If the IRS wrongfully denies your refund claim and you are successful in litigating the matter in court, you are entitled to recoup some of your court costs. But what about the taxpayer’s tax attorney’s travel costs? And what if the travel costs were necessary as the tax issue was complex and a tax attorney with the requisite knowledge wasn’t available in the local legal market? The court addresses this in Audio Technica U.S., Inc. v. United States, No. 5:16CV2052 (N.D. Ohio 2019).
Facts & Procedural History
The taxpayer reported research tax credits on its tax returns. The IRS did not allow the claims on audit. The taxpayer brought suit to recoup its tax overpayments.
Unlike most research tax credit cases, the taxpayer opted to litigate the case in U.S. District Court. This afforded the taxpayer the ability to have a jury trial. The jury was asked whether the activities constituted qualified research and found that it did.
After prevailing in the case, the taxpayer filed a bill of costs to recoup its costs for suing the government. This included a request for: 1). $350.72 in Clerk and Marshal Fees, 2). $2,761.84 in Recorded-Transcript Fees, and 3). $6,828.80 in Printing Fees and “Travel Expenses for Out-of-District Counsel” in the amount of $34,746.24.
The question for the court was whether the government was to pay these costs and, if so, in what amounts.
An Award of Court Costs
The Federal Rules of Procedure generally allow the prevailing party to recoup court costs. The courts have some discretion in whether the costs are allowable and in what amounts.
When it comes to the U.S. government paying costs, the general rule gives way to a statement that one has to find a statute authorizing costs. The statute in this case is 28 U.S.C. 1920, which includes:
- Fees of the clerk and marshal;
- Fees of the court reporter for all or any part of the stenographic transcript necessarily obtained for use in the case;
- Fees and disbursements for printing and witnesses;
- Fees for exemplification and copies of papers necessarily obtained for use in the case;
- Docket fees;
- Compensation of court appointed experts, compensation of interpreters, and salaries, fees, expenses, and costs of special interpretation services.
The court allowed the costs included in this list. The remaining dispute centered on the plaintiff’s attorney traveling costs.
Award of Tax Attorney Travel Costs
The largest expense was for tax attorney traveling costs. This is not a type of expense listed in Sec. 1920.
The plaintiff argued that they were allowable. It cited a third circuit opinion whereby costs are allowable if the local attorneys are not willing to represent the plaintiff.
The taxpayer was not located in the third circuit and, even then, the court noted that there was no evidence that a local attorney could not be found to litigate the case.
The plaintiff argued that local counsel would not have had the requisite legal expertise to handle the case. This very well may have been true, as the research tax credit is a highly specialized and nuanced area of law. But the court noted that this is not the test. The court did not allow the plaintiff’s attorney traveling costs.
Should Tax Attorney Travel Costs be Allowable?
Despite the courts conclusion on the travel costs, it should be noted that the taxpayer’s tax attorneys not only successfully litigated a very difficult type of case, but they no doubt also provided advice on the choice of forum.
This advice was not only insightful, but had a significant impact on the successful outcome of the case. The U.S. Tax Court does not afford jury trials and, as has been seen with other recent research tax credit cases, the tax court would likely have reached a different conclusion.
The importance of this insight as to the choice of forum isn’t limited to this tax dispute. It shines light on a path that many other research tax credit court cases will no doubt follow. While the travel costs may not have been recouped in this tax dispute, they were well worth the cost.