Ashburn v. U.S.

• Decision Date: 28 August 1984
• Docket Number: No. 83-7467,83-7467
• Citation: 740 F.2d 843
• Parties: -641, 84-2 USTC P 9761 Billy H. ASHBURN and Faye F. Ashburn, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 843

740 F.2d 843

55 A.F.T.R.2d 85-641, 84-2 USTC P 9761

Billy H. ASHBURN and Faye F. Ashburn, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.

No. 83-7467.

United States Court of Appeals, Eleventh Circuit.

Aug. 28, 1984.

Frank W. Donaldson, U.S. Atty., Caryl P. Privett, Asst. U.S. Atty., Birmingham, Ala., Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Chief, Appellate Section, Gilbert S. Rothenberg, Terry L. Fredricks, Tax Division, Dept. of Justice, Washington, D.C., for defendant-appellant.

Norman W. Harris, Decatur, Ala., for plaintiffs-appellees.

Appeal from the United States District Court for the Northern District of Alabama.

Before KRAVITCH and HATCHETT, Circuit Judges, and TUTTLE, Senior Circuit Judge.

TUTTLE, Senior Circuit Judge:

This is an appeal by the defendant United States from a judgment entered by the United States District Court for the Northern District of Alabama awarding plaintiffs Billy H. Ashburn and Faye F. Ashburn $23,330.17 in attorneys' fees and other expenses under the Equal Access to Justice Act ("EAJA"). We hold that the plaintiffs are not entitled to attorneys' fees and other expenses. Therefore, we reverse.

I. BACKGROUND

In April, 1975, Billy H. Ashburn ("Billy") and James C. Ashburn ("James"), who are brothers, owned approximately 30% and 70% respectively of the outstanding shares of stock in Pin Palace Lanes, Inc. ("Pin Palace"). Pin Palace, a Subchapter S corporation, owned and operated a bowling alley. The Ashburns decided to sell the business and assets of Pin Palace. To complete the sale, Billy established a trust for the benefit of his children, and James established a trust for the benefit of his children. Each appointed Central Bank of Alabama, N.A., ("Central Bank") as trustee. Billy and James then sold all of their stock in Pin Palace to the trusts for $870,000.

After Central Bank acquired all of the stock of Pin Palace, the board of directors of Pin Palace decided to liquidate and dissolve the corporation under section 337 of the Internal Revenue Code of 1954 ("the Code"), which requires that the assets be sold or distributed within the period of one year. Immediately after the adoption of the plan of liquidation, all of the assets of Pin Palace were distributed proportionately to Central Bank, as trustee of the respective Ashburn trusts, with the exception of inventories of alcoholic beverages and snack foods, which were sold prior to the distribution of assets to the trustee.

Central Bank then sold all of the assets (other than the cash) that the trusts had received for $900,000. Those assets consisted of .76 acre of land the trusts had acquired from Billy and James, 4.13 acres of real property previously owned by Pin Palace, a building and land improvements, and equipment that had been used in the bowling business.

Pin Palace notified the Internal Revenue Service ("the Service") that two trusts had acquired all of its stock. The Service wrote Pin Palace that its election to be treated as a Subchapter S corporation was terminated as of September 1, 1974.

On their 1975 individual income tax returns, Billy and James elected to report their gain on the sale of Pin Palace stock by the installment method of accounting authorized by section 453 of the Code. Consistent with this method, the Ashburns reported the gain attributable to each installment payment in the year in which the installment payment was received.

Pin Palace filed its corporate income tax return for the fiscal year ending on August 31, 1975. The return reflected tax liability of $24,909. The corporation did not report any of the gain or loss it realized on the disposition of its assets. Within twelve months of the date Pin Palace adopted the plan of liquidation, the corporation was dissolved in accordance with state law.

In 1977, the Service audited the Ashburns' 1975 federal income tax returns and Pin Palace's federal corporate income tax return. As a result of its examination, the Service issued deficiency notices against the Ashburns and against the two trusts, asserting three inconsistent positions.

The Service's primary position was that the sale of the Pin Palace stock to the two trusts should be disregarded for tax purposes. Consequently, the Service determined that Pin Palace's Subchapter S election had not terminated, that the Ashburns were required to include in their individual returns for 1975 the corporate income from operations and the section 1245 gain resulting from the sale of the machinery and equipment, and that all of the gain realized on the exchange of the stock for the corporate assets resulting from liquidation had to be recognized in the year of liquidation. The Service assessed deficiencies against Billy in the amount of $77,490.88 and against James in the amount of $252,223.43.

The Service's second position was to treat the transfer of the stock to the trusts as valid. As a consequence, it determined that the Subchapter S status of the corporation was terminated and that the sales of stock qualified for installment sale reporting. Under this alternative, however, it determined that Pin Palace had failed to report the section 1245 gain realized upon the sale of the machinery and equipment. Consequently, it issued deficiency notices to Central Bank, as trustee of the respective trusts, finding that the bank was liable for the taxes owed by Pin Palace as a result of having received the corporation's assets. Under the third position, the Service determined that the Ashburns were liable as transferees for the taxes Pin Palace failed to report.

To resolve the controversy, the Ashburns and the Service agreed that Billy would pay the assessment against him in the amount of $77,490.88, plus penalties and interest. Billy would then file a claim for refund, and upon its denial, bring suit for a refund. The parties further agreed that the entire controversy between Billy and James and the United States would be disposed of in accordance with the resolution of the refund suit filed by Billy.

Accordingly, Billy paid taxes, penalties, and interest of $106,604.62. Billy then filed a timely claim for refund for 1975 and after the lapse of six months without action on the part of the United States, filed suit on November 3, 1981 for refund of the entire amount paid. Once a complaint seeking a refund of taxes has been filed, the Service usually drafts a defense letter on the issues and forwards that letter, together with the relevant administrative files, to the Justice Department attorney assigned to the case. In this case, however, the Service did not send the relevant administrative files to the Justice Department until April 29, 1982, almost six months after the complaint was filed. The United States filed its answer to the complaint on January 5, 1982, prior to receipt of the files, denying that the tax, penalty, and interest were illegally assessed or collected or that plaintiffs were entitled to a refund.

On September 29, 1982, five months after it received the files and shortly before a scheduled pretrial conference, government counsel informed the district court and opposing counsel that the government's case would likely be conceded and that there was no need for a pretrial conference. Counsel for the government then sought approval of the proposed concession by the Service and the Review Section of the Department of Justice. The Justice Department notified plaintiff's counsel of its approval forty days later on November 9, 1982.

Judgment was entered March 22, 1983 in favor of plaintiffs and against the United States for $104,879.62, which was the full amount sought reduced by a prior administrative refund made on one of the protective claims for refund. On April 19, 1983, plaintiffs filed an application seeking to recover $23,330.17 in attorneys' fees and other expenses from the United States under the EAJA. Following a hearing, the district court filed its opinion and order granting the plaintiffs' application in full.

II. DISCUSSION

In reviewing the district court's decision to award fees under the EAJA, we reverse only if the district court has abused its discretion. National Treasury Employees Union v. IRS, 735 F.2d 1277, 1278 (11th Cir.1984); United States v. 2,116 Boxes of Boned Beef, 726 F.2d 1481, 1486 (10th Cir.1984); Matthews v. United States, 713 F.2d 677, 682 (11th Cir.1983); Spencer v. NLRB, 712 F.2d 539, 565 (D.C.Cir.1983), cert. denied, --- U.S. ----, 104 S.Ct. 1908, 80 L.Ed.2d 457 (1984); Hoang Ha v. Schweiker, 707 F.2d 1104, 1105 (9th Cir.1983); Knights of the Ku Klux Klan v. East Baton Rouge, 679 F.2d 64, 68-69 (5th Cir. Unit A 1982). The EAJA provides:

[A] court shall award to a prevailing party other than the United States fees and other expenses ... incurred by that party in any civil action ... 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.

28 U.S.C. Sec. 2412(d)(1)(A) (emphasis added). The issue before us is whether the government's position was substantially justified within the meaning of the EAJA. If it was substantially justified, plaintiffs are not entitled to attorneys' fees. To resolve this issue, we must answer two questions: the meaning of "the position of the United States," and the meaning of "substantially justified," as used in section 2412(d)(1)(A) of the EAJA.

A. The Position of the United States

The first issue is whether "the position of the United States" refers to the position taken by the government during litigation (the "litigation position" theory) or to the position taken by the agency on the underlying action before litigation (the "underlying action" theory). ¹ The district court found that the "position of the United States" requires an examination of the underlying conduct of the...