Jerry and Patricia A. Dixon v. Commissioner , 132 T.C. No. 5 ( 2009 )

132 T.C. No. 5
UNITED STATES TAX COURT
JERRY AND PATRICIA A. DIXON, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 9382-83, 15907-84, Filed March 23, 2009.
30979-85.
Ps’ cases were three of the Kersting tax shelter
test cases that were included in Dixon v. Commissioner,
T.C. Memo. 1991-614 (Dixon II), vacated and remanded
sub nom. DuFresne v. Commissioner, 26 F.3d 105 (9th
Cir. 1994) (DuFresne), on remand Dixon v. Commissioner,
T.C. Memo. 1999-101 (Dixon III), supplemented by T.C.
Memo. 2000-116 (Dixon IV), revd. and remanded 316 F.3d
1041, 1047 (9th Cir. 2003) (Dixon V), on remand T.C.
Memo. 2006-90 (Dixon VI), supplemented by T.C. Memo.
2006-190 (Dixon VIII) (on appeal Dec. 28, 2006, and
Jan. 3, 2007). The protracted and multiplied
proceedings in these cases stem from the misconduct of
the Government attorneys in arranging secret
settlements of the Ts’ and the Cs’ test cases that the
1
Cases of the following petitioners are consolidated
herewith: Robert L. DuFresne and Carolyn S. DuFresne, docket
Nos. 15907-84 and 30979-85.
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Court of Appeals for the Ninth Circuit held in Dixon V
was a fraud on the Tax Court.
In Dixon III we held that the Government
attorneys’ misconduct did not create a structural
defect and was harmless error but that it had caused
substantial delay in the resolution of Kersting project
cases, and we imposed limited sanctions against R under
Rule 123(a), Tax Court Rules of Practice and Procedure.
In Dixon IV, supplementing Dixon III, we addressed
requests by Ps and other participants in the remand
proceedings for attorneys’ fees under secs. 7430 and
6673(a)(2), I.R.C. We held that Ps and others were not
entitled to fees pursuant to sec. 7430, I.R.C., because
they had not prevailed on the merits against the
underlying deficiency determinations. We held that
they were entitled to fees pursuant to sec. 6673(a)(2),
I.R.C., because the Government attorneys had multiplied
the proceedings unreasonably and vexatiously and the
excess attorneys’ fees were caused by the misconduct.
In Dixon V the Court of Appeals held that we had
applied the wrong standard in Dixon III and that the
misconduct of the Government attorneys in the test case
proceedings was a fraud on the Tax Court. The Court of
Appeals reversed and remanded our decisions in the
remaining test cases, ordering the Tax Court to enter
decisions on terms equivalent to those provided in the
Ts’ secret settlement agreement. In Dixon VI we
determined the terms and benefits of the Ts’ settlement
and their application to the Kersting project
participants before the Court.
Early in the Dixon V remand proceedings, R agreed
that reasonable attorneys’ fees should be awarded to Ps
and others participating in those proceedings. R, Ps,
and the Court agreed that sec. 6673(a)(2), I.R.C.,
governed the recovery of attorneys’ fees.
HB and JI, attorneys with the law firm of P&H,
represented Ps in the Dixon V remand proceedings at no
cost to Ps over the amount of costs, expenses, and fees
that the Court might require R to pay pursuant to sec.
6673(a)(2), I.R.C. On June 29, 2007, JI filed a motion
for attorneys’ fees of $X for services provided in the
Dixon V remand proceedings, accompanied by the
stipulation of R and JI of the reasonableness of the
amounts requested. On Nov. 19, 2007, R and JI filed a
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supplemental stipulation regarding fees and expenses of
$Y for the preparation of the subject motion. R
concedes that fees and expenses requested on behalf of
P&H are reasonable and were caused by the Government
attorneys’ misconduct.
R argues that the Court cannot require R to pay
the requested fees and expenses because sec.
6673(a)(2), I.R.C., and the law of the case established
in Dixon IV require that they be paid or incurred by Ps
and they have not been so paid or incurred. R argues
further that we should not invoke our inherent power to
impose the sanction because we did not do so in Dixon
IV, in which we held that sec. 6673(a)(2), I.R.C., was
the statutory authority governing the award of
attorneys’ fees.
1. Held: Reasonable attorneys’ fees are “incurred”,
and may therefore be awarded, under sec. 6673(a)(2),
I.R.C., when they reflect efforts by attorneys on
behalf of their clients to resist or rectify the
unreasonable and vexatious conduct of opposing
attorneys.
2. Held, further, under sec. 6673(a)(2), I.R.C.,
attorneys whose unreasonable and vexatious conduct
multiplies the proceedings incur the excess costs,
expenses, and attorneys’ fees caused by their
misconduct.
3. Held, further, although in Dixon IV we limited the
sanction we imposed under sec. 6673(a)(2), I.R.C., to
the amounts paid by Ps and other participants for
attorneys’ services and expenses during the multiplied
proceeding up to that time, the law of the case
doctrine does not require us to limit additional
sanctions under sec. 6673(a)(2), I.R.C., to the amounts
Ps paid for attorneys’ fees and expenses for services
in the Dixon V remand proceedings.
4. Held, further, the requested attorneys’ fees and
expenses were incurred for purposes of sec. 6673(a)(2),
I.R.C., because (1) R incurred them either when the
Government attorneys commenced their unreasonable and
vexatious conduct or, alternatively, when we held in
Dixon IV that their conduct was unreasonable and
vexatious, (2) Ps were contingently liable for the
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fees, and (3) the contingency has been satisfied.
5. Held, further, our reliance on sec. 6673(a)(2),
I.R.C., for imposing sanctions in Dixon IV did not
foreclose recourse to our inherent power in this
proceeding.
6. Held, further, pursuant to sec. 6673(a)(2), I.R.C.,
and the inherent power of the Court, we may and will
require R to pay to P&H the requested attorneys’ fees
and expenses.
7. Held, further, because R incurred the requested
fees and expenses pursuant to sec. 6673(a)(2), I.R.C.,
and Dixon IV, we will invoke our inherent power to
require respondent to pay amounts equal to interest at
the applicable rates for underpayments under secs.
6601(a) and 6621(a)(2), I.R.C., on $X from June 29,
2007, the date JI filed the motion for attorneys’ fees
and expenses, and on $Y from Nov. 19, 2007, the date R
and JI filed the supplemental stipulation of facts
regarding fees and expenses incurred in preparing the
subject motion.
John A. Irvine, for petitioners.
Henry E. O’Neill, for respondent.
CONTENTS
Page
Background . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Discussion . . . . . . . . . . . . . . . . . . . . . . . . . 22
I. Sources of Tax Court’s Power To Assess Attorneys’ Fees . 22
II. Authority To Award Fees Under Section 6673(a)(2) . . . . 23
A. Positions of the Parties . . . . . . . . . . . . . 23
B. Preliminary Comment . . . . . . . . . . . . . . . . 24
C. Overview of Prevailing Party Statutes and
Sanctioning Statutes . . . . . . . . . . . . . . . 26
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D. Principles of Statutory Construction . . . . . . . 31
E. Interpretation of “Excess Costs, Expenses, and
Attorneys’ Fees Reasonably Incurred Because of
Such Conduct” . . . . . . . . . . . . . . . . . . . 32
1. Threshold Requirement: Attorney-Client
Relationship . . . . . . . . . . . . . . . . . 34
2. Definition of “Incurred” . . . . . . . . . . . 35
3. History of Section 6673(a)(2) . . . . . . . . 39
4. Purpose of Sanctioning Statutes . . . . . . . 41
5. Statutory Title and Heading . . . . . . . . . 44
6. Relevant Caselaw: When Attorneys’ Fees Are
“incurred because of such conduct” Under
Section 6673(a)(2) . . . . . . . . . . . . . . 45
7. Government Incurs the Excess Costs, Expenses,
and Attorneys’ Fees Attributable to
Government Attorneys’ Misconduct . . . . . . . 52
8. Section 7430 and the Equal Access to Justice
Act . . . . . . . . . . . . . . . . . . . . . 54
9. Law of the Case Doctrine . . . . . . . . . . . 58
F. Fees “Incurred” in Pro Bono Representation and
Contingent Fee Arrangements . . . . . . . . . . . . 64
1. Caselaw Under Prevailing Party Statutes . . . 65
2. Section 7430(c)(3)(B) . . . . . . . . . . . . 76
G. Respondent Must Pay Attorneys’ Fees and Excess
Expenses Requested on Behalf of Petitioners’
Attorneys . . . . . . . . . . . . . . . . . . . . . 78
III. Inherent Power To Impose Sanctions . . . . . . . . . . . 79
IV. Conclusion . . . . . . . . . . . . . . . . . . . . . . . 82
OPINION
BEGHE, Judge: These cases are part of the Kersting tax
shelter litigation that stemmed from the misconduct of
respondent’s trial counsel in Dixon v. Commissioner, T.C. Memo.
1991-614 (Dixon II), vacated and remanded sub nom. DuFresne v.
Commissioner, 26 F.3d 105 (9th Cir. 1994) (per curiam), on remand
Dixon v. Commissioner, T.C. Memo. 1999-101 (Dixon III), revd. and
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remanded 316 F.3d 1041 (9th Cir. 2003) (Dixon V). This is the
first Opinion in our third set of opinions requiring respondent
to pay attorneys’ fees and expenses incurred by or on behalf of
Kersting project taxpayers during the various stages of the
litigation.2 The current set of opinions pertains to fees and
expenses incurred in the proceedings before this Court during the
remand from Dixon V (Dixon V remand proceedings), which resulted
in Dixon v. Commissioner, T.C. Memo. 2006-90 (Dixon VI),
supplemented by T.C. Memo. 2006-190 (Dixon VIII), ascertaining
the terms and benefits of the Thompson settlement.
Petitioners’ cases were consolidated in the Dixon V remand
proceedings with 24 cases of other Kersting project taxpayers for
2
In our first attorneys’ fees opinion, Dixon v.
Commissioner, T.C. Memo. 2000-116 (Dixon IV) (supplementing Dixon
III), we awarded Kersting project taxpayers excess fees and
expenses under sec. 6673(a)(2)(B) for services rendered by
Attorneys Joe Alfred Izen (Izen), Robert Allen Jones (Jones), and
Robert Patrick Sticht (Sticht) during the DuFresne remand.
In the second set of attorneys’ fees opinions, Dixon v.
Commissioner, T.C. Memo. 2006-97 (Dixon VII), and Young v.
Commissioner, T.C. Memo. 2006-189, we responded to the
supplemental mandate of the Court of Appeals for the Ninth
Circuit to rule on Kersting project taxpayers’ requests for
appellate attorneys’ fees and expenses incurred in the Dixon V
appeal. In Dixon VII we awarded appellate attorneys’ fees and
expenses under sec. 7430 to Kersting project taxpayers
represented in the Dixon V appeal by Attorneys John A. Irvine
(Irvine) and Henry G. Binder (Binder) of Porter & Hedges, L.L.P.
(Porter & Hedges), and Michael Louis Minns (Minns). In Young we
awarded appellate fees and expenses to Kersting project taxpayers
represented in the Dixon V appeal by Attorneys Izen and Jones.
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purposes of hearing, briefing, and opinion (the Dixon V
taxpayers). Counsel for all Dixon V taxpayers have requested
attorneys’ fees and expenses for their services in the Dixon V
remand proceedings. In this Opinion we consider motions for
excess costs and attorneys’ fees under section 6673(a)(2)(B)3 for
services of Attorneys John A. Irvine (Irvine) and Henry G. Binder
(Binder) of Porter & Hedges, L.L.P. (Porter & Hedges), provided
to petitioners, the Dixons and the DuFresnes, in the Dixon V
remand proceedings.4
Early in the Dixon V remand proceedings, respondent’s
counsel agreed that, pursuant to section 6673(a)(2), respondent
is required to pay attorneys’ fees and expenses incurred in the
Dixon V remand proceedings. The parties have stipulated that
reasonable attorneys’ fees and expenses totaling $1,101,575.34
are attributable to services of Porter & Hedges in the Dixon V
remand proceedings. Porter & Hedges agreed to represent
petitioners in the Dixon V remand proceedings at no cost except
for such fees and expenses as might be allowed by the Court. The
issue for decision is: when attorneys representing the
3
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
4
Subsequent opinions will deal with the pending applications
of Attorneys Jones, Minns, and Izen for fees and expenses
incurred for their services on behalf of other Dixon V taxpayers
in the Dixon V remand proceedings.
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Commissioner have committed a fraud on the Tax Court that has
multiplied and protracted the proceedings, may the Court,
pursuant to section 6673(a)(2)(B) or under the Court’s inherent
power, require the Commissioner to pay attorneys’ fees and
expenses for services provided during such proceedings by counsel
representing the taxpayer pro bono5 or, as in these cases, for no
fee except for any fees that may be allowed by the Court?
5
Although the phrase “pro bono” stems from the Latin phrase
“pro bono publico” (“for the public good”), the definition in the
current edition of Black’s Law Dictionary 1240-1241 (8th ed.
2004) is wider ranging, encompassing “uncompensated legal
services performed esp. for the public good” and, quoting Rhode &
Hazard, Professional Responsibility 162 (2002):
“a wide range of activities, including law reform
efforts, participation in bar associations and civic
organizations, and individual or group representation.
Clients who receive such assistance also span a broad
range including: poor people, nonprofit organizations,
ideological or political causes, and friends,
relatives, or employees of the lawyer.”
Sec. 7430(c)(3)(B), titled “Pro bono services”, added by the
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, sec. 3101(c), 112 Stat. 728, describes the
covered fees as “fees [that] are less than the reasonable
attorneys’ fees because an individual is representing the
prevailing party for no fee or for a fee which * * * is no more
than a nominal fee.”
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Background6
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
(Kersting) during the late 1970s through the 1980s. Under the
test case procedure, most of the other Kersting program
participants who had filed Tax Court petitions (non-test-case
taxpayers) entered into “piggyback” agreements in which they
agreed that their cases would be resolved in accordance with the
Court’s opinion in the test cases.7
Initially, Kersting hired Attorney Brian J. Seery (Seery) to
represent Kersting project participants. After Seery resigned
because of a perceived possible conflict of interest, Kersting
replaced him with Attorneys Robert J. Chicoine and Darrell D.
Hallett, whom he later fired and replaced with Attorney Joe
6
The following background statement is based on the existing
record and additional information submitted by the parties in
connection with the attorneys’ fees requests. The facts in these
cases are fully set out in Dixon II, Dixon III, Dixon IV, Dixon
VI, Dixon VII, Young v. Commissioner, supra, and Dixon VIII.
The parties have stipulated additional facts related to the
motion for attorneys’ fees, and they are so found. The
stipulation of facts and the supplemental stipulation of facts
are incorporated herein by this reference. We have not found it
necessary to hold an evidentiary hearing. Cf. Rule 232(a)(2).
7
Upon the final disposition of the test cases, respondent
and the relatively few non-test-case taxpayers who did not enter
into piggyback agreements will generally be ordered to show cause
why those cases should not be decided the same way as the test
cases.
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Alfred Izen, Jr. (Izen), who represented the taxpayers in the
trial of the test cases. Kersting initially paid the taxpayers’
legal fees in the Tax Court litigation. Later some Kersting
program participants began contributing to a legal defense fund
created to share the cost of further proceedings (the defense
fund or fund). Eventually, more than 300 non-test-case
petitioners made periodic and/or lump-sum contributions to the
fund.
Before trial of the test cases in this Court, respondent’s
trial counsel entered into the then-secret, now notorious,
Thompson settlement, which was not disclosed to the Court until
after the test cases had been tried and decisions entered in
accordance with Dixon II,8 sustaining virtually all respondent’s
determinations.
On appeal, the Court of Appeals for the Ninth Circuit
vacated this Court’s decisions in the test cases and remanded
them for an evidentiary hearing to determine the full extent of
the Government attorneys’ misconduct and whether that misconduct
was a structural defect voiding the judgment or should be
disregarded as harmless error. DuFresne v. Commissioner, 26 F.3d
at 107 (citing Arizona v. Fulminante, 499 U.S. 279, 309 (1991)).
8
Before the trial of the test cases the Court had rejected
the test case taxpayers’ arguments, advanced by Chicoine and
Hallett, that certain evidence should be suppressed and the
burden of proof shifted to respondent. See Dixon v.
Commissioner, 90 T.C. 237 (1988) (Dixon I).
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On remand, in response to a direction by the Court of
Appeals to consider on the merits all motions of intervention
filed by interested parties, we ordered consolidation of the
cases of 10 non-test-case taxpayers with the remaining test cases
for purposes of the evidentiary hearing. Following that hearing,
we held in Dixon III that the misconduct of the Government
attorneys in the trial of the test cases did not cause a
structural defect in the trial but instead resulted in harmless
error. However, we sanctioned respondent in two ways for the
Government attorneys’ misconduct during the test-case
proceedings. First, in Dixon III we held that Kersting project
taxpayers who had not had final decisions entered in their cases
would be relieved of their liabilities for the interest component
of the addition to tax for negligence under former section
6653(a) and for the increased rate of interest provided by former
section 6621(c). Second, in Dixon v. Commissioner, T.C. Memo.
2000-116 (Dixon IV), pursuant to section 6673(a)(2)(B), we
ordered respondent to pay petitioners’ attorneys’ fees and
expenses incurred by them in the DuFresne remand proceedings in
the Tax Court as a result of the Government attorneys’
misconduct.9 We entered orders requiring respondent to pay a
9
In Dixon IV, we rejected the fee requests insofar as they
relied on sec. 7430, on the ground that the movants had not
substantially prevailed on the merits as required by sec.
7430(c)(4)(A)(i).
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portion of attorneys’ fees and expenses incurred for services
provided by Izen and Attorneys Robert Allen Jones (Jones) and
Robert Patrick Sticht (Sticht) to the taxpayers in the DuFresne
remand proceedings.10 In so doing, sua sponte and relying on our
inherent power, we included in the sanction the obligation of
respondent to pay interest on the awards at the rates provided by
sections 6601(a) and 6621(a)(2) from the dates of our orders
fixing the awards.11 Respondent did not appeal Dixon IV or those
orders.12
We entered decisions for respondent in the remaining test
cases, which the test-case taxpayers again appealed. We also
certified for interlocutory appeal the cases of non-test-case
10
We substantially reduced the amounts requested in varying
amounts because of insufficient substantiation. Sticht and
respondent thereafter entered into a comprehensive agreement and
submission regarding the fee and expense claims of Kersting
project non-test-case taxpayers represented by Sticht in all
phases of the Kersting project proceedings through the Dixon V
remand proceedings. That agreement and submission superseded our
awards to his clients in Dixon IV.
11
We note that Attorney Luis DeCastro’s monthly bills for
legal fees and expenses to the Thompsons provided for interest on
outstanding balances, which were expected to be paid from the
Thompsons’ refunds generated by the secret settlement. See Dixon
III, Findings of Fact IX. Postrial Developments, A. First
Thompson Refund (“Mr. DeCastro advised the Thompsons that,
because the Internal Revenue Service would be paying interest, he
believed it was fair to add interest to the Thompsons’ bill.”);
see also Exhibit 939-ALZ, at 9-13.
12
Decisions already entered after the Dixon V remand
proceedings on behalf of taxpayers who initially contributed to
the defense fund have included fee and expense awards pursuant to
our opinion in Dixon IV.
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taxpayers who had participated in the evidentiary hearing. The
Court of Appeals accepted the interlocutory appeals of the non-
test cases but held them in abeyance pending resolution of the
appeals of the test cases.
In January 2001 the defense fund retained Attorney Michael
Louis Minns (Minns) to replace Izen in the appeal. As a result,
Minns became counsel of record for the Dixons, DuFresnes,
Owenses, and Hongsermeiers. Izen remained counsel of record for
the appeals of the Youngs, the only other remaining test-case
taxpayers, and the Adairs, who were non-test-case taxpayers. The
steering committee of the defense fund later became dissatisfied
with Minns and asked Porter & Hedges to take over the appeals.
Porter & Hedges entered into an agreement with the defense
fund to represent test-case taxpayers through oral argument in
the appeal (the retainer agreement). Although the retainer
agreement provided for an up-front retainer and monthly billings,
Porter & Hedges received only a small portion of its billed
appellate fees from the defense fund. When Irvine and Binder
entered into the retainer agreement with the defense fund on
behalf of Porter & Hedges, they did not realize that the steering
committee whose members signed the retainer agreement had the
backing of less than a majority of the participants in the
defense fund, many of whom wished to continue to be represented
by Minns or Izen in the appeal.
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In accordance with the retainer agreement, Porter & Hedges
attorneys Irvine and Binder entered appearances in the Court of
Appeals on behalf of the Dixons, DuFresnes, and Owenses. Minns
remained counsel of record for the Hongsermeiers. Thus, three
sets of counsel pursued the appeals of the test cases: Izen on
behalf of the Youngs, Minns on behalf of the Hongsermeiers, and
Porter & Hedges on behalf of the Dixons, DuFresnes, and Owenses.
In Dixon V the Court of Appeals reversed Dixon III, holding
that the misconduct of the Government attorneys in the trial of
the test cases was a fraud on the Tax Court, for which no showing
of prejudice is required, and that respondent should be more
severely sanctioned. The Court of Appeals remanded the cases and
ordered this Court to enter judgment in favor of the test-case
taxpayers and non-test-case taxpayers who were before the Court
of Appeals (the Dixon V taxpayers) on terms equivalent to those
provided in the final Thompson settlement agreement. The Court
of Appeals left to our discretion the fashioning of judgments
that would put the Kersting project taxpayers in the same
position as provided in the Thompson settlement. Dixon V, 316
F.3d at 1047 n.11.
Petitioners and other taxpayer appellants requested the
Court of Appeals to award appellate attorneys’ fees and expenses
incurred in the Dixon V appeal. In a supplemental mandate, the
Court of Appeals sent those appellate fee requests to the Tax
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Court for a determination of entitlement and, if warranted,
amount. We responded to that supplemental mandate in Dixon v.
Commissioner, T.C. Memo. 2006-97 (Dixon VII), and Young v.
Commissioner, T.C. Memo. 2006-189, and awarded appellate fees and
expenses under section 7430. In Young we awarded appellate fees
and expenses incurred in the Dixon V appeal to taxpayers
represented by Izen and Jones. In Dixon VII we awarded appellate
attorneys’ fees and expenses incurred in the Dixon V appeal to
taxpayers represented by Minns and by Porter & Hedges attorneys
Irvine and Binder, including petitioners herein, the Dixons and
the DuFresnes. Primarily because of the caps on hourly rates
under section 7430, Porter & Hedges recovered only $248,049.27
(attorneys’ fees of $230,167.75 plus expenses of $17,881.52) out
of its total billings of $514,821.90 (attorneys’ fees of
$494,514.75 plus expenses of $20,307.15).
The agreement with the defense fund obligated Porter &
Hedges to represent petitioners (the Dixons and the DuFresnes)
and the Owenses only through oral argument in the Dixon V appeal;
it did not extend to the Dixon V remand proceedings in this
Court. Binder and Irvine discussed with petitioners the decision
of the Court of Appeals in Dixon V and the advisability of Porter
& Hedges representing them in the Dixon V remand proceedings.13
13
The record does not disclose whether Binder and Irvine had
similar discussions with the Owenses. The Owenses were
(continued...)
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Binder and Irvine told petitioners that the remand proceedings
would be time consuming and expensive. Binder and Irvine told
petitioners that Henry O’Neill (O’Neill), respondent’s counsel,
had agreed that respondent would be obligated to pay the
taxpayers reasonable attorneys’ fees and expenses in the remand
proceedings. Binder and Irvine believed that the Court would
require respondent to pay petitioners’ reasonable attorneys’ fees
and expenses incurred in the remand proceedings. Binder and
Irvine therefore agreed that Porter & Hedges would look only to
respondent for payment of those fees. They assured petitioners
that Porter & Hedges would not require petitioners to pay any
fees or expenses beyond those awarded by the Court. In a January
28, 2003, telephone conversation, petitioners agreed to have
Porter & Hedges represent them in the Dixon V remand proceedings
on those terms. Pursuant to that oral agreement, Irvine and
Binder entered their appearances in these cases in this Court.
Izen, Minns, Sticht, Jones, and Attorney Declan J. O’Donnell
represented the remaining Dixon V taxpayers.
On April 30, 2003, respondent filed a motion requesting a
status conference. On May 30, 2003, the parties filed status
reports with the Court. Respondent’s status report stated:
“With respect to attorneys’ fees related to Tax Court proceedings
13
(...continued)
represented by Izen in the Dixon V remand proceedings.
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occurring subsequent to the issuance of the Ninth Circuit’s
opinion [Dixon V], respondent’s position is that reasonable
attorneys’ fees should be awarded to the petitioners.”
Binder sent petitioners engagement letters dated August 27,
2003, memorializing the oral agreement of January 28, 2003. The
engagement letters, which were signed by Binder, stated:
Porter & Hedges, and John Irvine and I individually,
believe that because we represented you in the appeal
that led to the Appellate Decision [Dixon V], we should
continue that representation to its conclusion, even
though (I) the Fund has failed to fulfill its agreement
to pay our fees under the Letter Agreement and (ii) our
engagement with the Fund provides only for
representation through oral argument in the Appellate
Decision. We are not unmindful that hundreds of non-
test-case petitioners will be affected by the Appellate
Decision as that decision is effected on remand. For
these reasons, John Irvine and I agree to represent you
with respect to the remand of the Appellate Decision
without compensation from you.
* * * We may request payment of fees and expenses from
the government, as provided by law or by determination
of a court, for our representation. You agree to
provide facts, affidavits, testimony, and other
assistance as reasonably necessary to support such
requests for fees and expenses.
Extensive discovery, including petitioners’ interrogatories
and requests for production of documents and motions to compel
responses to interrogatories and production of documents,
preceded the hearings in the Dixon V remand proceedings. Counsel
for the Dixon V taxpayers informally agreed that Porter & Hedges
would essentially serve as lead counsel in the discovery process,
preparation for the evidentiary hearings, opening statements,
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examination of many key witnesses, and all significant research
and briefing. During the Dixon V remand proceedings, the Court
held six telephone conferences with respondent’s and the Dixon V
taxpayers’ counsel, two status conferences on the record, in
Houston and Los Angeles, and three hearings, in Las Vegas, Los
Angeles, and Washington, D.C. Through Binder, Porter & Hedges
took the lead in conducting and presenting the Dixon V taxpayers’
case.
On September 3, 2004, the Court and counsel to the Dixon V
taxpayers held a telephone conference on the record. During that
conference Minns stated that he was concerned about the pressures
on Binder because Porter & Hedges:
have had apparently little or no fees, and I’m not
willing to lose him [Binder]. If there is any way to
keep him around, I don’t want him to have a burden, so
I would like to give my clients some type of good-faith
-- I would like to make sure that Mr. Binder is still
there at the hearing.
Respondent’s counsel said he had no comments.
In one of the recorded telephone conferences with the
parties, we expressed the view that section 6673(a)(2) is the
applicable section insofar as legal fees for proceedings before
this Court are concerned.
During the third evidentiary hearing session in Washington,
D.C., we discussed with the parties’ counsel the briefing
schedule and whether the Dixon V taxpayers would file one brief
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or separate briefs. During that discussion, Jones stated to the
Court:
And I would like to hear from Mr. Binder because
he has been a prolific writer over the last year and a
half, so I’m sure he has got something to say about
that possibility [one brief for all remand
petitioners].
Your Honor, before any other opinions are
generated, I think we should recognize the Herculean
effort that Mr. Binder has produced on behalf of all
Petitioners’ counsel who have participated to various
degrees in this process, but the lead dog in this hunt
from the first day that we started again in Houston has
been Mr. Binder, who has taken it upon himself to do
the lion’s share of the work * * *
The Dixon V taxpayers agreed to submit a joint opening brief, for
which Binder was to do the bulk of the work. Binder noted that
the brief would take hundreds of hours and referred to an earlier
comment by Izen that the opening brief would be a “Herculean
effort”.
The parties also agreed that attorneys’ fees incurred in
determining the terms of the Thompson settlement should be
awarded under section 6673(a)(2) rather than section 7430.
During the hearing we inquired: “And I take it, there is no
disagreement that, at least, insofar as the work that was done in
the proceedings before the Tax Court are concerned, that the
legal fees are allowable under Section 6673(a)(2).” No one
challenged or made any attempt to clarify or qualify our
understanding of the parties’ agreement on attorneys’ fees.
- 20 -
On July 7, 2005, Izen filed a brief regarding the scope of
the mandate of the Court of Appeals. On July 14, 2005, Binder
filed a 189-page joint opening brief on behalf of all Dixon V
taxpayers. On July 15, 2005, Jones and Izen submitted a 20-page
joint supplemental opening brief.
The Dixon V taxpayers’ opening brief was drafted primarily
by Porter & Hedges attorneys. In respondent’s opening brief
respondent stated:
Although not actually elements of the “Thompson
settlement,” respondent has also urged the Court * * *
to award petitioners reasonable attorneys’ fees under
section 6673(a)(2) in connection with proceedings
before the Tax Court subsequent to the issuance of the
Dixon V opinion. Thus, the implementation of the Ninth
Circuit’s mandate should consist of the following: * *
* and an appropriate award of reasonable attorneys’
fees for Tax Court proceedings occurring subsequent to
the issuance of the Ninth Circuit’s Dixon V opinion.
The parties filed their reply briefs between October 3 and
10, 2005.
On May 2, 2006, we issued Dixon VI, determining the terms
and benefits of the Thompson settlement. On May 10, 2006, we
issued Dixon VII, awarding appellate fees and expense under
section 7430 to Kersting project taxpayers represented in the
Dixon V appeal by Minns and by Porter & Hedges attorneys Binder
and Irvine. On September 6, 2006, we issued Young v.
Commissioner, T.C. Memo. 2006-189, awarding appellate fees and
expenses to Kersting project taxpayers represented in the Dixon V
appeal by Izen and Jones.
- 21 -
On September 7, 2006, we issued Dixon VIII denying a motion
for reconsideration of Dixon VI filed by Minns and ordered entry
of decisions in the test and non-test cases of the Dixon V
taxpayers.14
Binder died of cancer on December 15, 2006.
On June 29, 2007, Irvine filed a motion for attorneys’ fees
and expenses related to services provided to petitioners by
Porter & Hedges during the Dixon V remand proceedings (Irvine’s
application for fees). That motion is the subject of this
Opinion. On the same date respondent and Irvine filed their
stipulation of facts with regard to Irvine’s application for
fees, stipulating inter alia that Porter & Hedges’ reasonable
fees and expenses through April 30, 2007, amount to
$1,037,542.58. On July 27, 2007, respondent filed respondent’s
objection to Irvine’s application for fees. On September 4,
2007, Irvine filed his response to respondent’s objection to
Irvine’s application for fees. On October 15, 2007, respondent
filed respondent’s memorandum in support of respondent’s
objection to Irvine’s application for fees. On November 19,
2007, respondent and Irvine filed a supplemental stipulation of
facts, stipulating that Porter & Hedges’s reasonable fees and
14
Such of those test and non-test cases whose taxpayers are
represented by Minns, Izen, and Sticht have appealed our
determinations in Dixon VI (as supplemented by Dixon VIII) of the
terms and benefits of the Thompson settlement.
- 22 -
expenses from May 1 to October 31, 2007, related to their
application for fees and expenses on remand, totaled $64,745.26.
The parties have stipulated that the total amount of
reasonable attorneys’ fees and expenses for services provided to
petitioners by Porter & Hedges in the Dixon V remand proceedings,
including fees and expenses related to Irvine’s application for
fees (the Porter & Hedges fees), is $1,101,575.34.
Discussion
I. Sources of Tax Court’s Power To Assess Attorneys’ Fees
The Tax Court has power to assess attorneys’ fees against
counsel who willfully abuse the judicial process. Harper v.
Commissioner, 99 T.C. 533, 543-544 (1992). These powers derive
from various sources, including the Internal Revenue Code, the
Tax Court Rules of Practice and Procedure, the Federal Rules of
Civil Procedure, and the Court’s inherent power. See Chambers v.
NASCO, Inc., 501 U.S. 32, 46 (1991); Roadway Express, Inc. v.
Piper, 447 U.S. 752, 766 (1980); Harper v. Commissioner, supra at
543-544. When an attorney representing the Commissioner has
committed a fraud on the Court, the Court has power to assess
attorneys’ fees against the Commissioner as a sanction pursuant
to section 6673(a)(2)(B) or under the Court’s inherent power.
See Chambers v. NASCO, Inc., supra; Roadway Express, Inc. v.
Piper, supra.
- 23 -
Early in the remand proceedings respondent agreed that
reasonable attorneys’ fees for services in the Dixon V remand
proceedings should be awarded to the Dixon V taxpayers pursuant
to section 6673(a)(2). Because of that concession and our
statements on the record that legal fees are allowable under
section 6673(a)(2), the parties have focused their arguments on
the Court’s authority under section 6673(a) to require respondent
to pay attorneys’ fees for services by Irvine, Binder, and others
in Porter & Hedges. We shall first address statutory authority
and then return to inherent power.
II. Authority To Award Fees Under Section 6673(a)(2)
If an attorney admitted to practice before the Tax Court has
multiplied the proceedings in any case unreasonably and
vexatiously, section 6673(a)(2)(A) authorizes the Court to
require the attorney to “pay personally the excess costs,
expenses, and attorneys’ fees reasonably incurred because of such
conduct”. If the attorney is appearing on behalf of the
Commissioner, the Court may require the United States to “pay
such excess costs, expenses, and attorneys’ fees in the same
manner as such an award by a district court.” Sec.
6673(a)(2)(B).
A. Positions of the Parties
The parties agree that reasonable attorneys’ fees related to
the Dixon V remand proceedings should be awarded to the Dixon V
- 24 -
taxpayers pursuant to section 6673(a)(2). They also agree that
the reasonable fees and expenses for services provided to
petitioners by Porter & Hedges in the Dixon V remand proceedings,
including those related to the fee request, total $1,101,575.34.
However, respondent asserts that section 6673(a)(2) does not
authorize the Court to require respondent to pay the fees and
expenses of Porter & Hedges because petitioners did not pay and
had no obligation to pay them. Respondent relies on cases
deciding taxpayers’ entitlement to attorneys’ fees under section
7430 providing for awards of litigation costs to prevailing
parties.15
B. Preliminary Comment
Before embarking on the required analysis, we will summarily
sketch the leading authorities in the Tax Court under section
7430 on which respondent relies. Frisch v. Commissioner, 87 T.C.
838 (1986), Swanson v. Commissioner, 106 T.C. 76 (1996), and
Grigoraci v. Commissioner, 122 T.C. 272 (2004), are cases
interpreting and applying section 7430, which, like all or most
prevailing party statutes, expressly requires that the award of
attorneys’ fees and expenses be made and paid to the prevailing
15
Sec. 7430(a) provides that “the prevailing party may be
awarded a judgment or a settlement for * * * reasonable
litigation costs incurred in connection with * * * [a Tax Court]
proceeding”. Litigation costs include “reasonable fees paid or
incurred for the services of attorneys”. Sec.
7430(c)(1)(B)(iii).
- 25 -
party. In denying fee awards, these cases all state that the
meaning of “incurred” incorporates the requirement that the
prevailing party have already paid or be obligated to pay his
attorney the amount of the fee for which the award is sought. In
Frisch this condition could not be satisfied because the
prevailing party was acting pro se and there was no attorney-
client relationship. In Swanson a ground for denial of a portion
of the requested award was that the taxpayers had no obligation
to pay fees to their attorney in excess of an agreed amount.
Grigoraci, interpreting “incurred” as in Frisch, Swanson, and
other prevailing party cases, denied an individual, essentially
acting pro se, an award for late-billed fees of the accounting
firm of which he was a member; the Court was persuaded that he
had no obligation to pay such fees and that they did not reflect
litigation services actually rendered. Accord Kruse v.
Commissioner, T.C. Memo. 1999-157; Thompson v. Commissioner, T.C.
Memo. 1996-468.
We amplify our sketch by referring to one of our prior
opinions in these proceedings, Young v. Commissioner, T.C. Memo.
2006-189. There, pursuant to the supplemental mandate of the
Court of Appeals for the Ninth Circuit in Dixon V, we awarded
appellate attorneys’ fees under section 7430 to clients of Izen
in excess of amounts they had paid or were obligated to pay him
in advance of an award. In so doing, we relied on Phillips v.
- 26 -
GSA, 924 F.2d 1577 (Fed. Cir. 1991), which held that a contingent
fee agreement that can be interpreted or deemed to require the
prevailing party awarded fees to pay them over to the attorney
satisfies the requirement that fees or expenses be “incurred” by
the prevailing party for the purposes of a fee-shifting
prevailing party statute.
We conclude our sketch by observing that we need not in this
Opinion further consider Swanson v. Commissioner, supra, and
Young v. Commissioner, supra, because the parties agree that the
statute to be applied in this case is section 6673, a sanctioning
statute, not section 7430, a prevailing party statute.16
C. Overview of Prevailing Party Statutes and Sanctioning
Statutes
The resolution of this controversy depends on whether, when,
and by whom excess costs, expenses, and attorneys’ fees are
deemed to be “incurred” under section 6673(a)(2). The question
is one of first impression under section 6673(a)(2) and its
statutory parent of general application, 28 U.S.C. sec. 1927
(2006) (the sanctioning statutes). Resolution of the question
will require detailed description, analysis, and explanation
16
However, at pt. II.E.8., infra, we conclude that the term
“incurred” has a broader reach under sec. 6673(a)(2), a
sanctioning statute, then it does under sec. 7430, as interpreted
by Swanson v. Commissioner, 106 T.C. 76 (1996); at pt. II.F.,
infra, we specifically address the subject of fees incurred in
pro bono representation and contingent fee arrangements under
sec. 7430(c)(3)(B) and other prevailing party statutes.
- 27 -
because section 7430, its statutory parent of general
application, 28 U.S.C. sec. 2412 (2006), and many of the scores
of other specifically targeted Federal prevailing party statutes
also incorporate the term “incurred” in their requirements for an
award of fees and expenses to the prevailing party.
We begin the analysis by observing what prevailing party
statues and sanctioning statutes have in common. The prevailing
party statutes and sanctioning statutes create exceptions to the
American rule that parties to litigation are required to bear the
burden of their own legal fees and are not obligated to pay the
attorneys’ fees and expenses of the representation of their
opponents. Despite their different emphases--compensation in
prevailing party statutes, punishment in sanctioning statutes--
they have a commonality at the inception of the process that
eventuates in the creation of the duty to pay attorneys’ fees to
the opposing party or his counsel. The prevailing party statutes
and the sanctioning statutes share a legislative judgment that
the party upon whom the liability to pay the attorneys’ fees and
expenses ultimately must fall has engaged in substandard conduct
that justifies a departure from the American rule.
Among the conditions to qualification for an award of
litigation costs under section 7430 is the requirement, built
into the definition of a “prevailing party” in section
7430(c)(4), that the Government have taken a position that was
- 28 -
unjustified. Under section 6673(a)(2), among the conditions for
requiring the United States to pay the taxpayers’ attorneys’ fees
and expenses is that the attorney appearing on behalf of the
Commissioner has “multiplied the proceedings * * * unreasonably
and vexatiously”.
In each case there is substandard conduct on behalf of the
Government that creates a liability on the part of the Government
which has as its correlative the power in the aggrieved party or
his attorney and/or the court to impose a duty or obligation to
pay the fees and expenses reasonably incurred in order to or
needed to respond appropriately to such conduct.17 The process
so initiated and continued is completed by the court, after audit
of the requested attorneys’ fees and expenses and a determination
that all statutory requirements for and limits on the award have
been satisfied, in deciding that the aggrieved party or his
attorney has the right to an award of fees and expenses.18
We see that the incurring of the fees and expenses is a
process that commences with the substandard behavior by one party
or its counsel and culminates in an obligation by that party or
counsel to pay the fees and expenses reasonably required to
respond appropriately to the substandard behavior. The process
17
See Cook, “Hohfeld’s Contributions to the Science of Law”,
28 Yale L.J. 721, 722-723 (1919) (and works cited at 722).
18
Id.
- 29 -
commences under the prevailing party statutes when the Government
takes the unjustified position and under the sanctioning statutes
when the attorney commits unreasonable and vexatious acts that
multiply the proceedings.
The differences between the prevailing party statutes and
the sanctioning statutes reflect and give effect to the degree or
extent of culpability for the substandard behavior that initiates
the process that leads to the duty to reimburse or pay the fees
and expenses as provided by the statutes. Under section 7430 and
other prevailing party statutes, the substandard behavior
violates a basic generalized duty of care that Congress has
decided Government owes to the citizen; this duty is embodied in
the requirement that the Government’s civil enforcement activity
be substantially justified. Under section 6673(a)(2) and the
sanctioning statutes, the substandard behavior violates the
attorney’s professional duty not only to the opposing party but
also to opposing counsel and the court;19 it directly adversely
19
All attorneys representing clients before this Court are
required by Rule 201(a) to conduct themselves “in accordance with
the letter and spirit of the Model Rules of Professional Conduct
of the American Bar Association” (the Model Rules). An attorney
who unreasonably and vexatiously multiplies the proceeding
violates the Model Rules and breaches his duty to the opposing
parties, their counsel, and the Court to refrain from such
conduct. See Model R. Profl. Conduct 3.2 (“A lawyer shall make
reasonable efforts to expedite litigation consistent with the
interests of the client.”), 3.5(d) (a lawyer shall not “engage in
conduct intended to disrupt a tribunal”), 4.4(a) (“a lawyer shall
not use means that have no substantial purpose other than to
(continued...)
- 30 -
affects the opposing party and his counsel, and also the court
and the judicial process. Under the sanctioning statutes the
substandard conduct is much more culpable, sinking so low in the
case at hand as to amount to a fraud on the court, a level of
seriousness requiring that the punishment be certain if it is to
have the necessary deterrent effect.
The different degrees of culpability of the substandard
conduct addressed by the prevailing party statutes and the
sanctioning statutes are reflected in the measures of liability
created by the substandard conduct. Under section 7430, the
Government’s liability to pay the prevailing party’s attorneys’
fees, created by taking a position that is not substantially
justified, is subject to the cap provided in section
7430(c)(1)(B)--$180 per hour for attorney’s services provided in
2008,20 Rev. Proc. 2008-66, sec. 3.38, 2008-45 I.R.B. 1107,
19
(...continued)
embarrass, delay, or burden a third person”).
20
Attorneys who are appointed by a court in criminal cases
and paid by the Federal, State, or local government fare far
worse than prevailing parties who qualify for reimbursement of
attorneys’ fees under sec. 7430. A 2007 survey of the rates of
compensation for court-appointed counsel in noncapital felony
cases reported hourly rates ranging from $40 per hour to $100 per
hour. The Spangenberg Group, Rates of Compensation Paid to
Court-Appointed Counsel in Non-Capital Felony Cases at Trial: A
State-by-State Overview (June 2007). Additionally, some States
place a cap on the maximum amount for a case ranging from $445 to
$20,000 depending on the crime and/or the sentence for the crime.
Id.
- 31 -
1114.21 Under section 6673(a)(2), the Government’s liability to
pay attorneys’ fees and expenses created by a Government
attorney’s misconduct has no such limitation other than the
requirement that the fees to be paid have been “reasonably
incurred” because of such conduct. This standard for the more
culpable conduct allows payments of attorneys’ fees to be made at
prevailing market rates, which usually exceed the capped amounts
for the less culpable conduct addressed by section 7430.
It now becomes necessary to compare and contrast the
purposes and language of section 6673(a)(2) and 28 U.S.C. sec.
1927 with those of section 7430 and the prevailing party statutes
that account for the different limitations on the rights to an
award under those sections and generally under prevailing party
statutes and sanctioning statutes.
D. Principles of Statutory Construction
In interpreting a statute, we begin with the statutory
language and apply the plain meaning of the words in the statute
unless we find the meaning to be ambiguous. United States v. Ron
Pair Enters., Inc., 489 U.S. 235, 242 (1989); Allen v.
21
Paradoxically, although sec. 7430 has a compensatory
purpose “‘to deter abusive actions or overreaching by the [IRS]
and to enable taxpayers to vindicate their rights regardless of
their economic circumstances’”, Cooper v. United States, 60 F.3d
1529, 1530 (11th Cir. 1995) (quoting Weiss v. Commissioner, 88
T.C. 1036, 1041 (1987)), the attorneys’ fees awarded to
prevailing parties often prove inadequate to fully compensate
them for the fees owed or paid to their attorneys at market
rates.
- 32 -
Commissioner, 118 T.C. 1, 7 (2002); Woodral v. Commissioner, 112
T.C. 19, 23 (1999). “When a statute appears to be clear on its
face, there must be unequivocal evidence of legislative purpose
before interpreting the statute so as to override the plain
meaning of the words used therein.” Fernandez v. Commissioner,
114 T.C. 324, 330 (2000); see also Huntsberry v. Commissioner, 83
T.C. 742, 747-748 (1984). “Interpretation of a word or phrase
depends upon reading the whole statutory text, considering the
purpose and context of the statute, and consulting any precedents
or authorities that inform the analysis.” Dolan v. USPS, 546
U.S. 481, 486 (2006); see also King v. St. Vincent’s Hosp., 502
U.S. 215, 221 (1991) (“we * * * follow the cardinal rule that a
statute is to be read as a whole * * * since the meaning of
statutory language, plain or not, depends on context”). Our
initial inquiry is whether the language of section 6673(a)(2) is
so plain as to permit only one reasonable interpretation that
answers the question. See, e.g., Robinson v. Shell Oil Co., 519
U.S. 337, 340 (1997).
E. Interpretation of “excess costs, expenses, and
attorneys’ fees reasonably incurred because of such
conduct”
The operative phrase of section 6673(a)(2) to be interpreted
is “excess costs, expenses, and attorneys’ fees reasonably
incurred because of such conduct”.
- 33 -
The part of the phrase “excess costs, expenses, and
attorneys’ fees” means only the costs, expenses, and fees
associated with the multiplied proceedings and not the total cost
of the litigation. See Roadway Express, Inc. v. Piper, 447 U.S.
at 756 n.3 (agreeing with the lower court that the same language
in 28 U.S.C. sec. 1927 provides only for excess costs and not for
the total cost of the appeal); Browning v. Kramer, 931 F.2d 340,
345 (5th Cir. 1991) (the same language in 28 U.S.C. sec. 1927
means “only those fees and costs associated with ‘the persistent
prosecution of a meritless claim’” (quoting Thomas v. Capital
Sec. Servs., Inc., 836 F.2d 866 (5th Cir. 1988))). The part of
the phrase “because of such conduct” means as a result of the
attorney’s unreasonable and vexatious conduct.
Respondent agrees that reasonable attorneys’ fees related to
the Dixon V remand proceedings should be awarded to Dixon V
taxpayers pursuant to section 6673(a)(2), conceding that (1) the
Dixon V remand proceedings are multiplied proceedings unrelated
to the merits of the test cases, (2) fees associated with the
Dixon V remand proceedings resulted from the misconduct of
respondent’s attorneys in the test-case proceedings, (3) the
requested fees and expenses are reasonable and attributable to
services provided by Binder and Irvine during the Dixon V remand
proceedings. Thus, the requested fees and expenses are excess
fees and expenses resulting from the misconduct of the Government
- 34 -
attorneys during the test-case proceedings. The remaining
question is whether those fees and expenses were “incurred”
because of that misconduct.
We begin by addressing the threshold requirement for
determining whether attorneys’ fees are incurred.
1. Threshold Requirement: Attorney-Client
Relationship
Attorneys’ fees cannot exist, and therefore cannot be
incurred, unless there is an attorney-client relationship. The
word “attorney” assumes an agency relationship, and an
attorney-client relationship is the predicate for an award of
attorneys’ fees. Kay v. Ehrler, 499 U.S. 432, 436 (1991)
(denying attorneys’ fees to a pro se attorney-litigant under the
Civil Rights Attorneys Fees Awards Act of 1976, 42 U.S.C. sec.
1988 (2000), a fee-shifting prevailing party statute designed to
encourage private enforcement of civil rights laws). Thus, pro
se litigants, even those who are attorneys, generally are not
entitled to an award because there is no attorney-client
relationship.22 “An ‘attorney’ is essentially an agent for
22
The Court of Appeals for the Federal Circuit has held,
invoking Chambers v. NASCO, Inc., 501 U.S. 32, 55 (1991), that in
proper circumstances a court may invoke its inherent power to
impose attorneys’ fees in favor of a pro se attorney as a
sanction. Pickholtz v. Rainbow Techs., Inc., 284 F.3d 1365,
1377-1378 (Fed. Cir. 2002). “Failure to do so * * * would place
a pro se litigant at the mercy of an opponent who might engage in
otherwise sanctionable conduct, but not be liable for attorney
fees to a pro se party.” Id.
- 35 -
another. Without the ‘other’ there can be no attorney, merely a
pro se litigant who happens to earn a living as a lawyer. At any
given time, an individual can be either a pro se litigant or an
attorney, but not both.” Frisch v. Commissioner, 87 T.C. 846
(citing Duncan v. Poythress, 777 F.2d 1508, 1518 (11th Cir. 1985)
(Roney, J., dissenting)).
Attorneys Binder and Irvine were independent counsel
representing petitioners in the Dixon V remand proceeding.
Therefore the threshold requirement of an attorney-client
relationship for an award of attorneys’ fees under Kay v. Ehrler,
supra, is satisfied.
2. Definition of “Incurred”
We consider dictionary definitions of “incurred” to inform
ourselves of the definition that Congress may have intended.
Webster’s Third New International Dictionary (1993) defines
“incur” as to “become liable or subject to: bring down upon
oneself”, which is reflective of the definition in Black’s Law
Dictionary 782 (8th ed. 2004): “To suffer or bring on oneself (a
liability or expense).” To become subject to is to become
“vulnerable to. Subjected”. Webster’s Tenth Edition Merriam
Collegiate Dictionary (1997).
The sixth edition of Black’s Law Dictionary contained the
following more expansive definition of “incur”:
Incur. To have liabilities cast upon one by act or
operation of law, as distinguished from contract, where
- 36 -
the party acts affirmatively. To become liable or
subject to, to bring down upon oneself, as to incur
debt, danger, displeasure and penalty, and to become
through one’s own action liable or subject to. Com. v.
Benoit, 346 Mass. 294, 191 N.E.2d 749, 751. [Black’s
Law Dictionary 768 (6th ed. 1990); emphasis added.]
The definition in the sixth edition reflects the distinction
between bringing a liability upon oneself by contract (i.e.,
voluntarily agreeing, expressly or impliedly by act, to be
liable--obligated by express or implied-in-fact contract) and
subjecting oneself to a liability by act or operation of law
(i.e., having the liabilities imposed by operation of law without
consent as a result of one’s own action--implied-in-law contract
or quasi-contract).23
The meaning of “incur” is not limited to “to contract for”
or “to agree to be liable for”, as respondent argues. While the
concept of incurred costs, expenses, and attorneys’ fees might
include a contractual obligation, it is a broader concept that
includes other obligations not necessarily arising from agreed-
upon contractual relationships. The word “incur” has a broad
range which can be seen in its synonyms: “sustain, experience,
suffer, gain, earn, collect, meet with, provoke, run up, induce,
23
The absence of promise distinguishes a contract implied in
law from a true contract in which the parties’ mutual promises
are express or implied in fact. United States v. P/B STCO 213,
756 F.2d 364, 370 n.7 (5th Cir. 1985) (citing 1 Palmer, The Law
of Restitution, sec. 1.2, at 8 (1978); Keener, The Law of
Quasi-Contracts 3-25 (1893); and Corbin, “Quasi-Contractual
Obligations”, 21 Yale L.J. 533, 544-545 (1912)).
- 37 -
arouse, expose yourself to, lay yourself open to, bring upon
yourself”. Collins Essential Thesaurus (2d ed. 2006).
Respondent asserts that it is the other party who must incur
the fees and that the proper definition of “incur” is limited to
“to become liable for”. Under that interpretation, fees
“incurred because of such conduct” would mean fees “for which the
other party has become contractually liable because of the
attorney’s unreasonable and vexatious conduct”.
It seems to us, in the context of section 6673, a
sanctioning statute, that when an attorney engages in conduct
that unreasonably and vexatiously multiplies the proceedings, the
attorney subjects himself to and becomes liable for the excess
fees and expenses related to the opposing counsel’s efforts to
resist or rectify the misconduct. If that is so, fees “incurred
because of such action” would mean fees “for which the attorney
has become liable or to which the attorney has subjected himself
through the attorney’s own unreasonable and vexatious conduct”.
See, e.g., Roadway Express, Inc. v. Piper, 447 U.S. at 764
(failure to comply with court order “exposed [attorney]
- 38 -
respondents and their clients to liability under Rule 37(b) for
the resulting costs and attorneys’ fees”).24
The attorney who acts unreasonably and vexatiously incurs
the fees in the sense that his misconduct creates a power in the
opposing parties, their counsel, and the court to impose the
obligation on that attorney (or his employer, the United States)
to reimburse or pay the opposing party or his counsel the amount
of reasonable fees for the counsel’s services needed to respond
appropriately to the misconduct.
As the opposing attorney renders the appropriate services to
respond to the misconduct, the fees are also “incurred” by either
(1) the opposing party who is liable to pay his attorney for the
additional services and expenses or (2) by the opposing attorney
who is providing the services pro bono or on a contingent or
fixed fee basis and incurs the fees and expenses if the time and
resources they devote to one case are not available for other
work. See Wisconsin v. Hotline Indus., Inc., 236 F.3d 363, 365
(7th Cir. 2000) (and cases cited thereat); see also Cent. States,
24
Our interpretation is not foreclosed by Manion v. Am.
Airlines, Inc., 395 F.3d 428, 432-433 (D.C. Cir. 2004)
(construing 28 U.S.C. sec. 1927), or Pickholtz v. Rainbow Techs.,
Inc., 284 F.3d at 1374-1376 (construing Fed. R. Civ. P. 37),
which denied sanction awards for attorneys’ fees to pro se
litigants. In Pickholtz, the Court of Appeals for the Federal
Circuit remanded for a determination whether the sanction could
be awarded under the court’s inherent power; in Manion, the Court
of Appeals for the Federal Circuit held that the award could not
be sustained under the court’s inherent power where the lower
court had relied on 28 U.S.C. sec. 1927 in denying the award.
- 39 -
Se. & Sw. Areas Pension Fund v. Cent. Cartage Co., 76 F.3d 114,
116 (7th Cir. 1996) (“Lawyers who devote their time to one case
are unavailable for others, and in deciding whether it is prudent
to pursue a given case a firm must decide whether the cost--
including opportunities foregone in some other case, or the price
of outside counsel to pursue that other case--is worthwhile.”).
The liability so incurred matures into an obligation when the
court exercises its discretion to make and fix the amount of the
award. The last step in our case is truncated because respondent
and Irvine have agreed on the amounts of the reasonable fees and
expenses.
Section 6673(a)(2) is not plain or clear regarding who must
have incurred the excess costs, expenses, and attorneys’ fees.
Because the statute does not define the term “incurred” and is
silent as to who must incur the fees, we may look to the
statute’s legislative history to determine congressional intent.
See Burlington N. R.R. v. Okla. Tax Commn., 481 U.S. 454, 461
(1987); Fernandez v. Commissioner, 114 T.C. 329-330.
3. History of Section 6673(a)(2)
The legislative history of a statute may be helpful in
resolving its ambiguities. See, e.g., Anderson v. Commissioner,
123 T.C. 219, 233 (2004), affd. 137 Fed. Appx. 373 (1st Cir.
2005). Congress enacted section 6673(a)(2) in the Omnibus Budget
Reconciliation Act of 1989, Pub. L. 101-239, sec. 7731, 103 Stat.
- 40 -
2400. The legislative history provides little guidance except to
explain that section 6673(a)(2) “is comparable to the authority
already provided to district courts under 28 U.S.C. section
1927.”25 H. Rept. 101-247, at 1400 (1989). Section 6673(a)(2)
and 28 U.S.C. sec. 1927 (the sanctioning statutes) “serve the
same purpose, just in different but similar forums, and should
therefore be interpreted similarly.” Johnson v. Commissioner,
289 F.3d 452, 456 (7th Cir. 2002) (citing Harper v. Commissioner,
99 T.C. 545), affg. 116 T.C. 111 (2001); see also Takaba v.
Commissioner, 119 T.C. 285, 296-297 (2002).
Congress enacted the first version of 28 U.S.C. sec. 1927,
in the Act of July 22, 1813, ch. 14 sec. 3, 3 Stat. 21, “‘to
prevent multiplicity of suits or processes, where a single suit
or process might suffice’”. Roadway Express, Inc. v. Piper,
supra at 759 (quoting 26 Annals of Cong. 29 (1813)). At the time
certain U.S. attorneys who were paid on a piecework basis were
filing unnecessary lawsuits to inflate their compensation. Id.
at 759 n.6. The Act of July 22, 1813, ch. 14 sec. 3, authorized
the Federal court to consolidate cases “of like nature, or
25
Tit. 28 U.S.C. sec. 1927 (2006) provides:
Any attorney or other person admitted to conduct
cases in any court of the United States or any
Territory thereof who so multiplies the proceedings in
any case unreasonably and vexatiously may be required
by the court to satisfy personally the excess costs,
expenses, and attorneys’ fees reasonably incurred
because of such conduct.
- 41 -
relative to the same question” pending before it and to require
any person who multiplied the proceedings in any case so as to
increase costs unreasonably and vexatiously to pay the excess of
costs so incurred. Roadway Express, Inc. v. Piper, 447 U.S. at
759 (citing H. Doc. 25, 27th Cong., 3d Sess. 21-22 (1842)).
The sparse legislative histories of the sanctioning statutes
make the provisions difficult to interpret. See id. We will
consider the purpose of the sanctioning statutes by “consulting
any precedents or authorities that inform the analysis”. Dolan
v. USPS, 546 U.S. at 486.
4. Purpose of Sanctioning Statutes
Section 6673(a)(2) and 28 U.S.C. sec. 1927 are “rooted in
the same basic goals--protecting the court and the public from
litigation which impedes the administration of justice”. Byrne
v. Nezhat, 261 F.3d 1075, 1131 n.110 (11th Cir. 2001); see also
F.J. Hanshaw Enters., Inc. v. Emerald River Dev., Inc., 244 F.3d
1128, 1137 n.6 (9th Cir. 2001) (28 U.S.C. sec. 1973 addresses
abuses of the judicial process); Conner v. Travis County, 209
F.3d 794, 800 (5th Cir. 2000) (“The purpose of a court’s
sanctioning power is to enable it to ensure its own proper
functioning.”). The purpose of the sanctioning statutes “‘is to
deter frivolous litigation and abusive practices by attorneys and
to ensure that those who create unnecessary costs also bear
them.’” Riddle & Associates, P.C. v. Kelly, 414 F.3d 832, 835
- 42 -
(7th Cir. 2005) (quoting Kapco Manufacturing Co. v. C & O
Enters., Inc., 886 F.2d 1485, 1491 (7th Cir. 1989)) (discussing
28 U.S.C. sec. 1927).
The sanctioning statutes are primarily punitive measures
whereby a “court can punish contempt of its authority, including
disobedience of its process, by [awarding] costs, expenses, and
attorneys’ fees against attorneys who multiply proceedings
vexatiously”. Chambers v. NASCO, Inc., 501 U.S. at 33, 62; see
also Red Carpet Studios Div. of Source Advantage, Ltd. v. Sater,
465 F.3d 642, 647 (6th Cir. 2006) (28 U.S.C. sec. 1927 sanctions
are penal; the purpose of 28 U.S.C. sec. 1927 is “deterrence and
punishment rather than restitution”); Moriarty v. Svec, 429 F.3d
710, 721 (7th Cir. 2005) (a “district court may impose sanctions
[under 28 U.S.C. sec. 1927] to punish unreasonable and vexatious
litigation”); Lee v. L.B. Sales, Inc., 177 F.3d 714, 718 (8th
Cir. 1999) (28 U.S.C. sec. 1927 is penal); Miera v. Dairyland
Ins. Co., 143 F.3d 1337, 1342 (10th Cir. 1998) (28 U.S.C. sec.
1927 is penal); Peterson v. BMI Refractories, 124 F.3d 1386, 1395
(11th Cir. 1997) (28 U.S.C. sec. 1927 is penal); Stiglich v.
Contra Costa County Bd. of Suprs., 106 F.3d 409 (9th Cir. 1997)
(28 U.S.C. sec. 1927 punishes the multiplication of proceedings);
Republic of the Philippines v. Westinghouse Elec. Corp., 43 F.3d
65, 73 (3d Cir. 1994) (28 U.S.C. sec 1927 punishes attorneys who
vexatiously multiply proceedings); FDIC v. Conner, 20 F.3d 1376,
- 43 -
1384 (5th Cir. 1994) (28 U.S.C. sec. 1927 is penal); Langton v.
Johnston, 928 F.2d 1206, 1226 (1st Cir. 1991) (the court may
impose a sanction under 28 U.S.C. sec. 1927 to punish attorney
misconduct).
Section 6673(a)(2) was designed to discourage unreasonable
and vexatious conduct that multiplies the proceedings. The Tax
Court’s ability to apply section 6673(a)(2) would be unreasonably
limited if the Commissioner could avoid sanctions under section
6673(a)(2) when a taxpayer is represented by pro bono counsel or
is otherwise not contractually obligated to pay the excess
fees.26 If attorneys should culpably delay the proceedings and
we were to deny sanctions against the attorneys, we would risk
compounding the problem and encouraging misconduct the statute is
intended to deter. See Guam Socy. of Obstetricians &
Gynecologists v. Ada, 100 F.3d 691, 695 (9th Cir. 1996).
An attorney who has agreed to represent a taxpayer at a
fixed fee, a reduced fee, or no fee on the basis of the time he
reasonably expected would be necessary to challenge the
taxpayer’s deficiency should not be victimized on account of the
26
For example, sanctions may be imposed under 28 U.S.C. sec.
1927 where fees are contingent on recovery of damages. Even
though the unreasonable and vexatious conduct does not increase
the damages in the underlying cause of action, the court may
require the attorney who multiplies the proceedings unreasonably
and vexatiously to pay the plaintiff’s counsel for the excess
hours spent combating the misconduct. See, e.g., In re Osborne,
375 Bankr. 216 (Bankr. M.D. La. 2007).
- 44 -
culpable misconduct of opposing counsel by being required to
spend additional time without compensation in order to respond to
that misconduct. Nor should an attorney who enters a case on
behalf of the taxpayer for the purpose of responding to such
misconduct be denied a reasonable fee for his services merely
because he has agreed to represent the taxpayer for no fee except
for any fees that may be allowed by the Court. This is
especially true in these case when the Court has already held
pursuant to section 6673(a)(2) that the Commissioner is required
to pay the attorneys’ fees for services provided in the
multiplied proceedings.
Interpreting fees “incurred because of such conduct” under
section 6673(a)(2) as fees “to which the attorney has subjected
himself through the attorney’s own unreasonable and vexatious
conduct” is consistent with the punitive purpose of the
sanctioning statutes. It is the bad-acting attorney’s own
unreasonable and vexatious conduct that exposes him to liability
under the statute. See, e.g., Roadway Express, Inc. v. Piper,
447 U.S. at 765.
5. Statutory Title and Heading
While statutory titles and headings cannot limit the plain
meaning of statutory text, they are tools available for
interpretive purposes when they shed some light on ambiguous
words or phrases. Bhd. of R.R. Trainmen v. B&O R.R. Co., 331
- 45 -
U.S. 519, 528-529 (1947). Section 6673 is titled “Sanctions and
Costs Awarded by Courts”. The heading for paragraph (2) of
section 6673(a) is “Counsel’s liability for excess costs”. The
word “Sanctions” in the title and the words “counsel’s liability”
in the heading support the interpretation that an attorney brings
down upon himself through his unreasonable and vexatious conduct
the liability to pay the excess costs, expenses, and fees.
Section 6673(a)(2) imposes the liability upon the unreasonably
and vexatiously acting attorney as a sanction for his misconduct,
and he incurs the excess costs, expenses, and attorneys’ fees
under section 6673(a)(2).
6. Relevant Caselaw: When Attorneys’ Fees Are
“incurred because of such conduct” Under Section
6673(a)(2)
Dixon IV was the first opinion in which the Court applied
section 6673(a)(2) to misconduct of a Government attorney. We
relied upon cases where the Court had imposed sanctions against
counsel for a taxpayer. E.g., Harper v. Commissioner, 99 T.C.
543-552; Matthews v. Commissioner, T.C. Memo. 1995-577, affd.
without published opinion 106 F.3d 386 (3d Cir. 1996); Murphy v.
Commissioner, T.C. Memo. 1995-76. In Dixon IV, citing Harper v.
Commissioner, supra at 549, 551, we held that “attorneys’ fees
awarded under section 6673(a)(2) are computed by multiplying the
number of excess hours reasonably expended on the litigation by a
reasonable hourly rate” and “that a reasonable hourly rate is the
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hourly fee that attorneys of similar skill in the area would
typically be entitled to for the type of work in question.”
In Harper v. Commissioner, supra at 545, noting the dearth
of judicial authority interpreting and applying section
6673(a)(2), we relied on caselaw under 28 U.S.C. sec. 1927 for
guidance on the level of misconduct justifying sanctions and the
proper measure of attorneys’ fees. Section 6673(a)(2)(B) directs
the Court to sanction the Commissioner for unreasonable and
vexatious conduct by a Government attorney “in the same manner as
such an award by a district court.”
An attorney’s actual hourly rate is highly probative of the
market rate for his services in the community. See Natl.
Association of Concerned Veterans v. Secy. of Def., 675 F.2d
1319, 1324 (D.C. Cir. 1982). Government attorneys, however, are
salaried employees and do not have a billable rate. In Harper v.
Commissioner, supra at 551 (citing United States v. Kirksey, 639
F. Supp. 634, 637 (S.D.N.Y. 1986) (applying Fed. R. Civ. P. 11)),
we held that the reasonable hourly rate properly charged for the
time of a Government attorney is the hourly fee that attorneys of
similar skill in the area would typically be entitled to for the
type of work in question. With regard to applying the market
rate to Government attorneys, the Court of Appeals for the Third
Circuit observed:
At first blush, it seems inappropriate for the services of
an Assistant United States Attorney to be valued at some
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kind of market rate. However, upon reflection, we can
perceive no difference between the situation of an Assistant
U.S. Attorney and that of a public interest lawyer whose
services, the Supreme Court has held, are to be valued at a
market rate, even though he or she, like Assistant U.S.
Attorneys, had no regular billing rate. See Blum v.
Stenson, 465 U.S. 886, 895 * * * (1984). [Napier v. Thirty
or More Unidentified Fed. Agents, 855 F.2d 1080, 1092-1093
(3d Cir. 1988) (applying Fed. R. Civ. P. 11).]
This Court has found hourly rates ranging from $125 to $200
to be reasonable hourly rates to charge for the services of a
Government attorney. See, e.g., Takaba v. Commissioner, 119 T.C.
at 304-305 ($150 and $200); Nis Family Trust v. Commissioner, 115
T.C. 523, 552-553 (2000) ($125 and $200); Harper v. Commissioner,
supra at 551 ($100); Gillespie v. Commissioner, T.C. Memo.
2007-202 ($150, $125, and $200), affd. 292 Fed. Appx. 517 (7th
Cir. 2008); Krol v. Commissioner, T.C. Memo. 2008-242 ($150);
Edwards v. Commissioner, T.C. Memo. 2003-149 ($200), affd. 119
Fed. Appx. 293 (D.C. Cir. 2005). The fact that the Government
does not pay the attorneys at that rate--$260,000 per year
($125/hr. x 2,080 hrs.) to $416,000 per year ($200/hr. x 2,080
hrs.)27–is not dispositive. See Novelty Textile Mills, Inc. v.
Stern, 136 F.R.D. 63, 77 (S.D.N.Y. 1991) (in applying 28 U.S.C.
27
The Federal Government pays its attorneys an annual salary
based on 40 hours per week 52 weeks per year. The Government
also provides paid holidays and benefits. On the basis of the
hourly rates awarded by the Court, if the employee benefits equal
50 percent of the total compensation, salaries for Government
trial attorneys would range from $130,000 to $208,000 per year.
The salary for a Federal employee at Grade 15 step 5 for 2008 is
$130,694, and the maximum pay for members of the Senior Executive
Service for 2008 is $172,200.
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sec. 1927, whether the client has in fact paid his attorneys at
the rate billed is irrelevant to the issue of the amount of the
sanction).
We perceive no difference between the situation of public
interest attorneys or Government attorneys, whose services are
valued at market rates, and the situation of Irvine and Binder,
who agreed to represent petitioners at no cost over the amount
the Court might allow. The fact that the taxpayer does not pay
the attorney at the market rate (or at any rate) is no more
relevant than the fact that the Government and litigants
represented by public service agencies do not pay their attorneys
at market rates. The appropriate sanction to impose on the
Commissioner depends not on what was actually paid, but on what
is a reasonable amount in the circumstances, on the basis of the
time reasonably spent and the prevailing rate in the area for
attorneys of comparable skill, experience, and reputation.
Novelty Textile Mills, Inc. v. Stern, supra at 77.
The phrase “incurred because of such conduct” in section
6673(a)(2) is similar to the phrase “incurred as a result of the
removal” in the attorneys’ fees sanction of 28 U.S.C. sec.
1447(c) (2006), applicable when a case has been improperly
removed from a State court to a Federal District Court. Title 28
U.S.C. sec. 1447(c) provides that the order of the District Court
remanding the case to the State court “may require payment of
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just costs and any actual expenses, including attorney fees,
incurred as a result of the removal.” 28 U.S.C. sec. 1447(c).
The Court of Appeals for the Ninth Circuit has held that the
words “any actual expenses, including attorneys’ fees, incurred
as a result of the removal” does not “remove the discretion of
the district court to award fees in certain cases, such as
contingent fee or pro bono cases, where the client had not
actually ‘incurred’ the obligation to pay her attorneys’ fees”.
Gotro v. R & B Realty Group, 69 F.3d 1485, 1487 (9th Cir. 1995);
see also Huffman v. Saul Holdings Ltd. Pship., 262 F.3d 1128,
1134-1135 (10th Cir. 2001) (“To be compensable, their fees must
be actually ‘incurred,’ that is, they must reflect efforts
expended to resist removal.”); cf. Wisconsin v. Hotline Indus.,
Inc., 236 F.3d 363 (7th Cir. 2000) (actual outlays incurred by
the State as a result of improper removal is the proper measure
of attorneys’ fees allowed for improper removal from State court
to Federal District Court under 28 U.S.C. sec. 1447(c)).
In computing attorneys’ fees sanctions under 28 U.S.C. sec.
1927, the generic sanctioning statute, Federal District Courts
apply the lodestar method without regard to the client’s
obligation to pay the attorney at the billed rate. See, e.g.,
Wisconsin v. Hotline Indus., Inc., supra (in applying 28 U.S.C.
sec. 1927, whether the client has in fact paid his attorneys at
the rate billed is irrelevant to the issue of the amount of the
- 50 -
sanction); see also Hamilton v. Boise Cascade Express, 519 F.3d
1197, 1207 (10th Cir. 2008) (“the choice belongs to the district
court, in the exercise of its discretion, which method [actual
cost or lodestar amount] to apply in a given case”); Mirch v.
Frank, 266 Fed. Appx. 586, 588 (9th Cir. 2008); Bailey v. Papa
John’s USA, Inc., 236 Fed. Appx. 200, 205 (6th Cir. 2007);
LaPrade v. Kidder Peabody & Co., 146 F.3d 899, 906 (D.C. Cir.
1998); United States v. Nesglo, Inc., 744 F.2d 887, 892 (1st Cir.
1984); Thorpe v. Ancell, No. 03-CV-01181 (D. Colo. Aug. 18,
2006); Amedisys, Inc. v. Natl. Century Fin. Enters., Inc., No.
2:04-CV-493 (S.D. Ohio May 2, 2006); Sony Elecs., Inc. v.
Soundview Techs., Inc., 389 F. Supp. 2d 443, 447 n.4 (D. Conn.
2005) (“The lodestar method is applicable in assessing awards for
attorneys fees under 28 U.S.C. § 1927 as it is when awarding fees
under fee-shifting statutes such as 42 U.S.C. § 1988.”); Ricks v.
Xerox Corp., No. 93-2545 (D. Kan. Sept. 29, 1995).
A court has “discretion to tailor the sanction to the
violation.” Napier v. Thirty or More Unidentified Fed. Agents
Employees or Officers, 855 F.2d at 1092. What constitutes
reasonable attorneys’ fees “must be considered in tandem with the
rule’s goals of deterrence, punishment, and compensation.”
Thomas v. Capital Sec. Servs., Inc., 836 F.2d at 879 (discussing
Fed. R. Civ. P. 11). The goals of section 6673(a)(2) are to
deter attorneys from unreasonably and vexatiously multiplying
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proceedings in this Court, to punish attorneys whose unreasonable
and vexatious conduct has multiplied the proceedings, and to
compensate the other parties’ attorneys for the excess time they
were required to expend in responding to the misconduct.
Reasonable attorneys’ fees are “incurred”, and thus compensable,
when they reflect attorney’s efforts on behalf of their clients
to resist the unreasonable and vexatious conduct or to mitigate
or overcome its effects. See Huffman v. Saul Holdings Ltd.
Pship., supra at 1134-1135.28 We conclude that the lodestar
28
In Huffman v. Saul Holdings Ltd. Pship., 262 F.3d 1128
(10th Cir. 2001), pursuant to 28 U.S.C. sec. 1447(c), the
District Court had awarded attorneys’ fees in full, without
conducting an independent inquiry into the reasonableness of the
fees demanded. The Court of Appeals for the Tenth Circuit
reversed, stating:
Our holding is that the statute’s limit on actual fees
to those “incurred as a result of removal” requires the
district court to conduct some sort of reasonableness
inquiry. Our balanced emphasis on the terms “actual”
and “incurred” mirrors the common-sense approaches
taken in both Hotline and Gotro. We have concluded
that the phrase “incurred as a result of removal”
informs and narrows the meaning of “actual expenses,
including attorney fees.” Nothing in either Hotline or
Gotro suggests that courts are compelled to award
unreasonable, if actual, fees to plaintiffs who
successfully obtain an order of remand. To be
compensable, their fees must be actually “incurred,”
that is, they must reflect efforts expended to resist
removal. As we said above, and repeat here,
unreasonably high fees are not “incurred” as a result
of removal; rather, excessive fee requests flow from,
and accumulate by means of, improper billing practices,
and will not be recoverable under § 1447(c). [Id. at
1135.]
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method is the proper starting point for computing reasonable
attorneys’ fees under section 6673(a)(2).
7. Government Incurs the Excess Costs, Expenses, and
Attorneys’ Fees Attributable to Government
Attorneys’ Misconduct
The sanctioning statutes look to unreasonable and vexatious
multiplications of proceedings, and they impose “an obligation on
attorneys throughout the entire litigation to avoid dilatory
tactics.” United States v. Intl. Bhd. of Teamsters, 948 F.2d
1338, 1345 (2d Cir. 1991) (emphasis added). A Government
attorney who unreasonably and vexatiously multiplies Tax Court
proceedings brings down upon the United States, subjects the
United States to, and makes the United States vulnerable to
liability for the costs, expenses, and fees attributable to the
services of the taxpayer’s attorney’s professional services that
are required as an appropriate response to the misconduct. The
United States incurs the attorneys’ fees by operation of law
under section 6673(a)(2), just as a taxpayer incurs a penalty for
his own misconduct under section 6673(a)(1).
Payment for the professional services of the taxpayer’s
attorney required to respond to the misconduct is “the cost of
doing business”--the cost of unreasonably and vexatiously doing
business. In Dixon IV we observed that “The resulting inquiry
has not had so much to do with the merits of petitioners’ cases
as it has been a cost of Government operations incurred for the
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purpose of determining the extent of the misconduct of the
Government’s lawyers.” In the Dixon V remand proceedings the
attorneys’ fees and expenses stemmed from the attorneys’ time
spent investigating the facts relevant to the Thompson settlement
and presenting the matter to the Court at the multiple sessions
of the evidentiary hearing. The fees and expenses were caused by
the Government attorneys’ misconduct during the test-case
proceedings and are costs of Government operations. Imposing
those fees and expense on respondent helps to protect the Court
and the public from multiplied litigation that impedes the
administration of justice.
Under section 6673(a)(2) the Government incurs the
attorneys’ fees and expenses for the efforts expended by the
taxpayer’s attorneys because of the Government attorney’s
unreasonable and vexatious misconduct. See Huffman v. Saul
Holdings Ltd. Pship., 262 F.3d at 1135 (discussing fees awarded
under 28 U.S.C. sec. 1447(c)). This interpretation is consistent
with the purpose of section 6673(a)(2)--“‘to deter frivolous
litigation and abusive practices by attorneys and to ensure that
those who create unnecessary costs also bear them.’” Riddle &
Associates, P.C. v. Kelly, 414 F.3d at 835 (quoting Kapco
Manufacturing Co. v. C & O Enters., Inc. 886 F.2d at 1491)
(discussing 28 U.S.C. sec. 1927). Any other approach would call
- 54 -
for a fictional formal agreement between the taxpayer and the
attorney.
8. Section 7430 and the Equal Access to Justice Act
Respondent argues that for purposes of section 6673(a)(2)
the Court should give the same meaning to the word “incurred” as
the Court has given to it for purposes of section 7430. Section
7430 authorizes the Court to award the prevailing party
reasonable litigation costs incurred in connection with the
proceedings, including “reasonable fees paid or incurred for the
services of attorneys”.29 Sec. 7430(c)(1)(B)(iii). The Tax
Court has held that litigation costs are not incurred for
purposes of section 7430 unless the prevailing taxpayer has a
legal obligation to pay them. Swanson v. Commissioner, 106 T.C.
76 (1996); see also Grigoraci v. Commissioner, 122 T.C. 277-
278; Frisch v. Commissioner, 87 T.C. 846.
Section 7430 closely resembles 28 U.S.C. sec.
2412(d)(1)(A),30 enacted under the Equal Access to Justice Act
29
If an attorney is representing the prevailing party for no
fee or a nominal fee, sec. 7430(c)(3)(B), titled “Pro bono
services”, now permits the Court to award fees in excess of the
attorneys’ fees paid or incurred, provided the award is paid to
the attorney or the attorney’s employer. At pt. II.F. infra, we
rebut any negative implications that might conceivably arise from
the lack of a similar express provision for pro bono services in
sec. 6673(a)(2)(B).
30
Tit. 28 U.S.C. sec. 2412(d)(1)(A) (2006) provides:
Except as otherwise specifically provided by statute, a
(continued...)
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(EAJA), title II of the Act of October 21, 1980, Pub. L. 96-481,
secs. 201-208, 94 Stat. 2325 (effective Octber 1, 1981). EAJA
requires other Federal courts to award attorneys’ fees to
prevailing parties in actions brought in those courts against the
United States unless the position of the Government was
substantially justified or special circumstances make an award
unjust.
Congress enacted section 7430 “‘to deter abusive actions or
overreaching by the [IRS] and to enable taxpayers to vindicate
their rights regardless of their economic circumstances.’”
Cooper v. United States, 60 F.3d 1529, 1530 (11th Cir. 1995)
(quoting Weiss v. Commissioner, 88 T.C. 1036, 1041 (1987));
Huffman v. Commissioner, 978 F.2d 1139, 1146 (9th Cir. 1992),
affg. in part and revg. in part T.C. Memo. 1991-144; Zinniel v.
Commissioner, 883 F.2d 1350, 1360 (7th Cir. 1989) (Will, J.,
dissenting), affg. 89 T.C. 357 (1987); In re Testimony of Arthur
Andersen & Co., 832 F.2d 1057, 1060 (8th Cir. 1987); Weiss v.
Commissioner, supra at 1041 (citing H. Rept. 97-404, at 11
30
(...continued)
court shall award to a prevailing party other than the
United States fees and other expenses, in addition to
any costs awarded pursuant to subsection (a), incurred
by that party in any civil action (other than cases
sounding in tort), including proceedings for judicial
review of agency action, brought by or against the
United States in any court having jurisdiction of that
action, unless the court finds that the position of the
United States was substantially justified or that
special circumstances make an award unjust.
- 56 -
(1981)). Attorneys’ fees awarded under section 7430 are intended
to be compensatory rather than punitive. See Estate of Cervin v.
Commissioner, 200 F.3d 351, 357-358 (5th Cir. 2000), affg. T.C.
Memo. 1998-176.
By contrast, the primary purpose of the sanctioning statutes
is “deterrence and punishment rather than restitution.” Red
Carpet Studios Div. of Source Advantage, Ltd. v. Sater, 465 F.3d
at 647. But see Thomas v. Capital Sec. Serv., Inc., 836 F.2d at
879 (“What constitutes ‘reasonable expenses’ and a ‘reasonable
attorney’s fee’ within the context of Rule 11 [Fed. R. Civ. P.]
must be considered in tandem with the rule’s goals of deterrence,
punishment, and compensation.”). The sanctioning statutes are
penal and serve a primary purpose different from that of the
prevailing party statutes, which are remedial. The imposition of
sanctions under section 6673(a)(2) and 28 U.S.C. sec. 1927
“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. at 53 (discussing sanctions under the
bad-faith exception to the American rule).
Section 7430 is a fee-shifting provision under which
attorneys’ fees are awarded to the prevailing party other than
the United States and requires that the fees be paid to the
prevailing party. Section 7430 and the EAJA require the fees to
have been incurred by the prevailing party, which prevents a
- 57 -
windfall to the prevailing party while furthering the purpose of
the statute.
By contrast, the sanctioning statutes neither award the fees
to any party nor require the fees be paid to any party, thereby
permitting the court to direct payment directly to the attorney.
The sanctioning statutes do not distinguish between winners and
losers or between the Government and the opposing party or the
taxpayer and the Commissioner. See Roadway Express, Inc. v.
Piper, 447 U.S. at 762 (discussing 28 U.S.C. sec. 1927). Neither
section 6673(a)(2) nor 28 U.S.C. sec. 1927 requires that the fees
have been incurred by the other party. The sanctioning statutes
merely require that the excess fees be incurred because of the
misconduct of the opponent’s attorney. In this regard, the
sanctioning statutes are more broadly drawn than section 7430.
Although courts construe a statutory term in accordance with
its ordinary or natural meaning in the absence of a statutory
definition, a single word “may or may not extend to the outer
limits of its definitional possibilities” and must not be read in
isolation. Dolan v. USPS, 546 U.S. at 486. The Supreme Court
has “repeatedly warned against the dangers of an approach to
statutory construction which confines itself to the bare words of
a statute, for ‘literalness may strangle meaning.’” Lynch v.
Overholser, 369 U.S. 705, 710 (1962) (citations omitted); see
also Ed. A. Wilson, Inc. v. GSA, 126 F.3d 1406, 1409 (Fed. Cir.
- 58 -
1997) (“legislative history of the Act warns against an ‘overly
technical construction * * * resulting in the unwarranted denial
of fees’” (quoting Brewer v. Am. Battle Monuments Commn., 814
F.2d 1564, 1566-1567 (Fed. Cir. 1987))). For purposes of section
6673(a)(2) the more appropriate meaning of the word “incur”
encompasses the broader definition “to make oneself subject to”
or “vulnerable to” and “to have the liability cast upon one by
operation of law”.
Reading the statute and considering the purpose and context
of section 6673(a)(2) as a whole, we believe the word “incurred”
extends nearer “to the outer limits of its definitional
possibilities”, Dolan v. USPS, supra at 486, than does its
restricted meaning in section 7430. The purpose of section
6673(a)(2) is punitive, and in context its reach is broader than
that of section 7430. Therefore, we do not restrict the meaning
of the word “incurred” in section 6673(a)(2) as the Court did in
Swanson v. Commissioner, 106 T.C. 101-102, in holding for
purposes of section 7430 that attorneys’ fees are incurred only
if the represented taxpayer has a legal obligation to pay them.
9. Law of the Case Doctrine
Respondent contends that the doctrine of law of the case
prevents us from requiring respondent to pay the excess costs,
expenses, and attorneys’ fees requested on behalf of Porter &
Hedges if petitioners are not liable to pay them. We disagree.
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“As most commonly defined, the doctrine posits that when a
court decides upon a rule of law, that decision should continue
to govern the same issues in subsequent stages in the same case.”
Arizona v. California, 460 U.S. 605, 618 (1983). However, the
doctrine “‘merely expresses the practice of courts generally to
refuse to reopen what has been decided’”. Christianson v. Colt
Indus. Operating Corp., 486 U.S. 800, 817 (1988) (quoting
Messenger v. Anderson, 225 U.S. 436, 444 (1912)).
The law of the case doctrine applies only to issues that
have been previously decided either explicitly or by necessary
implication by the same court or a higher court in the identical
case and does not preclude consideration of issues not previously
presented or decided. Thomas v. Bible, 983 F.2d 152, 154 (9th
Cir. 1993); Conway v. Chem. Leaman Tank Lines, Inc., 644 F.2d
1059, 1062 (5th Cir. 1981). It does not apply to meritorious
issues never previously submitted to or passed upon by the court.
Laitram Corp. v. NEC Corp., 115 F.3d 947, 952 (Fed. Cir. 1997);
Conway v. Chem. Leaman Tank Lines, Inc., supra at 1062.
The doctrine is subject to three exceptions: If the
decision is clearly erroneous and enforcement would cause
manifest injustice; if intervening controlling authority makes
reconsideration appropriate; or if substantially different
evidence has been introduced. Minidoka Irrigation Dist. v. Dept.
of Interior, 406 F.3d 567, 573 (9th Cir. 2005).
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In Dixon IV, pursuant to section 6673(a)(2) we required
respondent to pay attorneys’ fees petitioners had paid for their
attorneys’ services from June 10, 1992 (the date the Court filed
respondent’s motions to vacate the decisions in the Thompson and
Cravens cases), through March 30, 1999 (the date the Court issued
its opinion in Dixon III following the DuFresne remand
proceedings) (the Dixon III and IV multiplied proceedings).
Respondent contends that because we limited the awards in Dixon
IV to amounts petitioners paid or incurred in the Dixon III and
IV multiplied proceedings, the law of the case doctrine requires
us to limit the awards in these cases to the expenses and
attorneys’ fees petitioners paid or incurred in the Dixon V
remand proceedings. We disagree.
In Dixon IV the issue was whether petitioners’ requested
attorneys’ fees should be awarded under section 7430 or section
6673(a)(2). We held that section 7430 did not apply because
petitioners were not prevailing parties on the underlying merits
of the deficiency determinations. In Dixon IV we held that the
conduct of the Government attorneys in the test-case proceedings
was unreasonable and vexatious; that misconduct had multiplied
and protracted the proceedings in these cases unreasonably and
vexatiously. That holding is the law of the case.
We required respondent to pay the excess costs, expenses,
and attorneys’ fees incurred because of his attorneys’
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misconduct--costs, expenses, and attorneys’ fees incurred in the
Dixon III and IV multiplied proceedings. Citing Harper v.
Commissioner, 99 T.C. 549, 551, we stated in Dixon IV that
“attorneys’ fees awarded under section 6673(a)(2) are computed by
multiplying the number of excess hours reasonably expended on the
litigation by a reasonable hourly rate” (the lodestar method) and
“that a reasonable hourly rate is the hourly fee that attorneys
of similar skill in the area would typically be entitled to for
the type of work in question.” In Dixon IV, however, although we
had issued orders directing the attorneys to comply with Rule
231(d), we were presented with “less than an ideal record”.
Izen, Jones, and Sticht failed to provide the Court with
sufficient information to determine the number of excess hours
that they had reasonably expended during the Dixon III and IV
multiplied proceedings, and Jones and Sticht had neither
addressed the reasonableness of their hourly rates nor furnished
detailed billing statements. Consequently we could not apply the
lodestar method in computing the section 6673(a)(2) sanction.
We went on to recognize that petitioners and the other
Kersting project taxpayers participating in the Dixon III and IV
multiplied proceedings had incurred substantial attorneys’ fees
and costs that warranted imposition of the attorneys’ fees
sanction. We believed that petitioners and the other Kersting
project taxpayers should not be overly penalized for their
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counsel’s poor documentation efforts and required respondent to
pay an approximation of the amount of the excess attorneys’ fees
and costs. We imposed substantial percentage reductions in our
fee awards that were attributable to the attorney’s various
failures to substantiate their claims in their entirety. In so
doing, we further reduced the awards to Izen’s clients, making it
clear that under no circumstances would we require respondent to
pay attorneys’ fees and costs for services to Kersting that
appeared to have been rendered by various attorneys.
Respondent argues that our statement in Dixon IV that “our
decision to award attorneys’ fees and costs in Dixon IV is
intended to compensate petitioners for the additional fees and
costs that they incurred as a direct consequence of that [the
Government attorneys’] misconduct” is the law of the case. To
the contrary, that statement was made in response to respondent’s
contention that an award of attorneys’ fees and costs was not
justified because petitioners had already been compensated by the
sanctions imposed upon respondent in Dixon III. We rejected that
argument because the sanctions that we imposed in Dixon III
compensated petitioners for different costs resulting from the
misconduct of the Government attorneys--the time-sensitive
additions to tax and increased interest items of liability that
were indirectly compounded by the delay in the resolution of the
cases.
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The meaning of the word “incurred” was not at issue in Dixon
IV. In Dixon IV we did not examine or discuss whether
petitioners or the other Kersting project taxpayers had or were
required to have a contractual obligation to pay the requested
fees. Moreover, we issued our opinion in Dixon IV after having
held in Dixon III that the misconduct of the Government attorneys
did not result in a structural defect but rather resulted in
harmless error and before the Court of Appeals for the Ninth
Circuit held in Dixon V that the misconduct of the Government
attorneys in Dixon II was a fraud on the Court.
The intervening holding of Dixon V would make
reconsideration appropriate. Moreover, denying Porter & Hedges
attorneys’ fees for the services provided by Irvine and Binder in
the Dixon V remand proceedings would cause manifest injustice.
See Castro v. United States, 540 U.S. 375, 384 (2003); Arizona v.
California, 460 U.S. at 619 n.8. In addition, substantially
different evidence, an accurate description of the hours expended
by Binder and Irvine and reasonable rates of compensation, has
been introduced, and respondent has agreed that it is accurate
and reasonable. The doctrine of law of the case does not limit
our power to require respondent to pay the expenses and
attorneys’ fees requested on behalf of Porter & Hedges, which
resulted from the misconduct of the Government attorneys.
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In Dixon IV we held, pursuant to section 6673(a)(2)(B), that
respondent was required to pay the excess costs, expenses, and
attorneys’ fees incurred in the DuFresne remand proceedings
because the proceedings resulted from the Government attorneys’
misconduct during the test case proceedings. Respondent’s
liability for excess attorneys’ fees and expenses related to any
further proceedings resulting from the Government attorneys’
misconduct, including the Dixon V remand proceedings, is implicit
in the Dixon IV holding. Early in the proceedings respondent
agreed that reasonable attorneys’ fees related to the Dixon V
remand proceedings “should be awarded to the petitioners”
pursuant to section 6673(a)(2). Respondent has incurred those
fees as a result of the Government attorneys’ misconduct in the
test-case proceedings and the Court’s holding in Dixon IV.
F. Fees “Incurred” in Pro Bono Representation and
Contingent Fee Arrangements
For purposes of completeness, we will now put to rest any
concern that a negative implication arises from the lack of an
express provision in section 6673(a)(2)(B) for payment of fees
for pro bono services, similar to the provision in section
7430(c)(3)(B). We therefore address caselaw under prevailing
party statutes generally and the genesis of the specific
provision added to section 7430 in 1998.
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1. Caselaw Under Prevailing Party Statutes
Section 7430 and 28 U.S.C. sec. 2412 are two of more than
100 prevailing party statutes that oblige the losing party to
reimburse the winner for his attorneys’ fees.31 Pennsylvania v.
Delaware Valley Citizens’ Council for Clean Air, 478 U.S. 546,
562 (1986). “[A]lthough these [prevailing party] provisions
cover a wide variety of contexts and causes of action, the
benchmark for the awards under nearly all of these statutes is
that the attorney’s fee must be ‘reasonable.’” Id.
[T]he aim of such statutes was to enable private
parties to obtain legal help in seeking redress for
injuries resulting from the actual or threatened
violation of specific federal laws. Hence, if
plaintiffs * * * find it possible to engage a lawyer
based on the statutory assurance that he will be paid a
“reasonable fee,” the purpose behind the fee-shifting
statute has been satisfied. [Id. at 565.]
Courts have awarded attorneys’ fees under prevailing party
statutes, including the more narrowly drawn statutes requiring
that fees be “incurred”, when the prevailing party is represented
by a legal services organization, labor union, or counsel
appearing pro bono.32 See New York Gaslight Club, Inc. v. Carey,
31
See Marek v. Chesny, 473 U.S. 1, 44-51 (1985) (Brennan,
J., dissenting), for an extensive list of separate statutes
providing for the award of attorneys’ fees.
32
The legislative history of the EAJA, H. Rept. 1418,
10-11, 15 (1980), supports the conclusion that pro bono awards
were contemplated from its inception:
(continued...)
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447 U.S. 54, 70 n.9 (1980) (pro bono awards available under 42
U.S.C. sec. 2000e-5(k)); Ed. A. Wilson, Inc. v. GSA, 126 F.3d at
1409 (EAJA); Yankton Schl. Dist. v. Schramm, 93 F.3d 1369, 1377
(8th Cir. 1996) (pro bono award under the Handicapped Children’s
Protection Act, 20 U.S.C. sec. 1415(e)(4)(B)); AARP v. EEOC, 873
F.2d 402, 406 (D.C. Cir. 1989) (“[U]nder the EAJA, [the
prevailing party] should be able to recover ‘reasonable fees and
expenses’ of attorneys for their independently retained pro bono
counsel despite the fact that, if we denied fees, they [the
prevailing party] would not pay any fees to counsel.”); Eggers v.
Bullitt County School Dist., 854 F.2d 892, 899 (6th Cir. 1988);
Watford v. Heckler, 765 F.2d 1562, 1567 n.6 (11th Cir. 1985)
(“[I]t is well-settled that, in light of the act’s legislative
history and for reasons of public policy, plaintiffs who are
represented without charge are not generally precluded from an
award of attorneys’ fees under the EAJA.”); DeBold v. Stimson,
735 F.2d 1037, 1043 (7th Cir. 1984); Cornella v. Schweiker, 728
32
(...continued)
In general, consistent with the above limitations
[statutory caps], the computation of attorney fees
should be based on prevailing market rates without
reference to the fee arrangements between the attorney
and client. The fact that attorneys may be providing
services at salaries or hourly rates below the standard
commercial rates which attorneys might normally receive
for services rendered is not relevant to the
computation of compensation under the Act. In short,
the award of fees is to be determined according to
general professional standards. [Emphasis added.]
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F.2d 978, 986 (8th Cir. 1984) (legislative history of EAJA
support conclusion that pro bono awards were contemplated);
McLean v. Arkansas Bd. of Educ., 723 F.2d 45, 47 (8th Cir. 1983);
Falcone v. IRS, 714 F.2d 646, 647 n.3 (6th Cir. 1983); Clarkson
v. IRS, 678 F.2d 1368, 1371 n.3 (11th Cir. 1982); Cunningham v.
FBI, 664 F.2d 383, 385 n.1 (3d Cir. 1981); Crooker v. U.S. Dept.
of Treasury, 634 F.2d 48, 49 n.1 (2d Cir. 1980) (pro bono awards
available under Freedom of Information Act); Oldham v. Ehrlich,
617 F.2d 163, 168 (8th Cir. 1980) (pro bono awards available
under 42 U.S.C. sec. 1988); Rodriguez v. Taylor, 569 F.2d 1231,
1244-1246 (3d Cir. 1977) (pro bono awards available under Age
Discrimination in Employment Act).
In Gaskins v. Commissioner, T.C. Memo. 1996-268, the
taxpayers sought attorneys’ fees for counsel who had agreed to
provide representation pro bono. The Court noted that whether
attorneys’ fees could be awarded under section 7430 for pro bono
representation was an issue of first impression in the Tax Court
and expressed the view that pro se taxpayers could not recover
attorneys’ fees because they had not incurred them. However, the
Court had no occasion to decide the case on that ground because
the taxpayers and their counsel had unreasonably protracted the
proceeding and the Commissioner’s position was substantially
justified at all times throughout the proceeding.
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In Thompson v. Commissioner, T.C. Memo. 1996-468, the Court
noted, in the light of the legislative history of the EAJA and
for reasons of public policy, that representation by a legal
services organization or by an attorney pro bono does not
preclude an award of fees and costs under the EAJA. Id. n.9
(citing Phillips v. GSA, 924 F.2d 1577, 1582-1583 (Fed. Cir.
1991). The Court went on to observe that awards are routinely
made in those circumstances even though the claiming party did
not pay or incur fees. Id. (citing SEC v. Comserv Corp., 908
F.2d 1407, 1415 (8th Cir. 1990), AARP v. EEOC, supra at 406, and
Watford v. Heckler, supra at 1567 n.6).
Courts have held that allowing fee awards for pro bono
representation furthers the purpose of all attorneys’ fees
statutes by ensuring that legal services groups and other pro
bono counsel have a strong incentive to represent indigent
claimants. See, e.g., Cornella v. Schweiker, supra at 986
(quoting Ceglia v. Schweiker, 566 F. Supp. 118, 123 (E.D.N.Y.
1983)). Not allowing attorneys’ fees for pro bono representation
in litigation against the Government “would more than likely
discourage involvement by these organizations in such cases,
effectively reducing access to the judiciary for indigent
individuals”. Id. at 986-987. The Court of Appeals for the
District of Columbia Circuit has observed that if a party must
make himself liable to pay for the services of an attorney in an
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action that awards attorneys’ fees, awards could be made only
when the party could afford to pay for legal representation.
AFGE, AFL-CIO, Local 3882 v. FLRA, 944 F.2d 922, 933 (D.C. Cir
1991) (addressing awards to employees under the Back Pay Act).
Some courts have finessed the question of whether there is
an exception for pro bono representation by looking at the
arrangement between the attorney and his client as a contingent-
fee agreement. Some have held that fees are incurred by a
litigant represented by counsel working pro bono when, although
the litigant is not personally liable for the fees, he is subject
to an obligation to turn over any fees awarded. Phillips v. GSA,
supra at 1582-1583 & n.4; accord Raney v. Fed. Bureau of Prisons,
222 F.3d 927, 933 n.4 (Fed. Cir. 2000) (en banc); Preseault v.
United States, 52 Fed. Cl. 667, 674 (2002) (a plaintiff who has
obtained representation on the condition that he seek fees for
his attorneys has incurred an obligation that can be reimbursed
by a fee-shifting statute). “When an agreement exists to support
the conditional obligation, a plaintiff is not viewed as simply
having been given legal aid; instead, this condition is the cost
to the plaintiff of obtaining those services.” Preseault v.
United States, supra at 673. At least one court has held that an
implied agreement that the fee will be paid over to “can be said
to exist as a matter of law.” Wasniewski v. Grzelak-Johannsen,
549 F. Supp. 2d 965, 971 (N.D. Ohio 2008). Other courts have
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held that when a pro bono attorney “forgives” a fee to a client
unable to afford legal expenses, the client is eligible for an
award on the basis of that arrangement with the attorney. See,
e.g., AARP v. EEOC, 873 F.2d at 406; Watford v. Heckler, 765 F.2d
at 1567 n.6.
Courts have not summarily denied an award for fees that are
subject to a contingency. Rather, the courts consider whether
the contingency has been satisfied in discerning whether, and in
what amount, attorneys’ fees have been incurred.
In United States v. 122.00 Acres of Land, 856 F.2d 56, 58
(8th Cir. 1988), the Court of Appeals for the Eighth Circuit
denied an award of attorneys’ fees under 42 U.S.C. sec. 4654(a)
to a condemnee who had entered into a contingent fee contract
with his attorney under which the condemnee would bear no expense
for attorneys’ fees if there were no recovery. Because the
Government abandoned its condemnation action, the condemnee did
not receive payment for his land. Consequently, under his
agreement with his attorney, the attorney was not entitled to a
fee. The Court of Appeals held that the condemnee party
“actually incurred” only the amount owed under a contingency fee
agreement. The failure to fulfill the contingency was fatal, and
the condemnee was not entitled to an award of attorneys’ fees
under 42 U.S.C. sec. 4654(a).
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In Marre v. United States, 38 F.3d 823, 828-829 (5th Cir.
1994), the District Court had awarded a taxpayer who succeeded in
his suit for wrongful disclosure of tax return information
attorneys’ fees in an amount greater than those required under
his contingent fee agreement with his attorneys. The Court of
Appeals for the Fifth Circuit reversed, holding that the taxpayer
could not recover attorneys’ fees in an amount greater than those
required under his contingent fee agreement with his attorneys,
because the applicable attorneys’ fees statute, section 7430,
limits attorneys’ fees to those actually incurred. By contrast,
in Blanchard v. Bergeron, 489 U.S. 87, 93-94 (1989), the Supreme
Court held that 42 U.S.C. sec. 1988, which allows courts to award
prevailing parties reasonable attorneys’ fees as part of the
costs without any requirement that those fees be incurred,
“contemplates reasonable compensation * * * for the time and
effort expended by the attorney”, and that “a contingent-fee
contract does not impose an automatic ceiling on an award of
attorneys’ fees.”
Some cases discuss contingent obligations to pay fees where
the fees are paid by a third party. A litigant does not incur
payments made by third parties if the litigant has no obligation
to repay the third party. See, e.g., United States v. Paisley,
957 F.2d 1161, 1164 (4th Cir. 1992) (litigant who was entitled to
full indemnification of attorneys’ fees by her employer did not
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“incur” any expenses under EAJA); Kruse v. Commissioner, T.C.
Memo. 1999-157 (taxpayer wife was not entitled to an award for
fees and costs paid by taxpayer husband’s employee benefit plan);
Republic Plaza Props. Pship. v. Commissioner, T.C. Memo. 1997-239
(no award for fees paid by parent company of corporate tax
matters partners); Thompson v. Commissioner, T.C. Memo. 1996-468
(taxpayer wife cannot be awarded litigation costs that were paid
by taxpayer husband, who did not meet the net worth requirement).
Some of these decisions reflect taxpayers’ attempts to avoid net
worth limitations under prevailing party statutes. E.g.,
Thompson v. Commissioner, supra.
Courts have specifically held that a contingent fee
agreement that requires any awarded fees to be paid to the
attorney satisfies the requirement that fees or expenses be
“incurred” within the meaning of fee-shifting statutes. See,
e.g., Phillips v. GSA, 924 F.2d 1577 (Fed. Cir. 1991); Young v.
Commissioner, T.C. Memo. 2006-189.
In Phillips v. GSA, supra, the Court of Appeals for the
Federal Circuit held that a fee agreement that requires any
awarded fees to be paid to the attorney meant such fees were
incurred, even if the client would not be liable for fees if
there should be no such award. The Court of Appeals construed
the fee arrangement between the litigant and her attorney to mean
that if an award of attorneys’ fees was obtained on her behalf,
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she was obligated to turn it over to her attorney. The court
held that the litigant incurs the attorneys’ fees that may be
awarded her. On the other hand, if no fee is awarded, the
litigant would not have any obligation to pay any further fees to
her attorney from her own resources. Id. at 1582-1583. Other
courts have followed the reasoning in Phillips in allowing fees
subject to a contingency. See, e.g., Preseault v. United States,
52 Fed. Cl. at 673; Seay v. United States, 369 Bankr. 423,
429-431 (Bankr. E.D. Ark. 2007).
In Young v. Commissioner, supra, we awarded appellate fees
and expenses under section 7430 to Kersting project taxpayers
represented in the Dixon V appeal by Izen and Jones. We found
that Izen’s flat-fee appellate contracts encompassed an implied
agreement that any fee award would be paid over to Izen to the
extent the client’s share of the award exceeded the amount the
client had paid pursuant to the contract. In accord with
Phillips v. GSA, supra, we held that the contracts supplied
additional payment obligations that supported an award of the
potentially recoverable amount in its entirety.
We believe that petitioners’ arrangement supports the same
result in this case. Petitioners and their counsel believed that
the Court would require respondent to pay petitioners’ reasonable
attorneys’ fees and expenses incurred in the remand proceedings,
and respondent’s counsel had agreed that respondent would be
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obligated to pay petitioners’ reasonable attorneys’ fees and
expenses incurred in the remand proceedings. Binder and Irvine
agreed, therefore, that Porter & Hedges would not require
petitioners to pay any fees or expenses beyond those awarded by
the Court. Pursuant to that oral agreement, Irvine and Binder
entered their appearances in these cases.
Under written engagement letters Irvine and Binder agreed to
represent petitioners in the Dixon V remand proceedings without
compensation from them but explained that Porter & Hedges would
“request payment of fees and expenses from the government, as
provided by law or by determination of a court, for our
representation”. Petitioners agreed to provide necessary facts,
affidavits, testimony, and other assistance to support the
requests.
The engagement letters are consistent with the parties’ and
the Court’s interpretation of section 6673(a)(2)--that it does
not require petitioners to be contractually obligated to pay the
fees. The oral agreements reflect and clarify that petitioners
agreed to pay and are liable to pay Porter & Hedges any fees
awarded to them by the Court. We construe petitioners’ fee
arrangement with Porter & Hedges to encompass the parties’ oral
agreement that petitioners would not be liable to pay Porter &
Hedges any fees in excess of those awarded to them by the Court.
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A court’s decision to grant or deny attorneys’ fees is
reviewed for abuse of discretion. See, e.g., Liti v.
Commissioner, 289 F.3d 1103, 1104 (9th Cir. 2002) (citing Huffman
v. Commissioner, 978 F.2d at 1148). A court’s discretion to
award attorneys’ fees “is not without limit: the prevailing party
‘should ordinarily recover an attorney’s fee unless special
circumstances would render such an award unjust.’” Blanchard v.
Bergeron, 489 U.S. at 89 (quoting Newman v. Piggie Park Enters.,
Inc., 390 U.S. 400, 402 (1968), and Hensley v. Eckerhart, 461
U.S. 424, 429 (1983)). Once a litigant has satisfied the
statutory requirements entitling the litigant to attorneys’ fees,
it would be an abuse of discretion for a court to deny an award
of the fees. When an attorney agrees to accept the fees awarded
by the court as full compensation for representing a litigant,
the condition is satisfied and the litigant incurs the fees when
the statutory requirements are met.
The Dixon V remand proceedings were caused by Government
attorneys’ misconduct that was so unreasonable and vexatious that
it sank to the level of fraud on the Court. In Dixon IV we
decided that requiring respondent to pay attorneys’ fees under
section 6673(a)(2) was an appropriate sanction for that
misconduct. Petitioners’ obligation to pay any fees awarded
under section 6673(a)(2) was not contingent on a subsequent
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event. The requirements for awarding fees under section
6673(a)(2) have been satisfied.
2. Section 7430(c)(3)(B)
Section 7430(c)(3)(B), enacted by the Internal Revenue
Service Restructuring and Reform Act of 1998, Pub. L. 105-206,
sec. 3101(c), 112 Stat. 728, specifically provides for awards of
attorneys’ fees for pro bono services as follows:
(B) Pro bono services. The court may award
reasonable attorneys’ fees under subsection (a) in
excess of the attorneys’ fees paid or incurred if such
fees are less than the reasonable attorneys’ fees
because an individual is representing the prevailing
party for no fee or for a fee which (taking into
account all the facts and circumstances) is no more
than a nominal fee. This subparagraph shall apply only
if such award is paid to such individual or such
individual’s employer.
The legislative history of section 7430(c)(3)(B) explains the
reason for the change as follows:33
The Committee believes that the pro bono publicum
representation of taxpayers should be encouraged and
the value of the legal services rendered in these
situations should be recognized. Where the IRS takes
positions that are not substantially justified, it
should not be relieved of its obligation to bear
reasonable administrative and litigation costs because
representation was provided the taxpayer on a pro bono
33
The statement of the then Executive Director of the
Community Tax Law Project, Richmond, Va., Nina Olson (now the
National Taxpayer Advocate), before the House Ways and Means
Committee Sept. 26, 1997, suggests that the provision was enacted
in response to Gaskins v. Commissioner, T.C. Memo. 1996-268, as
an anticipatory measure to ensure that the Tax Court would not
deny attorneys’ fees under sec. 7430 for pro bono representation.
See Hearings on H.R. 2292 Before the House Ways and Means Comm.,
105th Cong., 1st Sess. 145-154 (1997).
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basis. [S. Rept. 105-174, at 47-48 (1998), 1998-3 C.B.
537, 583-584.]
There was no need to amend section 6673(a)(2) because this
Court had consistently held in cases where the Court had imposed
sanctions against counsel for a taxpayer that attorneys’ fees
awarded under section 6673(a)(2) are to be computed by
multiplying the number of excess hours reasonably expended on the
litigation by a reasonable hourly rate and that a reasonable
hourly rate is the hourly fee that attorneys of similar skill in
the area would typically be entitled to for the type of work in
question. Harper v. Commissioner, 99 T.C. 533 (1992); Matthews
v. Commissioner, T.C. Memo. 1995-577; Murphy v. Commissioner,
T.C. Memo. 1995-76. The fees were never computed on the amount
the Commissioner paid for the attorneys’ services; they were
computed under the lodestar method without any inquiry into the
Commissioner’s obligation or liability to pay the Government
attorneys those amounts.
When imposing the section 6673(a)(2) sanction on the
Commissioner, the Court may compute the lodestar amount without
regard to the taxpayer’s obligation to pay the attorney. Where
Government attorneys unreasonably and vexatiously multiply the
proceedings in this Court, the Commissioner should not be
relieved of his liability to pay the excess costs, expenses, and
attorneys’ fees because representation was provided the taxpayer
pro bono.
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G. Respondent Must Pay Attorneys’ Fees and Excess Expenses
Requested on Behalf of Petitioners’ Attorneys
The Court may require respondent to pay the excess costs,
expenses, and attorneys’ fees incurred because of the
unreasonable and vexatious conduct of respondent’s counsel. When
attorneys’ fees, expenses, and costs relate to the time for
attorney services caused by the unreasonable and vexatious
conduct of the Commissioner’s attorneys, the Court should
ordinarily require the Commissioner to pay those excess fees,
expenses, and costs, “unless special circumstances would render
such an award unjust.” Blanchard v. Bergeron, supra at 89. It
would be an abuse of discretion not to do so. Once the
unreasonable and vexatious conduct occurs, the excess fees,
expenses, and costs are incurred as the services are performed
and the expenses and costs accrue.
The requested attorneys’ fees and expenses were incurred for
purposes of section 6673(a)(2) because (1) respondent incurred
them either once respondent’s attorneys commenced their
unreasonable and vexatious conduct or once we held in Dixon IV
that their conduct was unreasonable and vexatious, (2)
petitioners were contingently liable for the fees, and (3) the
contingency has been satisfied. The Court may require respondent
to pay the excess attorneys’ fees and expenses requested on
behalf of Porter & Hedges.
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III. Inherent Power To Impose Sanctions
During the Dixon V remand proceedings we stated that section
6673(a)(2) was the applicable statutory provision regarding legal
fees for attorneys’ services performed in the remand proceedings.
That statement reflected our understanding that section 7430 did
not apply--the reasonableness of respondent’s position in the
remand proceedings, the statutory cap on the attorneys’ hourly
rates, and the Dixon V taxpayers’ net worths would not be at
issue. Our reference to the appropriate statutory provision did
not foreclose recourse to our inherent power.
This Court has inherent power to regulate and supervise its
proceedings to ensure the integrity of its process. Williams v.
Commissioner, 119 T.C. 276, 282 (2002) (citing Freytag v.
Commissioner, 501 U.S. 868, 891 (1991), and Chambers v. NASCO,
Inc., 501 U.S. 32, 43-46 (1991)). A primary aspect of the
Court’s discretion to invoke its inherent power is the ability to
fashion an appropriate sanction for conduct that abuses the
judicial process. Chambers v. NASCO, Inc., supra at 44-45. “In
this regard, if a court finds ‘that fraud has been practiced upon
it, or that the very temple of justice has been defiled,’ it may
assess attorneys’ fees against the responsible party”. Id. at 46
(quoting Universal Oil Prods. Co. v. Root Refining Co., 328 U.S.
575, 580 (1946)).
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The Tax Court may, in its informed discretion, rely on
inherent power rather than section 6673(a)(2). See Chambers v.
NASCO, Inc., supra at 50; Fink v. Gomez, 239 F.3d 989, 994 (9th
Cir. 2001). We may rely on our inherent power to impose a
sanction where other sources of the power to sanction are not “up
to the task” to do so. Chambers v. NASCO, Inc., supra at 50; see
also Toon v. Wackenhut Corr. Corp., 250 F.3d 950, 952 (5th Cir.
2001) (“When a party’s deplorable conduct is not effectively
sanctionable pursuant to an existing rule or statute, it is
appropriate for a district court to rely on its inherent powers
to impose sanctions.” (citation and quotation marks omitted)).
The Court can invoke its inherent power to sanction conduct
that defiles the Court even if existing statutes or procedural
rules sanction the same conduct. Chambers v. NASCO, Inc., supra
at 49.
[The inherent] power is both broader and narrower than
other means of imposing sanctions. First, whereas each
of the other mechanisms reaches only certain
individuals or conduct, the inherent power extends to a
full range of litigation abuses. At the very least,
the inherent power must continue to exist to fill in
the interstices. * * * [Id. at 46.]
Respondent asserts: “Throughout the course of the
protracted proceedings following the Dixon III opinion, the Court
has consistently and expressly eschewed ‘inherent power’ as a
basis for awarding attorneys’ fees. There is no reason for the
court to now decide to take a different approach.” We disagree.
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In Dixon IV, decided before the Court of Appeals held in
Dixon V that the Government attorneys had committed a fraud on
this Court, we considered whether attorneys’ fees should be
awarded to petitioners under section 7430 or section 6673(a)(2).
We held that section 7430 did not apply because petitioners were
not prevailing parties in the underlying merits of the deficiency
determinations. We held that the Government attorneys’ conduct
had multiplied the proceedings unreasonably and vexatiously and
imposed the sanction under section 6673(a)(2). We believed that
sanction to be sufficient and denied motions for additional
sanctions filed by Izen, Jones, and Sticht. However, we did
invoke our inherent power in Dixon IV and required respondent to
pay interest on the award from the date of the decisions at the
applicable rates for underpayments under sections 6601(a) and
6621(a)(2).
During the test-case proceedings the Government attorneys
committed a fraud on the Court that undermined the integrity of
the Court’s proceedings and the confidence of all future
litigants and violated the rights of petitioners, other test-case
petitioners, and non-test-case taxpayers in more than 1,300 cases
bound by the outcome of the test cases. Dixon V, 316 F.3d at
1047. We properly invoke our inherent power to impose sanctions
on respondent for the fraud committed on the Court by the
Government attorneys.
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IV. Conclusion
We hold, pursuant to section 6673(a)(2) and the inherent
power of the Court, that we may and will require respondent to
pay to Porter & Hedges $1,101,575.34 for reasonable attorneys’
fees and expenses attributable to services provided to
petitioners by Binder and Irvine during the Dixon V remand
proceedings. Further, because respondent incurred the fees and
expenses pursuant to section 6673(a)(2) and Dixon IV, we will
invoke our inherent power to require respondent to pay additional
amounts equal to interest to Porter & Hedges at the applicable
rates for underpayments under sections 6601(a) and 6621(a)(2) on
$1,037,542.58 from June 29, 2007, the date Irvine filed the
motion for attorneys’ fees, and on $64,745.26 from November 19,
2007, the date respondent and Irvine filed the supplemental
stipulation of facts regarding fees and expenses incurred in
preparing the subject motion. In so doing, we give effect to the
spirit of the direction of the Court of Appeals in Dixon V to
fashion judgments that would put taxpayers in the same position
as provided in the Thompson settlement; in augmenting the award
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of fees and expenses with interest equivalents, we do no more
than mimic DeCastro’s fee arrangement with the Thompsons.34
An appropriate order will
be entered.
34
See supra note 11.