United States Court of Appeals,
Eleventh Circuit.
No. 94-8805
Non-Argument Calendar.
Terrell COOPER, Plaintiff-Appellant,
v.
UNITED STATES of America, Defendant-Appellee.
Aug. 11, 1995.
Appeal from the United States District Court for the Northern
District of Georgia. (No. 1:92-cv-1642-ODE), Orinda D. Evans,
Judge.
Before EDMONDSON, COX and DUBINA, Circuit Judges.
PER CURIAM:
This case arises on appeal after a lengthy dispute between
Terrell Cooper ("Cooper") and the Internal Revenue Service ("IRS").
The facts are set forth in detail by the district court in its
order dated May 9, 1994, but we summarize the pertinent facts for
purposes of this appeal.
I.
Cooper owned a 20% share of a corporation named Co-Jo, which
operated the "On Stage Cuisine" restaurant. There were four other
shareholders who also owned 20% of the business, Donald Jorgensen
("Jorgensen"), Michael Cobb ("Cobb"), Frank Crivello ("Crivello")
and Theodore Ahrens ("Ahrens"). Cooper and Jorgensen were listed
in the articles of incorporation as the two initial directors, and
Cobb and Crivello became shareholders and directors of the
corporation three days after the business was incorporated. Ahrens
joined the business several months later when the restaurant
opened, and he became the fifth shareholder and the fifth director.
The directors hired a general manager to handle the day-to-day
operations of the restaurant.
After the restaurant ran into financial difficulties and Co-Jo
failed to pay its federal employment taxes, the IRS sought to
impose individual liability for these taxes on the corporate
principals, pursuant to 26 U.S.C. § 6672. Before assessing
individual liability for the taxes, the IRS conducted an
investigation whereby it obtained the affidavits of Cobb, the
corporate president, and four other employees involved in
day-to-day operations. Cobb told the IRS that Cooper was only an
investor in the business and never took an active part in or had
any knowledge of the day-to-day operations. The other employees
likewise did not mention Cooper when asked to list the persons
responsible for operating and managing the business.
Although the IRS' investigation revealed that Cooper was not
responsible for paying the withholding taxes of Co-Jo, the IRS
assessed penalty taxes and interest against Cooper personally in
the amount of $37,313.91 pursuant to Internal Revenue Code
("I.R.C.") § 6672. Section 6672 imposes liability on "(1) a
responsible person (2) who has willfully failed to perform a duty
to collect, [truthfully] account for, or pay over federal
employment taxes." Williams v. United States, 931 F.2d 805, 809-10
(11th Cir.1991) (citations omitted), opinion supplemented, 939 F.2d
915 (11th Cir.1991). The IRS imposed liability on Cooper for the
unpaid taxes on or about March 13, 1985, and Cooper first paid and
then sought a refund of the assessment through IRS administrative
procedures over a period of seven years.
By July, 1992, Cooper's claim for a refund had been rejected
by the IRS, and the statute of limitations on a refund claim was
about to expire. Thus, Cooper filed suit in district court to
preserve his claim. In his complaint, Cooper sought a refund of
the penalties and interest paid, as well as costs and attorneys'
fees incurred in seeking his refund, pursuant to I.R.C. § 7430.
Three days after Cooper filed his suit, the IRS reversed its
position and refunded Cooper the entire amount of the tax penalty
paid, plus interest. The district court allowed Cooper's § 7430
claims to go forward over the IRS' objection.
II.
Congress enacted § 7430 "to deter abusive actions or
overreaching by the [IRS] and to enable taxpayers to vindicate
their rights regardless of their economic circumstances." Weiss v.
Commissioner of Internal Revenue, 88 T.C. 1036, 1041, 1987 WL 49313
(Tax Ct.1987) (citing H.R.Rep. No. 97-404, 97th Cong., 1st Sess.,
at 11 (1981)). To be eligible for an award of attorneys' fees and
administrative expenses under § 7430, three requirements must be
satisfied. First, a claimant must have exhausted all
administrative remedies available within the IRS before commencing
a civil proceeding. § 7430(b)(1). Second, the claimant must prove
that he is a "prevailing party." §§ 7430(a) and 7430(c)(4)(A).
Finally, a claimant must show that the requested award constitutes
reasonable litigation or administrative costs. §§ 7430(a)(1),
7430(a)(2), 7430(c)(1) and 7430(c)(2). The IRS conceded that
Cooper had exhausted all administrative remedies. Also, the IRS
had refunded its assessment to Cooper; however, the district court
held that Cooper was not a prevailing party under § 7430 and denied
his claims for attorneys' fees and administrative costs. We review
the district court's judgment for abuse of discretion. In re
Rasbury, 24 F.3d 159, 165-66 (11th Cir.1994).
To qualify as a prevailing party, a taxpayer has the burden
to establish, among other requirements, the key requirement that
the IRS' position in the proceeding was not substantially
justified. Rasbury, 24 F.3d at 165; I.R.C. § 7430(c)(4)(A)(i).
Under this requirement, Cooper had to prove that the IRS' position
was not "justified to a degree that could satisfy a reasonable
person," Pierce v. Underwood, 487 U.S. 552, 565, 108 S.Ct. 2541,
2550, 101 L.Ed.2d 490 (1988) (interpreting similar provision for
attorneys' fees and costs under the Equal Access to Justice Act),
or had no "reasonable basis both in law and fact." Rasbury, 24
F.3d at 168 (quoting Pierce, 487 U.S. at 565, 108 S.Ct. at 2550).
The district court held that Cooper failed to prove that the
IRS' position was not substantially justified and denied his § 7430
claim. In its decision, the court recognized that the IRS' refund
of the taxes paid was a factor to consider, but was not
determinative of whether the IRS was substantially justified in its
position. See Heasley v. Commissioner, 967 F.2d 116, 120 (5th
Cir.1992). To determine if the IRS was substantially justified in
assessing a penalty on Cooper for Co-Jo's unpaid payroll taxes
pursuant to I.R.C. § 6672, the court examined the standard for
imposing a penalty under § 6672.
The court first addressed whether the IRS' position that
Cooper was a "responsible person" under § 6672 with respect to Co-
Jo's delinquent taxes was substantially justified. The standard
provided by this circuit to determine whether an individual is a
"responsible person" under this section provides in part:
[a] person is responsible within the meaning of section 6672
if he has a duty to collect, account for or pay over taxes
withheld from the wages of a company's employees.
Responsibility is a matter of status, duty and authority.
Indicia of responsibility include the holding of corporate
office, control over financial affairs, the authority to
disburse corporate funds, stock ownership, and the ability to
hire and fire employees.
Williams, 931 F.2d at 810 (citations and internal quotations
omitted). Based upon this standard, the district court held that
Cooper failed to establish that the IRS was not substantially
justified in its position that he was a "responsible person." The
court found that the IRS' position was "a reasonable position that
was supportable in light of the facts and existing law." Terrell
v. United States, 94-1 USTC p. 50,267, No. 1:92-cv-1642-ODE, 1994
WL 374334, at *5 (N.D.Ga. May 9, 1994) (citing Kinnie v. United
States, 994 F.2d 279 (6th Cir.1993)).
III.
We are not convinced that the facts known to the IRS
reasonably supported its position that Cooper was a responsible
person, especially in light of facts which reveal that the IRS took
no steps to determine who was actually responsible for paying the
delinquent taxes. The IRS' initial investigation revealed
testimony by the corporate president and four employees that Cooper
was not responsible for the operation or management of the
restaurant; yet, the IRS chose instead to rely upon the Articles
of Incorporation of Co-Jo which revealed that Cooper was one of two
initial directors who was authorized to sign checks. The fact that
Cooper was the only shareholder who was not involved in day-to-day
operations, and the fact that the IRS' investigation did not reveal
any checks or bank cards that were signed by Cooper, did not deter
the IRS from maintaining its position that Cooper was "responsible"
for paying the employee taxes.
We need not reach the determination of whether the district
court erred in holding that the IRS' position that Cooper was a
"responsible person" was substantially justified, however, because
we conclude that the IRS could not have reasonably viewed any
responsibility imputed to Cooper for failure to pay these taxes as
willful. Liability attaches to a "responsible person" under § 6672
only if he "willfully" fails to collect, account for, or payover
employee taxes. Although the district court held that the IRS
reasonably viewed Cooper as a "responsible person," the court
failed to determine if the IRS was substantially justified in its
position that Cooper willfully failed to collect or pay the
employment taxes.
Based upon a review of the record, we are persuaded that the
IRS knew that Cooper had no involvement in the operation or
management of Co-Jo. We are further convinced that the IRS had no
basis to maintain the position that Cooper willfully failed to pay,
or oversee the payment of, the employment taxes. The term
"willfulness," as used in criminal tax statutes, is defined as the
"voluntary, intentional violation of a known legal duty." Cheek v.
United States, 498 U.S. 192, 200, 111 S.Ct. 604, 610, 112 L.Ed.2d
617 (1991). At a minimum, to satisfy the willfulness requirement
of § 6672, a person must have some knowledge of failure or risk of
failure to remit the employment taxes. See Thibodeau v. United
States, 828 F.2d 1499, 1505-06 (11th Cir.1987). The IRS' position
that Cooper could have known of Co-Jo's unpaid liability because he
maintained the same home address as Jorgensen, Co-Jo's treasurer,
is not a reasonable basis to attach § 6672 liability, especially in
light of other facts and existing law.
After careful review of the record and the facts in this case,
we are persuaded that Cooper established that the IRS was not
substantially justified in maintaining its position that he was
liable under § 6672 for Co-Jo's failure to remit its employment
taxes. Therefore, we hold that the district court abused its
discretion in determining that Cooper failed to prove that the IRS'
position was not substantially justified, and we reverse the
court's judgment that Cooper is not entitled to recover attorneys'
fees and costs under I.R.C. § 7430.1 The IRS engaged in abusive
actions and overreached its authority by failing to properly
investigate Cooper's potential liability before assessing him with
a tax penalty under § 6672.
Cooper has satisfied two of the three requirements to receive
an award of attorneys' fees and administration expenses under §
7430. After exhausting his administrative remedies and proving
1
The IRS has conceded that Cooper has established the other
requirement to be deemed a prevailing party under §
7430(c)(4)(A)(ii). In addition to proving that the IRS was not
substantially justified in its position, Cooper also had to
establish that he "substantially prevailed with respect to the
amount in controversy, or substantially prevailed with respect to
the most significant issue or set of issues presented". IRC §
7430(c)(4)(A)(ii).
that he is a prevailing party, Cooper must now show that the
requested award is reasonable. I.R.C. § 7430(c)(1). Accordingly,
we reverse the judgment of the district court and remand this case
for a determination of the amount of attorneys' fees,
administrative costs and litigation costs Cooper is entitled to
recover.
REVERSED AND REMANDED.