Carriker v. Commissioner of the Internal Revenue Service et al
ORDER granting in part and denying in part 7 Motion to Dismiss. Signed by District Judge Robert J. Conrad, Jr on 2/5/2015. (Pro se litigant served by US Mail.)(eef)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NORTH CAROLINA
PHILLIP DUANE CARRIKER,
UNITED STATES DEPARTMENT OF THE )
COMMISSIONER OF THE INTERNAL
REVENUE SERVICE, AND
UNITED STATES OF AMERICA
THIS MATTER comes before the Court on Defendants’ Motion to Dismiss in part,
(Doc. No. 7); Plaintiff’s Response, (Doc. No. 9); the Magistrate Judge’s Memorandum and
Recommendation (M&R), (Doc. No. 10); and Defendant’s Objections, (Doc. No. 11).1
According to the Complaint, Plaintiff served on the board of directors of a non-profit
medical clinic. (Doc. No. 1 at 1-2). After the executive director failed to pay payroll taxes for
employees of the organization, Defendant Internal Revenue Service (IRS) assessed penalties
against Plaintiff. (Id. at 2-3). Plaintiff appealed through the IRS administrative process, resulting
in a reduction of the amount of penalty. (Id. at 4-5).
This action followed in which Plaintiff seeks: (1) abatement of the penalties; (2) return of
funds held by the IRS; (3) reimbursement, pursuant to 26 U.S.C. § 7430, of (a) legal fees related
Plaintiff has not responded to the objections, and the time for doing so has expired. Fed. R. Civ.
to the IRS administrative appeal; (b) legal fees related to defending his license before the North
Carolina CPA Licensing Board; and (c) legal fees and expenses for the instant action; (4) interest
on funds held by the IRS and reimbursable fees; and (5) payment of hourly fees, pursuant to §
7430, for Plaintiff’s own efforts in the matter. (Id. at 5-6). Defendants answered by filing the
instant Motion to Dismiss conceding the merits of the case but disputing some of the fees sought
by Plaintiff. Specifically, remaining in dispute are Plaintiff’s claims (3)(b) for legal fees incurred
during proceedings before the North Carolina licensing board; (3)(c) for costs of this judicial
proceeding; and (5) for fees for his own efforts. (Doc. No. 7: Motion at 7).
After Plaintiff responded to the motion, the Magistrate Judge found that Defendants’
motion was premature as the case involved unusual circumstances and recommended that
discovery proceed on all fee claims without prejudice to Defendants to re-file a motion to
dismiss at a later date. (Doc. No. 10: M&R at 3). This Court finds, after a de novo review of the
record as detailed below, that Plaintiff’s claims (3)(b) for legal fees incurred during proceedings
before the North Carolina licensing board and (5) for fees for his own efforts may not be
awarded under 26 U.S.C. § 7430; therefore, Defendants’ Motion to Dismiss will be granted as to
those claims, but denied as to claim (3)(c) for costs of this judicial proceeding.
STANDARD OF REVIEW
A district court may assign dispositive pretrial matters, including motions to dismiss, to a
magistrate judge for “proposed findings of fact and recommendations.” 28 U.S.C. §
636(b)(1)(A) and (B). The Federal Magistrate Act provides that “a district court shall make a de
novo determination of those portions of the report or specific proposed findings or
recommendations to which objection is made.” Id. at § 636(b)(1)(C); Fed. R. Civ. P. 72(b)(3);
Camby v. Davis, 718 F.2d 198, 200 (4th Cir. 1983).
Defendants’ motion does not identify a statutory or procedural basis for dismissal, but
sounds most like the assertion of a defense under Fed. R. Civ. P. 12(b)(6) for failure to state a
claim upon which relief can be granted. Defendants do not dispute the facts underlying
Plaintiff’s claims for fees which remain in dispute, and the parties agree that 26 U.S.C. § 7430
governs the award of any fees for this type of case. (Doc. No. 1: Complaint at 6; Doc. No. 7:
Motion at 7). Thus, the resolution of Defendants’ Motion to Dismiss is purely a question of law.
Fees for North Carolina Board Proceeding
Plaintiff alleges he was forced to defend his CPA license before the state board because
of the manner in which the IRS handled the administrative stage; thus, he is entitled to
reimbursement for legal fees associated with that action. (Doc. No. 9: Response at 3). Section
7430(a) provides that the prevailing party may be awarded 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 … penalty under this title …” Based on the facts
alleged by Plaintiff, the proceeding before the state board was not an administrative or court
proceeding brought by or against the United States in connection with the disputed penalty.
Therefore, no fees in that collateral matter are recoverable under § 7430 and Plaintiff’s claim
3(b) will be dismissed.
Fees for Court Proceeding
As noted above, the statute provides costs for the “prevailing party,” but it contains an
exception when the Government establishes that its position in the proceeding was “substantially
justified.” 26 U.S.C. § 7430(c)(4)(B)(i). Citing Grant v. Comm’r, 103 F.3d 948 (11th Cir. 1996)
and Huffman v. Comm’r, 978 F.2d 1139 (9th Cir. 1992), the Government argues that its
concession of the merits of Plaintiff’s penalty dispute was substantially justified, barring his
claim 3(c) for payment of costs for this court proceeding. (Doc. No. 11: Motion at 4).
In Grant and Huffman, the circuit courts ruled that the reasonableness of the
Government’s positions in the administrative and judicial proceedings are considered separately
and the Government’s position in the judicial proceeding is determined at the filing of its answer.
Grant, 103 F.3d at 952; Huffman, 978 F.2d at 1146, 1148. The Ninth Circuit went on to
recognize case law holding that “if the Government concedes the petitioner’s case in its answer,
its conduct is reasonable.” Huffman, 978 F.2d at 1148 (citing Bertolino v. Comm’r, 930 F.2d
759, 761 (9th Cir. 1991)). That decision has been criticized, however, by the Fifth Circuit which
reads § 7430 to allow “tax litigants to recover the costs of a civil proceeding they never should
have been required to litigate.” Hanson v. Comm’r, 975 F.2d 1150, 1156 (5th Cir. 1992).
Instead, that appellate court considers the Government’s concession as one factor in deciding
whether its overall position was substantially justified. Id.
The Government has not shown that the Fourth Circuit has adopted the seeming per se
rule of the Ninth Circuit; rather, Bowles v. United States, 947 F.2d 91, 94 (4th Cir. 1991), directs
district courts to consider factors from the statute’s legislative history along with “all the facts
and circumstances surrounding the proceeding,” in deciding whether the Government’s position
is substantially justified. Therefore, this Court cannot conclude as a matter of law that the
Government’s concession of Plaintiff’s penalty dispute bars recovery of the costs of this court
proceeding, and the Motion to Dismiss will be denied as to claim 3(c).
Fees for Plaintiff’s Own Efforts
Finally, Plaintiff asserts that he should be compensated for the hours he worked as a
skilled tax accountant in support of the attorney he hired during the administrative proceeding
because that mitigated the amount the attorney would otherwise have billed. (Doc. No. 9:
Response at 3-4). Section 7430(c)(1)(B) includes as administrative and litigation costs the
reasonable expenses of expert witnesses and fees incurred for the services of attorneys. The
Fourth Circuit has interpreted this provision to exclude reimbursement for self-help because a
person’s own time does not “incur” any debt to pay. United States v. McPerson, 840 F.2d 244,
245 (4th Cir. 1988). Although that case involved an attorney who acted pro se in his own case,
the court opined that “this statute cannot possibly be stretched to pay the accountant” who
devotes time to his own defense. Id. Therefore, the Court will dismiss Plaintiff’s claim (5) for
fees for his own efforts in disputing the penalty.
IT IS, THEREFORE, ORDERED that the Government’s Motion to Dismiss in part,
(Doc. No. 7) is GRANTED in part and DENIED in part. Specifically, Plaintiff’s claims 3(b)
for fees for the state board proceeding and (5) for his own efforts are DISMISSED. Plaintiff’s
claim 3(c) for costs for this court proceeding and conceded claims (1), (2), and (4) may proceed.
Signed: February 5, 2015
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