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Winning Attorney’s Fees the Old Fashioned Way

Posted on Jan. 29, 2018

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.

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.

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