ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR ATTORNEY'S FEES AND COSTS

SAMUEL CONTI, Senior District Judge

I. INTRODUCTION

This matter comes before the Court on a Motion for Attorney's Fees and Costs filed by Plaintiff Jose Reynoso ("Plaintiff" or "Reynoso") against Defendant United States of America ("the government" or "the United States"). ECF No. 36 ("Mot."). The Motion is fully briefed. ECF Nos. 52 ("Opp'n), 54 ("Reply"). The Court heard oral arguments on April 15, 2011 and ordered the parties to take Plaintiff's deposition on the narrow issue of whether Plaintiff's net worth allows him to qualify as a "prevailing party" entitled to recover attorney's fees and costs under 26 U.S.C. § 7430. The parties deposed Plaintiff on April 27, 2011, and Plaintiff subsequently filed a Statement of Net Worth with the Court. ECF No. 72 ("Stmt. of Net Worth"). The government filed an Opposition to Statement of Net Worth. ECF No. 75 ("Final Opp'n"). Plaintiff filed a reply. ECF No. 76 ("Final Reply"). For the following reasons, the Court GRANTS IN PART and DENIES IN PART Plaintiff's Motion.

II. BACKGROUND

Plaintiff is a chiropractor. ECF No. 26 ("Dec. 21, 2010 Order"). He was charged with and pleaded guilty to three misdemeanor counts of failing to file tax returns for 1999, 2000, and 2001. Id. While Plaintiff did not file returns for these years, he did make tax payments during these years. He made tax payments of $245,000 for 1999, $200,000 for 2000, and $200,000 for 2001. Id.

As a result of the criminal proceeding, the Internal Revenue Service ("IRS") seized approximately $1.2 million from Plaintiff to be held toward his unascertained tax debts for the 1999, 2000, and 2001 tax years. Mot. at 1. On May 10, 2005, Plaintiff sent a letter to the U.S. Attorney's Office requesting that $585,329 of the seized funds be designated as a deposit, or "cash bond," to offset Plaintiff's anticipated tax liability. Mot. at 2; Reynoso Decl. ¶ 4 Ex. A ("May 10, 2005 Letter"). The government complied with this request and released the remainder of the $1.2 million back to Plaintiff. Mot. at 2.

A. Plaintiff's Refund Requests

In the May 10, 2005 Letter, Plaintiff requested that, in the event that the $585,329 cash bond exceeded his tax liability, the balance of the bond be refunded to him as soon as possible. Id. On December 13, 2005, the IRS credited $75,852 of the bond toward Plaintiff's 1999 taxes, $278,338 toward his 2000 taxes, and $51,913 toward his 2001 taxes. Dec. 21, 2010 Order at 2. In 2008, the IRS transferred the remaining $179,227 of the bond to an excess collection account. Id.

In 2007 and 2008, Plaintiff filed his tax returns for 1999, 2000, and 2001, which revealed that he had overpaid for 1999 and 2000. Id. On December 5, 2008, Plaintiff sent a detailed letter to the IRS Appeals Office stating that, in light of the fact that he had now filed his delinquent tax returns and was due a refund on those returns, the entire amount of the cash bond should be returned to him immediately with accrued interest. Reynoso Decl. ¶ 4 Ex. B ("Dec. 5, 2008 Letter"). On February 23, 2009, the IRS sent Plaintiff letters confirming that he had overpaid his 1999 taxes by $75,852 and his 2000 taxes by $357,118 and stating that refunds for these overpayments would be sent to him within approximately two weeks. Reynoso Decl. ¶ 5 Exs. C and D ("IRS Refund Letters"). These letters did not mention the unapplied portion of the cash bond. See id.

Two months later, on April 23, 2009, having not received the promised refund payments, Plaintiff sent another letter to the IRS, this time requesting refunds for the 1999 and 2000 overpayments and again requesting the return of the unapplied portion of the cash bond. Ham Decl. ¶ 6 Ex. B ("Apr. 23, 2009 Letter"). Despite making numerous phone calls to follow up on his request, Plaintiff received no response. Ham Decl. ¶ 6. B. This Lawsuit

On January 8, 2010, Plaintiff filed suit seeking to recover the unapplied portion of the cash bond and the refunds from his 1999 and 2000 overpayments — an amount totaling $612,197. ECF No. 1 ("Compl.") at 5. On November 12, 2010, the parties filed crossmotions for summary judgment. ECF Nos. 11 ("Def.'s MSJ"), 13 ("Pl.'s MSJ"). In its MSJ, the United States conceded that Plaintiff was entitled to recover the unapplied portion of the cash bond and the entirety of his overpayment for 1999. Def.'s MSJ at 1-2. The government argued, however, that Plaintiff was only entitled to recover $239,590 of the $357,117 overpayment from 2000 because recovery of the remaining $117,527 was barred by the statute of limitations. Id. In its December 21, 2010 Order, the Court granted summary judgment in favor of the United States and awarded Plaintiff $494,670 plus interest.

Plaintiff filed the instant Motion on February 2, 2011, seeking to recover attorney's fees and costs incurred through his efforts to obtain the refund both prior to and during the instant litigation. Mot. at 1. At the time this Motion was filed, Plaintiff had not yet received payment of the award. He received payment on or about April 1, 2011. ECF No. 63.

III. LEGAL STANDARD

Section 7430 of Title 26 of the United States Code states that "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 . . . the prevailing party may be awarded judgment or a settlement for" (1) reasonable administrative costs, and (2) reasonable litigation costs. 26 U.S.C. § 7430(a); see also United States v. Yochum, 89 F.3d 661, 666 (9th Cir. 1996).

Under section 7430, a litigant is only a "prevailing party" if: (1) the litigant exhausted all administrative remedies; (2) the United States has failed to establish that its position in the proceeding was substantially justified; (3) the litigant substantially prevailed with respect to the amount in controversy or with respect to the most significant issue or set of issues presented; (4) the litigant did not unreasonably protract any portion of the proceeding; (5) the litigant meets certain net worth requirements; and (6) the litigant timely filed a fee application that is adequately supported by billing records. 26 U.S.C. § 7430(b) and (c); see also Yochum, 89 F.3d at 670.

When a prevailing party seeks both administrative and litigation costs and fees, the court must consider separately whether the United States' position at the administrative level was justified and whether its position during litigation was justified. Pac. Fisheries, Inc. v. United States, 484 F.3d 1103, 1109 (9th Cir. 2007).

IV. DISCUSSION

Plaintiff argues that he has met all of the requirements of section 7430 and is therefore entitled to fees and costs incurred both at the administrative level and during the course of this litigation. Mot. at 1. The United States argues that Plaintiff fails to qualify as a "prevailing party" for numerous reasons. First, as a new argument raised only in its Final Opposition, the government argues that Plaintiff did not "substantially prevail" in the action. Final Opp'n at 6-7. Second, the government contends that Plaintiff cannot recover because he has not established that he satisfied section 7430's net worth requirements. Opp'n at 11-12. Third, the government argues that Plaintiff cannot recover fees and costs incurred at the administrative level because the United States never "took a position" for the purposes of section 7430 prior to this litigation. Opp'n at 8-9. Fourth, Defendant argues that Plaintiff cannot recover fees and costs incurred during the litigation stage of the dispute because the position of the United States in the litigation was substantially justified. Opp'n at 9-11.

A. Plaintiff Substantially Prevailed in This Action

To qualify as a prevailing party under section 7430, a party must have substantially prevailed with respect to the amount in controversy or with respect to the most significant issue or set of issues presented. 26 U.S.C. § 7430(c)(4). Plaintiff filed this action seeking to recover a total of $612,197. In its summary judgment motion, the government conceded that Plaintiff was owed $494,670, but argued that recovery of the remaining $117,527 was barred by the statute of limitations. The Court granted summary judgment in favor of the government with regard to the $117,527 and awarded Plaintiff the remaining $494,670. Plaintiff thus recovered eighty-one percent of the amount in controversy in this action and has substantially prevailed under section 7430.

The government argues that because it conceded early on in the litigation that Plaintiff was owed the $494,670, the Court should consider only the remaining $117,527 to be the amount in controversy in this action. The government provides no authority for this argument, and the Court rejects it. The entire $612,197 was in controversy when Plaintiff filed this suit. The Court finds that Plaintiff substantially prevailed by recovering $494,670 as a result of this action.

B. Net Worth Requirement

In order to qualify as a "prevailing party" under section 7430, a litigant must meet certain net worth requirements set forth in 28 U.S.C. § 2412(d)(2)(B). See 26 U.S.C. § 7430(c)(4)(A)(ii). The litigant must be either: (1) an individual whose net worth did not exceed $2,000,000 at the time the action was filed; or (2) the owner of a business the net worth of which did not exceed $7,000,000 and which did not have more than five hundred employees at the time the action was filed. 28 U.S.C. § 2412(d)(2)(B). The litigant seeking to recover fees must make an evidentiary showing that its net worth did not exceed the statutory threshold. Al Ghanim Combined Group Co. v. United States, 67 Fed. Cl. 494, 496-97 (2005); King v. United States, No. H-90-1358, 1993 WL 379595, at *1 (S.D. Tex. June 18, 1993).

Because Plaintiff is the owner of a business, he meets the net worth requirements if his business did not have more than five hundred employees and was not worth more than $7,000,000 at the time this action was filed. Plaintiff initially submitted a declaration stating that he satisfied these requirements. ECF No. 54-1 ("Second Reynoso Decl.") at ¶¶ 2-3. The government argued that this declaration was insufficient to prove Plaintiff's net worth. Opp'n at 11-12. At the April 15, 2011 hearing on the Motion, the Court ordered the parties to depose Plaintiff regarding his net worth.

The parties deposed Plaintiff on April 27, 2011. ECF No. 72-1 ("Second Ham Decl.") ¶ 2. Plaintiff filed the deposition transcript, along with Plaintiff's detailed financial statements, which demonstrate that Plaintiff's net worth, including business assets, was approximately $3.3 million at the time this suit was filed. See Second Ham Decl. ¶¶ 2-3 Exs. A ("Reynoso Dep."), B ("Dep. Exhibits"). Plaintiff testified during his deposition that the financial documents produced represent the entirety of his assets. Reynoso Dep. at 73. The Court finds that Plaintiff's testimony and documentation conclusively demonstrate that he satisfied the net worth requirements in section 7430 at the time of filing suit.

C. Recovery of Administrative Fees and Costs

In total, Plaintiff seeks to recover fees and costs incurred from April 2009, when Plaintiff retained his current counsel, through the conclusion of post-judgment proceedings. This time span encompasses Plaintiff's efforts to recover his refund both at the administrative level and through this litigation. UnderPacific Fisheries, the Court must bifurcate its analysis and consider separately whether Plaintiff is entitled to administrative fees and costs and litigation fees and costs. 484 F.3d at 1109.

Plaintiff seeks administrative fees and costs from April 2009 through the filing of this lawsuit on January 8, 2010. Mot. at 1. The government argues that Plaintiff cannot recover administrative fees and costs because the government did not take a "position" with respect to Plaintiff's case at the administrative level, which precludes a finding that the government's administrative position was not "substantially justified." Opp'n at 8.

Section 7430(c)(7) defines the term "position of the United States" with respect to administrative proceedings as the position taken "as of the earlier of: (i) the date of the receipt by the taxpayer of the notice of decision of the [IRS] Office of Appeals, or (ii) the date of the notice of deficiency." The government contends that it never took a position at the administrative level as defined by the statute because Plaintiff never received a notice of decision from the IRS Office of Appeals or a notice of deficiency. Opp'n at 9. The government notes that section 7430 is a partial waiver of the government's sovereign immunity and must therefore be strictly construed in favor of the government. See Ardestani v. United States, 502 U.S. 129, 137 (1991).

The government relies on Florida Country Clubs, Inc. v. Comm'r, 122 T.C. 73, 83 (2004), to support its contention that it never took a position as defined by section 7430 prior to this lawsuit. In Florida Country Clubs, an IRS audit initially determined that deficiencies existed in plaintiffs' 1994 tax payments, and the IRS proposed adjustments to plaintiffs' taxes accordingly. Id. at 74. The plaintiffs protested the proposed adjustments to the IRS Appeals Office. Id. The parties settled the case before a formal notice of deficiency or Appeals Office notice of decision was issued. Id. at 75. In the settlement, the IRS conceded that it had erred and plaintiffs owed no additional taxes. Id. at 82. The plaintiffs filed suit seeking administrative fees and costs under section 7430. The court ruled that the government had not taken a position as defined by section 7430(c)(4) because no notice of deficiency or notice of decision from the IRS Appeals Office had been issued. Id. at 87. Therefore, plaintiffs were not "prevailing parties" as defined by the statute and could not recover fees and costs. Id.

Plaintiff argues that Florida Country Clubs is inapposite because here it was impossible for Plaintiff to receive a deficiency notice or a notice of decision from the IRS Office of Appeals. Opp'n at 3. Plaintiff notes that in his case, no deficiency existed; rather, he had paid more than he owed. Id. Furthermore, because the IRS never responded to his refund claims, he could not file an appeal with the IRS Office of Appeals. Id. (citing Pohl v. United States, 29 Fed. Cl. 66, 70 (1993)) ("[I]f the IRS takes no action on the claim, the taxpayer may file a complaint six months after the date of the filing of the refund claim; there is no provision for appeal within the IRS.").

Plaintiff further asserts that the government's argument has already been considered and rejected under similar facts inGrisanti v. United States, No. 3:05CV12-D-A,

2006 U.S. Dist. LEXIS 94180 (N.D. Miss. Oct. 10, 2006). Reply at 3. In Grisanti, the plaintiffs failed to timely file their 1998 tax returns or pay taxes on those returns. Id. at *1. After negotiations with the IRS, the plaintiffs and the IRS agreed to an installment repayment plan. Id. Despite the fact that the plaintiffs made timely payments in accordance with the repayment plan, the IRS seized their tax refund for 2002. Id. at *2. The plaintiffs filed a claim with the IRS in 2003 seeking the return of the seized refund but were denied. Id. They filed suit for damages in January 2005, and the IRS issued their refund three weeks later.Id. The plaintiffs sought attorney's fees and costs under section 7430. Id. at *4. The government argued, as it does here, that the plaintiffs could not recover fees and costs under section 7430 because the IRS Office of Appeals never issued a notice of decision, the plaintiffs were never issued a notice of deficiency, and therefore the government never "took a position" as defined by the statute. Id. The court rejected this argument, stating that "the IRS cannot hide behind the law by simply failing to act or take a position." Id. at *9. The court explained:

The Court notes that it was not until the Plaintiffs filed this action in this Court that the Government issued their refund. The IRS sat on Grisanti's refund for the entire calendar years of 2003 and 2004. The Plaintiffs made repeated demands and requests for their refund and were denied. The Government tries to hide behind the fact that it never formally denied the Plaintiffs their refund. . . . [T]he IRS attempted to insulate itself from any imposition of attorneys' fees by not issuing a formal denial. . . . [T]he IRS cannot protect itself by inaction or failure to issue an official administrative ruling.

Plaintiff argues this Court should follow Grisanti and not allow the government to protect itself from the imposition of attorney's fees by simply not responding to Plaintiff's numerous refund claims prior to filing suit. Reply at 3. The Court agrees. The IRS's failure to respond to Plaintiff's repeated requests for his refund and for the return of the unapplied portion of the cash bond was tantamount to a denial of those requests. The government cannot insulate itself from paying attorney's fees by simply ignoring a refund request instead of issuing a formal denial. The Court thus rejects the government's contention that it did not take a "position" prior to litigation in this case. Plaintiff is therefore entitled to costs and fees incurred at the administrative level.

D. Recovery of Litigation Fees and Costs

The government argues that the position of the United States in the instant litigation was substantially justified. Alternatively, the government argues that if the Court finds some positions taken by the government were justified and others were not, then Plaintiff should only be entitled to recover fees and costs incurred litigating against the particular government positions that the Court finds unjustified. Final Opp'n at 8-9.

The government bears the burden of establishing that its position was substantially justified under section 7430. Pac. Fisheries, 484 F.3d at 1107. "The position of the United States is substantially justified if it is justified to a degree that satisfies a reasonable person. That is, it must have a reasonable basis in both law and fact." Id. (internal citations omitted). "Generally, the position of the United States in the judicial proceeding is established initially by the [g]overnment's answer to the petition." Huffman v. Comm'r, 978 F.2d 1139, 1148 (9th Cir. 1992). Nevertheless, "[t]he Congressional intent behind section 7430 is not served by looking only to the answer to determine whether the government's position in the judicial proceeding was `substantially justified.' The better approach is to examine the parties' conduct within each stage of the case."Id.

The government filed its Answer on April 20, 2010. ECF No. 6 ("Answer"). In its Answer, the government denied Plaintiff's allegations that he was due a refund for tax overpayments "for lack of knowledge or information sufficient to form a belief as to the truth of the allegations." Answer ¶ 10. The government also denied that Plaintiff was entitled to recover the unapplied portion of the cash bond. Id. ¶ 23. The government concluded by requesting that "Plaintiff take[] nothing by his Complaint." Id. at 4.

Plaintiff argues that the government's Answer established an unjustified position that Plaintiff was due no refund, and that the government did not relent from this position until due diligence forced it to do so in its motion for summary judgment eleven months later. Mot. at 6-7; Reply at 5-6. Plaintiff contends that the government should have diligently investigated Plaintiff's claims before filing its Answer. Mot. at 7. Had it done so, it would have quickly determined that Plaintiff was due at least a portion of his overpayments and the entirety of the unapplied portion of the cash bond. Id. Instead, the government took the position that Plaintiff was due nothing, a position that the government has been unable to support with evidence. Id.

The government admits that "as [P]laintiff points out, the government did not initially concede any amount was due as a refund." Opp'n at 10. The government argues that this position was reasonable because the IRS was in the process of auditing Plaintiff's 1999 tax returns at the time, and the government wished to review Plaintiff's tax returns and await the results of the audit before conceding that Plaintiff was due any refund. Id.

The government further contends that it changed its original position almost immediately, and instead took the position that Plaintiff was due a refund for a portion of his overpayment but that a portion was time barred. Opp'n at 10-11. The government asserts that it voiced this position to Plaintiff's counsel during settlement negotiations as early as April 2010, the same month in which the government filed its Answer. Opp'n at 4; Stamm Decl. ¶ 4. The government argues that its new position was clearly justified because it was precisely the decision reached by this Court in its December 21, 2010 Order granting summary judgment in favor of the government. See ECF No. 26.

In rebuttal, Plaintiff contends that even if the government's position is construed to be that Plaintiff was due a refund for part but not all of his 1999 and 2000 overpayments, the government's continued refusal to remit the unapplied portion of the cash bond was unjustified as a matter of law. Plaintiff notes that section 7430 provides that the position of the United States "shall be presumed not to be substantially justified if the [IRS] did not follow its applicable published guidance." 26 U.S.C. § 7430(c)(4)(B)(ii). Plaintiff contends that the refusal of the IRS to return the unapplied portion of the bond violated IRS regulations and federal law.

The Court agrees with Plaintiff. Section 6.01 of Revenue Procedure 2005-18 provides that "[a] taxpayer may request the return of all or part of a deposit at any time before the service has used the deposit for payment of a tax." The Internal Revenue Code similarly provides that "[e]xcept in a case where the Secretary determines that collection of tax is in jeopardy, the Secretary shall return to the taxpayer any amount of [a] deposit (to the extent not used for payment of tax) which the taxpayer requests in writing." 26 U.S.C. § 6603(c). Here, the cash bond cannot be characterized as anything other than a deposit, as it was seized by the government as security against unascertained tax liabilities. See Rosenman v. United States, 323 U.S. 658, 660-63 (1945) (payment tendered "under protest and duress" to satisfy an unascertained tax liability was properly characterized as "a deposit made in the nature of a cash bond"). Plaintiff made three written requests for the return of the unapplied portion of the cash bond. The IRS violated its own guidelines by refusing Plaintiff's requests. The government's position with regard to the cash bond, therefore, was not substantially justified.

The only substantially justified position taken by the government during this litigation was its assertion that Plaintiff's recovery of $117,527 was time-barred. The government prevailed on this issue at summary judgment. By contrast, the Court denied Plaintiff's motion for summary judgment. Plaintiff is therefore not entitled to recover fees and costs incurred in preparing his motion for summary judgment or in preparing his opposition to the government's motion for summary judgment.Hensley v. Eckerhart, 461 U.S. 424, 440 (1983) ("Where the plaintiff has failed to prevail on a claim that is distinct in all respects from his successful claims, the hours spent on the unsuccessful claim should be excluded in considering the amount of a reasonable fee. . . . [W]here the plaintiff achieved only limited success, the district court should award only that amount of fees that is reasonable in relation to the results obtained.")

The government contends that Plaintiff should also be denied fees and costs incurred at any time after the government conceded that a partial refund was due. The Court disagrees. The government protracted this litigation even after the Court's judgment by failing to timely pay the agreed amount, prompting Plaintiff to file a Motion to Enforce the Judgment. ECF No. 44. The government also e-filed Plaintiff's unredacted tax returns, which disclosed his social security number, which forced Plaintiff to incur expenses corresponding with the government to remedy the improper disclosure. See ECF Nos. 53, 55. Plaintiff is entitled to the fees and costs incurred in pursuing these matters.

Lastly, Plaintiff notes that the IRS recently sent Plaintiff a letter stating that a failure-to-file penalty of $6,979 is due for the year 2000. Final Reply at 8. Plaintiff argues that this is incorrect and that no penalty is due. He states that he anticipates incurring fees to resolve this issue and should be entitled to recover those fees as well. The Court disagrees. Plaintiff is only entitled to recover fees and costs directly related to this action. The ambit of this action does not encompass each and every dispute that has arisen or may arise concerning Plaintiff's 1999, 2000, and 2001 tax returns.

V. CONCLUSION

For the foregoing reasons, the Court GRANTS IN PART and DENIES IN PART Plaintiff Jose Reynoso's Motion for Attorney's Fees and Costs. Plaintiff is entitled to attorney's fees and costs for: (1) the administrative phase of this dispute; (2) the litigation phase of this dispute, with the exception of time spent preparing his motion for summary judgment and opposition to the government's motion for summary judgment; and (3) time spent post-judgment due to the government's failure to timely remit payment and accidental posting of Plaintiff's unredacted tax return.

Within thirty (30) days of this Order, Plaintiff shall submit appropriate documentation of the fees and costs incurred in relation to the activities enumerated above.

IT IS SO ORDERED.