                     FOR PUBLICATION

    UNITED STATES COURT OF APPEALS
         FOR THE NINTH CIRCUIT


 BARBARA JANE KNUDSEN,                             No. 13-72077
              Petitioner-Appellant,
                                                   Tax Court No.
                      v.                             18048-09

 COMMISSIONER OF INTERNAL
 REVENUE,                                             OPINION
             Respondent-Appellee.


           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, post-
divorce, 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 two-
year 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 denying Knudsen’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 of the 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. See Restatement (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 summary judgment, 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.
