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

Opinion

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).

Key Issues:

• Under section 7122(f), was Brown’s OIC “rejected by the Secretary [IRS]” in November 2018, when the CS returned the OIC to Brown, or in August 2020, when Appeals issued the notice of determination sustaining the CS’s decision?

Primary Holdings:

• For purposes of section 7122(f), Brown’s OIC was deemed pending only for the period between the date the OIC was accepted for processing and the date the IRS returned the offer to Brown. See Reg. § 301.7122-1(d)(2). The OIC was accepted for processing in May 2018, but it was returned six months later in November 2018. Because the IRS returned Brown’s OIC within 24 months of submission, his OIC was not deemed accepted under section 7122(f).
• The time during which the IRS Appeals Office in a CDP case reviews the return of an OIC is not included as part of the 24-month “deemed acceptance” period of section § 7122(f).

Key Points of Law:

• 26 U.S.C. § 7122(f)–“Deemed acceptance of offer not rejected within certain period.” “Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary [IRS] if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer.” § 7122(f).
• Treasury Regulations. “An offer to compromise becomes pending when it is accepted for processing.” Reg. § 301.7122-1(d)(2). If the IRS accepts an offer for processing but subsequently determines that it was (or has become) non-processable, or that the offer is nonreviewable for other reasons, the offer may be returned to the taxpayer. “An offer returned following acceptance for processing is deemed pending only for the period between the date the offer is accepted for processing and the date the IRS returns the offer to the taxpayer.” Id. A taxpayer must submit an OIC according to the procedures, and in the form and manner, prescribed by the IRS. Id. para. (d)(1).
• “Deemed Accepted” Rules and Procedures. Proc. 2003-71, 2003-2 C.B. 517, and Notice 2006-68 explains the “deemed acceptance” rules of section 7122(f). The Notice 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 non-processable or no longer processable.” § 1.07, 2006-2 C.B. at 106. If a taxpayer requests review of a rejection, “[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.” Id.
• Deemed Pending. For purposes of section 7122(f), Brown’s OIC was “deemed pending only for the period between the date the offer [wa]s accepted for processing and the date the IRS return[ed] the offer to [him].” Treas. Reg. § 301.7122-1(d)(2).
• Rejection of Offer in Compromise. A rejection of an OIC ordinarily includes a “written notice” explaining the decision and providing the right to seek review in Appeals. See Reg. § 301.7122-1(f)(1). But it is the initial rejection, not the final determination by Appeals, that is relevant for purposes of section 7122(f). The initial rejection terminates the 24-month period “because the offer was rejected by the Service within the meaning of section 7122(f) prior to consideration of the offer by the Office of Appeals.” Notice 2006-68, § 1.07, 2006-2 C.B. at 106.
• Period in Office of Appeals. “The period during which the IRS Office of Appeals considers a rejected offer in compromise is not included as part of the 24- month period.” The statutory 24-month period ends when the COIC unit returns a taxpayer’s OIC; an offer is not deemed accepted if it is returned by the IRS within the 24-month period. The fact that a collection specialist’s decision was not “final” for purposes of judicial review does not prevent it from being a “return” or a “rejection” under section 7122(f), for the limited purpose of terminating the 24-month “deemed acceptance” period.

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.

Have a question? Contact Jason Freeman, Freeman Law.