A “substantially justified” position is the chief bulwark of IRS’ defense to a Section 7430 claim for admins and legals. But when is IRS held to have taken a position, “substantially justified” or not?

STJ Diana L. (“Sidewalks of New York”) Leyden tells us in Nirav Babu, Docket No. 20070-19, filed 5/2/22.

Nirav got chopped for $249K for Section 6695(g) preparer EITC due diligence footfaults. IRS never issued a Section 6212 SNOD, just assessed. Nirav filed for a refund of $5K and abatement of the balance. Exam rejected the refund and abatement, and Nirav went to Appeals.

At Appeals, IRS abated $167K, hit Nirav with $81.5K, and Nirav and his representative signed off on the deal, but Nirav now wants admins and legals, claiming he “substantially prevailed.”

But when did IRS taken the position it now claims was “substantially justified”?

“With respect to the administrative proceeding in issue, the “position of the United States” means the position taken by the United States as of the date petitioner received the notice of the decision of the IRS Appeals Office. I.R.C. §7430(c)(7)(B). The IRS is not considered as having taken any position in an administrative proceeding prior to the issuance of the Appeals Office’s notice of decision. A notice of decision is a ‘final written document’ notifying a taxpayer that the Appeals Office has made a determination of the entire case (typically, adverse to the taxpayer). Treas. Reg. §301.7430-3(c)(2). The date that the Appeals Office issued the notice of decision for this case was when the IRS established its position in this case. The amount in controversy is the amount in issue as of the administrative proceeding date, meaning the date the Appeal Office issued a notice of deficiency, or a notice of decision, as happened in this case. Treas. Reg. § 301.7430-5(e).” Order, at p.4.  (Citation and footnote omitted, but the footnote says since there was no SNOD, Appeals’ notice of decision is the magic date).

And of course the two-thirds-one-third agreed split on the chop means that IRS had “a reasonable basis in fact and in law” for its position.

Nirav wants back the $5K, claiming it was a Section 7430(c)(4)(E)(i) qualified offer. He doesn’t get it.

I am sure my wise-and-wary readers will yell “If you settle a QA, no 7430 legals or admins!” And of course they’re right. The statute says “judgment,” and there are no “judgments” in Tax Court, only decisions, but it doesn’t matter to STJ Di.

“However, by its terms, this provision applies only where a ‘judgment’ is entered in ‘a court proceeding.’ I.R.C. § 7430(c)(4)(E)(i); see Treas. Reg.§ 301.7430-7(a) (‘The provisions of the qualified offer rule do not apply if the taxpayer’s liability * * * is determined exclusively pursuant to a settlement”); see Klopfenstein v. Commissioner, T.C. Memo. 2019-156. In this case, petitioner settled before any court proceeding began, and so his liability was not determined by a ‘judgment’. Thus, petitioner could not have made a qualified offer.” Order, at p. 5 (For Mark Klopfenstein’s story, see my blogpost “No SNOD, No NOD, No Admins,” 12/9/10).

Now I have some fellow-feeling for Nirav’s hardlaboring trusty counsel. They got a real good settlement, but clearly they put in a lot of work to get there. And this isn’t a LITC or calendar call commando kind of case; as my esteemed colleague The Great Chieftain of the Jersey Boys says “I have never met a client that thought incurring fees to contest an erroneously determined tax was fair.” So of course they had to go for Section 7430 admins and legals, however long a shot it was.