Kaufman v. Egger, Civ. No. 83-0262 P.

• Decision Date: 08 May 1984
• Docket Number: Civ. No. 83-0262 P.
• Citation: 584 F. Supp. 872
• Parties: David KAUFMAN and Barbara Kaufman, Plaintiffs, v. Roscoe L. EGGER, Jr., Commissioner of Internal Revenue, and the United States Internal Revenue Service, Defendants.
• Court: U.S. District Court — District of Maine

584 F. Supp. 872

David KAUFMAN and Barbara Kaufman, Plaintiffs, v. Roscoe L. EGGER, Jr., Commissioner of Internal Revenue, and the United States Internal Revenue Service, Defendants.

Civ. No. 83-0262 P.

United States District Court, D. Maine.

May 8, 1984.

John M.R. Paterson, Jerome F. Goldberg, Bernstein, Shur, Sawyer & Nelson, Portland, Maine, for plaintiffs.

D. Patrick Mullarky, Paul Barker, Tax Division, Dept. of Justice, Washington, D.C., for defendants.

MEMORANDUM OF DECISION AND ORDER

GENE CARTER, District Judge.

Introduction

This action was initiated by a Complaint for Injunction filed on August 4, 1983. The Complaint, in addition to seeking an injunction restraining the Defendants from seeking to collect from Plaintiffs any taxes, interest or penalties for the Tax Year ending December 12, 1978, and payment of Plaintiffs' seized refund of $606 for the 1982 Tax Year, seeks recovery of Plaintiffs' "fees and expenses including attorney's and expert fees as required by 28 U.S.C. § 2412." The Complaint was accompanied by a Motion for Temporary Restraining Order supported by affidavits of the Plaintiff, David Kaufman, and an affidavit of Plaintiffs' accountant, George Violette. The Defendants never filed an Answer to the Complaint.

On September 30, 1983, the parties filed a Stipulation for Entry of Judgment waiving hearing and argument. The Court, on October 7, 1983, entered the agreed-upon Order and Judgment granting the requested injunctive relief concerning further efforts to collect taxes, penalties or interest for the 1978 Tax Year. Plaintiffs voluntarily dismissed their demand for repayment of the tax refund of $606 for the Plaintiffs' 1982 Tax Year, which had been seized by the Defendants.

Thereafter, on November 7, 1983, the Plaintiffs filed an Application for Attorney and Expert Fees and Costs. The motion predicates its claim for such relief on 28 U.S.C. § 2412(d)(1)(A) and 28 U.S.C. § 1920(1). It is supported by the affidavits of Plaintiffs' accountant, George N. Schatz, Plaintiffs' attorney, John M.R. Paterson, Esq., and the Plaintiffs, and by a memorandum arguing that the Plaintiffs are entitled to the relief sought by the motion under the statutory provisions cited in the motion. The Defendants filed on December 16, 1983, a response to Plaintiffs' motion discussing Plaintiffs' entitlement to the relief sought by the motion under both 28 U.S.C. § 2412 and 26 U.S.C. § 7430. Plaintiffs then filed on December 30, 1983, a Reply Memorandum asserting the claims made by the motion under both 28 U.S.C. § 2412 and 26 U.S.C. § 7430.

At oral argument the parties agreed that the Court should decide the Plaintiffs' entitlement to the relief sought by the pending motion by resolving the issues raised by the memoranda of the parties on the motion. As provided in Fed.R.Civ.P. Rule 15(b), "when issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings." Thus, Plaintiffs' entitlement to the relief sought pursuant to the provisions of 26 U.S.C. § 7430 is before the Court by agreement even though that issue was not initially generated by the Plaintiffs' motion. It was also agreed that the record for the Court's action on the motion would consist of the Complaint, the Motion for Temporary Restraining Order with its supporting affidavit, the Court's Order and Judgment, and the Motion for Costs and Expenses of the Plaintiffs with its supporting affidavits.

Background of the Case

The events precipitating this complaint began in February 1979 when Plaintiffs filed their 1978 United States Individual Income Tax Return with the Chicago District of the Internal Revenue Service (IRS). Shortly thereafter, in 1979, the Plaintiffs moved from their Chicago, Illinois residence to Norridgewock, Maine. Two years later, on March 2, 1981, the Chicago District of the IRS sent notice to Plaintiffs that their 1978 tax return was to be audited. Plaintiffs never received this notice, since it was sent to them at their Chicago address rather than to their Norridgewock, Maine residence.

On October 7, 1981, the IRS mailed a notice of adjustment of their tax liability to the Plaintiffs at a Stockton, Illinois address where Plaintiffs had never lived. The statutory notice of deficiency required by 26 U.S.C. § 6212 of the Internal Revenue Code also was sent erroneously to the Stockton, Illinois address. Eleven days later, the IRS acknowledged their error in a handwritten memo placed in the Kaufman's file stating that "Stat. Notice sent to wrong address." The memo also said that "there is no other available address, however."

The IRS apparently did not pursue the matter further until May 16, 1983. On that date, the IRS sent Plaintiffs a notice at their present South Freeport, Maine address that it had credited the $606 refund due to Plaintiffs on their 1982 tax return to the amount of taxes unpaid for the year ending December 31, 1978. Not until eleven days after it sent notice of the seizure of Plaintiffs' refund did the IRS send notice to the Plaintiffs requesting payment of $23,857.60, the amount allegedly owed to the IRS by the Plaintiffs for the 1978 tax year.

Fearing that the IRS would take additional unannounced collection measures to recoup the taxes it claimed they owed, Plaintiffs filed a motion with this Court for a temporary restraining order, a complaint to enjoin the IRS from taking further collection measures against the Plaintiffs, and a complaint requesting that the IRS be ordered to pay Plaintiffs their $606 refund, with interest. Aware of its irreparable error, the IRS, together with the Plaintiffs, signed a Stipulation for Entry of Judgment on September 30, 1983, which resulted in the entry of an Order and Judgment.

Discussion

A.

Plaintiffs initially predicate their right to recover attorney's fees on the Equal Access to Justice Act, Title 28, U.S.C. § 2412(d) (Supp.1983). Their reliance in that regard is misplaced, however.

Title 26 U.S.C. § 7430 of the Internal Revenue Code of 1954 (Supp.1982) was enacted on September 3, 1982, as part of the Tax Equity and Fiscal Responsibility Act (TEFRA). Pertaining to the awarding of court costs and certain fees, it provides:

(a) In general—In the case of any civil proceeding which is—

(1) brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty under this title, and

(2) brought in a court of the United States (including the Tax Court),

the prevailing party may be awarded a judgment for reasonable litigation costs incurred in such proceeding.

In their earlier action, Plaintiffs sought to recover the tax refund owed to them by the IRS, and to enjoin any further IRS collection efforts against them. The case plainly falls within the confines of § 7430. Moreover, 28 U.S.C. § 2412, upon which Plaintiffs rely, provides in pertinent part that:

(e) The provisions of this section shall not apply to any costs, fees, and other expenses in connection with any proceeding to which section 7430 of the Internal Revenue Code of 1954 applies.

Section 2412(e) is "applicable to actions or proceedings commenced after February 28, 1983." 28 U.S.C. § 2412 (Effective Date of 1982 Amendment). Plaintiffs maintain that "actions or proceedings" refers not exclusively to court actions or proceedings, but also to the administrative proceedings as instituted by the IRS in 1981 when it sent notice of audit to the Plaintiffs. The Court disagrees.

Section 292(e) of Public Law 97-248 provides that 26 U.S.C. § 7430 "shall apply to civil actions or proceedings commenced after February 28, 1983." This reference to "civil actions" implicitly addresses actions commenced in court. See Fed.R.Civ.P. Rule 2. Moreover, the legislative history reveals Congress's express intent that § 7430 shall "apply to civil tax actions or proceedings in United States courts ... commenced after" February 28, 1983. H.R.Rep. No. 404, 97th Cong.2nd Sess. 16 (1982); Senate Comm. on Finance, Technical Explanation of Committee Amendment, reprinted in 127 Cong.Rec. S 15595 (daily ed. Dec. 16, 1981) (emphasis added). Since Plaintiffs' action was not commenced in this Court until the filing of the complaint on August 4, 1983, it is plainly governed by 26 U.S.C. § 7430, rather than 28 U.S.C. § 2412.

B.

Before a party may be awarded "reasonable litigation costs" under 26 U.S.C. § 7430(a), that party must have met several pre-conditions. Foremost among them is the requirement of § 7430(b)(2) that administrative remedies provided by the IRS be exhausted by the prevailing party prior to pursuing court action. Defendants contend that Plaintiffs failed to meet this exhaustion requirement and therefore may not avail themselves of the costs and fees allowed under § 7430. However, if, in fact, no administrative remedies were available to Plaintiffs, then Plaintiffs would be able to pursue their remedies under § 7430.

Defendants refer to the Proposed Treasury Regulations on Procedure and Administration (1954 Code), § 301.7430-1 (40 Fed. Reg. 12560), and claim that Plaintiffs failed to exhaust the administrative remedies delineated therein. However, as Defendants conceded at oral argument, the regulations they cite are merely proposed. As of this writing, they have not been adopted as law and thus have no binding legal effect. U.S.Tax Cas. (CCH) ¶ 8975. Therefore, this Court must determine whether there were other administrative remedies available to, but not utilized by Plaintiffs, which would bar their recovery of fees and costs under § 7430.

Title 26 U.S.C. § 6212 requires the IRS to send a notice of deficiency to the taxpayer whose tax it finds to be deficient. Title 26 U.S.C. § 6213 provides that a taxpayer may, within 90 days, if residing in the United States, file a petition with the Tax Court for redetermination of the deficiency. Since Plai...