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Another Case Denying Attorney’s Fees; TAS Tries to go to Appeals

Posted on May 7, 2021

The case of Jacobs v. Commissioner, T.C. Memo 2021-51 (see the 39th doc on the docket) demonstrates once again how difficult it is to obtain attorney’s fees in Tax Court cases.  Maria Dooner and Linda Galler, the authors of the excellent chapter on attorney’s fees in the 8th Edition of Effectively Representing Your Client Before the IRS coming out this month and available for order now, wrote a post for us earlier this year in which they displayed the results of a FOIA request showing how infrequently petitioners succeed in obtaining attorney’s fees from the Tax Court.  Their data suggests that out of the approximately 25,000 petitioners each year who file a petition in the Tax Court about 10 will receive attorney’s fees or about .004%.

I was glad for their research because the other clinics at the Legal Services Center at Harvard routinely obtain attorney’s fees in their litigation with the government, but I have not obtained attorney’s fees since my arrival. Even though I have explained to them the difficulty of obtaining attorney’s fees in Tax Court cases, my colleagues no doubt simply consider me a slacker. Maria and Linda provided me with some empirical cover to avoid the slacker label. This post will not get into the disparity in the ability to win attorney’s fees in Tax Court versus other venues, but it is something to think about. It’s now been almost a quarter century since Congress last tweaked IRC 7430 adding, among other things, the qualified offer provisions in the Restructuring and Reform Act of 1998 yet petitioners in tax cases still get almost no traction in seeking attorney’s fees. Is the IRS this good compared to other agencies?

Professor Jacobs, a former Department of Justice attorney turned professor, author and private attorney, claimed a number of deductions for items related to his various professional pursuits. The IRS audited his 2014 and 2015 returns via its wonderful correspondence exam process. Unlike a high percentage of the individuals audited via correspondence, Mr. Jacobs responded and seems to have provided the IRS with quite a lot of documentation regarding his claimed expenses.

In response, in December 2016, Mr. Jacobs submitted a letter of explanation with 28 pages of documentation….

In February 2017, the Memphis Correspondence Exam office informed Mr. Jacobs by letter that the information he had provided was insufficient to substantiate his expenses. On April 3, 2017, the Commissioner issued to Mr. Jacobs a notice of deficiency for the 2014 tax year, which disallowed all the deductions Mr. Jacobs had claimed on Schedule C. Both the letter and the notice were sent to the wrong address.

The April 3, 2017, notice was subsequently rescinded after the Taxpayer Advocate Service (“TAS”) opened a case on Mr. Jacobs’ behalf (and at his [*7] request). The TAS assisted Mr. Jacobs in arguing successfully that he had not been given the opportunity to present further substantiating documents.

Mr. Jacobs then made a new submission to the Memphis Correspondence Exam office. That submission included 24 pages of annotated monthly credit card statements. Most of these pages had been provided previously in Mr. Jacobs’ December 2016 submission, but the annotations were new and were intended to replace highlighting in the prior submission that had not been visible to the Memphis Correspondence Exam office because of the way the materials were submitted. The new submission also included several pages of credit card statements that were not part of the December 2016 submission. After reviewing the additional documents, the Memphis Correspondence Exam office determined once more that the information was insufficient to support Mr. Jacobs’ claimed deductions.

He was in California corresponding with an examiner in Memphis.  When the examiner denied the deductions despite his documentation and written explanations, he protested the denial and appears to have been assigned to the Appeals Office in Memphis.

It should be noted that Mr. Jacobs appears not to have been pleased with the customer service he received from the Memphis correspondence unit:

In January 2018, Mr. Jacobs filed a formal request with the U.S. Treasury Inspector General for Tax Administration (“TIGTA”) for an investigation into alleged misconduct by examiners in the Memphis Correspondence Exam office. The request alleged that the Memphis Correspondence Exam office had made unnecessary and “increasingly burdensome” requests for documentation, had threatened to issue an unwarranted deficiency notice, had summarily rejected Mr. Jacobs’ claimed deductions despite the documentation he had provided, and had “stonewalled” for five months Mr. Jacobs’ request for a managerial conference call. TIGTA opened an active investigation into the Memphis Correspondence Exam office and tracked the status of Mr. Jacobs’ case by initiating correspondence with upper-level management of that office.

Mr. Jacobs was perhaps frustrated with his pen pal relationship with the IRS and sought to meet with an actual person.  In a case with lots of documents this can be especially important as keeping a multitude of documents straight over the phone is challenging.

I digress here for a brief mention of my only encounter with the Memphis Appeals Office which occurred more than a decade ago and involved a Collection Due Process case rather than an examination issue.  The Settlement Officer set a time for the telephonic hearing.  The correspondence was a bit unclear because the conference was set at 10:00 CST for a hearing in June when daylight savings time was in effect but I assumed the SO meant 10:00 CDT and called at that time.  No one answered and I got a generic voice mail message saying that the SO was “away from her desk or on the phone.”  I left a detailed message about the hearing and waited for a call back which did not come.  I was covering for a student who could not attend the hearing due to a bar prep session.  She eventually got through to the SO and set up the hearing for the same time one week later.  I called again at 10:00 the following week, received the same generic voice mail message.  I waited a couple hours and did not receive a call back.  I found this very frustrating.  Even more frustrating is the fact that I had no idea who the person’s manager was or how to reach that unknown person.  I happened to know the director of Appeals from having worked together with her at the Chief Counsel’s office and sent her an email message describing my frustration.  That did cause the SO to reach out to me rather promptly, and we were able to conduct the CDP hearing.  I don’t know if Ms. Jacobs’ experience with the Appeals Office in Memphis mirrored mine but it seems he was frustrated with the remote hearing experience.

Meanwhile, the IRS decided to audit Mr. Jacobs for 2015 and this time did so using the correspondence examination unit in Brookhaven.  This exam started four months before he submitted his request to TIGTA regarding the 2014 exam.  It’s not clear why the IRS would audit the same person with essentially the same issues for the subsequent year at a different location but it did and the audit again resulted in him submitting lots of documentation and the correspondence examiner rejecting his explanation.  After some back and forth which no doubt involved detailed explanations from the correspondence exam unit regarding the legal and factual basis for its determination, he requested a hearing with Appeals regarding the 2015 year as well.

Mr. Jacobs succeeded in having his Appeals case assigned from Memphis to Los Angeles.  He provided the AO with a detailed memo and lots of exhibits.  The AO decided that, in keeping with the judicial role of Appeals, she should not evaluate the factual nature of the evidence but send it back to the correspondence examiners in Memphis.  How wonderful for Mr. Jacobs yet he seemed disappointed with this opportunity for more interaction with the correspondence examiners and requested Appeals assign a new AO or at least send his material to an examiner in LA.  Appeals denied his request.  His material went back to Memphis.  The correspondence unit there surprisingly upheld its earlier decision.  An in person meeting was finally set with the AO in LA who by now also had his 2015 year and lots more correspondence from Mr. Jacobs.

This part of the case is interesting because Mr. Jacobs sought to bring his case advocate from TAS to the Appeals conference.  Appeals said no.  The day before the scheduled in person conference with Appeals the case was reassigned to a new AO.  The Court provided this explanation of the discussion regarding TAS attending the conference:

On November 16, Appeals Officer Guerrero was instructed not to schedule a conference with Mr. Jacobs until after management at IRS Appeals had determined a course of action in response to demands from the TAS to be present at Mr. Jacobs’ conference. As best we can tell, this new course of action was attributable to a memorandum the TAS sent to IRS Appeals on November 7, 2018. That memorandum asked that IRS “Appeals should refrain from holding Mr. Jacobs’ hearing until Appeals’ policy is modified” to permit a TAS representative to attend. Discussions between IRS Appeals and the TAS on this topic ensued.

The case does not get any further into the topic of TAS attending the Appeals conference.  I have never thought of bringing someone from TAS into any conference with the IRS but now I am a little intrigued by what happened here and how the issue was resolved.  I would welcome any comments from readers who have brought TAS representatives to Appeals or to other conferences and what role TAS played in those conferences and whether the TAS presence was helpful.

Meanwhile, because the statute of limitations was drawing close, the new AO requested a waiver of the statute of limitations before he would schedule a hearing based on Appeals policy of not working case too close to the statute date.  It’s possible that Mr. Jacobs was frustrated at this point because he declined to extend the statute of limitations causing the issuance of a notice of deficiency, the filing of a Tax Court petition and the resending of his case to Appeals after the IRS answered.

The AO with whom Mr. Jacobs met after filing his Tax Court petition conceded most of the issues and the Chief Counsel attorney promptly conceded the rest. So, he had a complete victory after a long an arduous process. Mr. Jacobs then sought attorney’s fees which is all that this case and this blog post is really about. The Tax Court said no. He was not a prevailing party within the meaning of IRC 7430. Why? Because all of the problems he had prior to filing his petition really did not matter. The IRS was still justified in not conceding before the petition because it had never met with him and received a detailed explanation of his justification for the positions he took and, therefore, the IRS was substantially justified in issuing the notice of deficiency. After the filing of the petition, the IRS relatively promptly conceded the case. The Court noted:

As the Supreme Court has observed, substantially justified means ‘more than merely undeserving of sanctions for frivolousness.’” United States v. Yochum (In re Yochum), 89 F.3d 661, 671 (9th Cir. 1996) (quoting Underwood, [*26] 487 U.S. at 566). The Commissioner’s position may be substantially justified even if incorrect “if a reasonable person could think it correct.” Maggie Mgmt. Co. v. Commissioner, 108 T.C. at 443 (quoting Underwood, 487 U.S. at 566 n.2). Courts have found that the Commissioner’s position was substantially justified in cases that involve primarily factual questions. See, e.g., Bale Chevrolet Co. v. United States, 620 F.3d 868 (8th Cir. 2010). The fact that the IRS loses a case or makes a concession “does not by itself establish that the position taken is unreasonable,” but is “a factor that may be considered.” Maggie Mgmt. Co. v. Commissioner, 108 T.C. at 443.

This case does not break new ground it simply demonstrates again why only .004% of petitioners obtain attorney’s fees in Tax Court cases. One could argue that he should have made a qualified offer earlier in the case to knock out the substantial justification argument, but Mr. Jacobs seems to have responded at every turn with substantial evidence. Does the fact that the IRS correspondence examiners were not equipped to process his arguments mean he should not be compensated for the many hours he spent trying to resolve his case.

Maybe it’s time for a fresh look at the standards for obtaining attorney’s fees in Tax Court cases.

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