Young v. Comm'r , 92 T.C.M. 228 ( 2006 )

T.C. Memo. 2006-189
UNITED STATES TAX COURT
HOYT W. AND BARBARA D. YOUNG, ET AL.,1 Petitioners
v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 17646-83, 4201-84, Filed September 6, 2006.
22783-85, 30010-85,
35608-86, 19464-92,
621-94, 9532-94.
Joe Alfred Izen, Jr., for petitioners in docket Nos. 4201-
84, 22783-85, 30010-85, and 35608-86.
Robert Alan Jones, for petitioners in docket Nos. 17646-83,
19464-92, 621-94, and 9532-94.
Henry E. O’Neill and Peter R. Hochman, for respondent.
1
Cases of the following petitioners have been consolidated
for purposes of this opinion: Hoyt W. and Barbara D. Young,
docket Nos. 4201-84, 22783-85, and 30010-85; Ronald L. and Mattie
L. Alverson, docket No. 17646-83; Norman W. and Barbara L. Adair,
docket No. 35608-86; Willis F. and Marie D. McComas, docket No.
19464-92; Wesley Armand and Sherry Lynn Cacia Baughman, docket
No. 621-94; and Norman A. and Irene Cerasoli, docket No. 9532-94.
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CONTENTS
Page
Background . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Discussion . . . . . . . . . . . . . . . . . . . . . . . . . 17
I. Introduction . . . . . . . . . . . . . . . . . . . . . . 17
A. Overview of Section 7430 . . . . . . . . . . . . . 17
B. Amplification of September 8, 2005 Order . . . . . 19
1. Inapplicability of Section 6673 . . . . . . . 20
2. Real Parties in Interest . . . . . . . . . . . 21
II. Entitlement to Relief Under Section 7430 . . . . . . . . 22
A. Jones Fee Request--Jurisdictional Issue . . . . . . 22
1. Respondent’s Position . . . . . . . . . . . . 22
2. Analysis . . . . . . . . . . . . . . . . . . . 23
a. September 8, 2005 Order . . . . . . . . . 23
b. Recent Ninth Circuit Cases . . . . . . . 24
c. Conclusion . . . . . . . . . . . . . . . 25
B. Paid or Incurred Requirement . . . . . . . . . . . 25
C. Substantial Justification Defense . . . . . . . . 27
D. Other Threshold Requirements . . . . . . . . . . . 28
E. Conclusion . . . . . . . . . . . . . . . . . . . . 28
III. Amounts of Awards . . . . . . . . . . . . . . . . . . . 28
A. Overview . . . . . . . . . . . . . . . . . . . . . 28
B. Reasonable Attorney’s Fee: The Lodestar . . . . . 28
1. In General . . . . . . . . . . . . . . . . . . 28
2. Hours Reasonably Expended . . . . . . . . . . 29
a. The Limited Success Factor . . . . . . . 29
b. Hours Relating to the Issue of
Attorney’s Fees . . . . . . . . . . . . . 30
3. Reasonable Hourly Rate Under Section 7430 . . 31
C. Hours Reasonably Expended--Izen Fee Request . . . . 31
1. Preliminary Issues . . . . . . . . . . . . . . 31
a. Scope of Representation We May Consider . 31
b. Discrepancies Between Fee Request and
Alleged Invoice . . . . . . . . . . . . . 34
2. Adjustments to Hours Claimed . . . . . . . . . 36
a. Hours Relating to “Intervention” . . . . 37
b. Hours Subject to “Billing Judgment”
Inference . . . . . . . . . . . . . . . . 40
c. Review of Other Parties’ Nonsubstantive
Filings . . . . . . . . . . . . . . . . . 42
d. Representation Issues . . . . . . . . . 43
e. Matters Relating to Remand Proceedings . 43
f. Duplicate Entries . . . . . . . . . . . 44
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g. Separately Claimed Fee Request Hours . . 44
h. Miscellaneous Additional Adjustments . . 45
3. Summary . . . . . . . . . . . . . . . . . . . 46
D. Hours Reasonably Expended--Jones Fee Request . . . 46
1. Reliability of Documentation . . . . . . . . . 46
2. Specific Time Entries . . . . . . . . . . . . 48
a. In General . . . . . . . . . . . . . . . 48
b. Dismissal and Recertification . . . . . . 48
c. The Cerasolis’ Motion To Intervene . . . 49
d. Pre- and Post-Appeal Tax Court Filings . 50
e. Miscellaneous Additional Adjustments . . 51
3. Summary . . . . . . . . . . . . . . . . . . . 51
E. Calculation of Lodestars . . . . . . . . . . . . . 51
1. Izen Fee Request . . . . . . . . . . . . . . . 51
a. 2000 and 2001 . . . . . . . . . . . . . . 51
b. 2002 through 2005 . . . . . . . . . . . 52
c. 2006 . . . . . . . . . . . . . . . . . . 52
d. Total . . . . . . . . . . . . . . . . . . 52
2. Jones Fee Request . . . . . . . . . . . . . . 53
a. 2000 and 2001 . . . . . . . . . . . . . . 53
b. 2002 and 2003 . . . . . . . . . . . . . 53
c. Total . . . . . . . . . . . . . . . . . . 54
F. Adjustment to Izen’s Fees-on-Fees Lodestar To
Reflect Limited Success . . . . . . . . . . . . . . 54
G. Reasonable Expenses . . . . . . . . . . . . . . . 55
1. Izen Expense Request . . . . . . . . . . . . 55
2. Jones Expense Request . . . . . . . . . . . . 56
H. Amounts Paid or Incurred by Eligible Persons . . . 57
1. Izen Fee Request . . . . . . . . . . . . . . . 57
a. Indirect Payments . . . . . . . . . . . . 57
b. Indirect Obligations . . . . . . . . . . 57
c. Direct Payments . . . . . . . . . . . . . 58
d. Direct Obligations--Fixed Amounts . . . . 59
e. Direct Obligations--Additional Amounts . 60
2. Jones Fee Request . . . . . . . . . . . . . . 62
I. Summary . . . . . . . . . . . . . . . . . . . . . . 63
Appendix--September 8, 2005 Order . . . . . . . . . . . . . . 64
MEMORANDUM OPINION
BEGHE, Judge: These cases are part of the Kersting tax
shelter litigation. In this opinion, we consider motions for
attorney’s fees and expenses relating to services provided by Joe
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Alfred Izen, Jr. (Izen) and Robert Alan Jones (Jones) in
connection with the appeal of Dixon v. Commissioner, T.C. Memo.
1999-101, supplemented by T.C. Memo. 2000-116, revd. and remanded
316 F.3d 1041 (9th Cir. 2003). Unless otherwise indicated,
section references are to the Internal Revenue Code of 1986, as
amended, and Rule references are to the Tax Court Rules of
Practice and Procedure.
Background
The following discussion is based on the existing record and
additional information submitted by the parties in connection
with the fee requests. We have not found it necessary to hold an
evidentiary hearing. See Rule 232(a)(2).
Petitioners Hoyt and Barbara Young (the Youngs) are test
case petitioners in the Kersting tax shelter litigation. The
remaining petitioners herein (the Adairs, Alversons, McComases,
Baughmans, and Cerasolis) are nontest case petitioners whose
cases were consolidated with the test cases for purposes of the
attorney misconduct phase of this litigation, discussed below.
The Youngs and the Adairs (collectively, the Izen petitioners)
are represented by Izen; the remaining petitioners herein
(collectively, the Jones petitioners) are represented by Jones.
The Kersting tax shelter litigation arose from respondent's
disallowance of interest deductions claimed by participants in
various tax shelter programs promoted by Henry F.K. Kersting
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(Kersting) during the late 1970s through the 1980s. Under the
test case procedure, nontest case petitioners in more than 1,000
docketed cases entered into “piggyback” agreements in which they
agreed that their cases would be resolved in accordance with the
outcome of the test cases.2
The test cases initially consisted of 14 docketed cases of
eight petitioners, six of whom (including the Youngs) were
represented by Izen at trial. Kersting, who had retained Izen to
represent those six test case petitioners, initially paid Izen’s
fees, either directly or through alter ego corporations.
Following a 3-week trial, the Court sustained virtually all
of respondent's determinations in each of the test cases. See
Dixon v. Commissioner, T.C. Memo. 1991-614 (Dixon II).3 However,
on June 9, 1992, respondent notified the Court that respondent’s
management had just discovered that, prior to the trial of the
test cases, respondent's trial attorney, Kenneth W. McWade, and
McWade’s supervisor, Honolulu District Counsel William A. Sims,
2
Upon the final disposition of the test cases, the
relatively few nontest case petitioners who did not enter into
piggyback agreements will generally be ordered to show cause why
their cases should not be decided in the same manner as the test
cases. See, e.g., Lombardo v. Commissioner, 99 T.C. 342, 343
(1992), affd. on other grounds sub nom. Davies v. Commissioner,
68 F.3d 1129 (9th Cir. 1995).
3
Prior to the trial of the test cases, the Court had issued
an opinion rejecting the test case petitioners' arguments that
certain evidence should be suppressed and that the burden of
proof should be shifted to respondent. See Dixon v.
Commissioner, 90 T.C. 237 (1988) (Dixon I).
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had entered into secret settlement agreements with the two test
case petitioners not represented by Izen (the Thompsons and the
Cravenses). Respondent asked the Court to conduct an evidentiary
hearing to determine whether the previously undisclosed
agreements had affected the trial of the test cases or the
opinion of the Court. The Court denied respondent's request for
an evidentiary hearing, entered decisions giving effect to the
Thompson and Cravens settlements, and reentered or allowed to
stand the decisions sustaining respondent’s determinations
against the other test case petitioners.
Around this time, Kersting organized, and initially
administered, a fund (hereafter, the “Defense Fund” or “Fund”)
through which nontest case petitioners shared the further costs
of the test case litigation. At various times, more than 300
nontest case petitioners contributed to the Defense Fund.
The test case petitioners (other than the Thompsons and the
Cravenses) appealed to the Court of Appeals for the Ninth
Circuit. The Court of Appeals, citing Arizona v. Fulminante, 499
U.S. 279, 309 (1991), stated:
We cannot determine from this record whether the
extent of misconduct rises to the level of a structural
defect voiding the judgment as fundamentally unfair, or
whether, despite the government’s misconduct, the
judgment can be upheld as harmless error. [DuFresne v.
Commissioner, 26 F.3d 105, 107 (9th Cir. 1994) (per
curiam), vacating Dixon v. Commissioner, T.C. Memo.
1991-614.]
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The Court of Appeals vacated this Court’s decisions in the test
cases and remanded them for “an evidentiary hearing to determine
the full extent of the admitted wrong done by the government
trial lawyers.” Id. In response to the direction of the Court
of Appeals to consider on the merits all motions of intervention
filed by interested parties, this Court ordered that the cases of
10 nontest case petitioners (hereafter, the participating nontest
case petitioners), including the Adairs and the four Jones
petitioners,4 be consolidated with the remaining test cases for
purposes of the evidentiary hearing.
On the basis of the record developed at the evidentiary
hearing, the Court held that the misconduct of the Government
attorneys in the trial of the test cases did not cause a
structural defect in the trial but rather resulted in harmless
error. See Dixon v. Commissioner, T.C. Memo. 1999-101 (Dixon
III). However, the Court imposed sanctions against respondent,
holding that Kersting program participants who had not had final
decisions entered in their cases would be relieved of liability
for (1) the interest component of the addition to tax for
negligence under former section 6653(a), and (2) the incremental
interest attributable to the increased rate prescribed in former
section 6621(c).
4
The remaining five participating nontest case petitioners
have been represented by Robert Patrick Sticht (Sticht).
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After the issuance of Dixon III, Izen and Jones filed joint
motions for attorney’s fees and costs (the Izen/Jones request).
The Izen/Jones request relied primarily on sections 7430
(authorizing fee awards for certain prevailing taxpayers) and
6673(a)(2)(B) (relating to misconduct of the Commissioner’s
attorneys in Tax Court proceedings).5 The Court ordered the
movants to submit documentation pertaining to fees and expenses
incurred commencing June 10, 1992 (i.e., the day after the Court
learned of the misconduct by the Government attorneys). In Dixon
v. Commissioner, T.C. Memo. 2000-116 (Dixon IV), the Court
rejected the Izen/Jones request insofar as it relied on section
7430, on the ground that the movants had not substantially
prevailed in the proceedings as required by section
7430(c)(4)(A)(i). The Court did award a portion of the claimed
fees and expenses under section 6673(a)(2)(B).
The Court entered decisions in the remaining test cases, and
on June 29, 2000, Izen filed notices of appeal on behalf of the
test case petitioners (the Dixons, DuFresnes, Hongsermeiers,
Owenses, and Youngs).6 See sec. 7483. Izen and Jones also
attempted to file notices of appeal on behalf of their respective
5
Sticht subsequently filed his own motion for sanctions
(including attorney’s fees and costs), which we effectively
treated as having been premised on sec. 6673(a)(2)(B).
6
Ralph J. Rina, the other test case petitioner initially
represented by Izen, had settled his case in 1995.
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participating nontest case petitioner clients and numerous other
nontest case petitioners labeled “intervenors”. Because the
Court had not entered decisions in any of the nontest cases
(pending final disposition of the test cases), the Court rejected
the notices of appeal filed on behalf of nontest case
petitioners. However, in response to a motion filed by Attorney
Sticht, see supra note 4, the Court certified for interlocutory
appeal certain orders it had issued in the participating nontest
case petitioners’ cases in connection with the evidentiary
hearing, thereby enabling those petitioners to apply to the Court
of Appeals for immediate review. See sec. 7482(a)(2)(A).
On the basis of this Court’s certification order, Izen and
Jones (as well as Sticht) continued their efforts on behalf of
nontest case petitioners in the Court of Appeals. Izen submitted
to that court a “Notice of Appeal of Certain Intervenors” bearing
docket No. 00-70858 (the docket number the Court of Appeals had
assigned to the test case appeal). Izen purported to submit that
document on behalf of not only the Adairs, but also nontest case
petitioners in more than 450 docketed cases who had not
participated in the evidentiary hearing and whose cases therefore
were not included in the certification order. Jones submitted
“notices of appeal” on behalf of the four Jones petitioners,
which the Court of Appeals construed as petitions for permission
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to appeal under section 7482(a)(2) (i.e., applications for
interlocutory review).
By order dated August 30, 2000, the Court of Appeals denied
the Jones petitioners’ initial applications for interlocutory
review as untimely. In a subsequent order addressing a motion
for reconsideration by the Jones petitioners, the Court of
Appeals suggested that they request the Tax Court to recertify
their cases for interlocutory appeal. They did so, and we
recertified the cases by order dated January 23, 2001. The Court
of Appeals granted the Jones petitioners’ ensuing applications
for interlocutory review on March 20, 2001, and ultimately
assigned docket Nos. 01-70638, 01-70639, 01-70640, and 01-70641
to their cases.
On January 30, 2001, the Court of Appeals assigned docket
No. 01-70155 to the Adair et al. matter (hereafter, the Adair
appeal). On March 22, 2001, the Court of Appeals issued an order
to show cause why the Adair appeal should not be dismissed for
lack of jurisdiction. Describing Izen’s initial filing as
“confusing in several respects”, the Court of Appeals apparently
surmised that Izen was attempting to establish the right of
nontest case petitioners to appeal the decisions in the test
cases (in their self-proclaimed capacity as “intervenors”) rather
than seeking permission to appeal the orders this Court had
certified for interlocutory appeal. On the same day, the Court
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of Appeals stayed the proceedings in docket No. 00-70858 (the
test case appeal) pending resolution of the various nontest case
matters. Izen and respondent contested the jurisdictional issue
in the Adair appeal over the next several months.
In an order dated May 10, 2001, the Court of Appeals decreed
that the Jones petitioners’ interlocutory appeals (as well as
those filed by Sticht) “shall be held in abeyance pending
resolution of the appeal in no. 00-70858” (the test case appeal).
On November 20, 2001, the Court of Appeals issued a similar order
in the Adair appeal. The next day, the Court of Appeals lifted
the stay of proceedings in the test case appeal.
Meanwhile, in January 2001, the Defense Fund, acting through
a five-person “steering committee” following Kersting’s death in
March 2000, had retained attorney Michael Louis Minns (Minns) to
replace Izen. Although Minns entered appearances in the test
case appeal on behalf of the Dixons, DuFresnes, Owenses, and
Hongsermeiers, Izen remained counsel of record for the Youngs in
that appeal (and counsel of record in the Adair appeal).
On or about April 16, 2001, Izen sent a demand letter to the
Defense Fund requesting payment of alleged outstanding fees. In
a subsequent lawsuit (filed in the District Court of Harris
County, Texas) against the Defense Fund, members of its steering
committee, and its business manager, Izen alleged that as of
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April 16, 2001, he was owed $44,884.70 “for legal work for the
evidentiary hearing and for preparation of the appeal.”7
Around December 2001, when the Defense Fund was no longer
paying Izen’s fees, he began entering into individual engagement
contracts with various nontest case petitioners. Pursuant to
those contracts, Izen undertook to “take all the necessary legal
actions and file the necessary papers for intervention of all
non-test case Petitioners in the appeal” as well as “take all
necessary actions on appeal to obtain a reversal of” the
decisions entered in the test cases. Although the contracts
recite Izen’s billing rate as $300 per hour, they limit the
client’s obligation to 24 monthly payments of $200 (or, in one
case, $100). The contracts also provide that “Attorney’s
previous bill which the Steering Committee refused to pay and his
bill for work on the appeal since April, 2001 shall be paid by
payments under this Agreement unless paid from another source.”
Also in December 2001, the steering committee of the Defense
Fund replaced Minns with Porter & Hedges, L.L.P. (Porter &
Hedges). Although Porter & Hedges attorneys Henry Binder and
John A. Irvine entered appearances in the test case appeal on
behalf of the Dixons, DuFresnes, and Owenses, Minns remained
7
By the time the case went to trial, the business manager,
Geoffrey Sjostrom, was the only remaining defendant. After a
jury verdict in favor of the defendant, the court entered a take
nothing judgment. That judgment is currently on appeal to the
Fourteenth Court of Appeals in Texas.
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counsel of record for the Hongsermeiers. Thus, three sets of
counsel pursued the test case appeal: Izen on behalf of the
Youngs, Minns on behalf of the Hongsermeiers, and Porter & Hedges
on behalf of the Dixons, DuFresnes, and Owenses (hereafter, the
PH appellants).
On July 26, 2002, after the test case appellants’ opening
briefs, respondent’s answering brief, and the test case
appellants’ reply briefs had all been filed, Jones filed a motion
for leave to intervene in the test case appeal on behalf of one
of the four Jones petitioners (the Cerasolis). The Court of
Appeals denied the Cerasolis’ motion by order dated September 6,
2002.
On January 17, 2003, the Court of Appeals reversed and
remanded the test cases, holding that the misconduct of the
Government attorneys in the trial of the test cases was a fraud
on the court, for which no showing of prejudice is required. See
Dixon v. Commissioner, 316 F.3d 1041 (9th Cir. 2003) (Dixon V).
As for the remedy, the Court of Appeals decreed that respondent
be sanctioned by entry of judgment in favor of the test case
petitioners “and all other taxpayers properly before this Court
on terms equivalent to those provided in the settlement agreement
with Thompson and the IRS.” Id. at 1047. The Court of Appeals
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also remanded the various nontest cases to the Tax Court for
further proceedings consistent with Dixon V.8
Shortly after issuance of Dixon V, the PH appellants and the
Hongsermeiers filed separate requests with the Court of Appeals
for attorney’s fees incurred on appeal. See 9th Cir. R. 39-1.6.
The PH appellants’ fee request related solely to services
performed by Porter & Hedges, and the Hongsermeiers’ fee request
related solely to services performed by Minns or under his
direction. As filed, both of those requests (hereafter, the
Binder/Minns fee requests) relied exclusively on section 7430.
Rather than filing their own fee request with the Court of
Appeals, the Youngs, through Izen, filed an objection to the
Binder/Minns fee requests. The primary thrust of the objection
was that the PH appellants and the Hongsermeiers had not paid or
incurred the amounts requested:
In actuality, Mr. Binder’s motion fails to reveal
the true clients in interest who have paid him fees to
represent their interests on appeal. These “real
clients in interest” are the same clients represented
by Joe Alfred Izen, Jr. in the appeal styled Barbara L.
Adair, Et Al, v. Commissioner, No. 01-70155, which is a
“related case” under this Court’s Local Rules. * * *
Although those real clients in interest paid Mr. Minns
and Mr. Binder for representation on appeal, (either
involuntarily or voluntarily) neither Mr. Minns nor Mr.
8
In response to inquiries by the Dixon V panel at oral
argument, Minns, acting pro bono, filed and pursued complaints
against McWade and Sims before their respective State bars and
the IRS Office of Professional Responsibility that resulted in
their suspensions from practice. See Dixon v. Commissioner, T.C.
Memo. 2006-90 (Dixon VI), at Findings of Fact Part IV.E.
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Binder ever substituted in on this appeal [No. 01-
70155] as their attorney of record. * * *
On the same day, Izen filed a motion in the Adair appeal (docket
No. 01-70155) to transfer consideration of appellate attorney’s
fees to the Tax Court. See 9th Cir. R. 39-1.8. Jones made no
filing on behalf of any of the Jones petitioners under either
Ninth Circuit rule 39-1.6 or 39-1.8.
The Court of Appeals granted Izen’s motion to transfer under
Ninth Circuit rule 39-1.8 on May 8, 2003. On May 28, 2003, the
Court of Appeals remanded the Binder/Minns fee requests to the
Tax Court “for a determination of entitlement and, if warranted,
amount.”
On May 19, 2005, more than 2 years after the Court of
Appeals had granted his motion to transfer under Ninth Circuit
rule 39-1.8 in the Adair appeal, Izen filed in this Court, on
behalf of the Youngs, a motion for appellate attorney’s fees and
expenses under section 6673 (the Izen fee request). On July 15,
2005, Jones filed a similar motion in this Court on behalf of the
Jones petitioners (the Jones fee request).9
In a September 8, 2005 order pertaining to both the Izen fee
request and the Jones fee request, which we incorporate by
9
To update the story regarding Sticht’s appellate fees, see
Dixon v. Commissioner, T.C. Memo. 2006-97 n.12., the Court has
been given to understand that Sticht and respondent are close to
completion of a comprehensive stipulation and submission
regarding the fee claims of participating nontest case
petitioners represented by Sticht.
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reference and reproduce as the appendix, we concluded that “the
reasoning of Cooter & Gell v. Hartmarx Corp., [496 U.S. 384(1990),] precludes us from awarding appellate fees and expenses
under section 6673.” We resolved instead to “treat the present
movants as having revived their section 7430 claims” (i.e., those
raised in the wake of Dixon III and rejected by the Court in
Dixon IV on “prevailing party” grounds).10 With a nod to the
Youngs’ previous objection to the Binder/Minns fee requests, we
ordered the submission of net worth affidavits for all real
parties in interest with respect to the Izen fee request and the
Jones fee request. See Rule 231(b)(4); see also infra Part I.A.
Specifically, we requested the affidavits of “those individuals
who have made payments of the requested appellate fees and
expenses to Mr. Izen--directly or through contributions to the
Atlas Legal Defense Fund--or Mr. Jones or are otherwise liable
for any portion of the requested appellate fees and expenses”.11
On May 10, 2006, we issued our opinion in Dixon v.
Commissioner, T.C. Memo. 2006-97 (Dixon VII), awarding, under
section 7430, $248,049.27 in respect of the PH appellants’ fee
request and $158,562.50 in respect of the Hongsermeiers’ fee
10
Consistent with that approach, on Nov. 2, 2005, we
ordered that all future filings pertaining to the Izen fee
request be filed on behalf of the Adairs as well as the Youngs.
11
We had issued a similar order pertaining to the
Binder/Minns fee requests on Sept. 1, 2005. See Dixon v.
Commissioner, T.C. Memo. 2006-97 App. A.
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request.12 In separate orders pertaining to the Izen fee request
(May 10, 2006) and the Jones fee request (June 14, 2006), we
afforded all parties herein an opportunity to rebut any of the
conclusions reached in Dixon VII that are relevant to these fee
requests.
The Izen petitioners request attorney’s fees of $375,195.99
and other expenses of $39,805.19, for a total of $415,001.18.
The Jones petitioners request attorney’s fees of $125,351.8013
and other expenses of $7,784.70, for a total of $133,136.50.
Discussion
I. Introduction
A. Overview of Section 7430
Section 7430 provides that, subject to certain conditions, a
taxpayer who prevails against the Government in any Federal tax
proceeding (administrative or judicial) may recover reasonable
costs, including attorney’s fees, paid or incurred in connection
with such proceeding if the Government’s position in the
12
As for Dixon VI, see Dixon v. Commissioner, T.C. Memo.
2006-90 (responding to the primary mandate of the Court of
Appeals in Dixon V). A motion for reconsideration is pending.
13
That figure actually includes paralegal fees as well as
attorney’s fees. Although sec. 7430 does not specifically
provide for recovery of paralegal fees, this Court has routinely
awarded them, and we have no reason to believe that the Court of
Appeals for the Ninth Circuit would take a different approach.
See Dixon v. Commissioner, T.C. Memo. 2006-97 n.14. Although
paralegal fees do not fit neatly within the category of either
“attorney’s fees” or “expenses”, we follow the Jones petitioners’
lead in grouping them with attorney’s fees.
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proceeding was not substantially justified. Sec. 7430(a),
(c)(1)(B)(iii), (c)(4)(A) and (B); see also Dixon v.
Commissioner, T.C. Memo. 2006-97 n.28. In its report
accompanying the bill in which section 7430 originated, the House
Committee on Ways and Means contemplated that such fee awards
“will enable individual taxpayers to vindicate their rights
regardless of their economic circumstances.” H. Rept. 97-404, at
11 (1981).
A taxpayer seeking litigation costs under section 7430 must
have exhausted all available administrative remedies prior to
litigation and, if an individual, must not have had a net worth
in excess of $2 million as of the filing date of the suit.14 Sec.
7430(b)(1), (c)(4)(A)(ii); see 28 U.S.C. sec. 2412(d)(2)(B)(i)
(1988) (individual net worth limitation contained in the Equal
Access to Justice Act (EAJA) and incorporated by reference in
sec. 7430(c)(4)(A)(ii)). Reasonable attorney’s fees may not
exceed the rate of $125 per hour (as adjusted for inflation)
unless “a special factor, such as the limited availability of
qualified attorneys for such proceeding, the difficulty of the
issues presented in the case, or the local availability of tax
14
We have applied the net worth requirement as of June 10,
1992 (the date on which the attorney misconduct phase of this
litigation effectively commenced). See app. note 14 and
accompanying text.
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expertise, justifies a higher rate.” Sec. 7430(c)(1)(B)(iii).15
In addition, a court may not award fees with respect to any
portion of the proceedings unreasonably protracted by the
taxpayer. Sec. 7430(b)(3).
Respondent publishes the inflation-adjusted rate cap on an
annual basis. The hourly rate cap for fees incurred in 2000 and
2001 (the earliest years for which petitioners claim fees) is
$140. Rev. Proc. 99-42, sec. 3.26, 1999-2 C.B. 568, 572; Rev.
Proc. 2001-13, sec. 3.26, 2001-1 C.B. 337, 341. The hourly rate
cap for fees incurred in 2002 through 2005 is $150. Rev. Proc.
2001-59, sec. 3.28, 2001-2 C.B. 623, 628; Rev. Proc. 2002-70,
sec. 3.32, 2002-2 C.B. 845, 850; Rev. Proc. 2003-85, sec. 3.33,
2003-2 C.B. 1184, 1190; Rev. Proc. 2004-71, sec. 3.35, 2004-2
C.B. 970, 976. The hourly rate cap for fees incurred in 2006 is
$160. Rev. Proc. 2005-70, sec. 3.36, 2005-47 I.R.B. 979, 985.
B. Amplification of September 8, 2005 Order
Before turning to our analysis under section 7430, we
briefly revisit our September 8, 2005 order (app.) in the light
of our recent Dixon VII opinion.
15
The latter two examples of special factors were added by
the Internal Revenue Service Restructuring and Reform Act of
1998, Pub. L. 105-206, sec. 3101(a)(2), (g), 112 Stat. 727, 729,
effective for costs incurred after Jan. 18, 1999. All of the
costs sought by petitioners were incurred after Jan. 18, 1999.
- 20 -
1. Inapplicability of Section 6673
In our September 8 order, we indicated that we would
evaluate petitioners’ fee requests under section 7430 rather than
the proffered ground of section 6673. We premised that decision
on the distinction the Supreme Court has drawn between (1) “fee-
shifting” provisions (such as section 7430) that embody a
substantive policy (e.g., encouraging private parties to enforce
their rights by allowing them to recover their attorney’s fees if
successful) and (2) what may be termed “fee sanction” rules (such
as section 6673), the applicability of which “depends not on
which party wins the lawsuit, but on how the parties conduct
themselves during the litigation.” Chambers v. NASCO, Inc., 501
U.S. 32, 53 (1991); see also Bus. Guides, Inc. v. Chromatic
Commcns. Enters., Inc., 498 U.S. 533, 553 (1991); Cooter & Gell
v. Hartmarx Corp., 496 U.S. 384, 409 (1990). We noted that,
whereas a fee award under a fee-shifting provision generally
encompasses all aspects of the litigation, see Commissioner, INS
v. Jean, 496 U.S. 154, 161-162 (1990), fees awarded as a sanction
are properly limited to those directly caused by the sanctionable
conduct, see Cooter & Gell v. Hartmarx Corp., supra at 406-407.
In Dixon VII, we discussed the practical consequences of that
distinction in the context of this fee litigation:16
16
The PH appellants had filed a motion in this Court in
November 2005 requesting appellate fees under sec. 6673, “to
(continued...)
- 21 -
Under section 6673(a)(2), we are authorized to sanction
respondent for the attorney misconduct that marred the
test case trial by charging him the full amount of
petitioners’ attorney’s fees relating to the Tax Court
proceedings necessitated by that misconduct, subject
only to the requirement that such amounts have been
reasonably incurred. Because that misconduct did not
extend to the appellate proceedings, petitioners are
relegated to the applicable fee-shifting provision--
section 7430, with its hourly rate cap and eligibility
requirements--with regard to their appellate fee
requests. [Dixon v. Commissioner, T.C. Memo. 2006-97
at Part I.C.; citation and fn. refs. omitted.]
Those observations apply equally here.
2. Real Parties in Interest
We also indicated in our September 8 order that we would
look to the real parties in interest with respect to petitioners’
fee requests in applying the net worth requirement of section
7430(c)(4)(A)(ii). We first adopted that approach in an order
pertaining to the Binder/Minns fee requests that we had issued 1
week earlier. See supra note 11 and accompanying text. In Dixon
VII, we amplified our thinking in that regard:
The case for looking beyond the named parties is
particularly compelling in these proceedings, where
similarly situated taxpayers not only shared the costs
of the litigation but also “had rights at stake in the
case on the merits”. Sisk, * * * [“The Essentials of
the Equal Access to Justice Act: Court Awards of
Attorney’s Fees for Unreasonable Government Conduct
(Part One),” 55 La. L. Rev. 217 (1994)] at 346 (arguing
that one can be a real party in interest with respect
16
(...continued)
ensure that their requests for fees on appeal before this Court
are procedurally postured with the Youngs’ Motion”. We summarily
denied the PH appellants’ motion “For the reasons discussed in
our Order dated September 8, 2005”.
- 22 -
to an EAJA fee request--and thereby potentially
entitled to recover the requested fees--only by virtue
of one’s status as a real party in interest in the
underlying litigation on the merits; i.e., that
financial responsibility for the claimed legal fees
does not confer real party in interest status).
We now hold that the real parties in interest in
this litigation include not only the test case
petitioners and participating nontest case petitioners,
but also all other remaining nontest case petitioners.
* * * [Dixon v. Commissioner, T.C. Memo. 2006-97 at
Part II.B.2.; fn. refs. omitted.]
We apply that reasoning to petitioners’ fee requests as well.
II. Entitlement to Relief Under Section 7430
A. Jones Fee Request--Jurisdictional Issue
1. Respondent’s Position
Respondent maintains that this Court lacks jurisdiction to
act on the Jones fee request. In his response to that request,
respondent states:
Mr. Jones never filed with the Ninth Circuit any
application or motion pertaining to an award of
appellate attorney’s fees. Unlike the situation with
Messrs. Binder, Minns and Izen, there is no order from
the Ninth Circuit conferring jurisdiction on this court
to determine the appropriate amount of Mr. Jones’
appellate attorney’s fees. [Fn. ref. omitted.]
Respondent then notes that, under Ninth Circuit rule 39-1.6:
“The period for Mr. Jones to request appellate attorney’s fees in
connection with his interlocutory appeal has long since expired.”
- 23 -
2. Analysis
a. September 8, 2005 Order
As indicated above, in our September 8, 2005 order, see
appendix, we resolved to “treat * * * [petitioners] as having
revived their section 7430 claims” that we had rejected in Dixon
IV. We did so “In light of the test case petitioners’ subsequent
appellate victory, and in order to give effect to Jean’s mandate
to ‘[treat] a case as an inclusive whole’ in applying fee-
shifting statutes”.17 That approach presupposes, in derogation of
respondent’s jurisdictional argument, that a request for
appellate fees under a fee-shifting statute (as opposed to a “fee
sanction” rule, see supra Part I.B.1.) need not originate in the
Court of Appeals. We continue to adhere to that view. See
Little Rock Sch. Dist. v. State of Ark., 127 F.3d 693, 696-697
(8th Cir. 1997) (claimant’s failure to move for appellate fees
under 8th Cir. R. 47C--the analog of Ninth Circuit rule 39-1.6
and 39-1.8--did not preclude District Court from including
appellate fees in its fee award under civil rights fee-shifting
statute; although filing in the Court of Appeals is the preferred
17
See Commissioner, INS v. Jean, 496 U.S. 154, 161-162
(1990), in which the Supreme Court held that the recipient of a
fee award under the Equal Access to Justice Act (EAJA), the fee-
shifting statute from which sec. 7430 derives, may recover fees
incurred litigating the fee award without a separate showing that
the Government’s opposition to the fee award was not
substantially justified.
- 24 -
procedure for requesting appellate fees, “Rule 47C cannot and
does not affect the jurisdiction of the district courts”).
b. Recent Ninth Circuit Cases
Two recent opinions of the Court of Appeals for the Ninth
Circuit reveal that the law of the circuit on this point is
unsettled. In Cummings v. Connell, 402 F.3d 936, 940, 947-948
(9th Cir. 2005), a case involving the general civil rights fee-
shifting statute, the Court of Appeals held that a District Court
is authorized to award appellate fees only if, in response to the
requesting party’s timely filing under Ninth Circuit rule 39-1.6
or 39-1.8, the Court of Appeals remands the request or transfers
the issue to the District Court. However, the Court of Appeals
appears to have retreated from that jurisdictional reading of its
rules in Twentieth Century Fox Film Corp. v. Entmt. Distrib., 429
F.3d 869 (9th Cir. 2005), involving the fee-shifting provision of
the 1976 Copyright Act, 17 U.S.C. sec. 505 (2000). The court
described the appellant’s argument in that case as follows:
Finally, * * * [appellant] argues that the
district court improperly awarded fees generated by
* * * [appellees] in defending against * * *
[appellant’s] prior appeal of the district court’s
summary judgment award. Relying heavily on Circuit
Rules 39-1.6 and 39-1.8, * * * [appellant] contends
that the district court was without jurisdiction to
award * * * [appellees’] appeal fees, primarily because
* * * [appellees] did not first file an application
with us to recover fees and expenses. [Twentieth
Century Fox Film Corp. v. Entmt. Distrib., supra at
884.]
- 25 -
Having spelled out the argument, the Court of Appeals did not
address it. The Court of Appeals instead framed the issue in
terms of whether a prevailing party is entitled to “fees for an
intermediate appellate stage of its litigation where it was
unsuccessful”. Id. The Court of Appeals upheld the District
Court’s award of appellate fees, id., something it could not have
done had it believed that the District Court lacked jurisdiction
to award those fees.
c. Conclusion
We continue to subscribe to the view that this Court has the
authority to consider (and award) both trial fees and appellate
fees under section 7430 without the necessity of a separate
filing in the Court of Appeals. Although we are mindful of
Cummings v. Connell, supra, the forbearance of the Court of
Appeals in Twentieth Century Fox Film Corp. v. Entmt. Distrib.,
supra, leads us to believe we are not faced with a situation
where we “would surely be reversed” on this issue on appeal. See
Lardas v. Commissioner, 99 T.C. 490, 495 (1992). Accordingly, we
hold that we have jurisdiction to consider the Jones fee request.
B. Paid or Incurred Requirement
Unlike certain other fee-shifting statutes, section 7430
generally allows the recovery of attorney’s fees only to the
extent such amounts have been paid or incurred.18 Sec.
18
But see sec. 7430(c)(3)(B), providing an exception for
(continued...)
- 26 -
7430(a)(2), (c)(1)(B)(iii); see Frisch v. Commissioner, 87 T.C.
838, 844 (1986) (distinguishing the Civil Rights Attorney’s Fees
Awards Act of 1976 (CRAFAA), 42 U.S.C. sec. 1988 (2000), under
which a court “may allow the prevailing party * * * a reasonable
attorney’s fee”); cf. Blanchard v. Bergeron, 489 U.S. 87, 96
(1989) (fee award under CRAFAA is not limited to the amount the
prevailing party owes his attorney pursuant to contingent fee
agreement). For purposes of section 7430, fees are “incurred”
when there is a legal obligation to pay them. E.g., Grigoraci v.
Commissioner, 122 T.C. 272, 277-278 (2004).
In his opposition to the Izen fee request, respondent,
referring to the $373,400.71 of fees and other expenses initially
requested, asserts that “there is no showing that the Youngs have
paid (or were obligated to pay) this or any other amount.”
Respondent raised a similar argument with regard to the
Binder/Minns fee requests. As we stated in Dixon VII: “Under
the ‘real party in interest’ approach * * *, the fact that
petitioners have not, by and large, paid or incurred the claimed
fees and expenses does not render those amounts unrecoverable
under section 7430.” Dixon v. Commissioner, T.C. Memo. 2006-97
at Part II.B.2. Rather, “the relevant inquiry is * * * whether
the real parties in interest who did pay or incur those amounts
satisfy the net worth requirement imposed by section
18
(...continued)
pro bono services.
- 27 -
7430(c)(4)(A)(ii).” Id.; see also id. n.27. As respondent has
forgone the opportunity provided in our May 10 and June 14, 2006
orders to challenge that (or any other) aspect of Dixon VII, we
shall again look to the real parties in interest to determine the
extent to which the requested amounts were paid or incurred. See
infra Part III.H.
C. Substantial Justification Defense
Under section 7430(c)(4)(B)(i), it is “the position of the
United States in the proceeding” that is evaluated under the
substantial justification standard. In Dixon VII, we identified
that position as “respondent’s litigating position regarding the
legal effect of the attorney misconduct (i.e., that such
misconduct amounted to harmless error and therefore did not
invalidate the decisions entered against the test case
petitioners following the issuance of Dixon II).” Dixon v.
Commissioner, T.C. Memo. 2006-97 at Part II.C.1. We then
concluded, although we had adopted that very position in Dixon
III, that the finding of the Court of Appeals in Dixon V that we
had committed clear error in that regard compelled the conclusion
that respondent’s position was not substantially justified. As
respondent has declined our invitation to challenge that aspect
of Dixon VII, we similarly conclude here that the position of the
United States, as so identified, was not substantially justified.
- 28 -
D. Other Threshold Requirements
Respondent does not allege that petitioners failed to
exhaust their administrative remedies and does not dispute that
petitioners prevailed in the proceedings at issue.
E. Conclusion
Petitioners are entitled to relief under section 7430.
III. Amounts of Awards
A. Overview
Our determination of the amounts of petitioners’ awards
under section 7430 turns on three inquiries with respect to each
fee request: First, what is a reasonable attorney’s fee (within
the confines of section 7430) for the representation covered by
the fee request? Second, what are the reasonable expenses
associated with that representation? Third, to what extent have
real parties in interest who satisfy section 7430’s net worth
requirement (hereafter, eligible persons) paid or incurred those
amounts?19
B. Reasonable Attorney’s Fee: The Lodestar
1. In General
“The most useful starting point for determining the amount
of a reasonable fee is the number of hours reasonably expended on
the litigation multiplied by a reasonable hourly rate.” Hensley
19
Respondent does not allege that petitioners unreasonably
protracted any portion of the proceedings at issue. See sec.
7430(b)(3).
- 29 -
v. Eckerhart, 461 U.S. 424, 433 (1983). The resulting figure,
commonly referred to as the lodestar, “‘has, as its name
suggests, become the guiding light of * * * [the Supreme Court’s]
fee-shifting jurisprudence.’” Gisbrecht v. Barnhart, 535 U.S.
789, 801 (2002) (quoting Burlington v. Dague, 505 U.S. 557, 562
(1992)); see also Hensley v. Eckerhart, supra at 433 n.7 (“The
standards set forth in this opinion are generally applicable in
all cases in which Congress has authorized an award of fees to a
‘prevailing party.’”).
2. Hours Reasonably Expended
a. The Limited Success Factor
In Hensley, the Supreme Court recognized that the
determination of hours reasonably expended extends beyond
considerations of efficiency and documentation. As the Court
stated:
If * * * a plaintiff has achieved only partial or
limited success, the product of hours reasonably
expended on the litigation as a whole times a
reasonable hourly rate may be an excessive amount.
* * *
* * * That the plaintiff is a “prevailing party”
therefore may say little about whether the expenditure
of counsel’s time was reasonable in relation to the
success achieved. * * *
Hensley v. Eckerhart, supra at 436. Professor Sisk sometimes
refers to this aspect of reasonableness as the limited success
factor. Sisk, “The Essentials of the Equal Access to Justice
Act: Court Awards of Attorney’s Fees for Unreasonable Government
- 30 -
Conduct (Part Two)”, 56 La. L. Rev. 1, 119 (1995). While it is
often difficult to allocate attorney time between successful and
unsuccessful issues and claims, “denial of a particular form or
aspect of relief occasionally may be attributable to a discrete
motion or proceeding, thus allowing the limited success factor to
be measured by hours devoted to that effort.” Id.; see also
Hensley v. Eckerhart, supra at 436 (a court applying these
principles “may attempt to identify specific hours that should be
eliminated”).
b. Hours Relating to the Issue of Attorney’s Fees
Respondent does not dispute that hours devoted to the
recovery of attorney’s fees (sometimes referred to herein as “fee
request” hours) are potentially compensable under section 7430.
See, e.g., Huffman v. Commissioner, 978 F.2d 1139, 1149 (9th Cir.
1992), affg. in part and revg. in part on other grounds T.C.
Memo. 1991-144. The fees generated by fee request hours are
commonly referred to as “fees-on-fees” or “fees-for-fees” (as
opposed to “merits” fees, which are attributable to “merits”
hours). Because we apply a separate percentage reduction to the
portion of Izen’s lodestar attributable to fee request hours (the
fees-on-fees lodestar) based on the ratio of merits hours allowed
to merits hours claimed, see infra Part III.F., we separately
identify his merits hours and fee request hours.20
20
The Jones fee request (as supplemented) does not include
(continued...)
- 31 -
3. Reasonable Hourly Rate Under Section 7430
As discussed supra in Part I.A., the determination of a
reasonable hourly rate under section 7430 is subject to an
inflation-adjusted cap “unless the court determines that * * * a
special factor, such as the limited availability of qualified
attorneys for such proceeding, the difficulty of the issues
presented in the case, or the local availability of tax
expertise, justifies a higher rate.” Sec. 7430(c)(1)(B)(iii).
In Dixon VII, after a thorough analysis of the relevant caselaw,
we concluded that we were constrained to apply the statutory rate
cap. As petitioners have not proffered any additional arguments
in that regard, we stand by our analysis and conclusion in Dixon
VII and shall apply the rate cap to petitioners’ fee requests.
C. Hours Reasonably Expended--Izen Fee Request
1. Preliminary Issues
Before we set forth our analysis of, and adjustments to,
Izen’s specific time entries, we address two overarching issues
raised by respondent.
a. Scope of Representation We May Consider
Respondent maintains, in his opposition to the Izen fee
request, that “Only the time spent on the ‘Adair appeal’
[approximately 145 hours] is subject to the court’s evaluation
for a determination of an appropriate award of attorney’s fees on
20
(...continued)
any time entries relating to work on the fee request.
- 32 -
appeal.” Respondent reasons that Izen filed his Ninth Circuit
rule 39-1.8 motion (requesting that the Court of Appeals transfer
consideration of attorney’s fees to the Tax Court) in case No.
01-70155--the Adair appeal–-and that “[t]he period for Mr. Izen
to request appellate attorney’s fees in connection with the
appeal in Case No. 00-70858 [the test case appeal] has long since
expired.” See 9th Cir. R. 39-1.6.
We begin by observing that we have already held we have
jurisdiction to consider the Jones fee request even though Jones
made no filing under either Ninth Circuit rule 39-1.6 or 39-1.8.
See supra Part II.A. It follows that we may consider the Izen
fee request in its entirety, despite the fact that Izen made no
filing in the test case appeal under either Ninth Circuit rule
39-1.6 or 39-1.8. Moreover, we would reach the same conclusion
even if an appellate filing were a prerequisite to our
consideration of appellate fees under section 7430. That is, we
conclude in the alternative that Izen’s timely motion under Ninth
Circuit rule 39-1.8 in the Adair appeal was sufficient to
transfer the issue of Izen’s fees in the test case appeal as
well.
Although we have been unable to find a case directly on
point, we believe Native Vill. of Quinhagak v. United States, 307
F.3d 1075 (9th Cir. 2002), is sufficiently analogous to support
our alternative ground for considering the Izen fee request in
its entirety. Quinhagak was one of several lawsuits filed in the
- 33 -
U.S. District Court for the District of Alaska challenging the
Federal Government’s implementation of the Alaska National
Interest Lands Conservation Act (ANILCA), 16 U.S.C. secs. 3101-
3233 (2000). As the Court of Appeals explained, the District
Court had consolidated two such cases, known as Katie John and
Babbitt, to serve as the lead cases:
Although several other cases were filed that turned on
the resolution of the * * * issues in Katie
John/Babbitt, the district court declined to
consolidate these additional dependent cases and chose,
instead, to manage them together and stayed proceedings
pending resolution of the core Katie John/Babbitt
issues.
* * * * * * *
The district court added the instant case to the
list of cases to be managed jointly in connection with
Katie John/Babbitt and, as part of an order explaining
how the joint management would proceed, the district
court invited the plaintiffs in the jointly managed
cases, including the case at hand, to submit amicus
briefing on the * * * issues in the consolidated cases.
Native Vill. of Quinhagak v. United States, supra at 1077-1078.
The various plaintiffs ultimately prevailed, and the Quinhagak
plaintiffs moved for attorney’s fees under ANILCA’s fee-shifting
provision. See 16 U.S.C. sec. 3117(a) (2000).
The District Court granted the Quinhagak plaintiffs’ fee
request in large part, rejecting the argument that they were not
entitled to fees for work relating to the Katie John/Babbitt
cases. In holding that the District Court did not abuse its
discretion in that regard, the Court of Appeals quoted at length
from the District Court’s order:
- 34 -
the Katie John case was the vehicle which the court
chose to resolve the * * * issues for all of the
jointly managed cases. * * *
“For defendants to suggest, as they do, that
plaintiffs’ work was for different parties in a
different case misconstrues and misrepresents the
reality of what was going on in these jointly managed
cases. For all practical purposes, there was but one
case in which the * * * issues were going to be
decided, and that decision was going to be binding in
all of the cases. The actual briefs may have been
filed (were filed) in the Katie John case, but they
bore directly upon issues raised by the plaintiffs in
this case. * * * ”
Native Vill. of Quinhagak v. United States, supra at 1079. Thus,
even though their brief in the Katie John/Babbitt cases had been
“‘proffered by a technical non-party’”, id. (again quoting the
District Court), the Quinhagak plaintiffs were entitled to
recover the corresponding attorney’s fees. Inasmuch as the test
case appeal and the Adair appeal share the same real parties in
interest and substantive issues, we similarly conclude that
Izen’s timely motion under Ninth Circuit rule 39-1.8, although
technically filed in the Adair appeal, effectively transferred
the issue of Izen’s fees in the test case appeal as well.
b. Discrepancies Between Fee Request and Alleged
Invoice
On April 13, 2006, respondent submitted to the Court certain
documents he had recently received from Geoffrey Sjostrom, the
business manager of the Defense Fund. See supra note 7 and
accompanying text. The documents include several pages of a
facsimile transmission that, based on the identifying information
- 35 -
printed thereon, appear to have originated from Izen’s telecopier
on the evening of April 3, 2001. Sjostrom alleges that the
pages, which contain time entries substantially similar (in
content and format) to those included in the Izen fee request,
are part of a contemporaneous invoice submitted by Izen to the
Defense Fund. As Sjostrom points out, for the period July 20,
2000 through March 20, 2001, the time entries in the alleged
invoice amount to 56.25 hours, while those included in the Izen
fee request for the same period amount to 130.93 hours.21 The
74.68-hour discrepancy is attributable to new entries as well as
additional time claimed for existing entries. In the
supplemental filing by which he submitted those documents to the
Court, respondent states:
Although respondent did not previously question the
veracity of the billing records, respondent requests
that, in light of this new information, the court
review all of Mr. Izen’s billing records and reduce the
fee award.
In his response to respondent’s supplemental filing, Izen
neither questions the authenticity of the April 2001 document nor
alleges that the discrepancies are attributable to some kind of
billing error. Rather, Izen attempts to downplay the
significance of the document, describing it as an “informational
21
Sjostrom also observes that the billing rate in the
alleged invoice is much lower than the rate claimed in the Izen
fee request. We are not troubled by that discrepancy; Izen
clearly based his request for the higher rate on his notion of
the market value of his services. See infra Part III.H.1.e.
- 36 -
bill”. He then separately addresses 17 of the discrepancies,
vouching for the necessity of the services and reasonableness of
the time not included in the bill (hereafter, the Sjostrom bill).
Although Izen has not, in our view, adequately explained why
the Sjostrom bill does not include certain charges claimed in the
Izen fee request, we are not inclined to pass judgment on his
veracity in that regard without further investigation, which we
are loath to undertake at this late date.22 Accordingly, we shall
assume that the time entries in the Izen fee request accurately
depict the services performed by Izen and the number of hours
devoted thereto. As discussed below, however, that does not mean
that the Sjostrom bill is irrelevant to our determination of
hours reasonably expended.
2. Adjustments to Hours Claimed
The Izen petitioners base their fee request on 1,072.03
hours of attorney time, including 223.23 hours we have identified
as fee request hours (leaving 848.8 merits hours). Our
adjustments to the hours claimed fall into eight major
categories. Of course, where adjustments are described in more
than one category, we take them into account only once.
22
Respondent, after receiving the Sjostrom bill from
Sjostrom and bringing it to the Court’s attention by means of a
supplement to respondent’s opposition to Izen’s appellate fee
request, did not request an evidentiary hearing on this point.
- 37 -
a. Hours Relating to “Intervention”
Izen allocates 147.51 hours of his time to “intervention”,
which we take to include not only his efforts to include in the
Adair appeal hundreds of nontest cases that had never been
consolidated with the test cases,23 but also time relating to
Jones’s belated attempt to intervene in the test case appeal on
behalf of the Cerasolis. We have previously described Izen’s own
intervention efforts as “unsuccessful and unnecessary”. Dixon v.
Commissioner, T.C. Memo. 2006-97 n.42. In response to that
characterization, the Izen petitioners assert in their latest
filing that
Izen was successful in at least establishing before the
Ninth Circuit that the prospective Intervenors which
were denied intervention status before this Court[24] had
an interest in this case which entitled them to appeal.
Further, it was never clear in this proceeding that the
test cases were, at all times, adequate representatives
of the prospective intervenors or the * * *
[participating nontest case petitioners]. * * *
The assertion that Izen “[established] before the Ninth
Circuit that the prospective Intervenors * * * [were] entitled
23
We distinguish those efforts from actions necessary to
preserve the participation rights of the Adairs, whose case was
included in our certification order. See infra note 36.
24
In September and October 1992, after this Court had
entered decisions in the Thompson and Cravens cases, Izen and
Sticht filed motions for leave to intervene in those cases on
behalf of numerous nontest case petitioners, which we denied.
See Adair v. Commissioner, 26 F.3d 129 (9th Cir. 1994)
(dismissing appeal of that denial). Respondent notes that Izen’s
lists of “prospective intervenors” in the Thompson/Cravens cases
and the test case appeal, respectively, are photocopies of the
same document.
- 38 -
* * * to appeal” does not square with the language of that
court’s November 20, 2001 order holding the Adair appeal in
abeyance pending the resolution of the test case appeal. In that
order, the Court of Appeals stated that, because the Tax Court
had consolidated the Adairs’ case with the test cases for
purposes of the evidentiary hearing, “It * * * appears at least
arguable that * * * [the Adairs] could appeal as intervenors from
a final decision in the test cases.”25 The court added, however,
that
if petitioners’ counsel, Joe Alfred Izen, Jr., Esq.,
asserts that this court has jurisdiction in this case
over any non-test Tax Court case other than No. 35608-
86 [i.e., the Adairs’ case], he shall submit to the
court evidence of the following: (1) that the
additional non-test case or cases were at one time
consolidated with the test cases; * * *.
Because none of Izen’s other “prospective intervenors” had ever
had any of their cases consolidated with the test cases, Izen
would not have been able to establish jurisdiction of the Court
of Appeals over their cases.
Given the unsuccessful nature of Izen’s intervention
efforts, we believe a complete disallowance of the corresponding
hours would be well within our discretion. See Hensley v.
Eckerhart, 461 U.S. at 436-437 (discussed supra Part
25
As discussed above, the Court of Appeals apparently
construed Izen’s “Notice of Appeal of Certain Intervenors” as an
attempt to appeal the decisions entered in the test cases rather
than a petition for permission to appeal the orders this Court
had certified for interlocutory appeal.
- 39 -
III.B.2.a.).26 We hesitate, however, to disregard completely
Izen’s concern that the test cases were insufficiently
representative. Accordingly, we shall defer to Izen’s
professional judgment in that regard--up to a point. When the
Court of Appeals stayed the proceedings in the interlocutory
appeals of the other participating nontest case petitioners on
May 10, 2001, pending resolution of the test case appeal, it
effectively determined that the interests of those nontest case
petitioners were adequately represented in the test case appeal.
That determination belies any continued justification for Izen’s
efforts that could counteract Hensley’s limited success factor.
We therefore disallow 75.84 hours Izen incurred after May 10,
2001, that relate to “intervention”, including 10.92 hours
relating to Jones’s July 2002 motion to intervene.27 See infra
Part III.D.2.c.
26
We do not mean to suggest that Hensley requires courts to
“scalpel out attorney’s fees for every setback” suffered by a
prevailing party. Cabrales v. County of Los Angeles, 935 F.2d
1050, 1053 (9th Cir. 1991). However, we fail to see how Izen’s
intervention efforts “[contributed] to the ultimate victory in
the lawsuit.” Id. at 1052.
27
Izen’s first time entry after May 10, 2001, relating to
intervention is dated June 2, 2001. Given the extent of
communications between Izen, Jones, and Sticht, we presume that
Izen was aware of the Court of Appeals’ May 10, 2001 order by
that time.
- 40 -
b. Hours Subject to “Billing Judgment” Inference
Although we accept Izen’s contention that the time charges
he excluded from the Sjostrom bill are bona fide, see supra Part
III.C.1.b., his exclusion of those charges undermines his claim
that the additional hours are properly chargeable to the
Government. Just as a recent arm’s-length sale of property is a
reliable indicator of that property’s fair market value, see,
e.g., Huber v. Commissioner, T.C. Memo. 2006-96, a
contemporaneous invoice is a reliable indicator of the “hours
reasonably expended” aspect of the lodestar calculation. As the
Supreme Court recognized in Hensley v. Eckerhart, supra at 434:
“In the private sector, ‘billing judgment’ is an
important component in fee setting. It is no less
important here. Hours that are not properly billed to
one’s client also are not properly billed to one’s
adversary pursuant to statutory authority.” Copeland
v. Marshall, 205 U.S. App. D.C. 390, 401, 641 F.2d 880,
891 (1980) (en banc).
We believe it likely that most of the discrepancies between
the Sjostrom bill and the Izen fee request are attributable to
Izen’s exercise of billing judgment. Indeed, except as noted in
the next paragraph, the new entries in the fee request (and
existing entries with time increases) relate to procedural or
peripheral matters, administrative tasks, or other expenditures
of time that strike us as prime candidates for Izen’s “billing
judgment” cleaver.28 For instance, the fee request, but not the
28
One of the new entries is actually a duplicate entry for
(continued...)
- 41 -
Sjostrom bill, includes a 5.75-hour charge for Izen’s
“preparation for conference” on top of the next day’s 6-hour
charge for the meeting itself. The fee request, but not the
Sjostrom bill, includes a charge for an additional hour that Izen
currently claims he spent “locating the Petition for Writ of
Certiorari he filed with the Supreme Court”. As any billing
attorney can attest, these are the types of attorney time charges
that, however necessary the underlying activity, are difficult to
justify on a client invoice. Under the corollary espoused by the
Supreme Court in Hensley v. Eckerhart, supra, they should not be
chargeable to respondent, either.29
On the other hand, we have identified five time entries
between January 16 and January 29, 2001 that, despite their
28
(...continued)
the same date (Aug. 25, 2000--2.5 hours).
29
Other examples include the following: New entry for 2.25
hours devoted to forwarding this Court’s Notice of Filing of
Notice of Appeal to the test case petitioners; 2 additional hours
for “transcript search” for the Court’s comments concerning
settlement; additional time claimed for routine filings such as
motions for enlargement of time (2.5 hours) and the Ninth
Circuit’s Civil Appeals Docketing Statement (4.25 hours);
additional time for “legal research/check of citations” or
“research of authorities cited” relating to other attorneys’
procedural filings, including Jones’s motion for reconsideration
of the Court of Appeals’ dismissal of his interlocutory appeal as
untimely (4.08 hours), the Government’s response thereto (3.5
hours), the ensuing order of the Court of Appeals (5.5 hours),
and Sticht’s objection to consolidation on appeal (1 hour); new
entry for 2.25 hours devoted to “proof of filing Notice of
Appeals”; and 2 additional hours for travel time to Minns’s
office for meeting “re - providing access to Hongsermeier
records”.
- 42 -
omission from the Sjostrom bill, are not as susceptible to the
“billing judgment” inference. Those entries, none of which is
among the 142 time entries to which respondent specifically
objected in his initial response, chronicle Izen’s earliest
substantive efforts with respect to his opening brief in the test
case appeal. Whatever Izen’s reasons for not including those
entries in the Sjostrom bill,30 we deem the corresponding 32.5
hours to have been a reasonable expenditure of time on his part.31
Accordingly, we disallow only 42.18 of the 74.68 hours excluded
from the Sjostrom bill (74.68 - 32.5 = 42.18).
c. Review of Other Parties’ Nonsubstantive Filings
Izen’s time entries include numerous references to his
“review, filing and analysis” of other parties’ filings (and
corresponding orders) relating to attorney appearances and
withdrawals, changes of address, extension requests, and bills of
costs. While these entries (typically claiming .25 hours) do not
necessarily stand out when viewed in isolation, we deem their
cumulative effect to be unreasonable. For instance, Izen claims
to have spent 6 full hours on August 24, 2000, reviewing, filing,
30
It is conceivable that Izen feared he would have to share
his substantive work product with the Minns faction if he
included those time entries in the Sjostrom bill. For his part,
Izen merely asserts that “At this point, neither Sjostrom nor the
legal defense fund had any intention of paying Izen for any work
he was doing on appeal”.
31
The omission of those hours from the Sjostrom bill does
raise the issue of whether the corresponding fees were “paid or
incurred”. See infra Part III.H.1.e.
- 43 -
and analyzing 24 Motions for Withdrawal from Joint Representation
filed by attorney Declan O’Donnell. We find that difficult to
believe, and even if it were true, it would constitute a grossly
inefficient use of attorney time. We have identified 66 entries
of this nature, and we disallow in full the corresponding 16.88
hours (including 2.58 fee request hours).
d. Representation Issues
In Dixon VII, we resolved not to hold the Government
responsible for fees attributable to the legal and proprietary
jockeying occasioned by the steering committee’s break with
Minns. We take the same approach here with respect to the
steering committee’s earlier break with Izen. Thus, for example,
we disregard time spent by Izen addressing matters such as
“status of Atlas Defense Fund”, “continued representation”,
“payment of outstanding bill”, and “demand for accounting for JAI
clients”. As was the case in Dixon VII, where time entries from
the period of the appeal do not reveal the subject matter of
client communications, we assume a 50/50 split between
compensable and noncompensable matters. The foregoing
adjustments, involving 31 time entries, result in an additional
15.025-hour reduction.
e. Matters Relating to Remand Proceedings
We have identified 16 time entries, totaling 12.25 hours,
that relate to the post-appellate remand proceedings in this
- 44 -
Court rather than the appeal. We reduce the claimed hours
accordingly.
f. Duplicate Entries
We have identified 10 time entries that appear to be
duplicative or, in our judgment, are excessive in light of other,
similar entries. Elimination of those 10 entries results in an
additional 13.05-hour reduction (including 8 fee request hours).
g. Separately Claimed Fee Request Hours
In their latest filing, the Izen petitioners claim an
additional 117.4 hours of attorney time relating to work on their
fee request. In an affidavit submitted with that filing, Izen
states that he devoted 36 hours to the initial preparation of the
fee request, 8.25 hours to the latest filing, and 73.15 hours to
a variety of tasks (described and dated in 13 numbered
paragraphs) between May 10, 2005 and April 24, 2006. The problem
here is one of overlap. The initial fee request (apparently
mailed on May 12, 2005) includes time entries for May 9-11, 2005,
claiming 28.5 hours (10, 12, and 6.5 hours, respectively) for
preparation of the fee request. In his latest affidavit, Izen
claims an additional 15.33 hours relating to fee request
preparation on May 10 and 12, 2005 (7.33 and 8 hours,
respectively). The new claim of 7.33 hours for May 10 duplicates
the earlier May 10 time entry claiming 12 hours. Adding the
additional 8 hours claimed for May 12 to the 28.5 hours
previously claimed for May 9-11 produces a total of 36.5 hours
- 45 -
devoted to fee request preparation, which approximates the 36
hours Izen separately claims to have devoted to that task.32 We
therefore conclude that the 36 hours separately referenced in
Izen’s latest affidavit are accounted for in the initial fee
request (28.5 hours) and his new claim for May 12, 2005 (8.0
hours). Disallowance of the duplicate claim for 36 hours, as
well as the duplicate claim for 7.33 hours on May 10, 2005,
results in a downward adjustment of 43.33 hours.
h. Miscellaneous Additional Adjustments
We have identified an additional 23 time entries (only 3 of
which exceed 0.33 hours) that either (1) pertain to matters that
are unrelated to, or are only marginally related to, the
appellate proceedings or the Izen fee request, or (2) are
insufficiently descriptive to establish the required nexus. The
first category includes two entries relating to the Izen/Jones
motion for trial fees that we ruled on in Dixon IV and three
entries relating to parallel State tax proceedings. The second
category includes unexplained references such as “letter
requesting trust documents from Darrell Hatcher” and “handwritten
32
Izen actually claims that the 36 undated hours relate to
both preparation of the fee request and “responding to
Respondent’s objections to the application”. We note that Izen
separately claims--and we allow in full--18.16 hours on Dec. 1
and 2, 2005, relating to the Izen petitioners’ “Supplemental
Response”, which responds to respondent’s opposition to the fee
request.
- 46 -
notation from Alan Jones”. The 23 entries amount to 7.84 hours,
which we disallow in full.
3. Summary
The foregoing adjustments amount to 226.395 hours,
comprising 172.485 merits hours and 53.91 fee request hours.
Accordingly, we conclude that Izen reasonably expended 845.635
hours (1,072.03 - 226.395) overall, comprising 676.315 merits
hours (848.8 - 172.485) and 169.32 fee request hours (223.23 -
53.91).
D. Hours Reasonably Expended--Jones Fee Request
1. Reliability of Documentation
The Jones fee request initially contained no time entries
whatsoever covering the period of the appeal. Rather, the Jones
petitioners based the amount of their fee request ($133,136.50)
on the aggregate payments received by Jones from his nontest case
petitioner clients from August 16, 1999 through May 27, 2003.
After two requests for additional documentation, the Jones
petitioners finally submitted “reconstructed worksheets of time”
for Jones and two unidentified paralegals.33 The time entries
included in Jones’s worksheet amount to 143.87 hours, while those
33
The Jones petitioners explain: “The computer system in
[Jones’s] office was completely overhauled and reformatted in
January of 2003, so much of the previously stored information was
not accessible for the purposes required herein and worksheets
had to be manually reconstructed.”
- 47 -
included in the paralegals’ worksheets amount to 210.5 hours
(106.25 hours and 104.25 hours, respectively).
Respondent points out that, with the exception of four time
entries (totaling 2 hours) that appear in one of the paralegal
worksheets but not the other, the paralegals’ worksheets are in
all respects identical. Furthermore, the 64 identical time
entries contained in the paralegals’ worksheets also appear in
Jones’s worksheet, with the only difference being the amount of
time claimed for each entry (the dates and descriptions are
identical).34 Respondent understandably questions the reliability
of these worksheets.
While we are willing to accept the “reconstruction” of
paralegal time based on Jones’s worksheet, we question the total
number of paralegal hours so reconstructed. In a declaration
submitted with the initial fee request, Jones’s office manager-
controller posits an attorney/paralegal hours ratio for the
period August 16, 1999 through May 27, 2003, of almost 8 to 3.
Materials submitted by the Jones petitioners for the post-appeal
period June 1, 2003 to July 15, 2005 (not addressed in this
opinion), reveal an attorney/nonattorney hours ratio of
approximately 5 to 4.35 Turning to the reconstructed worksheets
34
Jones’s worksheet contains an additional 42 time entries
that do not appear in the paralegals’ worksheets.
35
The nonattorney time for the post-appeal period includes
time charged by a law clerk, an accountant, and an “account
(continued...)
- 48 -
at issue, if we consider only one of the paralegal worksheets,
the attorney/paralegal hours ratio becomes 143.87 to 106.25, or
approximately 5.5 to 4. The foregoing comparison, coupled with
the questionable nature of the worksheets, prompts us to
disregard the duplicate paralegal worksheet claiming 104.25
hours.
2. Specific Time Entries
a. In General
Quite apart from the reliability concerns discussed above,
the time entries contained in the reconstructed worksheets are
woefully nondescriptive. However, as we did in Dixon IV, we
shall give the Jones petitioners the benefit of the doubt here,
on the ground that they should not be overly penalized for their
counsel’s poor documentation efforts.
b. Dismissal and Recertification
Respondent urges us to disallow the time Jones (and, by
extension, his paralegal) spent on behalf of the Jones
petitioners (1) contesting the Court of Appeals’ initial
dismissal of their applications for interlocutory review, and (2)
obtaining this Court’s recertification of their cases, describing
such efforts as “caused by Jones’ own error”. We find
respondent’s argument somewhat disingenuous in light of his
appellate attorneys’ concurrence (in response to Jones’s motion
35
(...continued)
manager” as well as paralegal time.
- 49 -
for reconsideration of the Court of Appeals’ dismissal) regarding
the applicability of the “mailbox rule”, under which Jones’s
initial filing would have been deemed timely without regard to
the factual issue of the time of receipt. See sec. 7502(a); The
Manchester Group & Subs. v. Commissioner, 113 F.3d 1087 (9th Cir.
1997), revg. T.C. Memo. 1994-604. Because it is not at all clear
that Jones’s efforts on this procedural front were required
because of any error by him, we decline respondent’s invitation
to disregard those efforts altogether.36
c. The Cerasolis’ Motion To Intervene
Given the denial by the Court of Appeals of the Cerasolis’
motion to intervene in the test case appeal, the hours that Jones
and his paralegal devoted to that matter are subject to
disallowance under the limited success principle of Hensley v.
Eckerhart, 461 U.S. 424 (1983).37 See supra Part III.B.2.a.
36
Respondent objects to one “recertification” time entry
(4.0 hours) on the ground that recertification had occurred 5
months prior to the date of the entry. We assume that the entry
is simply misdated, and we allow the time in full.
37
One could argue that the time Jones devoted to his
clients’ separate interlocutory appeals should be disallowed as
well, since the Court of Appeals effectively rendered those
appeals nugatory by putting them on the back burner and
ultimately remanding the nontest cases for disposition consistent
with the mandate of Dixon V. We do not hold that view. Jones
pursued those appeals in response to this Court’s order
certifying the cases of the participating nontest case
petitioners for interlocutory appeal. We issued that order to
ensure that the participation rights endorsed by the Court of
Appeals in DuFresne v. Commissioner, 26 F.3d 105, 107 (9th Cir.
1994) (per curiam), vacating Dixon v. Commissioner, T.C. Memo.
(continued...)
- 50 -
Moreover, unlike Izen, Jones commenced his intervention efforts
well after the Court of Appeals had effectively determined that
the interests of the participating nontest case petitioners were
adequately represented in the test case appeal. See supra Part
III.C.2.a. We therefore disallow all of his (and his
paralegal’s) time relating to the Cerasolis’ motion to intervene,
amounting to 37.15 hours of attorney time and 14.1 hours of
paralegal time.38
d. Pre- and Post-Appeal Tax Court Filings
The reconstructed worksheets include time entries relating
to filings in this Court that both predate (motion for
reconsideration of Dixon IV--May 2000) and postdate (status
reports--April 30 and May 2003) the period of the appeal. As
those entries are not properly includable in a request for
appellate fees, we disallow the corresponding 14.56 hours of
attorney time and 10.2 hours of paralegal time.
37
(...continued)
1991-614), would not automatically terminate at the Tax Court
door. Consequently, we believe Jones’s efforts in that regard
are properly compensable.
38
In their third supplement to the Jones fee request, the
Jones petitioners assert that Jones’s work on the Cerasolis’
motion to intervene “was useful to other counsel as they prepared
for oral argument.” Again, we fail to see the beneficial effect.
See supra note 25.
- 51 -
e. Miscellaneous Additional Adjustments
We have identified 10 additional time entries that are
either excessive in terms of attorney time or insufficiently
related to the appellate proceedings. The first category
includes an 8-hour charge for “Letters to Izen, Binder,
O’Donnell, Minns, Sticht” and a 1.5-hour charge for analysis of
the Court of Appeals’ amended Dixon V opinion, which contained no
substantive changes. Examples from the second category include
State-law research for an Alaskan client and a consultation with
attorney O’Donnell regarding efforts to reopen previously settled
cases in the wake of Dixon V. The resulting downward adjustments
amount to 17.75 hours of attorney time and 6.45 hours of
paralegal time.
3. Summary
The foregoing adjustments, coupled with our rejection of the
duplicate paralegal worksheet, amount to 69.46 hours of attorney
time and 135 hours of paralegal time. It follows that Jones and
his paralegal reasonably expended 74.41 hours (143.87 - 69.46)
and 75.5 hours (210.5 - 135), respectively.
E. Calculation of Lodestars
1. Izen Fee Request
a. 2000 and 2001
Izen’s time entries for 2000 and 2001 amount to 282.68
hours. We subtract 139.07 hours from that total to reflect the
adjustments discussed above that apply to 2000-2001 time entries.
- 52 -
We then multiply the remaining 143.61 hours by the $140 rate cap
in effect for 2000 and 2001 to obtain the lodestar for this
period: $20,105.40.
b. 2002 through 2005
Izen’s time entries for 2002 through 2005 amount to 758.19
hours. We subtract 87.325 hours from that total to reflect the
adjustments discussed above that apply to 2002-2005 time entries.
We then multiply the remaining 670.865 hours by the $150 rate cap
in effect from 2002 through 2005 to obtain the lodestar for this
period: $100,629.75.
The 758.19 hours claimed for this period include 192.07 fee
request hours, and the 88.575 hours disallowed for this period
include 53.91 fee request hours.
c. 2006
Izen’s time entries for 2006 amount to 31.16 hours, all of
which are fee request hours. Since none of our adjustments
relate to 2006, we multiply the full 31.16 hours by the $160 rate
cap in effect for 2006 to obtain the lodestar for this period:
$4,985.60.
d. Total
The lodestar with respect to the Izen fee request is
$125,720.75 ($20,105.40 + $100,629.75 + $4,985.60). The fees-on-
fees lodestar is $25,709.60, calculated as follows: [(192.07 -
53.91) X $150] + $4,985.60 = (138.16 X $150) + $4,985.60 =
- 53 -
($20,724 + $4,985.60) = $25,709.60. That leaves a “merits fees”
lodestar of $100,011.15 ($125,720.75 - $25,709.60).
2. Jones Fee Request
a. 2000 and 2001
Jones’s time entries for 2000 and 2001 amount to 48.41
hours. We subtract 3.3 hours from that total to reflect the
adjustments discussed above that apply to 2000-2001 attorney time
entries. We then multiply the remaining 45.11 hours by the $140
rate cap in effect for 2000 and 2001 to obtain Jones’s lodestar
for this period: $6,315.40.
The paralegal time entries for 2000 and 2001 amount to 92
hours. We subtract 45.2 hours from that total to reflect the
adjustments discussed above that apply to 2000-2001 paralegal
time entries. We then multiply the remaining 46.8 hours by the
hourly paralegal rate charged by Jones ($125) to obtain the
paralegal lodestar for this period: $5,850.
b. 2002 and 2003
Jones’s time entries for 2002 and 2003 amount to 95.46
hours. We subtract 66.16 hours from that total to reflect the
adjustments discussed above that apply to 2002-2003 attorney time
entries. We then multiply the remaining 29.3 hours by the $150
rate cap in effect for 2002 and 2003 to obtain Jones’s lodestar
for this period: $4,395.
The paralegal time entries for 2002 and 2003 amount to 118.5
hours. We subtract 89.8 hours from that total to reflect the
- 54 -
adjustments discussed above that apply to 2002-2003 paralegal
time entries. We then multiply the remaining 28.7 hours by the
hourly paralegal rate charged by Jones ($125) to obtain the
paralegal lodestar for this period: $3,587.50.
c. Total
The lodestar with respect to the Jones fee request is
$20,147.90 ($6,315.40 + $5,850 + $4,395 + $3,587.50).
F. Adjustment to Izen’s Fees-on-Fees Lodestar To Reflect
Limited Success
In Dixon VII, we reduced our awards of fees-on-fees to
account for the limited success achieved by the PH appellants and
the Hongsermeiers in pursuing their fee requests. See, e.g.,
Thompson v. Gomez, 45 F.3d 1365, 1367 (9th Cir. 1995) (“the legal
principles for recovering attorney’s fees laid out in Hensley
[citation omitted] apply to requests for fees-on-fees”); see also
Commissioner, INS v. Jean, 496 U.S. at 163 n.10 (dicta). The PH
appellants had unsuccessfully pursued certain discrete issues
relating to their fee request, “thus allowing the limited success
factor to be measured by hours devoted to that effort.” Sisk, 56
La. L. Rev. at 119; see supra Part III.B.2.a. Having lacked that
alternative in the case of the Hongsermeiers, we instead compared
the number of merits hours allowed to merits hours claimed and
applied the resulting “success ratio” to their fees-on-fees
lodestar. See Thompson v. Gomez, supra (applying 87.2-percent
success ratio); Harris v. McCarthy, 790 F.2d 753, 758-759 (9th
- 55 -
Cir. 1986) (applying 11.5-percent success ratio). We take the
same approach here with respect to Izen’s fees-on-fees lodestar.39
The numerator of the Izen petitioners’ success ratio (merits
hours allowed) is 676.315, and the denominator (merits hours
claimed) is 848.8. See supra Parts III.C.2., III.C.3. Applying
the percentage equivalent (79.68 percent) to Izen’s fees-on-fees
lodestar of $25,709.60, see supra Part III.E.1.d., yields an
adjusted fees-on-fees lodestar of $20,485.41. The resulting
reasonable attorney’s fee with respect to the Izen fee request is
$120,496.56 (merits fees lodestar of $100,011.15 plus adjusted
fees-on-fees lodestar of $20,485.41).
G. Reasonable Expenses
1. Izen Expense Request
Two items account for more than 90 percent of the Izen
petitioners’ claimed expenses of $39,805.19: The court
reporter’s fee for the transcript of the 1989 test case trial
($18,000), incurred June 15, 1989, and the court reporter’s fee
(plus postage) for the transcript of the 1997 evidentiary hearing
($17,840.25), incurred September 29, 1997. The first transcript
fee predates the attorney misconduct phase of this litigation
(and presumably was paid by Kersting in any event). The second
39
As we did in Dixon VII, we focus on merits hours rather
than merits fees because much of the difference between the
amounts of merits fees claimed and merits fees allowed is
attributable to sec. 7430’s rate cap, the effect of which is
already reflected in the fees-on-fees lodestar.
- 56 -
transcript fee (plus postage) was included in the fees and costs
we considered in Dixon IV. Accordingly, we disallow both
amounts. We also disallow the following items: “Initial fee to
set up Legal Defense Fund file”--$30; “Set up Legal Authority
file”--$30; “Postage/copy charges of letter to Clerk, State Board
of Equalization re Dixon appeal and stay”--$1.34; “Postage/copy
charges of the rest of the Wayne Young story to all of clients”--
$397.76; “Set up Steering committee file”--$30; “Postage/copy
charges fee application”--$23.95 (subsumed within the $181.35
postage/copy charge subsequently claimed with respect to the
initial filing); difference between aggregate expenses claimed in
latest filing and sum of “broken out” amounts--$34.05. The
remaining allowable expenses amount to $3,417.84.
2. Jones Expense Request
The Jones petitioners claim additional expenses of
$7,784.70. We disallow the following items: (1) Copying and
postage for Tax Court filings relating to Dixon III and Dixon
IV--$1,204.38; (2) copying and postage for court filings relating
to the Cerasolis’ motion to intervene in the test case appeal--
$554.36; (3) copying and postage for client correspondence
predating the period of the appeal--$2,753.84; (4) copying and
postage for client correspondence postdating the period of the
appeal--$229.68. The remaining allowable expenses amount to
$3,042.44.
- 57 -
H. Amounts Paid or Incurred by Eligible Persons
1. Izen Fee Request
a. Indirect Payments
In his affidavit submitted with the Izen fee request, Izen
states: “From the time of the filing of the Notice of Appeal,
June, 2000, until November, 2000, a portion, but not all of my
billings for Test Case representation were paid by the Atlas
Legal Defense Fund”. However, in response to respondent’s
subsequent reference to that statement, the Izen petitioners
state:
Respondent is mistaken when Respondent claims that the
Atlas Legal Defense Fund paid Izen’s fees on appeal for
work performed between June, 2000 and November, 2000.
The Atlas Legal Defense Fund refused to pay Izen’s
bill.
Accordingly, we need not concern ourselves, as we did in Dixon
VII, with indirect payments by eligible persons through the
Defense Fund.
b. Indirect Obligations
In Dixon VII, we concluded that three members of the Defense
Fund’s steering committee, all nontest case petitioners, were
liable for the Defense Fund’s obligations to Porter & Hedges
under the terms of the Fund’s retainer agreement with that firm.
In contrast, the Izen petitioners have failed to produce any
contract between Izen and the Defense Fund for the provision of
appellate legal services, let alone any agreement on the part of
individual nontest case petitioners to accept personal liability
- 58 -
thereunder.40 Although Izen has attempted, through litigation, to
establish the liability of four steering committee members (all
nontest case petitioners) to pay for a portion of his appellate
services, those efforts have thus far proved unsuccessful. We
therefore have no basis for finding any individual payment
obligations vis-a-vis the Defense Fund.
c. Direct Payments
In their second supplement to the Izen fee request, the Izen
petitioners submitted a list of “payments on appeal” made to Izen
by 19 nontest case petitioners. As discussed below, the Izen
petitioners have also submitted (or established the existence of)
individual contracts for appellate legal services between Izen
and 15 of the listed payors. Since none of those 15 payors is
credited with having made “payments on appeal” in excess of his
contractual obligation (the latter amount independently
satisfying the “paid or incurred” requirement), we focus on the
four remaining listed payors. We further narrow our focus to the
three remaining payors out of that group for whom we have
received net worth affidavits.
In our May 10, 2006 order, we indicated that, if the Izen
petitioners were unable to establish a payor’s fixed contractual
obligation to pay for Izen’s appellate services, we would assume
40
As indicated above, Izen’s initial agreement to provide
legal services in this litigation was with Kersting, not the
Defense Fund as reconstituted after Kersting’s death in March
2000.
- 59 -
that payments made by that person after the period of the appeal
were intended to compensate Izen for representation in the
ensuing remand proceedings in this Court. Since most of the
additional Izen contracts we have received relating to those
remand proceedings call for monthly payments beginning March 1,
2003, we shall deem the period of the appeal to have ended
February 28, 2003, for these purposes (rather than the January
17, 2003, issue date of Dixon V). Under that convention, the
three remaining listed payors who are eligible persons made
payments to Izen for appellate services in the aggregate amount
of $4,600.
d. Direct Obligations--Fixed Amounts
The Izen petitioners have submitted (or established the
existence of) individual contracts for appellate legal services
between Izen and 17 nontest case petitioners,41 as well as net
worth affidavits for 16 of those petitioners. All but one of the
contracts require payments of $4,800 (the other calls for
payments of $2,400). Thus, the aggregate fixed payment
obligation of the 16 eligible persons is $74,400 [(15 X $4,800) +
$2,400 = $72,000 + $2,400 = $74,400].
41
Two of those 17 nontest case petitioners apparently did
not make any “payments on appeal”.
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e. Direct Obligations--Additional Amounts
At first blush, it would appear that the amount potentially
recoverable with respect to the Izen fee request (reasonable
attorney’s fee of $120,496.56 plus reasonable expenses of
$3,417.84 equals $123,914.40) far exceeds the amount paid or
incurred by eligible persons ($4,600 + $74,400 = $79,000). That
is not the end of the story, however. On the basis of the
authority discussed below, we construe the Izen appellate
contracts as creating additional payment obligations that
eliminate the apparent shortfall.
In Phillips v. GSA, 924 F.2d 1577 (Fed. Cir. 1991), the
Court of Appeals awarded Ms. Phillips more than $9,000 in
attorney’s fees under the EAJA (which similarly limits awards to
amounts “incurred”), even though her attorney had agreed to
prosecute her appeal for a flat fee of $2,500. In an affidavit
submitted with the fee application (and quoted by the Court of
Appeals), the attorney described the fee arrangement as follows:
“She was to pay me $2500 of her back pay for the appeal
and I was to charge her no more. The recovery would
then be contingent upon success, recovery to be based
upon a statutory fee award if we prevailed. We kept
bookkeeping entries of my time, but once the $2500 was
paid by the client, she was not responsible for further
payment of our charges * * * ” [Id. at 1582.]
The Government argued that Ms. Phillips’s fee award should be
limited to $2,500, “because that is all she has paid, or is
obligated to pay, to her attorney.” Id. The Court of Appeals,
noting that the EAJA provides for an award “to the ‘prevailing
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party’” rather than to the attorney,42 construed the fee
arrangement
to mean that if an award of attorney fees is obtained
on her behalf she is obligated to turn it over to her
attorney. In this sense, Phillips incurs the attorney
fees that may be awarded to her. On the other hand, if
no fee award is made to her, she does not have any
obligation to pay any further fees to her attorney from
her own resources. * * * [Id. at 1582-1583.]
See also Sisk, 55 La. L. Rev. at 348-349 (adopting Professor
Silver’s argument that such an arrangement is the economic
equivalent of a nonrecourse debt and concluding that the EAJA’s
“incurred” requirement should be deemed satisfied thereby);
Silver, “Unloading the Lodestar: Toward a New Fee Award
Procedure,” 70 Tex. L. Rev. 865, 881-886 (1992).
In affidavits submitted with the Izen petitioners’ third
supplement to their fee request, Izen’s clients describe a
billing arrangement similar to that depicted in Phillips v. GSA,
supra. Specifically, each affiant states:
6. It was also my/our understanding that he
[Izen] could seek the full value of his services when
he applied for fees and that we would not be
responsible for any fees in excess of our payments
under our contract(s).
7. I/we agreed that we would be reimbursed any
money we had paid Mr. Izen out of any recovery he
received and that he would keep the difference, if any,
42
Sec. 7430(a) similarly provides that “the prevailing
party may be awarded” the costs specified therein. See also
Evans v. Jeff D., 475 U.S. 717, 730-732 (1986) (fee award under
CRAFAA, which provides that a court “may allow the prevailing
party * * * a reasonable attorney’s fee”, belongs to the
prevailing party rather than the attorney).
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between the amounts we had paid him and the reasonable
fees he was awarded by the Court.
Those representations are consistent with the inclusion of Izen’s
hourly billing rate in his flat-fee appellate contracts. We
therefore conclude that each such contract encompasses an
“implied agreement that * * * [any] fee award will be paid over
to the legal representative”, id. at 1583, to the extent the
client’s share of the award exceeds the amount paid by the client
pursuant to the contract. In this manner, the contracts supply
the additional payment obligations that support an award of the
potentially recoverable amount in its entirety.
2. Jones Fee Request
As indicated above, the Jones petitioners actually base the
amount of their fee request ($133,136.50) on the aggregate
payments received by Jones from his nontest case petitioner
clients between August 16, 1999 and May 27, 2003. Disregarding
(1) amounts received prior to the period of the appeal, (2)
amounts received from persons for whom the Jones petitioners have
not submitted net worth affidavits, and (3) amounts received from
persons who had settled their cases prior to the appeal, the
remaining amount (in excess of $84,000) still far exceeds the
reasonable fees ($20,147.90) and expenses ($3,042.44) with
respect to the Jones fee request. Accordingly, we conclude that
eligible persons have paid the potentially recoverable amount
($23,190.34) in its entirety.
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I. Summary
We shall award attorney’s fees and expenses in the amount of
$123,914.40 in respect of the Izen fee request and $23,190.34 in
respect of the Jones fee request.43 We shall address the manner
in which the awards are to be administered in a separate order or
orders implementing this opinion.
To reflect the foregoing,
Appropriate orders will be issued.
43
It turns out that the Izen fee award is the smallest of
the three fee awards we have granted that are premised on actual
participation in the briefing and argument of the test case
appeal. In Dixon VII, we posited a “range of reasonableness”
with regard to the number of hours properly devoted to the core
aspects of the test case appeal, with Izen occupying the low end
of that range. See Dixon v. Commissioner, T.C. Memo. 2006-97 at
Part III.C.1.b. It is not surprising that the attorneys who
joined the fray at a later stage--who did not participate in the
Dixon II trial of the test cases or the Dixon III evidentiary
hearing--would have spent more startup time than Izen in order to
familiarize themselves with the records of the trial and hearing
that he was instrumental in creating. Nor is it surprising that
Porter & Hedges, which had the most available resources and the
least amount of time to deploy them, would come in on the high
end of the range (even after application of a 130-hour haircut).
Suffice it to say that the variances in the amounts of the three
awards should not be interpreted as a judgment on our part
regarding the relative quality and effectiveness of the
underlying appellate representations.
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