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Precedential Opinion Regarding Deemed Offer Acceptance

Posted on June 29, 2022

In Brown v. Commissioner, 158 T. C. No. 9 (2022) the Tax Court addressed an argument by petitioner’s counsel that returning an offer in compromise did not stop the two year period within which the IRS must accept or reject an offer because of the existence of a Collection Due Process (CDP) hearing.  Mr. Brown argued that the IRS caused the deemed acceptance of his offer by failing to issue a notice of determination in the CDP case within 24 months after submission of the offer.  The Tax Court rejected this interpretation of the return of the offer and ruled that the 24 month period giving rise to a deemed offer acceptance ended when the offer unit returned the offer and not when the Settlement Officer sent the notice of determination.

We previously discussed the Brown case here after the Tax Court issued T.C. Memo 2019-121.  As we discussed in the prior post, Mr. Brown owed about $50 million to the IRS and the offer unit returned the offer because an enforcement collection group had the case.  The issues in the prior case play out in the recently issued opinion discussed below but with a twist because of the argument regarding the impact of the determination letter.

We have discussed the issue of deemed acceptance of offers here , in a case in which the taxpayer brought suit unsuccessfully in district court trying to enforce a deemed offer; here, where we first discussed the concept of deemed acceptance and here, where we discussed the possibility that the COVID shutdowns at the IRS could cause offers to sit for a sufficiently long period to meet the deemed acceptance period.  Although we have written about this topic several times before, we know of no one who has obtained a deemed accepted offer.  If any readers have had an offer deemed accepted, we would love to hear your story.  So far, the discussion has been too academic and ended only in losing stories.

Judge Lauber wrote the opinion in the original Brown case and writes this opinion as well. The only way to get an offer in compromise case into the Tax Court is through CDP. This case is a CDP case. The Settlement Officer (SO) hearing the case concluded that the OIC unit was right to send to the specialized collection unit as directed by the Internal Revenue Manual. According to the SO, once the OIC unit identified the case as one in the inventory of the specialized collection unit, it could not process the offer and had to return it. Petitioner argues that the return of the offer to the specialized collection unit did not equate to a rejection of the offer under the statute in a CDP case and the rejection did not occur until 27 months after submission when the SO issued the determination letter in the CDP case.

While I linked above to one of the earlier decisions of the Tax Court regarding Mr. Brown which I blogged, the Court notes that:

This is the third CDP case petitioner has prosecuted in this Court. See Brown v. Commissioner (Brown IV), T.C. Memo. 2021-112, supplementing Brown v. Commissioner (Brown II), T.C. Memo. 2019-121, aff’d in part, vacated in part, and remanded, Brown v. Commissioner (Brown III), 826 F. App’x 673 (9th Cir. 2020); Brown v. Commissioner (Brown I), T.C. Memo. 2016-82, aff’d, 697 F. App’x 1 (D.C. Cir. 2017). At issue in the previous cases were collection actions relating to petitioner’s 2001– 2007 and 2014 tax years. This case concerns collection action for petitioner’s 2009 and 2010 tax years.

Mr. Brown had submitted an OIC in Brown II and argued there that no formal rejection occurred.  In that case the Court ruled the return ended the OIC consideration and stopped the 24 month period keeping it from meeting the deemed acceptance provision.  The Ninth Circuit affirmed the decision that the return ended the 24 month period.  While the prior litigation was pending, Mr. Brown submitted the OIC at issue here to the SO in a new CDP case.  The Court describes the offer as substantially similar to the one in the earlier litigation.  The SO forwarded the offer to the OIC unit.  About seven months after receipt, the OIC unit:

issued petitioner 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 Laguna Group explained: “As of the date of this letter, we are considering your offer closed.

Petitioner argued to the SO that the reason for returning the offer was bogus. The SO kept the CDP case open during the pendency of the “other investigations” referred to as the reason for returning the offer. By the time the SO issued the determination letter on this CDP case more than 24 months had passed since the submission of the OIC. After filing the petition in Tax Court, Mr. Brown filed a motion for summary judgment arguing for deemed acceptance.

Because the language of IRC 7122(f) uses the term rejected and the language of the IRS here did not use the term rejected but rather the term “returned”, the issue for decision in the prior Brown cases turned on whether a return fits the definition of a rejection. The earlier decisions decided that returning the offer stopped the 24 month period.

Because the IRS returns many offers as non-processable, the regulations under IRC 7122 address the issue of the effect of a return:

The regulations provide that “[a]n offer to compromise becomes pending when it is accepted for processing.” Treas. Reg. § 301.7122-1(d)(2). If the IRS accepts an offer for processing but subsequently determines that it was (or has become) nonprocessable, or that the offer is nonreviewable for other reasons, the offer may be returned to the taxpayer. Ibid. “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.” Ibid.

The Court finds that the return of the offer results in the same outcome as the rejection of the offer.  Here, the offer was accepted for processing and returned within six months.  Because that six month period is less than the 24 month period necessary for a deemed acceptance, the IRS argues that the offer fails the criteria for deemed acceptance.

Petitioner accepts the earlier decisions regarding return vs. rejection but argues that this result only covers “ordinary” offers and not offers made in a case pending under CDP.  For an offer submitted as part of a CDP hearing, only the notice of determination issued by Appeals can serve as the terminating event.  The Court notes that Mr. Brown “floated a similar theory” in the earlier cases but both the Tax Court and the Ninth Circuit demurred and did not address the argument head on in part because Appeals issued the determination letter in those cases within the two year period keeping the focus squarely on return versus reject and not on any special status of reject in a CDP case.

Here, the Court rejects the argument that the offer remained open holding that petitioner conflates the offer period with the CDP resolution and providing other reasons for its decision some of which I copy here:

petitioner’s argument is meritless because it confuses 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….

In essence petitioner contends that section 6330 overrides sub silentio the outcome dictated by section 7122(f), asserting that the notice of determination is the “critical event” under section 7122(f) and that “there is no real authority that suggests a contrary result.” This assertion ignores Treasury Regulation § 301.7122-1, Brown II, Brown III, Notice 2006-68, and the IRM provisions discussed previously. These authorities confirm that the IRS’s initial decision to return an OIC is the event that terminates the 24-month “deemed acceptance” period. Petitioner has cited no authority for the proposition that section 7122(f) has a different meaning when the offer is made in a CDP context….

Acceptance of petitioner’s argument — that Appeals must issue the notice of determination within 24 months after an OIC is submitted — could place the SO in a dilemma. If the SO by that deadline has not resolved every issue raised by the taxpayer, the SO could be motivated to issue a notice of determination prematurely, lest the OIC be “deemed accepted.” But doing so would risk reversal and remand for failure to address all “relevant issue[s] relating to the unpaid tax or the proposed [collection action].” § 6330(c)(2)(A). That would prolong the case even further, defying logic and undermining Congress’ intent.

The Court’s decision keeps the deemed acceptance provision within the offer unit and does not allow interplay between offers and CDP to impact the time frame.  The decision seems right, but I appreciate the effort of petitioner’s counsel to push on this issue where very little precedent exists.  Taxpayers seeking to marry the 24 month period to the CDP notice of determination will need to take it up with circuit courts.  Perhaps Mr. Brown will once again visit the Ninth Circuit and create precedent there.

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