Opinion ID: 563670
Heading Depth: 2
Heading Rank: 2

Heading: Attorneys' Fees for the 1981 Petition

Text: 18 The Cassutos argue that, in addition to their fee award for the 1980 and 1982 Petitions, they should be awarded fees for time spent preparing the 1981 Petition. We do not agree. 19 26 U.S.C. Sec. 7430 provides that a prevailing party (other than the United States or another creditor of the taxpayers) in a Tax Court proceeding may be awarded reasonable litigation costs. Section 7430(c)(4)(A) defines prevailing party as one: 20 (i) which establishes that the position of the United States in the proceeding was not substantially justified, 21 (ii) which-- 22 (I) has substantially prevailed with respect to the amount in controversy, or 23 (II) has substantially prevailed with respect to the most significant issue or set of issues presented, 24 . . . . . 25 This circuit has defined the position of the United States for purposes of Sec. 7430(c)(4)(A)(i) as the position taken by the Commissioner in a statutory Notice of Deficiency sent to the taxpayer, even if the Commissioner changes its position during the actual adversary proceedings when the Commissioner's District Counsel becomes involved. Weiss v. Commissioner, 850 F.2d 111, 115-16 (2d Cir.1988). The term substantially prevailed in Sec. 7430(c)(4)(A)(ii) can be reasonably interpreted to refer to the final outcome of the case--whether by court judgment or settlement. Indeed, this is the interpretation given the term by Judge Wells, who looked to see if the Cassutos had substantially prevailed in the positions adopted in their Petitions by comparing these with the settlement amount reached for each year. Therefore, in assessing whether the Tax Court erred in holding that the Cassutos should not receive fees for the time spent preparing the 1981 Petition, we must decide whether the court abused its discretion in determining that 1) the Commissioner's position in the Notice of Deficiency for 1981 was substantially justified, and 2) the Cassutos' position in the 1981 Petition did not substantially prevail in the final settlement. 26 We believe that Judge Wells did not abuse his discretion in making these determinations. The Commissioner's position in the 1981 Notice of Deficiency was that both income and expenses from Salisbury Traders should be ignored, resulting in a deficiency of $653. This position was substantially justified in that both parties implicitly agreed, in the settlement, that the Salisbury Traders transactions were essentially devoid of economic substance, and should be disregarded as sham transactions. The Cassutos' assertion in their 1981 Petition that the Salisbury Traders transactions should be acknowledged and that no tax was due for the year was not embodied in the final settlement, in which the Cassutos agreed to pay $4,684; therefore they cannot be said to have substantially prevailed for that year. 27 The Cassutos argue, however, that because their response to the 1981 Notice of Deficiency was an integral part of their defense against the improperly filed 1982 Notice, they should be awarded fees for the preparation of that Petition despite the above. The Cassutos claim that they could best highlight the inconsistency and absurdity of the Commissioner's decision to recognize Salisbury Traders' income while disregarding Salisbury Traders' expenses in 1982 by pointing out to the Tax Court the Commissioner's position in the years 1980 and 1981 in which he refused to acknowledge income and expenses from the sham partnership. The only effective way to make this point to the court, the Cassutos argue, was to file petitions for those years as well. Therefore the time spent preparing for the 1981 Petition was an integral part of their successful challenge to the improperly filed 1982 notice. We reject this argument. 28 The Cassutos were able to point out the inconsistency between the Commissioner's position in his 1982 Notice of Deficiency and his position in the 1980 and 1981 Notices in their 1982 Petition itself, and did so. That Petition recites the entire history of the Commissioner's treatment of Salisbury Traders, and points out the novelty of the Commissioner's recognition of the partnership's income in his 1982 Notice. If the Cassutos wished to underscore or substantiate the sudden change in the Commissioner's position, they could have attached the previous Notices of Deficiency as exhibits to their 1982 Petition. There was no substantial need to respond to the 1981 Notice simply in order to point out the 1982 Notice's contrary position. 29 In any event, the Cassutos' 1981 Petition as submitted did not serve the function they now attribute to it. Their 1981 Petition is not a plea for consistency between the Commissioner's Notices of Deficiency for the years 1980 and 1982. It is a straightforward challenge to the Commissioner's determination that the Salisbury Traders transactions were purely tax motivated, and thus should be discounted. The Petition asserts that the Commissioner erred in discounting Salisbury Traders' income and expenses, and states that in fact no deficiency is due for 1981. That is, the 1981 Petition takes the position that the Salisbury Traders transactions were bona fide, unlike the 1982 Petition, which argues, successfully, that the Salisbury Traders transactions should be ignored. 30 The Cassutos' reliance on Action on Smoking and Health v. Civil Aeronautics Board, 724 F.2d 211 (D.C.Cir.1984) therefore is unavailing. In that case, plaintiffs brought a 1979 suit alleging that Civil Aeronautics Board regulations on smoking on passenger airplanes were inadequate to protect the rights of non-smoking passengers. In response to plaintiffs' challenge, the Board withdrew the regulations, but two years later issued regulations which afforded even less protection to non-smokers than those originally challenged. Plaintiffs then challenged the later regulations, and they were vacated. Plaintiffs sued for attorneys' fees for both their 1979 and 1981 challenges. The District of Columbia Circuit awarded them fees for both years, noting that the 1979 challenge, although never technically resolved, and the 1981 suit  'involve[d] a common core of facts,'  were  'based on related legal theories,'  were  'part and parcel of a single matter,'  724 F.2d at 216, and should be considered together in awarding fees. 31 The Cassutos' 1981 and 1982 Petitions, however, neither put forth the same version of the facts, nor argued a related legal theory. The theory of the prevailing 1982 Petition--that both expenses and income from Salisbury Traders should be disregarded--was not set forth in the 1981 Petition. The two Petitions were unified only in espousing an alternate theory, which did not prevail, that Salisbury Traders transactions should be given credence, and that no tax therefore was owed. The 1981 Petition was not part and parcel of the winning argument in the 1982 Petition. The time spent preparing it therefore is not reimbursable. 32