No, not the European colonies in China in the last century, but the story of Barbara Jane Knudsen, Petitioner, and Kurt H. Knudsen, Intervenor, 2013 T. C. Memo. 87, filed 4/1/13, and no, it’s not an April Fool’s Day joke either.

BJ and ex-spouse Kurt Hans (an attorney, natch) ran up $155K in tax delinquencies over a four-year stretch, but Kurt Hans gets a bankruptcy discharge, and, though offered a chance to participate, bows out. BJ of course wants Section 6015 equity, but is stymied by the old two-year rule (cf. Lantz, 132 T.C. 131 (2009), rev’d, 607 F.3d 479 (7th Cir. 2010), and its progeny, wherein Tax Court shot down IRS’ two-year rule for Section 6015(f) equitable relief in 1.6015-5(b)(1) and three separate Circuit Courts of Appeals shot down Tax Court. Thereupon, IRS decided to reconsider the two-year rule via Chief Counsel Notice CC-2009-012 (Apr. 17, 2009), amplified and clarified by Chief Counsel Notice CC-2010-005 (Mar. 12, 2010).

But while IRS was amplifying, clarifying and reconsidering,  BJ offered IRS $200, $50 for each of the four years at issue, and claimed it was a qualifying offer for Section 7430 purposes. BJ had meanwhile run up $50K in legal fees, claimed she had no money, and Jan Pierce, Esq., her redoubtable barrister, needed the cash.

On the eve of trial, and notwithstanding IRS was three-for-three in the CCAs, “…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.” 2013 T. C. Memo. 87, at p. 5.

When IRS folded and gave BJ equitable innocent spouse relief, meaning BJ paid zero, Jan played the Section 7430 card.

Judge Thornton trumps BJ’s ace. Although IRS yelps that Jan’s fees are unreasonable, Judge Thornton doesn’t go there, holding that BJ didn’t prevail (and where have we heard that song before?).

Judge Thornton: “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’. Sec. 7430(c)(4)(E)(i). The qualified offer rule may not apply, however, where the ‘judgment [is] issued pursuant to a settlement’. Sec.7430(c)(4)(E)(ii)(I).” 2013 T. C. Memo. 87, at pp. 9-10 (Footnote omitted, but read it. Jan never argues whether IRS was substantially justified, and rightly so, as IRS had won the pick-three in the CCAs; but the $200 offer was a nice move, and merits a Taishoff “good try” for clever Jan).

Alas for Jan and BJ, Judge Thornton declines to consider whether the $200 offer was  bona fide, and dumps Jan’s argument that the parties never agreed to a written setttlement, because BJ offered to pay $200 and the IRS refused that and gave BJ a free pass.

Ya gotta like Jan; moves like that should have gotten the dude something, ya think?

But Judge Thornton says “…respondent [IRS] 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.” 2013 T. C. Memo., at p. 12. (Footnote omitted.)

IRS had won all along the line to date, had no fear of an adverse result upon appeal, decided to give the late-filing spouses a break, and so IRS was substantially justified and then some.

And stipulations needn’t be written: the parties’ actions speak louder than words. And the aim of Section 7430 is to make parties settle pre-trial. BJ got everything she wanted–innocent spouse relief.

No payday for Jan. Too bad.