Opinion
Case No. C2-96-1211
March 14, 2002
OPINION AND ORDER
This matter is before the Court for consideration of an award of costs and attorneys fees filed by Effie Sabino (Doc. #46). After the motion was filed, Effie Sabino died. Thereafter, Joseph L. Sabino, Commissioner of her Estate, was substituted in her stead as a party-defendant. For the reasons that follow, the Court awards the costs sought by Mr. Sabino and denies recovery of attorneys fees.
I.
The plaintiff, United Companies Life Insurance Company ("United"), initially filed this suit in Franklin County, Ohio as a interpleader action. The case was thereafter removed to this Court by the Defendant Internal Revenue Service ("IRS") pursuant to 28 U.S.C. § 1335. United's Complaint alleges that the original Defendant, Effie Sabino, owned certain property upon which the IRS had levied. Specifically, on December 28, 1992, the plaintiff issued a single premium deferred nonqualified annuity contract, No. 319300134, to Effie Sabino. The annuity was purchased through one Buford F. Houck, a licensed insurance agent who, at the time, represented United. On March 6, 1996, the IRS sent a summons to United seeking documents establishing the amount and value of the annuity. Thereafter, on July 19, 1996, the IRS served notice on United of its claim to the proceeds of the annuity.
The levy notice recited that Effie Sabino was a nominee and/or alter ego of Buford F. Houck. The IRS served the levy in order to obtain assets owned by Houck to satisfy a lien which the IRS held against him. Although Houck's name does not appear on the annuity contract as an owner or beneficiary, the IRS contended that Effie Sabino was simply the nominee or named owner of the annuity and the funds used to purchase such policy were actually the funds of Buford F. Houck, which he sought to shield from the lien of the IRS.
The parties conducted full discovery over the next eighteen months. Shortly before the commencement of trial, the parties reached an agreement which essentially resulted in the payments of all funds deposited by United with the Clerk of this Court to Effie Sabino.
The issue now before the Court is whether Joseph L. Sabino, as successor to Effie Sabino, is entitled to an award of attorneys fees and costs. Under 26 U.S.C. § 7430, an award of attorneys fees and costs is authorized against the Government in a tax case, provided three requirements are satisfied. First, the party must have exhausted available administrative remedies before the IRS before commencing the civil proceeding. This issue is not contested. Second, the moving party must demonstrate that the requested award represents reasonable costs not otherwise payable by any other party. Third, the movant must be a "prevailing party" as defined in 26 U.S.C. § 7430 (c)(4).
With respect to the definition of prevailing party, Mr. Sabino must establish two additional criteria. He must demonstrate that he substantially prevailed as to the most significant issues presented in the case. There is no dispute that he has established this prong of the analysis. In addition, in a matter disputed by the parties, he must also establish that the position of the United States was not "substantially justified." 26 U.S.C. § 7430 (c)(4)(B). Finally, attorneys fees are not payable to the extent a Court determines that such fees were incurred by the unreasonable protraction of the proceedings. 26 U.S.C. § 7430 (b)(3).
Essentially, this Court must determine whether the position of the Government was substantially justified in the bringing and maintaining of this lawsuit, prior to the termination of the proceeding in favor of Effie Sabino. If the Court determines that the position of the Government was not substantially justified, attorneys fees are therefore payable to her, unless the Court also finds that she had unnecessarily protracted this lawsuit.
II.
To analyze whether the Government's claim was substantially justified, this Court must look at those facts known to the Government at the time the suit was filed, together with any additional facts known to the Government during which time the suit was maintained. The Government contends that the following factors justified its original position that the annuity titled in the name of Effie Sabino was essentially a scheme to shelter money of Buford Houck. According to the Government, it relied upon the following information:
1. Buford F. Houck is a tax protester whose driving force in life is to escape the payment of taxes. In re Houck, 180 B.R. 186, 188 (Bankr. S.D. Ohio 1996) (dismissing Chapter 7 bankruptcy petition for bad faith filing), aff'd, 199 B.R. 163 (S.D. Ohio 1996).
2. Effie Sabino's husband, Joseph, is a defendant in a criminal tax case. (He has since been convicted.)
3. In the criminal case, Mr. Sabino is alleged to have facilitated the evasion of tax by other individuals by acting as the trustee of certain trusts.
4. Joseph Sabino is a trustee of certain trusts created by or associated with Buford Houck. (Exhibit 1)
5. Buford Houck has derived substantial income as an insurance salesman on which he has failed to pay tax. (Exhibit 2)
6. Effie and Joseph Sabino have for year had income of only $15,000 per year. (Exhibit 3)
7. At the time of the purchase of the $24,000 annuity, the IRS had started to levy on some of Buford Houck's insurance commissions and Social Security. (Exhibit 2)
8. In response to a letter from the IRS to Sabino's counsel, Richard Donovan, for substantiation that Effie Sabino, not Buford Houck, purchased the annuity, Mr. Donovan represented that he had spoken with Mrs. Sabino and that she "personally" purchased the cashier's check. (Exhibit 4 at 3)
9. The representation by Mr. Donovan was demonstratively incorrect, as a currency transaction report (CTR) indicated that the cashiers' check was purchased by Buford Houck, not Effie Sabino. (Exhibit 5)
During the pendency of this litigation, the Sabinos identified another insurance agent, thoroughly unconnected to Buford F. Houck, who had also attempted to sell Effie Sabino an annuity. Initially, the Sabinos could only remember the agents name and were unable to locate him. Several months after this case was filed, in early January of 1997, Joseph F. Sabino sent to counsel for Effie Sabino a proposed affidavit for the agent, a George Crockett, to sign. The purpose of the affidavit was to verify that Mrs. Sabino did in fact have cash on hand to pay for an annuity in the amount of $24,000.00. Although Crockett did not sell the annuity to her, his testimony could verify that the Sabinos showed him the cash at their residence and further advised him that they were suspicious of banks and did not wish to deposit such funds in a financial institution. Counsel for Effie Sabino was not provided an address for Mr. Crockett. Not until September of 1997 did counsel locate Crockett, who then signed the proposed affidavit.
The Government first became aware of the affidavit and proposed testimony of George R. Crockett when Effie Sabino moved for summary judgment on September 17, 1997. Several weeks thereafter, the parties entered into a Stipulation for Entry of Judgment and the funds deposited by United were directed payable to Effie Sabino.
The Government contends that until it received the affidavit of George R. Crockett, it had a reasonable basis to believe that Effie Sabino was simply a nominee for funds otherwise owned by Buford F. Houck. The documents attending the transaction in which cash was received by a bank and a bank check subsequently reissued shows that the bank check was purchased by Buford F. Houck with cash in the precise amount used to thereafter purchase the annuity. These documents contradicted the information given the IRS by Sabino's counsel, who told the IRS that Effie Sabino herself purchased the bank check. Instead, bank documents demonstrated that Houck purchased the bank check with $24,000 in cash, at a time shortly after the IRS began to levy on his property.
The Government suspected that Effie Sabino, who had limited income prior to the date the bank check was purchased, was not the true source of the fund and did not have the financial resources to make such a transaction. The Government further contends that not until it received the affidavit of George R. Crockett did it have any independent basis to credit Mrs. Sabino's claim that the funds involved in the transaction were hers alone.
Prior to the affidavit of George R. Crockett, the Government further contends that all witnesses supporting the Sabino's position were essentially family members of the Sabinos. The Government further maintained that its evidence was essentially dependent upon a disbelief of the Sabinos' testimony in light of the financial documents accompanying the purchase of the bank check. The Government concluded, after the submission of the affidavit of George R. Crockett, that the defendants had submitted independent corroboration of Mrs. Sabino's testimony. Based upon the affidavit, the Government determined that it could not prevail and released any claim to the funds.
The Court concludes that the Government's position was substantially justified throughout these proceedings. The Government had reason to suspect that Buford F. Houck was hiding assets to prevent the IRS from executing upon his property. The husband of Effie Sabino was first accused and later convicted of tax evasion and was associated with Buford Houck. Financial documents attending to the purchase of the $24,000 annuity revealed that the purchaser was Buford Houck and that the funds tendered in exchange for the bank check were in the form of cash, contrary to the Sabino's previous position. Finally, Effie Sabino reported only minimal amounts of income in the years preceding the purchase of the annuity.
While Effie Sabino maintained that the source of the funds for the annuity was hers alone, the Government was justified in pursuing this claim given the documentation surrounding the cash purchase of the annuity through the obtaining of a bank check. Once the Government received independent verification of the transaction, it terminated any further litigation in this matter.
The Court concludes that the position of the Government was substantially justified. The Motion for Attorneys Fees is therefore DENIED.
III.
On December 15, 1997, Effie Sabino also filed a Motion for Taxation of Costs. Subsequently, the Clerk of this Court issued an award of costs on December 16, 1998 in favor of Defendant Sabino and against Defendant IRS. After review of the Order issued by the Clerk's Office from which the IRS has filed its opposition, the Court finds that the award is justified. It is therefore ORDERED that the Internal Revenue Service shall pay to Joseph F. Sabino his costs in the amount of $135.80. The Defendant's Motion for an Award of Costs and Attorneys' Fees (Doc. #46) is GRANTED in part and DENIED in part.