Or, Agree With Thine Adversary Whilst Thou Art In the Way

It doesn’t matter if you’re below the settlement officer’s number, because if you’re below IRS’ final number when you submit your OIC at your CDP, you’re out. This is the lesson Judge Thornton has for B.M. Vanmali and Bhari Vanmali, 2012 T.C. Mem. 100, filed 4/9/12.

B.M. and Bhari were hit for $600K underpayment deficiency, asked for an OIC with their Form 12153, claiming collectibility, and offered less than fifty cents on the dollar.

The SO said they’d undervalued their takes from their seven Sub S corps, and claimed they had better than $1.3 million. The discrepancy came from the difference between what the tax returns showed as income from the Sub S corps and what B.M. and Bhari claimed they actually got.

The SO told B.M. and Bhari to up the ante, but they did nothing for 60 days, so the SO rejected the OIC, and sent a Notice of Determination. B.M. and Bhari petition.

The issue is abuse of discretion.

Judge Thornton: “…without conceding any error by the settlement officer, respondent [IRS] asserts that even if one were to assume, solely for purposes of his motion, the accuracy of ‘many’ of the items reflected in petitioners’ offer amount, their computation nevertheless contains ‘clear errors’. Respondent asserts that correcting these errors would indicate that, consistent with petitioners’ own assumptions, their offer should have been no less than $349,740, rather than the $295,805 they actually offered. Petitioners do not dispute this conclusion; to the contrary, they state that they will ‘assume Respondent’s changes are correct’. They observe, however, that “the difference between $349,740 and Petitioners’ offer of $295,805 is a lot less than the difference between $1,296,531 [their RCP as determined by the settlement officer] and $295,805.’ They assert that had the settlement officer determined their RCP to be $349,740, they would have been “ready, willing, and able to make a counter-offer in that amount.” Citing Lites v. Commissioner, T.C. Memo. 2005-206, they argue because the settlement officer’s alleged error was so central to his determination, he abused his discretion in rejecting their offer.

“Whatever error the settlement officer might have made in calculating petitioners’ RCP–and respondent does not expressly concede that the settlement officer made any error–the undisputed fact remains that petitioners could afford to pay significantly more than they offered. In these circumstances, notwithstanding alleged errors in the settlement officer’s calculation of petitioners’ RCP, he did not abuse his discretion in rejecting their offer.” 2012 T.C. Mem. 100, at pp. 8-9. (Citations omitted.)

“Petitioners assert that they would have counteroffered $349,740 if the settlement officer had properly advised them that this was the correct amount of their RCP. But petitioners have effectively conceded that it was their own errors that caused their offer to understate the amount they could afford to pay, even under their own financial assumptions. The settlement officer did not abuse his discretion in rejecting their admittedly too low offer.” 2012 T.C. Mem. 100, at pp. 10-11. (Footnote omitted.)

But one sentence from the omitted footnote says a lot.  “The record indicates that although the settlement officer raised this issue with petitioners and gave them an opportunity to respond, they never did so.” 2012 T.C. Mem. 100, at p.11, footnote 9.

Takeaway: Don’t wait until you get to Tax Court to raise the ante.