Opinion
No. 5:93 CV 0037
July 21, 1995.
Randolph L. Snow, Charles J. Tyburski, Todd A. Lensman, Black, McCuskey, Souers Arbaugh, Canton, OH, for plaintiff.
Alan M. Shapiro, Department of Justice, Tax Division, Washington, DC, for defendant.
ORDER
The Court has examined the report and recommended decision of Magistrate Judge James S. Gallas submitted in this matter. No comment or objection having been received thereon, upon due consideration, the Court adopts the recommended findings and conclusions of the Magistrate Judge, therefore,
Plaintiff's motion for attorney fees and costs (pleading #62) is hereby denied.
IT IS SO ORDERED.
REPORT AND RECOMMENDATION OF MAGISTRATE JUDGE
This action was initiated by plaintiff, Canton Oil Well Services, Inc. [CWS] to recover second tier excise taxes paid by it on a single-employer defined benefit pension plan pursuant to 26 U.S.C. § 4971(b). Plaintiff contended that it had corrected the pension funding deficiency within the allowable time pursuant to 26 U.S.C. § 4961. Nonetheless, second tier excise taxes were paid by CWS plus deficiencies and interest and claims for refund were filed. Notice of disallowance of refund was received by CWS, thus precipitating this action.
After a two day bench trial, Judge Bell prepared findings of fact and conclusions of law and entered judgment for plaintiff CWS, finding CWS was entitled to refund. The government appealed to the Sixth Circuit Court of Appeals, but that appeal was voluntarily dismissed upon stipulation of the parties.
CWS has moved for attorney fees and costs pursuant to 26 U.S.C. § 7430 and the government has filed its opposition. This matter has been referred to this Magistrate Judge. Magistrate judges have authority to issue report and recommendations regarding post-trial matters for allowance of attorney fees and costs. Massey v. City of Ferndale, 7 F.3d 506, 510 (6th Cir. 1993); Bennett v. General Caster Service of N. Gordon Co., 976 F.2d 995, 997-98 (6th Cir. 1992); Homico Constr. Dev. Co. v. Ti-Bert, 939 F.2d 392, 394 n. 1 (6th Cir. 1991). CWS seeks an award of $50,779.41 which is comprised of $43,182.00 in attorney fees and $7,597.41 in costs.
Under 26 U.S.C. § 7430 Congress has permitted an aggrieved taxpayer to recover attorney fees and costs expended in actions against the government. The preamble to this section reads:
(a) In general — In any administrative or court proceeding which is brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty under this title, the prevailing party may be awarded a judgment or a settlement for —
(1) reasonable administrative costs incurred in connection with such administrative proceeding within the Internal Revenue Service, and
(2) reasonable litigation costs incurred in connection with such court proceeding.26 U.S.C.A. § 7430(a) (1989).
The Congressional purpose of § 7430 is to dissuade the Commissioner of the Internal Revenue Service from abusive and overreaching conduct. Mearkle v. Commissioner, 838 F.2d 880, 883 (6th Cir. 1988).
There are several exceptions and several foundational elements before an aggrieved party may petition under this section. The exceptions do not apply in the circumstances of this action, and the government has countered CWS's demands with arguments that bypass any foundational elements in order to strike at the heart of the matter, i.e., whether the position of the government was "substantially justified" under 26 U.S.C. § 7430(c)(4)(A).
Pursuant to § 7430(c)(4)(A):
(A) In general. — The term `prevailing party' means any party in any proceeding to which subsection (a) applies (other than the United States or any creditor of the taxpayer involved) —
(i) which establishes that the position of the United States in the proceeding was not substantially justified,
(ii) which —
(I) has substantially prevailed with respect to the amount in controversy, or
(II) has substantially prevailed with respect to the most significant issue or set of issues presented, and
(iii) which meets the requirements of the 1st sentence of section 2412(d)(1)(B) of title 28, United States Code (as in effect on October 22, 1986) except to the extent differing procedures are established by rule of court and meets the requirements of section 2412(d)(2)(B) of such title 28 (as so in effect). (emphasis supplied)26 U.S.C.A. § 7430(c)(4)(A) (1989).
Moreover, pursuant to § 7430(c)(4)(B)(ii) the court is authorized to make the determination whether or not CWS is a "prevailing party".
The intent of § 7430(c)(4)(A) is to determine prevailing party status based upon the criteria of the Equal Access to Justice Act ( 28 U.S.C. § 2412(d)). Under this Act the test for whether or not a government action was "substantially justified" is essentially one of reasonableness. So that when the government can demonstrate that its case had a reasonable basis both in law and fact, no award will be made. Wyandotte Savings Bank v. N.L.R.B., 682 F.2d 119, 120 (6th Cir. 1982); Trident Marine Const., Inc. v. District Engineer of U.S. Army Corps of Engineers, 766 F.2d 974, 980 (6th Cir. 1985); Jankovich v. Bowen, 868 F.2d 867, 869 (6th Cir. 1989). The proper standard is whether the government's position was justified, both in fact and in law, or to a degree that could satisfy a reasonable person. Comer Family Equity Pure Trust v. Commissioner, 958 F.2d 136, 139-40 (6th Cir. 1992), citing Pierce v. Underwood, 487 U.S. 552, 563-65, 108 S.Ct. 2541, 2549-50, 101 L.Ed.2d 490, 504 (1988); Rhoades, McKee and Boer v. United States, 846 F. Supp. 565, 566 (W.D.Mich. 1993).
Under the test, "the more clearly established are the governing norms, and the more clearly they dictate a result in favor of the private litigant, the less `justified' it is for the government to pursue or persist in litigation." Perket v. Secretary of Health and Human Services, 905 F.2d 129, 135 (6th Cir. 1990), quoting, Spencer v. N.L.R.B., 712 F.2d 539, 559 (D.C. Cir. 1983), cert. denied, 466 U.S. 936, 104 S.Ct. 1908, 80 L.Ed.2d 457 (1984). Examples of governing norms under these circumstances would be for the government to ignore Tax Court precedent when litigating in the Tax Court, to ignore formal acquiescence to a Tax Court decision, or to ignore a new law which unmistakenly overrules an earlier holding. Rhoades, McKee, and Boer, 846 F. Supp. at 567, citing, Stieha v. Commissioner, 89 T.C. 784, 1987 WL 45302 (1987); Giesecke v. United States, 637 F. Supp. 309, 311 (W.D.Tex. 1986); Estate of Perry v. Commissioner, 931 F.2d 1044, 1046 (5th Cir. 1991).
Moreover, even though the court may rule in favor of the taxpayer, the government's position is substantially justified when the outcome is dependent on the court's resolution of a credibility dispute. Creske v. Commissioner, 946 F.2d 43, 45 (7th Cir. 1991).
The parties agree that the definition of "substantially justified" is the same as that in the Equal Access to Justice Act. Comer Family Equity Pure Trust, supra. Further, there is no question that the taxpayer bears the burden of establishing entitlement to litigation costs and attorney fees. Additionally, the taxpayer must prove the lack of substantial justification for the position of the government. Estate of Johnson v. Commissioner, 985 F.2d 1315 (5th Cir. 1993); Miller v. Alamo, 983 F.2d 856 (8th Cir. 1993); Kenagy v. United States, 942 F.2d 459 (8th Cir. 1991). Comer Family Equity Pure Trust, 958 F.2d at 139.
The underlying facts found by the court in its finding of fact were:
On June 1, 1985, CWS [Canton Oil Well Services, Inc.] amended the Plan to allow early retirement, lump sum distribution of accrued benefits and waiver of accrued benefits by an owner-employee.
On June 17, 1985, the IRS mailed a statutory notice of deficiency stating that plaintiff owed $17,500 in first tier excise tax and $350,003 in second tier excise tax. The notice further explained: `The second tier tax deficiency shown above will be eliminated if correction is made by the end of the correction period, which ends 90 days after the mailing of this letter plus the total period of any extensions that may apply.'
On June 20, 1985, CWS received this notice and Hutcheson immediately contacted attorney Ross. Ross met with Hutcheson in the afternoon, after preparing a number of documents. Hutcheson received check number 106 drawn against the Canton Oil Well Service, Inc. Pension Plan Account in the Harter Bank, Canton, Ohio. Check 106 was payable to Hutcheson in the amount of $114,094.00. Hutcheson signed the face of the check in his capacity as Plan Trustee. On the reverse side of the check, Hutcheson signed two type-written indorsements. The first states: `Pay to the Order of Canton Oil Well Service, Inc.' The second indorsement, signed in Hutcheson's capacity as Chairman and C.E.O. of CWS states: `Pay to the Order of Canton Oil Well Service, Inc. Pension Plan.'
Check 106 was returned to Ross who retained possession of the check in his files. The account upon which the check was drawn had a balance of $265.78 from April 10, 1980 through September 7, 1988. Plan assets were held in an account with Prudential-Bache and were moved into the checking account only as needed to cover disbursements. No securities were sold or funds transferred, to cover check 106. The parties agree that the Prudential-Bache account had a value greater than the amount of check 106.
Hutcheson, as a corporate officer, also signed a resolution on behalf of CWS transferring `$114,094.00 received from Robert H. Hutcheson in partial satisfaction of certain outstanding loans extended to Robert H. Hutcheson by the corporation, to the Canton Oil Well Service, Inc. Pension Plan in order to satisfy any minimum funding requirements of ERISA or the Internal Revenue Code to which the Plan be subject.'
Last, Hutcheson signed a letter prepared for him by attorney Ross addressed to Hutcheson as Plan Trustee. The letter stated:
You are hereby notified, as Trustee of Canton Oil Well Service, Inc. Pension Plan, that the undersigned Employee hereby exercises his right to withdraw, in a lump sum distribution, his entire Early Retirement Benefit or, in the alternative, should such action result in adverse consequences to the Plan under any provision of the Internal Revenue Code or ERISA, the undersigned, as owner employee, hereby waives the entire accrued benefit maintained on my behalf as of this date.
I understand that any waived contribution may not be made up in a subsequent Plan year.
On October 23, 1985, the IRS assessed excise taxes in the amounts listed on the previous notices. Notices were sent seeking payment of the tax. On June 2, 1986, IRS mailed plaintiff notice of a Federal tax lien.
The government took three positions: first that this transaction was a sham because there were inadequate funds to pay the check upon presentment; that the mere preparation and signing an endorsement of check #106 did not constitute a contribution because it was unused and was merely kept in the file; and finally that economic equivalence with an actual contribution of funds and existence of other assets other than the checking account did not render check #106 a contribution.
CWS contends that the government's position in this case did not have a reasonable basis in law or fact. CWS points out that the government contended that check #106 was a sham, however, at trial CWS claims that the government did not present any evidence to rebut Hutcheson's testimony that check #106 transaction occurred as evidenced by the check itself and that the government show any deception on the part of CWS.
The government did have substantial justification for these positions even though they were erroneous. As the government argued, a somewhat similar situation was presented in Walt Wilger Tire Co. v. Commissioner, 38 T.C.M. 287, 1979 WL 3162 (1979) which determined the act of holding an insufficiently funded check as payment did not constitute a contribution. That precedent was distinguished, but there were clear similarities to the situation at hand.
Second, the court rejected the government's argument that check #106 would have "bounced" if presented. The court relied upon Section 4-401(a) of the Uniform Commercial Code (UCC) which permits a charge to an account even though the charge creates an overdraft and the fact that the check was ultimately endorsed to be deposited on the same account as drawn. The government had argued that the account had no overdraft protection and thus the check would have been dishonored upon presentment, and that no other investment assets were liquidated for nearly two years until after check #106 was drafted.
This in turn leads to a reasonable argument of the government. The government pointed out that the return filed by Hutcheson for the tax year 1985 did not report the lump sum pension fund distribution as income from the pension plan. Also in the original corporate tax return for 1985, CWS did not report a contribution of the pension plan. Further, check #107 was voided, and checks 108 and 109 were not written until June 1987. Thus, inferentially the government argued that the checks at issue (nos. 105 and 106) were not drafted in 1985 so as to be within the allowable 90 day correction period, but were in fact drafted at some later time.
The court considered the complete circumstances and found that there had been no intent to deceive the IRS but rather there had been a lack of communication. Nonetheless, although the government's interpretation of the factual circumstances was found erroneous, it certainly was reasonable to argue that there had been intent to deceive and to infer that check #105 was drafted subsequent to its purported date. CWS's contention is incorrect that the government had no evidence to rebut Hutcheson's testimony that check #106 transaction had occurred as evidenced by the check itself.
Finally, a portion of the government's economic equivalence argument concerning the source of funds for the accumulated funding deficiency was certainly reasonable. The government had argued that Hutcheson had borne the burden of funding his early retirement which was arguably a violation of certain statutory provisions. As the government points out, the court agreed that Hutcheson became $114,049 poorer than he was before the transaction.
Although the court did not accept the government's contention, the court's finding demonstrates there was a factual basis for this argument. Moreover, under the assumption that Hutcheson had no corporate loans to repay and had thus engaged in a deceptive transaction, there was a reasonable legal basis for this argument.
The court, however, found no intent to deceive. This argument ultimately turned on a credibility determination, and as such was substantially justified and constituted a second reasonable basis for the government to persist in denying refund. Creske, 946 F.2d at 45.
Accordingly, the government was substantially justified in denying refund and persisting in the defense of this matter. The contention of the government, that no corrective action was taken by CWS within the 90-day period following notice, as the court's decision acknowledged the government's strongest argument. Moreover, there was evidence arguably supporting the government's position of intent to deceive causing the means used to fund the accumulated deficit to be in contravention of federal law. Although both these arguments were erroneous, they nonetheless were substantially justified to a degree which would satisfy a reasonable person both in law and fact. Since 26 U.S.C. § 7430 by its terms limits the court's discretion to award attorney fees or costs unless the moving party is the "prevailing party," the circumstances of this case does not permit the court to award costs as it would normally under 28 U.S.C. § 1920, nor can the court award attorney fees. Accordingly, the motion for attorneys' fees and costs should be denied.
ANY OBJECTIONS to this Report and Recommendation must be filed with the Clerk of Court within ten (10) days of receipt of this notice. Failure to file objections within the specified time WAIVES the right to appeal the Magistrate Judge's recommendation. See, United States v. Walters, 638 F.2d 947 (6th Cir. 1981); Thomas v. Arn, 474 U.S. 140, 106 S.Ct. 466, 88 L.Ed.2d 435 (1985).