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United States v. Johnson

United States District Court, D. Utah, Central Division

January 8, 2018



          Clark Waddoups, United States District Judge.

         Defendants Mary Carol S. Johnson and James W. Smith seek recovery of reasonable litigation fees and costs pursuant to 26 U.S.C. § 7430. For the following reasons, defendants' motion is granted and defendants are awarded $285, 648.06 in attorney's fees and $30, 558.00 in expert witness report costs.


         On January 21, 2011, the United States filed a complaint against the children of Anna S. Smith, seeking collection of an estate tax deficiency owed by her estate as a result of her death in in 1991. Defendants filed a motion to dismiss on April 1, 2011 on the grounds that the government's claims were time-barred; that 26 U.S.C. § 6324(a)(2) largely did not impose personal liability upon them as beneficiaries, other than as to their receipt of insurance proceeds; and that they are not subject to fiduciary liability under 31 U.S.C. § 3713 because the estate had sufficient assets to pay the outstanding tax liability at the time the estate proceeds were distributed to the beneficiaries via a Distribution Agreement. The court granted in part and denied in part defendants' motion to dismiss on July 29, 2013, allowing the government's section 6324 claims against the trustees and life insurance beneficiaries to proceed, and concluding that the government had stated a claim for fiduciary liability under section 3713.

         On July 31, 2013, the United States filed an Amended Complaint, adding a claim seeking to foreclose against the Distribution Agreement as well as a claim as a third party beneficiary of the Distribution Agreement. Defendants answered the Amended Complaint on August 27, 2013, asserting defenses to include the expiration of the statute of limitations as to the government's interest as a third party beneficiary to the Distribution Agreement and that the government's section 6324(a)(2) claims are barred because the property was not included in the gross estate under any of sections 2034 through 2042 of the Tax Code. The parties filed cross motions for partial summary judgment on the government's first cause of action, namely whether Johnson and Smith, as successor trustees of the Trust, were personally liable for unpaid estate taxes under 26 U.S.C. § 6324(a)(2). The court initially granted summary judgment in favor of the government on this claim and granted defendant's motion to amend their answer.

         In the Amended Answer filed October 17, 2014, defendants asserted a defense that section 3713 liability was discharged in August 1997 pursuant to 26 U.S.C. § 2204 as a result of their tender of a special lien under 26 U.S.C. § 6324A. Defendants also filed a motion asking the court to reconsider its section 6324(a)(2) summary judgment ruling in the government's favor and instead find that trust assets were included in the gross estate under 26 U.S.C. § 2033. Following significant additional briefing, the court issued its final decision on December 1, 2016, finding for the defendants on all issues except for the liability of defendants Johnson and Smith for one quarter of their mother's life insurance benefits each received. On May 1, 2017, defendants filed a motion for attorney's fees and costs under 26 U.S.C. § 7430. The parties each subsequently appealed the court's December 1, 2016 memorandum decision. While the case was on appeal, the court declined to resolve the motion for attorney's fees until, at the parties' request, a status conference was held on December 13, 2017. At that time, both parties indicated it would be helpful to their appellate mediation efforts if the court decided the motion. The court now proceeds to do so.


         Section 7430(a) provides that in a “court proceeding which is brought by . . . the United States in connection with the determination, collection, or refund of any tax, interest, or penalty under this title, the prevailing party may be awarded a judgment . . . for . . . reasonable litigation costs incurred in connection with such court proceeding.” A “prevailing party” is a party other than the United States, with a net worth of less than $2 million at the time the proceeding was commenced, [1] who “has substantially prevailed with respect to the amount in controversy, or has substantially prevailed with respect to the most significant issue or set of issues presented.” 26 U.S.C. § 7430(c)(4)(A).

         The United States does not dispute that defendants Johnson and Smith have prevailed on both the amount in controversy and on the most significant issues or set of issues presented. (U.S. Opp'n to Mot. for Atty. Fees, ECF No. 201.) The United States also does not challenge the factual allegations in the Johnson and Smith affidavits asserting that they each had a net worth of less than $2 million at the time this proceeding commenced. (Id.)

         Section 7430(c)(4)(B) provides, however, that “a party shall not be treated as the prevailing party . . . if the United States establishes that the position of the United States in the proceeding is substantially justified.” The statute further goes on to state that the United States' position should be presumed “not to be substantially justified if the Internal Revenue Service did not follow its applicable published guidance . . . .” 26 U.S.C. § 7430(4)(B)(ii). Applicable published guidance is defined as “regulations, revenue rulings, revenue procedures, information releases, notices, and announcements” as well as “private letter rulings, technical advice memoranda, and determination letters” that are issued to the taxpayer.” 26 U.S.C. § 7430(4)(B)(iv). In addition, the Supreme Court has defined “substantially justified” as “justified to a degree that could satisfy a reasonable person, ” or in other words, having a “reasonable basis both in law and fact.” Pierce v. Underwood, 487 U.S. 552, 565 (1988). See also Anthony v. U.S., 987 F.2d 670, 674 (10th Cir. 1993). In making the determination about whether the United States' positions were substantially justified, “the district court must look at all facts and circumstances as well as the legal precedents relating to the case.” Pate v. U.S., 982 F.2d 457 (10th Cir. 1993). “The government's failure to prevail in the underlying litigation does not make its position necessarily unreasonable, but it remains a factor” for consideration. Anthony, 987 F.2d at 674.

         A. Substantially Justified

         Defendants' fee request segregates the fees according to claim. Specifically, defendants do not seek fees related to statute of limitations, transferee liability, discovery, or otherwise uncategorized issues. Instead, their fee request is limited to the following issues on which they substantially prevailed: (a) that the trust assets were not included in the gross estate of Anna S. Smith under one of 26 U.S.C. §§ 2034 to 2042, so therefore there could be no transferee liability under section 6324(a)(2); (b) that a section 6324A special lien had in fact been furnished to the IRS, which wrongfully rejected it, and therefore Carol Johnson and James Smith were entitled to discharge under section 2204 as a matter of law; and (c) that the government's attempts to enforce the Distribution Agreement and foreclose its tax lien were untimely or otherwise improper. The court will address each issue in turn as to whether the government's position was substantially justified.

         1. The government's position with regard to the discharge of Johnson and Smith's fiduciary liability was not substantially justified.

         The government argues that defendants could not have received a valid discharge of personal liability under § 2204 as a result of furnishing a valid § 6324A special lien because defendants “never made a written application for discharge, ” and because “the IRS never accepted the defendants' proposed § 6324A lien.” (U.S. Opp'n 5-6, ECF No. 201.) The government has never been able to identify any “form, method, procedure, or policy by which a ‘written application'” is properly made, nor point to “section 2204 or any applicable authorities or regulations [that] require a specific format, form, or wording to make an application for discharge.” United States v. Johnson, 224 F.Supp.3d 1220, 1237-38 (D. Utah 2016). This is nearly fatal to the government's claim that it had a reasonable basis in law and fact for its position. The government has nevertheless repeatedly asserted that a ...

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