Your clients love the idea, and always think the government should pay, but it isn’t that easy. Below are a summary of a handful of cases highlighting many pitfalls, and a few helpful pointers, in recovering legal fees and civil damages from the government (sorry federal readers) that have come out over the last few months.
3rd Party Rights
The Ninth Circuit, in US v. Optional Capital, Inc., held that a third party holding a lien on property could not obtain attorney’s fees for an in rem proceeding to determine its rights in real estate that had also been subject to government liens pursuant to the Civil Asset Forfeiture Reform Act, 28 USC 2465(b)(1)(A), or Section 7430. The Court determined the 3rd party was not the prevailing party “in any civil proceeding to forfeit property,” as required by CAFRA. The government had lost in a related hearing regarding the lien, but the 3rd party had “not pointed to any work it performed that was ‘useful’ or ‘necessary to secure’ victory against the Government,” so it was not the prevailing party. It would seem, however, this leaves open the possibility of other 3rd parties prevailing, if meaningful work was done in the underlying case. This case is a good reminder of another potential option under CAFRA in attempting to claim fees in certain collection matters.
As to Section 7430, the Court found, contrary to the 3rd party’s claims, it had not actually removed the government’s liens from the property, and therefore could not be considered the prevailing party, which is required under Section 7430 to obtain fees.
When You Are Rich Is Important
In Bryan S. Alterman Trust v. Comm’r, the Tax Court held that a trust could not qualify to recover litigation costs under Section 7430 because its net worth was over $2MM. Section 7430 references 28 USC 2412(d)(2)(B), which states an individual must have under $2MM in net worth in order to recover litigation costs. That is extended to trusts by Section 7430(c)(4)(D). The taxpayer argued the eligibility requirement should be as of the time the deficiency notice was issued or the date the petition was filed. That “reading” of the statute was found incorrect, as Section 7430(c)(4)(D)(i)(II) states the provision applies to a trust, “but shall be determined as of the last day of the taxable year involved in the proceeding.” At that time, the trust had over $2MM in net worth, saving the IRS from potentially having to shell out capital. And, that’s why I always keep my trust balances below $2MM…and right around zero dollars.
Key Questions: Are you the Taxpayer? Did you Exhaust the Administrative Remedies?
The District Court for the Northern District of Illinois dismissed the government’s motion for summary judgment in Garlovsky v. United States on fees under Section 7433, but also gave clear indication that the claim is in danger. In Garlovsky, the government sought collection on trust fund recovery penalties against an individual for his nursing home employer that allegedly failed to pay employment taxes. Prior to that collection action, the individual died, and notices were sent to his surviving spouse (who apparently was some type of fiduciary and received his assets). The taxpayer’s wife paid a portion, and then sued for a refund. As to damages, the Court found that the taxpayer’s wife failed to make an administrative claim for civil damages before suing in the District Court, which is required under Section 7433.
In addition, although the surviving spouse received the collection notices, none were addressed to her and the Service had not attempted to collect from her. Section 7433 states, “in connection with any collection of…tax…the [IRS] recklessly or intentionally, or by reason of negligence, disregards any provisions of this title…such taxpayer may bring a civil action…” The Court found that the spouse was not “such taxpayer”, and likely did not have a claim. Although I have not researched this matter, I would assume the estate of the decedent could bring this claim (unlike Section 7431, pertaining to claims for wrongful disclosure of tax information, which some courts have held dies with the taxpayer – see Garrity v. United States –a case I think I wrote up, but never actually posted).
Qualifying as a Qualified Offer
The 9th Circuit held that married taxpayers were not entitled to recover attorney’s fees under Section 7430 in Simpson v. Comm’r, where the taxpayer did not substantially prevail on its primary argument, even though they did prevail on an alternative argument. In Simpson, the wife received a substantial recovery in an employment lawsuit. The Simpsons only included a small portion as income, arguing it was workers comp proceeds (not much evidence of that). The Tax Court held 90% was income. This was upheld. The 9th Circuit held that the taxpayer was clearly not successful on its primary claim. They did raise an ancillary claim during litigation, which the IRS initially contested, but then conceded. The Court held the Service was substantially justified in its position, as the matter was raised later in the process and was agreed to within a reasonable time. Finally, the Court held that the taxpayer’s settlement offer did not qualify as a “qualified offer”, since the taxpayers indicated they could withdraw it at any time. Qualified offers must remain open until the earliest of the date it is rejected, the date trial begins, or the 90th day after it is made. Something to keep in mind when making an offer.
Making the Granite State Stronger – No Fees For FOIA
Granite seems pretty sturdy, but Citizens for a Strong New Hampshire are hoping for something even sturdier. The District Court for the District of New Hampshire in Citizens for a Strong New Hampshire v. IRS has denied Strong New Hampshire’s request for attorney’s fees under 5 USC 552(a)(4)(E)(i) for fees incurred in bringing its FOIA case. That USC section authorizes fees and litigation costs “reasonably incurred in any case under [FOIA] in which the complainant has substantially prevailed.” The statute defines “substantially prevailing” as obtaining relief through “(I) a judicial order, or an enforceable written agreement or consent decree; or (II) a voluntary…change in position by the agency…”
Strong New Hampshire requested documents through a FOIA request regarding various New Hampshire politicians. It took the IRS a long time to get back to Strong New Hampshire, and it withheld about half the applicable documents as exempt under FOIA. Strong New Hampshire continued to move forward with the suit, and the Service moved for summary judgement arguing it complied. Aspects remained outstanding, but the Court held that the Service had not improperly withheld the various documents. The IRS did a second search, moved for summary judgement, and Strong New Hampshire did not contest.
The Court held that the voluntary subsequent search by the Service did not raise to the level of substantially prevailing by Strong New Hampshire. As required by the statute, there was not a court order in favor of Strong New Hampshire, and the actions taken by the Service unilaterally in doing the second search was not sufficient to merit fees.