CLAY D. LAND, United States District Judge.
Introduction
This case arises from Defendant's unlawful assessment of federal income taxes allegedly owed by Plaintiff. Plaintiff successfully asserted a claim for a refund of those income taxes and now seeks to recover its attorneys' fees and costs pursuant to section 7430 of the Internal Revenue Code, 26 U.S.C. § 7430.
Defendant opposes Plaintiff's motion for attorneys' fees and costs, claiming that Plaintiff is not a prevailing party and therefore is not entitled to recover its attorneys' fees and costs. Finding that Plaintiff is a "prevailing party" in the underlying action, the Court grants Plaintiff's motion and awards Plaintiff its attorneys' fees and costs in the amount of $31,484.62.
Facts
Based upon the following facts, the Court finds that Plaintiff has substantially prevailed with respect to the amount in controversy and that the Defendant was not substantially justified in its position. Accordingly, Plaintiff is a "prevailing party" under section 7430(c)(4) of the Internal Revenue Code, 26 U.S.C. § 7430 (c)(4).
On June 28, 2000, Defendant issued Plaintiff a notice for deficiency for income tax due in the amount of $180,053.00 for the year ended December 31, 1996. Plaintiff paid the sum on August 1, 2000, as directed by the IRS. On September 7, 2000, Plaintiff filed a refund claim for the amount in controversy.
Defendant subsequently disallowed Plaintiff's refund claim through correspondence dated November 7, 2000. Confusingly, the IRS, on November 21, 2000, without explanation, sent Plaintiff checks for the income tax refund amount plus interest. Based upon Plaintiff's previous dealings with the IRS and the disallowance dated November 7, 2000, Plaintiff reasonably concluded that the refund checks were issued in error. Having properly exhausted its administrative remedies, Plaintiff filed the above captioned action on December 12, 2000, for a refund of federal income taxes.
During the pendency of this lawsuit, Defendant, by correspondence dated March 12, 2001, advised Plaintiff:
[T]hrough a clerical error, we failed to properly assess the tax. This failure now requires us to refund to the foundation its tax payments. I appreciate your sense of frustration with our handling of this matter, and I pledge to do what I can to bring it to a prompt and appropriate conclusion.
This communication from Defendant clearly confirmed that Plaintiff was entitled to the refund that it sought.
On April 4, 2001, Plaintiff sought to dismiss the present action upon receiving Defendant's written confirmation of the legitimacy of the refund. Prior to filing its dismissal motion, Plaintiff had filed a request for attorneys' fees and costs. The Court dismissed this action on May 15, 2001, allowing the parties the right to reopen the case, upon good cause shown, if settlement was not consummated within 90 days. The Court subsequently, on August 14, 2001, granted the parties' joint motion to extend the time within which to reopen the case, allowing for additional time to settle the issue of attorneys' fees.
The parties have been unable to settle the issue of attorneys' fees. Defendant takes the position that Plaintiff is not entitled to recover its attorneys' fees and costs. Since Defendant issued the refund checks prior to Plaintiff's filing of the present action, Defendant argues that Plaintiff is not a prevailing party and therefore has no right to recover its attorneys' fees and costs.
Discussion
Nowhere is the federal government's mighty hand felt more directly than when the Internal Revenue Service comes calling with a demand for unpaid taxes. Taxation, admittedly a necessary element of any form of civilized government, places unparalleled power in the hand of the sovereign. When that power is unleashed in an inconsistent, threatening, and arrogant manner, the powerless taxpayer, who for all practical purposes is at the mercy of the government, has little recourse to remedy such abuses. Recognizing the need for a remedy to soften the blow of the federal government's abuse of its tax-collecting power, Congress enacted section 7430 of the Internal Revenue Code, which allows the taxpayer who prevails against the IRS to recover the costs and expenses it incurred to establish vindication.
Taxation has long been the subject of judicial analysis. See M'Culloch v. Maryland, 17 U.S. 316, 431 (1819) (". . . the power to tax involves the power to destroy . . . ."); Panhandle Oil Co. v. Knox, 277 U.S. 218, 223 (1928) ("The power to tax is not the power to destroy while this court sits."); International Harvester Co. v. Wisconsin Department off Taxation, 322 U.S. 435, 450 (1944) ("The physical power to get the money does not seem to me a test of the right to tax. Might does not make right even in taxation."); Company General de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 (1927) ("Taxes are what we pay for civilized society . . . ."). Judges are not alone in their tax commentary. See Margaret Mitchell, Gone with the Wind (1936) ("Death and taxes and childbirth! There's never any convenient time for any of them."); Ethel Jacobson, Reader's Digest, April 1973 ("Behind every man who achieves success, stand a mother, a wife and the IRS.")
Section 7430 provides that in a proceeding brought against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty to a prevailing party, the prevailing party shall be entitled to recover its attorneys' fees. "Prevailing party" has been defined as one who has substantially prevailed with respect to the amount in controversy. To recover its attorneys' fees, the prevailing party must also demonstrate that the Defendant was not substantially justified in its position.
It is undisputed that Plaintiff was entitled to, and has now received, the amount it sought to be refunded in taxes that were unlawfully assessed by Defendant. Therefore, Plaintiff has clearly prevailed in this matter.
Defendant argues that since it refunded the amounts due prior to Plaintiff filing the instant action, Plaintiff did not prevail in this action. In effect, Defendant argues that Plaintiff had already prevailed prior to filing the present case. Consequently, it did not need to file this action to recover the refunds due.
The Court finds Defendant's argument unpersuasive. Although Plaintiff did receive refund checks prior to filing this action, those refund checks were not sent to Plaintiff in isolation; nor were they accompanied by an explanation stating that Defendant had reversed its recent disallowance of the refunds. Instead, Plaintiff reasonably concluded that the checks resulted from one of Defendant's hands (the refund) not knowing what the other hand (the refund disallowance) was doing. It was not until after Plaintiff filed the above captioned action that Defendant finally confirmed in writing that it had unlawfully assessed the income taxes in question and that Plaintiff was entitled to a refund of those taxes.
Defendant now suggests that when Plaintiff received the refund checks, it should have declared victory and "trusted" Defendant not to come back later and seek reimbursement of erroneously issued refund checks. Defendant's "trust us, we're from the IRS" argument ignores both common sense and Plaintiff's own personal unpleasant experiences with Defendant's error-prone bureaucracy. The Court finds that Plaintiff was entirely justified in filing the above captioned lawsuit to preserve its rights in light of the conflicting information that it had received from Defendant.
The Court further finds that the impetus for obtaining the ultimate and legally binding confirmation of Plaintiff's entitlement to the refunds was the present litigation. Defendant's argument that Plaintiff did not substantially prevail with respect to the collection of the refunds rivals Defendant's initial refund disallowance decision for its "frivolousness."
It is likewise clear that Defendant was not substantially justified in its position regarding the assessment of the taxes or the disallowance of Plaintiff's refund claim. In fact, Defendant now concedes that it had no legal right to assess the taxes in question or to disallow the refund demand by Plaintiff. Consequently, the Court finds that Plaintiff has carried its burden of showing that the IRS's position was not "justified to a degree that could satisfy a reasonable person." Pierce v. Underwood, 487 U.S. 552, 565 (1988) (interpreting similar provision for attorneys' fees and costs under the Equal Access to Justice Act).
Defendant admits that it erred by failing to properly assess the tax. Although Defendant issued refund checks to Plaintiff at the end of November, shortly before Plaintiff filed its complaint, Defendant had taken the position throughout the administrative proceedings that Plaintiff was liable for the sum in controversy. Furthermore, Defendant had issued a written letter to Plaintiff prior to the filing of the complaint that Plaintiff's refund request was disallowed and that Plaintiff could challenge the disallowance in court. It was not until March 2001 that Defendant acknowledged its mistake and confirmed that Plaintiff was due the refund. Plaintiff was forced to file this lawsuit to preserve its rights to the refunds in question. Defendant had no reasonable basis for disallowing the refunds initially and for failing to promptly correct its erroneous disallowance.
Under these circumstances, the Court finds that the Plaintiff was a prevailing party and that the Defendant's position lacked justification. Accordingly, Plaintiff is entitled to recover its costs and attorneys' fees.
Conclusion
Based on the foregoing, Plaintiff's motion is granted. Plaintiff is awarded its costs and attorneys' fees in the amount of $31,484.62, which amount this Court finds reasonable, necessary, and supported by the evidence in the record.