In the
United States Court of Appeals
For the Seventh Circuit
No. 00-1207
ESTATE OF EDWARD KUNZE, DECEASED,
Carol Ann Hause, Executor,
Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
Appeal from a Decision of the
United States Tax Court
No. 16583-98
Argued September 20, 2000--Decided November
16, 2000
Before COFFEY, EASTERBROOK, and EVANS,
Circuit Judges.
EVANS, Circuit Judge. Edward J. Kunze
died on December 18, 1992. The after-tax
net worth of his estate at the time of
his death was approximately $2.5 million.
This amount is uncontested. Nine months
after Edward’s Estate filed its tax
return, an audit, which eventually lasted
21 months, was started. During the long
audit, interest of $21,701.57 accrued.
On July 29, 1996, the Estate filed a
petition with the IRS requesting an
abatement of this interest charge by
invoking 26 U.S.C. sec. 6404./1
Exercising its discretion, the IRS denied
the request and the Estate filed this
suit in the U.S. Tax Court for review of
the denial. The IRS filed a motion to
dismiss for lack of jurisdiction, arguing
that the net worth of the estate as of
the date of Kunze’s death exceeded the
jurisdictional/2 limit of $2 million.
The Tax Court agreed and dismissed the
case.
On appeal to us, the Estate argues that
due to a convoluted series of cross-
references in the Internal Revenue Code,
the Tax Court applied the wrong statute
in determining subject matter
jurisdiction. It also alleges that the
jurisdictional requirement, limiting
judicial review of abatements to estates
valued at more than $2 million, is uncon
stitutional both on its face and as
applied.
We have jurisdiction over this appeal
under 26 U.S.C. sec. 7482(a). We apply
the same standard of review to a Tax
Court decision that we apply to district
court determinations in a civil bench
trial: We review questions of law de
novo; we review factual determinations,
as well as applications of legal
principles to those factual
determinations, only for clear error.
Eyler v. Commissioner of Internal
Revenue, 88 F.3d 445, 448 (7th Cir.
1996).
Internal Revenue Code sec. 6404 grants
the Tax Court jurisdiction to review
abatement of interest denials if the
appealing party meets the requirements of
sec. 7430(c)(4)(A)(ii)./3 Section
7430(c)(4)(A)(ii) references the
requirements of 28 U.S.C. sec.
2412(d)(2)(B), which, for purposes of an
award of attorneys fees and litigation
costs, defines party as "an individual
whose net worth did not exceed $2 million
at the time the civil action was filed."
However, 28 U.S.C. sec. 2412(d)(2)(B)
refers to the maximum net worth of an
individual or corporation seeking to
bring suit and not the maximum net worth
of an estate. Here, the Estate, not an
individual, brought suit. Thus, the Tax
Court applied another subsection of 7430-
-sec. 7430(c)(4)(D)--which provides
"special rules" for applying the net
worth requirement of 28 U.S.C. sec.
2412(d)(2)(B) "for purposes of section
7430(c)(4) (A)(ii)." The special rules
outlined in sec. 7430(c)(4)(D) state that
the $2 million net worth limitation set
forth in sec. 7430(c)(4)(D) shall apply
to an estate and shall be calculated at
the time of the decedent’s death.
(Emphasis added.)
The Estate contends that instead of
calculating the net worth of the estate
when Kunze died in 1992, as required by
sec. 7430(c)(4)(D), the Tax Court should
have followed the requirements of 28
U.S.C. sec. 2412(d)(2)(B) and calculated
the Estate’s value when it filed suit
against the IRS 6 years later, in 1998.
The Estate argues that sec. 7430(c)(4)(D)
was inapplicable because sec. 6404(i)(1)
refers only to subsection
7430(c)(4)(A)(ii) and not to subsection
7430(c)(4)(D). Moreover, it contends that
the IRS was estopped from contesting
jurisdiction because the Estate relied on
misinformation provided by an IRS
employee. Finally, the Estate argues that
sec. 7430(c)(4)(D) did not apply to sec.
7430(c)(4)(A)(ii) because the unamended
version of (4)(D) referenced a
nonexistent subsection of
7430(c)(4)(A)(ii).
We find that all three of these
arguments are unpersuasive and conclude
that the Tax Court correctly applied the
jurisdictional limitations set forth in
sec. 7430(c)(4)(D). Moreover, even were
we to disregard sec. 7430(c)(4)(D) and
calculate the estate’s net worth at the
time the action was filed, as required by
28 U.S.C. sec. 2412(d)(2)(B), the result
would remain unchanged. The Estate’s
contention that its net worth at the time
it filed suit was less than $2 million is
based on the mistaken assumption that, in
calculating its net worth, the IRS should
exclude the value of assets distributed
upon the death of the decedent. However,
we have rejected this calculus and held
that for the purpose of sec. 7430 the
valuation of an estate must encompass all
assets, including those distributed prior
to litigation. Estate of Woll v. United
States, 44 F.3d 464, 470 (7th Cir. 1994).
Thus, regardless of which statute
applied, the net worth of the estate
exceeded $2 million; therefore, the Tax
Court lacked jurisdiction.
The Estate is correct in noting that
sec. 6404(i)(1) does not directly
reference sec. 7430(c)(4)(D) and instead
refers to sec. 7430(c)(4)(A)(ii). This
section, (A)(ii), in turn, incorporates
the requirements of 28 U.S.C. sec.
2412(d)(2)(B). Unfortunately, 28 U.S.C.
sec. 2412 does not direct the reader back
to sec. 7430. However, because 28 U.S.C.
sec. 2412(d)(2)(B) refers to individuals,
corporations, partnerships, associations
and their like, but not estates, the
reader is on notice that this statute
alone does not establish the
jurisdictional requirements for estates.
In fact, sec. 7430 provides special
rules for estates. Section 7430(c)(4)(D)
specifically references sec.
7430(c)(4)(A)(ii) and states that 4(D)
provides "special rules" for applying the
net worth requirement of sec.
2412(d)(2)(B) "for purposes of the
subparagraph (A)(ii) of this paragraph."
Thus, sec. 7430 establishes that
subparagraph (4)(D) applies to sec.
7430(c)(4)(A)(ii) for determining
jurisdictional limits.
Granted, the series of back and cross-
references presented in this case is not
a model of clarity. However, such
meanderings are not uncommon in the Tax
Code and have been known to provide
lifetime employment, if not enjoyment, to
tax attorneys. Here, the Tax Court
adeptly followed the trail of cross-
references, applied the appropriate
statute, and correctly determined that it
lacked subject matter jurisdiction.
The Estate also argued that the IRS
should be estopped from raising the issue
of subject matter jurisdiction. In a
final determination letter sent in April
1998, the IRS denied the Estate’s
petition for interest abatement and
erroneously stated that the Estate could
file for court review, provided "your net
worth . . . not exceed $2 million as of
the filing date of your petition for
review." The Estate argues that the court
should have deferred to the IRS’s
erroneous letter and determined the net
worth of the estate at the time it filed
suit in 1998.
However, the Estate cannot manufacture
subject matter jurisdiction based solely
on a government agent’s misinterpretation
of tax statutes. See Commissioner v.
Schleier, 515 U.S. 323, 336 n.8 (1995)
(interpretative ruling by the IRS cannot
be used to "overturn the plain language
of a statute"). Moreover, we have held
that estoppel will not operate against
the government where a plaintiff has
relied on the erroneous advice of a
government agent. Cheers v. Secretary of
Health, Education, and Welfare, 610 F.2d
463, 469 (7th Cir. 1979) ("Parties
dealing with the Government are charged
with knowledge of and are bound by
statutes and lawfully promulgated
regulations despite reliance to their
pecuniary detriment upon incorrect
information received from Government
agents or employees.").
Here, the Estate’s argument that greater
deference should have been given to the
final determination letter is unavailing.
The Estate was represented by counsel,
and its failure to decipher the Tax Code
cannot be excused by its reliance on a
government employee’s error. The Tax
Court correctly held that a mistake on
the part of an IRS agent did not confer
subject matter jurisdiction where there
existed no statutory basis for judicial
review.
The Estate also argues that sec.
7430(c)(4)(D) should not have applied
because in April 1998, when it received
the IRS letter denying abatement, the
unamended version of sec. 7430(c)(4)(D)
referenced a nonexistent subsection of
sec. 7430, namely, sec.
7430(c)(4)(A)(iii)./4 Because subsection
7430(c)(4)(A)(iii) did not exist, the
Estate argues that the limits set forth
in sec. 7430(c)(4)(D) should be ignored
and we should look to 28 U.S.C. sec.
2412(d)(2)(B) to determine subject matter
jurisdiction.
This argument fails on two counts.
First, Congress amended sec.
7430(c)(4)(D) on July 22, 1998, 2 months
before the Estate filed suit in October.
Thus, even if the typographical error had
caused confusion, the Estate had access
to the corrected version of (4)(D) before
it filed suit.
Moreover, the error is so transparent
that the Estate can hardly claim to have
been bamboozled. The unamended version of
sec. 7430(c)(4)(D) incorrectly referred
to subparagraph (iii) instead of
subparagraph (ii). However, subparagraph
sec. 7430(c)(4)(A)(ii) still set forth
the relevant jurisdictional limitations.
In turning to subsection (4)(A), a reader
would realize that the subparagraph had
been misnumbered, but would not be
surprised by the intent of subsection
4(A).
Nevertheless, the Estate suggests that
we should read the subsection literally
and simply conclude that it no longer
applies. There are limits to literalism.
Generally, each word of a statute is
given effect unless the provision is the
result of an obvious mistake or error.
See 2A Norman J. Singer, Sutherland
Statutory Construction sec. 46.06 (6th
ed. 2000). Such is the case here. The
erroneous cross-reference in (4)(D) to a
misnumbered subparagraph in (4)(A) can
hardly be construed to have changed the
legislative intent of sec. 7430(c)(4)(D)
or to have affected the substantive
rights of the parties. The import of the
subsection remains clear, in spite of the
typo. Thus, we reject the Estate’s
suggested interpretation.
Finally, we consider the underlying
premise of the Estate’s argument that its
net worth when it filed suit in October
1998 was less than $2 million. The Estate
contends that between the time of Kunze’s
death in 1992 and when it filed suit 6
years later in 1998, all the assets of
the estate were distributed; thus its
remaining net worth was $21,701.57--the
amount of interest abatement sought by
the Estate. Based on this valuation, the
Estate argues that at the time it filed
suit, it satisfied the jurisdictional
requirements of 28 U.S.C. sec.
2412(d)(2)(B).
Unfortunately, the Estate has
miscalculated. In deciding whether an
estate was eligible for attorneys fees
and costs under sec. 7430 and 28 U.S.C.
sec. 2412(d)(2)(B), we held that the net
worth of an estate at the time suit was
filed must include all assets--even
assets that had been distributed prior to
litigation. Estate of Woll v. United
States, 44 F.3d 464, 470 (7th Cir. 1994).
We reasoned that to decide otherwise
would result in an arbitrary and unfair
determination of whether an estate was
eligible for litigation costs based on
what assets remained. Id. at 469-70.
Moreover, by not including the value of
distributed assets, estate administrators
could manipulate the timing of
distributions and litigation against the
government in order to "duck below the $2
million . . . limit." Id. at 470.
Prior to 1998, the decision to provide
or deny interest abatement was left to
the sole discretion of the IRS, and the
exercise of that discretion was not
subject to judicial review. By passing
the IRS Restructuring and Reform Act of
1998, Congress created a narrow window of
review, limiting court oversight to small
estates valued at less than $2 million.
If we were to accept the calculus
forwarded by the Estate, many more
abatement decisions would qualify for
judicial review, provided the estates
filing suit were clever enough to quickly
distribute assets and then seek
abatement, thus defeating the
jurisdictional limitations enacted by
Congress.
We reject the Estate’s calculus and
conclude that its net worth, both at the
time of the decedent’s death and when it
brought suit, exceeded $2 million.
Therefore, regardless of which statute
applied, sec. 7430(c)(4)(D) or 28 U.S.C.
sec. 2412(d)(2)(B), the Estate did not
satisfy the requirements for judicial
review, and the Tax Court correctly
dismissed the suit.
The Estate also forwards two
constitutional challenges. First, it
argues that the retroactive application
of sec. 7430(c)(4)(D) violates the Due
Process Clause of the Fifth Amendment.
Second, it contends that there is no
rational basis for the $2 million
jurisdictional limitation set forth in
sec. 6404; thus, the statute violates the
equal protection standard imposed on the
federal government by the Due Process
Clause of the Fifth Amendment.
The Estate argues that its right to seek
review accrued in 1998, when it received
the IRS final determination letter
denying abatement, and that the
retroactive application of the corrected
version of sec. 7430(c)(4)(D) violated
the Due Process Clause. However, sec.
7430(c)(4)(D) was amended 2 months
before the Estate filed suit in October
1998. Thus, the amended section was not
applied retroactively, and there was no
due process violation. Even assuming the
section was retroactively applied, we
conclude that the amended statute was
consistent with the Due Process Clause.
The Supreme Court "repeatedly has upheld
retroactive tax legislation against a due
process challenge." United States v.
Carlton, 512 U.S. 26, 30 (1994)
(citations omitted). The Court has set
forth a two-part test for determining
whether the retroactive application of a
tax statute violates due process. First,
for retroactivity to be upheld it must be
shown that the statute has a rational
legislative purpose and is not arbitrary.
Second, the period of retroactivity must
be moderate. Id. at 32 (permitting one
year retroactivity for tax statute
correcting a mistake in prior law).
Here, the amended statute merely served
to clarify a drafting error. It was a
curative measure that did not impose new
tax liabilities or alter the substantive
rights of the parties. Congress employed
rational means. It acted promptly to
correct the error and established only a
modest period of retroactivity, 11
months.
Finally, the Estate contends that it was
denied a fundamental right of redress. It
argues that there was no rational basis
for denying a taxpayer, with net worth in
excess of $2 million, the right to
judicial review of a denial of interest
abatement.
Unlike the Fourteenth Amendment, the
Fifth Amendment does not contain an Equal
Protection Clause. However, the Fifth
Amendment’s Due Process Clause does
contain an equal protection component
applicable to the federal government. See
Bolling v. Sharpe, 347 U.S. 497, 499
(1954). The scope of the equal protection
guarantee under the Fifth Amendment is
essentially the same as under the
Fourteenth Amendment. See Harris v.
McRae, 448 U.S. 297, 322 (1980).
Statutes affecting economic rights which
neither invade a substantive
Constitutional right or freedom nor
utilize a suspect classification such as
race are subject to only a low level of
judicial scrutiny--the rational basis
test. See Exxon Corp. v. Eagerton, 462
U.S. 176, 195-96 (1983). Under that test
"a statute will be sustained if the
legislature could have reasonably
concluded that the challenged
classification would promote a legitimate
state purpose." Id. at 196.
Moreover, "[l]egislatures have
especially broad latitude in creating
classifications and distinctions in the
tax statutes." Regan v. Taxation With
Representation of Washington, 461 U.S.
540, 547 (1983); see also Barter v.
United States, 550 F.2d 1239, 1240 (7th
Cir. 1977) (per curiam) (statutory
difference in tax rates for married
couples and single individuals does not
violate due process of law of the Fifth
Amendment; "perfect equality or absolute
logical consistency between persons
subject to the Internal Revenue Code [is
not] a constitutional sine qua non").
Thus a tax statute’s "presumption of
constitutionality can be overcome only by
the most explicit demonstration that a
classification is a hostile and
oppressive discrimination against
particular persons and classes." Id. at
547 (quoting Madden v. Kentucky, 309 U.S.
83, 87-88 (1940)). "The burden is on the
one attacking the legislative arrangement
to negate every conceivable basis which
might support it." Id. at 547-48.
Finally, the rational basis justifying a
statute against an equal protection claim
need not be stated in the statute or in
its legislative history; it is sufficient
that a court can conceive of a reasonable
justification for the statutory
distinction. McDonald v. Board of
Election Comm’n, 394 U.S. 802, 809
(1969).
Here, there is a reasonable basis for
the net worth limitation. Congress may
have established the limitation because
it reasoned that larger estates would be
in a better position to avoid the accrual
of interest charges by making an advance
payment or posting a cash bond during the
pendency of the IRS audit.
The Estate does not attack this
justification as irrational but merely
impractical. It contends that, by posting
a bond or paying an advance, larger
estates would be foregoing the
opportunity to invest these funds and
earn interest. Essentially, the Estate
bemoans the opportunity cost of lost
interest income. However, this complaint
does not render the $2 million net worth
distinction irrational. Congress can
treat taxpayers unequally so long as
there is a rational basis for the
distinction. Given the limited resources
of the judiciary, Congress may have
sought to restrict judicial review to
smaller estates with relatively limited
financial resources--a nonarbitrary,
reasoned distinction.
For these reasons, the decision of the
Tax Court is affirmed.
/1 Abatement is permitted for extensive delays
resulting from managerial acts of IRS officers or
employees such as: the loss of records, person-
nel transfers, extended illnesses, extended per
sonnel training, or extended leave. 14 Mertens
Law of Fed. Income Tax’n sec. 50:72.
/2 We have used the parties’ designation of "juris-
diction" as the issue, although whether the $2
million limit is truly jurisdictional--as opposed
to a condition of suit, like a timely filing--is
an open question.
/3 Unless otherwise indicated, all sections cited
are part of the Internal Revenue Code.
/4 Congress enacted the erroneous subsection
7430(c)(4)(D) on August 5, 1997. When enacted, this
subsection incorrectly referenced subparagraph
7430(c)(4)(A)(iii) rather than subparagraph
(A)(ii). Prior to 1996, subsection (4)(A) con-
tained three subparagraphs, but on July 30, 1996,
Congress amended this subsection, striking para-
graph (i) and renumbering subparagraphs (ii) and
(iii) as (i) and (ii), respectively. See Taxpayer
Bill of Rights 2, sec. 701(a), 110 Stat. at 1463.
Due to the 1996 amendment of subsection (4)(A),
when Congress amended subsection (4)(D) in 1997,
subsection (4)(A) no longer contained a subpara-
graph (iii). However, the language of subsection
7430(c)(4)(A) remained the same, and the juris-
dictional requirement was spelled out in subpara-
graph sec. 7430(c)(4)(A)(ii).