Friends of the Benedictines in the Holy Land Wins Tax Exempt Status but Loses Request for Fees Associated with Application Delays

0 Flares Filament.io 0 Flares ×

In a precedential opinion, the Tax Court ruled on the request of an applicant for tax-exempt status for administrative and litigation fees. The Court denied those fees in Friends of the Benedictines in the Holy Land, Inc. v. Commissioner, 150 T.C. No. 5 (2018). I think the case merits a precedential opinion because of the ruling on the administrative proceeding period in a case involving exempt status. No aspect of the opinion addresses the substance of the request for exempt status because the IRS conceded that issue at the very outset of the case in the fall of 2013. Since that time, the case focused on whether the taxpayer could receive an award for administrative costs and attorney’s fees.

read more...

Friends of the Benedictines requested exempt status on July 12, 2012, about the time the IRS exempt organization sank deeply into the mire of the allegations of improper treatment of certain applications. Perhaps because of the distractions going at the time in the Exempt Organizations Division of the IRS or perhaps due to the normal time lag for consideration of certain exemption requests, the IRS did not act on the request. The docket sheet in the case indicates that Marcus Owens, a former head of the Exempt Organization Division, was initially counsel in the case. The opinion states that counsel for petitioner called an IRS attorney around September 18, 2013, to ask about the status of the case. Petitioner’s counsel was told that the case was still in process and no definite date of disposition was known.

IRC 7428(a), (b)(2) provides that an applicant for exempt status can petition the Tax Court for a determination of that status if the IRS denies the request or if 270 days passes and the IRS fails to act upon the request. On Friday, September 20, Friends of the Benedictines filed a Tax Court petition. On Sunday, September 22, the IRS issued a determination letter recognizing Friends of the Benedictines as a 501(c)(3) organization. I have occasionally filed petitions which the IRS has conceded before answer but I have never had a two-day turn around with a concession on the weekend. This was impressive. I guess all of the exempt organization people were working overtime anyway to deal with the other problems that existed at the time.

Because of some non-relevant procedural issues, it took three months to get the decision entered by the Court but there was no fight in the Tax Court case since the IRS immediately granted what the taxpayer requested. Having won the substance of the case, taxpayer then requested that the IRS pay its administrative costs and attorney’s fees. Here the IRS balked. There was no two-day turn around to concession on this issue. The case settled in for a 4 and ½ year visit to the Tax Court despite the concession on the merits two days after filing.

Petitioner’s counsel submitted a series of billing statements related to the work done on the case. Some identify a different part as the client. After some back and forth to get more clarity to the billing statements and more clarity concerning the request and whether it was for administrative or litigation expenses, the material was submitted and it became clear that petitioner wanted reimbursement for both administrative and litigation expenses. The court decided the case without hearing based on the materials submitted by April of 2014.

No qualified offer existed in this case. We recently discussed a case in which the taxpayer succeeded in obtaining attorney’s fees without a qualified offer but that is difficult. The Tax Court recounted the statutory requirements of IRC 7430(b) and (c) the petitioner needed to establish in order to win: 1) it is the prevailing party; 2) it did not unreasonably protract the proceedings; 3) the amount of the costs requested is reasonable; and 4) it exhausted the administrative remedies available. The IRS conceded that taxpayer met 2 and 4, but contested the other two elements necessary for petitioner to win. To succeed, the taxpayer must meet all four elements.

The IRS first argued that there were no administrative proceedings in a case involving a request for exempt status. The Court disagreed. Unlike a private letter ruling request that the IRS need pay no attention to, a request for exempt status leads to a Tax Court proceeding if the IRS fails to respond after the appropriate interval and the petitioner wants judicial redress. Looking at all of the elements of the exempt status request and the broad definition of administrative status, the Court concluded that the request did indeed involve an administrative proceeding that could give rise, in appropriate circumstances, to an award of costs.

The IRS then argued that petitioner could not be the prevailing party with respect to administrative costs because the IRS never took a position. How could the petitioner prevail over the IRS which did not say yea or nay to its request? Petitioner argued that administrative costs should not be “limited to those incurred after the issuance or receipt of a notice or letter.” The Court responded to this argument by stating that to agree with petitioner, “we would have to find an unwritten exception to the statute and hold that the notice or letter requirement is inapposite when the claim for administrative costs rests on the fact that the IRS has failed to act.” In the end, however, the Court takes a pass on this issue finding that petitioner only provided evidence of litigation costs.

I wondered how you would measure administrative costs if the administrative issue begins with the submission of the request for exempt status. At the point of submission, all of the initial “administrative” work is done.   In a case like this in which the IRS does not but also requests nothing of the taxpayer, it does not seem as though the taxpayer has administrative costs. It costs nothing to sit and wait, as frustrating as that might be.

Nonetheless, the Court passes over the issue by finding that all of the fee requests from petitioner really relate to the “litigation” of the case. Litigation here is a two-day period over the weekend when the IRS cranks into gear on the exemption requests and pumps out a thumbs up. The IRS argued that its position in the judicial proceeding was substantially justified. The Court notes that the applicable statute, IRC 7430(c)(7), “does not specify when the United States takes a ‘position’ in a judicial proceeding.” The Tax Court has generally held that the IRS establishes its litigating position when it files its answer but notes that it could be established earlier under certain circumstances.

Here, the lightening quick concession of the case, 58 days before the answer was due, establishes that the IRS position in litigation was justified. In reaching this conclusion, the Tax Court rejected the reasoning of a pair of district court cases, Grisanti v. United States, No. 3:05CV12-D-A (N.D. Miss 2006) and Powell v. Commissioner, 791 F.2d 385 (5th Cir. 1986), that held unreasonable delays or positions during the administrative process could not be cured by a quick concession in the court proceeding. The Tax Court said that it bifurcates the administrative and court aspects of a case and could not accept the reasoning of these cases that a bad position during the administrative aspect of a proceeding washes over into a determination of the justification of the IRS’s litigating position.

Before closing, the Tax Court expresses sympathy for the position of the petitioner. Unless a case is brought where the appeal will go to the 5th Circuit, it looks like concessions before or near the filing of the answer will insulate the IRS from attorney’s fees except in those cases in which the taxpayer makes a qualified offer during the pre-notice visit to Appeals. The case shows again the difficulty facing taxpayers who seek attorney’s fees in Tax Court cases.

 

 

 

Comments

  1. Bryan "Tall Boy" Camp says:

    Good post, Keith.

    While delays are unfortunate on the front end, they can be even more unfortunate on the back in, as seen in the reviewed opinion Creditguard of America, Inc. v. Commissioner, 149 T.C. No. 17 (Oct., 2017). Here’s a link to that opinion: https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11442

    There the Tax Court held that when the Service revokes an organization’s tax exempt status retroactive to a given year, interest starts running from that retroactive year’s return due date, and not just from the date when the Service made its determination to revoke or actually assessed the tax liability.

    So the very resource constraints that created delays on the front end also create significant delays in completing examinations on the back end. In the Creditguard case, the examined year was 2002, the audit was opened in 2003, completed in 2012 and the resulting deficiency assessed in 2013. And now it’s 2017. That’s a lotta interest.

    For those interested, I blogged about the case here: http://taxprof.typepad.com/taxprof_blog/2017/10/lesson-from-tax-court-the-downside-of-easy-tax-exemption-approval.html

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind

*