Wilfong v. U.S.

Decision Date08 April 1993
Docket NumberNo. 92-1310,92-1310
Citation991 F.2d 359
Parties-1372, 61 USLW 2640, 93-1 USTC P 50,232 Stephen P. WILFONG, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
CourtU.S. Court of Appeals — Seventh Circuit

Donald E. Weihl, (argued), Sue A. Schultz, Thompson & Mitchell, Belleville, IL, for plaintiff-appellee.

Claudia M. Jones, Office of the U.S. Atty., Crim. Div., Fairview Heights, IL, Gary R. Allen, David I. Pincus, Bridget Rowan (argued), Dept. of Justice, Tax Div., Appellate Section, Washington, DC, Gerald M. Burke, Office of the U.S. Atty., Civ. Div., Fairview Heights, IL, Mark Winer, Dept. of Justice, Tax Div., Appellate Section, Washington, DC, for defendant-appellant.

Before RIPPLE and ROVNER, Circuit Judges, and ENGEL, Senior Circuit Judge. *

ROVNER, Circuit Judge.

Stephen P. Wilfong, a certified public accountant, filed this action seeking a refund of a tax-return-preparer penalty assessed against him by the Internal Revenue Service in connection with his preparation of the corporate income tax return of Francis F. Kayira, M.D., Ltd. After a jury found in his favor, Wilfong petitioned the district court for attorneys' fees and costs pursuant to 26 U.S.C. § 7430. The district court granted Wilfong's petition and ordered the United States to reimburse him for fees and costs totaling $26,708.71. The government appeals only from the award of fees and costs, arguing that the district court abused its discretion when it concluded that the government's position in this litigation was not substantially justified. The government also maintains that even if a fee award was appropriate, the district court erred in awarding fees at an hourly rate in excess of the $75 per hour statutory rate. We agree that the government's position was substantially justified and reverse the district court's award of fees and costs.

I. FACTS

Wilfong has been a certified public accountant ("CPA") since 1971. In 1979, he established his own accounting practice in Collinsville, Illinois. A portion of Wilfong's practice is devoted to the preparation of individual, corporate, and partnership tax returns. In August 1982, Dr. Francis F. Kayira, an obstetrician and gynecologist practicing in East St. Louis, Illinois, engaged Wilfong to prepare his corporate and individual income tax returns. Kayira hired Wilfong because he was dissatisfied with his previous accountant, Taylor C. Scott. One of Wilfong's initial tasks was to prepare the corporate return for Kayira's medical practice for the fiscal year ending January 31, 1983 (the "return"). Wilfong filed the return with the IRS on December 19, 1983. 1

Kayira's corporate and personal returns for 1982 were audited by Robert Meyer, an IRS auditor. Meyer proposed $44,658 in adjustments to the corporate return. Two types of errors prompted the adjustments: (1) personal or unsubstantiated items that were improperly deducted as business expenses; and (2) a $20,000 reduction to gross income intended to compensate for an error made the previous year. As a result of these errors, the IRS assessed against the corporation an $11,000 tax deficiency and $3,545 in penalties. Kayira ultimately conceded the propriety of all the auditor's proposed adjustments and penalties with the exception of a penalty for substantial understatement of tax liability.

In addition to these adjustments, Meyer recommended imposition of a $100 return-preparer penalty against Wilfong pursuant to 26 U.S.C. § 6694(a). 2 Meyer believed that the penalty was warranted because of the many negligent errors in the return, especially those relating to the deduction of Kayira's personal expenditures as business expenses. An IRS appeals officer subsequently upheld the penalty. Wilfong paid the penalty and then filed this suit for a refund.

A. The Trial.

In the course of a three-day jury trial, Wilfong offered evidence to justify his work on the corporate return. Because the propriety of Wilfong's accounting practices is central to whether the government's position was substantially justified, we recount the trial evidence in some detail.

1. Business expense deductions.

Among the items that Wilfong had deducted as business expenses were two season tickets to St. Louis Cardinals baseball games. Wilfong testified that he asked Kayira about the tickets, and Kayira told him that because he rarely had time to use the tickets himself, he routinely gave them to colleagues, patients, or "whoever happened to be around." (Trial Tr. at 46.) Wilfong accepted this explanation without asking Kayira to substantiate to whom or for what business purpose the tickets were provided. Testifying for the government, Kayira stated that he had the tickets because he enjoyed taking his son to baseball games and that he gave the tickets away only ten to fifteen percent of the time. He did not recall whether Wilfong had asked about his use of the baseball tickets while preparing the return but stated that if he had been asked, he would have told Wilfong the tickets were for his personal use. Indeed, he said as much to Meyer in the course of the IRS audit.

Wilfong also had deducted six checks payable to "Zale's." He testified that either Kayira or Sharon, 3 Kayira's office manager and bookkeeper, had told him that the checks were for office supplies. Kayira testified that Wilfong had not asked about the checks until after the audit, when he told Wilfong that he had purchased jewelry for his personal use. Wilfong claimed that when he was preparing the return, he was unaware that Zale's was a jewelry store; rather, he confused the name with Zayer's Department Store. He did concede, however, that personal jewelry could not be deducted as a business expense.

Wilfong also had deducted one hundred percent of the depreciation on the corporation's automobile, although he knew that Kayira utilized the vehicle for personal purposes. The IRS auditor computed the business use at just 17.68 percent. Wilfong explained that in taking the complete depreciation deduction, he had merely followed the practice of the prior accountant. Wilfong also emphasized that Kayira paid for insurance, minor maintenance expenses, and gasoline, thereby making up for his personal use of the vehicle. Meyer testified, however, that in addition to deducting depreciation on the corporate return, Kayira had deducted mileage on his personal return. Meyer testified that it was improper to take both depreciation and mileage deductions for the same vehicle.

The auditor also challenged deductions for two checks recorded in the general ledger as payable to the Committee to Elect Hall and the Committee to Elect Younge, which he determined were political contributions. Wilfong testified that the checks were made out to either Younge or Hall, or their respective law firms, and that Kayira had told him the checks were payment for legal services. Yet, Meyer observed that these payments were recorded in an account called "flowers and contributions," rather than the separate account for professional services.

The IRS also challenged a deduction for group insurance. This deduction represented premiums on group life, health, and disability insurance policies that Kayira purportedly had paid on behalf of his employees. The auditor discovered that Kayira in fact paid only for his own life and disability insurance and not that of his employees. As a result, the IRS disallowed these deductions.

The jury also heard extensive testimony about credit card charges, particularly amounts charged to Kayira's American Express and Chase Manhattan Bank ("Chase") credit cards. Wilfong had deducted these amounts as business travel and entertainment expenses because he had been told that the charges related to travel and expenses for professional education seminars. Kayira retained no receipts for these expenditures but told Wilfong that he could obtain receipts if necessary to substantiate the business purpose of the charges. Wilfong accepted his client's explanation without requiring Kayira to obtain receipts. The government produced evidence indicating that the receipts themselves would have been insufficient to substantiate the deductions in any event because, standing alone, they would not have established a business purpose for the charges. After the IRS auditor obtained the receipts, he determined that many of the charges were not deductible. In particular, a number of the charges served to pay off a Chase loan to Kayira. The loan repayments were not deductible because Kayira previously had deducted the items paid off by the loan proceeds. Moreover, many of the American Express charges proved to be personal and unrelated to Kayira's continuing professional education. The government's expert testified that, in his opinion, Wilfong had lacked sufficient information to substantiate the travel and entertainment deductions.

In defending these deductions, Wilfong maintained that he simply followed the practice of Kayira's prior accountant not to disallow any personal, non-deductible expenses. Because he assumed that the prior accountant had exercised some care in the preparation of the 1981 return, Wilfong did not consider it a priority to ensure that all expense deductions related to business rather than personal use. 4 Instead, his main priority was to file the return.

2. Gross income adjustment.

Apart from the improper deductions, the other major adjustment to the return related to a $20,000 reduction to gross income. Wilfong had reduced gross income by this amount to account for an alleged error in the 1981 corporate return. He believed that Kayira's prior accountant had improperly included $20,000 of accounts receivable as gross income. Because the corporation was on the cash rather than accrual accounting method, accounts receivable should not have been reported as income. When Wilfong discovered the error in the 1981 return, he...

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