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.
read more...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.
I wonder what the three IRS transcripts generated by this joint return would show. When innocent spouse relief is granted, two new separate accounts are created, one for each spouse. This was explained in an August 1, 2016 post here by the well-informed Marilyn Ames. (The original account is zeroed out, with all credits and assessments allocated to the new ones. See IRM 21.6.8, Split Spousal Assessments (MFT 31 / MFT 65)).
IRS agreed that the husband, as a partially innocent spouse, would be relieved of $8,512 liability but still owed $5,564. From the opinion:
“On the question of relief from joint and several liability, the AO concluded
that [Husband] was entitled to partial relief and petitioner to none. . . .[Husband] was entitled to relief with respect to $8,512 of the $14,076 proposed deficiency….[Husband] executed a Form 870-AD by which he consented to the granting of partial relief from joint and several liability and an assessment of $5,564 for 2009 ($14,076 – $8,512).”
So what I would expect to see is a transcript showing husband’s separate liability as $5,564, which presumably he paid back in 2015. His transcript should show a $14,076 assessment and an $8,512 innocent-spouse abatement. Or should it? If all of the tax was assessed on his separate account, can any of it now be assessed to the wife’s?
The separate account of the wife (here, the only petitioner) would until now not show any liability because her case was still in Tax Court. But at some point, a clerical error may have been made. The $8,512 abatement could have been posted to both accounts, showing she has a refundable balance and resulting in notices to her that there is an overpayment.
Someone in Chief Counsel may have noticed the error, but may have decided that it wasn’t worth a fight. We are left to wonder, though, what will now show on wife’s transcript? Does she still owe $5,564? If IRS collects that amount from both spouses, they have $11,128 against a $14,076 liability and have lost less than $3,000 from the mistake. It probably would have cost more than that, to train Service Center clerks on how to do Kazazian cases properly.
However, if no assessment posts to the wife’s account, will she receive a refund of $8,512 (plus interest from 4/15/10)? Let’s hope someone (like TIGTA) is monitoring this.