Taxpayers Win But the Court Denies Their Request for Attorney Fees and Costs
By Joel N. Crouch on December 5, 2024
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Joel N. Crouch
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In a recent blog post I discussed a case where a taxpayer was in a dispute with the IRS, made a qualified settlement offer of $1 to the IRS, won the case and collected attorney fees and costs from the IRS under IRC Section 7430. In a more recent case, the taxpayers did not make a qualified settlement offer, won their case and were denied attorney fees and costs.
In Anker v. United States, a case in the Middle District of Florida, the government was seeking Section 6700 penalties from the plaintiffs for promoting what the IRS called abusive tax shelters – in this case microcaptive insurance. In an unusual and interesting strategy, the plaintiffs requested a jury trial. This strategy is unusual because there are very few civil tax cases tried before a jury. Most civil tax cases are tried in U.S. Tax Court, where a jury is not available. Refund cases can be tried in the Court of Federal Claims, where a jury is not available. Refund cases can also be tried in U.S. District Court, where a jury is available if requested by either party. I don’t recall a tax refund case where the government requested a jury trial, and in over 35 years of tax practice, I can probably count the number of taxpayers who requested a jury trial on one hand.
In Anker, the plaintiffs paid a portion of the Section 6700 penalties, filed claims for refund, and later sued for refunds. In its answer, the government counter claimed for the balance of the penalties. The plaintiffs’ decision to request a jury trial worked, because the jury determined that the Government failed to prove by a preponderance of the evidence that the plaintiffs were liable for penalties for promoting an abusive tax shelter.
But the story does not end there. Because they were the prevailing party, the plaintiffs requested they be awarded attorney fees and costs under Section 7430. 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 (e.g., 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. Unfortunately, the Court found that the government’s position that the plaintiffs were liable for penalties under Section 6700 was substantially justified and denied the request for fees and costs. In reading the Court’s opinion, I was left with the impression that the Court disagreed with the jury’s decision that the government failed to prove by a preponderance of the evidence that the plaintiffs were liable for penalties for promoting an abusive tax shelter.
As we have discussed in prior blog posts, if a taxpayer makes a qualified settlement offer under Section 7430(g), the taxpayer is not required to prove that the IRS position was not substantially justified. Even an offer of $1 is enough to be a qualified settlement offer that can result in the awarding of attorney fees and expenses. A qualified offer is a written offer that: (i) specifies 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 (i.e., final audit report offering IRS Appeal review rights) but before the date that is 30 days before the case is first set for trial.
It is difficult to tell from the case whether the plaintiffs in Anker were ever in a position to make a qualified settlement offer. But if they were, they would have been able to avoid the high hurdle of proving that the IRS’ position regarding Section 6700 penalties was not substantially justified.
If you have any questions regarding this or any other tax issue, please feel free to contact me at jcrouch@meadowscollier.com.
In Anker v. United States, a case in the Middle District of Florida, the government was seeking Section 6700 penalties from the plaintiffs for promoting what the IRS called abusive tax shelters – in this case microcaptive insurance. In an unusual and interesting strategy, the plaintiffs requested a jury trial. This strategy is unusual because there are very few civil tax cases tried before a jury. Most civil tax cases are tried in U.S. Tax Court, where a jury is not available. Refund cases can be tried in the Court of Federal Claims, where a jury is not available. Refund cases can also be tried in U.S. District Court, where a jury is available if requested by either party. I don’t recall a tax refund case where the government requested a jury trial, and in over 35 years of tax practice, I can probably count the number of taxpayers who requested a jury trial on one hand.
In Anker, the plaintiffs paid a portion of the Section 6700 penalties, filed claims for refund, and later sued for refunds. In its answer, the government counter claimed for the balance of the penalties. The plaintiffs’ decision to request a jury trial worked, because the jury determined that the Government failed to prove by a preponderance of the evidence that the plaintiffs were liable for penalties for promoting an abusive tax shelter.
But the story does not end there. Because they were the prevailing party, the plaintiffs requested they be awarded attorney fees and costs under Section 7430. 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 (e.g., 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. Unfortunately, the Court found that the government’s position that the plaintiffs were liable for penalties under Section 6700 was substantially justified and denied the request for fees and costs. In reading the Court’s opinion, I was left with the impression that the Court disagreed with the jury’s decision that the government failed to prove by a preponderance of the evidence that the plaintiffs were liable for penalties for promoting an abusive tax shelter.
As we have discussed in prior blog posts, if a taxpayer makes a qualified settlement offer under Section 7430(g), the taxpayer is not required to prove that the IRS position was not substantially justified. Even an offer of $1 is enough to be a qualified settlement offer that can result in the awarding of attorney fees and expenses. A qualified offer is a written offer that: (i) specifies 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 (i.e., final audit report offering IRS Appeal review rights) but before the date that is 30 days before the case is first set for trial.
It is difficult to tell from the case whether the plaintiffs in Anker were ever in a position to make a qualified settlement offer. But if they were, they would have been able to avoid the high hurdle of proving that the IRS’ position regarding Section 6700 penalties was not substantially justified.
If you have any questions regarding this or any other tax issue, please feel free to contact me at jcrouch@meadowscollier.com.
