Saturday, February 11, 2017

Major Attorneys Fee Award for BASR Partnership Prevailing on the Allen Issue in Federal Circuit (2/11/17)

In BASR Partnership v. United States, [citation coming later] (2017), here, the  Court of Federal Claims held that the partnership in a TEFRA proceeding in which it prevailed after sending a qualified settlement offer of $1 was entitled to recover attorneys fees at the higher than normal attorney fee rate.  There is a good story here and practice tip for attorneys interested in recovering attorneys fees should they prevail in tax litigation.

BASR Partnership won the merits decision -- really a procedural decision -- at the trial and appellate levels holding that the fraud of persons other than the taxpayer or someone related to the taxpayer is not sufficient to invoke the unlimited statute of limitations in § 6501(c)(1).  BASR Partnership v. United States, 113 Fed. Cl. 181 (2013), aff'd BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015), reh. denied.  I previously blogged on these decisions, but link here to the one on the appeals decision:  Court of Appeals for Federal Circuit Holds that Fraud of the Taxpayer (Or Someone Closer to the Taxpayer than the Fraudster) is Required for Section 6501(c)(1) Unlimited Statute of Limitations (Federal Tax Crimes Blog 7/30/15; 7/31/15), here.

Having won the decision, rather than being satisfied with the substantial victory -- the avoided cost of large tax liabilities for its partners -- the partnership desired to recover attorneys fees.  That leads to § 7430, here.  Normally, recovering attorneys fees requires that the party seeking recovery be the "prevailing party."  The prevailing party is defined in § 7430(c)(4) to be the party who "substantially prevailed" as to the amount and who meets certain financial requirements (in relevant party net worth of less than $7 million).  BASR did not fail the financial test. (As noted below, the Government argued that the "real parties in interest" -- the ultimate parties behind the partners -- had net worths exceeding the $7 million limit, but the Court rejected that argument.)

The prevailing party requirement is a bit more nuanced.  Certainly, in ordinary parlance, BASR was the prevailing party.  It won the whole cahuna, so that the IRS is not able to assess and collect tax from its partners under the TEFRA procedures.  But, prevailing party is defined to exclude positions as to which the government was "substantially justified."  Given the holding in Allen v. Commissioner, 128 T.C. 37 (2007), the Government position was substantially justified.

But wait, there is an exception to the substantially justified exception.  If the taxpayer has made what is referred to as a qualified offer under 7430(g) then the party will be treated as the prevailing party if the judicial result "is equal to or less than the liability of the taxpayer which would have been so determined if the United States had accepted a qualified offer of the party under subsection (g)."  See § 7430(c)(4)(E).  The result of the BASR litigation is that the Government gets $0 from affected taxpayers which is certainly less than the $1 offered.  Hence, bottom-line, the Court award BASR its attorneys fees and at a higher than normal hourly rate.  The aggregate award was $314,710.49.
In getting to the bottom-line, the Court rejected the Government's various arguments, some of which seems pretty picky.

The Court held that BASR was a party (it filed the TEFRA proceeeding) and it did not fail the net worth test.  The Court refused to look through BASR to the single member LLC partners and then to the ultimate "taxpayers") who, if considered, would have flunked the net worth test.

Then, the Court found that BASR was a prevailing party because it made a qualifying offer.  The Court rejected the Government's argument that there was no tax at issue in the TEFRA partnership level proceeding, thus making the $1 offer meaningless.  The Court held that the FPAA was effectively a "letter of proposed deficiency" to the partners, analogizing the FPAA in the TEFRA  partnership proceeding to the notice of deficiency which clearly permits the qualified offer.  The Court also rejected the Government's argument that the $1 offer was a sham because it was de minimis relative to the potential tax liability at the partner level -- tax on gain of $6.6 million.  The Court rejected the argument because, well: "$1 is more than $0."

The Court then rejected other technical government arguments.

Nice victory for BASR and its lawyers.

I have for some time had the following Example and discussion in my Federal Tax Procedure Book (in the August 2016 edition in the Student Edition at pp. 400-401 and in the Practitioner Edition at pp. 570-571):
Example 2: Assume a single issue case also involving $100,000 in additional tax.  The issue is an either/or issue.  At trial, either the IRS prevails 100%, or the taxpayer prevails 100%.  There will be no point in between as is usually involved in valuation issues.  This appears to be a no-brainer in terms of a QO.  The taxpayer should offer $1.  
What happens if, in the ensuing litigation, the IRS offers the taxpayer an 80% victory to settle? If the taxpayer accepts, judgment will be entered at $20,000, which of course exceeds the QO of $1.  Settled issues do not qualify for the QO anyway, so the taxpayer appears no worse off for having offered only $1.  The taxpayer can still seek recovery under the general rules of § 7430, and the substantial concession made by the IRS might at least suggest that its position was not substantially justified, although a 20% settlement might suggest at least reasonable basis.  What happens if the IRS trial attorney concedes in full after receiving the QO (or, alternatively, accepts the QO of $1)?  Again, there is no issue left for trial and the QO is irrelevant.  However, barring unusual circumstances in which the taxpayer’s lack of cooperation led to the IRS’s assertion of the worthless position, it would appear that the taxpayer would have a strong case under the general § 7430 rules for recovery of costs.
This seems to be the BASR case, but without the complications of the partnership TEFRA rules.

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