Court Opinion

ID: 771279
Source: CourtListenerOpinion
Date Created: 2012-04-18 10:48:49+00
Date Added: 2024-06-11T17:55:56.475869
License: Public Domain

233 F.3d 948 (7th Cir. 2000)
ESTATE OF EDWARD KUNZE, DECEASED,  Carol Ann Hause, Executor, Petitioner-Appellant,v.COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
No. 00-1207
In the  United States Court of Appeals  For the Seventh Circuit
Argued September 20, 2000Decided November  16, 2000

Appeal from a Decision of the  United States Tax Court  No. 16583-98[Copyrighted Material Omitted]
Before COFFEY, EASTERBROOK, and EVANS,  Circuit Judges.
EVANS, Circuit Judge.

1
Edward J. Kunze  died on December 18, 1992. The after-tax  net worth of his estate at the time of  his death was approximately $2.5 million.  This amount is uncontested. Nine months  after Edward's Estate filed its tax  return, an audit, which eventually lasted  21 months, was started. During the long  audit, interest of $21,701.57 accrued.

2
On July 29, 1996, the Estate filed a  petition with the IRS requesting an  abatement of this interest charge by  invoking 26 U.S.C. sec. 6404.1  Exercising its discretion, the IRS denied  the request and the Estate filed this  suit in the U.S. Tax Court for review of  the denial. The IRS filed a motion to  dismiss for lack of jurisdiction, arguing  that the net worth of the estate as of  the date of Kunze's death exceeded the  jurisdictional2 limit of $2 million.  The Tax Court agreed and dismissed the  case.

3
On appeal to us, the Estate argues that  due to a convoluted series of cross-  references in the Internal Revenue Code,  the Tax Court applied the wrong statute  in determining subject matter  jurisdiction. It also alleges that the  jurisdictional requirement, limiting  judicial review of abatements to estates  valued at more than $2 million, is uncon  stitutional both on its face and as  applied.

4
We have jurisdiction over this appeal  under 26 U.S.C. sec. 7482(a). We apply  the same standard of review to a Tax  Court decision that we apply to district  court determinations in a civil bench  trial: We review questions of law de  novo; we review factual determinations,  as well as applications of legal  principles to those factual  determinations, only for clear error.  Eyler v. Commissioner of Internal  Revenue, 88 F.3d 445, 448 (7th Cir.  1996).

5
Internal Revenue Code sec. 6404 grants  the Tax Court jurisdiction to review  abatement of interest denials if the  appealing party meets the requirements of sec. 7430(c)(4)(A)(ii).3 Section  7430(c)(4)(A)(ii) references the  requirements of 28 U.S.C. sec.  2412(d)(2)(B), which, for purposes of an  award of attorneys fees and litigation  costs, defines party as "an individual  whose net worth did not exceed $2 million  at the time the civil action was filed."  However, 28 U.S.C. sec. 2412(d)(2)(B)  refers to the maximum net worth of an  individual or corporation seeking to  bring suit and not the maximum net worth  of an estate. Here, the Estate, not an  individual, brought suit. Thus, the Tax  Court applied another subsection of 7430-  -sec. 7430(c)(4)(D)--which provides  "special rules" for applying the net  worth requirement of 28 U.S.C. sec.  2412(d)(2)(B) "for purposes of section  7430(c)(4) (A)(ii)." The special rules  outlined in sec. 7430(c)(4)(D) state that  the $2 million net worth limitation set  forth in sec. 7430(c)(4)(D) shall apply  to an estate and shall be calculated at  the time of the decedent's death.  (Emphasis added.)

6
The Estate contends that instead of  calculating the net worth of the estate  when Kunze died in 1992, as required by  sec. 7430(c)(4)(D), the Tax Court should  have followed the requirements of 28  U.S.C. sec. 2412(d)(2)(B) and calculated  the Estate's value when it filed suit  against the IRS 6 years later, in 1998.  The Estate argues that sec. 7430(c)(4)(D)  was inapplicable because sec. 6404(i)(1)  refers only to subsection  7430(c)(4)(A)(ii) and not to subsection  7430(c)(4)(D). Moreover, it contends that  the IRS was estopped from contesting  jurisdiction because the Estate relied on  misinformation provided by an IRS  employee. Finally, the Estate argues that  sec. 7430(c)(4)(D) did not apply to sec.  7430(c)(4)(A)(ii) because the unamended  version of (4)(D) referenced a  nonexistent subsection of  7430(c)(4)(A)(ii).

7
We find that all three of these  arguments are unpersuasive and conclude  that the Tax Court correctly applied the  jurisdictional limitations set forth in  sec. 7430(c)(4)(D). Moreover, even were  we to disregard sec. 7430(c)(4)(D) and  calculate the estate's net worth at the  time the action was filed, as required by  28 U.S.C. sec. 2412(d)(2)(B), the result  would remain unchanged. The Estate's  contention that its net worth at the time  it filed suit was less than $2 million is  based on the mistaken assumption that, in  calculating its net worth, the IRS should  exclude the value of assets distributed  upon the death of the decedent. However,  we have rejected this calculus and held  that for the purpose of sec. 7430 the  valuation of an estate must encompass all  assets, including those distributed prior  to litigation. Estate of Woll v. United  States, 44 F.3d 464, 470 (7th Cir. 1994).  Thus, regardless of which statute  applied, the net worth of the estate  exceeded $2 million; therefore, the Tax  Court lacked jurisdiction.

8
The Estate is correct in noting that  sec. 6404(i)(1) does not directly  reference sec. 7430(c)(4)(D) and instead  refers to sec. 7430(c)(4)(A)(ii). This  section, (A)(ii), in turn, incorporates  the requirements of 28 U.S.C. sec.  2412(d)(2)(B). Unfortunately, 28 U.S.C.  sec. 2412 does not direct the reader back  to sec. 7430. However, because 28 U.S.C.  sec. 2412(d)(2)(B) refers to individuals,  corporations, partnerships, associations  and their like, but not estates, the  reader is on notice that this statute  alone does not establish the  jurisdictional requirements for estates.

9
In fact, sec. 7430 provides special  rules for estates. Section 7430(c)(4)(D)  specifically references sec.  7430(c)(4)(A)(ii) and states that 4(D)  provides "special rules" for applying the  net worth requirement of sec.  2412(d)(2)(B) "for purposes of the  subparagraph (A)(ii) of this paragraph."  Thus, sec. 7430 establishes that  subparagraph (4)(D) applies to sec.  7430(c)(4)(A)(ii) for determining  jurisdictional limits.

10
Granted, the series of back and cross-  references presented in this case is not  a model of clarity. However, such  meanderings are not uncommon in the Tax  Codeand have been known to provide  lifetime employment, if not enjoyment, to  tax attorneys. Here, the Tax Court  adeptly followed the trail of cross-  references, applied the appropriate  statute, and correctly determined that it  lacked subject matter jurisdiction.

11
The Estate also argued that the IRS  should be estopped from raising the issue  of subject matter jurisdiction. In a  final determination letter sent in April  1998, the IRS denied the Estate's  petition for interest abatement and  erroneously stated that the Estate could  file for court review, provided "your net  worth . . . not exceed $2 million as of  the filing date of your petition for  review." The Estate argues that the court  should have deferred to the IRS's  erroneous letter and determined the net  worth of the estate at the time it filed  suit in 1998.

12
However, the Estate cannot manufacture  subject matter jurisdiction based solely  on a government agent's misinterpretation  of tax statutes. See Commissioner v.  Schleier, 515 U.S. 323, 336 n.8 (1995)  (interpretative ruling by the IRS cannot  be used to "overturn the plain language  of a statute"). Moreover, we have held  that estoppel will not operate against  the government where a plaintiff has  relied on the erroneous advice of a  government agent. Cheers v. Secretary of  Health, Education, and Welfare, 610 F.2d  463, 469 (7th Cir. 1979) ("Parties  dealing with the Government are charged  with knowledge of and are bound by  statutes and lawfully promulgated  regulations despite reliance to their  pecuniary detriment upon incorrect  information received from Government  agents or employees.").

13
Here, the Estate's argument that greater  deference should have been given to the  final determination letter is unavailing.  The Estate was represented by counsel,  and its failure to decipher the Tax Code  cannot be excused by its reliance on a  government employee's error. The Tax  Court correctly held that a mistake on  the part of an IRS agent did not confer  subject matter jurisdiction where there  existed no statutory basis for judicial  review.

14
The Estate also argues that sec.  7430(c)(4)(D) should not have applied  because in April 1998, when it received  the IRS letter denying abatement, the  unamended version of sec. 7430(c)(4)(D)  referenced a nonexistent subsection of  sec. 7430, namely, sec.  7430(c)(4)(A)(iii).4 Because subsection  7430(c)(4)(A)(iii) did not exist, the  Estate argues that the limits set forth  in sec. 7430(c)(4)(D) should be ignored  and we should look to 28 U.S.C. sec.  2412(d)(2)(B) to determine subject matter  jurisdiction.

15
This argument fails on two counts.  First, Congress amended sec.  7430(c)(4)(D) on July 22, 1998, 2« months  before the Estate filed suit in October.  Thus, even if the typographical error had  caused confusion, the Estate had access  to the corrected version of (4)(D) before  it filed suit.

16
Moreover, the error is so transparent  that the Estate can hardly claim to have  been bamboozled. The unamended version of  sec. 7430(c)(4)(D) incorrectly referred  to subparagraph (iii) instead of  subparagraph (ii). However, subparagraph  sec. 7430(c)(4)(A)(ii) still set forth  the relevant jurisdictional limitations.  In turning to subsection (4)(A), a reader  would realize that the subparagraph had  been misnumbered, but would not be  surprised by the intent of subsection  4(A).

17
Nevertheless, the Estate suggests that  we should read the subsection literally  and simply conclude that it no longer  applies. There are limits to literalism.  Generally, each word of a statute is  given effect unless the provision is the  result of an obvious mistake or error.  See 2A Norman J. Singer, Sutherland  Statutory Construction sec. 46.06 (6th  ed. 2000). Such is the case here. The  erroneous cross-reference in (4)(D) to a  misnumbered subparagraph in (4)(A) can  hardly be construed to have changed the  legislative intent of sec. 7430(c)(4)(D)  or to have affected the substantive  rights of the parties. The import of the  subsection remains clear, in spite of the  typo. Thus, we reject the Estate's  suggested interpretation.

18
Finally, we consider the underlying  premise of the Estate's argument that its  net worth when it filed suit in October  1998 was less than $2 million. The Estate  contends that between the time of Kunze's  death in 1992 and when it filed suit 6  years later in 1998, all the assets of  the estate were distributed; thus its  remaining net worth was $21,701.57--the  amount of interest abatement sought by  the Estate. Based on this valuation, the  Estate argues that at the time it filed  suit, it satisfied the jurisdictional  requirements of 28 U.S.C. sec.  2412(d)(2)(B).

19
Unfortunately, the Estate has  miscalculated. In deciding whether an  estate was eligible for attorneys fees  and costs under sec. 7430 and 28 U.S.C.  sec. 2412(d)(2)(B), we held that the net  worth of an estate at the time suit was  filed must include all assets--even  assets that had been distributed prior to  litigation. Estate of Woll v. United  States, 44 F.3d 464, 470 (7th Cir. 1994).  We reasoned that to decide otherwise  would result in an arbitrary and unfair  determination of whether an estate was  eligible for litigation costs based on  what assets remained. Id. at 469-70.  Moreover, by not including the value of  distributed assets, estate administrators  could manipulate the timing of  distributions and litigation against the  government in order to "duck below the $2  million . . . limit." Id. at 470.

20
Prior to 1998, the decision to provide  or deny interest abatement was left to  the sole discretion of the IRS, and the  exercise of that discretion was not  subject to judicial review. By passing  the IRS Restructuring and Reform Act of  1998, Congress created a narrow window of  review, limiting court oversight to small  estates valued at less than $2 million.  If we were to accept the calculus  forwarded by the Estate, many more  abatement decisions would qualify for  judicial review, provided the estates  filing suit were clever enough to quickly  distribute assets and then seek  abatement, thus defeating the  jurisdictional limitations enacted by  Congress.

21
We reject the Estate's calculus and  conclude that its net worth, both at the  time of the decedent's death and when it  brought suit, exceeded $2 million.  Therefore, regardless of which statute  applied, sec. 7430(c)(4)(D) or 28 U.S.C.  sec. 2412(d)(2)(B), the Estate did not  satisfy the requirements for judicial  review, and the Tax Court correctly  dismissed the suit.

22
The Estate also forwards two  constitutional challenges. First, it  argues that the retroactive application  of sec. 7430(c)(4)(D) violates the Due  Process Clause of the Fifth Amendment.  Second, it contends that there is no  rational basis for the $2 million  jurisdictional limitation set forth in  sec. 6404; thus, the statute violates the  equal protection standard imposed on the  federal government by the Due Process  Clause of the Fifth Amendment.

23
The Estate argues that its right to seek  review accrued in 1998, when it received  the IRS final determination letter  denying abatement, and that the  retroactive application of the corrected  version of sec. 7430(c)(4)(D) violated  the Due Process Clause. However, sec.  7430(c)(4)(D) was amended 2« months  before the Estate filed suit in October  1998. Thus, the amended section was not  applied retroactively, and there was no  due process violation. Even assuming the  section was retroactively applied, we  conclude that the amended statute was  consistent with the Due Process Clause.

24
The Supreme Court "repeatedly has upheld  retroactive tax legislation against a due  process challenge." United States v.  Carlton, 512 U.S. 26, 30 (1994)  (citations omitted). The Court has set  forth a two-part test for determining  whether the retroactive application of a  tax statute violates due process. First,  for retroactivity to be upheld it must be  shown that the statute has a rational  legislative purpose and is not arbitrary.  Second, the period of retroactivity must  be moderate. Id. at 32 (permitting one  year retroactivity for tax statute  correcting a mistake in prior law).

25
Here, the amended statute merely served  to clarify a drafting error. It was a  curative measure that did not impose new  tax liabilities or alter the substantive  rights of the parties. Congress employed  rational means. It acted promptly to  correct the error and established only a  modest period of retroactivity, 11  months.

26
Finally, the Estate contends that it was  denied a fundamental right of redress. It  argues that there was no rational basis  for denying a taxpayer, with net worth in  excess of $2 million, the right to  judicial review of a denial of interest  abatement.

27
Unlike the Fourteenth Amendment, the  Fifth Amendment does not contain an Equal  Protection Clause. However, the Fifth  Amendment's Due Process Clause does  contain an equal protection component  applicable to the federal government. See  Bolling v. Sharpe, 347 U.S. 497, 499  (1954). The scope of the equal protection  guarantee under the Fifth Amendment is  essentially the same as under the  Fourteenth Amendment. See Harris v.  McRae, 448 U.S. 297, 322 (1980).

28
Statutes affecting economic rights which  neither invade a substantive  Constitutional right or freedom nor  utilize a suspect classification such as  race are subject to only a low level of  judicial scrutiny--the rational basis  test. See Exxon Corp. v. Eagerton, 462  U.S. 176, 195-96 (1983). Under that test  "a statute will be sustained if the  legislature could have reasonably  concluded that the challenged  classification would promote a legitimate  state purpose." Id. at 196.

29
Moreover, "[l]egislatures have  especially broad latitude in creating  classifications and distinctions in the  tax statutes." Regan v. Taxation With  Representation of Washington, 461 U.S.  540, 547 (1983); see also Barter v.  United States, 550 F.2d 1239, 1240 (7th  Cir. 1977) (per curiam) (statutory  difference in tax rates for married  couples and single individuals does not  violate due process of law of the Fifth  Amendment; "perfect equality or absolute  logical consistency between persons  subject to the Internal Revenue Code [is  not] a constitutional sine qua non").  Thus a tax statute's "presumption of  constitutionality can be overcome only by  the most explicit demonstration that a  classification is a hostile and  oppressive discrimination against  particular persons and classes." Id. at  547 (quoting Madden v. Kentucky, 309 U.S.  83, 87-88 (1940)). "The burden is on the  one attacking the legislative arrangement  to negate every conceivable basis which  might support it." Id. at 547-48.  Finally, the rational basis justifying a  statute against an equal protection claim  need not be stated in the statute or in  its legislative history; it is sufficient  that a court can conceive of a reasonable  justification for the statutory  distinction. McDonald v. Board of  Election Comm'n, 394 U.S. 802, 809  (1969).

30
Here, there is a reasonable basis for  the net worth limitation. Congress may  have established the limitation because  it reasoned that larger estates would be  in a better position to avoid the accrual  of interest charges by making an advance  payment or posting a cash bond during the  pendency of the IRS audit.

31
The Estate does not attack this  justification as irrational but merely  impractical. It contends that, by posting  a bond or paying an advance, larger  estates would be foregoing the  opportunity to invest these funds and  earn interest. Essentially, the Estate  bemoans the opportunity cost of lost  interest income. However, this complaint  does not render the $2 million net worth  distinction irrational. Congress can  treat taxpayers unequally so long as  there is a rational basis for the  distinction. Given the limited resources  of the judiciary, Congress may have  sought to restrict judicial review to  smaller estates with relatively limited  financial resources--a nonarbitrary,  reasoned distinction.

32
For these reasons, the decision of the  Tax Court is affirmed.

Notes:

1
 Abatement is permitted for extensive delays  resulting from managerial acts of IRS officers or  employees such as the loss of records, personnel transfers, extended illnesses, extended per  sonnel training, or extended leave. 14 Mertens  Law of Fed. Income Tax'n sec. 5072.

2
 We have used the parties' designation of "juris-  diction" as the issue, although whether the $2  million limit is truly jurisdictional--as opposed  to a condition of suit, like a timely filing--is  an open question.

3
 Unless otherwise indicated, all sections cited  are part of the Internal Revenue Code.

4
 Congress enacted the erroneous subsection  7430(c)(4)(D) on August 5, 1997. When enacted, this  subsection incorrectly referenced subparagraph  7430(c)(4)(A)(iii) rather than subparagraph  (A)(ii). Prior to 1996, subsection (4)(A) con-  tained three subparagraphs, but on July 30, 1996,  Congress amended this subsection, striking para-  graph (i) and renumbering subparagraphs (ii) and  (iii) as (i) and (ii), respectively. See Taxpayer  Bill of Rights 2, sec. 701(a), 110 Stat. at 1463.  Due to the 1996 amendment of subsection (4)(A),  when Congress amended subsection (4)(D) in 1997,  subsection (4)(A) no longer contained a subparagraph (iii). However, the language of subsection  7430(c)(4)(A) remained the same, and the juris-  dictional requirement was spelled out in subpara-  graph sec. 7430(c)(4)(A)(ii).