A taxpayer’s offer in compromise (OIC) submitted during a Collection Due Process (CDP) proceeding was rejected when the IRS returned the OIC to the taxpayer, not when the IRS issued the notice of determination closing the CDP proceeding. Because the OIC was returned to the taxpayer within 24 months of the date submitted, it was not deemed accepted by the IRS under Sec. 7122(f).
Michael Brown had an outstanding federal income tax liability of over $50 million. In order to collect the portion of that balance due from 2009 and 2010 in November 2017, the IRS issued Brown a Notice of Federal Tax Lien. In response to that notice, Brown timely requested a CDP hearing and indicated he would be filing an OIC. In April 2018, he submitted an OIC of $320,000 for 2009 and 2010 (and other years).
Brown’s case was assigned to a settlement officer (SO) in the IRS Appeals Office. When the SO received Brown’s OIC, he forwarded it to the Centralized Offer in Compromise (COIC) unit. The COIC determined the OIC met the requirements to be processable and referred it to a collection specialist for consideration.
After considering Brown’s OIC, the IRS sent him a letter stating that it had closed his file and was “returning your Form 656, Offer in Compromise” because “[o]ther investigations are pending that may affect the liability sought to be compromised or the grounds upon which it was submitted.” The letter further stated: “As of the date of this letter, we are considering your offer closed” and included with the letter was a copy of Brown’s original offer packet, which was marked “RETURNED.”
For about a year and a half after receiving the letter from the IRS, in his CDP hearing, Brown maintained that the IRS had erred in returning his offer (under the theory that the reason for rejecting the offer — the pendency of other investigations — was “bogus”). In June 2020, however, more than 24 months after Brown had submitted the OIC, he offered a new argument.
He now argued that “only Appeals can make the determination to return the OIC.” Because “Appeals did not return the OIC” within 24 months of its submission, he claimed that the OIC was “deemed accepted” under Sec. 7122(f). Under this provision, an OIC is deemed to be accepted by the IRS if it is not rejected within 24 months after its submission date.
The SO assigned to Brown’s case did not agree and told Brown he intended to close the CDP case unless Brown wished to propose a different collection alternative. Brown did not do so, and the SO closed the case. In August 2020, the IRS issued a notice of determination in which it concluded that Brown’s OIC was properly returned due to an ongoing IRS investigation.
Brown timely petitioned the Tax Court for review. In Tax Court, he filed a motion for summary judgment, again contending that the IRS was deemed to have accepted the OIC under Sec. 7122(f) because it had not rejected the OIC within 24 months of its submission.
The Tax Court’s decision
The Tax Court held that Brown’s OIC was rejected in November 2018, when the IRS returned it to him. Because this was within 24 months of Brown’s submission of the OIC, it was not deemed accepted by the IRS under Sec. 7122(f).
The Tax Court explained that under Regs. Sec. 301.7122-1(d)(2), an OIC becomes pending when it is accepted for processing. An OIC that the IRS returns following acceptance for processing is deemed pending only for the period between the date the IRS accepts the OIC for processing and the date it returns the OIC to the taxpayer.
Regs. Sec. 301.7122-1(d)(1) provides that a taxpayer must submit an OIC “according to the procedures, and in the form and manner, prescribed by the [IRS].” The IRS has prescribed the relevant procedures in Rev. Proc. 2003-71 and in Notice 2006-68. Notice 2006-68 states that “[a]n offer will not be deemed to be accepted if the offer is, within the 24-month period, rejected by the Service [or] returned by the Service as nonprocessable or no longer processable.” Under Rev. Proc. 2003-7, an OIC is considered to be returned on the day the IRS mails, or personally delivers, a written letter to the taxpayer informing the taxpayer of the IRS’s decision to return the offer. Also, under Notice 2006-68, “[t]he period during which the IRS Office of Appeals considers a rejected offer in compromise is not included as part of the 24-month period.”
In Brown’s case, his OIC was submitted in April 2018 and was returned to him seven months later in November 2018. Although the SO spent additional time evaluating Brown’s position, as provided in Notice 2006-68, this time was not included in the 24-month period under Sec. 7122(f). Thus, the Tax Court concluded that Brown’s OIC was rejected within 24 months of its submission and under Sec. 7122(f), the regulations, and other relevant guidance, the OIC was not deemed accepted by the IRS under Sec. 7122(f).
Brown, however, while accepting the validity of these rules, claimed that they are inapplicable to OICs submitted in a CDP case. According to Brown, OICs submitted during a CDP case are governed exclusively by Sec. 6330(c), under which only an Appeals notice of determination can be the event that terminates the Sec. 7122(f) 24-month period. The Tax Court, however, rejected Brown’s arguments, finding that they were “at odds with judicial precedent and derive no support from legal authority, policy considerations, or common sense.”
Brown had presented a similar theory to the court in an earlier case, Brown, T.C. Memo. 2019-121 (Brown II). In that case, the Tax Court held, citing Internal Revenue Manual (IRM) Section 22.214.171.124.1.1(6), that the 24-month Sec. 7122(f) period ends when the COIC unit returns a taxpayer’s OIC. In Brown, 826 F. Appx. 673 (9th Cir. 2020) (Brown III), the Ninth Circuit affirmed that portion of the Tax Court’s decision. Citing Notice 2006-68, the court held that if an OIC is rejected or returned within the 24-month period, it is not deemed accepted.
Brown sought to have the Tax Court reconsider its holding in Brown II. The court declined to do so and noted that it could not reconsider the Ninth Circuit’s holding in Brown III. Moreover, the court found that Brown’s argument was meritless because it confused “two kinds of finality: the administrative return of an OIC, which terminates the 24-month period under section 7122(f), and the notice of determination, which terminates the CDP proceeding under section 6330.”
The Tax Court stated that, in essence, Brown was contending that Sec. 6330 overrides the outcome dictated by Sec. 7122(f) because the notice of determination is the “critical event” under Sec. 7122(f) and that no real authority suggested a contrary result. This assertion, the Tax Court found, ignored Regs. Sec. 301.7122-1, Brown II, Brown III, Notice 2006-68, and the IRM provisions it had cited. The court stated that these authorities confirmed that the IRS’s initial decision to return an OIC is the event that terminates the 24-month “deemed acceptance” period and Brown had failed to cite any authority for his claim that Sec. 7122(f) has a different meaning when an OIC is made in a CDP context.
The Tax Court also found that having the 24-month period end with the IRS’s initial rejection was consistent with congressional intent expressed in the legislative history of Sec. 7122(f) that the IRS “would respond fairly promptly to OICs, rather than letting them sit in a pile for two years or more.” The court further noted that there was no reason to believe, in enacting Sec. 7122(f), that Congress intended to limit the duration of a CDP proceeding, which would be the practical effect of including the period of an Appeals review of a rejected OIC in the Sec. 7122(f) 24-month period.
Finally, the court pointed out that if Appeals was required to issue a notice of determination within 24 months after an OIC was submitted, an SO might be motivated to issue a notice before every issue raised by a taxpayer was resolved, in order to avoid having the OIC be deemed accepted. Doing this would risk reversal and remand of the IRS’s determination, prolonging the case even further, which in the court’s view, would be “defying logic and undermining Congress’ intent.”
The Tax Court, in a footnote, stated that adopting Brown’s theory could also invite “gamesmanship and abuse” by a taxpayer, who could submit an OIC at the outset of a CDP case and then engage in delaying tactics to try to extend the proceeding beyond the 24th month. According to the court, “It is obvious that Congress did not wish to encourage this type of behavior.”
Brown, 158 T.C. No. 9 (2022)
James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact email@example.com.