Michael A. Cramer, MAI, SRPA, Inc. v. U.S.

• Decision Date: 06 February 1995
• Docket Number: No. 93-6201,93-6201
• Citation: 47 F.3d 379
• Parties: -1140, 95-1 USTC P 50,093, Unempl.Ins.Rep. (CCH) P 14391B MICHAEL A. CRAMER, MAI, SRPA, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 379

47 F.3d 379

75 A.F.T.R.2d 95-1140, 95-1 USTC P 50,093,

Unempl.Ins.Rep. (CCH) P 14391B

MICHAEL A. CRAMER, MAI, SRPA, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 93-6201.

United States Court of Appeals, Tenth Circuit.

Feb. 6, 1995.

James H. Rice, Midwest City, OK, for plaintiff-appellant.

Christine A. Grant, Tax Div., Dept. of Justice, Washington, DC (Loretta C. Argrett, Asst. Atty. Gen., and Bruce R. Ellisen, Tax Div., Dept. of Justice, Washington, DC, with her on the brief), for defendant-appellee.

Before SEYMOUR, Chief Judge, HOLLOWAY and HENRY, Circuit Judges.

HOLLOWAY, Circuit Judge.

In this tax refund case, plaintiff/appellant Michael A. Cramer, MAI, ARPA, Inc. (an Oklahoma corporation) (Cramer) appeals an order of the District Court for the Western District of Oklahoma denying Cramer's application for litigation costs pursuant to 26 U.S.C. Sec. 7430. For reasons that follow, we reverse the district court's order and remand for further proceedings.

I

In 1991 Cramer filed suit against the United States seeking a refund of employment taxes, penalties, and interest assessed against Cramer by the IRS. The company paid part of the assessment prior to filing suit. In the suit, Cramer challenged the government's contention that certain real estate appraisers retained by Cramer in the course of its business were "employees" of the company--rather than independent contractors--for employment tax purposes. See 26 U.S.C. Secs. 3102, 3111, 3301, 3402.

Shortly before Cramer filed suit against the government, a similar tax refund case involving the assessment of employment taxes for retention of real estate appraisers was filed in the Western District of Oklahoma, REAG, Inc. v. United States, No. CIV-91-1267-C. ¹ The REAG case was tried without a jury in August 1992, before the scheduled trial in this case, resulting in a judgment for the plaintiff/taxpayer REAG. The trial judge found that the real estate appraisers there were independent contractors and not employees for tax purposes; alternatively, the court concluded that even if the appraisers could be characterized as employees, REAG had a reasonable basis for not treating them as such and was therefore entitled to relief from the assessed employment taxes pursuant to the safe harbor provision in Sec. 530 of the Revenue Act of 1978, Pub.L. No. 95-600, 92 Stat. 2763, 2885. ² REAG, Inc. v. United States, 801 F.Supp. 494 (W.D.Okla.1992), appeal dismissed per stipulation, No. 92-6347 (10th Cir. Dec. 21, 1992).

The government initially appealed the district court's judgment but subsequently stipulated to the dismissal of its appeal. REAG then filed an application for litigation costs, including attorney fees, pursuant to 26 U.S.C. Sec. 7430, arguing that the government's position in the case was not substantially justified. That district judge agreed and awarded costs.

In the instant case, a stipulated judgment in favor of Cramer was entered on February 26, 1993, shortly after the verdict in REAG. On March 12, 1993, Cramer filed an application for litigation costs under Sec. 7430, arguing that "since the United States conceded this case on the basis of REAG, it has also conceded that its position here was also not substantially justified." Brief in Support of Application for Litigation Costs, App. at 31.

On March 29, 1993, the government filed a lengthy objection to Cramer's application, arguing that notwithstanding the outcome in REAG, the government's position in the present case was substantially justified. Id. at 32-57. Acknowledging that "the United States['] decision to concede this case was due largely to the fact that REAG had already been decided in the Western District of Oklahoma" (id. at 51), the government nonetheless insisted that differences between this case and REAG belied the contention that the award of litigation costs to the taxpayer in REAG required a similar award here. Id. at 51-52. Specifically, the government argued:

In REAG, the court found that the appraisers were independent contractors because the taxpayer in question did not exercise control over either the manner in which the appraisers prepared appraisals or the final form of the appraisal. REAG, 801 F.Supp. at 500. Unlike the situation in REAG, where substantially less than one percent of the appraisals were reviewed, id. at 498, in the present case Cramer made it his practice to review and sign every appraisal. In addition, REAG is further distinguishable because the REAG holding was based on [the district judge's] interpretation of the credibility of the testimony of some of the witnesses. Id. at 499. The credibility of witnesses must be determined on an individual basis and is difficult to predict prior to trial.

Id. at 51.

Three days after the filing on March 29, 1993, of the government's objection and brief, and before Cramer had an opportunity to reply to the government's submissions, the district court entered an order denying Cramer's application for litigation costs on April 1, 1993. ³ This ruling was made by a different judge who handled the instant case, not the same judge as in REAG. The April 1 order in the instant case stated:

Plaintiff's Application for Litigation Costs is DENIED; the court is not persuaded that the litigation position of the United States was [not] ⁴ substantially justified. The Court declines to award costs on the basis that this case is but an echo of REAG, Inc. v. United States, CIV-91-1267 (W.D.Okla.), in which [the district judge] awarded costs. Who knows what similarities or differences there are? [The judge in REAG ] made many detailed findings that were possible only because REAG was litigated. A similar analysis in this case is not possible because of the spare record and the manner of its termination. Movant has the burden of persuasion on the issue, which is not met either by pointing to the agreed judgment in his favor or to REAG.

Id. at 145.

On appeal, Cramer contends that the district court erred in not allowing Cramer to supplement the record with evidence pertaining to the similarity between this case and REAG and in failing to conduct an evidentiary hearing to resolve the parties' dispute in this regard. Cramer argues that "having filed an application and affidavit fulfilling the statutory prerequisites for an award under Sec. 7430, [Cramer] was entitled to an opportunity to respond to the Government's objections before having judgment entered against it on the basis of a 'sparse record' and its failure to meet a burden of persuasion imposed on it prior to its having received what was effectively the opposing party's initial pleading on the issue being decided." Brief for Appellant at 7.

II

We review a district court's denial or award of reasonable litigation costs sought by virtue of 26 U.S.C. Sec. 7430 under an abuse of discretion standard. Pate v. United States, 982 F.2d 457, 459 (10th Cir.1993). Accord Anthony v. United States, 987 F.2d 670, 674 (10th Cir.1993). "The decision to rely upon affidavits and the record of a case rather than conduct an evidentiary hearing on a fee petition is also reviewed for an abuse of discretion." Hamner v. Rios, 769 F.2d 1404, 1406 (9th Cir.1985).

"In determining whether the position of the United States was 'substantially justified,' the district court must look at all facts and circumstances as well as the legal precedents relating to the case, bearing in mind the applicant bears the burden of proof." Pate, 982 F.2d at 459. Moreover, in order to permit this court to conduct a meaningful review of the fee determination, the district court must provide "a reasoned explanation" for its ruling. Anthony, 987 F.2d at 675. As noted in Creske v. Commissioner, 896 F.2d 250, 252 (7th Cir.1990) (citations omitted):

When reviewing a judgment by the [trial] court under the abuse of discretion standard, we focus "on the reasons given by that court for its determination [under Sec. 7430] that the Commissioner's position was not unreasonable." ... In order for this court to conduct its review of the [trial] court's judgment, the record must present an adequate manifestation of the reasoning of the court in denying litigation costs. While our review of the determinations of the [trial] court may be informed by reference to the opinion in the underlying deficiency litigation, ..., this does not obviate the need for a reasoned explanation regarding the issue of litigation costs.

Accord Berks v. United States, 825 F.2d 1262, 1263 (8th Cir.1987) (in reviewing a district court's denial of fees and costs under Sec. 7430, the appellate court must "examine both the underlying facts and law upon which the [district] court based its decision. The district court's bald conclusion, without any explanation of the facts or law upon which its conclusion was based, however, provides us with no findings upon which a meaningful review can be conducted.").

III

The controlling issue here is whether the district court abused its discretion by not affording Cramer an opportunity to introduce additional responsive evidence pertaining to its application for litigation costs and the objection to it, and in failing to give further consideration to the application under Sec. 7430 and make findings and conclusions to resolve disputed questions. Based on our review of the record, we conclude that the court did abuse its discretion in this regard.

The government argues that analogies drawn by Cramer to Fed.R.Civ.P. 12(b)(6) and other civil rules are not valid and that the local rules of the Western District of Oklahoma are on point, specifically Local Rule 6 pertaining to costs and fees and Local Rule 14 on motions, applications and objections. Brief for the Appellee at 21-23. We believe the government position is persuasive as to the pertinent rules and have considered those local rules. The government also says that under the rules it was Cramer's "responsibility to...