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United States Department of Justice, Tax Division v. Paul S. Hudson

November 10, 2010


The opinion of the court was delivered by: Dennis Jacobs, Chief Judge:


United States v. Hudson

Argued: September 23, 2010

Before: JACOBS, Chief Judge, KATZMANN and LIVINGSTON, Circuit Judges.

Debtor-Appellant Paul S. Hudson appeals from a July 8, 38 2009 judgment of the United States District Court for the 39 Northern District of New York (Scullin, J.), reversing the 40 decision of the Bankruptcy Court of the Northern District of 1 New York (Littlefield, J.), which awarded Mr. Hudson 2 attorney's fees under 26 U.S.C. § 7430. Mr. Hudson, a 3 lawyer, is appearing pro se here, as he did in the 4 bankruptcy court and the district court. The district court 5 held that a lawyer appearing pro se cannot be awarded 6 attorney's fees pursuant to 26 U.S.C. § 7430. We affirm.

Debtor Paul S. Hudson, having successfully challenged a 25 claim lodged against him in the bankruptcy court by the 26 Internal Revenue Service ("IRS"), sought attorney's fees 27 pursuant to 26 U.S.C. § 7430 of the Internal Revenue Code 28 ("IRC"), which permits the prevailing party to recover 29 litigation costs, including attorney's fees, in any 30 proceeding brought by the United States in connection with 31 the collection of interest on past due taxes. Mr. Hudson, a 2 1 lawyer who appeared pro se in the bankruptcy court (as well 2 as in the district court and now here), thus sought 3 attorney's fees on account of his legal work on his own 4 behalf. The Bankruptcy Court of the Northern District of 5 New York (Littlefield, J.) awarded IRC § 7430 attorney's 6 fees, but the United States District Court for the Northern 7 District of New York (Scullin, J.) reversed. Mr. Hudson 8 appeals from the district court's July 8, 2009 judgment. We 9 affirm.


Mr. and Mrs. Hudson were principals in a real estate 13 rental firm that deemed its maintenance workers to be 14 independent contractors for whom the firm paid no federal 15 employment withholding tax. After an audit, the IRS 16 determined that the workers were employees, and assessed 17 withholding and Federal Insurance Contributions Act ("FICA") 18 taxes for 1989 and 1990. See 26 U.S.C. §§ 3102(a), 3111, 19 3401, 3402(a), 3403. The firm failed to pay, and the IRS 20 assessed penalties pursuant to IRC § 6672 against Mr. and 21 Mrs. Hudson in the amount of the unpaid withholding taxes.

When the firm filed for bankruptcy in 1995, the IRS sought 3 1 to recover the delinquent employment taxes from the estate.

2 As to their personal exposure, the Hudsons entered into a 3 Stipulation of Settlement of Claims ("Stipulation") which 4 provided that "[t]he total liability of Eleanor and Paul 5 Hudson shall be the trust fund portion" of the past due 6 taxes in the amount of $30,838.49.

7 On November 12, 1999, Mr. Hudson himself filed for 8 bankruptcy. The IRS filed an amended proof of claim 9 seeking, inter alia, $50,026.61, which represented the 10 employment tax penalty in the amount of $27,916.49 (i.e., 11 the unpaid past due taxes owed by the firm) plus statutory 12 interest in the amount of $22,110.12. While the bankruptcy 13 petition was pending, the IRS sent Mrs. Hudson a final 14 notice of its intent to levy penalties exceeding the amount 15 of her settlement per the Stipulation. After a collection- 16 due-process hearing pursuant to IRC § 6330, the IRS Office 17 of Appeals sustained the proposed collection action, and 18 Mrs. Hudson sought review. The United States District Court 19 for the Northern District of New York ruled that the plain 20 wording of the Stipulation absolved her of liability for any 21 interest.

Relying on the district court's ruling, Mr. Hudson 4 1 argued in his bankruptcy case that he likewise was not 2 liable for interest accrued on the employment tax penalty. 3 The bankruptcy court agreed. Having thus prevailed, Mr. 4 Hudson moved for attorney's fees pursuant to IRC § 7430.

Citing the Fifth Circuit's holding in Cazalas v. United 6 States Department of Justice, 709 F.2d 1051 (5th Cir. 1983) 7 (awarding fees in the context of the Freedom of Information 8 Act), the bankruptcy court awarded fees.*fn1 The bankruptcy 9 court reasoned that "[b]y allowing reasonable fees to pro se 10 attorney litigants, the court will promote the 'vigorous 11 advocacy' policy advanced by the Court of Appeals for the 12 Fifth Circuit in Cazalas while still retaining the ability 13 to control fees awarded based on the facts of the case." In 14 re Hudson, 345 B.R. 477, 484 (Bankr. N.D.N.Y. 2006).

On the Government's appeal, the district court 16 reversed, relying on the reasoning in Kay v. Ehrler, 499 17 U.S. 432 (1991), McCormack v. United States, 891 F.2d 24 18 (1st Cir. 1989) (per curiam), and United States v. 19 ...

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