                                T.C. Memo. 2013-87



                          UNITED STATES TAX COURT



BARBARA JANE KNUDSEN, Petitioner, AND KURT H. KNUDSEN, Intervenor
      v. COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 18048-09.                         Filed April 1, 2013.



      Jan R. Pierce, for petitioner.

      Kurt H. Knudsen, pro se.

      Nhi T. Luu, for respondent.



                            MEMORANDUM OPINION


      THORNTON, Judge: Petitioner moves the Court to award her litigation

costs of $53,001 in attorney’s fees and $60 in other costs pursuant to section 7430
                                          -2-

[*2] and Rule 231.1 None of the parties have requested an evidentiary hearing on

this matter, and we conclude that a hearing is not necessary. See Rule 232(a). We

render our decision on the basis of the parties’ stipulations of fact, exhibits, and

settled issues and the uncontroverted declarations in the filings related to

petitioner’s motion. We decide that petitioner is not entitled to any of the requested

litigation fees or costs.

                                      Background

       Petitioner and her former husband, Kurt Hans Knudsen (intervenor), filed

joint Federal income tax returns for 1998, 1999, 2000, and 2001 (subject years).

On December 23, 2008, respondent received from petitioner a Form 8857, Request

for Innocent Spouse Relief, seeking equitable relief under section 6015(f) from

joint and several liability as to all tax and related amounts stemming from the joint

returns (claim). On May 14, 2009, respondent issued to petitioner a final

determination denying the claim as untimely because it was filed outside the

two-year deadline set forth in section 1.6015-5(b)(1), Income Tax Regs. (two-year

deadline). The two-year deadline is the same rule that was the subject of Lantz v.

Commissioner, 132 T.C. 131 (2009), rev’d, 607 F.3d 479 (7th Cir. 2010), and its


       1
        Unless otherwise indicated, section references are to the applicable versions
of the Internal Revenue Code, Rule references are to the Tax Court Rules of
Practice and Procedure, and dollar amounts are rounded.
                                         -3-

[*3] progeny. This Court in Lantz invalidated the regulation setting forth the two-

year deadline.

      On July 28, 2009, petitioner petitioned the Court to review respondent’s

denial of her claim. She resided in Oregon at that time. Respondent answered the

petition and then returned the claim to the Internal Revenue Service (IRS) Cincinnati

Centralized Innocent Spouse Operation (CCISO) to consider the claim on its

merits.2 The CCISO reviewed and denied the claim shortly thereafter. In February

2010 petitioner submitted additional documents to respondent and requested that the

CCISO reconsider that denial. The CCISO reconsidered the claim on its merits but

sustained its previous denial of the claim.

      Intervenor intervened in this case on October 14, 2009. Approximately six

months later, on April 21, 2010, petitioner (through her counsel) submitted a

“Qualified Offer” to respondent stating that she would pay $50 as to each subject




      2
       After this Court invalidated the two-year deadline in Lantz v. Commissioner,
132 T.C. 131 (2009), rev’d, 607 F.3d 479 (7th Cir. 2010), Chief Counsel attorneys
were directed to ask the CCISO to consider the merits of sec. 6015(f) claims in
docketed cases where the IRS had denied sec. 6015(f) relief solely on the basis of
the two-year deadline. See Chief Counsel Notice CC-2009-012 (Apr. 17, 2009),
amplified and clarified by Chief Counsel Notice CC-2010-005 (Mar. 12, 2010).
                                           -4-

[*4] year (a total of $200) to settle her total tax liability for those years.3 The offer

stated that the $200 “reflects the fact that our client earned no income, had no

obligation to file a return, and had no personal tax liability during those [subject]

years.” Respondent did not respond to petitioner’s offer.

      Generally from April 29, 2010, through January 31, 2011, the parties

conducted discovery as to the merits of petitioner’s claim. On or about February 23,

2011, respondent notified petitioner that she qualified for her requested relief but for

the fact that she did not file her claim before the two-year deadline expired.

      This case was called for trial on March 14, 2011, and petitioner and

respondent each submitted a pretrial memorandum. Intervenor, an attorney,

neither appeared for the calling of the case nor submitted a pretrial memorandum.


      3
       While the record does not establish petitioner’s total tax liability as of the
time of this offer, she asserts that her unpaid tax liabilities with respect to the
subject years were as follows as of January 10, 2011:

                            Year              Amount

                           1998               $49,076
                           1999                38,031
                           2000                44,708
                           2001                24,122
                            Total             155,937

She also asserts that intervenor’s liability for those amounts was discharged in
bankruptcy on February 9, 2009.
                                          -5-

[*5] On March 15, 2011, the case was recalled and the parties lodged a stipulation

of settled issues, a stipulation of facts, and a joint motion for leave to submit to the

Court pursuant to Rule 122 their dispute on the validity of the two-year deadline.

The lodged documents were filed six days later. The parties state in those

documents that they agree that petitioner qualifies for complete relief under section

6015(f) for all subject years if the two-year deadline is invalid. The parties also

state that they dispute whether the two-year deadline is invalid. By order dated May

12, 2011, the Court granted the parties’ motion and instructed the parties to file

simultaneous opening briefs by August 30, 2011.

      On July 25, 2011, the IRS announced as a policy directive that the

Department of the Treasury would expand the two-year deadline “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 two-year deadline would

no longer be enforced in cases docketed in this Court. Chief Counsel Notice

CC-2011-017 (July 25, 2011); see also Notice 2011-70, 2011-32 I.R.B. 135. As of

that time, three Courts of Appeals had held that the two-year deadline was valid.

See Jones v. Commissioner, 642 F.3d 459 (4th Cir. 2011), rev’g and remanding an

order and decision of this Court dated May 28, 2010; Mannella v. Commissioner,

631 F.3d 115 (3d Cir. 2011), rev’g 132 T.C. 196 (2009); Lantz v. Commissioner,
                                         -6-

[*6] 607 F.3d 479. This Court had repeatedly held to the contrary, see, e.g., Pullins

v. Commissioner, 136 T.C. 432 (2011); Hall v. Commissioner, 135 T.C. 374

(2010), Government appeal dismissed voluntarily, No. 10-2628 (6th Cir. Aug. 2,

2011); Mannella v. Commissioner, 132 T.C. 196; Lantz v. Commissioner, 132 T.C.

131,4 but no Court of Appeals had agreed. Contemporaneous with the July 25,

2011, announcement, respondent informed petitioner and intervenor that the

two-year deadline no longer applied to deny petitioner the relief she requested and

that she was entitled to her requested relief. Approximately one month later, on

August 24, 2011, respondent mailed to petitioner and to intervenor a proposed

supplemental stipulation of settled issues in which respondent stated that petitioner

was entitled to her requested relief under section 6015(f).

      On August 29, 2011, the Court held a previously scheduled telephone

conference with petitioner and respondent. Intervenor was notified that the

conference would be held at the scheduled time and, according to respondent’s

counsel, had discussed the matter with respondent’s counsel and expressed his

intention to participate in the conference. Intervenor ultimately failed to


      4
       We also note Payne v. Commissioner, docket No. 10768-09, an order and
decision of this Court entered June 24, 2010, Government appeal dismissed
voluntarily, No. 10-72855 (9th Cir. July 25, 2011). There, we followed our opinion
in Lantz v. Commissioner, 132 T.C. 131, invalidating the two-year deadline.
                                         -7-

[*7] participate in the conference or to communicate with the Court about his failure

to participate in the conference. During the conference respondent’s counsel

indicated that respondent was conceding that petitioner’s claim was timely on the

basis of Notice 2011-70, supra. The next day, the Court ordered that the parties

were no longer required to file the scheduled briefs but had to file a supplemental

stipulation of settled issues by September 29, 2011.

      No supplemental stipulation of settled issues was ever filed. In a status report

filed September 29, 2011, respondent indicated that petitioner and respondent had

attempted to execute a supplemental stipulation of settled issues but were unable to

do so. Respondent also reiterated that petitioner is entitled to her requested relief

and maintained that intervenor “tentatively agrees” with that treatment as well. The

report also referenced petitioner’s motion for litigation fees and costs, which was

filed one day before. On October 5, 2011, the Court ordered respondent and

intervenor to each file a response to that motion. Respondent later filed such a

response, but intervenor did not. Nor did intervenor ever file a response that the

Court subsequently ordered him to file to petitioner’s reply to respondent’s

response.

      On May 8, 2012, the Court ordered the parties to show cause why petitioner

should not be granted her requested relief. Petitioner filed a document stating that
                                         -8-

[*8] no cause exists to deny her her requested relief because respondent has

conceded all issues in the case. Respondent filed a document stating essentially the

same. Intervenor made no response to the show cause order.

                                      Discussion

      Section 7430(a) authorizes this Court to award reasonable litigation costs

(including attorney’s fees) to a qualifying taxpayer who commences a proceeding in

this Court. To qualify for a recovery of costs, a taxpayer such as petitioner must

establish: (1) she is the prevailing party, (2) she has exhausted the administrative

remedies available to her, (3) she did not unreasonably protract the proceedings, and

(4) the amount of the costs requested is reasonable. See sec. 7430(a), (b), and (c);

see also Rule 232(e); Grigoraci v. Commissioner, 122 T.C. 272, 275 (2004). These

requirements are conjunctive, and the failure to satisfy any one of them precludes an

award of costs. See Goettee v. Commissioner, 124 T.C. 286, 296 (2005), aff’d, 192

Fed. Appx. 212 (4th Cir. 2006); Minahan v. Commissioner, 88 T.C. 492, 497

(1987).

      Respondent objects to petitioner’s motion on the grounds that (1) she was not

the prevailing party within the meaning of the statute and (2) her claimed costs
                                          -9-

[*9] are unreasonable.5 We need not and do not reach respondent’s second ground

because we conclude that petitioner is not a prevailing party for purposes of

section 7430. Section 7430 generally provides that a taxpayer may qualify as a

prevailing party only if either (1) the taxpayer has made a qualified offer in certain

circumstances (qualified offer rule) or (2) the Commissioner’s position is not

substantially justified. See sec. 7430(c)(4); see also Haas & Assocs. Accountancy

Corp. v. Commissioner, 117 T.C. 48, 59 (2001) (stating that the qualified offer

rule may apply even where the Commissioner’s position was substantially

justified), aff’d, 55 Fed. Appx. 476 (9th Cir. 2003). Petitioner relies exclusively

upon the qualified offer rule, which is implicated where “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”.6 Sec. 7430(c)(4)(E)(i). The qualified offer rule may not apply, however,

      5
       Intervenor has not filed any response to petitioner’s motion, despite the
Court’s order that he do so.
      6
       Although petitioner fails to argue that respondent’s position was not
substantially justified, we note in passing that the record supports a conclusion that
respondent’s position was substantially justified in that it had a reasonable basis in
both fact and law. See Huffman v. Commissioner, 978 F.2d 1139, 1147 (9th Cir.
1992), aff’g in part, rev’g in part T.C. Memo. 1991-144; Swanson v. Commissioner,
                                                                          (continued...)
                                         - 10 -

[*10] where the “judgment [is] issued pursuant to a settlement”. Sec.

7430(c)(4)(E)(ii)(I).

      Respondent and petitioner disagree as to whether the judgment in this case

will be “issued pursuant to a settlement”. Petitioner argues that the judgment will

not be issued pursuant to a settlement. Respondent argues to the contrary.7 As

petitioner sees it, this case was not settled because the parties never mutually agreed

to end the case; instead respondent unilaterally declared that he was conceding the

case in full. Petitioner adds that the parties did not discuss or negotiate

respondent’s concession before it was made and that she offered to settle the case

for $200 whereas respondent unilaterally went one step further by conceding

(without any input from petitioner) that her liability was zero.




      6
      (...continued)
106 T.C. 76, 86 (1996).
      7
        Respondent does not address, nor do we decide, whether petitioner’s $200
offer was meaningful enough to be considered a “qualified offer” for purposes of
sec. 7430(c)(4)(E)(i). The qualified offer rule was tailored after Fed. R. Civ. P. 68
to “‘provide an incentive for the IRS to settle taxpayers’ cases for appropriate
amounts’”, see Johnston v. Commissioner, 122 T.C. 124, 129 (2004) (quoting S.
Rept. No. 105-174, at 48 (1998), 1998-3 C.B. 537, 584), aff’d, 461 F.3d 1162 (9th
Cir. 2006), and at least one Court of Appeals has decided that rule 68 is triggered
only through a good-faith offer, see August v. Delta Air Lines, Inc., 600 F.2d 699,
700-702 (7th Cir. 1979), aff’d on other grounds, 450 U.S. 346 (1981).
                                         - 11 -

[*11] Petitioner relies in part upon Estate of Lippitz v. Commissioner, T.C. Memo.

2007-293, stating in her reply to respondent’s objection that the case “is directly on

point”. There, the CCISO determined that the taxpayer was entitled to relief under

section 6015 and recommended that the taxpayer receive such relief. The

Commissioner filed an answer approximately one month later, however, denying

that the taxpayer was entitled to any such relief. Shortly thereafter, the CCISO’s

determination was disclosed to the taxpayer, the taxpayer filed a “dispositive

motion” for partial summary judgment after the Commissioner declined to accept

her qualified offer, and the Commissioner eventually conceded that the taxpayer was

entitled to her requested relief. The Court held that the Commissioner’s concession

was not a “settlement” within the meaning of the statute under the facts therein. The

Court emphasized that “Respondent was unwilling to settle this case on the terms

and at the times offered by petitioner” but waited until just before the resolution of a

dispositive motion to concede the matter. Id.

      Later, the Court held that the Commissioner’s concession in Trzeciak v.

Commissioner, T.C. Memo. 2012-83, was a settlement within the meaning of

section 7430(c)(4)(E)(ii)(I). In Trzeciak, the taxpayers moved for litigation costs

after the Commissioner had conceded all items in the notice of deficiency. The
                                          - 12 -

[*12] taxpayers relied upon Estate of Lippitz in arguing that the Commissioner’s

concession was not a settlement. The Court disagreed, stating that the case was

“materially distinguishable” from Estate of Lippitz and that the taxpayers’ reliance

on that case was “misplaced”. Trzeciak v. Commissioner, T.C. Memo. 2012-83.

The Court noted that the taxpayer in Estate of Lippitz had made multiple settlement

offers and was forced to actively litigate the case by filing a motion for partial

summary judgment. Id.

      We believe that the concession here is similar to the concession in Trzeciak

and is a “settlement” within the meaning of section 7430. Contrary to petitioner’s

assertion, the case of Estate of Lippitz is not directly on point with the instant case.

In this case, unlike in Estate of Lippitz, respondent did not ultimately concede that

he was wrong on the merits given the facts or law that existed when he first took a

position in the case. Respondent’s concession that petitioner was entitled to her

requested relief resulted from an administratively promulgated policy directive to

cease enforcing the two-year deadline in the interests of tax administration.

Respondent conceded this case shortly after that policy change.8 Nor, unlike


      8
        Petitioner asserts that a settlement must relate to the merits of the case and
cannot result from a change in the applicable law. We disagree for the reasons just
stated. Petitioner also asserts (in her reply to respondent’s response) that she was
                                                                            (continued...)
                                          - 13 -

[*13] Estate of Lippitz, is this a case in which the Commissioner conceded error in

the face of a likely adverse judicial decision. While petitioner construes Estate of

Lippitz to foreclose the Commissioner from settling for purposes of section 7430

any case that has been submitted to the Court for decision, we do not read Estate of

Lippitz so broadly. Whether the Commissioner settles a case for purposes of

section 7430(c)(4)(E)(ii)(I) does not rest entirely on the timing of the

Commissioner’s concession but instead depends on all the facts and circumstances.

      Petitioner also argues that respondent’s concession cannot be a settlement

because, she states, the concession was not a contract in that the concession was a

unilateral action that lacked an offer and an acceptance and, hence, mutual assent.

To that end, petitioner asserts, the parties neither discussed nor negotiated the

terms of the concession; instead respondent thrust the concession upon her without

affording her the opportunity to reject it. Petitioner asserts further that the

qualified offer rule contemplates that she would be liable for the amount that she



      8
        (...continued)
advancing in this proceeding an equitable tolling issue as to the two-year deadline in
the event the deadline were held valid. Petitioner’s pretrial memorandum, however,
makes no mention of such an issue, asserting solely that the two-year deadline is
inapplicable because it is invalid. Nor does the parties’ motion for leave to submit
this case to the Court pursuant to Rule 122 make any mention of an equitable tolling
issue.
                                          - 14 -

[*14] offered and she never offered to settle the case for no liability, which is what

respondent ultimately conceded. In short, petitioner suggests, a concession can

never be a settlement when the concession is made voluntarily without bargaining

between the parties or without their express mutual assent.

         We disagree that respondent’s concession was not eventually memorialized in

a contract between petitioner and respondent. “A settlement is a contract and,

consequently, general principles of contract law determine whether a settlement has

been reached.” Dorchester Indus. Inc. v. Commissioner, 108 T.C. 320, 330 (1997),

aff’d without published opinion, 208 F.3d 205 (3d Cir. 2000). 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. Id. 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. See, e.g., Circuit City Stores, Inc. v. Najd, 294 F.3d 1104,

1109 (9th Cir. 2002); Ahern v. Cent. Pac. Freight Lines, 846 F.2d 47, 49 (9th Cir.

1988).

         We have little difficulty concluding from the record that respondent’s

concession was an offer to petitioner to settle this case by granting her requested

relief and that she accepted (or in other words, assented to) this offer on the basis
                                         - 15 -

[*15] of the tendered terms.9 The fact that respondent informed petitioner that he

was conceding that she was entitled to her requested relief does not mean, as she

concludes, that she had to accept the concession as tendered. While it does not

happen often, a taxpayer such as petitioner could easily reject the Commissioner’s

full concession of a case and ask the Court to exercise our discretion to decide the

case on its merits. See, e.g., McGowan v. Commissioner, 67 T.C. 599, 604-608

(1976). Petitioner, however, never manifested any objection to respondent’s

concession notwithstanding the many occasions on which she had an opportunity

to do so. In addition, the parties’ failure to communicate the concession in a

formalized stipulation of settled issues carries little weight in our analysis because

the filing of a written agreement is not necessary to the finding of a settlement.

See Johnston v. Commissioner, 122 T.C. 124, 129 (2004), aff’d, 461 F.3d 1162

(9th Cir. 2006). Nor do we agree, as petitioner avers, that a settlement requires

active bargaining or negotiations between the parties. Key facts leading to our

finding that the parties settled this case for purposes of section 7430(c)(4)(E)(ii)(I)

include that respondent informed petitioner that he was conceding that she was

      9
       We also conclude that intervenor, an attorney, agreed with the concession
given that he opted not to participate in our telephone conference as to the matter,
reportedly after discussing the matter with respondent’s counsel, and that in
connection with our show cause order he later chose not to inform the Court of any
disagreement he had with the concession.
                                         - 16 -

[*16] entitled to her requested relief, that she never challenged the concession after

hearing it but accepted the accompanying benefits in full, and that we will enter our

judgment in this case without ever ruling on the merits of her claim. Ultimately, we

will enter a judgment in this case that in relevant part reflects respondent’s

concession, as petitioner in her response to our show cause order agreed we should

do.

      Our reading of the regulations underlying the qualified offer rule also

supports our position. The regulations draw no distinction between a settlement

and a concession and treat a taxpayer’s settlement the same as the taxpayer’s

concession. See sec. 301.7430-7(e), Examples (1) and (2), Proced. & Admin.

Regs.10 The regulations also define the word “judgment” for purposes of the

qualified offer rule to mean “the cumulative determinations of the court

concerning the adjustments at issue and litigated to a determination in the court

proceeding”, sec. 301.7430-7(a), Proced. & Admin. Regs., and set forth by

example that an issue that a taxpayer disputes in court but ultimately concedes or

settles is outside the meaning of the word “judgment” because the issue “was not

      10
        Black’s Law Dictionary also draws no material distinction between the
terms. Compare Black’s Law Dictionary 328 (9th ed. 2009) (defining “concession”
in relevant part as “The voluntary yielding to a demand for the sake of a
settlement”) with id. at 1496 (defining “settlement” in relevant part as “An
agreement ending a dispute or lawsuit”).
                                        - 17 -

[*17] determined by the court, but rather by concession or settlement”, sec.

301.7430-7(e), Example (1), Proced. & Admin. Regs. See also T.D. 9106, 2004-1

C.B. 384, 385, stating as to section 301.7430-7, Proced. & Admin. Regs.:

             The proposed regulations provided that a prevailing party may
      not recover fees under the qualified offer rule for any issue that is
      settled. Recovery is limited to issues that are actually determined by a
      court. One commentator recommended that the final regulations permit
      the recovery of fees attributable to adjustments that are settled. The
      final regulations do not adopt this comment. * * *

      Petitioner also argues that a finding that respondent’s concession was a

settlement would defeat the intent of the qualified offer rule. We disagree. The

qualified offer rule was included in the Internal Revenue Service Restructuring

and Reform Act of 1998, Pub. L. No. 105-206, sec. 3101(e)(1) and (2), 112 Stat. at

728-729, and the legislative intent for the rule supports our position. The qualified

offer rule was designed to “‘provide an incentive for the IRS to settle taxpayers’

cases for appropriate amounts’”. Johnston v. Commissioner, 122 T.C. at 129

(quoting S. Rept. No. 105-174, at 48 (1998), 1998-3 C.B. 537, 584). We find

nothing in the record that leads us to conclude that respondent was unwilling to

settle this case for an “appropriate amount”. Instead, the record establishes that

respondent was willing to settle this case, contrary to the CCISO’s determinations,

but for the fact that the two-year deadline, as explicitly and unambiguously
                                         - 18 -

[*18] written, precluded petitioner from requesting her desired relief in the first

place. Although that rule was repeatedly invalidated by this Court (first in Lantz

and later in subsequent cases), as of June 13, 2011, three Courts of Appeals had

held to the contrary. Respondent properly and timely conceded that petitioner was

entitled to her desired relief when the Commissioner announced that he would cease

enforcing the two-year deadline.

      We will deny petitioner’s motion for fees and costs. We have considered all

arguments the parties made for contrary holdings and, to the extent not discussed,

we have rejected those arguments as without merit. To reflect the foregoing,


                                                        An appropriate order and

                                                  decision will be entered.
