[00:00:00] Speaker 00:
for argument is 171925 BASR Partnership versus United States.

[00:00:44] Speaker 00:
Whenever you're ready, sir.

[00:01:15] Speaker 01:
Good morning, and may it please the court.

[00:01:17] Speaker 01:
I am Mike Hongs from the Department of Justice on behalf of the United States.

[00:01:22] Speaker 01:
This case concerns the special qualified offer rule in tax cases that allows a court to award attorney's fees in cases where the liability of a taxpayer pursuant to the judgment is less than the taxpayer's monetary offer.

[00:01:37] Speaker 03:
In the agent context, we generally review attorney's fees and cost awards for abuse

[00:01:45] Speaker 03:
of discretion, but we review prevailing party determinations de novo.

[00:01:51] Speaker 03:
That differs from our sibling circuits, who don't make that distinction.

[00:01:59] Speaker 03:
Should we follow our IJA precedent and review de novo on the prevailing party question, or follow our sibling circuits on this?

[00:02:13] Speaker 01:
We think you should review de novo certainly on the legal issues.

[00:02:18] Speaker 01:
It isn't quite the same as a prevailing party under each, of course, because it involves a specialized rule that applies only in tax cases.

[00:02:25] Speaker 01:
And we submit that the court of federal claims here erred in applying that rule in a case in which monetary liability was not determined and indeed in which the court doesn't have jurisdiction to determine monetary liability.

[00:02:39] Speaker 01:
And the phrase is at issue, right?

[00:02:41] Speaker 00:
I'm sorry?

[00:02:41] Speaker 00:
The phrase is at issue.

[00:02:43] Speaker 00:
Yes.

[00:02:44] Speaker 00:
Can we, if you don't mind, because the clock is running, I'd like to skip over that and get to then the net worth issue that arises.

[00:02:53] Speaker 00:
So let's assume we're past that.

[00:02:55] Speaker 00:
OK.

[00:02:56] Speaker 00:
And we're on to the issue of whether or not the partnership is a real party in interest.

[00:03:00] Speaker 00:
Yes.

[00:03:00] Speaker 00:
And then whose net worth are we determining?

[00:03:03] Speaker 00:
I'm a little confused by the net worth simply because the regulation that everybody seems to be talking about didn't go into effect till 2016.

[00:03:12] Speaker 00:
Right?

[00:03:12] Speaker 01:
Yes, yes, the March 1, 2016 regulation.

[00:03:15] Speaker 00:
Okay, so why are we all talking and relying on that since it was not in effect during the operative period?

[00:03:23] Speaker 01:
Well, I don't think it was not our primary contention to rely on the regulation, but in any event our contention regarding this issue of net worth and who is a party is simply that BASR as the partnership was not a party and cannot be a party under TEFRA, and that's just

[00:03:40] Speaker 01:
under the laws of the way TEFRA works.

[00:03:43] Speaker 00:
Well, let's assume we think it can be a party.

[00:03:45] Speaker 00:
Are we also making the argument that necessarily all the partners are also automatically parties?

[00:03:51] Speaker 01:
That's the way TEFRA works.

[00:03:52] Speaker 01:
In other words, the TEFRA partnership proceeding is brought by either the tax matters partner or one of the partners.

[00:03:59] Speaker 00:
Kind of on behalf of the partnership, right?

[00:04:01] Speaker 00:
Not as a partner in its role as a partner.

[00:04:05] Speaker 01:
per se, right?

[00:04:06] Speaker 01:
In a sense, although we have to always remember that partnerships don't pay income tax on their own rights.

[00:04:11] Speaker 01:
So to say on behalf of the partnership, that sort of depends what one means, because the partnership is not going to be liable for income tax at the end of the day.

[00:04:18] Speaker 00:
Well, you're back to the first issue, which I tried to allie.

[00:04:21] Speaker 00:
I'm talking about the net worth and whose net worth is operative in terms of figuring out whether or not they're entitled to reimbursement from litigation fees.

[00:04:29] Speaker 00:
So if we were to conclude that BASR

[00:04:32] Speaker 00:
is a real party in interest.

[00:04:35] Speaker 00:
Is there another argument you have of that we should not just be including their net worth, but also go down and look at the partner's net worth?

[00:04:45] Speaker 01:
Yes.

[00:04:46] Speaker 01:
I mean, the regulation, which, as you pointed out, is effective March 1, says it was to look at both.

[00:04:50] Speaker 00:
So it wasn't March 1, 2016, which was after this case.

[00:04:55] Speaker 00:
It doesn't apply to this case, right?

[00:04:58] Speaker 00:
Yes.

[00:04:58] Speaker 00:
What beyond, what do you point to that we should look, assuming again that we found that BSAR is the real party in interest, what beyond the net worth requirements with regard to the party do we look at, with regard to the partnership do we look at?

[00:05:15] Speaker 01:
Well, it would be the fact that the other partners are parties to the proceedings, and you have the rule from the DC Circuit, the unification church case,

[00:05:23] Speaker 01:
which says that essentially you have to look at if there are parties to the case who don't meet the net worth requirement, they can't, in a sense, hide behind the presence of another party that would meet the net worth requirement.

[00:05:37] Speaker 02:
I'm sorry.

[00:05:38] Speaker 02:
The unification church case, the fee ineligible party was the church, right?

[00:05:47] Speaker 02:
Yes.

[00:05:47] Speaker 02:
And then there were a bunch of individuals that were fee eligible.

[00:05:50] Speaker 02:
But the facts of that case, it was pretty clear that the fee in eligible church was the one that was responsible for and obligated to cover all the attorney's fees.

[00:06:03] Speaker 02:
In this case, as I understand it, it's the fee eligible partnership that, per the partnership agreement, is obligated to cover the attorney's fees or is responsible for the attorney's fees.

[00:06:19] Speaker 02:
the fee in eligible partners, to the extent that they are parties, they have a flipped relationship compared to the parties involved in the unification church.

[00:06:31] Speaker 02:
So that's why I'm trying to figure out whether that case really has some kind of persuasive effect here.

[00:06:40] Speaker 01:
We don't agree that the partnership really was responsible for the fees, notwithstanding what the

[00:06:47] Speaker 02:
the partnership agreement says, because the fees were really... So let's assume for the moment we find that the partnership agreement puts the obligation on the partnership itself.

[00:07:01] Speaker 02:
Then would there be a break between the facts of this case and the facts of Unification Church for the reasons I gave earlier?

[00:07:08] Speaker 01:
No, it was the partners individually who paid the fees in this case.

[00:07:13] Speaker 01:
The agreement between the law firm

[00:07:16] Speaker 01:
The law firm didn't sign a retainer or a relationship with the partnership.

[00:07:22] Speaker 01:
The retainer agreement was with the individual partners.

[00:07:25] Speaker 01:
The individual partners, and the billing records are all in the record here, paid it.

[00:07:28] Speaker 00:
But isn't it clear from the record that there's an indemnification requirement, so any fees incurred, they would have to be reimbursed by the partnership?

[00:07:38] Speaker 01:
Only to the extent that the partnership had any assets.

[00:07:40] Speaker 01:
Yeah, where would that money come from?

[00:07:42] Speaker 01:
Well, the partnership doesn't have any assets.

[00:07:44] Speaker 01:
They stipulated that the partnership

[00:07:46] Speaker 01:
well, it filed its final return for the 99 tax year back in 2000.

[00:07:50] Speaker 01:
This audit didn't begin until 2006.

[00:07:53] Speaker 01:
They agreed at some point in the briefing in the Court of Federal Claims that the partnership was not a going concern anymore and that it had zero assets.

[00:08:02] Speaker 01:
So this partnership essentially wrapped up its operations.

[00:08:05] Speaker 03:
My question is, in order to reimburse the other partners, the money would have to come from them, would it not?

[00:08:16] Speaker 01:
Oh, I see.

[00:08:16] Speaker 01:
Yes, to reimburse them, the money would have had to come from the other partners to begin with.

[00:08:20] Speaker 01:
But the partnership doesn't have any money with which to reimburse them, unless, of course, it gets a term.

[00:08:27] Speaker 03:
So it would have to, in effect, demand from the partners that they pay the money to the partnership so it could repay it to the partners.

[00:08:39] Speaker 03:
It would be an assessment.

[00:08:40] Speaker 01:
Yes, it'd be sort of circular.

[00:08:41] Speaker 01:
The partnership would have to get the money from the partners.

[00:08:44] Speaker 02:
I agree.

[00:08:45] Speaker 02:
It's confusing.

[00:08:46] Speaker 02:
But what we're trying to figure out is whether the partnership itself should be regarded as a legal entity.

[00:08:54] Speaker 02:
It's not something that's so morphed into the individual partners itself that it doesn't really exist in any meaningful way when the law obviously

[00:09:07] Speaker 02:
contemplates that there is the existence of this separate thing called a partnership?

[00:09:13] Speaker 01:
The partnership has a separate existence.

[00:09:15] Speaker 01:
And for tax purposes, that would be relevant in certain kinds of cases, but not in an income tax case, because it's a pass-through entity for income tax.

[00:09:23] Speaker 01:
If I could give the example that I think a lot of people are familiar with, which is a law firm.

[00:09:28] Speaker 01:
The firm's earnings pass through to the partners individually.

[00:09:32] Speaker 01:
So the firm doesn't pay income tax at the partnership level.

[00:09:35] Speaker 01:
But it certainly has a number of employees, associates, paralegals, et cetera.

[00:09:39] Speaker 01:
The firm is responsible for withholding income tax from their salaries, paying social security tax on their behalf, and paying that over to the IRS, just like any business would.

[00:09:50] Speaker 01:
The partnership as a business entity, just as if it were a corporation, in those kind of cases, a partnership certainly could be a party to a tax case.

[00:09:58] Speaker 01:
It could get into a dispute with the IRS.

[00:10:00] Speaker 01:
And in those sorts of cases,

[00:10:01] Speaker 01:
Yes, we would say that the partnership would be a real party and interest as a thing that was really paying the tax.

[00:10:08] Speaker 01:
But when we're talking about this TEFRA regime for determining income tax liability, the partnership doesn't pay income tax.

[00:10:17] Speaker 01:
It's only the partners that are going to pay that tax.

[00:10:20] Speaker 01:
And as the Supreme Court laid out in Woods, and this court, of course, has a number of decisions explaining this, we conduct that inquiry in two steps under TEFRA.

[00:10:27] Speaker 01:
There's a partnership level proceeding to determine

[00:10:30] Speaker 01:
partnership items, but it doesn't determine liability.

[00:10:33] Speaker 02:
What are we supposed to do about section 2412, which clearly contemplates that a prevailing party can be a lot of different things, including a partnership?

[00:10:47] Speaker 01:
Well, I think this is the EJA provision that's partly wrapped into the 7430.

[00:10:54] Speaker 01:
It could be, but not in a Tefer case.

[00:10:57] Speaker 01:
My example of a minute ago of an employment tax dispute, for example, the partnership could be the prevailing party.

[00:11:03] Speaker 02:
And I guess what worries me is where do we find in the statute, whether it's 2412 or 7430 or anywhere, that says, OK, but we were ratcheting back what

[00:11:19] Speaker 02:
the ability of partnerships and these specific kind of proceedings to be a prevailing party?

[00:11:27] Speaker 01:
Well, it goes back to whether it is a party at all to the proceeding.

[00:11:32] Speaker 01:
And under TEFRA, the partnership is not a party.

[00:11:36] Speaker 02:
What about under the factor of the government was not substantially justified in its position?

[00:11:44] Speaker 02:
Would a partnership be able to be a prevailing party in that circumstance in a TEFRA proceeding?

[00:11:51] Speaker 01:
No, the partnership still would not be the right entity to be looking at in that situation, I don't think, because the partnership is still not a party to the case.

[00:12:04] Speaker 02:
What about the 1997 legislative history, which seemed to indicate that

[00:12:14] Speaker 02:
that a partnership can be the party that's recovering the fees?

[00:12:20] Speaker 02:
Do you know what I'm referring to, the House report?

[00:12:22] Speaker 01:
I'm sorry, I'm not remembering that.

[00:12:25] Speaker 01:
OK, it was in the briefing.

[00:12:25] Speaker 01:
But with respect to the underlying litigation, BSASR was a party, right?

[00:12:32] Speaker 01:
It was not, actually.

[00:12:33] Speaker 01:
The litigation was brought by the tax matters partner

[00:12:37] Speaker 01:
In other words, under 6226 of code.

[00:12:39] Speaker 00:
Can you explain then how this jives with your first argument, which is that the liability with respect to the partners, there was no tax liability at issue here?

[00:12:48] Speaker 01:
Yes.

[00:12:51] Speaker 01:
This was a TEFRA partnership level proceeding under 6226.

[00:12:55] Speaker 01:
Brought, as you say, only by the partners.

[00:12:58] Speaker 01:
They were the only parties.

[00:12:59] Speaker 01:
Correct.

[00:13:00] Speaker 01:
The tax matters partner brings it.

[00:13:02] Speaker 01:
Every other partner is deemed to be a party to the case that 6226 sees.

[00:13:07] Speaker 01:
So they are the partners.

[00:13:08] Speaker 01:
It concerns the partnership in a sense, but the partnership is not actually a party to that case.

[00:13:15] Speaker 00:
And what is the issue?

[00:13:16] Speaker 00:
The amounts owed by the partners or the partnership?

[00:13:19] Speaker 00:
The partnership was nothing.

[00:13:20] Speaker 01:
No amounts are actually at issue per se.

[00:13:22] Speaker 01:
Partnership items are at issue in that proceeding.

[00:13:25] Speaker 00:
Obviously, the partners you say are the parties because they have the ultimate interests, because the determinations will result in either a tax liability or no tax liability.

[00:13:34] Speaker 01:
In a second level of proceedings, yes.

[00:13:36] Speaker 01:
There would be the second level of proceedings, which is after the partnership is up.

[00:13:40] Speaker 00:
It almost automatically flows from the first level.

[00:13:42] Speaker 00:
So that's the distinction between your making with respect to whether it's an issue

[00:13:46] Speaker 00:
because even though it automatically flows, that liability, that amount of issue automatically flows from whatever is done in the first proceeding, that is not at issue in the first proceeding.

[00:13:57] Speaker 01:
Yes, it automatically flows, but also it can be quite complicated.

[00:14:02] Speaker 00:
In other words, partnerships... Everything in tax law is always complicated.

[00:14:06] Speaker 01:
That's not... It could be even more complicated than here in the sense you could have a partnership with a hundred partners

[00:14:11] Speaker 01:
They don't imagine they don't all have equal shares.

[00:14:13] Speaker 01:
Some partners are sort of bigger shareholders, and others are smaller shareholders.

[00:14:16] Speaker 00:
But if you have a bucket, who cares which partners are getting what amount?

[00:14:20] Speaker 00:
There's a bucket.

[00:14:21] Speaker 00:
And the amount in that bucket, or owed or not, is automatically the result of what is determined at the partnership level, right, in this FPA proceeding.

[00:14:32] Speaker 00:
But the amount, the monetary amount... Is that a yes?

[00:14:34] Speaker 00:
You were shaking your head.

[00:14:35] Speaker 01:
I couldn't... I'm not quite sure what the question is.

[00:14:38] Speaker 01:
It's not a monetary amount at the partnership level because it's a liability determination, right?

[00:14:45] Speaker 00:
Not necessarily.

[00:14:46] Speaker 01:
It could be something more complex.

[00:14:47] Speaker 01:
Well, it's a determination of what a partnership item is, but how that affects the actual tax liability depends on the position of the different partners in terms of

[00:14:57] Speaker 01:
the amount of share or ownership they have in the partnership.

[00:15:00] Speaker 00:
Well, okay, that's pretty automatic.

[00:15:01] Speaker 00:
I mean, that's a given.

[00:15:02] Speaker 00:
That's just a calculation, right?

[00:15:04] Speaker 00:
As complicated as it may be, it's still just a calculation.

[00:15:07] Speaker 01:
But it may affect their tax liability differently depending on what that entity, what that item is that's being determined at the partnership level.

[00:15:14] Speaker 01:
In other words, how it affects an individual partner's losses or gains for the year, because they have

[00:15:20] Speaker 01:
individual tax situation separate from their ownership in the partnership.

[00:15:25] Speaker 00:
But that's separate and distinct from the issues that are adjudicated in terms of determining partnership liability, right?

[00:15:31] Speaker 00:
Yes.

[00:15:32] Speaker 00:
Okay.

[00:15:32] Speaker 00:
Yes.

[00:15:33] Speaker 02:
Oh, no.

[00:15:34] Speaker 02:
I just wanted to clarify that, okay, at the partnership level, the first stage of these TEFRA proceedings, you're saying that sometimes these partnership item determinations can be very complicated and maybe it's very murky as to

[00:15:49] Speaker 02:
how they impact individual partners, but I would imagine there's other times at the partnership level these determinations are fairly clear-cut in how they're going to impact the individual partners.

[00:16:05] Speaker 02:
So I guess what I'm saying is maybe it's not a one-size-fits-all thing, and maybe in a fact pattern like the one we have in front of us, here it's

[00:16:14] Speaker 02:
pretty straightforward in terms of understanding and evaluating what the impact is going to be on the individual partners one way or another on how the partnership item is assessed.

[00:16:28] Speaker 01:
And if I can respond to that, our position is simply that the rule does have to be a rule of general applicability.

[00:16:35] Speaker 01:
And we have to remember, too, that this is not the only way for people to recover fees.

[00:16:40] Speaker 01:
This is a specialized rule.

[00:16:42] Speaker 01:
that applies only in a subcategory of tax cases in which monetary liability is directly at issue.

[00:16:49] Speaker 01:
Partners in a case like this are certainly free to bring a claim under the general rule claiming that the government's position was not substantially justified, and they didn't do that here.

[00:16:59] Speaker 02:
They chose to go over this.

[00:17:01] Speaker 02:
Just to further clarify, you're saying that, under no circumstance, is a partnership entitled to seek attorney's fees?

[00:17:09] Speaker 01:
In a TEFRA proceeding like this, yes.

[00:17:11] Speaker 01:
That's right.

[00:17:12] Speaker 01:
The partnership would not be a party.

[00:17:14] Speaker 01:
So it couldn't.

[00:17:15] Speaker 01:
However, the individual partners certainly could have sought fees and claimed that the government's position.

[00:17:19] Speaker 00:
What about this regulation that we're assuming does not apply here?

[00:17:24] Speaker 00:
But that regulation talks about the net worth calculations for the partnership in terms of recovering fee.

[00:17:29] Speaker 01:
Yes.

[00:17:30] Speaker 01:
The regulation seems to say that in making a determination, one has to look at the net worth of the partnership and of the partners who are actually filing the fee request.

[00:17:38] Speaker 02:
Why isn't that some indicia that at least the government or the Treasury Department contemplates that partnerships can in fact be parties to these types of TEFRA proceedings that allow the partnership to also come in and seek fees?

[00:17:58] Speaker 01:
That is, within that regulation, that is paragraph 5 and then subparagraph little Roman 2.

[00:18:05] Speaker 01:
It says, in addition, each partner requesting fees.

[00:18:08] Speaker 01:
Nothing in this refers to the partnership requesting fees.

[00:18:12] Speaker 02:
But let's look at little i. I know you want to look at little double i, but let's look at little i. The single i is all about the partnership, right?

[00:18:21] Speaker 01:
That is correct, but at no point does it say that the partnership can request fees.

[00:18:26] Speaker 01:
It says in cases involving partnerships subject to TEFRA, the TEFRA partnership.

[00:18:31] Speaker 03:
It seems to me that it's designed to prevent transfer of assets in order to avoid that situation.

[00:18:38] Speaker 01:
Yes, exactly.

[00:18:39] Speaker 01:
That's exactly right.

[00:18:40] Speaker 01:
That one has to look at both, the partnership as an entity and the partners.

[00:18:45] Speaker 01:
But it doesn't change the fact that the partners are the ones who are parties to the proceeding and the individuals who would be requesting the fees.

[00:18:53] Speaker 01:
It does not give the partnership the right to request fees.

[00:18:56] Speaker 00:
Can I just ask you a different kind of question, which is this qualified offer provision and the fact that in this instance, the taxpayer offered a dollar.

[00:19:05] Speaker 00:
Yes.

[00:19:05] Speaker 00:
And then they're entitled to that.

[00:19:07] Speaker 00:
I mean, the government isn't disputing that literally applying the statutory language, that's what we're left with, notwithstanding that that may be inconsistent with what the intent was.

[00:19:18] Speaker 01:
We're not disputing, obviously, that that's the plain language of the statute.

[00:19:21] Speaker 01:
We have couched that in terms of the statute does give

[00:19:25] Speaker 01:
the court discretion, and we realize this is obviously a tough hill to climb, but we submit that on the facts of a case like this, it is an abuse of discretion to award fees for a $1 offer in a case where the government's position obviously was serious and substantial and indeed was supported by precedent before we brought the appeal.

[00:19:44] Speaker 01:
We didn't prevail, but we certainly had a reasonable argument here.

[00:19:49] Speaker 01:
And these rules are no longer operative?

[00:19:51] Speaker 01:
looking forward?

[00:19:52] Speaker 01:
The TEFRA rule, that's correct.

[00:19:54] Speaker 01:
Yes, as of, I guess it was January 1, TEFRA has expired and is being replaced with a new regime.

[00:19:59] Speaker 02:
So anything we do here, would it be a one-timer or would it control how other requests for fees would be controlled?

[00:20:12] Speaker 01:
Given the speed at which litigation moves, I expect we're going to be seeing TEFRA cases for many years to come.

[00:20:17] Speaker 01:
So it's true that at some point it will stop having precedential impact in TEFRA, but I think there's a lot of cases in the pipeline.

[00:20:25] Speaker 01:
And of course, this rule would apply generally, at least as to our first argument, as to any case in which the amount of tax liability is not at issue.

[00:20:33] Speaker 01:
TEFRA is an example of that.

[00:20:34] Speaker 01:
The statute gives other examples of cases that it does not apply to.

[00:20:38] Speaker 01:
Thank you.

[00:20:41] Speaker 01:
I see my time's up.

[00:20:42] Speaker 01:
Thank you very much.

[00:20:43] Speaker 01:
We'll resource some of that.

[00:20:58] Speaker 04:
Good morning.

[00:21:01] Speaker 04:
So I want to address the first issue is whether BASR was a party.

[00:21:05] Speaker 04:
Of course it was.

[00:21:06] Speaker 04:
The court recognizes 7430 expressly recognizes by incorporating 2412 that partnerships can be parties.

[00:21:14] Speaker 00:
They can be.

[00:21:15] Speaker 00:
And they could be hypothetical instances where they are.

[00:21:19] Speaker 00:
But why does that mean that necessarily in this case, in the circumstances in this case, they were a party?

[00:21:24] Speaker 04:
It was a party because the suit was brought on behalf of BASR, as it would be in any TEFRA case.

[00:21:30] Speaker 04:
You bring the suit on behalf of the TEFRA partnership.

[00:21:33] Speaker 04:
The whole point of the case was to determine whether the IRS adjustments to BASR's tax return were appropriate or not.

[00:21:40] Speaker 04:
It was a tax case all about BASR's partnership return.

[00:21:44] Speaker 04:
So of course it was a party.

[00:21:47] Speaker 04:
It's also a party because the legislative history that was mentioned by my colleague, I think that makes it clear that

[00:21:54] Speaker 04:
Congress, at least, intended for partnerships to be parties.

[00:21:58] Speaker 04:
And what the government's arguing here is that Section 6226 somehow precludes- I want to back you up to your of course.

[00:22:07] Speaker 03:
It was brought on their behalf, so of course they're a party.

[00:22:11] Speaker 03:
That's not necessarily a logical connection.

[00:22:14] Speaker 03:
Give me more.

[00:22:16] Speaker 04:
Well, the way TEFRA works is that the first level, as the government explained, is at the first level in the partnership level proceeding,

[00:22:23] Speaker 04:
you determine all of the partnership's partnership items.

[00:22:27] Speaker 04:
And whether a partnership can be a part of that case, and I'm talking about for purposes of Section 7430.

[00:22:33] Speaker 04:
I'm not talking about for purposes of Section 6226, which is what the government relies on.

[00:22:39] Speaker 04:
And as the legislative history, the House report explains in 1997, the net worth provision in Section 7430

[00:22:47] Speaker 04:
applies to partnerships in TEFRA partnership cases.

[00:22:50] Speaker 04:
It makes that clear.

[00:22:51] Speaker 04:
It says any case involving Section 6226, that net worth requirement applies.

[00:22:57] Speaker 04:
And the government just seeks to ignore that legislative history.

[00:23:00] Speaker 04:
And it says, you know, it's out of time.

[00:23:01] Speaker 04:
It's 10 years after the statute was enacted.

[00:23:04] Speaker 04:
But that's not quite true.

[00:23:05] Speaker 04:
That legislative history accompanied a 1997 change to Section 7430 that clarified the net worth requirements and how they would apply in certain circumstances.

[00:23:15] Speaker 04:
And to read the next section of the sentence of the House report, which neither party quoted in their briefs, Congress went on to say, although the net worth requirements are explicit for individuals, corporations, and partnerships, it's not clear which net worth requirement is to apply to other potential litigants.

[00:23:31] Speaker 04:
So Congress believed that the net worth requirement was clear as it applied to partnerships.

[00:23:36] Speaker 04:
And they explained in that House report that it applies to partnerships in a case involving the TEFRA partnership, section 6226.

[00:23:44] Speaker 04:
The government cannot reconcile its position with the House report at all.

[00:23:49] Speaker 04:
So they just say, we should ignore it.

[00:23:53] Speaker 04:
So we think that the court talked about the regulations.

[00:23:57] Speaker 04:
To the extent that the regulations apply, we think that they also make clear that a partnership is a PAR-UNITEFA partnership, because they apply a net worth test to the partnership.

[00:24:09] Speaker 03:
Which BASR partners individually satisfy the net worth requirement?

[00:24:14] Speaker 04:
The two trusts.

[00:24:17] Speaker 03:
And not the individuals?

[00:24:20] Speaker 04:
Correct.

[00:24:21] Speaker 04:
There were four partners, all who held their interest in single member policies.

[00:24:24] Speaker 04:
The trust for the children.

[00:24:25] Speaker 04:
The two trusts for the children.

[00:24:27] Speaker 04:
And there is evidence in the record that the two trusts, we provided affidavits from the trustees of those two trusts, as well as from the CPA who prepared the trust tax returns.

[00:24:36] Speaker 03:
Did the court of federal claims determine whether any of the partners individually met

[00:24:43] Speaker 03:
the net worth requirement?

[00:24:45] Speaker 04:
It did not.

[00:24:46] Speaker 04:
It passed on that question.

[00:24:47] Speaker 03:
Do we need to remand for that purpose?

[00:24:49] Speaker 04:
I don't think so, because I said there are affidavits in the record that accompany the initial fee motion and the supplement to the fee motion.

[00:24:56] Speaker 00:
Is it your view that in the case we have before us, you have to satisfy both the partnership net worth level and the net worth of every partner?

[00:25:06] Speaker 04:
No.

[00:25:06] Speaker 00:
No.

[00:25:07] Speaker 00:
I think that... You argued in your brief and you're arguing here that while the

[00:25:13] Speaker 00:
There's an issue as to which of the partners and whether they meet the net worth requirement.

[00:25:17] Speaker 04:
That's our alternative position.

[00:25:19] Speaker 04:
We believe that BASR was a party to the extent that the court disagrees with us.

[00:25:24] Speaker 04:
Are they the only party?

[00:25:26] Speaker 04:
No, I think all the partners are also parties.

[00:25:28] Speaker 04:
We don't dispute that.

[00:25:30] Speaker 04:
We think our dispute with the government is they say the only party is the parties.

[00:25:33] Speaker 00:
So if each partner is a party, then essentially they're all requesting fees, reimbursement of fees.

[00:25:40] Speaker 00:
So why shouldn't their net worth be at issue?

[00:25:43] Speaker 04:
because the partnership is requesting fees.

[00:25:45] Speaker 04:
Now, there may be cases where only partners would request fees if there were issues that were unique to them.

[00:25:51] Speaker 04:
For example, in this very case, the government made an argument that the statute of limitations was held open because of facts unique to the particular partners.

[00:26:00] Speaker 02:
You spoke a little quickly while I was thinking when you said, well, it's because it's the partnership that's the one that's asking for the fees, but can we so

[00:26:11] Speaker 02:
quickly separate out who is really the requester of the fees?

[00:26:15] Speaker 02:
Because let's face facts.

[00:26:18] Speaker 02:
Who are going to be the beneficiaries of receiving any fees?

[00:26:22] Speaker 02:
It's ultimately going to be the partners that cover the costs of the attorney's fees, right?

[00:26:30] Speaker 04:
Sure.

[00:26:31] Speaker 02:
And I think the statute.

[00:26:33] Speaker 02:
So that's why I'm confused, why we can so quickly deem the party

[00:26:40] Speaker 02:
of the multiple parties in the case as being the requester of the fees to be just this entity called the partnership and not all the other parties who are also in the case, the partners.

[00:26:53] Speaker 04:
I think the qualified offer statute contemplates that.

[00:26:57] Speaker 04:
So if you read the statute, it says a party to a court proceeding meeting the requirements of subparagraph A, Romana 2, shall be treated as the prevailing party if the liability of the taxpayer

[00:27:09] Speaker 04:
Now note, the statute starts using the terms party, and then it reverts to using the term taxpayer.

[00:27:15] Speaker 04:
If the liability of the taxpayer pursuant to the judgment and proceeding, et cetera, et cetera, is equal to or less than the liability of the taxpayer, which would have been determined if the United States had accepted a qualified offer of the party.

[00:27:28] Speaker 04:
So the statute starts off talking about a party.

[00:27:30] Speaker 03:
That can cut two ways.

[00:27:32] Speaker 03:
You're making an assumption.

[00:27:34] Speaker 03:
And the assumption is that when it uses the first phrase,

[00:27:39] Speaker 03:
if a party, and then refers to the taxpayer, well then obviously that includes the partnership.

[00:27:46] Speaker 03:
But the other way to look at it is to say, obviously it doesn't include the partnership under TEFTA.

[00:27:52] Speaker 03:
And they're taking that as a given when they use that language.

[00:27:59] Speaker 04:
And again, I think that legislative history, though, answers that question.

[00:28:01] Speaker 04:
That legislative history comes in 1997.

[00:28:04] Speaker 04:
This qualified offer provision was added less than a year later in early 1998.

[00:28:09] Speaker 04:
So you have the same people, well, not all the same people, but many of the same people probably wrote this Qualified Offer Provision as was involved in that House legislative history.

[00:28:18] Speaker 00:
And in the House report, they expressed... That's a really odd argument to be making on legislative history in terms of trying to identify.

[00:28:25] Speaker 00:
Was it the same Congress, do you know, the flipping Congress?

[00:28:28] Speaker 00:
I don't.

[00:28:29] Speaker 04:
I know it was added less than a year later.

[00:28:30] Speaker 04:
But still, I think that does suggest that Congress in 1997 says,

[00:28:36] Speaker 04:
We understand that partnerships are acting as nominees for their partners.

[00:28:40] Speaker 04:
And that still, a partnership can be a party.

[00:28:44] Speaker 04:
And then you have the qualified offer provision added a year later.

[00:28:47] Speaker 04:
And they're making a distinction, obviously, between party and taxpayer.

[00:28:50] Speaker 04:
So unless you want to read party and taxpayers interchangeably, like it's the same thing with respect to a partnership, there's no way to have any meaning between congresses.

[00:29:01] Speaker 03:
But that's what your opposing counsel said about the TEFRA scheme overall.

[00:29:07] Speaker 04:
Well clearly and I think I don't disagree with that then under the Tefer scheme You know a partnerships partnership items are determined at the partner level and then there's some subsequent partner level proceeding after that that is in most cases just a calculation after the partnership case is over the IRS just sends a bill one of the partners enter into this agreement with the attorney and he's liable for attorney's fees right and this proceeding if you get reimbursement would simply mean that the partnership what does the

[00:29:35] Speaker 00:
If you got an award here, does the award go automatically to the partner that paid for the attorney's fees?

[00:29:43] Speaker 00:
Who is the check written to?

[00:29:44] Speaker 04:
I think technically it'd be written to BASR and then BASR would be obligated to reimburse the partners that paid the fees.

[00:29:51] Speaker 00:
And what if he does, if BASR does not get the check, does not prevail, the fees have already been paid by the partner, right?

[00:30:00] Speaker 04:
Correct.

[00:30:00] Speaker 04:
Correct.

[00:30:01] Speaker 04:
And effectively they performed under the partnership agreement.

[00:30:05] Speaker 04:
One of the sons trust paid his share of the fees more because the other son's trust had absolutely no assets.

[00:30:12] Speaker 04:
The son was destitute.

[00:30:13] Speaker 04:
So all that they did is they paid their share of the fees that they were required to pay by the partnership agreement.

[00:30:19] Speaker 04:
So they performed.

[00:30:20] Speaker 00:
But I thought the partnership agreement we were talking a few minutes ago requires that the partnership indemnify fees.

[00:30:26] Speaker 00:
Not that indemnify fees, right?

[00:30:28] Speaker 00:
But we all recognize that's not a possibility here.

[00:30:31] Speaker 04:
Well, so what they could have done is they could have had the partnership

[00:30:34] Speaker 04:
go after each of the partners to recover a share of the fees and then distribute the money back out to the partners who paid it.

[00:30:41] Speaker 04:
And the government's wrong, by the way, with respect to the indemnification provision.

[00:30:45] Speaker 04:
The indemnification provision is limited to the assets of the partnership only with respect to partners who are not the managing member.

[00:30:51] Speaker 04:
That limitation does not apply to indemnification for the partner who is the managing member.

[00:30:56] Speaker 04:
I think that, as we pointed out in our brief, there's also a question under Texas state law

[00:31:00] Speaker 04:
I think Texas statutory law governs over any limitations on indemnification in the partnership agreement itself.

[00:31:08] Speaker 04:
So I think BASR was obligated to reimburse the other partners.

[00:31:13] Speaker 04:
Technically, BASR could have gone and sued for those fees to redistribute to the partners who paid them, but it didn't need to because they did it on their own.

[00:31:24] Speaker 03:
The only way it could have sued is at the direction of the managing partners, correct?

[00:31:29] Speaker 04:
Correct.

[00:31:29] Speaker 04:
But he didn't need to because, as I said, the other trust, there were two trusts.

[00:31:35] Speaker 04:
One of them was destitute.

[00:31:37] Speaker 03:
How were those trusts funded?

[00:31:39] Speaker 04:
They were funded initially with the sale of the stock from the printing business.

[00:31:44] Speaker 03:
So that was done through the family.

[00:31:46] Speaker 03:
Correct.

[00:31:47] Speaker 03:
But it was a trust that was apparently not a spendthrift of any sort.

[00:31:53] Speaker 03:
Correct.

[00:31:54] Speaker 04:
And so one of the trusts contributed.

[00:31:59] Speaker 04:
effectively, they got the only release that they could have gotten if they had gone to court and tried to make the parties perform under the partnership agreement.

[00:32:08] Speaker 02:
Going back to the qualified offer statute, it talks about the taxpayer giving the qualified offer.

[00:32:16] Speaker 02:
Is the partnership a taxpayer?

[00:32:19] Speaker 04:
No.

[00:32:20] Speaker 02:
So then it has to be a partner that is the one that's giving the

[00:32:28] Speaker 02:
qualified offer, not BAZR.

[00:32:32] Speaker 02:
Is that right?

[00:32:34] Speaker 04:
No, Your Honor.

[00:32:35] Speaker 04:
Again, the statute says a party to a court proceeding.

[00:32:38] Speaker 04:
So in this case, that would be BASR.

[00:32:40] Speaker 04:
Meeting the requirements, the net worth requirements.

[00:32:43] Speaker 04:
But the position of your opposing counsel is that under TEFRA, the partnership cannot be a party.

[00:32:49] Speaker 04:
I understand the government's position.

[00:32:51] Speaker 04:
It's just directly in conflict with the statute, which recognizes that part.

[00:32:54] Speaker 04:
I thought you agreed with it when I asked you that question before.

[00:32:57] Speaker 04:
Oh, then I'm sorry.

[00:32:58] Speaker 04:
I misspoke.

[00:32:59] Speaker 04:
I think the statute is very clear that partnerships can be parties.

[00:33:04] Speaker 04:
It expressly makes that in the net worth provision.

[00:33:08] Speaker 04:
It says that a partnership can be a party.

[00:33:10] Speaker 04:
The legislative history in 1997 could not be more clearly written that a partnership is a party, and you test the net worth of a party, including in a TEFRA partnership proceeding exactly like this one.

[00:33:22] Speaker 04:
So I think the government is, they're clearly wrong that a partnership cannot be a party.

[00:33:28] Speaker 02:
So getting back to my taxpayer question, and Basar is not a taxpayer.

[00:33:38] Speaker 04:
Correct.

[00:33:39] Speaker 04:
And again, the statute says a party to a court proceeding, meeting the net worth requirements, so that would be BASR, shall be treated as the prevailing party if the liability of the taxpayer.

[00:33:52] Speaker 04:
So it switches from talking about the prevailing party as a party, then it talks about the liability of the taxpayer.

[00:33:58] Speaker 04:
Pursuant to the judgment in the proceeding is less than or equal to the liability of the taxpayer that would have inured if the government had accepted the qualified offer of the party.

[00:34:10] Speaker 04:
So it goes from party to taxpayer to party.

[00:34:13] Speaker 04:
Here, BASR was the party.

[00:34:15] Speaker 04:
And the statute's use of the term taxpayer expressly recognizes that the party may not be the taxpayer.

[00:34:21] Speaker 04:
A party doesn't need to be a taxpayer.

[00:34:23] Speaker 03:
OK, so since you're so conversant with legislative history, what was said in the legislature?

[00:34:28] Speaker 03:
about the use of the word taxpayer as opposed to party?

[00:34:32] Speaker 03:
Couldn't find anything.

[00:34:33] Speaker 03:
There's nothing that I could find.

[00:34:34] Speaker 04:
That cuts two ways, doesn't it?

[00:34:40] Speaker 04:
I guess so.

[00:34:42] Speaker 04:
I do want to make one last point, the remainder of my time.

[00:34:46] Speaker 04:
We've been talking a lot about the qualified offer provision.

[00:34:49] Speaker 04:
There is another way that BASR can be a prevailing party, and that's under the substantially justified provision.

[00:34:56] Speaker 04:
And the government mainly argues that we waive that by not raising it below.

[00:35:00] Speaker 04:
And they make a mistake of law in the reply brief that I just want to point out as to whose burden this really was.

[00:35:06] Speaker 04:
There's nothing in rule 54 or section 7430 that required BASR to assert anything more than it did, which is it said in its fee application, we're a prevailing party.

[00:35:18] Speaker 04:
We invoke section 7430.

[00:35:20] Speaker 04:
And the government says, well, you had to argue that the government's position wasn't substantially justified.

[00:35:28] Speaker 04:
And that's wrong.

[00:35:29] Speaker 04:
The government claims on page 28 of its reply brief that 28 USC 2412 D1B required BASR to specify in its fee application that it was a prevailing party and that the government's position was not substantially justified.

[00:35:45] Speaker 04:
And that's not right.

[00:35:46] Speaker 04:
7430 expressly states that to be a prevailing party, you only need to comply with the first sentence of 2412D1B.

[00:35:55] Speaker 04:
It's actually the second sentence of 24D112 that says that you have to allege.

[00:36:03] Speaker 00:
Well, even if there was no waiver, we'd have to remand it for determination by the trial court, right?

[00:36:08] Speaker 04:
Well, except that the government didn't carry its burden below.

[00:36:13] Speaker 04:
The court asked questions at oral argument.

[00:36:16] Speaker 04:
The government misdescribed the standard and said, that's the taxpayer's burden.

[00:36:21] Speaker 04:
That was wrong.

[00:36:22] Speaker 04:
We got it wrong, too, as I said in our brief.

[00:36:24] Speaker 04:
Everybody was under a misimpression about what the burden was to show that.

[00:36:27] Speaker 04:
But the government didn't carry its burden.

[00:36:29] Speaker 04:
So I think you could just say that the government's waived it.

[00:36:30] Speaker 04:
They haven't shown that their position was substantially justified.

[00:36:33] Speaker 02:
But you went through the qualified offer route.

[00:36:36] Speaker 02:
You didn't go through the not substantially justified route.

[00:36:41] Speaker 04:
Absolutely true.

[00:36:41] Speaker 04:
In our brief that we attached to the fee application, it was about a 10-page brief.

[00:36:47] Speaker 04:
We're under a tight fee.

[00:36:50] Speaker 04:
It had been a long litigation.

[00:36:51] Speaker 04:
And we explained what we thought was the quickest way to get there in terms of it being a black and white case, that either the qualified offer provision applies or it doesn't.

[00:37:02] Speaker 04:
If you go to the substantially justified route, that's obviously discretion.

[00:37:07] Speaker 04:
It's more of a gray area.

[00:37:12] Speaker 04:
We should not be penalized by attaching a brief to our fee application that goes above and beyond what Rule 54 required.

[00:37:19] Speaker 04:
And in fact, the Supreme Court has repeatedly said that this type of fee litigation is not supposed to be a second major litigation.

[00:37:26] Speaker 04:
Yeah, look how that's worked out for us.

[00:37:28] Speaker 04:
I know.

[00:37:31] Speaker 04:
I see that I'm past my time.

[00:37:34] Speaker 00:
Thank you.

[00:37:35] Speaker 04:
Thank you.

[00:37:41] Speaker 00:
We'll give you an additional three minutes.

[00:37:48] Speaker 01:
To begin with this, with my friend's last point regarding substantial justification, I would just point to the fee application itself, which is in the appendix at page 1941.

[00:37:57] Speaker 01:
It lists the requirements that a taxpayer has to show and then says, the taxpayer need not show the first two requirements, however, if, as BASR did in this case, it made a qualified offer.

[00:38:09] Speaker 01:
and then the rest of it proceeds to argue qualified offer.

[00:38:11] Speaker 01:
So we would submit they really did not preserve this argument or one might almost say misled the Court of Federal Claims by asking it to focus on that.

[00:38:20] Speaker 01:
The government certainly did not attempt to show that it substantially prevailed because there was no need for us to do so.

[00:38:26] Speaker 01:
We were not under the impression that that's what the case was about.

[00:38:29] Speaker 00:
I am sorry if we are repeating ourselves, but what do you say to their alternative, not on the substantially justified age of fees, but on the alternative that at least some of the partners qualify?

[00:38:41] Speaker 01:
That is not undisputed.

[00:38:43] Speaker 01:
It is undisputed that the two partners, the husband and wife, don't qualify as to the gift trust.

[00:38:51] Speaker 00:
So you would agree that legally you are obligated to pay them at least a portion of it, but they

[00:38:57] Speaker 00:
You think the only dispute is whether or not what their net worth is?

[00:39:03] Speaker 01:
The government has disputed whether the Sons Gift Trust satisfies the net worth requirement, and the Court of Federal Claims made no findings on that point.

[00:39:11] Speaker 01:
So we would say at most the case would have to be remanded for consideration of that point.

[00:39:15] Speaker 01:
The court could not consider that on appeal as being undisputed.

[00:39:19] Speaker 03:
You're opposing counsel assets to look at the record.

[00:39:23] Speaker 01:
Yes.

[00:39:24] Speaker 01:
We don't think the record is... The record is disputed.

[00:39:27] Speaker 01:
Exactly, precisely.

[00:39:29] Speaker 01:
Yes, that's precisely right.

[00:39:32] Speaker 01:
Regarding the unification church case, I was just reminded during something that my friend said that the issue, I think the relevance of that case, the reason we cited it is that this is similar to unification church in the sense that if the court ultimately does not award fees to the partnership

[00:39:50] Speaker 01:
the partners really are stuck with the bill.

[00:39:53] Speaker 01:
In other words, they have already paid the bill.

[00:39:54] Speaker 01:
They're not going to be getting reimbursement from anybody because there are no assets unless the court gives them a fee award, gives BASR a fee award.

[00:40:02] Speaker 01:
And that really is the situation similar to unification church.

[00:40:06] Speaker 01:
And that's why the partners are the real parties of interest in this case.

[00:40:16] Speaker 01:
And yes, I think that's about the points I wanted to make.

[00:40:18] Speaker 00:
Thank you very much.

[00:40:19] Speaker 00:
Thank you.

[00:40:19] Speaker 00:
We thank both sides on the cases submitted.