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March 1, 2004
 

Code Section 7430 

Qualified Offer Binding upon Taxpayers Once the IRS Accepts 

Taxpayers could not reduce the amounts stated in their qualified offer to the IRS to settle their tax liabilities after the IRS accepted the offer, because the offer was a binding contract. Johnston v. Commissioner, 122 T.C. No. 6 (2/11/04). 

On January 31, 2003, Thomas and Shirley made a qualified offer under Code Section 7430(g) to resolve their tax liabilities for 1989, 1991, and 1992 (which at the time were all docketed cases in Tax Court). Their offer stated in part that the offer was made to fully resolve their liabilities. On February 10, 2003, the IRS accepted the qualified offer. After the IRS accepted the offer, the Johstons asked the IRS if they could reduce the agreed-upon amounts by applying net operating losses (NOLs) from 1988, 1990, 1993, and 1995. Thereafter, they filed an amendment to their petition in which they claimed deductions for the NOLs. 

The IRS contended that the deductions should not be allowed, arguing that its acceptance of the taxpayers' qualified offer completely resolved the issue of the Johstons' liabilities.  

The Johstons countered that their qualified offer included only items in dispute at the time the offer was made. Because the issue of the NOLs was not in dispute at that time, they claimed that the qualified offer excluded those amounts, and thus that they could take the deductions. 

The Tax Court agreed with the IRS. The court noted that the purpose of the Code's qualified offer provision is to encourage settlements by imposing litigation costs on the party not willing to settle. As a result, the court concluded that a settlement reached by way of a qualified offer should be treated the same way that the court treats other kinds of settlements. According to the court, under well-established principles of contract law, settlements are effective and binding once there has been an offer and acceptance. Because the Johstons' qualified offer was in fact an offer to settle all of their tax liabilities, and because the IRS accepted it, the court held that the Johstons were precluded from raising new issues that changed the terms of the agreement. 

The court also noted that under Reg. Section 301.7430-7T(c)(3), a qualified offer: (1) must specify the dollar amount for the liability; (2) must be with respect to all adjustments at issue and only those adjustments; and (3) must fully resolve the taxpayer's liability. The court said that under the third criterion, if the Johstons had wanted to apply the NOLs to reduce the liabilities set forth in the qualified offer, they should have at least stated that the offered amount was subject to reduction by the NOLs. Otherwise, the court stated, the third criterion would be meaningless.

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