given to a taxpayer when the Service intends to collect this penalty.

Section 7122(a) states that:

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.

Section 7122 (a) grants the Secretary broad authority in determining what types of liabilities to compromise. ¹ The express language of the section states that the Secretary may compromise “any civil or criminal case arising under the internal revenue laws.” This code section does not limit this authority to any particular type of liability and should not be interpreted in a manner to limit the Secretary’s discretion to compromise.

*************

¹   Additionally, Treas. Reg. § 301.7122 -1(a)(2) states that an agreement to compromise may relate to a civil or criminal liability for taxes, interest, or penalties.

*************

Your incoming memo argues that section 7122(b) only applies to penalties that are “imposed by law” and you interpret this phrase to refer to taxes or penalties that are determined and assessed by the Service pursuant to the Internal Revenue Code. This argument, however, fails to consider the fact that section 7122(a) conveys to the Secretary broad discretion in compromising liabilities. There is no indication either in the Code or legislative history that section 7122(b) is, in any way, intended to limit the scope of section 7122 (a). Further, it is irrelevant to section 7122 whether the Service makes the determination of the amount of penalty due or whether the penalty is determined by the Tax Court.

Thus, we disagree that a section 6673(a)(1) penalty is not subject to compromise under section 7122. We nonetheless believe that such penalties should only be compromised in limited circumstances as they, generally, fail to qualify for compromise under the standards set out for the three types of compromise in the Treasury Regulations and the Internal Revenue Manual. The three bases under which a liability can be compromised are doubt as to liability, doubt as to collectibility, and effective tax administration. Treas. Reg. § 301.7122 -1(b)(1) states that doubt as to liability does not exist where the liability has been established by a court decision or judgment. See also Rev. Proc. 2003-71. Since the 6673(a)(1) penalty is imposed by the court, it has obviously been established by court decision.

The Service could consider compromises for section 6673(a)(1) penalties based on doubt as to collectibilty. Policy Statement P-5-89, however, states that an offer-in-compromise may be rejected if acceptance, in any way, would be detrimental to the Government’s interest. Further, IRM 5.8.7.7 states that an offer-in-compromise can be rejected on policy grounds if public reaction to the acceptance would be so negative that future voluntary compliance by the public would be threatened. Compromising a section 6673(a)(1) penalty could diminish the effect that section 6673(a) has on deterring frivolous litigation. This penalty is an important tool to deter taxpayers from making frivolous arguments in the Tax Court. As the penalty is imposed by the Tax Court as a result of taxpayer conduct, institutional comity could best be served by deferring to Tax Court discretion as to when a taxpayer should be relieved of the obligation to pay a Court imposed penalty. Any decision by the Service to compromise a section 6673(a)(1) penalty could be viewed as overriding the court’s determination that a penalty should be imposed.

In light of these factors, we believe that section 6673(a)(1) penalties should not be compromised as a general matter of policy. However, we do not believe that there should be a categorical rule to not compromise these liabilities. Instances could exist where compromise would be appropriate. For example, if a formerly noncompliant taxpayer were to attempt to become compliant and abandon frivolous arguments, then perhaps these circumstances would warrant compromise. It is ultimately the decision of the Service to determine what policy to adopt in this regard.

The same considerations apply to compromises under an effective tax administration standard. Treas. Reg. § 301.7122 -1(b)(3)(iii) states that no compromise to promote effective tax administration may be entered into if compromise of the liability would undermine compliance with internal revenue laws. As this penalty was enacted to discourage the filing of frivolous Tax Court litigation, compromise could dilute the value of this penalty and could undermine compliance with the internal revenue laws. Again, the policy decision to compromise under this standard rests with the Service.

Additionally, per conversations we have had with personnel in the Department of Justice, we have been informed that, as a general matter, the Department of Justice does not compromise sanctions imposed under Fed. R. Civ. P. 11 or Fed. R. App. P. 38 for making frivolous arguments. Often times, these penalties are imposed in conjunction with prohibitions on the filing of any additional suits until the penalties are paid. Thus, an unpaid penalty can serve to deter the filing of further frivolous appeals and new cases.

You have also asked this office to address issues concerning the assessment of section 6673(a)(1) penalties. As we understand the problem, there are instances in which assessments for section 6673(a)(1) penalties are undistinguishable from assessments for other types of penalties. Section 6673(a)(1) assessments need to be easily identifiable for compromise purposes. We are working with Compliance and Appeals to ensure that uniform procedures addressing this concern are adopted.

Finally, we note that the issues a taxpayer may raise at a CDP hearing involving a section 6673(a)(1) penalty are limited. The merits of the penalty may not be raised under section 6330(c)(2)(B) and also pursuant to the doctrine of res judicata. Although the Service can as a legal matter compromise the penalty under collectibility or effective tax administration grounds for the reasons stated, we generally recommend against compromise on policy grounds. Additionally, if the taxpayer raises no legitimate verification issues, is not entitled to an installment agreement due to non-compliance with return filing requirements, and raises no other nonfrivolous issue, then consistent with the policy stated in Chief Council Notice 2003-031, the taxpayer is not entitled to a face-to-face hearing. Also, we note that cases involving section 6673(a)(1) penalties are often good cases to file motions for failure to state a claim or summary judgment. Additionally, these cases would generally be appropriate cases in which to file a motion to collect while the case is pending under section 6330 (e)(2). Further, the Service should request that in conjunction with imposing the penalty, the court should issue an order prohibiting the filing of any further appeals by the taxpayer in another CDP case until the penalty is paid.

Please call (202) 622-3610 if you have any further questions.

CC: Cheryl Sherwood, Director Payment Compliance (SB/SE)

Jeffrey Allison, Director, Tax Policy & Procedure (Appeals)

Co

Technical Advice Memorandum

Number: 200434001

Internal Revenue Service

July 2, 2004

Office of Chief Counsel

Internal Revenue Service

Memorandum

Number: 200434001

Release Date: 8/20/04

CC:PA:CBS:BR1

GL-145635-03

UILC: 62.01.00-00

date: July 2, 2004

to: Associate Area Counsel

SB/SE:5 ( Las Vegas )

from: Mitchel S. Hyman

Senior Technician Reviewer, Branch 1

Collection, Bankruptcy, & Summonses

(Procedure & Administration)

subject: IRC SECTION 6673(a)(1) and OFFERS-IN COMPROMISE

This Chief Counsel Advice responds to your request for assistance. This advice may not be used or cited as precedent.

ISSUE

Should the Internal Revenue Service (“Service”) consider an offer-in-compromise submitted by a taxpayer with respect to an I.R.C. § 6673(a)(1) penalty?

CONCLUSION

The Secretary can, as legal matter, compromise section 6673(a)(1) penalties. However, policy concerns exist that weigh against compromising section 6673(a)(1) penalties.

BACKGROUND

During a collection due process (“CDP”) hearing, a taxpayer may attempt to raise various issues regarding a section 6673(a)(1) penalty imposed by the Tax Court in an earlier CDP proceeding. In particular, a taxpayer may attempt to submit offers-in-compromise in satisfaction of section 6673(a)(1) penalties. Section 7122(b) states that whenever the Secretary enters into a compromise, a statement shall be made consisting of the following: (1) the amount of the tax assessed, (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, (3) the amount actually paid in accordance with the terms of the compromise. You interpret the phrase “imposed by law” in section 7122(b)(2) to mean a tax or penalty that is determined or assessed by the Service pursuant to the Internal Revenue Code. As section 6673(a)(1) penalties are imposed as a matter of judicial discretion, you determine that section7122 does not authorize the Secretary to compromise them. Additionally, your incoming memo states that section 7122(b) indicates that an offer-in-compromise applies to only certain types of liabilities: a tax, interest, an additional amount, addition to tax, or an assessable penalty. You determine that a section 6673(a)(1) penalty is a sanction or award for costs and, as such, is not included in the type of liabilities covered by section 7122(b).

Your memo further states that, assuming section 7122 does apply to section 6673(a)(1) penalties, these penalties may not be compromised under either “doubt as to liability” or “effective tax administration” standards. In addition, you conclude that the penalties should not be compromised under “doubt as to collectibility” standards.

LAW AND ANALYSIS

A section 6673(a)(1) penalty is unique in that it is imposed solely as a matter of judicial discretion. This office has previously determined that collection due process (“CDP”) rights extend to the collection of these penalties. Pursuant to I.R.C. § 6671(a), section 6673(a)(1) penalties are assessed and collected in the same manner as a tax. I.R.C. § 6330(a)(1) states that no levy may be made on any person unless such person has been notified in writing before such levy is made. Section 6330(3)(A) states that the required notice must include the amount of the unpaid tax. Because a section 6673(a)(1) penalty is assessed and collected as a tax, notice of a right to an administrative hearing must be given to a taxpayer when the Service intends to collect this penalty.

Section 7122(a) states that:

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.

Section 7122(a) grants the Secretary broad authority in determining what types of liabilities to compromise. ¹ The express language of the section states that the Secretary may compromise “any civil or criminal case arising under the internal revenue laws.” This code section does not limit this authority to any particular type of liability and should not be interpreted in a manner to limit the Secretary’s discretion to compromise.

*************

¹   Additionally, Treas. Reg. § 301.7122 -1(a)(2) states that an agreement to compromise may relate to a civil or criminal liability for taxes, interest, or penalties.

*************

Your incoming memo argues that section 7122(b) only applies to penalties that are “imposed by law” and you interpret this phrase to refer to taxes or penalties that are determined and assessed by the Service pursuant to the Internal Revenue Code. This argument, however, fails to consider the fact that section 7122(a) conveys to the Secretary broad discretion in compromising liabilities. There is no indication either in the Code or legislative history that section 7122(b) is, in any way, intended to limit the scope of section 7122(a). Further, it is irrelevant to section 7122 whether the Service makes the determination of the amount of penalty due or whether the penalty is determined by the Tax Court.

Thus, we disagree that a section 6673(a)(1) penalty is not subject to compromise under section 7122.  We nonetheless believe that such penalties should only be compromised in limited circumstances as they, generally, fail to qualify for compromise under the standards set out for the three types of compromise in the Treasury Regulations and the Internal Revenue Manual. The three bases under which a liability can be compromised are doubt as to liability, doubt as to collectibility, and effective tax administration. Treas. Reg. § 301.7122 -1(b)(1) states that doubt as to liability does not exist where the liability has been established by a court decision or judgment. See also Rev. Proc. 2003-71. Since the 6673(a)(1) penalty is imposed by the court, it has obviously been established by court decision.

The Service could consider compromises for section 6673(a)(1) penalties based on doubt as to collectibilty. Policy Statement P-5-89, however, states that an offer-in-compromise may be rejected if acceptance, in any way, would be detrimental to the Government’s interest. Further, IRM 5.8.7.7 states that an offer-in-compromise can be rejected on policy grounds if public reaction to the acceptance would be so negative that future voluntary compliance by the public would be threatened. Compromising a section 6673(a)(1) penalty could diminish the effect that section 6673(a) has on deterring frivolous litigation. This penalty is an important tool to deter taxpayers from making frivolous arguments in the Tax Court. As the penalty is imposed by the Tax Court as a result of taxpayer conduct, institutional comity could best be served by deferring to Tax Court discretion as to when a taxpayer should be relieved of the obligation to pay a Court imposed penalty. Any decision by the Service to compromise a section 6673(a)(1) penalty could be viewed as overriding the court’s determination that a penalty should be imposed.

In light of these factors, we believe that section 6673(a)(1) penalties should not be compromised as a general matter of policy. However, we do not believe that there should be a categorical rule to not compromise these liabilities. Instances could exist where compromise would be appropriate. For example, if a formerly noncompliant taxpayer were to attempt to become compliant and abandon frivolous arguments, then perhaps these circumstances would warrant compromise. It is ultimately the decision of the Service to determine what policy to adopt in this regard.

The same considerations apply to compromises under an effective tax administration standard. Treas. Reg. § 301.7122 -1(b)(3)(iii) states that no compromise to promote effective tax administration may be entered into if compromise of the liability would undermine compliance with internal revenue laws. As this penalty was enacted to discourage the filing of frivolous Tax Court litigation, compromise could dilute the value of this penalty and could undermine compliance with the internal revenue laws. Again, the policy decision to compromise under this standard rests with the Service.

Additionally, per conversations we have had with personnel in the Department of Justice, we have been informed that, as a general matter, the Department of Justice does not compromise sanctions imposed under Fed. R. Civ. P. 11 or Fed. R. App. P. 38 for making frivolous arguments. Often times, these penalties are imposed in conjunction with prohibitions on the filing of any additional suits until the penalties are paid. Thus, an unpaid penalty can serve to deter the filing of further frivolous appeals and new cases.

You have also asked this office to address issues concerning the assessment of section 6673(a)(1) penalties. As we understand the problem, there are instances in which assessments for section 6673(a)(1) penalties are undistinguishable from assessments for other types of penalties. Section 6673(a)(1) assessments need to be easily identifiable for compromise purposes. We are working with Compliance and Appeals to ensure that uniform procedures addressing this concern are adopted.

Finally, we note that the issues a taxpayer may raise at a CDP hearing involving a section 6673(a)(1) penalty are limited. The merits of the penalty may not be raised under section 6330(c)(2)(B) and also pursuant to the doctrine of res judicata. Although the Service can as a legal matter compromise the penalty under collectibility or effective tax administration grounds for the reasons stated, we generally recommend against compromise on policy grounds. Additionally, if the taxpayer raises no legitimate verification issues, is not entitled to an installment agreement due to non-compliance with return filing requirements, and raises no other nonfrivolous issue, then consistent with the policy stated in Chief Council Notice 2003-031, the taxpayer is not entitled to a face-to-face hearing. Also, we note that cases involving section 6673(a)(1) penalties are often good cases to file motions for failure to state a claim or summary judgment. Additionally, these cases would generally be appropriate cases in which to file a motion to collect while the case is pending under section 6330 (e)(2). Further, the Service should request that in conjunction with imposing the penalty, the court should issue an order prohibiting the filing of any further appeals by the taxpayer in another CDP case until the penalty is paid.

Please call (202) 622-3610 if you have any further questions.

CC: Cheryl Sherwood, Director Payment Compliance (SB/SE)

Jeffrey Allison, Director, Tax Policy & Procedure (Appeals)

Technical Advice Memorandum

Number: 200130043

Internal Revenue Service

June 25, 2001

OFFICE OF CHIEF COUNSEL

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

WASHINGTON , D.C. 20224

Release Date: 7/27/2001

CC:PA:CBS:Br2

UILC: 712.03-00

INTERNAL REVENUE SERVICE

NATIONAL OFFICE

FIELD SERVICE ADVICE

MEMORANDUM FOR ASSOCIATE AREA COUNSEL ( SBSE ), AREA 4, DETROIT ,

MICHIGAN

FROM: Lawrence H. Schattner

Chief, Branch 2 (Collection, Bankruptcy & Summonses)

SUBJECT: Default of Offer-in-Compromise

This Chief Counsel Advice responds to your memorandum dated May 8, 2001. In accordance with I.R.C. § 6110(k)(3), this Chief Counsel Advice should not be cited as precedent.

ISSUES

Whether the Internal Revenue Service (“Service”) may unilaterally default a joint offer in compromise when Taxpayer-Husband breached his obligations under a separate but related offer in compromise on the basis of an oral agreement tying the two offers together.

CONCLUSIONS

No. Treasury Regulations specifically require that offers in compromise be reduced to writing and thus cannot be altered by an oral agreement.

FACTS

A joint offer in compromise was accepted by the Service to resolve Taxpayers’ outstanding income tax liabilities. The notice of acceptance stated, “our acceptance is subject to the terms and conditions on the enclosed form 656, Offer in Compromise.” Taxpayers fulfilled their obligations under the offer in compromise by paying the total due plus interest.

The Service also accepted Taxpayer-Husband’s individual offer in compromise to resolve his outstanding employment tax liabilities. The notice of acceptance contained the same language as above. Taxpayer-Husband never made any payments under his offer in compromise and the Service defaulted both compromise agreements.

According to your memo, it was the practice of the local offer in compromise group to inform taxpayers orally that individual and joint agreements were tied together. Your memo does not state if Taxpayers in this case were specifically told that default of one offer would result in default of the other and whether Taxpayers agreed. Your memo also states that current practice is to make agreements tying the two offers together in writing.

LAW AND ANALYSIS

The Nature of an Offer in Compromise

An offer in compromise is a statutory creation. I.R.C. section 7122(a) states:

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

I.R.C. § 7122 (a). Thus, any offer in compromise is to be strictly construed according to the statutory requirements. Botany Worsted Mills v. United States , 278 U.S. 282 (1929); Klien v. Commissioner , 899 F.2d 1149 (11th Cir. 1990); Bowling v. United States , 510 F.2d 112 (5th Cir. 1975);.

It has also been said that an offer in compromise is a contract and is subject to the general rules governing contracts. United States v. Feinberg, 372 F.2d 352 (3rd Cir. 1967); United States v. Lane , 303 F.2d 1 (5th Cir. 1962); Kurio v. United States , 429 F.Supp. 42 (S.D. Tex. 1970). However, the rules of contracts cannot abrogate the statutory requirements governing offers in compromise. Bowling , 510 F.2d at 113.

Requirement of a Writing

Temporary Treasury Regulation section 301.7122 -1T(c)(1) requires that all offers in compromise be submitted in writing on forms prescribed by the Service. ¹ In accordance with this regulation the Service now requires that all offers must be submitted on Form 656. IRM 5.8.1.4(1)

*****************

¹ Acceptances must also be in writing. Temp. Treas. Reg. § 301.7122 -1T(d)(1). These writing requirements were also in effect when the offers at issue were accepted. See, Treas. Reg. § 301.7122 -1(d) (1960).

*****************

In Boulez v. Commissioner , 810 F.2d 209 (D.C. Cir. 1987) a taxpayer challenged the Treasury regulation’s writing requirement, arguing that he had a binding oral compromise agreement. Pierre Boulez ran afoul of U.S. tax law by failing to include certain income on his tax returns. Id. at 210. After extensive negotiations, Boulez reached an oral compromise agreement with the Service. Id. In an unrelated audit, the Service discovered more tax deficiencies and issued a notice of deficiency. Id. at 211. Boulez argued that the oral agreement settled all of his tax liabilities, including these newly discovered deficiencies, and was binding on the Service. Id. The court of appeals disagreed and found that Treasury Regulation section 301.7122 -1(d) (1960) required an offer in compromise to be set out in writing and that this requirement was “entirely reasonable, and a wholly permissible interpretation of Section 7122.” Boulez , 810 F.2d at 214. In addition the court stated that the writing requirement could not simply be overlooked as it is “a fundamental tenet of formalizing agreements.” Id. at 216. Thus, because the agreement did not conform to statutory requirements it was not binding on the Service.

The holding of Boulez was followed in In re Aberl , 159 B.R. 792 (Bankr. N.D. Ohio 1993), aff’d , 175 B.R. 915 (N.D. Ohio 1994), aff’d , 78 F.2d 241 (6th Cir. Ohio 1996). The Aberl court refused to find that oral negotiations between a taxpayer and the Service constituted an offer in compromise. “This Court agrees . . . that ‘[Treas. Reg. § 301.7122 -1(d)], which requires that all compromises be reduced to writing, has the force and effect of law, and that the [ IRS ] lacked authority to waive it.’” In re Aberl , 159 B.R. at 799, citing Boulez , 810 F.2d at 211 (alteration in original) (citations omitted).

The issue you have presented, however, deals with an oral term within a written offer in compromise rather than an entirely oral agreement. In Keating v. United States , 794 F.Supp. 888 (D. Neb. 1992) the district court concluded that an oral agreement could not supersede the written terms of Form 656. The Keatings submitted a written offer in compromise on Form 656, which expressly informed taxpayers that the United States would retain any tax refunds that arose within the period of the offer. Id. at 889. The Keatings then negotiated with the Service to increase the amount of their offer with the oral understanding that the Service would refund any tax overpayments, notwithstanding the language of Form 656. Id. The Service kept the Keatings’ refund and applied it to their tax liability. Id. at 888.

The District Court stated:

Even assuming that an oral agreement existed between the parties that attempted to supersede Form 656, an oral agreement with the Internal Revenue Service with respect to federal income tax liability cannot bind the government . . . The Internal Revenue Code and the Treasury regulations specifically require a written offer and acceptance of an offer in compromise. (citations omitted)

Id. at 891. Thus, according to the statutory scheme and regulations governing offers in compromise, an oral term cannot be added to a written offer. ² But see , Engelken v. United States , 823 F.Supp. 845 (D. Colo. 1993) (denying summary judgment because plaintiffs should have been allowed to show an oral modification to their offer in compromise). Without a contract term tying the two offers together, they must each stand alone. The joint offer in compromise has been fully paid. Assuming Taxpayers have complied with all of the filing and payment requirements of the I.R.C. for the five year period following acceptance of their offer as required by condition (d) of Form 656 (Rev. 9-93), the liability has been extinguished. See, Temp. Treas. Reg. § 301.7122 -1T(d)(5); Treas. Reg. § 301.7122 -1(c) (1960).

*****************

² It does not matter that the Keating court dealt with an attempt to supersede a written term of the offer whereas this case deals with an attempt to add a consistent term because the analysis under the statutory scheme is the same. Oral agreements are not enforceable.

*****************

Contract Rules Governing Oral Terms

It is our position that I.R.C. section 7122(a) and the regulations thereunder govern the requirements of an offer in compromise and that pursuant to these authorities all the terms of the offer and acceptance of the offer must be in writing. Even under general contract principles, we believe the conclusion would be the same

At the outset, in considering an offer in compromise a court should look to “the rules applicable to contracts generally.” Lane , 303 F.2d at 4; see also, United States v. Wainer , 211 F.2d 669, 673 (7th Cir. 1954) (applying common law when analyzing a compromise agreement with the Service).

The parole evidence rule governs when testimony will be allowed to prove an oral term of a written contract. The general rule is that evidence of a prior or contemporaneous agreement, not included in an integrated writing, is not admissible to prove the existence of that agreement. Restatement (Second) of Contracts §§ 215, 216 (1981); Samuel Williston, 4 Williston on Contracts § 631 (3d ed. 1961). ³ Parole evidence is admissible to prove: (1) that the writing is not integrated; (2) the writing is only partially integrated; (3) the meaning of the writing;

(4) illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause; (5) grounds for recission, reformation, specific performance, or other remedy. Restatement (Second) of Contracts § 214 (1981). Thus, parole evidence may be used to show that an agreement is not integrated. If the Service were able to prove that Form 656 is not integrated then it could introduce evidence of a contemporaneous oral agreement to tie the two offers in compromise together.

*****************

³ Michigan law is in accord with the common law on parole evidence. NAG Enterprise, Inc. v. All State Industries, Inc. 407 Mich. 407 (1979); UAW-GM Human Resource Center v. KSL Recreation Corp., 228 Mich. App. 486 (1998).

*****************

An agreement is determined to be integrated when the writing constitutes “a final expression of one or more terms of an agreement.” Restatement (Second) of Contracts § 209 (1981). Whether an agreement is integrated is to be determined by the court, however, written agreements are presumed to be integrated. Id. ; Samuel Williston, 4 Williston on Contracts § 633 (3d ed. 1961). This presumption is particularly strong when the parties use a standardized agreement. Restatement (Second) of Contracts § 211 (1981). Even if an agreement is not fully integrated courts generally will not allow parole evidence of an additional term if that term would normally be included in that type of agreement. Arthur Linton Corbin, 3 Corbin on Contracts § 583 (1960).

A further hazard for the Service is the rule that “in choosing among the reasonable meanings of a promise or agreement or a term thereof, that meaning is generally preferred which operates against the part who supplies the words or from whom a writing otherwise proceeds.” Restatement (Second) of Contracts § 206 (1981). ⁴ A court is particularly likely to construe a contract against the government as the drafting party. Restatement (Second) of Contracts § 207 cmt. a (1981).

*****************

⁴ Michigan law is in accord. Hanley v. Porter , 238 Mich. 617 (1927); Stark v. Kent Products , Inc., 62 Mich. App. 546 (1975); Elby v. Livernois Eng’g Co., 37 Mich. App. 252 (1971).

*****************

The use of parole evidence is decided on a case by case basis by the courts, however, given the rules of contracts as discussed above it is unlikely that the Service would prevail in proving that Form 656 is an unintegrated agreement and that evidence of an oral agreement should be admitted.

This writing may contain privileged information. Any unauthorized disclosure of this writing may have an adverse effect on privileges, such as the attorney client privilege. If disclosure becomes necessary, please contact this office for our views.

If you have any further questions please contact the attorney assigned to this matter at (202) 622-3620 .

Technical Advice Memorandum

Number 200037047

Internal Revenue Service

July 21, 2000

Release Date: 9/15/2000

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

WASHINGTON , D.C. 20224

July 21, 2000

MEMORANDUM FOR DISTRICT COUNSEL, INDIANA

FROM: Kathryn A. Zuba

Chief, Branch 2 (General Litigation)

SUBJECT: Offers-in-Compromise - Effect of Bankruptcy on

Processability

This memorandum contains our supplemental response to your memorandum dated January 10, 2000. You ask that we pre-review your memorandum to Acting Chief, Special Procedures Branch, Indiana District. This document is not to be cited as precedent.

Your memorandum raised issues regarding the processability of offers in compromise (“OICs”) that have not been accepted or rejected as of the date of the filing of the taxpayer’s bankruptcy petition. In our prior response dated March 27, 2000, we agreed with your conclusion that such OICs can be returned as nonprocessable. Your memorandum also concluded that while the Internal Revenue Service (“Service”) may consider OICs submitted by debtors in bankruptcy as nonprocessable, a Bankruptcy Court may not agree in light of the issues raised in In re Mills, 240 B.R. 689 (Bankr. S.D. W.V. 1999), and In re Chapman , 1999 Bankr. LEXIS 1091 (S.D. W.V. June 23, 1999 ). The court in Mills and Chapman held that the Service’s refusal to consider OICs from taxpayers in bankruptcy violated § 525(a) of the Bankruptcy Code. In our prior response we advised that we were in the process of developing our litigating position with regard to the issues raised in Mills and Chapman , and that we would respond to you on these issues in a detailed memorandum after our final position is reached. The following is our supplemental response. For the reasons that follow we conclude that the Service’s policy not to process OICs from taxpayers in bankruptcy does not violate the Bankruptcy Code, and that the Service may not be compelled by a court to consider OICs from taxpayers in bankruptcy.

ISSUE

Does the Service 's policy not to process OICs from taxpayers in bankruptcy violate the anti-discrimination provision of the Bankruptcy Code?

CONCLUSION

No, the Service's policy not to process OICs from taxpayers in bankruptcy does not violate the anti-discrimination provision of the Bankruptcy Code.

BACKGROUND

The Offer in Compromise Handbook provides that when an offer is received it is first reviewed for processability. IRM 5.8.3.1. OICs from taxpayers in bankruptcy or who have not filed required tax returns will be returned as nonprocessable. Id. Deviation from the not processable criteria may not be made without written authorization from the National Office. IRM 5.8.3.3.1. The instructions to Form 656, Offer in Compromise, rev. Jan., 2000, also explain that taxpayers are not eligible for consideration of an OIC on the basis of doubt as to collectibility or effective tax administration if they have not filed all federal tax returns or are involved in an open bankruptcy proceeding. ¹

****************

¹ It is our understanding that the Service’s policy not to consider OICs from taxpayers in bankruptcy does not prohibit compromise of the Service’s claim based upon doubt as to liability.

****************

An offer will not be considered until the conclusion or termination of the bankruptcy proceeding. IRM 5.8.10.2.1(2). In Chapter 7 cases, an offer in compromise will normally not be considered until a discharge is granted. IRM 5.8.10.2.2(1). If a Chapter 7 discharge has been granted, but the case is still pending, the Service may consider an offer, but the amount acceptable for the offer should include the amount the Service reasonably expects to recover from the bankruptcy in addition to what can be collected from the taxpayer on non-discharged liabilities or from the estate outside the bankruptcy. IRM 5.8.10.2.2(2). While the Service will not consider an offer in compromise in a Chapter 11 case, the manual authorizes the occasional acceptance of a “compromising plan” in a Chapter 11 case when it is in the Service’s best interest to do so. IRM 5.9.9.4.2(6). The manual does not authorize the acceptance of a compromising plan in a Chapter 13 case.

Where a determination is made to return offer documents because the offer to compromise was nonprocessable, the return of the offer does not constitute a rejection of the offer and does not entitle the taxpayer to appeal the matter to Appeals pursuant to I.R.C. § 7122(d). Temp. Treas. Reg. 301.7122 -1T(e)(5). The Offer in Compromise Handbook further explains, "The Service will not consider an offer in compromise submitted by a taxpayer in bankruptcy. When a taxpayer files Bankruptcy, the Bankruptcy Code provides procedures resolving the Service’s claim." IRM 5.8.10.2.1(1). See also IRM 5.9.4.7.

DISCUSSION

I. The Mills and Chapman Opinions

In re Mills , 240 B.R. 689 (Bankr. S.D. W.V. 1999), was a Chapter 13 case in which the Service had over $110,000 in tax claims, of which over $60,000 were entitled to priority status. These taxes arose from the debtors’ unpaid employment taxes of a failed convenience style grocery store. After a number of plans were rejected, the debtors submitted a Form 656 OIC, and filed another plan proposing to pay the Service $6,500 as a lump sum to pay the priority claims in full at confirmation. The Service objected to the use of an OIC as a basis for satisfying its priority tax claim, and did not process the OIC. The debtors then commenced an adversary proceeding in the bankruptcy court alleging that the Service violated § 525(a) of the Bankruptcy Code by refusing to consider their OIC. The facts were substantially the same in In re Chapman, 1999 Bankr. LEXIS 1091 (S.D. W.V. June 23, 1999 ). The debtors were represented by the same attorney, and the case was litigated before the same judge.

The bankruptcy court’s legal analysis was identical in Mills and Chapman . The court concluded that while the Service cannot be compelled to accept OICs, its failure to even consider them from taxpayers based solely on their bankruptcy status constitutes discrimination prohibited by Bankruptcy Code § 525(a). 240 B.R. at 698. Section 525(a) provides in pertinent part:

[A] governmental unit may not deny . . . a license, permit, charter, franchise, or other similar grant to . . . a person that is or has been a debtor under this title . . . solely because such bankrupt or debtor is or has been a debtor under this title[.]

(emphasis added). The court relied on the following portion of the legislative history of § 525 to support its conclusion:

In addition, the section is not exclusive. The enumeration of various forms of discrimination against former bankrupts is not intended to permit other forms of discrimination. The courts have been developing the Perez rule. ² This section permits further development to prohibit actions by governmental or quasi-governmental organizations that perform licensing functions, such as a State bar association or a medical society, or by other organizations that can seriously affect the debtor’s livelihood or fresh start, such as exclusion from a union on the basis of discharge of a debt to the unions’s credit union . . . This section is not so broad as a comparable section proposed by the Bankruptcy Commission . . . which would have extended the prohibition to any discrimination, even by private parties. Nevertheless, it is not limiting either, as noted. The courts will continue to mark the contours of the anti-discriminations provision in pursuit of sound bankruptcy policy.

H.R. Rep. No. 95-595 at 367 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6323 (1978) (citations omitted). The court concluded that “[t]he statute and legislative history, when read together, clearly indicate that Congress did not intend § 525 to be all-inclusive, but instead intended to prohibit bankruptcy-based discrimination that can seriously affect the debtor’s livelihood or fresh start.” 240 B.R. at 695.

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² Other portions of this legislative history show that when Congress wrote § 525, it “codified the result” of Perez v. Cambell , 402 U.S. 634 (1971), which held that a state law providing that a debtor’s drivers license would not be renewed because a tort judgment resulting from an automobile accident remained unpaid, even though the debt had been discharged in bankruptcy, violated the Supremacy Clause of the United States Constitution because it frustrated the fresh start policy of the Bankruptcy Code.

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The court agreed with the Service’s contention that it could not be compelled to accept an OIC because such a decision is within the discretion of the Service. However, the court found that the use of the word “shall” in I.R.C. § 7122(c)(1) indicates that consideration of the OIC is not discretionary. Id. at 696, citing United States v. Garden State National Bank, 465 F. Supp. 437 (D.N.J.1979). The court also recognized that §7122(d) provides for an administrative review of rejected offers. The court reasoned that by not considering OICs from taxpayers in bankruptcy, bankruptcy debtors are denied additional protections available to taxpayers who are not in bankruptcy. 240 B.R. at 696.

The court rejected the Service’s argument that because the Bankruptcy Code specifically provides that its priority claims will be paid in full, its refusal to consider OICs in bankruptcy does not affect debtor’s rights in bankruptcy. The court countered that if the taxes were compromised, a lesser amount would be required to be paid under the Chapter 13 plan. Id . at 697.

II. Does the Bankruptcy Code Require that the Service Consider Offers in Compromise from Taxpayers in Bankruptcy?

The first court of appeals case to address the scope of the “license, permit, charter, franchise, or other similar grant” in § 525(a) was In re Goldrich , 771 F.2d 28 (2nd Cir. 1985). In Goldrich , the debtor challenged the State of New York ’s refusal to guarantee debtor’s student loans because debtor had obtained bankruptcy discharges of previous student loans. The court considered the legislative history, and concluded that § 525 does not promise protection against consideration of the prior bankruptcy in post-discharge credit arrangements. Id. at 30. The court reasoned:

A credit guarantee is not a license, permit, charter or franchise; nor is it in any way similar to those grants. Had Congress intended to extend this section to cover loans or other forms of credit, it could have included some term that could have supported such an extension. We are reluctant to probe beyond the plain language of the statute. Although the exact scope of the items enumerated may be undefined, the fact that the list is composed solely of benefits conferred by the state that are unrelated to credit is unambiguous. Congress’ failure to manifest any intention to include items of a distinctly different character is also unambiguous. In the absence of ambiguity, no further inquiry is required.

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While Congress may have intended to allow expansion of the scope of protection described in section 525, it clearly also intended that such expansion would be limited to situations sufficiently similar to Perez to fall within the enumeration. The extension of credit is manifestly different from both examples given in the Senate Report: licensing and exclusion from a union. The fact that expansion must be permitted within the bounds of the statute’s undefined terms may not be interpreted to require similar amplification outside of those bounds.

Id . at 30-31.

Two courts of appeals cases followed Goldrich , but with varying results. In In re Exquisito Services, Inc. , 823 F.2d 151, 153-155 (5th Cir. 1987), the court ostensibly adopted the narrow approach articulated in Goldrich , reasoning that the application of § 525(a) should be limited to situations analogous to those enumerated in the statute, i.e., licenses, charters, franchises, and other similar grants. The court held that participation in a Small Business Administration Program under which minority businesses are given preferential treatment in selection for government contracts constituted a “franchise” as defined by Blacks’ Law Dictionary. Thus, the court held that the Air Force’s refusal to renew a SBA contract with a debtor because of its Chapter 11 status violated § 525(a).

In In re Watts , 876 F.2d 1090 (3rd Cir. 1989), the debtors challenged a provision of a state program that provided loans to homeowners in financial difficulty to prevent imminent mortgage foreclosure. Under the terms of the program, no loan payments would be made at any time the mortgagee was prohibited from instituting foreclosure proceedings against the mortgagor. Because the automatic stay prevented such foreclosure, loan payments were not provided to bankruptcy debtors during its duration. The court held that the loan simply is not a “license, permit, charter, franchise or other similar grant” per § 525(a). The court continued, “[I]t seems perfectly clear that the items enumerated are in the nature of indicia of authority from a governmental unit to the authorized person to pursue some endeavor. Thus, a ‘similar grant’ should be given the same meaning.” 876 F.2d at 1093.

While the narrow interpretation in these cases follows the language of the statute, Congress was not pleased with the result in Goldrich . In the Bankruptcy Reform Act of 1994, Congress overruled Goldrich through the addition of § 525(c). Section 525(c) provides that student loans or grants may not be denied based upon a debtor’s past or present bankruptcy status. The language in the legislative history indicates that the provision was only intended to “clarify” the anti-discrimination provisions of the Bankruptcy Code to ensure that applicants for student loans are not denied those benefits due to a prior bankruptcy. It further remarked:

This section overrules [ Goldrich ], which gave an unduly narrow interpretation to Code section 525. Like section 525 itself, this section is not intended to limit in any way other situations in which discrimination should be prohibited. Under this section, as under section 525 generally, a debtor should not be treated differently based solely on the fact that the debtor once owed a student loan which was not paid because it was discharged; the debtor should be treated the same as if the prior student loan had never existed.

140 Cong. Rec. H 10771 (Oct. 4, 1994). ³

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³ This is taken from the section by section description of the Bankruptcy Reform Act of 1994, which was inserted into the record in floor statements attributed to the Speaker of the House pro tempore and makes up the entirety of the legislative history of the Act.

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This legislative history arguably leaves unclear the scope of § 525. Though the language quoted above would indicate that the Goldrich court’s reasoning was mistaken, and that § 525 should be interpreted more broadly, the very narrow remedy employed by Congress indicates otherwise. That is, had Congress truly envisioned a much broader scope of § 525, it could have expanded the scope of prohibited acts in § 525(a) rather than specifically adding § 525(c).

The only court of appeals opinion addressing § 525(a) since the 1994 amendments did not mention the legislative history. In re Toth , 136 F.3d 477 (6th Cir. 1998), cert. den. 524 U.S. 954 (1998). In Toth , the debtors challenged the state’s policy of requiring at least three years to lapse after the date of a bankruptcy discharge before processing a loan application under a low income home improvement loan program of the United States administered by the state. The court refused the opportunity to construe § 525(a) broadly to further the fresh start policy of the Bankruptcy Code, and instead agreed with the analysis in Watts and Goldrich . 136 F.3d at 480. The court further explained:

The items enumerated in the statute – licenses, permits, charters, and franchises – are benefits conferred by government that are unrelated to the extension of credit. They reveal that the target of § 525(a) is government’s role as a gatekeeper in determining who may pursue certain livelihoods. It is directed at governmental entities that might be inclined to discriminate against former bankruptcy debtors in a manner that frustrated the “fresh start” policy of the Bankruptcy Code, by denying them permission to pursue certain occupations or endeavors. The intent of Congress incorporated into the plain language of § 525(a) should not be transformed by employing an expansive understanding of the “fresh start” policy to insulate a debtor from all adverse consequences of a bankruptcy filing or discharge.

Id . Thus, the Toth court’s limitation of the types of prohibited government action is perhaps the narrowest to date, limiting § 525 to situations where the government discriminates in its role as a gatekeeper in determining who may pursue certain livelihoods. Although the Toth court failed to address the legislative history relating to the passage of § 525(c), resort to the legislative history was not necessary considering the plain language of § 525(a).

An alternative view is reflected in a leading treatise’s criticism of Toth , Watts , and Goldrich :

While the conclusion that section 525 does not apply to extensions of credit may be generally correct, the courts did not adequately consider whether the state programs involved were in fact more in the nature of benefits conferred upon needy applicants, without regard to their credit worthiness, and therefore more similar to a franchise or similar grant, rather than an extension of credit.

4 Collier on Bankruptcy § 525.02[5], 525-16 (15th ed. 1999). Such an interpretation could be supported by a number of lower court decisions which have had little trouble finding government subsidy programs to be within the § 525 language. Courts have held that a public tenant may not be denied the continued right to live in his or her apartment, and thus denied the subsidy inherent in public housing, because of unpaid rent which is discharged or dischargeable, or because a bankruptcy has been filed, even if the bankruptcy had the effect of causing rejection of the preexisting lease. See In re Curry , 148 B.R. 966 (S.D.Fla. 1992); Gibbs v. Housing Auth. of City of New Haven , 76 B.R. 257 (D.Conn. 1983); In re Day , 208 B.R. 358 (Bankr. E.D.Pa. 1997); In re Szymecki , 87 B.R. 14 (Bankr. W.D.Pa. 1988). See also In re Rose , 23 B.R. 662 (Bankr. D. Conn. 1982) (state program offering mortgage assistance cannot deny benefits based upon the filing of bankruptcy or upon the automatic stay provided by a bankruptcy filing).

We disagree with the position espoused by Collier. The assertion that “benefits conferred on needy applicants” is somehow a like a “license, permit charter, franchise, or other similar grant” is not tenable. As the Watts and Toth courts concluded, the targeted government actions concern government’s role as a gatekeeper to pursue some occupation of endeavor. It is not so broad as to include benefit programs. Even so, we do not think even Collier’s position is so broad as to encompass the Service’s OIC program. The compromise of tax liabilities to reflect collection potential and enhance voluntary compliance with the Tax Code is not the type of “benefit conferred upon needy applicants” that even Collier envisioned.

We also disagree with the conclusion of the Mills and Chapman court that § 525(a) and its legislative history, when read together, indicate that Congress intended to prohibit bankruptcy-based discrimination by governmental units that can seriously affect the debtor’s livelihood or fresh start. As the courts in Goldrich , Watts , and Toth have recognized, the plain language of § 525(a) reveals that Congress did not in fact prohibit all forms of discrimination that affect a debtor’s fresh start. Congress only prohibited the discrimination with respect to a “license, permit, charter, franchise, or other similar grant,” or employment. See also United States v. Ron Pair , 489 U.S. 235, 242 (1989) (“The plain language of legislation should be conclusive, except in the rare cases in which the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters”).

Consideration of an OIC is not similar to a “license, permit, charter, or franchise.” Black’s Law Dictionary (6th ed. 1991) defines “license” in pertinent part as “[a] permit, granted by an appropriate governmental body . . to pursue some occupation or to carry on some business subject to regulation under the police power. A license is not a contract between the state and licensee, but is a mere personal permit.” A permit is “[i]n general, any document which grants a person a right to do something. A license or grant of authority to do such a thing.” Id . A charter is “[a]n instrument emanating from sovereign power, in the nature of a grant, either to the whole nation, or to a class or portion of the people, to a corporation, or to a colony or dependency, assuring them of certain rights, liberties, or powers.” Id . A franchise is “[a] special privilege to do certain things conferred by government on [an] individual or corporation, and which does not belong to citizens generally of common right; e.g., right to offer cable television service.” In contrast, an accepted OIC is a contract to settle the taxpayer’s tax liabilities. See , e.g ., United States v. Feinberg, 372 F.2d 352 (3rd Cir. 1967); United States v. Lane , 303 F.2d 1 (5th Cir. 1962). When the government enters into a contract with the debtor in compromise of existing tax liabilities, it is not engaging in the type of regulatory conduct that is similar to a license, permit, charter, or franchise. Thus, § 525(a) does not apply. Toth , Watts .

Further, the legislative history cited by the Mills court does not in fact support the court’s conclusion. The passage provided in pertinent part that “[t]his section permits further development [of case law] to prohibit actions by governmental or quasi-governmental organizations that perform licensing functions ” (emphasis added). The passage then cites two examples of government units that perform licensing functions: a state bar association or a medical society, and a union. Thus, this portion of the legislative history only shows that Congress intended courts to broadly prohibit other forms of discrimination by governmental units that do licensing functions, not to extend the prohibition to any function performed by governmental units.

When quoting the legislative history the court skipped over another portion of the legislative history which shows the intended effect of § 525:

The effect of the section, and of the further interpretations of the Perez rule, is to strengthen the anti-affirmation policy found in section 524([c]). Discrimination based solely on nonpayment could encourage reaffirmations, contrary to expressed policy.

H.R. Rep. No. 95-595 at 367 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6323 (1978). Thus, Congress was primarily concerned that debtors would be forced to reaffirm discharged debts because of conditions made by licensing-type governmental units, though the statute clearly intended to prohibit other forms of discrimination by these entities.

The concern evidenced by the legislative history is quite distinguishable from the issue at hand. The governmental power at issue is not its right to regulate under the police power provided for under non-bankruptcy law, but is the power to collect taxes as provided in the Internal Revenue Code and the Bankruptcy Code itself.

When Congress wrote the Bankruptcy Code it engaged in a complex balancing of various interests. Interpreting B.C. § 525(a) ⁴ so as to require that the Service consider compromise of its claims, notwithstanding the provisions of the Bankruptcy Code that provide for full payment of priority and secured claims, ⁵ is inconsistent with the statutory scheme and has the effect of rewriting the Bankruptcy Code on a legislative level. ⁶ Courts may not reorganize the priorities established by Congress on a legislative level. United States v. Noland , 517 U.S. 535 (1996) (even where statute contemplated equitable subordination of tax claims, bankruptcy court could not exercise the discretion in such a general way as to reorder the priorities established by Congress, because doing so would be impermissibly acting on legislative level). See also Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988) (“[W]hatever equitable powers remain in the bankruptcy court must and can only be exercised within the confines of the Bankruptcy Code”).

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⁴ The same would be true had the court relied upon § 105. The court did not specifically address the issue under this section, having found that § 525 applied.

⁵ A debtor would generally not need to compromise its tax liabilities with the Service if the Service did not have priority or secured claims in amounts that exceed the offer.

⁶ Also, “it is a commonplace of statutory construction that the specific governs the general.” Morales v. Trans World Airlines, Inc ., 504 U.S. 374, 384-5 (1992), citing Crawford Fitting Co. v. J. T. Gibbons, Inc. , 482 U.S. 437, 445 (1987). The rights granted under §§ 1322(a)(2) and 1325(a)(5) are more specific than the general (and inapplicable) prohibitions contained in § 525.

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Because the plain language of the statute does not allow for a broad reading of the types of governmental actions that can be subject to scrutiny under § 525(a), we conclude that the Service’s policy of not processing OICs from taxpayers in bankruptcy does not violate § 525. Further, we see no mechanism in the Bankruptcy Code whereby a court could order a governmental unit to consider compromise of its claim.

III . Does I.R.C. § 7122 Compel the Service to Consider OICs from Taxpayers in Bankruptcy?

Though the Mills court agreed with the Service’s contention that it could not be compelled to accept an OIC because such a decision is within the discretion of the Service, the court found that the use of the word “shall” in I.R.C. §7122(c) indicates that consideration of the OIC is not discretionary. ⁷ 240 B.R. at 696, citing United States v. Garden State National Bank, 465 F. Supp. 437 (D.N.J.1979), aff'd on other grounds 607 F.2d 61 (3rd Cir. 1979). The court also recognized that I.R.C. §7122(d) provides for an administrative review of rejected offers. The court reasoned that by not considering OICs from taxpayers in bankruptcy, bankruptcy debtors are denied additional protections available to taxpayers who are not in bankruptcy. 240 B.R. at 696.

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⁷ Section 7122(c)(1) provides that the Service “shall” prescribe guidelines for OICs, “shall” make allowances for living expenses, and the Service “shall not” reject an OIC solely on the basis of the amount of the offer.

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Section 7122 clearly states that the Secretary “may” compromise any civil or criminal tax case prior to referral to the Department of Justice, in accordance with applicable procedures. 26 U.S.C. § 7122(a), (c); 26 C.F.R. § 301.7122 -1. See also Boules v. Commissioner, 810 F.2d 209 (D.C.Cir. 1987), cert. denied , 484 U.S. 896. The decision to accept or reject an OIC is discretionary and cannot be compelled. See In re Davison , 156 B.R. 600, 602 (Bankr. E.D. Ark. 1993) (courts are not authorized to make or compel settlement for the parties under any construction of §7122); Carroll v. Internal Revenue Service, 14 A.F.T.R. 2d 5564 ( E.D. N.Y. 1964). As the court in Carroll noted, “[t]he decision to accept or reject a compromise offer by its nature involved the discretion of administrative authority and cannot be compelled by any action for a mandatory injunction.” To compel acceptance of, or, indeed, consideration of, a proposed compromise of a tax liability amounts to injunctive action with respect to the collection of a tax barred by IRC § 7421. See generally Enoch v. Williams Packing and Navigation Co. , 370 U.S. 1 (1962).

The only authority the court cited to support its contention that the Service must consider OICs was Garden State . Garden State was a summons enforcement case. The opinion contained language that the Service’s refusal to consider compromises before a decision whether to refer the case to the Department of Justice for criminal prosecution was evidence that the summons was unenforceable as it was issued in bad faith. The court held that bad faith was not shown in that case because the taxpayer had not actually requested a conference to negotiate a compromise. However, the court also stated that the outcome might be different had there been a request for compromise met only by pro forma efforts by way of lip service to the negotiation process.

The Mills and Chapman court did not mention that the language in Garden State was dictum, and was rejected on review by the Court of Appeals, 607 F.2d at 66, 73. The Third Circuit stated, “[T]he refusal of the Service to enter into compromise negotiations, standing alone, does not amount to ‘bad faith.’” Id . Indeed, the trial court itself later stated, “ Garden State was by way of hope or expectation that since I.R.S. has complete jurisdiction to compromise and settle all aspects of a ‘tax case’, both civil and criminal, before referral to the Attorney General . . . the comment might induce both taxpayers and I.R.S. to undertake good faith negotiations for resolution of any disagreement without generating avoidable litigation.” “ Pseudonym Taxpayer” v. Miller , 497 F. Supp. 78 (D.N.J. 1980). The Garden State dicta was also rejected by the court in United States v. Smith , 1979 U.S. Dist. LEXIS 12471; 80-1 U.S. Tax Cas. ( CCH ) P91089; 45 A.F.T.R.2d (RIA) 1105 (S.D.N.Y. 1979). The Smith court accepted the Government’s argument that Garden State is logically, practically, and legally unsound. The court also noted that the decision whether to discuss settlement and whether to issue a summons is a discretionary one that cannot be compelled by the court. Id. , citing Leaonard v. Michell , 473 F.2d 709, 713 (2nd Cir. 1973) (mandamus cannot force a discretionary act).

CONCLUSION

For the foregoing reasons we conclude that the Service 's policy not to process OICs from taxpayers in bankruptcy is not prohibited by the Bankruptcy Code, and that a bankruptcy court cannot compel the Service to consider an OIC from a taxpayer in a bankruptcy case.

If you have any questions, please contact the attorney assigned to this matter at (202) 622-3620 .

cc: Assistant Regional Counsel (GL), Southeast Region

Technical Advice Memorandum

Number: 200128054

Internal Revenue Service

May 29, 2001

OFFICE OF CHIEF COUNSEL

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

WASHINGTON , D.C. 20224

May 29, 2001

Number: 200128054

Release Date: 7/13/2001

CC:PA:CBS:Br2

GL-114537-01

UILC: 17.16.00-00; 9999.98-00

MEMORANDUM FOR ASSOCIATE AREA COUNSEL (SB/SE), AREA 1

LONG ISLAND

FROM: Joseph W. Clark

Senior Technician Reviewer, Branch 2 (Collection, Bankruptcy & Summonses)

SUBJECT: Delegation Order No. 11

This Chief Counsel Advice responds to your request dated March 1, 2001. In accordance with I.R.C. § 6110(k)(3), this Chief Counsel Advice should not be cited as precedent.

ISSUES:

1. Can the Compliance Area Director accept an offer in compromise notwithstanding an opinion by the Associate Area Counsel (SB/SE) opposing acceptance of the offer?

2. Can the Compliance Area Director accept an offer in compromise if no grounds for compromise under section 301.7122 -1T of the Treasury Regulations have been established?

CONCLUSIONS:

1. Yes. Although section 7122(b) of the Internal Revenue Code requires that an opinion of Counsel be placed on file whenever a compromise is made, Counsel’s opinion need not favor compromise in order for the Service to accept an offer.

2. No. Although section 7122(a) grants the Secretary broad authority to compromise, Treasury Regulations issued pursuant to that section establish that compromise can only be made on specific grounds. No compromise may be made unless one of the bases for compromise recognized by the regulations has been established.

BACKGROUND:

On July 19, 1999 , temporary regulations were issued which expanded the Secretary’s authority to compromise tax liabilities under section 7122 of the Code. See T.D. 8829, Compromises, 64 Fed. Reg. 39020 (July 21, 1999). In additional to the traditional compromise grounds of doubt as to liability and doubt as to collectibility, the temporary regulations authorize the Secretary to compromise when compromise will promote effective tax administration. Specifically, where there is no doubt as to either liability or collectibility, the Service may now compromise on the basis that: 1) collection of the full tax liability would create economic hardship, or 2) regardless of the taxpayer’s financial condition, exceptional circumstances exist such that collection of the full liability would be detrimental to voluntary compliance by taxpayers. See Treas. Reg. § 301.7122 -1T(b)(4).

You have asked our advice regarding several issues revolving around this expanded compromise authority. Specifically, you have asked whether and under what circumstances the Area Director can compromise a case notwithstanding an opinion by Counsel which opposes acceptance of a taxpayer’s offer when the offer is based on a purported finding that collection in full would cause the taxpayer economic hardship. First, you have asked that we address a situation in which the offer group has established that collection in full would result in economic hardship, but Counsel issues an opinion stating that the amount proposed for acceptance is nevertheless too low under the circumstances of the case. Second, you have asked our opinion of a case in which it has not been established that collection in full would result in economic hardship.

DISCUSSION:

Section 7122(a) of the Internal Revenue Code grants the Secretary the authority to compromise civil or criminal liabilities arising under the internal revenue laws. Ever since that authority was granted in 1868, the Code has also required that an opinion of Counsel be placed on file in certain cases. The current statement of this requirement provides:

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, ¹ with his reasons therefor, with a statement of—

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¹ The General Counsel for the Treasury has delegated the functions relative to the review of offers in compromise to the Chief Counsel of the Internal Revenue Service. See General Counsel Order No. 4. (Rev. January 19, 2001).

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(1) The amount of tax assessed,

(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

(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.

I.R.C. § 7122(b).

The system for obtaining review of offers recommended for acceptance is contained in the Service’s IRM Handbook 5.8, Offers in Compromise, Chapter 8, and in the Chief Counsel Directives Manual, Part 34, Chapter 5 (CCDM 34.5). The opinion of Counsel is sought after a recommendation of acceptance has been made but prior to formal acceptance of the offer by the official with delegated authority to accept. IRM 5.8.8.4.3. The offer itself (Form 656), along with the Form 7249, Offer Acceptance Report, and supporting documentation, are sent to the appropriate Associate Area Counsel (SB/SE) office for review. The Service expects that Counsel’s opinion will assess both whether the legal requirements for compromise are met and whether the offer conforms to the Service’s policies and procedures. IRM 5.8.8.2(2).

The CCDM states that the “primary role” of Counsel “is to determine whether there is a bonafide doubt as to liability or doubt as to collectibility.” CCDM 34.5.2.1(3)a. At the time this manual section was promulgated, doubt as to collectibility and doubt as to liability were the only authorized bases for compromise under then governing Treasury regulations. See Treas. Reg. § 301.7122 -1(a) (1960). Although the permissible bases for compromise have since been expanded in the regulations to include the promotion of effective tax administration, Counsel’s role has not changed, and verifying that a basis for compromise is present continues to be the most important part of Counsel’s role in reviewing proposed acceptances.

Although verifying that there is a legal basis for compromise is the principal role of Counsel, most of the manual is dedicated to Counsel’s examination of the “adequacy” of the amount proposed for acceptance, a matter which is undoubtedly a question of policy. See T.D. 8829, 64 Fed. Reg. at 39023 (“[T]he 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.”). Thus, both the offer in compromise handbook and the CCDM recognize that the role of Counsel is to review both legal and policy issues.

Asking that Counsel review policy matters does not grant a veto power or establish that Counsel has final say over whether an offer will be accepted. The procedures explicitly recognize that Counsel’s concurrence in the decision to compromise is not required. See IRM 5.8.8.2(2); CCDM 34.5.2.1(3)a.5. Thus, if Counsel issues an opinion that the compromise of the case is not in keeping with the Service’s acceptance policy, either because the amount offered is too low or for any other reason, the Service may nevertheless compromise the case. Because the Counsel opinion is sought prior to the issuance of an acceptance letter, the official with final authority to accept will have an opportunity to consider Counsel’s concerns before the decision to accept is made final.

Your question assumes that the basis for compromise is the promotion of effective tax administration, specifically economic hardship. The Internal Revenue Manual gives the following guidance with respect to determining an acceptable offer based on considerations of economic hardship:

In offers based on economic hardship, an acceptable offer amount should be determined based on the facts and circumstances of the taxpayer’s situation and the financial information analysis. For example, the taxpayer has $100,000 liability and assets and income of $125,000. To avoid economic hardship, it is determined that the taxpayer will need $75,000. The remaining $50,000 should be considered in determining an acceptable offer amount.

IRM 5.8.11.2.1(4). The standard articulated in this manual provision appears very similar to the “reasonable collection potential” standard used for doubt as to collectibility offers, See Policy Statement P-5-100, in that the Service expects a taxpayer to offer an amount equal to that which could be collected after the economic hardship has been accounted for. Counsel’s disagreement with the amount determined to be acceptable pursuant to the foregoing guidance will not barr compromise of the case. As with all advice issued by Counsel, it is appropriate and proper for you to render your opinion as to whether a proposed action is in keeping with the Service’s stated policies. The ultimate decision, however, remains with the Area Director or other delegated official.

A more serious issue is presented if Counsel concludes that no basis for compromise is present. Treasury regulations enacted by the Secretary in accordance with required procedures have the force and effect of law. They are mandatory, not directory, and must be followed. See Boulez v. Commissioner , 810 F.2d 209, 215 (D.C. Cir. 1987) (specifically discussing compromise regulations under section 7122). ² In fact, the Supreme Court has recognized that it “must defer to Treasury Regulations that implement the congressional mandate in some reasonable manner.” Commissioner v. Portland Cement Co., 450 U.S. 156, 169 (1981) (citations and internal quotation marks omitted). The Commissioner’s delegation of authority to compromise necessarily carries with it the implicit assumption that it will be exercised in accordance with applicable law and regulations. See Boulez, 810 F.2d at 215 (stating that it “defies common sense” to infer that Secretary’s delegates may waive requirements stated in regulations). Thus, no Service official may compromise a case unless it has been established that a basis for compromise, as established by Temp. Treas. Reg. § 301.7122 -1T, is present in the case. ³

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² In Boulez , the court was considering the requirement, contained in the regulations but not in the statute, that all compromises be in writing. We find the court’s analysis even more persuasive when the issue is one of substantive authority as opposed to mere procedural safeguards. In the words of the court: “Indeed, when a compromise of tax liability is at issue, the need for rigorous compliance with pertinent regulations may be at its greatest, for not only the integrity of the public fisc but also public faith in the equitable enforcement of the tax laws hangs in the balance.” 810

F.2d at 218.

³ See also Rev. Proc. 80-6, 1980-1 C.B. 586. In explaining the various delegations of compromise authority, the revenue procedure stated: “The above delegations are ‘limited’ to the extent that the delegated authority must be exercised in accordance with the limitations prescribed by section 301.7122 -1 of the Regulations on Procedure and Administration and with procedures established by the National Office.”

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Confusion on this point may in part stem from language in prior versions of Delegation Order No. 11, which grants certain officials the authority to compromise. Prior to revision in November 1999, the delegation of authority vested in certain officials the authority to compromise “in the event Counsel renders a negative legal opinion.” Delegation Order No. 11 (Rev. 25) (September 29, 1997). In spite of internal guidance to the contrary, many within the Service mistakenly believed that this language authorized compromise even where there was no doubt as to either liability or collectibility. In reality, this delegation was intended to authorize certain officials to accept less than reasonable collection potential once doubt as to collectibility had been established. See Delegation Order No. 11 (Rev. 24) (June 21, 1994) (stating that authority to accept notwithstanding negative Counsel opinion “applies only to offers in compromise - Doubt as to Collectibility”).

The more recent delegation of compromise authority, partially in an effort to alleviate any confusion, has removed language making reference to the opinion of Counsel in favor of positive grants of authority to certain officials. The authority to accept less than could otherwise be collected in a doubt as to collectibility case, now referred to as compromise based on “special circumstances,” is specifically delegated to certain officials. See Delegation Order No. 11 (Rev. 27) (November 1, 1999) (delegating authority to accept offers based on special circumstance criteria as well as authority to accept offers based on the promotion of effective tax administration); IRM 5.8.8.3 (explaining special circumstances criteria and acceptance authority).

In reviewing proposed acceptances, Counsel should defer to the offer group on factual determinations such as valuation of assets, allowable expenses, and the existence of circumstances which warrant acceptance of less than could otherwise be collected. ⁴ If, having done so, Counsel is unable to verify that a basis for compromise as authorized under the regulations is present, that determination is more than a policy disagreement. Under such circumstances, the seriousness of the decision to compromise warrants opening up a dialogue with the Area Director to attempt to reach consensus. If no consensus can be reached, it is appropriate to elevate the question to higher levels of management just as would be done in any other type of case. Nevertheless, because both Compliance and Counsel are working toward the same goals, disputes of this nature should be rare.

****************

⁴ At the outset, the CCDM states clearly that the factual determinations of the Service are not to be reexamined unless “patently erroneous” and that asset valuations in particular are “largely matters of administrative discretion and judgment and should rarely be questioned by Counsel.” CCDM 34.5.2.1(3)a.1.

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If you have any questions, please contact the attorney assigned to this matter at 202-622-3620 .

Technical Advice Memorandum

Number 200043046

Internal Revenue Service

July 19, 2000

Release Date: 10/27/00

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224

July 19, 2000

MEMORANDUM FOR DISTRICT COUNSEL, NORTH FLORIDA DISTRICT

FROM: Kathryn A. Zuba

Chief, Branch 2 (Collection, Bankruptcy & Summonses)

SUBJECT: Offer in Compromise --This memorandum responds to your request for advice dated April 3, 2000. This document is not to be cited as precedent by taxpayers. You requested our views regarding whether the above referenced case could be compromised under the Commissioner’s new authority to compromise based on the promotion of effective tax administration. We conclude this case does not present exceptional circumstances such that collection of the full tax liability would be detrimental to voluntary compliance by taxpayers.

OFFICE OF CHIEF COUNSEL

BACKGROUND :

The tax liability at issue was assessed against the taxpayer as the transferee of Company A, of which the taxpayer was president until Date D. Company A was incorporated in Year 1. The corporation was owned equally by four shareholders: the taxpayer, X, Y, and Z. On Date A, the taxpayer and his fellow shareholders met to discuss the sale of all of the assets of the company to Company B. At that meeting, they discussed ending their association, but no decision was made to liquidate the company. The transfer of assets to Company B took place on or about Date B.

In Date C, the accounting firm retained to prepare Company A’s Year 2 tax return informed X that the sale of assets to Company B would result in a substantial tax liability. Prior to this time, various ways to structure the deal for tax purposes had been discussed. Among the options was liquidation of Company A to take advantage of the nonrecognition of gain permitted by then section 337 when a corporation adopted a plan of liquidation and then liquidated within one year. ¹

****************

¹ The nonrecognition of gain or loss provisions of section 337 in connection with corporate liquidations were repealed by the Tax Reform Act of 1986, Pub. L. 99-514, § 633(d), 100 Stat. 2085, 2280. A transition rule allowed certain small corporations to be eligible for section 337 nonrecognition for a longer period.

****************

In late Year 3 or early Year 4, X and Y prepared a document which purported to be the minutes of the Date A meeting. The minutes falsely reflected that the shareholders had voted to liquidate Company A. The false minutes were attached to Company A’s Year 2 Form 1120 and submitted to the Service as evidence that Company A had dissolved. The taxpayer apparently had no knowledge of these acts at the time or when he resigned as president of Company A on Date D.

On Date F, the taxpayer met with IRS agents and was informed that X and Y were under investigation for fraud in connection with the Year 2 return of Company A. At this meeting, he was advised that he would likely be liable for additional taxes resulting from the sale to Company B. He requested a balance due during the meeting and was informed that he could not be given one at that time because the investigation had just begun. The taxpayer was again interviewed by IRS agents in connection with the investigation early in Year 5.

A notice of deficiency was issue to Company A in Date G. The company filed a timely petition with the Tax Court. In Date H, the taxpayer testified against X and Y in their trial for fraud. He testified again in Date I, after which X and Y pled guilty and were sentenced for making false statements in income tax returns. ²

*****************

² The taxpayer testified against X and Y for a third time in Date Q.

*****************

On Date J, the Tax Court upheld the Service’s determination of Year 2 tax liabilities against Company A. The Tax Court exhaustively reviewed the events surrounding the sale to Company B and the preparation of the Year 2 return. The court found no intent to liquidate the company and upheld the Service’s determination of fraud penalties against X and Y.

In Date K, a 30-day letter was issued to the taxpayer asserting a $AA deficiency as the transferee of Company A. The taxpayer filed a protest, arguing that: 1) the liability resulted from bad advice by tax advisors; 2) when he requested payoff figure and specifically stated that he was concerned about interest and penalties, IRS agents advised him he had nothing to worry about; 3) there was no evidence that he committed fraud so the fraud penalty should not apply; and 4) he had cooperated with the Government at every turn. Appeals reviewed the case and determined that the taxpayer was not liable for the penalties associated with fraud.

On Date L, the taxpayer was sent a corrected Notice of Deficiency. The total liability of Company A was computed as $BB and the taxpayer was liable as a transferee for $CC. The taxpayer paid the transferee liability in full in Date M. The tax was assessed the next month, and the taxpayer received a notice that he was liable for $DD in interest.

On Date N, at the local IRS Problem Solving Day, the taxpayer was advised that he may be eligible for interest abatement under section 6404(e) of the Code. He submitted his abatement request that day, and it was denied on Month/Day 1. On Date O, the taxpayer was informed that the denial of his abatement request was being sustained by Appeals. The final determination by Appeals was issued on Date P. The taxpayer’s offer in compromise was submitted on Date R.

The taxpayer’s proposed compromise, in essence, states that it would be unfair and inequitable to hold him responsible for interest attributable to the period between when he first requested a balance due until the time he was finally advised of the correct balance due. The taxpayer’s request and the district’s recommendation raise two main points in support of the assertion that compromise in this case would promote effective tax administration: 1) the Service’s delay in informing him of the liability was unreasonable; and 2) the taxpayer should not be liable for interest attributable to criminal acts by the taxpayer’s partners in which the taxpayer played no part and of which he had no knowledge. ³ The district has proposed acceptance of the taxpayer’s offer on the grounds that collection of the tax liability in full would be detrimental to voluntary compliance by taxpayers.

*****************

³ A fact which is heavily emphasized in the taxpayer’s offer, the district’s report, and various memoranda in the administrative file is that the taxpayer cooperated with the Service in the investigation and prosecution of his fellow shareholders. We disagree with the district’s apparent suggestion that such cooperation is a basis for abatement of the taxpayer’s liability.

*****************

DISCUSSION:

The Secretary may compromise a case to promote effective tax administration where: (1) collection of the full liability would create economic hardship within the meaning of section 301.6343 -1 of the Treasury Regulations; or (2) exceptional circumstances exist such that collection of the full liability would be detrimental to voluntary compliance by taxpayers. Temp. Treas. Reg. § 301.7122 -1T(b)(4). No such compromise may be entered into where it would undermine future compliance with the tax laws. Id .

The district has proposed compromise of this case based on a determination that it would “promote effective tax administration” under the standards articulated in the regulations. ⁴ It is undisputed that the assessed tax liability, including all interest accruals, could be collected in full without causing the taxpayer economic hardship as defined under the compromise regulations. The taxpayer argues that collection of the full tax liability would be detrimental to voluntary compliance by taxpayers. Where this basis can be established, compromise is authorized regardless of the taxpayer’s financial circumstances. See Temp. Treas. Reg. § 301.7122 -1T(b)(4)(ii). The regulations do not give a more exact standard or list factors to be considered, but illustrate this basis through two examples. See Temp. Treas. Reg. § 301.7122 -1T(b)(4)(iv)(E). The procedures implementing this basis for compromise show that the Service anticipates compromising when collection of the full liability would be unfair or inequitable. See IRM 5.8.11.2.2(3); Form 656, Offer in Compromise (Rev. 1-2000), Instructions at 2.

*******************

⁴ The taxpayer initially proposed compromise based on doubt as to liability. However, as the tax liability has been determined by the Tax Court, compromise on that basis is precluded. See Temp. Treas. Reg. § 301.7122 -1T(b)(2).

*******************

The taxpayer previously sought abatement of the same interest pursuant to the Commissioner’s authority to abate interest under section 6404(e). With respect to the tax periods in question, the Service has the authority to abate the assessment of interest on “any deficiency attributable in whole or in part to any error or delay in performing a ministerial act.” I.R.C. § 6404(e) (amended 1996). Treasury regulations define a ministerial act as follows:

Ministerial act means a procedural or mechanical act that does not involve the exercise of judgment or discretion, and that occurs during the processing of a taxpayer’s case after all prerequisites to the act, such as conferences and review by supervisors, have taken place. A decision concerning the proper application of federal tax law (or other state or federal law) is not a ministerial act.

Treas. Reg. § 301.6404 -2(b)(2). Such an act will be taken into account only if no significant aspect of the error or delay is attributable to acts of the taxpayer. Id. at (a)(2).

The taxpayer’s abatement request was denied. The examiner concluded that there was no error or delay, caused by a ministerial act, which authorized the abatement of interest. The denial letter specifically stated: “At the time you requested a pay off amount, Date E, the Agents had not started the examination of the Company and did not know how much the liability might be. The Agents could not provide an estimate. The fact they did not provide an estimate is not a ministerial act.”

The compromise proposal is based on the same allegation of unreasonable delay as was the abatement request. The question, then, is whether and to what extent interest should be compromised under section 7122 where Congress has defined the limits of the Commissioner’s interest abatement authority elsewhere in the Code. Allowing the compromise of interest for any Service error or delay on the ground that it falls within the intent of Congress to permit compromise based on equity under section 7122 would render the limits of section 6404 superfluous and would arguably constitute an implicit repeal of that section. There is no indication that Congress intended the amendment of section 7122 to repeal section 6404 and to allow the forgiveness of interest where the abatement of that interest would be precluded by section 6404. Moreover, it is a basic canon of statutory interpretation and application that no provision should be interpreted or applied so as to render another provision meaningless or superfluous. See Connecticut National Bank v. Germain , 503 U.S. 249, 253 (1992). We, thus, interpret section 7122 to permit a compromise of interest only where the taxpayer’s claim that interest should be compromised presents a set of facts and circumstances surrounding the error or delay which are so egregious that collection of the liability from the taxpayer would be detrimental to voluntary compliance by taxpayers.

The Service’s procedures recognize this concept. The Examination Offer in Compromise Handbook gives the following guidance with respect to compromise on the theory that collection would be detrimental to voluntary compliance:

The examiner should consider equity already established in the tax law in assessing/analyzing the taxpayer’s [detriment to voluntary compliance] offer. For example, if the taxpayer is requesting compromise of interest accruals, the examiner should be cognizant of the current tax laws concerning interest abatement (managerial, ministerial act), and why current parameters were so established.

IRM 4.3.21.3.4(3).

The taxpayer’s offer states that he played no part in, and had no knowledge of, the acts of his partners in submitting a fraudulent return. In sum, the taxpayer is alleging that the Government should compromise his liability for interest because it arose as a result of fraudulent acts by third parties committed against both himself and the Government which caused a delay in the determination and assessment of his liability. ⁵ He contends that he should not be liable for the full amount of interest that accrued during the time it took the Service to investigate the fraud of his partners and determine the correct tax liability, since he was not a party to the fraud and assisted the Service in documenting the fraud.

******************

⁵ As the taxpayer paid the assessed tax once a corrected notice of deficiency was issued, it is reasonable to assume that, but for the fraudulent acts of his partners, the tax would have been paid when due and no interest would have accrued.

******************

In directing the Service to consider additional bases for compromise in order to promote effective tax administration, we do not believe that Congress intended the Service to adopt a standard where the Government would act as an insurer or would relieve taxpayers of those risks attendant to business and financial transactions. The regulations, which expanded the Commissioner’s compromise authority, provide only a general standard for the kinds of cases that fall under this authority. They give two examples of potential compromises based on the conclusion that collection would be detrimental to voluntary compliance by taxpayers. In the first, a taxpayer is incapacitated and unable to comply with the tax laws. Upon regaining his ability to do so, the taxpayer immediately attends to his tax obligations. In the second, the taxpayer incurs a liability when he relies on erroneous advice by the Service and it is clear that he could have, and would have, avoided the liability had the advice been correct. See Temp. Treas. Reg. § 301.7122-1T(b)(4)(iv)(E).

Compromise due to the acts of third parties beyond the control of the Service is a departure from these examples. ⁶ In both of the examples in the regulations, the implicit assumption is that the taxpayer would have complied but for some occurrence over which he had no control. That is not so in this case. The tax liability arose out of the sale of the assets of Company A to Company B, a transaction in which the taxpayer participated and which took place while he was the president of Company A. The taxpayer now concedes that he should be held liable for the tax. In arguing that the Service’s delay was unreasonable, however, he ignores the fact that had a correct return been submitted at the time of the transaction, there would have been no delay whatsoever in determining the liability. While it is not disputed that the taxpayer played no role in preparing the fraudulent return, it is also undisputed that the taxpayer had knowledge of the transaction, its proceeds, and the fact that it would have tax consequences.

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⁶ One of the examples of compromise based on “economic hardship” does present a situation where a business has suffered an embezzlement loss. See Temp. Treas. Reg. § 301.7122 -1T(b)(4)(iv)(D), Example 4. However, compromise in that example is not premised on the theory that holding the taxpayer liable for the unpaid tax would be inequitable. Rather, the example makes clear that compromise may be entertained in that case because collection of the full tax liability would create an economic hardship in that the company would be driven out of business.

*******************

Under these circumstances, we do not agree that collection would be detrimental to voluntary compliance by taxpayers. To the contrary, compromise of the interest in this case would create an incentive for not inquiring into the consequences of a transaction by relieving those without direct knowledge of interest accruals. As in this case, a corporate officer with full knowledge of the transaction would have no incentive to insure that the return was correct, given that the later discovery of fraud would result in payment of only that amount which would have been owed had the fraud not occurred, with the taxpayer retaining the benefits of the use of those funds during the time that the tax liability went undiscovered. Such a compromise policy would seriously undermine the interest provisions of the Code. For this reason, compromise under these circumstances could not be said to “promote effective tax administration.”

If you have any questions, please contact the attorney assigned to this case at (202) 622-3620 .

cc. Assistant Regional Counsel (GL), Southeast Region

Technical Advice Memorandum

Number: 200248008

Internal Revenue Service

August 16, 2002

INTERNAL REVENUE SERVICE

DEPARTMENT OF THE TREASURY

WASHINGTON, D.C. 20224

August 16, 2002

Number: 200248008

Release Date: 11/29/2002

UIL : 6325.00-00

CC:PA:CBS:B01

7122.00-00

MEMORANDUM FOR ASSOCIATE AREA COUNSEL, SB/SE:3

FROM: Mitchel S. Hyman

Senior Technician Reviewer, Branch 1, Collection, Bankruptcy & Summonses

SUBJECT: Payment for Discharge of Lien or a Compromise to Release a Lien on Property When the Underlying Income Tax Liability has been Discharged in Bankruptcy

This responds to your request for Chief Counsel Advice on whether the Service in a Collection Due Process (“CDP”) case may accept an offer in compromise in lieu of enforcing a lien on a personal residence when the underlying income tax liability has been discharged in bankruptcy. In accordance with I.R.C. § 6110(k)(3), this guidance should not be cited as precedent.

ISSUE

In a CDP case, whether the Service should accept a payment for the discharge of a Federal tax lien or enter into a compromise to satisfy a lien on a personal residence, which is greater in value than the amount offered.

CONCLUSION

No, neither discharge or release, nor an offer in compromise, are available in this case. Because the taxpayers are no longer personally liable for taxes, we conclude that any compromise with the taxpayers would have no effect on the enforceability of the Service’s lien on the property. Thus, compromise would not render the liability “fully satisfied or legally unenforceable” such that the tax lien could be released under section 6325(a) of the Code. Furthermore, payment of a lesser amount would not reflect the value of the Government’s interest in the property in question such that a certificate of discharge could be issued under section 6325(b).

BACKGROUND

This CDP case involves a Federal tax lien on the taxpayers’ personal residence, which arose from the assessment of taxes for Year 1 and Year 2. The taxpayers filed a Chapter 7 bankruptcy petition on Date, and an order of discharge was entered on Date 2. The Service identified the personal residence of the taxpayers as exempt property subject to the lien. On Date 3, the Service sent the taxpayers Letter 1058: Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing. On Date 4, the taxpayers timely requested a CDP hearing.

On Date 5, the taxpayers filed a Motion to Enforce Discharge in the bankruptcy court, and in response, on Date 6, the court ordered that the taxpayers’ case be reopened. On Date 7, the bankruptcy court specifically held that the Year 1 and Year 2 income taxes were discharged, but that the Service could enforce its lien against any exempt property of the debtors.

A CDP hearing between the taxpayers and an appeals officer was held on Date 8 and Date 9. On Date 10, a Notice of Determination was sent to the taxpayers sustaining the proposed levy action. On Date 11, the taxpayers timely filed a petition for the judicial review of the determination.

You have recommended that this case should be resolved in one of two ways. First, you have suggested accepting an amount which is smaller than the value of the Service’s lien on the property in return for the discharge of the lien because, for all practical purposes, the liability is unenforceable due to problems arising from the seizure of the taxpayers’ personal residence. Second, you have suggested that the lien could be released by accepting a smaller amount than the value of the lien on the property through an offer in compromise under section 7122.

DISCUSSION

For the reasons discussed below, we recommend that the Service only settle this case for an amount equal to the value of the lien.

The doctrine of lien pass through was first announced in Long v. Bullard , 117 U.S. 617 (1886). It holds that a perfected lien may pass through the bankruptcy unscathed to the extent the liability it secures is not satisfied and the lien is not subordinated or set aside by the Bankruptcy Code. In practice, a Federal tax lien will usually survive discharge only when a Notice of Federal Tax Lien has been filed and only to the extent it is secured by property that was exempt or excluded from the bankruptcy estate or abandoned by the trustee. When a debtor receives a discharge but the lien nevertheless survives the bankruptcy, the debtor is no longer personally liable for the debt the lien secures. See Johnson v. Home State Bank , 501 U.S. 78, 82-83 (1991). The Service can, however, bring an in rem action to collect from the property by using its administrative collection powers.

Section 6325(a)(1) provides that a lien must be released by the Service when it determines that “the liability for the amount assessed . . . has been fully satisfied or has become legally unenforceable.” “‘Unenforceable’ means unenforceable as a matter of law, and not merely uncollectible.” IRM 5.12.2.2.2(1). When a liability has been discharged in bankruptcy but the lien continues to attach to the debtor’s property, release of the lien is not required because the liability continues to be legally enforceable against the subject property. See In re Wrenn , 40 F.3d 1162, 1164 (11 ^th Cir. 1994) ( citing Dewsnup v. Timm , 502 U.S. 410, 417-418 (1992)); In re Isom , 901 F.2d 744, 745 (9 ^th Cir. 1990).

Section 6325(b) sets forth the conditions under which the Service may issue a certificate of discharge with respect to a specific property subject to a lien. Discharge of a lien in exchange for partial payment of the liability is only authorized where the amount paid is at least equal to the value of the Government’s interest in the property. See I.R.C. § 6325(b)(2)(A); Treas. Reg. § 301.6325 -1(b)(2)(i). The section provides no discretion to accept some amount less than the value of the lien.

Section 7122 grants the Secretary authority to compromise cases. A compromise is an agreement with a particular taxpayer or taxpayers that settles a determined and assessed tax liability for less than the total amount owed. The effect of a compromise is clearly set out in Treasury Regulations, which state:

Acceptance of an offer in compromise will conclusively settle the liability of the taxpayer specified in the offer. Compromise with one taxpayer does not extinguish the liability of, nor prevent the IRS from taking action to collect from, any person not named in the offer who is also liable for the tax to which the compromise relates.

Treas. Reg. § 301.7122 -1(e)(5). Thus, the taxpayer is released from personal liability but the Service may continue to pursue collection from other persons liable for the tax. The regulations contemplate that compromise occurs between the Service and a particular taxpayer, and that the compromise does not act to eliminate or alter the underlying assessment itself.

In the case of a lien which has survived bankruptcy notwithstanding a discharge of the taxpayer/debtor’s personal liability, the lien is enforceable only as an in rem claim and the taxpayer is no longer personally liable. As such, section 7122 is not applicable because that section authorizes only agreements to compromise “civil or criminal liability for taxes, interest, or penalties,” not agreements for the release or discharge of liens. Treas. Reg. § 301.7122 -1(a)(2). Compromise with the taxpayer as an individual would have no effect on the enforceability of the lien for purposes of the analysis under section 6325(a), because the taxpayer has already been relieved of the obligation the compromise would purport to cover. Following such a compromise, the Service would be left with the same ability to collect as it had prior to accepting the offer. Under section 6325(a), lien release would not then be authorized or required. Similarly, compromise with the taxpayer in this case would not authorize lien discharge under section 6325(b).

The Service may compromise when there is doubt as to liability, doubt as to collectibility, or where compromise would promote effective tax administration. Treas. Reg. § 301.7122 -1(b). In this case, there has been no suggestion that the existence or amount of the tax liability is in doubt. The value of the property far exceeds the amount of the lien and no creditor has priority over the Service, so there is no doubt that the lien amount can be collected in full. ¹ The request for advice does not indicate facts that would authorize compromise to promote effective tax administration. Compromise on that basis is authorized only where collection in full would cause economic hardship or where compelling equity or public policy considerations identified by the taxpayer provide a sufficient basis for compromise. See Treas. Reg. § 301.7122 -1(b)(3).

******

¹ We are unaware of a case in which a bankruptcy discharge has been granted, but the lien passed through, in which there could be doubt as to collectibility with respect to the in rem liability that can be asserted against the property. By definition, the value of the in rem claim is limited to the interest in the property to which the lien attached. As a non-recourse debt secured by property, any loss of value in the property diminishes the value of the Service’s claim. Thus, at any point, the collection potential from the property is equal to the Service’s claim and can therefore always be collected in full.

******

While seizure of the residence would force the taxpayers and their dependents to find new housing, the financial analysis does not support the conclusion that other housing could not be obtained or that doing so would cause economic hardship as defined in applicable Treasury Regulations. In fact, the financial analysis supports the conclusion that the taxpayers have the ability to pay in full and thereby could avoid the seizure of the property. The act of enforcing the lien on the property despite the bankruptcy discharge does not rise to an authorized reason for compromise under the regulations. See I.R.M. 5.8.11.2.2(2) (“Compromise . . . is not authorized based solely on a taxpayer’s belief that a provision of the tax law is itself unfair.”).

********* deference must be given to the Service’s determination that there is sufficient equity in the taxpayers’ residence to warrant a levy. Additionally, the Service may not levy on a taxpayer’s principal residence without obtaining judicial approval from the district court under I.R.C. § 6334(e). If the taxpayers would like to challenge the propriety of having a lien foreclosed on their personal residence, they may raise this issue in the district court.

      *******************

*****

² Should the taxpayer default on a non-payment term of the compromise, the Service is authorized to revoke the certificate of release. I.R.C. § 6325(f)(2).

*****

For the above-mentioned reasons, we conclude that neither compromise, release, nor discharge is appropriate under the facts of this case.

This advice has been coordinated with Branch 2 of Collection, Bankruptcy and Summonses. If you have any questions concerning this matter, please contact

C

Technical Advice Memorandum

Number: 200248008

Internal Revenue Service

August 16, 2002

INTERNAL REVENUE SERVICE

DEPARTMENT OF THE TREASURY

WASHINGTON, D.C. 20224

August 16, 2002

Number: 200248008

Release Date: 11/29/2002

UIL : 6325.00-00

CC:PA:CBS:B01

7122.00-00

MEMORANDUM FOR ASSOCIATE AREA COUNSEL, SB/SE:3

FROM: Mitchel S. Hyman

Senior Technician Reviewer, Branch 1, Collection, Bankruptcy & Summonses

SUBJECT: Payment for Discharge of Lien or a Compromise to Release a Lien on Property When the Underlying Income Tax Liability has been Discharged in Bankruptcy

This responds to your request for Chief Counsel Advice on whether the Service in a Collection Due Process (“CDP”) case may accept an offer in compromise in lieu of enforcing a lien on a personal residence when the underlying income tax liability has been discharged in bankruptcy. In accordance with I.R.C. § 6110(k)(3), this guidance should not be cited as precedent.

ISSUE

In a CDP case, whether the Service should accept a payment for the discharge of a Federal tax lien or enter into a compromise to satisfy a lien on a personal residence, which is greater in value than the amount offered.

CONCLUSION

No, neither discharge or release, nor an offer in compromise, are available in this case. Because the taxpayers are no longer personally liable for taxes, we conclude that any compromise with the taxpayers would have no effect on the enforceability of the Service’s lien on the property. Thus, compromise would not render the liability “fully satisfied or legally unenforceable” such that the tax lien could be released under section 6325(a) of the Code. Furthermore, payment of a lesser amount would not reflect the value of the Government’s interest in the property in question such that a certificate of discharge could be issued under section 6325(b).

BACKGROUND

This CDP case involves a Federal tax lien on the taxpayers’ personal residence, which arose from the assessment of taxes for Year 1 and Year 2. The taxpayers filed a Chapter 7 bankruptcy petition on Date, and an order of discharge was entered on Date 2. The Service identified the personal residence of the taxpayers as exempt property subject to the lien. On Date 3, the Service sent the taxpayers Letter 1058: Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing. On Date 4, the taxpayers timely requested a CDP hearing.

On Date 5, the taxpayers filed a Motion to Enforce Discharge in the bankruptcy court, and in response, on Date 6, the court ordered that the taxpayers’ case be reopened. On Date 7, the bankruptcy court specifically held that the Year 1 and Year 2 income taxes were discharged, but that the Service could enforce its lien against any exempt property of the debtors.

A CDP hearing between the taxpayers and an appeals officer was held on Date 8 and Date 9. On Date 10, a Notice of Determination was sent to the taxpayers sustaining the proposed levy action. On Date 11, the taxpayers timely filed a petition for the judicial review of the determination.

You have recommended that this case should be resolved in one of two ways. First, you have suggested accepting an amount which is smaller than the value of the Service’s lien on the property in return for the discharge of the lien because, for all practical purposes, the liability is unenforceable due to problems arising from the seizure of the taxpayers’ personal residence. Second, you have suggested that the lien could be released by accepting a smaller amount than the value of the lien on the property through an offer in compromise under section 7122.

DISCUSSION

For the reasons discussed below, we recommend that the Service only settle this case for an amount equal to the value of the lien.

The doctrine of lien pass through was first announced in Long v. Bullard , 117 U.S. 617 (1886). It holds that a perfected lien may pass through the bankruptcy unscathed to the extent the liability it secures is not satisfied and the lien is not subordinated or set aside by the Bankruptcy Code. In practice, a Federal tax lien will usually survive discharge only when a Notice of Federal Tax Lien has been filed and only to the extent it is secured by property that was exempt or excluded from the bankruptcy estate or abandoned by the trustee. When a debtor receives a discharge but the lien nevertheless survives the bankruptcy, the debtor is no longer personally liable for the debt the lien secures. See Johnson v. Home State Bank , 501 U.S. 78, 82-83 (1991). The Service can, however, bring an in rem action to collect from the property by using its administrative collection powers.

Section 6325(a)(1) provides that a lien must be released by the Service when it determines that “the liability for the amount assessed . . . has been fully satisfied or has become legally unenforceable.” “‘Unenforceable’ means unenforceable as a matter of law, and not merely uncollectible.” IRM 5.12.2.2.2(1). When a liability has been discharged in bankruptcy but the lien continues to attach to the debtor’s property, release of the lien is not required because the liability continues to be legally enforceable against the subject property. See In re Wrenn , 40 F.3d 1162, 1164 (11 ^th Cir. 1994) ( citing Dewsnup v. Timm , 502 U.S. 410, 417-418 (1992)); In re Isom , 901 F.2d 744, 745 (9 ^th Cir. 1990).

Section 6325(b) sets forth the conditions under which the Service may issue a certificate of discharge with respect to a specific property subject to a lien. Discharge of a lien in exchange for partial payment of the liability is only authorized where the amount paid is at least equal to the value of the Government’s interest in the property. See I.R.C. § 6325(b)(2)(A); Treas. Reg. § 301.6325 -1(b)(2)(i). The section provides no discretion to accept some amount less than the value of the lien.

Section 7122 grants the Secretary authority to compromise cases. A compromise is an agreement with a particular taxpayer or taxpayers that settles a determined and assessed tax liability for less than the total amount owed. The effect of a compromise is clearly set out in Treasury Regulations, which state:

Acceptance of an offer in compromise will conclusively settle the liability of the taxpayer specified in the offer. Compromise with one taxpayer does not extinguish the liability of, nor prevent the IRS from taking action to collect from, any person not named in the offer who is also liable for the tax to which the compromise relates.

Treas. Reg. § 301.7122 -1(e)(5). Thus, the taxpayer is released from personal liability but the Service may continue to pursue collection from other persons liable for the tax. The regulations contemplate that compromise occurs between the Service and a particular taxpayer, and that the compromise does not act to eliminate or alter the underlying assessment itself.

In the case of a lien which has survived bankruptcy notwithstanding a discharge of the taxpayer/debtor’s personal liability, the lien is enforceable only as an in rem claim and the taxpayer is no longer personally liable. As such, section 7122 is not applicable because that section authorizes only agreements to compromise “civil or criminal liability for taxes, interest, or penalties,” not agreements for the release or discharge of liens. Treas. Reg. § 301.7122 -1(a)(2). Compromise with the taxpayer as an individual would have no effect on the enforceability of the lien for purposes of the analysis under section 6325(a), because the taxpayer has already been relieved of the obligation the compromise would purport to cover. Following such a compromise, the Service would be left with the same ability to collect as it had prior to accepting the offer. Under section 6325(a), lien release would not then be authorized or required. Similarly, compromise with the taxpayer in this case would not authorize lien discharge under section 6325(b).

The Service may compromise when there is doubt as to liability, doubt as to collectibility, or where compromise would promote effective tax administration. Treas. Reg. § 301.7122 -1(b). In this case, there has been no suggestion that the existence or amount of the tax liability is in doubt. The value of the property far exceeds the amount of the lien and no creditor has priority over the Service, so there is no doubt that the lien amount can be collected in full. ¹ The request for advice does not indicate facts that would authorize compromise to promote effective tax administration. Compromise on that basis is authorized only where collection in full would cause economic hardship or where compelling equity or public policy considerations identified by the taxpayer provide a sufficient basis for compromise. See Treas. Reg. § 301.7122 -1(b)(3).

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¹ We are unaware of a case in which a bankruptcy discharge has been granted, but the lien passed through, in which there could be doubt as to collectibility with respect to the in rem liability that can be asserted against the property. By definition, the value of the in rem claim is limited to the interest in the property to which the lien attached. As a non-recourse debt secured by property, any loss of value in the property diminishes the value of the Service’s claim. Thus, at any point, the collection potential from the property is equal to the Service’s claim and can therefore always be collected in full.

******

While seizure of the residence would force the taxpayers and their dependents to find new housing, the financial analysis does not support the conclusion that other housing could not be obtained or that doing so would cause economic hardship as defined in applicable Treasury Regulations. In fact, the financial analysis supports the conclusion that the taxpayers have the ability to pay in full and thereby could avoid the seizure of the property. The act of enforcing the lien on the property despite the bankruptcy discharge does not rise to an authorized reason for compromise under the regulations. See I.R.M. 5.8.11.2.2(2) (“Compromise . . . is not authorized based solely on a taxpayer’s belief that a provision of the tax law is itself unfair.”).

********* deference must be given to the Service’s determination that there is sufficient equity in the taxpayers’ residence to warrant a levy. Additionally, the Service may not levy on a taxpayer’s principal residence without obtaining judicial approval from the district court under I.R.C. § 6334(e). If the taxpayers would like to challenge the propriety of having a lien foreclosed on their personal residence, they may raise this issue in the district court.

      *******************

*****

² Should the taxpayer default on a non-payment term of the compromise, the Service is authorized to revoke the certificate of release. I.R.C. § 6325(f)(2).

*****

For the above-mentioned reasons, we conclude that neither compromise, release, nor discharge is appropriate under the facts of this case.

This advice has been coordinated with Branch 2 of Collection, Bankruptcy and Summonses. If you have any questions concerning this matter, please contact

Technical Advice Memorandum

Number: 200121012

Internal Revenue Service

February 8, 2001

OFFICE OF CHIEF COUNSEL

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224

February 8, 2001

Number: 200121012

Release Date: 5/25/2001

CC:PA:CBS:Br2

GL-804160-00

UILC: 17.07.00-00; 9999.98-00

MEMORANDUM FOR ASSOCIATE AREA COUNSEL, SB/SE, AREA 7, SEATTLE

FROM: Kathryn A. Zuba

Chief, Branch 2 (Collection, Bankruptcy & Summonses)

SUBJECT: Offer in Compromise --This memorandum responds to your request for advice dated June 13, 2000. This document is not to be cited as precedent. You have asked our advice as to whether the above referenced taxpayer’s tax shelter-related liabilities could be compromised under the Commissioner’s new authority to compromise based on the promotion of effective tax administration. We conclude this case does not present exceptional circumstances such that collection of the full tax liability would be detrimental to voluntary compliance by taxpayers.

BACKGROUND:

In 1983, the taxpayer learned of the opportunity to invest in X, a partnership which was itself a partner in several of the nationally marketed Y partnerships. The tax attorney who told him of the investment assured him that the general partners were credible and that the investment was real and substantive as opposed to merely a tax shelter. The taxpayer states that he also sought the advice of his accountant and hired an independent tax attorney to review the materials, and that both advised him that the investment was sound from both a tax and profit potential standpoint. The taxpayer signed on as a limited partner and immediately realized investment tax credits which significantly reduced or eliminated his tax liabilities for 1980, 1981, 1982, and 1983.

In 1988, the taxpayer learned that the Y partnerships were under investigation by the Service and that the investment tax credits would be disallowed. In an attempt to remove the partnership-related items from his return, the taxpayer filed amended returns for the years 1980 through 1985. The Service Center did not process the returns, concluding that the statute of limitations for assessment had run for those years.

In 1989, the taxpayer accepted the Service’s settlement offer with respect to the proposed adjustments to the partnership items on his returns. Consistent with this settlement, tax motivated transaction interest under former section 6621(c) was assessed against the taxpayer. In 1996, the taxpayer received a letter outlining the Service’s settlement proposal with respect to overvaluation, substantial underpayment, and negligence penalties. Partners accepting the settlement would be assessed only a 10% section 6659 overvaluation penalty. For partners who declined to settle, the letter explained that the Service’s litigation position would be that they were liable for both substantial underpayment and negligence penalties. The taxpayer apparently declined to settle, and statutory notices of deficiency were issued shortly thereafter. The taxpayer defaulted on the notices and penalties were assessed in late 1996. As of Date 1 the tax liability totaled more than $a.

The taxpayer has offered to compromise with the Service on terms more favorable than those he declined to accept in 1996. He proposes to pay just over $b in full satisfaction of his liabilities relating to investment in the tax shelter. The collection information statements in the file reveal that this offer represents less than 10% of the current value of his assets, without taking current and prospective income into account. In fact, it is undisputed that the assessed tax liability, including all interest accruals, could be collected in full without causing the taxpayer economic hardship as defined under Treasury regulations. The taxpayer’s offer is premised not on any hardship or collectibility grounds, but on the theory that holding him liable for full payment would be unfair and would therefore be detrimental to voluntary compliance.

The taxpayer raises two principal arguments in support of his contention that equity and fairness warrant the acceptance by the Service of less than the previously determined and assessed tax. First, the taxpayer argues that he should not be held liable for penalties or tax-motivated transaction interest because he performed “due diligence” prior to investing in the partnership and signed on as a partner with a legitimate expectation of future profits. Second, the taxpayer argues that the Service erred by failing to process the amended returns he submitted in December of 1988. In addition to these specific allegations, the offer and the supporting documentation imply that the Service should compromise with the taxpayer because he was defrauded by the tax shelter promoters.

In sum, the taxpayer argues that acceptance by the Service of his proposed compromise would promote effective tax administration because collecting the tax in full would be detrimental to voluntary compliance by taxpayers. Your draft memorandum to the offer group concludes that compromise of the taxpayer’s tax shelter-related liabilities would not promote effective tax administration. As is explained more fully below, we agree with your conclusion.

DISCUSSION:

The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to referral to the Department of Justice for prosecution or defense. I.R.C. §7122(a). Permissible bases for compromise are established by Treasury regulations. Temporary regulations issued July 19, 1999, expanded the Service’s authority to compromise beyond the traditional bases of doubt as to collectibility or doubt as to liability. See Temp. Treas. Reg. § 301.7122 -1T. Where there are no grounds for compromise on collectibility or liability grounds, a compromise may be entered into to promote effective tax administration, where: (1) collection of the full liability would create economic hardship within the meaning of section 301.6343 -1 of the Treasury Regulations; or (2) exceptional circumstances exist such that collection of the full liability would be detrimental to voluntary compliance by taxpayers. Temp. Treas. Reg. § 301.7122 -1T(b)(4). No such compromise may be entered into where it would undermine future compliance with the tax laws. Id.

The taxpayer has proposed compromise of this case based on a determination that it would “promote effective tax administration” under the standards articulated in the regulations. The taxpayer argues that even though, as is noted above, the tax liability at issue could be collected in full without causing economic hardship, collection of the full tax liability would be detrimental to voluntary compliance by taxpayers. Where this basis can be established, compromise is authorized regardless of the taxpayer’s financial circumstances. See Temp. Treas. Reg. § 301.7122 -1T(b)(4)(ii). The regulations do not give a more exact standard or list factors to be considered, but illustrate this basis through two examples. See Temp. Treas. Reg. § 301.7122 -1T(b)(4)(iv)(E). The procedures implementing this basis for compromise show that the Service anticipates compromising when collection of the full liability would be unfair or inequitable. See IRM 5.8.11.2.2(3); Form 656, Offer in Compromise (Rev. 1-2000), Instructions at 2.

The taxpayer maintains that his “due diligence” in investigating the partnership before investing demonstrates that his decision to invest was motivated by profit potential. However, his personal profit motive is not relevant to determination of the tax motivated transaction interest he seeks to avoid. Whether a partnership transaction is entered into for profit is determined by the intent of the partnership, based on the intent of the general partners entering into the transaction. See Polakof v. Commissioner , 820 F.2d 321 (9th Cir. 1987); Brannen v. Commissioner , 78 T.C. 741, 501-504 (1982), aff'd , 722 F.2d 695 (11th Cir. 1984). See also Goodwin v. Commissioner, 75 T.C. 424, 437 (1980), aff'd without published opinion , 691 F.2d 490 (3d Cir. 1982); Siegel v. Commissioner , 78 T.C. 659, 698 (1982), acq ., 1984-2 C.B. 1 and acq ., 1984-2 C.B. 2. ¹ As a “partnership item,” profit motivation is determined in a partnership level proceeding. Treas. Reg. § 301.6231 (a)(3)-1(b); I.R.C. § 6221.

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¹ Similarly, the valuation of partnership assets for purposes of the overvaluation penalty under former section 6659(c) and section 6662(b)(3) is determined at the partnership level. Smith v. Commissioner , T.C. Memo. 1990-510. Such an overvaluation makes tax motivated interest apply under former section 6621(c)(3)(A)(i).

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A partner is bound with respect to “affected items” based on the determination of partnership items. Affected items are items that are affected by partnership items. I.R.C. § 6231(a)(5). Affected items include penalties. Temp. Treas. Reg. § 301. 6231(a)(5)-1T. Tax motivated interest under former section 6621(c) is an affected item. White v. Commissioner , 95 T.C. 209 (1990). If a transaction is determined to be a sham at the partnership level because the partnership did not enter into the transaction for profit, tax motivated interest under former section 6621(c) applies irrespective of an individual partner’s personal motive for investing in the partnership. See Thomas v. United States 83 AFTR2d Par. 99-369 (6 ^th Cir. 1999) (section 6621(c) applies because the transactions were shams, regardless of the individual partner’s profit motive). See also Chakales v. Commissioner , 79 F.3d 726, 728 (8th Cir.), cert. denied, 117 S. Ct. 85 (1996); Anderson v. Commissioner , 62 F.3d 1266, 1274 (10th Cir. 1995); Estate of Carberry v. Commissioner , 933 F.2d 1124, 1130 (2d Cir. 1991); Karr v. Commissioner , 924 F.2d 1018, 1026 (11th Cir. 1991); Kozlowski v. Commissioner , 66 T.C.M. ( CCH ) 754, 755-56 (1993), aff'd , 70 F.3d 1279 (9th Cir. 1995); Klieger v. Commissioner , 64 T.C.M. ( CCH ) 1624, 1638 (1992).

The taxpayer’s offer makes no effort to dispute any of the foregoing. His offer maintains that these rules are unfair and that his personal profit motive should be taken into account. He is essentially maintaining that Congress has enacted an unfair statutory scheme and that the Service should use its compromise power to rewrite the rules regarding the determination of partnership liabilities. We cannot agree that the authority to compromise under section 7122 is so broad as to allow the Service to disregard or override the considered judgments of Congress. ² The Service’s procedures for compromise based on the promotion of effective tax administration recognize that the policy choices made elsewhere in the Code must be given due consideration. See IRM Handbook 4.3.21, Exam Offer in Compromise, Section 3.4(3). Where, as here, Congress has enacted an express and comprehensive scheme which dictates a certain result, a decision to categorically disregard that scheme would be beyond the Service’s authority.

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² An analogy to bankruptcy law may help illustrate this point. Congress has granted bankruptcy courts the power “to issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code].” 11 U.S.C. § 105(a). However, the Supreme Court has held that even this broad grant of power does not exist in a vacuum and cannot be used to disregard or circumvent specific Bankruptcy Code provisions. See Norwest Bank Worthington v. Ahlers , 485 U.S. 197, 206 (1988) (stating that a bankruptcy court’s equitable powers “must and can only be exercised within the confines of the bankruptcy code”). It is logical to conclude that the Secretary’s discretionary compromise authority is similarly constrained.

*******************

As is mentioned above, the taxpayer attempted to amend his returns to remove most of the investment tax credits related to his investment in the subject partnership. Upon receipt of the amendments, the Service Center concluded that the statute of limitations prevented amendment of the returns in question. The taxpayer and the offer examiner have correctly pointed out that the statute of limitations for assessment of the items the taxpayer sought to amend was held open by the on-going partnership level proceeding. However, it does not follow from this conclusion regarding the statute of limitations that the amended returns should have been processed. The Code requires that all partnership items on an individual partner’s return be treated in a manner consistent with the position taken on the partnership return. See I.R.C. § 6222(a). A partner who wishes to amend partnership items can request to do so by filing an administrative adjustment request with the Service within three years of the filing of the partnership return and prior to the issuance of a final partnership administrative adjustment (FPAA) to the tax matters partner. See I.R.C. § 6227(a) & (d). After the time for filing an administrative adjustment request has expired, an individual partner can make a deposit to stop the accrual of interest, but only in the manner specified by Announcement 86-114, 1986-47 I.R.B. 46. Because the taxpayer did not file an administrative adjustment request (Form 8082) with his return, and did not comply with the deposit procedures of Announcement 86-114, the amended returns should not have been processed. ³

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³ It is our understanding that the payment made at the time the taxpayer submitted the amended returns has since been applied as the taxpayer initially instructed, and that interest accruals have been adjusted accordingly.

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Finally, we address the claim that the fraudulent acts of the tax shelter’s general partners create a basis for compromise of this case. We cannot agree with this premise. In directing the Service to consider additional bases for compromise in order to promote effective tax administration, Congress gave no indication that it intended that the Service would adopt a standard under which the Government would act as an insurer or would relieve taxpayers of those risks attendant to business and financial transactions. The regulations expanding the Commissioner’s compromise authority are also inconsistent with this idea. They give two examples of potential compromises based on the conclusion that collection would be detrimental to voluntary compliance by taxpayers. In the first, a taxpayer is incapacitated and unable to comply with the tax laws. Upon regaining his ability to do so, the taxpayer immediately attends to his tax obligations. In the second, the taxpayer incurs a liability when he relies on erroneous advice by the Service and it is clear that he could have, and would have, avoided the liability had the advice been correct. See Temp. Treas. Reg. § 301.7122 -1T(b)(4)(iv)(E).

Compromise due to the acts of third parties beyond the control of the Service, particularly acts by a taxpayer’s partners, employees, or other fiduciaries, is a departure from these examples. In both of the examples in the regulations, the implicit assumption is that the taxpayer would have complied but for some occurrence over which he had no control. That is not so in this case. Here the taxpayer’s liability arose out of sham transactions in which he chose to participate as a partner. Regardless of whether the taxpayer knew or had reason to know that the general partners were making misrepresentations or would later fail to perform on their obligations as promised, the taxpayer was the individual in the best position to evaluate those risks.

Under these circumstances, we do not agree that collection would be detrimental to voluntary compliance by taxpayers. To the contrary, compromise on the basis of the general partners’ fraud would place the Government in the role of an insurer against poor business decisions by taxpayers, reducing the incentive for taxpayers to thoroughly investigate the consequences of transactions. For the Service to play that role would be particularly inappropriate when the transaction at issue is participation in a tax shelter. Reducing the risks of participating in tax shelters would encourage more taxpayers to run those risks, thus undermining, rather than enhancing, compliance with the tax laws. See Temp. Treas. Reg. § 301.7122 -1T(b)(4)(ii) (no compromise based on the promotion of effective tax administration may be entered into where it would undermine compliance with the tax laws). Compromise in this case could also seriously undermine the Service’s ongoing efforts to settle large tax shelter litigation on a consistent basis. See I.R.C. § 6224(c) (requiring that consistent settlements be offered to all partners). For these reasons, compromise under these circumstances could not be said to “promote effective tax administration.”

If you have any questions, please contact the attorney assigned to this matter at (202) 622-3620 .

Technical Advice Memorandum

Number 200043006

Internal Revenue Service

June 30, 2000

Release Date: 10/27/00

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224

June 30, 2000

MEMORANDUM FOR DISTRICT COUNSEL,

FROM: Kathryn A. Zuba

Chief, Branch 2 (General Litigation)

SUBJECT: Offer in Compromise --This memorandum responds to your request for advice dated February 4, 2000. This document may not be cited as precedent. You requested our views regarding whether the above referenced case could be compromised under the Commissioner’s new authority to compromise based on the promotion of effective tax administration. We agree with your conclusion that collection of the full tax liability would not create economic hardship within the meaning of section 301.7122-1T of the temporary Treasury Regulations.

BACKGROUND :

Company A, in which the taxpayers were limited partners during the taxable year T, was audited at the partnership level by the Service pursuant to the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”). The Service denied certain deductions and issued a final partnership administrative adjustment, the TEFRA equivalent of a statutory notice of deficiency, to the company.

The tax matters partner petitioned the Tax Court on behalf of the company, arguing that the disallowed deductions were legitimate losses incurred in the purchase and resale of time-share interests in resort properties. The Commissioner asserted that the sales were sham transactions which should not be given effect for tax purposes. ¹ The Tax Court examined the suspect transactions in depth, concluding that they lacked economic substance and were a variant on the “shopworn tax avoidance scheme” of purchasing deductions from other property owners. The court upheld the Commissioner’s determination of tax liability in full. See Case 1. As a result of the deficiency assessed against the partnership, the taxpayers now owe over $U.

*****************

¹ The company’s prospectus for potential investors projected a loss ratio of 3.67 to one in the first year. The prospectus made clear that “loss ratio” referred to the ratio of each partner’s loss for tax purposes to their respective cash investment.

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The taxpayers first proposed a compromise based on doubt as to liability. They asserted that the TEFRA audit procedures were improperly employed in the company’s case, because it was formed prior to the effective date of TEFRA. In response to a request from the Office of the Taxpayer Advocate, District B, your office advised that there can be no doubt as to liability where the tax liability has been settled by a final court determination concerning the existence of the liability. See Temp. Treas. Reg. § 301.7122 -1T(b)(2). You pointed out that the only means for obtaining relief if a partnership has been improperly classified as a TEFRA partnership is a motion to dismiss for lack of jurisdiction. As the tax liability of the partnership was tried in the Tax Court and upheld on appeal, there is no doubt as to liability.

The taxpayers next proposed compromise on the grounds that compromise would promote effective tax administration. Relying on the recently expanded regulations governing compromise, discussed below, they argued that their offer of $V should be accepted because collection of the liability in full would cause them economic hardship. See Temp. Treas. Reg. § 301.7122 -1T(b)(4)(i). Your office has concluded that collection of the full liability would not cause the taxpayers economic hardship within the meaning of the regulations. Applying the standard set forth in the regulations, you concluded that full payment would not render the taxpayers unable to meet their basic living expenses.

DISCUSSION:

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. I.R.C. § 7122(a). Permissible bases for compromise are established by Treasury regulations. Temporary regulations issued July 19, 1999, expanded the Service’s authority to compromise beyond the traditional bases of doubt as to collectibility or doubt as to liability. See Temp. Treas. Reg. § 301.7122 -1T. Where there are no grounds for compromise on collectibility or liability grounds, a compromise may be entered into to promote effective tax administration, where: (1) collection of the full liability would create economic hardship within the meaning of section 301.6343 -1 of the Treasury Regulations; or (2) exceptional circumstances exist such that collection of the full liability would be detrimental to voluntary compliance by taxpayers. Temp. Treas. Reg. § 301.7122-1T(b)(4). No such compromise may be entered into where it would undermine future compliance with the tax laws. Id .

In this case, the tax liability has been determined by a court judgment, and there is no doubt that the tax liability could be collected in full. Compromise could therefore only be based on a determination that it would “promote effective tax administration” under the standards articulated in the regulations. The local Taxpayer Advocate has suggested that this case should be compromised because collection by other means would create an economic hardship. As with compromises based on doubt as to collectibility, the individual financial circumstances of the taxpayers must be examined before concluding that compromise is authorized, as well as to determine that the amount offered should be accepted.

Economic hardship is defined as an inability to pay reasonable basic living expenses. Treas. Reg. § 301.6343 -1(b)(4). In determining reasonable basic living expenses, the Service must consider relevant information such as a taxpayer’s age, employment status and history, and number of dependents, as well as the cost of living in the taxpayer’s geographic area. See Treas. Reg. § 301.6343 -1(b)(4)(i)(A)-(C). Reasonable basic living expenses will vary according to a taxpayer’s unique circumstances. Id . However, unique circumstances do not include the maintenance of an affluent or luxurious standard of living. Id .

The financial analysis conducted by the revenue officer reveals substantial assets from which the tax liability could be collected. After reducing assets to their “quick sale value,” the taxpayer’s net equity is estimated at $W. ² This includes several assets that could readily be liquidated without loss of equity, such as individual retirement accounts and publicly traded securities. The analysis of monthly income and expenses shows that they are about equal. ³ Thus, the proposed offer $V represents less than 2% of the taxpayers’ net equity in assets after making allowances for reasonable basic living expenses.

***************

² In reviewing an offer in compromise, Counsel should accept the valuation determinations of the Service unless such determinations appear “patently erroneous.” CCDM (34)521(3)(a)1. We have done so for purposes of this discussion. We note, however, that several assets, such as the IRAs and stocks, have been valued at less than manual provisions dictate, without explanation. Where an asset has been disregarded or reduced in value without explanation, Counsel cannot evaluate the sufficiency of the offer. CCDM (34)521(3)(a)4c. In such cases, the office proposing acceptance of the offer should be contacted for additional documentation.

³ Your memorandum noted that the taxpayers became eligible for an $X monthly Social Security payment effective Date A, but that amount was not included in the analysis. For purposes of this discussion, we have included that amount in calculating monthly income.

***************

We agree with your conclusion that the above facts do not support a finding that collection of the liability at issue would render the taxpayers unable to meet reasonable basic living expenses. As you pointed out, the taxpayers’ assets total more the four times the amount of the tax liability. At the time your memorandum was issued, the tax liability could have been satisfied by liquidating less than half of the stock owned by the taxpayers, with no amount raised from other assets or future income. Given that monthly income and expenses are equal, and that more than $Y in assets would remain after collection of the tax liability, we can see no basis for concluding that collection would create an economic hardship within the meaning of the regulations.

The offer in compromise regulations give guidance beyond that contained in the regulations they cross-reference. They list several non-exclusive factors which support, but are not conclusive of, a finding of economic hardship:

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

(2) Although taxpayer has certain assets, liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses; and

(3) Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and disposition by seizure or sale of the assets would have sufficient adverse consequences such that enforced collection is unlikely.

Temp. Treas. Reg. § 301.7122 -1T(b)(4)(iv)(B). These factors do not provide additional, independent bases for compromise. Rather, they supplement the standard of section 301.6343 -1, by providing examples of circumstances encountered in the offer in compromise program in the past.

Each of these supplemental factors were intend to convey that the Service now has the authority to compromise in situations where, even though the liability could be collected in full, some exceptional circumstance exists such that full collection would render the taxpayer unable to meet basic living expenses. The factors and examples in the regulations contemplate an identifiable, present situation which leads the Service to conclude that collection in full would more likely than not lead to serious economic hardship in the near future. As has long been the case with doubt as liability and doubt as to collectibility cases, the Commissioner continues to anticipate that the basis for compromise will be investigated and verified, and that anticipation of some future, uncertain set of potential circumstances should not be the basis for compromise.

The offer recommendation report in this case makes mention of several of the unique circumstances of the taxpayers which, though this is not fully explained, appear to suggest that the taxpayers may experience financial hardship at some indefinite time in the future. For instance, it notes the taxpayer-wife has an illness and notes the financial instability of her current employer. However, neither of these facts establishes that the taxpayers are currently experiencing the type of hardship contemplated by the regulations. These facts are, moreover, insufficient to show with any degree of certainty that the taxpayers will suffer any reasonably foreseeable financial hardship in the near term. The file and the report do not support any finding, for example, that the taxpayer-wife will be unable to continue to earn a living or will not be able to obtain other employment should her current employer go out of business. The documentation in the file does not explain how, in the language of the regulation, it is “reasonably foreseeable that taxpayer’s financial resources will be exhausted providing for care and support during the course of the condition.”

CONCLUSION:

For the foregoing reasons, we conclude that this case is not susceptible to compromise on grounds of promoting effective tax administration. Examination of the taxpayers’ case does not support a finding that collection would result in economic hardship, because there has been no showing that collection of the tax liability in full would render the taxpayers unable to provide for reasonable basic living expenses. ⁴

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⁴ We note that a determination that collection of the full tax liability would create an economic hardship would not end the offer investigation. The offer specialist must still make a judgment as to whether an offer a particular amount should be accepted. The Internal Revenue Manual gives the following guidance with respect to determining an acceptable offer based on considerations of economic hardship:

In offers based on economic hardship, an acceptable offer amount should be determined based on the facts and circumstances of the taxpayer’s situation and the financial information analysis. For example, the taxpayer has $100,000 liability and assets and income of $125,000. To avoid economic hardship, it is determined that the taxpayer will need $75,000. The remaining $50,000 should be considered in determining an acceptable offer amount.

IRM 5.8.11.2.1(4). The standard articulated in this manual provision appears very similar to the “reasonable collection potential” standard used for doubt as to collectibility offers, see Policy Statement P-5-100, in that the Service expects a taxpayer to offer an amount equal to that which could be collected after the economic hardship has been accounted for.

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If you have any questions, please contact the attorney assigned to this case at (202) 622-3620 .

cc. Assistant Regional Counsel (GL), Western Region

Technical Advice Memorandum

Number: 199917020

Internal Revenue Service

January 21, 1999

Release Date: 4/30/1999

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224

January 21, 1999

CC:EL:GL:Br2 GL-706439-98

UIL : 9999.9800

MEMORANDUM FOR DISTRICT COUNSEL, KANSAS-MISSOURI DISTRICT

FROM: Kathryn A. Zuba

Chief, Branch 2 (General Litigation)

SUBJECT: Nominee - Offer in Compromise

This responds to your request dated October 19, 1998. This document is not to be cited as precedent.

By memorandum dated October 19, 1998, you requested our review of advice which you issued on that date to the Chief, Special Procedures Branch, Kansas-Missouri District. The SPB requested advice on two issues: first, whether a nominee may submit an offer in compromise based on doubt as to collectibility on behalf of the taxpayer against whom the assessment was made; and, second, whether nominee liens, in general, may be compromised. In your advice memorandum, you concluded that the nominee could not compromise the liability on behalf of the taxpayer and that nominee liens, generally, are not subject to compromise. We have reviewed your memorandum and, in general, agree with your conclusions.

ISSUES:

(1) Whether a nominee may file an offer in compromise on behalf of the taxpayer liable for the assessment.

(2) Whether nominee liens may be compromised under I.R.C. § 7122.

CONCLUSIONS:

(1) Absent authority to enter into a binding contract on behalf of the taxpayer against whom the assessment was made, a nominee may not compromise the tax liability giving rise to the lien.

(2) Section 7122 of the Internal Revenue Code authorizes the Service to compromise tax liabilities. A nominee lien can be extinguished only by satisfying the underlying liability, whether by full payment or by compromise agreement executed by an individual with authority to do so.

FACTS:

On Date B the Internal Revenue Service filed a proof of claim in the Probate Court for City A against the Estate of Taxpayer X for a total of Amount A. The claim included income taxes for Year 1 totaling Amount B, plus additions to tax and interest, and Amount C, plus additions to tax and interest. Taxpayer Y was appointed personal representative of the estate. A probate court filing of Date A listed probate assets of the estate totaling Amount D.

In the time since becoming personal representative, Taxpayer Y liquidated substantially all of the estate’s property and invested the proceeds in other ventures, ostensibly to increase the value of the estate. In an interview with the IRS on Date C, Taxpayer Y was unable to identify the specific investments made and was described by the Revenue Officer as evasive. A statement later submitted to the IRS by Taxpayer Y's attorney showed that funds totaling Amount E had been disbursed, that the initial filing with the probate court had apparently been false, and that individuals to whom bequests had been made had not been paid.

The Service has asserted a nominee lien against assets held by Taxpayers Y and Z, alleging that the Estate of Taxpayer X is the actual owner of the assets and that they are subject to the federal tax lien against the estate. Taxpayers Y and Z have attempted to free the assets from the lien by submitting an offer in compromise of the underlying tax liability. The offer was submitted by Taxpayers Y and Z as nominees and not by Taxpayer Y in his capacity as personal representative of the estate.

DISCUSSION:

When a person liable to pay tax to the United States fails to do so upon notice and demand, the amount of the tax, together with interest and penalties, becomes a lien in favor of the United States on all real and personal property belonging to the taxpayer. I.R.C. § 6321. This lien reaches every interest in property belonging to the taxpayer. United States v. National Bank of Commerce, 472 U.S. 713, 719-20 (1985). The Supreme Court has held that the lien created by section 6321 extends beyond the taxpayer, reaching property belonging to the taxpayer but held by his alter ego or nominee. G.M. Leasing Corp. v. United States, 429 U.S. 338, 350-51 (1977). Thus, a federal tax lien may be foreclosed against property which is titled to another, but which is actually the property of the taxpayer. Courts have consistently ignored the fact that property is in a third party’s name and allowed the Service to pursue such property to satisfy tax liens against the true owner. E.g., G.M. Leasing, 429 U.S. at 350-51; United States v. Miller Bros. Constr. Co., 505 F.2d 1031, 1036 (10th Cir. 1974). In this case, the Service has asserted that property in the hands of Taxpayers Y and Z is held by them as nominees of the taxpayer, the Estate of Taxpayer X. The facts which you have supplied support this contention, and it appears to be undisputed by Taxpayers Y and Z.

Taxpayers Y and Z have submitted an offer to compromise the tax liability of the estate in an effort to remove the federal tax lien. Section 712 authorizes the Secretary to compromise a taxpayer’s liability. I.R.C. § 7122(a). An agreement to compromise is a contract between the Government and the taxpayer, subject to rules applicable to contracts. See United States v. Lane, 303 F.2d 1, 4 (5th Cir. 1962); Walker v. Alamo Foods Co., 16 F.2d 694, 696-97 (5th Cir.), cert. denied, 274 U.S. 741 (1927). This contract relates to the entire liability of the taxpayer and conclusively settles all questions of liability therefor. Treas. Reg. § 301.7122 -1(c).

Although the property held by Taxpayers Y and Z is subject to the federal tax lien, they are not the taxpayers against whom the tax liability was assessed. As such, they cannot compromise the underlying tax liability unless they have the authority to enter into a binding contract on behalf of the taxpayer. Possession of the property, in and of itself, will not give the power to bind the estate to a contract with the Government.

You note that Taxpayer Y is the personal representative of the estate, and that he may be able to use this authority to submit an offer on behalf of the estate. We see no problem with your reasoning, and agree that, as personal representative, he may be able to enter into a contract to resolve the liability of the estate.

As an alternative theory, your memorandum of February 28, 1998, advised that the Service should assert transferee liability against Taxpayer Y under I.R.C. § 6901. Your memorandum of October 19, 1998, again raised this possibility, but noted that the statute of limitations had lapsed. As you stated, a transferee may compromise his own liability. See Rev. Rul. 72-436, 1972-2 C.B. 643. However, because the liability of the transferee is personal, such an offer would be evaluated by weighing the individual liability of the transferee against the Service’s ability to collect from that transferee.

The second issue delineated in your memorandum was whether nominee liens are subject to section 7122. You reason that the statute, regulations, and procedures do not contemplate such a compromise. Further, you note that the nominee is not personally liable, and therefore has nothing to compromise.

The federal tax lien arises pursuant to section 6321 upon assessment, notice and demand, and failure to pay. The lien is a mechanism that permits the collection of the tax. As discussed above, section 7122 provides for the compromise of that tax. The compromise of the liability extinguishes all federal tax liens against the taxpayers’ property upon full performance of the contract. In contrast, section 6325 provides for the discharge of property subject to a lien for which the underlying tax liability has not been satisfied.

In this case, a valid, binding contract to compromise the estate’s liabilities would eliminate the lien on the property held by Taxpayers Y and Z. As nominees, Taxpayers Y and Z cannot enter into such a contract. Should Taxpayer Y, in his capacity as personal representative of the estate, successfully reach a compromise agreement with the Government, the lien against the estate’s property, wherever held, would be extinguished.

If you have any further questions, please call the General Litigation attorney who handled this case at 202-622-3620 .

Technical Advice Memorandum

Number: 200130044

Internal Revenue Service

June 27, 2001

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224

CC:PA:CBS:RCGrosenick

Release Date: 7/27/2001

GL-119911-01

UIL 09.17.00-00

9999.98-00

MEMORANDUM FOR T. KEITH FOGG

ASSOCIATE AREA COUNSEL/RICHMOND (CC:SB:2:RCH)

FROM: Joseph W. Clark

Senior Technician Reviewer, Branch 2 (CBS)

SUBJECT: Offers in Compromise for Exempt and Abandoned Property

This Chief Counsel Advice responds to your memorandum dated April 16, 2001. In accordance with I.R.C. § 6110(k)(3), this Chief Counsel Advice should not be cited as precedent.

ISSUE:

Do the provisions of I.R.C. §7122 apply when the Service consents to release its lien for a discharged tax period upon payment of less than the full value of its interest in property subject to the lien?

CONCLUSION:

Amounts discharged in bankruptcy are accounted for by abatement under I.R.C. § 6404(c) rather than compromise under I.R.C. §7122.

FACTS:

A task force under the Insolvency Manager for Area 4 is developing uniform, areawide procedures for collection from exempt, abandoned or excluded property where a notice of federal tax lien was filed and where the underlying tax liability is discharged in bankruptcy. As explained in Notice CC-2001-014, abatements made pursuant to I.R.C. § 6404(c) to account for bankruptcy discharges do not invalidate otherwise proper assessments nor extinguish otherwise proper liabilities. When a tax liability is discharged in bankruptcy, the Service still may enforce a surviving tax lien against property which is exempt, abandoned or excluded from the bankruptcy estate. In some cases, you note, the Service may wish to accept less than the full value of its interest in the property, because levy or seizure is impractical or may result in severe financial hardship. You ask if the Service releases its tax lien in such cases, whether that action is subject to the Offer in Compromise provisions of I.R.C. §7122?

LAW AND ANALYSIS:

A discharge order in bankruptcy discharges the debtor from a personal obligation to pay and creates an injunction barring creditors from attempting to collect discharged debts from the debtor personally. B.C. § 524(a)(1), (2). The discharge does not destroy the pre-petition liability, however. Johnson v. Home State Bank , 501 U.S. 78, 84, 111 S. Ct. 2150 (1991) (“a bankruptcy discharge extinguishes only one mode of enforcing a claim -- namely, an action against the debtor in personam ”); see also In re Conston , 181 B.R. 769, 773 (D. Del. 1995) (collecting cases).

When the Service learns of a taxpayer's discharge from bankruptcy, the Insolvency function Tax Examiner or Bankruptcy Specialist evaluates the taxpayer's various tax liabilities to decide which have been discharged by the bankruptcy. See generally IRM 5.9.12.5 (describing procedures for evaluating and processing discharge). If the Insolvency employee decides that the costs of working the case do not warrant collection of the amounts involved, then the Insolvency employee must bring the balance due in each discharged tax liability module to zero by inputting adjusting credit Transaction Codes (TCs) to offset whatever debit TCs were used to account for the liabilities. Because the Service’s accounting system is designed so that a prior transaction is never erased or extinguished or eliminated from the record, the abatement always takes the form of a credit transaction entered to bring the balance due to zero. ¹

*****************

¹ Although the Insolvency employee does make a collectibility determination, the freeze code TC 530 cannot be used because (1) that would shut down collection on every tax module of the entire account and (2) the eventual reversal of the TC 530 would cause collection to commence against all of the taxpayer’s property. Only by abating specific tax assessments (the ones for discharged taxes) can the Insolvency employee continue to collect the nondischarged taxes and, if the opportunity arises, collect the discharged taxes out of the property to which the lien for those taxes still attaches.

*****************

Adjustments made to account for bankruptcy discharges are abatements made pursuant to section 6404(c). A section 6404(c) adjustment is caused by the Service’s decision that, despite section 6301's direction to collect taxes, it is not in the public interest to collect a particular liability because of the costs involved. Section 6404(c) authorizes the Service to abate the unpaid portion of any assessment when the Service decides "under uniform rules prescribed by the Secretary that the administration and collection costs involved would not warrant collection of the amount due." This abatement has nothing to do with a judgment about whether the assessment reflects the taxpayer’s true liability; it only represents the Service’s judgment that collecting the account is not cost-effective. ² In effect the Service excuses its collector's obligation to account for the tax liability, but does not excuse the taxpayer's liability. See Crompton-Richmond v. U.S. , 311

F. Supp. 1184, 1186 (S.D.N.Y. 1970) (Service can revive an assessment abated under section 6404(c) because the abatement of an uncollectible tax does not cancel the tax). See also Carlin v. U.S. , 100 F. Supp. 451, 454-55 (Ct. Cl. 1951) ( IRS cannot relieve a taxpayer of tax liability merely because it is uncollectible, but can only abate it as a bookkeeping entry); Sugar Run Coal Mining v. U.S. , 21 F. Supp. 10, 12 (E.D. Pa. 1937) (an abatement made because of a collectibility determination does not extinguish the liability).

*****************

² Treas. Reg. 301.6404 -1(d) delegates to the Commissioner the authority to prescribe the uniform rules for making a section 6404(c) determination. The Service has embodied the procedures for bankruptcy discharge determinations in the Bankruptcy Handbook, IRM 5.9.

*****************

Such abatements do not extinguish an otherwise valid tax liability, regardless of the reason for the abatement. Because the section 6404(c) abatement is made on the basis of collectibility and not because the liability was improperly assessed, money may still later be collected, so long as the collection limitations period is open. While the bankruptcy discharge affects the Service’s ability to collect the discharged liability, it does not extinguish either the underlying liability or those tax liens which have otherwise survived the bankruptcy. Since the underlying tax liability exists after bankruptcy discharge, it also exists after the assessments for the discharged taxes are abated. To account for the later collection, the section 6404(c) abatement may be reversed.

Bankruptcy Code section 522(c)(2)(B) provides that exempt property is generally not liable for a prepetition debt, except where such debt is secured by a properly filed tax lien. Accordingly, where a Notice of Federal Tax Lien is on file before the petition is filed, it may be possible to collect the dischargeable tax liabilities from prepetition assets that were exempted or abandoned in the bankruptcy. See In re Isom , 901 F.2d 744 (9 ^th Cir. 1990). Although the NFTL may be released pursuant to IRM 5.9.12.12(2) once the section 6404(c) abatement is posted, the Service can reinstate the NFTL under I.R.C. § 6325(f)(2) once the abatement is reversed. Adjustments such as these, because they do not affect tax liability, are not the same as a compromise of the debtor’s taxes.

The Service has the authority under I.R.C. §7122 to compromise tax liabilities. Agreements to compromise federal tax liabilities have generally been interpreted by applying contract principles. See United States v. Feinberg , 372 F.2d 352 (3d Cir. 1967); United States v. Lane , 303 F.2d 1 (5th Cir. 1962); Robbins Tire & Rubber Co., Inc. v. Commissioner , 52 T.C. 420 (1969). Contract formation requires mutual assent among the contracting parties: one party makes an “offer” of a contract and the other party accepts that offer. Some form of consideration also is necessary.

See Restatement (Second) of Contracts § 22. The Service’s determination of collectibility following a section 6404(c) abatement is a unilateral act by the Service which does not incorporate the required contractual elements of offer, acceptance, or consideration.

To enforce the debtor’s in rem liability, Insolvency makes a non-contractual determination as to the amount that can effectively be collected out of the property to which the lien for those taxes still attaches. See IRM 5.9.12.5.1. That determination is based on myriad factors, including the relative financial condition of the debtor, the net worth of the exempt, abandoned or excluded property, and the total amount of taxes owed. Such a unilateral collectibility determination is not a compromise bargained for with the taxpayer under I.R.C. §7122.

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS:

The discharge injunction of B.C. § 524(a)(2) prohibits the commencement or continuation of any act to collect, recover or offset any discharged debt. While the bankruptcy discharge affects the Service’s ability to collect the discharged liability from the debtor personally, it does not extinguish either the underlying liability or those tax liens which have otherwise survived the bankruptcy. I.R.C. § 6404(c) permits the Service to abate a tax assessment to reflect an administrative determination that collection of a tax is economically unfeasible due to a bankruptcy discharge. Should collection become feasible within the statutory collection period, a section 6404(c) abatement may be reversed without effecting an offer in compromise with the taxpayer under section 7122.

This writing may contain privileged information. Any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney-client privilege. If disclosure becomes necessary, please contact this office for our views.

If you have any questions, please contact Richard Charles Grosenick at 202/622-3620.

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224

CC:PA:CBS:Br2

Release Date: 9/14/2001

GL-127877-00

UILC: 17.00.00-00

9999.98-00

MEMORANDUM FOR MICHAEL W. BITNER

ASSOCIATE AREA COUNSEL (SB/SE)

FROM:            Joseph W. Clark, Senior Technician Reviewer

Branch 2 (Collection, Bankruptcy & Summonses)

SUBJECT:       Advisory Opinion–Offers in Compromise / Processability

This memorandum responds to a request for advice received from your office on January 22, 2001. You have asked us to consider whether an in-business taxpayer may compel the Service to process an offer in compromise under a prior version of the processability rules which were in effect before January 1, 2000 , and if not, whether the Service has the discretion to process the offer. In accordance with I.R.C. § 6110(k)(3), this Chief Counsel Advice should not be cited as precedent. This writing may contain privileged information.

ISSUE

When an in-business taxpayer submits an offer, and the processability rules pertaining to deposit, payment, and filing of employment taxes for the previous two quarters, change before the offer is accepted for processing, may the taxpayer compel the Service to apply the former processability rules? If not, may the Service exercise its discretion to process the offer?

CONCLUSION

Although the taxpayer may not compel the Service to process the offer under the prior rules, the Service may exercise its discretion to process the offer.

BACKGROUND

Your correspondence with us indicates the taxpayer, an in-business corporation, entered into an installment agreement to pay its delinquent employment taxes. After making only one payment, the taxpayer defaulted on the agreement, and after being notified by the Service that the agreement would be terminated, the taxpayer filed a Form 911 Application for Taxpayer Assistance with the Office of the Taxpayer Advocate on March 1, 1999 , requesting to file an offer in compromise. Collection received the taxpayer’s offer on June 1, 1999, and returned it on June 14, 1999, along with a letter characterizing the offer as non-processable, and informing the taxpayer that in order to process the offer, an in-business taxpayer must demonstrate compliance by filing and full paying employment taxes for the preceding two quarters. The caseworker for the Taxpayer Advocate then met with Collection and the taxpayer’s power of attorney to discuss the offer requirements, and the caseworker advised the power of attorney that the taxpayer needed to become current for the preceding two quarters.

On November, 12, 1999, the power of attorney requested additional time to provide proof of compliance, and after a meeting on December 8, 1999, the caseworker set a deadline of December 31, 1999. The power of attorney provided some documentation on December 23, 1999. On January 4, 2000, the caseworker called to request the remainder of the documentation, and requested the taxpayer become current by January 18, 2000, and provide the rest of the documentation by January 24, 2000. The power of attorney provided the balance of the documentation on January 22, and January 25.

On January 25, 2000, the caseworker told the power of attorney that as of January 1, 2000, the rules for processing an offer in compromise from an in-business taxpayer had changed and that the new rule required the taxpayer to be “timely” rather than “current.” The taxpayer advocate then asked the manager of the offer group to bypass the timeliness requirement, but he declined to do so. You have asked our advice on whether in this situation, the taxpayer may compel the Service to process his offer in compromise under the prior rule, and if not, may the Service exercise its discretion to process the offer.

DISCUSSION

The Secretary’s authority to compromise cases is contained in section 7122 of the Code, which provides, “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.” I.R.C. §7122(a) (emphasis added). Treasury regulations pertaining to that provision likewise state, “The Secretary may exercise his discretion to compromise any civil or criminal liability arising under the internal revenue laws. . . .” Treas. Reg. § 301.7122 -1T(a)(1). The Secretary’s authority to

compromise is, thus, discretionary. The Secretary has delegated this discretionary authority to the Commissioner, who has then re-delegated it to various officials throughout the Service. See Delegation Order No. 11.

The Secretary has set the threshold requirements for consideration of a proposed compromise, and all offers in compromise must be submitted according to the prescribed procedures. See Treas. Reg. § 301.7122 -1T(c)(1). Further, a taxpayer may not compel the Service to accept an offer for processing. See United States v. Garden State National Bank , 607 F.2d 61, 73 (3d Cir. 1979) (“the refusal of the Service to enter into compromise negotiations, standing alone, does not amount to ‘bad faith’”); United States v. Smith , 1979 U.S. Dist. LEXIS 12471 (S.D.N.Y.

1979)(the decision whether to discuss settlement is discretionary and cannot be compelled by a court); Leonhard v. Mitchell , 473 F.2d 709, 713 (2 ^d Cir.) cert. denied , 412 U.S. 949 (1973)(mandamus cannot force a discretionary act).

In keeping with the twin policy goals of the offer in compromise program to obtain the amount potentially collectible at the earliest possible time and at the least cost to the government, IRM 5.8.3.1(2) now provides that Service personnel will “work with taxpayers to provide an opportunity to perfect . . . defects or errors . . . rather than returning the offers as unprocessable.” The manual provides that as soon as possible upon receipt, offers should be sorted into three categories: processable, non-processable, and those which need to be perfected (usually due to missing information). IRM 5.8.3.3. If it is processable, the offer becomes pending, and if the offer is not processable, then the Service returns it to the taxpayer along with a letter detailing the reason. Treas. Reg. § 301.7122-1T(c)(2); IRM 5.8.3.3(1).

In order for the Service to process an offer to compromise employment taxes from an in-business taxpayer, the manual requires the taxpayer “must have demonstrated compliance by having timely filed and timely deposited the preceding two quarters,“ and “ timely paid all federal tax deposits due in the quarter in which the offer was submitted.” IRM 5.8.3.3(4) (emphasis added). Prior to January 1, 2000, the manual required the taxpayer be “current” for the past two quarters. The manual further provides the Service may not deviate from the processability criteria without obtaining written approval from the National Office. IRM 5.8.3.3.1(1).

In the current case, the facts as you have presented them indicate the taxpayer first submitted the offer in compromise on June 14, 1999. When the Service sent its first letter to the taxpayer indicating non-processability, it requested the taxpayer demonstrate compliance by filing and full paying its employment taxes for the preceding two quarters. For several months, the caseworker worked with the taxpayer’s power of attorney to perfect errors in the offer so that it could be processed. On several occasions, the caseworker requested the taxpayer become “current,” and on January 25 ^th , the power of attorney submitted documentation that the taxpayer had done so. Although the criteria changed before the taxpayer submitted documentation of compliance, nothing in the Code or the Regulations prevents the Service from exercising its discretion to process an offer in such a case based on the criteria existing when the offer was first submitted. Further, policy considerations favor such processing, because neither the Service nor the taxpayer would benefit from lengthening the process by requiring timeliness for the next two quarters before allowing the offer to be processed. Such a requirement in this case would have no practical effect on the taxpayer’s future compliance, because Form 656 requires as a condition to the offer that taxpayers agree to comply with future filing and payment requirements in order to avoid default of the compromise agreement.

Furthermore, once a taxpayer’s offer has been accepted for processing, the Service’s procedures do not establish a presumption that the offer will be accepted, nor do they presume rejection as the likely result. Rather, each proposed compromise should be evaluated and considered on its own merits, in light of the facts and circumstances of the case. In each case, the Service has the discretion to decide whether to accept or reject the offer. Provided the Service exercises sound judgment and discretion when exercising its authority to compromise, we do not believe processing this offer undercuts the Service’s overall compromise policy and objectives, and therefore, would not be an abuse of its discretion. Thus, provided the Service obtains the required written permission from the National Office pursuant to IRM 5.8.3.3.1(1), the Service has authority to process the offer.

If you have any further questions, please contact the attorney assigned to this matter at (202) 622-3620 .

Technical Advice Memorandum

Number: 200133045

Internal Revenue Service

July 9, 2001

OFFICE OF CHIEF COUNSEL

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224

CC:PA:APJP:BR 1:LCNash Release Date: 8/17/2001 TL-N-1602-01

UIL : 6402.00-00; 6611.00-00;

7122.00-00; 7809.00-00

MEMORANDUM FOR ASSOCIATE AREA COUNSEL, KANSAS CITY

(SMALL BUSINESS/SELF-EMPLOYED: AREA 5) CC:SB:5:KCY

FROM: Pamela Wilson Fuller

Senior Technician Reviewer, Branch 1 Administrative Provisions & Judicial Practice

SUBJECT: Significant Service Center Advice

TL-N-1602-01

In accordance with I.R.C. § 6110(k)(3), this Chief Counsel Advice should not be cited as precedent.

This responds to your request for Significant Advice, dated April 12, 2001, in connection with a series of questions concerning the accrual of interest on various types of monies that the Internal Revenue Service must return to the taxpayer in connection with Offers in Compromise.

Issues

(1) Taxpayer enters into an installment agreement prior to submitting an offer in compromise (“OIC”). Taxpayer remains in compliance with the installment agreement by making payments after the OIC is proposed. If the OIC is accepted, then the Internal Revenue Service (“Service”) refunds any installment payments made after acceptance of the offer. Does the Service pay interest on that refund if the refund is not made within 45 days of acceptance of the offer?

(2) Taxpayer submits a deposit with the OIC, but the deposit is larger than the amount called for under the terms of the offer. If the offer is accepted, then the excess deposit is refunded to the taxpayer. Does the excess deposit bear interest of not made within 45 days of acceptance of the offer?

(3) Does a deposit accrue interest it the offer in compromise is rejected and the deposit is not returned to the taxpayer within 45 days?

Conclusions

(1) A payment made, pursuant to an installment agreement, after the acceptance of an OIC by the Service is an overpayment of tax. As such, the overpayment is subject to the offsetting provisions of section 6402 of the Code. If there exists no outstanding liability to which the overpayment can be credited, the money must be refunded to the taxpayer with interest if it is not refunded within 45 days of the taxpayer filing a claim for refund.

(2) A deposit proffered in connection with an OIC prior to acceptance of the OIC does not accrue any interest, regardless of whether or not it is returned to the taxpayer within 45 days.

(3) A refunded deposit made in connection with an OIC that is rejected by the Service will not be refunded with any interest, regardless of whether or not the deposit is returned to the taxpayer within 45 days of the OIC rejection.

Analysis

Issue 1:

Generally, the Service is required to pay interest on any overpayment of tax from the date the overpayment arises until the money is refunded to the taxpayer. I.R.C. § 6611(a) and (b). A noted exception to this rule is found in section 6611(e)(1) of the Code which provides that the Service is not obligated to pay overpayment interest on any amount that is refunded to the taxpayer within 45 days of either the last day prescribed for filing, the date the return was filed if after the last day prescribed for filing, or after the taxpayer files a claim for refund. Section 6611(e)(3) provides that for IRS initiated adjustments, the Service is directed to subtract 45 days from the number of days that interest would otherwise be allowed. Any such interest paid on an overpayment will be paid at the rate authorized by section 6621 of the Code and compounded daily.

Paragraph 8(f) of the standard OIC form provides the following:

The IRS will keep all payments and credits made, received or applied to the total original tax liability before submission of this offer. The IRS may keep any proceeds from a levy served prior to the submission of the offer, but not received at the time the offer is submitted. If I/we have an installment agreement prior to submitting the offer, I/we must continue to make the payments as agreed while this offer is pending. Installment agreement payments will not be applied against the amount offered.

To the extent that the installment payments exceed the amount of tax owed, they are overpayments of tax. See I.R.C. § 6401(c). Section 6403 of the Code provides for the overpayment of an installment to be refunded to the taxpayer if there is no other unpaid balance of the installment plan to which the overpayment can be credited against. ¹

*****************

¹ This refund must be performed in accordance with the provisions of section 6402 of the Code. Thus, the overpayment can be offset against another outstanding tax liability of the taxpayer as well as any of the other offset provision outstanding liabilities set forth in section 6402.

*****************

To the extent that an installment payment constitutes an overpayment of tax, it is subject to the offsetting provisions of section 6402 of the Code. Section 6402 invests the Secretary with the right, in the case of an overpayment, to credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment. Only then is the Service required, subject to subsections (c), (d), and (e), to refund the balance to the taxpayer. I.R.C. § 6402(a).

Thus, if an installment payment made after acceptance of an OIC creates an overpayment, the Service is only obligated to pay interest on that overpayment if it does not issue a refund to the taxpayer within 45 days after the taxpayer files a claim for refund.

Issues 2 & 3:

The fact that the Service only pays interest on overpayments and not deposits is a well-established principle of law. This general principle remains unaltered by the rules and regulations concerning OIC. Section 7809(b)(1) of the Code provides that sums offered in compromise under section 7122 shall be deposited in a deposit fund account. The Code further provides that upon the acceptance of such OIC, the amount accepted shall be withdrawn from such deposit fund account and deposited in the Treasury as Internal Revenue tax collections. Upon the rejection of any such offer, the Secretary shall refund to the maker of such offer the amount thereof. The statute makes no provision for the payment of interest. ²

*****************

² The government, as the sovereign, enjoys sovereign immunity as a right against the imposition of interest. This, unless the statue specifically provides for the payment of interest by the government, it cannot be required to do so. See Angarica v. Baynard , 127 U.S. 251 (1888) and Library of Congress v. Shaw , 478 U.S. 310 (1986).

*****************

The Treasury regulations promulgated under section 7122 of the Code addresses interest on deposits proffered in connection with an OIC. The regulation makes it clear that the Service will not pay any interest on a deposit made in conjunction with an OIC. If an offer to compromise is withdrawn, is determined to be nonprocessable, or is submitted solely for purposes of delay and returned to the taxpayer, any amount tendered with the offer, including all installments paid on the offer, will be refunded without interest . If an offer is rejected, any amount tendered with the offer, including all installments paid on the offer, will be refunded, without interest , after the conclusion of any review sought by the taxpayer with Appeals. See Treasury Regulation 301.7122 - 1T(g). In accordance with section 301.7122 -1T(j), these regulations are effective for any OIC submitted on or after July 21, 1999 , through July 19, 2002 .

Courts have long recognized that a deposit made in connection with an OIC does not bear interest. Moskowitz v. United States , 285 F.2d 451 (1961), states that a deposit of money representing an OIC prior to the time a deficiency has been assessed, and where that same money is more than the ultimately determined liability of the taxpayer, such money does not constitute an overpayment of taxes on which interest is payable.

Furthermore, this principle is embodied in the language of the standard OIC agreement, item 8(c), which states “I/we understand that the IRS will not pay interest on any amount I/we submit with the offer.” The Service also includes a directive to the service centers in IRM 8(13)(32) stating that interest is not paid on funds on deposit regardless of whether the offer is accepted, rejected, or withdrawn.

For the reasons previously stated, no interest is paid on a deposit that is returned to the taxpayer.

Please call if you have any questions.

Technical Advice Memorandum

Number: 200133040

Internal Revenue Service

June 13, 2001

OFFICE OF CHIEF COUNSEL

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224

CC:PA:CBS:Br2

Release Date: 8/17/20 0 GL-114892-01

UILC: 17.10.00-00; 9999.98-00

MEMORANDUM FOR ASSOCIATE AREA COUNSEL (SB/SE), AREA 2, NEWARK

FROM: Joseph W. Clark

Senior Technician Reviewer, Branch 2 (Collection, Bankruptcy & Summonses)

SUBJECT: Collateral Agreements in Effective Tax Administration Offers in

Compromise

This Chief Counsel Advice responds to your request dated March 16, 2001. In accordance with I.R.C. § 6110(k)(3), this Chief Counsel Advice should not be cited as precedent. This writing may contain privileged information. Any unauthorized disclosure of this writing may have an adverse effect on privileges, such as the attorney client privilege. If disclosure becomes necessary, please contact this office for our views.

ISSUE :

Can the Internal Revenue Service accept, as additional consideration for an offer in compromise, a collateral agreement or other document which will entitle the Government to the proceeds from the sale of a particular asset at some point in the future?

CONCLUSION :

Yes. Although Treasury regulations establish certain conditions that must be satisfied in order to compromise under section 7122 of the Internal Revenue Code, the terms of a compromise agreement, including the amount acceptable to resolve a case, are policy matters within the discretion of the Commissioner. Insistence upon an agreement allowing the Government to collect from particular assets in the future is a permissible exercise of that discretion.

BACKGROUND :

The Compliance Area Director has asked your advice on the following scenario. The taxpayers, an elderly couple who are not employed, have submitted an offer in compromise. An analysis of the taxpayers’ financial condition shows that the tax could be collected in full. The major source of potential collection is their home, which has substantial net equity. However, the Service has determined that seizure of the home would cause the taxpayers economic hardship, and that collection in full cannot be accomplished otherwise. Based on the determination that collection in full would create economic hardship, the Service is considering accepting the taxpayers’ offer on the basis of the promotion of effective tax administration. The Area Director is concerned, however, that compromise under such circumstances would only serve to create a windfall for the taxpayers’ heirs. He has proposed obtaining a collateral agreement in such compromises which would allow the taxpayers to reside in their home until their deaths. Thereafter, the home would be sold with the proceeds going to the Government as part of the compromise.

LAW & ANALYSIS:

Section 7122 of the Internal Revenue Code grants the Secretary the authority to compromise and establishes certain rules to be followed in exercising that authority. Treasury regulations further define the Secretary’s authority by establishing permissible bases for compromise. See Temp. Treas. Reg. § 301.7122 -1T(b). The regulations provide procedures for the submission and processing of offers to compromise, as well as other rules relating to the acceptance or rejection of offers and how the submission of offers impacts upon the Service’s ability to continue collection efforts. See Temp. Treas. Reg. § 301.7122 -1T(c)-(i).

None of these rules, however, address how much should be accepted to resolve a case, or what terms or conditions should be included in a compromise agreement. The preamble to the temporary regulations explains this omission, stating:

Although the temporary regulations set forth the conditions that must be satisfied to accept an offer to compromise liabilities arising under the internal revenue laws, they do not prescribe the terms or conditions that should be contained in such offers. Thus, the amount to be paid, future compliance or other conditions precedent to satisfaction of a liability for less than the full amount due are matters left to the discretion of the Secretary.

T.D. 8829, Compromises , 64 Fed. Reg. 39020, 39023 (July 21, 1999). In exercising this discretion, the Service may request, “[a]s additional consideration, ... that the taxpayer enter into any collateral agreement or post any security which is deemed necessary for the protection of the interests of the United States.” Temp. Treas. Reg. § 301.7122 -1T(d)(2).

Terms and conditions applicable to all compromises are set forth in Form 656, Offer in Compromise, which must be submitted by all taxpayers offering to compromise with the Service. The Service’s procedures recognize that additional terms may be appropriate in some cases. These agreements, commonly known as “collateral agreements,” are discussed in Chapter 6 of the Offer in Compromise Handbook, IRM 5.8. Standard collateral agreements include: waivers net operating losses; agreements reducing the basis in particular assets; or agreements to pay a set percentage of future income over a certain base amount. See IRM 5.8.6.3(1). Such agreements allow the Service to recover part of the difference between the amount of the offer and the total liability. However, collateral agreements should not be used to allow acceptance of an amount less than the financial analysis dictates, or to recover amounts that should have been included on the Form 656 as part of the compromise. See IRM 5.8.6.1(3). Similar to the foregoing examples of collateral agreements, an additional agreement like the one proposed by the Area Director is legally permissible, and insisting on such an agreement would be within the Service’s discretion.

As with the other types of collateral agreements, whatever obligation a taxpayer undertook (for example, to sell the house and forward the proceeds to the Service) would have to take place within the statute of limitations applicable to the tax to which the proceeds would be applied. Section 6502(a) establishes a ten-year statute of limitations within which a tax liability must be collected or a proceeding in court commenced. Prior to the amendment of that section by the IRS Restructuring and Reform Act of 1998 (RRA), the Form 656 and any collateral agreements provided that the statute of limitations for collection was waived for the period of time that any terms of the compromise or collateral agreement remained outstanding. However, following the amendment of section 6502(a) of the Code by section 3461 of RRA, the ten-year statute of limitations can no longer be extended by agreement for this purpose. As a result, the terms of compromises and collateral agreements can last only for the period remaining on the collection statute.

An agreement for the limited amount of time remaining on the collection statute would not appear to address the concerns raised by the Area Director. One alternative might be the acceptance of some other type of debt instrument granting the Service the ability to collect as a state-law creditor rather than through the administrative collection provisions of the Internal Revenue Code. Courts have long recognized that the Service may accept bonds, letters of credit, or mortgages as a means of securing the payment of taxes, and have upheld the Service’s right to collect on such instruments as separate debts not subject to the administrative collection procedures set forth in the Internal Revenue Code. See Royal Indemnity Co. v. United States , 313 U.S. 289 (1941), Gulf States Steel Co. v. United States , 287 U.S. 32 (1932), United States v. John Barth Co., 268 U.S. 370 (1929) (bonds); United States v. Citizens Bank , 50 F. Supp. 2d 107 (D.R.I. 1999) (promissory note secured by mortgage); Julicher v. Internal Revenue Service , 95-2 U.S.T.C. ¶ 50,379 ( USDC , E.D. Pa. 1995) (irrevocable letter of credit).

In each of those cases, the taxpayers attempted to defeat the Government’s right to collect on the debt instrument by arguing that the statute of limitations for collection under the Code had expired. Each court held that the instrument executed in the Government’s favor created a new debt not subject to the period of limitations for taking administrative collection action or bringing suit. See Royal Indemnity , 313 U.S. at 283; Gulf States , 287 U.S. at 39; Barth , 279 U.S. at 374. The court in Citizens Bank summed up the reasoning in this line of cases as follows:

The principle to be derived from Barth and Julicher is that where the government suspends the collection of a tax at the request of a taxpayer, who in turn provides the government with security for later payment, the government is not thereafter bound by the statute of limitations applicable to the original obligation. Instead, the government may proceed against the security provided to it in consideration of its earlier forbearance.

Citizens Bank , 50 F. Supp. 2d at 111.

Thus, a mortgage on the taxpayers’ personal residence may give the Service an enforceable agreement of the sort contemplated by the Area Director. There is no mention of this kind of arrangement in the offer in compromise handbook, but mortgages, bonds and other similar arrangements are discussed in IRM 5.6, Collateral Agreement and Security Type Collateral. That handbook contemplates the use of mortgages not as a replacement lien on property already subject to the lien arising under section 6321 of the Code, but as a means of securing the Government’s right to collect from property the assessment lien does not attach to, such as real property held as a tenancy by the entirety. See IRM 5.6.1.2.3(4). ¹ The handbook further states: “The Service should never obtain a consensual lien in lieu of filing a notice of federal tax lien and reducing the tax claim to judgment or requiring the taxpayer post a bond.” IRM 5.6.1.2.3(5). This instruction is in keeping with the handbook’s recognition that the filing of a notice of federal tax lien provides the Service greater protection than a debt instrument enforceable only under state law. See IRM 5.6.1.1(3)a.

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¹ It is significant that the mortgage in Citizens Bank gave the Service a security interest in property that was not already subject to the lien created by the failure to pay the tax liability. The personal residence used as an example in the Area Director’s question is already subject to the Government’s lien and is reachable by levy.

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Although the IRM authorizes the use of mortgages and other consensual security arrangements in certain limited circumstances, the offer in compromise handbook does not appear to have considered the use of such instruments as part of a compromise. Because of the novelty of such an arrangement, we recommend that the Area Director consult with the Office of Compliance Policy, SB/SE, for guidance as to whether and under what circumstances a collateral agreement allowing the Service to collect from a personal residence in the future can be secured as consideration for a compromise.

If you have any questions or need further assistance, please contact the attorney assigned to this matter at 202-622-3620 .

Technical Advice Memorandum

Number: 200123059

Internal Revenue Service

April 2, 2001

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224

April 2, 2001

Number: 200123059

Release Date: 6/8/2001

CC:PA:CBS:Br2

GL-131739-00

UILC: 17.00.00-00; 9999.98-00

MEMORANDUM FOR MICHAEL W. BITNER

ASSOCIATE AREA COUNSEL (SB/SE)

FROM: Kathryn A. Zuba

Chief, Branch 2 (Collection, Bankruptcy & Summonses)

SUBJECT: Advisory Opinion–Offers in Compromise

This memorandum responds to a request for advice received from your office on December 26, 2000. In accordance with I.R.C. § 6110(k)(3), this Chief Counsel Advice should not be cited as precedent. This writing may contain privileged information. Any unauthorized disclosure of this writing may have an adverse affect on privileges, such as the attorney client privilege. If disclosure becomes necessary, please contact this office for our views. You have asked us to consider whether it is necessary to amend Form 656 when a taxpayer submits an offer in compromise on the basis of doubt as to collectability, and after investigation, the Service decides to accept the offer due to effective tax administration.

ISSUE

Whether the Service must request the taxpayer to amend Form 656 when a taxpayer has submitted an offer in compromise checking the box indicating doubt as to collectability and the service has decided to accept the offer on the basis of effective tax administration?

CONCLUSION

No, the Service need not obtain an amended Form 656 from the taxpayer. The reason underlying the Service’s decision to accept or reject a taxpayer’s offer in compromise (whether doubt as to collectability or affective tax administration) is not a material term of the compromise agreement between the taxpayer and the Service. Thus, when a taxpayer makes an offer based upon doubt as to collectability and the Service accepts that offer on the basis of effective tax administration, the Service is not required to ask the taxpayer to amend Form 656 to reflect the change.

BACKGROUND

Your correspondence with us indicates concern arising out of language in IRM 5.8, which sets out the basic procedures for the offer in compromise program. Section 5.8.1.1(3) of the IRM provides that offers can be based on doubt as to collectability, doubt as to liability, and effective tax administration, and IRM 5.8.4.8(1) provides that taxpayers may submit an offer based upon any one or combination of these three reasons. The taxpayer indicates this choice by checking any of the three boxes on line 6 of Form 656.

The manual states that during the offer investigation, the Service will consider all bases the taxpayer indicates, but will determine only one basis for accepting the offer. See IRM 5.8.4.8(1). The manual then states that Collection is to first evaluate the offer on the grounds of doubt as to collectability, and that if while working the calculations for doubt as to collectability, they determine that reasonable collection potential is greater than the amount due, but special circumstances exist, they are to consider the offer to compromise on the basis of effective tax administration. IRM 5.8.4.8(1); IRM 5.8.4.8(5). It then states that it is not necessary to amend Form 656 to show effective tax administration. Your concern is that by attempting to accept the offer on a basis different than the taxpayer has indicated, the Service has actually made a counteroffer, and thus no enforceable contract results, or that the contract may not be enforceable because there has been no meeting of the minds. You, therefore, believe this language should be changed to require the taxpayer to amend Form 656.

DISCUSSION

The Secretary’s authority to enter into offers in compromise with taxpayers comes from I.R.C. §7122, which provides, “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.” The Secretary has delegated this authority to the Commissioner, who has then delegated it to various officials throughout the Service. See Delegation Order No. 11.

Treasury regulations pertaining to section 7122 likewise set out the permissible bases for offers in compromise, including doubt as to liability, doubt as to collectability, and to promote effective tax administration. The regulations further provide that a taxpayer’s offer is not accepted “until the IRS issues a written notification of acceptance to the taxpayer.” Treas. Reg. § 301.7122 -1T(d)(1). Section 301.7122 -1T(d)(5) provides that acceptance of an offer will “conclusively settle” the taxpayer’s liability, and that neither the taxpayer nor the Government will be permitted to reopen the case except where the taxpayer has supplied false information or documents, the taxpayer has concealed assets, or “a mutual mistake of material fact sufficient to cause the offer agreement to be reformed or set aside is discovered.”

When interpreting agreements to compromise federal tax liabilities under I.R.C. § 7122, courts have applied generally accepted contract principles. See United States v. Feinberg , 372 F.2d 352 (3d Cir. 1967); United States v. Lane , 303 F.2d 1 (5 ^th Cir. 1962). In recognition of this concern, the Service requires the taxpayer to submit a Form 656 setting forth the essential terms of payment including the tax liabilities covered and the taxpayer’s obligations, including the amount and the time in which the taxpayer has to pay. Form 656 asks the taxpayer to indicate a basis for the compromise. The stated basis provides the authority for the Service to accept the offer. It is not a term of the agreement. The taxpayer has offered to pay a stated amount to resolve the outstanding liability. The Service’s acceptance of the offer binds the taxpayer to that payment obligation, regardless of the legal basis for the compromise.

In the scenario you present, the only difference between the taxpayer’s offer and the Service’s acceptance would be the grounds underlying the Service’s decision to accept the offer; i.e., the box the taxpayer checked on line six of Form 656. The underlying basis for the compromise relates only to the Service’s authority to compromise. Changing it from doubt as to collectability to effective tax administration results in no material change to the taxpayer’s rights or obligations under the compromise agreement. It changes neither the payment amount, nor the timing the payments come due, or any other obligations of the taxpayer. Accordingly, it is not a material term of the contract. Thus, when the Service decides to accept the offer on the basis of effective tax administration, rather than doubt as to collectability, this acceptance does not constitute a counteroffer.

Further, compromises serve the goals of obtaining the amount potentially collectable at the earliest possible time and at the least cost to the government. See Policy Statement P-5-100; IRM 5.8.1.1.1. So long as the Service accepts the offer on the same payment terms, neither the Service nor the taxpayer would benefit from a requirement to file an amended Form 656 simply to check another box. The result would only be further delay to the process. Accepting the offer on the basis of effective tax administration without requiring the taxpayer to amend Form 656 benefits both the taxpayer and the Service, because the process is more expeditious. Because the IRM in its current form reflects these principles, we do not believe revisions are necessary at this time.

If you have any further questions, please contact the attorney assigned to this matter at (202) 622-3620 .

Technical Advice Memorandum

Number: 200142025

Internal Revenue Service

September 18, 2001

OFFICE OF CHIEF COUNSEL

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224

Release Date: 10/19/2001

CC:PA:CBS:Br2

GL-133269-01

UILC: 17.44.00-00; 9999.98-00

MEMORANDUM FOR ASSOCIATE AREA COUNSEL (SB/SE), AREA 2, NEWARK

FROM:   Lawrence H. Schattner

Chief, Branch 2 (Collection, Bankruptcy & Summonses)

SUBJECT:   Effect of Offers in Compromise on Collection Statute of Limitations

This Chief Counsel Advice responds to your request dated June 13, 2001. In accordance with I.R.C. § 6110(k)(3), this Chief Counsel Advice should not be cited as precedent.

ISSUE:

Whether the completion of a second Form 656, Offer in Compromise, by a taxpayer prior to the Service having had an opportunity to consider the offer has the effect of rescinding the waiver of the collection statute of limitations contained in the original Form 656.

CONCLUSION :

An agreement on the part of the taxpayer to extend the collection statute is a unilateral waiver of a defense by the taxpayer. Because execution of the waiver was a unilateral act on the part of the taxpayer and not a contract for which consideration is necessary, the Service’s failure to act on the compromise has no effect on the validity or effect of the waiver.

BACKGROUND :

It has long been the policy of the Internal Revenue Service to suspend enforced collection efforts when a taxpayer submits an offer in compromise, unless collection of the tax would be jeopardized or the offer was made merely as a delay tactic. See Policy Statement P-5-97 (Approved July 10, 19 59); Treas. Reg. § 301.7122 -1(d)(2) (1960). To insure that the Government’s eventual ability to collect was not harmed by withholding collection efforts, consideration of an offer was conditioned upon the execution by the taxpayer of a waiver of the statute of limitations for collection for the period the offer was being considered, while any term of an accepted offer was not completed, and for one additional year. See Treas. Reg. § 301.7122 -1(f) (1960); Form 656, Offer in Compromise, Item 8(e) & (n) (Rev. 1-97).

The IRS Restructuring and Reform Act of 1998 (RRA) required several changes to this scheme. First, RRA section 3462 codified the practice of withholding collection while an offer to compromise is being considered by adding section 6331(k) to the Code. See P.L. 105-206, 112 Stat. 685, 764 (1998). Effective January 1, 2000 , that section prohibits levy while an offer is pending, for thirty days after an offer is rejected, and while a timely filed appeal of that rejection is pending with the IRS Office of Appeals. See I.R.C. § 6331(k)(1); Temp. Treas. Reg. § 301.7122 -1T(f)(2).

Second, RRA section 3461 amended section 6502 of the Code, also effective as of January 1, 2000, to limit the Service’s ability to secure from taxpayers agreements to extend the statutory period for collection. See P.L. 105-206, 112 Stat. 685, 763-64 (1998). The Service and taxpayers can now only agree to an extension of the statute of limitations for collection under 6502(a) in two circumstances: 1) the extension is agreed to at the same time as an installment agreement between the taxpayer and the Service, or 2) the extension is agreed to prior to a release of levy under section 6343 which occurs after the expiration of the statutory ten year period for collection. See I.R.C. § 6502(a)(2).

Finally, RRA contained a non-Code “sunset” provision which governs the continued effect of waivers of the collection statute executed prior to January 1, 2000. If a waiver was secured in conjunction with the granting of an installment agreement, the period for collection will expire ninety days after the date specified in the waiver. If the waiver was not obtained at the same time as an installment agreement, the period for collection will expire not later than December 31, 2002, or the end of the original collection statute if it would have occurred after that date. See RRA § 3461(c)(2).

The Service’s policies and procedures for the consideration and disposition of offers in compromise have been revised to reflect these changes in the law. However, some confusion exists with respect to the effect these changes in the law will have on offers that were accepted for processing prior to December 31, 1999, but remained pending after that date. Because the Service was authorized to secure waivers of the statute of limitations at the time the Forms 656 in such cases were submitted, those waivers had the effect of extending the time during which the Service can collect, subject to the “sunset” provision described above. For compromises submitted prior to December 31, 1999, but pending after that date, the Service’s practice is to secure new forms. Forms 656 with revision dates of January 2000 or later include several changes to the terms of the offer. The securing of new forms insures that all offers accepted after these policy changes are subject to the revised terms and conditions. Consistent with the changes made by RRA, the revised forms do not contain language waiving the collection statute.

Your office has asked whether the submission of the new form prior to the Service’s taking action on the offer has the effect of rescinding the previously executed waiver of the collection statute. For the reasons stated below, we conclude that the subsequent submission of a revised Form 656 has no effect on an otherwise valid waiver of the collection statute contained in the original Form 656.

DISCUSSION:

As is discussed above, prior to the enactment of RRA, the Service could extend the statute of limitations under section 6502 of the Code by agreement with the taxpayer at any time prior to the expiration of the ten-year statutory period. The statutory period, once extended, could be further extended by agreement at any time prior to the expiration date specified in the previous agreement. These agreements took the form of a waiver of the collection statute by the taxpayer, most often accomplished through a Form 900, Tax Collection Waiver. Although the statute refers to an extension by agreement, the courts have uniformly held that, since the statute of limitations is a defense available to the taxpayer in the event the Service attempts to collect beyond the statutory time period, extension of the time to collect is accomplished via a unilateral waiver of that defense by the taxpayer, and that a tax collection waiver is not a contract. See Strange v. United States , 282 U.S. 270, 276 (1931); Florsheim Bros. Drygoods Co. v. United States , 280 U.S. 453, 468 (1930).

Your request acknowledges this principle, but focuses on language in several lower court opinions stating that waiver of the collection statute is a “ quid pro quo ” for consideration of the offer. See United States v. Harris Trust & Sav. Bank, 390 F.2d 285, 288 (7th Cir. 1968); United States v. Havner , 101 F.2d 161, 163 (8th Cir. 1939). You conclude that since the waiver was in exchange for consideration of the offer, failure to consider the offer prior to a new form being submitted changed the effect of the previously signed waiver.

We cannot agree with this conclusion. The Seventh Circuit faced this precise argument in a later case than that cited above. The taxpayer submitted an offer in compromise based on doubt as to liability, which included the waiver language. The Service eventually rejected the offer because liability has been established in a prior court judgment. ¹ The taxpayer argued that since rejection was preordained, the Service’s agreement to consider the offer was illusory and that the waiver executed in exchange for such consideration was therefore unenforceable. In revisiting its opinion in Harris Trust, the court stated that the “ quid pro quo ” language should not be read in contractual terms: “ Harris Trust does not state that contract principles govern the validity of a waiver and, of course, it could not do so without directly contradicting the Supreme Court’s decisions in Florsheim Bros. and Stange .” United States v. McGaughey , 977 F.2d 1067, 1073 (7th Cir 1992).

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¹ See Treas. Reg. § 301.7122 -1T(b)(2) (“Doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability.”)

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The court’s conclusion was perhaps made less clear by what it went on to say. The court concluded that the waiver was valid “because contract principles do not apply and because the IRS did consider the offe r, even if rejection was preordained.” Id . (emphasis added). While this could be read to indicate that the failure to consider the offer would have had some effect on the validity of the waiver, we believe, reading the statement in context, it was more of a signal from the court that the waiver would have been found valid even if some quid pro quo on the part of the Service was needed.

We think the same can be said of the scenario you have presented. When the offer was countersigned by a Service official with authority to acknowledge the waiver, the offer became “pending.” Although not required by law prior to January 1, 2000, the Service suspended collection by levy so that the offer could be processed and considered. Even if the Service had not yet begun to weigh the merits of the offer, this stay of collection by the Service was a benefit to the taxpayer. No such benefit flowing from the Service to the taxpayer would be needed for the waiver to be valid. The existence of such a benefit, however, undercuts any suggestion that the taxpayer would not have signed the waiver had he known that the offer would not immediately be considered on its merits.

If you have any questions, please contact the attorney assigned to this case at 202-622-3620 .