No, not another essay about a point of law that’s past being argued about. This is about what a settlement consisting of two valid section 7121 closing agreements, both completed on Form 870-LT, Settlement Agreement for Partnership Items and Partnership Level Determinations as to Penalties, Additions to Tax, and Additional Amounts and Agreement for Affected Items, did to Michael McAvey and Kathleen McAvey 2018 T. C. Memo. 142, filed 8/20/18.

Since each of the closing agreements provided Mike and Kath had no quarrel with the numbers set forth therein, Mike and Kath petition the NITL on an OIC doubt-as-to collectability claim.

But Mike and Kath can’t exclude sales proceeds on some land because they spent some of the proceeds on unsubstantiated living expenses (although IRS did allow some of the unsubstantiateds), and they have to waive their heavy-duty NOLs arising from the torpedoed partnerships.

Ex-Ch J Michael B (“Iron Mike”) Thornton: “It is generally the Commissioner’s policy that collateral agreements waiving losses are appropriate to consider in situations where the taxpayer’s RCP is less than the amount of liability.  See IRM pt. 5.8.6.2 (Oct. 29, 2010).  As petitioners were claiming that their RCP was less than the amount of their debt, there was no abuse of discretion in the AO’s request for a collateral agreement. Moreover, it would appear that the collateral agreement was essentially offered in exchange for excluding petitioners’ partnership interests and income from calculation of their RCP.  The documents petitioners provided to the AO in support of their claims do not answer why, if the partnerships were worthless, the partners were choosing to report large amounts of interest income rather than wind up the partnerships.  There may be a perfectly reasonable answer, but petitioners did not provide it.  Consequently, it was not unreasonable for the AO to propose an alternative solution which avoided the issue, namely, the collateral agreement.” 2018 T. C. Memo. 142, at pp. 14-15.

And the settlement agreements foreclosed any arguments about Section 6751(b) Boss Hossery.

“Petitioners have not alleged or supported any fraud, malfeasance, or misrepresentation of material fact with respect to these closing agreements, and we deem petitioners to have waived or conceded any such argument.  Consequently, respondent may not reopen those aspects of petitioners’ case addressed in the closing agreements, and the closing agreements that petitioners signed may not be annulled, modified, set aside, or disregarded in this proceeding.  The closing agreements at issue specifically provide that petitioners consent to assessment of the penalties in question.  In signing these agreements, petitioners therefore agreed to waive the procedural requirement of section 6751(b)(1).

“Consequently it is clear that if there was any error in the AO’s failure to obtain verification of compliance with section 6751(b)(1), it was harmless error because neither respondent nor this Court may set aside petitioners’ valid closing agreements or petitioners’ consent to assessment contained therein.” 2018 T. C. Memo. 142, at pp. 22-23.

Takeaway- Be careful what you settle. Best to be well-settled.