Clients often ask me whether the IRS takes steps to slant the facts and law in the governments favor. I often explain that, as with most legal matters, there is really no right or wrong answer until the court makes a final determination and all appeals are exhausted. But when I say this I often think of all of the cases where courts have ruled against the IRS, the IRS lost the case on appeal, and the IRS simply rejected the rulings – justifying their defiance on a slanted view of the facts and an illogical interpretation of the law. There are numerous examples of this, but the IRS non-acquiescence in In re Macher case brought the issue back to mind so I will discuss the topic in light of that case.
FACTS & PROCEDURAL HISTORY
The Macher case involves the IRS practice of not considering offers-in-compromises submitted by taxpayers who are undergoing bankruptcy (the offer-in-compromise is essentially a means for requesting that the IRS to accept less than what is owed). Because of this IRS practice Macher did not complete the IRS Form 656, which is the form used to submit an offer in compromise. Instead Macher asked the Bankruptcy Court to exercise its statutorily granted equitable powers to order the IRS to consider the taxpayers plan of reorganization as an offer in compromise. The Bankruptcy Court made that order and, on appeal, the District Court affirmed the order. The IRS issued a two-page action-on-decision to discount both courts rulings and to state that the IRS will not follow either ruling. The analysis in this two page decision is slanted, illogical, and it fails to fully address the applicable law.
The IRS decision starts by defining the issue as a question of the Bankruptcy Courts authority. In support of this argument the IRS decision cites to a non-bankruptcy related Tax Code section and the supporting Treasury Department Regulation, both of which define the IRS authority to compromise tax liabilities. By making this statement about the IRS authority the IRS seems to be implying that its authority is greater than the authority vested in the Bankruptcy and District Courts. That is just not the case. In bankruptcy matters, including tax matters arising during the bankruptcy process, Congress has vested power to resolve the matter in the Bankruptcy Courts, not the IRS. Moreover, the IRS opinion did not mention the power of the District Court that upheld the Bankruptcy Courts order, but we will ignore that issue as it is more complex.
The IRS decision then goes on to discount the Bankruptcy Code section that grants the Bankruptcy Court the power to make orders to carry out the intent of the Bankruptcy Code. The IRS decision cites dicta (legal term referring to ideas pulled out of a case that were not pertinent to the holding of the case; ideas which are often suspect because they are often taken out of context) from two cases that have no bearing on the present case. One cite states that the Bankruptcy Courts powers must be exercised within the confines of the Bankruptcy Code (this would mean that the Bankruptcy Court could make no order involving taxes that isn’t specified in the Bankruptcy Code, which is just not true) and the other states that the Bankruptcy Courts powers must not override specific provisions of the Bankruptcy Code (which seems to imply that there was some provision of the Bankruptcy Code regarding the Bankruptcy Courts powers that was overridden, which was not the case here).
What the IRS decision failed to mention is that Congress specifically enacted a rule that prohibits any agency or person from treating a debtor in bankruptcy different due to the fact that the debtor is in bankruptcy. It is as if the IRS does not recognize that refusing to consider otherwise valid offer in compromise from a debtor in bankruptcy while considering otherwise valid offers in compromises from non-debtors in bankruptcy violates that statutory provision. In addition, the IRS decision fails to consider how the IRS practice violates the taxpayers Constitutional rights, such as how this practice is just another instance where the government is treating similarly situated persons differently, how this practice is an arbitrary taking of the taxpayers property, or how this practice effectively prohibits taxpayers in bankruptcy the opportunity to present and defend their case. Perhaps the IRS should re-frame the issue in their decision as: whether the IRS has the authority to treat taxpayers undergoing bankruptcy less favorably than those not undergoing bankruptcy or whether the IRS has the authority to take taxpayers property without affording them any due process of law.
True to form, the IRS decision then concludes with an irrelevant holding. I cite it here just so that we can all enjoy the true splendor of how irrelevant the conclusion is: Offers in compromise submitted on Forms 656 by taxpayers who are currently in bankruptcy will continue to be returned as non-processable under the procedures set forth in [the IRS Treasury Regulation and IRS Policy Manual].
As you will recall this case was about a taxpayer that did not submit a Form 656. That was the whole point. The taxpayer skipped the Form 656 and asked the Bankruptcy Court to exercise its equitable powers.
The IRS conclusion continues: Payment proposals submitted by taxpayers in bankruptcy will be considered by Insolvency employees in the context of their review of proposed plans, subject to the time constraints and other factors that are unique to bankruptcy litigation, and will be accepted when it is in the interest of the United States to do so.
Again, this conclusion does not address the Bankruptcy Courts equitable powers. The IRS decision indicates that the IRS does and will not acquiesce to the exercise of the Bankruptcy Courts equitable powers (by listing the word nonacquiescence at the bottom of the decision), yet nowhere in the IRS decision does the IRS actually state that the IRS will not follow the Bankruptcy Courts order.
My take on the IRS decision not expressly stating a conclusion is that the authors of the IRS decision know that the IRS position is incorrect. The IRS does not have the power to ignore an express mandate by the Bankruptcy and District Courts that was made pursuant to a law enacted by Congress or to violate the taxpayers Constitutional rights. It will be interesting to see the fallout when another taxpayer asks a Bankruptcy Court to exercise its equitable powers in a similar fashion.
So for now the bottom line is that the next time a client asks me if the IRS takes steps to slant the facts and law in the governments favor I will simply respond by saying: “yes, yes they do.”