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Ninth Circuit Vacates Tax Court Decision That Denied Litigation Costs to Taxpayer

(Parker Tax Publishing November 2022)

The Ninth Circuit vacated a Tax Court decision which denied litigation costs to a taxpayer in a case where the IRS had issued notices of deficiencies to the taxpayer, the taxpayer filed a petition with the Tax Court, and the IRS subsequently conceded the case in full. The Ninth Circuit remanded the case back to the Tax Court to consider the merits of the taxpayer's claim that, in light of the information the IRS had received in the administrative proceedings, the IRS's litigation position was unreasonable. Jacobs v. Comm'r, 2022 PTC 334 (9th Cir. 2022).


In 2014, after spending over 20 years as a government attorney and a law school professor, Daniel Jacobs (Jacobs) decided to start a new business as an "attorney-scholar-author." This led him to claim, as business expenses, a number of expenditures for food and lodging, travel, entertainment, and other expenses. The IRS first informed Jacobs that his tax return was being audited in October 2016. Over the next two years, Jacobs submitted numerous documents substantiating that he had incurred the claimed expenses. When Jacobs declined to extend the statute of limitations, the IRS filed notices of deficiencies in January 2019. Jacobs filed a petition in the Tax Court, the IRS filed an answer, and an in-person conference was held in June 2020. In July 2021, the IRS conceded the case in full.

Jacobs then filed a motion for litigation costs pursuant to Code Sec. 7430(a)(2), which permits the recovery of reasonable litigation costs incurred in connection with certain court proceedings. Jacobs argued that the information provided to the IRS during the administrative proceedings made it unreasonable for the IRS to file an answer denying allegations in his petition. The Tax Court denied the motion after finding the IRS's litigation position to be substantially justified. Jacobs appealed to the Ninth Circuit.

Code Sec. 7430(c)(4)(B) provides that a prevailing party against the United States in a tax case may be awarded reasonable litigation costs unless the United States establishes that its position was substantially justified. In Pacific Fisheries, Inc. v. U.S., 484 F.3d 1103 (9th Cir. 2007), the Ninth Circuit held that the burden is squarely on the United States, not on the taxpayer, to demonstrate that the government's position was substantially justified.


The Ninth Circuit vacated the Tax Court's decision after finding that the Tax Court failed to appreciate that evaluating the reasonableness of the IRS's litigation position, as reflected in the answer filed by the IRS, required some review of the administrative proceedings. Citing Pacific Fisheries, the court noted that the questionable nature of the government's actions during the administrative proceedings is not directly relevant to litigation costs because Code Sec. 7430 "does not provide a bridge," between the administrative proceedings and the judicial proceedings. However, the court said, the reasonableness of the IRS's answer depends on what the IRS learned, or should have learned, from the preceding administrative proceedings. Thus, whether the IRS should have issued an initial notice of deficiency or should have held an in-person meeting during the administrative proceedings does not control the inquiry as to the reasonableness of the answer the IRS filed in the Tax Court.

It was not clear to the Ninth Circuit whether the Tax Court interpreted case law separately analyzing administrative and judicial proceedings as precluding it from considering the merits of Jacobs' assertion that the IRS's answer to his petition was unreasonable. But the Ninth Circuit read its precedent as allowing the Tax Court, in ruling on a request for litigation costs under Code Sec. 7430, to consider the administrative proceedings, not to determine the propriety of the proceedings, but as informing the reasonableness of the IRS's answer in the Tax Court. As a result, the Ninth Circuit vacated the Tax Court's decision and remanded the case back to the Tax Court to consider the merits of Jacobs' claim that, in light of the information the IRS had received in the administrative proceedings, the IRS's litigation position was unreasonable.

For a discussion of the general rules for recovering litigation or administrative costs, see Parker Tax ¶263,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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