White v. U.S.

• Decision Date: 28 August 1984
• Docket Number: No. 83-7352,83-7352
• Parties: 84-2 USTC P 9762 Helen H. WHITE, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 836

740 F.2d 836

84-2 USTC P 9762

Helen H. WHITE, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 83-7352.

United States Court of Appeals Eleventh Circuit.

Aug. 28, 1984.

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Chief, Appellate Section, Gilbert S. Rothenberg, Lisa A. Prager, Tax Division, Dept. of Justice, Washington, D.C., for defendant-appellant.

J. Lister Hubbard, L. Lister Hill, Montgomery, Ala., for plaintiff-appellee.

Appeal from the United States District Court for the Middle District of Alabama.

Before TJOFLAT and ANDERSON, Circuit Judges, and TUTTLE, Senior circuit judge.

TUTTLE, Senior Circuit Judge:

This is an appeal by the defendant United States from a judgment entered in the United States District Court for the Middle District of Alabama awarding plaintiff Helen H. White $12,263.93 in attorneys' fees and other expenses under the Equal Access to Justice Act ("EAJA"). We affirm the district court's finding that plaintiff is entitled to attorneys' fees. But because the district court failed to apply the correct legal standard in determining the amount of recovery, we reverse in part and remand.

I. BACKGROUND

On January 3, 1977, Mrs. White and her former husband were divorced pursuant to a decree of the Marion County Court in Indiana. The divorce decree awarded a sum of $300.00 per week as child support to Mrs. White for the care of the White's youngest child. The Indiana court determined that the jointly accumulated property totaled $2,430,709.00, and it allocated the assets between the parties. Mr. White kept his personal property and his business assets and one-half of the value of various securities. Mrs. White was awarded the family home, including most of the household furnishings, and one-half the value of various securities. In addition, Mrs. White received the following:

... the Wife is granted a property settlement judgment in the sum of Seven Hundred Eighty-eight Thousand Four Hundred Dollars ($788,400); that said lump sum award shall be paid in the following manner by the Husband: Three Thousand Dollars ($3,000) per month beginning January 1, 1977, and each month thereafter until paid in full. Such monthly payments shall terminate upon Petitioner's death and the Respondent shall then be obligated to pay the then present value of the remaining balance to her estate, which payments shall be made in equal monthly installments over the remaining period.

That the awards herein shall be secured by appropriate insurance....

The property settlement judgment above shall be and constitute a lien against Respondent's interest in all real and personal property whether held severally or jointly held with any other person.

Mrs. White failed to report the installment payments as income on her original 1977 federal income tax return. Mr. White, however, deducted the payments as alimony. The Internal Revenue Service ("Service") adopted the position that the monthly payments represented alimony from Mr. White to Mrs. White and were taxable to Mrs. White. Thereafter, Mrs. White filed an amended 1977 federal income tax return, reporting $36,000 in additional income.

In 1977, Mr. White also paid Mrs. White a lump sum of $16,363.00 for state and federal income taxes and for clothing. Mrs. White did not report that payment as taxable income on her original federal income tax return. After the Service determined that this sum constituted taxable income, however, Mrs. White paid the deficiency.

On October 28, 1981, Mrs. White brought a suit against the United States seeking to recover a refund of $10,668.04 in income taxes and interest for the year 1977. On June 28, 1982, Mrs. White amended her complaint to claim a recovery of $36,966.10 in income taxes and interest for the years 1977, 1978, and 1979.

In the refund action, the parties filed cross-motions for summary judgment with respect to the characterization of the installment payments. Mrs. White asserted that the installment payments were a property settlement, not support payments, and thus, were not taxable to her. The government asserted that the payments were for support and were taxable to Mrs. White. In its summary motion, the government conceded that the payment of $16,363 in 1977 for taxes and clothing was not alimony and it settled the issue for $10,926.06. Thus, the amount in controversy was reduced to $26,040.04. The district court found that the installment payments made to Mrs. White were in discharge of a property settlement and, therefore, were not taxable to her. 550 F.Supp. 96, 100 (M.D.Ala.1982). The government did not appeal that order.

Mrs. White subsequently filed an application with the district court for legal fees and expenses pursuant to the EAJA. The district court awarded Mrs. White $12,263.93 for legal fees incurred during the administrative phase and during litigation, and the government appeals.

II. DISCUSSION

In reviewing the district court's decision to award fees under the EAJA, we reverse only if the district court has abused its discretion. National Treasury Employees Union v. IRS, 735 F.2d 1277, 1278 (11th Cir.1984); United States v. 2,116 Boxes of Boned Beef, 726 F.2d 1481, 1486 (10th Cir.1984); Matthews v. United States, 713 F.2d 677, 682 (11th Cir.1983); Spencer v. NLRB, 712 F.2d 539, 565 (D.C.Cir.1983), cert. denied, --- U.S. ----, 104 S.Ct. 1908, 80 L.Ed.2d 457 (1984); Hoang Ha v. Schweiker, 707 F.2d 1104, 1105 (9th Cir.1983); Knights of the Ku Klux Klan v. East Baton Rouge, 679 F.2d 64, 68-69 (5th Cir. Unit A 1982).

On appeal, the government asserts two arguments: first, its position was "substantially justified" within the meaning of the EAJA and consequently, no award of attorneys' fees should have been made; and second, even if its position was not "substantially justified," no award is permitted for legal fees incurred at the administrative level.

A. Was the Government's Position Substantially Justified?

The government's first argument is that its position was "substantially justified" within the meaning of the EAJA and consequently, no award of attorneys' fees should have been made. The EAJA provides:

[A] court shall award to a prevailing party other than the United States fees and other expenses ... incurred by that party in any civil action ... brought by or against the United States in any court having jurisdiction of that action, 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) (emphasis added).

The government bears the burden of showing that its position was substantially justified. H.R.Rep. No. 1418, 96th Cong., 2d Sess. 10 (1980), U.S.Code Cong. & Admin.News 1980, p. 4953; S.Rep. No. 253, 96th Cong., 1st Sess. 6 (1979). See also Enerhaul, Inc. v. NLRB, 710 F.2d 748, 750 (11th Cir.1983); S & H Riggers & Erectors, Inc. v. OSHRC, 672 F.2d 426, 430 (5th Cir. Unit B 1982). The standard is one of reasonableness; the government must show "that its case had a reasonable basis both in law and fact." H.R.Rep. No. 1418 at 10, U.S.Code Cong. & Admin.News 1980, p. 4989; S.Rep. No. 253 at 6. See also Matthews v. United States, 713 F.2d 677, 683 (11th Cir.1983). The fact that the government lost its case does not raise a presumption that the government's position was not substantially justified. H.R.Rep. No. 1418 at 11, S.Rep. No. 253 at 7. Nor is the government required to establish that its decision to litigate was based on a substantial probability of prevailing. H.R.Rep. No. 1418 at 11; S.Rep. No. 253 at 7.

To determine whether the government's position was "substantially justified" in the case at hand, we must examine the two underlying issues that gave rise to Mrs. White's application for legal fees and expenses: first, whether payments of $3,000 per month received by Mrs. White from her ex-husband pursuant to a divorce decree were periodic payments of alimony or payments in discharge of a property settlement; and second, whether payment of $16,363 to Mrs. White from her ex-husband in 1977 for state and federal income taxes and for clothing constituted taxable alimony.

First, we will analyze the character of the monthly payments. The determination of whether installment payments are alimony or payments made in discharge of a property settlement depends on an examination of the facts. The government contends that this case raised close factual questions and that therefore, its position in the case was reasonable. The district court, on the other hand, found the government's position to be "unconscionable" in light of the caselaw. After examining the caselaw, we agree with the district court that the government's position in the case was not reasonable.

Section 71(a)(1) of the Internal Revenue Code provides that periodic payments received under a divorce decree in discharge of a legal obligation imposed on the husband because of the marital or family relationship are taxable to the wife. 26 U.S.C. Sec. 71(a)(1). Under section 71(a)(1), however, if installment payments under such a divorce decree discharge a part of an obligation, the principal sum of which is, either in terms of money or property, specified in the decree, then the installment payments are not treated as periodic payments, and therefore, are not taxable to the wife. 26 U.S.C. Sec. 71(c)(1). Section 71(c)(2), however, creates an exception to section (c)(1). Section 71(c)(2) states that if by the terms of the decree the principal sum referred to in subparagraph (1) may be paid over a period in excess of ten years from the date of the decree, then the installment payments shall be treated as periodic payments. 26 U.S.C. Sec. 71(c)(2).

In this case, the monthly installments of $3,000 per month were to continue for 21.9 years--clearly in excess of ten years. Thus, the payments fit within section 71(c)(2) and must be treated as periodic payments. The...