An IRS full unilateral concession of the case is not a settlement, per the Ninth Circuit, and thus the taxpayer was prevailing party for purposes of Knudsen v. Commissioner, No. 13-720077, 2015 TNT 136-13 reversing the Tax Court’s contrary holding in an earlier ruling in the same case (TC Memo 2013-87).
The issue in this case involved the issue of the IRS’s change of mind regarding granting relief to taxpayers who asked for equitable innocent spouse relief pursuant to IRC §6015(f) more than two years after initial contact. The IRS, in Reg. §1.6015‑5(b)(1) took the position that such a claim must be filed within that two year period.
In June of 2011 the IRS issued Chief Counsel Notice CC-2011-017 where it announced it would expand the two-year period under that regulation and that it would not enforce the two year deadline in cases before the Tax Court.
Prior to that date, in December of 2008, Barbara Knudsen filed a Form 8857, Request for Innocent Spouse Relief, requesting relief from liability. She had received notices of intent to levy in June 2005, making her request more than 2 years after contact, thus after the due date in Reg. §1.6015-5(b)(1). The IRS denied her request based on that fact.
As the panel opinion noted:
On April 21, 2010, Knudsen made a "qualified offer," pursuant to 26 U.S.C. § 7430(g), to settle her tax liability for $50 per year, for each of the four years at issue. The IRS did not respond to the offer, which expired after ninety days, by operation of law. The case was set for trial on the Tax Court's calendar for March 14, 2011; the parties proceeded with discovery, and both Knudsen and the IRS submitted pretrial memoranda. Prior to the scheduled trial date, the IRS notified Knudsen's counsel that it would concede her entitlement to innocent spouse relief but for her failure to comply with the two-year statute of limitations in Treas. Reg. § 1.6015-5(b)(1).
The case proceeded to trial, but before the actual trial took place (but after discovery and incurring significant expense) the IRS change of position took place and the IRS conceded the case entirely.
A taxpayer will receive an award of fees if the requirements of the “qualified offer” provisions of IRC §7430(g). First, the taxpayer must make a qualified offer during the period beginning on the date the first 30 day letter is sent to the taxpayer and ending 30 days before a Tax Court case is first set for trial.
To be a qualified offer, the offer must meet the following criteria:
- The offer is made by the taxpayer during the qualified offer period;
- The offer specifies the offered amount of the taxpayer's liability (determined without regard to interest);
- The offer is designated at the time it is made as a qualified offer for purposes of this section; and
- The offer remains open during the period beginning on the date it is made and ending on the earliest of the date the offer is rejected, the date the trial begins, or the 90th day after the date the offer is made.
If a qualified offer is not accepted by the IRS and the Tax Court eventually determines there is a liability of less than the amount of the qualifying offer, the taxpayer is to be awarded reasonable fees pursuant to IRC §7430, regardless of whether the IRS’s position was or was not substantially justified. Thus, when the IRS rejects a qualified offer it has no only to prevail, but also be awarded more than the taxpayer was willing to settle for.
But, IRC §7430(c)(4)(E)(ii)(I) provides that it will not apply to any judgment issued pursuant to a settlement. And, in this case, since the IRS was unilaterally conceding a position that had been upheld as valid in other litigation the taxpayer clearly would not be able to show the original IRS position unreasonable.
The IRS notified the Tax Court and the taxpayer that it was waiving the two-year statute issue on the case. The Tax Court ordered the IRS and taxpayer to file a supplemental stipulation of settled issues—and, since the IRS had effectively agreed the taxpayer was eligible for relief except for the two-year issue previously, there clearly wasn’t going to anything for the Court to decide.
But the IRS notified the Tax Court that the taxpayer was not willing to enter a revised stipulation, but it confirmed that she was entitled to relief.
The Tax Court, in its original opinion, held that the unilateral concession amounted to a settlement under §7430(c)(4)(E)(ii)(I). While it granted the taxpayer innocent spouse relief, it found the qualified offer rules did not apply and the taxpayer was not to be awarded fees.
The Ninth Circuit panel did not agree. It noted:
Accordingly, in this case, we are asked to determine whether the IRS's unilateral concession is considered a settlement within the meaning of section 7430(c)(4)(E)(ii)(I). We conclude that it is not and that Knudsen, therefore, is the prevailing party, entitled to reasonable costs and fees, pursuant to section 7430.
The Ninth Circuit noted that a settlement is a contract and thus looked at whether a contract existed in this case when the IRS unilaterally conceded the only issue it was disputing. The Court found:
A settlement is a contract, and its enforceability is governed by familiar principles of contract law. Jeff D. v. Andrus, 899 F.2d 753, 759 (9th Cir. 1989). The formation of a contract generally requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration. See Restatement (Second) of Contracts § 17(1) (1981). Here, there was no exchange, and it is undisputed that there were no negotiations regarding settlement. Instead, Knudsen made a qualified offer to settle her tax liability for $50 per year for each of the four years at issue, which expired after ninety days when the IRS failed to respond. See 26 U.S.C. § 7430(g)(1)(D). Much later, and only after the case had been submitted to the Tax Court fully stipulated, did the IRS unilaterally concede the case. Even then, the parties never entered into a supplemental stipulation of settled issues, despite the fact that Knudsen had then succeeded on both the merits and the timeliness of her claim for equitable relief.
Thus, the Ninth Circuit sent the case back to the Tax Court.
While the facts of this case are unique, advisers should remember the existence of this provision in the law. Taxpayers who are likely taking their cases to Tax Court if the IRS disputes the matter need to consider, along with their tax adviser and counsel that will be taking the matter to court, the advisability of making a qualified offer and the amount that should be offered.
There are pros and cons to doing this, as the taxpayer must make an offer that turns out to be more than the Tax Court actually awards if the case goes to trial, and that offer will likely be higher than traditional negotiating theory would suggest as the amount to suggest—but it also puts pressure on the IRS to settle the case, since they now face a much greater risk that the agency will face paying fees.
Note that the Tax Court has ruled using this justification other cases (see our discussion of the Able case elsewhere on this site).