## Facts

- Individual taxpayers disputed an IRS deficiency arising from proceeds received upon termination of certain water rights.
- In earlier Tax Court litigation, the court resolved key legal questions about the transaction and, as a matter of law, denied any allocation of land basis to the water rights.
- After that partial adjudication, the taxpayers made a qualified settlement offer under I.R.C. § 7430(c)(4)(E); the IRS rejected it.
- The Tax Court entered a decision; the taxpayers appealed.
- The Ninth Circuit reversed the Tax Court on the legal basis-allocation ruling and remanded for further proceedings on allocation.
- On remand, the parties resolved the remaining factual allocation issues by settlement.
- The resulting liability was less than the liability reflected in the taxpayers’ qualified offer.
- The taxpayers sought litigation costs incurred after the qualified offer date under § 7430’s qualified-offer rule.
- The IRS opposed, arguing the “settlement limitation” barred qualified-offer treatment because the ultimate judgment was entered after a settlement.

## Issues

1. Whether the § 7430(c)(4)(E)(ii)(I) “settlement limitation” (“judgment issued pursuant to a settlement”) bars qualified-offer treatment when key legal issues were adjudicated, but remaining factual issues were settled on remand.
2. How “judgment issued pursuant to a settlement” should be construed when a case is partially adjudicated and only residual factual matters are resolved by agreement.

## Decision

- The Tax Court granted the taxpayers’ motion for partial summary judgment on the applicability of the qualified-offer provision.
- The court held the settlement limitation did not preclude application of § 7430(c)(4)(E) where judicial rulings determined the controlling legal framework and only factual matters were settled on remand.
- The ruling allowed the taxpayers to pursue recovery of post-offer litigation costs, subject to satisfying other § 7430 requirements (including proof, reasonableness, and computation).

## Legal Principles

- Under I.R.C. § 7430(c)(4)(E), a taxpayer may be treated as a prevailing party (for purposes of recovering litigation costs) when the final liability pursuant to judgment is no greater than the taxpayer’s qualified offer and the government’s position results in a worse outcome than the offer.
- The § 7430(c)(4)(E)(ii)(I) settlement limitation does not apply merely because some issues are resolved by agreement; it targets judgments that implement a settlement determining the liability in substance.
- When central legal issues are decided by courts and only remaining factual issues are settled within that legal framework, the resulting judgment is not “issued pursuant to a settlement” in the sense that bars qualified-offer treatment.
- Statutory interpretation of § 7430(c)(4)(E) should avoid readings that discourage partial settlements after a qualified offer or permit strategic behavior that would nullify cost-shifting incentives.

## Conclusion

The Tax Court held that a post-remand settlement limited to factual issues did not trigger § 7430’s settlement limitation, so the taxpayers could seek post-offer litigation costs under the qualified-offer rule because the ultimate liability was lower than the amount reflected in their qualified offer.


Gladden v. Commissioner, 120 T.C. 446 (2003)