## Facts

- Lena Culpepper-Smith invested in 1980 as a sole proprietor in the lease of audio recordings for a 7½-year term.
- She filed a timely 1980 federal income tax return reporting no tax due because claimed deductions and an investment tax credit eliminated liability.
- In 1991, the IRS assessed her for 1980 income tax, interest, and possible penalties, but did not send a statutory notice of deficiency required by 26 U.S.C. § 6212.
- The IRS later applied Culpepper-Smith’s refunds to the 1980 liability, crediting her 1993 refund ($2,618) and 1995 refund ($2,640) against the assessment.
- Culpepper-Smith sued the United States seeking: (1) an injunction against further collection; (2) payment of the 1993 and 1995 refunds; and (3) damages plus attorney’s fees and costs.
- In June 1998, the United States conceded the IRS had not sent the required notice of deficiency, represented that the 1980 assessment would be abated, and sought a stipulation of dismissal.
- Culpepper-Smith refused to stipulate to dismissal and continued litigating, including pursuing motions aimed at securing permanent injunctive relief and other remedies beyond the government’s promised abatement.
- In July 1998, the United States moved to dismiss; Culpepper-Smith cross-moved for summary judgment on certain claims, sought leave to amend to expressly request payment of the refunds, and sought orders “enforcing” the government’s concession and barring any further collection based on the 1980 assessment.
- In August 1998, the court dismissed Culpepper-Smith’s injunction claim and denied her motion to enforce the concession, both subject to the IRS abating the 1980 assessment and removing liens and levies; the court also denied her other motions.
- In March 1999, the parties stipulated to dismiss Culpepper-Smith’s remaining damages claim.
- Culpepper-Smith then moved for attorney’s fees and costs under 26 U.S.C. § 7430, requesting $40,912.50.

## Issues

1. Whether Culpepper-Smith qualified as a “prevailing party” under 26 U.S.C. § 7430 based on the IRS’s agreement to abate the 1980 assessment, and whether the United States’ position was “substantially justified.”
2. Whether § 7430 permitted recovery of fees for work devoted to issues on which Culpepper-Smith did not obtain relief (including post-concession motions and requests for broader injunctive/enforcement-type orders), as opposed to work tied to eliminating the 1980 assessment.
3. Whether the amounts sought were reasonable and recoverable under § 7430, including application of statutory rate limits and reductions for excessive, duplicative, or noncompensable time and expenses.

## Decision

- The court treated Culpepper-Smith as a prevailing party at least with respect to the central result of the litigation: the abatement of the unlawful 1980 assessment (approximately $150,000 with interest and penalties) and related collection consequences.
- The court rejected a full fee award because Culpepper-Smith did not obtain the additional relief she pursued after the government’s June 1998 concession and because § 7430 allows recovery only for reasonable litigation costs connected to successful claims.
- The court reduced the requested fees and costs to account for limited success, excluding or discounting time spent on unsuccessful motions and ancillary issues.
- The court applied § 7430’s statutory limitations on recoverable attorney time and rates and disallowed items not qualifying as reasonable litigation costs under the statute.
- The motion for attorney’s fees and costs was granted in part and denied in part, with an award below the amount requested.

## Legal Principles

- An income tax assessment made without the notice of deficiency required by 26 U.S.C. § 6212 is unlawful, and abatement is appropriate once the defect is established.
- Under 26 U.S.C. § 7430, a taxpayer who obtains meaningful relief in a tax proceeding may recover reasonable litigation costs as a “prevailing party,” unless the United States shows its position was substantially justified.
- Fee recovery under § 7430 is tied to the claims and issues on which the taxpayer actually succeeds; courts may reduce requested amounts when the taxpayer pursues additional relief and does not prevail.
- Courts evaluating § 7430 applications may exclude excessive, redundant, or unnecessary hours and may deny compensation for work not reasonably connected to the successful outcome.
- Attorney’s fees under § 7430 are generally subject to a statutory hourly cap, with increases available only when allowed by the statute and supported by the record.

## Conclusion

Culpepper-Smith obtained the abatement of an illegal 1980 IRS assessment after the government conceded no notice of deficiency had been sent, making her a prevailing party for § 7430 purposes on that core issue. However, because she did not succeed on several additional matters litigated after the concession and because § 7430 permits only reasonable, statutorily authorized costs, the court awarded fees and costs only in a reduced amount tied to the successful work.


Culpepper-Smith v. United States, 50 F. Supp. 2d 425 (1999)