Last month, in an obscure action, the Internal Revenue Service made an entirely gratuitous gift of $250,000 in taxpayer funds to Gay & Lesbian Advocates & Defenders (“GLAD”).

I’ve been documenting (here, here, and here, for example) how, in litigation involving gay issues, the Department of Justice has acted to sabotage the federal laws—specifically, Don’t Ask, Don’t Tell and the Defense of Marriage Act—that it is dutybound to defend vigorously. But this IRS action shows that the dereliction of duty goes beyond DOJ.

Here’s the basic background:

1. Federal law (section 7430 of the Internal Revenue Code) authorizes an award of litigation costs to a taxpayer who prevails in Tax Court litigation unless the IRS establishes that its position in the litigation was “substantially justified.”

The “substantially justified” standard is not a high one: Under prevailing precedent, the IRS’s losing position is substantially justified “if it has a reasonable basis in law and fact.”

2. In February 2010, the full Tax Court, dividing 11 to 5, ruled in O’Donnabhain v. Commissioner of Internal Revenue that O’Donnabhain—a transsexual diagnosed (by a psychotherapist) as suffering from severe “gender identity disorder”—was entitled to deduct expenditures incurred for hormone therapy and sex-reassignment surgery. (The court unanimously agreed that O’Donnabhain was not entitled to deduct expenditures for breast-augmentation surgery.) The ruling resulted in six separate opinions running 139 pages, and the judges in the majority divided 9 to 2 on how the legal issues should be decided.

I have no considered position on which judges got it right on what the majority opinion acknowledges (p. 32) to be “an issue of first impression.”

3. On November 9, the Tax Court issued an order ratifying the “agreement of the parties” that O’Donnabhain was entitled to $250,000 in litigation costs and that the award of litigation costs “shall be paid” to GLAD, O’Donnabhain’s counsel in the case.

Now let’s consider what’s wrong with—indeed, outrageous about—the IRS’s agreeing that O’Donnabhain was entitled to $250,000 in litigation costs:

The IRS’s agreement to an award to O’Donnabhain of litigation costs necessarily entails its own judgment that it couldn’t show that its position in the litigation was “substantially justified.” But what could possibly underlie such a judgment?

The majority opinion in the case itself acknowledged that the case “presents an issue of first impression,” and courts (including the Tax Court) have given that factor considerable weight in determining whether the government’s position is “substantially justified.” See, e.g., National Federation of Assemblies v. United States, 263 F. Supp. 2d 1372, 1378 (S.D. Ala. 2003) (whether government’s position was reasonable “depends largely on the ‘clarity of the governing law’”); Estate of Wall v. Commissioner of Internal Revenue, 102 T.C. 391, 393 (Tax Ct. 1994) (“This was a case of first impression, and [the IRS’s] position was not contrary to any published decision.”)

The fact that five members of the Tax Court agreed with the IRS’s position goes far to establish that that position had a reasonable basis in law and fact. Further, a lawyer who has been following the Tax Court closely for the last decade tells me that the very fact that the Tax Court chose to decide the case en banc (as opposed to the usual decision of ordinary cases by single judges) makes the IRS’s concession extraordinary: so far as he is aware, the IRS’s position in a case worthy of en banc consideration has never been determined to be unjustified during that period.

In sum, there’s no reason to believe that the IRS would have had difficulty establishing that its litigation position was “substantially justified.”

Also, if the IRS genuinely believed that its position wasn’t “substantially justified,” why did it continue to maintain it? And if the answer is that the new Obama political appointees at the IRS may have just discovered how ill-founded the IRS’s position, can we trust that appropriate reprimands have been or will be delivered to those responsible for the litigation position? I’d bet not, for it seems obvious that the IRS made its baseless concession only for the purpose of channeling taxpayer funds to GLAD.

The size of the award of litigation costs—$250,000—is also extraordinary and may even be a record, according to the lawyer who has been following the Tax Court closely for the last decade.