A Drama in Three Acts: Designated Orders Jan. 13 – 17 (Part Two of Three)

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Today we leave the familiarity of Graev and move into AJAC and administrative law. Without further ado I present:

Part Two: What to Expect When You’re Expecting A Better Deal from Appeals

Some of the most important designated orders are the ones that deal with common situations and fairly unremarkable facts, but raise arguments that rarely make it into published opinions. The order we will be discussing in Orienter v. C.I.R., Dkt. # 20004-13L (order here) is a perfect example. Though I (obviously) appreciate anyone reading my synopsis and analysis of the order, I strongly commend any practitioner that works in tax controversy (and especially collection) to read the order for themselves as well. It is that substantive and that worthwhile.

It is also fairly easy to digest. In just 16 (incorrectly numbered) pages Judge Holmes lays out four discrete issues I will focus on and three more that I won’t. The issues that I believe warrant additional detail are:

  1. How does the Court review the rejection of a multiple-year Offer in Compromise when the Court only has jurisdiction over some of the years contained in the Offer?
  2. How do the IRS “Appeals Judicial Approach and Culture” (AJAC) rules and procedures limit Appeals’ review of the record compiled by the Centralized Offer in Compromise (COIC)?
  3. Does the IRM or any other authority give taxpayers a way to accept an (initially rejected) Offer amount from COIC if the taxpayers end up doing even worse with Appeals?
  4. Is the IRM a source of “administrative procedure” such that a violation of it would be a violation of IRC 6330(c)(1) (that the requirement of “any applicable law or administrative procedure” be met)?

I’ve been at an ABA Tax Section meeting where Judge Holmes said that he would recommend studying administrative law to anyone considering going into tax. These are all interesting questions that bring us to the crossroads of administrative and tax law… Let’s see what Judge Holmes thinks about them.

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To set the scene, Judge Holmes describes matters as getting “complicated” for the taxpayers, though I found this case represent a fairly typical scenario for taxpayers filing an Offer in Compromise. This doesn’t mean that the situation isn’t complicated, only that it isn’t particularly unusual. The main complicating factors were (1) the Orienters had more tax debts they wished to settle than just the years at issue in the CDP Notice, and (2) the Orienters sent their Offer to the IRC COIC unit, rather than to the IRS Appeals Office working the case. Since IRS Appeals really just forwards the Offer to COIC in any case, so long as you let Appeals know that you submitted an Offer it shouldn’t really affect your CDP hearing -other than likely to have it postponed until COIC reaches a preliminary determination. These two factors (multiple years at issue, and especially multiple “levels” of IRS review of the Offer) are what bring us to the interesting legal issues.

Issue One: How does the Court review the rejection of a multiple-year Offer in Compromise when the Court only has jurisdiction over some of the years contained in the Offer?

As we have been told once or twice before, the Tax Court is a court of “limited jurisdiction.” In a CDP case, jurisdiction is limited only to those years that were a part of the CDP hearing (and consequently, those on the Notice of Determination). The CDP hearing and Notice of Determination was strictly for the 2004 tax year, but the Offer was for 2002 – 2005 tax debts. Should the Tax Court only consider the jurisdictional year and ignore the other years, even though those years clearly matter to the Notice of Determination?

I’m not sure what that would really look like, since in filing an Offer you are essentially wrapping all of your tax debts into one liability and arguing your inability to pay that one liability. You can’t really just look at one year in reaching a determination of ability to pay, because you need to look at the tax debt as a whole. Luckily, I don’t have to spend much time thinking about what such limited review would look like because, as Judge Holmes notes, there is already numerous cases (though none that are technically precedential: see post here) on point that allow the Tax Court to consider the full debt (i.e. non-jurisdictional years) in reaching a determination of abuse of discretion for the jurisdictional year.

Should practitioners find themselves dealing with a similar strain of “jurisdictional trap” in CDP hearings, I’d commend them to read this order for the cases cited, and particularly the case of Sullivan v. C.I.R., 97 T.C.M. 1010 (2009) (apologies, couldn’t find a link) that Judge Holmes highlights. While I’ve never had the IRS try to argue that the Tax Court is barred from even considering non-jurisdictional years, the Court’s reasoning in Sullivan for when and why such years can be considered may be helpful, because it brings up the statutory language which could be relevant for far more than just rejected Offers. The most relevant section of Sullivan is:

“This Court is disabled from halting the IRS’s collection of [non-jurisdictional] liabilities, but it is not disabled from knowing about them. In determining whether the rejection of the OICs and the collection […] is appropriate, this Court is authorized (as the Appeals officer was required) to consider ‘any relevant issue relating to … the proposed levy.’ Sec. 6330(c)(2)(A), (d).”

So, as to Issue One, we have a fairly uncontroversial (though helpful and clarifying) answer: the Tax Court can consider the other non-jurisdictional years in order to determine if there was an abuse of discretion for the jurisdictional year in the Offer.

Issue Two: How do the IRS “Appeals Judicial Approach and Culture” (AJAC) rules and procedures limit Appeals’ review of the record compiled by the Centralized Offer in Compromise (COIC)?

It is with Issue Two, I believe, where things start to get slightly away from the ordinary CDP Offer. The Orienters Offer was originally for $25,000. IRS COIC preliminarily recommended rejection of the Offer, but that they might consider it if the amount was bumped up to $65,860 -the amount COIC calculated as the “Reasonable Collection Potential” (RCP). This was unacceptable to the Orienters, so they decided to try their luck with Appeals.

And it does not appear that their luck improved.

In fact, IRS Appeals determined that the RCP was closer to $200,000, and sustained the rejection of the $25,000 Offer, finding that even the special circumstances of the Orienters (who appear to have health problems) would not warrant accepting either the $25,000 or the $65,860 proposed by COIC. The Orienters, now fearing that they had perhaps made the wrong decision in not accepting the $65,860 Offer, tried to have the case sent back to COIC so they could accept that proposal. But they were stymied: IRS Appeals said the case could not be transferred. Eventually, a Notice of Determination reflecting this was issued.

This all comes down to what your options are when IRS Appeals seems to take a harder line than the originating function. Here, the Orienters want to argue that IRS Appeals is essentially barred from behaving as they did, or at least that their behavior is an “abuse of discretion” because it goes against the IRM vis a vis the “AJAC” rules.

Put broadly, AJAC is meant to have Appeals review cases more like a reviewing Court (i.e. limited to specific issues before it, rather than looking for or raising new ones). To the Orienters, this means Appeals was only supposed to review whether enough information was provided to warrant acceptance of an Offer less than $65,860 -not to re-work the Offer or raise new issues. The IRM provides that “[g]enerally, Appeals will sustain a rejection only under the same basis for which the offer was rejected.” (IRM 8.23.4.3(2).) But the basis of the rejection by Appeals was not the same as the basis of rejection by COIC. And so the IRS Appeals officer went against the AJAC principles embodied in the IRM, and thus abused its discretion.

The IRS, however, frames the issue a bit differently: the only issue was whether the Offer of $25,000 should be accepted or the levy sustained. Oh, and the IRS Appeals officer did follow the relevant IRM provisions (for example, 8.22.7.10.6) in either case.

Judge Holmes sees the issue as hinging on what the meaning of the phrase “same basis” is in this context. If IRS Appeals did reject on “the same basis” as COIC, then there isn’t really an issue because IRS Appeals followed the IRM (more on what the consequence to not following the IRM could be in the next post, since it brings up some really interesting admin law points).

So what was is the “basis” for rejection at issue here? Judge Holmes thinks it would be too narrow to define the issue in the way the Orienters want. The question is simply whether an Offer should be accepted for $25,000  i.e. the Offer put forth and rejected. This amount was admittedly less than the RCP, and the discount was arrived at on the grounds of “special circumstances” (always difficult to quantify in exact dollars). When IRS Appeals reviewed the file and recalculated the RCP, Appeals wasn’t “raising new issues” but really just determining if they believed the $25,000 offer should actually be accepted (if Appeals didn’t take a second look at RCP, it isn’t immediately clear what they would be doing in Appeals to begin with). In finding that RCP + Special Circumstances did not equal $25,000 Offer, they were rejecting on the same basis as COIC -even if they reached a different amount they thought may be reasonable.

Thus, we conclude Issue Two: No AJAC violation. So no abuse of discretion on those grounds. On to the largely related Issue Three…

Issue Three: Does the IRM or any other authority give taxpayers a way to accept an (initially rejected) Offer amount from COIC if the taxpayers end up doing even worse with Appeals?

So maybe IRS Appeals didn’t violate AJAC. But is there another way the Orienters can get back to that (now-enticing) COIC number of $65,680? Let’s look a little bit more at how that number was memorialized, to understand what legal meaning it may carry.

When COIC proposes a rejection of an Offer, it will send a few spreadsheets walking through its calculation of RCP and, usually, a page of boilerplate about how they “considered” special circumstances but that they didn’t warrant accepting the Offer proposed. Sometimes when special circumstances are raised and considered the IRS may “suggest” an alternative Offer amount they may be willing to accept. Such appears to be the case with the Orienters. The question is how much “value” that suggestion of $65,680 holds.

There are a long line of cases that essentially treat Offers under contact principles. Which seems to make sense, since (1) it is loaded with contractual terms governing performance (e.g. filing and paying on time for five years), and (2) it is literally called an Offer in Compromise, with offer and acceptance being fundamental to the formation of a contract.

In this case, the Orienter’s would like to characterize that $65,680 as a counter-offer, which they are free to accept. Judge Holmes is not buying this: the COIC letter (which usually states “rejection”) was only that -a rejection. It was not a counteroffer, because “a mere inquiry regarding the possibility of different terms […] is ordinarily not a counter-offer.” Restatement (Second) of Contracts Sec. 39 (1981). In Judge Holmes’ words, the “$65,860 was never on the table – it wasn’t even in the oven.”

Further, even if the Orienters were able to characterize the rejection letter as a counter-offer (I believe the language of the letter said COIC “could not even consider an Offer of less than $65,680” which certainly makes it seem like a suggestion, and not a set term), they would probably not prevail on contract grounds. And that is because, lest we forget, the Orienters pretty clearly rejected the supposed counter-offer by going to Appeals. And once you reject, you can’t just “go back” now that you regret it.

So, no luck to the Orienters on trying to find some sort of authority for their proposition that they should be allowed to accept the “counter-offer” of $65,680. But does that mean the Orienter’s are doomed? Tune in for part three where we will look at one final (and very interesting) line of argument that explicitly puts administrative law and the IRM in the crosshairs.

About Caleb Smith

Caleb Smith is Visiting Associate Clinical Professor and the Director of the Ronald M. Mankoff Tax Clinic at the University of Minnesota Law School. Caleb has worked at Low-Income Taxpayer Clinics on both coasts and the Midwest, most recently completing a fellowship at Harvard Law School's Federal Tax Clinic. Prior to law school Caleb was the Tax Program Manager at Minnesota's largest Volunteer Income Tax Assistance organization, where he continues to remain engaged as an instructor and volunteer today.

Comments

  1. Bob Probasco says

    Caleb,

    Nice post!

    Here’s a link to the Sullivan case, from the Court’s website: https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=8345

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