Qualified Offers – Is it meaningless to offer what you think a case is worth?

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At the ABA Tax Section meeting coming up on January 25-26, I am moderating a panel that will focus on qualified offers.  Jan Pierce, who represented the taxpayers in the Knudsen case, which is currently on appeal to the 9th Circuit, will be on the panel as will Tom Thomas, SBSE Division Director and Lavar Taylor.  We had a conference call the other day to discuss the panel and Jan raised an issue found in a footnote in Knudsen that I had not paid much attention to when I first read it.  The issue is troublesome in a case that already presents other troublesome issues.

A qualified offer provides the easiest way to attorney’s fees because it can move the taxpayer past what is usually the biggest hurdle to obtaining attorney’s fees – whether the position of the Service was substantially justified.  Knudsen primarily sets up the issue of whether the Service can overcome the imposition of attorney’s fees, despite having failed to timely respond to a qualified offer, by subsequently conceding the case.  Steve has blogged about that issue before.  The interpretation that concession can eliminate the availability of attorney’s fees changes the operation of the statute in a way that I do not think was contemplated by Congress and certainly not set out by Congress in the statutory language.  The concession issue is discussed in greater detail below but is not the focus of this post.  This post focuses on Footnote 7 of the opinion which raises yet another possible basis for denying attorney’s fees – whether the qualified offer amount was sufficiently meaningful in amount.  I will discuss why this is yet another hurdle neither contemplated by the statute nor consistent with the statutory scheme.


Section 7430 sets out the requirements taxpayers face in order to obtain attorney’s fees, and other costs, from the Service at the conclusion of successful litigation.  The statute provides the opportunity for taxpayers to get fees and costs from the Service but not for the Service to get fees and costs from the taxpayer.  While it provides the opportunity to get fees and costs, the statute sets the bar pretty high before a taxpayer qualifies.  The major hurdle to obtaining fees involves the concept of prevailing party in IRC 7430(c)(4).  Although you might expect that this phrase sets out a straightforward concept measuring who won the case, that only serves as the starting point.  The initial test for prevailing party has two parts: 1) did the taxpayer “substantially prevail(ed) with respect to the amount in controversy”; and 2) did the taxpayer “substantially prevail(ed) with respect to the most significant issue or set of issues presented.”  Unless the taxpayer meets those definitions, the quest for attorney’s fees ends right there.  Still, taxpayers prevail on those definitions on a regular basis and if these two tests were all that matters obtaining attorney’s fees would be routine even if it occurred in a relatively low percentage of cases.

In addition to these two tests, the taxpayer must show that it meets the requirements of 28 U.S.C. 2412(d)(1)(B).  That code section contains the general rules for obtaining attorney’s fee against the United States: 

(B) A party seeking an award of fees and other expenses shall, within thirty days of final judgment in the action, submit to the court an application for fees and other expenses which shows that the party is a prevailing party and is eligible to receive an award under this subsection, and the amount sought, including an itemized statement from any attorney or expert witness representing or appearing in behalf of the party stating the actual time expended and the rate at which fees and other expenses were computed. The party shall also allege that the position of the United States was not substantially justified. Whether or not the position of the United States was substantially justified shall be determined on the basis of the record (including the record with respect to the action or failure to act by the agency upon which the civil action is based), which is made in the civil action for which fees and other expenses are sought.


The requirements of 2412 do not significantly add to the difficulty of proving prevailing party status.

The major hurdle for obtaining attorney’s fees caused by the prevailing party test comes next because the statute provides an exception where the Service shows that the position it took in the litigation was “substantially justified.”  The statute contains some definitions of substantially justified but, in general, the Service almost always succeeds in proving that its position was substantially justified.

In 1998 Congress amended IRC 7430 to offer taxpayers a glimmer of hope in obtaining attorney’s fees and other costs by creating the qualified offer exception to the substantially justified exception.  IRC 7430(c)(4)(E) provides that a taxpayer meets the prevailing party test if the taxpayer makes a qualified offer which the Service does not accept during the qualified offer period and the taxpayer ultimately obtains a better outcome in the case than it would have had the Service accepted the qualified offer.  IRC 7430(g) defines qualified offer to mean an offer which is: 1) made during the qualified offer period; 2) specifies the amount offered; 3) designates itself as a qualified offer and 4) remains open during the qualified offer period. 

Footnote 7 in Knudsen suggests that grafted onto these statutory requirements is the further requirement that the qualified offer must be meaningful and questions whether the $200 offer made by petitioner in the Knudsen case was a meaningful offer.  The suggestion in this footnote seeks to create yet another barrier to receipt of attorney’s fees and one which finds little or no basis in either the language or the purpose of the statute.

The plain language of the statute contains no statement concerning the amount which the taxpayer must offer.  With respect to the amount of the offer, the statute simply provides that the qualified offer must specify the amount offered.  The statute in no way explicitly or implicitly refers to an amount offered or the meaningfulness of the amount.  There is a good reason for not specifying the amount which relates to the purpose of the statute.

As the footnote states the “qualified offer rule was tailored after Fed. R. Civ. P. 68 to ‘provide an incentive for the IRS to settle taxpayers’ cases for appropriate amounts.’”  Sometimes the appropriate amount is very little.  If the Service’s case has little merit, why should the Court scrutinize whether the amount offered was meaningful as another means of denying attorney’s fees?   

The suggestion of a meaningful offer as another hurdle raises special difficulties given the Service’s position on settlement based on hazards of litigation.  The guidance to Appeals and Chief Counsel employees requires that, in a hazardous litigation settlement, they not settle a case based on nuisance value.  The guidance points out that the nuisance value could change from case to case.  When I was taught the settlement rules long ago, the prevailing number thrown out as a percentage that would have or begin to have the appearance of nuisance value was a settlement on the hazards for less than 20%. The concept behind this provision stems from a desire not to hold taxpayers up for some minimal amount reflecting their cost in proceeding to litigate when the Service’s claim has de minimus value.  Similarly, where the Appeals or Chief Counsel employees evaluate their case as having an 80% or better chance of winning, their interpretation of this rule taught to me long ago was that generally the IRS would make no concession in settling the case on a hazards of litigation basis just to give the taxpayer something to reflect the cost to the Service of continuing to litigate.  See relevant manual provisions here, here, and here.

The Knudsen case involved the issue of innocent spouse – an all or nothing issue.  The taxpayer evaluated that she should win.  Why should the Court interpret that the qualified offer provisions require a taxpayer who evaluates that she should win the case offer a “meaningful” amount?  Does meaningful amount mean something approximating 20% or greater since the Service should not accept a nuisance settlement of the case?  The Court suggests that taxpayers evaluating their cases as complete winners must offer to give up a “meaningful” amount of the taxes which they should win in order to receive the benefit of the qualified offer provisions.  This seems wrong as a policy matter and has no support in the language or the purpose of the statue.

It is also wrong to graft onto the statute a concept that the Court can evaluate the quality of the taxpayer’s offer as a further barrier to meeting the qualified offer provisions.  If the Service thinks an offer is too low, the Service should reject it.  If that rejection later proves misguided, the Service should pay attorney’s fees if the provisions of the statute have otherwise been met.  Adding to the mix another step which seeks to have the parties litigate about the meaningfulness of the offer places another layer of litigation in the way of a procedure designed to streamline the process.

One out for the Service in these situations is the final sentence of IRC 7430(c)(4)(B)(ii) which provides that even when a taxpayer has made a qualified offer; the Service has not accepted it and the taxpayer ultimately obtains a resolution in the case equal to or better than the qualified offer, the presumption created by the qualified offer provisions that the Service’s position was not substantially justified can be rebutted.  Rather than trying to knock out qualified offers because taxpayer offer a non-meaningful amount  the Courts and the Service should focus on rebutting the presumption.  In Knudsen, the Service could argue that its position in rejecting or failing to accept the qualified offer was substantially justified because at the time of the qualified offer it had prevailed in three Circuits and had every expectation of continuing to prevail.  The Court could evaluate that effort to rebut the presumption – something contemplated and addressed in the statute – rather than build off Code barriers to the success of a qualified offer.

The taxpayer’s appeal to the 9th Circuit in Knudsen primarily addresses the issue of whether the ultimate concession by the Service in the case serves as a settlement of the case which under Treas. Reg. 301.7430-7 would remove the case from qualified offer status.  The regulation provides that a taxpayer who settles a case cannot rely upon the qualified offer provisions to show that the IRS position was not substantially justified.  The litigating position of the IRS, but not the language of the regulation, is that a concession by the IRS is tantamount to a settlement.  Assuming that Mrs. Knudsen convinces the 9th Circuit that a concession is materially different from a settlement and that a concession after the 90 period of the qualified offer cannot take the case out of the qualified offer provisions, then the 9th Circuit or the Tax Court on remand may face the issue of the meaningfulness of the $200 offer submitted by Mrs. Knudsen.  Should the case reach that point, I hope that the 9th Circuit or the Tax Court will take the opportunity to remove the concept of meaningful offer as yet another non statute based barrier to the qualified offer provisions.


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