In Uncategorized on 03/19/2012 at 17:46

The Lawyers Did Not Get Paid

Section 7430 gives taxpayers who prevail against IRS a shot at reasonable legal fees and costs, provided the IRS’ position in the litigation wasn’t “substantially justified.” Whatever that phrase may mean isn’t always clear, but Maritza Furiatti Newman finds that it’s clear enough to Judge Gustafson for him to deny Maritza’s application for same in Maritza Furiatti Newman, 2012 T.C. Mem 74, filed 3/19/12.

Maritza and her pal Oscarlina worked for the Brazilian Government’s aircraft entity in the Brazilian Embassy in Washington, concededly a diplomatic mission and both doing the same sort of work as Americans working for the US in our embassy in Brazil, and Brazil didn’t tax the American’s wages. However, for the years at issue, the US  Secretary of State didn’t get around to giving Maritza and Oscarlina the Section 893(b) blessing. So IRS, having launched an initiative to tax the unblessed furriners, hit Maritza and Oscarlina with deficiencies, nonfiling and nonpaying penalties.

Maritza and Oscarlina first hired counsel on a fee basis, but counsel switched to pro bono (non-fee) when the costs got too high. Finally, Maritza and Oscarlina bade their counsel adieu, and after appeals failed, filed their own Tax Court petitions.

But then IRS loses Abdel-Fattah v. Commissioner, 134 T.C. 190 (2010), where Section 893(a) is held separate from 893(b), which means the State Department blessing isn’t necessary if the facts comport with Section 893(a); Abdel goes off on “plain meaning,” although the Abdel Court doesn’t say IRS’ position is crazy.

So eventually IRS bails on Maritza and Oscarlina.

Lo and behold,  “…[Maritza] re-engaged as counsel the same lawyers who had assisted her in her administrative proceedings but had not filed her petition in this litigation. …three days after the issuance of the Abdel-Fattah Opinion, petitioners’ counsel filed their entry of appearance in [Maritza]. … the IRS informed petitioners’ counsel that it intended to concede in [Maritza].

“Less than a month later…[Oscarlina] reengaged as counsel those same lawyers. Counsel filed their entry of appearance in [Oscarlina] three days later….

“The record does not show the reason for petitioners’ counsel’s exit from and re-entry into these pro bono cases.” 2012 T.C. Mem. 74, at p. 9. Perchance these hard-laboring pro bono counsel saw a chance actually to get paid? Ya think?

Comes the Section 7430 application. Yes, you prevailed, says Judge Gustafson, but the IRS wasn’t crazy, and you have to do more than win. “The relevant inquiry is whether the IRS knew or should have known that its position was invalid when adopted, given the facts available and any legal precedent related to the case. The Supreme Court has warned that courts must ‘resist the understandable temptation to engage in post hoc reasoning by concluding that, because a plaintiff did not ultimately prevail, his action must have been unreasonable or without foundation.’ Or, as the Court of Appeals for the D.C. Circuit put it, ‘courts need to guard against being ‘subtly influenced by the familiar shortcomings of hindsight judgment.’

“The IRS’s position may be incorrect but nevertheless substantially justified ‘if a reasonable person could think it correct’. The IRS’s eventually conceding or even losing a case does not establish that its position was unreasonable, but its concession does remain a factor to be considered.” 2012 T.C.Mem. 74, at pp. 15-16 [Citations omitted.]

IRS had an argument in Abdel that Tax Court didn’t just blow off. Then,  when they lost, IRS had to decide whether to appeal Abdel, and whether to issue an Action On Decision if they didn’t (and ultimately IRS did issue an AOD). Then they had to decide the specific Section 893(a) factual issues with Maritza and Oscarlina. IRS was entitled to time to deal with the serious questions here, and Abdel was a case of first impression.  Substantial justification all the way.

Sorry, counsel, no money for you.


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