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Offer In Compromise Is Considered Rejected When Returned to Taxpayer
(Parker Tax Publishing July 2022)
The Tax Court held that a taxpayer's offer in compromise (OIC) submitted during a collections due process hearing was "rejected" by the IRS for purposes of Code Sec. 7122(f) when a collection specialist closed the file and returned the OIC to the taxpayer after determining that other investigations were pending that could affect the liability sought to be compromised. Thus, because the OIC was rejected within 24 months of submission, it was not deemed accepted under Code Sec. 7122(f), and the time during which the IRS Independent Office of Appeals reviewed the return of the OIC was not included in the 24-month deemed acceptance period. Brown v. Comm'r, 158 T.C. No. 9 (2022).
Background
Michael Brown has a tax liability that is over a decade old and exceeds $50 million. In November 2017, in an effort to collect the balance due for 2009 and 2010, the IRS issued Brown a Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing. Brown requested a collection due process (CDP) hearing, checking the box "Offer in Compromise." On a Form 656, Offer in Compromise, submitted in April 2018, Brown offered to pay $320,000 in satisfaction of his liabilities for 2009-2010 (and other years).
This was not the first offer in compromise (OIC) Brown had submitted to the IRS. In November 2016, he submitted an OIC in which he offered to pay $400,000 in satisfaction of his total outstanding liabilities for all years. He submitted that OIC during a CDP hearing, and the settlement officer (SO) referred it to the IRS's Centralized Offer in Compromise Unit (COIC unit). In April 2017, the COIC unit returned the offer to Brown, concluding that it was no longer processable because there was an ongoing IRS investigation of an abusive tax avoidance transaction involving Brown. The SO thereafter issued a notice of determination, concluding that Brown's OIC had correctly been returned because there were other investigations pending that might affect the delinquent tax account he sought to be compromised.
Code Sec. 7122(f) provides that an OIC is deemed to be accepted by the IRS if the taxpayer's offer is not rejected before the date which is 24 months after the date the offer is submitted. Brown argued that the IRS had not formally "rejected" his OIC and therefore, it should have been deemed accepted under Code Sec. 7122(f). Previously, in Brown v. Comm'r, T.C. Memo. 2021-112 (Brown II), the Tax Court rejected that argument, holding that the COIC unit correctly returned Brown's OIC, at which point his OIC was considered closed. The court explained that the 24-month period of automatic acceptance prescribed in Code Sec. 7122(f) ends when the COIC unit returns a taxpayer's OIC. Brown appealed, and in 2020 PTC 343 (9th Cir. 2020) (Brown III), the Ninth Circuit affirmed the Tax Court's decision. Quoting Notice 2006-68, the Ninth Circuit ruled that an OIC "will not be deemed to be accepted" if the offer is, within the 24-month period, rejected or returned by the IRS to the taxpayer as non-processable.
In April 2018, while litigating these other CDP cases, Brown submitted a (substantially similar) OIC to the IRS. His case was assigned to SO James Feist in the IRS Independent Office of Appeals (Appeals). SO Feist forwarded the offer to the COIC unit, which determined that the offer appeared to be "processable," i.e., that it met IRS formal requirements. Brown's offer was then referred to a collection specialist in the IRS's Laguna Niguel branch (Laguna Group). On November 5, 2018, the Laguna Group informed Brown by letter that the IRS had closed the file and was returning Brown's OIC because other investigations were pending that could affect the liability that he sought to be compromised. After receiving that letter, Brown took the position in his CDP hearing that the Laguna Group had erred in returning his offer. Brown's lawyer told SO Feist that the reason given by the collection specialist for rejecting the offer - the pendency of other investigations - was "bogus."
On June 23, 2020 - more than 24 months after the offer was submitted - Brown's lawyer advanced a new argument in a letter to SO Feist. Brown now urged that only Appeals could make the determination to return the OIC and, because Appeals did not return the OIC within 24 months of the offer's submission, the OIC was deemed accepted under Code Sec. 7122(f). SO Feist agreed with the Laguna Group's decision to return the OIC and told Brown's lawyer that he would close the CDP case unless Brown wished to propose a different collection alternative. Brown did not propose a different collection alternative, and SO Feist proceeded to close the case. On August 12, 2020, the IRS issued Brown a notice of determination concluding that Brown's OIC was correctly returned by the Laguna Group because of an ongoing IRS investigation. The notice stated that, as a result of this investigation, the IRS was referring Brown's information to the Department of Justice "to reduce the federal tax debts to judgment."
Brown petitioned the Tax Court and filed a motion for summary judgment, contending that his OIC was deemed accepted under Code Sec. 7122(f). He argued that when an OIC is submitted in a CDP case, only a notice of determination from Appeals can terminate the 24-month period. This argument was similar to the one Brown offered in Brown II and Brown III, but Brown sought to distinguish those cases on the theory that the COIC unit's return letter and the SO's notice of determination were both issued there within a span of two years. Brown further argued that the Tax Court should reconsider its holding in Brown II. He asserted that the Laguna Group's decision to return the OIC was "procedurally meaningless" and that OICs in CDP cases are governed exclusively by Code Sec. 6330(c), which requires a final determination by Appeals.
Analysis
The Tax Court held that Brown's OIC was rejected for purposes of Code Sec. 7122(f) in November 2018, when the Laguna Group closed the file and returned the OIC to Brown. Because Brown's OIC was rejected within 24 months of submission, the court held that it was not deemed accepted under Code Sec. 7122(f). The court further held that the time during which Appeals reviews the return of an OIC is not included as part of the 24-month deemed acceptance period of Code Sec. 7122(f).
The court found that under Reg. Sec. 301.712-1(d)(2), an OIC becomes "pending" when it is accepted for processing, but if the IRS subsequently determines that the offer was unprocessable or nonreviewable for other reasons, the offer may be returned to the taxpayer. Further, the court noted that under Rev. Proc. 2003-71, an offer "will not be deemed to be accepted" if it is rejected or returned to the taxpayer within 24 months of submission. The procedure further states that, if the taxpayer requests review of the rejection, the period during which Appeals considers a rejected OIC is not included as part of the 24-month period.
According to the court, this outcome is the same under the regulations governing rejections outside the CDP context. The court explained that, under Reg. Sec. 301.7122-1(f)(1), a rejection of an OIC ordinarily includes a written notice explaining the decision and providing the right to seek review in Appeals. But the court found that it is the initial rejection, not the final determination by Appeals, that is relevant for purposes of Code Sec. 7122(f). The court found that under Notice 2006-68, the initial rejection terminates the 24-month period because the offer was rejected by the IRS within the meaning Code Sec. 7122(f) prior to consideration of the offer by Appeals. In other words, as provided in Notice 2006-68, the period during which Appeals considers a rejected OIC is not included as part of the 24-month period.
The court disagreed with Brown's attempt to distinguish Brown II and Brown III on the basis that in those cases, the COIC unit's return letter and the SO's notice of determination were both issued with two years; the court said that it did not see how this distinction helped Brown. The holdings of both Brown II and Brown III, the court said, clearly identified the terminating event as the COIC unit's return of the offer, not the SO's notice of determination. The court also rejected Brown's reliance on Code Sec. 6330(c). The court found that this argument was meritless because it confused two kinds of finality: the administrative return of an OIC, which terminates the 24-month period under Code Sec. 7122(f), and the notice of determination, which terminates the CDP proceeding under Code Sec. 6330. In the court's view, Brown was essentially arguing that Code Sec. 6330 overrides the outcome dictated by Code Sec. 7122(f), and the court found that this assertion ignored Reg. Sec. 301.7122-1, Brown II, Brown III, and Notice 2006-68, all of which confirm that the IRS's initial decision to return an OIC is the event that terminates that 24-month deemed acceptance period.
For a discussion of offers in compromise, see Parker Tax ¶263,165.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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