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A Different “Angle” on Recovery of Costs and Attorney’s Fees

Posted on Mar. 10, 2016

I previously posted on the Tax Court’s denial of attorney’s fees in the case of Angle v. Commissioner.  After the Tax Court entered the decision in the case, the 9th Circuit, the same Circuit to which the Angle case could be appealed, came out with the Knudson case, see post here, reversing the Tax Court’s decision to deny attorney’s fees in circumstances in which the IRS conceded the case.  Both Angle and Knudson involved circumstances in which the taxpayer made a qualified offer to the IRS, the IRS did not act upon the qualified offer during the offer period, and the IRS later conceded the case.  Based on the 9th Circuit decision, petitioner in Angle filed a motion for reconsideration.  The Tax Court, after reconsidering the request for attorney’s fees, denied the motion for the reason discussed below but the opinion shows how Knudson has opened the door for petitioners to obtain fees when the IRS concedes after the closure of the qualified offer period.

Before getting to the Angle case, I want to make brief mention of another recent opinion concerning attorney’s fees and cost, Foote v. Commissioner.  In the Foote case the taxpayers appealed an order for summary judgment in the Tax Court denying administrative costs and litigation expenses.  The Footes did not file a motion seeking an award of costs before the entry of the decision nor did they move to vacate the decision.  The 9th Circuit found that they did not petition the Tax Court for fees before the Tax Court decision became final and therefore they were barred from seeking administrative costs and litigating fees by res judicata.  It does not appear that the Footes would have received anything even if they had made a timely request but their loss here points to the importance of timing in making the request for attorney’s fees and other related costs.  You cannot do it in the petition but you must do it before the Tax Court case becomes final.  The best time to do it is before filing a stipulated decision that fails to mention fees or after the opinion and before the Court’s decision in cases that go to trial.  Getting the timing of the request right is critical to the success of getting the fees.

Ms. Angle’s case went back to a notice of deficiency issued in 2001 to her and her husband.  The case was tried in 2005.  About a year before the trial, Mr. Angle passed away.  She sought to raise an innocent spouse defense in that case but did not do so until the time of the trial.  Judge Holmes denied her motion to raise an innocent spouse defense at that time and ultimately ruled for the IRS in Estate of Angle v. Commissioner, T.C. Memo. 2009-227 finding a deficiency of about $2.8 million. The assessment of the deficiency subsequently resulted in a CDP case. Simultaneously, she pursued her claim for relief under IRC 6015(c) because of the death of her husband. These two cases were joined for trial and it was set for October 2013; however, before the trial the Chief Counsel attorney deposed Ms. Angle and decided that she qualified for innocent spouse relief under (c). She refused to sign the decision document, as she should, because it did not contain a provision for attorney’s fees.

In the original attempt for attorney’s fees, the Tax Court denied those fees as discussed in the previous post.  It denied them because it found that under its interpretation of the law, Ms. Angle did not meet the facts and circumstances test necessary to distinguish a concession from a settlement:

In Knudsen, we held a concession to be a “settlement” within the meaning of section 7430. Knudsen v. Commissioner, at *12-*16 (“The [qualified offer] regulations draw no distinction between a settlement and a concession[.]”). Whether a concession constitutes a settlement under section 7430(c)(4)(E)(ii)(I) does not rest entirely on the timing of the Commissioner’s concession but instead depends on all the facts and circumstances. Knudsen v. Commissioner, at *13. Moreover, “the parties’ failure to communicate the concession in a formalized stipulation of settled issues carries little weight in our analysis because the filing of a written agreement is not necessary to the finding of a settlement.” Id. at *15 (citing Johnston v. Commissioner, 122 T.C. 124, 129, aff’d, 461 F.3d 1162 (9th Cir. 2006)).

After the 9th Circuit reversed Knudsen, Ms. Angle filed a timely motion to reopen the decision to deny attorney’s fees based on the treatment of the concession as a settlement.  In the original opinion addressing attorney’s fees, the Court listed the six hurdles that a petitioner must meet in order to qualify for fees:

  1. Make a timely request for the fees – Tax Court Rule 231(a);
  2. Not have unreasonably protracted the proceeding – IRC 7430(b)(3);
  3. Exhausted all administrative remedies for the fees – IRC 7430(b)(1)
  4. Have a net worth that does not exceed $2 million – IRC 7430(c)(4)(A)(ii)
  5. Meet the requirement of prevailing party – IRC 7430(a) and (c)(4)(A), (B) &(E)
  6. Make a reasonable claim for costs – IRC 7430(a) and (c)(1)

The Tax Court agreed to reopen the case to reconsider whether it should award attorney’s fees. In doing so it decides not to change its original decision not to grant any fee award.  It reaches this conclusion due to a different substantive reason rooted in the six predicates to granting attorney’s fees.  The Tax Court accepts the Knudsen case as controlling precedent without tipping its hand regarding the concession issue in other circuits where the Golsen rule would not apply; however, Ms. Angel runs into problems with the asset limitation placed on persons seeking attorney’s fees.  As mentioned in the list, Ms. Angle cannot obtain attorney’s fees if her individual net worth exceeds $2 million.  The Court reviews her finances and determines that she fails this test.  Because she fails this test, she cannot obtain attorney’s fees.

The issue of net worth is clear in the statute.  The denial of the award on that basis appropriately follows a limitation created in the statute.  The decision on reconsideration leaves for another day how the Tax Court will treat requests for attorney’s fees where the IRS concedes the case outside of the qualified offer period.  As we have discussed before, allowing the government to wait until the time of trial or even after trial to concede a case and thereby avoid attorney’s fees frustrates the purpose of the qualified offer provisions.  It requires petitioners to expend significant resources after the qualified offer period ends rather than have the case resolve early in the proceeding as Congress intended.  If Knudsen did not convince the Tax Court to reject the reading of settlement to include concession, this issue will end up in additional circuits.

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