Noncontingent Obligation to Repay Fees or Contingent Obligation to Repay In Event of Recovery Justifies Fee Award Under Section 7430, the Ninth Circuit Rules.
The U.S. Tax Code, 26 U.S.C. section 7430(a), (c), permits a discretionary award of litigation costs, including attorney’s fees paid or incurred for attorney services, to the prevailing party in any civil tax proceeding brought by or against the United States, unless the United States’ position was substantially justified and subject to the prevailing party having net worth under certain limits. Furthermore, the prevailing party must show that it exhausted IRS administrative remedies and did not unreasonably protract the tax proceedings that generated fees in the first place. However, what happens if a third party (albeit a related corporate affiliate also sued) paid the fees for an individual prevailing party? Has the prevailing party still “incurred” fees for purposes of an award under section 7430? The Ninth Circuit has recently answered “yes” to this question.
In Morrison v. Comm’r of Internal Revenue, Case No. 06-75332 (9th Cir. May 13, 2009) (for publication), the Ninth Circuit adopted a broad definition of “incur” under section 7430, holding that a taxpayer can “incur” attorney’s fees if he assumes either (1) a noncontingent obligation to repay the fees advanced on his behalf at some later time, or (2) a contingent obligation to repay the fees in the event of their eventual recovery. In coming to this conclusion, it sided with the reasoning of the Federal Circuit in an EAJA case because of the immaterial differences between section 7430 and the EAJA. (See Ed A. Wilson, Inc. v. General Servs. Admin., 126 F.3d 1406, 1407, 1410-1411 (Fed. Cir. 1997).) It also found support in decisions where courts had awarded fees to petitioners represented by pro bono counsel in related legal contexts. (Slip Opn., at pp. 5759-5760.)
Although courts have sometimes denied fees to litigants with third-party backers (the “stand-in litigant” problem), the straw-man concerns in those cases were not present here, where the taxing authority had clearly focused on an individual as part of an audit and the paying third party had also been sued with the individual (and was awarded fees under section 7430). However, the Court of Appeals believed it was unfair to not allow the individual to recoup his fees, remanding so that the tax court could examine the contractual relationship between the two and apply the holding which allowed for fee recovery.
BLOG UNDERVIEW—The result here is consonant with state court decisions allowing fee recovery for payments made by others under California fee-shifting statutes. For cases so holding, see the discussion in our May 19, 2008 post on trespass.