Powers v. C.I.R.
| Decision Date | 26 January 1995 |
| Docket Number | Nos. 94-40005,94-40006 and 94-40007,s. 94-40005 |
| Citation | 43 F.3d 172 |
| Parties | -650, 95-1 USTC P 50,086 M. Lane POWERS, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Robert I. White, Lawrence Sherlock, Chamberlain, Hrdlicka, White, Williams & Martin, Houston, TX, for appellant.
David L. Jordan, Acting Chief Counsel, I.R.S., Thomas J. Clark Richard Farber, Attys., Gary R. Allen, Chief, Appellate Section, Tax Div. U.S. Dept. of Justice, Washington, DC, for appellee.
Appeals from the Decisions of the United States Tax Court.
Before GARWOOD, JOLLY and STEWART, Circuit Judges.
This consolidated appeal from the Tax Court involves the issue of the sufficiency of an award for litigation costs to prevailing taxpayer M. Lane Powers under Sec. 7430 of the Internal Revenue Code as well as the issue of whether Powers made an unequivocal, irrevocable election to relinquish the three-year carryback provision of Sec. 172(b) of the Code. We affirm in part, reverse in part, and remand in part.
On appeal, M. Lane Powers alleges the following assignments of error:
(1) That the Tax Court erred in holding that he unequivocally elected for the years 1978 and 1979 to relinquish the three-year carryback period provided by Internal Revenue Code Section 172(b);
(2) That the Tax Court erred in refusing to award attorney's fees for 298.35 hours out of the 559.50 total hours expended by Powers' counsel in settling the case on the merits and in pursuing the motion for litigation costs; and
(3) That the Tax Court erred in refusing to award attorney's fees at a rate higher than the statutory rate (plus a cost of living increase) for the hours reasonably expended in the case.
This consolidated appeal encompasses three Tax Court cases commenced by Petitioner-Appellant M. Lane Powers. Powers timely filed federal income tax returns for the years 1976 through 1979. The IRS audited Powers' 1976 and 1977 returns and issued notices of deficiency. Powers instituted litigation in the Tax Court in response to the 1976 and 1977 notices of deficiency. 1 The IRS requested that Powers sign extensions of the statute of limitations for assessing additional tax for the years 1978 and 1979. Powers agreed and signed IRS Forms 872A in 1982 and 1983, giving the IRS open-ended extensions that could be terminated by either party with 90 days' notice.
Until 1986, the IRS never audited or even contacted Powers about auditing the 1978 and 1979 returns. On March 31, 1986, Powers gave the IRS a 90-day notice of termination of the open-ended extension of the statute of limitations for the 1978 and 1979 returns. Upon receipt of the notice of termination, the 1978 and 1979 tax returns were assigned to an IRS agent who disallowed $1,853,043 and $4,804,790 of deductions on the 1978 and 1979 tax returns respectively by eliminating all deductions of $9,000 or more. From this report, the IRS issued a timely notice of deficiency to Powers for approximately $2.3 million for the tax years 1978 and 1979.
In the 1976 and 1977 litigation, Powers alleged that he had sustained net operating losses (NOLs) in 1978 and 1979 and was entitled, by virtue of the normal statutory rules applicable to net operating losses, to carry back the NOLs to 1976 and 1977. As a consequence of these NOL carrybacks, Powers alleged that he was entitled to refunds in 1976 and 1977. The IRS filed a motion for partial summary judgment with respect to Powers' 1976 and 1977 tax years, taking the position that Powers' 1978 and 1979 returns contained special elections in which he relinquished the normal carryback of those losses and elected instead to carry forward the 1978 and 1979 NOLs to subsequent years. The Tax Court granted the IRS's motion for summary judgment, finding that Powers had irrevocably elected to relinquish his right to carry the 1978 and 1979 losses back to 1976 and 1977.
The same day the Tax Court granted the IRS' motion for summary judgment with regard to years 1976 and 1977, Powers commenced litigation in the Tax Court to contest the proposed deficiencies for 1978 and 1979. 2 Powers maintained that his 1978 and 1979 returns were correct as filed and that he owed no additional taxes. He claimed that he sustained NOLs in 1978 and 1979 in the amounts of $1,054,355 and $2,985,344. At that point, Powers' bankruptcy proceeding was restarted, resulting in a stay of all Tax Court litigation. Four years later, the cases were reactivated, and in 1990, the 1978-1979 case was set for trial.
On the eve of trial in March 1991, the IRS stipulated that Powers owed no deficiency in taxes or penalties for 1978 and 1979 and had sustained NOLs that were later agreed to be $87,607 and $1,597,293. The IRS also stipulated in the 1976 and 1977 cases that if the NOLs from 1978 and 1979 were available for carryback, Powers would owe no taxes for 1976 and 1977 but rather would be entitled to refunds of $97,228.84 and $5,964.64. Without the NOL carryback, the parties stipulated that Powers would owe additional taxes for 1976 of $61,455.02 and would be entitled to a refund in 1977 of $683.45.
The Tax Court, in response to Powers' motion to reconsider, reaffirmed its decision (on the IRS motion for summary judgment) that Powers had relinquished his right to the carrybacks and entered judgment based on the parties' stipulations. Powers has appealed the Tax Court's grant of the IRS motion for summary judgment for both 1976 and 1977.
In March 1991, as soon as the IRS conceded the 1978 and 1979 litigation, Powers filed a claim for an award of litigation costs. This matter was tried for four days in November 1991. Upon the judge's order, a transcript was prepared, and the parties filed briefs through the first four months of 1992.
On May 25, 1993, the Tax Court determined that Powers was entitled to an award of litigation costs. The Court awarded $55,709 out of a claim of $148,560.67. Powers filed a motion for reconsideration and later a motion to revise the 1978 and 1979 decision, claiming that the Court had failed to award attorney's fees for hours expended on the 1978 and 1979 case. The court denied these motions. Powers has appealed the award of litigation costs as well.
As noted above, Powers has appealed the Tax Court's grant of the IRS's motion for summary judgment. The court granted the motion upon a finding that Powers had made an irrevocable, valid election under Sec. 172 of the Internal Revenue Code to carry forward his NOLs from 1978 and 1979; therefore, the Tax Court determined that Powers could not carry back those losses to 1976 and 1977. Powers argues that a valid election was not made; hence, he contends that he has the right to carry back his 1978 and 1979 NOLs to 1976 and 1977, entitling him to substantial refunds for those years.
We review Tax Court decisions in the same manner in which we review civil cases decided by the federal district courts. Grigg v. Commissioner, 979 F.2d 383, 384 (5th Cir.1992). We review the appeal of a grant of a summary judgment de novo to ascertain whether any genuine issue of fact exists and whether the moving party is entitled to judgment as a matter of law. City of Arlington v. FDIC, 963 F.2d 79, 81 (5th Cir.1992). The Tax Court's holding that Powers made an effective election is a conclusion of law also subject to de novo review. Branum v. Commissioner, 17 F.3d 805 (5th Cir.1994).
The Tax Court granted the Internal Revenue Service's motion for summary judgment based upon its finding that Powers had made an irrevocable, unequivocal election to relinquish his ability to carry back his net operating losses for 1978 and 1979. We disagree. We find that, on the undisputed facts, the taxpayer made no such unequivocal, irrevocable election.
Section 172 of the Internal Revenue Code sets forth rules under which a taxpayer who incurs a net operating loss 3 in one taxable year may use that loss to offset income of taxable years prior to or subsequent to the year of the loss. The Code allows a NOL deduction in a given taxable year for the aggregate of the NOLs carried over and back to that year. See 26 U.S.C. Sec. 172(a).
For tax years 1978 and 1979, 26 U.S.C. Sec. 172(b)(1) and (b)(2) provided that a NOL was required first to be carried back to each of the three years preceding the year of the loss, and then, to the extent the loss was not fully absorbed by taxpayer's income in the carryback years, it could be carried forward to each of the seven years following the loss. 4
A taxpayer, however, may elect to relinquish the 3-year carryback period, in which event he may use the NOL only by carrying it forward to offset income in subsequent years.
During the tax years in question, Section 172(b)(3)(C) of the Internal Revenue Code provided:
Any taxpayer entitled to a carryback period ... may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year ending after December 31, 1975. Such election shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extensions of time) for filing the taxpayer's return for the taxable year of the net operating loss for which the election is to be in effect. Such election, once made for any taxable year, shall be irrevocable for that year.
In 1977, the Treasury Department promulgated temporary regulations prescribing the procedure for making elections under, inter alia, Sec. 172(b)(3)(C). These regulations are still in effect. They provide, in pertinent part, as follows:
(d) Manner of making election. Unless otherwise provided in the return or in a form accompanying a return for the taxable year, the elections ... shall be made by a statement attached to the return (or...
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