On March 3, 2022, the Tax Court issued the full opinion in Lewis v. Commissioner (158 T.C. No. 3). The primary issues presented in Lewis v. Commissioner were (i) whether the letter that the taxpayer sent to the IRS constituted a “qualified offer” (sorry, Gina, but no) and (ii) whether the IRS’s position in the litigation was “substantially justified” (don’t quit your job at the diner, because the position was justified…substantially).
Lewis v. Commissioner in a Nutshell
The taxpayer, Gina Lewis, worked the diner all day, working for her man (Tim—not Tommy, as the Tax Court had initially guessed). She brought home her pay for love, for love. And where did this get Gina? On the hook, jointly and severally, for Tim’s income tax deficiencies. Gina petitioned for innocent spouse relief after the IRS issued notice of deficiency to her and former spouse Tim.
Following the resolution of the related case with the former spouse and a determination that Gina was entitled to innocent spouse relief, the IRS moved for an entry of decision that would grant Gina full relief from joint and several liability and filed a notice of concession that Gina was entitled to innocent spouse relief. Gina objected and moved for litigation costs.
Gina’s Attempt at a Qualified Offer
In late December 2016, Gina sent to the IRS a letter (December 2016 offer letter or offer) stating that she was making a qualified offer pursuant to IRC § 7430(g). She offered the following terms:
- To concede 100% of the tax and 100% of the penalties for the tax years 2008, 2009, and 2010, as set forth on the attached Form 4549-A dated February 12, 2013;
- To agree to the immediate assessment of the increase in tax and penalties set forth on the attached Form 4549-A.
- This is an offer of assessment, not payment, Mrs. Lewis reserves all collection rights that she may qualify for now or in the future, including without limitation, the right to relief under IRC § 6015 (innocent spouse), § 6159 (installment agreement), IRC § 7122 (offer in compromise), IRC § 6343 (release of levy), IRC § 7811 (taxpayer assistance order), IRC § 6502 (statute of limitations on collection), IRC § 6325 (release of lien), collection due process, collection appeals program, currently non-collectible status, bankruptcy, and any other current or future law that may serve to reduce the amount or delay the payment of amounts assessed as a result of the acceptance of this qualified offer.
The IRS neither accepted nor rejected the qualified offer, and instead allowed it to lapse.
The revenue agent’s activity record reflects discussion of Gina’s entitlement to innocent spouse relief under IRC § 6015, even though Gina had not provided any information to support a claim for innocent spouse relief. Nor did she submit a Form 8857, Request for Innocent Spouse Relief, prior to or contemporaneously with the December 2016 offer letter.
The Petition and Answer
In March 2018, the IRS issued a notice of deficiency to Gina and Tim for 2008, 2009, and 2010. Gina timely filed her petition, and in her timely amended petition she “elect[ed] the benefits” of IRC § 6015(b) and (c). In its answer to Gina’s amended petition, the IRS admitted that Gina “requested innocent spouse relief in her petition per IRC § 6015(b) and (c),” and that the IRS “will review her request and make a determination regarding her eligibility for said relief.” Tim challenged the notice of deficiency and intervened in Gina’s case pursuant to Tax Court Rule 325.
Throughout the proceeding, the IRS requested that Gina submit Form 8857 or provide some other information supporting her claim for innocent spouse relief under IRC § 6015. Gina never did. Nonetheless, the IRS’s counsel referred the case to the IRS Cincinnati Centralized Innocent Spouse Operations (CCISO), which requested the Form 8857 and supporting documentation from Gina.
Once again, Gina did not submit Form 8857 or supporting documentation to CCISO. Eventually, after resolving the related case with Mr. Lewis, the IRS concluded that Gina was entitled to innocent spouse relief under IRC § 6015(c).
In December 2020, the IRS moved for entry of a decision that would grant Gina full relief from joint and several liability under IRC § 6015(c) for the years at issue. After application of IRC § 6015(c), Gina had no liability. The IRS also filed a notice of concession that Gina was “entitled to relief under IRC § 6015(c)” for each year. Gina objected to the motion for entry of decision and the notice of concession, claiming that it was a “litigation tactic to avoid an award of fees and costs that [she was] entitled to.”
Gina eventually filed her motion for litigation costs after being ordered to do so by the Court. The IRS filed a response opposing Gina’s motion, and Gina filed a reply.
Awards of Litigation Costs, Generally
As relevant here, IRC § 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
- is the “prevailing party;”
- has exhausted available administrative remedies within the IRS;
- has not unreasonably protracted the proceeding; and
- has claimed “reasonable” costs.
The taxpayer bears the burden of proving that these requirements are met. These requirements are conjunctive; failure to satisfy any one of them precludes an award of costs to the taxpayer. The decision to award fees is within the sound discretion of the Court. The IRS disputes that Gina satisfies each of the four requirements outlined above.
Because the Tax Court begin determined that Gina was not the prevailing party, the opinion did not bother even addressing the other three.
To be the “prevailing party,” a taxpayer must satisfy certain net-worth requirements, and (somewhat critical to the whole gambit) must actually “substantially prevail” with respect to the amount in controversy or “the most significant issue or set of issues presented.” The IRS agrees that Gina meets the net-worth requirements and that she substantially prevailed with respect to the amount in controversy and the most significant issue presented.
The taxpayer generally will not be treated as the prevailing party if the IRS establishes that “the position of the United States in the proceeding was substantially justified.” With respect to showing that the position was substantially justified, the IRS bears the burden.
Even if the IRS’s position is substantially justified, under IRC § 7430(c)(4)(E)(i), the taxpayer will be treated as the prevailing party if “the liability of the taxpayer pursuant to the judgment in the proceeding (determined without regard to interest) 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 of the party under IRC § 7430(g).”
The qualified offer provision may not apply, however, where the “judgment [is] issued pursuant to a settlement.” With respect to establishing that she met the qualified offer requirements, the taxpayer (Gina) bears the burden.
Qualified Offer Requirements
A qualified offer is defined in IRC § 7430(g)(1) as a written offer which:
- is made by the taxpayer to the United States during the qualified offer period;
- specifies the offered amount of the taxpayer’s liability (determined without regard to interest);
- is designated at the time it is made as a qualified offer for purposes of this IRC §; and
- remains open during the period beginning on the date it is made and ending on the earliest of the date the offer is rejected, the date the trial begins, or the 90th day after the date the offer is made.
Treas. Reg. § 301.7430-7(c)(3) provides further guidance on the requirement that the offer must specify the offered amount of the taxpayer’s liability. Specifically, the Treasury Regulation provides that
The offer may be a specific dollar amount of the total liability or a percentage of the adjustments at issue in the proceeding at the time the offer is made.
This amount must be with respect to all of the adjustments at issue in the administrative or court proceeding at the time the offer is made and only those adjustments.
The specified amount must be an amount, the acceptance of which by the United States will fully resolve the taxpayer’s liability, and only that liability…for the type or types of tax and the taxable year or years at issue in the proceeding….
The IRS argued that Gina’s offer was not a qualified offer because it did not specify an amount “the acceptance of which by the United States will fully resolve the taxpayer’s liability.” The IRS argued rather emphatically that Gina’s offer merely conceded the assessment of a tax but also that it reserved the right to later challenge that assessed liability by raising IRC § 6015 relief.
In reply, Gina argued that her offer specified the amount of [her] liability because she offered “100% of the tax and the penalties” for all years at issue and because her liability in this case, without regard to innocent spouse relief, is less than what her liability would have been had the IRS accepted the offer. Gina’s rationale for determining liability “without regard to innocent spouse relief” is that her offer “was made almost 2 years before she made innocent spouse relief an issue by pleading it as an affirmative defense in this deficiency proceeding.”
Stated differently (to the best of the Tax Court’s ability), because Gina raised her IRC § 6015 claim after submitting her offer, “such relief from liability is to be ignored for the purpose of determining whether [she] is treated as a prevailing party under the qualified offer provision of IRC § 7430(c)(4)(E).” Equally as emphatically, Gina argued that her offer reserved all collection rights including innocent spouse relief and that when the offer was made, she did not know if she would ever submit a request for IRC § 6015 relief because Tim was in a position to pay the deficiency, potentially obviating the need for her to seek innocent spouse relief.
Examining Gina’s Offer
Whether Gina’s offer is a “qualified offer” turns on whether reserving the right to claim relief under IRC § 6015 relates to collection (as she tries to frame it) or to her underlying tax liability. For the answer, the Tax Court looks to the Code.
IRC § 6015 provides relief from the general rule under IRC § 6013(d)(3) that spouses filing joint federal income tax returns are jointly and severally liable for all taxes due. The operative provision in IRC § 6015(b) provides that in certain circumstances, an individual “shall be relieved of liability for tax (including interest, penalties, and other amounts).” Likewise, IRC § 6015(c) discusses treatment of an individual’s “liability for any deficiency which is assessed with respect to the return.” That is, IRC § 6015 relieves a taxpayer from liability for tax, not just the collection of tax.
This point is further supported by the fact that spousal defenses are listed separately from collection alternatives as a basis for challenging a proposed collection action under IRC § 6330(d)(1). A taxpayer may also seek relief from joint and several liability on a joint return by raising the matter as an affirmative defense in a petition for redetermination invoking the Court’s deficiency jurisdiction under IRC § 6213(a) (as Gina did here), or by filing a so-called stand-alone petition challenging a notice of determination denying a claim of innocent spouse relief.
Gina’s reply concedes that IRC § 6015 provides relief from liability. She argues, nevertheless, that the Tax Court should calculate her liability pursuant to the decision to be entered in this case “without regard to innocent spouse relief” and ignore “such relief from liability” (thereby acknowledging that IRC § 6015 would otherwise affect her liability). Gina further states that her spouse’s payment of the deficiency would have “obviated the need for [her] to claim IRC § 6015 relief.”
Somewhat deleteriously to her argument was the fact that she did not provide the Tax Court with any legal basis whatsoever for ignoring her reservation of her right to claim such relief in the December 2016 offer letter.
Rather, “the Tax Court must read her reservation as a caveat as to liability.” Consequently, “her offer flunks the requirement” in IRC § 7430(g)(1)(B) that the qualified offer must specify the offered amount of the taxpayer’s liability. An offer that reserves the right to claim relief under IRC § 6015 does not specify the amount because the amount of liability offered depends on potential—and reserved—application of IRC § 6015. Such application and amount of liability, therefore, cannot be determined until after the availability of IRC § 6015 relief is considered (or reservation of the right to claim it is withdrawn).
Applying the regulations to Gina’s offer illustrates the problem. Gina’s tax liabilities might be (and were) reduced to zero after consideration of her reserved right to claim relief from joint and several liability under IRC § 6015(c). Thus, her offer would not have fully resolved her liability…as she would have had no liability if IRC § 6015(c) applied…as it did…in this case…to Gina.
Gina argues that the “differences between the amount of an assessment pursuant to a qualified offer and the amount that a taxpayer actually pays as a result of adjustments that are not at issue when the offer was made, do not affect the validity of a qualified offer.” She points to Treas. Reg. § 301.7430-7(e), Ex. 4, which discusses whether a taxpayer may reduce the amount the taxpayer will pay pursuant to a qualified offer after the offer is accepted by the IRS by applying net operating loss carryovers.
Gina contends that “[a] future innocent spouse claim is similar to the carryback of net operating losses.” Unlike net operating loss carryovers not in issue when an offer is made and applied after a qualified offer is accepted to reduce payment for the years in issue, the right to relief from liability under IRC § 6015 that Gina reserved in her offer affects the amount of her liabilities—the assessed deficiencies—for the years in issue; it is not merely a carryover item applied later to reduce payment.
Rule of Law in Lewis v. Commissioner
The Tax Court therefore concluded that
an offer that reserves the right to claim relief from joint and several liability under IRC § 6015 is not a qualified offer because it fails to specify the offered amount of the taxpayer’s liability under IRC § 7430(g)(1)(B), and would not fully resolve the taxpayer’s liability.
Because Gina’s offer reserved the right to claim relief from joint and several liability under IRC § 6015, she did not, therefore, make a qualified offer under IRC § 7430(g). Thus, because Gina did not submit a qualified offer, her request for litigation costs will fail if the IRS’s position was substantially justified.
The “position of the United States” in a Tax Court proceeding is that set forth in the IRS’s answer. In its answer to Gina’s amended petition, the IRS acknowledged that Gina requested innocent spouse relief under IRC § 6015 and stated that it would “review her request and make a determination regarding her eligibility for said relief.”
A position 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.” The determination of reasonableness 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. A position has a reasonable basis in law if legal precedent substantially supports the IRS’s position given the facts available to him.
Unfortunately for Gina, Treas. Reg. § 301.7430-5(d)(1) provides that
A significant factor in determining whether the position of the Internal Revenue Service is substantially justified as of a given date is whether, on or before that date, the taxpayer has presented all relevant information under the taxpayer’s control and relevant legal arguments supporting the taxpayer’s position to the appropriate IRS personnel.
The IRS’s position was substantially justified because Gina did not present all relevant information under her control, and the IRS’s position had a reasonable basis both in law and fact. A reasonable person could require information such as Form 8857 or literally any other documentation supporting Gina’s claim for innocent spouse relief before making a determination.
The submission of Form 8857 or other supporting documentation to the IRS for CCISO review frequently has preceded evaluation of a claim for innocent spouse relief. The Tax Court observes, and rightfully so, that the IRS ultimately conceded that relief was appropriate not on the basis of documentation Gina submitted, as “there was none,” but instead the settlement the IRS reached with Gina’s former spouse.
Gina was not a prevailing party under IRC § 7430(c)(4) because she did not satisfactorily bear her burden of proving that she made a qualified offer. Instead, the IRS satisfied its burden of proving that his position was substantially justified.
- Bon Jovi, Living on a Prayer, Slippery When Wet (Mercury Records 1986). ↑
- Tim must have been a really, really bad dude for the IRS to sua sponte grant Gina innocent spouse relief. Like, really bad… ↑
- IRC § 7430(a), (b)(1), (3), (c)(1); Morrison v. Commissioner, 565 F.3d 658, 661 (9th Cir. 2009), rev’g on other grounds T.C. Memo. 2006-103; Alterman Tr. v. Commissioner, 146 T.C. 226, 227 (2016). ↑
- Tax Court Rule 232(e). ↑
- See Alterman Tr., 146 T.C. at 227; see also Minahan v. Commissioner, 88 T.C. 492, 497 (1987). ↑
- See Morrison v. Commissioner, 565 F.3d at 661 n.3 (noting that “[a] decision by the Tax Court denying an award of attorneys’ fees is reviewed for abuse of discretion”) (citing Huffman v. Commissioner, 978 F.2d 1139, 1143 (9th Cir. 1992), aff’g in part, rev’g in part, and remanding T.C. Memo. 1991-144)). ↑
- See IRC § 7430(c)(4)(A)(ii). ↑
- See IRC § 7430(c)(4)(A)(i). ↑
- IRC § 7430(c)(4)(B)(i). ↑
- Id.; see also Taxpayer Bill of Rights 2, Pub. L. No. 104-168, § 701(b), 110 Stat. 1452, 1463 (1996) (adding current IRC § 7430(c)(4)(B) to shift the burden of proving substantial justification from the taxpayer to the Government); Pac. Fisheries Inc. v. United States, 484 F.3d 1103, 1107 (9th Cir. 2007). ↑
- See Haas & Assocs. Accountancy Corp. v. Commissioner, 117 T.C. 48, 59 (2001) (holding that the qualified offer provision of IRC § 7430(c)(4)(E)(i) applies without regard to whether the IRS’s position in the matter is substantially justified), supplementing T.C. Memo. 2000-183, aff’d, 55 F. App’x 476 (9th Cir. 2003). ↑
- IRC § 7430(c)(4)(E)(ii)(I). ↑
- See Tax Court Rule 232(e). ↑
- Treas. Reg. § 301.7430-7(c)(3). ↑
- See Treas. Reg. § 301.7430-7(b)(3) (discussing treatment of adjustments raised subsequent to last qualified offer when calculating liability pursuant to the judgment). ↑
- See IRC § 6330(c)(2)(A)(i), (d); IRC § 6320(c). ↑
- See Butler v. Commissioner, 114 T.C. 276, 287-88 (2000). ↑
- See IRC § 6015(e)(1)(A). ↑
- See Treas. Reg. § 301.7430-7(c)(3). ↑
- See Treas. Reg. § 301.7430-7(c)(3). ↑
- See IRC § 7430(c)(7)(A); Huffman v. Commissioner, 978 F.2d at 1148; Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 442 (1997). ↑
- Swanson v. Commissioner, 106 T.C. 76, 86 (1996) (quoting Pierce v. Underwood, 487 U.S. 552, 565 (1988)); see also Huffman v. Commissioner, 978 F.2d at 1147. ↑
- Maggie Mgmt. Co., 108 T.C. at 443. ↑
- Underwood, 487 U.S. at 565. ↑
- Maggie Mgmt. Co., 108 T.C. at 443. ↑
- See, e.g., I.R.S. Chief Counsel Notice CC-2013-011 (June 7, 2013) (directing the IRS’s counsel to seek a CCISO determination regarding relief under IRC § 6015 in docketed cases with no prior CCISO review). ↑
- See, e.g., Knudsen v. Commissioner, 793 F.3d at 1032; Angle v. Commissioner, T.C. Memo. 2015-92, *3-4, supplemented by T.C. Memo. 2016-27, aff’d, 699 F. App’x 703 (9th Cir. 2017); Estate of Lippitz v. Commissioner, T.C. Memo. 2007-293, *2. ↑
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