Taropff v. United States of America
Filing
86
ORDER granting in part and denying in part 55 and 83 Motion to Award Fees and Costs. Signed by Chief Judge David R. Herndon on 6/19/2012. (mtm)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ILLINOIS
JOHN A. TARPOFF
Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.
Case No. 09-cv-411-DRH-PMF
MEMORANDUM & ORDER
HERNDON, Chief Judge:
I.
INTRODUCTION
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.
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II.
BACKGROUND
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). 1 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
1
Plaintiff notes Sam Brach passed away in early 2007 (Doc. 55-5, p. 1).
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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). 2 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 posttrial 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).
supplement on February 17, 2012 (Doc. 73).
Plaintiff filed his
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,
2
The government appealed this Court’s denial of its motion for judgment as a matter of law, the
denial of its motion for new trial, and the judgment entered in plaintiff’s favor, on March 30, 2012
(Doc. 78). On June 14, 2012, the government voluntarily dismissed its appeal (Doc. 85).
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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).
undisputed that Section 7430 is instantly applicable.
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Thus, it is
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. 3 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
3
On February 17, 2012, plaintiff submitted sufficient documentation demonstrating his net worth
is less than $2,000,000.00. (See Doc. 73) (filed under seal).
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“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
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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). 4
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). 5 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
4
The Court notes the Seventh Circuit has not yet directly addressed whether Section 7430
requires a bifurcated analysis as to the government’s administrative and litigation positions,
except to comment that the 1988 amendments to Section 7430 allow for consideration of the
government’s administrative and litigation position. See Zinniel v. Comm’r, 883 F.2d 1350, 1356
(7th Cir. 1989).
5
Although the Court has determined the specific provisions of Section 7430 instantly apply,
Congress copied the “substantially justified” standard in Section 7430 from the Equal Access to
Justice Act (EAJA) provisions. Thus, where the wording is consistent, courts have read the EAJA
and Section 7430 in harmony. Kenagy v. United States, 942 F.2d 459, 464 (8th Cir. 1991); In re
Arthur Andersen & Co., 832 F.2d 1057, 1060 (8th Cir. 1987); United States v. Balanced Fin.
Mgmt., Inc., 769 F.2d 1440, 1451 n. 12 (10th Cir. 1985).
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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. § 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 of the underlying litigation. 26 U.S.C. § 6672(a) provides
that,
Any person required to collect, truthfully account for, and pay over
any tax imposed by this title who willfully fails to collect such tax, or
truthfully account for and pay over such tax, or willfully attempts in
any manner to evade or defeat any such tax or the payment thereof,
shall, in addition to other penalties provided by law, be liable to a
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penalty equal to the total amount to be tax evaded, or not collected,
or not accounted for and paid over.
26 U.S.C. § 6672(a).
Thus, the jury must have found plaintiff both “responsible” and “willful” to
uphold the government’s assessment of 100 percent liability for the penalty
against plaintiff. Bowlen v. United States, 956 F.2d 723, 727 (7th Cir. 1992).
Further, a tax penalty is presumed valid; thus, plaintiff bore “the burden of
proving his lack of responsibility and/or willfulness for the given tax quarters.”
Kim v. United States, 111 F.3d 1351, 1357 (7th Cir. 1997).
An individual is “responsible” if “he retains sufficient control of corporate
finances that he can allocate corporate funds to pay the corporation’s other debts
in preference to the corporation’s withholding tax obligations.”
Jefferson v.
United States, 546 F.3d 477, 481 (7th Cir. 2008) (citing Bowlen v. United
States, 956 F.2d 723, 728 (7th Cir. 1992) (internal citation omitted)).
Importantly, a person need not have “exclusive control over the disbursal of funds
or have the final word as to which creditors should be paid so long as he has
significant control,” as “the key to liability under Section 6672 is the power to
control the decision-making process by which the employer corporation allocates
funds to other creditors in preference to its withholding tax obligations.”
Id.
“Indicia of ‘responsible person’ status include: holding corporate office, owning
stock in the company, serving on the board of directors, possessing authority to
sign checks, and control over corporate financial affairs.” Kim, 111 F.3d at 136263.
However, the Seventh Circuit has held that “merely because a corporate
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officer has check-signing responsibilities and his corporation is in financial
trouble, it does not follow that he can be held liable for any and all failures to pay
withholding taxes.”
Jefferson, 546 F.3d at 480-81 (citing Wright v. United
States, 809 F.2d 425, 428 (7th Cir. 1987)).
Further, the Seventh Circuit defines “willful” under Section 6672 as
encompassing “voluntary, conscious and intentional- as opposed to accidentaldecisions not to remit funds properly withheld to the government.” Domanus v.
United States¸ 961 F.2d 1323, 1324-25 (7th Cir. 1992). However, a person’s
actions are also considered “willful” if he or she “recklessly disregarded a known
risk that taxes were not being paid over.” Kim, 111 F.3d at 1357.
IV.
Application
A. Administrative Position not “Substantially Justified”
As to the government’s administrative position, both parties agree that the
IRS Appeals Office sent plaintiff notice of its rejection of his challenge to the
proposed assessment on November 1, 2007 (Doc. 83-5). Thus, the Court shall
evaluate the reasonableness of the IRS’s administrative position in light of the
facts and law it relied upon as of this date forward. As to the substance of the
IRS’s decision on the relevant date, both parties agree that the IRS’s position on
November 1, 2007, and IRS revenue officer Gloria Hayes’ (Hayes) position on May
9, 2007, generally share the same factual and legal basis.
As to the reasonableness of the IRS’s administrative position, plaintiff
argues Hayes made an unreasonable initial assessment of liability against him,
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resulting from a personal grudge; not his status as a person responsible who
willfully failed to pay the withheld incomes taxes of Gateway Beef. Plaintiff alleges
Hayes unreasonably persisted in her assessment of liability against him, while
refusing to investigate the liability of the true responsible parties. Specifically,
plaintiff argues Hayes refused to investigate Brach’s liability, instead allowing the
statute of limitations to foreclose recovery from his estate. Plaintiff cites to a
Saturday phone call as the motivation for Hayes’ “grudge.” Plaintiff relates that on
December 16, 2005, Hayes mistakenly left a note taped to the door of plaintiff’s
neighbor, asking plaintiff to contact her.
The next day, a Saturday, plaintiff
contacted Hayes at her home. According to plaintiff, this Saturday phone call
gave Hayes an “ax to grind, and she took revenge on [plaintiff] by levying a penalty
solely against [plaintiff], and no one else.”
The government responds that as part of the IRS’s administrative
investigation it, “(1) subpoenaed and reviewed bank records, including signature
cards and canceled checks, (2) conducted interviews of [plaintiff], his brother
Craig Tarpoff, and other employees of [Gateway Beef], [and] (3) reviewed
corporate documents such as the articles of organization and documents filed
with the state of Illinois.” Thus, as of November 1, 2007, the government states
that it had collected evidence demonstrating plaintiff’s position as an, “officer,
employee, member, and manager of [Gateway Beef].” Further, the government
states that it had collected evidence that plaintiff was a signatory on Gateway
Beef’s bank accounts, had invested $50,000.00 in Gateway Beef, directed payment
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of bills, opened and closed bank accounts, co-signed loans, authorized or signed
payroll checks, and transmitted, reviewed or signed payroll checks, all with
respect to Gateway Beef. In support, the government cites solely to the IRS field
notes regarding its investigation of the disputed liability (See Doc. 55-4).
Upon a detailed review of the IRS field notes in question, the Court does not
agree with the government’s characterization of the evidence upon which Hayes
relied in making her initial assessment of liability. The IRS investigatory notes
demonstrate that initially a different agent investigated the underlying tax liability;
Hayes’ investigation began in March 2005. Prior to Hayes’ involvement, various
persons were contacted in regards to the tax liability. On October 12, 2004,
Michelle Weiss (Weiss), described as the “Secretary of the corporation,” informed
the agent that, “Sam Brock[sic] is the person whom handles the taxes and he is
hospitalized.” Further, Weiss informed the agent that plaintiff was an “officer”
(Doc. 55-4, p. 6).
Relevantly, on March 24, 2005, Weiss called the agent,
identifying herself as one of the, “officers of the LLC.” The agent noted that Weiss,
“request[ed] [the IRS] deal with her because she has all paperwork” (Doc. 55-4, p.
11). Further, the notes generally indicate contemplation of assessment against
Brach, as Weiss specifically informed the agent he was responsible for the tax
liability (Doc. 55-4, pp. 7-9).
The investigation notably changed course upon Hayes’ involvement. Plaintiff
alleges this resulted from Hayes’ personal grudge against him. While the Court
declines to comment as to Hayes’ motives, prior to December 2005, Hayes
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indicates that she is investigating numerous individuals’ responsible status for the
liability in question. For instance, she notes the names of plaintiff, Alexander
Tarpoff, and Sam Brach, are all present on a bank signature card. Further, in
June 2005, she notes William Boston (Boston), a person she refers to as
“treasurer,” signed returns demonstrating balances due of $35,000.00 and
$42,000.00. Hayes indicated her intent to contact Boston to determine his
responsibility for the liability (Doc. 55-4, p. 17). However, her notes demonstrate
that she never contacted Boston. As to Hayes’ interview of Craig Tarpoff, plaintiff’s
brother, it appears he informed her that his, “brother owned [the] business and
leased the building from him” (Doc. 55-4, p. 20).
December 2005, as plaintiff suggests, marks a turn in Hayes’ investigation.
Hayes’ notes from the “Saturday phone call incident” state that plaintiff indicated
the “officers” of Gateway Beef as: plaintiff-member, Sam Brach-president, and Bill
Boston-treasurer. Further, Hayes notes that plaintiff “claims no responsibility for
the liability.” In contradiction, Hayes informed him, “bank statements, signature
cards and other information show[][plaintiff] as a responsible officer” (Doc. 55-4,
p. 29). On this same date, Hayes again indicates that she will investigate others
concerning their responsibility for the liability. However, the remainder of Hayes’
notes demonstrates she did not investigate other parties from this date forward.
Following a year of inactivity, on January 29, 2007, Hayes states, “[f]urther
review of case indicated for the periods in question sole responsible officer is
[plaintiff] as he signed all checks, and has signatory authority, there are no other
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parties who signed checks. Additionally, Hayes indicates that although Boston, “as
the treasurer” signed returns, his signature did not appear on any checks. Thus,
she stated her intent to prepare assessment against plaintiff, as the “sole
responsible officer” (Doc. 55-4, p. 38). In this same vein, Hayes concluded on
February 7, 2007, “[w]hile there are other members on the signature card and on
the signature of the 2941 return [sic] question, [plaintiff] was the only person to
write checks for thebusiness[sic] as heis[sic] on the signature card. Thus[,] the
proposed assessment is being made against this member solely” (Doc. 55-4, p.
39).
Therefore, on March 12, 2007, Hayes notified plaintiff of the initial
assessment of liability against him. Plaintiff retained counsel and filed an
objection to Hayes’ initial assessment on April 24, 2007 (Doc. 55-5). Generally,
plaintiff protested his control over the finances of Gateway Beef. Plaintiff stated
Brach, who passed away in early 2007, had total control over the allocation of
Gateway Beef’s funds during the relevant periods. Plaintiff stated Brach did not
share information about the company’s assets or liabilities with plaintiff. Further,
plaintiff stated he was never a manager of Gateway Beef, nor was he included in
meetings where Brach discussed the company’s finances with its accountant and
attorney, Mark Weiss. Plaintiff further related that while he initially had checksigning authority, Brach instructed the company’s bank to remove plaintiff from
the company’s signature card in June 2004. Brach instructed plaintiff to sign
checks only when Brach expressly authorized and directed plaintiff to do so.
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Plaintiff attached a letter to his formal protest from Mark Weiss stating that as of
June 20, 2004, Brach would be the sole signer on the account (Doc. 55-5, p. 5).
The letter further stated that plaintiff was not, nor he had ever been, a manager
and implied his general lack of authority as to finances. A letter from Brach
attached to plaintiff’s protests confirmed Brach’s direction that “any checks
written on said account and signed by [plaintiff] will not be honored by your
bank” (Doc. 55-5, p. 11).
Plaintiff further attached an affidavit of himself, detailing his limited
involvement in Gateway Beef’s finances. He stated he did not have authority to
decide what bills, debts, obligations, or taxes Gateway Beef would pay. He stated
he did not know whether Gateway Beef paid its withheld payroll taxes to the
government in 2004. However, plaintiff averred that when he asked Brach about
the payment of withheld payroll taxes to the government, Brach informed plaintiff
he had a “good lawyer” looking into the issue and stated he would handle the
payroll taxes (Doc. 55-5, pp. 8-9). Plaintiff also provided Hayes with a letter from
Brach dated August 4, 2004, stating, as Brach provided all funding for Gateway
Beef, any decision “big or small” concerning the “spending of money” required
Brach’s prior approval (Doc. 55-5, p. 13). Finally, plaintiff provided Hayes with a
letter from Brach dated October 19, 2004, informing Marsha Caughron
(Caughron), Gateway Beef’s office manager, “if we receive any correspondences or
communications regarding payroll liabilities [of Gateway Beef], pass the
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correspondence and refer any communications to [Mark Weiss]” (Doc. 55-5, p.
16).
On May 9, 2007, despite plaintiff’s protest and the documents he provided,
Hayes reiterated her conclusion that plaintiff was “the sole party in control of the
bank account and any decisions are reflected in all cancelled checks during his
occupancy in the business” (Doc. 55-4, p. 42).
Hayes additionally cites the
Saturday telephone conversation she had with plaintiff on December 17, 2005.
Hayes stated plaintiff indicated he was “an employee, member and manager of the
now defunct LLC.”
Further, Hayes stated plaintiff informed her he “invested
approximately 50K in the business and he bought and sold cattle for the business.
In addition, [plaintiff] further state[d] he directed and authorized payment of bills,
opened and closed bank accounts, co-signed loans authorized or signed payroll
checks, and transmitted, reviewed and or signed payroll returns” (Doc. 55-4, p.
42). 6
However, as related above, Hayes’ notes from the Saturday phone
conversation with plaintiff on December 17, 2005, simply state that plaintiff listed
the “known officers” of Gateway Beef as plaintiff- member, Brach- president, and
The Court presumes Hayes’ findings at least in part reply on corporate authorization resolutions
of Gateway Beef (Doc. 84-4). However, the corporate authorizations generally authorize plaintiff,
Alexander Tarpoff, and Sam Brach to open accounts, endorse checks, and engage in other limited
financial transactions. It is unclear on what basis Hayes’ specific statements rely, especially in light
of the evidence presented at trial. At trial, plaintiff specifically denied making these comments to
Hayes. Regarding the phone conversation to which Hayes refers, plaintiff states he told Hayes that
he was merely an employee of Gateway Beef and only had the authority to sign checks. Further,
plaintiff stated he gave Hayes Brach’s contact information and told her to contact Brach
concerning the liability (Doc. 59, Trial Transcript Vol. II, pp. 150, 155-56). This information is
notably absent from Hayes’ notes. Thus, as Hayes’ comments are not supported in either the
administrative or judicial record, and are in direct contradiction to plaintiff’s repeated and
consistent statements in opposition, the Court seriously doubts their sincerity.
6
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Bill Boston (Boston)- treasurer. Importantly, her notes make no mention of the
various factors recited above.
Further, the above-cited facts are in direct
contradiction to the affidavit and documentary evidence plaintiff provided. In
support of her assessment, Hayes cites the following:
i. Banks[sic] signature card dated September 3, 2003 showing,
[plaintiff] having authority on the account with one required
signature. [Plaintiff] is the only signature as listed.
ii. Bank signature card dated September 6, 2003 listing [plaintiff]
with 2 other persons and again authorizing one signature
requirement.
iii. Banks[sic] signature card dated September 16, 2003 with
[plaintiff] signature as being the only signature on the card.
iv. Bank signature card dated October 24, 2003 with [plaintiff]
having signatory authority and requiring one signature.
v. [Plaintiff] has signed the signature card under penalty of perjury.
vi. There is no record from the Bank of Edwardsville, that
[plaintiff’s] name was removed from the signature card.
(Doc. 55-4, p. 42).
Thus, Hayes states, “[a]ll cancelled checks disclose that
beginning January 1, 2004 through June 28, 2004, only [plaintiff] signed checks
for [Gateway Beef] thus making decision[sic] on who and what to pay. The liability
in question are payroll taxes for the quarter ending March 321[sic], 2004 and
June 30, 2004 of which [plaintiff] was in power to operate the business and make
financial decisions relating to the business” (Doc. 55-4, p. 42).
The government and plaintiff generally agree that Hayes’ decision of May 9,
2007, and the IRS’s position as of the relevant date, November 1, 2007, are based
on the same evidence. However, plaintiff additionally states that upon his appeal
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of Hayes’ determination on September 6, 2007, he submitted copies of Gateway
Beef’s articles of organization to IRS settlement officer Randy J. Allen (Doc. 55-7).
Plaintiff argues the articles of organization demonstrate that plaintiff was not a
manager of Gateway Beef. While plaintiff signed the articles in his capacity as an
organizer, the articles state that Gateway Beef is not member-managed. Further,
the articles list the managers of Gateway Beef as Gateway Beef Cooperative and
Brach’s Glatt Meat Markets. Thus, in addition to the evidence Hayes lists as
demonstrating plaintiff’s status as a responsible person for the tax liability,
plaintiff argues the government’s position of November 1, 2007, was also
determined in contradiction to Gateway Beef’s articles of organization.
Upon receiving notice of the denial of plaintiff’s appeal, plaintiff made a
formal offer in compromise in the amount of $14,217.60 on December 3, 2007.
The IRS rejected plaintiff’s offer on September 11, 2008, stating, “[w]e are
upholding the Trust Fund Recovery Penalty assessment as previously determined
by the Area Director” (Doc. 83-7).
Finally, on November 25, 2008, plaintiff filed a Form 843 Claim for Refund
and Request for Abatement on each of the quarterly taxes assessed against him.
In support, plaintiff attached affidavits from himself and Caughron. Caughron
stated that she was the officer manager of Gateway Beef from November 2001
until December 2004. 7 Caughron’s affidavit of June 26, 2008, stated that as
7
Caughron initially began her employment with Gateway Beef, Inc, Gateway Beef Cooperative’s
holding company. She began working for Gateway Beef around June of 2004. The government
believes that Caughron’s statements are not relevant to the liability in question, as her employment
at Gateway Beef did not begin until near the end of the default periods in question. However, the
Court finds that Caughron’s knowledge as to plaintiff’s general inability to control the finances of
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officer manager, she handled the day to day office operations at Gateway Beef and
reported to Boston and Brach. Generally, Caughron explained that plaintiff was
merely an employee of Gateway Beef with no ownership interest in the business.
Further, she related that as head cattle buyer for Gateway Beef, plaintiff spent
ninety percent of his time traveling. According to Caughron, plaintiff did not have
decision making authority regarding what bills Gateway Beef would pay.
Importantly, Caughron related that Brach controlled Gateway Beef’s
finances and made all decisions regarding what invoices or bills would be paid. In
regards to plaintiff’s check-signing authority, Caughron related that she would
prepare all checks on behalf of Gateway Beef, and would then send those checks
with supporting documentation to Brach in New York for his approval; plaintiff
only reviewed and signed checks that Brach or Brach’s son had previously
approved. Thus, Caughron stated that plaintiff “did not have authority to issue
payments or sign checks on behalf of [Gateway Beef] without Brach’s express
authority to make a specific payment or sign a particular check.”
As to the tax liability in question, Caughron stated she received notices
from the IRS regarding unpaid payroll taxes in her role as officer manager. She
notified Brach of the IRS notices and forwarded the notices to Brach at his
business address in New York. Further, Brach told Caughron that he had decided
that neither Brach nor Gateway Beef would pay the payroll taxes. Finally,
Gateway Beef as of June 2004 is relevant to his general inability to control Gateway Beef’s finances
prior to June 2004, as plaintiff’s affidavit concerning his lack of authority is consistent with
Caughron’s. Further, evidence presented at trial demonstrated that Kathy Kircher, the previous
bookkeeper, had the same duties as Caughron.
Page 19 of 36
Caughron stated plaintiff did not have the authority to decide whether Gateway
Beef would pay payroll taxes, he was not a part of Gateway Beef’s decision making
structure, and he did not sit on Gateway Beef’s board of directors (Doc. 83-8. pp.
25-28). The IRS denied plaintiff’s Form 843 request on February 3, 2009, forcing
plaintiff to file the underlying judicial action in this Court.
In light of the above, the Court finds the government has not met its burden
of demonstrating its administrative position was substantially justified. As to
Hayes’ decision of May 9, 2007, in her own words, she initially assessed sole
liability against plaintiff based entirely on his check-signing authority. Thus,
Hayes’ determination that check-signing authority equated financial control
constituted an improper analytical leap, as it was unsupported by the record
before her. See United States v. Bisbee, 245 F.3d 1001, 1008 (8th Cir. 2001)
(IRS’s position that a corporate officer was a responsible person solely because of
his title and status was not reasonable under § 7430. Officer’s ability to cause
check to be issued did not equate the authority to do, especially given that the IRS
possessed evidence indicating that the officer had no authority to pay taxes).
The government instantly argues that Hayes made her initial assessment
due to plaintiff’s status as a signatory on Gateway Beef’s bank accounts, his
investment of $50,000.00 in Gateway Beef, his direct payment of bills, his opening
and closing of bank accounts, his co-signature on loans, and his authorization or
signature on payroll checks. The Court notes that the government is correct that
Hayes cites these general facts in rebuttal to plaintiff’s protest. However, Hayes
Page 20 of 36
does not indicate a credible basis on which these statements rely, nor has the
government instantly demonstrated such a basis existed, especially in light of the
credible
evidence
plaintiff
submitted
in
protest
to
Hayes’
assessment
demonstrating his general inability to control Gateway Beef’s finances. Cf. Jean,
396 F.3d at 456-57 (upholding district court’s denial of fees under § 7430, as on
the relevant administrative date and at the onset of litigation the government
possessed evidence of plaintiff’s authority to disburse funds and it did not
possess reliable evidence of plaintiff’s lack of authority to decide which creditors
to pay). Moreover, Hayes’ initial assessment and the government’s instant
argument fail to point to any evidence of plaintiff’s “willfulness” on which the
government’s administrative position relied.
Thus, while Hayes’ interview led to somewhat contradictory information
concerning plaintiff’s involvement in Gateway Beef, for example, the statements of
his brother 8 and various vague references to plaintiff’s status as an “officer,” it is
clear that Hayes based her finding of sole responsibility on plaintiff’s status as a
signatory on Gateway Beef’s bank accounts. Thus, while it is undisputed that
plaintiff had check-signing authority, Hayes did not possess evidence concerning
plaintiff’s authority to control Gateway Beef’s finances.
Hayes clearly did not
diligently investigate the context of plaintiff’s check-signing ability, in light of the
8
To provide context to the comments of plaintiff’s brother, evidence presented at trial
demonstrated plaintiff’s family owned Tarpoff Packing Company which closed in 2001. Shortly
after its closing, plaintiff’s family rented out their packing facility to Gateway Beef Cooperative,
which then formed Gateway Beef with Brach’s Glatt Meat Market in 2003. Thus, plaintiff’s brother
was referring to a distinct and separate entity from Gateway Beef.
Page 21 of 36
credible evidence plaintiff provided Hayes demonstrating his lack of financial
control over Gateway Beef.
Moreover, while the Court concedes that more than one person can be
deemed “responsible” under 28 U.S.C. § 6672, Jefferson, 546 F.3d at 481, Hayes
deemed plaintiff the “sole” person responsible for the tax liability; a finding clearly
not consistent with Hayes’ investigation and plaintiff’s affidavit and letters sent in
protest to Hayes’ initial assessment. From the beginning of the administrative
investigation, it was clearly indicated that Brach was responsible for the tax
liability (See Doc. 55-4, p. 6) (statement of Michelle Weiss on October 12, 2004,
informing the agent that, “Sam Brock[sic] is the person whom handles the taxes
and he is hospitalized.”). It was further indicated that Boston had considerable
control over Gateway Beef’s finances. However, the IRS refused to investigate the
liability of either Brach or Boston. Thus, while it was obviously more convenient
for the IRS to assess sole liability against plaintiff, due to his locality and
willingness to communicate, the Court cannot hold that Hayes’ initial assessment
of sole liability against plaintiff was reasonable, in light of the considerable
evidence of his inability to control Gateway Beef’s finances.
As to the IRS’s position of November 1, 2007, in addition to the evidence
indicated above, the government possessed Gateway Beef’s articles of organization
which clearly demonstrate plaintiff was not a manager of Gateway Beef. Once
Hayes made an assessment of liability against plaintiff, it was his burden to prove
that he was not a person responsible and did not meet the willfulness
Page 22 of 36
requirement. Kim, 111 F.3d at 1357.
2007,
plaintiff’s
check-signing
As referenced above, as of November 1,
authority
represented
the
extent
of
the
government’s credible proof demonstrating his status as a “responsible person.”
Therefore, the government possessed minimal evidence of plaintiff’s status as a
“responsible person” and no evidence of his “willfulness.”
“The Commissioner cannot have a reasonable basis in both fact and law if it
does not diligently investigate a case.” Nicholson v. Comm’r, 60 F.3d 1020, 1029
(3rd Cir. 1995) (quoting Powers v. Comm’r Internal Revenue, 100 T.C. 457, 473,
1993 WL 175413 (1993) (quotations omitted)); see also United States v.
Estridge, 797 F.2d 1454, 1458 (8th Cir. 1986) (affirming award for litigation
costs granted where Commissioner did not diligently investigate). Plaintiff
submitted credible and relevant evidence in rebuttal of the IRS’s initial
assessment of liability. Thus, the government’s refusal to investigate the liability
of parties who indisputably possessed sufficient control over the finances of
Gateway Beef and acted “willfully” in not paying the taxes at issue was not
reasonable. Moreover, the IRS’s position became even more unreasonable in light
of the articles of organization plaintiff provided, in addition to Caughron’s credible
and relevant affidavit, offering specific, unbiased evidence in contradiction to the
government’s assessment of liability. Thus, the Court finds the government has
not met its burden of demonstrating its administrative position was substantially
justified.
Page 23 of 36
B. Judicial Position not “Substantially Justified”
As to the government’s judicial position, the government answered
plaintiff’s complaint on August 10, 2009, additionally asserting a counterclaim for
the unpaid balance of the disputed liability (Doc. 9). Despite the above referenced
evidence, the government maintained its position that plaintiff was liable for the
tax liability pursuant to 26 U.S.C. § 6672. Thus, for the reasons set forth above,
the Court holds the government was not substantially justified in maintaining its
assessment of liability against plaintiff.
Further, in addition to the above cited evidence, as of December 2010,
Boston had additionally informed the government that plaintiff was, “only the
registered agent and an employee of [Gateway Beef] and that it was not [plaintiff’s]
responsibility to pay [Gateway Beef’s] taxes.” Further, Boston informed the
government that he was aware that plaintiff “physically signed checks” but that he
only did so under Brach’s supervision and control, as Brach had “total control of
[Gateway Beef] and [Brach] had to control every check that was signed or payment
that was made.” Finally, Boston stated that he, “told the Government Attorneys
that [Brach] was the person responsible for paying [Gateway Beef’s] taxes and that
he did not understand “why the United States decided to pursue [plaintiff]
because it clearly was [Brach’s], not [plaintiff’s], responsibility to pay [Gateway
Beef’s] payroll taxes” (Doc. 55-8). 9 Thus, the government continued to pursue the
In regards to Boston’s sworn affidavit (Doc. 55-8), the government attaches an affidavit of Andrea
Kafka, one of the trial attorneys assigned to the underlying dispute. Kafka states she interviewed
Boston in December 2010. She further states he “confirmed” the government’s “theory and facts”
of the case and desired not to testify at trial (Doc. 84-9). Thus, the government disputes the
9
Page 24 of 36
instant judicial action against plaintiff, despite ample credible evidence of
plaintiff’s inability to control the finances of Gateway Beef.
Further, as to the specific evidence presented at trial, as the government
engaged in limited pre-trial discovery, its trial position substantially mirrored its
administrative position, varying in one relevant aspect; the government possessed
even more credible evidence of plaintiff’s lack of financial control over Gateway
Beef. The government instantly cites to numerous trial exhibits and testimony in
support of the substantial justification of its trial position. However, the Court
finds the government again mischaracterizes the evidence.
Relevantly, plaintiff testified at length as to how he came to be an employee
at Gateway Beef. Plaintiff worked at his family-owned meat packing company,
Tarpoff Packing Company, until its closing in 2001. Upon its closing, plaintiff
rented the facility to Gateway Beef Cooperative, an organization of farmers and
ranchers for which Boston served as treasurer. Gateway Beef Cooperative formed
an operating company, Gateway Beef, Inc. Plaintiff held the title of vice-president
of Gateway Beef, Inc. Gateway Beef Cooperative and Gateway Beef, Inc.,
maintained the same board of directors. Plaintiff was not a board member,
although he did attend board meetings. As a condition to plaintiff’s employment
with Gateway Beef, Inc., plaintiff stated he would have no responsibilities as to the
company’s finances, due to his strenuous travel schedule as a cattle buyer.
sincerity of Boston’s sworn affidavit specifically detailing information he provided the government
in December 2010. In considering the statements of both affidavits, the Court finds Boston’s
specific, detailed recollection of his conversation with the government is more credible and
relevant to the instant dispute than the general statements of trial counsel, especially in light of the
evidence presented at trial that generally corroborated Boston’s statements.
Page 25 of 36
Plaintiff became acquainted with Brach in 2003, as Gateway Beef. Inc., and
Gateway Beef Cooperative sold kosher beef to Brach that he would sell in his New
York grocery stores. Brach was interested in obtaining more kosher beef for his
stores and Gateway Beef Cooperative and Gateway Beef, Inc., were interested in
obtaining an outlet for their beef that was not subject to the “big packer pricing.”
Thus, the board and Brach, without plaintiff’s input, determined it would form
Gateway Beef, the LLC instantly at issue. Brach provided all the funding for
Gateway Beef; thus, every financial decision required his pre-approval.
As to plaintiff’s role in Gateway Beef’s formation, due to his familiarity with
the parties involved and his locality, he signed the articles of organization as
“organizer,” as he was not to be a member, manager, or officer of Gateway Beef.
Further, the parties agreed plaintiff should have check-signing authority again due
to his locality and familiarity with the parties involved. Upon Gateway Beef’s
formation, plaintiff was exclusively an employee of Gateway Beef and was no
longer an employee of Gateway Beef, Inc. Plaintiff again stated that as a condition
of his employment, he would have no involvement with the finances of Gateway
Beef. Thus, plaintiff provided the context through which the Court must evaluate
whether the government’s trial position was substantially justified.
Regarding plaintiff’s responsible person status, the government argues it
presented evidence of plaintiff’s status as an officer, his ability to hire and fire
employees, his investment of $50,000.00, and his general ability to direct the
payment of creditors, as evidenced through his check-signing authority.
Page 26 of 36
As to
plaintiff’s status as an officer or general decision maker, the government contends
that plaintiff “attended meetings of the Board of Directors” and “held himself out”
to be “Secretary” of the company, or “Manager or Member” of the company. As to
plaintiff’s
attendance
of
board
meetings,
the
government
blatantly
mischaracterizes plaintiff’s testimony. Plaintiff acknowledged that the board of
directors authorized the corporate authorization resolutions that authorized his
check-signing authority at board meetings. However, plaintiff specifically denied
he ever attended board member or shareholder meetings of Gateway Beef (Doc.
59, Trial Transcript Vol. II, p. 65). Regarding plaintiff’s status as an officer, the
government’s only evidence consisted of corporate authorization resolutions
signed by plaintiff which bear the pre-printed titles of “Secretary” or “Member or
Designated Manager” next to his name (Doc. 84-4). Plaintiff, Caughron, and
Boston
(through
his
affidavit)
all
stated
that
plaintiff
was
merely
an
employee/agent of Gateway Beef; he was not a member, manager, or officer.
As to plaintiff’s ability to hire and fire employees, plaintiff testified that he
hired employees at Gateway Beef, Inc. However, upon the formation of Gateway
Beef,
plaintiff
no
longer
possessed
this
authority.
He
could
make
recommendations as to hiring. However, every hiring decision required Brach’s
approval. As to firing, plaintiff similarly explained that he would merely carry out
Brach’s decisions (See Doc. 59, Trial Transcript Vol. II, pp. 118, 140-14).
The government also contends plaintiff invested $50,000.00 in Gateway
Beef. Plaintiff testified that in May 2004, while attending a cattle sale that plaintiff
Page 27 of 36
frequented weekly, an owner confronted plaintiff and informed him a check
plaintiff had signed had bounced. Plaintiff explained that cattle owners require
payment within 48 hours. Plaintiff further explained the importance of honesty
and trust in the cattle industry. Thus, plaintiff immediately called Brach, as he
provided all of the financing for Gateway Beef. As plaintiff was not able to reach
Brach, he called numerous other individuals with authority over the finances of
Gateway Beef; namely, Boston and Rob Meyer (Meyer), the president of Gateway
Beef Cooperative. After speaking with Meyer over multiple phone conversations,
Meyer explained it would be impossible to get plaintiff the money that same day,
but that he would get plaintiff the money by the following week.
Thus, in order to save plaintiff’s personal reputation, he provided the cattle
owner with a personal note. Plaintiff personally submitted a form for
reimbursement to Brach. However, after Brach’s repeated refusal to honor
plaintiff’s request, plaintiff was forced to refinance his home. Plaintiff testified that
he never intended the money as a capital contribution (Doc. 59, Trial Transcript
Vol. II, pp. 95-99). Thus, although it was the government’s theory that plaintiff
made a capital contribution to Gateway Beef, it did not offer evidence of such
intent.
Finally, the crux of the government’s argument relies on plaintiff’s checksigning authority. Plaintiff has never denied his ability to sign checks for Gateway
Beef. Moreover, it is undeniable that plaintiff signed over 1,700 checks during his
employment at Gateway Beef. However, plaintiff’s authority to sign checks must
Page 28 of 36
be viewed in context. See Jefferson, 546 F.3d at 480-81. The government relies
on plaintiff’s signature on the above mentioned checks, his status as a signatory
on Gateway Beef’s bank accounts, and the corporate authorization resolutions
which additionally endowed plaintiff with check-signing authority, as evidencing
plaintiff’s ability to direct the finances of Gateway Beef. Relevantly, two of the
three corporate authorization resolutions authorize plaintiff, plaintiff’s father, and
Brach to open accounts, endorse checks, withdraw funds, and enter agreements
for financial products on behalf of Gateway Beef; one resolution authorizes only
plaintiff (Doc. 84-4).
Plaintiff testified at length concerning the context in which he exercised is
check-signing authority. He would only sign checks that Caughron or the previous
bookkeeper, Kathy Kirker (Kirker), had previously printed and sent to New York
for Brach’s approval. Upon plaintiff’s receipt of the approved checks from Brach,
he would merely glance at the pre-approved check to make sure the bill and the
amount of the check coincided. The only instance in which plaintiff would hand
write checks was when plaintiff went to cattle auctions. In that instance, Brach
had given plaintiff the general authority to write checks for cattle without preapproval; a necessity given the nature of an auction (Doc. 59, Trial Transcript Vol.
II, pp. 93-95). 10 Thus, plaintiff did not have the authority to make decisions as to
10
The Court again feels it necessary to reiterate that although Caughron was not employed at
Gateway Beef until around June 2004, plaintiff testified that Caughron and Kirker maintained the
same duties concerning computation of the tax liability in question and the general procedure for
sending checks to New York for Brach’s pre-approval.
Page 29 of 36
what bills to pay. Caughron similarly testified that plaintiff had nothing to do with
payables.
The government further contends it presented evidence that plaintiff had
the authority to refuse to sign checks. Plaintiff testified he did not recall ever
refusing to sign a check. He suggested that he probably could have refused, but he
was merely speculating (See Doc. 59, Trial Transcript Vol. II, pp. 202-203). Thus,
the government’s trial position, much like its administrative position, rested on
plaintiff’s check-signing authority. When viewed in context, plaintiff’s checksigning authority was merely that; the ability to sign a pre-approved check. Brach
clearly did not authorize plaintiff to decide what creditors to pay. As evidenced by
the testimony of plaintiff and Caughron, the correspondence of Mark Weiss and
Brach, and Boston’s affidavit, plaintiff was not authorized to prioritize which
creditors should receive payment. Jefferson, 546 F.3d at 481. Thus, the
government’s position at trial that plaintiff was a “responsible person” was not
substantially justified. See Barton v. United States, 988 F.2d 58, 59 (8th Cir.
1993) (remanding district court’s denial of fees under § 7430, as the district court
did not even mention that from the onset of the litigation the government had no
evidence refuting plaintiff’s clear showing that he lacked significant authority in
matters related to federal tax payments and further noting, “[a] person’s technical
authority to sign checks and duty to prepare tax returns are not enough to make
the person responsible under § 6672”) (citation omitted).
Page 30 of 36
The Court finds the government has not met its burden of demonstrating
its position at trial that plaintiff was a “responsible person” was not substantially
justified. Thus, it is unnecessary to discuss the government’s evidence of his
“willfulness.” However, the for sake of completeness, the Court also finds the
government was not substantially justified in its trial position that plaintiff acted
willfully as to the tax liability. As to plaintiff’s knowledge, the government argues
that as he signed the majority of the payroll checks for the periods in question, he
knew the withholding taxes were not being paid, especially in light of the fact
plaintiff had previously paid withholding taxes through his ownership of Tarpoff
Packing Company. Thus, the government argues it presented evidence of
plaintiff’s direct knowledge.
Plaintiff signed checks for delinquent withholding taxes in 2004, and IRS
transcripts show that delinquent 2003 taxes were paid in 2004. However, plaintiff
testified that he had no knowledge as of June 2004 whether Gateway Beef had
paid its payroll taxes for the periods in question. Plaintiff stated he developed
fears that Brach had not paid the taxes sometime at the end of 2004, but at that
time plaintiff was in the employ of a different company (Doc. 59, Trial Transcript
Vol. II, p. 121-22). Caughron testified that the IRS notices were sent to her, as she
was the bookkeeper and computed the tax liability in question subject to Boston’s
approval. Caughron would then immediately send them on to Brach. Plaintiff
testified
that
Kirker
and
Caughron
maintained
responsibilities as Gateway Beef’s bookkeepers.
Page 31 of 36
the
same
duties
and
Thus, plaintiff never received
notice of the liability in question. Plaintiff’s general awareness of an employee’s
duty to pay withholding taxes does not equate actual knowledge of Gateway Beef’s
failure to pay.
As to reckless disregard, the government argues that plaintiff’s signing of so
many checks, including payroll checks, without ensuring that payroll taxes were
being paid, demonstrates that he clearly ought to have known that withholding
taxes were not being paid. In support, the government cites plaintiff’s general
awareness of Gateway Beef’s financial difficulties and his ability to find out very
easily whether the taxes were being paid. See Wright, 809 F.2d at 428.
Plaintiff had check-signing authority and was a signatory on the bank
accounts. Thus, his position did not encompass a right to look at the company’s
books, and it is unclear how easily it would have been for plaintiff to find out
whether the taxes were being paid. During the relevant time periods, plaintiff was
not aware of Gateway Beef’s history of failing to pay withholding taxes and there
was little evidence that plaintiff knew the company was losing money. Plaintiff was
aware of only one check’s return and in the beginning of his employ projected that
the company may lose money for a period of time. Thus, the government’s
position that plaintiff recklessly disregarded a known risk that trust fund taxes
were not being paid was not substantially justified.
Finally, the government contends it presented evidence of plaintiff’s
willfulness, as he used “unencumbered funds” to pay creditors other than the
United States. If a responsible person learns that withholding taxes were not paid
Page 32 of 36
in past quarters when he was also responsible, he is under a duty to use all
unencumbered funds available to the corporation to pay the taxes. Kim, 111 F.3d
at 1157 (citing Garsky v. United States, 600 F.2d 86, 91 (7th Cir. 1979)).
However, this case was not about unencumbered funds, as plaintiff did not learn
about the unpaid taxes until after Gateway Beef had closed and he had left.
Thus, the government has not met its burden of demonstrating that its
judicial position was substantially justified. From the onset of the instant judicial
proceedings, the government possessed ample, credible evidence of plaintiff’s
inability to control the finances of Gateway Beef. See Sharp v. United States, 145
F.3d 994, 996 (8th Cir. 1998) (holding that the government’s position was not
substantially justified because “[n]ot only [was] it clear that [the taxpayer] did not
have authority to pay the withholding taxes, it [was] also clear from the record
that the government was aware of the limitations on [the taxpayer’s] authority
before it filed its counterclaim”). Further, the evidence presented at trial merely
supported plaintiff’s repeated contentions concerning his lack of authority. Thus,
the government has not demonstrated that its position at any stage of the
underlying judicial proceeding was substantially justified.
C. Proper Amount of Award Under 26 U.S.C. § 7430
As the Court has determined that neither the government’s administrative
nor its judicial position was substantially justified, it must now determine the
proper amount to award plaintiff pursuant to Section 7430. Plaintiff seeks
attorney’s fees and costs in the amount of $51,526.67; reflecting fees above
Page 33 of 36
Section 7430’s statutory, incurred from March 21, 2007 through June 7, 2011.
Alternatively plaintiff seeks an award of $23,756.97, should the Court find
“special factors” do not exist warranting an award above the statutory rate.
An award under Section 7430 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, Section
7430 substantially limits the amount of administrative costs recoverable to
include “only costs incurred on or after” the earlier of:
(i) the date of the receipt by the taxpayer of the notice of the decision
of the Internal Revenue Service Office of Appeals; (ii) the date of the
notice of deficiency; or (iii) the date on which the first letter of
proposed deficiency which allows the taxpayer an opportunity for
administrative review in the Internal Revenue Service Office of
Appeals is sent.
26 U.S.C, § 7430(c)(2)(B).
Further, litigation costs may not be recovered as
administrative costs “because they are not incurred in connection with an
administrative proceeding.” TREAS. REG. § 301.7430-4(c)(3).
Litigation costs
include only “[c]osts incurred after the . . . commencement of any . . . court
proceeding.” TREAS. REG. § 301.7430-4(c)(3)(ii), (c)(4) Ex. 2. Thus, as plaintiff
received notice of the IRS’s decision to deny his appeal on November 12, 2007, he
may only receive an award of costs and fees incurred as of this date forward.
As to the amount of attorney’s fees recoverable, Section 7430 holds, “such
fees shall not be in excess of $125 per hour unless the court determines that a
special factor, such as the limited availability of qualified attorneys for such
Page 34 of 36
proceeding, the difficulty of the issues presented in the case, or the local
availability of tax expertise, justifies such a higher rate.” However, the rate of
$125 per hour, “shall be increased by an amount equal to such dollar amount
multiplied by the costs-of-living adjustment [COLA] determined under section
1(f)(3) for such calendar year, by substituting ‘calendar year 1995’ for ‘calendar
year 1992’ in subparagraph (B) thereof.” 26 U.S.C. § 7430(c)(1)(B)(iii).
Plaintiff argues that special factors warrant an award above the statutory
cap, as plaintiff’s undersigned counsel previously represented plaintiff in a similar
matter where a creditor of Gateway Beef unsuccessfully attempted recovery
against him. Plaintiff states the creditor voluntarily ceased its attempts at
recovery, as it determined plaintiff was not the party responsible for the debt.
Thus, plaintiff states his counsel acquired specialized knowledge of Gateway Beef
and the meat packing industry in general which entitle him to reimbursement
above the statutory rate. The Court finds plaintiff’s counsel’s previously-developed
familiarity with plaintiff and his business do not qualify as the type of special
factor contemplated under Section 7430. Thus, plaintiff’s recovery is limited to
the statutory rate.
Pursuant to § 7430(c)(1)(B)(iii), the IRS annually applies the COLA required
of the base hourly rate, and publishes the calendar-year hourly attorneys’ fee rate
in a revenue procedure. The allowable rates for legal fees incurred in 2007, 2008,
2009, 2010, and 2011 are as follows:
Year Allowable Fee
2007 $ 170 per hour
Revenue Procedure
Rev. Proc. 2006-53, 2006-48 I.R.B. 996
Page 35 of 36
2008
2009
2010
2011
$
$
$
$
170
180
180
180
per
per
per
per
hour
hour
hour
hour
Rev. Proc. 2007-66, 2007-45
Rev. Proc. 2008-66, 2008-45
Rev. Proc. 2009-50, 2009-45
Rev. Proc. 2010-40, 2010-46
I.R.B. 970
I.R.B.1107
I.R.B. 617
I.R.B. 663
See id. Plaintiff has provided the Court with invoices and summaries of his
requested fees (Doc. 55-1, 55-2; Doc. 83-9, 83-10). Upon careful review of the
documentation provided, the Court finds the fees and costs plaintiff seeks from
November 12, 2011 through March 25, 2011 are reasonable. 11 Thus, the Court
awards plaintiff attorney’s fees in the amount of $14,389.00 and costs in the
amount of $2,712.36; a total award of $17,101.36.
V.
CONCLUSION
For the above stated reasons, the Court GRANTS in part plaintiff’s motion
to award fees and costs (Docs. 55, 83). Thus, the Court awards plaintiff fees and
costs in the amount of $17,101.36.
IT IS SO ORDERED.
Signed this 19th day of June, 2012.
Digitally signed by
David R. Herndon
Date: 2012.06.19
15:15:23 -05'00'
Chief Judge
United States District Judge
11
The Court notes that plaintiff’s supplemented motion additionally seeks attorney’s fees incurred
from April 8, 2011 through June 7, 2011 (Doc. 83-10). However, plaintiff has not provided
documentation of such fees. Thus, as the Court cannot determine whether such fees are
reasonable, it cannot include the requested fees in its award.
Page 36 of 36
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