Summary:
Prior to filing Chapter 13, the Debtors entered into an Offer in Compromise (“OIC”) with the IRS, agreeing to make four installment payments of $1,000.00 each. After making the first due payment, the Debtors filed bankruptcy four months later and the IRS filed a secured claim for $21,033.15 and an unsecured claim for $83,289.35. The Debtors objected asserting that the IRS should remain bound by the terms of the OIC pursuant to the anti-discrimination provisions of 11 U.S.C. § 525(a). The IRS countered asserting that the terms of the OIC specifically provided that if the Debtors filed bankruptcy “before the terms are fully met, any claim the IRS files in the bankruptcy proceedings will be a tax claim”, interpreting the term “tax claim” to mean the full amount owed prior to the OIC.
The bankruptcy court held that this term was ambiguous and that it was required to interpret the term to avoid an illegal result. See Huttenstine v. Mast, 537 F.Supp.2d 795, 801 (E.D.N.C. 2008). Since the Internal Revenue Service’s “acceptance of an offer to compromise will conclusively settle the liability of the taxpayer specified in the offer” Treas. Reg. § 301.7122-1(e)(5), the bankruptcy court held that voiding of the OIC would violate § 525(a) and the Poof of Claim was allowed only as to the OIC amount.
Commentary:
It is also useful to note IRS bases its refusal to consider an OIC made by a Debtor in a bankruptcy is that the “[t]imeframes for the consideration of claims and payment proposals in a bankruptcy case do not mesh with the bulk processing operations established for the high volume of administrative offers in compromise received by the Service” See IRS Office of Chief Counsel Notice on Offers in Compromise in Bankruptcy (Below). The rationale does not apply once the OIC has been accepted.
For a copy of the opinion, please see:
Mead- Validity of Pre-Petition Offer in Compromise of IRS Claim.pdf
IRS Office of Chief Counsel Notice on Offers in Compromise in Bankruptcy
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