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

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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.

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