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LLC v. United States

United States District Court, D. Idaho

August 3, 2017

C1 DESIGN GROUP, LLC, Plaintiff,
v.
UNITED STATES OF AMERICA, Internal Revenue Service, Defendant. Reasonable Rate Hours Reasonably Expended Loadstar

          MEMORANDUM DECISION AND ORDER RE: MOTION FOR ATTORNEY'S FEES AND COSTS (DKT. 108)

          Honorable Candy W. Dale United States Magistrate Judge.

         Pending before the Court is Plaintiff C1 Design's Motion for Attorney's Fees and Costs (Dkt. 108). Having reviewed the parties' briefs and the record in this matter, the Court concludes oral argument is not necessary. Dist. Idaho L. R. 7.1(d). Accordingly, for the reasons stated herein, the Court will grant in part and deny in part C1 Design's motion and will award attorney's fees in the amount of $33, 735.00.

         PROCEDURAL BACKGROUND

         On April 30, 2015, C1 Design filed this lawsuit against the United States seeking a refund of penalties paid to the Internal Revenue Service pursuant to 26 U.S.C. § 7422. C1 Design's refund suit addressed whether its failure to timely pay its excise taxes was due to reasonable cause and not to willful neglect. The premise of C1 Design's refund claim was a car accident involving its President, Ryan Harrison. The downstream effects of the car accident led to financial difficulties for the small business, which in turn resulted in the untimely payment of its excise taxes.[1]

         On June 16, 2016, C1 Design sent the United States a 26 U.S.C. § 7430 Qualified Offer by mail, offering to settle the lawsuit for $14, 285.00. (Dkt. 108-12.) On August 25, 2016, the United States notified C1 Design of its rejection of the Qualified Offer. (Dkt. 108-13.) While the Qualified Offer was pending, the United States filed a motion for summary judgment on all of C1 Design's claims. (Dkt. 41.) On December 20, 2016, the Court denied the motion and the case proceeded to trial. (Dkt. 69.)

         Following a two-day jury trial beginning on January 31, 2017, the jury rendered its Special Verdict as to all relevant tax periods (Dkt. 102); Judgment was entered in favor of C1 Design in the amount of $29, 530.61 on February 17, 2017. (Dkt. 103.)

         STANDARD OF LAW

         “Section 7430(a) permits the award of reasonable administrative and litigation costs to a taxpayer in an administrative or court proceeding brought against the United States in connection with the determination of any tax, interest, or penalty under the Code.” Fitzpatrick v. Comm'r of Internal Revenue, 113 T.C.M. (CCH) 1416 (T.C. 2017). An award for costs may only be made if the taxpayer is the “prevailing party.”[2]

         To qualify as a prevailing party, a taxpayer must establish it “has substantially prevailed with respect to the amount in controversy, or…with respect to the most significant issue or set of issues presented.”[3] Sec. 7430(c)(4)(A). However, prevailing party status is not without exception. For instance, if the taxpayer meets the prevailing party requirements, it is not treated as a prevailing party if the Government can establish its position in the proceeding was “substantially justified.” Sec. 7430(c)(4)(B).

         “The Government bears the burden to demonstrate that its position was substantially justified, both in the administrative proceeding and in the court proceeding.” Pacific Fisheries Inc., v. United States, 484 F.3d 1103, 1107 (9th Cir. 2007) (government bears burden of establishing substantial justification). If the United States is successful in establishing that its position was substantially justified, the taxpayer may still be treated as a prevailing party if it makes a qualified offer and “the liability of the taxpayer pursuant to the judgment in the proceeding…is equal to or less than the liability of the taxpayer which would have been so determined if the United States had accepted [the] qualified offer.” Sec. 7430(c)(4)(E)(i).

         The qualified offer rule applies regardless of whether the United States' position in the proceeding was substantially justified. Haas & Assocs. Accountancy Corp. v. C.I.R., 117 T.C. 48, 59 (2001), aff'd, 55 F.App'x 476 (9th Cir. 2003). An award of reasonable administrative and litigation costs permitted under the qualified offer rule includes only “those costs incurred on or after the date of the last qualified offer.” 26 C.F.R. § 301.7430-7(a); Sec. 7430(c)(4)(E)(iii)(II).

         Moreover, the Court may award only “reasonable litigation and administrative costs which are allocable to the United States, ” and not to any other party. 26 U.S.C. § 7430(b)(2). And, an attorney's hourly rate is subject to a presumptively reasonable rate set by statute at $200.00 per hour during 2015-2017. 26 U.S.C. § 7430(c)(B)(iii); Rev. Procs. 2009-50, 2010-40, 2011-52. An attorney may request a higher rate, but the Court must determine whether a special factor, such as a limited availability of qualified attorneys for the proceeding, the difficulty of the issues presented in the case, or the local availability of tax expertise, justifies the higher rate. 26 U.S.C. § 7430(c)(B)(iii).

         DISCUSSION

         C1 Design seeks $76, 270.39 in attorney's fees and $1, 485.63 in costs pursuant to 26 U.S.C. § 7430(a). Alternatively, if the Court finds the United States' position was substantially justified, C1 Design seeks an award of fees and costs accrued after it made its Qualified Offer, in the amount of $50, 925.16. The United States concedes that C1 Design prevailed with respect to the amount in controversy; however, the United States contends its position was substantially justified, and therefore, C1 Design is entitled to fees and costs that accrued only after it submitted its Qualified Offer. The United States challenges also the reasonableness of the hourly rates requested by C1 Design's counsel (and his staff) and costs which lack proper documentation.

         Because there is no dispute that C1 Design meets the statutory requirements for prevailing party status, the Court will first address whether the United States meets the “substantial justification” exception and the application of the Qualified Offer rule before discussing the reasonableness of the fees and costs requested by C1 Design.

         I. Position of the United States

         The United States contends its position was substantially justified, and reasonable minds could differ on the existence of reasonable cause. C1 Design argues to the contrary, that because the jury found in favor of C1 Design for all relevant tax periods, reasonable minds could not differ as to the issues presented in this litigation. For the following reasons, the Court finds the position taken by the United States was substantially justified.

         “The United States' position was substantially justified if it is ‘justified to a degree that satisfies a reasonable person, '” or has reasonable basis in both law and fact. Pac. Fisheries Inc. v. United States, 484 F.3d 1103, 1108 (9th Cir. 2007) (citing Pierce v. Underwood, 487 U.S. 552 (1988). In making its determination, Section 7430(c)(4)(B)(iii), requires the Court to “take into account whether the United States has lost in courts of appeal for other circuits on substantially similar issues.” 26 U.S.C. 7430(c)(4)(B)(iii). “[L]osing does not mean substantially unjustified.” Van Duzer v. C.I.R., 9 F.3d 1555 (9th Cir. 1993) (citing Pierce, 487 U.S. at 569); See Awmiller v. United States, 1 F.3d 930, 931 (9th Cir. 1993) (affirming district court decision, that although plaintiff prevailed at trial, a reasonable person could have found that the plaintiff was responsible for its tax payment to IRS).

         Although the jury found in its answers to the Special Verdict that C1 Design's failure to pay its excise taxes for all relevant tax periods was due to reasonable cause and not to willful neglect (Dkt. 102), the evidence offered by the United States at trial on the factual disputes was substantial. C1 Design's financial difficulties and how it managed and prioritized its finances during the relevant tax periods at issue were a big focus at trial. During the period C1 Design claimed it could not pay its excise taxes, the company continued to pay its managing members' salaries of over $100, 000.00. C1 Design also prioritized other payments above its excise tax payments to the IRS, such as other tax payments and severance and salary payments to John Talbot after the termination of his employment. And, nearly $8 million dollars flowed into C1 Design's accounts during the periods it owed excise taxes to the IRS. In consideration of this evidence, the Court finds that reasonable minds could differ as to whether C1 Design acted with reasonable cause when it failed to timely pay its excise tax obligations for the relevant time periods.[4]

         Moreover, the United States' victories in the Ninth Circuit and other “courts of appeal for other circuits on substantially similar issues, ” lend further support for finding the position of the United States was substantially justified. For instance, the Ninth Circuit in Van Camp & Bennion, P.S. v. United States, affirmed summary judgment in the United States' favor where “[t]he record shows…the corporation was receiving large monthly deposits that were sufficent to meet its [employee withholding] tax obligations…. [and] the corporation was paying its president over $100, 000 per year.” 70 F.App'x 937, 938 (9th Cir. 2003); see also Pac. Wallboard & Plaster Co. v. United States, 319 F.Supp.2d 1187, 1190 (D. Or. 2004), aff'd, No. 04-35511, 2005 WL 3113470 (9th Cir. Nov. 22, ...


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