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Taxpayer Could Not Recover Litigation Costs Where IRS Promptly Conceded the Case

(Parker Tax Publishing March 2022)

The Ninth Circuit affirmed the Tax Court and held that a taxpayer was ineligible for an award of litigation costs under Code Sec. 7430 because the IRS had promptly conceded that the taxpayer's position was correct and therefore the IRS's position was substantially justified. However, in a concurring opinion, one of the judges opined that, while the IRS's reliance on Reg. Sec. 301.7430-3 was not at issue in the court's decision, he believed that this regulation is invalid. Dang v. Comm'r, 2022 PTC 48 (9th Cir. 2022).


In 2015, the IRS assessed deficiencies against Tung Dang and Hieu Pham Dang. In discussions with the IRS on payment options, the Dangs requested that the IRS levy against funds held by Mr. Dang's individual retirement account (IRA). The IRS declined the Dangs' invitation because it determined that the Dangs had alternative sources of funds that were sufficient to satisfy their tax liabilities in full. The IRS issued a notice of federal tax lien and a notice of intent to levy, and the Dangs requested a collections due process (CDP) hearing. During the hearing, the Dangs raised only one issue for consideration - whether the IRS should levy on the IRA. The IRS Office of Appeals sustained the collection actions.

The Dangs took their case to the Tax Court. In its answer to their petition, the IRS conceded that the Appeals Office abused its discretion in rejecting the Dangs' offer to pay in full via a levy on the IRA. The Tax Court granted the IRS's motion to remand the case so that the Appeals Office could correct its error. The Dangs' liabilities were fully paid in 2018 and the parties filed a joint stipulation of settled issues. The Dangs then filed a motion for reasonable litigation and administrative costs.

Under Code Sec. 7430, in any administrative or court proceeding which is brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty, the "prevailing party" may be awarded a judgment or a settlement for (1) reasonable administrative costs incurred in connection with such administrative proceeding within the IRS; and (2) reasonable litigation costs incurred in connection with the court proceeding. The "prevailing party" is the party who has substantially prevailed with respect to the amount in controversy or with respect to the most significant issue or set of issues presented. However, under Code Sec. 7430(c)(4) a taxpayer is not treated as a prevailing party if the position of the United States in the proceeding was "substantially justified."

In Huffman v. Comm'r, 978 F.2d 1139 (9th Cir. 1992), the Ninth Circuit held that when a taxpayer seeks both litigation and administrative costs, the determination of whether the government's position was substantially justified is made separately with respect to the administrative costs and litigation costs. Under Code Sec. 7430(c)(4)(B), a rebuttable presumption arises that the government's position was not substantially justified if it fails to adhere to applicable published guidance (e.g., regulations, revenue rulings, revenue procedures, etc.) during the administrative proceeding. However, the Ninth Circuit held in Huffman that this presumption may be rebutted by the government's concession of the case in its answer to the taxpayer's petition.

In a collection action, Code Sec. 7430(c)(2) and Reg. Sec. 301.7430-3(a) preclude the recovery of administrative costs; thus, only reasonable litigation costs are available. Code Sec. 7430(c)(2) provides that the term "reasonable administrative costs" does not include any costs incurred before the taxpayer receives the notice of decision of the IRS Office of Appeals (and since the notice ends the proceeding, no administrative costs can be recovered). In addition, Reg Sec. 301.7430-3(a) specifies that collection actions under Code Secs. 6320 and 6330 are not administrative hearings within the meaning of Code Sec. 7430, thus excluding the costs incurred in connection with such hearings from being recoverable as administrative costs.

Tax Court's Decision

In the Tax Court, the Dangs argued that because the IRS failed to adhere to Reg. Sec. 301.6330-1(e)(3) - which provides that in a collection proceeding, the IRS must consider the substitution of assets as a collection alternative - the IRS's rejection of the Dang's request to levy against the funds held by Mr. Dang's IRA was not substantially justified. The Dangs also challenged the validity of Reg. Sec. 301.7430-3(a) in excluding collection proceedings from the definition of administrative hearings as being contrary to the language of Code Sec. 7430. In T.C. Memo. 2020-150, the Tax Court rejected the Dangs' arguments and denied their motion for fees and costs. The Tax Court held that under Huffman, the presumption that the government's position was not substantially justified was rebutted by the government's prompt and reasonable concession in its answer to the Dang's petition. Regarding the Dangs' argument that Reg. Sec. 301.7430-3 is invalid, the Tax Court said that it did not need to address the validity of the regulation because, regardless of its validity, the government's prompt and complete concession in its answer established that its litigation position was substantially justified. The Dangs appealed to the Ninth Circuit.

Ninth Circuit's Analysis

The. Ninth Circuit affirmed the Tax Court's decision. It held that under Code Sec. 7430(c)(2), the Dangs were ineligible for an award of administrative costs because no costs were incurred before the commencement date for the relevant administrative proceeding. The court also agreed with the Tax Court that the Dangs could not recover litigation costs because the government's concession in its answer that their position was correct meant that its position was substantially justified under Huffman.

However, in a concurring opinion, one judge wrote that Reg. Sec. 301.7430-3 contradicts the plain language of Code Sec. 7430 and is therefore invalid. The judge noted that Code Sec. 7430(a) explicitly allows for an award of costs in any administrative proceeding in connection with the collection of any tax, interest, or penalty. Further, the judge noted that the statute defines "administrative proceedings" broadly to include "any" procedure or other action before the IRS. The judge explained that, although Code Sec. 7430(c)(2) precludes the recovery of administrative costs in collection proceedings, the regulation also handicaps taxpayers pursuit of litigation costs by excluding collection hearings from the definition of administrative proceedings. Specifically, the judge observed that in this case, the IRS conceded that it failed to observe published guidance but disputed the Dangs' entitlement to litigation costs by arguing that no presumption arose because collection actions are not administrative proceedings under Reg. Sec. 301.7430-3. Thus, in the judge's view, excluding collection hearings from the definition of administrative proceedings affects not only administrative, but also litigation costs.

For a discussion of the rules for recovering litigation and administrative costs, see Parker Tax ¶263,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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