The Honorable Charles E. Grassley,
United States Senate,
232 Russell Office Building,
Washington, D.C. 20510

Dear Senator Grassley:

I am responding to a question you raised about attorney fees in tax cases during my testimony on May 20 before your Subcommittee on Oversight of the Internal Revenue Service. You asked whether I preferred the attorney fee reimbursement rules in the Equal Access to Justice Act ("EAJA") or those in the Tax Equity and Fiscal Responsibility Act ("TEFRA").

The American Bar Association and the Section of Taxation have long supported a provision for reimbursement of a prevailing taxpayer's litigation costs, including reasonable attorney fees. Neither the ABA nor the Section has taken any position on the relative merits of EAJA and TEFRA. The views expressed in this letter are therefore my own and not those of the ABA or the Tax Section.

The attorney fee rules in TEFRA were enacted in response to certain deficiencies in the EAJA as applied to tax cases, the most serious of which was that the EAJA was held inapplicable to tax litigation in the United States Tax Court. In addition to authorizing the Tax Court to award attorney fees, TEFRA responds to an unprecedented backlog of cases in the Tax Court by requiring taxpayers to exhaust their administrative remedies within the Internal Revenue Service to be eligible for attorney fee awards in court. TEFRA also specifically defines a "prevailing party" in tax cases to include a taxpayer who wins a significant issue of continuing precedential importance even though he may lose other issues which involve a greater amount of tax in the particular year in suit. Finally, TEFRA makes all prevailing taxpayers eligible for attorney fee awards, regardless of their net worth, subject to an overall limitation of $25,000.

The TEFRA rules could be improved. For example, many members of the tax bar believe that the burden of proof under TEFRA should be on the Government, as it is in the EAJA, since the Government is in a better position to explain why it brought or defended the case and why its position was reasonable.

Imperfect as they are, however, the TEFRA rules address the special problems of tax litigation while EAJA does not. Put to a choice, therefore, my recommendation is to stay with TEFRA. If Congress is dissatisfied with the way the TEFRA rules are working, changes should be made within the existing TEFRA framework.

Sincerely,

M. Bernard Aidinoff
125 Broad Street
New York, N.Y. 10004