Opinion ID: 514010
Heading Depth: 1
Heading Rank: 2

Heading: Actions of the IRS prior to District Counsel involvement.

Text: 12 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). 13 Section 7430 of the Code permits a taxpayer to recover attorney's fees arising in a civil proceeding: 14 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. 15 26 U.S.C. Sec. 7430(a) (Supp.1988) (emphasis added). A prevailing party is one who 16 (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. 17 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. 18 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: 19 (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. 20 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). 21 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) (the position of the United States 'in the civil proceeding' encompasses only the government's in-court litigating position.); Ewing and Thomas, P.A. v. Heye (Commissioner of Internal Revenue), 803 F.2d 613, 616 (11th Cir.1986) (Sec. 7430 as drafted by Congress, does not allow for [awards for unreasonable actions during the administrative process]); Baker v. Commissioner of Internal Revenue, 787 F.2d 637, 641 (D.C.Cir.1986) (section 7430 and its legislative history are both literally and sensibly read to cover only costs incurred once litigation commences.); United States v. Balanced Financial Management, 769 F.2d 1440, 1450 (10th Cir.1985) (the position of the United States means the arguments relied upon by the Government in litigation). But see Sliwa v. Commissioner of Internal Revenue, 839 F.2d 602, 606 (9th Cir.1988) (the government's position both in its prelitigation administrative proceedings and after the commencement of the litigation should be examined for reasonableness); Weiss v. Commissioner of Internal Revenue, 850 F.2d 111, 116 (2d Cir.1988) (petition for rehearing en banc pending) ([w]e see nothing in the language of the amended version of Sec. 7430 or in its legislative history to suggest that Congress intended to narrow the pre-1986 amendments view of Sec. 7430 or to limit strictly an examination of the government's position solely to that taken in court). Comer v. Commissioner of Internal Revenue, 856 F.2d 775, 780 (6th Cir.1988) (the relevant inquiry extends to the reasonableness of the behavior which forced the taxpayer to incur the expenses related to the filing of a petition); Kaufman v. Egger, 758 F.2d 1, 4 (1st Cir.1985) (Congress intended the IRS's liability to be triggered by unreasonable conduct regardless of which stage in the proceedings such conduct occurs.) (Decided prior to the 1986 amendments.) Although we hold that the Shers cannot recover attorney's fees based on the position of the IRS before the District Counsel answered the Sher's petition, we do not minimize the ordeal the Shers underwent attempting to resolve the problem of the alleged deficiency. 22