Offer in Compromise as a Final Solution. The acceptance Of Offer In Compromise is Final

Johnston, 122 T.C. 6; Dutton, 122 T.C. 7

Two Tax Court decisions warn that an accepted offer in compro-mise (OIC) shuts the door to claims for further relief. In Dutton, the taxpayer was barred from adjusting an OIC for an innocent spouse claim. In Johnston, the taxpayers were precluded from reducing their accepted offer by net operating losses (NOLs).



Dutton dual claims

The taxpayer submitted a request for relief from joint and several liability for several tax years. The taxpayer later submitted an OIC for all liabilities.

An IRS manager subsequently informed the taxpayer that the government was proposing a partial grant of relief under Code Sec. 6015(c), but that relief under other provisions would be denied. The manager also informed the taxpayer that once relief was granted, no additional payments would be due and the taxpayer would be entitled to a refund.

The IRS accepted the taxpayer's $6,000 offer in compromise, subject to the conditions stated on Form 656, Offer in Compromise. The taxpayer completed the payment plan for his OIC.



IRS changes position

The IRS later determined that the taxpayer was not entitled to relief from joint and several liability. It asserted that the taxpayer's innocent spouse claims were barred because the taxpayer's OIC had been accepted.

The taxpayer argued that his OIC should be set aside because the IRS manager mistakenly stated that refunds would be allowed for any relief granted under Code Sec. 6015(c). The taxpayer contended that he would not have agreed to an offer in compromise if he had known he was waiving his right to refunds.



Tax Court's analysis

Code Sec. 6015 allows relief from joint and several liability (innocent spouse relief). Code Sec. 7122 governs offers. Generally, acceptance of a taxpayer's OIC will conclusively settle the taxpayer's liability as specified in the offer, absent fraud or mutual mistake.

The court found no mutual mistake or misrepresentation sufficient to set aside the offer. The court also noted that the reference in Code Sec. 6015(g)(1) to Code Sec. 7122 indicates that under the OIC, the taxpayer would not be entitled to a refund or credit even if relief was ultimately granted under Code Sections 6015(b) or (f).

Moreover, the court observed that Form 656 stated that the taxpayer would no longer be able to contest the amount of his liability. It concluded that there was no indication at the time the offer was submitted that the taxpayer was under the impression that if the offer was approved, the IRS would issue a refund.

The Tax Court recently held that an appeals officer did not abuse his discretion under Code Sec. 6332(c)(3), by rejecting the taxpayers' offer in compromise and proceeding with a levy. The taxpayer had sought to have the account declared uncollectible because of financial hardship.

The amount of the payment offer was determined following IRS guidelines and the taxpayers received two hearings, while they only entitled to one. The court concluded that the appeals officer's rejection of the taxpayer's $250 per month offer ($6,000 over two years) to satisfy tax liabilities in excess of $160,000 was reasonable.

The court also observed that, due to changes to Code Sec. 7122 resulting from the '98 IRS Restructuring Act, offers in compromise, in addition to doubt as to liability and collectibility, can be made to promote effective tax administration if collection imposes an economic hardship. In such instances, the payment period may be reduced to two years. The court stated that factors such as age and illness must be considered in determining economic hardship, but here the appeals officer had given these matters proper attention.

Galvin, TC, CCH Dec. 55,289(M)


Johnston compromise

The taxpayers made a qualified offer under Code Sec. 7430 to resolve their liabilities. The taxpayers offered to pay $105,000 and the IRS accepted the offer without negotiation.

After the offer was accepted, the taxpayers tried to reduce the agreed-upon amount by applying net operating losses (NOLs). The IRS asserted that the taxpayers could not raise new issues after it had accepted their OIC. The taxpayers argued that since the NOLs were not in dispute when they made the qualified offer, the offer was exclusive of the amounts related to the NOLs.



NOLs no-go

The court found that the taxpayers should have indicated in the settlement that the offer amount was subject to reduction by NOLs. The court concluded that the IRS's acceptance of the OIC fully resolved the taxpayers' liabilities.

The taxpayers could not add new terms to their agreement by applying NOLs from other years to reduce the agreed-upon amount. Although final regs under Code Sec. 7420 clarify that the question of whether a settlement can be decreased by NOLs depends on state and contract law, the court noted that the taxpayers' OIC had been made before the effective date of the final regs.


IRS Wrong In Rejecting Offer In Compromise Under Blanket Internal Rule For All Bankrupt Taxpayers

In the Matter of Holmes, BC-DC Ga., September 12, 2003

A bankruptcy court ordered the IRS to consider a debtor/taxpayer's offer in compromise (OIC). It held that the IRS's blanket rule not to consider an OIC while a taxpayer is in bankruptcy frustrates the basic principles of the Bankruptcy Code.



Facts

The taxpayer owned 3.2 million shares of stock. When the stock value plummeted due to financial problems, most of the taxpayer's stock was sold on "margin calls." The margin calls created substantial capital gains tax that the taxpayer was unable to pay, forcing him into Chapter 11 bankruptcy. The IRS filed unsecured claims for $10.5 million.

The taxpayer made a Code Sec 7122 compromise offer of $620,000 cash. The IRS refused to process the OIC, stating that the offer "will not be considered while a bankruptcy proceeding is open."

Comment:
As a general policy, the IRS does not consider OICs when the taxpayer has filed for bankruptcy. This policy is only found in the IRS's Internal Revenue Manual. Neither the Bankruptcy Code, the IRC nor regs restrict the IRS from considering an OIC during a Chapter 11 bankruptcy case.



Disparate treatment argument fails

The taxpayer argued that the IRS policy not to consider an OIC if a bankruptcy proceeding is pending is prohibited by section 525(a) of the Bankruptcy Code. Following Macher v. U.S., the court decided that an OIC is not "a license, permit, charter, franchise, or similar grant" under Code Sec. 525(a). Thus, the IRS's refusal to receive and consider the taxpayer's OIC is not prohibited by section 525(a) of the Bankruptcy Code.



IRS policy set aside

Nevertheless, the Court found that the IRS's policy frustrated the basic principles of the Bankruptcy Code and Code Sec. 7122. Internal policies of the IRS do not have the force and effect of law. Federal agencies must obey all federal laws, not just those they administer. Noting that federal courts are required to set aside federal agency action that "is not in accordance with law," the court exercised its authority to issue an order necessary to carry out the provisions of the bankruptcy title and Congressional intent for Chapter 11.