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Are Qualified Offers Worthless? Maybe when the Service gives up…

Posted on Aug. 29, 2013

Les and I recently updated Saltzman Chapter 9.10 to include a new subsection on using qualified offers while dealing with Appeals.  Keith addresses qualified offers in Chapter 18 of Effectively Representing.   Qualified offers allow a taxpayer to make a settlement offer, which must be accepted within ninety days.  If the offer is not accepted within ninety days, or rejected by the Service, and the taxpayer prevails in eventual litigation, the Service is prohibited from showing it was justified in its position when the taxpayer requests administrative and litigation costs. See IRC § 7430(g). This can make obtaining costs and fees substantially easier. If available, making a qualified offer should be considered in most negotiations with the Appeals division or with Chief Counsel.  This is something even seasoned tax practitioners may fail to do (I have no real data on this, just anecdotes and assumptions).

Over the last few years, the IRS has been litigating whether a full concession of a docketed case by the Service is tantamount to the taxpayer prevailing in litigation. If a Service concession is a taxpayer victory for qualified offer purposes, the taxpayer would be able to obtain costs. In a recent Journal of Taxation article, attorney Philip Jones does a nice job of summarizing three recent cases decided in this area, Estate of Lippitz, Trzeciak v. Comm’r, and Knudsen v. Comm’r.

Although the taxpayers have lost two of the three cases, the cases are very fact specific, and the Service is probably only selecting cases it believes it can win.  It would seem appropriate for most taxpayers who make a qualified offer and subsequently receive a full concession while a case is docketed to consider taking a denial of costs to court even if the facts are somewhat similar to the two taxpayer losses.

The facts in the two losing cases, Trzeciak and Knudsen, were favorable to the Service. Knudsen is currently on appeal to the 9th Circuit, and it will be very interesting to see how the Circuit holds, as the case was not that different from Lippitz.

In Trzeciak, the Court stated the Service somewhat promptly dropped its case upon receiving substantiation of the taxpayer’s position, and the Service and the taxpayer entered into a stipulation of settlement, which was provided to the Court.  The Tax Court held the qualified offer rule did not apply because Section 7430(c)(4)(E)(ii) states that it shall not apply to “any judgment issued pursuant to a settlement,” and the stipulation of settlement was a “settlement” regardless of whether or not the Service fully conceded its position.

Knudsen dealt with an innocent spouse claim under Section 6015(f), which was made more than two years after collections had begun, and was therefore untimely under the then applicable Regulations applying a two year statute of limitations.  At the time, the Tax Court had been holding the Regulations were not valid, but three Circuit Courts had upheld the Regulations. In 2011, the Service stated it would amend the Regulations, and remove the limitations period for innocent spouse relief under Section 6015(f) while collections actions were ongoing (the new Proposed Regs were recently issued, and Keith wrote a brief blog entry about the history of this issue and the new Regs, which can be found here).   In 2011, following the Service-wide change in policy, the Knudsen case was fully conceded by the Service.  In the taxpayer’s request for administrative and litigation costs, the Court held that the concession was tantamount to a settlement, because the taxpayer did not object to concession and force the Tax Court to decide the matter.  The Court held there was therefore implied consent.

Lippitz was essentially the same as Knudsen, but the Service dragged its feet in conceding the case and only threw in the towel right before a motion for summary judgment was about to be decided.  The Court stated that if the concession had occurred immediately after the Service’s announcement of its position change, then it would have amounted to a settlement, but, because the Service dragged it out to the eve of hearing on a dispositive motion, it would not be.

As mentioned above, at least one of these cases is heading for Circuit Court review, and it will be interesting to see the Court’s analysis of the matter. Before the Tax Court, or on appeal, it is possible to make various meritorious arguments, including what the plain meaning of “settlement” is, that prior Tax Court case law indicates that Knudsen and possibly Trzeciak were decided incorrectly, and that general contract principals are not met with these deemed “settlements” (there may be no actual acceptance by the taxpayer).  All should be argued, but what I find most compelling is how contrary these holdings seem to the reason that the qualified offer statute was enacted.  Frankly, not many taxpayers have any idea this battle is occurring, and probably over 90% would glaze over when I was explaining (I’ve learned not to talk about tax procedure issues at cocktail parties). However, if they did, this strikes me as the type of issue that gives taxpayers the impression that the Service is “unfair”.

In the IRS Restructuring and Reform Act of 1998, Congress created qualified offers to make it easier for taxpayers to obtain certain costs and put more pressure on the Service to settle cases. Prior to 1998, it was almost impossible to obtain attorney fees and administrative costs from the Service, as the substantial justification defense was just too high of a burden.  When a qualified offer is thrown into the mix by a taxpayer, it creates another consideration for the Service, which then knows if it loses, it will have to pay costs. This is a bit of an oversimplification, but is sufficient for making my point.  Presumably, a secondary consideration was reducing the judicial resources expended in handling cases that should have otherwise been settled.

The Tax Court holdings undermine these purposes, and arguably allows the IRS to put off considering the qualified offer until the end of the litigation, when it likely has a feeling for the outcome.  In a close case, the qualified offer statute provides no incentive to meaningfully settle before going to court based on the Tax Court holdings.  This is contrary of Congressional intent of assisting taxpayers, and a waste of judicial and taxpayer resources.  It effectively puts taxpayers back in the position prior to 1998 of having any claim of costs blocked by the Service’s substantial justification defense except in the very limited circumstances where the Service fully argues a case through trial, and the Service incorrectly gauges the outcome of the case and does not concede.  It also potentially creates a perverse situation where taxpayers need to object to the Service concessions in some fashion and possibly try to force a court decision.

My guess is the courts will somewhat reverse course on this or restrict the situations where a full concession is a settlement. If a qualified offer is possible, practitioners should still be considering them in appropriate cases.  We will have a blog post on some considerations in making qualified offers in the near future.  If I am before a court and obtain a full concession, I will likely not sign a stipulation of settlement, and will also consider what objections I could raise to protect my client’s rights.

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