Court Awards Attorneys Fees Under § 7430 Based on $1 Qualified Offer (11/6/24)

I have previously written about the saga of Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 3/3/22) and Mann Construction, Inc. v. United States, 651 F.Supp.3d 871 (E.D. Mich. 1/18/23). Sixth Circuit Invalidates Notice Identifying Listed Transaction Requiring Reporting and Potential Penalties (Federal Tax Procedure Blog 3/3/22), here, and On Remand from 6th Circuit, District Court Orders Vacatur of Listed Transaction Notice (Federal Tax Procedure Blog 1/19/23), here.

We now have perhaps the last chapter with the district court dismissing the case as moot and awarding attorneys’ fees against the Government under § 7430. Mann Construction, Inc. v. United States, ___ F.Supp.3d ___ (E.D. Mich. 1/1/24), CL here and GS here [to come]. Cutting to the chase, the court awarded Mann Construction attorneys’ fees because Mann Construction made a $1 qualified offer under § 7430(c)(4)(E)(i). In order for attorneys’ fees to be awarded under § 7430, the party seeking to recover attorneys’ fees must 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). Prevailing party is defined to exclude positions as to which the government was "substantially justified."  The Government was likely substantially justified in the positions it took in the litigation. But an exception to the “substantially justified” exception applies if the party has made a “qualified offer,” meaning an offer that "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)."  § 7430(c)(4)(E).  In this case, where the result was an up or down result, a minimal offer can meet the qualified offer standard. Mann Construction made an offer of $1, identifying the offer as a qualified offer. So the Court awarded “$220,482.50 in attorneys’ fees and $1,355.90 in costs.

The court specifically rejected a requirement that “a qualified offer to be reasonably calculated to justify serious consideration by the IRS to avoid tax-litigants gaming the qualified offer rule with nominal offers like Plaintiffs’ $1 offer.” (Slip Op. 11.) The Court said (Slip Op. 11):

The statute’s definition requires nothing else for qualified offers—not a minimum amount nor a good-faith reasonableness requirement—full stop, end of inquiry. See BASR P’ship v. United States, 130 Fed. Cl. 286, 305 (2017), aff’d, 915 F.3d 771 (Fed. Cir. 2019) (awarding attorneys’ fees under § 7430 when plaintiff made $1 qualified offer and had $0 of tax liability because “$1 is more than $0” and the statute’s definition of qualified offer “does not require any minimum amount” or good-faith reasonableness requirement); see also Tanzin v. Tanvir, 592 U.S. 43, 47 (2020) (“When a statute includes an explicit definition, [courts] must follow that definition.”).

For my discussion of the cited BASR case, see Major Attorneys Fee Award for BASR Partnership Prevailing on the Allen Issue in Federal Circuit (Federal Tax Procedure Blog 2/11/17), here.

As with the case discussed in the prior blog, the lesson is that, in a case where the ultimate result is up or down (with the court having no place to go in between), the $1 minimal qualified offer is the way to go. Of course, if the court can reach a result in between, the minimal $1 offer will fail where a more nuanced higher offer might have worked (in a manner somewhat like baseball arbitration).