People's Source International, LLC v. United States

F I L E D
United States Court of Appeals
Tenth Circuit
UNITED STATES CO URT O F APPEALS
October 12, 2006
TENTH CIRCUIT Elisabeth A. Shumaker
Clerk of Court
PEOPLE’S SOURCE
IN TER NA TIO N A L, LLC ; WILLIAM
M EG NEY S; ANNETTE M EG NEY S,
Plaintiffs - Appellants,
No. 06-1116
v. (D. Colorado)
(D.C. No. 05-CV-1935-PSF-M JW )
U N ITED STA TES O F A M ER ICA;
INTERNA L REVENU E SERVICE;
LINDA FARM ER; ANGELA RIZOR,
Defendants - Appellees.
OR D ER AND JUDGM ENT *
Before HA RTZ, EBEL, and T YM KOVICH, Circuit Judges.
People’s Source International, LLC, W illiam M egneys, and Annette
M egneys (Taxpayers) appeal the district court’s denial of their motion for
attorney fees incurred in bringing an action against the Internal Revenue Service
*
After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist the determination of
this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is
therefore ordered submitted without oral argument. This order and judgment is
not binding precedent, except under the doctrines of law of the case, res judicata,
and collateral estoppel. The court generally disfavors the citation of orders and
judgments; nevertheless, an order and judgment may be cited under the terms and
conditions of 10th Cir. R. 36.3.
(IRS). W e hold that their claim for fees must be denied because they did not
exhaust their administrative remedies with the IRS. Therefore, we affirm the
district court.
BACKGROUND
The IRS issued a letter (commonly referred to as a bypass letter) to
Taxpayers on September 28, 2005, informing them that the IRS w ould be
contacting them directly regarding their tax obligations because their attorney had
failed to respond to repeated requests for information and meetings. On
October 4, 2005, Taxpayers faxed to IRS G roup M anager Linda Farmer and
Revenue Officer Angela Rizor a letter objecting to this direct comm unication and
stating that Taxpayers would file suit unless the bypass letter was retracted by
4:00 p.m. that day. The next day they filed a complaint in the United States
District Court for the District of Colorado seeking a temporary restraining order
and a permanent injunction to prevent the IRS from contacting them directly. The
district court dismissed the complaint without prejudice for failure to state a claim
because Taxpayers had not stated a basis for the court’s jurisdiction. Taxpayers
on October 19, 2005, filed an amended complaint against the United States, the
IRS, the IRS Commissioner, M s. Farmer, and M s. Rizor, seeking injunctive relief
and up to $1 million in damages allegedly caused by the bypass letter.
On December 15, 2005, the IRS informed Taxpayers that it had determined
it to be in the best interests of the agency to withdraw the bypass letter. At the
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scheduling conference before the magistrate judge on December 19, 2005,
Taxpayers’ counsel agreed to withdraw the complaint for damages and the motion
for injunctive relief. The only issue remaining was Taxpayers’ claim that 26
U.S.C. § 7430 entitled them to attorney fees.
Taxpayers filed a motion for attorney fees (titled “M otion for Costs,
Determination or Settlement; or Rejection of Settlement”) on January 3, 2006.
On February 12, 2006, they filed a motion to reinstate their claims except for the
damage claim (thereby leaving only the claim for injunctive relief), stating that if
the case had not been settled, it should proceed. The magistrate judge denied this
motion, finding that all issues other than attorney fees had been settled at the
scheduling conference. On February 24 the magistrate judge issued a
recommendation that Taxpayers’ motion for attorney fees be denied. The district
court adopted the recommendation.
D ISC USSIO N
A. Statutory R ight to Attorney Fees
Under the Internal Revenue Code a court may award a “prevailing party”
its “reasonable litigation costs” incurred in connection with an administrative or
court proceeding relating to its tax obligations. 26 U.S.C. § 7430(a)(1). The
statute sets several limitations on a party’s right to recover litigation expenses. In
particular, “[a] judgment for reasonable litigation costs shall not be awarded . . .
in any court proceeding unless the court determines that the prevailing party has
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exhausted the administrative remedies available to such party within the Internal
Revenue Service.” Id. § 7430(b)(1). A party qualifies as a prevailing party only
if (1) it substantially prevailed with respect to the amount in controversy or the
most significant issue or set of issues presented and (2) the IRS’s litigation
position was not substantially justified. See id. § 7430(c)(4)(A), (B).
B. Application to This Case
On appeal Taxpayers raise four issues, all related to their attorney-fee
claim. They assert that the case is not moot, their motion to reinstate claims
(seeking injunctive relief) should have been granted, the district court should have
then granted injunctive relief, and they exhausted their administrative remedies.
W e review for abuse of discretion a district court’s denial of attorney fees under
§ 7430. See Pate v. United States, 982 F.2d 457, 459 (10th Cir. 1993).
W e agree with Taxpayers that the case is not moot; the IRS does not argue
otherwise. “A case is moot [only] when the issues presented are no longer ‘live’
or the parties lack a legally cognizable interest in the outcome.” City of Erie v.
Pap’s A.M ., 529 U.S. 277, 287 (2000) (internal quotation marks omitted).
Taxpayers have an ongoing interest in recovering attorney fees.
As for Taxpayers’ substantive issues, they argue that their motion to
reinstate claims should have been granted and urge us to rule that the district
court should have granted injunctive relief against the IRS. Presumably they are
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seeking this relief because they must be prevailing parties to recover litigation
expenses.
But we need not address these arguments, because even if Taxpayers w ere
prevailing parties, their attorney-fee claim is barred by their failure to exhaust
their administrative remedies. See § 7430(b)(1); Kenlin Indus., Inc. v. United
States, 927 F.2d 782, 786 (4th Cir. 1991) (“The initial or threshold requirement
imposed on a taxpayer asserting a claim under Section 7430 is the exhaustion of
administrative remedies before suit.”). The Treasury Regulations implementing
§ 7430 detail when a taxpayer will be deemed to have exhausted its administrative
remedies. In a dispute over the assessment, collection, or refund of any tax,
administrative remedies are exhausted once the taxpayer participates in an
Appeals office conference. See Treas. Reg. § 301.7430-1(b) (as amended in
2003). To exhaust administrative remedies when contesting revocation of tax-
exempt status, the taxpayer must comply with the requirements of 26 U.S.C.
§ 7428(b). See id. § 301.7430-1(c) (as amended in 2003). In all other situations
(including appeal of a bypass letter), § 301.7430-1(d) is the catch-all provision
for exhaustion. It states:
A party has not exhausted the administrative remedies available
within the Internal Revenue Service with respect to a matter other
than [one for which an Appeals office conference is available or one
regarding revocation of tax-exempt status] unless, prior to filing an
action in a court of the United States . . .
(I) The party submits to the district director of the district
having jurisdiction over the dispute a written claim for relief
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reciting facts and circumstances sufficient to show the nature
of the relief requested and that the party is entitled to such
relief; and
(ii) The district director has denied the claim for relief in
writing or failed to act on the claim within a reasonable period
after such claim is received by the district director.
Id. § 301. 7430-1(d) (as amended in 2003).
Taxpayers sent their letter to the wrong place and filed suit without
allowing a reasonable period to respond. Their fax of October 4, 2005, went to
Group M anager Linda Farmer and Revenue Officer Angela Rizor, not to the
district director; and they filed suit the next day. W hen the government waives its
sovereign immunity and consents to suit, as in 26 U.S.C. § 7430, those seeking to
sue the government must strictly comply with the terms of the waiver. See
Lehman v. Nakshian, 453 U.S. 156, 161 (1981); Libutti v. United States, 914
F. Supp. 804, 807-08 (N.D.N.Y. 1995). Accordingly, Taxpayers cannot recover
under § 7430.
Taxpayers argue that there is no statutory provision for appealing a bypass
letter. This argument is meritless. Taxpayers fail to explain why the Treasury
Regulation does not provide an avenue for administrative review. They also
argue, however, that because the damage would be done before the agency needed
to respond, any appeal would have been futile. As evidence of futility they allege
that they received no response to their appeal, appropriately sent to the district
director, of a communication from the IRS that they characterize as a second
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bypass letter. But the documents necessary to sustain this allegation were not
included in the record below. In any event, the statute contains no futility
exception to the exhaustion requirement. See Lilly v. IRS (In re Lilly), 76 F.3d
568, 573 (4th Cir. 1996).
C ON CLU SIO N
The district court did not abuse its discretion in denying Taxpayers’ motion
for attorney fees. The judgment of the district court is AFFIRMED.
ENTERED FOR THE COURT
Harris L Hartz
Circuit Judge
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