No Attorney’s Fee Award when § 7430 Action Brought Directly by Attorney Instead of Client

In many settings, we look to cut out the middleman as a means of cutting costs.  In Greenberg v. Commissioner, 147 T.C. No. 13, the missing middleman causes a loss in the pursuit of attorney’s fees as the Tax Court finds that the attorney who represented the taxpayer in the underlying case could not bring the action for attorney’s fees himself.  Instead of having the taxpayer bring an action for recovery of attorney’s fees, Mr. Greenberg decided to bring the action himself after successfully representing the taxpayer during the administrative phase of a dispute with the IRS.  The Tax Court looked to the language of the statute and concluded that Mr. Greenberg did not fit the definition of prevailing party as it rejected his claim.  The Court also briefly addresses the issue of the timeliness of the petition; however, it reaches no conclusion on this issue because of the determination that Mr. Greenberg could not recover based on the language of IRC 7430.

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The case does not describe exactly what happened during the administrative phase.  Getting attorney’s fees after a successful trial is difficult enough because of the statutory standard requiring a showing that the position of the IRS was not substantially justified.  Success on obtaining fees after a concession at the administrative level is significantly more difficult than obtaining fees after a trial since the earlier the IRS concedes a matter the more reasonable its position.  Because the opinion does not describe the basis for the resolution at the administrative level and the position of the IRS prior to resolution, determining whether the Tax Court might have awarded fees had the case moved past the issue of the proper party to bring the action is not possible from reading the opinion.

The opinion does say that the client agreed any fees awarded under IRC 7430 would go to Mr. Greenberg.   Mr. Greenberg submitted a request for administrative costs to Appeals on September 17, 2014, and did not receive a response.  He again wrote to Appeals on December 27, 2014.  The opinion states that he discussed the award of fees with Appeals, and Appeals refused to award them.  It appears that Appeals made an oral refusal.  On April 15, 2015, Mr. Greenberg filed a petition in Tax Court seeking an award.

The IRS moved to dismiss the petition.  Mr. Greenberg’s initial argument rested on the assignment of the award of fees from his client.  The IRS argument pointed to the Anti-Assignment Act found in 31 U.S.C. 3727(b), which bars the assignment of a legal suit against the United States.  After reading the IRS motion, Mr. Greenberg dropped his argument that the petition resulted from the assignment of the suit to him and instead argued that he brought the suit on his own rights to the claim.  Because no one had made this argument previously, the Court rendered a precedential opinion.

The Court’s discussion of the issue focused on jurisdiction because it normally addresses the issue of the proper party to bring suit as a jurisdictional issue.  The Court cited several opinions addressing its jurisdiction as it related to the party bringing the suit.  None of these cases involved IRC 7430, but they did involve instances in which someone other than the taxpayer attempted to obtain jurisdiction in order to litigate the taxpayer’s liability rather than their own.  The issue in Greenberg turns on whether IRC 7430 allows the attorney to directly bring suit, since the attorney clearly has an interest in the outcome and often has a direct financial interest.  Section 7430(f)(2) grants the Tax Court jurisdiction to hear proceedings contesting the denial of administrative costs and does not specify who may file such a petition.  Within IRC 7430, the “only limitation on claimants appears in section 7430(a) which limits awards of administrative costs to a ‘prevailing party’.”

The Court noted that the concept of prevailing party encompasses two elements: 1) the claimant must be a party; and 2) the claimant must prevail.  A prevailing party is one that substantially prevails with respect to the amount in controversy or substantially prevails with respect to the most significant issue and who meets the requirements set out in 28 U.S.C. 2412(d)(d)(1)(B) which include showing that the IRS was not substantially justified.  The Court looked to section 7430(c)(4) in search of the answer to who meets the tests necessary to become a party because only a party can bring a suit for which the Court has jurisdiction.  A Third Circuit case, Estate of Palumbo v. United States, 675 F.3d 234 (2012), addressed the issue of party in the IRC 7430 context for purposes of determining whether the party met the net worth limitation set forth in the statute.  Section 7430 limits the award of fees to certain parties.  Depending on who met the definition of party in Palumbo, the party would fall under those limitations or exceed them.  Naturally, the petitioner argued that the true party in the case was a charitable trust, the only beneficiary of the contested issue in the case.  The charitable trust fell under the statutory limitation; however, the estate itself had assets in excess of the statutory limitation.  The Third Circuit held that the estate was the prevailing party to the underlying dispute even if the result of the suit would benefit the charitable trust.

The Third Circuit looked to decisions under the Equal Access to Justice Act (EAJA) in reaching its conclusion.  That statute has a similar provision for fees and costs for the prevailing party.  Cases decided under EAJA similarly required the party be a party to the underlying proceeding.  One EAJA case specifically addressed the fee shifting aspect of that statute and whether an attorney, rather than the client, could bring suit as the party.  That case, Reeves v. Astrue, 526 F.3d 732 (11th Cir. 2008), held that the EAJA “unambiguously directs the award of attorney’s fees to the party who incurred those fees and not to the party’s attorney.”  Another case decided under EAJA, Panola Land Buying Ass’n v. Clark, 844 F.2d 1506 (11th Cir. 1988), held that “Congress did not intend that all persons performing services to the prevailing party in the litigation be allowed to become parties in the case to assert their claims for compensation.”  Based on its analysis of the cases and the statute, the Tax Court finds that Mr. Greenberg does not meet the definition of party meaning that the Court lacked jurisdiction to hear his case.

The Court, having found that it lacked jurisdiction, then addresses Mr. Greenberg’s argument that he was the real party in interest.  He made an interesting argument building on the case of Marre v. United States, 117 F.3d 297 (5th Cir. 1997).  In that case, the 5th Circuit held that the taxpayer’s attorney was the real party in interest when the IRS sought to offset the award of attorney’s fees against the taxpayer’s outstanding tax liability.  The 5th Circuit also held that the award was payable directly to the attorney and did not need to go from the IRS to the taxpayer and then to the attorney.  The Tax Court found that being the real party in interest is not the same as being the “prevailing party” as required by the statute and rejected this argument.

Finally, the Court made brief mention of the timing of the filing of the request for fees.  Although this section of the opinion is dicta, this discussion has importance because anyone who makes a claim for fees must do so at the proper moment.  That moment seems particularly elusive in the case of IRC 7430.  Section 7430(f)(2) requires that the Commissioner must make a decision concerning the application for administrative costs before the party files a Tax Court petition.  The applicable regulations provide that if the Commissioner fails to respond within six months that failure “can be considered a decision of the Commissioner denying the award.”  Here, the IRS argued that Mr. Greenberg filed the Tax Court petition too soon because the IRS issued no formal denial and six months had not elapsed since he wrote the December 27, 2014 letter before he filed the petition on April 15, 2015.  Of course, Mr. Greenberg countered that the timing harkens back to the letter dated September 17, 2014 and that the later letter merely amended the earlier one.  Alternatively, he argued that he had received an oral denial of the December 27 letter and that oral denial gave him the right to bring the petition at any time thereafter.  Having raised the issue as one present in the case, the Court declines to rule since it had already determined that it lacked jurisdiction.  While not a satisfying discussion from the perspective of providing guidance, the discussion serves to point out that you must carefully consider the timing of a petition seeking fees.

This discussion also leaves open the possibility that the letters sent by Mr. Greenberg seeking fees may serve as the request for fees by his client.  The IRS may not, as yet, have sent a letter denying the fees based on the letters.  More than six months has now elapsed.  Can those letters serve as the basis for a new petition by the taxpayer and place the parties back in the position of fighting over the merits of the fee award and not the procedure?  The Court did not discuss who must sign the letter seeking fees, whether such a letter must make clear that the request is one made on behalf of the taxpayer, or other aspects of the request itself.  Perhaps the taxpayer will file a petition and generate another precedential opinion on that issue of procedure before the Court can get to the underlying issue.

 

Procedure Grab Bag – Making A Grab for Attorney’s Fees and Civil Damages

Your clients love the idea, and always think the government should pay, but it isn’t that easy.  Below are a summary of a handful of cases highlighting many pitfalls, and a few helpful pointers, in recovering legal fees and civil damages from the government (sorry federal readers) that have come out over the last few months.

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3rd Party Rights

The Ninth Circuit, in US v. Optional Capital, Inc., held that a third party holding a lien on property could not obtain attorney’s fees for an in rem proceeding to determine its rights in real estate that had also been subject to government liens pursuant to the Civil Asset Forfeiture Reform Act, 28 USC 2465(b)(1)(A), or Section 7430.  The Court determined the 3rd party was not the prevailing party “in any civil proceeding to forfeit property,” as required by CAFRA.  The government had lost in a related hearing regarding the lien, but the 3rd party had “not pointed to any work it performed that was ‘useful’ or ‘necessary to secure’ victory against the Government,” so it was not the prevailing party.  It would seem, however, this leaves open the possibility of other 3rd parties prevailing, if meaningful work was done in the underlying case.  This case is a good reminder of another potential option under CAFRA in attempting to claim fees in certain collection matters.

As to Section 7430, the Court found, contrary to the 3rd party’s claims, it had not actually removed the government’s liens from the property, and therefore could not be considered the prevailing party, which is required under Section 7430 to obtain fees.

When You Are Rich Is Important

In Bryan S. Alterman Trust v. Comm’r, the Tax Court held that a trust could not qualify to recover litigation costs under Section 7430 because its net worth was over $2MM.  Section 7430 references 28 USC 2412(d)(2)(B), which states an individual must have under $2MM in net worth in order to recover litigation costs.  That is extended to trusts by Section 7430(c)(4)(D).  The taxpayer argued the eligibility requirement should be as of the time the deficiency notice was issued or the date the petition was filed.  That “reading” of the statute was found incorrect, as Section 7430(c)(4)(D)(i)(II) states the provision applies to a trust, “but shall be determined as of the last day of the taxable year involved in the proceeding.”  At that time, the trust had over $2MM in net worth, saving the IRS from potentially having to shell out capital.  And, that’s why I always keep my trust balances below $2MM…and right around zero dollars.

Key Questions: Are you the Taxpayer?  Did you Exhaust the Administrative Remedies?

The District Court for the Northern District of Illinois dismissed the government’s motion for summary judgment in Garlovsky v. United States on fees under Section 7433, but also gave clear indication that the claim is in danger.  In Garlovsky, the government sought collection on trust fund recovery penalties against an individual for his nursing home employer that allegedly failed to pay employment taxes.  Prior to that collection action, the individual died, and notices were sent to his surviving spouse (who apparently was some type of fiduciary and received his assets).  The taxpayer’s wife paid a portion, and then sued for a refund.  As to damages, the Court found that the taxpayer’s wife failed to make an administrative claim for civil damages before suing in the District Court, which is required under Section 7433.

In addition, although the surviving spouse received the collection notices, none were addressed to her and the Service had not attempted to collect from her.  Section 7433 states, “in connection with any collection of…tax…the [IRS] recklessly or intentionally, or by reason of negligence, disregards any provisions of this title…such taxpayer may bring a civil action…”  The Court found that the spouse was not “such taxpayer”, and likely did not have a claim.  Although I have not researched this matter, I would assume the estate of the decedent could bring this claim (unlike Section 7431, pertaining to claims for wrongful disclosure of tax information, which some courts have held dies with the taxpayer – see Garrity v. United States –a case I think I wrote up, but never actually posted).

Qualifying as a Qualified Offer

The 9th Circuit held that married taxpayers were not entitled to recover attorney’s fees under Section 7430 in Simpson v. Comm’r, where the taxpayer did not substantially prevail on its primary argument, even though they did prevail on an alternative argument.  In Simpson, the wife received a substantial recovery in an employment lawsuit.  The Simpsons only included a small portion as income, arguing it was workers comp proceeds (not much evidence of that).  The Tax Court held 90% was income.  This was upheld.  The 9th Circuit held that the taxpayer was clearly not successful on its primary claim.  They did raise an ancillary claim during litigation, which the IRS initially contested, but then conceded.  The Court held the Service was substantially justified in its position, as the matter was raised later in the process and was agreed to within a reasonable time.  Finally, the Court held that the taxpayer’s settlement offer did not qualify as a “qualified offer”, since the taxpayers indicated they could withdraw it at any time.  Qualified offers must remain open until the earliest of the date it is rejected, the date trial begins, or the 90th day after it is made.  Something to keep in mind when making an offer.

Making the Granite State Stronger – No Fees For FOIA

Granite seems pretty sturdy, but Citizens for a Strong New Hampshire are hoping for something even sturdier.  The District Court for the District of New Hampshire in Citizens for a Strong New Hampshire v. IRS has denied Strong New Hampshire’s request for attorney’s fees under 5 USC 552(a)(4)(E)(i) for fees incurred in bringing its FOIA case.  That USC section authorizes fees and litigation costs “reasonably incurred in any case under [FOIA] in which the complainant has substantially prevailed.”  The statute defines “substantially prevailing” as obtaining relief through “(I) a judicial order, or an enforceable written agreement or consent decree; or (II) a voluntary…change in position by the agency…”

Strong New Hampshire requested documents through a FOIA request regarding various New Hampshire politicians.  It took the IRS a long time to get back to Strong New Hampshire, and it withheld about half the applicable documents as exempt under FOIA.  Strong New Hampshire continued to move forward with the suit, and the Service moved for summary judgement arguing it complied.  Aspects remained outstanding, but the Court held that the Service had not improperly withheld the various documents.  The IRS did a second search, moved for summary judgement, and Strong New Hampshire did not contest.

The Court held that the voluntary subsequent search by the Service did not raise to the level of substantially prevailing by Strong New Hampshire.  As required by the statute, there was not a court order in favor of Strong New Hampshire, and the actions taken by the Service unilaterally in doing the second search was not sufficient to merit fees.

Summary Opinions — For the last time.

This could be our last Summary Opinions.  Moving forward, similar posts and content will be found in the grab bags.  This SumOp covers items from March that weren’t otherwise written about.  There are a few bankruptcy holdings of note, an interesting mitigation case, an interesting carryback Flora issue, and a handful of other important items.

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  • Near and dear to our heart, the IRS has issued regulations and additional guidance regarding litigation cost awards under Section 7430, including information regarding awards to pro bono representatives. The Journal of Accountancy has a summary found here.
  • The Bankruptcy Court for the Southern District of Florida in In Re Robles has dismissed a taxpayer/debtor’s request to have the Court determine his post-petition tax obligations, as authorized under 11 USC 505, finding it lacked jurisdiction because the IRS had already conceded the claim was untimely, and, even if not the case, the estate was insolvent, and no payment would pass to the IRS. Just a delay tactic?  Maybe not.  There is significant procedural history to this case, and this 505 motion was left undecided for considerable time as there was some question about whether post-petition years would generate losses that could be carried back against tax debts, which would generate more money for creditors.  This became moot, so the Court stated it lacked jurisdiction; however, the taxpayer still wanted the determination to show tax losses, which he could then carryforward to future years (“establishing those losses will further his ‘fresh start’”).  The Court held that since the tax losses did not impact the estate it no longer a “matter arising under title 11, or [was] a matter arising in or related to a case under title 11”, which are required under the statutes.
  • The Tax Court in Best v. Comm’r has imposed $20,000 in excess litigation costs on an attorney representing clients in a CDP case. The Court, highlighting the difference in various courts regarding the level of conduct needed, held the attorney was “unreasonable and vexations” and multiplied the proceedings.  Because the appeal in this case could have gone to the Ninth Circuit or the DC Circuit, it looked to the more stringent “bad faith” requirements of the Ninth Circuit.  The predominate issue with the attorney Donald MacPherson’s conduct appears to have been the raising of stated frivolous positions repeatedly, which the Court found to be in bad faith.
  • And, Donald MacPherson calls himself the “Courtroom Commando”, and he is apparently willing to go to battle with the IRS, even when his position may not be great…and the Service and courts have told him his position was frivolous. Great tenacity, but also expensive.  In May v. Commissioner, the Tax Court sanctioned him another seven grand.
  • The Northern District of Ohio granted the government’s motion for summary judgement in WRK Rarities, LLC v. United States, where a successor entity to the taxpayer attempted to argue a wrongful levy under Section 7426 for the predecessor’s tax obligation. The Court found the successor was completely the alter ego of the predecessor, and therefore levy was appropriate, and dismissal on summary judgement was proper.
  • I’m not sure there is too much of importance in Costello v. Comm’r, but it is a mitigation case. Those don’t come up all that frequently.  The mitigation provisions are found in Sections 1311 to 1314 and allow relief from the statute of limitations on assessment (for the Service) and on refunds (for taxpayers) in certain specific situations defined in the Code.  This is a confusing area, made more confusing by case law that isn’t exactly uniformly applied.  The new chapter 5 of SaltzBook will have some heavily revised content in this area, and I should have a longer post soon touching on mitigation and demutualization in the near future.  In Costello, the IRS sought to assess tax in a closed year where refunds had been issued to a trustee and a beneficiary on the same income, resulting in no income tax being paid.  Section 1312(5) allows mitigation in this situation dealing with a trust and beneficiary.  There were two interesting aspects of this case, including whether the parties were sufficiently still related parties where the trust was subsequently wound down, and whether amending a return in response to an IRS audit was the taxpayer taking a position.
  • The First Circuit has joined all other Circuits in holding “that the taxpayer must comply with an IRS summons for documents he or she is required to keep under the [Bank Secrecy Act], where the IRS is investigating civilly the failure to pay taxes and the matter has not been referred for criminal prosecution,” and not allowing the taxpayer for invoking the Fifth Amendment. See US v. Chen. I can’t recall how many Circuit Courts have reviewed this matter, but it is at least five or six now.
  • The District Court for the District of Minnesota in McBrady v. United States has determined it lacks jurisdiction to review a refund claim for taxpayers who failed to timely file a refund request, and also had an interesting Flora holding regarding a credit carryback. The IRS never received the refund claim for 2009, which the taxpayer’s accountant and employee both testified was timely sent, but there was not USPS postmark or other proof of timely mailing, so Section 7502 requirements were not met.  Following an audit, income was shifted from 2009 to other years, including 2008.  This resulted in an outstanding liability that was not paid at the time the suit was filed, but the ’09 refund also generated credits that the taxpayer elected to apply to 2008.  The taxpayers also sought a refund for 2008, arguing the full payment of the ’09 tax that created the ’08 credit should be viewed as “full payment”, which they compared to the extended deadline for refunds when credits are carried back.  The Court did not find this persuasive, and stated full payment of the assessed amount of the ’08 tax was needed for the Court to have jurisdiction over the refund suite under Flora.  Sorry, couldn’t find a free link.
  • The IRS lost a motion for summary judgement regarding prior opportunity to dispute employment taxes related to a worker reclassification that occurred in prior proceeding. The case is called Hampton Software Development, LLC v. Commissioner, which is an interesting name for the entity because the LLC operated an apartment complex.  The IRS argued that during a preassessment conference determining the worker classification the taxpayer had the opportunity to dispute the liability, and was not now entitled to CDP review of the same.  The Court stated the conference was not the opportunity, as the worker classification determination notice is what would have triggered the right under Section 6330(c)(2)(B), and such notice was not received by the taxpayer (there was a material question about whether the taxpayer was dodging the notice, but that was a fact question to be resolved later).  The Hochman, Salkin blog has a good write up of this case, which can be found here.
  • The IRS has issued additional regulations under Section 6103 allowing disclosure of return information to the Census Bureau. This was requested so the Census could attempt to create more cost-efficient methods of conducting the census.  I don’t trust the “Census”.  Too much information, and it sounds really ominous.  That is definitely the group in Big Brother that will start rounding up undesirables, and now they have my mortgage info.
  • The Service has issued Chief Counsel Notice 2016-007, which provides internal guidance on how the results of TEFRA unified partnership audit and litigation procedures should be applied in CDP Tax Court cases. The notice provides a fair amount of guidance, and worth a review if you work in this area.
  • More bankruptcy. The US Bankruptcy Court for the Eastern District of Virginia has held that exemption rights under section 522 of the BR Code supersede the IRS offset rights under section 533 of the BR Code and Section 6402.  In In Re Copley, the Court directed the IRS to issue a refund to the estate after the IRS offset the refund with prepetition tax liabilities.  The setoff was not found to violate the automatic stay, but the court found the IRS could not continue to hold funds that the taxpayer has already indicated it was applying an exemption to in the proceeding.   There is a split among courts regarding the preservation of this setoff right for the IRS.  Keith wrote about the offset program generally and the TIGTA’s recent critical report of the same last week, which can be found here.

 

 

Summary Opinions Catch Up Part II

Second part of the catch up.  These materials are largely from February.  One more installment coming shortly.  We may be renaming SumOp.  Although I loved the name (thanks Prof. Grewal), this keeps getting linked as a summary of all Tax Court summary opinions.  Feel free to suggest names, although it may just fall under the Grab Bag title from now on.  And, if you work at a law firm that is taxed as a C-corporation, check out the Brinks, Gibson discussion below.  Might be a little scary.

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  • Most of you probably heard that the Form 8971 was issued for basis reporting in estates.  Form can be found here and instructions here.  First set will (probably, although it has been extended a couple times already) be due June 30th.  Pretty good summary can be found here.  Lots of complaints so far.
  • The Fourth Circuit had a recent Chapter 7 priority case in Stubbs & Perdue, PA v. Angell (In re Anderson).  In Stubbs (great name), S&P were lawyers who represented Mr. Anderson.  Initially, the case was a Chapter 11 case, and S&P racked up $200k in legal fees.  Priority, but unsecured.  There was also over $1MM in secured tax debt.  The bankruptcy converted to a Chapter 7, and S&P were tossed in with the unsecured debtors, which they took exception with.  The Court looked to the current version of section 724(b)(2) of the bankruptcy code.  That section allows certain unsecured creditors to “step into the shoes” of secured creditors, and recover before other creditors.  Due to perceived abuses, that section had been amended in 2010 to limit the expenses that were given super priority, including Chapter 11 administrative expenses when the case was converted to a Chapter 7 case.  The amended provision was in place when the conversion occurred, and the Fourth Circuit relied on that version of the law, disallowing the legal fees super priority.  The law firm argued the prior version of the statute should apply, as it was the applicable statute when the originally filing occurred, but the Fourth did not agree.  Why does this really matter? It is the federal tax liability supported by the federal tax lien that gets subordinated to pay these priority claims.  So, the fight in this insolvent estate boiled down to whether the lawyers, who may have waited too long to convert the case to Chapter 7, or the IRS get paid (of course, the decision to convert is a client decision which puts the lawyer’s ability to get their fees at the mercy of the rationality of the client’s decision. A bad place to be) (thanks to Keith for giving me a quick primer on this subject).
  • The Tax Court in Brinks, Gilson & Lione, PC v. Commissioner has probably caused quite a bit of concern for quite a few law firms – or should (which reminds me, I have something to discuss with the Gawthrop management committee).  McGuire Woods has a good write up, and some insight into planning around the issue, which is found here.  The facts are that the firm would provide partners with a salary, and then at year end it would take all the profits and provide year-end bonuses to the partners, who would treat the amounts as W-2 wages.  This would wipe out the profits, so the c-corporation law firm would have no tax due (sounds familiar to a lot of you in private practice, doesn’t it?).  This firm had close to 300 non-lawyer employees who generated profits, and the IRS said that treating the bonus amount as w-2 income on to the partners on what those other folks generated was improper.  The corporation should have paid tax, and then dividends should have been issued to the partners, who would also then pay tax.  Yikes!  That is interesting enough, but the Court also found that the firm lacked substantial authority for its positions and there was no reasonable cause under Section 6662(d)(2)(B), so substantial penalties were also due on the corporate income tax due (the regulations do not allow for an “everyone else is doing it” defense).
  • Sometimes you go into court just knowing you are going to look like an @s$ for one reason or another.  I may have felt that way walking in to argue Estate of Stuller for the government before the Seventh Circuit.  Not because I would have been wrong, but, based on the opinion, the taxpayer was having a pretty bad year.  In Stuller, the Court held that the penalties for failure to timely file returns were proper when a restaurant business owner (who was a widow) missed the filing deadline.  In the year in question, the husband died in a tragic fire, which also injured the widow.  In addition, a key employee was embezzling from her businesses and she had difficulty tracking down aspects of the probate proceedings.  The Court found all required info could have been found in her records, and she did not exercise ordinary business care and prudence to fulfill the requirements of the reasonable cause exception (it probably didn’t help that she was taking questionable deductions related to her “horse” business that lost like $1.5MM in the preceding years).
  • We have covered Rand pretty extensively here on the blog, including the reversal of it by section 209 of the PATH Act and the Chief Counsel advice that followed, which can be found here.    In February, additional guidance was released stating there are no longer any situations where the Section 6676 penalty is subject to deficiency procedures, which was the same conclusion our (guest) blogger, Carlton Smith, came to in his post discussing the Kahanyshyn case.  Carl, however, reflected upon this more, and concluded there may, in fact, be a situation where the deficiency procedures might apply to a Section 6676 penalty.  I’m somewhat quoting Carl (via email) here.  All intelligent comments are Carl’s, while any errors are assuredly mine:

If you recall from prior posts, in PMTA 2012-016…the IRS changed its position and held that where it had frozen the refund of a refundable credit, there was no “underpayment” for purposes of section 6664(a) because the freezing of the refund should be considered as “an amount so shown [on the tax return] previously assessed (or collection without assessment)” under section 6664(a)(1)(B). So, there can be no assessment of a section 6662 or 6663 penalty in that circumstance.

However, section 6676′s penalty on excessive refund claims can apply even if the refund is never paid. Accordingly, within the PMTA, the IRS states (I think correctly) that where it freezes a refund of a disallowed refundable tax credit, it can assert a section 6676 penalty instead.

The PATH Act did two significant things to section 6676: It removed the previous exception to applying the penalty with respect to EITC claims. It changed the defense to the penalty from the troublesome proof of “reasonable basis” (an objective test) to the easier “reasonable cause” (a subjective one).

So, we may see section 6676 assessments in the future where refundable credits were improperly claimed, but the refund was frozen.…If a taxpayer improperly claimed, say, an EITC, but the refund was frozen, the IRS would later issue a notice of deficiency to permanently disallow the EITC.  The IRS could also assess a section 6676 penalty (assuming no reasonable cause), since it is the claiming of an improper refund that triggers the section 6676 penalty, not its payment.

It is still an open question whether or not the section 6676 penalty on disallowed frozen refundable credit claims will be asserted by the deficiency procedures or the straight-to-assessment procedures usually involved in the assessable penalties part of the Code.

  • In United States v. Smith, the District Court for the Western District of Washington reviewed a community spouse’s argument that her portion of the community property house could not be used to satisfy her husband’s tax debt from his fraud.  I found this write up of the case from a law firm out west, Miles Stockbridge.  The Court upheld the foreclosure, finding the wife did not show that she was entitled to the exception of collecting against community property under Section 66(c), nor did she show that the debt was not a community property debt by clear and convincing evidence, as required under Washington law.
  • Nothing too novel in US v. Wallis, from the District Court of the Western District of Virginia in February of 2016, but a good review of suspension provisions to collection statute.  In Wallis, the Service  took collection actions after the ten year period found under Section 6502 for penalties under Section 6722.  The Court found collection was not prohibited, as the statute was tolled due to the taxpayer’s bankruptcy and OIC/CDP hearings.  Sorry, couldn’t find a free version.
  • The folks over at The Simple Dollar have asked that we provide you with links to some of their content.  This post is about the best tax software for nonprofessionals to use for doing their own taxes.  This site is geared to the general public, but has some basic finance and tax info.  These are usually in the form of listicles, which are completely click bait, but are hard to hate.

 

 

 

 

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

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.

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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.

Summary Opinions for End of December 2015

Happy Presidents’ Day!  While some of you are at home celebrating the lives of Martin Van Buren, Chester Arthur, Tippecanoe and Tyler too, PT is still hard at work churning out tax procedure commentary.  In this SumOp, we cover a few remaining items from December that we didn’t otherwise cover (in detail).  Post includes more of Athletes, the IRS, and rich people behaving badly.  It also has a link to Frank Agostino’s January newsletter, which has a bankruptcy/OIC discussion that is really strong.

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  • The IRS has mud on its face again for wiping another hard drive, this time potentially destroying documents related to the IRS hiring of Quinn Emanuel.  Robert Woods at Forbes has coverage here.
  • Those of you who love the beautiful game should be excited Sepp’s on his way out, but worried that Mascherano’s stout defense won’t extend to his tax fraud conviction.  That’s three Barca players with tax troubles, including Messi and Neymar.  Barca should call me immediately, and bring me in house to review all their players’ finances (and/or play midfield).  Marketwatch has an article, found here, on why so many professional athletes get in tax trouble (recap:  their tax returns are more complicated than your tax return, they are super rich and young, and they often have issues handling their finances).
  • Agostino and Associates have issued their January tax controversy newsletter found here.  The bankruptcy/OIC discussion and which option to use is a great summary of something many of us probably grapple with on a weekly or even daily basis.
  • This is more substantive than procedural, but interesting.  Sometimes cases have the best names based on the underlying dispute.  Loving vs. Virginia is probably the best known.  Green v. US, a recent District Court case out of Oklahoma also fits the bill.  The case involves a bunch of green, in the form of a real estate charitable contributions (Hobby Lobby $$$ and land).  In Green, prior to the case, Chief Counsel had stated that a non-grantor trust could not deduct the full fair market value of appreciated property donated to a charity under Section 642(c)(1).  That section allows for a deduction, without limitation, for property passed to qualifying charities.  The CCA looks to various cases which indicated (tangentially) that the deduction was limited to the adjusted basis.  The District Court of the Western District of Oklahoma held that Section 642(c)(1) had no specific limitation on the deduction amount and the full FMV was allowed.
  • Morales v. Comm’r was decided by the Ninth Circuit in December.  Prior to the opinion, Carlton Smith has covered this case in detail for us, including this post in July, and he cited to it last week in discussing the 6676 penalty.   At issue in Morales was a Rand type case, where penalties were imposed on an “underpayment” created by a taxpayer improperly claiming and receiving the first time homebuyer credit. The question raised was whether a taxpayer must assign errors to each and every alleged error or whether pleadings are sufficient with only a general denial of liability. The Ninth Circuit in an unpublished opinion held that the Tax Court had properly denied the reconsideration of the penalty as the taxpayer had not specifically raised the argument that the credit did not give rise to an underpayment.
  • Before making flippant remarks about this case, I hope the US Attorney involved has obtained proper treatment for the mental illness.  Beyond the wellbeing of that individual, I do not feel terribly bad for the IRS in In Re: Murphy.  In February of 2015, the Assistant District Court found that the IRS violation of a preliminary injunction on collection actions could not be ignored due to the fact that the US Attorney was suffering from substantial mental health issues, including dementia.  In December, the Bankruptcy Court (sorry, no link) concluded it would not review the matter again, and the IRS was responsible for claims under Section 7433, even if the Service likely would have been successful in the case had the US Attorney been competent.  As we’ve seen many cases where taxpayer’s representatives have suffered from illness, but the IRS has still imposed substantial penalties, I’m not heartbroken to see the issue go the other way.
  • Way back in July of 2014, SumOp covered the tax problems of the Hit Dog, Mo Vaughn, where the Tax Court held he lacked reasonable cause for failing to file his tax returns and pay the tax due.  Mo took a swing and a miss with the Sixth Circuit also, which agreed with the Tax Court.  The Court held that simply hiring an attorney, financial advisor and accountant was not sufficient to show reasonable cause, and the fraud and embezzlement of those folks did not constitute disability.
  • Sumner Redstone did not have the best December and early January.  He probably lost a boatload in the stock market, and he was directed to undergo a mental exam to determine if he is incapacitated (his ex-ladyfriend is making this accusation – lover scorned!).  He was also found liable for gift tax from 1972!!!!!!.  Jack Townsend had coverage on his Federal Tax Crimes Blog here. Tax was around $740k.  The interest has to be pretty darn high.  There was one bit of good news, which was that no penalties were imposed.  As Jack notes, this is the interesting aspect of the case.  Underlying question involved the valuation of a closely held business interest, which was based on redemption price on intra-family sale.

Summary Opinions for June

Before covering the June tax procedure items we didn’t otherwise write on, I wanted to highlight that Keith was quoted in a Seattle Times’ article about the IRS/Microsoft litigation, where MS is questioning the length of its audit and the Service’s hiring of Quinn Emanuel to investigate its tax obligations.  Other tax procedure luminaries Stuart Bassin (who is working with Les on rewriting part of SaltzBook addressing disclosure litigation) and Professor Andy Grewal (a PT guest poster) were also quoted.   Keith’s last post on the topic can be found here, where he discusses Senator Hatch’s letter to the Commissioner questioning the use of an outside law firm on audits.

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  • The 2015 IRS annual Whistleblower Report to Congress was released in June and can be found here.  In 2014, the Service paid out around $52MM in awards, representing about 17% of the tax it claims was collected due to WB’s information.  Submissions to the WB group were up in 2014, with over 14,000 claims being filed.  Of those, about 8,600 were opened.  The report paints a slightly rosier picture of the program than what may be practitioners’ perceptions of the program.  It does note issues with taxpayer confidentiality, and whistleblower protection. The report also provides a spreadsheet of the reasons for closing cases and the time most cases have been in the program (which tends to be fairly long).
  •  This Tax Court case has a fair amount of tax procedure packed into it.  In Webber v. Comm’r, the Court found a taxpayer had retained control and incidents of ownership over life insurance held in a trust, which caused some negative tax  consequences.  In coming to this determination, the Court found that the IRS Revenue Rulings dealing with the “investor control” doctrine were entitled to Skidmore deference under the “power to persuade” standard.  The Court also found reasonable cause due to the taxpayer’s reliance on his advisor.  In the case, the advisor was an expert and was paid hourly to review the transaction, and had the pertinent information.  We just wrote this case up for SaltzBook, so I won’t go into too much detail (don’t want to give all the milk away, as we definitely want to keep selling cows).
  • Agostino & Associates has published its July Monthly Journal of Tax Controversy.  Frank and his associate Brian Burton have a nice piece on the public policy of OICs.  As always, it is interesting and essentially a mini law review article.
  • BMC Software v. Comm’r is a Fifth Circuit case we (I) missed in March that was potentially significant in how closing agreements are interpreted.  Miller & Chevalier’s Tax Appellate Blog has coverage here.  The facts are fairly specific, and the applicable Code sections do not pertain to many taxpayers.  What is important is that the Fifth Circuit reversed the district court, and held that the boilerplate in the opening paragraph stating, “for income tax purposes” did not cause the agreed treatment of a tax item for one purpose as applying for all purposes under the Code.  The Court would not read that into the agreement of the two parties, who had meticulously spelled out the specific tax treatments for one purpose.
  • Another case with multiple interesting tax procedure items.  In Riggs v. Comm’r, the Tax Court ruled on 1) whether a bankruptcy stay for the taxpayer’s successor-in-interest applied to the taxpayer, and  2) whether the IRS had to follow the taxpayer’s instructions about which debts its payment should be applied to when the Bankruptcy Court directed the payment generally.  As to the first point, the court found there was not sufficient “identity between the debtor and the [taxpayer] that the debtor may be said to be the real party defendant”, so the stay did not apply.  As to the second point, the Court found the payments were not voluntary, and therefore it did not have to follow the taxpayer’s instructions under Rev. Proc. 2002-26.  I would assume the Court would have specifically directed the payment application in the order had it been requested.
  • Hard to talk to an accountant these days and not discuss the tangible personal property change of accounting method.  The Service has provided additional time to file Form 3115 and modified some procedures.  See Rev. Proc. 2015-33.
  • For those of you who do work with Section 6672 penalties, you know the definition of willfulness and actually running a business can be in conflict.  Often, a business that is light on cash has to make a decision about which bills to pay, and sometimes the business thinks that suppliers need payment to keep product flowing.  If a responsible person makes such a decision and knows the withholding taxes are delinquent, Section 6672 penalties will almost certainly apply.  See Phillips v. US, 73 F3d 939 (9th Cir. 1996).  The Court of Federal Claims had occasion to review one such case in Gann v. US, and dismissed the government’s motion for summary judgement.  It held that determining when and whether the responsible person had knowledge of the company’s failure to pay taxes was a disputed issue of fact.  The Court found that simply showing that cash inflows and outflows indicating someone wasn’t going to get paid weren’t enough for summary judgement, and some level of actual knowledge was needed by the responsible person.  There was also some question as to whether the person was a “responsible person”, which was covered by Professor Timothy Todd on Forbes and can be found here.
  • Another attorneys’ fees case that probably would have ended differently had the client made a qualified offer.  In Mylander v. Comm’r, the Tax Court found that the taxpayer prevailed in the amount in controversy and the most significant issue, but the Service’s position was substantially justified.  The reasoning for this was because the case was complex and the taxpayer didn’t share all relevant facts or the case law for their claims.  I’m not sure how I feel about the complexity aspect or the onus being on the taxpayer to provide the applicable law  to the Service.  If the taxpayer’s position was clear, and reasonable research could have turned up the correct law, it seems unfair to make the taxpayer outline all relevant cases.  I hope those were only considered in conjunction with the missing facts, and wouldn’t have been sufficient on their own.  The Court did also mention that the current case was arguably distinguishable from the applicable prior holdings, so the Service’s position could have been somewhat reasonable no matter what.  All of this probably wouldn’t have mattered if the taxpayer had taken advantage of the qualified offer provisions (although if you make an offer, and fail to provide the IRS with the facts and the law, can you still prevail?).
  • SCOTUS has denied cert for Ford in its interest payment case involving the treatment of an advanced remittance.  Les has blogged this case twice before, most recently here.  In addition to the interest question, there was also a jurisdictional issue about whether the district courts could hear an interest disagreement or if it had to be determined by the Court of Federal Claims.  Les’ post outlines the issue and eventual court holding.
  • In Slone v. Comm’r, The 9th Circuit has decided another case on the two prong test necessary to establish a transferee is liable for the predecessor’s tax liability.  The court remanded for the tax court to review the transaction as to the first prong on federal law, but also held that the Service had to show it was a fraudulent transaction under the federal law and also had to independently show that the transferee was liable under the applicable state law.  This holding is in line with the various other recent cases, including Stern, Salus Mundi, and Diablod, which we most recently covered here.
  • Would you like to know how to file delinquent FBARs and not pay a penalty (i.e. are you mega rich and hiding money in some country with shady banking laws)?  Well, this probably doesn’t apply to you because you likely did not pay the tax due on those assets.  For those folks who paid the tax, but inadvertently failed to file the FBAR the IRS has issued updated guidance on filing late without penalties.
  • A res judicata case, which should have a familiar name for tax procedure junkies.  In Batchelor-Robjohns v. US, the 11th Circuit held the feds were barred by res judicata from raising the dead taxpayer’s income tax issues in an income tax audit when the same issue was previously litigated in an estate tax refund relating to same issue.
  • Just about a year ago, we covered Heckman v. Comm’r, where the Tax Court found the six year statute of limitations under Section 6501(e)(1)(A) applied to ESOP distributions that were not properly disclosed.  The Eighth Circuit has affirmed that ruling.  This is the link to the prior SumOp where we discussed the case.  In Heckman, the courts (Tax Court & 8Th Cir.) declined to incorporate other related entity returns to show disclosure for the individual’s return of the ESOP distribution.  It is interesting to compare that language to CNT Investors, another recent Tax Court statute of limitations case, which seemed to indicate the tax court would consider all the filings of the taxpayer and his related entities.  Although the tones are different, I do not think the holdings are necessarily in conflict.  In Heckman, there was not much disclosed that would adequately apprise the Service of the connection.  In CNT, a few key items were left off, but overall the filings painted a fairly full picture.

Tax Court Continues to Take the Same “Angle” on Attorney’s Fees When IRS Concedes the Case

We have written before (past articles can be found here, here, here, and here) about the Tax Court’s position when a petitioner seeks attorney’s fees and the IRS concedes the case after the period of the qualified offer.  Even though the petitioner achieves a result equal to or better than the qualified offer and even though the IRS concedes the case after the end of the qualified offer period, the Tax Court has determined that concession equals settlement and the exception to the qualified offer provisions for settlement set out in the code and regulation, discussed further below, negates the presumption created by the qualified offer that the position of the IRS lacked substantial justification.

A recent decision in the case of Angle v. Commissioner, citing to a prior memorandum decision, has again affirmed the position of the Tax Court judges who have looked at this issue.   As of yet no Tax Court decision with precedential authority has decided this matter; however, the issue currently exists in two Circuits, the 10th and the 9th.  The recent decision by the Tax Court provides the opportunity to update the issue both in the Tax Court and in the Circuits.  The Angle decision also comes out of the 9th Circuit so it will not create the opportunity for another circuit to weigh in on this issue.

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A student from the low-income tax clinic at Lewis and Clark Law School, Ashley McDonald, argued the Knudsen case before a panel in the 9th Circuit on May 4, 2015.  The briefs of the parties are available through PACER and the argument is available by podcast.  The Bussen case, currently pending in the 10th Circuit, is still in the early stages of the appeal during which the parties seek to resolve the litigation. The appellants have yet to submit their brief, and the court granted the most recent extension on May 14. So, it will still be months and maybe longer before a Circuit opinion addresses this issue.

With this backdrop of where the cases stand, a brief recitation of the issue and analysis of the recent Tax Court case provides further background for those following or just learning about this issue.  IRC section 7430 governs attorney’s fees in a tax cases.  Obtaining attorney’s fees generally proved difficult, if not impossible, because the statute requires the taxpayer to show that the position of the IRS lacked substantial justification.  Even in situations in which it loses, the IRS generally takes positions in cases that meet the standard of substantial justification.  In 1998 (see Pub.L. 105-206 section 3101(2)), Congress amended section 7430 to add subparagraph (g) which provides that a taxpayer who makes a qualified offer, as the statute defines that term, and who wins an amount equal to or greater than the qualified offer after the IRS rejects the qualified offer or fails to accept it within the 90-day period of the offer, no longer need prove that the position of the IRS in the litigation lacked substantial justification.  The qualified offer essentially allows taxpayers who use it to circumvent the most difficult element of the statute; however, the IRS has developed a powerful defense to the qualified offer based on a combination of its regulation and judicial interpretation of the regulation.

Section 7430(C)(4)(E))ii)(I) provides that an exception to the provision exists if the judgment is pursuant to a settlement of the parties.  Treas. Reg. 301.7430-7(e)(example 1) provides that if the case is resolved by settlement or concession the settlement or concession negates the power of the qualified offer to provide a path to overcome the substantial justification provision.  The litigation has centered on concessions and whether concessions of cases by the IRS after the period of the qualified offer and often either after litigation or on the eve of trial negate the qualified offer.  The IRS considers concessions the same as settlement and has learned that even though it did nothing to resolve the case during the period of the qualified offer, if it has a bad case it can wait to see what happens at trial or in the run up to trial and concede at that point with little fear of attorney’s fees.  By the point the IRS concedes in small cases, the amount of the fees will often exceed the amount of tax at issue.  In conceding the case the IRS avoids having to pay out attorney’s fees even though it causes counsel for the taxpayer to expend great amounts of time and energy to prepare (and try, potentially) the case.

To practitioners, the ability of the IRS to concede a case just before trial or after trial and walk away from attorney’s fees rips a big hole in the qualified offer provision by allowing the IRS to skirt the intention of the statute by waiting past the period of the qualified offer and then conceding the case at the last minute before a judgement gets rendered against it.  This issue presented itself in Knudsen where the IRS conceded the case after trial when the IRS decided on a programmatic basis to concede the time frame imposed for bringing innocent spouse cases in the regulations under IRC 6015(f). The Tax Court has to this point agreed with the IRS that it has the ability to concede a case at the last moment and avoid the ability of the qualified offer to move the taxpayer past the substantial justification hurdle.

The Angle case follows the decisions in Knudsen and Bussen.  It cites to Knudsen in support of its decision and provides the following reasons for allowing the last-minute IRS concession, made after the running of the qualified offer period, to negate the purpose of the qualified offer: 1) the parties did not submit any issue to the court regarding recovery under the qualified offer rule to be determined on the merits, 2) the petitioner had submitted a statement to the court following the IRS concession that “all outstanding issues had been resolved,” and 3) the IRS’s concessions were considered settlements “under the facts and circumstances;” therefore, the qualified offer rule does not apply.

I continue to find this line of cases to contradict the purpose of the statute.  Particularly for those of us representing low-income taxpayers where the amount of tax at issue is low but the amount of time spent to prepare a case for trial not inconsequential, this loophole is swallowing the rule.  A major purpose of the qualified offer provision was to resolve cases at an early stage.  The IRS has little incentive to pay attention to small cases as long as the loophole exists.  This is especially unfortunate because my client generally uses qualified offers on EITC cases in which the IRS has frozen the client’s refund.  Getting that refund to the client as quickly as possible fosters the purpose of the EITC statute since the funds usually represent a substantial portion of the client’s income for the year.  We make a qualified offer as early in the case as possible in the hopes that Appeals or Counsel will quickly look at the case and send the client the refund.  Our experience has been that the IRS does not accelerate its consideration of these cases when we send a qualified offer.  If it did not have the concession loophole to fall back on, I believe that it would do what the statute intended it to do – look at these cases within the 90-day period and make a relatively quick decision to resolve the case.