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Walter v. United States

March 2, 2010


The opinion of the court was delivered by: Robert C. Mitchell United States Magistrate Judge


On April 9, 2009, Plaintiffs, David and Helen Walter, brought this action against the United States of America pursuant to 28 U.S.C. § 1346(a)(1), seeking to recover federal income taxes for tax year 2002 in the amount of $5,670 that were overpaid yet not refunded by the Internal Revenue Service (IRS). They also sought an order requiring the IRS to apply this refund first to the underpayment of taxes for 2003 and 2004, and in their motion for summary judgment they requested permission to amend their complaint to include tax years 2005 and 2006. The United States opposed the refund on the ground that the statute of limitations for requesting it had expired and that Plaintiffs did not establish that they were entitled to statutory tolling on the ground that they were "financially disabled" pursuant to 26 U.S.C. § 6511(h). On December 16, 2009, an order was entered (Docket No. 25), denying Defendant's motion for summary judgment and granting Plaintiffs' motion for summary judgment. On that same date, the Court filed a memorandum opinion (Docket No. 26) and an order entering judgment in Plaintiffs' favor pursuant to Rule 58 of the Federal Rules of Civil Procedure (Docket No. 27).

On January 14, 2010, Plaintiffs filed a motion for reasonable litigation costs and attorneys' fees pursuant to 26 U.S.C. § 7430.*fn1 They seek $519.36 in court costs and $11,563.67 in attorneys' fees, representing 66.9 hours at the rate of $172.85 per hour. On February 4, 2010, Defendant submitted a response in opposition. Plaintiffs filed a reply brief and Defendant filed a sur-reply. For the reasons that follow, the motion will be granted, but the amount of attorneys' fees will be adjusted.

Applications for Reasonable Litigation Costs Pursuant to 26 U.S.C. § 7430 The Internal Revenue Code provides that, in any proceeding brought by or against the United States in connection with the determination, collection or refund of any tax, interest or penalty, "the prevailing party may be awarded a judgment or a settlement for ... reasonable litigation costs incurred in connection with such court proceeding." 26 U.S.C. § 7430(a)(2). The term "reasonable litigation costs" includes reasonable court costs, § 7430(c)(1)(A), and reasonable attorneys' fees, § 7430(c)(1)(B)(iii).

The term "prevailing party" is defined as "any party ... which has substantially prevailed with respect to the most significant issue or set of issues presented" and "which meets the requirements of the 1st sentence of section 2412(d)(1)(B) of title 28, United States Code ... and meets the requirements of section 2412(d)(2)(B)...." § 7430(c)(4)(A)(i)(II), (ii). The first sentence of § 2412(d)(1)(B) requires a party seeking to recover an award of fees and other expenses to submit, within thirty days of final judgment, an application for fees and other expenses which shows that it is a prevailing party and the amount sought including an itemized statement by the attorney stating the actual time expended and the rate at which the fees were computed. Section 2412(d)(2)(B) defines the word "party" to mean "an individual whose net worth did not exceed $2,000,000 at the time the civil action was filed." 28 U.S.C. § 2412(d)(2)(B)(i). In addition, the party must exhaust available administrative remedies. 26 U.S.C. § 7430(b)(1).

If the United States establishes that its position was substantially justified, a party shall not be treated as a prevailing party. § 7430(c)(4)(B)(i). The United States bears the burden of establishing that its position was substantially justified. 26 U.S.C. § 7430(c)(4)(B)(i). Pacific Fisheries, Inc. v. United States, 383 F.3d 1103, 1107 (9th Cir. 2007); St. David's Health Care Sys. v. United States, 349 F.3d 232, 234 (5th Cir. 2003); Sherbo v. Commissioner, 255 F.3d 650, 653 (8th Cir. 2001).*fn2 When the final determination with respect to tax liability is made by a court, the court shall determine whether a party is a prevailing party. § 7430(c)(4)(C)(ii). However, even if a plaintiff satisfies the statutory requirements, an award is not mandatory but is a matter committed to the court's discretion. KM Sys., Inc. v. United States, 360 F. Supp. 2d 641, 643 (D.N.J. 2005).

In an affidavit submitted with the motion for costs and attorneys' fees, Plaintiffs' counsel, James Carney, avers that: 1) Plaintiffs submitted a request for a refund which was denied on the ground that it had been filed too late; 2) they appealed this decision and included with their appeal a statement from their family physician explaining the physical and mental conditions which made them incapable of filing their 2002 return, but the IRS never ruled on this appeal; 3) after making numerous inquiries of the IRS offices in Fresno and Philadelphia, Attorney Carney learned that the IRS had apparently lost the file; 4) Attorney Carney made numerous inquiries of the National Taxpayer Advocate's Office and the two cited appeals offices, but received no replies; 4) Plaintiffs filed this action because the IRS had lost their file and was unwilling to address the situation or recreate the file; 5) they have incurred court costs of $519.36; 6) he spent 66.9 hours of time on this case; 7) Plaintiffs' net worth is less than $2 million; and 8) Plaintiffs have been paying their counsel at the rate of $200 per hour. (Carney Aff. ¶¶ 3-24 & Exs. 1-7.)*fn3

The United States argues that: 1) its position that Plaintiffs' refund application was untimely filed was substantially justified; 2) its position that Plaintiffs' financial disability claim failed as a matter of law was substantially justified; 3) Plaintiffs have not demonstrated that their net worth is less than $2 million because they have not submitted their own affidavits establishing this fact; and 4) they failed to exhaust their administrative remedies because the physician statement did not meet all of the elements of Revenue Procedure 99-21 and they have not even alleged that they exhausted their administrative remedies for the 2003 through 2006 tax years.

Substantially Justified Position

The United States contends that its position in this litigation was substantially justified, reiterating the argument it has made that Plaintiffs did not file their request for a refund in a timely manner and did not demonstrate that they were entitled to statutory tolling of the statute of limitations on the ground that they were "financially disabled" pursuant to 26 U.S.C. § 6511(h). It further contends that it has not taken the "position" that it lost the file and that Plaintiffs may not refer to prelitigation events.

Plaintiffs argue that the United States's position, both prelitigation and through this litigation, has not been substantially justified. Plaintiffs highlights the following points: 1) the government's prelitigation position was that it had lost the file and would do nothing about it, forcing them to file suit as the only way to receive any relief in their case; 2) the government's position in this litigation was that Plaintiffs were not financially disabled and that their physician certificate of disability was deficient in two technical matters that Plaintiffs corrected.

The United States responds that its position has consistently been that Plaintiffs' refund claim was untimely. It further argues that Plaintiffs improperly refer to the IRS's failure to act as the position of the United States when the relevant statute contains no such definition.

Under § 7430, the phrase "position of the United States" means:

(A) the position taken by the United States in a judicial proceeding to which ...

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