TAX COURT OPINION

Case: James Pennington a.k.a. James C. Sublett and Lisa Pennington a.k.a. Lisa S. Southworth
Docket Number: 18997-11
Judge: Goeke
Opinion Type: bench
Filed: 02/12/2014
Pages: 15

UNITED STATES TAX COURT WASHINGTON, DC 20217 JAMES PENNINGTON A.K.A. JAMES C. SUBLETT AND LISA PENNINGTON A.K.A. LISA S. SOUTHWORTH, ) ) ) Petitioner(s), v. ) Docket No. 18997-11. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Joseph Robert Goeke at Houston, Texas, on January 15, 2014, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. It is further ORDERED that in accordance with the oral findings of fact and opinion, the parties shall on or before March 31, 2014, submit to the Court the computations for the attorney's fees. It is further ORDERED that the parties shall on or before May 1, 2014, submit to the Court a stipulated decision document as to the deficiency in this case. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. February 12, 2014 SERVED FEB 1 8 2014 Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 12 13 Bench Opinion by Judge Joseph Robert Goeke January 15, 2014 Docket No. 18997-11 James Pennington, a.k.a. James C. Sublett, and Lisa Pennington, a.k.a., Lisa S. Southworth THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This opinion is rendered pursuant to Rule 152 of the Tax Court Rules of Practice and Procedure, and section 7459(b) of the Internal Revenue Code. 14 Hereinafter, rule references are to the Tax Court 15 16 17 18 1.9 20 21 22 23 24 25 Rules, and section references are to the Internal Revenue Code. Petitioners were residents of Texas when they filed their petition in this case through counsel on August 23, 2011. The present matter is before the Court to resolve Petitioners' motion for award of reasonable litigation and administrative costs filed on November 5, 2012, under Rule 213. Some history of this case is appropriate. Following the petition in this case, Respondent filed an answer, and the case was 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 5 1 eventually set for trial in San Antonio, Texas. 2 Prior to trial, the parties submitted a stipulation 3 4 5 6 7 8 9 of settled issues, which resolved all of the income tax issues in the case. The stipulation of settled issues is cross-referenced to this opinion and made a part of the opinion, as the terms of that stipulation are important to the outcome of this motion. At the time of the filing of the stipulation of settled issues, Petitioner filed the 10 motion for fees, which is presently before the Court. 11 Respondent was ordered to file a response to that 12 motion, and Respondent did in January of 2013. The 13 parties were instructed to seek a resolution of the 14 motion, and they attempted to do so, but they 15 16 17 18 19 20 submitted a status report on March 6, 2013, indicating that a final resolution of the motion would not be possible. Subsequently, Petitioner submitted a status report, advising the Court that on February 28, 2013, the Petitioner had filed for bankruptcy in the 21 Western District of Texas. On March 8, 2013, the 22 Court issued an order, staying the proceedings in 23 24 this case because of the bankruptcy filing. Subsequently, the Petitioner advised the 25 Court that on April 2, 2013, the Bankruptcy Court for 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 the Western District of Texas had lifted the stay of this matter, specifically to allow the Tax Court to resolve the pending motion and complete the closure of the Tax Court case. The Tax Court then set this case for hearing, based upon the factual issues noted by the parties in San Antonio, Texas, for the fall of 2013. Because of the government shutdown, the Court was forced to cancel the trial session in San Antonio, Texas, and this case was rescheduled for hearing on January 6, 2014, or during the week of January 6, 2014, in Houston, Texas. In fact, a trial was held relative to Petitioners' motion for reasonable fees on January 9 and 10 of 2014. After the trial, the Court advised the parties that the Court anticipated doing a bench opinion in this case, and requested that the parties file memoranda in support of their respective positions concerning the underlying fees in dispute, and the parties did, in fact, file post-trial 21 memorandum of authorities on January 13 and 14 of 22 23 24 25 2014. The parties also entered into a stipulation of facts and a supplemental stipulation of facts concerning the facts relevant to the resolution of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 Petitioners' motion for fees. Those stipulations are 2 3 4 5 6 7 8 9 also made by this reference a part of this opinion. Some discussion of the merits of the underlying tax case, which was resolved by the parties' stipulation of settlement, is appropriate. Respondent asserted adjustments which included into the income of the Petitioners for the years 2001 through 2008 significant amounts of income based upon deposits into bank accounts controlled by The Anchor 10 Group. 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Petitioner had maintained that The Anchor Group had previously been determined by Respondent to be subject to 501(d) status for the year 2004, and that Respondent's income adjustments were inconsistent with that determination. In addition, in the notice of deficiency, which Respondent issued to the Petitioner, which preceded the case in chief, Respondent asserted significant additions to tax, the amounts of which exceeded the tax generated by the income adjustments. These additions to tax for each of the years in question arose under sections 6651(a)(1), 6651(a)(2), and 6653. The total amounts involved in the deficiency and additions to tax asserted by the Respondent in the notice of deficiency issued to the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 Petitioners on May 18, 2011, which formed the basis 2 for the case in chief, exceeded $400,000, and as 3 Petitioner points out in Petitioners' motion, the 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 case was settled pursuant to the stipulation of settled issues previously referred to, based upon tax deficiencies of $8,695. Based upon Petitioners' assertion in paragraph 3(a) of Petitioners' motion, Petitioners prevèded on in excess of 98 percent of the amounts in controversy in the notice of deficiency, including a full concession by Respondent of the additions to tax, including the fraud penalty under section 6663(a). The fees in dispute can be broken down, based upon a subsequent event after the petition was filed, that event being Petitioners' filing of a petition in bankruptcy on February 28, 2013, as previously discussed. The fees prior to that date, based upon the record submitted to the Court and the parties' allegations, totaled $19,537.24. Respondent challenges these fees, based upon two arguments. First, Respondent maintains that the Petitioner is not entitled to any of these fees, because the Petitioner failed to exhaust 25 administrative remedies available to the Petitioner, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 and hence, under section 7430(b), a judgment of reasonable litigation costs should not be awarded. Respondent's argument is focused on the fact that after a discussion with the examining revenue agent prior to the issuance of the notice of deficiency, Petitioners' counsel, on August 4, 2010, provided a letter to the examining revenue agent, 8 which stated as follows: "This will confirm that I 9 presented the taxpayers' position to you concerning 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the above-referenced examination. If you do not accept our position, please refer the case for issuance of the notice of deficiency. We waive issuance of the 30-day letter. We will ask for an appeals conference when the case has been docketed in the United States Tax Court." This letter from Petitioners' counsel was precipitated by a meeting with the revenue agent, at which time the revenue agent provided a draft first page of what is normally characterized as a 30-day letter, and the first page or preliminary pages of the 30-day letter consist of a Form 4549-A, which listed adjustments to income and the resulting taxes due for the years 2001 through 2008, for each of the two Petitioners, with separate computations because of the community property situation in Texas. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 These adjustments did not include any additions to tax and were substantially less than the income adjustments in the notice of deficiency. Respondent's explanation for why the amounts provided the Petitioner on August 4, 2010, were so significantly smaller than the amounts ultimately included in the notice of deficiency is inadequate. And we believe that, although it is clear that Petitioners counsel did waive an administrative remedy in his August 4 letter to the revenue agent, we believe this waiver should not be deemed to be effective with respect to the additions to tax and adjustments which exceed the amounts proposed by the revenue agent in the informal Form 4549-A presented at the meeting with Petitioner husband and Petitioners' counsel in August of 2011. Respondent's second argument relative to the pre-bankruptcy filing fees is that Petitioner failed to list those fees properly as subject to the bankruptcy proceeding, and that no proof of claim was filed by Petitioners' counsel. Thus, Respondent believes that Petitioner should not be deemed to have incurred the fees which is required for the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Petitioner to recover the fees pursuant to the 25 language in section 7430(a)(2). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 1U 11 12 13 14 Respondent's post-trial memorandum of authorities regarding this matter asserts that in such a situation where Petitioner filing the bankruptcy may have no legal obligation to pay these fees, they should not be deemed as to have been incurred. Respondent cites Swanson v. Commissioner, 106 T.C. 76 (1996) in support of Respondent's position. In this regard, the Court notes that Swanson acknowledges that Congress amended section 7430 to conform that provision more closely to the Equal Access to Justice Act. The Court also notes that in the case of United States v. Claro, 579 F.3d 452 (Fifth Circuit 2009) ) 15 ( Î%e Court of Appeals for the Fifth Circuit 16 17 18 19 20 21 22 23 24 25 discusses situations where courts have awarded attorney's fees when there was no legal obligation to pay counsel. We note that the Fifth Circuit cites the legislative history of the Equal Access to Justice Act, and quotes a ederal (-ircuit case for the proposition that it is well settled that an award of attorney's fees under the Equal Access to Justice Act is not necessarily contingent upon an obligation to pay counsel. We find this case in the Court of Appeals 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 for the Fifth Circuit, which is the controlling Court of Appeals for any appeal in the present matter, to be inconsistent with Respondent's position relative to the significance of the bankruptcy filing of the 5 Petitioner in the present matter. Therefore, we 6 7 8 reject Respondent's alternative argument. In trying to determine whether Petitioners should be subject to a reduction of fees because of 9 Petitioners' failure to exhaust administrative 10 11 remedies, at least with respect to the deficiencies in income tax, suggested by the revenue agent at the 12 meeting that preceded the waiver by Petitioners' 13 counsel of a 30-day letter, we realize that 14 Petitioner maintains the failure by Respondent to 15 16 17 18 19 issue the 30-day letter should prevent Petitioner from being deemed to have waived any administrative remedy. This presents a dilemma, because on the one hand, there was no 30-day letter issued, but on the 20 other hand, it was not issued at the request of the 21 Petitioner and Petitioner's counsel. We believe the 22 23 24 fair resolution of this problem is to limit the fees prior to the filing of the bankruptcy petition to a ratio based upon the reasonable amounts that 25 Petitioner could not have anticipated that were 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 asserted by Respondent after the August 4, 2010, 2 meeting at which time we do believe Petitioner was 3 misled, at least as to Respondent's intentions 4 5 6 7 8 9 10 11 12 13 14 15 16 concerning additions to tax. The deficiency amounts asserts by Respondent, while somewhat less than what's in the notice of deficiency, were consistent in theory to the proposed 30-day letter given to the Petitioner in August of 2010. However, the additions to tax were clearly unanticipated and not even mentioned by the revenue agent. The revenue agent who testified at the hearing on this motion acknowledged that there was no way the Petitioner could have anticipated those additions to tax until the Petitioner received the notice of deficiency. Given that testimony, we believe that 17 Petitioner should not be deemed to have waived 18 19 20 21 22 23 24 25 administrative remedies concerning the additions to tax, providing the rough 60 percent to 40 percent ratio between the amounts asserted in the notice of deficiency and the amounts asserted in the draft 30- day letter which was provided to the Petitioner on August 4, 2010, we determine that the amounts of fees prior to the bankruptcy petition, including expenses incurred by the Petitioner, all of which we 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 determined to be reasonable, which should be allowable and should be deemed to have been incurred by the Petitioner and be reimbursable under section 7430 are $11,722.34. We make this determination by also concluding that Respondent was not substantially justified in asserting the amounts in the notice of deficiency. Subsequent to the filing of the notice of deficiency, Petitioner did have a conference with Respondent's Appeals Division which led to the resolution which is set forth in the stipulation of settled issues. That stipulation includes a full concession by Respondent of the additions to tax and a significant concession of all the income adjustments, especially income adjustments for years after 2004. We believe Respondent before the notice of deficiency was issued should have considered the implications of Respondent's determination that The Anchor Group was, in fact, a legitimate 501(d) entity before asserting the income adjustments. The legitimacy of The Anchor Group is fundamentally inconsistent with the adjustments Respondent has asserted, especially the fraud penalty, and 25 Respondent's failure to acknowledge that in the 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 15 1 2 3 4 5 administrative processing of the audit of Petitioners themselves was, we believe, not substantially justified. Now, we essa turn to the last segment of the case, which is the fees incurred after the Bankruptcy 6 Court lifted the stay and permitted this Court to 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 , proceed and have a hearing relative to the motion. Respondent makes various arguments concerning these fees in Respondent's post-trial memorandum of authorities filed in this matter. We find some of Respondent's arguments to be merited. We previously disposed of Respondent's arguments relative to the pre-bankruptcy petition fees, and we will not further discuss those arguments. Respondent notes that Petitioners conceded that there was a duplication of fees concerning 17.75 hours billed between July 25, 2013, and July 27, 2013, because these fees were rebilled in a September 1, 2013, statement of legal services. As such, the claimed fees post the bankruptcy petition are overstated by agreement of the parties in the amount of $2,840. We note that the hourly rate of 24 Petitioners' counsel exceeds the standard rate as set 25 forth in section 7430. However, we believe the rate 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 2 3 is proper because of the type of work involved, and Respondent has not challenged the specific hourly rate in general. Respondent does challenge the rate 4 with respect to certain specific activities. 5 6 Respondent notes that the November 1, 2013, statement for legal services includes 26.75 hours for 7 manual redaction of confidential information from 8 9 10 11 12 13 14 exhibits between October 25, 2013, and October 28, 2013. Respondent notes that this activity was billed at the rate of $160 per hour, and that $4,280 was invoiced for this manual redaction. We believe Respondent's position relative to the manual redaction activity is warranted, and we would reduce the claimed fees associated with the 26.75 hours of 15 manual redaction to $80 per hour, and thus reduce the 16 17 18 19 20 21 22 23 24 25 $4,280 claimed associated with this activity to $2,140. Respondent makes various other arguments challenging the reasonableness of the post-bankruptcy petition filing fees, and we find those arguments to lack merit, and we do not sustain any of the further reductions in the fees claimed. We find the fees and the expenses claimed in all other respects to be reasonable. With respect to the post-bankruptcy petition fees, we order the parties to submit an 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company agreed computation based upon this opinion on or before March 31, 2014. This concludes the Court's oral findings of fact and opinion in this case. 17 (Whereupon, at 3:42 p.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com