ORDER GRANTING PLAINTIFFS' MOTION FOR ATTORNEY FEES, COSTS AND INTEREST RATE

JAMES TODD, Chief Judge, District

On November 21, 2003, Plaintiffs, Todd's Discount Drugs, Inc. f/b/o J. Todd Gean and Michael H. Smelser and J. Todd Gean and Michael H. Smelser d/b/a Todd's Discount Drugs, Inc., filed a motion seeking an award of attorney fees and costs in the total sum of $81,088.98. Plaintiffs also request that the court finds that the non-corporate interest rate be applied to the overpayment refund underlying this tax dispute. Defendant has responded. Plaintiffs have filed a reply. For the following reasons, Plaintiffs' motion for attorney fees and costs is GRANTED to the extent of $63,590.48, and Plaintiffs are entitled to interest on the overpayment refund calculated at the non-corporate rate.

I. Background

Plaintiffs Todd Gean and Michael Smelser, d/b/a Todd's Discount Drugs, Inc. ("Todd's Discount"), filed a corporate income tax return for the period ending March 31, 1992, and paid tax in the amount of $979.00. The corporate tax return included a deduction for director's fees paid to Gean and Smelser. After filing the tax return, Gean and Smelser became aware that Todd's Discount was not properly incorporated under Tennessee law. Plaintiffs took action to incorporate Todd's Discount and it became a corporation on January 14, 1993. Plaintiffs, at that time, did not inform the Internal Revenue Service ("IRS") that, prior to 1993, Todd's Discount was not a corporation.

On April 20, 1998, the IRS assessed an income tax deficiency of $64,220 against Todd's Discount for the tax period ending March 31, 1992. The basis for this assessment was an audit determination that certain director's fees were not deductible by the taxpayer. On May 7, 1998, Todd's Discount paid the deficiency, a penalty, and interest in a total amount of $125,174.39. On December 30, 1999, Plaintiffs filed an amended income tax return for the disputed tax return. The Plaintiffs asserted in the amended tax return that in 1992, the business was operating as a partnership. The tax deficiency calculated by the IRS was based upon Todd's Discount being taxed as a corporation. Plaintiffs requested an overpayment refund. The IRS refused the refund on the basis that the request was untimely filed.

After unsuccessfully attempting to resolve this matter with the IRS through administrative means, Plaintiffs filed this action for a refund. Defendant ultimately conceded that Plaintiffs were entitled to a refund of the taxes, penalty and interest paid, and issued Plaintiffs a check representing the overpayment and statutory interest as determined by the IRS. Plaintiffs argue that the refund is insufficient because Defendant has applied the wrong overpayment interest rate. Plaintiffs also seek an award of attorney fees and costs.

II. The Appropriate Interest Rate

Plaintiffs argue that they are entitled to interest calculated at the non-corporate rate because Todd's Discount was not a corporation during the time period in which the additional taxes, penalties and interest were assessed against it. Plaintiffs separate Todd's Discount into two entities: the non-corporate entity existing during 1992 ("Todd's I"), and the entity that was incorporated on January 14, 1993 ("Todd's II"). According to Plaintiffs, the IRS assessed the additional taxes against Todd's I, Todd's I paid the assessment, and Todd's I is the entity due the overpayment refund. As a result, Plaintiffs contend that the non-corporate interest rate is appropriate.

Defendant submits that Plaintiffs are entitled to interest calculated at the corporate rate because Todd's II, the corporate entity, made the overpayment. Defendant's position is that Todd's II paid the tax because it was in existence at the time the tax was paid. According to Defendant, the corporate interest rate is appropriate because a corporate entity made the overpayment. The court disagrees.

The non-corporate interest rate is the appropriate rate for Plaintiffs' overpayment refund. As Plaintiffs point out, the additional taxes and penalties that gave rise to the refunded overpayment were assessed against Todd's I, which Defendant has agreed is a non-corporate entity. Todd's II, the corporate entity, was not in existence during the time period for which this tax situation occurred, and the fact that Todd's II existed when the overpayment was made is irrelevant. The additional taxes were assessed against a non-corporate entity, a non-corporate entity made the overpayment, and a non-corporate entity was entitled to the refund. Accordingly, the non-corporate overpayment interest rate is appropriate for Plaintiffs' refund.

III. Attorney Fees and Costs

Plaintiffs request an award of $78,090 in attorney fees and $2,998.98 in costs pursuant to 26 U.S.C. § 7430. Defendant responds that Plaintiffs are not entitled to attorney fees and costs, but if the court finds that such an award is appropriate, the amount Plaintiffs have requested is excessive. The court finds that Plaintiffs are entitled to attorney fees and costs, but that Plaintiffs initial request of $81,088.98 is excessive. Plaintiffs are entitled to $63,590.48 in attorney fees and costs.

A. Plaintiffs are Entitled to Attorney Fees and Costs

Section 7430 provides that a court may award taxpayers reasonable costs and attorney fees incurred in both administrative and court proceedings. Four conditions must be met to qualify for an award:

(1) the fees and costs must be incurred in connection with the determination, collection, or refund of tax, interest or penalty;

(2) the taxpayer must have exhausted the administrative remedies available within the IRS;

(3) the taxpayer must not have unreasonably protracted the proceedings; and

(4) the taxpayer must be the prevailing party.

See 26 U.S.C. § 7430.

The first two conditions are clearly met in this case. Plaintiffs have submitted an affidavit stating that they retained the services of Attorney Michael A. Robinson and Glankler Brown, PLLC, as a result of the IRS's actions in reviewing the 1992 tax return. Defendant does not dispute this statement in its response. Nor does Defendant dispute that Plaintiffs exhausted the administrative remedies available within the IRS before bringing this action. Defendant argues that Plaintiffs are not entitled to an award because they do not satisfy the third and fourth conditions of 26 U.S.C. § 7430.

Defendant submits that Plaintiffs are not entitled to an award under § 7430 because they unreasonably protracted the proceedings. See 26 U.S.C. § 7430(b)(3). Defendant argues that Plaintiffs refused to cooperate during discovery. Although Defendant's motion to compel Plaintiffs to cooperate in scheduling depositions was granted, any dilatory action by Plaintiffs did not affect the court's scheduling order or the progress of the case. Defendant also asserts that Plaintiffs failed to notify it of a closing agreement reached by J. Todd Gean and the IRS. Plaintiffs correctly point out that Defendant was not prejudiced by this lack of communication in any way because it had access to that same information from its client, the IRS. Because the Plaintiffs did not disrupt the court's scheduling of the case or withhold pertinent information, the court finds that Plaintiffs did not unreasonably protect the proceedings.

Next, Defendant argues that Plaintiffs are not a prevailing party because the government's position was substantially justified. Section 7430 prohibits a taxpayer from recovering attorney fees and costs if the IRS Commissioner's position is substantially justified. See 26 U.S.C. § 7430(c)(4)(B). The government can establish that its position was substantially justified if that position has a "reasonable basis in law and fact." Nicholson v. Commissioner, 60 F.3d 1020, 1025-26 (3d Cir. 1995).

Defendant based its litigation position on an equitable estoppel argument. Defendant's theory was that Plaintiffs' seven-year concealment of the true operating structure of the business resulted in harm to the national coffer because the statute of limitations on assessment against J. Todd Gean expired. Defendant submits that Plaintiffs mislead the IRS by not immediately correcting Todd's Discount's 1986 through 1992 corporate income tax returns to reflect its proper corporate status.

The elements of the defense of equitable estoppel are: 1) conduct or language amounting to a representation of material facts; 2) the party to be estopped must be aware of the true facts; 3) the party to be estopped must intend that the representation be acted upon or act in such a way that the party asserting the estoppel has a right to believe it so intended; 4) the party asserting the estoppel must be unaware of the true facts; and 5) the party asserting the estoppel must detrimentally and justifiably rely on the representation. Apponi v. Sunshine Biscuits, Inc., 652 F.2d 643, 649-50 (6th Cir. 1981); see also Elbo Coals, Inc. v. United States, 763 F.2d 818, 820 (6th Cir. 1985). Defendant must show "a reasonable basis in law and fact" that there was a misrepresentation by Plaintiffs and that Defendant relied upon that misrepresentation to its detriment in order for its position to be substantially justified. See Nicholson, 60 F.3d at 1025-26.

Although there is clearly a reasonable basis in law and fact that there was or might have been a misrepresentation by Plaintiffs regarding Todd's Discount corporate status from 1986 through 1992, Defendant has not demonstrated that there is a basis in law and fact that the government relied to its detriment on Plaintiffs' possible misrepresentations. Defendant points to the order denying Plaintiffs' motion for judgment on the pleadings as proof that its equitable estoppel position was substantially justified. However, in that order, the court did not reach the merits of that position. The order stated:

This case further presents fact specific issues because the Defendant raises the defense of equitable estoppel. Whether Defendant can prevail upon this claim is contingent upon unresolved factual issues presented at this stage of the litigation.

(Order May 14, 2003.) This statement does not indicate that Defendant's position was substantially justified. Because Defendant has not shown that its equitable estoppel position was substantially justified, Plaintiffs are a prevailing party for the purposes of 26 U.S.C. § 7430.

Finally, Defendant submits that Plaintiffs are not entitled to attorney fees and costs because Plaintiffs have received the relief they requested through Defendant's voluntary concession, and not through a court order or judgment. For a party to "prevail," and become eligible for attorney fees, the party must have obtained "a judicially sanctioned change in the legal relationship of the parties." Buckhannon Bd. Care Home v. W. Va. Dep't of Health Human Resources, 532 U.S. 598, 605 (2001). An award of attorney fees and costs is appropriate where a plaintiff has obtained an "enforceable judgment on the merits" or a "court-ordered consent decree ." Id. "A defendant's voluntarily change in conduct, although perhaps accomplishing what the plaintiff sought to achieve by the lawsuit, lacks the necessary judicial imprimatur on the change." Id.; see also Chambers v. Ohio Dep't of Human Serv., 273 F.3d 690, 692-93 (6th Cir. 2001).

Although Defendant, by conceding that Plaintiffs are entitled to a refund and making a payment to Plaintiffs for an amount that Defendant submits is the appropriate amount, has voluntarily changed its conduct and changed the legal relationship of the parties, Defendant's voluntary change did not remove all issues from the court's consideration. The court's decision regarding the appropriate interest rate creates the necessary judicial imprimatur to support an attorney fees and costs award. See Habich v. City of Dearborn, 331 F.3d 524, 534-35 (6th Cir. 2003) (finding that a district court's issuance of an injunction before abstaining from case might have created the "necessary judicial imprimatur" to support an award of attorney fees and costs for the relief received in federal court.). Buckhannon does not apply to this case because Plaintiffs did not receive the relief it requested through Defendant's voluntary conduct. Accordingly, attorney fees and costs are appropriate.

B. Plaintiffs' Initial Attorney Fees and Costs Request is Excessive

In its motion filed on November 21, 2003, Plaintiffs requested attorney fees of $275.00 and $200.00 per hour. The total amount requested was $81,088.98, representing $78,090.00 in attorney fees and $2,998.98 in costs. Defendant objects to this amount on the ground that there is a statutory limit of $150.00 per hour.See 26 U.S.C. § 7430(c)(1)(B)(iii). Plaintiffs' counsel, in their reply, recalculated their attorney fees and costs and submitted a request for $62,590.48, plus an additional $1,000.00 for preparing Plaintiffs' reply.

Defendant also accuses Plaintiffs of pursuing this matter in bad faith and attempting to procure a settlement through fraud or factual inaccuracies because Plaintiffs, during settlement negotiations, requested attorney fees greater than the amount requested in the present motion. Defendant also states that Plaintiffs have kept billing records inaccurately and have not provided Defendant with copies of Plaintiffs retainer agreement or hourly records of all attorneys involved in this case prior to December 3, as requested.

Plaintiffs respond that attorney fees were incurred in excess of the amount requested; however, due to problems with the firm's billing system, Plaintiffs are seeking only the amount of attorney fees for which it can produce records. Plaintiffs also state that any amount they requested for attorney fees and costs during settlement negotiations is irrelevant. Finally, Plaintiffs suggest that Defendant's incompetency in this matter is a basis for a departure from the statutory fee maximum.

After reviewing the Plaintiffs' billing records, the court finds that the number of hours for which Plaintiffs seek attorney fees is reasonable. Plaintiffs are correct in urging the court to find that any details of settlement negotiations are irrelevant to the present motion. "There exists a strong public interest in favor of secrecy of matters discussed by parties during settlement negotiations . . . [regardless of] whether [the] negotiations are done under the auspices of the court or informally between the parties." Goodyear Tire Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976, 980 (6th Cir. 2003). It simply does not follow that, because Plaintiffs sought a greater amount of attorney fees and costs during settlement negotiations than they seek from the court, Plaintiffs attempted to procure a settlement through fraud or factual inaccuracies. Plaintiffs have not, however, demonstrated that there exists any basis for awarding an hourly rate of compensation higher than the statutory maximum. Therefore, Plaintiffs are entitled to an award of attorney fees and costs in the amount of $63,590.48, representing the revised amount of $62,590.48 and an additional $1,000.00 for preparing Plaintiffs' reply.

IV. Summary

For the foregoing reasons, Plaintiffs are entitled to $63,590.48 in attorney fees and costs, and the appropriate interest rate for Plaintiffs overpayment refund is the non-corporate rate.

The clerk will prepare a judgment incorporating this order awarding attorney fees and costs in the amount of $63,590.48, and directing Defendant to pay Plaintiffs the non-corporate interest rate on its tax overpayment refund.

IT IS SO ORDERED.