William L. Comer Family Equity Pure Trust v. C.I.R.

• Decision Date: 02 March 1992
• Docket Number: No. 90-2114,90-2114
• Citation: 958 F.2d 136
• Parties: -789, 92-1 USTC P 50,132, 34 Fed. R. Evid. Serv. 1434 WILLIAM L. COMER FAMILY EQUITY PURE TRUST; William L. Comer; Myra L. Comer; T.R.Y.E.-A Trust; American Way Trust; Financial Freedom Consultants, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 136

958 F.2d 136

69 A.F.T.R.2d 92-789, 92-1 USTC P 50,132,

34 Fed. R. Evid. Serv. 1434

WILLIAM L. COMER FAMILY EQUITY PURE TRUST; William L Comer; Myra L. Comer; T.R.Y.E.-A Trust American Way Trust; Financial Freedom Consultants, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 90-2114.

United States Court of Appeals Sixth Circuit.

Argued Jan. 27, 1992.

Decided March 2, 1992.

Gary A. Kozma (argued and briefed), Detroit, Mich. and Robert M. Goldschmid (briefed) Goldschmid & Kozma, Detroit, Mich., for petitioners-appellants.

Abraham N.M. Shashy, Jr., Chief Counsel, I.R.S., Office of Chief Counsel, Gary R. Allen, Acting Chief (briefed), Kevin M. Brown (argued), Deborah Swann, and Gayle P. Miller, U.S. Dept. of Justice, Appellate Section Tax Div., Washington, D.C., for respondent-appellee.

Before KENNEDY and GUY, Circuit Judges, and ENGEL, Senior Circuit Judge.

PER CURIAM.

William Comer, et al. ("petitioners") appeal the Tax Court decision denying their motion for litigation costs and sanctions. The Tax Court denied the motion finding that the petitioners had failed to establish that the Commissioner's position was unreasonable or not substantially justified within the meaning of I.R.C. § 7430 (1954). For the reasons stated below, we AFFIRM the decision of the Tax Court.

I.

This is the second time this case has appeared before this Court. The previous decision provides an outline of the facts involved:

Petitioners Myra and William Comer are husband and wife. Mr. Comer established three trusts of which he and Mrs. Comer are trustees. In January 1983, Mr. Comer was notified that the trusts were to be audited for the 1981 tax year....

The petitioners received four notices of deficiency totaling about $18,000 and assessing interests and costs. One notice was for the Comers' joint return and the other three notices were directed to the three trusts: the Comer Family Equity Pure Trust; the American Way Trust; and the T.R.Y.E.-A. Trust.... Thereafter, in June of 1985, the petitioners filed four petitions in the Tax Court.

The petitions were docketed for trial on May 12, 1986. A pretrial stipulation settlement conference was held for two and one-half days in early April. This conference produced the parties' stipulated agreement adopted by the Tax Court in its decisions entered by May 27, 1986. The agreement declared that the petitioners were not liable for any deficiencies, penalties, or interest with respect to the 1981 tax year. Although the petitioners' original petitions sought litigation costs, the stipulated agreement was silent on this matter and does not indicate whether the silence was intended or due to oversight.

On May 30, 1986, petitioners filed motions for litigations costs pursuant to 26 U.S.C. § 7430. Reasonable litigation costs are awardable in a civil tax proceeding brought against the United States in the Tax Court if the taxpayer has "substantially prevailed with respect to the amount in controversy," § 7430(c)(2)(A)(ii)(I) and "establishes that the position of the United States in the civil proceeding was unreasonable." § 7430(c)(2)(A)(i) (1982). The Tax Court denied the motions on June 19, 1986, on two grounds. First, the motions were "untimely" because they had not been filed prior to the Tax Court's decisions, and second, there was no evidence of unreasonable behavior by the government after the filing of the petitions, that is, when the controversy became a lawsuit. Subsequently, petitioners filed a motion to vacate the Tax Court's May decisions in the four petitions solely to enable the petitioners to file timely motions for costs. The motions to vacate were denied on July 2, 1986. Because the petitions raised similar issues they were consolidated.

Comer v. Commissioner, 856 F.2d 775, 776-77 (6th Cir.1988).

This Court reversed the Tax Court's order dismissing the motion for litigation costs, finding that the motion was timely and holding that the reasonableness of the Commissioner's actions prior to the filing of the petitions was also relevant. The decision was remanded to the Tax Court for consideration of whether the government's pre-litigation position was unreasonable. Id. at 776. On remand, the Tax Court held that,

The record shows that when [Comer] eventually did what the agents originally asked him to do, i.e., provide testimony and review the records with them, most of his expenses were allowed. However, Comer did this only in the context of settlement conferences with District Counsel, after the statutory notices had been issued and petitions filed. Had he cooperated initially, none of that would have been necessary or, in our view, would have happened. Comer is the author of his own misfortune and is entitled to no litigation costs whatsoever.

Following the decision of the Tax Court, the petitioners filed this timely appeal. They argue that the Tax Court's denial of their petition for litigation costs was an abuse of discretion. Specifically, the petitioners argue that the Tax Court erred by denying their motion to sequester witnesses, by interfering with trial procedures on the side of the IRS thereby prejudicing the petitioners, in finding erroneous and distorted findings of fact, and in holding that the IRS actions were not unreasonable.

II.

The Internal Revenue Code provides that reasonable litigation costs and attorney's fees may be awarded to the prevailing party under certain conditions. I.R.C. § 7430. In order to be awarded the fees, the taxpayers must prove they are a "prevailing party." Id. A prevailing party is one who can show that the position of the United States in the proceeding was not substantially justified and who prevailed with respect to the amount in controversy or with respect to the most significant issue or issues. I.R.C. § 7430(c)(4).

The standard of review applicable to cost determinations under section 7430 is the subject of a split among the circuits. The Third, Seventh and Eighth Circuits have adopted an abuse of discretion standard to review the denial of costs and fees under the section. Rickel v. Commissioner, 900 F.2d 655 (3d Cir.1990); Zinniel v. Commissioner, 883 F.2d 1350 (7th Cir.1989), cert. denied, 494 U.S. 1078, 110 S.Ct. 1805, 108 L.Ed.2d 936 (1990); Berks v. United States, 825 F.2d 1262 (8th Cir.1987), appeal after remand, 860 F.2d 841 (8th Cir.1988). The Ninth Circuit concluded that the determination of the unreasonableness of the Commissioner's position presents a mixed question of law and fact and is therefore the subject of de novo review. Sliwa v. Commissioner, 839 F.2d 602 (9th Cir.1988). This Circuit has not articulated a specific standard of review for section 7430 cases.

The Seventh Circuit relied on the Supreme Court case Pierce v. Underwood, 487 U.S. 552, 563-565, 108 S.Ct. 2541, 2549-2550, 101 L.Ed.2d 490 (1988), in its holding that the award of litigation costs should be reviewed only for abuse of discretion. Zinniel, 883 F.2d at 1354. In Pierce, the Court addressed the award of attorney's fees under the Equal Access to Justice Act. The Supreme Court held that in reviewing a district court determination that the position of the Secretary of Housing and Urban Development was not "substantially justified," the court of appeals should apply an abuse of discretion standard. 487 U.S. at 560, 108 S.Ct. at 2547. In establishing the abuse of discretion standard, the Pierce Court noted that the question of fees depended on evidence regarding facts of the case and insights the district court might not have conveyed to the record. The Court further noted that the time and expense which would be expended by the reviewing court under a de novo review would not be well spent. As did the Seventh Circuit, we find this argument to be applicable to awards denied under section 7430. Section 7430 authorizes the Tax Court to award litigation costs but does not demand such awards. ¹ Thus, the discretionary basis of the awards, together with concerns about judicial economy, mandate an abuse of discretion standard. We therefore adopt the position previously taken by the Third, Seventh, and Eighth Circuit Courts.

III.

In Pierce, the Supreme Court defined the term "substantially justified" as "justified to a degree that could satisfy a reasonable person" or having a "reasonable basis both in law and fact." Pierce, 487 U.S. at 563- 65, 108 S.Ct. at 2549-2550. We adopt this definition and apply it in determining whether Comer is a prevailing party under section 7430 entitled to litigation costs.

First, because a finding of substantial justification must be based on the facts of the case, we review the Tax Court's findings of fact. Both the government and the petitioners have presented detailed summaries outlining the events which led to this litigation. The parties' views of the events differ substantially. The Tax Court's findings of fact appear to adopt the government's view of the events. The petitioners argue that the findings of fact were "distorted, misrepresentative and erroneous, were based on bias, speculation and perjury, and, were not supported by the evidence." Reviewing the findings of fact on a clearly erroneous standard, we find this argument to be without merit.

The Tax Court's findings of fact are supported by the testimony and evidence presented at trial. Many of the petitioners' complaints appear to reflect their dissatisfaction with the court's finding rather than actual bias on the part of the presiding judge. The petitioners offer no proof that the judge was personally biased or that he exhibited bias stemming from information learned outside of his involvement in this particular case. See United States v. Sammons, 918 F.2d 592, 599 (6th Cir.1990). Rather, the judge made a credibility determination and resolved the conflicting testimony in favor of the government. This type of credibility determination is within the province of the judge as factfinder. United...