                   United States Court of Appeals
                            FOR THE EIGHTH CIRCUIT



                                      No. 97-3777


Lynn G. Sharp,                              *
                                            *
           Plaintiff-Appellant,             *
                                            *
             v.                             *
                                            *
United States of America,                   *
                                            *   Appeal from the United States
        Defendant-Appellee,                 *   District Court for the
                                            *   Southern District of Iowa.
             v.                             *
                                            *
Douglas A. Wilson,                          *
                                            *
      Third-Party Defendant.                *


                               Submitted: May 15, 1998

                                   Filed: June 3, 1998


Before BOWMAN, Chief Judge, HEANEY and HANSEN, Circuit Judges.


HEANEY, Circuit Judge.

      The sole question in this appeal is whether the district court abused its discretion
in denying Lynn Sharp attorneys’ fees. We hold that it did and reverse.
                                             I.

       The Wilson Railway Corporation failed to pay federal income and social security
taxes withheld from employees’ wages for the first three calendar quarters of 1990.
The Internal Revenue Service (IRS) assessed Douglas Wilson, the corporation’s
president, and Sharp, an employee of the corporation, $155,604 under 26 U.S.C. §
6672 of the Internal Revenue Code (IRC) for the failed payment. Sharp paid $100 of
the assessment and immediately thereafter filed a tax refund claim with the IRS. The
IRS denied Sharp’s refund claim. Sharp then commenced an action seeking to recover
the refund. The government filed a counterclaim against Sharp; but, after it discovered
that the taxes had been paid for the first two quarters of 1990, dismissed that portion
of its counterclaim. The remaining issue, Sharp’s liability for the third quarter, was
tried before a jury. The jury returned a verdict in Sharp’s favor. The government did
not appeal. Sharp thereafter sought $57,223 in attorneys’ fees under §7430 of the IRC.
The district court denied Sharp’s motion and she now appeals.

                                            II.

        In reviewing a denial of attorneys’ fees under § 7430 of the IRC, we will reverse
the district court only if it has abused its discretion. In re Testimony of Arthur
Andersen & Co., 832 F.2d 1057, 1059 (8th Cir. 1987). To be eligible for an award of
litigation costs under § 7430 of the IRC, a party must satisfy three requirements: (1)
the party must have exhausted all administrative remedies available within the IRS, id.
§ 7430(b)(1); (2) the party must show that the requested award constitutes reasonable
litigation costs, id. § 7430(c); and (3) the party must prove that she is a prevailing party
as defined under § 7430(c)(4)(A).

      The government concedes that Sharp satisfied the first requirement, but
maintains that she failed to satisfy the second and third requirements. We first address
whether Sharp has demonstrated that she is a prevailing party as defined by §

                                             2
7430(c)(4)(A). To satisfy the prevailing party requirement, a prevailing party must (1)
establish that the position of the United States in the proceeding was not substantially
justified; (2) have substantially prevailed with respect to the amount in controversy or
with respect to the most significant issue(s); and (3) have a net worth that does not
exceed $2 million at the time the proceeding was commenced.

     The government concedes that Sharp substantially prevailed with respect to the
most significant issue and that she met the net worth requirement. It contends,
however, that its position was substantially justified. We disagree.

        “The government’s litigation position is not substantially justified if it lacks a
reasonable basis in law and fact.” Barton v. United States, 988 F.2d 58, 59 (8th Cir.
1993). Section 6672 of the IRC imposes liability on corporate personnel for unpaid
federal withholding taxes when the corporate employee has the responsibility to
truthfully account for, collect, and pay taxes, but has willfully failed to do so. Id.
(citation omitted).

       After a careful review of the record, we are convinced that the president of the
company, Wilson, was responsible for making the required quarterly payments to the
IRS. Indeed, Wilson specifically directed Sharp not to tender the money that had been
withheld from payroll to the IRS during the third quarter of 1990 or at any time.1 Not
only is it clear that Sharp did not have the authority to pay the withholding taxes, it is
also clear from the record that the government was aware of the limitations on Sharp’s
authority before it filed its counterclaim. Therefore, we conclude that the IRS’s
position in this proceeding was not substantially justified and finding to the contrary
was an abuse of discretion.



      1
       The record indicates that when Sharp left the company in 1991, she personally
contacted the IRS to complain about Wilson’s possible criminal conduct.
                                            3
                                        III.

      Because Sharp was able to demonstrate that the IRS’s position was not
substantially justified, we reverse and remand to the district court for an award of
reasonable attorneys’ fees.2

      A true copy.

            Attest.

                     CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.




      2
       We need not address whether the amount of attorneys’ fees Sharp requests is
reasonable because this should first be addressed by the district court.
                                         4
