Knudsen v. Commissioner
793 F.3d 1030
9th Cir.2015Background
- Barbara and Kurt Knudsen filed joint returns for 1998–2001; taxes were unpaid and they were jointly liable. Barbara (Knudsen) later sought innocent spouse relief under 26 U.S.C. § 6015(f).
- Knudsen filed Form 8857 in December 2008 and was denied in May 2009 as time-barred under Treas. Reg. § 1.6015-5(b)(1); she petitioned the Tax Court pro se in July 2009.
- On April 21, 2010, Knudsen made a qualified offer under 26 U.S.C. § 7430(g) to settle for $50 per year (total $200); the IRS did not accept and the offer expired after 90 days.
- After discovery and submission on a stipulated record, the IRS—following a July 25, 2011 Chief Counsel Notice—conceded that Knudsen was entitled to innocent spouse relief and confirmed she was not time-barred.
- Knudsen moved for litigation costs under 26 U.S.C. § 7430, invoking the Qualified Offer Rule (QOR). The Tax Court denied fees, holding the IRS’s concession was a "settlement" and thus excluded from the QOR. The Ninth Circuit reversed.
Issues
| Issue | Knudsen's Argument | IRS's Argument | Held |
|---|---|---|---|
| Whether an IRS unilateral concession after the qualified offer constitutes a "settlement" that excludes the QOR | IRS concession here is not a settlement; Knudsen should be deemed prevailing under the QOR because her qualified offer resulted in equal-or-better liability | Concession amounted to a settlement/judgment pursuant to settlement and therefore QOR does not apply | Court held the unilateral concession was not a settlement for § 7430(c)(4)(E) and QOR applies; Knudsen prevailed |
| Whether Knudsen qualifies as a prevailing party under § 7430 via the QOR despite IRS position justification defense | Qualified offer rule grants prevailing-party status regardless of substantial-justification defense | IRS argued settlement exclusion or, alternatively, substantial justification | Court treated Knudsen as prevailing under QOR; did not apply substantial-justification defense due to QOR applicability |
| Whether parties manifested mutual assent/offer–acceptance such that a contract/settlement existed | No mutual assent or consideration; IRS never negotiated or accepted Knudsen’s qualified offer within the statutory period | Tax Court previously found concession equated to an offer/acceptance forming a settlement | Court applied contract principles and found no mutual-assent settlement here (no bargain or exchange) |
| Remedy on remand | Entitled to reasonable attorney’s fees and costs incurred after the qualified offer | IRS opposed fees and argued failure to substantiate costs | Case reversed and remanded to Tax Court to calculate reasonable fees and costs |
Key Cases Cited
- Custom Chrome, Inc. v. CIR, 217 F.3d 1117 (9th Cir. 2000) (presumption that Tax Court applied law correctly but no special deference)
- AMERCO, Inc. v. CIR, 979 F.2d 162 (9th Cir. 1992) (review of Tax Court legal conclusions)
- United States for Use of Youngstown Welding & Eng’g Co. v. Travelers Indem. Co., 802 F.2d 1164 (9th Cir. 1986) (contract/settlement formation is mixed question of law and fact)
- Adkison v. CIR, 592 F.3d 1050 (9th Cir. 2010) (de novo review of Tax Court legal conclusions)
- Estate of Lippitz v. CIR, 94 T.C.M. (CCH) 330 (2007) (Tax Court memorandum treating late concession as non-settlement) (not an official reporter citation but relied on in opinion for analogy)
Note: The Ninth Circuit reversed the Tax Court, holding the IRS’s unilateral concession was not a settlement under 26 U.S.C. § 7430(c)(4)(E)(ii)(I), and remanded for determination of reasonable fees and costs.