. 1993-112.

An individual's gambling winnings were includible in his taxable income even though he lost more than he won in the year in question. The taxpayer elected to take the standard deduction rather than claiming his gambling losses as an itemized deduction.

A.C. Ling, CA-9 (unpublished opinion), 97-2 USTC ¶50,902, aff'g an unreported Tax Court decision.

Although the IRS was able to demonstrate that a gambler had failed to report all of his racetrack winnings, the taxpayer proved that his gambling losses exceeded those allowed by the IRS and approximately equalled his unreported winnings.

K.A. Forman, 55 TCM 139, Dec. 44,589(M), TC Memo. 1988-64.

Lottery winnings are taxable income.

Ayoub, BTA Memo., Dec. 8453-B.

H.A. Lange, 90 TCM 69, Dec. 56,099(M), TC Memo. 2005-176.

Lottery winnings were includible in the winner's gross income for the year in which he received a check for payment and not in the year that the prize was won because the taxpayer could not exercise essentially unfettered control of the proceeds until the check arrived.

T.J. Paul, Jr., 64 TCM 955, Dec. 48,551(M), TC Memo. 1992-582.

Taxpayers had unreported wagering gains in excess of their losses as determined by the Tax Court and, thus, were not entitled to deduct the losses. The taxpayers failed to establish additional gambling losses greater than the unreported gambling income. In addition, because the taxpayers failed to keep adequate records, the burden of proof was not shifted to the IRS. Bank statements showing cash withdrawals and debit or credit card charges at the casinos did not substantiate actual gambling losses, nor did generalizations by casino employees citing the unfavorable long-term odds of beating a casino.

R.J. Lutz, Jr., 83 TCM 1446, Dec. 54,705(M), TC Memo.

The value of a house won in a raffle drawing for the benefit of a charitable organization was includible in the winner's gross income as gambling winnings. The winner was required to include the fair market value of the residence less the amount paid for the raffle ticket.

Rev. Rul. 83-130, 1983-2 CB 148.

See also ¶5704.2892, ¶5901.40 and ¶6204.01.

A debtor unsuccessfully challenged the IRS's proof of claim against his bankruptcy estate for taxes, penalties, and interest. His unreported gambling income for the tax year at issue was includible in full in his gross income. His contention that the winnings were nontaxable because he sustained a net gambling loss for the year was rejected. Gambling losses cannot be netted against winnings; instead, the taxpayer was required to report the receipt of the winnings and claim an itemized deduction for the losses, but he failed to do so. Also, he produced no evidence to refute the IRS's deficiency determination.

G.N. Berardi, 2002-2 USTC ¶50,736. Aff'd, CA-3 (unpublished opinion), 2003-2 USTC ¶50,648, 70 FedAppx 660.

Lottery winnings were included in gross income for purposes of the Code Sec. 469(i)(3) phase-out of the rental real estate loss deduction.

E.D. Hamilton, 88 TCM 12, Dec. 55,686(M), TC Memo. 2004-161.

Gambling winnings from slot machine jackpots are includible in gross income.

A. McQuarrie, 91 TCM 1127, Dec. 56,505(M), TC Memo. 2006-93.

An individual could not deduct gambling losses beyond the amount conceded by the IRS due to her failure to provide any substantiation. The taxpayer argued that because she was in debt at the end of the year, her losses from playing slot machines must have exceeded her gains. Because the taxpayer presented no credible evidence to corroborate this theory, the Cohan rule was inapplicable, and the Court did not estimate the taxpayer's gambling losses.

K. Jackson, 94 TCM 611, Dec. 57,208(M), TC Memo. 2007-373.

fraudulent conveyances
Where a taxpayer is alleged to have fraudulently disposed of his property prior to the existence of federal tax liens, the United States may seek relief under the applicable fraudulent conveyance laws of the particular state in which the property is located. Commissioner v. Stern [ 58-2 USTC ¶9594], 357 U.S. 39, 45 (1958); Citizens Bank of Clearwater v. Hunt, 927 F.2d 707, 710 (2d Cir. 1991); United States v. Fernon [ 81-1 USTC ¶9287], 640 F.2d 609, 611-12 (5th Cir. 1981).
Ronald Smith, et al., Defendants

U.S. District Court, So. Dist. Ohio, West. Div., C-1-99-974 , 8/22/2002


The government's fraudulent conveyance claim was not barred by the state (Ohio) four-year statute of limitations on actions to set aside fraudulent transfers. In the absence of legislation imposing a limitations period, an action brought on behalf of the United States in its governmental capacity is not subject to any time limitation.

This matter is before the Court on motions for partial summary judgment and for summary judgment (Docs. 13, 14), and the parties' responsive memoranda. (Docs. 15, 17, 18, 19). The matter has been referred to the undersigned for initial consideration and a report and recommendation pursuant to 28 U.S.C. §636(b). (Doc. 20).

Plaintiff, the United States of America ("United States" or "government") brought this tax action pursuant to 26 U.S.C. §§7401, 7403. The government seeks to reduce to judgment unpaid federal tax assessments against defendant Ronald E. Smith ("Smith") and to foreclose on federal tax liens on two parcels of real property located at 4311 Tylersville Road, Hamilton, Butler County, Ohio. The government also seeks to set aside an allegedly fraudulent conveyance of an interest in the property made by Smith to his parents, Barney Smith (now deceased) and Naoma Smith, and to declare that Naoma Smith and Gregory Smith, Smith's brother, hold interests in the property as nominees of Smith. The government also named Smith's alleged common law wife, Donna Schaller, as a party defendant on the ground that she may seek to claim an interest in the property in her own right.



I. FACTUAL AND PROCEDURAL HISTORY
In January 1991, Smith pleaded guilty to charges of wilful failure to file income tax returns for tax years 1983, 1984, and 1985. Pursuant to a plea agreement, Smith agreed to file tax returns for the years in question. The plea agreement provided in part that "this agreement does not address or compromise in anyway any tax liability of Mr. Smith for the tax years 1982-1989." (Doc. 14, Ex. C). Smith later submitted "nonresident returns," forms 1040NR, for the years 1983 through 1990.

At that time he entered his plea, Smith was the owner of the Tylersville Road property, which he had acquired by warranty deed in 1986. On or about May 22, 1991, Smith sold an undivided one-half interest in the property to his parents, Barney Smith and Naoma Smith, for $85,000.00. In April 1995, in alleged contemplation of Barney Smith's final illness, Barney Smith and Naoma Smith transferred an undivided one-fourth interest in the real estate to Gregory Smith. Smith continues to reside at the Tylersville Road address; Naoma Smith resides in Cincinnati, Ohio; and Gregory Smith resides in Maineville, Ohio.

In January 1995, a delegate of the Secretary of the Treasury made assessments against Mr. Smith for unpaid taxes for the years 1982-1991. Notices of the assessments were filed with the Butler County Recorder's Office on June 16, 1995 and June 11, 1996.

On November 18, 1999, the United States filed its complaint against Smith, Naoma Smith, Gregory Smith, and Donna Schaller. (Doc. 1). The government alleges that Smith is liable for the assessed and accrued taxes, penalties, and interest, which totaled $3,464,751.82 as of August 2, 1999. ( Id.) The government seeks a judgment against Smith in that amount, plus additions and interest as allowed by law. ( Id.) The government asks this Court to set aside the conveyance to Barney and Naoma Smith as fraudulent with respect to the United States, to declare that Naoma Smith and Gregory Smith hold their interests in the Tylersville Road property as nominees of Smith, and to adjudge that the United States has valid liens on all property and rights to property of Ronald Smith. ( Id.) Finally, the government asks this Court to order that the federal tax liens be foreclosed upon the real property and that the property be sold at a judicial sale.

Naoma Smith, Gregory Smith, and Donna Schaller, by counsel, filed a motion for partial summary judgment in their favor. (Doc. 13). These three defendants request this Court to find, as a matter of law, (1) that their interests in the real property are not subject to federal tax liens, (2) that the conveyance of a one-half interest to Barney and Naoma Smith was not fraudulent, (3) that Naoma Smith and Gregory Smith do not hold their interests in the property as alter egos or nominees for Smith; and (4) that Donna Schaller is the lawful spouse of Smith and is entitled to a dower interest in his property under the laws of the State of Ohio. ( Id.)

Smith filed a separate pro se response to the government's motion for summary judgment alleging, in part, that he is not a taxpayer and is not liable to the United States for any tax. (Doc. 16). Smith maintains that he is a citizen only of the State of Ohio and that he is not a citizen or resident of the United States. ( Id.) He contends that the nonresident returns were filed in compliance with a provision in his plea agreement that he would file "true, correct and accurate income tax returns for the calendar years 1982 to 1989" and were accepted as such at his sentencing proceeding. ( Id.) Smith also argues that the income tax is an excise tax and claims not be subject to any excise tax. ( Id.) Finally, Smith challenges the authority of the United States Attorney, Lydia D. Bottome, to prosecute this case. ( Id.)



II. STANDARD OF REVIEW
A motion for summary judgment should be granted if the evidence submitted to the court demonstrates that there is no genuine issue as to any material fact and that the movant is entitled to summary judgment as a matter of law. Fed. R. Civ. P. 56. See also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). The moving party has the burden of showing the absence of genuine disputes over facts which, under the substantive law governing the issue, might affect the outcome of the action. Celotex, 477 U.S. at 323.

A party may move for summary judgment on the basis that the opposing party will not be able to produce sufficient evidence at trial to withstand a motion for judgment as a matter of law. In response to a summary judgment motion properly supported by evidence, the non-moving party is required to present some significant probative evidence which makes it necessary to resolve the parties' differing versions of the dispute at trial. Sixty Ivy Street Corp. v. Alexander, 822 F.2d 1432, 1435 (6th Cir. 1987); Harris v. Adams, 873 F.2d 929, 931 (6th Cir. 1989). Conclusory allegations, however, are not sufficient to defeat a properly supported summary judgment motion. McDonald v. Union Camp Corp., 898 F.2d 1155, 1162 (6th Cir. 1990). The non-moving party must designate those portions of the record with enough specificity that the Court can readily identify those facts upon which the non-moving party relies. Karnes v. Runyon, 912 F.Supp. 280, 283 (S.D. Ohio 1995) (Spiegel, J.).

The trial judge's function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine factual issue for trial. Anderson, 477 U.S. at 249-50. In so doing, the trial court does not have a duty to search the entire record to establish that there is no material issue of fact. Karnes, 912 F.Supp. at 283. See also Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479-80 (6th Cir. 1989); Frito-Lay, Inc. v. Willoughby, 863 F.2d 1029, 1034 (D.C. Cir. 1988). The inquiry is whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law. Anderson, 477 U.S. at 249-50.

If, after an appropriate time for discovery, the opposing party is unable to demonstrate a prima facie case, summary judgment is warranted. Street, 886 F.2d at 1478 (citing Celotex and Anderson). "Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no 'genuine issue for trial.' " Matsushita Electric Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).



III. ANALYSIS



A. Authority of the United States Attorney
As a threshold matter, Smith challenges the authority of the United States Attorney to prosecute his case on the grounds that Lydia Bottome, the attorney assigned to this case, has not been admitted to practice before this Court. His argument is unavailing.

Pursuant to 28 U.S.C. §§516, 517, the Attorney General may send any officer of the Department of Justice to attend to the interests of the United States in a suit pending in a court in the United States. Huff v. United States [ 93-2 USTC ¶50,633], 10 F.3d 1440, 1444 (9th Cir. 1993), cert. denied, 512 U.S. 1219 (1994). Section 516 provides that "the conduct of litigation in which the United States, an agency, or officer thereof is a party, or is interested ... is reserved to officers of the Department of Justice." 28 U.S.C. §516; Huff [ 93-2 USTC ¶50,633], 10 F.3d at 1444. See also United States v. Plesinski, 912 F.2d 1033, 1038 (9th Cir. 1990) (indicating that either the Department of Justice or United States Attorneys can represent the United States in litigation), cert. denied, 499 U.S. 919 (1991). Moreover, §517 states that "any officer of the Department of Justice ... may be sent by the Attorney General to any State or district in the United States to attend to the interests of the United States in a suit pending in a court of the United States." 28 U.S.C. §517; Huff [ 93-2 USTC ¶50,633], 10 F.3d at 1444.

The government has established that Lydia Bottome, an attorney in the tax division of Department of Justice, is an officer of the Department of Justice and that she was is authorized to represent the interests of the United States in this matter. ( See Doc. 18, Exs. A, B).



B. Fraudulent Conveyance
Where a taxpayer is alleged to have fraudulently disposed of his property prior to the existence of federal tax liens, the United States may seek relief under the applicable fraudulent conveyance laws of the particular state in which the property is located. Commissioner v. Stern [ 58-2 USTC ¶9594], 357 U.S. 39, 45 (1958); Citizens Bank of Clearwater v. Hunt, 927 F.2d 707, 710 (2d Cir. 1991); United States v. Fernon [ 81-1 USTC ¶9287], 640 F.2d 609, 611-12 (5th Cir. 1981). Because the property which is the subject of this dispute is located in Ohio, Ohio law applies. The government seeks summary judgment on its claim of a fraudulent transfer under the Ohio Uniform Fraudulent Transfer Act ("OUFTA"), Ohio Rev. Code §§1336.01-1336.11, et. seq. ( See Doc. 14).

Under OUFTA, a transfer made by a debtor is fraudulent as to a creditor, whether the claim arose before or after the transfer was made, if the debtor made the transfer in either of the following ways:

(1) with actual intent to hinder, delay, or defraud any creditor of the debtor;

(2) without receiving a reasonably equivalent value in exchange for the transfer ... and if either of the following applies: (a) the debtor was engaged or was about to engage in a business or transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (b) the debtor intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.

Ohio Rev. Code §1336.04(A). The government contends that the facts support a finding of summary judgment in its favor under both the actual fraud theory of §1336.04(A)(1) and the constructive fraud theory of §1336.04(A)(2).



1. The Statute of Limitations
Defendants, Naoma Smith, Gregory Smith, and Donna Schaller, 1 oppose the government's motion for summary judgment in part on grounds that the extinguishment provision of OUFTA, Ohio Rev. Code Ann. §1366.09, bars the government's claim.

Section 1366.09 provides as follows:

A claim for relief with respect to a transfer or an obligation that is fraudulent under section 1336.04 or 1336.05 of the Revised Code is extinguished unless an action is brought in accordance with one of the following:

(A) If the transfer or obligation is fraudulent under division (A)(1) of section 1336.04 of the Revised Code, within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was or reasonably could have been discovered by the claimant;

(B) If the transfer or obligation is fraudulent under division (A)(2) of section 1336.04 or division (A) of section 1336.05 of the Revised Code, within four years after the transfer was made or the obligation was incurred;

(C) If the transfer or obligation is fraudulent under division (B) of section 1336.05 of the Revised Code, within one year after the transfer was made or the obligation was incurred.

Ohio Rev. Code Ann. §1366.09. The government filed its complaint on November 18, 1999, more than four years after Smith conveyed an undivided one-half interest in the property to his parents.
Defendants concede that, as a general rule, the United States is not bound by state statutes of limitation except where it has expressly bound itself to them. See United States v. Summerlin [ 40-2 USTC ¶9633], 310 U.S. 414, 416 (1940); United States v. Isaac, No. 91-5830, 1992 WL 159795, *2 (6th Cir. July 10, 1992). See also United States v. Fernon [ 81-1 USTC ¶9287 ], 640 F.2d 609, 611-12 (5th Cir. 1981). The Court in Summerlin held that "the United States is not bound by state statutes of limitation or subject to the defense of laches in enforcing its rights." Summerlin [ 40-2 USTC ¶9633], 310 U.S. at 416 (1940). Defendants argue that the extinguishment provision is not a traditional statute of limitations and that Summerlin should not apply.

Although the Sixth Circuit has not yet ruled on the specific question, the Ninth Circuit has determined that a similar extinguishment provision in the California Uniform Fraudulent Transfer Act ("CUFTA") could not evade the rule of Summerlin:

First, although the IRS [Internal Revenue Service] must rely on the CUFTA to establish Petitioner's transferee liability, the government's underlying right to collect money in this case clearly derives from the operation of federal law ( i.e., the Internal Revenue Code). Second, in its efforts to collect taxes, the United States unquestionably is acting in its sovereign capacity; indeed, the right to collect taxes is among the most basic attributes of sovereignty. Because the United States is here acting in its sovereign capacity in an effort to enforce rights ultimately grounded on federal law, the rule of Summerlin will not allow the "extinguishment" of a valid, fully accrued claim by the IRS brought under the CUFTA.

Bresson v. Commissioner [ 2000-1 USTC ¶50,495], 213 F.3d 1173, 1178 (9th Cir. 2000).
Defendants' reliance on the extinguishment provision is unavailing. The government's action is not barred under Ohio Rev. Code Ann. §1366.09.



2. "Badges of Fraud" --Actual Fraud Theory Under Ohio Rev. Code §1336.04(A)(1)
As set forth above, under Ohio law, a transfer made with actual intent to hinder, delay, or defraud any creditor is fraudulent as to the creditor and may be set aside. Ohio Rev. Code Ann. §1336.04(A)(1). "No effort to hinder or delay creditors is more severely condemned by the law than an attempt by a debtor to place his property where he can still enjoy it and at the same time require his creditors to remain unsatisfied." United States v. Leggett, 292 F.2d 423, 426 (6th Cir. 1961) (internal quotations omitted). The burden of proof in a fraud case rests with the party asserting the fraud. McKinley Fed. Savings & Loan v. Pizzuro Enterprises, Inc., 585 N.E.2d 496 (Ohio Ct. App. 1990). The fraud must be proven by clear and convincing evidence. Cardiovascular & Thoracic Surgery of Canton, Inc. v. DiMazzio, 37 Ohio App.3d 162, 166, 524 N.E.2d 915, 918 (Ohio Ct. App. 1987). However, direct evidence of a party's fraudulent intent is not necessary. Leggett, 292 F.2d at 426. Because it is impossible to look into a defendant's mind for the purpose of ascertaining his intent, the trier of fact must consider the circumstances surrounding the transaction and determine intent from what a party does or fails to do. Id. at 426-27.

The issue of fraud is commonly determined by certain recognized indicia, denominated 'badges of fraud,' which are circumstances so frequently attending fraudulent transfers that an inference of fraud arises from them. Long Development, Inc. v. Oak Park Village Limited Partnership, 117 F.3d 1420, (unpubl.) 1997 WL 377055, at * --(July 2, 1997) (citing Leggett, supra). Ohio Rev. Code Ann. §1336.04(B) lists several statutory factors, or the so-called "badges of fraud," that a court considers to determine if an inference of fraud exists. The relevant factors include, but are not limited to, the following:

(1) Whether the transfer or obligation was to an insider;

(2) Whether the debtor retained possession or control of the property transferred after the transfer;

(3) Whether the transfer or obligation was disclosed or concealed;

(4) Whether before the transfer was made or the obligation was incurred, the debtor had been sued or threatened with suit;

(5) Whether the transfer was of substantially all of the assets of the debtor;

(6) Whether the debtor absconded;

(7) Whether the debtor removed or concealed assets;

(8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

(9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

(10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred;

(11) Whether the debtor transferred the essential assets of the business to a lienholder who transferred the assets to an insider of the debtor.

Ohio Rev. Code Ann. §1336.04(B).
"Although 'badges of fraud' are not conclusive and are more or less strong or weak according to their nature and the number occurring in the same case, a concurrence of several badges will always make out a strong case." Long Development, Inc., 1997 WL 377055, at *6 (citing Leggett, supra). If the party alleging fraud is able to demonstrate a sufficient number of badges, the burden of proof then shifts to defendants to prove that the transfer was not fraudulent. Baker & Sons Equipment Co. v. GSO Leasing, Inc., 87 Ohio App.3d 644, 650, 622 N.E.2d 1113, (Ohio Ct. App. 1993) (citing Cardiovascular & Thoracic Surgery, supra).

The government alleges that the evidence is sufficient to establish at least five of the relevant badges: (1) the transfer was made to insiders, i.e., Smith's parents; (2) Smith has retained full possession and control of the property since the transfer; (3) Smith made the transfer knowing that he was subject to potential civil tax liability for tax years 1982 through 1989, and knowing that pursuant to his plea agreement in the criminal case he was liable for up to $225,000.00 in criminal fines; (4) the subject property represented substantially all of Smith's assets at the time of the transfer; and (5) the value of the consideration allegedly received for his parents' one-half interest was not reasonably equivalent to the value of the transferred property.

In response, defendants Naoma Smith, Gregory Smith and Donna Schaller claim that the May 1991 conveyance was not fraudulent. They oppose the government's motion for summary judgment, in part, on the ground that the government has not shown sufficient "badges of fraud" to satisfy the fraudulent transfer statute. According to these defendants, the evidence establishes only one badge --that Smith transferred the property to insiders. Defendants further argue that: (1) the transfer of the property was properly recorded and never concealed; (2) Smith had neither been sued nor threatened with suit by the IRS at the time of the transfer; (3) because Smith transferred only one-half of the property, such a transfer does not constitute "substantially all of the asset"; (4) Smith has not absconded; (5) an $85,000.00 payment by Naoma and Barney Smith for their undivided one-half interest constituted fair market price for the property and therefore was reasonably equivalent to the value of the asset transferred. In support of their motion, defendants submitted an expert appraisal which valued the Tylersville Road property at $206,940.00, as of May 22, 1991, (Doc. 13, App. 1, Affidavit of Thomas A. Devitt, attached), and affidavits in which they attest that the $85,000.00 payment was considered a fair price for the sale of half the property. ( See Doc. 13, Apps. 3,5,6, Affidavits of Naoma Smith, Donna Schaller, and Ronald Smith, respectively).

It is undisputed that Smith transferred the property to insiders when he allegedly sold a one-half undivided interest in the Tylersville Road residence to his parents, Barney and Naoma Smith. Furthermore, defendants do not dispute the government's assertion that Ronald Smith retained possession of the property following the transfer. Rather, defendants Naoma and Gregory Smith argue that at all times they retained their right to possess and control the real estate or otherwise dispose of their interest in the property. (Doc. 13, App. 3, Naoma Smith Aff., ¶8; App. 4, Gregory Smith Aff., ¶8). Ohio Rev. Code Ann. §1336.04(B)(2). In addition, there is unrebutted evidence that Smith made the transfer shortly before or shortly after a substantial debt was incurred, as the transfer took place four months after the plea agreement and six months before he was fined in excess of $100,000.00 in the criminal case. Ohio Rev. Code Ann. §1336.04(B)(10). Thus, it appears that these three badges favor the government. However, as defendants noted, the transfer was never concealed and Smith has not absconded. Ohio Rev. Code Ann. §1336.04(B)(3) & (6). Moreover, questions of fact remain as to whether the transfer of a one-half interest was substantially all of Smith's assets, whether Smith was or became insolvent following the transfer, and whether the $85,000.00 allegedly received by the Smith was reasonably equivalent to the value of the property interest transferred. Smith admits that he was forced to sell an interest in the property to pay debts incurred defending against the criminal case. While defendants Naoma and Gregory Smith and Donna Schaller submitted evidence that the Tylersville Road property was valued at $206,940.00, as of May 22, 1991, there is no evidence other than the parties' affidavits that the purchase price of $85,000.00 was paid to Smith. Therefore it is recommended that defendants' motion for partial summary judgment be denied, and that the plaintiff's motion for summary judgment be denied in part. Genuine issues of material fact remain as to whether sufficient badges of fraud have been shown to support a finding that the conveyance of a one-half interest in the property to Barney and Naoma Smith was fraudulent.



3. Constructive Fraud Theory Under Ohio Rev. Code §1336.04(A)(2)
The government also contends that evidence supports a finding of a fraudulent conveyance under a constructive fraud theory. In support of its motion for summary judgment on this issue, the government argues that Smith did not receive reasonably equivalent value in exchange for the transfer and that at the time of the transfer, he should have believed that he would incur debts beyond his ability to pay as they came due.

Pursuant to Ohio Rev. Code §1336.04(A)(2)(b), a transfer is fraudulent if a debtor transfers property without receiving a reasonably equivalent value in exchange for the transfer, and the debtor intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due. The government asserts that the $85,000.00 purchase price allegedly paid by Smith's parent's for their one half interest is not reasonably equivalent to the value of half the property transferred. The government also claims that in the wake of his plea agreement, Smith knew or should have known that he was liable for a maximum criminal fine of $225,050.00 and that he would be subject to civil tax liabilities for at least 8 years of unpaid taxes. Defendants counter that the $85,000.00 purchase price was roughly equivalent to the property's value at the time of the transfer ( See Doc. 13, App. 1, expert appraisal, attached). Defendants further argue that plaintiff's evidence to the contrary is an uncertified document and therefore inadmissible. Defendants also note that at the time of the transfer, Smith had not been sued, nor had he been threatened with suit by the IRS. Plaintiff replies that there is no evidence that the $85,000.00 payment was ever made to Smith.

A question of fact clearly exists as to the value of the property at the time of the transfer and whether the payment changed hands. Furthermore, while Smith was subject to a maximum criminal penalty at the time of the transfer, the District Court had not assessed a fine at the time of the transfer. Accordingly, issues of fact preclude summary judgment for both plaintiff and defendants on the question of constructive fraud, and both motions should be denied in part on this basis.



C. Donna Schaller's Dower Interest
Defendant Donna Schaller seeks partial summary judgment declaring that she is the Smith's common law spouse and that she is entitled to a dower interest in the property. In response, the government maintains that Schaller is not entitled to summary judgment because that there remains a genuine issue of material fact as to sufficiency of indicia that she is the spouse of defendant Smith.

Under current Ohio law, common law marriages are prohibited. Ohio Rev. Code Ann. §3105.12(B)(1). However, the statute provides an exception for common law marriages that occurred prior to the effective date of the statute, October 10, 1991, and that have not been terminated by death, divorce, dissolution of marriage or annulment. Ohio Rev. Code Ann. §3105.12(B)(2); Lyon v. Lyon, 621 N.E.2d 718, 720 (Ohio Ct. App. 1993).

Prior to October 10, 1991, a common law marriage could be established in Ohio by a showing of certain required elements: (1) an agreement of marriage in praesenti; (2) cohabitation as husband and wife; and (3) a holding out by the parties to those with whom they normally come into contact, resulting in a reputation as a married couple in the community. State v. DePew, 528 N.E.2d 542, 549 (Ohio 1988).

In support of her motion for partial summary judgment, Schaller presents her own affidavit and the affidavits of Smith, Gregory Smith, Naoma Smith, and Robert J. Doss, a long-time friend. ( See Doc. 13, Exs. 2-6). Each affidavit recites the same conclusory language that as early as 1988, Smith and Schaller have lived together as husband and wife, have always considered themselves married, and have held themselves out as husband and wife, resulting in a long reputation as a married couple in the community. No other evidence in support of Schaller's claim has been presented.

The government opposes the motion on the ground that Schaller has failed to present evidence of an agreement to marry in praesenti. The government's argument is well taken.

The agreement to marry in praesenti is an essential element of a common-law marriage and its absence precludes the establishment of such a relationship even though the parties lived together and openly engaged in cohabitation. Brooks v. Brooks, No. CA2000-08-079, 2001 WL 433376, *2 (Ohio Ct. App. April 30, 2001) (citing Nestor v. Nestor, 472 N.E.2d 1091, 1094 (Ohio 1984)). Even if a party proves cohabitation and reputation, the lack of an agreement in praesenti will be fatal to any claim that there is a common-law marriage. Brooks, 20001 WL 43376 at *2; Nestor, 1472 N.E.2d at 1094; In re Estate of Hall, 588 N.E.2d 203, 206 (Ohio Ct. App. 1990). An agreement to marry in praesenti must be proved by clear and convincing evidence, either direct evidence which establishes agreement or by proof of cohabitation, acts, declarations, and conduct of the parties and their recognized status in the community in which they reside. Brooks, 20001 WL 43376 at *2; Nestor, 472 N.E. 2d at 1094. See also Lynch v. Romas, 139 N.E.2d 352, 359 (Ohio Ct. App. 1956) (citing Markley v. Hudson, 54 N.E.2d 304 (Ohio 1944)).

The affidavits in support of the motion for partial summary judgment are insufficient to establish an agreement to marry in praesenti as a matter of law. Therefore, it is recommended that the motion for partial summary judgment declaring Donna Schaller the common-law wife of defendant Ronald Smith should be denied.



D. Ronald Smith's Tax Liability
The government seeks summary judgment in part on its claim that Smith is liable for the taxes, interest, and penalties claimed. In support of its motion, the government presented certificates of assessment and payment for the tax years 1982 through 1991. (Doc. 14, Exs. F-O). Certificates of assessments are presumptively correct and enable the government to establish a prima facie case of tax liability. Gentry v. United States [ 92-1 USTC ¶50,225], 962 F.2d 555, 557 (6th Cir. 1992); United States v. Walton [ 90-2 USTC ¶50,429], 909 F.2d 915, 918-19 (6th Cir. 1990). The burden is on the taxpayer to produce evidence to the contrary. Walton [ 90-2 USTC ¶50,429], 909 F.2d at 918-19.

Smith has submitted no evidence to refute the government's position. Instead he asserted various arguments as to why he is not liable for payment of the taxes allegedly owed. Smith maintains that he is only a common law citizen of Ohio and is not a citizen or resident of the United States. He further contends that the income tax is an "excise" tax from which he is exempt. All of Smith's arguments are frivolous.

The Sixth Circuit, as well as other courts, has rejected as frivolous the argument that a person who claims to be a resident or citizen only of a state is not subject to federal income taxes. See United States v. Mundt [ 94-2 USTC ¶50.366], 29 F.3d 233, 237 (6th Cir. 1997); United States v. Gosnell [ 92-2 USTC ¶50,368], 961 F.2d 1518, 1520 (10th Cir. 1992); United States v. Collins [ 91-2 USTC ¶50,554], 920 F.2d 619, 629 (10th Cir. 1990), cert. denied, 500 U.S. 920 (1991). See also United States v. O'Brien [ 2000-2 USTC ¶50,679], No. 99-4314, 2000 WL 1175278, *1 (6th Cir. Aug. 11, 2000).

His contention that income tax is an unauthorized excise tax is also frivolous. See Martin v. Commissioner [ 85-1 USTC ¶9238 ], 756 F.2d 38, 40-41 (6th Cir. 1985) (concluding that the "not a taxpayer" and "unlawful excise tax" contentions are meritless and grounds for assessing sanctions); Coleman v. Commissioner [ 86-1 USTC ¶9401], 791 F.2d 68, 72 (7th Cir. 1986) (describing the "unlawful excise tax" argument as "objectively frivolous"); Parker v. Commissioner [ 84-1 USTC ¶9209], 724 F.2d 469, 472 (5th Cir. 1984) (stating that the "excise tax" argument is frivolous, stale, and long "put to rest"). See also Everett v. United States, No. 00-2159, 2001 WL 549457 (6th Cir. May 18, 2001) (imposing sanctions for a frivolous appeal based on the "not a taxpayer" and "unlawful excise tax" contentions) cert. denied, 122 S.Ct. 1174 (2002).

Smith also claims that he has no tax liability because the 1040NR nonresident returns that he filed pursuant to his plea agreement were accepted by the trial court as "true, correct and accurate." The plea agreement required Smith to file "true, correct and accurate income tax returns for the calendar years 1982 to 1989" and to make a good faith effort to settle any and all civil liability he faces with the Internal Revenue Service. ( See Doc. 14, Ex. C). In an apparent attempt to comply with the agreement, Smith filed the 1040NR nonresident returns stating that he was not a resident and that he had no income.

Smith's reliance on the plea agreement is misplaced. Contrary to Smith's assertions, the trial judge did not rule that the 1040NR returns were in fact "true, correct and accurate," but only that he recognized that Smith believed them to be so:

The Court finds that Smith has filed according to his view true, correct, accurate federal income tax returns for these years and from his point of view that he has complied with his good faith effort to settle.

(Doc. 14, Ex. D, p. 0237). Moreover, the plea agreement expressly states that it "does not address or compromise in any way any civil liability Mr. Smith may be subject to in connection with the tax years 1982 through 1989." (Doc. 14, Ex. C).
Smith has failed to come forward with any evidence to show that a genuine issue of material fact exists with respect to his tax liability or to the imposition of a federal tax lien on his property and interests in property. Therefore it is recommended that the government's motion for summary judgment should be granted in part and that judgment be entered in favor of the United States in the amount claimed.



E. Lien and Foreclosure
The government contends that the federal tax liens on the Tylersville Road property should be foreclosed by means of a forced judicial sale. Plaintiff argues that even if the Court were to find in favor of defendants Naoma and Gregory Smith that the transfer was not fraudulent, and find that Donna Schaller has a dower interest in the property, the government is still entitled to foreclose. According to the government, under 26 U.S.C. §7403(c), it would simply distribute the proceeds of the sale to those third parties found to have a legally enforceable interest, proportionally according to each parties' interest.

Smith has failed to come forward with any evidence to show that genuine issues of fact exist with respect to the government's claim for foreclosure. While Defendants Naoma and Gregory Smith and Donna Schaller argue that they retain legally enforceable interests in the property by virtue of the transfer of a one-half interest and Schaller's alleged dower rights as Smith's common law wife, these defendants do not assert any arguments in opposition to the government's motion with respect to foreclosure and a forced sale of the property.

Pursuant to 26 U.S.C. §7403(a), the government is authorized to file suit in the United States district courts in order to enforce a tax lien. See Bank of Fraser v. United States [ 88-2 USTC ¶9592 ], 861 F.2d 954, 958 (6th Cir. 1988). The statutory language authorizing the tax lien "is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [ 85-2 USTC ¶9482], 472 U.S. 713, 719-720 (1985). "Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes." Bank of Fraser [ 88-2 USTC ¶9592], 861 F.2d at 958 (citing Glass City Bank v. United States [ 45-2 USTC ¶9449], 326 U.S. 265, 267 (1945)).

Section 7403 provides in full as follows:

(a) Filing. --In any case where there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof, whether or not levy has been made, the Attorney General or his delegate, at the request of the Secretary [of the Treasury], may direct a civil action to be filed in a district court of the United States to enforce the lien of the United States under this title with respect to such tax or liability or to subject any property, [of] whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability. For purposes of the preceding sentence, any acceleration of payment under section 6166(g) or 6166A(h) shall be treated as a neglect to pay tax. (b) Parties. --All persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto. (c) Adjudication and decree. --The court shall, after the parties have been duly notified of the action, proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States. If the property is sold to satisfy a first lien held by the United States, the United States may bid at the sale such sum, not exceeding the amount of such lien with expenses of sale, as the Secretary directs. (d) Receivership. --In any such proceeding, at the instance of the United States, the court may appoint a receiver to enforce the lien, or, upon certification by the Secretary during the pendency of such proceedings that it is in the public interest, may appoint a receiver with all the powers of a receiver in equity.

As a general matter, the "lien of the United States" referred to in §7403(a) is that created by 26 U.S.C. §6321, which provides: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." Thus, the federal tax lien under 26 U.S.C. §6321 attaches to all of a taxpayer's property. See United States v. Big Value Supermarkets, Inc. [ 90-1 USTC ¶50,160], 898 F.2d 493, 496 (6th Cir. 1990).
The Supreme Court has clearly held that courts may order the judicial sale of an entire property, not just a delinquent taxpayer's interest in the property, to satisfy the taxpayer's tax indebtedness. United States v. Rodgers [ 83-1 USTC ¶9374], 461 U.S. 677, 693-97 (1982). Section 7403 protects those third parties with vested interests in the property and ensures that the government receives no more from the proceeds of the sale than that to which it is entitled. Id. at 699. See also Kingman v. United States, 2000 WL 1566280, at *3 (S.D. Ohio Sept. 13, 2000) (Beckwith, J.) ("There is no controversy over the power of this Court to require a sale of the [...] properties due to [defendant's] federal tax indebtedness.... This is so even though [defendant's wife] also has a one-half interest in the [...] properties."). However, the Court's power to require a judicial sale is "limited to some degree by equitable discretion." Rodgers [ 83-1 USTC ¶9374], 461 U.S. at 680; Kingman, 2000 WL 1566280 at *3.

Because the federal government has a paramount interest in the "prompt and certain" collection of delinquent taxes, the Court's exercise of its discretion not to order a sale must be applied "rigorously and sparingly." Rodgers [ 83-1 USTC ¶9374], 461 U.S. at 711. There are "virtually no circumstances, for example, in which it would be permissible to refuse to authorize a sale simply to protect the interests of the delinquent taxpayer himself or herself." Rodgers [ 83-1 USTC ¶9374], 461 U.S. at 709. Yet, when a third party has an interest in property that may be subject to a judicial sale, the Court must evaluate the following equitable considerations: (1) the extent of prejudice to the Government's financial interest if the Court orders a sale of only the delinquent taxpayer's interest; (2) whether the interested third parties would, under normal circumstances, hold a legally recognizable expectation that their interests would not be sold by the delinquent taxpayer or his creditors; (3) what, if any, prejudice the third parties will incur "both in personal dislocation costs and in undercompensation from the forced sale...."; and (4) the differences between the interests held by the delinquent taxpayer and the third parties, and whether any differences weigh against a compelled sale. Kingman, 2000 WL 1566280 at *3-4 (citing Rodgers [ 83-1 USTC ¶9374], 461 U.S. at 710-11).

Because genuine issues of material fact exist with respect to whether Smith's transfer of a one-half interest in the Tylersville Road property was fraudulent and whether Donna Schaller is Smith's common law wife and therefore entitled to a dower interest in his property, no determination has been made as to whether Naoma and Gregory Smith and or Donna Schaller have a legally enforceable interest in the subject property. Consequently, the Court is unable evaluate those equitable factors set forth in Rodgers until these underlying factual questions are resolved. Therefore, even though there is no question of fact as to Smith's liability for the amount claimed by the government, it is recommended that the Court decline to order a forced sale of the property until findings of fact have been made with regard to whether the transfer was fraudulent, and whether defendant Schaller is entitled to a dower interest in Smith's portion of the property as his common law wife.

IT IS THEREFORE RECOMMENDED THAT:

1. The motion for partial summary judgment filed by defendants Naoma Smith, Gregory Smith, and Donna Schaller (Doc. 13) should be DENIED;

2. Plaintiff's motion for summary judgment (Doc. 14) should be GRANTED in part and DENIED in part.

1 Ronald E. Smith did not oppose the government's motion for summary judgment on its claim that the conveyance to Barney and Naoma Smith was fraudulent. ( See Doc. 16).

Fraudulent conveyances. --Tax Liens: Property Subject to Tax Liens: Fraudulent conveyances

Property was fraudulently conveyed to a third party in an attempt to defeat the U.S.'s interest as a creditor.

Canadian American Co., Inc., CA-2, 53-1 USTC ¶9286, 202 F2d 751.

W.C. Graham, CA-9, 57-1 USTC ¶9645, 243 F2d 919.

Hyde Properties, CA-6, 75-1 USTC ¶9470, 507 F2d 301.

F.D. Duncan, CA-5, 79-2 USTC ¶9431, 597 F2d 51.

R.C. Fernon, Jr., CA-5, 81-1 USTC ¶9287, 640 F2d 609.

M.A. Wurdemann, CA-8, 81-2 USTC ¶9757, 663 F2d 50.

Carr Enterprises, Inc., CA-8, 83-1 USTC ¶9202, 698 F2d 952.

D.M. Pilla, CA-8, 83-2 USTC ¶9455, 711 F2d 94.

B.J. Chapman, CA-5, 85-1 USTC ¶9337, 756 F2d 1237.

Commonwealth Commercial State Bank, DC Mich., 39-1 USTC ¶9385, 27 FSupp 787.

W.M. Leach, DC Fla., 40-1 USTC ¶9399.

C.L. Hunter, DC Fla., 40-1 USTC ¶9400.

E.F. Shoemaker, DC Ark., 53-1 USTC ¶9209, 110 FSupp 898.

H. Kaplan, DC N.Y., 54-2 USTC ¶9532.

J.A. Schofield, 3rd, DC Pa., 60-2 USTC ¶9729.

H. Milloff, DC D of C, 62-2 USTC ¶9538, 306 F2d 783.

H. Schroeder, DC Iowa, 63-2 USTC ¶9608.

I. Prather, DC Ga., 66-2 USTC ¶9769.

R.N. Ream, DC Pa., 67-2 USTC ¶9703.

J.A. Wiltse, DC Calif., 68-1 USTC ¶9415.

J.D. Dobbelmann, DC Minn., 69-2 USTC ¶9591.

G. Barnes, DC Okla., 71-2 USTC ¶9638.

M.E. St. Mary, DC Pa., 72-1 USTC ¶9319, 334 FSupp 799.

W.F. Biddle, DC Fla., 73-1 USTC ¶9354.

L.F. Livingstone, DC Mass., 75-1 USTC ¶9242, 381 FSupp 607.

A.J. Werner, DC Wis., 75-2 USTC ¶9672.

T.J. Piscopo, DC Mass., 75-2 USTC ¶9691.

W.C. Briggs, DC Va., 76-2 USTC ¶9543.

H.B. Ressler, DC Fla., 77-1 USTC ¶9459, 433 FSupp 459. Aff'd on another issue, CA-5, 78-2 USTC ¶9571, 576 F2d 650.

H.G. Steiner, DC Wis., 77-2 USTC ¶9716, 441 FSupp 1069.

S.A. Dryden, DC Ga., 78-1 USTC ¶9108.

P.A. Gant, DC Ga., 78-2 USTC ¶9789.

W. Cox, DC S.C., 79-2 USTC ¶9434.

E. Bretz, DC Mont., 80-2 USTC ¶9675.

J.E. Wilson, DC Tex., 80-2 USTC ¶9824, 500 FSupp 831.

G.C. Stophel, DC Tenn, 81-2 USTC ¶9669, aff'd CA-6, in unpublished opinion, 5/17/82.

M.F. Kennedy, DC N.H., 82-1 USTC ¶9239.

L.C. Brown, DC Iowa, 81-2 USTC ¶9649.

M.F. Estes, DC Tenn., 82-1 USTC ¶9388.

B.H. Grice, DC Ala., 83-1 USTC ¶9399, 567 FSupp 113.

J.E. Morgan, DC Colo., 83-2 USTC ¶9535.

G.L. Turner, DC Fla., 83-2 USTC ¶9703.

S.L. Ambrose, DC Ohio, 84-2 USTC ¶9858.

Indiana National Bank, DC Ill., 84-2 USTC ¶9884.

E.L. May, DC Calif., 84-2 USTC ¶9970.

R.H. Schock, DC Calif., 85-1 USTC ¶9330.

B.G. Braswell, DC Ala., 85-2 USTC ¶9685.

L. Wodtke, DC Iowa, 86-2 USTC ¶9669.

I.R. Hoffman, DC Wis., 86-2 USTC ¶9733, 634 FSupp 346.

W.D. Gascock, DC Ala., 86-2 USTC ¶9794, 631 FSupp 383.

R. Jones, Sr., DC Mo., 86-2 USTC ¶9832.

W.E. Drexler, Sr., DC Okla., 87-2 USTC ¶9493.

J.A. Course, DC Ill., 87-2 USTC ¶9553.

W.E. Drexler, Jr., DC Okla., 87-2 USTC ¶9575.

Dardanelle Co. Trust, DC Minn., 88-1 USTC ¶9260 and 9261.

D. Morton, DC Mo., 88-1 USTC ¶9334, 682 FSupp 999.

M. Jack, DC Va., 88-1 USTC ¶9274.

D.W. Freeman, DC W.Va., 89-1 USTC ¶9127. Aff'd, CA-4 (unpublished opinion 1/11/90).

J.R. Montgomery, DC Tex., 89-1 USTC ¶9212. Aff'd, CA-5 (unpublished opinion 12/21/89).

J.W. Hart, DC Ill., 89-1 USTC ¶9255.

L. Simpson, DC Fla., 89-1 USTC ¶9285.

L.W. Berman, CA-6, 89-2 USTC ¶9524, 884 F2d 916.

Harris Bank/Glencoe-Northbrook, N.A., DC Ill., 89-2 USTC ¶9567.

J. Rode, DC Mich., 90-2 USTC ¶50,383, 749 FSupp 1483. Aff'd, CA-6 (unpublished opinion 8/30/91).

E.L. Denlinger, CA-7, 93-1 USTC ¶50,040, 982 F2d 233.

G.D. Sellner, DC Mont., 90-2 USTC ¶50,452.

E.D. Christensen, DC Utah, 90-2 USTC ¶50,543, 751 FSupp 1532. Dism'd, CA-10 (unpublished opinion 4/8/92).

M.E. Parks, DC Utah, 91-1 USTC ¶50,263.

E.K. Troyer, DC Ind., 91-2 USTC ¶50,401. Aff'd, CA-7 (unpublished opinion 12/16/92).

C. Murphy, Jr., DC Miss., 92-1 USTC ¶50,165.

Red Stripe, Inc., DC N.Y., 92-1 USTC ¶50,277, 792 FSupp 1338.

L. Scherping, DC Minn., 92-2 USTC ¶50,345.

W.B. Freeman, DC N.J., 93-1 USTC ¶50,296. Aff'd, CA-3 (unpublished opinion 12/28/93).

T.C. Brown, DC Ill., 93-2 USTC ¶50,375, 820 FSupp 374.

R. Mantarro, DC Ohio, 94-1 USTC ¶50,229.

W.J. McCullough, DC Ill., 94-1 USTC ¶50,280.

J.P. Veigle, DC Fla., 94-2 USTC ¶50,589, 873 FSupp 623.

A.M. Mayfield, DC Ind., 95-1 USTC ¶50,066.

A. Alden, DC Calif., 94-2 USTC ¶50,610. Aff'd, CA-9 (unpublished opinion), 97-2 USTC ¶50,604.

F.A. Wright, DC Calif., 96-1 USTC ¶50,005. Aff'd, CA-9 (unpublished opinion), 96-2 USTC ¶50,377, 90 F3d 473. Cert. denied, 4/21/97.

R.E. Hatfield, DC Ill., 96-2 USTC ¶50,342.

W.H. Zuhone, Jr., DC Ill., 96-2 USTC ¶50,366.

R.A. Sherlock, DC La., 96-2 USTC ¶50,462. Aff'd, per curiam, CA-5 (unpublished opinion), 98-1 USTC ¶50,139.

T.E. O'Day, DC Fla., 97-1 USTC ¶50,250.

R.M. Odd, CA-9 (unpublished opinion), 96-2 USTC ¶50,497.

W.E. Smith, DC Ind., 96-2 USTC ¶50,668.

D.D. Fitzgerald, DC Fla., 97-1 USTC ¶50,238.

R.L. Bodwell, DC Calif., 96-2 USTC ¶50,592. Aff'd, CA-9 (unpublished opinion), 98-1 USTC ¶50,172.

L.K. Hudnall, DC Fla., 96-2 USTC ¶50,609.

M. Carlin, DC N.Y., 97-1 USTC ¶50,302.

F.A. Brickman, DC Ill., 97-1 USTC ¶50,350.

R.P. Upton, DC Conn., 97-1 USTC ¶50,366.

E.S. Dubey, DC Calif., 97-1 USTC ¶50,392.

P. Marguglio, DC N.J. (unpublished opinion), 97-2 USTC ¶50,662.

T.P. Sheridan, CA-7 (unpublished opinion), 97-2 USTC ¶50,677, aff'g an unreported District Court case.

N. Nirelli, DC N.Y., 97-2 USTC ¶50,751.

G.J. Landsberger, DC Ariz., 97-2 USTC ¶50,822. Aff'd, CA-9 (unpublished opinion), 99-1 USTC ¶50,318.

H.E. Wilfley, DC Ore., 97-2 USTC ¶50,825.

R.S. Waltman, DC Ind., 97-2 USTC ¶50,760.

C.A. Cody, DC Ind., 98-1 USTC ¶50,205.

S.G. Hansel, DC N.Y., 98-1 USTC ¶50,293.

S.G. Hansel, DC N.Y., 99-1 USTC ¶50,432.

H.I. Green, CA-3, 2000-1 USTC ¶50,151, 201 F3d 251.

J.A. Kudasik, DC Pa., 98-2 USTC ¶50,535.

R. Dahmer, DC Mo., 99-1 USTC ¶50,482. Aff'd, per curiam, CA-8 (unpublished opinion), 2000-2 USTC ¶50,680.

E.L. LaBine, DC Ohio, 99-1 USTC ¶50,448.

U. Freudenberg, DC Tenn., 99-2 USTC ¶50,623.

L. Scherping, CA-8, 99-2 USTC ¶50,758, 187 F3d 796. Cert. denied, 2/22/2000.

Stretch-O-Rama, DC Tex., 99-2 USTC ¶50,847.

M.W. Simmons, CA-9 (unpublished opinion), 99-2 USTC ¶50,894, aff'g DC Calif., 98-1 USTC ¶50,418.

M.J. Stalker, DC Fla., 2000-2 USTC ¶50,632.

S.J. Tracy, DC Mo., 2000-2 USTC ¶50,708.

J.W. Marsh, DC Hawaii, 2000-2 USTC ¶50,726, 114 FSupp2d 1036.

M.K. Turner, DC Hawaii, 2000-2 USTC ¶50,815.

P. LaMontagne, DC N.Y., 2000-2 USTC ¶50,821.

A.C. Reid, DC Wash., 2001-1 USTC ¶50,250. Aff'd on other issues, CA-9 (unpublished opinion), 2002-1 USTC ¶50,333.

C.D. Schaut, DC Ill., 2002-1 USTC ¶50,184.

L.D. Wight, DC Calif., 2002-1 USTC ¶50,287.

D. Parkinson, DC Ida., 2001-2 USTC ¶50,462.

A. Patej, DC Mich., 2002-2 USTC ¶50,792. Motion for reconsideration denied, DC Mich., 2003-1 USTC ¶50,250.

P. Labato, DC Fla., 2002-2 USTC ¶50,541.

Audio Investments, DC S.C., 2002-2 USTC ¶50,757, 203 FSupp2d 555. Aff'd, per curiam, CA-4 (unpublished opinion), 2003-1 USTC ¶50,531

Sequoia Property and Equipment Ltd., DC Calif., 2002-2 USTC ¶50,773.

S.B. Doyle, DC Pa., 2003-2 USTC ¶50,619.

H. Engh, CA-7, 2003-1 USTC ¶50,500.

M. Dieter, DC Minn., 2003-1 USTC ¶50,439

T.L. Nipper, DC Okla., 2003-1 USTC ¶50,408.

T.D. Davenport, DC Okla., 2006-1 USTC ¶50,167.

Cal Fruit International, Inc., DC Calif., 2006-2 USTC ¶50,600.

The IRS was denied summary judgment on its motion to set aside certain transfers of property as fraudulent conveyances. The IRS had not established that, as a matter of law, actual fraud or constructive fraud had taken place because the taxpayer had introduced issues of fact that could only have been resolved at trial.

G.S. Sitka, DC Conn., 94-1 USTC ¶50,283.

The testimony in a taxpayer's deposition was insufficient to reopen a case in which it was decided that the IRS failed to establish that the taxpayer fraudulently conveyed property. Although the taxpayer testified that he was aware of his failure to file taxes for the years at issue, he was unaware at the time he transferred the property of his tax liability. Accordingly, the taxpayer did not have the intent to avoid a tax liability. Additionally, the taxpayer's testimony did not establish that the transfer of the property rendered the taxpayer insolvent.

R.A. Ward, DC Vt., 93-2 USTC ¶50,553.

The imposition of liens and wage garnishment on a married couple could not be challenged on the basis of the failure of the IRS to promulgate regulations. The Internal Revenue Code constitutes enforceable law even without specific regulations. Moreover, regulations exist governing the authority of the IRS to impose levies. These regulations detail the means of enforcement to be used to create and release liens. Therefore, the taxpayers' arguments were without merit, and the liens and wage garnishment were not released.

R. Reid, DC Colo., 94-1 USTC ¶50,088.

A real estate conveyance between an individual taxpayer (against whom the IRS assessed tax deficiencies) and his wife after the deficiencies arose was not valid under state (Pennsylvania) law. The taxpayer did not show that he was solvent at the time of the transfer or that the transfer was made for fair consideration. As such, the transfer was set aside as fraudulent even without an intent to defraud. Alternatively, the court held that the transfer was also fraudulent with an actual intent to defraud.

T.W. Purcell, DC Pa., 93-2 USTC ¶50,648.

Individuals who received real property by deed of gift from their tax-delinquent parents failed to show that the IRS could not establish its claim that a lien could attach to the property because the parents had fraudulently conveyed it under state (North Carolina) law to the individuals or that the lien attached prior to the transfer.

M.D. Ross, DC N.C., 94-2 USTC ¶50,372.

A husband's fraudulent conveyance to his wife of a principal residence held with his wife as tenants by the entirety was set aside. However, the IRS could not force a sale of the property. Instead, the wife was required to make monthly payments in satisfaction of her husband's outstanding tax liability. Each payment was equal to one-half of the monthly rental value of the property.

H.C. Jones, DC N.J., 95-1 USTC ¶50,190, 877 FSupp 907. Aff'd, CA-3, 96-1 USTC ¶50,056.

The IRS properly filed notices of federal tax liens on a farm that was owned by an individual who was assessed with deficiencies, penalties and interest even though he transferred his interest in the farm to his son. Under the Uniform Fraudulent Conveyance Act, which was adopted by the state (Wyoming) where the property is located, the transfer was set aside as fraudulent. The taxpayer received no consideration for the transfer and he continued to live on and farm the property after the transfer. His son had no input or control over the farm's operations. Since the transferee was the taxpayer's son, the taxpayer had a close relationship with him. The taxpayer admitted that he transferred the property to his son after he learned that a creditor planned to sue him. Moreover, the transfer rendered him insolvent. The taxpayer's son was also his nominee.

D.L. Jessen, DC Wyo., 96-2 USTC ¶50,449.

Although the IRS's cause of action under state (California) law for fraudulent conveyance had been extinguished by expiration of the statute of limitations, it was not precluded from asserting that a partnership was the alter ego and/or the nominee of its partners. The fraudulent conveyance, nominee and alter ego theories were discrete, despite the similar factual basis necessary to establish each theory. The partnership had transferred real property, which was subject to a federal nominee tax lien, to its general partners.

Sequoia Property & Equipment Ltd. Partnership, DC Calif., 98-1 USTC ¶50,460.

A corporation's transfer of assets to its officers without consideration, and the officers' subsequent contribution of those assets to a partnership that continued the corporation's business, was void as a fraudulent conveyance under state (Tennessee) law. Although no deficiencies had been assessed at the time of the transfer, the government qualified as the corporation's creditor because the tax liabilities had accrued, the corporation was under examination, and its officers expected significant assessments. The transfer liquidated and dissolved the corporation and, thus, rendered it insolvent and incapable of paying its assessments, despite the partnership's purported assumption of its liabilities. The evidence also indicated that the transfer was intended to hinder, delay or defraud the government.

L.A. Westley, DC Tenn., 98-2 USTC ¶50,545. Aff'd, CA-6 (unpublished opinion), 2001-1 USTC ¶50,340.

Genuine issues of material fact remained regarding whether the conveyance of a residence from an individual to his former wife was fraudulent; therefore, the IRS's motion for summary judgment was denied. Affidavits by the husband and wife stated that the conveyance was made in recognition of the husband's obligation to support his wife and minor children, which qualified as fair consideration under state (New York) law. Moreover, the burden of proving fair consideration did not shift to the husband since there was no showing that the transaction was clandestine or designed to conceal the nature and value of the consideration. Finally, despite the existence of an intrafamily transfer, there was no determination as a matter of law that the couple acted with actual intent to hinder, delay or defraud creditors since they did not have notice of the tax claims at the time of the conveyance.

D. Laronga, DC N.Y., 98-1 USTC ¶50,154.

The issue of whether the taxpayer was insolvent when he conveyed the property to his former wife was a question of material fact that precluded summary judgment that the conveyance was fraudulent. The taxpayer testified that, at the time he made the conveyance, the value of his assets exceeded his tax obligations; and, under state (Illinois) law, a property owner is competent to render an opinion as to the value of his property.

J.C. Dunkel, DC Ill., 98-2 USTC ¶50,610.

The IRS was denied summary judgment on the issue of whether a delinquent taxpayer fraudulently conveyed his interest in real estate to a church. It failed to establish that the transfer of the property rendered him insolvent or that he intended to defraud his creditors.

J.W. Noble, DC Mich., 98-2 USTC ¶50,642. Appeal dism'd, CA-6 (unpublished opinion), 99-1 USTC ¶50,173.

In a case related to J.W. Noble, above, proceeds from the sale of levied real property, after expenses, were to be divided equally between the government and a church to whom the taxpayer had conveyed his interest. Because the government sought to collect unpaid federal income taxes from the taxpayer's interest in the property, the government and the church were equally entitled to the proceeds from the sale of the property, as the third party still held title to the property subject to the rights of the government, as the taxpayer's creditor.

J.W. Noble, CA-6 (unpublished opinion), 2001-1 USTC ¶50,226, aff'g an unreported District Court decision.

Conveyances of real property by married taxpayers to trusts that qualified, under state (California) law, as alter ego and nominee trusts were set aside as fraudulent. As a result, the properties were subject to federal tax liens. The trusts paid no consideration for the transfers, and the taxpayers maintained possession and control of the properties after the conveyances. Moreover, a trustee of three of the four trusts at issue was a sibling of one taxpayer, and another trustee admitted to having no trust duties.

E.S. Dubey, DC Calif., 98-2 USTC ¶50,851.

Married taxpayers, through their failure to respond to the IRS's requests for admissions, were deemed to have fraudulently conveyed under state (Washington) law real property to their alter ego for the purpose of preventing the IRS from seizing and selling the property. Accordingly, the mortgage on the property was set aside as a fraudulent conveyance.

E. Butts, DC Wash., 98-2 USTC ¶50,896.

The existence of material issues of fact precluded entry of summary judgment for an individual in the government's action to set aside a fraudulent conveyance and foreclose on federal tax liens. Although the individual's previously executed prenuptial agreement required him to promptly convey the property at issue to his new wife, he did not make the conveyance until years later, after his net worth declined and his tax liabilities skyrocketed. Thus, a genuine issue of fact existed as to whether, at the time of the transfer, he knew or should have known that he was about to incur debts beyond his ability to pay. The four-year state (Florida) statute of limitations on fraudulent transfer actions did not bar the government's suit because, absent a congressional enactment, a government action is not subject to any time limitation.

S.J. Dellaquila, DC Fla., 99-1 USTC ¶50,196.

The government was not entitled to summary judgment that federal tax liens attached to property transferred by married taxpayers to a family trust. Genuine issues of material fact existed as to whether the taxpayers' transfers were fraudulent under state (New Hampshire) law.

G.T. Kattar, DC N.H., 99-2 USTC ¶50,834.

The primary transferee of real property rebutted the presumption of fraud with her allegation that the transfers were made in consideration of the dissolution of her common-law marriage to the taxpayer and pursuant to a related decree.

J.E. Kaiser, DC Ohio, 99-2 USTC ¶50,861.

The government was entitled to foreclose a tax lien on real property that a corporate officer fraudulently conveyed to his corporation. Under state (Illinois) law, the transfer was a sham because the taxpayer resided at the property before and after the conveyance, the corporation paid obviously inadequate consideration, and the transfer occurred shortly after the Tax Court ruled that the taxpayer owed a substantial tax liability.

P. Stout, DC Ill., 2000-1 USTC ¶50,294.

The existence of genuine issues of material fact precluded summary judgment regarding whether tax liens attached to real property and funds that were transferred by a delinquent taxpayer to his wife before the liens arose. Although the taxpayer conveyed the assets to his wife without fair consideration, it was not clear that he was insolvent at the time.

M. Mazzeo, DC N.Y., 99-2 USTC ¶50,901.

Tax liens attached to a taxpayer's interest in funds and property that he fraudulently transferred to a trust that qualified as his alter ego under state (New York) law. He used the trust to pay his personal expenses, he continued to act as the owner of real property that he purportedly transferred to the trust, and there was no documentation that the transfers were loans, as he alleged.

J. Letscher, DC N.Y., 99-2 USTC ¶50,947.

A valid IRS tax lien attached to two parcels of property that a debtor fraudulently conveyed to family members prior to filing for bankruptcy protection. The lien arose at the time of assessment, which preceded both the recording of the deed for the first parcel and the fraudulent transfer and recording of the deed for the second parcel. Following the bankruptcy trustee's recovery of the two properties and his sale of one of the parcels, the tax lien transferred to the debtor's interest in the sale proceeds.

J. McGhee, BC-DC Ky., 2000-1 USTC ¶50,275.

An individual's property conveyances and transfers to various family members were found to be fraudulent under state (Georgia) law and were consequently set aside. However, the transfers of the taxpayer's interest in his home to his former wife and children, even though fraudulent, involved factors that prevented the transfers from being set aside.

C.A. Reid, Jr., DC Ga., 2000-2 USTC ¶50,748, 127 FSupp2d 1361.

A father-son relationship, alone, was insufficient to support foreclosure on a nominee theory. The son testified credibly that his father no longer paid the property taxes, and that he and his mother, who is no longer married to his father, exercised exclusive control over the property. Further, there was insufficient evidence to determine whether the father actually intended to defraud the IRS or merely wanted to reward or make a gift to his son.

R.L. Turk, DC Mont., 2000-2 USTC ¶50,834, 127 FSupp2d 1165.

Conveyances by married taxpayers of three parcels of real property first to a sham church that they had created for tax-evasion purposes and then to their son were properly set aside as fraudulent under state (New Mexico) law. The state limitations period did not apply to an action brought by the federal government to vindicate public rights or interests.

R.N. Spence, CA-10 (unpublished opinion), 2000-2 USTC ¶50,849, 242 F3d 392, aff'g an unreported District Court decision. Cert. denied, 5/14/2001.

The government was entitled to foreclose a tax lien on a debtor and his wife's real property in connection with the unpaid employment taxes of two corporations. Under the state (Illinois) fraudulent transfer statute, it was undisputed that the couple voluntarily conveyed the property for inadequate consideration while aware of the tax debt and retained insufficient property to satisfy the debt.

N. Paradise, DC Ill., 2001-1 USTC ¶50,113, 127 FSupp2d 951.

Similarly.

A. Langrehr, DC Neb., 2001-1 USTC ¶50,253.

State (Ohio) law's recognition of the alter ego doctrine and the doctrine of equitable ownership was essentially a recognition of the nominee doctrine, in which the domination and control over an entity is so complete that the entity has no separate mind, will, or existence of its own, rendering it subject to the equitable ownership of another. Thus, the government could assert tax liens on various parcels of property that were, in name, owned by different businesses

Nantucket Village Development Co., DC Ohio, 2001-1 USTC ¶50,202.

The government failed to present evidence that an individual received no consideration for a transfer of real property to a trust, or that he was insolvent at the time of, or as a result of, such transfer. It also failed to present sufficient evidence of the five alleged badges of fraud with respect to the transfer. Accordingly, the government's motion for summary judgment on its fraudulent conveyance claim was denied.

D. Billheimer, DC Ohio, 2002-1 USTC ¶50,424, 197 FSupp2d 1051.

The government failed to present evidence that a taxpayer received insufficient consideration for the transfer of real property to his parents, or that he was insolvent at the time of, or as a result of, such transfer. As such, issues of material fact remained as to whether sufficient badges of fraud existed to support a finding that the conveyance was fraudulent. Additionally, a finding of constructive fraud was denied as question of fact existed as to the value of the property at the time of the transfer and whether any payments changed hands.

R. Smith, DC Ohio, 2002-2 USTC ¶50,657.

Summary judgment to recover a taxpayer's house to satisfy trust fund recovery penalties assessed against her parents was denied. There was no proof that the conveyance of funds from the parents to the taxpayer for purchase of the house was fraudulent. A discrepancy between the taxpayer's reported income and income reported on a mortgage application failed to establish fraudulent intent. Also, there was no proof that the conveyance left the parents unable to satisfy the tax penalties. The application of the nominee theory was rejected.

S. Snyder, DC Conn., 2002-2 USTC ¶50,660, 233 FSupp2d 293.

Conveyance of real property by an individual taxpayer to his father prior to the assessment of tax liability against the taxpayer was not a fraudulent attempt to evade tax liability. There was no evidence that the conveyance was intended to defraud the IRS. Rather, the conveyance was given in consideration of the father's significant financial contribution to the purchase price of the property and in forgiveness of a loan, and neither the taxpayer nor his father had contributed to the ten-year delay in the filing of the action by the IRS.

F.O. McGuire, DC S.C., 2004-1 USTC ¶50,267.

The statute of limitations period set forth in the Federal Debt Collections Procedures Act of 1990 (FDCPA) did not bar the government's fraudulent conveyance claims against limited partnerships that were deemed nominees and alter egos of the taxpayers. The government based its claim on Code Secs. 7401 --7403, which was permissible under the FDCPA. The district court relied on state law only to set aside the fraudulent transfer of residences to the partnerships.

Sequoia Property and Equipment, Limited Partnership, DC Calif., 2002-2 USTC ¶50,773. Aff'd, CA-9 (unpublished opinion), 2005-1 USTC ¶50,182.

The government was entitled to summary judgment against an individual where he owed back taxes and fraudulently conveyed his interests in several real properties to third parties. The taxpayer failed to respond to the government's motion and, therefore, failed to demonstrate the arbitrariness or inaccuracy of the assessments against him. His wholly conclusory and facially frivolous "vow of poverty/ministerial expenses" position was insufficient to meet his burden of proof and did not create an issue of fact concerning his tax liability. In addition, the government established that it would suffer prejudice if the individual was permitted to withdraw his admissions. The court held that the case presented unusual circumstances warranting departure from the general rule proscribing "re-serving" the complaint in the form of a request for admissions.

K. Persaud, DC Fla., 2006-1 USTC ¶50,104.

Property fraudulently conveyed to an individual was subject to a tax lien for payroll taxes unpaid by her former husband. At the time of the transfer, the husband had willfully failed to collect, truthfully account for, and pay employment taxes. The transfer was fraudulent conveyance under the state's (New York) debtor and creditor law because it was made without fair consideration. In the absence of evidence that, following the couple's divorce, the individual would forego maintenance and/or child support as consideration for the transferred property, the transfer did not satisfy the husband's antecedent debt to support his wife and children.

E. Hirko, DC N.Y., 2006-1 USTC ¶50,278.

The government could not seize assets of an irrevocable trust created by an individual in order to help satisfy the individual's tax liability. Although the individual had mixed motives when establishing and funding the trust, the government did not establish that he was insolvent at the time. Thus, it failed to meet its burden of proving actual or constructive fraud under state (New York) law. Moreover, the trust was not the individual's alter ego. It was set up primarily to aid the individual in his estate planning; the individual apparently had sufficient funds at the time to satisfy the amount owed; and, ever since, he respected the rental agreement with the trust and left the trust money untouched. Although the individual may have been partially motivated by concerns about tax collection, that, alone, was not a sufficient reason to pierce the trust to satisfy the individual's tax debts.

J. Evseroff, DC N.Y., 2007-1 USTC ¶50,222. Vac'd and rem'd, CA-2 (unpublished opinion), 2008-1 USTC ¶50,240.

The government was entitled to summary judgment reducing a married couple's tax liability to judgment and foreclosing on federal tax liens. Although the government failed to prove that the couple's transfer of their residence to their son was fraudulent under state (California) law, the evidence indicated that the son was their nominee. The government's nominee theory was supported by the fact that the son paid no consideration for the property, the parties had a close relationship and the couple retained possession of the property and continued to enjoy its benefits even after the transfer.

A.B. Secapure, DC Calif., 2008-1 USTC ¶50,277.

An individual's bankruptcy discharge of debt was revoked; consequently, federal tax liens filed against his property were valid, and the government was entitled to foreclose on the properties subject to the liens. The discharge of debt was revoked because the individual fraudulently failed to disclose the full extent of his assets, intentionally made numerous false statements and attempted to transfer and/or conceal assets by means of several nominees. The properties were ordered sold, subject to his wife's valid homestead interest in one of those properties.

A.R. Harrison, DC Texas, 2008-1 USTC ¶50,274. Aff'd, per curiam, CA-5 (unpublished opinion), 2008-1 USTC ¶50,279.

Federal tax liens attached to properties an individual had transferred because the transfers were made with the intent to defraud the government and to evade his tax liability. Under state (Arkansas) law, his conveyances were fraudulent because inadequate consideration was paid for the transfers, he continued to control the property after the transfers, subsequent transfers were made to entities that were under his control and all transfers were made after he became aware of his tax liabilities. Even if the transfers were not fraudulent, the government could levy against the properties held by the entities because they were his alter egos.

L. Muncy, DC Ark., 2008-1 USTC ¶50,341.

Offer in Compromise as a Final Solution. The acceptance Of Offer In Compromise is Final

Johnston, 122 T.C. 6; Dutton, 122 T.C. 7

Two Tax Court decisions warn that an accepted offer in compro-mise (OIC) shuts the door to claims for further relief. In Dutton, the taxpayer was barred from adjusting an OIC for an innocent spouse claim. In Johnston, the taxpayers were precluded from reducing their accepted offer by net operating losses (NOLs).



Dutton dual claims

The taxpayer submitted a request for relief from joint and several liability for several tax years. The taxpayer later submitted an OIC for all liabilities.

An IRS manager subsequently informed the taxpayer that the government was proposing a partial grant of relief under Code Sec. 6015(c), but that relief under other provisions would be denied. The manager also informed the taxpayer that once relief was granted, no additional payments would be due and the taxpayer would be entitled to a refund.

The IRS accepted the taxpayer's $6,000 offer in compromise, subject to the conditions stated on Form 656, Offer in Compromise. The taxpayer completed the payment plan for his OIC.



IRS changes position

The IRS later determined that the taxpayer was not entitled to relief from joint and several liability. It asserted that the taxpayer's innocent spouse claims were barred because the taxpayer's OIC had been accepted.

The taxpayer argued that his OIC should be set aside because the IRS manager mistakenly stated that refunds would be allowed for any relief granted under Code Sec. 6015(c). The taxpayer contended that he would not have agreed to an offer in compromise if he had known he was waiving his right to refunds.



Tax Court's analysis

Code Sec. 6015 allows relief from joint and several liability (innocent spouse relief). Code Sec. 7122 governs offers. Generally, acceptance of a taxpayer's OIC will conclusively settle the taxpayer's liability as specified in the offer, absent fraud or mutual mistake.

The court found no mutual mistake or misrepresentation sufficient to set aside the offer. The court also noted that the reference in Code Sec. 6015(g)(1) to Code Sec. 7122 indicates that under the OIC, the taxpayer would not be entitled to a refund or credit even if relief was ultimately granted under Code Sections 6015(b) or (f).

Moreover, the court observed that Form 656 stated that the taxpayer would no longer be able to contest the amount of his liability. It concluded that there was no indication at the time the offer was submitted that the taxpayer was under the impression that if the offer was approved, the IRS would issue a refund.

The Tax Court recently held that an appeals officer did not abuse his discretion under Code Sec. 6332(c)(3), by rejecting the taxpayers' offer in compromise and proceeding with a levy. The taxpayer had sought to have the account declared uncollectible because of financial hardship.

The amount of the payment offer was determined following IRS guidelines and the taxpayers received two hearings, while they only entitled to one. The court concluded that the appeals officer's rejection of the taxpayer's $250 per month offer ($6,000 over two years) to satisfy tax liabilities in excess of $160,000 was reasonable.

The court also observed that, due to changes to Code Sec. 7122 resulting from the '98 IRS Restructuring Act, offers in compromise, in addition to doubt as to liability and collectibility, can be made to promote effective tax administration if collection imposes an economic hardship. In such instances, the payment period may be reduced to two years. The court stated that factors such as age and illness must be considered in determining economic hardship, but here the appeals officer had given these matters proper attention.

Galvin, TC, CCH Dec. 55,289(M)


Johnston compromise

The taxpayers made a qualified offer under Code Sec. 7430 to resolve their liabilities. The taxpayers offered to pay $105,000 and the IRS accepted the offer without negotiation.

After the offer was accepted, the taxpayers tried to reduce the agreed-upon amount by applying net operating losses (NOLs). The IRS asserted that the taxpayers could not raise new issues after it had accepted their OIC. The taxpayers argued that since the NOLs were not in dispute when they made the qualified offer, the offer was exclusive of the amounts related to the NOLs.



NOLs no-go

The court found that the taxpayers should have indicated in the settlement that the offer amount was subject to reduction by NOLs. The court concluded that the IRS's acceptance of the OIC fully resolved the taxpayers' liabilities.

The taxpayers could not add new terms to their agreement by applying NOLs from other years to reduce the agreed-upon amount. Although final regs under Code Sec. 7420 clarify that the question of whether a settlement can be decreased by NOLs depends on state and contract law, the court noted that the taxpayers' OIC had been made before the effective date of the final regs.


IRS Wrong In Rejecting Offer In Compromise Under Blanket Internal Rule For All Bankrupt Taxpayers

In the Matter of Holmes, BC-DC Ga., September 12, 2003

A bankruptcy court ordered the IRS to consider a debtor/taxpayer's offer in compromise (OIC). It held that the IRS's blanket rule not to consider an OIC while a taxpayer is in bankruptcy frustrates the basic principles of the Bankruptcy Code.



Facts

The taxpayer owned 3.2 million shares of stock. When the stock value plummeted due to financial problems, most of the taxpayer's stock was sold on "margin calls." The margin calls created substantial capital gains tax that the taxpayer was unable to pay, forcing him into Chapter 11 bankruptcy. The IRS filed unsecured claims for $10.5 million.

The taxpayer made a Code Sec 7122 compromise offer of $620,000 cash. The IRS refused to process the OIC, stating that the offer "will not be considered while a bankruptcy proceeding is open."

Comment:
As a general policy, the IRS does not consider OICs when the taxpayer has filed for bankruptcy. This policy is only found in the IRS's Internal Revenue Manual. Neither the Bankruptcy Code, the IRC nor regs restrict the IRS from considering an OIC during a Chapter 11 bankruptcy case.



Disparate treatment argument fails

The taxpayer argued that the IRS policy not to consider an OIC if a bankruptcy proceeding is pending is prohibited by section 525(a) of the Bankruptcy Code. Following Macher v. U.S., the court decided that an OIC is not "a license, permit, charter, franchise, or similar grant" under Code Sec. 525(a). Thus, the IRS's refusal to receive and consider the taxpayer's OIC is not prohibited by section 525(a) of the Bankruptcy Code.



IRS policy set aside

Nevertheless, the Court found that the IRS's policy frustrated the basic principles of the Bankruptcy Code and Code Sec. 7122. Internal policies of the IRS do not have the force and effect of law. Federal agencies must obey all federal laws, not just those they administer. Noting that federal courts are required to set aside federal agency action that "is not in accordance with law," the court exercised its authority to issue an order necessary to carry out the provisions of the bankruptcy title and Congressional intent for Chapter 11.

26 U.S.C.A. §7122(a) authorizes the IRS to compromise "any civil or criminal case arising under the internal revenue laws" prior to the case being referred to the Department of Justice. Grounds for compromise include (1) doubt as to liability; (2) doubt as to collectibility; and (3) promotion of effective tax administration. 26 C.F.R. §301.7122-1(b). A taxpayer may appeal the denial of an offer in compromise to the IRS Office of Appeals. 26 U.S.C.A. §7122(e). Specifically, a taxpayer may appeal "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 ...." 26 C.F.R. §301.7122-1(f)(5). The timely appeal was not done in the following case:


U.S. v. Darrell L. Kadunce, Defendant., U.S. District Court, West. Dist. Pa.; Civ. 07-1704, October 20, 2008.


Offer in compromise: Valid defense. – Section 7122
The government was entitled to reduce to judgment federal income, employment and unemployment taxes assessed against an individual. The individual's claim that the IRS had selectively prosecuted the action against him was rejected because he did not provide evidence that the government had singled him out for prosecution. The individual also did not show that the decision to prosecute was made on the basis of an unjustifiable standard or that the prosecution was intended to prevent his exericse of a fundamental right. Furthermore, because the individual did not timely appeal the denial of his offer in compromise to the IRS Office of Appeals, he could not later request a review of that denial in the district court.


MEMORANDUM and ORDER


LANCASTER, District Judge: This is a tax collection case. Plaintiff, the United States of America (United States), seeks to reduce to judgment federal income, employment, and unemployment tax assessments against defendant, Darrell L. Kadunce, pursuant to 26 U.S.C. §§7401 and 7402. Plaintiff seeks payment of the unpaid tax amounts, penalties, and interest.

Plaintiff has filed a motion for summary judgment alleging that it has established a prima facie case as to defendant's liability. Defendant opposes the motion and argues that summary judgment cannot be granted because plaintiff selectively prosecuted this action and the Internal Revenue Service (IRS) arbitrarily rejected his offer in compromise. For the reasons set forth below, plaintiff's motion for summary judgment [doc. no. 15] will be granted.




Plaintiff certified that defendant, despite receiving these notices, refused to pay in full the amounts owed by him. Accordingly, as of April 28, 2008, defendant's outstanding tax liability for the aforementioned assessments was $480,750, including accrued interest and penalties. Defendant does not dispute that he owes the taxes in question. In his brief, he concedes that "[t]he issue in this case is not whether Mr. Kadunce owed the taxes in question. Mr. Kadunce has not disputed that."

On July 23, 2007, defendant filed an offer in compromise with the IRS. In his offer in compromise, defendant stated that he had "insufficient funds to pay the full amount [of his taxes owed]" and instead offered to pay the government $63,675 in exchange for the elimination of his tax liability. On October 26, 2007, the IRS rejected defendant's offer in compromise, stating that "[w]e have determined that your offer was submitted solely to hinder or delay our collection actions which are expected to collect significantly more than the amount you have offered." Defendant did not appeal this decision.


III. DISCUSSION

Plaintiff contends that it is entitled to summary judgment on its tax assessments against defendant. Defendant, however, asserts that summary judgment is not appropriate because plaintiff is selectively prosecuting this action against him and because the IRS arbitrarily rejected his offer in compromise.

The law is clear that tax assessments made by the IRS are presumed to be correct and they establish a prima facie case of liability against a taxpayer. See Freck v. Internal Revenue Serv. [ 94-2 USTC ¶50,518], 37 F.3d 986, 991-92 n.8 (3d Cir. 1994); Psaty v. United States [ 71-1 USTC ¶9346], 442 F.2d 1154, 1160 (3d Cir. 1971). The taxpayer then has the burden of proving that the assessments are wrong. Welch v. Helvering [ 3 USTC ¶1164], 290 U.S. 111, 115 (1933).

Here, it is undisputed that plaintiff has valid assessments for the tax years 1996, 1998, 1999, 2000, 2001, 2002, 2004, and 2005. The assessments are proven by the Certificates of Assessments, Payments, and Other Specified Matters, Form 4340, attached to the declaration of Mr. Kovscek. See United States v. Green, No. 01-3849, 2002 WL 31513379, at *4 (E.D. Pa. Oct. 22, 2002) (relying on a Form 4340 as proper proof of a valid federal tax assessment). According to Mr. Kovscek, the amount defendant still owes the IRS from his unpaid taxes, interest, and penalties is $480,750, as of April 28, 2008.

In response, Defendant admits that he "owe[s] the taxes in question" and that his "liability for the taxes in question is not disputed." Defendant, therefore, fails to meet his burden of producing any evidence showing that there is a genuine issue of material fact with respect to defendant's assessed federal taxes. Accordingly, we hold that there is no genuine issue of material fact as to the validity of the assessments for the taxes, interest, and penalties against defendant for the years as issue. It is undisputed that defendant owes plaintiff for taxes, interest, and penalties in the amount of $480,750, plus interest and statutory additions that have accrued since April 28, 2008.

Despite his failure to dispute the amount of taxes he owes to the government, defendant argues that summary judgment is inappropriate because plaintiff impermissibly selectively prosecuted this action and the IRS improperly denied his offer in compromise. We disagree.



A. Selective Prosecution

To establish a prima facie case of selective prosecution, defendant must establish that (1) "persons similarly situated have not been prosecuted"; and (2) "the decision to prosecute was made on the basis of an unjustifiable standard, such as race, religion, or some other arbitrary factor, or that the prosecution was intended to prevent his exercise of a fundamental right." United States v. Schoolcraft, 879 F.2d 64, 68 (3d Cir. 1989); United States v. Torquato, 602 F.2d 564, 569 n.8 (3d Cir. 1979).

Defendant fails to establish either prong of the selective prosecution standard. First, defendant alleges that plaintiff selectively targeted him "while literally thousands, if not tens of thousands, of similarly situated tax lien debtors are not so prosecuted ... ." Defendant, however, has not put forth any evidence in support of this allegation. The record is blank with respect to other similarly situated taxpayers who have not been prosecuted. Accordingly, defendant failed to create an issue of material fact with regard to whether he was prosecuted when others similarly situated were not. See Schoolcraft, 879 F.2d at 69 (upholding district court's denial of a motion to dismiss because defendant "merely alleged, without any supporting evidence, that he was the victim of selective prosecution"); United States v. Conley, 859 F.Supp. 909, 937-38 (W.D. Pa. 1994) (denying motion to dismiss on account of selective prosecution because defendant failed to proffer any specific evidence that other similarly situated persons were not prosecuted, despite defendant's broad statements in support of his selective prosecution theory).

Second, defendant also fails to establish that plaintiff's decision to prosecute was made pursuant to an unjustifiable standard. Defendant's brief is silent on the issue of why plaintiff allegedly is treating him differently. Because the "defendant bears the heavy burden of establishing, at least prima facie ... that the government's discriminatory selection of him for prosecution has been invidious or in bad faith ...", see Torquato, 602 F.2d at 569 n.8, and defendant has failed to suggest, much less show, a discriminatory basis for the alleged selective prosecution, we hold that defendant's defense must fail.

Accordingly, because we find that defendant has failed to establish that plaintiff singled him out for prosecution and that plaintiff had an invidious reason for doing so, we hold that defendant's selective prosecution defense is meritless and is no defense against plaintiff's prima facie case of liability.



B. Offer in Compromise

Defendant also contends that plaintiff's motion for summary judgment must be denied because there is a genuine issue of material fact as to whether the IRS's denial of defendant's offer in compromise was arbitrary. Plaintiff responds that defendant cannot now argue that the IRS wrongly denied his offer in compromise because defendant failed to exhaust his administrative remedies.

26 U.S.C.A. §7122(a) authorizes the IRS to compromise "any civil or criminal case arising under the internal revenue laws" prior to the case being referred to the Department of Justice. Grounds for compromise include (1) doubt as to liability; (2) doubt as to collectibility; and (3) promotion of effective tax administration. 26 C.F.R. §301.7122-1(b).

A taxpayer may appeal the denial of an offer in compromise to the IRS Office of Appeals. 26 U.S.C.A. §7122(e). Specifically, a taxpayer may appeal "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 ...." 26 C.F.R. §301.7122-1(f)(5).

Defendant did not timely appeal to the IRS Office of Appeals as required by 26 U.S.C.A. §7122(e) and 26 C.F.R. §301.7122-1(f)(5). A taxpayer who fails to timely appeal the denial of his offer in compromise cannot later request a review of the denial in district court. 1 See Cherbanaeff v. United States [ 2007-2 USTC ¶50,614], 77 Fed.Cl. 490, 496-97 (2007) (explaining that the court lacks jurisdiction to review the IRS's denial of an offer in compromise and that the "statutory and regulatory provisions that deal with offers in compromise provide solely for an appeal to the IRS Office of Appeals"); Asemani v. United States [ 2005-1 USTC ¶50,129], No. 04-0846, 2004 WL 2649718, at *2-3 (M.D. Pa. Oct. 19, 2004) (holding that no jurisdictional basis exists for a district court to review a denial of an offer in compromise). Accordingly, defendant's alleged arbitrary rejection to the offer in compromise is meritless and no defense against plaintiff's prima facie case of liability.



IV. CONCLUSION

Defendant has failed to prove that the tax liability established by the Certificates of Assessments, Payments, and Other Specified Matters is wrong and has asserted no valid defense to liability. Accordingly, plaintiff is entitled to summary judgment. Therefore, IT IS HEREBY ORDERED that plaintiff's Motion for Summary Judgment [doc. no. 15] is GRANTED.

1 We note that a taxpayer may seek review in the Tax Court after an IRS due process hearing held pursuant to 26 U.S.C.A. §6330. Taxpayers receive a section 6330 hearing upon request after receiving an IRS notice of intent to levy. See Cherbanaeff v. United States [ 2007-2 USTC ¶50,614], 77 Fed.Cl. 490, 497 n.9 (2007); 26 U.S.C.A. §6330(b). Because defendant failed to timely request a due process hearing pursuant to 26 U.S.C.A. §6330(b), he also cannot now request a review in the Tax Court. See Cherbanaeff [ 2007-2 USTC ¶50,614], 77 Fed.Cl. at 497 n.9; 26 U.S.C.A. §6330(d).

7206 Fraud in preparing Offers in Compromise financial statements under 7122



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;

FAST TRACK MEDIATION FOR OFFER IN COMPROMISE CASES (SECTION 7122) AND TRUST FUND PENALTY CASES (SECTION 6672).

IRS News Release IR-2008-135 , December 1, 2008.


Functions of the IRS: Appeals dispute resolution: Procedures: Binding arbitration. --
Effective December 1, 2008, the IRS has established a two-year test period, during which its Appeal Office will offer arbitration and mediation for offers-in-compromise (OIC) and trust fund recovery penalty (TFRP) cases for taxpayers whose appeals are being considered in one of eight cities (Atlanta, Chicago, Cincinnati, Houston, Indianapolis, Louisville, Phoenix and San Francisco). The availability of this program may be expanded to other locations during the test period. The test procedures for OIC and TFRP cases generally follow the provisions for mediation and arbitration, respectively, for Appeals set forth in Rev. Proc. 2006-44, 2006-2 CB 800, and Rev. Proc. 2002-44, 2002-2 CB 10.



WASHINGTON - The Internal Revenue Service today announced a two-year test of two programs: the post-Appeals mediation and arbitration procedures for Offer in Compromise (OIC) and Trust Fund Recovery Penalty (TFRP) in today's issue of the Internal Revenue Bulletin.

Beginning Dec. 1, 2008. for a two-year test period, Appeals will offer post-Appeals mediation and arbitration for OIC and TFRP cases for taxpayers whose appeals are considered at the Appeals office in Atlanta, Ga.; Chicago, Ill.; Cincinnati, Ohio; Houston, Texas; Indianapolis, Ind.; Louisville, Ky.; Phoenix, Ariz.; and San Francisco, Calif.

Under these two alternative dispute resolution programs, the taxpayer or Appeals may request nonbinding mediation. The taxpayer may decline Appeals' request for mediation. Appeals will evaluate a taxpayer's request for mediation based on the criteria detailed in Revenue Procedure 2002-44 and Announcement 2008-111. A request for binding arbitration must be made jointly by the taxpayer and Appeals. The mediation and arbitration procedures do not create any additional authority for settlement by Appeals.

During the test period, Appeals employees will advise the taxpayer of the availability of these alternative dispute strategies and the deadline for timely requesting such strategies when a rejection of an OIC is sustained or a proposed TFRP assessment is sustained. An OIC submitted during Collection Due Process (CDP) as an alternative to a Collection action is not eligible for these alternative dispute resolution strategies during the test period.

The Post-Appeals mediation process is available for both legal and factual issues. The mediator's role is to facilitate settlement negotiations so the parties can reach their own agreement. The mediator does not have settlement authority over any issue.

The Arbitration procedure is available for factual issues only. The arbitrator's role is to hear both sides of a disputed issue and then render a decision on the specific factual issue being arbitrated. This decision is binding on both parties. However, the arbitrator does not have the authority to decide that the offer in compromise itself must be accepted or that a person is/is not liable for the TFRP under § 6672. Neither party may appeal the decision of the arbitrator or contest the decision in any judicial proceeding.

Complete procedures for initiating a request for post-Appeals mediation or arbitration are in Announcement 2008-111 issued in today's issue of the Internal Revenue Bulletin. Appeals will seek appropriate Offer in Compromise and Trust Fund Recovery Penalty cases for both post-Appeals mediation and arbitration during the two-year test period in order to evaluate the effectiveness of alternative dispute resolution for these cases.

Rev. Proc. 2006-44 , I.R.B. 2006-44, October 18, 2006.

[ Code Sec. 7123 and Statement of Procedural Rules Sec. 601.106]


Functions of the IRS: Appeals dispute resolution: Procedures: Binding arbitration. --
The IRS has released procedures for the now-permanent Appeals arbitration process. The Appeals arbitration process was established as a pilot program for cases in Appeals with a limited number of unresolved factual issues. The permanent arbitration procedure may be used to resolve issues while a case is in Appeals, after settlement discussions are unsuccessful and, generally, when all other issues are resolved except the specific factual issues for which arbitration is requested. However, arbitration is not available for all issues, including legal issues, issues already being litigated, issues designated for litigation, collection cases with certain exceptions, and frivolous issues. Announcements 2000-4, 2000-1 CB 317, and 2002-60, 2002-2 CB 28, are superseded. Back references: ¶41,135.021, ¶41,135.10 and ¶43,352.033.





SECTION 1. PURPOSE

This revenue procedure formally establishes the Appeals arbitration program, which is designed to improve tax administration, provide customer service and reduce taxpayer burden. Arbitration is available for cases within Appeals jurisdiction that meet the operational requirements of the program. Generally, this program is available for cases in which a limited number of factual issues remain unresolved following settlement discussions in Appeals. Within Appeals, the Office of Tax Policy and Procedure will be responsible for the management of the Appeals arbitration program.



SECTION 2. BACKGROUND

.01 Section 7123(b)(2) of the Internal Revenue Code, as enacted by §3465 of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, 112 Stat. 685, provides that the Secretary shall establish a pilot program under which a taxpayer and Appeals may jointly request binding arbitration on certain unresolved issues. On January 18, 2000, Appeals began a two-year test of an initial arbitration procedure. See Announcement 2000-4, 2000-1 C.B. 317. On July 1, 2003, Appeals completed an additional one-year test of its arbitration procedure. See Announcement 2002-60, 2002-2 C.B. 28. During these test periods, the IRS allowed taxpayers to request arbitration for certain factual issues that were already subject to the Appeals administrative process.

.02 This revenue procedure supersedes Announcements 2000-4 and 2002-60.



SECTION 3. SCOPE OF ARBITRATION

.01 The arbitration procedure may be used to resolve issues while a case is in Appeals, after settlement discussions are unsuccessful and, generally, when all other issues are resolved but for the specific factual issue(s) for which arbitration is being requested.

.02 The arbitration procedure does not create any special authority for settlement by Appeals. During the arbitration process, Appeals is still subject to the procedures that would be applicable if the issue were being considered by Appeals, including procedures in the Internal Revenue Manual and existing published guidance.

.03 Arbitration is available:

(1) Only for factual issues;

(2) For factual issues for which a request for competent authority assistance has not yet been filed. Taxpayers are cautioned that if they enter into a settlement with Appeals (including an Appeals settlement through the arbitration process), and then request competent authority assistance, the U.S. competent authority will endeavor only to obtain a correlative adjustment with the treaty country and will not take any actions that would otherwise change the settlement. See section 7.05 of Rev. Proc. 2002-52, 2002-2 C.B. 242, or the corresponding provision of any successor guidance. If a taxpayer enters into the Appeals arbitration program, the taxpayer may not request competent authority assistance until the arbitration process is completed, unless the taxpayer demonstrates that a request for competent authority assistance is necessary to keep open a statute of limitations in the treaty country. If so, competent authority assistance may be requested while arbitration is pending and the U.S. competent authority will suspend action on the case until arbitration is completed; and

(3) For factual issues unresolved at the conclusion of unsuccessful attempts to enter into a closing agreement under I.R.C. §7121.

.04 Arbitration will not be available for:

(1) Legal issues;

(2) Cases in which arbitration is not appropriate under either 5 U.S.C. §572 or 5 U.S.C. §575, which provide the general authority and guidelines for the use of alternative of dispute resolution in the administrative process.

(3) Issues docketed in any court;

(4) Issues in a taxpayer's case designated for litigation;

(5) Compliance Coordinated (formerly Industry Specialization Program) Issues (CCI) or Appeals Coordinated Issues (ACI) listed at http://www.irs.gov/irs/article/0,,id=128327,00.html; see §§8.7.3.2.1 and 8.7.3.2.2 of the Internal Revenue Manual, found at http://www.irs.gov/irm/index.html;

(6) Issues for which a request for competent authority assistance has been filed under the provisions of Rev. Proc. 2002-52, or any successor guidance, including issues in cases submitted to the competent authority under the simultaneous appeals procedure. If the competent authority declines assistance, the competent authorities fail to agree, or if the taxpayer does not accept the mutual agreement reached by the competent authorities, the taxpayer is permitted to refer the unresolved issues to Appeals for further consideration and may submit a request to arbitrate unresolved factual issues under this revenue procedure;

(7) Collection cases, except for those involving: (i) an unsuccessful attempt to enter into a compromise under I.R.C. §7122; and (ii) trust fund recovery penalty (TFRP) cases that involve whether a person: (a) was required to collect, truthfully account for, and pay over income, employment, or excise taxes; (b) was willful in attempting in any manner to evade or defeat any aforementioned tax or the payment thereof; and (c) is liable for the TFRP under I.R.C. §6672; as provided for in any subsequent guidance issued by the Service;

(8) Issues for which arbitration would not be consistent with sound tax administration, e.g., issues governed by closing agreements, by res judicata, or controlling Supreme Court precedent;

(9) "Whipsaw" issues, i.e., issues for which resolution with respect to one party might result in inconsistent treatment in the absence of the participation of another party;

(10) Frivolous issues, such as, but not limited to, those identified in Rev. Proc. 2001-41, 2001-2 C.B.173 which defines frivolous issues and sets forth the Service's policy against making technical rulings on such issues.

(11) Cases in which the taxpayer did not act in good faith during Appeals settlement negotiations, e.g., failure to respond to document requests, failure to respond timely to offers to settle, failure to address arguments and precedents raised by Appeals; or

(12) Issues that have been otherwise identified as excluded from the arbitration program.



SECTION 4. APPLICATION PROCESS

.01 Arbitration is optional for both the taxpayer and Appeals. Either the taxpayer or Appeals may submit a request to arbitrate after consulting with the other party.

.02 A taxpayer may submit a request to arbitrate by sending a written request to the appropriate Appeals Team Manager and a copy to the Chief, Appeals, 1099 14 th Street, NW, Suite 4200 East, Washington, DC 20005, Attn: Office of Tax Policy and Procedure. The request to arbitrate should:

(1) Provide the taxpayer's name, TIN, address, and the name, title, address and telephone number of a person to contact;

(2) Provide the Appeals Team Case Leader's, Appeals Officer's, or Settlement Officer's name;

(3) Identify the taxable period(s) involved;

(4) Describe the issue for which the taxpayer is requesting arbitration, including the dollar amount of the adjustment in dispute; and

(5) Contain a representation that the issue is not an excluded issue listed in section 3.04, above.

.03 The Appeals Team Manager will respond to the taxpayer and the Appeals Team Case Leader, Appeals Officer, or Settlement Officer, generally, within two weeks after the Appeals Team Manager receives the taxpayer's request for arbitration. The Appeals Team Manager will secure the concurrence of the Chief, Appeals - Office of Tax Policy and Procedure, prior to notifying the taxpayer and the Appeals Team Case Leader, Appeals Officer, or Settlement Officer of the decision.

(1) If Appeals approves the request to arbitrate, the Appeals Team Manager will schedule a conference or conference call that will include a representative from the Chief, Appeals - Office of Tax Policy and Procedure. This representative will act as the Administrator to manage and supervise the arbitration proceeding and to act as liaison between the taxpayer and Appeals (the Parties) and between the Parties and the Arbitrator. At a later date, pursuant to section 6.02, the Parties may select another Administrator, including non-IRS persons.

(2) Although no formal appeal procedure exists for the denial of a request to arbitrate, a taxpayer may request a conference with the Appeals Team Manager to discuss the denial. The denial of a request to arbitrate is not subject to judicial review.



SECTION 5. AGREEMENT TO ARBITRATE

.01 Upon approval of the request to arbitrate, the Parties will enter into a written agreement to arbitrate. See Exhibit 1 of this revenue procedure for a model agreement to arbitrate. The attached model agreement is designed to serve as a basic framework; if there is mutual agreement, the Parties are free to eliminate or modify existing provisions and add new provisions as necessary. Each Party enters an agreement to arbitrate in reliance on the other Party's agreement to be bound by the decision of the Arbitrator. The agreement to arbitrate will, at minimum:

(1) Specify the issue(s) that the Parties have agreed to arbitrate;

(2) Assign to the Arbitrator the prescribed task of finding facts;

(3) Describe with precision the answer the Parties seek; e.g., a specific dollar amount, range of dollar values, a 'yes' or 'no' finding, etc.

(4) Describe and limit the kind of information the Arbitrator may consider, e.g., the Parties' agreement as to any legal guidance the Arbitrator must rely upon in reaching a decision;

(5) Contain an initial list of witnesses, attorneys, representatives, and observers for each Party (collectively known as Participants);

(6) Provide that the time and place of any hearing will be determined by mutual agreement of the Parties, and;

(7) Prohibit ex parte contacts between the Arbitrator and the Parties.

.02 The agreement to arbitrate may limit the number, identity and participation of Participants. In addition, the agreement may stipulate the subsequent tax or other treatment resulting from the Arbitrator's decision and clarify any other issues that may result from the Arbitrator's decision.

.03 The Appeals Team Manager, in consultation with the Appeals Team Case Leader, Appeals Officer, or Settlement Officer, will sign the agreement to arbitrate on behalf of Appeals.

.04 Generally, the Parties will complete the agreement to arbitrate within four weeks after the taxpayer is notified that Appeals has approved the request to arbitrate, and proceed to arbitration within 90 days after signing the agreement to arbitrate. A taxpayer's inability to adhere to these timeframes, without reasonable cause, may result in Appeals' withdrawal from the arbitration process.

.05 In executing the agreement to arbitrate, the taxpayer consents to the disclosure by the IRS of the taxpayer's returns and return information incident to the arbitration to any Participant for the taxpayer identified in the initial list of Participants and to any Participants for the taxpayer identified in writing by the taxpayer subsequent to execution of the agreement to arbitrate. If the agreement to arbitrate is executed by a person pursuant to a power of attorney executed by the taxpayer, that power of attorney must clearly express the taxpayer's grant of authority to consent to disclose the taxpayer's returns and return information by the IRS to third parties, and a copy of that power of attorney must be attached to the agreement.



SECTION 6. ARBITRATION PROCESS

.01 A Party must notify the other Party and the Administrator, in a signed writing, not later than thirty (30) days before the arbitration session, of any change to the initial list of Participants contained in the agreement to arbitrate. The Parties, by mutual agreement, may modify the list of Participants at any time up to and including the date of the arbitration session. The Administrator will forward each Party's list(s) to the Arbitrator. Appeals reserves the right to have an observer attend any arbitration. If a taxpayer does not accept observers, the taxpayer's request for arbitration may be denied. Taxpayers may also have an observer attend any arbitration session. The identity and affiliation of all observers will be established in the agreement to arbitrate signed prior to the arbitration session. See section 5.01(5); section 2 of Exhibit 1. All observers affiliated with Appeals will be bound by the confidentiality provisions of the Internal Revenue Code. See section 9.01. Appeals also reserves the right to have the Office of Chief Counsel assist and participate in the arbitration proceeding.

.02 The Parties, by mutual agreement, may select an Arbitrator from Appeals, or from any local or national organization that provides a roster of neutrals. In the event such local or national organization provides an Arbitrator, this organization may also provide the Administrator for the arbitration, in lieu of the Administrator from the Chief, Appeals - Office of Tax Policy and Procedure. In obtaining the services of a non-IRS Arbitrator, the IRS will follow all applicable provisions of the Federal Acquisition Regulation. An Arbitrator shall have no official, financial, or personal conflict of interest with respect to the Parties, unless such interest is fully disclosed in writing to the taxpayer and the Appeals Team Manager and they agree that the Arbitrator may serve. See 5 U.S.C. §573.

.03 If the Parties select a non-IRS Arbitrator, the Parties will share equally the compensation, expenses, and related fees and costs of the Arbitrator, as well as any reasonable costs for the services of a non-IRS Administrator subject to applicable rules and regulations for Government procurement. The non-IRS Arbitrator and non-IRS Administrator will be contractors subject to the disclosure restrictions of I.R.C. §6103(n).

.04 If the Parties select an Appeals Arbitrator, the Arbitrator shall be from another Appeals office, or from the office of the Chief, Appeals. Appeals will pay all expenses associated with an Appeals Arbitrator. Due to the inherent conflict that results because the Appeals Arbitrator is an employee of the IRS, the Appeals Arbitrator will provide to the taxpayer a statement confirming the proposed service as an Arbitrator and status as a current employee of the IRS, and that a conflict results from the continued status as an IRS employee.

.05 Criteria for selecting an Arbitrator may include some or all of the following: completion of arbitration training, previous arbitration experience, a substantive knowledge of tax law and knowledge of industry practices. The Arbitrator's qualifications and potential conflicts of interest should be thoroughly reviewed prior to selection. The projected travel costs, hourly fees and other expenses of a non-IRS Arbitrator are subject to the applicable rules and regulations for Government procurement. The non-IRS Arbitrator shall look solely to each Party for one-half of the compensation, expenses and related reasonable fees and costs.



SECTION 7. ARBITRATION SESSION

.01 Each Party will prepare a summary of its position for consideration by the Arbitrator. The Parties should submit their summaries to the Administrator no later than thirty (30) days before the scheduled arbitration session.

.02 The Arbitrator will look solely to the legal guidance identified by the Parties. If the Arbitrator desires further legal guidance, both Parties must agree to provide the guidance and the manner in which it is to be communicated to the Arbitrator.

.03 The arbitration process is confidential. Therefore, all information concerning any dispute resolution communication related to the arbitration proceeding is confidential and may not be disclosed by any Party, Participant, or Arbitrator, except as provided under 5 U.S.C §574. A dispute resolution communication includes all oral or written communications prepared for purposes of a dispute resolution proceeding. See 5 U.S.C. §571(5).

.04 The Parties agree that there shall be no ex parte communications between the Arbitrator and either Party or agent for a Party. In addition, the Arbitrator may not have contact with any other individuals, including Participants, outside the arbitration session, concerning the arbitration matter without the express approval of the Parties. Any contact with the Arbitrator by either Party must be in the presence of the other Party and the Administrator. Written submissions should be sent simultaneously to the Administrator and the other Party. The Administrator will in turn send the submissions to the Arbitrator. See section 6 of Exhibit 1. Should the Parties require additional information or clarification regarding the arbitration process, they shall contact the Administrator.

.05 By mutual agreement, the Parties may withdraw from the arbitration process to reach a final Appeals settlement at any time prior to the date of the arbitration session. Postponements for good cause shall be determined by agreement between the Parties.



SECTION 8. POST-SESSION PROCEDURE

.01 Generally, no later than thirty (30) days after completion of the arbitration proceeding, the Arbitrator will prepare a written report and submit a copy to the Administrator. Because the Arbitrator is limited to the task of finding facts, the report will not provide any decision or reasoning that represents an interpretation of the law. Neither Party may appeal the decision of the Arbitrator or contest the decision in any judicial proceeding, including, but not limited to, the Tax Court, United States Court of Federal Claims or a federal district or appellate court.

.02 Once the Arbitrator renders a decision on all or some issues through the arbitration process, Appeals will use established procedures to close the case, including preparation of a specific matters closing agreement (Form 906). Delegation Order 236 (Rev. 3), or any successor delegation order, may apply to settlements resulting from the arbitration process.

.03 If applicable, Appeals will report a settlement reached as a result of the arbitration process to the Joint Committee on Taxation in accordance with I.R.C. §6405.



SECTION 9. GENERAL PROVISIONS

.01 All IRS and Treasury employees, including the Appeals Administrator, who participate in or observe in any way the arbitration process and any person under contract to the IRS as described in I.R.C. §6103(n), including the non-IRS Arbitrator and non-IRS Administrator will be subject to the confidentiality and disclosure provisions of the Internal Revenue Code, including I.R.C. §§6103, 7213, and 7431.

.02 Under I.R.C. §7214(a)(8), IRS employees who have knowledge or information of the violation of any revenue law of the United States must report in writing such knowledge or information to the Secretary. The agreement to arbitrate will state this duty and the Parties will acknowledge it.

.03 The Arbitrator will be disqualified from representing the taxpayer in any pending or future action that involves the transactions or issues that are the particular subject matter of the arbitration. This disqualification extends to representing any other parties involved in the transactions or issues that are the particular subject matter of the arbitration. Moreover, the Arbitrator's firm will be disqualified from representing the taxpayer or any other parties involved in the transactions or issues that are the particular subject matter of the arbitration in an action that involves the transactions or issues that are the particular subject matter of the arbitration. The Arbitrator's firm will not be disqualified from representing the taxpayer or any other parties in any future action that involves the same transactions or issues that are the particular subject matter of the arbitration, provided that: (i) the Arbitrator disclosed the potential of such representation prior to the Parties' acceptance of the Arbitrator; (ii) such action relates to a taxable year that is different from the taxable year under arbitration; (iii) the firm's internal controls preclude the Arbitrator from any form of participation in the matter; and (iv) the firm does not allocate to the Arbitrator any part of the fee therefrom. In the event the Arbitrator has been selected prior to learning the identity of any Party involved in the arbitration, requirement (i) will be deemed satisfied if the Arbitrator promptly notifies the Parties of the potential representation.

.04 Although the Arbitrator may not receive a direct allocation of the fee from the taxpayer (or other party) in the matter for which the internal controls are in effect, the Arbitrator will not be prohibited from receiving a salary, partnership share, or corporate distribution established by prior independent agreement. The Arbitrator and the firm are not disqualified from representing the taxpayer or any other parties involved in the arbitration in any matters unrelated to the transactions or issues that are the particular subject matter of the arbitration.

.05 The disqualifications described in sections 9.03 and 9.04 only apply to representations on matters before the IRS. The provisions of these sections are in addition to any other applicable disqualification provisions including, for example, the rules of the American Bar Association Model Code of Professional Conduct and the applicable canons of ethics.

.06 The decision by the Arbitrator will neither be binding on nor otherwise control, the Parties for taxable years not covered by the arbitration. Except as provided in the agreement to arbitrate, no Party may use the arbitration findings as precedent.



SECTION 10. EFFECTIVE DATE

This revenue procedure is effective October 30, 2006.



SECTION 11. CONTACT INFORMATION

For further information concerning the drafting of this revenue procedure, please contact Sandy Cohen, from the Chief, Appeals - Office of Tax Policy and Procedure, (202) 435-5617 (not a toll-free number) or Jason Spitzer, from the Office of Chief Counsel, Procedure and Administration, Administrative Provisions and Judicial Practice, (202) 622-7950 (not a toll-free number). For further information about the operation of the Appeals Arbitration program, contact Sandy Cohen, listed above.



Exhibit 1


Model Arbitration Agreement


1. THE ARBITRATION PROCESS. Arbitration is optional and will be used to assist [NAME OF TAXPAYER] and the Internal Revenue Service --Appeals (the Parties) in resolving certain factual issues that are currently in the Appeals administrative process. This arbitration process will be conducted pursuant to Rev. Proc. 2006-44, 2006 I.R.B. 44. The Parties to this agreement will submit the issues for arbitration and agree to be bound by the Arbitrator's findings on these issues. Each Party enters this agreement in reliance on the other Party's agreement to be bound by the decision of the Arbitrator. There can be no ex parte communication between the Arbitrator and any Party, third party, witness, agent, or other person regarding the issues for arbitration. All communications between the Arbitrator and either Party, including requesting and transferring documentation and information, will be made through an Administrator.

2. PARTICIPANTS. The participants in the arbitration session will be: *****

For Taxpayer:

For Appeals:

Appeals reserves the right to have an observer attend any arbitration. Taxpayers or their representatives may also have an observer attend the arbitration.

All witnesses, attorneys, representatives and observers (Participants) who will attend the arbitration on behalf of or at the request of a Party must be set forth in the list of Participants. If a Party subsequently modifies its list, then, no later than thirty (30) days before commencement of the arbitration session, such Party will submit to the Administrator a complete and final list of Participants who will attend the arbitration session. The list must identify, for each Participant, his or her position with the Party or other affiliation and address, telephone and fax numbers. The Administrator will simultaneously submit each Party's list to the other Party and to the Arbitrator by facsimile or other arrangement agreed to by the Parties. The Parties, by mutual agreement, may modify the list of Participants in writing at any time up to and including the date of the commencement of the arbitration session. Witnesses will be identified in accordance with section 6 of this agreement.

3. SELECTION OF ARBITRATOR, COSTS. The Parties have agreed to select an Arbitrator from Appeals or from any local or national organization that provides a roster of neutrals. On behalf of the Parties, the Administrator will arrange for the hiring of the Arbitrator. The fees and costs of the Arbitrator will be shared equally by the taxpayer and Appeals, subject to applicable rules and regulations for Government procurement.

4. ISSUES TO BE ARBITRATED. The Parties agree that the issues submitted for resolution by the Arbitrator are factual in nature and do not require the Arbitrator to interpret any law, regulation, ruling or other legal authority. The following issues shall be resolved separately for each of the taxable years at issue:

5. GUIDANCE FOR ARBITRATOR. The Arbitrator is not permitted to make any determinations of law or provide reasoning that represents an interpretation of the law; however, it may be necessary for the Arbitrator to refer to the existing applicable law in making a finding on the factual issues. In doing so, the Arbitrator shall look solely to the following legal guidance specified by the Parties:

a. Findings of facts shall be consistent with the legal authorities identified in [Appendix A].

b. The Parties will follow the Federal Rules of Evidence when proffering testimonial and documentary evidence at the arbitration session. The Arbitrator, in his or her sole discretion, shall apply the Rules with the objective of admitting only evidence that is reliable and credible. The Arbitrator will make final rulings on evidentiary disputes. To the extent the conduct of the Arbitration session is not governed by this agreement, the Parties agree to follow the Federal Rules of Civil Procedure.

c. At the request of the Arbitrator, the Parties may agree to provide further legal guidance. The Administrator shall determine, after consultation with the Arbitrator and the Parties, the appropriate manner (i.e., verbal or written form and timing) to submit the further legal guidance to the Arbitrator. If no agreement can be reached with respect to the further legal guidance and it is determined by the Arbitrator that further guidance from the Parties is necessary to decide the matter, then the matter cannot be arbitrated and this agreement will terminate.

d. When legal guidance provided by the Parties is in conflict, the Arbitrator, where practicable, will ignore the guidance and decide the factual issue. If it is not practicable to set aside the Parties' guidance, then during the arbitration session, the Parties will attempt to agree on the guidance needed to resolve the issue. If the Parties cannot agree and the guidance is necessary to decide the matter, then the matter cannot be arbitrated and this agreement will terminate.

6. SUBMISSION OF MATERIALS. Each Party agrees to provide a written summary of the case and their position (not to exceed 25 pages) to the Administrator at least thirty (30) days prior to the date of commencement of the arbitration session. On the due date for the summaries, the Parties will simultaneously exchange the summaries by facsimile or other arrangement agreed to by the Parties and submit a copy to the Administrator for transmittal to the Arbitrator by facsimile or by means of an overnight express delivery service. The Parties will submit testimonial and documentary evidence to the Arbitrator in accordance with the procedures set forth in sections 6 a. and 6 b. below.

The Arbitrator may order a Party to produce a summary of their documents and other evidence which the Party intends to present in support of its position and may order a Party to produce other documents, exhibits or evidence deemed necessary or appropriate. Any and all information and materials that a Party provides must be submitted to the other Party and Administrator who will simultaneously forward such to the Arbitrator.

The Parties will attempt to stipulate to as many facts, documents or conclusions as possible prior to the arbitration session. A stipulation shall be submitted to the Arbitrator, through the Administrator, prior to the commencement of the arbitration session. The Parties may jointly submit supplemental stipulations to the Arbitrator, through the Administrator, at any time prior to the date that the report is issued pursuant to section 14.

a. The Parties may, with mutual agreement and the consent of the Arbitrator, offer witnesses at the arbitration session:

(1) Witnesses shall be subject to direct examination, cross examination and questions by the Arbitrator. In the discretion of the Arbitrator, Parties may request the opportunity to redirect and recross a witness. The Parties shall submit to the Administrator a listing of potential fact witnesses no later than thirty (30) days prior to the date of commencement of the arbitration session. The listing should include the name, current position (if an employee of [NAME OF COMPANY], current and former positions with the applicable company and period such position(s) were held), and brief description of the anticipated testimony.

(2) The Administrator shall forward the witness lists to the Arbitrator and the opposing Party on the due date for such documents.

(3) Once the witness lists have been submitted to the Arbitrator, a Party shall not add additional persons except upon joint agreement of both Parties. A witness will not be entitled to testify at the arbitration session if that person is not included on the listing of witnesses timely submitted to the Administrator.

b. The Parties may, with mutual agreement, submit to the Arbitrator any reliable and credible documents that are relevant to the issues to be decided by the Arbitrator. Issues of relevance, reliability and credibility shall be resolved by the Arbitrator. All documents shall be based solely on information contained within the existing record.

(1) All documents to be submitted to the Arbitrator prior to the commencement of the arbitration session shall be by joint agreement of the Parties, unless otherwise ordered by the Arbitrator. The time and manner of the submission shall be by joint agreement of the Parties.

(2) All documents to be offered by a Party during the arbitration session shall be identified and, if not previously provided, exchanged with the opposing Party no later than thirty (30) days prior to the date of commencement of the arbitration session. The Parties shall submit their documents to the Administrator who will immediately and simultaneously forward them to the Arbitrator. The Parties shall exchange documents directly. Failure to timely exchange documents not previously provided shall preclude the use of such document(s) in the arbitration session, except by a showing of good cause and lack of prejudice to the opposing Party, as determined by the Arbitrator.

c. The Parties agree that the methodology to be used by the Arbitrator in deciding any issue described in section 4 of this agreement must follow these principles:

[For example, language describing the answer sought by the Parties from the Arbitrator, e.g. a specific dollar value, a range of values, a 'yes' or 'no' finding, etc.]

d. The Parties agree to clarify issues that may arise in calculating any deficiency or overpayment resulting from the Arbitrator's findings and agree to the tax treatment of the Arbitrator's findings as follows:

[For example, the Parties should specify how to calculate the taxpayer's deficiency based on the Arbitrator's determination of the value of a particular asset.]

7. CONTACT WITH ARBITRATOR. The Parties agree that there shall be no ex parte communication between the Arbitrator and either Party or any Participant. In addition, the Arbitrator may not have contact with any other individuals, except the Administrator, concerning the substance of the arbitration or the arbitration process without the express approval of the Parties. Any contact with the Arbitrator by either Party must be in the presence of the other Party and such contact must be arranged by the Administrator.

8. ARBITRATION SESSION. Subject to the approval of the Arbitrator, the arbitration session will commence on the date and time agreed to by the Parties. The procedures for the arbitration session shall be determined by the Arbitrator, e.g., length and order of opening and closing statements, presentation of witnesses, etc. The postponement or continuance of the arbitration session for good cause shall be determined by agreement between the Parties, subject to the final approval of the Arbitrator.

9. PLACE OF ARBITRATION. The Parties prefer [NAME OF LOCATION] as the site for the arbitration session, subject to change by agreement among the Parties and the Arbitrator.

10. CONFIDENTIALITY. IRS and Treasury employees who participate in any way in the arbitration process and any person under contract to the IRS pursuant to Section 6103(n) of the Internal Revenue Code of 1986, as amended, including the Arbitrator, that the IRS invites to participate will be subject to the confidentiality and disclosure provisions of the Internal Revenue Code, including Sections 6103, 7213, and 7431. See also 5 U.S.C. §574. All information concerning any dispute resolution communication related to the arbitration proceeding is confidential and may not be disclosed by any Party, Participant, Administrator, or Arbitrator except as provided under 5 U.S.C. §574. A dispute resolution communication includes all oral or written communications prepared for purposes of a dispute resolution proceeding. See 5 U.S.C. §571 (5).

[NAME OF TAXPAYER] consents to the disclosure by the IRS of the taxpayer's returns and return information incident to the arbitration to any Participant for the taxpayer identified in the initial list of Participants in section 2 of this agreement, to any Participant identified in writing by the taxpayer subsequent to execution of this agreement, and to any other persons who participate in this arbitration proceeding on behalf of either Party. If the arbitration agreement is executed by a person pursuant to a power of attorney executed by [NAME OF TAXPAYER], that power of attorney must clearly express the grant of authority by [NAME OF TAXPAYER] to consent to disclose the returns and return information of [NAME OF TAXPAYER] by the IRS to third parties, and a copy of that power of attorney must be attached to this agreement.

11. I.R.C. SECTION 7214(a)(8) DISCLOSURE. The Parties acknowledge that IRS and all other Treasury employees involved in this arbitration are bound by Section 7214 (a)(8) and must report information concerning violations of any revenue law to the Secretary.

12. RECORD. The Arbitrator may request a stenographic or other record of the arbitration session. If a record is requested, the Administrator will make the arrangements and the Parties shall bear equally the costs of such record. The Parties agree that any stenographic record or other recording of the arbitration proceeding shall remain confidential and shall be destroyed by the Administrator following the issuance of the Arbitrator's report pursuant to section 14.

13. WITHDRAWALS AND POSTPONEMENT. By mutual agreement, the Parties may withdraw from the arbitration process in order to reach a final Appeals settlement any time before the scheduled arbitration session. Established Appeals procedures apply to any resolution reached by the Parties. The Arbitrator may grant postponements for good cause after a hearing before both Parties.

14. REPORT BY ARBITRATOR. The Arbitrator's report will identify each issue described in section 4 of this agreement, will state the findings of facts for each issue for each tax year, and explain any methodology referred to in section 6 c. of this agreement that was utilized in reaching such findings. The report shall be issued and submitted to the Administrator within thirty (30) days after the conclusion of the arbitration session, unless the Arbitrator requests additional time and the Parties approve such request. The Parties may not unreasonably withhold such approval. The Administrator shall forward the Arbitrator's report to the Parties.

15. FINALITY OF ARBITRATOR'S DECISION. The Parties agree to be bound by the Arbitrator's findings, as set forth in the report described in section 14 and to incorporate those findings and the final computations determined under section 6 d. of this agreement into an Appeals closing agreement that the Parties will execute. Delegation Order 236 (Rev. 3), or successor delegation order, may apply to settlements resulting from the arbitration process. Neither Party may appeal the findings of the Arbitrator nor contest the finding(s) in any judicial proceeding, including but not limited to the United States Tax Court, United States Court of Federal Claims, or a federal district or federal appellate court.

16. PRECEDENTIAL USE. The findings by the Arbitrator will not be binding on, or otherwise control, the Parties for taxable years not covered by the arbitration. Except as provided in this agreement, the findings of facts made by the Arbitrator may not be used as precedent by any Party.

INTERNAL REVENUE SERVICE, APPEALS

By:

Date:

[NAME OF TAXPAYER]

By:

Date:

FAST TRACK MEDIATION

Announcement 2008-110 , I.R.B. 2008-48, 1224, December 1, 2008.

The IRS announced a two-year extension of the test of the Fast Track Settlement for Small Business/Self-Employed (SB/SE) Division Taxpayers Pilot Program as set forth in Announcement 2006-61, 2006-2 CB 390, effective immediately.

.



SUMMARY AND BACKGROUND

This announcement extends the test of the Fast Track Settlement for Small Business/Self-Employed division (SB/SE) Taxpayers Pilot Program set forth in Announcement 2006-61, 2006-2 C.B. 390, for an additional two-year period, beginning on December 1, 2008, the date this announcement is published in the Internal Revenue Bulletin.

SB/SE and the Office of Appeals (Appeals) concluded a two-year test of the Fast Track Settlement for SB/SE Taxpayers Pilot Program on September 4, 2008. During the additional two-year test period, SB/SE and Appeals will seek additional cases for fast track settlement in the same seven cities designated in Ann. 2006-61 and IR 2007-200, to further evaluate the program. The extended program will contain no changes from the provisions set forth in Ann. 2006-61.

This procedure allows taxpayers with eligible cases, as listed in Ann. 2006-61, under examination by SB/SE to request fast track settlement. Using the services of a trained mediator from Appeals, the taxpayer and SB/SE will attempt to resolve unagreed issues on an expedited basis. The fast track settlement program is consistent with the Internal Revenue Service's efforts to improve tax administration, provide customer service, and reduce taxpayer burden.



EFFECTIVE DATE

This program is effective beginning December 1, 2008, the date it is published in the Internal Revenue Bulletin, and applications to the program will be accepted through November 30, 2010.



COMMENTS

The Service invites interested persons to comment on this pilot program. Written comments should be delivered or mailed by January 15, 2009, to:
Internal Revenue Service --Appeals

Attn: Nancy J. Talajkowski

160 Spears Street, Suite 800

San Francisco, CA 94105

Alternatively, comments may be submitted by e-mail to the following address: notice.comments@irscounsel.treas.gov.



FURTHER INFORMATION

For further information regarding this announcement, contact either: Xavier Guerrero, SB/SE Program Analyst, at (415) 552-6195 (not a toll-free number); or Nancy J. Talajkowski, Appeals Program Analyst, Tax Policy & Procedure (Alternative Dispute Resolution) at (415) 227-5007 (not a toll-free number).




Announcement 2006-61 , I.R.B 2006-36, September 5, 2006.

[ Code Sec. 7123]


Appeals dispute resolution procedures: Small Business/Self-Employed taxpayers: Fast Track Settlement. --
Beginning September 5, 2006, the IRS will launch a test program allowing Small Business/Self-Employed (SB/SE) taxpayers under examination in Chicago, Illinois; Houston, Texas; and St. Paul, Minnesota, to use fast track settlement (FTS) to resolve outstanding tax disputes. FTS will generally be available for cases under the jurisdiction of the SB/SE Division if the issues are fully developed, the taxpayer has stated a position in writing or filed a small case request, and there are a limited number of unagreed issues. The program will use the procedures described in Rev. Proc. 2003-40, 2003-1 C.B. 1044. During the FTS process, an IRS Appeals officer trained in mediation and dispute resolution techniques will hold a settlement conference with the taxpayer and IRS SB/SE representatives. If the parties fail to resolve any issue in FTS, the taxpayer will have the option to request a hearing through the traditional Appeals process. At the conclusion of a six-month test period, the IRS will determine whether to continue the program for an additional eighteen months with taxpayers nationwide. Back reference: ¶41,135.10.





DESCRIPTION OF SB/SE FAST TRACK SETTLEMENT

This Announcement provides an opportunity for small business/self employed taxpayers to use Fast Track Settlement (FTS) to expedite case resolution at the earliest opportunity within the IRS's Small Business/Self Employed organization (SB/SE). The purpose of SB/SE FTS is to enable SB/SE taxpayers that currently have unagreed issues in at least one open year under examination to work together with SB/SE and the Office of Appeals (Appeals) to resolve outstanding disputed issues while the case is still in SB/SE jurisdiction. SB/SE and Appeals will jointly administer the SB/SE FTS process. SB/SE FTS will be used to resolve factual and legal issues and may be initiated at any time after an issue has been fully developed, preferably before the issuance of a 30-day letter or equivalent notice.

SB/SE FTS will be available to taxpayers for a test period of up to two years, beginning upon the date of publication of this Announcement. Within this period, there will be an initial focused test of six months during which SB/SE FTS will only be available for taxpayers under examination in Chicago, Illinois; Houston, Texas; and St. Paul, Minnesota. By the end of this six-month focused test, SB/SE and Appeals will evaluate the program, consider necessary adjustments and determine whether to continue testing SB/SE FTS for the remaining eighteen months of the test period. If continued, SB/SE FTS will be available to taxpayers nationwide. Upon completion of the two-year test period, SB/SE and Appeals will again evaluate the program, consider necessary adjustments, and determine whether to make the program permanent.



RELIANCE ON AND DIFFERENCES FROM LMSB FAST TRACK SETTLEMENT

The procedures for using FTS for SB/SE taxpayers rely on the provisions of Revenue Procedure 2003-40, 2003-1 C.B. 1044, which implemented a Large and Mid-Size Business Fast Track Settlement Dispute Resolution Program and allow the use of Appeals settlement authority in SB/SE cases. See section 3.02 of Rev. Proc. 2003-40.

During the two-year test period, SB/SE FTS extends the provisions of the LMSB Fast Track program to SB/SE cases and provides for direct oversight of the program by SB/SE and Appeals. SB/SE FTS therefore involves procedures almost identical to the LMSB FTS procedures described in Rev. Proc. 2003-40. The key differences between the LMSB and SB/SE FTS procedures are as follows:
 The SB/SE Group Manager or designee fulfills the duties of the LMSB Team manager, as described in Rev. Proc. 2003-40;

 SB/SE Group Managers and Appeals Team Managers select and manage cases eligible for SB/SE FTS; and

 The SB/SE FTS process is designed to be completed within 60 days of acceptance of the SB/SE-Appeals FTS Application.



CASE ELIGIBILITY AND EXCLUSIONS

Subject to the limitations set forth below, SB/SE FTS is generally available for cases under the jurisdiction of the SB/SE Division if:
 Issues are fully developed;

 The taxpayer has stated a position in writing (or filed a small case request for cases in which the total amount for any tax period is less than $25,000, as described in Publication 5, Your Appeal Rights and How to Prepare a Protest if you Don't Agree); and

 There are a limited number of unagreed issues. SB/SE FTS is not available for:

 Collection Appeals Program, Collection Due Process, Offer-In-Compromise and Trust Fund Recovery cases, except as provided in any guidance issued by the Service;

 Correspondence examination cases worked solely in a Campus/Service Center site;

 Cases in which the taxpayer has failed to respond to Service communications and no documentation has been previously submitted for consideration by Compliance;

 Tax Equity & Fiscal Responsibility Act (TEFRA) partnership cases;

 Issues outside SB/SE jurisdiction, except as provided below;

 Issues designated for litigation;

 Issues under consideration for designation for litigation;

 Issues for which the taxpayer has submitted a request for competent authority assistance;

 Issues for which the taxpayer has requested the simultaneous Appeal/Competent Authority procedure described in section 8 of Rev. Proc. 2002-52, 2002-2 C.B. 242, or the corresponding provision of any successor guidance;

 Frivolous issues, such as, but not limited to, those identified in Rev. Proc. 2006-2, 2006-1 I.R.B. 89, or any successor guidance;

 "Whipsaw" issues, i.e., issues for which resolution with respect to one party might result in inconsistent treatment in the absence of the participation of another party; or

 Issues that have been identified in a Chief Counsel Notice, or equivalent publication, as excluded from the SB/SE FTS process.

If an issue is determined not to be eligible for the SB/SE FTS program, all issues in the case shall not be eligible for the SB/SE FTS program.

SB/SE FTS may not be the appropriate dispute resolution process for all cases involving SB/SE taxpayers. The SB/SE Group Manager or designee and the taxpayer will evaluate their individual circumstances to determine if this process meets their needs.

SB/SE FTS may also be available for cases under the jurisdiction of the Tax Exempt and Government Entities (TE/GE) Division, depending on the circumstances and operational needs of the case. The use of SB/SE FTS procedures for such cases will require the consent of the taxpayer, the local Appeals Team Manager and the TE/GE Field Manager, or equivalent. For TE/GE cases approved for SB/SE FTS, the appropriate TE/GE Field Manager, or equivalent, will carry out the responsibilities of the SB/SE Group Manager as set forth in this announcement. The application process for TE/GE taxpayers wishing to use SB/SE FTS procedures may be modified by subsequent published guidance.



APPLICATION PROCESS

A taxpayer that is interested in participating in SB/SE FTS, or that has questions about the program and its suitability for the taxpayer's case, may contact the SB/SE Group Manager for the year currently under examination. Either the taxpayer, Examining Agent or the SB/SE Group Manager can initiate the process to take part in the SB/SE FTS program at any time after an issue has been fully developed but preferably before a 30-day or equivalent letter is issued.

To apply for the SB/SE FTS program, the taxpayer and the SB/SE Group Manager should submit a SB/SE-Appeals FTS Application, attached as Exhibit 1, to the local Appeals Team Manager. A Summary of Issues or Examination Re-engineering Lead sheets (the equivalent to a Form 5701, Notice of Proposed Adjustment) will be prepared by the SB/SE Compliance team, and a written response from the taxpayer should be included with the SB/SE-Appeals FTS Application to complete the package for the parties to understand opposing views.

If the case is not accepted for inclusion in SB/SE FTS, the SB/SE or Appeals representative will inform the taxpayer of the basis for this decision and discuss other dispute resolution opportunities with the taxpayer, including 30-day letter procedures contained in IRS Publication 5, Your Appeal Rights and How to Prepare a Protest if You Don't Agree. The decision not to accept a case into the SB/SE FTS program is not subject to administrative appeal or judicial review.



SETTLEMENT PROCESS

SB/SE FTS employs various alternative dispute resolution techniques to promote case resolution. An Appeals Officer, trained in mediation, will serve as a neutral party (the FTS Appeals Official). The FTS Appeals Official will not perform in a traditional Appeals role, but will use dispute resolution techniques to facilitate settlement between the parties.

During SB/SE FTS, the taxpayer and SB/SE representatives hold a conference with the FTS Appeals Official (the FTS Session). The taxpayer and SB/SE representatives at the FTS Session should include individuals with decision-making authority and the information and expertise necessary to assist the parties and the FTS Appeals Official during the settlement process. The FTS Appeals Official may ask the parties to limit the number of participants at the FTS Session to facilitate the process. A taxpayer is not required to have a representative to participate in SB/SE FTS. If the taxpayer is represented by a person engaged in practice before the Service, however, this individual must have a power of attorney from the taxpayer (Form 2848, Power of Attorney and Declaration of Representative) in addition to the FTS Agreement.

The FTS Appeals Official will hold the FTS Session at the date and location agreed to by both parties. Prior to the FTS Session, the FTS Appeals Official will advise the participants of the procedures and establish ground rules. The FTS Appeals Official may modify the rules and procedures during the session to adapt to changes in circumstances. The FTS Session may include conferences attended by all of the parties, separate meetings with each party, or both as determined appropriate in the sole judgment of the FTS Appeals Official.

The FTS Appeals Official will use a FTS Session Report to assist in planning the FTS Session and to report on developments during the FTS Session. The FTS Session Report will include a list of all issues approved for the FTS program, a description of the issues, the amounts in dispute, conference dates, a plan of action for the FTS Session and other information useful to the process as determined by the parties and the FTS Appeals Official. The FTS Appeals Official may also prepare and update an Agenda, which guides the communication, sets the order of issue discussion, poses questions to clarify the issues and guides the meetings. During the FTS Session, the FTS Appeals Official will provide decision makers from both parties with copies of the Agenda and the FTS Session Report.

Generally, the FTS Appeals Official will consider only those issues outlined in the FTS Session Report, except by mutual agreement of the parties. If the taxpayer presents information during the FTS Session that the taxpayer had not previously presented during the audit, the FTS Appeals Official will adjust the targeted completion date to give the appropriate Service officials time to evaluate the information/documentation.

During the FTS Session, the FTS Appeals Official may propose settlement terms for any or all issues and may consider settlement terms proposed by either party. If the taxpayer accepts the FTS Appeals Official's settlement proposal, but the SB/SE Group Manager rejects it, the SB/SE Territory Manager must review SB/SE's rejection of the settlement proposal and either concur in writing, or accept the settlement proposal on behalf of SB/SE. If the SB/SE Territory Manager concurs with the Group Manager's rejection of the settlement proposal, and an acceptable alternative settlement cannot be reached, the issue will be closed out of the FTS program as unagreed.

If the parties resolve any of the disputed issues at the conclusion of the FTS Session, the parties and the FTS Appeals Official shall sign the FTS Session Report acknowledging acceptance of the terms of settlement for purposes of preparing computations. The signature of the parties on the FTS Session Report does not constitute a final settlement, nor does it waive restrictions on assessment, terminate consents to extend periods of limitation, start the running of any periods of limitation, or constitute agreement to close the case.

The SB/SE FTS process is confidential. IRS employees involved in any way with the SB/SE FTS process are subject to the confidentiality and disclosure provisions of the Internal Revenue Code, including section 6103. By signing the FTS Agreement, attached as Exhibit 1, the taxpayer consents, pursuant to section 6103(c), to the disclosure of the taxpayer's returns and return information pertaining to the issues being considered in the SB/SE FTS process to those persons named on the Agreement as participants in the process. IRS employees, the taxpayer and persons invited to participate by the IRS or the taxpayer shall not voluntarily disclose information regarding any communication made during the SB/SE FTS Session, except as provided by statute.

The prohibition against ex parte communications between Appeals Officers and other IRS employees provided by section 1001(a) of the Internal Revenue Service Restructuring and Reform Act of 1998 does not apply to the communications arising in the SB/SE FTS process because the Appeals personnel are facilitating an agreement between the taxpayer and SB/SE and are not acting in their traditional Appeals settlement role.

Any recommended settlement by the FTS Appeals Official of an issue in FTS shall be subject to the procedures that would be applicable if the issue were being considered by Appeals, including procedures in the Internal Revenue Manual and existing published guidance. FTS therefore creates no special authority for settlement by the FTS Appeals Official. For example, if the FTS issue is coordinated in either the Technical Advisor Program or the Appeals Technical Guidance program, the proposed settlement of that issue is subject to established procedures, including submission of the proposed settlement to the Appeals Coordinator for review and concurrence.

If the parties fail to resolve any issue in FTS, the taxpayer retains the option of requesting that the issue be heard through the traditional Appeals process.

Except as specifically provided above, both parties retain the right to withdraw throughout the entire SB/SE FTS process. A party wishing to withdraw should provide written notice to the FTS Appeals Official and the other party.



POST-SETTLEMENT PROCEDURE

If the parties reach an agreement on all or some issues through the SB/SE FTS process, the SB/SE representative or FTS Appeals Official, as appropriate, will use established issue or case closing procedures and applicable agreement forms, including preparation of a Form 906 specific matters closing agreement, if appropriate.

If applicable, the Service will report a proposed resolution reached as a result of SB/SE FTS to the Joint Committee on Taxation in accordance with section 6405. The taxpayer acknowledges that the Service may reconsider a proposed settlement, as reflected in a signed FTS Session Report, upon receipt of comments on the proposed settlement from the Joint Committee on Taxation. If the taxpayer declines to agree with any changes by the Service upon reconsideration, SB/SE will close the case unagreed and the taxpayer will retain all the usual rights to request Appeals consideration of any unagreed issues.



GENERAL PROVISIONS

A resolution reached by the parties through the SB/SE FTS process will not bind the parties for taxable years or issues not covered by the SB/SE-Appeals FTS agreement, unless such taxable years or issues are expressly addressed in a formal closing agreement reached as part of the SB/SE FTS process.

For SB/SE FTS cases that are returned for traditional Appeals consideration for any reason, ex parte restrictions will not be imposed on intra-Appeals communications. Appeals management will take appropriate measures to ensure these cases are handled impartially.



DELEGATION OF AUTHORITY

This Announcement constitutes a delegation by the Commissioner of Internal Revenue of settlement authority to Grade 14, 13 and 12 Appeals Officers who are assigned to be Appeals FTS Officials for SB/SE FTS cases described in this Announcement. This delegation of settlement authority includes the responsibility for arriving at the final disposition from the Government's perspective, approving the final settlement in accordance with the delegated authority, and executing the appropriate closing documents. This authority may not be redelegated.



EFFECTIVE DATE

SB/SE FTS is effective beginning September 5, 2006.



COMMENTS

The IRS encourages interested persons to comment on this program, including suggested changes to make the program more useful and effective. Send submissions to:

Internal Revenue Service-Appeals
Attn: Nancy J. Talajkowski
160 Spear Street, Suite 800
San Francisco, CA 94105




FURTHER INFORMATION

For further information regarding this Announcement, contact either: Thomas S. Ryan, SB/SE Program Analyst, at (717) 213-3810 (not a toll-free number); or Nancy J. Talajkowski, Appeals Program Analyst, Tax Policy & Procedure (Alternative Dispute Resolution) at (415) 227-5007 (not a toll-free number).


Announcement 2008-105 , I.R.B. 2008-48, 1219, December 1, 2008.


DESCRIPTION OF TE/GE FAST TRACK SETTLEMENT

This announcement provides an opportunity for entities with issues under examination by the Tax Exempt and Governmental Entities Division (TE/GE) to use Fast Track Settlement (FTS) to expedite case resolution. The TE/GE FTS will enable TE/GE entities that currently have unagreed issues in at least one open period under examination to work together with TE/GE and the Office of Appeals (Appeals) to resolve outstanding disputed issues while the case is still in TE/GE jurisdiction. TE/GE and Appeals will jointly administer the TE/GE FTS process. TE/GE FTS will be used to resolve factual and legal issues, and it may be initiated at any time after an issue has been fully developed, but before the issuance of a 30-day letter (or its equivalent). TE/GE FTS will be available to taxpayers for a pilot period of up to two years, beginning upon the date of publication of this announcement. Upon completion of the two-year pilot period, TE/GE and Appeals will evaluate the program, consider necessary adjustments, and determine whether to make the program permanent.



RELIANCE ON AND DIFFERENCES FROM LMSB AND SB/SE FAST TRACK SETTLEMENT

The procedures for using TE/GE FTS rely on the provisions of Revenue Procedure 2003-40, 2003-1 C.B. 1044, and Announcement 2006-61, 2006-2 C.B. 390, which implement Large and Mid-Size Business (LMSB) and Small Business/Self-Employed (SB/SE) Taxpayer FTS Dispute Resolution Programs, respectively.

TE/GE FTS, during the two-year pilot period, extends the provisions of the LMSB and SB/SE FTS programs to TE/GE cases and provides for direct oversight of the program by TE/GE and Appeals. TE/GE FTS therefore involves procedures almost identical to the LMSB and SB/SE FTS procedures described in Rev. Proc. 2003-40 and Ann. 2006-61. The key differences between the LMSB, SB/SE and TE/GE FTS procedures are as follows:
 The TE/GE Group Manager or designee fulfills the duties of the LMSB Team Manager or SB/SE Group Manager;

 The Appeals FTS Program Manager, after consultation with the TE/GE Group Manager, selects and manages cases eligible for TE/GE FTS. The Appeals Team Manager responsible for TE/GE Programs serves as the FTS Program Manager; and

 The TE/GE FTS process is designed to be completed within 60 days of acceptance of the TE/GE FTS Application. The process can be extended beyond the 60-day period if agreed to by all parties.



CASE ELIGIBILITY AND EXCLUSIONS

Generally, TE/GE FTS is available for cases involving: income tax, exclusion of income from interest paid on municipal obligations, employment tax, estate and gift tax, excise tax, and exemption, foundation or qualification issues or other such TE/GE functional issues as appropriate when:
 Issues are fully developed;

 The taxpayer has stated a position in writing; and

 There are a limited number of unagreed issues.

TE/GE FTS will not be available for:
 Issues that can be resolved through other established settlement initiatives, such as, but not limited to, the Self Correction Program "SCP", the Audit Closing Agreement Program "Audit CAP", or other programs described in Rev. Proc. 2006-27, 2006-1 C.B. 945;

 Correspondence examination cases;

 Cases in which the taxpayer has failed to respond to IRS communications and no documentation has been previously submitted for consideration by TE/GE;

 Cases in which Appeals does not have jurisdiction (including determination of penalties under § 6700 of the Code);

 Listed Abusive Tax Avoidance Transactions (ATAT);

 Cases involving potential for civil or criminal fraud;

 Rebate claim cases;

 Selected initiatives as determined on an annual basis by the TE/GE Commissioner or his delegate;

 Tax Equity & Fiscal Responsibility Act (TEFRA) partnership cases;

 Issues designated for litigation;

 Issues under consideration for designation for litigation;

 Frivolous issues, such as, but not limited to, those identified in Rev. Proc. 2008-2, 2008-1 I.R.B. 90, or any successor guidance;

 "Whipsaw" issues, i.e., issues for which resolution with respect to one party might result in inconsistent treatment in the absence of the participation of another party; or

 Issues that have been identified in a Chief Counsel Notice, or equivalent publication, as excluded from the FTS process.

If an issue is determined not to be eligible for the FTS program, all issues in the case are not eligible for the FTS program. Additionally, the Appeals FTS Program Manager will determine whether Appeals has the necessary staffing resources before accepting the case into the program.

TE/GE FTS will not be the appropriate dispute resolution process for all cases involving TE/GE taxpayers. The TE/GE Group Manager or designee and the taxpayer will evaluate their individual circumstances of their case to determine if this process meets their needs.



APPLICATION PROCESS

A taxpayer that is interested in participating in TE/GE FTS, or that has questions about the program and its suitability for the taxpayer's case, may contact the TE/GE Group Manager of the Examining Agent conducting the audit for the period(s) currently under examination. Either the taxpayer, Examining Agent or the TE/GE Group Manager may initiate an application to the TE/GE FTS process at any time after an issue has been fully developed but before a 30-day letter (or its equivalent) is issued.

A FTS Application, attached as Exhibit 1, should be submitted. A Form 5701, ( Notice of Proposed Adjustment) or a Revenue Agent Report will be prepared by the TE/GE Examining Agent. To facilitate the understanding of the parties' opposing views, a written response from the taxpayer must be included with the FTS Application.

If the case is not accepted for inclusion in TE/GE FTS, the TE/GE or Appeals representative will discuss other dispute resolution opportunities with the taxpayer, including 30-day letter procedures contained in IRS Publications 1, Your Rights As A Taxpayer, or 5, Your Appeal Rights and How To Prepare a Protest If You Don't Agree. The decision not to accept a case into the TE/GE FTS program is not subject to administrative appeal or judicial review.



SETTLEMENT PROCESS

TE/GE FTS employs various alternative dispute resolution techniques to promote agreement. An FTS Appeals Official will serve as a neutral party. The FTS Appeals Official will not perform in a traditional Appeals role, but will use dispute resolution techniques to facilitate settlement between the parties. A TE/GE Appeals Officer trained in mediation or, in limited cases, a mediation-trained Appeals Team Case Leader, will serve as the neutral FTS Appeals Official.

During TE/GE FTS, the taxpayer (or taxpayer's authorized representative) and TE/GE representatives, including at least one representative with decision-making authority from both TE/GE and the taxpayer, will meet with the FTS Appeals Official. Any person engaged in practice before the IRS must have a power of attorney from the taxpayer (Form 2848, Power of Attorney and Declaration of Representative). The taxpayer and TE/GE representatives should include individuals with the information and expertise necessary to assist the parties and the FTS Appeals Official during the settlement process. The FTS Appeals Official may ask the parties to limit the number of participants to facilitate the process.

The FTS Appeals Official will hold the FTS session at the date and location agreed to by both parties. Prior to the FTS session, the FTS Appeals Official will advise the participants of the procedures and establish ground rules. The FTS Appeals Official may modify the rules and procedures during the session to adapt to changes in circumstances. The FTS session may include joint sessions with all parties, separate meetings, or both as determined appropriate in the sole judgment of the FTS Appeals Official.

The FTS Appeals Official will use a FTS Session Report to assist in planning the FTS session and to report on developments during the session. The FTS Session Report will include a list of all issues approved for the FTS program, a description of the issues, the amounts in dispute, conference dates, a plan of action for the FTS session and other information useful to the process as determined by the parties and the FTS Appeals Official. The FTS Appeals Official also will prepare and update an Agenda to guide the communication, set the order of issue discussion, and pose questions to clarify the issues. During the session, the FTS Appeals Official will provide decision makers from both parties with copies of the Agenda and the FTS Session Report.

Generally, the FTS Appeals Official will consider only those issues outlined in the FTS Session Report, except by mutual agreement of the parties. If the taxpayer presents information during the session that the taxpayer had not previously presented during the audit, the FTS Appeals Official will adjust the targeted completion date to give the appropriate IRS officials time to evaluate the information.

During the session, the FTS Appeals Official may propose settlement terms for any or all issues. If the taxpayer accepts the FTS Appeals Official's settlement proposal, but the TE/GE Group Manager rejects it, the TE/GE Area Manager or equivalent TE/GE management official with jurisdiction for the case must review the rejection of the settlement proposal and either concur in writing with the rejection or accept the settlement proposal on behalf of TE/GE. If the TE/GE Area Manager or equivalent TE/GE management official concurs with the Group Manager's rejection of the settlement proposal, and an acceptable alternative settlement cannot be reached, the issue will be closed out of the FTS program as unagreed.

If the parties resolve any of the disputed issues at the conclusion of the session, the parties and the FTS Appeals Official shall sign the FTS Session Report acknowledging acceptance of the terms of settlement for purposes of preparing computations. The signature of the parties on the FTS Session Report does not constitute a final settlement, nor does it waive restrictions on assessment, terminate consents to extend periods of limitation, start the running of any periods of limitation, or constitute agreement to close the case. Post-settlement procedures are described below.

The TE/GE FTS process is confidential. IRS employees involved in any way with the TE/GE FTS process are subject to the confidentiality and disclosure provisions of the Internal Revenue Code. By signing the FTS Agreement, attached as Exhibit 1, the taxpayer consents, pursuant to section 6103(c), to the disclosure of the taxpayer's returns and return information pertaining to the issues being considered in the TE/GE FTS process to those persons named on the Agreement as participants in the process. IRS employees, the taxpayer and persons invited to participate by the IRS or the taxpayer shall not voluntarily disclose information regarding any communication made during the TE/GE FTS session, except as provided by statute.

The prohibition against ex parte communications between Appeals Officers and other IRS employees provided by § 1001(a) of the Internal Revenue Service Restructuring and Reform Act of 1998 does not apply to the communications arising in the TE/GE FTS process because the Appeals personnel are facilitating an agreement between the taxpayer and TE/GE and are not acting in their traditional Appeals settlement role.

Any recommended settlement by the FTS Appeals Official of an issue in FTS shall be subject to the procedures including procedures in the Internal Revenue Manual and existing published guidance, which would be applicable if the issue was being considered by Appeals. FTS therefore creates no special authority for settlement by the FTS Appeals Official. For example, if the FTS issue is coordinated in either the Technical Advisor Program or the Appeals Technical Guidance program, the proposed settlement of that issue is subject to established procedures, including submission of the proposed settlement to the Appeals Coordinator for review and concurrence.

If the parties fail to resolve any issue in FTS, the taxpayer retains the option of requesting that the issue be heard through the traditional Appeals process.

Except as specifically provided above, both parties retain the right to withdraw throughout the entire TE/GE FTS process. A party wishing to withdraw should provide written notice to the FTS Appeals Official and the other party.



POST-SETTLEMENT PROCEDURE

If the parties reach an agreement on all or some issues through the TE/GE FTS process, the TE/GE or Appeals FTS Official, as appropriate, will use established issue or case closing procedures and applicable agreement forms, including preparation of a Form 906, Closing Agreement On Final Determination Covering Specific Matters, if appropriate.

If applicable, the IRS will report a proposed resolution reached as a result of TE/GE FTS to the Joint Committee on Taxation in accordance with section 6405. The IRS may reconsider a proposed settlement, as reflected in a signed FTS Session Report, upon receipt of comments on the proposed settlement from the Joint Committee on Taxation. If the taxpayer declines to agree with any changes by the IRS upon reconsideration, TE/GE will close the case unagreed, and the taxpayer will retain all the usual rights to request Appeals consideration of any unagreed issues.



UNRESOLVED CASES

With respect to TE/GE FTS cases that are returned for traditional Appeals consideration for any reason, ex parte restrictions will not be imposed on intra-Appeals communications. Appeals management will take appropriate measures to ensure these cases are handled impartially.



PRECEDENTIAL VALUE OF SETTLEMENT AGREEMENTS

A resolution reached by the parties through the TE/GE FTS process will not bind the parties for taxable periods or issues not covered by the TE/GE FTS agreement, unless such taxable periods or issues are addressed expressly in a closing agreement reached as part of the TE/GE FTS process.



DELEGATION OF AUTHORITY

This announcement constitutes a delegation by the Commissioner of Internal Revenue of settlement authority to Grade 14, 13 and 12 Appeals Officers who are assigned to be Appeals FTS Officials for TE/GE FTS cases described in this announcement. This delegation of settlement authority includes the responsibility for arriving at the final disposition from the Government's perspective, approving the final settlement in accordance with the delegated authority, and executing the appropriate closing documents. This authority may not be redelegated.



EFFECTIVE DATE

TE/GE FTS is effective upon publication of this announcement in the Internal Revenue Bulletin.



COMMENTS

The IRS invites interested persons to comment on this program. Send submissions to:

Internal Revenue Service-Appeals
Attn: Leonard C. Horton
4050 Alpha Road
Farmers Branch, TX 75244-4201
Leonard.C.Horton@irs.gov



FURTHER INFORMATION

For further information regarding this announcement, contact either: Charles F. Fisher, TE/GE Team Leader, at (302) 286-1510 (not a toll-free number), Charles.F.Fisher@irs.gov or Leonard C. Horton, Appeals Program Analyst, Tax Policy & Procedure (Alternative Dispute Resolution) at (972) 308-7330 (not a toll-free number), Leonard.C.Horton@irs.gov.

How do tax liens arise and when are they discharged? When do IRS tax liens arise?

Under the Internal Revenue Code, a tax lien arises at the time of assessment, 26 U.S.C. § 6322, on "all property and rights to property, whether real or personal, belonging to" a delinquent taxpayer. 26 U.S.C. § 6321. The primary power of a tax lien, however, lies not in its effect against the taxpayer, but in its priority vis-à-vis other lienholders and subsequent purchasers. Under the Federal Tax Lien Act, a tax lien is valid as against any subsequent purchaser or holder of a security interest, but only if "notice thereof which meets the requirements of [26 U.S.C. § 6323(f)] has been filed." 26 U.S.C. § 6323(a); see also United States v. Pioneer Am. Ins. Co., 374 U.S. 84, 88 (1963) (stating that a tax lien notice is not valid against real property until placed in the public record); and Treas. Reg. § 301.6323(a) ("The lien imposed by section 6321 is not valid against any purchaser ... [or] holder of a security interest ... until a notice of lien is filed in accordance with § 301.6323(f)-1.").

Section 6323(f) governs the place of filing for tax lien notices, and defers to state law to select the proper office. 26 U.S.C. § 6323(f)(1)(A)(i). Nevada has chosen "the office of the county recorder in which the real property subject to the liens is situated." Nev. Rev. Stat. § 108.827.2. Here, there is no dispute that the real property is in Clark County, Nevada, and that the Clark County Recorder's office was the proper place to file a notice of tax lien.

Section 6323(f) gives the Secretary of the Treasury the authority to prescribe the content of the notice. 26 U.S.C. § 6323(f)(3). The applicable regulation is not particularly helpful to the resolution of this dispute; with respect to the appropriate name to use, it requires only that the notice of lien "must identify the taxpayer." Treas. Reg. § 301.6323(f)-1(d)(2).

The boundaries of proper identification have been left to case law. In this circuit, case law begins with an analysis of 26 U.S.C. § 6323(f)(4). Under that section, if applicable state law provides that:
a deed is not valid as against a purchaser of the property who (at the time of the purchase) does not have actual notice of knowledge of the existence of such deed unless the fact of filing of such deed has been entered and recorded in a public index at the place of filing in such a manner that a reasonable inspection of the index will reveal the existence of the deed,

and if it also provides that "a reasonable inspection of the index" would not reveal the existence of the notice of IRS's tax lien, then the IRS's tax lien is not enforceable against third parties. 26 U.S.C. § 6323(f)(4). See Kivel v. United States, 878 F.2d 301 (9th Cir. 1989).

In Kivel, the Ninth Circuit reviewed section 6323(f)(4), and stated:
This statute governs the validity of liens in a state, such as California, whose laws hold that a deed is valid against a purchaser of property only if the deed has been entered and recorded in the public index in such a manner that a reasonable inspection of the index will reveal the existence of the deed and whose recording system provides an adequate system for the public indexing of federal tax liens. In such a state, the federal requirements are not met unless the fact of filing is recorded in the index "in such a manner that a reasonable inspection of the index will reveal the existence of the lien."

Id. at 303-04 (citing 26 U.S.C. § 6323(f)(4)).


When are tax liens discharged? Section 7425 applies to . DISCHARGE OF LIENS.
7425(a) JUDICIAL PROCEEDINGS. --If the United States is not joined as a party, a judgment in any civil action or suit described in subsection (a) of section 2410 of title 28 of the United States Code, or a judicial sale pursuant to such a judgment, with respect to property on which the United States has or claims a lien under the provisions of this title --

7425(a)(1) shall be made subject to and without disturbing the lien of the United States, if notice of such lien has been filed in the place provided by law for such filing at the time such action or suit is commenced, or

7425(a)(2) shall have the same effect with respect to the discharge or divestment of such lien of the United States as may be provided with respect to such matters by the local law of the place where such property is situated, if no notice of such lien has been filed in the place provided by law for such filing at the time such action or suit is commenced or if the law makes no provision for such filing.

If a judicial sale of property pursuant to a judgment in any civil action or suit to which the United States is not a party discharges a lien of the United States arising under the provisions of this title, the United States may claim, with the same priority as its lien had against the property sold, the proceeds (exclusive of costs) of such sale at any time before the distribution of such proceeds is ordered.

7425(b) OTHER SALES. --Notwithstanding subsection (a)[, a] sale of property on which the United States has or claims a lien, or a title derived from enforcement of a lien, under the provisions of this title, made pursuant to an instrument creating a lien on such property, pursuant to a confession of judgment on the obligation secured by such an instrument, or pursuant to a nonjudicial sale under a statutory lien on such property --

7425(b)(1) shall, except as otherwise provided, be made subject to and without disturbing such lien or title, if notice of such lien was filed or such title recorded in the place provided by law for such filing or recording more than 30 days before such sale and the United States is not given notice of such sale in the manner prescribed in subsection (c)(1); or

7425(b)(2) shall have the same effect with respect to the discharge or divestment of such lien or such title of the United States, as may be provided with respect to such matters by the local law of the place where such property is situated, if --

7425(b)(2)(A) notice of such lien or such title was not filed or recorded in the place provided by law for such filing more than 30 days before such sale,

7425(b)(2)(B) the law makes no provision for such filing, or

7425(b)(2)(C) notice of such sale is given in the manner prescribed in subsection (c)(1).

7425(c) SPECIAL RULES. --

7425(c)(1) NOTICE OF SALE. --Notice of a sale to which subsection (b) applies shall be given (in accordance with regulations prescribed by the Secretary) in writing, by registered or certified mail or by personal service, not less than 25 days prior to such sale, to the Secretary.

7425(c)(2) CONSENT TO SALE. --Notwithstanding the notice requirement of subsection (b)(2)(C), a sale described in subsection (b) of property shall discharge or divest such property of the lien or title of the United States if the United States consents to the sale of such property free of such lien or title.

7425(c)(3) SALE OF PERISHABLE GOODS. --Notwithstanding the notice requirement of subsection (b)(2)(C), a sale described in subsection (b) of property liable to perish or become greatly reduced in price or value by keeping, or which cannot be kept without great expense, shall discharge or divest such property of the lien or title of the United States if notice of such sale is given (in accordance with regulations prescribed by the Secretary) in writing, by registered or certified mail or by personal service, to the Secretary before such sale. The proceeds (exclusive of costs) of such sale shall be held as a fund subject to the liens and claims of the United States, in the same manner and with the same priority as such liens and claims had with respect to the property sold, for not less than 30 days after the date of such sale.

7425(c)(4) FORFEITURES OF LAND SALES CONTRACTS. --For purposes of subsection (b), a sale of property includes any forfeiture of a land sales contract.

7425(d) REDEMPTION BY UNITED STATES. --

7425(d)(1) RIGHT TO REDEEM. --In the case of a sale of real property to which subsection (b) applies to satisfy a lien prior to that of the United States, the Secretary may redeem such property within the period of 120 days from the date of such sale or the period allowable for redemption under local law, whichever is longer.

7425(d)(2) AMOUNT TO BE PAID. --In any case in which the United States redeems real property pursuant to paragraph (1), the amount to be paid for such property shall be the amount prescribed by subsection (d) of section 2410 of title 28 of the United States Code.

7425(d)(3) CERTIFICATE OF REDEMPTION. --

7425(d)(3)(A) IN GENERAL. --In any case in which real property is redeemed by the United States pursuant to this subsection, the Secretary shall apply to the officer designated by local law, if any, for the documents necessary to evidence the fact of redemption and to record title to such property in the name of the United States. If no such officer is designated by local law or if such officer fails to issue such documents, the Secretary shall execute a certificate of redemption therefor.

7425(d)(3)(B) FILING. --The Secretary shall, without delay, cause such documents or certificate to be duly recorded in the proper registry of deeds. If the State in which the real property redeemed by the United States is situated has not by law designated an office in which such certificate may be recorded, the Secretary shall file such certificate in the office of the clerk of the United States district court for the judicial district in which such property is situated.

7425(d)(3)(C) EFFECT. --A certificate of redemption executed by the Secretary shall constitute prima facie evidence of the regularity of such redemption and shall, when recorded, transfer to the United States all the rights, title, and interest in and to such property acquired by the person from whom the United States redeems such property by virtue of the sale of such property.


In re Crystal Cascades Civil, LLC, Debtor. Richard H. Buenting, an Individual; and Road & Highway Builders, LLC, a Nevada Limited Liability Company, Plaintiffs, vs. Crystal Cascades Civil, LLC, a Nevada Limited Liability Company; Business Bank Of Nevada, a Nevada corporation; the Internal Revenue Service; and The Gore Family Trust, Howard L. Gore and Kimberly Hawkins-Gore, Trustees, Defendants.

U.S. Bankruptcy Court, Dist. Nev.; BK-S-05-20550-BAM Chapter 11, November 12, 2008.

[ Code Sec. 6323]

Tax liens: Notice of federal tax lien: Constructive notice: Wrong name: Reasonable and diligent search. --
Notices of tax liens filed by the IRS against a debtor's real property did not provide constructive notice of the liens to third parties because the notices omitted a key part of the debtor's legal name and misidentified the debtor's organizational form. Due to that omission, a reasonable and diligent search of the records maintained by the county would not have revealed the existence of the liens; therefore, the surplus proceeds from the foreclosure sale of the debtor's real property were free of any tax liens. The name used by the IRS in its tax lien notices was "Crystal Cascades, LLC, a corporation," not "Crystal Cascades Civil, LLC, a Nevada limited liability company," which was the debtor's legal name. A search of only the two-term search parameter "Crystal Cascades" would have revealed26 other entities; connecting any of those entities to the debtor would have required an extensive records search.


[ Code Sec. 7425]

Tax liens: Notice of federal tax lien: Right of redemption. --
The IRS's execution of a certificate of release in exchange for a payment of $100,000 was not a redemption that estopped it from asserting a claim to surplus foreclosure sale proceeds. The IRS had not properly filed notices of tax liens; therefore, the liens were not effective against third parties and the IRS had no Code Sec. 7425 right of redemption when the properly was sold at foreclosure.




OPINION AFTER TRIAL



I. Introduction


MARKELL, Bankruptcy Judge: Plaintiffs, Gary H. Buenting and his 50% owned company, Road & Highway Builders, LLC ("Plaintiffs"), claim that their deeds of trust on debtor's real property were senior to two tax liens filed by the Internal Revenue Service ("IRS") against the same property. This claim of priority matters because the real property involved has been foreclosed upon, and there are surplus proceeds of some $321,000. While not a small sum, it is less than either the Plaintiffs' or the IRS's claims. As a result, whoever is senior gets all the money. The loser gets nothing.

No one disputes that the Plaintiffs recorded their deeds of trust after the IRS recorded its tax lien notices. These notices identified the taxpayer only as "Crystal Cascades, LLC, a corporation." The debtor's full and proper name from the time it acquired the real property, however, was "Crystal Cascades Civil, LLC, a Nevada limited liability company." The IRS's notices thereby left out one of the nontrivial words of debtor's name, and misidentified its organizational form.

The main issue at the two-day trial was whether a reasonable search of the relevant real property records would have revealed either notice of tax lien. For the reasons set forth in this opinion, the court finds that a reasonable search would not have revealed either tax lien, and therefore federal law provides that the proceeds of the foreclosure are free of the IRS's liens. They may thus be distributed to Plaintiffs.


II. Facts


Crystal Cascades Civil, LLC, the debtor in this bankruptcy, owned three parcels of land in Clark County, Nevada (the "real property"). Debtor borrowed heavily against this real property. Business Bank of Nevada made loans secured by first- and second-priority liens against the real property; its first and second deeds of trust were recorded on July 15, 2004. 1 Debtor next encumbered the real property on February 4, 2005, borrowing money from and giving deeds of trust to Plaintiffs. A final deed of trust encumbering the real property was recorded February 16, 2005, in favor of the Gore Family Trust. 2

At all relevant times, Edward G. Riggs controlled the debtor. Mr. Riggs filed Articles of Organization for the debtor with the Nevada Secretary of State on November 20, 2000. These stated the debtor's name to be Crystal Cascades, LLC. 3 In addition, Mr. Riggs used this name, Crystal Cascades, LLC, when he applied to the IRS for an Employment Identification Number, or EIN, for this newly created entity.

On May 31, 2001, an amendment was filed with the Nevada Secretary of State, changing the debtor's name from Crystal Cascades, LLC, to Crystal Cascades Civil, LLC. No change of name was ever filed with the IRS, although the debtor listed its changed name on its income tax returns and on the employment tax returns that led to the IRS liens at issue in this case. Debtor purchased the real property using its proper name, Crystal Cascades Civil, LLC, at some time after this May 31, 2001 name change.

During the third and fourth quarters of 2003, debtor failed to pay its employment taxes. This led to the IRS filing a notice of tax lien on August 11, 2004. Debtor again failed to pay all its employment taxes during the last two quarters of 2004. The IRS filed a second notice of tax lien on January 28, 2005. The IRS filed both tax lien notices in the Clark County Recorder's office using the designation "Crystal Cascades, LLC, a corporation." 4

Debtor filed a petition under Chapter 11 of the Bankruptcy Code on September 28, 2005. The court lifted the automatic stay of section 362 in favor of Business Bank of Nevada with respect to the real property on January 30, 2006, so that Business Bank could proceed with a foreclosure of the real property. Business Bank foreclosed on its senior interest at a foreclosure sale held on February 28, 2006. The sale generated a surplus of $321,000 over the amount owed to Business Bank.

Both the IRS and Plaintiffs claim this surplus, which has been held in escrow pending the resolution of this proceeding. The IRS contends that both the August 11, 2004 tax lien notice and the January 28, 2005 tax lien notice, filed under the name "Crystal Cascades, LLC," sufficiently identified the debtor, and therefore the tax liens were effective against third parties, entitling the IRS to the proceeds from the foreclosure sale of the real property. See Quist v. Wiesener, 327 F. Supp. 2d 890 (E.D. Tenn. 2004) (valid tax lien on real estate attaches with same priority to proceeds of sale of that real property). Plaintiffs contend that both notices failed to sufficiently identify the debtor, and therefore the IRS's tax liens were not effective as against third parties.


III. Legal Standards



A. Statement of Jurisdiction


Although this dispute looks very much like a simple dispute by two nondebtors governed by nonbankruptcy law, this court had and has jurisdiction to hear and determine the matter. As with all bankruptcy-based matters, the district court, and derivatively, this bankruptcy court, has jurisdiction "of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b); D. Nev. R. 1001. When Plaintiffs filed this adversary proceeding, the estate owned the real property, making this a core matter arising in a case under title 11 under 28 U.S.C. § 157(b)(2)(K) & (O). 5 After the sale of the real property, the surplus proceeds were insufficient to benefit the estate's unsecured creditors. However, the creation and confirmation of this shortfall did not divest the court of jurisdiction over the parties. In the Ninth Circuit, subject matter jurisdiction in bankruptcy cases, as in other federal court cases, "should be determined as of the date that the complaint ... was filed." Fietz v. Great W. Sav. ( In re Fietz), 852 F.2d 455, 457 n.2 (9th Cir. 1988).

Additionally, even if this proceeding did not retain its character as a core matter, the court retained "related to" noncore jurisdiction. With respect to such jurisdiction, the Ninth Circuit has adopted the test articulated by the Third Circuit in Pacor, Inc. v. Higgins, 743 F.2d 984 (3rd Cir. 1984) which states that a proceeding is "related to" if "the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy." Fietz, 852 F.2d at 457 (citing Pacor, 743 F.2d at 994). Any change that occurred during the pendency of this action with regard to the origin of this court's jurisdiction "from arising in a case under title 11" to "related to" jurisdiction would not have been sufficient to alter the test for "related to" jurisdiction. 6 By continuing to prosecute the litigation through trial in this matter after the real property was sold, each party consented to this court's entry of final judgment under 28 U.S.C. § 157(c)(2).


B. Substantive Law on Priorities


Under the Internal Revenue Code, a tax lien arises at the time of assessment, 26 U.S.C. § 6322, on "all property and rights to property, whether real or personal, belonging to" a delinquent taxpayer. 26 U.S.C. § 6321. The primary power of a tax lien, however, lies not in its effect against the taxpayer, but in its priority vis-à-vis other lienholders and subsequent purchasers. Under the Federal Tax Lien Act, a tax lien is valid as against any subsequent purchaser or holder of a security interest, but only if "notice thereof which meets the requirements of [26 U.S.C. § 6323(f)] has been filed." 26 U.S.C. § 6323(a); see also United States v. Pioneer Am. Ins. Co., 374 U.S. 84, 88 (1963) (stating that a tax lien notice is not valid against real property until placed in the public record); and Treas. Reg. § 301.6323(a) ("The lien imposed by section 6321 is not valid against any purchaser ... [or] holder of a security interest ... until a notice of lien is filed in accordance with § 301.6323(f)-1.").

Section 6323(f) governs the place of filing for tax lien notices, and defers to state law to select the proper office. 26 U.S.C. § 6323(f)(1)(A)(i). Nevada has chosen "the office of the county recorder in which the real property subject to the liens is situated." Nev. Rev. Stat. § 108.827.2. Here, there is no dispute that the real property is in Clark County, Nevada, and that the Clark County Recorder's office was the proper place to file a notice of tax lien.

Section 6323(f) gives the Secretary of the Treasury the authority to prescribe the content of the notice. 26 U.S.C. § 6323(f)(3). The applicable regulation is not particularly helpful to the resolution of this dispute; with respect to the appropriate name to use, it requires only that the notice of lien "must identify the taxpayer." Treas. Reg. § 301.6323(f)-1(d)(2).

The boundaries of proper identification have been left to case law. In this circuit, case law begins with an analysis of 26 U.S.C. § 6323(f)(4). Under that section, if applicable state law provides that:
a deed is not valid as against a purchaser of the property who (at the time of the purchase) does not have actual notice of knowledge of the existence of such deed unless the fact of filing of such deed has been entered and recorded in a public index at the place of filing in such a manner that a reasonable inspection of the index will reveal the existence of the deed,

and if it also provides that "a reasonable inspection of the index" would not reveal the existence of the notice of IRS's tax lien, then the IRS's tax lien is not enforceable against third parties. 26 U.S.C. § 6323(f)(4). See Kivel v. United States, 878 F.2d 301 (9th Cir. 1989).

In Kivel, the Ninth Circuit reviewed section 6323(f)(4), and stated:
This statute governs the validity of liens in a state, such as California, whose laws hold that a deed is valid against a purchaser of property only if the deed has been entered and recorded in the public index in such a manner that a reasonable inspection of the index will reveal the existence of the deed and whose recording system provides an adequate system for the public indexing of federal tax liens. In such a state, the federal requirements are not met unless the fact of filing is recorded in the index "in such a manner that a reasonable inspection of the index will reveal the existence of the lien."

Id. at 303-04 (citing 26 U.S.C. § 6323(f)(4)).

Nevada is no different than California with respect to real estate priorities. Under Nevada law, a purchaser of real property with notice of a prior interest takes subject to that interest. Nev. Rev. Stat. § 111.320; Buhecker v. R.B. Petersen & Sons Const. Co., Inc., 112 Nev. 1498, 1500, 929 P.2d 937, 939 (1996); In re Grant, 303 B.R. 205, 211 (Bankr. D. Nev. 2003). To implement this general rule, Nevada law provides that every document recorded in a county recorder's office gives notice to all persons upon recordation, Nev. Rev. Stat. § 247.190.1, and mandates that county recorders maintain grantor-grantee indices that enable searchers to find recorded documents. Nev. Rev. Stat. § 247.150.1. Further, in Clark County, this indexing is supplemented by an Internetbased search engine that allows searching by entity name. See Nev. Rev. Stat. § 247.150.9(b). As a consequence, Nevada law provides that properly filed documents provide notice that can affect priority.

The issue then becomes how an entity would go about constructing a reasonable search of the Clark County Recorder's office index to discover prior liens or interests. Many courts have struggled when determining what constitutes a reasonable search of a recording office. Some have enforced federal tax liens even after finding an error in the taxpayer's name, so long as a reasonable search of the applicable index would have uncovered the notice of tax lien. See, e.g., United States v. Crestmark Bank ( In re Spearing Tool and Mfg. Co., Inc.), 412 F.3d 653 (6th Cir. 2005) ("Spearing Tool & Mfg. Co., Inc." rather than "Spearing Tool and Manufacturing Co., Inc."), cert. denied, 127 S.Ct. 41 (2006); Hudgins v. IRS ( In re Hudgins), 967 F.2d 973, 976 (4th Cir. 1992) ("Hudgins Masonry, Inc." rather than taxpayer's personal name, "Michael Steven Hudgins"); Kivel v. United States, 878 F.2d 301 (9th Cir. 1989) ("Bobbie Morgan" rather than "Bobbie Morgan Lane"); United States v. Polk, 822 F.2d 871 (9th Cir. 1987) ("Roy Bruce Polk" rather than "Bruce Polk"); Tony Thornton Auction Serv., Inc. v. United States, 791 F.2d 635, 639 (8th Cir. 1986) ("Davis's Restaurant" and "Daviss ( sic) Restaurant" rather than "Davis Family Restaurant"); Richter's Loan Co. v. United States, 235 F.2d 753 (5th Cir. 1956) ("Freidlander" rather than "Friedlander"); Quist v. Wiesener, 327 F. Supp. 2d 890 (E.D. Tenn. 2004) ("Joint Effort" rather than "Joint Effort Productions, Inc."); Whiting-Turner/A.L Johnson v. P.D.H. Development, Inc., 184 F.Supp.2d 1368, 1379 (M.D. Ga. 2000) ("PD Hill Development Inc." rather than "P.D.H. Development, Inc."); Brightwell v. United States, 805 F.Supp. 1464, 1471 (S.D. Ind. 1992) ("William S. Van Horn" rather than "William B. VanHorn"); Du-Mar Marine Serv., Inc. v. State Bank & Trust Co., 697 F. Supp. 929 (E.D. La. 1988) ("Lamant Marie Service Number 2, Inc." rather than "LaMart Marine Service No. 2, Inc."); United States v. Sirico, 247 F.Supp. 421 (S.D.N.Y. 1965) ("Sirico, George" and "Sirico, A." rather than "Assunta Sirico").

Conversely, other courts have found that third parties' property interests are superior to the IRS's interest when the notice of tax lien misspells or otherwise materially alters a taxpayer's name in such a way that a reasonable search would not reveal the relevant notice of tax lien. See, e.g., Walsh v. United States ( In re Focht), 243 B.R. 263 (W.D. Pa. 1999) ("Country Fochts Restaurant & Bakery [and] Lois E. Focht, Gen. Ptr.[,]" rather than "Ronald D. Focht"); Fritschler, Pellino, Schrank & Rosen, S.C. v. United States, 716 F. Supp. 1157 (E.D. Wis.1988) ("Allen G. Casey" rather than "Allen J. Casey"); Haye v. United States, 461 F. Supp. 1168 (C.D. Cal. 1978) ("Castello" rather than "Castillo"); United States v. Ruby Luggage Corp., 142 F. Supp. 701 (S.D.N.Y. 1954) ("Ruby Luggage Corp." rather than "S. Ruby Luggage Corp."); Continental Invs. v. United States, 142 F. Supp. 542 (W.D. Tenn.1953) ("W.R. Clark, Sr." rather than "W.B. Clark, Sr."); Reid v. IRS ( In re Reid), 182 B.R. 443, 446 (Bankr. E.D. Va. 1995) ("Gary A. Reid" rather than "Cary A. Reid"); Ducote v. United States ( In re de la Vergne), 156 B.R. 773 (Bankr. E.D. La. 1993) ("Hughes J. de la Verone II Payroll Account " rather than "Hugues J. de la Vergne II"); Robby's Pancake House v. Walker ( In re Robby's Pancake House), 24 B.R. 989 (Bankr. E.D. Tenn. 1982) ("LaForce-Walker Construction Co." rather than "Robert Walker").

The only unifying concept in this welter of cases is that each court had to determine whether a reasonable search would have put a searcher on notice of the errant tax lien notice. The seeming discrepancies among the various cases can be explained only by one salient fact: locality. Because different recording offices index their records differently, a person might very well use different searches in different localities, even when presented with the same name. A searcher would construct different searches, for example, in jurisdictions that maintain only grantor-grantee indexes than he or she would if the jurisdiction permits full-name searching by computer, with the added function of "wildcards."

That brings the matter to Clark County, Nevada. How would a reasonable person construct a search of the Clark County Recorder's office for a debtor named Crystal Cascades Civil, LLC? And would that search reveal the IRS's notice of tax lien if it was filed under the name "Crystal Cascades, LLC, a corporation?" The parties agree on the standard to be applied to these questions, but differ on how to apply it. Trial was held, and over its two-day course, each side produced experts who testified and disagreed as to how the relevant standard should be applied.


IV. The Testimony


At trial, Mr. Buenting testified, as did an IRS agent. Their testimony was, for the most part, unexceptional. Mr. Buenting explained that he was a general contractor who dealt with Mr. Riggs and the debtor and that the debts owed to him and his company arose when the debtor needed advances to finish work under contract with Plaintiffs. He also testified as to how he came to bid on the real property, and the nature of his post-acquisition dealings with the IRS.

Mr. Bauer, the IRS agent, testified as to how the IRS generates notices of tax liens. In essence, Mr. Bauer testified that the IRS maintains a master file with taxpayer names and taxpayer identification numbers, and that the names and numbers used are generated by the taxpayer's initial application, which in this case was an application for an employer identification number. The IRS does not change the name thereafter, and uses that original name in all notices of tax liens, although Mr. Bauer did testify that a revenue agent generating a notice of tax lien has discretion to add additional names on the notice.

The remaining testimony, however, proved more contentious. Plaintiffs and the IRS each produced one expert from the title insurance field to testify regarding what constitutes a reasonable and diligent search of the Clark County land records. Each expert gave his or her opinion about what constitutes a reasonable and diligent search from the perspective of a title officer working at a title insurance company and having access to its proprietary databases, and what constitutes a reasonable and diligent search from the perspective of a nonprofessional person having access only to the Clark County Recorder's office. Both experts had worked in the title insurance industry for many years, and both had substantial experience conducting title searches using title company proprietary databases, called "title plants," and using the Clark County Recorder's office grantor-grantee index. Both experts also acknowledged that nowadays most nonexperts would search Clark County real property records by computer. 7


A. Testimony of Plaintiffs' Expert, James P. Kiernan


Plaintiffs' expert witness was James P. Kiernan. Mr. Kiernan had recently retired as the owner, president, and chief executive officer of Northern Nevada Title Company. Over the course of a 40-year career, Mr. Kiernan worked at several different title companies and held a variety of positions that required him to become an expert in searching real estate titles.

Mr. Kiernan first testified how title companies create their proprietary title plants and what methods and procedures would be followed by a professional title officer conducting a title search. Title companies, either individually or in conjunction with other title companies, compile all filed or recorded documents affecting real property in a given locality (such as Clark County) and create a chain of title for each parcel of property. The chain of title includes documents that are property specific, such as deeds of trust, and documents that affect all property owned by a particular person, such as tax lien notices. Unlike the recording system used in the county recorder's office, these chains of title are indexed primarily by legal description. In addition, title plants collect information not normally filed with the county recorder's office, such as probate and bankruptcy information regarding grantors and grantees. Collectively, these chains of title and bits of information make up a title plant. A key aspect of title plants, however, is that they are accessible only by employees of a title company affiliated with that title plant. 8

Mr. Kiernan next explained that what constitutes a reasonable and diligent search for a professional title officer is completely different from a reasonable and diligent search by a nonprofessional searcher. Professional title officers are, according to Mr. Kiernan, subject to a higher standard because they have access to title plants and have been trained extensively in "how to search, what to look for, [and] how to operate the title plant" they are using. These title officers are trained to understand and classify hundreds of different types of documents that affect real property. 9 According to Mr. Kiernan, a title officer conducting a reasonable and diligent search may in fact have conducted a search using the search term "Crystal Cascades," assuming that a search of the entity name Crystal Cascades Civil, LLC, returned documents indicating Crystal Cascades was a name used by the debtor in the past.

Mr. Kiernan also gave his opinion on what constitutes a reasonable and diligent search by a nonprofessional searcher. He explained that the Clark County Recorder's office uses a grantorgrantee index, which indexes property alphabetically by the names shown in the documents affecting the real property, rather than by legal description (like a title plant). To determine whether there are liens affecting specific property through a search of the recorder's office, a searcher must first run a grantee search using the name of the property's current owner. The results of this search will provide the name of the current owner's grantor. The searcher must then run a grantee search using that grantor's name. Mr. Kiernan explained that unless the searcher is building a chain of title, a searcher generally does not need to repeat this process (grantee-back) beyond 20 years' worth of documents. The next step is to run grantor searches using all the names discovered in the grantee searches. These grantor searches will reveal any liens affecting the grantors, and thereby allow a searcher to determine if any of these liens have attached to a particular parcel of real property.

Clark County offers the public a computerized database in which grantors and grantees may be searched by name. This index also has a "wild card" feature; when a name is searched, the search results will not only contain documents with that name, but also documents that have the name searched as a root. For example, using Karl as a search term would return all documents in which anyone whose first name was Karl was involved (but not Carl), as well as names such as "Karl's Junior," "Karlton's Creations," and "Karl, Betty, and Jane, LLC."

For this case, this means that a search using the debtor's actual name, Crystal Cascades Civil, LLC, would not reveal the IRS lien, because the lien would have been indexed under Crystal Cascades, Inc. A search under one root of the debtor's name, "Crystal Cascades," however, would have revealed the IRS's tax lien notices, 10 as would have a search under just the word "Crystal."

Against this background, Mr. Kiernan testified that a reasonable and diligent search of the Clark County Recorder's office records, conducted by a nonprofessional searcher, would be constructed by starting with the exact name from the grant deed of the subject property. He also stated that, based on examining a copy of the search results from the Clark County Recorder's office for "Crystal Cascades Civil, LLC," a reasonable person would conclude that any property owned in Clark County by Crystal Cascades Civil, LLC, would not be subject to any tax lien.


B. Testimony of the IRS's Expert, Betty Waters


The IRS called Betty Waters as its expert. 11 Ms. Waters is the president of Clark County Title Services, a title plant that is co-owned by seventeen title companies operating in the Las Vegas area. Ms. Waters has held a variety of positions in the title industry since 1962, worked at Clark County Title Services since 1987, and served as its president since 1994.

The majority of Ms. Waters's testimony related to the construction of a reasonable and diligent search conducted by a title officer. She testified extensively about her personal searching philosophy/method of "less-is-more." This method is practiced by constructing searches using fewer search terms to find a greater number of documents, even though some of those documents may be irrelevant to a particular parcel. Title officers, according to Ms. Waters, often use this "less-is-more" method because it increases the chance of discovering documents relevant to the parcel on which the company is considering issuing a title insurance policy. Ms. Waters said that she would apply this philosophy whether searching in a title plant or searching the Clark County Recorder's office. Using this philosophy, a search would use just "Crystal Cascades," and so would find the tax lien notices.

Ms. Waters also gave her opinion as to what would constitute a reasonable and diligent search for a nonprofessional using the Clark County Recorder's website. Ms. Waters testified that if she was given the name Crystal Cascades Civil, LLC, and asked to search the county recorder's website, she would input a search for "Crystal Cascades Civil," taking advantage of the automatic wildcard to return documents ending in "LLC" or any other designation. 12

Ultimately, and surprisingly, although Ms. Waters asserted that although she would have found the IRS tax lien notices, her opinion was that the average reasonably diligent user looking for liens on property owned by Crystal Cascades Civil, LLC would input the legal name of the entity and not use a less-is-more approach. 13 As a result, average users would not have found the IRS's notices of tax liens because they would have searched under "Crystal Cascades Civil," and not under "Crystal Cascades." In addition, Ms. Waters admitted on cross-examination that an officer who is not conducting a High-Liability title insurance search would also likely reject her less-is-more method. From this, the court concludes that a regular title insurance searcher would also not have found the IRS's tax lien notices.


V. Discussion


Both Ninth Circuit precedent and Section 6232(f) require that to be effective against third parties, a notice of tax lien must be filed so that a reasonable search would uncover it. Kivel, 878 F.2d at 303-04; Polk, 822 F.2d at 872-73. Although simple in formulation, this test gives rise to several important questions. Does the test assume a professional searcher or just the average nonprofessional? To what extent could or should either be charged with knowledge of how Clark County indexes its records? And if they are charged with such knowledge, to what extent should they employ it in developing the ephemeral reasonable search? It is to these questions that this opinion now turns.


A. Professional Title Officer Search Versus Nonprofessional Search


The parties' expert witnesses, both title industry professionals, gave their opinions as to what constitutes a reasonable and diligent search for a title officer and for a nonprofessional searcher. Not surprisingly, the search parameters are different for each group. Title officers have extensive training in searching land records and, depending on the underwriting standards they are following, may investigate a parcel beyond the bounds of a reasonable and diligent search. This fact would initially disqualify the higher standard applicable to title officers from the applicable reasonableness test of Section 6232(f). Additionally, to hold that the only reasonable search would be one performed by a professional title officer would imply that the only reasonable and diligent search is one performed using a proprietary title plant like the one operated by Clark County Title Services (because a reasonable and diligent title officer would conduct a search using a title plant).

This in turn would render the searching apparatus operated by the Clark County Recorder's office irrelevant, something that this court will not do, in part because the structure of Section 6232 forbids it; that section looks to publicly available land records in its formation of standard for tax liens. This also means that a reasonable search would have to include paying for an independent title search in order to gain access to the data in various title plants; the federal standards do not refer to or incorporate such nonproprietary information, and thus what a title search produced by a title company is of little relevance to the application of section 6232(f) to this case. As a result, this court finds that the standard for what is a reasonable search must be viewed from the perspective of a nonprofessional searcher.


B. Reasonable Search Conducted by a Nonprofessional Searcher


A reasonable and diligent searcher has a duty to investigate the documents that underlie the search result obtained. Kivel, 878 F.2d at 304. If, as the IRS argues, a reasonable and diligent search is one that employs a less-is-more search methodology and uses the two-term parameter "Crystal Cascades," the searcher would have discovered a filing in the name of Crystal Cascades, LLC. Upon further examination, the searcher would find that the property address and employer identification numbers matched those of the debtor in this case and would have constructive notice of the tax liens. See id. at 305.

However, the expert testimony establishes that a reasonable nonprofessional searcher would not have used the two-term search parameter "Crystal Cascades." Although the testimony of the parties' experts was at times convoluted, the experts agreed that a reasonable search conducted by a nonprofessional searcher would be constructed using the name from the grant deed that vested the property in the current owner, or any reasonable truncation of that name. 14 That name is Crystal Cascades Civil, LLC.

Other cases on electronic or computer searches confirm the common-sense notion that a balance has to be struck between exactitude in searching - searching under the debtor's precise name, and only that name - and latitude in searching - searching under some variant of the debtor's exact name. In Quist v. Weisner, 327 F. Supp. 2d 890 (E.D. Tenn. 2004), for example, the IRS had filed a notice of tax lien naming the taxpayer as "Joint Effort." After the IRS filing, a creditor was pursuing an entity whose name was "Joint Effort Productions, Inc.," and had levied and caused to be sold some of that entity's property. Both the IRS and the creditor then laid claim to the approximately $10,000 in proceeds of the execution sale.

The court noted that the records of the relevant recording entity - the Knox County Registry of Deeds - were computerized. It also found that a search of "Joint Effort" would reveal both the creditor's lien and the IRS's notice of tax lien, while a search under the debtor's exact name, "Joint Effort Productions, Inc." would reveal only the creditor's lien. Notwithstanding this, the court found that the IRS's lien attached to the proceeds and was superior. Its logic required another step: an electronic search of Tennessee's Secretary of State's website, Tennessee Anytime. A search of that website under either "Joint Effort" or "Joint Effort Productions, Inc." would show that the two names were both registered for the same entity; that is, under Tennessee law, they were the different legitimate names for the same legal entity. Given that, the court had no trouble in finding that a filing of a notice of tax lien under "Joint Effort" served to place third parties on notice of the IRS's lien, as that name was a recognized, legitimate name of the debtor.

In this case, of course, the name used by the IRS was not the debtor's legal name as of the time it acquired the real property and as of the time of Plaintiffs' deed of trust filing. 15 This raises the issue of whether a reasonable person would do an inspection of not only the Clark County records, but also the Nevada Secretary of State's records to see if there were any prior names of the debtor that might need to be searched. This court holds that they would not.

As established in Sum of $66,839.59 v. IRS, 119 F. Supp. 2d 1358 (N.D. Ga. 2000), not every action possible need be taken in order for a search to be reasonable. Id. at 1362 (searcher not required to go beyond public indices to request county clerk to gain access to daily filings, even when evidence indicated that clerk would honor such requests); see also Associates Fin. Serv. Co. v. Brown, 258 Wis.2d 915, 656 N.W.2d 56 (2002) (even though creditor could have found errant deed with incorrect legal description through computerized searching, no duty to search for such deeds, and no notice imparted from fact that such deed could have been found with an expansive search).

As set forth above at note 10, there were some twenty-six other entities that a shortened search of "Crystal Cascades" would have revealed, and to connect any of those entities back to the debtor would have required an extensive search of not only the records indexed and filed at the Clark County Recorder's office, but also at the Nevada Secretary of State's office. Given the testimony of both experts, it would have been unreasonable to use this truncated search to find liens that had been misfiled as was the IRS's notice of tax lien.

This is not a case where the IRS made a minor mistake in filing its tax lien notice, such as by using a common abbreviation or making a minor misspelling in the taxpayer debtor's name that notwithstanding the error would require a searcher to investigate further. See, e.g., Crestmark Bank, 412 F.3d at 656 ("Mfg." and "&" for "Manufacturing" and "and", respectively); see, e.g., Brightwell, 805 F. Supp. at 1470-71 (incorrect middle initial and extra space inserted in last name). Rather, the IRS's notices of tax lien in this case omitted a key part of the debtor's name. Given the existing search logic 16 and manner in which Clark Country constructed its search function, that omission made the notices inaccessible to searchers who later used the debtor's real name, or any reasonable truncation of that name. It was undisputed that a search under the name listed on the grant deed by which the debtor acquired the real property would not return an entry in the name of Crystal Cascades, LLC. Therefore, as filed, the IRS's notices of tax lien did not impart constructive notice on third parties. The IRS's liens were therefore not effective as against third parties. Plaintiffs are entitled to the surplus proceeds from the foreclosure sale.


VI. Election of Remedies


The final issue in this case concerns the IRS's election of remedies. Plaintiffs argue that the IRS should be estopped from asserting a claim to any portion of the foreclosure sale proceeds because the IRS effectively redeemed the property before trial. The IRS responds that it did not redeem the property and therefore should not be estopped from asserting a claim to the sale proceeds.

After this court permitted Business Bank, the most senior lienholder, to foreclose upon its interest in the real property, a public sale was held. Mr. Buenting's company, Road and Highway Builders, was the purchaser at the foreclosure sale. Subsequently, the IRS approached Mr. Buenting and stated its intention to redeem the property under 26 U.S.C. § 7425. Because Mr. Buenting had already made additional investments in the real property that he would not be compensated for by the redemption, he negotiated a release of the IRS's claim of a right to redemption in exchange for his payment of $100,000. Plaintiffs claim that the IRS's acceptance of this payment extinguished any interest that the IRS might have had in the property, and, having elected redemption, the IRS cannot establish a claim to the surplus proceeds. The IRS argues that it merely accepted a payment for a certificate of release of its right of redemption (Government's Trial Exhibit 33), that it never exercised its right to redeem, and therefore it is not estopped from asserting a claim to the foreclosure sale proceeds.

The United States has a right of redemption under 26 U.S.C. § 7425(d) when property on which it has a tax lien is sold at a nonjudicial foreclosure sale. As interpreted by the Ninth Circuit, "the statute plainly and unambiguously allows the IRS to redeem the entire real property that was sold at a foreclosure sale if any portion of the real property was subject to a federal tax lien prior to the foreclosure sale." Vardanega v. I.R.S., 170 F.3d 1184, 1186 (9th Cir. 1999) (emphasis added). The redemption statute and applicable Treasury regulations are clear that a precondition of the IRS's right of redemption is the proper filing of the tax lien. See 26 U.S.C. § 7425(b)(1); TREAS. REG. 301.7425-2(a) (explaining that the application of section 7425 requires the notice of federal tax lien to be filed in accordance with section 6323(f); TREAS. REG. 301.7425-4 (requiring, in each example, that "a notice of tax lien is filed under section 6323(f)" as a precondition to the application of the redemption statute).

As set forth above, the IRS's notices of tax lien were not filed in accordance with 26 U.S.C. 6323(f) and thus its tax liens were not effective against third parties. Therefore, the IRS had no legal right of redemption which arose under section 7425(d) when the real property was sold at foreclosure. 17 Further, even if the IRS had properly filed the tax lien notices and a right of redemption had arisen, it would not affect the court's decision on the issue of election of remedies. It is simply the case that accepting payment not to not exercise a right of redemption is not itself a redemption; indeed, it is logically inconsistent. As a result, the IRS's execution of a certificate of release in exchange for a payment of $100,000 was not an election of remedies that estopped it from asserting a claim to the surplus foreclosure sale proceeds.


VII. Conclusion


Plaintiffs are entitled to judgment awarding them the surplus proceeds, subject to their settlement with the Gore Family Trust. This opinion shall constitute the findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052. A judgment in favor of Plaintiffs shall be entered in accordance with Fed. R. Bankr. P. 9021.

1 This adversary proceeding was originally filed to enjoin Business Bank of Nevada's foreclosure on the real property. At a hearing held February 27, 2006, the court allowed the foreclosure to proceed. Plaintiffs' complaint also sought declaratory relief regarding lien priority. Because no one contested Business Bank's priority, Business Bank was permitted to keep the foreclosure proceeds in satisfaction of its debt, and was thereafter dismissed from the action on March 3, 2006.

2 The Gore Family Trust, Howard L. Gore and Kimberly Hawkins-Gore, Trustees, were defendants in the action as originally filed, but Plaintiffs entered into a settlement agreement with them on October 18, 2007. The relevant provision of this settlement agreement, paragraph 17, states that "Plaintiffs agree to pay one third of all amounts recovered ... by prevailing on the merits at trial to Gore up to a maximum of $100,000." In return, The Gore Family Trust agreed to dismiss, with prejudice, its counterclaim against the Plaintiffs. The Gore Family Trust was dismissed from this adversary proceeding on November 1, 2007.

3 Information related to the debtor's past and present corporate status was retrieved from the Nevada Secretary of State website. Nevada Secretary of State, https://esos.state.nv.us/SOSServices/AnonymousAccess/CorpSearch/CorpSearch.aspx ( last visited Nov. 12, 2008).

4 At trial, an IRS revenue officer explained that the IRS uses the name listed in the IRS master file to generate a tax lien notice, and this master file name is the name associated with the taxpayer's EIN, even if the taxpayer files tax returns under a different name.

5 Indeed, the IRS admitted that the action was a core proceeding in its answer to the complaint and in its trial statement.

6 Although the Ninth Circuit has indicated that in some contexts, such as during the postconfirmation and postdischarge phase of a chapter 11 case, the "related to" test is more limited, with the test being "whether there is a close nexus to the bankruptcy plan or proceeding sufficient to uphold bankruptcy court jurisdiction over the matter," State of Montana v. Goldin ( In re Pegasus Gold Corp.), 394 F.3d 1189, 1194 (9th Cir. 2005), this case is not within the limited sphere of Pegasus.

7 Indeed, there was testimony that Clark County does not allow unrestricted access to its grantor-grantee index to the general public, and typically directs searchers who appear in person to computer terminals maintained in the public area of the recorder's office. The Clark County search site is http://recorder.co.clark.nv.us/extReal/default.asp ( last visited Nov. 12, 2008).

8 Mr. Kiernan explained that the general view in the title industry is that allowing public access to title plants would subject title plant owners to federal credit reporting regulations and could subject the title plant operators to liability if a party improperly relied on the title plant data.

9 Here, Mr. Kiernan was speaking about title officers generally. There was also testimony about a specialized type of title officer, known as a "High-Li" or high liability officer. High-li officers deal with title insurance involving a risk of high liability being imposed against the title company. During the course of the trial, there was conflicting testimony about whether a search performed by a High-Li officer is any different than a search performed by a non-High-Li title officer. According to Mr. Kiernan, the difference between the search conducted in a non-High-Li case and a High-Li case concerns the level of scrutiny that the results of the search are subjected to, rather than a difference in the method of searching.

10 It also would have revealed the following entities, with the number of documents for each entity represented by the number in parentheses after the name: Crystal Cascades Construction (2); Crystal Cascades Inc (7); Crystal Cascades Inc Pool Division (1); Crystal Cascades LLC (2); Crystal Cascades LLC, '(1) (with the ending apostrophe distinguishing this entry from the prior entry); Crystal Cascades Pools & Spas (2); Crystal Cascades Pools & Spas LLC (10); Crystal Cascades Pools and Spas LLC (1).

11 The IRS did not formally retain Ms. Waters as an expert because a shareholder of Ms. Waters's employer objected. The IRS instead subpoenaed Ms. Waters as a nonexpert witness, and attempted to qualify her as an expert on the stand. The court condoned this unusual procedure only because Plaintiffs knew the IRS intended to call her as its expert, and they had previously deposed Ms. Waters as a potential expert. Against this background, the court specifically found that the Plaintiffs were not prejudiced by this testimony.

12 In discussing the Clark County Recorder's website, Ms. Waters explained that it provides an automatic wildcard after the last search term inputted, which returns any record with more words or characters than have been entered.

13 During cross-examination, Defendant's counsel and Ms. Waters had the following exchange:

Q: Now, if you were asked to search for liens that affect Crystal Cascades Civil, LLC, what search terms would you use?

A. If I was doing it personally, I would use Crystal Cascades because it's - it's a business name, but average user would not. They would use Crystal Cascades Civil because that's the full name of the corporation.

14 For example, a reasonable search would probably omit "noise" words such as "LLC," "Inc." or similar designations of organizational status. By way of analogy, the Nevada Secretary of State omits such "noise" words when conducting searches of the index of Uniform Commercial Code financing statements. See Nev. Admin. Code § 104.370.2(d) ( "Words and abbreviations at the end of a name that indicate the existence or nature of an organization as set forth in the "IACANext Hit List of Ending Noise Words" adopted by the International Association of Corporation Administrators will be disregarded.").

15 If "the IRS has notice that a delinquent taxpayer has changed his or her name, and where the Notice of tax lien is filed under the taxpayer's original name, the IRS is under an affirmative duty to refile the Notice of tax lien to show the taxpayer's new name." Davis v. United States, 728 F. Supp. 513, 516 (C.D. Ill. 1989).

16 No testimony was introduced as to when Clark Country first implemented its computerized searching. The parties assumed, and the court accepts that assumption, that the Clark County's search function has been the same at all relevant times during this case.

17 Because the validity of the IRS lien in connection with the $100,000 redemption transactions was not litigated by the parties, the court expresses no opinion on the initial or continuing validity of the transaction by which the IRS received its $100,000.

Validity and Priority Against Third Parties: Filing and Refiling of Notice: Wrong name

A prior tax lien in the name of W.B. Clark, Sr., was not constructive or actual notice to chattel mortgagees where the owner of the property in litigation was W.R. Clark, Sr.

Continental Investments, DC, 53-2 USTC ¶9625.

The recording of an IRS lien under an incorrect name did not provide constructive notice of the lien. The lien was recorded using the first name Gary Reid instead of the debtor's true name Cary Reid. Although there were very few entries in the judgment lien index separating the incorrect and correct spellings, the address listed under the incorrect spelling was different from any of the addresses listed under the correct spelling. In addition, two experienced local examiners who had performed title examinations on the debtor's property had failed to discover the liens recorded under the incorrect spelling.

C.A. Reid, BC-DC Va., 95-1 USTC ¶50,221, 812 BR 443.

A slight misspelling of the taxpayer's name on a tax lien, i.e. "Freidlander" instead of "Friedlander", was not prejudicial to the government's interest because it could not have mislead searchers of the record who contemplated doing business with the taxpayer.

Richter's Loan Co., CA-5, 56-2 USTC ¶9706, 235 F2d 753.

Filing of notice against Manual de J. Castello was insufficient to give notice. The debtor's actual name was Manuel de J. Castillo. The IRS is to be held to strict standards as to the correctness of the name used on Form 688, especially when the state filing system is indexed by name only.

H.T. Haye, DC, 79-1 USTC ¶9192, 461 FSupp 1168.

Notice of tax lien filed against property of a taxpayer, using his nickname, was a proper filing and a subsequent purchaser was held to have received constructive notice of filing.

E. Hannus, DC, 60-2 USTC ¶9574.

On the basis of an assessment for withholding and F.I.C.A. taxes made against three partners doing business as Little Lake Lumber Company, the District Director filed a federal tax lien with the county recorder. The lien listed the name of the taxpayer as "Chas. E. McCulloch et al.", and indicated that his address was "Little Lake Lumber Co., Box 271, Willits, Calif." The lien did not indicate the names of the other two partners. The Court held that the mortgagee had priority over the government in the interests of these partners in the assets. The Court further held that a lien confers priority only on the taxpayers listed on the lien, and refused to apply the doctrine of constructive notice even though there are facts on the lien which warrant its application.

Baugh, Inc., CA-9, 61-2 USTC ¶9726, 297 F2d 692.

A lien filed against a company on a date when trustees to whom its assets had been transferred were the "taxpayers" was not valid.

G. Upton, Inc., DC, 74-2 USTC ¶9814, 378 FSupp 1028.

The Government's lien was superior to the rights of a subsequent mortgagee. Since the taxpayer's correct surname was listed and her residence address corresponded with the premises subject of the title search, the subsequent mortgagee was charged with constructive notice of the lien because due diligence, i.e., an examination of the records, would have disclosed the existence of the lien.

A. Sirico, DC, 66-1 USTC ¶9209, 247 FSupp 421.

A tax lien was not valid against a subsequent mortgagee where the government, after notification that the taxpayer-prior owner had changed her name following her remarriage, failed to refile its notice of lien.

C.S. Clark, DC, 81-1 USTC ¶9406.

Government's filing and indexing its line under the taxpayer-seller's married name but not under the name she used when she acquired the property was proper. The deed received by the purchaser and the title insurer identified the taxpayer under both names.

Pioneer National Title Insurance Co., DC, 81-2 USTC ¶9482.

The IRS's act of recording a lien under the taxpayer's full legal name affected property that he held under a shortened name.

R.B. Polk, CA-9, 87-2 USTC ¶9432, 822 F2d 871.

A tax lien recorded against "Kenneth Gardner Contracting, Inc." was valid against a purchaser who acquired title to property from "K.P. Gardner Contracting, Inc."

J.D. Weeks, DC Md., 87-1 USTC ¶9246.

A bank was improperly denied an opportunity to show that its lien survived a foreclosure involving a deed that was recorded under the name of "Mark H. Moss" instead of "Mark A. Moss."

First American Title Ins. Co., CA-9, 88-2 USTC ¶9408, 848 F2d 969.

A tax lien was valid, despite being filed under a variant of the taxpayer's name, where the lien was properly filed and recorded in the correct index and where a reasonable inspection of the index and chain of title would have revealed the existence of the lien. Under these circumstances, the subsequent purchasers of the property who had no actual knowledge of the lien, therefore, took their interest in the property subject to the lien.

J. Kivel, CA-9, 89-2 USTC ¶9415, 878 F2d 301.

Summary judgment was granted to the government after a finding that the notice of tax lien filed against a corporation for unpaid employment taxes was sufficient. The defendants, subsequent purchasers of real property once owned by the corporation, argued that the notice failed to provide them with constructive notice of the lien due to a misspelling of the corporate name. As the error was slight, the court noted that a reasonable inspection of the index maintained by the county would have revealed the existence of the lien.

J. Feinstein, DC Fla., 89-2 USTC ¶9547, 717 FSupp 1552.

A notice of federal tax lien filed with the appropriate county recorder's office was statutorily adequate despite the fact that it listed the property owner's middle initial incorrectly and inserted an extra space in his last name. The notice substantially complied with statutory requirements because the taxpayer's first name was correctly listed, the error concerning his middle initial arguably involved the least important aspect of his name, and the index card for the notice was filed exactly where it would have been if the extra space had not been inserted in his last name.

J.A. Brightwell, DC Ind., 93-1 USTC ¶50,223, 805 FSupp 1464.

A federal tax lien filed against a debtor in bankruptcy was invalid and, therefore, avoidable by the trustee. A reasonable search of the public index for recording federal tax liens did not reveal the existence of the lien because a misspelling in the name under which the lien was recorded rendered it inadequate to call attention to the government's claim. In addition to the misspelling, the term "Payroll Account" was added after the debtor's name. Since this error was due to erroneous preparation by the IRS, the lien was not perfected or enforceable at the time of the commencement of the case and, consequently, was avoidable.

H.J. De La Vergne II, BC-DC La., 94-1 USTC ¶50,089.

A notice of federal tax lien filed by the IRS against a cleaning establishment in the name of that establishment did not serve to give the tax lien priority over a lien of a judgment creditor of the taxpayer-owner. The notice, filed under the cleaning establishment's name, was not sufficient to provide constructive notice to the judgment creditor as to the existence of the tax lien. Under state (Oklahoma) law, a federal tax lien is indexed alphabetically by the name of the taxpayer; thus, a reasonable and diligent search for liens against property in the taxpayer's name would not have revealed the existence of the tax lien filed under the company's name. The IRS had actual knowledge that the cleaning business was run as a sole proprietorship and had a duty to refile the notice under the name of the taxpayer.

O.S. Renner, DC Okla., 93-2 USTC ¶50,527.

A notice of federal tax lien mistakenly filed under "Robert R. and Kari Rost," rather than "Kari Rost, individually and as Co-Executor of the Estate of Robert R. Rost, Deceased, and Ameritrust Texas National Association, Co-Executor of the Estate of Robert R. Rost, Deceased" would not have prevented a reasonably diligent examiner of the property records from discovering the lien.

National Union Fire Insurance Co., DC Tex., 95-1 USTC ¶50,135.

A genuine issue of material fact existed as to whether the name of a previous owner appeared in the chain of title for a married couple's property upon which the IRS issued a notice of seizure relating to the previous owner's tax liabilities. The chain of title reflected the previous owner's name prior to her divorce and subsequent remarriage while the IRS liens reflected her surname following her remarriage. There was no binding authority holding that filing under a delinquent taxpayer's correct legal name at the time precluded investigation into the sufficiency of the notice, and the statute did not state that such a filing was dispositive as to the sufficiency of the notice. The language of Code Sec. 6323(f)(4) plainly required a filing that would give notice of the lien's existence upon a reasonable inspection. Since the evidence provided to the court was insufficient to determine whether a reasonable inspection of the chain of title would have revealed the IRS lien, the previous owner's and IRS's motions for summary judgment were denied.

R. VanDolen, DC Tenn., 96-1 USTC ¶50,266.

The recording of the lien, which erroneously identified the taxpayer as a corporation, provided constructive notice, since the transferee acknowledged that she knew of the outstanding tax liabilities prior to the property transfer.

S. Taylor, DC Pa., 97-1 USTC ¶50,479. Aff'd, CA-3 (unpublished opinion), 98-1 USTC ¶50,185.

The omission of an individual taxpayer's name from the notice of a federal tax lien that listed only the business name and the taxpayer's spouse as the general partner did not provide constructive notice of the lien. The notice requirement that the taxpayer be identified is a mandatory requirement. Since a reasonable search would not reveal the tax lien against the taxpayer, the lien was not perfected. Therefore, the IRS's claim was not entitled to priority status in the taxpayer's bankruptcy estate.

R.D. Focht, DC Pa., 99-1 USTC ¶50,277.

Summary judgment was granted to the IRS and denied to a joint owner of property in his third-party suit for refund of taxes that were owed by the other joint owner and collected by the IRS out of proceeds from the sale of the property. The IRS's notice of federal tax lien against the delinquent taxpayer was sufficient to protect its interest in the property, even though the lien was not in the proper form or properly indexed with respect to the property due to a misspelling of the taxpayer's name. Because the third-party owner did not purchase his interest from the delinquent taxpayer, he was not a subsequent bona fide purchaser protected under Code Sec. 6323.

J.D. Brady, DC Calif., 99-1 USTC ¶50,334. Aff'd, CA-9 (unpublished opinion), 2000-1 USTC ¶50,131.

Summary judgment was granted to the IRS against a third-party creditor of the taxpayer because the mis-hyphenation of the taxpayer's name in the IRS's tax lien and the subsequent indexing discrepancy was not so extreme as to evade a reasonable inspection.

K. Villard, CA-5 (unpublished opinion), 99-1 USTC ¶50,407, aff'g an unreported District Court decision.

A federal tax lien filed in the name of "PD HILL DEVELOPMENT INC," which appeared directly above a lien for "PDH DEVELOPMENT INC" on the same page, was sufficiently similar to a delinquent taxpayer's true corporate name so that a reasonable inspection of the county lien index would have revealed the lien's existence.

Whiting-Turner, DC Ga., 2000-1 USTC ¶50,342.

Federal tax liens filed against a debtor manufacturing company had priority over a bank's Uniform Commercial Code liens, even though the federal liens did not identify the debtor by its registered name. The IRS liens satisfied the requirements of federal law and sufficiently identified the taxpayer so that a reasonable search would have revealed their existence. Moreover, requiring IRS liens to comply with Article 9 of the UCC and identify the taxpayer with absolute precision would be unduly burdensome to the government's tax-collection efforts.

In re Spearing Tool and Manufacturing Co., Inc., CA-6, 2005-2 USTC ¶50,663, rev'g DC Mich., 2004-1 USTC ¶50,110 and aff'g BC-DC Mich., 2003-1 USTC ¶50,525.


Discharge of Liens: Scope of redemption right

Payment tendered by the U.S. within 120 days of the trust deed sale in foreclosure of real property was a valid exercise of the government's right of redemption under a prior tax lien. The government was not required to accept payment offered by the purchaser at the foreclosure sale in an amount equal to the tax lien. The savings and loan association was not a successor in interest of the foreclosure purchaser who executed a deed of trust as security for a mortgage on the property, so the government correctly tendered the purchase price to the foreclosure purchaser.

Olympic Federal Savings & Loan Assn., CA-9, 81-2 USTC ¶9507, 648 F2d 1218.

An order of the Bankruptcy Court that the IRS could only apply the proceeds it derived from a sale of a bankrupt's land that it had redeemed to pre-petition interest and the principal of the tax debt was reversed. Such proceeds were outside the jurisdiction of the Bankruptcy Court because that court had released the property from its jurisdiction prior to the sale. Thus, the IRS had properly applied the proceeds to the debtor's full tax liability, including post-petition interest and penalties, even though those claims would not have been allowed in the bankruptcy proceeding itself.

Linganore Corp., DC, 81-2 USTC ¶9692.

The title to real property acquired by the U.S. pursuant to the exercise of its right to redeem property subject to a federal tax lien was valid. The state redemption right to which the lien attached constituted an interest in the real property to which a federal tax lien may attach. However, there was insufficient evidence in the record to determine whether the redemption price should have included amounts paid by the person from whom the property was redeemed for repairs and to obtain the beneficial interest in a senior encumbrance not extinguished in the foreclosure sale.

W. Little, CA-9, 83-1 USTC ¶9343, 704 F2d 1100.

Although the petitioner, the purchaser at a foreclosure sale under a second deed of trust, failed to comply with regulatory procedures in requesting reimbursement for his payments to a senior lienor under a first trust deed, the government's title upon redemption under the second trust deed remains encumbered by the first trust deed until the government reimburses the petitioner for his payment to the senior lienor. The government obtained a title upon redemption encumbered by the first trust deed, and the subsequent foreclosure of the first trust deed, invalid as to the government, left the encumbered title undisturbed.

W. Little, CA-9, 86-2 USTC ¶9558, 794 F2d 484.

A federal tax lien on a delinquent taxpayer's one-third interest in real property entitled the IRS to redeem the entire property from a third party who purchased the realty at a foreclosure sale and who had notice of the tax lien. Upon redemption, the IRS steps into the shoes of the foreclosure purchaser, not of the delinquent taxpayer.

R. Vardanega, CA-9, 99-1 USTC ¶50,353, aff'd an unreported District Court decision.

Subsequent to a governmental sale of real property to satisfy a tax lien, and within 120 days of a second sale by a senior lienor of the same property, the United States was entitled to redeem the property from the senior lienor. The federal tax liens were not extinguished by the government's sale but remained in existence until the earlier of either an expiration of the taxpayer's right of redemption or until the time that the senior lienor gave the IRS proper notice and conducted a foreclosure sale. A letter and attachments that a substitute trustee sent to the IRS were sufficient for the latter purpose so that the second sale extinguished the IRS's liens and began the running of the redemption period.

First-Lockhart National Bank, DC Tex., 84-1 USTC ¶9155.

The IRS properly redeemed a foreclosed property encumbered by a federal tax lien when it tendered a check for the amount of the purchase price, plus interest and maintenance, to the senior lienholder-purchaser and filed a certificate of redemption with the proper authorities. A deed of correction, executed by a subsequent purchaser after it learned of the IRS's intention to redeem, did not rescind the foreclosure sale. Therefore, the senior lienholder had full title to the property when the IRS tendered the check. The reasoning in Southwest Products Co., Inc., CA-4,89-2 USTC ¶9482, 882 F2d 113, was adopted.

Commonwealth Asset Services, DC Va., 2005-2 USTC ¶50,515.

Although a limited liability company (LLC) that brought a quiet title action could have redeemed by tendering sufficient funds, it was not entitled to contest the IRS's certificate of redemption because its tender was insufficient. The IRS redeemed the property after the purchaser at a sheriff's sale accepted the IRS's redemption money and waived any defects in the IRS's right to redeem. The amount required from the LLC to redeem the property under state (Minnesota) law included interest to the date of its attempted redemption. Since the LLC tendered only the same amount that the IRS had paid earlier, it failed to include interest from the date of the IRS's redemption and its tender was insufficient.

Real Estate Equity Strategies, LLC, DC Minn., 2007-1 USTC ¶50,413.

A limited liability company (LLC) was not entitled to contest the IRS's certificate of redemption because it failed to tender sufficient funds within the allotted time for redemption. Assuming that the IRS's redemption was invalid, the LLC was required under state (Minnesota) law to tender the amount paid by the foreclosure sale purchaser, plus interest calculated from the date of the sale to the date of its attempted redemption and any additional costs. Since the LLC failed to include interest from the date of the sale its tender was insufficient. Therefore, the LLC forfeited its interest in the property and its related right to contest the IRS's redemption of the property.

Real Estate Equity Strategies, LLC, CA-8, 2008-2 USTC ¶50,529.