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Appeals Court Holds That No Offer Is Too Low To Be A Qualified Offer

By Joel N. Crouch on February 26, 2019

In a prior blog post we discussed using a Qualified Offer as a tool for settling a tax case with the government. On February 8th, the U.S. Court of Appeals for the Federal Circuit issued an opinion in BASR Partnership v. United States, holding that a partnership that prevailed in a case against the IRS could recover its reasonable litigation costs from the government when it submitted a nominal $1 qualified offer. 

BASR was a TEFRA case involving the so-called Son of Boss transaction, the tax benefits of which the IRS disallowed in a Final Partnership Administrative Adjustment (FPAA) issued to the partnership.  BASR’s tax matters partner challenged the FPAA claiming that it was issued beyond the three year statute of limitations in I.R.C. Section 6501(a).  During the proceedings, the BASR partners submitted a $1.00 qualified settlement offer to the government, which the government rejected.  After the trial court granted the partnership’s request for summary judgement regarding the statute of limitations, BASR Partnership moved for an award of litigation costs under IRC Section 7430(c)(4)(E), which the trial court granted.

The government appealed the ruling granting the award of litigation costs raising a number of issues including whether nominal offers are permitted under I.R.C. Section 7430.  The government argued that the $1.00 qualified offer “was not made in a good-faith attempt to produce a settlement” and it was an abuse of discretion for the trial court to award litigation costs.  The government said that the $1.00 offer was “submitted solely to shift fees to the Government in the event BASR and the BASR partners prevailed.”  BASR responded that the $1.00 offer “was a good-faith attempt to settle a case that BASR believed the Government could not win.”  In ruling against the government, the appeals court agreed with the trial court that I.R.C. Section 7430 does not require any minimum amount or define the parameters of a reasonable offer, nor does it require that an offer be for a certain percentage of the taxpayer’s purported liability.

I.R.C. Section 7430 permits the award of reasonable administrative and litigation costs to a taxpayer in an administrative or court proceeding brought against the United States in connection with the determination of any tax, interest, or penalty. An award of reasonable administrative or litigation costs is available where: (1) the taxpayer did not unreasonably protract the proceedings, (2) the amount of the costs requested is reasonable, (3) the taxpayer exhausted available administrative remedies (i.e., sought review by IRS Appeals after the audit), and (4) the taxpayer is the “prevailing party.” The latter requirement is the most difficult, as it requires the taxpayer to establish, among other things, that it substantially prevailed as to the most significant issues and that the IRS position was not substantially justified. Where a taxpayer makes a qualified offer which the IRS rejects, and the taxpayer later wins a judicial determination to pay less than the amount offered, the taxpayer is treated as the “prevailing party,” paving the way for the award of practitioner fees and costs.

Under I.R.C. Section 7430(g), a qualified offer is a written offer that: (i) specified the offered amount of the taxpayer’s liability (without interest), (ii) is designated as a “qualified” offer under Section 7430(g), and (iii) is made by the taxpayer after the 30-Day Letter but before the date that is 30 days before the case is first set for trial.

It is important to note that qualified offers are not limited to income tax disputes. They can be made in connection with proposed trust fund penalty assessments, transferee liability disputes, and as evidenced by the BASR Partnership case, TEFRA proceedings involving proposed partnership tax return adjustments.



For any questions on this or any other tax-related matter, please feel free to contact Joel Crouch at (214) 749-2456 or jcrouch@meadowscollier.com.