Tax Court holds in 2 cases that acceptance of offer in compromise is a binding settlement and forecloses raising further issues 2/21/04 8/21/04
1. The Court in Johnson refused to allow taxpayers to reduce their qualified offer to settle 1989, 1991, and 1992 tax years before the Tax Court by net operating losses (NOLs) sustained in the 1988, 1990, 1993, finding the offer settled all issues.
2. The Court in Dutton found no mutual mistake of fact allowing revocation of the offer where the IRS sent a letter erroneously indicating taxpayer would receive a refund in connection with granting taxpayer's request for innocent spouse relief for 1986 and 1987 (refunds are not allowed) followed by IRS denial of the request for innocent spouse relief after acceptance of an offer in compromise for 1986, 1987 and 1993 through 1999. The erroneous letter was sent after taxpayer submitted an offer, and the error was corrected in subsequent communications with taxpayer's representative before the offer was accepted.
Johnson v. Comm., 122 T.C. 7, 2004 WL 244282 (Feb. 11, 2004)
(Thomas E. Johnston, individually and as Successor in Interest to Shirley L. Johnston, Deceased)
After the cases were set for trial taxpayers made a combined qualified offer pursuant to § 7430, of $105,000 to resolve taxpayers' tax liabilities for the 1989, 1991, and 1992. After the IRS accepted taxpayers' offer taxpayers sought to reduce the offer by net operating losses (NOLs) sustained in the 1988, 1990, 1993, and 1995 tax years.
The Court did not rule but assumed that the claimed NOLs were valid for its consideration. The Court concluded that the IRS' acceptance of taxpayers' qualified offer fully resolved the issue of taxpayers' liabilities for the 1989, 1991, and 1992 tax years, and taxpayers were not allowed to add additional terms to that agreement by applying NOLs from other years to reduce the agreed amounts.
- specify the dollar amount for the liability,
- be with respect to all adjustments at issue and only those adjustments, and
- be an amount that will fully resolve the taxpayer's liability for the type(s) of tax and tax year(s) at issue.
Taxpayers focused on the 2nd requirement, arguing that the language "and only those adjustments" prohibits taxpayers from including any items in the offered amount not in dispute at the time the qualified offer was made. The NOLs were not in issue.
The Court agreed with the IRS that to comply with the 3rd requirement, if taxpayers wanted to apply the NOLs to reduce the liabilities set forth in the qualified offer taxpayers should have at least stated that the offered amount was subject to reduction by application of the NOLs. The Court also noted taxpayers could have included the NOLs among the "adjustments at issue in the administrative or court proceeding" by simply moving to amend taxpayers' petitions to claim the NOL deductions before making their qualified offer rather than after.
The Court noted the IRS had published final regulations, 68 Fed. Reg. 74848 (Dec. 29, 2003), applicable to qualified offers made after December 24, 2003, adding Example 4 to sec. 301.7430-7(e) which provided that:
A makes a qualified offer that is accepted by the IRS. After the offer is accepted, A attempts to reduce the amount A will pay pursuant to the offer by applying net operating loss carryovers to the years in issue. Because the net operating losses were not at issue when the offer was made, A's offer was a qualified offer. Whether A is entitled to apply net operating losses to reduce the amount stated in the offer will depend upon the application of contract principles, local court rules, and, because net operating losses are at issue, section 6511(d) and related provisions.