Transaction tax

Tax Court in Brief | Mazzei v. Commissioner | Law of the case, winning party and “substantially justified” | law of the free man

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Tax litigation: The week of May 2, 2022 to May 6, 2022

Mazzei v. Comm’r, TC memorandum 2022-43 | May 2, 2022 | Thornton, J. | Dekt. No. 16702-09.


Short summary: Celia Mazzei, the taxpayer, appealed a decision of the Tax Court to the United States Court of Appeals for the Ninth Circuit. The Tax Court originally found Mazzei liable for excise taxes on excess contributions to his Roth IRA. The Ninth Circuit reversed and entered judgment for Mazzei. Next, and pursuant to 26 USC § 7430, Mazzei filed a motion in the Ninth Circuit for court costs associated with the underlying Tax Court litigation. The IRS argued that its position in the underlying tax proceeding was substantially justified, and therefore Mazzei’s fee claim should be denied or, failing that, returned to the Tax Court. The Ninth Circuit summarily denied Mazzei’s motion. Mazzei then filed a motion with the Tax Court for leave to file a motion for litigation costs out of time and concurrently filed a motion for litigation costs. Both parties made essentially the same arguments as presented to the Ninth Circuit.

Key issues:

  • Does the Tax Court have jurisdiction to consider and decide Mazzei’s motion for legal costs?
  • Assuming the Tax Court has jurisdiction to consider and decide the motion, is Mazzei entitled to the relief sought in the form of legal costs?

Main holdings:

  • The “law of the case” doctrine requires that, on remand, a lower court follow the appellate court’s resolution of a legal question in all subsequent proceedings in the same case. This applies to explicit decisions as well as matters decided by implication. Because the Ninth Circuit denied the very relief it sought from the lower level of the Tax Court, the Tax Court was deprived of the power to reconsider Mazzei’s claim.
  • Since the Tax Court found that the IRS was substantially justified in its position with respect to the underlying Roth IRA transactions, Mazzei was not and could not be a winning party for purposes of receiving an award of court costs under 26 USC § 7430 and related Treasury. Regulations, Treasures. Reg. § 301.7430-5.

Main points of law:

  • Law of the case. The “law of the case” doctrine requires that, on remand, a lower court follow the appellate court’s resolution of a legal question on all subsequent proceedings in the same case. United States ex rel. Lujan v Hughes Aircraft Co., 243 F.3d 1181 1186-87 (9th Cir. 2001). This doctrine applies to express decisions of the appellate court as well as to matters decided by necessary implication. United States vs. Côté, 51 F.3d 178, 181 (9th Cir. 1995). If an appellate court dismisses a taxpayer’s claim for costs incurred at the Tax Court level, or does not refer the matter to the Tax Court for determination, then under the doctrine of the law of the case, the Tax Court will likely not have the power to consider and rule on a taxpayer’s subsequent request to reconsider the issue of costs. See Pollei v. Com’r.94 TC 595, 596 (1990).
  • dominant party. 7430(a) provides that a prevailing party in a legal proceeding may be awarded reasonable court costs. “Prevailing party” means any party proper within the meaning of § 7430(a) who (1) has substantially prevailed as to the amount in dispute, or the most significant issue or issues presented; and (2) meets the requirements of 28 USC § 2412(d)(1)(B) and 28 USC § 2412(d)(2)(B). To see 26 USC § 7430(c)(4)(A)(i)-(ii); Treasures. Reg. § 301.7430-5(a)(1)-(4) (requirements for “winning party” status).
  • Basically justified. If the IRS determines that its position is substantially justified, the court does not consider the taxpayer to be a winning party. 26 USC § 7430(c)(4)(B)(i). If a litigation position has a reasonable basis in fact and law and is justified to a degree that satisfies a reasonable person, then it is substantially justified. Fisheries Inc. v. United States, 484 F.3d 1103, 1108 (9th Cir. 2007). Section 7430(c)(4)(B)(iii) provides that courts must consider whether the United States lost in appellate courts on substantially similar issues to determine whether the IRS’ position was substantially justified. To see Treasures. Reg. § 301.7430-5(d)(2).
  • Reasonable basis actually. Generally, if the transaction lacks economic substance in fact, the IRS may have a reasonable basis in fact. Mazzei vs. Comm’r2022 WL 1303511, at *5.
  • Reasonable basis in law. A first impression case and justifiable interpretations of federal tax laws and case law can provide the IRS with a reasonable legal basis so that the position on this unique case is substantially justified. TKB Int’l, Inc. v. United States, 995 F.2d 1460, 1468 (9th Cir. 1993). The mere fact that the government’s position is later found to be contrary to the plain meaning of the statute does not necessarily mean that it was not substantially justified. Mazzei vs. Comm’r2022 WL 1303511, at *5.

Knowledge: This case highlights the Tax Court’s position on the “law of the case” doctrine and its role in making decisions under section 7430(a). Essentially, a two-step procedure determines the applicability of the doctrine. First, the taxpayer asks the Court of Appeal to award legal costs or that the court refer the matter to the Tax Court for determination. Second, the appellate court expressly or implicitly rules on the taxpayer’s expense claim. In these circumstances, the doctrine precludes the decision-making power of the Tax Court on a subsequent claim for the same relief. Thus, litigants must weigh the likelihood of recovery in the Tax Court against the possibility that an appellate court will not respond to (or favor) the application for an award of legal costs. . This case also provides insight into the Court’s analysis of a “winning party” and “substantially justified” under § 7430 and Treasures. Reg. § 301.7430-5. The law requires the IRS to establish a position that is substantially justified, that is, that has a reasonable basis in law and in fact. In mazzei, the Court found a reasonable basis in fact because the underlying Roth IRA transaction lacked factual economic substance. Additionally, the Court noted that a reasonable basis in law may exist when the IRS raises a new issue. In addition, the presence or absence of case law on appeal plays a role in this analysis. However, the Court does not consider an adverse opinion to be determinative of the “reasonableness” of the IRS in its lawsuit.

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