Internal Revenue Code sec. 7430, a taxpayer can recover administrative and litigation costs, including attorney fees, if the taxpayer is the prevailing party and the IRS’s position was not substantially justified. There is one hitch: you have to ask for costs and fees before it’s too late. This is what the taxpayers learned in Foote v. Commissioner, Case No. 14-70668 (9th Cir. 12/23/2014) aff’g T.C. Memo. 2013-276.
The facts are ones which you would think cry out for an award of costs and attorney fees. The IRS audited the taxpayers and their companies. The IRS issued two 30 day letters. The first proposed additional tax of $27 million, plus penalties and interest. The second proposed additional tax of $55 million, plus penalties and interest. The taxpayers went to the IRS Appeals Office. Appeals determined that most of the proposed tax was wrong. It issued a notice of deficiency for $4 million tax and $1.5 million in penalties. It also issued a partnership adjustment notice determining that the partnership had $13.2 million in additional income.
The taxpayers and their partnership went to Tax Court. After further negotiations, the IRS agreed that the taxpayers only owed $310,000 tax plus $64,000 in late filing penalties and that the partnership return was correct as filed. The Tax Court entered stipulated decisions reflecting the agreement.
So the IRS starts by claiming the taxpayers owe $55 million and ultimately agree they only owe $310,000 in tax and its position was not unreasonable? No, the taxpayers did not ask in time. The taxpayers never claimed to be entitled to administrative and litigation fees and costs during the administrative phase or in any pleadings filed with the Tax Court prior to entry of the decision. In fact, they waited until more than a year after the decisions were entered and became final to seek fees and costs. The Tax Court held that they didn’t ask for fees and costs in time. The Ninth Circuit affirmed. As the Ninth Circuit stated in its memorandum opinion “As the Footes did not properly petition the tax court for administrative and litigation costs before the stipulated decisions became final, their current action for costs is barred by res judicata.”
The moral is that if you believe the IRS’s position is unreasonable, ask for fees and costs before it is too late.
ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – firstname.lastname@example.org or 310.281.3200 Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at http://www.taxlitigator.com