ESTATE OF ANTONIO J. PALUMBO DECEASED v. UNITED STATES OF AMERICA

Filing 53

MEMORANDUM AND OPINION re 42 MOTION for Attorney Fees and Costs filed by ESTATE OF ANTONIO J. PALUMBO DECEASED. Signed by Judge Arthur J. Schwab on 4/21/2011. (lmt)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
ESTATE OF ANTONIO J. PALUMBO
DECEASED PNC BANK, NATIONAL
ASSOCIATION, EXECUTOR,

10cv0760
ELECTRONICALLY FILED

Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.
MEMORANDUM OPINION
REGARDING PLAINTIFF’S MOTION
FOR ATTORNEYS’ FEES AND COSTS (DOC. NO. 42)
Before the Court is Plaintiff‘s Motion for Attorneys‘ Fees and Costs. This Motion is
predicated upon the Court‘s Opinion and Order of March 9, 2011, wherein this Court determined
that Plaintiff was entitled to a refund of the taxes that it paid on $11,721.141.00. See doc nos.
39-40.
I. FACTUAL BACKGROUND
A. Prior Procedural and Factual Background
The Estate of Antonio Palumbo and its Executor (hereinafter ―Plaintiff‖) brought this
action seeking a refund (plus accrued interest) of an alleged overpayment of federal estate taxes.
Plaintiff paid federal estate taxes on an amount – $11,721,141.00 – that was ultimately paid to
the A.J. and Sigismunda Palumbo Charitable Trust (hereinafter ―the Charitable Trust‖), a
charitable trust created by Mr. Palumbo during his lifetime. This payment was made to the
Charitable Trust under the terms of a settlement agreement negotiated (primarily) between the
Charitable Trust and Mr. Palumbo‘s son and intestate heir, although all legatees signed the
agreement.

Plaintiff‘s Complaint alleged Plaintiff was entitled to a return of the taxes paid on the
$11,721,141.00 (plus interest), claiming it constituted a charitable deduction pursuant to Section
2055 of the Internal Revenue Code (26 U.S.C. § 2055). Plaintiff filed a Motion for Summary
Judgment in this regard advancing law and authority in support of its position.
Defendant countered with its own Motion for Summary Judgment, contending that the
$11,721,141.00 amount was paid by operation of a settlement agreement, not by operation of a
residuary clause in Mr. Palumbo‘s Last Will and Testament, and therefore could not be claimed
as a charitable deduction from the Estate.
In light of these cross-motions, the sole issue before this Court was whether the sum of
$11,721,141.00 qualified as a charitable deduction under Section 2055.

This Court first, after

reviewing the legislative history to 2055 and the facts presented in the parties‘ respective
Motions for Summary Judgment, declined to narrowly construe 2055. Next, this Court
thoroughly analyzed the case law and other authority cited by both parties and determined that:
(1) that the 1999 Will was the last written iteration of Mr. Palumbo‘s intent; (2) that prior
testamentary documentation provided for a residuary estate, and that in all prior documentation,
the residuary estate was left to the Charitable Trust; (3) Mr. Palumbo‘s attorney admitted that he
made a scrivener‘s error when preparing the 1999 Will, in that he failed to include a provision
for the residuary estate; and (4) after the dispute over the residuary estate arose, arm‘s length
negotiations ensued which resulted the settlement agreement through which the Charitable Trust
received the sum of $11,721,141.00.
Based on the evidence of record, the Court further determined that: (1) there was no
evidence to indicate that the testator intended to forego a residuary clause and/or disinherit the
Charitable Trust; (2) the testator‘s attorney admitted to making a scrivener‘s error when drafting

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the 1999 Will and failing to include a residuary clause; (3) all settlement negotiations among the
legatees over the residuary estate were held at arms-length; (4) all of the legatees signed the
settlement agreement which was approved by the Orphan‘s Court, and (5) there was no evidence
of any collusion among the legatees nor any collusion on the part of their respective attorneys.
The Court also repeatedly noted that all prior testamentary instruments prepared for Mr. Palumbo
contained provisions for the residuary estate to pass to the Charitable Trust, thereby evidencing
Mr. Palumbo‘s intent to devise and bequeath his residuary estate to the Charitable Trust.
Based on all of these key facts and the applicable law, this Court found that the sum of
$11,721,141.00 should have been deducted from the gross estate as a charitable donation under
Section 2055 of the Internal Revenue Code. See this Court‘s Opinion and Order, doc. nos. 3940.
B. Factual Information Relevant to Attorney Fee Request
In light of the Court‘s Order (doc no. 40), Plaintiff now seeks an award of attorneys‘ fees
and costs as the prevailing party under Section 7430 of the Internal Revenue Code. See Motion
for Attorneys‘ Fees and Costs and Brief In Support, doc. nos. 42-43. Plaintiff timely filed its
Motion for Attorneys‘ Fees and Costs and provided factual information suggesting the precise
amounts that were incurred in costs and attorneys‘ fees stemming from litigating this matter
during the administrative proceedings held within the Internal Revenue Service (―IRS‖) as well
as the cost of litigating the matter before this Court. See doc. no. 44. Plaintiff also provided
argument suggesting that Defendant‘s position throughout the litigation was not substantially
justified, one of the many requirements that must be met in order for the Court to award
attorneys‘ fees and costs to Plaintiff.

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Defendant disputes that an award of attorneys‘ fees is proper. See Defendant‘s Brief in
Opposition to the Motion for Attorneys‘ Fees and Costs, doc. no. 45.
First, Defendant contends that attorneys‘ fees and costs should not be awarded because
the real party in interest is the Plaintiff – not the Charitable Trust – and the Plaintiff admits that
the Estate had a net worth of over $2,000,000.00, which statutorily bars it from recovery.
Defendant notes that Plaintiff attempts to circumvent this statutory bar by arguing that the
Charitable Trust, not Plaintiff, was and is the ―real party in interest‖ with respect to the issue
previously adjudicated and decided by this Court.

Defendant counters by arguing that Plaintiff,

not the Charitable Trust, is the taxpayer who incurred the tax in the first place and thus is the
entity entitled to the refund ordered by this Court, thereby rendering it (Plaintiff) the real party in
interest.
Second, Defendant contends that its position throughout this litigation was substantially
justified and because Defendant was substantially justified, Plaintiff (and/or the Charitable Trust)
is statutorily barred from recovering attorneys‘ fees and costs.
The final argument advanced by Defendant is that Plaintiff failed to submit any evidence:
(1) substantiating the work actually performed by its attorneys, and/or (2) supporting its claims
for fees in excess of the statutory cap on the hourly rate of attorneys.
Plaintiff filed a Reply wherein it cited additional case law supporting its argument that
the Charitable Trust, not Plaintiff, was the real party in interest and therefore contends that the
$2,000,000.00 net worth bar does not apply to preclude recovery of attorneys‘ fees and costs.
Secondly, Plaintiff reiterates its argument that Defendant was not ―substantially justified‖ in
adhering to its position throughout prior litigation. Finally, Plaintiff argues that it submitted

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plenty of evidence to support both the actual work performed by the attorneys, and the basis for
seeking fees in excess of the statutory cap.
This Court after thorough review of the submissions by the parties, the evidence
proffered, and the law and authority governing this matter, finds in favor of Defendant.

II. STANDARD OF REVIEW
The pertinent portions of title 26 of the United States Code section 7430 state:

(a) In general.--In any administrative or court proceeding which is brought by or
against the United States in connection with the determination, collection, or
refund of any tax, interest, or penalty under this title, the prevailing party may be
awarded a judgment or a settlement for-(1) reasonable administrative costs incurred in connection with such
administrative proceeding within the Internal Revenue Service, and
(2) reasonable litigation costs incurred in connection with such court
proceeding.
*

*

*

(c) Definitons.--For purposes of this section-(4) Prevailing party.-(A) In general.--The term ―prevailing party‖ means 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
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established by rule of court and meets the requirements of section
2412(d)(2)(B) of such title 28 (as so in effect).
*

*

*

(B) Exception if United States establishes that its position was
substantially justified.—
(i) General rule.--A party shall not be treated as the prevailing
party in a proceeding to which subsection (a) applies if the United
States establishes that the position of the United States in the
proceeding was substantially justified.
(ii) Presumption of no justification if Internal Revenue Service did
not follow certain published guidance.--For purposes of clause (i),
the position of the United States shall be presumed not to be
substantially justified if the Internal Revenue Service did not
follow its applicable published guidance in the administrative
proceeding. Such presumption may be rebutted.
(iii) Effect of losing on substantially similar issues.--In
determining for purposes of clause (i) whether the position of the
United States was substantially justified, the court shall take into
account whether the United States has lost in courts of appeal for
other circuits on substantially similar issues.
(iv) Applicable published guidance.--For purposes of clause (ii),
the term ―applicable published guidance‖ means—
(I) regulations, revenue rulings, revenue procedures,
information releases, notices, and announcements, and
(II) any of the following which are issued to the taxpayer:
private letter rulings, technical advice memoranda, and
determination letters.
*

*

*

(D) Special rules for applying net worth requirement.--In applying
the requirements of section 2412(d)(2)(B) of title 28, United States Code,
for purposes of subparagraph (A)(ii) of this paragraph-(i) the net worth limitation in clause (i) of such section shall apply
to--

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(I) an estate but shall be determined as of the date of the
decedent's death, and

26 U.S.C.A. § 7430
The subsection of section 2412 of Title 28 as referenced above states:
(2) For the purposes of this subsection—
(B) ―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, and which had not
more than 500 employees at the time the civil action was filed; except that
an organization described in section 501(c)(3) of the Internal Revenue
Code of 1986 (26 U.S.C. 501(c)(3)) exempt from taxation under section
501(a) of such Code, or a cooperative association as defined in section
15(a) of the Agricultural Marketing Act (12 U.S.C. 1141j(a)), may be a
party regardless of the net worth of such organization or cooperative
association or for purposes of subsection (d)(1)(D), a small entity as
defined in section 601 of Title 5;
28 U.S.C.A. § 2412(d)(2)(B).

III. DISCUSSION
Based on the foregoing, this Court need not reach the question of net worth, and
more specifically, who is the real party in interest in terms of determining net worth,
because this Court finds that Defendant was substantially justified in its position.
Similarly, this Court need not ascertain the reasonableness of the fees and costs awarded
because Defendant was substantially justified in its position.1 Based on the standard set
Although this Court need not reach a decision with respect to the merits of the attorneys‘ fees
and costs incurred during the pendency of this litigation, this Court did review each time and cost
entry, and based upon this Court‘s private practice experience of reviewing and approving time
sheets and expenses of $1 million to $5 million in billings per year for numerous years, plus
reviewing and approving fee statements of attorneys hired to serve as local counsel, the Court
finds that the time expended was meritorious. However, as stated in the main portion of the
Opinion, this Court will not comment on the rate of the fee – except to note that the hourly rates
1

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forth above, this Court declines to award attorneys‘ fees and costs because the Defendant
was substantially justified in the position it held during all prior proceedings, including
those held before this Court.
The question before this Court is a simple one: Was Defendant ―substantially
justified‖ in its position in the prior proceedings? If so, then an award of attorneys‘ fees
and costs must be precluded. If not, then the other matters raised by Defendant (i.e., the
real party in interest and the amount of fees and costs to be awarded) must be addressed.
The Internal Revenue Code specifically provides the criteria necessary to
ascertain whether Defendant was substantially justified in advancing its position:
(B) Exception if United States establishes that its position was
substantially justified.—
(i) General rule.--A party shall not be treated as the prevailing
party in a proceeding to which subsection (a) applies if the United
States establishes that the position of the United States in the
proceeding was substantially justified.
(ii) Presumption of no justification if Internal Revenue Service did
not follow certain published guidance.--For purposes of clause (i),
the position of the United States shall be presumed not to be
substantially justified if the Internal Revenue Service did not
follow its applicable published guidance in the administrative
proceeding. Such presumption may be rebutted.
(iii) Effect of losing on substantially similar issues.--In
determining for purposes of clause (i) whether the position of the
United States was substantially justified, the court shall take into
account whether the United States has lost in courts of appeal for
other circuits on substantially similar issues.
(iv) Applicable published guidance.--For purposes of clause (ii),
the term ―applicable published guidance‖ means—

although they exceed the statutory cap, are consistent with the marketplace for fees for very
experienced tax attorneys such as Mr. Prosperi – nor will it address what total amount would be
appropriate, because of the statutory bar prohibiting any such recovery due to Defendant‘s
substantially justifiable position throughout the litigation.
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(I) regulations, revenue rulings, revenue procedures,
information releases, notices, and announcements, and
(II) any of the following which are issued to the taxpayer:
private letter rulings, technical advice memoranda, and
determination letters.
26 U.S.C.A. § 7430(c)(4).

Using the above-cited portion of the section 7340(c)(4)(B), Plaintiff contends that
section 7430(c)(4)(B)(ii) and (iii) apply here.
With respect to section 7340(c)(4)(B)(ii), Plaintiff claims that the position of Defendant
(the United States) was not substantially justified because the IRS failed to follow its own
applicable published guidance during the administrative proceedings. Plaintiff specifically
points to Revenue Ruling 89-31, claiming this is the published guidance that the IRS ignored
during the administrative proceeding.
Revenue Ruling 89-31 states in pertinent part:
HOLDING
If, in settlement of a bona fide will contest, a decedent‘s estate makes an
immediate payment to a qualifying charity in satisfaction of the charity‘s claim to
a split interest remainder that would not be deductible under section
2055(e)(2)(A) of the Code, the estate is entitled to a charitable deduction under
section 2055.
Revenue Ruling 89-31.
Just reading this portion of Revenue Ruling 89-31, it appears as though Revenue Ruling
89-31 supports Plaintiff‘s contention that Defendant was not substantially justified in its position.
However, the fact pattern surrounding this holding reads as follows:
The decedent died testate in 1987. Under the will, which was executed in
1986, the decedent bequeathed the residue of the estate to a trust under which the
trust income was payable to A for life with the remainder payable to B charity, an

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organization described in sections 170(c) and 2055(a) of the Code. A was the
decedent‘s child.
Id.
Under the facts present in this case, the charity (i.e. the Charitable Trust) was named in
all prior testamentary documentation, including a prior Will, but no residuary clause was
included in the 1999 Will which was the will that was actually probated. As Defendant argued
before this Court, looking solely at the four corners of the 1999 Will, the Charitable Trust had no
legal standing as a residuary estate legatee. See doc. no. 33, p. 8 (―The Trust was entitled to
nothing under the Final Will. (See Ex. 1.)‖.) Because the facts of this case differed from those
in the fact pattern in Revenue Ruling 89-31, and because those different facts formed the very
basis for Defendant‘s position throughout the litigation of this matter, this Court does not find
that Revenue Ruling 89-31 proves that Defendant was not substantially justified in pursuing its
position.
However, Revenue Ruling 89-31 is not the only ―published guidance‖ expressly cited by
Plaintiff in support of its argument that Defendant was not substantially justified under
subsection 7430(c)(4)(B)(ii). Plaintiff contends Revenue Ruling 145 also constitutes ―published
guidance‖ which further illustrates how Defendant was not substantially justified in pursuing its
position. See doc. no. 43, p. 7.
Revenue Ruling 145 holds that ―[w]here a charity is legatee under a will and, as such
contests the probate of a later will and such contest is settled by agreement with the parties in
interest, the amount deductible for testamentary charitable gifts . . . is calculated on the basis of
what the charity actually received.‖ Revenue Ruling 145 (1953). The Court finds that this fact
pattern is substantially similar, with the instant case, if not on all four corners.

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In Revenue Ruling 145, the charities were residuary legatees under one will. A second
will, one that was admitted to probate, changed the residuary legatees. The former legatees,
including the charities, appealed the probate court‘s decision to probate the second will, but
before judgment was entered in the matter, the parties reached a settlement. Under the terms of
the settlement agreement the charities received substantial amounts to settle their claims. This
Revenue Ruling reads:
In the instant case the status of the charities contesting the probated will
was that of legatees under the prior will which they proffered as the decedent‘s
last will. Such status commanded the settlement agreement and was recognized by
it. . . .
In view of the foregoing, it is held that where a charity is legatee under a
will and, as such, contests the probate of a later will and such contest is settled by
agreement with the parties in interest, the amount deductible for testamentary
charitable gifts under section 812(d) of the Internal Revenue Code is calculated on
the basis of what the charity actually received.
Rev. Rul. 145 (1953).
Defendant claims that Revenue Ruling 145 was overruled by Commissioner v. Estate of
Bosch, 387 U.S. 456 (1967). See doc. no. 45, p. 9. However, as noted by Plaintiff, the Internal
Revenue Service never expressly ―revoked nor held that Ruling to be superseded.‖ Yet, it is
clear that Defendant relied throughout this litigation upon the holding in Bosch, a United States
Supreme Court decision which post-dated Revenue Ruling 145 by fourteen years. See doc. no.
33, pp. 3-7. Although this Court did not agree with Defendant‘s interpretation and/or application
of Bosch under the facts present here, and even though the Service did not expressly revoke or
supersede Revenue Ruling 145, Defendant‘s reliance on Bosch does not render its action in this
matter unjustifiable.
In addition, the Court notes that while Revenue Ruling 145, at a minimum, implies that a
charitable deduction is to take place under circumstances akin to those present in this case,
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Revenue Ruling 89-31, published well after both Revenue Ruling 145 and the Bosch decision,
fails to mention either one. In this Court‘s opinion, Defendant was substantially justified in
arguing that the legal posture concerning the ―deductibility‖ of charitable contributions via a
settlement agreement evolved from the time of Revenue Ruling 145 (1953) to the time Bosch
was decided (1967). Because Revenue Ruling 89-31 contained no reference to either the prior
Revenue Ruling or the Bosch case, Defendant seemingly found itself in a grey area. For this
reason as well as the foregoing, this Court does not agree with Plaintiff that Defendant was not
substantially justified in advancing its position.
Next, Plaintiff contends that Defendant was not substantially justified in pursuing its
position under subsection 7430(c)(4)(B)(iii). Plaintiff contends that Defendant‘s position
throughout this litigation was inconsistent with the decisions reached in the United States Court
of Appeals for the Fifth Circuit in Estate of Warren v. Commissioner, 981 F.2d 776 (5th Cir.
1993) and the United States Court of Appeals for the Third Circuit in Dumont‘s Estate v.
Commissioner, 150 F.2d 691 (3d Cir. 1945). Although this Court in its prior Opinion (see doc.
no. 39) does cite to and rely upon these two cases – more heavily on Dumont‘s Estate than
Warren – this Court does not agree that these cases prove that Defendant was not substantially
justified in advancing its position during the course of this litigation.
First, this Court noted that in Dumont‘s Estate, the charity, Lafayette College, was named
the residuary legatee in both wills. When the residuary clause in the later will was deemed void
under Pennsylvania law, Lafayette College entered into a settlement agreement with the
testator‘s next of kin (who would have inherited the residuary via laws of intestacy), the Court of
Appeals for the Third Circuit held that the amount paid to Lafayette College was deductible as a
charitable contribution.

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Under the facts present here, unlike the facts in Dumont‘s Estate, the Charitable Trust
was not a designated residuary beneficiary under the 1999 Will. In this case, this Court (based
on all evidence of record) was able to ascertain that the testator‘s intent was to provide a
residuary estate with the Charitable Trust as the legatee,2 this fact differs from Dumont‘s Estate
where it was unequivocal that the testator included Lafayette as a residuary legatee in the
probated will. Thus, even though this Court disagreed with Defendant‘s overall position in this
matter, because the facts between this case and Dumont‘s Estate were not identical, (i.e. here,
there was no residuary clause, but there was such a clause – albeit one that was rendered void –
in Dumont‘s Estate), this Court finds that Defendant was substantially justified in pursuing its
position in this matter.

2

This Court specifically held in its prior Opinion:
Here, there is no dispute that the 1999 Will was the last written iteration of
Mr. Palumbo‗s intent. However, the parties concur that prior testamentary
documentation provided for a residuary estate, and that in all prior documentation,
the residuary estate was left to the Charitable Trust. It is also uncontested that Mr.
Palumbo‗s attorney has admitted that he made a scrivener‗s error when preparing
the 1999 Will, in that he failed to include a provision for the residuary estate.
Finally, although the parties do not agree on the extent of the dispute concerning
the residuary estate which arose between Mr. Palumbo‗s son and the Charitable
Trust after Mr. Palumbo‗s death, they do agree that after the dispute arose, arm‗s
length negotiations ensued which resulted the settlement agreement at issue here.
As noted above, under the facts of this case, the parties agree that the sum of
$11,721,141.00 was paid to the Charitable Trust pursuant to this settlement
agreement which was negotiated among counsel for several interested parties, but
primarily by counsel for the Charitable Trust and counsel for Mr. Palumbo‗s son.
Based on the evidence of record, and there being no evidence to the
contrary, the Court finds that the negotiations were held at arms-length, that all of
the legatees signed the settlement agreement (which was approved by the
Orphan‗s Court), and there is no evidence of any collusion among the parties to
the agreement nor any collusion on the part of their respective attorneys.

Doc. no. 39, p. 15.
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Finally, with respect to the decision rendered by the Court of Appeals for the Fifth Circuit
in Warren, this Court cited that case mainly for the proposition that marital deduction cases are
not akin to charitable deduction cases. See doc no. 39, p. 8, fn. 1. Nevertheless, this Court notes
that in Warren, the question was the amount of a charitable deduction, not whether a charitable
contribution had actually been made. Therefore, Warren does not support the Plaintiff‘s
assertion that Defendant was not substantially justified in pursuing its position.

IV. CONCLUSION
Based upon the foregoing law and authority, this Court determines has Plaintiff has not
met its burden of proving that Defendant was not substantially justified in pursuing its claim
against Plaintiff in this matter. As such, an award of attorneys‘ fees and costs is precluded by 26
U.S.C.A. § 7430.

s/ Arthur J. Schwab
Arthur J. Schwab
United States District Judge

cc:

All Registered ECF Counsel and Parties

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