PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 11-2371
_____________
ESTATE OF ANTONIO J. PALUMBO DECEASED
PNC BANK, NATIONAL ASSOCIATION, EXECUTOR,
Appellant
v.
UNITED STATES OF AMERICA
______
On Appeal from the United States District Court
for the District of Western Pennsylvania
(D.C. No. 2-10-cv-00760)
District Judge: Honorable Arthur J. Schwab
______
Argued on March 6, 2012
Before: SCIRICA, and AMBRO and VAN ANTWERPEN,
Circuit Judges
(Filed: April 2, 2012)
Louis A. Prosperi, Esq. [ARGUED]
Law Office of Louis A. Prosperi
1910 Cochran Road
Manor Oak Two, Suite 730
Pittsburgh, Pennsylvania 15220
Steven L. Sablowsky, Esq.
Goldblum & Sablowsky LLC
285 East Waterfront Drive
Suite 160
Homestead, Pennsylvania 15120
John P. Iurlano, Esq.
500 McKnight Park Drive
Suite 501B
Pittsburgh, Pennsylvania 15237
Counsel for Estate
Tamara W. Ashford, Esq.
Jonathan S. Cohen, Esq.
Randolph L. Hutter, Esq. [ARGUED]
United States Department of Justice Tax Division
950 Pennsylvania Avenue, N.W.
P.O. Box 502
Washington, District of Columbia 20044
Christopher Williamson, Esq.
United States Department of Justice Tax Division
P.O. Box 227
Ben Franklin Station
Washington, District of Columbia 20044
Counsel for Government
2
______
OPINION OF THE COURT
______
VAN ANTWERPEN, Circuit Judge.
The Estate of Antonio J. Palumbo (“the Estate”)
prevailed in its suit against the United States when the
District Court ruled it was entitled to a tax refund. The Estate
then sought recovery of all of its attorneys’ fees and costs
under 26 U.S.C. § 7430, and alternatively the fees and costs it
incurred after December 16, 2010 under the theory that the
government rejected its qualified offer made pursuant to §
7430(g). Finding the position of the United States to be
substantially justified, the District Court denied the Estate its
fees and costs. On appeal, the Estate argues that the position
of the United States was not substantially justified and that
the net worth requirements of § 7430 did not prevent it from
recovering its fees and costs. We will affirm.
I. Factual and Procedural History
A. Creation of the Charitable Trust and Will
Contest
In 1974, Antonio Palumbo created the A.J. and
Sigismunda Palumbo Charitable Trust (the “Charitable
Trust”). Palumbo died in 2002. During his life, he executed
various wills and trust instruments; his last will was executed
on July 6, 1999 (the “1999 will”). The parties agree there
was no express residuary provision in the 1999 will, despite
the fact that each of Palumbo’s previous wills devised the
3
residue to the Charitable Trust. Palumbo’s attorney admitted
that this omission was a scrivener’s error.
The lack of a residuary clause led to a dispute over
who was entitled to the residue. Palumbo’s son claimed he,
as Palumbo’s sole intestate heir, was entitled to the residue,
while the Charitable Trust claimed it was entitled to the
residue because of the scrivener’s error. The two sides
reached a settlement wherein Palumbo’s son received
$5,600,000 along with real property in Wheeling, West
Virginia, and the Charitable Trust received $11,721,141. 1
The settlement agreement was approved by an order of the
Orphans’ Court Division of the Court of Common Pleas of
Elk County, Pennsylvania.
B. Federal Estate Tax Refund and Fees and Costs
Under § 7430
After the settlement, the Estate filed a claim for a
federal estate tax charitable deduction in the amount payable
to the Charitable Trust. The Commissioner of Internal
Revenue disallowed the charitable deduction, finding that the
charitable contribution was made by Palumbo’s son via a
settlement agreement, not by Palumbo through his 1999 will.
The Estate thereupon brought an action against the United
States District Court for the Western District of Pennsylvania
seeking a refund of the federal estate tax paid on the
$11,721,141 that was donated to the Charitable Trust. The
District Court granted the Estate’s motion for summary
1
The amount Palumbo’s son received was free of all
administrative expenses, debts, and estate and inheritance
taxes.
4
judgment; the Estate then sought its attorneys’ fees and costs
under 26 U.S.C. § 7430 (“§ 7430”) both as a “prevailing
party,” which would entitle it to full recovery, and as a party
who made a qualified offer pursuant to § 7430(g), which
would entitle it to fees incurred after December 16, 2010.
Because the District Court found the government’s
position in the litigation to be substantially justified, it did not
award the Estate fees or costs. The District Court did not
address the net worth requirements imposed by § 7430,
whether those requirements should apply to the Estate or the
Charitable Trust, or the validity of the Estate’s alternative
claim that it was entitled to certain costs because it made a
qualified offer under 26 U.S.C. § 7430(g). The Estate filed a
timely notice of appeal.
II. Jurisdiction and Standard of Review
We have jurisdiction over the final order of the District
Court under 28 U.S.C. § 1291. We review the District
Court’s decision that the government’s position was
substantially justified for abuse of discretion. Nicholson v.
Commissioner, 60 F.3d 1020, 1026 (3d Cir. 1995); see also
Pierce v. Underwood, 487 U.S. 552, 559 (1988). A district
court’s ruling can only be reversed under abuse of discretion
review if its decision was arbitrary, irrational, fanciful, clearly
unreasonable, or based on a “clearly erroneous finding of fact,
an errant conclusion of law, or an improper application of law
to fact.” United States v. Lee, 612 F.3d 170, 184 (3d Cir.
2010). We will not upset a district court’s exercise of
discretion “‘unless no reasonable person would adopt the
district court’s view.’” United States v. Starnes, 583 F.3d
5
196, 214 (3d Cir. 2009) (quoting Ansell v. Green Acres
Contracting Co., 347 F.3d 515, 519 (3d Cir. 2003)).
III. Analysis
A. Fee Provision Statute
In court proceedings “brought by or against the United
States in connection with the determination, collection, or
refund of any tax,” a “prevailing party” may recover fees and
costs incurred in the litigation. 26 U.S.C. § 7430(a).
“Prevailing party” is defined in § 7430(c)(4):
(A) In general.--The term “prevailing party”
means any party in any proceeding to which
subsection (a) applies (other than the United
States or any creditor of the taxpayer involved)
--
(i) which--
(I) has substantially prevailed with respect to
the amount in controversy, or
(II) has substantially prevailed with respect to
the most significant issue or set of issues
presented, and
(ii) which meets the requirements of the 1st
sentence of section 2412(d)(1)(B) of Title 28,
United States Code (as in effect on October 22,
1986) except to the extent differing procedures
are established by rule of court and meets the
6
requirements of section 2412(d)(2)(B) of such
Title 28 (as so in effect).
In referencing 28 U.S.C. § 2412(d)(1)(B), the statute
incorporates the net worth restrictions set forth in the Equal
Access to Justice Act (“EAJA”). 2 Under the EAJA, the
recovery of fees and costs is barred if a party’s net worth
exceeds the statutory amount. Moreover, the party seeking
fees has the burden of proving that it meets the net worth
requirements under § 7430. Tax Ct. R. 232(e); Estate of Woll
v. Commissioner, 44 F.3d 464, 470 (7th Cir. 1994).
Congress included a special rule in § 7430 that applied
the net worth requirement to estates. Section 7430(c)(4)(D)
states that the $2,000,000 net worth requirement imposed on
individuals in 28 U.S.C. § 2412(d)(2)(B)(i) shall apply to “an
estate but shall be determined as of the date of the decedent’s
death.” The rule appears to codify Estate of Hubberd v.
Comm’r, 99 T.C. 335 (1992). 3 At the time Hubberd was
decided, § 7430 did not contain a special rule subjecting an
estate to the $2,000,000 net worth requirement. The Hubberd
court decided that an estate was subject to the net worth
requirement set forth in § 2412. Id. at 341. The court
rejected the estate’s argument that when applying the net
worth requirement a court should “consider the net worth of
the [estate’s] beneficiaries, not the net worth of the estate.”
Id. at 339. The court explained its reasoning as follows:
2
The EAJA is codified at 5 U.S.C. § 504 and 28 U.S.C. §
2412.
3
The rule was added to § 7430 via the Taxpayer Relief Act of
1997, Pub. L. No. 105-34, 111 Stat 788.
7
[The Commissioner] determined a deficiency
against the estate. This case is brought in the
name of and on behalf of the estate by its
executor. This action is for a redetermination of
the estate tax deficiency. An estate is generally
responsible for bearing the costs of its own
litigation. It follows that we look to the net
worth of the estate, and not of the beneficiaries
or the executor.
Id. at 340–41 (citations omitted). 4
Unlike estates, charitable organizations exempt from
taxation under Section 501(c)(3) of the Internal Revenue
Code need not satisfy any net worth requirement to recover
fees and costs. Such an organization, however, cannot
recover fees and costs if it had “more than 500 employees at
the time the civil action was filed.” 26 U.S.C. §
2412(d)(2)(B)(ii).
The appellant cites legislative history in the form of
the Conference Report to the Tax Equity and Fiscal
Responsibility Act of 1982, the bill that enacted § 7430. The
applicable Senate Amendment, which was adopted by the
Conference, stated “Third-party costs.—A taxpayer may
recover costs for a third party incurred by that party on behalf
of the taxpayer.” H.R. Rep. No. 97-760, 97th Cong. 2d Sess.
687 (1982).
4
The Hubberd court did not decide whether clause (i) or (ii)
of § 2412(d)(1)(B) was applicable because the estate’s net
worth exceeded the limit stated in each provision.
8
Here, in addition to seeking fees and costs as a
“prevailing party” under § 7430, the Estate seeks to recover
under the qualified offer provision of § 7430(g). A qualified
offer under § 7430(g): (1) is made by the taxpayer to the
United States within the qualified offer period [which starts
on the date that the first letter of proposed deficiency is sent
to the taxpayer, and ends 30 days before the date the case is
first set for trial]; (2) specifies the offered amount of the
taxpayer’s liability; (3) is designated at the time it is made as
a qualified offer; and (4) remains open during the period
beginning on the date it is made, and ending at the earliest of:
the date the offer is rejected, the date of trial, or the ninetieth
day after the offer is made. If the offer fails to meet the
requirements, a party cannot receive litigation fees and costs.
McGowan v. Comm’r, T.C. Memo 2005-80, 2005 WL
826928 at *2 (2005).
Parties seeking to recover under either the prevailing
party provision or the qualified offer provision must satisfy
the net worth requirements discussed above. 5 Because the
5
Section 7430(c)(4)(B) states a “party shall not be treated as
the prevailing party” if the position of the United States is
“substantially justified.” Courts look to published guidance
(regulations, revenue rulings, etc) as well as the decisions of
courts of appeal on substantially similar issues in making this
determination. The “substantially justified” limitation does
not apply to qualified offers. See Swanson v. Comm’r, 98
T.C.M. (CCH) 42 (2009) (“The qualified offer provision of
section 7430(c)(4)(E)(i) applies without regard to whether the
Commissioner’s position in the matter is substantially
justified.”). This ground will not be discussed in this opinion
and does not affect our resolution of the case.
9
resolution of the net worth issue disposes of both issues, we
will resolve this case on that ground despite the fact that the
District Court did not address it. See Blum v. Bacon, 457 U.S.
132, 138 n.2 (1982) (“It is well accepted . . . an appellee may
rely upon any matter appearing in the record in support of the
judgment below.”).
B. Application of § 7430 Requirements
It is undisputed that the Estate’s net worth at the time
of the decedent’s death was greater than $2,000,000, and that,
as a result, the Estate cannot qualify for fees and costs under
either of its claims. The Charitable Trust, however, satisfies
the net worth requirements because it is a tax-exempt
charitable organization with fewer than 500 employees. The
Estate has thus argued that the Charitable Trust is the real
party in interest and that the Charitable Trust, not the Estate,
qualifies as a prevailing party who incurred fees.
The crux of the Estate’s argument is that because the
Charitable Trust was the sole residuary beneficiary under the
settlement agreement, it bore all the expenses incurred to
obtain the tax refund, reaped all the benefits of the tax refund,
and will reap the benefit of any attorneys’ fees and costs
recovered. In support of its argument, the Estate cites a
number of cases that looked beyond the named plaintiff and
aimed to determine whether “the real party in interest” could
be awarded fees, see, e.g., Young v. Commissioner, T.C.
Memo. 2006-189, 2006 WL 2564109 (2006), as well as
legislative history, see H.R. Rep. No. 97-760, 97th Cong. 2d
Sess. 687 (1982). The Estate asserts that these arguments
show the Charitable Trust was the “prevailing party” for the
purposes of fee recovery under § 7430. We disagree. The
10
fact that the Charitable Trust stood to benefit from the Estate
obtaining a tax refund, as well as any award of fees, does not
mean that it was a “prevailing party” that incurred fees as is
required under § 7430.
If the terms of a statute are unambiguous, the plain
meaning of the statute will govern. See Reves v. Ernst &
Young, 507 U.S. 170, 177 (1993) (“If the statutory language
is unambiguous, in the absence of a clearly expressed
legislative intent to the contrary, that language must
ordinarily be regarded as conclusive.” (citations omitted));
Rubin v. United States, 499 U.S. 424, 430 (1981) (“When we
find the terms of a statute unambiguous, judicial inquiry is
complete, except in rare and exceptional circumstances.”
(citations omitted)).
The definition section of § 7430 sets forth the criteria
for determining a prevailing party. First, an individual or
entity must be a “party in any proceeding” covered by §
7430(a). See § 7430(a) (stating it applies to “any
administrative or court proceeding which is brought by or
against the United States in connection with the
determination, collection, or refund of any tax”). Second, the
party must “substantially prevail[] with respect to the amount
in controversy” or “substantially prevail[] with respect to the
most significant issue or set of issues presented.” § 7430
(c)(4)(A)(i)(I) & (II). Finally, as previously mentioned, the
definition of prevailing party excludes any party that fails to
satisfy the net worth requirements of § 2412(d)(1)(B). §
7430(c)(4)(A)(ii).
In this case the Estate was the party in the underlying
proceeding. The executor of the Estate was (1) responsible
11
for paying the appropriate amount of federal estate tax, see 26
U.S.C. § 2002 (“The tax imposed by this chapter shall be paid
by the executor.”); (2) the party with the legal right to seek a
refund of taxes paid; and (3) the party that conducted the
litigation. The settlement agreement between the Charitable
Trust and Palumbo’s son explicitly states that the “residuary
estate will be solely responsible for the payment of all
inheritance and estate taxes payable as a result of the
Decedent’s death.” App. II at 87 ¶ 6. Further, the Estate was
the only party to the proceedings, and it was the only party
that prevailed in connection with the proceedings.
In addition to satisfying the prevailing party
requirements, a party seeking fees under § 7430 must incur
the litigation expenses attendant to that proceeding. Section
7430(c)(1)(B)(iii) states only reasonable fees “paid or
incurred” for the services of an attorney are reimbursable. In
order to recover fees under § 7430 a prevailing party must
actually incur the costs. Marre v. United States, 38 F.3d 823,
829 (5th Cir. 1994) (litigant “entitled only to the amount
owed under the contingency fee agreement plus costs”);
Young, 2006 WL 2564109 at *9 (T.C. 2006) (“Unlike certain
other fee-shifting statutes, section 7430 generally allows the
recovery of attorney fees only to the extent such amounts
have been paid or incurred.” 6). Unlike the term “prevailing
party,” “incur” is not defined by § 7430 so we must assume
6
We note that we are not dealing with the situation where a
non-party has advanced the funds to pay the fees and the
plaintiff is either liable to repay them, or that repayment is
contingent upon recovery. See Morrison v. Comm’r, 565
F.3d 658, 662 (9th Cir. 2009); SEC v. Comserv. Corp., 908
F.2d 1407, 1414 (8th Cir. 1990).
12
the legislature intended the ordinary meaning of the word to
apply. Smith v. United States, 508 U.S. 223, 228 (1993)
(“When a word is not defined by statute, we normally
construe it in accord with its ordinary or natural meaning.”).
Black’s Law Dictionary defines “incur” as “to suffer or bring
on oneself (a liability or expense).” Black’s Law Dictionary
at 836 (9th ed. 2009).
This definition is consistent with the Tax Court’s
statement “[f]or purposes of section 7430, fees are ‘incurred’
when there is a legal obligation to pay them.” Young, 2006
WL 2564109 at *9. Here, the Estate “suffered or brought on”
itself the fees it had the legal obligation to pay. The Estate
paid the attorneys’ fees and expenses and was the party in the
underlying litigation represented by those attorneys. It is thus
clear that the Estate was the prevailing party who incurred the
expenses related to the litigation.
The Estate’s argument that we should look at the sole
residuary beneficiary, the Charitable Trust, cannot be
reconciled with the plain language of the statute and the
ordinary meaning of its terms, and therefore must be rejected.
Since the Charitable Trust was not a party to the underlying
suit, it cannot be a prevailing party nor can it incur expenses
as contemplated by the statute. 7 The fact that it stands to
7
The Charitable Trust did hire an attorney to work on the
matter, and his expenses accounted for slightly less than 20%
of the total amount sought by the Estate. We do not believe
that the Charitable Trust’s legal expenses are the type covered
by § 7430. Section 7430 aims to ensure “that every citizen is
able to defend himself against unjustified government action,
free from the financial disincentives associated with
13
benefit from the Estate’s victory, and that it hired an attorney
to help in the litigation, cannot change the result that it does
not qualify under § 7430.
By their nature, decedents’ estates deal with resources
that will be passed along to other individuals or entities. See
Black’s Law Dictionary at 629 (9th ed. 2009) (defining a
decedent’s estate as “The real and personal property that a
person possesses at the time of death and that passes to the
heirs or testamentary beneficiaries”). If an individual or
entity is the residual beneficiary of an estate, that separate
individual or entity will indirectly bear the estate’s fees. Yet,
§ 7430 requires courts to analyze an estate’s, not its
beneficiary’s, net worth, and courts must make such a
determination “as of the date of the decedent’s death.” The
mere existence of an indirect consequence on the residual
beneficiary does not alter the application of the plain meaning
of the statute.
The Conference Report cited by the Estate does not
provide persuasive evidence that Congress intended a
different result. Although the Senate Amendment, officially
adopted by the Conference Report, stated “[a] taxpayer may
recover costs for a third party incurred by that party on behalf
of the taxpayer,” a number of hurdles were inserted into §
7430. Taxpayers must clear those hurdles before recovering
fees. To that end, we do not read the Senate Amendment in
the Conference Report as negating, or casting aside, the
litigation.” Morrison, 565 F.3d at 659. The Charitable Trust
did not participate in such litigation to protect its rights; it
merely hired counsel that advised it, and helped the Estate, in
the Estate’s participation in such litigation.
14
different barriers to recovery placed in § 7430. The taxpayer,
here the Estate, must still qualify as a prevailing party under §
7430 before it can recover any costs for third parties that
those parties incurred on its behalf.
The application of the statutory language to this case is
clear: we are to look at the Estate’s net worth since it was the
taxpayer that pursued its substantive legal rights in the
underlying action. See also Hubberd, 99 T.C. at 341
(examining estate’s net worth because the estate must pay
taxes, the case was brought in name of estate by executor, and
estate is “generally responsible for bearing the costs of its
own litigation”). The relevant point in time for determining
the value of the estate is its value at the time of Palumbo’s
death. It is undisputed that the Estate’s net worth exceeded
$2,000,000. As a result, the Estate is not eligible to recover
fees and costs under § 7430.
C. Decisions Focusing on the “Real Party of
Interest”
The Estate’s discussion of case law regarding the real-
party-in-interest doctrine does not dissuade us from our
conclusion. We now examine this case law and explain why
we believe it does not dictate a different result.
One of the first decisions to apply the real-party-in-
interest doctrine to the EAJA was Unification Church v.
I.N.S., 762 F.2d 1077 (D.C. Cir. 1985). The United States
Court of Appeals for the District of Columbia Circuit held
that courts should determine the real party in interest in the
fee litigation and decide whether that party is eligible to
recover fees. In the underlying litigation, the Unification
15
Church agreed to pay the attorneys’ fees for three of its
employees in their dealings with the Immigration and
Naturalization Service, and joined the suit as a named
plaintiff. Id. at 1082; see also Unification Church v. I.N.S.,
547 F. Supp. 623 (D.D.C. 1982). The employees and Church
were successful, and the Church sought to recover, through
the EAJA, the fees it paid on behalf of the employees. Id. at
1079. The court decided that the Church was the real party in
interest because it had incurred all of the fees, and would be
the beneficiary of any award of fees. Id. at 1082. Despite the
fact each employee was individually eligible to recover, the
Church was prevented from recovering because it had more
than 500 employees.
The court explained that if it “were to award fees in
this case on the basis that the individual appellants qualified
under subsection (d)(2)(B)(i), [it] would open the door for the
wholesale subversion of Congress's intent to prevent large
entities from receiving fees under subsection (d).” Id. The
D.C. Circuit feared that “[i]n a wide variety of circumstances,
organizations obviously not qualified for an award under
subsection (d) would be able to persuade individuals to be
among the parties, and the organization would then receive
free legal services if its side were to prevail.” Id. The court
could not “allow such a situation.” Id. As a result the court
held that “where the fee arrangement among the plaintiffs is
such that only some of them will be liable for attorney's fees,
the court shall consider only the qualification vel non under
the [EAJA] of those parties that will be themselves liable for
fees if court-awarded fees are denied.” Id.
The Estate also argues the decision in Wall Industries
v. United States, 15 Cl. Ct. 796 (1988), aff’d in unpublished
16
opinion, 883 F.2d 1027 (Fed. Cir. 1989), supports the
extension of the real-party-in-interest doctrine. In that
decision the court denied the taxpayer-plaintiff fees under the
EAJA because it was not the real party in interest.
Wall Industries Inc. (“Wall”), the taxpayer and
plaintiff in the action, filed suit seeking a tax refund. Wall,
however, entered into an agreement with its accounting firm,
Arthur Young (“Young”), whereby Young paid Wall
$291,045 to settle a potential malpractice claim against
Young for failing to file the refund claim. Wall Indus., 15 Cl.
Ct. at 799. As a condition of the settlement, Wall granted to
Young full responsibility for litigating the tax refund claim
and any refund proceeds resulting from that litigation. Id.
Therefore, Young conducted the litigation, paid for the
litigation, and would receive any and all benefit from the
litigation. Id. The court stated “[a] thorough analysis of the
settlement agreement between Young and Wall discloses that
there is no question that Young, in actuality, required Wall to
initiate this suit as a condition of the payment of $291,045,
and that Wall is little more than a nominal applicant.” Id. at
804.
After Wall prevailed and obtained a refund, it sought
fees under the EAJA. The court found that Wall was not
eligible for fees because it “never assumed any responsibility
to pay for legal services and would derive no benefit from an
award herein . . . .” Id. at 805. The court found that Young
was the real party in interest because it, not Wall, “actively
and continuously participated” in the litigation and “stood
alone to benefit.” Id. The court then analyzed whether
Young, not Wall, could qualify under the net worth
17
provisions, and denied fees because of Young’s net worth and
size. Id at 806.
Here, the Estate argues that because, in its view, the
Charitable Trust “actively and continuously participated” in
the litigation and “stood alone to benefit,” it must be
considered the real party in interest, just like the Unification
Church in Unification Church, and Young in Wall Industries.
The Estate errs in relation to both cases.
In both Unification Church and Wall Industries, the
real party in interest had a legal arrangement that made it
responsible for the fees. See also Love v. Reilly, 924 F.2d
1492, 1494 (9th Cir. 1991) (“The members of the
[association] would be the real party in interest in the fee
litigation only if they were liable for the [association’s]
attorney's fees.”). The Charitable Trust had no such
arrangement that made it liable or responsible for the fees.
The Estate argues that as the sole residuary beneficiary the
Charitable Trust did ultimately bear the fees. The Charitable
Trust, however, did not directly bear the costs of these fees in
the manner that the Unification Church and Young did. The
Unification Church and Young paid the costs directly out of
their pocket, whereas the Estate paid the costs out of its
pocket and the Charitable Trust will only indirectly bear the
costs after it receives a smaller distribution. In fact, the Estate
is in a more analogous position to Young and the Unification
Church than the Charitable Trust because the Estate, like
those organizations, directly paid the costs of litigation.
Other differences render Unification Church and Wall
Industries legally distinguishable from the current matter.
First, the Unification Church was an actual party to the
18
underlying suit, whereas the Charitable Trust was not.
Second, Young contracted for any tax refund obtained and
was thus legally entitled to it. By contrast, the tax refund
obtained by the Estate will go to the Estate, and the
Charitable Trust has no legal claim to it. The Charitable
Trust will benefit after the Estate obtains that refund and
passes it along in the proper manner, but that does not mean
that the Charitable Trust possesses the legal right, as Young
did, to the refund. But the essential difference is that neither
of these cases authorized payment under the EAJA to entities
that were not parties to the underlying suit. Courts have
rejected assertions by non-parties that they were eligible for
EAJA fees because they were the real parties in interest. Sw.
Marine, Inc. v. United States, 43 F.3d 420, 422 (9th Cir.
1994); S.E.C. v. Comserv Corp., 908 F.2d 1407, 1413 (8th
Cir. 1990); Am. Bayridge Corp. v. United States, 24 C.I.T. 9,
10-12 (2000). For that reason, the real-party-in-interest
doctrine, as applied to the EAJA, does not support the
Estate’s claim.
Though the above discussion explains why judicial
interpretations of the real-party-in-interest doctrine pertaining
to the EAJA do not militate in favor of the Estate’s position,
we must also discuss the cases, cited by the Estate, that apply
the real-party-in-interest doctrine to § 7430. See Young, 2006
WL 2564109; Dixon v. Comm’r, 91 T.C.M. 1138, 2006 WL
1275497 (2006), aff’d on other grounds, 612 F.3d 890 (9th
Cir. 2010). A careful analysis of these decisions reveals that
they provide little support for, and run counter to, the Estate’s
position.
In Young and Dixon, the Tax Court addressed both test
and nontest cases involving taxpayers who had invested in a
19
specific tax shelter. The analysis in these two decisions
applies to a small portion of tax litigation cases and provides
a narrow exception to an otherwise clear rule. Specifically,
both Young and Dixon arise from the tax shelter programs
promoted by Henry F.K. Kersting during the 1970’s and
1980’s. The shelters spawned more than 1,000 docketed
cases after the Commissioner of Internal Revenue disallowed
interest deductions claimed by participants in the shelters.
Young, 2006 WL 2564109 at *1. Test cases proceeded, while
nontest case petitioners entered into agreements whereby their
cases would be resolved in accordance with the outcome of
the test cases. Id. A “Defense Fund” was organized and
“nontest case petitioners shared the further costs of the test
case litigation.” Id. at *2.
In Young, the Tax Court held “that the real parties in
interest in th[e] litigation include not only the test case
petitioners and participating nontest case petitioners, but also
all other remaining nontest case petitioners.” Id. at *8
(quoting Dixon, 2006 WL 1275497 at *9). The court stated
“the fact that petitioners have not, by and large, paid or
incurred the claimed fees and expenses does not render those
amounts unrecoverable under section 7430.” Id. at *10
(quoting Dixon, 2006 WL 1275497 at *9). As the court
noted, “the relevant inquiry is . . . whether the real parties in
interest who did pay or incur those amounts satisfy the net
worth requirement” imposed by § 7430 and § 2412. Id.
(quoting Dixon, 2006 WL 1275497 at *9).
Here, we are dealing with a factual situation very
different from Young and Dixon. In those decisions many of
the taxpayers had filed petitions in the Tax Court regarding
related issues, and had done so because they had rights at
20
stake in the decisions. The petitioners in Young and Dixon
had similar rights in the tax shelter; the resolution of one case,
therefore, would determine the legal rights of many others.
To that end over 300 nontest case petitioners had contributed
to the Defense Fund.
Conversely, the resolution of the Estate’s tax refund
proceeding does not determine the Charitable Trust’s rights in
a similar proceeding; the Charitable Trust is not a nontest
case petitioner waiting to learn how the courts will rule on its
tax interests. While the nontest case petitioners had legal
claims dependent on the resolution of the test cases’
outcomes, the Charitable Trust has no legal claim of its own
that is dependent on the outcome of the Estate’s tax litigation.
The fact that the Charitable Trust will suffer an indirect
pecuniary consequence from the Estate’s litigation does not
elevate that consequence to an independent legal claim. The
Charitable Trust is thus more akin to the spouse of one of the
test case petitioners who stands to gain only through the
resolution of another’s legal rights, not the legal rights of its
own.
In Dixon, the Tax Court stated the “case for looking
beyond the named parties [was] particularly compelling in
the[] proceedings, where similarly situated taxpayers not only
shared the costs of the litigation but also ‘had rights at stake
in the case on the merits.’” Dixon, 2006 WL 1275497 at *9.
We believe Dixon’s exception is narrowly cabined to
situations involving complex tax litigation where similarly
situated taxpayers have foregone individual litigation to
further their independent legal claims and shared in the costs
of the representative litigation. It is not applicable to
situations, such as those present in this case, where an estate
21
has a sole residuary beneficiary that has no independent legal
claim and will only be affected indirectly by the outcome of
the Estate’s litigation.
For the reasons discussed above we do not believe that
any of the decisions applying the real-party-in-interest
doctrine dictate that we classify the Charitable Trust as the
real party in interest. The application of the statutory
language shows that the Estate was the prevailing party who
incurred the costs, and therefore is the party who must meet
the net worth requirements of § 2412 incorporated into §
7430. To look through the Estate and query whether the
beneficiary, or beneficiaries, qualified for recovery of fees
under § 7430 would complicate an otherwise straightforward
analysis. It would also make § 7340(c)(4)(D) superfluous
because we would never consider the net worth requirement
imposed on estates, let alone at the specific time Congress
required. We decline reading such a rule into the statute.
IV.
For the foregoing reasons, the District Court properly
denied the Estate the fees and costs it sought. Accordingly,
we will affirm the District Court’s opinion.
22