Procedure & Administration
The Tax Court held that IRS Appeals could not unilaterally accept an offer in compromise (OIC) proposed by Ronald Isley, vocalist and founding member of the Isley Brothers, because the OIC covered liabilities related to a case that had been referred to the Department of Justice (DOJ) for prosecution.
Background
Isley has been the lead vocalist of the Isley Brothers throughout the group’s long and successful history, which began in the ’50s. From 1959 to 2006, the group, in its various lineups, had numerous hits in the rock, R&B, soul, and funk genres. The group has sold millions of singles and albums and in 1992 was inducted into the Rock and Roll Hall of Fame. In addition to singing for the group, Isley co-wrote many of its songs.
Unfortunately, Isley was much less successful throughout the years at managing the considerable amount of money he earned and paying taxes on that income than he was at singing and songwriting. Isley filed for bankruptcy twice, once in New Jersey in 1984 and once in California in 1997. The IRS filed proofs of claim in both of these bankruptcy cases, and, as a result, the IRS was able to collect a substantial amount of the income tax Isley owed.
After the second bankruptcy, Isley did not get any better about paying his taxes, which led to even greater problems. Isley was prosecuted and convicted for tax evasion and willful failure to file with respect to 1997–2002 (the conviction years). This resulted in a federal district court’s issuing on Sept. 1, 2006, a judgment and probation commitment order (JPC order) sentencing Isley to 37 months in prison followed by a three-year probationary period, during which he was required to pay his tax liabilities for the conviction years and to truthfully and timely file tax returns and pay taxes for the probation years.
The IRS later issued Isley two notices of federal tax lien (NFTLs) and two notices of levy that together covered his assessed liabilities for the conviction years plus 2003, 2004, and 2006. Isley requested a Collection Due Process (CDP) hearing, which resulted in his tender of—and the IRS Appeals Office’s preliminary acceptance of—an OIC. The Appeals officer assigned to his case referred the OIC to an attorney in the IRS’s Office of Chief Counsel (OCC), for review.
The OCC attorney who reviewed the OIC was already familiar with Isley’s tax history from his work on the IRS’s proof of claim in Isley’s second bankruptcy case. He recommended that the Appeals officer reject the OIC. The attorney advised that because the conviction years (which were covered by the OIC) had been referred to the DOJ for prosecution, Appeals was prohibited by Sec. 7122(a) from compromising Isley’s liabilities for those years. He also advised that, in the alternative, the Appeals officer should reject the OIC because Isley’s realizable collection potential exceeded the proposed offer amount, he had provided the Appeals officer incomplete or inaccurate information, and he was not in compliance with his filing obligations. Following the attorney’s advice, the Appeals officer rejected the OIC and sustained the NFTL filings and levy notices.
Isley petitioned the court to have the OIC reinstated on the grounds, among others, that Sec. 7122(a) did not prohibit the Appeals Office from entering into an OIC pursuant to Secs. 6330(c)(2) and (3).
Secs. 7122(a) and 6330(c)
Sec. 7122(a) 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; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.
Regs. Sec. 301.7122-1(d)(2), clarifies the statute, stating, “[t]he IRS may not accept for processing any offer to compromise a liability following reference of a case involving such liability to the Department of Justice for prosecution or defense.” Sec. 6330(c)(2)(A), permits a taxpayer to “raise at … [a CDP] hearing any relevant issue relating to the unpaid tax or the proposed levy, including … (iii) offers of collection alternatives, which may include … an offer-in-compromise.”
The Parties’ Arguments
The IRS argued that Appeals had no authority to accept (or, indeed, even to process) Isley’s amended OIC because it sought to compromise tax liabilities for the conviction years, which had been referred to the DOJ for prosecution. The IRS attempted in its arguments to harmonize Secs. 7122(a) and 6330(c)(2)(A), by arguing that, in the light of Sec. 7122(a), the propriety of an OIC in this case was not a “relevant issue.” The IRS also argued that, because the Appeals officer’s consideration of collection alternatives “may include” an OIC, there was “Congressional recognition that not every collection alternative will be … available in every hearing.”
Isley argued that, under Sec. 6330(c), he had an absolute right to submit an OIC and that the IRS was required to take his OIC into consideration. Isley argued that Sec. 7122(a) prohibits the IRS from compromising only tax liabilities that are subject to “pending” criminal prosecutions, and his criminal case, which was complete with his sentencing on Sept. 6, 2006, was not pending when the liabilities for all but one of the years at issue herein were assessed. Isley also argued that the IRS’s position was not justified because the acceptance of his OIC in fact had no effect whatsoever on his sentence and probation. Finally, he noted that neither the prosecutor in his criminal case nor his probation officer actually objected to the acceptance of his OIC.
The Tax Court’s Decision
The Tax Court agreed with both Isley and the IRS that it was correct to harmonize Secs. 7122(a) and 6330(c) so that both provisions would be effective. However, it did not subscribe to either party’s rationale for reconciling the two provisions. The court held, as the IRS argued, that once a case has been referred to DOJ for prosecution or defense, Sec. 7122(a) trumps Sec. 6330(c). However, the Tax Court further held that Sec. 7122(a) does not prohibit the Appeals officer in a CDP hearing from at least negotiating the terms of a potential OIC with a taxpayer after referral of his or her case to DOJ for prosecution; rather, it only prevents the Appeals officer from unilaterally approving the OIC.
The Tax Court cited unpublished opinions from the Third and the Ninth circuits where the courts found that, pursuant to Sec. 7122(a), from the moment a taxpayer’s case is referred to DOJ for prosecution (or defense), the IRS loses its authority to compromise the taxpayer’s tax liabilities unless authorized by DOJ. The Tax Court noted that in the more recent of the two cases, Jackson, 511 Fed. Appx. 200 (3d Cir. 2013), which was decided after the enactment of Sec. 6330, the Third Circuit stated “the DOJ retains authority to compromise even if a judgment has been obtained and the case has been returned to the IRS for collection.”
The court found that it made perfect sense from a policy standpoint that DOJ’s primacy in compromising tax liabilities that have been referred to the attorney general for prosecution should continue until the terms of the court’s judgment (or of any settlement authorized by the attorney general or his delegate) have been satisfied. According to the court, this was demonstrated in Isley’s case by the fact that any compromise of his liabilities by the IRS would have violated the express terms of the JPC order issued in his criminal case.
Nonetheless, although Sec. 7122(a) prevented the IRS from compromising Isley’s liability without the DOJ’s permission, the Tax Court found that nothing in that Code section prohibited the IRS Appeals Office from negotiating a potential OIC after the taxpayer’s case had been referred for prosecution, so the Appeals Office could negotiate an OIC with Isley and present it to DOJ for its approval. However, if DOJ refused to approve the OIC, rejection of the OIC by the Appeals Office would not be an abuse of discretion. The court also found that since Sec. 7122(a) applies only to liabilities that have been referred for prosecution, the Appeals Office was free to compromise Isley’s liabilities for the other years at issue in the CDP hearing.
Reflections
Although the Isley Brothers famously encouraged listeners in song in 1975 to “fight the powers that be,” based on Isley’s personal experiences, one might question the wisdom of that advice with respect to the IRS. Even if the Tax Court had ruled in Isley’s favor on the Sec. 7122(a) issue, he would not have succeeded in getting the OIC reinstated. The Tax Court also held that it was not an abuse of discretion for the Appeals officer to reject the OIC on the alternative grounds that Isley had not met the OIC’s tax filing and payment requirements.
Isley, 141 T.C. No. 11 (2013)
