                         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. Taggart, 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.
                                - 2 -

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

purposes 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


     1
        Respondent concedes that petitioner is a prevailing
party, that he exhausted all administrative remedies available,
and that he meets the net worth requirement of sec. 7430. In
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, if any, he incurred on or after Apr. 5,
2004, which 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.
     2
        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 to
pay his fees. See Morrison v. Commissioner, 565 F.3d 658, 667
n.8 (9th Cir. 2009), revg. and remanding T.C. Memo. 2006-103.
Petitioner does not make this argument on brief, and we find
nothing in the record to support it.

     In addition, respondent argues that petitioner unreasonably
protracted the proceedings and that, in the event petitioner is
entitled to recover fees, he is not entitled to recover fees at
an enhanced rate. In the light of our holding that petitioner
did not incur litigation costs, we find it unnecessary to address
respondent’s additional arguments.
                               - 3 -

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



     3
        The buyout agreement states that its effective date was
Sept. 10, 2002.
     4
        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.
                               - 4 -

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 years.5   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

examination 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.




     5
        Caspian and Teymourian petitioned the Tax Court and won
favorable judgments. See Teymourian v. Commissioner, T.C. Memo.
2005-232; Caspian Consulting Grp., Inc. v. Commissioner, T.C.
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. She filed a separate
petition.
                                   - 5 -

       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.6      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



       6
        We defined “incur” for purposes of sec. 7430 as “to
become liable or subject to: bring down upon oneself.”
       7
        The Court of Appeals articulated the test using similar
language earlier in its opinion: “We hold instead that a
taxpayer can ‘incur’ attorneys’ fees if he assumes either: (1) a
noncontingent obligation to repay the fees advanced on his behalf
at some later time; or (2) a contingent obligation to repay the
fees in the event of their eventual recovery.” Morrison v.
Commissioner, supra at 662.
                               - 6 -

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
     litigant can never “incur” fees if the fees are first
     paid by a third party, it did not sort out the precise
     nature of the relationship between Caspian and
     Morrison, 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
     repayment obligation. We therefore remand to the Tax
     Court to apply the definition we have adopted of
     “incurred,” after determining the precise nature of the
     fee agreement, if any, between Caspian and Morrison.

Id. at 667.

     On May 4, 2010, we held an evidentiary hearing to gather

additional evidence needed to carry out the Court of Appeals’

mandate.   Respondent and petitioner filed supporting briefs with

the Court on August 3 and 4, 2010, respectively.8

                            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

assumed an obligation to repay attorney’s fees.


     8
        On Mar. 24, 2010, petitioner filed a motion for recovery
of additional litigation costs for costs incurred after our May
15, 2006, Memorandum Opinion. We shall deny that motion
consistent with our findings in this opinion.
                               - 7 -

     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 under 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 counsel expected to be paid for the

services provided.   Petitioner also contends that counsel charged

all of its time related to his case to him directly.9

     The test articulated by the Court of Appeals is whether

petitioner has an absolute obligation to repay Caspian; i.e., 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




     9
        We note that there is no evidence that counsel charged
petitioner directly. In fact, the Court of Appeals stated in its
opinion that the “firm billed all of its hours to an account
entitled ‘Caspian,’ and Caspian paid all of the associated fees.”
See Morrison v. Commissioner, 565 F.3d at 660.
                               - 8 -

services”, rather than on an obligation to repay Caspian.10

Nothing 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 is 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.11   In fact, Teymourian credibly testified that he




     10
        In addition, the eventuality petitioner invites us to
consider is hypothetical in the extreme, considering Caspian did
pay all the fees in the first instance.
     11
          Moreover, par. 14 of the buyout agreement states:

          This AGREEMENT supersedes any and all agreements,
     either oral or written, between the Parties hereto with
     respect to the subject matter hereof. Each Party to this
     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 to the subject matter
     hereof. Any modification or amendment of this AGREEMENT
     shall be effective only if such modification or amendment is
     in writing and signed by the Party to be charged with such
     modification or amendment.
                               - 9 -

does not recall discussing the issue with petitioner.

Specifically he said:

          Yes, I don’t, I--my understanding, I never discussed
     with * * * [petitioner] whether or not--what would happen.
     I don’t recall whether or not 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. That was my
     assumption * * * But I don’t recall ever having a direct
     conversation with Brad about it, to be honest with you.

We do not know what petitioner agreed to, if anything, since he

did not testify at the hearing.   Teymourian simply assumed that

Caspian would be entitled to 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 would 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 engagement letter.   The stock buyout

agreement does not include a provision for the repayment of
                               - 10 -

attorney’s fees.12   Petitioner did not enter into any written

agreement for the repayment of attorney’s fees.

     Since we do not find an agreement in the stock buyout

agreement and petitioner did not testify, we are limited to

Teymourian’s testimony.   Teymourian testified that he:

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

It appears to us that Teymourian unilaterally decided that

Caspian would pay petitioner’s attorney’s fees, and there was no

quid pro quo affecting this strategic decision.13   Thus, we find

on the facts of this case that petitioner did not assume a

contingent obligation to repay the fees to Caspian.



     12
          In fact, par. 8 thereof states, in pertinent part:

          BUYER shall indemnify and hold harmless SELLER
     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, the ownership, operation,
     management or business of BUYER on account of events
     which occur subsequent to July 1, 2002.
     13
        In addition, there is no evidence that Caspian was
helping a party with lesser resources or that Teymourian would
have been less inclined to cause Caspian to pay the litigation
costs of its employee had he known that he could not recover
those fees. Nor is there evidence that the burden of paying
legal fees would have deterred petitioner from challenging
respondent’s determinations himself. The Court of Appeals
highlighted these factors as driving the policy behind sec. 7430
and the test it articulated.
                             - 11 -

                           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 obligation to repay attorney’s fees.

Accordingly, petitioner did not incur attorney’s fees, and his

motions will be denied.

     In reaching all of our holdings 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.
