OIC Quick Sale Value in a COVID-19 World
I am sorry Sir, the IRS rejected your Offer in Compromise (OIC) because you are “Land Rich, Money Poor”. The colloquialism describes a taxpayer with little or no disposable income but who owns real property with ample equity. This type of taxpayer is an ideal OIC candidate – if it were not for his equity in real property. Sadly, in valuing equity for OIC purposes, OIC Examiners are often quick to apply the conservative Quick Sale Value (QSV) formula of 80% of Fair-Market-Value (FMV) in their OIC financial analyses; essentially, a 20% reduction in value from FMV. Societal currency is typically an afterthought, but COVID-19 may have changed that.
COVID-19 created an unprecedented and uncertain real estate marketplace. But more importantly, it touched the personal lives of everyone, from Treasury personnel to CEOs and to, yes, the “Land Rich, Money Poor” taxpayer. Its collective reach may loosen the IRS’s grasp to valuing equity at 80% of FMV for OIC purposes. Practitioners have long argued that the IRS’s overly uniform application of National Standards and its strict 80% of FMV valuations are out-of-touch with economic realities. But COVID-19 makes it impossible to be out-of-touch. It is an all-encompassing national emergency that sets a stage from which even the “aristocratic” OIC Examiner can relate. That common connection coupled with some wiggle room in the Internal Revenue Manual (IRM) creates a good opportunity for the “Land Rich, Money Poor”– once excluded from the OIC fraternity – to now join it.
The IRM defines QSV as an “estimate of the price a seller could get for [an] asset in a situation where financial pressures motivate the owner to sell in a short period of time…” It represents what a seller could get for his or her property if they had to dispose of it in a short period of time. The IRM defines a short period of time as “usually 90 days or less.” For over a decade, the IRS has maintained its belief that a 20% discount on property for OIC purposes is reasonable under “normal” market conditions. Today’s marketplace however is anything but normal.
Fortunately, the IRS recognizes that special circumstances warrant deviation from the 80% calculation – either higher or lower. The IRM explains that a “higher or lower percentage may be applied in determining QSV… depending on the type of asset and current market conditions.” The IRM offers an example of where a higher percentage, or no percentage at all, might be applied – “QSV [may] be the same as FMV [or 90% of FMV]… this is occasionally found to be true in real estate markets where real estate is selling quickly at or above the listing price.” Logic dictates that if a higher percentage may be used, so then a lower percentage may be used – depending on current market conditions.
Current market conditions are now overrun with rising unemployment rates, a decline in consumer spending and struggling housing sales. Real estate supply is struggling because, in part, Americans are staying home, not traveling and there is a certain uncomfortableness with face-to-face showings. The recent housing data shows a slide down a slippery slope with an uncertain end in sight. It suggests that sellers – on a short (“pressured”) timeline to sell (say 90 days or less) – may be forced to offer steeper discounts to dispose of property; for OIC purposes, that translates to a situation where a greater reduction in value beyond the 20% discount may be warranted.
When making an OIC argument for a discount greater than 20%, a taxpayer may rely on two recent reports published by the Commerce Department and Fannie Mae. Both highlight a decline in home sales, accompanied by lower prices. Commerce noted that new home sales fell about 15%, the largest decline in almost 7 years, and sales fell almost 10% from a year ago (and that the data does not include the cancellation of sales contracts). Even an OIC Examiner cannot dismiss his own institution’s data.
Further, Fannie Mae reports that its consumer confidence index fell almost 12%, leading its Chief Economist to say that attitudes about the current housing market deteriorated markedly. Those that who thought it was a good time to sell fell nearly 30%, those who thought it was a good time to buy fell 7%, and those not worried about their jobs fell nearly 20%, leading to fewer mortgage applications (down 11% this year and 24% from this time last year). Commence and Fannie Mae lay the groundwork from which the “Land Rich, Money Poor” taxpayer may frame their OIC argument.
The psychology of COVID-19 may also play a role. In addition to hard data, our COVID-19 mindsets may also support a deviation away from the 80% of FMV formula. For the first time, “Land Rich, Money Poor” taxpayers and all OIC Examiners share a commonality. From stay-at-home orders to teleworking to wearing masks to using hand sanitizer, taxpayers and IRS personnel face the same hardships and shared the same concerns – for themselves and their families. Psychologically, the COVIN-19 reality affected everyone, and everyone can relate to it. It is hard to believe that this shared experience would not bleed over into the discretionary aspects of OIC financial analyses. That is, if a taxpayer shares a story of COVID-19 hardship, surely the OIC Examiner can relate.
To conclusively deny an adjustment against this backdrop suggests that OIC financial analyses (“somehow”) operate uninfluenced by COVID-19. That is simply untrue — just ask IRS Service Center employees. No person and no institution are immune. “Land Rich, Money Poor” taxpayers should draw upon that common hardship in negotiating the estimated value of their real property. The more one can relate, the more empathy one can have. If the QSV estimate cannot be recalibrated for the greatest pandemic of our lifetime, then it is not a market “estimate” at all – it is merely a constant variable. COVID-19 affects everything in all respects – from paychecks to college graduations – and yes, it even affects the numbers written on a Form 433-OIC.
All the IRS can say is: “No”, and if they do so categorically, they are saying, COVID-19 never happened.