The Estate of Esther M. Hake et al v. The United States of America

Filing 54

MEMORANDUM OPINION re: 50 MOTION for Attorney Fees filed by Randy L. Hake, The Estate of Esther M. Hake, Ricky L. Hake. Accordingly, for the reasons discussed above, the plaintiffs motion for attorneys fees and costs is DENIED. Signed by Magistrate Judge Martin C. Carlson on May 1, 2017. (kjn)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
THE ESTATE OF ESTHER M. HAKE, :
RICKY L. HAKE and
:
RANDY L. HAKE, Executors,
:
:
Plaintiffs
:
:
v.
:
:
UNITED STATES OF AMERICA,
:
:
Defendant
:

Civil No. 1:15-CV-1382
(Magistrate Judge Carlson)

MEMORANDUM OPINION
I.

Factual Background

We are now called upon to write the final chapter in this litigation, and
resolve a motion filed by the plaintiffs to recover attorney’s fees and costs from the
United States. (Doc. 50.) This action was brought by two executors to their late
mother’s estate, who sued the United States on behalf of the Estate seeking
abatement and reimbursement of a penalty that was assessed after the executors
were late in filing the estate’s tax returns. The executors had filed the return on the
date that their tax attorney advised them that it was due, after the estate had been
granted extensions of both its filing and payment deadlines.

Yet, while the

executors paid the taxes that they believed were owed before payment was due and

in an amount that later proved to be more than $100,000 in excess of what was
actually owed, they unquestionably filed the estate’s return approximately six
months’ late, having been incorrectly advised by tax professionals concerning the
return deadline. For this error the Estate was assessed a late penalty in the amount
of $197,868.26, and interest of $17,202.44 was also imposed pursuant to section
6651(a)(1) of the Internal Revenue Code.
The executors pursued an administrative appeal for abatement of the penalty
on August 13, 2013. When that appeal was rejected, the executors paid the entire
balance owed for penalty and interest. The executors then took steps to secure a
refund of the penalty and interest, and exhausted their administrative remedies with
the Internal Revenue Service, all of which were unsuccessful. This litigation
followed when the executors filed a complaint on behalf of the Estate on July 15,
2015. (Doc. 1.)
The parties then filed cross-motions for summary judgment, (Docs. 23, 33.),
which we resolved in favor of the plaintiffs, finding that, given the unique and
undisputed facts of this case, as well as the developing law in this field, the
executors’ reliance upon the advice of their counsel in these particular
circumstances regarding the applicable deadlines for filing the estate’s return was
reasonable, and, therefore, the imposition of the penalties and interest was not
warranted. In reaching this conclusion, however, we noted and acknowledged that
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this legal issue was not free from doubt. Quite the contrary, we conceded that the
Government’s arguments drew substantial support from emerging case law from
other courts law in this field. We nonetheless found finds that application of
authority from the United States Court of Appeals for the Third Circuit to the
particular facts of this case compelled this outcome.
This motion for fees and costs followed. (Doc. 50.) In this motion the
Estate seeks recovery of $51,378.00 in attorney’s fees, and costs of $1,471.40, for
a total award of $52,849.40. (Id., ¶12.) The parties have fully briefed this motion.
(Docs. 51 and 53.) Accordingly, this matter is ripe for resolution.
Upon consideration on this motion, for the reasons set forth below, we find
that the Estate has not established an entitlement to fees and costs under the
controlling statute which governs such awards in federal tax litigation, 26 U.S.C.
§7430. Therefore, the motion for fees and costs will be denied.
II.

Discussion

Section 7430 of Title 26, United States Code, governs the award of costs and
fees in any action involving the United States which relates to the refund of any
tax, interest or penalty. Section 7430 provides in pertinent part that:
(a) In general.--In any administrative or court proceeding which is
brought by or against the United States in connection with the
determination, collection, or refund of any tax, interest, or penalty
under this title, the prevailing party may be awarded a judgment or
a settlement for-- (1) reasonable administrative costs incurred in
connection with such administrative proceeding within the
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Internal Revenue Service, and (2) reasonable litigation costs
incurred in connection with such court proceeding.
26 U.S.C. § 7430 (a)(1)-(2).
Since §7430 constitutes a limited waiver of sovereign immunity, allowing
for some financial recoveries against the United States, it is well-settled that: “the
traditional principle that the Government's consent to be sued ‘must be “construed
strictly in favor of the sovereign,” McMahon v. United States, 342 U.S. 25, 27 [72
S.Ct. 17, 19, 96 L.Ed. 26] (1951), and not ‘enlarge[d] ... beyond what the language
requires,” ’ Ruckelshaus v. Sierra Club, 463 U.S. 680, 685, 103 S.Ct. 3274, 3278,
77 L.Ed.2d 938 (1983) (quoting Eastern Transportation Co. v. United States, 272
U.S. 675, 686, 47 S.Ct. 289, 291, 71 L.Ed. 472 (1927)).” United States v. Nordic
Vill. Inc., 503 U.S. 30, 34, 112 S. Ct. 1011, 1014–15, 117 L. Ed. 2d 181 (1992).
See e.g Miller v. Alamo, 992 F.2d 766, 766 (8th Cir. 1993)(c0nstruing §7430); In
re Klauer, 362 B.R. 31, 35 (Bankr. M.D. Fla. 2006)(construing §7430). Adopting
this analytical perspective we note that for purposes of Section 7430, a “prevailing
party” entitled to fees and costs is defined as:
any party in any proceeding to which subsection (a) applies (other
than the United States or any creditor of the taxpayer involved)--(i)
which--(I) has substantially prevailed with respect to the amount in
controversy, or(II) has substantially prevailed with respect to the most
significant issue or set of issues presented, and (ii) which meets the
requirements of the 1st sentence of section 2412(d)(1)(B) of Title 28,
United States Code (as in effect on October 22, 1986) except to the
extent differing procedures are established by rule of court and meets
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the requirements of section 2412(d)(2)(B) of such Title 28 (as so in
effect).
26 U.S.C. § 7430 (c)(4)(A).
Thus, to be considered a prevailing party in tax litigation, a plaintiff must: First
have “substantially prevailed” in the lawsuit; and, second, must meet the
requirements of the 1st sentence of section 2412(d)(1)(B) of Title 28, United States
Code.
By engrafting the requirements of Section 2412(d)(1)(B) onto the definition
of prevailing parties, this statute substantially narrows the range of parties who
may successfully apply for attorney’s fees and costs since Section 2412(d)(1)(B)
provides that a: “ ‘party’ means (i) an individual whose net worth did not exceed
$2,000,000 at the time the civil action was filed, or (ii) any owner of an
unincorporated business, or any partnership, corporation, association, unit of local
government, or organization, the net worth of which did not exceed $7,000,000 at
the time the civil action was filed. . . .” 28 U.S.C. § 2412 (d)((1)(B). This rule has
particular and specific application to tax claims brought by estates, like the claims
made here, since: “Congress included a special rule in § 7430 that applied the net
worth requirement to estates. Section 7430(c)(4)(D) states that the $2,000,000 net
worth requirement imposed on individuals in 28 U.S.C. § 2412(d)(2)(B)(i) shall
apply to ‘an estate but shall be determined as of the date of the decedent's death.’ ”
Estate of Palumbo v. United States, 675 F.3d 234, 237 (3d Cir. 2012).
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This threshold financial definition of a party applies here, and is fatal to this
attorney’s fees motion, since it is evident that at the time of the decedent’s passing
the Estate had a net worth was greater than $2,000,000.

Indeed, the Estate

acknowledges, and it seems entirely undisputed, that the Estate was worth
$8,154,108 and reported $7,261,352 as its taxable estate on its tax return. (Docs.
35, ¶ 2, 42, ¶ 2.) Accordingly, the Estate simply does not qualify as a prevailing
party under § 7430, entitled to a fee award since it far exceeded the financial
limitations set by law for parties to obtain such fee awards from the United States.
The Estate’s motion for fees and costs fails on another score.
Pursuant to § 7430(c)(4)(B), a taxpayer shall not be treated as a
prevailing party, “ if the United States establishes that the position of
the United States in the proceeding was substantially justified.” §
7430(c)(4)(B). The term “substantially justified” means “justified to a
degree that could satisfy a reasonable person” or having a “reasonable
basis both in law and fact.” Pierce v. Underwood, 487 U.S. 552, 563–
65, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988) (defining “substantially
justified” under the Equal Access to Justice Act, 28 U.S.C. § 2412(d)).
That the United States loses or concedes an issue does not establish
that its position was not substantially justified. Underwood, 487 U.S.
at 569, 108 S.Ct. 2541. As the Supreme Court stated in Underwood,
the United States “could take a position that is substantially justified,
yet lose.” Id.
In re Klauer, 362 B.R. 31, 36 (Bankr. M.D. Fla. 2006).
Judged by these guideposts, we find that the government’s position in this
lawsuit was substantially justified, making a fees award inappropriate. As we
noted for the parties when we addressed the merits of this case, the Government’s
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position in this litigation was supported by a significant, and rising tide of case
law. In fact, we explicitly recognized that some other courts had interpreted Boyle,
the leading Supreme Court decision in this field, in the manner urged by the United
States, and on facts that were substantially similar to those presented in this case.
See, e.g., Knappe v. United States, 713 F.3d 1164 (9th Cir. 2013); West v.
Koskinen, 141 F. Supp. 3d 498 (E.D. Va. 2015). Had we been writing on a blank
slate these cases might have had great persuasive power, but we concluded that we
were constrained by the court of appeals’ decision in Estate of Thouron v. United
States, 752 F.3d 311, 314 (3d Cir. 2014) to find in favor of the Estate.
Thus, this case involved a legal dispute defined by competing case law,
including substantial case law which supported the Government’s position.
Recognizing that the term “substantially justified” means “justified to a degree that
could satisfy a reasonable person” or having a “reasonable basis both in law and
fact.” Pierce v. Underwood, 487 U.S. 552, 563–65 (1988), we find that the
Government’s position in this litigation drew substantial support from case law
construing the Supreme Court’s decision in Boyle, and, therefore, was both
“justified to a degree that could satisfy a reasonable person” and had a “reasonable
basis both in law and fact.” Id. Accordingly, an award of costs and fees is not
available or appropriate under §7430.

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In sum, understanding that §7430’s waiver of sovereign immunity must be
construed strictly in favor of the sovereign, and not enlarged beyond what the
language requires, we find that the Estate may not qualify as a prevailing party
under this statute entitled to fees and costs because: (1) it does not meet the
financial requirements for a party prescribed by Section 2412(d)(1)(B) of Title 28,
United States Code; and (2) the Government’s position in this litigation, while
ultimately unsuccessful, drew significant support from case law, and, therefore,
was justified to a degree that could satisfy a reasonable person and had a
reasonable basis both in law and fact.
III.

Order

Accordingly, for the reasons discussed above, the plaintiffs’ motion for
attorney’s fees and costs (Doc. 50.) is DENIED.
So ordered this 1st day of May, 2017.

/s/ Martin C. Carlson
Martin C. Carlson
United States Magistrate Judge

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