Opinion
Civil Action No. H-98-3292.
November 29, 2000
ORDER DENYING PLAINTIFFS' MOTION FOR COSTS AND FEES UNDER 26 U.S.C. § 7430
Pending before the Magistrate Judge is Plaintiffs' Motion for Administrative Costs and Litigation Costs Pursuant to 26 U.S.C. § 7430 (Document No. 30) and the Defendant's response thereto. (Document No. 31). Plaintiffs' seek to recover $5010.00, calculated at $150 per hour for 33.4 hours, for successfully pursuing their tax refund suit seeking a withholding income tax credit of $2718 allegedly withheld by Michael Winter's employer, Chemcolit, Inc. Defendant ("United States") opposes Plaintiffs' motion on the ground that while Plaintiffs' prevailed against the United States, they are not entitled to Administrative Costs and Litigation Costs because the United States' position was substantially justified. The United States further opposes Plaintiffs' request on the ground that Plaintiffs' seek attorney fees greater than that allowed by Section 7430 and because Plaintiffs' seek to recover administrative costs incurred between December 12, 1996 through August 30, 1998, which are time barred.
26 U.S.C. § 7430 (a) provides, in pertinent part:
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 proceedings
In addition, the statute provides an exception if the United States establishes that its position was substantially justified:
A party shall not be treated as the prevailing party in a proceeding to which subsection(a)applies if the United States establishes that the position of the United States in the proceeding was substantially justified.26 U.S.C. § 7430(c)(4)(B)(I). Here, Plaintiffs initiated this action against the United States seeking a refund of $2718.16 in tax, and penalties and interest thereon, which Plaintiffs paid when the Internal Revenue Service ("IRS") refused to allow them a tax credit for amounts that Mr. Winter's former employer, Chemcolit, Inc., ("Chemcolit") allegedly withheld as tax. Plaintiffs' pursued their claim at the administrative level, where the IRS ultimately disallowed it, and they filed the instant action on October 5, 1998. (Document NO. 1). The parties filed cross motions for summary judgment, but the Court, in an Order entered February 3, 2000, denied both motions because genuine issues of material fact existed with respect to whether Michael Winter's former employer, Chemcolit, Inc., withheld certain amounts from his compensation, and whether certain amounts were withheld as tax. (Document No. 16). On June 9, 2000, this matter was tried to the bench. The Court issued its Finding of Fact and Conclusion of Law on September 20, 2000(Document No. 26), and a Judgment was entered on October 5, 2000. (Document No. 28). The Court concluded that Plaintiffs established that Chemcolit had actually withheld amounts from Mr. Winter's gross wages in 1992 to cover Mr. Winter's federal income tax and social security tax obligations but that Chemcolit never remitted such amounts as withholding to the IRS. Because Plaintiffs prevailed in their refund suit, they may be entitled to an award of costs and certain fees pursuant to 26 U.S.C. § 7430(a)and(c)(1). An exception to this general rule applies where the United States establishes that its position in the proceeding was substantially justified. 26 U.S.C. § 7340 (c)(4). "An IRS position is `substantially justified when its actions are `justified to a degree that could satisfy a reasonable person.'" Estate of Johnson C.I.R., 985 F.2d 1315, 1318 (5th Cir. 1993) (quoting Heasley v. C.I.R., 967 F.2d 116, 120 (5th Cir. 1992)). "The Government's position must have a reasonable basis both in law and fact . . . prior to the onset of litigation. "Wilkerson v. United States, 67 F.3d 112, 119 (5th Cir. 1995). The Court, in evaluating the reasonableness of the Government's position, "consider[s] all the facts and circumstances surrounding the dispute." Nalle v. C.I.R., 55 F.3d 189, 191 (9 Cir. 1995). Moreover, the government's failure in the underlying action does not mandate a finding that its position lacked substantial justification. Estate of Johnson, 985 F.2d at 1318.
Here, although the Court concluded that the IRS' position regarding the Plaintiffs' entitlement to a tax refund was ultimately incorrect, the Court, however, also finds that the IRS' position was substantially justified. Based on the applicable law, in particular 26 U.S.C. § 31 and its related Treasury regulation § 1.31-1, and the documentary evidence submitted by the IRS in support of its summary judgment motion, including the affidavit of Manfred Krueter, Chemcolit's President, documents filed by Chemcolit with the IRS such as Form W-2 and Form 1099, and other tax authorities, the IRS was substantially justified in not accepting Plaintiffs' contention that Chemcolit actually withheld federal income taxes and social security taxes from Mr. Winter's salary in 1992. It is undisputed that Mr. Winter had no documentation in support of his contention that he was an employee of Chemcolit and not an independent contractor, and no documentation in support of his contention that Chemcolit had actually withheld taxes from his pay. Indeed, the Court's final ruling was based on the testimony of Kenneth Anderson, an IRS employee and expert in employment tax, that Mr. Winter was an employee of Chemcolit, and the Court's assessment of each witness' credibility. See Creske v. C.I.R., 946 F.2d 43, 45 (7th Cir. 1991) (When court's determination rests on credibility choices, IRS' reliance on contradictory documents not unreasonable.). Accordingly, the Court finds that sufficient evidence exists in the record to establish that the IRS was substantially justified in its position that Plaintiffs were not entitled to a tax refund for 1992. Because Plaintiffs' are not entitled to costs and expenses under § 7430, given the IRS' substantial justification for its position in this case, it is
ORDERED that Plaintiffs' Motion for Administrative Costs and Litigation Costs pursuant to 26 U.S.C. § 7430 (Document NO. 30) is DENIED.