Smith v. Brady, 90-56041

• Decision Date: 17 August 1992
• Docket Number: No. 90-56041,90-56041
• Citation: 972 F.2d 1095
• Parties: , 70 A.F.T.R.2d 92-5565, 61 USLW 2139, 92-2 USTC P 50,515 Lewis B. SMITH; Helen M. Smith, Plaintiffs-Appellees, v. Nicholas BRADY, Secretary of Treasury; John Murphy, Acting Commissioner of Internal Revenue, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1095

972 F.2d 1095

117 A.L.R.Fed. 653, 70 A.F.T.R.2d 92-5565,

61 USLW 2139,

92-2 USTC P 50,515

Lewis B. SMITH; Helen M. Smith, Plaintiffs-Appellees, v. Nicholas BRADY, Secretary of Treasury; John Murphy, Acting

Commissioner of Internal Revenue, Defendants-Appellants.

No. 90-56041.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 8, 1991.

Decided Aug. 17, 1992.

Kendrick L. Moxon, Bowles & Moxon, Los Angeles, Cal., for plaintiffs-appellees.

Joel A. Rabinovitz, Tax Div., Dept. of Justice, Washington, D.C., for defendants-appellants.

Appeal from the United States District Court for the Central District of California.

Before: FLETCHER, D.W. NELSON, and BRUNETTI, Circuit Judges.

BRUNETTI, Circuit Judge:

Lewis B. Smith and Helen M. Smith ("Smiths") sued the Internal Revenue Service ("IRS") seeking to have a letter expunged from the Smiths' files and to prevent the IRS from using such a letter in the future. The letter labeled their church, the Church of Scientology, a "sham" religion. After various motions to dismiss the case were rejected by the district court, the suit was settled almost a year after it was filed. The Smiths received most of the relief requested in their complaint. The district court then granted the Smiths' request for attorney's fees pursuant to the Equal Access to Justice Act ("EAJA"), 28 U.S.C. § 2412(d)(1)(A). The IRS appeals the award of fees.

We reverse the district court's award of attorney's fees. We find that the exclusive means of recovering attorney's fees in this tax-related case is Internal Revenue Code § 7430. Because the Smiths did not exhaust their administrative remedies as required by the I.R.C. provision, attorney's fees cannot be awarded.

FACTS

In the course of an audit of the Smiths' 1987 tax return the IRS sent the Smiths a letter ("Letter") dated February 14, 1989, disallowing a claimed deduction of $61,086 for contributions to the Church of Scientology. Part of the Letter stated that:

[I]t has not been established that the "Church of Scientology" is anything more than a sham designed for the purpose of claiming fictitious charitable contributions on your income tax return. Further you have failed to establish that "Church of Scientology" is an entity recognized for tax purposes as being separate and distinct from you as an individual.

The IRS claimed that the letter was sent in error. Indeed, the IRS itself has stipulated in other cases that the Church of Scientology is a bona fide religion. ¹ Around April 19, 1989, the IRS sent the Smiths a report entitled "Report of Individual Income Tax Examination Changes." This report disallowed $8,342 in deductions because the Smiths had not "establish[ed] that the amounts shown were (a) contributions, and (b) paid." The report also stated: "This report supersedes the one sent to you earlier."

The Smiths have been active members of the Church of Scientology for over 22 years. The Smiths allegedly believed that the Letter perpetuated a pattern of discrimination against the Church of Scientology by the IRS. ²

The Smiths filed suit on April 28, 1989, asserting violations of their civil and constitutional rights and seeking to account for all existing copies of the February 14 Letter, to expunge the Letter from the Smiths' files, to enjoin the IRS from disseminating the Letter or similar documents in the future, and to prevent the IRS from degradingly labeling the Church of Scientology as a "sham."

The Smiths' complaint alleged that the IRS injured them by: (1) demonstrating The filing of the complaint started a procedural odyssey, but the case was eventually settled and dismissed on April 19, 1990, with leave for the Smiths to file a motion for attorney's fees.

impermissible hostility to the Scientology religion in violation of the Establishment clause; (2) impermissibly burdening the Smiths in the free exercise of their religious beliefs; (3) acting to intimidate and chill the Smiths in the exercise of their right to freedom of association; and (4) treating the Church and its parishioners differently than other bona fide religious organizations and their adherents, thus denying the Smiths equal protection of the law.

On June 18, 1990, the Smiths filed a motion for attorney's fees under the EAJA. The IRS opposed the motion on the grounds asserted on this appeal. The district court granted the motion on June 26, 1990, and awarded the Smiths $13,972 in costs and attorney's fees under the EAJA.

Here the IRS challenges the award of attorney's fees on several grounds. Initially, it contends that the Smiths lacked standing to sue and that therefore the district court did not have jurisdiction over the case. Secondly, the IRS argues that the Internal Revenue Code's provision for attorney's fees in proceedings brought "in connection with the determination, collection, or refund of any tax" provides the exclusive means to recover attorney's fees in this case. If the Internal Revenue Code is the exclusive means to recover attorney's fees in this case, the Smiths are precluded from recovering because they did not exhaust their administrative remedies. Regardless of which attorney's fees statute is applied, the IRS also argues that fees should not be awarded because its position was "substantially justified."

DISCUSSION

I.

The IRS first argues that the award of attorney's fees must be reversed because the district court lacked jurisdiction over the Smiths' complaint. The IRS contends that the Smiths lacked standing because the Smiths neither suffered a specific actual injury nor faced a threat of specific future harm.

The question of jurisdiction is reviewed de novo. Latch v. United States, 842 F.2d 1031, 1032 (9th Cir.1988). Standing is a jurisdictional issue, Bender v. Williamsport Area School District, 475 U.S. 534, 541-42, 106 S.Ct. 1326, 1331-32, 89 L.Ed.2d 501 (1986), and if the district court lacked jurisdiction over the underlying suit, "it had no authority to award attorney's fees." Latch, 842 F.2d at 1033 (footnote omitted). ³

To satisfy the standing requirement the Smiths must show

" that [they have] suffered some actual or threatened injury as a result of the putatively illegal conduct of the defendant," ... and that the injury "fairly can be traced to the challenged action" and "is likely to be redressed by a favorable decision"

....

Presbyterian Church (U.S.A.) v. United States, 870 F.2d 518, 521 (9th Cir.1989) (quoting Valley Forge Christian College v. Americans United for Separation of Church and State, Inc., 454 U.S. 464, 472, 102 S.Ct. 752, 758, 70 L.Ed.2d 700 (1982)).

The IRS characterizes the Smiths' allegations as only general allegations of a subjective chill of their First Amendment rights, which are not sufficiently concrete to meet the standing requirement. See Laird v. Tatum, 408 U.S. 1, 13-14, 92 S.Ct. 2318, 2325-26, 33 L.Ed.2d 154 (1972) (failure to demonstrate a claim of specific present objective harm or a threat of specific future harm). We conclude that the Smiths do have standing, however, because they have alleged a direct injury from the IRS's action.

The Smiths' complaint was phrased in broad terms: an "impermissible burdening" of their free exercise of religious beliefs; being "intimidate[d] and chill[ed]" in their exercise of freedom of association; that the IRS demonstrated "impermissible hostility" to their minority religion; and that the Church of Scientology was being treated "differently" than other bona fide religions. Unlike Laird, however, where the plaintiffs made no showing that the government action directly affected the plaintiffs, 408 U.S. at 3, 92 S.Ct. at 2320, the IRS's action of sending the Letter uniquely affected the Smiths. The Smiths thus had a personal stake in any future use of the Letter by the IRS and certainly in the maintenance of the Letter in the Smiths' files as taxpayers. See Cardwell v. Kurtz, 765 F.2d 776, 779 (9th Cir.1985) ("A number of problems may arise from allowing the government to retain [a report based on] illegally-obtained information. For example, the IRS might share the report with other government agencies...."); cf. Meese v. Keene, 481 U.S. 465, 472, 107 S.Ct. 1862, 1866, 95 L.Ed.2d 415 (1987) ("While the governmental action need not have a direct effect on the exercise of First Amendment rights ... it must have caused or must threaten to cause a direct injury to the plaintiffs.") (citation omitted).

The present case is similar to the Presbyterian Church case, where we granted standing to various local and national churches seeking to prevent the Immigration and Naturalization Service from continuing a covert surveillance program. 870 F.2d at 520. We found that the claim that "INS surveillance has chilled individual congregants from attending worship services ... [and] interfered with the churches' ability to carry out their ministries" to be a "distinct and palpable" injury, not a mere subjective chill, id. at 522 (citations omitted); and that "[c]hurches, as organizations, suffer a cognizable injury when assertedly illegal government conduct deters their adherents from freely participating in religious activities protected by the First Amendment." Id. at 523. We also held that the alleged injuries could be traced to the government action and that a favorable judicial decision could redress the injury. Id.

The IRS maintains that the specificity of the allegations in Presbyterian Church distinguishes that opinion from the present case. They assert that the Smiths' allegations resemble the allegations in Church of Scientology of Celebrity Centre v. Egger, 539 F.Supp. 491 (D.D.C.1982). In Egger the district court held that allegations of "inhibition and discouragement" of ministers and stigmatization of the Scientology religion did not constitute irreparable injury and dismissed the case. 539 F.Supp. at 495-96. The IRS argues that here as well the plaintiffs have not alleged a "distinct and palpable"...