Government Opposes Request for Attorney Fees in Penalty Case

CHRISTOPHER A. HAYNES;
PRISCILLA HAYNES,
Plaintiffs-Appellants
v.
UNITED STATES OF AMERICA,
Defendant-Appellee

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

UNITED STATES' OPPOSITION TO APPELLANTS'
MOTION FOR ATTORNEY FEES

The United States opposes the motion for attorney fees filed by plaintiffs-appellants Christopher and Priscilla Haynes on March 18, 2019. As explained below, 26 U.S.C. § 7430 provides the sole avenue for awarding fees against the United States in a federal tax case, and the Hayneses fail to meet several requirements for an award of fees under that statute.

1. Section 7430 provides the sole avenue for an award of fees against the United States in a federal tax case

Section 7430 of the Internal Revenue Code (26 U.S.C.) (I.R.C. or Code) authorizes a discretionary award of “reasonable” attorney fees paid or incurred by a “prevailing party” who “substantially prevailed” against the United States in a civil action for a refund of a penalty imposed by the Code, when the “position of the United States” in the litigation was not substantially justified.¹ See I.R.C. §§ 7430(a), (c)(1), (4)(A), (B)(i). While this Court has the authority to award attorney fees against the United States in this case, it may do so solely within the terms of I.R.C. § 7430, and not pursuant to court rules or other statutes that authorize an award of attorney fees. See United States v. McPherson, 840 F.2d 244, 246 (4th Cir. 1988) (“section 7430 must be considered the only waiver of sovereign immunity in this context, and the exclusive authority for an award of attorney's fees in the class of cases described by § 7430”); H.R. Rep. No. 97-404, at 13 (1981) (attorney fees in tax actions are only available under I.R.C. § 7430). The Hayneses are thus wrong in suggesting that Fed. R. App. P. 38, 5th Cir. R. 47.8, or any other source of authority permits an award of fees against the Government in this tax case.² (Mot. for Att'y Fees 5-6.)

Moreover, as this Court has stated, “the award of any attorneys' fees [against the Government] can happen only pursuant to a waiver of sovereign immunity. As a result, such waiver must be strictly construed.” Estate of Cervin v. Commissioner, 200 F.3d 351, 355 (5th Cir. 2000); accord Kenlin Indus., Inc. v. United States, 927 F.2d 782, 786 (4th Cir. 1991); see also Fenton v. Federal Ins. Adm'r, 633 F.2d 1119, 1122 (5th Cir. 1981) (“[A]s a limited waiver of sovereign immunity, [28 U.S.C.] section 2412 is to be strictly observed.”). There are numerous conditions that must be strictly complied with before an award of attorney fees can be made under I.R.C. § 7430, and we discuss the conditions that are disputed in this case.

First, the party seeking attorney fees must be a “prevailing party” within the meaning of I.R.C. § 7430(c)(4). “A party shall not be treated as the prevailing party . . . if the United States establishes that the position of the United States in the proceeding was substantially justified.” I.R.C. § 7430(c)(4)(B)(i). In addition, parties whose net worth is greater than a statutory threshold dollar amount cannot be treated as prevailing parties. I.R.C. § 7430(c)(4)(A)(ii); 28 U.S.C. § 2412(d)(2)(B). The Hayneses, who filed a joint return, must establish that their combined net worth did not exceed $4 million at the time they filed their complaint. I.R.C. § 7430(c)(4)(A)(ii) & (D)(ii); 28 U.S.C. § 2412(d)(2)(B)(i); see H.R. Conf. Rep. No. 105-220, at 734 (1997) (combined “net worth limitation of $4,000,000 for individuals who file a joint return”); cf. 26 C.F.R. § 301.7430-5(g)(1) ($4,000,000 joint net worth limitation for administrative proceedings).

Second, an award of attorney fees is limited to “reasonable fees paid or incurred . . . except that such fees shall not be in excess of ” the statutory cap, which was $200 per hour for the years in which this case was litigated. See I.R.C. § 7430(c)(1)(B)(iii); Rev. Proc. 2015-53, § 3.50 (hourly rate for 2016); Rev. Proc. 2016-55, § 3.54 (hourly rate for 2017); Rev. Proc. 2017-58, § 3.54 (hourly rate for 2018); Rev. Proc. 2018-57, § 3.60 (hourly rate for 2019). Higher fees may be awarded if the court determines that “a special factor, such as the limited availability of qualified attorneys for such proceeding, the difficulty of the issues presented in the case, or the local availability of tax expertise, justifies a higher rate.” I.R.C. § 7430(c)(1)(B)(iii).

Finally, the statute excludes from any attorney fee award portions of the litigation that were unreasonably protracted by the party seeking attorney fees. I.R.C. § 7430(b)(3).

2. The Government's position was substantially justified because it was based on a Supreme Court decision that the District Court agreed was applicable

The Hayneses should not be treated as the prevailing party in this case because the Government's position on the late-filing penalty was substantially justified. This Court has held that “[s]ubstantially justified means 'justified to a degree that could satisfy a reasonable person' and having a 'reasonable basis both in law and fact.'” Nalle v. Commissioner, 55 F.3d 189, 191 (5th Cir. 1995) (quoting Pierce v. Underwood, 487 U.S. 552, 565 (1988)). “In determining whether the Commissioner's position was not substantially justified, the question is whether the Commissioner acted unreasonably — that is, whether she knew or should have known that her position was invalid at the onset of the litigation.” Nalle, 55 F.3d at 191. Factors relevant to this inquiry are whether the Government's position was based on existing precedent and whether the issue presented is novel or difficult. Id. at 191-92 & n.9 (collecting cases); see, e.g., Phillips v. Commissioner, 851 F.2d 1492, 1499 (D.C. Cir. 1988) (Government's position was substantially justified by longstanding precedent).

Under this standard, the Government's position in this case was substantially justified. The Hayneses brought this suit, initially arguing that their electronic return was timely filed and that, even if it was untimely, they had reasonable cause for the late filing. The District Court rejected both arguments. With respect to the reasonable-cause argument, the District Court applied a long line of precedent from this Court and the Supreme Court holding that reliance on an agent to file a return does not, as a matter of law, constitute reasonable cause for filing late. (ROA.695-703.)³ See United States v. Boyle, 469 U.S. 241 (1985).

On appeal, the Hayneses dropped their argument that the electronic return was timely, thereby effectively conceding that issue. (Gov't Br. 51.) Their only argument was that their CPA was not negligent in failing to follow up on the status of the electronic return and that the holding of Boyle should not apply to electronic returns — an issue of first impression in any court of appeals.

The Government's response to these arguments had a reasonable basis in both law and fact. In terms of fact, the Government argued that both the Hayneses and their CPA acted negligently in failing to ensure the electronic return was accepted by the IRS, noting that even the American College of Tax Counsel, which filed an amicus brief supporting the Hayneses, acknowledged that “Appellants' accountant should have followed up on his electronic transmission of Appellants' return to be certain that the return had been accepted by the IRS, and if not, why not.” (Gov. Br. 28-29, quoting Amicus Br. 27.) And the Hayneses admitted that they did nothing to ascertain whether the IRS had accepted their electronic return, even when months had passed and their $49,111 tax bill had not been paid. (Gov. Br. 29-31; ROA.266-267, 271-272.)

In arguing that the Government's position was “[i]ndefensible,” the Hayneses twist the facts. (Mot. for Att'y Fees 3.) They claim that the late filing was caused by a “transmission error” that was “beyond their control.” (Id. at 4.) But it was undisputed that the electronic return was rejected because their CPA made an erroneous entry on the return. (ROA.198-201, 258, 262, 707.) This was not a “transmission error”; it was human error. The Hayneses also claim that “the IRS did not notify the Lacerte software company, the CPA or Appellants that it had rejected the electronic filing” (Mot. for Att'y Fees 4), but the record does not establish this. Rather, the record is silent as to whether or not the IRS sent any rejection notice. (ROA.476, 674.)

On these facts, the Government had a reasonable argument that the Hayneses and their CPA acted negligently in failing to ascertain whether the electronic return had been accepted by the IRS. This Court agreed that there was a bona fide question of fact when it remanded the question of negligence for a trial. If this were “clearly a case of circumstances beyond a taxpayer's control and thus, clearly [showing] reasonable cause,” as the Hayneses assert (Mot. for Att'y Fees 5), this Court would not have remanded the case for a trial.

The Government also had a reasonable basis in law for arguing that the Hayneses lacked reasonable cause. This Court held in Logan Lumber Co. v. Commissioner, 365 F.2d 846, 853-54 (5th Cir. 1966); Millette & Associates, Inc. v. Commissioner, 594 F.2d 121, 124-25 (5th Cir. 1979); and Laney v. Commissioner, 674 F.2d 342, 350 (5th Cir. 1982) — consistent with the Supreme Court's later decision in Boyle — that reliance on an agent is not reasonable cause under I.R.C. § 6651(a)(1) for a late return. And this Court has rejected attempts to enlarge the narrow exceptions to Boyle. See Denenburg v. United States, 920 F.2d 301, 303-07 (5th Cir. 1991). Given the broad and emphatic language used by the unanimous Supreme Court in Boyle, the Government's position that the holding of Boyle applies to electronic returns was reasonable. See, e.g., Boyle, 469 U.S. at 248 (“We need not dwell on the similarities or differences in the facts presented by the conflicting holdings. The time has come for a rule with as 'bright' a line as can be drawn consistent with the statute and implementing regulations.”).

The Hayneses argue that the Government's application of Boyle was “Per Se Indefensible” (Mot. for Att'y Fees 3), but it was reasonable for the Government to rely on an on-point Supreme Court opinion that accords with decades of decisions from this Court. The Hayneses argue that it was obvious that Boyle should not apply to electronic returns (Mot. for Att'y Fees 3-4), but the Government had a sound argument, based on the rationale of Boyle, that the Supreme Court's bright-line rule applies to electronic returns as well as paper returns. (Gov. Br. 38-45.) A court may disagree, but it is generally the role of courts — and not the IRS — to decide that a Supreme Court decision does not apply.⁴

In fact, no court has rejected the Government's position advanced here. This Court (Op. 2) reversed the District Court without reaching the Boyle issue (and denied the Hayneses' petition for panel rehearing seeking immediate litigation of this issue), so it remains one of first impression today. More specifically, this Court held that “[w]hile the e-filing issue is an interesting one, it is one that we need not decide today. Even if the Government is right that Boyle should apply to e-filing, another genuine dispute of material fact . . . still defeats summary judgment. Consequently, we take no position on whether a taxpayer's reliance on a CPA to e-file a tax return, by itself, constitutes reasonable cause.” (Op. 4.) Courts have declined to award attorney fees against the United States where, as here, the Government was addressing a dispute of first impression, the outcome of which was not a foregone conclusion. See, e.g., Nalle, 55 F.3d at 192-93 (collecting cases). And this Court has held, in a case in which it ruled against the Government on the merits, that the appellants were not prevailing parties under I.R.C. § 7430 because the Government's position was “'not entirely without foundation.'” Nalle, 55 F.3d at 193-94 (quoting Nalle v. Commissioner, 997 F.2d 1134, 1137-38 (5th Cir. 1993)).

In sum, the Government's position in this case was substantially justified, and that fact alone precludes an award of attorney fees under I.R.C. § 7430.

3. The Hayneses' motion lacks the evidentiary support required to establish that other conditions to the waiver of sovereign immunity in I.R.C. § 7430 are met

The motion for attorney fees also should be denied because the Hayneses have not met their evidentiary burden on several other elements required for an award of fees under I.R.C. § 7430. See, e.g., Pate v. United States, 982 F.2d 457, 459-60 (10th Cir. 1993) (applicant bears the burden of proving net worth less than the statutory maximum, which is “a prerequisite to the award of attorney's fees” under I.R.C. § 7430); McPherson, 840 F.2d at 245 (taxpayers must prove that they actually paid or incurred fees for the services of an attorney); Heasley v. Commissioner, 967 F.2d 116, 123 (5th Cir. 1992) (party seeking attorney fees bears burden of proving hours expended were reasonable); RI Unlimited, Inc. v. Commissioner, 100 T.C.M. (CCH) 262, 2010 WL 3703835, at *9 (2010) (taxpayers bear burden of proving they did not unreasonably protract any portion of the court proceeding); Powers v. Commissioner, 43 F.3d 172, 183-84 (5th Cir. 1995) (taxpayer bears burden of proving a special factor that justifies an hourly rate above the statutory cap).

a. Christopher Haynes's declaration does not establish combined net worth of $4 million or less on the filing date of the complaint

As mentioned above (pp. 3-4), individuals who filed a joint return and whose combined net worth exceeded $4 million on the date they filed their complaint are not eligible for an award of attorney fees. See I.R.C. § 7430(c)(4)(A)(ii), (D)(ii); 28 U.S.C. § 2412(d)(2)(B)(i). The Hayneses do not even allege that they meet this limitation. Rather, Mr. Haynes's affidavit states, “I am an individual with an unincorporated business with fewer than 500 employees and my net worth did not exceed $7,000,000” when the complaint was filed. (Mot. for Att'y Fees, Ex. B.) Mr. Haynes appears to be referring to his law practice, and his reliance on the $7 million figure appears to stem from subsection (ii) of 28 U.S.C. § 2412(d)(2)(B), which does not apply here.

That provision applies to cases brought on behalf of a business-type entity. Specifically, it defines a “party” as “any owner of an unincorporated business, or any partnership, corporation, association, unit of local government, or organization, the net worth of which did not exceed $7,000,000 at the time the civil action was filed, and which had not more than 500 employees at the time the civil action was filed,” with exceptions for certain tax-exempt organizations. 28 U.S.C. § 2412(d)(2)(B)(ii). As Congress has explained in the context of § 7430, this provision applies to “actions that are in substance partnership actions or S corporation actions, including unified entity-level proceedings under [I.R.C.] sections 6226 or 6228, that are nominally brought in the name of a partner or a shareholder.” H.R. Conf. Rep. No. 105-220, at 733. See, e.g., Bruner v. Commissioner, 115 T.C.M. (CCH) 1030, T.C. Memo. 2018-10, at [*9] (2018) ($7 million net-worth limitation applies where petitioner is an individual and the underlying tax dispute relates to flow-through deductions from his LLC).

This case had nothing to do with Mr. Haynes's law practice, which was not a party to the suit in any capacity. See, e.g., Estate of Palumbo v. United States, 675 F.3d 234, 239, 244 (3d Cir. 2012) (“the Estate was the only party to the proceedings”; and therefore was “the party who must meet the net worth requirements of § 2412 incorporated into § 7430”). The sole issue in this case was a penalty assessed against the Hayneses personally for the late filing of their joint income tax return. Thus, the Hayneses bear the burden of proving that they are within the net-worth limitation of $4 million for individuals who file a joint return, and they have not met that burden.

Moreover, that burden cannot be met by the type of bare allegation contained in Mr. Haynes's affidavit. To meet the burden of proving that their net worth was below the statutory maximum, parties seeking fees “must do more than make a bare assertion that [they] meet[ ] the statutory criteria.” Shooting Star Ranch, LLC v. United States, 230 F.3d 1176, 1178 (10th Cir. 2000). See also Al Ghanim Combined Grp. Co. Gen. Trad. & Cont. W.L.L. v. United States, 67 Fed. Cl. 494, 496 (2005) (“Failure to submit documentation of plaintiff 's net worth, for the purpose of determining whether plaintiff qualifies for an award under [28 U.S.C. § 2412(d)(2)(B)], renders an application deficient.”). The Hayneses' motion does not include even minimal documentation to support their alleged net worth.

b. The Hayneses have not established that they actually paid or incurred the requested fees

Sovereign immunity protects the United States from an award of attorney fees that the Hayneses have not actually “paid or incurred.” I.R.C. §§ 7430(a)(2), (c)(1)(B)(iii); see Marré v. United States, 38 F.3d 823, 829 (5th Cir. 1994) (“§ 7430 limits attorney's fees to those actually incurred”); Frisch v. Commissioner, 87 T.C. 838, 845-46 (1986) (the “plain language” of I.R.C. § 7430 “is limited to actual expenditures”). “The mere fact that a taxpayer retained counsel who in fact represented the taxpayer in a proceeding in [ ] Court is not sufficient to meet th[e] 'incurred' requirement of section 7430.” Vasquez v. Commissioner, 93 T.C.M. (CCH) 660, 2007 WL 63742, at *21 (2007). Attorney fees “are incurred when there is a legal obligation to pay them.” Republic Plaza Props. P'ship v. Commissioner, 73 T.C.M. (CCH) 2836, 1997 WL 270516, at *3 (1997) (citing Marré, 38 F.3d 828-29).

The Hayneses presented no evidence that they have paid attorney fees or are contractually bound to do so. Nor have they alleged that the exception for pro bono services applies. See I.R.C. § 7430(c)(3)(B). Their motion for attorney fees therefore should be denied.

c. The Hayneses' chart for “Legal Services Before 5th Circuit” raises questions

For at least two reasons, the Hayneses' evidence does not support 117.5 hours of attorney fees for their appeal. (Mot. for Att'y Fees, Ex. C, at 3-4, 6.) See 5th Cir. R. 47.8.1.

1. In Bode v. United States, 919 F.2d 1044, 1047 (5th Cir. 1990), this Court held that, “[i]n determining the amount of an attorney fee award, courts customarily require the applicant to produce contemporaneous billing records or other sufficient documentation so that the [ ] court can fulfill its duty to examine the application for noncompensable hours.” See also Powers v. Commissioner, 43 F.3d 172, 181 (5th Cir. 1995) (“Any type of adequate evidence which permits the Court to determine the number of hours expended and whether they are reasonable will satisfy the taxpayer's burden of proof.”). The Hayneses failed to provide necessary evidence.

The Court's need for supporting documentation is evinced by the single 32-hour entry for the period September 21 to November 20, 2017 on Exhibit C (p. 3) to the Hayneses' motion for attorney fees. This appeal was docketed on September 21, 2017. On November 20, 2017, the Hayneses filed a motion to supplement the record on appeal (which the Government opposed) along with their opening brief. Their motion sought to file in this Court a document that was not part of the record on appeal, and which they oddly referred to as “Government Exhibit 5.” The Government filed a written opposition explaining that the proffered document was never filed in the District Court, it was not an exhibit to the Government's motion for summary judgment, and, in fact, it was a document that the Hayneses had neglected to include with their summary judgment evidence. This Court summarily denied their motion.

I.R.C. § 7430(b)(3) prohibits an award of attorney fees “with respect to any portion of the administrative or court proceeding during which the prevailing party has unreasonably protracted such proceeding.” Cf. Bode, 919 F.2d at 1052 (attorney fees should be excluded to the extent that the applicant failed to prevail). The Court, therefore, should not award attorney fees for time spent on the Hayneses' baseless motion to supplement the record. Without detailed, contemporaneously created billing records, the Hayneses cannot establish how much of the 32-hour entry in the fall of 2017 was for the motion to supplement the record and how much was for the opening brief, and thus have failed to meet their burden of proof.

2. Another problem with the Hayneses' motion for attorney fees is the inclusion of: (i) an undated 0.50-hour entry between November 20 and November 30, 2017, for “Arranging of Printing and Filing” and (ii) an undated 0.50-hour entry between January 25 and January 29, 2019, “Arranged for Printing and Filing of Appellants' Reply Brief,” at $425 per hour. (Mot. for Att'y Fees, Ex. C, at 3, 6.) Clerical work at $425 per hour is not a “reasonable litigation cost[ ].” I.R.C. § 7430(a)(2); see also I.R.C. § 7430(c)(1)(B); Bode, 919 F.2d at 1048 (taxpayers failed to produce evidence for work billed at a lower rate).

d. No special factor exists in this case to justify an hourly rate more than double the statutory cap

Finally, I.R.C. § 7430 imposes a $200-per-hour cap on attorney fees for the period 2016 through 2019. I.R.C. § 7430(c)(1)(B)(iii) ($125 per hour plus cost-of-living adjustment); Rev. Proc. 2015-53, § 3.50; Rev. Proc. 2016-55, § 3.54; Rev. Proc. 2017-58, § 3.54; Rev. Proc. 2018-57, § 3.60. An attorney fee award cannot exceed that statutory rate “unless the court determines that . . . a special factor, such as the limited availability of qualified attorneys for such proceeding, the difficulty of the issues presented in the case, or the local availability of tax expertise, justifies a higher rate.” I.R.C. § 7430(c)(1)(B)(iii). No special factor applies to 11.0 hours for preparing the motion for attorney fees. (Mot. for Att'y Fees, Ex. C, at 4.) See Powers, 43 F.3d at 183.

In Estate of Cervin, 200 F.3d at 354-55, this Court held that attorney fees in excess of the statutory cap are only available when the case required an attorney with “nonlegal or technical abilities.” And tax law expertise, without more, is not a special factor warranting an hourly rate greater than the $200 cap. See id. at 354. This Court repeatedly has held that, “[i]f a special expertise in tax law qualifies as a 'special factor' under Section 7430, the exception would wholly swallow the rule because almost all attorneys seeking compensation under section 7430 possess an expertise in tax law.” Powers, 43 F.3d at 183-84 (citing Bode, 919 F.2d at 1050).

The Hayneses seek fees at a rate that is more than double the $200-per-hour statutory cap, i.e., $425 an hour. (Mot. for Att'y Fees, Ex. C, at 6.) This request should be rejected because their case was not within the “narrow exceptions” requiring nonlegal or technical abilities. Estate of Cervin, 200 F.3d at 354-55. Even as tax cases go, this was not a technical or complicated case. This case did not involve complex business transactions, byzantine tax rules, or any specialized or technical knowledge within the field of tax law. This was a case about reasonable cause for late filing of a tax return, and it involved questions of negligence, agency law, and the applicability of existing case law – matters that require no unique or specialized skills.

At all events, courts have rejected the argument that limited availability of qualified attorneys at the statutory hourly rate is a special factor. See Powers, 43 F.3d at 183; United States v. Guess, 425 F. Supp. 2d 1143, 1155 (S.D. Cal. 2006); Cozean v. Commissioner, 109 T.C. 227, 232 (1997). A special factor is only established if the prevailing party shows that there are no qualified counsel that could handle the matter, not that “such counsel would not accept representation for compensation capped at [the statutory rate.]” Guess, 425 F. Supp. 2d at 1155.

To ascertain the number of tax attorneys in the Hayneses' “primary place of residence in El Paso, Texas” (ROA.6), the undersigned attorney entered the terms “Tax” and “El Paso” in the “Find A Lawyer” advanced search function on the State Bar of Texas's website (https://www.texasbar.com, last visited March 26, 2019). This search produced a list of more than 200 practicing attorneys (excluding government attorneys), of which 41 attorneys specifically listed “Taxation” in their personal profile. According to the records of the State Bar of Texas, there appears to be no scarcity of tax attorneys in El Paso.

CONCLUSION

The Hayneses' motion for attorney fees should be denied because prerequisites to the waiver of sovereign immunity in I.R.C. § 7430 are not met in this case.

Respectfully submitted,

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

/s/ Karen G. Gregory

GILBERT S. ROTHENBERG (202) 514-3361
FRANCESCA UGOLINI (202) 514-1882
KAREN G. GREGORY (202) 514-5399
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044
Appellate.TaxCivil@usdoj.gov
Karen.G.Gregory@usdoj.gov

MARCH 28, 2019