Two cases we have written about previously in which the taxpayers won after the IRS took positions that were hard to justify have recently been appealed to the Ninth Circuit seeking attorney’s fees. As we have discussed before, getting attorney’s fees is extraordinarily difficult in a tax case.
In Tung Dang and Hieu Pham Dang v. Commissioner, T.C. Memo. 2020-150, blogged here, oral argument before the Ninth Circuit took place on February 8, 2022. You can listen to it here. You can read the opening brief here, the government’s responding brief here, and the reply brief here. Steve Milgrom, the Dangs’ pro bono representative, argued for both administrative and litigation costs. As Maria Dooner points out in her post on this case, if someone in the Dangs’ circumstances cannot obtain attorney’s fees, it’s time to revisit the statute. That time may have come, because, unfortunately for the Dangs, the Ninth Circuit rendered a swift, and very brief, rejection of their claims for attorney’s fees and affirmed the Tax Court’s denial of the motion for costs. You can read the Ninth Circuit’s opinion here.
The silver lining in the opinion is the recognition by Judge O’Scannlain in a concurring opinion that the regulation “is invalid because it is not ‘a permissible construction of’ 26 U.S.C. 7430.” He finds that the exclusion of collection action from the definition of administrative proceedings is contrary to the plain language of the statute. Specifically, he states that the IRS argument:
disregards the fact that what constitutes an administrative proceeding is relevant, not only to administrative costs, but to litigation costs as well. Subsection (c)(2) specifies that accumulation of costs is triggered by the earliest of notice of decision, notice of deficiency, and letter of proposed deficiency. Because the only document relevant to collection hearings is the notice of decision—received at the end of such a hearing—no administrative costs accumulate.
In Jacobs v. Commissioner, T.C. Memo 2021-51, blogged here, Mr. Jacobs filed his opening brief here and the tax clinic at Harvard filed an amicus brief here. The responding brief for the government was originally due on February 25, 2022, but the government requested an extension to March 11, 2022, which was granted by the Court. As we have reported in the blog posts linked above, only a miniscule number of cases receive attorney’s fees in the Tax Court. We’ll see if this case can help to push that percentage upward, but the result in the Dang case makes me less optimistic.
Levy Action to Avoid IRC 72(t) Excise Tax
The Dang case involved an effort to get the IRS to levy on a taxpayer’s retirement account in order to allow the taxpayer to pay the outstanding liability without incurring the 10% excise tax for early withdrawal from such an account. The revenue officer and the appeals officer exhibited little sympathy for the taxpayer’s argument requiring that the taxpayer withdraw the money in order to avoid – drumroll – a levy. Ultimately, the Tax Court, after one remand made it clear that the IRS position was not reasonable. I have a nearly identical case pending in which the Settlement Officer took the same position that the IRS would not levy on the client’s retirement account in order to avoid the excise tax on early withdrawal even though I provided the settlement officer with the Dang case. Maybe the tax clinic at Harvard will soon get its own chance to pursue attorney’s fees, but with the Dangs’ failure, this seems unlikely.
Perhaps it’s time to take a harder look not only at the way the attorney’s fees statute is working but at the way the statute designed to allow taxpayers to avoid the 10% excise tax on early withdrawal is working out. The IRS employees don’t want to levy on retirement accounts because they must get approval from higher levels. IRM 220.127.116.11 provides the procedure for levying on retirement accounts and subsection (10) requires the IRS employee to secure approval of the Form 668-R, Notice of Levy on Retirement Plans, from the SB/SE Director in the Collection Area. On the other side, taxpayers may want the IRS to levy on their retirement account in order to avoid the 10% excise tax on early withdrawal (such levies are exempt from the 10% tax under IRC 72(t)(2)(A)(vii)). The IRM provision providing this exemption is contained in IRM 18.104.22.168(13). The manual could be changed to allow levy in a situation in which the taxpayer requests a levy. While changing the results in obtaining attorney’s fees in tax cases may, at this point, require legislation, the ability to change the result to cause the IRS to levy on someone’s retirement account when they are requesting that the IRS do so should not be that hard.