Humphreys v. US

• Decision Date: 26 October 1989
• Docket Number: No. 86-1677-C.,86-1677-C.
• Citation: 723 F. Supp. 1421
• Court: U.S. District Court — District of Kansas
• Parties: F.M. HUMPHREYS, Executor of the Estate of Roy V. Shrewder, deceased, and First National Bank in Wichita, Executor of the Estate of Dorothy Berryman Shrewder, deceased, Plaintiffs, v. UNITED STATES of America, Defendant.

723 F. Supp. 1421

F.M. HUMPHREYS, Executor of the Estate of Roy V. Shrewder, deceased, and First National Bank in Wichita, Executor of the Estate of Dorothy Berryman Shrewder, deceased, Plaintiffs, v. UNITED STATES of America, Defendant.

No. 86-1677-C.

United States District Court, D. Kansas.

October 26, 1989.

Jack D. Flesher, Bever Dye Mustard & Belin, Wichita, Kan., for plaintiffs.

Benjamin L. Burgess, Jr., U.S. Atty., Wichita, Kan., David R. House, Trial Atty., Tax Div., Washington, D.C., for defendant.

MEMORANDUM AND ORDER

CROW, District Judge.

The case comes before the court on the plaintiffs' motion for taxation and award of costs and attorney's fees pursuant to 26 U.S.C. § 7430 (1986). Plaintiffs filed this action on August 12, 1986, seeking to recover claimed refunds totalling $160,697 with interest which the Internal Revenue Service (IRS) had disallowed. On August 21, 1987, the parties filed a stipulation for entry of judgment against the defendant in the amount of $140,016 with interest. Plaintiffs thereafter filed their motion for costs and attorney's fees.

Section 7430 gives a federal court the discretion to award reasonable litigation costs to the prevailing party and against the United States in an action before it if certain conditions are satisfied. Feinberg v. United States, 628 F.Supp. 12, 13 (E.D. Pa.1985). In as much as the statute constitutes a waiver of sovereign immunity, it must be strictly construed. Ewing and Thomas, P.A. v. Heye, 803 F.2d 613, 616 (11th Cir.1986); see U.S. v. Charles Gyurman Land & Cattle Co., 836 F.2d 480, 483 (10th Cir.1987). In a proceeding commenced after December 31, 1985, a taxpayer may be awarded litigation costs only if it is proven that (1) the taxpayer "has substantially prevailed" with respect to either the amount in controversy or the most significant issue(s) presented, 26 U.S.C. § 7430(c)(2)(A)(ii); (2) "the position of the United States in the civil proceeding was not substantially justified," 26 U.S.C. § 7430(c)(2)(A)(i); and (3) the taxpayer has exhausted the administrative remedies available with the IRS, 26 U.S.C. § 7430(b)(1). The United States does not dispute that plaintiffs have satisfied conditions (1) and (3), but it does disagree with its position being unreasonable or without substantial justification.

What constitutes the position of the United States is defined by statute as follows:

The term "position of the United States" includes —

(A) the position taken by the United States in the civil proceeding, and

(B) any administrative action or inaction by the District Counsel of the Internal Revenue Service (and all subsequent administrative action or inaction) upon which such proceeding is based.

26 U.S.C. § 7430(c)(4). This definition was added in 1986 and applies to any amounts paid after September 30, 1986, in proceedings or civil actions commenced after December 31, 1985. It applies to the case sub judice.

Plaintiffs construe the above definition to mean that the position of the United States "includes" the administrative action or inaction of the IRS, and cite as authority, Powell v. C.I.R., 791 F.2d 385 (5th Cir. 1986), and Plowman v. U.S., 659 F.Supp. 34 (W.D.Okl.1986). Working from that construction, plaintiffs argue the Service Center lacked justification in failing to process their refund claims, in repeatedly requesting copies of claims and returns when multiple copies had already been submitted, and in disallowing their claims for plaintiffs' refusal to make and send even more copies. Deflecting this effective attack upon the IRS' nonfeasance, defendant argues administrative action or inaction below the level of the District Counsel to the IRS is not encompassed within its "position" as defined by § 7430. The issue for this court to decide is whether the "position of the United States," as used and defined in the 1986 amendments to § 7430, reaches the prelitigation actions or inactions of the IRS occurring prior to the involvement of the District Counsel. The court believes the Tenth Circuit would not adopt the broad construction of § 7430 proposed by plaintiffs.

Prior to the 1986 amendments, § 7430 did not define the term, "position of the United States in the civil proceeding." Circuits were divided over the construction of this provision. The Eighth, Tenth, Eleventh and District of Columbia Circuits have held that the position of the United States is determined by examining only the government's in-court litigating position. Wickert v. C.I.R., 842 F.2d 1005, 1008 (8th Cir.1988); Ewing and Thomas, P.A. v. Heye, 803 F.2d 613, 615-16 (11th Cir.1986); Baker v. Commissioner of Internal Revenue, 787 F.2d 637, 641-42 (D.C.Cir.1986); United States v. Balanced Financial Management, 769 F.2d 1440, 1450 (10th Cir.1985). On the other hand, the First, Fifth, Sixth and Ninth Circuits have taken a less restricted approach holding that the government's position includes that espoused in its prelitigation administrative proceedings. Comer v. C.I.R., 856 F.2d 775, 779-80 (6th Cir.1988); Sliwa v. C.I.R., 839 F.2d 602, 606-607 (9th Cir.1988); Powell v. C.I.R., 791 F.2d 385, 388-92 (5th Cir.1986); Kaufman v. Egger, 758 F.2d 1, 3-4 (1st Cir.1985).

The definition added in 1986 has not eliminated the division between the circuits. In Weiss v. C.I.R., 850 F.2d 111 (2nd Cir.1988), the Second Circuit placed itself in the thick of the disagreement by adopting the expansive interpretation preferred by the First, Fifth, Sixth and Ninth Circuits. After noting the absence of a circuit court opinion interpreting § 7430 as amended in 1986, the Second Circuit compared the 1982 and 1986 provisions finding no material difference as to what circumstances constitute the position of the United States. 850 F.2d at 115-16. The court was persuaded by the Fifth Circuit's reasoning in Powell and the apparent congressional intent to bring § 7430 in concordance with the parallel terms of the Equal Access to Justice Act (EAJA), 28 U.S.C. § 2412. 850 F.2d at 116. Observing that the EAJA reached agency actions, the Second Circuit concluded:

Except for the words "District Counsel," the language of the 1986 enactment of § 7430(c)(4)(B) is identical to the formulation used by the EAJA in Title 28 U.S.C. § 2412(d)(2)(D). This further suggests to us that agency action that directly results in litigation, such as the Commissioner's issuance of a deficiency notice in this case, should be considered in assessing the government's conduct. (citation omitted).

850 F.2d at 116. This quoted portion is the only instance that the Second Circuit specifically referred to the 1986 statutory definition for "position of the United States." Although noting that § 7430 included the language "District Counsel" and that similar language is not found in the EAJA, the Second Circuit placed no significance upon it or upon the obvious congressional intent behind it.

Since the Weiss decision, another circuit court has construed § 7430 as amended in 1986 and reached a different conclusion. The Fifth Circuit in Sher v. C.I.R., 861 F.2d 131, 133-34 (5th Cir.1988), implicitly limited its earlier decision in Powell to construe only the 1982 version of § 7430, and as to the 1986 amended version of § 7430, it expressly held:

In reviewing a taxpayer's claim for attorney's fees, courts should examine the position taken by the United States after the District Counsel became involved. This result is consistent with a report of the Joint Committee on Taxation, which stated that "prelitigation actions or inaction by the IRS prior to the involvement of the District Counsel are not eligible as components of any attorney's fee award." Staff of the Joint Committee on Taxation, 100th Cong., 1st Sess., "General Explanation of the Tax Reform Act of 1986" 1300 (Comm.Print 1986)

In passing this amendment defining "the position of the United States," Congress established that, in determining whether the position of the IRS was substantially justified, courts can only review the position taken by the IRS after the District Counsel enters the picture. (citations omitted).

861 F.2d at 134. See also Sher v. C.I.R., 89 T.C. 79 (1987), aff'd, 861 F.2d 131 (5th Cir.1988) (The Conference Report indicates that the agreement reached was to limit the Senate amendments for a prelitigation agency position to the action or inaction by the District Counsel of the IRS).

The Tax Court followed its Sher decision in Gantner v. C.I.R., 92 T.C. 192 (1989), where it noted that subsequent legislative activity also buttressed its holding in Sher. Section 7430 was again amended in 1988 changing subpart (B) to now provide: "the position taken in an administrative proceeding to which subsection (a) applies as of the earlier of — (i) the date of the receipt by the taxpayer of the notice of the decision of the Internal Revenue Service Office of Appeals, or (ii) the date of the notice of deficiency." Pub.L. 100-647, § 6239, 102 Stat. 3743. In discussing this amendment, the Conference Report explained the prior law to be that the government's position began in the civil proceeding unless the IRS district counsel took an earlier position in the administrative proceedings. H.Rept. 100-1104 (Conf.) 225 (1988) (cited in Gantner v. C.I.R., 92 T.C. 192). The Gantner court noted that the 1988 amendments were prospective indicating that Congress intended them to modify existing law, rather than to clarify it. 92 T.C. 192.

Plaintiffs' reliance on Plowman v. U.S., 659 F.Supp. 34, is misplaced, as the court there did not construe or apply the 1986 amendments to § 7430. Nowhere in the Plowman decision is it expressly stated that the 1986 definition of the government's position includes the conduct of IRS personnel prior to the involvement of the District Counsel. Plowman is not persuasive authority on the issue pending here.

This court is convinced the Fifth Circuit's decision in Sher and the Tax Court's decision in Gantner are better reasoned...