Robert T. Cozean v. Commissioner , 109 T.C. No. 10 ( 1997 )

109 T.C. No. 10UNITED STATES TAX COURT
ROBERT T. COZEAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19318-95. Filed October 15, 1997.
Prior to trial, R conceded the deficiencies
determined for the years 1990 through 1992. P filed a
timely claim for an award of litigation costs,
including, among other things, attorney's fees billed
at $250 per hour and one accountant's fees billed at
$170 and $175 per hour and another's fees billed at $90
and $92 per hour. R concedes that P has satisfied all
the requirements for entitlement to litigation costs
and disputes only the amounts of the fees claimed by
the attorney and the principal accountant.
Specifically, R asserts that the limitation of sec.
7430(c)(1)(B)(iii), I.R.C., of $75 per hour (adjusted
for inflation) for the years in issue, applies to all
fees claimed.
Held: P failed to establish that a special factor
existed which justifies an award of attorney's fees in
excess of the $75 limitation (adjusted for inflation).
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Held, further: The fees claimed for services of
the accountants, who are authorized to practice before
the Internal Revenue Service, are to be treated as
services of an attorney pursuant to sec. 7430(c)(3),
I.R.C., and, accordingly, the limitation of sec.
7430(c)(1)(B)(iii), I.R.C., applies to such fees.
Edward D. Urquhart, for petitioner.
Janet R. Balboni, for respondent.
OPINION
DAWSON, Judge: The case was assigned to Chief Special Trial
Judge Peter J. Panuthos pursuant to the provisions of section
7443A(b)(4) and Rules 180, 181, and 183.1 The Court agrees with
and adopts the opinion of the Special Trial Judge that is set
forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
PANUTHOS, Chief Special Trial Judge: This case is before
the Court on petitioner's motion for an award of reasonable
litigation costs2 pursuant to section 7430.
Respondent concedes that petitioner has satisfied all of the
requirements for entitlement to litigation costs. Therefore, the
only issue presented for decision is whether the amounts of
1
All section references are to the Internal Revenue Code
as amended unless otherwise indicated. All Rule references are
to the Tax Court Rules of Practice and Procedure.
2
Petitioner does not request an award of reasonable
administrative costs. See sec. 7430(a)(1).
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litigation costs claimed by petitioner are reasonable. Sec.
7430(a)(2), (c)(1).
Neither party has requested a hearing, and we conclude that
a hearing is not necessary. Rule 232(a). Accordingly, we decide
petitioner's motion on the basis of the motion, respondent's
notice of objection to petitioner's motion, petitioner's reply to
respondent's notice of objection, and affidavits submitted by
petitioner.
Respondent issued a notice of deficiency dated June 27,
1995, determining deficiencies in petitioner's Federal income tax
and accuracy-related penalties as follows:
Accuracy-Related Penalties
Year Deficiency Sec. 6662(a)
1990 $468,857 $93,771
1991 67,269 13,454
1992 36,250 7,250
The adjustments contained in the notice of deficiency relate to
respondent's determination that petitioner failed to report as
income distributions received from Development Southwest
Investments, Inc., his solely owned S corporation; that
petitioner failed to report cancellation of indebtedness income
relating to the activities of Double J & T Ranch (J & T), a joint
venture in which petitioner was a member; that petitioner was not
entitled to claimed losses in connection with the activities of J
& T, pursuant to the "at risk" rules of section 465; and that
petitioner was not entitled to capital losses claimed in
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connection with the disposition of his interest in J & T.
Petitioner filed a timely petition on September 26, 1995. At the
time the petition was filed, petitioner resided in Dallas, Texas.
The case was calendared for trial on November 12, 1996.
Approximately 2 weeks before the date of trial, respondent
conceded all of the determined deficiencies, and the case was
settled. A stipulation of settlement was filed on December 30,
1996. On the same date, petitioner filed a motion for award of
litigation costs.
Petitioner requests an award of total litigation costs in
the amount of $24,060.71. The costs requested include attorney's
fees in the amount of $16,365.21, attributable to 64 hours billed
by Edward D. Urquhart between July 1995 and April 1997 at a rate
of $250 per hour, as well as out-of-pocket expenses in the amount
of $365.21. The out-of-pocket expenses are attributable to
postage, delivery fees, photocopying, and computer research.3
The costs requested by petitioner also include charges
billed by the accounting firm of Werlein & Harris in the total
amount of $7,695.50, consisting of 30 hours billed by Victor E.
Harris at rates of $170 and $175 per hour, and 28.5 hours billed
by Pamela Zimmerman at rates of $90 and $92 per hour.4 Mr.
3
Respondent did not contest these out-of-pocket expenses,
and we consider these amounts conceded.
4
Mr. Harris billed 26.5 hours at $170 per hour and 3.5
hours at a rate of $175 per hour. Ms. Zimmerman billed 22 hours
(continued...)
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Harris and Ms. Zimmerman provided professional services to
petitioner including preparing the tax returns for the years in
issue, assisting in representing petitioner during the
examination of the returns by the Internal Revenue Service (IRS),
assisting counsel in preparation of the petition, and
representing petitioner before the IRS Appeals Office after the
case was docketed. Mr. Harris, who is a C.P.A., has also
represented many taxpayers before the IRS in the examination of
income tax returns as well as before the Appeals Office. The
accountant's fees are claimed for the period from July 1995
through December 1996.
Respondent objects to the motion for litigation costs on the
ground that the claimed fees are excessive.
A taxpayer has the burden of proving that he or she meets
each requirement before the Court may order an award of
litigation costs under section 7430. Rule 232(e); Minahan v.
Commissioner, 88 T.C. 492, 497 (1987).5 Accordingly, since the
4
(...continued)
at $90 per hour 6.5 hours at a rate of $92 per hour.
5
In 1996, legislation was enacted which shifted to the
Commissioner the burden of proving whether the position of the
United States was substantially justified, sec. 7430(c)(4)(B), as
amended by the Taxpayer Bill of Rights 2 (TBOR 2), Pub. L. 104-
168, sec. 701, 110 Stat. 1452, 1463 (1996), and raised the hourly
rate for attorney's fees to $110, sec. 7430(c)(1)(B)(iii), as
amended by TBOR 2 sec. 702(a), 110 Stat. 1464. These changes
apply only to proceedings commenced after July 30, 1996. TBOR 2
secs. 701(d), 702(b), 110 Stat. 1464; see National Industrial
Investors, Inc. v. Commissioner, T.C. Memo. 1996-423. Since
(continued...)
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parties agree that petitioner has otherwise satisfied the
requirements for an award of litigation costs, petitioner must
establish the amount of the reasonable litigation costs.
With respect to reasonable litigation costs, section 7430(c)
provides:
(1) Reasonable litigation costs.--The term
"reasonable litigation costs" includes--
(A) reasonable court costs, and
(B) based upon prevailing market rates
for the kind or quality of services
furnished--
* * * * * * *
(ii) The reasonable cost of
any study, analysis, engineering
report, test, or project which is
found by the court to be necessary
for the preparation of the
party's case, and
(iii) reasonable fees paid or
incurred for the services of
attorneys in connection with the
court proceeding, except that such
fees shall not be in excess of $75
per hour unless the court
determines that an increase in the
cost of living or a special factor,
such as the limited availability of
qualified attorneys for such
proceeding, justifies a higher
rate.
* * * * * * *
5
(...continued)
petitioner filed the petition in Sept. 1995, the proceedings at
issue were commenced before the effective date of TBOR 2, and the
changes enacted by TBOR 2 are not applicable. Maggie Management
Co. v. Commissioner, 108 T.C. 430, 441 (1997).
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(3) Attorney's fees.--For purposes of paragraphs
(1) and (2), fees for the services of an individual
(whether or not an attorney) who is authorized to
practice before the Tax Court or before the Internal
Revenue Service shall be treated as fees for the
services of an attorney.
Petitioner's motion for litigation costs, in support of his
request for an award of attorney's fees with respect to Mr.
Urquhart's services at a rate of $250 per hour, states as
follows:
The hourly rate of $250.00 charged Petitioner by
undersigned counsel is a reasonable rate for qualified
attorneys in the Houston, Texas area to handle a matter
such as this case. There is a limited availability of
qualified attorneys to handle a case such as this so as
to justify the $250 hourly rate over the $75.00 rate
set forth in I.R.C. Section 7430(c)(1)(B)(iii). * * *
Petitioner submits the affidavit of Larry A. Campagna, an
attorney specializing in tax law, in an attempt to establish that
the hourly rate for attorney's fees sought by petitioner is
consistent with the prevailing billing rate in the Houston area.
Petitioner also submits the affidavits of Mr. Harris and John W.
Storms, C.P.A., to establish that the costs for the accountants'
work are reasonable.
Respondent contests the hourly rate for attorney's fees
requested by petitioner because it exceeds the $75 cap (adjusted
for inflation) applicable to awards of attorney's fees under
section 7430(c)(1)(B)(iii) for the years in issue.6 In so doing,
6
Respondent does not argue that the amount of time billed
by Mr. Urquhart was excessive.
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respondent contends that the availability of qualified attorneys
to handle cases such as petitioner's was not limited, and that
petitioner has failed to establish the existence of any special
factor that would warrant departure from the statutory cap.
Accordingly, respondent argues that an award of attorney's fees
in this instance should be calculated at the adjusted statutory
rate of $104 per hour.7
Respondent also disputes petitioner's claims for the
accountants, Victor Harris and Pamela Zimmerman. Respondent
argues that since the compensation rate for attorneys cannot
7
This Court uses the Consumer Price Index (CPI) for all
urban consumers to adjust the $75 hourly limit for increases in
the cost of living. Cassuto v. Commissioner, 93 T.C. 256, 273
(1989), affd. in part and revd. in part 936 F.2d 736 (2d Cir.
1991). We have held that 1981 is the appropriate base year for
calculating cost of living increases under sec.
7430(c)(1)(B)(iii). Bayer v. Commissioner, 98 T.C. 19, 23
(1992); Cassuto v. Commissioner, supra at 269. Nevertheless, the
Court of Appeals for the Fifth Circuit, to which this case is
appealable, has held that the appropriate base year for
calculating cost of living increases is Jan. 1, 1986. Heasley v.
Commissioner, 967 F.2d 116, 125 (5th Cir. 1992), affg. in part
and revg. in part T.C. Memo. 1991-189. We follow that holding
here. Golsen v. Commissioner, 54 T.C. 742, 756-758 (1970), affd.
445 F.2d 985 (10th Cir. 1971).
We note that the $104 hourly rate utilized by respondent
apparently represents the $75 statutory rate, adjusted by a 39-
percent increase in the C.P.I. from Jan. 1986 to July 1995. The
record indicates that a portion of the fees claimed by petitioner
was billed after July 1995. Nevertheless, petitioner's objection
to respondent's position relates only to the applicability of the
statutory cap, and not to the calculation of the $104 amount.
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exceed $104 per hour, similar limitations must apply with respect
to the accountants' charges.8
In Pierce v. Underwood, 487 U.S. 552 (1988), the Supreme
Court addressed whether "special factors" existed which entitled
a party, who settled a dispute with the Government, to an award
of attorney's fees in excess of the general statutory cap of $75
per hour (adjusted for inflation).9 The Court explained that in
order for the "limited availability of qualified attorneys" to
constitute a special factor warranting departure from the $75
cap, there must be a limited availability of attorneys who
possess distinctive knowledge or a specialized skill needful to
the particular litigation in question, as opposed to an
extraordinary level of general lawyerly knowledge.10 Id. at 572.
8
Since petitioner requests costs with respect to Ms.
Zimmerman's services at a maximum rate of $92 per hour, we fail
to grasp respondent's objection insofar as it pertains to that
amount. Accordingly, since the hourly rate billed by Ms.
Zimmerman did not exceed $104 per hour, and because respondent
does not otherwise contest the costs sought by petitioner with
respect to Ms. Zimmerman's services, we deem respondent to have
conceded petitioner's claim to that extent.
9
Although the dispute in Pierce v. Underwood, 487 U.S. 552(1988), arose under the provisions of the Equal Access to Justice
Act (EAJA), 28 U.S.C. sec. 2412(d)(1994), the relevant provisions
of the EAJA are almost identical to the language of sec. 7430.
Powers v. Commissioner, 43 F.3d 172, 183 (5th Cir. 1995), affg.
in part and revg. in part T.C. Memo. 1993-125 and 100 T.C. 457(1993). We, therefore, consider the holding in Pierce v.
Underwood, supra, to be applicable to the case before us.
10
As examples of attorneys possessing distinctive
knowledge or specialized skill, the Court included patent
attorneys and attorneys with knowledge of foreign law or
(continued...)
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Accordingly, the Court cautioned that factors such as the novelty
and difficulty of the issues, the undesirability of the case, the
work and ability of counsel, the results obtained, and the
customary fees and awards in other cases, should not be
considered for the purpose of determining whether an increased
award is warranted. Id. at 573; see also sec. 301.7430-
4(b)(3)(iii)(B), Proced. & Admin. Regs.
The Court of Appeals for the Fifth Circuit, citing Pierce v.
Underwood, supra, has explained in similar fashion that the term
"special factor" refers to attorneys who possess nonlegal or
technical abilities, as distinguished from other types of
substantive specializations currently proliferating within the
profession. Perales v. Casillas, 950 F.2d 1066, 1078 (5th Cir.
1992); see also Powers v. Commissioner, 43 F.3d 172, 183 (5th
Cir. 1995), affg, in part and revg. in part T.C. Memo. 1993-125and 100 T.C. 457 (1993). In this regard, the Court of Appeals
for the Fifth Circuit has held that an expertise in tax law, as a
type of "substantive specialization currently proliferating
within the profession", is not a special factor warranting an
hourly fee in excess of that contained in the statute. Powers v.
Commissioner, supra at 183. Furthermore, the Court of Appeals
for the Fifth Circuit has noted that the "limited availability"
of attorneys in a particular field cannot, standing alone,
10
(...continued)
language. Pierce v. Underwood, supra at 572.
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constitute a special factor in the absence of any special
expertise or skill demanded of the attorney by the underlying
proceedings. Perales v. Casillas, supra at 1078 n.16.
We first address petitioner's request for an award of costs
relating to attorney's fees. Although the issues presented in
the notice of deficiency may have required petitioner to secure
the services of a competent tax attorney, this finding does not,
standing alone, demonstrate the presence of a special factor
which would justify an increased award under section 7430.
Powers v. Commissioner, supra at 183.11 In accordance with
Pierce v. Underwood, supra, we do not consider the complexity of
the underlying tax issues, nor do we consider whether the fees
requested by petitioner are "reasonable" in comparison to the
11
We consider the following example, provided in sec.
301.7430-4(b)(3)(iii)(D), Proced. & Admin. Regs., to be
applicable in this regard. While this regulation refers to
administrative costs, it is clear that it is also applicable to
litigation costs. Sec. 7430(c)(2)(B).
Taxpayer A is represented by B, a CPA and attorney with
an LL.M. Degree in Taxation with Highest Honors and who
regularly handles cases dealing with TEFRA partnership
issues. B represents A in a * * * proceeding involving
TEFRA partnership issues and subject to the provisions of
this section. Assuming the taxpayer qualifies for an award
of reasonable * * * costs by meeting the requirements of
section 7430, the amount of the award attributable to the
fees of B may not exceed the $75 per hour limitation * * *,
absent a special factor. Under these facts alone, B is not
a specially qualified representative since even
extraordinary knowledge of the tax laws does not constitute
distinctive knowledge or a unique and specialized skill
constituting a special factor. [Sec. 301.7430-
4(b)(3)(iii)(D), Proced. & Admin Regs.]
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fees charged by attorneys with similar experience. Petitioner
has failed to establish that Mr. Urquhart possessed any nonlegal
or technical abilities apart from his expertise in the field of
tax law. Powers v. Commissioner, supra at 183. Petitioner,
therefore, has failed to establish that a special factor existed
which justifies an award in excess of the maximum rate provided
in section 7430(c)(1)(B)(iii).
We now turn to petitioner's request for an award of costs
with respect to the accounting fees. Respondent's argument that
the accounting fees are not reasonable appears to be directed to
the limitation under section 7430(c)(1)(B)(iii) as applied to
attorneys.12 It is clear that section 7430(c)(1)(B)(iii) relates
to fees paid to attorneys. Petitioner did not direct the Court
to a specific statutory authority for an award of accountant's
fees. Moreover, petitioner did not respond to respondent's
argument that the limitation of section 7430(c)(1)(B)(iii) should
apply to the accountant's fees. Respondent, on the other hand,
suggests that the limitation applies without the citation of any
authority.
Section 7430(c)(3) provides that fees for the services of an
individual (whether or not an attorney) who is authorized to
practice before the Tax Court or before the Internal Revenue
12
As previously noted, since the hourly fee charged to Ms.
Zimmerman is less than the cap (adjusted for inflation), we deem
that portion of the accountants' fees to be conceded.
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Service shall be treated as fees for the services of an attorney
for purposes of section 7430(c)(1) and (2). The clear statutory
provision requires that fees claimed by nonlawyers who are
authorized to practice before the Internal Revenue Service are
subject to the same limitations applicable to attorney's fees.
From a review of this record, it is uncontroverted that Mr.
Harris fits within section 7430(c)(3). Mr. Harris, who is a
C.P.A., represented petitioner as well as other taxpayers before
the IRS. As an individual who is authorized to practice before
the IRS, his fees are to be treated as the fees of an attorney.
As such, the fees paid or incurred for Mr. Harris' professional
services are subject to the same limitations under section
7430(c)(1)(B)(iii) as those applicable to the attorney in this
case. Similarly, Mr. Harris has not shown a special factor which
would warrant a departure from the statutory cap.
In summary, we hold that petitioner is entitled to an award
of litigation costs in the amount of $6,656 with respect to the
legal fees paid or incurred for services provided by Mr. Urquhart
at the limited rate set forth in section 7430(c)(1)(B)(iii),
adjusted for inflation. Petitioner is also entitled to an award
of costs of $365.21 with respect to Mr. Urquhart's out-of-pocket
expenses. Finally, we hold that petitioner is entitled to an
award of litigation costs for the accountant's fees paid or
incurred for services provided by Ms. Zimmerman and Mr. Harris,
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at the limited rate set forth in section 7430(c)(1)(B)(iii), in
the total amount of $5,698.
To reflect the foregoing,
An order with respect to
petitioner's motion will be
issued and a decision will
be entered.