Ninth Circuit awards litigation costs paid by third party.

• Author: Beavers, James

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The Ninth Circuit reversed the Tax Court and held that a taxpayer could "incur" attorneys' fees initially paid by a third party for purposes of an award of litigation costs under Sec. 7430.

Background

Bradley Morrison and Nariman Teymourian formed an intellectual property management partnership, later reorganized as Caspian, a California corporation, of which Morrison owned 40% and Teymourian 60%. Morrison served as an officer and director at Caspian and was also employed in a technical capacity. In July 2002, Morrison sold his interest in Caspian to Teymourian and resigned from his officer and director positions and his employment with Caspian.

In November 2001, before Morrison resigned, the IRS began an audit of Caspian's 1999 and 2000 tax returns; it later expanded its examination to include a separate audit of Morrison's personal tax returns for the same time period. Eventually, the IRS issued notices of deficiency to both Caspian and Morrison. The notices raised several issues, the most significant of which was whether loans made by Caspian to its shareholders, including Morrison, in 1999 and 2000 were taxable as constructive dividends.

After trying but failing to resolve the dispute administratively, Morrison petitioned the Tax Court for a redetermination of the deficiencies. The Tax Court consolidated Morrison's case for trial with Caspian's related petition for redetermination, and both parties retained the same law firm--Taggart & Hawkins--as counsel for the litigation. The firm billed all its hours to an account titled "Caspian," and Caspian paid all the associated fees. Both Caspian and Morrison prevailed on their petitions, and each filed a motion for an award of the litigation costs, including attorneys' fees, under Sec. 7430.

The Tax Court found Caspian eligible to recover fees under Sec. 7430 and awarded Caspian fees equal to the portion of time Taggart & Hawkins spent on its case. The court denied Morrison's motion, however, reasoning that "[b]ecause Caspian, a separate entity, paid all litigation costs in issue, petitioner did not ... actually pay or incur any litigation costs." Morrison appealed the Tax Court's decision to the Ninth Circuit.

Sec. 7430

Under Sec. 7430, the prevailing party in a civil tax case brought by or against the government can be awarded reasonable litigation costs, including reasonable fees paid or incurred for the services of attorneys in connection with the court proceeding...