office_of_chief_counsel internal_revenue_service memorandum number release date cc fip b04 jeglover postu-141476-15 third party communication none date of communication not applicable uilc date october to richard e trogolo associate area_counsel cincinnati group large business international attn marc shapiro senior attorney cc lb_i hmt cin1 cle from rebecca l baxter senior technician reviewer branch financial institutions products subject coverage of foreign_currency fluctuation by captive this memorandum addresses coverage of foreign_currency fluctuation by a captive_insurance_company this memorandum should not be used or cited as precedent legend taxpayer captive state month a year contract contract number a number b number c number d year ------------------------------------------------------------------------------------ ---------------------------------------------------------- ----------------------------------------- ------------ ------ ------- ------------------------------------------------------------------------------------ ---------------------------------------------------------------------- ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ---- ---- ---- ---- ------- postu-141476-15 date a date b year outside actuary actuarial review number e number f number g number h number i number j number k number l number m number n number o number p issue ----------- ----------- ------- ------- ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ------------------------ ---- ----- ---- ---- ---- ---- ---- whether an arrangement between affiliated operating entities and a captive insurance affiliate concerning the fluctuation in the value of specified foreign_currencies is insurance for federal_income_tax purposes conclusion while economic risk of loss arising from the fluctuation in the value of specified foreign_currencies can be an insurable risk certain terms of this arrangement do not comport with the commonly accepted sense of insurance thus this arrangement does not constitute insurance for federal_income_tax purposes facts taxpayer is the parent of a group of business entities hereinafter taxpayer and its subsidiaries are referred to as taxpayer group taxpayer group designs manufactures and markets professional medical industrial and commercial products and services taxpayer group includes a captive_insurance_company captive which is regulated as a pure captive_insurance_company under state law as a pure captive captive may not insure any risks other than those of its parent and affiliated companies captive provides coverage to u s members of taxpayer group for automobile liability products liability general liability workers’ compensation product warranty credit guarantee postu-141476-15 insurance earthquake damage coverage retiree medical cost coverage and guaranteed renewable accident_and_health_insurance the u s members of taxpayer group for which captive provides insurance are subsidiaries of taxpayer captive is also a subsidiary of taxpayer taxpayer group conducts business throughout the world sales and purchases in currencies other than the u s dollar expose taxpayer group to fluctuations in foreign_currencies relative to the u s dollar and may adversely affect taxpayer group’s operations and financial condition therefore in month a year taxpayer entered into two categories of contracts with captive on behalf of u s members of taxpayer group participants to cover the risk arising from fluctuations in the rate of exchange between the u s dollar and specified foreign_currencies contract is intended to cover the participants’ currency risks with respect to receipts from the manufacturing and selling of products to foreign customers while contract is intended to cover the participants’ currency risks with respect to amounts owed to related foreign entities in their respective currencies taxpayer explained that a participant is exposed to the effects of foreign_currency valuations on the price of the participant’s products the volume of its sales the receipt of invoices priced in foreign_currency and the cost of materials and services purchased when translated to u s dollars for reporting purposes under contract captive agrees to indemnify participant for the amount of loss of earnings participant sustain s due to decrease in the value of specified foreign_currency relative to the u s dollar the covered amount of loss of earnings will be measured in u s dollars as the percentage increase in the rate of exchange of the u s dollar against the specified foreign_currency between the effective date and the expiration date as specified within the declarations endorsements multiplied by the coverage limit contract includes the following definitions coverage limit means the lesser_of the specified_loss limit for each participant as listed within the declarations endorsements or such participant ’s sales revenue received or accrued in the specified foreign_currency during the policy period as defined in the declarations as measured by translation into u s dollars at foreign_currency exchange rates that are reflected in such participant ’s financial statements loss of earnings means the percentage increase in the rate of exchange of the u s dollar against the specified foreign_currency between the we offer no opinion whether these risks are insurable risks or whether the structure of the arrangement between the members of taxpayer group and captive with respect to these risks is insurance for federal_income_tax purposes postu-141476-15 effective date and expiration date as stated within the declarations endorsements multiplied by the coverage limit the rate of exchange of the u s dollar against the specified foreign_currency means the spot price as quoted by bloomberg lp pincite a m est on the effective day of each declarations endorsement premium means the rate of premium multiplied by the coverage limit the rate of premium per dollar of coverage means two times the amount of premium as quoted by bloomberg lp pincite est on the effective day of each declarations endorsement as a percentage of notional for a month call option contract for the purchase of u s dollars against specified foreign_currency_contract also provides for a retrospective premium_adjustment as follows the premium shown in each of the declarations endorsements is a deposit premium only and is the maximum the participant will pay the actual premium will be subject_to adjustment after the expiration date of each declaration endorsement based on the participant ’s actual_loss_experience under contract the retrospective premium_adjustment is calculated as number a of the deposit premium minus paid losses in excess of number b of the deposit premium the effect of the adjustment in no case shall result in a final premium that exceeds the deposit premium and if the retrospectively adjusted premium is less than the deposit premium captive will refund the difference to participant within number d days of the end of the term outlined in the applicable declaration endorsement under contract captive agrees to indemnify participant for the amount of loss of earnings participant sustain s due to an increase in the value of specified foreign_currency relative to the u s dollar the covered amount of loss of earnings will be measured in u s dollars as the percentage decrease in the rate of exchange of the u s dollar against the specified foreign_currency between the effective date and expiration date as specified within the declarations endorsements multiplied by the coverage limit contract includes the following definitions upon an early termination the determination of retrospective adjusted premium differs to achieve a proration between the duration of coverage and the period not to be covered in such case the adjusted premium will not be less than number c of the deposit premium regardless of the duration of coverage postu-141476-15 coverage limit means the specified_loss limit for each participant as listed within the declarations endorsements loss of earnings means the percentage decrease in the rate of exchange of the u s dollar against the specified foreign_currency between the effective date and expiration date as stated within the declarations endorsements multiplied by the coverage limit contract uses the same definitions for rate of exchange premium and rate of premium as in contract contract also uses the same retrospective premium_adjustment mechanism as in contract taxpayer explains that the bloomberg option was chosen as the benchmark for determining the premium for both contracts because although the contracts differ from the referenced option the risks are comparable taxpayer offered that the purpose of this premium methodology under which the rate of premium and maximum premium payable are double the market rate for an option providing similar risk protection is to bolster the financial capacity of captive so that captive would have an additional source of funding for losses taxpayer previously offered that this methodology would be used initially but as the program gathered experience the pricing would use sound actuarial principles based on the experience of the participants however although the contracts have been in place since year it appears the contracts continue to be implemented using the original options-based pricing methodology notably neither contract describes the term specified_loss limit however representatives of taxpayer indicated to the service that contract generally has been implemented as if specified_loss limit was equal to the participant’s export sales for the prior year though apparently the limit was modified on an interim basis the reason and extent of modification are not clear representatives of taxpayer indicated that contract has been implemented as if the specified_loss limit was equal to the amount of each participant’s outstanding loans at the endorsement effective date the contracts each cover a policy period of one year with monthly endorsements extending the coverage of both contracts that is the contracts were initially issued for the period of date a year through date b year but beginning with the month after date a year an endorsement was added to provide coverage for the following year from that date for example if a contract was issued on january an endorsement would be added effective february expiring january of the following year in effect for each calendar_year taxpayer ha sec_12 separate contracts one becoming effective each month and one expiring each month taxpayer asserts that by staggering the purchase of foreign_currency exchange risk coverage in this manner each participant obtains protection against the trend of a strengthening or weakening dollar whichever side the coverage responds to postu-141476-15 outside actuary performed actuarial review noting that the coverage limits for the contracts are derived as a function of the prior year production for each participant separately with respect to the premium structure the final premiums are a function of both the currency options market year call_premium and the actual_loss_experience as adjusted by the retro premium feature the deposit premium rates are determined as twice the year call option rate for each currency pair separately the retro premium_adjustment is a risk sharing mechanism that recasts the final loss ratios most notably where actual losses are between number e and number f of the deposit premium amounts with regard to contract for year number g entities participated covering a total of number h currencies the average number of currencies covered per participant was number i for year number b entities participated covering at total of number j currencies the average number of currencies covered per participant was number i for year number k entities participated covering a total of number l currencies the average number of currencies covered per participant was number m with regard to contract for year number n entities participated covering a total of number o currencies the average number of currencies covered per participant was number o for year number p entities participated covering a total of number o currencies the average number of currencies covered per participant was number n for year number m entities participated covering a total of number o currencies the average number of currencies covered per participant was number n the contracts have features commonly found in insurance policies such as the format and language the payment of consideration and the administration of claims of covered loss in addition the contracts exclude any loss which is covered under property insurance or business interruption insurance the contracts do not mention any parental guarantee or premium loan back that could be inconsistent with a bona_fide insurance arrangement for year a previous taxable_year we concluded in cca that the contracts were not insurance because the contracts lacked insurance risk and that the contracts were also not insurance in its commonly accepted sense in light of r v i guaranty co v commissioner 145_tc_209 n22 we have reconsidered our analysis law and analysis neither the internal_revenue_code nor treasury regulations define insurance for federal_income_tax purposes r v i guaranty co t c pincite courts have held that a captive insurance arrangement among affiliates can constitute insurance for postu-141476-15 federal_income_tax purposes where the arrangement satisfies the following elements the arrangement must involve insurable risks the arrangement must shift the risk of loss to the insurer and distribute the risks among the policyholders and the arrangement must be insurance in its commonly accepted sense 142_tc_1 96_tc_61 aff’d in part and rev’d in part 972_f2d_858 7th cir 96_tc_18 aff’d 979_f2d_162 9th cir 96_tc_45 aff’d 979_f2d_1341 9th cir courts consider all of the facts and circumstances to determine whether an arrangement qualifies as insurance rent-a-center t c pincite citing harper group t c pincite whether a risk is an insurable risk is examined from the perspective of both the insured and insurer r v i guaranty co t c pincite citing harper group t c pincite not all risks faced by a business are insurable the tax_court has observed that i nsurance risk is involved when an insured faces some loss-producing hazard not an investment risk and an insurer accepts a payment called a premium as consideration for agreeing to perform some act if and when that hazard occurs r v i guaranty co t c pincite quoting 101_tc_173 aff’d 73_f3d_799 8th cir typically the loss produced by the occurrence of the hazard must be an economic loss 66_tc_1068 aff’d 572_f2d_1190 7th cir cert den 439_us_835 central to the notion of insurance risk is the concept of a fortuitous event amerco f 2d pincite a fortuitous event is a happening that because it occurs only by chance or accident the parties could not reasonably have foreseen black’s law dictionary 9th ed in order for an arrangement to constitute insurance the arrangement must involve the fortuitous occurrence of a stated contingency 183_f2d_288 2nd cir cert den 340_us_853 and must not merely involve an investment or business risk 312_us_531 revrul_2007_47 2007_2_cb_127 revrul_89_96 1989_2_cb_114 that the risk may be mitigated through a mechanism other than insurance does not mean the risk is not an insurance risk r v i guaranty t c pincite moreover nontax regulatory treatment of the risk and the arrangement to mitigate the risk as insurance is highly probative id pincite risk shifting occurs if a person facing the possibility of an economic loss transfers some or all of the financial consequences to an insurer such that a loss does not affect the insured because the loss is offset by a payment from the insurer revrul_2005_40 2005_2_cb_4 the arrangement addressed in this memorandum is described as a brother-sister arrangement because it involves an arrangement between affiliated subsidiaries of taxpayer here the participants and another subsidiary of taxpayer that is the insurer here the captive see eg rent-a-center t c pincite considering the deductibility of premiums_paid by affiliated subsidiaries to a captive in a postu-141476-15 brother-sister arrangement such an arrangement can shift risk from the affiliated subsidiaries to the captive even if the aggregate net_worth of all of the affiliated subsidiaries of a parent_corporation is not affected by an incurred loss id pincite however among the conditions predicate for risk shifting is that the entity assuming the risk the captive be financially capable of meeting its obligations id pincite see also 62_f3d_835 6th cir either undercapitalization or indemnification of the insurer by the taxpayer claiming the deduction or both precludes risk shifting to the insurer risk_distribution occurs when an insurer pools a large enough collection of unrelated risks those unaffected by the same event and distributes the risks among the policyholders rent-a-center t c pincite avrahami v commissioner t c no pincite a captive may achieve adequate risk_distribution by insuring only subsidiaries within its affiliated_group id but see revrul_2005_40 2005_4_cb_4 holding that where only one entity participates as the insured the arrangement lacks sufficient risk_distribution in analyzing risk_distribution there must be both a sufficient number of insured companies as well as a sufficient number of independent risk exposures avrahami t c no pincite in avrahami the court held that since the captive insured only or insured entities the captive failed to adequately distribute risk id in addition the captive did not cover a sufficient number of risk exposures to achieve risk_distribution merely through its affiliated entities issuing types of direct policies by contrast the court found sufficient risk_distribution in r v i which used policies covering different insured entities with more than big_number vehicles big_number parcels of real_estate and million equipment assets the court also found sufficient risk_distribution in 142_tc_1 where the arrangement covered approximately affiliated subsidiaries more than big_number employees big_number vehicles and big_number stores in all states see also securitas holdings inc v commissioner tcmemo_2014_255 here the number of participants in and the currencies covered by contract varied each year the number of participants in contract varied each year whether these contracts involved a sufficient number of insured companies as well as a sufficient number of independent risk exposures to achieve risk_distribution is not clear the determination of whether an arrangement fits within the commonly accepted sense of insurance is made by weighing certain nonexclusive factors these nonexclusive factors include whether the insurer is organized operated and regulated as an insurance_company by the states in which it does business the insurer is adequately capitalized the insurance policies are valid and binding the premiums are reasonable in relation to the risk of loss and the premiums are duly paid and loss claims are duly satisfied see eg r v i guaranty t c pincite citing harper group t c pincite securitas holdings t c memo an insurer may be considered adequately capitalized if it meets the minimum capital requirements of its regulator see avrahami t c no pincite however the the opinion does not provide additional detail regarding the number of entities postu-141476-15 court concluded that pan american was not a bona_fide insurance_company even though it met the island of nevis’ loosely regulated low capitalization requirements in this case the adverse movement of foreign_currency valuations presents the possibility of an economic loss the movement of the foreign_currency valuation could be a fortuitous event accordingly given the role of currency fluctuation in the participants’ business we conclude that foreign_currency risk can be an insurance risk though this arrangement bears resemblance to a notional_principal_contract or other type of a sec_988 transaction for each contract the foreign_currency risk is seemingly shifted from each participant to captive while contract and contract nominally cover opposite risks it appears no participant was simultaneously covered by both contracts with respect to the same foreign_currency risk hence under no scenario would the risk be neutralized cf le gierse u s pincite combination of contracts neutralizing risk however whether this risk was distributed particularly with respect to contract is unclear further development is necessary to evaluate whether the arrangement in particular contract involves the pooling of a large enough collection of unrelated risks to utilize the statistical concept that theorizes that the average of a large number of independent losses will be close to the expected loss avrahami t c no pincite captive is regulated by state as a pure captive_insurance_company premiums are also duly paid and loss claims are duly satisfied in addition taxpayer offered that the purpose of the premium methodology under which the rate of premium and maximum premium payable are double the market rate for an option providing similar risk protection is to bolster the financial capacity of captive so that captive would have an additional source of funding for losses though captive may meet the capital requirements of state and may be adequately capitalized cf avrahami t c no pincite taxpayer however has not demonstrated that the arrangement constitutes insurance in its commonly accepted sense as understood in avrahami t c no pincite r v i guaranty t c pincite and other decisions though the contracts follow a policy form an essential term of the agreement the coverage limit is on its face ambiguous the contracts state that coverage is provided up to the specified_loss limit but that term is not defined in the contracts whether the specified_loss limit can be inferred from the conduct of the parties is unclear given that at least in the case of contract the conduct of the parties apparently has not been entirely consistent specifically the parties modifed the meaning of the term on an interim basis without explanation cf restatement second of contracts sec_220 agreement interpreted in accordance with known relevant usage the information provided does not suggest that the participants have the legal or economic ability to meaningfully influence any currency valuation postu-141476-15 in addition no documentation has been provided showing that the premiums are set at arm’s length or priced using insurance experience captive’s premium methodology for the contracts which steeply retrospectively rates a multiple of the commercially available option_price may not be typical of commercial insurance practice moreover the contracts’ coverage does not appear to match participants’ risk of loss here the results under the contracts do not tie to the actual exposure of participants to particular foreign_currencies taxpayer and captive acknowledge that the results under each contract are determined independently of the actual value of loss indeed under these contracts it seems participants may both have currency gains over the life of a particular transaction or group of covered transactions and also be eligible for a benefit under the contracts eg the currency could move favorably over the time of the participant’s exposure to the currency but also unfavorably when measured over the one-year duration of a contract such that the risk involved may to some extent be described as speculative see eg couch on ins sec_101 wagering is not insurance couch on ins sec_246 insurance not for speculative purposes in addition participants may both have currency losses over the life of a particular transaction or group of covered transactions and also not be eligible for a benefit under the contract finally the sequential laddering of the contracts each for the duration of a year may result in a participant having multiple recoveries the possibility of multiple recoveries suggests that the insurable interest may not be substantial in relation to the amount of insurance see eg couch on ins sec_41 stating that the extent of insurable interest is typically not evaluated and it is immaterial that the interest of the insured is overvalued as long as the actual interest is substantial in relation to the amount of the insurance in addition this sequential laddering may be inconsistent with prevailing commercial practice for insurance contracts accordingly we cannot conclude that the material provided by taxpayer and captive demonstrates that either contract or contract satisfy each prong of the definitional test of insurance for federal_income_tax purposes case development hazards and other considerations postu-141476-15 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions


number release date october not-152875-01 cc pa cbs b2 uil bulletin no collection bankruptcy and summonses bulletin department of the treasury office_of_chief_counsel internal_revenue_service trustee does not commence distribution until bankruptcy court approves final report in its disposition of a somewhat novel issue the united_states court_of_appeals for the fifth circuit decided that a chapter trustee did not commence distribution of assets until the bankruptcy court approved the trustee’s final report and accounting giving the service’s claims priority status security state bank v irs in re milton van gerpen no 5th cir date the taxpayer-debtor filed a chapter petition in date the trustee subsequently paid certain administrative expenses_incurred by the bankruptcy_estate thereafter the bankruptcy court set a claim bar date of date in date the taxpayer-debtor filed two claims on the service’s behalf and the service submitted a claim of its own another creditor security state bank objected to the claims on the grounds that they were untimely and were not entitled to priority status the service argued that because the claims were filed before the trustee commenced distribution of estate assets within the meaning of b c a the claims were entitled to priority status security responded that by making payments to administrative creditors the trustee commenced distribution prior to the time the service’s claims were filed upholding the decisions of the bankruptcy and district courts the fifth circuit held in the service’s favor initially the court noted that section a affords first priority in payment to claims entitled to priority pursuant to b c sec_507 which are filed before the trustee commences distribution the court then determined that the term commences distribution is a term of art in bankruptcy law in that the word distribution as opposed to disbursement applies only to the final liquidation of the estate the court noted that a less restrictive definition of distribution given that trustees are already permitted to pay some administrative expenses without providing notice to creditors would result in a situation where creditors without their knowledge were barred from filing timely claims the court concluded that the appropriate interpretation of ‘commences distribution’ is the date when a bankruptcy court approves the trustee’s final report thus allowing the trustee to commence final distribution of the estate october bulletin no bankruptcy code cases chapter liquidation distribution_of_property of the estate priority claims proofs of claim time for filing case sec_1 bankruptcy code cases chapter liquidation exceptions to discharge turnover of property of the estate in re carlson 263_f2d_748 7th cir date - debtor an attorney was properly denied a discharge pursuant to b c a a in light of his failure to inform the trustee of his interest in a previously-earned contingency fee which he improperly transferred to his partner and which constituted property of the bankruptcy_estate bankruptcy code cases exceptions to discharge no late or fraudulent_returns - tainted taxes in re sgarlat bankr lexi sec_244 bankr m d fla date - court determined based on the record as a whole that taxpayer’s filing of documents purporting to be returns after service prepared substitute returns for and assessed the relevant liabilities did not constitute an honest and reasonable attempt to satisfy the requirements of the tax law sufficient to overcome the exception to discharge provided by b c a b i bankruptcy code cases priorities income taxes in re pattalochi bankr lexi sec_1241 bankr d wyo date - in a case controlled by in re richards 994_f2d_763 10th cir a bankruptcy court held that b c sec_105 applied as a matter of law to suspend the running of the three-year priority period provided by b c a a i for the duration of a prior bankruptcy but that b c sec_108 did not apply to afford the service an additional six-month tack-on period as provided by sec_6503 thus the service’s claim for one of the years at issue was not entitled to priority status bankruptcy code cases property of the estate turnover to trustee in re metcalf bankr lexi sec_1231 bankr n d tex date - under locally controlling case law taxpayer’s prepetition election to have overpayment credited to future tax_year was irrevocable accordingly refund was not property of the estate subject_to turnover bankruptcy code cases setoff refunds in re 266_br_441 bankr d minn date - since a taxing authority’s obligation to pay a refund arises on the last day of the tax_year state department of revenue properly offset of a refund for against a liability october bulletin no for given that the taxpayer did not file his bankruptcy petition until date and did not file his state tax_return for until date because the taxing authority’s right to effect the setoff arose before the bankruptcy commenced its rights were unaffected by the bankruptcy code collection_due_process sarrell v commissioner t c no date - where petition for tax_court review of notice_of_determination was not received within days of time notice was issued pursuant to sec_6330 petition was viewed as untimely accordingly tax_court lacked jurisdiction over petition and granted service’s motion to dismiss taxpayer could not avail himself of the timely mailing timely filing rule set forth in sec_7502 since the rule does not apply to documents mailed from post offices outside the united_states as was taxpayer’s petition collection_due_process boyd v commissioner t c no date - pursuant to sec_6330 statute_of_limitations for collection was suspended between the time the taxpayer requested a cdp hearing and the time a notice_of_determination was issued regardless of the fact that the taxpayer did not actively pursue his case or attend the hearing collection_due_process lindsay v commissioner t c memo date - where taxpayer never raised the issue of whether he actually received a notice_of_deficiency tax_court upheld notice_of_determination stating that pursuant to sec_6330 taxpayer was precluded from raising issues related to the underlying tax_liability since a notice_of_deficiency had been issued providing the taxpayer with an earlier opportunity to contest the tax_liability damages suits for against u s unauthorized collection levy sale suit for damages suits against the u s or employees kabakjian v united_states u s app lexis 3d cir date - district_court had jurisdiction over quiet title action brought after the subject property was sold since liens against taxpayers had not yet been released when the lawsuit was filed moreover district_court retained jurisdiction even after the liens were released since jurisdiction under u s c is properly determined at the time the suit is filed however quiet title claim was properly dismissed since the sale proceedings were substantially in accordance with law as required by sec_6339 moreover since taxpayers failed to demonstrate any actual economic harm sustained as a result of the service’s allegedly improper actions their claim under sec_7433 was without merit october bulletin no levy failure to surrender property service united_states v park forest care center inc u s dist lexis d colo date - proper service of notice_of_levy on taxpayer’s wages which was made on taxpayer’s employer’s bookkeeper was not undermined by the fact that the bookkeeper allegedly gave the unopened notice to the taxpayer the employer’s financial comptroller and taxpayer allegedly never informed her employer of the notice_of_levy this is especially the case since the employer never produced any evidence to rebut the sufficiency of the service or to substantiate the assertion that the bookkeeper forwarded the unopened notice to the taxpayer liens after-acquired property filing place to file personal_property in re eschenbach bankr lexis bankr n d tex date - federal_tax_lien against taxpayers’ personal_property properly filed in the appropriate county in florida where the taxpayers were living at the time of filing attached to personal_property acquired after their subsequent move to texas regardless of the fact that no lien was filed in texas since the liability underlying the lien remained unsatisfied and the statutory time for collection had not elapsed liens non-judicial sale discharge of property from orme v united_states u s app lexis 9th cir date - taxpayers’ forfeiture of land sale contract where federal_tax_lien attached to the land at issue constituted a nonjudicial_sale subject_to sec_7425 because the parties did not comply with the notice requirements imposed by sec_7425 the federal_tax_lien was not discharged upon the forfeiture and the owners of the property took back the land subject_to the lien liens priority over setoff right superpumper inc v nerland oil co inc u s dist lexis d n d date - since service’s liens against oil company were choate before any setoff right on the part of another creditor of oil company arose service is entitled to funds allegedly subject_to setoff creditor was not a purchaser with priority over the service since creditor’s interest was not that of a purchaser as defined by statute limitations assessment and collection waivers payment application of payment what constitutes malachinski v commissioner u s app lexis 7th cir date - tax_court did not err in determining that the relevant evidence failed to support the taxpayer’s contention that his consent to extend the statute_of_limitations on collection was forged by his ex-wife despite the fact that his ex-wife was serving jail time for participating in a murder-for-hire plot against the taxpayer moreover october bulletin no tax_court properly determined that an amount the taxpayer sent the service constituted a deposit on a liability other than the one at issue before the court and that the court accordingly lacked jurisdiction to decide whether the taxpayer was entitled to a credit against the subject liability for that amount payment installment payments united_states v stinson u s dist lexis w d pa date - service was entitled to reduce an assessment to judgment since sec_6331 which prohibits the service from instituting a levy while a valid installment_agreement is in effect does not apply to this case given that the installment_agreement here was signed and payroll deductions pursuant thereto began in date prior to the effective date of sec_6331 penalties failure to collect withhold or pay over responsible_officer united_states v hankins no na 99-0013-c-b g s d ind date - where person identified as responsible_officer failed to even allege either that he was not responsible for paying or did not willfully fail to pay employment_taxes and where he failed to provide any factual or legal support for his request that the service refund to him all amounts obtained by levy government’s motion for summary_judgment was granted property subject_to collection executory_contract of sale united_states v jepsen u s app lexis 8th cir date - where taxpayer at the time he conveyed real_property to his children did not intend to make the property a gift but instead intended to sell them the property with payments to come later he retained an interest in the property which was subject_to a subsequently-filed federal_tax_lien summonses defenses to compliance privileges accountant-client 153_fsupp2d_52 d mass date - in a pre-rra case taxpayers did not establish documents prepared by accounting firm were privileged since they did not demonstrate that the accounting firm was hired to assist their attorneys in providing legal advice moreover the documents were not protected by the common interest doctrine since not all parties to the subject litigation were represented by counsel transferees and fraudulent_conveyances eddie cordes inc v commissioner tcmemo_2001_265 date - corporation was a transferee liable for predecessor corporation’s tax debt in its entirety since corporation failed to show whether and to what extent its liability should be limited since corporation was a transferee at law service was not required to establish the value of the assets corporation received from the taxpayer at the time of merger in order to sustain its burden of proving transferee_liability ‘ october bulletin no the following material was released previously under sec_6110 portions may be redacted from the original advice chief_counsel_advice bankruptcy code cases refunds erroneous date cc pa cbs rcgrosenick gl-100935-01 uil memorandum for mark h howard associate area_counsel cc sb slc - salt lake city from joseph w clark senior technician reviewer branch cbs subject this chief_counsel_advice responds to your request for assistance dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend date a date b date c date d date e date f taxpayer attorney amount z amount y issues if an erroneous refund was generated by the abatement of dischargeable liabilities pursuant to a chapter discharge but prior to a distribution by the trustee of funds october bulletin no that should have been applied to those dischargeable liabilities is a reversal of the abatement permissible if so whether a reversal of abatement would violate the discharge injunction whether the filing of a suit to collect the erroneous refund violates the discharge injunction of b c a conclusions the abatement of dischargeable liabilities may be reversed reversal of the abatement does not violate the discharge injunction filing suit to collect an erroneous refund generated from an abatement of dischargeable liabilities may violate the discharge injunction of b c a facts on date a taxpayer and his wife filed a chapter bankruptcy receiving a discharge on date b on date c the service received a notice of assets from the chapter trustee requesting that creditors file proofs of claim in the case responding to the discharge order on date d the service abated the assessments for taxpayer for the taxable years and plus a frivolous filing penalty under sec_6702 for the year in response to the notice of assets on date e the service filed a proof_of_claim which resulted in a distribution to the service of dollar_figure amount z because the assessments for some of the periods had already been abated the application of the dollar_figureamount z to taxpayer’s account resulted in an erroneous refund of dollar_figureamount y which the service was unable to intercept at the time the mistake was discovered the refund check was negotiated on date f endorsed by taxpayer and stating pay to the order of attorney attorney is thought to be taxpayer’s attorney law and analysis the abatement of dischargeable liabilities may be reversed to understand the legal effect of an abatement it is essential to first understand the legal effect of an assessment assessments do not create tax_liabilities rather assessments reflect the service’s judgment of what taxes are owed 199_fsupp_331 d n j affirmed sub nom 316_f2d_521 3rd cir assessment is a prescribed procedure for officially recording the fact and the amount of a taxpayer's administratively determined tax_liability with consequences somewhat similar to the reduction of a claim of judgment taxpayers are liable for taxes however whether or not the service assesses them sec_6501 service must either assess or bring proceedings in court without assessment within three years after the return is filed see ewing v u s f 2d october bulletin no 4th cir cert_denied 500_us_905 rejecting taxpayer’s argument that prior to assessment there can be no tax_liability and therefore no payment of taxes just as assessments do not create a tax_liability neither does the abatement of an assessment extinguish a liability the authority to abate assessments is contained in sec_6404 which provides in relevant part a general_rule -the secretary is authorized to abate the unpaid portion of the assessment of any_tax or any liability in respect thereof which--- is excessive in amount or is assessed after the expiration of the period of limitations properly applicable thereto or is erroneously or illegally assessed c small tax balances -the secretary is authorized to abate the unpaid portion of the assessment of any_tax or any liability in respect thereof if the secretary determines under uniform rules prescribed by the secretary that the administration and collection costs involved would not warrant collection of the amount due the plain language of the statute authorizes the abatement of assessments not liabilities sec_6404 authorizes the service to abate the unpaid portion of the assessment of any_tax or any liability in respect thereof likewise sec_6404 begins the secretary is authorized to abate the unpaid portion of the assessment of any_tax or any liability in respect thereof these introductory clauses refer to abating the unpaid portion of the assessment of either any_tax or any liability in respect thereof they do not refer to abating the liability sec_6404 authorizes the service to abate the unpaid portion of any assessment when the service decides under uniform rules prescribed by the secretary that the administration and collection costs involved would not warrant collection of the amount due this abatement has nothing to do with a judgment about whether the assessment reflects the taxpayer’s true liability it only represents the service’s judgment that collecting the account is not cost-effective in effect the service excuses its collector's obligation to account for the tax_liability but does not excuse the taxpayer's liability see 311_fsupp_1184 s d n y service can revive an assessment abated under sec_6404 because the abatement of an uncollectible tax does not cancel the tax see also 100_fsupp_451 ct_cl irs cannot relieve a taxpayer of tax_liability merely because it is uncollectible but can only abate it as a bookkeeping entry 21_fsupp_10 e d pa an sec_301_6404-1 delegates to the commissioner the authority to prescribe the uniform rules for making a sec_6404 determination as discussed infra the service has embodied the procedures for bankruptcy discharge determinations in the bankruptcy handbook irm october bulletin no abatement made because of a collectibility determination does not extinguish the liability because the sec_6404 abatement is made on the basis of collectibility and not because the liability was improperly assessed money may still later be collected so long as the collection limitations_period is open the service may account for the collection by entering a debit to reverse the prior credit transaction reversal of the abatement does not violate the discharge injunction a debtor who successfully completes the bankruptcy process is discharged from all pre-bankruptcy debts b c the discharge order discharges the debtor from a personal obligation to pay and creates an injunction barring creditors from attempting to collect discharged debts from the debtor personally b c a the discharge does not destroy the pre-petition liability however 501_us_78 111_sct_2150 a bankruptcy discharge extinguishes only one mode of enforcing a claim -- namely an action against the debtor in personam see also in re conston 181_br_769 d del collecting cases while the service may continue to collect non-discharged taxes from all of the debtor’s property or rights to property it may collect discharged taxes only from pre-petition property to which a tax_lien is still attached when the service learns of a taxpayer's discharge from bankruptcy the insolvency function tax examiner or bankruptcy specialist evaluates the taxpayer's various tax_liabilities to decide which have been discharged by the bankruptcy see generally irm describing procedures for evaluating and processing discharge if the insolvency employee decides that the costs of working the case do not warrant collection of the amounts involved then the insolvency employee must bring the balance due in each discharged tax_liability module to zero by inputting adjusting credit transaction codes tcs to offset whatever debit tcs were used to account for the liabilities because the service’s accounting system is designed so that a prior transaction is never erased or extinguished or eliminated from the record the abatement always takes the form of a credit transaction entered to bring the balance due to zero some debts may be excepted from discharge b c although the insolvency employee does make a collectibility determination the freeze code tc cannot be used because that would shut down collection on every tax module of the entire account and the eventual reversal of the tc would cause collection to commence against all of the taxpayer's property only by abating specific tax assessments the ones for discharged taxes can the insolvency employee continue to collect the nondischarged taxes and if the opportunity arises collect the discharged taxes out of the property to which the lien for those taxes still attaches october bulletin no adjustments made to account for bankruptcy discharges are abatements made pursuant to sec_6404 a sec_6404 adjustment is caused by the service’s decision that despite sec_6301's direction to collect taxes it is not in the public interest to collect a particular liability because of the costs involved such abatements do not extinguish an otherwise valid tax_liability regardless of the reason for the abatement while the bankruptcy discharge affects the service’s ability to collect the discharged liability it does not extinguish either the underlying liability or those tax_liens which have otherwise survived the bankruptcy since the underlying tax_liability exists after bankruptcy discharge it also exists after the assessments for the discharged taxes are abated to account for the later collection the sec_6404 abatement may be reversed the discharge injunction of b c a prohibits the commencement or continuation of any act to collect recover or offset any discharged debt from the debtor personally because the reversal of an abatement is as explained above not a collection action but merely a bookkeeping function it is not a violation of the discharge injunction filing suit to collect an erroneous refund generated from an abatement of dischargeable liabilities may violate the discharge injunction of b c a the term refund within the phrase erroneous refund refers to any erroneous dispersal of money by the service whether or not that money has previously been paid in see eg 74_f2d_744 6th cir erroneous payment of interest on a valid refund constitutes an erroneous refund for purposes of sec_7405 an erroneous refund includes any receipt of money from the service to which the recipient is not entitled regardless of whether the recipient october bulletin no is the person whom the service intended to received the refund or whether the recipient is a taxpayer or a third party see eg derochemont v united_states ct_cl cl_ct a nonrebate erroneous refund occurs not as a result of a redetermination of the taxpayer's liability but rather as a result of a clerical or ministerial error nonrebate erroneous refunds can only be recovered through voluntary repayment civil suit or right of offset the service may not initiate any administrative collection action to recover a nonrebate erroneous refund because there has been no assessment of that amount thus the service may not file a notice_of_federal_tax_lien or issue a levy or notice of seizure for the amount erroneously refunded the service may however continue to administratively collect any unpaid portion of the original assessment regardless of whether an erroneous refund was generated on the particular tax module in question see 946_f2d_1143 5th cir as previously noted the discharge injunction of b c a prohibits the service from collecting dischargeable debts from the debtor personally however the discharge injunction does not extend to debts which arise after the date of the order for relief see b c b the filing of an erroneous refund_suit in this instance would be an action to collect a post-petition debt and so not subject_to the discharge injunction this is because an erroneous refund creates a new debt see 63_f3d_83 1st cir 49_f3d_340 7th cir thus an erroneous refund issued and received by the debtors post- petition like any other tax_liability incurred by the debtor post-petition is nondischargeable see 78_br_175 bankr e d tenn debts which became payable by a chapter debtor post-petition are not discharged by the debtor's completion of plan 817_f2d_1368 9th cir chapter debtor’s liability stemming from an erroneous refund nondischargeable under b c a a see also in re campbell bankr lexis bankr d colo service was entitled to return of an erroneous refund paid to a chapter debtor post-petition nor does the discharge injunction affect the ability of the service to proceed against the debtor in rem in re 40_f3d_1162 11th cir in united_states v buckner u s dist lexi sec_5861 n d ind date adopting magistrate’s recommendation u s dist lexis date the service levied on a retirement_plan but the debtor filed chapter bankruptcy before the fundholder replied to the levy when the debtor’s taxes were discharged under b c sec_507 and a the service abated the corresponding assessments the court held that the sec_6404 abatements did not extinguish the debtor’s liability and that the service could reverse the abatements because the service never but cf in re 253_br_570 m d ala bleak decided under former version of sec_507 that read erroneous refund would be treated the same as the tax current version gives the claim the same priority therefore erroneous pre-petition refund not excepted from discharge under section a a october bulletin no released its levy on the retirement_plan which remained outside the bankruptcy_estate the service could collect the funds case development hazards and other considerations the discharge injunction of b c a prohibits the commencement or continuation of any act to collect recover or offset any discharged debt while the bankruptcy discharge affects the service’s ability to collect the discharged liability from the debtor personally it does not extinguish either the underlying liability or those tax_liens which have otherwise survived the bankruptcy sec_6404 permits the service to abate a tax_assessment to reflect an administrative determination that collection of a tax is economically unfeasible due to a bankruptcy discharge should collection become feasible within the statutory collection_period a sec_6404 abatement may be reversed without violating the discharge injunction in bankruptcy the service then may proceed to collect by the filing of an erroneous refund_suit because such a suit is an effort to collect a post-petition debt it does not violate the discharge injunction this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney-client_privilege if disclosure becomes necessary please contact this office for our views if you have any questions please contact richard charles grosenick pincite compromise and settlement waiver provisions date cc pa cbs br2 gl-133269-01 uilc memorandum for associate area_counsel sb_se area newark from subject lawrence h schattner chief branch collection bankruptcy summonses effect of offers in compromise on collection statute_of_limitations this chief_counsel_advice responds to your request dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent october issue bulletin no whether the completion of a second form_656 offer_in_compromise by a taxpayer prior to the service having had an opportunity to consider the offer has the effect of rescinding the waiver of the collection statute_of_limitations contained in the original form_656 conclusion an agreement on the part of the taxpayer to extend the collection statute is a unilateral waiver of a defense by the taxpayer because execution of the waiver was a unilateral act on the part of the taxpayer and not a contract for which consideration is necessary the service’s failure to act on the compromise has no effect on the validity or effect of the waiver background it has long been the policy of the internal_revenue_service to suspend enforced collection efforts when a taxpayer submits an offer_in_compromise unless collection of the tax would be jeopardized or the offer was made merely as a delay tactic see policy statement p-5-97 approved date sec_301_7122-1 to insure that the government’s eventual ability to collect was not harmed by withholding collection efforts consideration of an offer was conditioned upon the execution by the taxpayer of a waiver of the statute_of_limitations for collection for the period the offer was being considered while any term of an accepted offer was not completed and for one additional year see sec_301_7122-1 form_656 offer_in_compromise item e n rev the irs restructuring and reform act of rra required several changes to this scheme first rra section codified the practice of withholding collection while an offer to compromise is being considered by adding sec_6331 to the code see p l 112_stat_685 effective date that section prohibits levy while an offer is pending for thirty days after an offer is rejected and while a timely filed appeal of that rejection is pending with the irs office of appeals see sec_6331 temp sec_301_7122-1t f second rra section amended sec_6502 of the code also effective as of date to limit the service’s ability to secure from taxpayers agreements to extend the statutory period for collection see p l 112_stat_685 the service and taxpayers can now only agree to an extension of the statute_of_limitations for collection under a in two circumstances the extension is agreed to at the same time as an installment_agreement between the taxpayer and the service or the extension is agreed to prior to a release_of_levy under sec_6343 which occurs after the expiration of the statutory ten year period for collection see sec_6502 finally rra contained a non-code sunset provision which governs the continued effect of waivers of the collection statute executed prior to date if a waiver october bulletin no was secured in conjunction with the granting of an installment_agreement the period for collection will expire ninety days after the date specified in the waiver if the waiver was not obtained at the same time as an installment_agreement the period for collection will expire not later than date or the end of the original collection statute if it would have occurred after that date see rra c the service’s policies and procedures for the consideration and disposition of offers in compromise have been revised to reflect these changes in the law however some confusion exists with respect to the effect these changes in the law will have on offers that were accepted for processing prior to date but remained pending after that date because the service was authorized to secure waivers of the statute_of_limitations at the time the forms in such cases were submitted those waivers had the effect of extending the time during which the service can collect subject_to the sunset provision described above for compromises submitted prior to date but pending after that date the service’s practice is to secure new forms forms with revision dates of date or later include several changes to the terms of the offer the securing of new forms insures that all offers accepted after these policy changes are subject_to the revised terms and conditions consistent with the changes made by rra the revised forms do not contain language waiving the collection statute your office has asked whether the submission of the new form prior to the service’s taking action on the offer has the effect of rescinding the previously executed waiver of the collection statute for the reasons stated below we conclude that the subsequent submission of a revised form_656 has no effect on an otherwise valid waiver of the collection statute contained in the original form_656 discussion as is discussed above prior to the enactment of rra the service could extend the statute_of_limitations under sec_6502 of the code by agreement with the taxpayer at any time prior to the expiration of the ten-year statutory period the statutory period once extended could be further extended by agreement at any time prior to the expiration date specified in the previous agreement these agreements took the form of a waiver of the collection statute by the taxpayer most often accomplished through a form_900 tax_collection_waiver although the statute refers to an extension by agreement the courts have uniformly held that since the statute_of_limitations is a defense available to the taxpayer in the event the service attempts to collect beyond the statutory time period extension of the time to collect is accomplished via a unilateral waiver of that defense by the taxpayer and that a tax_collection_waiver is not a contract see strange v united 282_us_270 280_us_453 your request acknowledges this principle but focuses on language in several lower court opinions stating that waiver of the collection statute is a quid pro quo for consideration of the offer see 390_f2d_285 7th cir 101_f2d_161 8th cir you conclude that since the waiver was in exchange for consideration of the offer october bulletin no failure to consider the offer prior to a new form being submitted changed the effect of the previously signed waiver we cannot agree with this conclusion the seventh circuit faced this precise argument in a later case than that cited above the taxpayer submitted an offer_in_compromise based on doubt as to liability which included the waiver language the service eventually rejected the offer because liability has been established in a prior court judgment the taxpayer argued that since rejection was preordained the service’s agreement to consider the offer was illusory and that the waiver executed in exchange for such consideration was therefore unenforceable in revisiting its opinion in harris trust the court stated that the quid pro quo language should not be read in contractual terms harris trust does not state that contract principles govern the validity of a waiver and of course it could not do so without directly contradicting the supreme court’s decisions in florsheim bros and stange 977_f2d_1067 7th cir the court’s conclusion was perhaps made less clear by what it went on to say the court concluded that the waiver was valid because contract principles do not apply and because the irs did consider the offer even if rejection was preordained id emphasis added while this could be read to indicate that the failure to consider the offer would have had some effect on the validity of the waiver we believe reading the statement in context it was more of a signal from the court that the waiver would have been found valid even if some quid pro quo on the part of the service was needed we think the same can be said of the scenario you have presented when the offer was countersigned by a service official with authority to acknowledge the waiver the offer became pending although not required_by_law prior to date the service suspended collection by levy so that the offer could be processed and considered even if the service had not yet begun to weigh the merits of the offer this stay of collection by the service was a benefit to the taxpayer no such benefit flowing from the service to the taxpayer would be needed for the waiver to be valid the existence of such a benefit however undercuts any suggestion that the taxpayer would not have signed the waiver had he known that the offer would not immediately be considered on its merits if you have any questions please contact the attorney assigned to this case pincite- limitations assessment and collection date see sec_301_7122-1t b doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability october bulletin no tl-n-3430-01 uil cc pa cbs bo1 memorandum for associate area_counsel brooklyn cc sb brk attn patricia a rieger from michael a arner senior technician reviewer branch collection bankruptcy summonses cc pa cbs bo1 subject irm procedural update this responds to your memorandum dated date in accordance with sec_6110 it should not be cited as precedent issue whether sec_6502 overrides the plain wording of sec_6501 which provides that the service’s execution of a return under sec_6020 shall not start the running of the period for assessment and collection conclusion sec_6502 neither conflicts with nor changes the plain wording of sec_6501 background irm procedural update provides that the csed shall be calculated from the date of the taxpayer’s late-filed return showing a smaller tax_liability than the amount assessed under the deficiency procedures discussion sec_6020 provides that a ny return so made the sec_6020 return and subscribed by the secretary shall be prima facie good and sufficient for all legal purposes sec_6501 provides that n otwithstanding the provisions of paragraph of sec_6020 the execution of a return by the secretary pursuant to the authority conferred by such section shall not start the running of the period of limitations on assessment and collection sec_6502 provides that w here the assessment of any_tax imposed by this title has been made within the period of limitation properly applicable thereto such may be collected by levy or by a proceeding in court but only if the levy is made or proceeding begun-within years after the assessment of the tax october bulletin no because we interpret sec_6502 the question has been raised as to whether sec_6502 changes the clear rule in sec_6501 that the service’s execution of a sec_6020 return does not start the running of the collection_period we conclude that sec_6502 does not change the rule in sec_6501 indeed courts have explicitly rejected taxpayers’ arguments that the execution of sec_6020 returns trigger the running of the assessment and collection_period under sec_6502 and have held that sec_6501 prevents the running of these periods e g jensen v i r s u s app lexis 9th cir taylor v i r s u s app lexis 10th cir the determination of assessment_date s is not a matter within our jurisdiction so we have coordinated related assessment questions with branch of apjp and we will issuing further guidance on the actual calculation of the csed please call if you have any further questions payment installment payments cc pa cbs br2 gl-118271-01 uilc date memorandum for area_counsel area small_business self- employed denver group from lawrence schattner chief branch collection bankruptcy summonses subject waiver of notice of termination of installment_agreement this responds to your request for advice dated date this document is not to be cited as precedent issue whether the service can obtain a waiver of a taxpayer’s right to receive the notice of termination of an installment_agreement required by sec_6159 conclusion sec_6159 does not authorize a waiver of the taxpayer’s right to receive notice of termination of an installment_agreement october bulletin no background you have brought to our attention two cases where as part of collection appeals proceedings before appeals settlement officers installment agreements were entered into with the taxpayer in which the taxpayer waived the right to notice of termination if any term or condition in the installment agreements were not met thus permitting the service to commence immediate collection action upon default one of those cases involved a prior default in an installment_agreement you have been asked by the revenue_officer to whom the accounts are assigned whether the waivers are valid thus permitting the service to levy on the taxpayers’ assets without notice of termination should the taxpayers default on the agreements you conclude that a waiver of the right to notice of termination is legally valid but that as a matter of policy such waivers should only be solicited in egregious cases such as where the taxpayer has had prior defaulted installment agreements law and analysis for the following reasons we conclude that waivers of the right to receive notice of termination of installment agreements are invalid a notice of proposed termination should be sent after default even if such a waiver was executed sec_6159 authorizes the service to enter into agreements for the payment of taxes in installments sec_6159 sec_6159 provides except as otherwise provided in this subsection any agreement entered into by the secretary under subsection a shall remain in effect for the term of the agreement sec_6159 further enumerates the grounds for which the service may alter modify and terminate installment agreements providing inaccurate or incomplete information before the agreement was executed collection of the tax is in jeopardy the financial condition of the taxpayer has significantly changed the taxpayer fails to pay an installment or any other tax_liability when due and the taxpayer fails to provide financial information requested by the secretary sec_6159 specifies that unless collection of the tax is in jeopardy the secretary may not alter modify or terminate an installment_agreement for the enumerated reasons unless the taxpayer is given days notice of such termination with an explanation of why the secretary intends to take the action sec_301_6159-1 further provides that upon receiving the notice of termination the taxpayer may provide information showing that the reason for the intended alteration modification or termination is incorrect levies with respect to the tax which is the subject of an installment_agreement are prohibited during the period that an installment_agreement is in effect and in the case of a default during the day period plus the period of any appeals after notice of termination is sent sec_6331 d the taxpayer can however waive the restriction on levy sec_6331 k we conclude that a waiver of the right to receive a notice of termination is not permitted under the current statutory scheme the purpose of the notice of termination is to give the taxpayer the right and opportunity to contest a proposed termination and there is no statutory basis for forcing the taxpayer to relinquish that right as a condition of entering an installment_agreement the receipt of the notice of termination is a fundamental right which cannot be withdrawn absent specific statutory authorization october bulletin no the secretary has the discretion to require terms that protect the interests of the government as a condition to entering into an installment_agreement such as a requirement that the taxpayer authorize direct debit bank transfers sec_301_6159-1 however the secretary cannot impose conditions inconsistent with sec_6159 because the statute and regulations contain restrictions on the ability of the service to terminate agreements the service can only insert additional terms in installment agreements which are consistent with these restrictions a waiver of the notice of termination entered into as a condition of acceptance of the installment_agreement is invalid because it is inconsistent with sec_6159 we finally note that it would be legally permissible under the statute to require the taxpayer to waive the restriction on levy for the day period and during any appeal period after the notice of termination as a condition for entering into the installment_agreement however the published procedures involving installment agreements do not contemplate such waivers see irm while it might be appropriate to require such waivers in cases involving past defaults this is a matter of policy which should be approved within the national_office of the sb_se division please contact the attorney assigned to the case at if you have any questions or comments concerning this memorandum payment installment payments date cc pa cbs rcgrosenick tl-n-2166-01 uil memorandum for paul j sude a s s o c i a t e a r e a c o u n s e l p h i l a d e l p h i a cc sb phi from joseph w clark senior technician reviewer branch cbs subject installment_agreement default processing one of the installment agreements at issue requires the taxpayer to timely file returns and make federal tax deposits we note in this regard that an installment_agreement can only be terminated for the reasons stated in sec_6159 failure to make federal tax deposits failure_to_file returns and failure to do any other act not specified in sec_6159 are not valid grounds for terminating an installment_agreement see irm october bulletin no this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent issues may the internal_revenue_service require that a taxpayer become current as to his estimated_tax payments as a condition for reinstatement of a defaulted installment_agreement may the service require that a taxpayer enter into a direct deposit installment_agreement as a condition for reinstatement of a defaulted installment_agreement may the service require that a taxpayer pay federal tax_liabilities or make future tax_payments by credit card as a condition for reinstatement of a defaulted installment_agreement conclusions yes the service may require as a condition of reinstatement that the taxpayer become current with his estimated_tax payments yes the service may require as a condition of reinstatement that the taxpayer enter into a direct deposit installment_agreement no the service may not require as a condition of reinstatement that the taxpayer pay by credit card facts the philadelphia service_center in the course of a project on defaulted installment agreements has suggested the service consider using the foregoing conditions as mandatory prerequisites to reinstatement in your proposed significant service_center advice you agree that the service may require a taxpayer to become current on estimated_tax payments and enter into a direct deposit arrangement as preconditions for reinstatement you do not believe the service may require the taxpayer to pay by credit card so that the service and the public are aware of these new conditions you further recommend that these procedures be incorporated into the internal_revenue_manual law and analysis sec_6159 of the internal_revenue_code governs installment agreements authorization of agreements - the secretary is authorized to enter into written agreements with any taxpayer under which such taxpayer is allowed to satisfy liability for payment for any_tax october bulletin no in installment payments if the secretary determines that such agreement will facilitate collection of such liability sec_6159 sec_6159 in addition to authorizing the execution of installment agreements includes provisions specifying the extent to which installment agreements remain in effect the situations in which installment agreements must be entered into the specific conditions under which an installment_agreement may be terminated by the service and the secretary’s duty to establish procedures for independent administrative review of termination of installment agreements see sec_6159 b c d the service is not required to enter into an installment_agreement with a taxpayer the director has the discretion to accept or reject any proposed installment_agreement sec_301_6159-1 see eg ajp management v united_states aftr2d c d cal date appeals officer did not abuse his discretion by rejecting proposed installment_agreement kitchen cabinets inc v united_states u s dist lexis n d tex date service not obliged to accept a proposed installment_agreement offered during a collection_due_process_hearing in addition prior to entering into an installment_agreement the service may impose terms and conditions to protect the interests of the government sec_301_6159-1 the law does not prohibit the service from establishing conditions such as the use of direct deposit before a proposed installment_agreement will be accepted in fact the example provided under this regulation is that the director may require that a taxpayer authorize direct debit bank transfers as a method of making installment payments under the agreement as the service may require a taxpayer to enter into a direct deposit agreement as a precondition to an initial installment_agreement the service likewise may require a taxpayer to enter into a direct deposit agreement as a precondition to reinstatement of a defaulted agreement although the service has wide discretion whether or not to accept a proposed installment_agreement the service’s ability to terminate an existing installment_agreement is limited by statute the service may propose termination of or place in default an installment_agreement if the taxpayer fails to pay an installment_payment when due under the terms of the agreement fails to pay another tax_liability at the time such liability is due there is an exception to this rule for proposed installment agreements which satisfy specific criteria as set forth in sec_6159 if a proposed installment_agreement meets these criteria the service must accept the guaranteed agreement see irm however one of the criteria is that the taxpayer not have entered into an installment_agreement with the service during the past five years sec_6159 this prevents a taxpayer who has defaulted from proposing a guaranteed installment_agreement as a means of bypassing preconditions the service sets on reinstatement and so the exception for guaranteed installment agreements is not applicable here october bulletin no fails to provide a financial condition update upon request provides information prior to the date such agreement was entered into that was inaccurate or incomplete or if the director determines the collection of any_tax liability to which the installment_agreement applies is in jeopardy sec_6159 sec_301_6159-1 an installment_agreement may not be defaulted or terminated for the taxpayer’s failure to make estimated_tax payments failure to make federal tax deposits or failure_to_file another return at the time such return is due irm however just because the service is limited in how it may terminate an agreement does not mean that the service is also limited in its ability to reinstate or refuse reinstatement to a taxpayer who has defaulted the bases on which the service may terminate or default an installment_agreement are set out by statute the bases for reinstatement are not though congress intends the service to be flexible in working with taxpayers to resolve their tax_liabilities via installment agreements the law does not require the service to automatically reinstate a defaulted taxpayer see lilley v united_states u s dist lexi sec_913 n d ohio jan acceptance of payments does not require irs to reinstate installment_agreement when congress amended sec_6159 in the restructuring and reform act of it did not limit the service’s ability to impose terms and conditions prior to entering into or reinstating installment agreements instead the service retains the discretion to refuse to accept a new installment_agreement proposed by a taxpayer who previously defaulted see mrca info servs v united_states u s dist lexis d conn date court upholds service’s rejection in collection_due_process_hearing of proposed installment_agreement by taxpayer who previously defaulted on two agreements as the service may impose reasonable terms and conditions before accepting a proposed installment_agreement the first two conditions suggested above payment of estimated_taxes and direct deposit may be set by the service as preconditions to the reinstatement of a terminated or defaulted installment_agreement in your proposed memorandum you disagree that the service may require payment by credit card as a condition of reinstatement you note that the internal_revenue_manual presently recommends that the service consider compliance with estimated_tax requirements and payment by direct deposit before considering reinstatement irm f g although payment by credit card is authorized by law the use of a credit card requires the taxpayer to incur a fee the instructions for form_1040 for example state that for_the_use_of a credit card a convenience fee will be charged by the service provider based on the amount the taxpayer is paying see also temp see internal_revenue_service restructuring and reform act of h_r codified at sec_6159 reprinted in joint_committee on taxation 106th congress general explanation of tax legislation enacted in pincite see sec_6311 temp sec_301_6311-2t october bulletin no sec_301_6311-2t e this convenience fee is not a tax debt but is an amount imposed by virtue of the method of payment selected by the taxpayer it is one thing if a taxpayer voluntarily chooses to pay the credit card fee but we do not believe the service can require the taxpayer to incur such a fee as a condition of reinstatement case development hazards and other considerations we agree with your recommendation that should the service decide to adopt any or all of these proposed conditions to reinstatement such procedures should be incorporated into the internal_revenue_manual this will insure uniformity of application and notify taxpayers of the new conditions we also share your concerns that some taxpayers may not have the ability to pay by direct deposit and that this may be perceived as unfair however a taxpayer who is denied reinstatement of a defaulted installment_agreement due to the conditions suggested above or for any other reason has a right to appeal such denial see sec_6159 cross- referencing sec_7122 irm we believe the appeal process affords sufficient safeguards to insure a taxpayer is not treated unfairly this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney-client_privilege if disclosure becomes necessary please contact this office for our views if you have any questions please contact richard charles grosenick pincite see also irm appeal of defaulted terminated installment agreements october redemption method for sale date bulletin no cc pa cbs br1 gl-112355-01 uilc memorandum for associate area_counsel richmond cc sb rch attn tbheavner from alan c levine chief branch collection bankruptcy summonses subject liquidated_damages this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent issue if the internal_revenue_service service sells real_property redeemed pursuant to sec_7425 and the sales contract does not provide for liquidated_damages for a defaulting purchaser may the service offset the bidder’s deposit to recover its actual damages conclusion when the sales contract does not provide for liquidated_damages the service may offset the bidder’s deposit against its actual damages arising from a defaulted sale facts the service redeemed real_property following a nonjudicial_sale and subsequently sold the property at public auction the notice of sale stated that the property would be sold to the highest bidder who would be required to pay of the highest bid price at the time of sale and would be required to pay the balance within days after the bid was accepted the purchaser defaulted on the remainder of the bid price the notice of sale made no mention of liquidated_damages october law and analysis bulletin no black’s law dictionary defines liquidated_damages as the sum which a party to a contract agrees to pay if he breaks some promise and which having been arrived at by a good_faith effort to estimate actual damage that will probably ensue from the breach is recoverable as agreed damages if a breach occurs sec_7506 provides the secretary shall have charge of all real_estate which is or shall become the property of the united_states or which has been redeemed by the united_states sec_7506 provides the secretary may at public sale and upon not less than days notice sell and dispose_of any real_estate owned or held by the united_states as aforesaid sec_301_7506-1 states in the event of the sale of redeemed property a notice of sale shall state whether in the case of a default in payment of the bid price any amount deposited shall be retained as liquidated_damages not to exceed dollar_figure sec_301_7506-1 limits the recovery_of liquidated_damages to a maximum amount of dollar_figure as discussed below the district_director may before giving notice of sale solicit offers from prospective bidders and enter into agreements with such persons that they will bid at least a specified amount in case the property is offered for sale in such cases the district_director may also require such persons to make deposits to secure the performance of their agreements any such deposit but not more than dollar_figure shall be retained as liquidated_damages in case such person fails to bid the specified amount and the property is not sold for as much as the amount specified in such agreement alternatively the service may choose not to insert a clause for liquidated_damages in that situation we have taken the position that the service may still recover its actual damages nothing in the regulations prohibit the service from recovering its actual damages and we see no reason why the service should not have the same right as any other seller to recover actual damages from a defaulting purchaser moreover it can be inferred from other sections of the internal_revenue_code and regulations that congress intended that the service not bear the economic burden resulting from the defaulted sales of property sec_6335 and the regulations thereunder which concern the sale of seized property rather than the sale of property that the government has redeemed provide that if the purchaser fails to pay the balance of the bid price the service can either institute suit for the balance of the purchase_price or readvertise and resell the property again and consider the deposit forfeited october bulletin no based upon the foregoing discussion if the service did not insert a liquidated_damages clause we think that the service may recover its actual damages in full given that the service has the defaulting purchaser’s deposit the service may exercise its common_law right of offset and recover its damages from the deposit in response to your inquiry concerning the discrepancy in pattern letters p-339 and p-637 referenced in irm we contacted the office of filing and payment compliance to ascertain why the letter used to give notice of sale of redeemed property p-637 contains a liquidated_damages provision but the pattern_letter for the sale of other than redeemed property p-339 does not apparently there is no explanation for the discrepancy and we were advised that it was probably just an oversight in drafting however to clarify matters that office will revise pattern_letter p-637 to delete any reference to liquidated_damages likewise they will revise pattern_letter p-340 notice of sealed bid sale other than redeemed property to delete any reference to liquidated_damages so that it will comport with pattern_letter p-1627 redeemed property which does not contain such a provision if you have any further questions please do not hesitate to call us on cc jeff basalla director filing payment compliance s c cp fp


department of the treasury int ernal revenue service washington d c date o f f i c e o f c h i e f c o u n s e l number release date cc pa cbs br2 uilc internal_revenue_service national_office field_service_advice memorandum for associate area_counsel sbse area detroit michigan from lawrence h schattner chief branch collection bankruptcy summonses subject default of offer-in-compromise this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent issues whether the internal_revenue_service service may unilaterally default a joint offer_in_compromise when taxpayer-husband breached his obligations under a separate but related offer_in_compromise on the basis of an oral agreement tying the two offers together conclusions no treasury regulations specifically require that offers in compromise be reduced to writing and thus cannot be altered by an oral agreement facts a joint offer_in_compromise was accepted by the service to resolve taxpayers’ outstanding income_tax liabilities the notice of acceptance stated our acceptance is subject_to the terms and conditions on the enclosed form_656 offer_in_compromise taxpayers fulfilled their obligations under the offer_in_compromise by paying the total due plus interest the service also accepted taxpayer-husband’s individual offer_in_compromise to resolve his outstanding employment_tax liabilities the notice of acceptance contained the same language as above taxpayer-husband never made any payments under his offer_in_compromise and the service defaulted both compromise agreements according to your memo it was the practice of the local offer_in_compromise group to inform taxpayers orally that individual and joint agreements were tied together your memo does not state if taxpayers in this case were specifically told that default of one offer would result in default of the other and whether taxpayers agreed your memo also states that current practice is to make agreements tying the two offers together in writing law and analysis the nature of an offer_in_compromise an offer_in_compromise is a statutory creation sec_7122 states the secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the department of justice for prosecution or defense and the attorney_general or_his_delegate may compromise any such case after reference to the department of justice for prosecution or defense sec_7122 thus any offer_in_compromise is to be strictly construed according to the statutory requirements 278_us_282 klien v commissioner 899_f2d_1149 11th cir 510_f2d_112 5th cir it has also been said that an offer_in_compromise is a contract and is subject_to the general rules governing contracts 372_f2d_352 3rd cir 303_f2d_1 5th cir 429_fsupp_42 s d tex however the rules of contracts cannot abrogate the statutory requirements governing offers in compromise bowling f 2d pincite requirement of a writing temporary sec_301_7122-1t c requires that all offers in compromise be submitted in writing on forms prescribed by the service in accordance with this regulation the service now requires that all offers must be submitted on form_656 irm 1acceptances must also be in writing temp sec_301_7122-1t d these writing requirements were also in effect when the offers at issue were accepted see sec_301_7122-1 in 810_f2d_209 d c cir a taxpayer challenged the treasury regulation’s writing requirement arguing that he had a binding oral compromise_agreement pierre boulez ran afoul of u s tax law by failing to include certain income on his tax returns id pincite after extensive negotiations boulez reached an oral compromise_agreement with the service id in an unrelated audit the service discovered more tax deficiencies and issued a notice_of_deficiency id pincite boulez argued that the oral agreement settled all of his tax_liabilities including these newly discovered deficiencies and was binding on the service id the court_of_appeals disagreed and found that sec_301_7122-1 required an offer_in_compromise to be set out in writing and that this requirement was entirely reasonable and a wholly permissible interpretation of sec_7122 boulez f 2d pincite in addition the court stated that the writing requirement could not simply be overlooked as it is a fundamental tenet of formalizing agreements id pincite thus because the agreement did not conform to statutory requirements it was not binding on the service the holding of boulez was followed in in re 159_br_792 bankr n d ohio aff’d 175_br_915 n d ohio aff’d 78_f2d_241 6th cir ohio the aberl court refused to find that oral negotiations between a taxpayer and the service constituted an offer_in_compromise this court agrees that ‘ sec_301_7122-1 which requires that all compromises be reduced to writing has the force and effect of law and that the irs lacked authority to waive it ’ in re aberl b r pincite citing boulez f 2d pincite alteration in original citations omitted the issue you have presented however deals with an oral term within a written offer_in_compromise rather than an entirely oral agreement in keating v united_states 794_fsupp_888 d neb the district_court concluded that an oral agreement could not supersede the written terms of form_656 the keatings submitted a written offer_in_compromise on form_656 which expressly informed taxpayers that the united_states would retain any_tax refunds that arose within the period of the offer id pincite the keatings then negotiated with the service to increase the amount of their offer with the oral understanding that the service would refund any_tax overpayments notwithstanding the language of form_656 id the service kept the keatings’ refund and applied it to their tax_liability id pincite the district_court stated even assuming that an oral agreement existed between the parties that attempted to supersede form_656 an oral agreement with the internal_revenue_service with respect to federal_income_tax liability cannot bind the government the internal_revenue_code and the treasury regulations specifically require a written offer and acceptance of an offer_in_compromise citations omitted id pincite thus according to the statutory scheme and regulations governing offers in compromise an oral term cannot be added to a written offer but see 823_fsupp_845 d colo denying summary_judgment because plaintiffs should have been allowed to show an oral modification to their offer_in_compromise without a contract term tying the two offers together they must each stand alone the joint offer_in_compromise has been fully paid assuming taxpayers have complied with all of the filing and payment requirements of the i r c for the five year period following acceptance of their offer as required by condition d of form_656 rev the liability has been extinguished see temp sec_301_7122-1t d sec_301_7122-1 contract rules governing oral terms it is our position that sec_7122 and the regulations thereunder govern the requirements of an offer_in_compromise and that pursuant to these authorities all the terms of the offer and acceptance of the offer must be in writing even under general contract principles we believe the conclusion would be the same at the outset in considering an offer_in_compromise a court should look to the rules applicable to contracts generally lane f 2d pincite see also 211_f2d_669 7th cir applying common_law when analyzing a compromise_agreement with the service the parole_evidence_rule governs when testimony will be allowed to prove an oral term of a written contract the general_rule is that evidence of a prior or contemporaneous agreement not included in an integrated writing is not admissible to prove the existence of that agreement restatement second of contracts sec_215 sec_216 samuel williston williston on contracts sec_631 3d ed parole evidence is admissible to prove that the writing is not integrated the writing is only partially integrated the meaning of the writing illegality fraud duress mistake lack of consideration or other invalidating cause grounds for recission reformation specific performance or other remedy restatement second of contracts sec_214 thus parole evidence may be used to show that an agreement is not integrated if the service were able 2it does not matter that the keating court dealt with an attempt to supersede a written term of the offer whereas this case deals with an attempt to add a consistent term because the analysis under the statutory scheme is the same oral agreements are not enforceable 3michigan law is in accord with the common_law on parole evidence nag enterprise inc v all state industries inc mich uaw-gm human resource center v ksl recreation corp mich app to prove that form_656 is not integrated then it could introduce evidence of a contemporaneous oral agreement to tie the two offers in compromise together an agreement is determined to be integrated when the writing constitutes a final expression of one or more terms of an agreement restatement second of contracts whether an agreement is integrated is to be determined by the court however written agreements are presumed to be integrated id samuel williston williston on contracts 3d ed this presumption is particularly strong when the parties use a standardized agreement restatement second of contracts sec_211 even if an agreement is not fully integrated courts generally will not allow parole evidence of an additional term if that term would normally be included in that type of agreement arthur linton corbin corbin on contracts sec_583 a further hazard for the service is the rule that in choosing among the reasonable meanings of a promise or agreement or a term thereof that meaning is generally preferred which operates against the part who supplies the words or from whom a writing otherwise proceeds restatement second of contracts a court is particularly likely to construe a contract against the government as the drafting party restatement second of contracts cmt a the use of parole evidence is decided on a case by case basis by the courts however given the rules of contracts as discussed above it is unlikely that the service would prevail in proving that form_656 is an unintegrated agreement and that evidence of an oral agreement should be admitted this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views if you have any further questions please contact the attorney assigned to this matter at 4michigan law is in accord hanley v porter mich stark v kent products inc mich app elby v livernois eng’g co mich app