Gross receipts, that is, when reckoning Average Annual Gross Receipts (AAGR) for Section 41 research tax credits.

That’s the lesson for Hewlett-Packard Company and Consolidated Subsidiaries, 139 T.C. 8, filed 9/24/12, Judge Goeke teaching the lesson.

This is not a replay of Foppingadreef and the Netherlands-US flimflam (see my blogpost “We Don’t Need No Stinkin’ Factors”, 5/15/12, Judge Goeke’s previous shootdown of a H-P ploy). No doubt H-P did research, but AAGR is a threshold that the researchers must cross before they can take the credit. Because the aim is to reward research that H-P otherwise wouldn’t have undertaken, the AAGR tries to exclude research that would have been undertaken, credit or no credit. The theory is that entities budget for research as a function of gross receipts, so by basing credit for new research on a threshold set at a function of gross receipts, the credit applies only to the new research, not the “anyway” research. This method also ties research into sales growth.

H-P tries to lower the threshold by not taking into account intercompany distributions (OK, says IRS, and so stipulates), and excluding nonsales income, like dividends, interest, rent, and other income, in computing AAGR (not OK with IRS or Judge Goeke).

H-P argues that only income from sales should be included in AAGR. “HP submits that by specifically excluding ‘returns and allowances’, a phrase connoting a merchant business association, Congress evinced a clear intention to limit gross receipts to solely sales receipts. Similarly, citing a Black’s Law Dictionary entry, HP asserts that the generally accepted definition of “gross receipts” focuses on sales or services income. See Black’s Law Dictionary 772 (9th ed. 2009) (defining ‘gross receipts’ as ‘The total amount of money or other consideration received by a business taxpayer for goods sold or services performed in a taxable year, before deductions. * * * [Sec.] 448; * * * [sec.] 1.448-1T(f)(2)(iv) [Temporary Income Tax Regs., 52 Fed. Reg. 22764 (June 16, 1987)].’).

“We are unpersuaded by HP’s contentions. Nowhere in the Code has the isolated term ‘gross receipts’ been construed as narrowly as HP suggests. On the contrary, an examination of the Federal income tax laws reveals that Congress widely embraces the notion of a broad, inclusive definition for the term. See, e.g., secs. 165(g)(3)(B), 993(f), 1244(c)(1)(C). Indeed, when adopting that term in a provision, Congress often qualifies the term’s comprehensive definition through specific exclusions or limitations to accommodate the relevant statutory scheme. See, e.g., secs. 448(c)(3)(C), 509(a)(2)(A)(ii), 1362(d)(3)(B) and (C).14 If, as proffered by HP, Congress intended to further limit the definition of ‘gross receipts’ in section 41, it undoubtedly recognized the constructional convention by which it had traditionally done so in numerous provisions.

“Further, HP’s attempt to equate the common meaning of ‘gross receipts’ with the narrow definition Black’s Law Dictionary is unavailing. Specifically, the definition provided in Black’s Law Dictionary is undermined by the cited authorities, section 448 and section 1.448-1T(f)(2)(iv), Temporary Income Tax Regs., supra, from which the definition was purportedly derived.” 139 T. C. 8, at pp. 17-18. (Footnotes omitted).

So Black strikes out. And so does H-P.

Some few of my older readers may remember, in the dim recollection of a long-ago time, an advertising tune that began thus. But Pepsico, successor-in-interest to the ancient hawker of “twice as much for a nickel, too”, definitely gets twice as much, both from Judge Goeke in Pepsico Puerto Rico, Inc., T. C. Memo. 2012-269, filed 9/20/12 (and the reason it took me so long to blog this case is that the decision is 100 pages of tightly-written corporate finagling of the highest order, with five lawyers for Pepsi and four for IRS).

Pepsi wants to expand into emerging markets during the 1990s, but doesn’t want to export any US cash, so it uses cash flow from notes issued by Frito-Lay to Pepsi’s Netherlands Antilles subs that are taxed at a minimal rate in the Netherlands Antilles, and are exempt from US tax. This works until the Netherlands Antilles preference in the Netherlands treaty with the US expires, and Pepsico has to restructure.

So Pepsico transfers some of its high-risk overseas subsidiaries from N.V.s to B.V.s, Dutch corporations. The notes get restructured, and finally are sold to an indirect Pepsi sub in exchange for advance agreements.

Now it gets amusing. For Dutch tax purposes, these advance agreements have to be debt, so that interest paid by the Dutch subs to its parent are deductible for Dutch tax purposes, but must be equity for the Pepsi subs that hold them.

IRS calls a halt and hits the convoluted Pepsi corporate structure with about $370 million in deficiencies, claiming the advance agreements are debt, Pepsi got taxable interest, and substance controls form.

Not so fast, says Judge Goeke. “Respondent asks this Court to disregard the objective form of the advance agreements and examine the substance of the transactions in discerning their proper characterization for Federal income tax purposes. It is axiomatic that the substance of a transaction governs for tax purposes. This principle is equally applicable in debt-versus-equity inquiries.

“While cognizant that the substance-over-form doctrine permeates tax law jurisprudence, we believe it prudent to emphasize that the form of a transaction often informs its substance. See e.g., Hewlett Packard Co. v. Commissioner, T.C. Memo. 2012-135 (dismissing the labels afforded to transactional instruments, but examining their terms to discern the true substance of the economic arrangement). An analysis focused myopically on the ‘substance’ of a transaction, but devoid of any consideration of the obligations engendered by the terms of the governing instruments, would typically result in deficient, or wholly flawed, determinations.” T. C. Memo. 2012-269, at pp. 49-50 (Some citations omitted).

However, see my blogpost, “We Don’t Need No Stinkin’ Factors”, 5/15/12, wherein I discuss the Hewlett-Packard case.

Since all the parties to the deal are related and are under common control, Tax Court must take a hard look at the documents, because fudging is so easy when you’re on both (or all) sides of the table.

But Judge Goeke gives Pepsi a bye. “However, notwithstanding the greater scrutiny afforded to related-party transactions, we believe that disregarding petitioners’ international corporate structure based solely on the entities’ interrelatedness is, without more, unjustified.” T. C. Memo. 2012-269, at p. 52.

So we have a voyage through the papers, with testimony concerning how Pepsi’s lawyers got what amounts to a PLR from the Dutch Revenooers saying the advance agreements were debt for Dutch purposes.

At the end, after an exhaustive review of the terms of the advance agreements, Judge Goeke finds them to be equity. Pepsi has indeed hit the spot.

This case has to go to Second Circuit, and I’ll bet we get interesting learning there. Follow.

I take the title of this blogpost from the English band of that name, but it isn’t only Dylan Moody who will be blue. He’s blue enough, when his dependents’ exemptions and child tax credits are disallowed, despite Judge Goeke’s sympathetic declaration, in 2012 T. C. Memo. 268, filed 9/19/12.

It’s the usual Section 152(e)(2) story. This time Dylan has a divorce decree that gives Dylan the exemptions (doesn’t mention the credit, but that’s not at issue) and states that Tammy Jean, his loved-once, shall sign Form 8332 each year by January 10, so long as Dylan pays the child support. Tammy Jean is custodial parent, of course.

Dylan pays. Dylan attaches a Form 8332 for each of their two children, but neither is signed by Tammy Jean. He subsequently submits the divorce decree, but Tammy Jean didn’t sign that either. Besides, says Judge Goeke, it isn’t IRS’ function to police or enforce divorce decrees.

Of course, signature by the custodial parent is the essential element of Section 152(e)(2), so game over for Dylan.

But I’ve suggested before that the matrimonial Bar should make sure that 8332s are prepared, signed and filed at the point the divorce decree is issued. If the non-custodial spouse welshes on the child support, any tax refunds, among other monies, are attachable. And there’s jail time as well.

Some lawyers could get in trouble if the payor doesn’t get what she or he expected.

Judge Gustafson is an obliging fellow. Remember the boost he gave hapless ol’ Khadija Duma? Read all about it in my blogpost “Go For It”, 1/23/12. Now Judge Gustafson again extends a helping hand, sort of,  in an Order, Docket No. 30786-09, filed 9/18/12, the story of John Carter.

John applied for a Writ of Habeas Corpus Ad Testificandum back in February, but it was denied by then-Chief Judge Colvin, because John hadn’t provided for the costs of bringing him to The Home of the Bean and the Cod (that’s Boston, Mass) from his abode, in order to try his tax case.

Apparently, John was a guest of the people and the government at the time, and needed to be in the courtroom in The Hub to try his case. No go, so C.J. Colvin then handed John’s case over to Judge Gustafson.

Now Judge Gustafson deals with John’s problems. First, he told John to mail a list of his trial witnesses both to the Court and to IRS. John doesn’t bother with IRS (which is probably the root cause of his problems with IRS; IRS gets peevish when ignored), but sends Judge Gustafson the following sad tale: “…the letter does state that Mr. Carter will not be calling any witnesses, because of: financial difficulty; the adverse nature of some potential witnesses; and the logistical difficulty of locating helpful witnesses.” Order, p. 1.

Tough to try a case when you’re in the Stony Lonesome. But remember Robert L. Willson, the hero of Justice Holmes’ (The Judge Who Writes Like a Human Being) famous lecture on basis. See my blogpost “Basis for Dummies”, 11/24/11. IRS kindly waited until Willie was restored to society before trying his case.

But Willie had some barfly witnesses. John has none, as aforesaid. And apparently John may be away longer than Willie.

But Judge Gustafson is willing to go more than halfway: “We point out that, in part because of Mr. Carter’s apparent inability to pay for his own transport to a Boston trial (see order of March 21, 2012), we have scheduled his trial to take place at his prison, which is the most we can do to address his financial difficulty and facilitate his presentation of his case. As for locating helpful witnesses, we note (1) that this case has been pending for more than two and a half years, during which Mr. Carter has not located these witnesses, and (2) that he does not suggest (nor does it appear) that the situation will change in the future.” Order, p. 1.

So Judge Gustafson orders the Clerk of Tax Court to send a copy of John’s missive to IRS, and, lest IRS feel even more neglected, orders John to show  the Court that he’s sending IRS copies of all his correspondence.

And now, Tax Court goes to jail. That’s my kind of court.

And, A Footnote

Loretta Lea Wanat, formerly a highflyer with Northwest Airlines, doesn’t bother with tax returns for three years, the IRS assesses deficiencies, apparently without bothering with Section 6020 SFRs, Loretta Lea petitions Tax Court, and, the day before trial of the eponymous 7463, Loretta Lea hands IRS counsel purported returns for the three years at issue.

Now this should call for a “Don’t Ambush the IRS, Either”. But STJ Lew Carluzzo (the Judge who spells our name correctly), seeing the IRS didn’t use the famous Rule 70 “the Court expects the parties to attempt to attain the objectives of discovery through informal consultation or communication before utilizing the discovery procedures provided in these Rules”, decides to wade through Loretta Lea’s last-second impromptu 1040s. His exegesis is found in T. C. Sum. Op. 2012-92, filed 9/17/12.

But first he gives Loretta Lea and IRS a piece of his judicial mind: “Issues arising from deductions yet to be shown on a Federal income tax return are contemplated in the petitions filed in these cases. Ignoring what petitioner labeled as ‘preliminary’ returns submitted to respondent’s counsel after the petitions were filed, the returns on which the deductions here in dispute are claimed were not provided to respondent’s counsel until the day before trial. Sometimes late is just as bad as never.

“Petitioner’s procrastination, coupled with respondent’s restraint from using formal discovery in cases subject to a sec. 7463 election, in effect transformed one of the traditional roles of a trial, that is, to resolve factual disputes between litigants, into an exercise more in the nature of an examination of petitioner’s untimely submitted returns. A trial even as informal as contemplated under Rule 174(b) is ill suited for such purposes.” T. C. Sum. Op. 2012-95, at p. 4, footnote 3.

Loretta Lea made her beds, but it wasn’t where she lay her head; it was dog beds she made to sell. And STJ Lew gives her some deductions in that regard. Her real estate venture deductions fall apart on non-substantiation and failure to distinguish between personal and business use. And she held the realty for appreciation in value, not in a trade or business, so at best she’d have the Section 212 production-of-income deductions, but can’t prove them. There’s an appendix in which the purported deductions are shown, and STJ Lew sends her and IRS off to a Rule 155 bean-count.

But why should Tax Court judges, even special trial judges, engage in what amounts to return preparation? Loretta Lea should have gone to Liberty, Jackson-Hewitt or H & R Block; she would have saved the additions to tax for nonfiling and nonpayment. But maybe she thought that the $60 filing fee and an overnight to 400 Second St, N.W., was cheaper. Better not let the word get out, STJ Lew. You might find yourself  overwhelmed on April 14.

And now the footnote. See my blogpost “The Rule of Reason – Circular 230 Revisited”, 9/15/12. As I have been preparing marketed opinions for at least 35 years, I am somewhat loath to throw my old Section 10.35 language away; I rather think that my modification will be much less extensive than my blogpost suggested.

Of course, if and when the proposed Regulations go temporary, I won’t send the “cigarette pack” warning on every piece of paper or electron I send out, but I will use a variant in my opinions. While the proposed regulations are well and good, neither IRS nor Treasury can overrule Section 6664(c). As long as that is the law, a serious disclaimer is in order, at least in marketed opinions, and not just for avoiding penalties either.

 IRS Drops the §10.35 Cigarette Pack Warning

In a burst of realistic thinking, the IRS has finally decided to get rid of the §10.35 “don’t rely on this to avoid penalties” boilerplate warning in Circular 230. The good news is to be found in REG-138367-06, notice of proposed rulemaking and public hearing.

You can read all about it here.

Finally realizing that the “cigarette pack” warning was being pasted on every e-mail every practitioner sent, whether it had anything to do with taxes or not, IRS decided to dump the whole thing. Nobody understood what it meant outside the tax profession, anyway. And if I sent a non-professional friend an e-mail on my office stationery saying “let’s meet for drinks tomorrow”, he or she would ask me “what do you mean I can’t use this to avoid penalties on my taxes?”

IRS also wants to get rid of the reliance-marketed tax opinion conundrum, which made us try to figure out exactly into what pigeonhole our opinions fitted, wasting time and energy.

Best of all, the proposed regulations establish a reasonable standard of competency, taking all facts and circumstances into account before hanging us out to dry; but with a heightened standard in abusive situations.

I’ve written a bunch of marketed opinions under the present §10.35, with no ill effects to person or property. I’ve got the boilerplate in my word processing software. But I can’t say I’ll be sorry to get rid of the rigamarole. I’ll have to put in a simpler statement when the new regulation comes into effect, and, as always, concentrate on the facts and the law.

Oh, and a word of warning. If a practitioner fails to file four out of five annual returns the practitioner needs to file for self, or misses filing in five out of seven periods where returns are required more times than once annually (like 941s, 1040-ES) for self, then IRS can invoke expedited suspension. And reapplication for reinstatement, if you don’t win administratively or before an ALJ, can’t be made sooner than five years.

But read, heed and file your comments with Treasury electronically via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-138367-06) by November 16, 2012. And if you want to attend the December 7, 2012 public hearing in the auditorium at 1111 Constitution in Our Nation’s Capital, get a hold of Oluwafunmilayo Taylor at (202) 622-7180, and give him (or her) your vital statistics.

It may not be as much fun as Laura Nyro’s 1968 hit “Stoned Soul Picnic”, but surry down anyway.

That’s the problem for Enterprise Water Works, Docket No. 20441-12L, filed 9/14/12. No decisions out of Tax Court today, and no Designated Orders, so this is the best of the plain-vanilla orders, from Chief Judge Thornton.

Enterprise files what looks like a timely petition, but it’s signed by “Tom B. King, ‘CPA – POA’”. Order, P. 1.

Chief Judge Thornton checks the shortlist of Tax Court admitteds, that miniscule number who made their way through the eye of the needle that is the admissions examination (see my blogposts “A Book and A Modest Proposal,” 5/22/12, and “Another Argument,” 6/7/12), and doesn’t find Tom’s name among the elect.

So he admonishes the waterworkers thus: “The Tax Court does not recognize powers of attorney.” Order, p. 1. Throw away those Form 2848s, guys.

He then directs the powerless waterworkers to “…file an amendment to petition, duly signed and bearing the original signature of its president or another officer authorized to institute this litigation on its behalf, ratifying and affirming the filing of the petition on its behalf.” Order, p. 1.

Chief Judge Thornton mercifully directs the Clerk of the Court to send a form to the waterworkers for the proper person to sign, ratifying whatever Tom did, because obviously the waterworkers will never get the paperwork right, and Tom is not among the chosen few who can advise them.

The relevant Rule is 23(a)(3), which requires that all papers filed with Tax Court shall be signed as follows: “The original signature, either of the party or the party’s counsel, shall be subscribed in writing to the original of every paper filed by or for that party with the Court, except as otherwise provided by these Rules. An individual rather than a firm name shall be used, except that the signature of a petitioner corporation or unincorporated association shall be in the name of the corporation or association by one of its active and authorized officers or members, as for example “‘Mary Doe, Inc., by Richard Roe, President’”.

And waterworkers, see also Rule 33. An unsigned pleading can be stricken, and if filed for an improper purpose can result in sanctions to the signer.

That’s Special Trial Judge Daniel A. (“Yuda”) Guy. Back on 4/24/12, when STJ Guy was appointed to the Tax Court bench, I greeted his appointment with the following comment: “We look forward to many interesting opinions from STJ Guy.” See my blogpost “Welcome, Judge Guy”, 4/24/12.

Well, it’s only a designated order, but it is interesting. It’s Diamond Packaging Corporation, Docket No. 27463-10, filed 9/13/12, and it deals with playing nice during informal discovery. The basic documents are Rule 70(a) and Branerton Corp. v. Commissioner, 61 T.C. 691, 692 (1974).

IRS made informal document requests from six of Diamond’s corporate clients, trying to track down the increasing research activities for which Diamond had claimed Section 41 tax credit for the years at issue.

Diamond replies with a motion for a protective order, claiming “…respondent’s actions circumvent the Court’s rules and procedures governing discovery, are unduly burdensome, and have unnecessarily tarnished petitioner’s reputation.” Order, p. 1.

Nope, says STJ Guy. “In the light of the record presented, we reject petitioner’s argument that respondent’s informal requests for documents circumvent the Court’s rules governing discovery. To the contrary, the Court has not prescribed rules specifically relating to informal pretrial discovery of potential witnesses. Moreover, it has been the Court’s longstanding policy to encourage the parties to attempt to attain the objectives of discovery through informal consultation and communications. There has been no showing that respondent’s requests are tantamount to the more formal administrative summons…. Although petitioner complains that respondent did not consult with petitioner before issuing the informal requests, the Court is not persuaded that this factor provides justification for a protective order.” Order, p. 2 (citations omitted).

Besides, four of the six clients Diamond wanted to protect are ready, willing and able to comply with IRS’ request, and raised no objection. The other two said they had nothing of the kind IRS sought, and IRS said they’re down with that.

“Petitioner’s final argument, that respondent’s informal document requests create ‘a stigma against petitioner that has already harmed its business interests’, is also unavailing. We agree with respondent that alleged harm to a party’s reputation generally is not sufficient to show good cause for the issuance of a protective order under Rule 103. See Willie Nelson Music Co. v. Commissioner, 85 T.C. 914, 921 (1985) (a showing that information in the public record would harm a party’s reputation is generally not sufficient to support the issuance of a protective order under Rule 103). Moreover, petitioner has failed to demonstrate any harm (financial or otherwise) that it has suffered or will suffer if its motion for protective order is denied. Id. at 925. Petitioner’s mere allegations of harm are insufficient to demonstrate good cause.” Order, at p. 2.

Note that Diamond doesn’t claim the clients don’t have relevant information or that IRS is on a fishing expedition, digging for irrelevant information.

So no dice, Diamond. No protective order. Play nice. Welcome, Judge Guy.

Judge Kroupa blows off Cigna Corporation in T. C. Memo. 2012-266, filed 9/13/12. The issue was whether Cigna could reserve for maximum guaranteed death benefits when it was reinsurer, using a method not approved at the time by the relevant State regulator, although subsequently it was generally adopted.

IRS conceded the deficiency, and the parties stipulated that IRS would accept Cigna’s numbers for every year except those that pre-dated the year at issue. Even though those years are not before the Court, Cigna claims it’s vital for the life insurers to know whether the magic method can be used for the years before it was adopted.

Nope, says Judge Kroupa. “It rests within our discretion to issue an opinion on the merits even where the Commissioner concedes that there will be no deficiency for the years before the Court.” T. C. Memo. 2012-266, at p. 7. But Cigna shouldn’t get too elated.

“Petitioner suggests the ‘interests of justice’ entitle petitioner and other taxpayers to an opinion resolving the tax reserve issue. See McGowan v. Commissioner, 67 T.C. at 604, 608. We disagree. In McGowan we were asked to decide whether a compulsory employee contribution constituted a State income tax that the taxpayer could deduct. Id. at 602. The Commissioner conceded the deficiency and asked us to enter a decision in the taxpayer’s favor. Id. We rejected the concession and issued a substantive opinion at the taxpayer’s request. Id. at 608. The interests of justice compelled us to issue the substantive opinion. See id. at 607. First, unlike here, we found that the unresolved issue would arise in the upcoming tax year for thousands of taxpayers. Id. at 601, 608. A substantive opinion would consequently alleviate confusion in an area that lacked clarity. Second, the taxpayer rejected the unilateral concession in its entirety. Id. at 606.” T. C. Memo. 2012-266, at pp. 9-10.

But in this case, Cigna agreed to the concession; the reserve issue affects only a small group of taxpayers, not thousands; the new method is already in place and IRS will allow it for future years, so it is only past years (not before the Court) that are at issue. While it might be nice for Cigna if Tax Court sorted out those years, to do so would be an advisory opinion, and we don’t give those.

In short, Cigna, you won, go home. And on the way, see my blogpost “Victory is Not Vindication,” 5/1/12, where Judge Kroupa teaches the same lesson.

Means no Section 7430 relief. That’s the story of Terry L. Worthan, T. C. Memo. 2012-263, filed 9/12/12.

The fight started over a defunct machine tool company. Trust fund taxes were paid late, with a request to allocate the payment to trust fund taxes (employees’ share), per Rev. Proc. 2002-26. IRS, of course, applied the payment to non-trust fund payroll taxes (employer’s share), and presents Terry with a NFTL.

Judge Marvel recounts the lengthy saga, wherein William Holman, Terry’s representative duly admitted to practice before IRS, runs up $11K in fees getting IRS to straighten out the payment, which finally happens.

Bill wants the money under Section 7430, because he prevailed in an administrative proceeding. IRS says “no, collection is not administrative, and anyway, you didn’t prevail.”

Judge Marvel doesn’t rule on who prevailed.  “Section 7430(c)(5) defines the term ‘administrative proceeding’ as ‘any procedure or other action before the’ IRS. Pursuant to section 301.7430-3(a), Proced. & Admin. Regs., an administrative proceeding does not include ‘[p]roceedings in connection with collection actions (as defined in paragraph (b) of this section)’. A collection action includes any action that the IRS takes to collect a tax or any action a taxpayer takes in response to the IRS’ act or failure to act in connection with collection of a tax. See sec. 301.7430-3(b), Proced. & Admin. Regs. Specifically, collection actions include actions taken by the IRS to collect a tax through the filing of a notice of lien with respect to a taxpayer and actions the taxpayer takes in response to the IRS’ filing of a notice of lien.” T. C. Memo 2012-263, at pp. 13-14.

Here there was a notice of lien, and everything took place without litigation. Thus, no recovery of administrative costs.

Hope the client paid you, Bill.

Next is a reminder to taxpayers offering collection alternatives, from The Judge Who Writes a Like a Human Being, The Great Dissenter, Judge Mark Holmes. The case is Thomas W. Brombach, T. C. Memo. 2012-265, filed 9/12/12. Tommy owes IRS $150K, accumulated over years; he said he would pay when the number was $60K, but never did, and the interest kept mounting.

Tommy had already lost in Tax Court on the $60K many moons ago, so abuse of discretion is the issue here.

Tommy offers IRS $28K on an OIC, but IRS says his RCP (reasonable collection potential, after applying the manual number for living expenses) is $113K, and tells Tommy no-go, and serves a levy.

I’ll skip Judge Holmes’ lengthy assurance to Tommy that his present wife will not lose her share of marital property, and his unpacking, at great length, of the differences between Tommy’s RCP and IRS’ (for Judge Holmes doing his best unpacking, see my blogpost “The Sum of Its Parts”, 3/12/12).

Tommy is still way light on the numbers, despite Judge Holmes’ massage thereof.

The issue is whether the IRS had any obligation to respond to Tommy’s $28K with anything but a flat rejection and a levy. “The Appeals officer credibly testified that ‘We were so far apart that we didn’t get into * * * the negotiation of one or two particular items [that] would have brought us together.’ Citing this refusal, Brombach makes one final procedural argument–that the Commissioner failed to give him an opportunity to negotiate or amend his offer before issuing the notice of determination, and that this was itself an abuse of discretion.” T. C. Memo. 2012-265, at p. 26.

Now “…Brombach doesn’t point us to, and we have not found, any legal authority that  mposes a duty on the IRS to negotiate a collection alternative in any particular way. He does point to one source that seems to impose a lesser duty on the Appeals officer–a duty to give the taxpayer a chance to match the RCP before outright rejection. Brombach says the Commissioner’s offer-in-compromise explanation packet states: ‘The examiner may decide that a larger offer amount is necessary to justify acceptance. You will have the opportunity to amend your offer.’ Form 656-B, Offer in Compromise Booklet (March 2009), at 15. This language suggests that if the examiner finds that a higher offer might be accepted, he’ll at least give the taxpayer a chance to take it or leave it. This is not what happened in Brombach’s case. He sent in an offer and received a rejection. While it’s understandably frustrating to Brombach that the guidelines weren’t followed in his case, instructions and other IRS publications are not authoritative sources of federal tax law. Taxpayers must look to authoritative sources of Federal tax law such as statutes, regulations, and judicial decisions and not to informal publications provided by the IRS.” T. C. Memo. 2012-265, at pp.26-27 (citations omitted).

So Tommy is out. “Brombach hasn’t shown that an opportunity to amend his offer is required by the Constitution or by any statute, regulations, or caselaw. The opportunity to amend an offer is not a taxpayer’s right but is within the Commissioner’s discretion, and the Commissioner has no binding duty to negotiate with a taxpayer before rejecting his offer.” T. C. Memo. 2012-265, at p. 28.

But see my blogpost “A Busy Day”, 9/10/12, with the sad story of Marcius J. Scaggs and Andrea L. Scaggs. “Don’t Ambush the Taxpayers”,  IRS. Your booklet is misleading. Why not make it clear that “you may have a chance to amend your offer, but maybe not, if you’re too low or play games”?

Still, the better path is “Agree with thine adversary whilst thou art in the way, lest the judge hand thee to the bailiff, and ye be cast into prison. Truly I tell thee, thou shalt not be let out until thou hast paid the last farthing.”  See my blogpost “Give It Your Best Number”, 4/9/12.