Menu
Tax Notes logo

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

Posted on Nov. 21, 2016

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.

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.

DOCUMENT ATTRIBUTES
Subject Areas / Tax Topics
Authors
Copy RID