Sanctions — IRS Ordered to Pay $1 Million in Attorneys’ Fees for Fraud on the Tax Court to Counsel Who Agreed to Appear Pro Bono or for Only Those Amounts Awarded by the Court — Interest Awarded

When it is not just the Government but the Internal Revenue Service that is sanctioned for more than one million dollars, one can’t help but wonder if life gets better than this. From Dixon v. Comm’r of Internal Revenue, 2009 U.S. Tax Ct. LEXIS 5 (U.S. Tax Court Mar. 23, 2009):

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), rev’d and remanded 316 F.3d 1041 (9th Cir. 2003) (Dixon V). ***

Early in the Dixon V remand proceedings, respondent's counsel agreed that, pursuant to section 6673(a)(2) [a sanctions analogue to 28 U.S.C. § 1927 that is contained in the Internal Revenue Code], 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 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 bono or, as in these cases, for no fee except for any fees that may be allowed by the Court?

Answer: Yes. Including interest.

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 obligated to pay petitioners' reasonable attorneys' fees and expenses incurred in the remand proceedings. Binder and Irvine [the active partners from Porter & Hedges] 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 be not be liable to pay Porter & Hedges any fees in excess of those awarded to them by the Court.

***

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 of fees and expenses with interest equivalents, we do no more than mimic DeCastro's fee arrangement with the Thompsons.

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