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Tolin v. Commissioner of Internal Revenue

United States Court of Appeals, Eighth Circuit

July 3, 2019

Stefan A. Tolin Petitioner
v.
Commissioner of Internal Revenue Respondent

          Submitted: January 15, 2019

          Appeal from The United States Tax Court

          Before SMITH, Chief Judge, COLLOTON and ERICKSON, Circuit Judges.

          SMITH, CHIEF JUDGE.

         Taxpayer Stefan Tolin prevailed in a deficiency proceeding before the United States Tax Court.[1] 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.

         I. Background

         Tolin, 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.

         In 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.

         To 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.

         Following 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.

         The tax 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.

         Then 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.

         The 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.

         Lastly, 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 160.1 ...


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