First Interstate Bank of Cal. v. Purewell Inv., Inc.

• Decision Date: 13 December 1995
• Docket Number: No. 94-15821,94-15821
• Citation: 76 F.3d 386
• Parties: -935, 96-1 USTC P 50,129 NOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel. FIRST INTERSTATE BANK OF CALIFORNIA, a California banking corporation, Plaintiff, v. PUREWELL INVESTMENT, INC. Defendant. UNITED STATES of America, Counter-Defendant-Appellant, v. CHAMBERLAIN INVESTMENT LTD, Cross-claim-defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 386

76 F.3d 386

77 A.F.T.R.2d 96-935, 96-1 USTC P 50,129

NOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel.

FIRST INTERSTATE BANK OF CALIFORNIA, a California banking

corporation, Plaintiff, v. PUREWELL INVESTMENT, INC. Defendant.

UNITED STATES of America, Counter-Defendant-Appellant, v. CHAMBERLAIN INVESTMENT LTD, Cross-claim-defendant-Appellee.

No. 94-15821.

United States Court of Appeals, Ninth Circuit.

Submitted Dec. 13, 1995. ^*

Decided Jan. 26, 1996.

Before: ALDISERT ^**, FARRIS and RYMER, Circuit Judges.

MEMORANDUM ^***

This appeal by the government, through the Internal Revenue Service, requires us to decide whether the district court properly exercised its discretion in granting appellee Chamberlain Investment Ltd.'s motion for costs and attorney's fees requested under the Internal Revenue Code, 26 U.S.C. § 7430, which allows the recovery of reasonable litigation costs by a prevailing party in a tax case. If we agree with the district court on the allowance of fees, we must then decide if the award was excessive. We conclude that there was no improper exercise of discretion and will affirm the judgment.

The district court had jurisdiction pursuant to 26 U.S.C. § 7609(h). We have jurisdiction under 26 U.S.C. § 7609(h) and 28 U.S.C. § 1291. The appeal was timely filed under Rule 4(a), Federal Rules of Appellate Procedure.

The decision whether to award fees is reviewed for an abuse of discretion. United States v. 87 Skyline Terrace, 26 F.3d 923, 927 (9th Cir.1994). Accordingly, this standard also governs review of the court's determination of whether the IRS's position was substantially justified. See Pierce v. Underwood, 487 U.S. 552, 557-563 (1988) (requiring abuse of discretion review on this point for the analogous EAJA "substantially justified" standard); Awmiller v. United States, 1 F.3d 930 (9th Cir.1993). Likewise, the amount of fees is reviewed for an abuse of discretion. Brown v. Sullivan, 916 F.2d 492, 495 (9th Cir.1990). A district court abuses its discretion when its decision is based on an erroneous conclusion of law or when the record contains no evidence on which it rationally could have based that decision. Williams v. Bowen, 966 F.2d 1259, 1260 (9th Cir.1992). A reversal requires a definite and firm conviction that a clear error of judgment was committed. TKB Int'l, Inc. v. United States, 995 F.2d 1460, 1468 (9th Cir.1993).

I.

The law suit grows out of the IRS efforts to collect delinquent federal income tax assessments made against Anthony T.C. Gaw, totaling more than $28 million for the tax years 1985-1987. Gaw is the controlling shareholder of Pioneer Investments Holdings, Ltd., which has two wholly-owned Liberian subsidiaries, Ryan Investments, Ltd., and Cater Investment, Ltd. The Appellee, Chamberlain, is another Liberian corporation and a wholly-owned subsidiary of Asia Insurance Group, which, in turn, is a wholly-owned subsidiary of Asia Financial Holdings.

Gaw had the attention of both the IRS and the Office of Thrift Supervision (OTS). An IRS auditor concluded that Gaw, together with Ryan Investments and Cater Investment had acquired 28% of the stock of Golden Coin Savings & Loan Association. Similarly, an OTS investigation concluded that Gaw, directly and indirectly through the use of third parties, including Chamberlain, had acquired 35% of the stock of Golden Coin, violating the 10% limit on ownership imposed by federal regulations. In November 1991, Gaw transferred the shares he held individually to Purewell Investment, Inc. of Liberia.

In 1991, United Savings Bank made a bid to buy out the shareholders of Golden Coin. The bid of $38.48 per share was approved by OTS, and United Savings transferred the purchase price to Plaintiff First Interstate Bank of California as escrow holder for the transaction. Gaw represented Chamberlain Investment, Cater Investment, Purewell Investment of Liberia and Ryan Investments in the stock sale transaction, and made arrangements to have the sale proceeds immediately transferred by wire to a Hong Kong bank when the funds were released from escrow.

Concurrent with the sale, on April 24, 1992, the California Department of Savings and Loan issued an order prohibiting the voting of stock held by Chamberlain Investment, Cater Investment, Purewell Investments of Liberia, and Ryan Investments. The California agency determined that Gaw "directly or indirectly controls the shares owned by [those] entities," and thus was an unregistered Savings and Loan Holding Company, in violation of state law.

In May 1992, United Savings merged with Golden Coin, and Golden Coin ceased to exist. Before First Interstate disbursed the money to the shareholders, the IRS levied upon the money in satisfaction of a tax obligation owed by Gaw.

On June 26, 1992, First Interstate Bank commenced this interpleader action, naming the investment companies and the United States as defendants.

Chamberlain Investment filed a wrongful levy cross-claim against the IRS under Section 7426. The district court ordered discovery stayed until the court could determine the sufficiency of the factual foundation for the IRS position that the other claimants held the Golden Coin stock as nominees of Gaw, i.e., whether the IRS had probable cause to connect Gaw to the Golden Coin stock held by the other claimants.

At the probable cause hearing, the IRS filed the declaration of a revenue officer, supported by several exhibits, establishing that the determination to issue the nominee levy against the escrow funds earmarked for Chamberlain Investment was based largely on information he learned concerning Gaw's plan to gain control of Golden Coin by having third parties purchase or hold blocks of stock for him, coupled with the formal finding of the California Department of Savings and Loan that Gaw controlled Chamberlain Investment's shares of Gold Coin. The district court found that "the Government has produced sufficient evidence to establish probable cause to believe that the funds interpled with the Court may be property or rights to property belonging to Gaw." The district court lifted its discovery stay and allowed the parties to commence formal discovery proceedings.

After deposing two officers of Chamberlain, the IRS conceded that Appellee was not a nominee of Gaw, and released its claim on the $239,538 claimed by Chamberlain, thereby allowing that sum to be paid out of the interpleaded funds.

Chamberlain then applied for an award of litigation costs under Section 7430, on the ground that the IRS was not substantially justified in initially taking the position that Appellee was a nominee of Gaw with respect to the stock. The district court issued an order granting the motion for an award of attorney's fees and determined that the IRS's position was not "substantially justified" under I.R.C. § 7430(c)(4)(A)(i), on the ground that the IRS never possessed "substantial evidence" to support that position.

The court held that its prior ruling that the IRS had "probable cause" to connect Gaw to the stock sale proceeds did not necessarily mean that the position was also "substantially justified." The court noted that, in finding probable cause, it drew inferences from the evidence relied upon by the IRS, without the benefit of the countervailing evidence subsequently supplied by Chamberlain. The district court further held that special factors in this case justified an award exceeding the general hourly rate ceiling imposed by I.R.C. § 7430(c)(1)(B)(ii) for the services provided by Chamberlain's lead counsel, William James. The court held that an exception to the statutory cap was called for in this case, due to counsel's tax litigation experience, including cases involving liens and levies, and the law firm's association with Chamberlain's Hong Kong counsel. The court further held that these factors were necessary in order to resolve this case efficiently. Finally, the court found no evidence establishing that James' $270-per-hour charge was disproportionately high for attorneys of like stature with offices in San Francisco that are also associated with firms in Hong Kong. Accordingly, the district court awarded Chamberlain the full amount it requested.

II.

Chamberlain sought to have its litigation costs reimbursed by the IRS under 26 U.S.C. § 7430, as amended by the Technical and Miscellaneous Revenue Act of 1988, Pub.L. No. 100-647, 102 Stat. 3342, § 6239(a). Section 7430 provides that a "prevailing party" may recover reasonable litigation costs. To qualify as a prevailing party, the tax litigant must establish that the position of the United States in the underlying litigation was not "substantially justified." 26 U.S.C. § 7430(c)(4)(A)(i). The litigant must have "substantially prevailed" on either "the amount in controversy" or "the most significant issue or set of issues presented." 26 U.S.C. § 7430(c)(4)(A)(ii)(I) and (II). Finally, the litigant must also have exhausted the administrative remedies available within the Internal Revenue Service. 26 U.S.C. § 7430(b)(1). The IRS concedes that Chamberlain Investment substantially prevailed in the...