Christensen v. US

• Decision Date: 10 March 1993
• Docket Number: Civ. A. No. 91-573 MMS.
• Citation: 815 F. Supp. 786
• Parties: James L. CHRISTENSEN, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Delaware

815 F. Supp. 786

James L. CHRISTENSEN, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 91-573 MMS.

United States District Court, D. Delaware.

March 10, 1993.

David H. Williams, of Morris, James, Hitchens & Williams, Wilmington, DE, for plaintiff.

William C. Carpenter, Jr., U.S. Atty., and Mary McDonough, Asst. U.S. Atty., Dept. of Justice, Wilmington, DE, Charles H. Keen, U.S. Dept. of Justice, Washington, DC, for defendant.

OPINION

MURRAY M. SCHWARTZ, Senior District Judge.

Plaintiff, James L. Christensen, has moved to recover costs and attorney's fees from the defendant, the United States of America, pursuant to 26 U.S.C. § 7430 (1988) and Rule 54 of the Local Rules of Civil Practice and Procedure of the United States District Court for the District of Delaware (1992). For the reasons which follow, the plaintiff's motion will be granted.

I.

The parties stipulated to many of the facts in a pretrial order which was to control at trial on the substantive merits of the litigation. The necessity for that trial was obviated when the government agreed that plaintiff was entitled to a refund and the government abandoned efforts to collect additional sums allegedly due from the plaintiff taxpayer. Those facts adopted in toto are:

1. Namco was incorporated in Colorado in January, 1982. Namco initiated its construction business in 1982 and ceased to function in 1983. Christensen was President of Namco.

2. The IRS determined that Namco paid its employees a total of $424,035.01 in wages, and that Namco failed to withhold from such wages total employee taxes of $119,661.21.

3. In 1986, the IRS assessed a 100 percent penalty in the amount of $91,946 against Christensen contending that Christensen is a responsible person for taxes withheld from the wages of Namco employees for the period January 1, 1982 through September 30, 1983.

4. Christensen had significant control over Namco's finances, and thus if Namco had employees, and paid such employees wages, Christensen was responsible for collecting, accounting for, and paying over federal income taxes and social security taxes required to be withheld from such wages.

5. As a result of the assessment against Christensen, the IRS applied overpayments which would have otherwise been paid to Christensen and his wife with respect to their individual joint income tax returns in the total amount of $3,087.40. Christensen filed a claim for refund of the $3,087.40. The IRS did not take action on the claim for refund and Christensen then filed this suit to recover the $3,087.40.

Docket Item ("D.I.") 14 at 2-3.¹

Plaintiff filed suit on October 17, 1991. D.I. 1. On September 10, 1992, after answer, counterclaim, discovery and a pretrial conference, and establishment of a September 22, 1992, trial date, the United States conceded the case. D.I. 27 at 1. A stipulation of dismissal was filed on September 14, 1992, which provided for a refund of $4,837.40. D.I. 24. Plaintiff, however, reserved his right to file for costs and attorney's fees. Id. On September 22, 1992, plaintiff filed this motion for costs of $238.40 and attorney's fees of $10,741.69. D.I. 25 at Exhibits A and E.²

II.

In response to plaintiff's motion, the defendant makes two arguments. First, the defendant argues that the plaintiff failed to exhaust his administrative remedies. Second, defendant argues that plaintiff has not shown that he was the "prevailing party", which Congress has required as a predicate to recovery of attorney's fees and costs under § 7430. For the reasons which follow, this Court finds neither argument persuasive.

A. Exhaustion of Administrative Remedies

Subsection (b) of § 7430 provides that "A judgment for reasonable litigation costs shall not be awarded.... in any court proceeding unless the court determines that the prevailing party has exhausted the administrative remedies available to such party within the Internal Revenue Service." 26 U.S.C. § 7430(b)(1). In this case, defendant has argued that plaintiff failed to exhaust his administrative remedies by not requesting an "Appeals office conference" as instructed on the letter he was sent. The record does not reflect an "Appeals office conference" was ever held. The absence of such a conference does not, however, automatically warrant a finding of a failure to exhaust administrative remedies.

The IRS regulations explain when administrative remedies have not been exhausted:

A party has not exhausted its administrative remedies available within the Internal Revenue Service ... unless —

. . . . .

(ii) If no Appeals conference is granted, the party, prior to ... the issuance of a statutory notice of disallowance in the case of a civil action for refund in a court of the United States —

(A) Requests an Appeals office conference in accordance with §§ 601.105 and 601.106 of the Statement of Procedural Rules;

(B) Files a written protest if a written protest is required to obtain an Appeals office conference; and

(C) Agrees under section 6501(c)(4) to extend the time for an assessment of tax if necessary to provide the Appeals office with a reasonable time period to consider the tax matter.

26 C.F.R. § 301.7430-1(b) (1992). The IRS does not argue that no request was made. Instead it urges "plaintiff never requested an Appeals conference as called for by applicable Treasury regulations." D.I. 27 at 6.³

The IRS has not made clear the factual predicate which would indicate the sort of response required of the plaintiff. When a taxpayer need only make an oral "request", and when a taxpayer must file a written "protest", depends upon the particular circumstances of the taxpayer's case. See generally, I.R.S. Publication 556, Examination of Returns Appeal Rights, and Claims for Refund (1991) (explaining when written protest is, or is not, required). Under the terms of section (ii)(A) of this regulation, a taxpayer will not exhaust his administrative remedies unless he "requests an Appeals office conference in accordance with §§ 601.105 and 601.106 of the Statement of Procedural Rules". This requirement applies to all taxpayer responses. Section (ii)(B), however, is not as broad as subsection (ii)(A) and requires the taxpayer "files a written protest if a written protest is required to obtain an Appeals office conference...." (Emphasis added). See also 26 C.F.R. § 601.106(b) (describing taxpayer's right to an appeal after a request and "a written protest when required").

Elsewhere, the regulations describe when a written protest is required versus when an oral request suffices. "An oral request is sufficient to obtain Appeals consideration in ... all office interview or correspondence examination cases.... No written protest or brief statement of disputed issues is required." 26 C.F.R. § 601.106(a)(1)(iii)(a). See also 26 C.F.R. § 601.105(d)(2)(i) (stating no written submission required "in office interview and correspondence cases."); 26 C.F.R. § 601.105(c)(1)(i) and (ii) (same). On the other hand, written protests are required if the amount in controversy exceeds $10,000 in a field examination case. "A written protest is required to obtain Appeals consideration in a field examination case if the total amount of proposed additional tax ... exceeds $10,000 for any taxable period." 26 C.F.R. § 601.106(a)(1)(iii)(c). See also § 601.105(d)(2)(iii) (requiring written protest if amount of proposed tax exceeds $10,000); 26 C.F.R. § 601.105(c)(2)(iv) (same).

Because in plaintiff's case the disputed amount was $91,946.89, if the letter from the IRS was written pursuant to a field examination, a written protest was required. If, on the other hand, the letter was written pursuant to an office examination, or a correspondence examination, a written protest would not be required. Plaintiff appears to have satisfied the requirement that an oral request be made since, in his subsequent letter, plaintiff explained "I would like to acknowledge that I have attempted to contact you several times during the last week. I have left messages almost daily and you have returned my request only once. I have requested to meet with you through a Mr. Joe Smith...." D.I. 27 at Exhibit B.

The sparse record does not reflect that the examination conducted by the IRS was a "field examination", § 601.105(b)(3), which would require a written protest.⁴ The record also does not reflect that the IRS conducted an "office examination", § 601.105(b)(2), or a "correspondence examination", § 601.105(b)(2)(i), both requiring only an oral request which plaintiff apparently satisfied.⁵ Indeed, the only substantive comments which reveal anything about the merits of the IRS's position appear to have been written after an interview at the IRS's office with a former associate of the plaintiff.⁶ If anything, this record leads to the conclusion that an office examination occurred.

Because a taxpayer need not file a written protest after an office or correspondence examination, and the IRS has failed to provide of record any information to establish that a written protest was required, the IRS has offered no support for its argument that plaintiff failed to exhaust his administrative remedies.⁷ For this reason, the Court will not find that plaintiff failed to exhaust his administrative remedies.

Even if a written protest were required, plaintiff has substantially complied with the instructions he was given. As guidance as to what suffices as a "written protest", the regulations state "Instructions for preparation of written protests are sent to the taxpayer with the transmittal (30-day) letter." 26 C.F.R. § 601.105(d)(2)(iv).⁸ The IRS argues plaintiffs letter response to the instructions was deficient in that "1 The letter did not request an Appeals office conference. 2 No facts alleged in plaintiff's letter were declared to be true under penalty of perjury. 3 There was no mention of the tax periods in dispute, 4 nor was there any itemized schedule of any unagreed sic...