Opinion ID: 789064
Heading Depth: 2
Heading Rank: 2

Heading: Application of Facts to Law

Text: 30 Paul claims that the district court erred when it denied his motion to recover the administrative and litigation costs he incurred after the IRS initially took the position that he was liable for Focus' unpaid taxes. The government, however, insists that the district court correctly found that because the government was substantially justified in rejecting Paul's challenge to the proposed assessment and in pursuing the litigation, Paul should not be treated as a prevailing party under § 7430 and, therefore, should not be permitted to recover his costs. 13 Thus, the question for us is did the district court abuse its discretion in finding that the government was substantially justified in taking, and in pursuing, the position that, for the first three quarters of 1992, Paul was a responsible person who willfully failed to pay Focus' taxes and, therefore, was liable for its tax liabilities under § 6672.
31 On the record before us, we cannot say that the district court abused its discretion in finding that the IRS was substantially justified when it initially took the position that Paul was liable for Focus' tax deficiencies for the quarters in question. 14 At that point, the IRS knew that Paul had full authority to disburse funds from Focus' bank accounts for the first two quarters in question and at least part of the third. 15 In addition, it knew that Paul had signed many of the checks Focus had issued during those quarters. Furthermore, the IRS did not then possess reliable evidence that Paul lacked authority to pay Focus' tax liabilities. Although, prior to the point at which the IRS took its position, Pottle had provided the agency with a statement in which he affirmed that he and George had complete authority over Focus' finances, Pottle had neglected to mention (and the IRS was aware) that, for much of the relevant period, Paul had the authority to disburse, and had disbursed, significant sums from Focus' bank accounts. Thus, Pottle's statement was of questionable probative value. The denial of Paul's request for administrative costs is affirmed. Cf. Bisbee, 245 F.3d at 1007 (noting that the IRS's position is not reasonable where the agency is possessed of [compelling] evidence indicating that the [individual] had no authority to pay taxes); Cooper, 60 F.3d at 1531-32 (same).
32 Similarly, the district court did not abuse its discretion when it decided that the government was substantially justified in (1) taking the position that Paul was liable under § 6672 for Focus' tax liabilities at the onset of the litigation and (2) refusing to abandon that position at the close of discovery. 16 33 At the onset of litigation, the information available to the government was the same as that which was available to the IRS when it initially took its position. The government knew that Paul had authority to disburse, and had disbursed, funds from Focus' accounts during the relevant quarters, and it did not then possess reliable evidence that Paul (1) lacked the authority to decide which of Focus' creditors were to be paid, see Vinick, 205 F.3d at 8 (To be a responsible person, one must have the actual authority ... to pay the taxes owed.), or (2) was not aware of Focus' tax liabilities, see Cooper, 60 F.3d at 1532 (To act willfully, one must have some knowledge of failure or risk of failure to remit the employment taxes.). Cf. Sharp v. United States, 145 F.3d 994, 996 (8th Cir.1998) (holding that the government's position was not substantially justified because [n]ot only is it clear that [taxpayer] did not have the authority to pay the withholding taxes, it is also clear from the record that the government was aware of the limitations on [taxpayer's] authority before it filed its counterclaim). Thus, the district court did not abuse its discretion in finding that the government was substantially justified in initially pursuing the litigation, particularly given that it was Paul's burden to prove that he was not a responsible person and did not meet the willfulness requirement, see Stuart, 337 F.3d at 36. 34 Although the government possessed additional information by the close of discovery — the deposition testimony of Paul and Pottle and Paul's affidavit, we do not think the district court abused its discretion in finding that the government was substantially justified in continuing to pursue the litigation. At his deposition, Paul stated that, throughout much of the relevant period, he could pay Focus' smaller bills without first obtaining approval from Pottle or George. Although Paul said that he could not pay Focus' larger bills without prior approval, he acknowledged that there were no specific ... criteria that [were] employed [to distinguish the smaller bills from the larger ones]. Paul also testified that he was involved in daily meetings with Pottle and George during which it was decided which of Focus' bills would be paid. And, Paul admitted that he was aware that Focus was not paying its taxes. Not only did Paul's statements fail to establish that he was not a responsible person of Focus, 17 they suggested that his actions would satisfy § 6672's willfulness requirement. 35 Pottle's deposition testimony does not undermine the district court's finding of substantial justification. Although Pottle testified that Paul did not have the authority to make independent spending decisions, Pottle was not responsible for the day-to-day operations of, and spent little time in, the office in which Paul worked. Therefore, it was not evident that Pottle possessed sufficient actual knowledge to testify as to the scope of Paul's authority. Moreover, Pottle's testimony about the extent of Paul's authority was inconsistent with Paul's, and as a result, it was not unreasonable for the government to seek clarification of Paul's status within Focus at trial. Cf. Barton v. United States, 988 F.2d 58, 60 (8th Cir.1993) ([T]he Government could not reasonably rely on [limited management and supervisory powers and restricted signature authority] in the face of uncontradicted evidence that [taxpayer] had no authority over tax matters.). 36 Similarly, the existence of Paul's affidavit does not undermine the district court's finding. While Paul may have stated in the affidavit that he had no actual authority to pay Focus' taxes, he failed to explain why his representations in the affidavit were inconsistent with his deposition testimony, and he provided no evidentiary support for those representations. Thus, the government was entitled to test Paul's credibility at trial. 37 In view of all of the above, the district court's denial of Paul's request for litigation costs is affirmed. 18 38 Affirmed.