Filicetti v. State of Idaho et al

Filing 76

ORDER ADOPTING except as modified 71 REPORT AND RECOMMENDATIONS; granting in part and denying in part 51 Motion for Attorney Fees; denying 66 Motion to Review Clerk's Action on Costs. Signed by Judge Edward J. Lodge. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (dmc)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
CAROL A. FILICETTI,
Case No. 1:10-cv-00595-EJL

Plaintiffs,
v.
UNITED STATES OF AMERICA, THE
STATE OF IDAHO; THE IDAHO
STATE TAX COMMISSION,

ORDER ON REPORT AND
RECOMMENDATION

Defendant.

INTRODUCTION
On February 5, 2013, United States Chief Magistrate Judge Candy W. Dale issued
a Report and Recommendation (“Report”), recommending that Plaintiff’s Motion for
Attorney Fees and Costs be granted in part and denied in part and the Motion to Review
Clerk’s Action on Costs be denied. Any party may challenge a Magistrate Judge’s
proposed recommendation by filing written objections to the Report within fourteen days
after being served with a copy of the same. 28 U.S.C. § 636(b)(1) and District of Idaho
Local Rule 72.1(b). The district court must then “make a de novo determination of those
portions of the report or specified proposed findings or recommendations to which
objection is made.” Id. The district court may accept, reject, or modify in whole or in part,
the findings and recommendations made by the Magistrate Judge. Id.; see also Fed. R.
Civ. P. 72(b).

ORDER ON REPORT AND RECOMMENDATION - 1

Defendant filed objections and a supporting Declaration arguing the Report erred
in concluding: 1) the Defendant's positions were not substantially justified, 2) the Plaintiff
exhausted her administrative remedies, 3) the administrative fees are recoverable, and 4)
the lumped attorney fee time entries should not be denied in their entirety. (Dkt. 72, 73.)
Plaintiff did not file any objections but did file a response to the Defendant’s objections.
(Dkt. 74.)
FACTUAL AND PROCEDURAL BACKGROUND
Plaintiff, Carol Filicetti, brought this action against the Defendant, the United
States of America, seeking to quiet title on the home she was awarded in her 2005 divorce
decree. (Dkt. 1.) The dispute arose in September of 2008 when the United States filed a
notice of federal tax lien against the Plaintiff’s ex-husband for his unpaid taxes and
sought to levy upon the Plaintiff’s house. This Court ultimately granted summary
judgment in favor of the Plaintiff concluding that under Internal Revenue Code § 6321
and the terms of the divorce decree, Plaintiff’s ex-husband had no property interest in the
home at the time the United States filed its notice of federal tax lien and, therefore, the
lien never attached to the house. (Dkt. 47.) Thereafter, Plaintiff filed the instant Motion
for Attorney Fees and Costs pursuant to Internal Revenue Code § 7430 and Motion to
Review Clerk’s Action on Costs. These Motions are the subject of the Report, the United
States' objections, and this Order. (Dkt. 51, 66.)1 The Court finds as follows.

1

Plaintiff also sought fees pursuant to the Equal Access to Justice Act, 28 U.S.C. § 2412 which
the Magistrate Judge properly addressed in the Report. (Dkt. 71.)
ORDER ON REPORT AND RECOMMENDATION - 2

DISCUSSION
1.

Motion for Attorney Fees and Costs
Plaintiff filed her Motion for Attorney Fees and Costs pursuant to Internal

Revenue Code § 7430 which provides:
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. “Section 7430 imposes three...requirements for fees and costs
recovery: (1) the underlying administrative or court action must be one by or against the
United States ‘in connection with the determination, collection, or refund of any tax,
interest, or penalty’ under the Internal Revenue Code; (2) the party must have ‘exhausted
the administrative remedies available to such party within the Internal Revenue Service;
and (3) the prevailing party must not have protracted the proceedings.’” United States v.
Guess, 390 F.Supp.2d 979, 985 (S.D. Cal. 2005) (quoting 26 U.S.C. §§ 7430(b)).
The Report concluded that Plaintiff had satisfied the three requirements for an
award of attorney fees. The objections of the United States challenge the Report's
conclusions in this regard.

ORDER ON REPORT AND RECOMMENDATION - 3

A.

Substantially Justified Position

Section 7430 of the Internal Revenue Code “allows taxpayers to recover costs and
attorneys’ fees if they prevail in either civil or administrative proceedings, so long as the
position of the United States was not substantially justified.” Pacific Fisheries Inc. v.
United States, 484 F.3d 1103, 1104 (9th Cir. 2007). “To prevail on a claim for attorneys’
fees, a taxpayer must demonstrate that he has substantially prevailed with respect to the
amount in controversy or the most significant issue or set of issues presented. A taxpayer
is then entitled to attorneys’ fees unless the United States can demonstrate that its position
was substantially justified.” Id. (citations omitted). Thus, it is the United States' burden of
proof to show its position was substantially justified. Id. (citing 26 U.S.C.
§ 7430(b)(4)(B)(i)).
The position of the United States is substantially justified if it is “justified to a
degree that satisfies a reasonable person.” Id. (quoting Pierce v. Underwood, 487 U.S.
552, 565 (1988)). “That is, it must have a reasonable basis in both law and fact.” Id. Here,
the United States argues its positions were substantially justified as to its belief that 1) it
could avail itself of the protections provided in the Idaho Recording Act and 2) the
divorce decree did not vest sole ownership in the subject property until after the federal
tax liens had arisen against Plaintiff’s ex-husband. (Dkt. 72.)
As to the first position, the United States argues there is conflicting circuit
authority concerning when a federal tax lien attaches to property disposed of in a divorce
decree. (Dkt. 72 at 5.) The United States maintains that its position was substantially
justified as it was based on the approach used in the Fifth and Eleventh Circuits. This

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Court as well as the Magistrate Judge previously considered the authority relied upon by
the United States and soundly rejected the same. (Dkt. 47, 71.) Regardless, the Court has
again reviewed the case law cited by the United States. Having done so, and for the
reasons stated in the Report, which this Court agrees with and adopts, as well as this
Court’s prior Order, the Court denies the United States’ objection regarding conflicting
circuit authority. (Dkt. 47, 71.) The law applicable in this case, in this circuit is clearly
contrary to the position taken by the United States. As such, the Court finds the United
States’ position on this point was not substantially justified.
On the second position, the United States maintains its argument that the divorce
decree in this case was ambiguous was substantially justified and reasonable when read as
a whole in light of basic contract interpretation. (Dkt. 72 at 12.) The Court has again
reviewed the language of the divorce decree and finds it is not ambiguous. As the Court
stated in its prior Order (Dkt. 47) the language of the divorce decree is plain and
unambiguous. The United States’ position on this point is not substantially justified.
B.

Exhaustion of Administrative Remedies

To recover fees and costs under § 7430, “the party must have exhausted the
administrative remedies available to such party within the Internal Revenue Service....”
Guess, 390 F.Supp.2d at 985. The United States objects to the Report’s conclusion that
Plaintiff had exhausted her administrative remedies arguing Plaintiff did not meet the
requirements of 26 C.F.R. § 301.7430-1(d) for exhaustion. (Dkt. 72 at 13.) That
regulation states:

ORDER ON REPORT AND RECOMMENDATION - 5

(1) A party has not exhausted the administrative remedies available within
the Internal Revenue Service with respect to a matter other than one to
which paragraph (b) or (c) of this section applies (including summonses,
levies, liens, and jeopardy and termination assessments) unless, prior to
filing an action in a court of the United States (including the Tax Court and
the Court of Federal Claims)-(i) The party submits to the district director of the district
having jurisdiction over the dispute a written claim for relief
reciting facts and circumstances sufficient to show the nature
of the relief requested and that the party is entitled to such
relief; and
(ii) The district director has denied the claim for relief in
writing or failed to act on the claim within a reasonable period
after such claim is received by the district director.
(2) For purposes of this paragraph (d)(2), a reasonable period is–
...
(iv) The 60–day period following receipt of the claim for relief in all
other cases.
In this case, the notice provided by the United States instructed the Plaintiff to
submit documents to the district director. Plaintiff submitted her claim seeking a
certificate of nonattachment to the district director as instructed in the notice. (Dkt. 54-1.)
The district director orally denied Plaintiff’s claim. The Magistrate Judge concluded in
the Report that this verbal denial satisfied the exhaustion requirement because the “IRS
had acted verbally denying [Plaintiff’s] claim.” (Dkt. 71 at 12.) The Report went on to
conclude that the “sixty day waiting period was not applicable because the IRS did not
‘fail to act.’ The IRS acted by verbally denying [Plaintiff]’s claim. Therefore, [Plaintiff]
exhausted the only administrative remedy that was available.” (Dkt. 71 at 12.)

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The United States argues this conclusion is in error because under the regulation
after a written claim for relief has been submitted, exhaustion can only occur if 1) the IRS
issues a written denial of the claim or 2) the IRS fails to act on a written claim within
sixty days; neither of which occurred here. (Dkt. 72 at 14.) The United States contends
that Plaintiff’s administrative claim was still pending at the time she filed her suit because
no written denial had been issued and sixty-days had not yet passed. (Dkt. 72 at 15.)
This Court has reviewed this argument de novo and finds the Report’s conclusion
is correct. The Plaintiff submitted her claim as directed in the Notice supplied by the
Government. The claim was verbally denied. Thus, under the applicable regulations, the
IRS did act in denying the Plaintiff’s claim. Furthermore, it appears the IRS has since
issued a written notice denying Plaintiff’s claim.
In their objections, the United States asserts that when the IRS orally denied the
claim, it instructed Plaintiff to file a request for a discharge of the lien which she did by a
letter dated “October 27, 2011.” (Dkt. 72 at 15.) It is that request which the United States
argues was under consideration at the time Plaintiff filed this action on “October 28,
2011.” (Dkt. 72 at 15.) The IRS has since issued a written denial of the Plaintiff's claim
on “November 15, 2011.” (Dkt. 72 at 15-16.)2 This argument was considered and
addressed in the Report. (Dkt. 71 at 12 n. 5.) This Court also has considered the United
States' argument as well as the Magistrate Judge’s reasoning in rejecting the same and is

2

It is worth noting that the United States’ briefing on this issue erroneously states the wrong year
for these submissions as having occurred in 2011; the correct year was 2010. (Dkt. 1, 54-1, 54-2.) Given
the United States’ staunch position concerning the running of the sixty day time period, it seems
important to ensure the dates are accurately noted when calculating the time period.

ORDER ON REPORT AND RECOMMENDATION - 7

in agreement with the Report’s conclusion on this point. For the reasons stated in the
Report, the Court denies the United States’ objection.
The Court agrees with the Report’s conclusion that Plaintiff exhausted her
administrative remedies. This is not a case where the individual simply neglected to
pursue an administrative remedy and instead filed suit without giving the IRS an
opportunity to consider possible administrative remedies. Here, the Plaintiff followed the
instructions given to her by the IRS and was denied relief by the IRS. The United States'
limited interpretation is unreasonable in this case given the Plaintiff’s diligent and
conscientious adherence to the instructions given to her by the IRS in pursuing her claim.
C.

Recovery of Administrative Costs

Here, following the United States’ filing of a notice of tax lien on her house, in
October of 2010, Plaintiff filed with the IRS an application for nonattachment of federal
tax lien and an application for certificate of discharge both under 26 U.S.C. § 6325. (Dkt.
54-1.) The United States argues the administrative costs incurred by Plaintiff in preparing
and submitting her administrative claims are not recoverable in this case because this is a
“collection action” and § 7430 does not allow for such recovery. (Dkt. 72 at 17.) The
United States points to 26 C.F.R. § 301.7430-3(a) and (b) and 26 U.S.C. § 7430(c)(2)(B).
Section 7430 allows for recovery of “reasonable administrative costs” in an
“administrative proceeding” but not in a “collection action.” 26 U.S.C. § 7430(a)(1),
(c)(2). Under 26 C.F.R. § 301.7430-3, an administrative proceeding “generally means any
procedure or other action before the Internal Revenue Service” but does not include
proceedings in connection with “collection actions.” 26 C.F.R. § 301.7430-3(a)(4). As

ORDER ON REPORT AND RECOMMENDATION - 8

defined by 26 C.F.R. § 301.7430-3(a)(4)(b), a collection action “generally includes any
action taken by the Internal Revenue Service to collect a tax (or any interest, additional
amount, addition to tax, or penalty, together with any costs in addition to the tax) or any
action taken by a taxpayer in response to the Internal Revenue Service’s act or failure to
act in connection with the collection of a tax (including any interest, additional amount,
addition to tax, or penalty, together with any costs in addition to the tax).” 3
The Report concluded that the “collection action” exclusion did not apply in this
case because the Plaintiff was not the “taxpayer” as defined by the regulation. (Dkt. 71 at
13-15.) Instead, the Report found it was the Plaintiff’s ex-husband who was the taxpayer
as he was the individual owing back taxes. The United States objects to the Report’s
conclusion arguing this action is a “collection action” because it is an action taken by the
IRS to collect a tax; regardless of who the person is that owes the tax. (Dkt. 72 at 17.)
Because the Plaintiff’s submissions were made in response to the IRS’s collection
actions, i.e. the filing of a federal tax lien, the United States maintains that this is a
“collection action” and the administrative fees are not recoverable.

3

The regulation goes on to state:
For example, a collection action for purposes of section 7430 and this
section includes any action taken by the Internal Revenue Service under
chapter 64 of subtitle F to collect a tax. Collection actions also include
those actions taken by a taxpayer to remedy the Internal Revenue
Service's failure to release a lien under section 6325 and to remedy any
unauthorized collection action as defined by section 7433, except those
collection actions described by section 7433(e). However, an action or
procedure directly relating to a claim for refund filed with the Service
Center's Collection Branch or District Director's Collection Division after
payment of an assessed tax is not a collection action.

26 C.F.R. § 301.7430-3(a)(4)(b).
ORDER ON REPORT AND RECOMMENDATION - 9

Although the definition may be framed broadly, the Court finds the United States’
interpretation to be far too broad such that it would include nearly any proceeding by the
IRS as a collection action. Here, the IRS issued a notice of federal tax lien against
Plaintiff’s ex-husband for his unpaid taxes. That is clearly a collection action. It then
sought to place a levy on Plaintiffs home. Plaintiff initiated the underlying administrative
proceedings to challenge the levy on her home; essentially contesting the IRS’s
determination that the home was subject to the Plaintiff’s ex-husband’s unpaid tax
liability. The Court finds Plaintiff’s challenge to the proposed levy to be an
“administrative proceeding” and, therefore, eligible for recovery of administrative costs
under § 7430.
D.

Reasonableness of Attorney Fee Award

The United States objects to the Report’s disposition of the “lumped time entries”
where attorney hours not allocable to the United States were joined with fees that are
allocable to the United States. (Dkt. 72.) The Report recommended accounting for the
non-allocable times by “trimming” the hours to deduct the extra tenths of an hour for the
lumped time entries identified in United States’ Exhibit A and deducting two hours spent
on a separate motion for default. (Dkt. 71 at 18 n. 7.) The United States argues the
lumped entries should be deducted in their entirety because the combination of
reimbursable and nonreimbursable time is not recoverable; citing to Barford v.
Commissioner, 194 F.3d 782 (7th Cir. 1999). (Dkt. 72 at 19.) Plaintiff argues this case is
distinguishable and the Report’s conclusion is a proper exercise of the court’s discretion
in determining attorney fees. (Dkt. 74 at 10.)

ORDER ON REPORT AND RECOMMENDATION - 10

The Barford case involved the Seventh Circuit’s affirming the Tax Court’s ruling
that the taxpayer’s inability to allocate their litigation costs between those fees that were
and were not reimbursable precluded any award of litigation costs under Internal Revenue
Code § 7430. Id. Both parties here recognize the facts in Barford are distinct from this
case but the United States seeks to liken the result concerning the unallocated litigation
costs to the facts here. (Dkt. 72 at 19) (Dkt. 74 at 10.) The Court disagrees with the
United States’ argument.
In Burford the tax payer was unable to differentiate litigation costs between the
two disputed issues in the case which resulted in their being denied litigation costs. Here,
however, the “lumped” hours can be separated and have been properly separated as
recommended by the Magistrate Judge in her Report. Having reviewed the particular
billing records at issue, this Court is in agreement with the Magistrate Judge’s
recommendation deductions as reflected in footnote seven of the Report. (Dkt. 71 at 18 n.
7.) What is applicable in this case from the Burford decision, is that the standard of
review concerning an award of attorney fees is abuse of discretion. Id. (There the Seventh
Circuit concluded that the Tax Court, under the facts before it, did not abuse its
discretion.); see also Pacific Fisheries, 484 F.3d at 1106 n. 2 (stating the same standard in
the Ninth Circuit). In this case, the Court agrees with the Report's recommendation
concerning the award of attorney fees as an appropriate exercise of this Court's discretion.
Accordingly, the United States’ objection on this point is denied.

ORDER ON REPORT AND RECOMMENDATION - 11

2.

Motion to Review Clerks
The Clerk previously denied Plaintiff’s Bill of Costs. (Dkt. 62.) Plaintiff filed a

Motion to Review the Clerk’s Action on Costs. (Dkt. 66.) The Magistrate Judge
considered the Motion in the Report and concluded that the Costs Bill was properly
denied. (Dkt. 71.) Neither side filed any objections to the Report’s recommendations
concerning the Motion to Review Clerk’s Action on Costs. Where no objections are filed
the district court need not conduct a de novo review. In United States v. Reyna-Tapia, 328
F.3d 1114, 1121 (9th Cir. 2003), the court interpreted the requirements of 28 U.S.C.
636(b)(1)(C):
The statute [28 U.S.C. § 636(b)(1)(C)] makes it clear that the district judge
must review the magistrate judge's findings and recommendations de novo
if objection is made, but not otherwise. As the Peretz Court instructed, “to
the extent de novo review is required to satisfy Article III concerns, it need
not be exercised unless requested by the parties.” Peretz, 501 U.S. at 939
(internal citation omitted). Neither the Constitution nor the statute requires a
district judge to review, de novo, findings and recommendations that the
parties themselves accept as correct. See Ciapponi, 77 F.3d at 1251
(“Absent an objection or request for review by the defendant, the district
court was not required to engage in any more formal review of the plea
proceeding.”); see also Peretz, 501 U.S. at 937-39 (clarifying that de novo
review not required for Article III purposes unless requested by the parties)
....
See also Wang v. Masaitis, 416 F.3d 993, 1000 & n.13 (9th Cir. 2005). Furthermore, to
the extent that no objections are made, arguments to the contrary are waived. See Fed. R.
Civ. P. 72; 28 U.S.C. § 636(b)(1) (objections are waived if they are not filed within
fourteen days of service of the Report and Recommendation). “When no timely objection
is filed, the Court need only satisfy itself that there is no clear error on the face of the
record in order to accept the recommendation.” Advisory Committee Notes to Fed. R.

ORDER ON REPORT AND RECOMMENDATION - 12

Civ. P. 72 (citing Campbell v. United States Dist. Court, 501 F.2d 196, 206 (9th
Cir.1974)).
On the Motion to Review Clerk’s Action on Costs, the Court has reviewed the
same and finds no clear error on the face of the record in the Magistrate Judge’s
recommendation as stated in the Report. Accordingly, the Court will adopt the same.
ORDER
NOW THEREFORE IT IS HEREBY ORDERED:
1)

The Report and Recommendation entered on January 7, 2013, (Dkt. 71) is
INCORPORATED by reference and ADOPTED EXCEPT AS
MODIFIED HEREIN.

2)

The Motion for Attorney Fees and Costs (Dkt. 51) is GRANTED IN
PART AND DENIED IN PART. Plaintiff is awarded litigation and
administrative costs under 26 U.S.C. § 7430 in the total amount of
$29,358.00 for Mr. Alkire's time. Mr. Alkire is directed to submit a
supplemental affidavit detailing the time spent in 2012 and, if able,
correcting the deficiencies with respect to the time claimed for his legal
assistant, consistent with the instruction given in the Report and
Recommendation. Any supplemental affidavit shall be submitted no later
than March 28, 2013. The United States may file a response to the same on
or before April 4, 2013. Any reply brief shall be filed no later than April 8,
2013. If a supplemental affidavit is filed, the Court will refer review of the
same to Chief Magistrate Judge Dale.

3)

The Motion to Review Clerk’s Action on Costs (Dkt. 66) is DENIED.

DATED: March 12, 2013

Honorable Edward J. Lodge
U. S. District Judge

ORDER ON REPORT AND RECOMMENDATION - 13