The United States Court of Appeals for the Federal Circuit just issued an opinion in BASR Partnership, William F. Pettinati, Sr., Tax Matters Partner v. United States, in which the court determined whether a partnership was entitled to recover its reasonable litigation costs from the government when it submitted a nominal $1 qualified offer to the government in tax controversy litigation and subsequently prevailed at summary judgment. On the surface, this does not seem like the type of case about which low-income taxpayer clinics would normally have a strong opinion. However, during the litigation the government asserted an argument that, if successful, could have severely hindered a common litigation strategy that low-income taxpayers employ in frozen refund litigation. Specifically, the government asserted that, in order to constitute a reasonable offer, a qualified offer must be of a minimal amount that would potentially depend on the amount of tax liability at issue. In other words, the government took the position that nominal offers were potentially unreasonable solely because they were nominal offers, even if a taxpayer believed he or she was likely to prevail and subsequently did prevail.
Accordingly, the Philip C. Cook Low-Income Taxpayer Clinic of Georgia State University College of Law and the Harvard Federal Tax Clinic filed a joint amicus brief in this case solely on the issue of whether taxpayers should be denied reasonable litigation and administrative costs based on the dollar value of a qualified offer. The clinics argued that none of the requirements of I.R.C. § 7430, which governs qualified offers, state that an offer must be of a minimum amount or of a minimum percentage of the taxpayer’s possible liability in order to be valid. The clinics were particularly concerned with the potential impact that a rule requiring a minimum qualified offer amount would have on low-income taxpayers, which motivated them to submit the brief. Low income taxpayers who have had their refunds frozen often submit $1 qualified offers when they believe that they will prevail in a tax court case in order to shorten the time it takes for them to resolve their case and receive their frozen refund. Obtaining these frozen refunds is of critical importance to these vulnerable taxpayers because they often need the tax refunds generated by the earned income tax credit to meet their basic living expenses. Filing a qualified offer puts pressure on the government to consider the low-income taxpayer’s case more quickly than it otherwise would because of the risk that the government would have to pay fees and costs if the taxpayer prevails.
In looking at this issue, the Federal Circuit agreed that a nominal $1 qualified offer can be reasonable. The court based its holding on the standard of review that it applied, which it determined should be abuse of discretion. Under an abuse of discretion standard, the court determined that the trial court did not abuse its discretion when it determined that an offer does not have to be of a minimal amount to be reasonable. While the court did not discuss the impacts to low-income taxpayers directly in its opinion, the clinics are pleased that the court reached this result and that nominal qualified offers will remain a viable litigation too to low-income taxpayers who rely on them to obtain improperly frozen refunds as quickly as possible.
The clinics are incredibly grateful for the hard work of Georgia State University College of Law student (now graduate) Reena Patel and Harvard Law School student (now graduate) Amy Feinberg, who did excellent work assisting in the preparation of this brief.