Winning Attorney’s Fees the Old Fashioned Way

For those who enjoy watching basketball, you occasionally hear the announcer say that a player has completed a 3 point play the old fashioned way.  Fans who are old enough to remember a time before the institution of the three point line allowing shots behind that line to receive 3 points if made understand that the announcer is referring to a play in which the player shooting the ball is fouled while shooting and making a basket.  The foul allows the player to make a third point from the free throw line.  This type of three point play has existed for many decades while the 3 point shot from behind a certain line is only a few decades old.  A similar situation exists with respect to attorney’s fees.  The ability to obtain attorney’s fees has existed for several decades; however, the creation of qualified offers a couple of decades ago changed the game and only occasionally does someone win attorneys fees the old fashioned way – without the aid of a qualified offer.

We have written several times about attorney’s fees issues, here, here, here, and here. In writing about attorney’s fees, we have almost always referenced the qualified offer provisions because obtaining attorney’s fees without a qualified offer is very difficult to do. In fact, that difficulty led to the creation of the qualified offer provisions which allow a prevailing taxpayer to overcome the substantially justified language in IRC 7430. Many taxpayers prevail and meet all of the other criteria for an award of attorney’s fees; however, few taxpayers can show, without the benefit of a qualified offer, that the position of the IRS was not substantially justified. The case of United States v. Johnson, No. 2:11-cv-00087 (D. Utah 2018) provides a rare example of a taxpayer who obtains attorney’s fees without the benefit of a qualified offer.

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The IRS brought this suit against the children of Anna S. Smith, seeking to collect an estate tax deficiency. The complaint was brought on January 21, 2011. Ms. Smith died in 1991. Not surprisingly, the defendants filed a motion to dismiss arguing that the IRS suit was time barred. They also argued that they had no personal liability with respect to funds from the estate except for insurance proceeds and that because the estate had sufficient assets to pay the taxes at the time of their distribution the personal liability provisions of 31 USC 3713 did not apply. The court initially found for the IRS. The defendants filed an amended answer asserting that they had a defense to personal liability because they tendered a special lien under IRC 6324A. After further argument, the court reversed and found for the defendants on all counts except for some of the life insurance benefits. The defendants requested attorney’s fees, which the court addresses in this memorandum opinion.

The court finds that the defendants meet the definition of prevailing party based on the dollar amounts and issues in controversy. It finds that that the defendants have a net worth less than $2 million and settles into a lengthy discussion of the issue of substantial justification that usually trips up taxpayers seeking fees. The court notes that the IRS position should be presumed not to have substantial justification if the IRS did not follow its published guidance, which is defined as “regulations, revenue rulings, revenue procedures, information releases, notices, and announcements.”

The defendants wisely segregated their fee requests according to the claims at issue in the case. They did not request fees on the issues of statute of limitations, transferee liability, discovery, and other uncategorized issues. Their fee request focused on the issues of whether the trust assets were includible in the estate, whether the beneficiaries received a discharge because of the special lien, and whether attempts to enforce the distribution agreement were improper. The court, in turn, addressed each of the three bases for fees. Although it is not clear exactly how the court calculated the amount of fees it ultimately awarded, the defendants would have had to provide the time spent by their attorneys on each of these issues with specificity in order to obtain the award.

IRS position on discharge of fiduciary liability was not substantially justified

The IRS argued that the defendants never made a written application for discharge and that it never accepted the proposed section 6324A lien. The court found that the IRS never identified any “form, method, procedure, or policy by which a ‘written application’” is properly made nor did it point to any specific format, form or wording to make the application. It stated “this is nearly fatal to the government’s claim that it had a reasonable basis in law and fact for its position.” The IRS pointed to the case of Baccei v. United States, 632 F.3d 1140, 1145-6 (9th Cir. 2011) in support of its position and the court examined that case. The court found that Baccei “placed the government on notice that in the absence of a ‘clear statutory prerequisite that is known to the party seeking to apply the doctrine,’ combined with the government’s utter inability to identify an ‘proper’ form or method of providing a written application for discharge, its position on this point was not substantially justified.” The court also found that its position that it could reject the section 6324A lien “contradicted its own published guidance, misinterpreted the plain language of statues and regulations, ignored relevant provisions of other statutes and regulations and conflicted with the undisputed purpose of section 6166.”

IRS position on liability as trustees was not substantially justified

The court acknowledged that this issue was difficult but still concludes that the IRS position was not substantially justified. The defendants acknowledged that the issue of the proper code section of inclusion was a novel issue but the IRS position merely restated their litigating position without discussing how their litigating position was reasonable. This is a very taxpayer favorable determination after an acknowledgement that the court struggled to find the right answer and that the taxpayer’s position was novel. Both of those factors normally preclude a determination that the IRS was not substantially justified. The court points to its conclusion that the IRS position contradicted a technical advice memorandum and a revenue ruling.

IRS attempts to enforce the distribution agreement and foreclose its tax lien were not substantially justified

The court found that the IRS sat too long on its right to enforce the distribution agreement and failed to release the tax lien twice. It found a parade of legal and factual errors in the way it pursued the agreement and the lien that was not overcome by the IRS arguments that recited the same facts contained in their losing brief.

Conclusion

This case should give heart to those pursuing attorney’s fees after successful litigation that if you can find something in the IRS actions that does not follow its own rules you can succeed in obtaining attorney’s fees even without the assistance of a qualified offer. Of course, the taxpayers’ victory here does not suggest the better course is not to file a qualified offer but this case does offer hope that fees are a possibility even without such an offer.

 

Attorney’s Fees Awarded in Penalty Case Arising From Late Payment of Excise Taxes

As in Keith’s post yesterday, today’s post also involves attorney’s fees, though the subject of toady’s post, C1 Design Group v US, involves a qualified offer and whether the awarding of fees justifies a rate higher than the statutory cap of $200/hour. C1 Design Group is a magistrate’s order from a federal district court in Idaho, and as I describe below is a helpful case for practitioners wanting insights into recovering attorney’s fees under Section 7430.

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The underlying case involved a refund action that considered whether C1 Design’s failure to timely pay its excise taxes was due to willful neglect. C1 argued that a car crash involving the company’s founder led to financial difficulties, which led to the late excise tax payments. IRS agreed with that excuse for the first four quarters but litigated the effect of the crash on later quarters. The taxpayer argued that the injury triggered financial difficulties, which amounted to reasonable cause for the late payments.

The matter went to trial, with a jury rendering its verdict in favor of the taxpayer for the full amount of the refund, about $28,000. About a year after filing its claim, C1 Design made a qualifying offer, essentially agreeing to accept as a settlement a refund of about half of what the jury found the taxpayer was ultimately entitled to receive.

Following the verdict, C1 Design filed its motion for fees, seeking about $76,000; approximately $50,000 was attributable to the period after it made the qualifying offer.

The court agreed that C1 was entitled to fees for the period after the IRS  rejected the qualifying offer, but found that rejecting the offer was “substantially justified”, thus not warranting fees for the period prior to the qualifying offer. In addition, the court reduced the lead lawyer and his associates’ hourly rate, based on a finding that the taxpayer did not prove that there were special factors that warranted an increase over the statute’s $200 cap. The net result was that the taxpayer was awarded attorneys’ fees of about $33,000, not the $70,000 that the taxpayer sought.

There are some things in the opinion worth highlighting.

One, just because a taxpayer wins on the merits, it does not mean that the government position is not substantially justified, especially on a fact intensive issue like reasonable cause involving late payment penalties. As the opinion discusses, the “United States’ position was substantially justified if it is ‘justified to a degree that satisfies a reasonable person,’” or has reasonable basis in both law and fact. Pac. Fisheries Inc. v. United States, 484 F.3d 1103, 1108 (9th Cir. 2007) (citing Pierce v. Underwood, 487 U.S. 552 (1988). That inquiry, under the statute, has a focus on whether the “United States has lost in courts of appeal for other circuits on substantially similar issues.”

In this case (as in most), the judge deciding the fees motion presided at the trial. She noted that while the taxpayer won, its victory was “no slam dunk” for either side. Pointing out evidence that favored the government, including the taxpayer’s decisions to pay other creditors and pay healthy salaries while not paying Uncle Sam, the magistrate judge emphasized that had the taxpayer’s main witness (the person whose crash caused the taxpayer’s financial spiral) been less credible, the US would have won on the merits.

The order also discusses the lack of circuit court authority on the issue as to whether financial difficulties equate to reasonable cause for late payment of excise taxes; the slim authority the taxpayer relied on was out of the Third Circuit and involved an analogous issue, employment taxes rather than excise taxes.

Finally worth noting is the court’s unwillingness to allow the full hourly rate for the partner and associate’s fees. The statute caps the fees at $200/hour; the taxpayer sought the $300 that the partner charged and that were the bulk of the fees. Section 7430 provides that the $200 cap is what the taxpayer gets “unless the court determines that a special factor, such as the limited availability of qualified attorneys for such proceeding, the difficulty of the issues presented in the case, or the local availability of tax expertise, justified a higher rate.”

To justify the fee, the lead attorney filed an affidavit, stating that he practiced law for over 37 years, that for the last 16 years his main focus was tax resolution and that his fees were equivalent to what other attorneys with similar expertise charged. For good measure he noted that he believed he was only one of a couple of attorneys in the Idaho area that “solely represents” clients in tax controversy matters.

The order found that the affidavit was insufficient:

While Mr. Martelle [the partner] “believes” he is one of few tax attorneys in the Boise, Idaho market, he does not identify in his affidavit who those other attorneys are or the rates charged by those attorneys. Mr. Martelle’s belief, without other evidence to corroborate it, is not sufficient to establish that Boise, Idaho, is lacking in qualified tax attorneys. Moreover, the Court finds the issues presented in this matter were not so difficult as to warrant an upward adjustment of attorney fees. The issues presented were not technical—neither side found it necessary to hire an expert, and the trial (including deliberations) was over in just two days. Finally, while the Court does not doubt Mr. Martelle’s vast experience in tax law, such expertise alone is not a special factor to justify attorney’s fees in excess of the statutory cap. For these reasons, the Court will award attorney’s fees at the maximum statutory rate of $200 per hour for Mr. Martelle.

Conclusion

Keith has previously discussed how qualifying offers are an important tool for taxpayers and practitioners. The qualifying offer in C1 Design was crucial, and allowed for the recovery of some fees. While the order and the underlying refund case is a victory for the taxpayer, it is not the complete victory that it sought. It is expensive to try tax cases. Assuming that the taxpayer is paying the balance of the attorney fees, that amount almost washes out the recovery of the late payment penalties that were the subject of the underlying refund case.

 

Innocent Spouse Denied Attorney’s Fees

In Kazazian v. Commissioner, T.C. Memo 2017-135, the Court denied attorney’s fees to a petitioner who succeeded in gaining innocent spouse status.  The Court determined that she was not a prevailing party under the statutory definition of IRC 7430.  The Court also determined that even if she were a prevailing party she did not prove that she incurred meaningful costs with the respect to the case.

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Petitioner is a lawyer who had a solo practice run as a Schedule C.  She also owned real estate and the joint return reported losses attributable to the rental real estate activities.  The year at issue in the case is 2009.  She separated from her husband in 2010 and divorced in 2011.  The IRS audited the joint 2009 return and disallowed the rental losses, disallowed some of her claimed Schedule C expenses and disallowed each spouses’ claim for innocent spouse relief.  In Appeals, some losses and some expenses were allowed and the husband was granted partial innocent spouse relief.  Appeals did not grant Petitioner innocent spouse relief.  She agreed to the tax adjustments but did not agree to the determination regarding her status as an innocent spouse.  Both spouses alleged abuse by the other.

Petitioner filed her Tax Court petition on the issue of her status as an innocent spouse.  Shortly before the case was calendared, the IRS agreed that she was entitled to relief under 6015(f) and a stipulation of settled issues was filed.  She requested fees.  As a curious person, I would like to know why the IRS granted her innocent spouse relief since the liabilities seem to stem from adjustments related to her if I am reading the opinion correctly.  That, however, will remain a mystery.

The Court addresses her claim for fees and notes that she makes the request both with respect to both the administrative and litigation phases of the case.  Because petitioner did not file a qualified offer, the Court states that the position of the IRS is “substantially justified” if it is “justified to a degree that could satisfy a reasonable person” and has a “reasonable basis both in law and fact.”  Swanson v. Commissioner, 106 T.C. 76, 86 (1996).  The fact that the IRS ultimately loses or concedes a case does not make the position unreasonable but the Court notes that this can be considered in determining reasonableness.

Petitioner argued that the return preparer acting on behalf of her ex-husband made the decision to treat her as a real estate professional without consulting her.  The Court finds that no factual basis for this argument exists.  It finds she actively engaged with the preparer.  The Court goes through a brief analysis of the determination of the Appeals Officer that she did not qualify for innocent spouse relief.  The Court seems to have the same problem I do understanding why Chief Counsel’s office conceded this case.  It finds the determination of the Appeals Officer reasonable and states that “there is no evidence in the record as to the basis for this concession.”  Neither party is required to put such evidence into the record when making a concession but here it would have been very helpful if petitioner had done so.  If we could know why Chief Counsel decided to concede the case perhaps we could understand why they did so and why it was unreasonable for the Appeals Officer to fail to concede the case.

The Court finds that “notwithstanding this concession, we conclude that the AO’s determination that the petitioner was entitled to no relief under section 6015(f) had a ‘reasonable basis both in law and fact’ and was ‘justified to a degree that could satisfy a reasonable person.’”

Aside from the problem of not providing the Court with an understanding of how she came to win the case and how it was unreasonable for Appeals not to have conceded it, petitioner has the problem of not proving the basis for her claim for a specific amount of fees.  She failed to submit the affidavit required by Rule 232(d) and relied on the declaration included with her original motion.  Because she represented herself (and did a great job), she has trouble showing her costs other than her $60 filing fee.  Her time entries and those of her accountants do not break out the time to reflect time worked on the innocent spouse aspect of the case as opposed to the other issues present.  In response to a request by the IRS for more detailed records regarding the time spent on the innocent spouse issue, petitioner made what the Court deemed as a frivolous response stating that she devoted 1,000 hours over four years to resolve the matter and her billing rate is $350 per hour.  So, she argued she should really receive $350,000.

Petitioner’s path to victory on the innocent spouse issue remains a mystery and that mystery makes it hard for the Court to decide the IRS was unreasonable when it initially decided she did not qualify for such relief.  The case makes the point that when the IRS concedes and you want fees and the basis for the concession does not jump out from the available facts, you must take the time and effort to put into the record the basis for the concession.  I hope there is some reason that the Chief Counsel attorneys conceded what looks like from these facts to be a very strong case on their side of the argument.  Whatever reasons that exist for the concession need to be made known by petitioner in order to show the Court that she substantially prevailed.  Without a qualified offer, it is hard enough to show this.  On these facts it seems impossible.

Of course, showing why the IRS was so wrong is only one thing you must do if you want fees.  You also have to show how you calculated the fees you seek.  Petitioner’s somewhat frivolous response to the request for more data further doomed her chances for recovering fees.

 

When Do Attorney’s Fees Start

In Fitzpatrick v. Commissioner, TCM 2017-88, the Tax Court took up the issue of the timing of attorney’s fees in a case in which the taxpayer made a qualified offer several months after the representation had begun.  The Tax Court previously found, in a seven day trial on the merits in a Collection Due Process (CDP) case, that the taxpayer was not a responsible officer.  The Tax Court tries a relatively small number of Trust Fund Recovery Penalty (TFRP) cases and probably a very small number of those cases involve a seven day trial.  A couple of other interesting aspects of this case from the underlying merits perspective are that the Court’s electronic docket sheet goes on for eight pages.  Only a small number of cases have that many entries.  The merits opinion leads me to believe that Ms. Fitzpatrick was the last remaining responsible officer because the IRS had determined the other possible responsible officers were not liable.  If I am correct in that determination, it could explain the effort the IRS put into her case.

Although this attorney’s fees opinion does not break significant new ground, hence its designation as a memorandum opinion, it does provide a good basis for discussion of when the fees begin as well as a few other fee related issues.

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Ms. Fitzpatrick held a position with a company that failed to pay over the withheld income and employment taxes from its employees.  From footnote 3 of the most recent opinion, I draw the conclusion that other persons working at the business sought to pin responsibility on her and made statements which the Court characterized as “misinformation.”  Of course, these statements would also have had the collateral effect of demonstrating that the persons making the statements were not themselves responsible.  The statements became a part of the revenue officer’s report – a report which the Court also indicated may not have provided the appropriate characterization of her role with the business.  For readers wanting more information about the underlying assessment, go to the opinion written last year.

After the IRS made its preliminary determination of liability, it would have mailed that determination to Ms. Fitzpatrick’s last known address.  The case does not find that the IRS improperly mailed the notice, but it does find that she did not receive it.  Her failure to receive the TFRP notice, much like the failure to receive a notice of deficiency, entitles her to litigate the merits of the assessment in her CDP case.  In Mason v. Commissioner, the Tax Court had previously decided, and we posted, that a proposed responsible officer who does not receive the notice proposing the liability and offering an opportunity to go to Appeals prior to the assessment may raise the merits of the TFRP liability in a CDP case.

The IRS did not take issue with her ability to raise the merits, and she made a presentation about the merits of her case to the Settlement Officer in the CDP hearing before she filed the Tax Court case.  Here, the filing of the notice of federal tax lien by the IRS triggered her CDP rights including the right to contest the underlying assessment.

She filed her request for a CDP hearing on July 25, 2012 within 30 days of receiving the CDP notice.  It is worth mentioning that the notice of federal tax lien would have remained on the public record for the four year period between the time of its filing and the decision of the Tax Court that she had no liability for the TFRP.  The filed notice of federal tax lien would have depressed her credit score, her general credit, limited her potential employment opportunities, and generally made life financially difficult for that entire period, which is why I have previously advocated for some type of expedited procedure in CDP cases involving liens.

The parties agreed that she made a qualified offer on November 7, 2012.  The date of the qualified offer comes about three and one half months after the filing of CDP request.  This period likely involved a fair amount of work for her attorney coming up to speed on the case and making a decision on her likely prospects for success but because of the way the qualified offer provisions work, she cannot recover attorney’s fees from the IRS for this period unless she can show that the position of the IRS lacked substantial justification.  After looking at the facts, the Court determined that the Settlement Officer had a file that contained sufficient facts to make the position of the IRS substantially justified.  So, the fees do not begin until the date of the letter.

Section 7430 provides guidance on when a taxpayer can file a qualified offer.  The taxpayer cannot make a qualified offer at the first minute the IRS raises an issue on audit or when the IRS issues a notice and demand.  A qualified offer can only occur at certain stages in the tax procedure continuum.  The time period for filing a qualified offer is set out in subparagraph 7430(g)(2) entitled “Qualified Offer Period.”  That subparagraph provides:

(2) Qualified offer period.  For purposes of this subsection, the term “qualified offer period” means the period—

(A)

beginning on the date on which the first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the Internal Revenue Service Office of Appeals is sent, and

(B)

ending on the date which is 30 days before the date the case is first set for trial.

This provision really provides guidance regarding deficiency proceedings and not TFRP cases or CDP cases.  The IRS and the Courts agree that a taxpayer cannot make a qualified offer in a CDP case that simply contests collection alternatives.  [find authority]  Other courts have found that a taxpayer can request a qualified offer as a part of contesting a TFRP determination even though the statute does not appear to contemplate such a result.  [find authority]  Here, the IRS does not contest the ability of the taxpayer to make a qualified offer and does not contest that the timing of the offer is valid.  Based on earlier cases, it appears that the earliest a qualified offer could have been made in Ms. Fitzpatrick’s cases was the time of making the CDP request contesting the merits of the underlying TFRP liability.  The taxpayer waited three months after bring the CDP action before making the qualified offer but considering the circumstances, did not wait very long before making the qualified offer.

This aspect of the statute regarding the making of a qualified offer puts pressure on a representative who wants to protect the client’s ability to recover fees.  The representative does not want to make a qualified offer that has no basis in fact or law but while the representative researches the facts and the law before making the offer, the client must cover those costs unless the representative can ultimately overcome the high hurdle of showing that the IRS lacked substantial justification.  The representative must consider the timing of the qualified offer and make it as quickly as possible after expending as few billable hours as possible and yet not make an offer that will disadvantage their client.  If the representative makes a qualified offer that fails to take into account the litigation risks, then it is possible that through settlement or trial, the IRS will exceed the amount of the offer and the qualified offer provisions which eliminate the need to prove the IRS lacked substantial justification will not apply.  Conversely, if the representative makes an offer that is too high, the IRS might accept the offer to the client’s disadvantage.

After the Court explains why the IRS had substantial justification for its position that Ms. Fitzpatrick owed the TFRP, the Court then turned to other arguments of petitioner most of which arise frequently in these cases.  Petitioner argued the amount of the award should exceed the statutory amount because in Jacksonville, Florida only a limited number of attorneys could have handled a case such as this.  The Court did not agree.  Petitioner argued that her attorney possessed exceptional qualities enabling him to succeed in this case.  Again, the Court found that although her attorney was a qualified attorney he did not have the nonlegal or technical ability referred to by the statute as creating a basis for enhancement based on qualifications.  Petitioner argued that the issue in her case was difficult and that “this was not a simple case to try.”  The Court pointed out that TFRP cases are basically a dime a dozen.  Petitioner argued that the case was undesirable because she did not have the money to front to the firm and it had to absorb significant costs to keep the case going.  The Court found that undesirability of a case does not constitute a special factor warranting an enhanced fee.  Lastly, petitioner argued that the IRS took an unusually litigious position.  The Court basically said that if the IRS prolonged the case through its overly litigious position, her attorneys would receive compensation for the additional hours they spent responding to the positions raised by the IRS.  Here, the length of the trial and the other work done by petitioner’s counsel does result in a fee award of approximately $179,000.  The Court does not say that the IRS took an unreasonable litigation position.

The arguments over enhancements here sound like arguments made in other similar cases in which the Court has made awards.  The interesting feature of this case for me is the timing of the qualified offer.  The decision points to the benefits of an early submission of such a letter although tensions will exist concerning when the practitioner will have enough information to make an informed offer.  Winning a TFRP case is not easy.  Winning and getting attorney’s fees paid for most of the representation deserves recognition.

From A to Z the IRS Throws Every Possible Argument at the Court in Unsuccessful Attempt to Avoid Attorney’s Fees

We have talked about what it takes to recover attorney’s fees from the IRS in prior posts here, here, and here.  The recent Court of Claims case of BASR Partnership v. United States, takes almost all possible defenses to attorney’s fees and puts them on display in one case.  For that reason the case deserves discussion.  One reason the IRS may have tried so hard to avoid attorney’s fees in this case stems from the fact that the taxpayer engaged in what the IRS no doubt considered abusive tax shelter activity and only avoided tax and penalties due to a snafu.  So, the fight over fees just added insult to injury with the IRS feeling that the taxpayers should have paid significant liabilities for its activities and yet ending up with no tax as well as payment by the IRS for the representation it received.

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In 2013, the Court of Federal Claims determined that the IRS did not timely issue an FPAA to BASR.  The IRS appealed to the Federal Circuit and lost again.  The IRS requested a Petition for En Banc Rehearing and the court denied that as well.   The government does not lightly seek en banc review.  It must have felt strongly on the merits of the FPAA issue, but I am not going to discuss that issue in this post.

After winning these significant victories which kept the IRS from making adjustments to the partnership for what the IRS viewed as abusive tax shelter activities, the taxpayer and its attorneys at Sutherland Asbill & Brennan sought attorney’s fees, and they sought fees at a higher rate than the statutory rate for attorney’s fees.  The IRS filed a motion to conduct limited discovery concerning the fees and the taxpayer responded.  After a conference with the court the taxpayer was required to “produce the client’s fee agreement, a copy of all legal bills sent to the client, and any proof of payment from the client.”  Then the IRS filed an objection to the motion for litigation costs and requested oral argument.  The taxpayer requested “fees for fees” seeking to add to its recovery and get reimbursed for the cost of fighting about the existence and amount of the fee award.

The first thing the taxpayer needs to do in seeking to recover fees is show that it is a “prevailing party” which means it must have (1) substantially prevailed with respect to the amount in controversy; (2) the IRS position was not substantially justified; and (3) the statutory requirements regarding net worth are met.  The taxpayer can meet the first two parts of this test, which are otherwise quite difficult to meet, if it makes a proper qualified offer and that is why we have discussed qualified offers to a significant extent in the prior posts cited above.  Making a qualified offer is the most direct path to obtaining fees since it moves the taxpayer past the substantially justified barrier.  In this case BASR made a qualified offer of $1 to the IRS to settle the FPAA issue.  As you can tell from the litigation I described above, the IRS did not settle the FPAA issue and fought it all the way to making the request for en banc reconsideration.  Because the IRS lost completely on the statute of limitation issue, the effect of its loss was that the taxpayer did better in the litigation than the $1 offer it made to the IRS since it owed $0 after winning the statute of limitation argument.  This put the taxpayer over a big hurdle to becoming a prevailing party and appeared to leave it only with net worth requirement.

In addition to showing that it was the prevailing party, BASR also needed to meet statutory tests set out in IRC 7430(b) involving (1) exhaustion of administrative remedies, (2) showing the fees and costs are allocable to the IRS and (3) showing that it did not unreasonably protract the proceeding.  My clients often fail the exhaustion of administrative remedies test because they do not avail themselves of the opportunity to go to Appeals prior to going to Tax Court.  Here, the IRS foreclosed the taxpayer’s option of using Appeals because it said that Appeals would not consider Son of Boss transactions.

Taxpayer argued that it needed the increased fee because it could not find any attorneys with expertise on this issue willing to take the case at the statutory rate.  Because of the billing rates of the firm it used, BASR seeks fees at a rate essentially twice what the statute suggests.  Almost no tax firm bills out at the statutory rate and taxpayers will always argue that their case is novel or complex but getting a higher rate than the one set in the statute is not necessarily easy just because the rate is out of sync with today’s fee schedules.

The IRS makes an argument regarding every possible issue that would prevent BASR from obtaining fees.  First, it argued that BASR did not pay or incur any litigation costs because the engagement letter was with William Pettinati, his wife and his son.  Second, the IRS argued that BASR was not a real party in interest because all of the fees were paid by these individuals.  Third, the IRS argues that the real parties in interest have net worths in excess of the statutory maximum.  Forth, the IRS argues that BASR did not make a qualified offer because the case did not involve a tax liability and the qualified offer provision does not apply to “any proceeding in which the amount of tax liability is not in issue.”  A clear example of this language would be a collection due process case in which the underlying merits of the liability were not at issue.  Fifth, the IRS argued that offer to settle for $1 was not made during the qualified offer period because the IRS never sent a letter of proposed deficiency so no qualified offer period ever began.  Sixth, the IRS argued that the offer of $1 was a sham since it was so low as to not be meaningful or in good faith.  Since I regularly make $1 offers when I make a qualified offer, I followed this particular argument with interest.  I have not encountered this argument from the IRS in the cases in which I have sought recovery.  Seventh, the IRS argued that the court should exercise its discretion not to award attorney’s fees since doing so would be unjust because of taxpayer’s participation in an invalid Son of Boss tax scheme.  Eighth, the IRS argued that the requested fees were unreasonable both because they exceeded the statutory maximum and because some were not in connection with a court proceeding.  Ninth, the IRS argued that BASR should not get paralegal fees for clerical tasks and tenth it argued that it should not receive fees for fighting the fee request.

The court walks through the responses filed by BASR before getting to its own conclusions on each of the issues raised by the IRS.  I will skip the responses and head straight to the court’s analysis.  Spoiler alert – the taxpayer gets attorney’s fees.

The Court found BASR was a prevailing party looking at partnership law.  It found that the individuals paid the costs because BASR was essentially defunct but that under Texas partnership law they had the right to bring the action on behalf of the partnership and to be reimbursed for doing so.  The Court was not persuaded that the form of the action trumped the substance.  It found that BASR had no money and therefore its net worth did not exceed the statutory maximum.  It found that BASR did have a liability at issue and that the offer was made during the qualified offer period.  It found that an offer of $1 was a reasonable amount to offer for a party that thought it did not owe the liability.  It found that even though the taxpayer may have engaged in tax shelter activities, the issue in this case was liability and it was not liable for the taxes so no basis existed for denying the fees on the basis of the shelter scheme.  It found that the fees were reasonable under the circumstances and that the paralegal fees were also reasonable.  It did make slight downward adjustments in fees and costs but these adjustments were minor in the scheme of the requested fees.  Finally, it found, what other courts have also found, that a prevailing party can receive fees for fighting fees.

This case is a handbook for those battling about attorney fees.  While giving fees to a tax shelter promoter may seem galling, the fees result here from the untimeliness of the IRS action.  The case not only provides an issue by issue review of almost all of the issues that come up in an attorney’s fee case but also stands for the proposition that courts should not look at the equities of the underlying tax in determining if the taxpayer should receive attorney’s fees.

 

No Attorney’s Fee Award when § 7430 Action Brought Directly by Attorney Instead of Client

In many settings, we look to cut out the middleman as a means of cutting costs.  In Greenberg v. Commissioner, 147 T.C. No. 13, the missing middleman causes a loss in the pursuit of attorney’s fees as the Tax Court finds that the attorney who represented the taxpayer in the underlying case could not bring the action for attorney’s fees himself.  Instead of having the taxpayer bring an action for recovery of attorney’s fees, Mr. Greenberg decided to bring the action himself after successfully representing the taxpayer during the administrative phase of a dispute with the IRS.  The Tax Court looked to the language of the statute and concluded that Mr. Greenberg did not fit the definition of prevailing party as it rejected his claim.  The Court also briefly addresses the issue of the timeliness of the petition; however, it reaches no conclusion on this issue because of the determination that Mr. Greenberg could not recover based on the language of IRC 7430.

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The case does not describe exactly what happened during the administrative phase.  Getting attorney’s fees after a successful trial is difficult enough because of the statutory standard requiring a showing that the position of the IRS was not substantially justified.  Success on obtaining fees after a concession at the administrative level is significantly more difficult than obtaining fees after a trial since the earlier the IRS concedes a matter the more reasonable its position.  Because the opinion does not describe the basis for the resolution at the administrative level and the position of the IRS prior to resolution, determining whether the Tax Court might have awarded fees had the case moved past the issue of the proper party to bring the action is not possible from reading the opinion.

The opinion does say that the client agreed any fees awarded under IRC 7430 would go to Mr. Greenberg.   Mr. Greenberg submitted a request for administrative costs to Appeals on September 17, 2014, and did not receive a response.  He again wrote to Appeals on December 27, 2014.  The opinion states that he discussed the award of fees with Appeals, and Appeals refused to award them.  It appears that Appeals made an oral refusal.  On April 15, 2015, Mr. Greenberg filed a petition in Tax Court seeking an award.

The IRS moved to dismiss the petition.  Mr. Greenberg’s initial argument rested on the assignment of the award of fees from his client.  The IRS argument pointed to the Anti-Assignment Act found in 31 U.S.C. 3727(b), which bars the assignment of a legal suit against the United States.  After reading the IRS motion, Mr. Greenberg dropped his argument that the petition resulted from the assignment of the suit to him and instead argued that he brought the suit on his own rights to the claim.  Because no one had made this argument previously, the Court rendered a precedential opinion.

The Court’s discussion of the issue focused on jurisdiction because it normally addresses the issue of the proper party to bring suit as a jurisdictional issue.  The Court cited several opinions addressing its jurisdiction as it related to the party bringing the suit.  None of these cases involved IRC 7430, but they did involve instances in which someone other than the taxpayer attempted to obtain jurisdiction in order to litigate the taxpayer’s liability rather than their own.  The issue in Greenberg turns on whether IRC 7430 allows the attorney to directly bring suit, since the attorney clearly has an interest in the outcome and often has a direct financial interest.  Section 7430(f)(2) grants the Tax Court jurisdiction to hear proceedings contesting the denial of administrative costs and does not specify who may file such a petition.  Within IRC 7430, the “only limitation on claimants appears in section 7430(a) which limits awards of administrative costs to a ‘prevailing party’.”

The Court noted that the concept of prevailing party encompasses two elements: 1) the claimant must be a party; and 2) the claimant must prevail.  A prevailing party is one that substantially prevails with respect to the amount in controversy or substantially prevails with respect to the most significant issue and who meets the requirements set out in 28 U.S.C. 2412(d)(d)(1)(B) which include showing that the IRS was not substantially justified.  The Court looked to section 7430(c)(4) in search of the answer to who meets the tests necessary to become a party because only a party can bring a suit for which the Court has jurisdiction.  A Third Circuit case, Estate of Palumbo v. United States, 675 F.3d 234 (2012), addressed the issue of party in the IRC 7430 context for purposes of determining whether the party met the net worth limitation set forth in the statute.  Section 7430 limits the award of fees to certain parties.  Depending on who met the definition of party in Palumbo, the party would fall under those limitations or exceed them.  Naturally, the petitioner argued that the true party in the case was a charitable trust, the only beneficiary of the contested issue in the case.  The charitable trust fell under the statutory limitation; however, the estate itself had assets in excess of the statutory limitation.  The Third Circuit held that the estate was the prevailing party to the underlying dispute even if the result of the suit would benefit the charitable trust.

The Third Circuit looked to decisions under the Equal Access to Justice Act (EAJA) in reaching its conclusion.  That statute has a similar provision for fees and costs for the prevailing party.  Cases decided under EAJA similarly required the party be a party to the underlying proceeding.  One EAJA case specifically addressed the fee shifting aspect of that statute and whether an attorney, rather than the client, could bring suit as the party.  That case, Reeves v. Astrue, 526 F.3d 732 (11th Cir. 2008), held that the EAJA “unambiguously directs the award of attorney’s fees to the party who incurred those fees and not to the party’s attorney.”  Another case decided under EAJA, Panola Land Buying Ass’n v. Clark, 844 F.2d 1506 (11th Cir. 1988), held that “Congress did not intend that all persons performing services to the prevailing party in the litigation be allowed to become parties in the case to assert their claims for compensation.”  Based on its analysis of the cases and the statute, the Tax Court finds that Mr. Greenberg does not meet the definition of party meaning that the Court lacked jurisdiction to hear his case.

The Court, having found that it lacked jurisdiction, then addresses Mr. Greenberg’s argument that he was the real party in interest.  He made an interesting argument building on the case of Marre v. United States, 117 F.3d 297 (5th Cir. 1997).  In that case, the 5th Circuit held that the taxpayer’s attorney was the real party in interest when the IRS sought to offset the award of attorney’s fees against the taxpayer’s outstanding tax liability.  The 5th Circuit also held that the award was payable directly to the attorney and did not need to go from the IRS to the taxpayer and then to the attorney.  The Tax Court found that being the real party in interest is not the same as being the “prevailing party” as required by the statute and rejected this argument.

Finally, the Court made brief mention of the timing of the filing of the request for fees.  Although this section of the opinion is dicta, this discussion has importance because anyone who makes a claim for fees must do so at the proper moment.  That moment seems particularly elusive in the case of IRC 7430.  Section 7430(f)(2) requires that the Commissioner must make a decision concerning the application for administrative costs before the party files a Tax Court petition.  The applicable regulations provide that if the Commissioner fails to respond within six months that failure “can be considered a decision of the Commissioner denying the award.”  Here, the IRS argued that Mr. Greenberg filed the Tax Court petition too soon because the IRS issued no formal denial and six months had not elapsed since he wrote the December 27, 2014 letter before he filed the petition on April 15, 2015.  Of course, Mr. Greenberg countered that the timing harkens back to the letter dated September 17, 2014 and that the later letter merely amended the earlier one.  Alternatively, he argued that he had received an oral denial of the December 27 letter and that oral denial gave him the right to bring the petition at any time thereafter.  Having raised the issue as one present in the case, the Court declines to rule since it had already determined that it lacked jurisdiction.  While not a satisfying discussion from the perspective of providing guidance, the discussion serves to point out that you must carefully consider the timing of a petition seeking fees.

This discussion also leaves open the possibility that the letters sent by Mr. Greenberg seeking fees may serve as the request for fees by his client.  The IRS may not, as yet, have sent a letter denying the fees based on the letters.  More than six months has now elapsed.  Can those letters serve as the basis for a new petition by the taxpayer and place the parties back in the position of fighting over the merits of the fee award and not the procedure?  The Court did not discuss who must sign the letter seeking fees, whether such a letter must make clear that the request is one made on behalf of the taxpayer, or other aspects of the request itself.  Perhaps the taxpayer will file a petition and generate another precedential opinion on that issue of procedure before the Court can get to the underlying issue.

 

Procedure Grab Bag – Making A Grab for Attorney’s Fees and Civil Damages

Your clients love the idea, and always think the government should pay, but it isn’t that easy.  Below are a summary of a handful of cases highlighting many pitfalls, and a few helpful pointers, in recovering legal fees and civil damages from the government (sorry federal readers) that have come out over the last few months.

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3rd Party Rights

The Ninth Circuit, in US v. Optional Capital, Inc., held that a third party holding a lien on property could not obtain attorney’s fees for an in rem proceeding to determine its rights in real estate that had also been subject to government liens pursuant to the Civil Asset Forfeiture Reform Act, 28 USC 2465(b)(1)(A), or Section 7430.  The Court determined the 3rd party was not the prevailing party “in any civil proceeding to forfeit property,” as required by CAFRA.  The government had lost in a related hearing regarding the lien, but the 3rd party had “not pointed to any work it performed that was ‘useful’ or ‘necessary to secure’ victory against the Government,” so it was not the prevailing party.  It would seem, however, this leaves open the possibility of other 3rd parties prevailing, if meaningful work was done in the underlying case.  This case is a good reminder of another potential option under CAFRA in attempting to claim fees in certain collection matters.

As to Section 7430, the Court found, contrary to the 3rd party’s claims, it had not actually removed the government’s liens from the property, and therefore could not be considered the prevailing party, which is required under Section 7430 to obtain fees.

When You Are Rich Is Important

In Bryan S. Alterman Trust v. Comm’r, the Tax Court held that a trust could not qualify to recover litigation costs under Section 7430 because its net worth was over $2MM.  Section 7430 references 28 USC 2412(d)(2)(B), which states an individual must have under $2MM in net worth in order to recover litigation costs.  That is extended to trusts by Section 7430(c)(4)(D).  The taxpayer argued the eligibility requirement should be as of the time the deficiency notice was issued or the date the petition was filed.  That “reading” of the statute was found incorrect, as Section 7430(c)(4)(D)(i)(II) states the provision applies to a trust, “but shall be determined as of the last day of the taxable year involved in the proceeding.”  At that time, the trust had over $2MM in net worth, saving the IRS from potentially having to shell out capital.  And, that’s why I always keep my trust balances below $2MM…and right around zero dollars.

Key Questions: Are you the Taxpayer?  Did you Exhaust the Administrative Remedies?

The District Court for the Northern District of Illinois dismissed the government’s motion for summary judgment in Garlovsky v. United States on fees under Section 7433, but also gave clear indication that the claim is in danger.  In Garlovsky, the government sought collection on trust fund recovery penalties against an individual for his nursing home employer that allegedly failed to pay employment taxes.  Prior to that collection action, the individual died, and notices were sent to his surviving spouse (who apparently was some type of fiduciary and received his assets).  The taxpayer’s wife paid a portion, and then sued for a refund.  As to damages, the Court found that the taxpayer’s wife failed to make an administrative claim for civil damages before suing in the District Court, which is required under Section 7433.

In addition, although the surviving spouse received the collection notices, none were addressed to her and the Service had not attempted to collect from her.  Section 7433 states, “in connection with any collection of…tax…the [IRS] recklessly or intentionally, or by reason of negligence, disregards any provisions of this title…such taxpayer may bring a civil action…”  The Court found that the spouse was not “such taxpayer”, and likely did not have a claim.  Although I have not researched this matter, I would assume the estate of the decedent could bring this claim (unlike Section 7431, pertaining to claims for wrongful disclosure of tax information, which some courts have held dies with the taxpayer – see Garrity v. United States –a case I think I wrote up, but never actually posted).

Qualifying as a Qualified Offer

The 9th Circuit held that married taxpayers were not entitled to recover attorney’s fees under Section 7430 in Simpson v. Comm’r, where the taxpayer did not substantially prevail on its primary argument, even though they did prevail on an alternative argument.  In Simpson, the wife received a substantial recovery in an employment lawsuit.  The Simpsons only included a small portion as income, arguing it was workers comp proceeds (not much evidence of that).  The Tax Court held 90% was income.  This was upheld.  The 9th Circuit held that the taxpayer was clearly not successful on its primary claim.  They did raise an ancillary claim during litigation, which the IRS initially contested, but then conceded.  The Court held the Service was substantially justified in its position, as the matter was raised later in the process and was agreed to within a reasonable time.  Finally, the Court held that the taxpayer’s settlement offer did not qualify as a “qualified offer”, since the taxpayers indicated they could withdraw it at any time.  Qualified offers must remain open until the earliest of the date it is rejected, the date trial begins, or the 90th day after it is made.  Something to keep in mind when making an offer.

Making the Granite State Stronger – No Fees For FOIA

Granite seems pretty sturdy, but Citizens for a Strong New Hampshire are hoping for something even sturdier.  The District Court for the District of New Hampshire in Citizens for a Strong New Hampshire v. IRS has denied Strong New Hampshire’s request for attorney’s fees under 5 USC 552(a)(4)(E)(i) for fees incurred in bringing its FOIA case.  That USC section authorizes fees and litigation costs “reasonably incurred in any case under [FOIA] in which the complainant has substantially prevailed.”  The statute defines “substantially prevailing” as obtaining relief through “(I) a judicial order, or an enforceable written agreement or consent decree; or (II) a voluntary…change in position by the agency…”

Strong New Hampshire requested documents through a FOIA request regarding various New Hampshire politicians.  It took the IRS a long time to get back to Strong New Hampshire, and it withheld about half the applicable documents as exempt under FOIA.  Strong New Hampshire continued to move forward with the suit, and the Service moved for summary judgement arguing it complied.  Aspects remained outstanding, but the Court held that the Service had not improperly withheld the various documents.  The IRS did a second search, moved for summary judgement, and Strong New Hampshire did not contest.

The Court held that the voluntary subsequent search by the Service did not raise to the level of substantially prevailing by Strong New Hampshire.  As required by the statute, there was not a court order in favor of Strong New Hampshire, and the actions taken by the Service unilaterally in doing the second search was not sufficient to merit fees.

Summary Opinions — For the last time.

This could be our last Summary Opinions.  Moving forward, similar posts and content will be found in the grab bags.  This SumOp covers items from March that weren’t otherwise written about.  There are a few bankruptcy holdings of note, an interesting mitigation case, an interesting carryback Flora issue, and a handful of other important items.

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  • Near and dear to our heart, the IRS has issued regulations and additional guidance regarding litigation cost awards under Section 7430, including information regarding awards to pro bono representatives. The Journal of Accountancy has a summary found here.
  • The Bankruptcy Court for the Southern District of Florida in In Re Robles has dismissed a taxpayer/debtor’s request to have the Court determine his post-petition tax obligations, as authorized under 11 USC 505, finding it lacked jurisdiction because the IRS had already conceded the claim was untimely, and, even if not the case, the estate was insolvent, and no payment would pass to the IRS. Just a delay tactic?  Maybe not.  There is significant procedural history to this case, and this 505 motion was left undecided for considerable time as there was some question about whether post-petition years would generate losses that could be carried back against tax debts, which would generate more money for creditors.  This became moot, so the Court stated it lacked jurisdiction; however, the taxpayer still wanted the determination to show tax losses, which he could then carryforward to future years (“establishing those losses will further his ‘fresh start’”).  The Court held that since the tax losses did not impact the estate it no longer a “matter arising under title 11, or [was] a matter arising in or related to a case under title 11”, which are required under the statutes.
  • The Tax Court in Best v. Comm’r has imposed $20,000 in excess litigation costs on an attorney representing clients in a CDP case. The Court, highlighting the difference in various courts regarding the level of conduct needed, held the attorney was “unreasonable and vexations” and multiplied the proceedings.  Because the appeal in this case could have gone to the Ninth Circuit or the DC Circuit, it looked to the more stringent “bad faith” requirements of the Ninth Circuit.  The predominate issue with the attorney Donald MacPherson’s conduct appears to have been the raising of stated frivolous positions repeatedly, which the Court found to be in bad faith.
  • And, Donald MacPherson calls himself the “Courtroom Commando”, and he is apparently willing to go to battle with the IRS, even when his position may not be great…and the Service and courts have told him his position was frivolous. Great tenacity, but also expensive.  In May v. Commissioner, the Tax Court sanctioned him another seven grand.
  • The Northern District of Ohio granted the government’s motion for summary judgement in WRK Rarities, LLC v. United States, where a successor entity to the taxpayer attempted to argue a wrongful levy under Section 7426 for the predecessor’s tax obligation. The Court found the successor was completely the alter ego of the predecessor, and therefore levy was appropriate, and dismissal on summary judgement was proper.
  • I’m not sure there is too much of importance in Costello v. Comm’r, but it is a mitigation case. Those don’t come up all that frequently.  The mitigation provisions are found in Sections 1311 to 1314 and allow relief from the statute of limitations on assessment (for the Service) and on refunds (for taxpayers) in certain specific situations defined in the Code.  This is a confusing area, made more confusing by case law that isn’t exactly uniformly applied.  The new chapter 5 of SaltzBook will have some heavily revised content in this area, and I should have a longer post soon touching on mitigation and demutualization in the near future.  In Costello, the IRS sought to assess tax in a closed year where refunds had been issued to a trustee and a beneficiary on the same income, resulting in no income tax being paid.  Section 1312(5) allows mitigation in this situation dealing with a trust and beneficiary.  There were two interesting aspects of this case, including whether the parties were sufficiently still related parties where the trust was subsequently wound down, and whether amending a return in response to an IRS audit was the taxpayer taking a position.
  • The First Circuit has joined all other Circuits in holding “that the taxpayer must comply with an IRS summons for documents he or she is required to keep under the [Bank Secrecy Act], where the IRS is investigating civilly the failure to pay taxes and the matter has not been referred for criminal prosecution,” and not allowing the taxpayer for invoking the Fifth Amendment. See US v. Chen. I can’t recall how many Circuit Courts have reviewed this matter, but it is at least five or six now.
  • The District Court for the District of Minnesota in McBrady v. United States has determined it lacks jurisdiction to review a refund claim for taxpayers who failed to timely file a refund request, and also had an interesting Flora holding regarding a credit carryback. The IRS never received the refund claim for 2009, which the taxpayer’s accountant and employee both testified was timely sent, but there was not USPS postmark or other proof of timely mailing, so Section 7502 requirements were not met.  Following an audit, income was shifted from 2009 to other years, including 2008.  This resulted in an outstanding liability that was not paid at the time the suit was filed, but the ’09 refund also generated credits that the taxpayer elected to apply to 2008.  The taxpayers also sought a refund for 2008, arguing the full payment of the ’09 tax that created the ’08 credit should be viewed as “full payment”, which they compared to the extended deadline for refunds when credits are carried back.  The Court did not find this persuasive, and stated full payment of the assessed amount of the ’08 tax was needed for the Court to have jurisdiction over the refund suite under Flora.  Sorry, couldn’t find a free link.
  • The IRS lost a motion for summary judgement regarding prior opportunity to dispute employment taxes related to a worker reclassification that occurred in prior proceeding. The case is called Hampton Software Development, LLC v. Commissioner, which is an interesting name for the entity because the LLC operated an apartment complex.  The IRS argued that during a preassessment conference determining the worker classification the taxpayer had the opportunity to dispute the liability, and was not now entitled to CDP review of the same.  The Court stated the conference was not the opportunity, as the worker classification determination notice is what would have triggered the right under Section 6330(c)(2)(B), and such notice was not received by the taxpayer (there was a material question about whether the taxpayer was dodging the notice, but that was a fact question to be resolved later).  The Hochman, Salkin blog has a good write up of this case, which can be found here.
  • The IRS has issued additional regulations under Section 6103 allowing disclosure of return information to the Census Bureau. This was requested so the Census could attempt to create more cost-efficient methods of conducting the census.  I don’t trust the “Census”.  Too much information, and it sounds really ominous.  That is definitely the group in Big Brother that will start rounding up undesirables, and now they have my mortgage info.
  • The Service has issued Chief Counsel Notice 2016-007, which provides internal guidance on how the results of TEFRA unified partnership audit and litigation procedures should be applied in CDP Tax Court cases. The notice provides a fair amount of guidance, and worth a review if you work in this area.
  • More bankruptcy. The US Bankruptcy Court for the Eastern District of Virginia has held that exemption rights under section 522 of the BR Code supersede the IRS offset rights under section 533 of the BR Code and Section 6402.  In In Re Copley, the Court directed the IRS to issue a refund to the estate after the IRS offset the refund with prepetition tax liabilities.  The setoff was not found to violate the automatic stay, but the court found the IRS could not continue to hold funds that the taxpayer has already indicated it was applying an exemption to in the proceeding.   There is a split among courts regarding the preservation of this setoff right for the IRS.  Keith wrote about the offset program generally and the TIGTA’s recent critical report of the same last week, which can be found here.