USLIFE Title Ins. Co. of Dallas on Behalf of Mathews v. Harbison

Decision Date14 March 1986
Docket NumberNo. 84-2754,84-2754
Citation784 F.2d 1238
Parties-1017, 54 USLW 2504, 86-1 USTC P 9278, Unempl.Ins.Rep. CCH 16,670 USLIFE TITLE INSURANCE COMPANY OF DALLAS on Behalf of Lillian V. MATHEWS, Plaintiffs-Appellees, v. Paul R. HARBISON, et al., Defendants, v. UNITED STATES of America acting By and Through the INTERNAL REVENUE SERVICE, Defendant-Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

Glenn L. Archer, Jr. U.S. Dept. of Justice, Tax Div., Washington, D.C., Michael L. Paup, Chief, Appellate Sec. Wynette J. Hewett, Teresa E. McLaughlin, Washington, D.C., for defendant-appellant.

Edward L. Kurth, San Antonio, Tex., for plaintiffs-appellees.

Appeal from the United States District Court for the Western District of Texas.

Before GOLDBERG, RANDALL, and JOHNSON, Circuit Judges.

GOLDBERG, Circuit Judge.

An old saying has it that the art of taxation consists in so plucking the goose as to get the most feathers with the least hissing. The practice of taxation, however, is seldom pretty. In this case, appellee's hissing roused the district court to condemn the Internal Revenue Service for overzealous plucking. This condemnation took the form of an award of attorneys' fees against the Government based on the finding that the Government's zealousness was not substantially justified within the meaning of the Equal Access to Justice Act.

At the heart of this case is the duty of the IRS, under Section 6672 of the Internal Revenue Code, 26 U.S.C. Sec. 6672, to collect and retain from certain corporate officers and employees those funds that their corporation The Government, on the other hand, contends that if it were required to halt its collection efforts at 100% of the delinquency, then it would face a shortfall if a person against whom assessments had been made later successfully exercised her right to challenge the Government's determination that she was a responsible person. The Government therefore argues that the critical question becomes not whether it has already collected an amount equal to the underlying tax, but whether its right to retain the funds collected is secure from challenge. The Government argues that this security comes only when the statute of limitations cuts off the person's right to challenge the penalty assessed against and collected from her. Because in the case at hand the statute of limitations had not yet expired, and given the government's policy of refunding any funds in excess of one full satisfaction, the government contends that it was substantially justified in continuing its collection efforts. We agree and accordingly reverse.

                has unlawfully failed to turn over to the Government. 1   To fulfill this obligation, the IRS will assess up to 100% of the penalty against each of those persons that it determines to be responsible for the corporation's delinquency, even though the sum of the funds collected may exceed the total liability by a factor equal to the number of responsible persons.  Once the Government's right to retain one full satisfaction is secure, however, its policy is to refund all amounts in excess of the total delinquency.  This policy notwithstanding, appellee argued, and the district court agreed, that the Government was not substantially justified in attempting to collect a Section 6672 assessment against one responsible person when collections from that person and one other responsible person already totaled the amount of the underlying delinquent taxes

The underlying tax liability in this case arose from Paul Harbison's and Delbert Walker's operation of W & H Construction, Inc., Sheppard Electric Company, a corporation that defaulted in the payment of withholding taxes in the total amount of $9,477.78 during the second and third quarters of 1976. Pursuant to 26 U.S.C. Sec. 6672, the IRS made assessments on November 13, 1978, in the full amount of the withholding taxes against Harbison and Walker as responsible persons with respect to the corporation. Neither Harbison nor Walker ever instituted a refund suit to contest his assessment, and each made payments in partial satisfaction of his liability.

On December 4, 1978, the Government filed a notice of tax lien with the County Clerk against real property owned by Harbison and his wife in Bexar County, Texas. On September 26, 1980, the Harbisons were divorced, and, pursuant to the divorce decree, they sold their property to Lilian V. Mathews and divided the proceeds. Ms. Mathews obtained title insurance from USLIFE Title Insurance Company of Dallas ("USLIFE"), which performed a title search but did not discover the tax lien because the County Clerk had misfiled the notice of tax lien against Harbison under the name Harrison. On April 30, 1982, USLIFE filed suit on behalf of Mathews against the Government and the Harbisons. USLIFE sought to restrain the Government from seizing the property by levy, to quiet title in favor of Mathews, and to recover from the Harbisons its attorney's fees and any amounts it was required to pay to satisfy the tax lien. USLIFE deposited $6,455.39 into the registry of the court, the amount which it asserted was claimed by the Government.

The Government moved for summary judgment against USLIFE on the basis that its tax lien was entitled to priority over Mathews' interest in the property, notwithstanding the failure of the County Clerk to file properly the notice of the tax lien. On August 20, 1982, the District Court granted the Government's motion. 2 On February 17, 1983, USLIFE filed a motion to reconsider the summary judgment on the grounds that the Internal Revenue Service had subsequently informed USLIFE's counsel that the full amount of the corporation's delinquent withholding taxes had already been collected from Walker.

In response, the Government admitted that, as a matter of policy, it does not retain payments exceeding the underlying withholding tax delinquency. The Government nonetheless opposed USLIFE's bid to reopen the case. It argued that in order to protect the revenue, it was justified in pursuing collection remedies against persons deemed responsible until the expiration of the statute of limitations for filing a refund claim challenging the assessment, when the Government's right to retain the amounts collected would be conclusively established. The Government represented, and the parties did not dispute, that the applicable statute of limitations would expire on April 5, 1984.

Nevertheless, the District Court granted the motion to reconsider and, after joining Walker on the Government's motion and concluding that the tax delinquency had been paid in full, granted summary judgment in favor of USLIFE on July 19, 1984. In doing so, the District Court acknowledged that the "date [for filing a refund claim] has now passed so any concern the government may have had regarding the possibility of refund claims is no longer at issue." (I-R. 136). The court ordered the return of monies being held in the registry of the court to USLIFE and noted that the only issue remaining for decision was USLIFE's claim for attorney's fees and costs pursuant to the Equal Access to Justice Act. After finding that USLIFE was a prevailing party and that the Government had failed to carry its burden of proving that its position was not substantially justified, the District Court awarded USLIFE $10,245.70 in fees. The Government appeals the fee award.


Section 204(a) of the Equal Access to Justice Act ("EAJA"), Publ.L. No. 96-481, which became effective on October 1, 1981, amended 28 U.S.C. Sec. 2412 to provide for the award of attorney's fees and other expenses against the Government "unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust." 28 U.S.C. Sec. 2412(d)(1)(A). 3 The Government bears the burden of proving that its position 4 was substantially justified.

Knights of the Ku Klux Klan v. East Baton Rouge Parish School Board, 679 F.2d 64, 68 (5th Cir.1982); S & H Riggers & Erectors, Inc. v. OSHRC, 672 F.2d 426, 430 (5th Cir.1982); Ashburn v. U.S., 740 F.2d 843, 850 (11th Cir.1984).

The touchstone of substantial justification is reasonableness. The government carries its burden of proof if it shows that its position has a reasonable basis both in law and fact. Houston Agricultural Credit Corp., 736 F.2d 233 at 235 (5th Cir.1984); S & H Riggers & Erectors, supra, 672 F.2d at 430.

The standard, however, should not be read to raise a presumption that the Government position was not substantially justified, simply because it lost the case. Nor, in fact, does the standard require the government to establish that its decision to litigate was based on a substantial probability of prevailing.

H.R.Rep. No. 1418, 96th Cong., 2d Sess. 11, 1980 U.S.Code Cong. & Admin.News 4953, 4989-90. See Ashburn, supra, 740 F.2d at 848.

This Court has held that it will overturn an award of attorney's fees when it appears that the district court abused its discretion in making the award.

We agree with the D.C. Circuit which held in Spencer v. NLRB, 712 F.2d 539 (D.C.Cir.1983), that the "abuse of discretion standard" under the EAJA should be given the same special meaning accorded that term in the review of preliminary injunctions and other preliminary orders: "On one hand, it has been interpreted to require highly deferential review of district courts' tentative findings of fact; such determinations are not overturned unless 'clearly erroneous' and, in practice, are rarely subjected to critical examination." [citations omitted]. "On the other hand, it allows for close scrutiny of district courts' rulings on questions of law." [citations omitted].

Houston Agricultural Credit Corp., supra, 736 F.2d at 235. The question in this case is one of law: whether it was reasonable for the Government, in defending the suit brought by USLIFE, to rely on...

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