Decision Not to Reinstate Offer Upheld

The Tax Court held that an IRS Appeals officer’s decision in a collection due process hearing not to reinstate a taxpayer’s offer in compromise after the taxpayer failed to meet a condition of the offer in compromise was not an abuse of discretion.

Background

In 1997, David Trout entered into an offer in compromise (OIC) with the IRS covering tax years 1989, 1990, 1991, and 1993. The OIC included conditions requiring Trout to timely file and pay his taxes for five years. However, Trout filed his 1996 and 1998 returns late. He also filed a late unsigned return for 1999 and did not pay the liability showing on the 1999 return.

In 2002, the IRS sent Trout a letter informing him that he was in default on his OIC. Trout did not reply to the letter, and the IRS subsequently issued him a notice of intent to levy on the full amount of tax that he owed before he entered into the OIC. After skirmishing with Trout over the 1999 return, the IRS issued a second notice of intent to levy. In response to the notice, Trout requested a collection due process (CDP) hearing, which the IRS granted. In the CDP hearing, Trout requested that the IRS reinstate his OIC. The IRS Appeals officer refused to reinstate the OIC and sustained the second levy because Trout had failed to comply with the OIC conditions.

Trout’s Argument

Trout claimed that the failure to timely file the 1999 return was not a material breach and that because it was not a material breach, the OIC was still in effect under general principles of contract law. Therefore, according to Trout, the Appeals officer abused his discretion in refusing to reinstate the OIC due to the failure to file the return.

The Tax Court’s Opinion

The Tax Court held that Trout’s failure to timely file the returns was a material breach of the OIC and that the Appeals officer did not abuse his discretion in refusing to reinstate the OIC. The court noted that it had previously held that OICs are contracts and that their construction is governed by general principles of contract law (Dutton, 122 T.C. 133 (2004)). In particular, the court held, OICs are governed by the federal principles of the common law of contracts. Under these principles, the Tax Court explained, if a condition of a contract is an express condition, it is subject to strict performance. Therefore, if there is a breach of the condition, whether the breach is material or immaterial is irrelevant.

The Tax Court then looked at whether or not the condition in the OIC requiring Trout to timely file his returns was an express condition. The court stated that this was an issue of contract interpretation and that the Ninth Circuit (where any appeal in this case would lie), applying federal common law principles, has favored interpreting OICs according to the plain meaning of their words, unless the parties manifest a different intention.

Applying this standard to the section of the agreement containing the condition requiring Trout to timely file his returns, the Tax Court found that the language of the section plainly stated that a condition of the OIC was that Trout timely file his returns for the years specified in the OIC. The court also noted that the IRS had gone to some lengths to make this point clear by printing the condition in boldface type on the OIC form and repeating the timely filing condition in the instructions to the form. Therefore, the Tax Court held that the condition to timely file returns was an express condition subject to strict performance and that Trout had breached the OIC.

Regarding the levy on Trout’s pre-OIC tax liability, the Tax Court explained that even if a taxpayer is in breach of an OIC, the Appeals officer in a CDP hearing is still required under Sec. 6330 to perform a balancing analysis in determining whether it was appropriate for the IRS to refuse to reinstate the OIC. The Tax Court held that in Trout’s case the Appeals officer had properly performed the analysis and did not abuse his discretion in sustaining the levy.

Trout, 131 T.C. No. 16 (2008)

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