208 B.R. 838 | Bankr. W.D. Pa. | 1997
MEMORANDUM OPINION
ACME Music Company, Inc. (ACME) commenced the above-captioned adversary proceeding so that this Court, pursuant to 11 U.S.C. § 505(a)(1), could determine both the amount and/or legality of taxes assessed by the Internal Revenue Service (IRS). Pursuant to an opinion and order of this Court dated June 7, 1996, ACME Music Company, Inc. v. Internal Revenue Service, 196 B.R. 925 (Bankr.W.D.Pa.1996), as well as a further order dated December 19, 1996, approving settlement of residual issues, this Court determined that ACME was not liable for any of the taxes assessed and filed as proofs of claim in this case. Pursuant to § 7430 of the Internal Revenue Code (I.R.C.) ACME now brings its motion for an award of administrative and litigation costs which it incurred prior to, as well as throughout, said proceeding. For the reasons set forth below, this Court finds that it must DENY the motion with prejudice.
DISCUSSION
“In an action before the bankruptcy court against the IRS, the prevailing party
The parties agree that ACME has met most of the conditions imposed for an award under § 7430, such as that ACME has (a) substantially prevailed with respect to both the amount in controversy and the significant issues presented in the underlying adversary action, I.R.C. § 7430(c)(4)(A)(i), (b) exhausted administrative remedies (pertinent only to recovery of litigation costs), I.R.C. § 7430(b)(1), and (c) met net worth requirements under I.R.C. § 7430(e)(4)(A)(ii). However, because the parties disagree as to whether the I.R.S.’ position in the underlying adversary action, as well as in relevant administrative proceedings, was “substantially justified,” I.R.C. § 7430(c)(4)(B), the parties disagree as to whether ACME can prevail in its motion under § 7430.
I. Whether the I.R.S.’position was “substantially justified”?
With respect to a position taken by the I.R.S., “[substantially justified means ‘justified to a degree that could satisfy a reasonable person’ and having a ‘reasonable basis both in law and fact.’ ” Nalle v. Commissioner, 55 F.3d 189, 191 (5th Cir.1995) (citing Pierce v. Underwood, 487 U.S. 552, 565, 108 S.Ct. 2541, 2550, 101 L.Ed.2d 490 (1988), which construed identical language in 28 U.S.C. § 2412, the Equal Access to Justice Act); Treas. Reg. § 301.7430-5(c)(1) (1994). Whether a position taken by the I.R.S. has a reasonable basis in law “depends on whether ... [the] position[ ] ... [was] reasonable in light of ... the applicable legal precedents.” Schlicher v. Commissioner, TCM 1997-163, 73 TCM 2501, 1997 WL 148238 (1997) (citing Sher v. Commissioner, 89 T.C. 79, 84, 1987 WL 42457 (1987), aff'd, 861 F.2d 131 (5th Cir.1988)). Additionally, § 7430, as amended in 1988, requires the Court to bifurcate its “substantial justification” analysis in the event that the I.R.S. takes a position at the administrative level that is different than that which it presses during the litigation phase. Huffman v. Commissioner, 978 F.2d 1139, 1143-47 (9th Cir.1992); Donlon I Development Corp. v. U.S., 830 F.Supp. 1315, 1317 (C.D.Cal.1993). If one of the two positions taken by the I.R.S. is not substantially justified, the taxpayer can potentially recover for costs incurred while said position is taken. Id.; see also Treas. Reg. § 301.7430-5(c)(2).
In the various proceedings in question involving the I.R.S. and ACME, the I.R.S. essentially maintained that ACME’s operations necessitated that it either comply with Form 1099 reporting and backup withholding tax requirements or, in the alternative, partnership tax reporting requirements. This Court finds that said position, although taken in error, nevertheless had a reasonable basis in law in light of (a) the conclusion in Manchester Music Co., Inc. v. U.S., 733 F.Supp. 473, 481-82, 484 (D.N.H.1990), that taxpayers similar to ACME are joint venturers, (b) the decision by the court in Williamson Music Co., Inc. v. U.S., 90-2 U.S.T.C.
This Court must also find that, regardless of the level of investigation conducted by the I.R.S. in support of its position, said position necessarily had a reasonable basis in fact given that (a) ACME is unquestionably a taxpayer similar in nature to those that were parties in Manchester Music and Williamson Music, and (b) such taxpayers’ operations are inherently similar so as to justify the I.R.S.’ conclusion that, if the taxpayers in Manchester Music and Williamson Music were labelled as joint venturers, then so too should have been ACME.
This Court, in deciding that the I.R.S. had a reasonable basis both in law and
II. Whether the administrative costs sought by ACME are not recoverable under § 7430 in any event.
Although ACME may not recover any costs pursuant to § 7430 given that the I.R.S.’ position in all proceedings was substantially justified, the Court also wishes to point out that § 7430 substantially limits the amount of administrative costs that ACME could have recovered in any event. First, “reasonable administrative costs” which may be recovered “shall only include costs incurred on or after the earlier of (i) the date of the receipt by the taxpayer of the notice of the decision of the Internal Revenue Service Office of Appeals, or (ii) the date of the notice of deficiency.” I.R.C. § 7430(c)(2); see also Treas. Reg. § 301.7430-3(c). The earlier of these dates in this particular matter is some time shortly after June 9, 1992, which is the date of the notice of the I.R.S. Appeals Office’s decision. Thus, ACME could not have recovered for any costs incurred prior to June 9, 1992. Second, litigation costs may not be recovered as reasonable administrative costs “because they are not incurred in connection with an administrative proceeding.” Treas. Reg. § 301.7430-4(c)(3). “Litigation costs include ... [c]osts incurred after the ... commencement of any ... court proceeding.” Treas.
Additionally, ACME could only recover as “reasonable administrative costs” those costs that were incurred in connection with an “administrative proceeding” as that term is defined for purposes of § 7430. However, “[f]or purposes of § 7430, ... an administrative proceeding does not include ... [proceedings in connection with collection actions.” Treas. Reg. § 301.7430-3(a)(4). Collection actions are defined generally as
any action taken by the Internal Revenue Service to collect a tax (or any interest, additional amount, addition to tax, or penalty, together with any costs in addition to the tax) or any action taken by a taxpayer in response to the Internal Revenue Service’s act or failure to act in connection with the collection of a tax (including any interest, additional amount, addition to tax, or penalty, together with any costs in addition to the tax). For example, a collection action for purposes of section 7430 ... includes any action taken by the Internal Revenue Service under Chapter 64 of Subtitle F [of the Internal Revenue Code] to collect a tax.
Treas. Reg. § 301.7430-3(b). Actions of levy and distraint by the I.R.S. under I.R.C. § 6331 constitute collection actions as previously defined because § 6331 comprises part of Chapter 64 of Subtitle F of the Internal Revenue Code. Therefore, costs incurred by a taxpayer in connection with levy actions by the I.R.S. are not recoverable under § 7430. Because certain of the costs sought to be recovered by ACME for the period between June 9, 1992, and July 27, 1994, pertain to levy actions performed by the I.R.S., those particular costs could not be recovered under § 7430.
Finally, several affidavits of Dixon Rich, co-counsel for ACME, as well as ACME’S brief in support of its motion under § 7430, indicate that costs were incurred between June 9, 1992, and July 27, 1994, in connection with a protest filed in response to proposed personal tax assessments against non-debtor principals of ACME pursuant to I.R.C. § 6672 (ie., the trust fund recovery penalty). Exhibit 3 to Mr. Rich’s affidavit dated April 14, 1997, indicates that this protest was instituted on May 13, 1993.
Ultimately, the Court finds that it must agree with the I.R.S.’ conclusion that ACME incurred, at most, minimal reasonable administrative costs that were subject to potential recovery under § 7430. The I.R.S., in its response brief, indicates that as little as 5.15 hours of administrative work appears to have been performed on ACME’S behalf that could have formed the basis for cost recovery under § 7430.
CONCLUSION
ACME may not recover any of the costs and fees which it incurred during any part of this matter with the I.R.S. under § 7430 because the I.R.S.’ position was substantially justified at all times given that said position had a reasonable basis both in law and fact. Furthermore, even had the position of the I.R.S. not been substantially justified during this matter, ACME would have been able to recover only a minimal amount of those administrative costs that it incurred throughout this matter. Therefore, ACME’s motion for an award of administrative and litigation costs incurred in this matter under § 7430 is DENIED WITH PREJUDICE. An appropriate order will be entered.
. Technically, ACME "shall not be treated as the prevailing party in [any] proceeding to which ... [§ 7430] applies if the ... [I.R.S.] establishes that ... [its] position ... was substantially justified.” I.R.C. § 7430(c)(4)(B)(i).
. The position taken by the I.R.S. in an administrative proceeding is that taken "as of the earlier of (i) the date of the receipt by the taxpayer of the notice of the decision of the Internal Revenue Service Office of Appeals, or (ii) the date of the notice of deficiency.” I.R.C. § 7430(c)(7)(B). Because, as ACME concedes, a notice of deficiency was either never issued or was issued subsequent to the I.R.S. Appeals Office’s decision regarding ACME's protest, the date of ACME's receipt of said Appeals Office's decision occurred first.
. Although ACME does not acknowledge the existence of this notice in either its motion or its supporting brief, the Court notes that, until either said notice is received by a taxpayer or a deficiency notice is issued, the I.R.S. does not take any position in an administrative proceeding and administrative costs cannot be recovered in any event. Huffman, 978 F.2d at 1147 (“the position of the United States starts with the earlier of the two [events]”).
. Subsequent to its decision against the I.R.S. on the merits, the Williamson Music court was also faced with, and ultimately denied, a motion by the taxpayer for an award of litigation costs and attorney’s fees pursuant to § 7430. Williamson Music Co., 91-1 U.S.T.C. 50131, 1991 WL 53289 at 3. Of substantial significance to the court in Williamson Music was the fact that, when the taxpayer commenced the action therein, Manchester Music had not yet been decided; thus, "the Government was required to develop a litigating position largely in the absence of authoritafive guidance.” Id. Of course, such was not the case in this matter involving ACME since Manchester Music and Williamson Music were both decided prior to the I.R.S.' assessments against ACME. Nevertheless, as mentioned above, the particular guidance which the courts in Manchester Music and Williamson Music provided regarding the joint venture classification of taxpayers similar to ACME supplied the I.R.S. with a reasonable basis for proceeding against ACME.
. Exhibit 4 to Mr. Rich's April 14, 1997, affidavit indicates that a similar protest was instituted on August 29, 1994. However, because this protest was instituted subsequent to the commencement of the above-captioned adversary proceeding on July 27, 1994, ACME may not recover as reasonable administrative costs any costs associated with said protest. Treas. Reg. § 301.7430-4(c)(3)(ii).
. The date upon which ACME would have received notice of a decision by the I.R.S.’ Office of Appeals necessarily applies with respect to this protest since a deficiency notice is not applicable to trust fund recovery penalties under I.R.C. § 6672.