9th Circuit: Contract Law Trumps NOL

Interesting decision from the Ninth Circuit:  Johnston v. Commsisioner, No. 04-73833 (9th Cir. 9/1/06):

This case presents an attempt at “post-deal negotiation.” It doesn’t usually work in business. Why should we treat the tax collector differently?

Specifically, we address the following question: when a taxpayer offers to pay the Internal Revenue Service a sum certain to “fully resolve all adjustments at issue” for certain tax years, and the Commissioner accepts his offer, may the taxpayer then apply net operating losses (“NOLs”) to reduce his agreed payments under the settlement? Here, the answer is no. The taxpayer did not reserve the right to use NOLs in the settlement agreement, nor did he raise the issue of using the NOLs before the Commissioner accepted his settlement offer. A deal is a deal, even with the tax man. Therefore, we affirm....

[W]hen we apply ordinary principles of contract law to Johnston’s offer and the Commissioner’s acceptance, it is plain that Johnston may not use his NOLs to reduce his liability under the settlement.