The trust in the case of Alterman Trust v. Commissioner, 146 TC No. 14 had prevailed in its case against the IRS in its previous case (TC Memo 2015-231) and now sought an award of attorney’s fees under Section 7430.
The issue to be decided was when the trust’s net worth was to be measure to determine if the trust was simply “too large” to be awarded the fees under IRC Section 7430. While Section 7430 allows for an award of costs if the taxpayer is the prevailing party, has exhausted administrative remedies, has not unreasonably protracted the proceedings and has claimed reasonable costs, Section 7430(c)(4)(A)(ii) imposes an interesting quirk in the definition of “prevailing party.”
That section reads that a prevailing party means (in part):
…which meets the requirements of the 1st sentence of section 2412(d)(1)(B) of title 28, United States Code (as in effect on October 22, 1986) except to the extent differing procedures are established by rule of court and meets the requirements of section 2412(d)(2)(B) of such title 28 (as so in effect).
That second provision in Title 28 cited there (the net worth provision of 28 USC §2412(d)(2)(B)) generally imposes a net worth test of $2 million on an individual and, in normal cases, applies that test “at the time the civil action was filed…” That provision in Title 28 doesn’t directly give a date on which the net worth of a trust is to be tested, but IRC §7430(c)(4)(D)(i) provides:
(D) Special rules for applying net worth requirement
In applying the requirements of section 2412(d)(2)(B) of title 28, United States Code, for purposes of subparagraph (A)(ii) of this paragraph—
(i) the net worth limitation in clause (i) of such section shall apply to—
(I) an estate but shall be determined as of the date of the decedent’s death, and
(II) a trust but shall be determined as of the last day of the taxable year involved in the proceeding
The case in question involved a transferee liability proceeding by the IRS.
The liability in question that the IRS was attempting to collect via a transferee liability proceeding against the beneficiary arose in 2003, though the IRS first asserted the transferee liability and issued its notice of liability in December of 2009.
The taxpayer argued that due to this being a transferee liability case there was no taxable year involved, so the general rule (as of the date the case was filed should apply) or, in the alternative, the tax year for the party against whom the transferee liability was asserted should be 2009. Needless to say, as the point is being litigated, it was clear the net worth of the trust exceeded the $2 million limit in 2003, the tax year noted in the Notice of Liability.
The Tax Court did not buy the taxpayer’s views on the measuring date, noting:
The statute is clear, and it requires the net worth of the trust “shall be determined as of the last day of the taxable year involved in the proceeding”. Sec. 7430(c)(4)(D)(i)(II). The notice of liability and its accompanying documents all identify December 31, 2003, as the end of the taxable year involved in the proceeding. The notice of liability is explicit that the liability is “for the taxable year ended December 31, 2003”. The accompanying waiver of restrictions on assessment identifies the “Tax year ended” as December 31, 2003. The notice of liability statement states that it is for the “Tax Liability for the taxable year ended December 31, 2003”. The statute requires that we look to the net worth of the trust as of the last day of the taxable year involved in the proceeding. And there is no support for the argument that there is no taxable year involved in the proceeding.
In a footnote, the Court goes on to provide a justification for applying this rule:
One can easily posit a rationale for this rule. Oftentimes, a trust’s assets can easily be depleted, thus enabling a trust to manipulate whether it meets the net worth requirements by the time a notice is issued at the end of a protracted proceeding. By looking retrospectively to the taxable year involved in the proceeding, the statute limits or eliminates gamesmanship that might be used to fit within the net worth requirements.