Huffman v. C.I.R.

• Citation: 978 F.2d 1139
• Decision Date: 04 December 1992
• Docket Number: 91-70423,Nos. 91-70331,s. 91-70331
• Parties: -6016, 61 USLW 2310, 92-2 USTC P 50,570 Clair S. HUFFMAN; Estate of Patricia C. Huffman, Deceased, Clair S. Huffman, Executor, Petitioners/Appellants/Cross-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent/Appellee/Cross-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1139

978 F.2d 1139

70 A.F.T.R.2d 92-6016, 61 USLW 2310,

92-2 USTC P 50,570

Clair S. HUFFMAN; Estate of Patricia C. Huffman, Deceased, Clair S. Huffman, Executor, Petitioners/Appellants/Cross-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent/Appellee/Cross-Appellant.

Nos. 91-70331, 91-70423.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted July 6, 1992.

Decided Nov. 4, 1992.

As Amended Dec. 4, 1992.

Kevin G. Staker, Gregory R. Gose, Philip G. Panitz, Steven L. Staker, Law Offices of Staker and Gose, Camarillo, Cal., for petitioners/appellants/appellees.

Gilbert S. Rothenberg, Gary R. Allen, Kimberly S. Stanley, Tax Div., Dept. of Justice, Washington, D.C., for respondent/appellee/appellant.

Appeal from a Decision of the United States Tax Court.

Before: SNEED and D.W. NELSON, Circuit Judges, and WANGER, ^* District Judge.

WANGER, District Judge:

Petitioners, Clair S. Huffman and his wife, Patricia S. Huffman, now deceased, appeal from the Tax Court's partial grant of their motion for costs and attorney's fees requested under I.R.C. § 7430, as amended by the Technical and Miscellaneous Revenue Act of 1988, Pub.L. No. 100-647, 102 Stat. 3342, § 6239(a) ("TAMRA"), which allows the recovery of "reasonable administrative costs" and "reasonable litigation costs" by a prevailing party in a tax case. I.R.C. § 7430(a). ¹ The Commissioner cross-appeals. We affirm in part, reverse in part, and remand.

I

ISSUES

1. Did the Tax Court err as a matter of law in bifurcating the analysis under § 7340 to determine whether the "United States' position in the proceeding" was "substantially justified" into two stages: the "administrative stage," which concerns the notice of deficiency, and the "judicial stage" which concerns the government's answer to the Tax Court petition? ²

2. Assuming bifurcated analysis is proper under § 7430, did the Tax Court err as a matter of law, or otherwise abuse its discretion, by considering only the answer filed by Respondent in the judicial proceeding and in holding that the United States' position in the judicial proceeding was substantially justified?

3. Did the Tax Court err as a matter of law in holding that the tax specialty of taxpayers' counsel was not, nor were any other "special factor[s]" shown, within the meaning of § 7430(c)(1)(B)(iii), which would justify awarding Clair S. Huffman, individually and as executor, attorney's fees in excess of the statutory rate of $75.00 per hour?

4. Did the Tax Court err as a matter of law in determining that, while Petitioners were entitled to reimbursement for attorney's fees in excess of $75.00 per hour due to an increase in the cost of living, the measurement of the cost of living adjustment was from October 1, 1981 (the effective date of the Equal Access to Justice Act) and not from January 1, 1986 (the effective date of the cost of living adjustment in § 7430)? ³

5. Did the Tax Court abuse its discretion in finding that 15.9 hours of attorney time and $20.00 for costs were all the recoverable fees and costs?

BACKGROUND

The procedural history of this matter is extended, and largely irrelevant to the disposition of the issues. The Internal Revenue Service engaged in stonewalling and outright perjury in handling the administrative disposition of Petitioners' notice of deficiency after this notice was initially issued in violation of the TEFRA partnership audit rules. Tax Equity and Fiscal Responsibility Act of 1982, Pub.L. No. 97-248, § 402, 96 Stat. 324, 648-69 (codified as amended at I.R.C. §§ 6221-6233). There followed an administrative hearing, a subsequent petition in Tax Court, a concession by the Commissioner to judgment on the pleadings, and then a motion by Petitioners pursuant to section 7430 and Tax Court Rule 231 for litigation costs and attorney's fees. The issues on appeal arise from the Tax Court's treatment of this motion.

Petitioners sought reimbursement for attorney's fees in the total amount of $8,400.00, representing 67.2 hours of attorney time at $125.00 per hour, plus costs of $156.77. Five point nine attorney hours were spent before the Tax Court petition was filed. Eleven point three attorney hours were spent after the petition was filed, but before the attorney's fees motion was prepared. Attorney hours in the amount of 50.0 were devoted to recovering taxpayers' reimbursement for attorney's fees and costs. ⁴

The Tax Court granted, in part, Petitioners' motion for costs and attorney's fees. Reimbursement for "reasonable administrative costs" under section 7430(a)(1) for all the 5.9 attorney hours incurred pre-petition after receipt of the notice of deficiency plus $20.00 costs was allowed upon the finding that the Commissioner's position as to the notice of deficiency was not substantially justified because the partnership adjustments violated the partnership audit rules. The award included the reasonable attorney's fees incurred to "persuade [the Commissioner] that the notice of deficiency was improper and to rescind that notice of deficiency."

The court did not award Petitioners reasonable "litigation costs" under section 7430(a)(2), and held that the Commissioner's position in the "judicial proceeding" was substantially justified because the answer fully conceded the case. Nevertheless, the court found it was reasonable for Petitioners' counsel to have spent time preparing, filing, discussing, and prosecuting the attorney's fees and costs motion, and awarded reimbursement for 10 of the 50 hours claimed. The balance was disallowed because the Tax Court "believe[d] that it was unreasonable to expend 50 hours of attorney time to recover costs pertaining to the entire 17.2 hours incurred prior to the Motion."

The $75.00 hourly rate, specified by section 7430 unless "the court determines that an increase in the cost of living or a special factor ... justifies a higher rate," was enhanced only for cost-of-living increases. § 7430(c)(1)(B)(iii). The Tax Court rejected Petitioners' claim that they were entitled to a special factor enhancement to $125.00 per hour, held that the prevailing market rate in a given geographic area is not a special enhancement factor under section 7430, and disagreed that "the dearth of qualified tax attorneys in Ventura County," justified fee enhancement. "It observed that [i]t is not enough to simply say 'that lawyers skilled and experienced enough to try the case are in short supply.' " The court rejected Petitioners' argument that their attorney Staker's "specialized training" in tax law was a special factor, and held that his expertise was not "needful for the litigation in question." In applying a cost-of-living adjustment ("COLA"), the court chose October 1, 1981, as the baseline date because that was the date of enactment of a similar attorney's fee provision contained in the Equal Access to Justice Act, Pub.L. No. 96-481, § 204(a), 94 Stat. 2321, 2327-29 (1980) (codified as amended at 28 U.S.C. § 2412(d)) ("EAJA").

Petitioners were awarded $1,628.49 attorney's fees for 15.9 hours of attorney's services at the rate of $102.42 per hour, ⁵ and $20.00 as "administrative costs." The remaining 51.3 hours of attorney time claimed and $136.77 of costs were held to be "nonrecoverable litigation costs."

Petitioners' appeal was timely. The Commissioner cross-appeals the Tax Court's calculation of the COLA under section 7430. Petitioners also seek recovery of fees and costs incurred in this appeal pursuant to section 7430. See Prandini v. National Tea Co., 585 F.2d 47, 53 (3d Cir.1978), cited with approval in In re Nucorp Energy, Inc., 764 F.2d 655, 660-661 (9th Cir.1985).

The central question presented under § 7430 is: At what point or points in the proceeding does the determination of whether there was substantial justification of government conduct commence? Once a determination of the point of commencement has been made and it is found that no substantial justification exists, do the effects of that determination persist throughout the entire proceedings? Petitioners contend that the determination of no substantial justification should be made at the earliest possible point in the proceeding consistent with law, and that the determination is thereafter binding. The Commissioner contends that an initial determination in administrative proceedings is not binding on later judicial proceedings.

JURISDICTION AND STANDARDS OF REVIEW

Jurisdiction is conferred by I.R.C. § 7482. The Tax Court's construction of section 7430, as to the bifurcation and cost-of-living adjustment issues, involves questions of law which we review de novo. Sliwa v. Commissioner, 839 F.2d 602, 605 (9th Cir.1988). The Tax Court's determination of whether the Commissioner's position was "substantially justified" is reviewed for abuse of discretion, Bertolini v. Commissioner, 930 F.2d 759, 761 (9th Cir.1991), as is its determination of the amount of attorney's fees to be awarded. Pierce v. Underwood, 487 U.S. 552, 571, 108 S.Ct. 2541, 2553, 101 L.Ed.2d 490 (1988) (setting review standard for award of attorney's fees under the Equal Access to Justice Act).

The reasoning employed by the courts under the attorney's fees provision of the Equal Access to Justice Act applies equally to review under section 7430. Estate of Merchant v. Commissioner, 947 F.2d 1390, 1393 (9th Cir.1991) ("[M]ost of the Supreme Court's reasoning [under the EAJA] applies equally to review under [section 7430]"); Oliver v. United States, 921 F.2d 916, 922 (9th Cir.1990) ("There is little dispositive difference between section 7430 and the EAJA.").

DISCUSSION

Construction Of Section 7430: Bifurcation.

Section 7430 was amended in 1988 to delineate separately the administrative and court phases of the proceedings by replacing the term "civil proceeding" with "administrative or court proceeding." The terms "reasonable administrative costs" incurred in an administrative hearing and "reasonable litigation costs...