TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

Tax Court Update: Attorney Looking to Get Paid Gets Dismissed For Lack of Jurisdiction

In a recent division opinion[1] the Tax Court held that an attorney cannot recover administrative costs under IRC §7430 because he was not a party to the underlying action, instead he acted on behalf of the party.  The Petitioner in the case was an attorney who represented a taxpayer before the IRS through a power of attorney.  Petitioner’s client owed him fees after the matter concluded and the client agreed that Petitioner would receive any administrative fees awarded.  After the Appeals Officer denied the request for fees, Petitioner filed his petition.  IRC §7430(f)(2) gives the Tax Court jurisdiction over petitions contesting the denial of fees.  IRC §7430(f)(2) does not specify who may file a petition.  The IRS moved to dismiss for lack of jurisdiction and the Court granted the motion.

IRC §7430 allows the prevailing party to recover administrative fees. The IRS successfully argued Petitioner, as the attorney and not the taxpayer, was not a party.  The Court relied in part of Estate of Plumbo v. United States[2], where the Third Circuit held that the party seeking administrative costs must be a party to the underlying action to be a prevailing party.  In that case, the estate argued that a charitable trust should be considered the prevailing party for purposes of the net worth requirement because it was the sole residuary beneficiary of the estate.  The Court rejected this view and held that the net worth requirement applied to the prevailing party, which needed to be the party to the underlying dispute, in that case the estate itself.

In determining that the Petitioner attorney was not the prevailing party, the Court distinguished two of its own Memorandum opinions.  This is likely why the case is a division or T.C. opinion, which gives it higher precedential value.  In Young v. Commissioner[3] and Dixon v. Commissioner[4], the Tax Court held that the net worth test would apply to individual taxpayers who were part of a large litigation with more than 300 similar cases, but were not the actual named parties.  The taxpayers had contributed to a fund and entered into “piggyback” agreements in which they agreed to follow the test cases.  Those taxpayers had an independent legal claim in the underlying action.  An attorney certainly wants to win (and get paid), but he or she has no independent claim.[5]

The Court also stated that treating an attorney representing a party as a prevailing party conflicts with the §7430 requirement the costs be incurred by the prevailing party. Fees are incurred by when there is a legal obligation to pay them.

JONATHAN KALINSKI – For more information please contact Jonathan Kalinski at Kalinski@taxlitigator.com. Mr. Kalinski is a senior tax attorney at Hochman, Salkin, Rettig, Toscher & Perez, P.C. and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigationhas considerable experience handling complex civil tax examinations, administrative appeals, and tax collection matters.Prior to joining the firm, he served as a trial attorney with the IRS Office of Chief Counsel litigating Tax Court cases and advising Revenue Agents and Revenue Officers on a variety of complex tax matters.  Jonathan Kalinski also previously served as an Attorney-Adviser to the Honorable Juan F. Vasquez of the United States Tax Court.

Mr. Kalinski routinely represents and advises U.S. taxpayers in foreign and domestic voluntary disclosures, sensitive issue domestic civil tax examinations where substantial civil penalty issues or possible assertions of fraudulent conduct may arise, and in defending criminal tax fraud investigations and prosecutions. He has considerable expertise in handling matters arising from the U.S. government’s ongoing civil and criminal tax enforcement efforts, including various methods of participating in a timely voluntary disclosure to minimize potential exposure to civil tax penalties and avoiding a criminal tax prosecution referral. Additional information is available at http://www.taxlitigator.com.

[1] Greenberg v. Commissioner, 147 T.C. No. 13 (2016).

[2] Estate of Palumbo v. United States, 675 F.3d 234 (3d Cir. 2012).

[3] Young v. Commissioner, T.C. Memo. 2006-189.

[4] Dixon v. Commissioner, T.C. Memo. 2006-97.

[5] Greenberg, 147 T.C. No. 13 at 9-10.