Robert Kreimes Joan E. Kreimes v. Department of Treasury

KRUPANSKY, Before MARTIN and Cir- CELEBREZZE, Judges, cuit Senior Judge. Circuit CELEBREZZE, Judge.1 paid resulting tax defi- The Kreimeses Senior filed an court ciency and action district In this tax refund recovery paid plus fees to inter- appeals seeking the tax Kreimes, pursu- Robert plaintiffs, and Joan est. Act, Access to Justice ant to magistrate, The case tried before 2412(d) (1982). The U.S.C. § jury.3 parties, with a by consent plaintiffs contends entitled the Kreimeses were jury The found that attorney’s they fees were not a deduction of casualty entitled to loss “prevailing party” under Section $8,500 year The Kreimeses for the that, 2412(d) prevail- they and if subsequently judgment notwith- moved for party, attorney’s fees standing the verdict and for “substantially justified.” litigation was Act, 28 Access to Justice under argues that further even 2412(d)(1)(A)(1982). magis- U.S.C. § proper, attorney’s fees was if an award not- judgment denied the motion for trate reduced should be the amount awarded withstanding granted verdict but in the liti- plaintiffs’ limited success reflect attorney’s in the amount of fees any award of attor- gation and to exclude $9,825. appeals proceedings. for administrative ney’s fees award of fees. I. II. Sandusky, Ohio on Kreimeses live depends on our Resolution of this case Lake Erie. In peninsula juts into 2412(d)(1)(A) interpretation of U.S.C. § storms

June and November (1982) provides “a court shall which damaged property their lake party other than prevailing award to $1,570 casualty on their claimed a loss expenses, fees ... States and other United to these 1972 tax return as attributable by any civil action party incurred In another storm storms. March brought against or the United ... damage to causing struck further finds that the States ... unless the court house Because the Kreimeses’ and land. position of the was substan- United States area, region a federal disaster was declared added). The tially justified.” (emphasis eligible for a Small the Kreimeses became pre- government maintains that it was make loan to re- Business Administration jury’s vailing party case because loan pairs applied such a closer to its verdict $13,165. Business amount of The Small Further, con- Kreimeses’. Administration, however, granted litigating position that its was sub- tends $2,000 The loan repairs. Kreimeses justified. consider each stantially We shall subsequently forgiven by the Small arguments these in turn. Business Administration. return, their 1973 the Kreimeses On tax A. $27,- casualty deduction of claimed a plaintiff un prevailing 1973 storm A attributable the March (1982).2 Act if he der the “ pursuant I.R.C. § any in liti significant on issue on a real apparently Kreimeses relied es- ‘succeedfs] of the benefit gation valued their which achieves some appraiser’s report tate ” sought bringing suit.’ part[y] The Internal Revenue loss at over Eckerhart, Service, the deduction. disallowed good any loss made acknowledges con- loss deduction for Author the substantial 1. The Treas.Reg. Judge opinion. other source. insurance tribution of Martin to 1(c)(4). § 1.165— deduction, taking this the Kreimeses did pursuant appeal was this Court taken to which the SBA 3. Direct account for the 636(c)(3) (1982). U.S.C. forgiven. taxpayer entitled to a to 28 A is not had (1983) 76 L.Ed.2d 40 County, Grenada (quoting Helgemoe, Nadeau v. offered for a Cir.1978)); land, (1st jury $48,260, 278-79 Omaha tract of and the Tribe awarded Swanson, the exact Nebraska v. amount that the landowner was (8th Cir.1984); seeking. Depart- County, Austin v. Grenada F.2d at Commerce, ment 801 n. 1. County, Idaho (Fed.Cir.1984). deposited $12,162.92 issue in ment had The central case two concerns deductible loss tracts of land and the awarded due $144,600, Kreimeses incurred to the 1973 the landowners re- storm.4 Consequently, simply spectively.5 this is County, tax Idaho 716 F.2d at valuation frequently case of the kind which 716-17. Both found courts on the facts court, courts, prevailed. confronts the tax the district that the landowners had Grena- and this e.g., Kaplin County, court. See Estate (implied); da F.2d at 813 Ida- of Commissioner, (6th 748 F.2d 1109 County, Cir. ho 726. F.2d at 1984). Thus, now we must determine what A more recent condemnation how- significant on a succeeding constitutes is- ever, rejected approach has this and held sue in a tax case. valuation prevailing party landowner is a if impression

This is an issue first of he wins amount more than what the tax context. A of cases in government number offered. United States v. however, area, Land, condemnation Less, instruc- Acres More or Locat- 341.45 of cases, dispute tive. In these Louis, is over the in the County ed St. State of of Minnesota, compensation govern- 924, of 751 F.2d Cir. pay acquire 1984).6 ment must through land County, St. Louis government $34,000, eminent domain. $6,000, The has fre- ment had offered quently deposited plaintiff land; which a sum for three tracts of the jury result, claims is As a insufficient. the is- found that the $204,500, tracts were worth simply $36,460, sue for the is determining $25,500, respectively.7 St. hence, property; they value of the are anal- County, Louis 751 F.2d at 927. The ogous present type Eighth of case. Circuit concluded the landowners prevailing parties simply Two of the condemnation cases have held they government won more than the of- the prevailing party the landowner is fered. if he wins “far more than the offered,” rule, In adopting United States v 329.73 this the St. Louis . Land, County rejected Acres explicitly Situated Grenada and court the “sub- Counties, Mississippi, stantially greater” Yalobusha “far State more” tests of 800, (5th Cir.1983) (en banc), 704 F.2d County and County. Grenada Idaho Court, “substantially greater or an citing award than a dissent in Grenada Coun- government’s deposit,” ty,8 principled way United States reasoned that no exists Land, Less, v. 101.80 Acres More or make a as to determination who is a Idaho, 714, County, Idaho 716 F.2d prevailing party upon based the size of the magistrate opinion adopted 4. in his first determined The Eleventh also 6. Circuit has presented issues, Land, incorrectly that the case two standard. United States v. 640.00 Acres of first, Dade, i.e., County More or Less in the State whether a loss suffered due to the Florida, second, and, so, storm if what was the briefing amount of the loss. After further companion County, In a St. Louis case to argument, in a second company United States had offered an oil opinion recognized con- $965.76 for its in a 107-acre mineral interests ceded that a deductible had occurred and jury eventually tract. The awarded the oil com- only dispute over amount. pany County, St. Louis 751 F.2d at 928. County opinion 5. The is Idaho unclear concern- County, Grenada 816 n. 7 seeking. J., (Rubin, what amount the landowners dissenting). (Rubin, J., ty, F.2d at 816 n. 7 County, 751 F.2d at 938. Louis award. St. dilemma, Eighth dissenting). Because test bright-line adopted the purpose Access than any amount more if win prevails litigants Act is to “ex to Justice has offered. seeking penses defending review of or against unreasonable action.” reasoning of the St. Louis (footnote County, F.2d at 801 Grenada adopted test County court sound. omitted). Congress citizens to did want County and Idaho County in Grenada expense involved se be deterred vague. courts will have too District plainly rights curing the vindication of their civil plaintiff difficulty deciding proceedings. actions and in administrative “substantially” or “far” more won Act, Pub.L. No. government offered. Inconsistent (1980). 96-481, 94 Stat. certainly will result of adjudications Thus, of the Act on the the focus and, rule conse an indeterminate plain and not appeals will follow. See quently, needless hold that the tiff’s We therefore Eckerhart, Hensley v. government’s position alone should be scru (1983) 76 L.Ed.2d 40 103 S.Ct. Equal Access to Justice tinized under the fees should (“request Act; comparative position of tax litigation”). major Fur result in a second Accordingly, we payer is irrelevant.9 hold ther, by espoused the Fifth the standard taxpayers case were the the Ninth Circuits is not conducive to and the prevailing party because the found entering into unfa Since an settlements. larger a may impo result in settlement vorable than would concede. fees, attorney’s sition of see Citizens Coa Compliance, Inc. Block Grant lition for B. 964, Euclid, (6th City v. next whether We consider Cir.1983), accept neither side want to will substantially amount that is closer to the other side’s an government’s position justified. position. In like this cases substantially justified if it has reasonable a factual, do purely issues are we not want Westerman, and fact. Inc. v. basis in law process. inhibit the settlement 14, (6th Cir.1984); NLRB, F.2d view, adopted by In our the rule NLRB, Wyandotte Savings v. Bank comports with de- Eighth Circuit also 119, magis purpose sign and trate in this case determined designed Act. The Act is so that Justice an took unreasonable attorney’s prevailing is not entitled magis will reverse We government’s position if the was sub- fees holding if an there has been “abuse trate’s deciding stantially justified. Westerman, Inc., 749 F.2d of discretion.” government’s position was substantial- at 17. justified, the court will examine ly district context of the Access to government’s arguments the merits [the Act], term ‘abuse of determine whether the case should meaning, special takes on a adopted If we discretion’ have been contested. respect to find- greater” With “substantially or the “far more” omitted]. [citation judge’s ings upon the district as- test, evaluating the based we would in essence be probative value of the determining sessment merits of case who evidence, highly standard of deferential party. prevailing See Grenada Coun- 38; by damages.” Fed.R.App.Proc. Martin v. positions Unreasonable taken 38, (6th Commissioner, Cir. imposition double can be remedied 1985). "just appeal by imposing costs for a frivolous

H91 force of clearly signifi- review erroneous five this loan is diminished order, cantly standard is because no evidence was introduced omitted]. [citation respect pertaining With to the district court’s evalu- to how the figure was government’s legal argu- Finally, magistrate ation reached.12 conclud- ment, ed, appropriate, agree, posi- a de novo standard is and we that a reasonable tion the could taken was [citations omitted]. deduction; to contest the amount of the Sigmon Valley Fuel Co. v. Tennessee Au- rather, that, other 162, Cir.1985). thority, 754 F.2d forgiven, loan which was Since the central issue this case is the entire deduction constituted a false purely one, the factual amount of deduct- claim. These reasons forwarded damage ible which the Kreimeses suffered magistrate “provide a concise but clear ex- storm, due to the 1973 we can reverse planation of its reasons fee award.” clearly if it is decision Eckerhart, Hensley 461 U.S. erroneous. (1983). 103 S.Ct. 76 L.Ed.2d 40 magistrate began analysis his hold, accordingly, We that the by noting government’s position ruling erroneous. $2,000 forgiven by was that other than the finally con SBA loan no “deductible oc Supreme tends Court’s decision during curred the 1973 storm.”10 The Hensley Eckerhart, magistrate then set forth his reasons con (1983), 76 L.Ed.2d 40 mandates cerning why reduction of the amount First, attorney’s fees substantially according justified. awarded to reflect the Kreimeses’ limited magistrate, contrary the evidence success.13 We do not believe that was overwhelm requires view, such a result. The ing. Court in Hens our this conclusion was am ley degree did note that the ply supported by Initially, record. success was magistrate pointed determining a critical factor in out that the destructive impact of the 1973 storm should have been fees. Id. at apparent Nevertheless, immediately any at reasonable S..Ct. 1941. the Court storm, person; explicitly rejected due to area any ap the the where mathematical the proach attorney’s fees, Kreimeses resided was declared a dis at 435 n. 11 id. & 436, Further, 103 area. the S.Ct. aster almost all other at 1940 n. 11 & and evidence, including testimony emphasized three ex that a district court has discre pert appraisers,11 supported taxpayer’s awards, determining appropriate the tion in fee fact, only support the magis the id. at 103 at S.Ct. 1941. was that the Small the present trate case considered the only granted Business Administration Supreme Hensley decision and Court’s the requested by recognized plaintiffs the that obtained on proba- request- Kreimeses their loan form. The about one-third the relief Administration, magistrate’s opinion We that pursuant note first 12. The Small Business misinterpreted government’s position. policy, destroyed to its internal all records relat- However, supra opinion note 4. in a second ing Consequently, the Kreimeses’ loan. no solely dealing attorney’s with the fees issue the concerning evidence exists the method rea- magistrate recognized government’s po- that the sons which the Small Business Administra- sition was that the Kreimeses incurred no de- $2,000 figure. tion arrived at the ductible due to the 1973 storm. Although Hensley attorney's dealt with fees 11. A realtor testified that the loss in value to the (1982), 42 U.S.C. set under standards property due to the storm was between applicable generally out in to attor- $30,000; engineer and an that the indicated cost ney's E.g., fees Sierra cases. Ruckelshaus v. repair property ap- to proximately would be Kreimeses’ Club, (1983); Hensley, $26,000; appraiser and real estate at 433 n. 1939 n. 7. that U.S. S.Ct. at estimated the loss due to both the 1972 and 1973 storms was magis- In this is not warranted. indicated magistrate, ed. way” by taxpay- “lost appropriately case its in this trate considered that rational figure for which no arriving adequate- at and set forth er’s limited success that Kreimeses’ and existed14 basis reducing not the award ly his reasons for prevented this from could not counsel Accordingly, deci- attorney’s fees. Also, presenta- described the occurring. he magistrate sion of the affirmed. by Kreimeses’ counsel the case tion of MARTIN, Jr., Judge, F. BOYCE “professional.” “straight-forward” dissenting. magistrate reasoned Consequently, agree Although I respectfully I dissent. penalized not Kreimeses should that the legal conclu- completely majority’s astray hence with jury went sions, hold- not a case that the that this was I believe concluded attorney’s proportional reduction that the degree of upon the success. fees based substantially justified clearly erroneous. magistrate make findings by These I must that the award therefore conclude relationship clear that he “considered improp- fees in this attorney’s case was fee awarded between er. Hensley, and the results obtained.” agree majority I with at 1941. there- 103 S.Ct. We U.S. position government’s principal is that the pro- refusal to fore affirm no loss other deductible attorney’s the award of portionately reduce forgiven by the SBA. fees.15 position holding not sub- summary, in a we hold that stantially justified, the stated:1 taxpayer prevail tax case valuation Upon reconsideration, I reaffirm Access ing party purposes my which I reached conclusions he amount more Act if wins Justice (namely, memorandum order earlier conceded. than what the prevailing were the bright-line such a rule will We believe that and that the failed to party, with encourage comports settlements litigation show that its in this policies behind substantially justified). Without Further, view, in our Act. the Su I ear- elaborating upon reasons which in Henlsey v. Eck preme Court’s decision expressed, persuaded lier I remain erhart, U.S. question plain- there can be no (1983), does mandate L.Ed.2d principal tiffs contention prevailed proportionately reduced fees be de- parties between about merits; on reflect limited success damage during had the ductible occurred rather, merely requires that the government the remained 1973 storm: fact the relief trier of consider extent of position unyielding in its that no such explain why a reduction is or obtained Helvering, E.g., figure appeal. at first time on Hormel The arrived 552, 556, 719, 721, party. never either 61 85 L.Ed. was mentioned (1941); Sigmon Fuel Val- 1037 Co. v. Tennessee government appeal contends on that the 15. The ley Authority, F.2d Cir. taxpayers the cannot collect fees for Co., 1985); Schneider v. Electric Auto-Lite proceedings before the IRS. administrative (6th Cir.1972). States, Compare v. United White (11th Cir.1984) (attorney’s fees at incurred magis- language quoted the taken from The recoverable) not Con- administrative level with the opinion issued.after trate’s second which he States, F.Supp. stantino United government him to reconsider the asked (E.D.Pa.1982) (attorney's fees at ad- incurred notes, major- attorneys' majority As the fees. recoverable). govern- ministrative level 4, magistrate’s opinion ity opinion n. the first at ment, however, adequately to raise failed identify government’s con- properly did not and, argument district court accord- before the tentions. ingly, for the we decline to consider issue

H93 storm, during had occurred a false aspect tuted claim. This advancing theory through government’s even trial. position also, my opin- in ion, an trial, aggravating contrary to circumstance

At the evidence when assessing overwhelming. my opinion, government’s was whether the po- to repeat my substantially justified. earlier statement the Au- sition was order, gust memorandum and magistrate govern- thus found that the consequences destructive position ment not substantially justi- was March, 1983, storm should have im- been (1) fied because the evidence was over- mediately apparent agent to a reasonable whelming it; (2) against who undertaking was a modicum of fair- keep attempting the taxpayers from inquiry minded into the basis claiming the 1973;2 loss in either plaintiffs’ claim on their 1973 tax return. (3) should con- addition, my as also noted earlier tested the amount of the claim. order, govern- memorandum The second and third reasons set forth position ment’s no could be support holding his was taken a time question irrelevant taxpayer-plaintiffs when the were fore- government’s position was amending closed from their 1972 return substantially justified. As the majority to obtain benefits deduction for recognizes, the central reviewing issue in year. government’s position, position in type therefore, though is classic Catch-22: position case is whether that reason- loss, there was a it could be claimed Westerman, able basis fact. Inc. v. taxpayers, govern- in the NLRB, view, falsely sought split ment’s magistrate’s govern- conclusion that years. loss into The fact two that the ment’s designed prevent plaintiffs, left, as a result of the taxpayer claiming a deduction in government’s position timing being either 1972 or legally besides assertion, its unable to claim the loss incorrect,3 bearing has no on whether the is, year my either opinion, a moderate- government’s "positionhad a reasonable ba- ly aggravating factor to consider when justifica- sis in fact. The third assessing question jus- of substantial tion—that should have government’s position. tification for the quibbled over the amount of deduction in- A final additional consideration—or allowing stead no deduction—assumes one perhaps which bears more mention that the had no rea- August 9, 1983, than in my it received sonable basis in fact. If the memorandum and order—is that grounds had reasonable believe based, taxpayers no suffered deductible loss be- analysis, upon last proposition loan, yond forgiven SBA then liars. no reason allow simply ment did contest the amount (which beyond might deduction that amount. deduction have been Therefore, justification position); rather, they more the one that can reasonable support holding contended that no his con- loss whatsoever had overwhelmingly clusion that the 1973 storm. evidence con- been words, or, government’s position, other tradicted the us- every being was appropriate language, that nickel that as deduction as a result of that event consti- had no reasonable 1311-1314, regard taxpayers 2. statements 3. Under I.R.C. §§ were directed to the contention would have been to loss entitled claim the for taxpayers prove had that failed to loss determined that 1972 if had was occurred in the March 1973 storm and what loss appropriate year the deduction. occurred in the 1972 storms. 1194 which concluded that into evidence To determine in fact. basis $31,300 damages. caused respect in this storm had conclusion flawed, erroneous, appraisal seriously evi how- must This I review

clearly ever, general on keeping in mind that the it was based because dence in the by in the hit property should of values area magistrate’s determination decline taxpayers’ own I am with the definite storm and not on the if “left reversed damages. has been that a mistake n. 6. firm conviction identifiable See infra v. United States committed.”4 United evidence, I think the Given this Co., 68 Gypsum States had a in fact clearly ment reasonable basis 525, 542, (1948). 92 L.Ed. S.Ct. its That basis the SBA's City, City Bessemer also Anderson of SBA determination. To obtain the loan — U.S.-,-, loan, fill com- to out a the Kreimeses had (1985). L.Ed.2d 518 including of all prehensive application a list pieces different evidence Several damaged property. or lost C.F.R. casualty amount of produced regarding the (1973). 123.8 then considered SBA § First, taxpayers. loss suffered loan amount of the based $2,000 loan the SBA to there “restoring, rehabilitating replac- or cost Al- repair their house. taxpayers ing damaged destroyed property.” government was not able to though the 123.5(b)(1973). Loan funds would C.F.R. § documenting from the present evidence “to Kreimes- granted then be restore [the how the loan amount was calcu- SBA as to predi- nearly possible as as home ... es’] lated, they taxpayers testified both 123.3(a)(1) 13 C.F.R. saster condition.” § $2,000 the total had received (1973). would An SBA loan determination requested they and that amount indicator of how therefore be a reasonable amount.5 had not contested the much the Kreimeses suffered how it cost the March 1973 storm and much Second, amount there was prior house its them restore their taxpayers requested in their loan condition. tax- application Although SBA. amount, it payers not awarded clearly SBA’s determination taxpayer’s of what the themselves evidence loss relevant as to amount their to be. considered 165. deduction allowable under I.R.C. § en- the Kreimeses were Under section appraisals as Finally, three different fair titled to deduct difference in the into evi- plaintiff's entered loss were home market value of their before relator, A testified for the dence. who fair value after storm and the market trial, had exam- taxpayers at stated he Any 1.165-7(2)(i). Treas.Reg. storm. house after the 1973 storm and ined the arising value reduction in fair market that he felt Kreimeses had general from a decline in market values damages. between from the casu- separated the area must be trial, also testified at engineer, An who however, loss, alty and is deductible. dam- 1973 storm caused testified Thus, entitled the Kreimeses were not Id. to the tax- ages in the amount of market in the fair to deduct reduction engineer, payers’ property. The fact resulting from the their home un- value inspect taxpayer’s property did their home was not marketable years A real til three after storm. high risk it was area report admitted appraisers’ estate was also Moreover, only presented re- Although is a erroneous standard one, ceipts repairs does not render us rubber document deferential "it Commissioner, Kaplin stamp." Estate 12,000. Cir.1984) (quoting Miami F.2d Commissioner, Broadcasting Corp. v. Valley (6th Cir.1979)). must still We rigorous a of the record. undertake review only $2,00 storms.6 The loss was that deductible ed to the SBA seriously under- was “the resulting holding actual loss from dam- mines his that age id., to the property,” justified of substantially cost in relying on the repairs is acceptable of a evidence SBA’s determination. 7(2)(ii). loss. Treas.Reg. § 1.165— Moreover, jury’s determination as to loan, granted SBA’s which was on the basis easily amount of loss could lead one to repairs, of cost of of excellent evidence conclude that found the SBA loan to

what was the Kreimeses’ loss deductible very probative be evidence. The de- jury under section 165. termined that the only enti- recognized $8,500 even to tled an loss deduction. $2,000 SBA Although determination was a reason- one speculate can as to how able appraisal damage amount,7 of to jury amount arrived at that sig- it is taxpayer’s denying house. nificant that that amount was much closer plaintiff’s for judgment motion notwith- SBA determination than to standing verdict, the magistrate any taxpayers’ stated: appraisals. of gravaman plaintiffs’ of motion for I therefore must mag- conclude judgment n.o.v. or an additur is holding government’s po- istrate’s jury could have reached one verdict substantially justified sition was not as to the amount of to the deduction view, my erroneous. long as as were entitled: name- reasonably author- $27,750. is, ly, opinion, in my This incor- appraisal of taxpayer’s itative Although rect. the evidence was over- loss, position is substan- whelming had been suf- justified tially if it appraisal. relied on that fered as a of a in result storm Land, United States Acres 341.45 of figures several jury available Less, More Located the County of it when came to determine the of amount Louis, Minnesota, St. State of properly deduction which could have 924, (8th Cir.1984) (government’s posi- year. been claimed for that tax These substantially justified tion is if it is based $2,000 (amount expended included qualified upon appraisal). Without such a repairs receipts which were avail- rule, the can courts reach re- anomalous also, able: amount Small Business present sults as in the case where loan); (amount Administration government successfully taxpay- reduced a plaintiffs’ application loss stated $20,000, er’s claimed deduction almost loan); $27,750 (amount for the SBA resulting in liability, an increased tax but deduction). of claimed pay at the same time was forced to out Because the evidence could led larger attorneys’ amount fees. The net jury return verdict one is a result even amounts, plaintiffs’ three motion for though litigated it what turned out to abe

judgment granted, cannot n.o.v. claim. pur- valid I do not believe that the added). (emphasis poses own behind the Access to Justice jury require conclusion that a reasonable could Act such an odd I result. therefore have found that Kreimeses’ loss was limit- dissent. taxpayer’s ap- tify part It was for this reason that decrease market value praisal following seriously the storm was damages attributable actual and what appraiser simply compared flawed. The market part prospective was attributable to the fact that properties values similar in the area before buyers likely do not want a house where it is and after the storm concluded that market be hit a storm. values area had fallen Based on 38%. estimate, appraiser, concluded that the magistrate speculated sub- taxpayers’ home had decreased value 38% tracted amount an insurance award from a loss $8,500 figure. of loss to reach the obviously inadequate This conclusion is for the purposes of section 165 because it fails to iden-

Case Details

Case Name: Robert Kreimes Joan E. Kreimes v. Department of Treasury

Court Name: Court of Appeals for the Sixth Circuit

Date Published: Jun 18, 1985

Citation: 764 F.2d 1186

Docket Number: 84-3072

Court Abbreviation: 6th Cir.