Stefan A. Tolin Petitioner
Commissioner of Internal Revenue Respondent
Submitted: January 15, 2019
from The United States Tax Court
SMITH, Chief Judge, COLLOTON and ERICKSON, Circuit Judges.
Stefan Tolin prevailed in a deficiency proceeding before the
United States Tax Court. He then sought an award of
attorney's fees. The tax court granted the award, but it
denied Tolin's request for an enhancement to the hourly
fee rate. Tolin received an award of attorney's fees at
the statutory rate of $180 per hour. See 26 U.S.C.
§ 7430. The tax court also reduced the number of
compensable hours. On appeal, Tolin claims the tax court
erred by reducing the hours claimed and by calculating the
award using the statutory rate. We affirm.
a Minnesota attorney, owned a thoroughbred horse racing and
breeding business. Tolin's business primarily sold
breeding rights for his prized stallion, Choosing Choice.
Though he lived in Minnesota, Tolin boarded Choosing Choice
in Louisiana under the care of thoroughbred industry
professionals. He generally conducted his business via
telephone, but he also prepared marketing materials and made
several trips to Louisiana each year to promote the stallion
among breeders there.
2008, the Commissioner of Internal Revenue
("Commissioner") issued Tolin a notice of
deficiency for his 2002, 2003, and 2004 federal income tax
returns. The notice informed him that the net losses he had
claimed for his thoroughbred business during those years were
disallowed as "passive activity losses" under 26
U.S.C. § 469. Section 469 prohibits taxpayers from
offsetting their active income with losses incurred through
business activities "in which the taxpayer does not
materially participate." Id. §
469(c)(1)(B). After receiving the notice, Tolin hired Richard
Craigo, a California attorney who specializes in tax issues
common to the thoroughbred horse industry, to petition the
tax court for redetermination.
avoid the tax deficiency, Tolin needed to demonstrate that he
met any one of seven available tests to qualify his conduct
as "material participation" in the thoroughbred
activity. See 26 C.F.R. § 1.469-5T(a). The
first of these tests requires showing that "[t]he
individual participates in the activity for more than 500
hours during" the taxable year. Id. §
1.469-5T(a)(1). Cumulatively, Tolin estimated that he had
participated in the thoroughbred activity for 891 hours in
2002, 862 hours in 2003, and 937.5 hours in 2004. He
corroborated these estimates with phone records, witness
testimony, and other materials. The case proceeded to trial,
and the tax court ultimately determined that Tolin performed
more than 500 hours of qualifying work during each of the
years in question. The court found Tolin's activities met
the "material participation" test. Consequently, he
was entitled to claim deductions for the losses he had
incurred through the business and avoid the deficiency
claimed by the Commissioner.
his trial success, Tolin petitioned the court for reasonable
litigation costs and attorney's fees allowable under 26
U.S.C. § 7430. He sought attorney's fees totaling
$256, 920, based on 642.3 hours of work between May 1, 2009,
and January 31, 2011, calculated at a rate of $400 per hour.
The government argued that Craigo's time expenditure and
rate were not reasonable given the nature of the case and
that § 7430 limits the hourly rate for attorney's
fees to $180 per hour.
court concluded that Tolin was a "prevailing party"
entitled to recover fees incurred after December 1, 2009-the
point at which the tax court determined the government's
litigation position was no longer "substantially
justified." See 26 U.S.C. § 7430(c)(4).
The court divided the relevant hours for separate
consideration: hours claimed during pretrial and trial
portions of the proceeding (153.7), and hours claimed for
post-trial work (300.1). The tax court reduced the pretrial
and trial portion of the recovery to 116 hours. Tolin does
not contest that portion of the ruling on appeal.
the tax court analyzed the claimed post-trial hours by
dividing them into periods during which the post-trial
opening brief and reply brief were prepared. First, Craigo
recorded 196.3 hours in his timesheets from August 21 through
December 8, 2010. Describing the timesheets as
"skeletal," the tax court determined that Craigo
spent 176.3 of those hours preparing the post-trial opening
brief. Tolin v. Comm'r, 115 T.C.M. (CCH) 1119,
2018 WL 1391815, at *15 (2018). The remaining 20 hours were
spent identifying and correcting an error in a trial exhibit.
The tax court determined that the hours spent on correcting
the exhibit were reasonably expended, but it took issue with
some of the remaining 176.3 hours for briefing.
opening brief, the tax court noted, was only 36 pages long
and "was devoted to demonstrating that [Tolin] had
satisfied three of the regulatory tests for material
participation." Id. at *16. The court's
review of Craigo's timesheets showed an
"extraordinary number of telephone conferences
between" Tolin and Craigo during the briefing period,
leading the tax court to "conclude that the consultation
. . . caused the preparation time to become unreasonable in
relation to the task at hand." Id. The court
noted that a "hallmark" of Tolin's activity in
his thoroughbred business was making numerous daily phone
calls to business associates, and it surmised that his
"penchant for incessant telephoning and micromanagement
carried over into his participation in the briefing of the
deficiency case." Id. Consequently, the tax
court treated only one-half of the 176.3 opening brief hours
as having been reasonably expended. The tax court similarly
reduced by half the 103.8 hours that Craigo submitted for
work on the reply brief, citing the same reasons.
the tax court limited Tolin's recoverable attorney's
fees rate to the statutory maximum. The tax court
acknowledged that an enhanced rate is available under §
7430(c)(1)(B)(iii) when justified by the presence of some
"special factor." But it concluded that nothing
more than generalized tax and litigation experience was
needed to prove the extent of Tolin's participation in
the thoroughbred activity. The tax court awarded fees for