It’s sweet to beat the IRS. It’s even sweeter to make the government pay your costs. The taxpayers in Gary M. Dennis and Sharon D. Dennis v. Commissioner, T.C. Memo. 2020-98 (July 1, 2020) (Judge Panuthos) learned the sad lesson that victorious taxpayers won’t receive an award of costs and fees under §7430 when their only cost was their time and labor. Details below the fold.
Law: The Tight-Fisted Congress
Sometimes taxpayers best the IRS. Sometimes they win at the administrative stage and sometimes they have to go to court. In both situations, however, §7430 allows taxpayers to recover reasonable costs, including attorneys fees. Each stage must be analyzed separately.
Congress is pretty stingy about cost recovery awards under §7430. It has thrown up some pretty tall hedges around them. To get an award under §7430 the taxpayer must generally: (1) be the prevailing party; (2) not have unreasonably protracted the proceedings; (3) have acted timely to (4) ask the IRS first; and (5) not have too much net worth. Each hurdle is the subject of detailed regulation and could be the subject of a separate lesson.
Today we just need to focus on one regulatory hedge: the one that defines what constitutes an administrative proceedings for §7430 cost recovery purposes. Not every interaction with the IRS counts as an administrative proceeding.
The regulations start by defining administrative proceedings broadly, as “any procedure or other action before the Internal Revenue Service.” Treas. Reg. 301.7430-3(a). But then the regulation almost immediately backs off by throwing up four exceptions. Some of the exceptions make intuitive sense. For example, when a taxpayer requests a letter ruling, that is not the kind of an administrative hearing that one can really “prevail” at, so it does not count. Treas. Reg. 301.7430-3(a)(1). The biggest exception, however, is that “proceedings in connection with collection actions” do not count either. Treas. Reg. 301.7430-3(a)(4). The regulation then goes on to define “collection actions” as “any action taken by the Internal Revenue Service under Chapter 64 of Subtitle F to collect a tax.” Well that’s pretty broad! And, wouldn’t you know it, the CDP provisions are in Chapter 64.
Yep. Taxpayers who prevail in a CDP hearing (and who otherwise meet all the other §7430 requirements) cannot recover their costs, at least so long as the CDP hearing is only about whether the IRS can proceed to collect the assessed tax. Treas. Reg. 301.7430-3(b). Worthan v. Commissioner, T.C. Memo 2012-263. But to the extent the taxpayer validly contests the underlying assessment---and wins on that---then the CDP hearing will count as an administrative proceeding for which the taxpayer can recover costs. Id.
Law: The Value of Labor
Your labor is worth nothing for tax purposes unless someone pays you for it. That is why we have the concept of imputed income. Sure, your labor has economic value to you. Mowing your own yard gets you Ben Franklin bucks: $35 saved is $35 earned. But the Tax Code ignores that value unless and until the value is recognized in a market transaction. That’s actually a good rule for ants, although grasshoppers won’t care. On the other side of the coin, so to speak, your services don’t count as deductions, either. Treas. Reg. 1.170A-1(g). So while hammering for Habitat for Humanity may be coin in God’s realm, Caesar does not care: you can’t deduct your labor as a charitable contribution.
That idea about labor carries over into §7430. When taxpayers represent themselves---even when they are themselves attorneys---the courts hold they are not entitled to be compensated under §7430 merely for their self-directed labor. See United States v. McPherson, 840 F.2d 244, 245 (4th Cir. 1988).
Facts of The Case
Mr. and Ms. Dennis were in an installment agreement (IA) to pay their 2013 and 2014 liabilities when they filed their 2015 return (apparently late) and failed to pay the interest on the balance due. The 2015 liabilities were rolled into the IA. But with the 2015 interest still showing as unpaid, the IRS systems put their IA into default and so triggered collection of the 2013 and 2014 liabilities. Apparently those were pretty big because the opinion notes that the case went to field collection. The assigned Revenue Officer sent out both CDP notices, the one explaining that the IRS had filed a Notice of Federal Tax Lien (NFTL) and the one explaining that the IRS was going to levy on all property or rights to property.
Mr. and Ms. Dennis timely asked for a CDP hearing, during which they convinced the Settlement Officer (SO) that the IA had been put into default by mistake. They also said that the NFTL reflected an erroneous liability because it failed to account for a $7,500 payment they had made.
The SO found that the IA was not in default. You would think the SO would then refuse to sustain both the NFTL and the proposed levy. Nope. Although the SO refused to sustain the proposed levy, he did sustain the NFTL. That’s a head-scratcher.
Mr. and Ms. Dennis timely petitioned the Tax Court. The Chief Counsel attorney scratched his head and asked that the matter be remanded to Appeals so Appeals could take a second look at why it sustained the NFTL. On that second look, Appeals scratched its head, changed its mind and did not sustain the NFTL.
Total victory! The taxpayers won partly in Appeals and party after going to Tax Court. And you know it was a ton of work. And Mr. Dennis did all that work himself. The taxpayers did not pay any lawyers.
On a roll, Mr. Dennis then asked the government to pay for both the administrative costs of the CDP hearing and the litigation costs. He knew about the CDP rule so he argued that contesting the amount of liability reflected on the NFTL was contesting the liability. He also knew about the pro-se rule but argued that, gosh, he was actually representing Ms. Dennis, too. So he was more like a pro-bono attorney than a pro-se. And pro-bono attorneys could recover fees. Treas. Reg. 310.7430-4(d). So he asked for $5,757 as litigation costs, which he said represented just half the value of his time, to account for representing Ms. Dennis. Clever.
Lesson: You Get What You Pay For
Judge Panuthos denied both requests.
As to administrative costs, he easily rejected Mr. Dennis’ claim that they were contesting their liability, pointing out “their challenge is to the amount of tax liability that remained unpaid at the time the NFTL was filed, not the total tax liability as imposed by the Code.” Op. at 11.
As to litigation costs, Judge Panuthos rejected the pro-bono-not-pro-se argument for recovery of litigation costs. While it is not clear from the opinion, it does not appear that Mr. Dennis was, in fact, an attorney. So he could not possibly be foregoing fees he would otherwise have charged Ms. Dennis. We may assume that Ms. Dennis may have expressed her thanks to her hard-working spouse. But she did not pay him money. And that, Judge Panuthos said, it what it takes: “the requirement for actual expenditures still applies where a pro-se taxpayer represents a spouse in addition to himself or herself.” Op. at 13. Since Mr. Dennis could show no actual monetary outlays for attorneys, there were no fees for the government to pay. To put the lesson a different way: you do not get what you have not paid for.
I would think the taxpayers here could recover other costs from the government, such as the Tax Court filing fee, or copying expenses, or travel expenses. Those would be actual outlays. Perhaps Mr. Dennis was unable to substantiate some of those. But the Tax Court has before taken judicial notice of the Tax Court filing fee. See Frisch v. Commissioner, 87 T.C. 838, 842. Perhaps that happened here, but is just not mentioned in the opinion.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law. He invites readers to return to TaxProfBlog each Monday for a new Lesson From The Tax Court.