Tax Court in Brief | Brown v. Commissioner | IRS Rejection of an Offer in Compromise

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Tax Litigation:  The Week of June 20th, 2022, through June 24th, 2022

Brown v. Commissioner, 158 T.C. No. 9| June 23, 2022 | Lauber, J.| Dkt. No. 11519-20L

Summary: Michael Brown had tax liability exceeding $50 million. This case regards that liability, collection due process (CDP), and review of a determination by the IRS to reject an offer-in-compromise (OIC). On November 9, 2017, the IRS issued petitioner Notice of Federal Tax Lien Filing (NFTL). Brown timely requested a CDP hearing and checked the box “Offer in Compromise.”  On April 19, 2018—and while Brown litigated other OIC and CDP issues through the Tax Court and the Ninth Circuit Court of Appeals—he submitted Form 656, Offer in Compromise, in which he offered to pay $320,000 in satisfaction of his liabilities for all years. The settlement officer (SO) referred the OIC to the IRS’s Centralized Offer in Compromise Unit (COIC unit). In May 2018, the COIC unit determined that the offer met the IRS formal requirements. The offer was then referred to a collection specialist (CS). On November 5, 2018, the CS issued Brown a letter informing him that the IRS had “closed [the] 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 CS explained: “As of the date of this letter, we are considering your offer closed. Any payments received with your offer or after the date of this letter will be applied to your liability.” Attached to the letter was a copy of Brown’s original offer packet, marked “RETURNED.” On February 22, 2019, Brown requested that the SO reconsider the CS’s decision. SO replied that “Appeals will maintain jurisdiction of [the] case,” but advised that it would be “difficult[] [to] overturn[] the reasons [given by the collection specialist] for the return of [the] OIC.” The CDP case then remained open during the pendency of the “other investigations” to which the CS had referred. On June 23, 2020—more than 24 months after the OIC was submitted—Brown urged that “only Appeals can make the determination to return the OIC.” Because “Appeals did not return the OIC” within 24 months of the submission, Brown insisted that the OIC was “deemed accepted” under section 7122(f). On August 12, 2020, the IRS issued the notice of determination on which this case is based. The notice of determination concluded that Brown’s OIC was correctly returned by the CS because of an ongoing IRS investigation. The notice states that, as a result of this investigation, the IRS in February 2019 referred Brown’s information to the U.S. 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, as a matter of law, the OIC was deemed accepted under section 7122(f).

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Insights: This case illustrates the importance of form, content, and timing of an offer-in-compromise submitted to and processed by the IRS in accordance with 26 U.S.C. § 7122, Treas. Reg. § 301.7122-1, Rev. Proc. 2003-71, 2003-2 C.B. 517, and Notice 2006-68. Under these facts, Brown’s chances of eliminating over $50 million in tax liabilities by a $320,000 offer in compromise were slim and then reduced to practically none by the Tax Court.

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