T.C. Memo. 1998-434
UNITED STATES TAX COURT
ESTATE OF CHARLES K. RUSSELL, DECEASED, LAVADA S. RUSSELL,
EXECUTRIX, AND LAVADA S. RUSSELL, Petitioners v. COMMISSIONER OF
INTERNAL REVENUE, Respondent
Docket No. 6953-97. Filed December 10, 1998.
Farley P. Katz and Charles J. Muller III, for petitioners.
Lewis J. Hubbard, Jr., for respondent.
MEMORANDUM OPINION
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A and Rules 180, 181, and 182.1
This case is before the Court on petitioners’ Motion for
Reasonable Litigation Costs under section 7430. Because of
1
All section references are to the Internal Revenue Code as
amended, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
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concessions by respondent, the sole issue now before us is the
allowable amount of recovery by petitioners for litigation costs
under section 7430.
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time the petition
was filed, petitioners resided in San Antonio, Texas.
Background
In 1991, the Internal Revenue Service (IRS) levied upon an
individual retirement account (IRA) owned by petitioner Charles
Russell (Mr. Russell). At the time of the levy, Mr. Russell's
IRA contained funds in the amount of $23,477.
Though the statutory period of limitations had run under
section 6502, the IRS still levied upon Mr. Russell's IRA account
and applied the $23,477 amount to a 1981 civil penalty assessed
against Mr. Russell on May 17, 1982.
Following the levy, Mr. Russell continued to make payments
to the IRS with respect to the 1981 civil penalty. On May 11,
1995, Mr. Russell filed Form 843, Claim for Refund, requesting a
refund of all payments made to the IRS on the grounds that
collection of the 1981 civil penalty was barred by the expiration
of the statutory period of limitations.
The IRS refunded part of Mr. Russell's payments but
contended that section 6511 limited any allowable refund to
payments made within 2 years before the filing of such claim.
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The IRS refund did not include the $23,477 amount from Mr.
Russell's IRA account.
Respondent sent a notice of deficiency for the 1991 and 1992
tax years to petitioners. Respondent determined that the levy on
Mr. Russell's IRA account resulted in a constructive distribution
to petitioners of taxable income in the amount of $23,477 for the
1991 tax year. Respondent further determined that petitioners
earned interest income for the 1991 and 1992 tax years in the
amounts of $77 and $56, respectively, which they failed to
report, and that petitioners had earned unreported wage income in
the amount of $10,000 for the 1992 tax year. Respondent also
determined an addition to tax under section 6651(a)(1) for the
1991 and 1992 tax years.
In their petition, petitioners contested only the inclusion
of $23,477 in income for 1991 and the addition to tax under
section 6651(a)(1) on that amount. They contended that the levy
did not constitute a constructive distribution to petitioners of
taxable income. Petitioners did not seek a redetermination of
the deficiency and addition to tax for the 1992 tax year.
Mr. Russell died on June 21, 1997. Petitioner Lavada S.
Russell qualified as executrix of Mr. Russell's estate on July
21, 1997. Because of petitioner Lavada S. Russell's financial
condition, petitioners' counsel agreed that they would limit
their fees to $2,000 for the period beginning on September 1,
1997, and ending on the resolution of petitioners' case in the
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Tax Court. Prior to this agreement, petitioners had been billed
at an hourly rate for attorney’s fees incurred.
This case was called from the calendar for trial on February
9, 1998, in San Antonio, Texas. Counsel for the parties appeared
and were heard. At that time the parties filed a statement of
stipulated settled issues in which respondent conceded the sole
issue before this Court. Petitioners then filed a Motion for
Reasonable Litigation Costs on February 9, 1998, and a
supplemental declaration on March 13, 1998, requesting an award
of attorney’s fees in the amount of $3,936, paralegal time in the
amount of $61.50, and expenses in the amount of $571.44.
Petitioners claimed total litigation costs in the amount of
$4,568.94.
Discussion
Section 7430 provides that in any court proceeding brought
by or against the United States, the "prevailing party" may be
awarded reasonable litigation and administrative costs. To be a
prevailing party, a taxpayer must establish: (1) That the
taxpayer substantially prevailed with respect to the amount in
controversy or with respect to the most significant issue
present, and (2) that the taxpayer met the net worth requirements
of 28 U.S.C. section 2412(d)(2)(B)(as in effect on October 22,
1986) on the date the petition was filed. Sec. 7430(c)(4)(A). A
taxpayer will not be treated as a prevailing party if the
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Commissioner establishes that the Commissioner's position was
substantially justified. Sec. 7430(c)(4)(B).
In addition, to obtain a judgment for reasonable litigation
and administrative costs, a taxpayer also must establish that he
did not unreasonably protract the proceedings, and, with respect
to litigation costs only, that he exhausted the administrative
remedies available to him within the Internal Revenue Service.
Sec. 7430(b)(1) and (3).
Respondent concedes that petitioners have met the
requirements of section 7430, but contends that petitioners'
claimed litigation costs are not reasonable and are in excess of
the statutory rate.
Section 7430(c)(1)(B)(iii) defines reasonable litigation
costs to include, in part, reasonable court costs and "reasonable
fees paid or incurred for the services of attorneys in connection
with the court proceeding, except that such fees shall not be in
excess of $110 per hour unless the court determines that a
special factor, such as the limited availability of qualified
attorneys for such proceeding, justifies a higher rate." Section
7430(c)(2) includes reasonable attorney’s fees in its definition
of reasonable administrative costs.
An award of attorney’s fees should not be in excess of the
fees agreed to by the taxpayer and his attorney and actually paid
or incurred by the taxpayer. See Marre v. United States, 38 F.3d
823 (5th Cir. 1994).
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Prior to September 1, 1997, petitioners were billed for 7.2
hours of attorney time.2 Beginning September 1, 1997,
petitioners were billed a flat fee of $2,000, which represented
attorney’s fees through the period ending with the resolution of
petitioners' case in the Tax Court.
Respondent contends that the statutory rate limit of $110
should only be applied to the 7.2 hours of attorney time billed
for the period before September 1, 1997. It is respondent's
contention that petitioners should not recover attorney’s fees in
excess of $2,000 for the time period from September 1, 1997, to
the present because petitioners entered into an agreement with
counsel to limit attorney’s fees charged for this time period to
a flat fee of $2,000. Thus, respondent contends that petitioners
are entitled to total litigation costs in the amount of $2,7923
and that any additional amount would be in excess of the amount
of litigation costs allowed by section 7430.
We do not agree with respondent's contentions. Section 7430
defines reasonable litigation costs to include "reasonable fees
paid or incurred for the services of attorneys in connection with
the court proceeding, except that such fees shall not be in
2
Some of this time was charged at $275 per hour (6.9 hours)
and some of the time was charged at $165 per hour (.3 hours).
3
This amount reflects the statutory rate of $110 multiplied
by the 7.2 hours which were billed for the period prior to Sept.
1, 1997, and the $2,000 flat fee for the period beginning Sept.
1, 1997.
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excess of $110 per hour". Sec. 7430(c)(1)(B)(iii)(emphasis
added.) Respondent would bifurcate petitioners' attorney’s fees
into two time periods and limit petitioners to the statutory rate
for the period in which petitioner was specifically billed at an
hourly rate. In effect, respondent would avail himself of the
benefit of petitioners' fee agreement, while assuming none of
petitioners' burdens under the same agreement.
Respondent's reliance on Marre v. United States, supra, is
misplaced. In Marre, the taxpayer attempted to recover
attorney’s fees greater than those incurred under a contingency
agreement. The present case is factually distinct from Marre.
Petitioners are seeking to recover litigation costs actually
incurred and in an amount which is less than the statutory rate
on average.4
In reviewing the record, we find that petitioners have shown
that all of the costs incurred were related to this case. We
find that petitioners' claimed attorney expenses are not in
excess of $110 an hour and do not exceed costs actually incurred
by petitioners. We hold that petitioners are entitled to recover
litigation costs in the amount of $4,568.94.
To reflect the concessions by the parties,
4
Petitioners' counsel expended 37.9 hours of attorney time in
this case and charged $3,936. This is equivalent to a charge of
$103.85 per hour.
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An appropriate order
and decision will be entered.