Hanson v. C.I.R.

• Decision Date: 26 October 1992
• Docket Number: No. 91-5060,91-5060
• Parties: -5990, 92-2 USTC P 50,554 Bruce HANSON and Irene C. Hanson, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1150

975 F.2d 1150

70 A.F.T.R.2d 92-5990, 92-2 USTC P 50,554

Bruce HANSON and Irene C. Hanson, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 91-5060.

United States Court of Appeals, Fifth Circuit.

Oct. 26, 1992.

Rehearing Denied Jan. 29, 1993.

Bruce Hanson and Irene C. Hanson, pro se.

Gary R. Allen, Chief, Edward T. Perelmuter, Kenneth L. Green, Appellate Section, Abraham N.M. Shashy, Jr., Chief Counsel, I.R.S., Shirley D. Peterson, Asst. Atty. Gen., Tax Div., U.S. Dept. of Justice, Washington, D.C., for respondent-appellee.

Appeal from the Decision of the United States Tax Court.

Before JONES and BARKSDALE, Circuit Judges and JUSTICE, ¹ District Judge.

EDITH H. JONES, Circuit Judge:

Bruce and Irene Hanson appeal an order of the Tax Court denying them litigation costs for their suit against the Internal Revenue Service. 26 U.S.C. § 7430. Because the Tax Court abused its discretion in denying those costs, we reverse.

I.

The Hansons provoked trouble with the IRS some fourteen years ago, when Bruce Hanson submitted a tax return for the year 1977 on which he objected to the form's questions. Hanson then sued the Commissioner in federal district court, seeking to invalidate the nation's tax system as unconstitutional. The district court dismissed the suit and this Court affirmed the dismissal in December 1979. Subsequently, Hanson was convicted of willfully failing to file a return for 1977. In March 1980, the Hansons at last filed a genuine joint return for 1977. The return disclosed wages of $37,768.71, other income, employee business and itemized deductions, and $9.50 in federal income tax withheld. The Hansons paid the balance due to the IRS.

Next began the proceedings that led directly to the present controversy over whether the Hansons should get their litigation costs. On October 13, 1988, the Commissioner issued a notice of deficiency that claimed the Hansons still owed $9,245.90 in income tax for the year 1977. The notice also alleged that the Hansons owed additions to tax totalling $2,639.73 under 26 U.S.C. §§ 6653(b) and 6654 for fraud.

On December 27, 1988, the Hansons, proceeding without an attorney, filed a petition for redetermination of the deficiency and additions to tax in the United States Tax Court. In their petition, the Hansons argued that the deficiency assessment was barred by the statute of limitations for collection of a tax because the IRS issued it more than three years after they filed their joint return in 1980. Two months later, the Commissioner responded in his answer that the statute of limitations had not run because of the asserted fraud penalty. The Hansons filed separate replies to the Commissioner's answer on April 10, 1989. Each reply was two pages long, largely unremarkable, but noted that the IRS had not alleged fraud with respect to the 1977 return filed in 1980.

The Hansons next filed brief motions for summary judgment accompanied by legal memoranda and numerous exhibits, primarily relating to the Hansons' earlier attempt to invalidate the tax system. The Commissioner objected to summary judgment and moved to recover damages totalling $10,000 under 26 U.S.C. § 6673, claiming that the Hansons' position was "frivolous." Meanwhile, the Commissioner sought to file an amended answer. The Tax Court scheduled a hearing on the various motions to take place in Washington, D.C. on August 16, 1989. The Hansons asked that the hearing take place in Dallas, Texas, where they live. The Tax Court accordingly rescheduled the hearing for December 7, 1989, in Dallas.

On September 5, 1989, the Hansons filed a request that the Commissioner respond to 66 separate admissions. On October 2 the Commissioner filed a motion for protective order. The Tax Court granted the motion ten days later "to preclude petitioners from requesting information that was irrelevant or available to the public." Order and Decision of Tax Court at 4.

Three days before the scheduled December 7 hearing, the IRS conceded the case to the Hansons. The parties entered a settlement that stipulated that: 1) the Commissioner's notice of deficiency was untimely, 2) the Hansons did not owe more income tax for 1977, 3) the Hansons did not owe additional tax under §§ 6653(b) or 6654, and 4) the Hansons did not owe any damages for their conduct of the litigation.

On December 12, 1989, the Hansons moved to recover litigation expenses of $1,694.53, including a filing fee, electronic legal research costs, postage, and copying and travel expenses. The Commissioner objected to an award of fees. From the Tax Court's denial of the petitioners' request, they have timely appealed.

II.

The petitioners seek to have their 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) ("TAMRA"). 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." § 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." § 7430(c)(4)(A)(ii)(I) and (II). Finally, the litigant must also have exhausted the administrative remedies available within the Internal Revenue Service. § 7430(b)(1).

The IRS concedes that the Hansons substantially prevailed in the underlying litigation and exhausted all administrative remedies available within the IRS. The sole issue on appeal is whether the position of the United States was "substantially justified." ² We review the Tax Court's determination on the issue of substantial justification for abuse of discretion. Heasley v. Commissioner, 967 F.2d 116, 120 (5th Cir.1992), citing Pierce v. Underwood, 487 U.S. 552, 557-63, 108 S.Ct. 2541, 2546-49, 101 L.Ed.2d 490 (1988) (requiring abuse of discretion review for analogous provision of the Equal Access to Justice Act).

We first examine the meaning of "substantial justification." Congress amended § 7430 in 1988 in part to bring its language more in line with that of the Equal Access to Justice Act, 28 U.S.C. § 2412 (EAJA). Sen.Rep. No. 100-445, in 1988 U.S.Code Cong. & Admin.News 4515, 4893. Like § 7430, the EAJA allows courts to award litigation costs to a prevailing party unless "the position of the United States was substantially justified." Compare 28 U.S.C. § 2412(d)(1)(A) with § 7430(c)(4)(A)(i). This court has previously drawn on a longer experience with the EAJA to construe analogous provisions of § 7430. Heasley, 967 F.2d at 120 (substantial justification); Powell v. Commissioner, 891 F.2d 1167, 1170 (5th Cir.1990) (awarding fees for fee litigation). We do so again.

Substantially justified means " 'justified in substance or in the main'--that is, justified to a degree that could satisfy a reasonable person." Pierce, 487 U.S. at 565, 108 S.Ct. at 2550 (interpreting substantial justification under the EAJA); see also Heasley, 967 F.2d at 120. It demands that the government's position have a "reasonable basis both in law and fact." Pierce, 487 U.S. at 565, 108 S.Ct. at 2550. It means more than that the government's position was "merely undeserving of sanctions for frivolousness." Id. For example, it is not as lenient as the standard presently governing fee awards in Title VII cases. Christianburg Garment Co. v. EEOC, 434 U.S. 412, 420-21, 98 S.Ct. 694, 699-700, 54 L.Ed.2d 648 (1978) (plaintiff avoids award by showing that the case was nonfrivolous, that is, having some merit or foundation). And although the fact that the government lost in the underlying litigation does not compel an award of costs, the outcome of the lawsuit remains a factor to be considered. Estate of Perry v. Commissioner, 931 F.2d 1044, 1046 (5th Cir.1991); see also S & H Riggers and Erectors, Inc. v. Occupational Safety & Health Review Commission, 672 F.2d 426, 430 (5th Cir.1982) (reviewing legislative history of substantial justification under EAJA). Together with relevant caselaw, these standards may be applied to the facts of this case.

The Internal Revenue Code provides that "the amount of [any] tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not the return was filed on or after the date prescribed)." I.R.C. § 6501(a). However, "[i]n the case of a false or fraudulent return with the intent to evade the tax, the tax may be assessed ... at any time." I.R.C. § 6501(c)(1). Thus, the three-year statutory limit does not apply to fraudulent returns.

The Hansons filed their joint return for 1977 in March 1980. The IRS had three years from that time to challenge the return. The Commissioner issued his notice of deficiency in October 1988, almost six years after the statute of limitations had run. When the Hansons pointed out in their petition that the statute of limitations barred the assessment, the government responded that the statute of limitations did not apply because the Hansons were guilty of fraud. However, at no time did the government allege that the return filed in 1980 was fraudulent, a fact that the Hansons noted in their reply to the government's answer. Bruce Hanson did file a protester document, which, combined with the filing of false W-4 forms (withholding $9.50 on taxable income of over $37,000), may have reflected a willful attempt to evade income tax. These documents were not a return, however, subsequently, the Hansons filed a joint return not infected by fraud. In these circumstances, the statute of limitations was applicable, and barred the assessment. Badaracco v. Commissioner, 464 U.S. 386, 404, 104 S.Ct. 756, 767, 78 L.Ed.2d 549 (1984); see also Rev.Rul. 79-178, 1979-1 C.B. 435.

During the litigation, the Hansons repeatedly called the...