Marre v. U.S., HP-84

• Citation: 117 F.3d 297
• Decision Date: 22 July 1997
• Docket Number: HP-84,Nos. 96-20004,96-20147,s. 96-20004
• Parties: -5523, 97-2 USTC P 50,573 Richard L. MARRE, et al., Plaintiffs, Agritech Enterprises, Inc., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. Richard L. MARRE; Agritech Enterprises, Inc., Plaintiffs-Appellees, v.NURSERY ASSOCIATES, INC., Intervenor-Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 297

117 F.3d 297

80 A.F.T.R.2d 97-5523, 97-2 USTC P 50,573

Richard L. MARRE, et al., Plaintiffs, Agritech Enterprises, Inc., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

Richard L. MARRE; Agritech Enterprises, Inc., Plaintiffs-Appellees, v. HP-84 NURSERY ASSOCIATES, INC., Intervenor-Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellant.

Nos. 96-20004, 96-20147.

United States Court of Appeals Fifth Circuit.

July 22, 1997.

Edward Dee Urquhart, Silvia Elena Hassell, Urquhart & Hassell, Houston, TX, for Plaintiffs-Appellees.

Gary R. Allen, Gilbert S. Rothenberg, Thomas J. Clark, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC, for U.S.

Douglas M. Becker, Charles McLay Craig, Gray & Becker, Austin, TX, for HP-84 Nursery Associates, Inc., Intervenor-Plaintiff-Appellant.

Appeals from the United States District Court for the Southern District of Texas.

Before KING, GARWOOD and PARKER, Circuit Judges.

GARWOOD, Circuit Judge:

Plaintiffs-appellees Richard L. Marre (Marre) and Agritech Enterprises, Inc. (Agritech), Marre's wholly owned corporation, sued the United States (government) under 26 U.S.C. § 7431 of the Internal Revenue Code for wrongful disclosure of plaintiffs' tax return information. The district court awarded statutory damages and attorneys' fees to Marre but rejected Agritech's claim for damages and attorneys' fees. Plaintiffs appealed and the government cross-appealed on the amount of attorneys' fees awarded to Marre. A panel of this Court affirmed Marre's damages award but reduced his attorneys' fees. The Court also reversed and remanded Agritech's claim for damages and attorneys' fees. On remand, the government and Agritech agreed on the amount of statutory damages. The district court awarded Agritech attorneys' fees in the amount of $55,500 and ordered the government not to set off the damages and attorneys' fees awarded to the plaintiffs against tax assessments made by the government against plaintiffs under 26 U.S.C. §§ 6700 and 6701. Further, the Court allowed HP-84 Nursery Associates (Nursery Associates), a judgment creditor of Marre, to intervene and held that Nursery Associates was entitled to fifty percent of Marre's damages and attorneys' fees. The government and Nursery Associates now appeal. We affirm in part and reverse in part.

Facts and Proceedings Below

In 1981, Marre founded Agritech, a corporation organized to construct modular solar-heated greenhouse facilities on various tracts of land in Ellis and Waller counties in Texas. Marre marketed these greenhouses to limited partnerships and individual investors as tax shelters. In early 1985, the Criminal Investigation Division of the Internal Revenue Service (IRS) began a criminal investigation of the plaintiffs' greenhouse operation. The IRS believed that the plaintiffs had marketed the solar greenhouses as a tax shelter but failed to construct completed greenhouse facilities.

During the course of the investigation, Special Agent Lindell Parrish of the IRS interviewed numerous Agritech investors, promoters, suppliers, and employees and mailed out a large number of form or "circular" letters to the Agritech investors and various suppliers. In these interviews and letters, Agent Parrish stated that Marre and Agritech were under investigation by the IRS for allegedly aiding and assisting in the filing of false tax returns in violation of 26 U.S.C. § 7206(2), and in the view of the IRS, any tax return that showed deductions or credits in connection with the Agritech tax shelter was false and fraudulent. Attached to each letter was a questionnaire that included statements that indicated Marre had been dishonest with the investors.

Marre and Agritech filed suit against the government in the district court below under 26 U.S.C. § 7431, seeking damages for wrongful disclosures of their tax return information as defined in 26 U.S.C. § 6103(b)(2), in violation of 26 U.S.C. §§ 6103(a)(1) and 6103(k)(6). Marre v. United States, No. Civ. A. H-88-1103, 1992 WL 240527 (S.D.Tex. June 22, 1992). Following a bench trial, the district court found that the IRS had made 215 unauthorized disclosures. The court determined that Marre suffered no actual damages from the disclosures and, therefore, was not entitled to an award for either compensatory or punitive damages. The court did, however, award Marre statutory damages of $1,000 per disclosure, or $215,000. The court also held that Agritech was not entitled to any damages because it had ceased doing business approximately two years before the disclosures were made; hence, the court opined, an award of damages to Agritech would amount to a double recovery for Marre. Finally, the court held that Marre, but not Agritech, was entitled under 26 U.S.C. § 7430 to recover reasonable attorneys' fees of $308,444.60 and costs of $17,738.02, for a total of $326,182.62.

Marre appealed on the amount of damages and Agritech appealed the district court's rejection of its claim for damages and attorneys' fees. The government cross-appealed on the amount of attorneys' fees awarded to Marre. On appeal, we affirmed Marre's damages award, holding that the district court did not err in denying him actual damages and that, even if punitive damages were recoverable under 26 U.S.C. § 7431(c) in the absence of actual damages, the evidence did not sufficiently support an award for punitive damages. Marre v. United States, 38 F.3d 823, 825-28 (5th Cir.1994) (Marre I ). This Court also reduced Marre's attorneys' fees award to $107,500 plus costs of $17,738.02, to reflect the actual expenses incurred under his contingency fee agreement with his attorneys. With respect to Agritech, this Court concluded that nothing in section 7431 precluded the corporation from recovering damages under that provision. We vacated that part of the district court's judgment denying damages to Agritech and remanded for reconsideration of Agritech's claim for damages and attorneys' fees. ¹

On remand, the parties agreed that Agritech was entitled to statutory damages under section 7431 of $111,000 for 111 separate acts of unauthorized disclosure of its tax return information. The parties disagreed, however, on whether Agritech was entitled to any attorneys' fees under section 7430. The district court determined that Agritech was entitled, "under the law of the case," to an award of $55,500 for its attorneys' fees. The court also held that the government could not set off the plaintiffs' damages and attorneys' fees awards against tax assessments the IRS had made against Marre and Agritech under sections 6700 and 6701 while appeal was pending in Marre I. ² Finally, the judgment required the government to pay fifty percent of Marre's damages and attorneys' fees to Nursery Associates, a creditor that had obtained a judgment and turnover order against Marre in Texas state court and that the district court had allowed to intervene.

The government now appeals, arguing that the district court erred in awarding Agritech attorneys' fees and in prohibiting the government from setting off plaintiffs' damages and attorneys' fees against their tax liabilities. Nursery Associates appeals the district court's judgment limiting its award to only fifty percent of Marre's damages and attorneys' fees and denying its request for reasonable attorneys' fees.

Discussion

I. Agritech's Attorneys' Fees

Section 7430 of the Internal Revenue Code provides that taxpayers who prevail in tax proceedings may recover their attorneys' fees incurred in such proceeding if they establish that (1) the position of the government at the time of litigation was not substantially justified; (2) the taxpayers substantially prevailed with respect to the amount in controversy or with respect to the most significant issue or set of issues presented; and (3) the taxpayers meet applicable net worth requirements. 26 U.S.C. § 7430(c)(4)(A); see also Nalle v. C.I.R., 55 F.3d 189, 191 (5th Cir.1995). ³ The burden of proving that the government was not substantially justified in its litigation position is with the taxpayers. Information Resources, Inc. v. United States, 996 F.2d 780, 786 (5th Cir.1993).

The government concedes that Marre and Agritech substantially prevailed on the most significant issues and meet the net worth requirements. The government contends, however, that the district court's award of attorneys' fees to Agritech was erroneous and should be reversed because, among other things, Agritech has failed to show that the government's position in the litigation with respect to Agritech was not "substantially justified," i.e. that it was not "justified to a degree that could satisfy a reasonable person" or had no "reasonable basis both in law and fact." Nalle, 55 F.3d at 191 (citations omitted). "In determining whether the [government's] position was not substantially justified, the question is whether the [government] acted unreasonably--that is, whether [it] knew or should have known that [its] position was invalid at the onset of the litigation." Id. (citing Bouterie v. C.I.R., 36 F.3d 1361, 1373 (5th Cir.1994)).

We review the lower court's award of attorneys' fees under section 7430 for abuse of discretion, see Wilkerson v. United States, 67 F.3d 112, 119 (5th Cir.1995), and the supporting factual findings are reviewed for clear error. Riley v. City of Jackson, Miss., 99 F.3d 757, 759 (5th Cir.1996). Review of the conclusions of law underlying an award or denial of attorneys' fees is de novo. Texas Food Indus. Ass'n v. United States Dept. of Agric., 81 F.3d 578, 580 (5th Cir.1996). This Court reviews the district court's ruling on substantial justification for abuse of discretion, and will reverse only if we have a definite and firm conviction that an error of judgment was committed. Portillo v. C.I.R., 988 F.2d 27, 28 (5th Cir.1993).

Having reviewed the record, we conclude Agritech has failed to...