791 F.2d 385 | 5th Cir. | 1986
Lead Opinion
The issue is the standard to apply in determining the right to recover attorney’s fees by a taxpayer who prevails against the Internal Revenue Service in tax litigation. The IRS contends that the test is whether the government’s position taken after litigation has begun is reasonable and the Tax Court adopted this interpretation of the controlling statute. Because the Tax Court should also take into account the government’s administrative position that necessitated the instigation of Tax Court litigation, we reverse the Tax Court’s judgment denying the taxpayer attorney’s fees and remand for application of this test.
I.
David J. Powell and Jeane D. Powell, who was then his wife and who is now deceased, invested $5,000 in WPGMA, a joint venture, which became a limited partner in INAS Associates, a coal mining limited partnership. The taxpayers claimed a deduction of $25,034 on their 1976 tax return as their share of the losses sustained by INAS. Most of INAS’s 1976 loss was represented by a nonrecourse note it issued in payment for a coal royalty.
The IRS determined that the taxpayer’s 1976 deduction was improper because, in addition to other reasons, the taxpayers had no “good faith expectation of profit” from their investment in INAS and because “the transaction for which [INAS] was organized lack[ed] economic reality.” In 1980, the IRS issued a notice of deficiency to the taxpayers for their 1976 tax in the amount of $12,892.51. Powell and the IRS subsequently reached an agreement that settled part of their differences: Powell waived his right to file a Tax Court petition
The IRS completed its audit of INAS in August 1982 and determined that the deductions claimed by the taxpayers as a result of INAS’s losses should be disallowed. To settle the 1976 case, the IRS offered by letter to let the taxpayers deduct the $5,000 they had invested in INAS. Powell’s letter in response stated: “Please make no further contacts with me other than to schedule a date for court, or similar ‘within the service’ forum with informed, senior people authorized to put an end to this agony.” The IRS interpreted this response as a rejection of its settlement offer. In its brief, the IRS states that, since Powell made no counter-offer, a “conference would have accomplished nothing.”
The IRS then, in January 1983, issued a notice of deficiency for the taxpayers’ 1977 return in the amount of $12,240.53. The “Explanation of Items” accompanying the notice stated, in effect, the alternative position of the IRS, that, if some court decided that the INAS nonrecourse note (which had been the basis for the 1976 deficiency) had economic substance, then it was the IRS position that the same note was later forgiven or became unenforceable in 1977 and the taxpayers consequently realized 1977 income in the amount of $20,998.57, their share of the nonrecourse note. The IRS recognized that this 1977 income adjustment was inconsistent with its primary position, which disallowed the entire $25,034 INAS loss claimed by the taxpayers in 1976 (i.e., the 1976 disallowance denied tax effect to the note in the first instance). However, it asserts that the purpose of the 1977 adjustment was to protect the government’s interest in the event the Powells successfully challenged the 1976 disallowance in a subsequent refund suit by establishing that the nonrecourse note did, in fact, have economic substance.
Powell filed a timely petition in the Tax Court seeking redetermination of the deficiency in the 1977 return. Soon afterward Powell and the IRS entered into settlement negotiations involving both the 1976 and 1977 notices of deficiency. In May 1984, they agreed that the taxpayers’ $25,034 deduction for 1976 would be reduced to $5,000, the amount of their investment in INAS. In return, the IRS withdrew the notice of deficiency for 1977. After taking account of various undisputed adjustments, the parties agreed the taxpayers had overpaid their 1977 taxes by $238.34.
Powell then sought to recover the litigation costs he had incurred in presenting his 1977 case to the Tax Court. Powell offered three bases for his charge that the IRS position had been unreasonable: (1) the IRS notice of deficiency for the 1977 return disallowed deductions that Powell had not taken on the return; (2) the IRS repeatedly failed to respond to Powell’s request for an explanation or a conference; and (3) the 1977 notice of deficiency required Powell to instigate the Tax Court litigation.
Powell challenges the Tax Court’s judgment on the basis that the court failed to consider, in its determination of reasonableness, the administrative position of the government that engendered the civil action. The three allegations of unreasonableness asserted by Powell in the Tax Court all refer, at least in part, to the position of the government before litigation. The Tax Court, however, held that, under the controlling statute, 26 U.S.C. § 7430, “the taxpayer must establish that the Commissioner’s position after the petition was filed was unreasonable.”
II.
Section 7430 of the Internal Revenue Code permits a “prevailing party”
Courts have interpreted the statute differently. The First Circuit and several district courts have held that both the IRS’s prelitigation position and its litigation position should be examined for reasonableness.
Analysis of the issue must begin with the language of § 7430. The phrase “civil proceeding” is not defined in the statute. The government, however, points out that subsection (a) of § 7430 provides that the statute applies to “any civil proceeding which is ... brought in a court of the United States.” It is reasonable to assume that the phrase “civil proceeding” in § 7430(e)(2)(A)(i), the crucial provision here, has the same meaning as it does in § 7430(a), that is, court-related proceedings only, not administrative proceedings.
Section 7430 was added to the Internal Revenue Code by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).
The debate, however, has another side. The reference in § 7430(a) to “any civil proceeding” is similar to the words used in the attorney fees provision of the Equal Access to Justice Act.
§ 7430(a)
In the case of any civil proceeding which is—
(1) brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty under this title, and
(2) brought in a court of the United States (including the Tax Court and the United States Claims Court),
the prevailing party may be awarded a judgment for reasonable litigation costs incurred in such proceeding.
§ 7430(c)(2)(A)
The term “prevailing party” means any party to any proceeding described in [§ 7430(a)] ... which — (i) establishes that the position of the United States in the civil proceeding was unreasonable.
EAJA § 2412(d)(1)(A)
Except as otherwise specifically provided by statute, a court shall award to a prevailing parly other than the United States fees and other expenses, in addition to any costs awarded pursuant to subsection (a), incurred by that party in any civil action (other than cases sounding in tort) brought by or against the United States in any court having jurisdiction of that action, unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.
In 1985, Congress amended the EAJA provision set out above to make it clear that the “position of the United States” was intended to include, “in addition to the position taken by the United States in the civil action, the action or failure to act by the agency upon which the civil action is based.”
The two statutes do, it is true, contain differences, and § 7430 by and large places taxpayers at a disadvantage in comparison with civil litigants seeking attorney fees under the EAJA. Under § 7430(c)(2)(A)(i), the taxpayer has the burden of demonstrating that the government’s position was unreasonable. Under the EAJA, by contrast, the government has the burden of showing that its position was “substantially justified.”
While § 7430 uses the words “civil proceeding” and the EAJA uses the phrase “civil action,” the different words do not of themselves indicate a different intent.
Only the First Circuit has decided this issue since the adoption of the EAJA amendments. In Kaufman v. Egger, it rejected the government’s argument that “the term ‘civil proceeding’ includes only the litigation-related proceedings after a suit is initiated,”
In Baker v. Commissioner,
These statements suggest that, under the appropriate facts, if a taxpayer is forced to resort to litigation by an unreasonable IRS administrative position, § 7430 does not require the captious position to be ignored. The taxpayer must be the plaintiff in Tax Court proceedings. If the IRS takes an arbitrary position and forces a taxpayer to file a suit, then, after the pa
We express no opinion concerning whether or not the IRS position that caused the taxpayer to file suit was reasonable. We remand for a determination of that question, and further proceedings consistent with this opinion.
. Tax Ct.R. 231(b)(3), reprinted in 26 U.S.C.A. foil. § 7453 (West Supp.1985) (motion for litigation costs to include "clear and concise statement of each reason why the moving party alleges that the position of the Commissioner in that action was unreasonable, and a statement of facts ... to support each of these reasons”).
. 26 U.S.C. § 7430(c)(2).
. 26 U.S.C. § 7430(c)(2)(A)(i).
. See Kaufman v. Egger, 758 F.2d 1, 4 (1st Cir.1985); Finney v. Roddy, 617 F.Supp. 997, 1000-02 (E.D.Va.1985); Roggeman v. United States, 85-2 U.S.Tax Cas. (CCH) ¶ 9473 (N.D.Ill.1985); Rosenbaum v. IRS, 615 F.Supp. 23 (N.D.Ohio 1985); Sharpe v. United States, 607 F.Supp. 4 (E.D.Va.1984); Penner v. United States, 584 F.Supp. 1582 (S.D.Fla.1984); Hallam v. Murphy, 586 F.Supp. 1, 3 (N.D.Ga.1983).
. See Baker v. Commissioner, 787 F.2d 637, 641 & n. 8 (D.C.Cir.1986); United States v. Balanced Financial Management, Inc., 769 F.2d 1440, 1450 (10th Cir.1985); Ewing & Thomas, P.A. v. Heye, 618 F.Supp. 648 (M.D.Fla.1985); Walsh v. United States, 56 A.F.T.R.2d (P-H) 5370 (D.Minn.1985); Contini v. United States, 55 A.F.T.R.2d (P-H) 419 (N.D.Cal.1984); Brazil v. United States, 54 A.F.T.R.2d (P-H) 5707 (D. Or.1984) [Available on WESTLAW, DCTU database]; Zielinski v. United States, 54 A.F.T.R.2d (P-H) 5132 (D.Minn.1984) [Available on WESTLAW, DCTU database]; Eidson v. United States, 53 A.F.T.R.2d (P-H) 841 (N.D.Ala.1984) [Available on WESTLAW, DCTU database]; cf. Peavy v. United States, 625 F.Supp. 974 (D.Colo.1986). See generally Langstraat, Collecting Attorney Fees From the Government in Tax Litigation: An Analysis of the Winners and Prospects for the Future, 17 St. Mary's LJ. 395 (1986).
. See Ewing & Thomas, P.A. v. Heye, 618 F.Supp. at 649-50.
. 617 F.Supp. 997, 1000 n. 4 (E.D.Va.1985).
. See H.R.Rep. No. 404, 97th Cong., 1st Sess. 14 (1981), quoted in Baker v. Commissioner, 83 T.C. 822, 827 (1984); cf. Sharpe v. United States, 607 F.Supp. 4 (E.D.Va.1984).
. Pub.L. No. 97-248, § 292(a), 96 Stat. 324, 572-74.
. Id., § 292(e)(1), 96 Stat. at 574.
. H.R.Conf.Rep. No. 760, 97th Cong., 2d Sess. 687, reprinted in 1982 U.S.Code Cong. & Ad. News 1190, 1450.
. See 28 U.S.C. § 2412(d)(1)(A) (1982) (repealed 1984).
. Act of Aug. 5, 1985, Pub.L. No. 99-80, § 2(c)(2), 99 Stat. 183, 185 (to be codified at 28 U.S.C. § 2412(d)(2)(D)).
. See, e.g., Iowa Express Distrib., Inc. v. NLRB, 739 F.2d 1305, 1309 (8th Cir.), cert. denied, — U.S. —, 105 S.Ct. 595, 83 L.Ed.2d 704 (1984); Rawlings v. Heckler, 725 F.2d 1192, 1195 (9th Cir.1984); Natural Resources Defense Council, Inc. v. EPA, 703 F.2d 700, 707 (3d Cir.1983). But see Russell v. National Mediation Bd., 764 F.2d 341, 350 (5th Cir.1985), vacated and remanded, 775 F.2d 1284 (1985); Ashburn v. United States, 740 F.2d 843, 849 (11th Cir.1984); Boudin v. Thomas, 732 F.2d 1107, 1115-16 (2d Cir.1984); United States v. 2,116 Boxes of Boned Beef, 726 F.2d 1481, 1486 (10th Cir.), cert. denied, — U.S. —, 105 S.Ct. 105, 83 L.Ed.2d 49 (1984); Spencer v. NLRB, 712 F.2d 539, 548-57 (D.C.Cir.1983), cert. denied, 466 U.S. 936, 104 S.Ct. 1908, 80 L.Ed.2d 457 (1984).
.Act of Aug. 5, 1985, Pub.L. No. 99-80, § 2(c)(2), 99 Stat. 183, 185 (to be codified at 28 U.S.C. § 2412(d)(2)(D)).
. 775 F.2d 1284, 1286 (5th Cir.1985); see also USLIFE Title Ins. Co. of Dallas v. Harbison, 784 F.2d 1238, 1241-42 & nn. 3 & 4 (5th Cir.1986).
. 28 U.S.C. § 2412(d)(1)(A); see Russell v. National Mediation Board, 775 F.2d 1284, 1288 (5th Cir.1985).
. 28 U.S.C. § 2412(d)(2)(A).
. It appears that, generally, cases before United States district court, and the Court of Claims are referred to as "civil actions.” See, e.g., 26 U.S.C. §§ 7401, 7426(a); Fed.R.Civ.P. 2, 3. Cases before the Tax Court are, on the other hand, denominated "proceedings.” See, e.g., 26 U.S.C. §§ 7452-55, 7458-59. The legislative history establishes that § 7430 was to encompass all such actions or proceedings. See S. 1673, 97th Cong., 1st Sess. § 2(a) (1981); H.R. 3262, 97th Cong., 1st Sess. § 2(a) (1981).
. See Baker v. Commissioner, 787 F.2d 637, 641, n. 8 (D.C.Cir.1986).
. See Finney, 617 F.Supp. at 1001-02.
. See, e.g., id.; Peavy v. United States, 625 F.Supp. 974 (D.Colo.1986); cf. Balanced Financial Management, 769 F.2d at 1450.
. 758 F.2d 1, 4 (1st Cir.1985).
. Id. (citations omitted).
. Act of Aug. 5, 1985, Pub.L. No. 99-80, § 2(c)(2), 99 Stat. 183, 185 (to be codified at 28 U.S.C. § 2412(d)(2)(D)) (emphasis supplied).
. 787 F.2d 637, 641 (D.C.Cir.1986) (emphasis in original).
. Id., n. 8.
. Id. at 642 (emphasis supplied).
. 769 F.2d 1440 (10th Cir.1985).
. Id. at 1450 (emphasis supplied).
. Id. at 1451, n. 12 (emphasis supplied).
. Id. at 1450-51 (emphasis supplied).
. H.R.Rep. 97-404, 97th Con., 2d Sess. 11 (1982), quoted in Kaufman, 758 F.2d at 4. See generally Langstraat, Collecting Attorney Fees from the Government in Tax Litigation: An Analysis of the Winners and Prospects for the Future, 17 St. Mary’s LJ. 395 (1986).
Dissenting Opinion
dissenting:
The issue in this case is whether the phrase “position of the United States in the civil proceeding” in 26 U.S.C. § 7430(c)(2)(A)(i) refers to the government’s litigation position only, or to its prelitigation position as well. Because I believe that the phrase refers to the government’s litigation position only, I respectfully dissent.
The majority properly begins its analysis with an examination of § 7430’s text. The majority demonstrates convincingly that as used elsewhere in § 7430, the phrase “civil proceeding” means proceedings before a court only. See § 7430(a), (c)(l)(A)(ii), (c)(l)(A)(iv).
Initially, I find surprising the majority’s inference that in amending the EAJA to clarify its terms, Congress meant by implication to amend § 7430 as well. I think it more plausible that when Congress amends one statute but does not amend a second, similar statute, it means the two statutes to be construed differently. But my objection to the majority’s reliance on the EAJA is more specific; I believe that the majority misapprehends the significance of the differences between the EAJA and § 7430.
Most obvious is the textual difference between the two statutes. The EAJA refers to the “position of the United States,” 28 U.S.C. § 2412(d)(1)(A), while § 7430(c)(2)(A)(i) speaks of the “position of the United States in the civil proceeding.” (Emphasis added.) The D.C. Circuit has concluded, and I agree, that the phrase “in the civil proceeding” in § 7430(c)(2)(A)(i) indicates “a focus narrower than the EAJA’s.” Baker v. Commissioner, 787 F.2d 637, 641 n. 8 (D.C.Cir.1986). The majority dismisses this textual difference, noting that the “in the civil proceeding” phrase is a mere “shard” from which the shape of the entire “pot” — presumably § 7430 — cannot alone be gleaned. This casual dismissal of a significant textual difference is particularly odd in light of the majority’s assertion earlier in its opinion that the “crucial issue” in this case is the
There are other significant differences between § 7430 and the EAJA. Section 7430, enacted in 1982, removed taxpayer litigation from the scope of the EAJA. See Pub.L. No. 97-248, § 292(c), 96 Stat. 324, 574 (1982). Section 7430 places taxpayers at a disadvantage compared to civil litigants proceeding under the EAJA. Under § 7430(c)(2)(A)(i), for example, the taxpayer has the burden of showing that the government’s position was unreasonable; under the EAJA, the government has the burden of showing that its position was reasonable. See Russell v. National Mediation Board, 775 F.2d 1284, 1288 (5th Cir.1985). Section 7430(b)(2) provides that the taxpayer may not obtain litigation costs unless he has exhausted his administrative remedies; the EAJA contains no such requirement. Section 7430(b)(1) establishes an attorney fee cap of $25,000; the EAJA does not set a limit on total fees.
I infer from these differences, disfavoring taxpayer litigants, that Congress may well have intended to disfavor them in defining the “position” phrase as well. This interpretation of Congress’ intent squares with the textual difference between the two statutes. The majority, however, views these differences in quite a different light. After examining the statutes and noting that Congress has placed taxpayers at a disadvantage, the majority comes to a startling conclusion: “These differences sufficiently disfavor taxpayer litigants as compared to other civil litigants without further placing them at a disadvantage by narrowly construing the scope of the phrase ‘position of the United States in the civil proceeding.’ ” Thus the majority, evidently believing that Congress has unfairly skewed § 7430 against the taxpayer, attempts to set matters right by giving the “position” phrase a broad reading. Although I respect the majority’s concern for fairness, I cannot agree with its freewheeling approach to statutory construction.
Near the end of its opinion the majority concludes that the “position” phrase in § 7430(c)(2)(A)(i) does not include the IRS’s position throughout the administrative proceedings; “rather, the inquiry should focus on the IRS’s position at the time the taxpayer’s petition was filed.” This limitation, like the majority’s rule itself, has warrant in neither the language nor the legislative history of § 7430.
If I were drafting a statute or formulating a common law rule to govern the award of litigation costs in tax cases, I might well endorse the majority’s approach. But that is not our role; we are construing a statute duly enacted by Congress. In so doing we must adhere to the congressional intent as revealed in the words of the statute. My reading of § 7430 persuades me that Congress intended the phrase- “position of the United States in the civil proceeding” to refer to the government’s litigation position only. Because I believe that the majority substitutes its own notion of fairness for the clear command of the statutory text, I must, with respect, dissent.
. The majority might have added that in an analogous context, this Court recently concluded that the phrase “ ‘action or proceeding’ commonly refers to some sort of adversary proceeding in the nature of a traditional lawsuit.” Arriola v. Harville, 781 F.2d 506, 510 (5th Cir.1986) (referring to attorney fee provision in the Voting Rights Act).
. In one respect the EAJA directly conflicts with the majority’s interpretation of § 7430. The recent amendments to the EAJA provide that the "position of the United States” includes "in addition to the position taken by the United States in the civil action, the action or failure to act by the agency upon which the civil action is based.” Pub.L. No. 99-80, § 2(c)(2), 99 Stat. 183, 185 (to be codified at 28 U.S.C. § 2412(d)(2)(D)) (emphasis added). In this context, Congress plainly used the phrase “in the civil action” to refer to proceedings before a court. If the majority is correct in its suggestion that "civil action” in the EAJA has roughly the same meaning as "civil proceeding” in § 743Ó, then it follows that the “civil proceeding” phrase also encompasses court proceedings only.
. The EAJA does limit the maximum hourly fee a lawyer may recover to $75 per hour "unless the court determines that an increase in the cost of living or a special factor ... justifies a higher fee.” 28 U.S.C. § 2412(d)(2)(A). Section 7430 does not contain an hourly fee cap for attorney fees.
. In support of its limitation, the majority cites Baker v. Commissioner, 787 F.2d 637, 641 (D.C.Cir.1986), and United States v. Balanced Financial Management, Inc., 769 F.2d 1440, 1450-51 (10th Cir.1985). The single sentence that the majority quotes from Baker — "Nor do we take issue with the Tax Court’s conclusion that the Commissioner’s legal position, at the time Baker filed his petition with that court, appeared to be within the pale of reason" — is far too conclusory and ambiguous to lend the majority’s position much support. The majority’s citation to Balanced Financial Management is even less apposite. There, the government commenced a civil contempt proceeding against the taxpayers. Thus, the government was in the position of plaintiff and the taxpayers were in the position of defendants. When the government is the plaintiff, its litigation position plainly includes the position it takes in instituting the litigation. See id. at 1450-51 & n. 12. Here, by contrast, the government was the defendant before the Tax Court. I do not see how the government as defendant can have a litigation position before it has filed its answer or otherwise made its position formally known to the court.