Nalle v. C.I.R., No. 94-40661

CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)
Writing for the CourtBefore POLITZ, Chief Judge, REAVLEY and EMILIO M. GARZA; EMILIO M. GARZA
Citation55 F.3d 189
Decision Date20 June 1995
Docket NumberNo. 94-40661
Parties-5018, 95-2 USTC P 50,333 George S. NALLE, III and Carole Nalle and Charles A. Betts and Sylvia I. Betts, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Page 189

55 F.3d 189
76 A.F.T.R.2d 95-5018, 95-2 USTC P 50,333
George S. NALLE, III and Carole Nalle and Charles A. Betts
and Sylvia I. Betts, Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
No. 94-40661.
United States Court of Appeals,
Fifth Circuit.
June 20, 1995.

Page 190

Michael L. Cook, Carolyn M. Beckett, Jenkens & Gilchrist, Austin, TX, for appellants.

David L. Jordan, Acting Chief Counsel, IRS, Gilbert S. Rothenberg, Gary R. Allen, Chief Appellate Section, Tax Div., Dept. of Justice, Washington, DC, for appellee.

Appeal from a Decision of the United States Tax Court.

Before POLITZ, Chief Judge, REAVLEY and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

George S. Nalle III and Carole Nalle, and Charles A. Betts and Sylvia I. Betts ("Nalle and Betts") appeal from the Tax Court's denial of their request for an award of attorney's fees as provided by 26 U.S.C. Sec. 7430 (1988). The Tax Court decided that Nalle and Betts had failed to establish as required by Sec. 7430 that the position of the Commissioner of Internal Revenue ("Commissioner") in the underlying litigation was not substantially justified. Finding no abuse of discretion, we affirm.

I

This appeal concerns the second phase of litigation between Nalle and Betts and the Commissioner over the Commissioner's denial of rehabilitation tax credits claimed by Nalle and Betts for the substantial rehabilitation of several houses in Austin, Texas. Pursuant to Treasury Regulation Sec. 1.48-12(b)(5), 1 the Commissioner disallowed credits which Nalle and Betts had claimed under 26 U.S.C. Sec. 48 (1988) 2 because they had moved the houses prior to rehabilitating them.

Nalle and Betts contested the Commissioner's decision. On appeal from the Tax Court, 3 this Court held the Treasury Regulation invalid because it contradicted the plain

Page 191

meaning of Sec. 48. Nalle v. Commissioner, 997 F.2d 1134 (5th Cir.1993) [Nalle I ]. In doing so, we rejected the Commissioner's interpretation of and reliance on selected legislative history of Sec. 48. Id.

Having won on the merits, Nalle and Betts petitioned the Commissioner for reimbursement of their attorney's fees. The Commissioner denied the petition, and the Tax Court upheld the Commissioner's decision. Nalle v. Commissioner, 67 T.C.M. (CCH) 2747, 1994 WL 146090 (1994) [Nalle II ]. Nalle and Betts now appeal from the Tax Court's ruling.

II

Nalle and Betts contend that the district court should have granted their petition for attorney's fees. We review the Tax Court's determination of whether the Commissioner's position was not substantially justified for abuse of discretion. Bouterie v. Commissioner, 36 F.3d 1361, 1367 (5th Cir.1994). Thus, we reverse " 'only if we have a definite and firm conviction that an error of judgment was committed.' " Id. (quoting Lennox v. Commissioner, 998 F.2d 244, 248 (5th Cir.1993)). Moreover, the burden is on the petitioner to prove that the Commissioner was not substantially justified in defending the underlying litigation. See Lennox, 998 F.2d at 248 ("The burden of proving no substantial justification is with the taxpayers.").

Section 7430 of the Internal Revenue Code provides that parties who prevail in tax proceedings may recover their attorney's fees. See Bouterie, 36 F.3d at 1367 ("Section 7430 allows a 'prevailing party' ... in tax proceedings to recoup reasonable litigation costs, including attorney's fees."). Parties "prevail" if:

(1) The position of the United States in the proceeding was not substantially justified;

(2) they have substantially prevailed with respect to the amount in controversy or with respect to the most significant issue or set of issues presented; and

(3) they meet applicable net worth requirements.

26 U.S.C. Sec. 7430(c)(4)(A). The only element at issue in this case is whether the Commissioner's position was not substantially justified. Substantially justified means "justified to a degree that could satisfy a reasonable person" and having a "reasonable basis both in law and fact." Pierce v. Underwood, 487 U.S. 552, 565, 108 S.Ct. 2541, 2550, 101 L.Ed.2d 490 (1988); see also Bouterie, 36 F.3d at 1367 (noting that substantial justification equates to satisfaction to a reasonable person and reasonable basis both in law and fact); cf. In re Graham, 981 F.2d 1135, 1139 (10th Cir.1992) ("In order to be 'substantially unjustified,' the litigation must have been initiated unreasonably, without a reasonable basis in law or in fact.").

In determining whether the Commissioner's position was not substantially justified, the question is whether the Commissioner acted unreasonably--that is, whether she knew or should have known that her position was invalid at the onset of the litigation. See Bouterie, 36 F.3d at 1373 (concluding that Commissioner's position was not substantially justified because IRS knew or should have known of its error before entering litigation). In answering this question of reasonableness, we consider all the facts and circumstances surrounding the dispute. Portillo v. Commissioner, 988 F.2d 27, 28 (5th Cir.1993). For example, courts have held that the Commissioner unreasonably defended her position after several earlier courts had rejected it, 4 when the IRS had ignored

Page 192

state law that clearly supported the taxpayer, 5 and when the IRS had failed to conduct a reasonable investigation that would have revealed the flaw in its position. 6 The Commissioner's loss in the underlying litigation is not determinative of whether she was not substantially justified; it is only a factor. 7 Therefore, if at the onset of litigation the error was not obvious, the Commissioner may still be substantially justified in defending an ultimately unsuccessful position. Sher v. Commissioner, 861 F.2d 131, 135 (5th Cir.1988) (holding that government's position was substantially justified because information, both factual and judicial, available at the time gave "no reason to believe" that basis for government's position was in error). Thus, courts have held that petitioners had failed to show that the government's position was not substantially justified when judicial decisions on the issue left the status of the law unsettled, 8 or when the issue was difficult or novel. 9

In this case, the validity of Regulation 1.48-12(b)(5) under 26 U.S.C. Sec. 48 presented an issue of first impression. Although other courts have held that the Commissioner was substantially justified in defending her position when her interpretation of a relevant statute had not previously been

Page 193

ruled on, 10 this Court has held that "[w]hen Congress adopts a new law the clear and unequivocal language of which unmistakably [excludes the Commissioner's position], the absence of a new decision recognizing the obvious does not equate with unsettled law or first impression in the context of this matter." Estate of Perry v. Commissioner, 931 F.2d 1044, 1046 (5th Cir.1991); see also Portillo, 988 F.2d at 29 (rejecting reliance on "new rule" argument where Commissioner's decision to assess tax was " 'naked and without any foundation' " (quoting United States v. Janis, 428 U.S. 433, 96 S.Ct. 3021, 49 L.Ed.2d 1046 (1976))). Accordingly, if a regulation obviously altered the scope of the relevant statute, the Commissioner should have known that such a regulation was invalid. 11 Also, if a regulation was "manifestly contrary" to the plain meaning of the relevant statute, Marcus, 17 F.3d at 1038, 12 the Commissioner would not be substantially justified in defending it. We have found the...

To continue reading

Request your trial
61 practice notes
  • Wilkerson v. U.S., No. 94-40713
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • October 23, 1995
    ...(5th Cir.1993). Substantially justified means "justified to a degree that could satisfy a reasonable person." Id.; Nalle v. Commissioner, 55 F.3d 189, 191 (5th Cir.1995). To meet this standard, the government's position must have a reasonable basis both in law and fact. Bouterie v. Commissi......
  • Marre v. U.S., HP-84
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • July 22, 1997
    ...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 taxpaye......
  • Jean v. U.S., No. 04-1121.
    • United States
    • U.S. Court of Appeals — First Circuit
    • February 3, 2005
    ...government's position in a judicial proceeding is its "position... at the onset of the litigation," Nalle v. Comm'r of Internal Revenue, 55 F.3d 189, 191 (5th Cir.1995), and at "each [subsequent] stage of the case," Huffman v. Comm'r of Internal Revenue, 978 F.2d 1139, 1148 (9th Cir.1992). ......
  • Hennessey v. Commissioner of Internal Revenue, No. 1032-01 (U.S.T.C. 5/24/2007), No. 1032-01.
    • United States
    • United States Tax Court
    • May 24, 2007
    ...is "whether * * * [the Commissioner] knew or should have known that * * * [his] position was invalid at the onset". Nalle v. Commissioner, 55 F.3d 189, 191 (5th Cir. 1995), affg. T.C. Memo. 1994-182. We look to whether the Commissioner's position was reasonable given the available facts and......
  • Request a trial to view additional results
61 cases
  • Wilkerson v. U.S., No. 94-40713
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • October 23, 1995
    ...(5th Cir.1993). Substantially justified means "justified to a degree that could satisfy a reasonable person." Id.; Nalle v. Commissioner, 55 F.3d 189, 191 (5th Cir.1995). To meet this standard, the government's position must have a reasonable basis both in law and fact. Bouterie v. Commissi......
  • Marre v. U.S., HP-84
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • July 22, 1997
    ...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 taxpaye......
  • Jean v. U.S., No. 04-1121.
    • United States
    • U.S. Court of Appeals — First Circuit
    • February 3, 2005
    ...government's position in a judicial proceeding is its "position... at the onset of the litigation," Nalle v. Comm'r of Internal Revenue, 55 F.3d 189, 191 (5th Cir.1995), and at "each [subsequent] stage of the case," Huffman v. Comm'r of Internal Revenue, 978 F.2d 1139, 1148 (9th Cir.1992). ......
  • Hennessey v. Commissioner of Internal Revenue, No. 1032-01 (U.S.T.C. 5/24/2007), No. 1032-01.
    • United States
    • United States Tax Court
    • May 24, 2007
    ...is "whether * * * [the Commissioner] knew or should have known that * * * [his] position was invalid at the onset". Nalle v. Commissioner, 55 F.3d 189, 191 (5th Cir. 1995), affg. T.C. Memo. 1994-182. We look to whether the Commissioner's position was reasonable given the available facts and......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT