Hongsermeier v. Commissioner of Internal Revenue, T.C. Memo. 2009-273 (U.S.T.C. 11/25/2009)
| Decision Date | 25 November 2009 |
| Docket Number | No. 29643-86.,29643-86. |
| Parties | RICHARD AND FIORELLA HONGSERMEIER, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
Michael Louis Minns and Enid M. Williams, for petitioners.
Henry E. O'Neill, for respondent.
This is the third opinion in our third set of opinions on various petitioners' applications for attorney's fees and expenses incurred in the Kersting tax shelter project litigation after the discovery and disclosure of the misconduct of respondent's trial counsel in Dixon v. Commissioner, T.C. Memo. 1991-614 (Dixon II), vacated and remanded per curiam sub nom. DuFresne v. Commissioner, 26 F.3d 105 (9th Cir. 1994), on remand Dixon v. Commissioner, T.C. Memo. 1999-101 (Dixon III), revd. and remanded 316 F.3d 1041 (9th Cir. 2003) (Dixon V), on remand Dixon v. Commissioner, T.C. Memo. 2006-90 (Dixon VI), supplemented by Dixon v. Commissioner, T.C. Memo. 2006-190 (Dixon VIII), on appeal (9th Cir., Dec. 28, 2006, and Jan. 3, 2007).
In our first attorney's fees opinion, Dixon v. Commissioner, T.C. Memo. 2000-116 (Dixon IV) (supplementing Dixon III), we awarded Kersting project petitioners attorney's fees and expenses under section 6673(a)(2)(B)1 for services in this Court rendered by Attorneys Joe Alfred Izen, Jr. (Izen), Robert Allen Jones (Jones), and Robert Patrick Sticht (Sticht) during the remand from DuFresne.
In the second set of attorney's fees opinions, Dixon v. Commissioner, T.C. Memo. 2006-97 (Dixon VII), and Young v. Commissioner, T.C. Memo. 2006-189, we responded to the supplemental mandate of the Court of Appeals for the Ninth Circuit to rule on Kersting project petitioners' requests for appellate attorney's fees and expenses incurred in the Dixon V appellate proceeding. In Dixon VII we awarded appellate attorney's fees and expenses under section 7430 to Kersting project petitioners represented in the Dixon V appeals by Porter & Hedges Attorneys John R. Irvine (Irvine) and his partner, Henry G. Binder (Binder), and by Michael Louis Minns (Minns). In Young we awarded appellate fees and expenses under section 7430 to Kersting project petitioners represented in the Dixon V appeals by Izen and Jones.
This third set of opinions pertains to fees and expenses incurred in this Court during the remand from Dixon V (Dixon V remand proceeding),2 which resulted in Dixon VI, supplemented by Dixon VIII, determining the terms and benefits of the Thompson settlement.3 In our most recent opinions, Dixon v. Commissioner, 132 T.C. __ (2009) (Dixon IX), and Gridley v. Commissioner, T.C. Memo. 2009-89 (Gridley II), we awarded fees and expenses under section 6673(a)(2)(B) for the respective services of Irvine, Binder, and other Porter & Hedges attorneys and of Jones in the Dixon V remand proceeding.
In this Memorandum Opinion we award fees and expenses under section 6673(a)(2)(B) for services of Minns and his staff on behalf of the Hongsermeier test-case petitioners and various non-test-case petitioners in the Dixon V remand proceeding. A later opinion will deal with the pending motion of other Kersting test-case and non-test-case petitioners to recover Izen's fees and expenses incurred in the Dixon V remand proceeding.
Petitioners have submitted an amended request for $967,3794 in fees and $21,525.99 in expenses. Respondent objects to the hourly rates and number of hours claimed as unreasonable; respondent requests substantial reductions.
After considering petitioners' amended request and respondents' objections to claimed hourly rates, we will reduce Minns' hourly rate from $500 to $350 per hour and reduce the claim for the services of his associate, Enid M. Williams (Williams), from $250 to $175 per hour. We will allow the requested hourly rates of $100 and $75 per hour for services of a paralegal and secretary. The rate reductions alone would reduce petitioners' requested award by $285,363.75 ($229,993.50 attributable to Minns and $55,370.25 attributable to Williams) to $682,015.25.5
In response to respondent's objections to specific items in various categories of services, we will reduce petitioners' requested award by a total of 736.89 hours for Minns, Williams, the paralegal, and the secretary, amounting to an additional $197,976.50 reduction of petitioners' requested fee award, which would leave petitioners a fee award of $484,038.75.
In addition to the above fee reductions attributable to respondent's specific objections, we will reduce petitioners' fee award across-the-board by an additional one-third (33-1/3 percent) of the remaining fee amount, amounting to $161,346.25, to reflect "overlawyering" and lack of contemporaneous documentation. After subtracting this percentage reduction, we hold that petitioners are entitled to a fee award of $323,692.50. We also reduce petitioners' requested expenses by $6,236.44, leaving an expense award of $15,289.55.
The underlying facts in these cases are described in Dixon II, Dixon III, Dixon IV, Dixon VI, Dixon VII, Young v. Commissioner, T.C. Memo. 2006-189, Dixon VIII, Dixon IX, and Gridley II. The parties have provided additional facts in petitioners' fee request, as amended, and respondent's objections. The parties have not requested an evidentiary hearing, and we have found a hearing unnecessary. Cf. Rule 232(a)(2).
The Kersting tax shelter litigation arose from respondent's disallowance of interest deductions claimed by participants in tax shelter programs promoted by Henry F.K. Kersting (Mr. Kersting) during the late 1970s and the 1980s. Respondent's determinations of deficiencies against Kersting tax shelter participants eventually resulted in the docketing of approximately 1,800 cases in the Tax Court. Most Kersting project petitioners entered into "piggyback" agreements with respondent in which they agreed that their cases would be resolved in accordance with a small number of test cases. The Hongsermeiers were among the test-case petitioners.
In Dixon II the Court upheld the deficiencies resulting from Kersting tax shelter deductions claimed by the test-case petitioners. On June 9, 1992, after entry of the Court's decisions in Dixon II, respondent's management discovered that before trial respondent's trial attorney, Kenneth W. McWade (McWade), and his supervisor, Honolulu District Counsel William A. Sims (Sims), had entered into secret settlement agreements with test-case petitioners John R. and Maydee Thompson (the Thompsons) and John R. and E. Maria Cravens (the Cravenses). McWade and Sims had not disclosed the Thompson and Cravens settlements to their superiors, the Court, or the other test-case petitioners or their counsel. The primary purpose and final effect of the Thompson settlement was to provide the Thompsons refunds more than sufficient to pay the fees of Luis G. DeCastro (DeCastro), the Thompsons' attorney, to provide the appearance of independent representation of test-case petitioners in the test-case trial.
Respondent filed a motion for an evidentiary hearing to determine whether the secret settlements had affected the Court's decisions in Dixon II. The Court denied respondent's motion for an evidentiary hearing, entered decisions giving effect to the Thompson and Cravens settlements, and allowed to stand the decisions sustaining respondent's adverse determinations against the other test-case petitioners. We also denied motions to intervene in the Thompson and Cravens cases filed by Izen and Sticht on behalf of certain test-case and non-test-case petitioners.
The test-case petitioners (other than the Thompsons and the Cravenses) and the non-test-case petitioners seeking to intervene appealed to the U.S. Court of Appeals for the Ninth Circuit. The Court of Appeals vacated our decisions in the test cases, holding that an evidentiary hearing was needed to determine whether the misconduct of respondent's counsel had given rise to "a structural defect voiding the judgment [in Dixon II] as fundamentally unfair, or whether, despite the government's misconduct, the judgment can be upheld as harmless error." DuFresne v. Commissioner, 26 F.3d at 107. The Court of Appeals directed the Tax Court to hold such a hearing and to consider the merits of all motions of intervention filed by affected parties. In an unpublished opinion, Adair v. Commissioner, 26 F.3d 129 (9th Cir. 1994), the DuFresne panel (Goodwin, Ferguson, and Trott, JJ.) affirmed our denials of the motions to intervene in the Thompson and Cravens cases on the ground that those decisions had become final.
To give effect to the direction of the Court of Appeals in DuFresne to consider the merits of all motions to intervene by affected parties, we ordered the consolidation of 10 non-test-cases with the remaining test cases for the evidentiary hearing, briefing, and opinion required by the Dufresne mandate.
In the course of that evidentiary hearing Izen sought discovery of documents pertaining to respondent's conduct after the trial of the test cases. Izen alleged, among other things, that respondent after May 1992 tried to conceal the fraudulent conduct of the Government attorneys in the test cases. We denied Izen's discovery requests, sustaining various privileges asserted by respondent. See Dixon III, PROCEDURAL HISTORY OF EVIDENTIARY HEARING, III. Developments Following Initial Evidentiary Hearing, C. Denial of Mr. Izen's Motion To Compel Production of Documents.
After the evidentiary hearing we issued our opinion in Dixon III, generally allowing the Court's decisions in Dixon II to stand and holding that McWade's and Sims' misconduct did not create a structural defect that prejudiced the Court's decision in Dixon II but amounted to harmless error. However, we imposed sanctions against respondent by relieving test-case and non-test-case petitioners of liability for (1) the interest component of the...
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