Taxing Lessons From Court Decisions

Decisions — Foreseeing anticipation

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According to Dr. Seuss, sometimes the questions are complicated, and the answers are simple. The good doc probably wasn’t referring to tax law, but that doesn’t stop tax practitioners from anticipating a simple answer before researching the question. Life’s more fun that way, right?

Here are questions from tax court and IRS decisions that seem simple. What answer would you anticipate before beginning research?


In T.C. Memo. 2017-80 (Asad/Akel), the taxpayers filed joint federal income tax returns for 2008 and 2009. The returns included losses from rentals. In 2013, the IRS issued a notice denying the losses.

The taxpayers were divorced in 2013. In 2014, the wife requested relief from joint and several liability for the years 2008 and 2009. The IRS denied her request in 2015.

In 2015, the husband requested relief from joint and several liability. The IRS denied his request in 2016.

Both taxpayers challenged the denial of relief and their cases were combined. Before the combined case came to trial, the IRS conceded that the taxpayers could each be relieved of the tax liability for 2008 and 2009 based on the respective percentage of the loss (a split of relief of 28% husband/72% wife for 2008 and 41% husband/59% wife for 2009).

The taxpayers said they would be willing to settle with each of them liable to the IRS for 50% of each year’s liabilities. The 50-50 split was the same percentage used in their divorce agreement, which stated they had agreed that each would be liable for 50% of their tax liabilities from prior tax years, including tax years 2008 and 2009.

The IRS said that even though the divorce agreement established each taxpayer’s rights in accordance with state law, the IRS was not a party to the agreement and was not bound by the agreement.



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In T.C. Memo. 2017-84 (Whitesell), in December 2015 the taxpayers sent the IRS an offer in compromise that they modified by crossing out certain sections. The taxpayers included with the offer a $3 million check for tax years 2006 through 2012.

The IRS received the modified offer and deposited the $3 million check. A few weeks later, on January 21, 2016, the IRS sent the taxpayers a letter informing them that it was returning their offer in compromise. On February 9, 2016, the IRS sent the taxpayers another letter confirming that it had closed its file on their offer and was in the process of refunding their $3 million deposit because of the modified terms and conditions.

The taxpayers argued that under the Uniform Commercial Code (UCC), their offer in compromise was accepted when the IRS negotiated the check and did not reject the offer within 90 days of receipt.

The IRS argued that negotiation of a check does not constitute accord and satisfaction and that the UCC does not govern the power of the IRS to administer the federal income taxation system.



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Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided in the post to read the entire case.

This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.


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Right answer!

The divorce agreement establishes the taxpayers’ rights against each other under state law. See Rude v. Commissioner, 48 T.C. 165, 174 (1967). The agreement may allow one to recover against the other through a right of contribution. However, it does not control their liabilities to the IRS.

The Taxpayer Bill of Rights 2 required the Department of Treasury and the General Accounting Office to each conduct studies of, among other things, “the effects of providing that, if a divorce decree allocates liability for tax on a joint return filed before the divorce, the Secretary [of the Treasury] may collect such liability only in accordance with the decree.”

A committee report discussing the Taxpayer Bill of Rights 2 (in proposed form) observed: “In some cases, a couple addresses the responsibility for tax liability as part of their divorce decree. However, these agreements are not binding on the IRS because the IRS was not a party to the divorce proceeding. Thus, if a former spouse violates the tax responsibilities assigned to him or her in a divorce decree, the other spouse may not rely on the decree in dealing with the IRS.”

The resulting report from the Department of the Treasury similarly observed: “Many taxpayers are apparently surprised to learn that under current law their divorce decree’s allocation of liabilities is not binding on creditors (including the IRS) who do not participate in the divorce proceedings.”

The resulting General Accounting Office report observed: “Divorcing couples may specify in their divorce decrees how future liabilities resulting from their prior joint returns are handled, i.e., one spouse is entirely liable, both spouses are equally liable, or some other permutation. However, the IRS is not bound by these divorce decrees because it is not a party to the decree.”

Because their divorce decree does not alter their liabilities to the IRS, the taxpayers are jointly and severally liable for their federal income tax liabilities under federal law.

Relief from joint and several liability is afforded to joint-return filers under the tests set forth in internal revenue code section 6015. Although the taxpayers petitioned the court for relief from joint and several liability under section 6015, at trial neither contended that they satisfied the tests for relief under section 6015.

It is apparent that they both would agree to a 50-50 settlement of these cases. But the IRS is also a party to these cases. Without the IRS’s consent to a settlement under which the liability is each reduced to 50%, there can be no enforceable settlement on those terms.

We accept the IRS’s concessions, which are not contested by the taxpayers.

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Right answer!

The parties have not filed with the court any document memorializing settlement of the issues for tax years 2011 and 2012, nor have the parties manifested mutual assent through an offer and acceptance.

The taxpayers argue that their submission of the offer in compromise with the $3 million check, together with the IRS’ negotiation of the check, constituted an accord and satisfaction under the UCC and thus meets the mutual assent requirement for a contract.

However, the US government, as the sovereign, is not bound by such state statutes as the UCC. In any event, the taxpayers’ submission of the offer on December 28, 2015, does not illustrate the IRS’ assent.

By letter dated January 21, 2016, the IRS notified the taxpayers that their offer would be returned along with their $3 million deposit. The IRS also notified the taxpayers in a second letter dated February 9, 2016, that the reason for rejecting the offer was the modification of its terms and conditions.

Under a contract law analysis, the IRS rejected the taxpayers’ offer; thus, there was no settlement.

The taxpayers further argue that by cashing their check, the IRS accepted their offer.

This argument is incorrect. The IRS cashing a check does not necessarily mean that the IRS has accepted the offer.
Additionally, the taxpayers understood at the time they submitted their offer that their payment could be returned. On their modified form, the taxpayers offered to pay $3 million and hand wrote “pursuant to section 4 Terms – 4b.” Section 4(b) of the Terms states: “If the IRS rejects or returns the offer * * *, the IRS will return any amount paid with the offer.”

Under IRS guidelines for offers in compromise, payments or deposits received with the offers are either placed in a noninterest-bearing account, stamped nonnegotiable and returned, or posted to a taxpayer’s account and processed through “paper check conversion.”

Once a determination has been made with respect to an offer, deposits on accepted offers will be applied against the taxpayer’s liability and deposits on withdrawn, rejected, or returned offers will be refunded to the taxpayer.

The IRS rejected the taxpayers’ OIC and subsequently returned their $3 million deposit in accordance with those guidelines.

Alternatively, petitioners argue that their offer was deemed accepted under the UCC because their offer was not rejected within 90 days.

The facts surrounding this offer in compromise and the IRS’ responses clearly show the IRS’ timely rejection of the offer and return of the $3 million deposit. More importantly, the US government, as the sovereign, is not bound by state statutes such as the UCC.

Accordingly, there is no objective manifestation of mutual assent by the parties to settle the tax liabilities for 2011 and 2012 and no settlement for the court to enforce.

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