Sher v. C.I.R.
| Decision Date | 05 December 1988 |
| Docket Number | No. 88-4123,88-4123 |
| Citation | 861 F.2d 131 |
| Parties | -422, 88-2 USTC P 9618 Leopold Z. SHER and Karen B. Sher, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Steven I. Klein, New Orleans, La., for petitioners-appellants.
William F. Nelson, Chief Counsel, IRS, Linda E. Mosakowski, Gary R. Allen, Wm. S. Rose, Jr., Ann Belanger Durney, Asst. Attys. Gen., Dept. of Justice, Tax Div., Washington, D.C., for respondent-appellee.
Appeal from the Decisions of the United States Tax Court.
Before THORNBERRY, RUBIN, and HIGGINBOTHAM, Circuit Judges.
The Defendants-Appellants Shers appeal the Tax Court's order denying their motion for attorney's fees incurred contesting an alleged tax deficiency. We affirm.
In 1982, the Shers received $775 in interest income from A.G. Edwards & Sons (A.G. Edwards). A.G. Edwards mistakenly reported to the IRS that the Shers earned $1325 in dividend income from two different A.G. Edwards accounts. This $1325 listed as dividend income was actually $775 that A.G. Edwards should have reported as interest income to the Shers and $550 in interest income paid to Mr. Sher's qualified pension plan.
The Shers reported interest income of $740 from A.G. Edwards on their 1982 tax return. (The Shers concede they underreported $35 of their A.G. Edwards interest income). Relying upon A.G. Edwards' reported figures, the IRS concluded that the Shers received dividend income of $1325 in addition to the $740 interest income the Shers reported to the IRS. Over the course of almost a year, the IRS asserted that the Shers owed taxes on the $1325, while the Shers asserted that they received $775 in interest income from A.G. Edwards. The Shers did not know about the erroneous report A.G. Edwards submitted to the IRS, nor did the IRS know A.G. Edwards' report was erroneous. As a result, neither the IRS nor the Shers were able to identify the source of the problem giving rise to the IRS's mistaken charge that the Shers owed this tax deficiency.
From the time the Shers first learned of the alleged tax deficiency, they tried to rectify the problem. The Shers and an office manager for A.G. Edwards allegedly spoke with a representative of the IRS explaining that A.G. Edwards paid the Shers $775 in interest income. The IRS claims the Shers did not speak with the IRS representative. In November, Mr. Sher and A.G. Edwards wrote the IRS documenting that A.G. Edwards paid the Shers $775 in interest income. The IRS acknowledged Mr. Sher's letter, but made no other contact with the Shers.
In December 1985, the IRS sent the Shers a notice of deficiency. Mr. Sher again made several calls to the IRS in an attempt to discuss the alleged deficiency. One IRS representative told Mr. Sher that the notice of deficiency was probably a mistake. Another representative said the IRS would get back in touch with Mr. Sher. Despite Mr. Sher's attempts to resolve the issue of the deficiency, the IRS never responded further.
The Shers retained an attorney who was an associate in the law firm in which Mr. Sher was a partner. The attorney suggested they file a petition in Tax Court to prevent the IRS from assessing an incorrect deficiency. The Shers filed a petition in March 1986 and attached copies of Mr. Sher's November letter to the IRS, the A.G. Edwards' statement that the Shers received $775 in interest income, and the relevant portion of the Shers' 1982 income tax return. The IRS District Counsel answered the Shers' petition denying their claims and reasserting the deficiency.
In the Spring of 1986, an IRS Appeals Officer requested a copy of the Shers' amended 1982 return and later scheduled a conference with the Shers' attorney. At the conference, the Appeals Officer and the Shers' attorney determined that the dividend income listed in the A.G. Edwards' report was actually the interest income the Shers had already reported. There still remained a discrepancy of $550.
The IRS Appeals Officer gave the Shers' attorney the information A.G. Edwards submitted to the IRS. The attorney reviewed this information and concluded that A.G. Edwards mistakenly listed $550 paid to Mr. Sher's pension fund as income to the Shers. The Shers' attorney wrote the Appeals Officer and explained the error he had discovered. Upon learning of the A.G. Edwards' mistake, the Appeals Officer indicated that the Shers did not owe a deficiency on the $1325 listed as dividend income.
The Shers then filed a motion for litigation costs, which the IRS opposed. The Tax Court denied the Shers' motion. The issues on appeal are (1) whether taxpayers can recover attorney's fees for actions of the IRS prior to the involvement of the District Counsel; (2) if the Shers are entitled to attorney's fees based on actions of the IRS after the District Counsel became involved; and (3) whether the Shers can recover attorney's fees even though their attorney was an associate in Mr. Sher's firm. Because we hold that the Shers are not entitled to attorney's fees, we need not reach the last issue.
The Shers can only claim attorney's fees for expenses incurred after the District Counsel became involved in the case. We base our holding on amendments Congress made to the Internal Revenue Code ("the Code") in 1986 limiting the circumstances under which a taxpayer can recover attorney's fees from the United States. Tax Reform Act of 1986, Pub.L. No. 99-514, 100 Stat. 2752 (1986).
Section 7430 of the Code permits a taxpayer to recover attorney's fees arising in a civil proceeding:
brought ... against the United States in connection with the determination, collection or refund of any tax ... under this title, and brought in a court of the United States.... [T]he prevailing party may be awarded a judgment ... for reasonable litigation costs incurred in such proceeding.
26 U.S.C. Sec. 7430(a) (Supp.1988) (emphasis added).
A "prevailing party" is one who
(i) establishes that the position of the United States in the civil proceeding was not substantially justified, [and] ... (ii) (I) has substantially prevailed with respect to the amount in controversy, or (II) has substantially prevailed with respect to the most significant issue or set of issues presented.
26 U.S.C. Sec. 7430(c)(2)(A) (Supp.1988) (emphasis added). The parties dispute the meaning of the phrase "the position of the United States in the civil proceeding." The Shers urge that the Tax Court should have considered the position of the United States prior to District Counsel involvement. The IRS argues that the Tax Court could only review the behavior of the IRS after the District Counsel became involved. We agree with the IRS.
In 1986, this court held that in reviewing a taxpayer's claim for attorney's fees, courts should look at "the IRS's position at the time the taxpayer's petition was filed." Powell v. Commissioner of Internal Revenue, 791 F.2d 385, 391-92 (5th Cir.1986). Since the ruling in Powell, Congress amended the Code to add that the "position of the United States" includes:
(A) the position taken by the United States in the civil proceeding, and (B) any administrative action or inaction by the District Counsel of the Internal Revenue Service (and all subsequent administrative action or inaction) upon which such proceeding is based.
26 U.S.C. Sec. 7430(c)(4) (Supp.1988). In reviewing a taxpayer's claim for attorney's fees, courts should examine the position taken by the United States after the District Counsel became involved. This result is consistent with a report of the Joint Committee on Taxation, which stated that "[p]relitigation actions or inaction by the IRS prior to the involvement of the District Counsel are not eligible as components of any attorney's fee award." Staff of the Joint Committee on Taxation, 100th Cong., 1st Sess., "General Explanation of the Tax Reform Act of 1986" 1300 (Comm.Print 1986).
In passing this amendment defining "the position of the United States," Congress established that, in determining whether the position of the IRS was substantially justified, courts can only review the position taken by the IRS after the District Counsel enters the picture. See Wickert v. Commissioner of Internal Revenue, 842 F.2d 1005, 1008 (8th Cir.1988) (); Ewing and Thomas, P.A. v. Heye (Commissioner of Internal Revenue), 803 F.2d 613, 616 (11th Cir.1986) (...
To continue reading
Request your trial
-
Powers v. Comm'r of Internal Revenue
...revg. 89 T.C. 779 (1987); Sokol v. Commissioner, 92 T.C. 760, 763 n. 7 (1989); Sher v. Commissioner, 89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th Cir.1988). The legislative history of EAJA states that the possibility that the Government's position was not substantially justified is clearl......
-
Cellar v. Commissioner
...[Dec. 45,194], 91 T.C. 963 (1988); Sher v. Commissioner [Dec. 44,035], 89 T.C. 79, 83 (1987), affd. [88-2 USTC ¶ 9618] 861 F.2d 131 (5th Cir. 1988). The taxpayer bears the burden of proving that he or she is entitled to an award of litigation costs. Rule 232(e); Coastal Petroleum Refiners, ......
-
Tinsley v. Commissioner
...to the factual development of the case. Sher v. Commissioner [Dec. 44,035], 89 T.C. 79, 84 (1987), affd. [88-2 USTC ¶ 9618] 861 F.2d 131 (5th Cir. 1988); Bayer v. Commissioner [Dec. 47,425(M)], T.C. Memo. 1991-282, modified [Dec. 48,051] 98 T.C. 19 (1992).1 We may also consider, among other......
-
Williford v. Commissioner
...Cir. 1992), affg. in part and revg. in part [Dec. 47,266(M)] T.C. Memo. 1991-144; Sher v. Commissioner [88-2 USTC ¶ 9618], 861 F.2d 131, 134-135 (5th Cir. 1988), affg. [Dec. 44,035] 89 T.C. 79 (1987). Respondent's counsel did not assert a position different from the position taken in the no......