Dixon v. Commissioner

T.C. Memo. 2000-116

UNITED STATES TAX COURT

JERRY AND PATRICIA A. DIXON, ET AL.,1 Petitioners
v. COMMISSIONER OF INTERNAL REVENUE, Respondent*

Docket Nos. 9382-83, 17646-83, Filed March 31, 2000.
4201-84, 15907-84,
40159-84, 22783-85,
30010-85, 30979-85,
29643-86, 35608-86,
19464-92, 621-94,
7205-94, 9532-94.

1
Cases of the following petitioners have been consolidated
solely for purposes of deciding the motions currently before the
Court: Ronald L. Alverson and Mattie L. Alverson, docket No.
17646-83; Hoyt W. and Barbara D. Young, docket Nos. 4201-84,
22783-85, 30010-85; Robert L. and Carolyn S. DuFresne, docket
Nos. 15907-84, 30979-85; Terry D. and Gloria K. Owens, docket No.
40159-84; Richard and Fidella Hongsermeier, docket No. 29643-86;
Norman W. and Barbara L. Adair, docket No. 35608-86; Willis F.
McComas, II and Marie D. McComas, docket No. 19464-92; Wesley
Armand and Sherry Lynn Cacia Baughman, docket No. 621-94; Joe A.
and JoAnne Rinaldi, docket No. 7205-94; Norman A. and Irene
Cerasoli, docket No. 9532-94.
*
This opinion supplements our previously filed
Supplemental Memorandum Findings of Fact and Opinion in Dixon v.
Commissioner, T.C. Memo. 1999-101 (Dixon III), which in turn
supplemented our Memorandum Findings of Fact and Opinion in Dixon
v. Commissioner, T.C. Memo. 1991-614 (Dixon II), vacated and
remanded per curiam sub nom. DuFresne v. Commissioner, 26 F.3d
105 (9th Cir. 1994).
 - 2 -

Joe Alfred Izen, Jr., counsel for petitioners in docket Nos.

9382-83, 4201-84, 15907-84, 40159-84, 22783-85, 30010-85, 30979-

85, 29643-86, and 35608-86.

Robert Alan Jones, counsel for petitioners in docket Nos.

17646-83, 19464-92, 621-94, and 9532-94.

Robert Patrick Sticht, counsel for petitioners in docket No.

7205-94.

Milton J. Carter, Jr., counsel for respondent.

SUPPLEMENTAL MEMORANDUM OPINION2

BEGHE, Judge: These cases are before the Court on: (1)

Motions for attorney's fees and costs jointly filed by test case

and nontest case petitioners represented by Joe Alfred Izen, Jr.

(Mr. Izen) and nontest case petitioners represented by Robert

Alan Jones (Mr. Jones); (2) motions for sanctions jointly filed

by test case and nontest case petitioners represented by Messrs.

Izen and Jones; and (3) a motion for sanctions filed by Robert

Patrick Sticht (Mr. Sticht) on behalf of petitioners Joe A. and

JoAnne Rinaldi in docket No. 7205-94.

2
Unless otherwise indicated, section references are to the
Internal Revenue Code, as amended, and Rule references are to the
Tax Court Rules of Practice and Procedure.
 - 3 -

Background3

These consolidated cases are part of a group of more than

1,300 remaining cases--more than 500 cases have settled--arising

from respondent's disallowance of interest deductions claimed by

participants in various tax shelter programs promoted by Henry

F.K. Kersting (Mr. Kersting) during the late 1970's through the

1980's. In 1989, by agreement of the parties and the Court, the

merits of the Kersting programs were litigated in a consolidated

trial of 14 docketed cases of eight petitioners that had been

designated as "test cases". At trial, six of the test case

petitioners were represented by Mr. Izen, test case petitioner

John R. Thompson was represented by Luis C. DeCastro (Mr.

DeCastro), and test case petitioner John R. Cravens appeared pro

se. The taxpayers in most of the remaining Kersting project

cases signed stipulations to be bound in which they agreed that

their cases would be resolved in accordance with the Court's

opinion in the test cases.

Following the trial of the test cases, the Court issued its

opinion sustaining virtually all of respondent's determinations

in each of the test cases, and entered decisions against the test

case petitioners in accordance with its opinion. See Dixon v.

Commissioner, T.C. Memo. 1991-614 (Dixon II).4 Shortly

3
The complete background of the these cases is set forth
in Dixon III and will not be repeated here.
4
Prior to the trial of the test cases, the Court had
(continued...)
 - 4 -

thereafter, on June 9, 1992, respondent filed motions for leave

to file motions to vacate the decisions entered against the

Thompsons, the Cravenses, and another test case petitioner, Ralph

J. Rina (Mr. Rina). Respondent's motions to vacate alleged that,

prior to the trial of the test cases, respondent's trial

attorney, Kenneth W. McWade (Mr. McWade), and his supervisor,

Honolulu District Counsel William A. Sims (Mr. Sims), had entered

into contingent settlement agreements with the Thompsons and the

Cravenses that had not been disclosed to the Court or to the

other test case petitioners or their counsel. Respondent asked

the Court to conduct an evidentiary hearing to determine whether

the undisclosed agreements with the Thompsons and Cravenses had

affected the trial of the test cases or the opinion of the Court.

The Court granted respondent's motions to vacate filed in

the Thompson and Cravens cases, vacated the decisions entered in

those cases, ordered the parties to file agreed decisions with

the Court, or otherwise move as appropriate, and denied

respondent's request for an evidentiary hearing. At the same

time, the Court denied respondent's motion to vacate the decision

entered against Mr. Rina on the ground that the testimony,

stipulated facts, and exhibits relating to the Thompson and

4
(...continued)
issued an opinion rejecting petitioners' arguments that certain
evidence should be suppressed and that the burden of proof should
be shifted to respondent. See Dixon v. Commissioner, 90 T.C. 237
(1988) (Dixon I).
 - 5 -

Cravens cases had no material effect on the Court's Dixon II

opinion as it related to Mr. Rina.

On appeal, the Court of Appeals for the Ninth Circuit

vacated our decisions in the test cases and remanded them for an

evidentiary hearing to determine the full extent of the admitted

misconduct by the Government attorneys in the handling of the

Thompson and Cravens test cases. See DuFresne v. Commissioner,

26 F.3d 105 (9th Cir. 1994).

To effectuate a direction of the Court of Appeals to

consider on the merits all motions of intervention filed by

parties affected by Dixon II, the Court ordered that the cases of

10 nontest case petitioners be consolidated with the remaining

test cases for purposes of the evidentiary hearing. One of the

nontest cases petitioners was represented by Mr. Izen; each of

the remaining nontest case petitioners was represented by either

Mr. Jones or Mr. Sticht.

On March 30, 1999, on the basis of the record developed at

the evidentiary hearing, the Court issued its Supplemental

Memorandum Findings of Fact and Opinion, Dixon v. Commissioner,

T.C. Memo. 1999-101 (Dixon III), and entered decisions in the

test cases. The Court held that the misconduct of the Government

attorneys in the trial of the test cases did not constitute a

structural defect in the trial but rather resulted in harmless

error. However, with a view to promoting basic fairness and

justice in the Kersting project cases, and to discourage future
 - 6 -

acts of Government misconduct, the Court exercised its inherent

power and imposed sanctions against respondent. In particular,

the Court held that Kersting program participants who either had

not had decisions entered in their cases or whose decisions were

not final were relieved of liability for (1) the interest

component of the addition to tax for negligence under sections

6653(a)(2) and 6653(a)(1)(B), and (2) interest computed at the

increased rate prescribed in section 6621(c).

Motions of Messrs. Izen and Jones

On June 24, 1999, Messrs. Izen and Jones filed motions with

supporting memoranda for attorney's fees and costs and for

sanctions on behalf of test case and nontest case petitioners.

Relying on 5 U.S.C. section 504 (1994), 28 U.S.C. section 2412

(1994), and sections 7430 and 6673(a)(2)(B), Messrs. Izen and

Jones asked the Court for an award of attorney's fees and costs

to their clients. Relying on Fed. R. Civ. P. 11, Tax Court Rule

230, and section 6673(a)(2)(B), Messrs. Izen and Jones also

contended that the Court should impose sanctions against

respondent in an amount not less than $2 million. Messrs. Izen

and Jones requested the Court to order respondent to pay any such

award and sanctions to petitioners immediately, rather than

waiting for assessment and collection of the underlying

deficiencies under section 6213(a).

Because the decisions in the test cases had not become final

by the time that Messrs. Izen and Jones filed their motions, the
 - 7 -

Court vacated the decisions in the test cases and ordered

respondent to file a response to the motions.

Messrs. Izen and Jones failed to provide the Court with

affidavits or documentation specifically setting forth the

amounts of attorney's fees and costs incurred by their clients.

See Rule 231(d). Over the next several months, the Court issued

a series of orders directing Messrs. Izen and Jones to follow the

procedure described in Matthews v. Commissioner, T.C. Memo. 1995-

577, affd. by unpublished opinion 106 F.3d 386 (3d Cir. 1996),

and to provide the Court with itemized affidavits of attorney and

paralegal time describing the nature of the services rendered and

a fee schedule "setting forth the amounts of legal fees and costs

allegedly incurred and paid by petitioners (not by Mr. Kersting)

and the recipients thereof, commencing on June 10, 1992 to

date."5 The Court served Mr. Sticht with copies of all of the

orders issued to Messrs. Izen and Jones.

5
The Court informed Mr. Izen that no consideration would be
given to any attorney's fees and costs paid by Mr. Kersting,
consistent with the Court's finding in Dixon III that "Initially,
Mr. Kersting or the entities that he controlled paid the legal
fees associated with the Tax Court litigation. Later, however,
some Kersting program participants began paying $100 per month to
a legal defense fund managed by Mr. Kersting." Dixon III, T.C.
Memo. 1999-101 n.19. The Court does not intend to award
petitioners attorney's fees and costs that have been paid by Mr.
Kersting out of funds representing the "fees" that Mr. Kersting
charged program participants for the interest deductions that
respondent disallowed. See Dixon II, T.C.M. (CCH) at 1506, 1991
T.C.M. (RIA), at 91-3049 to 91-3050.
 - 8 -

Mr. Jones filed a supplement and an additional supplement in

response to the Court's orders. Specifically, Mr. Jones executed

an affidavit stating that he generally charges his clients $200

per hour for his services and $80 per hour for paralegal services

and estimating that he and his paralegal expended approximately

4,500 hours on behalf of his clients (a group of 43 nontest case

petitioners) since June 10, 1992. Mr. Jones purportedly

increased the charges to his clients relative to the amount of

taxes they had in dispute. Mr. Jones provided the Court with a

schedule listing (by amount and date paid) the attorney's fees

and costs incurred between June 10, 1992 and August 15, 1999, by

the four nontest case petitioners on whose behalf he filed his

appearance in the evidentiary hearing, as well as the 39 other

nontest case petitioner-participants in Kersting tax shelter

programs. The schedule indicates that the Alversons, Baughmans,

Cerasolis, and McComases paid attorney's fees and costs totaling

$13,875, $12,450, $11,567, and $13,100, respectively, during the

period in question.

In a supplement to his motions, Mr. Izen stated that he had

charged his clients $150 per hour and that he had received

attorney's fees totaling $743,464.49 during the period June 1992

to September 1999. Mr. Izen further stated that petitioners had

incurred total attorney's fees of $1,196,706.19 during the period

in question and that such fees had been paid to a number of
 - 9 -

attorneys, including himself, Mr. Sticht, L.T. Bradt (Mr.

Bradt),6 Ron Fujiwara, and the law firm of Yempuku and Kugisaki.

Mr. Izen reported that a portion of his fees and costs was paid

from a fund to which various petitioners have contributed

approximately $100 per month. Because Mr. Izen did not set forth

and identify the amounts of the payments made by his individual

clients, or identify the nature and extent of the services that

he and the other attorneys named in his supplement had provided

to petitioners, the Court ordered Mr. Izen to submit such

information in an additional supplement. The Court also directed

Mr. Izen to explain Mr. Bradt's role in representing test case

and nontest case petitioners.

Mr. Izen further supplemented his motion by filing a one

paragraph supplement and attaching thereto copies of 15 billing

invoices addressed to Mr. Kersting for services rendered during

the period January 29, 1991, to October 28, 1998. A number of

the entries in these invoices indicate that Mr. Izen was

providing legal services to Mr. Kersting during and after the

evidentiary hearing.

The Court subsequently ordered Mr. Izen to file a further

supplement to his motion for attorney's fees and costs. In

6
The record shows that Mr. Bradt served as Mr. Kersting's
counsel during the original trial of the test cases, during the
evidentiary hearing, and in Mr. Kersting's personal deficiency
case assigned docket No. 7448-96.
 - 10 -

response, Mr. Izen filed a further supplement and an affidavit

stating that he had received $425,352.82 in attorney's fees from

the Don Belton Legal Defense Fund (the Belton fund). Mr. Izen

also submitted a spreadsheet purporting to show the amount of the

individual contributions that petitioners and hundreds of other

participants in the Kersting tax shelter programs had made to the

Belton fund.

Mr. Sticht's Motion For Sanctions

On January 4, 2000, Mr. Sticht filed a motion for sanctions

and a supporting memorandum on behalf of the Rinaldis.7 Mr.

Sticht contends that the Court should use its inherent power to

impose sanctions on respondent, including (1) an award of

petitioners' attorney's fees and costs, (2) an adjustment to

petitioners' tax liabilities for taxable years prior to 1987 to

reflect a 20-percent settlement offer by respondent that was

withdrawn on December 31, 1986, (3) the elimination of

petitioners' tax liabilities for taxable years after 1986, and

(4) the elimination of petitioners' liability for statutory

7
In addition to the petition assigned docket No. 7205-94,
in which the Rinaldis challenge Kersting-related adjustments
affecting their tax liabilities for 1990 and 1991, the Rinaldis
have filed petitions challenging Kersting-related adjustments for
the tax years 1980 (docket No. 31065-83), 1983 (docket No. 21615-
87), 1984 and 1985 (docket No. 6981-89), 1986 and 1987 (docket
No. 11439-90), 1988 (docket No. 27556-90), and 1989 (docket No.
14907-93). The other petitioners who participated in the
evidentiary hearing through Mr. Sticht’s representation were not
included in the motion.
 - 11 -

interest after December 31, 1986. In support of his motion for

sanctions, Mr. Sticht submitted a declaration stating that he

charged the Rinaldis $325 per hour for trial/appellate services

and $290 per hour for consultation services. Mr. Sticht further

stated that Joe A. and JoAnne Rinaldi have paid him legal fees

and costs of $34,948.43 and $15,741.32, respectively. These

amounts are exclusive of the Rinaldis' attorney's fees and costs

associated with the motion for sanctions.8

Respondent's Objection

Respondent filed objections to the above-described motions.

Respondent contends that none of the petitioners qualifies for an

award of attorney's fees pursuant to section 7430 inasmuch as

petitioners "have not substantially prevailed with respect to

either the amount in controversy or the most significant issue or

set of issues" and petitioners have not established (1) that they

"meet the applicable net worth requirements", (2) that they have

exhausted available administrative remedies, and (3) that "the

protraction of these proceedings, once the case was remanded for

evidentiary hearing, was solely caused by respondent". Finally,

respondent asserts the following grounds in support of the

position that the Court should not award additional sanctions in

8
Mr. Sticht has not disclosed the fees paid by his other
clients--neither those who also participated in the evidentiary
hearing nor any other Kersting tax shelter program participants
that he may represent.
 - 12 -

these cases: (1) Messrs. Izen, Jones, and Sticht failed to

substantiate the nature of the services rendered and the amount

of attorney's fees that their clients incurred as a consequence

of the Government misconduct; and (2) the Court has already

imposed significant sanctions on respondent in Dixon III.9

The Court subsequently directed respondent to file a

supplement to respondent's objection including (1) a detailed

statement, for each taxable year in issue, of the elements and

methodology of respondent's computation of the reduction in

petitioners' liability associated with the sanctions that the

Court imposed in Dixon III, and (2) a detailed computation of

petitioners' liability for interest under sections 6601(a) and

6621(a) for the years before the Court for the period June 10,

1992 (the date the Court filed respondent's motions to vacate the

decisions in the Thompson and Cravens cases) through March 30,

1999 (the date the Court issued its opinion in Dixon III).

Respondent complied with the Court's order.

Respondent filed a further supplement to respondent's

objection to the motions of Messrs. Izen and Jones, specifically

challenging the adequacy of the supplemental materials that they

filed. With regard to the materials submitted by Mr. Izen,

respondent argued that the fees paid by the Belton fund to Mr.

9
Respondent's objections included an addendum quantifying
the impact of the sanctions that the Court imposed in Dixon III.
 - 13 -

Bradt, Ron Fujiwara, and the law firm of Yempuku and Kugisaki

between June 10, 1992, and August 15, 1999, should not be

included as part of an award of attorney's fees to petitioners

because: (1) Mr. Izen failed to substantiate the basis for the

payments; and (2) the fees were in fact attributable to legal

services provided to Mr. Kersting in personal matters, including,

but not limited to, Mr. Kersting's challenges to the

Commissioner's assessments of promoter penalties (Kersting v.

United States, F.3d (9th Cir. Mar. 13, 2000)), Mr.

Kersting's personal bankruptcy (In re Henry F.K. Kersting, Bankr.

No. 92-01334 and United States v. Henry F.K. Kersting, No. 93-

0045 (Bankr. D. Haw.)), and Mr. Kersting's personal tax

deficiency case (Kersting v. Commissioner, T.C. Memo. 1999-197).

Respondent further argued that a portion of the fees paid to Mr.

Izen from the Belton fund likewise represented fees properly

allocable to services that Mr. Izen provided to Mr. Kersting in

respect of these same personal matters. Respondent also

emphasized that Mr. Izen's current position that he began

receiving payments from the Belton fund as early as 1992

conflicts with his earlier testimony at the evidentiary hearing

that his fees had been paid by Mr. Kersting until "about November

of '94 or December of '95".

With regard to the materials submitted by Mr. Jones,

respondent notes that Mr. Jones failed to submit time sheets or
 - 14 -

expense statements identifying the nature of the services that he

provided to his clients. Respondent also asserts that Mr. Jones

failed to bill his clients based upon a coherent fee schedule,

making it difficult to determine the proper amount of an award of

attorney's fees. Finally, respondent directed the Court's

attention to various materials, including one of Mr. Kersting's

so-called Dear Friend letters (dated February 6, 1992), which

suggest that a portion of Mr. Jones' fees relates to advice that

Mr. Jones provided to his clients regarding "asset protection

services"; i.e., bankruptcy advice. Respondent asserts that such

fees were not incurred as a consequence of the Government

misconduct.

Respondent filed a separate objection to Mr. Sticht's

motion. Respondent contends that an award of attorney's fees

under section 6673(a)(2) is not warranted in these cases inasmuch

as the Government misconduct in the trial of the test cases was

not vexatious and the Government exhibited its institutional good

faith by promptly bringing the misconduct to the Court's

attention in June 1992. Respondent also challenged Mr. Sticht's

request for an award of attorney's fees on the ground that Mr.

Sticht, like Messrs. Izen and Jones, failed to provide the Court

with time sheets or expense statements describing his services to

his clients. Finally, respondent asserts that Mr. Sticht's
 - 15 -

motion should be denied on the ground that the Court imposed

substantial sanctions against respondent in Dixon III.

Mr. Izen's most recent supplement to his motions included a

request for a further extension of time to provide additional

materials to the Court. Upon receipt of respondent's objection

to his motion for sanctions, Mr. Sticht filed a motion seeking

permission to file a reply. Considering the delays associated

with petitioners' current motions and counsels' repeated failures

to produce the documentation needed to substantiate fully their

clients' claims, the Court has concluded that further extensions

are unwarranted.

Discussion

I. Attorney's Fees and Costs

Messrs. Izen and Jones jointly filed motions for attorney's

fees and costs relying primarily on sections 7430 and 6673. Mr.

Sticht likewise seeks, among other sanctions, an award of

attorney's fees and costs. Mr. Sticht asserts that the Court

should rely on its inherent power in imposing such sanctions.

A. Section 7430

Section 7430, enacted under the Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 292(a),

96 Stat. 324, 572, provides that certain prevailing parties are

entitled to recover reasonable litigation costs from the United

States in specified civil tax cases. As originally enacted,
 - 16 -

section 7430 was effective with respect to proceedings commenced

after February 28, 1983. See TEFRA sec. 292(e)(1), 96 Stat. 574.

Section 7430 has been amended a number of times.10

A proceeding is "commenced" for purposes of the effective

date of section 7430 upon the filing of a petition for

redetermination of a deficiency under section 6213. Maggie

Management Co. v. Commissioner, 108 T.C. 430, 438 (1997). The

petitions in these consolidated cases were filed as early as 1983

and as late as 1994.11 Although several versions of section 7430

arguably are applicable in these cases, we do not dwell on the

point; petitioners do not qualify for relief under the provision

in any event.

Section 7430(a) provides the general rule that the

prevailing party may be awarded a judgment for reasonable

10
See Tax Reform Act of 1986 (TRA 1986), Pub. L. 99-514,
secs. 1551(a) and (h), 100 Stat. 2085, 2752-2753, applicable to
civil actions or proceedings commenced after December 31, 1985;
Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L.
100-647, secs. 6239(a) and (d), 102 Stat. 3342, 3743-3746,
applicable to proceedings commenced after November 10, 1988;
Taxpayer Bill of Rights 2, Pub. L. 104-168, secs. 701-704, 110
Stat. 1452, 1463-1464 (1996), applicable to proceedings commenced
after July 30, 1996; Taxpayer Relief Act of 1997 (TRA 1997), Pub.
L. 105-34, secs. 1285, 1453, 111 Stat. 788, 1038, 1055,
applicable to proceedings commenced after Aug. 5, 1997; and
Internal Revenue Service Restructuring and Reform Act of 1998
(RRA 1998), Pub. L. 105-206, sec. 3101, 112 Stat. 685, 727,
applicable to costs incurred more than 180 days after July 22,
1998 (i.e., Jan. 19, 1999).
11
The petition in the Dixon case (docket No. 9382-83) was
filed on Apr. 25, 1983.
 - 17 -

litigation costs incurred in a court proceeding brought by or

against the United States in connection with the determination,

collection, or refund of any tax, interest, or penalty under

Title 26. Section 7430(c)(4) defines the term "prevailing party"

in pertinent part as any party in a proceeding referred to in

subsection (a) who has substantially prevailed with respect to

the amount in controversy or with respect to the most significant

issue or set or issues presented. Section 7430(c)(4) also

provides that the prevailing party's net worth must fall within

certain limitations.

Petitioners do not qualify as prevailing parties within the

meaning of section 7430(c)(4). Despite the Government misconduct

in the trial of the test cases, we have sustained virtually all

of respondent's deficiency determinations on the ground that the

Government misconduct amounted to harmless error. Although we

sanctioned the Government by relieving petitioners of liability

for certain time-sensitive additions to tax under sections

6653(a)(2) and 6653(a)(1)(B) and increased interest under section

6621(c), petitioners have not substantially prevailed with

respect to either the amount in controversy or the most

significant issue or set or issues presented. See Bragg v.

Commissioner, 102 T.C. 715, 719-720 (1994); Bowden v.

Commissioner, T.C. Memo. 1999-30. Consequently, petitioners do
 - 18 -

not qualify for an award of attorney's fees and costs under

section 7430.12

B. Section 6673

Section 911 of the Revenue Act of 1926, ch. 27, 44 Stat. 9,

109, provided for an award of damages to the United States in the

event a taxpayer instituted a case in the Board of Tax Appeals

for purposes of delay. This provision was later adopted as

section 6673 of the Internal Revenue Code of 1954.

Congress amended section 6673 under the Omnibus Budget

Reconciliation Act of 1989 (OBRA 1989), Pub. L. 101-239, sec.

7731(a), 103 Stat. 2106, 2400, to provide for an award of costs,

expenses, and attorney's fees where an attorney, including an

attorney appearing on behalf of the Commissioner, has

unreasonably and vexatiously multiplied the proceedings in any

case. Section 6673(a)(2) is derived from section 1927 of the

Judicial Code, 28 U.S.C. section 1927 (1988). See H. Rept. 101-

247, at 1399-1400 (1989).

Section 6673(a)(2) provides in pertinent part:

SEC. 6673(a)(2). Counsel's liability for excessive
costs.–-Whenever it appears to the Tax Court that any
attorney or other person admitted to practice before

12
Messrs. Izen's and Jones' reliance on 5 U.S.C. sec. 504
(1994) and 28 U.S.C. sec. 2412 (1994) is misplaced. Both
provisions, which largely mirror sec. 7430 by providing that an
award may only be made to a "prevailing party", state that they
are not applicable where an award may be made under sec. 7430.
See 5 U.S.C. sec. 504(f) and 28 U.S.C. sec. 2412(e); see also
Mauerman v. Commissioner, T.C. Memo. 1995-237.
 - 19 -

the Tax Court has multiplied the proceedings in any
case unreasonably and vexatiously, the Tax Court may
require–-

* * * * *

(B) if such attorney is appearing on
behalf of the Commissioner of Internal
Revenue, that the United States pay such
excess costs, expenses, and attorney's fees
in the same manner as such an award by a
district court.

Section 6673(a)(2) is applicable "to positions taken after

December 31, 1989, in proceedings which are pending on, or

commenced after such date." OBRA 1989, sec. 7731(d), 103 Stat.

2106, 2402; see Harper v. Commissioner, 99 T.C. 533 (1992).

The trial of the test cases began on January 9, 1989,

and the Court did not issue its opinion in Dixon II until

December 11, 1991. Although Messrs. Sims' and McWade's

misconduct began in late 1986, they continued to mislead the

Court during the trial of the test cases, throughout the briefing

process, and in the submission of erroneous decision documents in

the Thompson and Cravens cases. Under the circumstances, we hold

that the Government misconduct falls within the effective date of

section 6673(a)(2).

The Court has not had the occasion to apply section

6673(a)(2) to misconduct of a Government attorney. We have,

however, relied upon the provision to impose sanctions against

counsel for a taxpayer. See Harper v. Commissioner, supra;

Matthews v. Commissioner, T.C. Memo. 1995-577, affd. by
 - 20 -

unpublished opinion 106 F.3d 386 (3d Cir. 1996); Murphy v.

Commissioner, T.C. Memo. 1995-76.

In Harper v. Commissioner, supra, counsel for the taxpayer

(1) failed to comply with the Court's order to produce documents

requested by the Commissioner pursuant to discovery, (2) filed a

frivolous motion for summary judgment, (3) failed to file a

proper trial memorandum, (4) failed to prepare for trial as

directed by the Court, and (5) failed to respond to the

Commissioner's motion for sanctions. In that case, we held that

counsel for the taxpayer had unreasonably and vexatiously

multiplied the proceedings by displaying a contemptuous disregard

for the Court's Rules and orders, acting in bad faith, and

knowingly abusing the judicial process throughout the course of

the proceeding. See id. at 549.

In Harper v. Commissioner, supra at 545, noting the dearth

of judicial opinions interpreting and applying section

6673(a)(2), we relied upon case law under 28 U.S.C. section 1927

for guidance on the level of misconduct justifying sanctions. We

found that most Courts of Appeals require a showing of bad faith

as a condition of imposing sanctions. See Oliveri v. Thompson,

803 F.2d 1265, 1273 (2d Cir. 1986). The Court of Appeals for the

Ninth Circuit (the apparent venue for appeal of these cases) has

held that sanctions under 28 U.S.C. section 1927 are appropriate

where the conduct causing multiplication of the proceedings was
 - 21 -

reckless or in bad faith. See United States v. Associated

Convalescent Enters. Inc., 766 F.2d 1342 (9th Cir. 1985); United

States v. Blodgett, 709 F.2d 608 (9th Cir. 1983); Barnd v. City

of Tacoma, 664 F.2d 1339, 1342-1343 (9th Cir. 1982). But cf.

Reliance Ins. Co. v. Sweeney Corp., Maryland, 792 F.2d 1137, 1138

(D.C. Cir. 1986) (adopting a standard of "reckless indifference"

to the merits of a claim).

In Oliveri v. Thompson, supra at 1272, the Court of Appeals

for the Second Circuit likened the imposition of a sanction under

28 U.S.C. section 1927 to the imposition of an award under a

court's inherent power to regulate its own proceedings. The

Court of Appeals identified the circumstances that might lead to

a finding of bad faith as follows:

This bad-faith exception permitting an award of
attorneys' fees is not restricted to cases where the
action is filed in bad faith. An inherent power award
may be imposed either for commencing or for continuing
an action in bad faith, vexatiously, wantonly, or for
oppressive reasons. "'[B]ad faith' may be found, not
only in the actions that led to the lawsuit, but also
in the conduct of the litigation." * * *

Oliveri v. Thompson, supra at 1272 (citations omitted).

Respondent concedes that Messrs. Sims and McWade engaged in

misconduct in the trial of the test cases. We summarized the

Government misconduct in Dixon III as follows:

Messrs. Sims and McWade negotiated a series of
contingent settlement agreements with Mr. DeCastro in
respect of the Thompsons' tax liabilities in advance of
the trial of the test cases. The final Thompson
settlement agreement provided for a reduction in the
 - 22 -

Thompsons' tax liabilities for 1979, 1980, and 1981 for
the purpose of generating refunds of tax and interest
that were used to pay Mr. DeCastro's attorney's fees.
The refunds actually made were more than sufficient for
this purpose; the excess was received and retained by
the Thompsons. The Thompson settlement was not based
upon or influenced by the Thompsons' participation in
the Bauspar program.

Messrs. Sims and McWade negotiated a contingent
settlement agreement with Mr. Cravens in respect of the
Cravenses' tax liabilities for 1979 and 1980 in advance
of the trial of the test cases. Messrs. Sims and
McWade misled Mr. Cravens as to the nature and legal
effect of his settlement and the need for counsel at
the trial of the test cases. In so doing, they
foreclosed the possibility that the Cravenses would
become clients of Chicoine and Hallett, and later, of
Mr. Izen. They thereby reduced the effectiveness of
Mr. Cravens' presentations to the Court from the point
of view of all petitioners; the likelihood that Mr.
Cravens would have informed counsel for test case
petitioners that his cases had been settled was also
reduced.

Messrs. Sims and McWade were the only persons in
the Honolulu District Counsel Office with knowledge of
the Thompson and Cravens settlements before and during
the trial of the test cases. Other than Mr. Stevens
[Chief of Special Procedures in the Collection Division
of the Honolulu District Director's Office], no one
else within the Internal Revenue Service was aware of
the Thompson and Cravens settlements before or during
the trial of the test cases through the times that the
Court issued its Dixon II opinion and entered the
initial decisions in the test cases.

Before the trial of the test cases, Mr. McWade
intentionally misled the Court, with the complicity of
Mr. DeCastro, by not disclosing the settlement of the
Thompson cases when he moved to set aside the Thompson
piggyback agreements. At the trial of the test cases,
Messrs. Sims, McWade, and DeCastro intentionally misled
the Court regarding the status of the Thompson cases by
not disclosing the settlement of the Thompson cases.
At the trial of the test cases, Messrs. Sims and McWade
intentionally misled the Court in similar fashion
regarding the settlement of the Cravens cases.
 - 23 -

Mr. McWade allowed Mr. Alexander to offer
misleading testimony to the Court during the trial of
the test cases regarding his understanding that his tax
liabilities would be reduced in exchange for providing
assistance to Mr. McWade. [Dixon III, 77 T.C.M. (CCH)
at 1696, 1999 T.C.M. (RIA), at 99-622 to 99-623.]

In sum, Messrs. Sims and McWade intentionally misled the

Court before, during, and after the trial of the test cases.

Further, the misconduct described above led the Court of Appeals

to remand the test cases to this Court for an evidentiary hearing

and has caused substantial continuing delay in the resolution of

the Kersting project cases. The Court and the parties have

expended substantial time, effort, and resources uncovering and

analyzing the effects on these proceedings of Messrs. Sims' and

McWade's misconduct. What we have found is a deliberate attempt

by Messrs. Sims and McWade to manipulate and abuse the trial

process of the test cases.

Considering all the circumstances, we conclude that the

actions of respondent's counsel Sims and McWade in entering into

the secret settlement agreements were undertaken and carried out

in bad faith. Further, the circumstances in which those actions

were discovered and brought to the attention of the Court and

petitioners have had the effect of multiplying the proceedings in

these cases "unreasonably and vexatiously". There is no

plausible justification for those actions; Messrs. Sims and

McWade engaged in a misguided attempt to bolster unfairly the

Commissioner's position in cases in which the Commissioner was
 - 24 -

destined to prevail. Moreover, their misconduct is properly

characterized as vexatious;13 they misled the Court, manipulated

the test case process, and caused a multiplication of the

proceedings that has resulted in such substantial delay in

bringing the Kersting project cases to a close as to amount to an

obstruction of justice.14 The Commissioner's institutional good

faith in promptly reporting the misconduct to the Court does not

negate or abrogate the bad faith inherent in Messrs. Sims' and

McWade's actions. See United States v. Associated Convalescent

Enters. Inc., supra at 1347 (Government's failure to move to

disqualify opposing party's attorney did not mitigate or excuse

attorney's misconduct in failing to disclose his potential

conflict of interest to the Court until the eve of trial).

The Court shares the concerns expressed by the Court of

Appeals for the Ninth Circuit in DuFresne v. Commissioner, 26

F.3d at 107, that it was necessary that these matters be

thoroughly ventilated "to determine the full extent of the wrong

done by the government trial lawyers". The resulting inquiry has

not had so much to do with the merits of petitioners' cases as it

13
Blacks Law Dictionary 1559 (7th ed. 1999), defines the
term "vexatious" as: "(Of conduct) without reasonable or
probable cause or excuse; harassing; annoying."
14
A court may find an obstruction of justice not only when
a miscarriage of justice results but also when the course of
justice is unreasonably delayed or burdened. See United States
v. Wells, 154 F.3d 412, 414 (7th Cir. 1998).
 - 25 -

has been a cost of Government operations incurred for the purpose

of determining the extent of the misconduct of the Government's

lawyers. The attorney's fees and related costs that petitioners

incurred in investigating that misconduct and presenting the

matter to the Court at the evidentiary hearing are substantial

and warrant redress.

Respondent contends that an award of attorney's fees and

costs is not justified on the ground that petitioners have

already been more than adequately compensated by the sanctions

imposed upon respondent in Dixon III. We reject this contention.

The sanctions that the Court imposed in Dixon III were directed

at time-sensitive additions to tax and increased interest–-items

of liability that were indirectly compounded by the delay in the

resolution of these cases occasioned by the misconduct of the

Government's lawyers. In contrast, our decision to award

attorney's fees and costs is intended to compensate petitioners

for the additional fees and costs that they incurred as a direct

consequence of that misconduct.

In Harper v. Commissioner, supra at 552, we observed that

"Unlike an application for attorney's fees under section 7430,

there is no rate ceiling on attorney's fees imposed under section

6673(a)(2)." To the contrary, attorney's fees awarded under

section 6673(a)(2) are computed by multiplying the number of

excess hours reasonably expended on the litigation by a

reasonable hourly rate. See id. at 549. Relying on cases
 - 26 -

decided under Rule 11 of the Federal Rules of Civil Procedure, we

concluded in Harper v. Commissioner, supra, that a reasonable

hourly rate is the hourly fee that attorneys of similar skill in

the area would typically be entitled to for the type of work in

question. See id. at 551, and cases cited therein.

We agree with respondent that Messrs. Izen, Jones, and

Sticht have failed, in varying degrees, to provide the Court with

sufficient information to determine the exact number of excess

hours that they reasonably expended in these cases as a result of

the Government misconduct, and that Messrs. Jones and Sticht have

neither addressed the reasonableness of their hourly rates nor

furnished detailed billing statements. We are particularly

troubled by Mr. Izen's persistent failure to produce the

documentation requested by the Court despite repeated extensions

of time for compliance. Nevertheless, the fact remains that the

test case and nontest case petitioners who participated in the

evidentiary hearing, as well as many other Kersting petitioners

who were not formal participants in the evidentiary hearing but

agreed to help fund the effort, incurred substantial attorney's

fees and costs following the remand of the test cases by the

Court of Appeals. Though presented with less than an ideal

record, we shall award attorney's fees to petitioners based upon

an approximation of the amount of the excess attorney's fees and

costs that petitioners incurred as a consequence of the

Government misconduct. See Ragan v. Commissioner, 135 F.3d 329,
 - 27 -

335 (5th Cir. 1998), affg. T.C. Memo. 1995-184, and cases cited

therein; cf. Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir.

1930).

Mr. Izen has requested an award of attorney's fees of

approximately $1.2 million on behalf of his clients representing

amounts that they paid to the Belton fund. Mr. Izen reported

that he had received $425,352.82 in attorney's fees from the

Belton fund.

It is now evident that only a relatively small fraction of

the amounts that Mr. Izen's clients paid to the Belton fund

should be considered in determining the amount of the award

under section 6673(a)(2). As previously discussed, under no

circumstances will we award petitioners attorney's fees and costs

for any portion of the Belton fund used to pay for services

rendered to Mr. Kersting. We therefore exclude from

consideration all amounts paid from the Belton fund

(approximately two-thirds of the total) to Messrs. Bradt and

Fujiwara and the law firm of Yempuku and Kugisaki. There is no

evidence in the record that these amounts were paid other than to

compensate those attorneys for services provided to Mr. Kersting.

In addition, we impose a further reduction to account for the

strong evidence that a significant portion of the $425,352.82

amount paid to Mr. Izen from the Belton fund also represents

compensation for services rendered to Mr. Kersting. In the

absence of evidence of the specific amount attributable to such
 - 28 -

compensation, we shall exclude from the remaining amount eligible

for an award of attorney's fees one-third of the amount that Mr.

Izen received from the Belton fund.

To recapitulate, test case and nontest case petitioners

represented by Mr. Izen are entitled only to an award of

attorney's fees equal to two-ninths of the amounts that they paid

to the Belton fund. We have arrived at this fraction by

eliminating from consideration all attorney's fees and costs

incurred in providing services to Mr. Kersting, including the

two-thirds of the Belton fund payments to Messrs. Bradt and

Fujiwara and the law firm of Yempuku and Kugisaki, and one-third

of the amount that Mr. Izen received from the Belton fund.15

Messrs. Jones and Sticht have also failed to prove the

amount of attorney's fees that their clients incurred as a

consequence of the Government misconduct in the trial of the test

cases. Consistent with the preceding discussion, we are prepared

to award their clients attorney's fees and costs pursuant to

section 6673(a)(2) in amounts reduced from those claimed. In the

absence of satisfactory substantiation and justification of the

actual attorney's fees and costs incurred, we shall award

attorney's fees and costs in amounts equal to two-thirds of the

amounts claimed by Messrs. Jones and Sticht.

15
Our orders in these cases will give effect to our
holding on this point on the basis of the amounts that Mr. Izen
has reported that his clients contributed to the Belton fund.
 - 29 -

The Court has inherent power to protect its own proceedings

from abuse, oppression, and injustice. See Fu Inv. Co. v.

Commissioner, 104 T.C. 408, 410-411 (1995); Harper v.

Commissioner, supra; see also Chambers v. NASCO, Inc., 501 U.S.

32 (1991). To give full effect to our award of attorney's fees

and costs, we exercise our inherent power and grant petitioners

interest on such award. Cf. BankAtlantic v. Blythe Eastman Paine

Webber, Inc., 12 F.3d 1045, 1052-1053 (11th Cir. 1994). In

particular, the decisions that we shall enter in the test cases

and the orders we shall issue in the nontest cases will provide

that interest will accrue in petitioners' favor--from the date of

such decisions and orders--at the applicable rates for

underpayments under sections 6601(a) and 6621(a)(2).16

II. Additional Sanctions

In addition to requesting an award of attorney's fees and

costs, Mr. Sticht contends that we should (1) adjust the

Rinaldis' tax liabilities for taxable years prior to 1987 in

accord with the 20-percent settlement offer that respondent

withdrew on December 31, 1986, (2) eliminate the Rinaldis' tax

liabilities for taxable years after 1986, and (3) eliminate the

Rinaldis' liability for interest after December 31, 1986. Mr.

Sticht bases his requests for relief on the assumptions that, had

16
Contrary to petitioners' request, we shall not direct
respondent to pay immediately the awards in question. We shall
simply include the amount of the award in each decision and order
referred to above.
 - 30 -

the Rinaldis been informed of the Thompson and Cravens

settlements in late 1986, the Rinaldis would have immediately

settled their cases based on the 20-percent settlement offer,

thereby avoiding the accrual of additional interest on their

liabilities, and the Rinaldis would not have continued to

participate in the Kersting programs during the years 1987

through 1991.

We considered and rejected similar claims for relief in

Dixon III; there simply is no justification for adjusting the

Rinaldis' tax liabilities to account for the 20-percent

settlement offer.17 Messrs. Sims and McWade began offering 20-

percent settlements between September and December 1986. During

this period, the settlement offer was not widely disseminated.

All settlement offers were withdrawn on or about December 31,

1986--in advance of the February 1987 Maui session. However,

Messrs. Sims and McWade revived the 20-percent settlement offer

after developments at the February 1987 Maui session led to a

delay in the trial of the test cases. In early 1988, Robert J.

Chicoine and Darrell D. Hallett (collectively Chicoine and

Hallett), then counsel to a number of test case petitioners, sent

letters to the test case petitioners and to other Kersting

program participants recommending that they accept the 20-percent

17
The details concerning the 20-percent settlement offer
are set forth in Dixon III, 77 T.C.M. (CCH) at 1659-1662, 1999
T.C.M. (RIA), at 99-576 to 99-580.
 - 31 -

settlement offer. At the same time, Mr. Kersting had written a

form letter to Kersting program participants denouncing Chicoine

and Hallett and the 20-percent settlement offer. Mr. Kersting

subsequently fired Chicoine and Hallett for recommending the 20-

percent settlement. The 20–percent settlement offer eventually

was withdrawn prior to the trial of the test cases in January

1989.

We see no compelling causal link between the Government

misconduct and the Rinaldis' failure to accept the 20-percent

settlement offer. As discussed above, Chicoine and Hallett

strongly recommended in early 1988 that all Kersting program

participants accept the 20-percent settlement offer.

Unfortunately for the Rinaldis, it appears that they (and many

other Kersting program participants) were victims of Mr.

Kersting's spurious and self-serving advice that they reject the

20-percent settlement offer and refrain from paying any amounts

to the Internal Revenue Service.18 In any event, there is no

indication that Messrs. Sims and McWade took any affirmative

18
Contrary to Mr. Kersting's advice, some program
participants agreed to settle their cases in full and/or made
payments in late 1986 in respect of the deficiencies and interest
accrued to that time in order take advantage of the full
deductibility of personal interest, which was about to be phased
out for 1987 and later years. For those petitioners who paid
their deficiencies in full, our decision to award attorney's fees
and costs will produce refunds. On the other hand, those
petitioners who imprudently followed Mr. Kersting's advice now
face enormous liabilities as a result of the inexorable force of
compound interest.
 - 32 -

steps to deny the Rinaldis a 20-percent settlement. Consistent

with our holding in Dixon III, the Rinaldis are bound by the

Court's decision in the test cases. We shall deny so much of Mr.

Sticht's motion as requests sanctions other than an award of

attorney's fees and costs.

III. Conclusion

Consistent with the preceding discussion, we shall grant

Messrs. Izen's and Jones' motions for attorney's fees and costs

and Mr. Sticht's motion for sanctions insofar as we award

petitioners attorney's fees and costs as more fully described in

this opinion. However, we shall deny Messrs. Izen's and Jones'

motions for sanctions, and so much of Mr. Sticht's motion for

sanctions as seeks relief beyond attorney's fees and costs. To

reflect the foregoing,

Appropriate orders and decisions will be

entered in docket Nos. 9382-83, 4201-84,

15907-84, 40159-84, 22783-85, 30010-85,

30979-85, and 29643-86.

Appropriate orders will be issued in

docket Nos. 17646-83, 35608-86, 19464-92,

621-94, 7205-94, and 9532-94.