Court Denies Attorneys' Fees under § 7430 to Parties Winning § 6700 Penalty Case Because Government Position Substantially Justified (11/25/24)

In Ankner v. United States (M.D. FLA 2:21-cv-00330 Opinion & Order Dated 11/19/24), TN here and CL here, the IRS asserted § 6700 penalties for promoting abusive tax shelters against the plaintiffs from their promotion of a microcaptive insurance tax strategy. The plaintiffs paid the amount sufficient to permit refund suits and sued for refunds.  In a trial to a jury, the jury held by special interrogatories here that the Government had not proved the plaintiffs’ liabilities for such penalties by a preponderance of the evidence.

Side observation: It is not clear whether the jury’s answer meant that (i) it affirmatively found the facts not to establish liability or (ii) it was in equipoise as to those facts, thus requiring verdict against the Government. In any event, the Government loses.

As the at least nominally prevailing parties, the plaintiffs sought to recover attorneys’ fees and costs under § 7430. But, as the court held, § 7430 does not permit recovery of attorneys’ fees and costs simply because someone beats the Government in a tax suit. Rather, one of the requirements is that the party seeking recovery is that, in addition to prevailing, the Government’s position must not have been “substantially justified.” § 7430(c)(4)(B)(i). Here the Court found that the Government’s position that the plaintiffs were liable for the § 6700 penalties was substantially justified.

As I read the opinion discussion of substantially justified (Slip Op. 9-21), I have a sense that the judge believed that, had he been the decider on the liability issue, he may have imposed liability for the § 6700 penalties. In other words he may have disagreed with the jury verdict, but the jury verdict must stand. (For an example of where a judge may disagree with the jury, see Justice Thomas and Tax -- The Plot Sickens (10/29/23; 10/7/24), here, discussing Grinstead v. United States , 447 F. 2d 937 (7th Cir. 1971), here.)

Other points, some picky:

1. Plaintiffs should have made a qualified offer. See Court Awards Attorneys Fees Under § 7430 Based on $1 Qualified Offer (11/6/24), here; and Major Attorneys Fee Award for BASR Partnership Prevailing on the Allen Issue in Federal Circuit (2/11/17), here. A qualified offer will avoid the requirement that the Government’s position not have been substantially justified.

2. It would appear that, based on the Court’s analysis, a taxpayer (or person subject to tax penalty) is not likely to get an award where the Government has come through motions for summary judgment before trial and directed verdict during trial. See particularly in this regard the Government’s brief, here,

3. Note the reference to Helvering v. Le Gierse, 312 U.S. 531, 539–40 (1941) (Slip Op. 18), but then shorthanded to Helvering (Slip Op. 20). Guy T. Helvering was the Commissioner of Internal Revenue; in the early days of the modern system the tax official was a named party in litigation; for such cases, the shorthand is properly to the taxpayer’s name (e.g., Le Gierse), without the tax official’s name.  Readers who are insurance taxation fans will recognize Le Gierse. For discussion of the use of the Commissioner’s name in earlier cases: Presumption of Correctness and Burden of Proof (Persuasion) at ¶ 4 (1/21/20; 12/28/22), here (toward end after JAT Additional Side Comments at ¶ 3). (The mention here of Guy Helvering gives me an opportunity to point to another noted incident of “guy” in the law from My Cousin Vinny, here.)