Young v. Comm'r

T.C. Memo. 2006-189

UNITED STATES TAX COURT

HOYT W. AND BARBARA D. YOUNG, ET AL.,1 Petitioners
v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 17646-83, 4201-84, Filed September 6, 2006.
22783-85, 30010-85,
35608-86, 19464-92,
621-94, 9532-94.

Joe Alfred Izen, Jr., for petitioners in docket Nos. 4201-

84, 22783-85, 30010-85, and 35608-86.

Robert Alan Jones, for petitioners in docket Nos. 17646-83,

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

Henry E. O’Neill and Peter R. Hochman, for respondent.

1
Cases of the following petitioners have been consolidated
for purposes of this opinion: Hoyt W. and Barbara D. Young,
docket Nos. 4201-84, 22783-85, and 30010-85; Ronald L. and Mattie
L. Alverson, docket No. 17646-83; Norman W. and Barbara L. Adair,
docket No. 35608-86; Willis F. and Marie D. McComas, docket No.
19464-92; Wesley Armand and Sherry Lynn Cacia Baughman, docket
No. 621-94; and Norman A. and Irene Cerasoli, docket No. 9532-94.
 - 2 -

CONTENTS
Page

Background . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Discussion . . . . . . . . . . . . . . . . . . . . . . . . . 17

I. Introduction . . . . . . . . . . . . . . . . . . . . . . 17
A. Overview of Section 7430 . . . . . . . . . . . . . 17
B. Amplification of September 8, 2005 Order . . . . . 19
1. Inapplicability of Section 6673 . . . . . . . 20
2. Real Parties in Interest . . . . . . . . . . . 21

II. Entitlement to Relief Under Section 7430 . . . . . . . . 22
A. Jones Fee Request--Jurisdictional Issue . . . . . . 22
1. Respondent’s Position . . . . . . . . . . . . 22
2. Analysis . . . . . . . . . . . . . . . . . . . 23
a. September 8, 2005 Order . . . . . . . . . 23
b. Recent Ninth Circuit Cases . . . . . . . 24
c. Conclusion . . . . . . . . . . . . . . . 25
B. Paid or Incurred Requirement . . . . . . . . . . . 25
C. Substantial Justification Defense . . . . . . . . 27
D. Other Threshold Requirements . . . . . . . . . . . 28
E. Conclusion . . . . . . . . . . . . . . . . . . . . 28

III. Amounts of Awards . . . . . . . . . . . . . . . . . . . 28
A. Overview . . . . . . . . . . . . . . . . . . . . . 28
B. Reasonable Attorney’s Fee: The Lodestar . . . . . 28
1. In General . . . . . . . . . . . . . . . . . . 28
2. Hours Reasonably Expended . . . . . . . . . . 29
a. The Limited Success Factor . . . . . . . 29
b. Hours Relating to the Issue of
Attorney’s Fees . . . . . . . . . . . . . 30
3. Reasonable Hourly Rate Under Section 7430 . . 31
C. Hours Reasonably Expended--Izen Fee Request . . . . 31
1. Preliminary Issues . . . . . . . . . . . . . . 31
a. Scope of Representation We May Consider . 31
b. Discrepancies Between Fee Request and
Alleged Invoice . . . . . . . . . . . . . 34
2. Adjustments to Hours Claimed . . . . . . . . . 36
a. Hours Relating to “Intervention” . . . . 37
b. Hours Subject to “Billing Judgment”
Inference . . . . . . . . . . . . . . . . 40
c. Review of Other Parties’ Nonsubstantive
Filings . . . . . . . . . . . . . . . . . 42
d. Representation Issues . . . . . . . . . 43
e. Matters Relating to Remand Proceedings . 43
f. Duplicate Entries . . . . . . . . . . . 44
 - 3 -

g. Separately Claimed Fee Request Hours . . 44
h. Miscellaneous Additional Adjustments . . 45
3. Summary . . . . . . . . . . . . . . . . . . . 46
D. Hours Reasonably Expended--Jones Fee Request . . . 46
1. Reliability of Documentation . . . . . . . . . 46
2. Specific Time Entries . . . . . . . . . . . . 48
a. In General . . . . . . . . . . . . . . . 48
b. Dismissal and Recertification . . . . . . 48
c. The Cerasolis’ Motion To Intervene . . . 49
d. Pre- and Post-Appeal Tax Court Filings . 50
e. Miscellaneous Additional Adjustments . . 51
3. Summary . . . . . . . . . . . . . . . . . . . 51
E. Calculation of Lodestars . . . . . . . . . . . . . 51
1. Izen Fee Request . . . . . . . . . . . . . . . 51
a. 2000 and 2001 . . . . . . . . . . . . . . 51
b. 2002 through 2005 . . . . . . . . . . . 52
c. 2006 . . . . . . . . . . . . . . . . . . 52
d. Total . . . . . . . . . . . . . . . . . . 52
2. Jones Fee Request . . . . . . . . . . . . . . 53
a. 2000 and 2001 . . . . . . . . . . . . . . 53
b. 2002 and 2003 . . . . . . . . . . . . . 53
c. Total . . . . . . . . . . . . . . . . . . 54
F. Adjustment to Izen’s Fees-on-Fees Lodestar To
Reflect Limited Success . . . . . . . . . . . . . . 54
G. Reasonable Expenses . . . . . . . . . . . . . . . 55
1. Izen Expense Request . . . . . . . . . . . . 55
2. Jones Expense Request . . . . . . . . . . . . 56
H. Amounts Paid or Incurred by Eligible Persons . . . 57
1. Izen Fee Request . . . . . . . . . . . . . . . 57
a. Indirect Payments . . . . . . . . . . . . 57
b. Indirect Obligations . . . . . . . . . . 57
c. Direct Payments . . . . . . . . . . . . . 58
d. Direct Obligations--Fixed Amounts . . . . 59
e. Direct Obligations--Additional Amounts . 60
2. Jones Fee Request . . . . . . . . . . . . . . 62
I. Summary . . . . . . . . . . . . . . . . . . . . . . 63

Appendix--September 8, 2005 Order . . . . . . . . . . . . . . 64

MEMORANDUM OPINION

BEGHE, Judge: These cases are part of the Kersting tax

shelter litigation. In this opinion, we consider motions for

attorney’s fees and expenses relating to services provided by Joe
 - 4 -

Alfred Izen, Jr. (Izen) and Robert Alan Jones (Jones) in

connection with the appeal of Dixon v. Commissioner, T.C. Memo.

1999-101, supplemented by T.C. Memo. 2000-116, revd. and remanded

316 F.3d 1041 (9th Cir. 2003). Unless otherwise indicated,

section references are to the Internal Revenue Code of 1986, as

amended, and Rule references are to the Tax Court Rules of

Practice and Procedure.

Background

The following discussion is based on the existing record and

additional information submitted by the parties in connection

with the fee requests. We have not found it necessary to hold an

evidentiary hearing. See Rule 232(a)(2).

Petitioners Hoyt and Barbara Young (the Youngs) are test

case petitioners in the Kersting tax shelter litigation. The

remaining petitioners herein (the Adairs, Alversons, McComases,

Baughmans, and Cerasolis) are nontest case petitioners whose

cases were consolidated with the test cases for purposes of the

attorney misconduct phase of this litigation, discussed below.

The Youngs and the Adairs (collectively, the Izen petitioners)

are represented by Izen; the remaining petitioners herein

(collectively, the Jones petitioners) are represented by Jones.

The Kersting tax shelter litigation arose from respondent's

disallowance of interest deductions claimed by participants in

various tax shelter programs promoted by Henry F.K. Kersting
 - 5 -

(Kersting) during the late 1970s through the 1980s. Under the

test case procedure, nontest case petitioners in more than 1,000

docketed cases entered into “piggyback” agreements in which they

agreed that their cases would be resolved in accordance with the

outcome of the test cases.2

The test cases initially consisted of 14 docketed cases of

eight petitioners, six of whom (including the Youngs) were

represented by Izen at trial. Kersting, who had retained Izen to

represent those six test case petitioners, initially paid Izen’s

fees, either directly or through alter ego corporations.

Following a 3-week trial, the Court sustained virtually all

of respondent's determinations in each of the test cases. See

Dixon v. Commissioner, T.C. Memo. 1991-614 (Dixon II).3 However,

on June 9, 1992, respondent notified the Court that respondent’s

management had just discovered that, prior to the trial of the

test cases, respondent's trial attorney, Kenneth W. McWade, and

McWade’s supervisor, Honolulu District Counsel William A. Sims,

2
Upon the final disposition of the test cases, the
relatively few nontest case petitioners who did not enter into
piggyback agreements will generally be ordered to show cause why
their cases should not be decided in the same manner as the test
cases. See, e.g., Lombardo v. Commissioner, 99 T.C. 342, 343
(1992), affd. on other grounds sub nom. Davies v. Commissioner,
68 F.3d 1129 (9th Cir. 1995).
3
Prior to the trial of the test cases, the Court had issued
an opinion rejecting the test case 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).
 - 6 -

had entered into secret settlement agreements with the two test

case petitioners not represented by Izen (the Thompsons and the

Cravenses). Respondent asked the Court to conduct an evidentiary

hearing to determine whether the previously undisclosed

agreements had affected the trial of the test cases or the

opinion of the Court. The Court denied respondent's request for

an evidentiary hearing, entered decisions giving effect to the

Thompson and Cravens settlements, and reentered or allowed to

stand the decisions sustaining respondent’s determinations

against the other test case petitioners.

Around this time, Kersting organized, and initially

administered, a fund (hereafter, the “Defense Fund” or “Fund”)

through which nontest case petitioners shared the further costs

of the test case litigation. At various times, more than 300

nontest case petitioners contributed to the Defense Fund.

The test case petitioners (other than the Thompsons and the

Cravenses) appealed to the Court of Appeals for the Ninth

Circuit. The Court of Appeals, citing Arizona v. Fulminante, 499

U.S. 279, 309 (1991), stated:

We cannot determine from this record whether the
extent of misconduct rises to the level of a structural
defect voiding the judgment as fundamentally unfair, or
whether, despite the government’s misconduct, the
judgment can be upheld as harmless error. [DuFresne v.
Commissioner, 26 F.3d 105, 107 (9th Cir. 1994) (per
curiam), vacating Dixon v. Commissioner, T.C. Memo.
1991-614.]
 - 7 -

The Court of Appeals vacated this Court’s decisions in the test

cases and remanded them for “an evidentiary hearing to determine

the full extent of the admitted wrong done by the government

trial lawyers.” Id. In response to the direction of the Court

of Appeals to consider on the merits all motions of intervention

filed by interested parties, this Court ordered that the cases of

10 nontest case petitioners (hereafter, the participating nontest

case petitioners), including the Adairs and the four Jones

petitioners,4 be consolidated with the remaining test cases for

purposes of the evidentiary hearing.

On the basis of the record developed at the evidentiary

hearing, the Court held that the misconduct of the Government

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

structural defect in the trial but rather resulted in harmless

error. See Dixon v. Commissioner, T.C. Memo. 1999-101 (Dixon

III). However, the Court imposed sanctions against respondent,

holding that Kersting program participants who had not had final

decisions entered in their cases would be relieved of liability

for (1) the interest component of the addition to tax for

negligence under former section 6653(a), and (2) the incremental

interest attributable to the increased rate prescribed in former

section 6621(c).

4
The remaining five participating nontest case petitioners
have been represented by Robert Patrick Sticht (Sticht).
 - 8 -

After the issuance of Dixon III, Izen and Jones filed joint

motions for attorney’s fees and costs (the Izen/Jones request).

The Izen/Jones request relied primarily on sections 7430

(authorizing fee awards for certain prevailing taxpayers) and

6673(a)(2)(B) (relating to misconduct of the Commissioner’s

attorneys in Tax Court proceedings).5 The Court ordered the

movants to submit documentation pertaining to fees and expenses

incurred commencing June 10, 1992 (i.e., the day after the Court

learned of the misconduct by the Government attorneys). In Dixon

v. Commissioner, T.C. Memo. 2000-116 (Dixon IV), the Court

rejected the Izen/Jones request insofar as it relied on section

7430, on the ground that the movants had not substantially

prevailed in the proceedings as required by section

7430(c)(4)(A)(i). The Court did award a portion of the claimed

fees and expenses under section 6673(a)(2)(B).

The Court entered decisions in the remaining test cases, and

on June 29, 2000, Izen filed notices of appeal on behalf of the

test case petitioners (the Dixons, DuFresnes, Hongsermeiers,

Owenses, and Youngs).6 See sec. 7483. Izen and Jones also

attempted to file notices of appeal on behalf of their respective

5
Sticht subsequently filed his own motion for sanctions
(including attorney’s fees and costs), which we effectively
treated as having been premised on sec. 6673(a)(2)(B).
6
Ralph J. Rina, the other test case petitioner initially
represented by Izen, had settled his case in 1995.
 - 9 -

participating nontest case petitioner clients and numerous other

nontest case petitioners labeled “intervenors”. Because the

Court had not entered decisions in any of the nontest cases

(pending final disposition of the test cases), the Court rejected

the notices of appeal filed on behalf of nontest case

petitioners. However, in response to a motion filed by Attorney

Sticht, see supra note 4, the Court certified for interlocutory

appeal certain orders it had issued in the participating nontest

case petitioners’ cases in connection with the evidentiary

hearing, thereby enabling those petitioners to apply to the Court

of Appeals for immediate review. See sec. 7482(a)(2)(A).

On the basis of this Court’s certification order, Izen and

Jones (as well as Sticht) continued their efforts on behalf of

nontest case petitioners in the Court of Appeals. Izen submitted

to that court a “Notice of Appeal of Certain Intervenors” bearing

docket No. 00-70858 (the docket number the Court of Appeals had

assigned to the test case appeal). Izen purported to submit that

document on behalf of not only the Adairs, but also nontest case

petitioners in more than 450 docketed cases who had not

participated in the evidentiary hearing and whose cases therefore

were not included in the certification order. Jones submitted

“notices of appeal” on behalf of the four Jones petitioners,

which the Court of Appeals construed as petitions for permission
 - 10 -

to appeal under section 7482(a)(2) (i.e., applications for

interlocutory review).

By order dated August 30, 2000, the Court of Appeals denied

the Jones petitioners’ initial applications for interlocutory

review as untimely. In a subsequent order addressing a motion

for reconsideration by the Jones petitioners, the Court of

Appeals suggested that they request the Tax Court to recertify

their cases for interlocutory appeal. They did so, and we

recertified the cases by order dated January 23, 2001. The Court

of Appeals granted the Jones petitioners’ ensuing applications

for interlocutory review on March 20, 2001, and ultimately

assigned docket Nos. 01-70638, 01-70639, 01-70640, and 01-70641

to their cases.

On January 30, 2001, the Court of Appeals assigned docket

No. 01-70155 to the Adair et al. matter (hereafter, the Adair

appeal). On March 22, 2001, the Court of Appeals issued an order

to show cause why the Adair appeal should not be dismissed for

lack of jurisdiction. Describing Izen’s initial filing as

“confusing in several respects”, the Court of Appeals apparently

surmised that Izen was attempting to establish the right of

nontest case petitioners to appeal the decisions in the test

cases (in their self-proclaimed capacity as “intervenors”) rather

than seeking permission to appeal the orders this Court had

certified for interlocutory appeal. On the same day, the Court
 - 11 -

of Appeals stayed the proceedings in docket No. 00-70858 (the

test case appeal) pending resolution of the various nontest case

matters. Izen and respondent contested the jurisdictional issue

in the Adair appeal over the next several months.

In an order dated May 10, 2001, the Court of Appeals decreed

that the Jones petitioners’ interlocutory appeals (as well as

those filed by Sticht) “shall be held in abeyance pending

resolution of the appeal in no. 00-70858” (the test case appeal).

On November 20, 2001, the Court of Appeals issued a similar order

in the Adair appeal. The next day, the Court of Appeals lifted

the stay of proceedings in the test case appeal.

Meanwhile, in January 2001, the Defense Fund, acting through

a five-person “steering committee” following Kersting’s death in

March 2000, had retained attorney Michael Louis Minns (Minns) to

replace Izen. Although Minns entered appearances in the test

case appeal on behalf of the Dixons, DuFresnes, Owenses, and

Hongsermeiers, Izen remained counsel of record for the Youngs in

that appeal (and counsel of record in the Adair appeal).

On or about April 16, 2001, Izen sent a demand letter to the

Defense Fund requesting payment of alleged outstanding fees. In

a subsequent lawsuit (filed in the District Court of Harris

County, Texas) against the Defense Fund, members of its steering

committee, and its business manager, Izen alleged that as of
 - 12 -

April 16, 2001, he was owed $44,884.70 “for legal work for the

evidentiary hearing and for preparation of the appeal.”7

Around December 2001, when the Defense Fund was no longer

paying Izen’s fees, he began entering into individual engagement

contracts with various nontest case petitioners. Pursuant to

those contracts, Izen undertook to “take all the necessary legal

actions and file the necessary papers for intervention of all

non-test case Petitioners in the appeal” as well as “take all

necessary actions on appeal to obtain a reversal of” the

decisions entered in the test cases. Although the contracts

recite Izen’s billing rate as $300 per hour, they limit the

client’s obligation to 24 monthly payments of $200 (or, in one

case, $100). The contracts also provide that “Attorney’s

previous bill which the Steering Committee refused to pay and his

bill for work on the appeal since April, 2001 shall be paid by

payments under this Agreement unless paid from another source.”

Also in December 2001, the steering committee of the Defense

Fund replaced Minns with Porter & Hedges, L.L.P. (Porter &

Hedges). Although Porter & Hedges attorneys Henry Binder and

John A. Irvine entered appearances in the test case appeal on

behalf of the Dixons, DuFresnes, and Owenses, Minns remained

7
By the time the case went to trial, the business manager,
Geoffrey Sjostrom, was the only remaining defendant. After a
jury verdict in favor of the defendant, the court entered a take
nothing judgment. That judgment is currently on appeal to the
Fourteenth Court of Appeals in Texas.
 - 13 -

counsel of record for the Hongsermeiers. Thus, three sets of

counsel pursued the test case appeal: Izen on behalf of the

Youngs, Minns on behalf of the Hongsermeiers, and Porter & Hedges

on behalf of the Dixons, DuFresnes, and Owenses (hereafter, the

PH appellants).

On July 26, 2002, after the test case appellants’ opening

briefs, respondent’s answering brief, and the test case

appellants’ reply briefs had all been filed, Jones filed a motion

for leave to intervene in the test case appeal on behalf of one

of the four Jones petitioners (the Cerasolis). The Court of

Appeals denied the Cerasolis’ motion by order dated September 6,

2002.

On January 17, 2003, the Court of Appeals reversed and

remanded the test cases, holding that the misconduct of the

Government attorneys in the trial of the test cases was a fraud

on the court, for which no showing of prejudice is required. See

Dixon v. Commissioner, 316 F.3d 1041 (9th Cir. 2003) (Dixon V).

As for the remedy, the Court of Appeals decreed that respondent

be sanctioned by entry of judgment in favor of the test case

petitioners “and all other taxpayers properly before this Court

on terms equivalent to those provided in the settlement agreement

with Thompson and the IRS.” Id. at 1047. The Court of Appeals
 - 14 -

also remanded the various nontest cases to the Tax Court for

further proceedings consistent with Dixon V.8

Shortly after issuance of Dixon V, the PH appellants and the

Hongsermeiers filed separate requests with the Court of Appeals

for attorney’s fees incurred on appeal. See 9th Cir. R. 39-1.6.

The PH appellants’ fee request related solely to services

performed by Porter & Hedges, and the Hongsermeiers’ fee request

related solely to services performed by Minns or under his

direction. As filed, both of those requests (hereafter, the

Binder/Minns fee requests) relied exclusively on section 7430.

Rather than filing their own fee request with the Court of

Appeals, the Youngs, through Izen, filed an objection to the

Binder/Minns fee requests. The primary thrust of the objection

was that the PH appellants and the Hongsermeiers had not paid or

incurred the amounts requested:

In actuality, Mr. Binder’s motion fails to reveal
the true clients in interest who have paid him fees to
represent their interests on appeal. These “real
clients in interest” are the same clients represented
by Joe Alfred Izen, Jr. in the appeal styled Barbara L.
Adair, Et Al, v. Commissioner, No. 01-70155, which is a
“related case” under this Court’s Local Rules. * * *
Although those real clients in interest paid Mr. Minns
and Mr. Binder for representation on appeal, (either
involuntarily or voluntarily) neither Mr. Minns nor Mr.

8
In response to inquiries by the Dixon V panel at oral
argument, Minns, acting pro bono, filed and pursued complaints
against McWade and Sims before their respective State bars and
the IRS Office of Professional Responsibility that resulted in
their suspensions from practice. See Dixon v. Commissioner, T.C.
Memo. 2006-90 (Dixon VI), at Findings of Fact Part IV.E.
 - 15 -

Binder ever substituted in on this appeal [No. 01-
70155] as their attorney of record. * * *

On the same day, Izen filed a motion in the Adair appeal (docket

No. 01-70155) to transfer consideration of appellate attorney’s

fees to the Tax Court. See 9th Cir. R. 39-1.8. Jones made no

filing on behalf of any of the Jones petitioners under either

Ninth Circuit rule 39-1.6 or 39-1.8.

The Court of Appeals granted Izen’s motion to transfer under

Ninth Circuit rule 39-1.8 on May 8, 2003. On May 28, 2003, the

Court of Appeals remanded the Binder/Minns fee requests to the

Tax Court “for a determination of entitlement and, if warranted,

amount.”

On May 19, 2005, more than 2 years after the Court of

Appeals had granted his motion to transfer under Ninth Circuit

rule 39-1.8 in the Adair appeal, Izen filed in this Court, on

behalf of the Youngs, a motion for appellate attorney’s fees and

expenses under section 6673 (the Izen fee request). On July 15,

2005, Jones filed a similar motion in this Court on behalf of the

Jones petitioners (the Jones fee request).9

In a September 8, 2005 order pertaining to both the Izen fee

request and the Jones fee request, which we incorporate by

9
To update the story regarding Sticht’s appellate fees, see
Dixon v. Commissioner, T.C. Memo. 2006-97 n.12., the Court has
been given to understand that Sticht and respondent are close to
completion of a comprehensive stipulation and submission
regarding the fee claims of participating nontest case
petitioners represented by Sticht.
 - 16 -

reference and reproduce as the appendix, we concluded that “the

reasoning of Cooter & Gell v. Hartmarx Corp., [496 U.S. 384

(1990),] precludes us from awarding appellate fees and expenses

under section 6673.” We resolved instead to “treat the present

movants as having revived their section 7430 claims” (i.e., those

raised in the wake of Dixon III and rejected by the Court in

Dixon IV on “prevailing party” grounds).10 With a nod to the

Youngs’ previous objection to the Binder/Minns fee requests, we

ordered the submission of net worth affidavits for all real

parties in interest with respect to the Izen fee request and the

Jones fee request. See Rule 231(b)(4); see also infra Part I.A.

Specifically, we requested the affidavits of “those individuals

who have made payments of the requested appellate fees and

expenses to Mr. Izen--directly or through contributions to the

Atlas Legal Defense Fund--or Mr. Jones or are otherwise liable

for any portion of the requested appellate fees and expenses”.11

On May 10, 2006, we issued our opinion in Dixon v.

Commissioner, T.C. Memo. 2006-97 (Dixon VII), awarding, under

section 7430, $248,049.27 in respect of the PH appellants’ fee

request and $158,562.50 in respect of the Hongsermeiers’ fee

10
Consistent with that approach, on Nov. 2, 2005, we
ordered that all future filings pertaining to the Izen fee
request be filed on behalf of the Adairs as well as the Youngs.
11
We had issued a similar order pertaining to the
Binder/Minns fee requests on Sept. 1, 2005. See Dixon v.
Commissioner, T.C. Memo. 2006-97 App. A.
 - 17 -

request.12 In separate orders pertaining to the Izen fee request

(May 10, 2006) and the Jones fee request (June 14, 2006), we

afforded all parties herein an opportunity to rebut any of the

conclusions reached in Dixon VII that are relevant to these fee

requests.

The Izen petitioners request attorney’s fees of $375,195.99

and other expenses of $39,805.19, for a total of $415,001.18.

The Jones petitioners request attorney’s fees of $125,351.8013

and other expenses of $7,784.70, for a total of $133,136.50.

Discussion

I. Introduction

A. Overview of Section 7430

Section 7430 provides that, subject to certain conditions, a

taxpayer who prevails against the Government in any Federal tax

proceeding (administrative or judicial) may recover reasonable

costs, including attorney’s fees, paid or incurred in connection

with such proceeding if the Government’s position in the

12
As for Dixon VI, see Dixon v. Commissioner, T.C. Memo.
2006-90 (responding to the primary mandate of the Court of
Appeals in Dixon V). A motion for reconsideration is pending.
13
That figure actually includes paralegal fees as well as
attorney’s fees. Although sec. 7430 does not specifically
provide for recovery of paralegal fees, this Court has routinely
awarded them, and we have no reason to believe that the Court of
Appeals for the Ninth Circuit would take a different approach.
See Dixon v. Commissioner, T.C. Memo. 2006-97 n.14. Although
paralegal fees do not fit neatly within the category of either
“attorney’s fees” or “expenses”, we follow the Jones petitioners’
lead in grouping them with attorney’s fees.
 - 18 -

proceeding was not substantially justified. Sec. 7430(a),

(c)(1)(B)(iii), (c)(4)(A) and (B); see also Dixon v.

Commissioner, T.C. Memo. 2006-97 n.28. In its report

accompanying the bill in which section 7430 originated, the House

Committee on Ways and Means contemplated that such fee awards

“will enable individual taxpayers to vindicate their rights

regardless of their economic circumstances.” H. Rept. 97-404, at

11 (1981).

A taxpayer seeking litigation costs under section 7430 must

have exhausted all available administrative remedies prior to

litigation and, if an individual, must not have had a net worth

in excess of $2 million as of the filing date of the suit.14 Sec.

7430(b)(1), (c)(4)(A)(ii); see 28 U.S.C. sec. 2412(d)(2)(B)(i)

(1988) (individual net worth limitation contained in the Equal

Access to Justice Act (EAJA) and incorporated by reference in

sec. 7430(c)(4)(A)(ii)). Reasonable attorney’s fees may not

exceed the rate of $125 per hour (as adjusted for inflation)

unless “a special factor, such as the limited availability of

qualified attorneys for such proceeding, the difficulty of the

issues presented in the case, or the local availability of tax

14
We have applied the net worth requirement as of June 10,
1992 (the date on which the attorney misconduct phase of this
litigation effectively commenced). See app. note 14 and
accompanying text.
 - 19 -

expertise, justifies a higher rate.” Sec. 7430(c)(1)(B)(iii).15

In addition, a court may not award fees with respect to any

portion of the proceedings unreasonably protracted by the

taxpayer. Sec. 7430(b)(3).

Respondent publishes the inflation-adjusted rate cap on an

annual basis. The hourly rate cap for fees incurred in 2000 and

2001 (the earliest years for which petitioners claim fees) is

$140. Rev. Proc. 99-42, sec. 3.26, 1999-2 C.B. 568, 572; Rev.

Proc. 2001-13, sec. 3.26, 2001-1 C.B. 337, 341. The hourly rate

cap for fees incurred in 2002 through 2005 is $150. Rev. Proc.

2001-59, sec. 3.28, 2001-2 C.B. 623, 628; Rev. Proc. 2002-70,

sec. 3.32, 2002-2 C.B. 845, 850; Rev. Proc. 2003-85, sec. 3.33,

2003-2 C.B. 1184, 1190; Rev. Proc. 2004-71, sec. 3.35, 2004-2

C.B. 970, 976. The hourly rate cap for fees incurred in 2006 is

$160. Rev. Proc. 2005-70, sec. 3.36, 2005-47 I.R.B. 979, 985.

B. Amplification of September 8, 2005 Order

Before turning to our analysis under section 7430, we

briefly revisit our September 8, 2005 order (app.) in the light

of our recent Dixon VII opinion.

15
The latter two examples of special factors were added by
the Internal Revenue Service Restructuring and Reform Act of
1998, Pub. L. 105-206, sec. 3101(a)(2), (g), 112 Stat. 727, 729,
effective for costs incurred after Jan. 18, 1999. All of the
costs sought by petitioners were incurred after Jan. 18, 1999.
 - 20 -

1. Inapplicability of Section 6673

In our September 8 order, we indicated that we would

evaluate petitioners’ fee requests under section 7430 rather than

the proffered ground of section 6673. We premised that decision

on the distinction the Supreme Court has drawn between (1) “fee-

shifting” provisions (such as section 7430) that embody a

substantive policy (e.g., encouraging private parties to enforce

their rights by allowing them to recover their attorney’s fees if

successful) and (2) what may be termed “fee sanction” rules (such

as section 6673), the applicability of which “depends not on

which party wins the lawsuit, but on how the parties conduct

themselves during the litigation.” Chambers v. NASCO, Inc., 501

U.S. 32, 53 (1991); see also Bus. Guides, Inc. v. Chromatic

Commcns. Enters., Inc., 498 U.S. 533, 553 (1991); Cooter & Gell

v. Hartmarx Corp., 496 U.S. 384, 409 (1990). We noted that,

whereas a fee award under a fee-shifting provision generally

encompasses all aspects of the litigation, see Commissioner, INS

v. Jean, 496 U.S. 154, 161-162 (1990), fees awarded as a sanction

are properly limited to those directly caused by the sanctionable

conduct, see Cooter & Gell v. Hartmarx Corp., supra at 406-407.

In Dixon VII, we discussed the practical consequences of that

distinction in the context of this fee litigation:16

16
The PH appellants had filed a motion in this Court in
November 2005 requesting appellate fees under sec. 6673, “to
(continued...)
 - 21 -

Under section 6673(a)(2), we are authorized to sanction
respondent for the attorney misconduct that marred the
test case trial by charging him the full amount of
petitioners’ attorney’s fees relating to the Tax Court
proceedings necessitated by that misconduct, subject
only to the requirement that such amounts have been
reasonably incurred. Because that misconduct did not
extend to the appellate proceedings, petitioners are
relegated to the applicable fee-shifting provision--
section 7430, with its hourly rate cap and eligibility
requirements--with regard to their appellate fee
requests. [Dixon v. Commissioner, T.C. Memo. 2006-97
at Part I.C.; citation and fn. refs. omitted.]

Those observations apply equally here.

2. Real Parties in Interest

We also indicated in our September 8 order that we would

look to the real parties in interest with respect to petitioners’

fee requests in applying the net worth requirement of section

7430(c)(4)(A)(ii). We first adopted that approach in an order

pertaining to the Binder/Minns fee requests that we had issued 1

week earlier. See supra note 11 and accompanying text. In Dixon

VII, we amplified our thinking in that regard:

The case for looking beyond the named parties is
particularly compelling in these proceedings, where
similarly situated taxpayers not only shared the costs
of the litigation but also “had rights at stake in the
case on the merits”. Sisk, * * * [“The Essentials of
the Equal Access to Justice Act: Court Awards of
Attorney’s Fees for Unreasonable Government Conduct
(Part One),” 55 La. L. Rev. 217 (1994)] at 346 (arguing
that one can be a real party in interest with respect

16
(...continued)
ensure that their requests for fees on appeal before this Court
are procedurally postured with the Youngs’ Motion”. We summarily
denied the PH appellants’ motion “For the reasons discussed in
our Order dated September 8, 2005”.
 - 22 -

to an EAJA fee request--and thereby potentially
entitled to recover the requested fees--only by virtue
of one’s status as a real party in interest in the
underlying litigation on the merits; i.e., that
financial responsibility for the claimed legal fees
does not confer real party in interest status).

We now hold that the real parties in interest in
this litigation include not only the test case
petitioners and participating nontest case petitioners,
but also all other remaining nontest case petitioners.
* * * [Dixon v. Commissioner, T.C. Memo. 2006-97 at
Part II.B.2.; fn. refs. omitted.]

We apply that reasoning to petitioners’ fee requests as well.

II. Entitlement to Relief Under Section 7430

A. Jones Fee Request--Jurisdictional Issue

1. Respondent’s Position

Respondent maintains that this Court lacks jurisdiction to

act on the Jones fee request. In his response to that request,

respondent states:

Mr. Jones never filed with the Ninth Circuit any
application or motion pertaining to an award of
appellate attorney’s fees. Unlike the situation with
Messrs. Binder, Minns and Izen, there is no order from
the Ninth Circuit conferring jurisdiction on this court
to determine the appropriate amount of Mr. Jones’
appellate attorney’s fees. [Fn. ref. omitted.]

Respondent then notes that, under Ninth Circuit rule 39-1.6:

“The period for Mr. Jones to request appellate attorney’s fees in

connection with his interlocutory appeal has long since expired.”
 - 23 -

2. Analysis

a. September 8, 2005 Order

As indicated above, in our September 8, 2005 order, see

appendix, we resolved to “treat * * * [petitioners] as having

revived their section 7430 claims” that we had rejected in Dixon

IV. We did so “In light of the test case petitioners’ subsequent

appellate victory, and in order to give effect to Jean’s mandate

to ‘[treat] a case as an inclusive whole’ in applying fee-

shifting statutes”.17 That approach presupposes, in derogation of

respondent’s jurisdictional argument, that a request for

appellate fees under a fee-shifting statute (as opposed to a “fee

sanction” rule, see supra Part I.B.1.) need not originate in the

Court of Appeals. We continue to adhere to that view. See

Little Rock Sch. Dist. v. State of Ark., 127 F.3d 693, 696-697

(8th Cir. 1997) (claimant’s failure to move for appellate fees

under 8th Cir. R. 47C--the analog of Ninth Circuit rule 39-1.6

and 39-1.8--did not preclude District Court from including

appellate fees in its fee award under civil rights fee-shifting

statute; although filing in the Court of Appeals is the preferred

17
See Commissioner, INS v. Jean, 496 U.S. 154, 161-162
(1990), in which the Supreme Court held that the recipient of a
fee award under the Equal Access to Justice Act (EAJA), the fee-
shifting statute from which sec. 7430 derives, may recover fees
incurred litigating the fee award without a separate showing that
the Government’s opposition to the fee award was not
substantially justified.
 - 24 -

procedure for requesting appellate fees, “Rule 47C cannot and

does not affect the jurisdiction of the district courts”).

b. Recent Ninth Circuit Cases

Two recent opinions of the Court of Appeals for the Ninth

Circuit reveal that the law of the circuit on this point is

unsettled. In Cummings v. Connell, 402 F.3d 936, 940, 947-948

(9th Cir. 2005), a case involving the general civil rights fee-

shifting statute, the Court of Appeals held that a District Court

is authorized to award appellate fees only if, in response to the

requesting party’s timely filing under Ninth Circuit rule 39-1.6

or 39-1.8, the Court of Appeals remands the request or transfers

the issue to the District Court. However, the Court of Appeals

appears to have retreated from that jurisdictional reading of its

rules in Twentieth Century Fox Film Corp. v. Entmt. Distrib., 429

F.3d 869 (9th Cir. 2005), involving the fee-shifting provision of

the 1976 Copyright Act, 17 U.S.C. sec. 505 (2000). The court

described the appellant’s argument in that case as follows:

Finally, * * * [appellant] argues that the
district court improperly awarded fees generated by
* * * [appellees] in defending against * * *
[appellant’s] prior appeal of the district court’s
summary judgment award. Relying heavily on Circuit
Rules 39-1.6 and 39-1.8, * * * [appellant] contends
that the district court was without jurisdiction to
award * * * [appellees’] appeal fees, primarily because
* * * [appellees] did not first file an application
with us to recover fees and expenses. [Twentieth
Century Fox Film Corp. v. Entmt. Distrib., supra at
884.]
 - 25 -

Having spelled out the argument, the Court of Appeals did not

address it. The Court of Appeals instead framed the issue in

terms of whether a prevailing party is entitled to “fees for an

intermediate appellate stage of its litigation where it was

unsuccessful”. Id. The Court of Appeals upheld the District

Court’s award of appellate fees, id., something it could not have

done had it believed that the District Court lacked jurisdiction

to award those fees.

c. Conclusion

We continue to subscribe to the view that this Court has the

authority to consider (and award) both trial fees and appellate

fees under section 7430 without the necessity of a separate

filing in the Court of Appeals. Although we are mindful of

Cummings v. Connell, supra, the forbearance of the Court of

Appeals in Twentieth Century Fox Film Corp. v. Entmt. Distrib.,

supra, leads us to believe we are not faced with a situation

where we “would surely be reversed” on this issue on appeal. See

Lardas v. Commissioner, 99 T.C. 490, 495 (1992). Accordingly, we

hold that we have jurisdiction to consider the Jones fee request.

B. Paid or Incurred Requirement

Unlike certain other fee-shifting statutes, section 7430

generally allows the recovery of attorney’s fees only to the

extent such amounts have been paid or incurred.18 Sec.

18
But see sec. 7430(c)(3)(B), providing an exception for
(continued...)
 - 26 -

7430(a)(2), (c)(1)(B)(iii); see Frisch v. Commissioner, 87 T.C.

838, 844 (1986) (distinguishing the Civil Rights Attorney’s Fees

Awards Act of 1976 (CRAFAA), 42 U.S.C. sec. 1988 (2000), under

which a court “may allow the prevailing party * * * a reasonable

attorney’s fee”); cf. Blanchard v. Bergeron, 489 U.S. 87, 96

(1989) (fee award under CRAFAA is not limited to the amount the

prevailing party owes his attorney pursuant to contingent fee

agreement). For purposes of section 7430, fees are “incurred”

when there is a legal obligation to pay them. E.g., Grigoraci v.

Commissioner, 122 T.C. 272, 277-278 (2004).

In his opposition to the Izen fee request, respondent,

referring to the $373,400.71 of fees and other expenses initially

requested, asserts that “there is no showing that the Youngs have

paid (or were obligated to pay) this or any other amount.”

Respondent raised a similar argument with regard to the

Binder/Minns fee requests. As we stated in Dixon VII: “Under

the ‘real party in interest’ approach * * *, the fact that

petitioners have not, by and large, paid or incurred the claimed

fees and expenses does not render those amounts unrecoverable

under section 7430.” Dixon v. Commissioner, T.C. Memo. 2006-97

at Part II.B.2. Rather, “the relevant inquiry is * * * whether

the real parties in interest who did pay or incur those amounts

satisfy the net worth requirement imposed by section

18
(...continued)
pro bono services.
 - 27 -

7430(c)(4)(A)(ii).” Id.; see also id. n.27. As respondent has

forgone the opportunity provided in our May 10 and June 14, 2006

orders to challenge that (or any other) aspect of Dixon VII, we

shall again look to the real parties in interest to determine the

extent to which the requested amounts were paid or incurred. See

infra Part III.H.

C. Substantial Justification Defense

Under section 7430(c)(4)(B)(i), it is “the position of the

United States in the proceeding” that is evaluated under the

substantial justification standard. In Dixon VII, we identified

that position as “respondent’s litigating position regarding the

legal effect of the attorney misconduct (i.e., that such

misconduct amounted to harmless error and therefore did not

invalidate the decisions entered against the test case

petitioners following the issuance of Dixon II).” Dixon v.

Commissioner, T.C. Memo. 2006-97 at Part II.C.1. We then

concluded, although we had adopted that very position in Dixon

III, that the finding of the Court of Appeals in Dixon V that we

had committed clear error in that regard compelled the conclusion

that respondent’s position was not substantially justified. As

respondent has declined our invitation to challenge that aspect

of Dixon VII, we similarly conclude here that the position of the

United States, as so identified, was not substantially justified.
 - 28 -

D. Other Threshold Requirements

Respondent does not allege that petitioners failed to

exhaust their administrative remedies and does not dispute that

petitioners prevailed in the proceedings at issue.

E. Conclusion

Petitioners are entitled to relief under section 7430.

III. Amounts of Awards

A. Overview

Our determination of the amounts of petitioners’ awards

under section 7430 turns on three inquiries with respect to each

fee request: First, what is a reasonable attorney’s fee (within

the confines of section 7430) for the representation covered by

the fee request? Second, what are the reasonable expenses

associated with that representation? Third, to what extent have

real parties in interest who satisfy section 7430’s net worth

requirement (hereafter, eligible persons) paid or incurred those

amounts?19

B. Reasonable Attorney’s Fee: The Lodestar

1. In General

“The most useful starting point for determining the amount

of a reasonable fee is the number of hours reasonably expended on

the litigation multiplied by a reasonable hourly rate.” Hensley

19
Respondent does not allege that petitioners unreasonably
protracted any portion of the proceedings at issue. See sec.
7430(b)(3).
 - 29 -

v. Eckerhart, 461 U.S. 424, 433 (1983). The resulting figure,

commonly referred to as the lodestar, “‘has, as its name

suggests, become the guiding light of * * * [the Supreme Court’s]

fee-shifting jurisprudence.’” Gisbrecht v. Barnhart, 535 U.S.

789, 801 (2002) (quoting Burlington v. Dague, 505 U.S. 557, 562

(1992)); see also Hensley v. Eckerhart, supra at 433 n.7 (“The

standards set forth in this opinion are generally applicable in

all cases in which Congress has authorized an award of fees to a

‘prevailing party.’”).

2. Hours Reasonably Expended

a. The Limited Success Factor

In Hensley, the Supreme Court recognized that the

determination of hours reasonably expended extends beyond

considerations of efficiency and documentation. As the Court

stated:

If * * * a plaintiff has achieved only partial or
limited success, the product of hours reasonably
expended on the litigation as a whole times a
reasonable hourly rate may be an excessive amount.
* * *

* * * That the plaintiff is a “prevailing party”
therefore may say little about whether the expenditure
of counsel’s time was reasonable in relation to the
success achieved. * * *

Hensley v. Eckerhart, supra at 436. Professor Sisk sometimes

refers to this aspect of reasonableness as the limited success

factor. Sisk, “The Essentials of the Equal Access to Justice

Act: Court Awards of Attorney’s Fees for Unreasonable Government
 - 30 -

Conduct (Part Two)”, 56 La. L. Rev. 1, 119 (1995). While it is

often difficult to allocate attorney time between successful and

unsuccessful issues and claims, “denial of a particular form or

aspect of relief occasionally may be attributable to a discrete

motion or proceeding, thus allowing the limited success factor to

be measured by hours devoted to that effort.” Id.; see also

Hensley v. Eckerhart, supra at 436 (a court applying these

principles “may attempt to identify specific hours that should be

eliminated”).

b. Hours Relating to the Issue of Attorney’s Fees

Respondent does not dispute that hours devoted to the

recovery of attorney’s fees (sometimes referred to herein as “fee

request” hours) are potentially compensable under section 7430.

See, e.g., Huffman v. Commissioner, 978 F.2d 1139, 1149 (9th Cir.

1992), affg. in part and revg. in part on other grounds T.C.

Memo. 1991-144. The fees generated by fee request hours are

commonly referred to as “fees-on-fees” or “fees-for-fees” (as

opposed to “merits” fees, which are attributable to “merits”

hours). Because we apply a separate percentage reduction to the

portion of Izen’s lodestar attributable to fee request hours (the

fees-on-fees lodestar) based on the ratio of merits hours allowed

to merits hours claimed, see infra Part III.F., we separately

identify his merits hours and fee request hours.20

20
The Jones fee request (as supplemented) does not include
(continued...)
 - 31 -

3. Reasonable Hourly Rate Under Section 7430

As discussed supra in Part I.A., the determination of a

reasonable hourly rate under section 7430 is subject to an

inflation-adjusted cap “unless the court determines that * * * a

special factor, such as the limited availability of qualified

attorneys for such proceeding, the difficulty of the issues

presented in the case, or the local availability of tax

expertise, justifies a higher rate.” Sec. 7430(c)(1)(B)(iii).

In Dixon VII, after a thorough analysis of the relevant caselaw,

we concluded that we were constrained to apply the statutory rate

cap. As petitioners have not proffered any additional arguments

in that regard, we stand by our analysis and conclusion in Dixon

VII and shall apply the rate cap to petitioners’ fee requests.

C. Hours Reasonably Expended--Izen Fee Request

1. Preliminary Issues

Before we set forth our analysis of, and adjustments to,

Izen’s specific time entries, we address two overarching issues

raised by respondent.

a. Scope of Representation We May Consider

Respondent maintains, in his opposition to the Izen fee

request, that “Only the time spent on the ‘Adair appeal’

[approximately 145 hours] is subject to the court’s evaluation

for a determination of an appropriate award of attorney’s fees on

20
(...continued)
any time entries relating to work on the fee request.
 - 32 -

appeal.” Respondent reasons that Izen filed his Ninth Circuit

rule 39-1.8 motion (requesting that the Court of Appeals transfer

consideration of attorney’s fees to the Tax Court) in case No.

01-70155--the Adair appeal–-and that “[t]he period for Mr. Izen

to request appellate attorney’s fees in connection with the

appeal in Case No. 00-70858 [the test case appeal] has long since

expired.” See 9th Cir. R. 39-1.6.

We begin by observing that we have already held we have

jurisdiction to consider the Jones fee request even though Jones

made no filing under either Ninth Circuit rule 39-1.6 or 39-1.8.

See supra Part II.A. It follows that we may consider the Izen

fee request in its entirety, despite the fact that Izen made no

filing in the test case appeal under either Ninth Circuit rule

39-1.6 or 39-1.8. Moreover, we would reach the same conclusion

even if an appellate filing were a prerequisite to our

consideration of appellate fees under section 7430. That is, we

conclude in the alternative that Izen’s timely motion under Ninth

Circuit rule 39-1.8 in the Adair appeal was sufficient to

transfer the issue of Izen’s fees in the test case appeal as

well.

Although we have been unable to find a case directly on

point, we believe Native Vill. of Quinhagak v. United States, 307

F.3d 1075 (9th Cir. 2002), is sufficiently analogous to support

our alternative ground for considering the Izen fee request in

its entirety. Quinhagak was one of several lawsuits filed in the
 - 33 -

U.S. District Court for the District of Alaska challenging the

Federal Government’s implementation of the Alaska National

Interest Lands Conservation Act (ANILCA), 16 U.S.C. secs. 3101-

3233 (2000). As the Court of Appeals explained, the District

Court had consolidated two such cases, known as Katie John and

Babbitt, to serve as the lead cases:

Although several other cases were filed that turned on
the resolution of the * * * issues in Katie
John/Babbitt, the district court declined to
consolidate these additional dependent cases and chose,
instead, to manage them together and stayed proceedings
pending resolution of the core Katie John/Babbitt
issues.

* * * * * * *

The district court added the instant case to the
list of cases to be managed jointly in connection with
Katie John/Babbitt and, as part of an order explaining
how the joint management would proceed, the district
court invited the plaintiffs in the jointly managed
cases, including the case at hand, to submit amicus
briefing on the * * * issues in the consolidated cases.

Native Vill. of Quinhagak v. United States, supra at 1077-1078.

The various plaintiffs ultimately prevailed, and the Quinhagak

plaintiffs moved for attorney’s fees under ANILCA’s fee-shifting

provision. See 16 U.S.C. sec. 3117(a) (2000).

The District Court granted the Quinhagak plaintiffs’ fee

request in large part, rejecting the argument that they were not

entitled to fees for work relating to the Katie John/Babbitt

cases. In holding that the District Court did not abuse its

discretion in that regard, the Court of Appeals quoted at length

from the District Court’s order:
 - 34 -

the Katie John case was the vehicle which the court
chose to resolve the * * * issues for all of the
jointly managed cases. * * *

“For defendants to suggest, as they do, that
plaintiffs’ work was for different parties in a
different case misconstrues and misrepresents the
reality of what was going on in these jointly managed
cases. For all practical purposes, there was but one
case in which the * * * issues were going to be
decided, and that decision was going to be binding in
all of the cases. The actual briefs may have been
filed (were filed) in the Katie John case, but they
bore directly upon issues raised by the plaintiffs in
this case. * * * ”

Native Vill. of Quinhagak v. United States, supra at 1079. Thus,

even though their brief in the Katie John/Babbitt cases had been

“‘proffered by a technical non-party’”, id. (again quoting the

District Court), the Quinhagak plaintiffs were entitled to

recover the corresponding attorney’s fees. Inasmuch as the test

case appeal and the Adair appeal share the same real parties in

interest and substantive issues, we similarly conclude that

Izen’s timely motion under Ninth Circuit rule 39-1.8, although

technically filed in the Adair appeal, effectively transferred

the issue of Izen’s fees in the test case appeal as well.

b. Discrepancies Between Fee Request and Alleged
Invoice

On April 13, 2006, respondent submitted to the Court certain

documents he had recently received from Geoffrey Sjostrom, the

business manager of the Defense Fund. See supra note 7 and

accompanying text. The documents include several pages of a

facsimile transmission that, based on the identifying information
 - 35 -

printed thereon, appear to have originated from Izen’s telecopier

on the evening of April 3, 2001. Sjostrom alleges that the

pages, which contain time entries substantially similar (in

content and format) to those included in the Izen fee request,

are part of a contemporaneous invoice submitted by Izen to the

Defense Fund. As Sjostrom points out, for the period July 20,

2000 through March 20, 2001, the time entries in the alleged

invoice amount to 56.25 hours, while those included in the Izen

fee request for the same period amount to 130.93 hours.21 The

74.68-hour discrepancy is attributable to new entries as well as

additional time claimed for existing entries. In the

supplemental filing by which he submitted those documents to the

Court, respondent states:

Although respondent did not previously question the
veracity of the billing records, respondent requests
that, in light of this new information, the court
review all of Mr. Izen’s billing records and reduce the
fee award.

In his response to respondent’s supplemental filing, Izen

neither questions the authenticity of the April 2001 document nor

alleges that the discrepancies are attributable to some kind of

billing error. Rather, Izen attempts to downplay the

significance of the document, describing it as an “informational

21
Sjostrom also observes that the billing rate in the
alleged invoice is much lower than the rate claimed in the Izen
fee request. We are not troubled by that discrepancy; Izen
clearly based his request for the higher rate on his notion of
the market value of his services. See infra Part III.H.1.e.
 - 36 -

bill”. He then separately addresses 17 of the discrepancies,

vouching for the necessity of the services and reasonableness of

the time not included in the bill (hereafter, the Sjostrom bill).

Although Izen has not, in our view, adequately explained why

the Sjostrom bill does not include certain charges claimed in the

Izen fee request, we are not inclined to pass judgment on his

veracity in that regard without further investigation, which we

are loath to undertake at this late date.22 Accordingly, we shall

assume that the time entries in the Izen fee request accurately

depict the services performed by Izen and the number of hours

devoted thereto. As discussed below, however, that does not mean

that the Sjostrom bill is irrelevant to our determination of

hours reasonably expended.

2. Adjustments to Hours Claimed

The Izen petitioners base their fee request on 1,072.03

hours of attorney time, including 223.23 hours we have identified

as fee request hours (leaving 848.8 merits hours). Our

adjustments to the hours claimed fall into eight major

categories. Of course, where adjustments are described in more

than one category, we take them into account only once.

22
Respondent, after receiving the Sjostrom bill from
Sjostrom and bringing it to the Court’s attention by means of a
supplement to respondent’s opposition to Izen’s appellate fee
request, did not request an evidentiary hearing on this point.
 - 37 -

a. Hours Relating to “Intervention”

Izen allocates 147.51 hours of his time to “intervention”,

which we take to include not only his efforts to include in the

Adair appeal hundreds of nontest cases that had never been

consolidated with the test cases,23 but also time relating to

Jones’s belated attempt to intervene in the test case appeal on

behalf of the Cerasolis. We have previously described Izen’s own

intervention efforts as “unsuccessful and unnecessary”. Dixon v.

Commissioner, T.C. Memo. 2006-97 n.42. In response to that

characterization, the Izen petitioners assert in their latest

filing that

Izen was successful in at least establishing before the
Ninth Circuit that the prospective Intervenors which
were denied intervention status before this Court[24] had
an interest in this case which entitled them to appeal.
Further, it was never clear in this proceeding that the
test cases were, at all times, adequate representatives
of the prospective intervenors or the * * *
[participating nontest case petitioners]. * * *

The assertion that Izen “[established] before the Ninth

Circuit that the prospective Intervenors * * * [were] entitled

23
We distinguish those efforts from actions necessary to
preserve the participation rights of the Adairs, whose case was
included in our certification order. See infra note 36.
24
In September and October 1992, after this Court had
entered decisions in the Thompson and Cravens cases, Izen and
Sticht filed motions for leave to intervene in those cases on
behalf of numerous nontest case petitioners, which we denied.
See Adair v. Commissioner, 26 F.3d 129 (9th Cir. 1994)
(dismissing appeal of that denial). Respondent notes that Izen’s
lists of “prospective intervenors” in the Thompson/Cravens cases
and the test case appeal, respectively, are photocopies of the
same document.
 - 38 -

* * * to appeal” does not square with the language of that

court’s November 20, 2001 order holding the Adair appeal in

abeyance pending the resolution of the test case appeal. In that

order, the Court of Appeals stated that, because the Tax Court

had consolidated the Adairs’ case with the test cases for

purposes of the evidentiary hearing, “It * * * appears at least

arguable that * * * [the Adairs] could appeal as intervenors from

a final decision in the test cases.”25 The court added, however,

that

if petitioners’ counsel, Joe Alfred Izen, Jr., Esq.,
asserts that this court has jurisdiction in this case
over any non-test Tax Court case other than No. 35608-
86 [i.e., the Adairs’ case], he shall submit to the
court evidence of the following: (1) that the
additional non-test case or cases were at one time
consolidated with the test cases; * * *.

Because none of Izen’s other “prospective intervenors” had ever

had any of their cases consolidated with the test cases, Izen

would not have been able to establish jurisdiction of the Court

of Appeals over their cases.

Given the unsuccessful nature of Izen’s intervention

efforts, we believe a complete disallowance of the corresponding

hours would be well within our discretion. See Hensley v.

Eckerhart, 461 U.S. at 436-437 (discussed supra Part

25
As discussed above, the Court of Appeals apparently
construed Izen’s “Notice of Appeal of Certain Intervenors” as an
attempt to appeal the decisions entered in the test cases rather
than a petition for permission to appeal the orders this Court
had certified for interlocutory appeal.
 - 39 -

III.B.2.a.).26 We hesitate, however, to disregard completely

Izen’s concern that the test cases were insufficiently

representative. Accordingly, we shall defer to Izen’s

professional judgment in that regard--up to a point. When the

Court of Appeals stayed the proceedings in the interlocutory

appeals of the other participating nontest case petitioners on

May 10, 2001, pending resolution of the test case appeal, it

effectively determined that the interests of those nontest case

petitioners were adequately represented in the test case appeal.

That determination belies any continued justification for Izen’s

efforts that could counteract Hensley’s limited success factor.

We therefore disallow 75.84 hours Izen incurred after May 10,

2001, that relate to “intervention”, including 10.92 hours

relating to Jones’s July 2002 motion to intervene.27 See infra

Part III.D.2.c.

26
We do not mean to suggest that Hensley requires courts to
“scalpel out attorney’s fees for every setback” suffered by a
prevailing party. Cabrales v. County of Los Angeles, 935 F.2d
1050, 1053 (9th Cir. 1991). However, we fail to see how Izen’s
intervention efforts “[contributed] to the ultimate victory in
the lawsuit.” Id. at 1052.
27
Izen’s first time entry after May 10, 2001, relating to
intervention is dated June 2, 2001. Given the extent of
communications between Izen, Jones, and Sticht, we presume that
Izen was aware of the Court of Appeals’ May 10, 2001 order by
that time.
 - 40 -

b. Hours Subject to “Billing Judgment” Inference

Although we accept Izen’s contention that the time charges

he excluded from the Sjostrom bill are bona fide, see supra Part

III.C.1.b., his exclusion of those charges undermines his claim

that the additional hours are properly chargeable to the

Government. Just as a recent arm’s-length sale of property is a

reliable indicator of that property’s fair market value, see,

e.g., Huber v. Commissioner, T.C. Memo. 2006-96, a

contemporaneous invoice is a reliable indicator of the “hours

reasonably expended” aspect of the lodestar calculation. As the

Supreme Court recognized in Hensley v. Eckerhart, supra at 434:

“In the private sector, ‘billing judgment’ is an
important component in fee setting. It is no less
important here. Hours that are not properly billed to
one’s client also are not properly billed to one’s
adversary pursuant to statutory authority.” Copeland
v. Marshall, 205 U.S. App. D.C. 390, 401, 641 F.2d 880,
891 (1980) (en banc).

We believe it likely that most of the discrepancies between

the Sjostrom bill and the Izen fee request are attributable to

Izen’s exercise of billing judgment. Indeed, except as noted in

the next paragraph, the new entries in the fee request (and

existing entries with time increases) relate to procedural or

peripheral matters, administrative tasks, or other expenditures

of time that strike us as prime candidates for Izen’s “billing

judgment” cleaver.28 For instance, the fee request, but not the

28
One of the new entries is actually a duplicate entry for
(continued...)
 - 41 -

Sjostrom bill, includes a 5.75-hour charge for Izen’s

“preparation for conference” on top of the next day’s 6-hour

charge for the meeting itself. The fee request, but not the

Sjostrom bill, includes a charge for an additional hour that Izen

currently claims he spent “locating the Petition for Writ of

Certiorari he filed with the Supreme Court”. As any billing

attorney can attest, these are the types of attorney time charges

that, however necessary the underlying activity, are difficult to

justify on a client invoice. Under the corollary espoused by the

Supreme Court in Hensley v. Eckerhart, supra, they should not be

chargeable to respondent, either.29

On the other hand, we have identified five time entries

between January 16 and January 29, 2001 that, despite their

28
(...continued)
the same date (Aug. 25, 2000--2.5 hours).
29
Other examples include the following: New entry for 2.25
hours devoted to forwarding this Court’s Notice of Filing of
Notice of Appeal to the test case petitioners; 2 additional hours
for “transcript search” for the Court’s comments concerning
settlement; additional time claimed for routine filings such as
motions for enlargement of time (2.5 hours) and the Ninth
Circuit’s Civil Appeals Docketing Statement (4.25 hours);
additional time for “legal research/check of citations” or
“research of authorities cited” relating to other attorneys’
procedural filings, including Jones’s motion for reconsideration
of the Court of Appeals’ dismissal of his interlocutory appeal as
untimely (4.08 hours), the Government’s response thereto (3.5
hours), the ensuing order of the Court of Appeals (5.5 hours),
and Sticht’s objection to consolidation on appeal (1 hour); new
entry for 2.25 hours devoted to “proof of filing Notice of
Appeals”; and 2 additional hours for travel time to Minns’s
office for meeting “re - providing access to Hongsermeier
records”.
 - 42 -

omission from the Sjostrom bill, are not as susceptible to the

“billing judgment” inference. Those entries, none of which is

among the 142 time entries to which respondent specifically

objected in his initial response, chronicle Izen’s earliest

substantive efforts with respect to his opening brief in the test

case appeal. Whatever Izen’s reasons for not including those

entries in the Sjostrom bill,30 we deem the corresponding 32.5

hours to have been a reasonable expenditure of time on his part.31

Accordingly, we disallow only 42.18 of the 74.68 hours excluded

from the Sjostrom bill (74.68 - 32.5 = 42.18).

c. Review of Other Parties’ Nonsubstantive Filings

Izen’s time entries include numerous references to his

“review, filing and analysis” of other parties’ filings (and

corresponding orders) relating to attorney appearances and

withdrawals, changes of address, extension requests, and bills of

costs. While these entries (typically claiming .25 hours) do not

necessarily stand out when viewed in isolation, we deem their

cumulative effect to be unreasonable. For instance, Izen claims

to have spent 6 full hours on August 24, 2000, reviewing, filing,

30
It is conceivable that Izen feared he would have to share
his substantive work product with the Minns faction if he
included those time entries in the Sjostrom bill. For his part,
Izen merely asserts that “At this point, neither Sjostrom nor the
legal defense fund had any intention of paying Izen for any work
he was doing on appeal”.
31
The omission of those hours from the Sjostrom bill does
raise the issue of whether the corresponding fees were “paid or
incurred”. See infra Part III.H.1.e.
 - 43 -

and analyzing 24 Motions for Withdrawal from Joint Representation

filed by attorney Declan O’Donnell. We find that difficult to

believe, and even if it were true, it would constitute a grossly

inefficient use of attorney time. We have identified 66 entries

of this nature, and we disallow in full the corresponding 16.88

hours (including 2.58 fee request hours).

d. Representation Issues

In Dixon VII, we resolved not to hold the Government

responsible for fees attributable to the legal and proprietary

jockeying occasioned by the steering committee’s break with

Minns. We take the same approach here with respect to the

steering committee’s earlier break with Izen. Thus, for example,

we disregard time spent by Izen addressing matters such as

“status of Atlas Defense Fund”, “continued representation”,

“payment of outstanding bill”, and “demand for accounting for JAI

clients”. As was the case in Dixon VII, where time entries from

the period of the appeal do not reveal the subject matter of

client communications, we assume a 50/50 split between

compensable and noncompensable matters. The foregoing

adjustments, involving 31 time entries, result in an additional

15.025-hour reduction.

e. Matters Relating to Remand Proceedings

We have identified 16 time entries, totaling 12.25 hours,

that relate to the post-appellate remand proceedings in this
 - 44 -

Court rather than the appeal. We reduce the claimed hours

accordingly.

f. Duplicate Entries

We have identified 10 time entries that appear to be

duplicative or, in our judgment, are excessive in light of other,

similar entries. Elimination of those 10 entries results in an

additional 13.05-hour reduction (including 8 fee request hours).

g. Separately Claimed Fee Request Hours

In their latest filing, the Izen petitioners claim an

additional 117.4 hours of attorney time relating to work on their

fee request. In an affidavit submitted with that filing, Izen

states that he devoted 36 hours to the initial preparation of the

fee request, 8.25 hours to the latest filing, and 73.15 hours to

a variety of tasks (described and dated in 13 numbered

paragraphs) between May 10, 2005 and April 24, 2006. The problem

here is one of overlap. The initial fee request (apparently

mailed on May 12, 2005) includes time entries for May 9-11, 2005,

claiming 28.5 hours (10, 12, and 6.5 hours, respectively) for

preparation of the fee request. In his latest affidavit, Izen

claims an additional 15.33 hours relating to fee request

preparation on May 10 and 12, 2005 (7.33 and 8 hours,

respectively). The new claim of 7.33 hours for May 10 duplicates

the earlier May 10 time entry claiming 12 hours. Adding the

additional 8 hours claimed for May 12 to the 28.5 hours

previously claimed for May 9-11 produces a total of 36.5 hours
 - 45 -

devoted to fee request preparation, which approximates the 36

hours Izen separately claims to have devoted to that task.32 We

therefore conclude that the 36 hours separately referenced in

Izen’s latest affidavit are accounted for in the initial fee

request (28.5 hours) and his new claim for May 12, 2005 (8.0

hours). Disallowance of the duplicate claim for 36 hours, as

well as the duplicate claim for 7.33 hours on May 10, 2005,

results in a downward adjustment of 43.33 hours.

h. Miscellaneous Additional Adjustments

We have identified an additional 23 time entries (only 3 of

which exceed 0.33 hours) that either (1) pertain to matters that

are unrelated to, or are only marginally related to, the

appellate proceedings or the Izen fee request, or (2) are

insufficiently descriptive to establish the required nexus. The

first category includes two entries relating to the Izen/Jones

motion for trial fees that we ruled on in Dixon IV and three

entries relating to parallel State tax proceedings. The second

category includes unexplained references such as “letter

requesting trust documents from Darrell Hatcher” and “handwritten

32
Izen actually claims that the 36 undated hours relate to
both preparation of the fee request and “responding to
Respondent’s objections to the application”. We note that Izen
separately claims--and we allow in full--18.16 hours on Dec. 1
and 2, 2005, relating to the Izen petitioners’ “Supplemental
Response”, which responds to respondent’s opposition to the fee
request.
 - 46 -

notation from Alan Jones”. The 23 entries amount to 7.84 hours,

which we disallow in full.

3. Summary

The foregoing adjustments amount to 226.395 hours,

comprising 172.485 merits hours and 53.91 fee request hours.

Accordingly, we conclude that Izen reasonably expended 845.635

hours (1,072.03 - 226.395) overall, comprising 676.315 merits

hours (848.8 - 172.485) and 169.32 fee request hours (223.23 -

53.91).

D. Hours Reasonably Expended--Jones Fee Request

1. Reliability of Documentation

The Jones fee request initially contained no time entries

whatsoever covering the period of the appeal. Rather, the Jones

petitioners based the amount of their fee request ($133,136.50)

on the aggregate payments received by Jones from his nontest case

petitioner clients from August 16, 1999 through May 27, 2003.

After two requests for additional documentation, the Jones

petitioners finally submitted “reconstructed worksheets of time”

for Jones and two unidentified paralegals.33 The time entries

included in Jones’s worksheet amount to 143.87 hours, while those

33
The Jones petitioners explain: “The computer system in
[Jones’s] office was completely overhauled and reformatted in
January of 2003, so much of the previously stored information was
not accessible for the purposes required herein and worksheets
had to be manually reconstructed.”
 - 47 -

included in the paralegals’ worksheets amount to 210.5 hours

(106.25 hours and 104.25 hours, respectively).

Respondent points out that, with the exception of four time

entries (totaling 2 hours) that appear in one of the paralegal

worksheets but not the other, the paralegals’ worksheets are in

all respects identical. Furthermore, the 64 identical time

entries contained in the paralegals’ worksheets also appear in

Jones’s worksheet, with the only difference being the amount of

time claimed for each entry (the dates and descriptions are

identical).34 Respondent understandably questions the reliability

of these worksheets.

While we are willing to accept the “reconstruction” of

paralegal time based on Jones’s worksheet, we question the total

number of paralegal hours so reconstructed. In a declaration

submitted with the initial fee request, Jones’s office manager-

controller posits an attorney/paralegal hours ratio for the

period August 16, 1999 through May 27, 2003, of almost 8 to 3.

Materials submitted by the Jones petitioners for the post-appeal

period June 1, 2003 to July 15, 2005 (not addressed in this

opinion), reveal an attorney/nonattorney hours ratio of

approximately 5 to 4.35 Turning to the reconstructed worksheets

34
Jones’s worksheet contains an additional 42 time entries
that do not appear in the paralegals’ worksheets.
35
The nonattorney time for the post-appeal period includes
time charged by a law clerk, an accountant, and an “account
(continued...)
 - 48 -

at issue, if we consider only one of the paralegal worksheets,

the attorney/paralegal hours ratio becomes 143.87 to 106.25, or

approximately 5.5 to 4. The foregoing comparison, coupled with

the questionable nature of the worksheets, prompts us to

disregard the duplicate paralegal worksheet claiming 104.25

hours.

2. Specific Time Entries

a. In General

Quite apart from the reliability concerns discussed above,

the time entries contained in the reconstructed worksheets are

woefully nondescriptive. However, as we did in Dixon IV, we

shall give the Jones petitioners the benefit of the doubt here,

on the ground that they should not be overly penalized for their

counsel’s poor documentation efforts.

b. Dismissal and Recertification

Respondent urges us to disallow the time Jones (and, by

extension, his paralegal) spent on behalf of the Jones

petitioners (1) contesting the Court of Appeals’ initial

dismissal of their applications for interlocutory review, and (2)

obtaining this Court’s recertification of their cases, describing

such efforts as “caused by Jones’ own error”. We find

respondent’s argument somewhat disingenuous in light of his

appellate attorneys’ concurrence (in response to Jones’s motion

35
(...continued)
manager” as well as paralegal time.
 - 49 -

for reconsideration of the Court of Appeals’ dismissal) regarding

the applicability of the “mailbox rule”, under which Jones’s

initial filing would have been deemed timely without regard to

the factual issue of the time of receipt. See sec. 7502(a); The

Manchester Group & Subs. v. Commissioner, 113 F.3d 1087 (9th Cir.

1997), revg. T.C. Memo. 1994-604. Because it is not at all clear

that Jones’s efforts on this procedural front were required

because of any error by him, we decline respondent’s invitation

to disregard those efforts altogether.36

c. The Cerasolis’ Motion To Intervene

Given the denial by the Court of Appeals of the Cerasolis’

motion to intervene in the test case appeal, the hours that Jones

and his paralegal devoted to that matter are subject to

disallowance under the limited success principle of Hensley v.

Eckerhart, 461 U.S. 424 (1983).37 See supra Part III.B.2.a.

36
Respondent objects to one “recertification” time entry
(4.0 hours) on the ground that recertification had occurred 5
months prior to the date of the entry. We assume that the entry
is simply misdated, and we allow the time in full.
37
One could argue that the time Jones devoted to his
clients’ separate interlocutory appeals should be disallowed as
well, since the Court of Appeals effectively rendered those
appeals nugatory by putting them on the back burner and
ultimately remanding the nontest cases for disposition consistent
with the mandate of Dixon V. We do not hold that view. Jones
pursued those appeals in response to this Court’s order
certifying the cases of the participating nontest case
petitioners for interlocutory appeal. We issued that order to
ensure that the participation rights endorsed by the Court of
Appeals in DuFresne v. Commissioner, 26 F.3d 105, 107 (9th Cir.
1994) (per curiam), vacating Dixon v. Commissioner, T.C. Memo.
(continued...)
 - 50 -

Moreover, unlike Izen, Jones commenced his intervention efforts

well after the Court of Appeals had effectively determined that

the interests of the participating nontest case petitioners were

adequately represented in the test case appeal. See supra Part

III.C.2.a. We therefore disallow all of his (and his

paralegal’s) time relating to the Cerasolis’ motion to intervene,

amounting to 37.15 hours of attorney time and 14.1 hours of

paralegal time.38

d. Pre- and Post-Appeal Tax Court Filings

The reconstructed worksheets include time entries relating

to filings in this Court that both predate (motion for

reconsideration of Dixon IV--May 2000) and postdate (status

reports--April 30 and May 2003) the period of the appeal. As

those entries are not properly includable in a request for

appellate fees, we disallow the corresponding 14.56 hours of

attorney time and 10.2 hours of paralegal time.

37
(...continued)
1991-614), would not automatically terminate at the Tax Court
door. Consequently, we believe Jones’s efforts in that regard
are properly compensable.
38
In their third supplement to the Jones fee request, the
Jones petitioners assert that Jones’s work on the Cerasolis’
motion to intervene “was useful to other counsel as they prepared
for oral argument.” Again, we fail to see the beneficial effect.
See supra note 25.
 - 51 -

e. Miscellaneous Additional Adjustments

We have identified 10 additional time entries that are

either excessive in terms of attorney time or insufficiently

related to the appellate proceedings. The first category

includes an 8-hour charge for “Letters to Izen, Binder,

O’Donnell, Minns, Sticht” and a 1.5-hour charge for analysis of

the Court of Appeals’ amended Dixon V opinion, which contained no

substantive changes. Examples from the second category include

State-law research for an Alaskan client and a consultation with

attorney O’Donnell regarding efforts to reopen previously settled

cases in the wake of Dixon V. The resulting downward adjustments

amount to 17.75 hours of attorney time and 6.45 hours of

paralegal time.

3. Summary

The foregoing adjustments, coupled with our rejection of the

duplicate paralegal worksheet, amount to 69.46 hours of attorney

time and 135 hours of paralegal time. It follows that Jones and

his paralegal reasonably expended 74.41 hours (143.87 - 69.46)

and 75.5 hours (210.5 - 135), respectively.

E. Calculation of Lodestars

1. Izen Fee Request

a. 2000 and 2001

Izen’s time entries for 2000 and 2001 amount to 282.68

hours. We subtract 139.07 hours from that total to reflect the

adjustments discussed above that apply to 2000-2001 time entries.
 - 52 -

We then multiply the remaining 143.61 hours by the $140 rate cap

in effect for 2000 and 2001 to obtain the lodestar for this

period: $20,105.40.

b. 2002 through 2005

Izen’s time entries for 2002 through 2005 amount to 758.19

hours. We subtract 87.325 hours from that total to reflect the

adjustments discussed above that apply to 2002-2005 time entries.

We then multiply the remaining 670.865 hours by the $150 rate cap

in effect from 2002 through 2005 to obtain the lodestar for this

period: $100,629.75.

The 758.19 hours claimed for this period include 192.07 fee

request hours, and the 88.575 hours disallowed for this period

include 53.91 fee request hours.

c. 2006

Izen’s time entries for 2006 amount to 31.16 hours, all of

which are fee request hours. Since none of our adjustments

relate to 2006, we multiply the full 31.16 hours by the $160 rate

cap in effect for 2006 to obtain the lodestar for this period:

$4,985.60.

d. Total

The lodestar with respect to the Izen fee request is

$125,720.75 ($20,105.40 + $100,629.75 + $4,985.60). The fees-on-

fees lodestar is $25,709.60, calculated as follows: [(192.07 -

53.91) X $150] + $4,985.60 = (138.16 X $150) + $4,985.60 =
 - 53 -

($20,724 + $4,985.60) = $25,709.60. That leaves a “merits fees”

lodestar of $100,011.15 ($125,720.75 - $25,709.60).

2. Jones Fee Request

a. 2000 and 2001

Jones’s time entries for 2000 and 2001 amount to 48.41

hours. We subtract 3.3 hours from that total to reflect the

adjustments discussed above that apply to 2000-2001 attorney time

entries. We then multiply the remaining 45.11 hours by the $140

rate cap in effect for 2000 and 2001 to obtain Jones’s lodestar

for this period: $6,315.40.

The paralegal time entries for 2000 and 2001 amount to 92

hours. We subtract 45.2 hours from that total to reflect the

adjustments discussed above that apply to 2000-2001 paralegal

time entries. We then multiply the remaining 46.8 hours by the

hourly paralegal rate charged by Jones ($125) to obtain the

paralegal lodestar for this period: $5,850.

b. 2002 and 2003

Jones’s time entries for 2002 and 2003 amount to 95.46

hours. We subtract 66.16 hours from that total to reflect the

adjustments discussed above that apply to 2002-2003 attorney time

entries. We then multiply the remaining 29.3 hours by the $150

rate cap in effect for 2002 and 2003 to obtain Jones’s lodestar

for this period: $4,395.

The paralegal time entries for 2002 and 2003 amount to 118.5

hours. We subtract 89.8 hours from that total to reflect the
 - 54 -

adjustments discussed above that apply to 2002-2003 paralegal

time entries. We then multiply the remaining 28.7 hours by the

hourly paralegal rate charged by Jones ($125) to obtain the

paralegal lodestar for this period: $3,587.50.

c. Total

The lodestar with respect to the Jones fee request is

$20,147.90 ($6,315.40 + $5,850 + $4,395 + $3,587.50).

F. Adjustment to Izen’s Fees-on-Fees Lodestar To Reflect
Limited Success

In Dixon VII, we reduced our awards of fees-on-fees to

account for the limited success achieved by the PH appellants and

the Hongsermeiers in pursuing their fee requests. See, e.g.,

Thompson v. Gomez, 45 F.3d 1365, 1367 (9th Cir. 1995) (“the legal

principles for recovering attorney’s fees laid out in Hensley

[citation omitted] apply to requests for fees-on-fees”); see also

Commissioner, INS v. Jean, 496 U.S. at 163 n.10 (dicta). The PH

appellants had unsuccessfully pursued certain discrete issues

relating to their fee request, “thus allowing the limited success

factor to be measured by hours devoted to that effort.” Sisk, 56

La. L. Rev. at 119; see supra Part III.B.2.a. Having lacked that

alternative in the case of the Hongsermeiers, we instead compared

the number of merits hours allowed to merits hours claimed and

applied the resulting “success ratio” to their fees-on-fees

lodestar. See Thompson v. Gomez, supra (applying 87.2-percent

success ratio); Harris v. McCarthy, 790 F.2d 753, 758-759 (9th
 - 55 -

Cir. 1986) (applying 11.5-percent success ratio). We take the

same approach here with respect to Izen’s fees-on-fees lodestar.39

The numerator of the Izen petitioners’ success ratio (merits

hours allowed) is 676.315, and the denominator (merits hours

claimed) is 848.8. See supra Parts III.C.2., III.C.3. Applying

the percentage equivalent (79.68 percent) to Izen’s fees-on-fees

lodestar of $25,709.60, see supra Part III.E.1.d., yields an

adjusted fees-on-fees lodestar of $20,485.41. The resulting

reasonable attorney’s fee with respect to the Izen fee request is

$120,496.56 (merits fees lodestar of $100,011.15 plus adjusted

fees-on-fees lodestar of $20,485.41).

G. Reasonable Expenses

1. Izen Expense Request

Two items account for more than 90 percent of the Izen

petitioners’ claimed expenses of $39,805.19: The court

reporter’s fee for the transcript of the 1989 test case trial

($18,000), incurred June 15, 1989, and the court reporter’s fee

(plus postage) for the transcript of the 1997 evidentiary hearing

($17,840.25), incurred September 29, 1997. The first transcript

fee predates the attorney misconduct phase of this litigation

(and presumably was paid by Kersting in any event). The second

39
As we did in Dixon VII, we focus on merits hours rather
than merits fees because much of the difference between the
amounts of merits fees claimed and merits fees allowed is
attributable to sec. 7430’s rate cap, the effect of which is
already reflected in the fees-on-fees lodestar.
 - 56 -

transcript fee (plus postage) was included in the fees and costs

we considered in Dixon IV. Accordingly, we disallow both

amounts. We also disallow the following items: “Initial fee to

set up Legal Defense Fund file”--$30; “Set up Legal Authority

file”--$30; “Postage/copy charges of letter to Clerk, State Board

of Equalization re Dixon appeal and stay”--$1.34; “Postage/copy

charges of the rest of the Wayne Young story to all of clients”--

$397.76; “Set up Steering committee file”--$30; “Postage/copy

charges fee application”--$23.95 (subsumed within the $181.35

postage/copy charge subsequently claimed with respect to the

initial filing); difference between aggregate expenses claimed in

latest filing and sum of “broken out” amounts--$34.05. The

remaining allowable expenses amount to $3,417.84.

2. Jones Expense Request

The Jones petitioners claim additional expenses of

$7,784.70. We disallow the following items: (1) Copying and

postage for Tax Court filings relating to Dixon III and Dixon

IV--$1,204.38; (2) copying and postage for court filings relating

to the Cerasolis’ motion to intervene in the test case appeal--

$554.36; (3) copying and postage for client correspondence

predating the period of the appeal--$2,753.84; (4) copying and

postage for client correspondence postdating the period of the

appeal--$229.68. The remaining allowable expenses amount to

$3,042.44.
 - 57 -

H. Amounts Paid or Incurred by Eligible Persons

1. Izen Fee Request

a. Indirect Payments

In his affidavit submitted with the Izen fee request, Izen

states: “From the time of the filing of the Notice of Appeal,

June, 2000, until November, 2000, a portion, but not all of my

billings for Test Case representation were paid by the Atlas

Legal Defense Fund”. However, in response to respondent’s

subsequent reference to that statement, the Izen petitioners

state:

Respondent is mistaken when Respondent claims that the
Atlas Legal Defense Fund paid Izen’s fees on appeal for
work performed between June, 2000 and November, 2000.
The Atlas Legal Defense Fund refused to pay Izen’s
bill.

Accordingly, we need not concern ourselves, as we did in Dixon

VII, with indirect payments by eligible persons through the

Defense Fund.

b. Indirect Obligations

In Dixon VII, we concluded that three members of the Defense

Fund’s steering committee, all nontest case petitioners, were

liable for the Defense Fund’s obligations to Porter & Hedges

under the terms of the Fund’s retainer agreement with that firm.

In contrast, the Izen petitioners have failed to produce any

contract between Izen and the Defense Fund for the provision of

appellate legal services, let alone any agreement on the part of

individual nontest case petitioners to accept personal liability
 - 58 -

thereunder.40 Although Izen has attempted, through litigation, to

establish the liability of four steering committee members (all

nontest case petitioners) to pay for a portion of his appellate

services, those efforts have thus far proved unsuccessful. We

therefore have no basis for finding any individual payment

obligations vis-a-vis the Defense Fund.

c. Direct Payments

In their second supplement to the Izen fee request, the Izen

petitioners submitted a list of “payments on appeal” made to Izen

by 19 nontest case petitioners. As discussed below, the Izen

petitioners have also submitted (or established the existence of)

individual contracts for appellate legal services between Izen

and 15 of the listed payors. Since none of those 15 payors is

credited with having made “payments on appeal” in excess of his

contractual obligation (the latter amount independently

satisfying the “paid or incurred” requirement), we focus on the

four remaining listed payors. We further narrow our focus to the

three remaining payors out of that group for whom we have

received net worth affidavits.

In our May 10, 2006 order, we indicated that, if the Izen

petitioners were unable to establish a payor’s fixed contractual

obligation to pay for Izen’s appellate services, we would assume

40
As indicated above, Izen’s initial agreement to provide
legal services in this litigation was with Kersting, not the
Defense Fund as reconstituted after Kersting’s death in March
2000.
 - 59 -

that payments made by that person after the period of the appeal

were intended to compensate Izen for representation in the

ensuing remand proceedings in this Court. Since most of the

additional Izen contracts we have received relating to those

remand proceedings call for monthly payments beginning March 1,

2003, we shall deem the period of the appeal to have ended

February 28, 2003, for these purposes (rather than the January

17, 2003, issue date of Dixon V). Under that convention, the

three remaining listed payors who are eligible persons made

payments to Izen for appellate services in the aggregate amount

of $4,600.

d. Direct Obligations--Fixed Amounts

The Izen petitioners have submitted (or established the

existence of) individual contracts for appellate legal services

between Izen and 17 nontest case petitioners,41 as well as net

worth affidavits for 16 of those petitioners. All but one of the

contracts require payments of $4,800 (the other calls for

payments of $2,400). Thus, the aggregate fixed payment

obligation of the 16 eligible persons is $74,400 [(15 X $4,800) +

$2,400 = $72,000 + $2,400 = $74,400].

41
Two of those 17 nontest case petitioners apparently did
not make any “payments on appeal”.
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e. Direct Obligations--Additional Amounts

At first blush, it would appear that the amount potentially

recoverable with respect to the Izen fee request (reasonable

attorney’s fee of $120,496.56 plus reasonable expenses of

$3,417.84 equals $123,914.40) far exceeds the amount paid or

incurred by eligible persons ($4,600 + $74,400 = $79,000). That

is not the end of the story, however. On the basis of the

authority discussed below, we construe the Izen appellate

contracts as creating additional payment obligations that

eliminate the apparent shortfall.

In Phillips v. GSA, 924 F.2d 1577 (Fed. Cir. 1991), the

Court of Appeals awarded Ms. Phillips more than $9,000 in

attorney’s fees under the EAJA (which similarly limits awards to

amounts “incurred”), even though her attorney had agreed to

prosecute her appeal for a flat fee of $2,500. In an affidavit

submitted with the fee application (and quoted by the Court of

Appeals), the attorney described the fee arrangement as follows:

“She was to pay me $2500 of her back pay for the appeal
and I was to charge her no more. The recovery would
then be contingent upon success, recovery to be based
upon a statutory fee award if we prevailed. We kept
bookkeeping entries of my time, but once the $2500 was
paid by the client, she was not responsible for further
payment of our charges * * * ” [Id. at 1582.]

The Government argued that Ms. Phillips’s fee award should be

limited to $2,500, “because that is all she has paid, or is

obligated to pay, to her attorney.” Id. The Court of Appeals,

noting that the EAJA provides for an award “to the ‘prevailing
 - 61 -

party’” rather than to the attorney,42 construed the fee

arrangement

to mean that if an award of attorney fees is obtained
on her behalf she is obligated to turn it over to her
attorney. In this sense, Phillips incurs the attorney
fees that may be awarded to her. On the other hand, if
no fee award is made to her, she does not have any
obligation to pay any further fees to her attorney from
her own resources. * * * [Id. at 1582-1583.]

See also Sisk, 55 La. L. Rev. at 348-349 (adopting Professor

Silver’s argument that such an arrangement is the economic

equivalent of a nonrecourse debt and concluding that the EAJA’s

“incurred” requirement should be deemed satisfied thereby);

Silver, “Unloading the Lodestar: Toward a New Fee Award

Procedure,” 70 Tex. L. Rev. 865, 881-886 (1992).

In affidavits submitted with the Izen petitioners’ third

supplement to their fee request, Izen’s clients describe a

billing arrangement similar to that depicted in Phillips v. GSA,

supra. Specifically, each affiant states:

6. It was also my/our understanding that he
[Izen] could seek the full value of his services when
he applied for fees and that we would not be
responsible for any fees in excess of our payments
under our contract(s).

7. I/we agreed that we would be reimbursed any
money we had paid Mr. Izen out of any recovery he
received and that he would keep the difference, if any,

42
Sec. 7430(a) similarly provides that “the prevailing
party may be awarded” the costs specified therein. See also
Evans v. Jeff D., 475 U.S. 717, 730-732 (1986) (fee award under
CRAFAA, which provides that a court “may allow the prevailing
party * * * a reasonable attorney’s fee”, belongs to the
prevailing party rather than the attorney).
 - 62 -

between the amounts we had paid him and the reasonable
fees he was awarded by the Court.

Those representations are consistent with the inclusion of Izen’s

hourly billing rate in his flat-fee appellate contracts. We

therefore conclude that each such contract encompasses an

“implied agreement that * * * [any] fee award will be paid over

to the legal representative”, id. at 1583, to the extent the

client’s share of the award exceeds the amount paid by the client

pursuant to the contract. In this manner, the contracts supply

the additional payment obligations that support an award of the

potentially recoverable amount in its entirety.

2. Jones Fee Request

As indicated above, the Jones petitioners actually base the

amount of their fee request ($133,136.50) on the aggregate

payments received by Jones from his nontest case petitioner

clients between August 16, 1999 and May 27, 2003. Disregarding

(1) amounts received prior to the period of the appeal, (2)

amounts received from persons for whom the Jones petitioners have

not submitted net worth affidavits, and (3) amounts received from

persons who had settled their cases prior to the appeal, the

remaining amount (in excess of $84,000) still far exceeds the

reasonable fees ($20,147.90) and expenses ($3,042.44) with

respect to the Jones fee request. Accordingly, we conclude that

eligible persons have paid the potentially recoverable amount

($23,190.34) in its entirety.
 - 63 -

I. Summary

We shall award attorney’s fees and expenses in the amount of

$123,914.40 in respect of the Izen fee request and $23,190.34 in

respect of the Jones fee request.43 We shall address the manner

in which the awards are to be administered in a separate order or

orders implementing this opinion.

To reflect the foregoing,

Appropriate orders will be issued.

43
It turns out that the Izen fee award is the smallest of
the three fee awards we have granted that are premised on actual
participation in the briefing and argument of the test case
appeal. In Dixon VII, we posited a “range of reasonableness”
with regard to the number of hours properly devoted to the core
aspects of the test case appeal, with Izen occupying the low end
of that range. See Dixon v. Commissioner, T.C. Memo. 2006-97 at
Part III.C.1.b. It is not surprising that the attorneys who
joined the fray at a later stage--who did not participate in the
Dixon II trial of the test cases or the Dixon III evidentiary
hearing--would have spent more startup time than Izen in order to
familiarize themselves with the records of the trial and hearing
that he was instrumental in creating. Nor is it surprising that
Porter & Hedges, which had the most available resources and the
least amount of time to deploy them, would come in on the high
end of the range (even after application of a 130-hour haircut).
Suffice it to say that the variances in the amounts of the three
awards should not be interpreted as a judgment on our part
regarding the relative quality and effectiveness of the
underlying appellate representations.
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