## Facts

- Taxpayers mailed a delinquent original federal income tax return that claimed a refund.
- The return was mailed less than three years after the return’s original due date, tracking the look-back limit in I.R.C. § 6511(b)(2)(A), but the IRS received the return after the three-year period had run.
- Consistent with the government’s then-existing position, the IRS denied the refund on the ground that a refund claim based on a delinquent original return had to be delivered to the IRS within the applicable period (i.e., that the “timely mailed, timely filed” rule of I.R.C. § 7502 did not control the timeliness of that refund claim).
- Taxpayers filed a refund suit in federal district court (Curell v. United States, 2001-2 U.S.T.C. ¶ 50,740, 88 AFTR2d 2001-5501 (S.D. Ohio 2001)).
- During the litigation, the government changed its position in response to other litigation and allowed the taxpayers’ refund claim.
- Taxpayers then moved for litigation costs and attorneys’ fees under I.R.C. § 7430, seeking an hourly rate above the statutory cap based largely on counsel’s tax-focused training (including an LL.M. in Taxation) and experience.
- The district court granted the motion, finding the government’s position was not substantially justified and awarding fees at a rate above the presumptive maximum.
- The IRS Office of Chief Counsel issued Action on Decision 2002-06 (Dec. 9, 2002) to announce how the IRS would treat the district court’s reasoning in later cases, especially the “special factor” basis for awarding fees above the § 7430 cap.

## Issues

1. Whether, for purposes of I.R.C. § 7430, the government’s earlier litigating position on the interplay of I.R.C. §§ 7502 and 6511 could be substantially justified when measured against the law as it existed when the position was taken, even if the government later changed course and paid the refund.
2. Whether an attorney’s tax-focused training (including an LL.M. in Taxation) and general tax practice background, without more, is a “special factor” under I.R.C. § 7430(c)(1)(B)(iii) that allows a court to award attorneys’ fees above the statutory hourly cap.

## Decision

- The IRS announced it would continue to argue that “substantially justified” under I.R.C. § 7430 turns on whether the government’s position had a reasonable basis in law and fact at the time it was maintained, and that a later change in position does not automatically establish a lack of substantial justification.
- The IRS stated it would not accept the district court’s approach in Curell to the extent it treated an attorney’s tax LL.M. and general tax-law background, standing alone, as a “special factor” allowing fees above the § 7430 hourly cap.
- The IRS indicated it would rely on Pierce v. Underwood and related § 7430 authorities to argue that “special factor” treatment is reserved for rare circumstances, not for routine tax-law qualifications that are widely available among tax practitioners.

## Legal Principles

- Under I.R.C. § 6511(b)(2)(A), the amount of a refund may be limited by a look-back period tied to when the claim is filed.
- I.R.C. § 7502 provides that certain documents are treated as filed on the date of mailing if specific conditions are met; disputes can arise over whether and how this rule applies to refund claims based on delinquent original returns.
- Under I.R.C. § 7430, a prevailing taxpayer may recover reasonable litigation costs only if the government’s position was not “substantially justified,” among other requirements.
- “Substantially justified” is assessed by asking whether the government’s position was reasonable in law and fact when taken and maintained; an eventual concession does not, by itself, decide the justification question.
- Attorneys’ fees under I.R.C. § 7430 are generally subject to a statutory hourly cap; a higher rate is allowed only if the court finds a qualifying “special factor” under § 7430(c)(1)(B)(iii).
- Following Pierce v. Underwood (interpreting the parallel “special factor” language in the Equal Access to Justice Act), “special factor” is construed narrowly so the cap remains the default rule.
- A lawyer’s general tax-law background (including an LL.M. in Taxation), without a showing that the case required uncommon skills and that attorneys with those skills were not reasonably available at the capped rate, is typically insufficient to justify a rate above the cap.

## Conclusion

Action on Decision 2002-06 is the IRS Office of Chief Counsel’s published response to the fee ruling in Curell v. United States: while the government had allowed the refund after changing its position, the IRS announced it would continue to argue in future cases that substantial justification must be judged based on the legal landscape at the relevant time, and it would oppose awarding § 7430 attorneys’ fees above the statutory cap where the only claimed “special factor” is counsel’s tax training or general tax-law practice background.


Action on Decision, AOD 2002-06 (2002)