Kenagy v. U.S.

• Decision Date: 06 August 1991
• Docket Number: No. 90-2620,90-2620
• Citation: 942 F.2d 459
• Parties: -5342, 91-2 USTC P 50,386 Karen Kingman KENAGY, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 459

942 F.2d 459

68 A.F.T.R.2d 91-5342, 91-2 USTC P 50,386

Karen Kingman KENAGY, Appellant, v. UNITED STATES of America, Appellee.

No. 90-2620.

United States Court of Appeals,

Eighth Circuit.

Submitted April 10, 1991.

Decided Aug. 6, 1991.

Ronald R. Holliger, argued, for appellant; Robert R. McQuain, Ronald R. Holliger and Dennis A. Boman, Kansas City, Mo., on the brief.

Elizabeth K. Wickstrom, argued, for appellee; Shirley D. Peterson, Gary R. Allen, Charles E. Brookhart and Elizabeth K. Wickstrom, Washington, D.C., on the brief.

Before BOWMAN, Circuit Judge, HENLEY and FRIEDMAN, ^* Senior Circuit Judges.

HENLEY, Senior Circuit Judge.

Appellant-plaintiff, Karen Kingman Kenagy, ¹ the former office secretary/manager of a small carpet cleaning business, All Pro Carpet Cleaning, Inc. (All Pro), was assessed a responsible person penalty pursuant to 26 U.S.C. § 6672 (1988) (the Internal Revenue Code, hereinafter the "I.R.C." or the "code"). The penalty assessment of $42,859.35 ² was based on unpaid payroll taxes of All Pro relating to the second, third and fourth quarters of 1985. Appellant protested the assessment but was denied relief in writing by the Internal Revenue Service Office of Appeals on April 22, 1988. Appellant paid a portion of the penalty due and filed a claim for refund that was denied November 23, 1988. Appellant then filed suit for a refund in federal district court on December 9, 1988, and the government counterclaimed for the balance of the penalty due.

The district court ordered non-binding arbitration before a three-person panel, and appellant prevailed on her claim for refund. The panel decided unanimously that appellant was not a responsible person during the second and third quarters and reached the same decision, by a vote of two to one, for the fourth quarter. The government requested a trial de novo only as to the third and fourth quarter decisions. At the close of trial the jury returned a verdict in favor of the appellant, concluding she was not a responsible person during the third and fourth quarters, thereby denying the government's counterclaim.

Appellant made a motion for an award of administrative and litigation fees and costs pursuant to code § 7430 in the amount of $26,835.37. After considering party briefs, trial testimony and exhibits, the district court ruled that while appellant had substantially prevailed, exhausted all administrative remedies, and met the procedural pre-requisites for a fee award, she had failed to prove the government's position was not substantially justified. See I.R.C. § 7430(c)(2)(A)(i)-(ii). She appeals the ruling of the district court. We affirm in part and reverse in part.

FACTUAL BACKGROUND

All Pro was a small carpet cleaning firm with two principal operating divisions, cleaning services and telemarketing. The sole and dominant corporate decision maker, at least until August 5, 1985, was the part-owner and president, Mike Payne. He hired appellant, a high school graduate, on approximately April 10, 1985, to be the office secretary at a salary of $300.00 per The record reflects that appellant developed office forms for the telemarketers and drivers. She also developed time sheets used in conjunction with employee wage rate information to compute gross payroll. She reported this information to the corporate secretary/treasurer and outside accountant, Littge. Littge, a former I.R.S. agent, was the principal in the firm Littge & Associates. He officed separately from All Pro. Littge maintained a client payroll account, prepared and signed All Pro's monthly payroll checks, prepared related reports, compiled the corporate financial statements, and prepared corporate tax filings. Littge alone signed corporate resolutions dated April 10, 1985, authorizing appellant to sign checks on the corporate account and designating her "office manager". No evidence was introduced that appellant was aware of the existence of these resolutions.

                week.   He had her added to the corporate checking account as a second signatory in addition to himself, but he maintained sole control over check writing authorization.   The evidence presented at trial indicated that Payne had previously made and was responsible for making federal tax payments
                

The record further indicates that appellant wrote occasional checks at Payne's direction, filled in from time to time for absent telemarketers and was generally the "girl Friday" around the office. On August 5, 1985, an incident (hereinafter the "incident") occurred in the office that allegedly changed the daily operations of All Pro. On this day, Payne became angry and shouted "I've had enough," slammed down his brief case and left the office. Appellant witnessed the incident. Apparently the brief case fell open and appellant discovered, among other things, official looking documents inside. She immediately contacted Littge who requested that she and the telemarketing manager and part-owner, Michael Kenagy, come to his office with the brief case. Appellant testified that while this was certainly the most significant such occurrence, Payne had become angry before and had made the same statement before.

Once in his office, Littge explained to appellant and Kenagy that the documents were unremitted federal payroll tax coupons and unfiled tax reports. ³ Questions as to whether and what instructions, if any, were given by Littge with respect to these documents and the payment priorities for future bills are in dispute. Littge then took appellant and Kenagy to the bank, removed Payne's signature from the Littge & Associates client payroll account and added their signatures. Littge later executed corporate resolutions dated August 5, 1985, authorizing appellant and Kenagy to sign payroll checks and to borrow money on behalf of the corporation. As before, no evidence was introduced to suggest that they were aware of these resolutions, and both denied knowledge of them.

Between August 5 and appellant's resignation near year end, she signed most of the corporate checks and her's was the second signature, in addition to Littge's, on all payroll checks. ⁴ She was also allegedly instructed by either Payne or Littge to remit two payroll tax payments, one in August and one in September, in the amounts of $2,060.84 and $1,482.51, respectively. Trial witnesses, including appellant, officers, employees and owners of All Pro, consistently and uniformly testified that after the incident Payne continued to control the business though he was often absent from the office. They stated they saw him in the office two or three times a week, that he called the office frequently, left instructional notes for employees, and wore a beeper so he could be reached if corporate or financial decisions needed to According to Littge's testimony, however, he believed that appellant and Kenagy were taking charge of the business when Payne became "absent". Littge could not specifically recall the incident nor any statements he might have made to appellant and Kenagy after the incident, though he denied instructing them about any priorities regarding payment of his fees, taxes and other bills. Littge denied any active role in the business and denied attending owners' or managers' meetings. Littge could not recall dealing with Payne again until December when Payne became very active in the sale of All Pro, though he admitted some knowledge that Payne called into All Pro. Littge continued to maintain a separate office and was not at the All Pro office on a day-to-day basis between August and December.

                be made.   Witnesses also testified that even after August 5, to their knowledge, appellant was not authorized to issue corporate checks without authorization by Payne or Littge, and that none of them had requested and received any checks not so approved
                

The district court found that the case was a close one and that appellant had failed to present evidence sufficient to show that the government's position was not reasonable. The court specifically found that the government had introduced evidence showing appellant was a manager, had check signing authority, and had some bill paying discretion after the departure of Payne. The district court relied to some extent on the statements of the arbitration panel that the case was close (a split decision) and on its denial of attorney's fees.

APPLICABLE STANDARDS

A. Cost and Fee Awards

The parties agree that the applicable statutes are those that were in effect as of December 9, 1988, when appellant filed her suit for refund in the district court. This means that the 1988 amendments to code § 7430 that re-define the proceedings for which fees and costs may be awarded are applicable. Nothing in the amendments suggests that our standard of review or appellant's burden of proof was changed, though appellant argues that congressional amendments were intended to harmonize § 7430 with the Equal Access to Justice Act (EAJA) provisions, 28 U.S.C. § 2412 (1985), placing the burden of proof on the government.

We disagree. The plain language of amended § 7430(c)(4) clearly places the burden of proof on the taxpayer, as in the past. Keasler v. United States, 766 F.2d 1227, 1236 (8th Cir.1985). We review the district court's findings of fact under a clearly erroneous standard, and we review its decision not to award fees and costs based on the facts under an abuse of discretion standard. In re Arthur Andersen & Co., 832 F.2d 1057, 1060 (8th Cir.1987).

A taxpayer is eligible for an award of reasonable fees and costs incurred in certain administrative and court proceedings where s/he is the prevailing party and has exhausted all administrative remedies. I.R.C. § 7430(a)-(b). The fees and costs are limited to those incurred in proceedings beginning with the earlier of the date of receiving a final determination from the Internal Revenue Service Office of Appeals or a notice of deficiency, I.R.C. § 7430(c), and ending...