Bradley K. Morrison, Petitioner

T.C. Memo. 2011-76 UNITED STATES TAX COURT BRADLEY K. MORRISON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent* Docket No. 18140-03.

Filed April 4, 2011.

William E. Taqqart, Jr. and Barbara N. Doherty, for petitioner.

Patricia Montero, for respondent.

SUPPLEMENTAL MEMORANDUM OPINION

VASQUEZ, Judge:

This case is before the Court on remand from the U.S. Court of Appeals for the Ninth Circuit for further consideration consistent with its opinion in Morrison v.

* This opinion supplements our prior opinion, Morrison v.

Commissioner, .T.C. Memo. 2006-103.

$ERVED APR - 4 2011 I Commissioner, 565 F.3d 658 (9th Cir. 2009), revg. and remanding T.C. Memo. 2006-103. After concessions,1 the issue for decision on remand is whether petitioner incurred attorney's fees.² We hold that he did not.

Background We summarize relevant background from Morrison v.

Commissioner, supra, and set forth additional details for purposés of deciding the issue on remand. At all relevant times petitioner Bradley K. Morrison resided in Belmont, California.

During 1999 and 2000 petitioner and Nariman Teymourian (Teymourian) owned 40 percent and 60 percent of Caspian , Respondent concedes that petitioner is a prevailing that he exhausted all administrative remedies available, party, In and that he meets the net worth requirement of sec. 7430. addition, pursuant to the stipulation of settled issues filed with the Court on May 4, 2010, petitioner's claim is limited to those costs and expenses, 2004, Ñhich was the date of his qualified settlement offer. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.

if any, he incurred on or after Apr. 5, The Court of Appeals in its opinion noted the possibility that petitioner may have "paid" attorney's fees if we find that he paid full consideration in exchange for Caspian's agreement See Morrison v. Commissioner, 565 F.3d 658, 667 pay hi's fees. n.⁸ (9th Cir. 2009), revg. and remanding T.C. Memo. 2006-103. Petitfoner does not make this argument on brief, and we find nothing in the record to support it.

to In addition, respondent argues that petitioner unreasonably protracted the proceedings and that, in the event petitioner is entitlied to recover fees, he is not entitled to recover fees at an enhanced rate. did not respondent's additional arguments.

incur litigation costs, we find it unnecessary to address In the light of our holding that petitioner Consulting Group, Inc.

(Caspian), respectively. Petitioner served as Caspian's vice president of engineering and also was employed in a technical capacity.

In 2001 the Internal Revenue Service (IRS) began an audit of Caspian's 1999 and 2000 income tax returns.

Its examination soon expanded to include separate audits of petitioner's, Teymourian's, and Teymourian's wife's personal tax returns for the same period.

Each of the four taxpayers was represented by the law firm Taggart & Hawkins (counsel). Caspian paid the legal fees for all four taxpayers.

In 2002, in the midst of the IRS' examinations, petitioner sold his stock in Caspian back to Caspian pursuant to a stock buyout agreement (the buyout agreement) prepared by counsel.³ Petitioner also resigned from his position as vice president of engineering and as an employee of Caspian, leaving Teymourian as the sole owner of Caspian.

The IRS' examination of petitioner's returns did not end with the sale of his Caspian stock.

The taxpayers executed an engagement letter (i.e., written disclosure agreement) with counsel dated October 4, 2002.4 The principal reason for the letter was to advise the taxpayers of The buyout agreement states that its effective date was Sept. 10, 2002.

The engagement- letter was signed and dated by Caspian, Teymourian, and Teymourian's wife on Apr. 24, 2003, and by petitioner on May 9, 2003.

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| the potential conflicts of interest that could arise from counsel's joint representation of them.

The letter specifically stated that counsel could not provide an accurate estimate of the fees and costs likely to be incurred.

On July 24, 2003, respondent issued a statutory notice of deficiency to petitioner for 1999 and 2000. Respondent also issued notices of deficiency to Caspian and Teymourian for the same yèars." Teymourian decided that the issues involved in all of the cases were important, and he wanted to ensure that the cases were properly handled.

On October 22, 2003, petitioner timely filed a petition with the Court. After a trial on the merits the Court issued an opinion finding in favor of petitioner on the major issues in the case.

See Morrison v. Commissioner, T.C. Memo. 2005-53.

Counsel represented petitioner throughout the IRS examidation and Tax Court litigation, and Caspian continued to pay all of petitioner's legal fees, even though his relationship with Teymourian had soured and he was no longer associated with Caspian.

s Caspian and Teymourian petitioned the Tax Court and won See Teymourian v. Commissioner, T.C.

favorable judgments. 2005-232; Caspian Consulting Grp., Memo. 2005-54. Respondent also determined deficiencies for 1999 and 2000 against Teymourian's wife because she had filed joint income tax returns with Teymourian. petition.

Inc. v. Commissioner, T.C.

She filed a separate lviemo.

Petitioner filed a motion for award of litigation costs, which we denied.

See Morrison v. Commissioner, T.C. Memo. 2006- 103.

We held that petitioner ,had not incurred litigation costs because a separate entity paid all costs in issue. Petitioner appealed.

The Court of Appeals for the Ninth Circuit rejected our definition of "incur" as too narrow.' After a discussion of the policy behind section 7430 and relevant caselaw, it held that when a third party who has no direct interest in the litigation pays fees on behalf of a taxpayer, the taxpayer "incurs" the fees so long as he assumes:

(1) An absolute obligation to repay the fees, regardless of whether he successfully moves for an award under section 7430; or (2) a contingent obligation to pay the fees in the event that he is able to recover them under section 7430. Morrison v. Commissioner, 565 F.3d at 666.7 With respect to petitioner, the Court of Appeals found it "difficult to discern the exact nature of the agreement between Caspian and Morrison regarding the repayment of attorneys' fees, or even determine whether such an agreement exists."

Id.

Its ' We defined "incur" for purpos,es of sec. 7430 as "to become liable or subject to:

bring down upon oneself."

The Court of Appeals articulated the test using similar language earlier in its opinion: taxpayer can 'incur' attorneys' (1) a noncontingent obligation to repay the fees, advanced on his behalf at some later time; or fees in the event of their eventual recovery." Morrison v. Commissioner, supra at 662.

"We hold instead that a fees if he assumes either:

(2) a contingent obligation to repay the y review of the written disclosure agreement (i.e., the engagement letter) revealed that it is silent on precisely how the payment and reimbursement of fees were to be handled.

The Court of Appeals stated:

Because the Tax Court took the view that a the relationship between Caspian and litigant can never "incur" fees if the fees are first paid by a third party, it did not sort out nature of Mðrrison, and so did not determine whether Caspian - agreed to pay some or all of Morrison's fees as consideration for an earlier transaction, or whether Morrison assumed a contingent or noncontingent rppayment obligation. Court "incurred," after determining the precise nature of if any, between Caspian and Morrison. fee agreement, to apply the definition we have adopted of We therefore remand to the Tax the precise the .

Id. at 667.

On May 4, 2010, we held an evidentiary hearing to gather additional evidence needed to carry out the Court of Appeals' manda e. Respondent and petitioner filed supporting briefs with the Court on August 3 and 4, 2010, respectively."

Discussion Petitioner has the burden of establishing that all of the requirements of section 7430 have been satisfied.

See Rule 232(e); Minahan v. Commissioner, 88 T.C. 492, 496-497 (1987).

Accordingly, petitioner bears the burden of proving that he I assumed an obligation to repay attorney's fees.

On Mar. 24, 2010, petitioner filed a motion for recovery litigation costs for costs incurred after our May of additional 15, 2006, Memorandum Opinion. consistent with our findings in this opinion.

We shall deny that motion Petitioner argues that he had both an absolute and a contingent obligation to repay the fees. Respondent argues there is no evidence of an agreement to repay the fees ùnder any , circumstances.

Noncontingent'Obligation Petitioner argues that he was liable,for the attorney's fees because he was ultimately responsible for them if Caspian could not pay. According to petitioner, this is because, he was a party to the engagement letter, and bounsel expected to be paid for "the services provided. Petitioner also contends that counsel charged all of its time related to rhis case to him directly."

The "test articulated by the Court of Appeals.is whether petitioner has an absolute obligation to repay Caspian; 3.et., a present obligation that does not depend on a future recovery of fees, not whether he was obligated to pay counsel in the event Caspian failed to pay in the first instance.'

In other words, the relevant inquiry is whether petitioner is indebted to Caspian for the amounts Caspian paid to counsel on his behalf. Petitioner's argument focuses incorrectly on his supposed obligation to pay the fees to counsel directly "if Caspian failed to pay for such there is no evidence that counsel charged

In fact, the Court of Appeals stated in its its hours to an account the associated fees."

I servicés", rather than on an obligation to repay Caspian.1° Nothin .in Teymourian's testimony supports the idea that he expects Caspian to be reimbursed regardless of any recovery or that petitioner assumed such an obligation.

There its simply no evidence to support a finding that petitioner assumed an absolute obligation to repay the fees Caspian advanced.

Contingent Obligation Petitioner argues that he and Teymourian orally agreed as part of the stock buyout agreement that Caspian would be entitled to any recovery of litigation costs from respondent relating to the litigation costs that Caspian paid on behalf of petitioner.

However, petitioner.has introduced no evidence to support such an oral agreement."

In fact, Teymourian credibly testified that he ° In addition, the eventuality petitioner invites us to consider is hypothetical pay all the fees in the first instance.

in the extreme, considering Caspian did Moreover, par. 14 of the buyout agreement states:

This AGREEMENT supersedes any and all agreements, Each Party to this to the subject matter hereof.

either oral or written, between the Parties hereto with respect AGREEMENT acknowledges that no representations, inducements, promises, or agreements, written or oral, have been made by any Party, or anyone acting on behalf of any Party, which are not embodied herein, and that no other agreement, statement, or promise not contained in this AGREEMENT shall be valid or binding with respect hereof. shall be effective only if such modification or amendment in writing and signed by the Party to be.charged with such modification or amendment.

Any modification or amendment of this AGREEMENT to the subject matter is does not recall discussing th issue with petitioner.

Specifically he said:

*. * Yes, I don't," I--my understanding, I never discussed [petitioner] whether or not--what would happen.

with * I don't recall whether or nót I've had a discussion with him in terms of recovery of the fees, what would happen to the proceeds. My assumption was, since Caspian was paying for it, Caspian was going to be reimbursed. assumption * conversation with Brad about it, to be honest with you.

* But I don't recall ever having a direct That was my * We .do not know what pe,titioner agreed to, if anything, since he did not testify at the hearing.

Teymourian simply assumed that Caspian would be entitled t~o 'a recovery of attorney's fees because Caspian paid them We do not equate Teymourian's assumption with an obligation assumed by petitioner.

Petitioner did not'highlight any specific language in the stock buyout agreement that wo là prove he assumed an obligation.

Our review of the agreement reveals that it is silent on the precise nature of how the payment-_and reimbursement of fees was to be handled, as is the engag ment letter.

The stock buyout agreement does not include a provision for the repayment of attorney's fees." Petitioner did not enter into any written agreement for the repayment of attorney's fees.

Sihce we do not find an agreement in the stock buyout agreement and petitioner did not testify, we are limided to Teymourian's testimony.

Teymourian testified that he:

* * [petitioner] would not be willing to * was worried that o wouldn't be able to pay the legal necessary, and I wanted to make sure that we are [sic] successful know, do to pay for all the legal in the outcome of the trial, and that I, you I--therefore we decided that it was the right thing to fees that was [sic] fees and do that.

It appears to us that Teymourian unilaterally decided that Caspia would pay petitioner's attorney's fees, and there was no quid pro quo affecting this strategic decision."

Thus, we find on the facts of this case that petitioner did not assume a contin ent obligation to repay the fees to Caspian.

In fact, par.

thereof states, in pertinent part:

BUYER shall indemnify and hold harmless SELLER I from and against any and all claims, liability, damages, costs and expenses (including without limitation, attorneys fees and costs) arising from, or in any way related to, management or business of BUYER on account of events which occur subsequent the ownership, operation, to July 1, 2002.

" In addition,.

there is no evidence that Caspian was its employee had he known that he could not recover the burden of paying helping a party with lesser resources or that Teymourian would have been less inclined to cause Caspian to pay the litigation costs hof those fees. Nor is there evidence that legal respondent's determinations himself. highlighted these factors as driving the policy behind sec. 7430 and the test it articulated.

fees would have deterred petitioner from challenging The Court of Appeals Conclusion On the basis of the foregoing, we find that petitioner has not met his burden of proving that he assumed either an absolute obligation or a contingent obl gation to repay attorney's fees.

Accordingly, petitioner did not incur attorney's fees, and his motions will be denied.

In reaching all of our hoidings herein, we have considered all arguments made by the parties, and to the extent not mentioned above, we find them to be irrelevant or without merit.

To reflect the foregoing, An appropriate order and decision will be entered.

9. We note that petitioner directly. opinion that the "firm billed all of entitled 'Caspian,' and Caspian paid all of See Morrison v. Commissioner, 565 F.3d at 660.