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Estate of Hake v. United States

United States District Court, M.D. Pennsylvania

May 1, 2017

THE ESTATE OF ESTHER M. HAKE, RICKY L. HAKE and RANDY L. HAKE, Executors, Plaintiffs
v.
UNITED STATES OF AMERICA, Defendant

          MEMORANDUM OPINION

          Martin C. Carlson United States Magistrate Judge

         I. Factual Background

         We are now called upon to write the final chapter in this litigation, and resolve a motion filed by the plaintiffs to recover attorney's fees and costs from the United States. (Doc. 50.) This action was brought by two executors to their late mother's estate, who sued the United States on behalf of the Estate seeking abatement and reimbursement of a penalty that was assessed after the executors were late in filing the estate's tax returns. The executors had filed the return on the date that their tax attorney advised them that it was due, after the estate had been granted extensions of both its filing and payment deadlines. Yet, while the executors paid the taxes that they believed were owed before payment was due and in an amount that later proved to be more than $100, 000 in excess of what was actually owed, they unquestionably filed the estate's return approximately six months' late, having been incorrectly advised by tax professionals concerning the return deadline. For this error the Estate was assessed a late penalty in the amount of $197, 868.26, and interest of $17, 202.44 was also imposed pursuant to section 6651(a)(1) of the Internal Revenue Code.

         The executors pursued an administrative appeal for abatement of the penalty on August 13, 2013. When that appeal was rejected, the executors paid the entire balance owed for penalty and interest. The executors then took steps to secure a refund of the penalty and interest, and exhausted their administrative remedies with the Internal Revenue Service, all of which were unsuccessful. This litigation followed when the executors filed a complaint on behalf of the Estate on July 15, 2015. (Doc. 1.)

         The parties then filed cross-motions for summary judgment, (Docs. 23, 33.), which we resolved in favor of the plaintiffs, finding that, given the unique and undisputed facts of this case, as well as the developing law in this field, the executors' reliance upon the advice of their counsel in these particular circumstances regarding the applicable deadlines for filing the estate's return was reasonable, and, therefore, the imposition of the penalties and interest was not warranted. In reaching this conclusion, however, we noted and acknowledged that this legal issue was not free from doubt. Quite the contrary, we conceded that the Government's arguments drew substantial support from emerging case law from other courts law in this field. We nonetheless found finds that application of authority from the United States Court of Appeals for the Third Circuit to the particular facts of this case compelled this outcome.

         This motion for fees and costs followed. (Doc. 50.) In this motion the Estate seeks recovery of $51, 378.00 in attorney's fees, and costs of $1, 471.40, for a total award of $52, 849.40. (Id., ¶12.) The parties have fully briefed this motion. (Docs. 51 and 53.) Accordingly, this matter is ripe for resolution.

         Upon consideration on this motion, for the reasons set forth below, we find that the Estate has not established an entitlement to fees and costs under the controlling statute which governs such awards in federal tax litigation, 26 U.S.C. §7430. Therefore, the motion for fees and costs will be denied.

         II. Discussion

         Section 7430 of Title 26, United States Code, governs the award of costs and fees in any action involving the United States which relates to the refund of any tax, interest or penalty. Section 7430 provides in pertinent part that:

(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. § 7430 (a)(1)-(2).

         Since §7430 constitutes a limited waiver of sovereign immunity, allowing for some financial recoveries against the United States, it is well-settled that: “the traditional principle that the Government's consent to be sued ‘must be “construed strictly in favor of the sovereign, ” McMahon v. United States, 342 U.S. 25, 27 [72 S.Ct. 17');">72 S.Ct. 17, 19, 96 L.Ed. 26] (1951), and not ‘enlarge[d] ... beyond what the language requires, ” ' Ruckelshaus v. Sierra Club, 463 U.S. 680, 685, 103 S.Ct. 3274, 3278, 77 L.Ed.2d 938 (1983) (quoting Eastern Transportation Co. v. United States, 272 U.S. 675, 686, 47 S.Ct. 289, 291, 71 L.Ed. 472 (1927)).” United States v. Nordic Vill. Inc., 503 U.S. 30, 34, 112 S.Ct. 1011, 1014-15, 117 L.Ed.2d 181 (1992). See e.g Miller v. Alamo, 992 F.2d 766, 766 (8th Cir. 1993)(c0nstruing §7430); In re Klauer, 362 B.R. 31, 35 (Bankr. M.D. Fla. 2006)(construing §7430). Adopting this analytical perspective we note that for purposes of Section 7430, a “prevailing party” entitled to fees and costs is defined as:

any party in any proceeding to which subsection (a) applies (other than the United States or any creditor of the taxpayer involved)--(i) 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 (ii) 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 ...

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