Page 2 - Recovering Fees from the IRS

06-0119 TPP.qxp_zEssentials.temp 6/6/19 3:42 PM Page 63

2412(d)(2)(B); Treasury Regulations sec- In one case, the court explained that section 7430(c)(4)(E); Treasury
tion 301.7430-5(f)(1)]. “substantial” means “being largely but not Regulations section 301.7430-7; Tolin v.
The taxpayer must submit an affidavit wholly that which is specified,” and that Commissioner, TC Memo 2018-29, *5].
to establish the net worth requirement. This as a result, “a recovery of slightly more An award of costs under the qualified
is usually enough, particularly if the gov- than one-half (½) of the requested amount offer rule includes only “those costs
ernment does not challenge the issue nor does not constitute ‘substantially’ prevail- incurred on or after the date of the last
submit evidence in opposition [Fletcher v. ing as to the amount in controversy” qualified offer” [Treasury Regulations sec-
U.S., 2019 WL 763587 (N.D. Okla. Feb. [Estate of Holmes v. U.S., 1990 WL tion 301.7430-7(a)].
21, 2019); Estate of Lippitz v. Comm’r, 10062, *4 (E.D. Pa. 1990)]. Accordingly, A qualified offer must strictly comply
T.C. Memo 2007-93]. the court rejected a request for fees from with the statute and Treasury Regulations;
The Treasury Department’s position is a taxpayer who recovered 54% of the defi- it must be made during the period between
that net worth should be determined using ciency. Other cases, however, have found the date on which the taxpayer is first noti-
the fair market value of the taxpayer’s that recoveries in this range were enough fied of the opportunity for appeals review,
assets because such a standard provides [e.g., Keeter v. U.S., 82 A.F.T.R.2d 98– and 30 days before the case is set for trial;
a “more accurate assessment of a taxpay- 5943 (E.D. Cal. 1998); Cox v. Comm’r, and the taxpayer must submit the offer, in
er’s actual and current net worth as of the T.C. Memo 1996-103]. writing, designated as an offer under IRC
administrative proceeding date” Alternatively, a taxpayer is a “prevailing section 7430, to the IRS, specifying the
[Proposed Treasury Regulations section party” if she has prevailed on the most amount of the tax liability [IRC section
301.7430-5(g)(1), 74 Fed. Reg. 61589- significant issue or set of issues presented, 7430(g); Treasury Regulations section
01 (Nov. 25, 2009), Background and 301.7430-7(c)].
Explanation of Provisions]. An offer that falls short of these
Prevailing party. The taxpayer is a “pre- The determination of requirements will not provide a basis for
vailing party” if he has substantially pre- an award under IRC section 7430. For
vailed as to either the amount in contro- whether the taxpayer is example, in Simpson v. Comm’r [668
versy or “the most significant issue or set Fed. Appx. 241 (9th Cir. 2016)], the
of issues presented,” or made a qualified the prevailing party can court held that a taxpayer’s settlement
offer [IRC section 7430(c)(4)(A),(E)]. The offer was not a “qualified offer” because
determination of whether the taxpayer is be made by agreement it stated that the taxpayers could with-
the prevailing party can be made by agree- draw it at any time. And in McGowan
ment with the IRS, or if no agreement can with the IRS, or if no v. Comm’r (TC Memo 2005-80) and
be reached, by the court [IRC section Coccotelli v. U.S. [2009 U.S. Dist. Lexis
7430(c)(4)(C); Treasury Regulations sec- agreement can be 83060 (E.D. Pa. July 22, 2009)], the
tion 301.7430-5(g)]. courts held that the offer failed as a
In determining whether the taxpayer reached, by the court. “qualified offer” merely because it did
substantially prevailed as to the amount in not contain designation that it was a qual-
controversy, one looks to the amount of ified offer under IRC section 6430. The
the award in comparison with the amount even if the amount of the deficiency is IRS’s “Procedures for Evaluating and
in controversy. If the taxpayer did not not substantially reduced. For example, in Responding to Qualified Offers
completely prevail against the IRS, this Heasley v. Comm’r [967 F.2d 116, 122 Submitted under Section 7430(g)” [IRS
can be difficult to gauge. There are obvi- (5th Cir. 1992)], even though the taxpay- CCN CC-2010-007 (Apr. 2, 2010)], is a
ous cases, such as in Bontrager v. Comm’r ers conceded liability on the deficiency useful guide for making sure that a qual-
(2019 WL 1936710, *2), in which the Tax and challenged only penalties, they sub- ified offer is in proper form.
Court found that the taxpayer substantially stantially prevailed on the most significant Substantially justified. Once the taxpay-
prevailed with a 70% reduction in the lia- issue when they secured a reversal of er clears the hurdles described above, the
bility, and Goettee v. Comm’r [124 T.C. penalties on appeal. burden of proof shifts to the IRS to estab-
286, 295 (2005)], in which the Tax Court Finally, if the taxpayer makes a “qual- lish that it was substantially justified in
found that taxpayers had not substantially ified offer,” the IRS rejects the qualified maintaining its position [IRC section
prevailed when they were awarded “not offer, and the IRS later obtains a court 7430(c)(4)(B)(i)].
quite 5% of what they claimed.” It is more judgment that is less than the dollar If the taxpayer seeks costs from admin-
difficult to predict the outcome of a case amount of the qualified offer, the taxpayer istrative proceedings and litigation, courts
that falls somewhere in the middle. will be treated as the prevailing party [IRC apply the “substantially justified” standard

JUNE 2019 / THE CPA JOURNAL 63