Tabcor Sales Clearing, Inc. v. U.S.

• Decision Date: 02 December 1983
• Docket Number: Nos. 81-1827,82-2926 and 82-3007,81-1898,s. 81-1827
• Citation: 723 F.2d 26
• Parties: 83-2 USTC P 9736 TABCOR SALES CLEARING, INC., Plaintiff-Appellant, Cross-Appellee, v. UNITED STATES of America, Defendant-Appellee, Cross-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 26

723 F.2d 26

83-2 USTC P 9736

TABCOR SALES CLEARING, INC., Plaintiff-Appellant, Cross-Appellee, v. UNITED STATES of America, Defendant-Appellee, Cross-Appellant.

Nos. 81-1827, 81-1898, 82-2926 and 82-3007.

United States Court of Appeals Seventh Circuit.

Argued Sept. 12, 1983.

Decided Dec. 2, 1983.

Shelly Waxman, Chicago, Ill., for plaintiff-appellant, cross-appellee.

Kristina E. Harrigan, Asst. Atty. Gen., Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellee, cross-appellant.

Before PELL, COFFEY, Circuit Judges, and NEAHER, Senior District Judge. ^*

NEAHER, Senior District Judge.

These appeals, consolidated by the Court's order of December 17, 1982, arise from a judgment of the district court awarding Tabcor Sales Clearing, Inc. (Tabcor), five thousand dollars ($5,000.00) in costs and attorney's fees.

The genesis of the dispute was a tax refund suit by Tabcor in which the United States counterclaimed to recover an unpaid portion of a tax assessment. The underlying problem of whether some of Tabcor's personnel were independent contractors, not subject to tax, or employees, subject to tax, has generated a multitude of litigation. United States v. Dema, 544 F.2d 1373 (7th Cir.1976) (the dissenting opinion of Chief Judge Markey, 544 F.2d at 1378, details the facts); Tabcor Sales Clearing, Inc. v. Department of Treasury, 471 F.Supp. 436 (N.D.Ill.1979); Dema v. Feddor, 470 F.Supp. 152 (N.D.Ill.1979), aff'd, 661 F.2d 937 (7th Cir.1981). Through section 530 of the Revenue Act of 1978, Public Law 95-600, Congress settled the issue in the taxpayer's favor; thus the government consented to a judgment and, subsequently, Tabcor sought costs and fees. We turn first to the government's contention that the district court erred in awarding costs and fees.

I.

We find that the district court erred in awarding costs and fees based upon the record before it. Accordingly, we vacate the judgment and remand the case for further proceedings consistent with this opinion.

The appropriate standard of review is stated in Holcomb v. United States, 622 F.2d 937, 942 (7th Cir.1980):

"The first question to be resolved in this matter is whether [42 U.S.C.] Sec. 1988 is applicable to the counter-claim. That section, literally applies to actions by or on behalf of the government, and the courts, in general have held the statute not applicable to suits instituted by taxpayers to obtain refunds.

"But where, as here, the government has responded with a counter-claim, there has been held to be an action 'by or on behalf of the United States,' and Sec. 1988 is applicable.

"Although Sec. 1988, by its terms, leaves the decision to award attorney's fees to the discretion of the trial court, the courts have held that attorney's fees are appropriate only where the government's action was instituted in bad faith or was frivolous, harassing, or vexatious." (Citations omitted.)

Applying this standard of review, the district court ruled as follows:

"To illustrate the unreasonable nature of the government's conduct in the matter at bar, Tabcor points to the assessment, for the tax year 1970, forming the basis of the defendant's counterclaim. The assessment for 1970 was $143,000, as compared to the plaintiff's total gross income for that year of $89,000.

"Without more, these figures do not, as the plaintiff contends, provide a basis of comparison sufficient to allow this court to determine, with relative certainty, whether the government's counterclaim was reasonable. These figures do, however, suggest that the assessment was excessive, and this suggestion is strengthened further by the fact that the government has offered no explanation or objective reason for such a large assessment, either in its pleadings prior to judgment or subsequent to the consent decree being entered.

"That the government's actions can properly be considered unreasonable is further illustrated by the fact that the tax liens filed by the United States to secure its counterclaim were not released until nearly two years after the judgment in favor of Tabcor was entered. Although the defendant claims that the prolonged attachment of these liens was due to computer error, the fact remains that Tabcor was subject to them for their extended duration, and was forced to move this court twice to have the liens removed. In this type of situation, where a plaintiff must move for additional relief to enforce a judgment, an award of costs and reasonable attorneys' fees is proper. Shakman v. Democratic Organization of Cook County, 533 F.2d 344, 350 n. 9 (7th Cir.1976) [cert. denied, 429 U.S. 858, 97 S.Ct. 156, 50 L.Ed.2d 135 (1976) ]; United States v. Greyhound Corp., 370 F.Supp. 881, 886 (N.D.Ill.1974)." Slip op. at 5-6 (footnote omitted).

Concerning the first factor the district court considered, the government contends that the court erroneously shifted the burden of proof. The district court merely determined that Tabcor's figures raised the inference of an excessive assessment. Given the lack of any contradicting evidence, the court understandably concluded that these figures evidence the unreasonableness of the government's conduct as well as its motives. Standing alone, however, this finding cannot support the judgment. Had Congress not settled the issue, the government might have been entitled to collect some employment taxes from Tabcor; thus, the filing of the counterclaim would not in and of itself have been unreasonable, vexatious, or in bad faith. See United States v. Rogers, 649 F.2d 1117, 1128 (5th Cir.1981), rev'd on other grounds, --- U.S. ----, 103 S.Ct. 2132, 76 L.Ed.2d 236 (1983).

The government explains that the assessment was computed for 1970 based on Tabcor's 1971 records because Tabcor refused to make its 1970 books and records available for inspection. This assertion would not, by itself, have foreclosed a finding that the government's true motive for the assessment, given its size, was to punish Tabcor's refusal to waive the statute of limitations for 1970. See Jones v. United States, 613 F.2d 1311, 1313-14 (5th Cir.1980) (the government admitted that it had counterclaimed for an excessive amount as a bargaining device). The district court's opinion, however, merely mentions this issue and its possible validity in a footnote. It was clearly not a basis for the conclusion of unreasonable conduct by the government. ¹

Lastly, the government urges that this Court has found, in an earlier unpublished opinion in this litigation, that the failure to release the tax liens was "inadvertent" and "not in bad faith." We direct the district court to consult that opinion and to give such weight to that determination and the circumstances attendant to the making thereof as may be appropriate in determining Tabcor's entitlement to costs and fees. ²

In summary, the record reveals that the only basis for the district court's award of fees and costs (finding of unreasonableness) may have been the size of the government's counterclaim. The district court recognized that "more" was required; yet, we cannot be certain from its order that more was furnished or considered to support the judgment. See Patzkowski v. United States, 576 F.2d 134, 139 (8th Cir.1978). Therefore, we remand the case for further proceedings consistent with this opinion. In so doing, we express no opinion upon Tabcor's entitlement to costs and fees; however, should the district court conclude on remand that Tabcor has established a right to costs and fees, we find, as explained below, that the award of $5,000.00 was not an abuse of discretion and should be affirmed.

II.

Citing Jones v. United States, 505 F.Supp. 781 (E.D.Tex.1980) (on remand from Jones v. United States, supra ), Tabcor first argues that the district court erred as a matter of law in limiting the fee award to work expended in defending the counterclaim. In Jones, the court ruled as follows:

"It is clear that were it not for the counterclaim, plaintiff would not be entitled to any fee award. The substance of the counterclaim and the plaintiff's claim overlapped, in that both involved the amount of tax due the government. To the extent that Jones' claim and the government's claim overlapped, the attorneys should be compensated. Furthermore, even if it were possible to separate the attorneys' work, the work should not be severed into 'issue parcels,' for the purpose of determining the fee award.

"The Fifth Circuit was aware that attorneys spent time on both the claim and the counterclaim, but did not limit the remand to fees incurred in defending the counterclaim. The Fifth Circuit impliedly required this result by remanding for an award of attorneys' fees for both the trial and appellate phases when the dismissal of the counterclaim was not appealed. It should be noted that most of the attorneys' fees requested in this case arose from the litigation of the attorneys' fees issue. Thus, but for the government's counterclaim, most of the fees would not have been incurred." Id. at 784-85 (citations omitted).

Nothing in Jones precludes an allocation formula in awarding fees in this case, especially because the bulk of the fees there was allocable to proceedings supplemental derived from the government's counterclaim. We note that nonallocation is not the exclusive method for awarding fees under Sec. 1988 in the Fifth Circuit. Miller v. Carson, 628 F.2d 346, 348 (5th Cir.1980). Moreover, the Supreme Court requires allocation between successful and unsuccessful claims. Hensley v. Eckerhart, --- U.S. ----, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983).

In the instant context, we find no abuse of discretion in allocating the expenses of the litigation between the complaint and the counterclaim. As we noted in Holcomb v. United States, supra, the plaintiff's right to fees arises by virtue of judicial interpretation that the government's counterclaim is an action "by or on behalf of the United States." ³ If there had been no...