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Opinions 3/12/12: Maryland Court of Appeals

Family Law

Attorneys’ fees

BOTTOM LINE: The gratuitous cost of pro bono legal services, provided to a party in a custody modification proceeding, may not be considered in awarding attorneys’ fees to the other party unless the circuit court first determines that both sides had substantial justification for bringing or defending the action.

CASE: Davis v. Petito, No. 30, Sept. Term, 2011 (filed Feb. 27, 2012) (Judges Bell, Harrell, BATTAGLIA, Greene, Adkins, Barbera & Eldridge (retired, specially assigned)). RecordFax No. 12-0227-20, 19 pages.

FACTS: Joanna Davis and Michael Petito were married in 1998 and had one daughter, Sophia. In April of 2006, the circuit court granted them an absolute divorce and awarded them joint legal custody with primary physical custody of Sophia to Ms. Davis.

In 2008, Ms. Davis, through retained counsel, filed an emergency complaint for immediate custody, injunctive ex parte and pendente lite relief, in which she sought sole legal and physical custody of Sophia because she alleged that Mr. Petito had sexually abused the child. Mr. Petito filed a counter complaint for modification of custody, seeking joint physical and legal custody of Sophia and a decrease in his child support payments. He also specifically requested attorneys’ fees. Eventually, Ms. Davis could not afford to pay an attorney and secured the pro bono services of Sexual Assault Legal Institute (SALI).

The circuit court determined that Ms. Davis had not established by preponderance of the evidence that there was any form of sexual abuse by Mr. Petito.

As to attorneys’ fees and costs, Mr. Petito submitted a request for $76,052, arguing that the judge should award him the total amount under FL §12–103 because Ms. Davis lacked substantial justification to seek a modification in child custody. He also asserted that Ms. Davis had financial circumstances that far exceeded his financial circumstances because she owned her own home and had pro bono representation, while he did not own property and had retained private counsel.

Ms. Davis submitted a request for an award of attorneys’ fees and costs in the amount of $14,080, representing the amount she paid to her private attorney before she retained SALI.

The judge awarded Mr. Petito $30,773 in attorneys’ fees, reasoning that Mr. Petito had substantial justification for defending himself in this proceeding and that Ms. Davis’s financial circumstances were better than that of Mr. Petito because she had been represented on a pro bono basis, whereas Mr. Petito had incurred significant debt as a result of retaining private counsel. The Court of Special Appeals affirmed.

The Court of Appeals reversed and remanded.

LAW: Under FL §12–103(a), the court may award to either party the costs and counsel fees where a person: “(1) applies for a decree or modification of a decree concerning the custody, support, or visitation of a child of the parties; or (2) files any form of proceeding: (i) to recover arrearages of child support; (ii) to enforce a decree of child support; or (iii) to enforce a decree of custody or visitation.”

FL 12–103(b) sets forth what a court may consider before it makes such an award including: (1) the financial status of each party; (2) the needs of each party; and (3) whether there was substantial justification for bringing, maintaining, or defending the proceeding.

Furthermore, upon a finding by the court that there was an absence of substantial justification of a party for prosecuting or defending the proceeding, and absent a finding by the court of good cause to the contrary, the court shall award to the other party costs and counsel fees. FL §12–103(c).

The award of attorneys’ fees in this case lumped the perceived values of the respective attorneys’ fees together and then applied a formula to assess Mr. Petito’s fees. The judge conflated Mr. Petito’s substantial justification for defending the custody proceeding with Ms. Davis’s use of pro bono legal services in bringing the claim. Substantial justification for each party’s position, however, is measured by the issues presented and the merits of the case, not the amount of attorneys’ fees charged. See Lieberman v. Lieberman, 81 Md.App. 575, 600 (1990).

In 1993, the Legislature repealed and reenacted §12–103 in order to introduce the mandatory award of attorneys’ fees and costs under subsection (c). Testimony provided in the file for the bill reflects that its purpose was to address the inability of custodial parents to finance judicial enforcement of court-ordered child support.

In support of the bill, Judge Rosalyn Bell of the Court of Special Appeals, as a member of the Governor’s Task Force on Family Law, provided written testimony that custodial parents, who were entitled to receive court-ordered child support payments, often did not because the non-custodial parent refused to pay, knowing that the custodial parent could not afford to hire an attorney and enforce the order. While judges already had discretion to award attorneys’ fees, many did not choose to exact this toll.

Substantial justification under §12–103(b) may require a consideration of the merits of each party’s position, including the non-prevailing party.

In Broseus v. Broseus, 82 Md.App. 183 (1990), the trial court granted child custody to Dr. Broseus. Dr. Broseus and Ms. Broseus incurred attorneys’ fees in the amount of $71,823 and $48,905.17, respectively, and the trial court, observing that the language of §12–103 permitted an award of attorneys’ fees to either party, awarded Ms. Broseus $5,000 in attorneys’ fees. The Court of Special Appeals affirmed, reasoning that “[j]ust because [Dr. Broseus] prevailed on the custody issue does not preclude an award to [Ms. Broseus], so long as there was substantial justification for bringing or defending the proceeding under…§ 12–103.” Id. at 200.

Essentially, substantial justification, under both subsections (b) and (c) of §12–103, relates solely to the merits of the case against which the judge must assess whether each party’s position was reasonable. A judge, after finding substantial justification, then must proceed to review the reasonableness of the attorneys’ fees, and the financial status and needs of each party before ordering an award under §12–103(b).

The value of Mr. Petito’s attorneys’ fees also controlled the judge’s perception of the financial status and needs of both parties. In factoring the needs of Mr. Petito, the circuit court considered both the amount paid to his private counsel, $76,052, as well as the debt he incurred to pay for those fees, including loans from his family.

In so doing, the judge considered the attorneys’ fees for Mr. Petito twice. Ms. Davis’s SALI representation was valued at zero and Ms. Davis’s needs, such as her lack of savings or disposable income, however, were not considered in the award of attorneys’ fees. The judge divided the amounts paid by the parties to their respective private counsel according to their relative income. No comparison, beyond their incomes, apparently was undertaken by the judge to determine the financial status and needs of each of these parties.

Financial status and needs of each of the parties must be balanced in order to determine ability to pay the award to the other; a comparison of incomes is not enough. Henriquez v. Henriquez, 413 Md. 287, 301 (2010).

Section 12–103 contemplates a systematic review of economic indicators in the assessment of the financial status and needs of the parties, as well as a determination of entitlement to attorneys’ fees based upon a review of the substantial justification of each of the parties’ positions in the litigation, mitigated by a review of reasonableness of the attorneys’ fees. The only time that the relative amounts of the parties’ attorneys’ fees should be considered is when both are determined to have a substantial justification for their positions; after which pro bono legal services must be valued. See Henriquez, 413 Md. at 301.

The case was remanded to the circuit court for a reconsideration of the attorneys’ fees award under §12–103. If the circuit court determines that Ms. Davis lacked substantial justification for bringing her child custody modification claim and absent a finding of good cause to the contrary, then under §12–103(c), the reasonableness of Mr. Petito’s attorneys’ fees would then be the only consideration.

If the circuit court finds under §12–103(b), however, that Ms. Davis and Mr. Petito each had substantial justification for bringing or defending their respective positions in the proceeding, then the circuit court must value the legal services afforded to both parties and determine their reasonableness, after which the circuit court must proceed to assess Ms. Davis’s and Mr. Petito’s financial status and needs.

COMMENTARY: The definition of “substantial justification” is derived from federal jurisprudence addressing the same standard in fee-shifting cases. Under the Equal Access to Justice Act, §2412(d)(1)(A), Title 28 of the United States Code, “a prevailing party other than the United States” shall be awarded fees and other expenses “incurred by that party in any civil action…brought by or against the United States…,unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.”

To be substantially justified, the United States must be “‘justified in substance or in the main’—that is, justified to a degree that could satisfy a reasonable person,’“ or, in other words, have “the ‘reasonable basis both in law and fact.’” Pierce v. Underwood, 487 U.S. 552, 565 (1988).

PRACTICE TIPS: In a fee-shifting context, reasonableness of attorneys’ fees is always a consideration, “taking into account such factors as labor, skill, time, and benefit afforded to the client.” Petrini v. Petrini, 336 Md. 453, 467 (1994); see also Monmouth Meadows Homeowners Ass’n v. Hamilton, 416 Md. 325 (2010).

Professional Responsibility

Disbarment

BOTTOM LINE: Disbarment was the appropriate sanction for an attorney who knowingly made false statements to Bar Counsel and engaged in conduct involving dishonesty, fraud and deceit.

CASE: Attorney Grievance Commission of Maryland v. Payer, Misc. Docket AG No. 8, Sept. Term, 2011 (filed Feb. 22, 2012) (Judges Bell, Harrell, Greene, Adkins, Barbera, WILNER & Cathell (retired, specially assigned)). RecordFax No. 12-0222-23, 24 pages.

FACTS: Bar Counsel filed a petition for disciplinary or remedial action against Michele Payer, alleging violations of numerous Rules of Professional Conduct (MLRPC) arising from two complaints. The first complaint involved Jeffrey and Abby Berow, who retained Payer to file a Chapter 13 bankruptcy petition. A retainer agreement was signed that called for a fee of $4,500. Ms. Berow paid Payer $1,274, and Payer filed a joint Chapter 13 petition on behalf of the Berows. The following Monday, Mr. Berow’s automobile was repossessed by Citizens Automobile Finance. Ms. Berow said that she or her husband notified Citizens of the bankruptcy, and the car was returned immediately, without any intervention by Payer.

On June 15, Payer, on behalf of the Berows, filed a motion for sanctions against Citizens for attempting to repossess the car in violation of the automatic stay that took effect under §362 of the Bankruptcy Code. In her motion, Payer also claimed that the towing company had done $3,825 in damages to the car.

Payer and the Berows gave conflicting testimony concerning the circumstances surrounding the return of the car. According to Payer, the Berows told her that the damages to the vehicle existed before the car was repossessed and that Ms. Berow instructed Payer to call Citizens and offer to drop the motion for sanctions if Citizens would reduce the monthly payments on the car. According to Ms. Berow, however, after informing Payer that the vehicle had significant engine problems, Payer recommended that they surrender the car by leaving it at her office where it would be picked up by Citizens.

Shortly after retaining Payer for the bankruptcy matter, Ms. Berow informed Payer about an incident that occurred at her work. Ms. Berow signed another retainer agreement with Payer calling for an additional deposit of $1,500 for her to represent Ms. Berow in an action against Ms. Berow’s employer. Payer filed a complaint in the circuit court against Sinai Hospital and Ms. Berow’s supervisor at the hospital, Diane Bongiovanni.

Payer failed to advise the Berows of the potential conflict of interest in her representing the Berows in both their bankruptcy matter and the employment case and failed as well to notify the Chapter 13 trustee or to file any notice in the bankruptcy case that she had filed the complaint.

After the filing of the motion for sanctions against Citizens and the lawsuit against Sinai, Payer, according to Ms. Berow, recommended that the bankruptcy petition be withdrawn, as there was a potential for a significant recovery from the action against Sinai. Ms. Berow testified that Payer never advised the Berows that, if the petition were voluntarily withdrawn, a new one could not be filed for 180 days. On August 4, 2009, Payer filed a motion for voluntary dismissal of the bankruptcy petition.

At no time did Payer ever amend the appropriate schedules to add the claims against Sinai and Ms. Bongiovanni or otherwise advise the Bankruptcy Court of that action. Payer withdrew her appearance as counsel for the Berows on September 21, 2009, and, through new counsel, the action against Sinai was dismissed.

In response to Bar Counsel’s inquiry regarding fees, Payer claimed that she deposited into her escrow account a cash payment of $400 received from Ms. Berow on July 2, 2009, and a $1,000 cash payment received from her on July 16, 2009. When Bar Counsel subpoenaed the original records from the bank, it became clear, however, that neither the $400 nor the $1,000 had been deposited in the escrow account, but rather had been deposited into her operating account and that one of the deposits was not of cash received from Ms. Berow but a check received from another client.

The second complaint involved Makbul Mughal, who retained Payer in connection with an action against a former tenant. He signed a retainer agreement under which, for a flat fee of $1,750, Payer would file one or more writs of garnishment to enforce a judgment Mr. Mughal had obtained against the tenant and would file a separate action against the tenant for damage done to the property. Mr. Mughal paid $875 of the fee on April 4.

Mughal, or his son on his behalf, called on several occasions to inquire whether the garnishments and the lawsuit had been filed. On April 21, 2009, Payer told the son that she had filed garnishments against all three of the tenant’s employers and also had filed the lawsuit. However, as of June 3, 2009, it became clear that no lawsuit had been filed against the tenant and there was no evidence that any of the writs of garnishment had been issued or served.

Payer advised Bar Counsel that she had deposited Mr. Mughal’s check for $875 in her escrow account and that she used the money for court costs, etc. She enclosed a deposit slip dated April 7, 2009 showing a deposit of $1,300 and claimed that the cash proceeds from Mr. Mughal’s check were part of that deposit. Payer had altered the deposit slip with a black pen so that the account name and number were not visible.

Upon Bar Counsel’s demand, Payer sent an unadulterated copy of the deposit slip and asserted that the deposit had been made to her operating account because it had to be used to pay direct expenses for the client in short order. The documents indicated that the unredacted deposit slip involved an account that appeared to be a personal checking account.

With respect to the Berow complaint, the hearing judge concluded, by clear and convincing evidence, that Payer had violated MLRPC 1.1, 1.3, 1.4(b), and 1.7. With respect to both complaints, the hearing judge concluded, by clear and convincing evidence, that Payer had violated MLRPC 1.15 and Rule 16–607, MLRPC 8.1(a) and (b), and MLRPC 8.4(c) and (d).

The Court of Appeals disbarred Payer.

LAW: In an attorney disciplinary proceeding, the hearing judge “may elect to pick and choose which evidence to rely upon” because he or she “is in the best position to assess first hand a witness’s credibility.” Attorney Grievance v. Khandpur, 421 Md. 1, 13 (2011).

Furthermore, “clear and convincing” evidence means only that “the witnesses to a fact must be found to be credible, and that the facts to which they have testified are distinctly remembered and the details thereof narrated exactly and in due order, so as to enable the trier of the facts to come to a clear conviction, without hesitancy, of the truth of the precise facts in issue.” Attorney Grievance v. Harris, 366 Md. 376, 388–89 (2001).

With respect to each material conflict, whether in the testimony of the witnesses or in Payer’s varying explanations of documents supplied to Bar Counsel, the hearing judge set forth the conflicting views, announced his credibility determinations, explained why he chose to believe Ms. Berow’s and Mr. Mughal’s versions of what occurred and not to believe Payer’s version, and why he found Payer’s shifting and inconsistent explanations of adulterated documents unworthy of belief. There was no error of law and no abuse of discretion with respect to those rulings.

Payer complained that certain bank records obtained by Bar Counsel that helped to demonstrate the falsity of her representation that the fees advanced by the Berows and Mr. Mughal had been deposited to her escrow account should not have been admitted because Bar Counsel failed to comply with the requirements of Rule 5–902(b), dealing with authentication of business records.

There was, in fact no compliance with the certification requirement of that Rule. However, the error was not so egregious as to require dismissal of the hearing judge’s finding that Payer submitted false and misleading documents to Bar Counsel and knowingly misstated that the funds had been deposited to her escrow account. There was ample other evidence to support the judge’s conclusions in that regard.

The one finding that was not so clear was that Payer had a potential conflict of interest in representing the Berows in both the bankruptcy case and the action against Sinai Hospital and Ms. Bongiovanni. The precise nature of that conflict in terms of MLRPC 1.7 was never clearly explained.

At the hearing, the dispute centered on whether the Berows were informed of the conflict. On disputed evidence, the hearing judge chose to believe Ms. Berow that she was never told about it until after the first petition had been withdrawn and the second one was under discussion.

The record did not demonstrate a real or potential conflict of interest under MLRPC 1.7, however, and therefore the exception to that finding was sustained. All other exceptions were overruled.

COMMENTARY: The heart of Payer’s derelictions was in the violations of MLRPC 8.1 and 8.4—the deliberate submission of false, adulterated documents intended to cover up the other violations.

The appropriate sanction for that kind of behavior, where there are no compelling extenuating circumstances, ordinarily is disbarment. See Attorney Grievance v. Keiner, 421 Md. 492, 523 (2011). There were no compelling extenuating circumstances here.

Accordingly, Payer was disbarred.

PRACTICE TIPS: “Attorneys are required to act with common courtesy and civility at all times in their dealings with those concerned with the legal process.” Attorney Grievance v. Link, 380 Md. 405, 425 (2004).

Tax Law

Statute of limitations on partnership refund claim

BOTTOM LINE: The one-year statute of limitations for plaintiff to file her Maryland tax refund claim after a federal audit of a partnership of which she was a limited partner began to run on the date that the IRS issued its report identifying the adjustments to her personal tax liability.

CASE: King v. Comptroller of the Treasury, No. 32, Sept. Term, 2011 (filed Feb. 24, 2012) (Judges Bell, Harrell, BATTAGLIA, Greene, Adkins, Barbera & Eldridge (retired, specially assigned)). RecordFax No. 12-0224-20, 26 pages.

FACTS: In 2005, the IRS conducted an audit, pursuant to the Tax Equity and Fiscal Responsibility Act of 1982, of the Baltimore Orioles Limited Partnership’s tax returns for years 1993–1999. Once the audit was concluded, the IRS sent Wanda King, one of the limited partners, two forms, one for year 1999 and one for year 2000, that identified the partnership items being adjusted and the amounts of the adjustments. Each was accompanied by a form that explained the results of the partnership audit.

Ms. King consented to the partnership item adjustments when she signed the relevant forms on April 7, 2005; the IRS accepted both forms, thereby closing the partnership audit.

On January 3, 2006, the IRS sent Ms. King a letter indicating the computational adjustments resulting from the partnership item adjustments for years 1999 and 2000. Ac-companying this letter were two Forms 4549A, one for each of the years 1999 and 2000; two unlabeled spreadsheets, one for each year, that explained the details of the calculations on the Forms 4549A; and two Forms 886–A, one for each year, that explained that the adjustments to Ms. King’s individual tax liability were made pursuant to the forms she had signed. Ms. King did not challenge the computations reported on the Forms 4549A that she received.

The practical effect of the adjustments to the partnership items was that Ms. King’s personal income tax liability was lessened, because partnership deductions were disallowed, permitting a pass through of partnership losses to her individual return; as a result, she became eligible for a Maryland tax refund totaling $173,364 for both years.

Ms. King filed a claim for refund on February 2, 2007. The Comptroller of the Treasury denied the refund claim, stating that it was not timely filed under TG §13–1104(c)(2)(i) because the IRS’s final report regarding adjustments to her personal tax liability had been issued on January 3, 2006, more than a year before Ms. King filed for her refund.

Ms. King filed an informal appeal with the Hearings and Appeals Section of the Comptroller’s Office, pursuant to TG §13–904(a)(2). The hearing officer affirmed the Comptroller’s denial of Ms. King’s refund claims as untimely. The hearing officer determined that Ms. King’s claims for refund needed to have been submitted within one year of the date the IRS issued Form 4549A. The Maryland Tax Court also ruled in favor of the Comptroller.

The circuit court reversed the Tax Court. The Court of Special Appeals reversed the judgment of the circuit court.

King appealed to the Court of Appeals, which affirmed.

LAW: In 1982, Congress passed the Tax Equity and Fiscal Responsibility Act (Act), including an amendment to the Internal Revenue Code, currently codified at §§6221 to 6234 of the Internal Revenue Code, which was designed to provide uniform treatment under federal tax law of partnership items with respect to the partners.

Under the Act, the process of auditing a partnership return is divided into two steps, whereby the auditor first analyzes the partnership return, and the results of the audit are either consented to or contested by a taxpayer-partner, and thereafter, the individual partner’s return is adjusted to comport with the adjustments on the partnership returns.

The gravamen of a federal audit of a partnership return under the Act is whether the line item under scrutiny should be classified as a partnership item, a non-partnership item, or an affected item.

Once the items have been classified, the IRS will conduct a review of the partnership items on the partnership returns to determine whether the returns were accurately completed. If the IRS determines that an adjustment needs to be made to partnership items on the partnership returns, it will inform the partners of the proposed adjustments. The taxpayer-partner can consent to the adjustments by signing the appropriate form or can petition for review of the partnership adjustments only. I.R.C. §6226(a)-(b).

When applying the partnership level adjustments to an individual partner’s tax liability, the IRS makes a “computational adjustment,” which, essentially, is an arithmetic operation to alter the partner’s personal tax liability to conform with adjustments made to partnership items on the partnership returns.

The IRS sends notice of the computational adjustment to the taxpayer-partner in a Form 4549 or Form 4549A. If the taxpayer disputes the calculations reported on Form 4549 or Form 4549A, the partner may file a claim, but only with respect to the arithmetic computations. I.R.C. §7422(h).

The taxpayer-partner has six months from the date that the IRS issues Form 4549A to file a challenge to the computational adjustment, I.R.C. §6230(c)(2), but if the taxpayer does not challenge the calculations reported on Form 4549A, the matter is concluded. A taxpayer-partner who files a refund claim for overpayment attributable to a settlement agreement has two years from the settlement date to file his or her refund claim. I.R.C. §6230(c)(2)(B)(i). A taxpayer-partner who did not settle with the IRS, receiving a final partnership administrative adjustment following the audit rather than a settlement agreement, has two years from either the expiration of the period during which he or she could have appealed the final partnership administrative adjustment or the date the decision of the court becomes final if an appeal was filed. I.R.C. §6230(c)(2)(B)(ii)-(iii).

Ms. King’s claim for refund was denied under TG §13–1104(c), which provides that a claim for refund may not be filed later than 1 year from the date of a final adjustment report of the IRS or a final decision of the highest court of the United States to which an appeal of a final decision of the IRS is taken. TG §13–1104(c)(2)(i) and (ii).

The statute is silent on the meaning of “final.” However, the natural, plain meaning of this sentence is that the date of the report itself is the date of the event that begins the one year limitation period. The section very clearly links the terms “date” and “report,” and the date of issuance is the only date on Form 4549A.

Therefore, a taxpayer-partner, such as Ms. King, who does not challenge the IRS’s calculations, is bound by the statute of limitations that begins to run on the date the final adjustment report is issued, without regard to the unused appeals process that was triggered.

The structure of §13–1104(c)(2), when viewed in conjunction with its federal analogue, also supports this interpretation. Section 13–1104(c)(2) was promulgated in response to the enactment of the Tax Equity and Fiscal Responsibility Act. Section 13–1104(c)(2) is in parallel to §6230 of the Internal Revenue Code, which was enacted as part of the Act, involving the statutes of limitations for filing federal refund claims following a partnership audit.

Like the federal statute, TG 13–1104(c)(2) is bifurcated. Section 13–1104(c)(2)(ii) applies to those taxpayers who challenge the IRS’s determination of tax liability and states that a taxpayer has one year from “a final decision of the highest court of the United States to which an appeal of a final decision of the Internal Revenue IRS is taken” to file a refund claim. Section 13–1104(c)(2)(i)) applies to taxpayer-partners who do not challenge the determinations made by the IRS, and provides that the taxpayer has one year from the date of “a final adjustment report of the Internal Revenue IRS” to file a claim for a refund.

Just as is the case under the federal statute, the applicable Maryland statute of limitations deals only with the date of a report and, although there is a different statute of limitations that does concern appeals, Ms. King does not benefit from it because she did not challenge the information on Forms 4549A. Thus, the statute of limitations applicable to Ms. King’s refund claim began to run when the IRS issued to her Forms 4549A on January 3, 2006.

Accordingly, Ms. King’s refund claim had to have been filed within one year of that date, so that her submission on February 2, 2007 was untimely.

COMMENTARY: A partnership item is an item that “is more appropriately determined at the partnership level than at the partner level.” I.R.C. §6231(a)(3). “[T]he hallmark of a partnership item is that it affects the distributive shares reported to the other partners,” according to the United States Tax Court. Grigoraci v. Commissioner, 84 T.C.M. (CCH) 186, 189 (2002). The factors to be considered when making a determination of partnership items are “the accounting practices and the legal and factual determinations that underlie the determination of the amount, timing, and characterization of items of income, credit, gain, loss, deduction, etc.” Treas. Reg. Section 301.6231(a)(3)–1(b) (1986).

An affected item, in contrast, is an item that is affected by an adjustment to a partnership item. “Affected items come in two varieties. The first are purely computational adjustments which reflect changes in a taxpayer’s tax liability triggered by changes in partnership items.” JT USA LP v. Commissioner, 131 T.C. 59, 66 n. 11 (2008). A non-partnership item is “an item which is (or is treated as) not a partnership item.” I.R.C. §6231(a)(4).