Kreimes v. Department of Treasury, 84-3072

• Citation: 764 F.2d 1186
• Decision Date: 18 June 1985
• Docket Number: No. 84-3072,84-3072
• Parties: -5352 Robert KREIMES; Joan E. Kreimes, Plaintiffs-Appellees, v. DEPARTMENT OF TREASURY, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 1186

764 F.2d 1186

56 A.F.T.R.2d 85-5352

Robert KREIMES; Joan E. Kreimes, Plaintiffs-Appellees, v. DEPARTMENT OF TREASURY, Defendant-Appellant.

No. 84-3072.

United States Court of Appeals, Sixth Circuit.

Argued Jan. 10, 1985.

Decided June 18, 1985.

Patrick J. Foley, Jason P. Green, Tax Div., Dept. of Justice, Glenn L. Archer, Michael L. Paup, Gilbert S. Rothenberg, Bruce R. Ellisen, argued, Washington, D.C., for defendant-appellant.

Dennis E. Murray, argued, Murray & Murray Co., Sandusky, Ohio, for plaintiffs-appellees.

Before MARTIN and KRUPANSKY, Circuit Judges, and CELEBREZZE, Senior Circuit Judge.

CELEBREZZE, Senior Circuit Judge. ¹

In this tax refund case, the government appeals the award of attorney's fees to plaintiffs, Robert and Joan Kreimes, pursuant to the Equal Access to Justice Act, 28 U.S.C. Sec. 2412(d) (1982). The government contends that the plaintiffs are not entitled to attorney's fees because they were not the "prevailing party" under Section 2412(d) and that, if they were the prevailing party, the government's position in the litigation was "substantially justified." The government further argues that even if an award of attorney's fees was proper, the amount awarded should be reduced to reflect plaintiffs' limited success in the litigation and to exclude any award of attorney's fees for administrative proceedings.

I.

The Kreimeses live in Sandusky, Ohio on a peninsula that juts into Lake Erie. In June and November 1972, storms on the lake damaged their property and they claimed a casualty loss of $1,570 on their 1972 tax return as attributable to these storms. In March 1973, another storm struck causing further damage to the Kreimeses' house and land. Because the region was declared a federal disaster area, the Kreimeses became eligible for a Small Business Administration loan to make repairs and applied for such a loan in the amount of $13,165. The Small Business Administration, however, only granted the Kreimeses $2,000 for repairs. The loan was subsequently forgiven by the Small Business Administration.

On their 1973 tax return, the Kreimeses claimed a casualty loss deduction of $27,725 attributable to the March 1973 storm pursuant to I.R.C. Sec. 165 (1982). ² The Kreimeses apparently relied on a real estate appraiser's report that valued their loss at over $30,000. The Internal Revenue Service, however, disallowed the deduction. The Kreimeses paid the resulting tax deficiency and filed an action in district court seeking recovery of the tax paid plus interest.

The case was tried before a magistrate, by consent of the parties, with a jury. ³ The jury found that the Kreimeses were entitled to a casualty loss deduction of $8,500 for the year 1973. The Kreimeses subsequently moved for judgment notwithstanding the verdict and for attorney's fees under the Equal Access to Justice Act, 28 U.S.C. Sec. 2412(d)(1)(A) (1982). The magistrate denied the motion for judgment notwithstanding the verdict but granted the plaintiffs attorney's fees in the amount of $9,825. The government appeals from the award of attorney's fees.

II.

Resolution of this case depends on our interpretation of 28 U.S.C. Sec. 2412(d)(1)(A) (1982) which provides that "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 ... unless the court finds that the position of the United States was substantially justified." (emphasis added). The government maintains that it was the prevailing party in the case because the jury's verdict was closer to its position than the Kreimeses'. Further, the government contends that its litigating position was substantially justified. We shall consider each of these arguments in turn.

A.

A plaintiff is a prevailing party under the Equal Access to Justice Act if he " 'succeed[s] on any significant issue in litigation which achieves some of the benefit the part[y] sought in bringing suit.' " Hensley v. Eckerhart, 461 U.S. 424, 433 103 S.Ct. 1933, 1939, 76 L.Ed.2d 40 (1983) (quoting Nadeau v. Helgemoe, 581 F.2d 275, 278-79 (1st Cir.1978)); Omaha Tribe of Nebraska v. Swanson, 736 F.2d 1218, 1220-21 (8th Cir.1984); Austin v. Department of Commerce, 742 F.2d 1417, 1419 (Fed.Cir.1984). The central issue in this case concerns the amount of deductible loss the Kreimeses incurred due to the 1973 storm. ⁴ Consequently, this is simply a tax valuation case of the kind which frequently confronts the tax court, the district courts, and this court. See e.g., Estate of Kaplin v. Commissioner, 748 F.2d 1109 (6th Cir.1984). Thus, we must now determine what constitutes succeeding on a significant issue in a tax valuation case.

This is an issue of first impression in the tax context. A number of cases in the condemnation area, however, are instructive. In these cases, the dispute is over the amount of compensation which the government must pay to acquire land through eminent domain. The government has frequently deposited a sum which the plaintiff claims is insufficient. As a result, the issue for the jury is simply determining the value of the property; hence, they are analogous to the present type of case.

Two of the condemnation cases have held that the landowner is the prevailing party if he wins "far more than the government had offered," United States v. 329.73 Acres of Land, Situated in Grenada and Yalobusha Counties, State of Mississippi, 704 F.2d 800, 809 (5th Cir.1983) (en banc), or an award "substantially greater than the government's deposit," United States v. 101.80 Acres of Land, More or Less, in Idaho County, Idaho, 716 F.2d 714, 723 (9th Cir.1983). In Grenada County, the government had only offered $6,350 for a tract of land, and the jury awarded $48,260, the exact amount that the landowner was seeking. Grenada County, 704 F.2d at 801 n. 1. In Idaho County, the government had deposited $12,162.92 and $40,000 for two tracts of land and the jury awarded the landowners $22,500 and $144,600, respectively. ⁵ Idaho County, 716 F.2d at 716-17. Both courts found on the facts that the landowners had prevailed. Grenada County, 704 F.2d at 813 (implied); Idaho County, 716 F.2d at 726.

A more recent condemnation case, however, has rejected this approach and held that the landowner is a prevailing party if he wins any amount more than what the government offered. United States v. 341.45 Acres of Land, More or Less, Located in the County of St. Louis, State of Minnesota, 751 F.2d 924, 938 (8th Cir.1984). ⁶ In St. Louis County, the government had offered $34,000, $6,000, and $2,200 for three tracts of land; the jury found that the tracts were worth $204,500, $36,460, and $25,500, respectively. ⁷ St. Louis County, 751 F.2d at 927. The Eighth Circuit concluded the landowners were the prevailing parties simply because they won more than the government offered.

In adopting this rule, the St. Louis County court explicitly rejected the "substantially greater" and "far more" tests of Grenada County and Idaho County. The Court, citing a dissent in Grenada County, ⁸ reasoned that no principled way exists to make a determination as to who is a prevailing party based upon the size of the award. St. Louis County, 751 F.2d at 938. Because of this dilemma, the Eighth Circuit adopted the bright-line test that a party prevails if they win any amount more than what the government has offered.

The reasoning of the St. Louis County court is sound. The test adopted in Grenada County and Idaho County is plainly too vague. District courts will have difficulty in deciding whether a plaintiff has won "substantially" or "far" more than the government offered. Inconsistent adjudications will certainly be the result of such an indeterminate rule and, consequently, needless appeals will follow. See Hensley v. Eckerhart, 461 U.S. 424, 437, 103 S.Ct. 1933, 1941, 76 L.Ed.2d 40 (1983) ("request for attorney's fees should not result in a second major litigation"). Further, the standard espoused by the Fifth and the Ninth Circuits is not conducive to settlements. Since entering into an unfavorable settlement may result in the imposition of attorney's fees, see Citizens Coalition for Block Grant Compliance, Inc. v. City of Euclid, 717 F.2d 964, 966 (6th Cir.1983), neither side will want to accept an amount that is closer to the other side's position. In cases like this in which the issues are purely factual, we do not want to inhibit the settlement process.

In our view, the rule adopted by the Eighth Circuit also comports with the design and purpose of the Equal Access to Justice Act. The Act is designed so that a prevailing party is not entitled to attorney's fees if the government's position was substantially justified. In deciding whether the government's position was substantially justified, the district court will examine the merits of the government's arguments and determine whether the case should have been contested. If we adopted the "substantially greater" or the "far more" test, we would in essence be evaluating the merits of the case in determining who was the prevailing party. See Grenada County, 704 F.2d at 813, 816 n. 7 (Rubin, J., dissenting).

The purpose of the Equal Access to Justice Act is to award litigants "expenses of seeking review of or defending against unreasonable government action." Grenada County, 704 F.2d at 801 (footnote omitted). Congress did not want citizens to be deterred by the expense involved in securing the vindication of their rights in civil actions and in administrative proceedings. Equal Access to Justice Act, Pub.L. No. 96-481, Sec. 202, 94 Stat. 2321, 2325 (1980). Thus, the focus of the Act is on the position of the government and not on the plaintiff's position. We therefore hold that the government's position alone should be scrutinized under the Equal Access to Justice Act; the comparative position of the taxpayer is irrelevant. ⁹ According...