It’s sweet to beat the tax man. It’s even sweeter when you can make the government pay your litigation costs and attorneys fees under §7430. But the bitter lesson for today is that you must be careful to ask the right court. Law is hierarchical. You can appeal a lower court’s adverse decision to a higher court. But you cannot appeal a higher court’s adverse decision to a lower court!
In Celia Mazzei v. Commissioner, T.C. Memo. 2022-43 (May 2, 2022) (Judge Thornton), the taxpayer asked the wrong court for attorneys fees and because of that had nowhere to go when the court denied fees. Ms. Mazzei had fought the IRS for over 10 years, losing in Tax Court in a reviewed opinion in 2018. Undaunted, she appealed to the Ninth Circuit. She won! Yay! Her attorneys then filed a “protective” motion with the Ninth Circuit for both her appellate litigation costs (about $70,000) and her trial court litigation costs (some $330,000). The government argued that its litigating position was substantially justified.
The Ninth Circuit’s response was disappointingly succinct: “denied.” Undaunted, Ms. Mazzei’s attorneys then asked the Tax Court for the $330,000 in trial court litigation costs. The government opposed the motion for the same reason it gave the Ninth Circuit. Judge Thornton, however, rejected the §7430 request for a different reason. He ruled that the Ninth Circuit’s single word left the Tax Court powerless to act on the request. Appeals go up the hierarchy, not down. The taxpayer had asked the wrong court. Details below the fold.
On the one hand, §7430(a) permits a taxpayer who is a prevailing party in their litigation with the IRS to recover their reasonable litigation costs, including attorneys fees. On the other hand, §7430(c)(4)(B) says a taxpayer will not be a prevailing party if the IRS litigating position was substantially justified. Taxpayers can slap that second hand away, however, by making a qualified offer. §7430(c)(4)(D), (e). For more details on these requirements, see Lesson From The Tax Court: The Finality Rule For §7430 Qualified Offers, TaxProf Blog (Mar. 14, 2022).
This is a case with a long, long history. Here’s the summary you need for today’s lesson.
Ms. Mazzei, along with her parents, owned and ran a successful company that developed and sold agriculture equipment. In 1998 Ms. Mazzei and her parents created self-directed Roth IRAs. They then attempted to avoid the contribution limits by having the Roth IRAs “invest” in a Bermuda-based Foreign Service Corporation (FSC) with a nominal buy-in. Over the next four years, they then poured money from the real business into the FSC, the FSC paid a preferred tax rate on its “income” and, transferred the balance to the Roth IRA, producing magical ROI. I think I got that right. Readers are welcome to correct me.
Yes, trouble followed. The IRS listed this structure as a tax avoidance transaction in IRS Notice 2004-8, audited Ms. Mazzei (and her parents), and proposed to assess excise tax on excessive IRA contributions, as well as penalties. The taxpayers trooped to Tax Court where Judge Thornton wrote a wonderfully nuanced opinion on why the IRS was right on the tax issue but not on the penalty issue. Mazzei v. Commissioner, 150 T.C. 138 (2018) (Mazzei I). It was a reviewed opinion, 12-4, with Judge Holmes writing a blunt dissent.
For more on the history in Mazzei I and on all those nuances, you can read the 104 pages of opinions, or read my summary in Lesson From The Tax Court: The Common Law of Tax, TaxProf Blog (Mar. 12, 2018).
Judge Thornton’s nuances were lost on the Ninth Circuit, however, who decided it preferred form-over-substance because of “the unusual statutory provisions at issue here.” Mazzei v. Commissioner, 998 F.3d 1041 (9th Cir. 2021). On June 2, 2021, the Ninth Circuit issued its opinion reversing the Tax Court, and on July 22, 2021, it issued its mandate, remanding the case to the Tax Court for entry of judgment in favor of Ms. Mazzei and ordering the government to pay costs of $340.10.
And that’s where today’s lesson starts. After the mandate, on July 31, 2021, Ms. Mazzei’s attorneys asked the Ninth Circuit for costs and attorneys fees under §7430. Their motion did not just ask for the costs and fees related to the appellate portion of the litigation. Nope. The motion also “lodges herewith proof of…fees and costs pre-dating this appeal, and protectively also moves this Court for the award of those fees and costs.” Op. at 2.
The attorneys really, really, really wanted the Ninth Circuit to rule on their request for trial-level litigation costs! They pointed to Ninth Circuit Rule 39-1.8 which provides a party “who is or may be eligible for attorneys fees on appeal to this Court may…file a motion to transfer consideration of attorneys fees on appeal to the district court or administrative agency from which the appeal was taken.” From that language they argued that “the converse is true, and that a request for attorney fees from trial proceedings, successfully appealed to the Circuit, may be heard and awarded by this Court.” Op. at 2.
The government opposed the motion for fees and costs, as you would expect. The government asked first for outright denial, on the grounds that the government’s position was substantially justified and thus Ms. Mazzei was not a prevailing party. As a first alternative, the government asked the Ninth Circuit to remand the case to the Tax Court to make the fee award decision. The government promised not to contest Tax Court jurisdiction in such a case. As a second alternative, the government asked for a remand to the Tax Court for a determination of amount of fees if the Ninth Circuit decided that Ms. Mazzei was indeed a prevailing party. For example, the government wanted to argue that Ms. Mazzei was not the responsible person for paying the fees since she shared the costs of the trial-level litigation with her parents.
The Ninth Circuit resolved the motion by an Order dated August 17, 2021. The Order stated only that the motion “is DENIED.” Judge Thornton emphasizes: “The Ninth Circuit issued no other commentary with respect to petitioner’s appellate motion.” Op. at 4.
Meanwhile, on August 13, 2021, the Tax Court had received and acted on the Ninth Circuit’s July 29, 2021 mandate: it entered decision for Ms. Mazzei. In September, Ms. Mazzei’s attorneys filed an untimely motion for a §7430 award. The Tax Court accepted the untimely motion and set aside its August 13th order, thus re-opening the case.
The government opposed the §7430 award request for basically the same reasons it gave in the 9th Circuit, only now it was the Office of Chief Counsel litigating the matter and not the DOJ Tax Division. That brings an interesting flavor to the case, as we shall see.
Lesson: Ask the Right Court
Both the taxpayer’s attorneys and the government assumed the Tax Court had the power (i.e. “jurisdiction”) to hear and decide the §7430 award request. Judge Thornton, however, had a different view, grounded in something called the “law of the case” doctrine. This is a common law rule that, broadly speaking, says once an issue is decided in an ongoing case, that decision stays fixed for the duration of the case. See generally, Comment, The Law of the Case Doctrine, 28 Wash. L. Rev. 137 (1953). Specifically, as Judge Thornton noted, the doctrine means that when an appellate court decides an issue and remands the case to a lower court for further proceedings, the lower court is powerless to revisit both “explicit decisions as well as those issues decided by necessary implication.” Op. at 5, citing to United States v. Cote, 51 F.3d 178, 181 (9th Cir. 1995)(quotations omitted).
Ms. Mazzei’s attorneys totally ignored the Ninth Circuit’s order denying the requested fees and costs, failing to even mention it in their motion. Op. at 5, note 6. Perhaps they did not think the law of the case doctrine applied and treated the denial as related only to their request for appellate costs, despite their explicit request for, and argument for, an award of trial costs. Or perhaps they did not even know about the law of the doctrine. Sloppy lawyering either way.
The Chief Counsel attorney did not ignore the Ninth Circuit’s Order, but explained that they felt bound by the Tax Division’s promise not to contest the Tax Court’s jurisdiction—made in its opposition to the Circuit Court motion.
Judge Thornton pointed out that the parties could not avoid or concede this jurisdictional issue because “the court has a continuing duty to confirm its jurisdiction and authority.” Op. at 5. For that proposition, Judge Thornton relied on Pollei v. Commissioner, 94 T.C. 595 (1990) where the Court faced a similar situation. There, the taxpayer had won a reversal in the Tenth Circuit on the merits. The taxpayer then had asked the Tenth Circuit to (1) award it fees and costs under §7430 for the appeal and (2) remand to the Tax Court to determine whether to award §7430 fees and costs for the trial litigation. In response, the Tenth Circuit issued an order denying attorneys fees and awarding only a part of the taxpayer’s costs. The Tenth Circuit did not remand to the Tax Court. But neither did it explicitly refuse to remand. It just….did….nothing.
The Pollei Court said that the Tenth Circuit’s silence was enough to preclude the Tax Court from considering the taxpayer’s §7430 award request. The Tax Court had no power, no jurisdiction, because the taxpayers had explicitly asked for an action and Tenth Circuit’s resulting silence necessarily denied that request. Judge Gerber wrote: “If petitioners had not requested the Court of Appeals to remand or for relief on the costs and fees issue at the trial level, it would then appear that the matter would be within our authority for consideration and decision.” But the taxpayers had asked. And they asked the wrong Court.
Judge Thornton uses similar reasoning here. Actually, Ms. Mazzei’s attorneys went even further than the attorneys in Pollei. They did not just ask for a remand. They explicitly asserted to the Ninth Circuit their entitlement to their litigation costs and sought to convince the Ninth Circuit to rule in their favor. Here, it was the government that asked for a remand and only then as an alternative to its substantially justified defense. And here, the Ninth Circuit was not simply silent. It literally said “DENIED.”
The mistake made here was to ask the Ninth Circuit for a §7430 award for the litigation costs. The taxpayers’ attorneys should have waited and asked the Tax Court when the case was returned there. Then, if they did not like that result, they could appeal back to the 9th Circuit. But it does not work the other way ‘round.
Judge Thornton says as much. He notes that the Ninth Circuit’s mandate “assessed costs of $340.10 against respondent but otherwise was silent as to costs and fees. It would appear, then, that because the mandate otherwise left open the issue of costs and fees, it did not deprive this Court of jurisdiction on remand to consider the collateral issue regarding costs and fees at the trial level.” Op. at 7. But once the taxpayer then asked the Ninth Circuit to rule on an application for a §7430 award, they were stuck. That would be good news if the Ninth Circuit had rule in their favor, but it was bad news as it turned out.
Law is hierarchical. You need to ask the right court for your fee award, the court you can appeal from if you get an adverse decision.
Coda: Judge Thornton also explained, for “the possible convenience of the Ninth Circuit” (!), why the government’s position was substantially justified such as to preclude Ms. Mazzei from being a prevailing party. And, really, what is there to say? The government won 12-4 in Tax Court! No nuance there. Even the Ninth Circuit should get it. Heck, even if the Tax Court had come out the other way, it would be difficult to say that a position agreed to by four Tax Court judges is not substantially justified.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law. He invites readers to return each week to TaxProf Blog for another Lesson From The Tax Court.