Opinion
Civil Action No. 03-1967.
March 23, 2005
REPORT AND RECOMMENDATION
I. Recommendation
It is respectfully recommended that Plaintiff's application for reasonable litigation costs pursuant to 26 U.S.C. § 7430 (Docket No. 40) be granted and that she receive reasonable court costs in the amount of $1,134.67 and reasonable attorneys' fees in the amount of $42,920.00, for a total of $44,054.67.
II. Report
On December 22, 2003, Plaintiff, Margery E. Cameron, Executrix of the estate of Nora A. Toepfer, deceased (the "Toepfer Estate"), brought this action against the United States of America pursuant to 28 U.S.C. § 1346(a)(1), seeking to recover federal estate taxes and interest that she alleged were erroneously or illegally assessed and collected against the Toepfer Estate by the Internal Revenue Service (IRS). On November 10, 2004, an order was entered (Docket No. 27), denying Defendant's motion for summary judgment and granting Plaintiff's motion for summary judgment, adopting a Report and Recommendation filed on October 6, 2004 (Docket No. 19). In addition, another order was filed, entering final judgment in Plaintiff's favor pursuant to Rule 58 of the Federal Rules of Civil Procedure (Docket No. 28).
Subsequently, Plaintiff filed a motion for clarification, seeking specification of the amounts of interest she would receive for various periods of time. On February 15, 2005, the Court entered a Memorandum Order granting Plaintiff's motion (Docket No. 39), adopting and modifying a Report and Recommendation that had been filed on January 13, 2005 (Docket No. 34).
On February 28, 2005, Plaintiff filed an application for reasonable litigations costs pursuant to 26 U.S.C. § 7430. On March 11, 2005, Defendant submitted a response in opposition. Plaintiff filed a reply brief on March 18, 2005.
Applications for Reasonable Litigation Costs Pursuant to 26 U.S.C. § 7430
The Internal Revenue Code provides that, in any proceeding 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 a judgment or a settlement for . . . reasonable litigation costs incurred in connection with such court proceeding." 26 U.S.C. § 7430(a)(2). The term "prevailing party" is defined as "any party . . . which has substantially prevailed with respect to the most significant issue or set of issues presented" and "which meets the requirements of the 1st sentence of section 2412(d)(1)(B) of title 28, United States Code. . . ." 26 U.S.C. § 7430(c)(4)(A)(i)(II), (ii). When the final determination with respect to tax liability is made by a court, the court shall determine whether a party is a prevailing party. 26 U.S.C. § 7430(c)(4)(C)(ii).
In addition, the party must exhaust available administrative remedies. 26 U.S.C. § 7430(b)(1). Defendant does not contend that Plaintiff failed to exhaust her administrative remedies in this case.
The United States bears the burden of establishing that its position was substantially justified. 26 U.S.C. § 7430(c)(4)(B)(i). St. David's Health Care Sys. v. United States, 349 F.3d 232, 234 (5th Cir. 2003); Sherbo v. Commissioner, 235 F.3d 650, 653 (8th Cir. 2001). However, the burden of proof as to all other elements is on the taxpayer. Tax Court Rule 232(e). See Jensen v. Commissioner, 80 T.C.M. (CCH) 645 (Nov. 6, 2000).
The Court of Appeals for the Third Circuit has held that the burden is on the taxpayer to demonstrate that the position of the United States was not substantially justified. Nicholson v. Commissioner, 60 F.3d 1020, 1025 (3d Cir. 1995). However, that case was decided in 1995 under a prior version of the statute. "A 1996 amendment to the statute explicitly placed the burden of proof on this issue on the government when it added § 7430(c)(4)(B). Sherbo, 255 F.3d at 653.
The United States argues that its position with regard to the Toepfer Estate was substantially justified and that the estate exceeds the net worth requirement. Plaintiff responds that the position of the United States was not substantially justified and that the estate's net worth does not exceed the statutory ceiling when it is properly determined.
Substantially Justified Position
The United States contends that its position in this litigation was substantially justified, reiterating the argument it has made that a literal reading of the documents leads to the conclusion that Nora's death terminated the 1989 Trust and that the remaining assets of the Trust were distributed according to her sister Grace's will, with fifty percent going to "Nora."
Plaintiff argues that Defendant's position, from its initial determination of the tax liability through this litigation, has not been substantially justified. Plaintiff highlights the following points: 1) in assessing the tax liability including the net remainder interest of the 1989 Trust, the auditor quoted and relied upon a passage from a case, Riverside Trust Co. v. Twitchell, 342 Pa. 558 (1941), that the case did not actually contain, nor has Plaintiff found this language in any other Pennsylvania decision; 2) no adequate reason was ever given for denial of her claim for refund and the letter disallowing it stated "The basis of the claim is a reversal of an adjustment made on examination of the return"; 3) Defendant has pointed to no Pennsylvania statute or case that suggests this result; 4) and Defendant's argument that the assets should have been given to "Nora" when she had died not only is absurd and illogical, but does not follow from the terms of Grace's will, which were that the assets pass to "Nora" and not "Nora's estate," two distinct entities under Pennsylvania law.
The government's position is "substantially justified" if it is "justified to a degree that could satisfy a reasonable person" or had a "reasonable basis both in law and in fact." Nicholson, 60 F.3d at 1026. See Pierce v. Underwood, 487 U.S. 552, 566 n. 2 (1988).
The United States has failed to demonstrate that its position was substantially justified. First, Defendant cites no authority in support of its position. Instead, it cites cases holding that testamentary documents should be followed without reference to extraneous evidence where their language is unambiguous. Pennsylvania law also recognizes, however, that construction of testamentary documents should include a common sense understanding of their unmistakable testamentary scheme. Bloom v. Selfon, 555 A.2d 75, 77 (Pa. 1989) (interpreting the unambiguous phrase "if my husband predeceases me" as meaning "if my husband is no longer able to take as a beneficiary" when a couple's divorce rendered the ex-husband unable to inherit as a matter of law and approving of the distribution of the wife's estate to the secondary beneficiary in her will).
Second, as Plaintiff observes, Grace's will provided that assets were to pass to "Nora" and not to "Nora's estate," which are two separate entities under Pennsylvania law. See Marzella v. King, 389 A.2d 659, 660 (Pa.Super. 1978) ("It is well settled that all actions that survive a decedent must be brought by or against the personal representative.") (citing 20 Pa. C.S. § 3373) (other citations omitted). Thus, the result advocated by the United States does not even follow from the literal language of the documents.
Finally, this Court has already determined that, to conclude that Nora's death triggered the termination of the 1989 Trust and invoked the provision of Grace's will giving fifty percent of her estate to "Nora" although Nora was deceased and Grace's will did not indicate that her estate should pass to "Nora's estate" would be an absurd result.
Net Worth Requirement
As noted above, to be a prevailing party for purposes of § 7430, a taxpayer must meet the requirement of the first sentence of 28 U.S.C. § 2412(d)(1)(B), namely that the party "submit to the court an application for fees and other expenses which shows that the party is a prevailing party and is eligible to receive an award under this subsection." For purposes of this section, the term "party" means "an individual whose net worth did not exceed $2,000,000 at the time the civil action was filed." 28 U.S.C. § 2412(d)(2)(B)(i). Section 7430 specifies that, for an estate, the net worth requirement shall be determined as of the date of the decedent's death. 26 U.S.C. § 7430(c)(4)(D)(i)(I). Although there appears to be some inconsistency between these sections in that § 2412 indicates that net worth should be calculated at the time suit is filed and § 7430(c)(4)(D) indicates that it should be calculated at of the date of the decedent's death, § 2412 refers to individuals, corporations, partnerships, associations and the like, but not to estates and therefore the more specific statute, which incorporates the more general one, applies along with its particular elements. Estate of Kunze v. Commissioner, 233 F.3d 948, 951 (7th Cir. 2000). Thus, the net worth of an estate for purposes of § 7430 should be determined as of the date of the decedent's death.
Plaintiff argues that she, the administrator of the estate, does not have a net worth in excess of $2,000,000. However, she cites no authority to support the contention that the administrator should be deemed the prevailing party rather than the estate itself.
Plaintiff's application states that, as of the date of Nora Toepfer's death, the estate had a gross estate value of $742,341.49. (Docket No. 40 ¶ 8.) Defendant notes that, on the Estate Tax Return filed by the Toepfer Estate on December 1, 1999, the "total gross estate" was listed as having a value of $6,429,210.23 and the "taxable estate" was listed as having a value of $4,028,059.01. (Docket No. 44 Ex. 1.) Plaintiff responds that these amounts include transfers made during the decedent's lifetime and the value of a trust, but these were not assets of the estate at the time of Nora's death.
In Estate of Rao v. United States, 987 F. Supp. 249 (S.D.N.Y. 1997), the United States argued that the plaintiff could not obtain attorney's fees and costs because, inter alia, the estate had a net worth above the statutory maximum of $2,000,000.00 The court noted that:
the disputed question is whether the calculation of net worth should also include properties that were controlled by the decedent at the time of his death but which passed outside of his estate because his children had survivorship rights. While the law on this point is unsettled, the Court concludes that, in the instant case, the properties that passed outside of the estate under survivorship agreements should not be included in the estate's net worth under 26 U.S.C. § 7430 and 28 U.S.C. § 2412(d)(2)(B). This conclusion follows from the purpose of the net worth ceiling, which is to limit the award of attorneys' fees to those persons who might otherwise be materially deterred from pursuing a valid legal claim against the Government. Here, the Estate's ability to bear the costs of this litigation was a function of the assets over which the Estate had control. An estate may be able to force distributees to bear its debts, but it cannot utilize the proceeds of properties that formerly belonged to the decedent but have now passed by survivorship to pay its attorneys' fees. Moreover, as a practical matter, it seems exceedingly unlikely that anyone would plan his estate with the express purpose of keeping the estate's net worth below the ceiling set by § 2412(d)(2)(B).Id. at 252 (citations omitted). The government conceded that, if the value of the decedent's property at East 61st Street (which had passed outside the estate) were excluded, the net worth of the estate at the time the suit was filed was $1,581,997. Therefore, the court concluded that no further discovery on this issue was necessary and that the estate met the net worth requirement.
In this case, Plaintiff notes that the "total gross estate" to which the United States refers includes "transfers made during decedent's life" in the amount of $5,686,868.74 as listed on Schedule G of the Estate Tax Return. This schedule lists a value for the trust established by Nora on June 10, 1992 for which Southwest National Bank was the trustee, but this trust was not part of the estate's "probate estate" and these assets were not assets of the Toepfer Estate at the time of Nora's death. Plaintiff argues that, excluding this amount, the stocks and bonds, mortgages and other miscellaneous property as listed on Schedules B, C and F, respectively, add up to only $742,341.49.
Defendant has not cited authority to support the contention that the net worth of the estate is the same as the "total gross estate" or the "taxable estate," terms specifically used for tax purposes. Plaintiff has demonstrated that the net worth of the estate as of the date of Nora's death totaled $742,341.49. She has further supported the argument that the value of the 1992 Trust, which was a transfer made during Nora's life, was not an asset of the Toepfer Estate as of the date of her death. Therefore, she has demonstrated that the estate's net worth did not exceed the statutory amount.
In conclusion, Plaintiff has demonstrated that she is a "prevailing party" and that she can recover reasonable litigation costs under § 7340. As presented in her application, she incurred reasonable court costs in the amount of $1,134.67 for document reproduction, filing fees, research, telephone expenses, postage and paralegal time, and she incurred reasonable attorneys' fees in the amount of $42,920.00, for a total of $44,054.67. The attorneys' fees are substantiated by affidavits from the attorneys who incurred them and, where applicable, the hourly rates of the attorneys have been capped at the statutory maximum rate of $150.00 per hour. (Docket No. 40 ¶ 6 Exs. A-F.) 26 U.S.C. § 7430(c)(1)(B)(iii); Revenue Procedure 2003-85, § 3.33. Defendant has not challenged the amount of costs or attorneys' fees Plaintiff seeks.
For these reasons, it is recommended that Plaintiff's application for reasonable litigation costs pursuant to 26 U.S.C. § 7430 (Docket No. 40) be granted and that she receive reasonable court costs in the amount of $1,134.67 and reasonable attorneys' fees in the amount of $42,920.00, for a total of $44,054.67.
Within ten (10) days of being served with a copy, any party may serve and file written objections to this Report and Recommendation. Any party opposing the objections shall have seven (7) days from the date of service of objections to respond thereto. Failure to file timely objections may constitute a waiver of any appellate rights.