F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

B A R B A R A J A N E K N UD S E N , Petitioner-Appellant
,

v

.

C O M M I S S I ON E R O F I

N T E R N A L R E V E N U E , Respondent-Appellee

. No. 13-72077

Tax Court No. 18048-09

OPI NI ON

Appeal from the United States TaxCourt Michael B . Thornton, J udg e, Presiding

Arg ued and Submitted May 4, 2015—Portland, Oreg on

F iled J uly 15, 2015

B efore: W illiam A. F letcher and Andrew D. Hurwitz
, Circuit J udg es, and Donald E. W alter, Senior District

J udg e. *

Opinion by

J udg e W alter

* T h e Ho n o rab le Do n ald E. W alter, Sen i o r Un ited States District J u dg e f o r W esternL o u isian a, sittin g b y d esig n atio n

.K N UD S E N V

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SUMMARY * *

Tax

The panel held that a unilateral concession by the Internal Revenue Service is not a settlement for purp o s es of the Qualified Offer Rule, reversed a Tax Court decision denying attorney s’ fees and litig ation costs, a n d r emanded for determination of such c o sts and f e es to be awarded to tax pay e r as a prevaili n g p a rty for purposes of 26 U .S.C. § 7430.

Tax pay e r made a qualified offer to settle her petition for judicial review of the I RS’s denial of innocent spouse relief. The I RS allowed the offer to ex pir e , but later conceded
tax pay e r’s entitlement to such relief. T he p anel ex p lained that, g iven that the purpose o f the Qualified Offer Rule is to encourag e settlements b y imposing litig ation c o sts on the party not willing to settle and that the I RS was unwil l i n g to settle this case o n the terms and at the times o f f e r ed b y tax pay e r, the I RS cannot subsequently s idestep the
consequences of such refusal by conceding t he issues a fter
tax pay e r had effectively presented her case for d isposition b y the Ta x C o u r t. According ly
, the panel held that the concession was not a settlement w ithin the meaning o f § 7430(c)(4)(E)(ii)(I

)
, a n d tax pay er w as a prevailing party entitled to litig ation costs.

** T h is su m m ary co n stitu

t es n o p ar t o f t h e o p in io n o f th e co urt. It h as b eenp rep ared b y

co urt staf

f f o r th e co n v en i en ce o f

th e read er.K N UD S E N V

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COUNSEL

Denis M. Vannier ( a r gued), Deputy City Attorney
, City Attorney ’s Office, Portland, Ore go n; J an R. Pierce, Supervisory Attorney
, L e wis & Clark L ow I n c ome Tax Pay er Clinic, Portland, Oreg o n, for Petitioner-Appellant.

Carol B arthel (arg

ued) a n d J oan I

. Oppenheimer, United States Department of J ustice, T a x Division, W as h i n gton, D.C., for Respondent-Appellee.

OP INION

W A L TER, District J udg e:

I n this case, we are asked to decide whethe r a unilateral concession by the I n ternal Revenue Service (“I RS”) is a settlement, f

or purposes of the Qualified Offer Rule (“QOR”) of the I nternal Revenue Code, c odified at 2 6 U

. S.C. § 7430(c)(4)(E). W e conclude that this c oncession was n ot a settlement, within the meaning of the QOR. According ly
, we

re v e r se the d e cision of the United States Tax Court a nd remand the case for a determination of reasonable attorney ’s fees and costs to b e awarded to the tax p ay er, as the prevailing party

.

I. F ACTUAL AND P ROCEDURAL HISTORY

The relevant facts a re n ot in d ispute. B a rbara J ane Knudsen and Kurt H. Knudsen married in 1979, separated in 2006, and d ivorced in 2008. During the y ears 1998–2001, the Knudsens filed joint tax r eturns. B arbara was a “stay -at-home mom,” earning no income of her o wn, and K urt was aK N UD S E N V

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practicing attorney

. Despite their having filed joint tax returns for those four y ears, the tax es were never p aid, and the Knudsens became jointly and severally liabl e f o r the respective tax liabilities.

I n J une 2005, the I RS sent the K nudsens separate notices of intent to levy with respect to underpay ments o f t he tax e s reported for those four y ears. On D ecember 23, 200 8, postdivorce, B arbara (hereinafter, “ Knudsen”) filed a F orm 8857, Request for Innocent Spouse Relief, seeking equitable relief, under 26 U .S.C. § 6015(f), from joint and several liability a s to all tax liabilities for the y ears 1998–2001

. O n M a y 14, 2009, Knudsen was denied innocent spouse relief because the two-y ear statute of limitations, a s set forth in Treasury Reg ulation § 1.6015-5(b)(1), had ex pired.

On J uly 28, 2009, Knudsen filed a pro se petition with the Tax Court, seeking review o f the d enial. Kurt K n u dsen intervened. The I RS ans w ered Knudsen’s petition a nd f o r warded the matter to the I RS Cincinnati Centraliz ed I nnocent Spouse Operation (“CCI SO”) to consider the merits of Knudsen’s claim for equitable r elief. After t h e C C I SO denied Kn u d s e n’s claim o n its merits, Knudsen submitted additional documentation in support of her request f or relief,

w h i c h was returned to the CCI SO for reconsideration, a nd
ag ain denied on the merits.

On Apr i l 21, 2010, Knudsen made a “qualified offer,” pursuant to 26 U.S.C. § 7430(g )
, to settle her tax liability for $50 per y e ar, for each o f the four y ears at issue. The IRS did
not r espond to the offer, which ex pired after ninety day s, b y operation of law. The case was set for trial on the Tax Court’s

ca l e n d a r for March 14, 2011; the parties proceeded with discovery
, and both Knud s en and the I RS submitted pretrialK N UD S E N V

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memoranda. Prior to the scheduled trial date, the I RS notified K n u d s en’s counsel that it would concede her entitlement t o innocent spouse relief but f or her f ailure t o c o m p l y with the two-y ear statute of limitations in Treas. Reg

. § 1 .6015- 5(b)(1). I n March 2011, the p a r t i e s f iled a joint motion for l e ave to submit the case on a stipulated record, for t h e Ta x Cou r t t o d etermine whether Knudsen’s claim for equitable relief was time-barred. The Tax Court g ranted the motion to submit the fully stipulated c ase and ordered opening briefs to be filed by

Aug ust 30, 2011.

On J uly 25, 2011, in Chief Counsel Notice CC-2011-017, the I RS announced that the Department of the Treasury would enl a r ge the two-y ear deadline under Treas. Reg

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

. . . not reflective of any doubt concerning the authorit y of the Service to impose the two y e a r deadline” a n d that the twoy ear deadline would not b e enforced in cases then p ending in the T ax Court. That same day
, the I RS informed Knudsen that it would concede that relief was not time-barred in this c ase.

On A ug ust 24, 2 0 1 1
, the I RS sent the Knudsens a proposed supplemental stipulation of settled issues, stating that B arbara Knudsen was entitled to the requested equitable relief and that a j u d gm e n t would be issued by the court pursuant to a settlement. In anticipation o f filing a motion for litig ation costs, Knudsen was unwilling to stipulate that the judg ment r esulted f

rom a settlement. During a n A u g ust 29, 2011 c onference call with the Tax Court, the I RS i n f o r m ed the court that the I RS conce d e d t h e statute of limitations issue, in accordance w ith the J u l y 25, 2011 policy directive. The nex t d ay , the court ordered the parties to file a supplemental stipulation of settled i s s u es. I nstead, the I RS filed a status report on Septemb e r 29, 2 011, indicating thatK N UD S E N V

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the parties could not ag ree to a supplemental stipulation, but confirming Knudsen’s entitlement to equitable relief.

One day prior, on September 28, Knudsen had moved for litig ation costs as the prevai l ing party , pursuant to section 7430(a), in lig h t of having made a qualified offer, pursuant to section 7430(g ). Knudsen requested attorney s’ fees and costs in the amount o f $39,813, representing amounts incurred a fter the qualified offer was made. The I RS o pposed the motion,
arguing : (a) that Knudsen was not a prevailing p a r t y under section 7430(c)(4)(E), because the judg ment w ould be issued pursuant to a settlement, disqu a l i f y ing the case from the QOR; (b) in the a lternative, that Knudsen was not a p r e v ailing party under section 7430(c)(4) because the I RS ’s position was substantially justified; and (c) that Knudsen h ad failed to substantiate her claim for reasonable litig ation costs.

On April 1
, 2 013, the T ax Court issued a memorandum opinion denying litig ation costs, including att o r n ey ’ s fees, and specifically h o lding that a concession by the I RS was a settlement of the case for purposes o f t h e QOR. On April 3, 2013, the T ax Court issued its f inal order and d e c i s i on, g ranting Knudsen relief under section 6015(f) from joint a nd several income tax liabilities for the tax able y ears 1998, 1999, 2000, and 2001, and denying Knudsen’s motion for attorney ’s fees and litig ation costs.

II. STANDARD OF REVIEW

“Althoug h a presumption ex ists that the Tax Court correctly a

pplied the law, no special deference is g iven to the Tax Court’s decisions.” Custom Chrome, I nc. v. CIR
, 217 F .3d 1117, 1121 (9th Cir. 2000) (citing AMERCO, Inc. v

. CIR
, 9 79 F .2d 162, 164 (9th C i r

. 1992)). Determining theK N UD S E N V

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ex istence of a contract, or a settlement, is a mix ed question o f law and fact. U

nited S tates for Use of Y

oungstown W

elding & Eng’g Co. v. Travelers Indem. Co.
, 802 F .2d 1164, 1169 (9th Cir. 1986). W e r eview t h e T a x Court’s conclusions of law, including its interpretations o f the Internal Revenue Code, de

novo

. Adkison v. CIR
, 592 F .3d 1050, 1052 ( 9th Cir. 2 010) (citing Suzy’s Zoo v. CIR
, 273 F .3d 875, 878 (9th Cir. 2001)). W e review q

uestions 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 I RS and Knudsen ag ree that 26 U.S.C. § 7430 is the provision under which Knuds e n must bring h er request for litig ation costs, i n c l u d i ng attorney ’s fees; however, the parties disag re e as to whether section 7430 g rants Knudsen “prevailing party ” status, in lig ht of the I RS concession in this

case. Section 7430(a) provides that the prevailing party “[ i] n any a dministrative or court proceeding wh i c h is broug ht b y

or ag ainst the United States in c onne c t ion with

. . . [ tax liability ]

. . . may be awarded

. . . r easonable litig ati o n c o s t s incurred in connection wit h s u c h c ourt proceeding ,” including attorney ’s f

ees. 1 “The term ‘prevailing party ’ means any party

. . . wh i c h ( I ) has substantially p revailed with respect to the
amount in controversy , or (I I ) h a s substantially prevailed with respect to the most sig nificant issue or set of issues presented . . . .” 26 U.S.C. § 7430(c)(4)(A)(i).

1 In o rd er t o reco v er atto rn ey ’ s f ee s , a p arty m

u st also ex h au st ad m i n istrativ e rem ed ies an d m u st n o t h av e un reaso n ab ly p ro t rac t e d t h e p ro ceed in g s. See 2 6 U.S.C. § 7 4 3 0 (b )(1 ) an d (3 ). Here, t h e IRS co n ced es th ese req u i rem en ts.K N UD S E N V

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There is a

n ex ception “if the United States establishes that

. . . [ it s p o s i t i on]

. . . in the proceeding was substantially j u stified.” 26 U .S.C. § 7430(c)(4)(B )(i). However, Knud s e n i s n o t claiming that she is the p r evailing party under t h e g eneral provisions of section 7 430, such that the substantial justification o f the I RS’s position mig ht be a d efense. I nstead, Knudsen claims that she is t h e prevailing party under the QOR, which applies reg ardless of whether the I RS’s position in the proceeding is substantially justified. See Haas & Assoc. Accountancy Corp. v. CIR
, 117 T.C. 48, 59 (2001) (“I n 1998, Cong r ess provided under the q ualified offer rule of sections 7 4 3 0 (c)(4)(E) and (g ) that a tax p ay e r may be d eemed t o qualify as a prevailing party under section 7430(a) and (c)(4)
reg ardless of whether the tax pay er substantially prevailed in the proceeding or of whether the position of respondent in the proceeding w as s ubstantially justified.” (citation o mitted)), aff’d
, 55 F ed. App’x 476 (9th Cir. 2003).

Under 2 6 U.S.C. § 7430(c)(4)(E)(i), a party “ shall be treated as the prevailing party if the liability of the tax pay er

. . . is equal to or less than the liability of the tax pay e r which would have bee n so determined if the United States h ad accepted a qualified o ffer of the party under subsection (g ).” Section 7430(g )(1) defines “qualified offer” to mean

a written offer wh i c h – (A) is made b y the
tax pay e r to the United States during the qualified o ffer period; (B ) sp ecifies the offered amount of the tax pay er’s liability (determined without reg ard to interest); (C) is desig nated at the time it is made a s a qualified offer for pu r

p oses of this section; a nd (D) remains open during the period beg inning

on the date it is made a nd endin g o n theK N UD S E N V

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earliest of t he date the offer is rejected, the d a t e the trial beg ins, or the 90th day after the date the offer is made.

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

. . . any judg ment i s s u ed pursuant to a settlement[

. ] ” 26 U .S.C. § 7430(c)(4)(E)(ii)(I

). According ly
, in this case, we are asked
to determine whether the I RS’s unilateral concession is considered a sett l em en t within the meaning of section 7430(c)(4)(E)(ii)(I

). W e conc lude that it is not a nd that Knudsen, theref

o r e , is the prevailing party , entitled to reasonable costs and fees, pursuant to section 7430.

As the Tax Court stated:

A settlement is a c o n tract and, consequently
, g eneral princ i ples of contract law determine whether a settlement has been re a c hed. A
contract requir e s a

n objective manifestation o f mutual assen t t o its essential terms, a nd mutual assent is ty

pically established throug h an offer and an acceptance.

Knudsen v. CIR
, 105 T.C.M. (CCH) 1538
, a t *5 (2013) (internal citations and quotation marks omitted). “The parties
to a c ontract need n ot manifest their mutual a ssent ex plicitly but may do so implicitly throug h their actions o r inactions a s vi e w e d in the lig ht of the surrounding f a cts a nd circumstances.” Id

. (citing Circuit C i t y Stores, Inc. v. Najd
, 294 F .3d 1104, 1109 (9th Cir. 2 002), and Ahern v. Cent. Pac. Freigh t L ines
, 846 F .2d 47, 49 (9th Cir. 1988)); see, e.g. , Trzeciak v. C

IR
, 1 03 T.C.M. (CCH) 1 448, at * 1 7 (2012) (finding a concession to b e a settlement where the parties l a ter e x ecuted a stipulation of settlement). Apply ing th o s eK N UD S E N V

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p r i n c iples to the facts of this c ase, the Tax Court conclu d e d that the I RS’s concession was an offer to settle th is case b y g ranting Knudsen’s requested relief, and Knudsen accepted,

or assented t o, this offer on the basis of the tendered terms. Knudsen , 105 T.C.M. 1538, at *5. W e disag ree.

A s ettlement is a contract, and its enforceability i s g overned b y fami l i a r p rinciples o f contract law. Jeff D. v

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

a contract g enerally requires a barg ain in which there is a manifestation of mutual ass en t t o the ex chang e and a consideration. See Restatement (Second) of Contracts § 17(1) (1981). Here, there was no e x chang e, and it is un disputed that there were n o neg otiations reg ard i n g settlement. I nstead, Knudsen made a qualified offer to set t l e her tax liability for $50 p er y ear for each of the four y ears at issue, which ex pired after ninety day s when the I RS faile d to respond. See 26 U.S.C. § 7430(g )(1)(D). Much later
, a nd only after the

case had been submitted to the Tax Court fully stipulated, did the I RS unilaterally concede the case. Even the n , the parties

never entered into a supplemental stipulation of settled issues, despite the f

act that Knudsen h a d then succeeded o n b oth the merits and the timeliness of her claim for equitable relief.

Knudsen’s position is most similar to that of the tax pay er in Estate of Lippitz v. CIR , 94 T.C.M. (CCH) 330 (2007). I n Lippitz
, the I RS denied the tax pay er’s rig ht to section 6015 innocent spouse relief, despite the CCI SO having previously determined the tax pay er’s entitlement thereto. After the I RS refused the tax pay e r’s q

ualified offer, the tax pay er moved for partial summary judg ment, prompting the I RS to concede that the tax p a y er was entitled to the requested relief. The Lippitz court held that the I RS’s concession was not a “settlement”

u nder section 7430. B e cause the I RS waited to concede t h eK N UD S E N V

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case until after the tax pay er had actively litig ated to the point of filing a d i s p o sitive motion, the Lippitz court found this akin to a concession after trial. The court ex plained that it did “not believe Cong ress intended to g rant [ the I RS] the latitude
to w ait 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 e xclusion of section 7430(c)(4)(E).” 9 4 T.C.M. 330, at *8. A s was the case in Lippitz
, the I RS was unwilling
to settle this case on the terms and a t the times offered b y Knudsen, and the I RS “cannot s i d e s t ep the consequences o f such refusal by conceding the issues a fter [ Knudsen] h ad effectively presented the case for disposi t i o n by the Court.” Id

.

The purpose of the QOR “is to encourag e settlements by imposing litig ation costs on t h e party not willing to settle.” Gladden v

. CIR
, 120 T.C. 446, 4 5 0 (2003); see also Vasquez

v. CIR
, 93 T .C.M. (CCH) 660, at *17 (2 0 0 7 )
, aff’d
, 2 84 F

. App’x 381 (9th Cir. 2008). Here, Knudsen made a qualified offer, to settle h er tax liability for $50 per y ear for each of the four y ears at issue, for a total of $200. The offer further stated that the “amount r eflects the fac t that [ Knudsen] earned no income, had no oblig a t i o n to file a return, and had no personal tax liability d uring those y ears.” T h e I R S’s concession that Knudsen w as e ntitled to full relief and owed

no tax liability is not a settle m e n t within the meaning o f 26 U.S.C. § 7430(c)(4)(E)(ii)(I ). According ly
, we reverse the decisi o n o f the Tax Court and find that Knudsen is a prevailing party for purposes of section 7430. This matter is remanded to the T ax Court for a determination of reasonable litig ation costs, including attorney ’s fees.

REVERSED AND REMANDED.