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Tax Court in Brief | Mazzei v. Commissioner | Law of the Case, Prevailing Party, and “Substantially Justified”

By Freeman Law
May 11, 2022

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Tax Litigation: The Week of May 2nd, 2022, through May 6th, 2022

Mazzei v. Comm’r, T.C. Memo 2022-43 | May 2, 2022 | Thornton, J. | Dkt. No. 16702-09.

Opinion

Short Summary: Celia Mazzei, the taxpayer, appealed a Tax Court decision to the U.S. Court of Appeals for the Ninth Circuit. Originally, the Tax Court found Mazzei liable for excise taxes on excess contributions to her Roth IRA. The Ninth Circuit reversed and entered judgment for Mazzei. Then, and pursuant to 26 U.S.C. § 7430, Mazzei filed a motion in the Ninth Circuit for litigation expenses associated with underlying Tax Court litigation. The IRS argued that it was substantially justified in its position in the underlying tax proceeding and thus, Mazzei’s request for fees should be denied or, alternatively, remanded to the Tax Court. The Ninth Circuit summarily denied Mazzei’s motion. Mazzei then filed with the Tax Court, a Motion for Leave to File Out of Time a Motion for Litigation Expenses and concurrently submitted a Motion for Litigation Expenses. Both parties advanced essentially the same arguments as were presented to the Ninth Circuit.

Key Issues:

  • Does the Tax Court have authority to consider and decide Mazzei’s motion for litigation expenses?
  • Assuming the Tax Court has authority to consider and decide on the motion, is Mazzei entitled to the relief requested in the form of litigation expenses?

Primary Holdings:

  • The “law of the case” doctrine requires that on remand a lower court follow the appellate court’s resolution of a legal issue in all later proceedings in the same case. This applies to explicit decisions as well as those issues decided by implication. Because the Ninth Circuit denied the very relief she sought at the lower Tax Court level, the Tax Court was deprived of authority to reconsider Mazzei’s request.
  • Because 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 prevailing party for purposes of receiving an award of litigation costs under 26 U.S.C. § 7430 and related Treasury Regulations, Treas. Reg. § 301.7430-5.

Key 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 issue 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 the appellate court’s explicit holdings as well as issues decided by necessary implication. United States v. Cote, 51 F.3d 178, 181 (9th Cir. 1995). If an appellate court denies a taxpayer’s request for fees incurred at the Tax Court level, or does not remand the issue to the Tax Court for decision, then, under the law of the case doctrine, the Tax Court will likely have no authority to consider and decide a taxpayer’s later request to re-examine the fee issue. See Pollei v. Comm’r., 94 T.C. 595, 596 (1990).
  • Prevailing Party. 7430(a) provides that a prevailing party in a court proceeding may be awarded reasonable litigation costs. The term “prevailing party” means any party properly within § 7430(a) which (1) has substantially prevailed with respect to the amount in controversy, or on the most significant issue(s) presented; and (2) meets the requirements of 28 U.S.C. § 2412(d)(1)(B) and 28 U.S.C. § 2412(d)(2)(B). See 26 U.S.C. § 7430(c)(4)(A)(i)-(ii); Treas. Reg. § 301.7430-5(a)(1)-(4) (requirements for “prevailing party” status).
  • Substantially Justified. If the IRS establishes that its position is substantially justified, then the court does not consider the taxpayer to be a prevailing party. 26 U.S.C. § 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). § 7430(c)(4)(B)(iii) provides that courts should consider whether the United States has lost in courts of appeals on substantially similar issues in determining whether the position of the IRS was substantially justified. See Treas. Reg. § 301.7430-5(d)(2).
  • Reasonable Basis in Fact. Generally, if the transaction lacks economic substance as a factual matter, then the IRS may have a reasonable basis in fact. Mazzei v. Comm’r, 2022 WL 1303511, at *5.
  • Reasonable Basis in Law. A case of first impression and supportable interpretations of federal tax statutes and case law can provide the IRS with a reasonable basis in law such that the position on that 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 determined to be contrary to the plain meaning of the statute does not necessarily mean that it failed to be substantially justified. Mazzei v. Comm’r, 2022 WL 1303511, at *5.

Insights: This case highlights the Tax Court’s position on the “law of the case” doctrine and its role in deciding § 7430(a) judgments. Essentially, a two-step procedure determines the doctrine’s applicability. First, the taxpayer requests the appellate court for an award of litigation expenses, or that the court remand the issue to the Tax Court for determination. Second, the appellate court expressly or implicitly rules on the taxpayer’s request for expenses. Under these circumstances, the doctrine precludes the Tax Court’s decision-making authority on a later-presented request for the same relief. Thus, litigants must weigh the likelihood of recovery from the Tax Court against the chance of an appellate court being nonresponsive on (or favorable to) the request for an award of litigation expenses. This case also provides insight on the Court’s analysis of a “prevailing party” and “substantially justified” under § 7430 and Treas. Reg. § 301.7430-5. The statute requires the IRS to establish a position that is substantially justified, being one that has a reasonable basis in law and fact. In Mazzei, the Court found a reasonable basis in fact because the underlying Roth IRA transaction factually lacked economic substance. Additionally, the Court noted that a reasonable basis in law can exist when the IRS raises a novel issue. Moreover, the presence or absence of appellate case law plays a role in this analysis. However, the Court does not regard one adverse opinion as dispositive of the IRS’s “reasonableness” in its pursuit.

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