In Fitzpatrick v. Commissioner, TCM 2017-88, the Tax Court took up the issue of the timing of attorney’s fees in a case in which the taxpayer made a qualified offer several months after the representation had begun. The Tax Court previously found, in a seven day trial on the merits in a Collection Due Process (CDP) case, that the taxpayer was not a responsible officer. The Tax Court tries a relatively small number of Trust Fund Recovery Penalty (TFRP) cases and probably a very small number of those cases involve a seven day trial. A couple of other interesting aspects of this case from the underlying merits perspective are that the Court’s electronic docket sheet goes on for eight pages. Only a small number of cases have that many entries. The merits opinion leads me to believe that Ms. Fitzpatrick was the last remaining responsible officer because the IRS had determined the other possible responsible officers were not liable. If I am correct in that determination, it could explain the effort the IRS put into her case.
Although this attorney’s fees opinion does not break significant new ground, hence its designation as a memorandum opinion, it does provide a good basis for discussion of when the fees begin as well as a few other fee related issues.
Ms. Fitzpatrick held a position with a company that failed to pay over the withheld income and employment taxes from its employees. From footnote 3 of the most recent opinion, I draw the conclusion that other persons working at the business sought to pin responsibility on her and made statements which the Court characterized as “misinformation.” Of course, these statements would also have had the collateral effect of demonstrating that the persons making the statements were not themselves responsible. The statements became a part of the revenue officer’s report – a report which the Court also indicated may not have provided the appropriate characterization of her role with the business. For readers wanting more information about the underlying assessment, go to the opinion written last year.
After the IRS made its preliminary determination of liability, it would have mailed that determination to Ms. Fitzpatrick’s last known address. The case does not find that the IRS improperly mailed the notice, but it does find that she did not receive it. Her failure to receive the TFRP notice, much like the failure to receive a notice of deficiency, entitles her to litigate the merits of the assessment in her CDP case. In Mason v. Commissioner, the Tax Court had previously decided, and we posted, that a proposed responsible officer who does not receive the notice proposing the liability and offering an opportunity to go to Appeals prior to the assessment may raise the merits of the TFRP liability in a CDP case.
The IRS did not take issue with her ability to raise the merits, and she made a presentation about the merits of her case to the Settlement Officer in the CDP hearing before she filed the Tax Court case. Here, the filing of the notice of federal tax lien by the IRS triggered her CDP rights including the right to contest the underlying assessment.
She filed her request for a CDP hearing on July 25, 2012 within 30 days of receiving the CDP notice. It is worth mentioning that the notice of federal tax lien would have remained on the public record for the four year period between the time of its filing and the decision of the Tax Court that she had no liability for the TFRP. The filed notice of federal tax lien would have depressed her credit score, her general credit, limited her potential employment opportunities, and generally made life financially difficult for that entire period, which is why I have previously advocated for some type of expedited procedure in CDP cases involving liens.
The parties agreed that she made a qualified offer on November 7, 2012. The date of the qualified offer comes about three and one half months after the filing of CDP request. This period likely involved a fair amount of work for her attorney coming up to speed on the case and making a decision on her likely prospects for success but because of the way the qualified offer provisions work, she cannot recover attorney’s fees from the IRS for this period unless she can show that the position of the IRS lacked substantial justification. After looking at the facts, the Court determined that the Settlement Officer had a file that contained sufficient facts to make the position of the IRS substantially justified. So, the fees do not begin until the date of the letter.
Section 7430 provides guidance on when a taxpayer can file a qualified offer. The taxpayer cannot make a qualified offer at the first minute the IRS raises an issue on audit or when the IRS issues a notice and demand. A qualified offer can only occur at certain stages in the tax procedure continuum. The time period for filing a qualified offer is set out in subparagraph 7430(g)(2) entitled “Qualified Offer Period.” That subparagraph provides:
(2) Qualified offer period. For purposes of this subsection, the term “qualified offer period” means the period—
beginning on the date on which the first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the Internal Revenue Service Office of Appeals is sent, and
ending on the date which is 30 days before the date the case is first set for trial.
This provision really provides guidance regarding deficiency proceedings and not TFRP cases or CDP cases. The IRS and the Courts agree that a taxpayer cannot make a qualified offer in a CDP case that simply contests collection alternatives. [find authority] Other courts have found that a taxpayer can request a qualified offer as a part of contesting a TFRP determination even though the statute does not appear to contemplate such a result. [find authority] Here, the IRS does not contest the ability of the taxpayer to make a qualified offer and does not contest that the timing of the offer is valid. Based on earlier cases, it appears that the earliest a qualified offer could have been made in Ms. Fitzpatrick’s cases was the time of making the CDP request contesting the merits of the underlying TFRP liability. The taxpayer waited three months after bring the CDP action before making the qualified offer but considering the circumstances, did not wait very long before making the qualified offer.
This aspect of the statute regarding the making of a qualified offer puts pressure on a representative who wants to protect the client’s ability to recover fees. The representative does not want to make a qualified offer that has no basis in fact or law but while the representative researches the facts and the law before making the offer, the client must cover those costs unless the representative can ultimately overcome the high hurdle of showing that the IRS lacked substantial justification. The representative must consider the timing of the qualified offer and make it as quickly as possible after expending as few billable hours as possible and yet not make an offer that will disadvantage their client. If the representative makes a qualified offer that fails to take into account the litigation risks, then it is possible that through settlement or trial, the IRS will exceed the amount of the offer and the qualified offer provisions which eliminate the need to prove the IRS lacked substantial justification will not apply. Conversely, if the representative makes an offer that is too high, the IRS might accept the offer to the client’s disadvantage.
After the Court explains why the IRS had substantial justification for its position that Ms. Fitzpatrick owed the TFRP, the Court then turned to other arguments of petitioner most of which arise frequently in these cases. Petitioner argued the amount of the award should exceed the statutory amount because in Jacksonville, Florida only a limited number of attorneys could have handled a case such as this. The Court did not agree. Petitioner argued that her attorney possessed exceptional qualities enabling him to succeed in this case. Again, the Court found that although her attorney was a qualified attorney he did not have the nonlegal or technical ability referred to by the statute as creating a basis for enhancement based on qualifications. Petitioner argued that the issue in her case was difficult and that “this was not a simple case to try.” The Court pointed out that TFRP cases are basically a dime a dozen. Petitioner argued that the case was undesirable because she did not have the money to front to the firm and it had to absorb significant costs to keep the case going. The Court found that undesirability of a case does not constitute a special factor warranting an enhanced fee. Lastly, petitioner argued that the IRS took an unusually litigious position. The Court basically said that if the IRS prolonged the case through its overly litigious position, her attorneys would receive compensation for the additional hours they spent responding to the positions raised by the IRS. Here, the length of the trial and the other work done by petitioner’s counsel does result in a fee award of approximately $179,000. The Court does not say that the IRS took an unreasonable litigation position.
The arguments over enhancements here sound like arguments made in other similar cases in which the Court has made awards. The interesting feature of this case for me is the timing of the qualified offer. The decision points to the benefits of an early submission of such a letter although tensions will exist concerning when the practitioner will have enough information to make an informed offer. Winning a TFRP case is not easy. Winning and getting attorney’s fees paid for most of the representation deserves recognition.