Dixon v. Commissioner of Internal Revenue, 032309 FEDTAX, 9382-83
|Docket Nº:||9382-83, 15907-84, 30979-85|
|Opinion Judge:||BEGHE, Judge|
|Party Name:||JERRY AND PATRICIA A. DIXON, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent|
|Attorney:||John A. Irvine, for petitioners. Henry E. O'Neill, for respondent.|
|Case Date:||March 23, 2009|
|Court:||United States Tax Court|
Ps' cases were three of the Kersting tax shelter test cases that were included in Dixon v. Commissioner, T.C. Memo. 1991-614 (Dixon II), vacated and remanded sub nom. DuFresne v. Commissioner, 26 F.3d 105 (9th Cir. 1994) (DuFresne), on remand Dixon v. Commissioner, T.C. Memo. 1999-101 (Dixon III), supplemented by T.C. Memo. 2000-116 (Dixon IV), revd. and remanded 316 F.3d 1041, 1047 (9th Cir. 2003) (Dixon V), on remand T.C. Memo. 2006-90 (Dixon VI), supplemented by T.C. Memo. 2006-190 (Dixon VIII) (on appeal Dec. 28, 2006, and Jan. 3, 2007). The protracted and multiplied proceedings in these cases stem from the misconduct of the Government attorneys in arranging secret settlements of the Ts' and the Cs' test cases that the Court of Appeals for the Ninth Circuit held in Dixon V was a fraud on the Tax Court.
In Dixon III we held that the Government attorney's misconduct did not create a structural defect and was harmless error but that it had caused substantial delay in the resolution of Kersting project cases, and we imposed limited sanctions against R under Rule 123(a), Tax Court Rules of Practice and Procedure. In Dixon IV, supplementing Dixon III, we addressed requests by Ps and other participants in the remand proceedings for attorneys' fees under secs. 7430 and 6673(a)(2), I.R.C. We held that Ps and others were not entitled to fees pursuant to sec. 7430, I.R.C., because they had not prevailed on the merits against the underlying deficiency determinations. We held that they were entitled to fees pursuant to sec. 6673(a)(2), I.R.C., because the Government attorneys had multiplied the proceedings unreasonably and vexatiously and the excess attorneys' fees were caused by the misconduct.
In Dixon V the Court of Appeals held that we had applied the wrong standard in Dixon III and that the misconduct of the Government attorneys in the test case proceedings was a fraud on the Tax Court. The Court of Appeals reversed and remanded our decisions in the remaining test cases, ordering the Tax Court to enter decisions on terms equivalent to those provided in the Ts' secret settlement agreement. In Dixon VI we determined the terms and benefits of the Ts' settlement and their application to the Kersting project participants before the Court.
Early in the Dixon V remand proceedings, R agreed that reasonable attorneys' fees should be awarded to Ps and others participating in those proceedings. R, Ps, and the Court agreed that sec. 6673(a)(2), I.R.C., governed the recovery of attorneys' fees.
HB and JI, attorneys with the law firm of P&H, represented Ps in the Dixon V remand proceedings at no cost to Ps over the amount of costs, expenses, and fees that the Court might require R to pay pursuant to sec. 6673(a)(2), I.R.C. On June 29, 2007, JI filed a motion for attorneys' fees of $X for services provided in the Dixon V remand proceedings, accompanied by the stipulation of R and JI of the reasonableness of the amounts requested. On Nov. 19, 2007, R and JI filed a supplemental stipulation regarding fees and expenses of $Y for the preparation of the subject motion. R concedes that fees and expenses requested on behalf of P&H are reasonable and were caused by the Government attorneys' misconduct.
R argues that the Court cannot require R to pay the requested fees and expenses because sec. 6673(a)(2), I.R.C., and the law of the case established in Dixon IV require that they be paid or incurred by Ps and they have not been so paid or incurred. R argues further that we should not invoke our inherent power to impose the sanction because we did not do so in Dixon IV, in which we held that sec. 6673(a)(2), I.R.C., was the statutory authority governing the award of attorneys' fees.
1. Held: Reasonable attorneys' fees are "incurred", and may therefore be awarded, under sec. 6673(a)(2), I.R.C., when they reflect efforts by attorneys on behalf of their clients to resist or rectify the unreasonable and vexatious conduct of opposing attorneys.
2. Held, further, under sec. 6673(a)(2), I.R.C., attorneys whose unreasonable and vexatious conduct multiplies the proceedings incur the excess costs, expenses, and attorneys' fees caused by their misconduct.
3. Held, further, although in Dixon IV we limited the sanction we imposed under sec. 6673(a)(2), I.R.C., to the amounts paid by Ps and other participants for attorneys' services and expenses during the multiplied proceeding up to that time, the law of the case doctrine does not require us to limit additional sanctions under sec. 6673(a)(2), I.R.C., to the amounts Ps paid for attorneys' fees and expenses for services in the Dixon V remand proceedings.
4. Held, further, the requested attorneys' fees and expenses were incurred for purposes of sec. 6673(a)(2), I.R.C., because (1) R incurred them either when the Government attorneys commenced their unreasonable and vexatious conduct or, alternatively, when we held in Dixon IV that their conduct was unreasonable and vexatious, (2) Ps were contingently liable for the fees, and (3) the contingency has been satisfied.
5. Held, further, our reliance on sec. 6673(a)(2), I.R.C., for imposing sanctions in Dixon IV did not foreclose recourse to our inherent power in this proceeding.
6. Held, further, pursuant to sec. 6673(a)(2), I.R.C., and the inherent power of the Court, we may and will require R to pay to P&H the requested attorneys' fees and expenses.
7. Held, further, because R incurred the requested fees and expenses pursuant to sec. 6673(a)(2), I.R.C., and Dixon IV, we will invoke our inherent power to require respondent to pay amounts equal to interest at the applicable rates for underpayments under secs. 6601(a) and 6621(a)(2), I.R.C., on $X from June 29, 2007, the date JI filed the motion for attorneys' fees and expenses, and on $Y from Nov. 19, 2007, the date R and JI filed the supplemental stipulation of facts regarding fees and expenses incurred in preparing the subject motion.
Background .......................... 9
Discussion ......................... 22
I. Sources of Tax Court's Power To Assess Attorneys' Fees . 22
II. Authority To Award Fees Under Section 6673(a)(2) . . . . 23
A. Positions of the Parties ............. 23
B. Preliminary Comment ................ 24
C. Overview of Prevailing Party Statutes and Sanctioning Statutes ............... 26
D. Principles of Statutory Construction ....... 31
E. Interpretation of "Excess Costs, Expenses, and Attorneys' Fees Reasonably Incurred Because of Such Conduct" ................... 32
1. Threshold Requirement: Attorney-Client Relationship ................. 34
2. Definition of "Incurred" ........... 35
3. History of Section 6673(a)(2) ........ 39
4. Purpose of Sanctioning Statutes ....... 41
5. Statutory Title and Heading ......... 44
6. Relevant Caselaw: When Attorneys' Fees Are "Incurred Because of Such Conduct" Under Section 6673(a)(2) .............. 45
7. Government Incurs the Excess Costs, Expenses, and Attorneys' Fees Attributable to Government Attorneys' Misconduct ....... 52
8. Section 7430 and the Equal Access to Justice Act ..................... 54
9. Law of the Case Doctrine ........... 58
F. Fees "Incurred" in Pro Bono Representation and Contingent Fee Arrangements ............ 64
1. Caselaw Under Prevailing Party Statutes . . . 65
2. Section 7430(c)(3)(B) ............ 76
G. Respondent Must Pay Attorneys' Fees and Excess Expenses Requested on Behalf of Petitioners' Attorneys ..................... 78
III. Inherent Power To Impose Sanctions ........... 79
IV. Conclusion ....................... 82
These cases are part of the Kersting tax shelter litigation that stemmed from the misconduct of respondent's trial counsel in Dixon v. Commissioner, T.C. Memo. 1991-614 (Dixon II), vacated and remanded sub nom. DuFresne v. Commissioner, 26 F.3d 105 (9th Cir. 1994) (per curiam), on remand Dixon v. Commissioner, T.C. Memo. 1999-101 (Dixon III), revd. and remanded 316 F.3d 1041 (9th Cir. 2003) (Dixon V). This is the first Opinion in our third set of opinions requiring respondent to pay attorneys' fees and expenses incurred by or on behalf of Kersting project taxpayers during the various stages of the litigation.2 The current set of opinions pertains to fees and expenses incurred in the proceedings before this Court during the remand from Dixon V (Dixon V remand proceedings), which resulted in Dixon v. Commissioner, T.C. Memo. 2006-90 (Dixon VI), supplemented by T.C. Memo. 2006-190 (Dixon VIII), ascertaining the terms and benefits of the Thompson settlement.
Petitioners' cases were consolidated in the Dixon V remand proceedings with 24 cases of other Kersting project taxpayers for purposes of hearing, briefing, and opinion (the Dixon V taxpayers). Counsel for all Dixon V taxpayers have requested attorneys' fees and expenses for their services in the Dixon V remand proceedings. In this Opinion we consider motions for excess costs and attorneys' fees under section 6673(a)(2)(B)3 for services of Attorneys John A. Irvine (Irvine) and Henry G. Binder (Binder) of Porter & Hedges, L.L.P. (Porter & Hedges), provided to petitioners, the Dixons and the DuFresnes, in the Dixon V remand proceedings.4
Early in the Dixon V remand proceedings, respondent's counsel agreed that, pursuant to section 6673(a)(2), respondent is required to pay attorneys' fees and expenses incurred in the Dixon V remand proceedings. The parties have stipulated that reasonable attorneys' fees and expenses totaling $1,101,575.34 are attributable to services of Porter & Hedges in the Dixon V remand proceedings. Porter & Hedges agreed to...
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