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Charlie Sheen Battles IRS Rejection of Offer in Compromise

Posted on Dec. 3, 2021

Actor Charlie Sheen, star of the TV series Two and a Half Men, is contesting the rejection of a $3.1 million offer in compromise for liabilities in tax years 2015, 2017, and 2018.

In a Tax Court petition filed November 5 in Sheen v. Commissioner, Sheen says the IRS abused its discretion when the Los Angeles area director rejected the OIC without explaining his reasoning or offering an opportunity for Sheen to address his concerns.

The rejection followed lengthy negotiations between Sheen’s counsel and an IRS settlement officer, who ultimately recommended the OIC for acceptance, according to the petition. Sheen claims that he already funded 20 percent of the offer — $626,084, including the first Tax Increase Prevention and Reconciliation Act payments of $1,000 per month — as required by the IRS's OIC rules and the agreement with the settlement officer. 

Sheen requests that the court consider the consolidation of the case with a docketed case still pending before the court, Sheen v. Commissioner, Dkt. 14774-18L. The petition for the case, served August 2, 2018, contests the sustaining of a lien notice for $5.7 million in taxes owed for the 2015 tax year.

The 2021 petition also asks the Tax Court to remand the two collection due process cases to an Independent Office of Appeals in a geographic location outside the jurisdiction of the Los Angeles area director.

Arm’s-Length Negotiations

The IRS notice of determination attached to the petition states that Sheen asked for an OIC and an installment agreement. The original offer submitted on January 6, 2020, totaled $1.2 million for all individual income tax liabilities arising from years 2015, 2017, and 2018, according to the notice.

The petitions says Sheen’s OIC was first sent to an offer specialist in Louisiana, then transferred to a specialist in Alabama, who evaluated it based on Sheen’s reasonable collection potential. In a letter dated July 20, 2020, the specialist in Alabama recommended the offer be rejected.

Following the specialist’s rejection, the offer was forwarded to a settlement officer in Los Angeles for final review. The petition says Sheen’s representative, Steven L. Jager, prepared a six-page memorandum rebutting the specialist’s evaluation of Sheen’s reasonable collection potential that served as a “working document” for intensive negotiations with the settlement officer.

Disagreements between the actor and the IRS offer specialist concerned whether to include some assets and how to value others, according to one of Sheen's advisers. The petition asserts that the settlement officer was annotating the memorandum with reference to applicable tax code sections to support concessions made on both sides.

As a result of those negotiations, Sheen and the settlement officer came to an agreement regarding doubt as to collectibility and settled on the $3.1 million OIC, which was then approved by the IRS Office of Chief Counsel.

The reasonable collection potential originally determined by the offer specialist was three to four times greater than the $3.1 million figure, an adviser familiar with the matter told Tax Notes.

Liquidating Assets

In later rejecting the otherwise accepted offer, the petition argues that the Los Angeles area director breached his duty of good faith and fair dealing. It asserts that the IRS further abused its discretion when the area director deprived Sheen of an opportunity to pursue an administrative appeal.

“You can't just have buyer's remorse,” Sheen's adviser said. “You have to explain with some legal reasoning why the error is an error that can support and justify breaching that covenant.” 

The notice of determination, filed October 7, says Sheen can liquidate assets to fully pay his liability.

While the 2021 notice doesn't include the asset tables or income expenses referenced in the assertion, a declaration in support of summary judgment for Sheen’s 2015 tax liabilities provides an inventory control system history transcript concluding that Sheen had net realizable equity of $4.8 million in assets at the time that could be liquidated to pay his tax debt in full. 

The officer’s calculation in the case included Sheen’s home in Beverly Hills, California, valued at $10 million; a house in Oak Park, California, valued at $1.8 million; and a property in Rosarito, Mexico, bought by Sheen for $581,591.

In a conversation summary provided by the settlement officer, Sheen indicated that he was about to enter escrow on the Beverly Hills home and that he expected to gain only about $4 million in cash from the sale.

Sheen also allegedly said he expected to receive about $7 million “on the back end” from his show Anger Management in late 2018 and expected to be able to pay the liability at that time.

According to IRS rules governing OICs, the 20 percent down payment tendered by Sheen will be forfeited to cover his tax liability in the event that the offer is rejected. 

“Mr. Sheen deeply regrets that he currently has a tax liability that he is unable to pay to the IRS,” said a statement provided by Sheen through his publicist. The statement said an OIC is “a win-win” and that “the law recognizes such settlements to be a legitimate alternative to otherwise protracted and expensive collection tools which are inconvenient for everyone involved.”

The petitioner in Sheen v. Commissioner, Dkt. No. 29680-21L, is represented by Steven L. Jager of Fineman West & Co.

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