Gladden v. Commissioner

The Internal Revenue Service (IRS) issued a deficiency notice to William and Nicole Gladden (plaintiffs) regarding water rights that the Gladdens owned. The Gladdens filed a petition against the IRS commissioner (defendant) with the United States Tax Court challenging the deficiency. In April 1999, the Tax Court granted partial summary judgment to the Gladdens regarding one issue and to the commissioner on another issue. In May, the Gladdens made a qualified settlement offer regarding the water-rights issue, which the commissioner declined. In October, the Tax Court redetermined the Gladdens’ deficiency based on its summary-judgment rulings. In August 2001, the United States Court of Appeals for the Ninth Circuit reversed the Tax Court’s partial-summary-judgment ruling for the commissioner and remanded the case to the Tax Court. On remand, the parties settled certain factual issues, which resulted in the Gladdens’ tax liability being less than what it would have been under their qualified offer. The Gladdens then moved for partial summary judgment on their request for litigation costs pursuant to Internal Revenue Code (code) § 7430(c)(4)(E). The commissioner responded that under § 7430(c)(4)(E)(ii)(1) (the settlement limitation), there was no qualified-offer liability if a judgment was issued pursuant to a settlement. The Gladdens countered that the settlement limitation was inapplicable if a disputed tax issue was settled only after a court decided issues and arguments relating to the tax issue. Per the Gladdens, that was the case here because the parties reached a settlement only after the Tax Court and the Ninth Circuit decided key legal issues.