We have written before about attorney’s fees in the context of qualified offers. The Tax Court issued an order and decision in the case of Estate of Mildred T. Quidley, Deceased, Karen Q. Pierce, Executor v. Commissioner, earlier this year, on an infrequently litigated aspect of the attorney’s fees statute – the net worth provisions. The decision reaches a logical conclusion denying the taxpayer attorney’s fees based on net worth. The case deserves discussion because it points out the difficulty any taxable estate will have in obtaining attorney’s fees under IRC 7430 and the net worth rules.
The Villanova Tax Clinic recently won a case in which it had made a qualified offer. That case presented the issue of the valuation of the time spent by the students. While case law exists on student fees under the Equal Access to Justice (EAJA) attorney’s fees provisions found in 28 U.S.C. 2412, no Tax Court precedent exists on this issue yet. I will combine both fee issues in this blog even though they arise in different settings and raise different issues.read more...
The Quidley Case
The taxpayer, an estate, won its Tax Court case and otherwise qualified for attorney’s fees. In requesting attorney’s fees, the estate did not submit the required net worth affidavit. The IRS pointed out that the estate reported a total value of $2,162,404 on the estate tax return and that the value of the estate exceeded the amount allowable for taxpayers seeking attorney’s fees.
The estate responded that although the gross value of the estate exceeded $2,000,000, it had elected the IRC 2032A Alternate valuation of its assets. This alternative calculation exists for valuing real property used for faming or for valuing small businesses. Based on the alternate valuation, the estate was worth $1,363,512 and, therefore, it met the net worth test.
The Tax Court rejected the estate’s argument finding that the valuation rules of IRC 2032A exists only for purposes of calculating the estate tax liability. These special valuation rules not only do not apply for purposes of determining eligibility for attorney’s fees but contain express statutory language limiting them to Chapter 11 (the estate tax chapter) of Title 26. The Court did not stop with the facts of this case but went further in footnote 4 of the Order and Decision. It stated that deductions allowable against the gross estate in computing the taxpayer estate also do not affect the fair market value of the estate’s assets. So, an estate with significant administrative expenses, charitable contributions or, perhaps most importantly, qualified transfers to a surviving spouse, could also fail the gross asset test if those deductions took it below the $2,000,000 threshold but the gross estate exceeded that amount.
It seems unlikely that any estate for which a return is required will qualify for attorney’s fees. Just because Congress sought to provide a break for valuations purposes in calculating the tax on the estate does not justify using the alternate valuation date or other deductions for purposes of calculating attorney’s fees. Section 7430 provides a one sided ticket to attorney’s fees. The IRS cannot get fees. The goal of the statute springs not from a desire to encourage well-heeled taxpayers to recover their fees but to allow the less well to do to recover modest amounts following a victory within the narrowly prescribed parameters of the statute.
Fees in Student Clinic Settings
Speaking of taxpayers with modest means, they must accept representation from students in many instances because they cannot afford the cost of an attorney. When students win a victory that otherwise meets the criteria for attorney’s fees, how should their fees be calculated? Neither the statute nor the case law under Section 7430 makes this clear.
Under 28 U.S.C. 2412 (the EAJA) fees that can be awarded include the “reasonable cost of any study, analysis, engineering report, test, or project which is found by the court to be necessary for the preparation of the party’s case.” Section 7430 will allow attorney fees to be collected for “an individual (whether or not an attorney) who is authorized to practice before the Tax Court or before the Internal Revenue Service.” This provision of 7430 allows compensation for law student time but does not state whether the rate for law students or other non-lawyers authorized to practice before the Tax Court should differ from the rate for lawyers.
Our research indicated that second year law students working at local firms during the summer after completing that year generally received compensation at the rate at which new associates were paid. In the Philadelphia area new associates bill at a rate higher than the statutory rate under IRC 7430. With no cases and no guidance in the statute or the regulations on student time, we requested student compensation at the same rate as the statutory rate based on rates billed by new associates in our area. The Government pushed back arguing that the student rate should be only half the rate paid to attorneys. In contrast with the rate stated in IRC 7430 of $190 an hour, the EAJA puts a limit of $125 an hour. The fees granted to students under the EAJA must be considered while keeping in mind this different in rates between the two provisions.
The language in EAJA does not provide a bright line rule for paying law students. However, courts have determined that law students should be compensated. The Eastern District Court of Pennsylvania held that, “because the services rendered by these certified law students are essentially the equivalent to those provided by licensed attorneys, they should be compensated under the EAJA as fees rather than expenses.”
While courts are willing to compensate students they have determined different billing rates for students than for attorneys and different billing rates, among themselves, for the students. In 2009 the Fifth Circuit concluded law student interns could be compensated at $75 per hour for their contributions. On the other hand, in 2012 the Maryland District Court determined student attorneys who represented an employee were appropriately compensated at $105 per hour. These decisions indicate that courts are willing to vary the amount a law student can be compensated under the EAJA. None of these cases clearly articulate the criteria for determining the exact dollar amount students can be compensated per hour.
Seeking Fees and Refundable Credits
One quirk in attorney fee litigation in the Tax Court results from the manner in which its decisions become final and the impact of that finality on the taxpayer. In the recent case in which the Villanova Tax Clinic sought attorney’s fees and in one prior case handled by the clinic also involving attorney’s fees, the taxpayer claimed the earned income tax credit and the IRS froze the refund resulting from the credit. The IRS will not issue the refund until the decision becomes final and in the Tax Court the decision does not become final (or at least should not become final) until the resolution of the attorney’s fees. The taxpayer who anticipates a refund as a result of the Tax Court decision must wait for the attorney’s fees to be resolved before the IRS processes the refund.
The client of a low income taxpayer clinic does not pay attorney’s fees whether or not they win the case. The client has no stake in the outcome of the attorney’s fees issue but the resolution of that issue delays, potentially for a prolonged period, the finalization of the decision and the issuance of the frozen refund. By this point in a Tax Court case, the client has already had to go for years without the benefit of a refund that can mean the difference between poverty and moving above the poverty line. No clinic wants to cause further delay in the receipt of the refund for their clients.
This puts the clinic pursuing the refund in quite an uncomfortable position. Even though clients may agree to forebear the refund for some additional period to allow the clinic to negotiate the amount of the attorney’s fees, no clinic wants to stand between the client and the long overdue refund. The fact that the refund continues to accrue interest provides no solace in this situation. Clinics will need to prevail in cases other than frozen refund cases in order to test the appropriate amount of student compensation under IRC 7430. By freezing the refund and holding on to it until the decision becomes final, the IRS not only disadvantages the low income taxpayer but also the clinic that has represented them in reaching a successful conclusion on the merits.