Estate of E. Kunze v. Commissioner of Internal Revenue, 00-1207

• Decision Date: 16 November 2000
• Docket Number: No. 00-1207,00-1207
• Parties: (7th Cir. 2000) ESTATE OF EDWARD KUNZE, DECEASED, Carol Ann Hause, Executor, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee
• Court: U.S. Court of Appeals — Seventh Circuit

Page 948

233 F.3d 948 (7th Cir. 2000)

ESTATE OF EDWARD KUNZE, DECEASED, Carol Ann Hause, Executor, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 00-1207

In the United States Court of Appeals For the Seventh Circuit

Argued September 20, 2000

Decided November 16, 2000

Appeal from a Decision of the United States Tax Court No. 16583-98

[Copyrighted Material Omitted] Before COFFEY, EASTERBROOK, and EVANS, Circuit Judges.

EVANS, Circuit Judge.

Edward J. Kunze died on December 18, 1992. The after-tax net worth of his estate at the time of his death was approximately $2.5 million. This amount is uncontested. Nine months after Edward's Estate filed its tax return, an audit, which eventually lasted 21 months, was started. During the long audit, interest of $21,701.57 accrued.

On July 29, 1996, the Estate filed a petition with the IRS requesting an abatement of this interest charge by invoking 26 U.S.C. sec. 6404.¹ Exercising its discretion, the IRS denied the request and the Estate filed this suit in the U.S. Tax Court for review of the denial. The IRS filed a motion to dismiss for lack of jurisdiction, arguing that the net worth of the estate as of the date of Kunze's death exceeded the jurisdictional² limit of $2 million. The Tax Court agreed and dismissed the case.

On appeal to us, the Estate argues that due to a convoluted series of cross- references in the Internal Revenue Code, the Tax Court applied the wrong statute in determining subject matter jurisdiction. It also alleges that the jurisdictional requirement, limiting judicial review of abatements to estates valued at more than $2 million, is uncon stitutional both on its face and as applied.

We have jurisdiction over this appeal under 26 U.S.C. sec. 7482(a). We apply the same standard of review to a Tax Court decision that we apply to district court determinations in a civil bench trial: We review questions of law de novo; we review factual determinations, as well as applications of legal principles to those factual determinations, only for clear error. Eyler v. Commissioner of Internal Revenue, 88 F.3d 445, 448 (7th Cir. 1996).

Internal Revenue Code sec. 6404 grants the Tax Court jurisdiction to review abatement of interest denials if the appealing party meets the requirements of sec. 7430(c)(4)(A)(ii).³ Section 7430(c)(4)(A)(ii) references the requirements of 28 U.S.C. sec. 2412(d)(2)(B), which, for purposes of an award of attorneys fees and litigation costs, defines party as "an individual whose net worth did not exceed $2 million at the time the civil action was filed." However, 28 U.S.C. sec. 2412(d)(2)(B) refers to the maximum net worth of an individual or corporation seeking to bring suit and not the maximum net worth of an estate. Here, the Estate, not an individual, brought suit. Thus, the Tax Court applied another subsection of 7430- -sec. 7430(c)(4)(D)--which provides "special rules" for applying the net worth requirement of 28 U.S.C. sec. 2412(d)(2)(B) "for purposes of section 7430(c)(4) (A)(ii)." The special rules outlined in sec. 7430(c)(4)(D) state that the $2 million net worth limitation set forth in sec. 7430(c)(4)(D) shall apply to an estate and shall be calculated at the time of the decedent's death. (Emphasis added.)

The Estate contends that instead of calculating the net worth of the estate when Kunze died in 1992, as required by sec. 7430(c)(4)(D), the Tax Court should have followed the requirements of 28 U.S.C. sec. 2412(d)(2)(B) and calculated the Estate's value when it filed suit against the IRS 6 years later, in 1998. The Estate argues that sec. 7430(c)(4)(D) was inapplicable because sec. 6404(i)(1) refers only to subsection 7430(c)(4)(A)(ii) and not to subsection 7430(c)(4)(D). Moreover, it contends that the IRS was estopped from contesting jurisdiction because the Estate relied on misinformation provided by an IRS employee. Finally, the Estate argues that sec. 7430(c)(4)(D) did not apply to sec. 7430(c)(4)(A)(ii) because the unamended version of (4)(D) referenced a nonexistent subsection of 7430(c)(4)(A)(ii).

We find that all three of these arguments are unpersuasive and conclude that the Tax Court correctly applied the jurisdictional limitations set forth in sec. 7430(c)(4)(D). Moreover, even were we to disregard sec. 7430(c)(4)(D) and calculate the estate's net worth at the time the action was filed, as required by 28 U.S.C. sec. 2412(d)(2)(B), the result would remain unchanged. The Estate's contention that its net worth at the time it filed suit was less than $2 million is based on the mistaken assumption that, in calculating its net worth, the IRS should exclude the value of assets distributed upon the death of the decedent. However, we have rejected this calculus and held that for the purpose of sec. 7430 the valuation of an estate must encompass all assets, including those distributed prior to litigation. Estate of Woll v. United States, 44 F.3d 464, 470 (7th Cir. 1994). Thus, regardless of which statute applied, the net worth of the estate exceeded $2 million; therefore, the Tax Court lacked jurisdiction.

The Estate is correct in noting that sec. 6404(i)(1) does not directly reference sec. 7430(c)(4)(D) and instead refers to sec. 7430(c)(4)(A)(ii). This section, (A)(ii), in turn, incorporates the requirements of 28 U.S.C. sec. 2412(d)(2)(B). Unfortunately, 28 U.S.C. sec. 2412 does not direct the reader back to sec. 7430. However, because 28 U.S.C. sec. 2412(d)(2)(B) refers to individuals, corporations, partnerships, associations and their like, but not estates, the reader is on notice that this statute alone does not establish the jurisdictional requirements for estates.

In fact, sec. 7430 provides special rules for estates. Section 7430(c)(4)(D) specifically references sec. 7430(c)(4)(A)(ii) and states that 4(D) provides "special rules" for applying the net worth requirement of sec. 2412(d)(2)(B) "for purposes of the subparagraph (A)(ii) of this paragraph." Thus, sec. 7430 establishes that subparagraph (4)(D) applies to sec. 7430(c)(4)(A)(ii) for determining jurisdictional limits.

Granted, the series of back and cross- references presented in this case is not a model of clarity. However, such meanderings are not uncommon in the Tax Code and have been known to provide lifetime employment, if not enjoyment, to tax attorneys. Here, the Tax Court adeptly followed the trail of cross- references, applied the appropriate statute, and correctly determined that it lacked subject matter jurisdiction.

The Estate also argued that the IRS should be estopped from raising the issue of subject matter jurisdiction. In a final determination letter sent in April 1998, the IRS denied the Estate's petition for interest abatement and erroneously stated that the Estate could file for court review, provided "your net worth . . . not exceed $2 million as of the filing date of your petition for review." The Estate argues that the court should have deferred to the IRS's erroneous letter and determined the net worth of the estate at the time it filed suit in 1998.

However, the Estate cannot manufacture subject matter jurisdiction based solely on a government agent's misinterpretation of tax statutes. See Commissioner v. Schleier, 515 U.S. 323, 336 n.8 (1995) (interpretative ruling by the IRS cannot be used to "overturn the plain language of a statute"). Moreover, we have held that estoppel will not operate against the government where a plaintiff has relied on the erroneous advice of a government agent. Cheers v. Secretary of Health, Education, and Welfare, 610 F.2d 463, 469 (7th Cir. 1979) ("Parties dealing with the Government are charged with knowledge of and are bound by statutes and lawfully promulgated regulations despite reliance to their pecuniary detriment upon incorrect information received from Government agents or employees.").

Here, the Estate's argument that greater deference should have been given to the final determination letter is unavailing. The Estate was represented by counsel, and its failure to decipher the Tax Code cannot be excused by its reliance on a government employee's error. The Tax Court correctly held that a mistake on the part of an IRS agent did not confer subject matter jurisdiction where there existed no statutory basis for judicial review.

The Estate also argues that sec. 7430(c)(4)(D) should not have applied because in April 1998, when it received the IRS letter denying abatement, the unamended version of sec. 7430(c)(4)(D) referenced a nonexistent subsection of sec. 7430, namely, sec. 7430(c)(4)(A)(iii).⁴ Because subsection 7430(c)(4)(A)(iii) did not exist, the Estate argues that the limits set forth in sec. 7430(c)(4)(D) should be ignored and we should look to 28 U.S.C. sec. 2412(d)(2)(B) to determine subject matter jurisdiction.

This argument fails on two counts. First, Congress amended sec. 7430(c)(4)(D) on July 22, 1998, 2« months before the Estate filed suit in October. Thus, even if the typographical error had caused confusion, the Estate had access to the corrected version of (4)(D) before it filed suit.

Moreover, the error is so transparent that the Estate can hardly claim to have been bamboozled. The unamended version of sec. 7430(c)(4)(D) incorrectly referred to subparagraph (iii) instead of subparagraph (ii). However, subparagraph sec. 7430(c)(4)(A)(ii) still set forth the relevant jurisdictional limitations. In turning to subsection (4)(A), a reader would realize that the subparagraph had been misnumbered, but would not be surprised by the intent of subsection 4(A).

Nevertheless, the Estate suggests that we should read the subsection literally and simply conclude that it no longer applies. There are limits to literalism. Generally, each word of a statute is given effect unless the provision is the result of an obvious mistake or error. See 2A Norman J. Singer, Sutherland Statutory Construction sec. 46.06 (6th ed. 2000). Such is the case ...