PNC Bank, Nat'l Ass'n v. United States (In re Estate of Palumbo)

• Decision Date: 02 April 2012
• Docket Number: No. 11–2371.,11–2371.
• Citation: 109 A.F.T.R.2d 2012,2012 USTC P 60643,675 F.3d 234
• Parties: ESTATE OF Antonio J. PALUMBO, Deceased, PNC Bank, National Association, Executor, Appellant v. UNITED STATES of America.
• Court: U.S. Court of Appeals — Third Circuit

109 A.F.T.R.2d 2012-1594

2012-1 USTC P 60,643

675 F.3d 234

ESTATE OF Antonio J. PALUMBO, Deceased, PNC Bank, National Association, Executor, Appellant

v.UNITED STATES of America.

No. 11–2371.

United States Court of Appeals, Third Circuit.

Argued on March 6, 2012.Filed: April 2, 2012.

Louis A. Prosperi, Esq. [Argued], Law Office of Louis A. Prosperi, John P. Iurlano, Esq., Pittsburgh, PA, Steven L. Sablowsky, Esq., Goldblum & Sablowsky LLC, Homestead, PA, for Estate.

Tamara W. Ashford, Esq., Jonathan S. Cohen, Esq., Randolph L. Hutter, Esq. [Argued], Christopher Williamson, Esq., United States Department of Justice Tax Division, Washington, DC, for Government.

Before: SCIRICA, and AMBRO and VAN ANTWERPEN, Circuit Judges.

OPINION OF THE COURT

VAN ANTWERPEN, Circuit Judge.

The Estate of Antonio J. Palumbo (“the Estate”) prevailed in its suit against the United States when the District Court ruled it was entitled to a tax refund. The Estate then sought recovery of all of its attorneys' fees and costs under 26 U.S.C. § 7430, and alternatively the fees and costs it incurred after December 16, 2010 under the theory that the government rejected its qualified offer made pursuant to § 7430(g). Finding the position of the United States to be substantially justified, the District Court denied the Estate its fees and costs. On appeal, the Estate argues that the position of the United States was not substantially justified and that the net worth requirements of § 7430 did not prevent it from recovering its fees and costs. We will affirm.

I. Factual and Procedural History

A. Creation of the Charitable Trust and Will Contest

In 1974, Antonio Palumbo created the A.J. and Sigismunda Palumbo Charitable Trust (the “Charitable Trust”). Palumbo died in 2002. During his life, he executed various wills and trust instruments; his last will was executed on July 6, 1999 (the “1999 will”). The parties agree there was no express residuary provision in the 1999 will, despite the fact that each of Palumbo's previous wills devised the residue to the Charitable Trust. Palumbo's attorney admitted that this omission was a scrivener's error.

The lack of a residuary clause led to a dispute over who was entitled to the residue. Palumbo's son claimed he, as Palumbo's sole intestate heir, was entitled to the residue, while the Charitable Trust claimed it was entitled to the residue because of the scrivener's error. The two sides reached a settlement wherein Palumbo's son received $5,600,000 along with real property in Wheeling, West Virginia, and the Charitable Trust received $11,721,141. ¹ The settlement agreement was approved by an order of the Orphans' Court Division of the Court of Common Pleas of Elk County, Pennsylvania.

B. Federal Estate Tax Refund and Fees and Costs Under § 7430

After the settlement, the Estate filed a claim for a federal estate tax charitable deduction in the amount payable to the Charitable Trust. The Commissioner of Internal Revenue disallowed the charitable deduction, finding that the charitable contribution was made by Palumbo's son via a settlement agreement, not by Palumbo through his 1999 will. The Estate thereupon brought an action against the United States District Court for the Western District of Pennsylvania seeking a refund of the federal estate tax paid on the $11,721,141 that was donated to the Charitable Trust. The District Court granted the Estate's motion for summary judgment; the Estate then sought its attorneys' fees and costs under 26 U.S.C. § 7430 (“§ 7430”) both as a “prevailing party,” which would entitle it to full recovery, and as a party who made a qualified offer pursuant to § 7430(g), which would entitle it to fees incurred after December 16, 2010.

Because the District Court found the government's position in the litigation to be substantially justified, it did not award the Estate fees or costs. The District Court did not address the net worth requirements imposed by § 7430, whether those requirements should apply to the Estate or the Charitable Trust, or the validity of the Estate's alternative claim that it was entitled to certain costs because it made a qualified offer under 26 U.S.C. § 7430(g). The Estate filed a timely notice of appeal.

II. Jurisdiction and Standard of Review

We have jurisdiction over the final order of the District Court under 28 U.S.C. § 1291. We review the District Court's decision that the government's position was substantially justified for abuse of discretion. Nicholson v. Commissioner, 60 F.3d 1020, 1026 (3d Cir.1995); see also Pierce v. Underwood, 487 U.S. 552, 559, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988). A district court's ruling can only be reversed under abuse of discretion review if its decision was arbitrary, irrational, fanciful, clearly unreasonable, or based on a “clearly erroneous finding of fact, an errant conclusion of law, or an improper application of law to fact.” United States v. Lee, 612 F.3d 170, 184 (3d Cir.2010). We will not upset a district court's exercise of discretion “ ‘unless no reasonable person would adopt the district court's view.’ ” United States v. Starnes, 583 F.3d 196, 214 (3d Cir.2009) (quoting Ansell v. Green Acres Contracting Co., 347 F.3d 515, 519 (3d Cir.2003)).

III. Analysis

A. Fee Provision Statute

In court proceedings “brought by or against the United States in connection with the determination, collection, or refund of any tax,” a “prevailing party” may recover fees and costs incurred in the litigation. 26 U.S.C. § 7430(a). “Prevailing party” is defined in § 7430(c)(4):

(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—

(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

(ii) which meets the requirements of the 1st sentence of section 2412(d)(1)(B) of Title 28, United States Code (as in effect on October 22, 1986) except to the extent differing procedures are established by rule of court and meets the requirements of section 2412(d)(2)(B) of such Title 28 (as so in effect).

In referencing 28 U.S.C. § 2412(d)(1)(B), the statute incorporates the net worth restrictions set forth in the Equal Access to Justice Act (“EAJA”).² Under the EAJA, the recovery of fees and costs is barred if a party's net worth exceeds the statutory amount. Moreover, the party seeking fees has the burden of proving that it meets the net worth requirements under § 7430. Tax Ct. R. 232(e); Estate of Woll v. United States, 44 F.3d 464, 470 (7th Cir.1994).

Congress included a special rule in § 7430 that applied the net worth requirement to estates. Section 7430(c)(4)(D) states that the $2,000,000 net worth requirement imposed on individuals in 28 U.S.C. § 2412(d)(2)(B)(i) shall apply to “an estate but shall be determined as of the date of the decedent's death.” The rule appears to codify Estate of Hubberd v. Comm'r, 99 T.C. 335 (1992).³ At the time Hubberd was decided, § 7430 did not contain a special rule subjecting an estate to the $2,000,000 net worth requirement. The Hubberd court decided that an estate was subject to the net worth requirement set forth in § 2412. Id. at 341. The court rejected the estate's argument that when applying the net worth requirement a court should “consider the net worth of the [estate's] beneficiaries, not the net worth of the estate.” Id. at 339. The court explained its reasoning as follows:

[The Commissioner] determined a deficiency against the estate. This case is brought in the name of and on behalf of the estate by its executor. This action is for a redetermination of the estate tax deficiency. An estate is generally responsible for bearing the costs of its own litigation. It follows that we look to the net worth of the estate, and not of the beneficiaries or the executor.Id. at 340–41 (citations omitted).⁴

Unlike estates, charitable organizations exempt from taxation under Section 501(c)(3) of the Internal Revenue Code need not satisfy any net worth requirement to recover fees and costs. Such an organization, however, cannot recover fees and costs if it had “more than 500 employees at the time the civil action was filed.” 28 U.S.C. § 2412(d)(2)(B)(ii).

The appellant cites legislative history in the form of the Conference Report to the Tax Equity and Fiscal Responsibility Act of 1982, the bill that enacted § 7430. The applicable Senate Amendment, which was adopted by the Conference, stated “ Third-party costs.—A taxpayer may recover costs for a third party incurred by that party on behalf of the taxpayer.” H.R.Rep. No. 97–760, 97th Cong.2d Sess. 687 (1982), 1982 U.S.C.C.A.N. 1190, 1450.

Here, in addition to seeking fees and costs as a “prevailing party” under § 7430, the Estate seeks to recover under the qualified offer provision of § 7430(g). A qualified offer under § 7430(g): (1) is made by the taxpayer to the United States within the qualified offer period [which starts on the date that the first letter of proposed deficiency is sent to the taxpayer, and ends 30 days before the date the case is first set for trial]; (2) specifies the offered amount of the taxpayer's liability; (3) is designated at the time it is made as a qualified offer; and (4) remains open during the period beginning on the date it is made, and ending at the earliest of: the date the offer is rejected, the date of trial, or the ninetieth day after the offer is made. If the offer fails to meet the requirements, a party cannot receive litigation fees and costs. McGowan v. Comm'r, T.C. Memo. 2005–80, 2005 WL 826928 at *2 (2005).

Parties seeking to recover under either the prevailing party provision or the qualified offer provision must satisfy the net worth requirements discussed above.⁵ Because the resolution of the net worth issue disposes of both issues, w...