FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BARBARA JANE KNUDSEN,

Petitioner-Appellant,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellee.

No. 13-72077

Tax Court No.

18048-09

OPINION

Appeal from the United States Tax Court

Michael B. Thornton, Judge, Presiding

Argued and Submitted

May 4, 2015—Portland, Oregon

Filed July 15, 2015

Before: William A. Fletcher and Andrew D. Hurwitz,

Circuit Judges, and Donald E. Walter, Senior District

Judge.*

Opinion by Judge Walter

* The Honorable Donald E. Walter, Senior United States District Judge

for Western Louisiana, sitting by designation.
2 KNUDSEN V. CIR

SUMMARY**

Tax

The panel held that a unilateral concession by the Internal

Revenue Service is not a settlement for purposes of the

Qualified Offer Rule, reversed a Tax Court decision denying

attorneys’ fees and litigation costs, and remanded for

determination of such costs and fees to be awarded to

taxpayer as a prevailing party for purposes of 26 U.S.C.

§ 7430.

Taxpayer made a qualified offer to settle her petition for

judicial review of the IRS’s denial of innocent spouse relief.

The IRS allowed the offer to expire, but later conceded

taxpayer’s entitlement to such relief. The panel explained

that, given that the purpose of the Qualified Offer Rule is to

encourage settlements by imposing litigation costs on the

party not willing to settle and that the IRS was unwilling to

settle this case on the terms and at the times offered by

taxpayer, the IRS cannot subsequently sidestep the

consequences of such refusal by conceding the issues after

taxpayer had effectively presented her case for disposition by

the Tax Court. Accordingly, the panel held that the

concession was not a settlement within the meaning of

§ 7430(c)(4)(E)(ii)(I), and taxpayer was a prevailing party

entitled to litigation costs.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.
KNUDSEN V. CIR 3

COUNSEL

Denis M. Vannier (argued), Deputy City Attorney, City

Attorney’s Office, Portland, Oregon; Jan R. Pierce,

Supervisory Attorney, Lewis & Clark Low Income Tax Payer

Clinic, Portland, Oregon, for Petitioner-Appellant.

Carol Barthel (argued) and Joan I. Oppenheimer, United

States Department of Justice, Tax Division, Washington,

D.C., for Respondent-Appellee.

OPINION

WALTER, District Judge:

In this case, we are asked to decide whether a unilateral

concession by the Internal Revenue Service (“IRS”) is a

settlement, for purposes of the Qualified Offer Rule (“QOR”)

of the Internal Revenue Code, codified at 26 U.S.C.

§ 7430(c)(4)(E). We conclude that this concession was not a

settlement, within the meaning of the QOR. Accordingly, we

reverse the decision of the United States Tax Court and

remand the case for a determination of reasonable attorney’s

fees and costs to be awarded to the taxpayer, as the prevailing

party.

I. FACTUAL AND PROCEDURAL HISTORY

The relevant facts are not in dispute. Barbara Jane

Knudsen and Kurt H. Knudsen married in 1979, separated in

2006, and divorced in 2008. During the years 1998–2001, the

Knudsens filed joint tax returns. Barbara was a “stay-at-home

mom,” earning no income of her own, and Kurt was a
4 KNUDSEN V. CIR

practicing attorney. Despite their having filed joint tax returns

for those four years, the taxes were never paid, and the

Knudsens became jointly and severally liable for the

respective tax liabilities.

In June 2005, the IRS sent the Knudsens separate notices

of intent to levy with respect to underpayments of the taxes

reported for those four years. On December 23, 2008, postdivorce, Barbara (hereinafter, “Knudsen”) filed a Form 8857,

Request for Innocent Spouse Relief, seeking equitable relief,

under 26 U.S.C. § 6015(f), from joint and several liability as

to all tax liabilities for the years 1998–2001. On May 14,

2009, Knudsen was denied innocent spouse relief because the

two-year statute of limitations, as set forth in Treasury

Regulation § 1.6015-5(b)(1), had expired.

On July 28, 2009, Knudsen filed a pro se petition with the

Tax Court, seeking review of the denial. Kurt Knudsen

intervened. The IRS answered Knudsen’s petition and

forwarded the matter to the IRS Cincinnati Centralized

Innocent Spouse Operation (“CCISO”) to consider the merits

of Knudsen’s claim for equitable relief. After the CCISO

denied Knudsen’s claim on its merits, Knudsen submitted

additional documentation in support of her request for relief,

which was returned to the CCISO for reconsideration, and

again denied on the merits.

On April 21, 2010, Knudsen made a “qualified offer,”

pursuant to 26 U.S.C. § 7430(g), to settle her tax liability for

$50 per year, for each of the four years at issue. The IRS did

not respond to the offer, which expired after ninety days, by

operation of law. The case was set for trial on the Tax Court’s

calendar for March 14, 2011; the parties proceeded with

discovery, and both Knudsen and the IRS submitted pretrial
KNUDSEN V. CIR 5

memoranda. Prior to the scheduled trial date, the IRS notified

Knudsen’s counsel that it would concede her entitlement to

innocent spouse relief but for her failure to comply with the

two-year statute of limitations in Treas. Reg. § 1.6015-

5(b)(1). In March 2011, the parties filed a joint motion for

leave to submit the case on a stipulated record, for the Tax

Court to determine whether Knudsen’s claim for equitable

relief was time-barred. The Tax Court granted the motion to

submit the fully stipulated case and ordered opening briefs to

be filed by August 30, 2011.

On July 25, 2011, in Chief Counsel Notice CC-2011-017,

the IRS announced that the Department of the Treasury

would enlarge the two-year deadline under Treas. Reg.

§ 1.6015-5(b)(1) “in the interest of tax administration and . . .

not reflective of any doubt concerning the authority of the

Service to impose the two year deadline” and that the twoyear deadline would not be enforced in cases then pending in

the Tax Court. That same day, the IRS informed Knudsen that

it would concede that relief was not time-barred in this case.

On August 24, 2011, the IRS sent the Knudsens a

proposed supplemental stipulation of settled issues, stating

that Barbara Knudsen was entitled to the requested equitable

relief and that a judgment would be issued by the court

pursuant to a settlement. In anticipation of filing a motion for

litigation costs, Knudsen was unwilling to stipulate that the

judgment resulted from a settlement. During an August 29,

2011 conference call with the Tax Court, the IRS informed

the court that the IRS conceded the statute of limitations

issue, in accordance with the July 25, 2011 policy directive.

The next day, the court ordered the parties to file a

supplemental stipulation of settled issues. Instead, the IRS

filed a status report on September 29, 2011, indicating that
6 KNUDSEN V. CIR

the parties could not agree to a supplemental stipulation, but

confirming Knudsen’s entitlement to equitable relief.

One day prior, on September 28, Knudsen had moved for

litigation costs as the prevailing party, pursuant to section

7430(a), in light of having made a qualified offer, pursuant to

section 7430(g). Knudsen requested attorneys’ fees and costs

in the amount of $39,813, representing amounts incurred after

the qualified offer was made. The IRS opposed the motion,

arguing: (a) that Knudsen was not a prevailing party under

section 7430(c)(4)(E), because the judgment would be issued

pursuant to a settlement, disqualifying the case from the

QOR; (b) in the alternative, that Knudsen was not a

prevailing party under section 7430(c)(4) because the IRS’s

position was substantially justified; and (c) that Knudsen had

failed to substantiate her claim for reasonable litigation costs.

On April 1, 2013, the Tax Court issued a memorandum

opinion denying litigation costs, including attorney’s fees,

and specifically holding that a concession by the IRS was a

settlement of the case for purposes of the QOR. On April 3,

2013, the Tax Court issued its final order and decision,

granting Knudsen relief under section 6015(f) from joint and

several income tax liabilities for the taxable years 1998, 1999,

2000, and 2001, and denyingKnudsen’s motion for attorney’s

fees and litigation costs.

II. STANDARD OF REVIEW

“Although a presumption exists that the Tax Court

correctly applied the law, no special deference is given to the

Tax Court’s decisions.” Custom Chrome, Inc. v. CIR,

217 F.3d 1117, 1121 (9th Cir. 2000) (citing AMERCO, Inc. v.

CIR, 979 F.2d 162, 164 (9th Cir. 1992)). Determining the
KNUDSEN V. CIR 7

existence of a contract, or a settlement, is a mixed question of

law and fact. United States for Use of Youngstown Welding &

Eng’g Co. v. Travelers Indem. Co., 802 F.2d 1164, 1169 (9th

Cir. 1986). We review the Tax Court’s conclusions of law,

including its interpretations of the Internal Revenue Code, de

novo. Adkison v. CIR, 592 F.3d 1050, 1052 (9th Cir. 2010)

(citing Suzy’s Zoo v. CIR, 273 F.3d 875, 878 (9th Cir. 2001)).

We review questions of fact for clear error. Custom Chrome,

217 F.3d at 1121 (citing Boyd Gaming Corp. v. CIR, 177 F.3d

1096, 1098 (9th Cir. 1999).

III. DISCUSSION

The IRS and Knudsen agree that 26 U.S.C. § 7430 is the

provision under which Knudsen must bring her request for

litigation costs, including attorney’s fees; however, the parties

disagree as to whether section 7430 grants Knudsen

“prevailing party” status, in light of the IRS concession in this

case. Section 7430(a) provides that the prevailing party “[i]n

any administrative or court proceeding which is brought by

or against the United States in connection with . . . [tax

liability] . . . may be awarded . . . reasonable litigation costs

incurred in connection with such court proceeding,” including

attorney’s fees.1“The term ‘prevailing party’ means any party

. . . which (I) has substantially prevailed with respect to the

amount in controversy, or (II) has substantially prevailed with

respect to the most significant issue or set of issues presented

. . . .” 26 U.S.C. § 7430(c)(4)(A)(i).

1

In order to recover attorney’s fees, a party must also exhaust

administrative remedies and must not have unreasonably protracted the

proceedings. See 26 U.S.C. § 7430(b)(1) and (3). Here, the IRS concedes

these requirements.
8 KNUDSEN V. CIR

There is an exception “if the United States establishes that

. . . [its position] . . . in the proceeding was substantially

justified.” 26 U.S.C. § 7430(c)(4)(B)(i). However, Knudsen

is not claiming that she is the prevailing party under the

general provisions of section 7430, such that the substantial

justification ofthe IRS’s position might be a defense. Instead,

Knudsen claims that she is the prevailing party under the

QOR, which applies regardless of whether the IRS’s position

in the proceeding is substantially justified. See Haas &Assoc.

Accountancy Corp. v. CIR, 117 T.C. 48, 59 (2001) (“In 1998,

Congress provided under the qualified offer rule of sections

7430(c)(4)(E) and (g) that a taxpayer may be deemed to

qualify as a prevailing party under section 7430(a) and (c)(4)

regardless of whether the taxpayer substantially prevailed in

the proceeding or of whether the position of respondent in the

proceeding was substantially justified.” (citation omitted)),

aff’d, 55 Fed. App’x 476 (9th Cir. 2003).

Under 26 U.S.C. § 7430(c)(4)(E)(i), a party “shall be

treated as the prevailing party if the liability of the taxpayer

. . . 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 subsection (g).”

Section 7430(g)(1) defines “qualified offer” to mean

a written offer which – (A) is made by the

taxpayer to the United States during the

qualified offer period; (B) specifies the

offered amount of the taxpayer’s liability

(determined without regard to interest); (C) is

designated at the time it is made as a qualified

offer for purposes of this section; and

(D) remains open during the period beginning

on the date it is made and ending on the
KNUDSEN V. CIR 9

earliest of the date the offer is rejected, the

date the trial begins, or the 90th day after the

date the offer is made.

However, by statute, the QOR “shall not apply to . . . any

judgment issued pursuant to a settlement[.]” 26 U.S.C.

§ 7430(c)(4)(E)(ii)(I). Accordingly, in this case, we are asked

to determine whether the IRS’s unilateral concession is

considered a settlement within the meaning of section

7430(c)(4)(E)(ii)(I). We conclude that it is not and that

Knudsen, therefore, is the prevailing party, entitled to

reasonable costs and fees, pursuant to section 7430.

As the Tax Court stated:

A settlement is a contract and, consequently,

general principles of contract law determine

whether a settlement has been reached. A

contract requires an objective manifestation of

mutual assent to its essential terms, and

mutual assent is typically established through

an offer and an acceptance.

Knudsen v. CIR, 105 T.C.M. (CCH) 1538, at *5 (2013)

(internal citations and quotation marks omitted). “The parties

to a contract need not manifest their mutual assent explicitly

but may do so implicitly through their actions or inactions as

viewed in the light of the surrounding facts and

circumstances.” Id. (citing Circuit City Stores, Inc. v. Najd,

294 F.3d 1104, 1109 (9th Cir. 2002), and Ahern v. Cent. Pac.

Freight Lines, 846 F.2d 47, 49 (9th Cir. 1988)); see, e.g.,

Trzeciak v. CIR, 103 T.C.M. (CCH) 1448, at *17 (2012)

(finding a concession to be a settlement where the parties

later executed a stipulation of settlement). Applying those
10 KNUDSEN V. CIR

principles to the facts of this case, the Tax Court concluded

that the IRS’s concession was an offer to settle this case by

granting Knudsen’s requested relief, and Knudsen accepted,

or assented to, this offer on the basis of the tendered terms.

Knudsen, 105 T.C.M. 1538, at *5. We disagree.

A settlement is a contract, and its enforceability is

governed by familiar principles of contract law. Jeff D. v.

Andrus, 899 F.2d 753, 759 (9th Cir. 1989). The formation of

a contract generally requires a bargain in which there is a

manifestation of mutual assent to the exchange and a

consideration. SeeRestatement (Second) of Contracts § 17(1)

(1981). Here, there was no exchange, and it is undisputed that

there were no negotiations regarding settlement. Instead,

Knudsen made a qualified offer to settle her tax liability for

$50 per year for each of the four years at issue, which expired

after ninety days when the IRS failed to respond. See

26 U.S.C. § 7430(g)(1)(D). Much later, and only after the

case had been submitted to the Tax Court fully stipulated, did

the IRS unilaterally concede the case. Even then, the parties

never entered into a supplemental stipulation of settled issues,

despite the fact that Knudsen had then succeeded on both the

merits and the timeliness of her claim for equitable relief.

Knudsen’s position is most similar to that of the taxpayer

in Estate of Lippitz v. CIR, 94 T.C.M. (CCH) 330 (2007). In

Lippitz, the IRS denied the taxpayer’s right to section 6015

innocent spouse relief, despite the CCISO having previously

determined the taxpayer’s entitlement thereto. After the IRS

refused the taxpayer’s qualified offer, the taxpayer moved for

partial summaryjudgment, prompting the IRS to concede that

the taxpayer was entitled to the requested relief. The Lippitz

court held that the IRS’s concession was not a “settlement”

under section 7430. Because the IRS waited to concede the
KNUDSEN V. CIR 11

case until after the taxpayer had actively litigated to the point

of filing a dispositive motion, the Lippitz court found this

akin to a concession after trial. The court explained that it did

“not believe Congress intended to grant [the IRS] the latitude

to wait until just before the resolution of a dispositive motion,

or the end of a trial to concede a matter and still benefit from

the settlement exclusion of section 7430(c)(4)(E).” 94 T.C.M.

330, at *8. As was the case in Lippitz, the IRS was unwilling

to settle this case on the terms and at the times offered by

Knudsen, and the IRS “cannot sidestep the consequences of

such refusal by conceding the issues after [Knudsen] had

effectively presented the case for disposition by the Court.”

Id.

The purpose of the QOR “is to encourage settlements by

imposing litigation costs on the party not willing to settle.”

Gladden v. CIR, 120 T.C. 446, 450 (2003); see also Vasquez

v. CIR, 93 T.C.M. (CCH) 660, at *17 (2007), aff’d, 284 F.

App’x 381 (9th Cir. 2008). Here, Knudsen made a qualified

offer, to settle her tax liability for $50 per year for each of the

four years at issue, for a total of $200. The offer further stated

that the “amount reflects the fact that [Knudsen] earned no

income, had no obligation to file a return, and had no

personal tax liability during those years.” The IRS’s

concession that Knudsen was entitled to full relief and owed

no tax liability is not a settlement within the meaning of

26 U.S.C. § 7430(c)(4)(E)(ii)(I). Accordingly, we reverse the

decision of the Tax Court and find that Knudsen is a

prevailing party for purposes of section 7430. This matter is

remanded to the Tax Court for a determination of reasonable

litigation costs, including attorney’s fees.

REVERSED AND REMANDED.