Aparacor, Inc. v. United States, 139-73.

• Decision Date: 22 February 1978
• Docket Number: No. 139-73.,139-73.
• Citation: 571 F.2d 552
• Parties: APARACOR, INC., formerly Queen's-Way to Fashion, Inc. v. The UNITED STATES.
• Court: U.S. Claims Court

571 F.2d 552

APARACOR, INC., formerly Queen's-Way to Fashion, Inc. v. The UNITED STATES.

No. 139-73.

United States Court of Claims.

February 22, 1978.

Warren C. Seieroe, Chicago, Ill., for plaintiff; Lawrence Gerber, Michael R. Fayhee, Judith S. Horn and McDermott, Will & Emery, Chicago, Ill., of counsel.

Asst. Atty. Gen. M. Carr Ferguson, Washington, D.C., for defendant; Robert S. Watkins, Washington, D.C., of counsel.

Before COWEN, Senior Judge, DAVIS, NICHOLS, KASHIWA, KUNZIG, and BENNETT, Judges, en banc.

ON PLAINTIFF'S MOTION FOR COSTS INCLUDING ATTORNEYS' FEES

DAVIS, Judge.

We have heard this case en banc because it is the first to present the general issue of whether The Civil Rights Attorney's Fees Awards Act of 1976, Pub.L.No. 94-559, 90 Stat. 2641, applies to tax refund suits in this court. The question is raised by the plaintiff's motion for the award of costs including attorneys' fees pursuant to 42 U.S.C. § 1988 (1970), as amended by The Civil Rights Attorney's Fees Awards Act of 1976, supra.¹ The costs were incurred in a withholding tax case before the court in which the issue was whether numerous individuals and groups or organizations of individuals engaged in selling the plaintiff's products at retail on a commission basis were independent contractors or employees of the plaintiff. The Internal Revenue Service had determined that taxes under the Federal Insurance Contributions Act and the Federal Unemployment Tax Act were owed by the plaintiff for the years 1968, 1969, and 1970 and had assessed the Federal Unemployment tax with interest for the year 1970. The plaintiff paid its Federal Unemployment tax for that year (with the assessed interest) and brought suit for a refund. A trial was held, and the plaintiff prevailed on the merits. Aparacor, Inc. v. United States, 556 F.2d 1004, 214 Ct.Cl. 130 (1977). It now seeks the award of court costs including attorneys' fees on the ground that the defendant acted in bad faith, that the position taken by the Government was so utterly contrary to case law, revenue rulings, and prior practice that "it is apparent that without regard to right or wrong, the IRS sought by administrative action to bludgeon plaintiff into doing its bidding or risk financial ruin."

Wholly aside from the claimed bad faith of the Government, we hold that The Civil Rights Attorney's Fees Award Act of 1976 does not authorize us to award attorneys' fees in this type of tax refund suit.² Both the language³ and the legislative history compel this result. The statute states that "in any civil action or proceeding, by or on behalf of the United States of America, to enforce, or charging a violation of, a provision of the . . . Internal Revenue Code, . . . the court, in its discretion, may allow the prevailing party, other than the United States, a reasonable attorney's fee as part of the costs." The defendant says that the statute is not applicable here because the suit was initiated by the taxpayer, rather than brought "by or on behalf of the United States." That seems to be the meaning of the words on their face. The Act governs suits in which the Government is the initiator and actor, but in an ordinary refund action such as this the taxpayer, not the Government, is the initiator and the actor. The "civil action or proceeding" is not "by or on behalf of the United States of America" but rather "by or on behalf of" the taxpayer. This normal understanding of the bare language is not conclusive but it is entitled to prevail unless overcome by a persuasive showing from the purpose or history of the legislation. Prairie Band of the Pottawatomie Tribe of Indians v. United States, 564 F.2d 38, 46, 215 Ct.Cl. ___, ___ (1977).

Far from being subverted by the legislative history of the Civil Rights Attorneys' Fees Award Act, the "plain meaning" of that Act (with respect to tax suits) is fully confirmed by its history and background. The Senate bill, S.2278, originally contained no references to actions or proceedings under the Internal Revenue Code. The House and Senate reports⁴ connected with the civil rights attorneys' fees legislation likewise made no reference to tax suits, or to the language in issue, which was added to S.2278 as an amendment by Senator Allen, who made the following comments on his amendment when it was called upon the Senate floor on September 29, 1976.⁵

What the amendment does is to add to the civil rights attorneys' fees provision a provision that if the Internal Revenue Service or the U.S. Government brings a civil action against a taxpayer to enforce any provision of the Internal Revenue Code, and the Government does not prevail against the taxpayer, then the court, in its discretion, just as in the other cases, would be entitled to award the taxpayer reasonable attorneys' fees. That is all it does, and I hope the amendment will be agreed to emphasis added.

Senator Tunney also made clear the limited applicability of the amendment in his remarks after Senator Allen's introduction of the amendment:⁶

Mr. President, as initial sponsor of S.2278, I would like to make clear my understanding of the intent of this amendment, which I support.

Essentially, it would apply to a situation where a taxpayer is harrassed sic by the IRS. In such a case, a court has discretion to award reasonable attorneys' fees to the defendant. The standard to be applied is the one the courts have adopted with respect to prevailing defendants, as described in the Senate report.

The purpose of this amendment is not to discourage meritorious lawsuits by the IRS, but to discourage frivolous or harrassing sic lawsuits.

The amendment would not apply to a situation where the Government is plaintiff on appeal since the Government did not bring the action in the first instance emphasis added.

After adoption of the amendment, but before passage of the bill by the Senate, Senator Kennedy explained the applicability of the amendment:⁷

As I understand the provisions of the Allen amendment, a court would be authorized to award attorneys' fees to a taxpayer who is a defendant in a civil action brought by the U.S. Government to enforce the provisions of the Internal Revenue Code. The usual standard applied in cases where fees are awarded to prevailing defendants would apply here as well—that is, awards are appropriate where the action initiated by the plaintiff, the Government, acted in a frivolous or vexatious manner or brought the suit for purposes of harassment. . . .

Since the amendment is intended to apply solely to prevailing defendants in tax cases, the courts would be guided by well-settled judicial standards in the exercise of their discretionary authority to make fee awards to defendants. These standards are discussed in the Senate report on S.2278. They are discussed with greater detail in the House report on its companion bill. In general, the taxpayer would have to show bad faith on the part of the Government to bringing suit against him in order for fees to be allowed.

The courts have articulated the policy reasons for utilizing a stricter test in awarding fees to prevailing defendants than to prevailing plaintiffs, and these apply equally in tax cases and in actions brought to enforce the civil rights laws. Awarding fees to prevailing defendants is intended to protect parties from being harassed by unjustifiable lawsuits. It is not, however, intended to deter plaintiffs from seeking to enforce the protections afforded by our civil rights laws, or in this instance to deter the Government from instituting legitimate tax cases by threatening it with the prospect of having to pay the defendant's counsel fees should it lose. Were Congress or the courts to provide otherwise, it would have a substantial chilling effect on the bringing of genuinely meritorious actions. I am sure that none of us would want to inhibit responsible lawsuits brought by the United States to enforce the tax laws of our country.

It should be clear, then, that a provision authorizing fee awards in tax cases has a fundamentally different purpose from one authorizing awards in lawsuits brought by private citizens to enforce the protections of our civil rights laws. In enacting the basic civil rights attorneys sic fees awards bill, Congress clearly intends to facilitate and to encourage the bringing of actions to enforce the protections of the civil rights laws. By authorizing awards of fees to prevailing defendants in cases brought under the Internal Revenue Code, however, Congress merely intends to protect citizens from becoming victims of frivilous sic or otherwise unwarranted lawsuits. Enactment of this amendment should in no way be understood as implying that Congress intends to discourage the Government from initiating legitimate lawsuits under the tax laws emphasis added.

After passage by the Senate of S.2278 with the Allen amendment, the House on October 1, 1976, then proceeded to consider the bill. Representative Drinan, who acted as sponsor of S.2278 in the House, was quite explicit in his view that the bill would not apply to a situation such as is before the court in the present case.⁸

The Allen amendment would allow the prevailing party to recover its counsel fees in any civil action brought by the United States to enforce the Internal Revenue Code. It would not apply to actions instituted against the Government by the taxpayer. Since S.2278 does not allow the U.S. Government to recover its fees under any circumstances, the effect of the Allen amendment is to permit prevailing defendants in such cases to recover their attorney fees if they satisfy the criteria generally applicable under the bill to prevailing defendants, which I will discuss later at greater length.

Briefly, under settled judicial standards, prevailing defendants would recover their attorney fees only if they could prove that the United States brought the action to harass them, or if the suit is frivolous and vexatious emphasis added.

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