SEC . 7122. COMPROMISES.

7122(a) AUTHORIZATION. --The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.

 

7122(b) RECORD. --Whenever a compromise is made by the Secretary in any case, there shall be placed on file in the office of the Secretary the opinion of the General Counsel for the Department of the Treasury or his delegate, with his reasons therefor, with a statement of --

 

7122(b)(1) The amount of tax assessed,

 

7122(b)(2) The amount of interest, additional amount, addition to the tax, or assessable penalty, imposed by law on the person against whom the tax is assessed, and

 

7122(b)(3) The amount actually paid in accordance with the terms of the compromise.

 

Notwithstanding the foregoing provisions of this subsection, no such opinion shall be required with respect to the compromise of any civil case in which the unpaid amount of tax assessed (including any interest, additional amount, addition to the tax, or assessable penalty) is less than $50,000. However, such compromise shall be subject to continuing quality review by the Secretary.

 

7122(c) STANDARDS FOR EVALUATION OF OFFERS. --

 

7122(c)(1) IN GENERAL. --The Secretary shall prescribe guidelines for officers and employees of the Internal Revenue Service to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute.

 

7122(c)(2) ALLOWANCES FOR BASIC LIVING EXPENSES. --

 

7122(c)(2)(A) IN GENERAL. --In prescribing guidelines under paragraph (1), the Secretary shall develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.

 

7122(c)(2)(B) USE OF SCHEDULES. --The guidelines shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph (A) is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses.

 

7122(c)(3) SPECIAL RULES RELATING TO TREATMENT OF OFFERS. --The guidelines under paragraph (1) shall provide that --

 

7122(c)(3)(A) an officer or employee of the Internal Revenue Service shall not reject an offer-in-compromise from a low-income taxpayer solely on the basis of the amount of the offer; and

 

7122(c)(3)(B) in the case of an offer-in-compromise which relates only to issues of liability of the taxpayer --

 

7122(c)(3)(B)(i) such offer shall not be rejected solely because the Secretary is unable to locate the taxpayer's return or return information for verification of such liability; and

 

7122(c)(3)(B)(ii) the taxpayer shall not be required to provide a financial statement.

 

7122(d) ADMINISTRATIVE REVIEW. --The Secretary shall establish procedures --

 

7122(d)(1) for an independent administrative review of any rejection of a proposed offer-in-compromise or installment agreement made by a taxpayer under this section or section 6159 before such rejection is communicated to the taxpayer; and

 

7122(d)(2) which allow a taxpayer to appeal any rejection of such offer or agreement to the Internal Revenue Service Office of Appeals.

 

§601.203., Offers in compromise

(a) General

 

(1) The Commissioner may compromise, in accordance with the provisions of section 7122 of the Code, any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense. Certain functions of the Commissioner with respect to compromise of civil cases involving liability of $100,000 or more, based solely on doubt as to liability, have been delegated to regional commissioners and, for cases arising in the District Office, Foreign Operations District, to the Assistant Commissioner (Compliance). The authority concerning liability of $100,000 or more based on doubt as to collectibility or doubt as to both collectibility and liability has been delegated to the Director, Collection Division, and regional commissioners. The authority with respect to compromise of civil cases involving liability under $100,000, and of certain specific penalties has been delegated to district directors, assistant district directors, and (including the District Director and Assistant District Director, Foreign Operations District), regional directors of Appeals, and chiefs and associate chiefs, Appeals offices. The authority concerning offers in compromise of penalties based solely on doubt as to liability, if the liability is less than $100,000, has also been delegated to service center directors and assistant service center directors. In civil cases involving liability of $500 or over and in criminal cases the functions of the General Counsel are performed by the Chief Counsel for the Internal Revenue Service. These functions are performed in the District Counsel, Regional Counsel, or National Office as appropriate. (See also paragraph (c) of this section.) In cases arising under chapters 51, 52, and 53 of the Code, offers are acted upon by the Bureau of Alcohol, Tobacco and Firearms.

 

(2) An offer in compromise of taxes, interest, delinquency penalties, or specific penalties may be based on either inability to pay or doubt as to liability. Offers in compromise arise usually when payments of assessed liabilities are demanded, penalties for delinquency in filing returns are asserted, or specific civil or criminal penalties are incurred by taxpayers. A criminal liability will not be compromised unless it involves only the regulatory provisions of the Internal Revenue Code and related statutes. However, if the violations involving the regulatory provisions are deliberate and with intent to defraud, the criminal liabilities will not be compromised.

 

(b) Use of prescribed form. --Offers in compromise are required to be submitted on Form 656, properly executed, and accompanied by a financial statement on Form 433 (if based on inability to pay). Form 656 is used in all cases regardless of whether the amount of the offer is tendered in full at the time the offer is filed or the amount of the offer is to be paid by deferred payment or payments. Copies of Form 656 and Form 433 may be obtained from district directors. An offer in compromise should be filed with the district director or service center director.

 

(c) Consideration of offer

 

(1) An offer in compromise is first considered by the director having jurisdiction. Except in certain penalty cases, an investigation of the basis of the offer is required. The examining officer makes a written recommendation for acceptance or rejection of the offer. If the director has jurisdiction over the processing of the offer he or she will:

 

(i) Reject the offer, or

 

(ii) Accept the offer if it involves a civil liability under $500, or

 

(iii) Accept the offer if it involves a civil liability of $500 or more, but less than $100,000, or involves a specific penalty, and the District Counsel concurs in the acceptance of the offer, or

 

(iv) Recommend to the National Office the acceptance of the offer if it involves a civil liability of $100,000 or over.

 

(2)

 

(i) If the district director does not have jurisdiction over the entire processing of the offer, the offer is transmitted to the appropriate District Counsel if the case is one in which:

 

(a) Recommendations for prosecution are pending in the Office of the Chief Counsel, the Department of Justice, or in an office of a United States attorney, including cases in which criminal proceedings have been instituted but not disposed of and related cases in which offers in compromise have been submitted or are pending;

 

(b) The taxpayer is in receivership or is involved in a proceeding under any provision of the Bankruptcy Act;

 

(c) The taxpayer is deceased; in joint liability cases, where either taxpayer is deceased;

 

(d) A proposal is made to discharge property from the effect of a tax lien or to subordinate the lien or liens;

 

(e) An insolvent bank is involved;

 

(f) An assignment for the benefit of creditors is involved;

 

(g) A liquidation proceeding is involved; or

 

(h) Court proceedings are pending, except Tax Court cases.

 

(ii) The District Counsel considers and processes offers submitted in cases described in paragraph (c)(2)(i)(a) through (h) of this section and forwards those offers to the district director, service center director, Regional Counsel, or Office of Chief Counsel in Washington, as appropriate.

 

(iii) In those cases described in (a) of subdivision (i) of this subparagraph no investigation will be made unless specifically requested by the office having jurisdiction of the criminal case.

 

(iv) In those cases described in (b) through (h) of subdivision (i) of this subparagraph the district director retains the duplicate copy of the offer and the financial statement for investigation. After investigation, the district director transmits to the appropriate District Counsel for consideration and processing his or her recommendation for acceptance or rejection of the offer together with the examining officer's report of the investigation.

 

(3) The district directors, assistant district directors (including the District Director and Assistant District Director, Foreign Operations District), service center directors, assistant service center directors, Regional Directors of appeals, and Chiefs and Associate Chiefs, Appeals Offices are authorized to reject any offer in compromise referred for their consideration. Unacceptable offers considered by the District Counsel, Regional Counsel, or Office of Chief Counsel in Washington, or the Appeals office are also rejected by the district directors (including the Director, Foreign Operations District) as applicable. If an offer is not acceptable, the taxpayer is promptly notified of the rejection of that offer. If an offer is rejected, the sum submitted with the offer is returned to the proponent, unless the taxpayer authorizes application of the sum offered to the tax liability. Each Regional Commissioner will perform a post review of offers accepted, rejected, or withdrawn by the district director's office if the offer covers liabilities of $5,000 or more. The post review will cover a sampling of cases processed by the Collection function and all cases processed by the Examination function.

 

(4) If an offer involving unpaid liability of $100,000 or more is considered acceptable by the office having jurisdiction over the offer, a recommendation for acceptance is forwarded to the National Office or Regional Office, as appropriate, for review. If the recommendation for acceptance is approved, the offer is forwarded to the Regional Counsel or Office of Chief Counsel in Washington , as appropriate, for approval. After approval by the Regional Counsel or Office of Chief Counsel in Washington, as appropriate, it is forwarded to the Assistant Commissioner (Compliance), Director, Collection Division, or Regional Commissioner, as appropriate, for acceptance. The taxpayer is notified of the acceptance of the offer in accordance with its terms. Acceptance of an offer in compromise of civil liabilities does not remit criminal liabilities, nor does acceptance of an offer in compromise of criminal liabilities remit civil liabilities.

 

(d) Conferences. --Before filing a formal offer in compromise, a taxpayer may request a meeting in the office which would have jurisdiction over the offer to explore the possibilities of compromising unpaid tax liability. After all investigations have been made, the taxpayer may also request a meeting in the office having jurisdiction of the offer to determine the amount which may be accepted as a compromise. If agreement is not reached at such meeting and the district director has processing jurisdiction over the offer, the taxpayer will be informed that the taxpayer may request consideration of the case by an Appeals office. The request may be in writing or oral. If the tax, penalty, and assessed (but not accrued) interest sought to be compromised exceeds $2,500 for any return, taxable year or taxable period, a written protest is required. Taxpayers and their representatives are required to comply with the applicable conference and practice requirements. See subpart E of this part. [Reg. §601.203.]

.01 Historical Comment: As last amended 11/8/96 by T.D. 8685.

Michael Henry v. United States of America , Internal Revenue Service.

U.S. District Court, East. Dist. La. ; Civ. 02-0968, July 6, 2004 .

[ Code Secs. 7121 and 7122]

Closing agreement: Authority to enter: Compromises: Attorney General: Authority. --

Since no authorized party ever signed a written settlement agreement on behalf of the government, no binding and enforceable settlement agreement existed for the tax year at issue. The IRS was granted partial summary judgment and the taxpayer's similar motion was denied in part. The taxpayer's issues under the internal revenue laws had been referred to the United States Department of Justice; therefore, only the Attorney General or his delegate had authority to enter into a binding settlement agreement, not the IRS ( Code Sec. 7122(a) and Reg. §601.203).

ORDER AND REASONS

ENGELHARDT, District Judge: Before the Court is the issue of whether the parties previously entered into a binding settlement agreement of Plaintiff's income tax liability for tax year 1999 entitling him to a judgment in his favor of $1,745,403. By Minute Entries dated November 20, 2003 and December 18, 2003 , Magistrate Judge Shushan ordered the parties to file cross motions for summary judgment on this issue. See Rec. Doc. Nos. 80 and 88. The cross-motion for partial summary judgment filed by the Government on December 4, 2003 ("Government's Cross-Motion") addresses only this issue. Plaintiff's December 24, 2003 motion for partial summary judgment, however, raises this issue, as well as alternative arguments, in support of judgment in his favor.

Specifically, though urging that a binding settlement exists in his favor, Plaintiff alternatively argues that he should prevail on his refund claim relating to the exchange of shares he held in MegsInet Inc. for stock in Corecomm, Inc., because the exchange qualified for nontaxable treatment under 26 U.S.C. §367 and/or because the Corecomm shares could not be assigned. Given the specific directive of Magistrate Judge Shushan's Minute Entries, and the posture of this case the Court will presently address only the issue of whether a binding settlement exists with regard to Plaintiff's 1999 tax liability. ¹

Regarding this issue, Plaintiff insists that the IRS Forms 3363 and 4549 provided to him by IRS Revenue Agent Debbie Arceneaux, and signed by him on or about March 14, 2003 , constitute a binding settlement agreement between the parties. The Court disagrees. Upon referral to the United States Department of Justice ("DOJ") for prosecution or defense, relevant statutes provide that only the Attorney General or his delegate, not the IRS , can enter into a binding settlement agreement with regard to disputes arising under the internal revenue laws. See 26 U.S.C. §§7121, 7122; see also Slovacek v. United States [ 98-1 USTC ¶50,397], 40 Fed.Cl. 828, 833 (1998); Int'l Paper Co. v United States [ 96-2 USTC ¶50,686], 36 Fed.Cl. 313, 321 (1996). ² Here, that person is Eileen J. O'Connor, Assistant Attorney General of the United States Department of Justice, Tax Division, or her delegate. Neither Ms. O'Connor nor her delegate has signed a settlement agreement regarding Plaintiff's 1999 tax liability.

Furthermore, the parties' submissions to the Court and their correspondence reflect their understanding that the proposed settlement agreed to on or about February 27, 2003 , which led to Plaintiff's execution of the Forms 3363 and 4549 in March 2003, still required approval by Ms. O'Connor or her delegate to become effective. See December 22, 2002 Consent Motion to Dismiss Action Without Prejudice or, in the Alternative, Consent Motion for Continuance of Certain Deadlines and Hearing (Rec. Doc. No. 46) at page 9, ¶32 (effectuation of settlement would require that terms of settlement be in writing and approved by Ms. O'Connor or her delegate); March 25, 2003 Correspondence from Plaintiff to Lynne Murphy of the DOJ, Exhibit 12 to Government's Cross-Motion (notifying Government that Plaintiff would ask Court to reinstate litigation "if all matters have not been approved by April 1 [, 2003]"); March 25, 2003 Correspondence from Lynne Murphy of the DOJ to Plaintiff, Exhibit 13 to Government's Cross-Motion (stating that settlement would not be approved by April 1 because the DOJ and the IRS cannot consider or approve settlement until all delinquent tax returns, specifically 1996, 1997, and 2001 are filed). Certain documents, created after March 14, 2003 , additionally reflect Plaintiff's acknowledgment that the required approval had not been obtained. See March 26, 2003 Correspondence from Plaintiff to Lynne Murphy of the DOJ, Exhibit 15 to Government's Cross-Motion (suggesting litigation as alternative to "all of the bureaucracy required on signature sign offs to pay the partial refund" but referencing the possibility that she might "like to discuss [] doing the settlement as originally discussed" and instructing her to "present [her] proposal in writing"]; April 11, 2003 Consent Motion for Enlargement of Time for Plaintiff Michael Henry to Reinstate Refund Action (Rec. Doc. No. 51) at pages 7-8, ¶ ¶19-21 (noting requisite approval procedure, as stated in December 11, 2002 Consent Motion, could begin once issue of Plaintiff's 1996 and 1997 tax returns was resolved and stating that Plaintiff would litigate the dispute if "parties ultimately determine that settlement is not feasible"); see also Government's Statement of Material Facts (Rec. Doc. No. 85) at ¶¶9-11, 20-21, 27-30, 33-35 & 37-45). ³

Because neither Eileen J. O'Connor nor her delegate ever signed a written settlement agreement, the Court finds that no binding and enforceable settlement exists between Plaintiff and the Government regarding Plaintiff's 1999 tax liability. ⁴ Accordingly, the December 4, 2003 Cross-Motion of United States for Partial Summary Judgment (Rec. Doc. No. 85) is GRANTED. The December 24, 2004 Motion for Partial Summary Judgment by Michael Henry (Rec. Doc. No. 90) is DENIED IN PART. The Court reserves ruling on the alternative grounds for relief asserted in Plaintiff's Motion for Partial Summary Judgment.

¹ The Court will consider Plaintiff's alternative arguments regarding his 1999 tax liability in a separate ruling.

² Perez v. United States [ 2002-2 USTC ¶50,795], 312 F.3d 191 (5th Cir. 2002), cited by Plaintiff for the proposition that an IRS examiner can provide the "acceptance of the [ IRS ] District Director" required by Form 4549, is distinguishable. The issue in that case was whether evidentiary submissions, Forms 4340 and 4549, were sufficient evidence of assessment by the IRS and notice to the taxpayer of unpaid taxes. It did not involve the issue of settlement authority presented here.

³ While Plaintiff's submission to the Court does not affirmatively dispute the Government's recitation of events in its Statement of Material Facts, it does dispute the legal effect of Plaintiff's execution of Forms 3363 and 4549.

⁴ The Court notes that the obstacle to settlement appears to be presented in paragraph 40 of the Government's Statement of Material Facts. There, the Government states that, in processing the proposed settlement, Ms. Murphy discovered that the IRS had not verified the information set forth in the Section 367 statement provided by Plaintiff. Correspondence dated August 12, 2003 from Ms. Murphy to Plaintiff's former counsel of record reflects that, after additional inquiry, Ms. Murphy had determined that she would not be able to recommend, and the Government would not be able to consider approving, the proposed settlement without formal discovery regarding the nontaxable treatment under Section 367. See August 12, 2003 Correspondence from Lynne Murphy of the DOJ to Brian Eddington, Exhibit 22 to Government's Cross-Motion; see also Government's Statement of Material Facts, ¶40-53.

Becker Holding Corporation and Subsidiaries v. Commissioner.

Docket No. 6400-03 . T.C. Memo. 2004-58. Filed March 10, 2004 . [Appealable, barring stipulation to the contrary, to CA-11. -]


[Code Sec. 6501]

Exception to period of limitations: Waiver of limitation period: Termination of waiver. --

A corporation's waiver of the period of limitations for an IRS assessment was deemed valid and enforceable. The court rejected the taxpayer's assertion that the waiver was conditioned upon a settlement agreement between the parties, which was subsequently invalidated. The Form 872-A executed by the taxpayer did not state any conditions precedent to its validity. Likewise, the cover letter accompanying the executed form did not restrict the language of the form. Moreover, the taxpayer failed to execute a Form 872-T, which would have terminated the extension of time prior to the issuance of a notice of deficiency.

[Code Sec. 7122]

Compromises: Authority to accept offers: Delegation of authority. --

A corporation and an Appeals officer did not enter into a valid settlement agreement concerning the entity's delinquent taxes for three tax years. The Appeals officer did not possess the requisite authority under Delegation Order No. 66 to bind the IRS to a compromise agreement. While the Appeals officer's team manager did have such authority, she did not approve the agreement. Because it was the taxpayer's responsibility to determine the Appeals officer's authority, the IRS was not bound by an apparent settlement. As such, the notice of deficiency issued to the taxpayer was valid. -

Jerald David August and James P. Dawson, for the petitioner. Andrew M. Tiktin and Sergio Garcia-Pages, for the respondent.

MEMORANDUM OPINION

 

HAINES, Judge: The matter is before the Court on the parties' cross-motions for partial summary judgment pursuant to Rule 121.¹ The issues to be decided are: (1) Whether the parties agreed to a settlement with respect to petitioner's tax years ending September 30, 1994 , 1995, and 1996 (years at issue); and, if not, (2) whether the notice of deficiency² is barred because it was mailed after the period of limitations on the assessment of taxes had expired.

 

The following facts are based upon the parties' pleadings, memoranda, and supporting documents. See Rule 121(b). They are stated solely for the purpose of deciding the parties' cross-motions for partial summary judgment, and not as findings of fact in this case. Fed. R. Civ. P. 52(a).

Background

 

Petitioner is a corporation with its principal place of business in Fort Pierce , Florida . During the years at issue, petitioner was the parent company of a consolidated group of affiliated corporations engaged in various aspects of the citrus industry.

 

In 1991, petitioner agreed to purchase stock owned by R. William Becker (Mr. Becker) in petitioner. One of the documents evidencing the transaction, the Agreement, dated March 15, 1991 , provided, in part, that for a period of 3 years Mr. Becker would not "directly or indirectly engage in the processing or sale of citrus concentrate or fresh juices" (covenant not to compete).

 

The total stated consideration for the transaction was $23,953,934 plus interest, payable over a period of 5 years. In its Federal income tax return for the tax year ending September 30, 1996 , petitioner deducted $5,307,600 as an amortization expense. Respondent's Examination Division disallowed the amortization deduction in its entirety.

 

The case at bar was assigned to Appeals Officer Neil Kaufman (Mr. Kaufman) to see whether it could be administratively resolved. Mr. Kaufman was also assigned the case involving Mr. Becker (the Becker case) in which the Examination Division took the position that $5,307,600 was allocable to the covenant not to compete, resulting in Mr. Becker's having to recognize $5,307,600 of ordinary income in 1996. Terri N. Beach (Ms. Beach) was Mr. Kaufman's supervisor and held the position of Appeals Team Manager.

 

The parties executed Form 872, Consent to Extend the Time to Assess Tax, extending the period of limitations for the years at issue to June 30, 2002 . Shortly thereafter, Lawrence Y. Leonard (Mr. Leonard) undertook the representation of petitioner before respondent's Appeals Office (Appeals). Mr. Leonard was aware that Mr. Kaufman had also been assigned the Becker case.

 

On April 8, 2002 , Mr. Leonard, on behalf of petitioner, wrote a letter to Mr. Kaufman proposing, inter alia:

 

Of the $5,307,600 which remains in dispute regarding the covenant not to compete signed by William Becker, 85% (or $4,511,460) would be allowed as a deduction for the 1996 fiscal year. This would increase the net operating loss for 1996. A net operating loss carryback of $4,511,460 would be taken for the 1993 fiscal year.

 

On April 18, 2002 , Mr. Kaufman wrote a letter to Mr. Leonard which stated:

 

I have considered your settlement proposal in your faxed letter to me of April 8, 2002 . My response is as follows:

 

l I am willing to allow 80% of the remaining $5,307,000 ($4,246,000) as a deduction in the 1996 fiscal year.

 

l I believe that the 1993 fiscal year is open only under a loss carryback and thus the originally claimed 1995 bad debt could not be claimed in that year.

 

l Unless the 1997 fiscal year loss has already been examined by the Examination Division, I cannot allow anything at this time. You may be able to file a carryback subsequently.

 

l The rest of your proposal would be acceptable.

 

On May 28, 2002 , Mr. Leonard wrote a letter to Mr. Kaufman enclosing duplicate executed Forms 872-A, Special Consent to Extend the Time to Assess Tax, which stated:

 

Enclosed please find two executed Special Consent to Extend the Time to Assess Tax. As we have discussed, it appears that the sole issue impeding our resolution of this matter is the carryback of net operating loss from 1997 to 1995. I will forward to you within the next week my research which indicates that the 1997 loss is required to be taken in 1995 if 1995 is an open year. This letter will also confirm our discussion that 1993 remains an open year for the purpose of net operating loss carryback. If this information is incorrect, please let me know.

 

Mr. Leonard, on behalf of petitioner, signed Form 872-A on May 28, 2002 , and Mr. Kaufman signed it on behalf of respondent on May 29, 2002 . The Form 872-A signed by the parties had not been altered by any insertions, additions, or deletions. The legal effect of the Form 872-A signed by the parties is in dispute.

 

On June 4, 2002 , respondent issued a notice of deficiency in the Becker case determining that Mr. Becker must recognize $5,307,600 of ordinary income during the taxable year 1996.

 

On July 8, 2002 , Mr. Leonard again wrote Mr. Kaufman and stated:

 

As we have discussed, my client, Becker Holding Corporation, hereby accepts the proposal which you outlined in your April 18, 2002 letter. As I understand your proposal you will:

 

(1) allow 80% of the remaining $5,307,000.00, to wit $4,246,000.00 as a deduction in the 1996 fiscal year. This would increase the net operating loss for 1996, which would be carried back to the 1993 fiscal year.

 

(2) allow a fuel tax credit for 1993 which was being disputed as a double deduction, but which in fact was not, in the amount of $87,467.00.

 

(3) make no changes to tax years 1991 and 1992.

 

As we had also discussed, there remain issues outstanding for the above stated tax periods, as well as tax period