Question Presented

Can a Defendant, in a criminal tax fraud suit, recover attorneys’ fees and costs form the US Government, claiming that the suit was not justifiable under 26 USC Section 7430?

Short Answer

No, recovery of attorney’s fees from the U.S Government, under Internal Revenue Code, Title 26, in a criminal tax fraud case, are not permitted.

Discussion

In 1982, 26 USCS § 7430, was enacted as part of the Tax Equity and Fiscal Responsibility Act (PL 97-248) and was made applicable to any civil proceeding brought by or against the United States, in a Court of the United states (Including the United States Tax Court), in connection with the determination, collection, or refund of any tax, interest, or penalty under the Internal Revenue code, and authorized an award of reasonable litigation costs incurred in the proceeding by any party (other than the United states or a creditor of the taxpayer) who substantially prevailed in the proceeding and established that the position of the United States in the proceeding was unreasonable. The threshold requirements of fee-awards under § 7430 are jurisdictional, since awards are available only to certain parties, only in certain proceedings, and may be made only by certain Courts.

Under 26 USCS § 7430 ( c)(6), the term "court proceeding" has been defined to mean “any civil action brought in a court of the United States (including the Tax Court and the United States Claims Court)”.

Various Courts have ruled that when interpreting a statute a court first must examine the statutory language, as held in United States v. Turkette, , 101 S. Ct. 2524 1981):

If the language of the statute is clear and unambiguous, judicial inquiry is complete and that language controls absent rare and exceptional circumstances. In re Perroton, 958 F.2d 889, 893 (9th Cir. 1992). Moreover, in statutes that contain statutory definition sections, it is commonly understood that such definitions establish meaning wherever the terms appear in the same Act.

Id. Therefore the definition of "court proceeding" under 26 U.S.C. § 7340(c)(6) has to be strictly construed and thus the statute must only be applied to civil proceedings.

A long line of Federal court decisions have interpreted the term “court proceeding” as defined under 26 USCS § 7430 ( c)(6). In John J. Petito v. Commissioner of Internal Revenue, T.C. Memo 2002-271, The United States Tax Court considered the question whether the petitioner may claim in this case administrative and litigation costs associated with separate criminal proceedings and held :

Section 7430 permits an award of reasonable administrative costs incurred in connection with an administrative proceeding within the IRS and reasonable litigation costs incurred in connection with a court proceeding. Section 7430(c)(6) defines the term "court proceeding" to mean any civil action. Accordingly, petitioner is barred in this action from claiming litigation costs associated with the criminal proceedings brought against him.

The Court therefore concluded that the petitioner is not entitled to an award under section 7430 for such attorney's or accountant's fees in criminal proceedings.

]In Kenneth E. Stieha Jr.v. Commissioner of Internal Revenue, 89 T.C. 784, The United States Tax Court held:

The reference in section 7430(c)(2)(A)(iii) to the "proceeding described in subsection (a)," appears to be unambiguous -- the "proceeding" described is the "civil proceeding." Subsection (a) "describes" this proceeding as "any civil proceeding which is -- (1) brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty under this title, and (2) brought in a court of the United States (including the Tax Court and the United States Claims Court)." Subsection (a) further provides that a prevailing party in this "civil proceeding" "may be awarded a judgment for reasonable litigation costs.

Id. at 78-79. The Court held that the civil proceeding before the Court was the litigation between the taxpayer and the Government.

In Baker v. Commissioner of Internal Revenue, 252 U.S. App. D.C. 81, The District of Columbia Circuit in its opinion vacating and remanding the case, held that section 7430 and its legislative history are both literally and sensibly read to cover only costs incurred once litigation commences, and that the relevant position of the United States is the one taken in the civil proceeding.

In Herbert Weiss v. Commissioner of Internal Revenue, 850 F.2d 111, The Court of Appeals, Second Circuit ruled that the section requires that the costs be related to a civil proceeding brought by or against the United States in a matter related to a tax, a penalty, or interest charges that arise under the Code.

Conclusion

In summary, the provision of law for recovery of litigation costs, 26 USCS § 7430, under Internal Revenue Code, Title 26, is applicable only to civil proceedings which are brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty. In the case at bar, the IRS agreed to return the money recovered from the defendant finding that criminal tax fraud suit was wrongfully brought. The defendant cannot in a criminal tax fraud suit recover attorney’s fees and costs from the U.S Government under 26 USCS § 7430 , claiming that the suit was not justifiable. A criminal tax fraud suit does not fall within the purview of the Statute.