Multiple Taxpayer Situations. The Treasury Decision states that the regulations apply to multiple taxpayer situations such as joint returns. Presumably, it also applies to affiliated groups filing consolidated returns. The regulations do not address whipsaw situations, innocent spouse situations or divorced spouse situations. We believe that in each of these latter situations, any of the parties should be able to make a qualified offer as to that taxpayer’s liability without regard to the actions of the other; i.e., one taxpayer may make a qualified offer in any amount whether or not the other makes a qualified offer and, if both make qualified offers, it is irrelevant whether or not the sum of the two qualified offers would equal 100% of the tax at issue.The taxpayers involved have net worths below the maximum allowable, which often indicates a lower level of tax sophistication or savvy. Each of the situations (whipsaw, innocent spouse and divorced spouse) often involves a level of adversity, if not hostility, in the parties’ relationship; accordingly, there is often not cooperation or coordination of the parties. Often, with less sophistication and/or non-cooperative parties, the IRS will have more facts and better legal analysis, so that it is in the best position of any of the three parties to evaluate the merits of the case.
Let us illustrate some possible scenarios. A sells his or her sole proprietorship to B. The IRS audits A and, as a result of a valuation or allocation dispute, audits B. The IRS views itself as a stakeholder as to the outcome, but independently evaluates that it has an 80% chance of success against A, and it has a 20% chance of success against B. We believe that B should be able to make a qualified offer of 20% of the tax involved. If the Service accepts, then it will ultimately collect between 20% and 120%. Based on these facts, the IRS should seek 80% in settlement with A; and, if A evaluates the case as the Service does, A will settle and the Service will collect 100% of the tax. If this is an "all or nothing" issue which is litigated, the Service could collect 120% of the tax. There is no policy reason to subject B to the time, effort and cost of a trial where it was willing to make a reasonable offer that fully evaluated the hazards of litigation. Depending on the precise facts, B may not otherwise be able to recover legal fees as a prevailing party.
Alternatively, on these facts, if A makes a qualified offer of 80% of the tax, the Service should accept it. In an "all or nothing" issue, the Service may reject the offer because it will prevail 100% against A and will likely get nothing from B in litigation and believes it cannot settle with B. In that instance, the Service should bear the burden, if it requires a taxpayer to litigate who makes a full and fair offer and comes out no worse than the offer.
With taxpayers who meet the net worth requirement, the issues will often not be novel. Litigating such a tax case nonetheless often requires taking time off work, dealing with a high level of anxiety and incurring extraordinary legal and accounting fees. Accordingly, it is appropriate to minimize the economic burden of legal fees for taxpayers who make reasonable offers that fully evaluate the merits of the case.
Similarly, if a spouse is "innocent," he or she would have no liability for the other spouse’s tax liability. If the innocent spouse made a qualified offer, it should be accepted or the Service should pay the legal fees if the litigated liability was less than the offer.
The same reasoning applies to divorced spouses. Suppose one former spouse deducts an "alimony" payment which the recipient spouse does not treat as includible. Either spouse should be able to make a qualified offer, and the Service should risk paying legal fees if it rejects an adequate offer.
