In a recent case before the United States Tax Court, an attorney, who also ran a thoroughbred horse-breeding and racing activity, demanded that the IRS pay his attorney’s fees related to litigation in the United States Tax Court. The attorney claimed losses on his federal Form 1040 tax returns for 2002, 2003 and 2004 on his Schedule C for his thoroughbred activity. The IRS disallowed these losses, claiming that they were passive activity losses. The IRS then issued a Notice of Deficiency, and the taxpayer filed a Petition in the United States Tax Court. A trial was held, and the Tax Court largely held for the taxpayer who proved that he spent more than 500 hours per year actively participating in his thoroughbred horse-breeding and racing activity. Small tax deficiencies remained related to his thoroughbred activity and his law office. Because he felt that he was the prevailing party in the Tax Court litigation, the attorney demanded an award of attorney’s fees from the IRS. Internal Revenue Code section 7430(a) authorizes the award of reasonable litigation costs to the prevailing party if he or she meets certain requirements. The taxpayer must have first exhausted all of his administrative remedies and did not reasonably protract the court proceeding, he must have substantially prevailed and the taxpayer must meet an applicable net worth requirement. If the court agrees that a taxpayer is entitled to attorney’s fees, the attorney’s fees must be reasonable, must have been incurred for services related to the court proceeding and must not be in excess of $125.00 per hour as adjusted for inflation. The court is free to increase the hourly rate for special factors, such as the limited availability of qualified tax attorneys, which will justify a higher hourly rate. The taxpayer claimed that his attorney spent over 642 hours working on the case and charged $400.00 per hour, which resulted in attorney’s fees in excess of $250,000.00. The IRS contended that the taxpayer was not entitled to attorney’s fees and, if he was, that the attorney was limited to $180.00 per hour. After considering the arguments, the Court held in favor of the taxpayer and awarded the attorney’s fees. However, after reviewing the attorney’s timesheets, it limited the number of hours to 276 and the hourly rate to $180.00 per hour. Do you owe money to the IRS? Call us, we can help.
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