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Attorney’s Fees Following Bad Faith Action by IRS

Posted on Oct. 1, 2020

In True the Vote v. IRS, No. 1:13-cv-00734 (D.D.C. 2020) one of the issues in the most recent opinion regarding this case concerns the calculation of attorneys’ fees. This case began in 2013, because the IRS denied exempt status to True the Vote. At that time numerous cases existed based on the allegedly intentional actions of the IRS to deny tax exempt status by improperly characterizing certain groups as political groups who did adhere to certain norms. You can read about the earlier decisions in this case at True the Vote, Inc. v. Internal Revenue Serv. (“True the Vote I”), 71 F. Supp. 3d 219, 223-25 (D.D.C. 2014) (Walton, J.), aff’d in part, rev’d in part and remanded, 831 F.3d 551 (D.C. Cir. 2016), and the procedural history of this case in its Memorandum Opinion issued on May 30, 2019, see True the Vote, Inc. v. Internal Revenue Serv. (“True the Vote II”), Civ. Action No. 13-734 (RBW), 2019 WL 2304659, at *2 (D.D.C. May 30, 2019) (Walton, J.).

In many ways it seems like peanuts for the government to argue about the attorney’s fees because the issue in this case, and other similarly situated cases, caused the IRS to lose about 20% of its budget over the past decade. That’s a gross simplification of the situation, but little doubt exists that the IRS paid dearly for the mistakes made by the exempt organization sector of the organization. Because of the severe budget cuts and their impact on the IRS’s productivity, it could be argued that we have all suffered due to the downturn in government revenue as a result of these events. Viewed in another light, perhaps we have all benefited. In any event the amount of attorney’s fees at issue pales in comparison to the true cost to the IRS brought about by this case and other similarly situated cases.

Here, the court faces a motion for reconsideration by the IRS of the award of attorney’s fees to plaintiff’s attorneys. The court found the IRS acted in bad faith and, as a consequence, granted fees at the market rate rather than the must less generous rate provided by the Equal Access to Justice (EAJA) act. Note that most attorney’s fee’s fights with the IRS would occur using IRC 7430 which provides a basis for fees quite similar to EAJA but not identical.

Relying on the Supreme Court precedent set in Goodyear Tire & Rubber Co. v. Haeger, 137 S. Ct. 1178 (2017), the IRS argues that granting the attorneys a market-based fee because of bad faith should only occur during the period of bad faith. It points out that the bad faith ended in 2013 when the IRS granted tax exempt status to the organization.

In Goodyear, the Supreme Court explained:

[A] sanction [of attorneys’ fees], when imposed pursuant to civil procedures, must be compensatory rather than punitive in nature. In other words, the fee award may go no further than to redress the wronged party for losses sustained; it may not impose an additional amount as punishment for the sanctioned party’s misbehavior. . . . [A] sanction counts as compensatory only if it is calibrate[d] to [the] damages caused by the bad-faith acts on which it is based. A fee award is so calibrated if it covers the legal bills that the litigation abuse occasioned. But if an award extends further than that — to fees that would have been incurred without the misconduct — then it crosses the boundary from compensation to punishment.

The court agrees. It determines that its prior decision did not take into account the decision in Goodyear and it should not have granted the fees based on bad faith beyond the point at which the IRS acted in bad faith and agreed that the bad faith action stopped in 2013 with the granting of the exempt status request. So, it reverses the prior award giving full market rate for attorney’s fees only to the point of the granting of exempt status and EAJA based fees thereafter.

The change in the fee rate based on the end of the bad behavior is the primary issue in this case. The case has several other fee issues which it addresses and may be worth reading for anyone engaged in fee litigation and looking for a further discussion of the types of issues that can arise in these cases.

Perhaps the IRS feels good to get a least a partial win out of this situation. As the cases stemming from the misadventures of the exempt organization sector of the IRS slowly come to an end, it can only hope that this chapter is behind it and better days — and better budgets — lie ahead. For those of us who would like to see the IRS staffed to meet the challenges on all of the issues it faces this will be good as well.

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