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CAL.

T.C. Memo. 2006-97

LES

UNITED STATES TAX COURT

JERRY AND PATRICIA A. DIXON, ET AL.,¹ Petitioners

v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos.

9382-83, 15907-84,

40159-84, 30979-85,

29643-86.

Filed May 10, 2006

Henry Binder and John A. Irvine, counsel.for petitioners in

docket Nos. 9382-83, 15907-84, 40159-84, and 30979-85.

Michael Louis Minns and Enid M. Williams, counsel for

petitioners in docket No. 29643-86.

Henry E. O'Neill and Peter R. Hochman, counsel for

respondent.

¹ Cases of the following petitioners are consolidated

herewith:

Robert L. and Carolyn S. DuFresne, docket Nos.

15907-84 and 30979-85; Terry D. and Gloria K. Owens, docket No.

40159-84; and Richard and Fiorella Hongsermeier, docket No.

29643-86.

$ERVD!D .MAY . 1 0 2006

- 2 CONTENTS

Page

Background

. . . . . . . . . . . . . . . . . . . . . . . . . . 4

Discussion

. . . . . . . . . . . . . . . . . . . . . . . . .

Introduction . . . . . . . . . . . . . . . . . . . . . . 17

II.

Overview of Section 7430 . . . . . . . . . .

Tax Court's Authority To Award Appellate

Fees Under Section 7430 . . . . . . . . . . .

The Other Side of the Coin: Inapplicability

of Section 6673(a)(2) and the Bad

Faith Exception . . . . . . . . . . . . . . . . . .

Entitlement to Relief Under Section 7430 .

Respondent's Position . . . . . . . .

Paid or Incurred Requirement

. . . .

Real Parties in Interest . . . . .

Substantial Justification Defense . . .

Identifying "the Position of the

United States in the Proceeding" .

Substantial Justification Analysis

III. Amount of Award . . . . . . . . . . . . . . . . . . . .

Respondent's Position . . . . . . . . . . . . . . .

Overview . . . . . . . . . . . . . . . . . . . 25

Conclusion

. . . .. . . . . . . . . . . . . . . . .

Applicability of Statutory Rate Cap . . . . . . .

Limited Availability of Qualified Attorneys

Local Availability of Tax Expertise . . . .

Difficulty of the Issues . . . . . . . . . .

Other Possible Special Factors

. . . . . .

In General

The Government's Misconduct

The Delay Factor

. . . . . .

. . . . . . . . . . . . . . .

Respondent's Objections

. . . . . . . .

Duplicative Fees Due to Change of

Counsel . . . . . . . . . . . . . . . . .

Overstaffing . . . . . . . . . . . . . .

Porter & Hedges Client Conferences

. . .

Additional Adjustments to Time Claimed for the

Test Case Status . . . . . . . . . . . .

Conclusion . . . . . . . . . . . . . . . . . .

.Compensable Hours . . . . . . . . . . . . . . . . .

Appeals

. . . . . . . . . . . . . . . . . . .

Missing Minns Time Entries

- 3 b.

Minns Hours Relating to Dispute With

Additional Porter & Hedges Time Relating

to Minns Dispute . . . . . . . . . . . .

Porter & Hedges Time Relating to

. . . . . . . . . . . . . . . . . .

2002 . . . . . . . . . . . . . . . . . . 56

Total . . . . . . . . . . . . . . . . . .

2003 to 2005 . . . . . . . . . . . . . . 57

2006 . . . . . . . . . . . . . . . . . . 57

Application of Limited Success Factor .

The PH Petitioners . . . . . . . . . . . . .

2001 . . . . . . . . . . . . . . . . . .

2002 to 2005 . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . .

2006 . . . . . . . . . ... . . . . . . . 61

Potentially Compensable Expenses

. . . . . .

Amounts Paid or Incurred by Eligible Persons

Amounts Paid Through the Defense Fund .

Interest . . . . . . . . . . . . . . . . . . . . . . . .

IV.

2001

The Hongsermeiers--Work on the Fee Request

Bill of Costs . . . . . . . . . . . . . . 51

Porter & Hedges Time Relating to Remand

3·.

Adjustments to Porter & Hedges Time

Relating to Fee Request

. . . . . . . . . .

Initial Research Time . . . .. . . . . .

Time Relating to Unsuccessful Claims

Computation of Potentially Compensable Fees . . .

The Hongsermeiers--Work on the Appeal . . .

Committee . . . . . . . . . . . . . .'. . 50

°·

Minns Agreement . . . . . . . . . . . . .

Porter & Hedges Agreement .

Amounts Paid Directly to Minns

Amounts Incurred But Not Paid .

Summary . . . . . . . . . . . . . . . . . . .

Final Figures . . . . . . . . . . . . . . . . . . .

Appendix A--September 1, 2005 Order .

Appendix B--September 8, 2005 Order .

Appendix C--November 18, 2005 Order .

MEMORANDUM OPINION

BEGHE, Judge:

These cases are before the Court on separate

remand from the Court of Appeals for the Ninth Circuit.

opinion, we address petitioners' requests for appellate

In this

- 4 attorney's fees and expenses under section 7430,2 originally

filed with the Court of Appeals in the aftermath of Dixon v.

Commissioner, 316 F.3d 1041

(9th Cir. 2003), revg. and remanding

T.C. Memo. 1999-101.

Backaround3

Petitioners

(the Dixons, DuFresnes, Owenses, and

Hongsermeiers) are, along with one other couple--the Youngs--the

remaining test case petitioners in the Kersting tax shelter

litigation.

That litigation arose from respondent's disallowance

of interest deductions claimed by participants in various tax

shelter programs promoted by Henry F.K. Kersting during the late

1970s through the 1980s.

Under the test case procedure, most of

the other Kersting program participants who had filed Tax Court

petitions

("nontest case petitioners") entered into "piggyback"

agreements in which they agreed that their cases would be

resolved in accordance with the Court's opinion in the test

cases.4

Eventually, more than 300 nontest case petitioners made

2 Unless otherwise indicated, section references are to the

Internal Revenue Code of 1986, as amended, and Rule references

are to the Tax Court Rules of Practice and Procedure.

3 The following background statement is based on the

existing record and additional information submitted by the

parties in connection with the appellate fee requests. We have

not found it necessary to hold an evidentiary hearing.

See Rule

232(a)(2).

4 Upon the final disposition of the test cases, the

relatively few nontest case petitioners who did not enter into

piggyback agreements will generally be ordered to show cause why

their cases should not be decided in the same manner as the test

cases.

- 5 periodic and/or lump sum contributions to a fund (hereafter, the

"Defense Fund" or "Fund") created to share the cost of the test

case litigation.3

Following a 3-week trial, the Court sustained virtually all

of respondent's determinations in each of the test cases.

Dixon v. Commissioner, T.C. Memo. 1991-614

(Dixon II).6

See

Shortly

thereafter, on June 9, 1992, respondent notified the Court that,

prior to the trial of the test cases, respondent's trial

attorney, Kenneth W. McWade

(McWade), and his supervisor,

Honolulu District Counsel William A. Sims (Sims), had entered

into contingent settlement agreements with two of the test case

petitioners (the Thompsons and the Cravenses) and had failed to

disclose those agreements to their superiors, to the Court, or to

the other test case petitioners or their counsel.

Respondent

asked the Court to conduct an evidentiary hearing to determine

whether the undisclosed agreements had affected the trial of the

test cases or the opinion of the Court.

The Court denied

respondent's request for an evidentiary hearing, entered

decisions giving effect to the Thompson and Cravens settlements,

and reentered or allowed to stand the decisions sustaining

5 The Defense Fund was initially known as the Don Belton

Legal Defense Fund and subsequently became known as the Atlas

Legal Defense Fund.

6 Prior to the trial of the test cases, the Court had issued

an opinion rejecting the test case petitioners' arguments that

certain evidence should be suppressed and that the burden of

proof should be shifted to respondent.

See Dixon v.

Commissioner, 90 T.C. 237 (1988) (Dixon I).

- 6 respondent's determinations against the other test case

petitioners.

On appeal, the Court of Appeals for the Ninth Circuit,

citing Arizona v. Fulminante, 499 U.S. 279, 309 (1991), stated:

We cannot determine from this record whether the

extent of misconduct rises to the level of a structural.

defect voiding the judgment as fundamentally unfair, or

whether, despite the government's misconduct, the

judgment can be upheld as harmless error.

[DuFresne v.

Commissioner, 26 F.3d 105, 107 (9th Cir. 1994) (per

curiam), vacating Dixon v. Commissioner, T.C. Memo.

1991-614.]

The Court of Appeals vacated the Court's decisions in the test

cases

(other than the Thompson and Cravens cases) and remanded

them for "an evidentiary hearing to determine the full extent of

the admitted wrong done by the government trial lawyers."

Id.

In response to the direction of the Court of Appeals to consider

on the merits all motions of intervention filed by interested

parties, this Court ordered that the cases of 10 nontest case

petitioners

(hereafter, the participating nontest case

petitioners) be consolidated with the remaining test cases for

purposes of the evidentiary hearing.

One of the participating

nontest case petitioners was represented by Joe Alfred Izen, Jr.

(Izen), who had represented the test case petitioners

(other than

the Thompsons and Cravenses) at the original trial; the others

were represented by either Robert Alan Jones

Patrick Sticht

(Jones) or Robert

(Sticht).

On the basis of the record developed at the evidentiary

hearing, the Court held that the misconduct of the Government

- 7 attorneys in the trial of the test cases did not constitute a

structural defect in the trial but rather resulted in harmless

error.

See Dixon v. Commissioner, T.C. Memo. 1999-101 (Dixon

III).

However, the Court imposed sanctions against respondent,

holding that Kersting program participants who had not had final

decisions entered in their cases would be relieved of liability

for (1) the interest component of the addition to tax for

negligence under former section 6653(a), and (2) the incremental

interest attributable to the increased rate prescribed in former

section 6621(c).

After the issuance of Dixon III, the remaining test case

petitioners, all of whom were still represented by Izen, and some

of the participating nontest case petitioners filed motions for

attorney's fees and costs (the initial fee requests), relying

primarily on sections 7430 and 6673.

The Court ordered the

movants to submit documentation pertaining to fees and expenses

incurred commencing June 10, 1992

(i.e., the day after the Court

learned of the misconduct by the Government attorneys).

In Dixon

v. Commissioner, T.C. Memo. 2000-116 (Dixon IV), the Court

rejected the initial fee requests insofar as they relied on

section 7430, on the ground that the movants had not

substantially prevailed on the merits as required by section

7430(c)(4) (A)(i).

However, the Court awarded a portion of the

claimed fees and expenses under section 6673(a)(2)(B)

(relating

- 8 to misconduct of the Commissioner's attorneys in Tax Court

proceedings).

The Court entered decisions in the remaining test cases and

certified the cases of the participating nontest case petitioners

for interlocutory appeal.

Izen filed notices of appeal on behalf

of the remaining test case petitioners, and he also filed an

interlocutory appeal on behalf of Norman and Barbara Adair, the

participating nontest case petitioners he represented.7

Izen

purported to file his interlocutory appeal on behalf of not only

the Adairs, but also on behalf of nontest case petitioners in

more than 450 docketed cases who had not participated in the

evidentiary hearing and therefore were not included in this

Court's certification order.

In January 2001, the Defense Fund, acting through a five-

person "steering committee", retained attorney Michael Louis

Minns (Minns) to replace Izen.

Under the Minns retainer

agreement, the Defense Fund agreed to pay Minns an up-front,

nonrefundable fee of $110,000, while Minns agreed to a maximum

fee for his firm of $150,000.

The Fund also agreed to a $75,000

fee for Lawfinders Associates, Inc.

(Lawfinders), a firm hired by

Minns to assist in researching and writing his appellate briefs.

Although Minns replaced Izen as counsel of record for the Dixons,

Jones and Sticht filed interlocutory appeals on behalf of

the other participating nontest case petitioners.

- 9 DuFresnes, Owenses, and Hongsermeiers, Izen remained counsel of

record for the Youngs, the only other remaining test case

petitioners.

In January and February 2001, the Hongsermeiers and 112

nontest case petitioners (hereafter, the group of 112) made

contributions to the Defense Fund (all but two in the amount of

$1,500) totaling $168,600 in connection with the hiring of Minns.

In addition, from January 2001 through November 2001 (the last

full month during which the steering committee recognized Minns

as the Fund's counsel), the Hongsermeiers and 106 members of the

group of 112 made smaller contributions to the Defense Fund

totaling $99,600.

Thus, total contributions to the Defense Fund

by the Hongsermeiers and the group of 112 from January 2001

through November 2001 amounted to $268,200.

The Fund paid the

aforementioned fees of $110,000 and $75,000 to Minns and

Lawfinders, respectively, in early 2001.e

The steering committee became dissatisfied with Minns, and

by letter dated December 7, 2001, the Defense Fund formally

requested Porter & Hedges, L.L.P.

(Porter & Hedges) to take over

the appeals and to represent the Fund in "the anticipated

litigation involving our former attorney in this matter, Michael

Minns."

The ensuing engagement letter confirms that Porter &

8 The Fund paid other amounts under the Minns agreement,

including a $20,000 fee to an accounting firm, for which the

Hongsermeiers do not seek recovery.

- 10 Hedges, in addition to the appellate work, would "represent the

Committee with regard to counsel and assistance in terminating

its relationship with its present lawyer, Michael Louis Minns,

and * * * assist * * * in obtaining a refund of attorneys' fees

and expenses paid to Mr. Minns or at his direction".

The

engagement is on an hourly fee basis, with the Defense Fund

agreeing to advance $120,000 for application against expected

billings.

Three members of the steering committee--all nontest

case petitioners--are jointly and severally liable for the

Defense Fund's obligations under the agreement, which are not

limited by the $120,000 estimate and required advance.

From December 12, 2001 to April 5, 2002, the Dixons and 43

nontest case petitioners (hereafter, the group of 43)--36 of whom

are also part of the group of 112--made contributions to the

Defense Fund (all but three in the amount of $1,500) totaling

$66,050 in connection with the hiring of Porter & Hedges.

addition, from December 2001 through April 2002, 37 members of

the group of 43 made smaller contributions to the Defense Fund

totaling $18,150.

Thus, total contributions to the Defense Fund

from December 2001 through April 2002 by the Dixons and the group

of 43 amounted to $84,200.

Porter & Hedges has received only

$60,000 from the Defense Fund to date, with the last payment

occurring in April 2002.

- 11 Although Porter & Hedges attorneys Henry Binder (Binder) and

John A. Irvine (Irvine) entered appearances in the Court of

Appeals on behalf of the Dixons, DuFresnes, and Owenses, Minns

remained counsel of record for the Hongsermeiers.

Thus, three

sets of counsel pursued the appeals of the test cases:

Izen on

behalf of the Youngs, Minns on behalf of the Hongsermeiers, and

Porter & Hedges on behalf of the Dixons, DuFresnes, and Owenses

(hereafter, the PH petitioners).

The Court of Appeals reversed and remanded, holding that the

misconduct of the Government attorneys in the trial of the test

cases was a fraud on the court, for which no showing of prejudice

is required.

2003)

See Dixon v. Commissioner, 316 F.3d 1041

(9th Cir.

(Dixon V); see also Dixon v. Commissioner, T.C. Memo. 2006-

(Dixon VI)

(determining the parameters of the illicit Thompson

settlement and extending the benefit thereof to all remaining

Kersting project petitioners in accordance with the mandate of

the Court of Appeals in Dixon V).

After the issuance of Dixon V,

a group comprising the Hongsermeiers and 38 nontest case

petitioners--35 of whom are also part of the group of 112 and

three of whom are part of the group of 112 and the group of 43-retained Minns to continue representing their interests in postappellate matters (including this fee litigation).

The

Hongsermeiers and each member of the group of 38 paid Minns a

$3,500 retainer fee.

- 12 Shortly after the issuance of Dixon V, the Hongsermeiers and

the PH petitioners filed separate requests with the Court of

Appeals for attorney's fees incurred on appeal.

The

Hongsermeiers' request relates solely to services performed.by

Minns and Lawfinders, and the PH petitioners' request relates

solely to services performed by Porter & Hedges.

As filed, both

appellate fee requests relied exclusively on section 7430.

Rather than filing a fee request with the Court of Appeals

on behalf of the Youngs, Izen objected to petitioners'

requests.9

fee

Izen's primary objection was that petitioners had not

paid or incurred the amounts requested:

In actuality, Mr. Binder's motion fails to reveal

the true clients in interest who have paid him fees to

represent their interests on appeal. These "real

clients in interest" are the same clients represented

by Joe Alfred Izen, Jr. in the appeal styled Barbara L.

Adair, Et Al v. Commissioner * * *.

9 Izen is not the only attorney in these proceedings who

was, at least initially, hostile to petitioners' appellate fee

requests.

In a filing relating to the evidentiary hearing

required to implement the primary mandate of Dixon V, Jones (who

would subsequently file his own appellate fee request on behalf

of the participating nontest case petitioners he represents, see

infra note 12) remarked:

Test case counsel, exclusive of Mr. Izen, charged

clients in excess of $500,000 to copy Mr. Izen's, Mr.

Jones', and Mr. Sticht's prior work from the

evidentiary hearing [held in 1996 and 1997] without

adding one new idea which had a substantial effect on

the Dixon appeal.

These taxpayers cannot afford to pay

expensive lawyers by the hour in order to get the

relief they so justly deserve.

- 13 Izen then filed a motion in the Adairs' interlocutory appeal to

transfer consideration of attorney's fees on appeal to the Tax

Court.

See 9th Cir. R. 39-1.8.

Although the Court of Appeals

promptly granted the motion, Izen waited more than 2 years to

file his appellate fee request with this Court.

That fee request

is currently pending and will be the subject of a later opinion.

See infra note 12.

On May 28, 2003, the Court of Appeals, acting through the

panel that had decided Dixon V, issued the following order in

response to petitioners' appellate fee requests:

Appellants' request for attorneys' fees on appeal

is remanded to the Tax Court for a determination of

entitlement and, if warranted, amount. Although not

required by this order, an evidentiary hearing may aid

the Tax Court in making this determination. The panel

retains jurisdiction over all further proceedings that

may arise.

Thereafter, petitioners' counsel attempted, unsuccessfully, to

retrieve from the Court of Appeals the documents relative to the

appellate fee requests.

Petitioners' counsel and respondent's

counsel eventually filed in this Court a Special Stipulation of

Facts Concerning Appellants' Request for Attorneys' Fees on

Appeal

(the stipulation), stipulating the authenticity of the

appellate fee requests and all related objections, oppositions,

replies, and records attached as exhibits to the stipulation.

Petitioners have largely pursued their appellate fee requests in

this Court on a joint basis.

- 14 In considering the appellate fee requests, we solicited the

parties' views as to whether we were limited to section 7430,

cited in their requests, or were instead free to proceed under

section 6673(a)(2), on which we relied in Dixon IV.¹°

In a May

2005 order, we expressed the view that "there are substantial

obstacles to awarding appellate fees and costs under section

6673(a)(2)".

Shortly thereafter, the Youngs filed a motion in

this Court for attorney's fees under section 6673 relating to

services performed (and expenses incurred) by Izen on appeal.

In August 2005, the PH petitioners amended their appellate .

fee request to assert entitlement under the "bad faith" exception

to the.so-called American rule (hereafter, the bad faith

exception), while continuing to rely on section 7430 as an

alternative ground.¹¹

By the amendment, the PH petitioners also

seek interest on the requested fees and expenses from January 17,

2003

(the date of the Court of Appeals' Dixon V opinion).

In an order dated September 1, 2005, which we incorporate by

reference and reproduce as Appendix A, we concluded that "the

¹° Sec. 7430 contains certain conditions and limitations

that do not apply to fee awards under sec. 6673(a)(2).

See infra

Parts I.A.,

I.C.

¹¹ The American rule generally prohibits a Federal court

from awarding attorney's fees in the absence of a statute or

contract providing for a fee award.

Chambers v. NASCO, Inc., 501

U.S. 32, 61 (1991) (Kennedy, J., dissenting) (citing Alveska

Pipeline Serv. Co. v. Wilderness Socv., 421 U.S. 240, 258-259

(.1975)).

- 15 principles enunciated in Cooter & Gell v. Hartmarx Corp.,

[496

U.S. 384 (1990),] preclude us from awarding appellate fees and

expenses under the bad faith exception to the American rule".

Having determined to proceed under section 7430, and with a nod

to Izen's previous objection, we ordered petitioners to.submit

net worth affidavits for all real parties in interest with

respect to their appellate fee requests; namely, "those

individuals who have made payments to Porter & Hedges or Michael

042

Minns, P.L.C.--through contributions to the Atlas Legal Defense

Fund or otherwise--or are liable to Porter & Hedges or Michael

Minns, P.L.C. for the unpaid portion of the requested fees and

expenses".

See Rule 231(b)(4); see also infra Part I.A.

Meanwhile, in an order dated September 8, 2005, which we

incorporate by reference and reproduce as Appendix B, we

similarly rejected the Youngs' reliance on section 6673 and

ordered them to submit net worth affidavits for all real parties

in interest.¹²

On November 7, 2005, the PH petitioners filed a motion for

reconsideration of our September 1 order, as well as a separate

¹² That order also pertains to a motion for appellate fees

and expenses filed in this Court in July 2005 by the

participating nontest case petitioners represented by Jones. We

subsequently informed the parties that we would handle that

motion and the Youngs' appellate fee motion (filed by Izen)

separately from petitioners' appellate fee requests.

To complete

the story regarding appellate fee requests, the Court understands

that Sticht and respondent are working on a comprehensive

stipulation and submission regarding requests for fees by

participating nontest case petitioners represented by Sticht.

- 16 motion for appellate attorney's fees under section 6673.

denied the motion for reconsideration by order dated November 18,

2005, which we incorporate by reference and reproduce as Appendix

We separately denied the PH petitioners' motion for fees

under section 6673 "[f]or the reasons discussed in our Order

dated September 8, 2005" (App. B).

The Hongsermeiers claim attorney's fees of $276,434.75,

based on (1) 930.32 hours devoted to the appeal and 278.75 hours

devoted to the fee request,¹³ and (2) rates ranging from $50 to

$300 per hour.

They have not requested any expenses other than

attorney's fees.

The PH petitioners claim attorney's fees of $494,514.75,

based on (1) 1,157.65 hours devoted to the appeal and 734.1 hours

devoted to the fee request, and (2) rates ranging from $90 to

$460 per hour."

They also claim other expenses of $20,307.15.

¹³ Respondent does not dispute that fees relating to work on

a fee request ("fees for fees" or "fees on fees") are potentially

recoverable under sec. 7430.

See, e.g., Huffman v. Commissioner,

978 F.2d 1139, 1149 (9th Cir. 1992), affg. in part and revg. in

part on other grounds T.C. Memo. 1991-144.

" Both fee requests include legal assistant or paralegal

fees. Although sec. 7430 does not specifically provide for the

recovery of such fees, this Court has routinely awarded them,

see, e.g., Foothill Ranch Co. Pship. v. Commissioner, 110 T.C.

94, 101-102 (1998), and we have no reason to believe that the

Court of Appeals for the Ninth Circuit would take a different

approach.

Cf. Commissioner, INS v. Jean, 496 U.S. 154, 163 n.10

(1990) (Equal Access to Justice Act (EAJA) case; Court's

hypothetical refers to paralegal fees even though the EAJA, from

which sec. 7430 derives, does not specifically refer to such

fees); Sorenson v. Mink, 239 F.3d 1140, 1144 (9th Cir. 2001)

(continued...)

- 17 Discussion

Introduction

Overview of Section 7430

Section 7430 provides that, subject to certain conditions, a

taxpayer who prevails against the Government in any Federal tax

proceeding (administrative or judicial) may recover reasonable

costs, including attorney's fees, paid or incurred in connection

with such proceeding if the Government's position in the

042

proceeding was not substantially justified.

(c).(1)(B)(iii),

(c)(4) (A) and (B).

Sec. 7430(a),

In its report accompanying

the bill in which section 7430 originated, the House Committee on

Ways and Means contemplated that such fee awards "will enable

individual taxpayers to vindicate their rights regardless of

their economic circumstances."

H. Rept. 97-404, at 11 (1981).

A taxpayer seeking litigation costs under section 7430 must

have exhausted all available administrative remedies prior to

litigation, must not have unreasonably protracted the

proceedings, and, if an individual, must not have had a net worth

in excess of $2 million as of the filing date of the suit.

7430(b)(1),

(b) (3),

2412(d)(2) (B)(i)

(c)(4) (A)(ii);

(1988)

see 28 U.S.C.

Sec.

sec.

(individual net worth limitation

"(...continued)

(EAJA fee application included legal assistant fees; no

discussion of the issue). Although legal assistant and paralegal

fees do not fit neatly within the category of either "attorney's

fees" or "expenses", we follow petitioners' lead in grouping them

with attorney's fees.

- 18 contained in the Equal Access to Justice Act and incorporated by

reference in sec. 7430(c)(4) (A)(ii)).

Reasonable attorney's fees

may not exceed the rate of $125 per hour (as adjusted for

inflation) unless "a special factor, such as the limited

availability of qualified attorneys for such proceeding, the

difficulty of the issues presented in the case, or the local

availability of tax expertise, justifies a higher rate."

Sec.

7430(c) (1) (B) (iii).¹³

Respondent publishes the inflation-adjusted rate cap on an

annual basis.

The hourly rate cap for fees incurred in 2001 (the

earliest year for which petitioners claim fees) is $140.

Proc. 2001-13, 2001-1 C.B. 337, 341.

Rev.

The hourly rate cap for

fees incurred between 2002 and 2005 is $150.

Rev. Proc. 2001-59,

2001-2 C.B. 623, 628; Rev. Proc. 2002-70, 2002-2 C.B. 845, 850;

Rev. Proc. 2003-85, 2003-2 C.B. 1184, 1190; Rev. Proc. 2004-71,

2004-2 C.B. 970, 976.

2006 is $160.

The hourly rate cap for fees incurred in

Rev. Proc. 2005-70, 2005-47 I.R.B. 979, 985.

Tax Court's Authority To Award Appellate

Fees Under Section 7430

Before we evaluate petitioners' appellate fee requests under

section 7430, we address the threshold issue of our authority to

¹³ The latter two examples of special factors were added by

the Internal Revenue Service Restructuring and Reform Act of

1998, Pub. L. 105-206, sec. 3101(a)(2), 112 Stat. 727, effective

for costs incurred after Jan. 18, 1999, id. sec. 3101(g), 112

Stat. 729. All of the costs sought by petitioners were incurred

after Jan. 18, 1999.

- 19 award appellate fees under that section.¹6

We begin by observing

that the Court of Appeals cannot independently empower us to make

such an award.

See Cooter & Gell v. Hartmarx Corp., 496 U.S.

384, 409 (1990)

(reversing that portion of Court of Appeals'

judgment remanding the case to District Court for award of

appellate attorney's fees as part of Rule ll" sanction; that

rule does not authorize District Courts to award attorney's fees

incurred on appeal).

Having said that, we are satisfied that

042

section 7430, unlike the provision at issue in Cooter & Gell,

authorizes trial courts (such as the Tax Court) to award

litigation costs incurred on appeal.

Our conclusion that we may award appellate fees under

section 7430 ultimately rests on the distinction between (1) fee

awards (such as those under section 7430) authorized under "feeshifting rules that embody a substantive policy, such as a

¹6 We are hesitant to phrase the issue (i.e., whether we can

award appellate litigation costs under sec. 7430) in terms of our

"jurisdiction".

See Scarborough v. Principi, 541 U.S. 401, 414

(2004) (Equal Access to Justice Act does not describe what

"classes of cases" the Court of Appeals for Veterans Claims is

competent to adjudicate; rather, it relates only to postjudgment

proceedings auxiliary to cases already within that court's

adjudicatory authority); see also Kafka & Cavanagh, Litigation of

Federal Civil Tax Controversies, par. 2.0l[5], at .2-8 (2d ed.

1997) (Tax Court's "jurisdiction" to consider a motion for

litigation costs is part and parcel of its jurisdiction over the

underlying action); cf. Rule 270(c) (recognizing that the Tax

Court's jurisdiction to review an administrative denial of

administrative costs derives from sec. 7430(f)(2)).

" References to Rule 11 are to Rule 11 of the Federal Rules

of Civil Procedure.

- 20 statute which permits a prevailing party in certain classes of

litigation to recover fees", Chambers v. NASCO, Inc., 501 U.S.

32, 52 (1991), and (2) fee awards (such as those under Rule ll,

the bad faith exception, or section 6673(a)(2)) that serve as

sanctions, the imposition of which "depends not on which party

wins the lawsuit, but on how the parties conduct themselves

during the litigation", Chambers v. NASCO, Inc., supra at 53

(drawing the distinction in the context of the Erie doctrine as

applied to the bad faith exception).

See also Wilkett

(Starr, J., dissenting from denial of rehg.

36 The Court of Appeals for the Fifth Circuit subsequently

stated, without mentioning Perales or its special factor

analysis, that Shaw precludes an award of interest on a sec. 7430

fee award.

See Wilkerson v. United States, 67 F.3d 112, 120 n.15

(5th Cir. 1995).

37 The courts in Marcus v. Shalala, 17 F.3d at 1039, and

Chiu v. United States, 948 F.2d at 721, also contended that

Wilkett runs afoul of the Supreme Court's subsequent admonition

in Pierce v. Underwood, 487 U.S. at 573, that special factors

under the EAJA cannot be of "broad and general application". The

Court of Appeals for the D.C. Circuit attempted to reconcile its

holding in Wilkett with Pierce in Okla. Aerotronics, Inc. v.

United States, 943 F.2d 1344, 1350 (D.C. Cir. 1991) (clarifying

that "what makes the factor 'special' is not simple delay, but

unusual delay").

- 43 en banc)

("the panel's decision is incompatible with the

teachings of" Shaw); Okla. Aerotronics, Inc. v. United States,

supra at 1353

(Williams, J., concurring and dissenting)

(finding

Wilkett's rationale "far from clear"); Masonry Masters, Inc. v.

Nelson, supra at 714 .(Henderson, J., concurring)

(asserting that,

because the EAJA lacks the express waiver contemplated in Shaw,

fees awarded thereunder "can never be enhanced for delay as a

matter of law").

In Shaw, the Supreme Court rejected the

042

argument that language in Title VII making the Government liable

for costs (including a reasonable attorney's fee) "the same as a

private person" operated as an express. waiver of sovereign

immunity with respect to interest, even though interest on

attorney's fees may be recovered in a Title VII suit against a

private employer.

In our view, the case for waiver was stronger

under the version of Title VII at issue in Shaw3e than it is under

the EAJA or, by extension, section 7430.

See Wilkerson v. United

States, 67 F.3d 112, 120 n.15 (5th Cir. 1995)

("Nothing in § 7430

indicates that Congress intended to waive its immunity from

interest awards"); Miller v. Alamo, 992 F.2d 766, 767

1993)

(8th Cir.

(same); Austin v. Commissioner, T.C. Memo. 1997-157

(same);

see also Intl. Woodworkers of Am., AFL-CIO, Local 3-98 v.

Donovan, 792 F.2d 762, 766-767

(9th Cir. 1985)

(pre-Shaw; no

38 Title VII has since been amended to expressly allow the

recovery of interest against the Government in Title VII actions.

See 42 U.S.C. sec. 2000e-16(d) (2000); Landoraf v. USI Film

Prods., 511 U.S. 244, 251 (1994).

_.44 _

interest on EAJA fee award since no statutory provision expressly

authorizes such interest).

Test Case Status

One aspect of this litigation that is certainly "not of

broad and general application" (and therefore potentially

supports the finding of a special factor) is its test case

status.

Undoubtedly, counsel's efforts have beneficially

affected hundreds of nontest case petitioners.

At least one

court, however, has explicitly rejected the notion that such

widespread benefit may be treated as a special factor under the

EAJA.

See Pollgreen v. Morris, 911 F.2d 527 (11th Cir. 1990).

Polloreen involved an EAJA fee award to plaintiffs who had

successfully challenged fines and property seizures stemming from

their participation in the "Freedom Flotilla" of Cuban refugees

in 1980.

The District Court had doubled the statutory rate, in

part because the litigation benefited "not only * * * the

Plaintiffs herein but a class of people, including over 1,000

vessel owners."

Id. at 537; see also Lyden v. Howerton, 731 F.

Supp. 1545, 1556 (S.D. Fla. 1990)

"Freedom Flotilla" case).

(same language in another

The Court of Appeals concluded that

the District Court's "consideration of the litigation's benefit

to a broad class of people is foreclosed by Pierce's prohibition

on considering 'the results obtained'".

Pollgreen v. Morris,

- 45 supra at 537.39

In that regard, we deem it noteworthy that Pierce

itself involved a class action in which plaintiffs' counsel

secured a $60 million settlement against the Department of

Housing and Urban Development that was paid to more than 150,000

low-income tenants of federally subsidized housing projects.

See

Underwood v. Pierce, 547 F. Supp. 256, 258 (C.D. Cal. 1982).

Conclusion

For the reasons discussed above, we conclude that we are

constrained to apply the statutory rate caps in determining the

respective amounts of petitioners' fee awards under section 7430.

Compensable Hours

Respondent's Obiections

Duplicative Fees Due to Change of Counsel

Respondent argues that any fee award should exclude

"duplicative attorneys' fees associated with two sets of

appellate counsel having to read the same record and learn the

same case."

While the inefficiencies associated with a change in

counsel may, in some instances, warrant a reduced fee award, see,

e.g., Spell v. McDaniel, 852 F.2d 762, 768

(4th Cir. 1988), we

conclude that such a reduction would be inappropriate here.

noted above, more than 300 nontest case petitioners have financed

the test case litigation through contributions to the Defense

39 The court also cited Jean v. Nelson, 863 F.2d at 775, a

class action involving Haitian refugee claims, in which it had

rejected "vindication of public rights" as a special factor under

the EAJA.

- 46 Fund.

It is hardly surprising that this group, faced with the

largely unfavorable outcome of Dixon III, would fracture over the

issue of legal representation going forward.

Indeed, given the

number of contributors to the Defense Fund, three sets of

appellate counsel (i.e., Izen, Minns, and Porter & Hedges) does

not seem unreasonable.4°

Therefore, we shall not reduce the

number of compensable hours merely to account for the fact that

Minns and Porter & Hedges had to "read the same record and learn

the same case" with which Izen was already familiar.

Overstaffing

Respondent also asserts that "it is apparent that these

cases have been overstaffed by both Mr. Minns and Porter and

Hedges and that the number of hours charged by those firms for

the appeal is excessive and outside the realm of reason."

evaluating the reasonableness of the hours claimed, we are aided

by the fact that, taking into account Izen's appellate fee

request, we have before us three separate fee applications

relating to the same appellate proceedings.4¹

Each of those

applications contains a breakdown of hours devoted to various

tasks as delineated in the Ninth Circuit's Form 9..

Regarding

4° We note that three sets of counsel participated in the

evidentiary hearing underlying our opinion in Dixon III as well:

Izen, Jones, and Sticht.

4¹ Although Jones has also filed a motion in this Court for

appellate fees and expenses, see supra note 12, he did not

directly participate in the appeals of the test cases as did

Izen.

- 47 -

what we deem to be the four "core" categories (obtaining and

reviewing records, legal research, preparing briefs, and

preparing for and attending oral argument), Izen claims 676.65

hours, Minns claims 779.18 hours (including Lawfinders' time),

and Porter & Hedges claims 1,013.9 hours.

While it may be

somewhat presumptuous for this Court to judge the relative merits

of the appellate briefs,42 we see no obvious justification for the

significantly greater number of hours claimed by Porter & Hedges

in these categories.

Assuming for these purposes that the

subject hours claimed by Izen and Minns represent the low end and

the midpoint, respectively, of the range of reasonableness, we

reduce the Porter & Hedges figure by 130 hours so that the

42 We do observe that it was Izen who hewed to the line that

the misconduct of respondent's attorneys was a fraud on the

Court, and that the primary relief to which all eligible

petitioners should be entitled is the benefit of the Thompson

settlement.

Binder and Minns argued primarily for the complete

042

vacatur of this Court's decisions, which would result in a

complete win--no deficiencies--for the petitioners (although

Binder did suggest the Thompson settlement as an alternative).

In the light of hindsight, Izen's approach has been vindicated;

the Court of Appeals in Dixon V adopted both his diagnosis and

his prescription without reservation.

Having said that, we do not mean to imply that all of Izen's

appellate time was well spent.

He was the only attorney who

continued to argue that the Kersting tax shelters created valid

tax deductions, a position not only contrary to the holdings of

this Court in Dixon II and Dixon III, but also contrary to that

of the Court of Appeals for the Ninth Circuit in the related

promoter penalty.case.

See Kerstina v. United States, 206 F.3d

817 (9th Cir. 2000). We also have the impression that

considerable time was wasted at the appellate level in dealing

with Izen's unsuccessful and unnecessary attempts to include

hundreds of nontest cases in the Adairs' interlocutory appeal.

- 48 resulting figure (883.9 hours) for these categories is in line

with the high end of the range of reasonableness.

Porter & Hedoes Client Conferences

Respondent alleges that the PH petitioners have failed to

demonstrate the reasonableness of "charges for numerous

conferences with various unidentified individuals, apparently

members of the Steering Committee."

Our concern lies with the

lack of subject matter descriptions for many of those conferences

and other client communications such as e-mail correspondence.

As discussed above, the committee hired Porter & Hedges not only

to replace Minns but also to recover amounts previously paid to

him.

We do not intend to hold the Government responsible for

fees attributable to the latter task.

parties'

In that regard, the

submissions indicate that Binder assumed primary

responsibility for the Porter & Hedges briefs, while Irvine dealt

with the Minns situation and client relations, in addition to

overseeing work on the briefs.

Most of the generic references to

client contacts appear in Irvine's time entries, and common

experience suggests that such contacts were more likely related

to the Minns dispute or client relations than, say, appellate

strategy.

Nevertheless, in the absence of subject matter

descriptions, we assume that the time Irvine spent consulting

with Defense Fund representatives was divided equally between

matters relating to the Minns dispute and client relations on the

one hand, and matters relating to the appeal, on the other.

- 49 2.

Additional Adiustments to Time Claimed for the

Appeals

Missing Minns Time Entries

Although Minns claims 577.42 hours of attorney and legal

assistant time for his firm (i.e., not including the Lawfinders

time) in the Hongsermeiers' initial appellate fee request, the

accompanying time entries for Minns and his in-house staff cover

only 462.56 hours.-

Inasmuch as those time entries run only

through January 22, 2002, they do not cover the final preparation

of the brief (apparently mailed on January 25, 2002), the

preparation of the reply brief, or the oral argument.43

While we

are not inclined to provide Minns the opportunity to "prove up"

his firm's undocumented efforts at this late date, we likewise

are not prepared to disregard those efforts altogether.

Accordingly, we shall credit Minns with the 66-hour block of time

he categorized as "preparing for and attending oral argument" in

his submission to the Court of Appeals and disallow the remaining

042

48.86 undocumented hours.44

43 We note that there is no corresponding break in the Bates

numbering of the documents accompanying the parties' special

stipulation of facts (filed in this Court) regarding the

appellate fee requests.

44 Only 11.5 of those 48.86 hours are attributable to Minns;

the balance is attributable to his associate attorney and his

legal assistant.

- 50 b.

Minns Hours Relating to Dispute With Committee

As stated above, we will not hold the Government responsible

for fees attributable to the dispute between the steering

committee and Minns.

Following the approach used above with

regard to Irvine's time, we assume that, absent subject matter

descriptions to the contrary, the time Minns and his staff spent

during December 2001 and January 2002 communicating with clients

was divided equally between damage control and matters relating

to the appeal.

Similarly, we assume that time spent

communicating with Irvine during this contentious period was

devoted to "self defense" and to coordination efforts in equal

measure.

Additional Porter & Hedges Time Relating to Minns

Dispute

We have previously dealt with Irvine's nondescriptive time

entries relating to client communications.

We add here that,

consistent with our treatment of Minns, we assume, absent subject

matter descriptions to the contrary, that time spent by Irvine

communicating with Minns and his staff was divided equally

between matters relating to the Minns dispute and matters

relating to the appeal.

We also disallow the relatively small

amount of time Irvine devoted to "review of contracts", as that

task is clearly identifiable with his firm's engagement by.the

steering committee to handle its dispute with Minns.

- 51 d.

Porter & Hedges Time Relating to Bill of Costs

Porter & Hedges claims approximately 33 hours of attorney

time (most of.it Binder's) relating to a bill of costs in the

amount of $5,663.40.45

See Fed. R. App. P. 39.

We see no

justification for the devotion of that much time to a task

normally considered ministerial.

In that regard, we note that

Minns has not claimed any time relating to the bill of costs he

filed on behalf of the Hongsermeiers.

We disallow all but 5

042

hours of attorney time relating to the PH petitioners' bill of

costs.

Porter & Hedges Time Relating to Remand

A few of Binder's time entries describe time spent analyzing

the illicit Thompson settlement shortly after the Court of

Appeals' issuance of Dixon V.

As those.entries relate to the

ensuing remand proceedings in this Court, they are not properly

the subject of an appellate fee request.

See supra text

accompanying note 21.

Adiustments to Porter & Hedoes Time Relatino to

Fee Request

Initial Research Time

According to the Porter & Hedges time entries, four

attorneys spent 85.2 hours researching section 7430 and

attorney's fees issues

(and memorializing that research) before

45 The Court of Appeals ultimately allowed $3,808.50 of such

costs.

- 52 work on the actual fee request even began.

That seems excessive

to us, and we accordingly reduce those hours by 50 percent.

Time Relating to Unsuccessful Claims

All of the adjustments we have made thus far relate to

either. (1) documentation or (2) what may be termed the efficiency

aspect of the reasonableness standard incorporated into section

7430.

In Hensley v. Eckerhart, 461 U.S. 424, 436 (1983), a case

involving CRAFAA (the general civil rights fee-shifting

statute)," the Supreme Court addressed another aspect of

reasonableness in this context:

If * * * a plaintiff has achieved only partial or

limited success, the product of hours reasonably

expended on the litigation as a whole times a

reasonable hourly rate may be an excessive amount.* * *

* * * That the plaintiff is a "prevailing party"

therefore may say little about whether the expenditure

of counsel's time was reasonable in relation to the

success achieved. * * *

Professor Sisk sometimes refers to this aspect of the

reasonableness standard as the limited success factor.

"The Essentials of the Equal Access to Justice Act:

Sisk,

Court Awards

of Attorney's Fees for Unreasonable Government Conduct

(Part

Two)," 56 La. L. Rev. 1, 119 (1995).

The Supreme Court subsequently referred to the limited

success factor in the context of "fees for fees" (i.e., fees

" "The standards set forth in this opinion are generally

applicable in all cases,in which Congress has authorized an award

of fees to a 'prevailing party.'" Hensley v. Eckerhart, 461 U.S.

424, 433 n.7 (1983).

- 53 incurred in obtaining a fee award) in Commissioner, INS v. Jean,

496 U.S. 154

(1990).

As discussed in Part I.B., supra, the Court

in Jean held that fees for fees are recoverable under the EAJA

without a separate showing that the Government's opposition to

the fee award was not substantially justified.

In response to

the Government's argument that such a holding would have the

effect of allowing "an automatic award of 'fees for fees'", id.

at 162, the Court stated:

Because Hensley v. Eckerhart, 461 U.S. 424, 437

(1983), requires the district court to consider the

relationship between the amount of the fee awarded and

the results obtained, fees [claimed] for fee litigation

should be excluded [from the award] to the extent that

the applicant ultimately fails to prevail in such

litigation.

For example, if the Government's challenge

to a requested rate for paralegal time resulted in the

court's recalculatiñg and reducing the award for

paralegal time from the requested amount, then the

applicant should not receive fees for the time spent

defending the higher rate.

[Id. at 163 n.10.]

The Court of Appeals for the Ninth Circuit has expressly held

that "the legal principles for recovering attorney's fees laid

out in Hensley [citation omitted] apply to requests for fees-onfees".

Thompson v. Gomez, 45 F.3d .1365, 1367

(9th Cir. 1995);

see also Atkins v. Apfel, 154 F.3d 986, 990 (9th Cir. 1998).

While it is often difficult to allocate attorney time

between successful and unsuccessful issues and claims, "denial of

a particular form or aspect of relief occasionally may be

attributable to a discrete motion or proceeding, thus allowing

the limited success factor to be measured by hours devoted to

- 54 that effort."

Sisk, 56 La. L. Rev. at 119; see also Hensley v.

Eckerhart, supra at 436 (one way a court can give effect to the

limited success factor is by "attempt[ing] to identify specific

hours that should be eliminated").

That is the case with regard

to our rejection of the PH petitioners' attempts

(1) to avoid the

section 7430 rate cap by asserting entitlement under the bad

faith exception and section 6673, and (2) to obtain interest on

their fee award (see infra Part IV).

Specifically, the PH

petitioners' August 2005 amendment of their fee request (and the

prerequisite motion for leave to amend), their motion for

reconsideration of our September 1, 2005 order, and their

November 20.05 request for appellate fees under section 6673

pertain exclusively to those unsuccessful claims.

We therefore

disal.low the 123.7 hours Porter & Hedges devoted to those

filings."

Cf. Anthony v. Sullivan, 982 F.2d 586 (D.C. Cir. 1993)

(plaintiff initially sought recovery of fees under both the Title

VII fee provision, which contains no rate cap, and the EAJA;

after Court of Appeals overturned the Title VII award, plaintiff

established entitlement to EAJA award on remand; held, Hensley

dictates that plaintiff's EAJA award not include any fees

incurred in the unsuccessful defense of the Title VII award on

appeal).

" We do not intend to suggest thereby that the positions

taken in those filings are in any way frivolous.

See Hensley v.

Eckerhart, supra at 436 (partial or limited success must be taken

into account even though the unsuccessful claims are nonfrivolous

and raised in good faith).

- 55 D.

Computation of Potentially Compensable Fees

We now determine the amount of claimed fees that, to the

extent paid or incurred by real parties in interest who satisfy

section 7430's net worth requirement (hereafter, eligible

persons), see infra Part III.F., are compensable under section

7430.

Where the fee requests reflect the use of "block billing"

(i.e., the assignment of multiple discrete tasks to a single

block of time), we use our best judgment to allocate the

042

aggregate amount of time among the various tasks.

The Hongsermeiers--Work on the Appeal48

2001

Taking into account the $140 rate cap in effect for 2001,

the Hongsermeiers claim 377.17 hours at $140 per hour, 31 hours

at $100.per hour, and 17.69 hours at $50 per hour.

Regarding the

50-percent reduction for time deemed attributable to both the

dispute with the steering committee and the appeal, we have

assigned 16.4 hours in December to client communications (Minns:

8.5 hours; associate attorney:

hours).

4.5 hours; legal assistant:

We therefore (1) reduce the $140

3.4

(Minns) time by 4.25

hours

(50% of 8.5 = 4.25), leaving 372.92 hours;

$100

(associate) time by 2.25 hours

(2) reduce the

(50% of 4.5 = 2.25), leaving

48 Because the Defense Fund retained Minns to pursue the

appeal and a separate group subsequently retained him to pursue

appellate fees, we compute the potentially compensable fees with

respect to those two engagements separately. The Hongsermeiers

claim $220,201 for work on the appeal and $56,233.75 for work on

the fee request.

- 56 28.75 hours; and (3) reduce the $50 (legal assistant) time by 1.7

hours

(50% of 3.4 = 1.7), leaving 15.99 hours.

amount is $55,883.30, determined a.s follows:

The resulting

[(372.92 X $140) +

(28.75 X $100) + (15.99 X $50)] = ($52,208.80 + $2,875 + $799.50)

= $55,883.30.

2002

Taking into account. the $150 rate cap in effect for 2002,

the Hongsermeiers claim 446.95 hours at $150 per hour, 34.4 hours

at $100 per hour, and 23.11 hours at $50 per hour.

Of the 48.86

hours disallowed due to missing time entries, 11.5.hours relate

to $150 time, 20.8 hours relate to $100 time, and 16.56 hours

relate to $50 time.

Regarding the 50-percent reduction for

January 2002 time deemed attributable to both the rift with the

steering committee and the appeal, we have assigned 6.9 hours to

client communications (Minns:

5.1 hours; legal assistant:

hours) and 2.9 hours to Irvine communications

legal assistant:

1 hour).

(Minns:

1.8

1.9 hours;

We therefore reduce the $150 (Minns)

time by an additional 3.5 hours (5.1 + 1.9 = 7; 50% of 7 = 3.5)

and reduce the $50

(legal assistant) time by an additional 1.4

hours (1.8 + 1 = 2.8; 50% of 2.8 = 1.4).

That leaves 431.95

hours of $150 time (446.95 - 11.5 - 3.5 = 431.95), 13.6 hours of

$100 time (34.4 - 20.8 = 13.6), and 5.15 hours of $50 time (23.11

- 16.56 - 1.4 = 5.15).

The resulting amount is $66,410,

determined as follows:

[(431.95 X $150) + (13.6 X $100) + (5.15 X

$50)] = ($64,792.50 + $1·,360 + $257.50) = $66,410.

- 57 -

Total

The total amount of potentially compensable fees with

respect to the Hongsermeiers' fee request for work on the appeal

is $122,293.30 ($55,883.30 for 2001 and $66,410 for 2002).

The Honosermeiers-Work on the Fee Request

2003 to 2005

Taking into account the $150 rate cap in effect during the

years 2003 through 2005, the Hongsermeiers claim 177.85 hours at

$150 per hour, 92.75 hours at $125 per hour, 2.4 hours at $75 per

hour, and 2.65 hours at $50 per hour.

$38,583.75, determined as follows:

The resulting amount is

[(177.85 X $150) + (92.75 X

$125) + (2.4 X $75) + (2.65 X $50)] = ($26,677.50 + $11,593.75 +

$180 + $132.50) = $38,583.75.

2006

Taking into account the $160 rate cap in effect for 2006,

the Hongsermeiers claim 0.5 hours at $160 per hour, 0.9 hours at

$125 per hour, and 1.7 hours at $50 per hour.

amount is $277.50, determined as follows:

The resulting

[(0.5 X $160) + (0.9 X

$125) + (1.7 X $50)] = ($80 + $112.50 + $85) = $277.50.

Application of Limited Success Factor

While the Hongsermeiers did not join in the PH petitioners'

unsuccessful fee request claims discussed in Part III.C.3.b.,

supra, that does not mean that Hensley's limited success factor

has no application to their claim for fees on fees.

As Professor

Sisk observes: "Because ordinarily it is difficult to precisely

- 58 link a certain segment of legal services to the denial of

particular relief, the limited success factor typically is

addressed at a separate stage through a percentage downward

adjustment of the lodestar."

Sisk, 56 La. L. Rev. at 119; see

also Hensley v. Eckerhart, 461 U.S. at 436-437 (in applying the

limited success factor, a court "may attempt to identify specific

hours that should be eliminated, or it may simply reduce the

award to account for the limited success").

Here, the lodestar

for the Hongsermeiers' fees on fees is $38,861.25 ($38,583.75 for

2003 through 2005, and.$277.50 for.2006).

In determining the

degree of success they achieved with regard to their fee request,

we compare the number of "merits hours" they claimed (i.e., hours

relating to the appeal--930.32) with the number of merits hours

we have allowed (868.36).49

(9th Cir. 1995)

See Thompson v. Gomez, 45 F.3d 1365

(uphòlding District Court's award of 87.2 percent

of requested fees on fees to reflect the parties' 87.2-percent

settlement with regard to requested "merits fees"); Harris v.

McCarthy, 790 F.2d 753, 759 (9th Cir. 1986)

(upholding District

Court's award of 11.5 percent of requested fees on fees to

reflect its award of 11.5 percent of requested merits fees).

The

49 See supra Parts III.D.1.a. and III.D.1.b. (372.92 + 28.75

+ 15.99 + 431.95 + 13.6 + 5.15 = 868.36). We compare merits

hours claimed to merits hours allowed rather than merits fees

claimed to merits fees awarded because much of the difference

between the merits fees claimed and the merits fèes awarded in

this case is attributable to sec. 7430's rate cap, the effect of

which is already reflected in the fees on fees lodestar amount of

$38,861.25.

- 59 resulting success ratio (868.36/930.32) is 93.33 percent, which

we apply to the aforementioned lodestar to obtain the amount of

potentially compensable fees on fees with respect to the

Hongsermeiers' fee request: $36,269.20.50

The PH Petitioners

2001

Taking into account the $140 rate cap in effect for 2001,

the PH petitioners claim 112.15 hours at $140 per hour, 3.25

hours at $105 per hour, and 0.5 hours at $90 per hour.

We begin

by allocating to 2001 a portion of the 130-hour "overstaffing"

reduction discussed above.

Based on the Porter & Hedges time

entries, we estimate that 10 percent of the hours devoted to

tasks described in the "core" categories of the Ninth Circuit's

Form 9, see supra Part III.C.1.b., are attributable to services

performed in 2001.

2001 by 13 hours

Accordingly, we reduce the time claimed for

(10% of 130 = 13).

Since more than 96 percent

of the time claimed for 2001 falls into the $140 category, we

further allocate the entire 13-hour reduction to the $140 time.

Next, we apply the 50-percent reduction to Irvine's 2001 time

deemed attributable to both the Minns dispute and the appeal.

5° We note here that, even though petitioners did not

receive all the relief they requested on appeal, see supra note

42, we see no need to reduce their "merits fees" awards by

applying a success ratio.

See Hensley v. Eckerhart, 461 U.S. at

435 & n.11 (where plaintiff obtains "excellent results", fee

award will normally encompass all hours reasonably expended on

the litigation; fact that such plaintiff did not receive all the

relief requested is not necessarily significant).

- 60 that regard, we have assigned 10.5 hours to generic client

communications and 1.5 hours to Minns communications.

therefore reduce the $140 time by an additional 6 hours (10.5 +

1.5 = 12; 50% of 12 = 6).

Finally, we have assigned 0.75 hours

to Irvine's review of contracts and further reduce the $140 time

by that amount.

The end result is a 19.75-hour reduction in the

$140 time (13 + 6 + .75.= 19.75), leaving 92.4 hours of $140

time.

The resulting amount is $13,322.25, determined as follows:

[(92.4 X $140) + (3.25 X $105) + (0.5 X $90)] = ($12,936 +

$341.25 + $45) = $13,322.25.

2002 to 2005

Taking into account the $150 statutory rate cap in effect

during the years 2002 through 2005, the PH petitioners claim

1,683.85 hours at $150 per hour, 1 hour at $140 per hour, 0.7

hours at $130 per hour, 1.4 hours at $120 per hour, 2 hours at

$105 per hour, 1 hour at $100 per hour, and 15.5 hours at $90 per

hour.

We adjust the $150 time to reflect the following

reductions:

(1) Remainder of the 130-hour overstaffing reduction-

-117 hours;

(2) Irvine's time deemed attributable to the Minns

dispute--7.8 hours;5¹ (3) excessive time pertaining to the bill of

costs--28 hours;

(4) work attributable to the remand proceedings-

S¹ We have assigned 15.6 hours of Irvine's 2002 time to

generic client communications (10.9 hours) and Minns

communications .(4.7 hours). As we deem 50 percent of that time

to be attributable to the Minns dispute, the resulting reduction

is 7.8 hours (50% of 15.6 = 7.8).

- 61 -7.9 hours;

(5) excessive preliminary research regarding section

7430 and attorney's fees issues--42.6 hours (85.2 X 50% = 42.6);

and (6) time devoted to unsuccessful fee request claims--123.7

hours (119.2 hours of Binder's time and 4.5 hours of Irvine's

time).

The end result is a 327-hour reduction in the $150 time

(117 + 7.8 + 28 + 7.9 + 42.6 + 123.7 = 327), leaving 1,356.85

hours of $150 time.

The resulting amount is $205,631.50,

determined as follows:

[(1,356.85 X 150) + (1 X $140) + (0.7 X

$130) + (1.4 X $120) + (2 X $105) + (1 X $100) + (15.5 X $90] =

($203,527.50 + $140 + $91 + $168 + $210 + $100 + $1,395) =

$205,631.50.

2006

Taking into account the $160 rate cap in effect for 2006·,

the PH petitioners claim 67.9 hours at $160 per hour and 2.5

hours at $140 per hour.52

determined as follows:

The resulting amount is $11,214,

[(67.9 X $160) + (2.5 X $140)] = ($10,864

+ $350) = $11,214.

Total

The total amount of potentially compensable fees with

respect to the PH petitioners' fee request is $230,167.75

52 In their final submission of fees and expenses, the PH

petitioners seek to recover an additional $4,865 that Porter &

Hedges estimates it will incur in pursuing the fee request "until

this Court rules on this motion". We are not aware of any

authority supporting such a request, nor do we see the need for

such additional fees and expenses under the circumstances.

- 62 ($13,322.25 for 2001, $205,631.50 for 2002 through 2005, and

$11,214 for 2006).

Potentially Compensable Expenses

The PH petitioners claim additional costs iñ the amount of

$20,307.18.

We reduce that amount by $2,425.66 as follows:

Delivery charges:

$105.11 (2 overnight deliveries to/from

persons with no identifiable connection to the litigation-$26.86; extra charges for a Saturday package pickup--$75.25;

discrepancy between claimed courier charge and computer

backup--$3)

Computer research:

$444.39 (difference between amounts

charged by provider and amounts reflected in billing

records--$226.31; unidentified research sessions--$218.08)

Secretarial overtime:

Double-counted charges:

$1,083.90

$751.26 (3/10/03 to 4/30/03)

Miscellaneous:

$41 ("various tips"--$16; unidentified

parking charge--$25)

The amount of potentially compensable expenses with respect to

the PH petitioners'

fee request is therefore $17,881.52.

As indicated above, the Hongsermeiers have not requested any

expenses other than attorney's fees.

Amounts Paid or Incurred by Eligible Persons

We now determine the extent to which eligible persons paid

or incurred the potentially compensable fees and expenses with

respect to the fee requests.

- 63 1.

Amounts Paid Through the Defense Fund

Minns Agreement

The Defense Fund paid $185,000 in legal fees under the Minns

agreement.

Of the $220,201 claimed by the Hongsermeiers for the

corresponding legal services, see supra note 48, $122,293.30 is

potentially compensable, see supra Part III.D.1., meaning that

$97,907.70 is noncompensable ($220,201 - $122,293.30 =

$97,907.70).

Given the fungibility of money, a case can be made

for allocating the Fund's $185,000 expenditure between the

potentially compensable fees and the noncompensable fees on a pro

rata basis.

We are not aware of any authority requiring us to do

so, and we think such an approach would run counter to the

remedial purpose of section 7430.

Accordingly, we allocate the

first $122,293.30 of the $185,000 expenditure to the potentially

compensable fees and the remaining $62,706.70 ($185,000 $122,293.30 = $62,706.70) to the noncompensable fees.

Next, we must identify the contributions to the Defense Fund

from which the Fund's $185,000 expenditure derived.

Owing again

to the fungibility of money, any methodology we use will be

somewhat arbitrary.

Nevertheless, we believe it is reasonable to

treat the $185,000 expenditure as having derived from the

$268,200 contributed to the Fund by the Hongsermeiers and the

group of 112 from January 2001 through November 2001.

The following table lists the persons described in the

preceding paragraph (i.e., the Hongsermeiers and the group of

- 64 112)

for whom we have received net worth affidavits, together

with the amount contributed by each such person to the Defense

Fund during the relevant period:

Name

Arbuckle

Asmus

Baccitich

Bakos

Beecher

Berger

Boettger

Bowersox

Branch

Bremner

Brown

Bruckner

Croft

Doyle

Ellis

Evans

Flatter

Fraser

Fruchnicht

Fusakio

Gaubert

Gavagan

Geisler

Graham

Hague

Hannan

Hartigan

Hatcher

Heintz

Hendrickson

Hillen

Hinrich

Hongsermeier

Howell

Humphries

Hunt

Jensen, John

Jensen, Steen

Johnson, Marvin

Jurewicz

Keadle

Amt. Contributed

$2,400

$2,500

$2,400

$2,300

$3,500

$2,300

$2,600

$2,400

$2,300

$2,400

$2,700

$2,300

$2,400

$2,100

$2,600

$2,500

$3,000

$1,500

$2,700

$2,400

$2,500

$1,800

$2,400

$2,000

$2,400

$2,500

$2,300

$2,000

$2,600

$2,300

$2,200

$2,900

$2,400

$2,300

$1,500

$2,400

$2,500

- 65 Kelley

Klasch

Krassner

$2,500

$2,700

Layman

$1,700

Leslie

Maeda

McNamee

Meyners

Michaelson

Miller, Dale

Miller, R.B.

Millon

Muckle

Myers

Norrell

Oakes

Oyler

Pistoll

Porter

Proctor

Pylate

Richmond

Satterfield

Sheasley

St. John

Tice

Toman

Tynan

Villines

Watkins

Whittlesey

Wiater

Wilson

$1,700

$2,600

$2,300

$2,500

$2,400

$2,800

$3,000

$2,300

$2,500

$2,400

$2, 700

$2,500

$2,300

$2,200

$1,500

$2,400

$2,500

$1,900

$2,600

$2,700

$2,400

$2,300

$2,500

$2,400

$176,100

Thus, at least $176,100 of the $268,200 contributed to the

Defense Fund by the Hongsermeiers and the group of 112 between

January 2001 and November 2001 derives from eligible persons

refer to such contributions as eligible contributions) .

(we

Here,

too, a case can be made for allocating the eligible contributions

between the Defense Fund's $122,293.30 payment for potentially

compensable fees and its $62,706.70 payment for noncompensable

- 66 fees on a pro rata basis.

Again, we are not aware of any

authority requiring us to do so, and we think such an approach

would run counter to the remedial purpose of section 7430.

Accordingly, we allocate the eligible contributions first to the

Defense Fund's $122,293.30 payment for potentially compensable

fees.

It follows that eligible persons paid all of those

potentially compensable fees.

Porter & Hedges Agreement

We take a similar approach with regard to the $60,000 the

Defense Fund paid to Porter & Hedges.

Of the $514,821.90 claimed

by the PH petitioners in their appellate fee request, $248,049.27

is potentially compensable.

See supra Parts III.D.3.,

III.E.

First, we allocate the entire $60,000 expenditure to the

potentially compensable fees and expenses.

Next, we identify the

contributions to the Defense Fund from which the Fund's $60,000

expenditure derived.

We believe it is reasonable to treat the

$60,000 expenditure as having derived from the $84,200

contributed to the Defense Fund by the Dixons and the group of 43

from December 2001 through April 2002.

The following table lists the persons described in the

preceding paragraph (i.e., the Dixons and the group of 43)

for

whom we have received net worth affidavits, together with the

amount contributed by each such person to the Defense Fund during

the relevant period:

- 67 -

Name

Amt. Contributed

Asmus

Bakos

Beecher

Brown

Bruckner

Croft

Dixon

Ellis

Gomes

Grippo

Hague

Hartigan

Hatcher

Heintz

$2,000

$2,200

$2,100

$2,000

$2,100

$1,500

$2,000

$1,000

$2,500

$2,000

$1,500

$2,000

$1,700

Hillen

$2,000

Hunt

Ingals

Johnson, Marvin

Johnson, M.P.

Jurewicz

Keadle

Klasch

Leslie

McNamee

Meyners

Miller, R.B.

Moore, L.

Norrell

Oyler

Pistoll

Porter

Pylate

Richmond

Satterfield

St. John

Tice

Tynan

Villines

Whittaker

Whittlesey

$2,400

$2,100

$1,500

$2,000

$1,800

$2,000

$2,100

$1,800

$1,700

$1,800

$1,500

$2,000

$ 900

$2,000

$1,500

$2,000

$2,200

$2,000

$1,900

$2,000

$75,300

Thus, at least $75,300 of the $84,200 contributed to the

Defense Fund by the Dixons and the group of 43 between December

2001 and April 2002 derives from eligible persons.

Again, .we

- 68 allocate the eligible contributions first to the Fund's $60,000

payment for potentially compensable fees and expenses.

follows that eligible persons paid $60,000 of the potentially

compensable amount of $248,049.27.

Amounts Paid Directly to Minns

The Hongsermeiers and each member of the group of 38 paid

Minns a $3,500 retainer fee for continued representation of

their interests in post-appellate matters, including services

relating to the Hongsermeiers' appellate fee request.

We have

received net worth affidavits for all but five of those

persons.

Thus, at least $119,000 of the $136,500 initially

paid by this group to Minns derives from eligible persons.

allocate that $119,000 first to the $56,233.75 claimed by the

Hongsermeiers for services relating to the fee request.

supra note 48.

See

It follows that eligible persons paid the

entire portion of the claimed amount that is potentially

compensable--$36,269.20.

See supra Part III.D.2.

Amounts Incurred But Not Paid

While eligible persons have paid all the potentially

compensable fees with respect to the Hongsermeiers' fee request

(thus obviating the need to determine whether eligible persons

are liable for any unpaid amounts), eligible persons have paid

only $60,000 of the $248,049.27 that is potentially compensable

with respect to the PH petitioners' fee request.

Under the

terms of the Defense Fund's agreement with Porter & Hedges,

- 69 nontest case petitioners Darrell Hatcher (now deceased), Robert

Norrell, and Don Hunt are jointly and severally liable for the

Fund's obligations under the agreement, which would include the

remaining potentially compensable fees and expenses of

$188,049.27

($248,049.27 - $60,000 = $188,049.27).

Since we

have received net worth affidavits for Messrs. Norrell and

Hunt, it follows that eligible persons are liable for, and

therefore incurred, the remaining potentially compensable fees

and expenses of $188,049.27."

Summary

Eligible persons have paid or incurred all the

potentially compensable amounts with respect to the appellate

fee requests.

Final Figures

We shall award (1) attorney's fees in the amount of

$158,562.50

($122,293.30 paid through the Defense Fund and

$36,269.20 paid outside the Defense Fund)

in respect of the

Hongsermeiers' appellate fee request, and (2) attorney's fees

" Respondent does not suggest, nor do we have any reason to

believe, that the disproportionate liability of Messrs. Norrell

and Hunt is not bona fide.

Cf. Sisk, "The Essentials of the

Equal Access to Justice Act:

Court Awards of Attorney's Fees for

Unreasonable Government Conduct (Part One)," 55 La. L. Rev. 217,

337-341 (1994) (discussing the potential for manipulation of the

EAJA eligibility requirements when counsel represents both

eligible and ineligible parties).

- 70 and expenses in the amount of $248,049.27 in respect of the PH

petitioners' appellate fee request.54

IV.

Interest

The PH petitioners seek interest on their fee award from

January 17, 2003 (the date of the Court of Appeals' Dixon V

opinion).

As discussed in Part III.B.4.c., supra, the "no-

interest" rule prohibits the recovery of interest in a suit

against the Government absent an express waiver of sovereign

immunity from an award of interest.

Shaw, 478 U.S. at 311.

Library of Congress v.

Section 7430 contains no such express

waiver, see Wilkerson v. United States,

Miller v. Alamo,

67 F.3d at 120 n.15;

992 F.2d at 767; Austin v. Commissioner, T.C.

Memo. 1997-157, and petitioners do not point to any other

provision that might fit the bill.

at 767

Cf. Miller v. Alamo, supra

(rejecting the argument that 28 U.S.C. sec. 1961(c)(1)

operates as an express waiver of sovereign immunity from

interest on a section 7430 fee award).

Accordingly, we deny

the PH petitioners' request for interest on their fee award."

54 We shall address the manner in which the awards are to be

administered in a separate order or orders implementing this

opinion.

In that regard, we note that some nontest case

petitioners who contributed to the Defense Fund during the

relevant period have not been asked to submit net worth

affidavits and therefore have not had the opportunity to

establish their right to share in the awards.

* We recognize that in Dixon IV we granted postjudgment

interest on petitioners' sec. 6673(a)(2) fee award. We did so

sua sponte on the basis of "this Court's inherent power to

protect its own proceedings from abuse, oppression, and

(continued...)

- 71 To reflect the foregoing,

Appropriate orders will be

issued.

"(...continued)

injustice", without the benefit of briefs on the subject.

Whatever one's views may be on the interrelationship between the

doctrines of inherent authority and sovereign immunity, compare

United States v. Horn, 29 F.3d 754, 764 (1st Cir. 1994), with

United States v. Woodley, 9 F.3d 774, 782 (9th Cir. 1993), that

issue is not presented here.

-72-

Appendix A--September 1, 2005 Order

UNITED STATES TAX COURT

Washington, D.C.

JERRY DIXON AND PATRICIA A. DIXON, )

ET. AL.,

)

Petitioners

)

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

)

20217

| C

Docket Nos.

9382-83

sTA

15907-84 . jg.r. Juncs

40159-84

30979-85

29643-86

)

O R D E R

On March 30, 1999, the Court issued its Supplemental

Memorandum Findings of Fact and Opinion, Dixon v. Commissioner,

T.C. Memo. 1999-101 (Dixon III), and entered decisions in the

captioned cases. In Dixon III, we held that the misconduct of

the Government attorneys in the trial that included the captioned

cases did not constitute a structural defect in the trial but

rather resulted in harmless error. We did, however, impose

sanctions against respondent in the form of interest reductions.

On June 24, 1999, petitioners in the captioned cases,

together with other petitioners then represented by Joe Alfred

Izen, Jr. and petitioners represented by Robert Alan Jones, moved.

for attorneys' fees and expenses (the initial fee requests). The

initial fee requests relied in part on sections 6673 and 7430.¹

The Court vacated the decisions in the captioned cases and

ordered the movants to submit documentation pertaining to fees

and expenses incurred commencing on June 10, 1992.2

On March 31, 2000, the Court issued its Supplemental

Memorandum Opinion, Dixon v. Commissioner, T.C. Memo. 2000-116

(Dixon IV), and entered decisions in the captioned cases

reflecting the Dixon III and Dixon IV opinions. In Dixon IV, we

rejected the initial fee requests insofar as they relied on

section 7430,. on the ground that the movants had not

substantially prevailed within the meaning of section .

¹ Unless otherwise indicated, all section references are to

the Internal Revenue Code of 1986, as amended, and all Rule

references are to the Tax Court Rules of Practice and Procedure,

2 June 10, 1992 is the date on which the Court granted leave

and filed respondent's motions to vacate the decisions in Cravens

v. Commissioner, Docket Nos. 16900-83 and 15135-84, and Thompson

v. Commissioner, Docket Nos. 19321-83, 31236-84, and 30965-85.

SERVED SEP

f 2005

-73-

- 2 7430(c)(4) (A)(i). We did, however, award a portion of the

claimed fees and expenses under section 6673(a)(2).3

Petitioners in the captioned cases appealed our decisions to

the United States Court of Appeals for the Ninth Circuit. The

Court of Appeals reversed and remanded, holding that the

misconduct of the Government attorneys in the trial that included

the captioned cases amounted to fraud on the court. See Dixon v.

Commissioner, 316 F.3d 1041 (9th Cir. 2003) (Dixon V).

Petitioners in Docket Nos. 9382-83, 15907-84, 40159-84, and

30979-85 (the PH petitioners) then filed with the Court of

Appeals a request for attorneys' fees and expenses relating to

services provided by Porter & Hedges, L.L.P. in connection with

the appeals. Petitioners in Docket No. 29643-86 (the Minns

petitioners) filed a similar request with the Court of Appeals

relating to services provided by Michael Minns, P.L.C. in

connection with the appeals. As filed, both appellate fee

requests relied exclusively on section 7430. The Court of

Appeals remanded the appellate fee requests to this Court "for a

determination of entitlement, and, if warranted, amount".

On August 18, 2005, the PH petitioners moved for leave to

amend their appellate fee request (the PH appellate fee request).

We granted the motion and filed the subject amendment (the

amendment). By the amendment, the PH petitioners premise their

entitlement to the requested fees and expenses on the "bad faith"

exception to the so-called American rule,' while continuing to

rely on section 7430 as an alternative ground.5

The Court has determined that, although the appellate fee

requests were filed on behalf of petitioners in the captioned

cases (hereafter, petitioners), the real parties in interest

include all persons who stand to benefit from the successful

prosecution of those requests (i.e., those individuals who have

made payments to Porter & Hedges or Michael Minns, P.L.C.-through contributions to the Atlas Legal Defense Fund or .

3 Our award would not have been any more generous had we

proceeded under section 7430 or any other theory of recovery.

The American rule generally prohibits a Federal court from

awarding attorneys' fees in the absence of a statute or contract

providing for a fee award. Chamberg v. NASCO, Inc., 501 U.S. 32,

61 (1991) (Kennedy, J., dissenting).

5 The PH petitioners also seek.interest on the requested

fees and expenses from January 17, 2003 (the date of the Court of

Appeals' Dixon V opinion). We reserve judgment on that aspect of

the amendment at this time.

-74-

- 3 otherwise--or are liable to Porter & Hedges or Michael Minns,

P.L.C. for the unpaid portion of the requested fees and

expenses). Accordingly, the Court cannot rule on the appellate

fee requests insofar as they rely on section 7430 without knowing

how many of the real parties in interest satisfy the net worth

requirement imposed by section 7430(c)(4) (A)(ii). Because the PH

petitioners no longer rely solely on section 7430, we take this

opportunity to address their newly advanced claim that they are

entitled to recover the requested fees and expenses under the bad

faith exception to the American rule.

In Cooter & Gell v. Hartmarx Corp., 496 U.S. 384 (1990), the

Supreme Court held that a district court may not include in a

Rule 11 sanction the amount of fees incurred defending the award

on appeal.6 In so holding, the Court distinguished between fee

awards imposed as sanctions and those granted under "feeshifting" statutes designed to encourage private parties to

vindicate their rights:7 "As Rule 11 is not a fee-shifting

statute, the policies for allowing district courts to require the

losing party to pay appellate, as well as district court

attorney's fees, are not applicable." Id. at 409. Rather,

Rule 11 is more sensibly understood as permitting an

award only of those expenses directly caused by the

[baseless] filing, logically, those at the trial level.

* * * If the district court imposes Rule 11 sanctions

on the plaintiff, and the plaintiff appeals, the

expenses incurred in defending the award on appeal are

directly caused by the district court's sanction and

the appeal of that sanction, not by the plaintiff's

initial filing in district court.

Id. at 406-407.8

6 The Court noted that the Court of Appeals for the Ninth

Circuit had adopted that view in Orance Production Credit Assn.

v. Frontline Ventures Ltd., 801 F.2d 1581 (9th Cir. 1986). 496

U.S. at 405-406.

2 See Commissioner, INS v. Jean, 496 U.S. 154, 164-165

(1990) (describing the purpose of the Equal Access to Justice

Act, the fee-shifting statute from which sec. 7430 derives).

e As then in effect, Rule 11 authorized a district court to

order the payment of fees and expenses incurred "because of" the

filing of a document signed in violation of the rule. The rule

now refers to fees and expenses incurred "as a direct result of"

the violation. Fed. R. Civ. P. 11(c)(2).

-75-

- 4 We believe the principles enunciated in Cooter & Gell v.

Hartmarx Corp., supra, preclude us from awarding appellate fees

and expenses under the bad faith exception to the American rule

(the bad faith exception). As is the case with a Rule 11 fee

award, "the imposition of sanctions under the bad-faith exception

depends not on which party wins the lawsuit, but on how the

parties conduct themselves during the litigation." Chambers v.

NASCO, Inc., 501 U.S. 32, 53 (1991). Under the reasoning of

Cooter & Gell, then, any fee award based on the bad faith

exception is properly limited to fees and expenses directly

caused by the sanctionable conduct. To paraphrase the Supreme

Court, the PH petitioners' appellate fees and expenses were

directly caused by this Court's rulings in Dixon III, not by the

attorney misconduct that occasioned the proceedings underlying

that opinion.'

The Court of Appeals for the Ninth Circuit has applied

Cooter & Gell's "direct causation" approach outside the context

of Rule 11 on at least two occasions. See Lockary v. Kavfetz,

974 F.2d 1166, 1178 (9th Cir. 1992) (fees awarded under district

court's inherent authority to impose sanctions; "Cooter & Gell

suggests that the trial court should limit sanctions to the

opposing party's more 'direct' costs", which do not include the

costs of preparing the motion);" Lyddon v. Geothermal

Properties, Inc., 996 F.2d 212, 214 (9th Cir. 1992) (citing

Lockary and its reliance on Cooter & Gell, court concludes that

fee award under Fed. R. App. Proc. 38 for frivolous appeal should

not include the costs associated with computing the amount of the

8 We recognize that, in Dixon IV, we awarded fees and

expenses under sec. 6673, a punitive (as opposed to fee-shifting)

provision, without distinguishing between trial and appellate

proceedings. Under the reasoning of Cooter & Gell, the appellate

fees and expenses included in the initial fee requests were

directly caused by this Court's initial refusal to conduct an

evidentiary hearing regarding the effect of the attorney

misconduct on the trial of the test cases, not the attorney

misconduct itself. Because we did not explicitly address the

propriety of awarding appellate fees and expenses under sec: 6673

in Dixon IV, we do not consider ourselves bound by the law of the

case doctrine to award appellate fees and expenses under the bad

faith exception.

" Although Lockary v. Kayfetz did not involve Rule 11

sanctions, we note that Rule 11 now explicitly authorizes the

awarding of fees and expenses incurred in "presenting or

opposing" the motion for sanctions. Fed. R. Civ. P. 11(c)(1)(A).

-76-

- 5 award on remand).¹¹ See also Manion v. American Airlines, 395

F.3d 428, 433 (D.C. Cir. 2004) (fee award under 28 U.S.C. § 1927

does not properly include the cost of defending the award on

appeal; "much of [Cooter & Gell's) rationale applies with equal

force in the § 1927 context").¹²

Based on the foregoing, we shall continue to evaluate the PH

appellate fee request solely under section 7430.

Premises considered, it is

ORDERED that, to the extent applicable, the PH petitioners

and the Minns petitioners shall submit to the Court by October

28, 2005 the affidavit of each real party in interest (as

described above) that his or her net worth as of June 10, 1992

did not exceed $2,000,000. It is further

ORDERED that, in addition to counsel for petitioners and

respondent, a copy of this order shall be served upon:

Joe Alfred Izen, Jr., Esq.

5222 Spruce Street

Bellaire, TX 77401

2¹ The PH petitioners cite Brown v. Sullivan, 916 F.2d 492,

497 (9th Cir. 1990) for the proposition that, under the bad faith

exception, a court may award fees incurred over "the entire

course of the litigation * * * if it finds the fees incurred

during the various phases of the litigation are in some way

traceable to the [government's] bad faith." Interestingly, the

Brown court cited Commissioner, INS v. Jean, supra note 7 (fee

award under the Equal Access to Justice Act--a fee-shifting

statute--encompasses all aspects of the litigation), but did not

cite Cooter & Gell, issued one week after Jean. We note that two

of the three judges comprising the Brown panel also sat on the

panel that subsequently decided Lockary v. Kayfetz, supra.

¹² 28 U.S.C. § 1927 provides:

Any attorney or other person admitted to conduct cases

in any court of the United States or any Territory

thereof who so multiplies the proceedings in any case

unreasonably and vexatiously may be required by the

court to satisfy personally the excess costs, expenses,

and attorneys' fees reasonably incurred because of such

conduct.

-77-

- 6 Declan J. O'Donnell, Esq.

499 S. Larkspur Drive

Castle Rock, CO 80104

Robert Alan Jones, Esq.

1061 E. Flamingo Rd., Ste. 7

Las Vegas, NV 89119

Robert Patrick Sticht, Esq.

P.O. Box 49457

Los Angeles, CA . 90049

Renato Beghe

Judge

Dated: Washington, D.C.

September 1, 2005

-78Appendix B--September 8, 2005 Order

UNITED STATES TAX COURT

Washington, D.C.

JERRY DIXON AND PATRICIA A. DIXON, )

ET. AL.,

)

Petitioners

)

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

)

20217

Docket Nos.

9382-83

17646-83

15907-84

40159-84 ( 5.t.

22783-85

30979-85

29643-86

19464-92

621-94

9532-94

O R D E R

On March 30, 1999, the Court issued its Supplemental

Memorandum Findings of Fact and Opinion, Dixon qr. Commissioner,

T.C. Memo. 1999-101 (Dixon III), and entered decisions in Docket

Nos. 9382-83, 15907-84, 40159-84, 30979-85, 29643-86, and 2278385 (the test cases). In Dixon III, we held that the misconduct

of the Government attorneys in the trial of the test cases did

not constitute a structural defect in the trial but rather

resulted in harmless error. We did, however, impose sanctions

against respondent in the form of interest reductions.

On June 24, 1999, petitioners in the captioned cases moved

for attorneys' fees and expenses relating to services provided by

Joe Alfred Izen, Jr. and Robert Alan Jones (the initial fee

requests). The initial fee requests relied in part on sections

6673 and 7430.¹ The Court vacated the decisions in the test

cases and ordered the movants to submit documentation pertaining

to fees and expenses incurred commencing on June 10, 1992.2

On March 31, 2000, the Court issued its Supplemental

Memorandum Opinion, Dixon v. Commissioner, T.C. Memo. 2000-116

(Dixon IV), and entered decisions in the test cases reflecting

the Dixon III and Dixon IV opinions. In Dixon IV, we rejected

the initial fee requests insofar as they relied on section 7430,

on the ground that the movants had not substantially prevailed

I Unless otherwise indicated, all· section references are to

the Internal Revenue Code of 1986, as amended, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

2 June 10, 1992 is the date on which the Court granted leave

and filed respondent's motions to vacate the decisions in Cravens

v. Commissioner, Docket Nos. 16900-83 and 15135-84, and Thompson

v. Commissioner, Docket Nos. 19321-83, 31236-84, and 30965-85.

SEftVED EP. 9 2005

-79-

- 2 within the meaning of section 7430(c)(4) (A)(i). We did, however,

award a portion of the claimed fees and expenses under section

6673(a)(2).3

Petitioners in the test cases appealed our decisions to the

United States Court of Appeals for the Ninth Circuit (the

appeals). The Court of Appeals reversed and remanded, holding

that the misconduct of the Government attorneys in the trial of

the test cases amounted to fraud on the court. See Dixon v.

Commissioner, 316 F.3d 1041 (9th Cir. 2003) (Dixon V).

On May 19, 2005, petitioners in Docket No. 22783-85 moved

for attorneys' fees and expenses relating to services provided by

Mr. Izen in connection with the appeals.' On July 15, 2005,

petitioners in Docket Nos. 17646-83, 19464-92, 621-94, and 953294 moved for attorneys' fees and expenses relating to services

provided by Mr. Jones in connection with the appeals. The Izen

and Jones appellate fee requests rely exclusively on section

6673.

Section 6673 vs. Section 7430

In Cooter & Gell v. Hartmarx Corp., 496 U.S. 384 (1990), the

Supreme Court held that a district court may not include in a

Rule 11 sanct·ion the amount of fees incurred defending the award

on appeal.3 The Court began by observing that "[o]n its face,

Rule 11 does not apply to appellate proceedings." Id. at 406.

Moreover, the reference in Rule 11 (as then in effect) to fees

and expenses incurred "because of" the offending filing did not

extend its reach:

In this case, respondents argue, they would have

incurred none of their appellate expenses had

petitioner's lawsuit not been filed. This line of

reasoning would lead to the conclusion that expenses

incurred "because of" a baseless filing extend

3 Our award would not have been any more generous had we

proceeded under section 7430 or any other theory of recovery.

* Petitioners in Docket Nos. 9382-83, 15907-84, 40159-84,

30979-85, and 29643-86 terminated their representation by Mr.

Izen shortly after the commencement of the appellate process and

therefore did not join in the motion. See infra note 14.

5 The Court noted that the Court of Appeals for the Ninth

Circuit had adopted that view in Orange Production Credit Assn.

v. Frontline Ventures Ltd., 801 F.2d 1581 (9th Cir. 1986). 496

U.S. at 405-406.

-80-

- 3 indefinitely. * * * Such an interpretation of the Rule

is overbroad. Rule 11 is more sensibly understood as

permitting an award only of those expenses directly

caused by the filing, logically,.those at the trial

level. * * * If the district court imposes Rule 11

sanctions on the plaintiff, and the plaintiff appeals,

the expenses incurred in defending the award on appeal

are directly caused by the district court's sanction

and the appeal of that sanction, not by the plaintiff's

initial filing in district court.

Id at 406-407.6 The Court went on to distinguish between fee

awards imposed as sanctions and those granted under "feeshifting" statutes designed to encourage private parties to

vindicate their rights:7 "As Rule 11 is not a fee-shifting

statute, the policies for allowing district courts to require the

losing party to pay appellate, as well as district court

attorney's fees, are not applicable." Id_ at 409.

We believe the reasoning of Cooter & Gell v. Hartmarx Corp.,

supra, precludes us from awarding appellate fees and expenses

under section 6673. As is the case with Rule 11, section 6673(a)

(on which the present movants rely) does not, on its face, apply

to appellate proceedings.8 Under the reasoning of Cooter & Gell,

the reference in section 6673(a)(2) to fees and expenses incurred

"because of" the sanctionable conduct does not extend the reach

of the statute beyond Tax Court proceedings. Rather, any fee

award under section 6673 (which, like Rule 11, is not a feeshifting statute)' is properly limited to fees and expenses

Rule 11 has since been amended to refer to fees and

expenses incurred "as a direct result of" the violation. Fed. R.

Civ. P. 11(c)(2).

7 See Commissioner, INS v. Jean, 496 U.S. 154, 164-165

(1990) (describing the purpose of the Equal Access to Justice

Act, the fee-shifting statute from which sec. 7430 derives).

8 Indeed, the heading of sec. 6673(a) is "Tax Court

Proceedings", while the heading of sec. 6673(b) is "Proceedings

in Other Courts".

9 That is, the applicability of sec. 6673 "depends not on

which party wins the lawsuit, but on how the parties conduct

themselves during the litigation." Chambers v. NASCO, Inc., 501

U.S. 32, 53 (1991) (discussing the "bad faith" exception to the

so-called American rule, the rule that generally prohibits

Federal courts from awarding attorneys' fees in the absence of a

statutory or contractual provision to the contrary).

-81-

- 4 -

directly caused by the sanctionable conduct. To paraphrase the

Supreme Court, the appellate fees and expenses at issue were

directly caused by this Court's rulings in Dixon III, not by the

attorney misconduct that occasioned the proceedings underlying

that opinion."

The Court of Appeals for the Ninth Circuit has applied

Cooter & Gell's "direct causation" approach outside the context

of Rule 11 on at least two occasions. See Lockary v. Kayfetz,

974 F.2d 1166, 1178 (9th Cir. 1992) (fees awarded under district

court's inherent authority to impose sanctions; "Cooter & Gell

suggests that the trial court should limit sanctions to the

opposing party's more 'direct' costs", which do not include the

costs of preparing the motion);" Lyddon v. Geothermal

Properties, Inc., 996 F.2d 212, 214 (9th Cir. 1992) (citing

Lockary and its reliance on Cooter & Gell, court concludes that

fee award under Fed. R. App. Proc. 38 for frivolous appeal should

not include the costs associated with computing the amount of the

award on remand). See also Manion v. American Airlines, 395 F.3d

428, 433 (D.C. Cir. 2004) (fee award under 28 U.S.C. § 1927 does

not properly include the cost of defending the award on appeal;

"much of (Cooter & Gell's] rationale applies with equal force in

the § 1927 context").¹²

" We recognize that, in Dixon IV, we awarded fees and

expenses under sec. 6673 without distinguishing between trial and

appellate proceedings. Under the reasoning of Cooter & Gell, the

appellate fees and expenses included in the initial fee requests

were directly caused by this Court's initial refusal to conduct

an evidentiary hearing regarding the effect of the attorney

misconduct on the trial of the test cases, not the attorney

misconduct itself. Because we did not explicitly address the

propriety of awarding appellate fees and expenses under sec. 6673

in Dixon IV, we do not consider ourselves bound by the law of the

case doctrine to evaluate the Izen and Jones appellate fee

requests under sec. 6673.

" Although Lockary v. Kavfetz did not involve Rule 11

sanctions, we note that Rule 11 now explicitly authorizes the

awarding of fees and expenses incurred in "presenting or

opposing" the motion for sanctions. Fed. R. Civ. P. 11(c)(1)(A).

t2 28 U.S.C. § 1927, from which sec. 6673 derives, provides:

Any attorney or other person admitted to conduct cases

in any court of the United States or any Territory

thereof who so multiplies the proceedings in any case

unreasonably and vexatiously may be required by the

court to satisfy personally the excess costs, expenses,

-82-

- 5 By contrast, a fee award under a fee-shifting statute such

as section 7430 generally encompasses all aspects of the

litigation. See Commissioner, INS v. Jean, 496 U.S. 154, 161-162

(1990) (while "[a]ny given civil action can have numerous

phases", "the [Equal Access to Justice Act]--like other feeshifting statutes--favors treating a case as an inclusive whole";

accordingly, fees incurred in obtaining an EAJA fee award are

recoverable regardless of the Government's reasonableness in

contesting the fee award). As noted above, the initial fee

requests relied in part on section 7430, a position we rejected

in Dixon IV on the ground that the movants had not substantially

prevailed. In light of the test case petitioners' subsequent

appellate victory, and in order to give effect to Jean's mandate

to "[treat] a case as an inclusive whole" in applying feeshifting statutes, we shall treat the present movants as having

revived their section 7430 claims by means of the Izen and Jones

appellate fee requests.13

Net Worth Requirement

For purposes of section 7430, a "prevailing party" must meet

the net worth requirement of 28 U.S.C. § 2412(d)(2)(B) (as in

effect on October 22, 1986). Sec. 7430(c)(4)(A) (ii). Rule

231(b)(4) requires the submission of the moving party's affidavit

to that effect. Although the initial fee requests relied in part

on section 7430, neither included any such net worth affidavits.

Furthermore, the Court has determined that the real parties in

interest with respect to the Izen and Jones appellate fee

requests include not only the present movants but all persons who

stand to benefit from the successful prosecution of those

requests (i.e., those individuals who have made payments of the

requested appellate fees and expenses to Mr. Izen--directly or

through contributions to the Atlas Legal Defense Fund--or Mr.

Jones or are otherwise liable for any portion of the requested

appellate fees and expenses). The Court cannot rule on the Izen

and attorneys' fees reasonably incurred because of such

conduct.

¹³ Jean arguably dictates that, in evaluating the Izen and

Jones appellate fee requests under sec. 7430, .we determine

prevailing party and substantial justification issues in terms of

the underlying deficiency litigation. Because the test case

proceedings relating to the underlying deficiencies and the

subsequent proceedings relating to attorney misconduct involved

fundamentally different facts and issues, we believe we are

justified in treating the attorney misconduct phase of the

litigation as a separate proceeding for these purposes.

-83-

- 6 and Jones appellate fee requests without knowing how many of

those real parties in interest satisfy the net worth requirement.

Premises considered, it is

ORDERED that, to the extent applicable, the present movants

(petitioners in Docket.Nos. 22783-85, 17646-83, 19464-92, 621-94,

and 9532-94) shall submit to the Court by October 28, 2005 the

affidavit of each real party in interest (as described above)

that his or her net worth as of June 10, 1992 did not exceed

$2,000,000.¹° It is further

ORDERED that, on or before October 28, 2005, respondent

shall file separate responses to the Izen and Jones appellate fee

requests consistent with this Order (i.e., by treating the

requests as supplementing the initial fee requests under section

7430). It is further

ORDERED that, in addition to counsel for petitioners in the

captioned cases and counsel for respondent, a copy of this order

shall be served upon:

Declan J. O'Donnell, Esq.

499 S. Larkspur Drive

Castle Rock, CO 80104

Robert Patrick Sticht, Esq.

P.O. Box 49457

Los Angeles, CA 90049

Judge

Dated: Washington, D.C.

September 8, 2005

¹* By Order dated September 1, 2005, we ordered counsel for

petitioners in Docket Nos. 9382-83, 15907-84, 40159-84, 30979-85,

and 29643-86 to perform a similar exercise with respect to their

appellate fee requests. All counsel are encouraged to coordinate

their efforts in this regard so that individuals who are real

parties in interest with respect to more than one appellate fee

request are not faced with multiple requests for net worth

affidavits. Counsel shall provide each other with copies of any

such "overlapping" net worth affidavits for inclusion in their

respective submissions to the Court, as applicable.

-84-

042

Appendix C--November 18, 2005 Order

UNITED STATES TAX COURT

Washington, D.C.

20217

JERRY DIXON AND PATRICIA A. DIXON, )

ET. AL.,

)

Petitioners

Docket Nos.

)

COMMISSIONER OF INTERNAL REVENUE,

)

SERVICE

9382-83

15907-84 /

40159-84

30979-85

STAT.

29643-86

ß.T. JUDGE

)

Respondent.

)

O R D E R

This Order responds to the motion for reconsideration of our

Order dated September 1, 2005, filed by petitioners in Docket

Nos. 9382-83, 15907-84, 40159-84, and 30979-85. For the reasons

discussed below, we shall deny the motion for reconsideration.

Background

Petitioners appealed the decisions we entered in their cases

reflecting our opinions in Dixon v. Commissioner, T.C. Memo.

1999-101 (Dixon III), and Dixon v. Commissioner, T.C. Memo. 2000116 (Dixon IV). The Court of Appeals for the Ninth Circuit

reversed and remanded. See Dixon v. Commissioner, 316 F.3d 1041

(9th Cir. 2003) (Dixon V). Petitioners in Docket Nos. 9382-83,

15907-84, 40159-84, and 30979-85 (the PH petitioners) then filed

with the Court of Appeals a request for attorneys' fees and

expenses relating to services provided by Porter & Hedges, L.L.P.

in connection with the appeals. Petitioners in Docket No. 2964386 (the Minns petitioners) filed a similar request with the Court

of Appeals relating to services provided by Michael Minns,. P.L.C.

in connection with the appeals. As filed, both appellate fee

requests relied exclusively on section 7430.2 The Court of

Appeals remanded the appellate fee requests to this Court "for a

determination of entitlement, and, if warranted, amount".

On August 18, 2005, the PH petitioners moved for leave to

amend their appellate fee request. We granted the.motion and

filed the subject amendment (the amendment). By the amendment,

the PH petitioners premise their entitlement to the requested

fees and expenses on the "bad faith" exception to the so-called

1 Unless otherwise indicated, all section references are to

the Internal Revenue Code of 1986, as amended, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

SERVED NOV 1 8 2005

-85-

- 2 American rule2 (the bad faith exception), while continuing to

rely on section 7430 as an alternative ground.3

The September 1 Order

In an Order dated September 1, 2005, we rejected the PH

petitioners' newfound reliance on the bad faith exception. We

did so primarily on the basis of Cooter & Gell v. Hartmarx Corp.,

496 U.S. 384 (1990). The issue in that case was whether a

district court could include in a Fed. R. Civ. P. 11 sanction the

fees incurred in defending the award on appeal. Reasoning that

"Rule 11 is more sensibly understood as permitting an award only

of those expenses directly caused by the [baseless) filing,

logically, those at the trial level", & at 406, the Court

broadly held that "Rule 11 does not authorize a district court to

award attorney' s fees incurred on appeal". E at 409. The

Court further reasoned: "As Rule 11 is not a fee-shifting

statute, the policies for allowing district courts to require the

losing party to pay appellate, as well as district court

attorney's fees, are not applicable." 1 We then observed that

the Supreme Court had drawn a similar i·listinction, albeit in a

different context, between the bad faith exception and feeshifting statutes: "the imposition of sanctions under the badfaith exception depends not on which party wins the lawsuit, but

on how the parties conduct themselves during the litigation."

Chambers v. NASCO, Inc., 501 U.S. 32, 53 (1991). We therefore

surmised that the reasoning of Cooter & Gell is applicable to fee

sanctions under the bad faith exception as well as those under

Fed. R. Civ. P. 11 (hereafter, Rule 11) .

In support of our reliance on Cooter & Gell, we cited three

cases in which courts had similarly applied the "direct

causation" approach of that case to fee sanctions not involving

Rule 11. See Manion v. American Airlines, 395 F.3d 428, 433

(D.C. Cir. 2004) (fee award under 28 U.S.C. sec. 1927 for

unreasonable and vexatious multiplication of the proceedings);

Lyddon v. Geothermal Properties, Inc., 996 F.2d 212, 214 (9th

Cir. 1992) (fee award under Fed. R. App. P. 38 for frivolous

appeal); Lockary v. Kayfetz, 974 F.2d 1166, 1178 (9th Cir. 1992)

(fee award under district court's exercise of its inherent

2 The American rule generally prohibits a Federal court from

awarding attorneys' fees in the absence of a statute or contract

providing for a fee award. Chambers v. NASCO, Inc., 501 U.S. 32,

61 (1991) (Kennedy, J., dissenting).

3 By the amendment, the PH petitioners also seek interest on

the requested fees and expenses from January 17, 2003 (the date

of the Court of Appeals' Dixon V opinion) .

-86-

- 3 authority to sanction bad faith conduct). We also questioned the

soundness (and continuing viability) of Brown v. Sullivan, 916

F.2d 492, 497 (9th Cir. 1990), a case the PH petitioners had

cited for the proposition that, under the bad faith exception, a

court may award.attorneys' fees "for the entire course of the

litigation, including time spent preparing, defending, and

appealing * * * awards of attorney fees, if it finds that the

fees incurred during the various phases of litigation are in some

way traceable to the [Government's) bad faith." Specifically, we

wondered why the Brown court cited as analogous authority

Commissioner, INS v. Jean, 496 U.S. 154 (1990), a case involving

a fee-shifting statute, rather than attempting to distinguish

Cooter & Gell, a case (like Brown) involving a fee sanction. We

also noted that two of the three judges comprising the Brown

panel also sat on the panel that subsequently decided Lockary v.

Kayfetz, supra.

Having rejected the PH petitioners' reliance on the bad

faith exception, we confirmed that we would continue to evaluate

their appellate fee request solely under section 7430. To that

end, we ordered the PH petitioners and the Minns petitioners to

submit net worth affidavits for each real party in interest (as

described in the Order) with respect to their appellate fee

requests on or before October 28, 2005. See sec.

7430(c)(4)(A)(ii); 28 U.S.C. sec. 2412(d)(2)(B); Rule 231(b)(4).

The Motion for Reconsideration

On November 7, 2005, the PH petitioners filed a motion for

reconsideration of our September 1 Order (the motion).4 We have

reviewed the motion and find counsel's arguments unpersuasive.

We address those arguments here by topic.

--Extension of Cooter & Gell

Counsel repeatedly asserts that the reasoning of Cooter &

Gell should not extend to fee awards under the bad faith

exception but offers no principled explanation why that is so.

For instance, counsel sometimes suggests that the bad faith

exception, unlike Rule 11, is a fee-shifting provision within the

me.aning of Cooter & Gell: "As an 'exception' to the fee-shifting

[American] rule (which rule provides that fee-shifting is not

generally permitted), the bad faith exception is a fee-shifting

rule itself." Mot. par. 6; see also Mot. pars. 7 (28 U.S.C. sec.

2412(b) makes the bad faith exception applicable to the United

The PH petitioners also filed on that date a request for

attorneys' fees on appeal under sec. 6673(a)(2). We shall

address that filing in a separate Order.

-87-

- 4 States; thus, "the bad faith exception, as a fee-shifting rule,

is authorized by federal statute") and 9 ("the bad faith

exception is the specific fee-shifting provision under applicable

law with respect to cases involving fraud on the court by the

United States"). Those statements clearly reflect a

misunderstanding of the sense in which the Court in Cooter & Gell

used the term "fee-shifting statute". The petitioner in Business

Guides, Inc., v. Chromatic Communications Enterprises, Inc., 498

U.S. 533 (1991), made a similar mistake:

In arguing that the monetary sanctions in this case

constitute impermissible fee shifting, Business Guides

relies on the Court's statement in Alyeska Pipeline

Service Co. v. Wilderness Society, [421 U.S. 240, 247

(1975)], that, in the absence of legislative guidance,

courts do not have the power "to reallocate the burdens

of litigation" by awarding costs to the losing party in

a civil rights suit; they have only the power to

sanction a party for bad faith. * * * Rule 11 sanctions

do not constitute the kind of fee shifting at issue in

Alyeska.lS) Rule 11 sanctions are not tied to the

outcome of litigation * * * .

498 U.S. at 552-553 (emphasis added); see also Chambers v. NASCO,

Inc., 501 U.S. at 52 (rejecting the argument that footnote 31 of

Alveska limits the authority of a Federal court sitting in

diversity to assess attorney's fees as a sanction; "[t]he

limitation on a court's inherent power described there applies

5 In his dissenting opinion in Business Guides, Justice

Kennedy further described "the kind of fee shifting at issue in

Alyeska":

In [Alyeska], while confirming the authority of the

courts to award attorney's fees against a party

conducting vexatious or bad-faith litigation, we

reversed an award of attorney's fees made on the theory

that the prevailing party had acted as a 'private

attorney general.'" We reaffirmed the American Rule

that litigants in most circumstances must bear their

own costs, and noted that Congress had itself provided

for fee awards under various statutes when it thought

fee shifting necessary to encourage certain types of

claims. We held that "it [was] not for us to invade

the legislature's province by redistributing litigation

costs in the manner" proposed in that case. [421 U.S.

at 271.]

498 U.S. at 565 (Kennedy, J., dissenting).

-88-

- 5 only to fee-shifting rules that embody a substantive policy, such

as a statute which permits a prevailing party in certain classes

of litigation to recover fees.").

Elsewhere, counsel merely asserts that "the distinction in

Cooter & Gell between sanctions and fee-shifting statutes does

not equate Rule 11 with the bad faith exception". Mot, par. 7.

The implication is that, regardless of the meaning of the term

"fee-shifting statute" in Cooter & Gell, the reasoning of that

case does not apply in the context of the bad faith exception

because Rule 11 and the bad faith exception are simply "apples

and oranges". Any such implication is belied by Chambers v.

NASCO, Inc., supra at 53:

In our recent decision in Business Guides, Inc. v.

Chromatic Communications Enterprises, Inc., 498 U.S.,

at 553, 111 S.Ct., at 934, we stated, "Rule 11

sanctions do not constitute the kind of fee shifting at

issue in Alyeska [because they] are not tied to the

outcome of litigation; the relevant inquiry is whether

a specific filing was, if not successful, at least well

founded." Likewise, the imposition of sanctions under

the bad-faith exception depends not on which party wins

the lawsuit, but on how the parties conduct themselves

durino the litigation. * * * [Alteration in original;

emphasis added.]

See also id at 46 n.10 ("the bad-faith exception resembles the

third prong of Rule 11's certification requirement, which

mandates that a signer of a paper filed with the court warrant

that the paper 'is not interposed for any improper purpose, such

as to harass or to cause unnecessary delay or needless increase

in the cost of litigation'"). Counsel's emphasis on the

differences between Rule 11 and the bad faith exception is devoid

of any explanation of how those differences are relevant to the

issue at hand: whether the Supreme Court's reasoning regarding

appellate fees in the context of Rule 11 sanctions applies to bad

faith sanctions as well.

--Brown v. Sullivan

As counsel again relies on Brown v. Sullivan, 916 F.2d 492

(9th Cir. 1990), we take this opportunity to explain further our

earlier skepticism. In Brown, the District Court had initially

held that the Government had acted in bad faith and that Ms.

Brown was therefore entitled to attorneys' fees under 28 U.S.C.

-89-

- 6 sec. 2412(b), which does not contain any rate caps.6 The

Government appealed the award, and the Court of Appeals vacated

and remanded for reconsideration of the bad faith issue in light

of an intervening Ninth Circuit case. On remand, the District

Court awarded fees to Ms. Brown as a prevailing party under 28

U.S.C. sec. 2412(d). As a fee-shifting provision, 28 U.S.C. sec.

2412(d) does not require a showing of bad faith or other

misconduct, but, like section 7430, it subjects fee awards to

hourly rate caps. Ms. Brown appealed that award, arguing that

the Government had indéed acted in bad faith and that her fee

award should therefore be predicated on the bad faith exception,

as applicable to the Government pursuant to 28 U.S.C. sec.

2412(b), rather than the fee-shifting (prevailing party)

provision of 28 U.S.C. sec. 2412(d). Ms. Brown also sought

additional fees "for bringing and appealing the present fees

motion." 916 F.2d at 493.

Holding that the Government had acted in bad faith, the

Court of Appeals remanded the case to the District Court "so that

it may exercise its discretion to award attorney fees to Brown at

reasonable market rates under 28 U.S.C. § 2412(b)." 916 F.2d at

493. The court then stated: "The district.court may award

attorney fees at market rates for the entire course of the

litigation, including time spent preparing, defending, and

appealing the two awards of attorney fees, if it finds the fees

incurred during the various phases of the litigation are in some

way attributable to the [Government's] bad faith." Id

The

court did not attempt to reconcile that statement with Cooter &

Gell v. Hartmarx Corp., supra; rather, it cited as analogous

authority Commissioner, INS v. Jean, supra, a case involving 28

U.S.C. sec. 24121d1 (court need not make a separate inquiry under

that provision as to whether the Government's position in the fee

litigation is substantially justified). See 916 F.2d at 497.

In Lockary v. Kayfetz, 974 F.2d 1166 (9th Cir. 1992), the

Court of Appeals addressed the issue of whether a fee award under

the bad faith exception properly includes the cost of "preparing

and supporting [the] motion for sanctions". Id at 1177.

Interestingly (in light of Brown v. Sullivan, supra), the court

viewed the issue as one of first impression in the Ninth Circuit.

After discussing cases from other jurisdictions, the court

stated:

6 Pursuant to 28 U.S.C. sec. 2412(b), the common law

exceptions to the American. rule, see supra note 2, including the

bad faith exception, "apply to the federal government in the same

manner as they apply to private litigants." Maritime Mgmt., Inc.

v. United States, 242 F.3d 1326, 1331 (11th Cir. 2001); see also

Brown v. Sullivan, 916 F.2d at 495.

-90-

- 7 The Supreme Court's recent decision in Cooter &

Gell v. Hartmarx Corp. fortunately provides some

guidance on this issue. The Court held that the party

who sought sanctions under Rule 11 was not entitled to

reimbursement for the costs of defending an award of

sanctions on appeal. The Court rejected the argument

that such costs were incurred "because of" the

sanctioned party's filing of the offending pleading.

The court refused to adopt the position of the party

seeking sanctions that "[it] would have incurred none

of [its] appellate expenses had petitioner's lawsuit

not been filed." Cooter & Gell, 496 U.S. at 406, 110

S.Ct. at 2461. The court found that "[t]his line of

reasoning would lead to the conclusion that expenses

incurred "because of" a baseless filing extend

indefinitely. * * *

Cooter & Gell suggests that the trial court should

limit sanctions to the opposing party's more "direct"

costs, that is, the costs of opposing the offending

pleading or motion. We thus find that the district

court erred in including the defendants' attorneys'

fees for preparing their motion for sanctions in the

sanctions it imposed.

Id. at 1177-1178.7 The foregoing strongly suggests that the

Lockary court disavowed, sub silentio, the language in Brown v.

Sullivan, supra, relied upon by counsel."

The Brown court also cited General Federation of Women's

Clubs v. Iron Gate Inn, Inc., 537 A.2d 1123 (D.C. App. 1988), as

direct authority for the proposition that a court may award fees

incurred over "the entire course of the litigation * * * if it

finds the fees incurred during the various phases of the

litigation are in some way attributable to the [Government's] bad

faith." See 916 F.2d at 497. In particular, the Brown court

quoted the following statement from General Federation, 537 A.2d

at 1129: "The law is well established that, when fees are

available to the prevailing party, that party may also be awarded

Although Lockary v. Kayfetz did not involve a Rule 11

sanction, we note that Rule 11 now explicitly authorizes the

awarding of fees and expenses incurred in "presenting or

opposing" the motion for sanctions. Fed. R. Civ. P. ll(c)(1) (A).

8 Again, we note that two of the three judges comprising the

Brown panel also sat on the panel that subsequently decided

Lockarv.

-91-

-8fees on fees, i.e., the reasonable expenses incurred in the

recovery of its original costs and fees." In support of that

statement, the court in General Federation cited Copeland v.

Marshall, 641 F.2d 880, 896 (D.C. Cir. 1980), in which the Court

of Appeals stated that "time spent litigating the fee request is

itself compensable". Copeland, however, involved an award under

the fee-shifting (prevailing party) provision of Title VII of the

Civil Rights Act of 1964, rather than a fee sanction. See 42

U.S.C. sec. 2000e-5(k). Similarly, the three cases cited by the

court in Copeland in support of its statement quoted above

(Johnson v. State of Mississippi, 606 F.2d 635 (5th Cir. 1979),

Gagne v. Maher, 594 F.2d 336 (2d Cir. 1979), and Lund v. Affleck,

587 F.2d 75 (1st Cir. 1978)) all involved the Civil Rights

Attorney's Fees Awards Act of 1976, another fee-shifting statute.

See 42 U.S.C. sec. 1988. Thus, the seeming disconnect in Brown

goes well beyond the court's citation to Commissioner, INS v.

Jean, supra.

Counsel also cites Chambers v. NASCO, Inc., supra, and

Kendrick v. Zanides, 609 F. Supp. 1162 (N.D. Cal. 1985), as being

in accord with Brown's statement regarding appellate fees under

the bad faith exception. Mot. par. 11. Counsel points to the

following language from Chambers, 501 U.S. at 55: "we find that

the District Court acted within its discretion in assessing as a

sanction for Chambers' bad-faith conduct the entire amount of

NASCO's attorney's fees". We direct counsel's attention to Part

I of the Chambers opinion, in which the Court, while

characterizing the District Court's fee award as representing

"the entire amount of NASCO's litigation costs paid to its

attorneys", notes that the District Court, in calculating that

award, deducted the amount of fees the Court of Appeals had

previously awarded under Fed. R. App. P. 38. 501 U.S. at 40 &

n.5. As for Kendrick, we note that (1) the opinion makes no

reference to any appellate proceedings in that case or to

appellate fees in general, and (2) in any event, it is a Rule 11

case that predates Cooter & Gell.

Counsel claims that "Brown does not stand alone in ruling

that when a party prevails against the United States on appeal,

such party is entitled to fees on appeal under (sic] 28 U.S.C. §

2412(a)." Mot. par. 13. We note that the cited provision deals

with costs, "not including the fees and expenses of attorneys".

28 U.S.C. sec. 2412(a)(1). Counsel must be referring to 28

U.S.C. sec. 2412(d), the fee-shifting (prevailing party)

provision of the Equal Access to Justice Act, since both of the

cases cited by counsel in support of its assertion involve that

provision. See United States v. Real Property Known as 22249

Dolorosa St., 190 F.3d 977 (9th Cir. 1999); Meinhold v. United

States Dept. of Defense, 123 F.3d 1275 (9th Cir. 1997). Again,

we submit that such cases are not in point,' given the Supreme

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- 9 Court's statement in Cooter & Gell that "the policies for

allowing district courts to require the losing party to pay

appellate, as well as district court attorney's fees" are

applicable to fee-shifting statutes but not Rule 11, 496 U.S. at

409, which, like the bad faith exception but unlike a feeshifting statute, punishes bad conduct.

--Commissioner, INS v. Jean

We have no quarrel with counsel's description of

Commissioner, INS v. Jean, 496 U.S. 154 (1990); rather, we reject

counsel's attempt to extend the reasoning of that case to the

cases at bar. See Mot. par. 14. Indeed, the language quoted by

counsel undermines that attempt: "While the parties' postures on

individual matters may be more or less justified, the EAJA--like

other fee-shifting statutes--favors treating a case as an

inclusive whole, rather than as atomized line-items." 496 U.S. at

161-162 (emphasis added). One week after the issuance of Jean,

the Supreme Court stated that "the policies for allowing district

courts to require the losing party to pay appellate, as well as

district court attorney's fees" are applicable to fee-shifting

statutes but not Rule 11. Cooter & Gell v. Hartmarx Corp., 496

U.S. at 409. The bad faith exception is not a fee-shifting

provision within the meaning of either Jean or Cooter & Gell.

--Direct Causation

Counsel contends that, because the Court of Appeals' mandate

in DuFresne v. Commissioner, 26 F.3d 105 (9th Cir. 1994),

contemplates the possibility of future appeals, "petitioners'

second appeal to the Ninth Circuit followed directly from

DuFresne with respect to the underlying merits litigation--the

misconduct of respondent's attorneys." Mot. par. 15.

Irrespective of the merits of that contention in the abstract,

believe counsel misses the point. The issue is whether a trial

court's fee award premised "not on which party wins the lawsuit,

but on how the parties conduct themselves during the litigation",

Chambers v. NASCO, Inc., 501 U.S. at 53, may include fees

incurred on appeal, notwithstanding the lack of any misconduct at

the appellate level. We have concluded that it may not.

We believe Hutto v. Finney, 437 U.S. 678 (1978), provides

additional support for our conclusion. In Hutto, the State of

Arkansas argued that fee awards ordered by the District Court and

the Court of Appeals violated the Eleventh Amendment. Analyzing

the fee awards separately, the Supreme Court found that, whereas

the trial court's award was adequately supported by its finding

of bad faith, the appellate court's award, clearly not supported

by any finding of bad faith, could be sustained under the Civil

Rights Attorney's Fees Awards Act of 1976 (CRAFAA), a fee-

-93-

- 10 shifting (prevailing party) statute. Id. at 689 & n.13, 693 &

n.21; see also id. at 699 n.32, 700 (CRAEAA authorizes a fee

award even though the appeal was not taken in bad faith; no

indication in this case that the defendants litigated in bad

faith before the Court of Appeals); id. at 714 (Rehnquist, J.,

dissenting) (restating the majority's conclusion that "the award

of fees in the Court of Appeals, where there was no bad faith, is

authorized by (CRAEAA]" and dissenting on Eleventh Amendment

grounds) (emphasis added). Logically, if a finding of bad faith

at the trial level could, in and of itself, support a subsequent

appellate fee award, the Supreme Court in Hutto would not have

had to rely on CRAEAA as the basis for the appellate fee award.

--Additional Cases cited in September 1 Order

Counsel alternatively argues that "[t]he 'directly caused'

element of the Cooter & Gell analysis is specific to Rule 11

sanctions", Mot. par. 15, and then attacks our reliance on cases

applying that approach outside the context of Rule 11, see Mot.

pars. 16-18. Most notably, counsel asserts that Lockary v.

Kayfetz, supra, "while decided under the court's inherent power,

was not decided under the 'bad faith exception' and thus is

inapposite." Mot. par. 16. We direct counsel's attention to

Chambers v. NASCO, Inc., supra at 45-46:

Indeed, "[t]here are ample grounds for recognizing

* * * that in narrowly defined circumstances federal

courts have inherent power to assess attorney's fees

against counsel," even though the so-called "American

Rule" prohibits fee shifting in most cases. As we

explained in Alyeska, these exceptions fall into three

categories. * * *

Third, and most relevant here, a court may assess

attorney's fees when a party has "'acted in bad faith,

vexatiously, wantonly, or for oppressive reasons.'" In

this regard, if a court finds "that fraud has been

practiced upon it, or that the very temple of justice

has been defiled," it may assess attorney's fees

against the responsible party, as it may when a party

"shows bad faith by delaying or disrupting the

litigation or by hampering enforcement of a court

order" * * * . [Citations and fn. ref. omitted.]

Clearly, the bad faith exception is subsumed within the broader

spectrum of inherent authority fee awards.

Counsel also states that, "[a]s noted above, the Sixth

Circuit specifically distinguished Lockary from the bad faith

exception in First Bank of Marietta." Mot. par. 16. Far from

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- 11 -distinguishing Lockary from the bad faith exception, the

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