Jean v. United States, CIVIL ACTION No. 00-11296-DPW (D. Mass. 12/9/2003), CIVIL ACTION No. 00-11296-DPW.
| Decision Date | 09 December 2003 |
| Docket Number | CIVIL ACTION No. 00-11296-DPW. |
| Parties | PAUL JEAN and GEORGE JEAN, Plaintiffs, v. UNITED STATES OF AMERICA, Defendant. |
| Court | U.S. District Court — District of Massachusetts |
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.
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.1
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 6672.2
Analyzing the evidence under the seven-factor framework set forth in Vinick v. United States, 205 F.3d 1, 7 (1st Cir. 2000),3 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 Focus4 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.5 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.
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.
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.6 Paul now moves for attorneys' fees pursuant to 26 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.7 26 U.S.C. § 7430(a)(1)-(2). Under section 7430, "reasonable litigation costs" include reasonable court costs and reasonable attorneys' fees.8 Id. § 7430(c)(1).
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,"9 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.
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) (); see also Cooper v. United States, 60 F.3d 1529, 1531 (11th Cir. 1995) (). 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 7430.10 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:
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) (); Wilfong v. United States, 991 F.2d 359, 367 (7th Cir. 1993) (). 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...
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