BASR Partnership won the merits decision -- really a procedural decision -- at the trial and appellate levels holding that the fraud of persons other than the taxpayer or someone related to the taxpayer is not sufficient to invoke the unlimited statute of limitations in § 6501(c)(1). BASR Partnership v. United States, 113 Fed. Cl. 181 (2013), aff'd BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015), reh. denied. I previously blogged on these decisions, but link here to the one on the appeals decision: Court of Appeals for Federal Circuit Holds that Fraud of the Taxpayer (Or Someone Closer to the Taxpayer than the Fraudster) is Required for Section 6501(c)(1) Unlimited Statute of Limitations (Federal Tax Crimes Blog 7/30/15; 7/31/15), here.
Having won the decision, rather than being satisfied with the substantial victory -- the avoided cost of large tax liabilities for its partners -- the partnership desired to recover attorneys fees. That leads to § 7430, here. Normally, recovering attorneys fees requires that the party seeking recovery be the "prevailing party." The prevailing party is defined in § 7430(c)(4) to be the party who "substantially prevailed" as to the amount and who meets certain financial requirements (in relevant party net worth of less than $7 million). BASR did not fail the financial test. (As noted below, the Government argued that the "real parties in interest" -- the ultimate parties behind the partners -- had net worths exceeding the $7 million limit, but the Court rejected that argument.)
The prevailing party requirement is a bit more nuanced. Certainly, in ordinary parlance, BASR was the prevailing party. It won the whole cahuna, so that the IRS is not able to assess and collect tax from its partners under the TEFRA procedures. But, prevailing party is defined to exclude positions as to which the government was "substantially justified." Given the holding in Allen v. Commissioner, 128 T.C. 37 (2007), the Government position was substantially justified.
But wait, there is an exception to the substantially justified exception. If the taxpayer has made what is referred to as a qualified offer under 7430(g) then the party will be treated as the prevailing party if the judicial result "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)." See § 7430(c)(4)(E). The result of the BASR litigation is that the Government gets $0 from affected taxpayers which is certainly less than the $1 offered. Hence, bottom-line, the Court award BASR its attorneys fees and at a higher than normal hourly rate. The aggregate award was $314,710.49.
In getting to the bottom-line, the Court rejected the Government's various arguments, some of which seems pretty picky.
The Court held that BASR was a party (it filed the TEFRA proceeeding) and it did not fail the net worth test. The Court refused to look through BASR to the single member LLC partners and then to the ultimate "taxpayers") who, if considered, would have flunked the net worth test.
Then, the Court found that BASR was a prevailing party because it made a qualifying offer. The Court rejected the Government's argument that there was no tax at issue in the TEFRA partnership level proceeding, thus making the $1 offer meaningless. The Court held that the FPAA was effectively a "letter of proposed deficiency" to the partners, analogizing the FPAA in the TEFRA partnership proceeding to the notice of deficiency which clearly permits the qualified offer. The Court also rejected the Government's argument that the $1 offer was a sham because it was de minimis relative to the potential tax liability at the partner level -- tax on gain of $6.6 million. The Court rejected the argument because, well: "$1 is more than $0."
The Court then rejected other technical government arguments.
Nice victory for BASR and its lawyers.
I have for some times had the following Example and discussion in my Federal Tax Procedure Book (in the August 2016 edition in the Student Edition at pp. 400-401 and in the Practitioner Edition at pp. 570-571):
Example 2: Assume a single issue case also involving $100,000 in additional tax. The issue is an either/or issue. At trial, either the IRS prevails 100%, or the taxpayer prevails 100%. There will be no point in between as is usually involved in valuation issues. This appears to be a no-brainer in terms of a QO. The taxpayer should offer $1.
What happens if, in the ensuing litigation, the IRS offers the taxpayer an 80% victory to settle? If the taxpayer accepts, judgment will be entered at $20,000, which of course exceeds the QO of $1. Settled issues do not qualify for the QO anyway, so the taxpayer appears no worse off for having offered only $1. The taxpayer can still seek recovery under the general rules of § 7430, and the substantial concession made by the IRS might at least suggest that its position was not substantially justified, although a 20% settlement might suggest at least reasonable basis. What happens if the IRS trial attorney concedes in full after receiving the QO (or, alternatively, accepts the QO of $1)? Again, there is no issue left for trial and the QO is irrelevant. However, barring unusual circumstances in which the taxpayer’s lack of cooperation led to the IRS’s assertion of the worthless position, it would appear that the taxpayer would have a strong case under the general § 7430 rules for recovery of costs.This seems to be the BASR case, but without the complications of the partnership TEFRA rules.
OK, I know some of you are wondering about examples 1 and 3. Here they are:
Example 1: Suppose a case involves a single issue with a proposed additional tax of $100,000. The issue is a valuation issue that a court may resolve to produce additional tax anywhere between 0 and $100,000. Taxpayer’s aggressive position is that the right result is 0, but believes that a court might find a range of values that would produce additional tax of between $30,000 and $40,000. The Appeals Officer, however, assesses the range of potential values differently, to produce say from $60,000 to $70,000 additional tax. (FYI, I have chosen a valuation issue first because, by the time the IRS refines its position for trial, it is likely that, absent a QO, a Court would find that the IRS’s position was substantially justified, thus precluding recovery under the general § 7430 rules; in this example, if the IRS refines its position in the notice of deficiency to $70,000, the upper end of the Appeals Officer’s range, then presumably the Court will find that the IRS was substantially justified.)
If the taxpayer were comfortable with his assessment of the range, the taxpayer might make an offer of $35,000 (middle of the taxpayer’s range). The taxpayer does not think the Appeals Officer would accept that offer, and they will go to trial. The taxpayer’s risk, of course, would be that the Court would determine a higher value than the taxpayer’s mid-range, thus producing a tax in excess of $35,000. The taxpayer might therefore be more conservative and propose additional tax of $40,000 (which represents the top end of his range). The Appeals Officer is not likely to accept this offer either, and it would give the taxpayer a better chance at recovering § 7430 costs. Still, there is some risk that the Court might come up with a higher value than even the taxpayer predicted as the top of the range. The taxpayer thus might consider an offer of $50,000 which is the mid-point between the respective mid-points of their two assessments. The taxpayer really does not want to settle for that amount (because he still believes the $30,000-$40,000 range is right), but the higher amount will better situate him to recover § 7430 costs which will be substantial and, if accepted, will at least avoid the further costs of litigation which will substantially exceed the amount recoverable under the qualified offer concept.
The tension, of course, is created because the QO works best when the taxpayer is conservative (i.e., offers the higher proposed additional tax). An aggressive taxpayer offer (e.g., one producing say $20,000 of tax in this example) is unlikely to be accepted, and in this example it may not be likely that an ultimate court holding would sustain that small a tax liability. A conservative taxpayer offer (i.e., one producing higher tax) better situates the taxpayer to recover § 7430 costs. The risk, of course, is that, if the offer is too conservative, the IRS may accept the offer and thus lock the taxpayer into a significantly worse result than the taxpayer could achieve at trial. Thus, the taxpayer must factor into his offers what he thinks he can get on the merits at trial and whether what he is risking in a conservative offer may be greater than the prospective benefits of recovering § 7430 costs at trial. The taxpayer must keep in mind that, even if he does recover § 7430 costs, the recovery will be less than his real additional costs (e.g., his attorneys fees will be higher than allowed). It may thus be that, given those additional costs, the taxpayer would be willing to offer $45,000 or even $50,000 which is beyond his estimate of the top end of the range in the hope that the IRS would accept it. Or that point may be his point of indifference as to whether the IRS accepts the offer or rejects it, with the result that, if he has assessed the case correctly, he will recover attorneys fees.
* * * * [See Example 2 above]
Example 3: Now assume that a single case for a single year involves both of the issues and amounts in Examples 1 and 2. Pull out your crystal ball, and have fun thinking through all the permutations of this one!