Estate of Palumbo v. United States

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

_____________

No. 11-2371

_____________

ESTATE OF ANTONIO J. PALUMBO DECEASED

PNC BANK, NATIONAL ASSOCIATION, EXECUTOR,

Appellant

v.

UNITED STATES OF AMERICA

______

On Appeal from the United States District Court

for the District of Western Pennsylvania

(D.C. No. 2-10-cv-00760)

District Judge: Honorable Arthur J. Schwab

______

Argued on March 6, 2012

Before: SCIRICA, and AMBRO and VAN ANTWERPEN,

Circuit Judges

(Filed: April 2, 2012)

Louis A. Prosperi, Esq. [ARGUED]

Law Office of Louis A. Prosperi

1910 Cochran Road

Manor Oak Two, Suite 730

Pittsburgh, Pennsylvania 15220

Steven L. Sablowsky, Esq.

Goldblum & Sablowsky LLC

285 East Waterfront Drive

Suite 160

Homestead, Pennsylvania 15120

John P. Iurlano, Esq.

500 McKnight Park Drive

Suite 501B

Pittsburgh, Pennsylvania 15237

Counsel for Estate

Tamara W. Ashford, Esq.

Jonathan S. Cohen, Esq.

Randolph L. Hutter, Esq. [ARGUED]

United States Department of Justice Tax Division

950 Pennsylvania Avenue, N.W.

P.O. Box 502

Washington, District of Columbia 20044

Christopher Williamson, Esq.

United States Department of Justice Tax Division

P.O. Box 227

Ben Franklin Station

Washington, District of Columbia 20044

Counsel for Government

2

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OPINION OF THE COURT

______

VAN ANTWERPEN, Circuit Judge.

The Estate of Antonio J. Palumbo (“the Estate”)

prevailed in its suit against the United States when the

District Court ruled it was entitled to a tax refund. The Estate

then sought recovery of all of its attorneys’ fees and costs

under 26 U.S.C. § 7430, and alternatively the fees and costs it

incurred after December 16, 2010 under the theory that the

government rejected its qualified offer made pursuant to §

7430(g). Finding the position of the United States to be

substantially justified, the District Court denied the Estate its

fees and costs. On appeal, the Estate argues that the position

of the United States was not substantially justified and that

the net worth requirements of § 7430 did not prevent it from

recovering its fees and costs. We will affirm.

I. Factual and Procedural History

A. Creation of the Charitable Trust and Will

Contest

In 1974, Antonio Palumbo created the A.J. and

Sigismunda Palumbo Charitable Trust (the “Charitable

Trust”). Palumbo died in 2002. During his life, he executed

various wills and trust instruments; his last will was executed

on July 6, 1999 (the “1999 will”). The parties agree there

was no express residuary provision in the 1999 will, despite

the fact that each of Palumbo’s previous wills devised the

3

residue to the Charitable Trust. Palumbo’s attorney admitted

that this omission was a scrivener’s error.

The lack of a residuary clause led to a dispute over

who was entitled to the residue. Palumbo’s son claimed he,

as Palumbo’s sole intestate heir, was entitled to the residue,

while the Charitable Trust claimed it was entitled to the

residue because of the scrivener’s error. The two sides

reached a settlement wherein Palumbo’s son received

$5,600,000 along with real property in Wheeling, West

Virginia, and the Charitable Trust received $11,721,141. 1

The settlement agreement was approved by an order of the

Orphans’ Court Division of the Court of Common Pleas of

Elk County, Pennsylvania.

B. Federal Estate Tax Refund and Fees and Costs

Under § 7430

After the settlement, the Estate filed a claim for a

federal estate tax charitable deduction in the amount payable

to the Charitable Trust. The Commissioner of Internal

Revenue disallowed the charitable deduction, finding that the

charitable contribution was made by Palumbo’s son via a

settlement agreement, not by Palumbo through his 1999 will.

The Estate thereupon brought an action against the United

States District Court for the Western District of Pennsylvania

seeking a refund of the federal estate tax paid on the

$11,721,141 that was donated to the Charitable Trust. The

District Court granted the Estate’s motion for summary

1

The amount Palumbo’s son received was free of all

administrative expenses, debts, and estate and inheritance

taxes.

4

judgment; the Estate then sought its attorneys’ fees and costs

under 26 U.S.C. § 7430 (“§ 7430”) both as a “prevailing

party,” which would entitle it to full recovery, and as a party

who made a qualified offer pursuant to § 7430(g), which

would entitle it to fees incurred after December 16, 2010.

Because the District Court found the government’s

position in the litigation to be substantially justified, it did not

award the Estate fees or costs. The District Court did not

address the net worth requirements imposed by § 7430,

whether those requirements should apply to the Estate or the

Charitable Trust, or the validity of the Estate’s alternative

claim that it was entitled to certain costs because it made a

qualified offer under 26 U.S.C. § 7430(g). The Estate filed a

timely notice of appeal.

II. Jurisdiction and Standard of Review

We have jurisdiction over the final order of the District

Court under 28 U.S.C. § 1291. We review the District

Court’s decision that the government’s position was

substantially justified for abuse of discretion. Nicholson v.

Commissioner, 60 F.3d 1020, 1026 (3d Cir. 1995); see also

Pierce v. Underwood, 487 U.S. 552, 559 (1988). A district

court’s ruling can only be reversed under abuse of discretion

review if its decision was arbitrary, irrational, fanciful, clearly

unreasonable, or based on a “clearly erroneous finding of fact,

an errant conclusion of law, or an improper application of law

to fact.” United States v. Lee, 612 F.3d 170, 184 (3d Cir.

2010). We will not upset a district court’s exercise of

discretion “‘unless no reasonable person would adopt the

district court’s view.’” United States v. Starnes, 583 F.3d

5

196, 214 (3d Cir. 2009) (quoting Ansell v. Green Acres

Contracting Co., 347 F.3d 515, 519 (3d Cir. 2003)).

III. Analysis

A. Fee Provision Statute

In court proceedings “brought by or against the United

States in connection with the determination, collection, or

refund of any tax,” a “prevailing party” may recover fees and

costs incurred in the litigation. 26 U.S.C. § 7430(a).

“Prevailing party” is defined in § 7430(c)(4):

(A) In general.--The term “prevailing party”

means any party in any proceeding to which

subsection (a) applies (other than the United

States or any creditor of the taxpayer involved)

--

(i) which--

(I) has substantially prevailed with respect to

the amount in controversy, or

(II) has substantially prevailed with respect to

the most significant issue or set of issues

presented, and

(ii) which meets the requirements of the 1st

sentence of section 2412(d)(1)(B) of Title 28,

United States Code (as in effect on October 22,

1986) except to the extent differing procedures

are established by rule of court and meets the

6

requirements of section 2412(d)(2)(B) of such

Title 28 (as so in effect).

In referencing 28 U.S.C. § 2412(d)(1)(B), the statute

incorporates the net worth restrictions set forth in the Equal

Access to Justice Act (“EAJA”). 2 Under the EAJA, the

recovery of fees and costs is barred if a party’s net worth

exceeds the statutory amount. Moreover, the party seeking

fees has the burden of proving that it meets the net worth

requirements under § 7430. Tax Ct. R. 232(e); Estate of Woll

v. Commissioner, 44 F.3d 464, 470 (7th Cir. 1994).

Congress included a special rule in § 7430 that applied

the net worth requirement to estates. Section 7430(c)(4)(D)

states that the $2,000,000 net worth requirement imposed on

individuals in 28 U.S.C. § 2412(d)(2)(B)(i) shall apply to “an

estate but shall be determined as of the date of the decedent’s

death.” The rule appears to codify Estate of Hubberd v.

Comm’r, 99 T.C. 335 (1992). 3 At the time Hubberd was

decided, § 7430 did not contain a special rule subjecting an

estate to the $2,000,000 net worth requirement. The Hubberd

court decided that an estate was subject to the net worth

requirement set forth in § 2412. Id. at 341. The court

rejected the estate’s argument that when applying the net

worth requirement a court should “consider the net worth of

the [estate’s] beneficiaries, not the net worth of the estate.”

Id. at 339. The court explained its reasoning as follows:

2

The EAJA is codified at 5 U.S.C. § 504 and 28 U.S.C. §

2412.

3

The rule was added to § 7430 via the Taxpayer Relief Act of

1997, Pub. L. No. 105-34, 111 Stat 788.

7

[The Commissioner] determined a deficiency

against the estate. This case is brought in the

name of and on behalf of the estate by its

executor. This action is for a redetermination of

the estate tax deficiency. An estate is generally

responsible for bearing the costs of its own

litigation. It follows that we look to the net

worth of the estate, and not of the beneficiaries

or the executor.

Id. at 340–41 (citations omitted). 4

Unlike estates, charitable organizations exempt from

taxation under Section 501(c)(3) of the Internal Revenue

Code need not satisfy any net worth requirement to recover

fees and costs. Such an organization, however, cannot

recover fees and costs if it had “more than 500 employees at

the time the civil action was filed.” 26 U.S.C. §

2412(d)(2)(B)(ii).

The appellant cites legislative history in the form of

the Conference Report to the Tax Equity and Fiscal

Responsibility Act of 1982, the bill that enacted § 7430. The

applicable Senate Amendment, which was adopted by the

Conference, stated “Third-party costs.—A taxpayer may

recover costs for a third party incurred by that party on behalf

of the taxpayer.” H.R. Rep. No. 97-760, 97th Cong. 2d Sess.

687 (1982).

4

The Hubberd court did not decide whether clause (i) or (ii)

of § 2412(d)(1)(B) was applicable because the estate’s net

worth exceeded the limit stated in each provision.

8

Here, in addition to seeking fees and costs as a

“prevailing party” under § 7430, the Estate seeks to recover

under the qualified offer provision of § 7430(g). A qualified

offer under § 7430(g): (1) is made by the taxpayer to the

United States within the qualified offer period [which starts

on the date that the first letter of proposed deficiency is sent

to the taxpayer, and ends 30 days before the date the case is

first set for trial]; (2) specifies the offered amount of the

taxpayer’s liability; (3) is designated at the time it is made as

a qualified offer; and (4) remains open during the period

beginning on the date it is made, and ending at the earliest of:

the date the offer is rejected, the date of trial, or the ninetieth

day after the offer is made. If the offer fails to meet the

requirements, a party cannot receive litigation fees and costs.

McGowan v. Comm’r, T.C. Memo 2005-80, 2005 WL

826928 at *2 (2005).

Parties seeking to recover under either the prevailing

party provision or the qualified offer provision must satisfy

the net worth requirements discussed above. 5 Because the

5

Section 7430(c)(4)(B) states a “party shall not be treated as

the prevailing party” if the position of the United States is

“substantially justified.” Courts look to published guidance

(regulations, revenue rulings, etc) as well as the decisions of

courts of appeal on substantially similar issues in making this

determination. The “substantially justified” limitation does

not apply to qualified offers. See Swanson v. Comm’r, 98

T.C.M. (CCH) 42 (2009) (“The qualified offer provision of

section 7430(c)(4)(E)(i) applies without regard to whether the

Commissioner’s position in the matter is substantially

justified.”). This ground will not be discussed in this opinion

and does not affect our resolution of the case.

9

resolution of the net worth issue disposes of both issues, we

will resolve this case on that ground despite the fact that the

District Court did not address it. See Blum v. Bacon, 457 U.S.

132, 138 n.2 (1982) (“It is well accepted . . . an appellee may

rely upon any matter appearing in the record in support of the

judgment below.”).

B. Application of § 7430 Requirements

It is undisputed that the Estate’s net worth at the time

of the decedent’s death was greater than $2,000,000, and that,

as a result, the Estate cannot qualify for fees and costs under

either of its claims. The Charitable Trust, however, satisfies

the net worth requirements because it is a tax-exempt

charitable organization with fewer than 500 employees. The

Estate has thus argued that the Charitable Trust is the real

party in interest and that the Charitable Trust, not the Estate,

qualifies as a prevailing party who incurred fees.

The crux of the Estate’s argument is that because the

Charitable Trust was the sole residuary beneficiary under the

settlement agreement, it bore all the expenses incurred to

obtain the tax refund, reaped all the benefits of the tax refund,

and will reap the benefit of any attorneys’ fees and costs

recovered. In support of its argument, the Estate cites a

number of cases that looked beyond the named plaintiff and

aimed to determine whether “the real party in interest” could

be awarded fees, see, e.g., Young v. Commissioner, T.C.

Memo. 2006-189, 2006 WL 2564109 (2006), as well as

legislative history, see H.R. Rep. No. 97-760, 97th Cong. 2d

Sess. 687 (1982). The Estate asserts that these arguments

show the Charitable Trust was the “prevailing party” for the

purposes of fee recovery under § 7430. We disagree. The

10

fact that the Charitable Trust stood to benefit from the Estate

obtaining a tax refund, as well as any award of fees, does not

mean that it was a “prevailing party” that incurred fees as is

required under § 7430.

If the terms of a statute are unambiguous, the plain

meaning of the statute will govern. See Reves v. Ernst &

Young, 507 U.S. 170, 177 (1993) (“If the statutory language

is unambiguous, in the absence of a clearly expressed

legislative intent to the contrary, that language must

ordinarily be regarded as conclusive.” (citations omitted));

Rubin v. United States, 499 U.S. 424, 430 (1981) (“When we

find the terms of a statute unambiguous, judicial inquiry is

complete, except in rare and exceptional circumstances.”

(citations omitted)).

The definition section of § 7430 sets forth the criteria

for determining a prevailing party. First, an individual or

entity must be a “party in any proceeding” covered by §

7430(a). See § 7430(a) (stating it applies to “any

administrative or court proceeding which is brought by or

against the United States in connection with the

determination, collection, or refund of any tax”). Second, the

party must “substantially prevail[] with respect to the amount

in controversy” or “substantially prevail[] with respect to the

most significant issue or set of issues presented.” § 7430

(c)(4)(A)(i)(I) & (II). Finally, as previously mentioned, the

definition of prevailing party excludes any party that fails to

satisfy the net worth requirements of § 2412(d)(1)(B). §

7430(c)(4)(A)(ii).

In this case the Estate was the party in the underlying

proceeding. The executor of the Estate was (1) responsible

11

for paying the appropriate amount of federal estate tax, see 26

U.S.C. § 2002 (“The tax imposed by this chapter shall be paid

by the executor.”); (2) the party with the legal right to seek a

refund of taxes paid; and (3) the party that conducted the

litigation. The settlement agreement between the Charitable

Trust and Palumbo’s son explicitly states that the “residuary

estate will be solely responsible for the payment of all

inheritance and estate taxes payable as a result of the

Decedent’s death.” App. II at 87 ¶ 6. Further, the Estate was

the only party to the proceedings, and it was the only party

that prevailed in connection with the proceedings.

In addition to satisfying the prevailing party

requirements, a party seeking fees under § 7430 must incur

the litigation expenses attendant to that proceeding. Section

7430(c)(1)(B)(iii) states only reasonable fees “paid or

incurred” for the services of an attorney are reimbursable. In

order to recover fees under § 7430 a prevailing party must

actually incur the costs. Marre v. United States, 38 F.3d 823,

829 (5th Cir. 1994) (litigant “entitled only to the amount

owed under the contingency fee agreement plus costs”);

Young, 2006 WL 2564109 at *9 (T.C. 2006) (“Unlike certain

other fee-shifting statutes, section 7430 generally allows the

recovery of attorney fees only to the extent such amounts

have been paid or incurred.” 6). Unlike the term “prevailing

party,” “incur” is not defined by § 7430 so we must assume

6

We note that we are not dealing with the situation where a

non-party has advanced the funds to pay the fees and the

plaintiff is either liable to repay them, or that repayment is

contingent upon recovery. See Morrison v. Comm’r, 565

F.3d 658, 662 (9th Cir. 2009); SEC v. Comserv. Corp., 908

F.2d 1407, 1414 (8th Cir. 1990).

12

the legislature intended the ordinary meaning of the word to

apply. Smith v. United States, 508 U.S. 223, 228 (1993)

(“When a word is not defined by statute, we normally

construe it in accord with its ordinary or natural meaning.”).

Black’s Law Dictionary defines “incur” as “to suffer or bring

on oneself (a liability or expense).” Black’s Law Dictionary

at 836 (9th ed. 2009).

This definition is consistent with the Tax Court’s

statement “[f]or purposes of section 7430, fees are ‘incurred’

when there is a legal obligation to pay them.” Young, 2006

WL 2564109 at *9. Here, the Estate “suffered or brought on”

itself the fees it had the legal obligation to pay. The Estate

paid the attorneys’ fees and expenses and was the party in the

underlying litigation represented by those attorneys. It is thus

clear that the Estate was the prevailing party who incurred the

expenses related to the litigation.

The Estate’s argument that we should look at the sole

residuary beneficiary, the Charitable Trust, cannot be

reconciled with the plain language of the statute and the

ordinary meaning of its terms, and therefore must be rejected.

Since the Charitable Trust was not a party to the underlying

suit, it cannot be a prevailing party nor can it incur expenses

as contemplated by the statute. 7 The fact that it stands to

7

The Charitable Trust did hire an attorney to work on the

matter, and his expenses accounted for slightly less than 20%

of the total amount sought by the Estate. We do not believe

that the Charitable Trust’s legal expenses are the type covered

by § 7430. Section 7430 aims to ensure “that every citizen is

able to defend himself against unjustified government action,

free from the financial disincentives associated with

13

benefit from the Estate’s victory, and that it hired an attorney

to help in the litigation, cannot change the result that it does

not qualify under § 7430.

By their nature, decedents’ estates deal with resources

that will be passed along to other individuals or entities. See

Black’s Law Dictionary at 629 (9th ed. 2009) (defining a

decedent’s estate as “The real and personal property that a

person possesses at the time of death and that passes to the

heirs or testamentary beneficiaries”). If an individual or

entity is the residual beneficiary of an estate, that separate

individual or entity will indirectly bear the estate’s fees. Yet,

§ 7430 requires courts to analyze an estate’s, not its

beneficiary’s, net worth, and courts must make such a

determination “as of the date of the decedent’s death.” The

mere existence of an indirect consequence on the residual

beneficiary does not alter the application of the plain meaning

of the statute.

The Conference Report cited by the Estate does not

provide persuasive evidence that Congress intended a

different result. Although the Senate Amendment, officially

adopted by the Conference Report, stated “[a] taxpayer may

recover costs for a third party incurred by that party on behalf

of the taxpayer,” a number of hurdles were inserted into §

7430. Taxpayers must clear those hurdles before recovering

fees. To that end, we do not read the Senate Amendment in

the Conference Report as negating, or casting aside, the

litigation.” Morrison, 565 F.3d at 659. The Charitable Trust

did not participate in such litigation to protect its rights; it

merely hired counsel that advised it, and helped the Estate, in

the Estate’s participation in such litigation.

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different barriers to recovery placed in § 7430. The taxpayer,

here the Estate, must still qualify as a prevailing party under §

7430 before it can recover any costs for third parties that

those parties incurred on its behalf.

The application of the statutory language to this case is

clear: we are to look at the Estate’s net worth since it was the

taxpayer that pursued its substantive legal rights in the

underlying action. See also Hubberd, 99 T.C. at 341

(examining estate’s net worth because the estate must pay

taxes, the case was brought in name of estate by executor, and

estate is “generally responsible for bearing the costs of its

own litigation”). The relevant point in time for determining

the value of the estate is its value at the time of Palumbo’s

death. It is undisputed that the Estate’s net worth exceeded

$2,000,000. As a result, the Estate is not eligible to recover

fees and costs under § 7430.

C. Decisions Focusing on the “Real Party of

Interest”

The Estate’s discussion of case law regarding the real-

party-in-interest doctrine does not dissuade us from our

conclusion. We now examine this case law and explain why

we believe it does not dictate a different result.

One of the first decisions to apply the real-party-in-

interest doctrine to the EAJA was Unification Church v.

I.N.S., 762 F.2d 1077 (D.C. Cir. 1985). The United States

Court of Appeals for the District of Columbia Circuit held

that courts should determine the real party in interest in the

fee litigation and decide whether that party is eligible to

recover fees. In the underlying litigation, the Unification

15

Church agreed to pay the attorneys’ fees for three of its

employees in their dealings with the Immigration and

Naturalization Service, and joined the suit as a named

plaintiff. Id. at 1082; see also Unification Church v. I.N.S.,

547 F. Supp. 623 (D.D.C. 1982). The employees and Church

were successful, and the Church sought to recover, through

the EAJA, the fees it paid on behalf of the employees. Id. at

1079. The court decided that the Church was the real party in

interest because it had incurred all of the fees, and would be

the beneficiary of any award of fees. Id. at 1082. Despite the

fact each employee was individually eligible to recover, the

Church was prevented from recovering because it had more

than 500 employees.

The court explained that if it “were to award fees in

this case on the basis that the individual appellants qualified

under subsection (d)(2)(B)(i), [it] would open the door for the

wholesale subversion of Congress's intent to prevent large

entities from receiving fees under subsection (d).” Id. The

D.C. Circuit feared that “[i]n a wide variety of circumstances,

organizations obviously not qualified for an award under

subsection (d) would be able to persuade individuals to be

among the parties, and the organization would then receive

free legal services if its side were to prevail.” Id. The court

could not “allow such a situation.” Id. As a result the court

held that “where the fee arrangement among the plaintiffs is

such that only some of them will be liable for attorney's fees,

the court shall consider only the qualification vel non under

the [EAJA] of those parties that will be themselves liable for

fees if court-awarded fees are denied.” Id.

The Estate also argues the decision in Wall Industries

v. United States, 15 Cl. Ct. 796 (1988), aff’d in unpublished

16

opinion, 883 F.2d 1027 (Fed. Cir. 1989), supports the

extension of the real-party-in-interest doctrine. In that

decision the court denied the taxpayer-plaintiff fees under the

EAJA because it was not the real party in interest.

Wall Industries Inc. (“Wall”), the taxpayer and

plaintiff in the action, filed suit seeking a tax refund. Wall,

however, entered into an agreement with its accounting firm,

Arthur Young (“Young”), whereby Young paid Wall

$291,045 to settle a potential malpractice claim against

Young for failing to file the refund claim. Wall Indus., 15 Cl.

Ct. at 799. As a condition of the settlement, Wall granted to

Young full responsibility for litigating the tax refund claim

and any refund proceeds resulting from that litigation. Id.

Therefore, Young conducted the litigation, paid for the

litigation, and would receive any and all benefit from the

litigation. Id. The court stated “[a] thorough analysis of the

settlement agreement between Young and Wall discloses that

there is no question that Young, in actuality, required Wall to

initiate this suit as a condition of the payment of $291,045,

and that Wall is little more than a nominal applicant.” Id. at

804.

After Wall prevailed and obtained a refund, it sought

fees under the EAJA. The court found that Wall was not

eligible for fees because it “never assumed any responsibility

to pay for legal services and would derive no benefit from an

award herein . . . .” Id. at 805. The court found that Young

was the real party in interest because it, not Wall, “actively

and continuously participated” in the litigation and “stood

alone to benefit.” Id. The court then analyzed whether

Young, not Wall, could qualify under the net worth

17

provisions, and denied fees because of Young’s net worth and

size. Id at 806.

Here, the Estate argues that because, in its view, the

Charitable Trust “actively and continuously participated” in

the litigation and “stood alone to benefit,” it must be

considered the real party in interest, just like the Unification

Church in Unification Church, and Young in Wall Industries.

The Estate errs in relation to both cases.

In both Unification Church and Wall Industries, the

real party in interest had a legal arrangement that made it

responsible for the fees. See also Love v. Reilly, 924 F.2d

1492, 1494 (9th Cir. 1991) (“The members of the

[association] would be the real party in interest in the fee

litigation only if they were liable for the [association’s]

attorney's fees.”). The Charitable Trust had no such

arrangement that made it liable or responsible for the fees.

The Estate argues that as the sole residuary beneficiary the

Charitable Trust did ultimately bear the fees. The Charitable

Trust, however, did not directly bear the costs of these fees in

the manner that the Unification Church and Young did. The

Unification Church and Young paid the costs directly out of

their pocket, whereas the Estate paid the costs out of its

pocket and the Charitable Trust will only indirectly bear the

costs after it receives a smaller distribution. In fact, the Estate

is in a more analogous position to Young and the Unification

Church than the Charitable Trust because the Estate, like

those organizations, directly paid the costs of litigation.

Other differences render Unification Church and Wall

Industries legally distinguishable from the current matter.

First, the Unification Church was an actual party to the

18

underlying suit, whereas the Charitable Trust was not.

Second, Young contracted for any tax refund obtained and

was thus legally entitled to it. By contrast, the tax refund

obtained by the Estate will go to the Estate, and the

Charitable Trust has no legal claim to it. The Charitable

Trust will benefit after the Estate obtains that refund and

passes it along in the proper manner, but that does not mean

that the Charitable Trust possesses the legal right, as Young

did, to the refund. But the essential difference is that neither

of these cases authorized payment under the EAJA to entities

that were not parties to the underlying suit. Courts have

rejected assertions by non-parties that they were eligible for

EAJA fees because they were the real parties in interest. Sw.

Marine, Inc. v. United States, 43 F.3d 420, 422 (9th Cir.

1994); S.E.C. v. Comserv Corp., 908 F.2d 1407, 1413 (8th

Cir. 1990); Am. Bayridge Corp. v. United States, 24 C.I.T. 9,

10-12 (2000). For that reason, the real-party-in-interest

doctrine, as applied to the EAJA, does not support the

Estate’s claim.

Though the above discussion explains why judicial

interpretations of the real-party-in-interest doctrine pertaining

to the EAJA do not militate in favor of the Estate’s position,

we must also discuss the cases, cited by the Estate, that apply

the real-party-in-interest doctrine to § 7430. See Young, 2006

WL 2564109; Dixon v. Comm’r, 91 T.C.M. 1138, 2006 WL

1275497 (2006), aff’d on other grounds, 612 F.3d 890 (9th

Cir. 2010). A careful analysis of these decisions reveals that

they provide little support for, and run counter to, the Estate’s

position.

In Young and Dixon, the Tax Court addressed both test

and nontest cases involving taxpayers who had invested in a

19

specific tax shelter. The analysis in these two decisions

applies to a small portion of tax litigation cases and provides

a narrow exception to an otherwise clear rule. Specifically,

both Young and Dixon arise from the tax shelter programs

promoted by Henry F.K. Kersting during the 1970’s and

1980’s. The shelters spawned more than 1,000 docketed

cases after the Commissioner of Internal Revenue disallowed

interest deductions claimed by participants in the shelters.

Young, 2006 WL 2564109 at *1. Test cases proceeded, while

nontest case petitioners entered into agreements whereby their

cases would be resolved in accordance with the outcome of

the test cases. Id. A “Defense Fund” was organized and

“nontest case petitioners shared the further costs of the test

case litigation.” Id. at *2.

In Young, the Tax Court held “that the real parties in

interest in th[e] litigation include not only the test case

petitioners and participating nontest case petitioners, but also

all other remaining nontest case petitioners.” Id. at *8

(quoting Dixon, 2006 WL 1275497 at *9). The court stated

“the fact that petitioners have not, by and large, paid or

incurred the claimed fees and expenses does not render those

amounts unrecoverable under section 7430.” Id. at *10

(quoting Dixon, 2006 WL 1275497 at *9). As the court

noted, “the relevant inquiry is . . . whether the real parties in

interest who did pay or incur those amounts satisfy the net

worth requirement” imposed by § 7430 and § 2412. Id.

(quoting Dixon, 2006 WL 1275497 at *9).

Here, we are dealing with a factual situation very

different from Young and Dixon. In those decisions many of

the taxpayers had filed petitions in the Tax Court regarding

related issues, and had done so because they had rights at

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stake in the decisions. The petitioners in Young and Dixon

had similar rights in the tax shelter; the resolution of one case,

therefore, would determine the legal rights of many others.

To that end over 300 nontest case petitioners had contributed

to the Defense Fund.

Conversely, the resolution of the Estate’s tax refund

proceeding does not determine the Charitable Trust’s rights in

a similar proceeding; the Charitable Trust is not a nontest

case petitioner waiting to learn how the courts will rule on its

tax interests. While the nontest case petitioners had legal

claims dependent on the resolution of the test cases’

outcomes, the Charitable Trust has no legal claim of its own

that is dependent on the outcome of the Estate’s tax litigation.

The fact that the Charitable Trust will suffer an indirect

pecuniary consequence from the Estate’s litigation does not

elevate that consequence to an independent legal claim. The

Charitable Trust is thus more akin to the spouse of one of the

test case petitioners who stands to gain only through the

resolution of another’s legal rights, not the legal rights of its

own.

In Dixon, the Tax Court stated the “case for looking

beyond the named parties [was] particularly compelling in

the[] proceedings, where similarly situated taxpayers not only

shared the costs of the litigation but also ‘had rights at stake

in the case on the merits.’” Dixon, 2006 WL 1275497 at *9.

We believe Dixon’s exception is narrowly cabined to

situations involving complex tax litigation where similarly

situated taxpayers have foregone individual litigation to

further their independent legal claims and shared in the costs

of the representative litigation. It is not applicable to

situations, such as those present in this case, where an estate

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has a sole residuary beneficiary that has no independent legal

claim and will only be affected indirectly by the outcome of

the Estate’s litigation.

For the reasons discussed above we do not believe that

any of the decisions applying the real-party-in-interest

doctrine dictate that we classify the Charitable Trust as the

real party in interest. The application of the statutory

language shows that the Estate was the prevailing party who

incurred the costs, and therefore is the party who must meet

the net worth requirements of § 2412 incorporated into §

7430. To look through the Estate and query whether the

beneficiary, or beneficiaries, qualified for recovery of fees

under § 7430 would complicate an otherwise straightforward

analysis. It would also make § 7340(c)(4)(D) superfluous

because we would never consider the net worth requirement

imposed on estates, let alone at the specific time Congress

required. We decline reading such a rule into the statute.

IV.

For the foregoing reasons, the District Court properly

denied the Estate the fees and costs it sought. Accordingly,

we will affirm the District Court’s opinion.

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