Opinion
CIVIL ACTION NO 00-11296-DPW
December 9, 2003
MEMORANDUM AND ORDER
Plaintiffs Paul and George Jean brought this action pursuant to U.S.C. § 7422(a) contending that the Internal Revenue Service ("IRS") erred in deeming plaintiffs "responsible persons" for the nonpayment of employment taxes for the period between March 31, 1992 and September 30, 1992. At the close of discovery, Paul Jean moved for summary judgment, which I granted as to the period following August 2, 1992 but denied as to the period preceding that date. After the close of evidence during the subsequent jury trial, I granted Paul Jean's Motion for a Judgment as a Matter of Law. Paul Jean now moves for attorneys fees pursuant to 26 U.S.C. § 7430.
I. BACKGROUND
A. Facts and Procedural History
From 1987 up through the period at issue in this litigation, Paul Jean ("Paul") worked as a bookkeeper for Focus Financial Services, Inc. ("Focus"). Near the end of his tenure with Focus, the company experienced financial troubles and as a result, employment tax liabilities accrued against the company. In 1996, the IRS, pursuant to I.R.C. § 6672, deemed Paul and his father George, who also worked for Focus, "responsible persons" as defined by the statute and assessed against them a penalty in the amount of the unpaid payroll taxes. The Jeans' subsequent administrative appeals were rejected by the IRS on June 28, 1996, and they brought this action to further challenge the assessment.
The Jeans each paid $84.00 of the amount assessed and brought this action for a refund of those payments. The United States counterclaimed, seeking $18,078.55 from George Jean and $13,683.04 from Paul Jean.
By the close of discovery, it was undisputed that (1) Paul's duties at Focus included managing company bills, preparing invoices, tracking accounts receivables, and filing payroll statements; (2) Paul was a signatory on Focus's bank accounts, and during a portion of the relevant period, he was authorized to write checks for the company, and (3) at no time was Paul an officer, director, or shareholder of Focus, nor did he ever have the authority to hire or fire employees. Before trial, Paul moved for summary judgment, arguing that the evidence was undisputed that he was not a "responsible person" under section 6672. B. Summary Judgment
Neither George Jean nor the United States filed any dispositive motions at that time.
Analyzing the evidence under the seven-factor framework set forth inVinick v. United States, 205 F.3d 1, 7 (1st Cir. 2000), I determined that there was a genuine issue of material fact as to whether Paul was a "responsible person" under section 6672 because of the factual disputes concerning his active involvement in substantial aspects of the day-to-day management of Focus and, more importantly, as to the extent of his decision-making authority to determine which, when, and in what order outstanding debts or taxes were be paid. As to the latter issue, I found that while Paul submitted an affidavit stating that he did not have any authority with regard to the payment of creditors, his own deposition testimony that he had the authority to issue small checks without the approval of Pottle or his father — and in fact had exercised such authority on a number of occasions — put the issue of his decision-making authority in dispute.
The seven non-exclusive factors identified in Vinick concern whether the party
(1) is an officer or member of the board of directors, (2) owns or possesses an entrepreneurial stake in the company, (3) is active in the management of day-to-day affairs of the company, (4) has the ability to hire and fire employees, (5) makes decisions regarding which, when and in what order outstanding debts or taxes will be paid, (6) exercises control over daily bank accounts and disbursement records, and (7) has check-signing authority.205 F.3d at 7 (citations omitted).
This finding relied primarily on Paul's own deposition testimony, in which he stated that he (1) participated in daily meetings with his father and Michael Pottle, the owner and director of Focus, to discuss the financial obligations of the company, (2) logged, filed, and tracked bills the company received, (3) prepared invoices and signed and disbursed corporate checks in payment of some of the company's bills and expenses, and (4) kept track of amounts owed to and owed by clients.
In order to establish liability under section 6672, the government must establish that (1) a person is "responsible" for collecting, accounting for, and paying over the taxes; and (2) he acted "willfully" in failing to do so. Vinick, 205 F.3d at 3-4. Paul also disputed that he acted "willfully" in failing to pay the employment taxes, but his argument stemmed from the fact that he was not authorized to make determinations regarding payments to creditors and thus it merged with his argument that he was not "responsible." In any event, I found that there was a genuine issue of material fact about Paul's willfulness even beyond the issue of Paul's authority to pay creditors.
While I found that summary judgment was not warranted as to the general question of whether Paul was a "responsible person" under section 6672, I found that there was no genuine issue of material fact that Paul was not a "responsible person" after August 2, 1992, when he relinquished his check-signing authority. I therefore granted Paul's summary judgment motion as to the period of August 3, 1992 to September 30, 1992.
C. Trial
After the conclusion of evidence at trial concerning the tax assessments against both Paul and his father, Paul moved for a judgment as a matter of law on his claim for the period of May 31, 1992 to August 2, 1992, as well as on the government's counterclaim against him. Having the benefit of a live testimony to evaluate, I granted Paul's motion. Paul now moves for attorneys' fees pursuant to 26 U.S.C. § 7430.
George also moved for a judgment as a matter of law, but I denied his motion. A jury subsequently returned a verdict against George.
II. DISCUSSION
A. Attorneys' Fees Under U.S.C. § 7430
Section 7430 of Title 26 states that "[i]n a 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 [Title 26]," a "prevailing party" may be awarded "reasonable administrative costs" and "reasonable litigation costs" incurred in connection with the court proceeding. 26 U.S.C. § 7430(a)(1)-(2). Under section 7430, "reasonable litigation costs" include reasonable court costs and reasonable attorneys' fees. Id. § 7430(c)(1).
Under section 7430, administrative and litigation costs are only warranted if (1) the prevailing party has exhausted his or her administrative remedies, (2) the costs are allocable to the United States and not to any other party, (3) the prevailing party has not unreasonably protracted proceedings, and (4) the prevailing party files an application with the IRS for such costs before the 91st day after the date on which the final decision of the IRS as to the determination of the tax, interest, or penalty is mailed to the party. Id. § 7430(b) (1)-(4). The United States does not contend that any of these conditions has not been met here.
Reasonable litigation costs also include the reasonable expenses of expert witnesses and the reasonable cost of any study, analysis, engineering report, test, or project necessary for the preparation of the party's case. Id. § 7430(c)(1)(B). Costs other than court costs are "based upon prevailing market rates for the kind or quality of services furnished," except that expert witnesses are not to be compensated in excess of the highest rate of compensation for expert witnesses paid by the United States, and attorneys' fees "shall not be in excess of $125 per hour unless the court determines that a special factor, such as the limited availability of qualified attorneys for such proceeding, the difficulty of the issues presented in the case, or the local availability of tax expertise, justifies a higher rate."Id. Paul has asked for fees in excess of the statutory rate and the government contends that such fees are not warranted, but, given my disposition of the claim in general, I need not reach those issues here.
As defined by section 7430, a "prevailing party" is one which (1) has substantially prevailed with respect to the amount in controversy, or (2) has substantially prevailed with respect to the most significant issue or set of issues presented. Id. § 7430(c)(4)(I)-(II). The United States does not dispute that Paul is a "prevailing party" under this core definition; however, there is an exception to the general definition of a "prevailing party" where the "United States establishes that its position was substantially justified," id. § 7430(c)(4)(B), and the United States contends that because the exception applies in this case this Court should not award litigation and administrative costs to Paul.
Prior to 1996, the taxpayer had the burden to show that the government was not substantially justified in its position to qualify as a "prevailing party." See Nicholson v. C.I.R., 60 F.3d 1020, 1025-26 (3d Cir. 1995); Kenagy v. United States, 942 F.2d 459, 463 (8th Cir. 1991); Powell v. C.I.R., 891 F.2d 1167, 1173 (5th Cir. 1990). Congress amended the statute in 1996, however, taking the substantial justification language out of the provisions defining "prevailing party" and turning it into an exception which clearly places the burden on the government to prove that it was substantially justified in its position. See Pub.L. No. 104-168, § 701(a); cf. United States v. Bisbee, 245 F.3d 1001 (8th Cir. 2001) (citing pre-1996 case for proposition that taxpayer bears burden).
B. Substantially Justified
A position taken by the government is substantially justified under section 7430 where it is not unreasonable, as determined on a case-by-case basis. Kenagy v. United States, 942 F.2d 459, 464 (8th Cir. 1991) (analogizing from Equal Access to Justice Act decisions);see also Cooper v. United States, 60 F.3d 1529, 1531 (11th Cir. 1995) (standard is that IRS's position was "justified to a degree that could satisfy a reasonable person" (quoting Pierce v. Underwood, 487 U.S. 552, 565 (1988))). In other words, the government's position is not substantially justified where its position is not "clearly reasonable, well founded in law and fact, [or] solid though not necessarily correct." Kenagy, 942 F.2d at 464 (quoting United States v. Estridge, 797 F.2d 1454, 1459 (8th Cir. 1986)) (alterations in original). For instance, the government's position may be unreasonable if it failed to adequately investigate its case or placed unwarranted reliance on biased witnesses. Id.
As an initial matter, Paul contends that there is a presumption that the IRS was unjustified in its position because it did not follow IRS Policy Statement P-5-60, part of which was incorporated into the IRS Manual. Under section 7430(c)(4)(B)(ii), there is a rebuttable presumption against the government if the IRS did not "follow its applicable published guidance in the administrative proceeding."
The United States argues that Policy Statement P-5-60 and IRS Manual do not constitute "applicable published guidance" as defined under section 7430. However, I need not reach the question of whether the policy statement and IRS Manual constitute "applicable published guidance" because I find that, even assuming they do, no presumption properly arises against the IRS. Policy Statement P-5-60 states, in relevant part:
The United States points out that the statute states that the term "applicable published guidance" means (1) "regulations, revenue rulings, revenue procedures, information releases, notices, and announcements" and (2) "private letter rulings, technical advice memoranda, and determination letters" issued to a taxpayer. 26 U.S.C. § 7430(c)(4)(B)(iv)(I)-(II). It argues that since IRS policy statements and the IRS Manual are not included in the enumerated lists, they do not constitute "applicable published guidance" under section 7430.
Responsibility is a matter of status, duty, and authority. Those performing ministerial acts without exercising independent judgment will not be deemed responsible.
In general, non-owner, employees of the business entity, who act solely under the dominion and control of others, and who are not in a position to make independent decisions on behalf of the business entity, will not be asserted the trust fund recovery penalty. The penalty shall not be imposed on unpaid, volunteer members of any board of trustees or directors of an organization referred to in Section 501 of the Internal Revenue Code to the extent such members are solely serving in an honorary capacity, do not participate in the day-to-day or financial operations of the organization, and/or do not have knowledge of the failure on which such penalty is imposed.
Paul does not spell out his argument in full, but apparently he contends that a presumption should arise against the United States because the tax penalty was assessed against him even though he was acting solely under the dominion of Focus's owner, Michael Pottle, was not in a position to make independent decisions on behalf of Focus, and did not participate in the day-to-day or financial operations of the organization. Whether Paul in fact was an employee with such limited authority, however, constituted the core of the dispute in this case; thus, whether the United States violated the policy statement in maintaining its position during the course of this litigation is essentially coextensive with, not antecedent to, whether the United States position was substantially justified. Paul cannot use the mere fact that he prevailed in the case to show that the government's position was not substantially justified. See De Allende v. Baker, 891 F.2d 7, 12 (1st Cir. 1989) ("The mere fact that the government lost in the underlying litigation does not create a presumption that its position was not substantially justified.");Wilfong v. United States, 991 F.2d 359, 367 (7th Cir. 1993) (reversing an award of fees where the district court's only valid explanation of its award was the jury's verdict). Similarly, the conclusion that the IRS violated its policy statement and manual — insofar as it follows in hindsight from the judgment in this case in favor of Paul — cannot be used to warrant a presumption that the government's position was not substantially justified.
Paul's central argument that the government's position was not substantially justified stems from his contention that the only bases for the government's position that he was a "responsible person" under section 7430 were his status in the company and his check-writing ability. Paul contends that in relying on such bases, the government failed to take into account case law which, he argues, clearly establishes that status and mere check-writing ability — as opposed to the authority to determine what payments to make — do not by themselves constitute sufficient bases for a payroll tax assessment. For example, inKenagy, the Eighth Circuit stated that "[m]ere technical authority to sign checks is not enough to become a responsible person. Broader authority with respect to significant tax matters is also required." Kenagy, 942 F.2d at 464 (citations omitted);see also Vinick, 205 F.3d at 10 ("[W]hether the taxpayer had check-signing authority is relevant, but only insofar as it demonstrates financial control."); United States v. Bisbee, 245 F.3d 1001, 1008 (8th Cir. 2001) ("ability [to cause a check to be issued] does not necessarily connote the authority to do so"). Similarly, the Eighth Circuit held in Barton v. United States, 988 F.2d 58 (8th Cir. 1993), that the government's reliance on plaintiff's "corporate titles, limited management and supervisory powers, and restricted signature authority" did not reasonably warrant an payroll tax penalty assessment.Id. at 60.
In those cases, however, the evidence that the taxpayers had only technical check-writing ability was virtually uncontroverted. See Kenagy, 942 F.2d at 465 (the government admitted at trial that its case was principally based on the taxpayer's signatory status);Barton, 988 F.2d at 60 (the government had "uncontradicted evidence" that the taxpayer had "no authority over tax matters"). Here, in contrast, whether Paul had authority to make determinations about which creditors to pay was in dispute. Indeed, I denied Paul's Motion for Summary Judgment largely because Paul's own deposition testimony arguably contradicted his affidavit about whether he had decision-making authority over creditor and tax matters. In his affidavit, Paul stated that he "did not have the authority at Focus to determine which creditors were to be paid" and pointed to Pottle's testimony that Paul had no "independent" authority to sign checks. However, in his deposition, Paul testified that while he consulted Pottle for large bills, he had the authority to make payments on smaller ones. For example, the following exchange took place in Paul's deposition:
It is worth noting that the standard for substantial justification, as a general matter, appears to be less stringent than the summary judgment standard. See Kaffenberger v. United States, 314 F.3d 944, 960 (8th Cir. 2003).
A. [A]gain, with the exception of very small invoices, and many of our invoice [sic] were very small, I mean, I would pay those for the most party without explicit authorization. But when it came to the largest invoices, then that was not my decision.
Q. What was the threshold that you used? Where did you draw the line between the ones that you would pay yourself and the ones you would seek approval on?
A. I'm not sure there was any specific sort of criteria that I employed or that we employed. But typically the very largest, the very largest bills, I mean, would be paid. Things like the phone bill, things of this nature. I would say certainly things under $100, for example, I would typically pay on my own.
Paul also testified that he frequently participated in discussions with Pottle and his father to determine which creditors were to be paid and that while he treated tax notices "with greater gravity than [he] would have other invoices," there was no different procedural structure in place to deal with tax payments.
In light of the state of the evidence prior to trial, I cannot say that the government's position in this litigation that Paul was a "responsible person" under section 7430 was not substantially justified. Because liability could lie with Paul even given that he had only the authority to issue small checks without approval, see Howard v. United States, 711 F.2d 729, 734 (5th Cir. 1983); Keohan v. United States, 138 F. Supp.2d 62, 74 (D. Mass. 2001), and because there was a legitimate question as to the extent of Paul's decision-making authority to make tax and debt payments, the government was not unreasonable in taking the position that Paul was a "responsible person" under section 6672 and hence liable for the payroll tax nonpayments. Accordingly, I find that the exception to the prevailing party provisions of section 7430(c)(4) apply to this case and bar the award of administrative and litigation costs to Paul.
In his Motion for Attorneys' Fees, Paul does not explicitly address the willfulness requirement for section 6672 liability. He does, however, cite to Cooper v. United States, 60 F.3d 1529 (11th Cir. 1995), in which the Eleventh Circuit held that the IRS was not substantially justified in its position that Cooper willfully filed to collect or pay employment taxes. Id. at 1532. InCooper, the IRS's position that Cooper could have known of his employer's unpaid liability was based solely on the fact that he lived at the same address as the company's treasurer. Here, in contrast, Paul admitted that he knew about Focus's nonpayment of payroll taxes, and moreover, he acknowledged that he knew that salary and debt payments were made in the same period that accruing tax liabilities were not paid. This knowledge would have been sufficient to support a finding that Paul "willfully" failed to pay the payroll taxes, see Thomsen v. United States, 887 F.2d 12, 17 (1st Cir. 1989); Howard, 711 F.2d at 735, and thus I find that the government was substantially justified in maintaining their position that the willfulness requirement of section 6672 was satisfied in this case.
Whether the government's position was substantially justified with respect to the period after Paul voluntarily gave up his check-writing ability is a more difficult issue. Indeed, as to that period, between August 3 and September 31, 1992, it was undisputed that Paul did not have check-writing ability, and I granted summary judgment in his favor on that basis. However, the fact that Paul was granted summary judgment as to this issue does not necessarily make the government's position not substantially justified, see Kaffenberger v. United States, 314 F.3d 944, 906 (8th Cir. 2003) (fact disputes that preclude summary judgment do not establish that the moving party's position is without substantial justification), and the Supreme Court has specifically stated that an officer or employee need not be responsible for the payment of withholding taxes at the end of the quarter in order to be a responsible person for that quarter. Slodov v. United States, 436 U.S. 238, 247 (1978); Brown v. United States, 591 F.2d 1136, 1140 (5th Cir. 1979). Thus, since the government was substantially justified in its position that Paul was a responsible person for at least the part of the third quarter of 1992 — prior to August 2 — I find that it was also substantially justified in maintaining its position that Paul was liable for the withholding taxes as to the entire period.
Paul also contends that the IRS sought duplicative collection of the withholding taxes for the third quarter of 1992. The IRS claims that Pottle made a payment which represented the full tax liability for the period and Paul was credited for this payment. There do appear to be credits given to Paul in 1998 and Paul has not pointed to any evidence in the record indicating that the IRS's account is not accurate.