Tax Court in Brief | Lewis v. Commissioner | Qualified Offers

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Tax Court in Brief | Lewis v. Commissioner | Qualified Offers

The Tax Court in Brief – February 28th- March 4th, 2022

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation:  The Week of February 28, 2022, through March 4, 2022

Lewis v. Comm’r, 158 T.C. No. 3 | March 1, 2022 | Pugh, J. | Dkt. No. 12930-18


Short Summary: This case regards joint and several tax liability, qualified offers to settle tax liability, and the ability for a taxpayer to recover litigation costs. Petitioner and her husband filed joint federal income tax returns. The IRS audited and proposed adjustments and penalties. Petitioner sent what she believed was a “qualified offer” pursuant to 26 U.S.C. (“Code”) § 7430(g), in which she reserved any rights she may have in any collection proceeding, including innocent spouse relief, statute of limitations, and other. The offer lapsed. Later, the IRS ultimately consented to Petitioner receiving, as an innocent spouse under Section 6015(c), full relief from joint and several liability with her husband. Petitioner filed a motion for litigation costs under Code Section 7430.

Issue: Was Petitioner is a “prevailing party” within the meaning of Code Section 7430 when (1) Petitioner made an offer to settle her tax liability, coupled with a reservation of rights as to innocent spouse under Section 6015(c), and (2) the IRS ultimately conceded that Petitioner was entitled to relief as an innocent spouse under Section 6015(c)?  

Primary Holdings:

  • An offer that reserves the right to claim relief under Section 6015 does not specify the offered amount of the taxpayer’s liability, as required under Section 7430, because the amount of liability offered depends on potential—and reserved—application of Section 6015 and cannot be determined until availability of Section 6015 relief is considered (or the reservation is withdrawn).

Key Points of Law:

  • Section 7430 provides for an award of reasonable litigation costs to a taxpayer in a proceeding brought by or against the United States involving the determination of any tax, interest, or penalty. An award may be made where the taxpayer can demonstrate that she (1) is the “prevailing party,” (2) has exhausted available administrative remedies, (3) has not unreasonably protracted the proceeding, and (4) has claimed “reasonable” costs. 26 U.S.C. § 7430(a), (b)(1), (3), (c)(1). The taxpayer bears the burden of proving each element.
  • To be the “prevailing party,” a taxpayer must satisfy certain net-worth requirements, see 26 U.S.C. § 7430(c)(4)(A)(ii), and must “substantially prevail[]” with respect to the amount in controversy or “the most significant issue or set of issues presented”. at § 7430(c)(4)(A)(i).
  • The taxpayer generally will not be treated as the prevailing party if the IRS establishes that the position of the IRS in the proceeding was substantially justified. at § 7430(c)(4)(B)(i). Even if the IRS’s position is substantially justified, the taxpayer is treated as the prevailing party if the liability of the taxpayer is equal to or less than the liability of the taxpayer which would have been so determined if the United States had accepted a qualified offer.
  • A qualified offer is defined in Section 7430(g)(1) as a written offer which: (A) is made by the taxpayer; (B) specifies the offered amount of the taxpayer’s liability; (C) is designated as a qualified offer for purposes of Section 7430; and (D) remains open for the applicable period. Further, Treas. Reg. § 301.7430-7(c)(3) provides, among other things, that the offer, if accepted, will fully resolve the taxpayer’s liability, and only that liability.
  • Section 6015 provides relief from the general rule under Section 6013(d)(3) that spouses filing joint federal income tax returns are jointly and severally liable for all taxes due. Section 6015 relieves a taxpayer from liability for tax, not just the collection of tax.
  • The position of the IRS in a Tax Court proceeding is “substantially justified” if it is “justified to a degree that could satisfy a reasonable person” or has a “reasonable basis both in law and fact.” That determination is based on all the facts of the case and the available legal precedents. A position has a reasonable basis in fact if there is such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. Conversely, a position has a reasonable basis in law if legal precedent substantially supports the Commissioner’s position given the facts available.

Insights: When making what is intended to be a “qualified offer” pursuant to 26 U.S.C. § 7430(g), the offeree is wise to closely consider whether conditions attached to the offer will destroy the “qualified” nature of the offer. Without a properly qualified offer, the offeree may be prohibited from pursuing the benefits afforded by Section 7430, such as the possibility to recover litigation and administrative proceeding costs, should the offeree, at the end of the day, prove to be the “prevailing party” for these purposes.