Heasley v. C.I.R. ( 1992 )

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
______________________________
No. 91-4526
______________________________
DAVID E. HEASLEY AND KATHLEEN HEASLEY,
Petitioners-Appellants,
Cross-Appellees,
versus
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee,
Cross-Appellant.
__________________________________________
Appeal from A Decision of the United States Tax Court
__________________________________________
(July 20, 1992)
Before BRIGHT,1 JOLLY, and BARKSDALE, Circuit Judges.
BRIGHT, Senior Circuit Judge:
David and Kathleen Heasley (The Heasleys) appeal from the
decision of the Tax Court denying a portion of their request for
attorneys' fees and litigation costs under 26 U.S.C. § 7430 (1988).
The Heasleys incurred the sought-after fees and costs during prior
litigation before the Tax Court and on appeal to this court. The
Internal Revenue Service cross-appeals, challenging the Heasleys'
entitlement to any fee award and disputing the manner in which the
1
Senior Circuit Judge of the Eighth Circuit, sitting by
designation.
Tax Court calculated the award. We affirm in part, reverse in part
and remand in part.
I. BACKGROUND
The facts that led to the underlying litigation have been set
forth in an earlier decision by this court. Heasley v.
Commissioner, 902 F.2d 380 (5th Cir. 1990) [Heasley I]. We
elaborate only as necessary to frame our analysis of the issues
raised on this appeal.
Prompted by Gaylen Danner, who purported to be a financial and
securities dealer, the Heasleys invested in an energy conservation
plan in December 1983. Under the plan, which was sponsored by the
O.E.C. Leasing Corporation [O.E.C.], the Heasleys leased two energy
savings units from O.E.C. at a yearly cost of $5,000 per unit.
O.E.C. ascribed a value of $100,000 to each unit.
Neither Heasley graduated from high school. Both had limited
investment experience. As a return on their investment, the
Heasleys thought they would receive a percentage of the energy
savings yielded by the end users of the units. Although Danner
discussed the investment's tax advantages, the Heasleys viewed the
O.E.C. leasing plan as a source of future income.2
At Danner's suggestion, the Heasleys employed Gene Smith, a
C.P.A., to prepare their 1983 tax return. Smith claimed a $10,000
deduction on the advance rent of the units and a $20,000 investment
tax credit, which he carried back to 1980 and 1981. After
2
For a more detailed description of the plan, see the Tax
Court's memorandum opinion, Heasley v. Commissioner, 55 T.C.M.
(CCH) 1748 (1988), and Soriano v. I.R.S., 90 T.C. 44 (1988).
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investing $14,161 in the O.E.C. plan, the Heasleys received in
excess of $23,000 in refunds from the Internal Revenue Service
[IRS] for the three years. The O.E.C. investment never generated
any income. The Heasleys lost all the money they invested with
Danner, over $25,000.
After sending the Heasleys a prefiling notification letter in
1986, the IRS totally disallowed the $10,000 deduction and $20,000
investment tax credit. The Heasleys became liable for the $23,000
deficiency, plus interest. The IRS also assessed $7,419.75 in
penalties: a $1,153.05 negligence penalty under I.R.C. § 6653(a)(1)
(1988); a $5,940.90 valuation overstatement penalty under I.R.C.
§ 6659 (1988); a $325.80 substantial understatement penalty under
I.R.C. § 6661 (1988) and an additional interest penalty on the
disallowed investment tax credit under I.R.C. § 6621 (1988).
After exhausting their administrative remedies, the Heasleys
sued the IRS. They conceded their liability for the deficiency and
only challenged the assessment of the penalties and additional
interest. The Tax Court upheld the assessment of the penalties and
interest. Heasley v. Commissioner, 55 T.C.M. 1748 (1988).
A panel of this court reversed the Tax Court on July 20, 1990.
Heasley I, 902 F.2d at 382-86. The Tax Court revised its decision
accordingly on October 26, 1990.
On November 19, 1990, the Heasleys moved for an award of
$40,221.86 in attorneys' fees and litigation costs under I.R.C.
§ 7430 (1988), which permits a "prevailing party" in a tax
proceeding against the IRS to recover reasonable litigation costs.
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The Heasleys' attorney, John D. Copeland, submitted a supporting
affidavit. Copeland did not submit billing records with the motion
for litigation costs.
The Tax Court held that the Heasleys were entitled to
reasonable litigation costs for the section 6661 substantial
understatement penalty only. Heasley v. Commissioner, 61 T.C.M.
(CCH) 2503 (1991). This was the sole instance in which they
demonstrated that the position of the IRS was "not substantially
justified." I.R.C. § 7430(c)(4)(A)(i). The Tax Court awarded
$198.99 in costs, or one-fourth of the requested award of $795.94.
The Tax Court disallowed the Heasleys' request for reimbursement in
excess of the statutory rate of $75.00 per hour. See id.
§ 7430(c)(1)(B)(iii). In addition, the Tax Court determined that
the statutory reimbursement rate, indexed to account for an
increase in the cost-of-living, was $91.43 per hour.
The Tax Court noted that the Heasleys failed to provide a
breakdown of specific hours and hourly rates as provided by Tax
Court Rule 231(d).3 The Tax Court also observed that after the IRS
disagreed with the reasonableness of the fee request, the Heasleys
failed to submit a more detailed affidavit, as required by Tax
Court Rule 232(d). Consequently, the Tax Court divided the total
3
Rule 231(d) provides, in relevant part:
A motion for an award of reasonable litigation costs
shall be accompanied by a detailed affidavit by the
moving party or counsel for the moving party which sets
forth distinctly the nature and amount of each item of
costs paid or incurred for which an award is claimed.
Tax Ct. R. 231(d).
-4-
fee award claimed by the Heasleys ($39,425.92) by Copeland's hourly
rate ($200) and yielded a figure of 197 hours. After dividing this
number by four and yielding a figure of forty-nine hours, the Tax
Court determined that the total award for attorneys' fees was
$4,480.07.
The Heasleys filed a motion for reconsideration with a
supplemental affidavit that broke down their request for fees by
attorney, hourly rate and the number of hours worked by each
attorney. The Tax Court denied the motion. This appeal and the
Government's cross-appeal followed.
II. DISCUSSION
A. Substantial Justification
The Heasleys argue that they are entitled to an award of fees
and costs incurred in litigating the three remaining penalties.
The Heasleys assert that they established that the position of the
IRS with respect to each penalty was "not substantially justified."
I.R.C. § 7430(c)(4)(A)(i). We agree only in part.
In order to recover an award of attorneys' fees from the
Government, a tax litigant must qualify as a "prevailing party"
under section 7430(c)(4)(A).4 First, the litigant must
"establis[h] that the position of the United States . . . was not
substantially justified." Id. Second, the taxpayer must also
"substantially prevail[]" with respect to either "the amount in
4
See, e.g., Sher v. Commissioner, 861 F.2d 131, 133 (5th Cir.
1988); Smith v. United States, 850 F.2d 242, 245 (5th Cir. 1988);
Huckaby v. Department of the Treasury, 804 F.2d 297, 298 (5th Cir.
1986) (per curiam).
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controversy" or "the most significant issue or set of issues
presented." Id. § 7430(c)(4)(A)(ii).
A position is "substantially justified" when it is "justified
to a degree that could satisfy a reasonable person." Pierce v.
Underwood, 487 U.S. 552, 565 (1988) (interpreting similar language
in 28 U.S.C. § 2412(d), the Equal Access to Justice Act). The
Government's failure to prevail in the underlying litigation does
not require a determination that the position of the IRS was
unreasonable, but it clearly remains a factor for our
consideration. Perry v. Commissioner, 931 F.2d 1044, 1046 (5th
Cir. 1991). Nor does a trial court ruling in the government's
favor preclude a finding of unreasonableness, although this acts as
a similarly important consideration. Huckaby v. Department of the
Treasury, 804 F.2d 297, 299 (5th Cir. 1986) (per curiam). We
review the Tax Court's determination on the issue of substantial
justification for abuse of discretion. Pierce, 487 U.S. at 557-63
(requires abuse of discretion review for analogous EAJA provision);
Cassuto v. Commissioner, 936 F.2d 736, 740 (2d Cir. 1991) (citing
Pierce, 487 U.S. at 557-63).
1. Negligence Penalty
As this court explained in Heasley I, the IRS may penalize
taxpayers for any underpayment due to negligence or disregard of
the rules and regulations. Heasley I, 902 F.2d at 383 (citing
I.R.C. § 6653(a)(1)). "Negligence" includes any failure to make a
reasonable attempt to comply with the Tax Code, including the
failure to do what a reasonable person would do under similar
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circumstances. Id. (citations omitted); I.R.C. § 6653(a)(3).
"Disregard" includes any careless, reckless or intentional
disregard. Heasley I, 902 F.2d at 383 (citing section 6653(a)(3)).
Due care does not require moderate income investors, like the
Heasleys, to investigate independently their investments; they may
rely upon the expertise of their financial advisors and
accountants. Id.
The Heasleys assert that they made reasonable efforts to
comply with the Tax Code and the Government unreasonably asserted
the negligence penalty. We agree. The Heasleys demonstrated that
they are moderate income investors with a limited education and
minimal investment experience. They relied on the expertise of
their financial advisor, whom they believed to be knowledgeable and
trustworthy. Although the Heasleys had always prepared their own
tax returns in the past, they hired a C.P.A. to handle the more
complicated tax matters created by their ill-fated investment. The
Heasleys also monitored their investment. Heasley I, 902 F.2d at
384.
Under these circumstances, we cannot say that a reasonable
person would have been satisfied with the IRS's position on the
negligence penalty. See Pierce, 487 U.S. at 565. The Heasleys
thus demonstrated that the position of the IRS with respect to the
negligence penalty was "not substantially justified." I.R.C.
§ 7430(c)(4)(A). Accordingly, the Tax Court's holding to the
contrary was abuse of discretion and we reverse.
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2. Valuation Overstatement Penalty
The IRS may impose a valuation overstatement penalty for any
underpayment "attributable to a valuation overstatement." I.R.C.
§ 6659(a)(2). A "valuation overstatement" occurs when a taxpayer
overstates the value of property on a tax return by 150% or more.
Id. § 6659(c). The IRS may waive any or all of the penalty when a
taxpayer shows good faith and a reasonable basis for claiming the
overvaluation. Id. § 6659(e).
The Heasleys overvalued the energy conservation units, which
were actually worth $5,000, by $95,000. The Tax Court upheld the
penalty. We reversed on the ground that the overvaluation was not
attributable to a valuation overstatement, but rather to an
improperly claimed deduction or credit. Heasley I, 902 F.2d at 383
(citing Todd v. Commissioner, 862 F.2d 540, 542-43 (5th Cir.
1988)).
At the fee dispute phase, the Tax Court held that the IRS was
substantially justified in seeking the valuation overstatement
penalty. The Tax Court refused to award the Heasleys fees and
costs incurred in challenging this penalty. The Tax Court reasoned
that the IRS asserted the penalty before the decision in Todd, when
the issue was in flux and litigants reasonably could have argued
either position.
The Heasleys do not now contest the determination that they
overstated the value of the energy conservation units. They
contend that they had a reasonable basis for the valuation and made
the claim in good faith. See I.R.C. § 6659(e). They also assert
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that the IRS abused its discretion by failing to waive the
valuation overstatement penalty.
The Heasleys have not shown, however, that the position of the
IRS with respect to this penalty was "not substantially justified."
We are persuaded, as was the Tax Court, that before Todd this issue
was unresolved in our Circuit. See 862 F.2d at 541-45. The IRS
simply argued for one of two plausible interpretations of the
statute. See Huckaby, 804 F.2d at 299. Accordingly, the IRS
reasonably asserted the section 6659 valuation overstatement
penalty against the Heasleys. We affirm.
3. Additional Interest Penalty
The IRS may impose a penalty for any substantial underpayment
attributable to a tax motivated transaction. I.R.C. § 6621(c)(1);
Heasley I, 902 F.2d at 385. A "tax motivated" transaction includes
a valuation overstatement. Heasley I, 902 F.2d at 385 (citing
I.R.C. § 6659(c) (overstatement of property value by 150%)). In
addition, the IRS may specify other types of transactions which may
be treated as "tax motivated." Id. (citing section 6621(c)(3)(B)).
The Tax Court originally held that the Heasleys' investment in
O.E.C. leasing was tax motivated because they had not engaged in
the transaction for profit. Id. at 385-86 (citation omitted).
This court reversed, concluding that the Heasleys displayed the
requisite profit motive and the IRS should have considered their
intent to earn future income. Id. at 386. At the fee dispute
phase, the Tax Court held that the IRS's position on the additional
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interest penalty was substantially justified because the evidence
supported the absence of a profit motive.
The Heasleys now maintain, under the authority of Heasley I,
that the IRS was not substantially justified in pressing for the
section 6621 additional interest penalty. We disagree. The
additional interest penalty is necessarily bound up with the
valuation overstatement penalty. See I.R.C. § 6621(c)(3)(A)(i)
("'tax motivated transaction' means . . . any valuation
overstatement (within the meaning of section 6659(c))"). We have
already held that the IRS reasonably asserted the valuation
overstatement penalty. It would be inconsistent to hold that the
IRS did not reasonably assert the section 6621(c) additional
interest penalty, which draws its definition in part from the
valuation overstatement penalty. Accordingly, we affirm.
B. Substantially Prevail Requirement
Having determined that the Heasleys established that the IRS's
position with respect to the negligence penalty was "not
substantially justified," we must determine whether the Heasleys
also substantially prevailed with respect to the amount in
controversy or the most significant issue or set of issues. See
I.R.C. § 7430(c)(4)(A)(ii). The Tax Court held that the Heasleys,
who secured a reversal of all four penalties on appeal,
substantially prevailed with respect to the most significant issue
or set of issues presented. We review this determination for abuse
of discretion. See Cassuto, 936 F.2d at 741.
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The IRS asserts that the Heasleys are not entitled to an award
of reasonable litigation costs because they conceded the most
important issue, their liability for the deficiency. Although the
Government acknowledges that the Heasleys prevailed on the
penalties, it claims these were not significant issues because they
lacked collateral or future impact. According to the IRS, the only
significant issue in this case was the deficiency. Br. for
Appellee/Cross-Appellant at 40-43. We disagree.
In order to determine whether a taxpayer has "substantially
prevailed" within the meaning of section 7430(c)(4)(A), we look to
the final outcome of the case, whether by judgment or settlement.
Cassuto, 936 F.2d at 741. This section "is phrased in terms of
issues not claims." Huckaby, 804 F.2d at 300. Thus, a victory on
the primary issue suffices. See id. But see Ralston Dev. Corp. v.
United States, 937 F.2d 510, 515 (10th Cir. 1991) (taxpayer who
recovers only 19% of the amount at issue in a tax case has not
substantially prevailed with respect to the amount in controversy).
The Heasleys, who conceded their liability for the deficiency,
only challenged the penalties. The primary issue in the underlying
litigation, therefore, was their liability for over $7,000 in
penalties and additional interest. After appeal to this court, the
Heasleys secured the reversal of all four penalties. As in
Huckaby, the final outcome of the case, reversal of the penalties,
represented their complete vindication on the most significant
issue. Unlike the taxpayers in Ralston, the Heasleys here did not
accomplish only a proportionally slight vindication. The Heasleys
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"substantially prevailed" with respect to the most significant
issue within the meaning of section 7430(c)(4)(A)(ii). Finding no
abuse of discretion, we affirm.
The Heasleys, who established that the position of the IRS was
"not substantially justified" with respect to the negligence and
substantial understatement penalties, meet the requirements of the
first level of "prevailing party" analysis. I.R.C.
§ 7430(c)(4)(A)(i). Because they "substantially prevailed" with
respect to the penalties, the most significant issue or set of
issues presented, they also withstand scrutiny under the second
tier of section 7430(c)(4)(A) analysis. Id. § 7430(c)(4)(A)(ii).
Accordingly, the Heasleys qualify as a "prevailing party" with
respect to the substantial understatement and negligence penalties.
They are entitled to an award of the reasonable litigation costs
incurred in connection with challenging these two penalties.5
The remaining issues relate to the amount of the attorneys'
fee award.
5
The IRS does not challenge on this appeal the Tax Court's
finding that no substantial justification supported the section
6661 substantial understatement penalty. Rather, the IRS argues
that the Heasleys are not entitled to an award of fees and costs
because they did not substantially prevail with respect to the
amount in controversy or the most significant issue or set of
issues. I.R.C. § 7430(c)(4)(A)(ii). Because we hold that the
Heasleys substantially prevailed with respect to the most
significant issue or set of issues, we reject the IRS's arguments
to the contrary. We also affirm the Tax Court's findings that the
position of the IRS with respect to the section 6661 substantial
understatement penalty was "not substantially justified." Id.
§ 7430(c)(4)(A)(i). We necessarily hold that the Heasleys are a
"prevailing party" with respect to the substantial understatement
penalty. Id. § 7430(c)(4)(A).
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C. Documentation
The IRS asserts that the Heasleys failed to document
adequately their request for attorneys' fees. According to the
IRS, the taxpayers should have provided contemporaneous billing
records and a breakdown of the tasks performed by particular
attorneys. See Bode v. United States, 919 F.2d 1044, 1047 (5th
Cir. 1990). The IRS asks us to remand with instructions to limit
the fee award to the number of hours that the Heasleys' attorneys
spent before the Tax Court.
We apply an abuse of discretion standard of review to the
decision to grant attorneys' fees to a prevailing party. Cassuto,
936 F.2d at 740 (citing Pierce, 487 U.S. at 571). We review the
overall amount of the award under the same standard. Id.; Bode,
919 F.2d at 1047 (citing Hensley v. Eckerhart, 461 U.S. 424, 437
(1983)). Subsidiary findings of fact are reviewed for clear error.
Bode, 919 F.2d at 1047 (citation omitted).
We agree with the IRS that the Heasleys, as parties seeking
reimbursement for attorneys' fees under section 7430, bore the
burden of establishing the number of attorney hours expended. Id.
Failure to provide contemporaneous billing records, however, does
not preclude recovery so long as the Heasleys presented adequate
evidence to permit the Tax Court to determine the number of
reimbursable hours. Id. In addition, the Heasleys had the burden
of establishing that their attorneys expended a reasonable number
of hours on this case and that the hours were reasonably expended.
Id. (citation omitted).
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In his affidavit in support of the motion for attorneys' fees
and litigation costs, John D. Copeland stated that he is a
certified specialist in tax law and that he devoted a substantial
number of hours to the Heasleys' case. Copeland charged clients
$200.00 per hour. His associate on the case, Andrea Winters,
billed at $100.00 per hour. Copeland also stated that
substantially all of the attorneys' time devoted to this case was
devoted to the penalty issues, which were the only issues to
proceed to trial. As the IRS points out, Copeland did not submit
contemporaneous billing records in support of this motion.
Unlike the IRS, however, we do not conclude that the Tax Court
abused its discretion by granting an award on the basis of the
evidence before it. The Tax Court had the opportunity to observe
the Heasleys' attorneys at trial and assess their credibility. The
Tax Court precisely set forth the means by which it arrived at an
overall figure of 197 hours. The Tax Court reasonably could have
determined, on the basis of the evidence in the affidavit, that 197
hours was a reasonable number and that those hours were reasonably
expended. Cf. Bode, 919 F.2d at 1049 (reversed attorneys' fee
award where the only evidence before the district court failed to
provide a reasonable basis for its calculation).
In addition, the Tax Court clearly noted that by failing to
submit a detailed affidavit which set forth the nature and amount
of each item for which costs and fees were claimed, the Heasleys'
attorneys failed to comply with Tax Court Rule 231(d).
Nevertheless, the Tax Court proceeded to calculate a fee award on
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the basis of the evidence Copeland did provide in his affidavit.
We cannot say that the manner in which the Tax Court calculated the
award of fees and costs constitutes abuse of its discretion to
interpret its own procedural rules.6
Finally, the IRS relies primarily upon Bode, which is readily
distinguishable. First, the taxpayers in Bode produced no
documentary evidence in support of their request for attorneys'
fees; they only presented vague expert testimony which did not
establish the total number of hours or the hourly rate of the
attorneys. 919 F.2d at 1046-47. The expert testimony gave the
court no basis upon which to conclude whether the hours at issue
were reasonable and reasonably expended. Id. at 1047-48.
Second, the district court in Bode awarded 600 hours at
$150.00 per hour without articulating its reasons. Id. at 1046.
Here, however, the Tax Court articulated both its reasons and its
methodology for deriving the 197 hour figure. The Tax Court
divided Copeland's hourly rate of $200.00, which was set forth in
the affidavit, by the total fee award sought by the Heasleys,
$39,425.92.
Accordingly, the Tax Court did not abuse its discretion by
awarding attorneys' fees on the basis of the evidence before it.
6
See, e.g., Ward v. Commissioner, 907 F.2d 517, 520-21 (5th
Cir. 1990) (not abuse of discretion for Tax Court to set aside
default judgment under Tax Ct. R. 123); Kelley v. Commissioner, 877
F.2d 756, 761 (9th Cir. 1989) (abuse of discretion to deny
taxpayers leave to amend under Tax Ct. R. 41(a)); Noli v.
Commissioner, 860 F.2d 1521, 1526 (9th Cir. 1988) (not abuse of
discretion to dismiss petition for failure to prosecute under Tax
Ct. R. 123(b)).
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Nor did it err by determining that 197 hours served as the base
figure for the attorneys' fee award.
As we have already decided that the Heasleys are entitled to
an award of the costs and fees incurred in challenging the
negligence and substantial understatement penalties, we now hold
that they are entitled to reimbursement for one-half of the hours
found by the Tax Court, rather than just one-quarter. The base
figure for which they are entitled to attorneys' fees, therefore,
is ninety-eight hours. Under the same reasoning, the Heasleys are
also entitled to an award of $397.97, one-half of the costs they
claimed.
D. Special Factors
The Heasleys contend that the Tax Court erred by not granting
them reimbursement based upon the actual hourly fee charged by
their attorneys. Taxpayers who recover attorneys' fees against the
United States may receive reasonable litigation costs at prevailing
market rates. I.R.C. § 7430(c)(1). A maximum hourly rate of
$75.00 applies unless the court determines that an increase in the
cost of living or a "special factor" justifies a higher rate. Id.
§ 7430(c)(1)(B)(iii). The statute suggests one special factor: the
limited availability of qualified attorneys for a proceeding. Id.
The Heasleys attempted to persuade the Tax Court that their
attorneys were entitled to hourly fees of $100.00 to $200.00, the
going rate in Dallas, Texas. The Tax Court held that the "going
rate" did not qualify as a "special factor" within the meaning of
section 7430. Accordingly, the Tax Court denied their request for
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reimbursement in excess of the $75.00 statutory hourly fee. We
review this determination for abuse of discretion. Cassuto, 936
F.2d at 740, 743.
The Heasleys now maintain that several "special factors"
warrant a higher award. They point to: (1) the limited
availability of qualified attorneys in Dallas who practice for
$75.00 per hour; (2) the need to deter harsh administrative action;
(3) the need to encourage attorneys to take on essentially pro bono
cases that speak to the fair administration of the tax laws; (4)
the tax expertise of their attorneys and (5) the unusual results
obtained by their attorneys. Although the Heasleys have made
substantial arguments in favor of a higher rate, we cannot say that
the Tax Court abused its discretion by limiting the attorneys' fees
to the statutory rate. See, e.g., Pierce, 487 U.S. at 572;
Cassuto, 936 F.2d at 743-44; Bode, 919 F.2d at 1050-52.
Accordingly, we affirm the award of attorneys' fees at the
statutory rate of $75.00 per hour, plus a cost-of-living increase.
E. Cost-of-Living Increase
Section 7430 permits a court to grant more than $75.00 per
hour in attorneys' fees when an increase in the cost-of-living
justifies a higher rate. I.R.C. § 7430(c)(1)(B)(iii). The Tax
Court awarded an hourly fee of $91.43, with the cost-of-living
adjustment calculated from October 1, 1981, the effective date of
a similar cost-of-living provision in the Equal Access to Justice
Act. We review this purely legal determination de novo. Cassuto,
936 F.2d at 740.
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The IRS contends that the proper date from which to calculate
a section 7430 cost-of-living increase is January 1, 1986, the
effective date of the section 7430 COLA provision. We agree. See
Cassuto, 936 F.2d at 742-43; Bode, 919 F.2d at 1053 n.8.
Accordingly, we remand to the Tax Court to recalculate the cost-of-
living increase from January 1, 1986.
F. Attorneys' Fees For This Appeal
The Heasleys have requested attorneys' fees for the time
devoted to the motion for litigation costs and this appeal. Br.
for Appellants at 22. We have the power to make an award for
services rendered in this court; and we elect to do so here in
order to bring this long-pending dispute to a close. Leroy v. City
of Houston, 906 F.2d 1068, 1086 (5th Cir. 1990) (citing Davis v.
Board of Sch. Comm'rs, 526 F.2d 865, 868 (5th Cir. 1976)).
In order to award attorneys' fees for this appeal, we need
only decide whether it was abuse of discretion for the Tax Court to
determine that the IRS's position with respect to the underlying
litigation was "not substantially justified." Bode, 919 F.2d at
1052 (citation omitted). We need not determine whether the
Government's appellate position was substantially justified once
this threshold decision has been made by the trial court. Id.
(citing Commissioner, INS v. Jean, 110 S. Ct. 2316, 2320 (1990)).
We must determine, however, whether the Heasleys are a "prevailing
party" on appeal. Id.
We have already held that the Tax Court did not abuse its
discretion by determining that the IRS's position with respect to
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the section 6661 substantial understatement penalty was "not
substantially justified." We thus proceed to the next inquiry.
The Heasleys have not prevailed on every issue raised during
this appeal. They secured additional attorneys' fees with respect
to the section 6653 negligence penalty, which will result in a
greater overall award of attorneys' fees.7 They did not prevail
with respect to the requested "special factor" reimbursement in
excess of the statutory hourly rate. In addition, the IRS
prevailed on the cost-of-living increase, which will yield a lower
COLA than previously awarded.
On balance, these losses are "'not of such magnitude as to
deprive [them] of prevailing party status.'" Bode, 919 F.2d at
1052 (quoting Leroy, 906 F.2d at 1082 n.24). Thus, to the extent
that the Heasleys prevailed on this appeal, they are entitled at
least to reimbursement for appellate fees that relate to their
success on appeal and in defending against the cross-appeal. See
Jean, 110 S. Ct. 2321 n.10; Bode, 919 F.2d at 1052. Accordingly,
we direct the Heasleys to submit to this court their application
for fees incurred during these appeals, together with supporting
documents, prior to the issuance of the mandate in this case. See
Fed. R. App. P. 41.
7
The Tax Court previously awarded the Heasleys $4,480.07 in
fees, including the cost-of-living adjustment. The Heasleys are
now entitled to at least $7350 in attorneys' fees, plus a cost-of-
living increase.
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III. CONCLUSION
We AFFIRM the Tax Court with respect to the section 6661
substantial understatement penalty, the section 6659 valuation
overstatement penalty and the section 6621 additional interest
penalty. We REVERSE with respect to the section 6653 negligence
penalty and hold that the Heasleys are entitled to reasonable
litigation costs because the IRS's position on this issue was not
substantially justified. We AFFIRM the determination that the
Heasleys substantially prevailed with respect to the most
significant issues presented and are thereby entitled to reasonable
litigation costs and fees for the negligence and substantial
understatement penalties. We AFFIRM the Tax Court's base figure of
compensable hours. We AFFIRM the Tax Court's denial of
reimbursement at the attorneys' actual hourly rate. We REMAND to
the Tax Court to award attorneys' fees for ninety-eight hours at
$75.00 per hour, plus a cost-of-living increase calculated from
January 1, 1986. The Heasleys are entitled to costs from the
previous litigation in the amount of $397.97, plus an award of
attorneys' fees from these appeals, to be determined by this court
after submission of the necessary documentation.
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