CONTINUEThis site uses cookies. By continuing to browse this site you are agreeing to our use of cookies. Find out more.
  1. Front Page
  2. News By Topic
  3. US Taxpayer Made To Shoulder Legal Costs, Despite IRS Inaction

US Taxpayer Made To Shoulder Legal Costs, Despite IRS Inaction

by Mike Godfrey, Tax-News.com, Washington

06 March 2018


The US Tax Court has ruled against the taxpayer in a case concerning its ability to claim back legal and administrative costs incurred in chasing the Internal Revenue Service regarding a request for tax-exempt status in the courts.

The case centered around the award of costs after the Internal Revenue Service (IRS) failed to act on the plaintiff's application for recognition of tax-exempt status. The petitioner filed a petition for a judgment declaring it to be an organization exempt from federal income tax under IRC Section 501(a). The IRS subsequently issued a favorable determination letter and, before even filing an answer, the IRS conceded. The plaintiff moved for an award of reasonable administrative and litigation costs under Internal Revenue Code (IRC) Section 7430.

Under Section 7430 of the US IRC, to recover costs, the taxpayer must establish that (1) it is the "prevailing party," (2) it did not unreasonably protract the proceedings, (3) the amount of the costs requested is reasonfable, and (4) it exhausted the administrative remedies available. These requirements are conjunctive, and the failure to satisfy any one of them will preclude an award of costs.

On administrative costs under Section 7430, the Court agreed that an application for tax-exempt status is an administrative proceeding, dismissing an argument to the contrary from the IRS.

The IRS said the taxpayer had satisfied conditions two and four but disputed that it satisfied points one and three.

On the first, Section 7430(c)(4)(B)(i) provides that a party shall not be treated as the prevailing party if the United States establishes that its position in the proceeding was "substantially justified."

The Court pointed out that, based on earlier case-law, when the Government fails to take a position at all, a taxpayer cannot be the prevailing party.,

The IRS pointed to the Court's ruling in Fla. Country Clubs, Inc. (122 T.C. 73 (2004)) in which the Court held that identifying the Government's position is a precondition for determining whether the taxpayer is a prevailing party. This ruling drew attention to statute provisions that define the position of the United States taken in an administrative proceeding as the position taken on the earlier of "(i) the date of the receipt by the taxpayer of the notice of the decision of the Internal Revenue Service Office of Appeals, or (ii) the date of the notice of deficiency." In Fla. Country Clubs, Inc., the Tax Court held that a taxpayer may not qualify as the prevailing party when neither of these notices has been issued.

The plaintiff instead urged the Court to look to Reynoso v. United States, No. 10-00098 (SC), 2011 WL 3473366 (N.D. Cal. Aug. 9, 2011) in which the Government failed to issue refunds of tax overpayments and seized funds despite the taxpayer's repeated refund requests. When the taxpayer filed suit and the Government conceded, the taxpayer moved to recover costs. The Government contended that it never took a position in the administrative proceeding (and therefore the taxpayer was not the prevailing party, citing Fla. Country Clubs, Inc. as support against the awarding of costs.)

The Court decided in favor of the taxpayer in this case, finding that the failure to respond to the taxpayer's repeated refund requests was tantamount to a denial of those requests.

For similar reasons, the petitioner in the most recent case contended that it incurred "administrative costs" under Section 7430 even though it never received a notice or letter and also that its administrative costs should cover the period prior to receiving a response.

The Court said, "to do so, however, we would have to find an unwritten exception to the statute and hold that the notice or letter requirement is inapposite when the claim for administrative costs rests on the fact that the IRS has failed to act."

"We need not reach a decision regarding either of petitioner's contentions [with regards to administrative costs], however, because petitioner has provided evidence only of litigation costs." The Court said that the taxpayer had failed to properly justify the administrative costs it said it had incurred. The IRS had challenged the content of the invoices, which listed a separate party, were heavily redacted, and were poorly organized, according to the Tax Court. At least some of the administrative costs listed related to the development of a litigation strategy, rather than the filing of the form for tax-exempt status. Further the petitioner had not paid the invoices, and the IRS argued that it never would.

Turning to discuss legal costs, the Tax Court noted that unlike with administrative proceedings, Section 7430 does not specify when the United States takes a "position" in a judicial proceeding. Instead the Court has held in prior rulings that the Government's position in a judicial proceeding is generally established at the filing of its answer. Some rulings have established that the Government took a position earlier, with Elder v. Commissioner finding that counsel established the Government's position in correspondence with the taxpayer; and in Estate of White v. Commissioner the Government was said to have established its position in its second motion to extend the time in which to file an answer.

The Tax Court noted that, in the case being discussed, days after the petition was filed, and before filing an answer, the IRS's counsel informed petitioner's counsel that the IRS would concede the case.

On this development, the Court noted that Congress amended Section 7430 to allow for the awarding of costs in declaratory judgment proceedings, but only where the Government's position is not "substantially justified," with the onus placed on the taxpayer to demonstrate it was not.

The Court said in conceding the case, and before agreeing to grant the plaintiff tax-exempt status, the IRS showed that its position in the litigation was "substantially justified" and the petitioner cannot be treated as the prevailing party.

The Court said: "The Government's concession within days of the filing of the petition was a substantially justified position in the judicial proceeding, irrespective of its previous actions. Accordingly, petitioner is entitled to neither administrative nor litigation costs."

It stated: "While we recognize that Section 7430 leaves a gap in coverage in circumstances such as this one, it is not our place to provide a remedy." It noted the conclusion in Pac. Fisheries, Inc. v. United States, 484 F.3d 1103, 1111 (9th Cir. 2007), wherein it was stated that, "although the IRS's issuance of the administrative summonses forced the taxpayers into litigation, we see no fees remedy for them in the judicial proceeding. We conclude that their case falls into a gap in the statute, but it is not our role to bridge that gap."

The Court continued: "In the instant judicial proceeding, because respondent's counsel promptly conceded the case, the Government's position was substantially justified, and petitioner is not a prevailing party entitled to recover litigation costs."

The Tax Court said: "We do sympathize with petitioner. Section 7428 was enacted because Congress recognized that '[m]ost organizations hoping to qualify for exempt status find it imperative to obtain a favorable ruling letter' from the IRS; doing so 'assure[s] potential donors in advance that contributions to the organization will qualify as charitable deductions.'"

"Congress intended section 7428 'to facilitate relatively prompt judicial review,'[…] and the statute expressly provides that an organization applying for tax-exempt status may file suit if the IRS has not ruled after 270 days."

"Petitioner waited well over 14 months after it applied, and even then the IRS declined to give petitioner any assurance that a ruling would be forthcoming. We cannot criticize petitioner for then filing a petition; and the IRS's almost immediate issuance of a determination and concession indicates that petitioner should not have been put to the trouble and expense of doing so."

"Congress amended Section 7430 to allow for the awarding of costs in declaratory judgment proceedings, but only where the Government's position is not 'substantially justified.' While we recognize that Section 7430 leaves a gap in coverage in circumstances such as this one, it is not our place to provide a remedy. […] In the instant judicial proceeding, because respondent's counsel promptly conceded the case, the Government's position was substantially justified, and petitioner is not a prevailing party entitled to recover litigation costs."

The Court concluded: "Petitioner failed to provide evidence of any reasonable administrative costs incurred in the administrative proceeding and cannot be treated as the prevailing party in the judicial proceeding. The Government's concession within days of the filing of the petition was a substantially justified position in the judicial proceeding, irrespective of its previous actions. Accordingly, petitioner is entitled to neither administrative nor litigation costs."

The total cost listed in the case documentation was USD37,866.

TAGS: court | tax | law | fees | Internal Revenue Service (IRS) | United States

To see today's news, click here.

 
















Tax-News Reviews

Cyprus Review

A review and forecast of Cyprus's international business, legal and investment climate.

Visit Cyprus Review »

Malta Review

A review and forecast of Malta's international business, legal and investment climate.

Visit Malta Review »

Jersey Review

A review and forecast of Jersey's international business, legal and investment climate.

Visit Jersey Review »

Budget Review

A review of the latest budget news and government financial statements from around the world.

Visit Budget Review »



Stay Updated

Please enter your email address to join the Tax-News.com mailing list. View previous newsletters.

By subscribing to our newsletter service, you agree to our Terms and Conditions and Privacy Policy.


To manage your mailing list preferences, please click here »