Update - see our discussion of Ninth Circuit's reversal of a similar case in July of 2015, two months after the Tax Court issued this opinion.

A taxpayer that makes a “qualifying offer ” in a tax dispute may receive an award of litigation costs if a judgment in the case subject to litigation ends up being less than the amount of qualifying offer. The case of Angle v. Commissioner, TC Memo 2015-92, looks at this issue in a tax matter that ended up with multiple proceedings (four cases, including this one).

The matter in question involved a gain on the sale of certain stock, giving rise to the first case. That was resolved against the taxpayer and her deceased spouse’s estate by the Tax Court (Estate of Angle v. Commissioner, T.C. Memo. 2009-227). The taxpayer then filed for innocent spouse relief and, in a separate matter after her innocent spouse claim was initially denied by the IRS, a collections due process hearing request.

The IRS denied the innocent spouse request and, following that request, the taxpayer sent the IRS Office of Appeals an offer to settle the case for $1,000. Appeals eventually sustained the IRS’s initially determination that she was not eligible for innocent spouse relief.

After the taxpayer filed with the Tax Court to challenge the IRS’s denial of innocent spouse relief the IRS abandoned it’s claim that the matter had already been litigated in the first case and, upon further review by the Cincinnati Centralized Innocent Spouse Operations (CCISO) determined she qualified for innocent spouse relief.

The IRS had also denied relief in the Collections Due Process hearing and the taxpayer filed a separate case with the Tax Court on that matter. Eventually that case was consolidated with the innocent spouse case.

Of course, with the IRS having decided that the taxpayer qualified for innocent spouse relief there was no longer a liability to which the CDP hearing would have applied—thus, the IRS had agreed, she owed no tax liability.

However the taxpayer now asked for an award of litigation expenses, pointing out that the taxpayer had put a $1,000 offer to settle before Appeals in the innocent spouse case. As the ultimate liability due from her was now agreed by the IRS to be zero, the taxpayer argued that she should receive an award of attorneys fees under the qualified offer rules. She noted that there would never have been any CDP case (and therefore no expenses related to the CDP case) had the IRS more quickly come to the conclusion that she qualified for innocent spouse relief.

The qualified offer rules of IRC §7430 are meant to impose a sanction on the IRS if they refuse a “qualified offer” and eventually the Court finds that the actual amount due to the IRS is less than that qualified offer. The rule is a relatively mechanical test that avoid the requirement to show the IRS had taken an unreasonable position as a matter of law (a relatively difficult standard to meet), but rather simply that the Court ultimately decided for less than the IRS could have had by simply accepting the offer and avoiding the costs of the litigation.

The rule also encourages taxpayers to make reasonable offers rather than attempting to hold out for a settlement that is better than the taxpayer would receive from the court.

A qualifying offer must meet the following criteria:

Must be made during the period from date of first letter of proposed deficiency and the date the taxpayer files a petition with the Tax Court;

Specifies the amount of the taxpayer’s offer
Is designated by the taxpayer as a “qualifying offer” under §7430(g); and
Remains open from the time it is made until the earlier of:
- The date the offer is rejected;
- The date the trial begins; or
- The 90th day after the offer is made

The Tax Court pointed that to obtain fees after filing a qualifying offer the taxpayer must meet six criteria:

The taxpayer must file a timely motion for litigation costs with the Court;
The taxpayer cannot have unreasonably protracted the court proceedings;
The taxpayer must have exhausted all administrative remedies available;
The taxpayer must have had a net worth of no more than $2 million when the taxpayer filed a Tax Court petition;
The taxpayer must be the prevailing party in a Court proceeding; and
The amount of costs claimed must be reasonable.

In this case the Tax Court found first that the taxpayer had not made a qualifying offer in the CDP case. The offer given was made for the innocent spouse case and, in fact, was made before the IRS first sent a letter in the CDP case.

For the innocent spouse case the Tax Court found that an offer had been timely made—that is, she had met all the criteria for an offer. But now the issue was whether she met the criteria to qualify for relief.

The Court decided she did not. The problem, in the Court’s view, was that the IRS had, through its concession prior to trial, ended up with a settlement. The basic issues in the case, aside from qualification for the costs, were not decided by the Court.

Note that the taxpayer did not claim that the IRS position was not justified and that she had substantially prevailed on the merits, an alternative option for obtaining an award of fees. The Tax Court noted, in a footnote, that the matter was not raised by the taxpayer and thus was deemed conceded.