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Taxpayer's Offer Letter to IRS Doomed Later Attempt to Recover Litigation Costs

(Parker Tax Publishing March 2022)

The Tax Court held that a taxpayer who sent the IRS a letter in which she offered to concede the amount of tax and penalties the IRS proposed after an audit, but reserved the right to claim innocent spouse relief under Code Sec. 6015 in the future, was not a qualified offer under Code Sec. 7430(g) because the letter did not specify the offered amount and would not have fully resolved the liability. The court therefore determined that the taxpayer was not entitled to recover litigation costs because she was not a prevailing party under Code Sec. 7430(c)(4) and the IRS's position was substantially justified. Lewis v. Comm'r, 158 T.C. No. 3 (2022).


Gina Lewis and her former spouse, Tim Lewis, filed joint federal income tax returns for 2008, 2009, and 2010. The IRS audited these returns and proposed adjustments and penalties. In December 2016, Gina sent a letter to the IRS stating that she was making a qualified offer pursuant to Code Sec. 7430(g). In the letter, she offered to concede 100 percent of the taxes and penalties for years 2008, 2009, and 2010. However, the letter also stated that it was "an offer of assessment, not payment," and that Gina reserved all "collection rights" that she may qualify for "now or in the future," including innocent spouse relief under Code Sec. 6015.

The IRS neither accepted nor rejected Gina's offer and instead allowed it to lapse. In the months before Gina made her offer, the revenue agent's activity record reflected discussion of Gina's entitlement to innocent spouse relief under Code Sec. 6015. Gina did not provide any information to support a claim for innocent spouse relief or submit a Form 8857, Request for Innocent Spouse Relief, prior to or contemporaneously with the December 2016 offer letter. In March 2018, the IRS issued a notice of deficiency to Gina and Tim, determining deficiencies and penalties for tax years 2008, 2009, and 2010. Gina filed a petition with the Tax Court in which she "elected the benefits" of Code Sec. 6015(b) and (c). In its answer, the IRS admitted that Gina had requested innocent spouse relief and stated that it would review her request and make a determination regarding her eligibility. Tim also challenged the notice of deficiency and intervened in Gina's case.

Throughout the Tax Court proceeding, the IRS requested that Gina submit Form 8857 or provide other information supporting her claim for innocent spouse relief. She never did. Eventually, after resolving the related case with Tim, the IRS concluded that Gina was entitled to innocent spouse relief. The IRS moved for entry of a decision that would grant Gina full relief from joint and several liability under Code Sec. 6015(c) for tax years 2008, 2009, and 2010. Gina objected to the IRS's motion, claiming that it was a litigation tactic to avoid an award of fees and costs to which she was entitled. Gina filed a motion for litigation costs, which the IRS opposed.

Under Code Sec. 7430, a taxpayer may be awarded reasonable litigation costs if the taxpayer can demonstrate that he or she is the "prevailing party." To be the prevailing party under Code Sec. 7430(c)(4), the taxpayer must "substantially prevail" with respect to the amount in controversy or the most significant issue or set of issues presented. The taxpayer generally will not be treated as the prevailing party if the IRS establishes that its position in the proceeding was "substantially justified." However, even if the IRS's position is substantially justified, Code Sec. 7430(c)(4)(E)(i) provides that the taxpayer will be treated as the prevailing party if his or her liability pursuant to the judgment in the proceeding is equal to or less than the liability of the taxpayer which would have been determined if the IRS had accepted the taxpayer's "qualified offer." Under Code Sec. 7430(g)(1), a qualified offer is required to specify the offered amount of the taxpayer's liability. In addition, Reg. Sec. 301.7430-7(c)(3) provides that the specified amount must be an amount, the acceptance of which by the United States will fully resolve the taxpayer's liability for the year or years at issue.

In its response to Gina's motion, the IRS argued that her December 2016 letter was not a qualified offer because, by reserving the right to claim innocent spouse relief in the future, it did not specify an amount the acceptance of which would fully resolve her liability. Gina argued that her offer specified the amount of her liability because she offered 100 percent of the tax and the penalties for the years at issue and because her liability in the case - without regard to innocent spouse relief - was 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" was that her offer was made almost two years before she made such relief an issue by pleading it as an affirmative defense in the deficiency proceeding. That is, Gina contended that because she raised her Code Sec. 6015 claim after submitting her offer, such relief should be ignored for the purpose of determining whether she was treated as a prevailing party under the qualified offer provision of Code Sec. 7430(c)(4)(E). Gina emphasized 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 Code Sec. 6015 relief. A future innocent spouse claim, Gina contended, is similar to the carryback of net operating losses.


The Tax Court held that Gina was not entitled to litigation costs under Code Sec. 7430. The court found that Gina was not a prevailing party under Code Sec. 7430(c)(4) because she did not make a qualifying offer and the IRS's litigation position was substantially justified.

In the court's view, the determination of whether Gina's December 2016 offer letter was a qualified offer under Code Sec. 7430(g)(1)(B) and Reg. Sec. 301.7430-7(c)(3) turned on whether reserving the right to claim innocent spouse relief related to collection, as Gina tried to frame it, or to her underlying tax liability. The court answered that question by looking to the text of Code Sec. 6015 and finding that the operative provisions of the Code Sec. 6015(b) and (c) relieve a taxpayer from liability for tax, not just the collection of tax. The court also noted that spousal defenses are listed separately from collection alternatives as a basis for challenging a proposed collection action under Code Sec. 6330(d)(1).

The court found no legal basis for Gina's argument that her liability should be calculated without regard to her reservation of the right to claim innocent spouse relief. Rather, the court saw her reservation as a caveat as to liability. Consequently, the court determined that her offer failed the requirement in Code Sec. 7430(g)(1)(B) that it specify the offered amount of Gina's liability, because that amount could not be determined until the availability of Code Sec. 6015 relief was considered (or her reservation of the right to claim it was withdrawn). In addition, the court further found that the IRS's acceptance of Gina's offer, subject to the reserved right to make an innocent spouse claim, would not fully resolve her liability for the years at issue as required under Reg. Sec. 301.7430-7(c)(3) because her tax liabilities might be (and were) reduced to zero after consideration of her claim. The court disagreed with Gina's analogy of her innocent spouse claim to a carryback of net operating losses. Unlike net operating loss carryovers not in issue when an offer is made which are applied after a qualified offer is accepted to reduce payment for the years at issue, the court said that the right to relief from liability under Code Sec. 6015 affected the amount of Gina's liabilities - the assessed deficiencies - for the years at issue and was not merely a carryover item applied later to reduce payment.

Because Gina did not submit a qualified offer and the IRS's position was substantially justified, the court denied Gina's request for litigation costs. The court noted that under Reg. Sec. 301.7430-5(d)(1), a significant factor in determining whether the IRS's position is substantially justified is whether the taxpayer has presented all relevant information under the taxpayer's control. In the court's view, the IRS's position was substantially justified because it was reasonable to require information such as a Form 8857 or other documentation supporting her claim for innocent spouse relief before making a determination as to her qualification for innocent spouse relief. Further, the court noted that the IRS ultimately conceded that relief was appropriate not on the basis of documentation Gina submitted (there was none) but instead on the settlement the IRS reached with Tim.

For a discussion of 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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