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John A. Tarpoff v. United States of America

June 19, 2012


The opinion of the court was delivered by: Herndon, Chief Judge:



Pending before the Court is plaintiff's motion to award fees and costs (Docs. 55, 83). Plaintiff seeks an award of attorney's fees and costs incurred in the instant litigation and underlying administrative proceedings, as he argues the government was not substantially justified in its position that he was a person responsible for the quarterly tax periods ended March 31, 2004 and June 30, 2004, who willfully failed to collect the withheld income, social security, and Medicare taxes or to truthfully account for or pay over those taxes to the IRS. See 26 U.S.C. § 6672. The government naturally opposes plaintiff's motion (Doc. 84). For the following reasons, the Court GRANTS in part plaintiff's request.


Plaintiff was the head cattle buyer at Gateway Beef, LLC, (Gateway Beef), a slaughterhouse and beef-packaging facility. Gateway Beef was formed in September 2003 by the Gateway Beef Cooperative, an organization of farmers and ranchers, together with Brach's Glatt Meat Markets, a grocery store in New York owned by Sam Brach (Brach).*fn1 The Cooperative invested in, and sold cattle to, Gateway Beef, which then produced kosher beef for Brach's Glatt Meat Markets.

The instant dispute arises from Gateway Beef's failure to pay its withholding taxes. On November 26, 2007, pursuant to 26 U.S.C. § 6672(a), the IRS levied a total penalty of $66,693.02 against plaintiff, alleging his status as a "responsible person" who "willfully" failed to collect, account for, or pay over payroll taxes to the United States. See 26 U.S. § 6672(a). Plaintiff contested this assessment at the administrative level to no avail. Therefore, plaintiff filed suit against the government on May 29, 2009, pursuant to 26 U.S.C. § 6672, seeking recovery of monies the IRS withheld from one of his tax refunds, as well as money he paid under protest. The government counterclaimed for the remainder.

Following a three-day jury trial held from March 14-16, 2011, the jury returned a verdict in favor of plaintiff, finding he was not a person responsible for collecting or accounting for the withheld taxes and that he did not act willfully (Doc. 48). On April 14, 2011, the government filed a motion for judgment as a matter of law and, alternatively, a motion for new trial (Doc. 64). Therefore, the government requested that the Court hold plaintiff's instant motion in abeyance pending the Court's ruling on the government's alternative requests (Doc. 56). The Court granted the government's request. Meanwhile, plaintiff motioned to supplement the instant motion on May 17, 2011 (Doc. 70).

In an Order dated February 15, 2012, the Court denied the government's alternative requests for judgment as a matter of law or a new trial, and granted plaintiff's request to supplement the instant motion (Doc. 73).*fn2 The Court further extended the government's deadline to respond to the instant motion from 14 days after entry of its Order, to the customary time allowed for responses to post-trial motions following plaintiff's filing of his supplement; 30 days. Thus, the government's response to the instant motion was due thirty days following plaintiff's filing of his supplement. See SDIL-LR 7.1(g). Plaintiff filed his supplement on February 17, 2012 (Doc. 73). Accordingly, the government's response was due, at the latest, by March 21, 2012. See SDIL-LR 5.1(c) (allowing an additional three days to the prescribed response time when filing an electronic response).

On March 21, 2012, the government motioned for a date certain to respond, as it cited confusion concerning the requisite date (Doc. 74). On March 29, 2012, the Court granted plaintiff's motion to enter judgment (Doc. 55), but deferred ruling on plaintiff's instant motion for an award of fees and costs, as the government requested a date certain to respond, and plaintiff's motion did not provide the Court with the information necessary of an informed decision. Thus, the Court ordered plaintiff to file a supplemented motion by April 11, 2012, and set the government's response date as April 25, 2012. Plaintiff timely filed his supplemented motion (Doc. 83), and the government timely responded (Doc. 84). Accordingly, plaintiff's motion is ripe for resolution.

Plaintiff alleges 26 U.S.C. § 7430 entitles him to an award of attorney's fees and costs incurred in the underlying administrative process and in litigating his claims before this Court. In support, plaintiff states he is a "prevailing party," as he "substantially prevailed" with respect to the issues presented and because both the government's administrative and litigation positions were not "substantially justified." Thus, plaintiff seeks fees in the amount of $51,526.67. However, as this amount reflects fees above the statutory cap, plaintiff alternatively seeks $23,756.97, should the Court find "special factors" do not exist.

III. Legal Standards

A. 26 U.S.C. § 7430

Plaintiff alleges 26 U.S.C. § 7430, a provision of the Internal Revenue Code, entitles him to the disputed award of fees and costs. Section 7430 is the exclusive means through which a "prevailing party" can recover an award of fees and costs, "[i]n 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." 26 U.S.C. § 7430(a). Thus, it is undisputed that Section 7430 is instantly applicable.

a. Threshold Requirements of Section 7430

The purpose of Section 7430 is to deter abusive IRS conduct and enable taxpayers to vindicate their rights regardless of their economic circumstances. See Morrison v. Comm'r, 565 F.3d 658, 661 (9th Cir. 2009). Thus, Section 7430 authorizes an award of attorney's fees and costs to the "prevailing party" in any administrative or court proceeding concerning a tax dispute, provided several conditions are satisfied. See Wilfong v. United States, 991 F.2d 359, 364 (7th Cir. 1993). Further, this award may include both, "(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. § 7430(a).

However, a "prevailing party" may recover administrative and litigation costs only if they exhaust all administrative remedies available to them, do not unreasonably protract the proceeding, prevail in the litigation, and demonstrate that their costs are reasonable. 26 U.S.C. § 7430(b); Zinniel v. Comm'r, 883 F.2d 1350, 1356 (7th Cir. 1989). Moreover, as threshold inquiries, a party must submit its application for fees and costs within thirty days of final judgment and attest that his or her net worth did not exceed $2,000,000.00 when the action was filed.*fn3 See 26 U.S.C. § 7430(c)(4)(A)(ii) (incorporating requirements of 28 U.S.C. § 2412(d)(2)(B)). Instantly, the parties dispute whether plaintiff qualifies as a "prevailing party," as defined under Section 7430, and whether the amount of fees and costs plaintiff seeks is reasonable.

b. "Prevailing Party"

Section 7430 defines "prevailing party" as any party which substantially prevailed with respect to the amount in controversy or the most significant issues presented. See 26 U.S.C. § 7430(c)(4)(A)(i). However, under the current version of Section 7430(c)(4)(B)(i), a party who seemingly prevailed against the United States is not deemed a prevailing party, "if the United States establishes that the position of the United States in the proceeding was substantially justified." Thus, the government bears the burden of demonstrating its "position" was "substantially justified." See Barford v. Comm'r, 194 F.3d 782, 786 n. 4 (7th Cir. 1999) (discussing 1996 amendments to Section 7430).

c. "Position of the United States"

Importantly, Section 7430(c)(7) defines "position of the United States," as:

(A) the position taken by the United States in a judicial proceeding to which subsection (a) applies, and

(B) the position taken in an administrative proceeding to which

(a) applies as of the earlier of --

a. the date of the receipt by the taxpayer of the notice of the decision of the Internal Revenue Service Office of Appeals, or

b. the date of the notice of deficiency.

Plaintiff seeks fees and costs incurred prior to the instant judicial proceedings. Thus, based on the plain language of the statute and case law interpreting it, two distinct stages of the government's position require evaluation: the government's position from the date plaintiff received notice from the IRS Office of Appeals of its decision, November 1, 2007, and the period following the government's filing of its answer, August 10, 2009. See Huffman v. Comm'r, 978 F.2d 1139, 1143 (9th Cir. 1992) (discussing 1988 amendments to Section 7430 which delineated the administrative and court phases of proceedings); Grant v. Comm'r, 103 F.3d 948, 952 (11th Cir. 1996); Jean v. United States, 396 F.3d 449, 455 (1st Cir. 2005); Pac. Fisheries Inc. v. United States, 484 F.3d 1103, 1109-10 (9th Cir. 2007); Bale Chevrolet Co. v. United States, 620 F.3d 868, 872 (8th Cir. 2010).*fn4

d. "Substantially Justified" "Substantial justification" means "justified in substance or in the main-that is, justified to a degree that could satisfy a reasonable person." Pierce v. Underwood, 487 U.S. 552, 565 (1988) (internal quotations and citations omitted) (applying the EAJA).*fn5 In other words, the government's position must have had a reasonable basis in both law and fact. See id.; Barford v. Comm'r, 194 F.3d 782, 786 (7th Cir. 1999); Wilfong, 991 F.2d at 364. However, it is well-settled that a party's position can be substantially justified yet incorrect, provided a reasonable person could think the position was correct. Pierce, 487 U.S. at 566 n. 2; United States v. Hallmark, 200 F.3d 1076, 1079-80 (7th Cir. 2000) (applying the EAJA). Accordingly, the government must demonstrate its position was grounded in: (1) a reasonable basis in truth for the facts alleged; (2) a reasonable basis in law for the theory propounded; and (3) a reasonable connection between the facts alleged and the theory propounded. Hallmark, 200 F.3d at 1081; Phil Smidt & Sons, Inc. v. NLRB, 810 F.2d 638, 642 (7th Cir. 1987) (applying the EAJA).

Thus, the Court must now determine whether the government's "positions" at both the administrative and trial level were "substantially justified," and if not, whether the Court should award plaintiff the amount of attorney's fees and costs he requests, as it exceeds the presumptive statutory hourly rates. See 26 U.S.C. § 7430(c)(1)(B)(iii).

B. 26 U.S.C. § 6672

As the applicability of 26 U.S.C. ยง 7430 turns on the reasonableness of the government's position that plaintiff was "responsible" and acted "willfully" as to Gateway Beef's withholding tax liabilities, it is necessary to recite briefly the requisite legal elements ...

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