Taxation: Tax Court’s Denial Of Fee Recovery To Innocent Spouse, Whose Qualified Settlement Offer Was Rejected, Was Improper Because Later IRS Concession Of Relief Was Not A Settlement

 

Internal Revenue Code Section 7340(g) Fee-Shifting Provision Was At Issue.

    Knudsen v. Comm’r of Internal Revenue, No. 13-72077 (9th Cir. July 15, 2015) (published) dealt with a very narrow issue under Internal Revenue Code section 7340(g)’s fee-shifting statutory provision:  whether the IRS’s concession after letting a claimed innocent spouse taxpayer’s qualified offer to lapse was a settlement barring fee recovery to taxpayer as a prevailing party when the concession ceded entitlement to innocent spouse equitable relief.

    What happened, in brief, was that wife claimed innocent spouse protection against a tax delinquency, which was basically denied based on the expiration of a 2-year deadline.  However, she had earlier made an offer to settle which was allowed to lapse.  She caught a lucky break when the IRS instituted a policy to give a break from the deadline such that supplemental briefing occurred before the Tax Court, with the IRS eventually conceding that wife was entitled to equitable relief.   Wife never entered into any formal settlement contract and never agreed to anything other than stipulated facts as to what occurred before the Tax Court.

    The Tax Court denied wife’s request to be declared the prevailing party under section 7340(g) based on the theory that the IRS concession was a settlement, which precluded her recovery of $39,813 in fees.  The Ninth Circuit reversed, determining that a concession was not a settlement and also observing that the fee entitlement provision did not have any requirement that the court has to pass on whether the IRS’s position was substantially justified in light of the fact this controversy arose under the Qualified Offer Rule (QOR) context.