WHITE v. UNITED STATES
Argument of Kenneth A. Payment
Chief Justice Rehnquist: We'll hear argument next in No. 88-928, James M. White versus the United States.
We'll wait, just a minute, Mr. Payment, until the Court clears.
Very well, Mr. Payment, you may proceed.
Mr. Payment: Thank you, Mr. Chief Justice, and may it please the Court:
This is a case about federalism and the right of the Internal Revenue Service to second-guess the determination of state trial courts, as has been held by the court below, the Second Circuit.
The case grew out of a recent campaign by the Internal Revenue Service of disallowing the estate tax deductions for attorney's fees on estate tax returns.
This campaign, over the recent years, has consisted of collateral attacks as to state probate decrees.
Unknown Speaker: Mr. Payment, has this so-called attack occurred only in one area of the country, or is this a nationwide effort?
Mr. Payment: It started in the western district of New York; it has spread to other parts of New York and apparently could be expected to spread nationwide, depending on the--
Unknown Speaker: But, thus far, just in New York?
Mr. Payment: --That... that is true.
Unknown Speaker: What is there, an... an ambitious revenue agent up there, who wants to make a quota or something?
Mr. Payment: So it would seem, Your Honor.
Unknown Speaker: In competition with the income tax people, who would pick it up on the other side of the coin?
Mr. Payment: I... that is our position, indeed, that as the Second Circuit mentioned, one would well wonder why the Internal Revenue Service would deploy its forces in this manner.
But, in any event, these attacks have persisted, and they have been made notwithstanding that orders of... of the probate courts have become final and binding on the estate, notwithstanding--
Unknown Speaker: Not only allowable, but allowed?
Mr. Payment: --That's correct.
Unknown Speaker: I will say, in my day, when I practiced a little tax law, this thing was just completely unheard of.
Mr. Payment: --It was unheard of until three or four years ago, Your Honor.
Justice Blackmun, I don't think, other than a few isolated cases you would find under 2053, in different areas, not attorney's fee issues, that you would see a lot of cases, even after the Bosch case.
These attacks are made notwithstanding--
Unknown Speaker: Mr. Payment, when you... you use the term "collateral attack", that isn't strictly correct, is it?
Because the government wasn't a party to the case in which the attorney's fees were... were... were allowed.
Mr. Payment: --As a matter of fact, the government does not have to appear in such cases, and, as a matter of policy, never does appear.
But it could have chosen to appear in the state court proceeding--
Unknown Speaker: Well, I think of a collateral attack as being a challenge to a final judgment by someone who... who is bound by the judgment, by someone who is a party to it.
Mr. Payment: --I understand there is a difference, Your Honor, but... and... and of course, we do not assert res judicata principles apply here.
But what's happening is that the dispute is moving out of the state court into the federal courts.
When you have a determination that is binding on all the parties to the estate, who, in most cases, have already consented to the result, the surrogate court or the probate court has made an order, it's final, the amount that has been assessed is... routine and the fact is that the amount has been paid, and the beneficiaries of the estate are stuck with the result.
They have no way--
Unknown Speaker: Well, I guess this comes up in the context of a summons enforcement proceeding, right?
Mr. Payment: --That's correct, it does come up in that context.
Unknown Speaker: Which complicates it somewhat, because the Court has been careful not to trench upon the summons enforcement power of the IRS.
Mr. Payment: That is very true.
You had two cases in the last year.
Unknown Speaker: That's right.
Mr. Payment: And there... have had many in the last 24 or [= 5] years since the Powell case, and the government almost always wins, and the policy comes--
Unknown Speaker: Right.
Mr. Payment: --out the same way every time.
The literal policy is in favor of enforcement.
But I think you have--
Unknown Speaker: So, presumably, the IRS could legitimately seek information by... by way of the summons enforcement technique?
Mr. Payment: --Well, that depends on whether our position is correct or not on Bosch and on 2053.
If we're right--
Unknown Speaker: So, for you to win, you have to persuade us that Bosch was perhaps... went too far, or we need to cut back on it or something?
Mr. Payment: --Well--
Unknown Speaker: For you to win?
Mr. Payment: --First of all, we're dealing with a different statute than was involved in the Bosch case.
So we're not seeking to overrule or really touch upon Bosch.
But we have commented and alerted the court to the fact, at least through one law review article that summarizes this very well, that the decisions since Bosch have been all over the lot; that the federal courts have had a very difficult time in dealing with a proper purpose test, and simply haven't been able to consistently apply it.
You have cases in which proper purpose is read to mean... or rather, excuse me... the concept of proper regard is read to mean no regard.
You have cases in which... that go 180 degrees the other way and give preclusive effect to the determination of the state court.
Unknown Speaker: You don't rely on any argument that the IRS has acted in bad faith, I gather?
Mr. Payment: In... in the sense that if you do not have a proper purpose for a summons enforcement proceeding, that is bad faith.
That is the antithesis of good faith.
Because, if we are right about our construction of 2053 and of the Bosch case, that means that the state court's determination is preclusive.
It should end the inquiry.
And if it ends the inquiry, then you can't have a proper purpose.
And if they come into court--
Unknown Speaker: What if there were fraud or the state court had applied state law erroneously in allowing the fee?
Mr. Payment: --Well, to treat those subjects one at a time.
The government has made much of the district court's imposing of prima facie tests, a prima facie showing of fraud test.
The district court in this case didn't have to go that far.
It didn't really have a case in which the Internal Revenue Service asserted that there was fraud involved.
You will recall that in the Powell case, there were explicit allegations to the effect that the revenue agent expected... or suspected fraud.
But this case came in on a record where the Internal Revenue Service simply said, in effect, reiterated the statutory rubric, said that we're interested in making a correct determination of the tax liability, and to determine the estate's liability for tax, and didn't explicitly state that they were suspecting fraud.
And, indeed, in the lower court, the transcript of the hearing can be read from end to end and you will not find a claim by the Internal Revenue Service that there might be fraud involved.
In fact, they specifically disclaimed that notion in their--
Unknown Speaker: Mr. Payment, may I interrupt?
Because I... I have some trouble with this argument, because in lots of tax enforcement, the Internal Revenue doesn't have any suspicion of fraud, but they'll just make random... take one out of every 100 returns and... and investigate them very thoroughly, and sometimes they'll stumble on fraud.
Mr. Payment: --I understand.
Unknown Speaker: Could they do this in the attorney fee area... just not necessarily have to allege fraud, but just say as our routine enforcement, we check up on every 15th fee... fee award?
Mr. Payment: Let's say that were the case, not... not what is actually happening, but that... hypothetical were the case.
The fact of the matter is that if, as a first instance, the decree is binding, you can see that there ought to be something more in this kind of a case, because it's so different.
In the Powell setting and almost every other setting that this Court has ever dealt with, you have an individual tax payer who has an ability to hide the records, who has an... has a... a purpose in hiding the records.
Unknown Speaker: Well, but the other side of the coin here is it's... it's not all that burdensome to turn over your time sheets, either.
Mr. Payment: That's true, unless you don't have to do it.
And the fact of the matter is, it was Mr. White's position that he didn't have to do it.
Unknown Speaker: Well, he has to do--
Mr. Payment: That the state court decree should have been given--
Unknown Speaker: --But whatever records are... are sufficient to justify the fee for the probate court, or whatever you call the judge, you used to have to turn over those same records to the... to the IRS.
Mr. Payment: --They weren't satisfied with those records.
They could see those records.
They went to the surrogates court and they could see what the surrogate had looked at.
Unknown Speaker: Were the time sheets in the records?
But if the surrogate had--
Mr. Payment: --The time sheets were not in the records.
Unknown Speaker: --But, if the surrogate had... if the surrogate had said to you, I'd like to take a look at your time sheets, you wouldn't have any doubt that you'd have to turn them over to him, would you?
Mr. Payment: That's correct, Your Honor.
If... if he was focusing on that--
Unknown Speaker: And he wouldn't have to say, I suspect you of fraud, I just think, every now and then, I ought to... ought to find out just how much time goes into these for... for general information.
Mr. Payment: --That would be... that... if we were in surrogates court and that inquiry was made of Mr. White, I am sure he would have turned them over.
He would have had no choice, because the court had an obligation to the beneficiaries of the estate and... and to cover its own obligations, as a court, to look into such matters, if it felt they were important.
But the New York Court of Appeals, as we have made very clear, has listed nine factors that the courts look to.
And those nine factors are largely subjective.
Other than time required for the project, they are very subjective factors, and local custom, local practice is an appropriate consideration under the Freeman case, and so the Freeman case held.
And the Freeman case, in fact, involved, in effect, a minimum bar fee schedule sometime before the Goldfarb case was in this Court.
And the court held that, so long as the surrogate made... this is in Freeman... so long as the surrogate made an independent judgment, it could use those bar schedules, and they, in effect, provided for a percentage.
Unknown Speaker: But, really, what you're saying is that if you turn over the records and the IRS challenged them, that a fee is not being a... allowable as a matter of New York law, you would win?
That's really what you're saying, I think, in final analysis?
Mr. Payment: I'm... I'm saying that the Internal Revenue Service can look at the same material that the surrogate looks at.
And if the surrogate makes... is willing to make an eyeball judgment, and... and... and apparently he did, as... as the record reveals, if he is willing to make that kind of an assessment, based on his long-term experience, in office, knowing what's required, looking at the accounting, for example, and knowing that the accounting required a certain amount of work, then that ought to be binding--
Unknown Speaker: Then IRS--
Mr. Payment: --because it's binding--
Unknown Speaker: --Then IRS must make an eyeball judgment, too.
Mr. Payment: --The IRS wants to make an eyeball judgment, but an eyeball judgment with a microscope.
They wish to examine time records.
And they are focused on the time records, and that's all they're focused on.
They're... in fact, what is so impressive about the record in this case is that only in this Court did they ever mention any possible fraud issue; only in this Court for the first time.
Unknown Speaker: Are there any cases in which you've litigated out the merits of a fee award in your... your county?
Mr. Payment: Oh, certainly.
Unknown Speaker: With the IRS, I mean?
Mr. Payment: Not with the IRS in... in... you mean in connection with the federal case--
Unknown Speaker: I understand you probably settle them; it's a lot easier to settle... to take... knock a thousand dollars off the fee and save the expense.
But have you ever had a test case on whether they have actually overreached in trying to disallow deductions for a fee?
Mr. Payment: --Mr. White paid... or rather the estate paid, apparently, a... because the Internal Revenue Service disallowed the entire fee, paid a deficiency, and has brought a companion action, a refund action in the federal district court, in which, of all things, the Internal Revenue Service has demanded a jury trial to have this entire matter relitigated.
So that case is pending down there... really awaiting the outcome of this case--
Unknown Speaker: Yes, but the government disallowed the entire attorney's fee in the--
Mr. Payment: --Didn't... didn't disallow a portion, disallowed the entire attorney's fee.
Unknown Speaker: --Was any reason given for that?
Mr. Payment: None that's in the record, Your Honor.
I am not sure I understand--
Unknown Speaker: Well, as a standard reason, the failure to obey the subpoena.
Mr. Payment: --I'm sure that that was their position.
The subpoena... the summons had not been obeyed, and therefore, as sort of a punitive measure, the entire deduction was disallowed.
Unknown Speaker: I'm... I'm still not sure how you answered Justice Stevens' question that I was interested in.
Which is, suppose the IRS just says we're going to have a... a routine audit of every hundredth return.
And we're going to go into it from top to bottom.
What... what is the rule that you wish us to promulgate that says they can't do that?
Mr. Payment: The rule is, to start with, that once the state court has spoken, as it... as it did in this case, that's... that's preclusive, that the Internal Revenue Service can go no further.
They would have to have something else in order to proceed.
I mean, it's true that Powell comes down on a very clear policy line of cases where enforcement takes place--
Unknown Speaker: Oh, so it's looking for something else.
Mr. Payment: --again and again.
Unknown Speaker: It's looking for something else.
That's... that... that's why it checks one out of every hundred.
In one out of every hundred it might uncover an enormous discrepancy between the amount of the fee allowed and the... and the... the hours actually expended, as shown by the time sheets.
Mr. Payment: There are--
Unknown Speaker: In which case, it would investigate further to see if there is any evidence of fraud--
Mr. Payment: --But there are no mysteries here.
There's nothing that the Internal Revenue... Revenue Service can't figure out from looking at the probate decree.
And if the... and particularly in this case, and they certainly know what the practice is in western New York, for example.
If the judge says, I keep the attorney's fee just short of an executor's commission, that's my local practice, that's my custom, well, he isn't spending time on time.
He's not concerned about time at all.
Unknown Speaker: --It's your--
Mr. Payment: He's making the other judgments that Freeman permit him to make.
Unknown Speaker: --It's your position, then, that if... if the practice in the surrogate in Monroe County is to just barely give a nod to time, that the... and that's supported by the New York Court of Appeals decision--
Mr. Payment: Right.
Unknown Speaker: --that the Internal Revenue Service must analyze in the same way?
Mr. Payment: Exactly so.
In other words, if this appears to be within his own guidelines, he knows... you know what his guidelines are, fine.
If it was 90 percent of the estate, for example, now we might have a case where they have to look further.
Unknown Speaker: Well, I would hope so, yeah.
Mr. Payment: Just peer below the surface and ask the question, what's going on here?
Unknown Speaker: But under your rule, could they do it if it was 90 percent of the estate?
Mr. Payment: Certainly.
Unknown Speaker: What--
Mr. Payment: Because they would have grounds to suspect.
Let's say that it was 90 percent of the estate, and we didn't have anything unusual; it was just a routine administration, and that's clear--
Unknown Speaker: --Well, supposing you had findings by the trial judge that this was a complicated estate, and I know from similar complicated estates it takes a great deal of time and effort, and I think it's an awful lot of money, but in this particular case, it's perfectly reasonable to give them 90 percent of the estate?
Mr. Payment: --If you have that kind of a finding, then they haven't got any reason to suspect fraud.
But if you didn't have that kind of a finding--
Unknown Speaker: So--
Mr. Payment: --and you had a routine sort of... of a case--
Unknown Speaker: --I would suspect you can never go behind a state court judgment.
Then that's really what you're saying, then?
Mr. Payment: --Not at all.
I think... I think there are instances where, looking at the record that he has in front of him, there is something unique and something troublesome.
But in the normal case... I mean this concept of doing sort of random audits now and again... that doesn't fly in an instance where a... you have a court, a state court, acting on a subject like this, where the determinations are presumed to be correct and presumed, especially--
Unknown Speaker: Yes, but don't we also have to presume that if you turned over the records and they disallowed the fee, you'd say I'm going to stick to my guns because I've got a court order approving it, and if we litigate it out, you're going to lose?
Mr. Payment: --If we litigate it out--
Unknown Speaker: Don't we have to presume you would win the lawsuit on the validity of the deduction?
Mr. Payment: --If we go into the refund case.
Unknown Speaker: Yeah.
Maybe not this one, because this is kind of peculiar.
He didn't comply with the subpoena.
Mr. Payment: But... but--
Unknown Speaker: But... but in the normal case where you comply with the subpoena and you've got a court order approving your fee, aren't you going to win 99 percent of those cases?
Mr. Payment: --Well, the Internal Revenue Service says no.
Unknown Speaker: No they don't.
Mr. Payment: The Internal Revenue Service's position is they're entitled to jury trials in such cases, they're entitled to drag the surrogate in, I guess, and have him testify under oath as to what he did.
They... they say the Bosch case requires that you give proper regard to state decrees.
Well, if you're going to give them any kind of regard, isn't it so that you'll have to have him come in as a witness?
The surrogate has to come in and explain exactly how he arrived at this, notwithstanding that he didn't look at the time, notwithstanding he used the Freeman factors besides time.
Unknown Speaker: But... I... I grant all that, but don't you think that if you assume an neutral tribunal in which the issue is litigated out, you think there's a danger of losing these cases?
Mr. Payment: We're in federal court; that's the neutral tribunal.
Unknown Speaker: Well, isn't that... you think the... the federal court is not a neutral tribunal?
Mr. Payment: I... I don't... I don't think that there should be a loss in a case like that, but I don't think the Internal Revenue Service ought to be coming in with these summonses, either, and causing this sort of disruption.
This, obviously, exerts a subtle pressure in the estate audit.
In the examination of the entire return, this can result in a collateral of... of possibly getting concessions along the line on other matters.
Unknown Speaker: Well, I understand that.
Mr. Payment: Because you're asking... you're putting the negotiator in a... in a very touchy position.
Unknown Speaker: Mr. Pay... Payment, the deficiency has been paid, hasn't it?
Mr. Payment: That is correct.
Unknown Speaker: Are you taking the position that this aspect of this case, the summons aspect, is moot?
Mr. Payment: No, not at all, Your Honor.
Unknown Speaker: Why isn't it?
Mr. Payment: Because he hasn't complied.
Unknown Speaker: Why isn't it moot?
Mr. Payment: Because he has not complied with the summons.
He has refused to comply with the summons.
And even though there is a refund case out there, that refund case is a separate matter entirely.
And, by virtue of the fact that he has not complied with the summons, this will dog him in... in the rest of... of the matter.
It's a separate case, in fact.
So there is no mootness as a result of this.
In fact, his obligation, pending this determination, is... is simply been stayed.
Unknown Speaker: Wouldn't you welcome--
Mr. Payment: But, if the result is that you affirm--
Unknown Speaker: --Wouldn't you welcome a holding to mootness here?
Mr. Payment: --I... I don't think so, Your Honor.
I think that we need to come to grips with the issue of the preclusive effect of state court decrees.
Unknown Speaker: Well, you'll do that--
Mr. Payment: We didn't come all this way--
Unknown Speaker: --You'll do that on the case that's pending out there.
Mr. Payment: --Well, that won't be from the United States Supreme Court; that'll be from a district court.
Unknown Speaker: Well, in that case, cannot the government subpoena the time records in the refund case?
Mr. Payment: They would certainly do so in the normal discovery process.
Unknown Speaker: Well, why doesn't that make the case moot, then?
They're going to get the material anyway.
Mr. Payment: Well, it all depends.
If, in the summons enforcement case pending here... and, in fact, all the proceedings have been stayed by mutual agreement of the parties... in... in... in this case, if the court determines that the material didn't need to be turned over, it doesn't need to be turned over in connection with discovery in the refund action, either.
That should preclude the matter.
Unknown Speaker: Well, I'm not sure why that... that follows, if the refund suit is still pending.
Mr. Payment: I... I think it's very clear that the issue in this case is whether there can ever be a proper purpose for issuing a summons, where the state court decree has a preclusive effect.
This case is so different from the Bosch case.
This case doesn't involve parties running to the state court to get a determination that would affect tax liability.
In fact, the parties are captives of the state court.
It's the only place where you can resolve this matter, by constitution of the State of New York and by virtue of the fact that there has always been a probate exception to diversity jurisdiction, there is no other place to do this.
So, as a matter of getting the matter resolved properly, the only place to go is in the surrogate court.
And in the surrogate court, when you get a result, it's binding on the beneficiaries.
And when it's binding on the beneficiaries, the result is that if they don't get the deduction, they're in... unfairly impacted.
And it seems to me that, under the circumstances of this case, there is no good reason for federal courts to get involved in this humdrum business of fixing estate attorneys' fees.
All the time, this Court is looking for ways in which to ensure that, properly, matters that are in state courts stay in state courts.
The abstention doctrines and all other sorts of doctrines that recognize principles of federalism, all point the way towards keeping significant issues in the state courts.
Unknown Speaker: What was the size--
Mr. Payment: This case goes the--
Unknown Speaker: --What was the size of the estate?
What's the bottom line of the size of the estate?
Mr. Payment: --It was a $450,000 estate.
The executor's commission was around 17,000, and the attorney's fee was around 16,000, roughly--
Unknown Speaker: Which was in... which was in line with a bar schedule for an estate of that size?
Mr. Payment: --It was in line with the judge's own local custom of... first of all, you have to understand, the executor's commission is fixed by statute, and so it doesn't vary.
There's a minimum percentage of the estate.
Unknown Speaker: Is the executor's commission also questioned here?
Mr. Payment: No, it is not.
Unknown Speaker: Because it's fixed by statute?
Mr. Payment: Fixed by statute.
One of our points is if this case had been in the State of California, instead of the State of New York, in California they fix both the attorney's fee, as a statutory minimum, and the fee of the executor, as a statutory minimum.
Unknown Speaker: How did--
Mr. Payment: And you couldn't have--
Unknown Speaker: --How did the two fees compare in size?
The attorney's fee was how much?
Mr. Payment: --Was about 16,000, and the executor's commission was about 17,000 and some odd change.
So, in keeping with what the judge declared to be his... his normal routine, he was keeping the attorney fee something less than the fee of the executor.
But as I was saying--
Unknown Speaker: Was Mr. White both executor and attorney?
Mr. Payment: --He was in this case, which is permitted under New York law.
And really what the--
Unknown Speaker: So he got a double fee, though?
Mr. Payment: --That's... that's correct.
And they allege that that was the reason why they were especially looking here.
But the fact of the matter is that it's permitted under New York law, and he had an announced... that is to say, the surrogate had an announced local practice, and he followed it in this case, and he wasn't... he wasn't bound to look at time as the exclusive determinant of this issue.
Unknown Speaker: Well, do you... do you think that... do you think that the IRS may inquire as to whether a surrogate's decision is consistent with state law?
Mr. Payment: Only if this Court believes that the Bosch decision requires that result.
But looking at 2053 of the Internal Revenue Code, looking at the Park decision of the Sixth Circuit, and the Jenner decision of the Seventh Circuit, the answer has to be no, that there should be no second guessing.
Unknown Speaker: Well, you shouldn't... if you know that the decision is consistent with state law, that may be so, but does it necessarily follow that every surrogate's decision is consistent with state law?
Mr. Payment: It doesn't follow that every one is, but the fact of the matter is, once it's been done--
Unknown Speaker: Well, suppose the Internal Revenue Code says what the surrogate did is... is wholly contrary to a... a decision of the Court of the Appeals in New York?
Mr. Payment: --That's what they seek to do, but they--
Unknown Speaker: And you say they cannot do that?
Mr. Payment: --They... they cannot do it, because 2053 of the Internal Revenue Code makes state law binding.
And Freeman tells us--
Unknown Speaker: Well, state law is what the court of appeals say it is, not what a surrogate says it is.
Mr. Payment: --And Freeman... Freeman... that's true, but Freeman governs the exact discussion here, and the surrogate contended that he followed the Freeman case, and the Freeman case has mainly subjective factors, not just time.
Unknown Speaker: Well, they've... they've got... the IRS, I would think, should be able to inquire as to whether what he did is consistent with Freeman.
Mr. Payment: And involve the federal courts in relitigating this very matter, just as in the refund... this case.
Unknown Speaker: But I guess if we conclude that under United States v. Powell, that you didn't make a showing of bad faith by the IRS, we don't reach any further question?
Mr. Payment: Bad faith, in our view, is the same as an improper purpose.
And if the purpose is not proper because you cannot second guess the surrogate's decree, you cannot relitigate this matter, then there is no proper purpose.
And if there is no proper purpose, then the summons is in bad faith.
Unknown Speaker: My... my notes show that the executor's commission was reduced also from $17,450 to 16,804; is that incorrect?
Mr. Payment: Apparently that was through some negotiations on incorrect mathematical calculation.
That was through negotiations with the Revenue agent.
That is correct.
Unknown Speaker: So the... so the agent in this case did reduce the executor's commission as well?
Mr. Payment: Well, he... before this summons enforcement proceeding, the matter was conceded, yes.
Because it was a mathematical error, in effect.
Unknown Speaker: I would like to--
You mean, you can just allege a mathematical error... the IRS can... and get behind the surrogate's judgment?
Mr. Payment: Well, one of the things is that that wasn't implicated in the summons enforcement end of the thing; it happened before they brought the summons enforcement proceeding.
Unknown Speaker: Well, could you have a summons enforcement just to determine there's no mathematical error?
Mr. Payment: I don't think that the Internal Revenue Service would come into federal court on a mathematical error issue ever.
But if they did--
Unknown Speaker: Well, I... I suppose they might if they were in disagreement.
Mr. Payment: --Well, perhaps so.
But I don't think that the matter would get that far if... if practice is of any guidance.
I would prefer to, if I might, reserve some time for rebuttal.
Argument of Alan I. Horowitz
Chief Justice Rehnquist: Very well, Mr. Payment.
Mr. Horowitz: Mr. Chief Justice, and may it please the Court:
I'd just like to clear up one factual matter before I begin.
The appendix filed in the Court of Appeals does contain the work papers of the agent when he issued the notice of deficiency.
The notice of deficiency was issued because the statute of limitations was about to expire any day, and if no notice had been issued, then the whole matter would have gone away.
The reason for disallowing the attorney's fee is stated in the work papers.
It says, and I quote,
"No amount is allowed as estate tax deduction for claimed attorney's fees if the estate has failed to provide the Internal Revenue Service with any time record, estate records or other documents in order to make an independent determination as to a proper remuneration for attorney services rendered to the estate. "
And then it goes on to cite the federal regulation and the matter of Freeman case in New York court.
Unknown Speaker: So the... the disallowance, then, did depend on the refusal to obey the summons?
Mr. Horowitz: Absolutely.
Unknown Speaker: So, it would be hard to say, though, that the summons enforcement proceeding was moot, so long as the entire refund proceeding has been necessitated by that?
Mr. Horowitz: No, the summons enforcement proceeding is not moot; the refund... the deficiency is being litigated.
And we still don't have the documents.
We have no court order giving us any right to the documents, and it's probably going to be hard for us to win the refund case without any documents.
Unknown Speaker: Yes, but you have the tax?
Mr. Horowitz: Well, we have the tax until the refund suit is litigated, but we don't have it to keep, yet.
Unknown Speaker: Well, can you use the discovery proceedings in the refund suit to get the documents?
Mr. Horowitz: Well, I guess we can ask, but, as far as I know, the IRS summons power is broader than any discovery right they would have in district court, so I assume if we can't get it with a summons, we can't get it with discovery, either.
The taxpayer would make the same argument, I suppose, that we just have no reason to look at these documents, because we have to follow the surrogate.
And they would be not relevant, just as they were viewed as not relevant by the district court here.
So, I don't... I mean if... if... it's true that if we had sought to discover these documents and the court had given them to him, that then the case would be moot, but there's no reason to believe that we'll be able to do that.
Unknown Speaker: Mr. Horowitz, is the Internal Revenue Service, in fact, starting some effort to review, generally, claims as allowed by state courts in estates?
Mr. Horowitz: I'm not aware of any IRS policy to begin to do this.
I understand that this is not the first case in... in this particular area where... where the attorney's fees have been questioned, but there are certainly no--
Unknown Speaker: Well, is there just some particular agent in New York that's on a roll, so to speak?
Mr. Horowitz: --Well, I... I can't really answer that.
But it may... apparently, what's happened is that the office there has determined that there may be a problem with attorney's fees and is looking at it more seriously than maybe other offices in the country.
But they're certainly not willy-nilly disallowing all attorney's fees or issuing summonses in all cases.
They've been looking at the returns and seeing whether there is some that... that... seem to be out of line.
Unknown Speaker: Well, do you... do you think that... that the statutes, section 2053, generally suggests, anyway, that the Internal Revenue Service will accept the fees that are awarded by the state courts?
Mr. Horowitz: Well, I... I think it's clear enough what the statute says.
The statute says that the administration expenses that are allowable under state law are to be allowed as a state tax deduction.
The question... the underlying merits question that's... that the Petitioner has tried to litigate in this case is what does the term "allowable under state law" mean?
And we've said that we think it means the same thing that the Court talked about in Bosch, which is that it depends whether the fee is, in fact, as allowable under state law set forth by the law of the highest court.
Now, what is prompting these investigations of fees is a concern that the... there is not sufficient inquiry being made at the... especially in these kind of... uncontested cases at the surrogate level as to whether these fees, indeed, are allowable under state law.
Unknown Speaker: You... you... you... you're... the IRS' position is that the surrogate in Monroe County is not following the Freeman decision?
Mr. Horowitz: --That's not our position yet, because we haven't been permitted to make an investigation.
Justice Stevens asked if there--
Unknown Speaker: Well, but I... I thought you said that you're investigating to see if... if--
Mr. Horowitz: --Well, yes, there is a concern that--
Unknown Speaker: --Well, where did the concern come from?
Mr. Horowitz: --Well, none of these papers are in the record; there are some papers that were shown to Mr. White.
His affidavit indicates that there have been some reports in the newspapers in the Rochester area.
It may be that... I think part of it just came from looking at the amounts of the fees.
In this case, for example, Mr. White collected almost 10 percent of the estate, about $34,000.
Unknown Speaker: Well, what... what--
Mr. Horowitz: And it doesn't seem that he did anything, as far as we can tell.
Unknown Speaker: --Well, okay.
But what if New York law says that someone who is both executor and attorney for the estate shall be entitled to a fee equal to 10 percent of the gross estate?
Mr. Horowitz: Then we probably would have very little reason to suspect that the... that this fee was not allowable under state law, and they probably would not have issued a summons.
But that's not what New York law says.
Unknown Speaker: --But you... you feel the New York law is different, that it requires a certain expenditure of time in order to warrant any fee?
Mr. Horowitz: Well, what the New York Court of Appeals said in Freeman was, it listed a whole host of factors, about nine factors or something, that it goes into.
We've cited several appellate division cases in our brief, in which fees were... surrogates' awards of fees were overturned by the appellate... appellate division as being excessive.
Unknown Speaker: Mr. Horowitz, what is the government really after here?
Are you biting off your nose to save your face, so to speak?
Might you not get a lot more taxes on the income tax end of it than on the estate tax end of it in the long run?
Mr. Horowitz: Justice Blackmun, we don't know if we would even disallow this deduction.
Unknown Speaker: Well, usually, I think that's the case, is it not?
Mr. Horowitz: That we would disallow--
Unknown Speaker: That why I think you have an agent up there working on a quota.
Mr. Horowitz: --Well, we have an agent who is trying to make an investigation.
Now, whether this is ultimately going to end up in a lot of tax for the IRS or not, I don't know, and he doesn't know either, until he can make the investigation.
Now, it happens the fee in this case is not very large.
For larger estates, there may be larger fees.
Unknown Speaker: Exactly.
That's why I wonder why you're making such a fuss over it.
Mr. Horowitz: Well, I don't think we're making such a fuss over it, frankly.
I mean, I understand the case is here now, and that's... we didn't bring it here.
All we did was issue a summons.
I don't know how many summonses are issued over the course of the year, but there are quite a few.
Unknown Speaker: Yes, but you issued... you issued the summons?
Mr. Horowitz: Yes, we did issue the summons, because the agent--
Unknown Speaker: And it may well be misguided--
Mr. Horowitz: --the agent looked at the return and he thought there was reason to suspect the... the fee was not allowable.
Unknown Speaker: --The IRS may lose a lot more taxes doing this than they would if they let it go to the income tax aspect.
Mr. Horowitz: I understand that Petitioner has claimed in his reply brief that we have state tax attorneys who are sitting around with nothing to do and this isn't what we should be doing.
But I think if there's one thing that this Court has made clear, and it's a quote from page 56 of Powell, it is,
"Congress did not intend the courts to oversee the Commissioner's determinations to investigate. "
"It is no basis for refusing to enforce a summons to say that the Service ought to be focusing on something else. "
And I suppose there are a lot of taxpayers out there who, let's say, take liberties with certain small items on their return because they think the Service has got more important things to do.
But I think that's a lot of gall to turn that, I guess, attempt to get away with something into a right to actually challenge the service, when the service does happen to look into one of these smaller matters.
Unknown Speaker: Is your next step along the line of Justice O'Connor's question?
Are you going to question claims that have been allowed in every probate in New York?
Mr. Horowitz: There is no next step, Justice Blackmun.
There is... the first step here is to try to get these records.
And I don't know what is going to happen after that, frankly.
There have been cases that are cited in our brief where claims allowed by probate courts have been disallowed by the IRS; there are not many.
And as far as I know, there are not many of these attorney's fee cases.
Justice Stevens asked before how many there were, and as far as I know, there is not a single case in this district where that has actually been litigated whether the Service can disallow the fee.
But I would really like to emphasize that this is a summons enforcement proceeding here, and I'm not sure that it complicates the question.
It seems to me that it simplifies the question that's before the Court.
It just presents the usual issue that's presented in a summons case: whether this... IRS summonses should be enforced.
And we submit that under Powell, under the usual rules for summons enforcement established and reaffirmed by this Court, the answer is clearly yes.
It's a very simple analysis.
The summonses were issued to enable the IRS to investigate the correctness of the estate's return, specifically, this one item on the return: whether the deduction for attorney's fees was valid under section 2053 of the Code, as allowable under state law.
That's a proper purpose for issuing a summons.
There's no basis for believing, and no allegation really, that the investigation is being made in bad faith or for some other collateral purpose.
And therefore we submit that the summonses should have been enforced.
Unknown Speaker: And... and your position is the IRS need say nothing more in a case like this than it wishes to look into the propriety of the award of attorney's fees.
It doesn't have to say why it wants to or what it thinks may be bad about it?
Mr. Horowitz: --That's absolutely right.
That is clear from Powell that the service doesn't have to explain its determination to investigate or make any sort of probable cause or lesser showing as to why it wants to investigate.
It is entitled to allocate its investigative resources as it sees fit.
Unknown Speaker: And I suppose you would say that... that even if the service is wrong about whether it has to accept the... the finding of the probate court, even if you're wrong about that, even if it is ultimately held that you have to accept it, at least at this point that's not clear, and you're not in bad faith to assume the contrary?
Mr. Horowitz: --Absolutely right.
There are at least... at least two reasons why... why that wouldn't make a difference at this stage.
I... I guess Respondent is trying to... if the statute said... if section 2053 said... I think it was Justice Rehnquist's hypothetical that the attorney is entitled to 10 percent of the estate, and we're going to allow that for a deduction, and he took a 10 percent deduction.
Or if it said that whatever the surrogate says is absolutely final, no matter whatever happens.
If the statute said that on its face, and then the IRS issued a summons like this, claiming that it wants to investigate the merits of that deduction, the taxpayer could reasonably come into the summons enforcement court and say, look, there's nothing for them to investigate.
It's clear as a bell, it's clear to us, it's clear to you, it's clear to them that they're not going to be able to disallow this deduction down the road.
Now, that would arguably raise an inference that there was an improper purpose for the summons, that if the purpose was something other than what was stated.
And that might... and that probably would justify denial.
But that's not what's going on here.
We can argue about what section 2053 means, whether Bosch applies, what sort of deference is required to the surrogate, but nothing... their argument that Bosch shouldn't apply does not suggest any bad faith on the part of the agent.
As Justice Scalia said, we don't know what section 2053 means, and it's not the place to litigate the merits here.
It's a summons enforcement--
Unknown Speaker: xxx as I gather from your brief, you say that the... the Service doesn't know whether there might be fraud?
Mr. Horowitz: --That... that's... that's the second point that I wanted to get to.
Unknown Speaker: And--
Mr. Horowitz: We've talked about fraud a little bit because--
Unknown Speaker: --And that might be true even if the statute said 10 percent?
Mr. Horowitz: --Well, that's so, I suppose.
There might be fraud there, too.
But let's suppose the statute said even if there is fraud, that... that you still have to follow it.
Unknown Speaker: That may be so.
Mr. Horowitz: --The... the only way in which... looking down the road to the merits... could effect the summons enforcement proceeding, it seems to me, is if it raised an inference of bad faith on the part of the agent, that it was clear enough that the stated purpose of investigating tax liability was not the true purpose, and that's not the case here.
Unknown Speaker: Some... somewhere in... somewhere in the briefs or record, Mr. Horowitz, it seems to me there is something to the effect that one of the concerns of the I... IRS was that New York allowed the attorney to... to also be the executor.
Am I right in that?
Mr. Horowitz: Well, that... that's one of the things that... that... that I think was a contributing factor in the decision to investigate this return, because it makes it a little more questionable what the surrogate might have done.
I mean, there--
Unknown Speaker: But that... that... that's... that really seems quite dubious to me.
I mean, if New York law allows--
Mr. Horowitz: --Well, New York law allows the same individual to serve as both executor and attorney, but New York law clearly does not allow him to collect a double fee for the same services.
And there are health division cases that have interfered with that.
So, our concern here was whether he in fact didn't do any work as attorney that's distinct from what the executor would do, and whether the attorney's fee was really being paid for the same services.
That's why we asked him to at least give us an affidavit.
Before the summons was ever issued, he was just asked to give an affidavit of what he did for the estate that warranted this fee, and he refused to provide that.
For all we know, he didn't do more than half-an-hour's or an hour's worth of attorney's work.
And there would be an issue, I suppose, under New York law, whether a $17,000 attorney's fee is valid under New York for an hour's worth of work.
But we would probably question that.
Unknown Speaker: --Well, that's rather--
Mr. Horowitz: And that would be litigated in another proceeding.
Unknown Speaker: --That's rather a broad statement, Mr. Horowitz.
You don't probate in an estate of this size in a half-an-hour's work, do you?
Have you ever probated an estate?
Mr. Horowitz: I've never probated an estate, no.
Unknown Speaker: No.
Mr. Horowitz: But there's nothing in the record as to what the attorney did.
In Respondent's brief they... on page 5 of their brief, in a statement they list various things that Mr. White did.
And almost all of these, it seems to me, are... are... refer to executor's duties.
So, I don't think there's anything wrong with the agent at least wondering whether in fact there was an independent attorney's work, separate from what the executor had done, that warranted this kind of fee.
But that's... if the agent is wrong, the district court will tell him so or in fact the IRS might never disallow the deduction.
The fact is that we're just trying to find out what he did and whether there's any basis for challenging the deduction.
I think that the entire case here has been confused by... by the Petitioner's decision to litigate it by looking down the road at the outcome of the investigation... possible outcome of the investigation, and then trying to reason backwards and say, since our position is the IRS is probably not going to win, ultimately, or is not going to be able to disallow the deduction, then they shouldn't issue the summons in the first place.
That's not the way the summons enforcement proceedings are supposed to be handled.
Unknown Speaker: Mr. Horowitz, don't misunderstand me, I'm frank to say I've never liked double fees, and I've never liked double fees that are fixed at the maximum possible.
But I just wonder if the IRS hasn't gone a little too far here.
Mr. Horowitz: Well, Justice Blackmun, as I said before, I mean, there... there has yet to be a case where we've actually been litigating whether the fee should be disallowed or not.
And it's perfectly possible that in this case we would look at the records of whatever he did and determine that the fee should not be disallowed.
The surrogate has a certain element of discretion here.
Unknown Speaker: Well, I'm sure--
Mr. Horowitz: But I'm sure you recognize that there can be abuses in this area and we can't find out--
Unknown Speaker: --I'm sure some fee is allowable in an estate of this size?
Mr. Horowitz: --If he did work for attorney, probably some fee is allowable.
Unknown Speaker: And the--
Mr. Horowitz: And I doubt very much we would have disallowed the whole fee if we had the records.
Unknown Speaker: --And the surrogate not only found it allowable, he allowed it.
Mr. Horowitz: The surrogate did allow it.
And that is the issue.
That is the second issue in this case, which is whether the surrogate's allowance of the fee is something that we have to defer to.
Unknown Speaker: Well, it really relates to the first issue, though, because if we construe the statute to mean, in effect, that anything that's been allowed by the state judge is deductible, then you would not have a proper purpose.
Mr. Horowitz: Well, I disagree with that, Justice Stevens, on... on two grounds.
First of all--
Unknown Speaker: I thought that was your hypothetical earlier?
Isn't that the same--
Mr. Horowitz: --No, my hypothetical is not if you ultimately construe the statute that way; my... my hypothetical--
Unknown Speaker: --You would not have a proper purpose in the next case if we came out that way in this case?
Mr. Horowitz: --Yes, sir.
Unknown Speaker: That's... but you would say that, as far as this case is concerned, having an arguable position on this, your... your purpose is... is--
Mr. Horowitz: --Well, we have more than an arguable position, we have a decision out of this Court that's directly on point.
Unknown Speaker: --Well, no.
No, you don't.
Mr. Horowitz: Pretty close.
Unknown Speaker: Which one?
Mr. Horowitz: The estate of Bosch.
Unknown Speaker: Well, the Bosch is a case where you basically had a collusive suit; everybody was interested in reducing taxes there.
I mean, there... there were no adversary parties that... that wanted... here, there at least are beneficiaries who--
Mr. Horowitz: Who--
Unknown Speaker: --presumably don't want to pay a larger fee than they have to.
Mr. Horowitz: --Who... well--
Unknown Speaker: Bosch is quite different, I think.
Mr. Horowitz: --The Court did not... as I recall, the Court did not focus on whether it was a collusive suit or not.
And, in fact--
Unknown Speaker: But, in fact, that was true.
They were construing, as a matter of state law, whether it was... I forget now... marital deduction or something.
But no... none of the... none of the parties stood to... to gain anything except tax savings by the decree.
Mr. Horowitz: --Well, I... I mean, I understand that.
Unknown Speaker: Well, that's not the case here.
Mr. Horowitz: To try to distinguish it on its facts, but I think the holding of the Court is that what... what the code means when it talks about applying state law in... in the case of a federal estate tax deduction, what it means is applying the law as set forth by the highest court of the state.
And the two dissenters in that case, Justice Harlan and Justice Fortas, wanted to limit the Court's decision just to the... to cases where there was no contest in the state court, where it was, if not collusive, at least consented or something.
And the Court didn't... the majority did not do that.
So, I think at least the agent certainly has very strong reason to think here that he... that he can do it--
And, apart from that point, though, I don't want to let slide the fact that the petitioner and the district court have conceded that the statute is not as we said in the hypothetical, that it can be set aside under certain conditions.
Now, how likely those conditions are to occur is not something to be determined before we're allowed to make an investigation.
In fact, I think that's most clearly stated in Petitioner's reply brief at page... pages 9 and 10.
I... I read as a concession that the IRS can issue a summons to the attorney of the estate as a... as a means of conducting an investigation of an attorney's... of the legitimacy of an attorney's fee that has been approved by the surrogate.
That's exactly what it says here.
Now... because of the possibility that there might be fraud.
Now, what Respondent... I'm sorry, Petitioner's defense, that... that he still maintains, is that that's not applicable in this case because the IRS agent didn't say that he was investigating fraud at the time he issued the summonses.
And so, maybe you can do that in another case, but not in this one.
But I think it's clear enough that we don't have to say at the outset of our investigation where the investigation is going.
In fact, we don't know.
And there's no reason to we should be expected to know.
The nature of an investigation is that you start looking into a particular area.
As you develop facts, your attention becomes more focused; then you move along and maybe you find fraud, maybe you find that the deduction was perfectly reasonable, or maybe you reach the conclusion that the surrogate made a mistake of New York law.
But we don't know where it's going to go in the beginning.
To... in order to get an IRS summons enforced, we have to allege a purpose of investigating tax liability.
That was clearly the purpose here.
And that's the end of the case, I think, from that perspective.
Now, the second issue in the case is one that we have stated in our brief that we don't think the Court needs to reach because... for the reasons I've just discussed.
I think the summons has to be enforced in any case, no matter... whether Bosch applies or not.
But the Court could reach it, and I'd just like to talk about it briefly.
We think it is clear, from the language of the statute, from using the terms allowable under state law, and from the history of the statute from its beginning, that section 20... 2053 does not set up a test of looking at whether the surrogate has, as a historical fact, allowed a particular deduction.
The idea is to make an inquiry into state law.
The reasons for that rule are explained by the court in Bosch, and there is no reason to have a different rule for this particular estate deduction than there is for the marital deduction that was at issue there.
We don't think the taxpayer has any--
Unknown Speaker: But you certainly can say there is a reason, suggested by Justice Stevens' question that, in Bosch, there was a motive on the part of all the parties to the litigation to have it come out a particular way, in order to reduce their tax liability.
Here there is a motive on the part of the beneficiaries not to want to pay any larger estate attorney's fee or executor's commission than was required by law.
Mr. Horowitz: [inaudible]
Unknown Speaker: That's certainly a factual difference from Bosch.
Mr. Horowitz: Yeah, you're suggesting that Bosch could be restricted to its facts, and that--
Unknown Speaker: I don't find the Bosch majority, in particularly, crystal clear as to what the rule is or why it's that way.
Mr. Horowitz: --All right.
Well, what I was responding to was... was the argument the Petitioner made that Bosch applies only to the marital deduction, section 2056, and shouldn't apply here to section 2053.
I think Justice Stevens' point would be that, even in the marital deduction context, Bosch should be given an extremely narrow reading.
And, as I say, we disagree with that, but that's something that would be litigated down the road, I think, in... in a refund suit here.
But at least what the Court said in Bosch, I think, is that state law means the law of the highest court, and that the IRS should not be bound by mistakes of state law, of lower courts.
Now, I... I would just like to say that we don't think this is really opening a great Pandora's box and federalism concerns and all this.
The IRS, for reasons that the Court seems to be well aware of, is not likely to go out willy-nilly, disallowing all these fees and bringing them into court.
And certainly the district courts are not likely to be second guessing the surrogates willy-nilly.
I think the problem is possible abuses here.
And the district courts aren't going to want to invite this kind of litigation; they're only going to step in and disagree with the surrogate if there's a real problem here.
And all we want is to be able to conduct an investigation and find out if there is a real problem.
Unless there are any questions--
Rebuttal of Kenneth A. Payment
Chief Justice Rehnquist: Thank you, Mr. Horowitz.
Mr. Payment, you have rebuttal.
You have two minutes remaining.
Mr. Payment: I want to respond only to the issue of this so-called inability of the court, under Powell, to look at the merits in determining whether a proper purpose is had by the Internal Revenue Service.
It seems to me that Powell said that the hearing on proper purpose ought not to be a meaningless inquiry.
And it is a meaningless inquiry if you can't look at the merits or you have a state court's determination intervening.
Because, in such an instance, the only way that you can judge whether the Internal Revenue Service is doing the right thing is by finding out what they're about.
And in this case, they made it very clear.
They said they were entitled under Bosch to make a second inquiry; that they could look... as a matter of fact, when they started the case, they said that it isn't determined under state law at all... alone, it's determined under federal standards, as well.
They only abandoned that position, shall we say, artfully, anyway, in the Second Circuit and in this Court.
But, in fact, what they would have this Court do is impose a federal standard on the surrogate courts and, in effect, on the parties.
And what happens if you don't find out in the beginning whether they really are interested in fraud and whether, as they said in this case, the only thing they thought they could do is second guess the determination of this surrogate.
You are not following the line of the Powell case, in which the court said that the hearing cannot be meaningless.
And it is meaningless unless you look into the merits of the controversy.
If we pick up on the hypothetical, suppose we had a California case in which the executor's commission and the attorney's fee are exactly the same.
If the court couldn't inquire into whether or not a proper purpose was had by virtue of the Internal Revenue Service issuing a summons in that case, then the inquiry would, indeed, be a meaningless one.
Chief Justice Rehnquist: Thank you, Mr. Payment.
Mr. Payment: Thank you, Your Honor.
Chief Justice Rehnquist: The case is submitted.
Argument of Speaker
Mr. Speaker: I have the opinion of the Court to announce in No. 88-928, James White versus the United States.
The writ of certiorari has dismissed as improvidently granted.
Justice White Dissents.