Estate of Woll by Woll v. U.S.

• Decision Date: 30 January 1995
• Docket Number: No. 94-1192,94-1192
• Citation: 44 F.3d 464
• Parties: -354, 63 USLW 2428, 95-1 USTC P 60,187 ESTATE OF Albert A. WOLL, by David WOLL, Co-Trustee of the Third Restatement of Intervivos Revocable Trust for the Benefit of Albert A. Woll, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 464

44 F.3d 464

75 A.F.T.R.2d 95-354, 63 USLW 2428,

95-1 USTC P 60,187

ESTATE OF Albert A. WOLL, by David WOLL, Co-Trustee of the

Third Restatement of Intervivos Revocable Trust

for the Benefit of Albert A. Woll, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 94-1192.

United States Court of Appeals,

Seventh Circuit.

Argued Sept. 8, 1994.

Decided Dec. 30, 1994.

Rehearing and Suggestion for Rehearing En Banc Denied Jan. 30, 1995.

Alan N. Shovers, Marjorie J. Scharpf (argued), Kahn, Dees, Donovan & Kahn, Evansville, IN, for plaintiff-appellee.

Judith A. Stewart, Office of the U.S. Atty., Indianapolis, IN, Gary R. Allen, Robert W. Metzler, Gilbert S. Rothenberg (argued), Karen A. Smith, Stephen T. Lyons, Dept. of Justice, Tax Div., Appellate Section, Washington, DC, for defendant-appellant.

Before COFFEY and ROVNER, Circuit Judges, and FOREMAN, District Judge. ^*

ILANA DIAMOND ROVNER, Circuit Judge.

After ruling against the government on the merits of a suit challenging the tax assessed against a decedent's estate, the district court concluded that the government's litigating position had not been substantially justified and that the estate was entitled to recover its attorneys' fees and costs. We hold that in determining an estate's eligibility to recover its fees and costs, a court must consider the net value of all assets in the estate, even those that were distributed in advance of suit. Here the record indicates that when distributed assets are included in the net worth determination, the estate is disqualified from recovering its litigation expenses. We therefore reverse the award of fees and costs.

I. FACTS

Albert Woll died testate on August 8, 1987. He was survived by three children and his second wife, Sarah G. Woll. His estate included the assets of two trusts, one a revocable trust established by Albert during his lifetime (the "Albert A. Woll Trust," which we shall refer to as the "AWT"), and another that came into being upon the 1985 death of Albert's first wife, Pearl (the "Albert A. Woll Marital Trust," which we shall refer to as the "PWT"), pursuant to the terms of a revocable trust she had established during her lifetime (the "Pearl Trust"). The terms of the PWT had made the principal and interest of that trust available to Albert for the remainder of his life, but provided that on his death, the balance after taxes be distributed in equal shares to the three children of Pearl and Albert. The AWT directed that Sarah be given the use of the home that she and Albert had shared for the remainder of her life and provided that Albert's personal effects be distributed to his children immediately. The remainder of the assets in the AWT trust estate were to be placed in the "Sarah G. Woll Qualified Terminable Interest Property Trust" ("SWT") which would provide income to Sarah during her lifetime. Upon her death, the principal of the SWT would then be distributed to the children of Albert and Pearl in equal shares.

A dispute arose between Albert's estate and the IRS as to whether the taxes, debts, and administrative expenses chargeable to the estate should be paid by the PWT or the AWT. On the estate tax return filed with the IRS, the estate claimed a marital deduction for all property in the AWT that was to be distributed to the SWT. In calculating the amount of that deduction, the estate assumed that the PWT would pay any taxes and other expenses owed by Albert's estate. When it conducted an audit, however, the IRS concluded that the AWT should pay these items, an allocation that would have the effect of diminishing the amount of property remaining in the AWT for distribution to the SWT and, consequently, reducing substantially the size of the marital deduction that the estate could claim. By the IRS' reckoning, the estate owed an additional tax of $179,302.29 and interest of $73,758.95. The estate paid the assessment and, after its claim for a refund was rejected, filed this suit pursuant to 26 U.S.C. Sec. 7422 and 28 U.S.C. Sec. 1346(a)(1).

On cross-motions for summary judgment, the district court held for the estate. The court looked primarily to the provisions of the Pearl Trust to decide whether the PWT or AWT should be charged with the taxes and other expenses occasioned by Albert's death. The Pearl Trust dictated that upon the death of the survivor of Albert and Pearl, the assets remaining in the PWT would be distributed to their children. However, it also specified that PWT funds should be used to pay any taxes "which may be assessed as the result of the death of the primary beneficiary"--the primary beneficiary being Pearl. The district court construed these provisions to mean that any taxes occasioned by the distribution of the PWT assets to the children on Albert's death would be paid from the PWT itself (before the remainder was distributed to the children) rather than from any other asset in Albert's estate. Moreover, the court noted, once Pearl had died, these provisions became irrevocable; thus, the Trust's directive as to the payment of taxes could not be altered by anything that Albert might direct later. For that reason, the district court found it unnecessary to consider any of the provisions in the AWT and Albert's will relating to the payment of taxes. 809 F.Supp. 643, 645. Finally, although the Pearl Trust ostensibly authorized the payment of taxes only insofar as such taxes resulted from the death of the "primary beneficiary" of the Pearl Trust, the court found it unnecessary to decide whether "primary beneficiary" really meant Pearl alone (as the terms of the Pearl Trust suggested) or included Albert as well. Despite the fact that the taxes came due only upon Albert's death, "[t]hese taxes would not be due if Pearl were living, therefore they are due 'as a result of' [Pearl's] death." Id.

Having thus convinced the court to order a refund of the additional estate tax and interest, the estate then sought an award of attorneys' fees and costs, arguing that it had "substantially prevailed" and that the government's position in the litigation had not been "substantially justified." See 26 U.S.C. Sec. 7430(c)(4). The government opposed the motion, arguing that the estate exceeded the $2 million net worth ceiling imposed on individuals eligible to recover litigation expenses and, in any event, that the government's position in the litigation had been "substantially justified."

The court granted the estate's motion. The court was satisfied that the three sources of estate assets totalled less than $2 million as of the date of suit: by that time, the PWT had been distributed and had a value of $0; the AWT had a net value of between $902,369.91 and $955,295.00; and Albert's probate estate had an unspecified but concededly negligible value, certainly less than the more than $1 million it would take to put the estate over the $2 million limit. The court rejected the government's contention that the net worth of the estate should be calculated using the value of all assets in the estate at the time of Albert's death including the PWT in particular, which had a value of approximately $1 million. Nov. 24, 1993 Mem. Op. and Order at 3-4. The court went on to conclude that the government's position in the suit had not been substantially justified: "Only by ignoring the unambiguous language of the PWT and through an absurd reading of the AWT and Albert's will was it even possible to understand the United States' argument." Id. at 5. Having thus concluded that the estate qualified as a "prevailing party," the court awarded the $17,147.00 in fees and $619.89 in costs requested. Id. at 6. From this award the government appeals.

II.

The government renews each of the two objections it asserted below to the estate's request for fees and costs, maintaining that the estate did not satisfy the net worth requirement and that the government's position had been substantially justified. Because we conclude that the net worth of the estate, when properly calculated, exceeded the $2 million ceiling and thus rendered the estate ineligible to recover its fees and costs, we confine our analysis to that question alone; whether the government's position was "substantially justified" is a matter we need not reach.

We begin with the relevant statutory provisions. Section 7430 of the Internal Revenue Code provides:

In any ... 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 this title, the prevailing party may be awarded a judgment or a settlement for--

. . . . .

(2) reasonable litigation costs incurred in connection with such court proceeding.

26 U.S.C. Sec. 7430(a). The statute later defines "prevailing party" as follows:

(A) In general.--The term "prevailing party" means any party in any proceeding to which subsection (a) applies (other than the United States or any creditor of the taxpayer involved)--

(i) which establishes that the position of the United States was not substantially justified,

(ii) which--

(I) has substantially prevailed with respect to the amount in controversy, or

(II) has substantially prevailed with respect to the most significant issue or set of issues presented, and

(iii) which ... meets the requirements of section 2412(d)(2)(B) of ... title 28 (as so in effect).

26 U.S.C. Sec. 7430(c)(4). By specifying that a party must meet the requirements of 28 U.S.C. Sec. 2412(d)(2)(B), the statute incorporates the net worth requirements of the Equal Access to Justice Act. The EAJA provides:

"[P]arty" means (i) an individual whose net worth did not exceed $2,000,000 at the time the civil action was filed, or (ii) any owner of an unincorporated business, or any partnership, corporation, association, unit of local government, or organization, the net worth of which did not exceed $7,000,000 at the time the civil action was filed,...